Challenges to the Pharmaceutical Industrys Blockbuster-Driven Business Model at GlaxoSmithKline - Case Study Example

? INTERNATIONAL BUSINESS ANALYSIS PROJECT By Introduction This is a report document providing challenges to the pharmaceutical industry’s blockbuster-driven business model. After successful analysis of the challenges that blockbuster-driven business model faces. Assessment of how effective is GlaxoSmithKline’s strategies for meeting these challenges. The pharmaceutical industry is a key global industry with numerous multinationals operating all over the world. According to Busfield (2006), the total worldwide sales of pharmaceutical products in the year 2003 amounted to $ 466 billion (10). It is necessary to note that the usage of prescription medicines globally is on the increase (Blume 1992). All the leading pharmaceutical multinationals, including Glaxo Smith Kline, have head offices in all advanced societies; and their worldwide presence is on the increase (Berg, 1997,). The challenges driving down revenues from the blockbuster strategy to 5% are recognized: declining R&D (Research and Development), rising expenditures of commercialization, augmenting payor influence and shorter exclusivity terms. The pharmaceutical industry has traditionally used the blockbuster approach to develop new drugs, despite numerous challenges of this approach (Williams et. al., 2008, p. 845). Using this approach, some prospective drugs may fail and when their costs are factored in, the actual cost of discovering, developing, and launching new drugs overly increases (McKeown 1976). Publishing arm of a consultancy firm forms the basis of this report and audience are expert in the pharmaceutical field. Challenges of the model The model structure is provided in the diagram below revealing the requirements of the model. The challenges of the model are viewed as the enslaving factors in the pharmaceutical industry. This is because the pharmaceutical industry has experienced a number of transformations in the recent years; however, the pharma business model that serves the industry has not kept pace (Wyman 2009). The challenges of the pharmaceutical industry’s blockbuster-driven business model can be illustrated in the following breakdown. It is evident that the business environment for pharma companies has transformed dramatically in the recent past; however, the founding model has not kept the pace thus posing challenges to emerging pharmaceutical companies. The declining research and development (R&D) productivity, increasing costs of commercialization, shorter exclusivity periods and augmenting payor influence have increased the mean expenditure per a successful introduction to $ 1.7 billion and decreased average expected profits on novel investment to the indefensible level of 5%. The challenges has presented predicaments that mergers created will not improve profitability. This forces pharmaceutical organizations to require fresh business models that fit the new environment. The model presents major challenges to all but the three largest organizations; GlaxoSmithKline PLC, Pfizer Inc., and Merck & Co. Inc. the choice is comparatively desolate: with little resources to drive primary care commodities and to venture in the arms race in sales & marketing, and research and development project (R&D), they will probably be driven faster to replace their blockbuster-based models (Moncrieff 2002). Market worth is shifting previously to some smaller actors that have embraced new models. The effects of model dilapidation have been seen in many pharmaceutical organizations. According to Busfield (2006), pharmaceutical companies get most of their revenue from patented drugs, with most patients lasting for a period of up to 20 years. In 2003, for instance, The US pharmaceutical market, including of six of the peak 10 pharmaceutical corporations, accounted for ‘just under half of the world’s revenue, (Busfield 2006, p. 3).’ The other four companies were based in Europe. Despite the importance of this industry in the world, companies in this industry face numerous challenges in their endeavour to globalize. Based on the current success rates, investment gains and predictions on commercial performance, the blockbuster model has yielded low rate of returns (Williams et. al. 2008, p. 843). The Effectiveness of GlaxoSmithKline’s Strategies for Meeting these Challenges GlaxoSmithKline is one of the leading pharmaceutical industries in the world. As such, GSK has an extensive brand and product portfolio, and the company operates in a highly competitive marketing environment. In spite of this competitive challenge, it is important to note that the pharmaceutical industry is one of the most regulated and compliance-laden industries. The company hence has to bear with a challenge of maintaining regulatory controls while at the same time improving efficiency in its commercial interests (Moynihan & Henry 2002). Year on year sales growth and market share of GlaxoSmithKline GSK has had a good year on year sale growth and market share since 1980s. With the year of Zantac and organic growth 1982 to 1994/5 increased the sale growth by 40-50%. The merger and acquisitions (M&A) that the company engaged in between 1995 to 2000 enhanced the growth of market share and sales (Hobson 2011). Key growth phase of the firm was 1981-2002 ranking from 20th to 2nd leading pharma corporation in the world. During 1982-1994, GSK’s modest medical performance increased by 40-50% of total sales revenue. Below is a graph illustrating Zantac and total sales 1980-1995 (?m nominal) During Zantac-led expansion phase, GSK was a star. In real terms market cap expanded from ?1bn in 1980 to ?20.8bn in 1994 (2003 prices); motivated by increasing share price and stock splits such as ?2.24 in 1980, reaching a peak at ?16.60 in 1987. The graph below summarizes