AstraZeneca Struggles to Justify Rejection of Pfizer
Hit by patent expirations and sagging shares, the pharma company has been seeking partnerships, cutting costs, and building a pipeline.
This could be the year that British drugmaker AstraZeneca finally starts delivering on the promise made to shareholders in 2014, when it claimed it would fare better alone than by accepting a $120 billion takeover bid from U.S. rival Pfizer.
Investors who stuck with the company haven’t had an easy ride. Pfizer ’s (ticker: PFE) final bid valued AstraZeneca (AZN) shares at about 55 pounds ($67.74) each. Today they trade around £47.
The pressures that AstraZeneca faces are common to most big pharmaceutical companies, battling to replace money-spinning blockbuster drugs as patents expire and cheaper generic alternatives sap revenue.
When AstraZeneca released earnings last month, it said this year could be a turning point, as the company gets beyond a series of major patent expirations and brings some important new drugs to the market. It sets particular store by its immuno-oncology treatments and others aimed at fighting respiratory and metabolic diseases.
“It is an exciting time as we rapidly approach the inflection point for our anticipated return to long-term growth, built on the solid foundations of a science-led pipeline,” AstraZeneca said in 2014.
KESTRA PRIVATE WEALTH SERVICES CEO Rob Bartenstein is an AstraZeneca fan, but he admits it’s a relatively risky bet. “I’ve gotten over 10% appreciation since early December, but this is not a position I would ever turn my back on,” he says.
He says the company is motivated to reward shareholders and has a healthy pipeline of treatments in clinical development. But he warns that the regulatory process is slow and full of pitfalls for even the most promising of new drugs.
“Even when you get to the final stage of trials, you can still have an implosion. We’ve seen that in related businesses, and we’ve seen it in this business,” Bartenstein says.
On the positive side, investors awaiting AstraZeneca’s turnaround are being paid to hold tight. With a dividend yield of about 4.7%, the stock is returning considerably more than U.S. 10-year Treasuries. “If you’re going to pay me that much to ride it out, I’m inclined to be patient,” Bartenstein says.
He reckons that investors have reason to be optimistic. AstraZeneca is well exposed to emerging markets, where revenue growth is running at about 6%. In China, it’s around 10%, while Japan is also a promising market, he says.
“There’s great expansion in market share in Japan, which is one of the largest health-care markets in the world and the third-largest per capita spender on pharma, so there’s some great news to be had there,” Bartenstein says.
The patent on AstraZeneca’s top-selling Crestor cholesterol treatment expired last July, allowing cheaper competitors to chip away at its roughly $5 billion worth of annual sales. In 2016, as generic alternatives sprang up in the U.S., Crestor’s sales plunged 32%, to $3.4 billion. That impact was most pronounced in the fourth quarter, when sales more than halved to $631 million from a year earlier.
AstraZeneca has a pipeline of 132 projects making their way along the slow and uncertain regulatory trail. The company has sought to monetize the potential from some of those by forging so-called externalization deals, in which it partners with other companies that make upfront payments for the right to market the drug.
Externalization revenue helped cushion some of the impact from sliding Crestor sales, rising 58%, to $1.68 billion, over the full-year 2016. Still, not all investors are keen on such deals.
“For a company that is dealing with the patent cliffs of Crestor and others, you can say that’s a reasonable strategy because you need a stop-gap measure from a revenue standpoint,” says Bartenstein. But with 80% of that revenue nonrecurring, he adds, “You’ve got to wonder if you’re not robbing Peter to pay Paul.”
MORE IMPORTANT, ASTRAZENECA has made considerable progress in containing costs. In the fourth quarter, the amount it spent on everything from research and development to selling, general, and administrative expenses fell sharply from a year earlier. As a result, despite a 15% decline in product sales to $5.26 million over the period, net profit jumped to $1.84 billion from $808 million.
With annual sales down 7% last year at $23 billion, the $45 billion that AstraZeneca insisted it could hit by 2023 when it rejected Pfizer remains a daunting goal.
Bryan, Garnier analyst Eric Le Berrigaud has AstraZeneca at Buy with fair value of 5,400 pence, giving it 14% upside based on Friday’s closing share of 4,779 pence.
Says Berrigaud: “If one franchise can make AstraZeneca a different company, one that can be profoundly transformed in the coming years, and one able to see unparalleled earnings growth in the large-cap pharma space, it’s oncology.”