AstraZeneca (LSE: AZN) has done well in the 2020 stock market crash. While the FTSE 100 is down 17% so far this year, the AstraZeneca share price is up 10%. It did dip in the early days of the crisis, but not for long. It’s perhaps not surprising that a pharmaceuticals firm is popular during a medical crisis. After all, AstraZeneca is one of a number pursuing Covid-19 research.
But seeing its attraction as being tied to Covid-19 would be, I think, a mistake. AstraZeneca shares have doubled in the past five years, while the Footsie is up 7%. That’s got little to do with 2020’s gains.
Growing drugs portfolio
For me, AstraZeneca’s real attraction is the portfolio of new drugs and drug candidates that are steadily emerging from its research and development pipeline. The firm’s main areas of expertise include respiratory, inflammatory and autoimmune disorders, cardiovascular and metabolic disease, and oncology. In a world of ageing and increasingly wealthy people, I see big potential profit there.
I doubt many would disagree with that, but less enthusiastic observers will point to the AstraZeneca share price itself. It reached an all-time high a month ago, though it has dropped a little since then. The minor dip is likely to be down to the dismissal of rumours of a merger with Gilead Sciences. Had such a thing happened, the idea was that the two would co-operate on coronavirus vaccine research and development. But again, I think pinning AstraZeneca investment hopes on the coronavirus is missing the big picture.
Coronavirus won’t be here forever
We don’t yet know how long the pandemic will be around. Medical experts are talking about a vaccine in maybe a year or so. However long it might take, I really can’t see Covid-19 still being a threat in five years’ time. Certainly not in 10 years. And that’s the timescale we should be thinking about when we consider the attractions of the AstraZeneca share price.
Share price valuation
Now, back to that share price valuation. Those who are bearish on the firm might point to a P/E multiple of 100. And yes, that might be enough to take your breath away. But it’s a trailing P/E based on 2019 results. And that year saw a drop in earnings per share (EPS) of around 40%, following on from an even bigger 60% slump the previous year.
That’s mostly due to the cost of the firm’s reinvestment in drugs R&D, and the length of time it takes for actual saleable products to start emerging from the pipeline. Analysts are predicting a big increase in EPS in 2020, which would send the P/E tumbling. I think we’re finally at the start of a new long-term growth phase for AstraZeneca’s earnings. If that’s true, that troublesome P/E ratio could be down close to the FTSE 100 average in two or three years. And I think that would be way too cheap.
AstraZeneca share price
So if you’re looking at the share price and wondering whether to buy, I have two main pieces of advice. One, forget the coronavirus, because that’s not what the firm is about. And two, think about where AstraZeneca will be in five and 10 years’ time, not this year or next year.