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Engine upgrade at AstraZeneca: Scientific focus reintroduced.

The journey of AstraZeneca is interesting.  For several years it has had the worst of times; continuous pipeline failure, restructure after restructure, looming patent expirations and a leadership team that was too marketing orientated and reverted to short-term financial fixes.  The inevitable happened; a new Chairman was recruited and the entire senior management team replaced.  The new team was able to turn the company around and steer it on a more effective course; building up a solid drug research portfolio and boosting innovation.  AstraZeneca indeed had some good building blocks:  Medimmune (the biologics division of the company), diabetes (AstraZeneca now has full control over its diabetes franchise), a good Japanese business, solid respiratory franchise and solid cash (once it stopped its buybacks).  However, it also had a big worry; a research and development engine that had a spectacular failure rate.  The engine was defunct and its scientific curiosity almost extinguished.  A detailed analysis of their failures revealed some remarkable insights and confirmed what we thought went wrong.

The never-ending string of pipeline failures stifled decision-making, fostering a culture of minimal risk taking.  Projects either got stuck or were moved ahead for the wrong reasons.  Focus was on ‘volume’ i.e. moving projects through to the next stage of development.  This distorted decision-making process hampered the pursuit of the best therapeutic approach to diseases.  As an example, at one stage about half of AstraZeneca’s portfolio was made up of backups, some not even structurally diverse enough to actually mitigate development risk.  All that mattered (which provided management comfort) was that the drugs progressed through the development cycle and consequently fulfilled the volume-based goals.

Quality did not rate high on their agenda and at times pre-clinical safety signals were ignored.  This carelessness would later cause the failure of projects in mid-stage clinical development.  Commercial attractiveness was often used as justification for moving ahead, despite a lack of detailed target knowledge, understanding of drug/target interaction dynamics or a solid understanding of the underlying disease pathology.  Even more concerning was the fact that often the confidence in the disease target declined as the drug moved through development.  Yet as the project progressed, commercial confidence miraculously increased.  About three quarters of projects from 2005-2010 failed due to lack of efficacy.

It was clear that AstraZeneca had to make drastic changes if it was to improve its output.  Indeed it did exactly that.  Through this review it established the ‘5R’ framework.  On top of that, the new CEO Pascal Soriot, supplied the urgency and vigour needed to make the changes.  Today the mantra is the right target, tissue, safety, patient and commercial potential.  To successfully implement the ‘5Rs’, they brought ‘science’ back into sharp focus and abolished the preoccupation with project volumes.  Sharpening the company’s strategic focus fosters a ‘truth seeking’ mentality that encourages its scientists to go out and engage with the leaders in their field and to ask, as they put it, the ‘killer questions’.

As part of its engine upgrade, the pipeline was overhauled and only projects that complied with the ‘5R’ mantra remained active.  AstraZeneca has put science at the heart of target decisions.  It has established:  significant biomarker and personalised medicine capabilities (the right patient: 85% of projects now include a personalised healthcare strategy), better pharmacological modelling capabilities (right tissue, right drug/target engagement) and dialogue between the commercial groups and the scientific teams (e.g. house them close to each other).  Importantly, people have been hired who thoroughly understand the payer and reimbursement environment (right commercial opportunity).

These principles are by no means fool proof but they have designed a framework allowing management to assess where the pressure points exist in a project.  We know from our work as stock pickers that it is often crucial to know what we do not know and that success is aligned with quality work rather than quantity.

AstraZeneca has come a long way in a short time.  There will be setbacks but the right pillars are in place and we are already seeing (in presentations and meetings) that this is a very different company from three years ago.

DISCLAIMER: The above information is commentary only (i.e. our general thoughts).  It is not intended to be, nor should it be construed as, investment advice.  To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.  Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.