Amid all the Brexit doom and gloom, shareholders of AstraZeneca (LSE: AZN) were handed a big win recently in the form of promising new trial results. Indeed, the stock continues to make new all-time highs even as the risk of a no-deal scenario rises. In the past I have been bearish on this company. Does this news change my fundamental view on Astra? Let’s dig into the data.
Making new highs
Shares of AstraZeneca hit new all-time highs of 7,550p on the back of positive phase 3 clinical trial data which demonstrated that diabetes drug Farxiga helped patients who had suffered heart failure. The report, delivered on Sunday, showed that Farxiga reduced mortality rates by 26% in patients with reduced ejection fraction heart failure.
This is big news for the pharmaceutical giant, as Farxiga is already approved for the treatment of diabetes in much of the developed world. Moreover, as diabetes increases the risk of cardiovascular diseases, doctors and hospitals should be excited at the prospect of being able to kill two birds with one stone. In other Farxiga-related news, the drug was recently granted Fast Track status by the US Food and Drug Administration for the treatment of chronic kidney disease.
Farxiga is currently forecast to net $2.5bn (£2.07bn) in sales in 2024, but that estimate now looks a bit conservative. Analysts believe that this new indication could add as much as $1bn (£0.83bn) to Astra’s valuation. That said, the company is set to lose exclusivity for the compound in 2025, which limits the potential upside for Astra. Nonetheless, it is a major (and unexpected) announcement for a company which is increasingly focusing on cancer treatments. The best discoveries are almost always random.
With all that being said, it’s important to point out that Astra’s competitors in the space haven’t been sitting on their hands either. Johnson & Johnson’s Invokana and Eli Lilly’s Jardiance (both diabetes medications with similar pharmaceutical mechanisms of action) have both also demonstrated benefits to patients with cardiovascular problems. This fact, coupled with the upcoming patent cliff for Farxiga, makes it less likely that Astra’s drug will be a total game-changer.
As I have written previously, Astra’s valuation seems very high to me. It currently trades at a forward P/E ratio of 25 and has a dividend yield of just under 3%. I believe that this is a stock priced for perfection, and this has historically not been a good situation to be in for investors. The data coming in from the Farxiga study has definitely lifted the ceiling on where this stock could go, but the market looks like it has already priced that potential in. For this reason I would still stay away from the stock.
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Stepan Lavrouk owns no shares mentioned. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019