4.1 Strategy and Learning

In the 1990s, global pharmaceutical companies began to develop highly sophisticated drugs, using new scientific insights from molecular biology, including cutting-edge recombinant DNA (rDNA) technologies. Developed by young biotechnology companies in collaboration with leading scientists, these novel biologics were the products of prolonged learning efforts, invariably rooted in government-funded projects. As new drugs entered the global market, major producers of traditional pharmaceuticals strategised how to transition into this booming segment.

Zeneca PLC was incorporated as an independent pharmaceutical company in 1993 following the demerger of Imperial Chemical Industries (ICI) and the spinoff of the company’s pharmaceutical division. Changing conditions of global drug markets and biomedical technologies posed a challenge to the demerged company’s top executives, as they sought new ways to boost its innovative productivity. Given the scale of, and the risk associated with, the investment necessary to expand into the biologics market, many established companies chose to enter into mergers.

In the late 1990s, Zeneca embarked upon discussions with Astra AB, based in Sweden. The senior executives of both companies were aware that neither Astra nor Zeneca possessed the productive capabilities necessary to transition into biologics. Both companies were searching for the ideal partner with which to pursue a merger-of-equals before becoming a takeover target amidst rising consolidation in the global pharmaceutical industry. Their merger into AZN in late 1999 created the world’s fourth-largest pharmaceutical company and the UK’s fifth-largest industrial organisation (see Figure 6).

Figure 6 Pre-merger evolution of AZN.

Source: Authors’ own illustration based on the compilation of information from various sources

Investor AB played a key role in the merger and further development of AZN. Founded in 1916, Investor is a Swedish investment company that has been tightly controlled by the country’s most influential industrialists, the Wallenberg family, through a governance mode known in the Nordic countries as the industrial foundation. Strategic control within industrial foundations has tended to be secured through a dual-class share structure. In the early 1920s, Astra, which had been founded as a Swedish pharmaceutical company in 1913 but was nationalised in 1920 after its bankruptcy, was acquired from the Swedish government by a consortium of Swedish industrialists and bankers, including Jacob Wallenberg. Subsequently, Investor held a controlling interest in Astra through a dual-class share structure, and at the end of 1998, preceding the merger with Zeneca, was still the pharmaceutical company’s most influential shareholder.

Over the past two decades, Investor has been a significant shareholder in other global companies, based in Sweden and abroad. However, prior to the merger, Astra was the largest holding in Investor’s investment portfolio. Reflecting the family’s ‘buy-to-build’ philosophy, Investor’s business strategy entails a long-term investment horizon with no timeline to exit. Investor favours involvement in companies with a dual-class share structure, which enables it to have active representation on corporate boards, with two or more directors including the board chairman.

Following the merger, AZN’s newly issued ordinary shares with one class of voting and dividend rights replaced the voting and non-voting shares of Astra, bringing the company’s dual-class share structure to an end. In AZN’s new single-class share structure, the majority of shares were owned by the former Zeneca shareholders. Following the merger, however, the Wallenberg family managed to acquire significant board representation, with former Astra executives filling seven of fourteen director seats. AZN’s board chairman was Percy Barnevik, CEO of the Swiss-Swedish power company ABB, in which Investor was the largest shareholder. He was also non-executive chairman of Investor. Marcus Wallenberg, CEO of Investor, was a director of AZN. Other former Astra executives became AZN’s non-executive chairman, executive deputy chairman, executive director of R&D, chair of the remuneration committee, and executive director of business development.

During the first five-year period following the merger, the directors with strong ties to the Wallenberg family were involved in major strategic decisions. During 2004, a series of events unfolded that reduced Investor’s influence on AZN’s board. It began with the pivotal ruling by the European Commission that required Volvo to sell its stake in Scania. With major stakes in both AZN and Scania, Investor reduced its shareholding in AZN from 5.0 per cent to 3.75 per cent to raise nearly $1 billion to purchase the vote-heavy A-shares of Scania (Reference Brown-HumesBrown-Humes 2004).

Investor’s downsizing of its shareholding in AZN resulted in a major transformation of the company’s board and senior executive team in 2004 and 2005. Barnevik, who had resigned from his chairmanship of Investor in 2002 in the wake of a scandal concerning the pension he had been awarded when he had retired as CEO of ABB (Reference WoodruffWoodruff 2002), stepped down from his post as AZN chairman in 2004. He was replaced by Louis Schweitzer, former chairman of French automobile maker Renault, who had no prior ties to Investor. In 2005, Schweitzer removed AZN’s first CEO, Thomas McKillop, filling the position with the head of the company’s US operations, David Brennan. Although Brennan was not the frontrunner among candidates to replace McKillop, the board promoted him from president of the company’s North American operations to lead AZN’s global operations as the new CEO.

During Schweitzer’s tenure, the AZN board continued to undergo major transformation, in part to address a movement that had been occurring since the 1990s within the UK business community to increase the number of independent directors of UK companies. Prior to Schweitzer’s arrival, major plans to amend the company’s corporate-governance policies were underway, including the appointment in 2003 of Michele Hooper, a corporate-governance expert, as an independent director.

AZN’s status as the world’s fourth largest pharmaceutical company following the merger was based largely on sales of the company’s flagship ulcer drug Losec/Prilosec and blood-pressure drug Zestril. AZN generated a steady flow of revenues from these drugs, which accounted for nearly 50 per cent of the company’s total revenues. With both drugs set to lose patent protection in major markets over the next few years, however, AZN struggled to come up with new replacements.

Given the prospective reduction of revenues because of patent expiry, AZN under McKillop responded by modestly increasing its R&D expenditure in the hope of developing drug replacements (see Figure 7). A successful replacement for the company’s ulcer drug arrived in 2001 with the approval of Nexium, a slightly more advanced version of Losec/Prilosec that had been developed by Astra researchers in the 1990s. The launch of Nexium was followed by Seroquel, a controversial anti-psychotic drug developed in the 1980s in the United States by scientists at Zeneca’s Wilmington, Delaware R&D facility (Reference GriffithsGriffiths 1996). AZN also found success with Crestor, a cholesterol-lowering drug. In the decade following the merger, booming sales of Seroquel along with Nexium and Crestor enabled AZN to more than double its annual product revenues from $15.1 billion in 1999 to $31.6 billion in 2008.

Figure 7 Product sales, net income, R&D spending at AZN, 2000–21

Note: The net income for AZN in 2021 reflects the extraordinary expenses the company accrued during the year.

Source: Authors’ analysis and graphic based on S&P Capital IQ and company annual reports.

Brennan became CEO at the onset of a period of rapid growth of the company between 2004 and 2007, with an average annual growth of product sales of 12.25 per cent. In the following four-year period (2008–11), however, the company’s product sales only grew at an annual average of 3.25 per cent. By the end of his tenure as CEO in 2012, Brennan had initiated a major R&D overhaul as several more AZN products faced patent expiry. A major increase in R&D employment related to globalisation of the labour force occurred from 2010 to 2012, with total R&D employment rising from 12,000 to 15,700 (see Figure 8). This expansion in R&D employment was followed by a deep restructuring with large scale job cuts in high-income regions, which left AZN with 11,300 R&D employees in 2011.

Figure 8 R&D spending (in £ billion), global employees and R&D employees at AZN, 2000–21.

Source: Authors’ analysis and graphic based on company annual reports

Replacing Brennan as AZN’s CEO was Pascal Soriot, who had to cope with the company’s plummeting sales, which dropped from $33.6 billion in 2011 to $22.1 billion in 2018, largely as a result of patent expiry of AZN’s flagship products. Under Soriot, who in 2022 remains AZN’s CEO, there has been steady sales growth of respiratory products. But his main focus has been a major reorganisation of the company to support biopharma product innovation. The transformation has centred on the combination of R&D units in six therapy areas – respiratory/inflammation, cardiovascular, gastrointestinal, neuroscience, oncology, and infection – into three focused R&D units: BioPharmaceuticals, Oncology, and Rare Diseases following the acquisition of Alexion. With the introduction of COVID-19 vaccines and therapies, AZN created a separate Vaccines and Immune Therapies Unit in 2022.

In reorienting the company to grow through internal innovation, Soriot has built on his experience at Roche’s wholly owned US subsidiary Genentech, where he oversaw the integration of Genentech and Roche R&D operations. AZN’s shift to biologics through a series of acquisitions has enabled the company to boost its clinical pipeline and alleviate concerns over AZN’s diminishing R&D productivity.

Figure 9 provides data for selected years on the evolution of the pipeline of AZN by different phases in the drug discovery process, as discussed in Section 2. We can observe a cyclical variation reflecting the drugs moving along the different phases of drug discovery, as well as a steady increase in the number of drugs that have been launched. There is no direct relation, however, between these dynamics in the drugs pipeline and variation in pharma product revenues. More importantly, these data do not allow us to understand changes in the organisational learning process within AZN under, first, Brennan, and, then, Soriot. Fortunately, this process was documented for AZN by its scientists in two studies published in 2014 and 2018, covering the periods 2005–10 and 2012–16, respectively.

Figure 9 AZN’s pharmaceutical products sales (£ billion), number of products launched and under development (pre-, early-, and late-clinical stages), 1999-FY2019/3Q2020

Note: The data for pipeline (preclinical, early-clinical, and late-clinical) and launched products illustrated in the figure are cumulative totals of product development activities reported by the company in the respective year. The latest available data for annual pharma product revenue is 2019. The latest cumulative totals include products that were under development (pipeline) or launched in 2019 through the third quarter of 2020.

Source: Authors’ analysis and graphic based on Pharmaprojects.

