Revamping AstraZeneca, Soriot Calls For Focus And Speedier Innovation

AstraZeneca will accelerate development of several mid-stage assets into Phase III and turn aggressively to business development under CEO Pascal Soriot’s strategy to transform the company, even as it shores up its P&L with more job cuts.

AstraZeneca PLC's new chief executive is working hard to convince investors and remaining staff that the troubled drug maker can turn its fortunes around. But it promises to be a long haul.

CEO Pascal Soriot’s strategy envisions the U.K.-based group emerging from the shadows of its patent cliff as a pure-play pharmaceutical innovator with a focus on three core therapeutic areas and an increased emphasis on specialty markets. Soriot unveiled his turnaround plan for the U.K. drug maker during a day-long investor meeting in New York March 21.

Under the plan, AstraZeneca is consolidating R&D and global marketing operations over the next two years, with the loss of nearly 4,000 jobs. The vision involves sizeable cost-cutting, accelerating the development of several mid-stage assets, and increasing in-licensing activities and acquisitions. While Soriot outlined more details of his strategy, the key messages were ones he has already discussed with investors since taking over as CEO in October (Also see "AZ Taps Outsider Soriot As CEO, While Roche Anoints 25-Year Veteran O'Day To Head Pharma Division" - Pink Sheet, 28 Aug, 2012.).

“It is critical that we improve the productivity of our operations and we take decisive steps to reduce complexity and costs. Our future success and long-term growth depends on our ability to create innovative medicines that benefit patients,” Soriot told investors.

If he is able to transform AstraZeneca – a company best known for its marketing savvy and a handful of blockbuster-level successes in primary care – into a nimble science-driven organization with a significant presence in specialty care amid massive patent losses, it will be an achievement.

Returning AstraZeneca to growth won’t be easy, however.

The company will lose billions of dollars in sales between 2012 and 2016 due to the entry of generic competition against its key brands. In 2012, it lost $3 billion in sales when its antipsychotic Seroquel IR (quetiapine) went generic. It will lose the heartburn pill Nexium (esomeprazole) in 2014 and statin Crestor (rosuvastatin) in 2016, drugs that generated combined sales of $10.19 billion in 2012.

Inability to bring new innovative medicines to market to replace mature blockbusters led the company’s former CEO David Brennan to resign in April 2012 (Also see "Brennan’s Abrupt Departure Has Some Viewing AstraZeneca As A Buyout Target" - Pink Sheet, 26 Apr, 2012.). Brennan tried to change the company’s trajectory, relying on a variety of strategies, including acquisitions like MedImmune LLC and Cambridge Antibody Technology Group PLCto expand into biologics, reduction of the workforce by thousands, and reorganization of the R&D structure and leadership. But those efforts failed to yield tangible commercial products.

“We need to bring in a greater sense of urgency. It is also about clarifying accountability, and importantly, I think we need to ramp up our willingness to take smart risks,” Soriot said.

Soriot, who previously headed Roche’s pharmaceutical unit, thinks he has the formula. In the near-term the focus is on consolidating R&D, reducing operating costs, shopping for new assets, and buckling down on executing on the launches of some of its newer products, both the clot buster Brilinta (ticagrelor) and those in its diabetes alliance with Bristol-Myers Squibb Co. (Also see "AstraZeneca Faces Uphill Battle In Talking U.S. Docs Into Using Brilinta" - Pink Sheet, 11 Feb, 2013.) and (Also see "AstraZeneca Deploys High-Sensitivity Troponin Test As Brilinta Biomarker" - Pink Sheet, 11 Feb, 2013.).

Other aspects of his plan are more nuanced. The finer elements of his strategy include changing a risk-averse and consensus-driven culture that has stunted innovation, increasing accountability through new metrics, and establishing a sense of urgency to move new drugs through the pipeline faster.

“We need to bring in a greater sense of urgency. It is also about clarifying accountability, and importantly, I think we need to ramp up our willingness to take smart risks,” Soriot said. “Taking no risk is the worst risk we could take because essentially taking no risk typically takes you to a place where you have no portfolio, no products.”

Soriot declined to provide much financial guidance, and executives would not say when it might return to growth or speculate on when the trough earnings year might be. The only financial prediction the company offered was that it will beat analyst consensus sales estimates of $21.5 billion in 2018. The company reported $27.97 billion in revenues in 2012.

A Focus In Three Therapeutic Areas

Going forward, AstraZeneca will be focused in three core therapeutic areas: cardiovascular/metabolic disease, oncology and respiratory/inflammatory disease. The company has a long history in these disease areas, with both marketed products and pipeline assets in each.

“Within these, we will certainly focus ourselves where we think we can have distinctive science and we can make a difference,” Soriot declared.

The company will stay in neuroscience, anti-infectives and therapeutic vaccines, but its investment in those areas will be “opportunity-driven.”

The company will also work to increase the number of biologics in its portfolio with the aim of having a balanced portfolio of large and small molecules, and will also aim to develop both large and small molecule drugs that have more of a specialty focus, with a tendency to have sustainable longer-term growth, Soriot said. Demonstrating how the company’s biologics portfolio has improved, Soriot said the company is on track to have one BLA filing per year beginning in 2016.

