GlaxoSmithKline’s major strength is its huge resource base and capital as the world’s largest pharmaceutical company. Whilst the company remains a success in a market that is constantly growing, the company is threatened by the reduction in patent lengths which have traditionally been the basis for increased sales. Some steps have been taken in order to change research practices and improve creativity in order to create new drugs and product lines, and success in many areas has been achieved.
However, more focus on biotechnology fields and less reliance on acquisitions is needed to push the company forward and reduce the pressure of shorter product life spans. If this can be achieved then the future of GSK looks extremely bright.
Contemporary developments in business and management are now crucial to the success of many companies, in particular those larger organisations who rely on a complex chain of command and processes in order to function at maximum efficiency. With such a range of factors involved in business and management strategy, it is important to analyse these factors in order to identify the strengths and weaknesses of a business. This report focuses on these issues with regards to the pharmaceutical company GlaxoSmithKline.
With such a large company as GlaxoSmithKline, the focus will remain on the medical division of the company rather than any other part, in order to avoid crossover between unrelated industries. The first section of the report will contain both a SWOT and PESTEL analysis of the factors affecting the company. The second part will look at the nature of corporate learning and creativity with regards to GlaxoSmithKline, and how their policies on Research and Development (R&D) affect their business and management decisions. The aim is to find understand the factors affecting the company, and to recommend changes that could help to improve the efficiency of the business in certain areas.
In order to understand the full range of factors affecting a company like GlaxoSmithKline, we need to divide the factors up into internal and external factors. The internal factors of GlaxoSmithKline can be analysed using a SWOT (strengths, weaknesses, opportunities and threats) analysis. The external factors will be looked at by means of a PEST (political, economic, social, technological, environmental, legal) analysis.
GlaxoSmithKline’s strengths clearly lie in its size as a company, being the largest pharmaceutical company in the entire world since the merger between Glaxo Wellcome and SmithKline Beecham in 2000. With such a massive resource base as this, GSK has the advantage over its competitors. Perhaps the biggest strength they have in this respect is the advantage of patents. Huge amounts of money are needed to overcome the regulations required to approve drug patents, and being the company with the most resources means GSK are poised to get the rights for many drugs.
These patents have helped GSK to increase its revenues, with examples over the last few years including the asthma drug Advair and the diabetes drug Avandia. GSK have the patents to both of these drugs, and this has seen sales skyrocket over the past few years. Indeed, Advair came from nowhere in 2000 to become the US market leader a few years later, with sales of A£1.6 billion in 2002 (Maynard, 2004). Other patented drugs such as Wellbutin and Combivir are also examples of the strengths of patent protection that GSK enjoys. Although patents generally only last for a certain amount of time for drugs, with their large capital resources GSK are also primed to develop new products in their R&D labs. In 2004 GSK held an R&D day where it was reported they were working on 147 new pharmaceutical projects, 82 of which were completely new compounds (www.gsk.com).
Although many of these will not work out, the sheer scale with which GSK can conduct research using some of the leading experts in the field means they are the most likely to develop the leading drugs of the future. In terms of weaknesses, GSK’s main internal weaknesses are to do with management control and circle of competence issues. One of the main criticisms levelled at GSK is their image as a ‘fat-cat’ management company. GSK boss Jean-Pierre Garnier saw his wage rise to nearly 25% to A£967,000 in 2002, and many were worried about the amount of control and accountability of such bosses (Maynard, 2004). However, GSK has gone some way to reduce these weaknesses by reducing contract notice periods and changing remuneration packages of some executive staff. Another weakness of GSK concerns its circle of competence.
Whilst it is clear that GSK is doing extremely well and overall is in a very healthy position, it is hard to understand details within the firm. Analysis of the various patents and research projects of GSK is extremely difficult, as is keeping an eye on all the major rivals and drugs of other companies. GSK is not in a particularly good position to change quickly with the market, particularly as it is hard to predict if and when certain projects and patents will fail.
Other issues include the prevalence of corporate activity within GSK. Although mergers have helped keep growth high, these mergers always carry a risk and cost-cutting can only help to a certain extent. Although new acquisitions at this point look less likely, if the research labs fail to help boost sales then other corporate activity could ensue. The main opportunities for GSK lie in the sustainability of current patents through development of new product lines, and the creation of new drugs to stay ahead of the field.
Also, the move into new and emerging markets in Asia such as China. However, new ‘blockbuster’ drugs and sustainability of current patents remains the key. The main areas of growth are in markets such as cancer and diabetes drugs, where drugs such as Cervarix (a drug against cancer-causing HPV’s) are potential winners in 2007 and beyond (Bio Portfolio, 2007). Both of these markets are growing because of the increase in prevalence of the diseases, particularly in terms of diabetes. GSK had no real program regarding diabetes 10 years ago, but now has a fully fledged research program dedicated to Type 2 diabetes drugs (Heffner, 2004).
