IT MAY be one of the biggest drug makers in the world, but the main talking point surrounding GlaxoSmithKline (GSK) in recent weeks has concerned two of Britain’s most popular drinks.
The company announced in its fourth-quarter results that it was reviewing the future of Lucozade and Ribena. Despite being healthy products, they have struggled to make a case for inclusion in the company’s plans.
As the review coincided with news that the merger of Irn-Bru maker AG Barr and Pepsi bottler Britvic was being referred to the Competition Commission, there was immediate speculation that a new combination could emerge.
“They are two great brands that have been in the company for a long time,” says GSK chief executive Sir Andrew Witty. “But as the company evolves it is important that the business is synergistic. These brands are not strong in emerging markets or bound together with the pharmaceuticals business, so it is the right time to ask if they would be better in someone else’s hands.”
He says there have been approaches from a variety of sources, but is not about to reveal from whom. Private equity firms are thought to be among them. Witty says a decision will be made by the middle of the year.
Witty is in Edinburgh to meet investors, and emerging markets is his main message as the company refocuses from Europe, where there has been a widespread clampdown on spending on drugs as part of austerity drives. Price cuts of 7 per cent are commonplace and make it difficult to build revenue.
He comments: “Europe is very challenging just now; it is tough on volumes and pricing. What is frustrating is that a price reduction in one country is quickly followed by a similar move in another. There is no official policy but a clear practice. Of the 27 member states [of the European Union], 24 reference each other on price.”
Apart from price, Europe is also not so interested in new products, and the change of attitude towards innovation and demand closer to home has forced GSK to seek out new markets. Sales in emerging markets grew by 10 per cent last year, while European sales fell 7 per cent. The company now has 40 per cent of its business in emerging markets and Japan, which is double its share from five years ago.
“Growth is everywhere except Europe,” Witty says. “In fact, 80 per cent of the world economy is in growth.”
The stagnation in Europe – which he does not expect to change any time soon – has led the group to axe 20,000 jobs across the continent, though a similar number have been created in the countries where the company is expanding.
It may be a sore point for Witty, as declining sales across Europe affected his performance-related pay. His total remuneration last year halved from £6.8 million to £3.9m. But he may be encouraged by the £10.7m he could earn if he meets all his targets.
The setback in Europe doesn’t mean the firm has given up on the region, or on the UK, where it has been repatriating some intellectual property and jobs. Witty is keen to increase investment in research and development (R&D) and Scotland is a target for extra funding.
The firm is already the biggest pharmaceutical company north of the Border with 900 employees and a contribution to the Scottish economy estimated at £160m. It announced £100m of investment in Scotland last year and has collaborative agreements with a number of institutions, including Dundee and Strathclyde universities and the Edinburgh BioQuarter. “It is a big year for the company in terms of delivering our R&D pipeline,” Witty says.
GSK has two main plants in Scotland – Irvine, where it produces antibiotics, and Montrose, which makes medicines for respiratory diseases – and he intends to expand these operations, investing in technology and improving their “green” credentials.
“We have significantly expanded our footprint in Scotland,” he says. “There was a debate about whether we needed Montrose and it was heading down the path of not being needed.
“I had a different view to my predecessor. We needed to make our plants more efficient, then bring production back that had been offshored. This has been very successful. By being more efficient, we can compete.”
He says the 600-strong workforce at the two plants are paid above the Scottish average, but still at a rate that can compete with India, and he believes that GSK’s commitment to manufacturing should be a model for the UK to follow. “We should not give up,” he says.
He is particularly pleased at the flow of new products coming on stream. There are currently six drugs under review with the regulators – two for respiratory illnesses, two for oncology, one for HIV and one for diabetes.
“That is unprecedented,” says Witty. “No company has had six [drugs] under review. It’s a reflection of our commitment to R&D.”
It is also a necessity, as products fall off the so-called “patent cliff” – the point when the company loses patent protection on its drugs. “It drives innovation, otherwise you would be out of business, and it ensures people get value for money,” he says.
Witty is a GSK lifer, having joined as a management trainee in 1985. He has worked in Asia, South Africa and the United States and was heading up the European business when he beat US head Chris Viehbacher and at least one other candidate for the top job.
Now five years into the post he has had to deal with some scandals as well as commercial challenges, both of which have tested his and the company’s resilience.
Pushing through those new drugs will prove critical in cracking new markets and steering the company along a growth path.