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LONDON (Reuters) - GlaxoSmithKline (GSK.L) warned on Wednesday that sales in 2012 would be flat as pressure on drug prices intensifies in Europe, due to government austerity measures aimed at curbing healthcare bills.
The worsening situation in Europe is a challenge for Britain's biggest drugmaker, which had previously forecast a return to sales growth this year after putting patent expiries and a record-breaking mis-selling fine in the U.S. behind it.
Chief Executive Andrew Witty said he saw a delay in the company's return to growth rather than a change in the shape of its future growth curve as it overcomes past problems.
"It's a question of timing - two or three quarters, if you will, being muted by the macro-economic effect of pricing in Europe," he told reporters.
Sales in Europe slumped 8 percent in the quarter, reflecting a 1 percent volume decline and an unprecedented 7 percent fall in prices. That year-on-year price decline might be at its worst point now, assuming there are no further shock moves by governments, Witty said.
Overall turnover was down 4 percent from the same period a year ago at 6.46 billion pounds ($10.0 billion), generating "core" earnings per share (EPS) down 5 percent at 26.4 pence.
Analysts, on average, had forecast sales of 6.70 billion pounds and core EPS of 27.4p, according to Thomson Reuters I/B/E/S. Core earnings exclude certain non-cash charges.
Shares in the group fell 1.8 percent by 1446 GMT, underperforming a flat European drugs sector .SXDP, as investors took a dim view of the earnings miss and reduction in the full-year sales outlook.
"Like Europe itself, Glaxo continues to kick the can down the road," said Keith Bowman, Equity Analyst at Hargreaves Lansdown Stockbrokers.
Bernstein analyst Tim Anderson said the results were "slightly disappointing" but not unexpected, since GSK had been signaling that a weak second quarter was likely.
GSK already missed forecasts for sales in the first quarter of 2012 and the last three months of 2011, underlining the difficulties faced by Witty in achieving the hoped-for return to growth.
That is also taking a toll on profit margins and the group now expects operating margin in 2012 to be broadly in line with last year's level of 32.1 percent, rather than improving.
GSK is taking further action to reduce costs in the face of the tough environment and said it expected new manufacturing process improvements to generate annual cost savings of around 500 million pounds by the end of 2015.
While drug companies have endured falling prices in Europe for several years, the situation has deteriorated markedly in recent months due to draconian budget cuts -- particularly in southern Europe -- triggered by the euro crisis.
Europe is now the toughest region for drug pricing anywhere in the world, Novartis NOVN.VX pharmaceuticals head David Epstein told analysts last week.
Witty is diversifying GSK to reduce reliance on "white pills in Western markets", the part of the business most vulnerable to price cuts and generic competition.
The strategy involves a major push into both emerging markets and non-prescription consumer healthcare.
The long-term growth of the company, however, depends on the prescription drug pipeline, where investor expectations are pinned on experimental medicines for diseases ranging from HIV/AIDS to chronic lung disease.
In particular, GSK hopes a new once-daily combination lung drug, known as Breo or Relvar, will eventually replace its current ageing top-seller Advair, which is taken twice a day.
The new drug was filed for approval earlier this month but industry analysts doubt it will replicate Advair's $8 billion annual sales, given mixed results in clinical trials.
Witty has also increased his pipeline bet on biotech drugs, as highlighted by last week's deal to buy Human Genome Sciences HGSI.O for $3 billion, giving GSK full control of recently launched lupus medicine Benlysta and other experimental drugs.
Such bolt-on acquisitions have been popular among Big Pharma companies recently but Witty said GSK was, in fact, less likely to buy other businesses in future as its focus shifts more to investing in the pipeline of new experimental medicines.
"Our hurdle (for acquisitions) has gone up significantly ... while I'm not going to rule out that we do more of the classic bolt-on acquisitions, I think it is going to be less likely than more likely going forward," he said. ($1 = 0.6441 British pounds) (Reporting by Ben Hirschler; Editing by Chris Wickham and Jon Loades-Carter)