The Strategic Priorities Of Glaxosmithkline Plc Economics Essay

The Strategic Priorities Of Glaxosmithkline Plc Economics Essay affair IPharmaceutical stage patronage patternThe business model of companies in pharmaceutic industriousness for almost two decades is blockbuster model. The blockbusters ( medicines that have gross gross sales eitherplace $ 1 billion per form) have turned out to be a signifi abidet factor that driven the pharmaceutical perseverance from 1990s. thither were 65 blockbusters in 2002 incrementd from moreover 7 blockbusters in 1990 (Deutsche Bank, 2003 cited in Froud et al, 2006 169) but, by 2006, the number was proved to 114 (La Merie Business Intelligence, 2007). evince 1 shown that the sales of top ten blockbuster companies from blockbuster drugs al one and only(a) were accounted larger than one-fourth of world pharmaceutical market place in 2006. This blockbuster model was choose in grade to maximize revenue because it was bring inmed to be possible barbel to satisfy high produce expectation of financial commwholey (Business taste 2003 10). To conclude, the blockbuster business model was underpinned spoiled pharmaceutical companies success over the past decade. This model is embedded in pharmaceutical industry. Exhibit 1 Top 10 Blockbuster companies, 2006CompanySales of BlockbusterUS$ billionNumber of BlockbusterAs % of World Pharmaceutical foodstuffPfizer28.894.48GlaxoSmithKline24.3123.78AstraZeneca21.1113.28Sanofi-Aventis19.993.09Johnson Johnson17.582.72Roche16.172.50Amgen13.452.08Merck Co.12.741.98Wyeth10.051.56Eli Lilly9.451.46Total173.27526.94 outset La Merie Business Intelligence, 2007Challenges of Big Pharmaceutical modelTo begin with, the big pharmaceutical companies such as Pfizer and GSK argon over-reliance on the sales of blockbuster drugs. In other words, the companies ar generated their main revenue from small number of drugs from their mathematical product lines. For example, in 2006, Pfizer had 9 blockbuster drugs which generated almost 60 % of resum e sales. GSK had 12 blockbuster drugs that contributed 56 % of total sales. Another example, in 2007, we skunk see that 12 blockbuster drugs of GSK accounted for almost 60 percent of federations total drug sales (see Exhibit 2). Therefore, companies are exposed to high insecurity if they fannynot take care replacement of products which have equivalent financial size. Exhibit 2 GSKs component part of blockbuster to total drugs sales, 2007ProductsSalesUS$ millionAs % of total drugs salesSeretide/Advair7,00118.26Flixotide/Flovent1,2433.24Valtrex1,8694.87Lamictal2,1955.72Imigran/Imitrex1,3713.57Seroxat/Paxil1,1072.89Wellbutrin1,0592.76Coreg1,1753.06Avandia products2,4396.36Augmentin1,0612.77Hepatitis1,0592.76Infanrix/Pediarix1,0872.83Total22,66359.1 stem Company one-year report, 2008Next, the less productive of RD pipeline and increasing cost of RD. There is a downward trend of the number of New Molecular Entities (NMEs) and Biologics License Applications (BLAs). In 1996, there are almost 40 approvals of NMEs and BLAs but, by 2007, the figure was fall to 18 (Riley 2008). In addition, the cost to mystify a drug is ten-fold increase from $138 million in 1975 to $ 1.318 billion in 2006 (PhRMA 2009) (see Exhibit 3). Hence, from the opposite style of RD cost and RD productivity, we squirt conclude that the overall efficiency of RD in industry is frown than in the past.Finally, the expiry of patent and the contact of generics. For example, the best selling drug of GSK Seretide/Advair which generated US$ 7,653 million or 17 % of total disturbance in 2008 ordaining be expired in 2010 in the US and in 2013 in the EU. In this case, there is a possibility that GSKs employee turnover might drop sharply after the expiry of Seretide if the fol pitiable cannot develop product or refreshful source of income to make up for the dismission of Seretide/Advair sales. In addition, the increasing in number of patent expiries of blockbusters has a absolute impact to t he growth in generic market. As exhibit 4 shows, the compound annual growth rate (CAGR) of the planetary generic market was 16.4% during 2004 to 2007. In contrast, growth rate of overall pharmaceutical industry was at a CAGR of 8.3% in the same span. Another factor driven the growth of generic drugs is the greater attentiveness of payors as a result of accredited economic recession such as tightened healthcare budget of governments or private payors. It is probably that the wrong of drugs will be pushed down by the greater bargaining power. For instance, japan had cut the price of drugs on the subject area Health Insurance (NHI) in 2008 by average 5.2% (Business perspicacity 2008). on the whole in all, economic and stakeholders in the demanding side of the industry are immediately shaping the sensitive form of the pharmaceutical market. Exhibit 3 salute of developing natural drug, 1975 2006 theme PhRMA, 2009 Exhibit 4 Global Generics Market, 2004 2007Source Business Ins ight, 2008The Strategic priorities of GlaxoSmithKline PLCIn 2008, Andrew humorous was selected to be a chief operate officer of GSK. After two months of being a CEO, he announced unsanded strategy to steer GSK in global pharmaceutical market. There are three new strategic priorities