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Glaxo Goes It Alone

Today it costs on average $160 million to bring a new drug to market, up from $125 million lust three years ago. No wonder most pharmaceutical companies are scrambling to combine-most, but not all.

For generations (starting in 1906), British nannies poured Glaxo into their infant charges to “Build Bonnie Babies.” Probably Mrs. Thatcher and the Queen were no strangers to the baby formula. Until 1940, when U.K. production ceased, Glaxo was the way to bring up baby. But today Glaxo is another kind of baby. So CE interviewed the man in charge of bringing up Glaxo Holdings, now a full-grown international pharmaceutical giant.

In 1988 Glaxo was the world’s second largest pharmaceutical company. Then the drug company merger wave of 1989 knocked it back to fourth place in terms of sales, behind Merck, SmithKline Beecham, and Bristol-Myers Squibb. But Glaxo’s Zantac (the trade name for the anti-ulcer medication ranitidine) remains the world’s single largest-selling prescription drug with sales exceeding $2.5 billion in 1989.

Headquartered in London‘s famous Berkeley Square, the company’s operations are international, with manufacturing sited in 30 countries, and marketing in approximately 150 nations. Sales growth has been enormous, rising from $1.5 billion to more than $4 billion in the six years ending in 1989, with profits more than tripling to $1.7 billion. For the six months ending December 31, 1989, Glaxo reported net earnings of $654 million on sales of $2.37 billion.

Under Chairman Sir Paul Girolami, 64, Glaxo has concentrated on prescription drugs. Sir Paul also spearheaded Glaxo expansion in Japan, and led the Glaxo takeover of Meyer Laboratories, giving the firm its first direct entry into the US., now its largest national market. CEO Bernard D. Taylor resigned in May 1989, following a reorganization that resulted in the appointment of Dr. Ernest Mario as his superior.

Born in 1938, Mario had headed Glaxo’s American operations since 1986. The former SmithKline and then Squibb vice-president was born in Clifton, NJ., and received a bachelor’s degree in pharmacy from Rutgers, and a Ph.D. in physical sciences from the Univ. of Rhode Island. The choice of an American as heir-apparent to Sir Paul reflects the importance of the American market for Glaxo products. Mario more than tripled Glaxo’s American sales force, making the company number two behind Merck in sales revenue.

In contrast to the cerebral and private Girolami, Mario is outgoing in a way Britons find “very American.” He uses birthday breakfasts with employees as a way to get to know what’s happening within the entire organization. “I’m almost naive in the sense that what you see is what I am,” he says. He draws his numeracy and stubbornness from his mother and his consistency, which he regards as his strength, from his father, a lay minister. (Although widely reported to be a janitor, the elder Mario really began as a butcher but temporarily became a janitor to raise cash to go into the painting contracting business.)

Blockbuster drugs now in the Glaxo R&D pipeline are odansetron, a cancer-therapy anti-emetic, and sumatriptan, a revolutionary treatment for migraine. Sumatriptan could be another Zantac with sales topping $1 billion. The trouble is it takes at least three years after approval to go from new product introduction to global marketing. That could leave Glaxo without a winner to take up earnings slack created by reduced Zantac sales, and the onset of generic substitutes for its aging Ventolin.

In 1989, Glaxo earnings were pumped up by profits on its bond investments and a favorable year-end dollar rate. New and heavy commitment to R&D and promotional expenses squeezed margins. Without dollar weakness, earnings growth could drop to single digits. According to UBS Phillips and Drew, “the commercial potential of many drugs in Glaxo’s pipeline has been grossly overestimated.” But Carine Menache, an analyst with Barclays Bank, notes “that for seven years Glaxo has been the fastest-growing drug company in the world.” The critical phase will be 1990-94, before new drugs can really impact the bottom line.

Glaxo seems to have sidestepped the consolidation frenzy over the last year or so. What do you know or what do you think you know that other folks don’t?

The consolidation you see going on in the industry will continue. It’s born out of the perceived difficulty that companies have in predicting their ability to discover and bring new and important drugs to market in a timely fashion. If you look down your research pipeline, and see wide open spaces, you realize that to sustain the revenue, expense, and investment in the business, in a reasonably continuous fashion, you must supplement.

