Glaxo Profits Slide By Almost a Third--2nd Update

By Hester Plumridge 

LONDON-- GlaxoSmithKline PLC's first-quarter profits slid by almost a third, the company said Wednesday, a week after it announced a series of multibillion-dollar asset swaps with Novartis AG to bolster its consumer-health and vaccines businesses.

The U.K. drug maker's profits were dented by asset disposals, currency pressures and falling sales of its established respiratory drugs in the U.S. They highlight the pressures facing Glaxo and the reasons behind its acquisition of Novartis assets to boost growth.

Chief Executive Andrew Witty refused to comment on any speculation that Glaxo could step in with a "white knight" offer for fellow U.K. drug maker AstraZeneca PLC, after the latter declined a takeover bid from Pfizer Inc. in January.

However, he said Glaxo's strategy was firmly focused on closing the Novartis deal and on its own drug-development pipeline. Mr. Witty has in the past ruled out signing large traditional merger-and-acquisition deals.

"What we're focused on is ensuring that our organization is not distracted in the core [research and development] business," Mr. Witty said on a conference call Wednesday.

"We committed ourselves last week to a very, very major transaction with Novartis," he added.

Sales at Glaxo fell 14% to GBP5.61 billion ($9.45 billion) from GBP6.47 billion in the same quarter of the previous year, missing market expectations. Sales were hurt by wholesalers and retailers destocking Glaxo's asthma drugs after stocking up the previous quarter, and the exclusion of Glaxo's best-selling drug--the asthma treatment Advair--from U.S. prescribing lists in January.

Respiratory drugs are Glaxo's biggest profit driver, and the disposal of its cancer-drug business to Novartis will increase this reliance.

Sales of Advair--responsible for just under a fifth of Glaxo's total sales--fell 15% at constant exchange rates in the first quarter, against increased competition in the U.S. and Europe.

"Inevitably, in the short run, we will have volatility," said Mr. Witty, as Glaxo tries to boost sales of its new asthma treatments Breo and Anoro, the latter launched in the U.S. last week, to make up for falling Advair sales. Uptake of Breo in the U.S. has so far been disappointing.

In the U.S, pharmacy-benefit manager Express Scripts Holding Co.--which negotiates drug prices on behalf of employers and health insurers--took the Glaxo asthma inhalers Advair Diskus, Flovent Diskus and Breo Ellipta off its "preferred drug" list as of Jan. 1, meaning patients prescribed them must pay full retail prices for the drugs. Express Scripts recommends rival treatments are prescribed instead, including Symbicort from AstraZeneca and Dulera from Merck & Co.

Glaxo's profit attributable to shareholders fell 30% to GBP668 million in the first quarter, from GBP961 million in the same quarter of the previous year. Its core earnings per share--a measure that excludes legal costs, asset impairments, profits on asset disposals and restructuring costs--fell to 21.0 pence from 26.9 pence in the same quarter of the previous year, in line with analysts' expectations.

Mr. Witty said Glaxo was continuing to evaluate the options for its "established-products portfolio"--a collection of its older drugs facing generic competition, responsible for 14.5% of its total sales.

Glaxo last year announced the sale of a portfolio of thrombosis drugs for GBP700 million. Mr. Witty said it was "highly likely we'll do more transactions," although he said these would be more likely for its portfolio of drugs in the U.S. and Europe rather than its established drugs in emerging markets.

The deals signed with Novartis last week, worth more than $20 billion in total, will see Glaxo sell its high-margin cancer-drug business to its Swiss rival and bulk up its own businesses in consumer health and vaccines, both lower-margin businesses but with more reliable cash flows.

Glaxo reiterated its guidance for a 4%-to-8% increase in core earnings per share at constant exchange rates this year. Its shares fell 2% in London trading Wednesday.

Write to Hester Plumridge at [e-mail]

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