The dust has now settled on Pfizer’s failed attempt to takeover AstraZeneca (LSE: AZN) (NYSE: AZN.US), but at 4,340p, the UK firm’s share price remains at a 14% premium to its pre-bid level of around 3,800p.
What’s more, AstraZeneca’s forecast P/E of 17.5 puts it at a premium to its UK peer GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), which trades on a forecast 2014 P/E of just 15.
Why is AstraZeneca’s valuation still so high?
One explanation could be that the market is pricing in a repeat visit from Pfizer later this year, after the six-month wait period has expired. That’s possible, although it’s hard to see the logic — political will in the UK and US is likely to remain against Pfizer, and unless the US firm offers more money, the end result is likely to be the same.
A second possible explanation could be that Pfizer’s advances have forced AstraZeneca to reveal new information about its product pipeline that have materially increased its valuation.
However, while it’s certainly true that AstraZeneca has embarked on a major PR offensive to talk up its sales prospects, nothing material seems to have changed. Analysts’ consensus earnings forecasts for the next couple of years have actually edged lower over the last month.
In contrast, during the same period, Glaxo has sold its portfolio of oncology drugs to Swiss pharma firm Novartis for $16bn, announced a £4bn capital return to shareholders and spent $5.25bn on acquiring a portfolio of vaccines that should help it consolidate its dominant position in this sector.
Most recently, Glaxo has announced a new oncology joint venture that could result in a further lucrative spin-off in years to come.
What about fundamentals?
I’ve already touched on AstraZeneca’s premium P/E rating, but a closer look at the firm’s financials reveals several even less appealing figures:
| AstraZeneca | GlaxoSmithKline | |
|---|---|---|
| Return on Capital Employed (ROCE) | 8.0% | 24.7% |
| Operating margin | 14.4% | 26.5% |
| Prospective yield | 3.9% | 5.2% |
Source: Company reports, Reuters consensus forecasts
For the record, I believe AstraZeneca is a great company and will deliver solid long-term returns to shareholders — but so is GlaxoSmithKline, and Glaxo is currently delivering attractive returns to shareholders, such as the £4bn capital return planned for next year, which equates to around 82p per share.
AstraZeneca shares are up 32% on one year ago, while GlaxoSmithKline’s share price is down by 5%. I don’t think that’s a fair assessment of the two firms’ relative progress over that time, which is why I would buy Glaxo today, but not AstraZeneca.
