GlaxoSmithKline plc (NYSE:GSK) traces its roots back to a London apothecary in 1715. But when Fortune Magazine compiled its "Change the World" list -- the top 50 companies that are making money by tackling society's biggest problems -- the venerable British drugmaker beat out all the younger innovators to take the top spot. There are lessons for the rest of the industry in that.
A challenge to the traditional model
Drug companies are increasingly in the crosshairs of politicians and activists for escalating prices of new drugs. Even without certain egregious examples of price hikes, it's easy to see why tensions are on the rise. Drugmakers face a lengthy process to get their products from clinic to market, and the cost to develop and gain approval of a new drug was recently estimated to average $2.6 billion. As the cost of bringing medicines to market escalates, drugmakers put higher and higher price tags on them in order to recoup costs and make the profits shareholders expect. Heftier prices, in turn, limit the accessibility of the treatments to smaller pools of patients, primarily those in developed countries with public or private insurance.
But Glaxo is charting a different course. Whereas the traditional model is supported by a patient population of roughly 600 million people in the U.S. and most of Western Europe, the company sees opportunity in the over 6 billion people in the world who are under-served by it. Over the last several years, GSK has announced policies in drug pricing and the management of intellectual property that challenge the traditional approach.
Glaxo has implemented a tiered approach to pricing its drugs around the world. It ranks countries around the world according to per capita income and tailors its pricing in each country according to affordability. In the least developed countries, prices are capped at 25% of prices charged in developed countries, as long as manufacturing costs are covered. Prices scale up according to the affordability measures in each country.
Many drug companies have programs to provide drugs to the world's poor. But what distinguishes Glaxo's pricing program is the blanket nature of it and its scalability. The company makes a profit in every market it serves, including the poorest ones. Charitable donations by other companies have the inherent limitation that they can only go so far as what the company can afford to sacrifice. But Glaxo's approach means that every drug sale in every market adds something -- even if it's very small -- to the company's bottom line. It also reinvests 20% of the profit generated in the least developed countries in training healthcare workers, improving public health, and building goodwill.
Generic versions of our drugs? Sure, let us help!
The expiration of a drug patent and the resulting development of a generic version often represents a major negative event in the financial history of a drug company. But GSK is actually enabling generic drugmakers in order to make its drugs more accessible by the world's poor.
The company surprised the pharmaceutical world early last year by announcing a tiered approach to intellectual property that mirrors its pricing policy. For the least developed countries and low-income countries -- about 50 in all -- the company will not file for patents on its drugs at all. This will provide legal clarity and an open door for generic drugmakers. For another 35 lower-middle-income countries, Glaxo will file for patents, but seek to provide 10-year licenses to companies that want to sell generic versions of its drugs into those markets. For those licenses, the company will charge a small royalty on sales. For more wealthy countries, Glaxo will continue to obtain full patent protection.
Even beyond this blanket approach, GSK is making further efforts to address humanitarian needs. Along with other companies, it has contributed the patents on its HIV drugs to the Medicines Patent Pool, a United Nations-backed public health organization that makes patents available to makers of generic drugs for sale to lower- and middle-income countries. Glaxo made news last year as the first drug company to announce its intention to contribute patents on its future portfolio of cancer drugs to the pool.
And some of the drugs Glaxo is working on are very much in need by the world's poorest populations. Its malaria vaccine, 30 years in development, is nearing approval. The price will be the manufacturing cost plus about 5%, which will be reinvested in research and development for second-generation malaria vaccines or vaccines against other neglected tropical diseases.
Doing well by doing good
Glaxo regularly gets recognition for its efforts in making medicines available to the needy of the world. It was named as the most access-oriented drug company in the world in the Access to Medicines Index in 2016 for fifth year in a row. But is publicity and a good reputation the only reward of consequence to investors? I don't think so.
Experienced, long-term investors appreciate that stocks represent ownership in businesses. Feeling good about our possessions can inspire us to take better care of them; might the same be true with our portfolios? In fact, investing in socially responsible companies may motivate us to stick with the positions when volatility makes us impatient.
Behind the humanitarian rationale for Glaxo's accessibility policies is a solid business case. The company is generating profits, goodwill, and a market presence among the "other 6 billion," many of whom will be experiencing rising standards of living in years to come. That business case means the approach is sustainable over time, and supportable by shareholders.
When discussing Glaxo's approach to the poor of the world with Fortune Magazine last year, CEO Sir Andrew Witty said, "GSK has existed for 300 years. We think about how we can be successful, not just in the next year or the next two years, but in the next 10, 15, 20, 30, 40 years."
In this era when drug companies are being publicly vilified, maybe it takes the wisdom of centuries to show us the way.