[p2p-research] Can GlaxoSmithKline take its medicine? - Management Today

[Ryan]

  Sent to you by Ryan via Google Reader: Can GlaxoSmithKline take its
medicine? - Management Today via PharmaGossip by insider on 3/1/10

Big Pharma is in big trouble. Superficially, the world's largest drug
companies seem in good shape - profitability remains buoyant, and they
have certainly ridden out the recession in fine style by comparison
with those engaged in more volatile industries. After all, people get
sick and need treatment, with scant regard for the phases of the
business cycle. But beneath this healthy-looking exterior, a malignancy
has been spreading through Big Pharma's body corporate. The business
model that helped create some of the highest-earning firms of modern
times - names such as Pfizer in the US, Bayer in Germany, and
GlaxoSmithKline (GSK) and AstraZeneca in the UK - is running out of
road.



To add to the longstanding problems of patent expiry and
the 'genericisation' of existing drugs - and the increasingly uphill
task of finding new ones - structural changes in the business now loom
large, as demographic and economic growth trends shift eastwards away
from Europe and the US and towards the emerging markets.



As chief executive of world number two, GSK, it's Andrew Witty's job to
ensure that his corporate supertanker stays off the rocks. And, despite
the headaches of command, he seems to be enjoying it. This morning,
tanned and smiling, he has swapped dull Brentford (where GSK is based),
for the upscale surroundings of midtown New York, to announce GSK's
latest efforts in the high-profile, PR-friendly battle to beat malaria.

Alongside TB and HIV/Aids, malaria is one of the top three global
killers, taking some three million lives a year in the developing
world. Working jointly with Bill Gates' huge philanthropy fund, The
Gates Foundation, GSK has developed a vaccine with the potential to cut
that death toll dramatically. Between them, they've spent $500m on the
genetically engineered vaccine, still known only as RTS,S/AS02A. It's a
year or two from coming to market, but the outlook is good.

It could be a huge breakthrough, a 21st-century reprieve for the
industry's 'magic bullets' heyday. And when it hits the market, GSK
will sell it for the unprecedentedly slim margin of just 5% over cost.
That seems a perverse decision - not enough profit to satisfy
shareholders that there's money in it, but enough to attract criticism
from those activists whose reaction to any mention of grubby mammon is
to start waving a placard.

But Witty has his reasons for not simply giving it away. 'Whatever we
do, it has to be sustainable: we want to leave an incentive there for
other companies to follow. We don't need to make a profit, but they
might.'

What he doesn't say is that it will also give GSK experience of
operating in low-margin, high-volume markets - experience that, as we
will see, it has much need of.

A confident and compelling ex tempore perfomer - he hates Powerpoint
and encourages 'real conversations' instead - Witty is not about to let
this opportunity to do 'the vision thing' go to waste. 'People expect
us to be playing a role in the developing world,' he says. 'I want
people outside this company to be as proud of what we do as those
inside it are.'

There's no reason to doubt the sincerity of his pledge, but the future
of such good intentions depends on GSK's ability to keep generating
billion-dollar incomes from big-ticket drugs in the key US and European
markets. And there, say many observers, is the rub.

'Something is wrong in today's pharmaceutical industry,' says Jonathan
Anscombe, joint head of European pharmaceuticals and healthcare at
consultants AT Kearney. 'An unprecedented number of blockbuster
products are going off-patent, and despite record investment in R&D,
the pipeline of new drugs to replace them is decidedly thin. The
industry's current model may become irrelevant in the context of the
21st century's global healthcare needs.'

In the US alone, GSK has lost �4.5bn of revenue over the past three
years from this 'patent cliff'. Big sellers such as migraine treatment
Imitrex, epilepsy drug Lamictal and anti-depressant Wellbutrin are now
suffering at the hands of cheap generic competitors.

Although GSK has a respectable 30-odd new drugs in its pipeline, across
the industry as a whole the law of diminishing returns is hard at work.
Big pharma accounts for some 20% of global R&D spend, but the
productivity of this huge investment is in free fall. Healthcare
systems themselves are also becoming much more price-sensitive - the
days of 80% profit margins on drugs freely prescribed by doctors who
didn't have to worry about the price are drawing to a close.

In the UK, Nice (the National Institute for Health and Clinical
Excellence) - postcode lottery controversies aside - has put value for
money right at the heart of prescribing strategy. Its message is
spreading: even the vast US healthcare bonanza - the country accounts
for a staggering 45% of total global healthcare budget, as much as 60%
of the total drugs spend - may not last for ever. Whatever the fate of
president Obama's stalled reform attempts, the underlying trend is
clear.

