How Much Lower Can AstraZeneca plc Go?

Right now I’m looking at some of the most popular companies in the FTSE 100 and wider market to try and establish which direction their shares are likely to move.

Today I’m looking at AstraZeneca (LSE: AZN) (NYSE: AZN.US) to ascertain if its share price will continue to fall.

Going it alone

When AstraZeneca revealed to the City that management was rejecting Pfizer’s increased offer of £55 per share, some shareholders celebrated but most vented their frustration at the decision.

AstraZeneca rejected the bid on the grounds that the takeover would pose a risk to the company’s pharmaceutical work, creating uncertainty for shareholders and workers. Management also stated that the price offered by Pfizer undervalued AstraZeneca as an independent science-led company.

AstraZeneca had previously stated that the minimum price it would be prepared to accept was £59 per share.

Unfortunately, as Pfizer has stated that its offer of £55 per share is “final”, due to City rules, the company cannot raise its offer again, unless there is a material change in circumstances. Pfizer is not allowed to approach with a higher offer for six months.

Short-term pain, long-term gain

AstraZeneca’s shares ended the trading day down 11% yesterday, after the buy-out rejection and it seems as if a lower share price is here to stay.

Indeed, AstraZeneca faces up to three years of shrinking earnings, before the company’s treatment pipeline starts to yield results.

Of course, this has angered many investors, as Pfizer’s offer would have meant that shareholders would have profited in the short term, without having to wait and see if the company can turn things around.  In particular, one top ten shareholder actually went so far as to call management’s rejection of the bid:

“…the single biggest case of value destruction on behalf of shareholders of all time…”

Still, over the long-term AstraZeneca’s gamble could pay off. The company’s management believes that the firm has the potential to grow sales to more than £27bn by 2023, 76% above the level reported for 2013.

This growth is expected to come from several key treatments, with heart drug Brilinta expected to produce sales of £2.1bn by 2023 and diabetes and respiratory medicines adding £4.7bn each.

Nevertheless, these growth forecasts do little to distract shareholders from the fact that AstraZeneca’s sales are not going to hit the level reported for 2013 until 2017 — that’s four years of waiting. 

Unfortunately, with earnings and sales set to fall, now the bid from Pfizer has been rejected, AstraZeneca should trade at a discount to its wider sector. So, as the biotechnology sector currently trades at an average historic P/E of 17 and AstraZeneca currently trades at a forward P/E of 17.1, the company’s current valuation seems about right.

However, AstraZeneca’s forward P/E is forecast to hit 17.2 by 2015, which makes the company look expensive and there is scope for the company’s share price to fall further if it fails to meet self-imposed growth targets. 

Foolish summary

So overall, now that AstraZeneca has rejected Pfizer’s offer, the company’s share price looks like it could fall much further as sales continue to slide.