AstraZeneca plc's shock plunge is a buying opportunity for the brave
AstraZeneca(LSE: AZN) chief executive Pascal Soriot was always pursuing a high-risk, high-growth strategy, everybody knew that. Betting the farm on producing a string of lucrative new drug treatments was going to rattle nerves at some point.
Yesterday was that point, with Astra's share price plunging 15% after the failure of its new Mystic drug, designed as a first-line alternative to chemotherapy in stage IV lung cancer. I have seen this described as the most anticipated pharmaceutical industry clinical experiment this year, and it has ended badly. We warned you about Soriot's high stakes game enough times and I said it was a strategy well worth pursuing. What choice did he have?
When Soriot was appointed CEO in October 2012 he inherited a seriously troubled company. The drug pipeline was depleting, key brands had lost exclusivity, cash-strapped governments were cutting health spending, and both revenues and profits were down sharply. At the time, investors could buy it for less than eight times earnings, on a yield of more than 6%.
Crestor of a wave
AstraZeneca looks in better shape today, even after yesterday's crash. Its share price has climbed from 2,971p to 4,325p since his appointment, a rise of more than 45%. It is currently valued at 13.12 time earnings. This is still a great income play, yielding 5.09%. However, there are clearly underlying problems.
Loss of exclusivity of Crestor and Seroquel XR in the US is hurting, and was largely responsible for the 11% fall in product sales to $9.78bn. This was in line with expectations and is of course why Soriot was so keen to build up a new generation of treatments to replenish the old guard.
AstraZeneca is hardly a one-trick pony either. As Soriot pointed out yesterday, it continues to deliver "transformative science across the pipeline, particularly in Oncology". There are successes: lung cancer pill Tagrisso has significantly improved progression-free survival.
The company also confirmed a new partnership with Merck & Co to develop its Lynparza treatment for multiple cancer types and selumetinib for multiple indications including thyroid cancer, which Soriot called a "truly exciting step". Also, while sales and revenues may have fallen, reported operating profit surged 37% to $1.84bn, boosted by the weaker pound, or 22% at constant currencies.
Yet AstraZeneca suffered a major blow and there is plenty of uncertainty swirling around the company as a result. Some analysts have suggested that this could put the dividend at risk. Others say this makes the company ripe for a takeover. It was strong enough to fight off Pfizer's $106bn bid in 2014, the next pursuer could find its target in a weakened state. Reports and rumours could quickly drive the share price back upwards.
Finally, there are reports that Soriot may be set to leave the company for Israeli firm Teva. Perhaps this wouldn't be such a disaster as he has given the company a fresh direction and a new face could take it on from here. AstraZeneca may look a little risky for a company with a market capitalisation of £54.74. Then again, it has done for the last five years. It is a buy, if a brave one.
Harvey Jones has no position in any shares 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.