Is now the perfect time to buy AstraZeneca plc & GlaxoSmithKline plc?

Have you been keeping an eye on the FTSE 100‘s big pharmaceuticals companies? I have, and though it might not have been the most exciting of spectator sports, they’ve been edging ever closer to a return to earnings growth. I can’t help feeling 2016 could be a pivotal year.

AstraZeneca (LSE: AZN) has been on a transformational path since Pascal Soriot took over in October 2012 when it was reeling from the expiry of some of its key patents and increased competition from generic alternatives. At the time the company had its finger in a lot of pies, not all of them particularly profitable — and some of which Mr Soriot saw as not vital to the business.

The result was a culling of non-core businesses and a serious reinvestment in AstraZeneca’s drugs pipeline. That’s led to a lot of new drug candidates making impressive progress through the testing and approvals process, with almost every week so far this year seeing a testing milestone or a new approval announced. It’s a long slow job for new products to add significantly to the bottom line, but I’m becoming increasingly convinced that it really is just a matter of time — and not much more time at that.

Share prices weak

AstraZeneca shares haven’t done so well as forecasts for a return to EPS growth have been put back a little — though it was only ever a very rough guess. Over the past 12 months we’ve seen an 11% fall to 3,930p, giving us a drop of 20% since mid-May 2014. And that, I think, gives us a nice buying opportunity this year that I didn’t think we’d see.

Astra shares are on a forward P/E of only a little over 14. That is, admittedly, only around the long-term FTSE average and might not look too hot at first glance. But if we really are close to the bottom of AstraZeneca’s earnings cycle, future EPS growth could see that drop significantly. Oh, and the company has maintained its dividend throughout and it’s expected to yield 5.1% this year.

The situation at GlaxoSmithKline (LSE: GSK) has been similar, with key drugs losing patent protection and cheap alternatives mopping up the market — as a single example, one of the company’s big earners, the prostate treatment Avodart, has seen sales slumping this year. But though Glaxo didn’t get a new boss, its recovery strategy has been pretty much the same. Glaxo is expecting its big-budget approach to R&D to result in up to 40 new big sellers in the next 10 years, of which it hopes the majority could be the best-in-class.

Quicker recovery

One difference between the two companies is that City analysts are forecasting a return to earnings growth this year for Glaxo, although growth would slow again in 2017 if they’re right (at AstraZeneca they don’t expect EPS growth before 2018).

That would put GlaxoSmithKline shares on a higher P/E than Astra’s, at around the 16 level. But that seems fair for a company with a quicker recovery predicted and offering better dividend yields at around 5.6%.

Despite these attractive prospects, Glaxo shares have remained flat over the past 12 months, and have lost 12% in two years to stand at 1,450p. But again, that makes me think we’re seeing a rare buying opportunity when the share price hasn’t caught up with the speed of the company’s improving prospects.

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