TO be the only Briton in the American magazine BusinessWeek’s list of the world’s most admired CEOs is no mean feat. But Tom McKillop, the Ayrshire-born chief executive of pharmaceuticals giant AstraZeneca, has taken this particular honour in his stride.
What really exercises the 58-year-old from Irvine is how AstraZeneca — the Anglo-Swedish giant formed from the 1999 merger of Sweden’s Astra with Britain’s Zeneca (formerly ICI’s pharmaceutical division) — is going to weather the next couple of years.
In particular, Tom McKillop needs to find ways of replacing one blockbuster with another – and many investment analysts remain sceptical about his chances of success.
And, perhaps secondarily, he needs to help restore the reputation of the international drugs industry, which lay in tatters following the recent debacle over whether generic Aids drugs should be made available to sufferers in South Africa.
The giant drugs group, whose HQ is in London’s Mayfair, is entering what McKillop acknowledges is a “critical phase in the business”. It must wean itself off dependence on Losec, an ulcer treatment which is the world’s biggest-selling drug with sales of £4.4 billion. The task involves heavy marketing and development costs, making some investors anxious.
Generic versions of AstraZeneca’s cash cow could be available from October, dramatically eroding revenues. Tom McKillop’s strategy is to prepare the stockmarket for the worst: that Losec’s patent will be fully lost even though there’s a chance it could be extended until 2007.
He said: “We are making assumptions that we may have generic [versions of Losec], but we think we have a very good chance of that not being the case and that there could be an offset.”
Last Thursday, some bearish analysts in the Square Mile were won over when AstraZeneca announced that group sales for the first quarter of this year had risen 7% — to nearly £2.8bn. In marked contrast to the grim picture in the technology sector, the company managed to lift operating profits by 12% to £730m.
But there was fodder for the bears in a warning that second-quarter profits would suffer because of heavy investment in the launch of Nexium, Losec’s replacement ulcer treatment, and in bringing other “next-stage” drugs to market.
McKillop is encouraged by “very promising” early take-up of Nexium, which was launched in the US in mid-March. He said: “It’s been available for a few weeks and has already taken a significant market share.”
But launching a drug seeking massive sales is not for the faint hearted. Last year AstraZeneca spent over £100m on building up its US salesforce to prepare for pushing Nexium into the medical world. Overall the development and launch is believed to be costing £700m to £1bn.
Tom McKillop said: “The aim is to ensure we retain the number one spot in gastroenterology.”
High hopes are also riding on AstraZeneca’s cholesterol-lowering drug, Crestor, which is to be filed with regulators this summer and reach the market next year. AstraZeneca is considering seeking a marketing partner to promote this drug but has yet to reach a decision.
Privately, Tom McKillop seems to think his company will bridge the gap between Losec’s patent expiry and new drugs building volumes. He said: “I believe we can weather the shortfall with the tremendous portfolio we’ve got. We have one of the best R and D pipelines in the industry — we’ve got some really exciting new products coming forward very nicely.”
“The bears are saying Nexium is not going to be big enough, quick enough. The bulls are saying they’ve got a terrific Research and Development pipeline and that is where the real value lies. You’ve got quite a polarised view on the same facts. Our job is to communicate accurately and let the market decide for itself.”
The real platform for Astra-Zeneca’s recent success was its merger with Astra —a Swedish-based drugs group part-owned by the powerful Wallenberg family. McKillop earned his spurs by completing the deal in a record 80 days and getting top executives from the merging businesses to face in the same direction, despite over 6,000 redundancies.
“The merger was not forced on us, a one-night stand or an instant falling in love. We had thought long and hard about what kind of company we wanted to create.”
The weekend before the deal was unveiled, Tom McKillop secreted senior management from both sides to an Essex hotel to thrash out structures. He believes this helped “build the spirit between the two teams”.
He said: “When I was invited to be chief executive, I went away for the weekend to my home in Cheshire. I had a good long walk and I sat in my study thinking about what we would need to do.
“At that point I formed a few key principles and we really implemented those. I said the merger had to be fast, fair, flexible and forgiving. That was behaviourally how we had to operate. Speed is awfully important as you have tremendous insecurity in these situations.”
