Questor: the onslaught of generic drugs is a bitter pill the new boss of Glaxo must swallow

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Glaxo: £16.60

Questor says HOLD

A little piece of good news greeted the beginning of Emma Walmsley’s reign at GlaxoSmithKline last week.

An application by rival Mylan to market a generic copy of the British group’s blockbuster drug Advair was rejected by the US Food and Drug Administration. 

It will be a brief celebration. Copycats are like buses: another will be along imminently. Should Hikma Pharmaceuticals sway regulators with its version of the asthma and lung treatment in mid-May, Glaxo expects US sales could fall to £1bn this year from £1.8bn in 2016. At the group level that would flatten earnings per share, compared to 5pc-7pc growth if no competition appears.

Advair’s decline has been a long time coming. Launched in the US in 2001, its patent expired in 2010, although the Diskus inhaler that administers the drug was covered until last year. 

The 20-year product cycle illustrates why the pharmaceuticals industry must take the long-term view. 

Even if Walmsley arrives in the office tomorrow armed with a new strategy for Glaxo at the start of her first full week in charge, the fruits of her labour are unlikely to be reaped while she is chief executive. 

Instead, she is left with a series of big decisions inherited from Sir Andrew Witty, who set Glaxo on its current course of concentrating on higher-volume, lower-value goods including vaccines and painkillers; a strategy that dovetails with her marketing background.

Emma Walmsley, Glaxo's chief executive
Emma Walmsley, Glaxo's new chief executive Credit: AFP

Witty’s reluctance to carry out a giant merger – favouring a complicated asset swap with Novartis – became something of a badge of honour. You suspect the legacy he would like to be remembered for is futureproofing the company. 

On a trade mission to India late last year he declared the best measure of success was hitting the highest proportion of new product sales of any drugs giant. 

One dollar in four in its pharmaceuticals arm comes from a treatment that is less than three years old and when Glaxo has weathered the Advair loss its next big drug doesn’t go off-patent until 2027.

What Walmsley must show is there is life in the product pipeline or otherwise restock it. The company expects important clinical trial results on 25 products currently in development, but most of those are back-weighted to 2018. 

In the meantime, Advair successor Breo is gaining traction, as is shingles vaccine Shingrix. 

There are concerns, however. In a February note, Deutsche Bank analysts highlighted some threats to the growth potential of ViiV, Glaxo’s majority-owned HIV company, whose Tivicay and Triumeq drugs are prescribed in combinations that could face pricing pressure from generic competitors.

On the consumer side, Walmsley has an opportunity next year to bulk up. Novartis has a put option to sell its 36.5pc stake in their consumer healthcare venture – home to Aquafresh, Panadol and Horlicks – to Glaxo at a cost close to £7bn. 

Some investors would simply like the dust to settle. As Barclays points out in a research note, Glaxo has been one of the heaviest restructurers in its peer group, booking £3.6bn of non-core charges in the last three years alone.

Still, investor calls for a break-up have quietened. 

The recent Unilever takeover approach showed that few FTSE 100 companies are out of predators’ reach, even without slicing themselves up. And what Glaxo isn’t wedded to is the kind of “La La Land” sales forecasts – as described by one fund manager at a recent press dinner – that domestic rival AstraZeneca set out after evading Pfizer’s clutches.

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Credit: Reuters

The trouble with stepping into Witty’s shoes now is that the benchmark has been set high. 

Even currency swings have conspired to flatter the figures. 

In the year since his retirement was announced, Glaxo shares have advanced by a fifth. 

The 15 times this year’s earnings that the stock currently trades on equates to a 20pc premium to the average multiple over the last decade.

It could be that the market has finally woken up to the potential of the new Glaxo: stable, diversified, innovative. It could have been a beneficiary of so much monetary stimulus, plus the flight to safety that has sent defensive stocks to fresh highs. 

The challenge is there is not enough good news around the corner to see the shares make immediate progress from here.

Hold.

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