Let's Only Sell High-Growth Drugs

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GlaxoSmithKline (NYSE: GSK  ) and "high growth" haven't typically gone hand in hand. Revenue at the pharma giant has grown by an average of just 3.5% over the last five years. But Glaxo has a plan to change that: sell off the stuff that isn't growing.

Sounds good, in theory.

Glaxo sold off an eclectic group of over-the-counter medications in a series of transactions. And today it announced the divestiture of 25 "classic brands" of prescription drugs in Australia to Aspen Global. "Classic brands" is a euphemism for drugs that aren't selling well anymore, mostly because they have generic competition. The drugs, which include Valtrex, Lamictal, Timentin, Amoxil, and Aropax, are on pace for a 25% decline this year.

Getting the drugs off the books -- and picking up around $270 million in the process -- will help the year-over-year revenue comparison. It'll hurt the profit line, but probably not by much since these are likely low-margin products.

Pfizer (NYSE: PFE  ) has taken the opposite approach, choosing to hold onto its older drugs, which it fondly refers to as "established products." The company even added to its portfolio a few years ago. Novartis (NYSE: NVS  ) has a whole division, called Sandoz, to develop and sell generics and Sanofi (NYSE: SNY  ) moved onto the international generic scene with a series of purchases a few years ago.

Which is the better strategy? Dabbling in generics doesn't make a whole lot of sense; volume is key to making a low-margin business work. But it's not like they're hurting anything unless you really believe the drugs are distracting, then I guess selling them off makes most sense. In the bigger picture, I don't think it really matters all that much. Growth will come from launching new drugs that sell well. Plain and simple.

It seems to me that concentrating on how it's going to develop high-growth drugs should be a higher priority for Glaxo than selling off two dozen low-growth ones.

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Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy.

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