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NORTH CAROLINA Culture change why Glaxo’s lower profile shouldn’t shatter the state’s thriving pharma industry

fRIeNd Me Social networking sews profits in kids’ clothing.

September 2015 BaseBaLL BooN Price: $3.95 businessnc.com Fans flock to the state’s minor league parks. Changing of the guard

GlaxoSmithKline, an instrumental force in ’s textiles-to-test tube transformation, slims down as cancer expert Stephen Frye and other researchers bulk up.

BY EDWARD MARTIN

Frye, right, is among ex- Glaxo employees with an entrepreneurial bent and limitless opportunities. PHOTO BY STEVE EXUM o heavy machinery rumbles America, that test blood for diseases, and giant here. At a plant east of Ra- contract-research organizations, like Durham’s leigh, down shrubbery-lined Quintiles Transnational Inc., that enlist people Apothecary Drive in Zebulon, to test new drugs that might cure them. stunningly fast production Life sciences, a sweeping term encom- Nlines fill purple inhalers with talc-like powder passing pharmaceuticals and other processes that has the remarkable ability to shrink swol- dealing with living organisms, has more than len airways that leave asthmatics and others 228,000 employees and an annual economic with lung disorders gasping. In near-sterile impact of $73 billion in North Carolina, second surroundings, scores of workers, some in white only to the $77 billion of agriculture, the N.C. lab coats, primarily monitor quality. Commerce Department says. The Raleigh- GlaxoSmithKline PLC, the world’s eighth- Durham market ranked second to the Boston largest pharmaceutical company, touts this metropolitan area as a life-sciences hub, accord- plant as one of its most advanced. More than ing to a recent ranking by Jones Lang LaSalle 850 employees work here, and another 130 or Inc., a Chicago-based company that analyzes more are being hired. A new production line commercial real estate. “We don’t want this is part of $90 million in upgrades. “In Zebu- industry to go the way of textiles, furniture lon,” says GSK’s Research Triangle Park-based and tobacco,” says Doug Edgeton, CEO of the spokeswoman Marti Skold Jordan, “we handle North Carolina Biotechnology Center based in over 30 brands which are sold in over 500 dif- the Research Triangle Park. ferent selling presentations.” The company’s best-known product, Advair, is both produced and prepared here. SoME LIFE-SCIENCES EXPERtS say the state GSK’s showplace is 40 miles east of its has reached the critical mass necessary to vast, 500-acre U.S. headquarters in Research maintain its commanding role in the industry Triangle Park. Momentum alone would seem to regardless of GSK. The corporation’s vulner- make it indomitable: Last year, Jordan adds, the abilities, though, underscore that in the rowdy Zebulon plant produced more than 200 million arena of big pharma in 2015, any cloud over capsules and tablets, filled more than 65 million GSK casts a shadow over life sciences in North inhalers and put together more than 112 million Carolina as well. Surprisingly, many observers drug packs. say the state isn’t helping its own cause. Instead, this plant is on the front lines of The biotechnology center, created in 1984, global pharmaceutical warfare. GSK has seen has been instrumental in attracting the indus- profits plunge and has shed tens of thousands try to North Carolina and nurturing it. Now, of workers worldwide. Its North Carolina while GSK struggles to find its footing, the employment has declined to about 4,000 — center faces an existential threat from lawmak- more than 20% lower than peak levels — and ers as the N.C. General Assembly considers it is leasing empty space in its 35-building cutting its funding, about $13 million of its $18 headquarters complex amid scars inflicted by million budget in 2014. Without state money, competitors, a tumultuous health care environ- “We would probably have to go into a wind- ment and scandals of its own making. The scars down mode,” Edgeton says. The center has are vivid reminders that in North Carolina, 62 employees in six statewide offices, and has more than the future of a charter member of the offered grants, funding assistance, technical and global big-pharma club is in play. business advice and other aid to hundreds of For more than four decades, Research existing and startup life-sciences companies. Triangle Park has ridden the coattails of GSK In addition to global competitors, other pro- and legacy companies such as Burroughs posals threaten to chill the life-sciences climate in Wellcome & Co. that it has absorbed as the North Carolina. The legislature also has declined state grew from life-sciences obscurity to global to extend tax incentives for pharmaceutical re- prominence. As economic transitions go, it’s a search and development activities that amount- remarkable one, from smokestacks, tobacco and ed to more than $40 million in 2014, along with textiles to clean-room manufacturing and labs, tax breaks for purchasing laboratory equipment.

