In particular, right now the company trades at a forward P/E of 17.1 compared to the FTSE 100 average of 15.And this is especially surprising when you consider the fact that the companys earnings are expected to decline by 3% this year and a further 4% next year.
Compared to peers Shire and Glaxosmithkline, which trade at forward P/Es of 19 and 15.3 respectively, and are both expected to report earnings growth over the next two years, Astra appears to be overpriced.
However, the City has great expectations for Astra and this seems to be the driving force behind the companys high valuation.
You see, after fending off a bid from US pharma giantPfizerearlier this year, Astras management laid out an ambitious growth plan to deliver annual revenues of $45bn by 2023. Thats a 73% increase in sales from reported revenues of just under $26bn during 2013.
And to back up this ambitious growth target, Astra has developed an industry-leading immuno-oncology portfolio with 13 clinical trials already under way. A further 16 trials are planned and a total of 14 potential new drugs are already in the process of Phase III testing or registration before sale. As many as ten drug approvals are set for 2016.
Analysts atUBSbelieve that even at current prices, Astras pipeline is undervalued. This thesis is based on the fact that the company has eight key assets under development, which have critical milestones in development over the next 18 months. Early stage success of these trails could lead to a re-rating of the company and faster return to growth than many expect.
As if to prove this forecast correct, only a few days after UBS issued its advice, Astra revealed the successful trail of itsBrilinta tablets for patients with a history of heart attack. The study, which involved over 21,000 patients, successfully met its primary efficacy endpoint andthe treatment led to a significant reduction in major cardiovascular thrombotic events.
The return of Pfizer?
Along with Astras impressive treatment pipeline, it seems as if some traders are also betting that Pfizer will return to make anotheroffer forAstra.
Superstar fund manager Neil Woodford estimates that there is a 50:50 chance Pfizer will come back for Astra but, based on Astras prospects, he believes that the US giant can simply cannot afford a suitable price for Astra.
Overall, Astras higher-than-average valuation can be justified by the companys attractive pipeline of treatments under development and projected revenue growth.
However, these high expectations leave plenty of room for Astra to disappoint. Only 7% of experimental drugs get from the invention to the production stage, so theres a high risk Astra could disappoint.
Still, only you can decide if AstraZenecais suitable for your portfolio.
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