SmithKline Beecham and Glaxo merged to form GlaxoSmithKline Plc., a multinational pharmaceutical company with its headquarters in the UK, in 2000. According to statistics from 2016, GlaxoSmithKline is the sixth-largest firm in the world (GSK & Roche 2016, p.2). The company is a part of both the FTSE 100 and the London Stock Exchange, where it is principally listed. CEO Emma Wakmsley has been in charge of GSK since April 2017. Among some of the most revolutionizing aspects of GSK is the introduction of 3D printing because such inventions have stratified patient populations and segregate them in a manner that it will become effect to provide specific solutions. Moreover, the company is currently investigating the usage of 3D printing in the manufacture of pills and tablets (GSK & Roche 2016, p.13). The growth of the multinational was outstanding in the 1980s and 1990s. In fact between 1980 and 2002, it grew from the 20th largest company to the 2nd largest in terms of sales.
The company has an extensive portfolio of advanced and well established medicines that treat and prevent respiratory and HIV disease (Phua 2012, p.90). The pharmaceuticals section aims at discovering, developing and commercializing medicines to treat chronic conditions. In addition, the vaccines departments has the broadest portfolio in the company because it incorporate clients of all ages. In fact the institution delivers over 2 million vaccine doses on a daily basis. Lastly, the consumer’s healthcare business deals with the development and marketing of services in oral health and skin -health category. Among the world worldwide brands associated with GSK include Otrivin, Panadol, parodotax, Sensodyne and Voltaren.
Industry Context
By revenue, the world pharmaceutical industry is worth more than 1 Million trillion US (GSK & Roche 2016, p.15). Dollar and the combined earnings of major MNCs such as Pfizer and GSK is equivalent to quarter of the annual US federal government expenditure. That in itself shows the magnitude of the pharmaceutical industry (Mennen et al. 2010, p.9). Global pharmaceuticals made combined sales of over £ 648 billion within a 12 month rolling period ending on September 2016. This value was up from £ 605 billion recorded in the previous financial period, North America was the largest pharmaceutical markets with 50 percent of the share of global sales coming from this region (GSK & Roche 2016, p.19). Europe followed with 21 percent while Asia-Pacific combined percentage were 21 percent. Emerging markets accounted for 8 percent of the market value. Global vaccine sales in units were £ 18 billion and it’s expected to grow by 5 percent annually by the end of 2022.
Table 1: Generic share of Pharma markets by value (%)
Region
2016
North America
50
Europe
21
Asia Pacific
21
Emerging Markets
8
To understand the global pharmaceutical industry, it is imperative that we mention three features namely: Importance of patents in safeguarding intellectual property, relative importance of research and development and transparency of the industry (Gad 2008, p.13). Patents are important because they help classifying a product and helps in determination of the corporate profits (Kokkoris and Ioannis 2010, p.23). Transparency is important because unlike other business, long term returns of individual drug companies rely on transparency from external parties (Brigham & Houston 2013, p.4). The structural factors that affect the Pharma industry include regulatory conditions, monopolistic power of pharmas, R & D and technological advancement (Boyes 2014, p.8). Among the global problems faced by individual companies in the industry include lack of fundamental innovation, new entrants, revenue problems, regulatory changes and weakening patent protection.
Demographically, the industry expects the world population to grow to 8.5 billion by 2030. More importantly, the emerging markets are likely to be the sources of long term economic growth for this industry. Increasing chronic conditions and cardiovascular diseases in the developing world will push up demand in these markets. Moreover, the changing political landscape has led to shifting towards globalization and wage stagnation for many. In 2016, GSK’s political dynamics was influenced by uncertainty by Brexit and the US presidential elections (Russell, J. & Cohn 2016, p.20). In the US, the new administration is likely to shape healthcare in a different way especially the repeal of the Affordable Care At and introduction of prescription drug pricing. In 2017, European market was influenced by the France and German elections.
