AstraZeneca in drive to slash costs

Hostile environment prompts root and branch review. Exanta unlikely to win US approval in near future

AstraZeneca, the UK's number two pharmaceuticals company, has launched a "root and branch" review of its business in a search for cost savings that can help counter worldwide pressure on drug prices.

AstraZeneca, the UK's number two pharmaceuticals company, has launched a "root and branch" review of its business in a search for cost savings that can help counter worldwide pressure on drug prices.

Sir Tom McKillop, its chief executive, warned investors yesterday that the pharmaceutical industry is facing a "hostile" trading environment and margins are coming under relentless pressure.

The company is to launch a string of internal initiatives to try to safeguard profitability in the face of government efforts to force down the cost of medicines. It will examine the regional management infrastructure, manufacturing and distribution arrangements and, above all, the soaring costs of its sales and marketing machine.

Sir Tom said: "The sales and marketing costs of pharmaceuticals has risen dramatically in recent years, and we have to consider more creative ways of reaching physicians, ways that are more cost effective and more time effective."

AstraZeneca spent $4bn (£2.2bn) on sales, marketing and administrative expenses in the first six months of this year alone, twice the amount it spent on research and development. Several drug industry leaders have spoken over the past few years about the need to cut back their giant sales forces. But encouraging doctors to prescribe their product over a rival continues to be vital if the company is to recoup the costs of developing a new drug, estimated at up to $1.2bn.

Stewart Adkins, a pharmaceuticals analyst at Lehman Brothers, said he was sceptical the AstraZeneca review could yield industry-leading savings. "There is a need for the drug industry to reconsider the relative balance of research and development spending and sales and marketing spending. But can a company change that unilaterally? I think they might find there is a first mover disadvantage."

AstraZeneca employs 60,000 people worldwide. Sir Tom insisted the review was not about cutting jobs but rather about increasing productivity within a growing company. He was speaking at the company's annual "business review day" for the investment community.

Sir Tom's downbeat assessment of the industry's prospects and some disappointing product news combined to make AstraZeneca's shares the poorest performers in the FTSE 100. They closed down 69p at 2,214p.

The company said there was little chance of Exanta, its revolutionary anti-clotting pill, being approved in the US in the near future, and revealed that the next big drug launch - a diabetes treatment called Galida - has been delayed by a year because the class of drug has been associated with cancer fears.

A panel of doctors concluded last month that Exanta might not be sufficiently useful and is certainly too dangerous to allow on the US market. The product is on the market in some European countries, but Sir Tom said he was not optimistic that the US regulator would go against the advice of its doctors unless further safety trials were done.

But he struck a note of defiance, saying he believed the doctors had "got it wrong" and that the liver problems which can be a side effect of the drug can be overcome if patients are monitored.

AstraZeneca said it would not be file for regulatory approval for Galida until 2007, rather than 2006 as initially expected, because more safety tests were needed.