Big is no longer beautiful for GSK

New GSK chief exec Andrew Witty has made his first strategic play, and it's a biggie - break up the firm's industry-leading R'n'D department...

Last Updated: 31 Aug 2010

Since big pharma businesses like GSK stand or fall by the quality of their new product development, this might seem like killing the goose that lays the golden egg. Witty’s proposal is that instead of the existing seven large global centres, GSK’s hunt for new drugs should be tackled by many more, much smaller teams – a maximum of 80 scientists per group, in fact.

This may not sound so radical to the uninitiated, but it’s pretty much the complete opposite of what the firm – and the industry - has being doing for the last couple of decades. Remember all those  big pharma merger deals of a few years ago? GSK itself was the end product of several of the biggest. They were intended to create vast international businesses, because only vast international businesses had the money and centralised research manpower to do the hugely expensive job of identifying new mega-drugs and taking them to market.

Witty’s idea may be controversial, but it’s far from crazy. The problem with big, centralised R’n’D is that it tends to result in a small number of blockbuster products – typically worth over $1bn annually apiece - because it is more efficient to follow up only the potentially most lucrative new product ideas.

This has led GSK into the uncomfortable position of generating 65% of its revenues from only 10 medicines. If something happens to one of them, the disruption to the business can be severe. When diabetes treatment Avandia was linked to increased risk of heart attack last year, £9bn was wiped off GSK's market cap almost overnight. 

The new model is based on the assumption that smaller, more dispersed teams will naturally tend to pursue a broader portfolio of products. Each of them may be rather less lucrative than one of the old blockbusters – which are anyway getting much harder to find – but the damage caused by one of them failing will also be a lot less traumatic. Less of a roller-coaster, more of a gentle drive in the country.

GSK is also getting into generic medicines, through an alliance with Aspen Pharmacare of South Africa. Another surprise move, given that generic copies of out-of-patent drugs can kill big-pharma’s profits stone dead. Something GSK knows only too well – generic competition to its off-patent heart medicine Coreg saw revenues from the treatment almost vanish overnight, falling 97% to only £5m. Witty has clearly decided that if someone is going to be eating GSK’s lunch, it might as well be GSK…

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