11 JANUARY 1992, Page 13


Matthew Lynn charts

the success of Glaxo, Britain's largest company

... She had no idea that he might die. When it became apparent that he would, she slept in a chair at his bedside. One night she was alerted by the noise of his breathing. `Father,' she said, leaning forward in a thrill of dedication. 'Father. Tell me what to do.' There was an interval of noise and silence, alternately mingled. `Father,' she said. 'Tell me.' After an immense effort Mr Hardy turned his head in her direction. `Don't sell Glaxo,' he said, and fell back, dead.

Anita Brookner, Latecomen

WHICH IS Britain's largest company? The weighty and respectable British Petroleum? The earthy chemicals combine ICI, perhaps? Or its occasional protago- nist, the urbane Hanson? Maybe the tele- coms monopolist, BT? The answer, in fact, is none of the above. Measured by market capitalisation, Britain's largest business is the pharmaceuticals company Glaxo.

It captured that position last November, when, with its shares pushed upwards by frantic American buying, its market value rose to £23 billion, taking it ahead of BT. The passing of the baton was little noticed at the time. And yet it was a teasing nugget of information. A country's largest compa- ny is, fairly obviously, a contributor to its wealth, but it is also a symbol — a symbol of its economic strengths and, also, of the way that nation might earn its living.

If Glaxo is a symbol, however, it is a sur- prising one; one, also, which shreds a heap of myths about the British economy. The other contenders seem, somehow, more fitting candidates to carry the flag of English capitalism. BT, for example, is an avaricious privatised industry; Hanson a takeover merchant; BP an inheritor of imperial concessions; and ICI an echo of industrial greatness. Each, it could be argued, is as much an aspect of economic decline as of renewal.

Glaxo is none of those things. Indeed, it fits none of the stereotypes of British industry. It is, for one, outlandishly suc- cessful. In the last decade its profits have grown from £66 million in 1980 to more than £1.2 billion in 1991. £.1,000 invested in Glaxo shares at the start of the 1980s was worth £27,400 by the end of the decade, compared with £6,570 if the same sum had

been invested in an average UK general unit trust. Glaxo has become the second largest drugs company in the world, a whisker behind its American rival, Merck. And it is ranked as Europe's most success- ful commercial organisation (in a recent survey by Germany's Der Manager maga- zine, where the inability of that country's own sleek combines to capture the prize must have created much disappointment).

Other features mark it out. Glaxo is a high-technology business. It is research intensive. It is aggressive and ambitious. It grows without resorting to takeovers. It is ruthlessly commercial. And it pursues novel and imaginative strategies. None of which is a characteristic much evident among British companies, at least for a century or so, but all of which make it an interesting story. For Glaxo is not only a success in itself, it is also a parable of what the British economy might have been, and could still become.

The rise of Glaxo is a tale of one man and one molecule. The man is Sir Paul Girolami, its chairman, and the molecule is raditidine, better known as the ulcer drug Zantac, the best-selling medicine ever.

Up until the Seventies, Glaxo was a commercial symbol of the worst vices of British industry. It was established in the last century as a New Zealand trading 'Let's buy it before they stick a picture of Lady Helen Windsor on it.' house, but migrated to Britain as its pow- dered baby milk ('Sunshine Glaxo — the milk that builds Bonny Babies') became a hit in this country. Under the leadership of its former chairman, Sir Harry Jephcott, it moved into drugs and took over a string of established pharmaceutical companies — the best known of which was Allen & Han- bury. It became part of the commercial woodwork, interested in only two things: taking over smaller rivals and securing gov- ernment contracts with fixed profit mar- gins.

In the opinion of researchers working under him, Jephcott was entirely uninter- ested in original science: he thought it a waste of time and money. It was an attitude which lingered among his successors. In the late Sixties, the company did come up with an important drug — Ventolin, for asthma — which in the view of most people in the business should have become the biggest in the world. And yet it didn't, largely because the then management thought it too risky to launch the product in the United States, and were even reluctant to introduce it in Europe. The company was run by men typ- ical of their times and British managers in those days couldn't see the point of push- ing technology on to the world market; nor could they see much point in venturing far beyond their traditional colonial markets. 'Not many decisions in those days were influenced by the marketplace,' one former board director was later to recollect. Defensive, insular, timid and queasy about trade, the company had certainly earned its place among the inbred and stodgy British industrial establishment.

The transformation of Glaxo can be traced to the early Seventies. In 1972, its rival, Beecham, launched a bid for the company worth £385 million, a bid that was repelled by its then young finance director, Paul Girolami. The bid was significant, for it marked not only the nadir of the compa- ny's fortunes (it was widely agreed that the business deserved to lose its indepen- dence), but also the emergence of Girola- mi. As finance director, he took charge of the restructuring which defeated Beecham. His influence grew, and he was to become managing director in 1980 and chairman in 1985.

Like many of the greatest British indus- trialists, Girolami was an outsider. A Vene- tian by birth, he was the son of a mosaics artist who had migrated to England in 1928, when Paul was two. Schooled at the LSE and trained as an accountant, he joined the company in the Sixties, and brought with him a cool, hard logic and a sharp indifference to tradition.

Many years later, as chairman, Girolami would enjoy instructing younger employees in a piece of folk wisdom. 'Having all your eggs in one basket concentrates the mind,' he would say, with one of his waspish half smiles, 'because you had better make sure it is a good basket.'

These days it is a conventional thought: business schools churn out armies of young executives armed with the idea of focusing their companies on a single objective. But in the early Seventies it was a new and risky idea; and an idea that was to be test- ed to the limit with the next drug to come out of the Glaxo laboratories.

