JP Morgan stays at overweight on AstraZeneca following merger rumours

JP Morgan has reiterated its ‘overweight’ rating on AstraZeneca, following reports that the drugs manufacturer was mulling a possible merger with US rival Gilead Sciences.

The UK’s biggest company by market value reportedly contact Gilead in May, according to Bloomberg, with a view to creating $240bn drugs giant. Both companies are currently focusing on Covid-19 treatments, with AstraZeneca working alongside Oxford University on a vaccine.

JP Morgan said it found AstraZeneca’s overture surprising, “giving Gilead’s weaker growth outlook – 3% 2021-24 earnings per share compound annual growth rate versus AstraZeneca at an 18% CAGR – limited pipeline, and the apparent lack of significant synergies, giving the limited therapeutic overlap”.

The bank also argued there was a “low probability” of a deal happening, with potential barriers including the US government being reluctant to see Gilead acquired by a foreign company and possible shareholder resistance.

However, it conceded that should a deal go through, it would bolster AstraZeneca’s earnings.

“We calculate this would be highly accretive to Astra earnings in the medium-term, with around 50% core EPS accretion in 2021, 40% accretion in 2022, accretion in the 20s in 2023-25.

“In addition, to the EPS accretion, depending on the offer structure, the deal could also allow Astra to de-lever, which in turn could provide more room for pipeline in-licensing.”

The bank concluded: “Astra shares could underperform this morning, despite the low probably of a Gilead merger occurring, due to concerns around Astra’s growth outlook being diluted.

“We believe the weakness could be a buying opportunity, given we believe such a deal is unlikely to happen, and if it did, the very high levels of accretion could more than compensate for the growth rate dilution.”

As at 1430 BST, the stock was trading down 2% at 8,216p. JP Morgan has a price target of 8,427p on the blue chip.