Equally, the internal threats to GSK’s success are the ability to develop new drugs as well as sustaining current patents. Once patents are lost and other companies can release generic versions of a drug, sales can dramatically fall away. For instance, in 2002 GSK lost the patent for an antibiotic called Augmentin, and sales dropped from A£403 million in 2001 to A£218 in 2003 with the release of generic substitutes as competition (Maynard, 2004). Many of GSK’s other patents are under threat, including drugs such as Wellbutin and Seroxat. If Glaxo loses such patents then it will need to develop new product lines or other completely new drugs to stay ahead.
For example, after the removal of the Augmentin patent, GSK released new ES and XR varieties of the drug which accounted for 35% of new prescriptions. However, the development of new drugs and the ability to stay ahead of the game with new product lines is never certain. GSK has put a lot of faith in their ability to develop these new products and keep the patents. If they cannot do this then patent and research issues will become a major threat to success for GSK.
Now that the internal factors affecting GSK have been looked at, the external factors will be analysed using a PESTEL analysis. In terms of political issues, GSK has the same problem as most other pharmaceutical companies, namely the issue of governmental intervention. However, as such a large company GSK probably has to deal with this issue more than any, due to its potential threats to competition through market dominance. The intervention of governments reduces the price that can be charged for certain products and also puts caps on supply and demand.
Another factor to consider in political terms is the governmental systems themselves. In countries such as the UK, healthcare spending is determined by tax and government spending. This means even if GSK develops an excellent product, it is not always possible to sell the product effectively in all countries where it is needed. The biggest economic factor is the amount of money available for health care in any given place. The nine most profitable markets that spend large amounts of pharmaceuticals are dictating 80% of industry growth.
Whilst emerging markets such as South America and Asia have the funding in place to spend large amounts of high price drugs, poorer areas like Africa limit the growth of global pharmaceuticals, which affects companies like GSK. Social factors are now playing a more important part in the industry, with consumers now more interested than ever in their healthcare treatments. There is now more choice in over-the-counter drugs and certain niche areas are developing – items such as slimming drugs for instance. This has caused a shift in marketing from targeting the doctors and healthcare professionals to more direct consumer marketing.
Branding of drugs is becoming more important, and so GSK must make sure its focus shifts to consumer marketing. Also, as the population ages the demand for drugs associated with conditions more prevalent in old-age will increase. This will generally increase the overall demand for drugs, as the older age market segments consume higher levels of pharmaceuticals than other segments. Technology is reducing the power of manufacturers whilst increasing the power of buyers and consumers.
The Internet and other resources allow society to find out more information on lower-priced treatments, thereby reducing the power of manufacturers to charge high prices for their products. Technology is also affecting the products and direction of research within companies such as GSK. Biotechnology is becoming more important, and may become a critical factor in the future success of GSK. These new processes and the way in which companies embrace the technology will be the keys to success or failure for many large pharmaceutical companies. As societal awareness increases of environmental issues, it makes the regulations for pharmaceutical companies stricter. Issues of human and animal testing are now critical, as is the disposal of laboratory waste. GSK will need to ensure that environmental issues are at the forefront of management decisions so that the company does not face the wrath of both regulatory bodies and the consumers.
Environmental legislation is not the only issue to worry about in legal terms.
Regulatory bodies are putting measures in place worldwide that are starting to increase drug development times considerably. With the number of product trials increasing, development costs are going up and patent protections are now running out very early into the life cycle of a product. Companies are now focusing on High Compression Marketing in order to make the most profit at launch to combat the problem of short life cycles.
Also, with patents being challenged more regularly, the pressure on GSK to develop new drugs and product lines more quickly is increasing all the time.
Now that the internal and external factors affecting GSK have been analysed, it is time to look in more detail at how issues of corporate learning, research and creativity affect decision making processes within GlaxoSmithKline.
As previously mentioned, with patents on pharmaceutical products now running out faster than ever, one of the critical factors for the future success of GSK and other pharmaceutical companies is the ability to develop new drugs and product lines. With this in mind, creativity and research now have a huge influence on the policies and managements decisions within GlaxoSmithKline. In response to the change in the market, GSK have implemented a number of research decisions in order to boost future success. GSK were originally a company who used their wide array of patents to generate large amounts of profit, and the need for new drugs was less of a concern. However, as patents are now fading away, GSK has become a far more research-based pharmaceutical company, and has literally hundreds of research projects currently in development.
With the average cost and time for a new medicine running at around A£500 million and 12-15 years, GSK are spending vast sums of money in order to remain ahead of the competition. With the development of new technology, GSK have restructured their R&D facilities to move along the lines of a Biotech company rather than a traditional pharmaceuticals company. Now with 6 different autonomous and accountable research divisions, GSK has made the decision that the creativity of new products is the most crucial factor for future success.
This move towards biotechnology is designed to increase the productivity of the research departments and further fuel creativity within the company (Dorey, 2001). The idea behind the biotechnology principle is that people’s rewards are far more tied to the level of work they put in; such is the entrepreneurial spirit behind such companies. The idea is that each of the research divisions acts as a small company, thereby increasing the inventiveness and hunger of staff and researchers seems to be the right way forward for GSK.
