The pharmaceutical giant AstraZeneca (LSE: AZN) saw some strong results last week, helping to boost its share price toward record highs. As a contrarian investor, I generally see this as a big no-no for investing in a stock, however this truth only holds if we think the number is not actually going to get any higher.
Last week the company lifted its sales forecast for the second time this year, and announced rising revenue for the fifth consecutive quarter – both of which I see as signs particularly good in the pharmaceutical sector, where failed drug trials and the availability of cheap generic alternatives, can take their toll.
Sales of its new medicines have been going strong, climbing 64% in the quarter; with notable sales of its oncology drugs – a key competitive area for AstraZeneca – seeing sales climb 45% on a constant currency basis.
Meanwhile the emerging markets arena, which for Big Pharma is where the biggest issues with cheap generic alternatives, both illegal and out of patent, take place, actually grew by 90% for AstraZeneca.
In a statement alongside the results, CEO Pascal Soriot emphasised how the latest numbers show the breadth of Astra’s resurgence – both geographically and on a product basis – another key investment point in my opinion.
What about the share price?
Though offering the stock a temporary boost, I think these numbers also indicate AstraZeneca’s strength over the long term.
For a start, the strong sales performance of its oncology drugs is a sign of its strategy in that field. While most of the big pharmaceutical names concentrate their efforts at Stage 4 levels of cancer, Astra focuses instead on early treatment and detection, carving out a niche for itself.
The company has also been making good headway in China, working with the government and local hospitals to gain a strong base for selling its drugs at fair prices, competing with generic alternatives. Mr Soriot did warn however that he expects sales in China to slow as changes in the way the country purchases drugs will make it more difficult for some of Astra’s medicines to maintain a foothold.
With this in mind, the main area impacting the share price going forward may not in fact be the underlying strength of the company, but rather market expectations. When companies put in such good performance, investors begin to expect greater and greater things.
It is strange, perhaps, that strong financial numbers are in and of themselves not considered good by investors, unless they are better than the ‘expected’ figures given by a particular analyst or talking head (company guidance itself is usually kept realistic to avoid large share movements).
Of course, this is because the stock will already be factoring in the expected numbers, but it still seems strange that a company with growing profits will see its share price hit. Unfortunately for AstraZeneca, I expect this may be a trap it falls into.
Its share price is not cheap, and though over the long term it seems to be a strong investment, any investors looking to get out in the next year or two may see more volatility. As a long-term Buy however, I still think Astra will see its share price climb.
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Karl has 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.