Analyst lays out 'doomsday scenario' for federal probe of AstraZeneca's Brilinta

Much as it tried to bury the information in its Q3 release, AstraZeneca's terse, unexplained note that the U.S. Justice Department has triggered an investigation into its controversial late-stage study of Brilinta has stirred some deep-seated concerns among longtime observers of the company. And Bernstein's Tim Anderson has spelled out a worst-case scenario for the pharma giant that can only increase the unease over AstraZeneca's future as a new captain attempts to right a badly listing ship.

AstraZeneca ($AZN) is stonewalling analysts on what exactly triggered the federal probe. But Anderson zeroes in on the likely cause: pointed criticism from a small group of outside experts who have been suggesting that the data produced in a major part of the Phase III study of Brilinta was rigged. Government investigations of Big Pharma companies have been more the norm than the exception, as Anderson notes today in a review for investors. But IF it's about rigged data and IF the feds conclude that someone was fixing the results to make the drug look more effective than it was, we're not talking about the usual heavy fines. Writes Anderson: "it is in the realm of possibilities that something really bad could happen to Brilinta/Brilique."

This federal probe, writes Anderson, could force the drug off the market. That threat is still considered low risk, he emphasizes, but with consensus models projecting $1.6 billion in sales for a drug with a 70% margin, the doomsday scenario would claw out 15% of the company's expected profits. And that's something no investor should overlook.

Anderson has taken a skeptical view of AstraZeneca's R&D efforts since CEO Pascal Soriot clearly spelled out the company's turnaround plan. Even as the company has pursued a frenzy of buyouts and licensing pacts aimed at swelling one of the industry's weakest late-stage pipelines, Anderson has been unable to muster much enthusiasm about the company's near-term prospects, and increasing generic competition will hit hard. A turnaround in R&D will take years, Anderson believes, and it doesn't help that some of AstraZeneca's recent pipeline deals are far from cutting-edge plays.

"At present, it remains difficult to point to any single source of unappreciated fundamentals, but at least the hiring of Pascal Soriot presumably rules out AZN doing any really bad, low-quality M&A deals, in our opinion," notes Anderson. "Some of the recent small deals AZN has done fill strategic gaps in AZN's existing therapeutic areas, but they are far from representing "high science." The Amplimmune and Spirogen assets, while more interesting, are probably too early to realistically matter to most investors but they supplement nicely the company's in-house immuno-oncology programs such as MEDI7436 (PD-L1) and tremelimumab (CTLA-4). There is some degree of risk to 2013 EPS estimates as management spends to rebuild the businesses – this was hinted at during Q2 results and has now been seen in Q3 results. From a pipeline standpoint, there is not likely to be much happening in the near-term that is pivotal."