By Daniel R. Hoffman, Ph.D.
Last week AstraZeneca reported a 44 percent drop in its first quarter net profit and 11 percent fall in revenue. Immediately the stock price declined by 6 percent and the company used the opportunity to announce that CEO David Brennan will leave June 1. Of course, it's not as if AZ's condition surprised anyone who was paying attention. The wonder is that the company followed its course under Brennan for as long as it did.
As a first point, Brennan's exit shows that pharma is improving only marginally as far as CEO accountability and fairness. Brennan received a going away package of £40 million (= $65 million) from AZ. That's not quite as outrageous as Hank McKinnell and Ray Gilmartin who received exit compensations of approximately $200 million and $100, respectively, after each lowered the market capitalization of his company by one-third. Still, if a company's future health represents an important performance measure, it's hard to square AstraZeneca's condition with a $65 million hail and farewell.
A second observation is that Brennan was possibly a sterling example of the Peter Principle. While heading U.S. marketing at AZ from Wilmington, De., Brennan directed several innovative moves that doubtlessly won him the CEO position. For example, when the company developed Nexium as a classic molecular manipulation from its blockbuster product Prilosec, Brennan negotiated prelaunch deals with leading managed care organizations such as Harvard Pilgrim and Puget Sound to gain immediate acceptance for the new brand. Then he successfully positioned Nexium as the go-to brand in its class for tougher cases of gastroesophageal reflux. In the me-too business model that prevailed in pharma at that time, these were creative business maneuvers.
The innovative moves slowed to a halt once Brennan became CEO and moved to London. In 2007 AZ paid 20 percent of its entire market capitalization to buy MedImmune. The idea was that the Maryland company would serve as AZ's biologicals and vaccines unit by operating at arm's length from the parent organization. A similar arrangement had worked spectacularly well for Roche and its Genentech subsidiary over a 20-year span. As it turned out, with Brennan out of the country, AZ's managers took close control over MedImmune, thereby strangling biotech innovation with Big Pharma's finance control. MedImmune's top scientists and managers soon departed and within the past year, AZ's major shareholders in London started complaining publicly that they have nothing to show for their $15 billion purchase.
Stung by a mid-sized acquisition that didn't work out, Brennan then ruled out making "large deals" and instead opted for a series of small, bolt-on purchases. By 2011 that strategy was too little, too late. Within the past few weeks, various shareholders expressed their divergent views to the effect that either AZ should persist with making small acquisitions, attempt a game-changing buy of another Big Pharma or put itself up for sale.
AstraZeneca's core problem in all this was not Brennan but, instead, a steadfast commitment to what is now an obsolete element of pharma's business model. Among AZ's top-selling products, none pioneered a new mechanism of action that substantially advanced clinical outcomes. At least three atypical antipsychotics preceded Seroquel, Nexium entered a crowded field of proton pump inhibitors and at least five statins came to market before Crestor. But the reality for several decades was that me-too's provided the heart and soul of pharma sales. The expression along the hallways was, "It takes the me-too's to pay for the breakthroughs." Employees at one pharma in this area used to joke that their company's appropriate motto should be, "Yesterday's products at tomorrow's prices."
Yet for a long time the me-too approach worked spectacularly well. No industry matched pharma's profitability, whether measured by earnings against equity, sales or assets. Now as pharma's customer base changes and more objective criteria emerge for selecting drugs, pharma must cater to demands for products that are either better or cheaper or both. A smile, a shoeshine and a me-too drug won't even make it in the door.