Can AstraZeneca Thrive on Its Own? Big Test Looms

AstraZeneca PLC Chief Executive Pascal Soriot made a promise to investors three years ago as the Anglo-Swedish drug maker was fending off takeover advances from Pfizer Inc.: If left alone, AstraZeneca would nearly double its revenue within a decade.

Three years into that commitment, Dr. Soriot still has a long way to go to convince investors that walking away from Pfizer was the right call. A series of drug-test successes have lifted AstraZeneca shares this year, bringing them within range of Pfizer's 2014 offer price. But AstraZeneca has hit some headwinds, including unfavorable currency rates and disappointing results of an attempt to widen the use of one of its new drugs.

Dr. Soriot faces his biggest test in coming weeks. Early results for a new lung-cancer treatment could shore up investor confidence in AstraZeneca's go-it-alone approach -- or sow fresh worry. The drugs involved are part of a new breed of cancer medicine called immunotherapies, which boost the immune system's ability to fight tumors.

The trial, dubbed Mystic, "will be a critical transition point for the company," said Jamie Freedman, who heads the company's cancer division. "Very soon we're going to see how that plays out."

The stakes in such trials are higher for AstraZeneca than most of its Big Pharma peers: It never diversified into fields outside the high risk-reward business of creating new drugs, which succeed or fail after costly development and clinical trials with uncertain outcomes. Drugs that become blockbusters eventually fizzle out when they lose patent protection and face competition from low-cost copycats.

Slower but steadier businesses -- over-the-counter medicines, personal care products such as toothpaste -- have provided a cushion for many of AstraZeneca's competitors. GlaxoSmithKline PLC engineered a $20-billion deal with Novartis AG in 2015 that expanded its vaccines and drugstore-staples businesses while slimming down its prescription-drug arm.

When Dr. Soriot came aboard in 2012, AstraZeneca had a near-empty new-drug pipeline and a series of patent expirations that have pressured profit. Last year, annual earnings per share came in at $2.77, down from $7.33 in 2011.

Instead of diversifying, Dr. Soriot doubled down on prescription drugs. He prioritized the development of cancer immunotherapies in particular, and embarked on a deal-making spree to stoke the pipeline in oncology treatments and a handful of other disease areas.

Earlier this year, Dr. Soriot backtracked a bit from the long-term revenue forecast he made in the heat of the Pfizer approach. Blaming currency fluctuation, he said sales should come in at about $40 billion by 2023, about $5 billion below his earlier promise.

Even so, revenue has fallen since that adjusted forecast. Dr. Soriot has long said he expected 2017 to be the year when sales bottomed out -- but the decline makes the road to his 10-year target look even steeper.

In his 2014 presentation, Dr. Soriot said drugs for respiratory diseases would generate $8 billion in 2023, compared with $4.75 billion generated in 2016. He said he expects AstraZeneca's diabetes franchise to bring in $8 billion in 2023, versus $2.39 billion last year.

Dr. Soriot has tried to position AstraZeneca as an industry leader in cancer treatment. AstraZeneca brought in $3.38 billion last year in that field, compared with $11.5 billion that he estimated such drugs could generate at their peak.

There have been some disappointments. The blood-thinning drug Brilinta failed to show positive results in treating peripheral artery disease, making it unlikely the drug would hit its $3.5 billion sales target by 2023, the company said.

A spokeswoman said AstraZeneca's internal revenue forecasts have evolved to reflect clinical-trial successes and setbacks since 2014, and the contribution from each disease area is likely to differ slightly from the forecasts Dr. Soriot laid out when fending off Pfizer.

The company declined to disclose the forecast adjustments. Executives have said they remain confident in delivering broadly on 10-year targets, and so far investors remain optimistic, too.

AstraZeneca shares are up 19% this year, trading just under GBP53, or around $67.40, just under the premium-rich GBP55, or roughly $70, share price Pfizer offered back in 2014.

Whether shares can top that offer price -- and vindicate Dr. Soriot's decision to turn it down -- depends in the short term on results of the Mystic trial, which is testing whether a combination of two AstraZeneca immunotherapy drugs can prolong survival in advanced lung cancer.

Analysts at Jefferies estimate success with Mystic would open the door to an extra $5 billion in revenue at the drug's peak -- nearly half the $11.5 billion Dr. Soriot hopes AstraZeneca's cancer franchise eventually will generate.

With its big investment in drug development, AstraZeneca "made an overt attempt to reinvent themselves," said Jack Scannell, an analyst at UBS. "Mystic is a critical readout on that route."

(END) Dow Jones Newswires

June 19, 2017 08:14 ET (12:14 GMT)