AstraZeneca (AZN) should be viewed as a long-term defensive asset for shareholders and investors interested in the pharmaceutical industry. AstraZeneca is facing a number of headwinds, including a struggling European market, strong competition in a number of segments, and recent litigation issues in conjunction with poor publicity. At the same time, AstraZeneca does have a strong position in the pharmaceutical sector, along with favorable partnerships that can lead to prominence in lucrative markets. Below, I will explain why the company's respectable dividend yield, strong financials, and high growth prospects make this a great stock to buy now and hold until 2015 and beyond.
Sales growth for AstraZeneca is down by over 11 percent from the previous year. Sales growth has also decreased by over 15 percent from the previous quarter. The current price has increased to over seven times earnings from over 6.5 times earnings in the trailing 12 months. AstraZeneca's beta is around 0.5 while the PEG ratio is around 3.5. Return on equity, operating margin and net margin all increased at the end of 2011 but currently all are marginally less than their estimates in the third quarter of 2011. The current ratio and quick ratio have both decreased by around ten percent since the third quarter of 2011. AstraZeneca's price to sales ratio is around 1.5. The current dividend yield is around 6.4 percent, this equates to an annual rate of $2.80.
AstraZeneca's growth rate for the last five years exceeded the industry average but its growth rate for the next five years is less than half the industry average. Its price to earnings ratio is around half the industry average while its dividend yield is significantly higher than the industry average. Its net profit margin for the trailing 12 months is around 50 percent greater than the industry average, while its return on equity for the trailing 12 months is over 50 percent greater than the industry average. Its growth rates for this year and next year are significantly less than the industry average. In light of the favorable dividend, strong margins and growth expectations, the balance sheet suggests that this is a dependable defensive asset to have from the pharmaceutical sector.
There are a number of headwinds that AstraZeneca is currently facing. Recently, AstraZeneca is facing an antitrust fine exceeding $65 million from the European Union. AstraZeneca is charged with predatory competition and artificially creating high drug prices in the market for end-users. This has created bad publicity and extraneous expenses for the pharmaceutical manufacturer. It also detracts management's attention and operational capabilities from developing new drugs and improving its market share in this region.
Struggling European markets are forcing many large pharmaceuticals to make cuts to the least productive divisions of their operations. AstraZeneca has had problems with maintaining its neuroscience division as well. AstraZeneca will be making cuts to its neuroscience facility, expecting to eliminate over 1,000 employees. This is a minimally profitable segment of pharmaceuticals that many competitors have already efficiently managed. Cannibalistic demand and pricing dynamics in the European market have adversely affected AstraZeneca; Greece's exit from the Euro could exasperate an already tumultuous market. Regulatory and transportation issues are expected to manifest if this happens. Many of these problems are compounded with the departure of the CEO, AstraZeneca is currently faced with transitioning into a new era of leadership and figuring out where its strengths and focus will be in the future. All of these reasons have led to dips in AstraZeneca's stock price as of late.
Aside from these headwinds, there are a number of promising ventures on AstraZeneca's docket as well. AstraZeneca has a strong position as a leader in the respiratory sector. It's working on two ventures to further strengthen its position in this industry. AstraZeneca is currently working with Rigel Pharmaceuticals (RIGL) to develop a treatment for chronic asthma. AstraZeneca will test and develop the drug while Rigel makes the drug and collects an upfront payment and royalties, post- launch. The treatment will focus on reducing inflammation in the airway and improving lung function as well. Human clinical trials have yet to be conducted. AstraZeneca is also working with Amgen (AMGN) on researching antibodies that can be effective in treating asthma conditions. Making headway in both of these ventures would give AstraZeneca a stronghold on the asthma treatment market.
AstraZeneca is also looking to develop a niche in the cancers market while entering the highly competitive diabetes market as well. AstraZeneca is developing a drug that can be combined with chemotherapy and radiotherapy in order to treat stomach and esophageal cancers. There are no competitors treating these types of cancers, success in developing this drug and passing trials would be a breakthrough in the industry. This can help add substantial value to AstraZeneca's stock price.
AstraZeneca has also partnered with Bristol-Myers Squibb (BMY) to develop a new drug for diabetes type 2 treatments. Bristol-Myer's recent purchase of Amylin (AMLN) for $5.8 billion will strengthen this partnership. Bristol-Myers and AstraZeneca have entered into agreements to both develop and commercialize Amylin's products. The new drug has had positive results and can help add value to both pharmaceuticals' current stock price. The new drug, dapagliflozin, will be in direct competition with treatments like Januvia, from Merck (MRK) and Lantus insulin treatments from Sanofi (SNY). Eli Lilly (LLY) and Johnson & Johnson (JNJ) also have treatments for diabetes called linagliptin and canagliflozin, respectively. The diabetes market is one of the largest in the industry and is growing increasingly competitive with time and successful trials by various large cap pharmaceuticals. Each drug has strengths and weaknesses so there is no clear leader in the industry as of yet.
AstraZeneca has also recently revamped and amended its long-lasting agreement with Merck. AstraZeneca will have the option to repurchase Merck's interests in Prilosec and Nexium in the spring of 2014 or 2017. The new agreement mostly favors Merck but does provide some long-term projections for AstraZeneca.
Considering the potential developments in the respiratory, stomach cancer and diabetes markets, I recommend investors buy AstraZeneca now and hold as a long-term defensive asset as it transitions into a new era of operations under the guidance of the new Chairman and future CEO.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.