AstraZeneca (AZN) provided an optimistic update on its strategic long-term vision through 2023, largely to persuade Pfizer (PFE) to increase its takeover offer, in our opinion. However, we think Astra's projections are overly optimistic and are sceptical that Pfizer will significantly increase its recent offer. Despite Astra's reluctance to engage with Pfizer over a potential merger, we believe the deal will occur, since a failure to engage with Pfizer would likely lead to a significant drop in Astra's stock price.
We continue to believe there is an 80% chance the deal will complete. Therefore, we are maintaining our fair value estimate for AstraZeneca of $78 per share, which is based on an 80% chance the deal is completed at $84 per share (Pfizer's offer price) combined with a 20% chance the deal collapses and the valuation returns to our stand-alone Astra valuation of $56 per share.
While Astra is making good strides in repositioning its pipeline for growth, we believe the updated outlook presented by management is overly optimistic. In particular, Astra's oncology pipeline drugs should be important new treatments, but management's non-risk-adjusted sales estimates appear significantly above our expectations. Lacking a clear differentiated profile and likely late to the market compared to Bristol (BMY), Merck (MRK), and Roche (ROG), we believe these drugs combined hold the potential to reach sales above $2 billion annually, well below Astra's projections of $10 billion in non-risk-adjusted annual peak sales.
Additionally, we doubt the company will achieve management's peak sales estimates for new respiratory drugs because of the increasingly competitive landscape. Further, the major patent losses Astra faces over the next few years increases the importance of Astra's pipeline, which we believe will lead to a relatively flat top line over the next decade.
