This not. It explains whether the company operates within

This report serves the purpose of basis
to decide whether The University of Manchester should invest in GlaxoSmithKline
following its Manchester 2020 Strategic Plan or not. It explains whether the
company operates within the boundaries laid down by the university’s Socially
Responsible Investment Policy taking into account the ESG issues. The report
gives an idea about how strongly does the company creates its shareholder value
and fulfil its corporate social responsibility. The report unfolds with brief
information of the Pharma Industry, business models existing in the industry
and followed by GSK, the industry and company-specific challenges and
strategies used to tackle them. The report also considers hard data like sales
growth, share price etc. and company related narratives and a concluding
paragraph.

GlaxoSmithKline is one of the
leading pharmaceutical companies providing employment to 99,300 employees. It
was established by the merger of Glaxo Wellcome and SmithKline Beecham in the
year 2000. It holds a place in the top ten leading pharmaceutical companies in
the world. It deals in three world-leading businesses namely Pharmaceuticals,
Vaccines and Consumer Healthcare. In this highly sensitive economic world, GSK
and the industry as a whole has shown growth. The company aims at maintaining a
balanced product portfolio and simplifying the working process in this dynamic
industry. The industrial landscape has been through several and continues to
undergo several substantial changes which target the improvement of the goods
and services offered and reduction of cost.

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The British pharmaceutical industry
has a great input in the country’s economy. It can be seen using various
economic measures, it has created a considerable positive trade surplus (the difference
between country’s export and import value) in last decade and also contributes
to national income. The pharmaceutical industry follows barriers to entry yet
it has large dynamic competition. To increase the sales, the companies have to
spend a huge amount of funds at R division to counterbalance the pressure
from the rivals. The business track is full of difficulties, where a small
delay at any stage of the product can cause huge losses. The companies are
pressured from all sides in the market, from drug effective laws and
regulations to cost-cutting and profit maximization in light of users who have
a low-cost shift to a variety of substitutes and business ethics. Changing
social trends as an increase of awareness in consumers forms a public debate for
pricing, creating uncertainty for the industry.

The industry is in the production
of three different sets of goods and services which are namely ethical, generic
and over-the-counter (OTC) pharmaceuticals. This is where patents play an
important role in the industry. They are used to categorize the goods into
these three broad classifications.

 Ethical products are those which take into
account the goods which are protected using patents. The goods taken into
account are the ones which generate high returns and are only available on
doctor’s prescription. The patents have a life for twenty years out of which ten-fifteen
years are utilized in drug development and the company is left with ten-five
remunerative years to sell the drug in the market which is free of rivals and
the firm becomes the price maker. The difference between generic and ethical
products is that generic product is those ethical products whose patents have
expired. As the number of producers’ increase, the prices and profit ratios of
the products decrease and last but not the least OTC drugs are those which
require no prescription from the doctor and are readily available in the
market.

The role of patents has been a
topic of debate in the industry since the last few decades. The companies argue
that patents are  requisite to recover
the amount the company has spent on R throughout and they also encourage
investment as patients are the ultimate receiver. The critics question whether
the companies maximize their profits using patents as their shield. They
questioned the relation between the governing body and the companies, the
degree of innovation in the product and difference in the cost of marketing and
R.

Amidst all the debate the UK
authorities have formed regulations under The Pharmaceuticals Price Regulation
Scheme (PPRS) OF 1957, a scheme which is favourable for the growth of domestic
pharma industry. It caps the rate of return on capital at 30%, and not the
prices which encourage research in the companies.

Thus, in the 1980-90’s, under the
protection of patents, the pharma companies accelerated their growth by
producing drugs which cured health issues that hadn’t been discussed before, like
anti-depressants, fat burners etc. It has surely rerouted the R’s
attention from fatal problems like AIDS, cancer, etc. but has opened new doors
of opportunities for the companies to be lifted in a short span of time. The
companies were focused to develop new drugs which would satisfy large medical needs
in the global market and flood them with profits. The journey of GlaxoSmithKline
from 20th to 2nd largest pharma company (based on sales)
also started during the 1980-90’s during which Glaxo focused only on the
production of “Blockbuster Drugs” like Zantac, an exemplary anti-ulcerant.
Blockbuster Drugs are those Ethical Drugs which generate $1 billion or more
sales yearly. Hence the companies hinged on the development of only a small
number of such proprietary blockbuster(ethical) drugs to earn them revenues. In
2017, the company planned to launch of its new possible blockbuster drug called
Shingrix for the treatment of herpes zoster. In the 90’s Zantac contributed to
50%of the GSK’s revenue and helped GSK to have 10% average real annual revenue
growth rate. Problems arose in the 1990’s, as Froud et al (1998) asserted that
companies put more resources in the marketing and aimed at earning more rather
than investing in new drugs which would help patients. He argued that GSK had
its 40-50%-man force invested in sales and marketing whereas, 14-15% in
R&D. He also stated that Glaxo’s Zanatac and SmithKline’s Tagmet were alike
in terms of result but the only difference was that Zantac was marketed more
and priced high. Prices of such drugs were put in for questioning as the
research in the 70’s and 80’s bore fruits in the 90’s but it takes way longer
for the products to clear its way into the markets due to an increase of
regulations, screenings and huge development costs. With the patent of Zantac
coming to an end in 90’s, the fear of generics taking its place in the market, leading
to falling of its share price, led to mergers forming Glaxo Wellcome in 1995
and GlaxoSmithKline on 6th December 1999.

