GlaxoSmithKline PLC is bracing for a challenging year in 2015, having made deep concessions on the price of its top-selling drug, Advair, in order to secure contracts with U.S. payers. Now it is battening down the hatches in preparation and looking outside the box at new ways to extract shareholder value.

During the company’s third quarter sales and earnings call Oct. 22, management unveiled a new cost cutting program. The company said it plans to save £1 billion ($1.6 billion) over three years, with half the savings coming in 2016. The U.K.-based company also said it is exploring the possibility of an initial public offering for ViiV Healthcare , its HIV-centric joint venture with Pfizer Inc. and Shionogi & Co. Ltd.

The changes come as GSK’s respiratory strategy has failed to deliver. The company’s ambition has been for new drugs like Breo Ellipta (fluticasone/vilanterol) and Anoro Ellipta (umeclidinium/vilanterol) to gain traction in the market before sales of its blockbuster inhaled corticosteroid/long-acting beta2-agonist (ICS/LABA) Advair Diskus (fluticasone/salmeterol) slipped amid new competition, pushback from payers and eventually generic entrants Also see "GSK’s Big Push To Maintain Its Respiratory Reign" - In Vivo, 18 November, 2013..

The story has not played out the way GSK envisioned. Early sales of Breo, the first once-daily inhaled ICSC/LABA approved in the U.S. for chronic obstructive pulmonary disease and asthma, and Anoro, the first once-daily LABA/long-acting muscarinic antagonist (LAMA) approved for COPD, have been downright dismal for a primary care category launch.

Third quarter sales of Breo, which launched in the fourth quarter of 2013, were just £8 million ($12.8 million). Anoro, which became available in April, generated just £1 million ($1.6 million) in third quarter sales, GSK reported.

Pressure On Respiratory Expected Through 2015

Meanwhile, sales of Advair – by far the British drug maker’s top-seller – are falling. Advair sales declined 14% on a global basis to £3.11 billion ($4.98 billion) for the first nine months of the year. In the third quarter, sales of Advair in the U.S plummeted 25% to £441 million ($706 million), driving down respiratory sales and the broader business. GSK’s consolidated sales fell 10% to £5.65 billion ($9.05 billion).

“2014 has been disappointing in terms of the impact of the U.S. pricing, but … it hasn’t, in my view, changed the strategic future of the company at all,” GSK CEO Andrew Witty insisted during the company’s quarterly call on Oct. 22. “The decisions and the moves we’ve made during this year are absolutely in line with the strategy that I’ve outlined back in 2008 and I think we’ve stuck to it very diligently, a strategy not dependent on M&A.”

The pressures besetting the respiratory franchise are expected to continue into 2015 with Advair expected to return to growth in 2016, GSK said. Still, growth could be short-lived if generics enter the market as some expect in late 2016 or 2017.

“We will also see Advair volumes increase as the product regains coverage on some of the key largest formularies,” Witty said. Additionally, GSK expects the launches of Breo and Anoro to accelerate as access to the drugs improves.

But Bernstein Research analyst Tim Anderson warned in a same-day research note that GSK’s 2016 growth target likely implies “that 2015 [respiratory] franchise sales will likely be lower year-on-year versus 2014.”

GSK is implementing the new cost savings program to help offset the lower sales, though little of the impact will be felt in 2015. Witty declined to provide details on the new restructuring initiative in terms of where cost cuts will come from, but the firm said they would come from commercial operations, global support functions and R&D/manufacturing across pharmaceuticals. There will be no change to the size of the respiratory sales force – or any sales force for that matter – as a result of the cost cutting, he added.

“We’ve identified things we believe are not going to affect the performance of the products,” he said. The cost of the program is expected to be £1.5 billion and will come on top of other initiatives already underway.”

A Stand-Alone ViiV Being Explored

GSK also announced it may spin off part of ViiV Healthcare as it looks for ways to return value to shareholders. Such a move would allow shareholders to better appreciate ViiV’s value and take advantage of a high-growth phase for the business fueled by the launch of the HIV drug Tivicay (dolutegravir).

The subsidiary was established in November 2009 as a joint venture with Pfizer and later added Shionogi as a partner in 2012. Talk of a possible spin-out has followed ViiV from the outset Also see "Glaxo and Pfizer Form HIV Venture, But A Spin-Off Could Be In The Wings" - Pink Sheet, 20 April, 2009.. GSK contributed the bulk of the portfolio, pipeline and investment in ViiV. Today it owns a 78.3% stake in the business, Pfizer owns 11.7% and Shionogi owns 10%.

Analysts believe a Viiv stock market spin-off would be well received by investors. “We believe it is possible that ViiV could IPO at a valuation as high as $14 billion to $18 billion,” Leerink’s Seamus Fernandez said in a reaction note, adding that ViiV could also be viewed as a potential M&A target for other companies committed to HIV/infectious disease development, such as Bristol-Myers Squibb Co.

