With new CEO Pascal Soriot just getting comfy in the CEO chair at AstraZeneca (AZN), he lost little time in making a mark on the company. On Monday, the large (but struggling) British drug company announced that it would suspend its buyback pending a "review of the company's strategy." While it certainly makes sense that the new CEO may just as soon keep $2 billion on hand (the company has completed $2.3 billion of an approved $4.5 billion buyback) for the time being, there are widespread assumptions that this is prelude to a larger deal.
AstraZeneca Needs Work, But Fixes Take Time
AstraZeneca didn't get itself into trouble overnight. In addition to the same patent cliffs that have affected others in the industry like Pfizer (PFE), Merck (MRK), and GlaxoSmithKline (GSK), AstraZeneca has seen significant setbacks in the clinic knock the wind out of its portfolio. While some of this can be chalked up to "hey, it's a risky business," there do appear to have been larger issues of lead identification and trial design (as investors in Rigel Pharmaceuticals (RIGL) know all too well) as well.
These pipeline setbacks, coupled with what many institutions saw as a lack of aggression when it came to large-scale M&A, cost the former CEO his job and ultimately resulted in Soriot, formerly of Roche (RHHBY.OB) becoming the CEO. Given Roche's demonstrated willingness to go big with M&A (including deals for Genentech, Ventana, 454 Life Sciences), the need for more deal flow at sell-side banks, and the fact that investors seem to love the mix-and-match game, the speculation about M&A makes sense.
Still, it's well worth noting that fixing a drug company takes a lot of time. Pipelines take time to mature, newly-launched drugs take time to get worked into standards of care, and so on. Likewise, the company still has risk from Crestor, Seroquel, and Nexium generic launches.
Is Forest The Pick Of The Litter?
Before diving into which company AstraZeneca may be about to buy, it's worth noting that the company has not exactly been lazy of late. The company reached a licensing deal with Amgen (AMGN) for early-stage compounds, acquired Ardea, and partnered with Bristol-Myers (BMY) to acquire Amylin Pharmaceuticals. The Amylin deal in particular was not exactly a cheap one, so it's worth noting amidst all of this speculation that the sell-side firm(s) brokering the deals are the only sure winners here.
In any event, it seems that many analysts have settled on Forest Labs (FRX) as the first/best target. Superficially, I can see how this makes sense. First, AstraZeneca has put a stake in the ground in respiratory care (COPD) and Forest's recently-approved Tudorz Pressair would be complementary. Second, Forest Labs has a pretty high-quality salesforce and a merger could allow management to cherry pick the best of the best. It's also worth noting that Carl Icahn has been a thorn in the side of Forest Labs management and a lucrative buyout would be one possible path for putting that issue to rest.
All of that said, there are arguments against as well. While Forest does have some promising drugs, including linaclotide (partnered from Ironwood (IRWD)), the company has explicitly changed strategy in recent years to focus less on blockbusters and more on a larger stable of solid drugs. In a world that loves blockbusters, that may not be what AstraZeneca investors crave most (even if the long-term returns could be good).
More significant in my book is the very structure of Forest Labs. In many respects, Forest Labs is a great salesforce attached to a bank account and savvy deal-makers. Forest Labs has virtually no internal R&D efforts, so buying Forest Labs would, at least to me, seem like more of an effort to buy time for Soriot to restructure/refill the pipeline and internal R&D efforts as opposed to a Genentech-type deal that brings fundamental new capabilities to AstraZeneca.
Can AstraZeneca Afford To Be More Bold?
It's not just Forest Labs that would seem to be a one-time fix-it M&A option. Other suggested/rumored targets like Amarin (AMRN) would, at best, just add some incremental revenue to a company that arguably needs a more sustainable core.
There are potential "core platform" companies out there, but none of them are going to come cheap. Regeneron (REGN) is pretty closely tied into Sanofi (SNY), while Biomarin (BMRN), Celgene (CELG), Onyx Pharmaceuticals (ONXX), and Seattle Genetics (SGEN) would all be pretty expensive deals in the short run (so much so for Celgene that I think it's very, very unlikely). Of course, Genentech was an expensive deal at the time too; one that has arguably paid off over the long term.
On the other hand, buying into emerging potential platform technologies would scarcely reduce the risk to Mr. Soriot's turnaround efforts. Maybe an RNAi company like Alnylam (ALNY) or one of the many stem cell companies could turn into tomorrow's Regeneron or Genentech, but that would be a mighty high-risk/high-reward swing and I would argue that AstraZeneca does not need any more of those right now.
The Bottom Line
I have no problems per se with the idea of Big Pharma buying biotechs as a means of restocking or complementing their own pipeline and/or currently marketed drugs. In the case of AstraZeneca, though, Soriot is going to get one chance to create support and enthusiasm for his plan to turn around this struggling drugmaker; he comes into the job with a halo of goodwill from his time at Roche, but that doesn't last long on Wall Street.
Although I respect the near-term benefits of a Forest Labs acquisition, I would rather see AstraZeneca establish a core competency that it can build its pipeline around for many years to come. These opportunities don't come cheaply, though, so Soriot had best have some far-reaching plans in mind before shelling out billions to help rebuild AstraZeneca.