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CNN BUSINESS UNUSUAL
Interview With GlaxoSmithKline's CEO; Ford Markets Electric Car to Commuters; Media Empire Focuses on Children
Aired March 3, 2002 - 15:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
WILLOW BAY, HOST: Ahead on BUSINESS UNUSUAL, a powerhouse drug maker's bill of health.
A more energy-efficient BTU.
A construction worker and his media empire.
That's all ahead on BUSINESS UNUSUAL.
Hello, and welcome to BUSINESS UNUSUAL. I'm Willow Bay.
GlaxoSmithKline, with nearly $25 billion in yearly sales, is the second largest pharmaceutical company in the world. It's been just over a year since the two companies, Glaxo Wellcome and SmithKline Beecham merged. And we thought it would be a good time to check on its health.
GSK has got a handful of aging big sellers, and some new blockbusters, like Adver (ph) and Avandia, but analysts are concerned about its pipeline of future drugs. CNN's Ali Velshi asked GlaxoSmithKline's CEO, Jean-Pierre Garnier, how the drug giant is faring today.
(BEGIN VIDEOTAPE)
JEAN-PIERRE GARNIER, CEO, GLAXOSMITHKLINE: The merger has been a big success. A year later, frankly, we have exceeded all the objectives we have set forward at the time of the merger. Our financial results speak for themselves. Earnings up 19 percent, ahead of our own predictions. We have tremendous business momentum.
ALI VELSHI, CNN FINANCIAL NEWS CORRESPONDENT (on camera): What did SmithKline Beecham bring to the table?
GARNIER: SmithKline Beecham and Glaxo Wellcome had a community of thinking about R&D and about other issues facing the industry. The belief that innovation and drug discovery was the soul of the company. And we also knew that we were facing new challenges in terms of drug productivity. We see the industry having a tougher time to discover and develop new drugs. It's getting more difficult. And we thought we had to dramatically transform the company to be able to meet those challenges.
VELSHI: Is size that important, is it really important to be that big as a major pharmaceutical?
GARNIER: You know, size does matter in certain aspects. For instance, financial strength and health requires size. And this gives you the sustaining power. You can go through up and down cycles, which always occur in business. Size is also important in terms of our ability to commercialize our drugs in all countries of the world. We don't want to have a gap. Because it's the same cost to discover the drug, whether you launch it in one country, or in 120 countries. But clearly, if you can sell it worldwide, the returns to the shareholders are much more significant.
In R&D, we needed to create and nurture a culture of creativity. And if you want to do that, size can actually get in the way. And that led us to the conclusion that at the center of the process we needed to create the center of excellence. And those centers of excellence are populated by the best scientists in the industry, and they are creating the new drugs that society wants.
VELSHI: Some of the analysts who follow your company are saying that come 2003, you are going to start to see some difficulty in generating enough product for your pipeline, to sustain you for the next number of years. What are your thoughts on that?
GARNIER: Well, the bet we have placed and that we're in the process of winning -- and I think there is a lot of evidence that we're winning -- is that we're going to build the best pipeline in the industry. But that will take a few years. So the concern is whether we're going to be able to deliver this pipeline on time.
VELSHI: You have really three options when it comes to developing drugs. You do them in your labs, you buy or merge with someone else, or you form a strategic alliance. And a lot of strategic alliances we've seen today between big pharma and smaller, more nimble biotechs seem to be paying dividends.
GARNIER: Absolutely. We have made more alliances than anybody else in the industry. I think people like to partner with GlaxoSmithKline. They get a lot of respect from us. We are very accessible to our partners. We treat them as equal partners, even though we're the big company, and also, more importantly, we're able to develop and commercialize those drugs very successfully.
VELSHI: And what does GlaxoSmithKline bring to the table?
GARNIER: Well, a number of competencies that are very often not available in the biotech world. When you see the number of biotech companies failing to get registration of their drugs, failing at the last stage with the FDA and getting their drugs to be late and sometimes not to come at all, we can bring this expertise in drug development. We can also bring the manufacturing, which is becoming a very big strategic issue now. The biotech companies typically don't have the means often to develop the drugs in production on industrial scale. They might be able to make the lots for the clinical trials, but then when we're talking about a worldwide launch, this requires significant investments in production, and also quality of production. We're bringing that. And then, last but certainly not least, we can make the pie bigger. We can commercialize those drugs more effectively, in more countries, with greater market penetration than our partners can. But we also recognize that they discovered the asset, and we give them great value for that tremendous achievement.
VELSHI: Drug discovery and development is a very, very expensive task. You have had a few setbacks.
