Glaxo cuts jobs to save £700m a year after profits slide

Glaxo cuts jobs to save £700m a year after profits slide

· US sales of top selling diabetes drug down 50%
· Tougher regulation and generics hurt entire sector

Marianne Barriaux
Thursday October 25, 2007

Guardian

GlaxoSmithKline yesterday unveiled a cost-cutting programme that will involve job losses and the closure of manufacturing sites, as it reported third-quarter profits were hit by declining sales of its troubled diabetes treatment, Avandia.

The world's second-largest drugs company said the restructuring programme would deliver annual pre-tax cost savings of up to £700m by 2010 but would need £1.5bn to implement.

Chief executive Jean-Pierre Garnier declined to say how many jobs were likely to go but 40% of the savings will be made in manufacturing, 40% in sales and the rest in research and development. Analysts said they expected the job losses to run into thousands.

Unions were quick to condemn the move. Linda McCulloch, Unite national officer for the pharmaceutical industry, said: "This is a profitable company that does not need to cut jobs or close plants and we will fight any attempt by the company to do either in the UK."

But Mr Garnier said the programme was crucial for GSK to adapt to a changing environment. It is the latest drug maker to announce cost-cutting measures in the face of growing competition from cheaper generic medicines and a tougher safety stance by drug regulators.

Pfizer, the world's leading pharmaceuticals group, announced this year that 10,000 positions will be axed worldwide, and AstraZeneca, the UK's second-biggest drug firm, is to cut 7,600 posts.

Mr Garnier said: "We have always had pricing and reimbursement issues - that's not new. What is new is that the regulatory authorities, particularly and primarily the FDA, have slowed down their pace of approval of new products. It's just taking a longer period of time to approve new products. In our business model, we need to replace products that go off patent quickly, so we can't have those delays. They're making our lives a little more difficult."

News of the cuts came as GSK reported a 2% drop in third-quarter pre-tax profit to £1.9bn at constant exchange rates, on sales 1% ahead at £5.5bn.

GSK said savings from the cost-cutting moves will amount to around £350m next year and will partly offset the impact on earnings from generic competition and lower Avandia sales.

The company has been hit hard by the safety scare surrounding Avandia, one of its best-selling drugs. In May, a study published in the New England Journal of Medicine linked the treatment to an increase in heart attacks, and prescriptions have fallen by more than 50% in the US since the week before the report was published. The company said total sales of Avandia and its related products were down 38% to £225m in the third quarter.

"Clearly the loss of part of Avandia, in the US particularly, gives more urgency to the need to adjust to the external environment," Mr Garnier said. "You can always have an Avandia day. It's a sad day but it happens and you have to be ready."

He added the group remained on track to meet its earnings guideline for the year - earnings per share growth of 8 to 10% at constant exchange rates .

The company said it would continue to look for outsourcing opportunities, although Mr Garnier ruled out outsourcing the group's entire production capability.

In R&D, it would increase investment in biopharmaceuticals, vaccines and emerging markets such as China.

GSK said its new drugs pipeline remained solid, with 149 projects in clinical development, including 33 products in phase-three development or registration. It has had 15 drugs launched, approved or filed so far this year.

The company announced this month that Andrew Witty, the Europe chief, would replace Mr Garnier when he retires next May. But Mr Garnier refused to be drawn on whether the two other candidates - David Stout and Chris Viehbacher - would remain with the company.

"When I was at their level in the company, I got lots of CEO offers," he said. "But I didn't take them. I waited for the right one to come along, which was my own company. Of course, the phone has been ringing even before - they're not exactly unknown within the industry - so I don't think anything has changed."

Shares in the group closed down 11p at £12.49.