GlaxoSmithKline announced Wednesday that third-quarter sales of prescription drugs and vaccines plummeted 61 percent in China, where the company faces a probe over allegations that staff bribed doctors and officials. CEO Andrew Witty said the drugmaker continues to co-operate with authorities in the country, although he warned "it is still too early for us to quantify the longer-term impact of the investigation."
While China contributes less than 4 percent of sales to GlaxoSmithKline, Barclays analysts say the country presents significant growth opportunities. In addition to employing approximately 7000 workers in the country, GlaxoSmithKline runs five factories as well as a research centre there. Witty said "we very clearly recognise there is a profound need to earn the trust of the Chinese people again, and we will take every action to do so." The executive emphasised that there was "absolutely no question" of GlaxoSmithKline pulling out of the country, adding "we are totally committed to China."
In response to the allegations, Witty indicated that GlaxoSmithKline plans to modify its incentive compensation programme for sales people to match changes it made in the US. "Our customers are telling us it was the right call…I've got no doubt we will look to export some of the lessons learned from that to other parts of the world," he said. According to Witty, the drop in sales in China was more severe in July and August than in September, while products affected the most were those where other options are available, such as Advair, for which AstraZeneca's Symbicort is an alternative treatment.
In the third quarter, the company reported that overall sales were flat compared with the year-ago period at 6.5 billion pounds ($10.5 billion), missing analyst estimates of around 6.7 billion pounds ($10.8 billion), with total revenue from prescription drugs and vaccines also largely unchanged at 5.2 billion pounds ($8.4 billion). GlaxoSmithKline said that profit attributable to shareholders was 969 million pounds ($1.6 billion), versus 1.1 billion pounds ($1.8 billion) in the year-ago period.
According to GlaxoSmithKline, three-month sales from pharmaceutical products declined 1 percent to 4.2 billion pounds ($6.8 billion). In the US and Europe, pharmaceutical and vaccine sales rose by 2 percent and 5 percent, respectively, to 1.9 billion pounds ($3.1 billion) and 1.3 billion pounds ($2.1 billion). Meanwhile, drug and vaccine revenue generated in emerging markets was down 9 percent to 1.1 billion pounds ($1.8 billion), mainly due to the impact of the China probe. Sanford C. Bernstein & Co. analyst Timothy Anderson remarked that "China continues to cast a pall over the company's emerging markets operations and could have long-standing effects in the country." Excluding the sales decline there, GlaxoSmithKline noted that its pharmaceuticals business in emerging markets grew by 5 percent.
Revenue from respiratory products during the quarter fell 2 percent from the prior-year period to 1.7 billion pounds ($2.7 billion), with Seretide/Advair sales dropping 1 percent to 1.2 billion pounds ($1.9 billion). The company noted that in the US, respiratory sales were down 3 percent to 830 million pounds ($1.3 billion), "reflecting wholesaler and retailer de-stocking and stronger competitive pricing pressure." Ongoing austerity measures in Europe hurt revenue from respiratory products by 2 percent, and while Seretide volumes there were flat, the company said continued pricing pressures led to a sales decline for the product of 1 percent to 344 million pounds ($556 million). For related analysis, see ViewPoints: Witty paints rosy picture for GlaxoSmithKline's respiratory franchise.
Revenue from cardiovascular and urogenital products decreased to 539 million pounds ($872 million), down 4 percent from the corresponding 2012 period, driven by Lovaza sales, which declined 12 percent to 135 million pounds ($218 million) "as a result of increased competition and a market decline in the US." GlaxoSmithKline reported that the Avodart franchise grew 6 percent to 207 million pounds ($335 million), with strong growth in Europe, emerging markets and Japan partially offset by an 11-percent decline in the US, where sales reached 73 million pounds ($118 million).
With regard to CNS drugs, which generated 5-percent less sales during the quarter to 364 million pounds ($589 million), the company noted declines in revenue from Seroxat/Paxil of 9 percent to 64 million pounds ($104 million), as well as Lamictal, which was down 6 percent to 139 million pounds ($225 million), "both primarily as a result of generic competition." Sales from the ViiV Healthcare unit fell 5 percent to 344 million pounds ($556 million). Meanwhile, vaccine revenue during the quarter grew 3 percent year-over-year to 987 million ($1.6 billion), boosted in part by strong growth of Infanrix/Pediarix in the US, where the product recorded a 69-percent increase to 100 million pounds ($162 million), "continuing to benefit from a competitor supply shortage." Overall sales of Infanrix/Pediarix rose 26 percent to 258 million pounds ($417 million).
Looking ahead, the drugmaker confirmed that it expects sales growth for the year to be around 1 percent in local currency terms, with earnings per share rising by 3 percent to 4 percent.
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