fortune--2020-08-10--Global stocks hold up despite latest China-U.S. escalation

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Good morning. U.S. futures are holding steady despite growing trade tensions between the U.S. and China. There’s more choppy trade in the dollar as gold soars for another day.
Let’s take a look at what’s moving markets.
Markets update
Asia
The major Asia indexes are mixed in afternoon trade with the Shanghai Composite leading the way higher, up 0.7% .
are mixed in afternoon trade with the Shanghai Composite leading the way higher, up . China has drawn up a list of Americans to sanction in retaliation for similar moves imposed on Friday by the Trump White House. The list includes senators Marco Rubio , Ted Cruz, Tom Cotton and Pat Toomey; Congressman Chris Smith and Human Rights Watch Executive Director Kenneth Roth.
has drawn up a list of Americans to sanction in retaliation for similar moves imposed on Friday by the Trump White House. The list includes senators , and Pat Toomey; Congressman Chris Smith and Executive Director Kenneth Roth. Hong Kong Media tycoon and pro-democracy advocate Jimmy Lai was arrested under Beijing’s contentious new national security law. Shares in his media network Next Digital fell as much as 16.7% to the lowest level on record Monday morning following reports of the arrests.
and pro-democracy advocate Jimmy Lai was under Beijing’s contentious new national security law. Shares in his media network fell as much as to the lowest level on record Monday morning following reports of the arrests. Saudi Aramco had a rough first half, with net profits crashing by 50%. The world’s biggest oil producer did manage to pay its second-quarter dividend of $18.75 billion, and plans to pay it this quarter too.
Europe
The European bourses were gaining out of the gates this morning, before falling. Germany’s Dax was down 0.2% two hours into the trading session.
were gaining out of the gates this morning, before falling. was down two hours into the trading session. A wave of mass unemployment is expected to hit the U.K. this quarter as one-third of employer s say they plan to cut payrolls, according to a new survey by human resources specialists CIPD and Adecco Group.
is expected to hit the U.K. this quarter as s say they plan to cut payrolls, according to a new survey by human resources specialists CIPD and Adecco Group. It’s not just Britain. A rising number of Europeans are heading for a household debt crisis, even in wealthy EU countries such as Germany where the economy is rebounding strongly.
U.S.
The major indexes look to start the week off in positive territory as U.S. futures are trading higher, though they’re off their early highs. The Dow and S&P 500 finished last week week in the green after a stronger than expected jobs report.
are trading higher, though they’re off their early highs. The and finished last week week in the green after a stronger than expected jobs report. With Congress failing to agree on a fiscal stimulus package, President Trump over the weekend signed a quartet of executive orders, including an extension of the unemployment benefit supplement to a reduced 400 bucks . “The details, however, are not as generous as he made them sound,” The Washington Post reports.
package, President Trump over the weekend signed a quartet of executive orders, including an extension of the to a reduced . “The details, however, are not as generous as he made them sound,” The Washington Post reports. Warren Buffett’s cash-rich Berkshire Hathaway was busy in Q2, buying a record amount of its own shares. Buffett famously scans the marketplace looking for bargains in a downturn, but settled on his own shares instead.
Elsewhere
Gold has been climbing all morning.
has been climbing all morning. The dollar is trading sideways at the moment.
is trading sideways at the moment. Crude is climbing with Brent up 1%.
***
Dollar daze
For dollar bulls, July was rough, the worst monthly performance in a decade. The greenback is off 10% since March, a stunning collapse. It’s unlikely to rebound any time soon, and that means you should think about how that will impact your portfolio.
Ben Carlson, the director of institutional asset management at Ritholtz Wealth Management, writes in Fortune that currency fluctuations like this are not uncommon. Currency strength is a cyclical phenomenon. And, he notes, we appear to be entering a new weak-dollar cycle after a decade of strength.
What does that portend for the markets? Carlson dug into the history books and pulled up data that shows a weak dollar most impacts these three assets: gold, foreign stocks and emerging markets.
“In years of dollar weakness,” he writes, “foreign stocks have risen 85% of the time, gold is up 80% of the time, and emerging markets have advanced 65% of the time.
“On the other hand, in years of dollar strength, foreign stocks are up just 62% of the time, gold is only up 42% of the time, and emerging markets rose just 50% of the time.”
Here’s the data, spanning back to the Nixon years.
A weak dollar is good news, in general, for the S&P 500—particularly for multinationals that got a currency boost for their products and services sold abroad.
Gold does even better in these years. But the best performers of the bunch are foreign stocks and emerging markets, also big beneficiaries of the favorable FX swing. It’s simple math, actually. “If the dollar falls, that means your foreign stocks are worth more once they’re converted to our currency,” Carlson writes.
There’s an added factor—politics—at play with overseas stocks at the moment. A wave of money managers are betting on a Biden victory in November, anticipating that a change of the guard in the White House would lead to smoother trade relations and more climate-friendly policy, thus boosting, for example, European clean-energy stocks and cyclicals.
A lot can happen between now and November, but it’s unlikely the dollar will mount a comeback any time soon.
***
Postscript
A few years ago, I found myself on a business trip in the Bay area. There was nothing particularly notable about that trip except that, on my final day there, my wife called me with surprisingly big news. “The hospital just rang,” she told me. “We might be getting a kidney. We’ll know tomorrow morning.”
This was December, 2017, and my daughter had been on the waiting list for a new kidney for just a few weeks. The news floored me. I went from dumbfounded to excited to an emotional wreck in the span of about three seconds.
How was I going to get from San Francisco to Rome in time for the transplant?, I instantly fretted.
I got an Uber to the airport and Googled every flight connection possible that would get me to Rome in under 15 hours, hoping that might buy me enough time to be there when my daughter came out of surgery. Just as I was determining my best route—fly direct to Zurich, then to Rome—I got a call. It was the home number.
It was my M., my daughter, (the twins were 7-years-old at the time). She had overheard all the commotion about her twin sister, T., and she had one very important question for me.
The exchange went something like this:
M.: Dad, is T. going in for surgery? To get a kidney?
Me: We’re not sure yet. But, yes, we might have a match. And that would be good news—
M.: Dad, do you remember what you promised us?
Me: Huh?
M.: That after the transplant we can have a dog.
M.: You promised!
I don’t remember how exactly I wiggled out of that phone call. But I remember negotiating for time in as firm a voice as possible, which wasn’t very firm at all.
A few minutes later I got to the airport, and, as luck would have it, I was able to change flights to get a seat bound for Zurich. The next 12-ish hours were among the longest of my life. The in-flight wifi was buggy the entire trip, and the Swiss Air crew was unable to help me get a line down to Planet Earth, to my wife and daughter at the hospital. Somewhere over the Atlantic, I had a momentary patch of reception and got the news, via WhatsApp, that the surgeons and nephrologists were in disagreement over the fitness of the organ. That only got me more anxious.
Hours later, I landed in Zurich, dashed across the airport and was still unable to get anything resembling an update. Too late. My gate was closing. I crammed into the last seat of the plane for a 90-minute flight that somehow felt longer than the San Fran-Zurich leg.
Once my plane touched down in Rome, I frantically checked my phone. I could see all kinds of WhatsApps messages. I exhaled, and was about to tap the app when the phone rang. It was the house number.
Me: Hey, I just landed.
A voice: Dad.
Me: M.?
M.: Does this mean we can’t get a dog!?
And that’s how I learned the docs had rejected the kidney, and that there would be no surgery, no transplant that day.
T. eventually got her kidney. From her super-hero mom. And, just a few days ago, I made good on our promise: the girls now have a new puppy. This is Scilla.
Scilla, our Lagotto Romangolo puppy. Original Photo: Bernhard Warner.
She has a story too. That’s for the next Postscript.
***
Have a nice day, everyone. I’ll see you here tomorrow.
Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com
As always, you can write to bullsheet@fortune.com or reply to this email with suggestions and feedback.
Today's read
Second homes. The real estate market has been turned upside down by COVID. This prompted Fortune to analyze real estate on the priciest parts of the market and found the biggest gains are happening in second-home country. Real estate prices around Lake Tahoe, Aspen and The Hamptons are soaring. The list of gainers may surprise you.
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Market candy
124
Fortune's Global 500 went live this morning and there are some big moves at the top of the annual list. For starters, at 124, Mainland China + Hong Kong now have the most companies on the list. The U.S. is second with 121. Throughout the week, I'll be pulling the data points from the list that catch my eye. Until then, please give it a look here.


fortune--2020-08-10--America’s Black brain drain: Why African-American professionals are moving abroad—and staying there

Closing schools is ‘ socially intolerable , ’ says Boris Johnson .
Teachers and parents are far less assured

It was 2013, and Najoh Tita-Reid, then an executive at pharmaceutical giant Merck, was in the midst of the interview process for a job that would send her on her first international assignment. During a break in the conversation, “a white gentleman pulled me aside,” she says, and told her that all of the white men up for the role were “selling that they’d conquered the moon”—while she was focused on explaining what she saw as the weak spots in her résumé. If Tita-Reid wanted the position, he said, she would need to turn everything she had into an asset.
So she went back into the interview and laid out her biggest selling point: She was the best person for the job because she was a Black woman in the United States. She was used to being the only person in the room who looked like her. The “cultural competency” the hiring managers were looking for was not a skill she’d had to learn for work; it was something she’d had to master to just get by in her everyday life. “I can get the nuances of every culture because this is what you have to do as an African-American,” she told them. “You have to shape-shift to survive.” She sold it, she says, “and it was all true.”
Tita-Reid got the promotion, running Western Europe for the company out of London. Seven years later, she’s still living and working abroad—now in Switzerland, where she holds a global marketing job for Logitech. And, at least for now, she has no plans to return to the U.S.
Like many of corporate America’s ladder climbers, Tita-Reid first went after an international role with the goal of enhancing her career. But in the years since she made that first move to London, she’s become part of a cohort of Black American expats who have chosen to stay abroad because they’ve found that the professional benefits of working overseas are far more profound than the usual résumé-building check mark. Working in Europe, Tita-Reid says, has been like wearing an oxygen mask. It’s allowed her to breathe—to lead and perform without feeling the crushing weight of America’s dysfunctional racial dynamics at every moment.
