Whoever becomes the new chief executive of AstraZeneca faces a difficult task - choosing a path to pursue to resuscitate the ailing Anglo-Swedish drug maker’s growth prospects. Options include a transformative acquisition, an outright sale of the company, or continuation of its current strategy of investing in R&D and smaller bolt-ons and hoping for a better success rate. None of them will provide an easy fix.
Astra now faces a tumultuous period until a permanent successor is announced to David Brennan, who has quit suddenly amid investor disquiet after six years in the job. While very effective at driving improvements in shareholder returns and profitability, Mr Brennan failed to do enough to protect the top line from inevitable patent expiries. Today’s disastrous first-quarter results, with sales of key products disappointing and a big downgrade to this year’s earnings forecast, illustrate the challenges that await his replacement.
Too little too late
European backing for diabetes drug dapagliflozin, the acquisition of gout-drug maker Ardea Biosciences and a co-marketing deal with The Medicines Company, all events of the past week, were insufficient to secure Mr Brennan’s office in the executive suite (AstraZeneca hopes to take off heat with gout acquisition, April 23, 2011).
The sheer weight of bad news had made his position shaky at best – first quarter results peppered with missed revenue and earnings targets, including for such key products as Crestor and Seroquel, and in nearly every geography surely made it untenable at last. Embarrassingly, sales of heart drug Brilinta, Astra’s projected biggest growth driver, were reported at zero in the US as launch stocks continue to worked through.
With a new chairman Leif Johansson, former Volvo chief executive, also succeeding Louis Schweitzer three month earlier than planned, attention now turns to the annual strategic review for the big pharma group. Any new direction is not likely to be revealed until the company’s autumn board meeting, by which time a new chief executive should be in place.
Simon Lowth, chief financial officer, has been tapped as interim CEO. He told investors today the company is committed to a strategy of delivering new products from internal R&D, external bolt-ons and licensing deals. In delivering cash to shareholders, payment of progressive dividends is an “absolutely core commitment”, Mr Lowth said.
Share repurchases remains optional and only will occur if there is money left over from business development activities, he also stressed. In 2011, Astra delivered $9.37bn in cash to shareholders, $5.6bn of which was in share repurchases, and another $4.5bn are planned for this year, highlighting the sort of fire power the company could muster, should it chose to.
Mega-merger activity is one strategic choice Mr Lowth did not mention, and given the company’s record in that sphere during Mr Brennan’s tenure – the $15.2bn purchase of MedImmune in 2007 has delivered little – it is not too surprising that Astra shies away from any major acquisition talk.
It has become crystal clear that Astra needs a new strategic direction, or the very least invigoration. Too many of its big hopes have been dry holes. With a market cap of $55.8bn, investors now value the company at less than the net present value of its marketed products, worth $75.6bn according to EvaluatePharma’s NPV Analyzer. That figure implies little confidence in the group delivering on existing products, let alone its pipeline (Pipeline setbacks hurt AstraZeneca, December 20, 2011).
It would perhaps be an exaggeration to call Astra a shadow of its former self in 2018, but based on current forecasts the company's prescription sales are projected to shrink at an annual rate of 6% a year through 2018, $10bn being erased through patent expiries (Novartis on track to become world's biggest drug maker, April 25, 2012).
These are signs of a company in need of a fix and in agitating for change at the top investors hope to find it.
Even as Mr Lowth reiterated the company’s commitment to its current path, he acknowledged that “fresh ideas” could emerge from the annual strategic review. These will now be eagerly awaited. As will the identity of the new chief executive, whose track record will be scrutinised for clues to Astra’s future direction.