British drug giant AstraZeneca (AZN) has recently been racing to fix the holes in its pipeline created by several high-profile clinical failures. The question for investors is whether the company is at risk of pulling a Wile E. Coyote and running right off the edge of the cliff. Although AstraZeneca has more work to do to fix the near-term outlook, long-term investors may have a brighter future now than just a few months ago.
For Now, A Big Mess
While AstraZeneca's future may be getter brighter, the here and now just got a little dimmer. Revenue fell 11% in the first quarter and missed the average Wall Street guess by what constitutes a large amount for a Big Pharma. Sales were hurt by disappointing sales in Crestor (up 2%), weaker than expected Seroquel results, and ongoing disappointment in the Brilinta launch (which seems to be seriously lagging Lilly's (LLY) Effient).
Where AstraZeneca does deserve real praise in its operating efficiency. Adjusted gross margin did slip two points, and operating profit did fall 19%, but both were better than the sales shortfall would have suggested. Of course, operating efficiency is something of a double-edged sword in pharma-land, as it suggests less cost-cutting leverage for the company.
A Change At The Top
There have been rumblings about management change at AstraZeneca for a few months now, and it looks like there was something to it. CEO David Brennan announced his retirement as CEO (effective in June), with the CFO Simon Lowth taking over at least on an interim basis. While Lowth would not be a bad pick for the permanent job (given AstraZeneca's demonstrated cost efficiencies), I suspect there will be pressure for a hiring that makes a bigger splash.
AstraZeneca Has Moved Fast, But Has It Moved Smart?
One of the biggest complaints about AstraZeneca is its weak pipeline - prior to some recent deals, it looked like contributions from the company's pipeline might only contribute 10% of 2012 sales in 2017. With some recent moves, the company has clearly shown that it means to address this problem.
The company's agreement with Amgen (AMGN) brought in some promising autoimmune/anti-inflammatory compounds, including brodalumab (which should have clinical data this year), and AstraZeneca didn't have to pay much at all upfront ($50 million).
AstraZeneca followed this up with the $1.3 billion deal for Ardea Biosciences (RDEA). Ardea's lead compound, Lesinurad, is in phase 3 for gout and offers a distinct and different mechanism of action relative to other drugs on the market. While investors may worry that this is another Krystexxa in the making (Savient's (SVNT) disappointing gout drug), Lesinurad would seem to have a broader addressable market, a better dosing profile, and a much lower price. Although some analysts believe Lesinurad is a $1.5 billion-plus drug, others have pegged the sales potential at only $500 million.
AstraZeneca also announced a co-promotion agreement with Medicines Co (MDCO) to help sell Brilinta in the U.S., an agreement that will also include Medicines' Angiomax and phase 3 drug cangrelor.
All of these deals make a certain amount of sense in their own right, though the Amgen deal won't pay dividends for years (if ever). That said, I'm reminded of the saying "marry in haste, repent at leisure". Need can create a false sense of strategic fit and the pace of AstraZeneca's deals has been pretty rapid.
Keep in mind, too, that AstraZeneca may not be done. There are ample rumors that AstraZeneca wants the European rights to Amylin's (AMLN) Bydureon, and may be willing to go for the company as a whole. I also wouldn't be shocked to hear about AstaZeneca going after Seattle Genetics (SGEN) or Ziopharm (ZIOP) - frankly, just about any company with recently-approved, filed, or Phase 3 compounds in cancer, autoimmune, or endocrine/metabolic disease would make a certain amount of sense.
The Bottom Line
About three months ago, I said I didn't like AstraZeneca and would prefer to hold other pharma stocks instead. With the stock down about 10% since then and management clearly keen on rebuilding its pipeline, I'm finding the share more interesting.
I have some general concerns about whether these deals represent throwing good money after bad, but I actually like them on balance. Moreover, expectations on Brilinta and Onglyza seem pretty much washed out now, and the company's good expense control has to be worth something.
I'm not sure I'd go all the way to "buy" today, but I see no problem at all with the company covering its dividend and the business seems undervalued on its own merits now. I like Merck (MRK), Pfizer (PFE), Sanofi (SNY), and Roche (OTCQX:RHHBY) better on their fundamentals, but value is value and AstraZeneca is a better value now than three months ago.