GARNIER: It's a heartbreaker to lose a drug, particularly in a late clinical stage. I can never get used to it. But realistically, the industry loses 90 percent of the drugs that they put into clinical development. So don't expect any company, including GlaxoSmithKline, to always be successful. It just doesn't happen. This is inherent, risk of drug development, it is a difficult, complex, very expensive process. And we're trying to improve that process all the time. We think we can beat the odds. And again, we think we can get fewer of those drugs to fail at the late stage. But it will continue to happen.
VELSHI: And have all the efficiencies from that merger already been realized, or is there more to come?
GARNIER: Oh, there is more to come. There is always more to come. On the manufacturing side, it takes time to streamline our network of manufacturing facilities, and that will continue to produce cost savings in the future. In fact, we want to pass on those cost savings, reduces our prices and compete aggressively in the marketplace. So there is still a lot of work to be done.
(END VIDEOTAPE)
BAY: Earlier this week, GlaxoSmithKline removed its lyme disease vaccine, Lymerix, from the market. Patients said they were sickened by Lymerix, the world's only vaccination for lyme disease, and filed several lawsuits against GSK. But a one-year Food and Drug Administration investigation found no danger in the drug. The company says it shelved the product because it wasn't selling well, not as a result of safety concerns.
Coming up next on BUSINESS UNUSUAL, energy conservation. A new solution hits the street, and we've got the details, next.
(COMMERCIAL BREAK)
BAY: For millions of people, fighting the morning commute can be the most difficult part of the day. But for a select few, warming up their car, revving the engine and stopping for gas will no longer be part of the routine. Instead, they will simply unplug, turn on and go. Electric cars hit the streets of New York, and although these cars are silent, their presence is making a lot of noise. CNN's Allan Chernoff has the story.
(BEGIN VIDEOTAPE)
TONY LUBETSKY, COMMUTER: I am going to the gym tonight. ALLAN CHERNOFF, CNN FINANCIAL NEWS CORRESPONDENT (voice-over): This is not a typical morning commute. For the next two and a half years, Tony Lubetsky will do things a little differently. As part of a pilot program, Lubetsky will use an electric car to complete the first leg of a zero-emission commute.
LUBETSKY: It's a completely non-polluting commute. I drive to the train station in a non-polluting car. I take the train in, and then I walk from the train station to my office.
CHERNOFF: New York State's Power Authority, Ford Motor Company and the region's Transportation Authority are sponsoring a program to promote electric vehicles and cleaner commutes.
Seth Leitman is managing the project for the state.
SETH LEITMAN, NYPA, CLEAN COMMUTE PROGRAM: Clean Commute is a program where the people can lease the Think City (ph) for 199 a month, commute from their home to the train station and back, picking up groceries and what have you. But the whole goal is to get people that are commuting from their home to the train to use an electric vehicle.
LUBETSKY: See you later, honey.
UNIDENTIFIED CHILD: Bye.
LUBETSKY: Bye bye.
CHERNOFF: The Think City (ph) electric car is made in Norway by Ford. In Europe, it sells for about $30,000, but the company hopes to bring that price down for the American market. The goal of the pilot program is to prove the effectiveness of electric cars for short- distance commutes. The auto maker also hopes to create a niche market.
Ford's Vicki Northrop has been working on the program for about five years.
VICKI NORTHROP, FORD MOTOR COMPANY, THINK MOBILITY DIVISION: We know it's a niche market. We know that this is never going to replace a long-distance vehicle. It's for commuters and it's for people who run errands, it's the weekend running around. So why fire up the big car or truck and burn up gas when you can jump into an electric vehicle?
CHERNOFF: There may be interest in electric cars, but politicians and private sector contributors know that getting American consumers off the gas habit won't be easy. So the Power Authority and the MTA (ph) threw in a few perks, like free subway passes, insurance breaks, and front row parking at commuter rail stations.
LUBETSKY: (UNINTELLIGIBLE) you had to park way in the back, unless you are fortunate enough to get here at 6:00 in the morning (UNINTELLIGIBLE). So for me, definitely this is the biggest perk, but that's not the reason why I got the car. It is definitely because I am very interested in the environment, and the fact that this is a electric and not polluting.
UNIDENTIFIED MALE: I think the cars are really fun. They're really easy to use, and I only travel eight miles a day with it. So why not do it? With all the incentives they give you, I think it's pretty reasonable to do it.
CHERNOFF: The car itself is 100 percent recyclable, and the only liquid it uses is windshield wiper fluid. According to Leitman, the Think (ph) is just as safe as a standard car.
LEITMAN: You have about 550 pounds of batteries that you sit on, which makes the car low and center to the ground, which actually hugs the ground sometimes even better than an SUV.
