‘How well do GSK balance demands for shareholder value with the need for corporate social responsibility?’

BMAN33000: GlaxoSmithKline (GSK) Case Study

The case pack

This case pack provides you with:

· Information on the global pharmaceutical industry, in which GSK is a key player

· An introduction to GSK and its development

· A timeline that identifies key events for GSK up to the merger of Glaxo Wellcome and SmithKline Beecham in 2000

· Tables which provide background on the characteristics of the industry

In week 5 you will also be given a spreadsheet with tables on Glaxo Smithkline (GSK) which provide financial data on GSK from 1980 to 2008. Please note the following about the company tables:

· The company financial data refers to Glaxo for the period 1980-1994, to Glaxo Wellcome from 1995 to 1999 and to GSK from 2000.

· The operating data has been taken from hard copy accounts rather than the Thompson OneBanker database because the TOB data is hugely inaccurate in this particular case. However it is OK to use TOB for share price data, where the information is accurate.

· Because the company data covers more than 20 years, the tables include financial data expressed in real 2008 prices where data has been adjusted for inflation using the RPI index which inflates all values to 2008 levels. This allows comparisons over the long term, removing the effects of general price inflation.

The case pack is intended as a concise introduction to the company and its industry, and provides background empirical data to get you started. You should start by reading through the case, which will give you some ideas about the focus of your additional research and the issues that you need to investigate in order to address the exam questions.

The most useful sources of information are likely to be:

· The business press (e.g. Financial Times, Economist, Business Week). The John Rylands University Library electronic databases allow you to search newspapers (search under individual title e.g. FT, Economist).

· Analyst reports. Again these can be accessed via John Rylands database using Investext Plus.

· Market reports, the best of which is the Reuters Business Insight ‘Healthcare’ publications, which can be accessed via the JRL ‘database’ webpage.

· Websites of appropriate corporate, industry and government (and non-govt) organisations.

· GSK’s website for information on company background, drug development and investor information

· the main US trade association (the PhRMA) as well as the UK trade association (the ABPI or ‘Association of the British Pharmaceutical Industries’)

· the websites for the FDA and NICE have some info on pharmaceuticals

· as do government websites, which can be quite thorough in places. e.g.. the US Dept of Health & Human Services or the UK Department of Health which has a role in regulating the industry in the UK.

· You could also look at some of the more troublemaking websites like Medecin Sans Frontieres or Oxfam. There are many…

The pharmaceutical industry

To understand the global pharmaceutical industry, it is important to appreciate three characteristics: (a) the importance of patents that safeguard intellectual property rights for firms bringing new drugs to the market; (b) the relative importance of research and development (R&D) and marketing to explain product market success; and (c) the essential transparency of the business where external commentators and investors focus on the drug pipeline. This section of the case pack provides a brief introduction to these three characteristics, before explaining the basis for the successful development of the industry and the dynamics of the changing environment in which the major pharmaceutical firms operate.

1. Industry characteristics

a) The importance of patents

The pharma business is concerned with the production of three distinct groups of products: ethical, generic and over-the-counter (OTC) pharmaceuticals. Some companies specialise in ethical drugs, while others produce all three kinds of pharmaceutical product. The patent status of a particular product is essential in classifying a particular product and helping to determine the contribution it makes to corporate profits.

· Ethical pharmaceuticals are patented products that generate high returns and are available only on a doctor’s prescription through pharmacies. The patents last for 20 years (see Mossinghoff, 1999 for a discussion of key regulatory changes) and prevent any company from retailing a drug with an identical molecular structure. However, due to stringent safety and efficacy requirements roughly 10-15 years of the patented period is taken up with drug development, leaving just 5-10 years to sell the drug in a competitor-free environment (there is some disagreement here: Deutsche Bank (2003) claim development time is up to 15 years, Reuters Business Insight (2003) claim it is 14 years). Nevertheless this 5-10 year period is highly lucrative because, in the absence of competitors, patented drugs can be sold at a premium price and hence have extremely high margins. Virtually all pharmaceutical companies rely on a very small number of patented drugs to generate most of their sales (see Table 2). These are frequently called ‘blockbuster’ drugs (defined as drugs which generate $1bn or more sales per annum).

· Generic drugs are cheaper substitutes for ethicals whose patents have expired. Where there is a large potential market, there may be several manufacturers of generics and, although margins are lower, this can still be an attractive business where there are large volumes. Like ethical drugs, generics are usually provided on a prescription basis and thus doctors may often have to choose whether to prescribe an ethical drug or an older (but significantly cheaper) generic drug.

