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There’s A Patent Cliff But AstraZeneca plc Has A Jetpack

drugs

It was something the pharmaceutical industry long saw coming but that doesn’t mean there were any easy solutions.

A large number of top-selling drugs are close to going off patent simultaneously. For AstraZeneca (LSE: AZN)  (NYSE: AZN.US), this includes the likes of the asthma treatment symbicort, and the cholesterol-lowering drug crestor. Combined sales for these two drugs totalled almost $10 billion.

This is an unprecedented event where big blockbuster drugs can be replaced by cheaper, generic options. For the global medicine producer, this newfound competition will cut into profits deeply.

Setting up for the future

In short, you need good R&D. AstraZeneca currently has  11 products in late stage 3 trials, which is double the number of a year ago, while 27 are in phase II programs. Getting the drugs pipeline back up to speed is a must and they seem on the right track here. R&D isn’t cheap, leading to a rise in core operating costs, but long term this is the key and short-term pain has to be expected.

Similarly, acquisitions can help strengthen the pipeline. A significant acquisition was made when AstraZeneca bought out Bristol-Myers Squibb’s diabetes alliance. The £2.4 billion deal will see AstraZeneca serving needs of some 350 million sufferers worldwide, a number that is set to grow a further 200 million by 2030.

This deal and a pipeline of new drugs for other diseases are a major way in which the pharmaceutical giant can get back on track for growth. There’s already been an immediate impact with a new diabetes drug Xigduo getting the green light for production in Europe.

All things considered

We’re assuming here that the new drugs pipeline can not only replenish the current decline in sales and profits, as well as exceed previous sales to return to growth. This isn’t going to be a turnaround that happens overnight such is the difficulty of that task. Should the pipeline fail to achieve the expectations set out for it then shareholders investments will only stand still.

I don’t think this return to growth is at all inconceivable, and with a P/E of 12 there’s good value to be found in AstraZeneca. The dividend yield of around 5% is also attractive, and more encouraging is the fact that the company has said it will maintain its progressive dividend policy. Lastly, while the company has seen net debt increase, its massive cash flow should ease worries in that regard.

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> Mark does not own shares in AstraZeneca.