GSK’s Strategy for Growth
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GlaxoSmithKline fine-tunes its strategies with an incremental restructuring plan and a possible initial public offering of its interest in the specialtist HIV company, Viiv Healthcare.

GlaxoSmithKline (GSK) has announced a new restructuring plan to rescale its commercial operations, global support functions, and relevant R&D and manufacturing across pharmaceuticals to deliver incremental cost savings. The plan is in addition to the company’s existing cost-savings initiatives and synergies that would be derived from its pending three-part transaction with Novartis. Under that deal, the companies are combining their consumer healthcare businesses into a new joint venture company, GSK is divesting its oncology assets to Novartis, and GSK is acquiring Novartis’ vaccine business (excluding influenza). That deal, announced in April 2014, is expected to close in the first half of 2015. The company is also considering an initial public offering for its stake in the specialist HIV company, Viiv Healthcare. DCAT Value Chain Insights (VCI) examines GSK’s recent performance and focus for the future.

More restructuring ahead
Under the new restructuring program, GSK says it expects to achieve annual cost savings of £1 billion ($1.6 billion) over the next three years, with around 50% delivered in 2016. This new program is expected to result in costs of £1.5 billion ($2.4 billion), predominantly in cash. Initial savings in 2015 from the program will help offset the earnings impact from declining sales of its respiratory drug Advair (fluticasone propionate and salmeterol xinafoate).

“We have recently concluded new contracts for Advair in the US, which gives us greater visibility on the outlook for 2015,” said GSK CEO Sir Andrew Witty, in the company’s third-quarter earnings release. “As we go forward, we expect US sales of the product to continue to decline in line with recent trends as some recovery in volumes is offset by lower price levels set in 2014.” Witty said that the company’s transition in its respiratory business is “significant and clearly challenging” but expects that total global respiratory sales (residual and new products) will return to growth in 2016.

Table I and Table II outline the company’s 2013 sales on a segment and franchise basis. Respiratory products account for the largest piece of the company’s pharmaceutical sales with overall revenues of respiratory products at £7.516 billion ($11.800 billion). The next leading product franchises are cardiovascular and urogenital products, followed by central nervous system drugs and antibacterials (see Table II).

Table I: GlaxoSmithKline’s 2013 Revenues by Segment
Segment
2013 Revenues  
US Pharmaceuticals and Vaccines £7.2 billion ($11.3 billion)
Europe Pharmaceuticals and Vaccines £5.2 billion ($8.2 billion)
EMAP Pharmaceuticals and Vaccines £4.7 billion ($7.4 billion)
Japan Pharmaceuticals and Vaccines £1.6 billion ($2.5 billion)
Viiv Healthcare £1.4 billion ($2.2 billion)
Other trading £1.2 billion ($1.9 billion)
Consumer Healthcare £5.2 billion ($8.2 billion)
US dollars are based on an average exchange rate of £1 = $1.57 and rounded.  
EMAP refers to Emerging Markets and Asia Pacific.
           
Source: GlaxoSmithKline 2013 Annual Report.
Table II: GlaxoSmithKline’s 2013 Revenues, Pharmaceuticals
Franchise 2013 Sales
(£ millions)
2012 Sales
(£ millions)
Growth
CER%
Growth
£%
Respiratory £7,516 £7,291 4% 3%
Anti-virals £667 £753 (6%) (11%)
Central nervous system £1,483 £1,670 (8%) (11%)
Cardiovasular and urogenital £2,239 £2,431 (8%) (8)%
Metabolic £174 £171 10% 2%
Antibacterials £1,239 £1,247 (1%)
Oncology and emesis* £969 £798 22% 21%
Dermatology £770 £850 (8%) (9)%
Rare diseases £495 £495 7%
Immuno-inflammation £161 £70 >100% >100%
Other pharmaceuticals £799 £786 6% 2%
Viiv Healthcare (HIV) £1,386 £1,374 1%
Total £17,898 £17,936 1%
CER is constant exchange rate. CER represents growth calculated as if the exchange rates used to determinethe results of overseas companies in Sterling had remained unchanged from those used in the previous year. CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.

