As I write these words, it’s unclear what’s going to happen to Pfizer‘s bid for pharmaceutical firm AstraZeneca (LSE: AZN) (NYSE: AZN.US).
What is clear, though, is that — as is often the case with these things — there’s an awful lot of muddied thinking about.
And to investors, such thinking isn’t helpful. Decisions as to whether to buy, sell, or hold shares ought to be made on the basis of investment fundamentals.
Sentiment shouldn’t come into it, in short.
Shareholder decision
But nevertheless, sentiment is what we’ve seen, with a lot of grandstanding about the national interest, and about AstraZeneca’s long heritage as part of former industrial giant ICI.
Is it really in the national interest that AstraZeneca remains in British hands? I’ve really no idea, but I somehow doubt it.
What I do know is that under current takeover rules, the decision is out of the hands of the British government, the pundits in the media, and the politicians busily mouthing soundbites.
It’s a decision that will be made — even if the bid goes hostile — by AstraZeneca’s shareholders. Among which I’m numbered, of course, and you may be too.
Some shareholders, judging from the talk on the Motley Fool’s discussion boards, have already taken the money, and sold. Having spent years hoping for a higher share price, they’ve finally got it.
Others — including me — are holding out to see what happens, judging the price on offer too low. Last I heard, fund manager and investing superstar Neil Woodford was pursuing the same strategy.
Start with the fundamentals
And as it happens, I think Neil Woodford’s approach is how we should think about the whole AstraZeneca/Pfizer situation.
Mr Woodford, of course, is famous for making big bets on unloved companies and unloved sectors — with the pharmaceutical industry’s giants, such as AstraZeneca, falling squarely into both camps.
In fact, before he left Invesco Perpetual last month, Mr Woodford had invested more than a fifth of a mammoth £20 billion fund in just three pharmaceutical companies, among them AstraZeneca.
And it’s not difficult to see why: the pharmaceutical industry enjoys strong patent protection, high barriers to entry, resilient demand, and considerable pricing power.
Plus, the potential from fast-growing emerging markets, and an ageing and increasingly affluent developed world population.
In other words, just the sort of business you’d like to be invested in.
Especially if — like me and Mr Woodford — you’d picked up the shares cheaply. Indeed, Mr Woodford is on record as saying that of all the trades in his career, his AstraZeneca purchase is the one that he’s most proud of.
Flawed valuation
Now, in recent years, the stock market has been nervous about AstraZeneca’s slowing patent pipeline — which is why the share price had been in the doldrums.
But as Mr Woodford pointed out in an interview in the Daily Telegraph just the other day:
“The market valuation [pre-Pfizer] implied that Astra would never develop another successful drug. But it spends billions of pounds on research and development — and I don’t believe that all this money is wasted.”
And clearly, neither does Pfizer. Or, indeed the broader market — since the turn of the year, AstraZeneca’s shares have outstripped the FTSE 100 by almost 15%, before Pfizer’s interest sent the share price rocketing.
Tasty yield
So where does that leave us? With a view, I think, that the pharmaceutical industry is certainly one that we’d like to have a stake in. I definitely do.
What’s more, within the sector, Astra’s dividend-paying credentials are undoubted — as, of course, Mr Woodford’s long-time stake has emphasised. Indeed, prior to Pfizer’s interest becoming known, my AstraZeneca shares were earning me a historic dividend yield of over 6%, calculated on the purchase price that I paid.
So at present, I’m minded to do nothing. I’m certainly not going to sell at a current market price of £46 or so, if a bid at £55 may yet emerge.
Decision point
And if a bid high enough to attract the board’s endorsement does emerge? Then I’ve then got to decide where to recycle the proceeds.
A switch out of pharma would reduce my pharmaceutical exposure, which I don’t want. And for reasons of tax and simplicity I’d prefer to stay British — which points me towards GlaxoSmithKline, FTSE 100 firm Shire, and FTSE 250 minnow Hikma Pharmaceuticals.
A move into Glaxo would deliver a useful fillip in the form of a higher income — approximately double, if AstraZeneca was taken out at £55 or so. The downside: reduced diversification, as I already own a stake in the business.
Shire? Hikma? I don’t, yet, know either business well enough to say. And one thing’s for sure: I won’t waste time looking at either until AstraZeneca’s fate is known.
As problems go, in short, it’s not a bad one to have.
