(GlaxoSmithKline) is one of the world's largest drug companies and size can matter in this industry. This case explores the competitive benefits of larger size and how GSK is using them to tackle twin strategic challenges now facing the industry.
Background
Over the past 20 years, pharmaceuticals have become increasingly expensive to develop typically, costing around US$500 million, spread over several years, for one major drug. After development, these drugs need to be marketed to customers such as doctors,hospitals and government health services for example, several thousand specialist sales personnel may be required for such a task in the North American market alone. To support such activities, substantial cash resources are important. In addition, world ,alliances and other connections between manufacturers can also be highly beneficial: drug companies can use these to support areas where they are both weak geographically and have gaps in their product development programmes.
From the size perspective, it helps to have substantial resources. But this does not explain
why even large companies have chosen to become larger over the past five years. For
example, the Swedish company Astra merged with the UK company Zeneca and the
French company Rhone-Poulenc joined together with part of the German company
Hoechst to form Aventis during 1998/99. Over this time, half the world's largest drug
companies announced either mergers or takeovers of fellow companies.
Some strategists would argue that if all the companies become larger then no drug
company has developed any competitive advantage over another. The benefit cannot
simply be size alone. It is necessary to examine the individual competitive resources of
each company to see what size delivers. To explore this, we need to look separately at the
two merger candidates in the case in question Glaxo Wellcome and SmithKline
Beecham.
Competitive resources at Glaxo Wellcome
During the period 1980-95, Glaxo (as it was called then) was highly dependent on its
patented drug, Zantac, which is used for treating stomach ulcers. For example, in 1994
this one drug alone accounted for 44 per cent of the company's sales and 50 per cent of
its profits. In the early 1990's, Zantac was the single biggest selling drug in the world and
its ownership by Glaxo was a major strategic resource.
But this substantial strength faced two threats. First, the patents would begin to expire in
1997 and allow any company to manufacture and market the drug, thus reducing the
profit margins that Glaxo was able to charge. Secondly, a new rival drug, Losec, was
introduced to health authorities in 1993-94 by the Swedish company Astra
Pharmaceuticals. Losec was claimed to be even more effective than Zantac. Glaxo knew
the seriousness of such a competitive threat because its own drug, Zantac, had wiped the
floor with an earlier rival in the mid 1980's, namely Tagamet, from the pharmaceutical
company SmithKline Beecham.
Faced with these twin threats, Glaxo needed a new resource strategy. Given the time lag
in developing new drugs, Glaxo used its existing resource strength the profitability of
Zantac to acquire two existing drug companies. Wellcome (UK) was bought in 1995 for
US$13.5 billion. This delivered a whole new range of patented drugs into the Glaxo
portfolio, including the anti-AIDS drug Retrovir and the anti-viral drug Zovirax. In
addition, the US company Affymax was bought for US$533 million. The latter company
was developing a range of genetic products whose benefits would be truly revolutionary,
if successful.
In addition to acquiring drugs from the two new companies, Glaox gained other resource
benefits from these purchases. The acquisition allowed Glaxo to combine its R&D team
with that of Wellcome, saving 1800 jobs and the labour costs associated with this. In
addition, 3000 jobs were lost in manufacturing by combining various plants and 2600
jobs were lost in marketing and administration. In total, around US$1 billion cost savings
were achieved. But it was not all good news: the patents on the top-selling drug Zovirax
were due to expire from 1997 onwards (patents have roughly a ten year life from first
registration).
Competitive resources of SmithKline Beecham
It was the loss of profits from Tagamet mentioned above that forced its makers, the
American company SmithKline, to seek a merger with the UK company Beecham in the
late 1980's. Nevertheless, the new company had proceeded to develop many new,
patented drugs over the succeeding ten years to the late 1990's. It had also exploited its
range of branded medicines sold directly to the general public with higher profit margins
than were available on many pharmaceuticals. By 1998, the company was particularly
strong in anti-depressants, vaccines, antibiotics and diabetes medicines.
