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AstraZeneca’s FY09 operational performance showed it was able to benefit from the opportunities created by the shortage in supply of generic Toprol XL and the swine flu vaccine, while also decreasing its working capital by $1.3bn. However, its shares trade at a considerable discount to its peers (FY09 P/E of 7.4x vs 12.5x) because of exaggerated concerns about the patent cliff. The five-year guidance suggests that revenues could be 15% higher than 2014 consensus forecasts. Cautious on 2010, but more optimism thereafter Although AstraZeneca reported adjusted EPS 8% below consensus estimates for Q4 09 and tempered expectations for 2010, it presented optimistic guidance for the next five years. The company believes that revenues in 2014 will be nearing $34bn, c 3% higher than in 2009, while consensus estimates suggest they will be 13% lower. Confidence of overcoming looming patent cliff This suggests AstraZeneca is confident about negotiating the challenges caused by patent expiries on key products (Arimidex, Nexium and Seroquel), with revenue pharmaceutical company focussed primarily on gastrointestinal, growth from the rest of its portfolio, including its promising new products (eg Onglyza and Brilinta), likely to more than compensate for lost revenues. This guidance is dependent on the successful defence of Crestor’s patents. Consensus well below medium-term guidance We believe that consensus estimates are conservative and are forecasting adjusted EPS of $5.60 compared to $5.37 in 2014. AstraZeneca’s revenue guidance suggests that it could achieve adjusted EPS of c $6.30 by 2014, 14% above our figure. We value AstraZeneca at £48.2bn using DCF, which puts the shares on a P/E of 8.4x, still at a significant discount to peers, which trade on average at 12.5x. The downside risk is reduced by the introduction of a progressive dividend policy with the shares yielding 4.9% and the re-introduction of a share buy-back programme. There is considerable upside if AstraZeneca can deliver on its long-term guidance. Note: Edison Investment Research estimates EDISON INVESTMENT RESEARCH LIMITED Edison is Europe’s leading independent investment research company. It has won industry recognition, with awards in both the UK and internationally. The team of more than 50 includes over 30 analysts supported by a department of supervisory analysts, editors and assistants. Edison writes on more than 250 companies across every sector and works directly with corporates, investment banks, brokers and fund managers. Edison’s research is read by every major institutional investor in the UK, as well as by the private client broker and international investor communities. Edison was founded in 2003 and is authorised and regulated by the Financial Services Authority. 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