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GSK returns to growth but has it put the fundamentals in place to sustain it?

Ed Corbett’s invited commentary in The Pharma Letter 3rd May 2016

 

GSK is a pillar of the UK business establishment, delivering consistent returns for investors seeking a reliable place to deposit their money. For many years ADVAIR sales, particularly in the US have driven its performance, but as patent protection is lost around the globe, generic entrants will eat into its revenue. Replacing this loss of sales is top of mind for senior management, with 2016 as the stated year in which the company will return to growth – Q1 earnings shows that this ambition is beginning to be realised.

Losing market exclusivity is a fact of life in the pharma industry and all companies need to address it at some point. Since becoming CEO in 2008, Sir Andrew Witty has had to focus on how to replace the loss of ADVAIR sales, though during his tenure he has to deal with both a $3bn fine for bribing US doctors and allegations of corruption in China. These events required focus that could otherwise have been directed at launching new products.

What we saw with the Q1 results was an indication that historical plans are bearing fruit and that 2016 may be the year in which the company returns to growth. However, three longer-term issues and potential headwinds remain:

Keeping the revenue stream fresh:

20% of GSK’s pharmaceutical revenue comes for new products, especially ANORO, BREO and NUCALA, which are key components of the respiratory franchise and designed to replace the loss of ADVAIR. Whilst this figure is encouraging, it begs two questions – what can GSK do to increase this contribution, and what can it learn from other comparable companies? Gilead and J&J have contributions of 68.5% and 49% respectively from new products, with comparable revenues. GSK needs to apply the philosophy and edge that companies like this have to in its growth agenda and uncover if money is being left on the table.

Managing growth after stopping payments to healthcare professionals:

The bold move to unilaterally stop payments to healthcare professionals has positioned GSK ahead of its rivals in terms of transparency and has be widely welcomed by doctors’ groups. Other companies are yet to take a similar step, particularly because they fear the commercial impact. The introduction of stopping payments to healthcare professionals was not mentioned in the Q1 results – this could be for a variety of reasons, but any hint that it has affected revenue will determine how the rest of the industry acts.

Making sure cost cutting only cuts fat, rather than muscle:

Delivering £400m of incremental cost savings in a quarter is no mean feat and GSK is on track to deliver £2.4bn annual cost savings by the end of the year. This supports the margin and is primarily driven by restricting and integration savings. The question is whether the company has trimmed available fat and will next have to cut into muscle. Any reduction is sales and marketing costs in the rest of the year may indicate that muscle is being hit, with a likely impact on top line revenue immediately or later.

On top of these specific issues, like other big pharma companies, GSK faces challenges of pipeline progression, geographical coverage and organisational agility. In the past, M&A activity has been seen as the solution to these problems – though with very variable results. While big pharma represents a dependable investment with median revenue growth of 3.2% per year, over the last 5 years, mid-cap pharma companies, particularly those that are listed, have achieved higher revenue growth rates (around 8%). Such growth is driven by a combination of a focused and entrepreneurial approach to drug development, coupled with requisite capital to grow the products. Big pharma could do worse than taking a similar approach, rather than defaulting to M&A to solve its problems.

Fundamentally, GSK is a strong company with a range of products that address the healthcare needs of humanity. In the long term, its volume driven, emerging market focused approach makes sense – the sheer number of patients who have unmet medical needs in such markets speaks for itself. The question that faces GSK and their next CEO, is, can it maintain revenue growth in the short to medium term? Confidently answering this in 2016 will keep investors happy, reduce the clamour to break up the group and maintain GSK’s position as a pillar of the UK business establishment.

Ed Corbett is an Engagement Manager at specialist pharmaceutical strategy consultants, Novasecta.

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