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Why I’d buy AstraZeneca plc for fat dividends and pipeline potential

Healthcare titan AstraZeneca (LSE: AZN) has long been favoured by income-seeking investors, but some fear the company won’t be able to replace blockbuster drugs that have lost patent protection. In fact, those fears have dogged a number of companies in the pharma industry, with critics claiming the model is bust. But I reckon such concerns are seriously overblown. 

Here are how Astra’s key blockbuster (I’ve classified this as sales of over $1bn) sales progressed in H1: 

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  • Crestor sales declined 43% (ouch!) to $1,191m accounting for 12% of total revenues
  • Symbicort declined 11% to $1,383m accounting for 14% of total revenues
  • Nexium increased 3% $1,056m accounting for 11% of total revenues, although I’d expect sales to decline.

A focused strategy 

That’s clearly not a great collection of results, but I believe the company’s growth strategy and burgeoning pipeline will eventually replace these lost revenues. Over the last few years, the company has adjusted its strategy to focus on a few areas of medicine: oncology, cardiovascular and metabolic disease, and respiratory. 

A lot of capital expenditure has been poured into the former, which seems a good choice from both a moral and an economic standpoint. The choices available for cancer patients are clearly sub-optimal, so any improvement, no matter how incremental, would be eagerly accepted by the medical community. A breakthrough here would help patients and grant AstraZeneca a certain amount of pricing power and return on investment. 

The company’s growth products are picking up some of the slack from declining sales too. Let’s look at what happened in H1:

  • Brilinta sales grew 26% to $496m, accounting for 5% of total revenues, 
  • Farxiga sales grew 22% to $457m, accounting for 5%, 
  • Faslodex sales grew 15% to $462m, accounting for 5%
  • And Tagrisso sales grew 182% to $403m, accounting for 4%. 

That last bullet point is all-important – it demonstrates that Astra is not incapable of nurturing fast-growing, revolutionary treatments. There was more good news for Tagrisso this morning as the FDA granted the drug “breakthrough therapy designation” for treatment of patients with EGFR mutation-positive non-small cell lung cancer. The drug outperformed standard treatments significantly, which surely bodes well for ongoing growth.  

The big picture looks bright

For FY17, the company expects to see a “low-to-mid single-digit percentage decline” in revenue and a“low-to-mid-teens percentage decline” in core EPS. That’s hardly compelling stuff, but if we take a long-term view, things are looking up for the company. With nine new medicines in phase 3 testing, 25 in phase 2 and a further 32 in phase 1, a few more profitable approvals seem likely in the coming years. Astra also has a very strong presence in certain emerging markets, like China. I’d expect sales to these developing countries to rise alongside wealth, because if there’s one area where people won’t pinch the pennies, it’s healthcare. 

Of course, there’s an element of speculation here because I’m no scientist, yet I’m banking on a certain number of regulatory approvals to drive growth. That said, CEO Pascal Soriot’s great track record and the aforementioned solid pipeline are encouraging, so I’m confident the company can keep pumping out its 4% yield while we wait for the next blockbuster. 

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Zach Coffell has no interest in any shares mentioned. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.