The background

The global pharmaceutical industry in the 21st century was in the throes of uncertainty with intensifying pressures of patent expirations, price pressures, spiralling drug development costs, regulatory issues, political involvement and fundamental shifts in technology for discovering, developing and testing drugs. 1) Selling and Marketing: The cost structure of a typical global pharmaceutical firm in the 1990s that successfully passed the R&D phase had 30% of their costs in Selling and Marketing, 20% in Manufacturing, 15% in R&D and 20% in Administration1. The administration expense figures it was believed was more in the region of 5% of sales taking the profit margin closer to 30% making it one of the most profitable industries globally. 2) Product Development: Product development was at the heart of the industry and the traditional development was described as molecular roulette of random screening. In the nineties, only one in 5,000 compounds discovered by researchers would prove to be safe and effective to meet regulatory approval. On an average, by some accounts, drugs that began FDA testing in the US between 1970 and 1982 had required a total of 12 years and $ 194 million to bring to market. By 1995 it cost about $350 million to bring a drug to market2. 3) Challenges in the new century In the US and Europe there were considerable pressures on prices with the advent of managed care organisations (MCOs)3 that used their enhanced buying power to secure lower costs. They also maintained extensive formularies that permitted substitution of branded products with generics and lower cost branded drugs. Membership in MCOs in the US soared from 5% in 1980 to over 90% in 2001. Generic drugs were off patent formulations that were priced at 30%- 90% discounts to the price prior to patent expiration. 4) Consolidation: All these pressures prompted a wave of industry consolidation that was unprecedented. In the mid nineties, drug firms sought to control managed care and acquired pharmaceutical benefit companies. However they were unsuccessful. Yet, between the years 1995-2000 the large mergers included, Glaxo and Wellcome, Pharmacia and Upjohn, Sandoz and Ciba-Giegy, Astra and Zeneca, Hoechst and Rhone Poulenc, Pfizer and Warner-Lambert

5) The Indian Drug Industry:

Despite being home to 16% of the world population, the Indian pharmaceutical market constituted little more than 1% of the world sales. The Indian drug market in 2000 was approximately $4 billion and was projected to reach $11 billion by 20104. Current growth rates were in the region of 8%, a decline from the 15% growth rates witnessed in the 1990s. The average per capita drug spending in the 1990s in India was around $3 compared to $ 412 in Japan and $192 in the US5. Indias low per capita expenditures on pharmaceuticals were due to its low prices and also its low per capita income of $350 per annum

6) Price Controls: The Drug Price Control Order (DPCO) regulated drug pricing in India. The 1987 version of the DPCO capped the domestic prices of 143 basic drugs that were deemed to be essential at 75% to 100% over their manufacturing costs. The later version of the order in 1995 pruned the list of drugs under DPCO to74. Discrimination towards small scale firms who benefited from lower taxes, less stringent regulatory compliance in workforce and environment, and no requirement to comply with the DPCO also fragmented the industry apart from lax certification and approval procedures by the bureaucracy. 7) Patent Protection: Through the nineties the industry grew at around 15% with improvements in infrastructure, health awareness in rural India and population increases. The Indian economy was slowly liberalised and benefited the drug industry by relaxing price controls, encouraging competition and lowering trade tariff barriers, and encouraging foreign investment. However for the foreseeable future India would continue to be a branded generics6 market and according to estimates would have a potential patented share of the market of not more than 3-5% of the $9 billion market in 2008 and 15% of a $14 billion market in 20137. The domestic players had been successful in promoting exports and firms like Ranbaxy and Cipla had enlarged their canvas to a global operation, geared to a generics leadership in the post 2005 patent era.

Revitalising GlaxoSmithKline (India)

GlaxoSmithKline Pharmaceuticals Limited.

1) Glaxo Wellcome With origins in the dried milk food business Glaxo in the mid 1970s was a small British firm. It had by then, a decent foray into pharmaceuticals with most of its sales in antibiotics, respiratory drugs and nutritional supplements. In the 1980s Glaxo grew organically by researching and developing innovative new medicines. By 1994 it had sales that totalled 5,656 million with 3.6% of the world market. In 1995 Glaxo managers engineered a takeover of Wellcome to create the worlds largest pharmaceutical research company, with 54,000 employees. A severe clash of cultures took place between Wellcomes academic leanings and weak marketing and Glaxos hard nosed commercial culture. Some complained that Glaxo Wellcome flattered its earnings performance by relying on disposals. 2) SmithKline Beecham: SmithKline Beecham another global leader in pharmaceuticals was an amalgamation of two firms in 1989 which were also running out of internal options and SmithKline failed to replace its income stream from its blockbuster drug Tagamet on patent expiration. While the amalgamation had generated the critical mass in R&D expenditure, it still lagged top firms who were outspending them two to one.

