GlaxoSmithKline Pharmaceuticals

I. Introduction :
 
 Some twenty years ago when I was the Executive Chairman of Hindustan
 Lever Ltd. (HLL) I had stated in my AGM address on A Changing Organisation to shareholders of that company,
my belief that no one should be Chairman of a company like HLL for less than 5 years and not more than 10
years.  The reasoning was that if someone had too short a tenure (less than 5 years) he would not have enough
time to make an impact on the organisation and more importantly to live with the consequences of the changes
he introduced.  On the other hand if he
 stayed on too long (i.e. more than 10 years) there were several
 disadvantages, viz. (i) when one does the same job for prolonged
 periods one loses some of the sparkle and excitement and would become a
 dead hand - stale, complacent and less open to new ideas; (ii) if one
 is successful and continues to be so for a long period, the tendancy is
 for sycophants to gather around him and make him believe that he can
 walk on water - the sure recipe for him to take a bath with the
 company; (iii) prolonged and indefinite tenure at the top stifles the
 ambitions of the next generation which aspires to go to the top and
 find that they have to wait for the proverbial dead man's shoes.  It
 has been said about one of the largest Indian business houses that
 their Directors had to be carried out of their offices feet first, i.e.
 as dead bodies since they never retired! So the brighter managers left
 the Company which was left with an aging mediocrity and that Business
 Group declined over the years till the non-retirement policy was
 reversed.  A well established retirement age for people at the top is
 therefore an essential part of Corporate Governance.  Once there is a
 stipulated retirement age, there can be proper succession planning and
 development of managers who can he identified as potential successors.
 In my opinion, the secret of sustained and outstanding success of my
 alma mater, Hindustan Lever Ltd. (HLL), and the ability of that company
 to produce such a succession of very able Executive Chairmen is its
 continued commitment to a Management Development Process.  Recruitment,
 training, identification, specially planned development and monitoring
 of managers with greater potential and succession planning linked to an
 established retirement age are key ingredients in that process.  We
 have now adopted the same principles in Glaxo India.
 
 I believe that even for non-executive Directors or non-executive
 Chairmen it is necessary to have a retirement age and a limitation of
 tenure for the same reasons as stated above.  I had stated this belief
 at the AGM of this company in 1992 when one of our non-executive
 colleagues resisted retirement.  For non-executive Directors of public
 companies the appropriate retirement age in my opinion should be 70.
 In a privately held company it can be more flexible.
 
 During the last 6 years I have been instrumental in introducing a
 number of significant changes in this company.  We have rejuvenated the
 company as I described in my last AGM speech.  -
 
 The major changes introduced were as follows :
 
 (i) Restructuring of the Board of the Company which has played a more
 active role in rejuvenation of the Company.  
 
 (ii) Heightening the awareness of Government and industry on policy
 matters e.g.  disadvantages of price control, advantages of India
 adopting IPR.  This set in train a wider debate on these policy matters
 which has helped to shape more rational and less damaging policies by
 Govt.
 
 (iii) Raising the equity holding of Glaxo Group to 51%.  Apart from the
 additional tare capital that the Group injected into the Company for
 restoring its stake from 40% to 51%, the major benefit to our company
 has been that there is a more significant involvement of the Glaxo
 Wellcome Group in supporting our company and in developing the business
 in India.  This is of great long term significance for the future
 growth and profitability of this company in a market that will become
 increasingly globalised.
 
 (iv) Withdrawal from four unviable projects.  All these were done with
 minimal losses to the company.  Apart from avoiding escalating losses,
 an important benefit to the company was that management attention was
 directed more to growing the main business of the company than to
 putting out fires in these diversifications.
 
 (v) Sale of Family Products Division (FPD) to Heinz for Rs. 210 crores.
 Food business was never a strategic fit with the pharmaceutical
 business as I had explained to you at that time and we had no support
 in this part of the business from the parent company which had already
 divested its corresponding business unit several years ago.  the
 business was profitable but was past its peak.  It would have been
 swamped by the larger and dedicated international food companies.  It
 timely sale not only generated cash but enabled our management to focus
 on the pharma business.
 
