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GlaxoSmithKline’s New Strategy, Defended

GlaxoSmithKline’s Moncef Slaoui has an interview in the Philadelphia Inquirer, and he’s responding to critics of the company’s strategy (and to rumors about it):

Slaoui suggested some reality for pharma cheerleaders: First, most Americans think drug prices are way too high and sooner or later the bottom will fall out from those firms trying to milk the big profits. Second, high-priced drugs that treat only a few patients and claim a disproportionate share of national health spending will cripple the broken system even faster.

“Our conviction – with the board, [CEO] Andrew Witty and the other executives – is that the current pricing model is unsustainable in the long run,” Slaoui said. “We need to prepare ourselves to be an equally profitable business by shifting a little bit the volume-price equation. It doesn’t mean we only do non-innovative products. Not for a second. . .

As for pricing, he’s probably right – up to a point. The industry certainly can’t charge whatever it wants for whatever it puts on the market, but the hope is that innovative treatments can justify high prices. After all, these prices are already set based on what the companies involved think that insurance companies and government plans will accept. I think that pricing pressure, though, should slide along the scale of usefulness and innovation, because I think that there should be a reward for taking the greater risk of breaking new ground.

But when you talk about usefulness, you run into some very hard decisions very quickly, as outlined in this post on cancer drug costs. What are the benefits of a new drug, and what are they worth? Another part of the article lays that out:

Gilead Sciences has been criticized because its hepatitis C drugs, Sovaldi and Harvoni, have 12-week price tags of $87,000 and $95,000. But they almost always cure the disease, eliminating the need for costly liver transplants. Merck’s Keytruda and other new high-priced immunotherapy cancer drugs often only slow tumor growth in a tiny group of patients. Keytruda is approved so far only for advanced melanoma, which has 76,000 new patients a year.

“From a pricing standpoint, we really need to be aware that a very small percentage of patients in the U.S. consume a very large percentage of the cost of health care for a benefit that is expressed in months to prolong survival,” said Slaoui, who trained in immunology.

Indeed. Curing advanced melanoma would be a wonderful thing, but we can’t do that yet. All we can offer right now – and that’s been hard enough – are a few more months (for some people, and we’re not always sure which ones, up front). So with the current situation,a lot of money gets spent near the end of life (and not just on drugs, mind you, not by a long shot), and it buys. . .some extra time. Which is worth. . .well, what? No one wants to answer that question, not for anyone else, and not for themselves.

Outside this big questions, this article has particular relevance for GSK, who have recently been shifting towards high-volume lower-margin areas (thus the defensive tone of some parts of the interview). Here’s the take on that over at FiercePharma, and it points out that if this strategy doesn’t show clear dividends, in a relatively short period, the company’s board may not continue to buy into it.

39 comments on “GlaxoSmithKline’s New Strategy, Defended”

  1. Kelvin says:

    Volume vs price does not solve the fundamental issue of diminishing returns, it merely takes them to a different spot in the same depleted coal mine.

  2. SteveM says:

    Re: The industry certainly can’t charge whatever it wants for whatever it puts on the market, but the hope is that innovative treatments can justify high prices.

    Derek,

    To think that the agreement to pay for very high cost “innovative” treatments with marginal therapeutic value is constant as more and more of those NME’s enter the market is wishful thinking.

    Moncef Slaoui has it right. Each new hyper-cost entity increases the tension on the coiled spring of payer rejection. The snap-back has to happen sooner or later as the niche compounds flood the market.

    But I agree. The equity markets are ruthless in the demand for near term profitability. Slaoui may be strategically correct, but also out of a job by holding that position.

