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Should I Buy AstraZeneca?

LONDON -- It's time to go shopping for shares again, but where to start? Energetic high-yielder SSE? Household favorite Unilever? Or cut-price Tesco?

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.L  ) (NYSE: AZN  ) ?

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

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 pounds 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 pounds, excluding currency movements. Of this, 15% was down to loss of exclusivity on key brands, which opened to competition from cheaper generic alternatives.

U.S. 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 U.S. in 2016. Astrazeneca is fighting back, by expanding its diabetes alliance with Bristol-Myers Squibb.

Austerity in Europe didn't help, as government slashed the price they paid for drugs. Nor did U.S. health care reform.

Unlike many U.K.-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 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 pounds. 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 program.

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

One stock on Buffett's menu
If AstraZeneca doesn't get your pulse racing, there are plenty of other blockbusters out there, including the one U.K. share that Warren Buffett loves.

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Harvey Jones doesn't own shares in any company mentioned in this article. The Motley Fool owns shares of Tesco. The Motley Fool has a disclosure policy.
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  • Report this Comment On October 13, 2012, at 2:26 AM, DrGoldin wrote:

    Can't quite agree with this statement: "This has been the pattern over the last three or four years, during which time the share price has gone nowhere, very slowly."

    Check the share price on March 9, 2009. It closed at 30.24. Today's close was 46.13. That's a 52.5% gain in about two and a half years.

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