Crunch Time for GSK as Q3 Avandia Losses Prompt New Job Cuts Plan

GSK to Cut Jobs

The world's second-largest drug company has announced plans to slim down over the next three years, in order to head off heavy losses expected from growing generic competition and shrinking sales of type 2 diabetes drug Avandia (rosiglitazone). U.K.-based GlaxoSmithKline (GSK) yesterday revealed a new "Operational Excellence" programme that will aim to deliver £700 million (US$1.4 billion) in annual pre-tax cost savings by 2010. The target is for £350 million of these savings to be achieved next year and a further £550 million to be achieved by 2009. Job cuts will form a key part of the plan, although GSK has stopped short of revealing how many positions will be cut. The three main areas of the savings programme are manufacturing, selling and administration, and R&D infrastructure. GSK plans to reduce its number of manufacturing sites around the world and simplify activities and processes at each of its remaining sites. Outsourcing production and seeking out low-cost materials will also play a crucial role here. Within sales, GSK is prioritising departments selling drugs in its biggest speciality growth areas, namely oncology and vaccines, while savings in R&D will reportedly be "focused on simplification and streamlining of support infrastructure". The programme itself will cost some £1.5 billion to implement.

The planned cutbacks have been revealed as GSK published its latest set of financial results for the third quarter of the year. Growth in group sales was affected noticeably by a downturn in the company's Pharmaceuticals division, which saw a 2% year-on-year (y/y) fall in turnover to £4.6 billion. Operating profit within the Pharmaceuticals unit was also down, contracting by 3% y/y to stand at £1.7 billion. GSK's Consumer Healthcare unit fared much better over the quarter, however, chalking up a 16% y/y increase in sales to £871 million and a 15% y/y rise in operating income to £203 million. Group operating profits were down by 1% y/y during the third quarter, reaching £1.9 billion.

The shrinking pharmaceutical revenue during the third quarter was propelled by heavy losses in sales of several key drugs, the most notable of which was Avandia. Following a disastrous year of safety scares and toughened label warnings, Avandia's decline continued with a 51% y/y nosedive in quarterly sales to £153 million, which contributed to a 28% y/y drop over the first nine months of 2007. Avandia was not the only product to have a negative impact on GSK's top line, however. The Wellbutrin (bupropion) anti-depressant franchise continues to suffer the effects of generic competition, with Wellbutrin XL sales plummeting 41% y/y to cause a 38% y/y decline to £135 million for the Wellbutrin franchise as a whole. The effects of generic erosion were visible elsewhere too, with sales of cardiovascular drug Coreg IR (carvedilol immediate release) down by 37% y/y to £114 million.

Outlook and Implications