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

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Seminar 1: GSK

International Business Analysis Project

BMAN33000

Sohrab Moshiri

[email protected]

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Seminars

Topic of the Presentation on Week 11
Challenges to the pharmaceutical industry’s Blockbuster- driven business model

Group Presentation on week 11
Week Commencing 5th of December

  • “What is the ‘blockbuster’ business model, what challenges does it face, and how effective are GlaxoSmithKline’s strategies for meeting these challenges?”
  • 5-6 slides
  • Group (3 – 4 students)

Expectations from the Seminars

Seminars:

  • Week 5 – 7 – 9 – 11 – 12

From Me:

  • Provide you with information to complete your assignment
  • Provide you with analytical and presentation skills needed for your job interviews/jobs

From you:

  • Arrive ON TIME
  • Prepare for your seminars
  • Attend your allocated slot – unless if you’ve emailed me first

Why Pharma?

  • According to business analysis, the pharmaceutical industry is the most profitable sector of commerce. (Fox & Ward 2008)
  • Around $1 trillion in annual worldwide sales in 2017
  • Major players in global and national economies
  • Major players in shaping healthcare in many societies

Pharmaceutical Industry

  • Products (three main types)
  • Regulation (patents, IPR)
  • Testing (long lead times & expensive R&D)

Characteristics!

  • The patents last for 20 years
  • Prevent any company from retailing a drug with an identical molecular structure
  • Monopoly sales position for cost recovery
  • Licence to print money

Phases/Pipeline of drug production

Nature and context of drug production

  • Uncertain & Expensive Process:

  • Of 250 compounds that enter pre-clinical phase, only 1 will be approved

Cost of researching & developing (R&D) 1 drug = $1bn

  • Difficulties in; re: product ‘positioning’ when lag time is so long?

Blockbuster!

  • The rapid growth of pharma companies in the 1990s was driven by a ‘blockbuster’ model
  • Drugs that generate over $1bn p.a.

  • Strategic product-centred strategy is risky because:

  • Genuinely new drugs are difficult and expensive to discover: estimated to be on average $1billion anyway
  • Strategic planning difficult because it takes 10-15 years to develop a drug, and impossible to predict buoyant therapeutic areas that far in the distance
  • The expiry of patent: will lose two thirds or more of revenues within three years

Tutorial Case Pack Questions

Discuss the following questions (15 min):

  • What are the ethicals Vs generics Vs OTC drugs?
  • Why do you think the US is the dominant market for Pharmaceuticals? (Table 1 & 2)
  • How have pharmaceuticals responded to tougher testing requirements? (Table 3)
  • What do you think the trends are in Pharmaceuticals? (Table 4 & 5)
  • Do you see the pharmaceutical industries’ high levels of expenditure on sales and marketing as something that might be considered socially problematic? (Table 7 & 8)

Question 1 -

  • Review tables 1 & 2 in the case pack. What are ‘ethicals’ and how do they differ from generics & OTC drugs? Explain why large pharmaceutical companies tend to focus on ethical drugs; and how do you explain the lower % contribution of ethicals in Merck, J&J and Novartis? How does table 2 add to our understanding of the source of a) profitability and b) risk in Big Pharma firms?

Ethical Vs Generics Vs OTC
(Froud et.al, 2006)

  • Ethical Drugs:
  • Recently developed under monopoly practices
  • Patented products that generate high returns (e.g. Blockbusters).
  • Prescribed by a doctor
  • Bought at pharmacy
  • Generics Drugs:
  • Are roughly 1/3 of the cost of ethicals
  • Me-too copies of ethical available through prescription
  • Patent expired and substitutes are produced by rivals
  • Made by various firms to one standard formula
  • Over The Counter (OTC):
  • OTC do not require a doctor’s prescription
  • Bought off-the –shelf in stores, supermarkets
  • Are often branded. Eg: Aspirin, Anadin

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

  • Advair – Asthma – GlaxoSmithKline - 8.7 billion/a year

Lipitor – Hypercholesterolemia – Pfizer - 12.5 billion/a year

  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

High return = High risk

Diversity = High return = Less risk when patent expires.

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

Table 2: For some smaller pharmaceuticals companies like Biogen, TAP and Forest, one or two blockbusters can account for 70 per cent to 90 per cent of company revenues for as long as the patent lasts. This also suggests that because fewer new patented products are in circulation it becomes easier to dominate one therapeutic segment with just one drug. However this makes the individual company desperately vulnerable to patent expiry.