When products come through your pipeline-you’re on a roll. You’re up on the top part of the cycle. Then there’s a delay: side effects show up, products drop out of the research cycle, the agencies don’t approve it as quickly as you would hope. The government doesn’t give you a good price. You’re arguing with them for longer than you thought and the investment is greater than you thought-all of these things lead to the down part of the cycle. So what the companies-good companies like Bristol-Myers Squibb for example-have said is, “let’s put our resources together, and maybe we can use your research pipeline to supplement our research and smooth the curve.”

Does Glaxo have plans to get married?

We’re not going to get married to anybody-we’re not going to merge. We are very attractive-we know that. People have looked at us, but our capitalization is so large, it would take a giant to eat us up. I think we’re $11 billion at today’s market cap.

Bigger companies have been targeted.

I understand that. But it would take a heck of a bite. It could happen, but it’s not terribly likely. For us to take on a merger or an acquisition is more likely, given our size and our strength and our position in the marketplace. In the context of where our pipeline products are, we’re just about to introduce Zofran, our anti-emetic odansetron formulation to control chemotherapy nausea.

What else is in the pipeline?

We’ve got products that we have been talking about that are in the final clinical phase. That includes sumatriptan-which is a new anti-migraine compound-an anti-asthma compound and a steroid compound. These aren’t just great ideas-they’re real commercial entities. The launch of a number of major products by this corporation in the next three years, in my view, precludes us from doing anything else. We’ve been continually taken to task by the analysts calling us a “one-product” company.

Your strategy is to stick to your knitting.

That’s it-and really to do the knitting better than anybody else. If you go back and look at the figures, even if you took Zantac out of Glaxo’s picture for the last six or seven years, Glaxo would still have been the fastest growing prescription business in the world.

Don’t you worry that someone might do to Zantac what you did to Tagamet?

It’s not likely that anyone will do to Zantac what happened with Tagamet. Because intrinsically, as it turns out, Zantac is a better product than Tagamet. It has fewer side effects. I think the competition went to sleep. In the early days, they didn’t take Zantac seriously, they didn’t really put the marketing muscle behind Tagamet. They should have taken Zantac seriously. That’s not happening with us. We see the threat to our business from Merck, Lilly and Marion Labs. And we haven’t lost our focus, our energy, or our market share.

You’re sitting on a $2 billion war chest of gilts and Treasuries. Doesn’t that make you an attractive plum for a would-be raider?

Having a cash pile, if that’s the right term, does enhance our attractiveness; there’s no question about that. On the other hand, from a raider’s standpoint, there’s nothing to sell. We’ve restructured internally-the animal health business was spun off, the medical generic business was spun off-I mean we’ve already restructured the company without a takeover.

That sounds like a man who’s ready for a stock buyback.

That’s certainly been discussed. A stock buyback is an option; a shareholder dividend is an option. But over the next five years, we will complete a really significant capital program in our research and development area. We will finish an almost $450 million U.S. research facility, a $1 billion plus investment in the U.K. and a $200 million research facility in Japan. We’ve just dedicated a research facility in Verona, and we will expand dramatically in Canada, and there’s a beauty going up in Mexico City. For $14 million, we’re getting a facility in Mexico that would cost $100 million in the U.K.

That’s a very heavy R&D commitment longterm. How do you stack up against Merck in research?

Merck has done something very, very smart in my view. They have been able to find a very nice blend of internally discovered and externally licensed products. Pepsid, for example, which competes with our Zantac, is a Japanese product. As far as Merck and Glaxo go, you would be hard pressed to find anybody close to us in terms of productivity, or research. Both of us spend around $700 million on R&D.

What about testing and approval?

Our filings have been very good-they have been very well set up in terms of the agencies in Europe, the Committee on Safety and Medicine in the U.K., the BGA in Germany; all over the world we’ve had timely and reasonable approvals. In the U.S. we’ve had to struggle a bit.

Are the FDA rules tougher?

The reason we’ve struggled in the U.S., and it’s changed now, is that when I first came into the company we would first put together documentation for the European agencies. At that time, the FDA required slightly different documentation. The FDA is different because it asks for the lowest effective dose of a new drug. So when doing your study, you need to not only find the effective dose but you need to lower it, as far down as you need to go, until it is no longer effective. That way you can identify the lowest effective dose.

