AstraZeneca PLC’s CEO Pascal Soriot and his executive team have begun executing on a meticulous plan to revamp the Big Pharma’s R&D. But it is new assets the company needs most if it is to convince investors to stick around as $10 billion in revenue is lost to patent expiries over the next few years. AstraZeneca’s ability to add medically important drugs, particularly products close to regulatory filing, through licensing and acquisitions could ultimately determine the company’s staying power.

Soriot knows it too. He has made business development a top priority, and plans to ramp up activity in 2013 now that he has completed a business review, made operational changes, and begun restructuring R&D. Soriot took over as CEO October 1 and unveiled his much anticipated turnaround plan for the company during an investor presentation March 21.

His strategy for transforming AstraZeneca – a company best known for its marketing savvy and a handful of blockbuster-level successes in primary care – into a nimble science-driven pure-play biopharma with an increased emphasis on specialty care calls for job cuts, an R&D overhaul, and management changes. It also involves transforming organizational culture: enhancing accountability, embracing risk, and creating a sense of urgency within R&D. The company has meanwhile accelerated development of six Phase II drugs, three in oncology and three in respiratory disease. (See [A#14130321005].)

Even with some luck, an element recently in short supply at AZ’s clinical development organization, the team’s best efforts to increase the pace of internal research won’t yield many new commercial products in the near term. The company has a fairly robust early-stage pipeline, 26 new molecular entities in Phase I and 21 in Phase II, but the Phase III pipeline includes just six NMEs, none of which investors find terribly rousing. (See Exhibit 1.)

Even with some luck, an element recently in short supply at AZ’s clinical development organization, the team’s best efforts to increase the pace of internal research won’t yield many new commercial products in the near term.

Newer launches, mainly the anti-platelet therapy Brilinta (ticagrelor) and the diabetes drugs partnered with Bristol-Myers Squibb Co. – the DPP-4 inhibitor Onglyza (saxagliptin), the SGLT-2 inhibitor Forxiga (dapagliflozin), and the GLP-1 agonist Bydureon (exenatide extended release) – haven’t yet shown they have the legs to prop up the company as it loses its best sellers. [See Deal]

In 2012, AZ lost $3 billion in sales when its antipsychotic Seroquel IR (quetiapine fumarate) went generic. It will lose the heartburn pill Nexium (esomeprazole magnesium) in 2014 and statin Crestor (rosuvastatin calcium) in 2016, drugs that generated combined sales of $10.19 billion in 2012.

Dealmaking is the one area of uncertainty that holds upside for investors. Any AstraZeneca transformation via business development is likely to include bolt-on acquisitions, in-licensing deals, and peer collaborations similar to those the company has in place with Bristol-Myers Squibb Co. in diabetes and Amgen Inc. for five biologic assets for inflammatory disease. [See Deal] The company hasn’t ruled out a transformative merger, an aggressive step some investors would applaud, but Soriot isn’t pushing to reshape the business that way. When pressed in public forums, the chief executive maintains that a transformative merger is “not our priority.”

Exhibit 1

Late-Stage Pipeline Fails To Excite: Six NMEs In Phase III

Small Molecule

Large Molecule

Molecule/Mechanism

Indication

Molecule/Mechanism

Indication

Fostamatinib*/SYK kinase inhibitor

Rheumatoid arthritis

Brodalumab*/IL-17 inhibitor

Psoriasis

Naloxegol*/µ-opioid receptor antagonist

Opioid-induced constipation

Metreleptin/leptin analog

Lipodystrophy

CAZ-AVI*/cephalosporin ceftaxidime and novel beta-lactamase inhibitor avibactam

Gram-negative resistant infections

Lesinurad/URAT1 inhibitor

Gout

*Partnered asset

Aberdare Ventures; Company web sites

Product Strategy Head Dunoyer Will Oversee BD

Leading the business development charge will be Marc Dunoyer, who will join AstraZeneca by the end of the second quarter in the newly created role of EVP, global portfolio and product strategy (GPPS). He will be responsible for driving business strategy, including business development and M&A.

