April 23-27 was the week of the changing narrative for AstraZeneca PLC, as the pipeline- and patent expiration-challenged company inked a pair of mid-sized deals – a bolt-on acquisition and a marketing alliance for a struggling, recently launched cardiology drug – unveiled poor first-quarter financial performance and announced the resignation of CEO David Brennan. Otherwise, it was business-as-usual at the multinational, cardiovascular therapy-focused pharma.

Following on the heels of several late-stage drug-development setbacks in recent months, a looming patent cliff that threatens several of the firm’s top-selling drugs and a restructuring initiative that will slash thousands of jobs, AstraZeneca on April 26 reported an 11% decline year-over-year in quarterly revenue to $7.349 billion. Also causing concern was the pharma’s sluggish performance in emerging markets, a key part of its growth strategy. First-quarter revenues in such markets grew by only 1%, AstraZeneca reported during an investor call April 26.

Emblematic of the challenge before a company facing the patent expiration by 2014 of Seroquel (quetiapine fumarate) and Nexium (esomeprazole magnesium) and sales erosion due to generic versions of Pfizer Inc.’s Lipitor (atorvastatin) competing with its blockbuster statin Crestor (rosuvastatin calcium), AstraZeneca reported very meager quarterly sales ($9 million) of recently launched cardiology drug Brilinta (ticagrelor) Also see "AstraZeneca's Brilinta Approved With Aspirin Warning" - Pink Sheet, 20 July, 2011..

Into the maelstrom of all those storylines came the April 26 announcement that Brennan, one of big pharma’s longest-serving chief executives with about six years on the job, would step down effective June 1 Also see "Brennan’s Abrupt Departure Has Some Viewing AstraZeneca As A Buyout Target" - Pink Sheet, 26 April, 2012.. CFO Simon Lowth will be his temporary replacement, while new Non-Executive Chairman Leif Johansson, whose succession of Louis Schweitzer also is being moved up to June 1, will lead the search process for a new CEO. In a statement, AstraZeneca said it will consider both internal and external candidates for the CEO position.

Several market analysts indicated that Brennan’s departure, which may have been forced, was not a great surprise. But still to be revealed is who Brennan’s successor will be, whether that person will come from within or outside of AstraZeneca, and whether he or she will greatly alter the pharma’s current strategy of enhancing its pipeline through licensing deals and small acquisitions, while avoiding the mega-merger strategy adopted in recent years by competitors such as Pfizer, Merck & Co. Inc. and Roche.

In an April 26 note, Panmure Gordon analyst Savvas Neophytou said the first quarter performance in emerging markets was perhaps the greatest concern arising from AstraZeneca’s first-quarter data. “[It] puts the company’s mid-term guidance at risk in our view,” he wrote. “We shall monitor this situation closely because we do not want to over-react based on data provided by one quarter, but emerging-market growth is a very important part of our thesis.” Panmure reiterated its “buy” rating on AstraZeneca’s shares in the note.

Credit For AstraZeneca’s Successes Eluded Brennan

In an e-mail, Neophytou told “The Pink Sheet” that AstraZeneca shareholders have been pushing for a change in the chief executive’s office and that Brennan struggled to maintain support on a number of counts, in part because the company’s good news often was attributed to other executives.

“Rightly or wrongly, [Brennan] was seen as uncharismatic and lacking vision for the business,” the analyst said. “His one large acquisition (MedImmune LLC) did not create immediate shareholder value and unfortunately the restructuring program success is credited to the CFOs (past and present), which is perhaps a little unfair. CEOs cannot really just point to cost controls as the only means of controlling profit. Shareholders expect a vision to be imposed, growth to be targeted and a strategy to be imposed which will execute on the agenda. Sadly on some of those counts, [Brennan] was seen by shareholders as falling short.”

“Currently the pipeline restocking is seen as the work of [President, R&D] Martin Mackay,” Neophytou continued. “[Likewise], AstraZeneca’s drive in emerging markets is often credited to outgoing chairman Louis Schweitzer. But Brennan’s detractors ignore the context of his stewardship. He succeeded a very charismatic (albeit too dominant) CEO in Tom McKillop and the company was heading towards significant patent expiries. That was the hand he was dealt. Perhaps if the $16 billion spent on Medimmune [instead was spent] on Shire PLC, the outcome would have been different.”

Neophytou added that leading candidates to be the new CEO include Lowth and Executive VP, Global Commercial, Tony Zook, but that the best person for the job, ironically, might be McKillop, who stepped aside at the start of 2006 Also see "AstraZeneca CEO Designate Brennan Will Take Reins From McKillop In 2006" - Pink Sheet, 28 July, 2005..

While the identity and subsequent strategic decisions of the next CEO raise one set of questions about AstraZeneca, another emerging theme is whether the pharma, resistant to the big merger itself, may in fact become an M&A target. Gbola Amusa, an analyst in the London office of UBS Investment Bank, believes AstraZeneca could be an appealing buyout target, particularly for another pharma intending to shut down all or part of its R&D function and just benefit from the pharma’s large portfolio of drugs.

“If AstraZeneca spends $5 billion a year on R&D and if you assume that’s being spent in perpetuity, shutting down R&D basically saves about $53 billion of value, and the market cap today is roughly that amount,” he noted. “You could argue that someone could buy the company, shut down the R&D engine 100%, and generate enough value to finance the acquisition … [or] a buyer could do a partial R&D shutdown to finance portions of the deal, for example. That way, investors will see if is there is less value being destroyed potentially and that leads to upside for the manager who makes that decision.”

