Analysis: New AstraZeneca boss can't dodge taking risks

LONDON Thu Dec 13, 2012 9:59am EST

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LONDON (Reuters) - AstraZeneca's (AZN.L) new CEO Pascal Soriot needs to take risks if he is to replicate the kind of turnaround pulled off by Bristol-Myers Squibb (BMY.N) - another drugmaker down in the dumps a few years ago.

The former Roche (ROG.VX) executive is preparing to invest in deals and fast-track some research projects, but given the group's poor track record in finding winners, he will also have to work hard to keep shareholders on side.

AstraZeneca's credibility gap was in the spotlight again on Thursday when it reported disappointing results with a new drug for rheumatoid arthritis, licensed from Rigel Pharmaceuticals (RIGL.O) in 2010.

Yet Soriot will have to take more such gambles.

His decision to suspend share buybacks on his first day in the job in October immediately prompted speculation of larger acquisitions. More recently, he has been fleshing out his ideas for a bolder approach in meetings with investors.

The prescription for returning AstraZeneca to health includes re-focusing its marketing operations, accelerating certain in-house drug projects and taking a wider look at deal-making to refill the company's sparse new drug pipeline.

It is a significant, albeit evolutionary, change of tack for Britain's second-biggest drugmaker, which has so far responded to one of the industry's steepest patent "cliffs" - when patents expire and its drugs face generic competition - by slashing costs, limiting risk-taking and targeting near-term cash.

A smarter approach to selling is likely to be applauded by shareholders, who feel the group has not shown its true potential as a marketing machine recently.

Embarking on major acquisitions is another matter.

WARNING SIGNS

"We are supportive of Pascal and the new management team, but I would say that there are some amber warning signs out there," said Nick Kirrage, portfolio manager at Schroders, one of the 10 largest AstraZeneca shareholders.

"One of the things we value about Astra is its balance sheet strength ... I wouldn't want to see them give that up for a deal that would expose them to even more risk."

Kirrage would need to see "a good justification" for not reinstating the share buyback program, which reached $2.3 billion in the first nine months of 2012 out of an initial target of $4.5 billion.

AstraZeneca has already picked up its pace of deal-making in 2012, and Soriot is expected to do more, following the lead set by Bristol, which has used what it calls a "string of pearls" strategy to boost revenue through small or mid-sized purchases.

Soriot, who has so far made few comments in public about the company's future, will give the "top-line" results of a strategic review when he presents 2012 results on January 31, with more details to follow at a capital markets day in March.

His first priority is to jump-start sales of heart drug Brilinta, after a poor start. That means more focus on interventional cardiologists and, potentially, a future tie-up with another company to help boost international sales.

An obvious partner would be Bristol, given existing ties between the two firms in diabetes, though Bristol's sales force is pre-occupied for now with launching anticoagulant Eliquis.

Beyond Brilinta, Soriot said during a third-quarter earnings call that he wanted to "turbo-boost" growth in diabetes and emerging markets - two other key platforms of the business.

Existing in-house research projects are also likely to get a boost, after a highly conservative period that has led to frustration among some research staff that promising new treatments are being held back by excessive caution.

A number of biotech products from the MedImmune division - including drugs for lung disorders, cancer and lupus - are potential candidates for faster progression into final-stage Phase III studies, along with the cancer drug olaparib.

But the biggest - and riskiest - lever Soriot has to pull is acquisitions.

Citigroup analysts expect deals in the $10 billion to $20 billion range, which they argue will be needed to help fill an estimated $3.5 billion "gap" in operating profit between 2012 and 2017 as key drug patents expire.

"We do think there are good opportunities out there for him to do some bolt-ons as well as focus on products," said another institutional investor ranking among AstraZeneca's 20 largest holders.

The company is not alone in facing big patent losses, but while rivals like GlaxoSmithKline (GSK.L), Sanofi (SASY.PA) and Bristol have now put the worst behind them, AstraZeneca's has the worst to come; its two biggest selling drugs - Nexium for stomach acid and cholesterol fighter Crestor - will lose U.S. protection in 2014 and 2016.

MEDIMMUNE SHADOW

Getting mid-sized buys right will be a big challenge, given the perception that AstraZeneca destroyed value when it bought MedImmune for $15 billion in 2007 - a pricey deal that brought in few products to replenish the sales line.

The short-term impact of the new approach is also likely to be negative for earnings, as cost savings are reinvested and buybacks are de-emphasized over acquisitions, according to Deutsche Bank.

The brokerage last week cut its forecast for 2013 earnings per share by 6 percent and reduced estimates for 2014-16 by 9-13 percent, even though it now expects higher sales in some areas.

AstraZeneca's dividend, however, remains sacrosanct, according to Soriot and Chairman Leif Johansson, who have both committed to stable or improving payouts. With a yield of 6 percent - the top of the range for Big Pharma stocks - the dividend is a key factor underpinning the shares, which trade on less than eight times this year's expected earnings.

(Editing by Will Waterman)

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