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Are Investors Betting On Pfizer Inc. Coming Back For AstraZeneca plc?

A few analysts are puzzled about AstraZeneca‘s (LSE: AZN) recent rally, and so am I. The shares are up about 13% since 10 March — why is that? 

Rumours & Deals

There are “widespread rumours in the asset management community that Pfizer is considering another bid for Astra,” a senior banker in London told me this week.

That possibility was reinforced on Tuesday, when Teva Pharmaceutical made an unsolicited offer for Mylan; at $40bn, the deal could turn out to be the biggest acquisition in the pharmaceuticals industry in 2015 and could strengthen the position of Teva as the biggest generic drugs business on a global scale. 

The stars seem aligned for a Pfizer’s comeback — but are they, really? 

Performance

AstraZeneca is currently valued at 4,851p a share, which is in line with the level it recorded in early May 2014, when investors were eager to bet on a successful outcome for Pfizer’s proposed offer. By late May, however, Astra had rejected Pfizer’s £70bn proposal, noting that the bid had undervalued its growth potential. 

AstraZeneca’s shares tumbled 13% to £42.04 on the news, wiping about £8bn off the company’s market value as investors concluded that the chance of a deal was now remote,” The Guardian reported at the time. 

How serious is the risk that Astra stock will dive again?

Even after its recent rally, Astra is up only 6% this year, which is a poor performance compared to Shire (+22%) and Glaxo (+13%), and is also a couple of percentage points below that of the FTSE 100.

Pfizer/Results/Drugs

I think that Pfizer won’t make any comeback as tax-driven deals appear to be off the table, so there are two elements you ought to take into account right now: first-quarter results, which are due on Friday, and Astra’s pipeline of drugs. 

On the face of it, 2014 quarterly figures are relatively easy to beat, so I would not be surprised if good news surrounded Astra in the wake of the announcement. That may contribute to short-term upside, but it’s hard to believe capital appreciation would be greater than 1% to 1.5% on the day, regardless of how the market performs. 

Let’s consider its drugs pipeline, then: there has been much talk of upside potential for cardiovascular pill Brilinta in recent weeks. Astra has been talking about Brilinta for a very long time and has been investing hugely in its development. So, is that the reason why Astra stock is on a roll?

Heavy investment should be a real concern, as virtually nobody in the market believes in Brilinta, and hasn’t done for a long time. If anything is going to push the stock up it’s M&A, or oncology,” a second senior analyst in London pointed out, ruling out M&A upside. 

Oncology? Well, is that behind the rally, then? 

Its oncology pipeline could be a factor, and in particular its checkpoint inhibitors…anti-PD1, anti-CTLA4 and others, but here it gets a bit sciency!” the analyst concluded, noting that “lots of study data” is shortly coming up at the ASCO conference both for Astra and such competitors such as Bristol-Myers Squibb, Merck and Roche.

In fairness, I'd avoid Astra; for a similar level of risk, I'd rather invest in a fast-growing, debt-free manufacturer of electronic equipment that has been included in this FREE investment report

Its shares trade on 13x earnings for 2016, which is a very low valuation for a business that is expected to double revenues and operating income over the period. If my calculations are right, it could pay a dividend higher than 3% in less than 24 months. 

Its one-year performance reads +83%, and you'd have recorded a +240% gross return if you had invested in it only a couple of years ago. Download our FREE report right now -- it comes without further obligations and is available for free only for a limited amount of time!

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.