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