Dec. 29 (Bloomberg) -- David Brennan couldn’t sit still. During a meal of beef and potatoes at AstraZeneca Plc’s drug research center near Stockholm in October, Brennan, the company’s chief executive officer, grilled six drug-development managers over a concern raised by a laboratory scientist.
That morning, the newly recruited researcher told Brennan during a town hall-style meeting that he didn’t have the freedom he would have in academia to pursue unusual ideas. Brennan wanted to know why.
“It was quite amazing to see how agitated he was over one question,” recalls Samantha Budd, who left her own lab in San Diego 10 years ago to head neurological research at AstraZeneca in Sweden.
Brennan, 57, has more reason than most drug-company CEOs to ensure that his scientists are happy and productive, Bloomberg Businessweek reports in its Jan. 3 edition. While competitors such as GlaxoSmithKline Plc and Sanofi-Aventis SA expand into flea sprays and energy drinks to offset slowing drug revenue, AstraZeneca is sticking to one business -- developing pharmaceuticals innovative enough to command premium prices.
Betting on drug discovery is risky these days. The industry has gone through a dry spell, with none of the 15 best-selling drugs winning approval in the past six years, according to data compiled by IMS Health Inc., a Norwalk, Connecticut-based provider of market information, and Bloomberg. More than half of London-based AstraZeneca’s $32.8 billion in sales came from drugs that may face generic competition by 2014. The company is one of the worst performers among big drugmakers in winning regulatory approval of new medicines in the U.S. or European Union in the past three years, according to statistics compiled by a competitor, Novartis AG.
‘Get Through This’
“We’re going to figure out how to get through this,” Brennan, a 6-foot, 2-inch former college linebacker who has spent his 35-year career in the drug industry, said during an interview in his west London office. “People are living longer and getting older, and they are consuming more health care. They want advances.”
Investors are skeptical. AstraZeneca’s shares trade at about 7.2 times estimated earnings, the cheapest of the world’s big drug companies. Basel, Switzerland-based Roche Holding AG, which gets about 20 percent of sales from disease-detecting tests, and Johnson & Johnson of New Brunswick, New Jersey, which derives almost two-thirds of revenue from medical devices and consumer products, are more highly valued.
“The market seems to be saying essentially that R&D productivity is dead, that they’re destroying value by investing in research and development,” said Gareth Powell, who helps run $200 million in health-care funds at Polar Capital Partners Ltd. in London. “We’re in a completely different world now.”
Brennan’s commitment to research has its origins at Merck & Co., when the U.S. drugmaker dominated global drug discovery and blockbusters were easier to find. He joined Whitehouse Station, New Jersey-based Merck as a 21-year-old salesman in 1975, and was there when the company’s labs pioneered new ways to treat hypertension and cholesterol.
“This is what David saw happening,” says P. Roy Vagelos, who ran Merck’s R&D and later, when he became CEO, promoted Brennan to run its collaboration with Swedish drugmaker Astra AB, a predecessor to AstraZeneca.
“That apparently has influenced his view of running a pharma company, which I think is a correct view,” Vagelos, 81, said in an interview. “The world has changed but the impact of important new drugs that fulfill unmet medical needs is no different.”
While researchers now understand diseases better because of genetic breakthroughs, drugmakers are having limited success translating that into medicines for heart disease, pain or cancer. Regulators also are requiring greater safety after several big-selling drugs proved more dangerous than anticipated, and governments, especially in Europe, and insurers in the U.S. are pushing back on price increases.
Despite these headwinds, Brennan’s commitment to R&D as the road to growth is making AstraZeneca a magnet in the research community.
Menelas Pangalos helped build an industry-leading pipeline of experimental drugs at Wyeth, helping persuade Pfizer Inc. to buy the company in 2009 for $68 billion. He was lauded by New York-based Pfizer’s then-CEO Jeffrey Kindler for his “incomparable” expertise.
Looking for someone to invigorate his labs, Brennan courted Pangalos, 43, who says he was impressed by the CEO’s “hunger for change.” Pangalos joined AstraZeneca in May as head of early-stage drug research.
“As the head of research, you want to be hearing your CEO say that the way we are going to grow the business is by driving successful research and development,” Pangalos said. “It’s an incredible challenge.”
