Generic prescription drugs are the bane of big pharmaceutical companies and investors alike. As patents for name brand drugs expire, generics eat into revenue, shrink earnings, and depress stock prices of the Big Pharma players.

But the smart investor knows that good drug companies are hardly one-trick ponies. The herd always overlooks the mountains of products that either still have patent protection, or have survived and retained market share. Then there’s the pipeline full of new products that’s often not given enough consideration.

#-ad_banner-#Bottom line: It’s important to be able to see the forest for the trees if you want to recognize a good investment opportunity.

And right now, industry giant AstraZeneca Plc (NYSE: AZN) is the forest. And it’s on sale.

But first the not-so-good news…
The near-term picture is… well… simply “not good.” In the first-quarter, sales declined 11% to $7.34 billion, compared with the year-ago period. Operating profits were off 19% from $3.67 billion reported in the first quarter of 2011. The result was a dismal 38% drop in earnings per share (EPS) from $2.08 to $1.28. It’s no surprise that the company has lowered core 2012 EPS guidance from $6.00-$6.30 to $5.85-$6.15.

On top of all this, there’s concern about succession at the top of management. Chairman and CEO David Brennan just announced his retirement. Chief Financial Officer Simon Lowth will serve temporarily in the top slot until a permanent replacement is found.

But amid these concerns lie some real positives — ones that I think outweigh in favor of considering buying shares of AstraZeneca…

It’s all about the value
Three of the company’s major drugs — Seroquel (for Schizophrenia), Symbicort (for Chronic obstructive pulmonary disease) and Crestor (for cholesterol control) — have come off patent protection. But the company has two years’ worth of patent protection on its highly-effective (and extremely expensive) gastrointestinal drug Nexium. Throw in widely-used general anesthetic Diprivan and popular local anesthetic Xylocaine, and AstraZeneca still has some strong drug franchises to its advantage. (As an anecdotal note, I’m friends with a couple anesthesiologists, and they don’t shop for drugs based on price.)

On average, the company’s research and development spending as a percentage of sales comes in at about 15%, nearly twice the industry average of 8.5%. This explains the 86 projects the company has in the pipeline in some form of clinical trial.

The balance sheet is also incredibly healthy. There’s plenty of cash (a lot of it, actually) — about $10 billion to be exact. I’m comfortable with the safety of the $2.80 per share annual dividend, which comes to a yield of about 6%.

And remember, when I say AstraZeneca is Big Pharma, I mean big. The company’s market cap is around $58 billion. This is a good value opportunity for smart investors looking for some dependable yield.

Risks to consider: As discussed in the first part of this article, going long AstraZeneca is the equivalent of buying a fixer-upper. The challenges are pretty clear. The value, however, is compelling, and the generous dividend offers ample compensation for investor risk.

Another risk is foreign taxes on stock dividends paid to U.S. citizens (AstraZeneca is domiciled in the United Kingdom). Currently, U.S. investors are not subject to withholding on U.K. dividends. But with the mess the British economy faces, it wouldn’t surprise me to see this policy change. Typically, some if not all of foreign taxes paid on dividends are recoverable through your income tax refunds (taxable accounts only). Also, tax policy in the United States is going to change soon. At best, count on uncertainty.

Action to take –> Based on a strong balance sheet, a full pipeline and a relatively safe 6.0% dividend yield, shares of AstraZeneca Plc are a good opportunity for patient, growth- and income-biased investors.

The stock trades at around $43 with a forward price-to-earnings (P/E) ratio of 7. If the company executes effectively in resolving its top management deficit and stabilizing its revenue stream, then a 20% multiple expansion is not out of the question (7.0 to 8.5 is still dirt cheap). This would result in a 12-month price target of $52 a share. Adding the dividend brings the potential total return to 27%.