The Biggest (Potential) Turnaround Story in Pharma


In the following roundtable discussion, our health care analysts look at one big pharma player that is confronting a number of risks: AstraZeneca.

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Brenton Flynn: Well, moving on, we're going to talk about AstraZeneca. What's up with them?

Max Macaluso: Yeah, they're definitely reeling from the patent cliff right now. That's an issue that a lot of the Big Pharma companies are dealing with. Pfizer , for instance, lost patent protection for Lipitor in November of last year, but it seemed to weather that pretty well.

It's the same kind of story for Merck . Merck lost patent protection for Singulair over the summer, but it's had some growth from Januvia and Janumet, its diabetes franchise, and that growth has helped offset losses.

It also has a pretty robust pipeline. Looking at AstraZeneca, I know a lot of investors might be seduced by the large dividend, but they're really facing a lot of difficulties with their patent expirations. I have a short list of some drugs that are losing patent protection, like Seroquel, Nexium, Merrem, Atacand; they've either already lost patent protection, or will soon.

Crestor is the biggest-selling drug, and it'll lose patent protection in 2016, but we've already seen generic drugmakers try to overturn the patent. Just the other day, AstraZeneca was able to defend that patent in court, but 2016 is coming soon, so we have to be careful about that. It brought in about $5.7 billion in 2011 for AstraZeneca, so it's by far their top-selling drug.

Big events in 2012, AstraZeneca bought Amylin with Bristol-Myers Squibb and, of course, got their diabetes drug along with it. But they're going to face competition from an Eli Lilly drug that's performing very well in clinical trials, so that purchase may not play out very well. They're both once weekly doses, so if Lilly's drug is approved and proves to be better than AstraZeneca's, we could see some problems there.

Brenton: Yeah. AstraZeneca, to me, is what the future AbbVie from Abbott Labs might be, in a few years. Abbott Labs is kind of AstraZeneca Junior, in a sense, if it doesn't find a way to backfill this pipeline because what you've seen from AstraZeneca is...

This issue has obviously been something that you can see. That's one of the things with Big Pharma stocks, is that you know when the patent cliff is going to come, and you can help prepare for that.

David Williamson: Yup. It's right in their filings. They don't hide it.

Brenton: It hasn't played out that well for AstraZeneca, so I think one of the key things to watch is what the new CEO decides to do.

Max: Yeah, and actually that's one of the things I like about AstraZeneca right now. The new CEO, Pascal Soriot, has a wealth of knowledge in this industry. He's a veteran of the industry.

David: His head isn't in the sand, either. He's talked about making acquisitions to fill the pipeline. We've seen Amarin bulls really hoping that AstraZeneca will buy them to help supplement their Crestor franchise.

Max: I think he can potentially lead a turnaround here, but I'll be following his actions closely this year, before I make the decision to invest.

Brenton: Yeah, and it's certainly something to point out to any viewers, that AstraZeneca's dividend yield, while it might look attractive, there's obviously a lot of risks that go along with that.

David: Well, it's high because the share prices have collapsed. They haven't raised it substantially more than any of the other Big Pharma competitors. It's just it's cheap on a yield basis because of all the pressure on the actual shares.

Brenton: Yeah, and the pressures certainly are significant. In terms of acquisitions, I know that there's still a bad taste in AstraZeneca shareholders' mouths from the MedImmune acquisition, I believe, which didn't really play out as expected, and came at a very lofty cost.

Certainly not looking good for AstraZeneca; that overhang is really not going to go away until we see, potentially, a new strategic direction from the CEO.

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Brenton Flynn has no positions in the stocks mentioned above. David Williamson owns shares of Pfizer. Max Macaluso, Ph.D. has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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