Why GSK sales shift is a turning-point for pharma

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The announcement that GlaxoSmithKline (GSK), one of the world’s biggest pharma companies, will stop paying doctors and remove sales incentives is a sea-change in an industry struggling with faltering sales and political disapproval.

“It’s been mooted for a while. They’re all going to do it eventually,” Savvas Neophytou, pharmaceuticals analyst at Panmure Gordon, told CNBC.

“It has been a pinch point for regulators and politicians with regards to conflicts of interest.”

It has been standard industry practice for decades for pharmaceutical companies to sponsor doctors attending medical conferences, and pay sales forces commission on the prescriptions they got doctors to write. However, these practices have come under increased scrutiny by regulators in recent years, particularly in the U.S., the world’s biggest medicines market.
(Read moreGSK says it will stop paying doctors to promote drugs)

As part of the new U.S. healthcare legislation, companies will have to disclose such payments to doctors from next fall.

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GSK is likely to spend the money saved by cutting spending on doctors attending conference in other ways such as grants to medical schools. And its sales force compensation bill will remain roughly similar, as sales people are given salaries based more on the quality of the information they give to doctors, according to a spokeswoman for GSK.

“There’s a very small saving on the operating margin, but they are presumably going to relocate that investment in other ways,” Neophytou said.

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“We believe that it is imperative that we continue to actively challenge our business model at every level to ensure we are responding to the needs of patients and meeting the wider expectations of society,” Sir Andrew Witty, chief executive of GSK, said.

“We recognise 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.”

GSK has faced scrutiny this year on its sales practices in China, where its sales representatives allegedly paid bribes to officials.

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This year has on some levels been a good one for the industry, with the number of new approvals starting to rise again after years of decline.

“2014 should be the first year in which the term ‘patent cliff’ is finally used in a historical context,” Mark Clark, analyst at Deutsche, wrote in a research note.

– By CNBC’s Catherine Boyle. Twitter: @cboylecnbc.

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