Healthy Skepticism Library item: 1108

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Publication type: news

Abelson R.
For Glaxo, the Answers Are in the Pipeline
The New York Times 2003 May 4

Full text:

ALMOST three years after a merger created GlaxoSmithKline, Jean-Pierre Garnier, its chief executive, exudes nothing but confidence about the benefits of the combination.

The merger made it easier to cut costs and to marshal resources. But Dr. Garnier said the union also gave GlaxoSmithKline, now the world’s second-largest pharmaceutical company, after Pfizer, the opportunity to completely overhaul its research efforts into fast-moving, almost autonomous units.

“If we have the best pipeline in the industry in a few years, which I think we are well positioned to do – that’s in terms of shareholder value and also benefits to the patients – that’s all there is to it,” Dr. Garnier said recently in an interview at GlaxoSmithKline’s American headquarters here.

Whether GlaxoSmithKline, which has its world headquarters in Middlesex, England, is really poised to become a research powerhouse is subject to considerable debate.

Last week, the company announced stronger earnings than many analysts had expected, as it reduced costs and reaped strong sales from drugs like Advair, its asthma treatment. But many investors and Wall Street analysts remain skeptical about the company’s ability to come up with promising new medicines to take the place of those now threatened by generic versions.

“Glaxo has done many acquisitions over the last 12 to 15 years, and, to me, they’ve derived a lot of their growth from that,” said Jon M. Fisher, a portfolio manager at Fifth Third Bank, who said competitors like Merck and Pfizer have had more new drugs.

Glaxo bought Wellcome in 1995 and merged in 2000 with SmithKline Beecham, itself a product of a merger, to become GlaxoSmithKline. Both times, company executives said the transactions would increase the number of new drugs coming down its pipeline. But Mr. Fisher said GlaxoSmithKline was likely to merge again, to try to cover up weakness in its pipeline.

Dr. Garnier says a merger is not in the works, despite rumours in the last year or so. “What kind of competitive advantage am I going to get?” he asked. “I can’t think of one. Being bigger has never been the objective for us.”

Dr. Garnier, who was born in France and has a doctorate in pharmacology, joined SmithKline Beecham in 1990 after 15 years at Schering-Plough, another pharmaceutical company. He has run GlaxoSmithKline since it was formed. Despite the company’s incorporation in Britain, GlaxoSmithKline has a powerful presence in the United States, and Dr. Garnier has displayed an American taste for executive pay. Shareholders protested plans last year to substantially increase his pay, to roughly $18 million. But he defends higher compensation as an important tool in attracting talented people.

“We are a global company, so our scientists, our executives, they can work for us, or they can work for Merck, or they can work for Aventis,” he said, referring to two other pharmaceutical giants.

Dr. Garnier’s most immediate challenge, however, is to find new medicines to replace those under threat from generic alternatives. In March, the company lost a court decision that significantly increases the risk that Paxil, its popular treatment for depression, will face a generic rival in the United States this year or next. Paxil accounts for about 11 percent of the company’s worldwide annual revenue of $31.8 billion.

Although the company plans to appeal the decision, “this is a setback,” Dr. Garnier said.

In a conference call with analysts about the company’s first-quarter results, some callers expressed concern about other threats to its portfolio. Augmentin, a GlaxoSmithKline antibiotic, has already lost significant sales to a generic version, and there are legal challenges to patents on Wellbutrin, another antidepressant, and Zofran, an antinausea drug given to cancer patients treated with chemotherapy.

“The generic issue is not behind them,” said Hemant K. Shah, an analyst based in Warren, N.J., adding that he is not recommending the stock because such a large portion of the company’s revenue is at risk.

Many analysts and investors discount the quality of the company’s current portfolio of drugs in development. Although there are some promising candidates, like Levitra, a competitor to Viagra that is expected to be introduced later this year in the United States under a venture with Bayer, “there is really nothing outstanding in their pipeline,” said an analyst with an investment fund that owns the stock.

The company did little to build analysts’ confidence when it did not schedule a meeting last year to discuss research and development efforts. Instead, GlaxoSmithKline has promised to hold such meetings for analysts and investors in early December.

After GlaxoSmithKline’s development process was reorganized, Dr. Garnier said, researchers have been finding more compounds that may someday yield new drugs. The results, “even though it’s early days, have been spectacular,” he said.

To counter the inevitable bureaucracy that comes with size, GlaxoSmithKline carved up its research into six units, organized around areas like neurology and cardiovascular disease. Those units, while not completely independent, have considerable authority to decide what potential new therapies to pursue on their own or through licenses from other companies.

“They’re killing bad projects early now,” he said, and deciding when to license.

E said companies like GlaxoSmithKline have had difficulty developing best-selling drugs largely because of their size: “too many controls, too many layers, all the things that slow down productivity and progress.”

The new structure lets the company make decisions faster – sometimes in as little as a day. Previously, they could take months.

After the company was among those that identified an enzyme that appears to play an important role in Alzheimer’s disease, for example, the half-dozen people who run the unit that develops neurological drugs took just one day to decide to devote more resources to finding a medicine that could block this enzyme, called beta-secretase. They doubled the number of chemists assigned to the task.

Before the restructuring, the same researchers would have had to consult various divisions within the corporation, and the final say would have belonged to a group of two dozen or so members of a pan-European science committee.

Dr. Garnier argues that GlaxoSmithKline’s success is already visible in the number of compounds the company is testing in early stages of drug development. This year, the company has 45 compounds in the first two phases of development, roughly double the number in 2001.

But many industry analysts say this is no guarantee of GlaxoSmithKline’s eventual success. Analysts tend not to put much emphasis on the numbers of compounds being developed so early, said Mr. Fisher, at Fifth Third.

GlaxoSmithKline executives agree, however, that the proof of its success will be in its ability to introduce breakthrough medicines. “I think everybody thinks we are on the right track, but they want to see,” Dr. Garnier said, adding that drugs in early development require years of testing.

“I’m not waving the victory flag,” he said. “Far from it.”

To show that he understands the challenge before him, Dr. Garnier, again embracing American culture, paraphrased Jerry Garcia of the Grateful Dead. “Something has to be done about R.& D. productivity,” he said, “and frankly it’s mind-boggling that we have to be the ones.”