AstraZeneca is Overvalued

While Astra continues to impress equity analysts with strong clinical data in its late-stage pipeline that reinforces our wide moat rating, we still view the stock as overvalued 

Damien Conover, CFA 27 April, 2015 | 3:11PM
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AstraZeneca (AZN) reported first-quarter results slightly ahead of both our expectations and consensus, but one-time sales helped boost the outperformance, and we don’t expect any changes to our £41.60 fair value estimate. While Astra continues to impress us with strong clinical data in its late-stage pipeline that reinforces our wide moat rating, we still view the stock as overvalued and believe the investment community is overlooking the major patent losses facing the company over the next two years. Further, even though the pipeline is making significant strides, we doubt the company will achieve its 2017 sales guidance of $25.7 billion, 9% above our projection.

In the quarter, results were buoyed by one-time gains from product sales, as new product launches helped offset increasing generic competition. We expect that the top-line operational growth in the quarter of 1% year over year will steadily decline as generic competition intensifies for gastrointestinal drug Nexium, 14% of 2014 sales, through the remainder of the year. Further, generic competition for cholesterol drug Crestor, 21% of 2014 sales, will further hurt growth in 2016.

Partly masking the increased generic competition in the quarter, Astra recorded several one-time gains, including the sale of several noncore drugs, which we believe is a good strategy, but we feel these sales should be excluded from core results based on the nonrecurring status.

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