Hard to swal­low

Ma­jor phar­ma­ceu­ti­cal shake-up may re­sult in re­duced risk of re­ly­ing on few big sell­ers

Finweek English Edition - - The Company You Keep - MICHAEL COUL­SON coul­sonmh@gmail.com

IT’S NOT SUR­PRIS­ING that com­ment in the me­dia in South Africa with re­gard to the As­pen-Glax­oSmithK­line agree­ment cen­tred on the ben­e­fits to the lo­cal com­pany – which should in­deed be sub­stan­tial – but in Lon­don the em­pha­sis was dif­fer­ent, fo­cus­ing on GSK’s need for the deal and its rel­e­vance to changes in the global phar­ma­ceu­ti­cal sec­tor.

GSK is the world’s sec­ond-largest phar­ma­ceu­ti­cal group even though just 10 medicines ac­count for 65% of its rev­enue and it has so far had lit­tle or no ex­po­sure to the branded gener­ics sec­tor. That de­pen­dence on a small num­ber of prod­ucts isn’t unique in the sec­tor: ex­perts like to draw pyra­mids of how, for ev­ery 1 000 prod­ucts re­searched, 100 may have pos­si­bil­i­ties, 10 will be tested and one will make it big-time.

How­ever, GSK has a new CE – Andrew Witty – who took over in May. He ob­vi­ously has se­ri­ous reser­va­tions about that modus operandi. Witty, though only 43, has been with GSK since 1985. How­ever, his train­ing as an econ­o­mist may have given him a dif­fer­ent per­spec­tive to the sci­en­tific types who’ve tended to rise to the top of ma­jor pharma groups.

With the reliance on a few block­buster prod­ucts, ev­ery time one comes out of pa­tent, rev­enue takes a big hit. That re­in­forces the need to keep spend­ing huge sums on re­search to find the next golden goose. In­vestors don’t like that and, in­ter­na­tion­ally, the rat­ings of phar­ma­ceu­ti­cal firms have suf­fered. It’s a vi­cious cir­cle that Witty clearly wants to break away from.

GSK was shed­ding staff even be­fore Witty took over. At­tri­tion will con­tinue, but Witty also plans fun­da­men­tal changes in struc­ture. The plan is to break up the seven ex­ist­ing big R&D cen­tres into smaller groups of up to 80 sci­en­tists, who will have to com­pete for fund­ing from a cen­tral in­vest­ment board.

GSK hopes this new model will lead to the de­vel­op­ment of more drugs that are smaller earn­ers but re­duce the risk of re­ly­ing on a few ma­jor sell­ers. It re­port­edly also plans to set up a ven­ture cap­i­tal-style fund to in­vest in small early stage com­pa­nies, or set up smaller com­pa­nies us­ing drugs in de­vel­op­ment at GSK.

There’s also an­other, not un­re­lated, mo­tive. Phar­ma­ceu­ti­cal de­mand in emerg­ing mar­kets is fore­cast to grow by 13%/year – three times as fast as in the de­vel­oped world. And those are the coun­tries hun­gri­est for generic drugs, as low-in­come economies sim­ply can’t af­ford the price struc­tures of patented medicines. A com­pany that wants to re­tain its global mar­ket share has to adapt to that change in the mar­ket’s struc­ture.

One of Witty’s first acts as CE was to hire Eli Lilly’s Ab­bas Hus­sein to head an emerg­ing mar­kets di­vi­sion. Born in In­dia, Hus­sein was ed­u­cated in Bri­tain and worked for Lilly in Aus­tralia, the US, In­dia, Turkey and Ger­many, so has a broader ex­pe­ri­ence of in­ter­na­tional mar­kets than most and should have a par­tic­u­larly good un­der­stand­ing of emerg­ing ones.

Add all those con­sid­er­a­tions to­gether and the As­pen-GSK deal takes on a big­ger sig­nif­i­cance. The two have had an as­so­ci­a­tion for some time, but what’s cur­rently hap­pen­ing will not only be a po­ten­tially big source of ad­di­tional rev­enue for As­pen (and, pre­sum­ably, for GSK), it could also be a pointer for an en­tirely new phase in the evo­lu­tion of the global pharma in­dus­try.

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