Online Extra: "It's a Perfect Storm" for Drugmakers

Glaxo CEO Jean-Pierre Garnier on the industry's hardships and how his company is improving its search for new drugs

Times are tough for the pharmaceutical industry. Pricing pressures, stiff generic competition, and declining research and development productivity are dealing a major blow to drugmakers. On Sept. 9, BusinessWeek London Correspondent Kerry Capell interviewed Jean-Pierre Garnier, CEO of Britain's GlaxoSmithKline (GSK ), the world's second-largest drugmaker, about how his company is weathering the storm. Edited excerpts from their conversation follow:

Q: The drug industry is taking a lot of heat about the cost of prescription drugs.


There's a recognition among the political parties that the American consumer is overpaying and Europeans are basically taking a free ride. But we're caught between a rock and a hard place because we didn't create the monster, that's for sure. We don't like it, either.

We would love to have a global single price in all industrial countries, and maybe another, lower price for all developing countries, but that's just a dream. Because every attempt we have made to do it failed because a government here or a government there tried to get a better deal and put our price down.

Q: How much political pressure are you under?


Tremendous. It's a perfect storm. The problem is, everyone's under impression that the pharmaceutical industry makes a lot of money. That was true 10 years ago. But since then, we have had two major changes: Pricing pressure and productivity decline, and a very efficient genericization of drugs.

A decade ago, the generic makers were slow, and you didn't lose everything day one. Now, it's like switching off the light. So you have a much tougher environment. In the past, yes, the industry could raise prices whenever they felt like it more or less. That's over. People should be worried. They should say, "Wait a minute, let's not kill the golden goose here. We do want those folks to try and discover new drugs."

The political pressure is very important to me because it could break the back of pharmaceutical industry in a fundamental way. There's nothing that could replace the pharma industry in terms of drug discovery.

Q: GSK has come in for criticism about its lack of new drugs.


We have had a long dry spell pre- and post-merger. But now we're seeing fruits of our efforts because we have changed R&D in a fundamental way, more than any other pharmaceutical company. It has been a long road, and there was a lot of inertia in the research process. When you switch things around, nothing happens for several years. But we're at the point where we can see the first wave of new products coming out of pipeline, and we like what we see. Nothing is home yet, but we're getting closer.

Q: What were some of those changes?


We have removed all the layers in the organization and created seven autonomous Centers of Excellence for Drug Discovery (CEDDS). The typical R&D operation that one of our competitors might have -- between the chemists on the bench and the head of R&D -- [has] five to six layers. When we had that structure before the merger, I had difficulty in knowing who was truly responsible for Project X. Now we have just two layers, it has improved transparency and accountability.

Q: Both GlaxoWellcome and Smith Kline Beecham invested heavily in new technologies. Are those investments starting to pay off?


It has improved dramatically the output of discovery. At the same time, I also know that a fool with a tool is still a fool. So you can have a great tool, but if scientists don't use it effectively, it's completely useless. So I don't have any illusions. Even with superior technology, there's no guarantee of success.

Q: What are some of the more promising new drugs in the pipeline?


The next four products are pretty exciting. They will be a big test of the new approach. They're all coming within the next two to three years, tops. The first is a dual kinase inhibitor for the treatment of breast and other types of cancer. It's extremely safe and orally available.

The second is a COX-2 inhibitor for pain and inflammation. But its unique characteristic is that it crosses the brain-blood barrier, so it interferes with the central nervous system and has the potential to treat neuropathic pain such as back pain.

Then we have a long-acting cortical steroid that's an improvement on the existing family. It isn't a breakthrough drug, but it's pretty much the best you can hope for in cortical steroid. This is important because Advair will one day need to be replaced by something better, and one of the components of Advair is a cortical steroid, and we think we have one that's better. This drug will be used in rhinitis, and we're very encouraged with the clinical data so far.

There is 162, a drug for treatment of conditions such as depression and some anxieties. This one is a bit earlier, in the sense that we're still working on the dosage. It's a very interesting way to attack depression, and it has many advantages over classic antidepressants such as Seroxat and Prozac because it has no sexual side effects and no weight gain but equivalent efficacy.

Q: Are you trying to keep more compounds in phase 2 studies longer?


Yes. It's better to make all your guessing in phase 2 and none in phase 3. When you go to phase 3, you should just be repeating your successful profile because losing a drug in phase 3 is very expensive and very painful. Losing it or delaying it in phase 2 is better as a strategy. Of course, the best way is to do it right the first time, but sometimes conditions don't allow for that.

Q: What about your vaccine business?


We have two vaccines just around the corner: rotarix, for rotavirus, which has just been approved in Mexico -- we're still waiting for the final data, but it looks clear. We also have cervarix for cervical cancer, which is still a couple of years away. The latter is a big breakthrough vaccine -- Merck (MRK ) also has a slightly different version of the vaccine for this -- but this is a vaccine which stops cervical cancer in its tracks and one that every woman should take.