The real test will be our Zofran filing, which went in clearly in terms of U.S. requirements. It’s our first electronic New Drug Application (NDA). We sent discs, not truckloads of paper. It now brings us up to the same level as Merck.

Let’s talk about the marketing end.

Nobody has a better marketing organization than Glaxo.

Why did I think you were going to say that?

We really have pulled together a superb sales and marketing team around the world. Interestingly enough, put the U.S. aside, because the record is clear there, and we are still really a superb company in a lot of the rest of the world. Our marketing strength is phenomenal. There are almost 7,000 sales reps now-2,000 of them in the U.S.

Do you think you can hold the threat of generics at bay?

Don’t forget, there’s nothing wrong with the patent system. In our case it takes sometimes 10 years before you get the patent and 10 years before you can market. We’re looking for a patent restoration term of up to five years. The generic companies are not going to bring Zantac to the marketplace or discover Zofran.

Even as we’re speaking, there are AIDS demonstrators in front of your rival Wellcome with placards reading “People Not Profits.” Do you see this sentiment spilling over into your business?

I see it as a very difficult situation for Wellcome. I have no problem with a company trying to recoup its investments in research and development. Our business has many, many more failures than successes. It’s like saying why do you charge $28,000 for an automobile when the amount of steel in it is about $2,000, or whatever it is. People have to get a little more realistic about this business.

We will continue to price our products fairly in our judgment. The structure of our pricing is a combination of a lot of events, not just somebody’s whim.

You mention an attitude of realism. But even your fellow colleagues in the private sector are unhappy to be paying very high health care costs for their own employees. They’re unhappy to be paying what they perceive to be outrageous costs for drugs. So you’re not only coming under pressure from governments, but also from your fellow CEOs. How are you dealing with this pressure?

I feel duty-bound, having been in pharmacy all my life, to defend against what you just said.

Do you dispute the fact that they are unhappy?

No question about it. But the pharmaceutical industry in the U.S. hardly ever raised its prices. They lagged the inflationary spiral like you wouldn’t believe. And they did it for 10 to 15 years. I mean from the middle ’60s to the early ’80s. At the beginning of the ’80s, all of a sudden people said, wait a minute-they woke up. Margins were shrinking. People said, wait a minute, we better start to catch up. If you look at the 20-year period from 1968 to 1988, you will see quite a reasonable progression of cost and pricing in relation to the rest of the economy. The difficulty is that the industry did nothing for almost 10-15 years, and then had to catch up.

What do you reckon that you have to put right most to get Glaxo where you want it to be?

In the next decade, the challenge will be to be sure, while we’re still quite happy with our growth and our past explosion, that we develop a firm foundation and a firm basis on which to grow in the future. People will have to look at their budgets and expansion programs a little differently, to be sure they don’t get too far out on the risk curve. I see clear signs of cost containment in health care.

You’ve also mentioned the U.S. government’s unhappiness with the cost of health care. They also see drug prices as being out of line.

The key is that there now has to be a dialogue between the pharmaceutical companies, and the people who head up major HMOs, and those who head up any of the third-party insurers, private insurers, to be sure that everyone is getting value for what they are paying. Pricing activity-particularly in the U.S.-will be much more in line with the inflation index in coming years.

It could be said that Sir Paul Girolami brought his financial expertise and empire building to Glaxo. What do you bring to the party?

I bring my entire career. I’ve had global experience, which is what everybody’s after when they look for a senior executive. They want someone who’s actually been around the world, and knows the markets reasonably well.

I’ve never been in any other business except health care. It’s been a terrific personal thing for me. I don’t think I really want to do anything else.

But the history of such transitions generally is that the CEO who comes along after the empire builder either restructures the company or makes a strategic right-angle turn. Some expect you to do something similar.

I hope not. I hope not. Both of us only have one goal in mind and that’s really to grow the business.

Glaxo has a number of dermatological treatments-have you ever thought about or discussed going into the “cosmeceutical” area?

Yes, in fact we have a licensing arrangement for a retinoid compound for skin care. Now if I could find the right acquisition, I would like to expand our dermatological sector-it’s recognized as a potential area for great success.

We have a home-grown business in the U.S. where we started with a couple of products from Glaxo group research. And if I could expand that business through an acquisition, I would do it. So you see a little beginning of a right turn.

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