AstraZeneca's (AZN) Robust Pipeline, Cost Savings Could Mitigate Patent Expirations - Moody's

While patent expiry risk over the next three years is significant for AstraZeneca PLC (A2 negative)(NYSE: AZN), the rapidly increasing number of drugs in its pipeline with blockbuster sales potential and the company's significant headroom for cost savings could relieve the pressure of patent expirations, says Moody's Investors Service in a special report published today.

Moody's report, titled "AstraZeneca PLC Solid Pipeline Execution, Cost Control Would Ease Patent Cliff Pressure", is available on www.moodys.com.

"Although AstraZeneca is facing material revenue erosion risk because of patent expirations, internal R&D efforts and acquisitions mean that the number of drugs in its pipeline with blockbuster sales potential has increased significantly. This, coupled with the potential to significantly reduce restructuring costs and expenses, could ease the patent cliff pressure," says Stanislas Duquesnoy, a Moody's Vice President -- Senior Credit Officer and author of the report.

The recent expiration of the patent on heartburn drug Nexium in the US and the upcoming loss of patent protection in the US next year on Crestor, which has global annual sales of $5.2 billion (as per LTM June 2015), pose major challenges as they are two of AstraZeneca's biggest-selling and most profitable drugs.

However, the quality and breadth of its drugs pipeline has markedly improved in the last three years. Moody's currently estimates that at least four of its late-stage pipeline assets or line extensions - AZD 9291, MEDI4736, PT003 and Brilinta - have blockbuster sales potential. The rating agency also foresees high revenue potential for Trememilumab, Movantik, Benralizumab, and Lesinurad.

"We believe that AstraZeneca will emerge stronger after its patent cliff than it was 12 to 18 months ago, assuming that it continues to deliver on its late-stage pipeline and product launches," adds Mr. Duquesnoy.

In terms of costs reductions, the company's restructuring costs should fall markedly in 2015 and beyond. As these restructuring costs are very material in relation to the group's cash flow from operations (CFO), CFO will automatically increase as these outflows fall away.

Similarly, AstraZeneca has already made headway in reducing its core selling, general and administrative (SG&A) expenses, which, as a percentage of revenues declined for the third consecutive quarter, by 1% in Q2 2015. Moody's considers AstraZeneca's tight management of these expenses as the key lever to control the group's credit profile over the next three years.

Subscribers can access the report at: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1002578

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