At first glance, AstraZeneca (LSE: AZN) looks expensive. Indeed, at present levels Astra is currently trading at a forward P/E of 16.1, while peer GlaxoSmithKline is trading at a forward P/E of 16.
So, by using the P/E ratio it does look as if Astra is marginally overvalued compared to its closest London-listed peer.
However, if we use the enterprise value to earnings before interest, tax, depreciation and amortization (EV/EBITDA) ratio, and compare Astra to its international peers, a different picture emerges.
Two speed industry
The international pharma industry can be broadly separated into two groups: Those companies that are suffering from loss of patent protection on key drugs, and those that aren’t.
The group of companies suffering from patent expirations include US pharma giants, Pfizer and Merck as well as a European group Sanofi. This group currently trades at an average forward EV/EBITDA multiple of 11.5. Astra is also part of this group and trades at a slight discount to its non-growth peer group. The company trades at a forward EV/EBITDA figure of 11.1.
The other big pharma group, which is still reporting organic revenue growth and not suffering from patent expirations, includes Swiss biotech giants Roche and Novartis. These companies trade at an average forward EV/EBITDA figure of 14.8.
Breaking down the valuation
The figures above show that when compared to international peers facing similar patent expiration pressure, Astra is undervalued. What’s more, after looking at the numbers, it seems as if the market is failing to fully understand the potential of Astra’s pipeline of new treatments under development.
In particular, the company is planning to return to growth by 2016, at which point the market should re-rate the shares. If all goes to plan and the company does return to growth in 2016, at this point the market should place a growth valuation on Astra’s shares — a valuation similar to the ‘growth group’ of big pharma companies.
Further, after 2016, as Astra’s treatment pipeline starts to yield results, the market is likely to place an even higher value on the group’s shares. A high rate of growth in a specialist industry usually demands a growth premium.
The bottom line
Overall, by using the fairly basic P/E multiple Astra looks to be expensive, compared to its only London listed peer. But when you compare Astra on an EV/EBITDA basis to its international peers, the company appears to be undervalued.
In addition, it looks as if the company’s shares are in for a significant re-rating when the group finally returns to growth.
So all in all, Astra is an undervalued company with great potential for long-term growth.
