3 Reasons Why GlaxoSmithKline plc And AstraZeneca plc Are Worth Buying Right Now

While Pfizer’s bid for AstraZeneca (LSE: AZN) (NYSE: AZN.US) did not come off last year, both it and sector peer GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) could prove to be realistic bid targets moving forward.

The reason for this is fairly simple: a number of larger pharmaceutical companies are struggling to deliver top and bottom line growth, thereby making acquisition-led growth a relatively appealing option. And, with robust balance sheets and very attractive rates of borrowing still on offer, this year could prove to be the best chance of securing bid targets before interest rates begin to move higher.

As such, AstraZeneca and GlaxoSmithKline could see their share prices head north as investors begin to include a bid premium in their valuations.

New Strategies

As well as being bid targets, AstraZeneca and GlaxoSmithKline are also adopting strategies that could unlock considerable shareholder value. In AstraZeneca’s case, it has made multiple bolt-on acquisitions in recent years and continues to have the financial firepower to make more. This is helping it to overcome its Achilles heel: the loss of key, blockbuster drugs that has caused its top and bottom lines to fall heavily. And, as a result of its new strategy, AstraZeneca expects to begin growing by 2017, which would represent an impressive turnaround.

Meanwhile, GlaxoSmithKline’s plans to rationalise its business and potentially spin-off faster growing divisions (such as ViiV health care) and reduce its reliance on consumer goods could prove to be a prudent move. Certainly, it may leave it more exposed to the peaks and troughs of the drug development cycle but, with a promising pipeline of new drugs, it should be able to deliver strong growth moving forward.

Cost Reduction

As with any business that is struggling to grow its top line, cost cutting has become an integral part of AstraZeneca and GlaxoSmithKline’s focus in recent years. For example, GlaxoSmithKline continues to target £1bn of cost savings in its prescription-drug division over the next three years, while AstraZeneca is aiming to deliver £520m of cost reductions as it seeks to reduce its headcount by 5,000 over the next couple of years.

Looking Ahead

So, with AstraZeneca and GlaxoSmithKline both having the potential to become bid targets during the course of the year, adopting very sound strategies that could boost their bottom lines, and also having the potential to make significant cost savings, now could be a great time to buy shares in both companies.

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Peter Stephens owns shares of AstraZeneca and GlaxoSmithKline. The Motley Fool UK has recommended 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.