A stand-alone ViiV would be in the top 30% to 40% of the FTSE 100 index listed on the London stock exchange, making it larger than Marks and Spencer, Sainsbury’s and other well-known corporations in the U.K., Witty said.

The business generated £1.39 billion ($2.23 billion) in 2013 and is growing. It generated £373 million ($598.9 million) in the third quarter, up 18% over the year-ago quarter at constant exchange rates, and £1.04 billion ($1.67 billion) in the first nine months of the year, up 12% over the first nine months of 2013 at constant exchange rates.

Growth is being driven by the launch of Tivicay, a once-daily integrase inhibitor approved for the treatment of HIV in 2013 Also see "Tivicay Launch Returns ViiV To HIV Spotlight And Growth" - Pink Sheet, 19 August, 2013.. It was the first new approval for ViiV since the unit was established in 2009. At the time, GSK and Pfizer each contributed their current HIV drugs to the joint venture, all part of an effort to combine their resources to better compete against the HIV market leader Gilead Sciences Inc.

Before the introduction of Tivicay, sales in the business unit had deteriorated as it lost drugs to generic competition, including the antiretrovirals Combivir and Epivir. Aside from Tivicay, ViiV’s other top-selling drug is the backbone nucleoside reverse transcriptase inhibitor therapy Epzicom (abacavir/lamivudine). In August, ViiV secured FDA approval of a fixed-dose combination called Triumeq combining the active drugs in Tivicay and Epzicom.

Part Of A Bigger Strategy To Reshape GSK

The revelation about ViiV further highlights how GSK is working to refine its business strategy and focus on core areas. In April, the company announced a swap to trade its marketed oncology portfolio for Novartis AG’s vaccines business and establish a joint venture with Novartis for its consumer health care business ([A#14140421007]).

That transaction is expected to complete in the first half of 2015, at which point GSK will begin to report much more distinctly on its core vaccines, pharma and consumer healthcare businesses. “What we are going to have here is three very, very clear global businesses,” Witty told analysts.

GSK’s reshaped structure will also allow for better efficiencies. “It really gives us a chance to rethink and put pressure on our corporate costs and overhead costs and to really use those three businesses to expose and leave only the absolute minimum of non-allocated costs,” the chief executive added.

GSK committed to maintaining its dividend at the same level in 2015 as 2014, backing off an earlier promise to increase it, and plans to return another £4 billion to shareholders after completing the Novartis transaction.

Global R&D Chairman Slaoui To Oversee Vaccines; Vallance Promoted

Management Changes

Abbas Hussain

Was: President, Pharmaceuticals Europe, Japan and Emerging Markets
Now: President, Global Pharmaceuticals

Moncef Slaoui

Was: Chairman, Global R&D and Vaccines
Now: Chairman, Global Vaccines

Patrick Vallance

Was: President, Pharmaceuticals R&D
Now: President, Pharmaceuticals R&D (title is the same, he will take on additional accountabilities as a result of the changes to Slaoui’s role)

Emma Walmsley

President of Consumer Healthcare for GSK
Now: CEO Designate for the Consumer joint venture with Novartis (subject to transaction completion )

As GSK revamps its business, the company announced the same day a series of top-level management changes to oversee the changing portfolio, which will include three business segments: Pharmaceuticals, Vaccines and Consumer Healthcare.

In a big shift, Chairman-Global R&D and Vaccines Moncef Slaoui will change his focus entirely to vaccines. Slaoui has led R&D at GSK since 2006 and took over vaccines research in 2011.

Slaoui is “a highly accomplished vaccine expert and will work with our current management team there to integrate the Novartis business, a highly complex piece of work and the right person to lead it,” Witty said.

The pharmaceutical R&D top spot will go to President-Pharmaceuticals R&D Patrick Vallance. Abbas Hussain, currently president of pharmaceuticals in Europe, Japan and emerging markets, will run GSK’s global pharmaceuticals business, taking over the leadership of the U.S. and working closely with North American Pharmaceuticals head Deirdre Connelly. Emma Walmsley, who has served as GSK’s president of consumer health care since 2011, will lead the joint venture with Novartis.

“These changes put some of the industry’s most experienced leaders in our enterprise leadership positions and will be responsible for implementing the transaction in vaccine and consumer and delivering the portfolio transformation in pharma,” Witty said.

The new leaders will need to execute well if GSK is to continue to keep investors’ confidence. As Leerink’s Fernandez noted, “GSK management must upgrade its execution meaningfully in 2015 to deliver on the promise of real upside for long-term investors. To date, evidence remains elusive.”

GSK Reveals Big Changes As 2015 Growth Prospects Fizzle

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