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Questor: on the cusp of a golden age, AstraZeneca shares might look expensive but are a buy
Questor share tip: after a long time on the road to recovery, the drug maker’s strategy is finally starting to pay off financially
AstraZeneca's 160pc share price rise over the past decade hides the challenges it has faced from a loss of patents on blockbuster drugs.
While the shares have outperformed the FTSE 100 index by 100pc in the past decade, its core earnings per share have fallen by 32pc.
A key reason for investors’ optimism during a highly unsuccessful financial period for the business is the strategy it has put in place. Under a refreshed management team, AstraZeneca suspended its share buyback programme, froze dividends and sought to re-energise its product pipeline.
After a long path to recovery, its strategy is finally starting to pay off financially. Recent results have shown improving performance from its core operations, with its latest half-year results delivering a rise in sales of 17pc at constant exchange rates.
Looking ahead, Questor thinks the company is well placed to capitalise on growing global demand for healthcare, catalysed by demographic changes.
Notably, the world’s population is forecast to rise from 7.6 billion in 2018 to 9.8 billion by 2050, with a growing proportion of people expected to reside in cities.
Although urbanisation provides improved access to healthcare, the lifestyle choices it brings lead to an increasing prevalence of “non-communicable diseases” (NCDs) – those not transmissible from one person to another, such as heart disease and cancer.
NCDs are also likely to become more prevalent as global life expectancy increases; it is expected to rise by 4.4 years between now and 2040. As a result, the proportion of the world’s population aged over 60 is forecast to increase from around 11pc in 2015 to more than 20pc by 2050.
Following significant investment over the past decade, AstraZeneca has an improving pipeline in NCD categories such as oncology. Since 2014 it has delivered five oncology medicines that contributed to a 58pc rise in the segment’s sales in the first half of 2019.
AstraZeneca’s transformation has also been geographical, with emerging markets representing its largest region by product sales. It now generates more than a third of its sales from emerging economies such as China, where revenues rose by 35pc in the first half of 2019.
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The firm expects continued high levels of growth in emerging markets. It is also likely to benefit from a tailwind in the North American market, where growth of 5.4pc a year is forecast between 2019 and 2022. In 2018, the US accounted for a third of the company’s sales.
Despite its growth prospects, the company faces a number of risks. They include how Britain will work with the EU regulatory system after Brexit and a continued focus among American policymakers on boosting generic drug use in government programmes. This could lead to pressure on pricing.
Therefore, while AstraZeneca may be less sensitive to the economic cycle than many of its FTSE 100 peers, it could be negatively affected by an evolving healthcare industry.
Questor sees the shares’ valuation as a further risk to their future performance. The stock trades at a price-to-earnings ratio of 25.4, which suggests there may be limited scope for a higher rating over the medium term.
Likewise, its relatively low yield of 2.9pc reflects the rising share price and a recent lack of dividend growth.
AstraZeneca, though, is at the beginning of a period of improving financial performance. Its strategy and market outlook could combine to catalyse its sales and profits after a decade of disappointment.
While investors have not lost faith in its prospects over the past 10 years, its financial resurgence could further stimulate market sentiment and send the share price higher.
Questor says: buy
Ticker: AZN
Share price at close: £73.51
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