Can the AstraZeneca (LSE: AZN) share price end 2019 above 6,000p?
We’ve been there before, and it’s only a 4% premium over the current price, but the shares have been climbing over the past few years and we’re looking at a forward P/E now of over 22. And since the end of December 2018, AstraZeneca shares have declined by 2% against the FTSE 100‘s 9% gain.
It started when Pascal Soriot was appointed chief executive in 2012 in an attempt to turn around the company’s declining fortunes caused by the expiry of key patents and the resulting rise in competition from generic alternatives.
Cyclical
It’s an unavoidable part of a drug’s lifecycle, and there needs to be a balance between getting proven medicines to sick people as cheaply as possible and providing the profit motivation for companies to keep developing new ones. Whether or not you approve of the current balance, it’s unarguably true that patent expiry does push companies to invest billions in new research.
It’s perhaps surprising that it took a new boss to see what clearly needed doing at AstraZeneca, but I liked Mr Soriot’s new approach right from the start. He got rid of a lot of the company’s marginal non-core business, and focused all its efforts on what matters most — the drug pipeline.
Drug development is a long and expensive process, and it was always going to take some years for any positive effect on bottom-line earnings. But pipeline research soon stacked up, and the new drugs started inching their ways to profitability.
Approvals
The latest is Friday’s news of the approval by the US Food and Drug Administration (FDA) of AstraZeneca’s Qternmet XR extended release tablets for the treatment of type-2 diabetes. The new medication, a combination of dapagliflozin, saxagliptin and metformin hydrochloride, is targeting a disease of affluence — and that’s got to be a booming part of the future pharmaceuticals market, and a very smart segment on which to spend a company’s research cash.
In the past couple of months we’ve seen European Commission approval for Forxiga (dapagliflozin) for type-1 diabetes, and for Lynparza (olaparib), a breast cancer treatment. And the company’s potential new medicine selumetinib, aimed at paediatric neurofibromatosis, has been granted an FDA Breakthrough Therapy Designation.
Cautious
But with all this good news, why am I getting a bit twitchy? It’s my experience of watching so many company shares going through booms and busts over the years, and I’m starting to fear we could be in an overvaluation part of the cycle for AstraZeneca shares.
In the pre-Soriot slump days, when institutional investors couldn’t see past the short-term falls in earnings, I saw AstraZeneca shares as super-cheap. And I think that comes from an advantage that private investors have over the big City firms — we can handle short-term uncertainty, and we don’t have shareholders breathing down our necks wanting to see sparkling results every quarter.
Forecasts
Forecasts suggest a 22% rise in earnings per share for 2020, which would drop the P/E to 18.5, and that’ll be adding impetus to the share price rise. But it’s maybe still a bit high, dividend yields are down to 3.5%, and we’ve had false starts before.
I still see AstraZeneca as a solid long-term investment, but right now I’m cautious about a valuation that’s possibly overheating.