AstraZeneca Plc's (AZN) key drugs such as Crestor (cholesterol), Seroquel (schizophrenia) and Symbicort (asthma) will continue to be the driving force of growth until the company can monetize its pipeline. Generic competition will eat into revenue growth, but productivity initiatives should pay off in the form of healthier margins and mid-single digit earnings growth for the next few years.
The company is facing a number of challenges as it enters 2008, most notably from generic competition to Toprol (hypertension) and Nexium (ulcer) and the possible launch of generic Seroquel. Management is determined to grow earnings largely through expanding its top-line and only secondarily through cost-cutting, share buybacks and productivity initiatives. This is in sharp contrast to many large-cap pharma peers, which are wringing out earnings through very significant cost-cutting strategies.
We believe the management's productivity and synergy initiatives should benefit operating margins and earnings in the next few years, which should help grow EPS faster than revenues. Its goal is to file up to three new license applications per year and bring two new drugs to market per year through 2010.
Although the company is faced with some significant hurdles in the next few years, we think that AstraZeneca offers a compelling case for growth beyond current expectations. We believe the stock offers fair valuation and rate the shares a Hold with a $45 price target, representing 9.0x our 2008 EPS forecast of $4.65, well below the large-cap pharmaceutical peer-group average of 13.6x.
Jason Napodano, CFA, contributed to this report.
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