CEO Interview: AstraZeneca's David Brennan

David Brennan has sharpened AstraZeneca’s therapeutic area focus and embraced external R&D. The next two years will determine whether the productivity drive is working—or if more radical change is needed.

Melanie Senior

AstraZeneca PLC has proved its skills in the marketplace, with its top five drugs accounting for more than 50% of sales, and growing at 23% in 2006. The challenge is to defend that (mostly primary care) growth through aggressive life-cycle management, while building up an innovation-driven, and more productive R&D pipeline—one that comes increasingly from the outside.

It’s the challenge facing CEO David Brennan, promoted from head of commercial operations and then to CEO of AZ’s North America subsidiary in January 2006, and who had previously helped build up the AstraMerck joint venture. Brennan’s predecessor Tom McKillop wasn’t forced out, unlike the chiefs of Pfizer Inc., Bristol-Myers Squibb Co., and Merck & Co. Inc. But AZ was nevertheless ripe for change, and this may be just the start.

Q: [AstraZeneca’s CFO] Jon Symonds recently said that AZ’s biggest competitive advantage was its sales force. Do you agree?

Our marketing and sales organizations have been doing a great job. To say that there’s a particular competitive advantage and that this one thing is what makes the organization hot; well, perhaps that’s a bit strong. But if you take a look at the performance of our top five products [Nexium, Seroquel, Crestor, Symbicort and Arimidex], which have been growing at more than 20% for several years now, that’s what our organizations in the market execute against. One of the things we’ve been able to do very effectively is put in place good life-cycle management programs behind those products that give the marketing organization lots to talk about. So I think it [the competitive advantage] is a combination of being able to continue to develop the products once they get in the market, and being able to execute against it, that works well for our organization. We just need more!

Q: How is sales-force strategy changing—are you moving toward smaller, more focused teams?

We adapt our organization based on the opportunities. We already have specialist sales forces in oncology and in neuroscience (for Seroquel for instance); that means very focused expertise in marketing and selling in those areas. And we have a big primary-care capability in our larger sales forces, for Crestor and for Nexium.

Is this changing? Yes it is; I think it is changing—more so on the primary-care side than the specialty side. Over time we’ll have less [on the PC side]. I don’t think the nature of what we’re doing is changing, but what we’re doing is scaling it back, to some degree. Or rather, we’re scaling it—because although in a few markets we’ll pull back, in other markets—such as China, and other emerging markets—we’ve been adding people. So probably the net number of salespeople globally hasn’t changed; we just scale it according to the opportunity. In the US for example, when Zocor and Pravachol went generic, Merck and Bristol stopped promoting in those markets—so the whole level of promoting just dropped. We’re still competing with Lipitor and Vytorin, but the absolute number of sales reps is reduced, so you can take some of those resources and put them on something else or take them out, if it’s capacity that you don’t need. That’s very different than what’s going on in China, where we’ve added a couple of thousand people over the course of the last several months.

Our organizations on the marketing and selling side tend to self-correct based on where the opportunities are in the marketplace.

Q: How do you juggle a high-infrastructure primary-care business that has great difficulty re-filling the pipeline and a specialist business with very different commercial requirements and opportunities…both in R&D and at the market-facing end?

A lot of our activities are driven by the therapeutic areas we have decided to focus on, and those in turn are determined by where we see unmet need. Last year we re-focused our disease area strategies, moving away from some areas like hypertension and lower gastrointestinal disorders, maintaining our focus in others, and building in some, such as diabetes and obesity, analgesia, and inhalation capabilities. (See Exhibit 1.) The areas we’ve said we’ll maintain or build include both primary-care and specialist areas. So we’ve got, in Cheshire, UK, basic research in oncology that continues to deliver candidate drugs. That portfolio should be regenerating itself--that’s why we have two oncology products in Phase III. We’ve increased our investment in research in oncology over the last three years—our facility in Boston is also expanding significantly.

