Anaysis - AstraZeneca gets serious on deals as drugs run out

LONDON Fri Mar 9, 2012 12:35pm GMT

A worker leaves the AstraZeneca research facility in Loughborough, March 2, 2010. REUTERS/Darren Staples

A worker leaves the AstraZeneca research facility in Loughborough, March 2, 2010.

Credit: Reuters/Darren Staples

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LONDON (Reuters) - AstraZeneca (AZN.L) is dusting off its cheque book. The country's second biggest drugmaker has bought nothing for more than $400 million (253 million pounds) since its 2007 purchase of U.S. biotechnology company MedImmune for $15.6 billion -- an overpriced flop that has failed to deliver.

Now, its drug pipeline down to a trickle, the company is venturing back into the market and aiming for multiple low-billion-dollar deals.

"We are very actively talking to a number of companies, including potential peer-to-peer and biotech deals," research head Martin Mackay, whose job it is to find tomorrow's big sellers, told Reuters.

"I would be very disappointed if we do not do some deals this year that the market will be pleased by."

Investors, analysts and bankers say the Anglo-Swedish firm must do something. The strategy to date of slashing costs, firing staff, and returning billions in share buybacks and dividends is not seen as sustainable in the long run.

The clock is ticking.

Later this month, U.S. and European patents will expire on Seroquel, its hugely profitable antipsychotic drug -- the first of three major drugs facing cheap generic competition over the next five years.

Recent setbacks with a trio of new medicines for depression, ovarian cancer and diabetes mean confidence in the group's ability to rejuvenate the pipeline internally is at rock bottom.

Dan Mahoney, a portfolio manager at Polar Capital Global Healthcare & Income Trust, is one of those who has ridden the AstraZeneca rollercoaster. He had high hopes for the depression drug licensed from Targacept (TRGT.O), which did well in a mid-stage trial but then failed in two later pivotal studies.

In the risky world of drug development, he believes a series of five or six acquisitions is the best way forward - a view that seems to resonate with management thinking.

"If I look out over the next couple of years that is the kind of framework I think we are looking at," Mackay said, when asked about the possibility of half a dozen deals.

"We are looking at some in the low billions (of dollars) ... with deals of that size, we can do them sequentially and build that way. We know one deal won't be the answer in itself."

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Graphic on future sales: link.reuters.com/jej96s

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AMYLIN A TARGET?

AstraZeneca CEO David Brennan said last month he wouldn't do a "transformational" deal or even anything as big as MedImmune, effectively ruling out a bid for Shire (SHP.L), which has been tipped as a target but would cost close to $30 billion.

That still leaves plenty of other candidates. Several analysts have suggested a tie-up with diabetes specialist Amylin Pharmaceuticals AMLN.O given AstraZeneca's interest in the booming sector and the small U.S. firm's need for an international partner.

Bernstein analyst Tim Anderson believes an Amylin buy would fit well and work financially, assuming AstraZeneca paid a 30 percent premium, about the going rate, in a $4.5 billion deal.

The diabetes sector is one of the fastest-growing in the drug industry because of rising obesity rates worldwide.

Mackay declined to comment on Amylin specifically but said so-called GLP-1 diabetes drugs, like Amylin's Byetta and Bydureon, were "an interesting class".

On its own, buying a company like Amylin would not solve AstraZeneca's problems. But completing several single-digit-billions-of-dollars deals would move the dial -- and mitigate the risk of another MedImmune moment.

"TARNISHED" CEO

One top-five AstraZeneca shareholder said Brennan remained "very tarnished" by the 2007 U.S. biotechnology deal, which was slammed at the time and has been criticised ever since for the high price paid and the scant pipeline rewards it yielded.

Given that poor track record, some investors have questioned whether Brennan, who has been in the top job for six years, will continue to lead the company - especially now that an new chairman has been found, offering scope for change.

AstraZeneca has picked former Volvo boss Leif Johansson as its next chairman, hoping his experience of steering the truckmaker through tough times will help the drugmaker as it moves into a new and harsher period.

A company spokeswoman declined to comment on speculation but said Brennan, 58, remained fully committed to driving the company's business strategy.

MARGIN HIT

It is, however, going to be a tough ride. AstraZeneca expects revenues to fall by more than 10 percent in 2012 - ending a decade of continuous growth - and it has twice revised down its long-term 2014 outlook, with new drugs expected to contribute a lot less than initially hoped.

This year's hit from the loss of Seroquel will be particularly severe given the medicine's very high profitability. Analysts at Berenberg estimate it could knock 330 basis points off the group's pre-R&D margin.

There is more bad news to come. Nexium, for acid reflux, faces U.S. generics in 2014 and cholesterol fighter Crestor, AstraZeneca's top-seller, loses patent protection in 2016.

"They have to do something, unless they want to show significant sales declines in the coming years," said Britta Holt, a director at Fitch Ratings. "They have the cash on the balance sheet."

Cash reserves were $7.6 billion at the end of December.

Increasingly AstraZeneca's main shareholders are value funds simply attracted to its dividend yield of more than 6 percent -- others may have given up in the face of poor development plans.

The headline figures are grim. Despite spending $42 billion on R&D in the past decade, AstraZeneca has produced just one new medicine, Crestor, with annual sales over $1 billion. The 2010 approval of heart drug Brilinta is a positive but analysts have been disappointed by its slow take-up.

With the shares trading at just over 7 times this year's consensus earnings per share, AstraZeneca is the cheapest of any major European or U.S. pharmaceutical company.

For the brave that may represent an opportunity - especially if management succeeds in its quest to find new products to roll down the company's existing sales channel.

"I can't help but thinking that if AstraZeneca actually had some drugs to sell, it could do quite well," said Polar's Mahoney.

(Editing by Sophie Walker)

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