News of Angus Russell’s departure comes as Britain’s second-largest drugmaker reports a 19% slide in third-quarter sales
The boss of Shire Pharmaceuticals, Angus Russell, is stepping down next April after five years at the helm and will be replaced by a senior Bayer executive.
Russell, 56, will leave at the annual meeting after 13 years with the drugs manufacturer, during which he turned the company from a small specialist firm into a FTSE 100 company, focused on attention deficit hyperactivity disorder medicines, a lucrative market in the US. Having spent 32 years in the pharmaceutical industry, including at AstraZeneca and ICI, he said he now wanted to spend more time with his family, as well as pursue his charitable interests and non-executive directorships. He got married for the second time last year, leaving him with responsibility for four young children.
Russell will be replaced by Flemming Ornskov, chief marketing officer of Bayer’s speciality pharmaceuticals business with sales of more than €10bn in Europe, China and the US. “He has impressed investors in this role, where he was responsible for the rollout of [blood-thinning pill] Xarelto,” said analysts at JP Morgan Cazenove. Ornskov previously worked for Merck and Novartis, as well as biotech firms.
Analysts at Cowen were surprised by Russell’s departure, noting: “The explanation given is the business is expanding further and more aggressively into international markets in which Ornskov has significant experience. This appears to be sound rationale.”
The news came as Shire’s third-quarter sales growth disappointed due to a cut-price version of one of its top-selling ADHD drugs coming onto the market. Missing analysts’ expectations, sales at Shire grew by 4% to $1.1bn. Sales of Adderall XR dropped 32% to $102m, which partially offset the 24% rise in sales of Shire’s new lead product Vyvanse to $247m. The drug will be called Elvanse when it is launched in Europe.
Mick Cooper, analyst at Edison Investment Research, said: “Shire’s growth has slowed because of generic competition to Adderall XR showing that it does face some of the issues facing big pharma. However the underlying growth remains strong and Angus Russell will be leaving Shire in a very strong position.”
Patent expiry on best-selling medicines also continues to haunt AstraZeneca, Britain’s second-largest drugmaker, which reported a 19% slide in third-quarter sales.
The company said it was hurt by the loss of exclusivity for Seroquel IR, its blockbuster antipsychotic treatment, as well as high blood pressure drug Atacand, antibiotic Merrem, cholesterol drug Crestor in Canada and heartburn pill Nexium in Europe. Revenues fell to $6.7bn (£4.15bn) in the third quarter from $8.2bn a year ago.
New chief executive Pascal Soriot, who joined from Roche and suspended share buybacks on his first day in the job, said buying in new treatments would be an important way of rebuilding the pipeline. He added that the recently launched heart drug Brilinta had the potential to do “far better”, admitting that AstraZeneca had failed to make the most of it.
The Frenchman replaced David Brennan, who was ousted by shareholders in the spring amid growing concern about AstraZeneca’s thin pipeline of new drugs. Soriot said his priority was to “restore the company to growth and scientific leadership” and promised to unveil the results of a strategy review to investors at the end of January.
The decision to halt share buybacks is seen as a sign that AstraZeneca is on the prowl for mid-sized to larger acquisitions, with speculation circling around UK group Shire and US firm Forest Laboratories.
“AstraZeneca’s key issue remains its shrinking sales line … impacted heavily by generic losses and with little offset from new products,” said Mark Clark at Deutsche Bank.
“The results, in our view, appear to put the company on track only to meet the bottom end of its guidance for a low-to-mid teens sales decline for the year and to deliver core earnings per share in the lower half of its $6-6.30 guidance range. This is of little consequence, however, given the overriding importance of the strategy review which is expected to be unveiled in early 2013.
Astra’s share price is in the doldrums while bond investors are happy to lend to it at a low rate – they can’t both be right
Pascal Soriot, AstraZeneca’s new chief executive, knows how to make a splash. On his first day in the office after his arrival from Roche, Soriot suspended this year’s $4.5bn (£2.8bn) share buy-back programme with only half the cash spent. Removing a perceived short-term prop to the share price tends to go down badly, at least with investors who are focused on such things. But suspension looks the right decision for the company’s long-term health.