 (vi) Strategic use of surplus funds generated through the sale of FPD
 and additional equity injection.  Strict control was exercised on
 investment of such surplus so that it did not get used up in working
 capital.  Part of the funds were returned to the shareholders and the
 rest retained for suitable acquisitions.
 
 (vii) Recruitment and training of management trainees in Marketing,
 Technical and Commercial areas and introduction of Residential
 Management Development courses for Middle and Senior Managers combined
 with regular appraisal systems.
 
 (viii) Succession planning for management which helped smooth
 transitions at the level of MD and Board members.
 
 (ix) Reduction in working capital, more stringent controls on capital
 expenditure and turnaround of the pharmaceutical business into a cash
 positive business.
 
 (x) Increase in sales with a larger and better managed sales force with
 better concentration in urban markets and also wider penetration into
 rural markets.
 
 (xi) Downsizing of manufacturing operations in the very expensive city
 of Mumbai.
 
 (xii) Introduction. of Voluntary Retirement Schemes from 1994 onwards
 through which the company has been able to reduce employee strength by
 over 1300 people.
 
 (xiii) Closure of Company owned depots and introduction of C&FA system
 for distribution.  This has improved the efficiency of distribution and
 sales and reduced costs.
 
 (xiv) Restructuring and integration of the activities of Burroughs
 Wellcome India without any disruption.
 
 (xv) Acquisition of Biddle Sawyer.
 
 These changes have indeed transformed Glaxo Wellcome Group's business
 in India and I look back with a great deal of satisfaction in what has
 been achieved by the management of the Company and I must pay special
 tribute to the Board and the Managing Directors, Mr. Thyagarajan and
 Mr. Khusrokhan who have worked diligently and with a great deal of
 commitment to the new direction.
 
 I have recalled the age of 70 and have done the job for 6 years.  So
 according to the criteria I have myself enunciated, it is time for me
 to go and therefore I announce my retirement from your service at the
 end of this AGM.
 
 No job is ever fully done to one's absolute satisfaction and one of the
 joys of life is to choose your successor and hand over to him your
 unfinished agenda which can serve him both as a challenge and as a base
 to build on.  Therefore this year in what will be my farewell speech as
 Chairman of the Company, I have chosen to place before you THE
 UNFINISHED AGENDA, the dreams that I leave for my successor and the
 management team of the company.
 
 II. THE UNFINISHED AGENDA :
 
 1. The Context :
 
 In describing my Unfinished Agenda, I would like to place it in the
 context which has facilitated the emergence of this agenda.
 
 On the one hand in a macro sense, as compared to the pre 1991 period,
 India has become somewhat more open to market oriented economic
 policies and has tended to move towards the global economy.  Although
 we are still thrown off balance periodically because of political
 changes and consequent uncertainties, it is inevitable that whoever may
 be in power, this country will move more in that direction albeit
 slowly and erratically.
 
 Furthermore in the pharmaceutical industry despite all rhetoric to the
 contrary, it is inevitable that by the year 2095 India will adopt the
 international agreement on Intellectual Property Rights as China,
 Brazil, etc., have done.  It is an essential part of our being able to
 trade with the rest of the world as others have discovered.  It is time
 now to plan and make preparations for that change.
 
 There has also been a major change in the way Glaxo Wellcome Group
 manages its global business.  It has given up the highly centralized
 style and over the last two years decentralized and reorganized its
 management structure.  It has recognised the need to look at the world
 as Regional markets each of which has its own diseases, priorities,
 Govt. regulations, market potential, management cultures, pricing,
 distribution needs, etc. This major Regionalisation of the Group has
 also opened up new possibilities for our Company in India.
 
 2. The Tasks Ahead :
 
 There are five items of the Unfinished Agenda that I commend to my
 successor and the Management Team.  Each of them has been already
 initiated but needs to be pursued to completion.  I shall now outline
 each of them briefly.
 