Merger failure in 1998 and success in 2000
In 1998, Glaxo Wellcome explored merging the company with SmithKline Beecham.
This would have transformed the resource capability of the two companies because they
both had different areas of product strength in the drugs market, and the duplication of
some facilities and services could have been eliminated. But the merger did not take
place. The two companies clashed over two matters: the style of negotiation and the
proposed new management structure. The cultures of the two companies were so
different that the merger discussions themselves became difficult for example, they
were so bad that participants never even had lunch together. In addition, there were
differences between the two chief executives and other senior managers over their
respective roles in the merged company. The result was that the merger never took place
and the substantial resource benefits were never achieved.
In the face of increased competition and the cost of drug development, the pressure to
consolidate remained. What made the difference was that the some of the senior
managers involved in the abortive talks in 1998 decided to retire, allowing the two
companies to merge in year 2000. As a result, the combined company was able to employ
an enhanced research budget of over US$4 billion in 2002. Annual cost savings of
US$750 million were achieved: this was ahead of earlier expectations. It had a sales team
in North America alone of over 7500 people. The two product ranges from the two
companies complemented each other, with some minor overlap. The company had a
global market share of over 7 per cent. This might appear small but the company
dominated some segments of the world drug market.
GSK turnover by geographical area 2004
USA
49%
Europe
30%
Rest of
World
21%
USA
Europe
Rest of World
Twin Strategy challenges of the new millennium
The increased size of the company delivered a diverse product range in terms of
geographical spread and product portfolio. But the company faced two major strategic
challenges in the new millennium:
Some of its leading drugs would run out of patents protection, allowing
generic varieties of the same drug to be made and sold much more cheaply.
This was a major threat to companies like GSK that invested heavily in new
drugs and then relied on a high profit margin stream to pay for the drug
development costs. The generic drug companies were picking off major drugs
as they came out of patent and marketing cheap, reliable, copies at much
lower prices.
The new company had only a limited supply of new patented drugs in its
pipeline. All drugs have to go through a period of rigorous testing procedures
over several years. Inevitably, there would be failures during the tests, so it
was essential to have a good pipeline of new drugs.
GSK turnover by product type 2004
27%
20%
14%
9%
7%
7%
5%
5%
6%
Respiratory Central Nervous System
Anti-Virals/HIV Anti-Bacterials
Metabolic Vaccines
Oncology and Emesis Cardiovascular and Urogenital
Others
When the GSK chief executive took over in 2000, he made a detailed study of the
company's drug pipeline. He concluded: We had an empty cupboard. He therefore set
about creating a new vibrant research and development regime in the company. He
regarded this as being crucial to the long-term future of any major pharmaceutical
company. It would counteract the effects of the generic drug companies and would ensure
continued growth at GSK. He recognised that the danger for a large company like GSK
was to make its research and development large and bureaucratic: the small bioengineering
companies had been more successful in recent years. Hence, with his new
research director, Tachi Yamada, he set up seven centres of excellence for drug discovery
(CEDDs) in Europe and the USA.
Size was getting in the way, explained Mr Yamada. In the bureaucracy, traditional
biotechnology expertise was forgotten. Very few companies believed that they were
failing in the 1990's. Most are just beginning to realize how bad it is. The GSK solution
was to set up seven CEDD teams, each no more than 300 strong and multidisciplinary in
make-up. Each team had its own library, research facilities, even its own financial director. The smaller structure means that there were fewer reporting layers so that ,research can be started and stopped more quickly. One of Mr. Yamada's colleagues explained Before we could be stuck for years with a project that was no viable becausethe visibility was not there..[Now] we can give a Go/No decision within six months .For many of our competitors, that takes two years. But the results of this massive re-organisation were not yet complete in early 2005. the company's turnover had continued to increase and it was making progress in terms ofnew product development: R&D productivity metrics were showing success in terms of drug developments in the pipeline. However, as the chief executive, Mr Garnier stressed at that time We are not claiming victory yet.
IBPS Exam Case Study. (2017, Jun 26).
Retrieved November 21, 2024 , from
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