All the excitement around the bid for AstraZeneca (LSE: AZN) (NYSE: AZN.US) from US giant Pfizer has died away. The rocket Pfizer put under the share price of the FTSE 100’s number two pharma firm has fizzled out. Nevertheless, I think there’s potential for the shares to soar again before the end of the year.
Pfizer recap
Pfizer went public with its approach to Astra on 28 April. Under the “put up or shut up” rule introduced after the long-drawn-out takeover of the UK’s Cadbury by US group Kraft Foods in 2010, Pfizer had 28 days to either strike a deal or get Astra’s directors to agree to further talks.
On 2 May, Pfizer announced an indicative offer valuing Astra at £50 a share. Astra’s board immediately rejected the proposal, saying the terms “substantially undervalue” the company. Further offers — of £53.50 on 16 May, and £55 on 18 May — were also rejected. Pfizer officially ended its interest two hours before the put-up-or-shut deadline on 26 May.
Share price roller-coaster
Astra’s shares were trading below £38 before rumours of Pfizer’s interest began to swirl. The shares hit an intra-day high of £57.50 on 1 May, the day before Pfizer announced its £50 proposal; thereafter, the highest closing price was £48.23.
AstaZeneca’s shares are currently trading at £44.50, comfortably above the pre-Pfizer-interest price. And with the price representing 17.5 times current-year forecast earnings, compared 15.5 times for rival GlaxoSmithKline, it would appear the market is still attaching something of a bid premium to Astra.
There are, though, other factors. Newsflow on Astra’s pipeline has been strong over the last six weeks, and, in the process of fending off Pfizer, Astra’s chief executive, Pascal Soriot, made an eyebrow-raising claim that Astra’s revenue would reach more than $45bn by 2023 — $20bn higher than today.
Shareholder pressure
There was pressure from some of Astra’s major shareholders for the Board to enter talks with Pfizer. Now, a number of shareholders are seeking to link the directors’ remuneration packages to the rejected £55 valuation and the extravagant revenue projection, which far exceeds the forecasts of even the most optimistic industry analysts.
It has emerged that Pfizer’s valuation of Astra wasn’t far short of a £58.50 threshold at which Astra’s Board would have been willing to talk. Under the UK’s takeover rules, Pfizer has to wait six months to make another approach, which would take us to November. However, it need only be three months (August) if Astra were to invite Pfizer to talk.
Upside scenario
If either of those things happened — or even on rumours they were going to — I think we could see Astra’s shares shoot up 20% to around £53. That would be a 12% discount to an assumed successful offer from Pfizer of £60. And £60, if it actually materialised, would give a 35% upside from Astra’s current price.
Of course, none of this may happen. Certainly, though, there are shareholders who feel the valuation is already close to where they would be happy to sell. And £60 could bring more on board.
Will Pfizer want to come back? Analysts reckon the company could afford to bid higher. However, there is a potential fly in the ointment. Part of Pfizer’s interest in Astra is to gain a significant tax advantage by shifting its tax base from the US to the UK. The US isn’t happy about such ‘inversions’ and would like to stymie them. So, time isn’t on Pfizer’s side.
Anyone investing in AstraZeneca today could see the shares soar before the end of the year, but in the absence of a deal with Pfizer, the shares look pricey.