Shares in AstraZeneca (LSE: AZN)(NYSE: AZN.US) have put on nearly 30% since Pascal Soriot became CEO in September 2012, outperforming rival GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), up 7%, and the FTSE 100, up 10%.
That’s a testimony to the Frenchman’s success in focusing Astra on a science-based strategy of drug development, cost-cutting and improved marketing. Astra has narrowed the discount on which it was trading compared to GSK, with its prospective P/E of 12.7 now much closer to GSK’s 13.8.
Astra hit new highs off the back of a bullish trading update ahead of next Thursday’s results. It has 11 drugs in final Phase III trials, almost double that of a year ago, with another 27 drugs in Phase II. Whilst analysts were expecting patent expiries to push the company’s revenues downwards until 2018, Mr Soriot said he expected sales to return to growth a year earlier. It suggests that $7bn of acquisitions and a streamlined R&D structure is paying off.
A pleasant surprise in Thursday’s announcement and broker upgrades — turning the corner on 12 months of downgrades — could put further momentum behind the shares. So why have I sold my holding?
Greed
Well, it never pays to be greedy. I’ve had a good run with Astra’s shares, but I think the market has got ahead of itself in calling Astra’s recovery. The pipeline looks promising but success is inevitably uncertain, depending on the outcome of scientific trials. However Astra’s two top blockbuster drugs, Nexium and Crestor, come off patent in 2014 and 2016. So decline in those revenues is certain, while replacement revenues from new drugs are uncertain.
Contrast that with GSK. It too has a promising pipeline of new drugs which, if successful, will add to revenue growth. But it has largely turned the corner on patent expiries. It has similar upside, but less downside. It also has the ballast of substantial profits from its more stable vaccines and health-care businesses. What’s more, GSK is currently yielding more than Astra: 4.9% against 4.5%.
To my mind, Astra’s greater risk merits more than an 8% discount to GSK’s rating — which is what the relative P/E ratios imply. Of course, I’ve probably got the timing wrong: only with hindsight will I know. And I’d certainly be happy to see Astra resume its standing as a reliable and safe high-yield defensive stock. But currently I see a better balance of risk and reward with GSK than with Astra.