On the specialty side, the ability to demonstrate differentiation with the products is clearer. With PC products it’s more difficult to demonstrate significant differentiation. But in areas like diabetes and obesity, there are still significant unmet medical needs, and that’s what we’re always looking at first. Then we look at where the science can take us. So we could develop another proton-pump inhibitor [PPI], but we won’t. We have essentially cured acid-related disorders, so let’s not continue to do that. The world doesn’t want another PPI unless there’s something very, very different about it, which is hard to imagine. The situation’s similar in hypertension: there’s just not a lot of new science. The products that are available generically, the ACE inhibitors, ARBs, beta-blockers, do an incredible job of treating people, so something additional would have to be a really significant advance. We don’t see the science breaking in such a way that compels us to invest in that. Whereas in diabetes we do: even though there are good products to treat diabetes right now, we expect that there will be better products coming along, so we want to continue to invest in this primary-care business.

Q: Your deal with Bristol-Myers Squibb is a sign of diverging strategies among Big Pharma. Do you expect more such deals?

It’s difficult to project that one out. Bristol has said it wants to be more specialty oriented, but because it has a couple of projects in primary care, it needed a partner. (See "BMS Deals Diabetes Drugs, Solidifies Specialist Stance," IN VIVO, February 2007 (Also see "BMS Deals Diabetes Drugs, Solidifies Specialist Stance" - In Vivo, 1 Feb, 2007.).) That decision was based on some of Bristol’s circumstances. We have a lot of cardiovascular expertise in our organization. Although [PPAR agonist for diabetes] Galida failed last year, the fact is that we’ve conducted probably the most significant diabetes clinical research work in the last couple of years—we had almost 6,000 patients in Phase III trials—so we have a lot of development expertise.

With deals, I often say, "If you’ve seen one, you’ve seen one." Each company we talk to has a completely different set of circumstances and thus strategic drivers. Dealmaking is opportunistic: the Bristol deal was competitive. I think they saw our commercial capability as a strength. They looked at what we’ve been doing with our products on the market and decided that with us, and with our execution, they could create more value than trying to do it themselves with a smaller organization. But some of the other Big Pharma companies that still have primary-care businesses, they’re not going to partner their drugs.

Q: Many Big Pharma are cutting costs, externalizing, and driving efficacy. Is this enough? Don’t you think about other, more revolutionary change?

Yes. But we’re not going to talk about it!

The word that gets used is efficiency, but it’s really about a drive toward simplification—finding ways to do things simpler, better, and more effectively. We’ve been at this for a couple of years now, and it’s evident in our financial performance. We’ve exceeded our targets, in part on the back of being more efficient. We’re making changes in the way we do things, setting some more aggressive targets in the organization and driving it toward them. Our selling, general, and administrative expenses have grown significantly less than the rate of sales growth for the last few years, so we have had lots of leverage on our P&L to increase our operating margins.

Will it continue? Absolutely, it can continue, but it can’t be a project. It’s a way of operating. That’s not what drives the business. What drives the business is R&D productivity and customer-facing activities that create value. So we’re experimenting in the marketplace; we are trying to look at different ways to market our drugs, to have go-to-market activities that are not so manpower-dependent and to utilize new technologies differently. We’re trying a number of things.

On the R&D side: last year at this time we didn’t have a biologics capability, now we have a biologics company whose technology we can leverage across oncology, cardiovascular, and neuroscience in a way we couldn’t do before because we had a limited relationship with them. Those are the things that will drive our business.

The announcements of job losses make great headlines. But they’re too focused on one specific part of the organization. Overall, we have attracted far more people than [we’ve cut] in the last two years.

Q: Do you see AstraZeneca’s fundamental structure changing over the next 10 years?

We’ll be a research-based pharma organization. How many companies will be doing that is hard to say. If you go and look back at the list of top 20 companies 20 years ago, few of them still exist today. Being successful is not a certainty—you have to make it happen.

