AstraZeneca goes cheap – should you buy?

Shares in pharmaceutical giant AstraZeneca (LSE: AZN) took a hit last month after the head of the company’s Chinese business was detained. Reports suggested the Chinese government was looking into allegedly fraudulent practices in the division. The stock has now fallen by a fifth in three months. It’s not often that investors are presented with the opportunity to buy a great company at a discounted price. When these opportunities emerge, it usually pays to snap them up, as they won’t be around for long.

Investors seem to have panicked. While there is a risk that any investigation could lead to sanctions against the company, China only comprises 13% of the group’s top line, and the market isn’t as important as it once was. Growth is slower than in bigger, and frankly more lucrative, regions such as the US.

Revenue from the key US market made up 44% of the group’s total in the third quarter, rising 23%, compared with growth of 15% at the Chinese division. The market doesn’t seem to have taken this into account. And the stock is trading at just 13.6 times forward earnings. The five-year average is 19. The stock also offers a 2.3% dividend yield.

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What's the outlook for AstraZeneca's share price in 2025?

Next year several developments have the potential to bolster the share price. Last May, AstraZeneca’s management laid out the goal of $80 billion in revenue by 2030 (exceeding the City’s consensus by $10 billion and nearly double 2023’s revenue of $45.8 billion) with a number of key programmes set to kick off in 2025. The company has identified seven new drugs in its pipeline that could yield $5 billion in sales by the end of the decade.

Next year, we’ll get the results of at least three of these potential blockbusters (two new cancer treatments and one for treatment-resistant hypertension). The company dominates the global oncology (cancer treatment) sector and is closely watched for major drug developments and breakthroughs.

Revenue from the company’s cancer-drugs business grew 21% in the third quarter, driven by sales of blockbuster medicines Enhertu and Tagrisso, while revenue from the respiratory- and immunology-therapies unit grew 24%. Management has earmarked these as vital areas in the company’s growth plan. Spending on research and development (R&D) has doubled since 2019 as the company ramps up development to keep its treatment pipeline full. The strategy, at this stage, seems to be working – the group stands in a league of its own when it comes to the number of potential blockbusters moving through the testing phase.

AstraZeneca is also recording further successes with existing treatments. Its drug Imfinzi was first approved in 2017 to treat bladder cancer, but has since been approved to combat a range of other cancers, including most recently a variation of limited-stage small-cell lung cancer.

Management has laid out plans to reach an operating income margin in the mid-30s by 2026, despite this increased spending. The company argues that operating leverage and cash from new treatments will help the business grow profitability and expand its margins while still investing for the future. The City seems to agree.

Huge opportunity for AstraZeneca

AstraZeneca’s current valuation looks attractive based on the outlook and management’s 2030 revenue target. The group is also a great play on the growing demand for healthcare worldwide. Over the next three decades, the number of elderly people aged 65 or over worldwide is projected to double to more than 1.5 billion in 2050, and this growth is expected to lead to a jump in cardiovascular diseases and cancer.

Deaths from these diseases are expected to increase by at least 40% by 2030 and account for almost 80% of all deaths in people aged 60 years or over. For AstraZeneca, which has carved out a niche in the oncology market, this presents a huge opportunity.

Should you buy AstraZeneca?

According to research complied by IQVIA, a leading global provider of advanced analytics and clinical-research services to the life-sciences industry, global spending on cancer medicine increased to $223 billion in 2023, $25 billion more than in 2022, and is projected to reach $409 billion by 2028.

North America makes up 48% of the market and is expected to lead the growth over the next decade. The US oncology market will more than double from $74 billion in 2023 to $180 billion by 2033, according to Nova One Advisor. AstraZeneca plans to invest $3.5 billion in the US by the end of 2026 to capitalise on this growth, expanding manufacturing sites in Maryland, Texas and California.

AstraZeneca isn’t the only company making huge strides in this market. Roche earns almost twice as much from oncology sales as AstraZeneca does, but the latter is catching up. AstraZeneca’s explosive jump in research and development spending stands in stark contrast to Roche’s, which has risen just 30% over the same time frame. The spending does not guarantee success, but money is everything in the rapidly developing world of oncology.

Next year will be a landmark one for the group as this spending starts to translate into growth. Right now, there’s an opportunity to buy the company’s future growth at a discount. Considering the firm’s pipeline, drug portfolio and growth targets, investors shouldn’t wait around for a better time to buy.

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