GSK – Keep it simple

GSK – The Big Pharma that decided to keep it simple in an industry that is getting more complicated than ever

 

GSK has the average, simple business model of a large pharmaceutical company. They are a science-led global healthcare company that researches and develops wide range of innovative products in areas of Vaccines, Pharmaceuticals and Consumer Healthcare to commercialize them in more than 150 countries around the world.
However, what made GSK stand out in the pharma community and get heavy criticism from the investors, was its new strategy to focus on selling “low price-large volume” drugs in emerging markets instead of most common practice of selling “high price-low volume” products in the US and Europe (2). In an industry where biotech start-ups are the main point of attention and all pharmacos are re-designing their R&D operations to catch-up with new, more complicated level of innovation, GSK Chief Executive Sir Andrew Witty chose to swim against the current by defining his vision as “A simpler, stronger and more balanced platform for long-term growth” (1) One major pillar of this new strategy was simplifying the three components of the operating model in alignment with the new vision. Simplification plan turned out to have further controversial initiatives that challenged many of the accepted truths about the pharmaceutical industry. Highlights of the change in operating model were the following:


GSK Business & Operating model
 
R&D
– With the objective of simplifying its product portfolio, GlaxoSmithKline entered to an unprecedented $20 billion swap deal with Novartis. (5) GSK received vaccine portfolio from Novartis in exchange of handing its Oncology business to the Swiss company. The two giants also agreed to form a joint venture in Consumer Healthcare. Swap agreement was the first move by GSK to divest its assets in relatively more complex therapeutic areas. It was followed by announcement of job redundancies in R&D of respiratory team
– In an unseen manner in a protective industry of pharma, company opened up access to facilities, some of its intellectual property and expertise to collaborate with external organisations on product innovation
– As a result, GSK had more medicines approved than any other healthcare company since 2009

MANUFACTURING
– Manufacturing is perceived as key capability of GSK. It owns 14 Vaccines and 43 Pharmaceutical sites in 26 countries. (3) The company is in the process of reviewing its global manufacturing footprint to ensure effectiveness and is considering to reallocate its production needs among facilities given its new geographical focus. This is expected to result with closure of certain facilities
– In the new lower margin strategy, streamlining supply chain processes became further critical. GSK launched end-to-end supply chain programme in 2013 to simplify supply chain by firstly re-designing the organization structure to a streamlined simpler governance model. This aims to improve coordination across the value chain from sourcing raw material to more efficient delivery of products to end consumers
– In 2014, company introduced the GSK Production System across manufacturing facilities, a standard way of working to identify and eliminate the root causes of accidents, defects and waste. Standardized way of working significantly improved business performance, evidenced by 40% decrease in manufacturing interruptions despite 26% increase in production in Cairo facility
– To further bring down the complexity in manufacturing, production of 19% of packs have been discontinued and number of outsource manufacturing partners have been reduced by 8% in 2013-2014 (3)

Simplify the operating model

COMMERCIAL MODEL
– Global commercial structure was streamlined to create a single commercial center in London to support Europe, emerging markets and Asia Pacific Japan markets. GSK also reduced complexity in US operations by creating a single headquarters for the US Pharmaceuticals
– GSK has taken two very controversial decisions that caused heated discussions in the industry. Firstly, company decided to evaluate performance of its sales reps solely based on their technical knowledge, quality of information conversed to healthcare professionals, and the company’s overall business performance. New incentive system completely eliminated typical individual sales targets system. Secondly, GSK decided to invest in its full-time employee healthcare professionals to market its products instead of paying to external experts and key opinion leaders for promoting it. GSK positioned both initiatives as signs of its commitment to becoming a more responsible, consumer-centric pharma company that is living up to its values

With all the heated debates it brought to conservative pharma industry, GSK reduced its annual operating costs by $4,5 billion and announced strong growth of 11% CER in Q3 2015. Financial analysts recently published favorable reports evaluating GSK stock as undervalued in the market now (6). Further data points are needed to make full assessment of drastic strategic change. However, even current positive numbers are solid proof for importance of two points: (1) Re-assessing business model continuously even if the company is central part of industry, (2) Fully re-designing operating model to meet needs of new direction – regardless of the size of change required

(1) “GlaxoSmithKline : Out of step”, Andrew Ward, Financial Times, http://www.ft.com/cms/s/2/3a7f8df0-f7b7-11e4-9beb-00144feab7de.html#axzz3tmY7j8RU
(2) “GlaxoSmithKline: A drugs giant that puts the lives of the poor before the money of the rich – could it happen?”, Charlie Cooper, Independent, http://www.independent.co.uk/life-style/health-and-families/health-news/glaxosmithkline-a-drugs-giant-that-puts-the-lives-of-the-poor-before-the-money-of-the-rich-could-it-10237538.html
(3) GSK 2014 Annual Report, https://www.gsk.com/media/603031/annual-report-2014.pdf
(4) “GSK Changes Its Drug Sales Practices And R&D Suffers”, John LaMattina, Forbes, http://www.forbes.com/sites/johnlamattina/2014/12/10/gsk-changes-its-drug-sales-practices-and-rd-suffers/
(5) “GSK-Novartis deal is a game changer for M&A”, Ashley Armstrong, Telegraph, http://www.telegraph.co.uk/finance/newsbysector/pharmaceuticalsandchemicals/10791444/GSK-Novartis-deal-is-a-game-changer-for-MandA.html
(6) “GlaxoSmithKline: Unfairly Beaten Given Strategic Direction”, Peter Mantas, Logos-LP, http://seekingalpha.com/article/3601886-glaxosmithkline-unfairly-beaten-given-strategic-direction?li_source=LI&li_medium=liftigniter-widget

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3 thoughts on “GSK – Keep it simple

  1. This is a very interesting post. I have some questions about the overarching strategy. How is GSK dealing with the lack of IP protection that may be present in some emerging markets? The Doha Declaration of 2001 left an opening for nations to deal with public health crises at the expense of intellectual property rights; has this affected which markets GSK has entered? Additionally, this strategy seems like it might run into roadblocks downstream, with distribution problems in emerging markets. This would be especially relevant for vaccines requiring a cold chain. Its adoption of this strategy implies that GSK believes distribution will not be an issue; as such, why doesn’t it lower the prices of its “low volume, high price” products in order to increase volume, instead of eliminating these products from their portfolio entirely? Finally, given how expensive pharmaceutical research has become, do you anticipate additional companies’ following GSK’s R&D in sharing intellectual property, and might we eventually see a transition to complete transparency among disease-specific researchers?

  2. The point about sales rep evaluation is particularly interesting. Do you think these changes drove improved financial results, or did financial performance improve despite these changes to sales rep compensation? If the former, do you think this model of sales rep compensation is transferable to other pharma companies or are there reasons you think it could only work at GSK?

  3. Great topic and article.

    It will be interesting to see how GSK’s strategy plays out in the coming years. The decision to move away from high priced drugs seems to have been well-timed, given many drug prices (e.g., Sovaldi, Daraprim) have come under increased pressure in the last year. However, given the shift from “high price – low volume” products in western markets to “low price – high volume” products in emerging markets, I’m curios to see what the R&D department (organization, IP agreements, etc.) will look like in five years. Given that GSK is playing in many disparate areas – consumer, HIV (ViiV), vaccines, dermatology, and other prescriptions – it would seem that the R&D needs are quite different. As such, I’d be interested to hear your thoughts on how well this component of the operating model is aligned with GSK’s business model (and how it varies by area).

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