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October was not a great month for investors in AstraZeneca (LSE:AZN) following the release of disappointing results for the company’s latest lung cancer drug. But does the resulting drop in share price now represent an opportunity for investors?
What went wrong?
AstraZeneca’s experimental precision drug, datopotamab deruxtecan, showed rather mixed results in a late-stage trial. Unfortunately, the drug only improved the lifespan of patients with non-small cell lung cancer by 0.7 months without their disease getting worse compared to chemotherapy. This clearly fell short of analysts’ expectations, with one calling the results “worse than expected“, which caused the shares to fall more than 3% on the day.
However, the safety data was better than expected, with only three drug-related deaths in the study compared to two in the chemotherapy group. Overall, the data summaries were not as interesting as some analysts expected, but there are still some positive signs for AstraZeneca.
What does the company look like in general?
Clearly, AstraZeneca is more than just a single drug. With more than 83,500 employees and revenue of $45 billion, there are many areas the company can turn to to absorb some of the potential revenue lost after a recent disappointment.
From an investor’s perspective, analyzing a biopharmaceutical company can be challenging as the revenue stream is highly technical and requires specific knowledge. However, in a company the size of AstraZeneca, the portfolio of approved and widely used drugs obviously provides more stability and certainty than a company with a single drug awaiting approval.
Compared to the broader biopharmaceutical sector, which has an average price-to-earnings (P/E) ratio of 19.4, AstraZeneca has a slightly more expensive P/E ratio of 31.3. The company is growing earnings at 18.3% annually, slightly above the industry average of 17.1%. These are pretty solid numbers in the context of an uncertain economy. However, with a lot of competition in the sector, this growth is not a guarantee for the future.
Is AstraZeneca Stock At My Buy Level?
In my case, I want to buy quality companies below their fair value. My preferred means of identifying this is a discounted cash flow calculation. Although this does not tell the full story, the calculation suggests that there could be 47% growth before the fair value of £193.04 is reached. Analysts also expect AstraZeneca to have a good year ahead, broadly agreeing on a price target 20% above the current price. Of course, analysts can be wrong.
However, before buying AstraZeneca shares, I want to have a clear idea of how healthy the company’s debt is, as interest rates are likely to remain high for the foreseeable future. With more than 29 billion dollars of debt and a debt ratio 64%, I think this could become a concern for investors. At some point, the management team may choose to cut the dividend or take steps to manage debt, which may again drive investors to the exit.
Although the company appears to be in good health, aside from the debt, I believe there are better places for my money to work. The biopharmaceutical sector still appears to be recovering from the turmoil of the pandemic, so I’ll stay away from AstraZeneca stock until things look a little more secure in the economy.
