Shares in AstraZeneca (LSE: AZN) (NYSE: AZN) are currently up around 7% on weekend reports that Pfizer made a tentative bid approach. The newspapers are full of speculation while the City’s scribblers enthuse over the scope for costs savings, the potential of Astra’s oncology pipeline to reverse Pfizer’s declining sales, and the tax efficiency of the US company spending money that has never touched home shores.
The known unknowns
But hang on! Just when did this approach take place? The Sunday Times, which broke the story, said informal talks have taken place ‘in recent weeks’. But the Financial Times said they took place last year and have since ended. So why has the news come out now? We’ll never know, just as we’ll never know the identity of the ‘senior investment bankers’ who spoke to the Sunday Times. But a £3bn overnight movement in AstraZeneca’s market value is testimony to the significance of that conversation.
Amidst all the speculation, two things are certain. One is that there is always a lot more talk about mega-mergers than actual, concrete deals. Buying shares in the hope of a much talked-about deal coming off is a risky strategy. Vodafone shareholders are still waiting for AT&T to make its return call: meanwhile Voda’s shares have drifted by 14% since the share consolidation, as the bid premium evaporates.
Secondly, if the FT‘s timing is accurate, then Astra’s shares were 20-25% cheaper when the talks took place. That quite changes the arithmetic for Pfizer’s M&A department.
High-yield biotech
So it makes sense to take a step back and look at Astra’s fundamental value. I have previously described the company as a high-yield biotech play. CEO Pascal Soriot is pursuing an R&D-led strategy to develop new drugs to replace blockbusters rapidly coming off-patent. He adopted a flexible dividend policy to maintain cover ‘over the business cycle’ allowing Astra to carry on paying a fat yield — currently 4.7% — but dependence on the success of its scientists gives it the characteristics of a speculative biotech play.
Astra’s shares have climbed a wall of confidence in the past six months, as investors seized on promising pipeline developments. Having been at a discount of 20-30%, Astra’s shares are now on a similar P/E to sector peer GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and yield less than GSK’s 5.1%.
Like Astra, only better
But GSK retains the defensive characteristics of a classic pharma share. Its diversified business model, including over-the-counter healthcare and vaccines, reduces reliance on scientific success. It has just announced a deal that further de-risks and diversifies its business model, selling its oncology business to Novartis whilst buying the latter’s vaccines and consumer healthcare businesses.
