Astra will miss target as US drug sales fall

As its blockbuster Losec is set to come off patent in America, AstraZeneca may find that only a merger can cure a revenue headache
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The Independent Online

AstraZeneca, the Anglo-Swedish pharmaceutical company, yesterday dropped its promise to deliver double-digit sales growth this year after a slowdown in sales of Losec, the heartburn treatment which is the world's best-selling drug.

AstraZeneca, the Anglo-Swedish pharmaceutical company, yesterday dropped its promise to deliver double-digit sales growth this year after a slowdown in sales of Losec, the heartburn treatment which is the world's best-selling drug.

The setback comes months before Losec loses its United States patent protection. As the company braces itself for an assault on a drug that accounts for 40 per cent of its sales, is it possible that AstraZeneca may have to follow Glaxo Wellcome and SmithKline Beecham and pursue a merger?

AstraZeneca's warning yesterday that group sales would be up only 8 per cent this year - against a previous target of at least 10 per cent - does not sound catastrophic, especially as AstraZeneca has not dropped its double-digit profit growth target. But it is a blow for a company that was trumpeting the double-digit sales growth target as recently as August. Tom McKillop, chief executive, had spoken then of "good prospects of enhanced sales growth". The key message was "enhanced confidence", he said.

The cause of yesterday's warning is growing competition in the giant market for ulcer and heartburn treatments, a market supported by the increasing incidence of stress and the popularity of rich foods.

New drugs such as Johnson & Johnson's Aciphex and American Home Products' Protonix have been taking market share from Prilosec, as Losec is known in the US. This is happening faster than forecast, and a decline in AstraZeneca's US healthcare sales saw the group's third-quarter results, out yesterday, fall short of expectations. It appears Losec's problems are not confined to the US - the group's warning came despite Mr McKillop saying he anticipated a significantly more favourable performance from the US in the fourth quarter.

About 50 million Americans - 40 per cent of adults - suffer from heartburn, so there should be room for several players. AstraZeneca's problem is that is highly dependent on this particular market.

Prilosec and Losec accounted for 42 per cent of its business in the third quarter. With their sales rising by only 4 per cent in constant currencies, to $1.57bn (£1.04bn), the group's entire healthcare portfolio could muster only a 3 per cent rise in turnover, to $3.8bn.

The uncertainty created by Losec and its impending US patent expiry makes it hard for the City to assess AstraZeneca's prospects. Last year the stock came under pressure amid fears that cheap generic versions of the drug - priced some 80 per cent lower - would blow a huge hole in profits when the US patent expires next year. Losec sales tumbled in Germany after it lost patent protection there.

But the shares have recovered this year, thanks to punchy short-term forecasts for Losec and the expectation that Nexium, a superior version set to replace the drug, will comfortably step into the breach.

Both these expectations now look shaky. Near-term Losec sales forecasts were cut yesterday, sending the shares down 80p to 3,170p. More worryingly, it appears the heartburn market is becoming more price-sensitive - bad news for Nexium. "We were seeing signs of a slowdown in Prilosec sales at the half-year stage, but are now seeing greater than expected price competition," Jon Symonds, the chief financial officer, said yesterday.

AstraZeneca has chosen to lose market share rather than cut Losec's price for fear of undermining the price of Nexium when it is launched in the US next year. The challenge now is to price Nexium in a way that generates revenues comparable to Losec's when Losec's active ingredient becomes widely available at a big discount. Mr Symonds said AstraZeneca would probably pursue the same policy in the US as in the UK, where Nexium has been launched at the same price as Losec. But will doctors prescribe Nexium when cheap generic Losec works very well?

"It's hard to see how AstraZeneca can position Nexium against competitors so it can meet the high expectations investors have for it," said Marc Booty, an analyst at ABN Amro.

If Nexium fails to replace Losec revenues, Mr McKillop will doubtless come under pressure to find a merger partner. Glaxo Wellcome dropped its double-digit sales target in July last year and announced a merger with SmithKline Beecham five months later.

It is difficult to see the rest of AstraZeneca's portfolio compensating. Yesterday's results showed sales of Zestril, a cardiovascular treatment and the group's second-best seller, falling 5 per cent to $299m amid stiffening generic competition in Germany. The group achieved strong growth only in its smallest-selling products. Sales of Atacand, a cardiovascular drug, grew 76 per cent to$72m; Rhicort, a respiratory compound, was up 39 per cent to $51m; and Seroquel, the schizophrenia treatment, advanced 35 per cent to $89m.

AstraZeneca has other possible blockbusters up its sleeve, notably its "superstatin" cholesterol-lowering drug, but these are some way from launch. In the meantime it must find a way to meet its tough 27 per cent margin target, bravely reiterated yesterday.

If this target collapses, calls for a merger will be hard to ignore. AstraZeneca's strengths in cancer and cardiovascular remedies are the very weaknesses of the future GlaxoSmithKline. Many think a combination of Britain's pharmaceutical majors would make sense. "The marketplace is getting even more competitive," said HSBC's Martin Hall. "We could see four players commanding half of the US market within four years."