AstraZeneca plc goes 'nuclear' on R&D spend to double sales

Shrinking pharmaceutical giant AstraZeneca's (LSE: AZN) chief executive Pascal Soriot is on record as saying he had no choice but to overhaul the company when he took over in October 2012 because "the company was imploding" due to the number of patents expiring around the same time.

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The truth of that statement is plain to see -- revenue and earnings fell just about every year since 2012 and look set to continue falling during 2016 and 2017. Between 2011 and 2017, City analysts expect around $17bn to have been lost from annual sales.

Ambitious turnaround plan

However, Mr Soriot is cutting deep into AstraZeneca's culture, its bloated workforce, and the firm's economics in the belief that such radical surgery will transform the company into a speciality drugs supplier focused on treatments for cancer, respiratory and cardiovascular diseases, and similar areas that have potential to drive future sales. That's in contrast to the mass-market approach that fuelled AstraZeneca's previous ascendancy, but which is now losing its wheels.

Thousands of redundancies over the last three years precede more to come -- painful but necessary, and an indication of how the firm is bearing down on selling, general and administrative costs. Meanwhile, research and development (R&D) spend runs at around 24% of sales, which is a figure that exceeds the industry average. Spending on R&D can be a good forward indicator for investors. A sustained programme of R&D investment often creates real value that could pay dividends down the line.

Targeting talent

The bold centrepiece of Mr Pascal's master plan for AstraZeneca is the new $500m corporate headquarters and research hub the firm is building near Cambridge. It aims to attract top brains from Britain's best university labs to enable ground-up research to drive AstraZeneca's forward growth. That kind of initiative seems to be what many have been crying out for -- it's just what Britain and AstraZeneca need to help commercialise the country's raw talent. This move could prove to be a masterstroke that powers its comeback.

The firm has already shifted around a quarter of its UK workforce into rented accommodation around Cambridge to work closely with academic researchers. Mr Soriot thinks his game plan has great potential and said two years ago that he expected sales to rise to $45bn by 2023. That would be a more-than-90% increase over the $23.6bn the firm achieved during 2015 and would work wonders for the company's share price.

AstraZeneca has gone 'nuclear' on R&D which, along with a lively bolt-on acquisition programme, seems set to rejuvenate the firm's product pipeline. AstraZeneca oozes potential right now, and investors can hop aboard for a forward price-to-earnings rating of just over 14 at today's 3,876p share price. That strikes me as a reasonable price, and there's a 5% forward dividend yield to keep us warm while we wait.

AstraZeneca looks like a strong defensive opportunity to capture medium-term growth, but I also want to alert you to these five firms, which make good candidates for further research and remain strong and well placed in their industries.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.