GSK battles against austerity

The extent of sales problems caused by austerity measures in Europe was made fully clear in GlaxoSmithKline 's (GSK) results, with declining revenues and profits in key markets very much the theme. But the company's pipeline is in much better shape, with 14 different drugs expected to report Phase III data during the next two years. So, with further savings in the supply chain to come, investors can afford to wait for an upturn.

The relatively flat performance in 2012 was caused by a combination of declining European sales and a lack of growth in GSK's consumer healthcare division. European pharmaceutical revenues fell 7 per cent to £5bn, but the extent of cuts to medicine prices in markets such as Germany meant segmental operating profits were 11 per cent lower at £2.6bn. The consumer healthcare business, which makes premium products such as Sensodyne toothpaste, has proved to be vulnerable to shifts in spending, which is partly why divisional sales were flat at £5.1bn.

Management's response to the difficult business climate was to announce yet more cost-saving measures, on top of the £2.8bn of annual savings scheduled to kick in by the end of 2014. The new programme will result in GSK rationalising its supply chain, which is forecast to save the company £1bn a year by 2016 at an upfront cost of £1.5bn. The majority of exceptional charges will be booked by the end of 2015.

In addition to saving costs, the diversification of the company's revenues, particularly in emerging markets, continues to be a priority and before the results GSK announced a £500m investment to increase its stake in its Indian consumer healthcare subsidiary to more than 72 per cent. The investment underlines how GSK intends to shift its existing business model and products into emerging markets.

Management's forecast for 2013 is that core EPS will grow by 3-4 per cent, with revenues increasing by 1 per cent, with the proviso that foreign exchange fluctuations could add or subtract about 2 percentage points from core EPS.

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