Surviving and Thriving in a Changing Business Environment

Speaker Name: Dr. Charles A. Sanders
Speaker Title: Chairman
Speaker Company: Glaxo, Inc.
Glaxo, Inc. Website

Dr. Charles A. SandersThank you very much for that very warm and generous introduction. I am very pleased to be here with Treasurer and Mrs. Boyles, Dean Peacock, Chancellor B orkowski, and Senator Broyhill. In particular, it is always an honor to give a name to a lectureship but one named for Harlan Boyles has a very special meaning to me because he represents the finest qualities that you can find in a human being. He's warm, he's caring, he's intelligent, he's committed and he is dedicated to public service. We have all, in this state, been beneficiaries of his wise stewardship of the state funds. I wonder what would have happened if the federal government had had Harlan Boyles there for the past 50 years.

I'm particularly pleased to be here to be part of this celebration -- the installation of the fifth chancellor in the fifth year and all the fives that go with it. Dr. Borkowski assumes the leadership of a strong tradition of learning which was established here in 1899 by B. B. and D. D. Dougherty. The Dougherty brothers had a mission -- to train teachers who could teach the children living in these Appalachian mountains. Today the roots of that mission are still alive and well and dug deep into the reputation and traditions of this university. In all things, time and change have molded that mission, given it new dimension in other disciplines and an international flair under Dr. Borkowski's leadership. A few other things have changed; after all, tuition was only $2 a semester back in 1899. And, of course, all of the students here today are no strangers to change, because going to college has to be one of the biggest changes that you have ever encountered in your lives. And lest any loyal Mountaineer forget, the Southern Conference tournament this year is a sufficient reminder of how quickly the cruel hand of fate can change good fortune into bad.

At the luncheon today, the theme from the CEOs who spoke along with Treasurer Boyles was one of change, and while the questions don't change, the answers do. I am reminded of a story of a New Yorker who would issue forth from his condominium -- high rise condominium, of course -- every day dressed to go to work with his Wall Street Journal under his arm. He walked snappily down the street, passing a lady selling pretzels for 25 cents. He would go by the pretzels and put 25 cents into the tray and walk off, never taking a pretzel. He did this day after day after day -- Wall Street Journal, 25 cents, off to work never taking a pretzel. One day as he passed and put the 25 cents into the tray and started to walk off, the lady said, "Sir." He said, "Oh yes, I know, you want to ask me why I come by here every day, put 25 cents into the tray and never take a pretzel." She said, "No sir, I just wanted to let you know the pretzels are now 35 cents."

The distinguishing feature of change in these '90s is the pace at which change is occurring. Of course, that has been discussed in previous lectures, but we are living in a global economy which some have characterized as a global village. We're linked together in so many ways. We have global trading in the stock and bond markets, foreign investors are key to selling our U.S. Treasury bills on a regular basis, and our economy and our people are very much dependent upon foreign imports. What happens in Europe and Asia in one way or another unpredictably often has profound effects on what happens here. Remarkably enough, the United States has now banded together with Canada and Mexico into a free-trading zone which will become the largest trading block in the world.

I would argue, as we move into the '90s and the next millennium, that if our society is going to be successful, we must concentrate on two things. First, we must continue to foster the innovation that has made this country the leader in so many areas, particularly in my area of biomedical research. We must continue to focus on tight expense controls so that we are the low-cost producer in whatever field we want to compete. The car companies are wonderful examples of having gone through the searing experience of losing market share to foreign companies simply because of the fact that their costs were out of control and, by the way, are now coming back under control and are highly competitive.

In order to do this, we've got to have a highly educated, motivated and flexible workforce. We must recognize that there is a continuing need to learn and a necessity to adapt to changing conditions, often on short notice, with the ability to define the various options that are available and go ahead and take a chance -- take action.

