AstraZeneca (LSE: AZN) shares are up 18.5% so far in 2021. Things had looked like cooling a bit, until the AstraZeneca share price jumped 6% on Monday. It was a tumultuous day, on the back of energy market fears and a Chinese sell-off. But at least for the drugs giant there was actually some good news.
As we’re heading further away from Covid-19 headlines, all those conventional diseases still need a lot of work. And the latest is in the oncology sphere. In a phase three trial, AstraZeneca pitted its new breast cancer drug Enhertu against trastuzumab emtansine (T-DM1).
In tests for efficacy against HER2-positive metastatic breast cancer, the firm reported that Enhertu reduced the risk of disease progression or death by 72% compared with T-DM1. That sounds like an impressive result even to a non-expert like me.
And to explain her thoughts, executive vice-president of Oncology R&D Susan Galbraith was emphatic: “Today’s results are ground-breaking. Enhertu tripled progression-free survival as assessed by investigators.” She added: “These unprecedented data represent a potential paradigm shift in the treatment of HER2-positive metastatic breast cancer.”
This is a one-off drugs success. But it does paint a picture of growing oncology expertise. And investors will surely be hoping for further successes to help drive the AstraZeneca share price higher. It might also mark a key milestone in the company’s R&D rejuvenation.
R&D renewal
When Pascal Soriot joined as chief executive in 2012, he took over a company with a dying development pipeline. A number of blockbuster drugs were nearing the end of patent protection, and facing generic competition.
Pharmaceuticals development is a long-term and very expensive business. And it was always going to take a good few years and a heap of cash to get things flowing again. It took longer than many of us feared for AstraZeneca to get earnings back on track again. But in a rare example of the market taking a long-term outlook, the AstraZeneca share price took off in advance.
Over the past five years, AstraZeneca shares have gained 66%. That’s against a FTSE 100 that’s gone almost precisely nowhere in the same timescale. Oh, and since Soriot took over, the price has almost trebled.
AstraZeneca share price valuation
The question now is whether AstraZeneca stock’s still good value. At the interim stage, the company’s 2021 guidance put core EPS at between $5.05 and $5.40. Based on the mid-point, the current share price suggests a forward P/E multiple of around 23.
That’s a fair bit higher than the long-term FTSE 100 average. And we’re talking core EPS here — the bottom line figure might not be that impressive. But I don’t really see the current AstraZeneca share price valuation is being obviously too high. At least not if we really are back to a period of sustainable earnings growth.
Weakness ahead?
My fear is that investors might still see AstraZeneca shares as fully valued now. So we could be in for a period of stagnation. And with enthusiasm for coronavirus research possibly waning, we might even see a period of weakness in the pharma sector. But the 2021 news flow from AstraZeneca’s has included a succession of positive trial results, and I’m optimistic.
AstraZeneca is on my list as a possible buy, if a cautious one.
