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Lilly competitor Glaxo to shake up U.S. operations

December 1, 2014

A major drugmaker that was part of three-way multi-billion-dollar deal this year involving Eli Lilly and Co. is planning a reorganization that will include hundreds of job cuts in the United States, where the drugmaker is struggling to sell respiratory medicines, people familiar with the situation said.

London-based GlaxoGlaxoSmithKline Plc will announce a workforce restructuring as soon as this week, said the people, who asked not to be identified discussing a private company matter. The changes will involve operations in the U.S., its biggest market.

Former Lilly executive Deirdre Connelly, president of Glaxo's North American operations, is scheduled to speak to U.S. employees on Dec. 3, two people said.

Glaxo pledged in October to cut costs $1.57 billion over three years, with half the savings coming in 2016. U.S. sales are flagging amid increased competition for the company’s best-selling Advair asthma medication. Analysts estimate that sales of the drug will decline 30 percent by 2015, from $5.3 billion last year.

“After stagnating for years, Advair sales have taken a dive and Glaxo lacks growth drivers right now,” said Philippe Lanone, an analyst at Natixis Securities in Paris. “It makes sense they would take a hard look at costs.”

The lackluster U.S. performance has put Connelly under pressure. Connelly was with Lilly for 24 years before leaving as president for Lilly USA division in 2009. She was part of a management reshuffle last month, and now reports to Abbas Hussain, Glaxo’s head of global pharmaceuticals, rather than directly to CEO Andrew Witty.

In April, Lilly agreed to pay $5.4 billion in cash for Novartis Animal Health in the second-largest deal in the company's history. The acquisition from Switzerland-based Novartis was part of a blockbuster three-way drug deal that included Novartis buying GlaxoSmithKline's oncology products for $14.5 billion while selling Glaxo its vaccines business for $7.1 billion plus royalties.

‘Unnecessary complexity’

Glaxo shares have fallen 7.9 percent this year, while the Bloomberg Europe Pharmaceutical Index has climbed 22 percent.

In October, “GSK announced a new restructuring program to refocus our global pharmaceuticals business and deliver cost savings,” Glaxo said in an e-mailed statement on Nov. 28. “The aim of this program is to improve performance by taking unnecessary complexity out of our operations and establish a smaller, more focused organization, operating at lower costs, that supports our future portfolio.”

Each business unit is “currently deciding how to respond to this challenge,” Glaxo also said. “When we do have proposals, we will first share those with our employees.”

Glaxo told workers last month it would tweak one part of its “patients first” program in the U.S., which was designed to disconnect compensation of sales representatives from prescription numbers, one person said.

‘Patients first’

While the program remains in place, changes are being brought to the way sales professionals are tested on knowledge of products as part of their evaluation, two people said. Sales representatives continue to be judged on simulations of interactions with doctors and by manager observations of real meetings, one person said.

Connelly unveiled the initiative in 2010, saying the company would no longer link bonuses to sales targets and instead reward sales staff for their scientific knowledge. The changes came as Glaxo grappled with probes into its sales and data disclosure practices. The company eventually paid a $3 billion fine to settle U.S. criminal and civil investigations and signed an agreement with the U.S. government pledging to reform sales and marketing methods.

Some top managers in the U.S. have left Glaxo since Connelly’s appointment in 2009, in part driven away by the new approach, several people said. One reason for Glaxo’s poor performance in the U.S. may be that the sales force no longer has the right incentives, some analysts have said. Witty intends to expand the model globally by early next year.

Global approach

Efforts to improve “patients first,” given Advair’s difficulties and the tougher U.S. payer environment, will be a “good thing” for Glaxo, Odile Rundquist, an analyst at Baader Helvea in Geneva, who has a “hold” recommendation on Glaxo shares, said in e-mailed comments yesterday.

“Top performers under our previous sales compensation model continue to be some of the top performers under the patient-focused model we introduced in 2011,” Glaxo said in its Nov. 28 e-mailed comments. “We remain resolutely committed to our commercial model and are on track to role out this approach globally.”

The drugmaker is hoping a new selection of lung medicines led by Breo and Anoro will help make up for Advair’s shortfall. So far, sales of the new drugs have fallen short of analyst estimates.

“They haven’t been able to launch Breo and Anoro as planned and have faced pretty heavy pricing pressure from insurers,” David Munno, head of pharmaceutical research at Sphera Global Healthcare, a Tel Aviv-based hedge fund that held Glaxo shares as of its last quarterly filing, said. “It has been a tough year for their respiratory franchise. I assume the cost cuts are going to come from there.”

Glaxo has about 99,000 employees in 115 countries, with about 17,000 in the U.S., where the company gets almost one-third of its sales.

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