· OTC drugs are products like branded cold and flu remedies available through chemists, supermarkets etc.

(b) Men in white coats or sales reps in cars? Understanding the business

There has been much discussion about the social benefits of patents in the pharmaceutical business. This has been central to the argument made by the industry over the last 40 odd years: patents are needed to recover the high costs of R&D incurred over many years and with uncertain outcomes. Without the protection against competition that patents provide, there would be little incentive for investment and hence no new drugs to help patients. This argument can usually be seen on pharma company websites as well as in promotional material from trade associations like the ABPI in the UK (Association of the British Pharmaceutical Industry) and PhRMA (USA). The dominant image of ‘men in white coats’ permeates the industry version of what the activity, epitomised by US giant Merck’s claim, they operate for ‘people, not profits’ . Others take a slightly more sober line: that the R&D investment should be rewarded because patients are always the beneficiaries. Various permutations of this theme can be found in the mission statements of large pharmaceutical companies or industry trade associations like the ABPI and the FDA.

This industry narrative is contested by more radical commentators who see patents as a way of profiteering at the expense of the society as a whole. The key critique is one that was comprehensively set out almost 40 years ago by Kefauver (1965), a radical Democrat and chairperson of the US Senate’s Anti-Trust and Monopoly Subcommittee in the late 1950s and early 1960s. His investigation into the sector led him to make the following criticisms. He:

i) questioned the links between regulatory agencies and pharma companies,

ii) argued that drug prices were not only unacceptably high, but differed between countries in ways that suggested exploitation of lax regulation

iii) criticised the lack of innovation in the sector by arguing that most drugs were me-too copies of existing drugs with little benefit to the patient and

iv) highlighted the fact that marketing is a considerably higher expense than R&D for most pharma companies.

His recommendation was to introduce a test for efficacy (ie making sure that the drug can do what it says it can do) and to limit the length of patents to 3 years, after which they had to be licensed out to other companies. The former recommendation was accepted, the latter rejected by the Kennedy administration.

This alternative narrative, which questioned the importance of innovation and focused on marketing, assumed a much lower public profile in the 1980s but, interestingly, the underlying criticisms resurfaced in the 1990s. (See Table 1 for 2000 data.) Froud et al (1998) for instance argued that pharma companies were really marketing machines that generated high returns for shareholders, rather than R&D intensive companies generating new drugs for patients. Using the yardstick of numbers employed, sales and marketing accounted for around 40-50% of GSK’s workforce compared with just 14-15% in R&D. Moreover some of the most profitable drugs of all time are simple copies of existing drugs: Glaxo’s anti-ulcerant blockbuster, Zantac, was a me-too variant of SmithKline’s Tagamet. The major difference between these two drugs was not in the findings of the trial results, but in the amount of marketing applied to Zantac over Tagamet, indicating that a better metaphor for the business might be ‘reps in cars’ not ‘men in white coats’ .

(c) Transparency

From the perspective of the investor community, pharmaceuticals are unlike many other businesses in that the medium to long-term returns of individual companies are relatively transparent to external parties. The transparency is the result of two key features of the industry: (i) patents whose lifespan is set by intellectual property law (and occasionally challenged in the courts by competitors who wish to produce generic copies), and (ii) the company pipeline of new products which, increasingly, is disclosed in considerable detail to investors and analysts.

i) In terms of patent exposure, an ethical drug that comes to the end of its patent term will lose two thirds or more of its revenues within three years (see Coe 2003, p.66 for examples). Given the dependency of all pharmaceutical companies on a relatively small number of drugs, the exposure to patent expiry is one of the key areas that investors and analysts look to when basing their buy, sell, hold decisions and recommendations. Hence the front pages of analysts’ reports on pharma companies often highlight and discuss the implications of recent patent defences against generic manufacturers which might indicate a likely reduction of patent life.

ii) The expiry of a patent need not be the end of the world for pharmaceutical companies provided there is another drug in the pipeline that could feasibly take its place. Hence the second key focus of investor and analyst assessment is the key transition of drugs from Phase II to Phase III in the pipeline, which brings them one step closer to approval for sale. For example, ABN AMRO only includes Phase III and marketed drugs in their discounted cash flow valuation of companies within the sector (2002, p.7). Phase I and II drugs are completely discounted from their forecasts of future profit because the necessary data that demonstrates efficacy of the drug and its patentable status is rarely generated until late Phase II trials. The fact that 60% of all drugs entering Phase II trials will not make it to Phase III appears to justify analysts’ sceptical handling of Phase II pipeline products as there is little guarantee at this stage that any marketable product will eventually result. The process of development of new products, including testing and meeting regulatory requirements, is both long and uncertain: Table 5 shows that drug development times have increased from 8.1 years on average in the 1960s to over 14 years in the 1980s and 1990s.

