Why Glaxo Can't Shake The Flu

Sales are weakening as hot sellers come off-patent. But the pipeline looks healthy

Is bigger really better? Jean-Pierre Garnier, the chief executive of Britain's GlaxoSmithKline PLC (GSK ), certainly thinks so. But he's having a hard time convincing investors. Four years after the merger that created the world's second-largest drugmaker, GSK has a wealth of drugs undergoing testing. But no potential blockbuster drugs are ready to hit the market for two to three years. Sales meantime are under siege after the patents expire on two of GSK's best-sellers, antidepressants Paxil and Wellbutrin. That's not all: New York Attorney General Eliot Spitzer this year accused the company of concealing negative information about trials of Paxil in children and adolescents.

Beset with such problems, other CEOs might start popping Paxil. But the 57-year-old Frenchman is a master strategist who knows when to be patient and when to cut losses. Although he denies Spitzer's charges, GSK in August settled the Paxil case out of court for $2.5 million, a fraction of the $286 million in damages Spitzer initially claimed. "It was much ado about nothing," Garnier says. Spitzer praised GSK for agreeing in the deal to release both positive and negative studies about the safety and efficacy of its drugs.

And the merger? Garnier remains supremely confident. "We are going through a tough time, which is why investors are not giving us the benefit of the doubt," he says. "No company has a great pipeline today. But five years from now, I wouldn't trade mine for anyone else's."

The problem is keeping growth on track until the pipeline pays off. A weak dollar -- the company reports in sterling but gets more than half of its sales in the U.S. -- and stiff generic competition are expected to take a toll on sales and profits this year. New York research firm Sanford C. Bernstein & Co. (AC ) forecasts that GSK earnings will fall 7.4%, to $8 billion, with sales sliding 4.6%, to $37 billion. "They created this huge organization and the expectations that went with it, but they didn't reckon on such a long learning curve in turning their investment in genomics and new technologies into actual drugs," says Stewart Adkins, senior pharmaceutical analyst at Lehman Brothers Inc. (LEH ) in London.


That is starting to change. With 80 new molecules in clinical development, GSK has the industry's biggest pipeline. By yearend, 15 compounds are expected to progress to phase III trials -- the last step before filing for U.S. Food & Drug Administration approval. Sanford C. Bernstein senior analyst Gbola Amusa estimates that seven have blockbuster potential. These include a novel cancer treatment which inhibits two growth factors that tumors need to survive; an antidepressant that does not produce weight gain and loss of libido; and a dual-action cox-2 inhibitor which shows promise for easing a wide range of pains. Meanwhile, GSK is set to launch four new drugs this year. Analysts say that although none is likely to be a blockbuster, all will be important to help GSK expand sales. "Their pipeline is unparalleled in the industry, but because they've been out of favor for so long investors aren't giving them credit for it just yet," Amusa says.

And there's the rub. Just when GSK's image is at a new low, its prospects are improving. Second-quarter sales of diabetes treatment Avandia are up 59%, to $552 million, vs. a year earlier, while sales of asthma drug Seretide are up 22%, to $1.1 billion. Productivity is better and the threat from generics is dimming. Three years ago, 20% of GSK's sales were at risk from patent expirations. Only 5% are at risk over the next five years, analysts say.

One of the most exciting projects in late-stage testing, analysts say, is a novel cardiovascular drug that targets an enzyme known as Lp-PLA2, high levels of which some studies have indicated as a risk factor for heart attacks and stroke. If the drug works, GSK could snare a slice of a cardiovascular drug market now worth more than $27 billion a year. GSK will still have a tough task convincing regulators that targeting Lp-PLA2, a completely new approach, is more effective than the slew of cholesterol-busting drugs, known as statins, that are already on the market. But if the pipeline is paying off, Garnier can afford to meet that challenge head on.

By Kerry Capell in London

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