Mixing Business And Philanthropy Yields Returns For Glaxo In Africa

GlaxoSmithKline is having success with its "hybrid" approach in Africa, combining no-nonsense business with the aim of improving access to medicines there – in part through deeply discounted prices, measuring managers’ sales performances by the amount of drugs sold, rather than profits, and reinvesting in health infrastructure.

Can a big company successfully mix business and philanthropy? GlaxoSmithKline PLC says it can – and it is.

The British company in 2010 set up a unit to operate in 50 of the world’s least developed countries, giving it the twin tasks of improving access to health care there and growing a sustainable business for the long term.

“We started with a goal of generating a five-fold increase in volume [of products sold] over five years and we’ve had amazing success in those two years,” said Allan Pamba, director of public engagement and access initiatives at the LDC unit. “Volume in Africa has doubled since 2010. That would never have happened without the unit.” While performance is measured in these countries by volume and product prices are steeply discounted, GSK anticipates increased revenues in the long term as these countries’ economies and health care infrastructures improve.

Sub-Saharan Africa, where most of these LDCs are found, has 24% of the world’s health burden due to huge numbers of cases of infectious diseases such as HIV, tuberculosis, malaria, and other diseases that could be prevented through immunization – but it has only 3% of the health workers and just 1% of the global health budget. Both adult and child illness and death rates are high, sapping these societies of the opportunity to grow and prosper.

“We saw that a different strategy was needed in the least developed countries. Our approach is recognizing that we need to go further down the wealth pyramid – connecting with NGOs [nongovernmental organizations], governments further afield. That’s where we can really increase volume and access,” Pamba said in an interview. The Kenyan, a trained physician, has previously worked in clinical care and conducted clinical trials on management of malaria. He joined Glaxo in 2005 and was involved in strategic and tactical leadership of R&D programs before his work in Glaxo’s LDC unit, formally named the Developing Countries and Market Access (DCMA) division.

Sowing Seeds For Future Profits

Traditionally, companies have kept charitable giving separate from their profit-making activities.

But Glaxo’s CEO Andrew Witty believes it can be incorporated in the company’s activities.

“Our focus is very much on two strands. One is innovation and the other is access – it is not one or the other, it is both. We believe, and I think we are proving this, that we can deliver a very sustainable return to our shareholders and, at the same time, be a very innovative and forward-leaning organization in terms of developing the access agenda, and finding ways in which we can meaningfully contribute towards the strengthening of the developing world particularly in the health care arena,” Witty told journalists on a May 9 conference call on a new partnership with Save the Children.

That message is in stark contrast to the approach of a decade ago when Glaxo, alongside other big drug makers, was forced to climb down in a furious fight with South Africa over AIDS drug patents.

That public relations debacle helped trigger the latest thinking and the move away from the concept of charging a set high price for drugs across the world, irrespective of wealth.

And while the approach might not be generating the highest of returns today, it is sowing seeds for the future, as not all the least developed countries will be LDCs forever.

“We are reinvesting 20% of profits made in Sub-Saharan Africa back into the health care infrastructure in these 50 countries. It’s not much, but the signal this gives is powerful,” Pamba said. In 2012, £4 million was available for reinvestment and that amount is rising as the business grows, he added.

Under the GSK approach, the seven general managers of the LDC unit’s seven regions are all incentivized based on volume targets, not profit. The 700-strong unit works with country managers for Glaxo’s businesses to provide an integrated approach to increasing access which reflects the needs of each country. Since the DCMA unit was established in 2½ years ago, volume has doubled, with the 2013 volume target now being 106 million packs against 55 million packs delivered in 2010 before activation of the DCMA unit.

The DCMA is now Glaxo’s fastest growing business unit globally measured in volume.

“Given the rate of growth that we’ve seen, we’re hopeful that even if we don’t hit that five-fold volume target then we’re going to get close to it,” Pamba said.

Access Key

A nation is considered an LDC when it meets three criteria set by the United Nations: low-income, drawn from three-year averages of gross national income; “human resources weakness,” reflecting factors such as nutrition, education and literacy; and “economic vulnerability,” based on such indicators as instability of agricultural production, economic smallness and percentage of population displaced by natural disasters.

In the least developed countries, where many people survive on less than $1 a day, Glaxo caps the prices of its patented medicines and vaccines at no more than 25% of developed world prices.

“Cutting the price is only one aspect. We’re working on awareness, availability, improving distribution channels, and removing inputs to improve affordability,” Pamba said.

It is a step-by-step process in some of the world's toughest markets where problems can be deeply complicated.

In Zambia, for example, access barriers include long lead times to get the product into the country, sometimes taking up to six months.

“Another is that our distributors and wholesalers all have to hold huge amounts of stock and are borrowing at up to 30% to hold that stock, and that cost is then passed on to patients,” Pamba said. “So there are clear inefficiencies in the distribution chain which we need to fix. Another problem is that distributors add their own mark-ups. Add to that tax that’s slapped on by the local government. So at the end of the day the patient can’t afford to buy this medicine.”

As a result, local pricing of Glaxo’s Ventolin (albuterol sulfate) inhaler in Zambia is between $9 to $10 compared to around $4 (£2.6) in the U.K.

