Jeremy Warner's Outlook: More than careless as Astra suffers new blow

Cairn Energy; Christmas spirit; Actuarial angst
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The Independent Online

If aspirin were invented today, Sir Tom McKillop, chief executive of AstraZeneca, is fond of observing, it would fail to get US Food and Drug Administration approval. In many ways a miracle drug that dulls pain and helps prevent heart disease and strokes, it can also in a small number of cases cause potentially fatal gastric ulcers. Could such a product ever hope to gain approval in today's risk averse world? Sir Tom thinks there is a real danger it would not. Yet innovation and progress require risk taking, and within reason, that's the culture he encourages in his own company.

If aspirin were invented today, Sir Tom McKillop, chief executive of AstraZeneca, is fond of observing, it would fail to get US Food and Drug Administration approval. In many ways a miracle drug that dulls pain and helps prevent heart disease and strokes, it can also in a small number of cases cause potentially fatal gastric ulcers. Could such a product ever hope to gain approval in today's risk averse world? Sir Tom thinks there is a real danger it would not. Yet innovation and progress require risk taking, and within reason, that's the culture he encourages in his own company.

Unfortunately, it doesn't seem to be paying off. Hard on the heals of the FDA's damning rejection of Astra's anticoagulant drug, Exanta, comes news that its lung cancer treatment, Iressa, has failed to show any significant survival benefits in a major clinical study. Sir Tom insisted yesterday that there was some benefit in certain subgroups, such as those of oriental race or lung cancer victims who have never smoked, and that in some people the drug improved quality of life, yet there's no getting away from the substantive finding which is that in the great bulk of cases the drug is no more effective than a placebo.

It could have been worse. Like Merck's Vioxx, the drug might have been shown to be positively harmful. Fortunately, this doesn't appear to be the case. Even so, the news is quite bad enough. Yesterday's findings make the product, for which Astra and its supporters had high hopes, essentially redundant in all markets other than Japan. All it would require now is for Crestor, a cholesterol reducing drug which has been publicly criticised by a senior FDA official, to be clinically proven unsafe and the company would be in complete meltdown.

Sir Tom insists that he's getting the balance right in research and development between risk and potential reward. Crestor, Exanta and Iressa are all fundamentally different approaches to treating these conditions than tried and tested methods. The risk run in developing such treatments is correspondingly higher, yet in Sir Tom's view it is what both medicine and investors want. Quite so, but is it not possible to have both innovation and low risk at the same time?

Most drug companies would argue that it is. The chief criticism of AstraZeneca is that it has failed to move with the times so that data and tests are presented in a way that will satisfy the FDA. Sir Tom is also guilty of over-optimism. A humbled Sir Tom insists he still has the support of the board and intends to soldier on as long as that's the case. Yet he's due to go anyway at the end of next year, and in a few weeks' time there will be a new chairman, Louis Schweitzer of Renault fame, to oversee him. In recognition of the company's R & D failings, Dr John Patterson is being appointed to the board in charge of overseeing the development programme.

It would be a shame if Sir Tom, who in the round has been an outstanding chief executive during his five years at the helm, were forced to bow out on such a low note. There's no obvious successor in sight, and with the City in its present frame of mind, it might in any case be wise to look for an outsider. Appetite for risk is an admirable quality, but you can always have too much of a good thing.

Cairn Energy

The higher they rise ... Cairn Energy's appearance in the FTSE 100 share index looks as if it will prove as transitory as that of Bookham, Baltimore and other now forgotten wonder stocks of the past. Natural resource companies are subject to exploration setbacks; it comes with the territory, and the discovery by Cairn that part of its Rajasthan acreage contains a lot less oil than investors had imagined, was in many respects wholly predictable.

Yet Cairn is no Poseidon, the Australian gold mining stock which rose from nothing to £124 before sinking back to nothing again. The company's two original Rajasthan fields are real enough. Recent data has suggested their recover potential is greater than expected. It is in one of the extension areas where hopes have been dashed. There's a lot less oil there than investors were hoping for. Bill Gammell, the chief executive, insists the potential elsewhere remains good, but having been bitten once by disappointment, investors will be twice shy.

Worryingly, the company has also been hit by demands for greater royalties from the Indian government, which plainly reduces the value to shareholders of the existing pool of proven reserves. Mr Gammell, a former Scottish rugby international who bizarrely was a childhood friend of both Tony Blair and George W Bush, has always been modest about his achievements and acutely aware of how precarious his position is after such a meteoric rise. Yesterday's near 20 per cent collapse in the share price serves as a sharp reminder of just how volatile the natural resource business can be.

Mining stocks are the new dot.coms. A huge number of them have been floated on AIM over the past couple of years, many of them frankly on little more than a wing and a prayer. Take care to be off the escalator when the music stops.

Christmas spirit

I always look forward to Professor John Kay's Christmas cards. As one of Britain's most engaging and iconoclastic economists, he's a master at getting the old brain cells working overtime, and he extends this talent to his cards. This year's offering contains a drawing of two $50 notes, gift labelled as from Professor Waldfogel to his wife and vice versa. Professor Waldfogel's argument is simple, reads an explanation inside. Suppose I give you a tie that cost me $50. It is unlikely you would have bought that tie had I given you a $50 note instead. The difference in value between what I bought and what you would have done with the money is a measure of the inefficiency of gift giving - the deadweight loss of Christmas. So now we know. Bah, humbug to you too.

Actuarial angst

Prediction is easy, it is sometimes said, except when it's for the future. The actuarial profession used to be regarded as a dull old business that made accountancy look interesting, yet in recent years it has managed to get its predictions so spectacularly wrong that all of us have been forced to sit up and take notice. The purpose of an actuary is to help pension funds, savings institutions and governments assess their long-term liabilities, which necessarily involves making certain assumptions about the future.

The charge sheet is damning. Most of them wholly failed to predict the downward path of inflation and interest rates during the 1990s, or its persistence. They also failed to allow for the collapse in the stock market and more generally they failed to question the prevailing orthodoxy that equities could be expected to provide healthy long-term returns.

The result was disaster. Sir Derek Morris, a former chairman of the Competition Commission, has been looking on the Government's behalf into the causes of these failings and what might be done about them. His starting point is the collapse of Equitable Life, which in part was down to over-optimistic actuarial prediction, but he might just as well have begun with endowment shortfalls or pension fund deficits. The savings industry has widely over-promised. It based these promises on what actuaries said would happen.

Sir Derek suggests a number of low key and sensible reforms, yet the key is for companies, governments and savers not to put so much trust in these people in the first place. No one can predict the future. All actuaries can do is assess the risks and lay them transparently before those who must face the consequences. The problem in the past is that directors, trustees and salesmen were only too happy to hide behind the unduly sanguine forecasts of their actuaries, who too often told them only what they wanted to hear. That's got to change.

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