There is a long list of companies that have failed to do this. Doubtless many of you do not remember the Royal and Underwood typewriter companies, and that's the point, because those companies failed to recognize that the day of the mechanical typewriter had passed and the electric typewriters were the way of the future. Of course, big blue, IBM, is an unfortunate case study. It, in 1957 sitting on top of the computer world, predicted that there would be no more than 15-20 very large computers in the world in the future, which of course IBM would build because they would service the management information needs of the world. As recently as 1982, there was the prediction that there would be no more need than 200,000 personal computers in the world. In 1990 IBM posted a record profit for all corporations of $6 billion, but how quickly things change because in 1992, they posted a $5.2 billion loss -- another record -- and in 1993, yet another one, and that loss was in excess of $8 billion. They did not recognize the change; their infrastructure was such that they were vertically organized. The people in the trenches or in the divisions were not empowered to bring about change to bring the news that the world had changed and to expect rapid action. It was like trying to turn a very large crude carrier around in the middle of the ocean and you know that takes a very long time. I am happy to report that, as recently as this afternoon, IBM has reported a profit of $333 million and their stock is up five points. They have adapted to change, but it's those subtle changes that take place over time that can be most devastating to the dozing business manager.

If you drop a frog into a pan of hot water, that frog will immediately react to the heat and jump out of the pan. But if you carefully place the same frog in a pan of cold water and then slowly raise the temperature a degree at a time, the frog will accept the change, perhaps without noticing it, and stay in the water until it is literally killed by the heat. Change has been the order of the day since the founding of Glaxo. Let me tell you a little bit about how we have dealt with our changing marketplace over the past century.

We've been changing since we were first founded in New Zealand over a hundred years ago. The company began with the invention of powdered milk which is very useful in treating infant diarrhea. Not surprisingly, we then branched out into baby food. The motto became sort of the watchword of baby food in the '30s that "Glaxo Builds Bonny Babies." We are after all a British company. We moved to London, which is where our worldwide headquarters are now, and then began to understand that as the world was changing the conglomerate was not going to be as successful in the latter part of the twentieth century. We began to sell off the hospital furniture business, the baby food, the powdered milk, the farm and garden tools so that we could focus on one business alone and that was pharmaceuticals.

We are a so-called research-based pharmaceutical company in contrast to a generic pharmaceutical company. We're research based in the sense that we sell what we find in our laboratories or what we can license from another company that has a product with patent protection. Generic companies have an important place, by the way, but they're selling products which are off patent and they don't do research. So that what we find is what we are and innovation is the lifeblood of our industry. If we don't find anything, we are in great difficulty. It reminds me of the true story of the dedication of a new research building at a company which will remain nameless, a pharmaceutical company. A member of senior management went up to the chairman and said in what was probably a career-ending statement, "Mr. Chairman, I am sure glad we have a new research building because we didn't find anything in the old one."

We as a company have been very fortunate in terms of being productive in our research and development pipeline. It is for that reason that we have become the second largest pharmaceutical company in the world after Merck, second largest here in the United States as well. It has been built on the success of products such as Zantac which treats the acid overproduction in the stomach and ulcers, on asthma drugs, on antibiotics, on dermatologicals. Remember that we only came to the United States in 1977 and moved to North Carolina in 1982 at the behest and heavy campaigning on the part of then-Governor James Hunt. We came to the Triangle in 1983; our sales at that point in time were about $70 million. This past June 30, we had sales in excess of $3.2 billion. We now represent some 40% of the business of Glaxo Holdings worldwide. We employ 6,000 people in the United States, including some 2,300 sales and marketing people, with the remainder being divided between Glaxo's Research Triangle Park headquarters and Zebulon, our manufacturing site.

How have we done this? We've done it through two things. First of all, we've had the products that I mentioned before. The second thing is that we have had an extraordinary group of people working at Glaxo. We have literally built this company by defining what the needs were, finding the people that could meet those particular needs, and then moving on and taking action where it seemed appropriate.

These people were very special because they believed very much in what they're about and they still do. They weren't afraid to change and they still aren't. They've always been willing to learn and we're still learning. And in the final analysis, they really didn't know what they couldn't do; they thought they could do everything and they still do.

We've also been blessed by a stream of new products coming forth from our research and development. Among these are Zofran and Imitrex and then another drug called Serevent. Zofran treats the nausea and vomiting associated with cancer chemotherapy and also is useful on post-operative nausea and vomiting. Imitrex is the first drug introduced in more than 30 years for the treatment of migraine headaches for which it is very effective. Serevent is the first new drug in asthma treatment introduced in 25 years.

