Glaxo SmithKline suffered a blow recently when the High Court in London ruled that a version of the drug developed by Synthon, a small Dutch pharmaceuticals company, did not infringe its patents on Paxil, the Anglo-American drugs group's best-selling antidepressant. Mr Justice Jacob said Synthon's version of paroxetine, the active ingredient in Paxil and Seroxat, was not covered by the original patents filed by SmithKlineBeecham, the company that merged with Glaxo Wellcome to form GSK last year.
The vast majority of prescribed drugs on the National Health Service are prescribed by the public sector. This is completely dependent on government funding through general taxation. Changes of government and policies, or the introduction of new legislation, can significantly have an impact on the market.
The Economic Factors encompass the financial side of the pharmaceutical market and affect the purchasing power of potential customers and the firm's cost of capital. In a profit-making organization such as Glaxo SmithKline a large proportion of decisions would revolve around the financial situation of the company. Glaxo SmithKline would have to look at factors such as consumer expenditure and disposable income, interest rates, currency fluctuations and exchange rates and investment by the state, private enterprise and foreign companies.
As the vast majority of prescription pharmaceuticals are prescribed by the government-funded public sector, funding is highly dependent on the state of the economy and the NHS budget. The OTC, or self-medication, market is independent of government funding but is highly dependent on individual wealth and disposable income.
Global harmonisation and progress in mutual recognition agreements are facilitating trade with other countries. This is creating global competition, while the reduction in trade barriers is giving rise to parallel importing, where drugs are imported into the UK from a country in which prices are cheaper such as Spain, Italy, Belgium and France. According to the British Association of European Pharmaceutical Distributors (BAEPD), the current annual value of these imports to the UK is £300m. Although the UK is a net parallel importer, it also parallel exports to countries such as Denmark and Germany, where prices are higher.
The high costs and lengthy process of drug development create very high market barriers. As a result, the industry in recent years has been undergoing an unprecedented amount of merger and acquisition activity. Merger and acquisition is an attractively rapid way to complete product portfolios and extend R&D pipelines, while economies of scale can lead to considerable cost savings.
Changing trends in society are represented by Socio-cultural factors. They have a large impact on the types of medication that pharmaceutical companies produce and hence on the organisation’s strategy. Elements included under socio-cultural factors are shifts in value and culture, change in lifestyle, green environment issues, demographic changes distribution of income and education and health.
The population of the UK is ageing demographically and, as a result of the increase in the chronic diseases of ageing, there is a growing demand for medication for illnesses experienced by elderly people. The total UK population rose by 12% between 1961 and 1997, to 59 million and is projected to continue rising by another 5.4% to reach 62.2 million in 2021. The demographic profile of the population is ageing, with the proportion of people over 75 years increasing from 4% in 1961 to 7% of the population in 1997. This trend is projected to continue until 2021, when the over-75s will constitute 9% of the total population. This means that in the near future there will be an increased need for medication for diseases affecting the elderly such as arthritis.
People are becoming more aware and educated about healthcare issues. In particular, the advent of the Internet has given people access to large amounts of information that enable them to demand and make choices about their treatment and care. People are also becoming increasingly willing to take responsibility for their own care, through self-medication or modifying their lifestyles.
People are becoming more accepting of alternative medicine. Many of these drugs are sold as food supplements, thereby avoiding the need for expensive clinical trials and a product licence. The increasing popularity of alternative medicines could be at the expense of conventional pharmaceuticals, particularly over-the-counter (OTC) products. Sales of OTC medicines are continuing to rise. The advent of limited pack sizes is leading to more out-of-hours purchases from late night stores and higher value-to-volume sales of analgesics.
Technological factors affect directly the manufacturing, management and sale processes. It can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions. Factors included under technology are identified new research initiatives, new patents and products, speed of change and adoption of new technology, level of expenditure on R&D by the organisation and their rivals.
Novel drug discovery techniques, such as pharmacogenomic technology and combinatorial chemistry, are increasing the number of potential new chemical entities. The human genome project, which is in the process of mapping the whole human genome, is resulting in possible new lines of research and therapy.