In the first study, published in Nature Reviews, Reference Cook, Brown and AlexanderCook et al. (2014) explain how the decline of the company’s R&D productivity between 2005 and 2010 resulted from a shift in the organisational culture during the 2000s away from incentivising ‘truth-seeking’ efforts to learn more about diseases and towards rewarding ‘progression-driven’ behaviours to meet ‘numerical volume-based goals’. Cook et al. blamed the ‘industrialization of R&D’ at AZN for the company’s clinical failures. The industrialisation of R&D, they argued, encouraged the adoption of a ‘volume-based approach’ that stressed the ‘use of quantity-based metrics to drive productivity’, but which ultimately undermined the ‘quality and sustainability’ of product pipelines (p. 419).

The scientists described the reorganisation of R&D, begun towards the end of Brennan’s tenure, to implement a new ‘five-dimensional framework’ (Reference Cook, Brown and AlexanderCook et al. 2014), which features decision-making guidelines for R&D teams to improve AZN’s innovative productivity. It was the presence of these forward-looking scientists at AZN that made it logical for the board to appoint the like-minded Soriot as the new CEO in 2013. Under Soriot, these dissidents to the ‘volume-based approach’ have gained more power within the R&D organisation. Rather than further expanding the company’s clinical pipeline, AZN has focused on enhancing the productivity of existing capabilities to improve the yield of the company’s drug development efforts.

These learning processes helped the R&D organisation reduce the attrition rate of the company’s clinical candidates and increase the success rate of late-stage trials while enhancing the efficiency of the company’s overall R&D spending. In 2018, seventeen senior R&D managers at AZN, including three of the authors of the 2014 Nature Reviews article, one of whom was the current executive vice-president of biopharmaceutical R&D, Menelas Pangalos, wrote a follow-up piece in which they examined the progress of clinical candidates in the company’s product pipeline between 2012 and 2016 (Reference Morgan, Brown and LennardMorgan et al. 2018). In addition to narrowing the company’s research focus to fewer disease areas and particular classes of targets, AZN established a thorough internal screening process to carefully evaluate and select fewer lead compounds to be further evaluated during the preclinical studies for their safety and efficacy. This reduction in the number of strategically selected and thoroughly assessed lead compounds to be pursued is responsible for the major improvement that AZN has achieved in the productivity of R&D, which became superior to the industry average in every stage of the drug discovery and development process.

This decision-making framework developed by AZN has encouraged project teams to assess the validity of targets by utilising new scientific knowledge developed through exploring disease genomics and has prevented the R&D organisation from pursuing those lead compounds for which insights into disease biology are limited. The drug-development efforts on genetically validated targets began to improve the company’s R&D yield in terms of drug candidates that successfully progressed through clinical trials. This innovative transformation of AZN’s R&D has enhanced the company’s internal capabilities for collaborative learning with the world’s leading genomics research institutes for the purpose of gaining insights into the pathology of various complex diseases. At the same time, the company’s advances in organisational learning have augmented its capabilities for integrating innovative acquisitions into its organisation.

4.2 Innovation through In-House Development and Acquisition

In addition to in-house drug development, AZN’s growth has been highly dependent on acquiring other companies and integrating them into its organisational-learning process. Over time AZN also restructured its product portfolio in part by divesting certain assets and units. Table 4 shows AZN’s acquisitions, major licensing deals, and divestments from 2001 to 2021.

McKillop, AZN CEO from the merger in 2000 to the end of 2005, focused on improving the company’s financial performance. During his tenure, AZN did no acquisitions. The company made some attempts at collaborative research and licensing arrangements with a small number of biotech start-ups in the United States such as Abgenix and Array BioPharma, but these engagements yielded no significant innovative outcomes.

Under McKillop, AZN shifted attention to the greater biotech community and revamped the company’s licensing efforts to expand its product portfolio in oncology, neurodegenerative, cardiovascular, and anti-infectives. In 2005, the company launched a new strategy to increase its innovative productivity and grow its revenues inorganically through pursuing licensing deals with companies such as Cambridge Antibody Technology (CAT), Astex Therapeutics, and Protherics in the United Kingdom as well as Targacept and AtheroGenics in the United States. AZN’s total cost of these deals included a $560-million payment to be made upfront plus $2.2 billion for contingent payments to be paid upon the products that were subject to licensing agreements achieving various clinical, regulatory, and commercial milestones.

Brennan changed direction by initiating the company’s acquisition spree, starting with the most promising British companies pioneering in the field of immunotherapy drugs such as KuDOS Pharma, CAT, and Arrow Therapeutics. In 2007, AZN made its most important acquisition by taking control of the US-based immunotherapy company MedImmune. As a result, there were sharp increases in goodwill, other intangible assets, and debt on AZN’s balance sheet (see Figure 10). The contributions of these acquisitions to the company’s drug-innovation processes depended on (a) the nature and the extent of new productive capabilities absorbed through these acquisitions and (b) the integration of these productive capabilities into AZN’s learning processes.

Figure 10 Intangible and tangible assets in relation to total net debt at AZN, 2000–21.

Source: Authors’ analysis and graphic based on S&P Capital IQ and company annual reports

In 2007, Brennan completed AZN’s largest acquisition, MedImmune, for $15.6 billion. Many shareholders criticised Schweitzer and Brennan for paying an excessive premium for MedImmune (Reference BarriauxBarriaux 2007; Reference PollackPollack 2007). AZN’s top leadership pursued the Medimmune acquisition because of the gloomy prospects for the company’s R&D productivity following the failure of multiple late-stage clinical candidates reported in 2006. As cancer immunotherapies entered the market for oncology drugs in the early 2000s, Big Pharma companies, including AZN and GSK, had very limited internal capabilities to develop immunotherapies. AZN paid a high acquisition price because of intense competition to acquire a company such as MedImmune, as did other companies for similar acquisitions. For example, in April 2008, Japan’s Takeda paid $8.8 billion for Millennium Pharmaceuticals, and in July 2008 Roche paid an enormous $44 billion to acquire the remaining 44 per cent stake of Genentech that the company did not yet own (the deal was completed in March 2009). Having won a bidding war against Bristol-Myers Squibb (BMS), Eli Lilly managed to complete the acquisition of ImClone Systems for $6.5 billion in October 2008. In July 2009, BMS paid $2.4 billion to acquire Medarex, a major competitor of Abgenix and CAT in the development of human antibodies.

In the cases of MedImmune and ImClone, the high prices paid for these acquisitions were in part because of the control that hedge-fund activist Carl Icahn had gained over the targets by winning major proxy fights. With AZN paying a 21 per cent premium for the shares of MedImmune and Eli Lilly a 51 per cent premium for the shares of ImClone, Icahn was able to double his money very quickly (Reference HamiltonHamilton 2007; Reference Saul and PollackSaul and Pollack 2008).

Since the acquisition of MedImmune in 2007, AZN has addressed a sharp decline in the company’s cash flow from operating activities through the disposal of several assets (see Table 4). In 2011, the company sold Astra Tech, its Swedish dental implants and devices subsidiary, for $1.8 billion. The following year, AZN disposed of Aptium Oncology, a subsidiary that provided outpatient oncology management and consulting services in the United States. In 2010, AZN paid $500 million for Novexel (which had been spun off from Sanofi-Aventis) to boost the company’s anti-infectives franchise with a new generation of antibiotics. But in 2012, AZN divested several antimalarial brands in this therapeutic segment.

Following this restructuring, AZN’s cash flow declined sharply because the new revenues that the acquisitions generated did not offset the haemorrhaging sales of the major products in its pre-acquisition portfolio, which, as we have seen, began to fall off the patent cliff towards the end of Brennan’s tenure. In addition, in 2012, several promising mid- and late-stage clinical candidates in AZN’s pipeline experienced major setbacks. In response, institutional shareholders led by Neil Woodford, who was at the time a prominent asset manager at Invesco, began to pressure the AZN board to search for a replacement for Brennan. Woodford, who in 2012 had been managing Invesco’s equity portfolio for over two decades, had allocated £1.64 billion to the purchase of AZN shares, 8.17 per cent of his assets under management.

When Soriot joined AZN as CEO in 2013, the company was already grappling with the problem of its ailing R&D productivity. One move was to recruit Pangalos, who had been vice-president of neuroscience at Wyeth and had become a Pfizer senior vice-president when it acquired Wyeth in 2008. Pangalos joined AZN in 2010 to lead the company’s innovative medicines and early clinical development (IMED) unit. Soriot came to rely heavily on Pangalos’ leadership in creating a more innovative learning culture in AZN R&D.

Working with Pangalos on the R&D leadership team were Bahija Jallal and Sean Bohen. France-educated biologist Jallal had joined MedImmune as vice-president of translation sciences in 2006, nearly a year before the acquisition of the Maryland-based company by AZN. With Soriot at the helm, Jallal was promoted from executive vice-president of R&D to president of MedImmune and executive vice-president of AZN. Under Jallal, the MedImmune unit became AZN’s global hub for biologics R&D, overseeing the company’s entire biologics pipeline.

In 2015, Bohen became executive vice-president of global medicines development and chief medical officer. Like Soriot, Bohen joined AZN from Genentech. When Soriot had led Roche’s efforts to transform Genentech’s R&D operations to become the Swiss company’s new Genentech Research and Early Development (gRED) division, Bohen had served as senior vice-president responsible for early development activities at gRED.

Under this trio, AZN R&D began to engage in new learning, primarily with the objective of gaining more insight into the biology and mechanisms of diseases for which the company sought to develop new innovative treatments. Over time the focus of the company’s product strategy has narrowed down to three main therapy areas: oncology; cardiovascular, renal, and metabolism (CRM); and respiratory diseases. Soriot identified immuno-oncology as the most strategic market in which AZN needed to grow. He recruited José Baselga, the top physician at New York’s Memorial Sloan Kettering Cancer Center – the world’s oldest and largest institute for cancer research – to be AZN’s executive vice-president, oncology R&D. Also, in 2019, Soriot promoted Pangalos to executive vice-president, biopharmaceutical R&D, which includes both CRM and respiratory diseases.

