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Glaxo unveils change in pricing strategy

Drugmaker GlaxoSmithKline, which employs thousands in the Philadelphia region, will zig while the rest of Big Pharma zags, chief executive officer Andrew Witty said Wednesday from London, laying out his plans after striking a multibillion-dollar deal with Novartis.

Glaxo CEO Andrew Witty: One or two high-priced drugs is big pharma’s old business model. (AKIRA SUWA / File Photograph)
Glaxo CEO Andrew Witty: One or two high-priced drugs is big pharma’s old business model. (AKIRA SUWA / File Photograph)Read more

Drugmaker GlaxoSmithKline, which employs thousands in the Philadelphia region, will zig while the rest of Big Pharma zags, chief executive officer Andrew Witty said Wednesday from London, laying out his plans after striking a multibillion-dollar deal with Novartis.

Most big pharmaceutical firms, Witty said, are narrowing their focus toward high-priced drugs, and pushing patients, insurers, and governments in rich countries to pay those high prices, doubling down on the old business model and ignoring resistance to high-cost drugs.

Witty argued that that strategy might help in quarterly profits and a stock bump, but that it was bad in the long term because even in wealthy countries - the United States and some in Western Europe - the need for health care is growing while the ability or willingness to pay is declining. Witty said GSK has to focus less on the 600 million people in the U.S. and Western Europe and more on the six-billion-plus people in the rest of the world.

With a realistic pricing strategy, GSK will use its vaccine, over-the-counter health care, and prescription-drug divisions to "swim with" that global tide rather than against it, Witty said.

"Going forward, the anxiety and pressure on this industry will only increase," Witty said. "The ability of companies to achieve super-high prices, for product after product, in a small number of markets is limited. It's why we've focused our strategy on building a much more balanced portfolio . . . so we can deliver a higher degree of confidence around long-term sales and earnings."

Speaking to analysts at the London offices of Goldman Sachs, Witty made a point of saying the GSK board, including its new chairman, was in the room and had been part of discussions about strategy. The annual shareholders meeting will be Thursday in London. Speculation rose in recent months about Witty's job security because his slightly "contrarian" strategy had not yielded the profit and stock-price rise that many investors demand.

GSK's first-quarter revenue rose from $6.37 billion in 2014 to $6.38 billion this year. (Profits were skewed by the Novartis deal-closing payment.)

"I'm a CEO, so I'm not going to talk about job security - they serve at pleasure of the board and shareholders," he told reporters earlier.

In the Novartis-GSK deal, GSK gets all but one of Novartis' vaccines, cash, and the majority position in an over-the-counter joint venture, while Novartis gets GSK's established, but not future, cancer medicines. Witty said he believes the cancer drugs will not be market leaders.

Like every pharma CEO, Witty relishes blockbuster-drug profits, but he sees danger in overreliance on even one such drug, because it will eventually lose patent protection and profit. He argues that a better strategy involves a broader range of drugs that generate profit, vaccines with more consistent demand and fewer competitors, and steady over-the-counter products. As part of that, he said Wednesday, GSK would keep Viiv, its joint venture with Pfizer that makes HIV drugs.

Witty has cut costs and jobs and reorganized divisions. Montgomery County facilities are losing vaccine researchers to Rockville, Md., but drug research is being consolidated in Montgomery County and the United Kingdom at the expense of facilities in North Carolina. Some jobs at the Navy Yard were also cut.

Witty became CEO in 2008, winning the job over two GSK executives who led the U.S. operations during a period - from 1999 through 2007 - that later came under scrutiny from the Justice Department for questionable sales and safety disclosure practices. In 2012, GSK pleaded guilty to three criminal charges and settled the case for a still-record $3 billion.

Trying to repair GSK's reputation with patients and regulators, Witty angered sales representatives by eliminating bonuses based on the number of prescriptions written by doctors they called upon. GSK was the first company to say it would end payments to doctors outside the company by the end of 2015.

The asthma medicine Advair is GSK's top seller and had the second-highest spending among Medicare patients in 2013, government figures show. But declines in Advair sales in 2014 were due to the pricing pressure Witty spoke of.

Insurer consolidation and strapped government budgets in the U.S. are putting pressure on prices. Abbas Hussain, head of the pharmaceutical unit, said nine insurers cover 80 percent of people in the U.S. And pharmacy-benefit managers are exerting more influence. PBMs are for-profit companies that manage drug plans for insurers and employers in the U.S. They negotiate for the lowest drug price (without automatically passing on savings) before putting a drug on the list for patients.

As part of those negotiations, PBMs will exclude one company's drug in favor of a competitor. Express Scripts excluded Advair for part of 2014. Hussain said the two biggest PBMs - Express Scripts and CVS Caremark - excluded 65 and 95 brands, respectively, last year.