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Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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June 1, 2012

AstraZeneca "Braced For Change"

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Posted by Derek

Well, that's because things can't go on the way that they have been, as this Reuters piece makes clear:

For several years, AstraZeneca kept investors happy with a strategy of hefty dividend payments and share buybacks, but more recently key shareholders have grown restive about its failure to develop promising new medicines.

The group has suffered repeated drug development setbacks, stoking fears about its long-term prospects given a complete reliance on prescription medicines at a time when rivals have diversified.

I'm not so sure about how well their rivals have done with that diversification, if it even exists in many cases. AstraZeneca has discovered too few new drugs and spent far too much money doing so, and no amount of share buyback programs can help that. There are apparently two contradictory sets of recommendations: that AZ should aggressively buy someone, perhaps several companies, in an effort to make up for its own failures. But the other camp says that the company should shrink down to something viable, and thus make itself an attractive target for someone else to buy.

Both of those are, needless to say, business recommendations from Wall Street analysts. As such, they're answering the question "If I owned a lot of AstraZeneca stock, what would I want to the company to do to keep me from losing even more money?" (Never mind that the answer, in some of these cases, is "Don't own that stock; cut and run"). Another question, asked from a different perspective, is "What should use should be made of AstraZeneca's vast drug discovery and development resources? How can we make something different happen than what's been happening for the last ten years?" In other words, "How can this company discover more drugs?"

Those two viewpoints intersect if you believe that discovering more drugs would lead to a more profitable company. And that would follow, except for the nasty lead time of ten or twelve years. If someone at AZ waved a magic wand this afternoon and caused a host of future clinical successes to be made in the labs, and also magically caused their future development to go as smoothly as possible, then the company's bottom line would show the effects in. . .what, 2022 or so? Given that, the shorter-term Wall Street solutions will have a free hand. There isn't time for science to rescue this situation.

Comments (21) + TrackBacks (0) | Category: Business and Markets


1. g on June 1, 2012 9:11 AM writes...

"And that would follow, except for the nasty lead time of ten or twelve years. If someone at AZ waved a magic wand this afternoon and caused a host of future clinical successes to be made in the labs, and also magically caused their future development to go as smoothly as possible, then the company's bottom line would show the effects in. . .what, 2022 or so? Given that, the shorter-term Wall Street solutions will have a free hand. There isn't time for science to rescue this situation."

I think that is an important point. I am not sure if modern day, post-global financial crisis drug development is well suited for timelines often dictated by stock market pricing. It is harder than ever to create new drugs that will get to the market. Drug development takes many years. The average tenure of CEO's is probably less than half of how long it takes to develop a drug.

Drug development needs long term strategies and the conviction to stick with it long enough to see the outcomes. The stock market and financial sectors do not foster this type of business practice.

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2. Hap on June 1, 2012 9:54 AM writes...

Doesn't that imply that, unless you can continuously find drugs (successful ones, at that), that funding a drug company through the stock market (and perhaps through any method other than your own wealth) can't work?

If you have a drought of drugs at a public company, and you probably will, then the length of time to get a drug to market (and thus to make money) is longer than funders can tolerate, and requires cuts in spending which almost certainly mean more droughts in the future (because without sufficient research, you're not going to find many drugs). That might encourage smaller companies, because big companies will need them to fill the gap, but that makes them more expensive and leaves the least predictable part of drug development to be paid for by the big company. (Partnerships may mitigate this, but they probably will also cut the number of companies willing to play, because the magnitude of a payout and its likelihood are smaller, and the risk is higher to the smaller company.)

I would dread the flood of unemployed people, and the lack of drugs, but if investors haven't the stomach for finding new drugs, perhaps the larger pharmas should become generic/consumer products producers and liquidate their new drug businesses? The current model of slow death hurts investors or customers. It helps employees (for as long as they remain so) some, and disproportionately benefits buyout firms and upper management, thus rewarding them for inncompetence or evil. Instead, investors might be able to find companies that can give them what they want, if such things exist.

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3. Chemjobber on June 1, 2012 10:07 AM writes...

Rivals have diversified?

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4. RM on June 1, 2012 10:17 AM writes...

Isn't this what the new drug discovery paradigm is supposed to fix?

You see, AZ doesn't actually have to discover drugs. They just have to buy/cross-license from a start-up that does. You skip all that nasty lab, preclinical and early clinical work, and go straight to large-scale clinical trials, cutting your time horizon from 10 years to 2-3 years. (Oh, yeah, we're going to eschew long-term mortality metrics and just focus on secondary endpoints. Lowered protein assay levels after three months is good enough - we don't actually have to show we cured things.)

