How GlaxoSmithKline Lost $635M in Bad Bets on Sleeping Pills
Most people will ignore today's news that GlaxoSmithKline (GSK) ended a pact with Actelion for the development of almorexant, yet another sleeping pill. After all, Actelion and almorexant aren't exactly household names. But the history of this failed joint venture contains a lesson for dealmakers: Sometimes, a bird in the hand really is worth two in the bush.
The Actelion deal was big news when it was struck in 2008: GSK paid $598 million for the drug and promised further payments up to $3.3 billion if certain milestones were met. But in order to make that deal, GSK had to first extract itself from a pre-existing, conflicting deal with Sunovion (then called Sepracor), maker of the highly advertised Lunesta insomnia drug. GSK paid $37 million to get out out of the Lunesta deal, on a contract that would have given GSK rights to a share in the drug's foreign revenues for just $155 million in total.
Lunesta made about $600 million in sales in 2009 in the U.S. As a rule of thumb, U.S. sales are frequently about 50 percent of sales for any drug that has worldwide distribution. If GSK and Sunovion had split foreign revenues on Lunesta, GSK could be earning about $300 million in annual sales at this time. In the event, GSK decided to go with Actelion's experimental product, calling it "first-in-class."
Now, $635 million later and having fallen on its Lunesta sword to get almorexant, GSK has neither drug. The crucial -- wrong -- decision here was to go with Actelion in the first place. There are half a dozen sleeping pills already on the market; Sanofi-Aventis (SNY)'s Ambien dominates the category and is now a cheap generic; and consumers have access to any number of "nighttime" over-the-counter products. The idea that almorexant was somehow going to be leagues better than existing drugs -- enough to earn back $3.3 billion in a market where 2nd place earns only $600 million -- was simply delusional.
So who is responsible for all this waste? Step forward Andrew Witty. That's GSK's current CEO and, in 2007, the company's European pharma president, who was quoted in the press release announcing the Lunesta deal and, after his promotion, in the 2008 quarterly report recording the Actelion deal.
Related:
- Red Wine Turns to Vinegar: At Glaxo, a String of Deals Has Gone Sour
- End of Sepracor-GSK Deal Raises Question in Lunesta Patent Fight