AstraZeneca chief claims vindication five years after Pfizer bid
Some investors and analysts still unconvinced UK company was right to resist approach
Five years ago this week, AstraZeneca boss Pascal Soriot was embarking on the fight of his life.
The urbane Frenchman, who learned how to hold his own growing up in the Parisian banlieues, had to marshal his forces to see off an attempt by Pfizer, the US pharma group, to take over the company he had headed for just 18 months.
Much of his defence against this transatlantic predator rested on a personal appeal to investors and AstraZeneca’s board to trust that he could breathe new life into its faltering R&D operation, as it faced one of the more vertiginous “patent cliffs” in the industry.
When the stock finally surpassed £55 last Autumn — the offer with which Pfizer had sought to tempt investors — it was a long-awaited moment of vindication for Mr Soriot.
“We kept having to answer that question ‘where is my 55?’ for two or three years,” said Mr Soriot in an interview with the Financial Times. “Of course I would have preferred to focus on other things and some other question than that one.”
Some investors and analysts said that even now it was far from clear that the company was right to resist Pfizer’s approach. Joe Walters, a fund manager at Royal London Asset Management, a top-20 shareholder, pointed out that on Tuesday AstraZeneca’s shares were just £3 above the level Pfizer had offered.
“I could have taken [£55] five years ago and reinvested it back into the market and the market has gone up by 10 to 15 per cent . . . the jury is out on was it the right thing to do to turn it down,” he said.
A recent $3.5bn equity placement, to part-fund a collaboration with Japan’s Daiichi Sankyo on an experimental treatment for breast cancer, had been “dilutive” of the company’s shares, which ended Tuesday at a little more than £59, and had “not gone down particularly well with investors”, Mr Walters added.
Michael Leuchten, a research analyst at UBS, said the move showed the company had struggled to raise the additional debt needed to execute its R&D ambitions. “While the top line is doing really well, that didn’t come for free,” he cautioned.
However, criticism is tempered by an acknowledgment that Mr Soriot — who has long argued that Pfizer’s offer was never deliverable as it relied on a subsequently outlawed tax inversion strategy — has executed an impressive overhaul of AstraZeneca’s R&D operation, delivering one of the industry’s more striking turnrounds.
Mr Leuchten said the chief executive had succeeded in “giving the organisation its R&D mojo back . . . Whichever way you twist and turn it, you have a completely different animal today than it was before Pascal took over. And I don’t think I’ve seen anything like it anywhere else in the industry.”
Another analyst said a key decision by Mr Soriot was to end his predecessor’s practice of allocating money to share buybacks, instead directing capital to developing the next generation of money-spinning drugs. Mr Soriot has increased spending on R&D from $4.8bn, or 18.7 per cent, of total revenue in 2013 to $5.9bn, or 26.7 per cent in 2018. Acquisitions have also helped to fill the company’s pipeline.
Perhaps the biggest challenge the company has faced under his stewardship is the devastating failure of a combination therapy for late-stage lung cancer, in which AstraZeneca had invested enormous hopes.
Mr Soriot denied any link between that setback and his decision this year to launch a wide-ranging shake up of R&D. The changes, which created two units — one focused on oncology and another for biopharmaceuticals — were intended to streamline the process from initial discovery through to late-stage development and marketing of drugs.
The existing R&D model had “served us very, very well for a number of years, but as you grow bigger and more successful with more projects [the risk is] you revert . . . back to being governance-focused, process-driven, a bit bureaucratic, a bit risk-averse, and then you start slowing down.
“So, you’ve got to act . . . because if you wait till you’ve slowed down to act, then you’re behind the ball already.”
As well as continuing to replenish the pipeline, the pressure is on to maximise sales, after Mr Soriot in November announced the company’s return to growth for the first time since 2014. The majority of the growth expected between now and 2023 will come from drugs already on the market: Lynparza, Tagrisso, Imfinzi and Calquence, all cancer treatments, and Fasenra, an injectable biologic drug for severe asthma. All have been launched in the past three years.
Royal London’s Mr Walters noted that, with the impact of patent expiries expected to diminish after 2019, “we are at the bottom of the valley and you can see the sunny uplands at the top . . . if they can execute and deliver on that, over time it would look sensible to have turned the [Pfizer] bid down”.
Particularly striking has been Imfinzi — the drug at the centre of the Mystic debacle — which has proved highly effective in a different patient group, that of people suffering from an earlier stage lung cancer.
The greater challenge may come with drugs commonly prescribed and used outside the hospital setting, such as diabetes and respiratory medicines. “Outside oncology it’s more competitive,” acknowledged Mr Soriot.
AstraZeneca’s policy of selling, or partnering with others to develop, strategic assets to raise money for drug development has also furrowed brows in the City.
A striking example was its decision to collaborate with Merck on the development of Lynparza, handing the US company a 50 per cent share of the proceeds of one of its leading medicines.
While conceding that, in that instance, AstraZeneca may have been unable to fully realise the medicine’s potential without this partnership, Mr Leuchten noted: “These guys have been doing a lot of deals where they’ve been selling the family silver to be able to fund R&D.”
For Mr Soriot, the focus is now firmly on the future. “I always thought ‘we have a good plan and we have a good team of people, we should be able to get there’.”
He added: “Sometimes you have to kind of believe, right?”