Most potential and actual AstraZeneca (LSE: AZN) (NYSE: AZN.US) investors will know that American drugs giant Pfizer tried to take the firm over recently. Some will no doubt be hoping that other big pharmaceutical companies will be along soon to pitch in a higher offer.
That hope certainly seems evident in AstraZeneca’s current valuation, and I’d argue that investing now for the first time seems to put investors on the wrong side of binary takeover bet.
Bid hopes
Before Pfizer’s recent offer, AstraZeneca’s shares traded around 3,700p before taking off and arcing at about 4,800p during May at the height of the bid frenzy.
AstraZeneca’s rejection of Pfizer’s wooing was swift and brutal: cough up or get lost, your offers aren’t high enough, the firm effectively said. So Pfizer got lost.
Now AstraZeneca shares are hanging around at 4,342p, well above their pre-Pfizer-offer level, and the view downwards is dizzying. Is it just speculation and hope that a new suitor will arrive — or that Pfizer will find a bigger offer to waggle under AstraZeneca’s nose — that’s keeping the share price floating around like a kite on a breezy day, or is it AstraZeneca’s own stunning forward growth prospects causing the re-rating?
Jam eventually
AstraZeneca isn’t your usual highly rated growth prospect with double-digit earnings’ predictions. In fact, the firm has struggled on growth recently, thanks to loss of exclusivity on some of its bestselling and most profitable drugs. Patents tend to run out over time, generic competition pours into the market, and previously key earners fail to deliver the cash flow and profits the firm relied on.
AstraZeneca is busy developing new products to replace the earnings’ gap, but there’s a long and torturous road to follow before today’s little test-tube creations become tomorrow’s big blockbusters. AstraZeneca’s CEO reckons the process takes years, and that explains City analysts’ predictions on earnings: down 14% this year and down another 3% in 2015.
AstraZeneca’s CEO reckons revenues will probably return to 2013 levels in 2017. That ‘smiley face’-shaped revenue prediction sounds grim for investors holding the shares in the meantime and, in its light, the recent upwards re-rating in valuation seems even more out of place. The re-rating seems like nothing but bid-hope breeze and, if a new bid fails to appear, the AstraZeneca kite could float back down where it came from, taking investors’ capital with it.
Valuation
AstraZeneca’s forward P/E rating is running at about 17.6 for 2015 and the dividend yield looks set to be around 3.9% at the current share-price level. That looks expensive compared to its London-listed peer GlaxoSmithKline, which trades at a rating of just under 14 for 2015 with a better dividend yield of 5.3%. What’s more, City analysts predict earnings’ growth of 9% at GlaxoSmithKline for 2015, beating AstraZeneca to an earnings’ turnaround.
What now?
AstraZeneca could halt, and even reverse, its earnings’ slide in the future, as it develops and markets new drugs. However, that’s a jam-tomorrow proposition and the timescale seems to be measurable in years. Meanwhile, the shares seem to trade at a premium because of bid speculation.
If I’d been holding the shares pre-Pfizer bid, I’d be tempted to take profits. Buying shares now, perhaps in the hope of another bid appearing, seems a non-starter. Surely the best time to buy is before a bid appears; not after, when the shares have gone up and when AstraZeneca has just demonstrated its unwillingness to party.
