Pascal's stratagem

AstraZeneca can avoid self-medicating with M&A

AstraZeneca can avoid self-medicating with M&A. Pfizer's reported interest in a $100- billion bid has put pressure on Britain's second-biggest pharmaceuticals group. Chief Executive Pascal Soriot needs to be prepared should an offer ever arrive. To make that day less likely, he could theoretically bulk up, gear up, or find a merger partner. But quarterly results show plan A is working: Astra's drug pipeline is refilling, and investors recognise this.

With such an enormous predator looming, it pays to think through the strategic options. With a market capitalisation of $86 billion, AstraZeneca has the capacity to swallow sizeable outfits such as London-listed Shire ($32 billion), Actelion of Switzerland ($12 billion) or Seattle Genetics ($5 billion). Or an all-share merger of equals with a similarly sized outfit, such as the US AbbVie, could work. Astra's balance sheet looks robust but not exceptional by pharma standards, so the case for borrowing to lift shareholder payouts looks weak.

The most likely answer, though, is none of the above. As Soriot himself said on April 24, mega-mergers are "often very disruptive." Indeed. Anyway, smaller drugmakers once touted as Astra targets, such as Forest Labs or Questcor, have been gobbled up. Those that remain are pricey. Actelion and Shire shares have each run up 59 percent in a year, 40 percentage points more than Astra, and trade at a substantial premium to the sector.

Soriot's plan to keep sharpening the group's focus on cancer, diabetes and asthma looks right. Just as GlaxoSmithKline and Novartis have swapped units to concentrate on what they do best, he envisages possible selloffs or partnerships to retreat from anaesthetics, mental illness and infections. That means smaller, smarter deals.

Moreover, first-quarter results suggest Soriot's research-first attitude is paying off. The pipeline now includes a fresh quartet of lung cancer and asthma drugs selected for extensive "Phase III" trials. And while sales and earnings are still shrinking, the market is already giving Astra a lot of credit for a future turnaround. The shares closed on April 23 at 15.9 times forward earnings, Datastream shows. That is up from 9.6 times when Soriot took over in October 2012 and no longer a big discount to peers. No need to reach for a poison pill.