GlaxoSmithKline forecast lower 2008 earnings due to falling sales of diabetes drug Avandia and increased generic competition, sending shares in Europe's biggest drugmaker down 7.6 percent on Thursday.
Glaxo said sales fell 2 percent to 22.7 billion pounds ($44.4 billion) in 2007, while underlying "business performance" earnings per share (EPS) rose 4 percent to 99.1 pence against analysts' median forecast of 97p in a Reuters Estimates poll.
Total EPS fell 1 percent to 94.4 pence.
For the coming year, Glaxo said the impact of lower Avandia sales together with increased generic competition would lead to a mid-single digit percentage decline in business performance EPS, at constant exchange rates.
"The outlook is disappointing. Consensus expectations were for low- to mid-single digit earnings growth in 2008 and they are talking about a decline," said Ben Yeoh, an industry analyst at Dresdner Kleinwort.
Glaxo shares were down 7.3 percent at £10.76, after hitting a trough of £10.71, the lowest level in more than three years.
Avandia prescriptions have fallen sharply since May last year, following a U.S. study linking it to heart attack risk. Annual revenues from the Avandia product group fell to 1.2 billion pounds from 1.6 billion in 2006.
Glaxo insists the benefits of Avandia outweigh any risks but Chief Executive Jean-Pierre Garnier said any turnaround in the product's fortunes would take time.
"The shadow of Avandia will continue over us in '08 and make life a little bit more difficult for us," he told reporters. "But underneath all this you have a very strong business. In fact, without the Avandia incident, the company would have grown 19 percent in 2007."
Sales of asthma drug Advair, Glaxo's top seller, rose to 3.5 billion pounds from 3.3 billion in 2006.
Garnier, who will hand over to his successor Andrew Witty in just over three months, said 2007 had been a challenging year but the company remained focused on delivering the high potential of its large new drug pipeline.
Industry analysts are wary about near-term prospects, however, with Glaxo set to lose patent protection on a clutch of central nervous system drugs this year.
At the same time, some delays to the portfolio of new drugs have shaken investors' confidence.
Most damaging has been the setback for cervical cancer vaccine Cervarix, arguably the most important new product for Glaxo this decade.
The U.S. Food and Drug Administration delayed approval of Cervarix in December, pending more information. Garnier said the company now expected to update the agency on Cervarix by the third quarter of 2008.
Cervarix is already approved in Europe. It competes against Merck & Co's Gardasil, which is available on both sides of the Atlantic.