Business Performance of GlaxoSmithKline - Case Study Example

Introduction The for this report are some of the well-respected business newspapers. In relation to the challenges associated with the pharmaceutical industry’s blockbuster-driven business model, this report aims to inform the general public about the challenges and limitations of using the Blockbuster-Driven Business Model and how GlaxoSmithKline (GSK) is able to meet these challenges. To inform the general public about the company, this report will first discuss the business press and analyst’s narratives concerning GSK followed by discussing its annual sales growth and share price between 1980s to 2012 on top of the market shares, challenges on patent, shape of the pipeline, and academic perspectives between pharmaceutical industry and GSK. After discussing the challenges associated with the use of the Blockbuster-Driven Business Model, the effectiveness of GSK’s strategies to meet these challenges will be tackled in details. 2. About the Company: Business Press and Analyst’s Narratives on GlaxoSmithKline (GSK) and Its Business Performance (i.e. Sales Revenue, Stock Prices, and Market Share) Based in Britain, GlaxoSmithKline (GSK) is a science-based health care company that aims to develop a wide-range of medicines through product researches and innovation (GSK, 2013a). Serving 115 countries worldwide, GSK is one of the top three biggest pharmaceutical companies around the world (GSK, 2013a ; Gilbert, Henske and Singh, 2003). To develop and innovate new drugs, GSK spent as much as ?4 billion in 2002 (GSK, 2013a). Back in July 1986, the share price of GSK was only 7.31 (Yahoo, 2013). Since January 1992, GSK’s share price has been fluctuating due to a series of merger and acquisition, expiry of patents, heavy investment on new drug innovation, and tight competition in the market. Between 1979 to 1993, GSK filed 6 patents on Augmentin (Community Catalyst, n.d.). As a result, GSK’s share price started to increase in December 1992 at 30.75. However, its share price slide down to 15.88 in July 1993 probably due to the presence of generic drug-makers who were trying to manufacture and sell a cheaper version of GSK’s Zantac (Los Angeles Times, 1996). Between April 1994 to December 1998, the share price of GSK has gradually gone up from 17.25 up to the highest point at 69.50. It was between 1994 to 1995 when GSK contested their point-of-views with the federal appeals court concerning the legal issues behind patent infringement on one of their famous ulcer drug called Zantac (Los Angeles Times, 1995). Since the federal appeals court supported the arguments made by GSK, Novopharm – a Canadian company was not allowed to sell the generic version of Zantac in the U.S. throughout the period when the patent right is still effective (Los Angeles Times, 1995). One of the possible reasons why GSK’s share price significantly decreased from 69.50 in December 1998 down to 48.75 in February 2000 and 35.05 in February 2003 was because of patent litigation of GSK’s Paxil (Evaluate, 2002). In relation to the expiration of GSK’s patent on Advair in 2010, GSK’s share price has also significantly decreased from 42.29 in December 14, 2009 down to the lowest point at 33.46 in May 24, 2010 (Yahoo, 2013). Because of GSK’s business strategy, this company managed to gradually increase its share price up to 52.51 in December 2013. Since it takes 10 years for GSK to develop new patented drug (Williams et al., 2008), this company has been continuously developing other promising drug that can compete or even better than their existing “blockbuster” drugs. (See Chart I – Historical Trend of GSK’s Share Price below) Chart I – Historical Trend of GSK’s Share Price Source: Yahoo, 2013 One of GSK’s “blockbuster” drugs was the Advair Diskus – an inhaler which can be used in the treatment of chronic asthma and chronic obstructive pulmonary disease (COPD) such as bronchitis or emphysema (Kitamura, 2013; Recruiting Experts Worldwide, 2013). Costing roughly US$300 per dose, the selling of GSK’s Advair has reached total sales of US$7 billion around the world in 2009 (Recruiting Experts Worldwide, 2013). In 2012, GSK’s total sales on Advair reached a total of US$8 billion (Kitamura, 2013). In line with this, Kitamura (2013) reported on Bloomberg that the total market sales of medicine for COPD worldwide have reached US$10 billion in 2013. This figure only shows how GSK was able to dominate the market for asthma and COPD