Today I am looking at why shares in AstraZeneca (LSE: AZN) (NYSE: AZN.US) could be set to bounce once more.
Cancer treatment failure sparks M&A chatter
Of course, adverse regulatory rulings for the likes of AstraZeneca and its peers rarely translate into good news for these firms’ investors. But 
counter-intuitively, I believe that the drugs firm’s latest failure last week could lead to fresh overtures from Pfizer, a situation that could ramp share prices higher once again.
The US Food and Drug Administration (FDA) ruled last week that clinical trial results for AstraZeneca’s olaparib product — used to treat ovarian cancer — were not robust enough to support the fast-tracking of the drug’s approval. The news represents a body-blow to the company, who just this month was widely trumpeting the promise of its oncology pipeline.
Indeed, last week’s news promped analysts at broker Bernstein to comment that:
“The rejection comes at a critical time because failed R&D efforts may make AstraZeneca shareholders more inclined to push AstraZeneca into Pfizer’s arms.”
“Is the olaparib ruling a major setback for AstraZeneca that will materially change how investors think about AstraZeneca? No, but every bit of slippage at the company probably does tilt the balance slightly more in favour of a future Pfizer-AstraZeneca tie-up,” it added.
AstraZeneca’s bare product pipeline has caused the company to suffer two successive annual revenues and earnings declines. And City analysts expect further earnings woe in the near-term, with earnings declines to the tune of 15% and 3% for 2014 and 2015 correspondingly currently pencilled in.
With AstraZeneca already warning that its ambitious lab-building drive across the US and Europe is not expected to yield results until 2018 at the earliest, investors can expect more of the same stretching far into the future as patent expirations across key products bite.
Pfizer’s takeover proposal was given short shrift by AstraZeneca’s board back in May, who explained that the US firm’s offer significantly undervalued the business. But last week’s setback highlights the precarious nature of drugs development, particularly for firms as desperate as AstraZeneca to get the next generation of earnings drivers on the shelves.
As Shire’s rebuttal of North American drugs manufacturer AbbVie’s £27bn takeover attempt this month shows, the acquisition race in the global pharma space is well and truly on, with the world’s largest manufacturers aiming to get the edge in the R&D stakes and battle ongoing exclusivity losses. Against this backdrop, I expect AstraZeneca to once again enter the crosshairs of the likes of Pfizer, a situation that could drive shares substantially higher.