In broad terms, Soriot’s task at AstraZeneca is clear: he has to use the abundant current cash flows to reinvent the business for the time when patent expiries of big-selling drugs bite. And that time starts now: first-half revenues were down 15%. So critical decisions have to be made on how much cash to allocate for internal research on new drugs (probably not much more than currently) and how much for development of drugs that arrive via in-licensing and partnership deals (probably a lot more). But buy-backs are a distraction until that debate is settled.
In this context, it is intriguing to note the share market’s and the bond market’s wildly different assessments of the odds on a successful reinvention of AstraZeneca. The shares are priced at a miserable 7.5 times this year’s expected earnings and carry a dividend yield of 6%, which is the sort of rating associated with companies whose survival for the next decade or so is less than certain. Yet AstraZeneca last month issued a 30-year $1bn bond carrying an attractive (for the borrower) rate of 4%, suggesting fixed-income investors have no such doubts. Either the share price or the bond price must be wrong.
TUC figures show average retirement savings of top UK executives are now 24 times size of occupational pension
Directors of the UK’s largest companies have increased their retirement savings over the past year by an average of £400,000 to £4.3m, according to the TUC’s tenth annual PensionsWatch survey.
The boost to executives’ pensions gives each director included in the survey an average pension of at least £240,000, said the TUC.
The largest pot was amassed by Sir Frank Chapman, the 59-year-old chief executive of gas company BG Group who has a pension worth £19.4m, which could give him an income of £1m a year in retirement. Peter Brennan, who retired as the boss of pharmaceutical firm AstraZeneca in June, left the company with a retirement income of at least £978,000.
PensionsWatch, which analyses the pension arrangements of 351 directors from FTSE 100 companies, found the average director’s pension has increased faster than most ordinary pension schemes and is now 24.4 times the size of the average occupational pension (£9,828).
Brendan Barber, the TUC general secretary, said: “Companies continue to chip away at the pensions of ordinary workers while awarding their directors solid platinum pensions worth hundreds of thousands of pounds a year.
“Top executives already enjoy huge pay packages that go up every year irrespective of the success of their company or the state of the economy. These salaries alone guarantee lucrative pensions so the generous packages uncovered are an insult to the vast majority of workers who are denied such favourable terms.”
The National Association of Pension Funds (NAPF) said it was concerned that executives pensions were outstripping those of ordinary workers.
Darren Philp, director of policy, said: “It follows that people who earn more will accrue bigger pensions. But investors may have important questions about fairness if the pensions of directors are disproportionately more generous than those of other staff.
“More transparency is needed around boardroom pensions. Boards need to be open about their pension arrangements so that shareholders such as pension funds can hold top management to account.”
Workers who rely on defined contribution (DC) occupational schemes depend on increases in the value of shares and other assets, but saw little improvement over the past year. The euro crisis and recessions in the UK and across the continent have hit stock markets and property markets, limiting the scope for investment growth.
Barber added: “The gap between the pensions of top directors and everyone else does not just reflect the excess of the super-rich, but shows just how poor pensions are for ordinary workers in the private sector, where more than two out of three get no employer pension help.”
The survey found that companies contributed £144,508 on average to directors’ DC schemes. The average employer contribution rate to a director’s pension as a percentage of salary is 22%.
“This is nearly four times the size of the average employer contribution rate (6%) in DC pensions. The figure is also more than seven times the size of the maximum employer contribution required under the new automatic enrolment regime that will start being phased in for all workers from next month,” the report said.
Investors no longer qualify for the latest dividend payment, so index odds-on to get knocked
It is a huge day for shares going ex-dividend – the date after which investors no longer qualify for the latest dividend payment – so the fact that the FTSE 100 is trading down 35 points at around 5806 effectively means it is flat-lining.
Reuters predicted that the dividend deadline would shave 26.41 points from the blue chip index today, and it has been trading pretty well in that range all session.
Shares tend to fall when they go ex-dividend as the payout is subtracted from the share price. There are a number – such as Standard Chartered and AstraZeneca – that also have corporate news today, and the roll call of FTSE 100 stocks going “ex-divi” are:
Royal Dutch Shell
Company hopes to develop drugs for Parkinson’s, Alzheimer’s and other neurodegenerative diseases after striking US deal
AstraZeneca is pinning its hopes on developing new treatments for Parkinson’s, Alzheimer’s and other neurodegenerative diseases as it tries to refill its threadbare pipeline of medicines.
