AstraZeneca: a medicine worth taking?

AstraZeneca's (AZN, 2,687p) shares are like an "unpalatable but beneficial medicine", says Philip Aldrick in The Daily Telegraph: buying them may leave an unpleasant taste in the mouth, but it could well be worth doing anyway.

The unpleasantness is due to "jitters" over future earnings prospects after a US court invalidated patents on one of its $1bn-plus "blockbuster" drugs, Toprol XL, 19 months before the patents were due to expire.

It is the first time Europe's third-largest pharmaceutical firm has lost such a challenge, and the ruling casts doubt over AstraZeneca's earnings guidance of $3.40-$3.60 a share, says Richard Irving in The Times, which assumes the judgment "can be overturned". The company aims to challenge the ruling, but most analysts "hold out little hope" it can overturn the verdict on appeal, says Ian Lyall in The Daily Mail.

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Nor is Toprol the only drug under threat from generic producers. Challenges have also been made to AstraZeneca's biggest product, top-selling heartburn drug Nexium, and another of its "fabulous five" drugs, anti-psychotic Seroquel (which, with Toprol, accounts for nearly 40% of company revenues). It has also seen two potential blockbusters Iressa and Exanta "fail at the final [regulatory] hurdle".

But things aren't as bad as they seem, says Aldrick. None of the competition has yet won FDA approval for a generic version of Toprol. And AstraZeneca has "a strong cash position", which it is using to rebuild its drug pipeline via a series of licensing and corporate deals, with as many as "nine medicines in final Phase III trials within 18 months". This is not a cheap process, but is already well discounted in Astra's share price, which (on a p/e of 14.3 times for next year) stands at a 17% discount to the sector. If that fails, says Lyall, then there is always the hope of a bid from either Pfizer or Glaxo. "A cautious buy."