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GlaxoSmithKline’s Andrew Witty: On a Mission

Andrew Witty recently met with Institutional Investor Staff Writer Neil Sen to discuss how his early desire to “do something connected to improving peoples’ lives” — which is partly what impelled him to join Glaxo — is reflected today in the company’s core philosophy.

Some CEOs of multinationals hold themselves aloof. Not Andrew Witty. The 46-year-old chief of GlaxoSmithKline visits African villages to see for himself the state of health care.

Indeed, he speaks of addressing the medical needs of the least-developed countries with a missionary zeal, and it is not bluster. Since becoming CEO of the world’s second-biggest pharmaceuticals company by sales in May 2008, the native Briton has slashed GSK’s drug prices in the poorest regions. No less boldly, he has pledged to spend 20 percent of group profits on medicines for underdeveloped areas and on improving their health care infrastructure. He sees this as good not only for the locals, but also for GSK shareholders.

Witty’s active, hands-on approach well suits the volatile pharmaceuticals industry. A side effect of making medicines seems to be the occasional crisis, and GSK has lately had its share of them, after undergoing years of cost-cutting and head-count reductions.

In October the London-based company reached a $750 million settlement with the U.S. Food and Drug Administration after pleading guilty to long-standing FDA charges that it knowingly manufactured certain “adulterated” drugs at its Cidra, Puerto Rico, plant, now closed. At the time, Witty was in Singapore as senior vice president of GSK’s Asia-Pacific operations. However, he has been busy practicing damage control with shareholders and the public.

A more common problem in producing drugs is that they can take decades to develop but may have short commercial life spans. GSK’s diabetes drug, Avandia, introduced in 1999, is a case in point. After fresh evidence of side effects emerged recently, U.S. and European regulators issued safety alerts. Once GSK’s second-biggest product, Avandia saw its sales plunge 65 percent in the third quarter, to just £70 million ($111 million).

The research-to-reward ratio for a drugmaker can become even more imbalanced for the more ephemeral varieties of drugs. Although fears of a pandemic such as swine flu can boost sales of a vaccine in the short run, they tend to drop off quickly. Meanwhile, the research effort can be enormous. Witty, speaking of GSK’s swine flu vaccine, Pandemrix, says: “We spent £2 billion on developing technology and increasing capacity. We produced 400 million doses of the vaccine in the period from April to August 2009. That was virtually D-day in its scale.”

In 2011 the patent on GSK’s top-selling drug in the U.S., the asthma reliever Advair, expires. At stake: £2.7 billion in annual sales. Nevertheless, this may not be quite the crisis it appears. GSK forecasts continued strong Advair sales because rivals will have trouble replicating the proprietary inhaler technology needed to create a generic version. (None has done so yet.)

Still, dwindling sales of Avandia and antiviral drugs, along with the impact of austerity measures in Europe and health care reforms in the U.S., contributed to a 2 percent slide in GSK’s third-quarter sales, to £6.8 billion. Operating profits fell 5 percent after restructuring charges, to about £2 billion.

Witty, a 1985 economics graduate of the University of Nottingham, has spent virtually his entire career, apart from a few months at a biotechnology firm, at Glaxo and its successors. (Glaxo and Burroughs Wellcome merged in 1995, and Glaxo Wellcome combined with SmithKline Beecham in 2000.)

“Every time I felt the grass was greener somewhere else, the company came up with another opportunity,” he says. During his 25 years at GSK, he has run businesses in Africa and Asia, giving him a firsthand feel for emerging markets, which offer the most promising growth prospects.

He sees his long tenure as a distinct advantage. “It is emotionally different running a company you’ve been with for so long,” Witty says. “You treat it with more respect; you’re more long-termist and less cavalier.”

He believes GSK is well placed to increase sales as important drugs make their way through its pipeline. For example, Benlysta, which treats lupus, has potential sales of $3 billion, estimate analysts at J.P. Morgan. Approval could be imminent, as an FDA advisory panel has signed off on the drug.

Witty recently met with Institutional Investor Staff Writer Neil Sen to discuss how his early desire to “do something connected to improving peoples’ lives” — which is partly what impelled him to join Glaxo — is reflected today in the company’s core philosophy.

How does GSK incorporate improving lives into its mission?

We have tried to improve access to drugs with a tiered pricing approach. The richest countries pay the most, and in the poorest countries we have cut prices by two thirds or even 75 percent. Our HIV drugs in Africa, for instance, are sold at cost. In middle-income countries too, we have cut prices on some medicines. In India they sell for one rupee, the lowest price you can charge. We’re investing in research centers for neglected tropical diseases, and we’ve opened them up to non-GSK scientists. This is not a bolt-on part of the company; it is a core part of our mission.

It’s admirable, but is it in shareholders’ interest?

I’ve run GSK’s operations in Africa, India, Pakistan and Bangladesh; I’ve seen for myself what a difference we can make. When I became CEO, I wanted to move this agenda forward aggressively. I wanted to prioritize it, and I believe it is consistent with serving shareholders because this approach can boost sales. For instance, since we’ve reduced the price of Cervarix in the Philippines by 60 perent, our sales have increased sixfold. We’ve also maintained around a 35 percent margin in emerging markets.

After ten years, are Glaxo Wellcome and SmithKline Beecham a successful union?

Yes, it definitely feels like one company. It’s been a very successful merger, but not in the way that was envisaged in 2000. At that time, the potential to invest in research and development was given as the rationale. But in fact it’s turned out that it is perfectly possible to improve R&D without just spending more money. Instead, the real benefit of the merger has been that we’ve been able to reallocate our increased resources efficiently in our most important units.

How so?

In particular, the former SmithKline consumer and vaccine businesses, along with Glaxo’s respiratory business, have been properly invested in. And we have bigger capacity all-round, including distribution, so that, for instance, we’re well placed in growing markets such as India and China. This is the second big merger I’ve been through at the company — I was around when Glaxo and Wellcome merged in 1995 — and I think both deals have worked well in driving sales growth.

So big mergers can work. And you’ve just hired a veteran deal maker from Goldman Sachs Group, Simon Dingemans, as CFO.

Is a deal in the offing?

I’m not opposed to big mergers in principle. But all the possible targets for us are challenged in their sales lines because they’re on a patent [expiration] cliff — which means their sales growth will slow. A deal might generate more profits in the short term, but I’m not convinced it would generate shareholder value. And it would slow sales growth. For the next four or five years at least, we need to focus on organic sales growth, bolt-on acquisitions and other innovative deals. And Simon is not just a deal maker. He is a strategic thinker with wide experience and has a broad knowledge of different sectors. If I am the consummate insider, Simon is the consummate outsider.

What is your strategic priority for GSK?

We are moving away from “white pills, Western markets” and increasingly investing in vaccines and emerging markets. So far we’ve taken almost £2 billion of costs out of traditional markets and reinvested it in those growth areas. We’re already seeing the benefits. Our emerging-markets sales were up 14 percent in the third quarter compared to the same period in 2009, and they now account for 24 percent of the group’s total. Our vaccines business is now the biggest in the world.

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