LONDON GlaxoSmithKline Plc (GSK.L) is getting more bang for its buck in drug research, underpinning expectations for a return to sales and margin growth despite fourth-quarter results that fell short of analyst forecasts.
Britain's biggest drugmaker said on Tuesday it had lifted financial returns from its laboratories to an estimated 12 percent, from 11 percent two years ago, and was confident of reaching its longer-term 14 percent target.
That augurs well for the future but doesn't offset near-term challenges such as pricing pressures in Europe and some emerging markets.
Still, Chief Executive Andrew Witty reiterated 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 feed through of recent cost-cutting measures and further pipeline progress.
"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.
The immediate problems, however, centre on dealing with a tough environment for selling medicines, which led to turnover in the final quarter of 2011 falling 3 percent from a year earlier to 6.98 billion pounds ($11 billion).
Earnings per share before major restructuring costs reached 28.4 pence, bouncing back from a loss of 7.5 pence a year earlier, but the results failed to live up to investors' hopes and GSK shares fell 2 percent by 1400 GMT.
Analysts, on average, had forecast sales of 7.33 billion pounds and EPS of 29.0 pence, according to Thomson Reuters I/B/E/S.
Navid Malik, an analyst at Cenkos Securities, said investors were also disappointed by plans for share buybacks of 1-2 billion pounds in 2012 -- against 2.2 billion in 2011 -- while better R&D productivity needed to be translated into hard cash.
"The returns are certainly rising but they need to show how they can deliver multi-hundreds of millions or billions of dollars of sales from each product they get to the market," he said.
GRAPHIC-Global pharma players: r.reuters.com/nyf26s
In addition to pruning certain areas of research, GSK has also changed radically the way it organizes scientists by splitting them into dozens of so-called discovery performance units (DPUs) which compete for funding.
The process is designed to emulate competition in the biotech sector and means only the strongest projects survive. Following a review of its 38 existing DPUs, GSK said it was adding four new units, including one looking at traditional Chinese medicine. It is also closing three DPUs and changing the leadership at eight.
The company now expects up to 30 programs 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 Plc (AZN.L), 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. There are also 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.
A clutch of non-core over-the-counter (OTC) brands were sold to Prestige Brands Holdings (PBH.N) in December -- triggering a 5 pence supplemental dividend on top of an ordinary payout of 70 pence -- and Witty said he hoped to sell the rest of the OTC businesses earmarked for disposal in the first half of this year.
(Editing by Kate Kelland and David Holmes)