It’s fair to say that 2014 was a stunning year for investors in AstraZeneca (LSE: AZN) (NYSE: AZN.US). That’s because the pharmaceutical company’s share price rose by a whopping 26%, with much of this gain being due to the pricing in of a bid premium. In fact, US rival, Pfizer, made three separate bids for AstraZeneca prior to the closing of the so-called ‘tax inversion’ loophole that allowed US companies to lower the tax they pay by relocating abroad.
However, the changes to US tax laws do not necessarily mean that UK firms such as AstraZeneca are no longer appealing. In fact, AstraZeneca could be a major bid target this year. Here’s why.
While AstraZeneca is still in the midst of falling off a ‘patent cliff’ (ie, losing exclusivity and, therefore, sales on many of its key, ‘blockbuster’ drugs), its near term forecasts are relatively encouraging. For example, it is expected to post a decline in earnings of just 3% in the current year and 4% next year. Given the fact that declines of over 20% have been recorded in the prior two years, this is a much improved outlook for the company.
Furthermore, looking at the longer term, AstraZeneca is making excellent progress in beefing up its pipeline of new drugs. Acquisitions have been numerous and have focused on core areas for the company, such as diabetes, and this gradually improving outlook regarding long term profitability could appeal to a number of rival pharma companies.
That’s even more so because the industry is currently experiencing a challenging period, with many of AstraZeneca’s peers also struggling to grow their top lines. As such, just as AstraZeneca is, to an extent, acquiring its way out of the ‘patent cliff’, so too could one of its rivals via a bid for AstraZeneca.
AstraZeneca also appeals due to its excellent financial standing. For example, it has a debt to equity ratio of just 45%, which indicates that many more acquisitions are possible without leveraging its balance sheet to too high an extent. In addition, AstraZeneca continues to post excellent returns for its investors with, for example, its return on equity being a very impressive 11% despite the aforementioned fall in profitability.
Although the closing of the tax inversion loophole in the US inevitably removes one ‘plus’ for buying AstraZeneca, its excellent pipeline, improving near-term prospects, and highly attractive financial standing still mean that a bid seems very likely.And, with AstraZeneca still trading on a price to earnings (P/E) ratio of just 17.8, it still seems to offer good value for money when its long term potential is taken into consideration. As a result, a bid for the company seems relatively likely before the calendar year is out.
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