Big pharmaceutical companies like GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) have a reputation for developing costly medicines with fat profit margins, a reputation that has attracted a lot of negative attention over the years.
However, big pharma is now seeking to change this image. The development of low-cost affordable medicines is becoming a priority for many pharmaceutical companies. Glaxo is leading the group.
The best of breed
The Access to Medicine organisation has developed an index that is used as a barometer, to show how big pharma is approaching and dealing with challenges brought about by medical conditions of the developing world. Assessing the quality and availability of affordable care in the developing world is an extremely important trend to monitor in many respects.
Indeed, the majority of the world’s population lives within the developing world, and many low-income families struggle to get access to basic healthcare. What’s more, it makes perfect business sense to appeal to this market — while margins will fall, sales will explode.
Glaxo topped the annual Access to Medicine Index for the fourth consecutive time this year, despite the company’s high-profile corruption scandal in China. It’s the company’s work outside of China that’s really attracting attention.
For example, the company has introduced a tired pricing model around the world, based on each countries’ ability to pay. Moreover, Glaxo is rapidly closing in on producing the world’s first malaria vaccine, after filing for regulatory approval in July. While the invention of a malaria vaccine is itself a ground breaking development, Glaxo isn’t actually going to make any money from the production of the vaccine. Management has declared that the malaria vaccine will be sold at only 5% above cost, with all profits reinvested into research and development for other tropical diseases.
Novo Nordisk, Johnson & Johnson and Novartis all rank below Glaxo in the Access to Medicine index.
Economic sense
They say money isn’t everything, and Glaxo’s efforts to become a respectable global corporate citizen are commendable — but will these efforts affect shareholders?
Well, in business reputation counts for a lot, and Glaxo’s reputation as a leading light in the production and development of affordable medicine has got the company out of some sticky situations. Specifically, when Glaxo was found guilty of bribing doctors within China earlier this year, the company’s punishment — a fine of $490m — was given alongside a guarantee from management that the company would help the development China’s healthcare infrastructure.
Additionally, the good publicity surrounding Glaxo’s charitable actions is invaluable. On the business side of things, with billions of potential customers located within the developing world, Glaxo’s presence and reputation will draw customers towards it.
With billions of potential customers and huge economies of scale, Glaxo’s charitable actions now are bound to pay off in the future. This makes Glaxo the perfect long-term investment for me, and that hefty 5.4% dividend yield cannot be ignored.