Why You Shouldn’t Expect Much From AstraZeneca Stock

Shares of AstraZeneca (NYSE:AZN) stock are climbing in advance of the company’s earnings report on February 14. The earnings whisper has the company posting earnings per share (EPS) of 48 cents on revenue of $6.71 billion.

AZN stock is trading essentially flat so far in 2020. However, the stock is up nearly 40% in the last 12 months. This continues an upward trend that started for the stock in 2017. Anytime a stock is on a run like AZN stock, it’s fair to wonder how high it can go. In the case of AstraZeneca, I’m not sure that there’s much more growth in the short term.

Drug Companies are Drawing the Ire of Politicians

AstraZeneca falls under the umbrella of health care stocks. This would make it, perhaps, a desirable target for investors in an election year. However, more specifically, AZN is a pharmaceutical stock.

Let’s start by stating the obvious. Prescription drugs are big business. The annual revenue of the pharmaceutical industry exceeds $1 trillion dollars. However with this revenue comes scrutiny and competition. This makes pharmaceutical stocks volatile in any market.

And “big pharma” is in the crosshairs of state and local governments of both parties. But some of that debate is less about the drug companies and more about the insurance providers. Either way, it’s a messy area that is sure to weigh on the stock at least temporarily.

AstraZeneca Continues to Have a Strong Pipeline

AstraZeneca is best known for its cancer treatment drugs. As much as we might like to say differently, a cure remains elusive. However, breakthroughs continue to be made and individuals are living longer with the disease. AstraZeneca plays a role in that.

As investors in the pharmaceutical sector know, the pipeline is one of the most important factors in considering a stock. In the case of AZN, the company has an ambitious pipeline one of which is Lymparza.

In January, AstraZeneca and Merck (NYSE:MRK) received approval on their joint application for this new prostate cancer drug. Lymparza is being targeted for cases where patients are resistant to androgen depletion therapy and the cancer has metastasized in the body.

The FDA is giving the application a priority review. This means that the review cycle for Lymparza will be shortened by four weeks. AstraZeneca and Merck are now expecting to hear from the FDA in the second quarter of this year, but a decision could come sooner.

Lymparza is currently approved for treatment of ovarian, breast, and pancreatic cancer. The company announced it had booked $847 million of sales in the first three quarters of 2019.

AstraZeneca Continues to Expand in Australia

In early February, AstraZeneca announced its intention to invest $133 million U.S. dollars to expand its Sydney, Australia facility. This will create 250 new jobs and increase the site’s annual exports to AU$4.4 billion through 2023.

The investment is being spurred by high demand for its respiratory drugs in China. The new investment will “allow us to bring more life-changing respiratory medicines” to patients with asthma and chronic pulmonary diseases, said AZN CEO Pascal Soirot.

Recent Options Activity Raises a Caution Flag

Early in February there was a large amount of put options against AZN stock. On Thursday, February 6, a total of 3,545 put options were taken out on AZN stock. That was a 1,008% increase compared to the average daily volume of put options.

Although put options are not as blatantly bearish as short selling, they are still an indicator of negative sentiment towards the stock.

Is AZN Stock a Victim of Its Own Success?

AstraZeneca has been outperforming its peers since 2017. However that success has led to the stock being one of the more expensive stocks in the sector. The stock is trading at roughly 19 times 2021 core earnings.

Analysts seem to agree. The 12 analysts that rate AZN stock give the stock a price target of $50.68 which is only a 1.89% increase from where the stock is trading as of this writing. The stock has a consensus rating of hold.

As investors will tell you a high stock price comes with high expectations. And when it comes to pharmaceutical stocks, there are many variables that are out of their control. It’s not a reason to dislike AZN stock, but it is a reason for investors to manage expectations.