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UPDATE 3-Glaxo drops some drug research in efficiency drive

* Q4 earnings of 35.4p per share, beating 32.7p consensus

* Sales 8.09 bln pounds vs 7.80 bln consensus

* Plans extra 500 mln pounds of savings by 2012

* Dropping depression, pain research; rare diseases in focus * Shares up 1.7 percent

(Adds graphic)

By Ben Hirschler

LONDON, Feb 4 (Reuters) - GlaxoSmithKline Plc GSK.L is to cut more costs and abandon some areas of research -- including depression -- joining a growing band of big drugmakers taking a knife to previously sacrosanct drug discovery work.

The move should improve research productivity and help protect profit margins as a temporary boost from swine flu starts to dwindle, Europe’s biggest drugmaker said on Thursday.

Glaxo beat expectations with a 33 percent jump in fourth-quarter earnings, helped a lower tax rate, a one-off accounting gain from a HIV joint venture with Pfizer Inc PFE.N, and record sales of H1N1 vaccines and flu drug Relenza.

Chief Executive Andrew Witty said he expected similar shipments in H1N1 vaccines in 2010 as in 2009. But the windfall won’t last, and some countries are cutting vaccine orders as the pandemic proves to be less serious than originally feared.

At the same time, sales of herpes drug Valtrex are plunging, following expiry of its U.S. patent, making 2010 a tricky year for Glaxo.

Still, Witty said he was “increasingly confident” about prospects in 2010, arguing Glaxo faced a lesser threat from generics than many of its rivals, and he predicted 2010 operating margins would be broadly similar to those in 2009.

Shares in Glaxo, which does not give explicit earnings guidance, rose 1.7 percent by 1440 GMT. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on Glaxo EPS growth and share price:

here ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Pharmaceutical companies around the world are being squeezed by crimped government healthcare budgets and the loss of patent protection on many previous blockbusters, forcing many to make radical cuts to their cost base.

U.S. rival Pfizer, the world's largest drugmaker, announced a big cut in R&D spending on Wednesday when it and Swiss-based Roche Holding AG ROG.VX both posted uninspiring results. [ID:nN03182229]

Britain's AstraZeneca Plc AZN.L -- which faces one of the biggest patent expiry "cliffs" in the industry -- said last week it was cutting an additional 8,000 jobs, or 12 percent of the workforce, because of shrinking sales. [ID:nLDE60Q0K3]

Mike Ward, an industry analyst at Ambrian Partners, said Glaxo’s decision to exit depression and pain, while creating a new rare diseases unit, made sense and represented a more measured response.

“They are showing they can weather the storm. They are finding the cost savings they need and there is probably still a long way to go in terms of sweating the assets,” he said.

Antidepressants, such as Paxil, used to be big money-spinners for Glaxo but Witty said it was increasingly difficult to make a decent return on depression research.

JOB CUTS

Witty, who took over in May 2008, wants to reduce his firm’s traditional reliance on “white pills in Western markets” by diversifying into emerging markets and consumer health products.

The shift means and cutting back in developed markets. That will result in further job losses, although Witty played down suggestions of major redundancies in Britain, saying cuts in Glaxo’s home base would be “hundreds rather than thousands”.

Overall, Glaxo said it planned additional annual savings of 500 million pounds ($794 million) by 2012, with half of the savings coming from the planned reduction in R&D activities.

The upside would be an improvement in productivity, Witty said, with the company aiming for a long-term rate of return on its late-stage pipeline of 14 percent after tax, up from 11 percent at present.

Glaxo’s pretax profit totalled 2.48 billion pounds in the fourth quarter, equivalent to earnings per share before major restructuring of 35.4 pence, on sales of 8.09 billion pounds.

The mean consensus forecast had been for earnings of 32.7p and sales of 7.8 billion pounds, according to Thomson Reuters I/B/E/S. (Editing by Kate Kelland and Andrew Callus)

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