Company in the news: AstraZeneca

The stock market can be a funny place. Less than a year ago shares in AstraZeneca (LSE: AZN) were changing hands for just over £30 per share.

The company was seen as one of the weakest players in the global pharmaceutical industry, facing years of declining sales and profits as some of its blockbuster drugs came off patent and became exposed to competition from cheap generic ones. Yet value is often in the eye of the beholder.

US drug giant Pfizer has had two bids (the latest being tabled at £50 per share) for AstraZeneca rejected, because the management said that it undervalued the firm.

AstraZeneca has been talking up the value of its drugs pipeline in development. It reckons that new drugs to treat cancer, diabetes and Alzheimer’s, among others, could see its sales grow by 75% by 2023.

Given that these drugs have not yet seen the light of day in terms of regulatory approval, let alone sales and profits, this sounds like a valiant attempt to get Pfizer to pay up. But will it?

Maybe. Pfizer has a reputation for growing by buying other companies, rather than by making its own drugs. On top of that it strips out costs and boosts profits. It would seem that the time for Pfizer to do this again has arrived, hence its interest in AstraZeneca.

Pfizer’s own sales are falling, because its big earning drugs, such as Lipitor and Viagra, are attracting fierce competition. It seems that Pfizer can chop a lot of costs out of AstraZeneca – but that there is also a bigger prize of moving its headquarters to the UK and paying lower taxes than it does in America.

AstraZeneca share price chartThese add up to some big numbers and explain why Pfizer can offer £50 a share and possibly more. However, this has seen the takeover approach become political.

The UK government is under pressure to stop Pfizer sacking lots of highly trained scientists and damaging the country’s science base. The American government
will be keen to stop a big taxpayer like Pfizer moving to Britain.

Pfizer has until 26 May to get its bid accepted. If it does not, it will have to increase it or pursue a hostile takeover. Should the deal fail, then you have to ask whether AstraZeneca’s shares are worth their current £46. That would put it on 18.5 times forecast earnings, compared with 15.3 times for the more highly regarded GlaxoSmithKline.

A year ago AstraZeneca shares were probably too cheap, but buying them now looks more risky. Existing shareholders should sit tight, but don’t buy if you haven’t already.

Verdict: hold

Merryn

Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.