Dunoyer comes to AstraZeneca from GlaxoSmithKline PLC, where he was global head of rare diseases, spearheading that company’s efforts in rare diseases from R&D to commercialization. In 2009 and 2010, GSK completed several deals in the rare disease area: a deal with Prosensa Holding BV to develop four RNA-based compounds for the treatment of Duchenne muscular dystrophy for $25 million up front [See Deal], a collaboration with Amicus Therapeutics Inc. for the Fabry disease treatment Amigal (migalastat HCL) for $60 million up front [See Deal], a deal with Ionis Pharmaceuticals Inc. for rights to that firm’s antisense drug discovery platform to develop drugs against five targets [See Deal], and a stake in Japan’s JCR Pharmaceuticals Co. Ltd., which develops recombinant biologics for orphan diseases. [See Deal]

GSK’s dealmaking activity in rare diseases had petered out more recently, however. In December, CEO Andrew Witty acknowledged that rare diseases would no longer be an area of focus for the company. (See Also see "GSK Is Getting Ready For A Return To The ’90s" - Pink Sheet, 10 December, 2012..)

By installing Dunoyer to lead GPPS at AstraZeneca, Soriot has established the third and final pillar of his new executive leadership team. Leaders on the commercial side include Paul Hudson (North America), Ruud Dobber, PhD (Europe), and Mark Mallon (international). In R&D, Briggs Morrison was appointed to steer late-stage development for both small and large molecules; discovery and early-stage small molecule research is overseen by Mene Pangalos, PhD, while large molecule discovery and early research is overseen by Bahija Jallal, PhD, and run out of AstraZeneca’s MedImmune LLC subsidiary. The research leadership changes were announced in January when the company eliminated the positions held by R&D president Martin Mackay, PhD, and EVP, global commercial Tony Zook. (See Also see "AstraZeneca’s Executive Shakeup Includes Global Strategist To Be Named Later" - Pink Sheet, 16 January, 2013..)

GPPS will have three areas of oversight: R&D strategic metrics monitoring, global sales and marketing strategy, and business development. “It’s a complete pulling together of strategy for discovery/development, commercial, and intertwining business development,” explains Shaun Grady, VP, strategic partnering and business development. The business development group previously reported to Chief Financial Officer Simon Lowth, but will now report to Dunoyer.

GPPS will concentrate on late-stage clinical phase projects, M&A, and regional commercial dealmaking, Grady says. Meanwhile, each of the company’s two early-stage research groups, the large- and small-molecule groups, will have its own business development team that will report to the head of its respective group. Kumar Srinivasan, PhD, previously VP, new business development for AZ’s neuroscience efforts, will handle BD for Pangalos’ group; Jallal’s team has yet to announce who will fill that role.

“The driver for the split was that Pascal is very strong on delegation of decision making and having single points of accountability,” Grady says of the new business development structure. “Having business development hard-wired into the science units is a by-product of that” since it equips and empowers the early development leaders to source the best possible assets – from within AZ or from elsewhere.

It’s not that AZ’s business development team hasn’t been busy. “We are pleased with what we’ve done over the past couple of years, and 2012 in particular was a very successful year for us in terms of variety and strategic success,” Grady says. Indeed, AstraZeneca was in 2012 the most active dealmaker among the Big Pharmas, according to Elsevier’s Strategic Transactions. (See [A#2013800005].) Most notably, the company acquired Amylin Pharmaceuticals Inc. in June with its diabetes partner Bristol for $6.8 billion. [See Deal]

But there will be changes. Whereas the company used to seek out assets to utilize its global footprint and commercial organization, the focus will be more on high-quality science and technologies. “We’ll figure out the commercialization model and approach at the appropriate time rather than being led by our very strong commercialization capabilities,” Grady says.

And whereas AstraZeneca has in recent years mainly focused on in-licensing or acquiring late-stage assets, and that will remain a critical area of business development despite the scarcity of such programs, the organization is increasingly willing to make bets on earlier-stage opportunities. Early-stage deals offer the chance to uncover more value over time and don’t contribute to the same level of distinction between internal and external assets, Grady says. Evidence of that evolution is already emerging. (See Exhibit 2.)