Source: GlaxoSmithKline 2013 Annual Report.

 

GSK is further refining its pharmaceutical portfolio with the divestment of its oncology products as part of its pending deal with Novartis. Under the deal, Novartis has agreed to acquire GSK oncology products for a $14.5-billion payment and up to $1.5 billion contingent on a development milestone, the results of the COMBI-d trial, a Phase III study evaluating the safety and efficacy of the combination of two drug candidates to treat metastatic melanoma: Tafinlar (dabrafenib) and Mekinist (trametinib). In addition, Novartis would have opt-in rights to GSK’s current and future oncology R&D pipeline. Sales of the acquired GSK oncology products in 2013 were approximately £1 billion ($1.6 billion). Key products from GSK’s oncology portfolio are Tafinlar and Mekinist, Votrient (pazopanib)(a VEGFR inhibitor for treating renal cell carcinoma);Tykerb (lapatinib) (for treating HER2+ metastatic breast cancer), Arzerra (ofatumumab) (for treating chronic lymphocytic leukemia); and Promacta (eltrombopag(for treating thrombocytopenia).


Building OTC and vaccines
With regard to its pending three-part transaction with Novartis, GSK said that it expects the deal to result in an increase in overall revenues of £1.3 billion ($2.1 billion). The company is targeting total annual savings from the transaction of £1 billion ($1.6 billion) by the fifth year from closing, with approximately 50% delivered by year three.

The deal also underscores GSK’s focus on its three core businesses: pharmaceuticals, vaccines, and consumer healthcare. Upon completion of the deal, GSK estimates that 40% of its revenues will be generated from its vaccines and consumer healthcare. For the proposed consumer healthcare joint venture with Novartis, GSK Consumer Healthcare would hold a majority control with an equity interest of 63.5% and Novartis a 36.5% share; the combined entity would have global sales of approximately $10 billion. The proposed joint venture would create critical mass for the companies globally and in the US market. The geographic footprint would have a commercial presence in the developed world as well as in emerging markets, such as Brazil, China, Mexico, and Russia. Emma Walmsley, currently president of GlaxoSmithKline Consumer Healthcare, has been appointed as chief executive officer designate of the new business and will be a member of its board. GSK CEO Andrew Witty will be chairman of the board. The board will be comprised of directors from both GSK and Novartis. Novartis will have four of eleven seats on the joint venture’s board. Furthermore, Novartis will have customary minority rights and exit rights at a pre-defined, market-based pricing mechanism.

The proposed joint venture will have almost half of its sales derived from brands with annual revenues larger than $300 million and be positioned in four categories based on GSK’s current over-the-counter (OTC) segmentation: wellness, oral health, nutrition, and skin health. On a global product basis, key contributions from Novartis are treatments for cough/cold/respiratory ailments (e.g., Theraflu and Otrivin) and pain relief (e.g., Excedrin and Voltaren), as well as products for digestive health (e.g., Benefiber and Prevacid 24HR), dermatology (e.g., Lamisil and Fenistil), and smoking cessation (Nicotinell). GSK has several specialized product areas, such as smoking cessation (i.e., Nicorette, NiQuitin, NicoDerm, and Nicabate), weight-loss (e.g., alli) as well more established product areas, such as in health (e.g., Tums), pain relief (e.g., Panadol), oral care (e.g., Sensodyne and Aquafresh), and nutrition (e.g, Horlick). Overall, the combined business will have 19 major brands, each generating sales of more than $100 million.

Under its pending deal with Novartis, GSK is acquiring Novartis’ vaccine business (excluding flu) for $7.1 billion plus royalties. The $7.1 billion consists of $5.25 billion upfront and up to $1.8 billion in milestones. The deal strengthens GSK’s position in pediatric and meningitis franchises, which include Bexsero, a new vaccine for prevention of meningitis B. 2013 actual net sales of Novartis’ vaccines (including flu) business were approximately $1.4 billion.