I’d never been an American first and then Black. It’s a refreshing change. Nancy Armand, an executive at HSBC Bank USA
With her friends, Tita-Reid calls it the “James and Josephine effect”—a hat tip to James Baldwin and Josephine Baker, Black Americans who fled the racial persecution of the U.S. during the first half of the 20th century and ended up with thriving careers in Europe. “It’s not a new phenomenon at all,” she says. “I feel like part of that legacy.”
The decision to work and live abroad has been brought into sharp relief for many Black American expats this spring and summer as they watch a national movement take hold back home in the aftermath of the police killing of George Floyd. There’s a sense of guilt at not being on the front lines, mixed with affirmation of why they did not want to return.
Working abroad, these executives say they left behind the fatigue that many described as routine for Black people in corporate America: the exhaustion brought about by being asked to solve your company’s diversity issues; living by the unwritten rules that dictate how you present yourself at work; having to prove every day that you deserve to be in your role. Once abroad, with the weight of their companies behind them, many Black expatriates said they felt instantly valued and treated with a level of respect and deference from their colleagues they had not known in the U.S.
The benefits extend far beyond the office. The prevailing message in more than a dozen interviews with Black Americans who are working or have worked overseas: Their international experience was the first time race was not the primary frame of reference through which they were viewed. “You’re an American, you’re not African-American,” says Shaundra Clay, who lived in Europe for eight years as a health care executive. “You are not made to feel like you are carrying the burden of anything. You are carrying the power of something.” She said it was a level of privilege she had never experienced before in her life. In the U.S., Nancy Armand, an executive at HSBC Bank USA, was always conscious of her gender and race, she says. In the U.K., she was always conscious of her nationality first. “I’d never been an American first and then Black,” Armand says. “It’s a refreshing change.”
Adrian Anderson helps companies manage their expat execs—and he’s been one himself. PHOTOGRAPH BY NANCY NEWBERRY
And yet these jobs can be isolating. Rarely does Tita-Reid see another Black woman at her level. “On a day-to-day basis,” she says, “I am alone.” That’s in part because the expat universe is running 20 to 30 years behind the larger corporate world in terms of diversity and inclusion, says Adrian Anderson, a partner in KPMG’s global mobility services. He has both personal and professional experience here: For more than 25 years, Anderson has worked in the industry, which helps multinational organizations manage their workforces’ foreign assignments; he has also lived abroad as a Black American executive. Most of these coveted international roles come through word-of-mouth networks, which have historically boxed out Black employees. Or they are reserved for developing those expected to move into the executive suite—a space that has also long passed over Black talent. Anderson says most global organizations prefer that executives have international experience in order to move into top-level roles, making the lack of access to the expat world a systemic barrier that has kept Black employees from reaching the top echelons of corporate America.
Black executives who pack their bags and leave the U.S. behind are quick to point out that they are by no means moving to any sort of utopia. “I’m very clear that wherever I go, I’m perceived as a Black man,” says Warren Reid, Tita-Reid’s husband and founder and CEO of Nemnet Minority Recruitment, a diversity recruitment and consulting firm that works with educational institutions. “Unfortunately, in the overwhelming majority of the globe, I don’t have a positive brand image. I’m mindful and not naive about that.” Despite such awareness, Reid and others interviewed for this story said they had not realized how heavily the stress of being Black in America weighed on them until they left. Even when they faced bias abroad, they never feared for their lives or their children’s the way they did in the U.S. Says Ini Archibong, a designer and business owner originally from California who now lives in Switzerland: “The brand of racism in America is unique.”
In corporate America, Black executives are used to having to tell people they’re the boss. Otherwise, says Tita-Reid: “When you walk into a room in the U.S. and you are five levels above your sales rep who’s a white man, they look at him and shake his hand and give you the bag.” But soon after transferring to the U.K., she had a meeting with a client who immediately identified her as the person in charge. “You’re a Black American female, and you’re here, so you have to be the best,” she recalls him saying. It was the first time anyone had labeled her the “best” at anything, she says. “I almost cried.” Reid distills the dynamic this way: In the U.S., he says, the question is always, How did you get in the room, and who let you in? In the U.K., the assumption is that if you’ve made it into the room you deserve to be there.
But working in Europe means adjusting to more subtle forms of racial prejudice—which often intersect with a strong vein of classism, say many Black execs who have done tours abroad. Arlene Isaacs-Lowe, a 22-year vet of Moody’s, transferred to the U.K. in 2015 to run relationship management for Europe, the Middle East, and Africa for the ratings agency. The day she met her new U.K. team, she recalls being repeatedly introduced as an alumna of Howard University and a board member of its business school, followed by a recitation of Howard’s famous alumni. It stuck her as odd, she says, until she realized it was a way of establishing the bona fides of the historically Black university—and by extension, proving her “pedigree” as fellow member of the upper class.
Once that fear lifted from me, I realized I was never going to move back. Ini Archibong, a designer and business owner who now lives in Switzerland
In 2017, Tita-Reid joined a health food company as global CMO, and the family moved to Switzerland. In her new home, nationalism was the dominant force, she says. Swiss people support Swiss people first, she says: “If you don’t happen to be of that culture, it has nothing to do with you.” She recalls a conversation with a German businessman, who felt that there was bias against his nationality throughout the country. To Tita-Reid, it was a relief that everyone was considered an outsider. “We’re all equal-opportunity excluded,” she says. “To me, that’s amazing. It’s the first time I’ve ever been equally excluded.” She explained to the businessman that unlike when he returned to Germany and felt accepted, when she went back to the U.S., she still felt like an outsider. “The negativity of being an American in Europe is not as bad as being a Black American in America,” she says.
Three years ago, Tita-Reid had a chance at a job that would take her back to the U.S., but she turned it down. It wasn’t just a career decision but one for her family. “The stress that I felt in the U.S. and concern for my husband and son was gone,” she says. “It was more of a weight than I had ever realized.”
I spoke to Reid over Zoom, where he sat outside their Zurich home on a sunny day with birds chirping in the background. He told me about the family’s first night in London when they were living in temporary housing. He was going back and forth between the hotel and the flat late at night when he saw two police officers walking toward him. “I remember in that moment, I went through my mental checklist of no sudden moves, communicate, make sure you’re seen.” The police officers walked past him with nothing more than a good night. “That blew my mind,” he said.
After we talked, Reid sent me a follow-up email, quoting James Baldwin: “To be a Negro in this country and to be relatively conscious is to be in a state of rage almost, almost all of the time.” Living abroad, Reid was free of that rage, he said: “It does not consume or preoccupy me in the way that it did and does when I return home.”
For Dimitry Léger, the narrative of the Black American expat who thrives abroad holds true—until you want to get hired by a European company. If you have the wealth of America behind you, “you are welcomed with open arms,” he says. “When you ask for a job, things change.”
Léger made the move abroad 15 years ago. His then-wife is Swedish and wanted to live closer to her family, and Léger had always been intrigued by the idea of an international career. In 2004, he left journalism behind to get a graduate degree in international relations at Harvard, and the following year ended up in Geneva with the World Economic Forum as a partnership and communications manager. (Léger worked at Fortune from 1999 to 2002, but we never overlapped.)
Over a decade, Léger says he tried repeatedly to secure a full-time role with the UN, or as a corporate communications executive with a multinational company. Léger, who is Haitian-American and speaks both English and French, says at the UN he was repeatedly passed over; the jobs ended up going to Brits who were not perfectly bilingual—a supposed prerequisite for those roles. In the corporate world, interviews abounded, but he says the leads would turn cold once he showed up in person. One would-be employer went as far as explicitly citing his race as an issue, he says, telling him, “Our investors will have a problem with a Black spokesperson.” Eventually Léger started following the European practice of putting his photo on his résumé to spare himself the grief. Once he did, even the interviews dried up.
Léger attributes part of his struggle to a lack of formal or informal support structures. The number of top Black executives in the U.S. is woeful, but in Europe Léger found the situation to be far worse. “There are no senior Black executives anywhere,” he says, “so there’s no network of us to look out for each other.” Several Black men, including Léger, told me it was often assumed that they were visitors, because otherwise how could they be eating in this fancy restaurant in this nice part of town?
Now, with his oldest child thinking about attending college in the U.S., Léger was back in New York, living in Midtown Manhattan. When we spoke in June, he was regularly encountering the Black Lives Matter protests in the city and feeling nervous every time he saw a police car. “I did not miss that,” he says. But he was still glad to be home. “I like my odds of finding a stable full-time job in media,” he says, “of getting the job that eluded me in Europe, even in the middle of a pandemic and the ongoing fight for racial justice here.”
One of the major downsides of transferring abroad is the struggle that comes with moving back. All of a sudden, executives’ worlds felt much smaller, their jobs narrower. Clay returned to the U.S. in 2016 after eight years in Europe. She described the experience as akin to going back to your hometown after decades away, and having your successes celebrated but no one fully understanding how much you have grown and changed.
But for Black Americans, repatriation also came with unique baggage. Clay said the racism she had always seen and experienced in the U.S. now emerged with a different sense of clarity. “The longer you’re away, the more stinging and shocking it becomes,” she said. “All the burdens become your burdens again, and they feel heavier because you’ve lost the muscle of carrying them.” She and others I spoke to said they now had less tolerance for the racism they regularly experienced.
Those who have remained abroad have faced their own new personal struggles this spring and summer, describing feelings of deep conflict in the wake of the police killing of George Floyd and protests that have followed. Reid says by being abroad he’s meeting his primary obligation to provide a safe and affirming environment for his family; his children have not had to wrestle with some of the issues he did as a Black kid growing up in the U.S. “That’s been the good side,” he says. “The other side is there is a movement that’s going on, and I’m removed from it. There’s a little guilt that goes along with it: How could I bring to bear my education, resources, and network to move the movement forward?”
Archibong, the American designer based in Switzerland, says it’s difficult not to be in the U.S. right now. But while Switzerland has its own problems, he says, it’s not enough to make him want to go back. The power of escaping that constant existential fear described by so many of the Black American executives I spoke to is too strong. “Once that fear lifted from me, I realized I was never going to move back,” he says. Not being constantly concerned with his physical safety has allowed him to “clear up space” in his head and be more creative in his work. A few years into his move to Europe, Archibong stopped wearing the collared shirts he’d long worn every day—even if it meant being overdressed for the occasion. The formal look had started as an aesthetic choice, he says, but at some point he realized it had become a kind of armor. In the U.S., he’d felt safer when he was dressed up, he says, and the dressier clothes had helped him command the same professional respect that other, non-Black designers got even when casually attired. In Switzerland, he no longer feels the need; now he pulls out the suit and tie only when he’s in the mood.
