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Feb 7, 2012

GSK Counts on R&D Cost Savings, Pipeline Progress to Deliver Better Results in 2012

  • GlaxoSmithKline (GSK) put its best face possible on fourth-quarter 2011 numbers, which surpassed year-ago numbers but fell short of forecasts. The firm predicted better results this year based on stronger performances from R&D and drug delivery.

    GSK finished Q4 with a net profit of £1.25 billion ($1.98 billion), up from a £633 million loss in Q4 2010 reflecting legal charges of about £2.17 billion and restructuring costs of £283 million. Despite the turnaround, the numbers still fell below analyst forecasts of £1.45 billion. Excluding restructuring costs, GSK’s net profit was £1.41 billion.

    Quarterly sales fell 3% year-over-year to £6.98 billion ($11.03 billion) compared with forecasts by analysts of £7.33 billion (as reported by Thomson Reuters) to £7.38 billion (as reported by The Wall Street Journal). Sales dipped down 6% in the first half and increased 1% in the second half. The company linked the sales drop to a continued decline in sales of diabetes pill Avandia, antiviral Valtrex, and vaccines for pandemic flu.

    For all of 2011, GSK more than tripled its net profit to £5.26 billion from £1.63 billion in 2010 despite a 3.5% dip in revenue to £27.4 billion. “Our record in 2011 demonstrates that we are succeeding,” GSK CEO Sir Andrew Witty said in a statement. He cited underlying sales growth of 4%, not counting a year-ago surge in vaccine sales, dividend growth of 8%, and “significant progress” in the numbers generated by its R&D operations.

    Driving that underlying sales growth were gains across GSK’s three product segments: Pharmaceuticals (+2% year over year), vaccines (+11%), and consumer healthcare (+5%). However, sales growth was largely driven by Japan (+28% gain from 2010 numbers reduced by the effects of the earthquake and tsunami), Asia Pacific (+10%), and other emerging markets (+15%). US sales were flat last year, while sales in Europe fell by 4%.

    Also during 2011, GSK’s R&D operations generated a 12% return, up from 11% in 2010. It is on track, Sir Andrew said, to reach 14% even though the company expects its core R&D expense “to be at around the same level as in 2011.” Core results exclude “the impairment of intangible assets, legal charges, and asset disposal gains and losses. This is very encouraging and reflects both the progress of our late-stage pipeline and the impact of targeted reductions in fixed R&D costs over the period,” Sir Andrew said.

    How does GSK plan to achieve greater R&D returns despite flat spending? “Reduced attrition and cost reduction,” the company says. GSK has been restructuring R&D since 2008 by organizing its researchers into “discovery performance units” (DPUs) that compete for company funding.

    One analyst quoted by the Associated Press, Keith Bowman of Hargreaves Lansdown Stockbrokers, said the fourth-quarter results were at the lower end of expectations. He offered two reasons why: “Pricing pressure has been seen across a number of the group’s markets, while the company’s R&D efforts are yet to yield what the group itself sees as an acceptable return.”

    The pressure to maintain low prices for medicines is an issue for all pharma giants, especially in Europe, where government cost-containment policies have helped depress company sales and thus profits. “Pricing pressure in Europe adversely impacted underlying growth in the region by approximately five percentage points (approximately £320 million) during 2011. We anticipate a similar impact in 2012,” Sir Andrew stated.

    Sir Andrew also disclosed in GSK’s earnings statement that following a review of its R&D discovery performance units, the company created four new DPUs while closing three others, without disclosing what diseases the units focused on. “Of the remaining DPUs, six have received increased investment and five have had investment decreased,” he stated, again without details. GSK says additional info on the DPUs will come at a March 29 meeting for analysts and investors.

    “Based on the review, we expect to deliver up to 30 new assets into late-stage development’ (typically Phase IIb) over the next three years. This increase in productivity would mean GSK is moving towards sustainable replenishment of its late-stage pipeline, with no increase in cost,” Sir Andrew stated.

    Those 30 products include four expected to begin undergoing  regulatory reviews in coming months: Relovair for asthma, Promacta for hepatitis C, a MEK inhibitor for melanoma, and a new flu vaccine. Relovair is the first of eight Phase IIb/III development programs in the respiratory area. Relovair is one of six late-stage assets and indications, for which GSK expects to complete Phase III development programs in 2012; the other five are LABA/LAMA, albiglutide, BRAF, dolutegravir and Mosquirix. 

    All this comes with increasing signs that we can replenish our pipeline on an ongoing basis,” Sir Andrew said. “We expect further delivery from our R&D organi[z]ation in 2012.” GSK investors will be counting on Sir Andrew and the company to deliver on those words this year.

     

    --

    For the Wall Street Journal report, click here.

    For the Reuters story, click here.


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