* Internal rate of return on R&D 12 pct vs 11 pct in 2010
* Dividend growth and share buybacks of 1-2 bln stg in 2012
* Q4 sales 6.98 bln vs consensus 7.33 bln; EPS 28.4p vs 29.0p
By Ben Hirschler
LONDON, Feb 7 GlaxoSmithKline is getting more bang for its buck in drug research following an overhaul of the way it hunts for new medicines that has lifted financial returns from its labs to an estimated 12 percent from 11 percent two years ago.
Britain's biggest drugmaker said on Tuesday it was confident of reaching its 14 percent target, even as it reported fourth-quarter results that fell short of analyst expectations.
Turnover in the final quarter of 2011 was 3 percent down from a year earlier at 6.98 billion pounds ($11.03 billion) and earnings per share before major restructuring costs were 28.4 pence against a loss of 7.5p.
Analysts, on average, had forecast sales 7.33 billion pounds and EPS of 29.0p, according to Thomson Reuters I/B/E/S.
Chief Executive Andrew Witty reiterated that GSK was on track to return to full-year sales growth in 2012, with gradually improving margins.
GSK is alone among major pharmaceutical companies in setting a clear target for research productivity and the increase in its reported internal rate of return (IRR) on research and development (R&D) contrasts with an industry-wide decline.
Lack of investor confidence in R&D spending is arguably the biggest challenge facing Big Pharma, since it results in investors ascribing little or no value to drug pipelines.
While GSK's R&D returns are still below its long-term goal of 14 percent, research head Moncef Slaoui said they were set to increase as the benefits of recent cost cutting measures and further pipeline progress feeds through.
"I think 12 percent is significant and I'm happy with it. I'm quite confident it will continue to move towards 14 in the coming years," he said.
In addition to pruning certain areas of research, GSK has also changed radically the way it organises scientists by splitting them into dozens of Discovery Performance Units (DPUs) which compete for funding.
The process is designed to emulate competition in the biotech sector and means that only the strongest projects survive. Following a review of its 38 existing DPUs, GSK said it was adding four new units, closing three and changing the leadership at eight.
The company now expects up to 30 programmes to move into late-stage clinical development over next three years. It also has four ready to be submitted for regulatory approval in the coming months -- lung drug Relovair, Promacta for hepatitis C, a MEK inhibitor for melanoma and a new flu vaccine.
GSK's improving R&D returns contrast with the story at smaller British rival AstraZeneca, whose management admitted last week its productivity was at the lower end of the industry average.
GSK -- trading at a near 50 percent premium to Astra, based on expected 2012 earnings -- is emerging from a revenue trough caused by patent expiries and a slump in sales of diabetes pill Avandia, which was linked to serious heart risks.
It is now over the worst of its patent losses, although uncertainty remains about when top-selling lung drug Advair will face generic competition and there are reservations over whether Relovair can fill the gap.
CEO Witty is diversifying the group to reduce reliance on "white pills in Western markets", the part of the business most vulnerable to generic competition and price cuts imposed by cash-strapped governments.
The strategy also involves divesting certain non-core assets, such as some consumer healthcare lines, and returning cash to shareholders. The firm said it expected share buybacks to total 1-2 billion pounds in 2012.