GSK’s approaches for adapting to a changing industrial setting
Solving the changes due to Collapse of “Blockbuster model”
One of the biggest issues affecting the pharm industry is the shift of focus from the traditional business models. The conventional strategies of employing blockbuster style (products realizing sales of more than £ 1 billion) has been in sharp decline because patents expire on key products and as a result, their output decline (Li 2014, p.13). The decline in the blockbuster model has also affected GSK’s business approach. For instance, in 2002, eight blockbusters added up to a revenue value of $ 14.34 million. However, the same model did not suffice in the years towards the financial depression. A large amount of ethical drugs are trailing in protection of patents and this leads to more competitors (Ferrel & Fraedrich 2013, p.56). For instance, the 2007 sales declined by 22 percent.
To solve the blockbuster challenge, GSK has embraced diversification in order to capture opportunities and maintain its positive growth. Diversification lowers dependence and allocates different segments and markets especially on consumer healthcare and emerging markets. Moreover, the company is embracing acquisition through collaboration with external partners. It strong R & D department has sustained the company for a long while. To add on, GSK has totally changed its approach to business by capturing growth opportunities in the emerging markets. (Financial Times 2017. p.1)
The company has focused on investing in research and development innovation across the three departments namely: pharmaceutical, Consumer healthcare and Vaccine departments. Research is focused on six areas namely HIV, vaccines, respiratory diseases, immune-inflammation, rare diseases and oncology (Ernst & Young Global Pharmaceutical Center 2012, p.9). The firm is also concentrating on its efficient global operating model. Operations have been enhanced through restructuring investments, modernization and improvement of profitability and efficiency (Nisen 2017, p.1).
Policy on Shareholder Value using Hard Data
Using relevant data, this section explains how the management balances between policy shareholder value and corporate social responsibility. The company’s pharmaceutical, Consumer healthcare and Vaccine departments have generated a combined £ 27.9 Billion during the 2016 financial period. The businesses benefits from global commercial infrastructure, integrated supply networks and the numerous innovations in the research and development departments. The company’s incremental savings increased by £ 1.4 billion while the total operating profits increased by 9.3 percent. In addition, the business’s core operating profits increased by 27.9 percent. Sales by department Wellness (3726 m) Nutrition (674 m) and oral health (2223 m). The group’s total turnover was £ 16.1 billion and this translated to a total turnover value of 58 percent. The packs of medicine sold by the firm was 2 Billion and the vaccines delivered were 833 million. Consumer healthcare products were 5 billion. Top 3 groupings by revenue include, HIV £ 3556 million, Established products £ 2541 million and Respiratory £ 6510 million (GSK Report 2016, p.5). These statistics show that the company is quite competitive.
All the three business delivered positive growth in line with the pre-determined strategic plan. Pharmaceutical sales were up by 14 percent in 2016 compared to 2015. Moreover, vaccine sales increased by 26 percent and this was driven by strong execution across the business departments. Consumer healthcare also delivered strong performance in 2016. In fact, the sales levels rose by 19 percent. The growth was attributed to seven power brands which offset tough headwinds in the international industry. The total operating leverage was 9.3 percent compared to 2015’s 43.1 percent (GSK Report 2016, p.54). Net cash inflows increased by 6.5 billion pounds, which was a significant improvement from 2015. The inflow was attributed to improved operating performance and currency fluctuations. However, net debt was £13.8 billion in the 2016 financial period, a £ 3.1 billion increase when compared to 2015.
Shareholder Returns and Market Share
In the 2016 financial period, common dividend was 80p, same as 2015. The justification for this value is seen in the 2015 commitment to re-invest capital on CSR and also facilitate the Norvatis transaction in early 2015. The maintained dividend was important in enhancing integration and reshaping of the Group (GSK Report 2016, p.54). Despite imminent short term pressures, the free cash flows restructure shareholders returns. With regard to the share price, the company determines the annual share price based on the closing share price. Also, performance share plans are awarded to directors and employees for good performance, and at no cost. During the 2016 fiscal period, weighted valued of each share was £ 13.73 and the market value of each share was valued at the same price. IN 2016, the FTSE valued GSK’s share at £ 13.76. The table below illustrates this fact.
Table 2 Illustrating Market share prices
Date
2016
2015
2014
1 /1/
13.7
13.7
16.1
31 /12
15.6
13.7
13.7
Increase/decrease
13.88 %
0.21 %
(14.62) %
Highest during the year
17.22
16.42
16.91
Low during the year
13.44
12.28
13.24
Source: (GSK Report 2016, p.263)
The table set outs the market’s closing prices as per these periods.