He also divested Zeneca’s chemicals businesses — which means that its former unit at Grangemouth is now trading under the names Avicia and Syngenta. The result is that AstraZeneca is one of the purest players in the pharmaceutical sector.
But McKillop, whose pay packet is now £1.3m, believes that the merger stands out because it boosted market share. “It’s the first time in our industry that a merger has led to an increase in market share within a year [of the merger]. There is usually so much internal focus that people take their eye off the ball.”
The lifeblood of any pharmaceutical company is the quality of its R and D and its boffins’ hit rate in dreaming up and creating new drugs. AstraZeneca has 12,000 drugs in R and D, located in labs in Sweden, the UK, US, France, India and Australia.
Tom McKillop said: “Stopping failing projects early is very important. You’ve got to be prepared to put your resources behind the most probable projects and to take the tough decisions.”
McKillop also plays a role as senior ambassador for he pharmaceutical industry. He recently served as co-chairman of the government’s drugs industry taskforce, which has helped ram home the sector’s significance to the UK economy. He said: “We are concerned that the competitiveness of the UK is diminishing as a base for this industry. It’s the kind of industry the UK has got to succeed in. Twenty-five per cent of all industrial research is done in pharmaceuticals and it’s a major employer of well- educated people.”
Nevertheless, he acknowledges that the industry suffered a severe setback with its abortive legal battle in South Africa —although he is incensed by some claims made in the media. “There’s an emotional imbalance. When you start talking about the World Trade Organisation and the need to protect innovation these are never going to stand up in PR terms against images of a boy dying of Aids.” Implying the South African government’s approach to Aids is wanting, he said “the industry is a beautiful scapegoat”.
“Oxfam and Medecins sans Frontires have a tremendous credibility in the public mind and, when they blame the pharmaceutical industry, everyone assumes it’s true.” But Tom McKillop believes there is a silver lining to the affair. “For the first time in my experience we are now having intelligent discussion about the issues at stake.”
He believes the drugs industry could and should make products available at different prices according to a country’s’ ability to pay. “But we need help — we need a lot of people working coherently on this. The G7 countries need to commit serious money to building a health infrastructure in the developing world.
“This industry is not fabulously profitable. You’ve got winners and losers — but in aggregate it’s a total myth to say the industry is fabulously profitable. The cost of bringing a new product to market is $1bn (£700m) and it takes 10 years before you sell a dollar’s worth, and there’s a one-in-10 chance of a product you take into development making it. It’s transparently ludicrous that people would be prepared to invest that kind of money if the products were to be made freely available everywhere.”
SIR TOM MCKILLOP MINI PROFILE:
NAME: Dr Tom McKillop
BORN: Ayrshire, March 19 1943
EDUCATED: Irvine Royal Academy and Glasgow University. PhD in Chemistry in CMOA, Paris
1969: Joined ICI’s research laboratory
1978: Head of research at ICI Pharmaceuticals France
1994: Demerger of ICI’s pharmaceuticals division, which became Zeneca. Tom McKillop is its first CEO.
1999: CEO of AstraZeneca plc. Became a non-executive of Lloyds TSB.
PURPLE PATCH FADES FOR LOSEC
Until the 1970s, the most common treatment for stomach ulcers was surgery. Today there are many drug-based therapies – which have saved health boards money and proved a rich vein for pharmaceutical companies.
The most successful product, AstraZeneca’s Losec, marketed as the “purple pill” in the US market and with annual sales of £4 billion, has pretty much cornered the market for proton pump inhibitors. These stop the production of stomach acid as part of dual therapy for ulcers. But Losec is reaching the end of its natural life, as its core patent expires this October.
The Anglo-Swedish drugs giant is challenging the makers of generic Losec in the US courts at the same time as rushing out a replacement product called Nexium. But it remains to be seen how quickly Losec’s sales will evaporate and whether AstraZeneca’s strategy will work.
Copyright SMG Sunday Newspapers Ltd 2001
Ths profile interview with Sir Tom McKillop was published in the Sunday Herald on 29 April 2001