Inside This Issue - News
GlaxoSmithKline builds new paradigm
June 24th, 2012
LONDON – The business model that has long sustained the research-based pharmaceutical industry is faltering, with the steady stream of blockbuster medications that once characterized it drying up and competition from generics suppliers increasing as an unprecedented number of branded products lose patent protection. One of the first big drug makers to hit the so-called patent cliff, GlaxoSmithKline (GSK) has responded by rethinking its strategic positioning and adopting a more balanced approach to the evolving health care marketplace.
The chief architect of the new paradigm is Sir Andrew Witty, who, shortly after he was named chief executive officer four years ago, began to implement a program designed to fuel growth, reduce risks and enhance the company’s long-term financial results. The three major components of the plan aim to expand GSK’s diversified global business, deliver more products of value and simplify the operating model.
“We will seek to generate future sales growth through supplementing strength in the core small-molecule pharmaceuticals business, with new investments in fast-growing areas such as vaccines and consumer health care and new growth in areas such as biopharmaceuticals,” he said when the initiative was unveiled. “At the same time we are actively seeking to unlock the geographic potential of our different businesses, particularly in emerging economies.”
A central element of the program, which has impacted all of GSK’s global operations, including those in the United States, its biggest single market, is to improve research and development productivity and returns. The company’s early stage R&D work is now conducted by Discovery Performance Units (DPUs). Composed of between five and 80 researchers each, the DPUs focus on early-stage discovery related to specific conditions within eight broad therapeutic areas — immuno-inflammation, neuroscience, metabolic pathways, oncology, respiratory, infectious disease, ophthalmology and biopharmaceuticals.
The new structure has already started to deliver the desired results. During a conference call with financial analysts following the recent release of the company’s first quarter results, Witty said, “GSK’s momentum is being fundamentally underpinned by excellent late-stage asset progression. Since February we have received positive Phase III data on three assets — our HIV integrase inhibitor, Albigutide for diabetes and our B-Raf inhibitor for treatment of melanoma.
“We also filed our quadrivalent flu vaccine in the U.S. and Europe during the quarter. And we now have four products with sufficient data in-house to file in 2012, and four products for which we expect to complete Phase III registration studies for this year.”
The Food and Drug Administration has approved nine GSK medications and vaccines in the past three years, including three in 2011: Benlysta for treating lupus in adults who do not respond to standard therapies, Potiga for treating partial-onset seizures in adults suffering from epilepsy and Horizant for treating restless leg syndrome.
Witty asserts that recent progress in R&D points to the company’s ability to maintain a robust product pipeline for the foreseeable future.
“We now believe that we can progress up to 30 medicines into late-stage development over the next three years,” he wrote in the annual report. “As part of our continued focus on improving returns, we have updated our calculation of our expected rate of return on R&D investment. This has now increased to 12% from 11% in 2010. We are the only health care company to publish this analysis. I am extremely encouraged by this progress, and we are on track to deliver our long-term goal of 14%.”
Diversification — in terms of both business sectors and geography — is another way GSK is working to adjust to the changing health care landscape and ensure sustainable long-term growth. Stepped-up investment in consumer health care, vaccines and emerging markets is a direct response to new realities. As part of its strategy, GSK has evolved away from a reliance on business generated by “white pills in western markets,” which generated 22% of sales in 2011, compared with 40% in 2007.
The company’s efforts to streamline operations have benefited the bottom line. At a projected cost of some $7.8 billion, the restructuring program launched four years ago is on track to deliver annual savings of about $4.5 billion when it is fully in place in 2014. The cost of support functions has been cut by 23% since 2008.
“Our first quarter performance provides more evidence of the sustainable business that we’re building here at GSK,” Witty said. “Importantly, we are delivering exactly what we said we would: reported sales growth, gradual operating leverage, good cash generation, enhanced return to shareholders and continued positive R&D assets progression.”
“All in all, I’m pleased with the progress we’ve made. Our strategy is on track. And, despite the external pressure we face, we remain confident in our outlook for 2012.”