AstraZeneca Prepares for a Dry Spell

What have you have done for me lately, AstraZeneca (NYSE:AZN)?

The London-based pharmaceutical company may be growing well today, but a weak late-stage pipeline is crimping some enthusiasm for these shares.

For now, though, business is still pretty strong. Sales were up 9% in local currencies to $5.8 billion and reported operating profit rose 45% to 1.7 billion. Cash flow was also strong, as the company has generated about $4.3 billion in free cash flow year to date versus less than $2 billion at this time last year. That cash flow has, in turn, funded ongoing stock repurchases that have thus far totaled over $2 billion in 2005.

Although the forward outlook may seem a bit dour to some, AstraZeneca is seeing good current growth from its major franchise drugs. Nexium was up 18% to about $1.1 billion in sales, while Crestor, Symbicort, Arimidex, and Seroquel all posted 20%-or-better revenue growth in their own right. While there are worries about patent challenges (it looks like Teva (NASDAQ:TEVA) is challenging the Seroquel patent) and still some lingering concerns about the safety of Crestor, the company is doing a good job of managing that which is in its control.

I don't want to seem like I'm harping on the issue, but the state of AstraZeneca's pipeline seems to be the major concern with this company and stock. With past setbacks to candidates like Exanta and Iressa, Cerovive looks to be the only major near-term filing, and given the industry's track record with stroke medications, I wouldn't consider that a given just yet. And while the company has potentially promising candidates in anti-platelet therapy and diabetes, those might not be enough.

AstraZeneca isn't the only company facing near-term pipeline issues, and its position isn't quite as pressing as, say, that of Forest Labs (NYSE:FRX). While this company has managed the ebbs and flows of patent expiries and pipeline candidates in the past, investors shouldn't expect a quick fix. It takes times for new candidates to work through to approval, and in-licensing other compounds can be an expensive proposition, particularly because I sense other large pharmas are on the hunt, as well.

Were this stock to get really cheap - like, say, in the mid-$30's -- I'd be more interested. It's not that I dislike the company, but I'm just not sure that strong near-term performance is going to be able to persistently counterbalance the worries about the pipeline. Still, if you can look at potential holdings in terms of several years, the market may be overestimating the risks here.

Go into our medicine cabinet for more pharmaceutical Foolishness:

• Is Wyeth Your Happy Pill?
• Lilly Steady As She Goes
• Standby Drugs Sustain AstraZeneca

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).