Glaxo Follows the Biotechs

Motley Fool Income Investor pick GlaxoSmithKline (NYSE: GSK  ) took time out on Wednesday to boast about its cancer drug pipeline. The pharmaceutical giant pointed to four experimental drugs that will begin late-stage testing in 2006, bringing the number of experimental medicines in the company's late-stage oncology arsenal to seven. That's an impressive amount, even for the world's second-largest pharmaceutical manufacturer in terms of sales.

Glaxo's research and development chairman noted that the latest update shows just how far the company's oncology work has come. There is no denying this fact: The new concentration on cancer also reflects something else. Glaxo is shifting from its traditional pharmaceutical giant model and following a well-worn path carved out by the biotech industry.

Glaxo, like a lot of major drugmakers, has traditionally swung for the fences when it comes to R&D. This meant targeting medicines that offer large markets and recurring sales. The firm's marketed portfolio reflects this bias to some extent. Its top two sellers in the third quarter, Advair for asthma and Avandia for diabetes, target chronic conditions, and each addresses a market of more than 20 million people in the U.S. alone. These two drugs together accounted for almost 20% of Glaxo's revenue in the quarter. By contrast, the firm's cancer portfolio brought in less than 5% of revenue.

It's not surprising that Glaxo had neglected cancer. In recent years, oncology has been the domain of biotechs. Large pharmaceutical companies saw the area as more risky -- while cancer as a whole is a big killer, markets for individual types of cancer are not huge, and the opportunity for repeat sales is lower.

Glaxo is gearing up to change that division of labor. One of the drugs in late development, Tykerb, targets breast cancer, and as a result would compete with Genentech's (NYSE: DNA  ) Herceptin. And, as it turns out, cancer drugs are a pretty good business. Prices for newer oncology drugs are high, and reimbursement by payers is virtually guaranteed if the treatment is proven to be effective. For Glaxo, following the biotechs looks like a good idea.

For more on Glaxo:

• A Balanced Attack for Glaxo
• Glaxo Keeps It Going
• The Future of Cancer Therapy

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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.