To try to get around these drug barriers in Zambia, the DCMA is forming an alliance with a large banking company there.

“That can hopefully help us develop solutions, for example, to help our wholesalers and distributors to hold large inventories without being hurt by paying huge interest rates, and thus not need those extra costs to be passed on to needy patients,” Pamba said.

“This necessary process has been identified because we focused on volumes, not profit. We’re focusing in LDCs on the volume rather than the profits, and when we saw that drug volumes were not growing as we would have expected, we dissected the situation and identified inefficiencies in the system. So to try to get around these problems in Zambia, we’re trying to now work with a financial institution to remove these dislocations and thus improve access to medicines there.”

Pamba would not identify the institution, but said that discussion is already under way. “We’ve said to them, ‘Look guys, a lot of the problems here seem to be finance-oriented. We want to find sustainable solutions.’ And we expect to have an announcement within the next two months (mid-July) giving details of this new partnership.”

“Our overall goal here is to help increase access to affordable medicines and health care in Africa whilst helping create the conditions for long-term sustainable business growth and development. We will be running pilots in Zambia with the intention of scaling what works across other countries,” Pamba said.

Outside of the specific DCMA initiatives, GSK has been publicizing new partnerships with nonprofit groups to expand drug access.

One is with the GAVI Alliance, which works with governments on mass immunization programs, and through which Glaxo supplies childhood vaccines at reduced prices.

That effort has been boosted by the roll out of the pneumococcal vaccine Synflorix. And on May 9, Glaxo said it would also provide its cervical cancer vaccine Cervarix at a deeply discounted price as part of a new long term program to help protect girls against cervical cancer in the world’s poorest countries. Glaxo currently supplies more than 80% of its total vaccine volumes to developing countries, but the discounts vary, as Glaxo has a tiered pricing policy for its medicines and vaccines. For example the Cervarix HPV vaccine being made available to GAVI for four demonstration projects in Madagascar, Mozambique, Sierra Leone and Zimbabwe will be at a price of $4.60 per dose, representing a 96% discount on western prices.

Glaxo’s approach has won support from charities like Save the Children, the African Medical and Research Foundation (AMREF) and CARE International, which are helping GSK with 20% reinvestments back into health care infrastructure.

That backing was echoed by Save the Children chief executive Justin Forsyth during the May 9 joint conference call with Witty when the charity and British drug maker announced a five-year partnership aimed at saving the lives of 1 million children.

Under this collaboration, GSK will provide £15 million ($23 million) over five years to train health care workers and fund Save the Children community projects in the Democratic Republic of Congo and Kenya. These will be closely monitored and the evidence on how to save children’s lives at scale will be used to replicate programs in other countries within Sub-Saharan Africa, Asia and Latin America.

Save the Children will also have a seat on a Glaxo research and development board for pediatric medicine. The drug maker hopes to leverage Save the Children’s child health expertise and on-the-ground experience to reach children in the most remote and marginalized communities with basic health care.

It is part of an incremental approach by Glaxo in the region that the company hopes will gain critical mass over time.

Calling On Mobile Technology

In a more unusual partnership, the drugmaker in December 2012 formed a partnership with mobile phone operator Vodafone to harness innovative mobile technology to help vaccinate more children against common infectious diseases in Africa.

Starting with a one-year pilot vaccination project in Mozambique, supported by Save the Children and run in collaboration with the Mozambique Ministry of Health, the project aims to establish whether mobile technology solutions could increase the proportion of children covered by vaccination in Mozambique by an extra 5% to 10% by encouraging mothers to take up vaccination services, supporting health workers, improving record keeping, and enabling better management of vaccine stock.

The project aims to create a model that can be replicated throughout Mozambique and then scaled across Africa to reach thousands more children with life-saving vaccination, Glaxo says. The pilot will include up to 100 clinics and will be independently tested to prove its impact, effectiveness and cost benefits.

Such initiatives could have wide-ranging effects in poor countries, and also have helped rehabilitate Glaxo’s reputation in some corners.

”I used to protest against GlaxoSmithKline and campaign against them in the days when they kept drug prices very high for AIDS drugs many years ago and before Andrew was CEO,” Forsyth said on the May 9 conference call. “What’s changed is GlaxoSmithKline is now at the forefront of making changes in its sector,” he said, adding that the alliance “is only a very small part of something that will in the end become much bigger. I know I am not allowed to say that, but I believe it is only the tip of the iceberg.”

Since becoming CEO in 2008, Witty – who earned his top management spurs when he ran the company’s South Africa operations in the early 1990s – has been revamping the company and reorienting its business ethos while becoming more open to sharing its intellectual property and knowledge, and to forming partnerships to help stimulate more R&D into diseases that most affect the world’s poorest people (Also see "GlaxoSmithKline Offering Free Access to Potential Malaria Compounds" - Pink Sheet, 25 Jan, 2010.).

Witty says hard-nosed business and doing good can also be shareholder-enhancing when done well.

“That is something that I believe our shareholders have welcomed and I know that many of our shareholders are as proud as I am that GSK has three times in a row been the #1 company in the Access to Medicine Index, which summarizes which companies are doing the most. This is the reason why people want to own shares in the company,” he said.