worldwide. In US, GSK’s patent right on Advair expired last 2010 (Recruiting Experts Worldwide, 2013). For this reason, the reported sales revenue of GSK dropped from 23,842 in 2010 down to 18,695 in 2011. Specifically the cost of R&D is usually the highest in pharmaceutical companies. To save money, GSK decided to create 38 small teams composed of highly competitive chemists and biologists who were assigned to conduct research studies on several diseases (Stovall, 2011). By doing so, GSK will be able to apply patent for new drugs on or before the patent right of their blockbuster drugs expires. For instance, GSK managed to develop a vaccine for “chickenpox in 1984, hepatitis B in 1986, hepatitis A in 1992, diphtheria, tetanus, whooping cough and hepatitis B including hepatitis A and B in 1996, hepatitis A and typhoid in 1999, meningitis strains ACW135 in 2003”, and so on (Glaxo Smith Kline, 2005). Since GSK managed to continuously develop new drugs and vaccines, the fact that GSK religiously apply a patent for each of their blockbuster drug before selling it in the market made the company able to continuously increase their total sales revenue. Back in 2005, GSK’s total sales for its biological alone was reported to have reached ?1.4 billion which was almost 15% higher as compared to GSK’s total sales revenue last 2004 (Glaxo Smith Kline , 2005). In 2010, GSK managed to have sales of US$1.2 billion from the selling of its Infanrix and Pediarix along (Kaddar, 2012). (See Chart II – GSK’s Consolidated Sales Worldwide between 1996 to 2006 in ? millions on page 4) Chart II – GSK’s Consolidated Sales Worldwide between 1996 to 2006 in ? millions Source: Glaxo Smith Kline, 2005 As of 2012, GSK’s total sales were reported to have reached almost ?26.4 billion (GSK, 2012). GSK’s total sales can be broken down into different categories such as therapy, vaccine, wellness, oral care, nutrition, and skin care. Under the therapy area, GSK’s total sales under therapy area, vaccine, total wellness, oral, care, nutrition, and skin care are as follows: Sales Category ? in Million Therapy Area 17,996 Vaccine 3,225 Total Wellness 2,008 Oral Care 1,797 Nutrition 1,050 Skin care 255 Total 26,331 For instance, under therapy category, the breakdown of GSK’s total sales includes the following: (1) respiratory (?7,291m); (2) anti-virals (?753m); (3) central nervous system (?1,670m); (4) cardiovascular and urogenital (?2,431m); (5) metabolic (?171m); (6) anti-bacterials (?1,247m); (7) oncology and emesis (?798m); (8) dermatology (?850m); (9) rare diseases (?495m); (10) immuno-inflammation (?70m); and (11) ViiV Healthcare (HIV) (?1,374m); and (12) others (?846m) (GSK, 2012, p. 8). Under vaccine category, the breakdown of GSK’s total sales includes the following: (1) Boostrix (?238m); (2) Cervarix (?270m); (3) Fluarix, Flulaval (?200m); (4) Hepatitis (?646m); (5) Infanrix, Pediarix (?775m); (6) Rotarix (?360m); (7) Synflorix (?385m); and (8) Others (?451m) (GSK, 2012). Furthermore, GSK has been continuously acquiring other small-scale pharmaceutical drug companies as one of its strategies when it comes to dominating the market. In line with this, GSK acquired Corixa for the price of US$300 million and ID Biomedical for US1.4 billion back in 2005 (Kaddar, 2012). Other GSK’s business strategy is to simplify its operating model, deliver highly valuable products, and growth diversity in the world market (Bourdot and Leuchten, 2008). Because of GSK’s shape of pipeline and the strategies used to meet the challenges of Blockbuster-Driven Business Model, GSK’s total sales were reported to have reached almost ?26.4 billion in 2012 (GSK, 2012). Based on the constant exchange rate (CER), the IMS Health reported that GSK’s market share in North America is worth ?221 billion in terms of value (GSK, 2012). In Europe, EMAP, and Japan, GSK’s market share in North America is worth ?120 billion, ?112 billion, and ?63 billion respectively (GSK, 2012). (See Table II – Summary of GSK’s Market Share by Geographic Region below) Table II – Summary of GSK’s Market Share by Geographic Value in ? billion % of Total Market Shares North America Europe EMAP Japan 221 120 112 63 42.8 23.3 21.7 12.2 Total 516 100 3. Shape of the Pipeline Analyzing the shape of the product development pipeline is necessary in terms of allowing the company to avoid threats of losing their chances for a patent protection (Carroll, 2013). It simply means that in the process of keeping the product development pipeline