AstraZeneca Licenses Ardelyx's Drugs

AstraZeneca (AZN - Analyst Report) recently announced that it has entered into a global exclusive licensing agreement with Ardelyx for the latter’sNHE3 inhibitors. The deal includes Ardelyx’s lead candidate, RDX5791, an orally administered NHE3 sodium transport inhibitor. RDX5791 is being developed for constipation-predominant irritable bowel syndrome/IBS-C (phase II) and the prevention of sodium overload in patients with end-stage renal disease (ESRD), chronic kidney disease (CKD) and heart disease (completed phase I).

As per the terms of the agreement, AstraZeneca will make an upfront payment of $35 million and milestone payments of $237.5 million, on the achievement of launch and commercialization targets, to Ardelyx. Additionally, AstraZeneca will pay tiered double-digit royalties on net sales of the candidates developed under the collaboration.

While Ardelyx will conduct the phase II trials, AstraZeneca will bear the subsequent development costs. Meanwhile, Ardelyx also has an option to co-promote RDX5791 in the US, subject to certain pre-specified conditions.

Apart from the licensing agreement, AstraZeneca was also in the news recently when it suspended its share repurchase program. The company has repurchased shares worth $2.3 billion during 2012. The company was targeting net share repurchases of $4.5 billion in 2012. The termination of the share repurchase program will not affect the 2012 earnings guidance of $6.00 - $6.30 per share.

This step was taken by the new Chief Executive Officer (CEO) Pascal Soriot, who joined AstraZeneca in August 2012 from Roche Holdings Ltd. (RHHBY) to maintain flexibility while he reviews AstraZeneca’s annual strategy.

Our Recommendation

We are encouraged by AstraZeneca’s focus on the high-potential emerging markets. We are pleased with its efforts to expand its pipeline and portfolio through mergers and acquisitions.

The Ardelyx agreement, Ardea acquisition, the Amgen (AMGN - Analyst Report) collaboration and the expansion of the diabetes alliance with Bristol-Myers Squibb (BMY - Analyst Report), all represent the company’s efforts in this direction. We expect more such deals in the near term.

However, we remain concerned about the generic competition faced by the company’s key products. In 2011, the company lost revenues worth almost $2 billion to generic competition. The weak late-stage pipeline at AstraZeneca coupled with slow Brilinta uptake also bothers us.

We currently have a Neutral recommendation on AstraZeneca. The stock carries a Zacks #3 Rank (Hold rating) in the short run.