AstraZeneca: The Street Is too Pessimistic on This High Dividend Big Pharma Stock

| About: AstraZeneca Group (AZN)

A lot of investors are avoiding big pharmaceutical stocks like AstraZeneca (NYSE:AZN), and this might be just the time to get back into these stocks before they go considerably higher.

At the height of unemployment, abysmal consumer sentiment, a reduction in the insured population and legislative uncertainty all gave investors pause. AstraZeneca was further punished because it entered 2011 facing steepening generic competition.

The good news, however, is these headwinds are already priced into the market, and at 8.5x 2012 earnings expectations - the low end of its historical PE range - AstraZeneca offers plenty of upside. Especially when we consider how many mutual funds and hedge funds are underweight and short the sector.

Investors shouldn't be surprised AstraZeneca saw sales fall 3.4% year-over-year last quarter. After all, we were well aware of the pending shortfall as generics cut into top sellers like cancer drug Armidex, which saw sales halved.

What has caught some analysts off guard is AstraZeneca's ability to grow their emerging markets business. Last quarter, generics reduced AstraZeneca's sales by $550 million - certainly not chump change. But, their emerging markets revenue increased 13%. Sales in China alone were up 28% in 2010, eclipsing $1 billion for the first time. And, those emerging markets offer plenty more growth going forward.

AstraZeneca has operated in China for 20 years and benefited as China's drug market tripled from $10 billion in 2004 to $30 billion in 2009. China's marketplace is expected to expand by an additional 20% annually through 2014. And, estimates call for the market to reach $80 billion in the next few years, making it the third largest market behind the U.S. and Japan. As a result, AstraZeneca's sales have doubled since 2004. And, the size of the sheer size of the market offers significant opportunity. For example, in China and India, there are 92 and 50 million cases of diabetes, respectively - and the number of cases increases every year.

Also underappreciated is AstraZeneca's cash flow. In Q1, cash flow increased to $1.89 billion, up from $1.739 billion year-over-year; despite the revenue drop. This strength fueled $1.2 billion in stock buybacks last quarter. Overall, AstraZeneca's balance sheet provides a lot of flexibility too, with $10.78 billion, or $7.79 per share in cash. Solid cost control has helped drop more to the bottom line. The company has beat street estimates in three of the past four quarters. And, thanks to a less than feared tax settlement, analysts have boosted their 2011 EPS forecast to $7.23 from $6.65 90 days ago.

The company continues to see upside from Crestor, with sales rising 12% to $1.478 billion last quarter. Here in the U.S., sales rose 17% on 9.3% growth in total prescriptions. But, it also has a number of attractive drugs recently launched or in the pipeline.

Last month, the FDA approved the company's first orphan drug, Vandetanib, which treats metastatic medullary thyroid cancer (MTC). This is a small and profitable market, with 1760 cases in the U.S. annually and a monthly list price of $10,454. The company also has upside from its Plavix competitor, Brilinta, which has EU approval and is under FDA consideration with a July 20, 2011 PDUFA date.

The company is partnering with Merck (NYSE:MRK) on a combination cancer drug and inked an agreement with Agendia and the Netherlands Cancer Institute to develop treatments for specific colorectal cancer subtypes. In March, Bristol-Myers (NYSE:BMY) and AstraZeneca announced the FDA has accepted for review an NDA for Dapagliflozin, which treats type 2 diabetes mellitus, with an October PDUFA date. And, the company has also announced a partnership with GlaxoSmithKline (NYSE:GSK) and the University of Manchester to create an inflammation research center. Clearly, collaboration is a key to AstraZeneca's future. Overall, AstraZeneca expects new drugs launching and in its pipeline will contribute 3-5 billion of its annual revenue through 2014.

Of the company's existing drugs, Nexium sales rose 20% in emerging markets despite U.S. sales falling 8%. ONGLYZA sales rose to $35 million from $4 million year-over-year. Symbicort sales were up 8%, led by 14% growth in the U.S. and 40% growth in the rest of world segment. Pulmicort, facing generic headwinds, still saw 1% sales growth thanks to 37% growth in emerging markets. Iressa, which targets non small cell lung cancer, rose 40% to $121 million. And Faslodex, which is used to treat certain forms of breast cancer, saw sales rise 76% to $123 million. Seroquel XL sales were up 33%.

As AstraZeneca moves through this challenging period, its cost cutting, cash flow generation, emerging markets upside and focus on collaborative solutions across biologics, heart disease, cancer and diabetes offers investors considerable upside. Given its current 5% dividend yield, investors will be paid nicely for their patience.

Disclosure: I am long BMY, PFE.

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