Global
Pharmaceutical Industry: GlaxoSmithKline
1.
Introduction:
Company Overview:
GlaxoSmithKline (GSK) is a British pharmaceutical
multinational company that is ranked as the fourth largest pharmaceutical
company in the world based upon its revenue (GSK, GSK Annual Report, 2010) . The company is
listed on the London Stock Exchange (LSE) with a secondary listing on the New
York Stock Exchange (NYSE). Its headquarters is located in Brentford, United Kingdom
and employs a staggering number of 97,000 employees worldwide, with 12,500
employed in its research wing. It mainly researches, develops, manufactures and
distributes medicinal drugs and vaccines and is known for its involvement in
consumer healthcare as well. The company was formed as a result of a merger
between former Glaxo Wellcome plc and SmithKline Beecham plc that was announced
on January 17, 2000 (Business, 2000) and completed in December
2000. GSK since then has acquired many pharmaceutical companies in order to
expand its operations and widen its product portfolio. Its acquisitions include
the New Jersey based pharmaceutical company, Block Drug, in 2001, US based
inventor of “FiberChoice” dietary fiber supplements, CNS Inc. in October 2006, and
a dermatological pharmaceutical company based in the US, Stiefel Laboratories,
in 2009. At first, GSK’s strategy comprised of increasing its market share
through acquisition of the companies that held
rights to popular drugs and vaccines. This strategy is still being
followed to date, as GSK recently made a bid for a US based biopharmaceutical
company, Human Genome Sciences, in April 2012 (Whalen, 2012) . However, GSK itself also is involved
in the development of new products through its research and development centre
that was opened up in Shanghai, China in May 2007. Other research centers
established by GSK are located in the United Kingdom, Croatia, France and
India. GSK’s revenue as of financial year 2011 was £27.387 billion with a total
net income worth £5.458 billion (GSK, GSK Annual Report, 2011) .
Industry Overview:
The global pharmaceutical industry is currently amidst a
strategic crisis. The changes in the regulation, and increased cost pressure
combined with the state of the global economy, are leading to shrinking margins
in the business. The pharmaceutical
industry is generally rated highly risky with a great deal of investment tied
up in research and development (R&D). There is a high amount of uncertainty
in connection to the recovery of the investment. There are many drugs that are
chalked off the board during the later development stages, while some fail to
reach the market after the testing and clinical trial stages. The R&D costs
have risen by 80% in the last decade, whereas new product launches have
declined by 43%. The return on investment (ROI) in the area of R&D of major
pharmaceutical companies is believed to be more or less negative. The
pharmaceutical industry faces long product lead times, that may span at the
very least a decade. The average lead time from discovery of a potential new
drug to the stage where it can be marketed to the general public is 12 years.
There are also a set of regulatory bodies with their own lists for rules and
reforms, involved, which the pharmaceutical companies must be in compliance
with in order to continue in the trade.
Other concerns for those in business in this particular industry include
the high competition for patents and intellectual property along with pricing
pressures placed upon them by the consumers.
There is also concern of the markets maturing in Europe and United
States of America, and emerging markets in Asia and Japan not being able to
provide revenue to match those of the aforementioned markets.
Target Market Identification:
Being the fourth largest pharmaceutical multinational in
world, GSK has penetrated most of the major markets around the world. It sells
its products in around 70 countries worldwide and has offices in 39 countries. GSK
serves not only to the elderly with severe need of prescription medicine to get
through the day but also to the middle aged, and middle classes with a line of affordable
anti-anxiety, anti-depression, cholesterol-lowering medicines. It also designs
products for specific target markets that encompass a particular section of the
demographic. For example, it targets the female demographic, of all ages and
income groups, with its Cervarix vaccine for the prevention of cervical cancer.
As mentioned before, the markets in Europe and United States have been maturing
and it is time for the pharmaceutical companies to look for markets elsewhere.
Markets in Asia and Japan have been identified as emergent and hence, most
pharmaceutical companies are focusing their new endeavors that direction. In such
developing countries, GSK is establishing itself through techniques such as
further reinvestment of profits from sales in those countries into the
development of a better and effective healthcare infrastructure for its people.
