Understanding the Complex Challenges Facing AstraZeneca
Over the past five years, pharmaceutical giant AstraZeneca has underperformed its industry rivals GlaxoSmithKline , Merck , and Pfizer . All four companies have been struggling to overcome generic competition with new products and restructuring.
The dependence of these four companies on blockbuster treatments resulted in lopsided revenue growth. Over the past two years, Pfizer struggled with the loss of patent exclusivity for cholesterol drug Lipitor, Merck lost patent protection for its asthma medication Singulair, and GlaxoSmithKline shareholders now fear eventual generic competition for its top-selling asthma treatment Advair.
Yet, AstraZeneca's challenges are far more complex than those three companies -- the patent cliff that the company is tumbling down is much steeper, with seven of its drugs being gobbled up by generic competition.
The Foolish fundamentals
First, we should take a look at how AstraZeneca measures up to its competitors on a fundamental scale.
Quarterly revenue Growth (YOY)
Quarterly earnings Growth (YOY)
Although AstraZeneca appears to be the cheapest stock on a P/E basis, its negative PEG ratio implies that analysts believe that the company will experience negative earnings growth over the next five years. Meanwhile, it reported negative top and bottom line growth last quarter.
The only company that fared worse was Merck, which recently cut 20% of its workforce to deal with the double impact of patent expirations and pipeline failures. Meanwhile, Pfizer's big earnings boost was attributed to the spin-off of its animal health unit, Zoetis, rather than organic bottom line growth.
The good old days are gone
AstraZeneca was once lauded by analysts for owning one of the most diversified drug portfolios in the pharma industry.
In 2009, AstraZeneca had nine blockbuster drugs reporting more than $1 billion in annual sales each across five therapeutic categories. Three of the most important drugs were the antipsychotic drug Seroquel, the cholesterol-lowering drug Crestor, and the gastrointestinal disorder medication Nexium. Generic versions of two of the three -- Seroquel and Nexium -- have since hit the market, with disastrous effects on AstraZeneca's top line.
Peak Sales (Year)
$6.2 billion (2011)
$1.3 billion (Seroquel IR)
$1.5 billion (Seroquel XR)
$7.0 billion (2011)
$5.2 billion (2007)
Those problems continued through AstraZeneca's second quarter, where sales of eight treatments -- which together accounted for 42% of total sales -- all reported year-over-year declines. All of these treatments, except for Crestor, faced generic competition during the quarter.
Percentage of total revenue
heartburn, stomach ulcers
AstraZeneca's continued dependence on Crestor is troubling, considering that it accounts for nearly a fourth of the company's top line and is still steadily edging lower. Crestor's major competitor is Pfizer's Lipitor, which lost patent protection in 2011, and led to the market being flooded by similar statin-based treatments.
AstraZeneca will be able to keep generic Crestor off the market until July 2016 -- but if Pfizer's problems with Lipitor are any indication of how quickly a leading cholesterol treatment can lose market share, then AstraZeneca needs to brace itself for some big losses.
The bright side isn't bright enough
That's not to say that all of AstraZeneca's treatments are slipping away. Last quarter, six treatments, which accounted for 26% of its quarterly sales, reported encouraging year-over-year growth.
Percentage of total revenue
Unfortunately, Symbicort and Pulmicort, which account for 17% of its top line, won't last much longer. Symbicort will lose patent protection in 2014, but Pulmicort will last a bit longer to 2018.
This means that the only way for AstraZeneca to grow is to expand its pipeline in search for the next blockbuster drug, build up new collaborations, or to acquire smaller competitors.
A difficult road ahead
Looking forward, the road is tough for AstraZeneca. For a while, AstraZeneca was convinced that it could join the rheumatoid arthritis market with its experimental treatment fostamatinib, which was eventually scrapped after a disappointing comparison with AbbVie's top-selling Humira last year, and lackluster late-stage results earlier this year. Over the past two years, it also canceled a prostate cancer drug and an experimental antidepressant, on top of a pile of other pipeline failures.
In 2013, AstraZeneca made several acquisitions, including Pearl Therapeutics for its respiratory portfolio and Omthera Pharmaceuticals for a new high cholesterol treatment, which are aimed at eventually replacing Symbicort and Crestor, respectively. The company also inked a new collaboration with Fibrogen, in an effort to create new anemia treatments for patients with kidney disease. AstraZeneca has also been expanding into cancer and psoriasis treatments.
However, AstraZeneca's greatest hope is its new CEO, former Roche executive Pascal Soriot, who took over the top post last October. Soriot has promised a radical reorganization of the company's R&D segment, in which the company will focus on three key areas: heart disease and diabetes, oncology, respiratory and inflammation.
He also announced 2,300 new layoffs to reduce costs. In other words, it's not much different from Merck's plan, which I discussed in a previous article.
The Foolish takeaway
My opinion of AstraZeneca is the same as that of Merck and Pfizer -- investors shouldn't expect much upside, but the company's downside is quite limited, considering its cost-cutting measures. For now, investors should wait and see if Soriot's plans can finally break the company's vicious streak of pipeline failures.
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The article Understanding the Complex Challenges Facing AstraZeneca originally appeared on Fool.com.Leo Sun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.