The vaccine operation is a fabulous business. Fifteen years ago, we were a no-show in vaccines, but we came from behind, and today we are -- along with Aventis Pastuer -- the largest vaccine biz in world. It proves that with the right science and with the right model, you can create a vaccine business from scratch. Our model was exactly the one we're [using] in the drug business: a center of excellence doing discovery inside and outside collaborations with biotech and academia. It's also run as an autonomous unit and not coalesced into some kind of a bureaucracy.

Q: You've also been aggressively in-licensing [buying rights to products being developed by external players] since the merger. Do you plan to continue?


We in-licensed about 30 products in the first two to three years after the merger because I thought the cupboard was kind of empty and we had to restock. Wellbutrin XL [the follow-on drug to Wellbutrin] turned out to be a very good deal. I would like to continue to do that, frankly. The problem is, there isn't much out there. Over the last four years, two things have happened: We're seeing earlier and earlier compounds, which are very high-risk, and they have become more expensive.

The danger in in-licensing is that it dies in your arms. Because the whole drug industry has a thin pipeline, whenever the few biotech companies that need a partner have an asset, the whole industry is around the table. But frankly, [a slower pace on deals] has been more [due to] a lack of assets than pricing issues because we would have paid whatever it was worth. But there just haven't been that many molecules.

Q: What has happened with the suit brought by New York Attorney General Eliot Spitzer [charging that GSK withheld negative information about its antidepressant pill, Paxil]?


What happened is we were accused of things [but], when you scratch the surface of the press release, Mr. Spitzer's substance was fairly modest. Our bad luck, in a way, was we did four studies in depression for children to prepare for a filing because we generally thought it would work. The first was positive, and the others were not. But when the first one came out positive, we said, "Great, let's publish it."

Of course, the journals were delighted, as they always want to publish positive stuff -- it's news. Then the second one comes in negative. That doesn't surprise you -- Prozac was approved on seven pivotal studies, four of which were positive and three negative. But when the third one came in negative, then there was no doubt, and that's when we communicated. We didn't file it with the FDA as it was obvious it wasn't going to get approval. We pulled the data on all the trials, [which also indicated] a signal of suicidality -- it's very weak, like [that of] placebo. There has never been a kid attempting suicide while on those trials.

Q: And now you're publishing all your clinical results since the 2000 merger on the Web?


We didn't wait for Mr. Spitzer. We think the accusation had no merits, but the fact is, people could accuse us because we were less than completely transparent. Now, we're going to publish every clinical trial there on all our marketed drugs and be completely transparent. I will give credit to Mr. Spitzer for having accelerated something that was going to happen anyway. [Apart from agreeing to release all clinical results, GSK's settlement with the New York Attorney General also includes a $2.5 million payment to the state.]

Q: What about marketing practices?


We're reviewing every single process at the company. The environment of the business has changed after Enron. I believe that there was a lack of trust [on the part of] the public for big business, and that lack of trust has been amplified by a few bad apples in the cart. And because of that, there has been a tremendous loss of trust in all big business -- not just pharma -- and that has implications to me as a CEO.

I can't count on people just to trust us as a company to do the right thing, even though they should. You only have to go inside GSK and ask people -- go to the CEDDS, the people who deal with HIV issues in Africa. But it's irrelevant, because the public doesn't see all this. We have reformed our marketing practices to point of political correctness.

We can't buy baseball seats for a doctor anymore. Five to ten years ago, it was a different world. People say, "Well, you had bad marketing practices [then]." Maybe we did, judged on today's criteria. It's tougher for sales reps today because they can't just buy access to physicians -- doctors are too busy, and there are too many sales reps.

But the industry is cleaning itself up, and we're leading the way. We were the first to stop having dinners for physicians in the U.S., and we're very aggressive about this. But all the major companies are spending less on promotion and more in research -- the whole industry is wising up after considerable scar tissue.

Q: Are you planning to do more clinical trials in lower-cost countries?


There's no doubt that the cost of doing clinical trials in Europe and the U.S. is absolutely prohibitive, and we can save substantially -- I mean hundreds of millions of dollars of pure savings -- by switching some of those trials to other, lower-cost countries. Of course, we have to go to places where they can do trials [with the] highest-quality standards to meet FDA requirements. So we will divert more trials to certain countries that have the infrastructure, such as Poland and India. Now, we do about 10% of our trials in these lower-cost countries, and our goal is 30% by the end of 2005.

We do about 60,000 patients in total trials each year -- so the saving per person if you switch, say, 20,000 of those patients to India is in excess of $10,000 per patient. So that's a savings of $200 million right there.

Q: Speaking of India, tell me more about your partnership with Ranbaxy, an Indian generic firm.


The generic companies know the best times are behind them in India [since India will be forced to respect patent rights come 2005]. They have had a free meal for many years. Now, for a variety of reasons, the future will be much more challenging. So smarter players realize they have to reinvest some of those gains into discovering drugs.

Indian companies have some of the core capabilities to do it -- they have the chemists and biologists -- but what they don't have very often is adequate targets, so they're missing pieces in early discovery. We're providing them exclusive targets that we have discovered, and they're applying the weight of their chemistry and biology to those targets. If they find something, then we share.

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