Analysis of AstraZeneca International
ESM 210 – Strategic Management
May 30, 2002
Jennifer Gibson
Tom Whitaker
AstraZeneca International
Analysis of AstraZeneca International
Introduction
AstraZeneca International was formed in April 1999 with the merger of two leading
pharmaceutical companies, Astra AB of Sweden and Zeneca Group PLC of the United Kingdom.
Both Astra AB and Zeneca Group PLC had built impressive pharmaceutical drug businesses.
Zeneca was a major international bioscience group engaged in the research, development,
manufacture and marketing of pharmaceuticals (focusing on cancer, cardiovascular, central
nervous system, respiratory and anesthesia), agricultural chemicals, and specialty chemicals.
Zeneca had established its oncology business in 1973 with the launch of Nolvadex, the first
targeted treatment for breast cancer. Astra AB's research, development and marketing efforts
were focused primarily on pharmaceutical products in four main product groups: gastrointestinal,
cardiovascular, respiratory and pain control, in addition to research in the central nervous system
(AstraZeneca, 2002b).
The merger made AstraZeneca one of the world’s leading pharmaceutical companies, with a
strong research base in addition to their portfolio of medicines. AstraZeneca spent over $10
million on R&D every working day in 2001, totaling over $2.7 billion for the entire year. The
company’s sales in 2001 totaled $16.5 billion, encompassing over 100 countries, with
manufacture in 20 and major research centers in 5 (Figure 1) (AstraZeneca, 2002b).
AstraZeneca’s sales represent a 4.9% share of the global pharmaceutical market (AstraZeneca,
2002c). AstraZeneca’s operating profit reached $4.2 billion in 2001 (AstraZeneca, 2002c).
AstraZeneca’s corporate headquarters are located in London, with the R&D headquartered in
Sweden, and a strong presence in the U.S. Led by Chief Executive Tom McKillop, AstraZeneca
has more than 54,000 employees worldwide. In 2000, AstraZeneca ranked fourth in the world
pharmaceutical industry. AstraZeneca’s two biggest product areas are in the treatment of
gastrointestinal disease ($6.3 billion in sales in 2001) and cardiovascular medicines ($3.5 billion)
(AstraZeneca, 2002c). Other key product areas are oncology (cancer treatment), respiratory and
inflammation products (asthma), treatment of central nervous system disorders, pain control, and
infection treatments (Figure 2).
Pharmaceutical Industry Analysis
Increasingly, pharmaceutical companies are selling off their ancillary businesses, which focused
on agriculture, chemicals, medical devices, or other related products, and are solely in the
business of developing medications. In 1999, AstraZeneca spun off and merged its agrochemical
business with Novartis’ crop protection and seeds businesses, resulting in the first dedicated
agribusiness company (Herper, 2001b). This has been repeated throughout the pharmaceuticals
industry, as more and more companies are focusing solely on drug development and marketing
and moving away from a diversified operation. This is occurring since the pharmaceuticals
industry is a high-growth, low-margin business, and any other operation reduces a company’s
earnings. Due to a company’s patent rights, providing the exclusive right to sell the drug, as well
as the high demand for the products, firms can charge a premium for the medicine. To keep
profits rising, the largest pharmaceutical companies tend to rely on a handful of blockbuster
1
AstraZeneca International
drugs to bring in a majority of their annual sales. AstraZeneca’s top ten drugs contributed to
nearly $12 billion of the annual sales for 2001, accounting for more than 70% of the company’s
total annual sales. Of these drugs, the top two, Losec and Zestril, accounted for $6.8 billion, or
more than 40% of the company’s total sales (AstraZeneca, 2002c). This is repeated throughout
the industry, with companies focusing their energies on fewer products that generate sales in
excess on $1 billion (Herper, 2001b).
The difficulty of operating a diversified business can be seen through an analysis of Porter’s five
forces for the pharmaceuticals market. First, there are huge barriers to enter the pharmaceutical
industry. Large amounts of time and research go into new drug development. For example, the
drug Erbitux was developed by Bristol-Myers Squibb to fight colon cancer. Nearly $2 billion
dollars went into its development, yet in 2001 the Food & Drug Administration refused to review
the trial results, creating serious delays and additional marketing costs (Moukheiber, 2002).
