|GSK CEO Sir Andrew Witty and Save the Children CEO Justin Forsyth in Africa--Courtesy of GSK/Save the Children|
Emerging Markets Sales 2012: £6.78 billion ($11 billion)
Percentage of Sales in Emerging Markets: 26%
Until a few months ago, GlaxoSmithKline's ($GSK) claim to fame in emerging markets was tiered pricing. The U.K.-based company was one of the first multinational drugmakers to cut prices in the developing world, aiming to pump up its top line there even at lower margins. And GSK garnered a lot of attention for those moves, winning goodwill not only within emerging countries but elsewhere, too. In June of this year, GSK and Save the Children said they'd teamed up on a $1 million awards initiative to highlight programs in developing countries that had proven to reduce childhood deaths. That partnership wouldn't have happened without GSK's earlier forays into improving access to healthcare. Plus, CEO Andrew Witty's exhortation to move beyond "white pills in Western markets" has become an industry catchphrase.
But that all changed in July, when Glaxo suddenly became Exhibit A in China's probe of alleged corruption in the pharmaceutical industry. Top domestic executives were detained; one confessed on state television; GSK's emerging markets chief Abbas Hussain jetted over to the scene. The allegations were that GSK employees funneled about $490 million worth of payments to doctors in hopes of meeting ambitious sales-growth targets. The company has said some managers apparently breached the law, but it's not clear yet what, exactly, transpired--or who knew about it and when.
Now, Google "GlaxoSmithKline and emerging markets," and the Chinese investigation pops up. That's unfortunate, because Glaxo has substantial operations in the developing world--about 37% of its employees work in emerging markets--and some of its strategies are worth looking at. For instance, its joint venture with Binnopharm. GSK supplies bulk vaccines, plus technology and expertise, to the Russian company, which handles filling and packaging. The joint venture covers oncology drugs as well as rotavirus and pneumococcal vaccines. Besides the obvious commercial motivation, GSK's hook-up with Binnopharm is aimed at the Russian government, which (a) wants to build up a local pharma industry and requires multinationals to produce drugs locally, and (b) controls the national immunization calendar. Getting its vaccines onto that calendar is obviously key to their sales in Russia.
And then there's the tiered pricing approach. The company figures tailoring prices to a market's pocketbook makes sense, so it has been cutting prices significantly in many emerging markets. In 40 countries in Africa and 10 in Asia--which make up a least-developed countries group--the business is judged on volume alone. The idea there is to build up GSK's reputation now so the company can cash in later when economies do begin to grow. Already, that unit has expanded sales by 61% to £158 million last year.
In other countries, GSK has significantly discounted prices--up to 70%--aiming for volumes that can make up for lower margins. "One has to be very clear that pricing should be much more driven by affordability and create value in the society that one wants to trade in," Witty said in an interview last year with Indian television.
Some discounted products in emerging markets have grown as much as ninefold, the company has said. For instance, GSK launched an allergy remedy in Mexico at a 50% discount and, with that cut-rate price, won over a 50% share of that drug's market. Price reductions in emerging markets put Avodart, the prostate drug, on a trajectory to 76% sales growth. One of Witty's reasons for remaining bullish on India--despite recent moves against Big Pharma IP--is that tiered pricing there has worked for the company. Letting GSK India "really be an Indian business," he says, will keep the company's drugs and consumer healthcare products growing.
GSK also credited discounts with its 20% growth in China sales last year. In July, Glaxo said its sales for the second quarter were up 14%--but warned that the probe would change all that. Now, analysts figure the bribery allegations--and their ripple effects on sales promotions and physician relationships--will take a 30% bite out of sales in that country. Plus, those previous discounts will soon be replaced by bigger ones; in apologizing to Chinese officials for GSK's role in industry corruption, Hussain offered something he knew the government really wanted: more price cuts.
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