“Hope will triumph over adversity.” That may be harsh, but it sums up the investment case for AstraZeneca (LSE: AZN) (NYSE: AZN.US), or at least its burgeoning share price, which is at its highest for over a decade: that at a time of secular decline in Astra’s sales and profits.
The adversity is Astra’s well-known patent cliff. As proprietary drugs have lost patent protection sales have declined, dropping 20% in 2012 and an anticipated 10% or so in 2013. It’s not over yet, with three key drugs responsible for 45% of sales coming off-patent between 2014 and 2016.
The hope is that Astra can rebuild its pipeline of drugs with new discoveries, helped along by a smattering of acquisitions. By and large, investors’ fate is in the hands of Astra’s scientists.
Biotech
Pascal Soriot, CEO since 2012, has eschewed the diversification strategy of sector peer GlaxoSmithKline in favour of concentrating on research and development of new drugs. That makes the company essentially a biotech play — quite different in character from the traditional notion of pharmaceuticals as defensive stocks. But there are two big differences between an investment in Astra and one in a more speculative biotech company.
First, Astra is large and diversified, with multiple drug therapies under development. The company is focused on three therapeutic areas: oncology; cardiovascular and metabolic disease; and respiratory, inflammation and autoimmune diseases. It’s doing well bringing new drugs through trials, with 11 treatments now in the critical ‘Phase III’ stage, nearly double the number last year.
That perhaps owes something to M. Soriot’s new, streamlined structure — cutting both costs and bureaucracy. He has also spent $7bn on acquiring new therapies, despite rejecting a ‘big-bang’ acquisition strategy.
Dividend
The second big difference is that Astra pays a dividend — and a fat one at that, currently yielding 4.4%. The dividend is covered, too. Management has given itself the wriggle-room of two-times cover ‘over the investment cycle’, whatever that may be. Astra’s strong balance sheet, with net gearing of just 11%, provides a financial safety net.
The momentum behind Astra’s shares could continue, with the company now saying it expects to return to growth sooner than analysts’ expectations. It expects 2017 revenues to be in line with 2013’s, whereas previously 2018 was the target date. That could lead to the oddest of broker upgrade cycles: pencilling in smaller-than-previously-forecast falls in sales.
Astra’s discount to GlaxoSmithKline has narrowed. Investors will only know if that is merited if and when Astra’s new drugs come to market.