Glaxo pipeline cure still in question

Glaxo’s ‘patent cliff’ has struck again.

Glaxo progresses

The fourth quarter brought more progress for GlaxoSmithKline, the world no. 9 pharma by drug revenues, which is trying M&A to treat a chronic case of patent cliff. Glaxo shares erased losses from earlier on Wednesday, trading slightly higher after earnings were released. But the stock is now dithering. Investors are trying to make up their minds about how to react. Volumes and turnover rose year-on-year, lifting net profit to £1.22bn, above the £992m expected. New medicines helped, particularly Shingrix, a shingles vaccine, sales of which more than doubled to £221m. But the group also flagged a 5%-9% EPS drop in 2019. The forecast is pegged on a recently approved generic version of Advair, GSK’s best-selling drug, till recent years.

Costly cure

Part of GSK’s strategic blueprint for reducing development risk has also been aired in recent days with the tie-up with Germany’s Merck KGaA. The deal sees Glaxo acquire rights to a new-generation cancer immunotherapy. The cost is $4.2bn. Investors are aware that such outlays are necessities with pipelines maturing at alarming rates. But the market still winces on such news, including on Wednesday, when the group said that similar tie-ups “can be expected going forward”. These will eat up savings – seen at £500m a year – from splicing GSK’s consumer unit into Pfizer’s and spinning it off. Note the sharp negative reaction by Glaxo shares to the acquisition of Tesaro late last year.

Shares lag

Sure, GSK’s drive to tidy-up cash leeching developments continues.  Seven such projects were ended between Q2 and the end of the recent quarter. But market tolerance for capital intensive remedies remains in question. With GSK flagging continued generic risk ahead the stock is unlikely to embark on much progress for the year just yet. After a 12% advance in 2018, it has since lagged even a sluggish FTSE with a rise of 2.6%.