FRIDAY INTERVIEW: Andrew Witty, CEO of GlaxoSmithKline:EVEN IN the intensely competitive world of global pharmaceuticals, the decision by the GlaxoSmithKline group to do a deal with Formula 1 racing team McLaren was exceptional.

But to GSK chief executive Andrew Witty, it is simply the latest example of the importance of thinking outside traditional structures in order to secure the future of a company that employs almost 100,000 people in 2,000 locations across 80 countries. He hopes that in sharing its capabilities in engineering, technology, analytics and strategy modelling, McLaren will help boost GSK’s global business performance, with an initial focus on its manufacturing, research and development (RD) and consumer healthcare departments.

Since taking over the reins at GSK in May 2008, the calm but typically forthright Yorkshireman, who has been with the company throughout his working life, has focused on reshaping it to meet changing needs of the market – including how it gets paid for its medicines.

“I believe [that] if we deliver a true innovation that creates value for the patient and for the system, we should be rewarded for that. I will stand up and defend that all day long,” he says. “What I don’t necessarily believe is that you should be paying those same great prices for products which are not delivering such a big impact.”

What he is proposing, and has agreed with a number of governments, is a new, more flexible pricing approach, reflecting that drugs may deliver a range of results in different patients. Flexible pricing is an effort to persuade cash-strapped healthcare businesses, largely governments, not to simply block drugs on grounds of cost or to continually cut prices.

“Even if all the drugs were free, you’d still have 90 per cent of the healthcare budget left. So, we’re not the problem, we’re part of the problem but if we get this right we could be a big part of the solution in terms of using new medicines to keep people out of hospital,” Witty says.

Delivering this message to a government preoccupied with shrinking its costs in line with the terms of our bailout was a major reason for Witty’s visit to Dublin last week.

“As the austerity era descends on everyone, this fixation on reducing costs really is obviously apparent,” he says. “I think here in Ireland we have had something like a 20 per cent reduction in prices in the last two year – that can’t go on forever. No business can absorb that. I don’t care where you start, no business can absorb that. So we have to come with something which is sustainable.

“Either prices are going to get cut so far that the innovative drugs are not going to be around . . . or we come up with some cleverer way which continues to stimulate us to develop innovative drugs and makes it possible for the patients who need them to get them and is efficient enough not to overpay for the things which don’t add anything . . . I’m quite happy to support a system like that, even though it might reduce earnings for some companies, and maybe our company from time to time, but I think we’ll have a more sustainable position.”

An economist by training, Witty has gone against the traditional orthodoxy of growth by merger. He was at GSK back in 2000 when scale was the holy grail and the merger of Glaxo Wellcome and SmithKline Beecham became the final chapter in creating the company in its current form – but he is far more convinced of the merits of organic growth.

“It has become clear that scale is not the key. If anything, we need to be more efficient, we need to be leaner, we need to get rid of the excess capacity in the system. And those mergers have created a lot of excess capacity. So I think we are in an era of consolidating in the true sense of the word, not just fewer companies but less capacity.”

He believes organic growth is a more reliable way of creating shareholder value than acquisitions. “Although acquisitions are very good for the testosterone adrenaline boost, they are usually value destroying. I saw no strategic rationale for getting bigger. I can see my way to an organic growth story, and organic growth usually beats MA.”

And rather than hedge his bets, Witty says he nailed his colours to the mast when he took over. “I felt right from the beginning that if I shut the door on the escape route [growth by acquisition], it would focus everybody on plan A. If you know there’s only one plan, then you’ll make plan A work, and I think that has worked out, actually.”

But GSK is more than simply a drug company. Uniquely in its market, it is also a significant presence in the fast-moving consumer goods sector, where its brands include Lucozade, Ribena, Sensodyne and Aquafresh.

There was a clamour at one time to offload the non-core consumer business but Witty stood firm. The juxtaposition of the two businesses in the group has delivered synergies that might never have come to light in a more traditional pharmaceuticals group, he says – both in applying the evidence-based “pharma” approach to claims made for its consumer products and using the consumer sector’s expertise in communications, customer relations and flexible supply chain expertise in its medicines business, especially in emerging economies.

“I haven’t done a single thing which I didn’t say I would do when I took over. So when people bought me as CEO, they knew what they were getting and they got it,” he says. “Nobody is surprised at where I stand on these issues.

“I am very confident my RD organisation will succeed, I just cannot tell you exactly when or how. And that’s where having the vaccines and the consumer and the emerging market business become important because they provide some level of balance to the uncertainty of pharma. But make no mistake, if pharma hits, it’s going to be the driver of real expansion at the company.”

Ireland hosts operations across the breadth of GSK’s business interest, with 1,500 people employed here – in Cork, Dungarvan and Dublin.

Perhaps unsurprisingly, given Irish people’s continuing enthusiasm for branded goods, Witty says its Irish consumer business is recognised in GSK as “one of the best we have” globally, though he is looking to a bounce in the Irish economy to keep it that way.

On the medicines business, he acknowledges that GSK and others have to work with the Government “to work out a long-term sustainable approach to how you pay for innovation in Ireland, because there is a risk that in Ireland that the focus just on price cuts will ultimately hurt everybody too much”.

While pricing continues to be a major issue, Witty is much more bullish on the prospects for its manufacturing operations here. Increased efficiency both in process design and labour costs means the gap between the cost of manufacturing in India and in the West is narrowing – and there is greater capacity in places like its £400 million plant in Cork.

“So a lot of the production which was taken away 10 or 15 years ago, we are now actually looking to bring back to theses factories,” Witty says. “We have moved some products back to plants we have in Scotland and we are moving some to Cork.

“Out of this [economic] crisis, we are going to rediscover what it means to be competitive. And if we do, there’s an awful lot of market share we can take from overseas and, in the context of Ireland and factories, the market share you want to take is from outsourced production which was sent years ago.

“For me the future for our plants in Ireland looks quite good. Provided we can keep that efficiency, we are going to start to bring back volumes from overseas, from places like India, and we are going to continue to bring some of our new products here which of course depends on our RD pipeline. Cork and Dungarvan have both gone through periods where we have had to reduce headcount to get that efficiency. As we get to that efficiency level, which is competitive, we should bring more volume and I hope what that will lead to is a gradual rebuilding of headcount.”

But no more than Ireland itself, Witty is acutely aware that pharmaceuticals is never going to be a low-cost business.

“It will always be a relatively expensive business. RD is not getting cheaper and manufacturing needs to be high quality . . . People need to realise if you want this kind of highly complex product they don’t drop out of the sky . . .”

ON THE RECORD

Name: Andrew Witty.

Born: 1964.

Position: Chief executive GSK.

Family: Married, two children.

Career: Has worked for GSK since joining Glaxo UK in 1985 after graduating in economics from the University of Nottingham. Previous roles included leading GSK operations in Asia Pacific and president, GSK Pharma Europe.

Some things you might expect: He is passionate about promoting GSK's initiatives to improve access to medicines in less developed countries, such as voluntary HIV licences, 20 per cent of profit reinvestment back into least-developed countries and price caps in Africa.

Something that might surprise: He is a committed daily runner and has completed two marathons for charity in recent years.