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European austerity knocks GlaxoSmithKline off course

GlaxoSmithKline, the drugs giant reeling from a US mis-selling scandal, has been hit by the slowdown in Europe. Longer-term growth prospects remain good, however.

 
European austerity knocks GlaxoSmithKline off course

The eurozone financial crisis has forced GlaxoSmkithKline to scale back its expectations for the year after the drug giant’s sales dropped sharply in the second quarter.

The austerity regimes of various European governments meant Glaxo had to cut its prices in the Continent by 7%. This was the main factor in a 2% fall in second quarter turnover to £6.46 billion.

In the US, where the company is reeling from a £1.9 billion ($3 billion) legal settlement with the Justice Department over the unlawful promotion of drugs, sales fell 6% as generic rivals increased their market share and Glaxo retired old products.

Shares in Glaxo (GSK.L), which is the most popular of our Citywire Top Stocks, fell heavily immediately after the results were published as the company said sales and operating margins this year would be unchanged from 2011. Analysts had expected earnings growth of around 2-3%.

The shares have since bounced back to trade at £14.34 on Wednesday, down 11p or 0.8% after chief executive Sir Andrew Witty cautiously indicated that Europe may have bottomed out. ‘If nothing new happens then we may be at the worst point now,’ he said.

Questioned about Glaxo’s decision to plead guilty to charges of fraud and failure to report safety data on its drugs in the nineties and early noughties, Witty expressed his regret at the company’s actions. However, he insisted that there had been a change in culture and a huge investment in compliance and auditing since he took over in 2008. ‘I’m very sorry we had to deal with the echoes of the past in this settlement.’

The setbacks in the Europe and the US were offset by a bounce back in emerging markets and continued strong performance in Japan and consumer healthcare. With provisions for the legal settlement already in place, the half-year picture was unchanged on last year, with turnover and operating profits for the six months to 30 June flat at £13.1 billion and £3.7 billion using constant exchange rates.

Although Witty acknowledged the challenging economic backdrop, he was upbeat about the prospects for new drug launches. Glaxo has eight treatments at advanced phase-three trialling that could be brought to market in the next two years, and its recent clinching of a deal to buy Human Genome Sciences will boost the pipeline further.

Combined with an extra £500 million in savings the company aims to squeeze from its manufacturing base in the next three years, Witty said ‘we remain confident in our ability to drive improvements in the group’s core operating margin over the next few years’. The company has declared a 17p second quarter dividend, up 6% on the previous year.

Citywire verdict:

Glaxo’s settlement of criminal charges this month was truly shocking. If the news had not been overshadowed by events at Barclays and the Libor-rigging scandal, the damage to the company’s reputation would have been worse. It was extremely disappointing to see Glaxo conform to the stereotype of bad, big pharma.

The main charges were that Glaxo targeted the antidepressant Paxil to patients under the age of 18 when it was approved for adults only; it pushed the drug Wellbutrin for uses it was not approved for, including weight loss and treatment of sexual dysfunction; and went as far as distributing a misleading medical journal article to promote the drugs. It was also lavish in its spending on providing doctors with meals and spa treatments that amounted to illegal kickbacks, the US Justice Department said.

Let’s hope Witty is right and this is a relic from Glaxo’s past that will not be repeated.

Away from the scandal, Glaxo is performing pretty well in the circumstances. Certainly its drugs pipeline will be the envy of AstraZeneca (AZN.L), which lost its chief executive in the Shareholder Spring over the lack of new products to take the place of old treatments that are now losing patent protection. The company is not spending any more on R&D than it did five years ago, but now has a lot to show for its money. Meanwhile, it continues to pay good, well-covered dividends and yields over 4%. While defensive, the shares are not immune to the economic turmoil and are down 3% year to date. But with four of our five Top Stocks managers consistently holding the shares, the message must be to hold on.

1 comment so far. Why not have your say?

Chuck

Jul 25, 2012 at 19:02

According to Google, at close, GSK is down -11.24p (-0.78%). Tomorrow is another day though, and more information will have been digested.

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