CHERNOFF: Within the next year, Ford plans to sell the cars to commuters across the country. Electricity-powered vehicles may never drive the auto business but Ford feels confident they'll find the market.
LEITMAN: The number one thing I've always heard is, it's about time.
CHERNOFF: For BUSINESS UNUSUAL, I'm Allan Chernoff, CNN Financial News.
(END VIDEOTAPE)
BAY: These cars never run out of gas, that's the good news. The bad? Well, they may not be entirely reliable. Last week, when Tony Lubetsky got off the train, her car was dead. Fortunately, Ford provides 24-hour road side assistance, so drained commuters can have someone else take care of their drained batteries.
Just ahead on BUSINESS UNUSUAL, a kid show nails down a loyal audience. Little Bob the builder and his booming business, when we return. The bow.
(COMMERCIAL BREAK)
BAY: If you have got preschoolers, chances are they have taken a interest in construction, or at least a certain construction worker. Bob the Builder is the brain child of Britain-based Hit Entertainment. And since his debut on the BBC in 1999, Bob has taken the preschool market by storm. But Bob the Builder is just one brick in Hit Entertainment's media empire. Becky Anderson has the story.
(BEGIN VIDEOTAPE)
BECKY ANDERSON, CNN CORRESPONDENT (voice-over): Kids, it seems, just can't get enough of Bob the Builder.
(BEGIN VIDEO CLIP)
UNIDENTIFIED MALE: Hello, everyone. You don't know where Spud is, do you?
UNIDENTIFIED MALE: We haven't seen him all day, Farmer Pickles (ph).
(END VIDEO CLIP)
ANDERSON: For Peter Orton, chairman of the company who owns Bob, bringing characters like this to our TV screens has been a lifelong passion.
PETER ORTON, CHAIRMAN, HIT ENTERTAINMENT: It's an enormously educational vehicle. It appeals to young children. He become the greatest friend. It is an extraordinary magical element that these shows have. And you have lots of other television shows which are successful, but sometimes you create a show which becomes almost like a brand. And that is what Bob is.
ANDERSON: Working the first seven years of his career with Jim Henson, creator of the highly famed Muppets, Orton was to learn from the master, only later to start his own company, Hit Entertainment. Initially just distributing children's shows, Hit graduated to creating the programs itself. And now with a market value of around $750 million, it has some of the best loved kids' properties in its stable.
Amongst others, the beloved Barney, acquired from Lyric Entertainment last year. Making a big splash, Pingy (ph) the Penguin, its most recent attribution. And...
(BEGIN VIDEO CLIP)
UNIDENTIFIED FEMALE: One, two, three. Two, two, Angelina, two, three.
(END VIDEO CLIP)
ANDERSON: Angelina Ballerina.
ORTON: We believe that we can grow a very strong business in the United States, and globally, based on our desire to build preschool brands.
ANDERSON: Buying Barney, for example, is just the type of property Hit hopes will build its business. A household name across the world, the purple dinosaur's popularity continues to reach giant proportions. Research shows that the preschool audience is about as loyal as it gets, but hitting upon the right character for that audience is crucial. For every Bob the Builder that succeed, there are literally millions that fail.
ORTON: As far as Bob is concerned, it's a can-do attitude. The characters are always engaged in wonderful stories. They are beautifully executed, they're very colorful. Children adore them. They're fascinated with the different stories.
ANDERSON: And while Bob draws in the kids, (UNINTELLIGIBLE) draws in the cash. Thirteen 10-minute episodes, costing a little under $1 million to make, are expected to bring in around $60 million. (on camera): But the company's success is built on not just the making and distributing of these program, but on the endless merchandising opportunities available. Last year, consumer products accounted for nearly 40 percent of Hit's revenues. These kids are clamoring to get their hands on the latest and greatest gear.
(voice-over): But protecting their brands from commercial overkill is always a concern.
UNIDENTIFIED MALE: We put a style guide in place to make sure people have the road map that says this is how the characters, this is what Barney would do, this is what Bob the Builder would or would not do.
ANDERSON: Whatever they hit on, kids are racing to buy. And it's not just toys. Videos of the program still remain one of company's chief sources of revenue. In 2001, Hit was the third largest kids video distributor in the U.S., with a 12 percent market share.
UNIDENTIFIED MALE: Preschool children love to watch things over and over again, so they will watch a show, and then they get to see other aspects of the show as they learn the show.
(BEGIN VIDEO CLIP)
UNIDENTIFIED MALE: Hey, I'm back here with the gear.
UNIDENTIFIED FEMALE: There is tons of it, (UNINTELLIGIBLE).
(END VIDEO CLIP)
ANDERSON: As this preschool icon climbs the ladder of success, Hit Entertainment does as well.
