Glaxo’s dire results point to need for a strategy re-think

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GlaxoSmithKline's announcement of a potential flotation of its interest in HIV business ViiV Healthcare served its purpose yesterday to distract attention from a pretty dismal set of results that laid bare the company’s torments.

The group's top line is being pressured by ongoing problems in two core areas, respiratory and consumer healthcare, while cost cuts are being used to protect profitability and the dividend. It is hard to escape the conclusion that the targeted divestment strategy pursued by chief executive Andrew Witty is failing to have a big enough impact on a company that needs more urgent reinvigoration.

Those divestments have so far involved the sale of older off-patent products and various consumer brands, and more radically an asset swap with Novartis.

The decision to exit oncology, one of the hottest areas of medicine, and expand in vaccines, is certainly a move that prompted some head scratching. Analysts at Leerink, for example, expect a significant drop in margins as the more profitable oncology business is traded for the longer-lived but lower-margin vaccine and consumer businesses.

So plans to sell off ViiV, one of the still-growing arms of the company that provided a rare bright spot in yesterday’s quarterly results, again raised eyebrows. UBS described it as the next step of Glaxo’s “selling the family silver strategy” to cover the dividend.

Nothing is likely to happen imminently, however; Glaxo dangled the prospect of the IPO without really providing details, and conceded that movement was unlikely until 2016.

Look over there!

With value leaking from Glaxo’s respiratory and consumer health units, it is perhaps understandable that the company moved to highlight the worth of ViiV. The division's sales surged 18% to £373m in the third quarter, while respiratory sales slumped 8% to £1.4bn and consumer health slipped 3% to £1.1bn.

It is the far more pressing issues facing the last two units, particularly respiratory, that is hobbling Glaxo’s reputation with investors.

The company is paying for dropping the ball on pricing, and this is apparent in results. Quarterly sales of Advair fell 13% globally, and by a huge 25% in the US, while the newly launched Breo and Anoro amounted to a mere £35m so far in 2014. For the full year, analysts were expecting sales of the two products to reach £116m, EvaluatePharma’s consensus shows, suggesting that both are heading for a big miss.

The company has confidently predicted a return to growth in 2016 for respiratory, although this relies on the failure of competitors to launch generic versions of Advair. Glaxo maintains that copycats will not appear in the US until at least 2016 or 2017, but this sounds like wishful thinking, particularly as Sandoz, among the meanest competitors in this space, has deliberately kept its progress under wraps.

Prices for the three core products will all be considerably lower this year than the company previously assumed, executives said. This is a shocking admission from one of the biggest forces in respiratory medicine.

Getting it so wrong on both new launches and its world-leading Advair franchise is a staggering misstep, and it is hardly surprising that support for the company’s strategy, and confidence in its ability to execute, is waning.

What to do?

Glaxo shares climbed 2.6% yesterday in the wake of the results, ultimately lifted by reassurances that it was throwing everything at protecting its dividend. With a yield of almost 6%, this is a big reason for many investors to continue holding the stock.

As well as divestments to fund the dividend, costs are being cut to prop up margins, which are being squeezed by respiratory and will soon be pressured by the Novartis asset swap. Investors also like these sorts of moves.

But these strategies can only be effective up to a point; underneath fat lies muscle. Andrew Witty now needs to deliver growth, in respiratory particularly but also beyond. This could well require getting over his stated aversion to more sizeable acquisitions. What such a U-turn would do to his reputation is another question.

To contact the writer of this story email Amy Brown in London at AmyB@epvantage.com or follow  @AmyEPVantage on Twitter

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