Should I buy AstraZeneca shares on vaccine news?

AstraZeneca shares are up by 80% in five years. Roland Head’s been taking a look at the pharma stock as a possible buy for his portfolio.

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The AstraZeneca (LSE: AZN) share price fell slightly this morning, despite good news on the firm’s Covid-19 vaccine. Trials suggest the vaccine is up to 90% effective and AstraZeneca says it will apply for regulatory approval to start deploying the vaccine.

The vaccine isn’t the only new product in AstraZeneca’s portfolio. Sales of new medicines rose by 34% to nearly $10bn during the third quarter of the year. Should I be buying the shares, or do share price gains mean that a more cautious attitude makes sense?

Vaccine success

AstraZeneca shares spiked to a record high of £87 in July, when the company said phase one and two trials showed a good response to the vaccine. The firm has now released interim results from the large-scale phase-three trial of the AZD1222 Covid-19 vaccine. This has been developed in partnership with scientists at Oxford University.

The phase-three trial results show that the vaccine is 90% effective if it’s given as a half dose followed by a full dose at least one month later. Other dosing regimens were less effective, but the average achieved was 70%.

It seems like a good result to me. The firm is now applying for regulatory approval to start deploying the vaccine. The company has experience of large-scale manufacturing and says the vaccine can be stored in normal fridge temperatures for extended periods. This should make it easier to deploy than the Pfizer vaccine, which needs unusually cold storage.

Shareholders won’t benefit from the Covid-19 vaccine directly, as AstraZeneca has already said it won’t profit from the vaccine during the pandemic.

However, the rapid development of this new product suggests to me AstraZeneca’s all-important R&D division is performing well. This vaccine success also seems to support the group’s strategy of linking with many smaller external partners on new products.

New medicine sales growth

AstraZeneca’s recent third-quarter results confirm that newer products are making an increasing contribution to the group’s sales. Total sales for the first nine months of 2020 rose by 9% to $18,879m. But sales of new medicines climbed 34% to $9,894m. This means new medicines have generated more than half the group’s sales this year.

This result looks like evidence that chief executive Pascal Soriot’s strategy of investing heavily in new products is starting to pay off. Sales were in decline until 2018, but are now growing steadily again.

Investors have backed Soriot’s judgement and AstraZeneca shares have risen by 80% over the last five years. I want to increase my exposure to the healthcare sector, but is it too late to buy?

AstraZeneca shares: my verdict

I should probably have bought AstraZeneca shares when they were trading at around £40 five years ago. But now that the stock is hovering around £82, can it still deliver attractive returns?

As things stand, the shares are trading on about 27 times 2020 forecast earnings. City analysts expect profits to rise by 25% in 2021, which would push the price/earnings ratio down to 22.

At this level, I think a lot of growth is already priced into AstraZeneca stock. I don’t think the shares offer much of a safety margin. Any disappointment could knock the valuation, in my view. If I already owned the shares, I’d probably sit tight. But I think I’ll find better opportunities to buy in the future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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