In conversation with Philip Broadley of AstraZeneca

Teresa Owusu-Adjei:

Welcome to the latest episode of our Business in Focus podcast. I am Teresa Owusu-Adjei, a financial services partner and head of legal at PwC. We’re excited to bring to you the next episode of our ‘In conversation with’ podcast. Today, I am talking to Hemione Hudson, Head of Audit at PwC; and Philip Broadley, Audit Committee Chair at AstraZeneca. This podcast series features conversations between our people and our guests about the impact of the pandemic on their organisation. Today, we are going to explore what we've learned from the disruptions faced over the last 18 months, as well as look ahead to the impact of climate change on business and corporate reporting. As I said, I am really thrilled today, Philip, to invite you here. Would you just like to introduce yourself to our audience?

Philip Broadley:

Yes, delighted to. It’s certainly a pleasure to be back having face-to-face conversations like this one. I am Philip Broadley, I am on the board of AstraZeneca. I both chair the audit committee and I am senior independent director. I've been on the board, actually I am halfway through my nine-year term of office. I have, obviously, along with the rest of the organisation, spent the last 18 months very much focused on the impact of the pandemic across our business, and in particular, our initiative with Oxford University to produce a vaccine.

Teresa:

Thanks for that. Hemione, do you want to introduce yourself?

Hemione Hudson:

Yes, thank you very much, Teresa, and as you said, I am the Head of Audit for PwC in the UK. For the last 18 months that has certainly meant that as well as working out how we audit remotely, and now in a hybrid way as we're back as Philip says to some face-to-face meetings. We've also seen into other businesses as they have faced the disruption of the pandemic, so it has been really quite a privilege place to be.

Teresa:

Thanks Hemione. Now Philip, I've already said a couple of times that I'm thrilled to talk to you. Just before we started, I said my arm and the vaccinated parts of me all thank you and your colleagues at AZ, but this last 18 months, Hemione talked about disruption, I can't think of any other organisation that really has been in the eye of that disruption like AstraZeneca. Would love to get just your perspective on what the last 18 months has been like.

Philip:

Sure, well you are one of one-and-half billion people now that has had the AstraZeneca vaccine.

Teresa:

Wow.

Philip:

Let's go back to January of 2020. I can well recall the AstraZeneca board meeting routinely held at the end of the month to consider and approve the results announcement. At that time, we along with other corporate reporters were aware of the first cases being reported in China. We considered the impact that we thought that was likely to have. You can go back and look at the announcement, we weren't very different from anyone else, we did not foresee the pandemic. We foresaw some short-term disruption to the business, but if you move forward to April, by then clearly the world was in the grip of the pandemic. The UK was in lockdown. The team at Oxford University led by Dame Sarah Gilbert were in the stage of manufacturing the first doses of their candidate vaccine and conducting trials. The choice we had as a board was whether to add vaccine production on an unprecedented scale to our key business, and to respond to the pandemic in that way.

Teresa:

I love the really understated way in which you just explained that. Just to pick up on vaccine production, I think that's not normally what AZ does?

Philip:

That's absolutely right. AstraZeneca’s routine vaccine activity is much more limited, very different to what we were embarking on with Oxford.

Hemione:

It just happened so quickly, Philip, as well. From a board perspective, how did you get comfortable with those decisions in that time frame, that has now turned out to be such a massive investment for the world?

Philip:

We had talked about pandemics previously, and we were very clear that vaccines are in the end the only really effective way of dealing with a pandemic virus. Assumptions were being made right at the start that coronavirus would evolve, but not in a way that would quickly limit vaccine effectiveness. The decision was very clear. AstraZeneca’s purpose is around harnessing the power of science to improve the quality of life for millions of patients around the world. This was scaling that up to this is an opportunity to collaborate with Oxford on a candidate vaccine that has reasonable potential to be effective. Constantly time was of the essence, and if we're going to make it work, then we need to be figuring out how we are going to scale up manufacturing massively and quickly. Therefore, decisions that would normally be taken over a longer period of time, had to be taken in days.

Teresa:

Can I pick up on that around scaling up quickly and effectively with the eyes of the world on you, I’d love to understand just what that sort of supply chain looks like?

Philip:

Now normally in any process of scaling up from that research stage to commercialise manufacture, that will be a process that would take place over several years. None of that was going to be possible for any of us, for any of the manufacturers, but what we did have with the Oxford vaccine was a process that was similar to others that are undertaken. It was a question of, for our global manufacturing team, finding some of our own capacity, but far more importantly, finding capacity around the world.

Teresa:

Supply chain has been so much more in people's minds, particularly over the last 18 months. Hemione, if I can turn to you, that's something that you've seen in your role and across audit.