3) GlaxoSmithKline:
In 1998 the merger between the two top British firms Glaxo and SmithKline Beecham was virtually complete. With a market capitalisation of $110 billion the deal would have created the biggest pharmaceutical company and the worlds third largest company. The all-stock merger deal was realised through
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an offer of Glaxo shares or SmithKline Beecham shares, resulting in an approximate 59: 41 split in Glaxo's favour. It was headed by J.P. Garnier with headquarters in London and operations in the US. Glaxo had its origins in India in 1924 as H J Foster & Co Ltd, to distribute Glaxo baby food in India. The name was later changed to Glaxo Laboratories (India) Ltd and headquartered in Mumbai following a change in the parent companys name. Glaxo India acquired the Indian branch of Allen & Hansburys Ltd, UK. Starting with basic vaccine manufacture at Worli in 1956, Glaxo set up the bulk drugs unit at Thane in 1961, a formulations unit at Nashik in 1983 and another bulk drugs unit at Ankleshwar in 1985. It had employee strength of 7,200 with more than 400 at the head office. It was one of the oldest firms in the country. 5) SmithKline Beecham Pharmaceuticals India: SmithKline in India was much younger than Glaxo starting in 1984 at Bangalore and then called Eskayef Ltd. and was just a fourth the size of Glaxo. It had a small range of mature products. However it had two strong brands in its stable the Hepatitis-B vaccine Engerix-B introduced in 1994 and an antibiotic Augmentin. 6) The Merger: In retail terms the merger of Glaxo, Burroughs Wellcome and SmithKline Pharma widened the gap between the number one company and the rest of the top five drug companies in India. According to an industry estimate in 1999 the merged entity would have combined annual sales of Rs. 1,085 crores and a 7.9% share of the Indian pharmaceuticals market. Market leader Glaxo's sales were Rs 880 crores, while SmithKline recorded Rs 205 crores. SmithKline Beecham Pharmaceuticals was ranked 20th in retail sales. The combined entity had an annual prescription base of 23.5 million. At the time of the merger Glaxo was in the midst of a restructuring exercise of forming seven distinct therapeutic groups but had yet to integrate its acquisitions of Burroughs Wellcome and Biddle Sawyer. This would be more complicated with the SmithKline addition. Besides the imbroglio between the Burroughs. GSK was the top firm in the industry but had inherited an unenviable baggage of a broad portfolio with a long tail, a large and complex set of legal entities that numbered more than six firms, seven manufacturing locations, a multiplicity of discordant unions among labour, the sales force, and the channel members.

Revitalising GlaxoSmithKline (India)

4) Subsidiary Concerns: Glaxo India

Envisioning Change
1) Scripting the Vision: In January 2001 the Board appointed Mr. V. Thyagarajan, as Glaxo India vicechairman and managing director. Ostensibly Thyagis task was to effect the
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merger in India with urgency ease and with less pain.His plan had delineated five elements; financial aspirations of profitability and growth, Segment focus on core and priority therapeutic areas building on and leveraging capabilities across organisations, operationalising the GSK value system into business practice and strengthen the image of being the premier healthcare provider in the Country.

Revitalising GlaxoSmithKline (India)

There was an urgent need to increase demand, restructure and turnaround the business, address its profitability, reduce its complexity, harmonise the organisation, and prepare for the long haul of a post 2005 product patent regime. To align the Indian operations more with the global business there was a need to perform at a level that was respectable to the parent organisation in its key metrics of profitability. That would generate the necessary salience needed for GSK India as a global citizen in the GSK network. It might be noted that though GSK India was barely 1% of the global GSK turnover its volumes would constitute a fourth of the GSK world wide output. Besides it was the only one in the global GSK network who had consistently and uninterruptedly held and maintained industry leadership in an MNC hostile patent regime dominated by branded generics. In light of the diagnosis, a simple rallying point needed for focussing the organisational energies was chosen: to grow profits faster than sales and achieve a trading profit of 25% of sales by the year 2004. The merger was the perfect alibi.

