Why Glaxo bids adieu to cancer drugs

|By:, SA News Editor

WSJ's Hester Plumridge reports on the reasons GlaxoSmithKline (GSK +4.6%) exits the cancer space despite its substantial long-term growth prospects.

The move enables the firm to focus on its core businesses in respiratory, HIV, vaccines and consumer health with the intent of improving operating margins. These four areas constitute 70% of its revenue. The remaining 30% is evenly split between its legacy products and metabolic/cardiovascular. It intends to retain the latter and divest the former.

The $16B sale of its cancer business to Novartis (NVS +1.5%) delivers substantial value for shareholders considering its relatively modest top line of $1.6B and the lack of promising immunotherapies. Glaxo ranks a distant fourteenth in market share with little hope of making headway versus the dominant players.

Earlier this month, Glaxo stopped the development of IMAGE-A3, its once-promising cancer vaccine. The firm will continue some cancer-related R&D but Novartis will have commercial rights to all future products.

With the inclusion of Novartis' vaccine business Glaxo is the global leader in market share and scale.

The consumer health joint venture will have the heft to compete more effectively with Reckitt Benckiser Group (RBGPF +0.1%), Colgate-Palmolive (CL -0.5%) and Unilver (UN +0.1%). Glaxo is the dominant partner with a 63.5% stake. It has the option of buying out its partners or selling its holdings in three years.

Glaxo expects to save ~$1.3B per year due to improved operational efficiency in vaccines and consumer health.