GlaxoSmithKline appears ready to turn the typical pharmaceutical company business model on its head, with plans to significantly increase the percentage of sales spent on research & development and reduce spending on selling, general & administrative expenses.

"Now that we have a very productive R&D engine, [our goal] is to make it a bigger engine and to reverse the business model" to create a competitive advantage, CEO J.P. Garnier said at the recent Goldman Sachs annual global healthcare conference in California. Garnier's speech focused on R&D productivity and the need for innovation.

"You just have to double up on R&D and then before you know it, in 10 years, which is not that long a period of time, you have now established a formidable intensity of R&D in your company."

The Goldman Sachs presentation was not the first time for Garnier to send the message that the pharmaceutical industry needs to ramp up spending on R&D; the CEO has been making similar statements over the last year about the need for increasing research spending.

With a nod to the chief exec, GSK R&D Chairman Tachi Yamada pushed the idea of an industry-wide shift in R&D allocation during an oncology business review at the end of last year (¹ Also see "Rx Industry May Need To Inject More Funds Into R&D – GSK Exec" - Pink Sheet, 5 December, 2005., p. 7).

Currently, the average business model for pharmaceutical companies is to spend 34% of sales on SG&A expenses and 16% on R&D, according to Garnier. "We want to be able to swap them around," he said.

According to the company's annual report, GSK spent about 14.5% of its total sales (including consumer products) on R&D in 2005. R&D investment for the year was £3.14 bil. ($5.79 bil.). SG&A expenses were £7.25 bil. ($13.33 bil.), or 33.5% of sales.

Garnier maintained that the majority of the increase in R&D investment could be done without affecting the company's profits.

"We will be able to do this by saving on SG&A as we have been doing for the past five years. If you keep your sales line going at 10% - and [at] GSK, we're nearly there, 8%-9%, but we don't increase SG&A 7%, we've been increasing it 4% for the last five years, with no problem at all," he said.

The exec also noted that it is not necessary to cut the sales force to achieve this sort of budget allocation. Several manufacturers have considered - or taken - steps to reduce their sales rep headcount.

Part of the solution, Garnier suggested, is looking at outside sources for R&D innovation - he indicated that most of the increased R&D funds would be spent beyond the walls of GSK.

"Frankly, our 20,000 scientists - all their good ideas are being funded - so it's like having all those lines in the same lake, if there's a fish there we're going to catch it," he said. "The trick is now to go out and catch the line in other people's lakes, to find some exciting scientific programs."

With its emphasis on licensing, GSK has been a big part of an increasingly common refrain for big pharma as major manufacturers look to licensing to fill pipelines and drive innovation (² Also see "Big Pharma Gets Flexible As Licensing Activity Heats Up" - Pink Sheet, 3 April, 2006., p. 10).

In 2005, GSK established its Center for Excellence for External Drug Discovery, an independent division to set up external alliances. At the Goldman Sachs conference, Garnier highlighted GSK's evolution into a highly flexible "virtual organization".

Garnier suggested that a larger R&D engine would provide a company the financial resources to place more "bets" on finding successful products.

"It makes sense to place small bets. And I always say, there are seven roads to wrong, [so] let's put a bet on every single road because nobody can tell you what is the best way to get there today."

"Our scientists...actually sometimes do not believe in a given project, they are a little worried, they don't believe in it, but they think, 'I'm going to look pretty stupid if my bet is wrong, and that product does produce a first-in-class drug.' We have seen that in diabetes and so forth."

"A lot of it is not rocket science," he maintained, "it's playing the odds and never coming to the point where you place all of your bets on one single approach in a given therapeutic area, because, you know, that's not the real world."

By increasing the spending on R&D, "you have far more shots at the goal," Garnier concluded. "So, even if the attrition in the clinical pipeline doesn't get better...you have established yourself in a position where you have more opportunities to get lucky, so to speak."

However, raising R&D spending is not the only element of Garnier's strategy. The exec also pushed for better spending and cutting the cost of development, decrying the industry norm of spending $1 bil. on development of a compound.

"I hear my critics complain about the fact that it costs anywhere from $1 bil.-plus to cover new drugs. I don't complain about it, I refute it. You cannot accept that. If you think this is a fact of life, then the industry, the business model is going to erode over time."

"What you have to do is, if you improve R&D productivity, you can bring that number down significantly. For starters, you can make sure that what you do today cost less than it did yesterday."

GSK undertook a considerable reorganization a few years ago when it implemented the Centers of Excellence for Drug Discovery in an effort to make its large company run more like a biotech (³ Also see "GSK Recipe For R&D: Keep Drugs In Phase II Longer, Foster Accountability" - Pink Sheet, 8 December, 2003., p. 10).

One method that companies could use to become more efficient in the R&D process is by conducting more clinical research outside of the U.S., Garnier said.

"When you move a trial from U.S. to Poland or India, you go from $20,000 cost of patient to about $2,000, $3,000. It's a huge favor."

GSK now conducts about a third of its clinical trials outside of the Western world. "On all accounts we can take a lot of money out of this budget, [and] do more. Not necessarily save it, but to do more," Garnier said. With this approach, "we have actually doubled the size of our clinical pipeline without basically increasing R&D in a significant way."

Garnier noted that the reason that GSK is willing to share its strategy publicly is because "many of the companies we compete with are not in a position" to take a similar approach.

Garnier’s Vision: GSK To Be “The Most R&D Intensive Company In The World”

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