These large development costs and the uncertainty regarding drug approval make the
pharmaceuticals market an extremely difficult market to enter.
However, in the areas of supplier and buyer power, as well as substitutions, the pharmaceutical
industry appears to be a very attractive market. Due to patent protection and a high demand for
the drugs, firms have the ability to charge higher prices for an increased profit margin. Buyers,
on the other hand, are very unlikely to find substitutes for the marketed drugs. In many cases,
patients are in a position where access to the drug could be instrumental for their recovery. This
reduced buyer power forces consumers to pay premium prices in order to have access to the drug
they require. General strategy for pharmaceutical manufacture is to operate a small number of
sites for the manufacture of active pharmaceutical ingredients. Their global purchasing policy is
aimed at ensuring the secure supply of raw materials, manufacturing equipment, and other key
supplies, all of which are purchased from a wide variety of sources.
One concern is the way in which large corporations manage their suppliers. There is a worry that
companies use suppliers that do not apply the same high social and environmental standards as
their own and thereby avoid taking full responsibility for impacts caused by their activities. In
AstraZeneca’s Safety, Health, and Environment Management Standards (SHE), they addressed
these concerns and in 2001 provided additional support to purchasers in the form of a new global
guideline that prescribes that suppliers adopt their Corporate Social Responsibility (CSR)
principles (AstraZeneca, 2002a).
AstraZeneca operates in the highly competitive and regulated prescription pharmaceutical
market. The principle competitors are other major pharmaceutical companies, such as Merck,
GlaxoSmithKline, Pfizer, Lilly, and Novartis. See Figure 3 for a comparison of AstraZeneca’s
stock prices compared to their competitors. AstraZeneca’s ability to maintain and enhance their
competitive position in specific therapeutic areas depends primarily on the development of new,
innovative, cost effective products. Drug patents play an important role in reducing the rivalry
among competing pharmaceutical firms. As long as a company’s drugs are protected through
patent rights, other companies are unable to create an identical drug and charge consumers
competitive prices.
2
AstraZeneca International
As with many markets, however, non-market forces play a huge role in the future profitability of
the pharmaceuticals industry. Drugs typically only enjoy 12 to 14 years under a patent’s
coverage (Ghosh, 2001). Once the patent protection is gone, drug prices plummet. Typically,
within 12 months of expiration nearly 80% of a drug’s business will migrate from the developers
of the drug to copycat manufacturers such as Barr Laboratories and Mylan (Ghosh, 2001).
Patent expirations have a huge effect on the industry. By 2005 a collection of brand drugs that
pulled in more than $35 billion in the U.S. in 2000 will lose their patents. This is nearly more
than twice the amount that patent expiration had cost companies for the entire 1990s. The
market share for generic drug prescriptions has increased from 33% to nearly 45% over the past
decade (Ghosh, 2001).
Since drug patents will eventually expire, diminishing the value of the drug, pharmaceutical
companies need heavy-duty research facilities to keep a steady pipeline of new drugs.
AstraZeneca’s success ratio of bringing new products to market is among the best in the
pharmaceutical industry (AstraZeneca, 2002b). They currently have several new products
coming to market in the near future, including a lipid-lowering statin, a new oncology therapy
for breast cancer and a breakthrough medicine for the treatment of non small-cell lung cancer
(AstraZeneca, 2002b).
Even with the factors previously discussed, the prescription drug market is a very attractive
market for long-term growth. The market was worth more than $330 billion in sales in 2001 and
is increasing by more than 10% annually. Developed countries typically commit 7% to 14% of
their gross domestic product to healthcare, of this, typically one-tenth relates to prescription
medicines (AstraZeneca, 2002c). In addition, demography favors the industry: Society is aging
and the elderly consumes more than three times as many prescription drugs as the population as a
whole.
Non-market forces, however, also offer a huge risk to the industry. The United States
prescription drug market, the world’s largest, is under increasing critique regarding the high cost
of medicine. Should legislators institute price controls, drug companies will see their steady
profit growth diminish. Due to the huge expenditures in research and development and the lack
of diversification of leading drug companies this would cause serious damage to the
pharmaceuticals market.