Let me tell you a little about the research process that we go through because it's not the easiest thing in the world to figure out where one is going when you're beginning with the basic research principle. The programs that yielded Imitrex and Zofran began in 1972. It was based upon the general theory that a neurotransmitter substance, a natural substance called serotonin, was found in great quantities throughout our central nervous system in our brains. Its action was not well understood, but because there was so much of it there we believed it must have a particular purpose. So the basic research to look into what serotonin did began in 1972. Through a whole series of projects which synthesized compounds that acted like serotonin and others that opposed serotonin, two drugs emerged -- one was Zofran and one was Imitrex. Both were introduced into the marketplace in 1990, eighteen years after the project began and after some $300 million had been expended in pursuit of products that you did not know you were ever going to reach.

Our business takes enormous risks in research and development. Some of these risks pay off; others don't. For example, one in 5,000 compounds synthesized makes it to the marketplace. Only one in three ever pays back the initial investment. But the investment is worthwhile because if the product is successful, that usually means that it has been beneficial to patients, that patients have gotten better. The sales therefore come, and those sales are the ones that fund tomorrow's medicines.

But this industry is far different from the one that I entered when I left the Massachusetts General Hospital some thirteen years ago. During this time, health care costs have continued to increase at an ever increasing rate. There has been more and more pressure for cost containment of these health care costs and business has become involved in trying to keep these health care costs down, resulting in the rise of so-called managed care. There also has been an increasing number of people who are uninsured and therefore don't have access to health care insurance. That doesn't mean they don't have health care; they usually get it at the most expensive sites known as the emergency room. They often delay seeking health care and that's a problem which has to be dealt with.

President Clinton and the First Lady, I believe, deserve great credit in terms of putting this issue squarely at the head of the public policy debate. But I would urge all of us to consider the following: As we address the issues of costs of health care, which is now about 14% of the gross national product, and as we address the cost of universal coverage for everyone, we must remember that quality in this system is absolutely essential to maintain. At the same time we have to reaffirm our commitment to supporting innovation. Because it is that innovation which is going to bring the new drugs, the new pharmaceuticals, that are going to treat the diseases which are not yet effectively treated. We also must remember that this is the best health care system in the world. It may not be the most efficient, but there is no system better. People come here from all over the world to seek health care. People come across the border from Canada to take advantage of the tremendous technological capacity that we have to treat a whole variety of diseases which is denied to them in Canada simply because of their health care system. So, I would urge us as we move through this debate to build upon the present system and not redesign it.

There are market forces already at work which are containing costs. The rise of managed care, the so-called HMO, the preferred provider organizations, the independent practice associations which will give care for a specific price, has become more and more the means by which we provide health care in this country. In 1986 only 23% of care was given by managed care organizations; that rose to 47%, twice as much, in 1990. It will reach 75% in 1995 regardless of what happens in health care reform legislation.

Medical inflation this past year rose 5.4%, CPI was only 3.1%. It's still well above but it is the lowest rate of medical inflation that we've had in the past 22 years. Pharmaceutical prices, incidentally, are also modifying to some extent on the basis of voluntary price restraint on the part of companies but I would argue, more importantly, because of the intensively competitive marketplace in which we operate.

If we do four things, in terms of fixing the problems that we have, I think we will have done a lot. The first of these is to subsidize those people with insurance who are chronically uninsured. That number is no more than five to ten million people per year. We often hear the number of 35, 45, 50 million Americans without insurance. Yes, that's true at any given time. Those are often people on the way from one job to another; those are also people who choose not to have insurance. But if we could take care of the people who are chronically uninsured, who get their care in the emergency rooms in the highest cost setting, and by the way, we pay for that care because the cost of their care is shifted to us in the private sector. If we can take care of that particular group, then we can step back and see what else needs to be done in terms of additional coverage.

The second thing I would argue that we should do is to provide a prescription drug benefit to everyone. This is an area that is so sensitive, particularly in the elderly population who often have insufficient income to cover all of their needs.

The third thing that we should do is to fix the insurance system in the following way. We should simplify the form. We have 1500 health insurance companies in this country. If we could just have one form, how easy it would be. Doctor's offices wouldn't have to have these cadres of assistants just filling out the different insurance forms. We should also provide portability of insurance in this country so that we do not have to worry about people going from one job to another and ending up with job-lock. They stay in one job simply because of the fact that they're afraid to leave for fear of losing their health care insurance.

