Investment Focus: AstraZeneca

Although AstraZeneca's pipeline ranks toward the bottom of its peer group, we think the company is developing several key products that hold blockbuster potential

Damien Conover, CFA 12 May, 2015 | 10:13AM
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AstraZeneca (AZN) has built its leading presence in the pharma and biotech industry on patent-protected drugs and a developing pipeline that add up to a wide moat. However, the massive patent losses on gastrointestinal drug Nexium and cholesterol reducer Crestor in 2015 and 2016, respectively, will weigh on the company's growth prospects.

Although AstraZeneca's pipeline ranks toward the bottom of its peer group, we think the company is developing several key products that hold blockbuster potential. In particular, Forxiga holds a first-mover advantage as a new type of diabetes therapy in Europe. Also, the company's recently launched cardiovascular drug, Brilinta, could develop into a multibillion-dollar product if doctors get comfortable using the drug with low-dose aspirin.

Further, the company is developing several late-stage cancer compounds where approval requirements tend to be lower and pricing power remains strong. Within the cancer pipeline, we believe Astra's PD-L1 drug for lung cancer will be a major blockbuster.

In addition to internal development, AstraZeneca has aggressively pursued acquisitions, with mixed results. The $15.6 billion price paid for MedImmune in 2007 appears to have been too high. Several of MedImmune's early-stage products need to achieve blockbuster status to warrant the acquisition price. Although the company creates growth opportunities through acquisitions, its variable record leaves us less confident in management's adherence to price discipline.

However, the recent partnership with Amgen to develop immunology drugs and the acquisition of full rights to several diabetes drugs from Bristol look like steps in the right direction as far as a solid external development strategy.

AstraZeneca is significantly cutting costs to mitigate lost profits from products losing patent protection. Initially announced in 2007 and subsequently expanded several times, AstraZeneca's cost-saving initiatives should save the company more than $6 billion annually.

Further efficiency enhancements are likely to add to the cost savings over the long run. The cost savings should help the company navigate the patent losses on several high-margin drugs.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
AstraZeneca PLC12,510.00 GBX0.95Rating

About Author

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

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