AstraZeneca’s Corporate Strategy
To ensure continued growth and success, AstraZeneca’s corporate strategy is to transform their
portfolio from successful but mature brands to a range of new products. Specific R&D targets
include doubling the value of their portfolio by increasing candidate drug output, doubling the
development project success rate to 20%, and delivering three or more medically important,
commercially successful products per year by 2005 (AstraZeneca, 2002b).
The transformation of their portfolio is particularly important, as several major patents will soon
expire, including Losec and Zestril. This transformation involves a focused investment in R&D,
realizing the full potential of both the established portfolio and the potential pipeline,
3
AstraZeneca International
maintaining and building on their positions in key markets, including the U.S., Europe, and
Japan, and effective resource allocation and cost control (AstraZeneca, 2002c).
They aim to accomplish these goals through six steps. First, they will grow through key product
development with the successful launch of new medicines. In 2002, three new medicines will be
launched, including Crestor (lipid lowering), Exanta (thrombin inhibitor), and Iressa (lung
cancer). Second, they are striving to be the first choice for customers by meeting the medical
needs of patients in a cost-effective manner. Third, they aim to be the number one
pharmaceutical company in the U.S. The U.S. has the world’s largest market for
pharmaceuticals, worth $169 billion and growing at 16% a year (AstraZeneca, 2002c). In 2001,
AstraZeneca achieved a strong sales performance of $8.7 billion with a growth rate of 7%. Their
sales ranked fourth in the U.S., with a share of 5.8% in the prescription US pharmaceutical
market. (AstraZeneca, 2002c) (Figure 4) Fourth, they will secure the flow of new products
through continual investment in R&D. In 2002, the current pipeline has 86 projects, of which 25
are currently in the development for launch phase (AstraZeneca, 2002c). One emphasis in R&D
is the collaboration with genetics and biotechnology. Access to external expertise and
technology has been expanded by collaboration with an increasing range of universities and
other companies, particularly in the drug delivery and strategic outsourcing which is now used
widely, accounting for about 30% of total development (Gibson, 2002). Fifth, they will build the
talent base by attracting and retaining the best talent through a performance-based culture. In
2001, they introduced their employer of choice initiative, which centers on the areas of work
environment, learning and development, and reward. The sixth step is to focus on fast, effective
organization, enabling them to respond quickly and efficiently to changing business needs.
AstraZeneca’s corporate strategy is rooted in their mission statement, which has three facets:
discovering, developing and delivering innovative pharmaceutical solutions; enriching the lives
of patients, families, communities and other stakeholders; and creating a challenging and
rewarding work environment for everyone (AstraZeneca, 2002b). AstraZeneca has a corporate
philosophy that values social responsibility and a culture that encourages employees to volunteer
within their communities. They pledge to serve as a good corporate citizen in all communities
where they conduct business. This is accomplished through community outreach programs,
partnerships with nonprofit organizations and schools, and employee volunteer initiatives. In
2001, a total of $19 million was invested in local communities (AstraZeneca, 2002b).
A theme that pervades through the corporate culture is to “Take the Lead and Make a
Difference” within AstraZeneca, for customers, and with the local communities (Gibson, 2002).
There are several programs to encourage employee leadership in this area. One program is
AstraZeneca’s Foundation Patient Assistance Program (PAP), to provide products free of charge
to those who cannot afford them. In 2001, $182 million worth of product was donated to
indigent patients across the U.S. and Puerto Rico (AstraZeneca, 2002b).
AstraZeneca’s Environmental Strategy and Recommendations For Improvement
AstraZeneca seeks to improve human health and the quality of people’s lives through their
pharmaceuticals. However, their activities impact not only on the patients served and investors
but also on their employees and on society as a whole. As a major pharmaceutical company,
4
AstraZeneca International
AstraZeneca faces multiple challenges in the environmental area, including pollution from the
manufacture of pharmaceuticals, atmospheric emissions, the release of pharmaceuticals into the
environment and their subsequent fate and transport, and the potential effects from
biotechnology. They are also faced with additional social responsibility issues, including
providing increased access to medicines in developing countries and the proper care of
laboratory animals. This section will examine whether AstraZeneca’s corporate strategy seeks to
improve and protect human health in all facets of the company, including environmental
management.
