IBPS Exam Case Study - Free Essay Example

(GlaxoSmithKline) is one of the worlds largest drug companies and size can matter in this industry. This case explores the competitive benefits of larger size and how GSK is using them to tackle twin strategic challenges now facing the industry. Background Over the past 20 years, pharmaceuticals have become increasingly expensive to develop typically, costing around US$500 million, spread over several years, for one major drug. After development, these drugs need to be marketed to customers such as doctors,hospitals and government health services for example, several thousand specialist sales personnel may be required for such a task in the North American market alone. To support such activities, substantial cash resources are important. In addition, world ,alliances and other connections between manufacturers can also be highly beneficial: drug companies can use these to support areas where they are both weak geographically and have gaps in their product development programmes. From the size perspective, it helps to have substantial resources. But this does not explain why even large companies have chosen to become larger over the past five years. For example, the Swedish company Astra merged with the UK company Zeneca and the French company Rhone-Poulenc joined together with part of the German company Hoechst to form Aventis during 1998/99. Over this time, half the worlds largest drug companies announced either mergers or takeovers of fellow companies. Some strategists would argue that if all the companies become larger then no drug company has developed any competitive advantage over another. The benefit cannot simply be size alone. It is necessary to examine the individual competitive resources of each company to see what size delivers. To explore this, we need to look separately at the two merger candidates in the case in question Glaxo Wellcome and SmithKline Beecham. Competitive resources at Glaxo Wellcome During the period 1980-95, Glaxo (as it was called then) was highly dependent on its patented drug, Zantac, which is used for treating stomach ulcers. For example, in 1994 this one drug alone accounted for 44 per cent of the companys sales and 50 per cent of its profits. In the early 1990s, Zantac was the single biggest selling drug in the world and its ownership by Glaxo was a major strategic resource. But this substantial strength faced two threats. First, the patents would begin to expire in 1997 and allow any company to manufacture and market the drug, thus reducing the profit margins that Glaxo was able to charge. Secondly, a new rival drug, Losec, was introduced to health authorities in 1993-94 by the Swedish company Astra Pharmaceuticals. Losec was claimed to be even more effective than Zantac. Glaxo knew the seriousness of such a competitive threat because its own drug, Zantac, had wiped the floor with an earlier rival in the mid 1980s, namely Tagamet, from the pharmaceutical company SmithKline Beecham. Faced with these twin threats, Glaxo needed a new resource strategy. Given the time lag in developing new drugs, Glaxo used its existing resource strength the profitability of Zantac to acquire two existing drug companies. Wellcome (UK) was bought in 1995 for US$13.5 billion. This delivered a whole new range of patented drugs into the Glaxo portfolio, including the anti-AIDS drug Retrovir and the anti-viral drug Zovirax. In addition, the US company Affymax was bought for US$533 million. The latter company was developing a range of genetic products whose benefits would be truly revolutionary, if successful. In addition to acquiring drugs from the two new companies, Glaox gained other resource benefits from these purchases. The acquisition allowed Glaxo to combine its RD team with that of Wellcome, saving 1800 jobs and the labour costs associated with this. In addition, 3000 jobs were lost in manufacturing by combining various plants and 2600 jobs were lost in marketing and administration. In total, around US$1 billion cost savings were achieved. But it was not all good news: the patents on the top-selling drug Zovirax were due to expire from 1997 onwards (patents have roughly a ten year life from first registration). Competitive resources of SmithKline Beecham It was the loss of profits from Tagamet mentioned above that forced its makers, the American company SmithKline, to seek a merger with the UK company Beecham in the late 1980s. Nevertheless, the new company had proceeded to develop many new, patented drugs over the succeeding ten years to the late 1990s. It had also exploited its range of branded medicines sold directly to the general public with higher profit margins than were available on many pharmaceuticals. By 1998, the company was particularly strong in anti-depressants, vaccines, antibiotics and diabetes medicines. Merger failure in 1998 and success in 2000 In 1998, Glaxo Wellcome explored merging the company with SmithKline Beecham. This would have transformed the resource capability of the two companies because they both had different areas of product strength in the drugs market, and the duplication of some facilities and services could have been eliminated. But the merger did not take place. The two companies clashed over two matters: the style of negotiation and the proposed new management structure. The cultures of the two companies were so different that the merger discussions themselves became difficult for example, they were so bad that participants never even had lunch together. In addition, there were differences between the two chief executives and other senior managers over their respective roles in the merged company. The result was that the merger never took place and the substantial resource benefits were never achieved. In the face of increased competition and the cost of drug development, the pressure to consolidate remained. What made the difference was that the some of the senior managers involved in the abortive talks in 1998 decided to retire, allowing the two companies to merge in year 2000. As a result, the combined company was able to employ an enhanced research budget of over US$4 billion in 2002. Annual cost savings of US$750 million were achieved: this was ahead of earlier expectations. It had a sales team in North America alone of over 7500 people. The two product ranges from the two companies complemented each other, with some minor overlap. The company had a global market share of over 7 per cent. This might appear small but the company dominated some segments of the world drug market. GSK turnover by geographical area 2004 USA 49% Europe 30% Rest of World 21% USA Europe Rest of World Twin Strategy challenges of the new millennium The increased size of the company delivered a diverse product range in terms of geographical spread and product portfolio. But the company faced two major strategic challenges in the new millennium: Some of its leading drugs would run out of patents protection, allowing generic varieties of the same drug to be made and sold much more cheaply. This was a major threat to companies like GSK that invested heavily in new drugs and then relied on a high profit margin stream to pay for the drug development costs. The generic drug companies were picking off major drugs as they came out of patent and marketing cheap, reliable, copies at much lower prices. The new company had only a limited supply of new patented drugs in its pipeline. All drugs have to go through a period of rigorous testing procedures over several years. Inevitably, there would be failures during the tests, so it was essential to have a good pipeline of new drugs. GSK turnover by product type 2004 27% 20% 14% 9% 7% 7% 5% 5% 6% Respiratory Central Nervous System Anti-Virals/HIV Anti-Bacterials Metabolic Vaccines Oncology and Emesis Cardiovascular and Urogenital Others When the GSK chief executive took over in 2000, he made a detailed study of the companys drug pipeline. He concluded: We had an empty cupboard. He therefore set about creating a new vibrant research and development regime in the company. He regarded this as being crucial to the long-term future of any major pharmaceutical company. It would counteract the effects of the generic drug companies and would ensure continued growth at GSK. He recognised that the danger for a large company like GSK was to make its research and development large and bureaucratic: the small bioengineering companies had been more successful in recent years. Hence, with his new research director, Tachi Yamada, he set up seven centres of excellence for drug discovery (CEDDs) in Europe and the USA. Size was getting in the way, explained Mr Yamada. In the bureaucracy, traditional biotechnology expertise was forgotten. Very few companies believed that they were failing in the 1990s. Most are just beginning to realize how bad it is. The GSK solution was to set up seven CEDD teams, each no more than 300 strong and multidisciplinary in make-up. Each team had its own library, research facilities, even its own financial director. The smaller structure means that there were fewer reporting layers so that ,research can be started and stopped more quickly. One of Mr. Yamadas colleagues explained Before we could be stuck for years with a project that was no viable becausethe visibility was not there..[Now] we can give a Go/No decision within six months .For many of our competitors, that takes two years. But the results of this massive re-organisation were not yet complete in early 2005. the companys turnover had continued to increase and it was making progress in terms ofnew product development: RD productivity metrics were showing success in terms of drug developments in the pipeline. However, as the chief executive, Mr Garnier stressed at that time We are not claiming victory yet.