VIAGRA NEWS

Source: Times Online

Date: 27-Oct-2007

Author: Matthew Goodman

IN what has been a difficult year, last week is likely to go down as one of the toughest for JP Garnier, the outgoing chief executive of Glaxo Smith Kline, the world's second-biggest drugs company.

As he toured institutional investors on Wednesday to discuss third-quar-ter figures, and a cost-cutting initiative designed to produce £700m of annual savings by 2010, Garnier was met with what has become an all-too-predictable sense of gloom about his company and the pharmaceutical sector as a whole.

There were some pearls in the figures. The group's consumer business – which makes Aquafresh toothpaste, Lucozade and Ribena drinks and Panadol headache pills – is performing well. But instead shareholders wanted to dwell on the problems surrounding Avandia, the blockbuster diabetes drug that has been linked with an increase in the risk of heart attacks among its users.

They are also worried about how Glaxo is going to deal with the threat posed by the number of its drugs that are coming off patent over the next couple of years.

The cost-cutting programme was part of the group's response to these questions. Thousands of jobs are expected to go, with the bulk of the losses coming from Glaxo's manufacturing division and its 24,000-strong sales force. The precise number being sacrificed will not be disclosed until after consultation with those affected. Each salesman costs up to $200,000 (£97,600) a year to run, including salary, and produces average sales of $2m. After a series of internal trials, Garnier is confident a reduced sales force can sell more.

The cost of job cuts and plant closures will be £1.5 billion. In effect, Garnier is doing all the hard work for his successor, Andrew Witty, who takes over in May. "I did not want the new chief executive to start with this project," said Garnier. "I should shoulder this one; it's the right thing to do."

While Witty will no doubt be grateful for that, it is unlikely the programme – dubbed "Operational Excellence" – will be enough to placate investors who have seen little reason to buy Glaxo shares, even though the sector is traditionally a defensive play in times of uncertainty.

"While cost control is always a good thing, in our view Glaxo will need to score better in the bread-and-butter business of big pharma – developing and launching new blockbuster treatments," wrote industry analysts at Deutsche Bank in a note to clients.

The problems facing Glaxo have once again raised the question of whether the whole model adopted by "big pharma" has stopped working. Garnier argues that a focus on drug making, particularly in areas "that make people better than nature intended" – such as Viagra – and the growth of new economies such as China and India, which are going to increase spending on healthcare, are key to the future success of Glaxo and its peers.

Garnier said: "I am confident we will see higher productivity in new drugs in big pharma, but on the condition that you have R&D [research and development] organisations that fight 'bigness'."

There is certainly room for improvement. A report published this year by Price Waterhouse Coopers found that in 2006, the US Food and Drug Administration (FDA) approved just 22 new molecular entities and biologics [drugs from natural sources], against 53 a decade earlier.

The fight against "bigness" or bureaucracy is something that will come to characterise the Garnier era at Glaxo, where he has won plaudits for restructuring R&D into smaller units – known as CEDDs, or centres of excellence in drug discovery – with each concentrating on particular types of disease or illness.

He also reckons Glaxo is in better shape than some rivals to deal with today's challenges, particularly drugs going off-patent, and not having a pipeline of replacements at the ready.

He points out that Glaxo – with its consumer division and a growing vaccines business – is a more diversified business than some of its rivals. "We don't have 100% of our risk in this door-die tough business model," he said. "Five years out, with vaccines, that percentage [of business from patented drugs] will decrease even if we don't do anything."

But Garnier, who is reticent about discussing what he will do after he steps down, acknowledges that investors don't share his optimism. The shares peaked fairly early in the Garnier era, touching £20.79 in November 2000, five months after he took over. They have since edged back, and over the past year have underperformed the FTSE All-Share index by more than 20%. They closed on Friday at £12.32, giving a yield of 4%.

"The market is not picking on any one company," he said, "but investors are afraid of pharma. It's fair to say that between now and 2012 the industry will lose a number of blockbusters to the generics. It's a worry."

But Garnier believes Glaxo is getting much of its pain out of the way now. The group loses three $1 billion drugs this year, and more will fall away in 2008, "but then it gets better".

Glaxo has plenty of new drugs in late-stage clinical trials or awaiting approval, some of which it hopes will become blockbusters, replacing those going off-patent. There are 33 in the pipeline, far more than the two when Garnier became chief executive. There are high hopes in particular for Tykerb, a breast-cancer treatment.

But even this, it seems, is not enough to cheer perennially underwhelmed Glaxo shareholders.

"They say, yes, there's a good pipeline, but then the FDA has been temperamental and is not approving new drugs," said Garnier.

While he may be preparing to step back from the front-line of the pharmaceutical industry, Garnier, who lives just outside Philadelphia on the east coast of America, is still passionate about improving the sector.

One of the problems is a lack of young British scientific talent. It is an indictment of this country that Glaxo, for example, has to look to France to recruit enough chemistry graduates.

"The UK is competitive on many counts, but it is hard to find enough top-notch chemists," said Garnier. "We need more science graduates. We can't have everyone doing media studies or investment banking. We need engineers, technologists, scientists. If you want to compete globally, you have to compete in the knowledge economy because there's nothing else left. Many of the PhDs here come from Asia, and not all of them stick around. We need local people to become scientists."

Another area for potential improvement is the way that the National Institute for Clinical Excellence (Nice), the body that decides which drugs should be available on the NHS, makes its decisions.

This month, an adviser to Nice criticised the big drug companies for the quality of the data they supply for assessments on whether a particular treatment offers value for money.

"I agree with this gentleman," said Garnier, who reckons the whole system needs an overhaul. "Nice evaluates a drug before it goes on the market. Would the best way to evaluate a car be to do it before it hits the road? Wouldn't driving it help understand what it can do? We are asked to provide economic outcome data before the drug has been used widely."

An alternative approach, advocated by Garnier, would be to fix a price and put the drug into the market where it can be used for a couple of years, and then have a debate about its economic viability.