The geography may look different, though. Today, half the global pharma market is based in the US, which has just 5% of the population. But we’re starting to see the emergence of markets such as Russia, China, Korea, and the Asia-Pacific in general. People are getting older, living longer, and generally getting wealthier. Demographics suggest there will be more demand, not less. The question will be: can you bring something that matters, that makes a difference? Of our $26.5 billion in 2006 sales, just under $3 billion came from emerging markets, a share that’s growing at more than 20%. It’s not clear what these new markets will look like; some of it is branded generics. In some markets, Crestor was being sold by the local generics companies before we got there! But we do go there, and we try to compete. China has a middle class of 300 million people. That’s a market in and of itself.

Q: So would you consider buying nonbranded pharmaceutical assets, such as branded generics?

Each year, when we do our strategic review, we go through a long list of nonpharma opportunities that are emerging. But at the time of the [Astra and Zeneca] merger, the board decided to get rid of the agrichemicals business, and it focused this organization on human health pharmaceuticals. So when we look at diagnostics, implants, and generics, it gets a little off the track of what we’re trying to do.

That said, if a strategic opportunity presented itself, we would obviously look carefully at it. But the real opportunity for us is to deliver on the investments we make in R&D ever year. We spend more than $4 billion a year in R&D, so we’d better make sure we’re getting something from it.

Q: How are you increasing efficacy in R&D?

One example is clinical data management. This used to be paper-based; now it’s Web-captured, and it can be handled offshore at lower cost. There’s other clinical trial work that we can outsource now, for instance some of the processing. The basic research you have to own, though.

Our internal capacities for development vary depending on how much we have going on. But we staff our development organization for the run-rate, not for the peak-rate. If we pick up an enormous clinical trial for something, then we’ll outsource it. We won’t double our development organization for a finite project like this. That basic run-rate stays roughly the same, though. The business model for the research-based pharmaceutical organization is intellectual property and intellectual capital—so you want to own smart people in the development organization. The problem with getting someone else to run a trial is that you don’t then have the opportunity to build relationships with investigators within the organization. So there’s a balance. We’ve got a pretty big development organization, but we’re pushing more products into development without significantly increasing our capacity, so the expectations of efficiency deliveries are higher.

Q: You have recently embraced external R&D, big time. (See Exhibit 2.) Do you actively try to balance risk across internal and external programs?

Q:

The whole business is based on risk—you’re trying to turn the science into some kind of opportunity. We focus first on our priority disease areas. Then we do a significant financial analysis along with the scientific analysis to work out what an opportunity really represents to us. But it starts with the science, and scientists.

Take two projects we recently licensed in, for instance—the neuronal nicotinic receptor targeting candidate from Targacept (Targacept Inc.], licensed in December 2005 [See Deal]), and the [January 2007] discovery deal with Argenta [Argenta Discovery Ltd. ] [See Deal]. Both of these external programs were ahead of our own work in their respective areas, and our scientists were the ones who said, "Those projects are better than what we have got." So in that case it was more to do with scientific risk than financial risk.

The hurdle for in-licensing used to be higher. The way we look at it now is, we’ve got risk in our portfolio, there will be risk in what we’re licensing in, so let’s make sure we’re looking at the best technology, project, or product that we think we can get at the time, and we’ll deal with it accordingly. We have lots of projects that fail, and that will continue to happen. We’re just trying to do a little better than the industry average.

There’s also a balance between first-in-class molecules and best-in-class molecules. AGI1067 (Phase III atherosclerosis candidate licensed from AtheroGenics Inc. in December 2005 [See Deal]) is first-in-class; the mechanism has not yet been shown to work in man. That’s why it’s risky. Galida was like that, so were [cancer drug gefitinib] Iressa and [clotbuster ximelagatran] Exanta. We were probably a bit heavier in the first-in-class category, so in the last couple of years our portfolio has probably shifted a little bit more toward best-in-class: compounds with known mechanisms that we’re trying to improve upon. So for example we have a platelet inhibitor in Phase III development; we know the mechanism works, but is the product really going to be any better than what there is now? Maybe we were 70%-30% first-in-class over best-in-class, and now we’re 50%-50%. You’ve got to have novelty.

