By Ben Hirschler
LONDON (Reuters) - GlaxoSmithKline
A run of weak results highlights the pressure on Chief Executive Andrew Witty, whose drive to reshape Britain's biggest drugmaker has yet to deliver the hoped-for return to sustained revenue growth, following a lengthy period of patent expiries.
Investors are frustrated by the fact that profit growth has been delayed year after year and GSK shares fell as much as 6.9 percent on Wednesday, the biggest daily fall since 2008, before clawing back some losses to stand 5.2 percent lower at 1455 GMT.
The company is also mired in a serious corruption scandal in China, where it has been accused of paying bribes to doctors to use its medicines. Sales in China were down by a quarter compared to the same period a year ago.
Witty told reporters he remained "very concerned" about the allegations in China, which have damaged its business in a fast-growing emerging market, but declined to comment further.
Investors had been braced for a tough quarter, given the increasing competitive pressures facing GSK's 15-year-old respiratory medicine Advair but the results were worse than expected. Advair U.S. sales tumbled 19 percent.
The company pared its financial outlook for the full year, predicting core earnings per share (EPS) would be "broadly similar to 2013" in constant exchange rate terms. Previously, it had been hoping to increase 2014 EPS by between 4 and 8 percent. Sales growth in 2014 was "unlikely", it added.
Deutsche Bank analyst Mark Clark, with a hold rating on the stock, said the revised guidance implied consensus 2014 earnings forecasts for the group would have to be cut by more than 5 percent and the poor performance could call into question the company's dividend payout ratio.
GSK said share buybacks over the rest of 2014 were likely to be immaterial but added its dividend policy was unchanged.
A big investor concern is its reliance on the inhaled lung drug Advair, which makes up nearly a fifth of sales. It already faces competition from copycat versions in Europe, with generics in the United States perhaps a couple of years away.
In addition, AstraZeneca's
GSK hopes two new inhaled respiratory drugs - Breo and Anoro - will fill the gap, but their uptake so far has been slow.
Witty declined to predict when GSK's growth would improve, but he argued that the respiratory business was going through an important period of change that would ultimately bear fruit.
"Now is the moment to start thinking about what this group looks like post-Advair," he said. "We expect the transition of this portfolio to continue over the next 2-3 years and remain confident that GSK will maintain its leadership position in respiratory well into the next decade."
Ketan Patel, senior investment analyst at Ecclesiastical Investment Management, which holds GSK shares, said he believed GSK would overcome its challenges in the long term - and in the meantime the stock was offering an attractive 6 percent yield.
But many analysts remain skeptical. "We continue to look for credible evidence that GSK's conviction in the growth potential of its respiratory franchise is warranted given its importance to the company's long-term pharma strategy," said Leerink analyst Seamus Fernandez, who rates GSK shares market perform.
Quarterly sales totaled 5.56 billion pounds ($9.48 billion), generating pretax profits of 986 million, down from 1.29 billion a year earlier. Core EPS - the measure most followed by investors - fell 25 percent to 19.1 pence, with the results depressed by the strength of the pound versus other currencies.
Analysts, on average, had forecast sales of 5.76 billion pounds and core EPS, which excludes certain items, of 21.3 pence, according to Thomson Reuters.
Although it has put the worst of its patent losses behind it, GSK still faces challenges in some areas, including the earlier-than-expected launch of a generic version of heart pill Lovaza in the U.S. market in April.
The company's HIV business was a rare bright spot in the quarter, showing growth of 13 percent thanks to strong uptake of its recently launched drug Tivicay.
Witty joined the deal-making bandwagon sweeping the healthcare sector in April by trading more than $20 billion of assets with Swiss rival Novartis
But the GSK boss has eschewed full-scale mega-mergers, arguing they are distracting and disruptive to the company's research and development activities.
He has opted instead for a strategy of focusing GSK's portfolio, with the next step in the process involving the sale of a number of older drugs that are marketed in North America and Western Europe with annual sales of around 1 billion pounds.
Witty said there had been "very significant" interest from mid-sized pharmaceutical companies and private equity firms in these products and he hoped to conclude a sale by the end of the year.
Reuters reported exclusively on Tuesday that Indian generics firm Lupin
($1 = 0.5865 British Pounds)
(Additional reporting by Francesco Canepa; Editing by Elaine Hardcastle and Pravin Char)