UPDATE: Glaxo Quarterly Results Hit By Legal Charge, Generics

21st Jul 2010 14:00

(Adds detail, CEO and analyst comment.) By Sten Stovall Of DOW JONES NEWSWIRES LONDON (Dow Jones)--GlaxoSmithKline PLC (GSK, GSK.LN) Wednesday missed earnings forecasts for the second quarter as continued strong sales of new products and its pandemic flu vaccine and further expansion in emerging markets was offset by generic competition and a legal charge taken to meet litigation costs. Andrew Witty, Glaxo's chief executive officer, said in a statement: "For the quarter, GSK sales were impacted by several individual factors and adverse prior year comparisons. For example, we saw an acceleration of generic competition to Valtrex in the USA and temporary suspension of Rotarix in the quarter." Witty later told journalists he expects the group's overall vaccine business to recover and Rotarix to regain its previous momentum. The company has been restructuring since Witty took the helm in April 2008, cutting costs and simplifying its structure. The group is now better placed than many of its rivals when it comes to patent expiries. It will nonetheless continue to be hit by accelerating erosion in sales of its antiviral Valtrex. In the three months to end-June, Glaxo's net profit, before major restructuring, plunged to GBP130 million from GBP1.57 billion in the same period a year earlier. A poll of 13 analysts had foreseen unadjusted net profit declining to GBP1.40 billion. Post-restructuring, the company posted a net loss of GBP304 million. Sales climbed 4% to GBP7.03 billion, beating analysts' forecasts of GBP6.98 billion for the latest quarter. The analyst survey was conducted before Glaxo's surprise announcement last week it was taking a charge of GBP1.57 billion in the second quarter to cover costs of settling legal disputes involving antidepressant Paxil, its diabetes drug Avandia, and a U.S. government investigation of a Glaxo factory in Puerto Rico. That pre-tax charge was in addition to GBP2.3 billion in provisions Glaxo had previously booked. Second-quarter earnings per share before major restructuring slid to 2.6 pence from 31 pence a year earlier. Before news of the latest legal charge, analysts polled by Dow Jones had forecast second-quarter unadjusted EPS of 27.66 pence. Glaxo said unadjusted EPS in the latest quarter was 29.3 pence without the legal charge. The quarterly dividend was raised 7%, to 15 pence, making 30 pence for the half year. Witty said the U.K.'s biggest drug maker is "making good progress to build our group of healthcare businesses which offer sustainable growth and have complementary risk/value profiles. At the same time, we have also taken action to drive improved returns on invested capital in our core R&D operation." Witty indicated on a journalist conference call that Glaxo isn't interested in bidding for SSL International PLC (SSL.LN), which is being bought by Reckitt Benckiser Group PLC (RB.LN). Although Witty declined to answer directly, he stressed that Glaxo is focused on science-based over-the-counter businesses and that the U.K.-based condoms and insoles maker is "quite different" in nature, and said interpretation could be made accordingly. As a global player, Glaxo faces pressure from government healthcare reforms and price cuts in the U.S., Europe and Japan. Witty said he expects to see pressure on drug prices in Europe going forward, with more than the usual 3% price erosion occurring in the region over the next year-and a half. Witty said any decisions on share buybacks would depend on the group's business performance and its acquisition opportunities. Jeremy Batstone-Carr, analyst and director of private client research at Charles Stanley said investors should not have been surprised by the second-quarter legal charge or restructuring as both were well-flagged in advance. Evolution Securities said second-quarter sales were in line with market forecasts, noting that a profit decline of about GBP500 million in Glaxo's U.S. pharmaceutical business had been offset by profit rises in all the company's other significant businesses. It also noted a strong margin increase in emerging markets, a sign that the company is focusing on future profit growth areas. Glaxo shares at 1245 GMT were up 1.1% at 1,187 pence, underperforming a 2% rise in the FTSE 100. The stock has risen 2.3% in value over the past 12 months. -By Sten Stovall, Dow Jones Newswires; +44 207 842 9292; [email protected] (END) Dow Jones Newswires July 21, 2010 09:00 ET (13:00 GMT)