How AstraZeneca plc’s “Externalisation” Deals Are Set To Boost Growth

AstraZeneca’s (LSE: AZN) management is focused on returning the group to growth, and they’re not taking any chances. 

Indeed, as part of the group’s drive to return to growth, Astra has signed a number of “externalisation”, or joint-venture, deals with other pharma groups.

These deals have two goals. Firstly, they allow Astra to benefit from the experience of other pharma groups — as they say, two brains are better than one.

Secondly, by using externalisation deals, Astra is hedging its bets. Additionally, the company can develop more new drugs than it would have been able to if it were working alone.  

Revenue split

One of Astra’s recent joint-venture deals was with US pharma giant Celgene. The deal will see the two companies develop blood cancer drugs together.

Astra received a $450m windfall from the deal and any future revenue from the deal will be split 50/50. For Astra, this is a great deal.

Celgene specialises in the development of blood cancers drugs, a promising new market for Astra. However, Astra’s existing experience in the field of blood cancer is limited. So, this deal will allow Astra to benefit from Celgene’s experience.  

That being said, some analysts have criticised Astra for doing this deal. Analysts have accused the company of trading future growth for short-term revenues. 

Nevertheless, it is deals like this that have helped Astra develop its treatment pipeline into one of the best in the pharma industry.

Promising pipeline

Astra currently has 72 cancer treatments under development, 31 of which are immuno-oncology drugs — treatments that harness the immune system to fight tumours. Of these 72 new treatments, the company had 13 immuno-oncology drug trials under way, with a further 16 planned at the end of November last year.

For pharma companies, immuno-oncology is somewhat of a new frontier and with that in mind, it makes sense for Astra to bring as many R&D teams together, to get the best results.

Moreover, less than 10% of new drugs actually make it from the early stages of development to market. So, by selling off some rights to other companies, Astra is also de-risking its portfolio.

During the past few months, Astra has signed deals to work on new treatments with Innate Pharma of France, Juno of the US and Immunocore. All of these deals should reduce development risk and increase the prospect of success. 

Great news for investors 

These deals are, broadly speaking, good news for Astra’s investors.

Astra is de-risking its portfolio and improving the chances of the company’s new treatments making it to market. Unfortunately, Astra is trading future revenues for some of these benefits, but overall, the company should come out on top. 

As Pascal Soriot, Astra’s chief executive, put it:

“We are going to create value together that doesn’t exist now and will be much bigger than we would have created by ourselves…We get 50 per cent of a much bigger value proposition.”

Targeted growth 

It’s becoming clear that Astra’s management is serious about its target to deliver annual revenues in excess of $45bn by 2023. But, even though the company is working hard to hit this target, investors need to be patient. 

Astra’s revenue and earnings are set to fall steadily by 1%-2% per annum over the next two years, although the company is planning to submit 14-16 new treatments to regulators this year for approval. Management expects these new treatments to help fire up sales, and sales should start to expand again by 2017. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.