After revealing that patent-based deals had helped to shore up its revenues and boost core operating profits in the third quarter of 2017, AstraZeneca has said it will continue its controversial strategy of selling stakes in and offering licences to many of its innovative medicines. The apparent vindication of the Anglo-Swedish outfit’s approach may cause other pharmaceutical innovators facing steep patent cliffs to look more closely at the transactional opportunities available to them.

Following the announcement of the company’s quarterly results, AstraZeneca CEO Pascal Soriot last week reiterated his commitment to the ‘externalisation’ strategy which has seen it sell and license a significant number of innovative medicines to rival entities. A range of recent transactions – including the $8.5billion sale of a 50% stake in Lynparza to Merck and the transfer of the US rights to Duaklir to Circassia – are designed to raise revenue by transferring non-core assets to companies that can better commercialise them. “We will continue … to partner assets that are good products in areas where we don’t have a presence,” Soriot said, adding: “We think partnering is a good thing – sharing risk, knowledge and capabilities.”

These tactics form part of broader efforts to overcome significant commercial problems at AstraZeneca; 2017 has been described as a pivotal year for the company, which has recently suffered from the loss of US patent rights for blockbuster products Crestor, Seroquel and Nexium – difficulties compounded by disappointing clinical data for crucial pipeline drug, Mystic. These troubles come at the end of a period - 2011-2017 - in which an unparalleled patent cliff has seen sales fall by 50%. In this context, externalisation is intended to offset further declines in income and to free up resources for investment in high-priority developmental drugs in core areas of research.

But Soriot’s strategy has attracted a torrent of criticism, with some accusing him of selling off valuable assets to satisfy short-term targets at the expense of longer-term commercial interests. His externalisation tactics have been scrutinised in the press, forcing him to mount a public defence of his approach in a recent Financial Times interview.

But there were encouraging signs for Soriot in last week’s quarterly results, which showed that externalisation revenues are exceeding expectations. The proceeds from recent deals topped $1.35 billion (more than 20% of company turnover) in the third quarter of 2017 – considerably higher than the projected $997 million. This included higher than expected income from Lynparza, whose sales jumped by 40% to $81 million. Although direct product sales were down 3% in the three months, total revenue was 9% higher than in the same period last year. Operating profits rose 12% to $1.15 billion and core operating profit core EPS rose by 9% to $1.85 billion, partly because of recent deal making. And it was against this background – with a 2.8% share price bounce and improved annual revenue expectations – that Soriot committed to more partnerships and more patent sales.

However, these results are unlikely to dispel all the criticisms that have been made of the externalisations. It will continue to be pointed out that some notable sales have involved drugs in core business areas: Duaklir, for example, is a treatment for respiratory illnesses – supposedly a key focus for AstraZeneca – while Lynparza is a promising oncology medicine, also a high priority for the company. Many will argue that it would be better to maintain the exclusive rights to such drugs in the belief that a product such as Lynparza can create more shareholder value in the long-term if 100% of its increasing sales flowed into Astra Zeneca’s coffers.

Soriot insists not, though; declaring last week that the strategic partnership with Merck offers “significant opportunities” to optimise Lynparza’s potential. This follows comments he made in his recent Financial Times interview that the combination of Lynparza with Merck’s Keytruda could maximise the drug’s value as a combination immunotherapy treatment. Perhaps, then, these deals reflect the increasing difficulty, complexity and specialisation of drug innovation, where even products in core business areas may have to be partnered with other companies’ innovations to achieve maximum bang for buck.

Of course, as Soriot would no doubt be the first to admit, on its own externalisation is unlikely to create long-term revenue growth. AstraZeneca needs to convert some of its promising pipeline drugs into blockbusters in order to reverse income declines and achieve sustained revenue increases. The good news for investors is that growth platforms such as ‘new oncology’ enjoyed success in the last three months, with products such as Tagrisso gaining real momentum.

However, the company’s recent results illustrate how a strategy of large-scale patent licensing and transactions for innovative drugs can serve crucial short and medium-term objectives - boosting revenues and improving cash flow when other sources of income are in decline. Not only is AstraZeneca likely to be spurred on to further deals by these successes, but other pharmaceutical innovators – many of which also face steep patent cliffs – may find much to ponder in their rival’s experiences when shaping their own patent strategies.