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* Soriot's bolt-on M&A strategy helps fill strategic gaps
* No quick fix as patent losses set to shrink sales, profits
* Heavy science focus good for staff morale at drugmaker
By Ben Hirschler
LONDON, Sept 30 (Reuters) - Fixing ailing drugmakerAstraZeneca remains a work in progress for ChiefExecutive Pascal Soriot, with sales and profits still headingfirmly downhill after his first year in the job.
Yet confidence is slowly building that he may have the rightlong-term prescription for the British group, helped by somelessons learnt at his past employer Roche.
Soriot has shunned a big acquisition as a way to plug thedeep revenue gap left by multiple patent expiries, optinginstead for a string of smaller deals, a reboot of the drugpipeline and a shake-out of top management.
His goal of "achieving scientific leadership" may fall shorton the kind of hard financial targets that some investors wouldlike, but it has resonated with many younger researchers whofelt the group was drifting, following past R&D setbacks. It hasalready accelerated work on several promising cancer drugs.
"When I talk to people in the industry about AstraZeneca, itis a place where people now want to go and work - and thathasn't been true for about 10 or 15 years," said Dan Mahony, afund manager at Polar Capital, who has raised his stake in thecompany in the past year.
Reversing AstraZeneca's poor record in drug research isSoriot's top priority, so staff morale matters. Rival executivessay he is borrowing some ideas from Switzerland's Roche.
Roche - particularly its Genentech biotech unit, whichSoriot used to head - is renowned for its R&D successes,something Soriot hopes to replicate with a $500 million move ofAstraZeneca operations to Cambridge, a British science hub.
"I see him implementing some of the same strategies thathave been adopted by Roche, in terms of focusing on highlyinnovative products and taking risks," said one senior Rocheinsider.
"You have to have patience when your company is goingthrough these kinds of adjustments."
Soriot told Reuters in June that turning around the companywould take three to four years.
Industry analysts predict sales and earnings will continueto fall to 2017 or beyond, since a big hit is still to come whentop-selling cholesterol fighter Crestor loses patent cover in2016.
AstraZeneca's problems are not unique, but its patentexpiries are bigger and longer-lasting than at rivals such asBritish peer GlaxoSmithKline. Its pure focus onprescription drugs also means it lacks the buffer ofconsumer-focused sales seen at the likes of GSK andSwitzerland's Novartis.
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Things could be different with a large acquisition thatmight bring in new revenue overnight - a strategy adopted bysome other drugmakers, such as Pfizer, faced withsimilar sales cliffs. Soriot, however, says such a deal isunlikely, though he hasn't ruled it out altogether.
Since taking over on Oct. 1, 2012, the one-time Frenchveterinary surgeon has spent a modest $2 billion on buyingcompanies like heart drug firm Omthera, respiratory medicinespecialist Pearl and Amplimmune in oncology.
That is far below the $20 billion analysts believe he couldafford, and the cautious approach is cheered by shareholders whoworry about the risk of wasting cash on over-priced deals.
"He is focusing on the appropriate areas like bolt-on ratherthan major acquisitions, restructuring management and shiftingR&D to Cambridge," one of AstraZeneca's 30 largest shareholderssaid, speaking on condition of anonymity.
Proving the value of this strategy will take time, however.
"The M&A has looked okay, but it is still too early to sayif it is really going to shore up the pipeline," a secondleading investor said.
In the meantime, Soriot also has his work cut out trying tobolster AstraZeneca's existing drugs business, where he hasraised investment in new heart drug Brilinta, in the hope of apick-up in sales towards the end of this year.
Investors, though, are not banking on a quick turnaround foreither Brilinta or the company's important diabetes business.
Emerging markets, another key growth driver, are also achallenge as economies slow and China becomes a far moredifficult market following an anti-corruption drive that hasdisrupted drug sales.
China is an especially important market for AstraZeneca,representing some 7 percent of the group's total revenue.
Given its well-known problems, investor expectations forAstraZeneca are the lowest among all major drugmakers, with theshares trading at just 10 times this year's expected earnings,against more than 16 times for Roche.
But they do offer a chunky 5.5 percent dividend yield as aconsolation for those investors who are betting such "broken"drug stocks have a way of mending themselves, as Bernsteinanalyst Tim Anderson says has often been the case in history.
"I'm patient," said Polar Capital's Mahony. "It might takethree years, but I'll get paid the best part of 6 percent in adividend while I'm waiting."
