Astra Overvalues Prospects

AstraZeneca's optimistic long-term outlook is fair say analysts, but projections appear too high and are largely to persuade Pfizer to increase its takeover offer

Damien Conover, CFA 7 May, 2014 | 11:18AM
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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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
AstraZeneca PLC8,994.00 GBX-0.10Rating
Bristol-Myers Squibb Company56.49 USD-3.00Rating
Merck & Co Inc81.54 USD-0.86Rating
Pfizer Inc42.97 USD-1.35Rating
Roche Holding AG354.55 CHF-0.95Rating

About Author

Damien Conover, CFA  is an equity analyst and associate director at Morningstar.