Would A Combined AstraZeneca plc/Pfizer Inc. Be Worth Owning?

When Neil Woodford, Britain’s star fund manager, first invested in AstraZeneca (LSE: AZN) (NYSE: AZN.US) a great deal of negativity hung over the shares. From the ‘patent cliff’ stemmed panic, with seemingly little in the pipeline to replace the expected fall in sales.

AstraZeneca’s valuation was wide of the mark, however. The market assumed AstraZeneca wouldn’t again develop another blockbuster drug, which, to paraphrase Woodford, was ludicrous. The firm’s R&D wasn’t valued for even a penny.

AstraZeneca was undervalued then, and it’s still undervalued.

PfizerPfizer (NYSE: PFE.US) initially offered £47 a share for AstraZeneca, which, should you have not heard by now, is positively the crown jewel of British industry. With such pervasive good will on display, one wonders whether UK plc’s most influential need sunglasses, or else risk blindness on account of the jewel’s brightness.

The gesture is likely too little, too late.

So why, when AstraZeneca’s share price languished around £38, was everyone so oblivious to its potential? If Pfizer ended its advances tomorrow, you’d hardly expect AstraZeneca’s shares to plummet by equal to the amount they’ve advanced since Pfizer’s offer became public. Such bandwagoning is in part understandable, but when it takes the shape of political posturing — but what about our jobs? — it becomes positively galling.

AstraZeneca intends to cull around 5,600 jobs worldwide by 2016 to reduce costs and deliver growth. Its motivations are strictly financial, and it’s no more or less their wont to cut jobs than Pfizer’s, but there was little handwringing then from politicians about the staff in Macclesfield and Alderley Park. Some consistency would be nice.

So, what will be the impact of a successful bid from Pfizer on the UK pharmaceutical industry?

AZNThe R&D portfolio of AstraZeneca is particularly vulnerable, which should be concerning for investors, given that as a separate entity the company’s future is profitable. Since Pascal Soriot took charge in 2012 the drugs pipeline has been revived and there are 11 treatments in late stage trials.

Of particular promise is olaparib, an ovarian cancer drug which has been granted a priority review by the FDA — pending a successful result the drugs entry into the marketplace could be expedited.

7,100 women were diagnosed with ovarian cancer in the UK in 2011. We’ve yet to conquer cancer and, rather than regarding R&D as money down the drain, it goes without saying that there’s massive value to better meeting our medical needs.

AstraZeneca’s oncology pipeline is an asset coveted by Pfizer. But, if a merger happens, then research would be split across the UK and California, where Pfizer consolidated its oncology R&D in 2007. The more Pfizer has to pay for AstraZeneca — likely £55 per share and upwards — then the greater the “synergies”, or savings, that will be made. Researchers in both organizations will worry about their livelihoods, which isn’t good for the employees or either company.

It took a long time it took for investors to wisen up to AstraZeneca’s quality, which goes to show that the efficient market hypothesis is claptrap. There are always discrepancies to be exploited, but a combined Pfizer/AstraZeneca stock will likely blunt Astra’s strengths, so you might want to look elsewhere for market-busting gains.

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Mark does not own shares in any company mentioned.