Investor demands on Astra's cash shows industry must improve R&D prowess


Comments made by some of AstraZeneca’s biggest investors in the wake of the announcement yesterday that chief executive David Brennan will be departing are likely to have had many a pharma executive shifting uncomfortably. The Financial Times among others reported that leading shareholders would prefer to see greater cash returns wrung from the company and R&D investments curtailed rather than any other strategic course pursued.

The analysis below shows that Astra already spends a much smaller proportion of its income on drug research than most of its peers; the generosity of its dividend is about average and share buy back programme substantial (see tables). With the company’s profitable products nearing the end of their lives, milking the cash cows dry without replacing them inevitably means a much smaller future herd. It is understandable that investors fed up with pipeline failure see this as a preferable option, and should serve as a wake up call to those striving to prove that the pharma industry can improve returns on R&D productivity.

How to spend it

The issue of R&D productivity and how to improve it rightfully remains a huge preoccupation of the pharma industry and its investors. The decline in returns on investment is well charted and companies have mounted varying responses to the ever increasing difficulties in bringing new drugs to market.

Diversification has served some like GlaxoSmithKline and Sanofi well and appears to be a path prefered by investors at the moment. The likes of Eli Lilly and AstraZeneca, which have not strayed from the pure play pharma path, have fared less well.

The events in the AstraZeneca boardroom this week serve to show that investors are willing and able to flex their muscles when it appears this path leads nowhere. All pharma companies, to greater and lesser extents, are facing the same demands as Mr Brennan and his boardroom colleagues.

Companies like Bristol-Myers Squibb, which has scored a string of pipeline successes recently, show that investing in R&D can pay back. Meanwhile a good year for new drug approvals last year raised hopes productivity is on the rise.

However, the pressure from investors to prove this is really the case is unlikely to abate as austerity measures continue to pressure drug prices. Different parties will inevitably have different ideas about how the money should be spent, and industry needs to continue working hard to win the argument or more scalps will be claimed from more boardrooms.

Big Pharma dividend payout ratios and other metrics
Payout as % of earnings
Company 2006 2010 2012 2014 Change 10-14 EPS CAGR (10-14)  DPS CAGR (10-14)  Active share buyback programme?
Bristol-Myers Squibb 111% 59% 71% 61% 2% 1% 2% yes
GlaxoSmithKline 52% 70% 63% 59% (11%) 13% 8% yes
Eli Lilly 51% 41% 61% 73% 32% (13%) (0%) no
Roche 36% 55% 54% 55% 0% 9% 9% no
AstraZeneca 45% 38% 50% 51% 13% (1%) 6% yes
Sanofi 38% 35% 48% 51% 16% (1%) 9% no
Novartis 34% 43% 47% 45% 2% 5% 6% yes
Merck & Co 60% 44% 43% 37% (7%) 4% (0%) yes
Pfizer 47% 33% 39% 41% 9% 3% 9% yes
Johnson & Johnson 39% 44% 38% 33% (11%) 6% (2%) no
Average 51% 46% 51% 51%

As the table above shows, Astra actually fares pretty well in terms of shareholder returns, compared to its peers. Its dividend payout as a proportion of its earnings have risen substantially over the last five years and after spending $5.6bn buying back stock last year, committed to a further $4.5bn spend this year. 

Others do appear to be paying out more, and investors clearly see room for greater generosity. Comments from the board yesterday imply that they are cognisant of the need to protect or even inflate this payout, and any successor will be under huge pressure to do so.

The table below also shows that as a proportion of its income from prescription drug sales, the company comparatively spends fairly little on R&D. Again, investors clearly see room for that ratio to decrease further and given the company's track record, perhaps that is a better use of money.

But for those who believe in big pharma's capacity to innovate its way out of the productivity crisis and ability to invent vital new medicines, seeing AstraZeneca run primarily for cash will be a sorry sight.

Big pharma R&D spend as % of prescription drug sales 
2006 2010 2012 2014
Bristol-Myers Squibb 22% 22% 27% 25%
Eli Lilly 21% 23% 25% 27%
Johnson & Johnson 22% 21% 22% 21%
Roche 20% 22% 21% 20%
Novartis 18% 19% 20% 20%
Merck & Co 17% 20% 18% 18%
GlaxoSmithKline 17% 16% 17% 16%
Sanofi 16% 16% 16% 15%
AstraZeneca 15% 13% 16% 16%
Pfizer 16% 17% 14% 14%

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