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The Best Reason To Buy AstraZeneca plc

AstraZenecaThe FTSE’s second-biggest pharmaceuticals company AstraZeneca (LSE: AZN) (NYSE: AZN) has been in the news over the past year, with its share price having been boosted by the Pfizer bid attempt, to 4,573p today.

But are AstraZeneca shares worth buying? I say yes, and I’ll explain my key reason.

No undervaluation

Firstly, it’s not because of any obvious undervaluation. With a forward P/E of 17 for this year rising to 18 based on forecasts for 2015, I find AstraZeneca less favourably valued than GlaxoSmithKline right now — there’s a lower P/E and a higher dividend yield at Glaxo, with earnings growth expected sooner. But that’s all short term.

And to get the biggest elephant out of the way, I reject buying in the hope of a quick profit from any takeover. The price has already risen again, and it will no doubt spike even higher should there be a renewed bid. But it will almost as surely fall back again if Christmas and the New Year come and go and there’s no sign of Pfizer knocking at the door.

No, while a takeover windfall can be a nice bonus if we buy fundamentally sound shares, it’s not a long-term investing strategy — it’s really just a gamble.

What about cash?

Dividends? They’ve been held at 280 cents per share for the past three years, and with the share price having risen you’d be on for a forecast 3.8% yield at today’s price. That’s still pretty nice, but it’s not yet backed by rising earnings, and it is easily beaten by Glaxo’s mooted 5.7%.

Is my optimism based on the whirlwind known as Pascal Soriot, the new man at the helm since October 2012?

Now we’re getting there. AstraZeneca’s big problem was not simply the pain of the so-called patents cliff when it lost protection on some key drugs. No, it was the absence of any real clue what to do about it.

But Mr Soriot has provided that clue, and has done what with hindsight seems obvious — he’s refocused on AstraZeneca’s core strength of leading the market in major drug discovery and development. But that alone would not satisfy me, not without any results to show for it.

The pipeline!

And that brings me to the key piece of evidence, AstraZeneca’s rejuvenated development pipeline.

At the first-half stage this year, there were 14 projects in Phase III, up from 8 a year previously, moving Mr Soriot to say “We now have one of the most exciting pipelines in the industry“. That number has since risen to 15. And a lot of these candidates are in the critical, and potentially lucrative, field of oncology.

In a few years time I hope we’ll look back on these days as just a start, as major new drugs find their way to approval and widespread use — just as long as AstraZeneca’s shareholders are wise enough to keep Pfizer’s grubby paws off their treasure.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended shares in GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.