With FTSE 100 biopharmaceutical company AstraZeneca (LSE: AZN), I think the Research and Development (R&D) pipeline is a key factor to consider. I’d invest in the firm’s shares because of the potential for earnings to grow from the sale of new medicines.
Growth powered by new medicines
And today’s full-year results report contains good news. More than half the firm’s total revenue in 2020 came from “fast-growing” new medicines. And because they’re new, the products have names I’ve never heard of, such as Tagrisso, Imfinzi, Lynparza and several others.
But AstraZeneca reckons the new medicines are “pillars” in the therapy areas of Oncology, Cardiovascular (CV), Renal & Metabolism (CVRM), and Respiratory & Immunology. And looking ahead, the directors describe the new clutch of products as “important platforms for future growth.”
The R&D pipeline has been successful in churning out big-selling medicines. And that’s turned the company around from the dark days of just a few years ago. Back then, earnings were falling. Previous top-sellers had been timing-out of patent protection, leaving the company’s markets wide open to cheaper competition.
How things have changed. Today’s figures, adjusted for constant currency exchange rates, show that revenue increased by 10% year-on-year in 2020. And core (adjusted) earnings per share rose by 18%. Chief executive Pascal Soriot described the outcome as a “significant step forward” for AstraZeneca.
He thinks the company’s “industry-leading” pipeline and “consistent execution” will deliver more progress and “compelling results” in the years ahead. Meanwhile, City analysts have pencilled in a further advance in earnings for 2021 close to 26%.
A fair valuation
The potential growth in earnings looks attractive, but AstraZeneca has been cautious with the shareholder dividend. The directors confirmed their commitment to a progressive dividend policy but kept the total payment flat at $2.80 per share.
With the stock near 7,397p, the forward-looking earnings multiple is around 20 for 2021. And the anticipated dividend yield is close to 2.8%. I think that valuation looks fair compared to AstraZeneca’s potential to grow its earnings in the years ahead.
Indeed, AstraZeneca has re-discovered its growth mojo. In the report, Soriot points to the “consistent achievements” in the pipeline and the “accelerating” performance of the business. He thinks those factors demonstrate strong progress, as does the performance the firm is achieving with the rollout of its Covid-19 vaccine.
The company’s Regulatory News Service (RNS) feed has been vibrant with multiple notifications of progress on several fronts. Although the past isn’t a reliable guide to the future, things are going well for the firm right now.
I’m tempted to buy some of AstraZeneca’s shares now for my long-term portfolio. Perhaps the biggest risk is that the R&D pipeline could stall in the future and forward earnings growth could tail off. If that happens, we could see the valuation de-rate and I could lose money.
Nevertheless, I like the look of the stock today and I think the risks are balanced by the potential.