Is buying AstraZeneca shares a good investment?

| Last Updated September 7, 2022

Doctor considering to invest in AstraZeneca shares

Key points

  • AstraZeneca is a world-leading pharmaceutical and biotech company within the FTSE 100.
  • The company completed the sale of commercial rights in Plendil in 35 markets globally.
  • AstraZeneca operates in over 100 countries, and its innovative medicines are used by millions of patients worldwide.

AstraZeneca Plc (LSE:AZN) shares are listed on the London Stock Exchange. But it’s worth noting that the company has a dual listing on the Nasdaq in the United States under the ticker NASDAQ:AZN.

AstraZeneca is a global science-led pharmaceutical company founded in the United Kingdom in 1999 after Astra AB and Zeneca Group merged together. At the time, it was one of the largest pharmaceutical mergers in Europe.

Over the last five years, the stock has delivered some fairly impressive performance, delivering a 114% return to shareholders. And that doesn’t include the extra gains from dividends.

By comparison, the FTSE 100 index is actually down by around 2% over the same period. Needless to say, the AstraZeneca share price has vastly outperformed the British stock market.

But past performance is a poor indicator of future performance, so can this bullish trend continue in the long term? And should I be considering this pharmaceutical stock for my portfolio today? Let’s take a closer look at the business.

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What is AstraZeneca’s financial position?

As a quick reminder, this business is focused on discovering, manufacturing and commercialising prescription medicines. The group specialises in several therapy areas, including oncology, biopharmaceutical, respiratory, immunology, renal, metabolism, and rare diseases.

The company’s mission is to push the boundaries of science to deliver life-changing medicines. And that certainly seems to be the case when the group was one of the first to develop a Covid 19 vaccine.

So what about its fundamentals?

In my opinion, AstraZeneca delivered impressive results in the first half of 2022. Total revenue increased by 48% to $22.16bn, with growth coming from all disease areas as well as new income streams from the recently acquired Alexion.

The company’s product sales grew by 41%, while gross profit increased to $15.65bn. There was also an increase in net cash flow to $4.48bn. All of this ultimately translated into a whopping 70% surge in earnings per share that landed at $0.48.

With more money flowing into the treasury, management declared an interim dividend of $0.93 per ordinary share. Beyond the larger payday for investors, this decision also follows management’s previously announced intentions, indicating the business is hitting internal targets. In my experience, that’s an encouraging sign for the future of the AstraZeneca share price.

But the debt situation continues to be somewhat concerning. Total loans increased by $367m, bringing the total outstanding balance to $24.69bn.

Seeing a high debt load on a pharmaceutical stock is not uncommon. After all, drug development is incredibly expensive, with the probability of success relatively low, especially during pre-clinical and clinical trials.

With interest rates on the rise, the high debt balance could apply greater pressure on profit margins. And it’s something I’ll be watching moving forward.

What is the future of AstraZeneca shares?

AstraZeneca currently has a market capitalisation of £164.53bn, with 1.55 billion shares outstanding. That makes it one of the largest pharmaceutical stocks in the world. But it seems analyst opinions continue to be positive.

Of the 32 institutional analysts following the stock, 25 have issued a “buy” rating with an average price target of 11,996p, which is currently ahead of where the stock is trading today. And it’s not difficult to see why there is bullish sentiment.

The firm’s revenue is primarily derived from the sale of medicines covered by patents. This provides a high level of predictability of future cash flows. And even when inflation is clamping down on consumer spending, the demand for medicine is rarely affected.

However, that doesn’t make future performance a guarantee. Beyond the difficulty of developing and introducing a new drug to the market, the regulatory nature of pharmaceuticals creates a lot of hurdles. Government price intervention in response to budgetary constraints is a threat that will continue to plague this business for decades to come.

Is it good to invest in AstraZeneca shares?

There are a lot of factors to consider before committing to an investment decision.

One factor I like to check is the level of insider ownership, as this signals confidence from the management team. In the case of AstraZeneca, insiders appear to own less than 1%. While that certainly doesn’t sound encouraging, it’s worth remembering this is a massive multi-billion-dollar enterprise.

Therefore, even with the potentially troublesome debt level, the risks surrounding drug development, and low insider ownership, I believe AstraZeneca shares could make a fine addition to my personal portfolio.

Final thoughts on the AstraZeneca stock

While I may be bullish on this business, I’m not blind to the risks. The pharmaceutical and biotech industry is arguably one of the most regulated industries in the world. And suppose the group intentionally or accidentally breaches these regulations. In that case, it could trigger severe financial and reputational penalties that could compromise the AstraZeneca share price.

I also previously mentioned the difficulty of developing new drugs. To put things in perspective. On average, bringing a new medicine to market can cost upwards of $2bn. Not to mention that historically only around 10% of drug candidates that make it to phase 1 trials actually end up being successful. Needless to say, the odds are not in AstraZeneca’s favour.

Consequently, while I believe AstraZeneca shares are a good investment for my portfolio, they may not be appropriate for every investor, depending on risk tolerance.

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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.