Boardroom Revolt At AstraZeneca

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By

Alan Oscroft

Published in Company Comment on 26 April 2012

Heads roll, as the drugs company board listens to investor complaints.

Investor discontent at Britain's second largest pharmaceuticals giant, AstraZeneca (LSE: AZN), has been growing for some time. The firm's drug development pipeline, which is increasingly crucial for future profits as patents expire on current drugs and competition from generics hots up, has been slowing to a trickle.

While rivals, like GlaxoSmithKline (LSE: GSK), have been expanding their horizons in the direction of novel biotechnology, AstraZeneca has pretty much stuck to the old-fashioned search for blockbuster prescription drugs. And that business model is starting to look a bit tired these days.

Since chief executive David Brennan took over the helm six years ago, the only real attempt to rectify the growing problem has been the acquisition of biotech researcher MedImmune, now widely considered an expensive flop.

And it has all come to a head today, on first-quarter results and AGM day.

Time to go

Facing a strong challenge to his board re-election, and just a year before his 60th birthday, Mr Brennan has announced his retirement. He'll stand down on 1 June, with chief financial officer Simon Lowth stepping in as interim chief while the search for a long-term replacement, from within the company or from outside, goes ahead.

Chairman Louis Schweitzer is to step down as well, to be replaced by Leif Johansson who will head the CEO search.

But what about those Q1 figures? Well, they're not good. Pre-tax profit has fallen by 38% to $2.1bn (£1.3bn), with earnings per share (eps) sliding from $2.08 to $1.28.

And it's largely down to that long-expected, and inadequately planned-for, patent expiry, with the outgoing CEO telling us: "The anticipated impact from the loss of exclusivity on several brands [...] has made for a difficult start to the year in revenue terms."

The anti-depression drug Seroquel is the main culprit, after its patent expired last month. But we'll see protection for heartburn treatment Nexium ending in 2014, and for the big one, the anti-cholesterol statin Crestor, in 2016. That's going to hurt.

Profit warning

This Q1 shortfall is no short-term blip, and we have also been given what is effectively a profit warning for the full year, with eps guidance having been revised downwards from the earlier figure of $6.15 to $5.85 -- a fall of 5%.

The shares have lost 5.5% as I write, and are currently changing hands for £26.80 apiece.

Will the next CEO get AstraZeneca back on track? Are the shares oversold and worth buying now? Please do share your thoughts, below.

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Comments

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ANuvver 26 Apr 2012 , 12:46pm

Well, I'm going to try to find some positives.

None of this news is really very new. It is often the case that the market punishes shares at precisely the point that the company reaches maximum focus on the major problems. It also often happens that bombouts like these level up a bit towards the end of the day as the shorts come home. It'll be interesting to see where the "value floor" settles - at least for now.

Anyone involved in AZN recently has realistically had to accept that they're buying an acquisitions story. The fact that current management made themselves look like nits by overpaying for Medimmune will mean that the new team will be hypersensitive and loth to make the same mistake again.

Hmm. The Polyannicillin-Contrarox pills are wearing off now. But I still have enough of a buzz left to say that today's experience has been an object lesson in diversification for me. Sure, AZN is getting monstered, but RDBS and ULVR are countering the worst effects.

I'm holding. Okay, it's been unpleasant, but it hasn't become a "Tesco dive" - yet!

LastChip 26 Apr 2012 , 1:02pm

Are they worth buying? No they're not.

Drugs take a lot of time and patience to develop and you cannot "magic up" a new stream overnight.

Years of management neglect are going to take their toll and I don't see that changing any time soon.

The moat is beginning to empty and run dry.

Yet again, it begs the question; why are we paying megabucks for these morons to run companies? In many instances, the quality of top management is the lowest I've seen in decades, coupled with the highest costs.

The letters plc, have become an excuse for management to rip owners off and I'm getting sick of it.

Astronomical bonuses just for turning up to work are no longer an option and should be defeated (and destroyed) at every possible opportunity.

The AstaZenica board have a great opportunity now, to kill off these huge pay packets and re-base remuneration at board level to more realistic base salaries, that ONLY pay a bonus for sustained, long term out-performance. And the targets should be created by shareholders, not management.

It's about time the owners of these companies started receiving a decent return on their investment. The last decade has been appalling and if the share structure is to survive, it needs a serious change of attitude towards the owners.

thebarns 26 Apr 2012 , 6:23pm

Good points and rant LastChip.

Small private sector non final salaried pension schemed investors are blasted at from all sides and seem powerless to do anything about it.

We disproportionately support generous public sector pensions and other packages.

We are told to invest and do so in large Plcs, the directors and senior management of whom are there purely to look after and enrich themselves at the expense of the shareholders (us). People may justifiably rant about public sector pensions but the remuneration packages at these large Plcs is also mind blowing.

In an owner managed smaller company (anything from £50M downwards), the owners (the shareholders) are very often involved in day to day management and there is no opportunity for the directors and senior managers to rip the company for all it is worth.

In the large PLCs, the owners are so disparate and feeble (insurance companies/fund managers, themselves grossly overpaid for what they do) that they make half hearted attempts at protesting about remuneration packages, paying lip service to some media pressure. But they dont rock the boat, because they also benefit from ripping off their own insurance or fund management companies, which once again are owned down the line by millions of small investors.

I dont know how the problem is solved but the odds are certainly stacked against the small investor.

WealthyInvestor 26 Apr 2012 , 7:43pm

AstraZeneca has been overvalued for some time. The most serious issue for this business is its lack of new pipeline drugs, ruling it out as an acquisition target itself leaving its only realistic option in the short term to go on the hunt itself. Whether it has the resources and ability to do that is questionable... At the current price, it's still overvalued. More pain lies ahead.

Mark878 26 Apr 2012 , 8:41pm

Is it really overvalued with a PE of 5? Even if it's profits were to drop by a third it would still be valued less per earnings than GSK

F958B 26 Apr 2012 , 10:29pm

Mark878

I agree.

About half of AZN's current revenues are reckoned to be off-patent by 2016 (assuming no new drugs) which would put the shares on a P/E of 12x in 2016; simlar to GSK's valuation today.
The more-than-twice-covered dividend also looks payable for at least a few more years, even without any new drugs (but let's see what Brilinta delivers, along with a few others in their pipeline).

So AZN's shares have already priced-in an incredible amount of "bad stuff".
However, almost uniquely to the FTSE; AZN have negligible debt, which puts them in quite a strong position. In fact, a stockmarket wobble - for which there are plenty of triggers - could allow AZN an opportunity to snap up some bargains while nobody else is prepared - or able to raise funds - to buy them.

The usual company killer - as with HMV, GMG, TCG etc - is a usually prolonged drop in profits coupled with high debt.
AZN do not have both of those ingredients. A significant increase in debt without a pickup in revenues will be the warning to watch for over the next few years.

I have suggested before that AZN's lowly valuation could well set them up to be quite a strong "recovery" candidate in the longer term, but they will experience considerable volatility while they sort themselves out.

duffmanchon 26 Apr 2012 , 10:52pm

I'm holding as long as divi keeps going up. For a case study in how to make money from a stock in a declining industry look at the total return for the last decade for Reynolds American Tobacco. Hopefully AZN will do the same.

Sotograndeman 30 Apr 2012 , 12:15pm

'Bout time there was a major shakeup!

Like GSK (but unlike Pfizer UK) AZN have failed over and over again in their attempts to discover new drugs. Their track records in Research are dismal. And the prospects remain dim, for both.

There may be value in the existing sales, divis etc, but anyone who expects AZN (or GSK) to have great new products coming thru is in for a big disappointment.

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