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AS­TRAZENECA  BUY (AZN) £63.00 Stop loss: £47.00 Mar­ket cap: £80bn

Phar­ma­ceu­ti­cal gi­ant

As­traZeneca (AZN) is look­ing more at­trac­tive as it en­joys mo­men­tum with drug de­vel­op­ments and stream­lines its busi­ness.

Its share price is start­ing to pick up af­ter be­ing slug­gish for a long time. An­a­lysts have also started to up­grade earn­ings fore­casts which is im­por­tant for sus­tain­ing up­wards mo­men­tum in the stock.

Drug com­pa­nies had been out of favour for sev­eral years amid con­cerns over po­lit­i­cal in­ter­fer­ence on pric­ing and block­buster prod­ucts los­ing patent pro­tec­tion.

Sen­ti­ment is now im­prov­ing, helped by suc­cess with ap­prov­ing new drugs and the Con­gres­sional grid­lock fol­low­ing the US midterm elec­tions re­duc­ing the risk of dis­rup­tive, govern­ment-dic­tated price changes in that part of the world.

As­traZeneca is big in on­col­ogy which is the study of can­cer. The com­pany achieved a ma­jor break­through a few months ago with one of the most im­por­tant drugs in its can­cer port­fo­lio, Imfinzi, which has shown to im­prove pa­tient sur­vival rates.

STRENGTH IN ON­COL­OGY

In Oc­to­ber As­traZeneca re­ported pos­i­tive progress with tri­als in­volv­ing its Lyn­parza ovar­ian can­cer drug. This week the US Food and Drug Ad­min­is­tra­tion granted Lyn­parza pri­or­ity re­view sta­tus – some­thing given to medicines that, if ap­proved, would of­fer a sig­nif­i­cant im­prove­ment in the treat­ment, di­ag­no­sis, or pre­ven­tion of se­ri­ous con­di­tions.

In­vestors should ap­pre­ci­ate that pharma com­pa­nies are high risk, even ones worth bil­lions of pounds. There is no guar­an­tee that drug de­vel­op­ments will be suc­cess­ful and the sec­tor is at risk of dis­rup­tion from reg­u­la­tory and po­lit­i­cal in­ter­fer­ence.

As­traZeneca has set it­self $40bn sales tar­get in 2023. It stems back to when man­age­ment fought off a takeover bid from Pfizer in 2014 and needed to be seen as hav­ing strong am­bi­tions.

Big sales tar­gets are al­ways a risk as fail­ure to hit them can be neg­a­tive for a com­pany’s share price. In­vest­ment bank Credit Suisse fore­casts As­traZeneca will achieve $31bn of sales in 2023, adding the full tar­get would only be hit if its en­tire drug pipe­line is suc­cess­ful.

While we’re five years away from need­ing to mea­sure this tar­get, it is some­thing for in­vestors to watch closely.

The near-term fo­cus is on con­tin­ued suc­cess with its can­cer drugs, as well as prod­uct news linked to treat­ments for anaemia, lu­pus and di­a­betes.

Fi­nally, don’t be shocked when As­traZeneca re­ports its 2018 fi­nan­cial re­sults as pre­tax profit is fore­cast to fall by 14.8% to $5.84bn. The mar­ket is fully aware of the trend with earn­ings and the fo­cus is on the fu­ture where profit is fore­cast to re­cover to $5.96bn in 2019 and then hit $6.37bn in 2020.

The div­i­dend is fore­cast to stay flat at $2.80 (216.66p) for the fore­see­able fu­ture, im­ply­ing a de­cent 3.4% yield.

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