 2.1 R & D Centre in India :
 
 Indian scientists, in general, have been successful in Synthetic
 Organic Chemistry and in Biosciences, (viz., Biochemistry/Molecular
 biology/Microbiology) all of which are very relevant for pharmaceutical
 research.  The cost of doing research in India is much lower than in
 Europe or USA.  India is a signatory to the WTO accord including
 Intellectual Property Rights (IPR).  India will come under increasing
 pressure from our own intellectuals and trading partners to have the
 Patents bill passed by Parliament.  The recent cases like Basmati rice
 has opened eyes of many people in India including politicians to the
 need for India to recognize IPR and to take advantage of it.
 
 When that hurdle of IPR is crossed in the next 2 to 3 years, India will
 become an even more attractive location for conducting R&D by
 international companies.  The discovery of lead molecules may continue
 t be concentrated in Europe and USA.  Initially we can play a role in
 the further development of the Chemistry, the synthesis and the
 processing of such newly discovered molecules.  We can identify those
 molecules which have a regional relevance in terms of prevalent
 diseases and progress them through developmental stages like
 toxicology, Phase I, II, III, clinical trials, etc. in India.  India is
 in the process of developing Good Clinical Practices (GCP).  Draft
 guidelines for GCP are under preparation and Industry Associations are
 discussing its implementation with the Drugs Controller General and the
 Ministry of Health.
 
 As a result of internal discussions over th last few years, Glaxo
 Wellcome Group has accepted in principle that an R&D Centre can be
 located with advantage in India, Accordingly we have already set up a
 small R&D centre in Thane.  It has successfully undertaken custom
 synthesis of target molecules and side chains on a contract basis for
 Group companies in France and UK.
 
 We have to be ready to grasp the emerging opportunity by developing the
 existing R&D Centre in Thane into a much larger one as IPR and GCP
 procedures fall into place.  In my view, Mumbai is the appropriate
 location as there is a well established scientific community in BARC,
 TIFR, IIT UDCT HLRC and several other private sector research
 establishments.  In addition there are several large teaching hospitals
 in Mumbai with their own R&D centres into which we can link.  Our own
 marketing and technical teams are also located in Mumbai.
 
 Over the next decade I can visualize a Glaxo Wellcome Group Regional
 R&D Centre coming up on a 10 care site which is already available with
 us in Mumbai.  This will require capital expenditure and an
 organizational arrangements with the Group so that this R&D Centre
 forms an integral part of Group R&D effort and not an isolated Indian
 effort.
 
 The future development of business of Glaxo Wellcome Co. in India will
 depend on our ability to formulate new drugs relevant to diseases in
 India.  In my view this is the most important item on my unfinished
 agenda.
 
 2.2 Establishment of a Management Training Centre :
 
 One of the major changes in Glaxo Wellcome India in the last few years
 has been the introduction of Management Development Process.  This has
 yielded not only improved performance as well as employee satisfaction.
 It has led to better quality of promotions and well planned successions
 with the least disruption to operations.
 
 A recent survey conducted by an outside professional agency showed a
 high level of satisfaction among managerial staff who rated training
 and development opportunities as one of the key contributions to their
 pride in working for the company.
 
 However, internal communications and more training of managers as well
 as operational staff, field force, etc., need to be intensified.  To
 facilitate this and to provide a focus it was decided two years/ago
 that a dedicated Residential Management Training Centre should be built
 on a vacant part of our site at Thane.  This is ideally located on the
 fringe of woods and away from the manufacturing facilities, yet within
 easy access for faculty who have to come in from Mumbai.  The capital
 for the project was sanctioned and plans were prepared.  It has been
 held up for approval of the site plan by Municipal authorities.  Now it
 is understood that these plans are likely to be approved shortly.
 
 When this unfinished task is completed we will have a world class
 Residential Training Centre where Managers from all over the Region can
 come together to share their experiences and learn from each other as
 well as from professionals.  As the largest company in the Region
 within the Glaxo Wellcome Group and one located in a country which has
 world class external faculty for this specialised task, it is
 appropriate that Glaxo Wellcome India provides this facility which will
 enhance our links with the rest of the Group.  It will also underline
 our commitment to Training and Development of people.  Once we generate
 and develop more managers, the Indian company will be a valuable
 sourcing point for the Group which will find it advantageous to
 leverage on the management strength in India.  As you know we already
 have in Mr. Thyagarajan our previous MD an Area Director of the Group.
 This is only the beginning.  This trend can strengthen further as we
 invest more in the development and training of managers.
 
