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A year to growth for AstraZeneca

The pharma giant has a 12-month deadline to prove to shareholders it can return to top-line growth
December 29, 2015

If targets are to be believed, AstraZeneca (AZN) has a year to get its house in order. Chief executive Pascal Soriot promised investors at an industry conference three years ago that the pharmaceutical giant would return to sustained top-line and earnings per share growth in 2017. That no doubt felt like a fairly long lead time. But as the deadline approaches is the target still realistic for the company?

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These past couple of years have hardly been event-free. In May 2014, only a matter of months since Mr Soriot's rousing address, US giant Pfizer (US:PFE) came forward with an aggressive £69bn takeover bid for its Anglo-Swedish rival. Pfizer had multiple motivations for a foreign merger - which have latterly been demonstrated by its agreed deal to buy Botox maker Allergan - but it insisted AstraZeneca's future product development pipeline was what caught its eye. Mr Soriot's response was blunt: AstraZeneca was not for sale, and would be going it alone. 'It' referred to the rigorous research and development process to find new game-changing medicines - not to mention getting them approved by the relevant regulators and successfully launching them in a crowded marketplace. In recent times, GlaxoSmithKline's (GSK) less-than-inspiring launches of respiratory products Anoro and Breo should be a warning to many.

While Astra rebuffed Pfizer - perhaps sensing the US group's motivation had more to do with the tax benefits of the deal - that hasn't stopped it pursuing its own M&A strategy. Mergers and acquisitions have gripped the healthcare sector this past year and debate rages about the motives at play. Pfizer will be able to take over Allergan's Irish tax domicile and repatriate its offshore cash pile for a far lower tax rate, while Shire (SHP) - once the target of US group AbbVie (US:ABBV) - has completed a nearly $6bn (£4bn) deal to buy a single-product company, US biotech Dyax (US:DYAX). But what of AstraZeneca? The pharma group was forced to admit it was in negotiations to buy a controlling interest in privately held Californian biotech Acerta in mid-December, confirming the $4bn deal a matter of days later.

This is not a dissimilar tie-up to the Shire-Dyax transaction. AstraZeneca has bought a 55 per cent stake in Acerta to have access to the biotech's blood cancer drug, acalabrutinib, which bosses think could generate sales of $5bn a year once approved. That would certainly help Astra reach its massive $45bn sales target by 2023 - another goal Mr Soriot has laid out for investors. One problem: the Acerta deal is going to be dilutive to earnings in the short term. And it's come hot on the heels of a $2.7bn deal to buy ZS Pharma, announced in November 2015, and a $575m agreement to acquire the entire respiratory business from Japanese group Takeda Pharmaceuticals - the third respiratory deal the group has signed in the past 18 months.

It's therefore no great leap to say Mr Soriot is hoping to buy in plenty of growth as well as develop new blockbuster drugs in-house, from start to finish. Merger enthusiasts would argue it is cheap to do strategic deals like those announced - particularly as many of the assets targeted are in latter-stage testing and will require less investment from a research point of view. And most market commentators still see 2017 as the year AstraZeneca will return to sales growth, particularly once 2016 absorbs the dilutive impact from the string of 2015 deals.