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Glaxo Expects Greater Cost Savings, Lower Corporate Tax Rate

The GlaxoSmithKline Plc Headquarters
GlaxoSmithKline Plc reported a third straight drop in quarterly revenue on lower sales of the Avandia diabetes drug, the Valtrex antiviral medicine and pandemic-flu products. Source: GlaxoSmithKline Plc via Bloomberg

GlaxoSmithKline Plc said it expects greater cost savings than originally forecast from a cost-reduction plan and a lower tax rate as the company adopts new measures to improve efficiency.

The additional savings will total 300 million pounds ($435 million) with no increase in restructuring charges, bringing expenses down by a total of 2.5 billion pounds by 2012, the London-based company said today in a statement. The U.K.’s largest drugmaker also said it identified measures that will help reduce its tax rate by about two percentage points by 2014.

Glaxo today reported second-quarter earnings excluding restructuring costs of 25 pence a share, the same as the average of 13 estimates compiled by Bloomberg. The company’s revenue decline, the smallest in three quarters, also was in line with analyst estimates, with lower sales of the Avandia diabetes drug, the Valtrex antiviral and pandemic-flu products.

“GSK is demonstrating strong financial discipline in its approach to building the business,” Navid Malik, a London-based analyst with Matrix Corporate Capital LLP, said by e-mail. He recommends buying Glaxo shares.

Glaxo shares rose 9.5 pence, or 0.7 percent, to 1,373 pence at the close of London trading. Before today, the stock had returned 21 percent in the past year including reinvested dividends, compared with 20 percent for the Bloomberg Europe Pharmaceutical Index.

Improved Outlook

“Overall, a solid set of numbers” with an “improved medium-term outlook,” Alistair Campbell, an analyst at Berenberg Bank in London, wrote in a note to clients today. The announced cost savings and tax rate may add 5 percent to 6 percent to earnings in the medium term, Campbell said.

Earnings before reorganization costs were 1.27 billion pounds, compared with 130 million pounds a year earlier, when profit was hurt by a 1.57 billion-pound legal expense to settle cases over Avandia and other products.

Glaxo stopped promoting Avandia worldwide in 2010 after regulators withdrew it from the market in Europe and limited sales in the U.S. because of an increased risk of heart attacks. Valtrex has faced generic competition since November 2009, and flu sales sank after the end of the pandemic last year. Revenue growth will resume “as we move into 2012,” Chief Executive Officer Andrew Witty said today.

Revenue from Avandia, Valtrex and flu products fell by a combined 472 million pounds, Glaxo said. Excluding those three items, Glaxo’s “underlying sales” climbed 5 percent.

Headwinds Weaken

“GSK is on track and delivering good progress on its strategy,” Witty said during a conference call with reporters. “The headwinds are clearly beginning to weaken.”

Pharmaceutical sales fell 1 percent at constant exchange rates to 4.66 billion pounds, while consumer-health revenue climbed 4 percent to 1.28 billion pounds. Vaccines declined 15 percent to 787 million pounds.

Since taking the helm of the company in 2008, Witty has been reorganizing Glaxo’s research and development, building its vaccines, emerging-market and consumer health-care businesses and selling assets that aren’t related to its main operations. He has avoided large acquisitions, focusing on smaller deals such as the $2.9 billion purchase in 2009 of closely held U.S. drugmaker Stiefel Laboratories Inc.

“The real catalyst for this improving outlook is the rebalancing and reshaping of the group’s sales profile, a direct result of the reinvestments and of the major restructuring that have taken place over the last three years,” Witty said on the call.

Product Approvals

Three Glaxo products have been cleared for sale this year, including Benlysta, a therapy for the auto-immune disease lupus that was approved by U.S. regulators in March. The U.K. company expects final-stage results for about a dozen compounds before the end of 2012, including data on Relovair, which Glaxo is developing as a successor to the Advair asthma inhaler.

“We look forward to important late-stage pipeline news later in 2011,” Brian White, an analyst at Shore Capital in London, wrote in a note to clients yesterday. The drugmaker is “set to retain its global leadership position with the broadest portfolio of therapies for the treatment” of smoker’s cough and asthma.

Respiratory sales climbed 2 percent in the second quarter, with Advair revenue also rising 2 percent, the company said today. Advair sales “were ahead of our forecasts,” Berenberg Bank’s Campbell wrote in today’s note.

Advair Competition

Glaxo doesn’t expect generic competition to Advair in the U.S. and chances of a “pan-European” generic version of the drug are low, even though some countries may approve one, Witty told reporters today.

Advair will “remain a big product” for Glaxo in the years to come, Witty said.

Glaxo in February announced its first share buyback since 2008 in a bid to reassure investors that expenses for investigations and lawsuits are under control.

The drugmaker is seeking buyers for over-the-counter products such as the Alli diet pill, Lactacyd soap, and the Nytol sleep aid, seeking to focus its consumer-health unit on faster-growing brands such as the pain reliever Panadol. Glaxo expects to complete the sale in the fourth quarter and has seen interest from private-equity firms, Witty said.

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