Today I am looking at why I consider AstraZeneca (LSE: AZN) (NYSE: AZN.US) to be vastly overpriced.
A pricey pick given its paltry earnings potential
The effect of exclusivity losses across key products has weighed heavily on AstraZeneca for what seems like an age now. And these woes are set to persist, forecasters say, with the firm expected to follow last year’s 26% earnings decline with a 15% fall in 2014. A further 3% drop anticipated for next year suggests that a return to earnings growth will remain elusive for some time to come.
These figures mean that the pharma play currently changes hands on a P/E rating of 17.7 for 2014, and which worsens further to 18.2 for 2015. These figures fall outside the watermark of 15 or below which represents reasonable value, territory in which I feel the firm should be comfortably rooted given its meagre revenues prospects.
And AstraZeneca’s premium relative to its competitors also suggest that the company could be in line for a significant share price correction.
GlaxoSmithKline boasts a prospective P/E multiple of 15.3, while Smith & Nephew — although dealing on a corresponding readout of 20.8 — has a solid record of earnings growth behind it, and which is predicted to punch expansion to the tune of 15% this year alone.
AstraZeneca received a boost earlier this month when it announced that its peripherally-acting mu-opioid receptor antagonist (or PAMORA)class of drugs — which includes the potentially earnings-driving Movantik product — will not require cardiovascular testing from the US Food and Drugs Administration (FDA), removing a critical pre-launch barrier.
Earlier in the month the drugs giant announced that its oncology pipeline was delivering stellar testing results, particularly for its AZD9291 and MEDI4736 tumour-battling experimental products. Indeed, the firm hopes to roll-out the former for regulatory approval in the US as soon as the first quarter of 2015.
Even though the firm should be applauded for these achievements, AstraZeneca’s R&D efforts are not expected to deliver strong enough revenues to replace those lost as a result of patent expiration for some years yet.
And given the unpredictable nature of product roll-outs as testing setbacks bite, there are no guarantees that AstraZeneca will be able to get many of the next generation of mooted earnings drivers to market in the first place.