by Alex Lash | Published June 2, 2008 at 12:00 PM
Jean-Pierre Garnier did not leave GlaxoSmithKline plc quietly. Formally handing over the reins to company veteran Andrew Witty on May 21, the outgoing CEO made sure to remind everyone of his legacy, to warn about the stormy future of the drug industry and to take a swipe at rival AstraZeneca plc.
Beyond the chatter, one intriguing development of Garnier's endgame was a surge in big-ticket deals to boost the firm's pipeline, a result of his decade-long initiative to decentralize R&D at the massive firm. Licensing doesn't get the same attention as splashy M&A, but in the drug world, it's a critical conduit of new products to Big Pharma and of cash to tiny biotechs.
Of 20 licensing partnerships signed this decade with potential value of $1 billion or more -- what biopharma consulting firm Recombinant Capital Inc. calls "blockbuster alliances" -- Glaxo has nabbed eight, all in the last two years.
That boosts Garnier's claims to the industry's deepest pipeline, with 34 compounds in late stage. But it hasn't insulated him from criticism. Garnier passed the baton at Glaxo's annual meeting in London amid shareholder anger over executive pay. Shares are down 20% from a 52-week high, and it's no coincidence the firm has begun a £12 billion ($24 billion) share buyback to be completed next summer.
The licensing spree may not quell dissent. Glaxo spent a lot, and the compounds won't bear fruit until the next decade -- if ever. But Garnier recently told the Financial Times that GSK is "200 percent better at reloading the pipeline."
The eight $1 billion deals are built in part on "biobucks" -- future payments unlikely to be realized. If every condition were met, GSK would end up paying more than $25 billion. But that's like saying every member of last year's top college basketball team will have a Hall of Fame professional career.
But the numbers are impressive. GSK spent more than $675 million cash up front (in one deal the details were undisclosed). It's already paid out roughly $65 million more as its partners advance the drugs through milestones. "It's still significant up-front cash," says Recombinant Capital director Michael McCully, "but it's better risk mitigation."
Glaxo has spread its bets several ways. For example, some up-front cash paid for equity and a stake in its partners' success. GSK is the largest shareholder of Epix Pharmaceuticals Inc. of Lexington, Mass., with 13% ownership. GSK originally bought 3 million shares for $17.5 million as part of its December 2006 alliance. It now owns 4.27 million shares, and Epix stock sells at an ugly $2.33 a share.
The eight deals are also spread across different development stages, from "baskets" of preclinical targets to well-defined Phase 3 compounds. Glaxo has also structured many of the deals as options. If the partner, using much of its own money, gets one or several compounds to a milestone, Glaxo can grab the rights and take over development.
Garnier's decentralization legacy is apparent in these deals. In 2001 the firm created research groups called CEDDs (Centers for Excellence in Drug Discovery) focused on therapeutic areas: metabolic disease, neurology, oncology and so forth. Later, the firm created a dealmaking group called CEEDD (the extra "E" is for "External") charged with signing partnerships. Glaxo was thus one of the first Big Pharmas to shed the "not invented here" bias. Of the eight recent "blockbuster" alliances, five are shepherded by the CEEDD, two by the corporate business development team and one by the infectious disease CEDD.
Garnier's R&D transformation has skeptics. In a report released May 27, analysts with ABN Amro say the firm's stronger pipeline stemmed from activity before the merger (pre-Garnier) and that the last few years have been disappointing. "If the structure alone was intrinsically successful, then we should now be seeing a tremendous lift in the late-stage output of the company's pipeline," the authors write.
While Glaxo still makes its share of splashy acquisitions, Garnier scoffed at the thought of a big merger and took a parting shot at AstraZeneca: "What kind of future do they have? Why would you trade down?"