Changing today to win in the future
On 1st April 2017, the GSK Board of Directors made the decision to appoint Emma Walmsley as the first female CEO in the 300-year history of GSK. By many key stakeholders, it was recognised as a controversial decision, inconsistent with GSK and common practices in the UK. She was the first woman to ever lead a major pharmaceutical company. Emma Walmsley succeeded Sir Andrew Witty who was leading GSK for almost a decade. Her mission was to make GSK innovative, customer focused and successful again. Today, we can create a business case by retrospectively reflecting on the past 3 years, drawing some conclusions and analysis on what has happened.
A lost decade with a light at the end of a tunnel
When Sir Andrew Witty was appointed as CEO, his profile ticked all the boxes of a successful CEO. He joined GSK as a management trainee in 1985 and he held many leadership positions within Glaxo in the UK and globally. It was obvious that somebody who spent 23 years of his professional life in GSK and who knows the company in and out, has a license to succeed, would win the market and would put the pharma giant back on performance course.
Sir Witty’s strategic development plan for Glaxo was hit a few years later. On 2nd July 2012, GSK pleaded guilty to criminal charges in the USA and agreed to a $3 billion (!!!) settlement. To drive performance in the largest drug market globally, GSK implemented illegal promotional practices (off-label promotion), bribed doctors and failed to report safety data. It was the largest healthcare fraud case and the largest fine ever paid by a drug company.
Another knockdown hit Glaxo a year later. The Chinese authorities investigated GSK’s illegal practices in China. GSK had paid out bribes to doctors and hospitals in order to have their products own promoted. The penalty to be paid was almost $0.5 billion ($490 million) and it was the largest penalty in China’s history. Four executives were arrested, spent many years in jail before being finally deported. Witty later claimed that he knew nothing about the China fraud, however instead of leading GSK and focusing externally they had to focus on improving internal processes.
More and more people started openly criticising Witty’s strategy and execution. He had to come up with something significant. He announced a three-part transaction deal with another pharma giant from Switzerland, Novartis.
Key assumptions of the 3-part deal:
- GSK was to acquire Novartis’ global Vaccines business (excluding influenza vaccines) for an initial cash consideration of $5.25 billion
- GSK was to create a new world-leading Consumer Healthcare joint venture with Novartis in which GSK will have majority control and an equity interest of 63.5%
- GSK was to divest from its Oncology business for an aggregate cash consideration of $16 billion.
The net after tax proceeds of the transaction received by GSK today are estimated to be $7.8 billion. Retrospectively, we know that it was a good move for Consumer Health and Vaccines businesses but a miss for GSK in case of Oncology.
When Emma Walmsley joined GSK’s Consumer Health business as the European Head in CH, nobody thought she may eventually become their future CEO. She was headhunted to lead CH globally, but not the entire company. Her expertise was with the consumer business. She spent 17 years in L’Oreal; holding various general management and marketing roles and her last position in L’Oreal was Head of consumer business in China.
In October 2011, she was promoted to the position of President of Consumer Healthcare worldwide. Under her leadership, the sales of CH business had doubled. She successfully closed a deal with Novartis, creating one of the largest consumer health companies globally.
Business performance, building a new, winning culture in CH and her leadership style could not be unnoticed. Board of Directors were impressed with all these achievements and started thinking about appointing her as the new CEO. They reviewed a potential from the GSK Pharma talent bench but, in April 2017 had finally decided to appoint ‘The Outsider’ as the new CEO. It was an incredibly controversial and brave leadership decision.
“She doesn’t even hold a science degree!”
“She is experienced in management, marketing and CH but not across the board within Pharma and Vaccines!!”
“And she is a woman!!!”
Investors did not like it at all. In May 2017, British fund manager Neil Woodford sold all GSK shares. The decision was driven by disappointing results of Glaxo over the previous decade. In 2017, they generated same results as they did in 2004. It happened a few months after Sir Andrew Witty had left GSK and just when Emma Walmsley was appointed as the new CEO.
