UPDATE 2-GSK sales fall short as pain in Europe continues

* Q3 sales 6.53 bln pounds vs consensus forecast 6.67 bln

Core EPS 26.5p vs consensus forecast 27.8p

* CEO says reviewing European business as prices fall 7 pct

* Group getting ``closer and closer'' to sustainable growth

* Shares down 1.6 pct on weak results

By Ben Hirschler

LONDON, Oct 31 (Reuters) - GlaxoSmithKline sales fell a bigger-than-expected 8 percent in the third quarter, hurt by continued pressure on drug prices in austerity-hit Europe and lower demand for some vaccines.

GSK, like its rivals, has suffered a string of patent expiries in recent years and is struggling to grow sales, even though it has come through the so-called ``patent cliff'' earlier than others.

It was the fourth consecutive quarter in which Britain's biggest drugmaker missed sales and earnings expectations.

European prices fell 7 percent, after an unprecedented 8 percent fall in the second quarter, and Chief Executive Andrew Witty said he was now reviewing operations in the region. Plans for reshaping the business may come with full-year results early next year.

Witty told reporters he saw no reprieve in Europe ``in the next quarter or two'' and warned governments the industry could not sustain such poor returns forever.

``It is not reasonable for governments to believe that they can continue to make these sorts of price reductions and delay the introduction of novel medicines without that creating unintended consequences,'' he said.

``It will erode the attractiveness of Europe for the entire industry.''

In one unnamed country, GSK was now selling medicines for 50 percent less than in 1996, after years of cumulative price cuts.

The tough conditions in Europe have blown off course GSK's hopes for a return to sales growth this year, although the company's growing business in emerging markets and its large consumer healthcare operation are both doing well. It also has an extensive pipeline of new drugs in development.

Until July, GSK had been predicting a return to sales growth this year. It revised its 2012 sales outlook down to flat at mid-year and reiterated this forecast on Wednesday, adding the caveat that this excluded any further deterioration in Europe.

``We are getting closer and closer to delivering sustainable sales growth,'' Witty said.


Shares in the group fell 1.6 percent by 1425 GMT, underperforming a 0.6 percent decline in the European drugs sector, on the weak results.

``Austerity measures in Europe are having a significant impact on GSK's growth but fortunately the company has a strong late-stage pipeline,'' said Mick Cooper, analyst at Edison Investment Research.

Tim Anderson of Bernstein said the quarterly miss was not a big surprise and GSK's longer-term growth outlook continued to look comparatively good.

Sales of 6.53 billion pounds ($10.50 billion) generated ``core'' earnings per share (EPS) down 13 percent at 26.5 pence in the quarter. Analysts, on average, had forecast sales of 6.67 billion pounds and core EPS, which excludes certain items, of 27.8p, according to Thomson Reuters I/B/E/S.

The vaccines business suffered a particularly tough comparison because Japan bought a large amount of GSK's cervical cancer shot Cervarix a year earlier when the group also sold a lot of flu vaccine in the United States.

Excluding these vaccine factors and the impact of product disposals, GSK said sales for the latest quarter were broadly in line with last year in constant currency terms.

Witty is diversifying GSK to cut reliance on ``white pills in Western markets'', the part of the business most vulnerable to price cuts and generic competition.

The strategy involves a push into both emerging markets and non-prescription consumer health - and in some cases a combination of the two. In India, for example, sales of GSK's Horlicks drink total 3.5 billion cups a year.

The heart of the company, however, remains its pipeline of prescription drugs, where it is stepping up investment on experimental medicines for diseases ranging from HIV/AIDS and cancer to chronic lung conditions.

Part of the investment involves buying up rights to products previously shared with other companies, as GSK did in July by buying Human Genome Sciences for $3 billion and again this week with a revamped deal for HIV drug dolutegravir.