Tita-Reid struggled to articulate what it’s been like watching the current movement in the U.S. from afar. She, like her husband, says she feels somewhat guilty that she’s an ocean away. It has been both sad and validating to see all of the concerns that had kept her from wanting to return bubble up to the surface. It’s also made her acutely aware of all the good things she had left behind. “You do give up something, which is having your culture, your people, your friends and family,” Tita-Reid says. “It’s at a cost.”
77%
Share of companies that say international experience is a critical skill for moving into leadership
Experts say Black executives have less access to global assignments, contributing to the systemic bias that Black professionals face in corporate America.
41%
Share of employers that said they have specific diversity and inclusion objectives as part of their global mobility strategy
Some employers are now focusing on ensuring that international assignments don’t exclude women and people of color, but it’s still a long way from being a top priority for most.
20%
Share of companies that said they were likely to see a decrease in international moves as a result of COVID-19
This shift could have an outsize impact on Black executives, who are already less likely to land foreign assignments because of the informal way they are doled out.
Sources: PWC, KPMG
A version of this article appears in the August/September 2020 issue of Fortune with the headline “America’s Black brain drain.”


fortune--2020-08-10--How reborn pharma giant AstraZeneca is taking the lead against COVID-19

On a Wednesday morning in late June, Junior Mhlongo arrived at the Chris Hani Baragwanath hospital in Soweto, the predominantly Black township outside Johannesburg, South Africa. Sitting inside an examination room, he unzipped the purple jacket he wore to guard against winter in the southern hemisphere. But he kept on the red cloth mask he wore to guard against the spread of COVID-19.
Mhlongo slipped his left arm from his coat sleeve and hiked up the cuff of his shirt. He winced as a nurse stuck a needle into his arm and injected him with a syringe of clear liquid. “I feel a little bit scared, but I want to know what is going on with this vaccine, so that I can tell my friends and others,” he told the reporters who had come to watch.
It’s not just Mhlongo: The whole world is awaiting an answer. The young volunteer is among the first of some 2,000 patients in South Africa—and thousands more in the U.K., the U.S., and Brazil—participating in clinical trials for a vaccine for COVID-19, pioneered by scientists at the University of Oxford in England.
A vaccine is the key to ending the long, global nightmare of the coronavirus pandemic. It can unlock economies and save countless lives. Without it, millions more could die, and business and government will remain hostage to the virus.
As of late July, there were at least 168 different vaccine candidates in some stage of development, according to the World Health Organization. But the Oxford vaccine is arguably the furthest along in human testing. Preliminary human trials have been promising. In anticipation of success, the U.S. government has preordered 300 million doses at a cost of $1 billion. The U.K. has ordered 100 million; the European Union, 400 million. Deals have been struck to provide the developing world with more than 1.3 billion doses.
A Shot at Salvation: A volunteer receives an injection at a hospital in Soweto, South Africa, as part of clinical trials for the COVID-19 vaccine developed at Oxford’s Jenner Institute. If the trials succeed, AstraZeneca has committed to producing billions of doses. Felix Dlangamandla—Beeld/Gallo Images via Getty Images
Still, vaccine development is always a gamble—a 2018 MIT study found that 66% of vaccine candidates for infectious diseases fail. And no one has staked more on the Oxford vaccine than Pascal Soriot, chief executive officer of AstraZeneca, the British pharma giant. Soriot scored a coup in late April when AstraZeneca swept in to become Oxford’s commercial partner on its COVID-19 vaccine, displacing rivals with better track records in vaccine development to seize the lead in this global race.
The Oxford partnership has drawn unprecedented attention to AstraZeneca. But it’s only the latest in a series of bold collaborations, strategic shifts, and calculated risks at the company over the past eight years—moves that have elevated AstraZeneca from one of Big Pharma’s least successful drug developers to its most dependable. Soriot is the engineer of that metamorphosis. Born in France, the 61-year-old pharma lifer has spent most of his career abroad but still speaks in French-inflected English. He has jet-black hair that contrasts with the crisp white dress shirts he favors, and he speaks with a directness rare in executives of any nationality. Soriot tells Fortune he believes in “casual intensity.” “We have to take what we do seriously, but we should not take ourselves too seriously,” he says.
Of course, few pharma CEOs have faced a challenge as existentially serious as COVID-19. The Oxford partnership is risky, requiring AstraZeneca to commit hundreds of staffers to expanded clinical trials and manufacturing—long before the vaccine is even proven. Whether the vaccine is truly effective won’t be known until sometime this fall. But if clinical trials show a positive result, U.S. and U.K. regulators are expected to approve the vaccine on an emergency basis, and Soriot has promised to have doses ready as soon as late September so mass vaccination programs can begin.
On average, developing a new vaccine takes more than a decade. In this case, it is being done in about six months. Even if it works, AstraZeneca, which brought in $24.4 billion in revenue last year, will make no money at first. It has agreed to provide most of those initial 2 billion doses, and perhaps billions more, at cost. The vaccine will boost AstraZeneca’s bottom line only if COVID-19 proves to be an endemic, seasonal menace, like the flu, for which people require regular vaccinations. Still, AstraZeneca (or AZ, as it is informally known) has seen a stock market bump. On the day the Oxford deal was announced, its shares soared to an all-time peak. They have since traded as high as 97 pounds ($124), up 38% from their pre-pandemic price, and AZ now commands the highest market capitalization on London’s FTSE 100 index.
How AstraZeneca got the inside track on the Oxford vaccine is a story, like all business stories, about relationships. But it’s also about COVID-19’s fraught geopolitics. And it’s a tale of a remarkable corporate turnaround—one that holds lessons for any business trying to profit at science’s cutting edge, and for any executive trying to lead through a radical cultural transformation.
When news of a mysterious respiratory illness in Wuhan, China, surfaced in December, AstraZeneca was quick to take notice. More than any other Western pharmaceutical firm, AZ has bet big on China. Almost a quarter of its 61,500 people are based there, and last year its Chinese revenues were some $4.8 billion. Beginning in late December, Soriot held almost daily video calls with AstraZeneca’s Chinese executives, tracking the outbreak as it inched toward becoming a pandemic.
“Then we quickly thought, ‘What can we do to help?’ ” Soriot recalls. AstraZeneca bought 9 million FFP3 respirators, which can filter out the virus, and donated them to health care workers worldwide. It began investigating whether any of its existing drugs—including a leukemia treatment that fights inflammation and a diabetes drug that can protect the heart and kidneys—could be repurposed to battle COVID-19. It is collaborating with Vanderbilt University on synthetic antibodies that might treat the disease. And after it became apparent that the U.K. lacked adequate COVID-19 testing capacity, AstraZeneca teamed up with its British rival, GlaxoSmithKline (GSK), and the University of Cambridge to set up a new test-processing lab.
One thing was conspicuously absent from AstraZeneca’s response: a vaccine. AZ is not a significant player in that field. It currently sells just one vaccine, a nasal spray that protects against seasonal influenza. But events taking place not far from its Cambridge, England, headquarters, in a rival college town, were about to change that.
A painting by Ernest Board shows Dr. Edward Jenner (1749-1823) performing his first vaccination against smallpox. Oxford’s Jenner Institute is named after the pioneering doctor. DEA Picture Library—Getty Images
Amid a cluster of research labs in Oxford, the Jenner Institute is housed in a low-slung modern office building with smoky glass windows and green cladding. Named for Edward Jenner, the 18th-century physician who first inoculated people against smallpox, it has emerged in the past two decades as one of the world’s foremost centers for vaccine development.
Oxford was able to leap out in front in the sprint for a coronavirus vaccine because of similarities between SARS-CoV-2, the coronavirus that causes COVID-19, and those that cause severe acute respiratory syndrome (SARS) and Middle East respiratory syndrome (MERS). Sarah Gilbert, a Jenner researcher, had been working on a MERS vaccine, and she realized almost immediately it might be possible to use the same method for SARS-CoV-2.
The majority of vaccines are made using a weakened version of the virus they target. Gilbert’s vaccine is different: It takes a harmless chimpanzee virus and genetically modifies it to produce the surface spike protein found on SARS-CoV-2, allowing the body to develop a potentially effective immune response. Vaccines produced this way have at least one major advantage: They don’t have to be kept at subfreezing temperatures, which is especially important in developing countries that lack reliable cold transport and storage.
The Oxford scientists knew from previous work that the modified chimpanzee virus was safe. And they knew it could be manufactured in large quantities. But John Bell, the professor who helps oversee the Oxford medical-science division’s work with external partners, says the university also knew it would need help from Big Pharma. “Making billions of doses of vaccine for the whole world, let’s be clear, that’s not what universities could or should be doing,” says Bell, an athletic 68-year-old Canadian who habitually keeps his eyeglasses propped atop his silver-gray hair.
Sky-high Aspirations: The courtyard of AstraZeneca’s new R&D center, under construction in Cambridge, England. The building puts AZ scientists close to top academic labs in biology and in stem cell and cancer research, in hopes of enabling more collaboration. Charles Abbott—Courtesy of AstraZeneca
Oxford set out to find a partner with proven vaccine expertise—but politics made negotiations difficult. Oxford balked at some U.S. companies’ insistence on exclusive worldwide manufacturing rights. The Trump administration was prepared to offer large sums to guarantee the American public was first in line for a vaccine. Various governments, including those of the U.S., France, and Germany, vowed to block exports of vaccines made in their countries. Ultimately, Bell says, the British government, which steers millions of pounds in funding to Oxford each year, grew anxious that it could wind up without adequate vaccine access, and in April it told Oxford to find a British partner.
There were only two U.K. companies with sufficient manufacturing capability: GSK and AstraZeneca. GSK might seem like the obvious choice. It is the world’s top vaccine producer, with a portfolio of more than 30, including inoculations for measles, meningitis, and pneumonia. But GSK was already working on its own COVID-19 vaccine efforts, including one with French drug giant Sanofi and another with Chinese biotech firm Clover Biopharmaceuticals. (The project with Clover is now in early-stage human testing.)