Under Soriot, AZN has consolidated its global R&D operations at three main geographic sites. The first is the newly constructed corporate headquarters located in Cambridge, UK, which became the company’s main location for oncology R&D, while also consolidating most of its small-molecule and biologics R&D sites that had been scattered across the United Kingdom. After delays, this facility opened in 2019, and is, in 2022, still in the process of being made fully operational. The second main R&D site is the global hub for biologics R&D in Gaithersburg, Maryland, USA, where MedImmune’s global headquarters had been located prior to its acquisition by AZN. The third major R&D hub is in Gothenburg, Sweden, continuing the legacy of AZN’s predecessor, Astra, which is now supporting the entire life cycle of medicines in the global product portfolio.

Since Soriot arrived, the transformations in both the composition and age of AZN’s product portfolio have been dramatic. The percentage share of oncology in total product revenues increased from 12 per cent in 2013 to 36 per cent in 2021. AZN’s oncology product sales more than tripled from $4.0 billion in 2017 to $13.1 billion in 2021. AZN’s total product sales increased by 81 per cent, from $20.2 billion in 2017 to $36.5 billion in 2021. This sales growth occurred even with sharp revenue declines in the company’s legacy flagship products, Nexium, Synagis, and Seroquel. These products, along with others that had been losing patent protection, accounted for 35 per cent of product sales in 2013 but only 11 per cent in 2019. Despite an $8.6 billion sales drop in legacy products and CRM segments since 2013, excluding the sales of Alexion products and COVID-19 medicines, AZN’s total product revenues were $3.8 billion more in 2021 than in 2013. The company’s commitment to new learning in oncology began to pay off in a number of new product launches.

In 2015, the company spun off its anti-infectives unit as a standalone company. And in 2016, it sold its small-molecule assets to Pfizer. As shown in Table 4, AZN under Soriot has pursued acquisitions to support the company’s internal drug development efforts. As previously discussed, oncology products’ sales have been driving AZN’s revenue growth with the two cancer drugs, Lynparza and Tagrisso, accounting for over half of the entire oncology segment revenues.

To clinch its prominence in the oncology market, AZN has been pursuing growing numbers of strategic partnerships for research, development, and commercialisation of drug candidates. It has been acquiring equity stakes in biopharma companies with highly anticipated oncology pipelines such as the US-based Moderna Therapeutics, which in 2020 developed a COVID-19 vaccine, and Innate Pharma, based in the Netherlands and the United States, with deal sizes ranging from $100 million to $300 million. A notable partnership into which AZN has entered is the development and commercialisation of Japan-based Daiichi Sankyo’s trastuzumab deruxtecan (Enhertu), a highly effective cancer therapy that has been undergoing late-stage clinical trials. Sankyo’s novel cancer therapy was granted Breakthrough Therapy Designation by the US Food and Drug Administration (FDA) for the treatment of patients with HER2-positive breast and gastric cancers.

Given the efficacy shown during clinical trials, Sankyo’s cancer therapy received final regulatory approval from the FDA in December 2019. In exchange for commercialising Sankyo’s cancer drug jointly, AZN paid the Japanese drug company $1.35 billion in cash up front in addition to $5.55 billion in future payments, contingent upon the drug meeting certain regulatory and performance targets. AZN decided to raise the cash to secure the deal with Sankyo by issuing new shares rather than take on additional debt that could threaten its credit rating.

In December 2020, AZN announced the acquisition of US-based Alexion Pharmaceuticals, its largest acquisition ever. When the deal closed in July 2021, it was valued at $41.1 billion, of which one-third was cash and two-thirds AZN stock. In doing the acquisition, AZN issued long-term debt of $8.0 billion and short-term debt of $4.0 billion. AZN also paid $2.3 billion debt acquired with Alexion shortly after the completion of the acquisition in 2021 (see Figure 10).

As in the case of MedImmune in 2007, the opportunity to acquire Alexion occurred because a US-based hedge fund – in this case Elliott Management – purchased Alexion shares and then sought to realise financial gains through the sale of the company to a Big Pharma corporation at a premium price (Reference De La MercedDe La Merced 2017). Initially, after Elliott acquired Alexion’s shares in April 2017, the pharmaceutical company rejected the proposal to sell itself. From January 2018, however, after Paul Singer of Elliott had negotiated placing his ‘own’ representative on Alexion’s board, the proposal for a sale of the company gained more traction. Negotiating the sale to AZN was its former CEO David Brennan, who had been a director of Alexion since 2014 and chairman since 2017. With the acquisition of Alexion, AZN secured a company which had revenues of $6.1 billion in 2020, including its two blockbuster drugs, Soliris with sales of $4.1 billion and Ultomiris $1.1 billion.

Although the opportunity to buy Alexion could not have been foreseen when Soriot became CEO of AZN in 2012, the acquisition helped AZN achieve revenues of $37.4 billion in 2021, bringing AZN much closer to Soriot’s revenue goal of $40 billion by 2023. With the acquisition, AZN’s stock price continued to soar, but the benefits that AZN will derive from Alexion depend on how it invests profits from both its patented drugs and, prospectively, successful drugs from those now in its pipeline. To better integrate Alexion, AZN has set up its global R&D headquarters for rare diseases at Alexion’s base in Cambridge, Massachusetts.

4.3 Distributions to Shareholders

As we outlined in Section 3, dividends provide an income stream to all shareholders for holding shares, whereas stock buybacks done as open-market repurchases reward those sharesellers who are in the business of timing their stock trades. These types of stock buybacks are nothing more than (currently legal) tools to manipulate the company’s stock price, and thus manifest the financialised firm. Our analysis of the changing balance between innovation and financialisation at AZN (and in the next section of this Element, GSK), therefore, pays close attention to value extraction as dividends versus value extraction as buybacks. AZN paid out cash in the form of both dividends and buybacks in the first decade of the century and into the second decade. Since 2013, however, the first full year that Soriot was CEO, AZN has ceased doing buybacks, although the company’s dividend payout ratio is high. This eschewing of buybacks is consistent with the increased attention of AZN’s management to investment in innovation in recent years.

In five years after the merger of Astra and Zeneca in 1999, AZN was in sound financial condition, as it constrained distributions to shareholders (see Figure 11). In the two years following the MedImmune acquisition in 2007, AZN launched an ‘Enhancing Productivity’ restructuring programme, resulting in a 9 per cent growth in the company’s net earnings. To achieve this result, AZN controlled the growth of cost items in major operational units except R&D. At the time, however, under Brennan as CEO, AZN became very shareholder-value oriented, distributing nearly £24.8 billion in cash to shareholders from 2006 to 2012. This shareholder payout amount was 2.3 times greater than that which was done by the company under McKillop from 1999 to 2005.

Figure 11 Value extraction: distributions to shareholders (£ billion), 2000–21, by AZN.

Source: Authors’ analysis and graphic based on S&P Capital IQ and company annual reports

Although the company suspended its buyback programme in 2008–9 (as was usual among large companies during the financial crisis), AZN resumed buybacks from 2010 to 2012, spending £7.2 billion to repurchase its own shares. Towards mid-2012, amidst rising shareholder concerns about the lack of new product development, Brennan’s tenure as CEO abruptly came to an end. Certain longer-term shareholders, led by Woodford, realised that without a renewal of sales revenues through new product launches, the distributions to shareholders that had been made over the previous years could not be sustained.

4.4 Executive Compensation

Senior executives may favour distributions to shareholders because they receive stock-based pay, usually in the form of stock options or stock awards, that incentivise them to increase stock yields. As a result, senior executive remuneration schemes, and particularly the mode of compensating the CEO, may influence the tension between innovation and financialisation.

Figure 12 shows the changing levels and components of executive pay for McKillop, Brennan, and Soriot. In 2021, the fixed portion of CEO total annual remuneration (TAR) was made up of base salary (£1,367,002), other benefits (£123,000), and CEO post-employment (pension) benefits (£146,000). The fixed portion declined from 79 per cent in 2004, when the PSP programme was introduced, to 29 per cent in 2011, just before Brennan retired from AZN. The fixed portion of TAR increased to 40 per cent in 2013 when Soriot became AZN’s top executive before declining to 14 per cent in 2021 as Soriot’s share-based compensation began to vest.

Figure 12 Changing composition of CEO pay at AZN, 2000–21

Notes: Annual Bonus Plan [ABP], AstraZeneca Investment Plan [AZIP], AstraZeneca Share Option Plan [AZSOP], Deferred Annual Bonus Plan [DABP], Long-term Incentive [LTI], Performance Share Plan [PSP], Share Option Plan [SOP], Total Annual Remuneration [TAR], and Total Realised Value [TRV].

Source: Authors’ analysis and graphic based on S&P ExecuComp.

At AZN, in the early 2000s, the components of base pay, including salary, pension, and other taxable benefits, collectively accounted for nearly two-thirds of total CEO remuneration. The only variable pay component was the annual bonus plan (ABP). Independently of base and variable pay, the AZN board occasionally granted stock options to senior executives under the AstraZeneca Share Option Plan (AZSOP).

As a long-term incentive (LTI) programme, AZSOP was introduced in 2000 to replace the Zeneca 1994 Executive Share Option Scheme. AZSOP was designed for a ten-year period. To determine the number of options to grant to a senior executive under AZSOP, the board considered the overall performance of the company at the time the options were granted in terms of three broad performance measures: (a) the prospects for sales growth, (b) the launch of new products in the four years prior to the grant, and (c) savings achieved during this period through restructuring (‘synergy benefits’).