Hemione:

We've certainly seen, over the last two years, that the speed at which issues become issues for all companies, that we had lots of these macro issues, which I'm sure have happened to AstraZeneca, but have happened at many of the organisations. Of course, there has been the pandemic, and that has been a huge issue for so many companies, but things like supply chain disruption, are also a big issue and a continuing issue. People have spent decades working on just in time, on very lean and efficient supply chains globally distributed, and for many years thinking that we're moving to the more global, the better, the more efficient the better, and it's all about cost. In reality, of course now that we're seeing that people are finding other drivers, but actually the cost of certain supply chains will change quite dramatically. There feels to me like there has been a speeding up of a number of things that were already in train.

Teresa:

Philip, just going back to what you've talked about on the supply chain, I'd love to just go back and just talk about some of those challenges, and then maybe come to you Hemione and just understand what other organisations have faced on that, on the challenges front as well?

Philip:

Certainly, at the outset, we knew there would be challenges in so significantly increasing the global production of vaccines. One of the things that perhaps will be surprising to listeners, is in an industry as regulated as pharmaceuticals is that there isn't actually easy data to hand as to how many vaccines are produced normally in the year. At the outset, we knew how many doses governments wanted to buy from us. We had our idea about how quickly we could increase production, and how long it will take to meet those orders, but we had to make a number of assumptions about not just the raw materials and the production sites, but then how do you actually filter the end product, how do you transport it from the manufacturing plant to the filling plant, how do you fill it, distribute it. All of that is made more complicated perhaps than in some other industries, because all of this has to be done maintaining a sterile environment. It wasn't just about the manufacturing capability to make a vaccine measured in terms of thousands of litres at a time, but all the way through the additional components required. Because these are specialist products, manufacturing does tend to be concentrated in the hands of a few suppliers, but if you look at what's happened, actually the supply chain has adapted extraordinarily to the demands placed on it, and global production is now at 6.8 billion.

Hemione:

Philip, your word adaptability is the relevant word, and that's what set some companies apart from other companies. Some companies have had to scale things up dramatically and have had to adapt their supply chains in the way that we've just heard about, but others of course face the exact opposite. When they faced the distribution, channels or revenue streams completely disappearing overnight in a way that it could never have been anticipated, and they then had to think about what are the things that they need to do to reinvent themselves or to cope during a period where they're unable to take their product to market, or their services, or whatever it wasn't. We can all think of various industries that were very heavily hit. Airlines, for example, the travel industry, and of course, some aspects of the retail industry massively hit, but a number of them were able to adapt.

I would say that whilst we have seen definite themes across industries, what's been really interesting is that the individual circumstances of individual companies has been more relevant than necessarily the industry that they're in in all cases. Some companies were better able to face dramatic change, because they were more adaptable by nature, or perhaps they had better financing arrangements, or a stronger balance sheet, and those sorts of things, or were able to take their distribution channels online in a better way. I do think that the individual situation of the companies has been a higher determinant in a number of cases, but across all of it, our role of course as auditors is to look at what are the risks, and how is the organisation dealing with them, and how do they impact financial reporting. We are the auditors of AstraZeneca, so I am quite interested to also hear from Philip, how have you thought about the risks, more from a business perspective and a financial perspective, in a way that we might have talked about in the audit relationship?

Philip:

To answer that, I have to remind everyone, that whilst we've been producing vaccines, everything else at AstraZeneca has been going on as normal. Actually, we've got over 60,000 people working for AstraZeneca around the world, I would say less than 2000 of them have been directly involved in vaccines. Now, for those that have, it's been a very significant activity, which they have combined with the existing responsibilities, but for most of us, and I will include the board in that, we've been carrying on with the work that we would normally do. Research has carried on, trials have been conducted by us, and with partners, and results have been published, and development of successful products has continued, and manufacturing has continued, and so on. The underlying risks, I would say, haven't really changed. As we look at them in the audit committee, they're about recognising what is the value that we attach to our intellectual property, is that still valid, can we successfully commercialise, by which I mean take something that successfully passes a phase three trial, but can we actually manufacture at scale, does the supply chain function? Actually, I suppose, in that connection, one of the challenges that the organisation needed to respond to was changes in freight pattern. Air freight is the natural route, but obviously schedules were very different, point-to-point routes ceased, product had to travel in more complex ways.

Then day in day out, there are a continued set of compliance risks that we need to manage. That's the compliance with regulatory standards for manufacturing, for the distribution chain that I've spoken about. Then of course, there are a whole set of economic and financial risks, but that takes us back almost in full circle to where we began the conversation, which was to come out of the pandemic, and for economic activity, for social activity to return to previous levels, we knew vaccines were essential. Actually, if we could play a part in ensuring that return to as close to pre-pandemic normality as possible, then that was in the long-term interests of patients, employees, shareholders. On top of it, there clearly were a set of, I suppose what you could call reputational risks, which really were around the fact that our involvement in, as a scale vaccine producer, in the face of the pandemic took AstraZeneca from being a company that is most normally reported on the back pages of the newspapers, into almost daily appearance on the front page.

