Shareholders of AstraZeneca (LSE: AZN) have had a lot to cheer this past year. The stock is currently trading near all-time highs at 7,250p a share. The question is — can it continue to break its own records? Let’s dig in to see what has changed at Astra since the last time we talked about this pharmaceuticals giant.
Much has been made of the successful pivot towards oncology by CEO Pascal Soriot, who assumed his post back in 2012. Seven years ago, Astra was facing a number of imposing patent cliffs, and a sense that the company was at a crossroads. Today, with oncology accounting for 36% of all sales in the first half of 2019, it looks like the new course is firmly established. In addition to accounting for over a third of sales, oncology is also the fastest-growing part of Astra, with revenue from the segment increasing by 52% over the same period.
The current market price already assumes impressive future growth in the sector, so in order to justify the thesis that the share price will grow in the future, we have to look at other recent developments for Astra.
One of the company’s most promising new products is Lynparza, which is currently approved for the treatment of some types of ovarian and breast cancers. In the first half of 2019, it brought in £422m in sales, or 5% of total revenue. More importantly, sales of Lynparza grew 93% year-on-year, underscoring its importance to the company. This week, Astra released some excellent data that showed that Lynparza cut the risk of disease progression by 41% in the treatment of another type of breast cancer. Because the fixed costs of developing a new product are so high, every additional indication that a pharmaceutical company receives approval for is a huge deal.
A pricey proposition
Despite these successes, or perhaps because of them, shares of Astra look significantly overvalued to me. The stock currently trades at a P/E ratio of 43.3, which of course is extremely high. Even if one uses its projected earnings for the next year, its P/E still comes out to at least 25. On top of this, it currently yields just 3.1%, so it is hardly a bargain for dividend investors either. And as my colleague G A Chester has noted, it trades at a hefty 4.9 times current-year forecast sales, compared to rival GlaxoSmithKline which sports a more modest 2.5 multiple. He also believes that Astra’s ‘core’ earnings aren’t as good as they look on the surface, which would put its forward P/E ratio upwards of 28.
This is a stock that in many ways is priced for perfection, which is generally not a recipe for a sound investment, and while I congratulate those shareholders who have opted to stick with Astra through the rough times into the good, I will not be joining them.
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Stepan Lavrouk owns no stocks mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.