GSK to Implement Price-Cutting Strategy in Emerging Markets
IHS Global Insight Perspective
GlaxoSmithKline (GSK; U.K.) has outlined its emerging-markets strategy, and central to this are price cuts that will be introduced starting in spring 2010.
GSK expects this to boost demand for products in the emerging markets. The scheme has already been piloted and was shown to be successful.
This is another indication of GSK's commitment to diversify its sources of growth. Most of its rivals have shied away from price cuts for patent-protected drugs, due to the belief that it will do little to stimulate demand in poor countries; however, GSK is clearly ready to take a new approach. It remains to be seen whether other companies will replicate this move.
U.K. pharma major GlaxoSmithKline (GSK) has laid out its latest plans tailored towards intensifying its emerging-markets presence. Central to its emerging-markets strategy are plans to reduce drug prices in developing countries, as revealed by GSK's head of emerging markets Abbas Hussain in an interview with U.K. daily the Financial Times.
According to Hussain, starting from next spring, GSK will reduce product prices in emerging markets so that the price in those markets is below two-thirds of the price of the corresponding products in traditional Western markets. This price-cutting strategy will form the basis of GSK's emerging-market expansion. Central to this idea is the belief that price cuts will stimulate increased demand for the company's products. In the interview, Hussain stated that "My preference is not a high price and 100 units of profit for 100 patients, but to drop the price and make 100 of profit from 500 patients; we fundamentally believe access for more of the masses is the way to go". There are early indications that this strategy is indeed effective. GSK has already piloted the strategy in collaboration with non-governmental organisations in the poorest markets, and volume increases were reported.
In addition to its price-cutting plans, GSK has outlined other key components of its emerging markets strategy. These include:
- Emerging Market Portfolio Expansion: GSK believes that providing a wider range of products in the emerging markets will enable the company to compete more effectively for government-procurement drug contracts. Central to this is the provision of off-patent brands acquired from other pharmaceutical companies. GSK has already piloted this in the Middle East and North African (MENA) markets, following its acquisition of Bristol-Myers Squibb's (U.S.) branded generics business in that region, and with the Aspen (South Africa) deal in Sub-Saharan Africa (see United Kingdom - South Africa: 23 July 2008: GSK Aims for Greater Emerging-Market Penetration Through Aspen Collaboration; United Kingdom - South Africa: 12 May 2009: GSK to Strengthen Foothold in Emerging Markets Through 16% Stake Acquisition in Aspen; and United Kingdom - United States: 2 July 2009: GSK Takes Over Branded Generics Business of BMS in MENA Region). It can be expected that more of these deals will be seen in the future.
- Local Manufacturing: Engaging in local manufacturing will enable the company to control its costs, thereby allowing it to deliver the proposed price cuts. GSK's recent announcement of plans to manufacture its anti-viral drug Relenza (zanamivir) in China in a move to improve access to the drug in the Chinese market is an example of this.
- Volume Cuts: GSK plans to sell small packs of its drugs in the emerging markets in order to improve accessibility.
Outlook and Implications
So far, GSK's emerging-markets strategy has been mainly focused on the provision of generic drugs; however, Hussain has now provided a much-needed insight into GSK's overall emerging-markets strategy. This further cements chief operating officer Andrew Witty's vision to diversity the company's sources of growth by moving away from the "white pill western markets". More importantly, it reflects the increased importance of the emerging markets to GSK's revenue stream, as reflected in it's financial results for the third quarter of this year, with a 25% year-on-year increase in sales.
GSK is no stranger to this price-cutting strategy, albeit for a small range of products (most noticeably vaccines and anti-retroviral drugs) and fewer countries. The company recently introduced significant price cuts in some Asian countries, whereby it reduced the prices for 28 of its drugs in the Philippines by 30–50%, as well as making reductions in the price of its cervical cancer vaccine Cervarix in a number of Asian countries, such as Thailand and Malaysia (see United Kingdom: 12 June 2009: GSK Cuts Drug Prices in Emerging Markets But Rejects Russian Requests for Cheaper HIV Drugs). Some of its competitors remain critical of this price-cutting strategy, insisting that even significant reductions in the price of drugs will contribute little to sales volume in poor countries. In addition to this, concerns have emerged that these price reductions might give rise to parallel trade; however, GSK has dismissed these claims as there is little or no evidence to support them.With many resource strained and economies imposing lids upon drug prices, much to the dissatisfaction of pharmaceutical companies (see Turkey: 5 October 2009: Turkish Pharma Industry Outraged by Government-Instigated Price Cuts Affecting All Drugs), GSK appears to be one step ahead, and closer attention should be paid to the company's strategy to see whether its competitors will follow suit. At this stage, it remains unknown how widespread the price cuts will be in terms of the range of drugs and countries. However, IHS Global Insight will continue to closely monitor these developments.
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