No Quick Fixes, But Astra's Soriot Can Still Be Bold

| About: AstraZeneca Group (AZN)

Although some investors seem to think that AstraZeneca (NYSE:AZN) will announce a major acquisition at its long-awaited corporate update this Thursday, an M&A flurry is unlikely to feature on the agenda for Pascal Soriot, the group’s recently appointed chief executive.

The reason? The company is still smarting from its disastrous pre-crash $15.6bn takeover of MedImmune and as the saying goes, once bitten, twice shy. True, there are no quick fixes, but radical change is both necessary and possible. The optimists will thus see today’s R&D restructuring as a prelude to bigger things.

Prudence is often wise, but caution should not be allowed to get in the way of a deeper corporate revamp involving smart deals, acquisitions and divestments. Neither is it the right response to the complexity and size of Astra’s problems.

The move announced yesterday will see Astra axe 1,600 R&D jobs, with another 2,500 relocating as the group focuses small-molecule and biological work around sites in Cambridge, UK, Gaithesburg, US, and Mölndal, Sweden. But Mr Soriot could be bolder and distance the company further from early-stage R&D, for which investors give it little credit.

EP Vantage has argued that an independent unit that raises its own cash would make sense at a time when spin-outs are all the rage (Vantage Point – Stars align for AstraZeneca to team up with Bristol for Shire swoop, January 24, 2013). Moreover, this should be accompanied by corporate action elsewhere, involving M&A across several fronts and joint-venture activity to spread the risk.

Sliding down

Yet despite the increasing pressure on Astra to be radical or risk sliding further down the ranks of mid-tier pharma groups, Mr Soriot spent much of the company’s January 31 financials presentation playing down the scale of the problem.

It must therefore be frustrating to be an M&A banker pitching restructuring ideas hearing Mr Soriot deny the relevance to Astra of Bristol-Myers Squibb – a logical strategic partner – and argue that a large-scale acquisition is not necessary to succeed.

Investors certainly expect something, and Astra’s stock has started to recover since the financial results presentation prompted a sell-off. These gains and more are at risk if the vaunted capital markets day underwhelms and the gloom does not lift in the near term.

But underwhelm is precisely what it will do if the information being dribbled out by sell-side analysts, who have taken their steer from the mood of management briefings, is anything to go by. The rhetoric points to organic growth, a “string of pearls” strategy in product licensing, and possible bolt-on buys; in other words, no profound changes.

War chest

Of course, it is not as simple as taking the size of Astra’s war chest – $7.7bn of year-end cash, plus scope to lever up – and seeing how many companies can fit within it.

For instance, one of the more harebrained ideas to do the rounds of late has Astra buying Puma Biotechnology. It is patently obvious to anyone who knows either Astra or Puma – an overvalued one-trick pony developing a drug that Pfizer apparently did not want – that such a deal makes little sense.

But a series of smart, transformational moves like the one for which EP Vantage has argued still has legs – all that is needed is for Mr Soriot to draw a line under MedImmune and embrace the old maxim: if at first you don’t succeed, try, try and try again.

There are surely few areas to which this advice applies as nicely as it does to drug development.