British-Swedish global pharmaceutical company AstraZeneca (LSE:AZN) is rumoured to be in talks with US drugmaker Gilead to merge. The FTSE 100 multinational approached Gilead about the deal last month. AstraZeneca’s share price was down 2% in response to the news this morning, as it appears to be nothing more than speculation at this stage. A report stated Gilead discussed the deal with its advisers, but it prefers partnerships and smaller acquisitions to a large partnership.
Coronavirus treatment rivals
AstraZeneca and Gilead are currently competing to develop a coronavirus vaccine. AstraZeneca is working on a Covid-19 vaccine in collaboration with researchers at Oxford University. It reportedly received orders for 400m doses last month. It is also working on an antibody treatment.
Meanwhile, Gilead has gained approval in the US and South Korea for its highly touted drug Remdesivir, also being used to treat coronavirus. Although this has generated a good deal of positive publicity for both firms, coronavirus treatments are unlikely to result in big profits. However, a merger between the two pharma giants would create the world’s largest healthcare group, worth over £200bn.
In recent months, AstraZeneca has released a string of positive updates with exciting drug releases and positive trial results. The company is on track to become the UK’s biggest company by market value, with a market capitalisation of around £110bn. The AstraZeneca share price reached £90 per share in May and remains up over 40% in a year.
With such a high valuation, its price-to-earnings ratio (P/E) has reached an eye-popping 101. To give you an idea of why this is astronomically high, the average FTSE 100 P/E is around 15. Billionaire investor Warren Buffett has traditionally used a P/E of under 10 to seek a company trading below its intrinsic value. Clearly, with a P/E of 101, the AstraZeneca share price is far from undervalued. This shows possible over-confidence surrounding the share has created a bubble. Any negative news could burst the bubble, sending the share price spiralling downwards.
Stock volatility and mounting pressure
Research and development in the pharma sector is hugely expensive and sometimes politically sensitive. Marketing and production eats into profits and competition from generic drugs can affect sales. While a stock price often soars on rumour and anticipation of positive outcomes, equally it can plummet when trials do not reach their expected outcome. Therefore, share price volatility is to be expected and a long investment horizon is wise.
The AstraZeneca share price has generally been on an upward trajectory since 2016. It has more than doubled during this time, so long-term investors that bought and held will sit on a pretty profit. However, I struggle to see how it can sustain such a high valuation. Pressure to increase scale and push innovation will continue to mount. I don’t think the AstraZeneca share price is a sensible investment at today’s price. I think there are better FTSE 100 stocks to invest in.
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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.