For Bob and Hit Entertainment, they're not just fixing it, they are making it big.
For BUSINESS UNUSUAL, I'm Becky Anderson.
(END VIDEOTAPE)
BAY: Bob the Builder is currently broadcast in more than 100 countries, and is the top rated preschool show in Germany, Japan and Australia. Bob is also a hot seller in toy stores. Licensees include Hasbro, Lego, BRIO and Golden Book.
Still to come on BUSINESS UNUSUAL, how a simple product became an American classic that's standing the test of time. Details when we return.
(COMMERCIAL BREAK)
BAY: At 94, the Ohio Art Company has seen toys come and go. But its pride and joy, the Etch A Sketch, has managed to stay on top for more than 40 years, an eternity in the toy market. (BEGIN VIDEOTAPE)
BAY (voice-over): The toy business is notoriously fickle, driven by fads, unpredictable crazes and blockbuster characters.
The industry is full of one-hit wonders, but what it really covets: Toys with resilience. Ohio Art created their classic in 1960.
(BEGIN VIDEO CLIP, "COMMERCIAL")
UNIDENTIFIED CHILD: Don't you think everybody should have their own Etch A Sketch, mister?
UNIDENTIFIED MALE: Right you are, Parnella (ph).
(END VIDEO CLIP)
BAY: Founded in 1908, and now run by the Kilgallon family, Ohio Art become a household name, to toy sellers, at least, soon after Etch A Sketch hit the market.
LARRY KILGALLON, PRESIDENT, OHIO ART CO.: When Etch A Sketch was first introduced in 1960, it was a huge success right from the very beginning. It was the toy of the year, and first years sold over a million pieces, and in the second year sold over two million pieces. And when the second year is bigger than the first, you know you have got something going.
BAY: Soon the company was selling three million Etch A Sketches a year. In 1966, Ohio Art was taken public, and it still trades on the American Stock Exchange. Last year, it had revenues of $50 million. Only toy giants Hasbro and Mattel are bigger.
But Kilgallon says that owning a classic is not enough. Success in the toy business hinges on new product development, and one badly timed toy can really cripple the business.
KILGALLON: Oh, we had a great product called Bullfrog, it was a new technology. We had huge orders and everybody was exuberant. And then, Furby (ph) came on, and it was on the "Today Show" in August. And all of a sudden, everyone in the world went out and wanted a Furby (ph), and we had not even started marketing Bullfrog yet. And everyone was clamoring for Furby (ph), and we just saw our orders go down, and we had inventories -- and in the toy business, inventories will, you know, will kill your business quicker than anything.
We finally got rid of him, but it wasn't easy. That was three years ago.
BAY: Last year, Ohio Art signed a licensing deal with Hasbro to design a character for European and Australian McDonald's happy meals. Sales on that product, Betty Spaghetti, skyrocketed, and pulled the company out of a three-year slump.
KILGALLON: Sales were up in Europe dramatically. We had a 65 percent increase in European volume last year. We're picking up new distribution in new countries around the world.
BAY: But even with revenues up, Ohio Art was forced to move its 80-year-old toy factory overseas to cut costs.
Now the only production done in the U.S. is metal printing, on machinery left over from days of tin toys. Today, it accounts for about one-third of the company's business.
Kilgallon admits that recycling machinery and depending on a classic cash cow may not be the most adventurous business plan. But it has worked, and Kilgallon has learned a few lessons along the way.
KILGALLON: I like things that I can wake up in the morning and think that I am going to be marketing for a couple of years. Unfortunately, it is a very faddish industry. We have 6-year-olds that are making the decisions about our products every day. If they don't like it, they turn off the TV and go onto something else, and you have to live with that. I always say that the toy industry will damage an ego faster than anything else. If you have an ego in this industry, get out. These 6-year-olds will just whip you up.
BAY: So Kilgallon knows he can always go back to the drawing board.
KILGALLON: You see why Etch A Sketch is a quiet toy. You have to think.
BAY: For BUSINESS UNUSUAL, I'm Willow Bay, CNN Financial News.
(END VIDEOTAPE)
BAY: Well, Betty Spaghetti is expected to give Ohio Art a financial boost later this year. Last month, the company announced a license deal with Random House Children's Books. Random House will produce four or five activity books, featuring Betty Spaghetti and her pals. The books are said to hit U.S. shelves by fall of this year.
If you missed any of today's program, you can catch it on the Web. Just go to CNNmoney.com/businessunusual.
I'm Willow Bay. Thanks for joining us, and goodbye from Los Angeles.
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Electric Car to Commuters; Media Empire Focuses on Children>
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