Is AstraZeneca plc (LON:AZN) on the path to recovery in 2013?
In this short series of articles, I'm profiling three good recovery candidates for 2013: insurer Aviva, drugs firm AstraZeneca (LSE: AZN) (NYSE: AZN.US), and miner Anglo American. They all start the year with a new chief executive, and a good chance that new management and a new strategy will rehabilitate them in investors' eyes.
Earlier this week, I looked at Aviva. Today, it's the turn of AstraZeneca.
The drug company's new CEO, Pascal Soriot, has taken a slower-burn approach than the insurer's temporary executive chairman, who was touting his new strategy within weeks of taking over and had implemented great swathes of it within six months. But he had the advantage of knowing the company, and a simpler challenge. It's easier to cut costs and sell businesses than it is to generate new revenue.
Income
The main task facing Mr Soriot is to find new sources of income to replace sales from blockbuster drugs as they come off patent. It's an issue facing the whole sector, but especially severe for Astra. Last year's third-quarter results showed revenues down 15%, in large part because of losing exclusivity on drugs.
That issue -- and the austerity-budgets of developed countries' health services -- are the negatives of the industry. But there's still plenty to make investors bullish about the sector. Populations in the west are ageing, and in the east are growing in numbers and affluence. And medical discoveries continue to grow apace. The industry's long-term position should be secure.
Buy-backs
So how is Mr Soriot going to turn things around at Astra? He has made no big strategic announcements as yet: a strategy review is due to report in March, and there should hopefully be a clear direction when the results are announced in early February. But there are some clues.
The day he was appointed, he put a halt to Astra's share buy-back programme. That cost the company $5.6bn in 2011, and $2.3bn before it was stopped last year. When you need to invest to create new revenue streams, it's better to conserve cash, and the share price doesn't seem to have suffered as a result.
A shake-up
On Tuesday, the company announced a radical shake-up of senior management. The heads of research and commercial operations have been ousted, stripping out a layer of management. Three separate R&D roles report directly to Mr Soriot, as well as three regional heads and a role to coordinate R&D with sales.
It's supposed to speed up decision-making, but also smacks to me that Mr Soriot was encountering resistance to change.
What it does show is his emphasis on taking Astra back to its roots in scientific innovation. That chimes with statements that there'll be no major acquisitions or diversification such as rival GlaxoSmithKline has done.
It looks as if Mr Soriot is going to take Astra along a different path. Glaxo's diversification, into over-the-counter consumer pills and into emerging markets, is explicitly designed to reduce its dependence on 'white pill, Western markets'. That's very different from Mr Soriot saying (in the Q3 results) that his priority is to restore the company to growth and scientific leadership.
But the FD remains
Astra is more likely to do is the kind of deal it did when finance director Simon Lowth was temporarily in charge: acquiring biotech firm Amlyn alongside Bristol-Myers-Squibb. Astra can both develop and buy new patents.
Simon Lowth is credited with driving down Astra's cost base. Continuing to bear down on costs is likely to form another plank in the company's strategy. It has to cut its coat to suit its cloth. The benefits of 2012's programme should produce annual benefits of $1.6bn by 2014.
So it's good news that Mr Lowth has stayed on board, at least for now, despite having been passed over as CEO.
Dividends
GSK is the safer share but Astra has more recovery potential, trading on a price-to-earnings ratio of 8, a 33% discount to GSK. Both have juicy dividends and have a place in my portfolio.
One of the UK's top stock-pickers, Neil Woodford who runs Invesco Perpetual's Income and High Income funds, is a fan of the pharmaceutical sector. For nine years, from 2000 to 2008, he outperformed the FTSE All-Share index. And in 2011, his funds returned double the index.
Mr Woodford has substantial holdings in both AstraZeneca and in GSK. To discover more of his investing style, and which other stocks he's backing, you can download this free and newly updated report from the Motley Fool: "8 Shares Held By Britain's Super-Investor". Simply click here, without obligation.
> Tony owns shares in Aviva, AstraZeneca and GSK, but no other shares mentioned in this article.
