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AstraZeneca Struggles to Meet Expectations

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With the JPMorgan Healthcare Conference over, it's interesting to note that AstraZeneca's (NYSE: AZN  ) prospects for this year may be less optimistic than it may have been projecting.

He's selling, but are investors buying?
CEO Pascal Soriot was stumping at JPMorgan with multiple positive notes: 11 drugs in Phase 3, 27 drugs in Phase 2, a late stage pipeline twice as big as a year prior, initial trials in oncology immunotherapy with results anticipated this or next year, the purchase of Bristol-Myers Squibb's (NYSE: BMY  ) diabetes arm, and filings in the next few years with asthma medication Benralizumab and MEK inhibitor selumetinib .

However, numbers don't lie, and based on AstraZeneca's recently release quarterly earnings, the picture is dismal. In constant currency, quarterly earnings were down 25%, quarterly revenue fell 4%, and annual revenue declined 6%. AstraZeneca underperformed analyst estimates in most categories.

The real deal on the pipeline
AstraZeneca is relying heavily on its pipeline as the saving grace for the troubled company. Soriot has put a lot of effort into rehauling the organization of the R&D at AstraZeneca; while management started by added several early stage deals into the pipeline, they've also jumped to deals for adding late-stage agents .

Last week, the company release its list of agents in the pipeline commencing on Dec. 31, 2013; this list revealed 15 discontinued projects in the fields of infection, neuroscience, oncology, and respiratory/inflammation/autoimmunity. Of note, this list also came with AstraZeneca's announcement that it will be dumping projects quarterly rather than once every 6 months. Phase III trials are expected this year for hopeful high-earning prospects anti-PD-L1 antibody MEDI4736 (part of the oncology immunotherapy arm),  and Alzheimer BACE inhibitor therapy AZD3293 (in a race with competing agents from Merck and Eli Lilly).

And those "11 drugs" in late stages? Necessary but not sufficient. Failure rate is quite high, and it does not seem that any of those late stage agents are expected to be blockbusters. Former CEO David Brennan may be a cautionary tale for his successor – he too stumped hard on the company's pipeline , only to lose investors as those prospects failed to materialize into profits.

Strength in numbers
While Soriot may be touting the pipeline, AstraZeneca has still been very active in partnership and acquisitions. Among those include the company's purchase of Spirogen, Pearl Therapeutics and Amplimmune.

The purchase of Bristol-Myers' diabetes arm is of particular note, as analysts expect $1-2 billion in additional annual revenue by 2017 as a result of the $4 billion deal struck late last year. The completion of the acquisition will immediately translate into increased sales, however – a buffer than AstraZeneca can certainly use while the pipeline continues to move slowly. Already, AstraZeneca and Bristol-Myers' collaboration has yielded the approval of diabetes agent Farxiga earlier this year. Bristol-Myers continues to be a rival to AstraZeneca in its other arm, notably cancer immunotherapies.

Bristol-Myers was certainly not AstraZeneca's only Big Pharma partnership. Consistently strong performer Johnson & Johnson (NYSE: JNJ  ) also struck a deal with AstraZeneca to take J&J's prostate cancer medication Zytiga to Japan. As such, the deal helped diversify the global portfolio of AstraZeneca into the quickly growing pharmaceutical market in Japan, a country with a very aging population and openness to new therapeutics. Zytiga was already a quickly booming product throughout all of last year for J&J.

What's more, J&J may be a good company for AstraZeneca to align itself with, as the company is adapting rapidly to new situations as a Big Pharma leader. For example, J&J has begun improving transparency by opening its trial data to the public (via Yale University) and is addressing philanthropy by putting more focus on R&D for poor and developing countries via its Janssen Global Public Health group .

Additional trouble with generics
Soriot is mostly harping on AstraZeneca's pipeline to justify his optimistic projections. However, so far that pipeline has not met projections, and it will be an uphill battle to win investor confidence again. Realistically, the pipeline is not particularly large, just lost several mid stage programs, and notably lacks any late stage blockbusters. Patent expirations are troubling AstraZeneca as well, although that particular problem is endemic to all of Big Pharma. Blockbuster antipsychotic Seroquel continues to face generics since its patent expiration in March of 2012. Acid-reflux medication Nexium, which accounted for 15% of 2013 revenue, loses patent this May, and cholesterol agent Crestor faces patent expiration in 2016.

All other indicators seem to say the company is in trouble – optimistic analyst projections have AstraZeneca's 2017 sales just on par with that of 2013. The company has eliminated 5,600 jobs to date as part of their grand restructuring, and management has also shut down the company facility in India targeting neglected tropical diseases .

The major saving grace may be the partnerships and acquisitions that AstraZeneca has struck, but it is unlikely these will be enough to revive investor confidence in the face of all the other dismal factors for the company.

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