AstraZeneca's Prescription for Growth

NEW YORK ( TheStreet) -- Given the Street's insatiable appetite for growth, it's quite surprising that "Big Pharma" stocks have performed as well as they have. And when you factor in uncertainties with eroding pipelines and patent expirations, drug stocks don't appear healthy. And to say nothing about the federal restrictions that will be imposed by Obamacare.

AstraZeneca (AZN) just might be the exception to its rivals that sell at premium but don't deliver a bargain. Unlike several of its peers that have under-invested in their product pipelines, AstraZeneca has spent the past couple of years looking for ways to grow its lifeblood. The result? A stronger pulse. With the stock price up nearly 60% in 18 months, there's no denying management has found the right formula.

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Investors are justifiably surprised by the stock's performance against severe headwinds. Along those lines, I don't even believe management has gotten the credit they deserve. The question now is, to what extent can AstraZeneca sustain this run in the face of growing competition from Johnson & Johnson (JNJ) and Merck (MRK).

CEO Pascal Soriot has shown more than enough times that he'll find an edge if one exists. Never shy about doing deals, three times last year Soriot pulled out his checkbook, spending roughly $1.5 billion in three separate acquisitions. When it comes to building for the future, AstraZeneca takes a backseat to no one. At the same time as it has also fought slowing growth with strategic cost-cutting measures.

The company will look to extend this winning streak when it reports fourth-quarter and full-year earnings results on Thursday. The Street will be looking for earnings-per-share of $1.22 on revenue of $6.91 billion, which represents a 5% year-over-year revenue decline. If you've been following the sector's performance over the past couple of quarters, you'll notice the revenue trend has been weak and growth has slowed. So that's not where the attention should be placed.


Management recently placed an emphasis on growing AstraZeneca's capabilities in oncology immunotherapy. Last summer, the company spend half a billion dollars to acquire privately-held Amplimmune. Prior to this deal, Amplimmune was working on a monoclonal antibody called AMP-514, an anti-programmed cell death 1 (PD-1) that was (at the time) in late-stage pre-clinical trial.

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I believe AMP-514 was one of the key assets of the acquisition since it granted AstraZeneca access to more advanced PD-1 therapies. This is a multi-billion dollar market currently controlled by Roche (RHHBY) and Bristol-Myers Squibb (BMY). To that end, any advancement management was able make to grow that segment should trump whatever near-term earnings and revenue shortages they might reveal.

It's worthwhile for investors to focus more on what management plans to do to further strengthen its pipeline. In December, management announced that it was ending its diabetes joint venture with Bristol-Myers Squibb. This came after mounting pressure from the Food and Drug Administration and what can only be described as a disappointing effort to get several drugs to market.

There are now concerns that this breakup exposes AstraZeneca to increased competition from Eli Lilly (LLY) and Novo Nordisk (NVO). That's a bit premature; it would be a mistake to abandon this stock solely on this basis. Giving up assumes management won't come up with a way to offset whatever weakness the Bristol-Myers breakup presents. Besides, it isn't yet a given that there is a weakness. And I'm sure this will come up during the conference call.

For now, skeptics will continue use this and any other metric to raise concerns about valuation. But beyond standard profit-taking, there isn't a legitimate argument to make. Despite the company's strong 2013, AstraZeneca still trades at a P/E that is 8 points lower than the industry average. With management's ability to leverage recent acquisitions to build for the future, I'm compelled to diagnose this stock as a buy with $72 price target in the 12-18 months.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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