GSK Steps Up Cost-Cutting Programme as 2008 Revenues, Profits Slump

U.K. pharmaceutical giant GlaxoSmithKline (GSK) has closed its books on a challenging year as the company posted an anticipated slump in both revenues and net profits. The company's top-line suffered from generic competition in the United States and declining Type 2 diabetes drug Avandia (rosiglitazone) sales while its bottom line also suffered from an unexpected legal charge booked in the fourth quarter of the year (see United Kingdom: 30 January 2009: GSK Secures U.K. Government Contract for Antiviral Relenza, to Book US$400-mil. Legal Charge in Q4). For the full year, the group's net profit decreased by 25% year-on-year (y/y) at constant exchange rate (CER) to £4.7 billion (US$6.8 billion), while total revenues contracted by 3% y/y at CER to £24.4 billion. Pharmaceutical sales were also down 3% y/y at CER to £20.4 billion, while consumer healthcare sales rose by 3% y/y to nearly £4 billion. Pharmaceutical sales growth was driven by the Emerging Markets (+12% y/y at CER) and Europe (+3% y/y at CER) while U.S. sales were down 11% y/y at CER as generic competition on mature brands bite and Avandia sales dived further.

On the expense side, for the full year, cost of sales rose by 13% y/y to £6.4 billion, reflecting the loss of higher-margin products to generic competition, lower Avandia sales and lower margins on a new product mix. The negative impact of the above-mentioned factors were partly offset by the company's savings that have resulted from its Operational Excellence programme (see United Kingdom: 25 October 2007: Crunch Time for GSK as Q3 Avandia Losses Prompt New Job Cuts PlanGSK Snaps Up Heart-Drug Maker Reliant Pharmaceuticals for US$1.65 bil.). In the meantime, selling, general, and administrative (SGA) costs rose by 2% y/y at CER to £7.7 billion, benefiting from the company's restructuring programme and positive currency movements but suffering from the £278-million legal charge booked in the fourth quarter of the year. R&D expenses rose by 4% y/y to £3.7 billion as the company heavily invested in its pipeline. In 2008, GSK booked £1.12 billion in restructuring charges associated with its Operational Excellence programme and the acquisition of Reliant Pharmaceuticals (see United States - United Kingdom: 22 November 2007: GSK Snaps Up Heart-Drug Maker Reliant Pharmaceuticals for US$1.65 bil.). More specifically, GSK charged £639 million to the cost of sales, £304 million to SGA, and £175 to R&D expenses.

With regards to the company's Operational Excellence programme, GSK has announced that it will step up its cost-cutting efforts in a bid to generate an extra incremental £1-billion in savings by 2011, of which £450 million will be made in 2009. The cost-cutting efforts will result in job losses although GSK has refused to give an estimate on the number of jobs that will go despite reports of up to 10,000 in the press. The cost of the programme will now reach £3.6 billion, up from the previous estimate of £1.5 billion. From 2011, it is expected to generate annual pre-tax savings of £1.7 billion, up from the previous estimate of £700 million.

In 2008 and in the fourth quarter of the year, GSK's respiratory, cardiovascular and urogenital and vaccine franchises drove sales growth. The respiratory franchise remains the company's top earner, with full-year global sales up by 5% y/y at CER to £5.8 billion. Asthma treatment Seretide/Advair (salmeterol/fluticasone propionate) remains GSK's best asset, with sales up by 8% y/y at CER to £4.1 billion. The vaccines franchise displayed strongest growth momentum with sales up 15% y/y at CER to £2.5 billion. Other 2008 growth drivers were herpes medicine Valtrex (valacyclovir), with full year sales up by 161% y/y at CER to £1.2 billion; cardiovascular drug Lovaza (omega-3-acid ethyl esters) with sales up over 100% y/y to £290 million; osteoporosis drug Bonviva (ibandronate) with sales up by 34% y/y at CER to £237 million and prostate cancer drug Avodart (dutasteride) with sales up by 27% y/y at CER to £399 million.

The loss of epilepsy and bipolar disorder drug Lamictal (lamotigrine) to U.S. competition in July was dearly felt as the 2008 sales of the drug were down 22% y/y to £926 million. The generic impact was felt even more in the fourth quarter of the year when sales plummeted by 57% y/y at CER to £177 million. In the meantime, the heart drug Coreg (carvedilol), antidepressant Wellbutrin (bupropion) and Parkinson's disease Requip (ropinirole) franchises continued to tumble as U.S. generic competition bit further with sales down 68%, 40% and 31% y/y at CER respectively. Sales of anti-viral Relenza (zanamivir) have suffered from lower governmental stockpile orders as revenues were down 80% y/y at CER in 2008 to £57 million. Finally, with regards to Avandia, the fallen star of GSK's portfolio, sales have fallen 46% y/y at CER to £512 million for the full year and 24%y/y at CER to £147 million in the fourth quarter of the year, reflecting that the financial impact of the drug's plummeting sales should start wearing off.