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Nigel Thomas: why I bought AstraZeneca before the bid

Nigel Thomas: why I bought AstraZeneca before the bid

Citywire AA-rated Nigel Thomas bought into Astra-Zeneca ahead of its takeover offer from Pfizer, saying that even without the acquisition bid the company appeared to have been over-discounted.

While the company will see a number of key revenue-earning patents expire within the next few years, Thomas said that the market had failed to see the strength in its continuing drug portfolio.

Writing in his bi-annual Thomas Report update, the manager of the £4.8 billion AXA Framlington UK Select Opportunities identified the company as one of a number of businesses he was invested in which found itself on the right side of disruptive technological change.

In particular the business was one of the top four businesses, behind Bristol-Myers Squibb and Merck in the US and Roche AG in Switzerland, to benefit from advances in cancer immunotherapy.

‘While approaching the subject as a layman, the basic tenet of the research is that cancer can be transformed from a terminal illness to a chronic disease through immunotherapy,’ wrote Thomas.

‘We have purchased shares in AstraZeneca in the last six months; their predicament of significant revenue-earning patent expiries over the next few years has been heavily discounted by the stock market.

‘However, behind the other three companies, Astra’s portfolio of compounds is notable due to their expertise, with existing drugs across a wide spread of clinical outcomes. Given that many immunotherapies will incorporate other drugs in "combination therapies", AstraZeneca will have the option to commercialise a great deal of in-house compounds to late stage trials.'

Recent positive results in research involving similar therapies had estimated that as many as 60% of cancers could in future become chronic rather than fatal conditions. Market-leader Bristol Myers-Squibb has estimated 2013 revenues related to just one immune-therapeutic product, melanoma treatement Yervoy, of around $1 billion (£592 million).

‘AstraZeneca shares have been lowly rated due to their cliff of patent expiries but have recently responded to the takeover approval from Pfizer. More portfolio managers are now looking across to the sunlit hills beyond. Bristol-Myers Squibb was lowly rated for similar reasons, but now trades on 31 times its consensus 2014 earnings.’

Thematically and stylistically, he said there were fundamental similarities between a business such as AstraZeneca and others he holds such as food distributor, retailer and caterer Booker.

He cited as a second derivative consequence of internet retail the 65% increase in food revenues generated by discount retailers in an increasingly stratified market, alongside the 98% increase in revenues generated by web businesses.

‘Even in Booker’s nascent cash and carry business in India, which we visited last year, the largest customer in their Pune branch is an online grocer! Booker themselves have made £800 million of web sales from nil in 2005.’

Similar drivers were behind his top ten holding GKN. The company owns the rights to a range of aerospace-related materials, such as carbon fibres and powder metals, which will see a range of new specialist applications in an age of 3D printing.   

‘It will take a decade to make significant inroads, but additive manufacturing will open up the growth of new materials, will be disruptive for those companies using traditional tooling techniques and will reduce the underlying volume of machining.

‘For complex or large parts, the time taken from design to first production prototypes could be reduced from 95 to 12 weeks. Using less raw material will save cost and waste. Working with these 3D printing, or additive, machines will mean less design constraints – complexity is in for free!’

Over the last five years Thomas has returned 166% versus the average UK All Companies manager return of 126.7%.

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