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Apr 9, 2013

AstraZeneca Raises S&P Eyebrows

  • AstraZeneca’s comeback strategy has won a vote of no-confidence from Standard & Poor’s, which yesterday said it downgraded the troubled pharma giant’s credit outlook from “stable” to "negative".

    The rating agency expressed doubt that the strategy unveiled last month by CEO Pascal Soriot would generate enough in sales to make up for revenue AZ is set to lose due to the “patent cliff” expiration of several brand-name drugs through the end of 2014.

    “This could lead to a downgrade if the new management cannot stabilize key credit metrics in the short term," S&P cautioned.

    While S&P analyst Olaf Toelke lowered the outlook for AZ, he has maintained for now the company’s ratings for AZ of AA- for long-term credit—the fifth-highest of nine investment grade ratings—but a lower A-1+ for short-term credit. To keep those credit ratings where they are, according to S&P, AZ will have to keep its ratio of funds from operations to net debt at a minimum 60%—a level the agency said AZ will have trouble maintaining absent a rebound in profits.

    AZ finished 2012 with a 17% decline (or 15% drop at constant exchange rates) in full-year revenue, to $27.973 billion, while operating profit fell 36% (34% at CER) to $8.148 billion.

    “For the full year 2013, the company anticipates a mid-to-high single digit decline in revenue on a constant currency basis,” AZ stated January 31, when it announced fourth-quarter and full-year 2012 results. However, S&P predicts a 9% drop in revenues this year.

    Soriot on March 21 unveiled a comeback strategy designed to reverse years of clinical setbacks by achieving growth and scientific leadership. The strategy calls for eliminating 5,050 jobs—roughly 10% of the current workforce—by 2016, including 2,300 selling, general, and administrative (SG&A) jobs, and 1,600 R&D positions the company said it would cut three days earlier.

    At the time, AZ said it would also restructure its R&D operations by consolidating small molecule and biologics R&D in three newly-named global centers—one each in the U.K., Sweden, and the U.S.

    "We believe that the group's newly released strategy, which focuses mainly on cost cutting and organic development, will likely not meaningfully mitigate expected continuing short-term negative effects on credit quality," Toelke concluded for S&P.

    AZ has struggled in recent years to recover from several late-stage clinical setbacks involving drug candidates the company had counted on to make up for sales revenues it is set to lose due to the “patent cliff” expiration of several brand-name drugs through the end of 2014.

    That year, AZ will lose U.S. patent protection for two of its biggest selling drugs—its proton pump inhibitor Nexium, and its asthma and COPD medicine Symbicort. Nexium generated $3.944 billion in sales last year, down 10% from $4.429 billion in 2011; while Symbicort racked up another $3.194 billion, up 5% from $3.148 billion.

    Last year alone, AZ lost $3 billion in sales for Seroquel IR, plus a combined $1 billion due to regional losses of patent protection for Nexium, blood pressure/heart failure drug Atacand, and cholesterol drug Crestor. Last month, AZ settled litigation over Crestor’s U.S. patent from Watson Laboratories and Egis by holding on to protection until 2016; Crestor racked up $6.253 billion in sales last year, making it AZ’s best-selling drug.


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