* Consensus earnings post ‘16 look materially too low (7-27%)… we maintain our NEUTRAL rating, although our in-depth early pipeline analysis lifts our DCF-derived intrinsic value from £37 to £49 (the greatest discount to NPV in our universe). Our target price remains unchanged (£35, 12% ETR) and is based on c.12x 2014E core earnings. The market ascribes minimal value to the potential of AZN’s extensive and growing cancer pipeline and the longer-term potential of Brilinta (cardiovascular). Despite the DCF support, ahead of maturing pipeline data we continue to prefer BUY rated Roche, Novartis and Bayer in EU and BMY and PFE among US majors.
* …but near/mid-term EPS still face downward pressure and few catalysts. Our new estimates are c.2% below consensus for 2014-2015 EPS. Dividend yield rather than capital appreciation prospects will likely remain the determinant of the share price until AZN discloses pipeline data 4Q 2014/2015.
* Restructuring of BMY diabetes JV and Actelion deal or similar could provide c.24% EPS accretion. We have previously outlined our belief that a restructured diabetes JV for BMY/AZN would be mutually beneficial, potentially accreting AZN’s EBIT by c.7%. (AZN Could Seek Increased Ownership Of Diabetes JV). Acquisition of “long runway” assets like Actelion could provide c.12% EBIT accretion without jeopardizing the dividend.
* AZN’s unappreciated $7bn pa cancer pipeline — AZN is building the broadest portfolio of cancer immunotherapies (IO), outside BMY and Roche (Immunotherapy – The Beginning of the End for Cancer). AZN has multiple checkpoint inhibitors/ costimulators, armed antibodies, antisense inhibitors and a plethora of high potential novel small molecules. First phase II data due 4Q 2014 for immunotherapy agents, with first novel oral launches anticipated in 2014/2015.
* Likely positive PEGASUS data in ACS set to make Brilinta a >$3bn drug — The direct and indirect effect of positive Brilinta data from PEGASUS should fuel increased uptake in the primary ACS (Acute Coronary Syndrome) and help extend treatment duration (data due 1Q 2015). We are unperturbed by the planned investigation into the PLATO registration trial (DOJ Investigation Into Brilinta/PLATO Trial Integrity Likely Immaterial. PEGASUS Is Key For Transforming Brilinta Outlook)