New Developments in Pharma Companies: $AZN $GSK $LLY

We have previously voiced concerns over the future of AstraZeneca (NYSE: AZN), in particular its lackluster pipeline (read more on high dividend pharma stocks). Based on the company’s situation, we anticipated that it would engage in M&A activity to bolster its pipeline. Yesterday’s announcement of AZN’s $1.3 billion acquisition of Ardea Biosciences falls in line with our speculation. The acquisition adds Phase III gout drug, lesinurad. Gout is prevalent in both developing and developed markets, but lesinurad is not expected to be a blockbuster drug given the cheapness and effectiveness of allopurinol. Peak sales estimates for the drug are less than a billion. We think this is just the beginning of AZN’s acquisition spree. It would make sense for AZN to build out its cardio, respiratory, and central nervous system portfolios since it already has existing products in those areas, but we would like to see the company make a concerted effort at enhancing its oncology franchise. So in short, Ardea will not be enough to save AZN, but additional tuck-in acquisitions to compensate for the upcoming Seroquel, Nexium, and Crestor expiries. This is a critical year for the company. If it does not succeed in building out its pipeline, the company will need to reevaluate its model and cost structure.

GlaxoSmithKline plc (ADR) (NYSE:GSK)

AZN is not the only big pharma with acquisition news, last week GlaxoSmithKline (NYSE: GSK), held by Warren Buffet, Christopher James, and Ken Fisher, made a $2.6 billion offer for Human Genome Sciences (NASDAQ: HGSI). GSK is already HGSI’s main partner and CEO Andrew Witty has reiterated what he sees as a logical fit saying, “We[GSK] absolutely believe that we are the compelling owner for this business…we have the rights and the operational control for the three main assets…” If the deal goes through, GSK would fully own Benlysta (lupus), which missed expected sales by a couple million this past quarter, darapladib (cardiovascular), and albiglutide (diabetes). Investors have been wondering if a “white knight” will come in, topping GSK’s bid; we do not think that is a likely scenario given the depth and breadth of the two companies’ partnership. The more likely outcome is that GSK may up its $13/share bid but not by much. Like AZN, GSK is also trying to recover from its patent cliff and dropping Avandia sales, but its pipeline is far more promising than AZN’s on the back of positive data for dabrafenib (BRAF inhibitor for melanoma) and lung cancer vaccine this past quarter. Q1 was a disappointing one, with revenue increasing a paltry 1% q-o-q, but we are optimistic on GSK’s prospects this year.

Competitor Eli Lilly (NYSE: LLY) also reported some news with a strong Q1 with EPS of $0.92 versus consensus estimates of $0.78. Robust Cymbalta sales, better-than-expected sales of Zyprexa (LLY’s antipsychotic drug), and resulting higher gross margins (78.6%) drove the earnings beat. Zyprexa generated $563 million in revenue while the street expected $488 million. Animal Health did very well with sales of $491 million and Straterra and Forteo revenues came in on the high side. Thus, management raised 2012 guidance from $3.10 to $3.20 in EPS to $3.15 to $3.30 on increased revenue contribution from Zyprexa. In terms of pipeline updates, solanezumab for Alzheimer’s will release data this summer and JAK 1/2 for rheumatoid arthritis has potential to begin Phase III trials this year based on data from the Phase IIb study should be released at the European League Against Rheumatism (EULAR) in June. Tasisulam, survivin ASO, and SARM/Cialis have been dropped from development. We are not concerned about the discontinuation of development for these products as they were not a huge focus or upcoming catalyst for the company.

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