What Next For AstraZeneca?

Published in Company Comment on 3 December 2012

What does the future hold for the pharma giant AstraZeneca (LSE: AZN)?

To say the least, it has been a difficult year for AstraZeneca (LSE: AZN). While rivals like GlaxoSmithKline (LSE: GSK) seem to be past the worst of their troubles and now have burgeoning drug pipelines, AstraZeneca's drug pipeline is running dry.

The company had high hopes for its acquisitions, notably US biotech business MedImmune, but these hopes seem to be turning sour. And these pipeline disappointments are happening at a time when current sales are crumbling.

Astra's Wile E. Coyote moment

Think of Wile E. Coyote in his desperate pursuit of Road Runner. He runs over the (patent) cliff, looks down in disbelief, and after a few seconds he falls. AstraZeneca is like Coyote, just as he has looked down.

Just take a look at the numbers: third-quarter sales have slumped by almost 20%, as blockbusters such as Seroquel have gone off-patent. Pre-tax profits have halved compared to the same period last year.

Sales in Western Europe slipped 29%, although a bright spot was emerging markets, with revenues up a quarter in China.

Compare this to the best in class, Swiss firm Roche, which has been steadily increasing sales and profits in the past few years.

The accumulation of bad news led to the resignation of the chief executive, Dave Brennan, in April 2012. AZ has appeared rudderless, heading for a fall and not able to do anything about it.

A signal of intent

But the company's hire of Pascal Soriot from Roche as their new chief executive signals their intent. In my view, Astra wants to 'do a Roche'.

What I mean by this is that Roche is a company that, out of all pharma companies, has most successfully grasped the future of biotechnology and bioscience that AstraZeneca has so far failed to reach.

Up to now, AstraZeneca has spent much of its profits on share buybacks. For me, this is money which -- though not exactly wasted -- could be put to better use.

In his first day in office, Soriot suspended the share buyback programme. What will he use this extra money for? Well, the dividend is already high enough, so I suspect he is seeking out acquisitions.

Two ways to make it in pharma

I think these days there are two ways to succeed for pharma companies: either you invest in scientific research (the GSK way), or you buy other innovative companies (the Roche way).

AstraZeneca is pursuing the acquisition approach, and I think this is the correct strategy. The proviso is, of course, that it must make these acquisitions work.

If Soriot follows the same approach as Roche, then AstraZeneca won't be taking any half-measures. After all, in 2009 Roche took over the world's premier biotechnology company, Genentech, for a tidy £28 billion. The acquisition was a game-changer, both for Roche and the whole of the pharma and biotech industry.

The future of AstraZeneca will depend on Soriot getting these calls right. If he really can change the game for AZ, then he might just boost the business's currently depressed share price -- but this is no given. I think AstraZeneca has an exciting few years ahead of it.

Star fund manager Neil Woodford has been a strong believer in the pharmaceutical industry, investing heavily in companies such as AstraZeneca, GlaxoSmithKline and Roche, as he feels the industry as a whole has been undervalued.

If you are interested in learning more about the businesses he has invested in, please read our free report, "8 Shares Held By Britain's Super Investor".

> Prabhat owns shares in GlaxoSmithKline, but does not own shares in any of the other companies mentioned in this article.

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