GlaxoSmithKline’s decision to appoint Emma Walmsley as chief executive is a clear commitment to past strategy but an acknowledgement that a fresh, and arguably more commercially astute, approach is required to return the company to growth.

Walmsley represents an insider with an established internal track record of success and an understanding of how to get things done, but with a valuable external point of view on the weaknesses of the pharmaceuticals business gained through experiences at L’Oreal and latterly as the leader of GSK’s consumer healthcare division where she has been since 2010.

The choice of an insider signals renewed commitment to the volume-first growth strategy launched by GSK in 2015, a plan borne out of a belief that the current sky-high pricing model in pharmaceuticals is unsustainable in the long run. Industry analysts and investors were initially critical, especially given GSK’s recent performance, but the mood has warmed to the notion that large volume sales in vaccines and over the counter (OTC) products offer an attractive revenue cushion to the more risk-reward pharma division.

Walmsley brings a proven track record of delivering tremendous volume growth in global businesses. She is a seasoned marketer and consumer operator, with an emphasis on emerging markets: her legacy of achievement must be the core reason for her appointment.

Her turn around of the consumer health business unit based on strong marketing and a focus on accountability indicates a more commercially-focused approach for the company as a whole. The OTC business, traditionally seen as a stable revenue-generator, has now been placed at the core of Britain’s largest drug maker.

However, reshaping a pharmaceuticals business in the mold of consumer health will require substantial cultural shifts – this is often the hardest part of an organization to change and will be a challenge.

An interesting parallel to Walmsley’s appointment is Joseph Jimenez’s move from senior executive at H.J. Heinz Company to head of the consumer health business at Novartis, making his way to CEO a short time later.

Jimenez’s success may have set a precedent for industry outsiders with experience in consumer goods to run Big Pharma companies. Consumer marketing is always about the customer, and executives from this arena tend to have an external, ‘big picture’ mindset – a useful thing in pharma.

Many might consider the steep learning curve of the R&D space that lies ahead of Walmsley to be too risky, but she has been on the executive team since 2011 and will have picked up a significant amount through exposure to executives from the pharma business.

The Board obviously believes that the pros outweigh the cons. One risk of this appointment is that Walmsley may continue to operate too much in the sphere of her old job, giving attention to the consumer healthcare and related vaccines business. However, the future for GSK looks bright if she can manage to bring her relentless external, customer and service focus to the pharma business.

At this stage, appointing an ‘inside-outsider’ looks like a shrewd move for GSK.

Christopher Pettigrew is an Associate at specialist pharmaceutical strategy consultants, Novasecta.

GSK is the UK’s most highly valued pharmaceutical company, and is an exemplar of the past successes of “UK plc”. Yet like the entire UK economy post-Brexit, it faces some formidable challenges in the next years. GSK is at a crossroads: its CEO of 8 years is moving on, some investors are calling for it to be broken up, and the financial markets are valuing its future (in terms of market cap to sales ratio) at a lower level than all of its US and Swiss Big Pharma peers. Though the next CEO will have a lot on his or her plate, the central issue to solve will be seeding the next wave of growth.

The past model for pharma growth no longer applies

Like many pharma companies, GSK started its life as a relatively small organisation. Since coming into existence in 1715, the company has grown both organically and through multiple mergers and acquisitions, creating the organisation we recognise today. Whether the component companies of GSK would have delivered greater growth than if they were not combined is a moot point that applies to GSK and all of its Big Pharma peers. It is also not clear that the acquisitive plus organic model is the right one for the future: first the mega-acquisition model for Big Pharma has cooled in the last year, and second GSK’s revenue in 2015 was very similar to where it was in 2006. There is only so much GSK can do to grow earnings without growing its top-line too.

Getting too big creates risks

The constant pursuit of growth is not unique in the pharma industry and is demanded by investors, who increasingly want dependable returns in an uncertain world. As industries mature, there is a trend for increased consolidation realising many economies of scale (think of big oil and big tobacco). There are however a number of downside risks that require careful management with complexity being number one. Put simply, the more people you employ, the more markets you expand into and the greater range of therapy areas you cover, the great complexity you have to manage.

Managed well, scale brings enormous benefits, but perversely, the additional complexity it creates can reduce the likelihood of continued success, with employee motivation and company culture at the heart of the problem. Those that joined a small organisation to avoid bureaucracy and attain the creative freedom to research, develop and commercialise medicines, can find themselves acquired by a new company that doesn’t provide them with what they want. Staff can then leave with the outcome that the benefits that the acquiring company was seeking are lost.

Small can be beautiful

Having achieved Big Pharma status, the question for GSK now is therefore how to create the next wave of growth. One option that is championed by investor Neil Woodford, is to break the company up into its distinct businesses of pharmaceuticals, vaccines and consumer healthcare. This approach is radical and potentially hugely disruptive – the view of the next CEO and the board will determine if this is the direction taken. Another option would be to foster a mid-cap, entrepreneurial mindset throughout the business. Not only would this make financial sense, as the growth rate of European mid-cap pharma companies is anywhere from 2-5% higher per year than Big Pharma, but also it could engage employees and cut through bureaucracy. The success of GSK’s ViiV HIV joint venture to date illustrates the advantage of such a mid-cap mindset and focus in a specific area.

GSK needs to combine a dynamic “small” mindset with its “big” balance sheet

GSK is going to find top-line growth tough given its size and dominance in many geographies and therapy areas and its relatively flat top-line performance over the last 10 years. The classic approach to secure quick growth is through M&A, but frequently the results do not meet expectations and increased bureaucracy causes further problems. GSK could do well to reflect on what made it big in the first place – an entrepreneurial, innovative mindset in each of its constituent parts. So if the Board and new CEO of GSK choose to keep GSK big, they need to find ways to create and sustain the dynamism and focus that has provided strong growth for its smaller pharmaceutical brethren. Mastering this “big” strength, for financing and risk-taking, with a “small” mindset, for focus, dynamism and entrepreneurialism, is the best hope for GSK to now get back to growth.

Ed Corbett is an Engagement Manager at specialist pharmaceutical strategy consultants, Novasecta.

 

John Rountree, Managing Partner of Novasecta, was recently quoted in The Times, a major UK newspaper. In an article discussing Shire, a highly successful mid-cap pharmaceutical company headquartered in Ireland with strong growth and a high share price rating, John offers a number of cautionary messages. He asserts that Shire is making the risky transition from mid-cap to Big Pharma, and that the complexity of the business and the research pipeline is now more of a concern than it was after Shire’s previous deals, such as the $6 billion purchase of Dyax last year. John states that “they can say they have done integration very well but those have been $4 billion to $6 billion deals: this is $32 billion. They have got to prove themselves. They’re talking about leverage, synergies and savings. This has become a new game.”

John goes on to comment on pricing pressure from governments, insurers and health service providers, another concern for Shire in the long run as it is becoming increasingly dependent on oncology and rare diseases after the Baxalta acquisition. “Rare diseases and oncology are almost by definition high-price markets. How long can it last in the US?” he was quoted as asking.

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