Products:
GSK offers a range of products ranging from prescription
medication to vaccines along with consumer health products. GSK’s prescription
drugs are available for a variety of diseases areas, including those for diabetes,
asthma, viral infections, cancer, digestive problems, mental illness, and
common infections. Some of GSK’s prescription drugs are household
names such as Panadol, Amoxil, Augmentin, Betnovate, Zantac, etc. GSK has also
developed over 30 vaccines for preventable diseases such as the Havrix vaccine
for the prevention of Hepatitis A, Fluarix for Influenza, Fendrix for Hepatitis
B, Typherix for battling typhoid, Priorix for protection against mumps and
measles, along with a dozen others. In addition to the vaccines for the
prevention of diseases, GSK also conducts several health awareness programs in
order to spread information regarding the prevention and treatment of diseases
and the way to healthier and better quality lifestyle. Recently in 2009, GSK in partnership with
Pfizer, founded ViiV Healthcare, an independent specialist HIV company, that is
focused upon the developing a comprehensive portfolio of drugs that are
targeted at the treatment and the prevention of HIV / AIDs, along with
organizing HIV awareness programs, and setting up specialist pharmacies solely
supplied with medicines that combat this particular disease and a specialist
trained staff to tend to the incoming purchasers questions.
2.
Extended
Analysis:
PEST:
On July 2, 2012, GlaxoSmithKline pleaded guilty to the
charges of criminal wrongdoing, agreeing to a settlement of $3 billion.
Criminal wrongdoing in the case of pharmaceutical industry involves dishonest
behavior in the course of trade by the pharmaceutical companies. The accusation
of criminal wrong doing with regard to the activities of GSK involved off-label
promotion, failure to disclose safety data, bribing doctors and practitioners and
illegal promotion of prescription drugs. The drugs involved included Lamictal,
Paxil, Zofran, Advair and Wellbutrin. This has lead to a great amount of
negative publicity for GSK, and a sharp decline in its goodwill. Its public
perception, despite of the CSR activities, is that of a pharmaceutical
fraudster. Before this, GSK has previously been accused of animal cruelty in
its laboratory trials of drugs with cruel and unnecessary procedures being
subjected on defenseless animals. Another concern voiced out is by the
environmental groups about the damage that dozens of GSK’s manufacturing plants
may inflict upon the environment. GSK’s manufacturing plant in Ulverston,
United Kingdom is marked by its carcinogenic emission and repeated violations
of environmental regulations. In 2001,
the Ulverston manufacturing plant emitted a total of 773 tonnes of carcinogens,
forming about 10% of the nations’ total. Thus, GSK is under constant pressure
not only from the government but also animal rights activists and environmental
groups.
GSK faces a tough competition from its rivals in the fast
paced ever changing pharmaceutical industry. Its rivals include, world leaders
in pharmaceuticals, Pfizer, followed by Novartis and Merck & Co. These pharmaceutical
companies are in direct competition with GSK, being involved in the race for
markets, innovation and better R&D. Although GSK is a pharmaceutical
multinational giant itself, comparatively, its sales revenue is less than that
of the aforementioned pharmaceutical multinationals.
In addition to that, there are several of GSK’s patents are
near their expiration date. Although GSK has many new medicinal drugs in the
pipeline, will they be just as successful to replace the ones going out is the
most important question. Once the patent expires, rival pharmaceutical
companies will able to manufacture drugs with the formula of that of the
original GSK brand drug. The generic drug will be priced cheaper than the original
drug, leading to a drop in the sales revenue for GSK. GSK’s blockbuster drugs
such as Valtrex for the treatment of genital herpes, Mepron for the treatment
of pneumonia and Lamictal treatment for
epilepsy and bipolar diseases have all gone
off patent. Unless GSK’s pipeline drugs prove miraculous, the company may fall
over what is called a “Patent Cliff”.
Other problems include the limited approval of pipeline
drugs by the government and regulatory bodies, which means that much of the R&D
expenditure on the development of the drug will have to be written off as it
will not be recovered.
Moreover, there has been an increased trend of people
avoiding to visit and consult the practitioners due to increased health care
expense. Instead, they opt to directly purchase medicines from retailers or
online stores. If such a trend of increased cost continues, the public would
eventually ask the pharmaceutical companies, including GSK, to lower the prices
of their products. This could lead up to government interventions where GSK
would have to give in to the pressure and lower the prices. This pressurizing
would cost GSK badly and economically would have an adverse impact.
