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AstraZeneca and WuXi Join Forces

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AstraZeneca’s (AZN - Free Report) global biologics arm MedImmune recently joined forces with WuXi AppTech, a subsidiary of China-based WuXi PharmaTech Inc. to develop and commercialize MEDI5117 in China. MEDI5117 is being developed for autoimmune and inflammatory diseases such as rheumatoid arthritis.

AstraZeneca and WuXi have formed a joint venture and will share the development and commercialization right to MEDI5117 equally in China. AstraZeneca has an option to acquire full commercialization rights to MEDI5117. While WuXi will recognize revenues earned on the basis of services provided, AstraZeneca will get milestone payments as the candidate advances.

The companies plan to file an investigational new drug (IND) application in China, following which they plan to initiate phase I studies. We note that in the US and Europe, MEDI5117 is in phase I studies.

The Chinese pharmaceutical market is growing rapidly. From being worth $10 billion in 2004, its value increased to $41 billion in 2010. According to IMS Health, the market is further anticipated to grow and would be valued at over $100 billion by 2014. AstraZeneca aims to tap this market and expand in this region.

With factors like pricing pressure in the EU and intensifying generic competition affecting sales in large pharmaceutical markets, emerging markets have become an area of focus for several companies. AstraZeneca strengthened its presence in China through the acquisition of privately-held generics manufacturing company, BeiKang Pharmaceutical Company Ltd. The recent collaboration with WuXi further emphasizes AstraZeneca’s strategy.

Our Recommendation

We are encouraged by AstraZeneca’s focus on the high-potential emerging markets and are pleased with its effort to drive the bottom line through cost-cutting initiatives and share buybacks.

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 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.

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