Is AstraZeneca Pharma’s Best Kept Secret?
James is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s amazing just how tough investors can occasionally be on a CEO. Even more amazing is how tough the market can be on a CEO that not only doesn’t deserve to be run through the wringer, but one that actually deserves a pat on the back; sometimes shareholders just don’t know what a good thing they have in their company’s leadership.
Case in point à AstraZeneca plc’s (NYSE: AZN) CEO David Brennan. A few days ago at a pharmaceutical industry meeting in Boston, Brennan was under fire by shareholders (and others) concerned that the company’s current strategy just wasn’t/isn’t going to offset the sales lost from recent and upcoming patent expirations on Nexium and Seroquel. Fair enough – it’s a legitimate question. If there was ever a case to trust a guy though, AstraZeneca’s Brennan is as good of a choice as any.
Why? Newsflash to current AZN owners: Over the past several years, David Brennan has led your pharmaceutical company to earnings growth that should have other major pharma names envious.
Proof in the Pudding
Quick – name the company that’s grown earnings every year since 2005, cranking up per-share profits from $2.91 then to last year’s $7.28. If you said AstraZeneca, you were right. And just for the record, that’s an average growth rate of 25% per year.
For some investors, that number alone would be all the convincing they needed. The number doesn’t do this particular company justice though, especially when compared to other major players in the industry.
Care to guess which major pharma names didn’t crank out comparable earnings growth? Icon Merck (NYSE: MRK), for one. In fact, Merck’s been a relative disaster compared to AstraZeneca’s earnings. Per-share earnings have been stuck in the mid-$3’s since 2007, and though we’ve basically seen growth during that time, you’ve needed a microscope to find it.
Pfizer (NYSE: PFE) has been even worse on the earnings front, actually clearing less per-share in 2011 ($2.31) than it did in 2008 ($2.42). In fact, earnings for Pfizer have been even more stagnant (and for longer) than they have been with Merck.
The disparities raise several question, not the least of which is why has AstraZeneca been able to do what others in the industry haven’t been able to do? The runner-up question is, given the clear outperformance, what in the world are AZN owners complaining about.
There’s an answer to both.
Not All Deals Are the Same
To be fair, Brennan’s critics are likely more concerned about the future than the past. Analysts say income is going to fall to $6.14 this year, largely on the heels of a key patent expiration just a few days ago on Seroquel – a schizophrenia treatment worth $5.8 billion in annual revenue to the United Kingdom-based drugmaker. The patent on Nexium, for GERD and acid reflux, expires in 2014 in the United States, with patent protection in other countries also expiring around the same time. It generates just shy of $6 billion in annual revenue for Astra, which is more than chump change for the $60 billion company that did $33.5 billion in sales last year.
In that light, investors are rightfully alarmed about the lack of similar blockbuster drugs in the pipeline. And truth be told, it’s not like a wave of patent expirations is going to be a breeze for AstraZeneca. Yet, the facts of the matter are (1) the company still has a decent pipeline, and (2) David Brennan has navigated the company through more fruit-bearing acquisitions than most investors may realize.
And ‘fruit bearing’ is the operative term there.
Since 2010, Astra has inked eight partnership or acquisition deals; it’s made seventeen deals since 2000. Granted, it’s sold 24 pieces of itself during that time, but numbers don’t lie…. earnings are increasing. They’re increasing because those deals either add revenue, or add profit, or both.
During that same period (since 2000), Pfizer has made 49 acquisitions, and 71 divestitures. Merck has made five acquisitions during that time. So, the opportunities for growth and selling have been there for everyone, but only AstraZeneca has wheeled-and-dealed itself into growth.
Now, guess who’s been in charge of Astra since 2006. It’s David Brennan, who led the way for most of these key buyouts and deals that clearly worked out.
Point being, if the guy says the company doesn’t need a major deal to survive or thrive, he’s earned the right to say so with his results.
At the same time though, Brennan also answers critics about the apparent lack of a pipeline with this short but brilliant reality check: “…spending more money does not have a linear increase in the number of returns you get from a research and development perspective.” Clearly he’s aware of the pipeline issue, and in many ways it’s pretty clear he’s been picking the low-hanging, albeit smaller, fruit in his recent acquisitions, and holding out for a ‘big’ deal that was actually worth doing. Given the guy’s track record though, it’s a perspective we have to trust.
But What About the Looming Patent Expirations?
Yes, the bad news is, Nexium and Seroquel are going away. The good news is (and ‘good’ is still a relative idea), other pharma names are in the same boat. Pfizer’s Lipitor is now off-patent, and Viagra as well as Geodon (for schizophrenia) are on the chopping block this year. Merck’s losing patent protection on Singulair in August. And there are other pretty big drugs losing protection soon too. While patent expirations from other pharma names are not directly beneficial to Astra, indirectly, these represent opportunities for Astra to introduce a generic… a strategy that actually hasn’t yet been exploited by AstraZeneca.
Whether or not the company opts to go all the way down that road or not, however, its pipeline is more robust that one might think. It’s got dapagliflozin (for diabetes) in Phase III trials, Faslodex and Iressa (oncology) in the lineup for 2015 and 2016, and Brilique (Brilinta) as a cardiovascular treatment ready for an NDA filing sometime in 2014. And, those are just a few of what’s in the works.
In the meantime, Dutoprol – for blood pressure – is now on the market. It’s a $66 billion market. Even a small piece of it could offset the loss of Nexium and/or Seroquel.
Bottom line? Smaller deals and a less dramatic pipeline may not be sexy, which is what investors seem to want. Sexy blockbusters are eventually a headache though, since when they go away, they leave behind a big hole that’s tough fill. Take Pfizer’s Lipitor for instance. With more than $10 billion in annual sales, it made up 15% of Pfizer’s revenue. Now there’s nothing in the Pfizer pipeline that can even come close. While smaller – and more – deals may not be fun for Astra owners, reliable and consistent growth is fun in its own way. AZN owners may not realize just how good they’ve got it. Newcomers have it even better though, as they can own shares for only 7.2 times forward-looking earnings.
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