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Is Alliance Pharma plc The Perfect Partner For AstraZeneca plc In Your Portfolio?

The last year has been rather mixed for investors in AstraZeneca (LSE: AZN) (NYSE: AZN.US). Rewind a year and the company was in the midst of takeover rumours, with US rival, Pfizer, making a number of unsuccessful bids for the pharmaceutical play. Since then, its share price performance has disappointed, with its valuation falling by 5% even though it remains on track to emerge from the current patent cliff in excellent shape, with bottom line growth being forecast from 2017 onwards.

An Excellent Stock

Despite its disappointing share price performance over the last year, AstraZeneca remains a very appealing investment. That’s at least partly because of its strategy of buying up smaller rivals in order to more quickly counter the effects of the loss of key, blockbuster drugs. For example, AstraZeneca bought the other half of the diabetes alliance from Bristol-Myers Squibb and this highlights the renewed focus on major global illnesses that, over the coming years, are expected to provide growth in demand for AstraZeneca’s products.

A Similar Business Model

Of course, Alliance Pharma (LSE: APH) is a very different beast to AstraZeneca. For starters, it is considerably smaller, has less diversity and a reduced economic moat. However, a key similarity is the company’s business model of growth through acquisition, rather than as a result of organic growth which, as mentioned, AstraZeneca is now increasingly reliant upon.

In fact, Alliance Pharma’s continual purchase of off-patent drugs which still offer wide margins and relatively consistent performance means that its financial performance is relatively robust. For example, in the last five years, Alliance Pharma has remained very profitable and, while its pretax profit has not grown at a rapid rate, it has been very consistent and occupied a narrow range of between £10m and £12m during the last five years.

Income Prospects

This consistency allows Alliance Pharma to pay out a rather generous dividend, with its dividend yield currently standing at 3%. For a smaller company, that’s impressive and, looking ahead, there is considerable scope for increases in dividends per share since Alliance Pharma currently pays out just 33% of profit as a dividend and, looking ahead, is expected to increase its bottom line by 7% next year.

Clearly, AstraZeneca has better income prospects than Alliance Pharma, with it offering a yield of 4.5% at the present time. However, Alliance Pharma is far cheaper than its larger sector peer, with it having a price to earnings (P/E) ratio of just 11.2 versus 15 for AstraZeneca. This, though, does not mean that AstraZeneca is expensive; it still offers upward rerating potential while most global pharmaceutical plays trade on much higher ratings. However, it provides evidence of just how cheap Alliance Pharma is, given its consistency and impressive growth forecasts.

Looking Ahead

So, while there are numerous options within the pharmaceutical sector, AstraZeneca and Alliance Pharma appear to be two of the most promising. Between them, they offer excellent income potential, great value for money, impressive medium to long term growth prospects and relative consistency. As such, they appear to make for a superb combination.

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