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Glaxo Alters R&D Process to Ensure Survival in Changing Pharma Industry

GlaxoSmithKline (NYSE:GSK) CEO Andrew Witty predicts that, during the next five to seven years, the number of companies in the pharmaceutical industry is going to shrink. He is confident his firm will be among the survivors.

Witty says the key to any drug maker surviving — and prospering — is increased productivity from its R&D investment. One big reason is the industry’s critical need for blockbuster drugs to replace those that will be going off patent in the next few years. Even though pharmaceutical companies continue to spend huge sums on R&D — about $133 billion this year alone — they don’t have much to show for it. Last year the FDA approved only 26 new medicines, down nearly 25% from 2004.

As Frank Sinatra and others sang so eloquently, “Something’s Gotta Give.” Pharmaceutical companies looking at declining revenues, increasing regulatory scrutiny and government cost containment no longer can afford a strategy that yields one drug approval for every 5,000 that enter pre-clinical trials. That batting average just won’t cut it any longer.

To boost the development process at Glaxo, Witty is putting the company’s scientists in the driver’s seat. He thinks the way to R&D success today is to make those closest to the action more accountable. Toward that end, the big British drug maker has created a “dragon” culture, named after a British television version of “Dragons’ Den,” on which entrepreneurs pitch their ideas to obtain investment funding.

The Glaxo entrepreneur-scientists belong to drug performance units, or DPUs. These groups are small teams, some with just a few people on staff who work on different diseases. Periodically, each DPU has to run a gauntlet of probing Glaxo executives to gain continued funding for their projects. One of the big benefits of the system is it has brought together scientists who previously sat in different laboratories, even though they might have been involved in the same project. Now they’re sitting side by side.

Analysts seem to like the Glaxo approach. In a recent London Times article, Mark Dainty at investment bank Citigroup said, “It’s very difficult to innovate in large companies. Creating smaller teams that behave in a way that biotech companies might do is likely to be conducive to better innovation and decision-making in the longer term. Whether it delivers greater returns is a whole other question.”

Savvas Neophytou, pharmaceuticals analyst at the stock firm Panmure Gordon, agrees. “They are sending out a lot of little boats rather than one big ocean liner,” he said. “Hopefully, with a lot of them, it will be more likely that one will get to the Promised Land.”

Glaxo’s chairman of R&D, Moncef Slaoui, thinks the DPU system has been in place long enough — three years — to know it’s not failing but not long enough to know if it’s succeeding. However, he is confident the company is heading in the right direction.

Among drug makers, Glaxo’s pipeline is flush, with 30 drugs in the late stages of development, although many of them were cultivated under the former system. If the new approach proves even more productive, look for other drug makers to follow the company’s lead. But they’d better hurry.

Article printed from InvestorPlace Media, https://investorplace.com/2011/09/glaxosmithkline-glaxo-gsk-pharmaceutical-stocks/.

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