But the biggest challenges are the markets emerging in the east.
Historically, the industry has hardly covered itself in glory in the
developing world, being largely concerned with policing prices in
territories such as Africa in order to maintain margins in the west.
But the scale of the opportunity is now too great to ignore - by 2020
there will be an estimated 724 million middle-class people in China
(those earning more than $10,000 p.a.), and 124 million in India.

Educated professionals, they will have, as Anscombe puts
it, 'western-style healthcare needs and expectations'. The world's
new 'mass wealthy' will have money to pay for these expectations too,
but not at the kind of prices Big Pharma currently likes to charge. If
the industry doesn't cut its costs dramatically to cater to the pockets
of these new customers, it's in danger of becoming a
business-class-only airline in an increasingly low-budget world. And we
all know what happened to most of them ...

Witty needs to move fast to tackle these issues. Since taking over the
hot seat in May 2008, he has been busy driving through the most radical
shake-up that GSK's 99,000 employees have seen in a generation. He also
knows how to lead by example - in sharp contrast to his notoriously
well-paid predecessor JP Garnier, whose proposed �22m pay packet got
him into hot water with shareholders in 2003, Witty's salary of about
�1.7m makes him the least well-rewarded of his Big Pharma colleagues.

Whatever the size of his cheque, he's working for it. Most of the
firm's senior management are now his picks, including the bosses of the
UK and US businesses, Simon Jose and Deirdre Connelly, respectively,
and human resource head Clare Thomas. They are a close-knit team, and
Witty is by all accounts an open, approachable and inspiring leader.

'Andrew's great strength is that he can connect with all types of
people at all levels of the business,' says Thomas, 'and do it without
compromising his own personality. It's a very unusual skill.'

He'll need it. A huge streamlining of the 'business platform' (HR,
finance, IT and so on) is in full flow and the core R&D capability is
being completely re-organised and re-prioritised. People are going to
be feeling the pressure as a whopping �2.4bn of efficiency savings has
been promised by 2012 - that's �500m more than Witty's 2009
announcement, itself an extension of a 'mere' �1bn cost-reduction plan
dating back to October 2007. Given the scale of the cuts, substantial
job losses must be on the cards. So far this year, 380 UK redundancies
have been announced, all at the firm's neurosciences research centre in
Harlow, Essex. Globally, the figure is likely to run into thousands.

'There's no panacea,' Witty says, talking a few hours after giving his
presentation. 'It's a question of applying better approaches and
redesigning the organisation to make it happen. What you're seeing now
is an almost entirely new generation of CEOs who aren't wedded to the
past, and they are all pushing hard on strategy. Over the next five
years, we'll see the characteristics of the old model break up and the
emergence of something new.'

At 45, Witty himself is in the vanguard of that new generation, and his
progress up the greasy pole has been as rapid and consistent as you
would expect from a man who runs marathons for relaxation.

The only son of a Milk Marketing Board executive, Witty was born in
Yorkshire and raised in Cheshire, and retains some of the region's
flattened vowels and no-nonsense attitudes. With an economics degree
from Nottingham under his belt, he toyed with being a Eurocrat but
ended up as a management trainee at Glaxo Pharmaceuticals in 1985.

Whoever gave him that first break earned their pension - the subsequent
two and a half decades have taken him all over the world in the service
of GSK's shareholders. He has run businesses in Europe, Africa and
Asia, and worked on both the operational and marketing sides. He knows
the firm and its people inside out, and he has a politician's knack for
reading between the lines. 'One of the big things is that people don't
always tell you everything,' he says. 'It's not that they don't tell
you the truth; they just don't tell you. But I know people all over the
organisation - Africa, Korea, Asia, India - so I get to hear what's
really going on.'

No fan of the industry's traditional business model, with its
distracting mega-mergers and reliance on expensive, unreliable and
infrequent blockbuster drugs, he wants to wean GSK onto a less risky
but just as nourishing 'little and often' diet. 'If we can launch four
or five new drugs a year, then we're in business, even if none of them
is a blockbuster,' he says. Yes, margins on individual products will
have to come down, but so will the cost base. As long as the operation
as a whole is made more efficient, he doesn't think that overall
returns will suffer - too much.

But it is a huge task to push through, especially as GSK is still doing
well. Sales of its swine flu vaccine topped �883m last year, and even
in the recession in 2008 profits still came in at �7.8bn. For 2009,
revenues grew 16% to �28.4bn and profits rose to a hefty �8.7bn. Says
Andrew Baum, pharmaceutical analyst at Morgan Stanley: 'The impetus for
change at GSK is not so great, because the revenue pressure is less
there.'

