AstraZeneca Pipeline Must Deliver

We currently rate shares of AstraZeneca PLC ( AZN - Analyst Report ) a Hold with a $38 price target. The company is facing a number of challenges as it enters 2009, most notably generic competition to Toprol-XL, Nexium, Casodex, and Pulmicort.

The just-announced increase to the cost-cutting program will aid EPS in the near-term, but we do not believe this will be enough to compensate for continued revenue deterioration beyond 2010. Atacand and Arimidex will both be subject to generic competition in 2010, then Seroquel and Symbicort lose U.S. patent protection in 2011 and 2012, respectively. This puts significantly more pressure on the company to commercialize its late-stage pipeline.

The MedImmune acquisition significantly beefs up the company's pipeline, which should aid in this effort through its sizable biologics platform. We expect management to continue to look for additional licensing and outsourcing opportunities in order to reduce operating leverage and offset some of the softer pricing due to generic competition.

Financial leverage should also come down as the company expects to reduce total debt by $3 billion to $4 billion over the next two to three years. The company also suspended share repurchases for 2009. This should make the company more nimble and enable it to use cash flow to reinvest in the business. Deleveraging the balance sheet should also help AstraZeneca weather the tightening in the credit markets or a prolonged downturn in global economy. We also believe that the company, with a healthier balance sheet, could tap the credit market to finance a large acquisition.

As far as the pipeline, the company currently has ten projects in phase III trials or filed for registration. Their goal is to file up to three new license applications per year and bring at least two new drugs to market per year through 2010. AstraZeneca expects to make four regulatory filings in 2009; Zactima, PN-400, Brilinta and Crestor-TriLipix. We note, however, that Zactima was pushed back from an expected filing during 2008.

Although we believe the company is faced with some significant hurdles in the next few years, we think that AstraZeneca offers a compelling case for out-performance given the low expectations. We think the shares trade a relatively attractive level given the potential that management can grow long-term EPS through additional deal-making and cost-cutting. We rate the shares a Hold with a $38 price target, representing 7.0x our 2009 EPS forecast of $5.41.