AstraZeneca had virtually no vaccine track record. But it had experience with a manufacturing process similar to the one Gilbert uses for her modified chimp virus. (AZ uses it to make synthetic antibodies.) What’s more, Bell had a personal connection to Soriot: Until last year, Bell served on the board of Swiss drugmaker Roche, where Soriot had been a fast-rising star, serving as chief operating officer for two years before taking the top job at AZ. “I knew Pascal was somebody who was absolutely committed to the highest-quality science, but also prepared to take risks,” Bell says. “And, to be crystal clear, this vaccine is a big risk.”
Oxford also had another important factor in mind: AstraZeneca’s remarkable R&D rebound under Soriot’s leadership. “It’s one of the great turnaround stories in pharmaceutical companies over the past 20 years,” Bell says. Michael Leuchten, an equity analyst for Swiss bank UBS, says of AstraZeneca’s recovery: “It’s remarkable. I’ve never seen anything like that before, and I don’t think we will again anytime soon.”
When Soriot took the helm of AstraZeneca in 2012, the company faced a bleak future. Its bestselling medicines—Crestor for high cholesterol, Nexium for acid reflux, and antipsychotic drug Seroquel IR—were about to plunge off the industry’s dreaded “patent cliff.” As soon as they lost intellectual-property protection, generic drug manufacturers would be able to sell cheap copies. Half of AZ’s annual sales—$17 billion in total—were likely to disappear in the next five years.
Worse, the company, having underinvested in R&D, had no pipeline to replace its blockbusters. “At the time, the company was run like a spreadsheet,” Soriot says. “It was all about cost savings, increase the profit and use that for a buyback, and mechanically increase the share price. But the company was on the road to nowhere.” Many investors agreed. “He has to rethink the strategy,” Stephanie Maher, a fund manager at asset management firm AGF, said when Soriot was appointed.
The minute Soriot took over, he stopped the buybacks and plowed money back into science. AZ’s R&D spending as a percentage of sales was 16% in 2011, the year before Soriot was appointed; in 2019, it was 26%, the highest percentage of any of its peers. And reviving the drug pipeline wasn’t just a case of throwing money at a problem: It involved refocusing the entire company.
A decade ago, AZ’s R&D operation was extremely inefficient: Just 4% of its drug candidates made it to market. “We were spending $5 billion a year on R&D and not delivering any medicine,” says Mene Pangalos, who heads AZ’s biopharmaceuticals R&D. A damning 2012 analysis from the InnoThink Center for Research in Biomedical Innovation, a consultancy, found that AZ was spending, on average, $11.8 billion in R&D for every drug that received U.S. Food and Drug Administration approval, the worst record in the industry.
Before the company’s strategic shift, “we were spending $5 billion a year on R&D and not delivering any medicine,” says Mene Pangalos, who heads AZ’s biopharmaceuticals R&D. Courtesy of AstraZeneca
Soriot’s predecessor, David Brennan, hired Pangalos to revive the research division. After Soriot took over, he accelerated the effort to restock the medicine cabinet. In one early leadership meeting, a sales executive said a researcher’s presentation “had been a bit technical and over my head.” Soriot publicly upbraided him. “If you want to be a senior leader in our organization, you need to be interested and engaged in the science that we do and the patients that we are treating,” Pangalos recalls Soriot saying. “There was stunned silence and quite a few gulps. But if you were an R&D person in the room, it was the best we’d ever felt.”
The fledgling overhaul was almost smothered in its nest. In the spring of 2014, the larger U.S. drugmaker Pfizer launched a hostile takeover attempt. Investment bankers initially told Soriot the company had a less than 10% chance of remaining independent, the CEO recalls. Soriot repelled the effort with hefty promises to investors—pledging to sustain dividend growth and boost revenue to a lofty $40 billion, a 75% increase, by 2023. In retrospect, Soriot says, the takeover attempt galvanized his strategy, making it crystal clear to the entire company that its survival depended on more effective, and thus more profitable, R&D.
AstraZeneca had been focused on primary-care drugs, medications for chronic conditions such as allergies and high blood pressure. Soriot shifted its emphasis to specialty care—drugs that command high reimbursements from insurers and better profit margins, even though their market size is smaller.
Nowhere has that change in priorities been more dramatic than in oncology. Under Soriot’s predecessor, AstraZeneca had been divesting from cancer treatments. But early on, leading oncologists outside the company told the CEO that AZ was about to write off a potential blockbuster in Lynparza, a drug for late-stage ovarian cancer that had shown promise in clinical trials. Soriot reversed course and revived the drug.
It was a momentous decision. Lynparza emerged as a pioneer in a class of drugs called PARP inhibitors. These drugs target enzymes critical to cell repair; by blocking them, they keep cancer cells from rejuvenating. It soon emerged that Lynparza could treat some pancreatic, breast, and prostate cancers, too. It’s now the bestselling PARP inhibitor: In 2019, it generated $1.2 billion in revenue, with sales growing 85% year over year. Its versatility also makes it attractive to corporate partners. In 2017, Merck agreed to pay AZ up to $8.5 billion to share in Lynparza’s development.
AstraZeneca has seen its drug-development success rate soar from 4% to almost 20% in less than a decade. “It’s one of the great turnaround stories in pharmaceutical companies over the past 20 years,” says Oxford’s John Bell.
Lynparza is the flagship example of AstraZeneca’s oncology strategy, which has yielded highly specialized medications that merit premium prices. Tagrisso, which targets a specific, highly dangerous mutation of lung cancers, has become AZ’s brightest star: It brought in $3.2 billion last year. Imfinzi, an immunotherapy treatment for lung, urinary, and bladder cancers, made $1.5 billion in 2019. (AZ has also struck partnerships for oncology drugs, including two multibillion-dollar deals with Japan’s Daiichi Sankyo in as many years. In July, it agreed to pay as much as $6 billion for the right to codevelop a Daiichi drug that could limit chemotherapy’s side effects.) Oncology now accounts for 37% of AZ’s annual product sales, more than any other area, and up from just 12% five years ago.
In addition to oncology, Soriot reorganized AstraZeneca around drugs for cardiovascular, renal, and metabolic disease, respiratory illness, and immunology. Across all those categories, Soriot and Pangalos instituted a rigorous process for assessing drug candidates. Known as “the five R framework,” it mandates that before the company commits to developing a drug it must be satisfied it has identified five “rights”: the right target, the right patient group, the right body tissue, the right safety regime, and, crucially, the right commercial opportunity. The checklist sounds like Pharma 101, but it’s the kind of discipline AstraZeneca had once lacked.
Disciplined deployment of the framework has drastically reduced the number of compounds AstraZeneca had under development. But it has lifted its success rate in moving promising molecules from preclinical investigation through to completion of late-stage clinical trials. Once a paltry 4%, that rate is now 20%, three times the industry average.
AZ has also used new digital technologies to reinvent its approach to clinical trials. Software called Merlin enables AZ to select trial sites 70% faster than before, according to Cristina Duran, chief digital health officer for the R&D division. Merlin produces trial cost estimates in minutes (it used to take days). In a research ecosystem where trial volunteers often skew disproportionately male and white, Merlin helps select trial populations that better reflect real-world demographics. Another software system, called Control Tower, allows managers to get a visual snapshot of all AZ’s trials on a single dashboard, helping them predict problems in patient recruitment. “We’ve taken systems that the company was using for 20 years, and in the past two years we changed them—which is either insane or brave, but it has been successful,” Duran says.
To cement its science-led ethos, in 2016 Soriot moved both AZ’s corporate headquarters, which had been in London, and its research headquarters, which had been in Macclesfield, to Cambridge. Here Soriot is overseeing construction of a signature, $1.2 billion strategic R&D center, a round glass doughnut to showcase the work of AZ’s scientists. The building is steps from the government molecular biology lab known as “the Nobel factory”—its scientists have won 12 of them—as well as top-flight cancer and stem cell research labs. Since moving, AZ has increased its collaborations with Cambridge University to more than 130, up from fewer than 10 five years ago.
AstraZeneca is a smaller company today than it was before its reinvention, thanks largely to the loss of sales from those older blockbusters that fell off the patent cliff. AZ’s revenues last year were 27% lower than in 2011. But investors seem to think the company has made up in drug quality for what it lacks in sales quantity. AZ’s stock price has risen 137% in dollar terms since Soriot took over, trouncing the 61% increase in the S&P Pharmaceuticals Select Industry Index over the same period.
AZ’s deal to produce Oxford’s vaccine was brokered in a flurry of Zoom calls during the last week of April. Oxford had two main conditions: that AstraZeneca forgo any profit on the vaccine until the pandemic is over, and that it commit to making the vaccine as widely available as possible. AZ agreed to both.
For AstraZeneca, the vaccine is a showcase project where it can demonstrate its ability to be a partner for academic groups and biotech companies at the forefront of science. That’s worth more than bragging rights: Those relationships are critical to feeding AZ’s pipeline of winning medicines. The speed of the vaccine project, meanwhile, is a key test of the systems AstraZeneca has built to run clinical trials more efficiently.
A vial of the Oxford/AZ experimental COVID-19 vaccine, in use in a clinical trial in Soweto, South Africa. Felix Dlangamandla—Beeld/Gallo Images/Getty Images
To condense testing that would normally take years into months, Oxford took unprecedented steps: Rather than recruiting just a few dozen patients for Phase I trials, which are designed to show a drug is safe by testing it on a small cohort, Oxford recruited 1,100 and accelerated the pace of inoculations. Phase II trials, which test for safety and efficacy on a much larger number of volunteers, and Phase III trials, which aim to prove that a drug is effective, would normally take place sequentially. Instead, they are happening simultaneously. Oxford is recruiting 10,000 people in the U.K. for this testing, plus 5,000 in Brazil and 2,000 in South Africa, while AZ is enrolling 30,000 volunteers in the U.S.
Results are expected anytime between September and November, Soriot says. But the pandemic’s urgency means large-scale vaccine production must start even before testing concludes. With funding from governments and international agencies, AZ has licensed manufacturing—again, at no profit—to firms across the globe, including a landmark deal with the Serum Institute of India, a private biotechnology company, to provide 1 billion doses for low- and middle-income countries.
In early June, AstraZeneca’s soaring stock was momentarily rattled. Bloomberg News, citing anonymous sources, reported that AZ had approached the U.S. pharmaceutical company Gilead about a supernova-scale merger—one that would be the largest in the sector’s history. The pandemic has made Gilead a household name, thanks to its production of remdesivir, one of the few drugs that has been shown to reduce hospitalization time for severely ill COVID-19 patients.