2) The Dramatis Personae: Having been with the organisation before and knowing its people first hand, Thyagi had the advantage of knowing his allies in this transformation and an idea of those who might be resistant to change. More importantly, he knew those whose inclusion in building a consensus was vital, both politically and organisationally.
The task was dual, managing the integration of the two companies and simultaneously create a company greater than the sum of its parts not merely in terms of estimated synergies but creating a robust organisation geared for leadership in the post 2005 new patent regime. With two organisations to be merged, a selection committee with one member from each of the organisations was formed to impartially judge the competencies and challenges in the existing organisational climate and the desired culture. SmithKline was a small organisation that would be absorbed into the body of Glaxo in India without much pretension to the merger of equals. However an important lesson learned from the Wellcome merger was
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to set pace, move rapidly and arrest the drain of the key people, competencies, capabilities and systems. There was no need of awaiting the legal merger and all to be gained in capitalising on the considerable time in the interim to have as much of integration as was feasible prior to the close. 3) Change in Four Acts: The strategy was fleshed out by Thyagi and his team initially into three limbs was christened as the three ring circus. To set a longer time horizon and prepare for a post 2005 era the fourth element was added to balance the three. The three ring circus now had four elements viz. a) Restructuring the Pharmaceutical Business - Restructuring the pharmaceuticals business included reviewing and rationalising the product portfolio, sizing the sales force, optimising their allocation and enhancing their productivity b) Redesigning Manufacturing - Redesigning manufacturing was the second element which had the unenviable task of closing locations that were inefficient. It also meant a concomitant outsourcing strategy shifting manufacturing to third parties. They were also to migrate to new enterprise software to link procurement, manufacturing, distribution and accounts on one unified database. c) Reducing Complexity - Reducing complexity was the third element which had the task of integrating and presenting a unified pharmaceutical firm than the assorted stables of Glaxo, Burroughs Wellcome, SmithKline Beecham, and three companies of the Biddle Sawyer. d) Gearing up for 2005 - While the impact of the new patent laws would be observed only after 2008, it would be important to gear up for introducing newer medicines and a more profitable revenue mix.

Revitalising GlaxoSmithKline (India)

Enactment: Marshalling the Functional Troops:

1) Redesigning the Portfolio: The portfolio of products had grown by accretion and spanned across therapeutic groups. While Glaxo had dominated in six out of ten therapeutic areas it lacked focus. Almost 60 % of these were under DPCO and were losing money. While 30 brands contributed 80% of the net earnings in 2000 in the Glaxo Wellcome portfolio, only 9 bands gave a similar contribution from SKB. There was a considerable variation in profitability across products. High margin and high growth products were targeted to lead the portfolio and 30 brands grouped under their umbrella commanding premium pricing were called Priority brands. They included the two SKB staples of Augmentin and Vaccines (esp. Engerix-B), Seretide, Phexin, etc. The marketing and sales effort was further focussed by matrixing these product groups against a sales grouping of six divisions. Each division was like an SBU and each SBU formulated its own strategy and managed contribution. Marketing managers reported to the SBU head. The product managers reported to the SBU head and created marketing plans for the year
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for each therapeutic option and each quarter based on competitive intelligence. The six groups included

Revitalising GlaxoSmithKline (India)

1. Entero Plus: A general practitioner (GP) focussed group but which

included gastrointestinal and ENT lines lead by Phexin and Cetzine. This group contributed 27% of the turnover in 2003.

2. Dermatologicals: Also based on GPs but included dermatologists and

led by Betnovate. This group contributed 16.6% of the turnover in 2003, up from 12% in 2001.

3. Asclepius: This was a specialist group that served the needs of

gynaecologists and orthopaedic and nephro surgeons. This group was led by brands like Ceftum contributed 16.6% of the turnover in 2003.

4. Unicorn: These served GPs largely and were led by the brands of the
Burroughs Wellcome stable of products including Neosporin, Actifed etc. This group contributed 18.5% of the turnover in 2003.

5. Vaccines/Biologicals: A critical acquisition from SmithKline which had

high potential. It served GPs and specialists and was led by Engerix-B. This group contributed 7.2% of the turnover in 2003.

6. PACC: This served specialists in intensive therapy and pulmonary

critical care, was a set of antibiotics largely focussed on hospitals 8. This group was led by Augmentin and Fotum and contributed 13.9% of the turnover in 2003, up from 7.4% in 2001.

2) Aligning the Sales Force: Accustomed to years of top line focus the task was now to align the sales force to the strategic priorities of market share and productivity of focused products in the new groupings based on growth and margins. Medical representatives were asked to spend more time detailing doctors on priority brands than with trade. Over time the primary sales to stockists and the retail off-takes would balance. Bonuses, trade offers or discounts were discouraged.

