GlaxoSmithKline sees another round of defensive mergers coming in the pharmaceutical industry, CEO J.P. Garnier declared during a securities analysts meeting in London Feb. 14.

"My sense is there are some companies with a very difficult future and therefore, sure, the integration and some of the defensive mergers that you might think about are likely to happen at some point," he said.

The upcoming merger round will underscore the astute timing of the Glaxo Wellcome/SmithKline Beecham merger, Garnier maintained.

"I think it's very good to have done the merger when we did it, because now that the 'perfect storm' might be ahead of us...our boat is stable," he said.

"Timing is always very important in those things. You don't want to be distracted internally when everything is changing externally."

Garnier, a vocal advocate of the growth through merger strategy for SmithKline and GSK, is not bashful about stirring up merger speculation for other companies.

During GSK's inaugural analysts meeting a year ago, Garnier casually listed a number of companies potentially up for sale, including Schering-Plough and Biogen (¹ Also see "GlaxoSmithKline Is Mouthful But Still Hungry: Is Next Course Japanese?" - Pink Sheet, 26 February, 2001., p. 3).

The two factors that will continue to drive defensive mergers are thinning pipelines and patent expirations, Garnier said.

"We'll see what those two elements are going to produce in terms of the structure of the industry, but I cannot believe that this is going to be a status quo-kind of industry when lots of pipelines are kind of thin, and patent expirations loom large for some of our peers."

The pharmaceutical industry has been facing what is probably its most significant patent expiration period ever. In 2002, products representing more than $10 bil. in branded sales could be facing generic competition (² Also see "ANDA Approvals In 2002 Could Affect Over $10 Bil. In Brand Sales" - Pink Sheet, 14 January, 2002., p. 8).

Garnier suggested that the stock prices of some pharma companies seem insupportable.

"I cannot believe some of the stock prices of companies in the pharmaceutical industry who are facing 40%-50% of their sales going down," he said. "Maybe they have a decent pipeline, but hey wait a minute, this is going to go away, you know? Hello?"

The Glaxo/SmithKline merger, which closed in 2000, was done to make the company "lean and fit to face the challenges of the future," Garnier said.

The merger has delivered critical mass to GSK in key markets. In the U.S., GSK holds an 8.7% overall market share with 8,000 reps (behind Pfizer) and is ranked number one in Europe with 9,000 reps and a 7.2% market share.

GSK's sales reps are also ranked either first or second in quality by general practitioners, pediatricians, pulmonologists, internists and psychiatrists, Garnier said, citing Scott-Levin data from 2001.

While "there might be a controversy about critical size in research, there's no controversy about critical size in marketing and selling," he declared. "If you do not have the worldwide infrastructure, if you do not have the size and flexibility in terms of marketing and selling, you just simply do not play anymore."

"It is a competitive advantage. That is one of the reasons why people come to us - even mid-size pharmaceutical companies - and say 'please help me with my launch, I have a promising asset, but I'm not sure I can bring it up there.'"

"Partner-of-choice is not a figment of my imagination. It's happening," Garnier declared. "People are coming to see us, because they see...the opportunity. You launch a drug with GlaxoSmithKline, you can stand out of the crowd, and you can get immense returns from the same assets."

Garnier listed 16 in-licensing deals struck since the merger, including Bayer's vardenafil for erectile dysfunction; four HIV and central nervous system compounds through the Shionogi joint venture; and Roche's ibandronate for osteoporosis.

Garnier acknowledged, however, that its marketing advantage may not be "long-lasting." While "Pfizer and GlaxoSmithKline are clearly one scale above everybody else, some day some other companies might catch up with us somehow."

One challenge regardless of size is getting enough face time with physicians, Garnier noted. "Physicians spend nine minutes on average per day in front of sales representatives. There are 15 sales representatives trying to see him that day. Not everybody is going to get through."

"It explains why some companies feel one way to [increase access] is to buy them dinner, buy them lunch," he said. "We do not agree with that, and we think that this is going to backfire....The better companies in the industry are cleaning up their act at the speed of light, because we have made it clear that we will not tolerate" it.

Another major post-merger asset is enhanced R&D, Garnier said. "We thought we could transform R&D, not just slap it together between the two companies, but take the merger...as a way for us to transform the way we do R&D."

He pointed to the Shionogi joint venture as evidence of what makes GSK an R&D "partner of choice" (³ Also see "GSK/Shionogi Joint Venture Will Have HIV Integrase Inhibitor In Phase II" - Pink Sheet, 30 July, 2001., p. 22).

"Shionogi, they talked to the whole industry, everybody wanted this deal so bad. How come we got it? It's certainly not because we signed the biggest check, there were lots of Swiss around the table," he quipped.

"We don't sign the big checks among the Americans either. Our scientists were on the go, they knew what they were talking about."

GSK restructured its R&D program into individual Centres for Excellence in Drug Discovery to foster independence from the corporate offices and promote competition between the sites.

The CEDDs have each formed product portfolios: neurology; vaccines; psychiatry; cardiovascular, cancer and urogenital; anti-bacterial and host defense; respiratory and inflammation; and metabolic, musculoskeletal and viral.

Garnier described the appeal of the structure for recruiting scientific staff. "People have the passion. They can get independently wealthy if they hit gold with a few compounds. They are young scientists. They don't have seven layers of management between them" and R&D Chairman Taichi Yamada.

With GSK's incentive system, "you can write your own ticket if you are on the team that discovers lots of major products," Garnier said. "The projects that are so-so are being dropped out. They die because nobody wants to work on them."

"People don't want to waste their chance by working on a project that is dead but nobody is saying so. One of the plagues of big pharma has always been that that dead projects keep walking."

The CEDDs impact will not become clear until the 2004-2005 timeframe, he said. "It's going to become much more evident to you by '04-'05, because that's the time it's going to take to extract from that series of compounds the ones that have blockbuster potential."

"You're going to get R&D reviews not soon. I want to show you the Phase III stuff. I don't want to show you Phase I and get you mesmerized with science, because that won't matter if the product dies in Phase II and beyond," Garnier said. "So we're going to wait until we have a substantial amount of news, but we will probably have some communication of some of the score card statistics to show you what's happening to the pipeline."

Garnier used the R&D discussion to plug the company's stock to investors. "By the time you see that the pipeline is real, the P/E ratio will not be as cheap as it is today, so the smart people are jumping in now, and we know this is happening in the U.S. I can tell you I have no problem selling the stock in the U.S."

For 2002, GSK expects to launch five new molecular entities or indications: vardenafil for ED with Bayer; Bexxar for non-Hodgkin's lymphoma with Corixa; the Infanrix DTaP, hepatitis B and polio vaccine combo; Advair for COPD; and dutasteride (now called Avolve ) for benign prostatic hyperplasia.

The expected filings for 2002 include the NCEs Ariflo for COPD and ibandronate (with Roche) for osteoporosis. GSK's line extension filings will include Lamictal for bipolar depression; Wellbutrin XL ; and the protease inhibitor fosamprenavir (with Vertex). In addition, MMR-V will be filed in the EU.

The company has 105 projects in the clinic: 41 line extensions; 22 vaccines; 15 Phase II NCEs and 27 Phase I NCEs. Many of the NCEs are "trailblazers; they are first in their class," Garnier said. "A few are intelligent follow-throughs, copycats. But most of them are really, truly unique."

GSK Sees New Round Of “Defensive Mergers” Ahead, CEO Says

More from Archive

More from Pink Sheet