  3. Andy II says:

    An interesting opinion from GSK’s Moncef Slaoui, head of vaccine. yeah, pricing strategy for vaccine is totally different from current immuno-oncology products which target relatively small patient populations where they showed tremendous survival benefits over conventional treatment. Re pricing, Asian countries such as Japan have a totally different system. Health authority is much more involved in and the drug price is “decreasing” over time. And, there is certain limit for premium pricing though Gilead has had a success in setting their HepC drug high enough.
    When people talk about high cost of drugs, I think of Hatch-Waxman Act and its effect on the market exclusivity of a drug. Pharma companies use ROI as a basis for high price of an innovation drug and ROI is based on the estimated market exclusivity by IP and regulatory process. If a certain market exclusivity period for NCE exclusivity, say 10 yrs (I think EU and Japan have 8 yrs for it?) is given to pharma company by which they can retrieve reasonable portion of the investment to develop an innovative drug, would it be helpful to reduce a cost of drugs? Or, am I too naive?

  4. ex-GSK says:

    The macro picture certainly seems correct: trying to turn niche markets into blockbusters by pricing them like they are cures has to cease. Maybe the HCV drugs deserve the price; not so for many targeted agents in cancer (the area I worked in at GSK and still in academics). I had a family member with head and neck cancer who had a good initial palliative response to Tarceva who might have benefitted from subsequent Tykerb (b/c of the dual activity, MOA, her-2’s role in H&N etc) when she progressed, but the price (set by GSK) was prohibitive. It was not going to cure her, just possibly improve the quality of her remaining life for a few months. Tarceva helped her reach her 50th wedding anniversary – and that was very important to her. This is the type of story behind the dismal Kaplan–Meier curve of many targeted agents. They are not worthless, but they are not transformative in most settings. I’m optimistic we will get better over time and that combination and immune agents will lead to K-M curves that make us all proud. The cost issue though will not go away though, only be exasperated.

    The micro GSK picture is that given their current leadership, they should focus on volume and not innovation. The 10 year track record is indicative of an inability to provide a stable environment for creative scientists to thrive and a lot of bad decision-making from senior leadership where scientific acumen is required (Sirtris etc – “let’s ignore all internal scientific advice and diligence b/c we have no idea what the requirements are for proof of target engagement”). It is a positive sign that they are recognizing their “strengths”.

  5. TOSG says:

    “Curing advanced melanoma would be a wonderful thing, but we can’t do that yet. All we can offer right now – and that’s been hard enough – are a few more months (for some people, and we’re not always sure which ones, up front).”

    I think the situation is a little better than described — at least 10-15% of patients treated with Yervoy, and (maybe – too early to tell) the PD-1s are surviving for many, many years now.

  6. watcher says:

    Moncef’s comments along with GSK’s overall strategy should be considered in light of his terrible leadership when head of all of R&D. He is speaking the company line, but it’s missing any introspection or honesty about the performance of management, including himself and Witty, in the past 8 to 10 years. During this time there were very bad investments of large sums, poor internal decisions of staffing and projects selected to progress into Phase 3, and multiple reorganizations leading to the current structure that is simply unable to discover new entities due to the lack of focus in that area, and such smothering environment. Many of the best discovery scientists have left or have been forced out in the many restructurings (another underway as we speak).

  7. cancer_man says:

    Why has the GSK/Sirtris compound, SRT 2104, been written off as a failure? Bloomberg ran an anti-aging article this past February that stated: “But the [GSK] drugs all flopped in human trials, and in 2013 GSK shuttered its Sirtris division and fired all but a handful of staffers.”

    Yet David Sinclair has shown a photo of someone whose psoriasis was clearly reduced after taking SRT2104 for 40 days, which he claimed was the first time a pill had that effect.

    In 2014, a study showed that mice fed a normal diet (unlike a high fat diet in the earliest studies) showed that they lived longer if taking SRT2104.

    Maybe that pill will never be sold but is it obvious?

  8. ex-GSK says:

    “Yet David Sinclair has shown a photo of someone whose psoriasis was clearly reduced after taking SRT2104 for 40 days, which he claimed was the first time a pill had that effect.”