Increasing the size of R&D functions may work in theory in terms of economies of scale, but you can lose much of the creativity with this method. Therefore, splitting up the research into smaller companies with entrepreneurial drive is a far more effective way of producing new products successfully. The research units were created around 5-6 years ago, and are labelled as Centres of Excellence for Drug Discovery.
All the units compete for funding and will develop drugs up until the clinical development stage, at which point they will be handed back to the main arm of GSK. This allows the crucial factors of high throughput level and combinatorial chemistry to be supplied at the corporate level, thereby improving efficiency and booting creativity. The bureaucracy is left to the main arm of GSK, thereby allowing the researchers to get on with what they do best – creating new products for the market (Dorey, 2001).
However, it is not clear whether GSK’s success over the last few years is down to this new research platform or more down to its ability to seek out and buy the best new drugs research around. Whilst some important drugs are coming out of the GSK labs, such as the new cancer drug Cervarix, many of the company’s recent successes have come through the acquisition of other companies. For instance, in 2005 GSK purchased Corixa, a company which had the rights to a crucial component of the Cervarix formula.
Purchase of the company also helped massively increase GSK’s vaccine research platform. The purchase of Domantis has also been crucial, adding an anti-body research unit to GSK’s centres of excellence. Although these can all be classed as research successes for GSK and excellent management decisions, it is not clear whether the creation of the biotechnology research units has really increased creativity and helped to improve the company’s sales (Pharma Projects, 2007). Despite this, it is still extremely likely that with all the projects in the pipeline, some blockbuster drugs will emerge from the GSK labs over the next few years.
However, with such high levels of research spending and short product life cycles before patents run out, is all the spending on research and the push for creativity really necessary? In many ways, the answer is no. Whilst biotechnology is going to be absolutely crucial for the future success of the pharmaceutical industry, it is not clear that GSK’s change in research policy is really the main reason for its success. Many see these labs as not much more than ‘window dressing’ and that the actual core of the research policy remains the same. The centres were created in response to a disastrous few years for R&D within the company, and probably harbour a genuine desire to improve creativity.
However, it seems that much of this is simply PR, and the research methods and practices remain the same: simply bolstered by GSK’s large capital resources and acquisitions of important companies and drugs. Although GSK’s policy of acquisitions is creating success, and that some of the drugs that have come out of the research laboratories have been a success, GSK needs to do a fair amount more in order to improve its decisions regarding creativity and research.
More of a focus on biotechnology and an increase in the accuracy and efficacy of internal monitoring and research is needed to allow GSK’s research and development department to function more effectively. GSK is still relying too heavily on mergers and acquisitions that are both costly and have potential risks attached to them. This needs to be combated with a larger focus on developing new product lines to keep patents running for longer. With product life cycles short, it can be less costly to develop a new line of the same drug than to develop a new drug completely.
Less trials and tests are needed for such product lines, and they can help maintain profitability on product lines even when patents are reduced. As previously mentioned, the removal of the Augmentin patent in 2002 did have a significant effect on sales, but the newer XR and ES varieties helped combat the problem by being responsible for 35% of all new prescriptions for the drug (Maynard, 2004).
In addition, GSK needs to switch its focus from relying on the purchase of drugs and companies to creating these products within their own labs. Now that they have acquired a huge research platform, they should look at refining the processes within the company itself and helping to boost creativity further. Purchasing new companies and adding resources will help in the short-term, but if those companies are not looked after and policies not in place to continue their creativity then the costs will be wasted. GSK needs to push further towards a biotechnology-style of research development, and give each department even more flexibility to create new products.
With other biotech companies crowding the market, GSK needs to focus even more on this area in order to triumph. Indeed, many of the company’s biggest successes have come through the biotechnology field in recent years. As well as Cervarix, the biotech research at GSK has helped to improve the risk benefit ratio of the drug Ziagen and helped to create the Rota virus drug Rotarix (Kalyanasundaram, S. 2005). Overall, a move towards move biotechnology research will help to increase the success of GSK’s research department.
In conclusion, the biggest problems facing GSK at this time are the expiration of patents and the pressure to create new drugs and product lines in order to keep sales high and profits increasing. With GSK’s large capital resource base they are in an excellent position to remain leaders in the market, but there are a number of challenges to be faced. Whilst management decisions in recent years have helped to improve productivity and creativity within the research departments, the company still relies too heavily on the acquisitions of other companies for drug innovation.
With the increase in biotechnology companies competing with GSK, it is important for them to focus more on the biotechnology research in fields such as cancer research. These areas are primed for growth and with the right setup GSK can take advantage of the market.
It is recommended that GSK put in place further measures to move towards a biotechnology research company style, in order to give researchers more freedom and spawn further creativity. Acquisitions should be kept to a minimum due to their cost and potential risk, and lack of obvious long-term advantages. New product lines in existing drugs should also be looked at as an area for growth, as this will help keep the pressure off new drugs being produced and will increase product life spans for relatively lower costs.
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