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What I think will happen to the AstraZeneca share price

Andy Ross
A stock price graph showing growth over time

Q1 results from AstraZeneca (LSE: AZN) showed just why the share price has been rising. Product sales grew by 14% year-on-year, with new medicines growing by an impressive 83%. This bodes well for the company as it relies on new drugs to outweigh the loss of patents on some of its older ‘blockbuster’ drugs (meaning those medicines with sales of over £1bn a year). The same set of results also showed total revenue was up by 11% and core operating profit up 96%.

The opportunity

For AstraZeneca, the two exciting avenues for growth come from emerging markets and new medicines. Growth in emerging markets has been strong. In Q1, sales in these territories grew by 22%, with China doing particularly well as it rose 28%. Overall, emerging markets account for 37% of product sales and this is on an upward trajectory as Q1 emerging markets sales totalled $2bn.

One of the pharma company’s most exciting new drugs, lung cancer treatment Tagrisso, is doing particularly well in emerging markets, again an example of just how important these countries are, with sales up by a massive 108%. That was far higher than the (admittedly-still-impressive) 55% growth in Europe for the same drug.

New drugs are the lifeblood of any pharma group and are especially so when patents are running out. When it comes to replacing these drugs, AstraZeneca seems to be on the right track. Investment in R&D over recent years looks to be feeding into some potentially massive oncology and respiratory medicines which could become patent-protected blockbusters that will underpin shareholder returns for years.

Reflecting the opportunity, AstraZeneca’s shares have been on the charge, pushing up the P/E to around 23. The group does offer an above inflation yield of a little more than 3%, which has dropped because of the good run for the share price, so I will be looking to take advantage of any dips, although they might be few and far between. H1 2019 results on 25 July will offer more updates on the progress of the drug pipeline and sales in emerging markets and I expect further good news to keep pushing the share price higher.

A broad church

Rival pharma group GlaxoSmithKline (LSE: GSK) is a little less reliant on new drugs as it still has a consumer arm. But under CEO Emma Walmsley, appointed in 2017, it’s focusing heavily on developing new drugs.

The group has been reshuffling its consumer arm significantly over the last three years – the Horlicks brand has been sold, and a deal with Pfizer was announced at the end of 2018 for a joint venture comprising both their consumer health businesses. It is expected that the consumer division will be spun off within a few years, making GSK more focused on developing prescription drugs and vaccines.

Like AstraZeneca, GSK has been investing heavily in oncology. This includes the $5.1bn acquisition of Tesaro and a tie up with Merck that could set Glaxo back €3.7bn. The success of its pipeline will also be critical to its future success.

GlaxoSmithKline has a lot more divisions to manage and this – alongside lower growth – I think explains why its share price is not doing as well as AZN’s. The upside for investors seeking more value is that the shares have a P/E of 13 and a yield of 5%, making it an affordable pick for long-term growth.

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Andy Ross has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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