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Andy Wong/Andy Wong/Associated Press

From the FT's Lex blog

The bottom line is usually the one to watch. But not for AstraZeneca. On Thursday, the British drug maker announced a 7 per cent increase in earnings per share before exceptional items. However, this was merely an accounting tweak related to share buy-backs and the disposal of assets. When investors saw that revenue and operating profit before exceptionals fell 2 and 4 per cent respectively, they wiped 4 per cent from the share price.

Chief executive David Brennan knows he has a problem.

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Top-selling anti-cholesterol drug Crestor now has to fight against generics, namely Pfizer's Lipitor, which went generic late last year. And AstraZeneca's third-highest-selling drug Seroquel will lose patent protection in both the U.S. and Europe this year. As a result, revenues will decline about 9 per cent in 2012, estimates UBS.

To prop up earnings, Mr. Brennan is rejigging his balance sheet. The company will buy back $4.5-billion worth of shares this year. By 2013, its current net cash position of about 10 per cent of equity will turn into a net debt position of about 2 per cent. If these share buy-backs continue, investors should be worried. AstraZeneca has not diversified into areas such as consumer healthcare, so will live or die based purely on its drug discoveries. Adding further leverage to its inherent operational risk could be dangerous.

Mr. Brennan's other initiative is to cut about 12 per cent of his work force. The $2-billion a year this will save is equivalent to almost one-sixth of last year's profit before tax. But the worry is that AstraZeneca's ability to discover new drugs will be compromised. About one-third of the job cuts will come from research and development, and exactly why Mr. Brennan believes this will make AstraZeneca "more innovative" is unclear. Investors should hope he has not sacrificed long-term rewards for a short-term earnings boost.

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