Although AZN used company performance criteria in deciding to grant stock options to senior executives, it did not impose any performance criteria for the vesting of these options – apparently following US practice (Reference Hopkins and LazonickHopkins and Lazonick 2016). In the United Kingdom, performance measures for the vesting of options are called ‘testing’ performance conditions. This issue was raised by some larger shareholders at the 2003 annual general meeting (AGM), but, with AZN’s stock price in a slump, it was a moot point because previously granted options were ‘under water’ (i.e., the market price was less than the grant price at which the options could be exercised).

In the context of searching for a replacement for Barnevik, who retired as chairman in 2004, the board sought shareholder feedback for ‘formulating proposals which focus upon performance-related pay’ and that ‘strengthened the links to measures which are aligned to the creation of shareholder value’ (AstraZeneca 2004, p. 63). Following these discussions, in July 2004, the remuneration committee appointed Carol Arrowsmith, head of the remuneration division at Deloitte & Touche, a prominent consultancy, to advise the committee on matters concerning executive pay.

The result was an ABP awarded as part of the short-term incentive (STI) programme, accounting for no less than 14 per cent of total CEO remuneration. Subject to achieving the three performance targets, the company CEO could receive up to 180 per cent of his or her salary as an annual bonus under each plan year. Among the changes introduced to the ABP in 2004, upon meeting such goals, only two-thirds of the bonus amount is payable in cash, with the remaining one-third taking the form of the company’s common shares under the deferred bonus plan (DBP). Awards deferred under DBP are subject to an additional three-year holding period, although no additional performance conditions are applied. In 2004, AZN also instituted a share ownership requirement (SOR), whereby the CEO had to accumulate and hold company shares valued at one full-year salary during and beyond employment.

In 2005, the AZN directors introduced a new set of testing performance conditions to determine when and to what extent the senior corporate leaders were authorised to exercise previously granted options. The new performance measures included an earnings per share (EPS) target, which rewarded senior executives for increases in EPS by 5 per cent more than the UK retail price index for each three-year performance period.

During the first implementation period from 2005 to 2008, performance share pay (PSP) was based on the relative performance of AZN’s ‘total shareholder return’ (TSR) over the three-year period following each award in comparison with the TSR performance of twelve major pharmaceutical companies. The initial awards granted under PSP could be as much as 125 per cent of the CEO’s base salary and the vesting percentage would depend on the relative TSR performance against a selected pharmaceuticals peer group (PPG) of twelve companies. The vesting metric ranges from 30 per cent of salary, if the company’s TSR ranked at the median, to 100 per cent, if it ranked in the upper quartile. The remuneration committee has the discretion to award an additional 25 per cent if the company’s TSR ranked significantly above the comparison group.

As a performance measure for the vesting of PSP awards, a cumulative free cash flow (FCF) target was introduced in 2008, in part to address ‘shareholder concern’ over the company’s declining cash flow following the MedImmune acquisition. The vesting of one-half of the maximum option awards granted under PSP was subject to achieving a pre-defined FCF during the three-year performance period. These cumulative cash-flow targets have changed, depending on the company’s projected performance in the product market, ranging anywhere from $8.5 to $23 billion.

At the company’s AGM in 2010, following the expiration of AZSOP, AZN shareholders approved a major overhaul of the company’s LTI programme. In addition to PSP, the AstraZeneca Investment Plan (AZIP), a newly adopted share-based employee incentive programme, became a major component of the company’s LTI programme. AZIP was approved for an eight-year implementation period, including a four-year performance period for granting an additional four-year holding period for vesting of share awards.

During the first period, the board measures performance based on two indicators to determine the vesting percentage of maximum share awards granted at the start of the performance period. Unlike its predecessor, the extent to which the new share options granted under AZIP vest depends on the company’s ability to sustain a progressive dividend payout policy. In addition to meeting the dividend per share targets determined previously, the vesting of option awards at the maximum level also depends on maintaining a dividend cover ratio (DCR), requiring the company’s core EPS to be 1.5 times greater than per share dividend paid in each year during the performance period.

As AZN’s structure of executive pay changed over the 2000s, the performance criteria for granting annual bonuses and stock awards became more focused on financial targets based on company stock-price movements. This pressure to adopt a more financialised remuneration policy that encourages value extraction by shareholders, however, was counterbalanced by a group of institutional shareholders who had a more patient and stable view of the need for value creation. Over the course of the 2010s, these ‘value-creating’ shareholders exerted influence over the design of the company’s remuneration policy.

As displayed in Figure 13, relative TSR performance determines the amount of LTI for senior executives. TSR is a measure that reflects the price appreciation of company shares as well as the per-share dividends paid to the holders of the company’s ordinary shares in any given year. During the first five-year implementation period following its launch in 2005, the company’s relative TSR performance against PPG entirely determined the number of shares granted under PSP.

Figure 13 Weights assigned by the AZN Remuneration Committee to different financial-performance and productive-performance targets in the long-term incentive (LTI) component of remuneration for CEOs at AZN, 2000–21

Notes: AstraZeneca Investment Plan [AZIP], AstraZeneca Share Option Plan [AZSOP], Earnings Before Interest, Tax, Depreciation, and Amortisation [EBITDA], Earnings Per Share [EPS], Dividends [DIV], Free Cash Flow [FCF], Performance Share Plan [PSP], and Total Shareholder Return [TSR].

Source: Authors’ analysis and graphic based on company annual reports.

Although core EPS was introduced as a performance condition for any share option to be granted under AZSOP, the board also decided to reduce the weight of core EPS (100 per cent for CEO and 80 per cent for other senior executives). In addition, between 2005 and 2010, the board implemented a variety of qualitative and quantitative measures in the performance-evaluation process to determine the amount of ABP.

The company ceased to grant new AZIP awards in 2016, leaving PSP as the only programme that AZN implements as an LTI. Unlike its predecessor AZSOP, vesting of awards granted under AZIP was subject to achieving a dividend payout target during a four-year performance period. One-fourth of LTI awards granted under AZIP lapsed each year when AZN failed to achieve the DCR target set for that year. During the 2010s, this remuneration policy encouraged senior executives to support the company’s generous dividend payout policy despite severe cash-flow problems, and as a result the LTI awards granted under AZIP rarely lapsed.

No new awards have been granted under AZIP since 2016; the company phased out AZIP, with the vesting of the last awards on 31 December 2019. The holding period for the vested awards is set to expire in 2024. Typically, within the total awards granted under LTI, AZIP awards account for 25 per cent while PSP makes up the remaining 75 per cent. Vesting of AZIP awards is subject to achieving two performance targets: AZN must pay a minimum of $2.80 dividend per share (DPS) and achieve 1.5 DCR, which requires core EPS to be 1.5 times greater than DPS.

In 2020, AZN adopted a number of changes to the company’s CEO remuneration policy. While the CEO pension contribution decreased from 30 per cent to 20 per cent of the base salary, the maximum award for the annual bonus increased from 180 per cent to 200 per cent of base salary. Also, for the grants awarded under the ABP in 2020 and subsequent years, the board has increased the mandatory deferral from one-third to 50 per cent of the total annual bonuses received. Along with the increase of maximum award opportunity under PSP to 550 per cent of the base salary, the shareholding requirement for the CEO has been increased from 300 per cent to 550 per cent of the base salary. The most notable recent change in the remuneration policy is that the CEO and other senior executives are required to maintain 100 per cent of their shareholding during the two-year period following the termination of their employment.

Looking back two decades, by setting various TSR goals for senior executives to maximise their variable pay, the company’s stock-market performance became a top managerial priority. AZN’s TSR outperformed the FTSE 100 Index in 2005, but during almost the entire tenure of Brennan as CEO, the company lagged behind both the FTSE 100 index companies and its pharma peers in terms of delivering higher shareholder yields.

Rising shareholder dissent against the ever-growing remuneration of CEOs at a number of UK companies, including AZN, has had an impact on government legislation. As UK lawmakers were getting ready to pass the Enterprise and Regulatory Reform Act of 2013, a major provision of which would allow shareholders to cast a binding vote on remuneration policy every three years, growing shareholder sentiment against executive pay led to the ‘shareholder spring of 2012’, and the ousting of several CEOs of major publicly listed companies, both in the United States and the United Kingdom.

Disappointed with the company’s innovative productivity under Schweitzer and Brennan, in 2012, as part of the UK’s shareholder spring (Reference PratleyPratley 2012), a number of influential holders of AZN shares, led by Woodford, increased pressure on the company directors to replace the AZN chairman of the board and CEO (Reference EvansEvans 2014). Anticipating that his pay package would be voted down at the AGM in April 2012, Brennan pre-emptively announced his decision to retire by June 2012 (Reference Burgess and McCrumBurgess and McCrum 2012; Reference KolleweKollewe 2012).

Since he became CEO in October 2012, Soriot has had a clear mandate to move AZN from financialisation towards innovation. Yet, his pay package at AZN still reflects a legacy of financialisation, with its various components of stock-based pay. Given Soriot’s innovation mandate, however, AZN introduced pay-performance targets related to the clinical development of innovative drugs (Innovative Science: First approvals and NME volume over three years in PSP and Innovative Science: Annual pipeline progression in ABP) and the sales growth in various therapeutic areas (Return to Growth in PSP and Deliver Growth and Therapy Area Leadership in ABP). Each pay-performance target related to innovation and sales accounted for 20 per cent and 30 per cent of PSP and ABP awards vested in Soriot’s total compensation in 2021.

Unlike AZIP, LTI awards granted under PSP are nil-cost stock options which automatically vest upon achieving a combination of financial, commercial, and innovation-based performance targets during a three-year performance period. The impact of LTI awards granted under PSP on CEO TAR is evident in Figure 12. Since 2016, following the vesting of the first PSP awards granted after joining AZN, Soriot’s TAR has been rising. Similar to the AZN US Executive Performance Share Plan, the global PSP is based on the relative performance of the company’s TSR over the three-year period following each award against the TSR performance of PPG. As Figure 12 shows, Soriot’s annual pay dropped significantly in 2018 following his failure to achieve one of the performance targets, resulting in the lapsing of awards.