So instead of having 1 company with 10+ years of lead time, we can break the process down into 5 companies each with only 2-3 years of lead time before they cash out to the next company in the chain. Who cares if it's less efficient with respect to developing drugs? It satisfies Wall Street, and at the end of the day, isn't that what really matters?

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5. WCA on June 1, 2012 11:48 AM writes...


Rivals have diversified?

Not really. Pfizer and Abbott are doing the opposite, and I just read an article yesterday that some Wall St. talking head feels that J&J should do the same (their CEO disagrees). Merck's CEO came out as saying that he has no intention of shedding the non pharma parts of the company, so there's at least one sane guy in the lot.

Diversification a few years ago was looked upon as a core strength in terms of weathering economic storms, but that's SOOOO boring. Wall St. needs some action (and fees), so they started whispering to pharma CEOs that shedding 'non-core' businesses was the way to 'unlock' the hidden potential of the individual parts. It's just another way for investment banks and Wall St to make money now that the mega-merger phase of the industry is over...

Our industry is in a tough spot today, but AZ is a train wreck. I'm not even sure they'll be able to buy their way out of this mess. Whichever method they choose to take, you can bet that even more people will end up losing their jobs.

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6. Bunsen Honeydew on June 1, 2012 11:56 AM writes...

Perhaps then this would be an apt time to have a discussion of alternate models of funding drug research.

Option #1: The stock market- This akin to crowd-sourcing your financing but the mob is far to fickle and impatient to allow us to do our job well so someone gets brought in to restructure the company, be it financially, structurally or both. None of those help with productivity and IMHO significantly hinder it.

Option #2: Privately held company- This is the Boehringer-Ingelheim model. They are arguably the most stable pharma company out there. Is their dollar-for-dollar (euro-for-euro?, franc-for-franc?) productivity any better? I'll let others answer that question. However, it is difficult to argue that this approach does a better job of promoting stability in the company.

Option #3: Academic research- Frankly, I think that there are many brilliant minds in academia and the leaner organizational structure helps a lot. However, you are largely working with students and postdocs so you are short on experienced people to actually do the work. That's going to slow things down quite a bit. Moreover, your people turn over much faster than in industry (or at least faster than they used to. Love that NWO). That hurts. How would an academic lab run a clinical trial? They can't. They don't have the money. They are back to partnering with another company. Perhaps this should be labeled as Option #1a and #2a.

Let's not even get into outsourcing and CRO's.

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7. anonie on June 1, 2012 12:06 PM writes...

In a recent exchange, the facilitator (non-scientist, of course) of a company "internal course" (not AZ) made a statement that the current R&D management and structure is succeeding, as demonstrated by the compounds in Phase 3 and those to be filed in the next two years. To their credit, some scientists (experienced) in the room emphatically pointed out that the compounds being referred to were actually discovered during the previous, or even its predecessor to the previous administrative scheme, that the entire process to get the compounds to and through Phase 3 has been as long or longer than 10 years, and that the current "upper management" had little to do with this crop of compounds except to continue to fund the work as they already were well advanced when they were inherited...and as long as they stayed out of the way.

The facilitator had nothing to say, was speechless, confronted with the truth by people who had lived thorugh the time involved, but which conflicted with the restating & advertising of today's wishful party-line.

Increasing success in company profitability, hopefully involving marketing new drugs, can only be achieved by 1) internal investment and commitment from 5 or more years ago 2) starting anew and waiting for (an average) approximately 8 to 10 years, 3) buying potential assets to jump start a new portfolio 4) downsizing 5) being aquired. What else is there in today's economic world and short term vision?

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8. lynn on June 1, 2012 12:13 PM writes...

Invest in pre-clinical discovery beneath the shareholders' radar. Basic research is relatively cheap [certainly compared to clinical}. Have an active basic research establishment taking a variety of approaches to targets, phenotypes, screening, SBDD, whatever. This is best done in an integrated interdisciplinary environment [like Big Pharma used to have] where everyone can talk to each other - when necessary. But don't let upper [business] management meddle. No hard deadlines for a given project (but robust vetting of scientific progress within the program). Have general expectations for candidates to arise from this over time. Once candidates enter the pipeline, they will be subject to expectations from upper management and investors. But, time pressure to move leads to clinical candidates yields failed development.

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9. CR on June 1, 2012 12:28 PM writes...

Is the model really not working? AZ's 2012 profit margin (1st quarter) is 31.6%. In fact, the lowest 2012 profit margin among the Pharma companies (as reported in C&EN) is 16.0% (Elan). Tell me what isn't working?

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10. TGIF on June 1, 2012 1:01 PM writes...

Again, this is what happens when MBAs and not engineers/scientists become the leaders of a company. The focus goes from building a quality product to maximizing profits. It only works well for a short time and you start with a well-footed base.