GSK says that the proposed acquisition of Novartis’ vaccine business (excluding flu) would provide an overall stronger portfolio, particularly in the US, and increase the profitability of the business through synergies, including the integration of antigen supply currently provided by Novartis to GSK. The new vaccine business will also hold R&D platforms and technology offerings in both viral and bacterial disease

The acquisition  with Novartis is expected to strengthen GSK’s manufacturing network and increase overall capacity, notably with the addition of Novartis’ secondary packaging and supply facilities in Rosia, Italy and Marburg, Germany. GSK would also acquire new manufacturing sites in India and China. In addition, the integration of the supply of a number of key antigens, currently provided to GSK by Novartis, will provide improvements and enhance the future flexibility of the business, particularly in pediatric vaccines.

Possible IPO for Viiv Healthcare

GSK also said it is considering an initial public offering  (IPO) of its minority stake in the specialist HIV company, ViiV Healthcare. ViiV Healthcare was established in November 2009 by GSK and Pfizer with a specific focus on HIV treatments. Shionogi joined as a shareholder in October 2012.

In the company’s third-quarter release, GSK CEO Sir Andrew Witty said: “We believe now is the right time to explore the potential for an IPO of a minority shareholding in this business. This will provide greater visibility of the intrinsic value we see in its currently marketed assets and future pipeline and also enhance potential future strategic flexibility.”

Table III outlines the sales of Viiv’s products in 2013. Its top-selling product is Epzicom/Kivex (abacavir sulfate and lamivudine) with sales of more than $1 billion. In terms of new product developments, the company received US and EU marketing authorization for Triumeq, a once-daily, single pill, combination therapy to treat HIV earlier this year. Triumeq (dolutegravir 50 mg / abacavir 600 mg / lamivudine 300 mg) tablets was approved for treating HIV in adults and adolescents aged 12 years and older and weighing at least 40 kg. The combination therapy consists of the integrase strand transfer inhibitor,  dolutegravir, with the nucleoside reverse transcriptase inhibitors, abacavir and lamivudine. Dolutegravir was the first drug approved from Viiv Healthcare; it was approved in the US in August 2013 and in Europe in January 2014 under the brand name Tivicay.

Table III: 2013 Revenues by Product of Viiv Healthcare
Product 2013 Revenues Growth in CER%
Combivir £116 million ($182 million) (36%)
Epivir £43 million ($68 million) (10%)
Epzicom/Kivexa £763 million ($1.198 billion) 14%
Selzentry £143 million ($225 million) 10%
Trizivir £97 million ($152 million) (10%)
CER is constant exchange rate. CER represents growth calculated as if the exchange rates used to determine the results of overseas companies in Sterling had remained unchanged from those used in the previous year. CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.

US dollars are based on an average exchange rate of £1 = $1.57 and rounded.

Source: GlaxoSmithKline 2013 Annual Report.

In June 2014, ViiV Healthcare formed an agreement with Janssen R&D Ireland Ltd. for developing and commercializing a single-tablet combining dolutegravir, the active ingredient in Tivicay, and Janssen’s non-nucleoside reverse transcriptase inhibitor, rilpivirine, the active ingredient in Edurant. The deal represented ViiV Healthcare’s first external collaboration to develop a single-tablet regimen with another company’s branded product and builds on ViiV Healthcare’s strategy to expand its portfolio of dolutegravir-based regimens.Tivicay received FDA approval in 2013 for use in combination with other anti-retroviral medicinal products for treating HIV-1 infection in adults and children aged 12 years and older weighing at least 40 kg. The European Medicines Agency approved the drug in 2014 for use in combination with other anti-retroviral medicinal products for the treatment of HIV-infected adults and adolescents above 12 years of age.

Under the agreement, the two companies will investigate the potential of combining dolutegravir and rilpivirine into a single-tablet to expand the treatment options available to people living with HIV. Studies included in the new development program are expected to begin by the first quarter of 2015 and will investigate the two-drug combination regimen as an HIV maintenance therapy for patients already virally suppressed on a three-drug regimen. The companies will further investigate the development of pediatric fixed-dose formulations that combine dolutegravir and rilpivirine.

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