Therefore,
investors should at two things while analysing an investment offer,
specifically the patent’s life which might end soon and the second is the new
drugs in the pipeline of the company.

GSK’s
another blockbuster drug which grabbed headlines for all the wrong reasons was
Avandia. The drug was created to treat Type 2 diabetes by SmithKline and was
approved by The FDA in 1999. In 2000 GSK was formed as a result of the merger
between SmithKline and Glaxo Wellcome. In 1999 SmithKline held an independent
study to evaluate the risks related to the drug for heart patients, which had
negative results, which the company tried to conceal. It had to fight 50000
lawsuits over this drug and got caught in a drug-safety scandal as drug caused
cardiovascular issues. The company was accused of hiding and misrepresenting important
information related to risks which come with the use of the drug. The company
bound by the legal settlement with The State of New York had to submit its clinical
trials for Avandia and all others. With more upcoming studies the FDA asked GSK
to sell Avandia with a black box warning from November 2007.In 2010, FDA had
Avandia’s sales restricted to people in dire need of the drug. It was available
through mail order from specific pharmacies whereas the European Medicines
Agency lifted it from the markets. This case cost GSK a huge financial and
goodwill loss.

The Blockbuster
Model has started to fade away creating uncertainty in the industry. Many drugs
have and are about to loose their patents, handing over their market to
generics and taking away the profit obtained from them. With the increasing
need of drugs in the medical sector there is still plenty room for new research
and development. With the increasing discoveries, the areas of development have
decreased making the new drugs compete with the existing drugs in the market. Unlike
the 1980-90’s the research and development of new goods takes time and huge
investments While the return on investments is decreasing the investors still
expect high returns requiring the company to maintain constant growth rate. Consumers
have also made it difficult for the model to work in these past 10-15 years as doctors
are irked by regular drug marketing (for the same drugs) and with the change
from individual patient to the insurance companies, which now have to pay the
bills and pressurise to produce drugs which are both effective and efficient
(low costing). Increasing use of technology and internet has the consumers are
more informed and aware of their options, making companies to alter their
marketing techniques like direct-to-customer advertising. Companies have
started to focus more on producing generic drugs and personalised medicines
using biotechnology. Melange of products in the pipeline of the company has
become a new target to achieve. Uncertainty about the future of the industry is
very well illustrated by the way companies do mergers and acquisitions like
Glaxo had to merge with Wellcome to in 1995 and with SmithKline in 2000. The
company has strategized itself with proportion to the changing environment. In
2008 with alteration of R&D department of the company 38 drug-performance-units
were formed to explore various diseases. These DPU’s had to explain their studies
to win the budget from company’s R&D fund at the beginning and then after
third year’s assessment, for second instalment till 2014. This increased the accountability
of scientists and now, 38 people had a say in the decisions related to company’s
strategy. This has bought chemists and biologists to work in a team which didn’t
happen before. The company had set it’s targets in terms of the return from it’s
investments. This led to having 15 compounds in it’s late-stage pipeline of
drugs from just five-six years (Anon, 2017). The company joined hands
with some external associates to find new significant compounds and then taking
over it to develop. It had team upped with Francis Crick Institute, a prime
biomedical research centre to have both companies the scientists work together(Gsk.com,
2017). The increase in demand for
vaccines rather then reactive treatments by the government has also proposed as
a challenge to the industry. GSK
and Novartis asset swap transactions gave company a competitive edge in the
market of vaccines with large sales and reduction of the profit margin showing
effect on it’s growth rate. It illustrated how companies in the sector have
started to concentrate on their strength and power to compete internationally. A recent challenge that the UK pharma industry face is Brexit.
Which denied an easy admission in the crucial economic bloc, the gains from the
system and European Union’s espousal of multinational trade. Though the company
believed that it had no foreseeable material impact but “will involve real
cost” (Independent.ie,
2017). GSK prepared itself to pull out
of the UK and replicate and construct its provisions in the European Union in
order to safeguard its European market. Total sales for the company jumped in
the third-quarter comparing from the third-quarter previous quarter. Drop in
the value of pound has shown to benefit the company with a foreign exchange
benefit of 15%in 2016 and estimated to be minimum of 10% in 2017(Seeking
Alpha, 2017). Till October 2016 the
company had discovered 11 new products that would generate £6 billion yearly by 2018(Supply
Chain Online, 2017). Hiring brighter personnel like scientists to the UK with
increasing regulations for entry has also been a topic of concern for the
companies as they will loose them to global competitors. Evolving economies
like the E7 i.e. China, India, Brazil, Russia, Indonesia, Mexico and Turkey and
developed economies like Singapore and Ireland are becoming problems for the
British pharma industry as they provide tax rebates, cheap labour etc. (Anon,
2017). Uncertainty also prevails on
political grounds due the US presidential elections and general elections in France
and Germany in 2016. Increased international trafficking of drugs due to
globalisation and innovation in technology has led phonier drugs take the
market effecting companies sale and profits.