This feature of the business is highly visible with detailed information on the drug pipeline reported in company accounts and presentations and discussed at length in analyst reports. An update on the pipeline of new drugs is also presented by companies at an annual R&D day, which, though not obligatory, is considered ‘usual’ by analysts of the pharma industry. While the companies hope that such disclosures will provide encouraging information to external commentators and investors, it does provide a level of transparency that can also work against the company when analysts come to the conclusion that the pipeline (and hence future profits) are likely to be disappointing.

2) The structural factors that explain the success of the pharma industry

Glaxo operates within an industry that has historically had favourable external conditions that aid cost recovery. When comparing the pharmaceutical industry with other parts of British manufacturing where the story has been one of decline, it is obvious that pharma companies have moved along a different trajectory of strong growth in the twenty years after 1973. In the UK, real output in the pharmaceutical industry increased steadily year on year, employment increased by over a third and an increasing trade surplus was generated (Froud et al 1998, pp.10-11).

This successful trajectory can be explained by considering three external factors which, along with patent protection, have allowed and encouraged the development of the industry.

(i) Pharmaceutical industry success has always been underpinned by favourable regulatory conditions that aid cost recovery. In the UK, these favourable conditions were written into a national regulatory framework under the Pharmaceuticals Price Regulation Scheme (PPRS) of 1957 . What is unusual about the PPRS is that it regulates the rate of return on capital, not the price of drugs, and thus offers research oriented pharma companies a maximum allowable rate of return on capital of up to 30%. This generous rate was justified by presenting it as a necessary incentive for the pharma sector to invest in R&D (with ensuing economic benefits for the nation), but of course it also ensured that large profits were made on each patented drug (Danzon, 1997). Meanwhile in the US prices are not regulated and tend to be higher due to the fragmented relations between consumer, purchaser, financier, prescriber and dispenser (see lecture 4 this year).

(ii) Up to the mid-1990s the nation state in Europe & Japan was essentially a monopsonistic purchaser of ethical pharmaceuticals but was reluctant to use this market power to force companies to reduce drug prices. This is perhaps because drugs represented a relatively small proportion of the total health spend (roughly 10% according to Froud et al. 1998, p.27). (See also Table 3 for data from 1991 to 2000 on seven major OECD economies.) But governments have also viewed the successful development of a domestic pharma industry as an important part of industrial policy that yielded welcome economic good news. Private medical provision in the US also meant that the expense of drugs was not a problem under insurance schemes where rising costs were simply factored in to next year’s premium for the consumer, often corporate employers.

(iii) Lastly, while the 1940s and 1950s represented a time of considerable medical advance, with a string of new, socially useful products after the introduction of antibiotics, the 1980s introduced an era where the opportunities for new drugs appeared to be linked increasingly to new opportunities to medicate risk, mood and lifestyle. These drugs, targeted at such conditions as obesity, hyper-activity in children and impotence, have brought with them a greater need for marketing – particularly in the US where anti-depressants (along with cardiovascular drugs) have been the major growth area. This development has certainly been socially contentious, encouraging chemical solutions to what are often social problems, while companies divert some of their R&D focus away from medical conditions and life-threatening illnesses like cancer, Alzheimer’s and AIDS. But they have presented major opportunities for some, who can quickly activate a large, focused marketing campaign on key high-prescribing physicians in an attempt to persuade doctors to prescribe their patients what are often long term drug treatments (Financial Times Magazine, 24th January 2004).

3) Developments since the mid 1990s: a more difficult environment

The global pharmaceutical industry has continued to grow through the 1990s though with clear differences between different regions. Throughout the late 90s and into the 2000s the geography of the pharma market in value terms drifted towards the US. In the US, the Bush government’s Medicare Prescription Drug Benefit Law provided enough money to supply free medicines to 6 million Americans, which presents obvious profit opportunities for all pharma companies. Despite the privately-oriented nature of the US healthcare system, the State funded Medicare and Medicaid are still major sources of income for large pharmaceutical firms. The importance of the US market is clear when we observe that, even before the Bush reforms have been implemented, it accounts for 53% of the total global pharmaceutical market (Reuters 2003, p.78). However, while there are opportunities, the business environment has undoubtedly become much more difficult, as this section outlines.