the price share growth of GSK since 1989 to date. The price share growth graph reveals that the company has had a stable growth. It was reported that Year on year GSK’s revenues dropped by 3.49% from 27.39bn to 26.43bn this year. This together with a boost in selling, common and administrative costs has attributed to a decline in net revenue from 5.26bn to 4.57bn, a 13.23% reduction (The Financial Times Ltd 2013). GlaxoSmithKline business press and analysts’ According to “the wall street Journal” provides Glaxo Scientists perceptions and predicaments. The business press reports that Glaxo Scientists clash on sales pitches; by ensuring Scientists pitch for expansion resources, Glaxo's chief of study hopes to give a boost to a lackluster novelty record. According to Glaxo utilizes the following concepts to address challenges presented by the model. In 2008, Mr. Slaoui refurbished the corporation’s research and expansion structure into 38 small units and releases them off to examine different diseases. Before commencing, each of drug performance teams, or DPUs, had to defend their case for a fraction of Glaxo's ?2.88 billion yearly drug R&D financial plan. Mr. Slaoui assumed as R&D head at Glaxo five and half years by then (2008) and instantly introduced major transformations. The 4 key values that underpin all the company have done in R&D for the previous 5 years is: concentrates on the best technology, externalize R&D; re-personalize R&D; and concentrate on return on investment. These are essential means of cubing the challenges. According to Europe Equity Research 2008, proved vto be tough for GlaxoSmithKline and to manage the situation the company trimmed EPS 6-7% from '09 onwards. The strategies were given by incoming CEO Andrew Witty. In the examination of a (1) lower increase from buybacks, (2) a rough ’08 base from elevated disposal increases (3) still important generic attrition (Paxil CR, Lamictal, Valtrex Requip, Imitrex,), (4) no foremost new product initiated in 2009 (US Cervarix initiation pushed to 2010), 2009 had to be another time of declining EPS. These strategies help the organization since they manages the challenges of the model by restructuring. An illustration of changes to suit the period The diagram below reveals the adopted strategies to review the EPS to manage the tough year 2009. The sales changes were prompted by the prevailing conditions of tough year and the table below reveals the proposed changes that were proposed (Jpmorgan 2008). The Deutsche bank press released and acknowledgement that GlaxoSmithKline strategy seemed sensible but execution would take time. The press acknowledged that the upside could originate from the effect of new strategy on costs or growth potential and GSK retains important cost flexibility. The table below is extracted from deutsche and confirms cost flexibility and projections of the strategy. GlaxoSmithKline Patent challenges Abraham, (n.d. p. 2) further reveals that there exists a ‘conflict of purpose between regulatory agencies and the government. The pharmaceutical industry has always been quick to ward off any kind of regulation it perceives to threaten its interests by perpetuating such claims as negative effects of the regulation to balance of payments or employment. According to Busfield (2006), pharmaceutical companies get most of their revenue from patented drugs, with most patients lasting for a period of up to 20 years. In 2003, for instance, The US pharmaceutical market, comprising of six of the top ten pharmaceutical companies, accounted for ‘just under half of the world’s revenue, (Busfield2006, p. 3).’ The other four companies were based in Europe. Despite the importance of this industry in the world, companies in this industry face numerous challenges in their endeavour to globalize. Based on the current success rates, investment gains and predictions on commercial performance, the blockbuster model has yielded low rate of returns (Williams et. al., 2008, p. 843). Long product approval procedures, a situation where every new marketing and sales piece has to seek approval from a variety of dispersed managers, and should naturally go through three to five accounts prior to being signed off. Many of these executives were in different places, and hence it was extremely difficult to ascertain documents had been approved, making the entire process last up to 12 days on average (Bodenheimer, 2000, p. 1542). In addition, over than 90% of approvals did not include compulsory information to attain industry standard of conduct rules. This called for unnecessary reorganizations in the approval process, as well as extra time required by legal, medical and compliance teams (Bury, & Gabe, 1996, p. 453). GlaxoSmithKline’s Shape of the pipeline Representation: putting more attention on competences and reorganising R&D to create pipeline 1995 Welcoming merger: improving R&D, creating technology competences, integration of chemistry, blue skies perception. 2000 SKB merger: CEDDs and 2008 DPUs (Drug Performance Units). But under rhetoric of technology, merger employed to: Prevent sales fall down as Zantac’s patent terminate: Welcome extra ?2.3bn cut overlap expenditure to steady or improve margins: close labs; sacked 12% of merged labour force(Brown & Funk1986); slash R&D in real condition and as a % of sales and combine marketing position in US The figure below represents Glaxo real R&D spend and R &D as percentage of turnover. Conclusion The challenges driving down revenues from the blockbuster strategy to 5% are recognized: declining R&D (Research and Development), rising expenditures of commercialization, augmenting payor influence and shorter exclusivity terms. Blockbusters are not disappearing. Big-franchise complexes will keep on to be a noteworthy source of incomes for the industry. 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