In 1973, David Jack, the Scots research director who had invented Ventolin, and who had been bitterly disappointed by its commercial failure, attended a lecture by Sir James Black. Black, later a Nobel Prize winner, was already famous for his work on heart drugs at ICI. He was now working for the United States drugs house, SmithKline, where he had been studying ulcers, a condition which in those days could only be treated by surgery. Black had worked out the chemical processes that create ulcers. A naturally occurring substance, histamine, stimulates acid secretion in the stomach. Block histamine and you would heal the ailment. Black had also found a chemical to do just that. The drug, called Tagamet, was launched by SmithKline in 1976 to great acclaim, and quickly became the biggest-selling medicine in the world.

Until Zantac. After listening to Black's lecture, Jack began working on his own version of the drug. It would work in the same way, but, to avoid patent infringe- ment, a different blocking agent would be used. It is not uncommon in the drugs industry for successful drugs to attract imi- tators; they are known as 'me-too' drugs in the business. But it was unheard of for an imitative drug to take more than 10 per cent or so of the market. And unimagin- able for it to overtake the innovator.

Unimaginable, that is, to everyone apart from Girolami. This was his chance to test his ideas, and he was about to take it. Enough would be staked on the success of Zantac to make it among the riskiest prod- ucts ever launched.

The chips started to be stacked up in the laboratory. Normally, a drug takes about ten years from invention to reach the mar- ket. Jack had discovered Zantac in 1976, and yet it was launched in only five years, soon enough to steal a significant lead on the other imitators then being prepared. Glaxo achieved this through a process called 'parallel development', a process which short-circuited development by pushing ahead with all the different stan- dards and safety tests at the same time. Put in laymen's terms, Glaxo didn't wait to see how the mice had fared before trying the drug on the rabbits. It cost a lot more money, money which could easily have been wasted if the drug was found to have any side-effects. But it would be a lot faster.

The risks didn't stop there. Zantac would also be the first drug to be launched simultaneously in every major market in the world. And this would be attempted despite the fact that Glaxo then had no subsidiary in the United States, the world's biggest drug market. For that, Glaxo struck a novel deal with the Swiss combine Hoffmann-La Roche: Roche salesmen, who had plenty of time on their hands fol- lowing the decline in Valium sales, would sell the drug for Glaxo. Again, it was an untried device, but one which offered a quick way into the market. Yet those risks were feeble compared with the final gam- ble: the price. Girolami wanted to make Zantac a third more expensive than its rival Tagamer, a decision which horrified his board.

But it worked. While I was researching a book on the industry, a Glaxo marketing man confided what he felt to be the com- pany's most important discovery: that doc- tors are not very scientific, and they work mainly by intuition. Their intuition told them a more expensive drug was a better drug. The pricing move turned out to be zi masterstroke, and one with the happy side- effect of pushing profit margins to well over 90 per cent.

Girolami's gambles paid off. Every con- ventional rule of the industry had been bro- ken, and yet the results showed the rules were there to be rewritten. By the end of the 1980s, less than a decade after Zantac had been launched, its sales had passed fl billion annually, and the company had moved to second place in the world indus- try. And the company had been trans- formed.

Its rise showed the riches to be gained from selling a niche product the world over. Peptic ulcers might not sound like

much of a foundation for an industrial giant, but 15 per cent of the population of the industrialised world suffer from ulcers at some time in their lives, and the world market for ulcer treatments is worth about $6 billion a year.

But it would be surprising if, within Glaxo's headquarters, there were not a large number of Zantac users. For all its success, it had become an unhappy ship. Bodies had been tossed overboard. Bernard Taylor, for one, who had become managing director in 1985 after Girolami assumed the chairmanship, quit in 1989 after his job was effectively offered to another man. He had been, for a time, Girolami's heir apparent, but had fallen out with the chairman. Another heir, a younger man called John Burke, who was briefly very close to Sir Paul, also fell out.

He had become unhappy with the way it was run, he said later. (On an anecdotal level, other companies in the industry note with surprise how their job advertisements tend to be greeted with a tidal wave of applicants employed by Glaxo.) Others confirm that view. Former employees describe Glaxo as a savage and unpleasant place to work. And yet the ship sails on.

'Of course we want to be the largest [in the world],' Sir Paul told me. 'That would be something. But we're going to get there. It'll only take a bit of patience and we're going to get there.'

Whether he makes it depends on one more molecule. Glaxo's big new drug for the Nineties is Imigran, a compound for curing migraines. As a commercial propo- sition, it is very similar to Zantac. It is a cure for a very common ailment: it will be launched around the world and the price will be high (indeed, when Glaxo indicated the likely price earlier this year, even the City analysts, men hardened to displays of avarice, were taken aback). In effect, Glaxo is proposing to charge £8 per headache removed. But then a migraine is a migraine.

Even if Sir Paul does not achieve his Ultimate ambition for his company, his is still a story loaded with significance. It tells US that whatever the overall state of the economy — and the British economy was in deep decline when all the important work at Glaxo was being done — individu- al capitalists of vision can, nonetheless, transform dog-eared British companies into classy world competitors. It tells us that the old alliance between science and commerce that created the first industrial revolution can be recreated in new high- technology industries — and recreated pri- vately, without wasteful government subsidies or bossy quangos. And it tells us that Britain is still a place where global companies can be created, if its skills and talents can be imaginatively harnessed.

Matthew Lynn is the author of The Billion Dollar Battle: Merck v. Glaxo (Heinemann £16.99)