(i) Lack of Fundamental Innovation. The most significant problem for the pharma industry is that there are very few new chemical advances. Ameliorative remedies have already been developed for many of the more minor medical conditions, leaving cures for major degenerative illnesses and infectious diseases like arthritis, Alzheimer’s and AIDS as the outstanding targets for pharmaceutical research. It has proved far more difficult to develop cures for these conditions, suggesting that new blockbusters in these therapeutic areas will be difficult to find. Evidence produced by the FDA shows that the number of new molecular entity approvals have been virtually static between 1980-2001, with only a minor leap in 1996-7. . Post 2001, NMEs fell quite considerably to a new low in 2007 (just 18 in that one year). A good indicator of such a trend is the declining productivity of R&D investment – more is being spent to realise the same, or even slightly fewer new patented drug approvals.

(ii) New Entrants. In response, many pharma companies have begun to license research from small biotech companies in a bid to discover new compounds (and externalise some R&D costs). This is best exemplified in the example of GSK, whose research director publicly speculated as to whether the company would in the long term maintain its integrated model (from research lab to sales rep). However, biotech firms are becoming increasingly powerful and could pose a significant threat to Big Pharma companies should they either move into marketing or begin negotiating better prices on their innovations.

(iii) Revenue problems outside the US. While the US remains an attractive profit area, the industry faces the problem of declining growth rates elsewhere as state and private agencies that fund healthcare squeeze health expenditure in advanced Western societies. Europe’s share of the overall pharmaceutical market has fallen from 30% in 1981 to 25% in 2001(Deutsche Bank, 2003, p.8). In Japan the situation is even worse so that the market is at best static and may even be in decline following an extended period of recession (Deutsche Bank, 2003, p.15).

(iv) Institutional/Regulatory Change. One aspect of attempts to control healthcare budgets has been a reduction in guaranteed rates of return offered by regulatory bodies. For example, the PPRS now only guarantees a ROCE of 16% (with the indirect effect of curbing prices), while in Japan the introduction of capitation (where doctors receive a flat fee per patient out of which they pay for all services and drugs) resulted in a falling hospital consumption of drugs of 83% (Thomas, 2001, p.58).

(v) Weakening patent protection. The industry’s previous success in developing ethical drugs leaves the legacy effect of an increasing number of generics after patents have expired, which do an adequate job at low cost, and are typically produced on a low margin, commodity basis by small firms (the number of which have increased dramatically over recent years). The growth in generic prescribing by doctors who are now required to be more cost conscious means that generic producers have an increased interest in courtroom skirmishes about patent protection in attempts to reduce effective patent length. (Table 4 shows that the share of generics in the total pharmaceutical market has grown in the major markets.) Significantly, GSK recently lost two high-profile US cases where the company attempted to prevent competitors selling generic copies of Paxil (its best selling drug) and Augmentin. (See the FT or Wall Street Journal for details of these cases).

GlaxoSmithKline

This section provides background information on GlaxoSmithKline (GSK), the UK’s leading pharmaceutical company, focusing on two periods: (i) the 1980s and much of the 1990s, when GSK enjoyed rapid growth, and (ii) the period of more difficult conditions in the last six years or so.

The growth story

The story of GSK during the 1980s and most of the 1990s was that of outstanding success. Glaxo (as the company was then known) enjoyed growth during this period unsurpassed by that of any other pharmaceuticals company, as they moved from the 20th largest to the 2nd largest pharma company based on sales revenues from 1981-2002 (Deutsche Bank 2003, p18). Much of the company’s success in the 1980s and early 1990s was down to the development of one world beating anti-ulcerant blockbuster drug, Zantac, though more recent growth has been obtained via merger.

By the middle of the 1990s the patent on Zantac was about to expire, with the expectation that the introduction of generic copies that would quickly eat away at Zantac’s share of the gastrointestinal therapeutic market segment. The problem, therefore, facing GSK in the middle of the 1990s was how to keep this upward trajectory going to meet normalised investor expectations of 10% year-on-year real sales growth, given that any drop in this rate would have an impact on share price. Glaxo’s response to this problem was to make two large mergers: with Wellcome in 1995 (to form Glaxo Wellcome), and with SmithKline Beecham (SKB) in 2000 (to form GlaxoSmithKline).

