Despite a few weak years when AstraZeneca (LSE:AZN) was struggling, its share price has soared by 160% over the past 10 years, easily beating the FTSE 100‘s 45% rise. Here’s why I think the next decade could be equally good.
The 2010s started out poor as the pharmaceuticals giant lost some key drug patents and was hit by generic alternatives. That certainly wasn’t a surprise, and wouldn’t have had such a big impact if the company had been investing sufficiently in its drug development pipeline to produce a stream of new candidates.
But it hadn’t been doing that, and had diversified into all sorts of retail medical-related products (where it didn’t really have any significant competitive advantage).
The turnaround started with the appointment of Pascal Soriot as the firm’s new chief executive in 2012, with the share price starting its climb a year later. Soriot’s turnaround plan included the disposal of the firm’s non-core businesses, and a renewed focus on research and development.
The hoped-for return to earnings growth has taken some time to come about — drug development is not a speedy process. A modest 4% rise is forecast for 2019 (with full year results due on 20 February), and there’s a more impressive 19% predicted for 2020.
The share price recovery has preceded the earnings turnaround, and I do like it when I see investors looking at a company’s long-term prospects rather than short-term gains. But what that means is the valuation has become, if perhaps not overheated, at least a little warm. We’re looking at a P/E for 2019 of 28, which is about twice the FTSE 100’s long-term average, and it’s going to take a few years of earnings growth to justify that. But my confidence is growing, so let’s try some some finger-in-the-air guesswork.
I don’t expect to see 19% earnings growth every year, but what if AstraZeneca could manage to average 10% per year until the next decade? That could see EPS reaching 843p in 2030, three times the expected 2019 figure. If the share price didn’t move, we’d see that P/E multiple drop to only around nine, so I’d expect the bull run to continue, though more modestly, over the decade.
Is such earnings growth feasible? It depends, obviously, on the profitability of the drugs the firm produces, and I’ll look at just a few from the stream of recent approvals and other positive developments.
The FDA in the US has accepted a supplemental New Drug Application and granted Priority Review for Farxiga (dapagliflozin), aimed at heart failure, after phase II trials showed impressive results. It has also approved Lynparza (olaparib) for treating some pancreatic cancers, and Enhertu (trastuzumab deruxtecan) for targeting some breast cancers.
China has approved Lokelma (sodium zirconium cyclosilicate) for treating hyperkalaemia (elevated blood potassium), plus a triple-combination of budesonide/glycopyrronium/formoterol fumarate for COPD, and Lynparza has been approved there for an advanced ovarian cancer.
That’s just scanning the news since December, and you know what those diseases have in common? They mostly (I don’t know about hyperkalaemia) increasingly afflict the affluent, and could prove to be very profitable indeed.
I see AstraZeneca as, in the words of Warren Buffett, a wonderful company at a fair price.
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Alan Oscroft has no position in any of the 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 2020