GlaxoSmithKline's Q1 Call Has Muted Mention Of Relovair

Apr.29.12 | About: GlaxoSmithKline (GSK)

I would like to provide balance, as a preamble to my article, by stating that although there was nominal mention of Relovair in the actual transcript of the Q1 Earnings Call itself, the official press release of the Q1 results did contain several lines that addressed the completion of a Relovair registration program and made reference to some top line results (which were not disclosed in the press release) of the direct trials comparing it to Advair.

GlaxoSmithKline Pharmaceuticals' (NYSE:GSK) Q1 2012 Earnings Call had Andrew Witty, CEO of GSK, paint a very optimistic portrait of the company for the first quarter of 2012. Andrew has done a remarkable job in transforming both the culture and focus of the company. As a result of his superb global strategy, he has reoriented GSK to sustainable performance. This is especially important in the face of geopolitical instability in the Middle East, greater governmental price controls, the severe pandemic debt-crisis in the European markets, and a tsunami of regulatory and competitive pressures. In spite of the turbulence of this operating landscape, GSK, under Andrew's guidance, delivered 2% sales growth and 7% growth in EPS for Q1 2012. In my humble estimation, especially when you factor in all the pressure points, the performance has been quite good.

Additionally for those who have a long position on GSK based on the hefty dividend that it offers, you will be overjoyed in the cash generation strategy that GSK has fortified by increasing its share dividend by 6% to 17 pence/share. GSK has also increased its expectation for share repurchases for the year to the range of GBP 2 billion to GBP 2.5 billion. Both these maneuvers will work to increase shareholder value.

Andrew advances the opinion that the underpinnings of the company rest with its late stage pipeline of therapeutic entities and it does appear that it is somewhat promising. In his own words, he states,

We have received positive Phase III data on 3 assets: our HIV integrase inhibitor, albiglutide for diabetes and our BRAF inhibitor for treatment of melanoma cancer. We also filed our quadrivalent flu vaccine in the U.S. and Europe during the quarter. And we now have 4 products with sufficient data in-house to file in 2012 and another 4 products which we expect to complete Phase III registration studies for this year.

What was ostensibly muted in terms of specific discussion points was articulation around the status of Relovair. As background, Relovair is a combination of two drugs: A LABA, vilanterol, and an inhaled corticosteroid, fluticasone furoate. The combination is logically based on the fact that Asthma, and Chronic Obstructive Pulmonary Disease (COPD), has a two-component disease process that occurs simultaneously: bronchoconstriction and inflammation. A Long-Acting Beta2 Agonist (LABA) is a medicine that works by relaxing the muscles in the walls of the airways, allowing the airways to expand (known as bronchodilation) and leading to improved lung function in COPD and Asthma patients. The corticosteroid component of Relovair will address the underlying inflammation that is associated with both Asthma and COPD.

There was a question following the earnings report with respect to a LAMA (Long Acting Muscarinic Antagonist) being developed. Additionally there was a tangential discussion about possibility of an ideological bias by the FDA towards twice-a-day formulation. This seems to be unfounded and certainly counter-intuitive. But, for the most part the discussion with respect to Relovair was minimal. Why this is so important is that Relovair is the heir apparent to GSK's best-selling asset: Advair, for the treatment of Asthma and COPD. Relovair, to the uninitiated, is vying for the once-a-day treatment, as compared to Advair's twice-a-day treatment, for Asthma and COPD. Advair (salmeterol and fluticasone propionate) is without question, the single largest asset of GSK delivering annual worldwide sales of approximately $8 Billion. It represents a significant portion of GSK's portfolio of products and has supremacy relative to market penetration (in the US) when compared to its competitors Symbicort (Astra Zeneca-AZN), and Dulera, (Merck-MRK).

The imminent problem is that Advair, in some of its forms, is (combination patent has expired) or will be heading to the edge of the patent cliff in 2013-2025 (as indicated by the 2011 annual report). Moreover, as has been the experience in other countries (most notably the European Market), Advair's patents have either expired, been ignored, usurped, or challenged by generic formulations of Advair. Elpen, a Greek Pharmaceutical Manufacturer, has a form of Advair named Rolenium, but it is in a totally different dry-powder presentation and dispenser than Advair. Parenthetically, although this example of a generic has the same ingredients, you can easily decipher from its instructions that it is cumbersome to use and not patient-centric. Nevertheless, it exists. Additionally, both Sandoz (a division of Novartis-NVS) and Teva Pharmaceuticals Industries Limited (NYSE:TEVA) are attempting to gain generic entries that would thwart Advair's market presence.

In light of this, a more proactive mention of Relovair and a status update would have been meaningful in terms of authenticating the succession plans for Advair and invigorating investor confidence. Relovair has had bifurcated clinical results in its two clinical trials so far, showing superiority in one, and only numerical improvement in another, relative to twice-a-day Advair. This may have been an ideal opportunity to put these top line results in the best possible light.

Some believe that the biggest challenge will be with the payers of Relovair. The question becomes, "Is it relevant to have a once-a-day version of an "Enhanced Advair" at a higher cost, or, will the various Healthcare Insurers and pharmacy benefit managers (PBMs) be content in providing patients a generic formulation of Advair at a dramatically reduced price?" It is my belief, and hope, that the propensity for greater patient use, and patient adherence, with a once-a-day formulation coupled with demonstrated superiority in clinical endpoints, outcomes, and mortality data, should weigh heavily in the formulary acceptance of Relovair by payers. If products such as Relovair establish a role in the prevention of disease relapse, or, in the reduction of acute exacerbations of COPD then it would be suitably positioned, and aligned, with the overarching goal of healthcare: prevention.

No doubt as Relovair, which is being developed by Theravance (THRX) in cooperation with GSK, makes its journey to FDA submission and is eventually approved, it will make an indelible mark on the therapeutic landscape. With so much attention around the fate of Advair and its continued performance while waiting for the baton to be passed on to Relovair, it would have been a reassuring reminder to all of us loyal investors in GSK, that the succession plans for Advair are on course and should manifest itself in renewed vitality, and sustainment, of the company's respiratory franchise.

Based on my observations, I am currently a hold for GSK, as I believe it would be prudent to take a deep dive in the data from the direct comparative trials when they are released at some of the premier scientific, and clinical meetings, this year. This will represent the proverbial tea leaves; and if the initial readings are good relative to superiority in clinical endpoints, then this would usher in a veritable groundswell of confidence relative to buying shares of GSK. Having said this, it will be important to see what strategies GSK institutes to inoculate itself from having this category of medicines from increasingly becoming commoditized and succumbing to precipitous price erosion.

The reality is that GSK's near-term success will be predicated on its ability to grow the Asthma and COPD markets and retain a critical mass of Advair prescriptions to provide the substrate for conversion to Relovair as its therapeutic successor. Add 98 cents to the aforementioned and you will have a dollar.

Disclosure: I am long GSK.

Additional disclosure: I have previously worked for GSK for over 31 years in a variety of capacities that include Account Management, Corporate Training, Brand and Marketing Management, Pharmacy Benefit Management Services, District and Regional Field Management, Senior Care Director, Health Systems Account Management and National Accounts Director.

Disclaimer: The information in the aforementioned article is provided for informational purposes only. It represents the opinions of the author and is not a call for action relative to the buying or selling of stocks and other investment vehicles. It is highly recommended that you conduct your own research and reach your own conclusions before you make an investment in anything.