A Year After Making Big Changes To Sales Practices, GSK Cuts R&D In Midst of Declining Sales

GlaxoSmithKline’s 2012 Corporate Integrity Agreement made mandatory the company’s policy that it would not provide sales reps with incentive compensation based upon volume of sales. In December 2013, GSK announced that they would stop paying healthcare professionals to speak at conferences and would abandon prescription sales targets. It turned out this decision was not entirely voluntary—in June of this year, GSK settled under state consumer protection and agreed to promotional restrictions above and beyond their initial CIA.

While some speculated that these announcements might push other companies to adopt similar promotional practices, that didn’t seem to happen. Others wondered whether GSK’s revamped policies could actually help sales. A year later, the answer seems to be “no.” After GSK’s blockbuster Advair went off patent, and a few promising drugs have failed to take off, GSK announced that they were cutting 900 R&D jobs in the Research Triangle Park site in North Carolina as part of a consolidation effort by the company to reportedly save $1.6 billion.

GSK recently released a statement about the cuts:

In the U.S., we are reshaping and reducing the size of our commercial and R&D operations (now 17,000 employees) to be more agile to flex with shifting market demands. Cuts are not being made across the board but are strategic, focused changes to allow GSK to operate more efficiently. This is not a change in our strategy, which has helped us deliver more new medicines than any other company in the industry in the past 18 months. This is a rescaling of work to reflect market forces that were anticipated but that have accelerated and are affecting the entire industry.

A recent Forbes article notes that “[c]uts of $1.6 billion are not usually made by companies that have launched ‘more new medicines than any other company in the industry in the past 18 months.’” The article, written by John LaMittina entitled GSK Changes Its Drug Practices And R&D Suffers examines the potential effect of GSK’s new marketing practices on the company’s performance. 

At the end of last year, LaMattina wrote that while he admired GSK’s announcements, he was at best cautiously optimistic about the effect on business performance:

[I]n areas where GSK is competing head-to-head in a certain drug class, all things being equal, a less aggressive approach to marketing could be a sales disadvantage. One might argue that doctors could become more loyal to the GSK brand because of such behavioral changes. However, this is unknown territory.

Now, in the midst of GSK’s latest troubles, LaMattina believes there is some closure: 

One wonders if GSK’s woes are due in part by trying to compete against increasingly aggressive rivals. If you don’t market drugs, how do you expect to sell them? GSK’s COPD franchise is being hit pretty hard and normally a company would actively tout its products to meet the challenge. But the relatively passive approach to sales and marketing taken by GSK precludes such an approach. It is hard to believe that a sales rep, whose compensation has little to do with the number of prescriptions that a doctor will write, will be as effective as a competing rep who has a lot more to gain. A less incentivized sales rep is simply not going to be as motivated.

The article raises an interesting point about what branch of the company has been affected most by the sales decision, given GSK’s layoffs: “Ironically, it is R&D that is now being impacted as a result of these declining sales forecasts. That is unfortunate. At a time when there are great opportunities in drug R&D, one would hope that a pharmaceutical company would be at least maintaining its R&D commitment if not increasing it. GSK, unfortunately, is taking a different path and following others like Pfizer [ ] in deemphasizing internal R&D. That is a shame.”

LaMattina concludes: “For those who don’t appreciate the importance of sales success to R&D, this should be a cautionary tale. The greater the amount of revenue that a company generates, the more it can invest in R&D.”

Another point to draw from this situation: Many of GSK’s promotional changes appear to be the result of negotiations with the government. The pattern was that GSK would announce  major marketing changes, and these would then end up in either GSK’s Corporate Integrity Agreement or the state consumer protection settlement agreement. This may serve as a warning to other companies that agreeing to overly restrictive sales practices can send tremors through the company.