Challenges Persist for JP Garnier at Glaxo

A string of high-profile setbacks isn’t what Jean-Pierre Garnier envisioned as he enters the home stretch as CEO of GlaxoSmithKline, writes Robert Steyer at TheStreet.com

Back in 2006, he agreed to delay his retirement until May 2008, instead of October 2007, so he could shepherd the launch of new drugs with alluring revenue prospects. Instead, Garnier is spending much of his time defending the diabetes drug Avandia, coping with regulatory and scientific delays for two touted compounds and supervising a giant stock repurchase due to Glaxo’s slumbering shares.

“Diversity is Glaxo’s biggest strength,” says Heather Brilliant of the independent research firm Morningstar. “Clearly, Avandia will be an overhang for awhile. But Glaxo can withstand the bumps that affect other companies.” However, others say the new and experimental drugs won’t offset revenue surrendered from products that have lost patent protection or will lose exclusivity in the next few years. If Glaxo is too big to fail, it’s also too big to grow significantly without developing more mega-medications.

Glaxo suffers from “deteriorating earnings power,” says Alexandra Hauber, of Bear Stearns, in a recent report illustrating the bear case for Glaxo. Her underperform rating is based partly on the belief that “the combined sales potential of [R&D] pipeline assets looks insufficient to sustain GlaxoSmithKline’s earnings into the next decade.”

Hauber’s assessment came before an FDA advisory panel in late July recommended more restrictions for Avandia because they say it raises heart-attack risks. Afterwards she said Avandia’s prescription volume was “unlikely” to recover. Hauber’s firm has had a noninvestment banking relationship.

For the 12 months ended Aug. 15, Glaxo’s stock was down 10.4% while the Amex Pharmaceutical Index of mostly giant drugmakers was down 4.2%. Glaxo tried to prop up the stock last month with a big stock buyback, saying it will expand an original repurchase plan from $8.8 billion to $24.6 billion over the next two years. That may have temporarily mollified equity investors, but Moody’s Investors Service dropped Glaxo two notches from the Aa2 high-grade level to A1 upper-medium-grade.

Avandia remains Glaxo’s biggest headache as well as its second-biggest seller. Some medical research says Avandia raises the risk of heart attacks compared to other diabetes pills, a claim that Glaxo disputes. A recent recommendation by advisers to the FDA portends more restrictions and lower sales for the drug whose U.S. sales fell 31% in the second quarter and whose worldwide sales dropped 22%.

The FDA doesn’t always agree with its advisors, but it usually does so. The advisors voted 22-1 to keep Avandia on the market, but they also agreed by a 20-3 vote that Avandia has a higher risk of heart attack than other pills that control blood sugar.

Last week, the FDA said Avandia’s label will include the agency’s strongest alert for the risk of heart failure — the impaired pumping ability of the heart. Avandia’s label has carried a less urgent warning about heart failure, and the FDA is still reviewing the research on heart-attack risk.

Speaking of headaches, Glaxo and its partner Pozen (POZN – Cramer’s Take – Stockpickr) were recently hit with another delay for their migraine treatment Trexima. The FDA granted conditional approval in early August, but one condition is more testing, which could take several months. The original application was filed two years ago, and the FDA issued its first conditional approval in June 2006. “We think the drug has a decent chance of being approved,” says a recent note by the independent research publication BioMedTracker, which analyzes drug and biotechnology prospects.

Trexima represents a standard Big Pharma generic-competition defense — developing a close relative of a brand-name drug. Trexima combines the generic pain reliever naproxen with Glaxo’s patented Imitrex.
For the first half of 2007, Imitrex produced $656 million. U.S. sales rose 11%, but sales in Europe and other foreign markets were down. U.S. generic competition will start in February 2009. Glaxo wants to secure early FDA approval so it has more time to persuade doctors and patients that newer is better.

Trexima isn’t the only problematic partnered product. Another is Entereg, developed by Adolor, for treating constipation and bowel disorders in patients who take powerful drugs for chronic, noncancer pain.

Entereg has suffered a host of delays. In April, Glaxo and Adolor said unusual results in a late-stage clinical trial caused them to suspend several other studies. Patients taking Entereg had a higher-than-expected rate of cardiovascular problems, as well as benign and malignant tumors. The companies are reviewing the research, and they are preparing a response to the FDA’s questions about another use for Entereg.

In November, the FDA granted conditional approval to the product for treating post-operative ileus, or constipation and abdominal pain caused by high-strength painkillers taken by people recovering from surgery. The FDA wants more data about possible cardiovascular side effects, and the companies plan to file their response before Sept. 30.

November’s delay wasn’t the first for Entereg. The companies received conditional clearance in July 2005 with the agency asking for more efficacy data. Clinical trial results have played havoc with Adolor’s stock over the years.
And even when a partnered product reaches the market, the path to higher revenue isn’t always smooth.

Coreg CR, a controlled-release version of the blood-pressure/heart failure drug Coreg, is off to a weak start following a first-quarter launch. Coreg CR had $20 million in sales in the second quarter vs. Coreg’s $400 million.
Flamel Technologies (FLML – Cramer’s Take – Stockpickr)developed Coreg CR, but Morningstar and other observers say the drug has been slow out of the gate primarily due to Glaxo’s sales force spending so much time defending Avandia.

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