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Are We Seeing A Golden Opportunity With AstraZeneca plc, Shire plc & BTG plc?

Shares are down from recent highs at AstraZeneca (LSE: AZN), Shire (LSE: SHP) and BTG (LSE: BTG) but the investment story remains compelling in each case. Are we seeing a good-value entry point for these shares right now?

Delays, not disasters!

After peaking near 830p at the beginning of the year, shares in specialist healthcare company BTG are down around 34% at today’s 547p. It looks like the shares were well ahead because many thought the firm’s new treatment for varicose veins, Varithena, would roll out faster in the US than has been the case.

That’s often a feature of growth shares — the price and company valuation tends to rise ahead of the ‘fact’ of growth. If that growth is delayed, or doesn’t happen at all, the shares can crash back down, as we see today with BTG. Uptake for Varithena in the US seems to be slow because of pedestrian rollout of medical insurance coverage for the product, so it’s not an issue about how effective the treatment might be.

BTG itself remains upbeat on the company’s prospects. In an update released on 6 October, the firm said it is making good progress in implementing its growth strategy to become a leader in interventional medicine. Varithena isn’t the only growth driver in the firm’s stable of branded products, and the directors reckon that BTG saw strong first-half performances across the product portfolio. Varithena isn’t dead in the water either. There’s strong interest from physicians in the US and insurance coverage is expanding, but this yet to translate into sales growth.

Overall, the firm expects to hit the lower end of its revenue guidance for the full year — about £410 million. That’s not too bad, and with the speculative froth now blown off share price, I think we see an opportunity to buy the shares of a decent, growing company in the pharmaceutical sector with any upside from Varithena now a bonus rather than a necessity.

The forward price-to-earnings (P/E) ratio runs at just over 20 for year to March 2017. That strikes me as modest for a growth proposition where City analysts following the firm still expect earnings to grow by 11% this year and a further 56% to March 2017, presumably as sales of Varithena gain traction.

A promising pipeline?

Big-cap pharmaceutical firm AstraZeneca is shaking off its patent-cliff induced headache of the last few years by bearing down on costs, ploughing money into its development pipeline and pushing to gain market share. The firm points to steady revenue growth over the last few quarters as evidence that the strategy is working. However, profits have yet to follow. City analysts following the firm expect earnings to slip 2% this year and a further 4% during 2016. That means earnings are relatively stable compared to the double-digit reductions we’ve seen in recent years.

So, maybe now is the time to jump in and collect the firm’s 4.4% forward dividend yield. Forward earnings will likely cover the payout almost one-and-a-half times even though profits will be down. With the shares at 4164p, the forward P/E ratio sits at just under 16. That’s not cheap, but if the firm’s pipeline delivers a new generation of blockbuster sellers, as many hopes, profits could be on the rise down the road. That said, unlike BTG, which is growing earnings now, AstraZeneca’s growth proposition remains “jam tomorrow” for the time being.

Best of both?

City analysts following Shire expect earnings to dip by 33% this year and to bounce back by 16% during 2016. Although the pharmaceutical firm is a big-cap company, the high level of dividend cover from earnings suggests the directors still see plenty of growth ahead. At a share price of 4990p the forward dividend yield runs at 0.4% for 2016 and forward earnings cover the payout almost 14 times. If there were no opportunities to invest for growth the directors would surely pay more free cash back to shareholders in a larger dividend.

Shire is an interesting proposition falling between reassuringly large AstraZeneca and fast-growing but smaller BTG, and perhaps combines some of the attractions of both. However, I think the firm most likely to be presenting investors with a golden opportunity right now is BTG.

That said, BTG isn't the only firm that looks interesting in the pharmaceutical sector. I'm also looking closely at a small-cap idea that our analysts are getting excited about here at the Motley Fool. You can find out why we are interested in this investment opportunity, free of charge and for a short while longer, by clicking here.

Kevin Godbold owns shares in BTG. The Motley Fool UK has recommended AstraZeneca and BTG. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.