GlaxoSmithKline isn't planning to diversify into fields it doesn't know about, but it is moving aggressively beyond its core prescription drug business, Andrew Witty told investors at a Goldman Sachs conference in New York recently.

The company is interested in "bolt-ons," which strengthen its existing franchises in emerging markets, vaccines, biotech and consumer health, and which are "tremendous earnings enhancers," he said in his Jan. 8 presentation. Bolt-ons enable companies to buy brands while avoiding the organizational disruptions that go with large M&A.

In October, for example, as part of its effort to shore up its consumer health business, GSK spent $170 million, or more than three times 2007 sales, to buy Laclede's Biotene mouthwash business. Likewise, in emerging markets, where GSK expects to derive an increasing percentage of its growth over the next decade, Witty said he expects to see "a fair amount of assets in play" - none of which are in distress, he added.

With the industry suffering from overcapacity, large pharma needs to cut across the board and is more likely to spin off non-core businesses than to engage in large-scale M&A deals, which haven't worked out, he said in response to an analyst's question. "I don't think big M&A will be the solution in the next few years."

Pricing flexibility a key GSK strategy

Witty also discussed pricing for value, which is part of GSK's strategy for growth. Prior to assuming the top job at GSK in May 2008, he led the company's European pharmaceutical business, which negotiated prices in some of the world's toughest single-payer markets.

Global pricing, he insisted is "the quickest way to sterilize your business." Companies can carefully set uniform prices, only to have currency fluctuations, which they cannot control, undermine those efforts.

Tailoring prices and distribution to local needs, is key, Witty said. Particularly in emerging markets, "you have to think about the purchasing power of the people." That is important to gaining market share and brand recognition, so that the company maintains a leading position in emerging markets as they grow.

"We are big in India because we have been there right from the emergence of a middle-class. We sell Zantac (ranitidine) in India for three cents a day, but we sell hundreds of millions of tablets… The other thing to think about is that people [in emerging markets] are going through very different distribution channels. In the Philippines, we sell products one dose at a time because that is what patients can afford."

In Western markets, flexible "at-risk" pricing agreements, in which payers and manufacturers negotiate a price that can be reset as additional safety and efficacy data become available, are of increasing interest to GSK. These are "pragmatic" solutions to deadlocks that prevent products from getting on the market rapidly, he said, noting that people tend to consider the value, volume and price, but underestimate the importance of time.

"We are obviously constrained by patent expirations and need to be careful not to burn up two years negotiating a price because you'll never get those two years back," he said.

Payers and regulators appear to be receptive to at-risk pricing, and the company already has contracts of that sort for certain vaccines and small molecule products it undertook when negotiations stalled on pricing and access. "In these deals, you put your money where your mouth is. You say you believe this product is worth $1 and they will say, 'The benchmark values it at only 67 cents.' Our argument would be that it produces deep value for the system, and they say, 'When you prove it,' the price can go up," he explained, emphasizing that in order for these agreements to work, the company also has to accurately assess the value of its products.

"If you are not pricing for value, as opposed to your competitive position, you'll see some real challenges," he warned. For companies that can "thread the needle and deliver on value, the challenge will be to sustain their strength. The demand for truly innovative, effective new medicines remains strong, with payers willing to recognize the value of those products."

-Wendy Diller (w.diller@elsevier.com)

GSK’s Witty Speaks Further On M&amp;A, Pricing

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