When compared to its international peer group, AstraZeneca (LSE: AZN) looks like a bargain.
Astra’s primary peers, the likes of Bristol-Myers Squibb, Eli Lilly, Merck, Pfizer, Novartis, Roche and Abbott Laboratories, all trade at an average forward P/E of around 19.9, a full 25% above Astra’s current forward P/E of 15.9.
City analysts are currently forecasting that Astra will report earnings per share of 275p for 2015. If Astra’s valuation moved in line to that of its peers, the company shares could be worth 5,473p.
However, it will take time of Astra’s shares to reach this level. A number of catalysts are needed to unlock value at the company and restore investor confidence. Most importantly, Astra will need to prove to the market that it is back on a growth trajectory.
The foundations for growth
Astra is already making progress in its quest to boost growth. Around 33% of the $24.5bn in revenue the company will generate this year will come from three drugs, which Astra is set to lose the exclusive manufacturing rights for by 2017 at the latest.
To fill the revenue hole left by these drugs, Astra’s management is pinning its hopes on the group’s best-in-class pipeline of opportunities, new drugs such as Brilinta, an anti-clotting drug, Durvalumab and AZD9291, all of which are currently moving through various stages of regulatory approval.
City analysts believe that these new blockbuster treatments will produce sales for the group of around $4bn per annum by 2018, which will fill in much of the gap left by drugs coming off patent.
Alongside the launch of new treatments, Astra is also signing deals with other pharma groups as it seeks to exploit as many growth avenues as possible. Indeed, at the beginning of September Astra agreed to license its Brodalumab drug for the skin disease psoriasis to Canada’s Valeant, in return for up to $450m in payments. This deal follows similar deals made earlier in the year.
Some of the assets divested include an experimental dementia drug, which was placed into a partnership with Eli Lilly, co-marketing rights for a new constipation pill sold to Daiichi Sankyo of Japan for $200m, all non-US rights for Entocort, a treatment for Crohn’s disease and a $450m collaboration on immunotherapies with Celgene, one of the biggest names in the US biotech industry.
These “externalisation deals” coupled with Astra’s treatment pipeline of 222 new products should enable the group to hit management’s sales target of $45bn by 2023.
Foolish summary
Astra is trading at a discount to its peers due to concerns about the company’s growth potential. However, the company is working hard to allay these concerns, and as the market starts to pay attention to Astra’s progress, the company’s share price should stage a recovery. And investors will be paid to wait for this recovery.
At present, Astra supports an attractive dividend yield of 4.4%, and I believe this payout should be here to stay, as it is linked to management compensation.
