An estimated 43.8 million, or 19% of the adults, in the US smoke cigarettes as per the data released by Centers for Disease Control and Prevention (CDC). Current regular smokers or people who used to smoke regularly account for almost 80-90% of the chronic obstructive pulmonary disease (COPD) patients - a chronic disease that makes it hard for an individual to breathe. GlaxoSmithKline (GSK) has collaborated with Theravance (THRX) and has recently come up with a drug once again to treat this disease.
COPD -prevalence of the disease in the US market
COPD is one of the main diseases leading to a number of deaths per annum in the US. According to The National Heart, Lung and Blood Institute (NHLBI), as many as 27 million people in the United States are affected by COPD. This number is expected to increase further as smoking is becoming increasingly common in the young generation of the US. Health experts believe that many people who suffer from this disease may not have been diagnosed yet.
Currently, there is no cure for COPD. However, medicines are available on the market to treat this disease. Once the damage to the airways and lungs has occurred, the reversal of the negative effects is not possible to date. Only the pace of progression of the disease can be slowed down.
What is there in it for GSK?
The straight away gain for the company is the $30 million milestone payment that Theravance would be paying GlaxoSmithKline after the launch of BREO ELLIPTA in the US market.
The successful addition of BREO to GSK's product portfolio is likely to add growth to the company's top line as the new treatment option becomes available. It is the first once daily ICS/ LABA for maintenance treatment of the disease. Also, the company has the highest market share in the respiratory drugs segment in terms of revenue generation (as shown in the table below). This also indicates the effectiveness of the company's medicines.
Source: Company reported data
Current revenue driver - Advair
The company's asthma and COPD drug, Advair, contributes approximately 20% of the total revenue. The company currently has a huge dependence on this product which will see its inhalation device patent expire in the US by 2016 while the active ingredients patents had already expired in 2010.
However, the FDA has laid stringent regulatory guidelines for the generic companies which need to be met before they will be granted an exclusive right to the new version of the product. In fact, Mylan President Rajiv Malik said: "We still believe that the hurdles for a generic Advair remain high and that there will be a very limited number of companies who are able to successfully bring a generic version of this complex product to market." Ever since the expiration of Advair's ingredient patent, GlaxoSmithKline had been working on the assignment and has recently launched BREO ELLIPTA for the treatment of COPD. It was comparatively easier for GlaxoSmithKline to come up with a medicine that competes at par with its Advair. However, BREO does not treat asthma.
Another gem in GSK's pipeline
GlaxoSmithKline is focused on reducing its dependence on Advair which is likely to expire in the next few years by actively launching new competitive medicines which will effectively replace Advair. The company's drug, Anoro, is currently being reviewed by the advisory committee of FDA. The drug has received majority of the panel's votes in its favor which increases the probability of approval of this medicine which will treat COPD.
The FDA is looking forward to approve the drug with the same efficient results as Advair and that triggers the same response at the same dosage level. This is rather easier for GlaxoSmithKline to achieve who was the original manufacturer of Advair as compared to other players in the market.The company's successful launch of BREO and the potential approval of Anoro are likely to help the company in sustaining and increasing its market share in the respiratory segment.
The company is currently generating an operating margin (ttm) of 25% while the industry average stands at 22.2%. Considering the rigor with which the company is coming up with drugs that are up to the standards of FDA and the way it is about to secure its major patented drug, Advair, back in to its product portfolio will help GlaxoSmithKline in maintaining its high margin.
In light of the recent steps that the company has been undertaking, I believe GlaxoSmithKline will be able to maintain its lead in the respiratory segment as its new drugs replace the expiring patent of Advair.
While the company is currently trading at a significant discount based on its PE valuation, it is also offering an attractive dividend yield of 4.52% in an industry where 1.77% is the normal level.