The reason for it is a closing of a loophole that allowed US companies to relocate their headquarters abroad for tax purposes so as to lower their tax payments. As a result, potential bid premiums that were built into the sectors valuation have been removed, leaving pharmaceutical stocks at lower prices.
Of course, an obvious choice in the sector is AstraZeneca (LSE: AZN), due to its size, scale and improving pipeline. Indeed, the company is making significant improvements to its long term growth potential and has been on something of an acquisition spree over the last couple of years, as it seeks to overcome the patent cliff that is hurting its top and bottom lines in the short run.
Furthermore, now that shares in the company have fallen by 2.5% in the last week, they look even more attractive. And, although a bid from a US rival such as Pfizer is less likely, AstraZeneca could still make for a hugely profitable investment moving forward.
However, it could be complemented in Foolish portfolios by sector peers such as Shire, BTG (LSE: BTG) and Hikma (LSE: HIK). All three companies have excellent growth potential over the next couple of years and, in this sense, would be a good match for AstraZeneca due to the short term declines that are forecast in its top and bottom lines.
For example, Shire is expected to grow its bottom line by 24% in the current year and by a further 10% next year. Better still, shares in the company now trade on a price to earnings (P/E) ratio of 19.1, which puts them on a price to earnings growth (PEG) ratio of just 0.8. This highlights that they offer growth at a reasonable price and, as a result, Shires share price could easily make up the bid premium lost in recent days.
In addition, Hikma has a strong track record of growth, with its bottom line growing in four of the last five years and averaging growth of 37% per annum during the five year period. Furthermore, the company has grown revenue in every year since 1996 and, looking ahead, has considerable potential.
Thats because its stable of consumer goods, generics and injectables have significant growth prospects especially in the Middle East and North Africa, which is a focus for Hikma at present. While a P/E ratio of 22.7 may seem high, Hikmas growth potential could be well-worth paying for.
Meanwhile, BTG could also complement AstraZeneca in your portfolio. Thats because it is expected to increase its bottom line by a whopping 43% next year and, when combined with a P/E ratio of 45.7, this equates to a PEG ratio of just 1.1, which is hugely attractive.
While BTGs profit track record is volatile and its rating is high, the prospect of such impressive growth numbers should be enough to keep demand for shares in the company buoyant and allow it to keep moving higher. With share price gains of 20% in 2014, BTG could continue to be a top performer moving forward.
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Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended BTG. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.