AstraZeneca Reports Higher Profits, But Cuts R&D Jobs

LONDON--Facing U.S. patent expiries on key drugs , AstraZeneca announced at its Jan. 28 results meeting a further restructuring of its R&D operations, with the expected net loss of 1,800 jobs, and annual cost savings of $1 billion by 2014.

Overall, the company expects restructuring in R&D and elsewhere in the company to affect more than 10,400 positions between 2010 and 2014 -8,000 more than in previous plans - and to produce annual savings of $1.8 billion.

CEO David Brennan tried to inspire the markets with news of a 12 percent dividend increase to $2.30 for the full year, as well as a progressive dividend policy and a $1 billion share buyback program for 2010. But investors are wise to such short-termist, keep-sweet tactics, which largely fail to conceal the company's underlying growth woes. AstraZeneca is perhaps more heavily exposed to near-term patent expiries than any of its Big Pharma peers, and has not engaged in the kind of M&A activity others - such as Merck or Pfizer - have pursued in order to help bridge those gaps.

As such, news of the cuts, along with a downbeat prediction on future revenues (a mid-single digit decline for 2010) prompted a 4 percent decline in AstraZeneca's share price.

Analysts including Jeffrey Holford at Jefferies in London said that markets had expected share re-purchases of up to $4 billion, and were disappointed by earnings-per-share guidance of $5.75-6.15. "AstraZeneca is our least favored stock," he wrote in a same-day note.

The R&D cuts - affecting about 3,500 positions - are part of a desire to have a "nimble" R&D organization in which investments can be quickly raised or lowered in particular research areas, depending on their success or failure, explained Brennan. He also announced a "portfolio investment board" set up to drive the review of the R&D pipeline, and flagged other ongoing changes including a reduction in the number of core therapeutic areas and in the number of R&D sites. The restructuring follows a departure at the top: AstraZeneca's Exec VP preclinical discovery Jan Lundberg left in November 2009 to join Eli Lilly as head of R&D.

Until now, AstraZeneca has appeared less radical in its R&D re-organization efforts than peers including including GlaxoSmithKline, with its biotech-like Drug Performance Units, overseen by a part-external investment boards, and Pfizer, which has followed a similar "smaller-is-better" philosophy, including during its $67 billion merger with Wyeth.

Yet U.S. patent expiries later this year for breast cancer drug Arimidex (anastrazole) and asthma treatment Pulmicort (budesonide) provide more pressing financial reasons for the cuts. Arimidex sales in 2009 were up 16 percent to $878 million, while the Pulmicort franchise (including the Respules and Flexhaler ) in the U.S. declined by 18 percent to $804 million. With those looming gaps in its balance sheet, AZ said it's expecting a mid-single digit decline in 2010 revenues, not helped by boosted 2009 figures that included unexpected contributions from US sales of beta-blocker Toprol XL (metoprolol) - thanks to supply shortages at two generic manufacturers, including Novartis' Sandoz unit - and the pandemic flu vaccine Pandemrix .

Even with the patent expirations, the product picture for 2010 has some bright spots, but also a significant storm cloud. The antiplatelet Brilinta (ticagrelor) could launch this summer if it receives a speedy approval by FDA, and an expanded indication for Crestor (rosuvastatin) could be cleared in February that would make it the only statin approved for otherwise health people with elevated levels of C-reactive protein. But February is also the scheduled start of the Crestor patent trial, and if that goes badly, the firm would be denied the opportunity to capitalize on the new indication. Even if AstraZeneca holds off Crestor generics until 2016, the product will still face significant pressure once Pfizer's Lipitor (atorvastatin) goes generic in 2011.

AstraZeneca also needs to fund its share of the late-stage clinical development of four Phase III projects licensed over the past six months in a particularly aggressive - and expensive - deal-making splurge. These include Forest's cephalosporin antibiotic ceftaroline, to which AZ bought ex-North American rights in August 2009; Nektar Therapeutics' NKTR-118 for opioid-induced constipation, Targacept's TC-5214 for major depressive disorder, which cost the Big Pharma $200 million up front; and two late-stage antibiotics that came with the $350 million acquisition of Novexel in December 2009.

The Forest deal in particular, which excludes U.S. rights, signaled AstraZeneca's continued interest in emerging markets such as China where it has also made considerable R&D investments. The company is outpacing its rivals in China with 27 per cent annual growth during 2009.

As such, similar to many of its Big Pharma peers, AstraZeneca reported significantly higher revenue growth rates in emerging markets as a group (up 12 percent) than in established markets (up just 4 percent). Although those markets account today for only 13 percent of group sales, this share is likely to grow. Revenues in the US rose by 9 percent (2 percent excluding Toprol XL and the H1N1 vaccine), with overall revenues up 7 percent to $32.8 billion in 2009 at constant exchange rates (or just 4 per cent on an actual basis).

There was some good news for potential partners in the call, with AstraZeneca saying it would continue its focus on external tie-ups - just like its competitors, all of which have little choice in the matter. Also similar to some of its peers, AZ will try to address R&D productivity issues by pitting its in-house projects directly against externally-licensed products.

In 2009, AstraZeneca achieved a 23 percent increase in operating profit, growing to $13.6 billion at constant exchange rates, and had a strong cash flow that led to it becoming debt free at the end of the year. It had funds of $535 million on Dec. 1, compared with a net debt of $7.2 billion at the end of 2008.

 - John Davis (² j.davis@elsevier.com)

This article is reprinted from "The Pink Sheet" DAILY –Jan 28, 2010

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