Brennan also poached Pfizer’s global research chief, Martin Mackay, for AstraZeneca’s most senior R&D role, president of research and development.
Brennan, a Philadelphia native, says he has taken steps to breathe life back into AstraZeneca’s labs. The company reviewed every step in the development process, narrowed the scope of research to focus on more promising areas such as diabetes and cancer, and shut sites to save $1 billion annually by 2014 to pay for rising costs. What Brennan won’t do is move out of prescription drugs.
Stung by Failures
To succeed, Brennan will have to fix an R&D operation stung by failures.
The company this month dropped development of motavizumab for infant respiratory disease, taking a $445 million charge, after a U.S. advisory panel recommended against approval of the drug because studies linked it to allergic reactions and didn’t prove it worked better than the company’s older medicine Synagis.
A study published in May showed the experimental drug Recentin didn’t help colon cancer patients. In June, the U.S. Food and Drug Administration failed to approve Axanum for ulcers. These follow four potential blockbusters that failed in late-stage trials between 2006 and 2008: stroke drug Cerovive, heart medicine AGI-1067, blood thinner Exanta and Galida for diabetes.
AstraZeneca did win permission in December to sell Brilinta, the company’s most important experimental product, in the European Union, where it’s known as Brilique. The clot-preventing drug proved more effective in studies than Paris-based Sanofi and New York-based Bristol-Myers Squibb Co.’s Plavix, which had $9.8 billion in sales last year.
Still, the FDA failed to approve Brilinta Dec. 17, saying it wanted additional analysis of a study that compared the two drugs. That may push back a decision to the second half of 2011, according to Seamus Fernandez, an analyst at Leerink, Swann & Co. in Boston. If approved, the medicine would be Plavix’s only rival.
Like its competitors, AstraZeneca is experimenting with new ways to organize research to improve productivity. Glaxo of London and Novartis of Basel, Switzerland, are breaking up labs into teams encouraged to quickly exploit new approaches.
At AstraZeneca, scientists now are responsible for candidate drugs until they begin the final human trials, ending a culture of handing off early-stage products -- along with responsibility -- to other researchers as if in an assembly line, Brennan said. He’s also willing to license experimental compounds from other companies.
‘Need to Change’
“In a couple of years, we’re going to look very different,” Brennan said. “We need to change the way we’re doing it because we haven’t been successful.”
AstraZeneca’s focus on pharmaceuticals adds pressure on the company, said Andrew Baum, a Morgan Stanley analyst in London.
“There’s a bigger risk here than for every other major EU pharma company given their leverage to one asset class,” Baum said in an interview. “When you have an enormous patent cliff, poor record of returns in R&D, no diversification, what do you do? It’s not a strategy of choice. It’s a strategy that was thrust upon them.”
Brennan tells investors to focus on dividends and buybacks while revenue “fluctuates” until 2014. The company expects revenue of $28 billion to $34 billion annually through 2014 as it loses patent protection on its two biggest-selling drugs, the Nexium heartburn treatment and the Seroquel anti-psychotic.
AstraZeneca fell 13 pence to 2,975 pence in London trading, giving the company a market value of 42 billion pounds ($64 billion). The stock has returned an average of 5.4 percent annually including reinvested dividends since Brennan took over as CEO in 2006, compared with a 3.7 percent return for the Bloomberg World Pharmaceutical Index.
Brennan has earned time to make his research plan work. A U.S. judge said June 29 that the patent on AstraZeneca’s Crestor cholesterol drug is valid until 2016. The decision safeguarded $2 billion in U.S. sales. The company plans to submit the diabetes drug dapagliflozin for approval in the U.S. and Europe by early 2011. AstraZeneca may get a decision from the FDA by Jan. 7 on vandetanib, a treatment for advanced cases of a rare type of thyroid cancer.
Brennan has persuaded AstraZeneca’s board that the company should stick to the business of developing pharmaceuticals, said Jane Henney, one of the directors who chose him as Tom McKillop’s successor in 2005.
“I don’t sense there’s any feeling among the board that we should move in another direction,” said Henney, a former FDA commissioner who is in her ninth and final year as a director. “It’s the path that we’ve chosen. Only history is going to be able to judge if we were correct.”