GSK bets $300 million on genetics as CEO plays down break-up talk

By Ben Hirschler

LONDON (Reuters) - GlaxoSmithKline aims to turbo-charge its drug discovery engine with a big bet on genetics as its CEO on Wednesday played down the idea of hiving off consumer healthcare, which is a source of cash generation for such R&D investment.

GSK is buying a $300 million stake in the Silicon Valley gene testing company 23andMe, giving it exclusive access to the Google-backed firm's vast DNA database.

The move was announced alongside a raised forecast for 2018 profit growth, due to strong sales of new shingles vaccine Shingrix, benefits from taking full ownership of consumer health and delays in U.S. generic versions of its lung drug Advair.

The 23andMe deal won't yield new products overnight but new R&D head Hal Barron believes it will accelerate GSK's drug development work, which has lagged behind rivals in producing multibillion-dollar blockbuster drugs.

GSK's pharmaceuticals business - its biggest unit - has seen sluggish growth in recent years and the group reported flat overall revenue in the second quarter, although the result was slightly better than analysts had forecast.

Chief Executive Emma Walmsley said she was "increasingly confident" GSK would deliver mid to high single digit percentage earnings growth out to 2020 and the shares rose around 1.5 percent following the results.

The company also unveiled a new restructuring programme to deliver annual cost savings of 400 million pounds ($526 million) by 2021, with proceeds to be reinvested in research and development (R&D).

Walmsley has made her top priority turning around the pharmaceuticals division, which analysts see as a prerequisite for any potential future spin-off of consumer health.

While such a move has been advocated by some investors from time to time, Walmsley told reporters the board still favoured the current diversified structure, as long as the pharma, vaccines and consumer divisions all continued to perform.

"The board's position today is unchanged," she said.

The focus on improving pharma performance puts Barron - a veteran of Roche's successful Genentech unit - at the centre of the next chapter in GSK's story.

Barron said his strategy would centre on science related to the immune system and investments in advanced technologies, as well as leveraging genetics.

GENETIC ANCESTRY

While 23andMe is best known for saliva-based test kits that offer users a glimpse into their genetic ancestry, it also has a three-year-old drug R&D unit, whose efforts will now dovetail with those of researchers at GSK.

And with more than 5 million customers, 80 percent of whom have opted in to participate in research, it has a trove of information about the links between genes and disease.

"Human genetics is going to represent a core component of our drug discovery strategy, so 23andMe is a terrific partner for us to jump-start our efforts," said Barron, who joined GSK in January.

"By studying genetically validated targets we think we can cut the cost of development in half or, putting it a different way, develop twice as many medicines for the same price."

The first project under an initial four-year collaboration will focus on an experimental GSK pill for Parkinson's disease. It is linked to a specific gene mutation and 23andMe has already identified hundreds of its users with the right genetic profile.

The 23andMe transaction marks Barron's first deal to bolster pharma R&D, and is unlikely to be his last. "We'll be looking for opportunities moving forward, but we're going to keep a pretty high bar," he told Reuters.

The British drugmaker is not alone in tapping modern genetic data. Competitors including Roche and AstraZeneca have already made similar moves.

But by working with 23andMe it can now scan the world's largest human genetic database with associated health records, according to the privately owned firm's therapeutics head Richard Scheller, who used to work with Barron at Genentech.

Currencies and pricing pressure in respiratory medicine are both creating headwinds for GSK this year, although its new shingles vaccine is enjoying very strong demand.

GSK's overall sales in the quarter were 7.31 billion pounds, producing adjusted earnings per share (EPS) of 28.1 pence. Analysts, on average, had forecast 7.21 billion pounds and 26.1 pence, according to Thomson Reuters data.

For the full year, the company said EPS in constant currencies would grow 4-7 percent if generic copies of Advair hit the U.S market by Oct. 1. Without generics, earnings would be up 7-10 percent.

The timing of generic copies of its blockbuster lung drug arriving in the United States is a big uncertainty in 2018, after copycats failed to launch in 2017 because U.S. regulators knocked back applications.

($1 = 0.7600 pounds)

(Editing by Keith Weir and Elaine Hardcastle)