Shire (LSE: SHP) and AstraZeneca (LSE: AZN) are two very different companies with very different outlooks. Shire is growing rapidly and snapping up smaller peers to complement organic growth, but the company’s shares are relatively expensive.
On the other hand, Astra’s sales have been contracting for several years now. And while the group has one of the best treatment pipelines in the business, it will take several years for the drugs Astra currently has under development to generate income for the company.
So, when trying to decide between the two companies, investors need to ask themselves if they’re willing to pay a premium price for growth now, or pay less and wait for growth to materialise.
Valuation is key
Astra and Shire’s outlooks are reflected in their current valuations. For example, Shire currently trades at a forward P/E 20.6, while Astra is currently trading at a forward P/E of 15.1. Shire’s earnings per share are forecast to expand by around 17% during the next two years. Astra’s EPS are set to contract by around 5%.
Moreover, Shire is currently chasing the acquisition of Baxalta, another specialist in rare disease treatments. If Shire’s management gets Baxalta shareholders to accept the company’s offer, it will create a global leader in rare disease drugs with projected product sales of $20bn by 2020.
Further, based on current treatment pipelines, the enlarged group could launch more than 30 new products, with an incremental sales potential of $5bn by 2020. Shire’s management is also planning to undertake a share buyback to minimise dilution after the all-stock transaction.
Still, it remains to be seen if the deal between Shire and Baxalta will actually go ahead. Baxalta’s management has signalled that it intends to turn down Shire’s “low-ball” offer.
Buy and hold
Even if Shire’s attempt to buy Baxalta fails, the company’s double-digit organic growth rate is still worth paying a premium for. However, as Astra’s earnings are contracting, investors are turning their backs on the company.
But Astra shouldn’t be written off just yet. The group is one of the cheapest companies in the global big pharma sector, and with more than 200 new products under development, Astra has plenty of potential.
Astra is planning to conduct 50 treatment trials this year, with several product launches planned between now and 2017. According to City analysts, three of these treatments have the potential to be blockbusters, which can return the company to growth by 2017, as targeted by management.
Granted, there’s no guarantee that Astra will be able to return to growth by 2017, and the company’s valuation reflects this. Although, with so many new products under development, there’s a good chance that the company will be able to return to growth before the end of the decade.
The bottom line
All in all, if you’re prepared to pay a premium for near-term earnings growth, Shire looks like the best bet. However, if you don’t want to pay a premium and are prepared to wait for the group to return to growth, Astra could be the better investment.
Paid to wait
It will take time for Astra to return to growth, but the company is one of the FTSE 100’s dividend champions, and investors will be paid to wait.
At present, Astra supports an attractive dividend yield of 4.4%, and this payout should be here to stay, as it is linked to management compensation.