Britain’s second-largest drugmaker has acquired a portfolio of experimental compounds from private US biotech Link Medicine for an undisclosed sum in a deal announced on Thursday which it hopes will help it come up with groundbreaking treatments for brain diseases – an area that other pharmaceutical companies have pulled out of. AstraZeneca also agreed a collaboration with American academic groups to study a major risk factor for Alzheimer’s, the apolipoprotein E4 genotype.
The company has given itself three years to make its new 40-strong neuroscience division work, largely relying on external collaborations and partnerships. Based in the academic hubs of Cambridge, US, and Cambridge, UK, but away from AstraZeneca’s other campuses, the aim is to keep neuroscience free from internal bureaucracy.
Up to 900 neuroscientists have been laid off and half the brain disease products in development scrapped to make way for the new “virtual” approach.
Menelas Pangalos, who heads Innovative Medicines at AstraZeneca, described the brain research unit as a “biotech that doesn’t have to sell its asset when it gets to Phase III”, referring to the crucial last test phase for medicines.
But the company will not apply this approach to other disease areas. “There are things we will learn from this that will inform other areas as well, but we won’t go virtual with others,” said Pangalos. “The reason we’re doing it with neuroscience is it’s exceptionally high risk. If you were to do this with infectious diseases, you’d struggle. Our infection group research is better than what the academic community are doing.”
Pangalos also praised Britain for “punching above its weight scientifically”, giving researchers access to the NHS and hospitals, but said ethical approvals and regulatory hurdles in Britain slowed down clinical trials compared to other countries.
AstraZeneca hopes to come up with 8 to 11 new drugs in late-stage (Phase III) clinical trials over the next three years – in areas ranging from breast cancer to asthma – after reorganising its research operations into smaller, nimbler units. Without giving more figures, it said that 80% of the research budget was now being allocated on a flexible, meritocratic basis. About 60% of its research leaders were hired in the last couple of years.
Like rivals, the group has ditched its focus on quantity over quality. “In the past, if you developed 30 drugs you’d hope to get 3 products out of it,” said Pangalos. In addition, there has to be a strategy for future reimbursement by health authorities for every medicine that is going into Phase III trials.
AstraZeneca has also set up a New Opportunities division, to find new uses for molecules that have been discarded elsewhere in the organisation. A collaboration with the UK’s Medical Research Council signed last October yielded 106 proposals for 22 compounds, which were whittled down to 25 that will receive funding.
There are major challenges for the industry as a whole, with 95% of compounds going into clinical trials never making it to market. In late-stage clinical trials, which cost millions of pounds to conduct, half of all drugs fail, while a decade ago the industry was enjoying a success rate of 70% to 80%.
A $7bn joint deal to acquire diabetes drug developer Amylin with AstraZeneca’s US partner Bristol-Myers Squibb last week boosted the standing of Simon Lowth, AstraZeneca’s interim chief executive, who took over after David Brennan was ousted by a shareholder revolt.
Investors shrug off disappointing global manufacturing data to push index to best level since start of May
As markets moved higher again, still basking in the positive mood which following last week’s European summit, one of the day’s big risers was Soco International.
The oil explorer and producer rose 20p to 309.4p – a near 7% increase – after it paid $95m to take full control of a key asset in Vietnam. It has bought the 20% minority interest in Soco Vietnam from Lizeroux Oil & Gas, at what it said was an attractive price compared to other deals done in the country. The business includes stakes in the Ca Ngu Vang and Te Giac Trang fields, with a second production platform at the latter expected to start in the middle of this month or early August.
The deal needs shareholder approval since Lizerouz’s major shareholder is Hai Hoang Nguyen, who is also a director of Soco Vietnam. Analysts at N+1 Brewin said:
We see the deal as good value for the company, while also giving it complete control over its flagship assets. Furthermore, the deal provides a solid underpinning for the value in Soco’s portfolio. Stripping out the minority interest and the cash consideration from our net asset value, we move our price target from 359p to 400p. We retain our buy recommendation.
Importantly the acquisition will enable Soco to assume complete management control of Soco Vietnam; the deal could also been seen as a sensible tidy up ahead of any potential sale of Soco Vietnam.
Numis was also positive, and pointed out that Soco could be a potential bid target, but perhaps not immediately:
We recognise that Soco’s concentrated Vietnamese resource base may be of interest to a strategic buyer, however, we believe a potential acquirer is likely to wait until there is greater certainty on TGT production potential, ultimate recoverability and is likely to use a more conservative oil price assumption than Numis forecast long term $100 a Brent barrel.
