The success of a CEO is often predicated on the situational status of the company he or she inherits. Bill Steere took the helm at Pfizer in 1991, riding on the crest of five recently launched blockbusters: Zoloft, Norvasc, Zithromax, Diflucan, and Cardura. He then oversaw the rollout of Viagra and, if all this wasn’t enough, masterminded the Pfizer Warner-Lambert Parke-Davis co-promotion deal for Lipitor. By the end of his tenure, Pfizer sales had grown from $6.6 billion to $29 billion and at one of his last annual shareholders meetings, he received a standing ovation from his grateful constituents — before he uttered a word.
GSK CEO Sir Andrew Witty hasn’t been quite as fortunate. Since taking over in the summer of 2008, GSK sales and earnings have dropped by 6% and 9%, respectively. But beyond lagging sales, GSK has been rocked by two scandals. The first, for the illegal promotion of its drugs, resulted in a lawsuit settlement in July of 2012 of $3 billion. This was followed by a separate scandal involving the bribery of officials in China for which the company was fined nearly $500 million. Obviously, this wasn’t quite the Steere experience.
Witty has taken actions to prevent recurrences of such scandals. For example, in 2013, he announced major changes in GSK’s sales and marketing practices. No longer would the compensation of sales representatives be tied to the number of prescriptions written but rather to the technical knowledge and the quality of service that they provided to their clients. Witty rationalized this change by saying that “we continue to actively challenge our business model at every level to ensure we are responding to the needs of patients and meeting the wider expectations of society.” However, though well intentioned, it is possible that this change is negatively impacting the sales of GSK’s drugs.
Witty has also been sensitive to the needs of patients in poorer regions of the world. In a 2013 interview with The Times of India, he gave the following vision of how to bring innovative drugs to Indian patients in an affordable manner:
If we have to find a way of bringing innovation to India you should set prices which are affordable. And the key to that isn’t getting rid of patents, the key is to fix the R&D process and manufacturing process to make it more efficient…..companies cannot turn up and have any price they want. Companies have to come with a competitive and efficient business model, which brings real innovation to people.
Witty is not just uncomfortable with pricing issues in countries like India. He has made statements recently that indicate that GSK will be moving away from therapeutic areas that are dependent on pricing to be commercially successful. Indeed, this seems to be the motivation for orchestrating the exchange of GSK’s oncology portfolio for the vaccine portfolio of Novartis. By relying heavily on vaccines and consumer health, Witty says that GSK can build volume in these low-margin businesses and “not be fixated on defending ever and ever higher prices in the developed world.”
There are two big issues with this stance. The first is that drugs are NOT priced on the cost of delivering them. Rather, price is derived on the VALUE that the new medicine brings to healthcare. If a patient has a certain disease that costs the healthcare system $100,000/year, and you discover and develop a drug that alleviates this patient’s disease and drastically reduces the healthcare costs borne by payers, a $40,000 price tag represents a favorable deal for patients, payers, and innovators. It’s the value of the medicine, not the cost of delivering it to the marketplace, that should determine price. However, Witty is clearly skeptical about this. His view, as told to the Financial Times, is that “believing that the pharmaceuticals industry can carry on relying on pricing power and believing, no matter how high the price, no matter how small the patient base, that it is going to be paid for — it is quite hard to see how that carries forward.”
But the bigger issue with Witty’s stance is the direction that he is taking GSK. His company has a long and proud history of delivering new drugs to patients. Unfortunately, he has seemed to have lost his appetite for the difficult challenges faced in drug discovery. Sure, vaccines and consumer healthcare product are necessary and important. But so are new drugs for cancer, rare diseases, Alzheimer’s disease, etc. For a major company like GSK to deemphasize this type of research, especially given all of its R&D experience and capabilities, will correspondingly decrease the amount of innovation devoted to curing these diseases. That’s a shame.
By John LaMattina