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Glaxo’s expanding galaxy
The Economist, November 23, 2001
As the British
lament the decline of their car companies and the demise of steelmaking,
they can at least find consolation in drugs—the pharmaceutical industry,
that is. Britain is one of the world’s leading centres for the research,
development and manufacture of prescription medicines, an increasingly
high-tech business that is one of the most successful bits of the
“knowledge economy” so beloved of Tony Blair. Britain’s
pharmaceutical output has almost doubled in value since 1980 in real
terms, and exports have boomed.
The fortunes of
British pharmaceuticals are closely linked to those of Glaxo Wellcome (GW). For the past decade, GW’s manoeuvres have not only reshaped the industry
nationally, but also set the international trend. For most of the 1990s,
the firm’s share price soared as its new drugs minted money. Sir Richard
Sykes, GW’s
straight-talking chairman, has become one of Britain’s most admired
businessmen.
For all its
scientific glamour and commercial chutzpah, however, GW
has been criticised lately for the poor performance of its newly launched
drugs and its unexciting pipeline of future ones. Now the company faces
its biggest challenge yet, as it tries to create a pharmaceutical colossus
by merging with SmithKline Beecham, a rival drug maker. How well the new
company will be able to translate a massive first-year budget of £2.4
billion for research and development (R&D)
into profits remains to be seen. Firms of such magnitude are unprecedented
in the pharmaceutical industry, though they will emerge as consolidation
rapidly spreads. In these uncharted waters, past success means precious
little.
From milk cow to
cash cow
Quarter of a century
ago, Glaxo was a small British firm with its origins in the dried-milk
business and most of its sales in antibiotics, respiratory drugs and
nutritional supplements. Then the discovery of one medicine, Zantac for
stomach ulcers, transformed it, bringing in billions of pounds to finance
its move into other medicines, such as migraine treatment, and its
expansion into America throughout the 1980s. As it grew, the company
developed a reputation for arrogance. Zantac’s homegrown success had led
it to eschew outside collaborations and rely on its own researchers and
marketers. At one point its then chairman, Sir Paul Girolami, travelled
around Glaxo’s facilities with a sculptor in tow, ready to immortalise
him for the company’s headquarters.
There was little,
though, that Glaxo could do to stop Zantac’s patent from expiring. This
was due in 1997, at which point almost half the firm’s revenue would be
threatened as generic rivals began to flood the market. So Sir Richard
Sykes, then chief executive, went fishing for a partner with solid
products. He eventually settled on Wellcome, a smaller rival, which he
secured in 1995 by cutting a handsome deal with the charitable trust that
held 40% of Wellcome’s shares. Wellcome was known for its “academic”
approach to pharmaceuticals, combining strong science with weak marketing.
The clash with Glaxo’s hard-nosed, commercial culture was severe, made
worse for Wellcome by the fact that few of its executives survived the
takeover to serve the new Glaxo Wellcome.
The merger has,
however, yielded some clear benefits. Sales from newly revitalised
Wellcome products, such as Retrovir, or AZT,
for HIV infection and Wellbutrin, an antidepressant, still
make money. Managers also used the merger to take costs out of the new
entity. They have retooled its R&D,
investing heavily in new discovery technologies, reaching out to
biotechnology firms through acquisitions and alliances, and realigning the
new firm’s research and marketing units. But drug making is a slow
business, and it will be at least another five years before these new
initiatives bear fruit in terms of lucrative new drugs.
In the meantime, GW has run into trouble. Its drugs pipeline is
unimpressive and many of its new products are failing to live up to
expectations—though not for lack of good science or ample investment.
Why Glaxo has faltered puzzles many observers. Sergio Traversa, a
pharmaceutical analyst at ING
Barings, reckons that too much conservatism in its core therapeutic areas
is to blame for its dull stable of drugs in development. At the same time,
though, GW has developed what Stewart Adkins, a pharmaceutical analyst at Lehman
Brothers, calls “Star Trek syndrome”: an irresistible urge to boldly
go into new areas where no firm has gone before—a high-risk strategy
that is not yet paying off.
An example of this
is Lotronex, GW’s
new drug for irritable bowel syndrome, a condition that falls outside its
traditional strengths (such as infectious ailments, asthma and diseases
affecting the central nervous system). When the product was launched in
America earlier this year, annual sales of $1 billion were predicted. But
Lotronex has disappointed, since constipation and a potentially lethal
condition called ischemic colitis have turned out to be rather more
serious side-effects than the company’s clinical trials suggested.
American consumer groups are calling for the drug’s withdrawal and
regulators have insisted that stern warnings be put on its bottles,
neither of which bodes well for Lotronex’s future. Meanwhile, another of
GW’s new drugs, for diabetes, has run into trouble
and faces lengthy delays in development.
But these are small
problems compared with the issues of management and strategy that GW must now tackle in its greatest challenge yet: the
merger with SmithKline Beecham.
Take two
Unlike many of the
mergers in the drug industry over the past two years, the union of GW with SmithKline, unveiled earlier this year, was
born more of deliberation than desperation. It is true that SmithKline has
also had trouble with some of its new products, and its short-term
pipeline is relatively unexciting. But unlike, say, Astra, a Swedish drug
firm that merged with Britain’s Zeneca in 1998, neither GW
nor SmithKline risks sudden death from the expiry of patents in the coming
years. Nor do the two firms need to unite to boost their presence in
America: both now make roughly half their money from pharmaceuticals
there.