such as Burlington’s Laboratory Corporation of Many business incentives are being cut and now, StEVE EXUM by Photo

66 BUSINESS NORTH CAROLINA life-sciences supporters fear parallels with the MEMoS WENt oUt LASt DECEMbER to 900 state’s once-thriving, 30-year-old, $250 million- employees of GSK in the Research Triangle. a-year movie industry. Loss of tax breaks and They were being fired, part of a three-year other incentives has prompted some film and campaign by the Brentford, England-based television productions to choose other states. drugmaker to slash $1.6 billion in worldwide Thirty-eight other states offer companies expenses. Not clerks and technicians, most were such as GSK tax breaks for R&D expenditures, research and development scientists, the glam- including states covetous of North Carolina’s our corps of pharmaceuticals. GSK won’t reveal thriving life-sciences sector. Mirroring nation- salary information, but many likely earned far wide cutbacks in federal drug-research funds, above the state average for life-sciences workers North Carolina has also cut the budget of its of about $81,000 a year. University Cancer Research Fund, a catalyst for The impact was almost as jolting as 19 new drugs and startups, and other programs. years earlier, when news broke that Glaxo had “It’s a competitive country and world,” bought Burroughs Wellcome, which estab- Edgeton says. “We can’t turn around without lished its Research Triangle Park headquarters seeing Texas pouring hundreds of millions of in 1970 and was Glaxo’s neighbor there. “I was dollars into trying to attract life-sciences jobs. driving to work on Interstate 40 that morning,” Florida, Georgia, Massachusetts, California, says Bill Shore, a retired senior executive at Maryland, Virginia, all are doing the same. We both companies. “Three-thousand sets of brake hope to keep these folks in our state, rather than lights came on.” having them recruited away.” Some laid off in December would be of- For now, in what once was the quiet fered jobs at other GSK sites, and more than bedroom community of Zebulon, production 400 were steered to Parexel International LLC, lines roll out the iconic purple disks of Advair a Waltham, Mass.-based contract-research orga- at a frenetic pace. (Except for a week in August, nization with about 1,100 Triangle workers. In when a large part of the plant closed because ln July, Parexel began slashing Triangle jobs too. the bacteria that causes Legionnaires’ disease The company will cut 125 jobs starting Sept.30, was discovered in cooling towers. No illnesses according to a state filing. Architect Paul Rudolph were reported.) GSK, Jordan says, “treasures “RTP will not be an R&D hub moving devised Burroughs our heritage in North Carolina.” For the state, Wellcome’s RTP site in forward,” Jordan says, though she adds that the late ‘60s, when many that’s a past inexorably linked with its life- the park is still GSK’s U.S. headquarters. “A global giants prized sciences future. substantial group of our commercial, manufac- provocative design. North Carolina’s Anglo-American triumph Few companies have made a larger economic and philanthropic mark on the state than GlaxoSmithKline and its predecessors. Entrepreneurial success stories keep spinning out of GSK, even as its consolidates its own research efforts.

1830 John K. Smith opens a 1970 Burroughs Wellcome moves its drugstore in Philadelphia. U.S. headquarters from Tuckahoe, N.Y., to Research Triangle Park. 1842 launches Beecham’s Pills in 1972 Beecham scientists England. discover , a revolutionary antibiotic. 1880 Burroughs Wellcome & Co. is established in by American druggists Henry Wellcome and Silas Burroughs. 1981 Wellcome unveils Zovirax, for herpes infections. 1906 The Glaxo 1969 Glaxo begins name is trademarked. It making Ventolin, an is derived from Lacto, a asthma treatment. 1981 Brainstorm, a science-fiction food for infants. movie starring Natalie Wood, is filmed at the Burroughs Wellcome building. Wood drowns in an

accident unrelated to the filming. PARtNERS

1985 Fred Eshelman leaves Glaxo to found Wilmington-based GlaxoSmithKline, or GSK, and its legacy components contract-research organization date to the 18th century. It is based near London, Pharmaceutical Product has market capitalization of about $101 billion, and Development. It sells for $3.9 billion makes both drugs and consumer products such as in 2011. In 2014, he founded Aquafresh toothpaste and breathe Right nasal strips. Eshelman british and U.S. executives have comprised its leader- Ventures, which ship, including many living in North Carolina. mostly invests

in private health VENtURE ASSoCIAtIoN,hAttERAS LoGy care companies.