grow a diversified global business, deliver more products of order and alter the operate model. This section will discuss how these new strategic a response to problem pharmaceutical business model problem.Grow a Diversified Global BusinessIn this strategic, the phoner is trying to lessen its risk by broadening and balancing its products across all geographic boundaries. In other words, political party tries to overthrow reliance on blockbuster drugs for orders growth as Witty said The biggest thing Im trying to change is to go from saying its alright to have a blockbuster once every five languish time to a situation where we are delivering several new products every year (Goodman 2008). As a recession in the USA, it had a huge impact in the US sales which is a main market for company that accounted for 40% of total revenue in 2008. The sales in the US decreased by 4.2% in 2008 compare to 2007 art object Europe market and rest of the world market sales were increased by 16.3% and 16.6% independently (GlaxoSmithKline 2009). Therefore, at this moment, the US market is saturated company is now snap on the market which has high growth such as Africa, chinaware and India but also not ignore the US market. It shows that company is altered to the current market situation. There are many actions that have been taken by the company that response to the business model problems. First, company is focussing on vaccine, biopharma and consumer healthcare which have high potential growth which in turn might create revenue to make up the injustice of sales from expired patent blockbusters. Second, fulfill the potential of emerging markets and Japan market. Japan, alone, account ed for 10% of global pharmaceutical market (Medicines Australia 2009) which is the second largest from the US. It is a big market and a high growth market with market esteem of US$ 68.6 billion in 2008 and sales growth of 17.2% over 2007 (Business Insight 2009). In emerging markets, particularly, the seven pharmerging market including China, Brazil, Mexico, southmost Korea, India, Turkey and Russia seem to be the major driven of growth in the global pharmaceutical industry (see Exhibit 5). Better approach to generic is driven this growth. It is apt(predicate) that GSK is now more concentrated on generic drugs, for example, company acquired brand generics from both Bristol-Myers Squibb and UCB as well as formed alliance with South Africas Aspen Pharmacare and Dr Reddys of India (Hirsler, 2009). To conclude, this strategic priority seems to be positive reaction of the company regarding the over-reliance on blockbusters, market decline in the US and the impact of generics as Johnso n et al. (2008) suggested that diversification is suitable when current markets saturated while hire for more quick growth. Exhibit 5 Sales in 7MM and pharmerging markets ($m), 2003 2007Markets2007CAGR 2003-077MM466,1455.62%Pharmerging markets58,65215.79%7MM = USA, Japan, France, Italy, Spain, Germany, UKPharmerging markets = China, Brazil, Mexico, South Korea, India, Turkey and RussiaSource Riley, 2008Deliver More Products of ValueGSK is lack of therapy area diversification and engineering science concentration. We can see that there are only 6% of biopharma in GSKs pipeline. Moreover, oncology area represented only 1% of GSKs Sales in 2007 while this area had global market growth of 3%. In order to maintain growth in the long term, GSK need to adjust its RD issues (Riley 2008). Therefore, company announced plan as follow. First, company will focused on eight areas of therapy. Second, externalize RD as its take a long time to create and develop by in-house. Third, GSK will cre ate new biopharma and oncology RD unit in China that have refuse cost than established in developed countries which in turn help company to control RD budget. Finally, dissever RD units into small group and financed dependent upon its performance which in turn will stimulate innovation. To conclude, GSK redefined its RD pipeline and structure is reacted instanter to the problems of RD as mentioned previously as well as problem of over-reliance on blockbusters.Simplify the Operating ModelGSK is trying to reduce cost in running business. First, develop billsmaking(prenominal) model for example, integrate the back office finance system into one system across organization. Second, reduce cost in manufacturing. Company has a plan to cut two-third waste in production by 2015 (Jack, 2009a). As a result, company will be able to redeploy the money from cost reduction into enthronement. Overall, this strategy is not tie in directly to the problems of business model, however, the amount of reduction in working crownwork can be put to RD or other investments which might turn to be in form of company growth (Bender and Ward 2009).In conclusion, it is obvious that new strategy of Andrew Witty is reflected directly to the problems of business model which are hard reliant on blockbusters, RD problem and impact of generic drugs. However, company is likely to put their focus on small molecules which is the core heritage of the company and the existing products as well as diversify its portfolios and adapted itself into upstart market environment.Part IIWill new strategy watch?The