GSK’s response to the changing environment: keeping it going

During the boom period of the 1980s Glaxo’s response was to exploit the market opportunities that presented by dropping all other activities and focusing solely on ethical pharmaceuticals. Glaxo was astute enough to realise that it was not necessary to have the best researchers to generate the most profit and set about actively targeting therapeutic and geographic areas with good volume potential. It did this by striking a deal with Hoffman La Roche’s marketing arm in the US and aggressively pushing Zantac, their me-too version of SKB’s Tagamet (again, see Wright et al 1996). This strategy proved highly successful, enabling Glaxo to establish itself among the top five pharma companies within 10 years of Zantac’s introduction. By the early 1990s Zantac accounted for over 50% of Glaxo’s revenue, allowing the company to achieve average real annual revenue growth of at least 10% through the 1980s and most of the 1990s. This in turn made Glaxo a prime stock for investors because it virtually guaranteed a high dividend yield and share price appreciation.

The looming expiry of Zantac and worsening external environment in the 1990s posed a threat to Glaxo’s future cost recovery. Glaxo’s response was to use defensive merger and acquisition activity to try to maintain its growth rate and share price appreciation. The 1995 debt funded takeover of its British competitor Wellcome was Glaxo’s first attempt at ‘keeping it going’. The 1995 takeover achieved two things: it allowed Glaxo Wellcome to maintain top line growth after Zantac sales fell and it allowed a stabilisation of margins through cost cutting: the equivalent of approximately two thirds of Wellcome’s employees lost their jobs immediately after the merger.

The merger with Wellcome succeeded in the short term as the new revenue streams from Wellcome offset those lost as the Zantac patents expired. However with no new drugs in the pipeline, another merger was needed by 2000. This time the merger was with a much larger company, SmithKline Beecham (SKB). Whilst there were limited opportunities for cost cutting due to a pre-merger pruning of the workforce by SKB, it did allow Glaxo to diversify into new therapeutic areas and expand further into the lucrative US market.

However, despite the size and diversity of GSK, it has still not really impressed the stock market as investors and analysts can see that there is still very little in the pipeline, while generic manufacturers continue to challenge their patented drugs in the courts.

Recent developments during the financial crisis have ambiguous outcomes. The attempt by the Obama administration to reform the US healthcare system has uncertain implications for the pharmaceutical industry. Clearly there may be some attempts to control pharmaceutical prices, which have historically always been higher in the US. On the other hand the goal of widespread public provision may open up an even larger market for the biggest pharmaceutical companies.

References

ABN:AMRO (2002) Playing The Numbers Game, 27th May 2002

Coe, J (Reuters Business Insight) (2003) Healthcare Future Growth Strategies: Drivers of sustainable development in biotech, specialist and major pharma sectors, London: Datamonitor, MBS databases

Danzon, P. M. (1997) Pharmaceutical Price Regulation: National Policies versus Global Interests, Washington DC: AEI Press

Deutsche Bank (2003) Pharmaceuticals for Beginners, London: Deutsche Bank (downloadable) via Investext Plus

Froud, J, Haslam, C, Johal, S, Williams, K, Willis, R (1998) ‘British Pharmaceuticals: A Cautionary Tale’ Economy & Society, Vol.27 (4) (downloadable)

Kefauver, E (1965) In A Few Hands, Middlesex: Penguin, Ch1.

Mossinghoff, G (1999) ‘Overview of the Hatch-Waxman Act’, Food and Drug Law Journal, Vol.54 available online: http://www.fdli.org/pubs/Journal%20Online/54_2/art2.pdf

Reuters Business Insight (2003) The Pharmaceutical Outlook to 2010: Essential Analysis of Key Drivers of Change London: Datamonitor available through MBS database.

Thomas III, L (2001) The Japanese Pharmaceutical Industry, Cheltenham: Edward Elgar.

Wright, R et al (1996) ‘How Zantac Became The Best Selling Drug In History’, Journal of Health Care Marketing, Vol 16 (4) (downloadable)

GSK TIMELINE (1976 – 2000)

1976 The H2 blocker Tagamet (cimetidine) is introduced in the UK by the SmithKline Corporation, and in the US in the following year. The treatment will revolutionise peptic ulcer therapy.

1978  Through the acquisition of Meyer Laboratories Inc, Glaxo’s business in the US is started, to become Glaxo Inc from 1980. The broad-spectrum injectable antibiotic Zinacef (cefuroxime) is introduced by Glaxo.

1981 The anti-ulcer treatment Zantac (ranitidine) is launched by Glaxo and is to become the world’s top-selling medicine by 1986. Augmentin (amoxicillin / clavulanate potassium), to combat a wide range of bacterial infections in children and adults, is launched by Beecham. The antiviral Zovirax (aciclovir) is launched by Wellcome for herpes infections.

