Strength In Astra's R&D To Cushion Losec's Demise?

The Swedish pharmaceutical company Astra is trading at a significantdiscount to the drug sector, mainly on concerns about the future of its antiulcerant Losec (omeprazole), which is due to come off patent around the world between 2001 and 2004.

Analysts Genghis Lloyd-Harris and Vikram Sahu at Credit Suisse First Boston believe that these concerns are overstated and that Astra's stock is traded at an unjustified discount to its fair value.

The analysts carried out research on 24 drug companies and their analysis found that there is a striking correlation between a firm's market value and its return on invested capital. When viewed in this context, they say it is clear that Astra trades at a 30% discount to the value implied by its ROIC in 1996. In other words, the market is implying that Astra's ROIC will decline from 27% in 1996 to 19%, which is even lower than Astra's pre-Losec ROIC of 21%, the analysts point out.