GSK Reports Dip in Profit During 2007, Braces for Difficult 2008

Generic competition, a dive in sales of its former top earner, adverse currency effects, restructuring costs and the acquisition of Domantis and Reliant Pharmaceuticals have hit U.K. pharmaceutical giant GlaxoSmithKline's (GSK) bottom line in 2007. Operating income, as calculated by Global Insight, declined by 5% year-on-year (y/y) to £7.12 billion (US$13.97 billion). The group's worldwide sales declined by 2% y/y to £22.7 billion as pharmaceutical sales went down by 4% y/y to £19.2 billion due to strong U.S. generic competition and the nosedive in U.S. sales of type 2 diabetes drug Avandia (rosiglitazone). On the other hand, the consumer healthcare franchise saw 11% y/y growth to reach nearly £3.5 billion. Thanks to 4% y/y savings in both R&D and selling, general and administrative (SG&A) expenses, the company has managed to maintain its operating margin in 2007, which stabilised at one percentage point (pp) lower than in 2006.

The cost of goods sold increased by 6% y/y, reflecting a disappointing regional sales mix. The decrease in R&D costs was due to a decrease in charges associated with prior restructuring activity, while the £338 million cost relating to the company's Operational Excellence programme also weighed on operational expenses (see United Kingdom: 25 October 2007: Crunch Time for GSK as Q3 Avandia Losses Prompt New Job Cuts Plan). GSK forked out just over £1 billion for the acquisition of U.S. heart drug firm Reliant Pharmaceuticals and U.K. antibody therapy specialist Domantis (see United States - United Kingdom: 22 November 2007: GSK Snaps Up Heart-Drug Maker Reliant Pharmaceuticals for US$1.65 bil.).

The respiratory franchise was GSK's top earner in 2007, with sales of asthma treatment Seretide/Advair (salmeterol/fluticasone propionate) growing by 10% y/y at constant exchange rates (CER) to £3.5 billion. Sales of epilepsy and bipolar disorder drug Lamictal (lamotrigine) also fared well with an 18% y/y growth at CER to £1.1 billion. Overall, the vaccine products performed well with growth of 20% y/y at CER for the franchise. Other products with strong growth were herpes medicine Valtrex (valacyclovir), Parkinson's disease drug Requip (ropinirole), osteoporosis drug Bonviva (ibandronate) and anticoagulant Arixtra (fondaparinux sodium), with jumps in sales of 18%, 36%, 79% and 81% y/y at CER respectively.

The metabolic franchise took a beating due to a dramatic 34% y/y decrease in sales at CER for last year's top-earner Avandia, on the back of safety scares (see United Kingdom: 22 May 2007: GSK Strongly Defends Avandia After Study Links It to Increased Heart Attack Risk). In 2007, Avandia generated revenues of £877 million. The HIV franchise delivered mixed results with global sales down by 1% y/y at CER, as older products faced competition from new products such as Merck's (U.S.) Isentress (raltegravir) and Pfizer's (U.S.) Celsentri/Selzentry (maraviroc). GSK's newer HIV products, Lexiva (fosamprenavir calcium) and Epzicom/Kivexa (Epivir + Ziagen), saw strong market uptake.

Heart drug Coreg IR (carvedilol), cancer treatment Zofran (ondansetron), asthma treatment Flonase (fluticasone propionate) and anti-depressant Wellbutrin XL (bupropion) fell victim to generic competition and saw their sales plummet by 18%, 77%, 34% and 37% y/y at CER respectively.