Gilead declined to comment on the report, as did Soriot. But, speaking in general terms to Fortune, he implied that initiating merger talks would make little sense in the current climate. “I would just invite you and everybody else to look at the facts,” he says. Figuring out how to execute clinical trials under pandemic conditions is an all-consuming undertaking, he says. So too is working on the vaccine. “It is energizing everybody, but it is a big job for a number of us.” Plus, given travel restrictions and quarantine measures, negotiating teams would be unable to meet face-to-face. “Imagine the biggest merger in the history of the industry, done by Zoom? I mean, come on,” he says.
Industry and stock market analysts, on the whole, discounted the possibility of a tie-up. Except, some noted, there was a possible scenario where the merger made sense—and it was a scenario that turned investors’ blood cold: What if AstraZeneca had to do a deal because it was running out of cash?
Gilead is sitting on a cash hoard of $24 billion. AZ, for all its recent success and highly valued stock, is cash poor. Last year the company didn’t generate enough net cash from operations to cover its $3.5 billion in dividend payouts—the ones Soriot promised to keep growing during his fight with Pfizer. In fact, the company had to raise $3.5 billion through an additional share offering, its first in 20 years, in order to meet that and other obligations.
66% of vaccine candidates for infectious diseases fail to make it through clinical trials, according to a 2018 MIT study. Those odds have often helped deter pharmaceutical companies from vaccine research, but the urgent need for a COVID-19 vaccine has changed the equation.
AZ’s cash issues stem in part from its reinvention push. The company has taken restructuring charges to discontinue legacy projects, made lump-sum upfront payments to new drug-development partners, and taken on debt to fund R&D—all strategies that hurt cash flow today. Naresh Chouhan, an analyst at London’s Intron Health, an equity research boutique focused on health care, says the company has used “a lot of creative accounting”—legal but aggressive tactics, such as amortizing those lump-sum payments over the life of the partnership—to keep these transactions from depressing the non-GAAP “core earnings per share” figure AstraZeneca tells investors to pay attention to.
That high-wire act has left some investors wary. UBS’s Leuchten admires AZ’s turnaround, but he is also one of three analysts (out of 24 that cover AZ) to have a sell rating on the shares. Leuchten calls the company “a concept stock.” He says that investors have convinced themselves that AZ has a “platform” for churning out a succession of blockbusters, but that so far, its performance doesn’t justify its outsize valuation, currently 106 times its trailing earnings per share.
Soriot accuses critics like Leuchten of “looking at their shoes instead of looking at the horizon.” He says, “The question people have to decide about is, ‘Do I believe in the future of this company?’ ” He defends AZ’s dividends, saying they reward shareholders for their patience. Cash flow will eventually improve, he says. “And soon enough the people who say, ‘You should cut the dividend’ will move to another criticism: They will say, ‘Why won’t you increase the dividend?’ ”
For now, any debate about AstraZeneca’s long-term financial health is superseded by a single question: Will the Oxford vaccine work?
On July 20, the first glimmer of an answer emerged when medical journal The Lancet published the results of Oxford’s Phase I trials. The headlines were positive. (“First human trials of Oxford coronavirus vaccine show promise,” Reuters declared.) Yet AstraZeneca’s stock price fell 5.9% on the news, its largest one-day drop since March, and subsequently drifted lower still.
Phase I trials are designed to prove a vaccine doesn’t threaten users’ health, but they also offer clues to its effectiveness. The AZ-Oxford vaccine appeared to succeed on both counts. The drug showed no serious side effects. Of the 25 volunteers vaccinated with a single dose whose blood was analyzed in detail, 91% produced antibodies capable of neutralizing the virus. In 10 volunteers who also received a second booster dose, 100% produced antibodies—and in those subjects, antibody levels equaled those found in patients who recover from COVID-19.
So what unnerved the markets? In part, it was that booster-dose group. The disparity between their results and the first group’s may indicate that Oxford’s vaccine will require two doses. As Pangalos pointed out at the time, most competing vaccine efforts are also looking at two-dose protocols. Still, the need for multiple shots would make any global vaccination program more fiendishly complicated and expensive. If another vaccine could confer immunity with a single dose, it could become the preferred option, negating AZ’s first-mover advantage.
The Oxford candidate could also lose out to a rival two-dose vaccine. Analysts noted after the Lancet report that initial trials of some competing vaccines—notably, one that Pfizer is developing with biotechnology firm BioNTech (see box)—indicated higher levels of antibody production than Oxford’s. Another question hovering over the effort: Whether it will confer “sterilizing immunity,” which would keep inoculated people from spreading the virus to the unvaccinated.
For those reasons and more, Oxford’s Bell has put his vaccine’s odds of success at no better than 50/50. “This is not a slam dunk, at all,” he says.
Still, the Phase I study provided reason to believe AZ and Oxford could score. The antibody counts were encouragingly high. And COVID-19 antibodies may not be the only key to any eventual vaccine’s effectiveness (indeed, an increasing number of studies indicate that those antibodies may fade rapidly). AstraZeneca and Oxford were keen to note that their vaccine also prompted a strong response from T cells, which seek out and destroy pathogens. Thanks in part to these cellular warriors, Pangalos told reporters, he is “increasingly confident” Oxford’s vaccine will provide immunity for at least a year.
In 2012, AstraZeneca “was run like a spreadsheet,” says CEO Pascal Soriot. “It was all about cost savings, increase the profit and use that for a buyback. But the company was on the road to nowhere.”
As for its strength relative to other vaccines, Oxford and AstraZeneca researchers note that, so far, no two of the trials have used an identical blood sample assay, making apples-to-apples comparisons impossible. What’s more, Soriot observes, there’s room for more than one winner: Safely inoculating the entire world will certainly require multiple vaccines.
And as it turns out, Oxford is not AZ’s only ticket in the COVID-19 vaccine sweepstakes. Shortly after Soriot became CEO, AstraZeneca invested $240 million in a biotechnology startup in Cambridge, Mass., called Moderna; AZ later invested a further $140 million, upping its stake to 9%. Moderna is developing a vaccine based on messenger RNA (mRNA), which carry instructions from a cell’s nucleus to parts of the cell that manufacture proteins. Modify mRNA and you can get the cell to produce whatever proteins you want—including ones that (hopefully) elicit an immune response. Moderna’s vaccine is now entering large-scale human testing, and its stock has soared on the news—inflating the value of AstraZeneca’s stake to more than $3 billion.
With a bit of luck, both vaccines might succeed. Now all eyes are on those later-stage trials. The testing needs to happen in places where coronavirus infections are rampant, so that scientists can make a comparison between inoculated individuals and a control group. That’s why Oxford researchers are racing to hotspots where cases are still surging—to Junior Mhlongo’s hospital in South Africa, as well as to Brazil and India and, yes, to the still-stricken U.S. Oxford is also contemplating a controversial “challenge trial”—where healthy young volunteers will be inoculated and then purposefully infected with the coronavirus to see if the vaccine works.
If both vaccines fail, AstraZeneca may not be materially worse off. But the world will be that much further away from obtaining the get-out-of-lockdown card it so desperately needs.
Honing an Early Edge: A scientist at work at the Jenner Institute, whose research on vaccines for the MERS coronavirus has given it a head start in the COVID-19 vaccine race. John Cairns—University of Oxford
Leaders of the vaccine pack
At least 168 COVID-19 vaccine candidates are now in development—a fact that hopefully increases the likelihood that one or more will succeed. Here are six that look particularly promising. All are in Phase II or Phase III trials, which means they did well in early studies and are now being tested in larger groups for safety and efficacy.
Oxford/AstraZeneca
This vaccine uses a modified chimpanzee virus to produce a protein found on the surface of SARS-CoV-2, the virus that causes COVID-19. That antigen prompts the body to develop an immune response. In early trials, it increased production of antibodies and T cells; Phase II and III trials are underway.
Sinovac
This Chinese biopharma company bases its vaccine on an inactivated version of SARS-CoV-2 (the approach used in the majority of vaccines). The drug has appeared safe and produced antibodies in two rounds of trials. Sinovac recently launched Phase III studies in Brazil, where the virus has spread rapidly.
Pfizer/BioNTech
U.S. pharma giant Pfizer and Germany’s BioNTech are developing a vaccine that relies on messenger RNA (mRNA), bits of genetic code that instruct cells to make proteins. The goal: Modify mRNA so it prompts cells to make proteins that look like COVID-19, eliciting an immune response. Early trial results led the U.S. government to put up $1.95 billion to secure doses if the vaccine works.
Moderna
The Cambridge, Mass., startup also uses a vaccine based on mRNA. (AstraZeneca owns a 9% stake in Moderna.) The project has been backed by $950 million in U.S. government funding. The vaccine provoked an immune response in all 45 patients tested in a Phase I trial; a study involving 30,000 volunteers launched in late July.
Cansino
A Chinese company that specializes in vaccines and is partly backed by U.S. drugmaker Eli Lilly, Cansino is testing a vaccine based on a genetic mutation of an adenovirus (the kind that causes colds). The Chinese military has approved the vaccine for use in its ranks; wider safety trials are in progress.
Murdoch Children’s Research Institute
This Australian institution is experimenting with the bacillus Calmette-Guérin (BCG) vaccine—a drug introduced in the 1920s to fight tuberculosis. Studies have suggested that BCG protects against other respiratory infections; Phase III trials are underway to see whether that immune response extends to COVID-19.
A version of this article appears in the August/September 2020 issue of Fortune with the headline “A reborn pharma giant takes the lead against COVID-19.”


fortune--2020-08-10--Inside China’s drive for digital currency dominance

In the 13th century, Kublai Khan, the Mongolian emperor who founded China’s Yuan Dynasty, upended monetary convention with a magisterial edict: Accept my money, or die.
The threat of execution was not so novel back then, of course. The Khan’s true innovation lay in his refashioning of money itself. The grandson of fearsome Genghis realized he could finance his realm untethered to finite supplies of precious metals. No longer would his geopolitical reach depend on backbreakingly mined and smelted ores hauled along the Silk Road. Instead, he could tap a boundless, lightweight resource—and make money grow on trees.
Mulberry trees, to be exact. In a contemporary account, Marco Polo, the wandering merchant of Venice, marveled at “how the great Khan causeth the bark of trees, made into something like paper, to pass for money overall his country.” The banknotes were issued, he wrote, “with as much solemnity and authority as if they were of pure gold or silver.”
