The success of just about any business hinges heavily on the ability of the management to build an economic moat around the business. As for the drug-making business, amassing as many patents as possible is important to having a large economic moat.
In essence, a degrading patent portfolio means a company is losing its competitive edge, thus, its investment appeal. And that’s exactly where AstraZeneca (AZN) finds itself at the moment.
The company has been seeing both its top and bottom lines decline since 2012 as a number of its top drugs lost their patents. And AZN stock is sure to shrink even further on both fronts as some other of its key drugs — including Crestor — lose their patents in 2016.
While it seems like these factors would make AstraZeneca a terrible investment, I believe the future is bright for AZN stock. The company has been investing relentlessly on widening its economic moat again, repositioning itself for the future.
Taking a Leading Position in Immuno-Oncology
Immuno-oncology is quite the hottest thing in oncology at the moment. In simple terms, immuno-oncology drugs are targeted at triggering a suppressed immune system to identify and fight cancer. What makes this approach so hot is the fact that most of the existing therapies — notably chemotherapy, irradiation and surgery — are not all that reliable.
At times, other issues do arise during treatment due to the already susceptible nature of cancer patients. However, immunotherapy promises to be the least toxic and perhaps the most natural way to combat cancer.
AZN has been expanding its reach in the cancer space through collaborations. In 2015 alone, AZN has struck multiple deals relating to oncology. These partnerships are mostly in immuno-oncology combination therapy. And this approach is what makes AZN attractive for the long-term, as the combination approach will lead the next generation of cancer treatments.
The combination approach is particularly important because cancers can modify to evade destruction (treatment). Therefore, the combination approach will ensure that treatments are there to corner cancers in whatever path they take.
Even more attractive for AZN is its first-mover status in immuno-oncology. The only company that seems to be ahead in this space is Bristol Myers (BMY), with two monotherapy immuno-oncology drugs in the market.
Analysts predict that Astrazeneca’s PD-L1 drug for lung cancer holds a blockbuster potential. Moreover, AZN’s tremelimumab will only be second to market behind BMY’s Yervoy for immuno-oncology drugs that target the CTLA-4 (cytotoxic T-lymphocyte-associated protein 4).
Still, AZN has a good chance to be a true first mover in the combination therapy space. One advantage of being a first mover in oncology is that, once oncologist are comfortable with certain treatments, they are less likely to switch.
AZN says it has nine drugs in clinical trials being studies for combination therapy — with the hope of adding more through partnerships. And there should be a very strong chance for those drugs to make it to market.
AstraZeneca is a big pharma with sufficient experience to identify projects that are worth pursuing and those that aren’t. While not all of the pipeline candidates would eventually make it to the market, for a company as experienced as AZN, it is highly unlikely that none of these candidates won’t make it to the market.
And if AZN wasn’t seeing a big upside in its endeavors, it wouldn’t have resisted the $117 billion takeover from Pfizer (NYSE: PFE), a bid that valued the company at over $50 per share. And perhaps PFE saw this potential as well before valuing the company at a significant premium to its current enterprise value.
Bottom Line
AZN doesn’t look particularly attractive at the moment, and it might not for the next few years. But once its effort in immuno-oncology starts paying off, investors would start reaping the benefits of being patients.
Considering that oncology drugs have proven to be high-margin products, its efforts in oncology will boost the bottom line over the long-term. So, for patient, long-term investors, AZN stock is definitely a buy.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