    Maybe he can get Moncef and Patrick to pony up another $720M based on the photo? Personally, I’d want to see a little more correlation of in vitro assay/cellular biochemical efficacy (KAc levels on substrates by MS/MS?) & target engagement/in vivo effect related to “on-target” activity. In other words, competent drug discovery science. My 1st year grad students could smell the problems with the Sirtris data in 2007 – as did all the discovery scientists at GSK who worked on the target and did the diligence. Check out: Bunnage ME, Chekler ELP, Jones LH. Target validation using chemical probes. Nat Chem Biol, 9(4), 195-199 (2013) for some of the criteria that should have been applied. This was not a matter of taking a risk on what was not yet known, it was steam rolling over all objections and lots of data showing that the compounds on offer were artifacts. Maybe some one will do good science in this area and something come of it one day. That doesn’t change the bad decision made by GSK leadership or the sales-job done by Sinclair. We all make mistakes, but arrogance + ignorance should not be the defining feature of senior leadership in a major drug company. (At least the “major” bit may change, if not the leadership.)

  9. exGlaxoid says:

    I also know some of the scientists formerly at GSK who looked at the Sirtris compounds and they were crap. Only a moron would have invested in that company, their data was obviously flawed and the photos are likely photo-shopped.

    The pricing issues are real and the pharma industry is clearly tough, but if the strategy of laying off most of their the best scientists so that they could spend that money on Sirtris, Praecis, Chinese travel agencies, bribes, and other snake oils was the best they had, then perhaps staying in oncology and keeping the great group that they had there might have been better (they laid off the people that got 3 or 4 drugs to the clinic in a 15 year span), and maybe doing more real research in the US and UK instead of fabricated results from China.

    The main fault to blame for the GSK fiasco are the management from GW who decided to merge with SKB and most of the management there since then. There have been a few good managers there, but most were fired for telling the emperor the truth. GW had some excellent R & D management, but those people were all gradually replaced with bean counters, consultants, wackos, and new age guros.

  10. cancer_man says:

    I have no idea if GSK’s purchase of Sirtris was worth it, and I don’t have the background to know. It just seemed premature to say all of the drugs “flopped in human trials” after seeing that SRT2104 helped some of the 40 pserios patients after 80 days.

    The photo is at 12:45
    https://www.youtube.com/watch?v=eMX1K9tEj1s

    (I understand that may still not be worth ever marketing.)

  11. CMCguy says:

    AndyII I am not sure I would classify as naivety but IMO the arguments and application of ROI in drug development, even manufacturing COGs, do not seem to really follow classical assumptions and modeling. Although extension of IP coverage period might influence the evaluation somewhat it is doubtful to dramatically impact the pricing. Its not entirely accurate but price based on what the market willing to pay is relatively practiced approach (and GSK may be right that a correction may be coming). Development of many new drugs in Pharma are already paid for from profits generated from existing marketed drugs and once that new drug is approved its return is likely directed more to go to pay other costs. That used to include much R&D for new innovation cycles which may no longer be that true, mainly replaced by demand to show steady increases in quarterly earnings statement.

  12. sgcox says:

    #cancer_man,
    You posted some excellent comments about immuno-modulatory drugs in other threads but please do not wade into this Sinclair scam and Harvard promotional youtubes !

    I too hate the font for “.” and “,” What is the font name so I can use it to e-communicate with various not-my-most favourite mail senders?

  13. cancer_man says:

    Well, that was the only place I saw the before and after SRT2104 pictures. Are those photo shopped? I also don’t see the scam aspect. Either SRT2104 will be worth selling or won’t. For the past three years or so, I have doubted it, but I don’t know.

  14. Andy II says:

    #CMCguy: Yeah, you are right about: “Its not entirely accurate but price based on what the market willing to pay is relatively practiced approach,” and I agree with your point. I wonder why some countries, including Japan, have a regulation under which drug prices are “descending” over time while those in US are in the opposite direction as long as the drugs enjoy the exclusivity.

  15. Andy II says:

    #CMCguy: Yeah, you are right about: “Its not entirely accurate but price based on what the market willing to pay is relatively practiced approach,” and I agree with your point. I wonder why some countries, including Japan, have a regulation under which drug prices are “descending” over time while those in US are in the opposite direction as long as the drugs enjoy the exclusivity.

  16. a says:

    Sirtris was a huge mistake forced on everyone by Moncef or Patrick, or I don’t know who. But Pracis was awesome. I think that technology is and was very cool. If that was a mistake, it’s one that any company could make.