1982  SmithKline acquires Allergan, an eye and skincare business, and merges with Beckman Instruments Inc, a company specialising in diagnostics and measurement instruments and supplies. The company is renamed SmithKline Beckman. John Vane of the Wellcome Research Laboratories is awarded the Nobel Prize, with two other scientists, "for their discoveries concerning prostaglandins and related biologically active substances."

1983 Glaxo Inc moves to new facilities in Research Triangle Park and Zebulon, North Carolina. The broad-spectrum injectable antibiotic Fortum (ceftazidime) is launched. Wellcome launches Flolan (epoprostenol) for use in renal dialysis.

1986 Beecham acquires the US firm Norcliff Thayer, adding Tums antacid tablets and Oxy skin care to its portfolio.

1987 The AIDS treatment Retrovir (zidovudine) is launched by Wellcome. Glaxo introduces the oral antibiotic Zinnat (cefuroxime axetil).

1988 SmithKline BioScience Laboratories acquires one of its largest competitors, International Clinical Laboratories, Inc, increasing the company's size by half and establishing SmithKline BioScience Laboratories as the industry leader. The Nobel Prize for medicine is awarded to George Hitchings and Gertrude Elion, of Burroughs Wellcome Inc, and to Sir James Black, who had worked at the Wellcome Foundation and Smith Kline & French Laboratories, "for their discoveries of important principles for drug treatment."

1989 SmithKline Beckman and The Beecham Group plc merge to form SmithKline Beecham plc. Engerix-B hepatitis B vaccine (recombinant), a genetically engineered hepatitis B vaccine, is launched in the US and France.

1990 The synthetic lung surfactant Exosurf and the anti-epileptic drug Lamictal (lamotrigine) are launched by Wellcome. Glaxo introduces long-acting Serevent (salmeterol) for asthma, the inhaled corticosteroid Flixotide (fluticasone propionate) and Zofran (ondansetron) anti-emetic for cancer patients.

1991  Glaxo launches its novel treatment for migraine, Imigran (sumatriptan), Lacipil (lacidipine) for high blood pressure, and Cutivate (fluticasone propionate) in the US for skin diseases. SmithKline Beecham moves its global headquarters to New Horizons Court at Brentford, England. SmithKline Beecham’s Seroxat/Paxil (paroxetine hydrochloride) is launched in the UK, its first market.

1992  Mepron (atovaquone) for AIDS-related pneumonia is introduced by Burroughs Wellcome in the US. SmithKline Beecham’s Havrix hepatitis A vaccine, inactivated, the world’s first hepatitis A vaccine, is launched in six European markets.

1993 SmithKline Beecham and Human Genome Science negotiate a multi-million-dollar research collaboration agreement for identifying and describing the functions of the genes in the human body. Glaxo introduces Flixotide (fluticasone propionate) for bronchial conditions.

1994 SmithKline Beecham purchases Diversified Pharmaceutical Services, Inc, a pharmaceutical benefits manager. Sterling Health also is acquired, making SmithKline Beecham the third-largest over-the-counter medicines company in the world and number one in Europe and the international markets. With the intention of focusing on human healthcare, SmithKline Beecham sells its animal health business.

1995  Glaxo and Wellcome merge to form Glaxo Wellcome. Glaxo Wellcome acquires California-based Affymax, a leader in the field of combinatorial chemistry. The Queen opens Glaxo Wellcome’s Medicines Research Centre at Stevenage in England. Valtrex (valaciclovir) is launched by Glaxo Wellcome as an anti-herpes successor to Zovirax (acyclovir). SmithKline Beecham acquires Sterling Winthrop's site in Upper Providence, Pennsylvania, to fulfil US R&D expansion needs.

1996  Community Partnership is established by SmithKline Beecham to focus philanthropy on community-based healthcare. SmithKline Beecham Healthcare Services is formed by combining the clinical laboratories, disease management and Diversified Pharmaceutical Services businesses.

1997  SmithKline Beecham’s research centre, New Frontiers Science Park, opens at Harlow in England. SmithKline Beecham and Incyte Pharmaceuticals create a joint venture - diaDexus - to discover and market novel molecular diagnostics based on the use of genomics.

1998  SmithKline Beecham and the World Health Organization announce a collaboration to eliminate lymphatic filariasis (elephantiasis) by the year 2020. The largest pharmaceutical company in Poland is created with the acquisition of Polfa Poznan by Glaxo Wellcome.

