Business Risks in the Pharmaceutical Industry based on AstraZeneca

Imagine working in a business that is 50% riskier than any other (KPMG, 2005), where government regulations threaten to wipe out $32-42b of potential industry revenues in the next few years (Rhodes and Mulder, 2005), more class-action suits will be filed against companies in the same industry (Griffith, 2004), and worst of all, animal rights and environmental activists are becoming more aggressive (BBC, 2005). These indeed are trying times for the pharmaceutical industry, of which AstraZeneca is a part. AstraZeneca (2005, pp. 155-157) identified the company’s business risks. Loss or expiration of patents, marketing exclusivity or trademarks negatively affects the company’s pricing and sales. For example, sales of best-selling drugs Losec/Prilosec, Zestril, and Nolvadex fell significantly in 2004 due to patent expiration (drugs developed by the company) and anticipated loss of marketing exclusivity (drugs developed by other laboratories but marketed by AstraZeneca). Manufacturers of generic pharmaceutical products in countries like Asia and Latin America are challenging the company’s patents and trademark protection.
Exchange rate fluctuations are a major concern for a company with headquarters in the U.K., operations in 45 countries, 64,200 employees of whom 60% are based in Europe (AstraZeneca, 2005, p. 16), 49% of sales from the U.S. and Canada, and 30 manufacturing sites in 20 countries buying and selling raw materials from different sources using a variety of currencies (AstraZeneca, 2005, p. 14), although they are minimizing this to avoid currency fluctuation effects. The company reports in U.S. dollars, so a stronger dollar will have a negative effect on its bottom line due to lower dollar revenues on sales in foreign currencies. Although AstraZeneca mitigates currency risk, it does not “seek to remove all such risks (AstraZeneca, 2005, p. 155).” The company, with a $1.1b fixed interest rate debt, is exposed to interest rate risk due to fluctuations in market interest rates. By converting fixed interest debt to a floating rate (AstraZeneca, 2005, p. 91), every one hundred basis point (one percent) rise in interest rates means the company pays $11m more.
Uncertainties of developing new products from the Research and Development (R&amp.D) pipeline affects not only AstraZeneca but the whole pharmaceutical industry, which spends an estimated $1 billion over at least ten years to launch a new drug (KPMG, 2005, p.6), which includes losses incurred in developing drugs that do not even reach the market. Companies need to launch new drugs to replace those with expiring patents, marketing exclusivity or trademarks (Bate, 1997, p. 230-231).
AstraZeneca is the 9th largest pharmaceutical company in the world (Fortune, 2005) and competes with bigger companies with more resources for R&amp.D and marketing. It also competes with biotechnology companies developing similar products.