It’s been an incredible turnaround for investors in AstraZeneca (LSE: AZN) (NYSE: AZN.US) in recent years. Indeed, after posting next to no share price gains between 2010 and 2013, shares in the pharmaceutical major have risen by 49% since the start of 2013, as the company has rejuvenated its pipeline and become a bid target.
However, there could be much more to come in future and AstraZeneca could help you to retire rich. Here’s how.
A New Pipeline
A major reason for AstraZeneca’s disappointing share price performance in previous years was the company’s patent cliff. This is where a number of key, blockbuster drugs were going off-patent and would therefore be subject to generic competition. In turn, this would reduce AstraZeneca’s sales by a huge amount.
This is, of course, part and parcel of the pharmaceutical industry. The problem AstraZeneca had, though, was that its pipeline was weak and it was unable to replace the drugs it was set to lose exclusivity on.
However, under new management, the company has pursued an ambitious M&A strategy that has revitalised its pipeline. For example, the purchase of Bristol-Myers Squibb’s share of the two companies’ diabetes joint venture could prove to be highly lucrative, with the number of diabetes sufferers expected to increase rapidly over the next 50 years.
Furthermore, new management ended the share repurchase programme and maintained dividends so as to put the company on a more stable financial footing with which to tackle its pipeline problem. The result is a strong and diversified pipeline that looks set to grow AstraZeneca’s top and bottom lines at a rapid rate over the long run.
Bid Potential
With US rival Pfizer making three bids for AstraZeneca in recent months, it is clear that the company has considerable appeal to a rival. Indeed, it would be of little surprise for there to be another bid from a rival pharmaceutical company, since many of the sector’s largest players are struggling to grow their top and bottom lines.
With huge financial firepower, acquisitions seem to be the obvious answer and, although the US treasury recently took steps to curb ‘inversion’ deals that allow US companies to avoid high US taxes by relocating abroad, the merits of AstraZeneca’s pipeline may be enough to warrant future bids.
Valuation
While AstraZeneca’s share price has not fallen much since the bids were announced, the company still offers good value for money right now. Certainly, a price to earnings (P/E) ratio of 17.6 is high when compared to the FTSE 100’s P/E of 13.7 but, when you consider that pharmaceutical rival Shire was trading on a P/E of over 20 when it was approached by AbbVie, there appears to be scope for a considerable upward rerating to AstraZeneca’s current P/E.
