GlaxoSmithKline will be investing more R&D dollars in its consumer health care business, where spending on innovation pays off more quickly and more consistently than in the prescription sector, CEO Andrew Witty says.

During its recent earnings call, Witty highlighted research and development for consumer products as a "significant area of opportunity" because of the rapid return on investments and the relatively low risk involved, compared to R&D investments made in Rx pharma (¹ Also see "Alli Sales Slender On Lower Retailer Demand, Flatten GSK Consumer Sales" - Pink Sheet, 28 July, 2008., p. 5).

The consumer business will continue to play an important role in the firm's strategy going forward as the pharmaceutical sector is perceived as "higher risk" and "lower growth," he said.

Bigger ROI From Consumer R&D

According to Witty, the firm invested 100 million U.K. pounds ($195 million at Aug. 8 exchange rates) in consumer health care R&D during 2007 and reaped considerable benefits from the subsequent successes of its product innovations.

Witty cited the 2007 launch of Aquafresh White Trays as an example of how the firm's R&D spending can rapidly turn around to revenue in the consumer business.

GSK spent $12 million to develop the teeth whitening product, reaching sales of $42 million by the end of the first year on the market, yielding a 4-to-1 ratio on sales per dollar to R&D investment, Witty pointed out.

He also referred to Sensodyne Pronamel as an example of ROI for consumer health innovations.

"It is not very expensive to develop a new toothpaste," Witty said, adding that the product's launch in 40 markets led to 72 percent growth.

Advances in consumer products "are innovations which have very high probability of success" and the firm launches "typically 70 percent" of the products it develops for the consumer group, Witty said.

"So you have very low attrition, low cost per project, rapid payback and you see the numbers."

Other consumer health care R&D investments that have produced big payoffs include innovations made for the firm's Abreva , Commit and Lucozade brands, Witty pointed out.

A $2 million investment in 2007 to repackage Abreva cold sore treatment in a pump dispenser produced $14 million in sales the same year - a 7-to-1 sales to R&D ratio.

Similarly, Lucozade Hydro Active nutritional beverage has produced a 7-to-1 return on investment since its 2003 launch. The firm invested $2 million and has since recorded $84 million in sales for the product, according to the firm.

Commit lozenges have paid off 13 times the invested capital since their 2001 launch, generating $658 million in cumulative sales up to 2007, GSK says.

Routes To Consumer Health Growth

In addition to investment in innovation, Witty cited switch, acquisitions and geographic expansion as ways to grow the consumer health care products division while achieving the firm's strategic objectives.

Witty said the Rx-to-OTC switch of the alli weight loss drug is a clear example of the kind of venture the firm wishes to repeat.

"Despite some inter-quarter stocking issues, we've now got a $200 million, top 10 OTC medicine in America from nothing 12 months ago," he said.

Witty also cited the growth of acquired brands such as the Breathe Right nasal strips line - added in GSK's 2006 purchase of CNS - as contributing to growth in the consumer division as well as enhancing the firm's position in the global market (² Also see "GSK Looks To Expand OTC Reach With CNS Brands" - Pink Sheet, 16 October, 2006., p. 10).

While CNS sold Breathe Right products in eight markets, GSK increased the number to 27 markets a year after the acquisition and will reach 43 before 2009, Witty said. There is "absolutely no rocket science to that," he commented.

"That is just disciplined grinding out sales growth as you apply good quality brands into different markets."

Glaxo's ongoing efforts to expand into emerging markets will create opportunities to apply its innovation practices and switch expertise to new territories, Witty added.

"There are not very many global health care companies ... probably two or three who play in America, Europe and the emerging markets and we're one of them."

He pointed to Japan as a specific area for potential expansion. GSK has a "very small presence" and commands less than 0.5 percent of the country's OTC market, 35th among consumer products firms operating there.

Specific areas for consumer business opportunity in Japan are oral care, where the firm currently ranks 4th with 13 percent of the market, and the nicotine replacement therapy market, according to GSK data.

Consumer Health Fits Broader Strategy

Increased investment in consumer health will boost organic growth as well as serve the strategy of further diversifying the business, Witty said.

GSK's increased emphasis on its consumer business may help offset the difficult times ahead expected for the pharmaceutical industry as "an unprecedented number of products lose patent protection," Witty said.

He outlined three strategic priorities intended to reduce the firm's risk and improve long-term financial performance: grow a diversified global business, simplify its operating model and deliver more products of value to consumers.

"These new strategic priorities will evolve GSK into a company that has a balanced group of health care businesses and a lower overall risk profile" and "also point to a more disciplined allocation of capital across all our different business areas," Witty said.

Second-quarter sales for GSK's consumer unit dipped 1 percent to $1.9 billion. The company cited weaker NRT product sales in the face of generic competition and safety concerns about Pfizer's Chantix smoking cessation drug and slower alli sales linked to retailers' inventory stocking cycles

- Jessica Lake (j.lake@elsevier.com)

GSK Leverages Higher Return On OTC R&D Investment To Drive Growth – Witty

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