GSK Q2: Generics Wreak Havoc; Cost Reductions From Layoffs Spent on Advertising

(MoneyWatch)  GlaxoSmithKline's Q2 2009 results, released a few days ago, were well received but within the company's disclosures and investor presentations were some sobering statistics on the ongoing damage that generics are doing to the company, and the limited progress of its cost-reduction programs.

The basics: Revenue rose 15 percent to ?£6.7 billion, net income was ?£1.5 billion.

This chart shows first-half sales of GSK drugs affected by generics. Last year, the company sold ?£1.2 billion of those brands, such as Flonase and Paxil. This year, GSK sold only ?£437 million, a 65 percent decline.

In the second half of 2008, GSK sold only ?£757 million. Thirty-five percent of that would be ?£265 million, if the slope stays the same for 2009. Brutal.

What is GSK doing about this? Laying people off, mainly.

Or trying to. In fact, even as it reaches for 6,000 redundancies, its costs are increasing. Sales and admin expenses were up 21 percent to ?£2.2 billion, and up 26 percent if you include legal costs -- which at BNET we do, because only a fool thinks lawsuits aren't the cost of doing business for drug companies. GSK said:

We are making good progress to deliver cost reduction through our restructuring programme. Cumulative annualised cost savings amount to ?£900 million and we are very much on track to deliver our target of ?£1.7 billion annual pre-tax cost savings by 2011.

Is it working? Not yet. This chart shows the amount of revenue and gross profit the company gets for every pound it spends on its largest quarterly expense, sales and admin -- the meat of the company.

The layoffs and the revenue swings seem to be getting progressively more exaggerated, which is to be expected for a company clawing its way through a generic cliff. But average growth in operating expense productivity over the last two years was just 0.42 percent. (Interestingly, it's an almost identical picture to that of AstraZeneca.)

One reason the savings from the "cost reduction" program aren't showing up in higher revenue yields is that GSK is turning around and spending them -- on advertising. Page 45 of this slideshow shows that incremental advertising costs funded by cuts have ballooned 32 percent, from under ?£50 million in 2005 to somewhere near ?£125 million in 2008. In the last two years the incremental ads have been greater than the restructuring savings, the chart shows.

Which rather defeats the point, doesn't it?

• Previously:
• The FDA Gives GSK a New Way to Tout Alli
• GSK Wins Full Review of Tafas v. Doll, Wonky-But-Crucial Patent Case
• GSK's Alli Shows Future for Vivus, Arena and Orexigen's Obesity Candidates
• Why Abbott Is Allowed to Manipulate GSK and BMS's AIDS Drug Prices
• Sanofi, GSK Make Novartis Look Scrooge-Like on Swine Flu Vaccine Donations
• GSK Q1: ?£450 Million in Generic Damage to CNS Category
• GSK's Alleged $1.9 Billion Tax Dodge Went Against Its Own Ethics Code
• GSK's Offer of 50% Discount on Pills Was a "Mistake"; Press Release Published in Error
• Consumer Reports: GSK-Roche Boniva Ads Are "Misleading"
• Allergan CEO Gets $15.7 Million Bonus if He Says Yes to GSK
• GlaxoSmithKline: Look Who's Not Getting Laid Off