Why GSK will struggle to mount AstraZeneca-style revival

“Tremendous operational challenges”; “complexity and corporate sprawl”; and an “ailing”, “thin” or “flagging” pipeline of innovative drugs.

Media reports about GlaxoSmithKline in 2021? No, AstraZeneca eight years ago.

It’s easy to forget how tarnished the current golden child of UK pharmaceuticals was back then. AstraZeneca traded at a whopping discount to the rest of the European pharma sector, including blue-chip peer GSK. 

Now the tables have turned. Astra is, of course, battling questions over its Covid-19 vaccine but its reputation as an innovative pharma outfit is assured — something bordering on unimaginable when Pascal Soriot arrived as chief executive. 

GSK is the one besieged by concerns over a barren pipeline, its management, and strategy. Its pharma sales have been pretty flat for years. After the pledged split from the consumer business, the pharma and vaccines division could trade at a single-digit multiple, say UBS analysts — a huge discount to peers. 

There are some lessons from Astra’s revival. But the task for rejuvenating GSK, which now counts activist Elliott Management as a shareholder, looks even more onerous.

There is, at least, one problem GSK doesn’t have. In 2013, Astra faced the evaporation of a fifth of its revenues as multibillion-dollar statin Crestor lost patent protection. GSK’s next hole will be loss of exclusivity on HIV drug dolutegravir towards the end of the decade. Next week’s first quarter numbers are expected to be weak: Covid has disrupted the rollout of vaccinations against other illnesses. But that should mean pent-up demand for Shingrix, GSK’s shingles vaccine and its most important product in years.

Where will the next one come from? One lesson from Astra’s revival is that you don’t cut your way to success, at least not in pharma. (And there is speculation that Elliott may have its sights trained on cost-cutting.) 

Soriot boosted R&D spending to close to $6bn annually, or approaching 30 per cent of product sales at its peak as revenues dwindled. GSK boss Emma Walmsley has moved in the same direction: R&D spending in the pharma unit has risen from about 15 per cent of sales to closer to 20 per cent.

But each pharma chief executive is hostage to their inheritance, given drug development timelines. Soriot’s, contrary to popular belief at the time, was quite good: Astra had interesting biologics and oncology prospects. Its challenge was to focus on them — and, in a scramble of sales and partnerships, to free up the money for development.

What does Walmsley have in the cabinet? Dispelling the most common answer — nothing exciting — is the company’s key challenge at a June investor day focused on the pipeline. But the choices of her predecessor don’t inspire huge confidence. 

Andrew Witty cut R&D spending at a time when advances in sciences meant others were investing more. His inclination towards primary, not specialty, care is out of favour. A three-way deal with Novartis that sold GSK’s on-market oncology products, the hottest of hot areas, to bulk up in consumer and vaccines looked odd at the time, and even more so now.

If no one has built the future, then you have to buy it. And with an FDA approval on Thursday, GSK has had some success from its $5bn purchase of Tesaro in 2018 to rebuild in oncology.

But Soriot, a frenetic dealmaker, had the advantage of a pristine balance sheet. One plus point of next year’s demerger for GSK (as well as separating two businesses that appeal to very different types of investor) is to send debt with the consumer business’s cash flows.

That there is still lobbying from some quarters for a partial IPO to raise further funds to spend on the pipeline — another area of idle talk about Elliott’s plans — tells you something about the perceived scale of the challenge.

GSK may have lost some of its British establishment sheen, particularly as it’s been outgunned by its rival on the Covid vaccine. But it retains enough to think that the more drastic, break up and sell for parts thinking doing the rounds since Elliott’s arrival wouldn’t fly.

Those looking for a quick fix, from GSK’s management or its new shareholder, may ultimately be disappointed. (And people familiar with Elliott’s approach say it isn’t averse to sticking around for the long haul where it sees value). Drug development, even with a fair wind, takes time. And so does resurrecting confidence in an R&D operation.

helen.thomas@ft.com
@helentbiz