Should you buy shares in AstraZeneca? Today’s options explained

Pharmaceutical giants are basically simple beasts. They toil away, discovering drugs to keep us well. Some turn out to be duds, but the winners comfortably outstrip the losers, giving them a flow of royalty income until patents expire or pirates flood the market with copies. On balance, though, the portfolios grow and so do revenues and profits. This business model has made AstraZeneca the London stock market’s most valuable company, at £185 billion.
So it seemed odd for the market to be spooked last week when Deutsche Numis analysts recommended selling the shares on the back of disappointing late-stage trial results for Dato-DXd, a key lung cancer drug being developed jointly with Japan’s Daiichi Sankyo. Some patients in the trial lived longer, but overall, the treatment “did not reach statistical significance”. That did not necessarily make it a dud, but it may at least need serious tweaking, adding to costs and delaying revenue.
As Deutsche Numis says, it may not be “the next breakthrough in lung cancer we had hoped last summer”. It is, however, debatable whether it merited setting a new target share price — £105 — that would knock £22 billion off the company’s market capitalisation. For context, the world’s most-popular drug — the anti-cancer immunity treatment Keytruda — is expected to log $30 billion of sales this year. While Deutsche rightly adds that “Dato is not the only important pipeline prospect” for AstraZeneca, it said the stock’s risk-reward opportunity had “become outright challenging on a six-to-twelve-month view and we don’t think that is reflected in valuation”. Maybe so, but that is only a small part of the upcoming story.
AstraZeneca helps millions of people with medical difficulties in three main areas: oncology, biopharmaceuticals and rare diseases. In the last financial year, the first two each produced 40 per cent of total revenue, rare diseases 17 per cent and the rest were miscellaneous other medicines. The US generated 42 per cent of revenue, emerging markets 26 per cent, Europe 21 per cent and the rest of the world 11 per cent.
According to GlobalData, an analysis and consulting firm, the company currently has 29 “pipeline progression events”, 30 projects in phase II or phase III development stage and 74 life-cycle management studies, collaborating with governments, academic institutions and not-for-profit organisations.
As it is vital that the company keeps pumping discoveries down the pipeline, the Deutsche downgrade shows how its shares will always have a news-driven element, good or bad. But there is a much more powerful factor beginning to drive the industry. Artificial intelligence (AI) has the potential to tilt the odds in drug manufacturers’ favour through machine learning, natural language processing and deep research. By spotting winners and losers early, and tailoring drugs more closely to individual patients, AI will cut R&D costs, shrink development times and broaden product ranges to take a giant stride towards a more efficient healthcare system. Machine learning algorithms will analyse huge datasets, identify potential drug candidates and predict how they will behave.
The point of comparison for investors will be how well each pharma company exploits these new tools. Fresh infrastructures will not come cheap and talented individuals will be at even more of a premium than they are now. Faster development will require increasingly sophisticated techniques to talk producers through international regulatory hurdles.
In May, AstraZeneca shares broke out of the £100-to-£120 range that they had been stuck in since March 2022, though since the start of this month they have come back from £132 to £118.
At the halfway stage this year, total revenue rose 18 per cent to $12.9 billion, the core operating margin was 33 per cent and core earnings per share were 5 per cent higher at $4.03. The chief executive, Sir Pascal Soriot, raised his sales and profit projections for the year to mid-teens percentage gains.
That should take core EPS to about £6.40, giving a multiple of 18.75 with the shares at £120. That is good value, given the growth prospects in an industry trying to meet virtually infinite demand. The expected dividend is 1.85 per cent.
ADVICE Buy
WHY The long-term positive factors outweigh the inevitable short-term hiccups
Manufacturing has been the poor relation of the British economy for more than 30 years and that has had an inevitable effect on investors’ sentiment towards the sector’s operators. But sometimes that sentiment overlooks success stories.
Take Renold. Not so long ago it might have been called a Manchester metal-basher, but nowadays it does so much more to metal than just bash it. It claims to deliver “the highest precision-engineered power-transmission products to all industries worldwide”, from cement-making to chocolate-manufacturing, subway trains to power stations, escalators to quarries. It makes several types of chain, clutch, gearbox and sprocket for anything that needs to be lifted, moved, rotated or conveyed. The shares rocketed in March on the back of a trading update that “results for the full year are now expected to be materially ahead of current market expectations”.
In the next two months the shares rose from 36p to 65p, although they have since fallen back a little. As ever, it is better to travel hopefully than to arrive. Nevertheless, the various measures of 2023-4 adjusted profit and earnings rose by between 18.8 per cent and 22.7 per cent.
Given the sluggish UK economy, the management is expanding overseas. Recent moves into Australia and Spain were followed last week by buying the North American business Mac Chain for $31.4 million cash. Renold is also picking up significant military contracts, a fashionable activity in these troubled times.
Accompanying the Mac announcement, Renold said revenue for the five months to August 31 was 2.3 per cent down on the same period last year, largely due to adverse foreign exchange movements. But order intake was up from £92.6 million to £105.5 million, while trading and profitability were in line with expectation. This encouraged Peel Hunt, a house broker, to nudge its earnings per share forecast up to 8p, and between 9p and 9.6p for 2026-27. If Peel’s predictions are accurate, at the current 56p the prospective price-earnings ratio falls to 7 this year and 6.22 for 2026-27.
ADVICE Buy
WHY The shares undervalue the international outlook