Can a management shake-up cure AstraZeneca?

Shareholder revolts have claimed the jobs of a handful of Britain’s most high profile bosses in the last couple of months, among them David Brennan, the chief executive of drugs giant AstraZeneca (LON:AZN). 

After six years in the role, Brennan is leaving under a cloud of concern about the drug giant’s ability to replenish its product pipeline at a quicker rate than the speed at which blockbuster drugs are dropping off-patent. Three weeks ago, when the group announced its first quarter earnings, it was plain how serious the situation has got. 

Revenues were down 11 percent to $7.35 billion, with 8 percent of that decline credited to losing exclusivity on some key brands. As a result, pre-tax profits fell by a startling 38 percent to $2.05 billion. With EPS falling (and a lowered target this year), AstraZeneca finds itself in the position of owning the lowest P/E ratio of its big pharma peers – just 7.0 versus an industry average of 13. 

Until this week, AstraZeneca stood out as the company that qualified for the highest number of trading strategies followed by Stockopedia – an impressive 11 screens spanning value, quality and income. But that figure has now dropped to nine because the company no longer qualifies for two of our stock screens inspired by Warren Buffett. 

Both the Buffettology Sustainable Growth Screen and the Buffettology Historical Growth Screen present a series of demanding performance filters for companies to meet. As the names suggest, the only difference is that, in working out the expected rate of return, one screen uses historical earnings while the other looks for a sustainable growth rate. In both screens, companies are required to deliver a five-year price change of greater than zero – and this is where AstraZeneca falls down. At £26.51p per share, the company’s stock is now short of the £27.33 it was trading at five years ago this week. 

Some would argue that it’s a moot point – that it’s more important that the group maintains its dividend yield (currently 6.56 percent) and cares less about the share price. Indeed, for fans of AstraZeneca, it remains a stock that qualifies for some of the best regarded trading strategies around – including Joel Greenglatt’s Magic Formula and the Dividend Dogs and Forecast Dividend Dogs of the FTSE 100. In other words – from a quant perspective – AstraZeneca looks like a well priced stock with good quality credentials and it pays a hefty yield to boot. However, the drugs pipeline problem is undoubtedly a headache – so all eyes are now on how a new management team can treat it.