1989 SmithKline and the 1995 Glaxo and merge to form Wellcome merge, forming SmithKline Beecham. Glaxo Wellcome.

1995 Christy Shaffer leaves Glaxo to 1989 Charles Sanders is co-found Inspire Pharmaceuticals. She named CEO of Glaxo’s U.S. is a partner at Hatteras subsidiary. He Venture Partners in left the company Durham and serves on in 1995 and has the boards of RTP-based served on many G1 Therapeutics and corporate boards. Alpharetta, Ga.-based Clearside Biomedical.

1997 Robert Ingram is named CEO 1989 Ernest Mario becomes of Glaxo Wellcome and becomes CEO of Glaxo Holdings in 2001 Glaxo Wellcome and chairman in 1999. London. He left SmithKline Beecham merge, forming He is a partner at Glaxo in 1993 GSK, with dual headquarters in RTP Hatteras Venture and became and Philadelphia. Partners and serves on CEO of Alza the boards of Valeant Corp. He now Pharmaceuticals and is a partner at GSK makes 2008 Durham-based Cree. Pappas Ventures. Research Triangle Park its sole U.S. headquarters.

2012 GSK sells the 550,000-square-foot, former Burroughs Wellcome headquarters building and 2014 GSK announces other properties to United Therapeutics Corp. for 2015 GSK acquires some thousands of job cuts worldwide, $17.5 million. of Novartis’ vaccine lines. including about 900 in RTP. bIotEChNo PARtNERS/NC VENtURE URI/hAttERAS LEWIS, SANDERS/NoRA ChARLES EShELMAN/DR. FRED by PRoVIDED

68 BUSINESS NORTH CAROLINA turing and support function teams are located Christy Shaffer, who left Burroughs Wellcome at the RTP campus,” including the office of Jack in 1995 to help found Inspire Pharmaceuticals Bailey, president of GSK’s U.S. pharmaceuticals. Inc. in Raleigh, which developed ophthalmic He succeeded Deirdre Connelly, who abruptly and other drugs. It went public in 2000, and retired in February. GSK did not make senior was acquired by Merck & Co. for $430 mil- executives available for this story. In a recent lion in 2011. Small-molecule drugs — the conference call with analysts, Bailey cited simplest example is aspirin — are inorganic “unprecedented change” in pharmaceuticals as compounds, relatively cheap to produce and necessitating cost cuts. “We have sharpened our dispense. “Everyone now is more interested in focus,” he said. what are called precision or targeted drugs,” GSK earned $4.3 billion in 2014, slumping Shaffer says. “That’s what you hear even from from $7.3 billion two years earlier. Sales de- President Obama.” The president in Janu- clined 16% to $36 billion in that period. Its stock ary announced what he called a $215 million traded in mid-August at about $44, well below precision-medicine initiative to discover drugs its historic high of $70 in 1999. With its shares to fight genetic diseases such as cystic fibrosis. mired in a long-term slump, GSK has consid- Called biologics, they derive from natu- ered breaking itself into separate consumer ral organisms and include gene therapies products, pharmaceutical and vaccines units. and cancer treatments, highly focused but Company officials have rebuffed suggestions of expensive and difficult to perfect, manufac- a merger with another giant such as New York- ture and administer. “We see this changing based Pfizer Inc. Antitrust regulators would even more,” says Shaffer, now a partner probably block such a move, some analysts say. who analyzes drug startups for the Durham One reason for the stock’s slide is that the investment firm Hatteras Venture Partners. patent for Advair expires in 2016, opening the “We’re going to have even more personalized door to generics that sap profitability. In recent medicine, more customized.” years, Advair has generated about 20% of GSK GSK is scrambling to increase its stake sales, while revenue is likely to slip from $8.3 in biologics, which includes vaccines. It has billion in 2013 to less than $2 billion in 2020. launched more than a half dozen drugs in two GSK is optimistic about Breo, a well-regarded years and has about 40 in late-stage develop- new respiratory drug, and advanced Ellipta ment. Its most dramatic move came last fall inhalers, which will be made in Zebulon. when it sold its oncology lines to Swiss giant But it’s a tough environment as generic Novartis AG for $14.5 billion, while in turn pay- drug giants such as Israel’s Teva Pharmaceuti- ing Novartis $7.1 billion for its vaccine business, cal Industries Ltd. are pushing down prices for excluding influenza. off-patent drugs. Bailey concedes GSK has had Novartis, which had a 550-employee, too many eggs in the Advair basket, calling the $1 billion plant in Holly Springs in Wake loss of patent protection “traumatic.” County that makes primarily Flucelvax flu “The chickens are coming home to roost, in vaccine, recently sold that plant to an Aus- the sense that we’ve been talking about changes tralian pharmaceutical company, but GSK’s in big pharma for many years, and now we’re acquisition of its other vaccine lines ensures seeing a lot of these things happening simulta- North Carolina’s status as a global vaccine neously,” says Atul Nerkar, an associate dean epicenter. Four of the five largest vaccine mak- at UNC Chapel Hill’s Kenan-Flagler Business ers — GSK, Merck & Co., Pfizer and Novartis School who focuses on pharmaceutical research — have operations in the state, Edgeton says. and development. “It will get worse before it GSK is also recovering from self-inflicted gets better. The shakeout is not complete yet, wounds. In 2012, it was hit with $3 billion in and you’re going to see a lot more volatility.” He fines and penalties by U.S. regulators for mar- and others say a core reason for the shakeout is a keting drugs such as Flovent, an asthma drug fundamental shift in the kinds of drugs coming made in Zebulon, for unapproved uses and for online, not only at GSK but scores of other Tar disregarding safety data and cheating Medi- Heel drugmakers and research companies. caid, the national health insurance program for “The days of all drugs being 80% to 90% the poor, out of $300 million. Two years later, small-molecule formulations are gone,” says China slammed the company with $500 million