Overall the FTSE 100 finished 69.49 points higher at 5640.64 – its best close since 4 May – on continuing optimism following last week’s EU summit, which agreed to provide support to struggling Spain and Italy. A number of disappointing PMI manufacturing indices from China, Europe, the UK and – especially – the US took some of the shine off shares, but prompted talk of more economic stimulus to boost the global economy.
Banks were among the gainers. Barclays added 5.55p to 168.4p after chairman Marcus Agius announced he was stepping down in the wake of the libor-fixing scandal, a move which seemed to ease some of the pressure on chief executive Bob Diamond for the moment. Other banks also moved higher, with Royal Bank of Scotland rising 3.7p to 219p and Lloyds Banking Group ending 0.385p to 31.485p.
AstraZeneca added 29p to £28.82, after it partnered with US group Bristol-Squibb Myers to pay around $7bn for diabetes specialist Amylin. Bristol will buy the business, and Astra will then make a $3.4bn contribution to the deal. In return Amylin’s products and portfolio will be shared between the two.
Elsewhere GlaxoSmithKline rose 25p to £14.72. The company has agreed to pay a total of $3bn to settle a US government investigation into its marketing practices for nine products. The treatments included Paxil, Wellbutrin and Avandia, where Glaxo also pleaded guilty to misdemeanor violations. The company said the costs of the settlement were covered by existing provisions, and added that it had made fundamental changes to its procedures in the US over the last few years.
Aviva added 10.1p to 282.7p ahead of a strategic update on Thursday, with reports suggesting it could sell or close up to 15 underperforming divisions – a quarter of its business. But analysts at Panmure Gordon said the insurer had been trying to dampen down expectations ahead of the meeting:
To date we have avoided joining in the game of trying to guess what Aviva will announce at its investor morning on Thursday 5 July. We’ve now thrown in the towel, but only to say that we don’t expect any ground breaking announcements. We expect noises about cost reductions and greater efforts being made to execute the previously announced disposal programmes with the US and Delta Lloyd likely to be mentioned. We do not believe that it would be in shareholders’ best interests for the US business to be ‘given away’ in a market where currently there are few, if any, buyers.
BP rose 10.55p to 432.5p on hopes of a settlement with the US Department of Justice over the Gulf of Mexico disaster, ahead of any court case. At the same price Investec issued a buy recommendation on the oil group, although it cut its price target from 495p to 460p.
Among the midcaps, Invensys was back in the bid spotlight with reports over the weekend suggesting that China South Locomotive – majority owned by the Chinese government – was in the early stages of planning a move for the UK rail signalling and process controls group. But an Invensys spokesman said the company was not currently in any talks, and its shares came off their best levels to close 3.1p higher at 225.8p.
Halfords lost 5.4p to 223.8p after Philip Dorgan at Panmure Gordon cut his recommendation from buy to hold and his share price from 315p to 220p. He said:
We have underestimated the weakness of Halfords’ markets and this has had three implications. First, our forecasts have been too high and we have had to progressively cut them. Second, we have assumed that it would generate sufficient free cashflow to be able to maintain its dividend. Finally, we have been too optimistic on the shares’ prospective performance. When it announced, with its 2012 results, that retail sales in the opening few weeks of the new financial year had been ‘very disappointing’, we downgraded once again. However, with a forecast for free cashflow of £63m, versus the cost of its dividend at £44m, we believed that the 22p payment would be maintained.
However, we now do not expect that first quarter sales will be materially better than ‘very disappointing’, given weather patterns (April to June was the wettest on record in England and Wales) and comment from other retailers that points to a vast divergence between the winners and the losers. Unfortunately, we expect Halfords to continue to be one of the losers and we expect its markets to remain tough for quite some time. Therefore, we are downgrading our forecasts once again. We are now forecasting a pretax profit of £51m, which is a downgrade of 30%. For 2014 and 2015, we are cutting by 29% and 25% to £59m and £70m respectively.
Taking everything into consideration, we believe that the board will eventually (and reluctantly) take the decision to cut the dividend. We are assuming that it is halved to 11p.
Finally Forbidden Technologies climbed 5p to 25.5p after announcing YouTube would use its FORscene product for coverage of the London Olympics this summer.
