On January 31, 2014, a report was released that AstraZeneca Group plc ADR (NYSE:AZN) (hereafter, "AZ") announced that it was closing its Avishkar Research & Development facility in Bangalore, India. The closing, which will affect 168 employees, is part of an effort by the British pharmaceutical firm to refocus its resources in R&D. The closing is to take place later this year.1
What makes this closing unfortunate is that it indicates a cutback in endeavors to support the commitment AZ had made in 2011 when it became a founding member of the World Intellectual Property Organization (WIPO) Re:Search initiative. The initiative is aimed at promoting research in neglected tropical diseases (NTDs), tuberculosis and malaria.
As part of its commitment to Re:Search AZ made all of its patents available for royalty-free licensing under the terms of the WIPO Re:Search Guiding Principles.2 Moreover, in April, 2012, AZ entered a research agreement with the Liverpool School of Tropical Medicine to finding new treatments for NTDs "river blindness" and lymphatic filariasis.3 Later that same year AZ entered into agreements with iThemba Pharmaceuticals (South Africa), the University of California, and the University of Dundee (U.K.) under the aegis of WIPO Re:Search.4
The Bangalore facility opened in 2003 as a research facility focused on finding treatments for tuberculosis,5 expanding the facility to include research in malaria in collaboration with Medicines for Malaria Venture ("MMV") in 2010.6
With the closing of the facility, ongoing projects will either be transferred to the company's Macclesfield facility (U.K.) or be continued by external organizations. Other than development of a Phase II tuberculosis treatment (AZD5847), AZ does not expect to continue any early-stage research in NTDs, tuberculosis or malaria - although it will continue to keep its patent library open for WIPO Re:Search programs.7
Rebuilding a Pipeline
There is little doubt that the closing of the site in India, as well as the refocusing of AZ's R&D in general, is prompted by the reduction in revenues the Company has experienced over the past two years. According to AZ executives, the decrease in revenues is due largely to the expiration of patent exclusivity on several of its drugs recently.8 The decline in revenues is shown in the following chart:
[Note that 2013 revenues are provided only through 3Q13.]
Note that 2012 revenues were down 16.7% - a substantial drop. If we assume fourth-quarter earnings consistent with those of the first three quarters of the year, AZ would be expecting 2013 revenues to be in the neighborhood of $25.16 billion - a 10% decrease from 2012 and more than 25% below 2011. Estimates are that AZ revenues will not recover fully until 2017.9
As AstraZeneca sees it, in order to minimize the time it takes to regain the profitability the Company had in 2011, it must reduce the focus of its R&D pipeline. In such a reduced pipeline, AZ sees itself ultimately focusing on three product areas:10
- Cardiovascular and metabolic diseases;
- Respiratory, inflammation and autoimmunity issues.
Accordingly, an examination of their most recent development pipeline list shows products in various stages of development, with the predominance being in the three areas cited. Drugs for neuroscience and infection, while still included, are apparently being deemphasized.11 That being said, AZ still presents an impressive pipeline that would appear to be ready to bear considerable fruit by 2017.
To be sure, discontinuing one operation is not a major issue in a company as large as AstraZeneca, but when coupled with the expressed intention of discontinuing research to which it had made a significant commitment does warrant some reflection. Certain questions beg to be asked that - quite frankly - I am glad I do not have to answer:
- Is AstraZeneca claiming that its time and efforts are better served making more profit than in actively promoting humanitarian causes that may involve less profit?
- Is Bangalore the only "cut" it is going to make in its commitment to Re:Search, along with its stated intention to eliminate "early-stage" research in NTDs, tuberculosis and malaria?
- How much support will be given to the agreements, collaborations, and associations AZ has made through WIPO and Re:Search? To what extent are these "expendable" when profit is on the line?
It is completely understandable that a company insure its profitability, and assign profitability a more urgent priority than unprofitable ventures (no matter how humanitarian those ventures may be), since only by operating profitably is a company able to commit itself to extraneous operations.
But how "profitably" must a company operate? This is not a situation where AZ had to choose between making a profit and taking a loss, but where the Company stood to earn a few billion less in profits than a few years ago - although it is still making net profits in the billions.
What is perhaps most saddening is that AstraZeneca is relinquishing the leadership position it had assumed when it became one of the founders of Re:Search. AZ has reaffirmed its commitment to the dividends it pays to shareholders.12 Too bad it can't make that same reaffirmation to the initiative it helped found.
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1 Reported in India Times, 1/31/2014.
2 WIPO release.
3 AstraZeneca press release 4/12/2012.
4 AstraZeneca press release 8/14/2012.
5 AstraZeneca press release 6/2/2003.
6 AstraZeneca press release 06/28/2010.
7 Reported in India Times, 1/31/2014.
8 AstraZeneca Earnings Call Transcript Q3 2013, 11/1/2013.
9 Reuters, 1/14/2014.
11 PDF download of pipeline candidates available here.
12 AstraZeneca Earnings Call Transcript Q3 2013, 11/1/2013.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.