GSK to strip down through outsourcing and offshoring

By Kirsty Barnes

- Last updated on GMT

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GlaxoSmithKline (GSK) is planning to strip itself down closer to
the bare bones of the business through further outsourcing and
offshoring, with hopes of making itself into a lean, mean, pharma

The pharma heavyweight announced a sweeping restructuring plan in the form of an 'Operational Excellence' programme, designed to achieve savings of up to £700m (€1bn) by 2010 - 40 per cent of which will come from cutting down on manufacturing sites and simplifying production processes and activities to reduce over capacity.

The cornerstones of this new programme are "persistent focus across all functions; a reduction in complexity, to be achieved by standardisation, consolidation, outsourcing and offshoring; and the exploitation of global opportunities, in regard to procurement, skills, labour cost and arbitrage," indicated GSK's CEO Dr J.P. Garnier.

As with most pharm firms in today's tough business climate, GSK has already been embracing outsourcing and offshoring to a certain extent in order to tighten its purse strings, however, as more parts of the business are seeing the fruits of this strategy, the firm is stepping up its resolve in this regard.

"Basically, we are good at standardising and outsourcing when it's not a core activity that we want to manage ourselves.

The arbitrage that is now available through the global world in which we live is a phenomenal opportunity and we are taking full advantage," said Garnier during an analyst call covering GSK's third quarter results.

"We are now in a position to basically accelerate what we've been doing all along," he said, without going into much further detail.

Garnier highlighted the business areas the firm has already been either offshoring or doling out to third parties: clinical trials; human resources; IT, data management and shared financial services; and back-office functions.

In addition, the firm has established a commercial analytics centre in India, conducted a rationalisation of its manufacturing network, and now undertakes global procurement across all functions.

The company's selling, general and administrative (SG&A) costs as a percentage of turnover, were 35.0 per cent in 2001, and now nine months into 2007 they sit nearly six percentage points lower at 29.4 per cent.

"This is an example of those savings," said Garnier.

"Even in the years where we didn't have significant growth in revenues, for instance, the year we lost Paxil and Augmentin, we were still able improve the SG&A ratio every time, and I expect this to continue in the future".

In terms of manufacturing, GSK has big plans for slimming down an already shrinking in-house capability over the next three years.

In 2000 GSK owned 108 manufacturing sites, by 2006 this had been cut by 28 to 80 and the firm is anticipating similar cuts by 2010.

Meanwhile, in 2001 only 9 per cent of the firm's primary active pharmaceutical ingredient (API) costs were outsourced, now that figure has jumped to 41 per cent and continues to climb.

"We think that over the next three years we will be able to make significant inroads, which means first of all, that the percentage of our primary cost is going to be different in three years in terms of outsourcing," said Garnier, adding that the company had in an internal target in place for this.

"But, the point is that outsourcing is going to grow, particularly, when you look at the share of the multi-sourced business we are still manufacturing and we have a number of products going generic, which are now fair game for potential outsourcing.

So, that's what it's all about with manufacturing, a more efficient network at the end of the day."

However, GSK is only willing to relinquish control of production when it feels products are established enough to warrant outsiders picking up some of the work: "What we want is to protect our new products… We don't want anybody to have control over our new products - for commercial reasons, but also for ethical reasons.

We don't want people to make our oncology products because if they go wrong [or] out of stock, we are killing people", said Garnier.

As such, he indicated that the company wants to retain manufacturing control of all new products until they become multi-sourced.

After that time, the firm is less bothered as to whether products are made in house or by third parties, but with Garnier's caveat that "if we can buy it cheaper than we can make it then of course that's what we're going to do."

A GSK spokesperson told that at this point, the company cannot comment on who or where the potential beneficiaries of its outsourced work may be: "It will be decided on a case-by-case basis."

What is known is that job cuts are planned.

The majority of details have not been finalised regarding which sites would be axed, nor how many employees could be affected, although the company has said that troubled Cidra, Puerto Rico, plant would be the first to fall to its axe, with news on a number of UK plants fast on its heels.

In terms of the effect this will have on the company's margin, Garnier told analysts that "clearly there will be significant improvement in terms of the cost saving program," although he warned that they may not materialise straight away.

There are site closures and so some of the benefits of the cost saving programme will come toward the end of the [three year] cycle.

Speaking on the company's ongoing plans to reduce infrastructure and improve efficiency, Garnier said that the firm now has a chance to expand these efforts a little bit beyond the classic areas of selling, general and administrative (SG&A) and manufacturing to also include research and development (R&D) and sales.

In terms of R&D, the company has plans to increase the number of external collaborations it undertakes as well as embrace the budget option that is Asia.

Only earlier this week, in fact, the company announced a multi-million dollar deal with Tolerx to develop and commercialise otelixizumab, a humanised anti-CD3 monoclonal antibody.

Many other such preclinical collaborative deals are already in place with an array of specialist firms.

Meanwhile, in July, GSK announced its intention to plant itself in China and establish a new R&D center to be based in Shanghai, which will eventually have full global responsibility to create medicines for neurodegenerative disorders, and also be well positioned to tap into the vast number of Chinese PhD graduates.

The company is already quite active on the Indian pharma scene and now has its eye scanning for opportunities in other emerging Asian regions.

"In terms of R&D, we have to talk first about where we are going to super invest," said Garnier.

"We are building biologicals, first of all with some in-licensing but also with our own molecules…Of course we will also accelerate our establishment of R&D in China."

Garnier pointed out that the company is looking at up to 25 new launches over the next three years, with products "that will come right on time…to replace what we are losing to the generics."

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