As its drugs increasingly come off patent, Astra could look at cutting research and marketing spending
AstraZeneca has been under pressure for a while to improve its drugs pipeline by splashing out on major acquisitions, but analyst at Societe Generale are suggesting the company might do better to shrink down.
Astra recently announced that chief executive David Brennan would leave in June, following shareholder disquiet about the growing threat to its key products from generic competition. SocGen said it estimated that by 2017 some 79% of its sales would come from drugs which were no longer protected by patents:
Investors have focused on what products or companies Astra can acquire to make up for the sales and profits likely to be lost to generic forms of Seroquel, Nexium and Crestor (all generic by 2016-17), on the assumption that Astra continues with its R&D and marketing-driven business model.
Instead, said analyst Stephen McGarry , the new chief executive could consider an alternative:
We present a scenario whereby, after all the major patent expiries, Astra embraces a future where it significantly reduces R&D and sales and marketing to the same level as an average specialty pharma company, ie it becomes a specialty pharma company.
If it adopts a specialty pharma-like cost structure post the 2016 Crestor patent expiry (the last of its major patent expiries), its R&D/sales ratio could reduce from 18% to 5% and general expenses/sales from 27% to 23%. In our view, this would result in significant earnings upgrades from 2017 onwards and a return to earnings growth.
We would expect it to lead to a significant increase in net cash by 2020, from $22bn to $37bn – more than enough for the acquisitive growth of other specialty pharma companies and for an increase in its dividend payout ratio. This would increase our current discounted cash flow valuation from 2,693p to 3,169p.
Should Astra pursue such a strategy, in our view, it could also become an attractive M&A target for other specialty pharma players or large cap pharma companies.
Astra shares are currently 10p higher at 2641.5p.
Rexam, the global consumer packaging company, advises that Graham Chipchase, Chief Executive of Rexam, is to be appointed as a non executive director of AstraZeneca PLC, a company listed on the London Stock Exchange.
London’s blue-chip index dragged into the red by renewed scepticism over whether Greece can avoid a debt default
The FTSE 100 index, which was up for most of the day, finished down 0.13%, or 7.71 points, at 5892.16. Relief that Antonis Samaras, leader of Greece’s conservative New Democracy party, had signed the country’s austerity pledge gave way to renewed scepticism over whether Greece can avoid a debt default. This was fed by a Reuters report that European officials are considering delaying Greece’s second bailout until April, after the general election.
On the continent, Germany’s Dax and France’s CAC both ended the day 0.44% higher after receiving a fillip from better-than-expected GDP figures. France unexpectedly saw slight growth and Germany saw a smaller than expected contraction in the fourth quarter (while Italy declined by 0.7% and the eurozone as a whole shrank by 0.3% triggering fresh recession talk).
Banks were among the biggest risers on the FTSE after Tuesday’s sharp declines, boosted by forecast-busting numbers from French bank BNP Paribas and soothing comments from China, which said it would keep investing in eurozone debt. Barclays added 6.75p, or 2.9%, to 241.6p. HSBC, which said it would beef up its presence in China, gained 14.4p, or 2.6%, to 575.9p and Standard Chartered rose 35p, or 2.2%, to £16.20.
Defensive stocks were in the red, led by pharmaceutical group AstraZeneca, which closed down 119.5p, nearly 4%, at £28.98. Fellow drugmaker GlaxoSmithKline dropped 19p, or 1.3%, to £14.21. The pharma companies, along with oil groups BP and Royal Dutch Shell, have all gone ex-dividend – which means it’s now too late to go on the share register for the next dividend. BP shed 7.4p, or 1.5%, to 487.4p, while Shell was down 30.5p, or 1.3%, at £23.01.
Miner Anglo-American, the second-largest faller, was dragged down by a broker downgrade, falling 82p, almost 3%, to £26.90. Citigroup cut its rating to “neutral”, and moved to a bearish stance on the wider sector on a 3-6 month view.
European broadcasters suffered, with Britain’s ITV dropping 1.2p, or 1.5%, to 77.3p, as Deutsche Bank became more pessimistic about the sector in a review, citing a turn in the cycle.
The lesson of prior cycles is to own the broadcaster stocks in the early phase of any market rally. Thereafter underperformance sets in and these are not stocks to own through the cycle.
On the FTSE 250, Sports Direct shone after reporting strong third-quarter results and hinting that it could reinstate its dividend at the end of the year. The shares rose 15.2p, or 5.8%, to 278p.