Exhibit 2

Soriot’s Style: Deals AstraZeneca Has Completed Since October 2012

Date	Partner	Asset/Technology	Up-Front Type
April 2013	AlphaCore	ACP-501, a recombinant human lecithin-cholesterol acyltransferase (LCAT) enzyme	Undisclosed/acquisition
March 2013	Karolinska Institute	Establish an Integrated Translational Research Center	$20M annually for five years/research collaboration
March 2013	Moderna Therapeutics	40 mRNA compounds	$240M/option deal
January 2013	Orexo AB	OXCLI for respiratory diseases	No up-front/option deal
January 2013	Vanderbilt University	Brain disorder compounds that act on the M4 muscarinic acetylcholine receptor	Undisclosed/licensing deal
December 2012	Progenics Pharmaceuticals	Preclinical antibody against Clostridium difficile	Undisclosed/licensing deal
December 2012	Isis Pharmaceuticals	Antisense therapeutics against five cancer targets	$25M/licensing deal
December 2012	Optimer Pharmaceuticals	Fidaxomicin for C. difficile in South and Central America and Mexico	$1M/licensing deal
October 2012	Ironwood Pharmaceuticals	Linaclotide rights in China	$25M/licensing deal
October 2012	Ardelyx Inc.	Sodium-hydrogen exchange 3 inhibitor program including RDX5791 for renal disease	$35M/licensing deal

Elsevier’s Strategic Transactions

A Trio Of Early CV Deals

The company’s most recent three deals, for example, are all for early-stage assets and technologies. AstraZeneca announced two collaborations the day of the investor presentation, an agreement with Moderna Therapeutics LLC to discover and develop messenger RNA therapeutics [See Deal] and an agreement with the Swedish medical university Karolinska Institute to develop an Integrated Translational Research Center for cardiovascular and metabolic disease and regenerative medicine. [See Deal] (See [A#14130321004].)

In the third deal, announced April 3, MedImmune acquired private biotech AlphaCore Pharma LLC for an undisclosed sum [See Deal], gaining ACP-501, a recombinant human lecithin-cholesterol acyltransferase (LCAT) enzyme that is believed to play a major role in removing cholesterol from the body and also may increase levels of high-density lipoprotein (HDL) cholesterol, better known as “good cholesterol.” ACP-501 has completed Phase I testing. (See[A#14130403004].)

Another link between the three deals is that they are all in the cardiovascular/metabolic space, not surprising as that is one of three therapeutic areas the company has deemed core. The other two areas of therapeutic focus for AstraZeneca are oncology and respiratory/inflammatory disease. Although AstraZeneca has a long history in cardiovascular disease and currently markets Crestor and Brilinta, its pipeline has a dearth of CV hopefuls. Soriot vowed to rebuild the cardiovascular pipeline and is making early strides to deliver on that promise.

Grady also says the business development team is putting much more focus into its approach, with an emphasis on assets and technologies in the three core therapeutic areas, while other therapeutic areas such as infectious disease and neuroscience – where AstraZeneca has traditionally been active – are viewed as “opportunistic.”

“We’ll figure out the commercialization model and approach at the appropriate time rather than being led by our very strong commercialization capabilities.” – Shaun Grady

Of the three deals AstraZeneca recently announced, the one with Moderna stands out, particularly because it required the most substantial up-front investment. The deal is an option agreement for up to 40 programs across several therapeutic areas and carries an eye-catching price tag: $240 million up front, plus potential for technical, development, and regulatory milestones as well as sales royalties.

All told, Moderna, which aims to use messenger RNA (mRNA) as therapeutics, could earn more than $1 billion under the deal with AstraZeneca. The $240 million up-front payment is the largest this year in a biotech/pharma collaboration and one of the biggest ever for a deal built around preclinical assets.

Moderna will perform discovery work against targets selected by AstraZeneca, but the pharma will be responsible for preclinical and clinical development for any candidate it then opts to license. This will leave Moderna with substantial opportunity to continue advancing its own proprietary programs, focused on niche opportunities within oncology.

Moderna’s selling point is that its mRNA candidates, based on research licensed from Harvard University and Massachusetts Institute of Technology, will enable the human body to restart or increase the production of endogenous therapeutic proteins inside a patient’s cells without triggering an innate immune response. In addition, whereas other RNA-based technologies such as RNA interference have faced significant drug-delivery obstacles, Moderna believes it can create injectable drugs for intramuscular, subcutaneous, or intravenous administration. Evidently, AstraZeneca agrees.

AstraZeneca’s research collaboration with Karolinska is connected to the Moderna deal. It will establish an Integrated Translational Research Center for cardiovascular, metabolic, and regenerative disease in Stockholm. The pharma will provide up to $20 million a year to finance the effort, with an initial five-year term. To be operational by mid-year, the center will include 20 to 30 scientists, including several from AstraZeneca’s roster. AstraZeneca said the center will work on projects derived from the agreement with Moderna.

