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Wall Street Journal
Glaxo Plans More Restructuring as Profit Sinks
<p>Jessica Hodgson</p>
February 6, 2013

LONDON - GlaxoSmithKline GSK.LN +0.45% PLC said Wednesday it planned to restructure its European drug business and is weighing its options for drinks brands Lucozade and Ribena, as it reported a decline in fourth-quarter net profit.

The U.K.'s largest drug maker by sales said changes at its European operations, alongside broader amendments to manufacturing and research and development, are expected to deliver annual cost savings of at least £1 billion ($1.57 billion) by 2016, at a cost of about £1.5 billion.

"Given the sustained shift we have witnessed in the European reimbursement and pricing environment, we plan to initiate further restructuring of our European pharmaceuticals business to reduce costs, improve efficiencies and reallocate resources to support identified growth opportunities in these markets," said Chief Executive Andrew Witty.

He declined to say how many jobs would be cut as part of the restructuring, saying the amount would probably be "not enormous, but material." He didn't anticipate any individual regions would suffer significantly from cuts, and said it was more likely job losses would be spread across Europe and could be balanced out by some job creation in certain areas. Glaxo will also push through efficiencies in manufacturing techniques to reduce costs and may consider strategies such as joint ventures for sales and commercial staff.

Mr. Witty said the company would consider various options for Lucozade and Ribena, ranging from boosting investment to selling the brands outright. He said that sales of both were growing, but they didn't sit easily within the company's consumer health-care portfolio. The company expects to make a decision on how to proceed by the middle of 2013, he added.

Lucozade and Ribena sell primarily in Western markets such as the U.K., he said, and don't have as significant a profile in emerging markets.

Glaxo has been retooling itself after many of its biggest-selling drugs have lost or are losing patent protection amid mounting competition from cheap copies - a phenomenon known as the patent cliff that has affected the whole pharmaceutical industry. Like many of its rivals, Glaxo has turned to emerging markets in search of growth, such as India and Nigeria, where it recently gained more control over its subsidiaries.

The company has also been restructuring its research-and-development and commercial operations since Mr. Witty became chief executive in 2008, breaking its research operation into small units designed to mimic the culture of biotech startups and pooling some management and commercial functions.

The focus on European costs underscores a long-term shift away from mature Western economies, and comes in response to sustained cuts to government health-care budgets in the region, which have been deeper than the company originally expected. Glaxo has also been diversifying into adjacent product categories such as consumer health care, which provides more stable revenue.

The company said Wednesday that net profit fell 31% from a year earlier to £864 million in the fourth quarter, largely because of higher taxes, and declined 13% to £4.57 billion in 2012 as a whole. Revenue fell 2.5% to £6.8 billion in the quarter and 3.5% to £26.43 billion for the full year.

Glaxo had previously expected to generate margin and revenue growth in 2012 but was forced to revise its expectations in the third quarter. The company said in October it expected sales growth in the fourth quarter.

Sales in Europe fell 6% on a constant-currency basis, a marginal improvement on the 9% decline during the third quarter. Sales in the U.S. fell 4% in the three months to Dec. 31, compared with an 8% decline at constant currencies in the third quarter.

Glaxo has 15 new drugs in its pipeline, which it hopes will drive revenue beyond the patent cliff over the next three years. Drugs awaiting regulatory approval this year include diabetes drug albiglutide, lung treatment Relvar and HIV medicine dolutegravir.

Write to Jessica Hodgson at jessica.hodgson@dowjones.com



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