AstraZeneca is "Undervalued" Say Analysts

Morningstar analysts have upgraded the pharmaceutical company to four stars - rating it as undervalued. Could this be a buying opportunity?

Damien Conover, CFA 8 August, 2013 | 8:45AM
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AstraZeneca (AZN) reported second-quarter results that largely met both our expectations and those of consensus. We don't expect any significant changes to our fair value estimate based on the results. Further, while we believe Astra's wide moat remains intact based on a robust lineup of currently marketed drugs and an emerging pipeline, the company's negative moat trend was highlighted in the quarter with intense generic competition that should not subside for several years.

In the quarter, total sales fell 4% year over year due to patent losses, and we expect this pressure to intensify over the next three years. Patent losses on gastrointestinal drug Nexium and cardiovascular drug Crestor in 2014 and 2016, respectively, will likely create a long-term drag on the company. While new product launches are helping to mitigate the generic headwinds, we don't expect the company to return to growth for several years. On the new product side, we are most enthusiastic about cardiovascular drug Brilinta, which holds blockbuster potential, but has been off to a slow start. Also, we expect diabetes drugs Onglyza and Forxiga to eventually develop into blockbusters.

Turning to the pipeline, Astra is making several acquisitions, helping to offset internal pipeline setbacks. We believe the recent Pearl acquisition will help further entrench Astra's respiratory franchise with the important new class of drug LABA/LAMA, which should help Astra keep up with competitors. The new respiratory addition should also make up for lost growth potential due to the Phase III failure of fostamatinib for rheumatoid arthritis. Overall, we expect Astra will need further acquisitions to deal with its long and steep patent cliff.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
AstraZeneca PLC8,219.00 GBX0.96Rating

About Author

Damien Conover, CFA  is an equity analyst and associate director at Morningstar.

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