The AstraZeneca (LSE: AZN) share price has exploded over the past month. Stock for the FTSE 100 pharmaceutical firm is in high demand, driven in part by its participation in Covid-19 vaccine trials.
Likewise, its 9% stake in Moderna is also helping its prospects. The US therapeutic company has been blitzing US news channels with self-described positive progress on its own Covid-19 vaccine trials.
But markets are fickle beasts and the FTSE 100 slumped 0.3% on opening on Wednesday as doubts were raised about Moderna’s Covid-19 vaccine trial data. Moreover, AstraZeneca’s share price slipped 1.2% over the same time period.
The slippage implies that some investors are getting nervous about a potential Covid-19 vaccine trial failure. But trial failures are part-and-parcel of owning a pharmaceutical firm. With this in mind, are AstraZeneca’s future growth prospects enough to justify a current share price of 8,723p?
Strong developing pipeline
One of the better ways of evaluating a pharmaceutical company is by analysing its ability to get drugs to market. This includes looking at the firm’s pipeline. In other words, how many drugs it has in research and development (R&D) and in all the other stages they go through before they reach the market.
AstraZeneca has a highly innovative pipeline covering a wide variety of diseases from oncology to neuroscience. It boasts nine globally renowned patent-protected drugs, illustrating its well-honed ability to bring its products to market.
Over the last 10 days, AstraZeneca has added to its market-leading position. Oncology drug Lynparza is now approved in the US for prostate cancer and Enhertu is designated a breakthrough therapy for certain types of lung cancer. In addition, the Chinese have approved Bevespi Aerosphere for patients with chronic lung disease.
The provision of these drugs will likely offset previous losses experienced with other drugs, such as Nexium, and the market is expecting the FTSE 100 stalwart to profit accordingly. Consequently, the AstraZeneca share price is skyrocketing, after significantly outperforming the FTSE 100 over the last five years.
AstraZeneca share price is risky
However, with this good news already factored into the AstraZeneca share price, the firm’s earnings need to follow. Currently, selling at a price-to-earnings (P/E) ratio of 90, investors appear to be speculating that they will do so.
But, big pharma trials take considerable time and are expensive; a vaccine for Covid-19 is still a remote prospect that could lower earnings in the meantime. Of note, AstraZeneca has reported negative earnings for the last three years and a high P/E is a huge gamble on turning that around.
Another problem with a high share price is a low dividend yield. At 2.5%, AstraZeneca’s dividend yield is far less attractive than it was a short time ago, lowering an investor’s total return considerably. Buying the stock in March at 6,221p gave you a return of about 3.5%. This 1% difference, compounded over time, will mean much less return and far more risk for your money.
If you bought AstraZeneca shares after they plummeted in March, well done. You’ve bought into a great company at a good price. If not, I think it’s currently too expensive and too risky to do so now. The FTSE 100 is unpredictable and if you want to beat it, you need to maximise your returns. Right now, AstraZeneca is unlikely to do that for you.
Stay ahead of the game and find a stock that will earn you superior returns, whatever happens to the market.
Don’t miss our special stock presentation.
It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.
They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.
That’s why they’re referring to it as the FTSE’s ‘double agent’.
Because they believe it’s working both with the market… And against it.
To find out why we think you should add it to your portfolio today…
Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.