1999  The 30th anniversary of the launch of Ventolin (albuterol) is marked as respiratory becomes Glaxo Wellcome’s largest therapeutic area. Sharpening its focus on pharmaceuticals and consumer healthcare, SmithKline Beecham divests SmithKline Beecham Clinical Laboratories and Diversified Pharmaceutical Services. SmithKline Beecham’s Avandia (rosiglitazone maleate), for the treatment of type 2 diabetes, is launched in the US.

2000

2000 GlaxoSmithKline formed through the merger of Glaxo Wellcome and SmithKline Beecham.

Tables Section A: the industry

Table 1: Ethical sales as a % of total sales of large pharma companies

	Total sales revenue $m	Total ethical sales $m	Ethical sales as a % of total
Pfizer	32,373	28,288	87.4
GSK	31,819	27,003	84.9
Merck	51,790	21,631	41.8
Astra Zeneca	17,841	17,343	97.2
J&J	36,298	17,151	47.3
BMS	18,106	14,700	81.2
Novartis	23,151	13,493	58.3
Pharmacia	13,993	12,037	86.0
Wyeth	14,584	11,733	80.5
Lilly	11,077	10,384	93.7

Table 2: Contribution of blockbuster sales to total ethical sales 2002

Company	blockbuster sales 2002 ($m)	total sales ($m)	blockbusters as % of total sales	number of blockbusters
Biogen	1034	1148.4	90%	1
TAP	3600	4037	89%	1
Pfizer	22291	28288	79%	8
Forest	1423	2022	70%	1
Merck & Co	14670	21631	68%	5
Aingen	3187	4991	64%	2
J&J	9754	17151	57%	5
GSK	14240	27003	53%	8
Schering Plough	4538	8745	52%	2
Novo Nordisk	1881	3810	49%	1
Lilly	4692	10384	45%	2
Astra Zeneca	7746	17343	45%	3
Wyeth	5022	11733	43%	3
Aventis	5463	15104	36%	3
Bayer	1588	5352.4	30%	1
Sanofi-Synthelabo	2590	8705	30%	2
BMS	4156	14700	28%	2
Novartis	3810	13493	28%	3
Pharmacia	3050	12037	25%	1
Abbott	1102	8451	13%	1
	115837	236128.8		55

NB: excludes Roche/Genentech due to non-standardisation of total ethical sales and Purdue Pharma (privately owned)

Blockbusters defined as ethical drugs which generate $1bn(US) in one year.

Source: Reuters blockbuster p104

Table 3: Pharmaceutical Development Times 1960s-1990s (years)

	Approval	Clinical	Pre-Clinical	Total
1960s	2.4	2.5	3.2	8.1
1970s	2.1	4.4	5.1	11.6
1980s	2.8	5.5	5.9	14.2
1990s	1.8	6.3	6.1	14.2

Reuters Business Insight (outlook2) p52

Table 4: Generic share of pharma markets by value (%)

Country	1995	2000	Compound Annual Growth Rate (CAGR) (1995-2000)
USA	11	16	7
Germany	30	40	6
UK	15	24	10
France	3	5	11
Italy	3	5	11
Spain	2	4	15
Japan	8	12	8

Table 5: Consumer price index of prescription drugs, non-prescription drugs and all items 1935-2004

0.0

50.0

100.0

150.0

200.0

250.0

300.0

19351940194519501955196019651970197519801985199019952000

Index (1986=100)

Prescription Drugs and Medical Supplies

All Items

Non-prescription Drugs and Medical Supplies

Source: Bureau of Labour Statistics, Consumer Price Index Statistics

Note (a): Figures are not seasonally adjusted; (b): Figures are for US city average; (c): 1986 is used as the base year.

Table 6 Mission statements and defence of patents by major pharma companies

Company	Mission statement	Defence of patents
Pfizer	‘We dedicate ourselves to humanity's quest for longer, healthier, happier lives through innovation in pharmaceutical, consumer, and animal health products’.	‘where inadequate therapies exist, patents provide the incentives to invest in the search for new medicines…Without patent protection it is unlikely that patients would receive many new medicines’ (Pfizer 2000: 3)
GSK	‘our quest is to improve the quality of human life by enabling more people to do more, feel better and live longer’.	‘we support intellectual property protection because it stimulates and fundamentally underpins the continued R&D of new and better medicines, including those for diseases prevalent in the developing world’ (GSK 2002: 11)
Merck	‘to provide society with superior products and services by developing innovations and solutions that improve the quality of life and satisfy customer needs, and to provide employees with meaningful work and advancement opportunities, and investors with a superior rate of return’	‘To be successful, the pharmaceutical industry must help create an environment that encourages and rewards risk taking…Strong patent laws allow companies to generate the profits required to finance future R&D while providing investors with a competitive return on their capital’ (Merck 1998: 6).
AstraZeneca	‘The people of AstraZeneca are dedicated to: Discovering, developing and delivering innovative pharmaceutical solutions Enriching the lives of patients, families, communities and other stakeholders Creating a challenging and rewarding work environment for everyone’	‘The international protection of intellectual property rights underpins future investment by the pharmaceutical industry in the research and development of new medicines and, like other pharmaceutical companies, we will continue to work to uphold our intellectual property rights where appropriate’. (AstraZeneca 2003)
Johnson & Johnson	reject a mission statement and instead have a ‘credo’ which begins: ‘We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services’	N/a

