The Top-Selling Drugmaker Still Isn't Satisfied

Why GlaxoSmithKline longs for Wall Street's respect

When rival British drugmakers Glaxo Wellcome and SmithKline Beecham got together in a $154 billion merger last December, newly appointed CEO Jean-Pierre Garnier boasted that the partners would be the "kings of science." So far, he's right. GlaxoSmithKline PLC is the global champ in pharmaceuticals, with $25.6 billion in drug sales last year--equal to about 7% of the $317 billion global prescription drug business. With an annual research budget approaching $4 billion and 16,500 in-house scientists, GSK is well placed to push the boundaries of science.

Kings, however, get no time to kick back. In the brief seven months since the merger was approved, Garnier has kept up a breathless pace of dealmaking. He has inked more than 100 joint ventures with biotech companies and is expected to sign new product-licensing deals in Japan and Europe. With an intensity rarely seen in Europe's mature drug sector, GSK is rushing to fill the remaining gaps in its product lineup--cancer and cardiovascular drugs. "In the drug industry, size is essential these days," says Jonathan de Passe, managing director of pharmaceutical consultancy Evaluate PLC, "but being big doesn't guarantee success."

At first blush, it's hard to fathom why GSK is in such a hurry. The company is the world's top supplier of antibiotics, AIDS drugs, vaccines, and central nervous system and respiratory medicines. It netted $5.6 billion in profits last year. And with the second-quarter results announced in July, GSK is on track to meet its estimates of 13% earnings per share growth for 2001.

Yet GSK's great girth and strong performance mask an awkward fact: The company's market value of $175 billion looks positively skimpy compared with $239 billion for Pfizer Inc., an American rival with slightly smaller revenues. Fact is, Wall Street loves Pfizer's marketing muscle--prominently flexed with hits such as Viagra and cholesterol-lowering blockbuster Lipitor. And while GSK's shares have held steady at about $56, after reaching a high of $60 in December, the company hasn't convinced analysts that its megamerger spells rapid growth. Partly because of that, and partly in light of Pfizer's strong product pipeline, Evaluate expects Pfizer to outstrip GSK on profits in the year 2003--$11.7 billion to $7.6 billion.

With such concerns squarely in view, Garnier is intent on expanding his realm. The company has roughly $6 billion in cash assets, so Wall Street is keenly interested in any and all objects of Garnier's desire. Indeed, barely a month ago, reports swirled that GSK was making moves on giant American Home Products Corp. Both companies quickly squelched the rumors, and GSK continues to insist that it isn't going after any other big prey.

SIDE DEALS. Instead, for the near future, it will rely on stepped-up marketing, faster drug discovery by its own scientists, and so called in-licensing deals with other drugmakers---essentially deploying its reps to sell a rival's products for a percentage of sales. GSK has signed more than a dozen such deals this year. "We want to capture the best opportunities, whether the source is internal or a university, small biotech company, or another drugmaker," says Garnier's right-hand man, research Chairman Tachi Yamada.

Under Yamada's watch, the company will launch 15 drugs, including product extensions, by 2005. All told, it has 117 compounds in clinical trials, of which 50 are new chemical entities, 44 are updated formulations of current drugs, and 23 are vaccines. Its asthma drug, Seretide, is the fastest-growing respiratory treatment in Europe. Launched as Advair in the U.S. in April, it is likely to top $1 billion in global sales by the end of this year.

Two other stars, the antidepressant Paxil and antibiotic Augmentin, racked up sales of $608 million and $564 million, respectively, in the first quarter and are expected to drive GSK's profits through 2003. A third billion-dollar success story is taking shape: a diabetes drug, Avandia, which went on sale in the U.S. last year and was recently launched in Europe. Taken orally, it helps the body use its own insulin more effectively to control blood sugar.

HOOKWORM HELP. GSK's biggest challenge will be addressing its twin weaknesses: cancer and heart drugs. GSK recently recruited the former head of Merck & Co.'s oncology efforts, Allen Oliff, and struck a $50 million alliance with Cytokinetics Inc. The San Francisco-based biotech company is studying enzymes that play an essential role in cell division in order to discover molecules that GSK could develop as cancer drugs.

To pump up its cardiovascular business, GSK may turn to U.S. biotech hotshot Corvas International, says Kate Bingham, a partner with venture capitalists Schroder Ventures Life Sciences' London office. Corvas is testing a protein derived from hookworms that could be used to prevent blood clots in stroke victims. Bingham figures GSK could license the drug for about $50 million and eventually earn royalties of 10% to 12% on upwards of $1 billion in annual sales--if all goes well. Over the next few months, this strategy of in-licensing "will be a major part of new product flow for GSK," says Goldman, Sachs & Co. pharmaceutical analyst Mark Tracey.

One deal investors really hope Garnier will clinch: the rights to an experimental impotence drug, Vardenafil, from Germany's Bayer. In clinical trials, it has caused fewer side effects than Viagra and starts working 20 minutes faster. Sales should begin next year and could eventually exceed Viagra's expected $1.6 billion tally for 2001. By pursuing such opportunities, while harnessing its internal research might, GSK is well-positioned to wear the crown.

By Kerry Capell in London

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