At 11,016p, the AstraZeneca (LSE: AZN) share price has risen by just over 12% this year. But the ride has been bumpy. Nevertheless, news on 3 October may help to propel the stock higher in the long term.
The chart shows a tight sideways price range over the past year. And that can be a good thing if it allows underlying operational progress in a business to catch up with its valuation.
Earnings growth ahead
City analysts are optimistic about the potential of the pharmaceutical business to grow its earnings. Ever since the research and development (R&D) pipeline burst into life a few years ago, profits have been tearing higher.
AstraZeneca has proved that R&D can power growth when it clicks. And the pipeline has been spitting out good-selling new medicines for some time.
Looking ahead, analysts expect normalised earnings to grow by almost 90% this year and by around 16% in 2024 – there’s no doubt that AstraZeneca is clinging to its growth mojo.
But litigation can be a fact of life for many big businesses. And there have been many claims against the company rumbling on for years – costing money to fight, and distracting the management.
However, there was good news for shareholders. The directors announced the settlement of Nexium and Prilosec product liability litigations.
Those medicines are for treating acid-related symptoms and diseases, such as heartburn and stomach ulcers. And they work by inhibiting the production of acid in the stomach.
But these proton pump inhibitors (PPIs)have been linked to kidney failure, liver damage and bone problems. And legal claims in the US allege that drug companies knew about potential side effects before they manufactured them.
Around 18,600 PPI lawsuits had been filed against the manufacturers of Nexium, Prilosec, Prevacid, Protonixand Dexilant for causing various health injuries.
Removing the uncertainty
But those claims don’t just affect AstraZeneca. Other companies on the hook include Proctor & Gamble, Pfizer and Takeda Pharmaceuticals.
In the recent announcement, AstraZeneca said it’s entered into settlement agreements that effectively resolve most of the product liability claims that are currently pending regarding PPIs. However, the specific terms of the agreements are confidential.
The directors believe the claims are without merit and admit no wrongdoing in the settlement agreement. But the settlements avoid ongoing costly litigation and allow the company to “move forward with its purpose of delivering life changing medicines to millions of patients around the world”.
The settlements cost a cool $425m. And that’s a lot of money, but at least it removes the uncertainty.
I don’t believe this announcement will catalyse the share price much in the short term. And that’s because it’s worth just over 3.7% of anticipated net profit for 2023 – so it’s a relatively minor expense.
Perhaps the biggest risk for shareholders is that the R&D pipeline dries up at some point. Nevertheless, the recent announcement is positive and it’s another small reason to dig into AstraZeneca with deeper research.
I think the stock could potentially sit well in a diversified long-term portfolio.