short, the pharmaceutical company has a higher chance of being able to immediately apply for a patent license even before other pharmaceutical companies can do so for the same or close to similar type of medicine or vaccine (McBride, 2013). The size and shape of GSK’s product development pipeline is short, simple and steady (GSK, 2012; Pharmalicensing, 2007). Basically, GSK’s product pipeline is composed of three (3) stages known as: Phase I, Phase II, and Phase III (GSK, 2013b). To ensure that GSK is able to benefit from being first to apply for a patent protection, this particular company has decided to simplify the process of the traditional hierarchical R&D business model by cutting down unnecessary stages. This was done by creating a smaller and more reliable group of scientists who are responsible and accountable for the delivery of new projects (GSK, 2012). By keeping its pipeline short, GSK was able to immediately respond to each stages of its R&D processes (Pharmalicensing, 2007). 4. Academic Perspectives on Pharmaceutical Industry and GSK The market competition within the global pharmaceutical industry is very tight (de Frutos, Ornaghi and Siotis, 2013). The only way for pharmaceutical companies to gain competitive advantage is through patent licensing. Through patent rights, pharmaceutical companies are able to dominate and monopolized the global markets for certain period of time (de Frutos, Ornaghi and Siotis, 2013; Fink, 2001). 5. Challenges of Blockbuster-Driven Business Model and Patent in Pharmaceutical Industry Awarding patent protection to pharmaceutical companies have time limitation. Therefore, one of the most serious challenges that most pharmaceutical companies would face after using the Blockbuster-Driven Business Model is that the sales revenue that a pharmaceutical company enjoys out of discovering, manufacturing, and marketing the patented drugs would immediately dropped overnight after its patent protection for the said drug expires (Huang and Aslanian, 2012; OECD, 2009). Specifically the expiration of patents will legally allow generic drugs to be sold in the world market. Another challenges associated with the use of the Blockbuster-Driven Business Model is that the use of this particular business model has significantly reduced the number of drugs that are available in the market (OECD, 2009). This notion is true since most of the pharmaceutical companies tend to withdraw from R&D each time a specific drug shows less promising returns as compared to what blockbuster drugs could offer them. Furthermore, the use of Blockbuster-Driven Business Model can serve as barriers to entry for new drugs (Shab, 2005). Because of patent rights, other pharmaceutical companies are prohibited from manufacturing and selling of generic drugs. In short, the use of this particular business model strongly promotes the “development of life-style medicines” rather than purposely developing drugs that can cure or treat various diseases for the benefit of the general public (OECD, 2009). 6. GSK’s Strategies to Meet these Challenges Heavy reliance on Blockbuster-Driven Business Model increases the pharmaceutical companies’ risks of experiencing overnight drop of sales and revenues right after the patent protection expires (Huang and Aslanian, 2012; OECD, 2009). To avoid facing such challenges, GSK aims to promote the need for business diversification such as the need to create new business opportunities in other countries particularly within the emerging markets (Bourdot and Leuchten, 2008). Without the need to purchase or acquire generic companies, GSK also aims to create and deliver more pharmaceutical drugs to the general public using its global sales force (Bourdot and Leuchten, 2008). To reduce unnecessary operating costs, GSK will purposely improve the efficiency of its operational and marketing arm (Bourdot and Leuchten, 2008). 7. Conclusion and Recommendations Despite the on-going tight market competition within the global pharmaceutical industry, GSK remains strong in terms of its market shares, sales, and share price. In general the use of the Blockbuster-Driven Business Model has its own limitation. Even though the application of this particular business model promises a significantly high return for pharmaceutical companies, the fact that patent protection has an expiration date makes this model develop more challenges on the part of most pharmaceutical companies. 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