Having been the subject of numerous bid approaches in recent months from US peer Pfizer, AstraZeneca (LSE: AZN) (NYSE: AZN.US) has now seen CEO Pascal Soriot buy around £2 million of shares in the company. The price he paid was £43.45 per share, which is within 10% of their five-year high. Does this mean that even after share price gains of 38% over the last year he is still extremely bullish on the company’s prospects? Or should investors in AstraZeneca lock in recent gains?
A New Pipeline
Clearly, AstraZeneca remains something of a turnaround story. Although over the medium to long term its pipeline is now in a much better state than it was even a year or two ago after the company has made a number of key acquisitions, AstraZeneca’s short-term outlook remains rather disappointing. For example, earnings per share (EPS) are expected to fall by 15% this year and by 3% next year, which indicates that the CEO is looking beyond the next couple of years and focusing on the longer term potential of the pipeline.
Short Term vs Long Term
Indeed, the fact that AstraZeneca’s CEO has bought shares in the company indicates that there are no fresh takeover talks taking place. Therefore, with earnings set to decline over the next couple of years, it could be the case that AstraZeneca’s current valuation comes under pressure. That’s because it was boosted by the Pfizer bids and it would not be a major surprise for it to drift back towards pre-bid levels. Of course, that’s not to say that AstraZeneca doesn’t have growth potential over the long run (it certainly does), but it does mean that the pace of recent gains may not be repeated until the company starts to deliver on its potential.
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Sector Peers
Clearly, AstraZeneca has significant long term potential and continues to boost its pipeline, which bodes well for investors. However, sector peers GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and Smith & Nephew (LSE: SN) could also prove to be winning plays in the long run. For example, GlaxoSmithKline currently offers a better yield than AstraZeneca (5.2% versus 3.8% for AstraZeneca), as well as a lower price to earnings (P/E) ratio of 15.2 (versus 17.4 for AstraZeneca). GlaxoSmithKline also has a strong pipeline and has cash to burn after the sale of its Lucozade and Ribena brands.
Similarly, Smith & Nephew could also prove to be a strong long-term performer. Its business model is more stable than that of AstraZeneca, with the company focusing on wound care and orthopaedic reconstruction as opposed to the development of new drugs. Smith & Nephew trades on a relatively high P/E of 20.8, but offers double-digit EPS growth over the next two years. This means that shares in the company could continue to rise after gaining 40% in the last year alone.
