Forget About 2015: Why AstraZeneca plc Remains A Spectacular Long-Term Pick

Today I am looking at why AstraZeneca (LSE: AZN) (NYSE: AZN.US) could prove a shrewd recovery play.

Patent pitfalls crush turnover

The effect of revenues-crushing patent expirations has long been a drag on AstraZeneca’s bottom line. The problem has been seen across the entire pharmaceutical sector, but while rivals such as GlaxoSmithKline have been investing heavily to develop the next generation of market-leading products, AstraZeneca has lagged far behind its rivals at the chemistry bench.

As a result, the business has suffered two consecutive years of earnings declines, culminating in 2013’s calamitous 26% dip. And City analysts do not expect the company to drag itself out of the red anytime soon, with declines to the tune of 13% and 6% pencilled in for 2014 and 2015 respectively.

AstraZeneca undoubtedly has plenty of work ahead of it to replace the lost revenues of key drugs, with further significant patent knocks just around the corner. The firm is due to lose exclusivity for its Crestor cholesterol medication in the US — a product which accounts for more than a fifth of group turnover alone — in mid-2016. And its Nexium stomach-soothing drug is due to face generic competition in the States in the coming months.

… but heavy investment beginning to pay off

Still, the expected improvement in AstraZeneca’s earnings performance through to the close of 2015 indicates that the worst of the company’s revenues problems could be behind it.

Under the stewardship of chief executive Pascal Soriot, parachuted in two years ago to rescue the ailing company, AstraZeneca has established an ambitious lab-building programme which will see a network of new facilities created across Europe and the US, as well as a cutting-edge laboratory and HQ in Cambridge, England. The fruits of these labours are expected to start rolling from 2018.

In the meantime AstraZeneca’s pipeline continues to improve, and the company noted last month that it has 121 projects currently in development. Of these 107 are at the clinical phase, it notes, with 14 at the late-stage point. Promisingly the firm said that it is “accelerating its investments in its growth platforms and expanding pipeline” on the back of better-than-expected revenues in the year to date.

On top of this, AstraZeneca is also poised to enjoy surging demand from developing regions thanks to rising population levels and greater healthcare investment in these territories. Indeed, the company saw emerging market sales rise 12% at constant exchange rates during January-September, driven by a 22% uptick in Chinese revenues.

Of course the business of drugs development is a tricky process which can swallow huge sums and whack potential revenues should studies disappoint. But should AstraZeneca’s ambitious R&D programme pay off, investors could see returns head through the roof in the long-term.

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