2014 has been a superb year for investors in AstraZeneca (LSE: AZN). That’s because shares in the pharmaceutical company have risen by 19% since the start of the year, which is well ahead of the FTSE 100’s disappointing decline of 6%.
A key reason for such strong gains has been continued bid rumours for the business, following three firm offers from sector peer Pfizer.
Although further bids now seem less likely, I’m still bullish on the future prospects for AstraZeneca. Here’s why.
US Regulatory Changes
A major reason for Pfizer’s bids for AstraZeneca was the potential tax advantage that could result from relocation outside of the US. However, since the bids were made, US regulators have sought to tighten up the loophole that allows such a situation to exist and, as a result, the prospect of further bids for AstraZeneca from US peers has diminished.
Indeed, today’s news that AbbVie is reconsidering its bid for Shire is perhaps the first evidence that this is the case. Although the deal does not yet appear to be dead in the water, it seems as though the without tax advantages, European pharmaceutical companies look a lot less attractive to their US peers.
An Improving Pipeline
Despite future bids apparently being less likely, AstraZeneca still looks like a strong buy at present. The main reason for this is a rapidly improving pipeline that holds the key to future top and bottom line growth for the company.
Indeed, under its new management, AstraZeneca has embarked on an acquisition programme to turn the company’s longer-term fortunes around. For example, it has purchased Bristol-Myers Squibb’s share in a diabetes joint venture, as well as numerous other companies with huge potential. This means that AstraZeneca’s pipeline, which was once regarded as its Achilles heel, is now viewed as a major strength of the company.
Looking Ahead
While AstraZeneca doesn’t appear to offer particularly good value when compared to the wider index, for a high-quality pharmaceutical play with vast long term potential, its shares seem to be very reasonably priced.
For instance, AstraZeneca’s current price to earnings (P/E) ratio is 15.8, which is considerably higher than the FTSE 100’s P/E ratio of 12.9. However, when the longer term earnings growth potential resulting from a strong pipeline is taken into account, shares in AstraZeneca, it could be argued, deserve an even larger premium to the wider market.
Furthermore, with a yield of 4% and the potential for it to move higher as a result of increasing dividends per share over the medium term, AstraZeneca could prove to be a great investment — even if further bids for the company are not forthcoming.
