GlaxoSmithKline (LSE: GSK),AstraZeneca(LSE: AZN) andShire(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 currentlyexhibit 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, Glaxos management believes that the companys earnings are set to grow by a double-digit percentage next year. Whats more, management revealed this week that the group has thepotential 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 Glaxos sales by 6bn before the end of the decade.
Astra also has a robust treatment pipeline thats 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 forSaxaDapa, a diabetes pill that analysts were expecting to produce sales of $1bn per annum for the group.
The FDAs demands mean that SaxaDapa wont be available for sale in the US for another 1218 months. Still, Astra has more than 200 treatments under development so the company isnt 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
Shires 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 Shires management has been forced to make this acquisitionas Dyax is currently developinga breakthrough rare disease treatment that would have rivalled parts of Shires existing portfolio.
In other words, Shirehas 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 calledDX-2930. Ithas 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 ofrival drugmaker Baxalta, in a deal that has the potential to transformShireinto the worlds biggest maker of rare disease drugs by sales.
It is clear that these deals will boost Shires growth over the long-term. If the Baxalta all-stock deal goes through, it woulddouble Shires annual sales. Synergies gained from the merger will also boost margins. The Dyax deal is expected to boost Shires earnings from 2018 onwards.
According to Cityforecasts,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, Shires growth will leap even higher.
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Rupert Hargreaves owns shares of AstraZeneca and GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and GlaxoSmithKline. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
