AstraZeneca faces long haul back to health

By Ben Hirschler

LONDON (Reuters) - AstraZeneca's <AZN.L> new CEO Pascal Soriot, outlining his investment strategy for the ailing drugmaker this week, is unlikely to offer any quick fixes to plug a looming $6 billion (3.9 billion pounds) sales gap.

The former Roche <ROG.VX> executive aims to invest more in existing products, rebuild the group's research base, and - crucially - use acquisitions to replenish future drug supply.

He has already flagged his broad intent by suspending share buybacks and freezing AstraZeneca's dividend, which gives a yield on its shares of some 6 percent, the fattest in the Big Pharma universe, as well as ousting the firm's previous commercial and research heads.

He will flesh out his ideas in a briefing to analysts and investors in New York on March 21, with headline news from the event expected to be announced in London during the morning.

The scale of AstraZeneca's merger and acquisitions ambitions will be a key focus for investors, many of whom believe it could easily spend $20 billion (13 billion pounds), given a cash pile of well over $7 billion and scope for borrowing on the basis of strong near-term cash flows.

Soriot, however, has already made clear a single large-scale deal - such as an often-rumoured purchase of Shire <SHP.L> - is less likely than a string of smaller bolt-on buys, although he does not altogether rule out a transformational buy.

Daniel Mahony, a fund manager at Polar Capital, expects him to reiterate a message of smaller deals over large ones.

"He's not going to pull a rabbit out of a hat and fix things overnight ... if there was an asset to buy that was the game-changer, they would have done it by now," Mahony said.

"I think he can transform the company through a series of five or six M&A transactions, each of which could be anything from half a billion to $5 billion."

AstraZeneca is in a tough spot because it is losing exclusivity on its once best-selling medicines and has few promising drugs in the pipeline to replace them.


It is not alone in facing big patent losses, but while many rivals including GlaxoSmithKline <GSK.L> have put the worst behind them, AstraZeneca still has big hits to come. Its two top drugs - Nexium for stomach acid and the cholesterol pill Crestor - lose U.S. protection in 2014 and 2016.

As a result, sales at the group are set to fall from $28 billion to just over $22 billion in 2017, according to a consensus analyst forecast compiled by Thomson Reuters.

Analysts at brokerage Jefferies, who last week cut their revenue predictions for AstraZeneca, said investors were still too optimistic about how quickly the company can be turned around.

Expectations going into this week's investor event may be low but Polar's Mahony, for one, likes the frankness of Soriot - who trained as a vet - in acknowledging the challenges ahead.

The stock is relatively cheap - trading at about nine times expected 2014 earnings, a discount of nearly 30 percent to its European peers - so if Soriot gets it right there could be plenty of scope for a re-rating.

As a pure pharmaceuticals group, without the cushion of alternative revenue streams, AstraZeneca is particularly exposed to patent losses on key prescription drugs. That limits room for manoeuvre, but Soriot still has a number of levers he can pull.

He has already made clear that his first priority is to boost performance in five key existing business areas - new heart drug Brilinta, emerging markets, diabetes care, respiratory medicine and Japan.

But he may also choose to refocus the company - particularly by targeting more biotech drugs over conventional chemical ones - and new investment in these areas is likely to be complemented by deals to license in drugs as well as buying smaller firms.

Fresh spending, however, will have to go hand in hand with cost savings, if AstraZeneca is to placate investors who value the group's strong balance sheet and its record of cash payouts. Under the previous CEO, David Brennan, AstraZeneca cut thousands of jobs and paid out billions in share buybacks and dividends.

Getting that balance right is Soriot's biggest challenge.

(Editing by David Holmes)