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Earlier this morning British pharmaceutical giant GlaxoSmithKline (LSE:GSK) announced a complete revamping of it incentive pay plans for its sales staff and of incentives paid to doctors for promoting its products. For whatever reason, investors seems to have panicked on the London Exchange. As I am writing, it will be only a matter of minutes until we see how the NASDAQ will react. The GSK share price on the LSE is currently at 1,566.50, down 22.5 pence (1.42%) from yesterday’s close at 1,589.
It would appear that investors are not particularly enamored with the GSK’s new sales strategy. From an ethical position, GSK is doing a good thing. With the shadow hanging over its head from alleged bribes of phenomenal proportions in China, the company needs to position itself as far away from the payola style bribery system that has long been euphemistically described as an incentive system in the pharmaceutical culture. Taking that system into the Chinese culture, a commercial culture founded on a paradigm of what most westerners would call “bribery” was, and is, a move that GSK and many other companies may come to regret. To be successful in the Chinese culture, it is almost axiomatic that occidental companies have to create a magnanimous “incentive” system.
But, lest I appear to berate the Chinese, let me restate the fact that many, if not all, pharmaceuticals are sold within an “incentive” system. It’s a system that, employed on a retail scale would work like this: You go to your local supermarket and a representative from Dole is in the produce area, and he offers you 50 pence for every Dole banana that you buy during the year. As an added bonus, if you want to learn more about bananas and how we grow them, we’ll fly you to one of our plantations in Honduras for a week, all expenses paid. Well, it’s not exactly like that, but you get the idea.
Under the new compensation plan, GSK sales reps will no longer be paid commissions based upon the number of prescriptions they generate through client doctors. In addition, GSK will cease paying physicians and other healthcare professionals for publicly endorsing their products. Paid expenses for physicians to attend medical conferences will also be discontinued
So, here’s the problem for investors. They must decide if they want to risk investing in a sector-leading company that has chosen to take the high road whilst the entire industry continues on the incentive path. The obvious problem is whether or not competitors will follow suit. My guess is that, at least initially, they will not. That, of course, tips the sales advantage in favor of the competitors. Andrew Witty, CEO at GSK explained that “We recognize that we have an important role to play in providing doctors with information about our medicines, but this must be done clearly, transparently and without any perception of conflict of interest.”
Fiona Godlee, editor of the British Medical Journal, observed that “Where GSK leads we must hope that other companies will follow, but there is a long way to go if we are to truly to extricate medicine from commercial influence. Doctors and their societies have been too ready to compromise themselves.”
AstraZeneca (LSE:AZN) ceased paying healthcare professionals to attend conferences in 2011. Until today, no other company has followed suit.
As I draw this to a close, the NASDAQ has opened and GSK is down 1.46% to 51.13 in the first 35 minutes of trading. As a note of interest, AstraZeneca and Johnson & Johnson shares are on the rise.
