Since May, AstraZeneca‘s (LSE: AZN) (NYSE: AZN.US) shareholders have been excitedly awaiting the return of Pfizer to make a new buyout offer for the UK’s second largest pharmaceutical company. 
The prospect of another bid has kept Astra’s shares above the key 4,000p per share level for much of this year. Unfortunately, there’s a very real chance that Pfizer won’t come back and make another offer for Astra.
Potential for disappointment
The US government has introduced rules of the past few months that blocks so called tax ‘inversions’, whereby a company shifts its tax base outside of the US to lower its tax bill.
Pfizer’s takeover of Astra was motivated by Astra’s lower tax bill but with restrictions now in place, Pfizer’s options are limited. As a result, it’s likely that Pfizer won’t make another bid for Astra any time soon. For this reason, Astra’s shares could fall by as much as 10%.
Indeed, takeover speculation has driven Astra’s valuation up to a level which appears to be unsustainable in the long-term. For example, Astra currently trades at a forward P/E of 16, compared to the pharmaceutical & biotech average sector P/E of 13.1. What’s more, Astra’s larger peer, GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) currently trades at a forward P/E of 14.6, despite the company’s growth prospects.
Specifically, Glaxo’s earnings are expected to fall around 16% this year but City analysts are expecting earnings per share growth of 4% during 2015. Meanwhile, Astra’s earnings are expected to fall 14% this year, then a further 7% next year. Astra’s management does not expect the company to return to growth until 2017, although by 2023 management believes that the company will have doubled sales.
Unfortunately, these figures imply that if Pfizer does not come back for Astra, Astra’s shares will fall. If the company’s valuation were to fall to a level similar to the rest of the sector, the shares would only be worth 3,523p. With earnings expected to fall during 2015, the company’s shares could fall further to 3,262p by 2015.
Room for growth
As Astra’s earnings fall, Glaxo’s earnings are set to begin rising again next year, which indicates to me that the company could be a better investment than its smaller peer.
What’s more, Glaxo has been investing for growth during the past year. As these investments start to pay off next year, the company should see earnings shoot higher.
But it’s not just Glaxo’s future growth that has convinced me that the company has better prospects than Astra, Glaxo, as covered above is also cheaper. In addition to Glaxo’s low P/E multiple, the company supports a highly attractive dividend yield of 5.7%, compared to Astra’s 4.1%.
Two solid picks
All in all, if Pfizer does not return to make another bid for Astra, then Astra’s shares could fall than 10% from current levels. That being said, for long-term investors due to its defensive nature, Astra remains an attractive investment.
