British pharma giant GlaxoSmithKline (GSK 1.26%) is at the epicenter of the industrywide crisis known as the patent cliff. Because of the loss of patent exclusivity for its top-selling lung drug Advair and subsequent payer issues in the U.S. following aggressive pricing structures from competitors, the company has seen revenue plummet and its market cap steadily erode, and it's had to undergo a massive reorganization effort simply to buoy its bottom line.
Based on Glaxo's third-quarter conference call, though, management appears to be decidedly upbeat about the future, despite the significant headwinds facing the company. With that in mind, let's take a deeper look at the call, keying in on five things management wants investors to know going forward (quotes courtesy of S&P Capital IQ).
The U.S. pharma landscape may have changed forever
Kicking the call off, CEO Andrew Witty touched on the company's struggles to stem the loss of its market share in the pivotal respiratory drug market. Noting the slower-than-expected launches of newer respiratory drugs such as Anoro and Breo Ellipta and the negative impacts of competitor pricing regimens for Advair that together led to an 8% drop in revenue for the unit year over year, Witty said: "It does feel like a new reality in U.S. primary care. ... All launches appear to be, in primary care, much slower."
Perhaps more problematically, CFO Simon Dingemans said later on in the call that we should expect: "Advair revenues in the U.S. to continue to decline" and that total global respiratory sales should grow "in 2016."
All told, we aren't likely to see Glaxo retain its overwhelmingly dominant position in the respiratory drug market because of the negative impacts of AstraZeneca's (AZN +0.00%) Symbicort and, to a lesser extent, Merck's (MRK +2.85%) Dulera on the formulary decisions of the industry's leading names. So this environment is indeed a new reality for Glaxo and its shareholders.
Cost savings, anyone?
With Glaxo's most important drug segment expected to continue its decline at least until 2016, management is actively searching for creative ways to save money. Chief among them, Witty noted that the transaction with Novartis (NVS 0.80%) earlier this year -- that saw the company exchange its oncology unit for a portion of Novartis' vaccine business -- should result in $1.6 billion in annual cost-savings. Although the details of how these savings would be generated weren't disclosed, Witty did let us know that the Novartis transaction "is on track for completion in the first half of next year."
Because this is going to be a rather complex process with its own unique costs, management has decided to keep its dividend payout the same next year to cover the expense of integrating this unit into its own vaccine business.
Despite high-profile failures, R&D is alive and well
Glaxo's clinical program has made headlines this year more for its high-profile failures, such as its cancer vaccine MAGE-A3, than for its achievements. Undeterred, Witty pointed out, "In 2015 alone, we expect around 250 discrete pipeline product launches around the world."
While this number sounds truly impressive, it's important to provide some context. What Witty meant here is that 250 products will be launched in various markets around the world -- i.e., one product per market, not 250 individual products. Moreover, we aren't likely to see any particular product launch successfully replace lost Advair revenue, meaning that further erosion on the top line is probably in store.
Glaxo's story right now centers on savings, not growth
Witty nicely captured Glaxo's near-term prospects on the call: "Despite the challenges that the U.S. respiratory market has brought during 2014, the Novartis transaction, the reshape of the pharma business, and the substantial R&D progress, marked major steps forward in our long-term strategy."
Glaxo has decided to avoid costly acquisitions to buy its way out of the patent cliff, as many of its peers have done, and is instead focusing on lowering operating costs until a major breakthrough on the R&D front finally comes to fruition. To entice shareholders to stay the course while this lengthy process unfolds, management plans on returning up to $6.4 billion to shareholders through a special B-share transaction next year.
Foolish final thoughts
Outside its HIV joint-venture business, ViiV health care, Glaxo doesn't have much to offer investors on the growth front. The company has been stonewalled by most private payers during the launch of its newer respiratory medicines, and the clinical failures in oncology have left the cupboard bare in terms of major new drugs. So I'm not sure this special B-share transaction will ultimately be enough to stop the stock's double-digit decline. My plan of action is therefore to watch this top dividend stock safely from the sidelines for now.
