A casual observer might conclude that AstraZeneca’s (LSE: AZN) (NYSE: AZN.US) full-year results for 2014 could disappoint investors. The firm reports currency-adjusted core operating profit down 13% on the year before.
Something’s keeping us excited
As I wrote this, the shares were down around 5%, which is nothing much. Over the last couple of years, AstraZeneca is well up.
In July, I wondered whether the market overvalued the company after the shares jumped following Pfizer‘s bid approach. Before Pfizer came along, AstraZeneca traded at around 3700p. At the height of the bid frenzy, the shares hit 4800p before slipping back to 4340p at the time of my last article. Today, shares change hands around 4350p — the longer-term trend still seems to be up despite current full-year-result jitters.
Behind the headline figures, we see that AstraZeneca’s core revenue is up 2% and its core gross profit up 1% for the year at constant currency rates. The core results strip out intangible amortisation and impairments, and one-off expenditures to provide a clearer picture of the firm’s ongoing financial performance.
The big change for the year that drives core operating profit down is AstraZeneca’s increased spend on research and development, up to 18.9% of sales from 16.6% the year before, and its spend on selling, general and administration costs, up to 39.1% of sales from 34.5% of sales the year before.
That’s a good sign. AstraZeneca is squeezing all it can from its development pipeline by ploughing more money in to nurture its creations. The firm is also putting resources into selling and marketing its wares, which is necessary to gain market traction. These moves strike me as the actions needed to drive future earnings’ growth.
Is explosive growth around the corner?
Naturally, AstraZeneca’s chief executive sounds upbeat — we can usually rely on that with chief executives! He reckons the firm posted six product approvals as it accelerated its pipeline across all main therapy areas.
Crucially, AstraZeneca scored four quarters of revenue growth during 2014. That’s good, because as long as we see top-line growth profits can catch up later. The company is doing well in emerging markets, and China is now its second largest national market, which bodes well for growth when we consider the sheer size of China’s population. If growth goes exponential there, investors may not need to worry about much else to see a decent return. However, AstraZeneca still tackles the problem of profit contraction thanks to patents expiring on its established drugs. A focus on productivity helps the company cope with that.
Organic growth isn’t the only growth driver. The latest acquisition deal involves rights to Actavis‘ branded respiratory portfolio in the US and Canada, which the firm sees as a good fit with previous acquisitions, thus bringing long-term value to one of its key growth platforms.
What next?
On the surface AstraZeneca doesn’t look cheap. The forward P/E rating is running in excess of 17 and City analysts still shy from predicting any growth in earnings for the next couple of years.
However, the longer-term attraction resides in the potential of the R&D pipeline to drive future earnings’ growth — that’s a message that the market won’t stop shouting! AstraZeneca is a big player in its sector and that kind of economic franchise can contribute to a decent long-term investment.
