Astrazeneca May Pay Top Dollar to Beat Chronic Sales Fatigue
The London-based company faces cheaper copies of seven drugs by 2014, including its three biggest sellers: Nexium for ulcers, antipsychotic Seroquel and Crestor for cholesterol. Bank of America Corp. analyst Graham Parry downgraded the stock in April to “underperform,” citing a pipeline that isnt robust enough to fill the looming sales gap.
AstraZeneca trades at about 8.8 times reported earnings, below the 12.7 times for the Bloomberg Europe Pharmaceutical Index. That suggests investors are betting that the company will struggle to combat the generic onslaught to drugs that by 2014 will threaten as much as 62 percent of revenue, according to Bloomberg calculations based on 2008 sales. That unprecedented hurdle may force AstraZeneca to pay top dollar to fill the gap, said Johan Stein, a fund manager at Nordea Asset Management.
“I am wary of their acquisition strategy,” said Stein, whose Stockholm-based firm oversees about $170 billion including AstraZeneca shares. “Im sure they feel a certain desperation right now. When you are eager to fill the pipeline, there is always a risk you will overpay.”
Chief Executive Officer David Brennan, who bought U.S. vaccine maker MedImmune Inc. for $15.2 billion in 2007, is now seeking smaller deals. Brennan said on March 27 that he will “wait and see” whether the pipeline delivers before reconsidering that stance. He wants to expand in areas including diabetes, pain, infection and cancer.
Blue-Sky Blockbuster
Investors may be too pessimistic, said UBS AG analyst Gbola Amusa. He upgraded the stock to “buy” on April 27, saying the market underestimates AstraZenecas experimental drugs, especially the “blue-sky mega blockbuster” potential of dapagliflozin, a diabetes treatment in development with U.S. partner Bristol-Myers Squibb Co. A blockbuster has sales of more than $1 billion a year.
“Much of AstraZenecas longer-term concerns — excess capacity, merger and acquisition risk — can be diminished by pipeline execution,” Amusa wrote in the note.
AstraZeneca has risen 4.6 percent since April 30, after reporting earnings that exceeded analyst estimates and after AstraZenecas experimental clot therapy Brilinta beat Sanofi- Aventis SAs Plavix in a study. Plavix is the worlds second- best selling drug with $9.45 billion in revenue. AstraZeneca was the best performer in the Bloomberg Europe Pharmaceutical Index last year, gaining 30 percent. The shares have declined 11 percent this year.
On the Lookout
“Were actively on the lookout for opportunities of any size that make sense for the business and our shareholders,” spokesman Chris Sampson said in an e-mail.
AstraZenecas $7.17 billion in debt and $4.29 billion in cash limit its ability to pursue a deal like Pfizer Inc.s $68 billion takeover of Wyeth in January. Still, the suspension of share buybacks this year, “aggressive” cash generation and banking facilities may lead to as much as $15 billion to be built up over the next three to five years, Charles Stanley analyst Jeremy Batstone-Carr said.
MedImmunes Premium
The MedImmune deals 21 percent premium, at about 11 times sales, has yet to be justified two years later, Stein said.
Out of MedImmunes 45 products under development at the time of AstraZenecas purchase, only three have since come onto the market — Flumist for influenza, respiratory drug Synagis and Ethyol for cancer. Those therapies generated $1.36 billion.
“The tricky thing about Astra is that its hard to see the value in the pipeline,” Stein said. “Thats why the company is so cheap right now.”
AstraZeneca is working on a combination of Crestor and TriLipix, made by Belgian drugmaker Solvay SA and Abbott, that would improve cholesterol levels more than either drug alone. TriLipix works much like Abbott and Solvays TriCor to reduce artery-clogging fats in the blood. Solvay reported first-quarter U.S. sales of $253 million for TriCor and TriLipix.
Solvay, which said April 1 it was considering options for its pharmaceutical unit, may be a suitable target for AstraZeneca, said Wim Hoste, an analyst at KBC Securities in Brussels. The stock has gained 26 percent since the announcement.
Solvay Unit