Licensing projects by definition won’t be as profitable as ones you develop in-house, but you can structure the deals such that they become quite profitable because you share the risk. Newspaper headlines last month screeched that AstraZeneca had done $850 million worth of deals. We in fact did two deals, each with $10 million up front. If they get bigger, then great, it means they’re working. So if the AtheroGenics deal turns into an $800-million deal, then we’ll be happy to pay them because that means the product is a $1 billion drug.

Q: How do you measure how externally focused your R&D group is?

The measure is really just about improving the quantity and the quality of our portfolio overall. We don’t have a target for what proportion of our compounds have to come from outside. But we recognize that it must be a significant share. Last year we put in place a new organizational structure to deliver on licensing and business development opportunities. We have brand-new business development people, aligned by therapeutic area, integrated into what’s going on in-house. We can’t have people out there looking for projects who don’t know what we’re doing ourselves.

That said, a lot of the licensing is still driven by the scientists who monitor the environment that we’re in. We have created a mind-set within the R&D organization—which starts with our R&D leadership, John Patterson [executive director, development] and Jan Lundberg [EVP, discovery research]--that is tuned to spotting what’s going on, and to saying, "We value that, and we want to create some resources to bring it in." Of course, those resources are finite. That creates a bit of competition, which is a good thing. At the portfolio level, we want to make sure the five or six things that look best are going to make it.

Q: What are your top criteria when thinking about M&A?

It’s A, not M, first of all. We’re not merging with anybody. Our strategy is to acquire technologies that bring new capabilities in therapeutic areas where we think we can add value. We’d rather own technologies since we can then apply them more broadly. Take CAT, for instance. (Cambridge Antibody Technology Group PLC) We saw how their technology could come up with literally millions of monoclonal antibody approaches to a target. We wanted to apply that across our portfolio, and because we didn’t have the expertise in-house, we brought it in. [See Deal]

In the case of KuDOS (KuDOS Pharmaceuticals Ltd. , acquired in December 2005 [See Deal]), our oncology guys knew about their DNA repair technology and said, "This is something we should have." It’s different, and it’s new science in oncology, in breast cancer—where we have a leading position. Then [in February 2007] we bought [UK antivirals group] Arrow Therapeutics. (Arrow Therapeutics Ltd. [See Deal]) We had capabilities in infectious diseases, but this brings us IP in antivirals, and a platform that’s new, although related to some things we’re doing already.

At the product-level, here we’d rather license. With products, you can shape a deal so that the risk is shared. It’s a finite project, with a life cycle, which you can value. We know exactly when it will be valuable, if it gets to the market. You can time-constrain everything.

Q: Are larger bolt-on acquisitions out of the question?

I never say never. But bigger acquisitions are not really on the radar screen at the moment. We’re focused on getting more quality products into the portfolio. Large-company transactions are complicated, painful, and take a lot of effort.

Q: So do you think there will be any more Big Pharma M&A?

It’s needs-driven. The most important thing in Big Pharma is productive R&D. If putting two companies together improves R&D productivity, then it’s a smart thing to do. If you’re putting them together to save costs, you will be left with the same problem. Take a look at the two largest pharmaceutical companies. They have not yet been able to demonstrate that just because they have spent twice as much in the industry as everyone else, they have become more productive. So that’s probably not what drives R&D productivity. We’ve lost three mid-cap pharmaceutical firms last year—Altana (Altana Pharma, now Nycomed Group [See Deal]), Serono (now Merck Serono SA [See Deal]), and Schwarz Pharma AG (acquired by UCB Group [See Deal])—because they couldn’t compete relative to keeping up with what it takes to regenerate a pipeline.

We’re spending $4 billion on R&D a year. It’s not as productive as I’d like it to be, but I think we’ve got the momentum going in the right direction. I don’t know that spending $8 billion would make it any better. But I wouldn’t want to spend just $1 billion. There’s a certain critical mass of a few billion dollars in spend, and once you’re above this, you can size yourself depending on the opportunity. If we want to run an 18,000 clinical trial, we don’t have to hire thousands of people, we go to a CRO. So we can afford it; we’re big enough to be able to do that. That’s our capability; not everyone can do that.

