GSK Argues Its Strategy Is Delivering As Still More Cuts Are Made, Including in R&D

GlaxoSmithKline CEO Andrew Witty declared on Feb. 4 that his strategy of building a global, diversified business was delivering. And to prove his point, he announced a return to full-year sales growth in 2009 after a negative 2008, and an upbeat forecast for 2010 as well.

GSK reported a 3 percent increase in overall sales, dragged down by a poor performance by its U.S. pharma unit - a 13 percent drop. But results were boosted by 7 percent growth in the consumer division as well as 20 percent from emerging markets and 20 percent in Japan.

The drug maker lost approximately £4.5 billion in sales to generics in the 2007-2009 period, including copycats of diabetes blockbuster Avandia, as well as migraine treatment Imitrex , epilepsy drug Lamictal and Requip for symptoms of Parkinson's. Witty, however, argued that "headwinds [facing the business] are starting to diminish" and that GSK's patent cliff "ended up being a gentle slope."

This year, GSK faces still more generics, such as for the herpes drug valacyclir ( Valtrex ), whose £942 million in sales already were down 9 percent last year. But as well as adding £5 billion in new sales over that same 2007-2009 period, the overall revenue share of "white pills in western markets" continues to diminish, down to 30 percent in 2009 from 40 percent in 2007.

Thus, Witty insisted that 2009's results illustrated that the company's moves to broaden and diversify its revenue base into consumer, vaccines and emerging markets were paying off.

He also focused strongly, as have his peers at other big drug makers, on cost-cutting, announcing plans to save a further £500 million by 2012 (on top of the £1.7 billion that the company is on track to deliver by 2011). Half of that £500 million will come from R&D.

However, Witty wouldn't be drawn into discussion over UK press speculation earlier this week of up to 3,000 job cuts. He also was reluctant to say explicitly that GSK is cutting investment in pharma R&D, as other Big Pharma including Pfizer, AstraZeneca and Roche have done recently.

Instead, he highlighted proposals to discontinue discovery research in depression, anxiety and pain. These areas are expensive, both in terms of clinical trials and fixed infrastructure costs - costs that Witty would like to reduce by £250 million over the next three years. These therapeutic areas also carry only a low probability of success, he added.

Overall, though, Witty claimed success for the company's extensive R&D restructuring, culminating in 2008 with the creation of a dozen or so small, pathway-focused and biotech-like Drug Performance Units. Pointing to GSK's 30-odd late-stage assets, six potential new NME launches over the next 18 months and joint top ranking with Novartis in terms of the number of NME and vaccine approvals in 2009, Witty declared he was "extremely positive about the way things are going" in R&D.

With R&D staff promised a large part of their bonuses only when a product is approved and reimbursed, rather than simply when it passes onto the next stage of development, Witty highlighted what he called a strict focus on quality. Six programs had been terminated in 2009, he said, because of poor reimbursement prospects rather than any lack of activity.

He also announced the creation of a new rare diseases unit; not surprising perhaps given GSK's recent deal-making activity in this area. In October 2009, GSK did a deal in Duchenne's muscular dystrophy with Holland's Prosensa, a few months after signing an amyloidosis deal with University College London spin-out Pentraxin.

There's no sign of a let-up in GSK's externalization drive, which allows it to tap a range of outside R&D engines with "fundamentally different thought processes which gives us increased probability of a win," says Witty. He claims that 30 percent of GSK's discovery research is now done externally, with almost 50 partners, and that this will increase - along with GSK's appetite for cheap, low-risk option-based deals.

"We like low-cost optionality across a range of programs," he said, rather than "going for stuff that everyone is after." Indeed, on Jan. 11, GSK exercised an option taken in 2006 to full rights to ChemoCentryx's Crohn's disease compound.

Witty highlighted the 11 'value-creating' bolt-on deals that GSK had undertaken in 2009, including, among the largest, the $2.8 billion acquisition of dermatology group Stiefel. But nothing much bigger is planned; certainly not a Pfizer-Wyeth-style mega-merger anyway. "The bankers have finally stopped bringing me mega-merger proposals," Witty said, "although it's taken them a year."

Like some of its peers including Roche and Novartis, GSK benefited last year from windfall pandemic flu vaccine sales, which boosted overall vaccine sales to £3.7 billion, representing growth of 30 percent. (Without flu, this would have been just 2 percent). Witty said he expects the same level of flu vaccine sales in 2010 as in 2009. Sales of flu products also helped boost European pharma sales, up 9 percent over the year.

But the real star of the show was GSK's consumer division, where sales were up 7 percent to £4.7 billion against market growth of just 2 percent. That performance included the successful launch in Europe of OTC weight-drug Alli and continued strong U.S. sales of toothpaste brand Sensodyne . Consumer profits haven't tracked sales, however, mostly because GSK has invested heavily in R&D and marketing. Going forward, "I expect profit growth to catch up," Witty said.

Consumer - which accounted for more than 16 percent of GSK's £28.4 billion revenue in 2009 - is likely to become an even more important component of GSK's growth, as the company plans to leverage the Stiefel acquisition to add a fourth platform to this division in consumer dermatology.

[This article also appeared in¹ 'The Pink Sheet' DAILY . Visit our Web site to sign up for a free trial.]

- Melanie Senior (² m.senior@elsevier.com)