GSK cut down by Avandia scare

GSK yesterday followed in the footsteps of fellow pharma firms Pfizer, AstraZeneca, Amgen and others as it too joined the ranks of the restructuring revolution sweeping the industry. GSK's moves essentially follow the same pattern that is becoming the unnerving mantra of the pharmaceutical industry - close sites, cut jobs, embrace the budget option that is Asia. While several of GSK's competitors have hit the headlines over the last year with their major restructuring plans, GSK has managed to avoid this particular kind of negative exposure. That is, until Avandia (rosiglitazone) put a spanner in the works. Couple that with generics gnawing through far enough to hit a GSK nerve, and the answer is an accelerated £1.5bn (€2.2bn) 'Operational Excellence programme.' The company plans to rejig things across its business to deliver savings of up to £700m by 2010 - 40 per cent of which will come from cutting down on manufacturing sites and simplifying production processes and activities to reduce over capacity. According to a GSK spokesperson, details have not been finalised regarding which sites would be axed, nor how many employees could be affected. The company, unsurprisingly, is looking to outsource manufacture of its existing products, as well as continue its trend of taking advantage of third party firms to source its active pharmaceutical ingredients (APIs). However, GSK is only willing to relinquish control of production when it feels products are established enough to warrant outsiders picking up some of the work: "What we want is to protect our new products,"​ GSK's CEO J.P. Garnier said during the company's analyst call yesterday. "We don't want anybody to have control over our new products - for commercial reasons, but also for ethical reasons. We don't want people to make our oncology products because if they go wrong [or] out of stock, we are killing people." ​ As such, Garnier says the company wants to retain manufacturing control of all new products until they become multi-sourced. After that time, the company is less bothered as to whether products are made in house or by third parties, but with Garnier's caveat that "if we can buy it cheaper than we can make it then of course that's what we're going to do."​ The UK company is likely to have a fight on its hands, however, with union representatives already coming out to voice their outrage at the latest pharma cuts: "This is another massive blow to the UK pharmaceutical industry coming hot on the heels of the announcements of 7,000 jobs worldwide by AstraZeneca and 420 job cuts being made by Pfizer in the UK,"​ said Lind McCulloch, UK union Unite's national officer for the pharma industry. "The difference with GSK's job cuts are that they are being made solely to keep shareholders happy. This is a profitable company that does not need to cut jobs or make closures and we fight any attempt by the company to cut either at any of the firm's three UK plants." ​ A further 40 per cent of the company's £700m savings target is to come from overhauling its sales and marketing initiatives so that new sales structures and techniques reflect the changes in the company's portfolio, as well as providing a more "tailored and customised​" approach for both developed and emerging markets. R&D cuts ​ R&D has escaped relatively lightly, picking up the final 20 per cent of the anticipated savings but only through simplifying and streamlining support infrastructure. Investments will continue to be made to drum the most out of the company's late stage pipeline and the future growth areas of biopharmaceuticals, vaccines and oncology, with the predictable footnote regarding the possibilities of emerging markets in Asia. "In terms of R&D, we have to talk first about where we are going to super invest,"​ said Garnier. "We are building biologicals, first of all with some in-licensing but also with our own molecules…Of course we will also accelerate our establishment of R&D in China." ​ Only earlier this week, in fact, the company announced a multi-million dollar deal with Tolerx to develop and commercialise otelixizumab, a humanised anti-CD3 monoclonal antibody. Garnier pointed out that the company is looking at up to 25 new launches over the next three years, with products "that will come right on time…to replace what we are losing to the generics."​ GSK may be luckier than its counterparts in this respect, having a few options that could help buffer the generic onslaught. Others, namely the uncertain leader of the pack, Pfizer, have suffered blow after disappointing blow, leaving their defence seriously compromised. However, GSK has not been without thorns in its side. Avandia, the company's Type II diabetes drug, was the subject of an unflattering appraisal in the New England Journal of Medicine (NEJM) back in May that claimed the drug was linked to an increased risk of heart attack and death from cardiovascular causes. Although GSK emphatically denies the article's allegations, it hasn't prevented Avandia losing over half its prescription market share. Since publication, sales for the quarter are 38 per cent down on this time last year to £225m, with a 48 per cent drop in US markets. In July, a US Food and Drug Administration (FDA) advisory committee met to discuss the potential cardiovascular risks associated with the drug and thiazolidinediones (TZDs) in general. The FDA is currently considering the committee's recommendations. Generics have, of course, played their role in thinning out product revenues as well, with competition for GSK's Zofran (ondansetron), Wellbutrin (bupropion) and Coreg (carvedilol) all gnawing away at the branded products' revenues. Zofran was hit particularly hard, with sales down a whopping 86 per cent for the quarter to £32m, along with Wellbutrin dropping 41 per cent and Coreg down 20 per cent compared to Q3 last year. All of these blips contributed to a 6 per cent drop in operating profit over the quarter, hitting £1.91bn. For the year to date, operating profit was down around 2 per cent to a touch over £6bn. Pre tax profit for the quarter was down about 7 per cent to £1.88bn, with year to date figures showing a 3 per cent drop to £5.92bn. With the firm's over-the-counter (OTC) business performing well, these losses came almost exclusively from the challenged pharmaceuticals division. While GSK's Operational Excellence drive is due to bring in pre tax savings of £350m by 2008 and £550m by 2009, the one off charges associated with implementing the programme are expected to be a hefty £1.5bn. The costs will be incurred over the three year period to 2010, with around 70 per cent in cash expenditures and 30 per cent in accounting write-downs. Andrew Witty, the company's recently appointed CEO designate, is due to take over the reins at GSK at the end of May next year. These first months in Garnier's shadow will be at least partly defined by the cuts and closures announced yesterday, leaving him (ideally) with a tighter ship, but also with tough choices to be made as the pharma industry navigates its way through increasingly choppy waters.