GlaxoSmithKline's Cutbacks Should Come as No Surprise

Well, this is turning into GlaxoSmithKline (GSK) week around here, but with good reason. I’ve had a lot of mail from people who have been affected by this week’s cutbacks, and others who left the company before the latest round. And that leads to these thoughts for today:

1. The company is being rather coy when they describe the current layoffs as only involving 2% of the work force. The recent cuts were focused on the Centers for Excellence in Drug Discovery [CEDDS], which is where the great bulk of discovery medicinal chemists are. To be more specific, this one seems to have hit the Metabolic Pathways group especially hard, and there’s thought that the other CEDDS will be going through similar contractions.

And there have been other cutbacks over the last few months, though, and there are surely more to come. With such a smaller head count in the CEDDS, everyone seems to be expecting the related groups to be next in line – IT, chemical development, more of the in-house biology, and so on. If the company is doing more research on the outside, then some of these folks will presumably not be needed. GSK looks to be shrinking for many months to come.

That makes a person wonder about whether these cutbacks are meant to send some big signal to the investors or not. You'd think that you'd make a bigger deal out of them if that were the case, rather than minimizing them for the public, as the company seems to be doing.

2. It’s going to be interesting to watch to see if the new style the company is trying will work. They’re breaking down the CEDDS into even smaller teams, from what I hear, turning the discovery organization into who-knows-how-many smaller competing units. It’s been described as the “if only we were a bunch of startups” philosophy, and there are several points to consider about that.

For one thing, startups may not be as wonderful as they appear statistically, because of survivorship bias: a number of them disappear with people having hardly been aware that they were around in the first place. Even if that’s a desirable state of affairs, will a large company be able to replicate it in-house? And even if it can be done, will it happen in this case, or will the teams be either too large to be nimble or too small to work? I’ve no idea. Neither does anyone else, and it'll be years before we know.

3. There have been a lot of comments, both here and at other news sites, about how this is another evil deed of the MBA folks, and if they’d only turn things over to the scientists and get back to the science, the company wouldn’t be in this position. Hmmm.

What I'm about to say feels strange to me, because I’m a scientist through-and-through, and I’ve done my share of complaining about ridiculous business attitudes. For that matter, I've found myself laid off through what I thought was a mistaken site closure. But all that said, there’s a case to be made that GSK partly got themselves into this fix by letting the scientists free to do science. That’s how I see, for example, the huge effort the company had for years in nuclear receptors. A massive amount of fundamental work was done, but (because it’s such a horrendously difficult area) little or nothing ever came out the far end to make anyone any money. I'm willing to be corrected on those points, but that's how I see it now.

And it’s not like the company’s productivity has been one of the wonders of the world overall. One correspondent, an ex-GSK researcher, pointed out to me in an e-mail that one of the sites hit hard this week had taken one drug to market in twenty-five years. Some of that is surely bad luck, but that explanation can only take you so far.

It’s interesting to hear people talk about the good old days in the industry. The other day I saw a comment about getting things back to the good productive days of the mid-to-late 1990s, which (I can tell you) didn’t seem to flippin’ productive at the time. But there are stories beyond counting of the days when Company XYZ Really Had Their Act Together, when the scientists were happy and management was wise and stayed out of their way, and the clinical candidates flowed like a free bar at an ACS meeting.

I used to feel bad, hearing these tales, sorry that I’d missed such days. But then I noted their similarity to the myths of Golden Ages that you see everywhere, and began to wonder. The drug industry was definitely a different place back when. Screening cascades weren’t so rigorous, animal models ruled the day (and actually, in some cases, steered projects right more quickly than their replacements), and there were more good targets that hadn’t been exploited yet. I’m willing to stipulate all that; it was a different world.

But most of us, I think, date the Real Good Old Days of the industry to a period before we joined – no matter when that was. Listening to people talk about when things were good is like listening to the guys down at the lake tell you that you should have been around last week when the fish were biting. There were any number of severe problems back in any Golden Era, but those sort of disappear into the glowing mist.

4. So GSK’s upper management is doing what upper management does: they’re trying to get a better return on their money – for which, read “the money of the shareholders”. Looking over the last ten years or so, they’ve decided that what the company has been doing has not been working. The loss of Avandia (whose discovery goes back further than that period) made the problems unignorable. So they’re trying something different. It’s hard to make the case that something different wasn’t needed.

We can all argue about whether this particular something is the right idea, or whether it’s being implemented in the right way. But no one should be surprised that a company with GSK’s current issues and cost structure is being shaken up. These cutbacks may be the work of people who are mistaken; they may even be the work of fools. But it's not the work of greedy sociopaths bent on destroying the drug industry. I’d give up on that line of thought and switch to something more useful.

Comments

[Phed-Up]

Having observed the nuclear receptor group from a close vantage point in R&D, I must say that some of of their best discoveries never made the light of day. Poor management decisions and self interests of the CEDDs squashed some very creative programs. I can't elaborate the details, but I think you're wrong on this point and it's quite appropriate to point the finger at management.

[selene]

PU you may well be right. But I think Derek's point is that in this kind of situation, there are always lots of people saying that kind of thing, regardless of how right or wrong it is. It's practically impossible for an outside observer to sort out.

To the extent that the shareholders are outside observers, they are very likely to agree with Derek.

[Cete]

I'm surprised there's so little, if any, mention of the fact that last week GSK aquired a small drug research firm by the name of Sirtis Pharamceuticals for $720M. This is a Cambridge, MA (US) based company doing significant research on drugs which could have a major impact on diabetes. Another part of their R&D is focused on Resveratrol which has significant anti-oxidants which are found in grapes and therefore in wine. Sirtis will become part of GSK's Drug Discovery organization and will continue to operate out of its present location in the U.S. Perhaps this acquisition has something to do with the apparent restrucuring of the CEDDS group.

[Geoff Considine]

Great article and comments. This is what makes SeekingAlpha great--trained professionals who comment on trends in their industry. Thanks for the insights.

Reading all of this, I have to wonder: is the drug industry just following the lead of so many other industries by cutting back on internal R&D and instead acquiring the small and interesting companies that have developed innovations. This is a major trend in a range of industries--is that what is going on in Pharma?