Despite a brimming pipeline touted by execs earlier this year, storm clouds are gathering for AstraZeneca, and the best way to weather them is through a takeover, says one analyst.
If it wants to deliver results, the UK drugmaker's dwindling set of options really boils down to one: take over a company with a pipeline that will keep it afloat, wrote Tim Anderson of Sanford Bernstein.
In a note titled, "Something's Gotta Give. But When & Why?" Anderson writes of a "left for dead" attitude by many investors towards the company. “AZN faces a prolonged, multi-year patent cliff that gives it among the steepest revenue and EPS declines of the different US and European companies we cover,” Anderson noted, referring to a slew of patent expirations that start in 2012 and run through the next the next four years. Among those aging out this year are anti-psychotic Seroquel and blood pressure drug Atacand. Seroquel IR and XR brought in over $6 billion in sales for the company last year, and Atacand brought in almost $2 billion. Blockbuster Crestor ($6.6 billion in sales last year), already generic in some European markets and facing a threat from off-patent Lipitor in the US, is scheduled to lose US exclusivity in 2016.
“The company's late-stage pipeline has progressively crumbled, [and] Crestor is likely to face a slow-down because of the availability of generic Lipitor,” Anderson pointed out.
The only other path is to keep on slashing spending, but there is a limit to how much AstraZeneca can cut as a way to rein in costs. It's been on a sustained diet of pink slips since 2007, when it initiated its first round of cuts; that has since been followed by two more. The most recent losses will cost the company about 3,750 jobs that come under SG&A expenses, 2,200 in R&D and about 1,350 in operations. The company has also gone so far as to reduce its selling regions from five to three.
Its drug discovery operation can't take further gutting. “AZN spends less on R&D (measured as a % of sales) compared to almost all of its peers, and cutting R&D can be likened to ‘selling the family silver,'” Anderson noted.
If the company, which acknowledged this precarious outlook in its annual report, is considering an acquisition, it's keeping its cards close to the vest. The last major one, AZ's 2007 purchase of MedImmune, has been widely derided, but Anderson says another company acquisition is the best hope for continued survival.
With an acquisition or merger "more likely than further big spending cuts," Anderson ran through three possible targets: Abbott's pharmaceutical unit
, Shire or Amylin. The smallest of these three, an Amylin buyout (for $4.5 billion) would simply give AZ a foothold in the diabetes market with Byetta and Bydureon. Buying Shire (for $30 billion) would make for a relatively easy integration, but it may not do enough to revive AZ's struggling pipeline.
Finally, taking over Abbott's pharma business (for $52 billion) would be a messy mega merger, but would offer AZN late-stage pipeline products for kidney disease and liver cancer. "However," Anderson acknowledged, "our belief is that only mid-sized deals ($10B or less) will be pursued."