In 2001 AstraZeneca set standards for corporate social responsibility (CSR). These standards
include (AstraZeneca, 2002a):
As a minimum, to meet national and international regulations
Importance of safety, health and environmental considerations
To make a positive contribution to the communities in which they operate
The individuality, diverse talent and creative potential that every employee brings to the
business are fully valued and respected
Marketing and sales practices are reputable
Ethical issues are dealt with in an effective and transparent way
Encourage suppliers to embrace standards similar to AstraZeneca’s
At the core of the CSR agenda is the commitment to good SHE performance. The SHE system
outlines eight standards by which to manage and provide for responsible health, safety, and
environmental practices (AstraZeneca, 2002b). These standards include making senior managers
responsible for ensuring that the SHE policies are effectively carried out as well as managements
responsibility to ensure that all staff are properly trained to work safely and with due regard to
the environment. In addition, the SHE outlines policies for open communication with the public
to provide for a mutual understanding of AstraZeneca’s operations as well as the concerns of the
public.
Following the annual review of SHE at the end of 2000, five objectives were set. The first was
to improve the safety, health, and well being of employees by introducing behavior-based
programs at all locations. The second was to have no accidents and to minimize the
environmental impact. The third was to publish information about SHE performance using the
internationally recognized guidelines produced by the Global Reporting Initiative. The fourth
objective was to conduct auditing as an essential part of continuous improvement. The fifth was
to reduce the growth of carbon dioxide emissions from facilities by 2005 by an amount
equivalent to 20% of 1998 emissions (AstraZeneca, 2002a).
AstraZeneca monitors its environmental performance in several areas. These include greenhouse
gas emissions, energy consumption, volatile organic compounds (VOC) and chlorofluorocarbon
(CFC) emissions, waste and recycling, water use and discharges, and unplanned releases into the
environment.
One of AstraZeneca’s biggest environmental concerns is the use of CFC propellants in asthma
inhalers. Although AstraZeneca is currently replacing CFCs in the propellants with HFCs,
5
AstraZeneca International
HFCs are greenhouse gases, so they are not the most desirable alternative. AstraZeneca has
begun efforts to reformulate inhalers, developing dry powder inhalers (DPIs), which do not
require any form of propellant. We recommend continued research and development of non-
propellant inhalers, which have greater environmental sustainability.
A current objective is to reduce the growth in CO2 emissions by 20% from a 1998 baseline
(Figure 5). AstraZeneca aims to accomplish this in two ways: using energy with lower CO 2
emissions, and improving internal energy efficiency. This is expected to deliver a saving
equivalent to over 100,000 tons of CO2 by 2005 (AstraZeneca, 2002a). Due to the large
contribution of CO2 emissions to climate change, we recommend further reductions, perhaps
50% of 1998 levels. In addition, with more than 54,000 employees worldwide, AstraZeneca is in
a good position to reduce global CO2 emissions with the implementation of carpooling programs
or incentives for employee use of alternative transportation.
Operating activities generated a total of 65,000 tons of waste, of which 36,000 tons was
classified as hazardous waste. This represents a 16% increase in hazardous waste production,
mainly due to production changes, limited capacity for recycling of solvents on site, and
increased production (Figure 6). Only 4% of hazardous waste and 26% of non-hazardous waste
was recycled, with 56% of hazardous waste and 22% of non-hazardous waste incinerated
(AstraZeneca, 2002a). We recommend the undertaking of a comprehensive pollution prevention
program, which evaluates the life cycle manufacturing process and may substantially reduce
waste generation, through improved inputs, closed-loop recycling, and nonhazardous by-
products. The analysis and implementation of such a program should create dramatic reductions
in waste generations.
A highly controversial current environmental issue is the use of biotechnology. AstraZeneca
utilizes genetically modified organisms (GMOs), including bacteria, mammalian and insect cells
in vitro, and transgenic animals (Gibson, 2002). They are optimistic that these in vitro
applications during early stages of drug development will reduce animal testing later. However,
due to health and environmental uncertainties regarding GMOs, substantial care should be taken
to avoid undesirable and unforeseen effects. In addition, we recommend safety committees, with
community and stakeholder involvement, to generate transparency with consumers and
encourage feedback.
