July 24 (Bloomberg) -- Andrew Witty, chief executive officer of GlaxoSmithKline Plc, has a challenge overseas. It’s just not the one that’s been making headlines.
While the media has been obsessed with the corruption investigation that has enveloped Glaxo in China, investors are more worried about the U.K. drugmaker’s disappointing performance, and particularly sales of its hallmark respiratory medicines in the U.S.
The lackluster debut of two new treatments -- Breo and Anoro, which both treat lung diseases including emphysema -- are yet another stumbling block for Witty and Glaxo.
Witty has been CEO for six years, and his company remains a puzzle for analysts and investors. Glaxo’s stock has fallen 11 percent in the past year as other drugmakers’ shares soared. It’s among the cheapest relative to earnings of the world’s 10 biggest pharmaceutical companies, indicating skepticism about its prospects. The company cut its profit forecast yesterday for the second time in three years.
Witty has made transparency and ethical behavior a priority, yet the company has been dogged by investigations and scandals. And just as investors are flocking to companies with bulging oncology pipelines, Glaxo sold off its cancer drugs.
“Every sector from time to time has a whipping boy, and right now that whipping boy is GSK,” said Neil Woodford, who has Glaxo among the largest holdings in his 1.6 billion-pound ($2.7 billion) CF Woodford Equity Income Fund. “There’s been a period of disappointment, that’s fair to say.”
Glaxo fell 0.8 percent to 1,469.50 pence today in London. Yesterday the stock sank 4.7 percent, the biggest drop since November 2008.
Witty, who turns 50 next month, has worked at Glaxo since 1985, when he joined out of Nottingham University. A native of Cheshire, he still has traces of the broad accent of northern England. After spending much of his career running units in Asia and Africa, he won a public contest to succeed Jean-Pierre Garnier as CEO in 2008, beating Christopher Viehbacher, who now runs Sanofi, and David Stout, now a Shire Plc board member.
Since taking over, Witty says he’s been streamlining the company and preparing it for life after the patent expiration of Advair, its best-selling asthma drug. To do so, Witty revamped research and development, leading to a steady stream of new drugs that will reach the market over the next few years, he said on a conference call with analysts yesterday.
“The good news is we’ve got a lot of new products coming into these markets,” Witty said. “But, clearly, the transition isn’t painless.”
People who work with Witty say he’s tried to connect with workers across the company, and rally them around its mission. One of his first acts as CEO was moving his office in Glaxo’s imposing glass tower in a London suburb from the 12th floor to the ground floor, near a coffee stand, where he can be seen chatting with rank-and-file employees.
Younger than most of his fellow corporate chiefs, Witty, who declined to be interviewed for this article, is a marathon runner who eschews suits, favoring dark jeans and shirts unbuttoned at the collar.
In meetings, he can be informal and disarming, eager to hear opinions, but reveals little about his own thinking. He’s comfortable in the company of politicians, serving on various government panels. Last year, he was part of a delegation accompanying Prime Minister David Cameron to China.
During his term as president of the European Federation of Pharmaceutical Industries and Associations, he convened his rival CEOs in workshops lasting up to three hours, working the room to tease out views on major issues, said Richard Bergstroem, the director general of the Brussels-based trade group.
“He wanted to look people in the eye and ask, ‘What do you think?’” Bergstroem said.
Witty deserves credit for making Glaxo’s research and development more efficient, and for executing a complex transaction with Novartis AG in April, Woodford said.
“That’s one of the best bits of M&A I’ve ever seen,” he said. “The market has forgotten about it.”
As part of the deal, Witty created a new, Glaxo-controlled joint venture with Novartis for over-the-counter drugs and sold Glaxo’s oncology portfolio for as much as $16 billion. Glaxo also acquired most of Novartis’s vaccines business. The combined effect of the deals is to move the company to more predictable revenue streams and lessen its dependence on patented drugs, which suffer when generics reach the market.
The problem for Glaxo is that the company is moving to safety just when investors are developing an appetite for risk, said Eric Le Berrigaud, an analyst at Bryan Garnier & Co. in Paris.
“We are probably at the point where investors are more confident about companies innovating and investing in R&D again,” he said. “One or two years ago, it would have been more appealing.”
The sale of its oncology drugs also highlights how, under Witty, Glaxo hasn’t invested in immune therapies, a new oncology segment that could be worth $35 billion annually. That interest is helping drive investors to Roche Holding AG, Bristol-Myers Squibb Co. and AstraZeneca Plc -- all companies with significant immune therapy drugs in their pipelines -- and away from Glaxo.