The introduction over the past decade of innovation metrics as performance criteria in determining CEO pay at AZN reflects attempts to shift the strategic orientation of the company away from the financialisation of the previous decade. It must be recognised, however, that the very existence of the stock-based components of executive pay in the form of stock options and stock awards reflects the financialisation of the business enterprise. In principle, CEOs who have the ability to envision and augment an innovation strategy should not require stock-based incentives to do their jobs. Senior executives of the business corporation are employees in leadership positions who, as professionals, should be able and willing to perform at the highest possible level for a good salary and, for extraordinary outcomes, a bonus that reflects, as well, the salary/bonus structure of others in the company’s hierarchical and functional division of labour.

5.1 Strategy and Learning

In 1996, a year after acquiring Wellcome Laboratories to become the second largest pharmaceutical company in the world, Glaxo Wellcome chairman, Richard Sykes, met with the CEO of SKB, Jan Leschly, to initiate discussions about a possible merger. The $70-billion deal, considered to be the ‘the mother of all mergers’, sent shockwaves through the industry as it threatened to oust Merck & Co. as the global leader in pharmaceuticals (Reference Heracleous and MurrayHeracleous and Murray 2001). The talks were suddenly suspended, however, with initial reports citing personality clashes between Sykes and Leschly about leadership positions, while, later, evidence emerged that pointed towards cultural differences in managerial direction as the source of termination (Reference RandlesRandles 2002, pp. 346–9; Reference Batiz-LazoBatiz-Lazo 2004, pp. 75–89).

In a highly perceptive essay, Tony Reference Corley, Quirke and SlinnCorley (2010, p. 235) notes ‘a struggle over the direction which the pair should take, whether to pursue British- or American-type strategies’. He goes on to state: ‘Sykes’ basically British approach was to spend as much as possible [on R&D]’, and he adds: ‘ … a policy of maximizing research activity was expected to take precedence over financial and marketing considerations’ (Reference Corley, Quirke and SlinnCorley 2010). Leschly ‘pursued a more money-saving policy, in the main following the American-based Pfizer’s recent practices’. This approach included concentrating production in five therapeutic categories; economising on R&D expenditure by acquiring products from small biotech companies to further develop and market; establishing co-partnerships with larger competitors to gain access to therapeutic areas that it did not already dominate; and launching smaller research teams in an effort to increase flexibility, creativity, and personal initiative (Reference Corley, Quirke and SlinnCorley 2010).

The dramatic dissolution of merger talks between Sykes and Leschly in 1998 occurred against the backdrop of extensive changes in the competitive structure of the global pharmaceutical industry, with M&A activity among large, established pharmaceutical companies beginning to surge in the late 1990s. The 1999 merger of Germany-based Hoechst and France-based Rhône-Poulenc briefly positioned the merged company Aventis in the top global spot. Pfizer, however, became the world’s largest pharmaceutical company following the completion of its $112 billion takeover of Warner-Lambert in 1999. Amidst consolidation in the pharmaceutical industry in 1999, Sykes and Leschly came together once again to talk about a potential merger between the two pharmaceutical companies (Reference Corley, Quirke and SlinnCorley 2010, p. 236).

After obtaining regulatory and shareholder approvals to complete the $76 billion merger deal on 27 December 2000, GSK became the world’s largest pharmaceutical company. Over the last two centuries, GSK evolved through the merger of several companies which originated in the United Kingdom, New Zealand, and the United States (see Figure 14). GSK’s roots in the United Kingdom can be traced back to three drug makers: Allen and Hanburys, Burroughs Wellcome & Company, and Beecham Group (see Reference JonesJones 2007). SKB founded in 1989 and Glaxo Wellcome (GW) founded in 1995 merged to create GSK in 2000, with 40 per cent and 60 per cent shares, respectively, in the new company. Among companies included in Figure 3, GSK’s pharmaceutical sales were only exceeded by those of Pfizer and Merck, while outperforming other major companies such as Bristol-Myers Squibb, Novartis, Eli Lilly, and Roche.

Figure 14 Pre-merger evolution of GSK.

Source: Authors’ own illustration based on information compiled from various sources

Shortly before the merger, Leschly announced his decision to retire, which paved the way for Sykes to become the non-executive chairman of the combined entity. As a result of merger negotiations, GW executives secured three of the top leadership positions – chief financial officer (CFO), chief operating officer (COO) & president pharmaceutical operations, and chief science & technology officer (CSTO) – in exchange for SKB’s CEO, Jean-Pierre Garnier, becoming the top executive of the newly formed entity. It is important to note that GSK’s first CSTO, Jim Niedel, was a GW executive who had been based in the United States.

Aside from the top corporate and R&D leadership, SKB also controlled two-thirds of the senior positions, including senior vice-presidents of legal affairs and human resources, in addition to three of the five critical leadership positions in strategic business units, including president of pharmaceuticals international, US pharmaceuticals, and consumer healthcare. More importantly, SKB’s head of R&D, Tachi Yamada, became the company’s top scientist, overseeing GSK’s global R&D operations following the merger. With Sykes as non-executive chairman of the combined entity, SKB secured strategic control of GSK, even though GW shareholders controlled 17.5 per cent more equity in GSK than SKB’s.

The SKB–GW combination took the form of a nil-premium merger of equals through which the ownership of both parties was transferred into a holding company, avoiding stamp duty of over £200 million. GSK stock was listed on both the UK and US markets. With UK-based holders of Glaxo, Burroughs Wellcome, and Beecham Group maintaining their ownership stakes, it was anticipated that 85 per cent of the new GSK shares would be issued to UK-based shareholders. GSK was established as a UK-based company, thus avoiding legal issues concerning securities regulations in the United Kingdom and the United States. US-based shareholders held less than 10 per cent of GSK’s outstanding shares (Reference BirkettBirkett 2001).

GSK’s global headquarters were located in London, but SKB’s former headquarters in Philadelphia became GSK’s administrative base because the new CEO, Garnier, wanted to remain in the United States. It was only in 2008 when Andrew Witty replaced Garnier as the first British CEO of the Anglo-American company that GSK’s administrative offices were relocated to the United Kingdom.

Over the two decades since the merger, GSK has had three CEOs: Jean-Pierre Garnier, 2000–8; Andrew Witty, 2008–17; and Emma Walmsley, 2017–present. Although Garnier was from France, he had spent the 1990s as an executive in the United States, having joined SKB in 1990. He became the chief operating officer in 1995 and, just before the merger, SKB’s CEO. As GSK CEO, Garnier demanded a US-style stock-option package as a condition for staying with the company. While Garnier allocated resources to innovation by investing in the internal development of high-risk specialty drugs, he also sought to boost GSK’s stock price by doing large-scale buybacks in addition to dividend payments. Reference Froud, Johal, Leaver and WilliamsFroud et al. (2006) examine various internal (organisational) and external (institutional) factors that resulted in GSK’s disengagement with organisational learning as the company began to outsource early-discovery research and build a pipeline through partnership deals with other companies in the early 2000s. Despite high levels of R&D spending, by the second half of the decade, GSK’s pipeline was not generating any blockbusters. In 2008, Garnier’s pay exploded as he exercised his stock options. But GSK’s stock price languished as did its innovative performance, and in 2008 the company’s board ousted their first CEO.

With his departure, the GSK board appointed Witty, a long-term employee of GW, as CEO. Witty, who had stayed on at GSK as the head of marketing, had been promoted to president of GSK Europe in 2003. As GSK CEO, he was averse to continuing to invest in the company’s existing pipeline of high-risk specialty drugs. Besides the uncertainty of the strategy, Witty thought that the major pharmaceutical markets, including the United States, would move to tighter regulation of prescription drug prices. He favoured investments in ‘high-volume, low-price pharmaceuticals’, and, towards this end, in 2015, he swapped GSK’s cancer business for Novartis’ vaccine unit (Reference WardWard 2015). Witty also formed a joint venture with Novartis in consumer-health products.

Witty’s high-volume, low-price strategy resulted in a dramatic drop in GSK’s profits and free-fall in share prices in 2016. As Figure 15 shows, while GSK’s product sales increased during the period 2000–21, net income was generally flat, and, although it rose after 2016 after plunging to its lowest point in the two decades, net income was still low in 2021 both in absolute terms and relative to sales.

Figure 15 Product sales, net income, R&D spending at GSK (£ billion), 2000–21.

Source: Authors’ analysis and graphic based on S&P Capital IQ and company annual reports

Given GSK’s lacklustre performance, certain institutional shareholders demanded the spin-off of the consumer healthcare business (CHB), which Witty opposed. In February 2016, Neil Woodford, a longstanding GSK shareholder who had 7 per cent of his investment fund in GSK shares, voiced the discontent with GSK’s current leadership: ‘What did Einstein say? That doing the same thing over and over again and expecting a different result is the definition of madness? Well that is what Witty and the board have done for the past eight years.’ (Reference WildWild 2016). In March 2016 Witty announced he would retire as CEO in the following year.