Endocrine disrupting chemicals are a group of compounds that cause adverse effects on the
hormone systems of animals. Although certain substances are known to cause these effects, in
the 1990s tests indicated that a broad range of substances might be capable of acting as estrogen
mimics. This discovery was linked with a wide range of problems appearing in humans and
wildlife, due to impacts on hormonal systems. These effects include the apparent decline in
human male sperm count, with the associated concerns over human fertility, and the feminization
of fish and birds in several regions. In response, AstraZeneca’s environmental research team
began investigating this area. Further research is being conducted on these effects, yet the
uncertainty has prevented federal regulations. Since some of AstraZeneca's products for the
treatment of cancer work by modulating the endocrine systems, we recommend that AstraZeneca
take a proactive approach to minimize these potential impacts, including chemical substitution,
6
AstraZeneca International
higher degradability, and prevention of release into the environment, in addition to continued
studies of environmental fate and ecological effects.
Another potential environmental impact is the release of pharmaceuticals into the environment,
through effluent discharges from facilities and through excretion by patients. AstraZeneca
currently assesses the environmental fate and consequences of its products and processes to
comply with regulatory requirements for new drug applications. Although assessment and
monitoring to determine the pervasiveness of the problem are difficult, the health implications,
for both humans and livestock, are serious enough to warrant increased attention. Therefore, we
recommend continuous improvement in waste treatment technologies and collaboration with
regulatory agencies and academics on this topic.
Although AstraZeneca is not a company with a strong history in diseases affecting the
developing world, they announced a future commitment to ongoing research and development in
this area. This includes a new $100 million research center in Boston designed to focus on,
among other things, infectious diseases. In addition, in 2001, AstraZeneca announced a $10
million capital investment in India to focus on new treatments for tuberculosis, an infectious
disease diagnosed in nearly two million people every year in India and in over eight million
people worldwide (AstraZeneca, 2002a). They are also lobbying for the establishment of
creative, carefully constructed policies that will drive long-term improvements in healthcare for
the developing world. Recently, AstraZeneca announced support for the World Economic
Forum’s Global Health Initiative, which focuses on the role that businesses can play in reducing
diseases that contribute to global poverty and hold back economic development. We recommend
continual commitment in this area, along with the creation of a differential pricing structure for
developing countries.
Strategic Recommendations
Due to AstraZeneca’s worldwide presence, we feel it may be beneficial to implement global
policies for environmental management, instead of the current facility-specific approach.
AstraZeneca has implemented an internal SHE management system for all sites, which complies
with international SHE management standards, including ISO 14001. However, the decision to
seek external certification is granted to individual sites. To date, only four facilities have
received ISO 14001 certification (AstraZeneca, 2002b). A stronger commitment from top
management for certification will encourage consistency throughout the organization. This is
particularly important due to the substantial number of recent acquisitions. A standardized
environmental program will ensure that these new facilities incorporate AstraZeneca’s
environmental policies.
Informal communication with employees appears to indicate environmental performance is
viewed as secondary to pharmaceutical development (Gibson, 2002). Therefore, to obtain the
full cooperation of employees a change in culture is necessary, with backing from all levels of
management. Additional improvements in the systems of risk recognition and assessment, to
prevent future problems, and the increased provision of relevant information to all stakeholders
will help to improve environmental performance.
7
AstraZeneca International
Benchmarks
While continual improvement is a necessary part of corporate environmental management,
recognition of AstraZeneca’s current progress should be noted. Business in the Environment
ranked AstraZeneca 49th in the FTSE 100 companies, and 3rd in the pharmaceutical sector. This
index provides a measure of corporate environmental engagement, including the extent to which
a company manages its environmental impacts and then brings together all the elements of its
environmental programs as an integral part of its business strategy (Business in the Environment,
2002).
AstraZeneca was also included in the FTSE4Good index, which focuses on companies known
for their socially responsible investment strategies and approaches. The three criteria for
inclusion include working towards environmental sustainability, developing positive
relationships with stakeholders, and upholding and supporting universal human rights
(FTSE4Good, 2002).