AstraZeneca is intent on accelerating the pace of development of new drugs. The company currently has six drugs in Phase III clinical trials but is accelerating development of some of its mid-stage assets with the aim of advancing five to seven new molecular entities into Phase III by the end of 2014.

“If we can do that on a sustainable basis, move three new NMEs [new molecular entities] into Phase III, we would have one or two launches a year, and I think that is a nice place for us to be,” said Chief Medical Officer Briggs Morrison. The company will redirect some of the resources for discovery and early development to later-stage development, but will do so without impacting the long-term sustainability of the pipeline, according to Morrison, because of steps taken to improve the quality of the assets moving forward.

Indeed, the company gave a lengthy overview of its pipeline and highlighted several of the assets it is accelerating development for. The takeaway for some analysts at least was that the early- to mid-stage pipeline may be broader and more interesting than some investors had given it credit for.

Bernstein analyst Tim Anderson said many of the proposed solutions appear reasonable. “On balance, we continue to think AstraZeneca is likely "at the bottom [of its fortunes now] and that the dividend is safe – at the current yield of 6% – while they spend the next several years trying to fix past problems and eventually return to growth.”

Analysts at Jefferies said in a reaction note that AstraZeneca’s “message of a long-term fix driven by innovation and a focus on the current asset base may not be exciting, but it at least reassured in terms of the dividend security. We continue to see a significant re-rating of the [earnings per share] multiple being likely over the next 2-3 years.”

Another reassuring message was the company’s aim to reinvest 50% of cash flow from on-market brands back into the business. That figure has fluctuated between 41% and 47% in the past decade, so the guidance is a “slight nudge ahead of where we averaged,” and that is a function of the attractive set of investment opportunities that we see,” Chief Financial Officer Simon Lowth told the investor day gathering.

New Assets Or Transformative M&A?

AstraZeneca will rely on business development to pad the internal R&D efforts. “We need to rebuild when it comes to cardiovascular, when it comes to oncology and when it comes to respiratory,” Soriot said. The chief executive said the company would accelerate its deal-making activity and that the effort would begin in earnest now, after he spent the first several months as CEO conducting a business review and implementing operational changes. AstraZeneca is already the most active deal maker among the big pharmas, according to Elsevier’s Strategic Transactions (Also see "2012’s Top Biopharma Dealmakers" - In Vivo, 9 Jan, 2013.) and (Also see "AZ Is Top Deal-Maker: Neurodegenerative Disease Deals, 2010 – Q1 2013" - Pink Sheet, 25 Mar, 2013.).

Its activities to date largely have involved small, focused R&D deals around particular targets or late-stage compounds, with the exception in 2012 of the joint effort with Bristol to acquire Amylin (Also see "With Bristol/AstraZeneca In Driver’s Seat, GLP-1 Race Takes A Turn" - Pink Sheet, 9 Jul, 2012.). On the surface, Soriot’s words did not seem that different from those efforts. The deal-making focus will be on acquiring new assets and “bolt-on” acquisitions, he said – but he did not rule out the possibility of a transformative merger, the kind of aggressive step some investors think the company needs to weather the coming patent expirations.

Soriot came to the meeting with a couple of examples of his deal-making style. The company announced two collaborations the same day, an agreement with Moderna Therapeutics LLC to discover and develop messenger RNA therapeutics, for which it paid $240 million upfront, and an agreement with the Swedish medical university Karolinska Institute to develop an Integrated Translational Research Centre for cardiovascular and metabolic disease and regenerative medicine (Also see "AstraZeneca Bets Big On Moderna’s Preclinical Messenger RNA Technology" - Pink Sheet, 21 Mar, 2013.).

Additionally, the company announced a new appointment to further business development: Marc Dunoyer, who most recently was global head of rare diseases at GlaxoSmithKline PLC, spearheading that company’s efforts in rare diseases from R&D to commercialization. He will join AstraZeneca in the second quarter in the newly created role of exec VP-Global Portfolio & Product Strategy. He will be responsible for driving business strategy, including business development and M&A, the firm said.

AstraZeneca unveiled more job cuts March 21, announcing plans to eliminate 2,300 positions, mainly in the area of sales, marketing and general administrative support functions. The sales and marketing positions that will be eliminated are mainly in the European markets and are in response to patent expirations, CFO Simon Lowth said. The company previously announced it would eliminate 1,600 positions in R&D as part of a major R&D overhaul unveiled March 18. Under that plan, the company will consolidate all research and development across small molecules and biologics in three strategic regional centers: Cambridge (U.K.), Gaithersburg, Md. (U.S.) and Mölndal (Sweden) (Also see "AstraZeneca’s R&D Restructuring Follows Hot Spot Trend" - Pink Sheet, 18 Mar, 2013.)).

One of the primary goals of the R&D restructuring is to reduce the company’s brick and mortar footprint, as the company decreases its presence in other areas like Alderley Park and London in the U.K. and Wilmington, Del. in the U.S.

Since 2006, AstraZeneca has eliminated 27,000 jobs, though it has reinvested in other areas like biologics and emerging markets, resulting in a net workforce reduction of 15,100.