As his replacement the board appointed Emma Walmsley. She had been an executive at L’Oréal, the French personal care company, for seventeen years before she joined GSK in 2010. Walmsley had been handpicked by Witty to oversee the expansion of GSK’s CHB, which was an integral part of his grand strategy to grow GSK (Reference Fry and ZillmanFry and Zillman 2018). Given pressure in the United Kingdom for gender diversity in top corporate positions, Walmsley was a prime candidate for CEO at GSK. Indeed, shortly after his appointment as non-executive chairman of GSK in May 2015, Sir Philip Hampton, along with Dame Helen Alexander, had been commissioned by the UK government for a five-year period to conduct annual independent reviews of gender diversity in the UK-listed companies’ boards of directors and senior executive teams. What became known as the Hampton-Alexander review of FTSE Women Leaders, published from 2016 through 2021, provided the framework for a voluntary code of conduct for UK-listed companies to improve gender balance in FTSE leadership. With Hampton as GSK chairman, Walmsley became the first female CEO to run any Big Pharma company.

Upon taking the helm, Walmsley vowed to ‘put more discipline in place’ to stop ‘drifting off in hobby land’, announcing the closure of thirty preclinical drug development programmes, allocation of 80 per cent of the R&D budget to be spent on no more than four strategic disease areas, and replacing 50 per cent of GSK’s top management team (Reference NevilleNeville 2017; Reference WeintraubWeintraub 2018). Figure 16 indicates that Wamsley’s restructuring strategy has entailed higher value-added R&D, with R&D spending per R&D employee increasing from £300,000 in 2016 to just over £400,000 in 2021. Between 2016 and 2021, employment in manufacturing declined dramatically from 38,400 to 32,100.

Figure 16 R&D spending (in £ billion), global employees and R&D employees at GSK, 2000–21.

Source: Authors’ analysis and graphics based on company annual reports

While the company’s clinical pipeline and sales of pharmaceutical products declined from 2010, the number of products that GSK launched increased steadily. The implications of such a disengagement are illustrated in Figure 17, showing a significant increase in GSK’s early-clinical pipeline (phases 1 & 2), while the number of projects in the preclinical stage appears to be stagnating. Our analysis of GSK’s changing drug-development activities indicates a strategy to downsize in-house discovery research in favour of research geared more towards the clinical development and commercialisation of products acquired from external partners.

Figure 17 GSK’s pharmaceutical products sales (£ billion), number of products launched and under development (pre-, early-, and late-clinical stages), FY1999–3Q2020.

Source: Authors’ analysis and graphic based on Pharmaprojects

GSK’s pace of transition from innovation to financialisation increased significantly through the mid-2010s, underpinning the company’s ongoing productivity crisis. As we have seen, however, with Walmsley as CEO, an attempt at reversal has been in progress since 2017.

5.2 Innovation through In-House Development and Acquisition

At GSK, intangible assets accounted for 51 per cent of the company’s total assets at the end of 2021. Figure 18 shows GSK’s cumulative growth of tangible assets, goodwill, and other intangible assets in relation to total net debt since 2000. The cumulative growth of GSK’s goodwill was significantly higher than the company’s other intangible assets from 2007.

Figure 18 Intangible and tangible assets in relation to total net debt (£ billion) at GSK, 2000–21.

Source: Authors’ analysis and graphic based on S&P Capital IQ and company annual reports

With the exception of the significant drop in 2014, a reflection of the company’s divestment of oncology products, the overall growth in the value of GSK’s goodwill and other intangible assets is striking, with a major increase between 2018 and 2019 under Walmsley due to various acquisitions, including Tesaro (see Table 5). While the value of other intangibles increased by 9.4 times from 2004 to 2016, the value of goodwill increased by forty-three times during the same period – a reflection of the company’s heightened interest in acquisitions, and the high prices paid for them, while Garnier and Witty were CEOs. In retrospect, these intangible assets were overvalued because they did not translate commensurably into higher revenues and profits.

GSK embarked on an acquisition spree in part to boost the number of new products in its portfolio, which included several products whose patents were facing expiry. Ten drugs identified in the company’s 2008 Annual Report, which accounted for nearly 20 per cent of GSK’s total product revenues and 40 per cent of pharma revenues, had patent protection in major world markets that was set to expire between 2006 and 2009. The sales of GSK’s blockbuster type-2 diabetes drug, Avandia, began to plummet in 2007 following a warning letter issued by the FDA, indicating an increase in cardiovascular problems associated with its use among diabetes patients.

Figure 18 shows a sharp growth in GSK’s intangible assets, the result of acquisitions, in the final years of Garnier’s tenure. In anticipation of a significant decline in product sales following patent expirations, acquisitions under Garnier mainly focused on expanding the company’s pipeline in high-growth product markets such as immuno-inflammation therapies as well as mature drugs such as cardiovascular and dermatology products. In 2006, when some shareholders began to show scepticism over the company’s innovative productivity, GSK increased its efforts to pursue collaborative research and licensing deals valued at up to £3 billion, including upfront cash as well as milestone payments contingent upon drug candidates subject to the partnership deals. In 2006, GSK also spent £280 million in cash to expand the company’s consumer health product portfolio, with its acquisitions including CNR, Inc., the US-based developer of popular healthcare products such as Breathe Right nasal strips and FiberChoice dietary fibre supplements.

Following the leadership transition from Garnier to Witty in 2009, GSK stepped up its efforts to further expand its dermatology business with the acquisition of US-based Stiefel Laboratories, paying £2.5 billion in cash for the world’s largest dermatological pharmaceutical company (see Table 5). This acquisition not only resulted in the further growth of the company’s intangible assets but also enhanced GSK’s commercial infrastructure in major emerging drug markets.

In the following years, under Witty, GSK’s market growth strategy swiftly shifted towards acquisitions with revenue-generating drugs that would help the company to replace products for which patent expiry loomed ahead. As Figure 18 shows, GSK’s intangible assets took a sharp downturn in 2014 following the decision to divest certain brands in the consumer health division (also see Table 5).

In the two markets, anti-infectives and respiratory drugs, in which GSK had been a major competitor in the past, the company entered into a licensing agreement with Galapagos in 2010. In the same year, GSK acquired one-quarter of Theravance’s equity shares, in part to secure the future commercial rights to Relvar/Breo Ellipta and Anoro Ellipta, asthma drugs that the two companies had co-developed through an R&D partnership established in 2002, with the expectation of completing late-stage clinical studies in 2012. Under Witty, GSK’s product-market strategy took another swift turn in 2015 following the decision to swap several assets in the company’s oncology drugs portfolio for the assets in Novartis’ consumer health division.

In 2008, when Witty had taken over as CEO, GSK held 22 per cent of the market for global HIV medicines, estimated at £6.4 billion. Of the six HIV products that GSK marketed in 2008, four drugs, accounting for 60 per cent of GSK’s HIV product revenues, would lose patent protection in major drug markets by 2016. The market leader was Gilead Sciences, whose four HIV drugs accounted for 43 per cent of the HIV drug market in 2008. The patents on the four Gilead drugs were set to expire in the US or European drug markets on dates ranging from 2017 to 2021. In response to the competitive pressure from Gilead Sciences, in 2009 GSK and Pfizer agreed to consolidate their HIV assets into a UK-based joint-venture, ViiV. Shionogi, a Japanese pharmaceutical company, later became a partner in ViiV. The joint venture competed with Gilead by offering cocktail therapies that combine existing drugs of the three companies, despite the fact that most of the individual active ingredients of the therapy combinations are no longer under patent protection (Reference Gupta, Kumar, Roy and GaudGupta et al. 2010). In vaccines, GSK acquired two Switzerland-based companies: Okairos in 2013 for its clinical pipeline of vaccines for infectious diseases such as hepatitis C and certain cancer types, and GlycoVaxyn in 2015 for its highly sophisticated vaccine-development capabilities.

GSK was also positioned to enter the field of genomics. Prior to its merger with GW in 2000, SKB had begun exploring opportunities for validating targets as researchers gained more insights into the biological knowledge of various diseases made available by advances in the field of genomics. In 1993, SKB entered a new partnership with Human Genome Sciences (HGS), founded in Rockville, Maryland, the previous year, for the co-development of HGS’s novel drug therapies for auto-immune, cardiovascular, and metabolic diseases (Reference McNamee and LedleyMcNamee and Ledley 2013). Through the continuation of this collaboration with HGS, GSK gained access to capabilities in this new field. In 2011, the R&D partnership between GSK and HGS resulted in the approval of Benlysta, the first and only approved treatment for lupus. GSK completed the £2.4 billion acquisition of HGS in 2012. Of the five mid- or late-stage clinical candidates acquired from HGS, Tanzeum, for the treatment of diabetes, was the only drug to win regulatory approval. Approved by the FDA in 2014, Tanzeum was withdrawn in 2017, however, following its disappointing sales performance due to safety concerns.Footnote ⁵

Ultimately, therefore, GSK failed to take advantage of the opportunity to engage in organisational learning in the field of genomics. Noting dissatisfaction with this failure, several institutional shareholders emerged around 2015 as proponents of a major restructuring plan to transform GSK from a large healthcare conglomerate into four standalone businesses specialised in distinct segments of the global healthcare market: HIV-AIDS, consumer health products, vaccines, and pharmaceuticals (Reference RomeoRomeo 2015). The institutional shareholders became particularly disgruntled when, in 2015, CEO Witty swapped GSK’s oncology unit for Novartis’ vaccine division, while agreeing with Novartis to merge the consumer healthcare businesses of the two companies into a non-traded joint venture, with 63.5 per cent of its votes controlled by GSK. As a large GSK shareholder, Woodford criticised Witty for ‘a misalignment … between Glaxo and its shareholders’, reflecting in his view a more general disdain among shareholders for GSK’s diminishing innovative capabilities (Reference WoodfordWoodford 2017).

