Pharma's best bargains

At present, it is abundantly clear that AstraZeneca is in the weakest position of the three main UK pharmaceutical companies. More than 7,300 staff were made redundant in the latest round of cost-cutting - the company's third major restructuring since 2007. The latest move is supposed to save about $1.6bn (£1bn) a year and comes in response to the imminent loss of patent protection on best-selling drugs such as Nexium, which faces generic competition from 2014, and increased competition to blockbuster heart drug Crestor; which is being undercut by the expiry of patents for Lipitor, Pfizer's biggest selling medicine which has now gone generic.

The major problem is that in-house research & development has become ever more unproductive. Partly this is a bureaucratic paradox where employees prioritise budgets over results, but also reflects how the easy science in medicines has been completed. But despite the painful process, there are grounds for optimism. For example, Professor David Phillips of the Royal Society of Chemistry argues that structural change in the pharma industry will mean more government money going into early-stage research at universities and small companies. Even AstraZeneca itself acknowledged that it would have to "share cost, risk and reward," which is code for paying smaller companies fatter royalties in return for better and higher value drugs.

Naturally, this makes investing in drugs companies a far trickier proposition because it forces a choice between different types of business model to generate essentially the same type of defensive income. AstraZeneca is only at the start of its turnaround, it probably needs 60 per cent or more of the drugs in its pipeline to be sourced from outside its internal R&D structure. Achieving that took GlaxoSmithKline decades but pressure on earnings is speeding up the process and AstraZeneca, with a model to follow, could find the going slightly easier.