Teresa:

I am probably going to come to a last question here, which is around the future, Philip you already reminded us that we're not quite through the pandemic yet. You've already touched on some of this as well, but would love to get your thoughts on, as you look forward to the future, the discussion around ESG, what you've learned over the last 18 months, how do they come together, and what does that look like for AstraZeneca?

Philip:

A couple of times you've said my comments seem understated. Let me try and address that by pointing out that one of the things I find interesting at the moment is the position that the world is in, with now getting close to half the global population having received at least one dose of vaccine, but with obviously very different levels. There is a whole debate in which AstraZeneca has commented about whether or not it's appropriate to be giving fully vaccinated people booster vaccinations, when so much of the less developed world, particularly in Africa is still so far behind. Nonetheless, we are at a point where we've achieved getting close to that milestone of half the population having had a vaccine. This time last year, it was perfectly possible that we'd be facing a second northern winter with no successful vaccine. This was untried, and it wasn't until mid-November last year that first Pfizer and then AstraZeneca were able to publish successful readouts. 

The wider health care accounts for about 4% of global CO2 emissions so we do have a part to play as an industry and AstraZeneca does as a company as well, and we are committed to being carbon neutral by 2025 within AstraZeneca, and then for our entire supply chain to be carbon negative by 2030. Now that has benefits not only for the company itself, but there are potentially broader benefits from our strategies around developing pharmaceutical products that can reduce severe illness, which causes hospital stays, and/or provides an alternative to hospital-based treatments. If we can treat chronic respiratory conditions with products that reduce severe exacerbations that cause hospital stays, then we are obviously improving patients’ quality of life, but we're keeping patients out of what is almost inevitably a very carbon consuming environment. Hospitals have controlled environments, treatment is obviously energy consumptive, so we're actually thinking not only about what we do ourselves, but how what we are doing can actually reduce hospital stays or substitute, for example, cancer treatments that are chemotherapy based, which have to be given in a hospital for immunotherapies, which more commonly can be given by a nurse in the patient's own home. So you're changing the setting in which treatment happens. You're changing the energy consumption, and it's almost a truism to say any alternative to a hospital stay is likely to be beneficial to the patient's quality of life.

Teresa:

That's a really fascinating perspective on the ESG in terms of being in that environment, and therefore, AstraZeneca’s contribution is actually to make sure that patients aren't in that environment that actually then consumes more CO2, that had not even occurred to me, that’s really fascinating. Hemione, if I can come to you last on this, this is obviously a topic that lots of our clients are talking about. Is that beginning to impact, as auditors, the work that you do, or is that something that we see, it's certainly in the non-financial reporting sense, that will be more of what you do over the next few years?

Hemione:

Absolutely both, there are some things where companies have made statements, for example, about milestones that they intend to achieve or indeed there is regulatory change that means that there are already things that impact their financial reporting. To the extent they already materially impact their financial reporting, that's part of the role as auditors for us to understand what is the impact of things that you're talking about, and is that properly reflected in the financial reporting, in the financial statements. That is going to be a growing impact as more and more organisations think about what changes are we making to, what commitments are we making, and how do they impact the assets we have, the business processes we have, all of those sorts of things.

Then there is this other part that you talked about, which is the non-financial reporting. It's often in the front half of annual reports, for example, which is where a lot of the narrative around what the intentions are for companies is disclosed, but also certain metrics and certain KPIs that they intend to hit. There is increasing interest from stakeholders and investors, how is that being assured, how can we get comfortable that what is being said is worked into the plans of the organisation, and that they are actually on track to hit those milestones, what were the controls that were used to pull together the information that's being disclosed. All of that, there is now more and more a desire for independent assurance over that. As auditors we are ideally placed to give that independent assurance. I see this being an area where the audit skills are used absolutely. Potentially over time the audit itself expands to some of these areas, because that's what is the relevant information that stakeholders are wanting.

Teresa:

Brilliant, thank you, Philip and Hemione, this has just been the highlight of my day, an absolutely fascinating discussion. I was looking forward to this, and it has lived up to the billing, so thank you. Really appreciate the discussion.

That draws us to the close of another ‘In conversation with’ in our Business in Focus podcast. If you're enjoying this series, please do hit subscribe to keep up to date with future episodes. Thanks everyone for listening, and please tune in again soon.

Participants

• Teresa Owusu-Adjei
• Philip Broadley
• Hemione Hudson