April 22, 2009 / 11:19 AM / 10 years ago

UPDATE 3-Glaxo earnings fall short as generics, costs weigh

* First-quarter EPS up 3 pct at 26.3p, short of forecasts

* Hit by generics, phasing of costs, R&D write-offs

* Sales rise 19 pct, boosted by weak pound

* Shares fall 4 pct

(Updates with latest share price)

By Ben Hirschler

LONDON, April 22 (Reuters) - GlaxoSmithKline Plc’s (GSK.L) first-quarter earnings missed expectations on Wednesday as the impact of patent losses on several drugs, phasing of costs and research write-offs weighed.

But the world’s second biggest drug company, whose shares slid 4 percent by 1420 GMT, predicted a better performance in the second half as cost pressures reduce and the worst of the impact from generic competition washes through.

“This first quarter performance marks what we always expected to be a year of two halves,” Chief Executive Andrew Witty told reporters.

The latter half of 2009 would see a smaller generic impact, while the key U.S. market was set to improve and Glaxo stood to benefit from increased sales of new products, he said.

Pre-tax profit in the quarter fell 1.5 percent to 1.93 billion pounds ($2.81 billion), equivalent to earnings per share before major restructuring up 3 percent at 26.3 pence, on sales up 19 percent at 6.77 billion.

Industry analysts had forecast earnings of 28.4p on sales of 6.75 billion pounds.

Because Glaxo sells the vast majority of its products abroad, it has gained substantially from the pound’s decline, flattering results in sterling terms.

The underlying picture, however, is less healthy. After stripping out currency benefits, pre-tax profits were actually down 31 percent, hurt by generic competition to drugs like epilepsy treatment Lamictal and antidepressant Wellbutrin.

MARGINS UNDER PRESSURE

The loss of U.S. patent protection on these and other highly profitable products took a heavy toll on Glaxo’s profit margins.

“This was always going to be one of the toughest quarters,” said Navid Malik, an analyst at Matrix Corporate Capital.

“But the risk is that if they don’t get the restructuring in the U.S. fully implemented or they have delays to new products then the second half could disappoint.”

Patent expiries are a problem across the drugs sector. But while some companies, like Pfizer Inc (PFE.N), have decided they need to merge, Glaxo is pursuing a bolt-on diversification strategy as a way to wean itself off blockbusters.

In the past week, Witty has struck two deals to make Glaxo lower-risk, by buying unlisted skincare company Stiefel Laboratories Inc for up to $3.6 billion and agreeing to merge its HIV business with that of Pfizer.

He reiterated on Wednesday he was not interested in large-scale deals and said he continued to search for further “targeted” acquisitions.

Glaxo no longer provides specific short-term numerical earnings guidance, a decision it announced in February. But it does guide on elements contributing to profits, including costs.

In the first quarter, costs as a percentage of sales were higher than analysts expected but Witty said this simply reflected phasing and Glaxo was not changing its overall expectations on costs for the year.

Sales of big brands with patent protection, like top-selling lung drug Advair, held up reasonably well, reflecting the sector’s defensive qualities and Glaxo’s strong position in several key areas.

Witty said sales of non-prescription treatments were also proving “resilient”.

Pipeline news was mixed, with clinical trials of an extended release version of rosiglitazone — the active ingredient in Glaxo’s diabetes drug Avandia — being scrapped, due to poor results. However, Glaxo is starting a new Phase III trial of its cancer vaccine MAGE-A3 in melanoma. (Reporting by Ben Hirschler; Editing by Ben Deighton and Andrew Callus)

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