Legal charge slashes Glaxo quarterly profit

A GlaxoSmithKline logo is seen outside one of its buildings in west London, February 6, 2008.

LONDON (Reuters) - GlaxoSmithKline (GSK.L) earnings slumped 92 percent in the second quarter, hit by a big charge to settle litigation over its controversial diabetes pill Avandia, antidepressant Paxil and a former factory in Puerto Rico.

The earnings wipe-out had been expected, since Britain's top drugmaker said last week it was taking a 1.57 billion pounds charge to settle legal claims.

The group's underlying financial performance was broadly in line with expectations, reassuring investors worried by the difficult environment facing Glaxo on both sides of the Atlantic.

Chief Executive Andrew Witty said the company's main businesses were performing well in the face of challenges, including generic competition to herpes drug Valtrex in the United States and mounting pressure on drug prices in Europe.

"It was good to see the results come in in line in what we knew was going to be a difficult quarter," said Savvas Neophytou, an industry analyst at Panmure Gordon.

Glaxo's shares were 0.8 percent higher by 2:10 p.m. on Wednesday, outperforming a flat overall market for European drug stocks .SXDP.

Witty has set out a distinctive strategy of "de-risking" Glaxo's operations by embracing diversification into areas such as consumer healthcare, emerging markets and biotechnology.

The goal is to reduce reliance on "white pills in Western markets," the part of the business most vulnerable to generic competition and pricing pressure.

In the key U.S. market, Glaxo will continue to suffer in the short term from genericisation of Valtrex, which has intensified since May, as well as price cuts resulting from healthcare reform and falling sales of Avandia, which has been linked to heart risks.

But Witty said he was confident competitiveness in the U.S. would improve.

Europe, meanwhile, is set to be a tough market for the next 18 months as austerity measures by European government drive down drug prices. Witty predicted prices would fall by somewhat more than the usual annual rate of 3 percent in the second half of 2010 and 2011.

BOOSTING THE PIPELINE

On the pipeline front, Glaxo research laboratories are showing increased promise and the company is moving five experimental drugs into the final-stage Phase III clinical development, which Witty said were "significant opportunities."

"That's pretty impressive," Emmanuel Papadakis, an analyst at Collins Stewart, said of the strong pipeline flow.

Assets moving into Phase III tests include a drug for Duchenne muscular dystrophy, two medicines for skin cancer and a new vaccine against shingles.

The fifth product is an experimental AIDS drug which Glaxo and its partner Shionogi (4507.T) said earlier on Wednesday was moving into pivotal testing.

Industry analysts also have high hopes for lupus drug Benlysta, which has been filed for regulatory approval and could reach the market early next year.

Pretax profit in the second quarter was 494 million pounds, equivalent to earnings before major restructuring of just 2.6 pence per share, on sales up 4 percent to 7.03 billion pounds.

Earnings per share before the legal charge were 29.3p, against a mean consensus forecast for 28.7p, according to Thomson Reuters I/B/E/S. Analysts had expected sales of 7.02 billion pounds.

Witty said he was continuing to look for acquisitions but any purchases had to meet strict thresholds for financial returns and offer a good strategic fit.

He played down suggestions that Glaxo might be interested in condom and sandal maker SSL International SSL.L, which has agreed a 2.54 billion pounds takeover offer from Reckitt Benckiser (RB.L).

"I think the way our businesses are sold and developed in the marketplace is quite different to the way a SSL business is sold and developed in the marketplace," Witty said.

(Additional reporting by Paul Sandle; Editing by Sharon Lindores)