“With AstraZeneca already at historic levels of valuation, the cheaper it gets, the easier it is for someone to pick up the company in an acquisition,” Amusa concluded. “Although I wouldn’t say it is likely, the probability of AstraZeneca being bought is likely higher from today than it was yesterday.”

For now, Lowth is indicating that AstraZeneca’s business development strategy will not change. During the investor call April 26, he indicated that the strategy remains to complement AstraZeneca’s late-stage pipeline “through peer collaboration” and “more traditional and licensing deals.” “The first priority [is to] strengthen the pipeline,” Lowth said. “And second, as we’ve got a very strong commercial capability around the world, we actively look for portfolios and marketed products to bring into the company.”

Nonetheless, in recent months, AstraZeneca has been cited as a potential buyer for more costly companies, including specialty pharma Forest Laboratories Inc. and biotechs Amarin Corp. PLC and Amylin Pharmaceuticals Inc.

Ardea, TMC Deals Reflect Current Strategy

Those strategies are exemplified by two deals earlier in the week, a $1.26 billion acquisition of Ardea Biosciences Inc. and its Phase III gout candidate lesinurad and a pact to co-market Brilinta with The Medicines Co. in the U.S. Also see "AstraZeneca’s Ardea Acquisition: A Rich Deal Spurred By Phase III Gout Candidate" - Pink Sheet, 23 April, 2012.. The latter company will focus on detailing the antiplatelet drug to interventional cardiologists, while AstraZeneca will retain a focus on hospital-based customers.

TMC CEO and Chairman Clive Meanwell said disappointment over Brilinta’s slow sales pace reflects an out-of-date viewpoint about new drug launches in the present U.S. and European economies.

“Drugs do not get off to a fast start anymore,” he said in an interview. “The good old days when a drug goes out the door like a rocket … very occasionally, we may see those kinds of launches again but generally launches are slow. In the end, the value that the product creates, and I believe Brilinta creates a lot of value, comes through. Expectations for launches are sometimes unrealistic and we have to catch up with the notion that customers are asking for different things – they’re asking for proof of value and they’re skeptical. We’re learning how to cope with slower launches. That doesn’t mean that products can’t still be blockbusters, and I believe Brilinta will be very successful, but it’ll take a while.”

Brilinta’s value proposition, Meanwell asserts, derives from pivotal trial data showing the drug outperforms the Bristol-Myers Squibb Co./Sanofi drug Plavix (clopidogrel) in risk-reduction for ischemic stroke and mortality rate at 12 months of treatment Also see "AstraZeneca's Brilinta Approved With Aspirin Warning" - Pink Sheet, 20 July, 2011..

TMC markets a cardiology drug of its own, thrombin inhibitor Angiomax (bivalirudin), and is developing an antiplatelet therapeutic, cangrelor. Both compounds originally were in-licensed from AstraZeneca. Meanwell said TMC’s experience with catheterization lab clinicians would benefit the U.S. effort to market Brilinta. To co-promote the acute coronary syndrome drug in the U.S., TMC will earn $15 million a year under the four-year agreement. In addition, TMC can earn another $5 million each year under the pact if undisclosed performance thresholds are met – it will not collect sales royalties related to Brilinta, however.

“The management of ACS is now centered around the cath lab,” Meanwell said. “Patients go in to be adequately staged and when they come out, with or without stents, we know what the issue is. In the old days, when we didn’t really understand how to risk-stratify ACS patients, we only had a couple of drugs to play with. But now we have the ability based upon cardiac enzyme markers, ECG and angiography, and possibly in the future with CT or MRI scanning, to get very precise information about the prognostic outlook of an ACS patient. That informs us what the right mix of drugs is.”

“We have spent many years now working with leading cath labs, and our understanding of how they go about their business, how they move patients through the hospital, how they react to what they find in the cath lab and how they set the patient on the way home with the right discharge meds, is something we can add to the Brilinta discussion,” he continued. “I suspect that’s how AstraZeneca sees it, and certainly it’s congruent with our goal of seeing an ACS patient’s treatment as a pathway issue.”

Ardea Deal Enhances Primary Care Portfolio

In the acquisition of Ardea, the key value-driver is lesinurad, a Phase III oral candidate for chronic gout that is expected to be used in combination therapy with allopurinol and possibly take market share in extreme gout from Savient Pharmaceuticals Inc.’s Krystexxa as well. The deal terms call for AstraZeneca to pay $32 a share for the San Diego biotech, a 54% premium over its closing share price on April 20. Ardea, a publicly traded firm with multiple candidates in clinical development, raised $156.7 million in a follow-on public offering in February, pricing its shares at $17 apiece [See Deal].

Both companies’ boards of directors have agreed to the transaction, which is expected to close during the second or third quarter, and shareholders representing roughly 30% of Ardea’s outstanding shares already have entered a voting agreement in favor of the sale to AstraZeneca.

In an April 23 note, Leerink Swann & Co. analyst Seamus Fernandez called the deal “a good use of cash” for AstraZeneca and a good global fit with the multinational pharma’s global primary care business. He added that key opinion leaders in the gout arena view lesinurad, which Ardea fully owns, as the most attractive late-stage candidate for the disease.

Brennan’s Departure Not Expected To Disrupt Current Business Development Strategy At AstraZeneca

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