GSK hit by poor lung drug sales, CEO dislikes mega-mergers

LONDON, May 01, 2014 – GlaxoSmithKline’s sales fell 10 percent in the first quarter as its flagship lung drug Advair struggled in a tough U.S. market, highlighting the kind of pricing pressures behind a wave of deals sweeping the sector.

GSK joined the deal-making bandwagon last week to trade more than $20 billion of assets with Swiss rival Novartis, representing the kind of targeted transaction that Chief Executive Andrew Witty said he much preferred to mega-mergers.

U.S.-based Pfizer has rocked the industry by trying to buy GSK’s smaller British rival AstraZeneca for $100 billion, but Witty said he was just an “interested observer” in that fight.

Asked if GSK could consider a “white knight” counterbid, he declined to comment specifically but told reporters that such broad-based deals were “distracting”.

GSK’s performance in the three months ended March was overshadowed by a 20 percent fall in sales of Advair in the United States, after one of the country’s largest healthcare providers stopped paying for prescriptions.

Sales of its new respiratory drug Breo have also been slower than anticipated due to delays in securing healthcare contracts for the medicine, although GSK expects things to improve from next month.

Alistair Campbell, an analyst at Berenberg Bank, said GSK’s reliance on Advair had long been a concern for investors, making new lung products vital for the future, and the unimpressive start for Breo in the U.S. market was disappointing.

GSK shares fell 2.4 percent by 1500 GMT. Deutsche Bank analyst Mark Clark said the worse-than-expected sales performance and the dropping of explicit sales growth guidance would lead analysts to question their profit assumptions.

NO EXPLICIT SALES FORECAST

Reported sales in the first quarter, which were hit by the strength of sterling, totalled 5.61 billion pounds ($9.45 billion), generating “core” earnings per share down 20 percent at 21.0 pence.

Analysts, on average, had forecast sales of 5.84 billion pounds and core EPS, which excludes certain items, of 20.7 pence, according to Thomson Reuters.

GSK said it still expected sales to grow over the year in constant exchange rate terms, after a 2 percent decline on this basis in the first quarter, but it is no longer giving a specific figure. Previously it had predicted 2 percent growth.

The company reiterated its target of increasing 2014 EPS by between 4 and 8 percent.

In addition to the weak Advair performance, GSK also continued to be held back by difficulties in China, where sales fell 20 percent from a year ago, following a damaging bribery scandal that broke last July.

The global drugs industry is having to contend with increasing pressure on healthcare spending, prompting a wave of restructuring as companies seek to focus on areas of strength and exit those where they lack the scale to compete.

CEO Witty aims to do that via his recent deal with Novartis to sell its cancer drugs and buy most of the Swiss group’s vaccines, with the two firms also creating an $11 billion-a-year consumer health business.

The revamp means GSK in future will get 70 percent of sales from its franchises in respiratory medicines, HIV, vaccines and non-prescription consumer health. Reuters