More agita may be in order for Astra Zeneca (NYSE:AZN) investors.
Since hitting $52.40 on the last day in May, the company’s shares have retreated about 6%. That’s just slightly better than the decline in the S&P 500, but some recent developments may jeopardize AstraZeneca’s ability to hit its full-year earnings target.
The most recent blow to the giant Anglo-Dutch drug maker was the loss of a key patent in Europe for the company’s acid reflux treatment Nexium. The popular “Purple Pill” is a huge cash cow with handsome margins — in 2010, sales of the drug were nearly $5 billion.
But the company is already feeling the effects of its loss of patent protection in Europe, reflected in an 18% decline in Nexium sales in Western Europe in the first quarter of 2011. If a competitor can get a generic version of the drug onto the European market this year, analysts predict Astra Zeneca will struggle to meet its earnings guidance.
Nexium and the cholesterol drug Crestor account for about one-third of AstraZeneca’s annual sales. Last year, the company won a key legal battle when a U.S. court ruled generic-drug makers can’t sell cheaper copies of Crestor until 2016. The court rejected challenges by companies including Teva (Nasdaq:TEVA), ruling that the patent on the active ingredient in Crestor was valid and enforceable.
AstraZeneca certainly dodged a bullet with that decision, but it hasn’t escaped unscathed on the cholesterol drug front. Crestor profits have been hurt by the decision of many patients to use the generic version of the popular Merck (NYSE:MRK) drug Zocor, even though it and Crestor aren’t comparable.
The company also needs to find a way to overcome one of the big obstacles facing it and many of its Big Pharma brethren: patent expiration on blockbuster drugs. In 2014, AstraZeneca will lose marketing exclusivity on Nexium in the U.S. as well as its antipsychotic Seroquel.
The company is hoping for better results when the Food and Drug Administration takes another look at the blood thinner Brilinta, which is used for acute coronary syndrome. However, since the agency rejected the drug in December, optimism isn’t running high, since drug reapplications have seldom proved successful.
In fact, one Wall Street analyst recently downgraded AstraZeneca to underperform, citing a bearish view for Crestor and Brilinta
AstraZeneca shareholders can take heart in the fact that the news isn’t all bad. A few months back the company received FDA approval of its late-stage treatment for a form of thyroid cancer market. But because the disease strikes only a few thousand patients a year, the drug won’t be the blockbuster AstraZeneca so desperately needs.
There are other reasons to like the stock. For one, AstraZeneca pays a sweet dividend – $3.70 a share, giving investors a nice 7.5% yield at its current price. What’s more, shares are relatively cheap for a company with profit margins approaching 25%, trading at a trailing price-to-earnings ratio of 8.62, exceptionally low by traditional industry standards.
But are a good dividend and a low P/E going to be enough to prop up the share price if AstraZeneca drug sales erode? We’ll see.
Barry Cohen is long AZN shares.