Witty also has been bedeviled by bad luck and poor execution, Woodford said.
While the respiratory drugs had disappointing sales, Glaxo also suffered from the strength of the pound, which is depressing revenue from the U.S., Japan and the rest of Europe, he said.
Witty had to clean up some of the mess left by his predecessors, including paying a record $3 billion fine to settle a U.S. investigation into how it marketed drugs and reported data. In June, it settled separate claims brought by U.S. states for $105 million.
“He’s had to grapple with quite a few things that have nothing to do with his leadership and everything to do with the business he’s inherited,” Woodford said. “There’s a lot of good stuff that’s happened under his leadership but much of it has been occluded.”
Witty has been public about reforming the image of Glaxo, and the drug industry more broadly. The company is making its past clinical trial data publicly available, it’s no longer paying doctors to talk about its products and has partnered with Save the Children to develop child-safe products for the developing world. Witty was knighted for his contributions to Britain.
“He wants his company to change the whole sector, and to be a leader,” said Justin Forsyth, the CEO of Save the Children. “He sees it as a competitive advantage.”
It’s now the China bribery scandal that’s clouding the picture for Glaxo.
The Chinese government last year began an investigation into Glaxo’s sales practices, and in May the police handed the case to prosecutors and accused Mark Reilly, a British Glaxo employee, of ordering employees to offer bribes.
The case took a sensational turn last month when the Sunday Times reported Glaxo executives, including Witty, were sent a sex tape of Reilly in 2013.
Glaxo said it’s cooperating with the investigations, and is conducting an internal review.
Absent a probe by the U.S. Department of Justice, any financial impact from the China scandal should be absorbed by Glaxo without much difficulty, said James Hay, an analyst for Brewin Dolphin, a London-based investment company.
“I don’t see a sufficient reason to be concerned,” Hay said. “Right now, it’s something that can be managed internally.”
China generated 129 million pounds in sales for Glaxo in the second quarter, a 25 percent decline from the previous year. The country accounted for 2 percent of Glaxo’s revenue.
A much bigger concern is the state of Glaxo’s respiratory business, said Ori Hershkovitz, a partner at Sphera Funds Management in Tel Aviv, which owns Glaxo shares.
“The jury is still out on one major question -- the longevity of the respiratory franchise,” he said. “This is a franchise that accounts for a huge part of Glaxo’s profits.”
Glaxo’s drug sales fell 13 percent in the U.S. in the first half, which included a 17 percent drop in respiratory treatments. Advair fell 24 percent as it lost patent protection and the U.S. largest pharmacy-benefits manager stopped reimbursing prescriptions.
Breo and Anoro are struggling to gain traction, with a combined 10 million pounds in U.S. sales in the second quarter, compared to 528 million pounds for Advair, the company said yesterday.
“Their launch rate is really way under what analysts expected,” Hershkovitz said. “Right now it’s pretty early in the game. But so far it looks like they’re behind.”
In yesterday’s conference call, Witty said the drugs were gradually picking up market share, although were never intended to replace Advair.
The debut of Breo and Anoro in the U.S. has followed changes in how Glaxo trains and compensates its sales representatives, part of a 2012 settlement with the Justice Department. Glaxo sales people, with the encouragement of executives, had promoted the use of Advair for all asthma patients, the Justice Department said, even though regulators approved it only for use in severe cases.
As part of a corporate integrity agreement it signed with the U.S. government, Glaxo pledged to reform its sales practices and no longer give bonuses for reaching targets. Sales people are now rewarded on their knowledge of Glaxo’s products and on evaluations filled out by doctors.
That has led to private speculation by some analysts that the slow start for the new respiratory drugs may be tied to the changes in sales practices that Witty introduced.
A sales force is at its most critical when a company is introducing new products into a competitive market, said Pratap Khedkar, an industry consultant for ZS Associates based in Philadelphia. Changes in compensation may disrupt that sales push, he said.
Incentives remain important, said Deirdre Connelly, Glaxo’s president for North America.
“Historically, in this industry we always had the notion, when you launch a product, you really have to give a big carrot to a sales organization so that they can really drive performance of a product,” Connelly said in a March interview. “We do give a big carrot, but it’s not in the way of individual sales targets.”
In the conference call, Witty said sales people remain motivated, and he noted the company’s debut of Tivicay, an HIV drug, has been better than expected.
Ultimately, Glaxo and Witty need to deliver on those drugs if it wants to win back investors, Woodford said.
“They know they have to deliver a successful outcome on those respiratory drugs,’” he said. “They need to deliver and I think they will.”
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