If I’d been holding any of pharmaceutical company AstraZeneca’s (LSE: AZN) (NYSE: AZN.US) shares since before Pfizer‘s recent offer, when they were around 3700p, I’d be kicking myself now for not selling out when they touched 4800p during May at the height of the bid frenzy.
Since AstraZeneca rejected Pfizer’s final offer the shares have settled around 4370p, well above their pre-offer level, which leaves them looking precarious.
Bid fever
Suddenly, investors realise that others see greater value in AstraZeneca than the market had previously assigned. Now, the share price seems to be accounting for bid prospects but, like all new fads, there seems great potential for the excitement to die down, which could see the share price fall to reflect AstraZeneca’s organic growth outlook.
Reality check
Revenue and profits are heading down:
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Revenue ($m) | 32,804 | 33,269 | 33,591 | 27,973 | 25,711 |
| Adjusted earnings per share (cents) | 632 | 671 | 728 | 641 | 505 |
City forecasters predict a 16% jolt downwards in earnings per share during 2014 followed by another slip of 3% in 2015.
AstraZeneca’s CEO reckons revenues will probably return to 2013 levels in 2017. That’s grim for the years in-between, then.
Loss of growth at AstraZeneca is down to loss of exclusivity on some of the firm’s bestselling and most profitable drugs. Patents run out over time, generic competition swamps the market, and once key earners fail to deliver. Now, it’s all about developing new products to replace the earnings’ gap. The trouble is, as indicated by AstraZeneca’s own CEO, the process is set to take years. It’s a jam-tomorrow proposition and I’d argue that the firm doesn’t deserve a growth rating.
So, when and if the bid premium finally evaporates, the share price could be lower. After all, the company has just demonstrated its attitude to potential suitors: cold. To me, holding AstraZeneca shares right now looks like a dangerous place.
Valuation
The forward P/E rating is running at almost 18 for 2015 and the dividend yield looks set to be around 3.9% at the current share-price level.
AstraZeneca’s growth seems likely to be a long way off , so the valuation seems expensive.
