Should I Buy AstraZeneca?

Published in Company Comment on 12 October 2012

Harvey Jones samples AstraZeneca (LSE: AZN).

It's time to go shopping for shares again, but where to start? Energetic high-yielder SSE (LSE: SSE)? Household favourite Unilever (LSE: ULVR)? Or cut-price Tesco (LSE: TSCO)?

There are plenty of great stocks to choose from, and I'm enjoying doing some window shopping. So here's the question I'm asking right now. Should I buy AstraZeneca (LSE: AZN) (NYSE: AZN.US)?

Pharmo woe

I thought pharmaceutical stocks were supposed to be smooth and soothing defensives, but AstraZeneca's performance chart over the last 12 months looks as jagged as the Alps.

By July, the UK's second-largest pharmaceutical company was trading at under £26, before quickly scaling the heights to nearly £31. Now it's fallen again, to around £28.50.

This has been the pattern over the last three or four years, during which time the share price has gone nowhere, very slowly. Should I be in any rush to buy it?

The drugs don't work

AstraZeneca has been suffering from a headache for some time. It keeps banging its head against a looming 'patent cliff', one of the largest in the sector, which will push sales of some of its best-selling drugs over the edge.

It has struggled to find replacements, after suffering a string of setbacks with its pipeline of antidepressants, and medicines for diabetes and ovarian cancer.

Sales fell by £2 billion in 2011, and have remained on the sick list this year as well.

A sequel to Seroquel?

In the second quarter of 2012, sales fell 18% to £6.66 billion, excluding currency movements. Of this, 15% was down to loss of exclusivity on key brands, which opened to competition from cheaper generic alternatives.

US sales fell 29%, largely due to loss of exclusivity for Seroquel IR. Worse will follow, as brands worth more than 40% of sales are set to lose their patent protection by the end of 2014. Crestor, its best-selling high cholesterol treatment drug, loses protection in the US in 2016. Astrazeneca is fighting back, by expanding its diabetes alliance with Bristol-Myers.

Austerity in Europe didn't help, as government slashed the price they paid for drugs. Nor did US healthcare reform.

Unlike many UK-listed blue chips, Astrazeneca couldn't seek solace abroad, as emerging market sales rose just 1%, after being hit by supply-chain problems.

Across 2012, it expects sales to fall "in the range of the low to mid-teens". The headache continues.

On a cliff edge

AstraZeneca has responded to its troubles by slashing more than 7,000 jobs, but this has only caused investors to fret over whether it can replenish its drugs pipeline, if research and development costs are under pressure.

This is a shrinking, retrenching company, that has until recently been buying back its own shares. It isn't the type of thing I usually look to invest in.

6.1 reasons to buy

On the plus side, AstraZeneca does yield a mighty 6.1%, covered 2.6 times. And it's cheap, trading on a forecast price-to-earnings (P/E) ratio of 7.8 times earnings for December 2012.

Then again, it was considered cheap 18 months ago, when the shares traded at £30.30. It needs a new blockbuster product, badly, but finding that is always a notoriously hit-and-miss affair.

AstraZeneca's new chief executive, Pascal Soriot, clearly has his work cut out, although he has won some early praise for suspending the share buyback programme.

For now, that dividend seems safe -- and so it should, because I can't see any other reason to buy AstraZeneca right now.

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> Harvey doesn't own shares in any company mentioned in this article. The Motley Fool owns shares in Tesco.

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Comments

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HousingBear999 12 Oct 2012 , 8:52pm

Neil Woodford must believe in AZN though. It's his biggest holding in his High Income Fund. What does he know?....

ANuvver 13 Oct 2012 , 5:40pm

I think Woodford knows that it's on a very low P/E and has an attractive well-covered yield. I hope for the sake of his liberty he doesn't know much more than that...

His background is in agricultural economics and insurance, so I don't think he's got some unique insight into pharmacology. I would suspect it's more of a value theme play.

A massive blue chip that's down on its luck, but still enormously cash generative. You get paid well to wait and see whether it can reinvent itself through a combination of its own R&D and acquisitions of new developments.

It's possible we're on the cusp of a medical revolution. Big pharmas are much of a muchness, so getting into AZN, which is cheap relative to its peers and under more immediate pressure than most to develop or fade, has attractions as a play on that theme. For me, the main risk is not so much that the labs won't find a groundbreaking cure for teenage rudeness, it's more that the board will be irresponsible with the chequebook.

So faith in management is key, and Woodford certainly does like to get to know management.

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