Shares I love: AstraZeneca

After AstraZeneca rejected a takeover offer from American drug giant Pfizer (PFZ) to buy its shares for £55 each, their value has fallen back to a level which does not reflect the company's "substantial" pipeline potential, he says.

He believes AstraZeneca's shares could easily justify a £55 price, and possibly a much higher one. But he is agnostic as to whether this is achieved via a bid or under the company's own steam.

In response to the bid, AstraZeneca has announced a revenue target of $45bn (£26bn) by 2023, up from $25.7bn last year, giving it a compound annual growth rate of just over 6 per cent. And it has stated that due to operational leverage, the earnings growth rate should be even greater.

In April Mr Bailey reduced his holding in AstraZeneca, when its share price was between £47 and £48. But since then he's built his position back up - buying back shares for around £41 to £43 a share, following the board's rejection of Pfizer's offers.

He said: "AstraZeneca's management mounted a creditable defence to Pfizer's proposed offer, but they now face the challenge of justifying the rationale behind their rejection.

"I think there is the potential for a substantial re-rating of the pharmaceuticals sector as pipeline potential translates into profit growth potential. Following something of a 'lost decade', the sector is finding growing political patronage which is encouraging companies to shed consumer-facing businesses and return to being the innovative growth businesses of the past. More efficient research processes and various regulatory changes (fast-track processes and breakthrough therapy status) certainly provide further encouragement to 'Big Pharma'."

AstraZeneca is trading at £44.21 (8 July 2014). The last IC view on the shares was hold at £43.62 on 4 July 2014. We said investors would do well to sit back and benefit from the generous dividend yield while the company brings products to the market.