* Soriot's bolt-on M&A strategy helps fill strategic gaps
* No quick fix as patent losses set to shrink sales, profits
* Heavy science focus good for staff morale at drugmaker
By Ben Hirschler
LONDON, Sept 30 Fixing ailing drugmaker
AstraZeneca remains a work in progress for Chief
Executive Pascal Soriot, with sales and profits still heading
firmly downhill after his first year in the job.
Yet confidence is slowly building that he may have the right
long-term prescription for the British group, helped by some
lessons learnt at his past employer Roche.
Soriot has shunned a big acquisition as a way to plug the
deep revenue gap left by multiple patent expiries, opting
instead for a string of smaller deals, a reboot of the drug
pipeline and a shake-out of top management.
His goal of "achieving scientific leadership" may fall short
on the kind of hard financial targets that some investors would
like, but it has resonated with many younger researchers who
felt the group was drifting, following past R&D setbacks. It has
already accelerated work on several promising cancer drugs.
"When I talk to people in the industry about AstraZeneca, it
is a place where people now want to go and work - and that
hasn't been true for about 10 or 15 years," said Dan Mahony, a
fund manager at Polar Capital, who has raised his stake in the
company in the past year.
Reversing AstraZeneca's poor record in drug research is
Soriot's top priority, so staff morale matters. Rival executives
say he is borrowing some ideas from Switzerland's Roche.
Roche - particularly its Genentech biotech unit, which
Soriot used to head - is renowned for its R&D successes,
something Soriot hopes to replicate with a $500 million move of
AstraZeneca operations to Cambridge, a British science hub.
"I see him implementing some of the same strategies that
have been adopted by Roche, in terms of focusing on highly
innovative products and taking risks," said one senior Roche
"You have to have patience when your company is going
through these kinds of adjustments."
Soriot told Reuters in June that turning around the company
would take three to four years.
Industry analysts predict sales and earnings will continue
to fall to 2017 or beyond, since a big hit is still to come when
top-selling cholesterol fighter Crestor loses patent cover in
AstraZeneca's problems are not unique, but its patent
expiries are bigger and longer-lasting than at rivals such as
British peer GlaxoSmithKline. Its pure focus on
prescription drugs also means it lacks the buffer of
consumer-focused sales seen at the likes of GSK and
Things could be different with a large acquisition that
might bring in new revenue overnight - a strategy adopted by
some other drugmakers, such as Pfizer, faced with
similar sales cliffs. Soriot, however, says such a deal is
unlikely, though he hasn't ruled it out altogether.
Since taking over on Oct. 1, 2012, the one-time French
veterinary surgeon has spent a modest $2 billion on buying
companies like heart drug firm Omthera, respiratory medicine
specialist Pearl and Amplimmune in oncology.
That is far below the $20 billion analysts believe he could
afford, and the cautious approach is cheered by shareholders who
worry about the risk of wasting cash on over-priced deals.
"He is focusing on the appropriate areas like bolt-on rather
than major acquisitions, restructuring management and shifting
R&D to Cambridge," one of AstraZeneca's 30 largest shareholders
said, speaking on condition of anonymity.
Proving the value of this strategy will take time, however.
"The M&A has looked okay, but it is still too early to say
if it is really going to shore up the pipeline," a second
leading investor said.
In the meantime, Soriot also has his work cut out trying to
bolster AstraZeneca's existing drugs business, where he has
raised investment in new heart drug Brilinta, in the hope of a
pick-up in sales towards the end of this year.
Investors, though, are not banking on a quick turnaround for
either Brilinta or the company's important diabetes business.
Emerging markets, another key growth driver, are also a
challenge as economies slow and China becomes a far more
difficult market following an anti-corruption drive that has
disrupted drug sales.
China is an especially important market for AstraZeneca,
representing some 7 percent of the group's total revenue.
Given its well-known problems, investor expectations for
AstraZeneca are the lowest among all major drugmakers, with the
shares trading at just 10 times this year's expected earnings,
against more than 16 times for Roche.
But they do offer a chunky 5.5 percent dividend yield as a
consolation for those investors who are betting such "broken"
drug stocks have a way of mending themselves, as Bernstein
analyst Tim Anderson says has often been the case in history.
"I'm patient," said Polar Capital's Mahony. "It might take
three years, but I'll get paid the best part of 6 percent in a
dividend while I'm waiting."