It is important to get away from denying access to health care insurance or rating up health insurance simply because you have a prior medical condition, and that could be done through the creation of large purchasing pools -- nothing terribly revolutionary by the way.

The fourth thing I think is absolutely essential to do is to take care of catastrophic insurance coverage so that people will not go broke if they have a serious illness, regardless of their ability to pay.

There are other things that are important such as tort reform, trying to get away from the punitive damage issues, and that is important but, in my estimation, less important than these four other things. If we could do those things this year, we would have done a heck of a lot and then we would have built upon the present system and can see what needs to be done in the years ahead.

At the beginning of this health care reform debate, my industry in particular was singled out and we were vilified, I think, to give impetus to the reform movement simply because every reform movement can move along a lot faster if you've got somebody to dislike. We're an easy target. We're small, and we're very unpopular. Indeed, I would say that the pharmaceutical industry and Prime Minister Mulroney in Canada had a lot in common. Toward the latter days in his administration, he characterized his popularity as being limited to the members of his immediate family. But the reason that we are unpopular is because of the fact that people pay out-of-pocket for pharmaceuticals more than half the time. They get a little bottle of pills for $120 or $150 or $160. It doesn't make much difference how much it cost; if you don't have the money to pay, you just don't have the money to pay. It's very hard, I think, to understand why that little bottle of pills costs so much. You don't see all those years spent in developing the basic research program, all the compounds that were synthesized and discarded, all of the clinical trials that had to be done on patients in order to satisfy the regulatory criteria. Indeed it's hard to see that that really cost $300 million or more to get it to the market. But that's the way it is.

When you think about it, if you go into a hospital you will spend $1,000 a day or $2,000, depending upon what the problem is. I broke my ankle a couple of years ago and went into the Duke Hospital. I went in on Monday and came out on Thursday and had a $10,000 bill. And my ankle is fine, I can walk, and I'm very happy. But I didn't have to pay for that out of my pocket. I could have if I had to, but I didn't have to because insurance takes care of it. Ninety-five cents out of every dollar paid for hospital bills comes from insurance, 85 cents out of every dollar paid to doctors comes from insurance, but only 45 cents out of every dollar paid for pharmaceuticals comes from insurance. And, in particular, the elderly population is disadvantaged because Medicare does not have a prescription drug benefit. I think what has not been pointed out in this entire argument is that pharmaceuticals, while being the most cost-effective, keeping patients out of the hospital, getting them out of the hospital faster, preventing diseases, only account for $80 million out of the trillion dollars we spend annually on health care. Hospitals and doctors cost about $600 million. If you take away the $80 million, you've still got a $900 billion problem.

There is also the general perception that governments discover drugs or universities discover drugs. That happens occasionally, but infrequently. Ninety-four out of the 100 most commonly sold drugs in the world were discovered and developed in industry, those of where the patents reside. Four patents are owned by universities and government and two are owned by individuals. What also has not been pointed out is the tremendous success that pharmaceuticals have conferred upon our population. I have seen it all in the period of time that I have been in health care, starting way back in medical school. We as a government began to foster the academic medical establishment and basic research for the structuring of the National Institutes of Health back in the 1940s, late '40s and '50s. Out of that came a whole cadre of basic knowledge which we have been the beneficiaries of ever since, and it continues to come.

But what the pharmaceutical companies have done is taken those basic principles and developed a product concept and then invested the money to develop a product and the successes have been extraordinary. Zantac or Tagamet or any of the H2 acid suppressors has been a wonderful case study. If I went into the Massachusetts General Hospital operating room back in 1972, I would see 25 or 30 or 40 cases related to ulcer surgery or to some problem related to acid-overproduction in the stomach. You go into that operating room today, you would find one case a week at the most, simply because of the fact that pharmaceuticals have taken care of that.

We now have drugs that can control blood pressure in ways that we never expected before. Or they control diabetes, or they control cancer, but we still have a long way to go. In the end, what we would seek to do, I think, as potential patients, is to take a pill that will prevent our problems or will take care of whatever problem we have. I don't think any of us want to lend ourselves to the tender mercies of a surgeon, if we can possibly avoid it, and we would like to enjoy a high quality of life as long as we can.