The old line, "You get what you pay for!" comes to mind.

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11. boo on June 1, 2012 1:32 PM writes...

Re. 6. Bunsen Honeydew's remark "the leaner organizational structure [found in academic research] helps a lot":

You're kidding, right?

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12. Anon on June 1, 2012 2:47 PM writes...


Perhaps then this would be an apt time to have a discussion of alternate models of funding drug research.

Option #4: the Roy Vagelos model. Leaders who know WTF they're doing.

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13. Hap on June 1, 2012 3:09 PM writes...

"braced for change"

Bracing in a Ford Fiesta for a head-on collision with an eighteen-wheeler probably won't do much good.

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14. Electrochemist on June 1, 2012 3:35 PM writes...

#6 - Maybe there is an Option #1b:

Diversify product lines enough to maintain a revenue stream sufficient to pay a reasonable dividend and to continue to fund R&D. Court institutional investors who have a longer time horizon and look closely at ROI from dividends (rather than share price). Do not take extraordinary measures (stock buy-backs, large scale M&A) to prop up the share price. (Stagnant share prices will scare away day traders over the long haul.)

There are a couple of large pharmas who are trying this approach.

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15. NoDrugsNoJobs on June 1, 2012 4:48 PM writes...

#14 - I like your approach. A 3-5% dividend in a time of very low bond returns should be seen very favorably. I would think one would be happy to sit tight with that sort of yield assuming that a good long term R&D plan was in place to try and return to growth. Just need a good CEO to articulate this strategy while not evidencing panic by laying off everybody, dividing, merging, and acting too crazy.

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16. Anom on June 3, 2012 10:26 AM writes...

#4: they already do it in form of the CNS virtual iMed.

David had 6 years time to fix things, but he "only" fixed his bankaccount (more than 300 million $, for him very successful) - in full agreement with the so-called analysts and shareholders. If he and his analyst comrads would have been succesfull (making this time a real difference to the patient - but who cares about the sick - for sure not upper management OR the analysts OR "the" shareholder), AZ should have been now a "dazzling" Phase I/II - but there is NOTHING. "Analysts" or "the" shareholder want money - if possible without products, they are only a mess (demonstrated by e.g. Facebook or AZ ...).

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18. davesnyd on June 4, 2012 7:06 AM writes...

I think the picture that appears to be emerging is:

  • Basic discovery happens in academia or non-profit research houses on NIH (or equivalent) grants. Initial hit screening gets done there, too, at least enough to prove some sort of compound efficacy.
  • Private money (PE or VC or ongoing private firms) buy the compounds-- perhaps we see a regular auction system set up to facilitate this transfer. They then take the compounds through animal models and development.
  • The "large pharma" becomes essentially clearing houses-- they buy whatever shows good efficacy in animals and has a promising production path. They do clinical trials and sell the medicines.

I'm not saying I like this. I'm not advocating for it. But it breaks the pieces of the drug discovery pipeline into bite size chunks, allows PE money to triage compounds and do development without Wall Street looking over their shoulders, and allows the "big pharmas" to have a more stable situation (need a new compound? buy one!) without paying the basic R&D costs that they claim to hate.

Again, I don't like it-- but I think this is where the industry is headed. It may not be spot-on-- the handoff between private firms and public ones might happen after clinical or there may be another set of players in between them, just doing clinical trials (though, if I had to bet, I'd guess that will be done on a wholly outsourced basis, and paid for by big pharma).

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19. Michael on June 4, 2012 7:56 AM writes...

I think the solution should not be so much about cost cutting and acquisition, as about true risk sharing between CROs and sponsors. I think the rhetoric of risk-sharing has conditioned sponsors to not expect much in return for said sharing, but in reality, sponsors can and should demand risk models that hold CROs responsible for what they promise, incentivize cost savings and allow sponsors to share those savings. I've written more on this idea on my blog, linked above.

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20. Doug Steinman on June 4, 2012 1:27 PM writes...

It is great to advocate changing the world of pharmaceutical discovery but this is not going to happen unless it can be demonstrated that whatever new model is proposed will be profitable. The suggestions posted above all have merit but, until pharma companies begin to care as much about helping patients as they do about making money, the current situation will not improve and will probably get worse before it gets better. I hate to be so pessimistic but my experience in the pharmaceutical industry leads me to believe that management, at least at the large companies, does not value research or bench scientists and views pharmaceutical discovery as nothing more than a drain on profits.

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21. Kugelrohr on June 4, 2012 2:54 PM writes...

@18.davesnyd – agreed. In addition, many drugs and targets are discovered in small biotech companies, taken to IND stage or Phase1/2 and then parted with Big Pharma. A good example is the Rigel-AZ partnership for Fostamatinib in RA.

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