    Yes, GW and SB were probably better apart. Would have been better for society, for drug discovery, for everyone at RTP. Sigh. Same thing is probably true for Schering and Wyeth.

  17. biotechtoreador says:

    Didn’t GSK (maybe it was SKB) spin out its low cost/high volume consumer health division in the 90s? I assume big pharms re-acquiring animal health divisions is next (I’m sure this is what PETX et al. are hoping).

    The trend of big companies spinning out and then re-merging seems really smart……for the M&A bankers who collect the fees.

  18. SteveM says:

    Re: Font Complaints

    With Firefox you can elect to use your own fonts. Go to:

    Menu -> Tools -> Options -> Content -> Advanced

    Select your favorite font parameters and uncheck “Allow pages to choose their own fonts…”

  19. Anon says:

    I’m not surprised GSK can’t innovate. Six months ago I was contacted by someone at GSK looking for an innovation director. So I had an interview. And then another two weeks later. And then another one week later. And another two weeks later. And another 3 weeks later. And another 2 weeks later. Then another 1 week later. Then another 3 weeks later. And then one more 2 weeks later. And another. 10 interviews in total over 4 months.

    And then I heard nothing!

    So I called the GSK contact to ask what is happening, and he told me that “those weren’t ‘proper’ interviews, they were just ‘informal discussions'”, despite the fact that each one was accompanied by a formal invite for an ‘interview’; so “the ‘proper’ interview process would begin very soon”, I was told…

    And then I heard nothing!

    Great company.

  20. M says:

    @AndyII:

    The simplest model is that companies will get as much as they can from any current drug. If you increase the amount of time they have exclusivity, and there’s no other competitor entering the market, they will charge a premium for longer.

    What this should effect is which drugs get researched. If you are calculating how much you can make if you successfully develop a drug for disease X, you should be more willing to gamble on a risky research effort if you think you can make twice as much.

  21. Emjeff says:

    The big problem with GSK is that management keeps confusing failure with experience. Patrick and Moncef would have been shown the door long ago at any other company, but at GSK, they keep getting rewarded.
    The other problem is the terrible bureaucracy. Things that take days to do at my new company take weeks to do at GSK. Maybe things will get better once Pfizer buys GSK…

  22. Fat Old Man says:

    We are all aware of the whining over oncology drugs. I have a different opinion:

    1. Is a few extra months worth it? For my wife and I the answer is unequivocally yes. the extra 2 years was valuable to me above any dollar cost.
    2. You can tell instantly if the drug is working by measuring tumor size or biomarker, so it’s not like the high cost is for nothing: patients stop treatment for disease progression or toxicity.
    3. What about the other costs associated with cancer treatment? I saw the insurance bill, and the clinical cost for one infusion (~$6000) was more than the cost of the drug (Avastin, 1 dose ~$4000). Now that is not what the insurance paid, that was the asking price.

  23. xGSK says:

    Expensive drugs can be net cost-saving to the healthcare system, particularly if they keep people out of (increasingly consolidated) hospitals or keeps people in work (paying taxes).

    Anyone who doesn’t realize this should not be running an R&D organization.

  24. Nope says:

    @xGSK: You need to do some math: keeping people alive for just 6 months longer at 8 times the median income destroys net economic value.

    And treating one patient at 60 times the average drug price on a limited budget means that 60 normal patients go without treatment. We are already seeing a net decline in drug prescriptions thanks to over-priced branded drugs.

  25. Scifiknitter says:

    I’m a stage 4 lung cancer patient with an EGFR mutation, currently on my second line of treatment via a phase 2 trial of the Clovis drug Rociletinib. I’m doing pretty well so far, thanks for asking, and this 3rd generation TKI has shrunk all cancer in my body by 26% after 5 weeks of treatment. I well understand that what I have here is no cure but at best a good quality extension of my life. About the best we stage 4 LC patients can hope for currently, and there are a lot of us.