As we go through this debate, I think that you all must be aware that our industry is being totally restructured by a changing marketplace. The price competition that has been forced upon us by the big buyers which result from these large managed care enterprises has resulted in narrower margins and single digit growth. We're no longer the darling of the investment community. There's been a consolidation in the industry, a new way of marketing products, reflected by the Merck-Medco alliance. And unhappily, there have been 30,000 job losses up through October of 1993, now approaching 40,000 as I speak, all without any legislation. The stockholders of our companies have been badly bruised.

The ten largest pharmaceutical companies' market capitalization in early 1992 was $289 billion. As of March 31, 1994, it had fallen to $164 billion, which is down 43%. I want to let you know that I'm not interested in telling an unhappy tale here, because what we are seeing is the product and the results of a free marketplace and that exacts a very rigorous and difficult toll. We are all responding first by maintaining our commitment to research and development as best we can because that is what we are. We're doing everything we can to cut costs. Indeed, of the 30,000 jobs that were lost up until October of '93, 12,000 (40%) were in the sales and marketing area while very few were in the research and development area.

We're exploring all kinds of ways of doing business differently such as through pharmacy benefit managed companies and so on. We're going to be focusing on growing through volume not through price. We're going to continue to exercise price restraint because that's what the market demands. We're going to be adding services that truly add value, information services to physicians and patients so that the diseases can be managed better with the pharmaceuticals that we provide. We're going to be doing more and more outcomes research to prove the cost effectiveness of the products that we put on the marketplace. Indeed, I would suggest that perhaps the entry into a formulary of a health maintenance organization will require a cost effectiveness study which demonstrates a medicine's value, not only in terms of justifying the price, but in terms of eliminating the need for more costly treatments like surgery or hospital stays, and in improving the patient's quality of life

We're also changing our marketing focus to include payers and consumers as well as physicians and pharmacists. In a system that focuses more on prevention and requires that all of us take greater responsibility for our own health, it's important that we all have the information we need to make the right health care decisions for ourselves. We're going to try and provide some of that information.

But along with all the changes, the bottom line at Glaxo and in our industry has been and will remain innovation -- innovation in meeting unmet medical needs and innovation in meeting the needs of a changing marketplace. Innovation is the key to discovering and developing the medicines that will cure or treat diseases like AIDS, Alzheimer's, cancer and Parkinson's. And innovation is the key to success in the marketplace, because the company that develops innovative medicines whose value is clearly understood by patients and managed care administrators alike is the company that will stay one step ahead of the competition.

Without a doubt, companies that are capable of sustaining innovation -- even in a highly competitive and volatile industry like pharmaceuticals -- are companies that employ flexible and far-sighted people who are always learning. Unlike our frog in the water, these innovative people know when the heat is rising in the marketplace, and they take action.

I know it may be a hard thing to hear just when you're nearing the end of sixteen years of education, but learning never ends. If you're smart, you'll never allow yourself to become complacent, but remain constantly alert to the forces operating on your environment.

I'm reminded of a story about Bob Hope's advice to a graduating class. He said, "I know all of you are concerned about going out into the world. I know that going out into the world to make a living means going through some very difficult times. I know that going out into the world means you have to work very hard to be successful. If you want my advice about going out into the world, my advice is, don't go."

Unfortunately, that's not an option. But I can tell you that, armed with the benefit of knowledge, you'll be flexible enough to respond to the challenges of the day, and in the end, succeed.

I would encourage you to adopt as your example Thelma C. Raley for whom your new business school building is named. I'm sure most of you are familiar with her story. How she took over the management of the family orange grove in Florida after her husband was killed in World War II. How she met a payroll, picked fruit, oversaw the field hands and tended to all aspects of the business. How she was told that a woman couldn't do it on her own, and how she built up that business anyway until she became owner of the second largest grove in Florida.

Thelma Raley was a formidable business woman. But what did she do when, late in life, she finally turned the business she had built over to her son? She came here, to Appalachian State University. Why? Because Thelma Raley always wanted a college degree. It was her philosophy that education, like life, is a journey, not a destination.

Thelma earned her college degree, walking across the stage to receive her diploma in December 1992 -- at the ripe young age of 80.

Thelma Raley kept on learning for a lifetime. And so, I hope, will you.