Glaxo Keeps Alli As Recently Pruned Consumer Division Thrives

GlaxoSmithKline abandons its attempt to divest the OTC weight loss aid alli, even though the beleaguered brand continues to drag down consumer division sales. The division’s sales climbed 7% excluding alli in the firm’s second quarter, but only 5% including the product’s results.

GlaxoSmithKline Inc. abandoned its attempt to sell the alli brand and recommitted to promoting the beleaguered OTC weight loss aid, although it continues to drag down consumer health care product sales.

“We’re going to take the business back in hand and rebuild that brand in a much more focused way and see how that plays forward from here,” GSK Chief Financial Officer Simon Dingemans said July 25 during a conference call with analysts to discuss the firm’s fiscal 2012 second-quarter earnings.

The U.K. firm said it decided not to sell alli now because it feared the brand would be undervalued due to an interruption in the supply of the active ingredient, orlistat. Due to the shortage, alli was “effectively withdrawn from the market over the last quarter” resulting in “almost zero sales,” Dingemans said.

“Given that position, we have decided that we will not be generating the right value for shareholders if we proceed with the sale,” he added.

Alli sales “are exceeding expectations” since the product began returning to U.S. store shelves in June, a spokeswoman said in an email.

Glaxo is “finalizing a rebuild plan for the brand that leverages” consumer loyalty and will “focus on one-on-one connections with alli consumers,” she pointed out.

The firm previously said it would launch a “robust promotional plan for alli” in the fall once inventory levels return to normal (Also see "Consumers Need Motivation To Buy Brands Returned To Stores After Absence" - Pink Sheet, 16 Jul, 2012.).

Past marketing campaigns have emphasized the importance of healthy eating and exercise while taking the drug, the success and experiences of users and that alli is the only FDA-approved OTC weight loss drug (Also see "Alli Campaign Seeks To "Drive Behavior Change," Stresses Healthy Choices" - Pink Sheet, 17 Jan, 2011.). The firm also tapped celebrity endorser Wynonna Judd in a campaign that fizzled as the entertainer continued to struggle with her weight (Also see "Glaxo "Shakes Up" Alli Ad Strategy With New Agency" - Pink Sheet, 29 Jun, 2009.).

Weight On Consumer Sales

The interruption of the weight loss aid’s sales during the April-June period dragged down overall sales for Glaxo’s consumer health care division. Including alli, the division grew 5%, but excluding it, sales climbed 7% from the year-ago quarter to $1.98 billion, Dingemans said.

The difference between the consumer division’s growth with and without alli “will diminish very, very rapidly given the trend in alli’s business over the last 12 months,” he added.

The 7% growth also came without non-core OTC brands that GSK sold in the last year. Dingemans said if those brands were included, the division’s sales would have been flat, which illustrates the strength of the remaining, underlying business.

Among the non-core brands GSK sold are 19 international OTC brands to Aspen Pharmacare Holdings Ltd. for $263 million in April. The deal included the rights outside the U.S., Canada and Europe to Dequadin sore throat lozenges, Phillips Milk of Magnesia and Zantac antacids, among others (Also see "Only Alli Remains After Glaxo’s OTC Transaction With Aspen" - Pink Sheet, 23 Apr, 2012.). Omega Pharma NV acquired the rights to Zantac elsewhere in a previous deal with Glaxo that involved five other OTC brands (Also see "Omega Pharma Acquires Six Glaxo OTC Brands, But Alli Lingers" - Pink Sheet, 19 Mar, 2012.).

The remainder of the OTC brands GSK originally placed on the auction block – sans alli – went to Prestige Brands Holdings Inc. (Also see "Prestige Acquires 17 Glaxo OTC Brands, Enters Analgesics Market" - Pink Sheet, 2 Jan, 2012.).

The deals were part of Glaxo’s plan to simplify its consumer business, with which CEO Andrew Witty seemed pleased during the call.

“The cleaning up of the portfolio, the divestment of the products there, really helped release the energy and focus” necessary to deliver the 7% growth during the quarter, he said.

Strong oral health care sales – up 9% to $695 million in the quarter – also contributed significantly to the division during the quarter, according to a same-day release.

In particular, Sensodyne contributed with an 8% increase in sales to $255 million (£165 million according to July 25 exchange rates). Brand innovation, such as the introduction of Sensodyne Repair and Protect and Sensodyne Pronamel, helped Glaxo defend the toothpaste’s price point in an economically challenging period when retailers increasingly exert pressure to negotiate lower prices, Witty said.

Innovation is “the reason why our business is actually looking pretty good,” he added about consumer health.

He noted new forms of Lucozade and Panadol Advance also helped the nutrition and pain management businesses grow. According to the firm, Lucozade grew 1% in the three-month period, pushing nutrition sales up 6% in the quarter to $428 million, and Panadol grew 7% to drive the pain management business up 6% in the period. GSK did not break out dollar figures for the pain management business, which is part of the firm’s wellness sector.

Also within the wellness division during the quarter, the gastrointestinal business grew 13%, led by Eno, and smoking cessation sales climbed 11% – primarily from enhanced marketing, according to GSK.

However, these successes were not enough to spur overall growth in the wellness sector. The division fell 8% in the quarter to $768 million compared to the previous year’s second quarter, GSK reported.

Skincare sales also fell 2% to $95 million, a disappointment following the acquisition of Stiefel Laboratories for $1.5 billion in 2009 (Also see "GSK Gains Foothold In U.S. Skin Care With Stiefel Deal" - HBW Insight, 27 Apr, 2009.). The firm attributed the dip partly to supply chain issues in Europe and aggressive competition in Latin America.

Overall Sales Down 4%

While consumer health care was a bright spot for Glaxo in the quarter, it did not overcome shortages in other areas that pulled down the firm’s overall sales 4% to $10.21 billion in the quarter. Earnings per share also came in 5% lower at 39.7 cents per share, according to GSK.

Glaxo missed its targets for the third consecutive quarter, which “is again explained by weak sales momentum from the company’s highly mature pharma business,” Deutsche Bank Markets Research analysts said in a research note.

The firm acknowledged the disappointments, but executives remain optimistic about the potential to launch eight new drugs and vaccines in the next two years. It also plans to reduce costs and improve operating margins by improving its manufacturing process, “accelerating financial efficiencies” with an improved tax rate and other changes, according to GSK.