SEPTEMBER 2015 69 in fines and sentenced its top in-country execu- their search for drugs based on peptide hor- tive to prison for bribing doctors to prescribe mones such as insulin. It’s fueled by a $50,000 GSK drugs. China said it let GSK off lightly biotechnology center loan and venture capital because the defendants admitted guilt. While from Durham-based Pappas Ventures and besmirching GSK’s brand, an adverse impact underscores why the future of a global phar- on its future is doubtful. “With today’s 24/7 maceutical giant is of interest to more than news cycle, these things blow over when the shareholders: GSK and its ancestral companies cycle goes on,” Nerkar says. have long served as spawning grounds for new Of more concern to GSK and the phar- life-sciences companies. maceutical industry, Nerkar and others say, Cutbacks, layoffs, expansions and merg- is upheaval in U.S. health care as it revamps ers and acquisitions have characterized under the Affordable Care Act. Supreme Court pharmaceuticals since 1970, when Burroughs challenges and attempts to repeal the law create Wellcome set up headquarters in what was uncertainty for drugmakers. “It’s rare that you then a fledgling office park with big ambi- have an industry in which you don’t know tions. Its iconic office, with spaceship-like who your customers are,” Nerkar says. “Big cubes seemingly stacked at random on each pharma produces the drugs, patients use them, other and designed by Paul Rudolph, was the insurance company pays for them, but it is one of the state’s first examples of postmod- employers and employees who bear the cost.” ern architecture. The December layoffs, though, hit ground Then the college-age son of a Durham phar- zero in another of the challenges facing GSK macist, Bill Shore visited the building with his and its rivals. “Once, big pharma would spend father. “We were both blown away not only by eight or 10 years in R&D to come out with one the architecture, but by the fact Burroughs Well- big drug,” Nerkar says. “That model is not come had chosen Research Triangle Park as its there anymore.” Now, instead of spending bil- home,” says Shore, who retired as GSK’s com- lions on developing new drugs that might not munity relations director in 2012. The building pan out, industry titans are shedding R&D and is now owned by Silver Springs, Md.-based pushing risk out to highly focused startups. United Therapeutics Corp., which researches In that regard, ironically, even GSK’s such treatments as transplanting porcine lung malaise is again fostering a new generation of tissue into humans. It bought the property from pharmaceutical swashbucklers. Shaffer calls it GSK for $17.5 million in 2012. “the circle of life.” A study last year led by Maryann Feldman, a UNC Chapel Hill public-policy professor, traced 144 firms whose founders and principals IN MID-FEbRUARy, with an ice storm bearing cut their teeth at GSK and antecedents Glaxo down outside, Andrew Young sat in an audito- Wellcome, Glaxo and Burroughs Wellcome. rium on GSK’s Research Triangle Park campus. “The vast majority of these new firms were A medical doctor and native of New Zealand, established in the wake of acquisitions, mergers until the month before he’d been a researcher in and major corporate restructurings,” she says. GSK’s enteroendocrine discovery unit search- Separately, biotechnology center records show ing for drugs for such metabolic diseases as a bump in startups in 1995 and 1996 after Glaxo diabetes. “It was clear near the end of 2014 acquired Burroughs Wellcome. Jim Shamp, an there would be layoffs,” he says, “but it was ex-Glaxo employee and now public relations a surprise that they cut all of the research and director at the center, asked its librarian to trace development in North Carolina.” He and more former GSK workers. than a hundred others listened as Shaffer and “Of 239 people identified by GSK in the other panelists addressed a question aimed at Research Triangle Park and Zebulon, 52 have potential entrepreneurs: Is there life after GSK? president or vice president in their current Eight months later, Young has a new job. job titles and 34 have C-level titles,” such as As chief scientific officer, he is one of six former chief executive officer, chief operating officer GSK research teammates, all terminated, and chief scientific officer. The list includes who founded Research Triangle Park-based life-sciences legends in North Carolina, such Phoundry Pharmaceuticals Inc. to continue as Fred Eshelman, who left Glaxo Wellcome

