Glaxo Ditches Raft of R&D Projects to Focus on Best Prospects -- 2nd Update

By Denise Roland Features Dow Jones Newswires

GlaxoSmithKline PLC axed more than 30 drug-research projects to focus on four key disease areas, in a push by new Chief Executive Emma Walmsley to sharpen the company's research-and-development operations.

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U.K.-based Glaxo said Wednesday it would now focus its research on respiratory diseases, HIV and other infectious diseases, cancer and immuno-inflammatory conditions.

The company plans to pour more investment into 16 drug candidates that it believes stand the best chance of becoming big sellers, while shelving 13 drug-development programs and around 20 early-stage research projects.

Glaxo's low research productivity is viewed as a fundamental problem by investors, who have been stung by some high-profile failures in recent years.

Glaxo -- until now -- has had a very broad research pipeline, unlike many peers who have pruned their own pipelines to focus on a few key disease areas. Ms. Walmsley said that spreading its bets too thinly had hurt Glaxo's competitive edge, but that research investment would stay roughly the same overall.

The biggest research focus to face the cut is rare diseases, an area that Ms. Walmsley's predecessor Andrew Witty had highlighted as a promising one for the company. Glaxo said it was deciding how best to offload these projects, which include the substantial research into new gene therapies that recently produced a cure for children born with an extremely rare immune-system condition known as "bubble-boy disease."

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That move runs counter to the broader industry, which is in general pouring more investment into rare diseases. That's because such drugs -- often the only option available for the rare disease in question -- can command sky-high prices, and many companies view them as a safer bet than developing drugs in highly competitive areas. Several of Glaxo's rivals, such as Shire PLC, Sanofi SA and Pfizer Inc. have prioritized rare disease drugs in recent years.

Other shelved drug development programs span a broad range of ailments like liver disease, heart failure and dermatology. Glaxo has also ended several programs that fall within its new priority areas, but were deemed too incremental to justify heavy research investment.

In making such a move just months into her tenure, Glaxo's new boss is addressing a key investor concern: her lack of experience in managing a pharmaceutical pipeline.

Ms. Walmsley, who became CEO on April 1, previously ran the company's consumer health-care arm, which sells drugstore staples like over-the-counter painkillers and toothpaste. Before joining Glaxo, she had spent most of her career at French cosmetics company L'Oréal SA.

The announcement came as Glaxo reported second-quarter earnings, and announced plans to cut an additional GBP1 billion ($1.16 billion) in annual costs by 2020.

Despite the strategic shift, the company made no change to its long-term outlook. It maintained that annual sales growth would come in at a low- to mid-single-digit percentage on average, to 2020. It said adjusted earnings per share would expand at a mid-to-high-single-digit percentage annually, on average, in the same period.

Glaxo shares were trading down 1.4% at GBP15.64 on Wednesday afternoon.

The company also cut its full-year guidance after spending $130 million on a priority review voucher, which grants it a six-month review process from the U.S. Food & Drug Administration, instead of the standard 10 months. Glaxo bought the voucher from an unidentified drugmaker in the second quarter, and has used it to speed the agency's review of the company's new two-drug HIV regimen.

Glaxo now expects adjusted earnings per share to rise 3% to 5% at constant exchange rates, having previously guided for an increase of 5% to 7%.

Priority review vouchers are awarded by the FDA to incentivize the development of drugs for neglected diseases. But a secondary market has sprung up where the original awardee can sell the voucher to others at prices that can reach several hundreds of millions of dollars.

The steep cost of the voucher contributed to Glaxo posting a net loss of GBP180 million in the quarter. That compared with a GBP435 million loss a year earlier, when the company took a GBP1.8 billion write-down after a sharp decline in the value of the pound following the U.K.'s Brexit vote increased the value of its liabilities.

The drugmaker said revenue increased 12% to GBP7.32 billion, thanks to growing sales for several new drugs and vaccines. Analysts had expected a net profit of GBP1.14 billion and revenue of GBP7.27 billion. Adjusted operating profit, a measure that strips out one-time items, rose 14% to GBP2.08 billion, beating analyst estimates of GBP2.02 billion.

Glaxo, which reports results in sterling but makes most of its revenue in other currencies, is benefiting from the weakness of the pound. Stripping out the currency effect, adjusted operating profit was flat and revenue was up 3%.

Write to Denise Roland at Denise.Roland@wsj.com

(END) Dow Jones Newswires

July 26, 2017 11:37 ET (15:37 GMT)