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AstraZeneca's tarnished R&D image haunts its fight against Pfizer

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Up to now about the only reason any serious analyst could justify Pfizer's ($PFE) interest in AstraZeneca's ($AZN) pipeline centered on its early-stage work in immuno-oncology. But the U.K.'s Sky News city editor says that the company will be highlighting all of its "hidden gems" in long-term development as a solid reason why investors should give Pfizer's $106 billion buyout offer a pass.

The longterm value of AstraZeneca is something that its execs have been selling hard for some time now. The CEO and R&D directors have insisted that after inking a long string of R&D deals, AstraZeneca has turned the corner. And now they evidently plan to argue this week that the best longterm value can be built with the experimental projects now in the clinic.

"It will be about showing the market that it has to think about the longer term and the hidden gems in AstraZeneca's pipeline," a company source told Sky News about AstraZeneca's strategy.

The problem is that so far that strategy hasn't worked very well. Longtime analysts at the company have never been convinced that AstraZeneca has come up with the kind of development programs that can quickly slow and then stop the revenue plunge now taking shape in the face of crushing generic competition to its top drug franchises, Seroquel, Nexium and Crestor.  

Today, AstraZeneca should hear whether its bid to get an approval for epanova, acquired in the $443 million Omthera buyout, is successful. But at best it would be heading into a crowded market for fish oil therapies. Longer term it's looking to market a combination of epanova and Crestor to help save that franchise.

"When blending together its eroding base business and its future pipeline product flow, our model still shows declining revenues that span 2014/2015/2016/2017," Bernstein's Tim Anderson wrote recently. "It is not until 2018 that growth returns, and the growth only seems modest at that."

The previous CEO, David Brennan, was cut loose after continuing to sound confident about a pipeline that had become widely ridiculed for repeated failures. And any attempt to spin gold out of high-risk experimental drugs, a field Big Pharma in general has been bedeviled by, is likely to spur a considerable amount of skepticism. While immuno-oncology is cited repeatedly, AstraZeneca is trying to come up behind the leaders: Merck ($MRK), Bristol-Myers Squibb ($BMY) and Roche ($RHHBY). That's not an enviable position to be in, for any market.

No one knows where the bottom is at AstraZeneca, and so investors have been advised to proceed with extreme caution. By downsizing its R&D work in the U.K., AstraZeneca may also have made it easier for Pfizer to win this takeover battle. But after initially counseling investors to be patient as it works a turnaround, you can expect considerable confidence from CEO Pascal Soriot as he highlights his buried treasure.

Pfizer, which released disappointing Q1 numbers today, has an image problem as well. The pharma giant's R&D rep is primarily built on its ability to carve billions out of its research budget after big buyouts. And now it's been working around the clock to overcome its draconian image and reassure the U.K. that it wants to keep a large R&D group in the country.

R&D may be the big sticking point right now, but it's AstraZeneca's favored tax status and sure-fire ability to beef up the bottom line that's driving this deal for Pfizer, which has a large stockpile of overseas cash to complete the buyout.

- here's the story from Sky News

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