Tom McKillop's job could give you an ulcer. Luckily he has Losec, but for how long?

Time is running out on the patent for AstraZeneca's anti-ulcer drug Losec

By Stephen Foley
Thursday 10 April 2014 02:53

"I don't really want to talk very much about the Percy situation," says Tom McKillop, chief executive of AstraZeneca, in his clipped Scottish accent.

The Percy in question is Percy Barnevik, his boss as chairman of the UK's number two drugs company, and the "situation" is Mr Barnevik's decision, while chairman of the Swiss-Swedish engineering conglomerate ABB, to pay himself a pension of £61m and not tell his board. He's had to give half the money back and has been forced out of some of his other jobs as a result of the scandal, but AstraZeneca – first its board and, last month, its shareholders – gave him their backing to continue as company chairman.

"That was something to do with ABB, nothing to do with AstraZeneca," says Mr McKillop. "From the AstraZeneca perspective, we are transparent in our corporate governance, it was laid out at the time of our merger, there has been absolutely no issue about how the business is run – and Percy is a very good chairman."

It is almost verbatim what Sir Peter Bonfield, another senior non-executive, told shareholders at their annual general meeting, right down to describing Mr Barnevik's self-approved pension bonanza at ABB as "events outside AstraZeneca".

The top brass at AstraZeneca are always on-message. Mr McKillop is a polished performer, ever the politician, with his practised arguments and perfected soundbites. You know what he will say before he says it.

Which is okay, since the City hates surprises, and he is going to need all his skills at soothing investors' nerves during the coming months. He is trying to navigate one of the biggest patent expiries in pharmaceutical history, which could see its blockbuster anti-ulcer drug Losec facing copycat competition for the first time. Losec had sales of more than £10m a day last year. That's a lot to lose.

Mr McKillop has been preparing for this period for three years, since he and Mr Barnevik won the top jobs when Sweden's Astra, which developed Losec, was swallowed up by Zeneca. The active ingredient in Losec lost patent protection last October; now AstraZeneca is fighting tooth and nail in a New York court to defend patents on the way Losec is made, keeping generic rivals off the market in the process.

Fighting tooth and nail, but not dirty, says Mr McKillop. Although most in the City expect the company to lose, and the generic drugmakers have accused the company of taking vexatious legal action, he asserts the importance of defending the company's intellectual property to the last. Only by doing so can drug companies guarantee the returns they need on their investment.

"The cost of research and development has gone up quite dramatically," Mr McKillop pointed out. "Correctly, the regulatory authorities want only safe and effective products to go on the market but the demands for more and more evidence mean bigger clinical studies, more costly development processes taking a long time. It costs $1bn to bring a new major primary care product to market. That's a horrendous amount of money. You have to recover that investment during the lifetime of the product patents."

Mr McKillop is a Zeneca man through and through, one of the few FTSE 100 chief executives never to have worked at any other company. He joined ICI's research laboratories in 1969 with an academic background in chemistry, and was chief executive of the pharmaceuticals division by the time it was spun out, with the agrochemicals business, as Zeneca in 1993.

When the Swedish company Astra merged with Zeneca in a £46bn deal six years later Mr McKillop became chief executive of the combined group, brought together to join the race for size in the rapidly expanding global pharmaceuticals industry. It was the biggest corporate deal in European history, creating the world's third largest drug company by market value and Britain's fifth largest company across all sectors, and catapulted Mr McKillop from the sidelines to the centre stage.

As big pharmaceuticals companies come under pressure to maintain earnings in the face of disappointing new product pipelines and falling sales from off-patent drugs, many are succumbing to the temptation to cut research and development spending, but Mr McKillop insists AstraZeneca remains a research-driven organisation.

He explained: "All the action in a company like this is out in the research and development labs, the sales and marketing organisations, the manufacturing sites. We've got a very small head office – 130 people – I hate big head offices." Is that a dig at the rival GlaxoSmithKline, which has just moved into a £300m headquarters west of London? "You said it, I couldn't possibly comment," he replied deadpan. "I think there's an enormous tendency in large companies to centralise everything, but that's a waste of time. The leaders in a company should be out there where it is happening. We need to network effectively as a leadership, but not have everybody surrounding you. You want the barriers as low as possible between a senior executive and the rest of the organisation."

This is textbook Barnevik, the sort of management theory which AstraZeneca's chairman formulated at ABB and which won him chief executive of the year four years on the trot in the Nineties. Mr McKillop says he sits up until one or two in the morning reading about business.

He has emerged as the industry's lobbyist-in-chief, jointly heading a task force with the Government to protect and improve the position of the UK's pharmaceutical firms and now working its way down a 69-point plan of action.

He is also a staunch defender of the "industry against human rights" campaigners who challenge its role and motives with regard to the developing world. With clenched fists he argues that pressure groups got "carried away by some erroneous notion" when they protested against Glaxo last year – when the South African government fought to get the company to give up patent rights on its new Aids treatments. He says the industry point of view was never fully aired in the media.

"The problem isn't availability, because the industry has been offering these drugs for nothing or for very low prices for a long time; the problem is how the heck do you deliver them. The South African government isn't prepared to make them available, doesn't have the infrastructure, maybe, or the will," he says.

But how does he square the industry's moral circle, making multi-billion pound profits from life-saving drugs? Glaxo's travails showed the pressure the industry is under to give drugs away to the poorest nations. Is there any money to be made out of developing countries? "There are huge populations of people going to want better medicines, so over the long-term these will be important markets to the pharmaceutical industry. 'Money to be made out of them' has the wrong feel to it as a phrase at the moment, because you are not going to make a lot of money in Africa or in some less developed countries in Asia."

And if AstraZeneca's new research facility in India comes up with a novel treatment for infectious disease plaguing the developing world? "We have said we will try to develop that, and will work with agencies. Until we know what the product is, we don't know how, but we recognise that if we come up with something, there will be an expectation for us to do something like that. We don't want the company's reputation to be damaged by being accused of exploitation. We will do that honestly and with a commitment and dedication to try to bring some good. But we have to, of course, respect our shareholders."


Title: Chief executive, AstraZeneca

Age: 59

Pay: Basic £816,000, totalling £1.3bn with bonuses

Interests: Sport, reading, carpentry and music

Biggest influences: "My father. He was a coalminer in Ayrshire. At home there were books everywhere, and we used to have discussions about politics, religion, philosophy, everything. My parents were totally committed to education. That commitment has stayed with me all my life and I want it for my children."

What motivates you? "My vision is for everybody to die healthy. We should pop off with a heart attack or some other acute incident, so that in the later years of our lives we are still contributing to society."

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