One of the FTSE 100’s best performers so far this year has been AstraZeneca (LSE: AZN) (NYSE: AZN.US). Indeed, year to date, AstraZeneca has rallied nearly 10%, surging ahead of its peer GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), which has only returned 1% during the same period.
However, AstraZeneca’s impressive run, it could be time for investors to take profits.
Future growth
AstraZeneca has outperformed during the last few months thanks to renewed optimism about experimental mental cancer therapies. In particular, investors have been pleased with early-stage trials of the company’s immuno-oncology treatment, which aims to treat cancer patients by boosting their immune system.
Unfortunately, this cancer therapy is not expected to file for regulatory approval much before 2017, which means that AstraZeneca is likely to lose a significant chuck of the market to rivals during this time. What’s more, AstraZeneca’s’ own management does not believe that the company’s overall sales will return to growth until 2017 and over the next three years sales are going to decline further before they start to mover higher.
In comparison. GlaxoSmithKline’s earnings are sales are expected to remain fairly stable over the next few years as the company cuts costs, brings new treatments to market and buys backs shares.
Still, unlike GlaxoSmithKline AstraZeneca’s treatment sales to China are still expanding, although this is not enough to offset declining sales in other regions around the world as treatments come off patent.
Pipeline
Biotechnology companies like AstraZeneca rely upon their treatment pipelines to drive future growth and boost earnings. Unfortunately, AstraZeneca’s treatment pipeline lacks that of GlaxoSmithKline and the latter is making solid progress bringing new products to market.
For example, GlaxoSmithKline had five new drugs approved for sales during 2013 and a further 40 are in the process of coming to market. Meanwhile, AstraZeneca does not expect to have any new products file for regulatory approval before 2016.
Actually, GlaxoSmithKline’s pipeline of drugs has been called the ‘best in class’ and ‘sector leading by many analysts, putting the company ahead of many of its larger international peers, such as Johnson & Johnson.
Valuation
As AstraZeneca is not expected to return to growth until 2017, in theory the company should trade at a lower valuation than GlaxoSmithKline, as GlaxoSmithKline’s prospects for growth are more promising. This is not the case. Specifically, at present levels, AstraZeneca is trading at a forward P/E of 15.5 for 2014, while GlaxoSmithKline trades at a forward P/E of 14.6.
What’s more, according to City forecasts GlaxoSmithKline’s current share price means the company is trading at 13.6 times 2015 earnings, while AstraZeneca is trading at 15.7 times, despite the fact the company’s profits are expected to slide. So, it would appear that GlaxoSmithKline is relatively undervalued compared to AstraZeneca.
Further, GlaxoSmithKline currently offers a dividend yield of 4.8%, forecast to rise to 5.2% during 2015. AstraZeneca only offers a yield of 4.2%, forecast to rise 4.3%. All in all, AstraZeneca’s current premium over GlaxoSmithKline really looks unwarranted.
