Why I see more upside ahead for AstraZeneca plc

Year-to-date, shares in pharmaceutical giant AstraZeneca(LSE: AZN) have been on a roll. Since the beginning of the year, the stock has added 17% excluding dividends.

After this performance, some analysts are starting to doubt whether the company can continue on its current trajectory. I believe that it can as new products are approved, and after years of stagnation, revenue growth begins to return.

Improving outlook

Astra has staked its future on the development of immunotherapy treatments, which target cancer cells. So far, the group has had mixed success. Earlier in the year, the shares crashed when data from the eagerly awaited Mystic trial showed a combination medicine was no better than chemotherapy at keeping late-stage lung cancer at bay. However, two weeks after this disappointment, its Tagrisso drug was found to reduce the risk of progression or death by more than half, in patients with a particular mutation of lung cancer.

Meanwhile, a treatment named Imfinzi improved progression-free survival by more than 11 months compared with the current standard therapy for sufferers of stage three cancer.

These are not small breakthroughs, they are huge steps forward for the company and patients. They also show that the firm is heading in the right direction. Two steps ahead after one step back is, in my opinion, highly impressive. Combined, management estimates these treatments can produce $4bn of sales.

Growth targets

In 2014, Astra's management promised investors that the company would hit $40bn in annual revenues by 2023. After several years of contraction, sales expansion was expected to start this year and continue to 2023, but so far, this growth has failed to materialise.

Its last set of results in July showed sales down 10%, at constant currencies, in the first half of this year. City analysts are expecting earnings per share to decline by 12% for the full-year, which is hardly the most encouraging forecast.

Nonetheless, analysts believe that next year, the fruits of Astra's research work should begin to pay off. Earnings growth of just 1% is expected, hardly blowout growth but enough to stem the bleeding. This will be the only positive performance in seven years, and it should mark a turning point.

Astra's sales have been under pressure in recent years from multiple factors including pricing pressures and the expiry of exclusive manufacturing rights. While these factors are still proving to be headwinds, rising revenues from other sources are helping blunt the impact. I believe that this means, over the next few years, Astra should be able to return to growth.

Time to buy?

Even though shares in Astra might look expensive today at a forward P/E of 18.1, they're trading in line with the pharma sector median multiple (18.1). The shares support a dividend yield of 4%, which is almost double the sector median of 2%.

This valuation, as well as the company's outlook, leads me to conclude that as Astra's growth picks up, the shares could head a lot higher as the market re-rates the business. With a dividend yield of 4%, investors are being paid to wait for this correction.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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