LONDON (Reuters) - AstraZeneca (AZN.L) may decide to make a big acquisition if it fails to improve the flow of new drugs from its pipeline, and its $10 billion cash pile hints at a desire to keep strategic options open, according to an analyst report.
Michael Leacock of Royal Bank of Scotland said the drugmaker's cash balance at the end of the second quarter was nearly twice the level before it bought MedImmune in 2007, and $5 billion more than it needed for working capital.
AstraZeneca says the strong cash position gives capacity for its share repurchase program, but Leacock believes the group may also be deciding whether to step up product acquisitions significantly or make one larger purchase.
"We believe there is a material risk that if the pipeline performance does not improve to reach the industry average, or presents little prospect of doing so, AstraZeneca management will decide to make a larger acquisition to boost longer-term growth," he said in a note on Thursday.
Given comments from rivals such as GlaxoSmithKline (GSK.L) and Novartis NOVN.VX that the price of acquisitions remains high, there is a risk AstraZeneca will strike a deal that destroys value, he added.
For the time being, AstraZeneca is continuing to generate plenty of cash from a clutch of highly profitable medicines.
But Chief Executive David Brennan faces a challenge to drive growth beyond 2016, when more patents will expire on drugs such as cholesterol fighter Crestor and anti-psychotic Seroquel XR.
"We do see a need for a material acquisition to overcome the weakness in R&D and to provide a new franchise over which AstraZeneca can apply its strong marketing and cost-saving skills," Leacock said.
"The sooner this could be delivered, the greater the benefits in the vulnerable 2016-18 period."
RBS raised its target for AstraZeneca shares to 2,915 pence from 2,825p, while keeping its "hold" recommendation. The stock was 0.2 percent higher at 2,860p in a little changed European drugs sector .SXDP by 0930 GMT.
Reporting by Ben Hirschler; Editing by David Hulmes