Those like Pfizer, Merck and GSK are also heavily dependent on blockbusters to generate sales revenue but are less vulnerable because they have a portfolio of blockbuster drugs across therapeutic areas, which spreads risk and limits exposure to early patent challenges on one drug.

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Tutorial Case Pack Questions

  • After looking back over the lecture 4 slides, explain why the US is the dominant market for pharmaceuticals. To what extent does this sectoral feature structure the strategic choices of all large pharmaceutical firms?

World pharmaceutical market: revenues by country (Source: Kesic, 2008 and IMS World Review Analyst 2014)

Position 2005 Value in billion $ (2005) 2013 Value in billion $ (2015)
1. USA 248 USA 339
2. Japan 67 Japan 94
3. Germany 29 China 86
4. France 26 Germany 45
5. UK 17 France 37
6. Italy 16 Brazil 30
7. Canada 14 Italy 27
8. Spain 12 UK 24
9. Brazil 9 Canada 21
10. Mexico 8 Spain 20

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Estimated 2014 sales, by region

Discussion on Q2!

It is a private system rather than public system: The state does not interfere as much

There is direct-to-consumer marketing

The US is less price sensitive partly due to the fragmented way the purchasing is structured

Doctors are also influenced by invisible marketing by pharma companies known as ‘detailing’

Prominent culture of pill-popping in US

Tutorial Case Pack Questions

Looking over the tables (3,4,5) in the case pack – what are the trends in generic medicines and to what extent and why do they pose a threat to Big Pharma growth and profits?

For example, how have they responded to tougher testing requirements?

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

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

Patents last 20 years from filing. Now co’s only have 6-8 years to recover costs of R&D

Generic as % of pharma is GROWING

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
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

The threat therefore is that there is a smaller window from which to recover your R&D costs for ethicals. But increasingly there is substitution from generics. See patent challenges and also governments who are increasingly willing to use generics for basic complaints, leaving ethicals marginalised (see Bush reforms)

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

Impact

  • Companies are simply upping prices
  • Favourable policies are allowing generic prescriptions, leaving ethical marginalised
  • Eg: Medicare Part D

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Tutorial Case Pack Questions

Q4. Review the mission statements and clippings from large Pharma company websites in table 6. To what extent are they supported or undermined by the data on R&D and marketing? Explain the reasons why companies might invest considerable amounts of effort and finance into representation (you could look at table 9, which shows the number of new drug approvals after the Kefauver commission).

Q5. Looking at tables 10 and 11, to what extent would you say that the pharmaceuticals market is concentrated or fragmented? How does the information in table 11 connect with what we know about blockbuster drugs and marketing? What are the implications of this market structure for pharmaceutical company strategy?

Mission statement content

  • Mission statements highlight ’for the people not the profits’ type arguments. Lots of emphasis on R&D and the need for IPRs to protect investment.
  • Need to say that this should not be taken lightly – what incentives would there be to invest in drug discovery if the moment you hit upon a new cure, everyone else copied your drug? Big Pharma also invest a lot in politics & political donations: they have active trade bodies, the PhRMA (in the US) ABPI (in UK), which lobby heavily on behalf of their members.
  • For big pharma it is important to make the argument that IPRs are needed to defend investment in R&D which yields new drugs which will cure more people.
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

Mission statements highlight ’for the people not the profits’ type arguments. Lots of emphasis on R&D and the need for IPRs to protect investment. Need to say that this should not be taken lightly – what incentives would there be to invest in drug discovery if the moment you hit upon a new cure, everyone else copied your drug? Big Pharma also invest a lot in politics & political donations: they have active trade bodies, the PhRMA (in the US) ABPI (in UK), which lobby heavily on behalf of their members. For big pharma it is important to make the argument that IPRs are needed to defend investment in R&D which yields new drugs which will cure more people.

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Table 10

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

Source: ABPI (2005)

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

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Table 10 suggests that the market is fragmented (no monopolies here). But table 11 suggests this is the wrong way to think about pharmaceuticals. Pharma is a grouping of separate markets or ‘segments’– eg a cancer drug cannot cure obesity problems, and a CNS drug cannot cure cardiovascular problems.

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Next Session; Seminar 2!

  • GSK Financials
  • See the Seminar Spec in the BB
  • Read the case and answer the questions in advance!

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19351940194519501955196019651970197519801985199019952000

Index (1986=100)

Prescription Drugs and Medical Supplies

All Items

Non-prescription Drugs and Medical Supplies