Investors in AstraZeneca (LSE: AZN) in the early years of the 21st century endured a long period of frustration. The shares peaked at just over 3,500p in 2002 and it took until 2013 for them to break through that level again.
The renewed optimism followed a boardroom shake-up in 2012 when investor unrest over the underperforming share price, falling sales and a dearth of new medicines saw the departure of both the chairman and chief executive.
Sales have remained under pressure due to expiring patents on some of the company’s major products, but the market has warmed increasingly to Astra’s future prospects. The shares are now trading at around 5,000p but I believe they’re set to rise much higher.
Turnaround
When new chief executive Pascal Soriot arrived he found a company that was “imploding” and in need of radical overhaul. Research — the lifeblood of a pharma company — was sprawling, inefficient and lacking in dynamism and new ideas.
Soriot has shrunk its operations to focus on core areas like cancer, respiratory and cardiovascular disease. He’s moved the business closer, both culturally and physically, to cutting-edge academic research. It’s taken time but Astra now has one of the strongest pipelines in the industry.
Trough year
The business hasn’t quite reached the inflection point of a return to growth but it’s fast approaching. It reported in its Q3 results that the impact from the loss of exclusivity on its products is starting to recede and laid out the major news flow on the pipeline it expects through 2018 — an impressive list of regulatory submissions and decisions.
City analysts expect 2018 to be the trough year for earnings. The consensus forecast gives a P/E of 18.3 but this comes down to 16.3 for 2019 on expectations of earnings growth kicking in for the first time. One of Soriot’s achievements for shareholders has been to maintain the company’s dividend throughout the overhaul of the business. As such, buyers of the shares today have a prospective yield of around 4%. However, I believe this could be just the topping on far more substantial capital gains.
Buy of the decade?
Even when earnings were falling and Soriot’s turnaround strategy was in its infancy, Astra was viewed as a valuable franchise by trade players. In 2014, he persuaded shareholders to reject a 5,500p a share offer from US giant Pfizer. He argued that the terms “substantially undervalue AstraZeneca” and pledged to achieve revenues of $45bn by 2023.
He may have made himself a hostage to fortune — the target is ambitious — but if he can deliver anywhere near that kind of revenue, the rewards for investors are likely to be substantial. Astra generated revenue of $23bn in its last financial year, making a net profit of $3.5bn at a margin of a bit over 15%. Roll on to revenue of $45bn at the same margin in 2023 and we’d be looking at a net profit of $6.8bn. Furthermore, an improvement in the margin to nearer 20% (net profit $9bn) wouldn’t be entirely fanciful.
I see the stock as a good buy today, taking a considerably more conservative view of growth prospects, but if the company does achieve its ambitious targets, it could be the buy of the decade, certainly among its big pharma peers.