What drives the
merger is a belief that size will bring success in the rapidly changing
world of drug making. Evidence to date suggests otherwise: firms growing
through mergers have tended to be less productive than those remaining
single. But Sir Richard argues that the recent sequencing of the human
genome has changed the rules of the game. Only those firms with plenty of
money and manpower will be able to make sense of all the new genetic
information that the sequence throws up, he argues, and thus stake an
early claim on the drugs that emerge. “Serendipity will be replaced by
strategy in drug making,” he predicts.
Creative types
But a look at its
new organisational structure suggests that GlaxoSmithKline, as the new
entity is to be called, is hedging its bets, trying to build scale without
losing intellectual nimbleness. Taking a drug from bright idea to
marketable product involves three main stages. The first is basic
research, where genetic information is turned into physical entities, such
as small molecules, which may prove biologically interesting. Here, size
matters more than inspiration. So GlaxoSmithKline is, quite
straightforwardly, combining the might of GW’s chemistry with the strengths of SmithKline’s
genomics. The final part, late-stage clinical development, where drugs are
tested on patients, also benefits from scale.
Sandwiched between
these two is drug development, where clever chemistry, complicated
computer modelling and cunning pre-clinical experimentation can turn an
unassuming compound into a promising new medicine. Here, in the heartland
of small biotechnology firms, creativity counts for something, and
GlaxoSmithKline wants to give its free-thinkers enough room to manoeuvre
within their gigantic organisation. So it has decided to divide this layer
into six “discovery centres”, each specialising in one of the
company’s existing strongholds and essentially left to its own devices
by head office. These units will not be allowed to seek their own outside
investors any time soon, since GlaxoSmithKline is keen to encourage
co-operation rather than competition among them. But their individual
performance—in terms of what they produce for the clinical developers to
take forward—will be closely monitored by their parent, and those that
fail to meet a range of tough targets may find their funding cut.
This strategy is an
innovative attempt to have the best of both worlds in drug making. But
putting the plan into practice is proving slow. Only the heads of the
discovery centres and their deputies have been appointed. Filling the
ranks has been delayed while one of America’s antitrust regulators, the
Federal Trade Commission, scrutinises the deal and asks for the disposal
of some overlapping assets, such as one of the partners’ two drugs to
help stop smoking.
There is little
doubt that the merger will go through, although when is less clear (GW and SmithKline hope it will be before the end of
the year). Despite this uncertainty, both firms have reported improved
results this year. And the culture-clash Cassandras have so far been
proved wrong: there has been little squabbling in the early phase of the
integration process.
That said, the
potential for trouble lurks in the differences between GW’s and SmithKline’s approach to business. GW is highly decentralised, giving its divisions
considerable autonomy. SmithKline, on the other hand, believes in tight
control of far-flung units. And whereas GW likes to
be first into new areas and then to dominate each with several products,
SmithKline has traditionally had what Mr Adkins describes as a
“gun-slinging” style, moving into areas that may already be
well-populated, then jostling for space through intensive marketing—as
it did with Paxil, its bestselling antidepressant.
Such
differences—along with old rivalries between the two firms’
bosses—are said to have scuppered the first attempt at a full-scale
merger between GW and SmithKline, in 1998. Then, GW
firmly expected to be running the combined show. GlaxoSmithKline mark two
is a very different beast, with both its chief executive, Jean-Pierre
Garnier, and its head of R&D,
Tachi Yamada, coming from the SmithKline side.
Although it has a
long history in England and more than three-quarters of its shareholders
are in Britain, SmithKline is widely considered a more American drug firm
than GW, a perception strengthened by the fact that it is
run from Philadelphia (as will be the newly combined business). This has
led some to worry that GW
risks losing its British identity through the merger. But Martyn Postle,
of Cambridge Pharma Consultancy, argues that such distinctions matter
little with giant drug firms, which simply move their centre of gravity to
wherever business can be done best.
Still, Sir Richard
proudly flies the Union Jack over GW.
“We are very much a British firm, in terms of our research, our
manufacturing and our history,” he says. “Our board is British, as is
80% of our shareholder base.” Nonetheless, only 6% of GW’s drug
sales are in Britain. A much larger chunk of its sales comes from the
United States.
With its strong
science base, growing entrepreneurialism and reasonable tax regime,
Britain seems to Sir Richard to be a good place for drug makers. He is
undeterred by the flap over genetically modified foods and a popular
“anti-science” movement. But Sir Richard, along with Mr Garnier and
others sitting on the government’s Pharmaceutical Industry
Competitiveness Taskforce, worries about other trends that might make
Britain a less attractive location for the drug business.
Among them is the
rise of NICE,
the government’s new advisory body on the cost-effectiveness of medical
interventions and drug reimbursement. Britain’s leading pharmaceutical
firms kicked up a huge fuss last year when NICE refused to recommend reimbursement for GW’s new flu medication, Relenza. For all Sir
Richard’s patriotism, GW
even hinted it might decamp from Britain altogether in protest—a hollow
threat given its massive capital investment in the country. Anyway, such
scrutiny is hard to escape these days as governments around the world try
to cope with rising consumer demand for costly medicines. And in fact, NICE has
since relented and this week approved Relenza.
GW
is clearly at a crossroads. Its merger with SmithKline may yield a wealth
of new drugs, for the good of shareholders and patients alike. The new
company seems to have everything it needs to be the best in the business.
But so did Glaxo and Wellcome when they merged, and together they have
stumbled nonetheless. Turning bold vision into brilliant performance is
never easy.
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