Glaxo Earnings Rise 13%, Cautious on Outlook

GlaxoSmithKline's new chief executive set out plans to make the world's second largest drug maker a broader business with lower costs, but kept a cautious view on short-term prospects that knocked its shares.


Laying out his strategy formally for the first time on Wednesday, Andrew Witty declared his three priorities were diversification, smarter value-based drug research and a simplification of operating systems.

He said money saved from the simpler group structure will be reinvested or returned to shareholders.

But Europe's biggest drug maker signaled the short-term focus would be on investment as the timeline for its remaining 6.5 billion-pound ($13 billion) share buyback program would be extended beyond July 2009.

Glaxo reported a better-than-expected 13 percent rise in second-quarter earnings, as strong sales of vaccines and consumer products offset tough trading in pharmaceuticals.

But the group kept its full-year forecast for a mid single-digit percentage decline in underlying earnings per share (EPS), dashing hopes it might raise its guidance, and some analysts were disappointed in a meager rise in sales of its top-selling drug, Advair for asthma.

"It's clear that key growth drivers remain under pressure," said Charles Stanley analyst Jeremy Batstone-Carr.

"There's nothing in these results to encourage analysts to upgrade and therefore investors have taken an opportunity to lock in profits after a reasonably good three-month performance."

Glaxo shares were down. Second-quarter sales rose. Earnings per share (EPS) rose faster, helped by cost cutting and disposal gains.

Analysts polled by Reuters Estimates had forecast EPS of 25p.

Emerging Markets

Witty made emerging markets a top priority -- a pledge backed up by a pioneering deal with South Africa's Aspen Pharmacare Holdings that paves the way for the sale of cheap branded generic medicines in emerging markets.

Witty's blueprint represents a shift in direction for a company that, like many of its peers, has focused in the past on developing blockbuster prescription drugs.

In future, Glaxo will put equal emphasis on other areas, such as consumer products -- ranging from headache tablets to toothpaste to nutritional drinks -- as well as vaccines and non-traditional biotech medicines.

"That broader front will allow us to reduce some of the volatility we've seen in the performance of the company over the last few years and therefore start to diminish some of the risk which is perceived by shareholders in the business," he said.

Witty told reporters he was also open to expanding into new areas, if it could be shown that these would drive growth.

But he ruled out buying a generic drug business in the United States or Western Europe.

The diversification strategy aligns Glaxo more closely with companies like Novartis and Johnson & Johnson, which have long trumpeted the breadth of their healthcare portfolios.

The rethink has become necessary because of the grim outlook for conventional or small molecule, pharmaceuticals, where a barrage of looming patent expiries promises to slash prices in many therapeutic areas for ever.

That changing landscape means Glaxo needs to focus on areas where there is both an unmet medical need and the scientific potential for developing new products, Witty said.

Glaxo's eight areas of focus for future drug research will be inflammation, oncology, metabolic pathways, ophthalmology, respiratory, neuroscience, anti-infectives and biopharmaceuticals.

Glaxo already has a reputation for cutting costs, but Witty said more could be done, for example by eliminating duplicate financial accounting systems and reducing the number of packs its pharmaceutical factories produce.

Witty said he was actively looking for bolt-on acquisitions across all areas of Glaxo's business but he was skeptical about big deals, given the pipeline problems facing any large company Glaxo might look to acquire.