    This whole issue is burning up the airwaves among many people involved in lung cancer treatment, whether patients or health care professionals. We are seeing a lot of new TKI and immunotherapy drugs coming online for our disease and they are all expensive. The #lcsmchat group on Twitter is hosting a chat on the topic of controlling high drug prices from 8-9 pm tonight 8/13 for those interested in listening in or participating. (lscm = lung cancer social media)

  26. Immunotherapy Advocate says:

    Sigh, where to begin with respect to how off base Moncef is on checkpoint inhibitor efficacy. Highly suspect that this misinformation is coming from a vaccines guy and company in GSK which bizarrely excited oncology just as the immunotherapy revolution was gathering major momentum.

    The clinical data speak for themselves. There are many formally terminal cancer patients still alive years after receiving anti-PD-1 therapy. Anti-PD-1 pathway therapies will soon become the cornerstone of combinations addressing most if not all oncology indications. Skeptics will be silenced by data.

  27. xGSK says:

    @Nope

    Your example makes a useful point, but misses the broader point. I agree that cancer prices unless they lead to cures (and they will) or extremely durable responses (and they are) requires a justification on grounds beyond economics. Indeed, nothing is cheaper than a dead patient.

    Nevertheless, the fact remains, very expensive therapies can still save the health care system money. The example given in the article is reasonable; 120,000 dollar hepatitis cure versus a several hundred thousand dollar transplant, followed by chronic use of drugs and hospitalization from associated complications. The math works fine.

    The fact of the matter is outpatient inefficiency and misaligned economic incentives dominate costs in the US, exacerbated by hospital consolidation, and this situation creates widespread opportunity for moderately priced drugs that keep patients away from hospitals or outpatient clinics save the health care system enormously.

  28. Actual Physician Scientist says:

    What an idiotic thing to say about PD-1 blockade. As a monotherapy it CURES (as far as we can tell) 25-30% of advanced unresectable stage IIIc and metastatic stage IV melanoma. In combination with anti-CTLA4, it’s closer to a 50% complete response rate (see Wolchok et al NEJM 2013). Do a simple google or pubmed search and look for the waterfall plots and Kaplan Meier curves. We’re living in a new era.

    This isn’t speculation… it’s what we’re seeing in clinic. And yes, I am a doctor giving patients these medicines. I can’t tell you the incredible feeling it is to see the PET scans on these patients. The cancer is MELTING away.

    And it’s not just melanoma. PD-1 and other immunotherapies are looking amazing in RCC, bladder cancer, microsatellite instable colon cancer, to name a few. Even glioblastoma is responding. I’ll admit the lung cancer results leave a lot to be desired, but for F’s sake, it’s lung cancer.

    Even at a price-tag of hundreds of thousands per year, the QALYs for these drugs when all is said and done will rival the best medicines and procedures. We are literally pulling dead patients out of the grave and they will live for decades longer and die of some completely unrelated process. Also, it won’t be longer before we will be able to predict which patients are going to respond to treatment and save on costs and unnecessary AEs, either by predictive models of neoantigen load or biomarkers like PD-L1 (albeit probably not by immunohistology).

    So anyway, Derrek, please update and correct your post– we ARE curing melanoma in a lot of people!

  29. Still Nope says:

    @xGSK: I think you are missing the broader point: First of all, you are only assuming that the healthcare costs of treatment (transplants, etc.) withouth the drug would otherwise be paid, but this is a false assumption, because the healthcare system is pushed to the limit so that it could never afford to pay these costs anyway. So you are talking about saving money that we could never afford to spend in the first place, by charging prices that we can also not afford.

    Second, curing cancer would double the average cost of death per patient as more people will live on to die from Alzheimer’s disease and diabetes. We all die once, we all have to die from something, and some diseases like AD and diabetes cost a lot (several times) more per death than heart disease and cancer. Do the math. If we cure cancer then the healthcare system would soon implode.

    1. tt says:

      By your logic we should encourage smoking, bad diet, and driving without a seat belt. It’ll be much less pressure on our health care system if people die early and quickly.