Having witnessed the Asian economic miracle first-hand, Witty knows
that the emerging markets are key to future growth. He has championed
the move away from 'white-pill western markets', opening an R&D lab in
China and cutting the price of key drugs in countries where the 'list
price' makes them unaffordable.

He's also pledged to invest 20% of profits garnered from the Least
Developed Countries (LDCs) back into those local economies. The sum
amounts to only a couple of million quid, but it will grow - GSK's
sales in the emerging markets have risen from 20% of revenues two years
ago to 30% today.

Another shot in GSK's locker for cracking Asia is its impressive
marketing track record. The firm's consumer division - comprising
brands such as Lucozade, Ribena, Sensodyne and Panadol - is a star
performer, growing at a hefty 7% in 2009, outpacing all comers even as
the recession raged. 'We have some very accomplished FMCG marketers,'
says Witty, 'and they have done a great job. Our consumer business is
the fastest growing in the world - faster than Reckitts, Colgate,
Beyer, P&G. Even in the recession, we've won market share.'

The skills that help flog toothpaste and sports drinks in western
supermarkets today are likely to prove useful in selling medicines to
the emerging middle classes in the east tomorrow, he believes. In China
and India, pharma businesses will be engaged much more in a battle for
personal, high street-style sales, paid for out of household income,
than in the centrally purchased environment that pertains in western
countries.

'There's no doubt that pharma in the emerging markets has some
analogous characteristics to our consumer business,' says Witty. 'It's
more about cash out of people's pockets, and they care about brands.
There will still be regulation, of course, but many of the processes
and mindsets are similar.'

He's also worked hard to break down GSK's old-fashioned hierarchical
corporate culture in no-nonsense style. Out have gone separate offices
for senior managers on the upper floors of the firm's huge
glass-and-steel Brentford HQ. Officers are now where Witty thinks they
belong, sharing open-plan workspaces with their troops in the business
units. 'Strategy is all very well, but you've got to know what it feels
like on the line,' he says.

At the heart of his masterplan for the firm lies research and
development - the fount of innovation for any pharma business. GSK's
14,000-strong R&D function has already been reorganised and broken up
into smaller teams, each working to a more tightly defined brief and a
strict three-year funding cycle. There's plenty more change to come -
of the recently announced additional �500m savings to be made by 2012,
�250m will come from R&D. GSK is not alone in facing pressure to
remodel its R&D processes, says Morgan Stanley's Baum. 'There will be
significant shrinkage of internal research across the industry.'

It's the job of Dr Patrick Vallance, GSK's SVP in charge of drug
discovery, to make this new strategy work. 'The R&D challenge is to
provide enough innovative medicines that fulfil unmet clinical needs,'
he says. 'I'm not sure we have been doing that historically. We got
over-automated and very inward-looking.'

The teams are composed of about 60 people, and have to make a business
case for every project they pursue. And if after 18 months or so there
isn't a clear new product pathway on the horizon, the funding is
switched to something more promising. 'We want to fund the drug
pipeline, not create internal infrastructure that doesn't add value,'
says Vallance.

At the same time, external research partnerships and JVs have been
expanding briskly - GSK owns stakes in 40 biotech firms across the
globe and plans to continue making small, bolt-on, strategic
acquisitions.

It's a commercial approach that aims to reverse the alarming decline in
R&D productivity elsewhere in the industry. The return on research
investment is estimated by McKinsey to have fallen as low as 7% across
the board. 'We're supposed to discover medicines, not spend 20 years
pursuing interesting research in which you can't see the medicine,'
says Vallance. 'We have to ask where the tractable problems are, things
we can do something about. This industry grew great by innovating to
improve health; we need to get back to that.'

So far, it seems to be bearing fruit - GSK's drug discovery
productivity stands at an industry-leading 11%, and Witty's target is
14%. But achieving it calls for hard decisions on where to spend the
cash: the announcement in February that GSK would be pulling out of R&D
in the pain and depression areas to focus on the scientifically more
promising fields of dementia and Alzheimer's resulted in those 380 job
losses in Essex.

So GSK is to diversify at the sharp end to pursue more numerous,
smaller product areas. But the cost-base is also key. Surely
diversification equals complication and thus more cost? Well, yes and
no. Witty thinks it's possible to diversify and simplify at the same
time.