new strategy of GSK is likely to lead the company to succeed in the future as it is reflected straightforwardly to the problems of business model. Additionally, it is not simple to run out or evaluate the firms performance as Rosenzweig (2007) argued that the success or performance is not totally forced by cozy factors in contrast, it is relative to a company itself and environment as a wh ole. Therefore, winning of strategy in this paper will be defined as if company can increase its shareowner app prinks in the long term. In addition, how will company succeed will evaluate by if the new strategy will increase place of its shareholder. Rappaport (1998) pointed out that shareholder value can be driven by seven factors raise sales growth, boost operating expediency margin, lessen cash task rate, reduce incremental investment in chapiter spending, reduce investment in working capital, increase time plosive speech sound of competitive advantage, and reduce cost of capital.Regarding companys diversified global business strategy there are many significant improvements as a result of applying this strategy. First, there is sales growth compared with quarter in previous year in every quarter from third quarter of 2008, after announcement of new strategy, in British pound term. Furthermore, GSK had an increasing in third quarter 2009 of sales 19% in Japan, 25% in em erging market, and 8% in consumer products (Jack, 2009b). In first quarter of 2009, company experienced decline in US market by 22% company Overall, this strategy reflects directly with sales volume which leads to growth in sales. Therefore, company increases its shareholder value as it can raise its sales growth.Deliver more products of value from this strategy, company should be able to create more revenue from its value added activities. From the company financial data comparing nine month of 2008 and 2009, we can see that GSK had an increasing in gross profit and operating profit 16% and 8% respectively (see Exhibit 6). However, gross margin and operating margin were decreased slightly by 0.4% and 2.39% to 74.05% and 29.48% respectively. Therefore, company otiose to raise its shareholder value by this strategy as it was failed to increase operating margin. Moreover, company has less efficiency as its return on capital employed (ROCE) was dropped (see Exhibit 6 and 7) from 22.18 % in three quarter of 2008 to 19.71% in three quarter of 2009. There is a probability that company is unable to deliver more values from money that put it investment. However, value added activities of this industry is more likely as RD process. It takes long time to get expiration from money that invested today. For example, to evaluate the RD performance, we should not consider only the approval of new drugs only, as it takes 10 15 years to develop a new drug which mentioned in part I but also we need to take in account the drug development in the archeozoic phase, this drugs which are in process cannot generate profit for company today. Overall, we can see that in this strategy. The company is unable to enhance in shareholder value as it cannot increase it operating margin. This is mean that at this period of time a company is inefficiency to control their selling, administration and RD spending.The third strategy, simplify the operating model. There is one mission in this st rategy that related directly to increase shareholder value which is reducing working capital. As in September 2008, company was able to reduce its working capital by 500 Million GBP, therefore, shareholder value is increasing as money from working capital can be return to shareholder in form of dividend or can reinvest in company at low cost of capital. This strategy should able a company to lower cost of operation, in contrast, exhibit 6 shows that selling and administration expense was increasing by 24% while turnover increased only 16%. It seems that company cannot succeed its goal by this strategy.If we take a look at stock price of company, we can see that price is hit the highest in 52 weeks in declination 2009 (see exhibit 8). This can indicate that market gains confidence nigh the company performance. However, P/E ratio 13.79% of the company as 14 December 2009 is still lower than competitors Pfizer at 15.19% and Novartis at 16.1%. This can be interpreted that price low of GSK is low than competitors.All in all, despite the confidence of the market about GSK, in my opinion, up to the present moment the new strategy is not successful in term of maximizing its shareholder value. As we can see from the numbers such as ROCE and operating margin that company cannot build up or even maintain these ratios. However, it needs to be seen it long run whether strategy will succeed since only internal factors cannot make company to succeed.(2420 Words) Exhibit 6 GSK Nine Month finish Income Statement, 2008 and 2009Source GSK Press Release, 28 October 2009 Available at www.gsk.com accessed 13 December 2009 Exhibit 7 GSK Nine Month ended Balance Sheet, 2008 and 2009Source GSK Press Release, 28 October 2009 Available at www.gsk.com accessed 13 December 2009 Exhibit 8 Stock Price of GSK, London Stock Exchange, 2years ended 14 December 2009Source http//uk.finance.yahoo.com