The lead time for products leads to high R&D costs and
most of the products do not get through the R&D phase. Therefore, it is
normal for the cost of those failed products to be charged on the successful
products to recover the investment. With increasing R&D costs and the
decreasing number of products coming through in the market, GSK faces huge
decrease on its ROI.
In terms of technology and innovation in the pharmaceutical
industry, GSK faces strong challenges from its competitors, such as Pfizer.
With ever advancing technologies, competition has become fierce as ways are
being searched to decrease the lead time taken by drugs to avoid higher losses.
3.
Internal
Analysis:
Financial Analysis:
In terms of its global financial position, the
pharmaceutical segment of GSK had witnessed fall of group turnover from over
£28.4 billion in 2009 to around £27.4 billion in 2011 (GSK Annual Summary, 2011) . This resulted in an
overall group earnings per share falling to 144.1p by the end of 2011. This can
be attributed largely due to global lawsuit payouts and the expiration of the
patent of GSK’s blockbuster product, Valtrex, in 2009 (USPTO, 2012)
as very soon cheaper generic versions of Valtrex were introduced by different
pharmaceutical companies that lead to Valtrex sales to fall to just over £5
million (Adams, 2011) .
Marketing Analysis:
Keeping in view the negative image created and litigations
faced due to GSK’s prevalent marketing methods in the US and UK, GSK has made
amendments to its practices. In recent years, by entering the emerging markets
of the Asia Pacific regions, GSK has changed its policies regarding the
marketing of its drugs according to each country’s specific laws and
regulations so as to avoid previous mishaps (GSK Marketing Practices, 2011) .
Human Resources Analysis:
GSK’s policy towards the Human Resource segment has been
crucial to its development even in its dim periods of massive litigation
payouts and diminished public perception. GSK values its employees as one of the key
competitive advantages that it possesses. Its global recruitment statistics
show a great amount of increase in its work force in recent years (GSK, Corporate Responsibility Review, 2006) . According to
statistics, GSK possesses the biggest sales team in the complete pharmaceutical
industry (GSK, 2004) .
Market surveys have shown that GSKs employees are more satisfied with their
company than employees of different pharmaceutical companies are with theirs.
Value Chain:
The most important part of a pharmaceutical company’s value
chain is R&D. In 2011, GSK invested £3.9 billion in R&D to aid the
development of new drugs (GSK, GSK Corporate Responsibility Report, 2011) . Comparatively, GSK has
spread and developed its distribution network as well in recent times through
entering emergent markets of the Asia Pacific region. GSKs HRM function is one
of the best in the industry and technologically, it falls within the top 4 most
advanced pharmaceutical companies. Therefore, GSK holds a strong value chain in
the pharmaceutical industry.
4.
SWOT:
|
Strengths
·
Preferential employer in the job market.
·
Attractive policies regarding its employees
and the surrounding communities.
·
State of the art R&D.
|
Weaknesses
·
Bad public perception.
·
GSK has had to face several legal cases.
·
Target of activist groups.
|
|
Opportunities
·
Can introduce its existing products in new
emergent markets, such as Asia and Japan regions.
·
Public perception can be changed.
|
Threats
·
Cheaper generic drugs of expired GSK patents
can take over market share.
·
Increased regulations.
·
Competitors increasing market share at a fast
pace.
|
Strategic Position:
GSK should take benefit of its reputation in the job market
and should pursue hiring of efficient and productive staff. This is very
beneficial for GSK as this would lead to better minds showing their brilliant
skills by helping in developing more drugs. This could result in increased
sales revenue in the form of more successful products coming through R&D,
discovering blockbuster drugs and lowering the chances of high spending on
failure drugs. Moreover, more patents can be sought, consequentially leading to
a strengthened public image and better hold in the market compared to its
competitors.
GSK has been served with several law suits around the globe
and has been found guilty of wrongdoings on quite a few occasions. In 2006, in a law suit against GSK
by the Internal Revenue Service (IRS) in the USA due to a tax dispute, which has been the biggest in
the history of IRS, GSK had to payout $3.1 billion (Matthews & Whalen, 2003) . Moreover, the
company has been targeted by animal-rights activist groups and has resulted in
disgruntled customers who complain about lack of information GSK provided about
side effects of its drugs (Stayton, 2008) . With such issues arising, it has
become vital for GSK to improve its public image to continue with its growth
and to avoid a huge setback.