The
company strategies aim to increase its value in the long run for its shareholders
and the society at large. Where the company strategized itself to deliver growth,
creating shareholder returns and sustainable sales in 2015 and grow, deliver, simplify
&responsible business in 2016. GSK became the 1st company to
access to Medicine Index after its launch in the year 2008. (Gsk.com,
2017). Changes in demographics, living
conditions and ageing consumers have increased the disease liability. The focus
of GSK is on six different domains namely HIV and infectious diseases, respiratory
diseases, oncology, Immuno-inflation and rare diseases(Gsk.com,
2017). Innovation and technical progress
is the key to sustain in this market. It formed Global Risk Management Offices to
manage some fundamental risks like safety concerns for patients, quality of
goods delivered, protection of company information and areas for development of
new products. Under consume healthcare the company has diversified it business in
overall wellness, oral and skin health, power brands, nutrition. GSK’s turnover
increased in 2016 to £27.9
Billion from £23.9 billion in 2015.The free cash flow in 2016 was £3.1 billion
and £2.5 billion in 2015 compared to 2014 i.e. £3.9 billion which shows the
effect of Novartis transactions and lower operating profit (in 2015)
(Gsk.com, 2017).
The company in 2016 has presented 4 assets to the authorities which if
validated, would bring gains to the company. GSK had 56 regulatory inspections
were carried all bearing positive results. The company had started to conduct
phase III trials for a variety of treatments of HIV, respiratory and anaemia.
(Gsk.com, 2017).

The company aiming to reduce the cost stopped hiring
marketers who would promote the product among the prescribers. GSK exhibited
its social responsibility by supplying necessary vaccines to institutions which
help refugees from Syria etc. at the possibly lowest prices said the company’s
CEO Sir Andrew Witty in the company’s annual report. GSK came 3rd in its sector for Dow Jones
Sustainability Index. The commitment of GSK to Davos Declaration has led to
decrease the affect of production of antimicrobials and checking that it is
only available to the patient who really requires them. The company provided
1.3 million children with life-saving vaccines, medicine courses with its partnership
with Save the Children in 2016. The company was able to achieve 25% decrease in
its operational waste from the past 5 years. The company provided vaccination necessary healthcare to approximately
100,000 employees. Though the overall value chain’s carbon emission increased
by 1% GSK has been able to omit 18% of the company’s operational emissions.(Gsk.com,
2017). The company according to its
annual report measures its performance around four sectors namely “health for
all, Our Behaviour, Our people, and Our Planet”. The company was able to link
its economic state of countries with the degree of patent enforcement. It has
stopped filing the patents in poor and economically vulnerable countries. The company
was in process of a developing a breakthrough vaccination for Malaria, which
causes the most deaths all over the world after TB by 2015.According to Andrew
Witty, the company was said to sell the vaccine at cheap prices and allow the easy
granting of a license for generic editions to manufacturers in India and Africa.
The company has also prioritised its shareholders in its annual strategies. It
paid the same amount of 80p as a dividend (total of 3.9 Billion GBR) in 2016 as
in 2015(Gsk.com, 2017). The company will be reviewing its dividend policy in 2018
as the 3-year Dividend Commitment made in 2015 and will mark 2017 as last year
said the company’s chairman Philip Hampton. The company had total earning per
share of 18.8p in 2016 compared to 174.3p in 2015 and 57.3 in 2014(Gsk.com,
2017).

 

 

The
company has been accused of misrepresenting and misleading information on its
Voltaren Osteo Gel and its Voltaren Emulgel products for pain relief by
Australian Competition Commission. They had allegedly claimed it to have out
performed Emulgel with a unique formula where in reality it had the same formula.

Despite
all the challenges and hurdles faced by the company remains one of the top pharmaceutical
producer in the world. GSK had its contribution towards the society and duty to
fulfil its corporate social responsibility while creating shareholder value. It
complies with most of the conditions laid down by ESG issues enlisted by the
university but lacked in the areas of bribery and Human rights violation. The company’s
bribery case in China which made company suffer a loss in its Chinese market,
misrepresenting of facts in case of Avandia and Voltaren risking the lives of
patients can all be seen as proves of non-ethical behaviour. The company from
it’s past has shown a bend in monetary profit the reasons for which are arguable
in terms of survival, growth and ethical code of conduct.