Is AstraZeneca a Buy After Pfizer Breakup? 3 Pros, 3 Cons

by Susan J. Aluise | May 23, 2014 10:30 am

In the wake of AstraZeneca’s (AZN[1]) quick dismissal of Pfizer’s (PFE[2]) $119 billion bid to acquire the London-based rival this week, investors ran for cover — causing AZN stock to gap down more than 11% on Monday. AZN quashed the deal[3], which would have created the world’s largest pharmaceutical giant, because the offer did not reflect “the value of its exciting pipeline.”

azn-stock-astrazeneca-pfizerAstraZeneca expressed concerns that a merger with Pfizer could potentially harm the company’s promising pharmaceutical pipeline. In a company statement explaining the decision to rebuff Pfizer’s advances, AZN pointed out that it has a growing and accelerating late stage pipeline, with aggregate risk-adjusted pipeline peak year sales potential of around $23 billion and non risk-adjusted pipeline peak year sales potential of around $63 billion. AZN also believes it could deliver annual revenues of more than $45 billion by 2023 if it remains an independent company.

That said, AZN turned down a very rich offer from Pfizer — a premium of more than 40% for AZN stock. Does the potential of AstraZeneca’s product pipeline outweigh the benefits of combining the two pharmaceutical giants? And is AZN stock a buy now? Here’s a look at the stock’s pros and cons:

AZN Stock Pros

Growth and promising pipelines: AstraZeneca has amped up its pipeline of promising experimental drugs over the past three years — and that’s great news for the company’s future growth. Perhaps the highest potential treatments are cancer drugs meant to trigger the body’s own immune system to seek and destroy malignant tumors — particularly with hard-to-treat ovarian, lung and breast cancer. One key drug in Phase III clinical trials is olaparib — a treatment that aims to treat ovarian cancer in women with the BRCA gene mutation. Last week, AZN took the wraps of another potential blockbuster, MEDI4736, a molecule which essentially leaves cancer cells with nowhere to hide — unleashing the power of the human immune system to destroy the disease. MEDI4736 holds such great promise for tough-to-treat cancers that it has been fast tracked to Phase III hospital trials.

Fundamentals: There are several things I like about AZN stock, beginning with its attractive debt management. AZN has a debt-to-equity ratio of less than 0.5, lower than most of the sector and an indicator that AstraZeneca is doing a solid job of managing its debt. It also has total cash of nearly $6.4 billion, and its 3.6% current dividend yield is sweetens the pot, too. AZN stock has a price-to-earnings-growth (PEG) ratio of more than  5 (1 is considered fairly valued), and a forward P/E of 17.5, which are higher than I’d like. But I do believe AZN is a growth play once it gets through some near-term turbulence. The stock has gained about 20% so far this year.

Cheap entry point: After AZN sent Pfizer packing, some of AstraZeneca’s Top 30 investors — including U.K. investment firms Schroders, Jupiter Fund Management and Axa Investments — publicly chided the AZN board for rejecting the offer so quickly. Fidelity and others supported AZN’s decision to hold out for a sweeter deal. Such a significant — and public — split among institutional investors is more likely to trigger a selloff in AZN. Such a retreat in AZN stock price would offer a very attractive entry point for new investors.

Before you rush in to buy AZN stock, though, you should consider a few other things…

AZN Stock Cons

Pfizer’s offer will be hard to beat: What Pfizer characterized as its “final offer” for AstraZeneca would have given AZN shareholders more than $92 per share at a total price of about $119 billion. That breaks down to 1.75 shares of the combined company and £24.75 per share in cash for a total of £55 — a premium of 44% over the price AZN stock was trading at before word of Pfizer’s bid went public. AstraZeneca was looking for an offer of £59 a share. Technically, PFE has until May 26 to submit another offer, but that’s unlikely since the offer on the table was pushing the envelope of shareholder value for PFE.

Patent cliff challenges in 2014: The so-called “patent cliff” — expiration of pharmaceutical manufacturers’ exclusive rights to produce their blockbuster drugs — will dampen AZN’s earnings over the next couple of years. Beginning this year, AZN will lose protection on key products like the acid reflux pill Nexium, with sales of $4 billion a year, and the asthma drug Symbicort.

Approval of new drugs is uncertain: Failure of experimental drugs in the late-stage trial phase are fairly common, which presents significant risk to AZN. Case in point: Last week, GlaxoSmithKline’s (GSK[4]) new heart drug darapladib failed another Phase III clinical trial. The drug, which was hailed as a revolutionary tool in reducing plaque in arteries, has failed two late-stage trials, and GSK might be considering writing off darapladib[5], according to FierceBiotech. AstraZeneca has been no stranger to pipeline disasters in recent years, most notably the failure of its oral anticoagulant Ximelagatran, which AZN withdrew after the FDA failed to approve the drug.

AZN Stock Bottom Line

AstraZeneca is in a tough, bleeding-edge business and faces near-term pressures as drug patent expirations negatively impact sales. AZN’s drug pipeline (particularly its oncology products) could revolutionize the battle against cancer. AZN expects the new cancer drugs — as well as strong portfolios in cardiovascular disease and treatment for serious respiratory problems — to deliver as much as $45 billion in annual revenue nine years from now.

AZN stock is down 8% this week on the news of the failed deal with Pfizer. Look for AZN to slide further over the next few weeks, providing an attractive entry point for new investors.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.  

  1. AZN:
  2. PFE:
  3. AZN quashed the deal:
  4. GSK:
  5. writing off darapladib:

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