After Walmsley replaced Witty, she initially refused to break up the company (Reference HirschlerHirschler 2017). Dissatisfied with this position, on 12 May 2017, Woodford issued a public statement with the title ‘GLAXIT’, in which he stated he would sell the GSK stake that he had held for 17 years (Reference WoodfordWoodford 2017). Led by Woodford, the advocates for demerger had argued that corporate leadership at GSK had lost its strategic focus as a pharmaceutical company and that both the consumer healthcare division and the pharmaceutical division would gain by becoming separate units of strategic control. They argued that GSK had become increasingly dependent on its HIV/AIDS franchise to sustain its profit margin. Furthermore, revenue growth in the consumer healthcare and vaccines divisions had helped top management offset the decline in pharmaceutical-division revenues as several pharma products in the company’s fast-ageing portfolio began to lose market share following the launch of innovative new therapies by competitors.

The new product strategy adopted while Witty was at the helm may have helped the company to stabilise revenue growth overall, by stopping the haemorrhaging of sales in the pharma division. That strategy, however, appears to have also eliminated any sense of urgency for the pharma division to reinvigorate its clinical pipeline by engaging in new learning that could place the company on a more sustainable growth path as a pharmaceutical company. While Witty persisted in dismissing the idea of splitting up GSK, several global drug companies were in the process of, or had already completed, major shifts in product strategies that focused on innovative drug therapies. For instance, since 2009, when Roche fully acquired Genentech, a company in which it had held a majority stake since 1990, Roche’s product strategy has focused on developing highly innovative specialised biopharma therapies and companion diagnostics. In 2013, Abbott Laboratories spun-out its pharma division to form a standalone company, AbbVie, which focuses solely on developing novel biopharmaceutical therapies. As we discussed in the previous section of this Element, with Soriot as CEO since 2012, AZN has transformed itself into an innovative biopharma company, focusing mainly on the development of high-value-added specialty pharmaceuticals such as immuno-oncology products.

During the final year of his tenure as CEO, Witty repeatedly denied the claims that his decision to retire sooner than anticipated was because the board wanted a new CEO who would be favourable to the idea of pursuing the demergers of GSK’s pharmaceutical and consumer healthcare businesses (Reference HirschlerHirschler 2016). Early in her tenure as CEO, Walmsley appeared to be aligned with Witty on this issue. In fact, she revealed that when she was head of CHB GSK was considering the option of acquiring some of Pfizer’s non-pharma assets to create the world’s largest consumer healthcare business under GSK (Reference BradshawBradshaw 2018). Discussions of this acquisition plan were dropped, however, when several institutional shareholders raised concerns over the impact of a $25-billion acquisition on the company’s near-term cash flows, with the possibility that GSK would be financially constrained in achieving dividend payout targets (Reference HirschlerHirschler 2017).

Unlike Witty, however, Walmsley championed a major change in innovation strategy in the pharma division by means of the transformation of R&D leadership and re-organisation of global R&D operations. Walmsley initiated the organisational transformation process with the appointment of Hal Barron as GSK’s top scientist. A world-renowned cancer researcher, Barron had previously led the R&D organisations of Genentech/Roche and Calico, Google’s healthcare technology venture. As a condition of his employment, Barron insisted on keeping California as his base in order to remain embedded within one of the world’s most productive biomedical innovation ecosystems.

Barron recognised the importance of increasing genetically validated targets to improve the clinical success rate. To implement this strategy, he initiated a culture shift in R&D to focus on projects with significantly greater scientific understanding rather than the previous volume-based approach to assess the efficiency of R&D. Based on this orientation, GSK has entered into a new strategic partnership with 23andMe, a California-based developer of genetic test-kits, allowing GSK to explore the vast database of genetic information collected by 23andMe from, in 2021, 12 million individuals (Reference MullardMullard 2019; 23andMe 2021).

With Walmsley’s support, Barron also sought to turn GSK into a major player in the market for immuno-oncology products. In 2019, GSK became engaged in the highly innovative Massachusetts biopharma sector through its £4.0 billion acquisition of Tesaro, a company in the Boston area with several late-stage oncology assets.

With this renewed focus on pharma innovation, Walmsley was now ready to spin off consumer healthcare as a separate company. In December 2018, GSK agreed to a major joint-venture deal with Pfizer to consolidate their consumer product businesses into what would become the world’s largest consumer healthcare company. Named Haleon plc, the standalone company was de-merged on 18 July 2022. Against the objection of Elliott Management, Walmsley succeeded in remaining CEO of GSK, with the pharma company’s financial position strengthened by offloading over ten billion pounds.

Overseeing the launch of Haleon as GSK chairman is Jonathan Symonds, who in September 2019 replaced Hampton. Symonds was a financial executive at Zeneca when he became centrally involved in the merger with Astra in 2000. He was appointed the AZN CFO in 2001 and was seen as a top candidate to become the company’s CEO. In 2007, however, AZN’s directors decided to replace retiring CEO McKillop with Brennan (Reference HirschlerHirschler 2007). As a result, Symonds left AZN for Goldman Sachs as a transition (as it turned out) to becoming CFO of Novartis in 2009. In 2013, he became senior independent director of HSBC Holdings plc, rising to deputy chair in August 2018. He was recruited to become GSK’s board chairman just over a year later. Iain Mackay, GSK’s new CFO from April 2019, also came from HSBC.

What lies at the core of this turnaround strategy appears to be a major shift away from focusing on the commercialisation of significantly lower value-added products such as consumer health towards developing high value-added products, focusing on relatively fewer therapeutic areas, including immuno-oncology. Given the breadth and depth of learning required for such drug therapies, the extent to which GSK’s top leadership maintains its commitment to support the required collective and cumulative learning efforts will determine the success of the company’s new innovation strategy.

5.3 Distributions to Shareholders

Through its two decades of existence, GSK has had a strong focus on extracting value for shareholders. As Figure 19 shows, following the merger in 2000, GSK’s dividend payments continued growing steadily reaching a peak in 2016, in the same year when the company’s net income reached a twenty-year low. In 2017 to 2021, GSK reduced its dividends back to the level where they had been in 2012 to 2015. In addition, GSK did stock buybacks from 2000 to 2014, with buybacks surpassing dividends in 2007 and 2008 before cutting them out completely during the financial crisis of 2009 and 2010. GSK resumed buybacks from 2011, but in 2014 announced that it would be doing much less buybacks in favour of dividends in the future. After 2017, when GSK had to reduce its dividends from their peak in 2016, the company ceased doing buybacks.

Figure 19 Value extraction: distributions to shareholders (£ billion), 2000–21, by GSK.

Source: Authors’ analysis and graphic based on S&P Capital IQ and company annual reports

In July 2007, shortly after the publication of a new study that revealed higher risk associated with the use of Avandia – the major type-2 diabetes drug launched in 2003 that had reached blockbuster status of £1.1 billion in revenues in 2004 – GSK’s board approved a £12-billion share-repurchase programme, double the size of the programme authorised in 2006, to be completed over the next two years. With the company’s stock price declining sharply following the release of an FDA warning letter restricting the use of Avandia, GSK repurchased £7.5 billion in 2007 and 2008 in an attempt to offset the stock-price decline.

These large-scale repurchases contributed to the inflation of Garnier’s pay as he was retiring as CEO on May 2008. The high levels of payouts as dividends and buybacks under Garnier contributed to the quadrupling in GSK’s total net debt, from £4.0 billion in 2000 to £16.2 billion by the end of 2008. Nearly 72 per cent of the new debt was issued in 2007 and 2008 to finance the stock buybacks (see Figures 18 and 19).

In 2010, amid escalating Avandia safety concerns following the additional clinical evidence reported by independent studies, the FDA finally decided to restrict the use of this drug while the marketing of Avandia had been halted by the European drug regulatory agency, citing the mounting evidence of cardiovascular risk. During the marketing of Avandia, from the first approval in 1999 to its withdrawal globally in 2012, cumulative sales of Avandia products were over £10 billion. With the US and European regulators suspending the use of Avandia in 2009 and 2010, GSK took a provision of £4.8 billion for settlement of potential civil and criminal charges. In 2010, GSK’s net income went down to a record low of £1.6 billion. Under these circumstances, GSK decided that, whatever was happening to its stock prices, it could not afford to do buybacks.

Following the divestment of oncology as well as various pharmaceutical and consumer health assets from 2014, GSK’s total debt decreased from £18.8 billion in 2014 to £17.1 billion in 2017. In anticipation of the prospective joint-venture arrangement with Pfizer to consolidate its consumer health assets in a jointly owned subsidiary, GSK issued £9.9 billion in new debt in 2018 to acquire Novartis’ 36.5 per cent equity stake in GSK’s consumer health division.

5.4 Executive Compensation

In 2021, the fixed portion of the CEO’s total annual remuneration (TAR) was made up of base salary (£1,223,160), other benefits (£134,000), and CEO post-employment (pension) benefits (£245,000). As Figure 20 shows, this fixed proportion declined from 60 per cent in 2002, when the Performance Share Plan (PSP) programme was introduced, to 26 per cent in 2016 when Witty retired from GSK. The fixed proportion of the CEO TAR increased to 44.8 per cent in 2021 as Walmsley’s share-based compensation granted under Share Option Plan (SOP), Deferred Annual Bonus Plan (DABP), and PSP was still subject to performance and holding conditions before realising any gains. Since GSK ceased granting new stock options to executive directors under SOP in 2009, the total value realised from exercising options (TRV-SOP) has been limited. Note also that the remuneration shown for 2008 combines that received by Garnier and Witty, with Garnier capturing all the realised gains from stock awards (TRV-PSP/DABP) at the end of his tenure. Similarly, the total remuneration for 2017 combines pay received by Witty and Walmsley, with Witty reaping all the gains from stock awards.

Figure 20 Changing composition of CEO pay at GSK, 2000–21

Notes: Annual Bonus Plan [ABP], Deferred Annual Bonus Plan [DABP], Long-term Incentive [LTI], Performance Share Plan [PSP], Share Option Plan [SOP], Total Annual Remuneration [TAR], Total Realised Value [TRV].