Source: All mission statements were taken from either mission statement links on the company website or the captions which appear below company logos on company websites. The defence of patents were taken from different publications also available on each company website.

Table 7 Comparison of expenditure on sales and marketing with research and development in 2000

	Spend on sales and marketing as a % of sales revenues	Spend on research and development as a % of sales revenues
Pfizer	39	15
Schering Plough	37	13
GSK	37	13
Astra Zeneca	36	17
Roche	30	13
Aventis	32	15
Novartis	31	13
Eli Lilly	28	19
Bristol Myers Squibb	21	12

Source: Company Annual Report and Accounts, various years.

Table 8 The significance of sales and marketing costs for selected non-pharma companies in 2000

Company	Spend on sales and marketing as a % of sales revenues
Coca Cola	36
Nestle s.a.	32
Panasonic	27
Proctor & Gamble	26
Sony	24
Microsoft	18
IBM	17

Source: Company Annual Report and Accounts, various years.

Table 9 Number of NCEs and ‘other’ drugs patented per year 1951-70

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1967-70

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Source: Paul de Haen International Inc (various years)

Table 10 Market share of the ten largest pharmaceutical companies, 2003

Ranking	Corporation	Market Share (%)
1	Pfizer	10.1
2	GlaxoSmithKline	6.6
3	Merck & Co	4.8
4	J&J	4.8
5	Novartis	4.3
6	AstraZeneca	4.1
7	Aventis	3.7
8	Bristol Myers Squibb	3.4
9	Roche	3.3
10	Abbot	2.8

Source: ABPI (2005)

Table 11 Share of key pharmaceutical products by therapeutic segment (2002)

	Cardio	CNS	Anti-infectives	Respiratory	Metabolism	GI	Oncology	Hormones	Muscular	Other
AstraZeneca	XX Crestor	X Seroquel		XX Pulmicort		XXX Nexium	XXX Zoladex
Aventis	X Lovenex		X Several	XX Allegra			XX Taxotere	X Lantus
Bristol Myers Squibb	XX Pravachol		XX Zerit				XX Various
Eli Lilly		XXX Zyprexa			X Evista		X Gemzar	XXX Insulin
GSK		XX Paxil	XXX Trizivir	XXX Advair	X Avandia	X Zantac				XXX Vaccines
Merck	XXX Zocor		X Crixivan	XX Singulair	XX Fosamax				XXX Vioxx	XXX Vaccines
Novartis	X Diovan	X Clozaril					XX Zometa		X Voltaren	XXX Neoral
Roche			XXX Rocephin		X Xenical		XXX Rituxan			X Cellcept
Pfizer	XXX Lipitor	XXX Zoloft	XXX Zithromax	X Zyrtec			X Camptosar	XX Genotropin	XXX Celebrex	X Viagra
Schering-Plough			XX PEG-Intron	XX Clarinet
Sanofi Synthelabo	XX Plavix	X Ambien
Tak	X Blopress				X Actos	XX Prevacid	X Lupron
Wyeth		X Effexor				X Protonix		XXX Premarin	X Enbrel	XX Vaccines

Key: XXX = 15+% market share, XX = 5-15% market share, X = good presence.

Source: Deutsche Bank (2003b: 23).

�EMBED Excel.Sheet.8���

� http://www.merck.com/about/feature_story/10282002_harvard_award.html

� NB there is only 1 copy of this book in the library. However a Google internet search using the keywords “Kefauver” and “drugs” should provide some good summaries.

� For a good overview see Wright et al 1996.

� For more details on the PPRS and how this regulatory framework has evolved, go to the UK Department of Health website and search for PPRS.

� See http://www.phrma.org/publications/quickfacts//2002-06-11.421.pdf.

� Discussion about the threat of biotech companies can be found in any number of market reports, though Reuters (2003, p.33) covers it adequately.

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1951-54

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1967-70

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400

NCEs

Others