It's Time for This Big Pharma to Save Its Future


The hits keep coming at AstraZeneca . The struggling big pharma player has seen its stock taken down more than 6% so far in 2013, and with earnings season in the rearview mirror -- one that did little to boost this company's lagging fortunes -- AstraZeneca is in need of a shakeup.

The company's pipeline needs help. AstraZeneca faces a potent patent cliff ahead in the near future, and without new products to compensate for the inevitable sales losses to come, this company will struggle to succeed. Is a well-timed acquisition just what AstraZeneca needs to stave off the losses to come?

Earnings trouble, past and future
Let's review the company's waning fortunes and why it's in bad shape.

AstraZeneca's full-year revenue fell 17% year-over-year in 2012, with operating profit and earnings per share both falling more than 30% in the same time frame. The only silver lining came in that fourth-quarter losses managed to top even more downbeat analyst projections; still, that's little consolation for long-term investors concerned about the future.

The U.S. market has taken the biggest bite out of AstraZeneca. Domestic sales fell 23%, which the company largely blamed on Seroquel, the company's blockbuster schizophrenia drug, losing patent protection last March. Emerging markets did manage to grow by a meager 6%, but that won't be enough to power AstraZeneca's future.

With AstraZeneca CEO Pascal Soriot projecting more losses in 2013, the mess isn't going away any time soon. Seroquel's losses have certainly hurt, but AstraZeneca's patent-related woes don't stop there. Nexium and Crestor, both top sellers for the company, face patent expirations of their own in 2014 and 2016, respectively. AstraZeneca's already given us a preview of what could happen with Crestor: Generic competition in Canada knocked the drug's sales down 84% in 2012.

A barren pipeline can't feed the future
Unfortunately for long-term investors, AstraZeneca's pipeline isn't anything impressive. Disappointing clinical trials put the kibosh on AstraZeneca's phase 3 rheumatoid arthritis medication fostamatinib, after studies last year showed the product failed to match AbbVie's RA market-leading therapy -- blockbuster household-name Humira -- in efficacy. AstraZeneca is still on pace to file for fostamatinib's regulatory approval later this year, but don't expect the drug to make much of a dent in the market. In any case, fostammatinib isn't going to even approach Humira's sales, which hit $9.3 billion in 2012 and are projected to go higher in 2013.

Forxiga, the company's diabetes medication, did receive approval late last year in the EU, but with the FDA rejecting the drug, peak sales expectations are muted. AstraZeneca's pipeline is in desperate need of a blockbuster -- or at least something that can deliver a steady stream of revenue. Credit Suisse noted in a report that AstraZeneca would need to add $6 billion in annual sales just to make 2% sales growth by 2016; that's not going to happen without a major move.

Soriot did mention late last year after taking the helm at AstraZeneca that, "We need to bolster our pipeline and there is no question we will rely on business development." While Soriot has sounded receptive to the possibility of takeovers, he sounded less optimistic on any massive, industry-shaking type of takeover earlier this year, saying, "I don't think we need a large-scale acquisition to succeed."

A warning from rating agency Standard & Poor's further hints that large-scale acquisitions might not be coming. The agency mentioned that it could cut AstraZeneca's AA credit rating with a major purchase, citing the pressures of a big deal with patent expirations on the way.

Recently, AstraZeneca's flirted with small-scale agreements and acquisitions. The company purchased small biotech Ardea Biosciences or $1.3 billion early last year, with the acquisition giving AstraZeneca the potential hyperuricemia therapy lesinurad. The company's planning to file for lesinurad's regulatory approval in Europe and the U.S. in 2014, and more small- to mid-size acquisitions could relieve the pressure on AstraZeneca's pipeline.

So just who exactly should this company be in the hunt to acquire?

Who should AstraZeneca buy?
Let's mention the obvious candidate first: Shire . The company wouldn't exactly fit a "small- to mid-size acquisition" with a market cap of more than $17 billion, but rumors flew in January that AstraZeneca could be in the running to snap up this surging company. Shire's sales of more than $4 billion would make significant progress toward clearing Credit Suisse's proclamation of $6 billion in necessary sales, while the firm's strong foothold in the gastrointestinal market would mesh well with AstraZeneca's own GI experience. Gastrointestinal sales made up more than 17% of AstraZeneca's sales in 2012.

Sticking with the gastrointestinal synergies, if AstraZeneca is looking for a small, up-and-coming biotech with a bright future, it should look no further than NPS Pharmaceuticals . NPS recently scored a victory with the FDA approval of Gattex, its short bowel syndrome orphan drug with projected peak sales of $350 million. NPS has another promising orphan drug, Natpara, in the pipeline, and with a market cap of under $700 million, it would be a relatively cheap buy for AstraZeneca. NPS wouldn't cure all of the company's ills, but paired with another acquisition -- such as Shire -- it'd brighten AstraZeneca's future considerably.

Onyx Pharmaceuticals is a smaller acquisition that wouldn't cost the farm and would give AstraZeneca the benefit of already-marketed products with some serious momentum. AstraZeneca boasts significant sales in cancer therapies -- the market that Onyx specializes in -- and while the synergies aren't a perfect fit, the Onyx's Nexavar has rolled along nicely with respectable sales growth, while its new multiple myeloma drug Kyprolis has begun its post-FDA approval life strongly. Onyx would cost AstraZeneca a pretty penny with a $5.3 billion market cap, but with drugs already on the market and doing well, AstraZeneca might be able to overlook that in exchange for the sales boost it needs.

Time to make a move
AstraZeneca might be playing things cautious as far as major acquisitions go, but this company needs to do something. Whether it's a big splash such as Shire or a bit-by-bit pickup like NPS, AstraZeneca's future needs a lift. The company's pipeline isn't enough to stave off the hits of the patent cliff, and with sales and profit already falling, it's long past time AstraZeneca pull the trigger on a move to safeguard its future. Its investors should demand nothing less.

The patent cliff has struck the entire pharmaceutical sector hard, and AstraZeneca is one of its biggest victims. AbbVie is a perfect example of another troubling story in the making, as investors in the new company are left wondering what the future holds once the company's golden goose, Humira, is cooked. The Fool's brand new premium report on the company answers the high-profile questions that AbbVie investors are asking, and as an added bonus, you'll receive a full year of free analyst updates as significant news hits. Simply click here now to claim your copy today.

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