No Relief For AstraZeneca

More bad news about potential blockbusters weakens AstraZeneca

The past year was one that Britain's AstraZeneca PLC (AZN ) would rather forget. A series of setbacks for three of the London-based company's aspiring blockbusters caused its stock to plummet by nearly 30% in the past 12 months. But if shareholders thought that 2005 might bring some relief, they had better think again. On Jan. 10, AstraZeneca announced that a patient taking its anti-cholesterol medicine Crestor had died of a condition possibly related to the drug.

AstraZeneca's woes have fueled rumors that Europe's third-largest drugmaker might become a takeover target for hometown rival GlaxoSmithKline PLC (GSK ). Sanford C. Bernstein & Co. (AC ) senior research analyst Dr. Gbola Amusa reckons that if the share price was to fall below $32 a share, GSK just might pounce. Both AstraZeneca and GSK declined to comment on "market rumors."

The drugmaker's stock has been in a tailspin since October. That's when the U.S. Food & Drug Administration withheld approval for Exanta, a blood-thinning drug with blockbuster potential, citing the regulatory agency's concerns about side effects. Two months later, FDA official David Graham told Congress that AstraZeneca's Crestor is one of five drugs with serious safety concerns, claiming that it was the only cholesterol-lowering treatment to cause acute kidney failure. AstraZeneca was quick to point out that Graham's testimony does not reflect the views of the agency.

December brought more bad news. AstraZeneca revealed that follow-up tests showed that while lung-cancer drug Iressa shrank tumors, it did not prolong the life of patients. The findings prompted the company to withdraw Iressa's application for European approval. And now many expect the FDA to yank the drug from the U.S. market. In a conference call on Dec. 17, AstraZeneca Chief Executive Tom McKillop called the news on Iressa a "disappointment" and described 2004 as "a very difficult, challenging year."

That's putting it mildly. A year ago, AstraZeneca looked untouchable. It had one of the most well-respected management teams in the industry and a pipeline of innovative new drugs. But now it looks vulnerable. "There had been an awful lot of expectation built into high-profile new drugs such as Crestor, Exanta, and Iressa, and none of them have come through as expected," says Lloyd Whitworth, head of British equities at Morley Fund Management in London, who has been selling off his AstraZeneca shares since the start of the summer.

He isn't the only one bailing out. The company's stock is trading at a price-to-earnings ratio of 15, compared with a 17.9 average for European pharmaceutical companies. Analysts say the only thing keeping Astra's shares from going into free fall is the mounting speculation that GSK might make a play for the troubled drugmaker. GSK is keen to bulk up its market share in oncology and cardiovascular drugs, two areas in which AstraZeneca is very competitive.

Despite the slew of setbacks, McKillop claims that AstraZeneca is still "financially very strong" and can ride out the crisis on its own. On Jan. 27, the company is expected to report 2004 sales of $21.3 billion and a net profit of $3.5 billion, up from the previous year by 13% and 11%, respectively, according to Bernstein analyst Amusa. Until recently, the expectation was that AstraZeneca's earnings would grow in excess of 15% annually for the next five years, outpacing its rivals. Now that forecast seems way too ambitious. Although the company still has strong-selling drugs such as schizophrenia medicine Seroquel and ulcer treatment Nexium, analysts reckon that it will be at least five years before the company has any new blockbusters hit pharmacy shelves. "They have one of the weakest late-stage pipelines in the industry," says Jerome Berton, pharmaceutical analyst at Paris-based brokerage Natexis Bleichroeder.

Meanwhile, AstraZeneca must repair its battered reputation. In December, McKillop reassured investors that the company will probe its clinical development and regulatory processes for weaknesses. The company could yet be dealt another setback with Crestor. Already, prescriptions for the drug have been falling as more information about the potentially serious side-effects of this class of drugs comes to light. "AstraZeneca needs to rebuild the credibility of its research and development," says Natexis' Berton. The sooner the better: Investors' patience is running out.

By Kerry Capell in London

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