R&D is a key driver of the pharmaceutical market. Glaxo SmithKline is a world leading research-based pharmaceutical company with over 100,000 employees worldwide. Of these, over 40,000 are in sales and marketing, the largest sales force in the industry. Over 42,000 employees work at 102 manufacturing sites in 40 countries and over 16,000 are in R&D. GSK R&D is based at 24 sites in seven countries. The company has a leading position in genomics/genetics and new drug discovery technologies. The GSK R&D budget is about £2.4bn/$4bn. A regular supply of new and improved drugs is essential to maintain a company's position in an increasingly competitive marketplace.
Michael Porter’s Five Forces model examines the factors specific to the competitive balance of power in the industry. The assumption of the model is that the company will wish to protect and benefit their own interests first and develop their competitive advantage to defeat their rivals. It explores the following five forces:
The bargaining power of suppliers. Glaxo SmithKline has a large portfolio of products. They
* Supply products to 191 global markets for GSK
* Produce over 1,200 different brands
* Manufacture almost 4 billion packs per year
* Produce over 28,000 different finished packs per year
* Supply around 6,000 tonnes of bulk active each year
* Manage about 2,000 new product launches globally each year
Production of nutritional products is in excess of 300 million Lucozade/Ribena bottles, 350 million Ribena tetra packs and 20 million Lucozade carbonated cans per year. The annual output of Horlicks is 50 million kilogrammes, equivalent to about 1,000 million servings. In oral care, the volume of toothpaste manufactured annually exceeds 600 million.
They therefore have high bargaining power to the suppliers and hence there is relatively low level of threat from the suppliers.
The bargaining power of buyers is relatively high. Glaxo sells medicines primarily to physicians, chain retail pharmacies, hospitals and government entities. If the new products were introduced with the discovery and development in this market, customers can move to new products easily. In other words, because switching costs are low, we think that the threat of buyers is relatively high.
The threat of potential new entrants is low because of high brand recognition, many patented products, and difficult access to distribution channel. Glaxo’s brand is strongly recognised in the market. It can be potential barriers to entry. Ziagen and Trizivir are representative AIDS medicines of Glaxo. Physician acceptance to these products has clearly demonstrated Glaxo is a leading pharma company based on R&D. approximately, 16,000 staff are involved in R&D in 24 sites worldwide. 6 new AIDS products in Glaxo are in the pipeline. This technology advantage can serve as an entry barrier. Glaxo sells its products worldwide through an extensive network of distributors based on the brand loyalty. It is therefore difficult for new entrants to create new distribution channels in the market.
The threat of substitutes is quite low as there aren’t many cures for terminal illnesses such as AIDS, for which there is no cure. For more widespread illnesses Glaxo have already established themselves with their brand names.
The extent of competitive rivalry is quite high since the pharmaceutical industry is quite competitive. Large international pharmaceutical companies are Glaxo’s principal competitors. Generic companies do not bear R&D costs and consequently, they can offer the products at lower prices. Although Glaxo has high brand recognition in the market, the introduction of a new product by some other company may lead to replacement if a big price gap exists.
From this model we can conclude that the overall threats within the environment of Glaxo is medium and it would take a company at least the same size to do some harm. As mentioned earlier, in the incident where the Dutch company Synthon's reproduced Glaxo’ version of paroxetine, Glaxo’s reaction to that was that it did not believe the case, which it planned to appeal against, would have any financial impact.
The Opportunities aspect of the SWOT analysis explores spaces in the environment waiting to be tapped. It may be in the form of a new product or a new service or just any means of diversification. For example, GSK could make available in the Internet, the products readily available over the counter.
Potential Acquisitions and Partnerships are opportunities to specialise in certain fields, gain competitive advantage over the rest of the industry and obtain a larger proportion of market share. A small South San Francisco firm has signed a deal with Glaxo SmithKline's technology development department. Fluidigm is used to working on a very small scale, but now Fluidigm will provide Glaxo SmithKline new micro-fluidic tools and design software, as well as prototype micro-fluidic chips. Fluidigm’s tiny pipes designed for use in gene-based experiments are turning out to be pretty good conduits for cash.
Threats signify shifts in consumer tastes away from the firm's products and can be in the form of an emergence of substitute products, new regulations, and increased trade barriers.
The company can face competition from unbranded generics from the local players, which may lead to decline in its margins as mentioned before with the case of the Dutch company Synthon.
