AstraZeneca May Rethink Aversion to Big Deals After Setbacks

David Brennan
David Brennan, chief executive officer of AstraZeneca Plc, poses for a photograph in London, U.K. Photographer: Chris Ratcliffe/Bloomberg

AstraZeneca Plc’s pledge to avoid big acquisitions may be tested after setbacks for three of the company’s most promising drugs in development.

Chief Executive Officer David Brennan hasn’t announced an acquisition of more than $1 billion since buying MedImmune Inc. in 2007 for about $15.2 billion, and the company says it’s not looking for another deal of that size.

Analysts at Credit Suisse AG and JPMorgan Chase & Co. have said AstraZeneca may undertake a bigger takeover to replace revenue that will be lost to generic competition. With the failure or delay in the past month of experimental drugs for diabetes, ovarian cancer and severe depression, the risk is increasing, said Credit Suisse’s Luisa Hector.

“They are gradually running out of options,” she said by telephone yesterday. Hector, who rates the stock “underperform,” declined to speculate on which companies may be a target or how much AstraZeneca might spend on an acquisition.

AstraZeneca fell 1.3 percent yesterday to close at 3,070 pence in London. The stock sells for 6.6 times estimated 2011 profit. That’s the lowest among the world’s 10 biggest drugmakers, reflecting investor skepticism about the company’s earnings prospects.

AstraZeneca’s second-best-selling drug, Seroquel for schizophrenia, loses U.S. patent protection in March, while the patent on Nexium for ulcers, the third-biggest seller, expires in 2014. The two probably generated $5.6 billion and $4.5 billion in sales last year, respectively, based on the average analyst estimates compiled by Bloomberg.

Increased Competition

Crestor, its top seller with $6.6 billion in estimated 2011 sales, faced increased competition from a copy of Pfizer Inc.’s Lipitor in November. AstraZeneca declined to make an executive available for an interview.

“We continue to believe in our focus on innovation, both home grown and, increasingly, by accessing the best of external science through partnering, collaborations and in-licensing,” Abigail Baron, a spokeswoman, said by e-mail yesterday. “In terms of acquisitions, we’ve said all along that we are not looking for scale but would consider small, bolt-on acquisitions so long as there is a good strategic fit and an opportunity to add value to the pipeline.”

AstraZeneca is interested in partnering in areas in which it already has drugs, such as neuroscience, gastrointestinal illnesses, oncology and diabetes, as well as new areas such as women’s health and wound healing, the company said in a presentation last week at a JPMorgan Chase & Co. conference.

Cash Holdings

AstraZeneca bid last year to buy Enobia Pharma Corp., a maker of experimental treatments for genetic metabolic disorders, a person with knowledge of the sale said. The person declined to be identified because the process was private. The offer signals an attempt to move into new therapeutic areas, the person said. Alexion Pharmaceuticals Inc. won the bidding for Montreal-based Enobia and will pay as much as $1.08 billion for the company.

Esra Erkal-Paler, an AstraZeneca spokeswoman, said the company doesn’t comment on rumors. The company is “increasingly active” in looking for opportunities that fit with its existing business, and it’s looking at new opportunities as well, she said in an e-mail.

As of Sept. 30, AstraZeneca had $9.9 billion in cash on the balance sheet. Some investors and analysts said the company overpaid for MedImmune and didn’t get enough out of the purchase.

‘Questionable Acquisition’

“Given AstraZeneca’s questionable acquisition of MedImmune in 2007, investors are rightly very sensitive over how the company deploys its excess cash,” Justin Smith, an analyst at Oriel Securities Ltd., said in a Jan. 9 note. He said he doesn’t expect a big acquisition.

AstraZeneca so far has been devoting cash to buying back shares and increasing the dividend. The company’s $5 billion share buyback last year was its biggest ever. AstraZeneca probably will announce another $3 billion of repurchases this year, Alexandra Hauber, a JPMorgan analyst, said in a note to investors on Jan. 5. An “underwhelming” buyback of about $2 billion “may increase deal risk concerns,” she wrote. She cut the stock to “underweight.”

‘Decade-Long’ Decline

“With the prospect of a potentially decade-long decline in operating profit, management may resort to a sizable acquisition,” Hauber wrote. “Even an earnings-accretive transaction may not be appreciated by investors who may prefer buybacks.”

The Food and Drug Administration wants more information on the diabetes treatment dapagliflozin, and may require new clinical trials, AstraZeneca and partner Bristol-Myers Squibb Co. said yesterday.

Last month AstraZeneca terminated development of olaparib for ovarian cancer and ended a late-stage study of TC-5214 for severe depression. If the company is asked to conduct another large trial for dapagliflozin, the company may decide against pursuing it, Mark Belsey, an analyst with WestLB, said in an interview.

Given its cash holdings, AstraZeneca could make small to mid-sized acquisitions without losing its AA- credit rating, Britta Holt, a director on the corporate team at Fitch Ratings Ltd., said in a telephone interview. Buying a few pipeline products won’t be enough to compensate for the sales decline that starts this year, she said.

“The expiry is putting a lot of pressure on AstraZeneca’s pipeline and it may be tempting for the company to fill the upcoming sales gaps with the help of medium-sized to larger acquisitions and to lose the AA- rating,” she said.

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