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?Â
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.Â
The stars seem aligned for a Pfizer’s comeback — but are they, really?Â
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.Â
“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.Â
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.Â
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.Â
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.Â
Oncology? Well, is that behind the rally, then?Â
“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.