Source: Authors’ analysis and graphic based on S&P ExecuComp.

Since the merger in 1999, with the implementation of new corporate governance practices, CEO pay at GSK has taken on a highly complex structure as the board has introduced a number of new pay components, many features of which reflect changing views of the remuneration package needed to attract, retain, motivate, and reward the CEO. In the immediate aftermath of the merger, CEO pay consisted of a minimum base salary (BASE) that, at the discretion of the board, could be augmented by a bonus that was justified by a vague combination of criteria, including revenue growth and ‘total shareholder return’ (TSR). The implementation of the Combined Code in the early 2000s included stock-based ‘performance’ incentives for CEOs.

To bring the company’s governance practices in alignment with the Combined Code, in 2002, GSK’s directors divided the purview of the Remuneration and Nomination committee into two independent bodies. The newly created Remuneration Committee hired the consultancy Deloitte & Touche to evaluate the company’s executive-pay policy that would be both in compliance with the Combined Code and sufficiently competitive to attract global talent.

Among the consultancy’s notable policy recommendations was the change of the comparator benchmark group when determining the amounts and components of the CEO’s annual pay. Deloitte & Touche argued that CEO pay at GSK was not competitively packaged to attract global talent, especially from the US-based global pharmaceutical companies that offered more generous pay packages, heavily weighted with stock-based pay. In benchmarking CEO pay at GSK, the remuneration strategies of a pharmaceutical peer group (PPG) of thirteen global companies, nine of them US-based, replaced the practice, that had been adopted in 2000, of using a group of leading FTSE-100 companies. The former benchmark had been adopted because, according to the 2002 Annual Report, ‘a number of shareholders with a UK equity mandate requested a performance measure tied to a UK equity index’ (GSK 2002, p. 42).

In 2002, GSK directors introduced PSP that included TSR as the performance measure, in part to align the company’s remuneration policy with PPG. The Companies Act 2006 introduced several important corporate governance rules to regulate the duties and remuneration of corporate directors and to establish standards for the ways in which UK-listed companies were required to comply when reporting the activities of corporate directors. The interaction of the 2006 Act and the Combined Code resulted in major revisions to the company’s remuneration policy in the context of a transition in GSK’s top leadership in 2008.

As mandated by these new regulatory requirements, GSK’s directors proposed revisions in the company’s remuneration policy during the 2009 AGM. They adopted a comparison group of sixteen major UK-listed companies against which the total CEO and CFO compensation at GSK was benchmarked. As the remuneration benchmark for the chief scientific officer (CSO), however, PPG remained in effect as the remuneration benchmark. Additional revisions to the company’s remuneration policy in 2009 responded to growing shareholder concerns of the ineffectiveness of the current stock-option plan to enhance executive performance.

The new remuneration policy proposed in 2009 included provisions such as a ‘clawback’ mechanism to ensure that poor corporate performance was not rewarded. Authorised for a ten-year implementation period following the merger in 2000, the company’s expiring SOP was reauthorised in 2009 for another ten-year period for GSK employees and senior leadership. The changes introduced in the 2009 remuneration policy, however, excluded the CEO and CFO from participating in the SOP.

Since the changes introduced in 2009, LTI in CEO pay has been mainly implemented through the PSP under which the CEO can receive stock-based awards up to six times their base salary. Under the 2011 remuneration policy, the company directors introduced more comprehensive revisions, which entailed more explicit linkages between LTI performance measures and the company’s key strategic objectives such as growing a diversified business, delivering more products of value, simplifying the operating models, and delivering value to shareholders (see Figure 21).

Figure 21 Weights assigned by the GSK Remuneration Committee to different financial-performance and productive-performance targets in the long-term incentive (LTI) component of remuneration for CEOs at GSK, 2000–21

Note: Earnings Per Share [EPS], Free Cash Flow [FCF], Performance Share Plan [PSP], and Total Shareholder Return [TSR].

Source: Authors’ analysis and graphic based on company annual reports.

The vesting level of PSP awards that the CEO received under each plan year between 2011 and 2015 was determined by the extent to which GSK achieved a number of stretching targets in four distinct LTI performance measures: business diversification, R&D new product performance, adjusted FCF, and relative TSR, with each factor weighted in equal proportion.

Performance measures are calculated differently for each stretching target. The business diversification performance measure is an aggregate three-year revenue target to be achieved in four strategic markets: vaccines, consumer healthcare, dermatology, as well as emerging markets and Japan. The R&D new product performance measure is an aggregate three-year revenue target to be achieved in products launched any time during a five-year period, up to two years prior to the grant date and during the three-year performance period. The adjusted FCF measure is the aggregate three-year cash flow target to be achieved each year during the performance period. Relative TSR ties the vesting of up to one-quarter of LTIs to the ranking of the company’s TSR performance among the top ten global pharmaceutical companies included in the PPG for benchmarking. While the vesting of awards at the maximum requires GSK’s TSR performance to rank within the top three of the peer-group companies, no awards vest if the relative TSR ranked below the group median.

GSK’s directors introduced several changes to the company’s remuneration policy for 2013 that sought shareholder approval at the 2013 AGM. Those changes included the discontinuance of business diversification as an LTI performance measure, bringing the weight of non-financial targets within the total LTI performance measures down from one-half to one-third starting with the awards granted in 2016 (see Figure 21). Since the early 2000s, prominent UK institutional shareholders had demanded that more comprehensive and competitive performance hurdles be exceeded for the vesting of LTIs granted to UK executives to occur. These hurdles include a longer vesting or holding period before the exercise of any LTI award. The changes introduced in the 2013 remuneration policy included an additional two-year holding period after the vesting of PSP awards, following a three-year performance period.

Against a backdrop of policy debate urging major UK-listed companies to engage in long-term value creation, GSK’s directors introduced significant changes to various bonus plans in the remuneration policy for 2017. The remuneration package for the new executive team under Walmsley no longer offered one-for-one matching for deferred annual bonuses, as the mandatory deferral increased from 25 per cent to 50 per cent. For the purpose of increasing accountability of senior leadership, the SOR increased from 400 per cent to 650 per cent of salary.

In 2017, the performance targets for the annual bonus were simplified: the core Group operating profit target was removed to link 70 per cent of bonus to a predefined core Group PBIT target for the award year. The vesting of the remaining 30 per cent of the annual bonus is subject to achieving pre-agreed individual objectives based on financial, sales, and R&D-related targets, paying particular attention to restructuring of R&D operations and reviving the company’s clinical pipeline.

In 2019, GSK changed the benchmark groups for CEO pay and relative TSR performance as major shareholders argued that the UK cross-industry and global PPGs used for benchmarks were too narrow. The board approved a broader European cross-industry comparator group as the benchmark for the company’s relative TSR performance as well as the CEO pay.

Unlike the top executives of US-based pharma companies who can typically realise gains on their stock options as soon as they are exercised and on their stock awards as soon as they vest, it may take GSK executives many years to build a shareholding that complies with SOR before they can sell some shares and realise gains. Under the new SOR rules, after termination of employment, senior GSK executives are required to maintain 100 per cent of their shareholding for the first twelve-month period and 50 per cent for the second twelve-month period. Unlike US stock-based executive pay, which enables the timing of the sale of acquired shares to realise gains from the use of stock buybacks to manipulate stock prices (Reference Hopkins and LazonickHopkins and Lazonick 2016), UK stock-based executive remuneration schemes such as that at GSK just described give senior executives a far greater interest in dividends as opposed to buybacks.

At GSK, from 2011 to 2021 at least 50 per cent of the LTI performance targets in CEO remuneration were finance-oriented rather than product-oriented, with the proportion rising as high as two-thirds from 2016 to 2019. In the company’s remuneration policy for 2021, the weights of finance-oriented performance targets, relative TSR and adjusted FCF each decreased from one-third to 30 per cent. The extent to which GSK’s CEO can realise immediate pay gains from hitting these targets is mitigated by the SOR requirements for maintaining the levels of shareholding stated earlier.

In 2011, GSK also began including innovation targets in their executive remuneration schemes. From 2011 to 2015, GSK included business diversification and R&D new product performance targets, with each accounting for 25 per cent of the PSP. In 2016, however, the business diversification target was dropped, so the remaining R&D performance target now accounted for one-third of PSP. In 2020, the R&D new product performance target was reduced to 20 per cent and renamed innovation sales. In addition, in 2020, the board added a new innovation metric to PSP called pipeline performance (PP), which can account for up to 20 per cent of total PSP awards. PP includes two equally weighted targets: one target is linked to the start of pivotal trials, mainly for candidates entering into phase III clinical trials, and the second target is linked to major regulatory approvals.

GSK’s adoption of innovation metrics along with financial metrics should be viewed as an attempt by the board to influence the balance between innovation and financialisation in the company. The introduction of the SOR requirements is intended to mitigate financialisation by ensuring that senior executives accumulate shares that are multiples of their salaries before they can realise gains from them. The increased emphasis on performance pay, whether using innovation or financial metrics, is in keeping with the Combined Code, which requires companies listed on the London Stock Exchange to increase the variable portion of executive pay through LTIs. The types of metrics in LTIs, however, are up to each company, which takes into account guidelines advocated by major institutional shareholders.

It should be recognised that this complicated morass of executive pay components and their qualifications originated with a focus on stock-price performance in a financialised business model. With the attempted transition from financialisation to innovation, the board has sought to introduce into the remuneration schemes productive performance measures as well as conditionalities for realising gains from stock-based pay. In the end, however, it is our view that any senior executive who has the ability and incentive to pursue an innovation strategy should be satisfied with a reasonable salary and perhaps a bonus. In that way, senior executives can devote their energies to running an innovative enterprise, rather than be concerned with how each move they make is going to affect their pay package.