Medieval Europeans were dumbfounded by Polo’s report. But the emperor was ahead of his time. Fiat currencies—descendants of Kublai Khan’s chao, backed by government edict rather than hard assets—are standard everywhere today.
Fast-forward to this century, and China once again is remaking money. Except this time, it is paper currency that’s getting tossed; China is going digital. And while things didn’t end well for the Mongols—they printed themselves into hyperinflation, and lost the throne—China’s current leaders have something far more stable and enduring in mind.
China is further along than any other large country in its development of a national digital currency—in this case, a purely electronic yuan based on technology inspired by blockchains, the record-keeping databases that underlie cryptocurrencies like Bitcoin. President Xi Jinping issued a ringing endorsement of blockchains in an October speech, making him the first major world leader to get behind the technology. Xi vowed to “seize the opportunity” that would let China “take the leading position” in the field.
The futuristic money, clunkily dubbed the “digital currency/electronic payment,” or DC/EP, is a dramatic step in that direction. The government aims for the currency, now in a pilot phase, to be ready for broader rollout by the time Beijing hosts the Winter Olympics in February 2022—allowing China to demonstrate its fintech prowess on a global stage.
Chinese officials publicly tout the currency’s many benefits: lower operational and transaction costs; greater financial inclusion; and, for the state, enhanced crime-fighting capabilities and expanded influence abroad. The innovation is set to strengthen the Communist Party’s control of China’s monetary system, while restoring the government’s power over China’s tech giants, especially Tencent’s WeChat and Alipay, run by Alibaba’s IPO-bound Ant Group division.
Some observers even believe the e-yuan could spell the beginning of the end for the U.S. dollar as the de facto conduit of international commerce. For Westerners who think China’s digital mulberry tree will bear fruit, that’s a startling possibility—one that would diminish America’s ability to defend its economic and political interests. “Letting China win this race to be at the center of payments for the next century is a far greater threat to our national security than the perceived threats” that Westerners attribute to digital currencies, says Kathryn Haun, a partner at venture capital firm Andreessen Horowitz who sits on the board of the Libra Association, a blockchain consortium assembled by Facebook.
For now, however, the perceived threats Haun alludes to—notably, balancing privacy, law enforcement, and economic stability—have hindered digital-currency development outside China. Out of 66 central banks surveyed in a recent study by the Bank for International Settlements, 80% reported having begun investigating the feasibility of a digital currency. But only 10% were anywhere close to minting one; the Federal Reserve is not among them. (For more, see the sidebar.)
The upshot: China is sprinting ahead in a race that few others realize they’re running.
A casual observer visiting a railway station in Suzhou, a canal-sluiced city northwest of Shanghai, might notice nothing out of the ordinary. Train cars are thronged with masked passengers. At entryways, commuters queue up and show guards their green-colored smartphone codes, indicating bills of good health for COVID-19.
But some passengers have another feature on their phones: an officially approved digital currency. China began testing an e-yuan in the real world in May, as municipal workers in Suzhou started receiving half their monthly transit subsidy in the form of DC/EP. Similar trials, some involving local merchants, are taking place in Shenzhen, Chengdu, and Xiong’an, near Beijing.
Sample screens show, from left, the Agricultural Bank of China’s e-yuan wallet next to Alipay and Bank of China’s mobile banking app. Sino Global Capital
The transactions are small, but they send a big message: While most countries were distracted by a pandemic, China staged a technological coup. Matthew Graham, CEO of investment firm Sino Global Capital, conveyed the significance after posting leaked images of “beta” DC/EP wallets on Twitter. “Americans [are] still trying to figure out if they should put on a face mask while China pushes out a revolutionary technology,” he commented.
Americans still trying to figure out if they should put on a face mask while China pushes out a revolutionary technology https://t.co/Ie2JMDPBhI — Matthew Graham (@mattysino) April 14, 2020
Beijing has said little about the pilot program since announcing it. Big companies operating in China have been reluctant to talk about DC/EP—not unusual in a country where businesses are loath to get out ahead of the government. But they’re watching the situation with interest, and homegrown stars such as ride-hailing service Didi Chuxing and food deliverer Meituan-Dianping, along with foreigners McDonald’s and Subway, have been reported to be preparing for the trials. (Didi confirmed its participation; Meituan declined to comment; McDonald’s and Subway did not reply to requests for comment.)
More than 80% of Chinese people already use smartphone apps like Alipay and WeChat Pay to conduct payments. Cosmetically, DC/EP apps resemble those omnipresent e-wallets. Yet technologically, there’s a wide divide between the two types of digital money. The DC/EP, in one key innovation, will be usable everywhere, even among parties who are otherwise “offline.” But the biggest difference lies in who logs the debits and credits. Unlike its private-sector counterparts, the e-yuan is intrinsically linked to a centralized ledger maintained by the People’s Bank of China (PBOC), the nation’s central bank.
The ramifications are manifold. China’s gambit could help bring 225 million “unbanked” people into its economic fold; all they’ll need is a smartphone, not even a traditional bank account. E-yuan wallets could be used to distribute stimulus payments, subsidies, and tax refunds. But most fundamentally, the digital money will grant the government unparalleled oversight and fine-tuned control of China’s economy. As with the Khan’s ancient cash, the biggest benefits are likely to accrue to the state.
When Edith Yeung, a Chinese national and investor at VC firm Race Capital, caught a Chinese state television segment on blockchain technology a couple of years ago, something seemed off. “It tried to teach the masses in layman’s terms what blockchain was all about,” she recalls. But “the word ‘decentralization’ ”—the antiestablishment mantra of cryptocurrency boosters—“was not mentioned at all,” she says. That’s not really blockchain, Yeung remembers thinking.
The omission is in keeping with the Communist Party’s focus on centralized authority. When the PBOC first started considering a digital currency, in 2014, Bitcoin was just breaking into the mainstream consciousness. Libertarians loved how it permitted the creation and transfer of value, independent of government. But many banks and states saw in the blockchain’s distributed ledger technology something equally attractive: the potential to track financial activity with incredible precision.
China, ever wary of capital outflows that could weaken its currency, preemptively barred banks from handling cryptocurrencies starting in 2013. But the country’s leadership studied and cherry-picked aspects of blockchain technology for the DC/EP project—keeping its innate transparency, while scrapping its potential to sideline authorities.
Meanwhile, China’s fintech sector, lofted by a fast-rising middle class, was taking off. Transaction volume on mobile payment apps in China rose from a negligible amount in 2013 to as much as 350 trillion renminbi, or $50 trillion, in 2019. Today, Ant Group’s Alipay and Tencent’s WeChat Pay command 55% and 39%, respectively, of that market. Phones displaced physical cash; China’s ratio of cash use to household financial assets, an increasing share of which is held in fintech apps, is among the lowest in the world, at 4%. (In the U.S., it’s 24%.)
The PBOC viewed this flight of deposits from state-controlled banks into a rising, under-regulated duopoly as too much, too fast. “Those big tech companies bring to us a lot of challenges and financial risks,” Yi Gang, governor of the PBOC, explained at a conference last year. “In this game, winners take all.” So, in 2017, the government started requiring Alipay and WeChat to store customer funds in non-interest-bearing accounts at the central bank. The PBOC also set up a clearinghouse for online payments, a checkpoint allowing it to scrutinize the giants’ money flows.
With an e-currency, China will gain even greater visibility into, and command over, the money sloshing around the system. Digital transactions won’t have to be routed through a checkpoint; transparency will be inherent in the all-seeing, back-end ledger. That could also enable the country to keep closer tabs on investment risks, potentially helping avert the debt crises that periodically disrupt China’s economy, explains Nathan Chow, senior economist at DBS Holdings, a Singapore-based multinational bank. Say authorities deem a “ghost town” mega–housing project to be unsalvageable: The nation’s fiscal engineers could restrict—literally, by tweaking e-yuan code—investors from plowing more money into it. Rather than address problems after the fact, an e-yuan will let China “have everything under control in advance, preprogrammed,” says Chow.
But skeptics fear more insidious outcomes. Mu Changchun, head of the PBOC’s digital currency research institute, has promised the DC/EP will offer “controllable anonymity.” But many people consider the phrase to be an Orwellian oxymoron. More likely, the digital currency will grant the state financial omniscience. With an e-yuan, China will be able to monitor the transactions of suspected criminals and terrorists, loose labels that could be applied to dissidents and ethnic minorities. It doesn’t take a great stretch of the imagination to envision how the technology could be combined with China’s nascent “social credit” system, granting privileges to upstanding citizens and revoking financial access for anyone deemed disloyal.
Marta Belcher, a tech-focused attorney at law firm Ropes & Gray, notes how Hong Kong pro-democracy demonstrators often wait in long lines at subway stations to purchase tickets with cash, so authorities can’t place them at the scene of a protest. If an e-yuan displaced its hard-copy forebear, that world would dramatically shrink. “A cashless society is a surveillance society,” Belcher warns.
“This design will have difficulty gaining traction outside of China, given the weak privacy controls,” says Charles Cascarilla, CEO of Paxos, a U.S.-based cryptocurrency company. But privacy concerns may not stop DC/EP from attracting a global following.
After Facebook announced its plans for Libra in 2019, CEO Mark Zuckerberg warned Congress that the free world risked losing its edge to China. Libra has since scaled back its ambitions after early stumbles, while the PBOC has accelerated its timeline. And China stands to gain more than just a technological edge: The e-yuan represents its best chance yet to challenge the dollar as the global reserve currency, plastering the visage of Mao Zedong over the face of George Washington.
The U.S. has benefited enormously from the greenback’s status as the global reserve currency since World War II. Exporters sell to the U.S. more cheaply, and lenders ask for lower interest rates, because they get paid in a globally prized currency. The U.S. also faces less risk from fluctuating exchange rates and wields greater sway over lesser economies’ monetary policies.
All money systems are subject to network effects—gaining greater value as more people use them. Today, the renminbi makes up only 2% of global foreign-exchange reserves, while the U.S. dollar accounts for more than 60% (and the euro 20%). But if the DC/EP ever attains critical mass, it will likely be thanks to China’s “Belt and Road” global trade and infrastructure initiatives.
