AstraZeneca: Don't Sell This Stock

| About: AstraZeneca Group (AZN)

There were many reasons not to like AstraZeneca (NYSE:AZN) last quarter. With poor sales of old treatments and a list patents soon to expire, the company appeared to be in trouble. A few moves, such as axing its risky neuroscience department and replacing its CEO have made it more attractive. Nothing will be able to replace innovation, something that the company is working fast to increase. Not only that, but the company has decreased its cost of revenue in each of the last three quarters, and this trend should continue (with exception of a certain acquisition). But, I think it will be the development of the acquired Link Medicine's Alzheimer treatment that pushes AstraZeneca higher. The Alzheimer treatment market is expected to triple over the next 10 years, and success here will help its bottom line. With an already attractive dividend yield of 3.8%, AstraZeneca's new pipeline drugs should drive these numbers up.

AstraZeneca is focusing heavily on development of new neurological treatments, the same kind that previously had lost a lot of money, leading up to the closing of a specific neurological R&D plant. But the approach this time is significantly different. Working with academics and acquiring other companies are the main drivers of innovation.

With these neurological treatments, there is a large, untapped market. Namely, the two major neurological disorders AstraZeneca is looking to treat are Alzheimer's and Parkinson's. In an attempt to develop these markets, AstraZeneca acquired Link Medicine Corporation for an undisclosed sum of money. Specifically, AstraZeneca is acquiring Link Medicine's drugs that tackle the cause of some neurological disorders, folded proteins. Link Medicine's drugs target these folded proteins, clearing and recycling them from the brain.

This is certainly not a bullet-proof strategy. These drugs are in the experimental stages and could easily fail before being introduced to a specific market. But these drugs have an edge over the treatments that AstraZeneca attempted to create itself: the approach is low cost. It is low cost for AstraZeneca because it doesn't have to deal with the high cost of research, which Link Medicine has already done. Thus, much of the high risk has been taken out of the equation, allowing AstraZeneca to focus on successfully developing and marketing these new drugs.

With its approach to working with academics, AstraZeneca is also assuming a smaller share of risk. It is working with four academic research laboratories to study other root causes of Alzheimer's disease. This model shows a lot of potential and has been increasing undertaken among its competition. With this agreement, AstraZeneca will pay for the research, but will get four different academic laboratories that are highly developed and specialized for this type of research. This eliminates a lot of the burden of R&D, as the company will not have to invest in new facilities, it can just tap into leading researchers with leading facilities. Much lower risk.

All this will increase revenue in addition to alleviating investor concerns. If these drugs succeed, it will signal to investors that the company has turned a corner and management is back on track. It will also decrease some of the risk of owning the stock, as the company is buying established research instead of spending the money itself.

AstraZeneca will face strong competition with neurological disorders as the pharmaceutical industry is spending billions to be the first into these markets.

Regarding Parkinson's disease, AstraZeneca will face competition from Abbott Laboratories (NYSE:ABT) and ACADIA Pharmaceuticals (NASDAQ:ACAD). Both of these companies are further along in the development of their respective Parkinson's treatments. To be sure, each company intends to tackle different aspects of Parkinson's initially. ACADIA's treatment targets psychotic symptoms in Parkinson's patients, a treatment it also expects to apply to Alzheimer's as well. This is good news to investors, as analysts have the stock pegged at a price target of $4.67, which is about triple the current price of the stock. Acadia will need the treatment to come through, it's been operating with a -2000% profit margin for the last three years, and it seems to be leading up to this.

Abbott's Parkinson's treatment targets the mobility of Parkinson's patients using an investigational gel. This treatment has a long way to go before becoming any sort of widely available treatment but it shows promise. Patients using this gel showed a significant decrease in symptoms of poor mobility, slowness, and stiffness. Keep an eye on Abbott to move forward with this treatment, results could be big.

In Alzheimer's treatments, AstraZeneca will face competition from Roche Holding and Eli Lilly (NYSE:LLY).

Specifically, Roche Holdings has purchased the rights to treatments that would attack Alzheimer's in much the same way as AstraZeneca's proposed treatment. Roche Holdings treatment would block the protein that allows fibers the brain to become twisted in the first place. In addition, it has another treatment in the pipeline to block stick substances called Amyloid from entering the brain.

Eli Lilly's treatment aims to clear stick plaque from the brain, much like Roche Holdings' treatment. Eli Lilly has invested a lot of money into Alzheimer's treatments in an effort to find a new big source of revenues, but investors have little confidence that it will work. Eli Lilly's drug is one of the last drugs in Phase III trials, and there is speculation that failure of this drug would cause an exit from the Alzheimer's treatment market. This would be horrible news for Eli Lilly and could set the company back even further.

Finally, AstraZeneca would have to fight the popular Namenda drug, manufactured by Forest Laboratories (NYSE:FRX). Namenda accounts for one-third of the Alzheimer market. With estimates that this market will bring in as much as $14.4 billion by 2020, any successful foray AstraZeneca could make into this would help. The current market is sitting somewhere around $6 billion, so if AstraZeneca can steal a 10% market share away from Forest and others, it will account for $600 million in revenue. This increase, accompanied by substantially less cost than drug development usually amounts to, could start to bring in $200 million in gross profit per quarter, helping AstraZeneca return to the 30-35% profit margin it had this time last year. The possibility is there, and once I hear any word of success in the drug's development, AstraZeneca becomes a certain buy. For now, it's a hold, though an enticing one.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.