Today I’ll be taking a closer look at pharmaceuticals giant AstraZeneca (LSE: AZN), and asking whether last week’s major news announcement could be just the tonic for this troubled FTSE 100 blue chip.
Healthy tonic
Anglo-Swedish pharmaceuticals giant AstraZeneca has revealed that its experimental drug for the treatment of a type of thyroid cancer has been granted ‘orphan’ status in the US. Selumetinib is being tested for its ability to help with the uptake of radioactive iodine, which is currently recommended for treating differentiated thyroid cancer, diagnosed in approximately 60,000 people in the US each year.
‘Orphan’ status is awarded to medicines promising significant benefit in treating rare life-threatening diseases, and provides companies with special development and market exclusivity incentives. This is a big win for Astra, which is relying on cancer treatments to revive its fortunes, as revenues have been in decline in recent years due to increased competition from generic medicines.
The London-listed drugs giant reported a decline in earnings recently for its first quarter, despite higher revenues. On a constant currency basis, core earnings fell 7% to 95¢ per share, while revenues were up 5% to $6.12bn, driven by a significant increase from joint ventures with other pharma groups. The company says its guidance remains unchanged for the full year, predicting a low-to-mid-single-digit decline in both total revenue and core earnings per share for 2017.
Time to buy?
Astra’s shares have underperformed this year, trading 10% lower than they were 12 months ago, while its sectors peers and wider FTSE 100 index remain unchanged over the same period. Does this present a buying opportunity for investors looking for value?
Well, the City is expecting a 6% drop in earnings for the full year to December, with a further 2% decline expected next year. This would leave the shares trading on 14.3 times forecast earnings for this year, rising slightly to 14.5 times for 2018. I believe Astra’s shares are trading at fair value given the medium-term earnings outlook, and it will take many more pipeline drugs like Selumetinib over the next few years to convince shareholders of long-term sustainable earnings growth.
For income seekers on the other hand, the company has continued to reward its shareholders with strong dividend payouts each and every year. Analysts expect this to continue with 193.78p per share forecast for this year, and 193p for 2018, rewarding loyal investors with prospective yields of 5.1% until 2019.
Astra has increased its investment into Research & Development, and has embarked on a cost-cutting exercise to help turn the business around. In addition, the company has a number of late stage drugs like Selumetinib that should help revenues over the longer term. In my opinion, existing investors should hold on to their Astra shares for the strong dividends and long-term recovery prospects , new investors might want to wait for growth to appear on the earnings horizon.