Every day that passes, it gets harder and harder for Western-backed projects to keep up. Kathryn Haun, General Partner, Andreessen Horowitz
Belt and Road, the centerpiece of Xi Jinping’s foreign policy, is helping China cinch together a network of economically dependent client states from Southeast Asia to Egypt to Ecuador. If China can lure those countries into the e-yuan ecosystem, that could help the currency become a serious counterweight to the dollar. China has considerable leverage over these nations—many have borrowed heavily from Beijing. But China also has enticements to offer. Transaction fees can make cross-border trade and borrowing slow and costly in developing nations. Because digital currencies require fewer intermediaries, an e-yuan could “minimize transaction lag while lowering barriers to entry,” says Da Hongfei, CEO and cofounder of Neo, a Shanghai-based blockchain project.
The DC/EP could cause problems for the U.S. even without attaining global-reserve status. Thanks to the dollar’s dominance, the U.S. is a global financial gatekeeper: It can effectively decide who is approved for or blacklisted from using the SWIFT network, the international bank money-wiring system. That enables the U.S., for example, to “inflict very targeted sanctions on specific Russian oligarchs in response to bad behavior,” says Aditi Kumar, executive director of the Belfer Center for Science and International Affairs at Harvard Kennedy School.
A Chinese digital currency threatens that power. “One of the built-in functions for DC/EP is direct remittance, which would bypass SWIFT,” notes Jennifer Zhu Scott, founder of investment firm Radian Partners in Hong Kong. Wider adoption of DC/EP could reduce America’s ability to punish adversaries and criminals—and give anyone embroiled in a policy dispute with the U.S. an alternative place to do business.
Last December, Treasury Secretary Steven Mnuchin told Congress that he and Fed Chairman Jerome Powell considered digital currency a low-priority issue. “In the next five years, we see no need for the Fed to issue a digital currency,” Mnuchin said. The pandemic has revived interest on Capitol Hill—in part because Washington has struggled to issue stimulus benefits quickly through traditional channels—but progress remains slow.
The inertia may reflect a deep-seated disbelief that China can overtake America. Hank Paulson, former secretary of the Treasury and founder of a think tank focused on U.S.-China relations, regards DC/EP as “not a serious concern,” as he wrote in an op-ed for Foreign Affairs in May. Beijing’s approach to governance is too illiberal for its currency to win widespread adoption, Paulson argued.
But others believe the naysayers miss the bigger picture. “I think of it as analogous to the debate we’re having about 5G,” Kumar says. “The U.S. has had a tough time urging allies not to use the 5G tech Huawei is providing,” she says, referring to the controversial Chinese telecom giant. While the U.S. alleges that the company poses espionage risks, customers argue that they can’t pass up a chance to get high-quality tech at low cost. Haun, the Libra board member, laments: “Every day that passes, it gets harder and harder for Western-backed projects to keep up.”
China’s government, meanwhile, is seizing the chance to become an integral part of the world’s digital fabric for decades to come. Yifan He, CEO of Red Date Technology, a state-supported company that aims to offer blockchain-based cloud services, likens all this work to “building the next Internet.” The current Internet, of course, owes its existence to Pentagon-funded research. It’s a reminder that technologically ambitious governments can reshape economic history in profound ways. Just ask Kublai Khan.
Swedish Krona Karol Serewis—SOPA Images/LightRocket via Getty Images
Currency contestants
From PayPal’s Venmo to M-Pesa in Africa, the private sector has dominated digital payments. Now central banks are exploring national digital currencies of their own, often with corporate partners—though none has progressed as far as China.
Sweden
Sweden’s Riksbank, the world’s oldest central bank, has talked about launching a digital currency since 2016. It’s now working with consulting firm Accenture to develop the technology behind an e-krona that it plans to test next year.
Singapore
In July, the Monetary Authority of Singapore said it “successfully” concluded a trial with JPMorgan Chase and state-backed giant Temasek that settled payments in different currencies on a blockchain-based network. The bank’s managing director has said he would welcome cooperation with China.
The Bahamas
The Bahamas started its “project sand dollar” pilot in its Exuma district on Dec. 27, 2019. The trial attracted more than 1,000 testers in a month, and the nation plans to expand the program across all 700 of its islands before year’s end.
Venezuela
In 2018, Venezuela launched the petro, a cryptocurrency (allegedly backed by oil reserves) designed to help citizens cope with international sanctions and the dysfunctional nation’s hyperinflation. The petro has been a flop, and the U.S. is offering a $5 million bounty for information leading to the capture of the initiative’s leader, who has been indicted for drug trafficking and sanctions violations.
A version of this article appears in the August/September 2020 issue of Fortune with the headline “China’s drive for digital currency dominance.”


fortune--2020-08-10--Exclusive poll: Amid COVID-19, Americans don’t care about climate change anymore

Battered by pandemic and economic collapse, do Americans have the capacity to care about the environment? Not so much, judging by a national poll we just conducted.
We asked a panel of U.S. adults a series of questions about today’s most crucial issues, environmental policy options, and their own behavior. In all three categories, I was personally surprised and discouraged to discover that our devotion to the world around us is flagging.
In a survey we at the Harris Poll conducted last December, American adults said climate change was the number one issue facing society. Today, it comes in second to last on a list of a dozen options, ahead of only overpopulation. Among Gen X men, in fact, more than third dismiss climate change as unimportant. COVID-19 and the recession have, of course, reordered priorities around the world. Still, the coronavirus didn’t elbow aside other issues as muscularly as it did climate change. (Incidentally, global warming is a bigger concern to retirement-age women than any other age group except millennial men.)
Additionally, we asked about policies the government could adopt to fight global warming or help the environment generally. There was majority support for only one of nine initiatives, with 51% endorsing tax credits or rebates for greater energy efficiency in buildings. Moreover, 13% of all respondents say the government should do nothing to improve the environment, a stance that rises to nearly one in five of all survey takers in the South.
More telling is what we are doing—or should I say what we no longer are doing.
We know from this survey, conducted on July 24, that American adults are burning less fuel than they did before the pandemic hit. In pre-COVID-19 America, 77% of adults said they used to drive. Today, with more people working from home, or not working at all, just 61% say they are using their cars to get around. Similarly, only 14% of adults say they are still flying, down from 21% last winter. That’s an environmental plus, since it means we’re pumping less greenhouse gas into the air.
But we are also reverting back to a society that throws too much away. Younger men in particular are ordering more takeout food, packed in single-use plastic bags and disposable boxes, often with those plastic straws scorned for littering the landscape and polluting waterways. We are toting reusable bags less often on errands. Probably because more of us are home, we also are consuming more energy to keep our homes cooler in the summer and warmer in chilly months than we used to.
And when the pandemic ends—or at least is suitably controlled—American adults say they’ll behave in ways that would increase their carbon footprint. According to our survey, we’ll drive as much as we did before, take public transportation less, bicycle or walk less, buy more clothes, and have more stuff packaged up and shipped to our homes. And most of us plan to jack up the home AC and heat even more than we already have.
There are some bright spots for the environmental cause. Americans are shifting their diets away from meat. (Cattle for dairy and beef production is one of the biggest sources of greenhouse gases, accounting for approximately 15% of worldwide emissions.) Two-thirds of us say we currently recycle at home, and even more say we will, though how much of what we put in our blue bins actually gets recycled is another matter. Air travel won’t be coming back to pre-pandemic levels, our survey shows. And we say we’ll pick up our reusable bags again.
One last point: Americans know the consequences of backsliding. We asked the survey’s 1,083 representative respondents whether COVID-19 was good or bad for the environment short term and long term. The multiple choice option chosen the most, at 39%, is that it is helping short term, but causing long-term damage.
Maybe when we’re feeling safer and more prosperous, we’ll care more about the fate of our planet. For now, though, global warming isn’t the rallying cause it was only a few months ago.
Will Johnson is CEO of the Harris Poll, one of the world’s leading public opinion research firms.


fortune--2020-08-10--Couche-Tard’s CEO is plotting to make the convenience-store giant even bigger

Alimentation Couche-Tard started life as a single store in a suburb of Montreal. Through a mix of deft M&A and strong merchandising, it has become one of Canada’s largest companies, and the second-largest convenience-store owner in the U.S. (Circle-K is the biggest and best-known of the chains it owns.) Global sales topped $54 billion in its most recent fiscal year, which ended in April.
For an in-depth look at the company’s evolution in the current issue of the magazine, Fortune spoke with Couche-Tard CEO Brian Hannasch about the retailer’s M&A strategy, its efforts to update its merchandise, and its company culture.
Fortune: How has the company avoided the M&A trap of making bad deals for the sake of making deals, and known when to plunge in and when to walk away?
Hannasch: We are not a group of Harvard MBAs, we’ve developed a unique culture. When we do M&A, we don’t do hockey-stick charts. A lot of companies would hire an investment bank to look at M&A; we don’t do that, we do it ourselves. We know the business, we know what we can do, and we know what we can’t do. And we don’t grow crazy with valuations.
Are you still in the acquisition market after largely sitting it out since 2017, and dropping your bid for an Australian chain because of COVID-19?
The market was frothy, things traded at multiples that didn’t make sense to us. There will be more activity caused by the pandemic. We have a strong balance sheet, lots of cash, and we are ready if the opportunity arises.
You’re No. 1 in much of Canada: What are the remaining M&A opportunities in your home market?
In Quebec and Ontario, there is no more room for M&A, so we are building stores to grow. But there is still opportunity in Western Canada. We are building 100 stores a year, double that in next three years, so we have developed internal real estate and construction teams.
How has Couche-Tard managed to create such a far-flung c-store empire without choking local initiative at the store level?
We don’t allow a “not invented here” mentality. We have 26 distinct operating units, so it’s very decentralized. The industry historically has taken a cookie-cutter approach. We’re not here trying to say, “Hey this is the Circle K way.” We want to be a lot more local. We don’t import a bunch of Canadians or a bunch of Americans into Denmark or Norway.
What are some of the tech initiatives you are trying out at the store level?
There is license plate recognition so when you pull up, the system knows who you are and gets the pump ready for you. We are testing something like Amazon Go style stores [with minimal or no on-site staff]; but we will always have staffed stores because of age-restricted products (alcohol, tobacco.)
You are also testing dynamic pricing, or prices set according to hyper-local conditions. Why?
It’s easier to charge $1.69 for a Pepsi at every store you have. The changes aren’t huge, but if you take a couple of pennies here, a couple of pennies there across 10,000 locations, it adds up quickly.
