GlaxoSmithKline (LSE: GSK), AstraZeneca (LSE: AZN) and Shire (LSE: SHP) have all fallen out of favour with investors during the past six months. Indeed, since the beginning of May, these three pharma giants have seen their shares fall 8%, 6.4% and 10.7% respectively.
But for the savvy long-term investor, these declines have presented the perfect opportunity.
Classic value
Glaxo and Astra currently exhibit all the traits of classic contrarian value investments. Specifically, the two pharma giants are unloved by the market, but their underlying businesses are still chugging along nicely.
For example, Glaxo’s management believes that the company’s earnings are set to grow by a double-digit percentage next year. What’s more, management revealed this week that the group has the potential to file up to 20 new drugs and vaccines with regulators before 2020, and the same number again in the following five years. These new treatments have the potential to boost Glaxo’s sales by £6bn before the end of the decade.
Astra also has a robust treatment pipeline that’s expected to return the group to growth by 2017. That said, the group has recently suffered a setback after the FDA demanded that the company provide more data for SaxaDapa, a diabetes pill that analysts were expecting to produce sales of $1bn per annum for the group.
The FDA’s demands mean that SaxaDapa won’t be available for sale in the US for another 12–18 months. Still, Astra has more than 200 treatments under development so the company isn’t out of options just yet.
Astra currently trades at a forward P/E of 15.1 and supports a dividend yield of 4.4%. Glaxo trades at a forward P/E of 18.5 and supports a dividend yield of 7.1%.
Buying up growth
Shire’s shares have been under pressure this week after the company announced that it was spending $5.9bn deal to buy Dyax, a US biotech company. But it looks as if Shire’s management has been forced to make this acquisition as Dyax is currently developing a breakthrough rare disease treatment that would have rivalled parts of Shire’s existing portfolio.
In other words, Shire has ensured that it will continue to dominate its key markets for years to come by acquiring one of its main competitors. The drug that Shire wanted to get its hands on so badly is called DX-2930. It has a market of only 40,000 identified patients, but could achieve annual sales of up to $2bn if fully approved.
Also, Shire is pursuing the acquisition of rival drugmaker Baxalta, in a deal that has the potential to transform Shire into the world’s biggest maker of rare disease drugs by sales.
It is clear that these deals will boost Shire’s growth over the long-term. If the Baxalta all-stock deal goes through, it would double Shire’s annual sales. Synergies gained from the merger will also boost margins. The Dyax deal is expected to boost Shire’s earnings from 2018 onwards.
According to City forecasts, Shire is currently trading at a forward P/E of 19.8. Earnings per share are expected to grow by 15% during 2016, which implies that the group is trading at a 2016 P/E of 17.3. Of course, if the Baxalta deal goes through as well, Shire’s growth will leap even higher.
