AstraZeneca: Could Recover In 2017

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About: AstraZeneca Group plc (AZN)
by: Cash-Centered Creep
Summary

AstraZeneca has lost patent protection on money-making products in recent years.

Their pipeline gives good grounds for optimism.

Investors should seriously consider this one for healthcare exposure.

The British-Swedish pharmaceutical firm AstraZeneca plc (NYSE:AZN) has had a rough time in recent years. The 'patent cliff' that many pharmaceutical companies fear was particularly steep for AstraZeneca in 2012, as they had already lost the patent for the breast cancer drug, Arimidex, and were about to lose the patent for the antipsychotic medicine Seroquel.

In addition to Arimidex and Seroquel, AstraZeneca also lost patents for the proton pump inhibitor Nexium and the cholesterol medicine Crestor. The impact that these patent losses, in tandem with the inevitable generic competitors, had on revenue and net income can be gleaned from the table below.

Year Revenue ($) Net Income ($)
2011 33.59 billion 9.92 billion
2012 27.97 billion 6.24 billion
2013 25.81 billion 2.56 billion
2014 26.55 billion 1.23 billion
2015 24.71 billion 2.83 billion

To their credit, AstraZeneca are making efforts to turn things around and the results are showing. The lung cancer drug Tagrisso has seen a rapid sequential rise of 45%, making $133 million in the third quarter of 2016, and sales overall have risen 33% quarter on quarter. Tagrisso's success looks set to continue. In addition, the cardiovascular drug Brilinta is also proving profitable, having made $619 million last year and now expecting to make sales of $2 billion a year.

Going forward, the Mystic lung cancer trial will post results in the first half of 2017, and results from head and neck cancer trials - which were temporarily suspended in October - are expected in the second half of the year. There is hope that even partial success from these trials will yield $7 billion a year in revenue - though the word 'hope' must be noted in such speculation.

Many value investors may look at the above factors and AstraZeneca's current price-to-earnings ratio of 28.05 and dismiss it out of hand. However, the firm does have a forward P/E ratio of 14.85, is trading in the high-$20 range and 20% lower than its 52-week high. It offers a 3.29% dividend yield, which is sustainable given the 42.5% payout ratio. Furthermore, AstraZeneca has $6.85 billion worth of cash on hand, total assets of $60.12 billion and total debt of $15.05 billion.

AstraZeneca, then, is in a sustainable financial position to continue rewarding shareholders with dividends going forward. The continuing success of Tagrisso and Brilinta, combined with the optimism surrounding the 2017 trials, all point to AstraZeneca being an attractive healthcare play that merits serious consideration.

DISCLAIMER: I am not a financial professional and accept no responsibility for any investment decisions a reader makes. This article is presented for information purposes only. Furthermore, the figures cited are the product of the author's own research and may differ from those of other analysts. Always do your own due diligence when researching prospective investments.

Disclosure: I/we 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.