Is AstraZeneca plc A Buy On $45bn Revenue Targets?

In AstraZeneca‘s (LSE: AZN) (NYSE: AZN.US) defence of the recent Pfizer bid, one number was more critical than any other.

Pascal Soriot, the Astra chief executive, landed a flush right hand when he attached a valuation to the drugs pipeline, forecasting revenue gains of 75% in the coming decade, from $26bn to $45bn.

From that moment, Pfizer — much as happened to George Groves at Wembley this past weekend — lost the legs underneath itself.

The scrappy UK pharmaceutical firm — suddenly hailed for its innovation, after years of being anything but a frontrunner — retained its independence.

Not everyone was pleased by this. But, as far as I’m concerned, they’re wrong.

Product delivery

AstraZenecaBlackrock and Axa, the two largest shareholders in AstraZeneca, would like Pfizer to be brought to the discussion table again.

For long-term AstraZeneca investors, however, this would extract a brutal cost. Destructive synergies would serve to impede the best efforts of Astra’s scientists, and likely delay the delivery of new products.

It’s difficult for a scientist to apply complete focus if they don’t know whether their job is safe. Pfizer’s keenest interest (in addition to huge tax savings) was in Astra’s promising oncology treatments. These treatments can now be delivered more quickly.

New cancer treatments

Earlier this week AstraZeneca reported positive trial data for two of its lung cancer treatments AZD9291 and MEDI4736. Mr Soriot, who has plenty of doubters, needs to convince those who are sceptical that his revenue projections are more than hot air.

In Soriot’s words, these drugs, known as immunotherapies, “demonstrate potential to transform the way cancer is treated”.

Immunotherapies stimulate the body’s immune system to fight cancer, whereas rival healthcare companies have opted for checkpoint inhibitors, which flag up cancer cells that the body has mistaken as healthy and then the immune system attacks.

A $10bn market

Could MEDI4736 be the next blockbuster drug for AstraZeneca? Analysts have suggested the immunotherapy market could be worth more than $10bn a year, and were Astra to take a piece of that then shareholders would have reason to smile.

The field is competitive but, for all of AstraZeneca’s strides, the firm is a latecomer in the area, and the effectiveness of its treatments against similar products has yet to be proven.

Time matters here. Often, perhaps most pertinently for new shareholders, tardiness might be an irrelevance. The market only looks forward, and if a company has low hanging fruit to grab, that can be a selling point.

But AstraZeneca needs marketplace primacy to achieve its revenue targets.

Is pharma fair value?

AstraZeneca's valuation is fair (trading at 17 times forecast earnings) if hardly cheap.

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Mark does not own shares in AstraZeneca.