Is AstraZeneca plc set to lose out to Hikma Pharmaceuticals plc and BTG plc?

In the last three months, shares in AstraZeneca (LSE: AZN) have performed relatively poorly. They’re down by almost 8% and with sector peers such as Hikma (LSE: HIK) and BTG (LSE: BTG) rising by 5% and 2%, respectively, during the same time period, many investors may be wondering whether it’s time to sell AstraZeneca and pile into two of its pharmaceutical rivals.

On the one hand, selling AstraZeneca could be viewed as a sound move. That’s because the company is forecast to report a further fall in its earnings in both the current year and next year as a loss of patents on key, blockbuster drugs continues to hurt its top-line performance. During this period, it would be rather unsurprising for AstraZeneca’s share price to come under further pressure as investors begin to price-in yet more pain on the earnings front.

However, beyond the next two years AstraZeneca has huge appeal. That’s because it has invested heavily in its drug pipeline through major acquisitions. They’ve strengthened its growth potential and while it looks as though it will take more than a couple of years for the company to deliver positive earnings growth, it appears to be on the path to doing so. And with AstraZeneca’s balance sheet and cash flow being very strong, it has the financial firepower to make many more sizeable acquisitions to further bolster its long-term profit outlook.

What’s the alternative?

Clearly, the likes of Hikma and BTG have significant appeal for long-term investors. In the case of the former, it’s forecast to endure a tough 2016 as a result of an expected fall in earnings of 12%. However, looking ahead to next year, Hikma is due to reverse this with growth of 36%. This has the potential to significantly improve investor sentiment in the company. And with its shares trading on a price-to-earnings-growth (PEG) ratio of just 0.5, there seems to be considerable scope for an upward rerating due in part to Hikma having such a wide margin of safety.

Similarly, BTG is set to increase its earnings over the next two years with growth of 17% in the current year and 25% next year being pencilled-in by the market. This is an exceptionally strong rate of growth and has the potential to positively catalyse investor sentiment in BTG. As with Hikma, BTG trades on a relatively low PEG ratio, which affords it a wide margin of safety. Therefore, there’s upside potential from BTG’s PEG of 0.9, while the risk of a major fall in its share price is somewhat limited by having such an appealing valuation.

So, while BTG and Hikma offer better growth potential in the short run and have outperformed AstraZeneca in the last three months, AstraZeneca has a very bright long-term future. Furthermore, it has a size and scale advantage over its peers, with it arguably having more diversity and financial firepower through which to improve its pipeline. As such, AstraZeneca still seems to be the best buy of the three, although Hikma and BTG offer excellent risk/reward ratios.

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