 2.3 India as a Sourcing Point for Products :
 
 Manufacturing facilities for pharmaceutical products are relatively
 expensive.  Basic chemical manufacture requires complex facilities for
 processes like synthesis and fermentation, adequate safety standards
 for use of hazardous chemicals, protection of the environment, etc.
 Formulation facilities require to be approved by international drug
 authorities.  Therefore unlike in the case of consumer products,
 international pharmaceutical companies tend to concentrate their
 manufacturing facilities in few centres throughout the world from where
 they supply the markets in different regions.  India happens to have
 dedicated manufacturing facilities both for basic chemicals and for
 formulations.  These facilities in India are regularly audited and
 approved according to the international standards of the Glaxo Wellcome
 Group.  Therefore approval by FDA authorities from developed countries
 like USA and UK will not pose any problems.  The cost of skilled labour
 and management are lower than in most countries in the Asia Pacific
 Region.  These advantages in terms of cost per unit are enhanced by the
 relatively large volumes required for the domestic market.  It has been
 established that we will have the lowest cost in the Asia Pacific for
 tablets, ointments and oral liquids.
 
 The major hurdle will be to overcome the traditional prejudice in Asian
 countries against sourcing from India which is generally seen as a poor
 country with low standards.  Our counterparts in the region have to be
 persuaded that while India is a poor country it also has a highly
 developed segment as evidenced by the performance of Indian software
 industry.  As it is in the overall interests of the Group we can
 reasonably expect to have the support of the Group and the Regional
 Management if we sustain our cost advantage and quality standards.
 This is the other unfinished task which this company has to pursue.
 
 2.4 Further Growth through Selective Acquisitions :
 
 Glaxo Group had traditionally believed in expansion through organic
 growth, based on new product development from R&D.  This policy was
 modified a few years ago and led to the acquisition of the Wellcome
 group.  Glaxo India has been looking for acquisitions ever since we
 sold off the Family Products Division and set apart the proceeds of
 that sale for acquisition.  Our first target was Burroughs Wellcome
 India.  But before we could consummate that transaction Glaxo Group plc
 had acquired Wellcome Group.  So Burroughs Wellcome India became part
 of our business in India without Glaxo (India) having to invest
 separately in acquiring it.  Since then we have looked very seriously
 at more than one Indian pharmaceutical company in India.  One of the
 major obstacles have been that most of them have products based on
 violations, of IPR.  As part of an international pharmaceutical company
 that respects IPR we cannot acquire such companies.  Some other
 companies have a set of old products which are losing their place in
 the market.  Another hurdle has been the potential liability of taking
 on a large number of employees especially expensive sales force which
 are not always well trained or controlled and also factory labour with
 inflexible and over generous terms of employment.  The success with any
 such acquisition will depend on our ability to restructure the acquired
 company in reasonable time, change its culture and make it grow faster
 than in the past through better management inputs.  lt can be a
 formidable task with its own risks.
 
 In the pharmaceutical industry which is highly fragmented, the
 advantages of acquiring 0.5 to 1% market share through acquisitions
 have to be weighed against the cost and effort as well as the
 disruptions and clash of culture that are inevitable.  In this respect
 the pharma industry is very different from many other industries where
 market shares of individual companies are far higher and worthwhile
 acquiring.  To acquire a below average drug company with 300 or 400
 inefficient salesmen and 2 or 3 vulnerable manufacturing sites can
 merely add to future liability and divert management attention to the
 problems of integration.  We have in the recent past deliberately
 avoided such acquisition candidates offered to us especially when the
 price expected, made the investment unattractive.  In terms of sales
 force and manufacturing facilities we already have enough size and
 spread.  What we need is strategic acquisitions which bring new product
 ranges into our company which we can exploit more aggressively under
 our umbrella to improve their profitability.  The Biddle Sawyer
 acquisition is typical of this.  One can reasonably expect that with
 the adoption of IPR by India, in the next few years, there will be a
 shake out in the pharmaceutical industry in India.  We have to continue
 to search for good candidates for selective acquisition and integration
 into our company.  The necessary skills, experience and capital are now
 available within the company.
 
