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Will AstraZeneca’s new strategy make the share price soar?

Shareholders of AstraZeneca (LSE: AZN) have been on a bumpy ride these last six months, with the stock price bouncing between the 5,000p and 6,500p marks. Back in February, the company reported excellent operating results for the fourth quarter of the previous year, showing robust sales growth and earnings that exceeded analyst expectations.

However, since topping out in late March, shares are down more than 10%. Is this an opportunity for investors to get in on a pullback? Let’s dive into it.

Bestselling cancer drugs driving sales

Over the last few years, AstraZeneca has been increasingly focused on developing its oncology pipeline. Most notably, lung cancer drug Tagrisso has the potential to achieve blockbuster status. It has already become AstraZeneca’s best-selling drug, constituting 9% of total product sales at around £1.4 billion in 2018. Moreover, the drug is still a long way away from patent expiry, and some analysts believe that sales could peak at £4.5 billion in 2023. Even if sales fall short of that lofty figure – management’s own number is closer to £2.3 billion – Tagrisso is likely to be a reliable revenue source for AstraZeneca for years going forward.

A long-term strategy

CEO Pascal Soriot deserves a lot of credit for this turnaround. Appointed in 2012, following years of declining sales resulting from a steep patent cliff, he has managed to pivot AstraZeneca towards oncology treatments. This makes sense on two levels. Firstly, given the overall demographic trend of populations getting older, the prevalence of cancer is set to increase. Accordingly, pharmaceutical companies that reposition themselves to cater to this aging world will do comparatively well.

Secondly, AstraZeneca suffered a competitive disadvantage in that many of its older therapies were small-molecule, orally administered drugs that were quite easy to replicate. As a result, the company was hit hard by sales of generics almost as soon as those patents expired. While the conventional view is that patent expiry affects drug company equally, the reality is that makers of generics and biosimilars still need to manufacture the actual product, and so not all generics can undercut prices in the same way.

It’s a tough environment to live in

However, the current regulatory environment has thrown up a number of potential threats to AstraZeneca’s long-term prospects. In particular, the Food and Drug Administration in the USA is increasingly seen to favour lower-cost alternatives to some of the more expensive options. For instance, techniques such as gene editing are being looked at as potentially more cost-effective ways of treating cancer.

Although these technologies are still in relatively early stages, when one considers the fact that drug development takes place over a timescale of decades, it doesn’t seem like such a far-fetched threat. For this reason, I believe AstraZeneca could be vulnerable in the long run.

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Stepan does not own shares in AstraZeneca. 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.