Tobacco remains a big part of your business, especially as retailers like CVS have dropped out in recent years. What future does the category have?
C-stores have been aggregating the cigarettes market, but industrywide it is still heading downward. In the future, there will be less space for smokes, but more for products like non-tobacco nicotine.
What else might be new on your shelves in the coming years? And how does localization of a store’s assortment come in to play?
More “grab-and-go.” And more healthy options. There are areas where we can’t sell a $10 bottle of wine, and some where we can sell a $50 bottle, so we have to figure that out.
What about your cannabis efforts? [The company has taken a stake in a Canadian cannabis retailer called Fire & Flower.]
That is to understand the market, how to run the stores, consumer behavior. One-third of Americans are in states where it’s legal, but we can’t go in because it is still illegal at the federal level. Eventually the U.S. will legalize it.
You’re making a big push for better coffee. Are consumers taking to it?
The stigma of gas station coffee is still out there, and we just need to work on creating awareness.
How did Couche-Tard executives initiate you on a fishing trip after they bought your employer, Bigfoot, in 2001?
I proposed playing cards, but they bring out songbooks to play traditional Québécois songs to sing all night. “Frère Jacques,” I could handle, but beyond that I was in trouble.
What do you stock up on when you shop at a Couche-Tard or Circle K store?
My kryptonite is Doritos.


fortune--2020-08-10--How a Canadian convenience store giant built its empire

There are few rituals more American than a stop at a gas-station convenience store. It starts with the badly needed fill-up or bathroom break, then progresses to an impulse food-and-beverage buy—the jumbo soft drink, the bag of chips, maybe something more substantial like a pizza slice, whatever it takes to replenish yourself for the interstate.
But what few drivers know is that this American road-trip ritual is increasingly likely to involve a huge Canadian company. CST Corner Stores in Texas and the Southeast, Holiday gas stations across the Northern Tier, and above all, Circle K just about everywhere in the U.S.: These familiar brands and others—making up 7,300 U.S. stores in all—belong to Alimentation Couche-Tard, a convenience-store giant headquartered in Laval, Quebec, outside Montreal.
Having started in 1980 as a single store, Couche-Tard (pronounced “koosh-tar,” it means “late sleeper” or “night owl” in French) now owns or licenses more than 14,500 “c‑stores” in a network that spans North America and Northern Europe, with outposts in Latin America, the Middle East, and Southeast Asia. Couche-Tard took in $54 billion in sales in its 2020 fiscal year, making it Canada’s third-biggest company. But the U.S. accounts for 70% of its revenue, and its stateside footprint could get bigger. In late July, the company reportedly made an offer to buy the 3,900-store Speedway chain from Marathon Petroleum. Although that bid was unsuccessful, Couche-Tard has signaled that it’s still on the hunt.
Couche-Tard built this gas-station Goliath with savvy M&A—including 33 acquisitions big and small in the 2010s alone. The company aims to buy well-run retailers that it can help improve, rather than acting as turnaround artists. “They’re never looking for fixer-uppers or things that are broken,” says Moody’s senior analyst Louis Ko of Couche-Tard’s leaders.
But they are looking to keep growing. Brian Hannasch, an Iowa native who became Couche-Tard’s CEO in 2014, tells Fortune that the company’s ambitions were stymied by high valuations in recent years. “The market was frothy. Things traded at multiples that didn’t make sense to us,” says Hannasch. That has changed: The travel pullback resulting from the COVID-19 pandemic has hurt Couche-Tard’s sales, but it has also driven other chains’ values down to an affordable range.
(Read more: Fortune’s interview with Brian Hannasch)
At the same time, Couche-Tard is relying on food to make its existing empire more profitable. The company posits that gas-station retail can be quality retail, with higher-margin merchandise: It doesn’t have to be day-old coffee and endless beef jerky. At hundreds of stores in the U.S. and Canada, the company is bringing in fresher food, installing espresso machines, and stocking wines that cost up to $50 a bottle. In Canada, where recreational marijuana use is legal, Couche-Tard is even exploring cannabis retail. “Couche-Tard is attracting a customer into their stores who’s not necessarily going in to fill up their gas tank,” says Derek Dley, an analyst at Canaccord Genuity.
Whichever strategies pay off, Couche-Tard has room to grow in a fragmented North American landscape. According to Euromonitor International, only two c-store brands command more than 5% of the U.S. market: Couche-Tard’s Circle K, with 5.7%, and 7-Eleven (owned by Japan’s Seven & I Holdings), with 10.7%. It was Seven & I that snared Speedway, for $21 billion, far more than Couche-Tard has ever spent on an acquisition. But the country is full of smaller chains that are ripe for takeovers and of hard-pressed energy companies eager to divest from gas-station retail—dynamics that should help Couche-Tard keep climbing the U.S. leaderboard.
Quebec has its own bustling convenience store culture. There, they’re called dépanneurs, from dépanner, to get someone out of a bind. Alain Bouchard, a native of Quebec’s remote Saguenay region, got his first c-store job as a preteen in the 1960s, helping his brother operate a location of a retailer called Perrette. He later worked at Provi-Soir, then the biggest Quebec chain, before striking out on his own in 1980, with his first Couche-Tard store.
M&A quickly became part of Couche-Tard’s MO. Bouchard gradually expanded in Quebec, culminating with the 1997 acquisition of Provi-Soir, whose winking-owl logo Couche-Tard adopted. The company then turned its attention south, cannily purchasing a few operations in the Midwest, where competition was lighter than in the Northeast. (One of those chains was Indiana-based Bigfoot, where Hannasch worked at the time.) In 2003 came the deal that made Couche-Tard a major U.S. player: It bought Circle K, with its 2,300 stores, for $821 million from ConocoPhillips, beating Blackstone and Morgan Stanley for the prize.
As a dealmaker, Couche-Tard developed an M&A discipline that helped it avoid the ill-considered mergers that have helped decimate the retail sector. Couche-Tard has been ultra-strict about not overpaying. It uses its own internal M&A SWAT team, rather than relying on costly, sometimes self-interested help from investment banks. (Bouchard, now chairman, still joins that team for big deals.) Before agreeing to the Circle K acquisition, Couche-Tard execs insisted on visiting 460 of the chain’s stores—to learn its strengths and weaknesses, to see what sold well where, and why, and to meet and win over the rank and file. When Circle K initially balked, Couche-Tard threatened to walk away.
Couche-Tard is organized into 26 highly decentralized operating units, so local chains don’t lose touch with their customers. “We don’t import a bunch of Canadians or a bunch of Americans,” says its CEO, Brian Hannasch, an Iowa native.
Once a chain becomes part of Couche-Tard, it’s likely to retain its identity (though not its brand name: Since 2015, Couche-Tard has rebranded most of its stores outside Quebec as Circle K). The company is organized into 26 operating units that are highly decentralized, so local chains don’t lose touch with their customers. Local managers tend to stay on, too. “We don’t import a bunch of Canadians or a bunch of Americans,” Hannasch says. Not that Couche-Tard lacks a unifying culture: When Hannasch joined the corporate team, his initiation included a fishing trip with Bouchard and his deputies where he had to sing traditional Québécois folk songs around a campfire, despite not speaking a lick of French.
Couche-Tard’s emphasis on autonomy makes the company unusually nimble for a retailer of its size. When COVID-19 struck Ireland in March, the government required home-improvement stores and nurseries to stay closed, leaving Emerald Isle green thumbs stranded as spring began. But Circle K gas stations were considered essential—and they spotted an opportunity. By April, the 406 Irish stores were selling plants, shrubs, and gardening tools to relieved horticulturists. Local management acted on its own, says Hannasch: “If we had waited for [headquarters in] Laval to say, ‘This is okay,’ we’d never have gotten it done.”
Couche-Tard has pulled off the balancing act to which all big retailers aspire: catering to local tastes while operating at massive scale. When Hannasch visited Latvia, he was put off to see soda stocked in Circle K aisles rather than refrigerated—until he learned that many Latvians like their soft drinks warm. “It’s not a chain of 9,000 locations,” says Louis Hébert, a professor at HEC Montreal business school who has studied Couche-Tard’s North American stores. “It’s 9,000 chains of one location.”
Ideas still flow downward from the parent company, of course. Couche-Tard advises store managers about product selection, often based on hyper-detailed analysis of store-by-store data. It is also testing dynamic pricing technology, which sets prices specific to a given store based on demand and local purchasing power. “It’s easier to charge $1.69 for a Pepsi at every store,” says Hannasch. “But if you take a couple of pennies here, a couple of pennies there, across 10,000 locations, it adds up quickly.”
These days, Couche-Tard is hunting for more pennies in the food-and-beverage aisles. Management has set an ambitious goal to double earnings before interest, taxes, depreciation, and amortization (Ebitda) to some $6 billion by 2023. Fuel generates 72% of company sales, but its margins are low. Nonfuel services and merchandise like food, on the other hand, represent 27% of sales but more than half of gross profit.
Food was the driving force behind one of Couche-Tard’s last big deals, the 2017 acquisition of Minnesota-based Holiday Stationstores. Holiday has a reputation for offering far better breakfast and sandwich fare than you’d expect from a gas station—think fresh food from offsite providers, rather than microwaved mush—and Couche-Tard is working to absorb its dining DNA.
Back home in Canada, Couche-Tard is exploring a business line that isn’t compatible with driving at all. It has teamed up with Canopy, a leading cannabis supplier, to open a proof-of-concept retail store in Ontario. And last year it bought a 9% stake in pot retailer Fire & Flower, with an option to become a majority owner. For Hannasch, this is about getting ready for an inevitable new opportunity: “Eventually it will be legalized in most of the U.S.,” he says.
Underlying Couche-Tard’s bustle is an awareness that it can’t stand pat: After all, its top-selling product, fossil fuel, is in a long-term decline. In Norway, where Couche-Tard bought the retail business of state oil company Statoil in 2012, half of all new cars sold are electric. Today, Circle Ks in that nation are rapidly rolling out electric-vehicle charging hubs. They’re also doubling down on lattes and upscale baked goods, so that drivers have something to enjoy while they wait 20 minutes for a recharge. The takeaway: Couche-Tard wants to keep its gas-station empire thriving, even if gas stations stop selling gas.
A version of this article appears in the August/September 2020 issue of Fortune with the headline “Pumped up to expand.”