Resource based analysis the resources of an organisation are those assets that contribute to the generation of value added, competitive advantage and make-or-buy decisions. They can be broken up into tangible, intangible and organisational capability and the Strengths and Weaknesses factors of the SWOT analysis tool.
The Tangible resources are the physical resources of the company. GSK has 102 manufacturing sites in 40 countries. Which is a valuable asset in terms of cost, placement and market control. With this extensive network of plants they manufacture almost 4 billion packs per year. They have substantial cash reserves, which gives them an edge over the smaller companies but is nothing really unique in comparison to the other big companies like Merck etc.
Intangible resources are those assets that have no physical presence but represent real benefit to the organisation. With over 42,000 employees they produce over 1,200 different brands. They produce nutritional products in excess of 300 million Lucozade/Ribena bottles, 350 million Ribena tetra packs and 20 million Lucozade carbonated cans per year. The annual output of Horlicks is 50 million kilogrammes, equivalent to about 1,000 million servings. In oral care, the volume of toothpaste manufactured annually exceeds 600 million.
Organizational capability measures the skills, routines, management and leadership of the organisation. They have a strong promotion and marketing team along with a strong research and development team. Specialist medical expertise is needed when selling to doctors and health authorities. Glaxo has built a strong team over many years but it is not anything unique.
The strengths factor of the SWOT analysis measures factors such as dominance, economies of scale financial resources, innovation etc. Through their year of experience, production and marketing they have managed to establish strong brand equity and a wide distribution network. It is not used just to measure what an organisation is good at, but what they are better than their rivals at. They have 7 products in the world top 50, namely - Zantac, Imigran, Zovirax, Zofran, Zinnat, Flixotide, and Serevent.
To help address a critical gap in prescription drug coverage, Glaxo SmithKline recently unveiled an innovative program, the orange card program, to offer savings on its outpatient prescription medicines directly to eligible low-income seniors and the disabled. The Orange Card, an extension of Glaxo SmithKline's patient assistance program, is designed so participants will realize average savings of 30% off the usual price they pay for outpatient GSK medicines. In some cases, savings may be 40% or greater.
Diversified Pharmaceutical Services, a leading US pharmacy benefit management company, recently announced the results of an annual, independent survey of 500 customers: 94% of participants are very satisfied or satisfied with Diversified's program, with 80% rating themselves as very satisfied.
Diversified is committed to a philosophy of total quality management. According to Brad Hewitt, Diversified's Chief Operating Officer, “customer satisfaction is critical to the company's success and continued growth.” Independent surveys have found that the number one reason for leaving an existing PBM is because of lack of customer satisfaction. Diversified is a unit of Glaxo SmithKline.
Weaknesses virtually record a lack of strength such as, lack of management and leadership, products are not differentiated, weak organisation, weak finances and poor cash flow and maybe an old plant with high costs. GSK don’t have many weaknesses. In the UK, Relenza fell foul of the National Institute for Clinical Excellence (NICE), which refused to endorse the drug. Their cancer and cardiovascular product line is not as good as the competition and that is one area that they could work on. The blockbuster drug Zantac is now off patent, which has significantly affected sales in recent years.
The two approaches show different viewpoints of the company’s position as the resource analysis shows the internal situation of the firm, whereas the environmental analysis shows the company relative to the environment and all its competitors. From the environmental analysis we can conclude that there is a possibility of new entrants and possibly a new mega merger between Pfizer and Warner Lambert, which will mean serious competition, as they will have the similar kind of funds to invest in R&D, advertisement and marketing. Hence GSK should concentrate on Advertising and creating stronger brand equity. From the resource analysis we can see that their product line is not the best in all major areas, which one could expect from a company of their size and hence they should focus on expanding their cancer and cardiovascular drugs product line. The pay rise for the GSK chief executive might have caused a little doubt to the shareholders but it was probably for the best as it acts as an incentive and keeps Mr. Garnier satisfied and working for the company. Glaxo is one of the safer investment opportunities in the pharmaceutical sector for investors.
Bibliography
1.Lynch, R.: Corporate Strategy, 2nd Edition, Pitman, 2000
2.Johnson, G., & Scholes, K.: Exploring Corporate Strategy, 5th Edition, Prentice Hall 1999
