Ten years ago, buying AstraZeneca (LSE: AZN) shares was a difficult decision for many investors. Back then, the pharmaceutical company’s earnings were weak and growth seemed elusive.
All the talk was of a ‘patent cliff’. And that meant lots of the firm’s high-earning brands were timing-out of patent protection. And generic competition flooded the market causing AstraZeneca’s profits to plunge.
Earnings did a handbrake turn
For years, the company posted decreases in earnings instead of rises. Even as late as 2018 they plunged by almost 40%. But that marked the end of the company’s long period of purgatory. And the following year saw rocketing earnings up more than 70%. Happily, there’s been a rise every year since with City analysts predicting more ahead.
But despite all AstraZeneca’s sufferings on the earnings front, the share price has trended up since the beginning of 2013. And savvy investors saw it coming, such as Neil Woodford (yes, that Neil Woodford but when he was still great).Â
Key to seeing the potential in AstraZeneca was to look below the surface of weak earnings. And specifically, to appreciate the strength and value of the company’s research and development (R&D) pipeline. I remember lots of analysts comparing AstraZeneca to GlaxoSmithKline (now GSK) back then. And AstraZeneca came out on top.
However, it’s hard to see into the ‘black box’ of a company’s R&D pipeline. And shareholders had to keep the faith. But those that did have been well rewarded, so far. The pipeline started spewing out new medicines and treatments and most sold in the market. Earnings received the long-awaited boost they needed. And the business has been flying ever since. Indeed, there’s been an annual double-digit percentage rise in earnings every year, starting from 2019.
The positive R&D spiral
Looking ahead, analysts expect an almost 200% uplift in the current year and nearly 16% in 2023. And the share price has risen to reflect all the progress. In 2012, I could have bought some of the shares for about 3,010p. But today they change hands for around 10,900p. That’s a gain of almost 265% — not bad for a sleepy FTSE 100 giant.
So, is it too late for me to buy AstraZeneca shares today? I don’t think so. The company is still pumping millions into its R&D activities and that, for me, is a powerful reason to buy some of the shares. July’s half-year results report started with the headline: “Strong revenue performance and R&D success enables further investment in the pipeline and new launches.” So, it looks like a case of success begets success in a kind of positive upward spiral.
However, there can be no certainty that R&D efforts will lead to blockbuster drugs. And it’s easy for any company to miss its earnings estimates because of operational setbacks and challenges.
Nevertheless, I’m tempted to tuck away some AstraZeneca shares now to hold for the long term as part of my diversified stock portfolio. And while I’m waiting for further operational progress to unfold, there’s a rising dividend to collect. It’s yielding around 2.3% for 2023, according to analysts’ predictions. However, I’m kicking myself for not buying around 2016 when the yield was over 5%!