With many products still in the R&D pipeline and many
closing towards the end of their patent periods and falling sales in western
regions (Peacock, 2012) , GSK has the opportunity to introduce
its already established products in the emergent markets. For pharmaceutical
companies, most of Asia, including Japan, China and India and several European
countries are seen as such markets. Gradually, the level of income of the
general public in these regions is increasing and with that, affordability is
rising GSK can market its products quite successfully here and can build its
image by penetrating through its CSR policies and community developing measures,
resulting in a better public perception.
GSK has several big competitors with huge resources and
strong market hold, and as time passes, their penetration into the emergent
markets and development of new drugs at an increased pace is a major threat to
GSK. In addition, the patents of several GSK’s drugs expired in 2012 (PP&Pmag, 2009) , which means other
small pharmaceutical companies can now develop cheaper drugs using GSK’s
formulas. Moreover, tightened regulations and pressure from various government
organizations are major threats to GSK’s survival.
5.
Recommendation:
Strategic Options:
·
Employ efficient workforce.
·
Penetrate the emergent markets through existing
successful products.
·
Introduce attractive CSR programs to create a
better public perception.
·
Make use of policies to ensure that legal cases
are avoided.
·
Set up more R&D centers.
·
Develop cost cutting policies.
SFA Test:
Winning Strategy:
The quintessence ingredient of today’s pharmaceutical
industry remains the discovery, development and marketing of new medicinal
drugs, vaccines and treatments in order to provide a better and healthier
quality of life to the society at large. The declining success rate of new
drugs together with the high costs of R&D is the major source of the crisis
in which the global pharmaceutical industry is steeped in. Hence, there is a
need for the strategy to be restructured in order to change the focus on to what
the regulators as well as the consumers require from the company.
GSK has recently adopted a reorganized policy of corporate
social responsibility to deal with the negative publicity and penetrating into
new emergent markets. Markets in Asia, Japan and Western Europe are identified
by the industry as emergent and now focus is towards endeavors in this these
areas. Andrew Witty, CEO of GlaxoSmithKline
(GSK), was named the 2010 Individual Leader of the Year (Barham, 2010) at the Ethical Corporation for
Responsible Business Summit, for re-defining GSK’s approach towards CSR, by
dropping the prices of patented medicine in developing countries by 25% along
with the promise of reinvesting about 20% of the profits from all drug sales in
those countries towards building a better local health care infrastructure in
the said developing countries. The company is also initiating programs that
lead to develop better health care, improved access to medicines, R&D
specifically based on diseases that are customary in developing nations,
monetary donations, and establishing a system of health education and awareness
in such areas. There are many new drugs under development for combating
malaria, tuberculosis, typhoid, and other diseases that are rampant in
developing countries by GSK.
Another strategy would be to focus on the emergent markets
with new products. A growing middle class, improving healthcare and rising
income levels are driving up the demand for medication in emergent markets. These
markets may be even able to afford expensive medication that can accentuate
their quality of life. In order to achieve success in this department however,
the GSK should conduct/outsource their R&D activities to their local
offices/research wings, so as to have a better understanding of that the
consumer and regulator in the specific region need more thoroughly. An example
of this is the two research wings set up in India in Maharashtra at Thane and
Nashik.
Effective cost
reduction should also be a part of the strategy to overcome the problems faced
by the company. In many of the mature markets, there is stiff competition from
rivals and price sensitivity in the segment is considerably high. Thus, to
remain profitable in such markets, the company can relocate its certain
functions to low cost countries or outsource the non-core functions so as to
not to incur a high in-house expenditure of maintaining the department. However,
there are certain ethical issues involved when using the work of cheap labor in
certain countries which may have to be dealt with.
GSK can benefit from selling its existing blockbuster drugs
into new markets. But in order to do that, it needs to carefully analyze the
local market situation and collaborate and form partnerships with local
pharmaceutical companies to launch into ventures that are country specific in
order to drive the sales and profits up in the emergent markets.
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