The Witty Answer to GSK’s Future

Andrew Witty took the helm of pharmaceutical giant GlaxoSmithKline in May 2008. At 43 he joins the ranks of a growing number of young chief executives in the pharmaceutical industry. Pharmaceutical-Technology spoke to Paul Diggle, analyst at Nomura Code Securities about Witty’s appointment.

Pharmaceutical Technology: What do you think Andrew Witty’s appointment means for GlaxoSmithKline?

Paul Diggle: It could be described as a new phase of the company’s development. Dr JP Garnier had been at the helm of GlaxoSmithKline (GSK) since the merger completion; his main focus initially was to ensure successful integration and then to rebuild the meagre R&D pipeline that he inherited.

The choice of Andrew Witty as his successor reflects the tougher times that face GSK and the industry, especially in the US. Witty’s senior roles within the company have included the remodelling of much of the European operations, where profitable growth has been a challenge for decades.

PT: Given recent problems with a safety scare over diabetes drug Avandia and GSK’s guidance for a fall in 2008 earnings, what do you envisage Witty’s top or first priorities will be in the new job?

PD: He will undoubtedly continue the process of adapting the business model to the more difficult market conditions. Witty has already committed himself to generating more value from GSK and we expect further cost efficiency initiatives in addition to the current £1.5bn operational excellence programme. At the same time he has also confirmed the priority of continuing to build GSK’s science base and to bring the pipeline to market as quickly as possible.

PT: How do you think GSK is placed competitively?

PD: We believe that GSK has the strongest pipeline in the industry.

This will limit the impact of important patent expirations over the next couple of years and should subsequently support above industry average growth. Important elements within this expectation are the build up of strong contributions from Rotarix, Cervarix and Tykerb, while the outlook for GSK’s important asthma franchise becomes less clear beyond 2010.

Overall, we regard GSK as one of the most strongly placed of the pharmaceutical majors in competitive terms, along with its Swiss counterparts, Roche and Novartis.

PT: Glaxo shares have fallen 17% in the past year. What do you envisage could be done by Witty to soften the pain?

PD: The whole sector has suffered a dramatic collapse in stockmarket valuation over the last three years as its twin appeals of reliable profitable growth and low risk have both been progressively undermined. GSK has, in fact, fallen less than the other nine global pharmaceutical majors in the last 12 months. GSK has already responded to shareholder pressures to escalate share buy-backs and increase its dividend payout ratio.

It is hard to see any further moves which Witty might make other than by delivering a solid operating performance.

PT: Recently GSK has been actively acquiring smaller companies such as Reliant Pharmaceuticals and biotech firm Sirtris Pharmaceuticals. Can we expect to see more such deals?

PD: GSK’s preference is to acquire rights to individual products or projects, often forming partnerships with smaller drug development companies. It has struck a large number of such deals in the last couple of years and we expect the number to continue to increase.

However, in some cases, GSK is prepared to purchase small companies, at the vendor’s request or to access platform technology. Reliant was an unusual acquisition for GSK, adding an already-launched product, Lovaza, plus a strengthening of US cardiovascular marketing infrastructure.

PT: How could the US elections affect the pharmaceuticals market and GSK?

PD: It is clear that the pressure from politicians on the pharmaceutical industry have intensified following the success of the Democrats in the mid-term elections. All three candidates are broadly in favour of wider Medicare coverage, but they differ in the details of implementation.

Most of the ambitions of politicians to restrain drug prices have been met by the much more aggressive attitude of private sector administrators. On balance, the actual difference between the two parties will be relatively small, with any important legislation likely to require bipartisan support.

PT: At 43 Witty is quite young. Is there an emerging trend in the pharmaceutical industry to appoint younger chief executives?

PD: It seems to be the case in Europe, with Severin Schwan, who is 41, recently appointed as chief executive at Roche. In the last couple of years David Brennan (54) has taken over as CEO at AstraZeneca and Gerard Le Fur (58) at Sanofi. Daniel Vasella (54) has been CEO at Novartis since 1996.

This trend is not noticeable in the US pharmaceutical majors.

The main factor favouring younger CEOs is the expectation that they will prove more capable of making radical change to meet the more difficult operating environment than older executives whose industry experience will have embraced periods when profitable growth was much easier.

PT: How is the fact that new drugs are taking longer to emerge from the laboratory affecting the industry and how can investors be reassured on the large but unproven pipeline?

PD: New drug candidates are emerging from the laboratory at an improving rate for GSK and some of its competitors at present, although many companies are still suffering from a lower level of candidate generation in the late 1990s and early this decade. Moreover, clinical trials programmes tend to be larger and longer, because of increasing demands from regulators.

Delays of products in the regulatory process, especially with the US FDA, have become an increasing problem over the last few years. GSK has fared better than its competitors, with more approvals than any other company in the last couple of years.

Sales generated by new products are vital to the growth of the industry, to at least offset the inevitable attrition which follows patent expirations.

The worsening balance between these two factors is a major contributor to the slowdown in world pharmaceutical sales growth which in turn is the main reason for the much lower stockmarket valuation of the sector.

Because regulatory approvals have taken longer to achieve and some of the FDA’s decisions have been unpredictable, investors may be right to take a more skeptical attitude. Forecasting peak sales for successfully-launched products is also more difficult, with increased clinical effectiveness now being balanced more critically against value for money.

It will be hard to reassure investors of the value of GSK’s pipeline or any other until there is a more clearly identifiable contribution to growth from recently launched products.

PT: How can GSK diversify, given Witty has talked about consumer health and new emerging market opportunities being important drivers at a time when the mainstream pharmaceuticals market faces choppy waters?

PD: We expect GSK to continue to build its consumer health business organically and by the acquisition of companies and products. It has always regarded this business as an important lifecycle opportunity for older drugs and we expect an increasing number of prescription drugs to be made available over the counter as payors for prescription drugs increasingly shift the expense to the patient.

GSK has also been building its position in developing markets such as China, India and Latam. These markets are growing at very high rates and are sustaining reasonable levels of profitability, although it will be a few years before in aggregate they account for enough of GSK’s sales to have a significant impact on overall profits growth. Strategic fill-in acquisitions are likely.

In our view, a substantial acquisition to diversify into a major new activity for GSK is very unlikely. Similarly, the company recently reaffirmed that it would not seek a major acquisition or merger to help combat the difficult operating environment, believing that the exploitation of its pipeline will be the key to above-average performance.