Changing today to win in the future
She had to face many challenges from day one:
- Uncompetitive structure and size of R&D spending
- No oncology drugs in pharmaceutical portfolio
- Lack of confidence within investors
But she had two critical success factors: her vision and her leadership style. This is on top of the fact that she had unique personality attributes – analytical thinking and assertiveness. Each decision in her professional and private life are always supported with solid and true arguments by looking at the costs and benefits. She is open to a discussion; however, she expects people to be prepared, objective and rational.
GSK’s Pharma business without a rich R&D budget and pipeline cannot compete with global drug giants like Pfizer, Roche, Novartis or Johnson&Johnson. Without blockbuster drugs, it is downgraded to a lower class and then finally it competes with any generic company. When Walmsley was appointed as CEO, only about 13% of sales revenue was invested into R&D, top notch companies on the other hand spend on the level of 25%. Glaxo ran a strategic review of R&D projects, about 30 projects were deemed to have no consumer potential and were killed (termination or divesture). She pushed the organisation to stop all “hobby” projects in R&D.
These days, pharma companies cannot afford not to have an oncology business if they want to play in the Pharma Premiership. Witty’s move to divest the oncology unit by transferring all oncology R&D to Novartis benefited shareholder returns, but not GSK’s long-term earnings. Emma Walmsley understood how critical oncology is for drug companies very quickly and in December 2018, GSK announced an acquisition of TESARO, an oncology focused biopharmaceutical company based in the USA. The $5.1 billion transaction strengthened GSK’s Pharma operations and enabled them to be competitive in the oncology area. Additionally, in her first year as CEO she sold off GSK’s rare disease unit and began a strategic review of its antibiotic business.
From day one, Walmsley started driving a challenging talent strategy focused on upgrading talent profiles and building long term succession planning. She replaced about 40% of top executives within the first few months of her leadership. There have been two critical talent acquisitions. First, the employment of Hal Barron as Head of R&D (he used to be Head of R&D in Calico, Alphabet’s start up run by Google) and second, the recruitment of Luke Miels as the Global Pharma Business Head (he was Head of Global Product & Portfolio Strategy / Business Development & Licensing / Corporate in Astra Zeneca).
Witty’s strategy benefited shareholders returns, not GSK’s long-term earnings potential. High yield dividends attracted short-term investors with high expectations. GSK used to pay a 7% dividend, which was above the market average, and used the money which should have been invested in the development of new molecules. Walmsley has successfully explained her long-term strategy to institutional investors and to convinced them to stay with GSK.
Once dealing with many challenges, Walmsley identified some opportunities: Consumer Health and Vaccines. Both businesses do not fit a long-term strategy of GSK which is the focus on oncology and immuno-inflammation yet are critical in driving corporate sales and cash flow. In 2019, half of the group’s sales were generated by CH and Vaccines. Profits are reinvested into Pharma’s R&D projects as well as mergers & acquisitions.
Since the 3-part deal transaction with Novartis, Walmsley approved two additional strategic steps to strengthen the Consumer Health business. Glaxo decided to buy the remaining 33% of GSK Consumer Health joint venture from Novartis, with the transaction being valued at $13 billion. In 2019, there was another important decision for GSK Consumer Health. They decided to create a joint venture which is the number one consumer health organisation with 7.7% market share globally. It is a cash cow for GKS. In the future, there is a plan to spin off the Consumer Health business into a separate company which will be listed on the London Stock Exchange (LSE). It looks like GSK has identified a fuel source for their future R&D strategy and growth.
The GSK Board of Directors with its out-of-the-box idea to appoint Emma Walmsley as the GSK CEO in 2017 was a gamble. Retrospectively, it seems that they knew what GSK needed and they found it on Walmsley’s CV. The Board appointed the ‘Outsider’ to Pharma business who did not know that it is not fixable. After almost 3 years, GSK is back in the global pharma game, R&D pipeline is getting stronger and Walmsley has become the highest-paid female FTSE female CEO.
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