AstraZeneca Chief Talks Pharma Challenges

David Brennan is a man with many demands on his time. Not only is he chief executive of AstraZeneca (AZN), one of the world's biggest pharmaceutical companies, but the group he leads, and the industry he is part of, faces some of its biggest challenges for a generation.

On any given day, Mr Brennan, a tall and softly spoken American, could be dealing with a challenge to the patent protection on the company's best-selling drugs, answering calls from the White House about Barack Obama's struggling healthcare reforms, or explaining to staff why 8,000 of them are going to lose their jobs over the next five years as part of AstraZeneca's recently announced restructuring plans.

Unlike most of those who make it to the chief executive's chair in the pharmaceuticals industry, Brennan is a salesman. Indeed, he is only the one of his peers in the world's top five drugs makers to have come through the sales division of the business. But the salesman's sharp tongue may serve him well in the coming years.

First in his in-tray is AstraZeneca's unimpressive recent performance at introducing new drugs. Mr Brennan admits: "We haven't been as productive as we would have liked to have been in the last few years and, for a pharmaceutical company, that's pretty significant, right? I would like to see sustainable delivery on a consistent basis from our research and development organisation, and that's why they have been set a goal. From the beginning in 2010, on average, we will bring two new products to the market each year. That's our goal and what I want to be measured against."

Cynics, even some from within his own company, may argue that cuts to the group's R&D arm may go some way to explaining why its performance has disappointed. When the Anglo-Swedish group's revealed its full-year results at the end of January, Mr Brennan announced that 8,000 staff, largely from the research unit, would be made redundant over the next five years, in addition to the 12,600 that have departed since 2007.

"Big pharma" is changing and devoting fewer resources to scientists, for various reasons. Drugs companies have woken up to the idea of licensing agreements, where they can pay smaller biotechnology companies to develop potential treatments at a fraction of the cost. This month, AstraZeneca signed a deal for a rheumatoid arthritis drug developed by Rigel Pharmaceuticals (RIGL), which, even if it becomes a top seller, will cost a maximum of $800m, much less than AstraZeneca would have spent developing its own treatment.

But the biggest problem by far is the competition posed by generic drugs firms. A host of companies are increasingly turning to the courts to challenge intellectual property rights that the likes of AstraZeneca have depended on to guarantee a competition-free market. Analysts believe AstraZeneca is likely to be one of the worst hit in the coming years. Mr Brennan concedes that the loss of exclusivity on the breast cancer drug Arimidex and the asthma medicine Pulmicort Respules will squeeze revenues, but is confident it will grow market share in other medicines.

Despite accepting that generic competition is now an established feature of the industry, Mr Brennan denies AstraZeneca's defence of its patents in the courts is akin to King Canute trying to stop the tide.

"You see us in court when we are challenged – it's a defensive strategy," he says. "We defend our intellectual property when generics choose to challenge it. About 10 years ago, the generics changed their strategy and decided to challenge every patent, so what you're seeing is a shift from them. They are saying, 'let's get the top 20 drugs and start challenging them. We only need one patent and we've made lots of money'."

The strategy is not just trying to block groups such as Israel's Teva Pharmaceuticals (TEVA) or India's Dr Reddy's (RDY) from copying drugs and selling them more cheaply. Upholding patents is often a case of extending periods of exclusivity, or allowing generics access to certain markets, keeping the prized US market free of rivalry.

Earlier this year, AstraZeneca struck a deal with Teva over its plans to launch a generic version of the heartburn treatment Nexium. Under the agreement, AstraZeneca will grant a licence to Teva that prevents it entering the US market until May 2014, when the first Nexium patent expires. "You ask, is it a sustainable strategy?" says Mr Brennan. "It is actually critical for us to retain our intellectual property on our products – it is mission critical. But you know, the thing about patents is that they are not binary. The strengths vary, so on some where we have been challenged, we have settled. Sometimes that's better than a court deciding, because when a court decides, now that's binary. In other situations we have been to court. Will we continue to do it? Absolutely."

AstraZeneca's Nexium deal with Teva underlines the importance of the US healthcare market. America is by far the biggest spender on drugs and Mr Brennan, as chairman of the Pharmaceutical Research and Manufacturers of America, has become a focal point for the industry's reaction to President Obama's plans to offer universal healthcare to all Americans.

The election of the Republican Senator, Scott Brown, in Massachusetts has removed the Democrats' filibuster majority and, with it, the likelihood that Mr Obama will get all his proposals on to the statute book. Some argue that the inertia is good news for big pharma, but Mr Brennan denies that the industry is pleased with the delays. He insists that the White House respects the industry's need to make a return on the billions of dollars it invests in trying to find new treatments, a condition he refers to as the industry's "assumptions."

"Prior to Massachusetts election, getting healthcare reforms through was probably the highest priority of the President," says Mr Brennan. "As an industry we have supported healthcare reform, with certain assumptions. Experience of dealing with the Senate and White House on making sure those assumptions could be held has been pretty positive, and so we have stayed pretty positive."

Asked if the Obama administration is happy with the assumptions, Mr Brennan replies: "Well, I think they accept them."

The CV: David Brennan

2006-present Chief executive of AstraZeneca.

2001-2006 Chief executive and president of AstraZeneca's North American subsidiary.

1999-2001 Senior vice-president of AstraZeneca's commercial operations in the US.

1992-1999 Various senior commercial roles at AstraMerck. Responsible for turning the venture into a multibillion-dollar business in the US.

1975-1992 Worked as a sales representative in the US with Merck (MRK), rising to general manager of its French subsidiary.