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Why I’m Buying AstraZeneca plc At Current Prices

Throughout 2014, I wasn’t a fan of AstraZeneca (LSE: AZN). However, last week I started to build a position in the company.

You see, over the past few months my opinion of Astra has changed.

True, the company is still suffering from the loss of exclusive manufacturing rights on some its key treatments, but the group’s outlook is improving.

Falling sales

Falling sales of Astra’s blockbuster Crestor and Nexium drugs, which together accounted for a third of overall sales during 2014, are holding the company back. 

In March, management warned that due to falling sales of these key treatments, revenue for full-year 2015 is expected to decline by mid-single digit percentage. 

Still, Astra’s growth initiatives are coming on in leaps and bounds.

Specifically, during the first quarter of this year, Astra’s five growth platforms –Brilinta, Diabetes, Respiratory Emerging Markets and Japan — reported sales growth of 13%.

Further, the company’s productivity agenda has started to yield results. While sales are set to fall during 2015, due to cost savings, core earnings per share are expected to increase by low single-digit percentage. 

Bright outlook

It’s nice to see that Astra’s efforts to stem falling sales are taking hold, but that’s not why I’m interested in the company.

I’m really interested in Astra’s future growth potential. 

The company has 119 projects in its clinical development pipeline. During 2015-2016 alone, around a third of these will progress to the next stage of development. What’s more, Astra is currently conducting 72 trials for its oncology treatments under development. Some of these trails have already yielded substantial results. 

Unfortunately, if history is anything to go by, only a small number of the treatments Astra is currently developing will make it to market. Figures show that on average, less than 10% of drugs make it from inception to sale. 

Nevertheless, with 119 treatments under development, Astra stands to bring 12 new products to market over the next few years. 

Lofty targets

12 new products may not seem like much, but many of these drugs will be high-margin oncology treatments. 

And the key test will come over the next two years when Astra’s sales are set to being expanding again.

Astra’s long-term plan is to achieve sales of £45bn by 2023, which seems wishful thinking, although, with so many products under development, the company stands a good chance of hitting this target. 

Attractive valuation 

As I’ve mentioned before, if Astra manages to meet this lofty target, based on my figures and historic profit margins, the company could report a net profit around £5.6bn or 443p per share by 2023.

At present, Astra currently trades at a forward P/E of 15.6. 

15.6 times 2023’s projected earnings per share of 443p gives a target price of £69.11 by 2023. That’s an annual return of around 6.9%. Assuming Astra’s dividend yield remains at 4.2% and dividends are reinvested, in the best-case, investors could see a total return of 136% by 2023. 

Now, clearly this is an optimistic forecast but it really shows the growth potential Astra has ahead of it.

That’s why I’m a buyer.

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Rupert Hargreaves owns shares of AstraZeneca. 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.