Two characteristics are indicative of a pharma stock that can meaningfully increase a shareholder's wealth over the long term. First, a prospective stock should have a diversified portfolio of cutting-edge therapies on the market. Second, the stock should have a good amount of potential blockbuster drugs in its pipeline and undergoing clinical trials. These two traits allow for a stock's revenue and earnings capacity to keep growing consistently.
AstraZeneca (AZN 5.38%) is one pharma stock that appears to meet these requirements. But is it a buy? Let's dive into the stock's fundamentals and valuation to try to answer that question.
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Its existing portfolio powered results higher in 2021
When AstraZeneca shared its earnings report last month for fiscal 2021, it reported significantly higher revenue and core earnings per share (EPS). The company recorded $37.4 billion in revenue, or 40.6% higher than the year-ago period. What was behind the company's laudable growth?
AstraZeneca's COVID-19 vaccine Vaxzevria and its anti-COVID Evusheld hauled in a combined $4 billion. Together, these two products accounted for 37.1% of the company's total revenue growth in 2021.
AstraZeneca's aquisition last July of rare disease drugmaker Alexion Pharmaceuticals chipped in another $3.1 billion in revenue for the company. This was mostly derived from the rare disease blockbusters Soliris and Ultomiris. This works out to 28.4% of AstraZeneca's total revenue growth last year.
The company's remaining top-line growth was derived from the oncology, cardiovascular, renal and metabolism, and respiratory/immunology therapy areas. AstraZeneca's combined revenue from these three therapy areas surged 16.3% higher year over year to $27.1 billion in 2021. This growth was led by blockbuster cancer drugs Tagrisso and Imfinzi, the type 2 diabetes and heart failure drug Farxiga, and asthma drug Fasenra.
The company's higher revenue base also led its core EPS higher by 31.6% year over year to $5.29 last year.
A bright future due to a promising drug pipeline
AstraZeneca's growth in 2021 was awe-inspiring for a large-cap pharma stock. But what's even better is that double-digit annual earnings growth looks positioned to continue. Analysts are forecasting that the stock will generate 15.7% annual earnings growth through the next five years.
This is because AstraZeneca has a pipeline of 177 projects for a variety of compounds. As these compounds are commercialized for certain indications, this should continue to drive up the stock's revenue and earnings.
One of the more promising projects in AstraZeneca's pipeline is Ultomiris. The drug is already approved in the U.S. for the rare conditions known as paroxysmal nocturnal hemoglobinuria and atypical hemolytic uremic syndrome. But it could be approved by the U.S. Food and Drug Administration in the second quarter of this year to treat patients with generalized myasthenia gravis -- a rare autoimmune disease. This indication alone could be a blockbuster in its own right, adding $1 billion to AstraZeneca's annual revenue.
The company's financial health should improve
AstraZeneca's growth prospects are encouraging. But can the same be said of its balance sheet?
Due to its acquisition of Alexion, AstraZeneca's debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio more than doubled from 1.43 in 2020 to 3.21 in 2021. But analysts anticipate that a full year of revenue and earnings contributions from Alexion, new product launches, and debt reduction will drastically lower the debt-to-EBITDA ratio back down to 1.55 in 2022.
All things considered, AstraZeneca's $24.4 billion debt load at the end of 2021 appears to be manageable for a company of its size.
A wonderful stock at a fair valuation
AstraZeneca is a fundamentally healthy stock. But does the valuation make it a buy?
Investors can snatch up AstraZeneca's market-beating 2.3% dividend yield at a forward price-to-earnings (P/E) ratio of 13.3. This is only moderately higher than the drug manufacturer industry average of 11.3. And since AstraZeneca's growth outlook is more than double the 7.5% annual earnings growth expected from its industry over the next five years, the valuation today looks fair.
AstraZeneca gives investors a blend of yield, growth, and value, which makes it a compelling buy for income, growth, and value-oriented investors.
