GSK warns on profits as weak lung drug sales hit

By Ben Hirschler

LONDON (Reuters) - GlaxoSmithKline <GSK.L> cut its 2014 earnings outlook after sales fell by a worse-than-expected 13 percent in the second quarter as its all-important lung drugs struggled in the United States and a strong pound took a bite out of growth.

A run of weak quarters 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.

Shares in the company fell more than 6 percent by 1300 GMT (9.00 a.m. EDT), the biggest daily fall since 2008.

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 any 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 sales tumbled 19 percent.

The company pared its financial outlook for the full year, predicting core 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.

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 remainder of 2014 were likely to be immaterial.

A big concern for GSK investors 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 <AZN.L> rival product Symbicort is winning business in the United States and further eroding its leading market position.

GSK is hoping two new inhaled respiratory medicines - Breo and Anoro - will fill the gap, but their uptake so far has been slow, disappointing many analysts who follow the company.

RESPIRATORY TRANSITION

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.

"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," he said.

Quarterly sales totalled 5.56 billion pounds ($9.48 billion), generating "core" earnings per share down 25 percent at 19.1 pence, with the results depressed by the strength of the pound versus other currencies, the drugmaker said on Wednesday.

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 <NOVN.VX> in a complex three-part transaction designed to make the group more focused.

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 <LUPN.NS>, some U.S. drugmakers looking for a tax-saving deal in Europe and private equity funds were all planning to bid for the drugs.

(Editing by Kate Kelland; Editing by Elaine Hardcastle)