Analyst: Buy AstraZeneca On The Turnaround Story

Following AstraZeneca plc (ADR) AZN’s strong start to 2017, including a positive data report for breast cancer treatment Lynparza, investors await a barrage of news highlighting significant findings and potential approvals for various portfolio components. Updates on immuno-oncology trial Mystic are among the most anticipated.

“The rise of oncology should ultimately help Astra's margins rebound towards peer average levels of 35 percent,” Berenberg analysts wrote in a Tuesday note. “As a result, we expect strong double-digit earnings growth beyond 2017, which is not reflected in the valuation.”

The firm reported a 2016 return to growth in the oncology franchise, which is “the most important sales driver in our forecasts” going forward.

“Oncology was 12 percent of sales in 2015, but its influence will double by 2020,” the note read.

On The Horizon

Berenberg suggested near-term outlook is unpredictable as AstraZeneca invests “aggressively” in its pipeline while employing cost-saving strategies.

Although analysts expect the company to continue using externalization to drive growth, they acknowledge near-term results are “under pressure.” Though the pipeline is forecasted to support continued growth, existing product sales are expected to stabilize throughout the next two years as AstraZeneca nears the end of patent protections.

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However, analysts pointed to one point of solid optimism in operating cost trends.

Because 2016 operating costs beat estimates by 3 percent and improved 5 percent on the year, the firm expects costs to drop another 3 percent throughout 2017. For the years following, it predicts operating costs to grow in proportion with expanding sales and EPS.

Reducing Valuation

Considering unexpectedly accelerated “erosion of legacy franchises” such as Symbicort, Berenberg lowered its near-term sales projections for AstraZeneca. Even balancing this factor with the recent Zoladex deal with TerSera, the firm justified an EPS estimate of $1.94 — about 50 percent below consensus.

However, analysts expect the gap to close as AstraZeneca confirms more deals in the immediate future.

Altogether, Berenberg maintained a Buy rating on AstraZeneca with a slightly lowered price target of $67.91 accommodating “small forecast changes further out.”