Chart: Growth of Sales, Profits and Dividends
The graph shows a constant positive growth from the 1980s to 2008 (Dinsmore & Rocha, p.5). Therefore, this is a justification that shareholder value has grown despite the fact that the company has invested in corporate social responsibility.
Policy on Corporate Social Responsibility
Traditionally, investors have not taken into account the way in which companies make their profits. However, in recent times, there has been movement towards social responsible investing. In GSK, the board of governors act as trustees and they have the fiduciary duty to maximize returns and at the same ensure that these returns are not made at the expense of the social responsibility (Brigham & Houston 2013, p.19). GSK’s Board-level Corporate Social Responsibility Committee is in charge of providing high-level guidance on performance against commitment. The chairman and the CEO are part of this review committee (Chatterji 2016, p.5). For instance, in 2016, the firm partnered with India with regard to national health priorities. In this country, there are still millions of citizens who do not have access to basic healthcare. As a result, the firm initiated a number of target responsibility projects that are run by a partnership between the government and local non-governmental organizations (Andrew 2015, p.8). Principally, the organization’s philosophy is based on supporting selected health and employability programs that have been proved to be innovative and sustainable. The programs have to share GSK’s vision of improving healthcare and also offering opportunities to GSK employees who wish to assist in the communities that the company operates (Newell 2014, p.5).
Additionally, GSK has partnered with other pharmaceutical companies as well as the World Health organizations in a bid to create synergy in the support of countries that hare facing Neglected Tropical diseases (Evens 2007, p.34). This coalition aims at eliminating NTDs by the year 2020. In 2016, the company donated over 5 crore albendazole tablets to the WHO for distribution to these affected areas. Moreover, GSK is committed to saving newborn babies. India loses about 7.6 lakh of babies within the first 28 days and over 75 percent of these deaths are preventable. As a result, the corporation initiated a GSR project on newborn baby survival by lining the Government’s New Born Action plan and embracing the continuum of care approach. Moreover, GSK has set up toilets in all Nashik school s to improve their sanitation.
In the fight to protect the environment, GSK has reduced its carbon footprint by an average of 25 percent since 2010. Currently, over 60 percent of manufacturing and R & D have zero waste to landfill (GSK Report 2016, p.45). The company’s CSR approach goes in line with its shareholder wealth maximization objective because it solves some of the greatest global health challenges and the same time it is racking in profits. For instance, in 2016, outbreaks of Ebola and Zika virus led to a partnership between the firm and Coalition for Epidemic Preparedness in a bid to create permanent bio-preparedness organization. The project is based in (Rockville, Maryland Crane & Matten 2017, p.13).
Since 2009, GSK has spent £ 21 million in educating healthcare’s workers in 39 countries from the developing world (GSK Report 2016, p.45). Moreover, the company is supplying vaccines at the lowest prices to civil society organizations across the world. The company is committed to maintain stable vaccination programs by developing reliable and predicable supply of medicine to CSOs (Heal 2008, p.8). The firm is committed to widening the access to vaccines through a reasonable pricing plan. Prices of medicine in least developed countries have been lowered by 25 percent. In fact, in 2016 alone, GSK delivered over 75 million doses off Synflrix vaccine (GSK Report 2016, p.46). To strengthen the healthcare systems in least developed countries, the organization’s policy is to re-invest 20 percent of its profits to these regions. Working with Amref Health Africa, the firm has invested £ 2.8 billion in the past 10 years for the purpose of developing hospitals and training personnel (GSK Report 2016, p.54). All these CSR activities have been conducted and yet the corporation is still generating profits.
Conclusion
The report concludes that GSK has sustainable balance between shareholder’s demand and the need for corporate social responsibility. This conclusion is justified by the fact that GSK continues to record competitive profits and at the same time, the firm has invested in the social sector. Also, the report uses the blockbuster model to explain dynamics in the Pharm industry and how GlaxoSSmithKline has managed to brave its way through the detrimental changes due to decline in the blockbuster approach. By use of hard data, the report explains GSK’s continued dominance irrespective of political conditions such as Brexit and the US presidential elections.
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