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.