It’s been an interesting year for investors in AstraZeneca (LSE: AZN) (NYSE: AZN.US). Indeed, it has been the subject of several unsuccessful takeover attempts by Pfizer and has seen its share price rise by 20% over the course of 2014. Certainly, that’s at least partly because of a bid premium, but today’s update confirms that some of its recent gains are due to the company continuing to turn itself around as it successfully navigates through its much-talked-about patent cliff. Does this mean all is now rosy at AstraZeneca and that it is the number one UK healthcare investment?
A Strong Update
Today’s second-quarter update beat expectations, as AstraZeneca saw sales increase by a higher than expected 4% in the second quarter as its five key growth areas saw impressive levels of expansion. Perhaps of more interest, though, is earnings per share (EPS) growth, which was well ahead of expectations in the second quarter and meant that AstraZeneca delivered EPS of $1.30 versus forecasts of $1.06.
AstraZeneca expects there to be further strength in the second half of the year and, as such, has upgraded its forecasts for the full year. Although profit is expected to decline, the company has guided the market to expect low double-digit percentage falls rather than the 14% that was priced in. This is encouraging news for investors and shows that the company is turning itself around, with an improved pipeline also highlighting the company’s longer-term potential. On this front, AstraZeneca’s pipeline included 114 projects, of which 19 were moved onto their next phase of trials in the last quarter.
Sector Peers
Clearly, AstraZeneca is starting to gain momentum and is beginning to turn itself around after a number of challenging years when its patent losses hit revenue hard. However, it’s not the only health care stock with huge potential. GlaxoSmithKline (LSE: GSK) released an encouraging update earlier in the week that highlighted the diversity and opportunity within its pipeline.
Certainly, neither company is expected to grow sales as quickly as Shire (LSE: SHP) (which is in the process of being acquired by Abbvie). It took the unusual step of highlighting in significant detail its pipeline, with the company expecting to double sales by 2020. However, neither AstraZeneca nor GlaxoSmithKline trade on the same price multiple as Shire did, so could offer better value than their former sector peer.
Looking Ahead
Indeed, on the face of it, GlaxoSmithKline appears to be a better long-term play than AstraZeneca. That’s because it trades on a lower price to earnings multiple of 12.8 (versus 17.1 for AstraZeneca) and comes with a higher yield of 5.7% (versus 3.8% for AstraZeneca). It also has a pipeline that is well diversified and full of potential (as does AstraZeneca), but the one key difference is market sentiment. For AstraZeneca, it keeps getting stronger, but for GlaxoSmithKline, with continued allegations of bribery being present, it seems to keep on getting weaker.
Therefore, while both companies offer huge long term potential via their respective pipelines, GlaxoSmithKline seems to be the more logical buy, while AstraZeneca could benefit (in the short term at least) from improved sentiment following its strong second quarter. For longer-term investors, therefore, GlaxoSmithKline still appears to be #1, with AstraZeneca a close second place.