3) Rationalising Manufacturing: Manufacturing at Glaxo had grown over the years and was riddled with problems of an unwieldy product mix, poor forecasts and uneconomic batches, high costs and inefficiencies, rising expense levels, industrial relations problems, and higher bulk drug costs.
Streamlining the deliveries from contract manufacturers and stabilising production based on corporate norms of operational excellence was the challenge. Broader job roles, integrated work processes and reorganisation led to reduce the headcount considerably. Energy and other overhead savings were planned, through a series of projects by cross functional teams. Quality brought in the twin concepts of lean manufacturing and six-sigma to reduce slack, process variation, improve yields and delivery compliance 4) Outsourcing Supply: The task of ensuring consistent supply according to a predetermined scheduled at an agreed cost had been transferred from factory to
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procurement. A task they rapidly adopted and aligned according to Glaxos global norms in their SGM global system. With the merger a multiplicity of products with differing specifications, supply and vendor bases demanded rationalisation into a single coherent system. This enabled the considerable movements in adding new brands and SKUs, exiting some of them, altering specifications, write offs, changes in printing and packaging to be consistently handled. Rationalising a supplier base from 18,000 to 3,500 was a significant task. However among the chief accomplishments of Mr .Madhav Kurdekar and Jayant Dwivedi who later succeeded him was the transfer of manufacturing volumes to 25 contract manufacturing units

Revitalising GlaxoSmithKline (India)

5) Restructuring Distribution: It was not merely labour, and medical representatives in the industry which were unionised but also the channel partners, the stockists. At the time of the merger sales was driven by month end stock dumping and not demand. The trade was flooded with inventory, debtors alarming, discounting rampant and bounced cheques climbing. A new compensation to the C&FAs using both fixed and variable payments depending on volume off take were put in place which along with the rationalisation generated 30% of the total savings in supply chain.
6) Extending Information Technology: While SKB had one integrated enterprise requirement planning system Glaxo had for example four different payroll systems. Setting up a cross functional and cross organisational team the group was trained and set on a task of reengineering. On the anvil and at a considerable stage in development was sales force automation, linking the 1,800 medical representatives to 260 area business managers, and 45 regional managers. Representatives call productivity could be improved by discriminating call frequency within a territory by doctor profile and integrating it with calls per day targets and speciality mix. High achievers visit plans could be shared with others and emulative action taken. When retailers would get linked, a sales representatives call plan could track retail off take. Similarly suppliers were linked and visibility of plan performance and order tracking through plant and dispatch were made transparent. E-procurement events where suppliers could bid were already in place. Employee portals were already in place with MRs able to chat with the CEO. An HRMS system was at an advanced stage.

Chapter II: Scripting a Sustaining Sequel:

Through 2003 Kal and his colleagues started talking of chapter II which was to be preparatory to realising the impact of the new patent regime that would come into force in 2005. Competitor activity in product introductions had been considerable and according to one analysis, since 2000, product launches contributed 35% of all brands in the market9. The last few years saw an acute upswing in launches as the earlier patent regime closed. The real impact of the patents would begin to be visible only in 2007-2008. It was not yet time for a level playing field. But then the Indian players always saw it differently. Sales and marketing would need to segment the market and target their offerings to make benefits more palpable and acute. The foreseeable horizon was still a branded generics market where prices would continue to be low though there would be an increase in prices and skimming
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would be unsustainable. In India the product life cycles were not as sharp as those in the US and their gentle curve meant large room to several players and a good elasticity. Patented products were projected to be only 3-5% of the market in 2008 and 15% by 2013.

Revitalising GlaxoSmithKline (India)

The Challenges Ahead:

Competition in India was gearing up in their respective ways for new times ahead. Ranbaxy one of the largest Indian firm to have crossed the $1 billion mark in 2004, had diversified through exports into a large generics global operation and was moving from strength to strength. Cipla another large player who had considerably created world interest and humanitarian debate through its low pricing of the AIDS triple therapy was also pursuing generics markets in the US. However there were GlaxoSmithKline. concerns of a different kind for a firm like

1. How could it convert itself into a position of increasing salience and influence its acceptance and integration as a global citizen? 2. If India did become a sourcing hub for the global network how would it balance the concerns of local responsiveness and global integration?

3. The domestic pharmaceutical business would not scale in the same

way as any consolidation of supply hubs in India would for procurement, manufacturing and clinical research. Would there be contradictions and strains?

4. Would the supply networks be spun into a new company?

5. How would they be able to present a responsiveness to balance the long term healthcare environment demands of India and their need to comply with parent pressures for returns?

6. How would provisions in the TRIPS on compulsory licensing be

handled? What would be defined as national emergencies?

7. Had they exhausted the possibilities of squeezing out enough through

the supply side efficiencies and had it reached a point of diminishing returns?

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