GlaxoSmithKline Needs More Quiet Victories
By Helen Thomas
GlaxoSmithKline can yet make a virtue of being boring.
The U.K. pharmaceutical group released second-quarter results on Wednesday that were mercifully free of unpleasant surprises, management mishaps or unexpected strategic rethinks. That is something of a triumph: In the past two years, Glaxo has suffered from falling U.S. sales, a scandal in China, manufacturing problems and soul-searching about the shape of its business. Consistent, if unremarkable, performance is the first step toward recovery.
Glaxo’s new strategy is at odds with received industry wisdom. The company, led by chief executive Andrew Witty, argues pressure on drug pricing will mount, even in specialist, innovative medicines. It sees an opportunity to sell medicines in much greater volumes in the developing world. Meanwhile, bulking up in vaccines and the consumer health business through its multibillion asset swap with Novartis has given Glaxo a more robust, stable portfolio.
This all sounds encouraging for investors nervously eyeing a more competitive U.S. pricing environment. And while valuations in biotech reflect increasing hype around drugs in development, after Glaxo’s travails it has been trading at a discount even to the European pharma sector.
There are a few outstanding problems. First, there is the lingering worry that Glaxo’s strategy is born out of necessity, not desire. Despite substantial investment, with research and development spending running at about 18% of pharmaceutical and vaccine sales in the first half, the perception is that Glaxo’s pipeline lacks the quality of some peers. The challenge is to change that at a November investor day, where Glaxo will talk through its 40 new drugs in development. The company should at least benefit from generally low expectations.
Glaxo’s business also doesn’t yet look steady enough. While it beat second-quarter earnings forecasts, these had come down 15% since April. Its large respiratory business is still under pressure in the U.S. Sales of new products offset this to a degree, but remain small in the overall context and are overly reliant on two HIV drugs. Meanwhile, some of Glaxo’s new respiratory products are struggling.
Finally, there is Glaxo’s tendency to fall over its own feet. The company needs to demonstrate it can quickly and reliably deliver on restructuring plans, which aim to save £3 billion ($4.68 billion) in annual costs by 2017. To really capture attention, Glaxo probably needs to show it is not only on track to meet 2020 margin targets but exceed them. For example, the operating margin of at least 20% targeted in the consumer business has already been criticized as unambitious versus peers like Reckitt Benckiser.
Mr. Witty says Glaxo is “hyper-fixated” on meeting its promises. It will take a few more uneventful quarters to build much excitement about success.
Write to Helen Thomas at [email protected]
Source: Wall Street Journal Health
