By Ben Hirschler
LONDON (Reuters) - Fixing ailing drugmaker AstraZeneca remains a work in progress for Chief Executive Pascal Soriot, with sales and profits still heading firmly downhill after his first year in the job.
Yet confidence is slowly building that he may have the right long-term prescription for the British group, helped by some lessons learnt at his past employer Roche.
Soriot has shunned a big acquisition as a way to plug the deep revenue gap left by multiple patent expiries, opting instead for a string of smaller deals, a reboot of the drug pipeline and a shake-out of top management.
His goal of "achieving scientific leadership" may fall short on the kind of hard financial targets that some investors would like, but it has resonated with many younger researchers who felt the group was drifting, following past R&D setbacks. It has already accelerated work on several promising cancer drugs.
"When I talk to people in the industry about AstraZeneca, it is a place where people now want to go and work - and that hasn't been true for about 10 or 15 years," said Dan Mahony, a fund manager at Polar Capital, who has raised his stake in the company in the past year.
Reversing AstraZeneca's poor record in drug research is Soriot's top priority, so staff morale matters. Rival executives say he is borrowing some ideas from Switzerland's Roche.
Roche - particularly its Genentech biotech unit, which Soriot used to head - is renowned for its R&D successes, something Soriot hopes to replicate with a $500 million move of AstraZeneca operations to Cambridge, a British science hub.
"I see him implementing some of the same strategies that have been adopted by Roche, in terms of focusing on highly innovative products and taking risks," said one senior Roche insider.
"You have to have patience when your company is going through these kinds of adjustments."
Soriot told Reuters in June that turning around the company would take three to four years.
Industry analysts predict sales and earnings will continue to fall to 2017 or beyond, since a big hit is still to come when top-selling cholesterol fighter Crestor loses patent cover in 2016.
AstraZeneca's problems are not unique, but its patent expiries are bigger and longer-lasting than at rivals such as British peer GlaxoSmithKline. Its pure focus on prescription drugs also means it lacks the buffer of consumer-focused sales seen at the likes of GSK and Switzerland's Novartis.
Things could be different with a large acquisition that might bring in new revenue overnight - a strategy adopted by some other drugmakers, such as Pfizer, faced with similar sales cliffs. Soriot, however, says such a deal is unlikely, though he hasn't ruled it out altogether.
Since taking over on October 1, 2012, the one-time French veterinary surgeon has spent a modest $2 billion on buying companies like heart drug firm Omthera, respiratory medicine specialist Pearl and Amplimmune in oncology.
That is far below the $20 billion analysts believe he could afford, and the cautious approach is cheered by shareholders who worry about the risk of wasting cash on over-priced deals.
"He is focusing on the appropriate areas like bolt-on rather than major acquisitions, restructuring management and shifting R&D to Cambridge," one of AstraZeneca's 30 largest shareholders said, speaking on condition of anonymity.
Proving the value of this strategy will take time, however.
"The M&A has looked okay, but it is still too early to say if it is really going to shore up the pipeline," a second leading investor said.
In the meantime, Soriot also has his work cut out trying to bolster AstraZeneca's existing drugs business, where he has raised investment in new heart drug Brilinta, in the hope of a pick-up in sales towards the end of this year.
Investors, though, are not banking on a quick turnaround for either Brilinta or the company's important diabetes business.
Emerging markets, another key growth driver, are also a challenge as economies slow and China becomes a far more difficult market following an anti-corruption drive that has disrupted drug sales.
China is an especially important market for AstraZeneca, representing some 7 percent of the group's total revenue.
Given its well-known problems, investor expectations for AstraZeneca are the lowest among all major drugmakers, with the shares trading at just 10 times this year's expected earnings, against more than 16 times for Roche.
But they do offer a chunky 5.5 percent dividend yield as a consolation for those investors who are betting such "broken" drug stocks have a way of mending themselves, as Bernstein analyst Tim Anderson says has often been the case in history.
"I'm patient," said Polar Capital's Mahony. "It might take three years, but I'll get paid the best part of 6 percent in a dividend while I'm waiting."
(Additional reporting by Sinead Cruise; Editing by Will Waterman)
- Health Care Industry