What’s Really Behind GSK’s New Business Model? (From Mad in America Blog)


What’s Really Behind GSK’s New Business Model?


December 20, 2013

GSK has recently announced that it will cease paying doctors for promoting its drugs and sponsoring them to attend conferences and sever the link between pay for its sales representatives and the numbers of prescriptions physicians write.

Commentary from the critics of GSK have attributed the changes they are making to pressure from the government or the requirements of recently enacted legislation. My assessment of the situation is that this could not be further from the truth.

In my view, the key to GSK’s actions is in a small paragraph from the Chair of the Board in their most recent annual report which reads “Operating in a responsible and ethical way is essential for the commercial success of GSK.”
From a business perspective there are very clear reasons why GSK are doing this and why other pharmaceutical companies will follow suit. My reading of GSK’s annual report leaves me in no doubt that they are changing their business model because it is likely to increase their profitability – not because they are being forced to. I do not think GSK is concerned to any great extent about legislative change because it, along with the other players in the pharmaceutical industry, has considerable power not only to influence US legislation but to control the legislation of other countries.

Consider the Trans Pacific Partnership Agreement (TPPA) currently being negotiated between eleven Asian and Pacific-rim countries, including the United States. Key to this agreement are
• the protection of patents by US pharmaceutical companies which would see member countries’ domestic legislation controlled or overturned

• provisions for pharma to sue governments for millions in damages for undermining the value of their investments by purchasing generic drugs; and
• compensation for drug companies if the market approval process for medicines extended beyond a drug’s patent term.

The proposed Article 15 of TPPA would specifically prevent countries enacting law that was unanimously agreed by all parties in their Parliaments.

Across the countries represented, the unprecedented secrecy under which these negotiations have taken place has been strongly criticized. This secrecy does not extend to the pharmaceutical industry however. The Dominion Post in New Zealand reports that a politician with top-level United States security clearance was barred from viewing the draft text as was US Senate finance subcommittee on trade chairman Ron Wyden who sits on the committee that oversees America’s intelligence agencies but that “more than 600 representatives of pharmaceutical and film corporations are given access because they are deemed to be US Government ‘advisers’’’

Surely, you may be thinking, if the pharmaceutical industry had this power the first thing it would do is to dismantle the regulatory process, removing the need to obtain very expensive approval before marketing its drugs. Not so. Strong regulation serves a very important function in any industry that of providing a strong barrier to entry for new competitors. Michael Porter of Harvard Business School, a world leading authority on company strategy and competitiveness, identifies barriers to entry for new companies as one of the keys to industry profitability.

The cost of the drug approval process is a significant barrier to the establishment of new drug companies and therefore a deterrent to the entry of new competitors to the market, something that works in the favour of pharmaceutical companies. Far better to control regulators like the FDA than to abolish them, and that’s exactly what Big Pharma have done. The regulatory process also serves the interests of pharmaceutical companies by giving the consumer a sense of security that drugs have been through an independent quality control process.

Removal of the regulatory regime could see a flood of new pharmaceutical companies enter the market, increasing competition and reducing profits. The goal of pharma is to control regulation, not to abolish it and there is ample evidence that they have been successful in achieving control of regulatory policy and practice internationally.

In my view, the key driver of GSK’s shift away from providing incentives to doctors and to their sales reps for influencing prescribing practice is that these practices threaten their profitability.
The only distribution channel (the path through which goods and services travel from the vendor to the consumer) for prescription drugs is the medical profession, and the actions of the pharmaceutical industry have undermined confidence in the honesty and integrity of this channel. Low levels of trust in the medical profession result in reduced profitability for Big Pharma.

Americans are turning to complementary and alternative medicine because they feel the current healthcare system is failing them for many reasons. These, according to an analysis of the CAM market include “cost prohibitive prescriptions, impersonal & dismissive physicians, a heavy reliance on drugs, misdiagnosis, and conflicting views regarding the maintenance of wellness. “

GSK’s recent prosecutions and fines have undermined their reputation but in practice this is unlikely to have much impact on sales. Governments not consumers are their customers and government purchasing agents are interested in the quality and price of drugs not in whether the company who produces them behaves ethically or not. While patients may question the class of drugs they are prescribed there is no evidence they are aware of who manufactures the particular brand of drug they are prescribed or reject prescriptions because of the manufacturers reputation.

More relevant to sales is the impact GSK’s actions may have had on public confidence in the medical profession who are the pharmaceutical company’s distribution channel. Prescribing behavior is the biggest driver of pharmaceutical sales. Loss of confidence in doctors represents a huge threat to profitability.
While in the past, increasing sales through providing incentives to doctors to prescribe has been a successful strategy, revelations about the prevalence and quantum of incentives to doctors has damaged public confidence in the integrity of the medical profession to the extent that GSK and its rivals have seriously harmed their own distribution channel.

We have seen this happen in other industries. A Deloitte survey of retirement advisers found that 20% of respondents didn’t trust advisors to provide objective advice and were concerned that they were motivated to guide them towards investments benefitting the provider rather than the client. The survey found that 83% of those who have a high level of trust in advisors sought their advice, compared with only 32% of those who have a low level of trust.

Given that doctors are the sole distribution channel for drugs, it is in the interests of pharma to ensure they are trusted by consumers and are not perceived as compromising their commitment to patient care as a result of their relationship with the pharmaceutical industry. Stopping payments to doctors and funding for medical conferences and severing the ties between sales rep remumeration and prescribing rates will be key to convincing consumers of the independence of doctors.

Marketing guru Kotler believes that strong brands are the only route to sustained, above-average profitability and that great brands present emotional benefits, not just rational benefits. Great brands work more on emotions than on product attributes and benefits and show social responsibility care and concern for people and society.
There is a niche in the market for a pharmaceutical company to become the leader in ethical practice. Branding is about perception rather than reality and it is not necessary for GSK to be ethical in reality but to create the perception of being so.

The recently announced changes in GSK’s business practices are, in my view, aimed at increasing confidence in the medical profession and positioning GSK as the ethical player in the pharmaceutical industry, they have nothing to do with requirements imposed by government.