For GlaxoSmithKline and AstraZeneca — twin pillars of Britain’s pharmaceuticals sector — 2016 promises to be a critical year. Under their respective chief executives, Sir Andrew Witty and Pascal Soriot, both are pursuing difficult turnrounds — and the next 12 months will go a long way towards determining their success or failure.
But the fates of GSK and AstraZeneca are also being watched closely across the wider pharma sector, because of the divergent approaches they are taking to restoring growth. As they enter this potentially defining period, the Financial Times assesses their prospects.
GlaxoSmithKline
After a prolonged period in intensive care, GSK hopes 2016 will be the year it enters recovery.
Since 2012, annual sales have fallen by nearly a tenth and earnings per share by a third, based on analysts’ most recent estimates. This has left the company’s share price almost unchanged over the period while the S&P pharmaceuticals index has doubled.
Some investors had hoped the arrival of Sir Philip Hampton, the serial City troubleshooter, as chairman last May would be followed quickly by a change of CEO. Instead, though, Sir Andrew was given a vote of confidence. However, even his supporters now accept that he has little margin for error if his three-decade career with GSK is to survive another year.
At the root of GSK’s problems is the decline of its best-selling but ageing Advair asthma drug. Revenues from it have declined by 50 per cent since 2013 because of generic competition in Europe and rising price pressure in the US.
Sir Andrew’s turnround plan will hinge in large part on his promise to restore the group’s respiratory business to growth in 2016, albeit from a much-diminished base. That will require two newer lung drugs — Breo and Anoro — to achieve some sales momentum after a slow start. A successful launch of Nucala, the first of a new class of asthma drugs recently approved by US and European regulators, would also increase faith in GSK’s ability to defend its leadership of the respiratory market.
Further help is expected from HIV drugs — GSK’s star-performing business — which increased sales by 56 per cent in the first nine months of 2015, driven by Tivicay, a new antiretroviral.
Another boost should come from the group’s vaccines and consumer health businesses — both newly-enlarged after a $20bn asset swap with Novartis. Synergies from that deal, together with cost cuts, are expected to deliver £3bn in annual benefits by the end of 2017, with a large proportion of that figure achieved this year.
Sir Andrew is counting on these diverse revenue sources to restore earnings growth in 2016, while an improving research and development outlook — the group is aiming to file up to 20 new drugs and vaccines with regulators by 2020 — instils some long-term optimism. GSK was becoming a more “spiky competitor,” he told the FT, “with leadership positions in vaccines and consumer, and a cracking pharma innovation pipeline”.
Some investors have questioned a strategy that mixes high-value drugs with moderately-priced vaccines and consumer products such as toothpaste and painkillers. Nevertheless, Sir Andrew insists it makes sense to hedge against the risks inherent in drug development — particularly when the price of medicines is coming under pressure from budget-constrained health systems around the world.
Big shareholders questioned by the FT said they were willing to give the plan a chance provided GSK’s high-yielding dividend is protected. Sir Andrew has promised to keep the payout steady at 80p until 2017, by which time he hopes earnings growth will be firmly re-established. But there are still plenty of sceptics ready to renew their calls for a change of leadership — and even a break-up of the company — should the recovery fail to take root this year.
AstraZeneca
While GSK has diversified its business, AstraZeneca has placed all its bets on pharmaceuticals. This has left Mr Soriot relying entirely on his company’s ability to develop or acquire new drugs as he tries to make up for the loss of patent protection on several of the company’s biggest-selling products.
Nexium, a treatment for heartburn, recently lost market exclusivity in the US and the same fate awaits Crestor for high cholesterol this year, and Seroquel for schizophrenia in 2017. Together, these three drugs accounted for almost 40 per cent of sales in 2014, but most of these will have disappeared next year.
This urgent need to refill the medicine cabinet explains the $10bn shopping spree that AstraZeneca has embarked on in the past two months. A portfolio of respiratory drugs bought from Takeda of Japan will provide an immediate lift to sales while US biotech companies ZS and Acerta were both acquired with an eye on the longer term.
AstraZeneca’s in-house research and development is also coming to life after a long innovation drought. Lynparza for ovarian cancer and Tagrisso for lung cancer were launched in the past year and several other potential blockbusters are nearing market.
It was these prospects that gave AstraZeneca the confidence to resist a £69.4bn bid from Pfizer in 2014. Mr Soriot says the company is on track to meet his goal — set during that takeover battle — to increase revenues by three-quarters to $40bn by 2023. He told the FT: “You will hear people say, ‘they’re doing these acquisitions because they’re not on track’. We are absolutely on track and every acquisition we make is on top of [the forecasts] we have communicated before.”
However, the renewal of AstraZeneca’s product portfolio is coming at a heavy cost. Analysts at UBS estimate that the company spent $5.5bn on R&D in 2015, 10 per cent more than projected at the start of the year.
AstraZeneca has tried to smooth over its “patent cliff” by putting some experimental medicines into partnerships with other drugmakers in return for upfront fees that are booked as revenues. Seamus Fernandez, analyst at Leerink, has questioned whether it is wise for the company "to twist its financial reporting in knots” to defend its dividend. But, having rejected a £55-per-share offer from Pfizer two years ago, Mr Soriot cannot afford to sacrifice short-term returns — and risk the share price slipping much below its current £46 level.
Cancer drugs have long been critical to the turnround efforts of AstraZeneca, but have appeared less important to GlaxoSmithKline since it sold its oncology portfolio to Novartis last year.
However, Sir Andrew Witty, GSK chief executive, says that, contrary to perceptions, the group has not given up on cancer treatments. He says GSK wanted to focus its efforts on the next generation of oncology developments. “We had a good oncology business . . . but we took a view that [it] was not where the future lay,” he says.
GSK is not competing in the class of cancer “immunotherapies” called PD-1/PD-L1 checkpoint inhibitors, which AstraZeneca has bet on. Instead, it is focusing on what it believes will be the next wave of immunotherapies: drugs that supercharge the immune system to destroy cancer cells, including programmes focused on molecules called OX40 and NY-ESO.
These and GSK’s other experimental cancer drugs are at an earlier stage than AstraZeneca’s oncology pipeline — and so will do nothing to aid the group’s short-term turnround. But Alistair Campbell, analyst at Berenberg, says that, because investors have paid little attention to GSK’s cancer assets, they have the potential to “drive upgrades” in the stock if they make progress in clinical trials.
Critics question why GSK got rid of its existing drugs and the marketing infrastructure if it wanted to remain active in oncology. However, Sir Andrew says: “Rebuilding the commercial organisation is the easiest proposition, discovering the [new drugs] that’s difficult.”
