Is AstraZeneca (LSE:AZN) Still Undervalued After a Strong Share Price Rally?

The question of whether AstraZeneca (AZN) remains undervalued despite its recent share price rally hinges on a nuanced interplay between intrinsic valuation models, market sentiment, and looming growth risks. While some discounted cash flow (DCF) analyses suggest the stock is trading at a 43% discount to its intrinsic value, others argue it is modestly overvalued. This divergence underscores the inherent sensitivity of valuation models to assumptions about future cash flows, growth rates, and discount factors. Meanwhile, AstraZeneca's premium P/E ratio and robust financial performance in 2025 contrast sharply with the existential threats posed by patent expirations and biosimilar competition.

DCF Valuation: A Tale of Two Models

The DCF valuation of AstraZeneca reveals a striking inconsistency. According to a report by Simply Wall St, the company's intrinsic value is estimated at $236.29 per share, implying a 42.5% undervaluation relative to its current price of $94.94. This model assumes a conservative long-term growth rate and a discount rate reflecting the company's risk profile. Conversely, Alpha Spread's DCF analysis, which employs a firm valuation approach via free cash flow to the firm (FCFF), calculates an intrinsic value of 12,309.13 GBX (approximately $155.74), suggesting the stock is overvalued by 13%. The disparity highlights the critical role of assumptions in DCF modeling. For instance, variations in projected revenue growth for oncology drugs like Enhertu or the terminal growth rate for AstraZeneca's pipeline can dramatically alter outcomes.

Market Sentiment: A Premium on Earnings and Innovation

AstraZeneca's current P/E ratio of 30.1x exceeds both its industry average and peer group averages, reflecting investor optimism about its long-term growth potential. This premium is justified by the company's strong performance in 2025, including an 11% year-over-year revenue increase in the first nine months of the year and a 15% rise in core earnings per share (EPS) to $7.04. The company's focus on oncology, rare diseases, and biopharma has positioned it as a leader in high-margin therapeutic areas. For example, Tagrisso and Imfinzi, two of its flagship oncology drugs, continue to drive revenue growth, while its collaboration with Daiichi Sankyo on Enhertu offers a promising long-term revenue stream .

However, this optimism is not without caveats. AstraZeneca's P/E ratio is only modestly below its fair ratio of 31.2x, indicating that the stock is not excessively overvalued based on earnings fundamentals. Yet, the recent Q4 earnings miss- actual EPS of $0.97 versus expectations of $1.76-raises questions about the sustainability of its growth trajectory.

Growth Risks: Patent Expirations and Biosimilar Pressures

The most significant downside risk for AstraZeneca lies in its patent expirations and the encroachment of biosimilars. By 2025–2027, the company faces the loss of exclusivity for key drugs such as ticagrelor (Brilinta) and lenvatinib (LENVIMA), which together contributed $10.3 billion in annual revenue in 2024 . These expirations threaten to erode market share as generic and biosimilar competitors enter the fray. For instance, Brilinta's U.S. patent expiration in 2025 could lead to rapid price erosion, a pattern observed with other cardiovascular blockbusters. Similarly, LENVIMA's patent cliff in 2026 may diminish its revenue contribution, particularly in the oncology segment where biosimilars are increasingly competitive .

AstraZeneca's strategy to mitigate these risks includes lifecycle management, such as reformulating existing drugs to extend patent protections, and aggressive R&D investment. The company has over 180 projects in development, with a focus on oncology and rare diseases. Additionally, its ambition to reach $80 billion in annual revenue by 2030 relies heavily on the success of Enhertu and other late-stage candidates . However, the biosimilars market is projected to grow at a 15.9% CAGR through 2030, reaching $76.2 billion, which could intensify competitive pressures .

Upside and Downside Scenarios

The upside case for AstraZeneca hinges on its ability to capitalize on its oncology pipeline and expand into high-growth markets. If Enhertu maintains its market dominance and new drugs like Calquence achieve blockbuster status, the company could outperform its revenue targets. Moreover, its strategic acquisitions and partnerships, such as the collaboration with Bristol Myers Squibb, could provide additional revenue streams .

The downside scenario, however, is more precarious. If biosimilar competition accelerates revenue declines for Brilinta and LENVIMA, or if clinical trials for key candidates fail, AstraZeneca's growth narrative could unravel. Additionally, regulatory hurdles or pricing pressures in key markets could exacerbate these risks.

Conclusion: A Balancing Act

AstraZeneca's valuation remains a complex puzzle. While DCF models suggest a wide range of intrinsic values-from a 43% undervaluation to a 17.6% overvaluation-the company's strong earnings growth and innovative pipeline justify the premium P/E ratio. However, the looming patent cliff and biosimilar pressures introduce significant uncertainty. For investors, the key lies in assessing whether AstraZeneca's R&D prowess and strategic agility can offset these risks. In the short term, the stock appears attractively valued relative to its intrinsic estimates, but long-term success will depend on the company's ability to navigate the patent expirations and maintain its competitive edge in a rapidly evolving industry.