      1. tt says:

        Last comment was in response to “Still Nope”

        Really need comment numbering

  30. Still Nope says:

    @tt: Technically, that is correct, but morally it is very different. Encouraging an early death is not the same as refusing costly treatments to extend life beyond its socioeconomic value. And I’m not saying we should not bother at all with healthcare, I’m just saying that we should/must focus on curing the most expensive diseases (per death) first before we cure the cheap and quick killers, in order to make healthcare more affordable for eveyone. By the way, if we cured Alzheimer’s and diabetes then healthcare costs would be halved. That’s a win-win, but curing cancer is not.

  31. Still Nope says:

    By the way, if you want to do these calculations yourself (and we all should), you can just loook at mortality rates and total healthcare costs by disease to calculate the average cost per death by disease. Then to all those who would die but are saved from one disease, you apply the mortality rates and cost per death of all the other diseases pro rata, to calculate a good approximation of impact on total healthcare cost. You will be shocked by what you find, given where we invest the most in finding new treatments. Essentially we are spending more money in areas that will cripple the healthcare system IF we are successful.

    Thus, instead of “saving” lives which is impossible (we can only delay death), Pharma should focus on making lives better and death cheaper.

  32. Still Nope says:

    PS. Whether you accept what I say or not, this is the new economic reality as both debt and healthcare costs rise to unsustainable levels. If we don’t make these tough moral choices now, then they will soon be made for us in any case, as the economy and healthcare system will simply collapse under their own weight. Basically, reality is catching up with us and will soon challenge our entire moral value system at its very core.

  33. c says:

    I find it convenient and sad that GSK takes the position of taking the ‘high road’ of ‘choosing’ to focus on their lower margin consumer heath care and vaccine businesses over the business of innovating those costly breakthrough medicines. Indeed there is almost a sense of pride that comes through of being out ahead of the curve in focusing away from the high priced/high impact medicine game.

    Personally I believe this position of altruistically looking out for the bottom line of the entire health care industry is not a purposeful direction but reflects management’s knowledge of the current state of its R&D division. By all accounts GSK’s R&D force has been diminished and fragmented over the last few years. What is different now is that it is to the point where GSK management must acknowledge strategically that it is not a good idea to think it can deliver sustainable/profitable innovation.

    Bad gambles and management decisions over the years have no doubt taken a lot of the punch out of company’s internal R&D effort. In my mind not holding the elite class accountable for those missteps and changing course has been the undoing of the ‘older’ business strategy which aspired to be a consistent leader and impact player in the innovative prescription drug business.

    It seems much less plausible to me that GSK management reasoned that it was in its best interest to vastly scale down/essentially leave the field of prescription drug R&D for the betterment of itself and the industry as a whole.

  34. jl says:

    hi there,

    @ cancer_man:the photo is at 13:41

    with respect to the comments made on M&As and the quality of the product: you acquire early stage compounds with promising profiles. fine. does not mean that they will automatically hit the market. they probably have the same probabilities as if they were your own, except they are not and they have been following other pathways.

    usually you the chances of success are included in the calks and this is why you have milestones and all the hoopla.

    so don t blame someone for investing and then finding out that the research pathway was not successful, unless you want to kill the spirit of innovation.

    best

  35. Jack Scannell says:

    If you believe the GSK analysis, then sell your GSK shares.

    The branded drug industry is the most profitable industry in the world precisely because sales volume is relatively insensitive to price. In drug classes where volume goes up when price goes down, pricing power and profitability tend to be low (e.g., generics and drug classes with a high degree of therapeutic substitution). Furthermore, financial returns on drug R&D are extremely sensitive to drug pricing and to drug price inflation. See, for example, analysis at: http://beta.eurekaselect.com/130894

    Therefore, the GSK view that “We need to prepare ourselves to be an equally profitable business by shifting a little bit the volume-price equation.” looks like wishful thinking. If you believe that lower price will bring in substantially higher volume, then you should also believe that the pricing power and profitability of the industry will decline, and that financial returns on today’s R&D are likely to be poor.

    I think there is a chance that GSK is correct in its view of the future. However, I don’t envy folks working in GSK investor relations who try to explain the position. The GSK view aligns with the beliefs of people who either don’t own or else actively short sell drug stocks. No one who believed the GSK position should want to own GSK shares, nor those of any other drug major.

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