70 BUSINESS NORTH CAROLINA GSK lags the market in 1985 to create what is now Wilmington- GSK shares gained 51% in the last decade, half the increase of the S&P 500 index. based Pharmaceutical Product Development Canada’s Valeant, whose board includes ex-Glaxo CEO Bob Ingram, has soared. LLC, which has about 14,000 employees in 46 300 countries. PPD sold to an investment group in 2011 for $3.9 billion. In December, as GSK was 2,362% announcing layoffs, Eshelman said he would 250 GlaxoSmithKline PLC donate $100 million to UNC Chapel Hill’s Valeant Pharmaceuticals Inc. pharmacy school. Standard & Poor’s 500 index GSK is giving many like Young and his 200 108% colleagues at Phoundry a shove. “Probably at some stage we would have done something 150 like this, but it was made easier by GSK forc- ing the decision on us,” he says. Others left on their own, convinced that smaller, innova- 100 tive entrepreneurial ventures can respond to the vagaries of big pharma better than GSK- 51% scale behemoths. “You’ve got talent,” Young 50 says, “thinking they can do a better job on their own.” 0 Stephen Frye underscores the point. He ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 Prices are adjusted for dividends Source: Yahoo Finance joined Glaxo immediately after receiving a doctorate in organic chemistry from UNC most likely route for small companies like this Chapel Hill in 1987. He achieved pharmaceuti- is, if you’re successful, somebody buys the cal rock-star status as project leader of the product and completes the clinical develop- company’s blockbuster Avodart, which became ment.” Somebody like GSK? “Yes, if everything a $1 billion-a-year drug for prostate disease. worked out, that’s certainly a possibility.” His last seven years there, he was world vice Time will tell how much further the long president for medicinal chemistry. He quit in coattails of GSK carry the life-sciences indus- 2007, and now heads the Center for Integrative try in North Carolina. Some insiders fear the Chemical Biology and Drug Discovery at UNC. chilly regard by some lawmakers sends shivers “Over the years, GSK had a number of changes through the industry, which once enjoyed in direction, and I just wanted to try something unquestioned political esteem. Former Gov. Jim different,” he says. Two years ago, Frye, oncolo- Hunt made three trips to London to help recruit gist Doug Graham and Shelton Earp, former Glaxo in 1983, Shore says. director of UNC’s Lineberger Comprehensive Regardless of GSK, the state has the Cancer Center, formed Meryx Inc. to seek treat- necessary ecosystem, says Nerkar. “You have ments for leukemia and other cancers. The a bunch of talented people, you have the seven-employee company — some others universities, the specialized knowledge, the came from GSK — has received funding from hospitals, everything in place, for the equiva- Eshelman, who is a director. lent of a Silicon Valley for life sciences.” And Still, GSK’s challenges in 2015 differ in one often, motivation. Christy Shaffer relates how respect from earlier ones. This time, a giant Martine Rothblatt founded United Therapeu- corporation is minimizing its risk, encourag- tics in 1996 to license and perfect a compound ing staffers to strike out on their own. “We Glaxo had shelved because its worldwide were a functioning team at GSK,” Young says market, about 200,000 patients, was too small of Phoundry’s creators. “GSK was generous to be profitable. It would treat pulmonary with us. We were able to keep the fruits of our arterial hypertension, lethal high blood pres- work and some clinical information — they sure in the lungs. licensed it to us for a royalty — and they gave Since, Remodulin has saved thousands of us a lot of the equipment we needed. They lives worldwide. Rothblatt, the chairman and helped us get started.” CEO, had become interested after her dying Startup Meryx has discussed its projects young daughter, today healthy and in her early with several large companies, Frye says. “The 30s, asked, “Mom, isn’t there a pill for this?”

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