Is AstraZeneca plc Overvalued?

AstraZeneca (LSE: AZN) (NYSE: AZN.US) is currently one of the most expensive companies in the FTSE 100.

In particular, right now the company trades at a forward P/E of 17.1 compared to the FTSE 100 average of 15. And this is especially surprising when you consider the fact that the company’s earnings are expected to decline by 3% this year and a further 4% next year.

Compared to peers Shire and Glaxosmithkline, which trade at forward P/Es of 19 and 15.3 respectively, and are both expected to report earnings growth over the next two years, Astra appears to be overpriced.

Great expectations

However, the City has great expectations for Astra and this seems to be the driving force behind the company’s high valuation. 

You see, after fending off a bid from US pharma giant Pfizer earlier this year, Astra’s management laid out an ambitious growth plan to deliver annual revenues of $45bn by 2023.  That’s a 73% increase in sales from reported revenues of just under $26bn during 2013.

And to back up this ambitious growth target, Astra has developed an industry-leading immuno-oncology portfolio with 13 clinical trials already under way. A further 16 trials are planned and a total of 14 potential new drugs are already in the process of Phase III testing or registration before sale. As many as ten drug approvals are set for 2016.

Analysts at UBS believe that even at current prices, Astra’s pipeline is undervalued. This thesis is based on the fact that the company has eight key assets under development, which have critical milestones in development over the next 18 months. Early stage success of these trails could lead to a re-rating of the company and faster return to growth than many expect.

As if to prove this forecast correct, only a few days after UBS issued its advice, Astra revealed the successful trail of its Brilinta tablets for patients with a history of heart attack. The study, which involved over 21,000 patients, successfully met its primary efficacy endpoint and the treatment led to a significant reduction in major cardiovascular thrombotic events.

The return of Pfizer?

Along with Astra’s impressive treatment pipeline, it seems as if some traders are also betting that Pfizer will return to make another offer for Astra.

Superstar fund manager Neil Woodford estimates that there is a 50:50 chance Pfizer will come back for Astra but, based on Astra’s prospects, he believes that the US giant can “simply cannot afford” a suitable price for Astra. 

Foolish summary 

Overall, Astra’s higher-than-average valuation can be justified by the company’s attractive pipeline of treatments under development and projected revenue growth.  

However, these high expectations leave plenty of room for Astra to disappoint. Only 7% of experimental drugs get from the invention to the production stage, so there’s a high risk Astra could disappoint. 

Still, only you can decide if AstraZeneca is suitable for your portfolio. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended shares in GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.