Why AstraZeneca plc may still not be cheap enough to beat this upstart

The pharmaceutical sector is expected to benefit from Donald Trump's election as US president. But I'm not sure whether AstraZeneca (LSE: AZN) will be one of the big winners.

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The group's shares have fallen by 4% so far this year, despite UK peer GlaxoSmithKline gaining nearly 20%. One reason for this is that AstraZeneca is taking much longer than Glaxo to recover from patent expiries on key products and return to growth.

AstraZeneca shares fell by 3% this morning after the group said that generic competition had led to a 4% fall in third-quarter sales and a 12% drop in reported operating profit for the period. Analysts had expected AstraZeneca's sales to remain flat during the quarter, so today's figures are disappointing.

Things may soon change

Of course, it isn't wise to place too much emphasis on figures from just one quarter. AstraZeneca's transformation has been underway for a number of years, and may soon start to yield results.

Indeed, Pascal Soriot, its chief executive, said today that "we are entering an intensive period of news flows over the next 12 months." Trial results from new cancer treatments and other potentially high-value medicines are expected during this period.

However, even if these trials are successful, it will take longer for these successes to feed through to the firm's profits. AstraZeneca confirmed today that a modest decline in sales and profits is expected this year. Broker forecasts suggest that earnings will also fall in 2017.

Is it too expensive?

I accept the long-term story about AstraZeneca's growth potential. But I'm beginning to be concerned about the stock's valuation. Back in 2011, AstraZeneca had net cash of $2.5bn and a net profit of nearly $10bn. This year, AstraZeneca is expected to report a net profit of only $4.7bn, but the group's shares are worth 50% more and it now has a net debt of $12.9bn.

The question in my mind is whether AstraZeneca's current valuation is too high. It's hard to know when profits from new treatments will start to rise, offsetting the losses from patent-expired products.

Although AstraZeneca's 5% dividend remains attractive, I'm not sure the shares are especially cheap at the moment. On balance, I'd rate the shares as a hold.

Can this upstart double up again?

One pharma stock that hasn't disappointed investors is Indivior (LSE: INDV), which has risen by 148% since its flotation in December 2014. This group's main product is a treatment that's used to help treat opioid addiction. The main market for this is the US, where such addiction is a big problem.

Indivior was spun-off from Reckitt Benckiser ahead of the expected launch of generic competitors for its main products. Many investors thought that the group's sales and profits might collapse within a couple of years. That hasn't happened. Indivior's sales and profits have proved more resilient than expected, and legal challenges have slowed the rollout of generic competitors.

Risks remain at Indivior, but the group has used its strong cash flow wisely, reducing debt and leaving the door open to potential acquisitions. Indivior shares currently trade on 13 times forecast earnings, with no dividend.

Although future visibility is poor, the group has consistently outperformed expectations so far. If this continues, then shareholders could see further gains.

The ultimate income growth stock?

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Roland Head owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and Reckitt Benckiser. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.