If we become more productive, and I have to spend more on R&D, I think the market will say thank you very much. The average R&D spend is 17% of sales, and many firms try to circle around that number. Two years ago we spent 13.5% because we didn’t have any products going through Phase III. You can’t set your margin targets based on R&D. R&D needs to pursue the opportunities.

Q: How worried are you about the global pricing environment, including formulary access in the US under Medicare and growing pricing pressure in France, Germany, the UK, and Italy, where nearly 20% of your sales come from?

In the US it’s all about access, and we have good access and good relationships with our customers. Companies have shown they are willing to give deeper discounts. That’s why the Medicare Part D program came in below budget because they got better prices than they thought they could get. If the marketplace changes relative to access, we’ll change our strategy.

In Europe we’re actively involved in talks with governments when we can be, and we’re constantly in value-based discussions about why our products should be priced at certain levels. Sometimes, though, you wake up one morning and find that a country has reduced prices by 10%. That’s not a negotiation. That’s a budget cut. That’s different than someone wanting to talk to you about the launch price you want in a market. Still, we get on with it--I don’t wring my hands and say, "Oh no everything’s going bad." I say, "This is the new world and let’s live in it."

Q: Are you doing anything to gain better control of product distribution, as for example Pfizer has done in the UK with its direct-to-pharmacy arrangement? (See "Pfizer Gets Closer to Customers," IN VIVO, February 2007 (Also see "Pfizer Gets Closer to Customers" - In Vivo, 1 Feb, 2007.).)

Yes, we’re looking at this. The real issue for us is safety and security of supply, making sure the patient is getting the right drugs. Anytime this is at risk—and it is at risk in this system because of parallel trade and counterfeits—you want to look at what you can do to secure the product supply. We’ve haven’t taken any actions in the UK, though.

It’s complicated to disaggregate distribution from the rest of the system. In the US, it’s part of a payment system. Sure, FedEx can deliver a parcel faster than anyone. But the system isn’t set up to allow that easily [for pharmaceuticals] because of the way the reimbursement mechanisms are built into it.

Q: What’s your approach to generics—fight ’em or join ’em?

Generics play an appropriate role. At the end of a product life cycle, generics should have access to the market. Challenging patents is costly and laborious. It’s an unfortunate part of the system, but we deal with it. There is currently proposed legislation in the US to stop pharmaceutical firms entering into authorized generic agreements. It’s just unbelievable that we could even entertain this legislation, which would serve to prevent prices from going down. Why shouldn’t Big Pharma be able to go to a generic company and put them on the market? This drives the price down, and gives us a period of time where we run our business down a bit more slowly. We’re out of it in six months or a year anyhow.

I’m worried about some of the markets in Europe that keep the generic prices propped up. They’re effectively giving money back to generics firms that have no innovation at all. The model that works well is the one that rewards innovation, and when patents expire, lets the low-price guys fight it out. The trouble is that in Europe, the generics companies are local, and the governments are taking care of their own.

Q: What are the three biggest risks facing AstraZeneca over the next two to three years?

We certainly need to demonstrate, in the next couple of years that our R&D activities are more productive than they have been in the past. We need to show lower attrition rates.

The second risk is external. The markets in which we operate will continue to increase pressure on value, so the challenge for us is to demonstrate why our products are truly valuable, and where they fit into payors needs. In part based on this, we made some decisions last year to move in a particular direction. But these are longer-term strategies: because of the lead times involved in bringing products to market, you don’t just say let’s stop this and do that all of a sudden. You have to say, with regard to Cambridge Antibody Technology for instance, that we’re committed to biologics, that’s a 10- to 20-year strategy and we’re going to play it out. That’s different from our ability to leverage things on the front-end, at the market-facing side. If we get a project or product coming through that we don’t have the expertise for, we’ll build it. If the R&D guys call me and say we just came up with a cure for glaucoma, I can develop the expertise in marketing and sales around ophthalmics. So a lot of what happens in the marketplace is driven by the productivity in R&D.

The third risk relates to our organization: we need to be able to move faster, and be more flexible in how we do things.