A third benchmark is the Dow Jones Sustainability Index. AstraZeneca scored above the
industry average across the three primary areas of corporate sustainability, which include
economic, environmental, and social performance, as measured by over 30 criteria. AstraZeneca
is a member of the DJSI World Index, and is ranked 10th among the top global pharmaceutical
and biotechnology companies (Dow Jones Indexes, 2002)
Conclusion
While AstraZeneca is a company focused on the improvement of human health through the
development and innovation of new medicines, their actions and strategies contain some
disconnects between corporate and environmental goals. To provide the drug treatments
demanded by the public, the pharmaceutical industry must rely on the use of hazardous
chemicals and potentially damaging techniques such as GMO’s and endocrine disrupters. While
these chemicals and treatments are necessary to achieve the corporate goals of the company,
their effects on the environment may be contradictory to their social and environmental
responsibilities. In order to balance these to goals it is critical that AstraZeneca focus further
resources on the improvement of its environmental performance. AstraZeneca has become a
pharmaceutical industry leader in environmental protection; however, there is room for
improvement.
This paper recommends increased reductions in CO2 emissions, programs to increase employee
use of alternative transportation, implementation of a comprehensive pollution prevention
program that substantially reduces waste generation, the establishment of safety committees for
the evaluation of use of GMOs, a more proactive approach to the understanding and reduction of
the impacts of endocrine disrupting chemicals, and the continuation of their strong commitment
to the research of infectious diseases affecting the developing world. In addition, a stronger
commitment from top management on continued environmental management certification at all
facilities is important to show employees and stakeholders AstraZeneca’s dedication to high
environmental performance standards.
8
AstraZeneca International
Figures
Key Financial Data for AstraZeneca
2001 (U.S. $ million) 2000 (U.S. $ million)
Sales 16,480 15,804
Operating Profit 4,156 3,984
Dividends (Cash) 1,225 1,236
R & D investment 2,687 2,620
Earnings per share 1.77 1.64
Figure 1 (AstraZeneca, 2002c)
2001 Sales ($ Millions) Gastrointestinal
Figures (cont.) Cardiovascular
$1,007 $323
$999 Oncology
$1,556 $6,308 Respiratory and
Inflamation
Central Nervous
$2,146 System
Pain Control
$3,537
Infection
Figure 2 (AstraZeneca, 2002c)
AstraZeneca International
Figures (cont.)
Figure 3 (AstraZeneca, 2002c)
Sales by Geographic Area
10,000
8,000
$ million
6,000 2001
4,000 2000
2,000
0
U.S. Europe Japan All others
Figure 4 (AstraZeneca, 2002c)
AstraZeneca International
Figures (cont.)
Greenhouse Gas Emissions
13% Released from
products
15% Purchased
electricity
55% Transport
17% In-house operations
Total Emissions: 1.853 Mte
Figure 5 (AstraZeneca, 2002a)
Incineration with
Fate of Hazardous Waste Generated
energy recovery
4% 1%
Incineration without
energy recovery
17%
Other treatment
(biological,
chemical)
56%
Recycled
22%
Landfill
Total Hazardous Waste in 2001: 36,000 te
Figure 6 (AstraZeneca, 2002a)
AstraZeneca International
References
AstraZeneca. Corporate Social Responsibility Summary Report 2001. London: March 2002a.
AstraZeneca. AstraZeneca International Website. 22 May 2002b. http://www.astrazeneca.com
AstraZeneca. Annual Report & Form 20-F 2001. London: 2002c.
Business in the Environment. Business in the Environment Website. 26 May 2002.
http://www.business-in-environment.org.uk/
Dow Jones Sustainability Index. Dow Jones Indexes Website. 26 May 2002.
http://www.djindexes.com/jsp/index.jsp
FTSE4Good. FTSE Website. 24 May 2002.
http://www.ftse4good.com/frm_home.asp
Gibson, Joseph. Telephone interview. 21 May 2002.
Ghosh, Chandrani. “Patent Play.” Forbes 17 September 2001.
http://www.forbes.com/forbes/2001
Herper, Matthew. “Crops, Shmops. Pharmacia Spins Off Monsanto.” Forbes 28 November
2001a. http://www.forbes.com/2001
Herper, Matthew. “Drugmakers Get Addicted.” Forbes 5 June 2001b.
http://www.forbes.com/2001
Moukheiber, Zina. “Modesty Ablaze.” Forbes 18 March 2002.
http://www.forbes.com/forbes/2002