 2.5 Organic Growth Post-IPR
 
 When our Parliament approves the Patent Bill which is now inevitable,
 the opportunities for Glaxo Wellcome India to grow organically will
 increase significantly.  We already have a large and well organised
 sales force in lace.  We have high quality and lean manufacturing
 sites.  We have an R&D Centre to adapt international products Group to
 local conditions.  So far we have not introduced several of the new
 products from the Group into the Indian market due to the absence of
 IPR protection and the threat of copying by local manufacturers.  When
 that threat is removed we will be able to introduce such products into
 the market.  That should increase our sales and profitability
 significantly.  In preparation for this we should constantly update and
 attune our managers in R&D Manufacturing and in Marketing and Sales to
 the potential of the Group's new product ranges and the implications of
 introducing them in india.
 
 The other somewhat longer term organic growth opportunity which can be
 even more significant is to develop in the Indian R&D Centre product
 formulations which are relevant to diseases peculiar to India and other
 tropical countries.  These can be based on molecules discovered in the
 Group R&D Centres and further developed here.
 
 To me this is the greatest opportunity that awaits Glaxo Wellcome India
 in the next millennium.  We must continue to invest in R&D and
 development of people with this vision for the future. We should not be
 distracted by noises generated in our politics by those who do not have
 an understanding of international trade or India's need to conform to
 WTO.  Nor should we be put off by the skepticism of those who may not
 share our vision of the future potential for R&D in India. I predict a
 revolutionary change in the perception of scope for international class
 R&D in India once the misconceived domestic objection to IPR is
 overcome.  We have built up adequate financial reserves and with a cash
 positive business we will have even more resources.  What it will now
 need is continued awareness of, and sensitivity to, this possibility
 and the willingness to invest and persevere.  In the meantime we also
 have to ensure that our major shareholders continue to share this
 vision with us.  This is an on going task which can never end in a
 company like ours.  As the key players change here and in London,
 renewed efforts need to be made to convert this vision into reality.
 
 III. CONCLUSION :
 
 During the last 6 years as your Chairman, I have had to take
 initiatives which were at times beyond what is normally expected of a
 non-executive Chairman.  But I believe that whether a person is called
 non-executive or executive, if he is Chairman of the Board he has a
 duty and responsibility to the shareholders of the Company and to the
 public at large, both consumers and investors, to ensure that the
 company is well managed and that the performance of its Board members
 is upto the mark.  Looking back over the last 6 years I draw
 satisfaction from the fact that we have managed to restructure the
 company and to change its character and direction to make it a more
 focussed, better managed, more profitable and a cash generating
 company, which has also fitted in well with the global business of the
 parent company.  For this I am grateful for the co-operation of all
 employees in the company especially the Executive Committee and the
 Board of the Company.  I am also grateful for the support I have
 received from the shareholders in India and the principal shareholder
 in the UK, without which we could not have progressed so far.
 
 In 1994 I had invited Mr. Deepak Parekh to join the Board.  It was part
 of my preparation for retirement from this job to bring in a younger
 generation of non-executive Directors from among whom my successor
 could be identified.  Over a year ago after consulting the principal
 shareholders I had asked Deepak whether he would accept the
 responsibility.  He had accepted the offer and from today he will
 assume the role of Chairman of this Company.  I hope that he will
 include my Unfinished Agenda in his own Agenda for the Company in the
 new millennium.  Deepak will bring to this job his vast and varied
 experience in business, his transparent honesty of purpose and his
 ability earn the goodwill of people.  I am sure you will extend to him
 the same co-operation as you have been kind enough to give me all these
 years. I want to Wish him and the Company continued success.