GSK's Witty fights back amid bribery scandal and profit warning

For most of his six years as chief executive of GlaxoSmithKline, Andrew Witty has been the golden boy of British business.

Young, dynamic and plain-speaking, the Yorkshireman became a fixture in any ranking of most admired UK chief executives. A knighthood sealed his status in 2012.

Yet a difficult past year has taken some of the sheen off his reputation and, as he approaches his 50th birthday next month, Sir Andrew finds himself under pressure.

First came the Chinese bribery scandal that has imperilled GSK's position in a crucial growth market and undercut Sir Andrew's image as a champion of ethical reforms in the drugs industry. Then, last week, he issued a profits warning that exposed weakness in the company's core respiratory medicines business.

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GSK's shares are down 14 per cent in the past year, compared with an 18 per cent rise in the Dow Jones pharmaceuticals index.

But anyone expecting to find a sense of crisis at GSK's headquarters in Brentford, west London, is in for a disappointment. While Sir Andrew accepts recent headlines have been ugly, he insists the company's position remains strong.

"If you look back at the last seven or eight years, we've absorbed all our [patent losses] … and we've broadly held the business at the same scale," he says. "You contrast that with almost anyone else who has been through that and they've either had a dramatic decline in size or they've made an acquisition or they've been bought."

Shareholders are now questioning whether that resilience can be sustained in the face of decline in the company's best-selling drug. Revenues from Advair, an asthma treatment that accounts for about a fifth of sales, fell 12 per cent in the second quarter, on top of the 15 per cent drop in the prior three months.

Sir Andrew accepts this erosion will continue as the ageing medicine faces mounting competition. Meanwhile, new respiratory products intended to help replace Advair have got off to a slow start in an increasingly tough US market.

This forced GSK to make a choice between reining back marketing spending on the new drugs to keep earnings on track or letting targets slip. "To try and chase the quarter in a way that could undermine these products felt like the wrong decision," says Sir Andrew.

He admits there could be more bumps ahead as Advair declines, but says he is "more convinced than ever" that GSK will remain respiratory market leader as new products gradually gather momentum, with several more in development.

"The key for the respiratory business is can these six or seven new products plus whatever's left of Advair compensate for where we were? I think the chances of that are very high, but maybe we go through a couple of years where the two lines don't perfectly match."

Sir Andrew points to the six new drugs approved across all therapeutic areas last year and a further 40 in advanced development as proof that GSK's innovation engine is working strongly. "We have one of the biggest pipelines in the industry. Just because some people don't think it's where it should be after three months is not going to stop us taking a long-term view."

While restocking the pipeline, Sir Andrew has sought to build buffers against the risks of drug development by strengthening GSK's other two businesses: vaccines and consumer healthcare. This strategy was reinforced by a $20bn asset swap with Novartis in April under which GSK traded its sub-scale oncology business for the Swiss group's vaccines division, while the pair agreed to set up a joint-venture in consumer products. Once completed, half of GSK's revenues will come from outside pharmaceuticals.

The Novartis deal represented GSK's contribution to the mergers and acquisition frenzy that has swept the pharmaceuticals sector this year as the cash-rich but slow-growing industry hunts greater efficiency. Many of them, including this month's £32bn takeover of UK-listed Shire by AbbVie, have involved so-called "tax inversions" in which US companies use foreign acquisitions to lower their tax rate.

Could GSK be vulnerable? With a market capitalisation of £69bn it would be a stretch even for Pfizer, which has tens of billions of dollars in offshore cash looking for an outlet after its failed takeover of AstraZeneca. However, Sir Andrew says he is not complacent. "I don't wake up every morning worrying about that kind of thing. But equally...we don't believe there is some guarantee we will be successful. We have to earn it all the time."

Some analysts worry GSK is making life harder for itself through marketing reforms that have seen it sever the link between sales and pay for drug reps and, from 2016, stop payments to doctors for promoting its products. This was designed to clean up the way it sells medicines after a $3bn fine from the US Department of Justice in 2012 for rogue practices.

No other big pharmaceuticals group has yet matched the reforms. Sir Andrew rejects suggestions that GSK's lone stance could explain its deteriorating market share in the US respiratory market and says, in the long-run, the company will benefit from being first mover towards a new marketing model.

Yet, his attempts to cast GSK as a standard-bearer for industry ethics have taken a battering over the past year as allegations of large-scale bribery in China have been followed by a succession of smaller-scale allegations in the Middle East and Poland. In addition to the Chinese inquiry, which could result in big penalties, GSK is also under investigation by the UK Serious Fraud Office and again by the US justice department.

Sir Andrew refuses to discuss the China case in detail other than to declare his determination to stamp out any corruption. But he says it has helped him drive home to employees the need for greater transparency. "It gives me the ammunition to say we are in the public eye and our behaviour counts. It's not just about generating prescriptions; it's how you do it."

Sir Andrew warns on perils of government intervention

GlaxoSmithKline's chief executive has warned the UK government against putting up barriers to foreign investment in the wake of Pfizer's abortive £69.4bn bid for AstraZeneca.

Sir Andrew said it was important to defend the UK life science sector but argued that heavy-handed intervention could backfire. "We've got to be very careful in a high technology space not to put up too many barriers," he told the Financial Times.

Pfizer's offer for Britain's second-biggest drugmaker in May sparked widespread political opposition and calls for the government to be given powers to block foreign takeovers of companies that are important to the UK science base.

But Sir Andrew pointed out that GSK, the biggest UK drugmaker, was itself the result of a merger with a US company and that AstraZeneca's origins were part Swedish. "UK companies are just as likely to be the beneficiaries of being allowed to go shopping as we are to be victims," he added.

However, he backed proposals by Vince Cable, business secretary, to impose tough financial penalties on companies that renege on commitments made during takeovers.

Pfizer promised during its pursuit of AstraZeneca to keep at least 20 per cent of the merged group's research and development staff in the UK for at least five years, but critics said the government lacked powers to enforce the commitment.

"It is entirely reasonable that if a company makes a commitment to anybody, whether that be to shareholders of the target or to a government, that they be held to account," said Sir Andrew, adding that there should be a price to pay if promises are broken.

Pfizer walked away after AstraZeneca rejected what would have been the biggest foreign takeover of a UK company. Some analysts think the US drugmaker could make a fresh approach when a mandatory six-month cooling off period ends in November, or in late August if invited back to the table by AstraZeneca.

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