Shares in pharmaceutical heavyweight AstraZeneca (LSE: AZN) fell by more than 4% on Thursday morning after the firm published its full-year results.
Core earnings of $4.26 per share exactly matched the latest forecasts, and the full-year dividend of $2.80 is also in line with expectations. However, although the stock’s 4.5% dividend yield is attractive, AstraZeneca’s results didn’t provide the same level of reassurance about the future as those from GlaxoSmithKline on Wednesday.
What’s the problem?
AstraZeneca’s sales fell by 7% to $24,708m in 2015, while the firm’s core (adjusted) operating profit fell by 1% to $6,902m. In today’s results, the firm warned investors to expect a further “low to mid-single digit percentage decline” in both revenue and core earnings per share in 2016.
AstraZeneca still seems to be suffering badly from falling sales and profit margins on products that have lost patent protection. Some of the company’s biggest earners were hit hard last year. Sales of Crestor, a statin, fell by 3% to $5,107m after it lost market exclusivity in the US in May. Sales of Symbicort fell by 3% to $3,394m while revenue from Nexium fell by a whopping 26% to $2,496m.
As these three products accounted for 45% of AstraZeneca’s revenue in 2015, it’s easy to see why further declines are expected this year. Although many of the firm’s newer products are delivering strong sales growth, they mostly have much lower levels of sales. This means it will take some time to regain the revenue lost by older products.
Is any of this a surprise?
It’s probably true to say that most of this bad news was already reflected in the price of AstraZeneca’s shares. It’s also true that turning around a business like this will always take a number of years.
However, investors will remember that US giant Pfizer offered £55 per share for AstraZeneca two years ago. The shares would have to rise by 30% from today’s share price of £42 to match that figure.
Pascal Soriot, AstraZeneca’s chief executive, convinced investors not to back the Pfizer deal by promising long-term sustainable growth. Back in May 2014, Mr Soriot said he was targeting annual revenues of more than $45bn by 2023, with sustained revenue growth from 2017 to 2023.
Given that last year’s revenues totalled just $24bn, 2016 must be the last year of declines if AstraZeneca is to hit these forecasts. I think that today’s share price wobble reflects the risk involved in trusting long-term forecasts that were produced to defend the firm during a takeover battle.
Is the stock a contrarian buy?
There’s no doubt that AstraZeneca does have a pipeline of promising new products that should deliver long-term sales growth. The exact numbers may not match up with 2014’s statement, but the direction of movement is likely to be upwards.
On this basis, the stock doesn’t look expensive in my view, as long as you’re investing on a three-to-five-year timescale. The shares trade on around 15 times forecast earnings for 2016, and the 4.5% yield provides an attractive reward for your patience.