Several Challenging Years Ahead

AstraZeneca plans to reinvest up to 50% of on-market cash flow first toward maintaining its dividend – a carrot that may entice some investors to stick around through hard times ahead – and second toward value-added acquisitions, Soriot said during the investor forum. One of the first steps Soriot took when he became CEO in October was to suspend AstraZeneca’s share buyback program, a move that gave the company more financial flexibility for acquisitions. The company had already completed $2.5 billion in share repurchases in 2012, but had planned $4.5 billion initially. (See[A#14121001005].)

Returning AstraZeneca to growth won’t be easy. The company declined to provide much financial guidance, and executives would not say when it might return to growth or speculate on what year will have an earnings trough. The only financial branch the company extended during its investor day was to say that it will beat analyst consensus sales estimates of $21.5 billion in 2018. The company reported nearly $28 billion in revenues in 2012.

Soriot, who previously headed Roche’s pharmaceutical unit, thinks he has the formula, but his business development efforts will have to bear more fruit than his predecessor’s if AstraZeneca is to return to growth in the near term. Former CEO David Brennan certainly attempted years ago to acquire his way through, over, or around AstraZeneca’s impending patent cliff. He notably added substantial – and expensive – biologics capabilities with the acquisitions of Cambridge Antibody Technology Group PLC[See Deal] and MedImmune [See Deal], but his efforts failed to yield marketable commercial products soon enough.

In addition to aggressive business development, other components of Soriot’s strategy include an R&D restructuring and an ambitious re-launch of Brilinta intended to propel the drug into a blockbuster brand

In addition to aggressive business development, other components of Soriot’s strategy include an R&D restructuring and an ambitious re-launch of Brilinta intended to propel the drug into a blockbuster brand. Brilinta generated only $89 million in 2012 in an $8.9 billion market for oral anti-platelet drugs, despite data supporting the drug’s mortality benefit versus clopidogrel (Plavix and generics). Not surprisingly, Soriot has homed in on the brand as one opportunity to extract more value for investors. (See Also see "Is Brilinta The Treatment To Keep AstraZeneca’s Lifeblood Flowing?" - Pink Sheet, 1 April, 2013..)

The R&D restructuring was unveiled March 18, just days ahead of Soriot’s investor meeting. The plan includes 1,600 job cuts and the relocation of hundreds of other employees. At its core, the program will consolidate research and development across small molecules and biologics in three strategic regional centers: Cambridge (UK), Gaithersburg, MD (US), and Mölndal (Sweden). (In addition, the company’s corporate headquarters is being shifted from London to Cambridge.)

The R&D restructuring has three key goals: to reduce costs by decreasing AstraZeneca’s far-flung footprint and bricks and mortar investment; to increase productivity by bringing small molecule and biologics research closer together and by combining research with commercial and corporate staff; and to bring researchers closer to bioscience centers.

“It’s very hard to make people collaborate effectively if they are spread around,” Soriot told investors. “By bringing them together and bringing more of our people closer to leading bioscience centers, I believe we will make our people more effective.”

AstraZeneca will invest $500 million (in addition to the $1.4 billion one-time restructuring charge) in the Cambridge site, and will terminate R&D work at the Alderley Park, UK, site, relocating “1,600 roles” from there to Cambridge. Alderley Park lies 167 miles northwest of Cambridge, so AstraZeneca may need to hire the majority of those jobs and contend with the inevitable interruptions in programs.

Gaithersburg, where MedImmune is located, will become the primary site for biologics R&D and home to much of the US-based global medicines development activities for both small and large molecules, as well as some global marketing and US specialty care commercial functions. Finally, Mölndal will continue as a global R&D center with a primary focus on small molecules. Wilmington, DE, will remain AstraZeneca’s North American commercial headquarters, although with the exit of the global medicines development group, and relocation of global marketing and US specialty care, about 1,200 roles will leave Wilmington, with some of these individuals possibly ending up in Gaithersburg.

The reshuffling will pose challenges when it comes to keeping researchers engaged and moving projects forward – not to mention accelerating development of many programs. Embracing new assets into the fold at the same time will further complicate matters. But if Soriot’s turnaround ends up being successful, it will certainly be an achievement, one that will undoubtedly include some savvy dealmaking along the way.

AZ’s Make Or Break Moment Comes Down To Business Development

More from Deal-Making

More from In Vivo