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GSK to cut costs in Europe as sales growth disappoints

A sign for British pharmaceuticals company GlaxoSmithKline is seen on its London offices. Sales in the final quarter of 2012 fell 3 per cent, mostly due to the economic downturn in Europe.

SANG TAN/The Associated Press

GlaxoSmithKline plans to cut costs in its struggling European drugs division and promised investors a return to growth this year, after failing to deliver a hoped-for sales and margin recovery in 2012.

Britain's biggest drug maker said a new program to restructure European operations, drug manufacturing and research would save at least £1-billion ($1.6-billion U.S.) annually by 2016, with related charges of £1.5-billion.

GSK also placed its Lucozade and Ribena drinks brands under strategic review – a process that could see the products repositioned, partnered with another company, or sold off.

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The company has not yet decided whether to sell either beverage – but that did not stop bankers thirsty for a deal pitching in within minutes after the review was announced in the group's results statement at noon Wednesday. It took just 18 minutes for the company to get the first call from an investment banker offering to help it dispose of its famous drinks.

Their eagerness reflects a view that GSK has two very sell-able brands on its hands, which together could fetch $1.2-billion or more, even if they no longer fit so well within the company's own portfolio.

"I'm surprised it took as long as 18 minutes," GSK chief executive Andrew Witty joked.

So far, GSK has not appointed any bankers to advise on the process.

After putting a number of major drug patent losses behind it, GSK had originally banked on pulling out of its trough in 2012. In the event, sales were held back by larger than expected drug price cuts in austerity-hit Europe.

Mr. Witty hopes to do better this year.

He predicted on Wednesday that earnings per share, after stripping out some items, would grow by 3 to 4 per cent at constant exchange rates in 2013, with sales rising about 1 per cent. "2013 should be the first in a series of growth years for GSK," Mr. Witty told reporters.

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Still, the forecast 2013 pickup in sales and earnings was less than some analysts had hoped. Deutsche Bank analyst Mark Clark also noted GSK gave a cautious outlook for profit margins, since these are only expected to improve "over the medium term."

Europe has been a weak point for many drug makers but GSK's portfolio has been particularly hard hit by government budget cuts. As a result, Mr. Witty said he was taking action to "reduce costs, improve efficiencies and reallocate resources."

The action in Europe will involve some job cuts but he declined to go into details.

GSK is relying on a clutch of new drugs to revive its fortunes in the mid-term, starting with six that have already been submitted for approval in lung disease, melanoma, diabetes and HIV/AIDS.

Keenly awaited final-stage Phase III clinical trial results are also due for two high-risk, high-reward projects in heart disease and cancer.

That makes 2013 a crucial year for GSK's pipeline, although the main impact on the sales line will be felt during 2014 and beyond – assuming the new medicines live up to expectations.

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"Flat sales over the last year highlight the importance to GSK of the potential new product launches in 2013, as it looks to return to growth," said Mick Cooper, an analyst at Edison Investment Research.

Sales in the final quarter of 2012 fell 3 per cent to £6.80-billion, generating core earnings per share (EPS) up 4 per cent at 32.6 pence.

Analysts, on average, had forecast sales of £6.88-billion and core EPS, which excludes certain items, of 31.3 pence, according to Thomson Reuters I/B/E/S.

The results got a muted response from investors, although there was some relief that GSK did not miss earnings forecasts as it had in the four preceding quarters.

The shares were unchanged following the results, in line with a steady European drugs sector.

GSK's stock has underperformed in the past year, due to disappointment at its lack of growth, and it now languishes second to last among large European drug makers in terms of sell-side analyst ratings, ahead only of AstraZeneca PLC, according to Thomson Reuters data.

With a busy portfolio of experimental drugs nearing the market, Mr. Witty said he had a "low appetite" for acquisitions and would return cash to shareholders if the company did not find compelling deals.

As was the case last year, GSK has set itself a modest target of buying back between £1-billion and £2-billion in stock this year. But Mr. Witty said that figure could be increased during 2013, as was the case in 2012.

Although GSK is not champing at the bit for acquisitions, Mr. Witty said he was always looking at opportunities in emerging markets and consumer health care, two areas where the company sees good growth prospects.

Mr. Witty has for several years pushed a diversification strategy designed to cut the drug maker's traditional reliance on "white pills in Western markets."

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