The demand for pharmaceutical companies’ stocks has surged dramatically. AstraZeneca (LSE:AZN) shares have been no exception. Investor enthusiasm was fuelled by hopes of a new Covid-19 vaccine. But isn’t the AstraZeneca share price already too high?
Why did the AstraZeneca share price rally?
On Monday, the pharma giant resumed phase 3 vaccine trials. As we all know, the company’s stock has been surging in recent months. That’s because people expect AstraZeneca to develop a Covid-19 vaccine. But is the future so bright for AstraZeneca and its vaccine?
Quite recently the FDA said AstraZeneca’s coronavirus vaccine trial in the US is still pending. That’s because the FDA is unsure if there is a big safety issue or not. So, many questions remain. Phase 3 vaccine trials don’t mean the vaccine will be available tomorrow. What’s more, the FDA’s investigation also suggests there are still many regulatory hurdles. That’s why the AstraZeneca share price surge isn’t quite reasonable, in my opinion.
But there’s one more issue. Everyone wants to develop an effective Covid-19 vaccine. For example, in Russia a coronavirus vaccine was developed and approved by the state. Phase 3 trials are still going on, however. Some companies are close to launching their vaccine too. For example, Johnson & Johnson is doing late-stage testing right now. But we’ve all read plenty of stories about the likes of Gilead Sciences and Moderna. The point I’m making is that no one has developed and launched an effective Covid-19 vaccine yet, and it’s hard to predict who’ll be the first one to do so.
Please don’t forget that developing a good treatment doesn’t mean it’ll be easy to commercialise. Some drugs, for example, are easy to copy. Many companies such as Teva Pharma produce generics in developing countries. They are much cheaper but the quality isn’t much worse.
The overvaluation problem
My colleague Kirsteen wrote a wonderful article about AstraZeneca shares. I fully agree that the company is one of the largest and greatest Footsie constituents.
At the same time, the multiples the company is trading at are incredibly high. In my view, investors are already certain AstraZeneca will develop a best-selling and profitable Covid-19 vaccine. Only in that case can the price-to-earnings (P/E) ratio of 104 be justified.
Let’s compare AstraZeneca to its peer GlaxoSmithKline (LSE:GSK). Both companies are large pharmaceutical businesses with large market shares. GlaxoSmithKline’s sales revenue in 2019 totaled £33.8bn, while AstraZeneca’s was just $24.4bn. AstraZeneca’s dividend yield is about 2.5%. In comparison, GlaxoSmithKline’s is over 5%. What’s more, GSK’s insiders bought some of their company’s shares in late July. AstraZeneca’s directors also acquired some of their firm’s stocks. But they did so in February and March when the stock market was crashing. And yet GlaxoSmithKline shares are trading at a P/E of just 16 as opposed to AstraZeneca’s 104.
I don’t think it’s fair. AstraZeneca shares are popular just because of the vaccine hopes, I think.
Here’s what I’d do
I appreciate the fact AstraZeneca is a respectable FTSE 100 constituent. Indeed, it’s large and operating in a stable sector. But, in my view, it’s just too overvalued. So, I’d avoid its shares. I’d look through the Motley Fool’s excellent library for other investment ideas.