It's a question of who does what. 'Everyone is busy, nobody in my
company sits on their hands. But are they all generating value? We
launched Sensodyne in China last year - that was a new venture, we'd
never done it before.' It added complexity, he says, but it also added
value - as did the acquisition of skincare specialist Stiefel Labs for
�2.3bn last year.

That's good complexity, argues Witty, but there is also a lot of bad
complexity that needs to be got rid of. 'Would I rather we generated
less paper arguing internally about policy decisions? Would I rather
not have 24 finance systems that don't talk to each other? Yes, I
would. We have to invest in growth, and at the same time aggressively
prune the organisation. These things are not contradictory, they are
complementary.'

That's fighting talk all right, but couple it to the challenges of
balancing the low-margin opportunities in the emerging markets with
GSK's existing high-margin traditional operations, and the scale of the
task facing Witty starts to take shape.

He's trying to create a business that is low-cost but can still engage
in cutting-edge innovation, that is diversified at the sharp end but
integrated behind the scenes - a kind of four-way hybrid of Ferrari and
Kia, Unilever and Procter & Gamble, if you will - and to do it all
quickly enough that he doesn't get stampeded in the rush.

That's a pretty big ask, but Witty reckons it's better than the
alternative. 'Yes, it is difficult, but we have to be brave. It's a
journey, it isn't going to happen in 12 months. This industry is
changing, it's like the scene in Jason and the Argonauts where they
have to sail through a narrow channel with the clashing rocks. A big
fleet arrives but only a handful of ships make it through to the other
side.'

Witty is determined that the good ship GSK will be the first vessel to
emerge from the crush, which brings us neatly back to where we started.
It's his view that a company with the financial, intellectual and
political will to take on centuries-old killers such as malaria can
achieve many other great things if it puts its collective mind to it.

'I'm not changing our stance to get headlines,' he says. 'I'm doing it
to get medicines to people in Africa who are dying from diseases that
haven't had any good treatments developed for 50 years. I want to
create a firm that lives by its values and makes decisions people are
proud of.'

If he can work out a way to make a bit of dosh in the developing world
at the same time, so much the better. Full speed ahead, captain - but
don't take your hand off the tiller.

GSK'S NEW RULES OF ENGAGEMENT IN THE DEVELOPING WORLD

John Le Carre knew what he was doing when he set his 2001 bestseller
The Constant Gardener in Kenya, against a backdrop of corruption,
cover-up and murder orchestrated by a dodgy drug firm. The plot may be
far-fetched, but so bad is the pharmaceutical industry's reputation in
the developing world that it has just the plausibility for which Le
Carre is renowned.

The non-fiction low point of recent years came in 2001. In a doomed
effort to protect prices in the west, 39 multinational drug firms (GSK
among them) began legal action against the South African government to
prevent it importing cheap drugs on the 'grey market'. It was a
spectacular own goal - an industry that has done more to improve the
human condition than most in the past 50 years ended up tarred as
heartless, profiteering and immoral.

GSK CEO Andrew Witty knows pharma has to work on its reputation, but
refuses to agonise over profitability. 'When we make money in the west,
we can afford to provide healthcare in the developing world that
otherwise would not happen. People don't always like it when we say
this, but we're just being honest. At a societal level, it's part of
our overall licence to operate.'

He's begun to put his money where his mouth is, pledging to re-invest
in least-developed countries 20% of the profits earned there, and
cutting the price of key drugs like Aids treatment Combivir by up to
75% in those markets to boot.

Perhaps inspired by similar developments in the IT industry, Witty has
decided to give 'co-opetition' a go - hence its groundbreaking Aids
joint venture with Pfizer. The two largest drug companies in the world
joined forces last November to create Viiv Healthcare, pooling their
knowledge to work together, instead of squabbling over who owns what.

He has also taken the radical step of going public with a big chunk of
IP on potential malaria treatments. All the data on the 13,500 most
promising molecules in GSK's 2 million-strong 'novel compounds'
database is to be opened up to allow anyone to check them out. 'It
might take us five years to do them all on our own,' he says. 'So let's
get together and maybe we can do it in a year.'

It may not exactly be thriller material, but in the real world, this is
as life-and-death as it gets.


via managementtoday.co.uk


Posted via web from Jack's posterous

Things you can do from here:
- Subscribe to PharmaGossip using Google Reader
- Get started using Google Reader to easily keep up with all your
favorite sites
-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://listcultures.org/pipermail/p2presearch_listcultures.org/attachments/20100302/74e49209/attachment.html>