GlaxoSmithKline Layoffs: It's All Colorado's Fault

Last Updated Feb 5, 2009 7:01 PM EST

GlaxoSmithKline is to shed another 6,000 to 10,000 jobs as part of a restructuring brought on by the collapse of its sales of Avandia and patent expiries.

But it's not just that. The job losses are also being triggered by the missteps of some as-yet-unnamed GSK execs who triggered an investigation by Colorado officials into "marketing and promotional practices for several products for the period 1997 to 2004."

GSK put those legal costs at $400 million. CEO Andrew Witty described them as "unexpected" in his statement, so I would expect someone in the U.S. to be fired over this -- and not as part of a restructuring.

Witty's description of the layoffs program came in wording that only an accountant would love:

... we have expanded our restructuring programme and now expect to realise pre-tax total annual savings of £1.7 billion by 2011, with related pre-tax charges of £3.6 billion.
Er ... you're going spend £3.6 billion to save £1.7 billion? OK. As long as you know what you're doing.

GSK's SG&A expenses -- the money it spends on staffing, selling and marketing -- was up because of those legal charges:

SG&A costs, including legal charges, were 30.2% of turnover (2007: 30.0%).
And they will be up next year too:
... Excluding legal costs the 2009 SG&A margin is expected to be slightly higher than in 2008 as restructuring savings are more than off-set by increased marketing investments to support the strategic priorities and higher pension costs.

... costs for legal matters were £611 million (2007: £255 million),

To give you an idea of the scale of the collapse, here's a chart that shows how much money GSK gets back in revenues and gross profit for every dollar (or pound) it spends on staffing and promotion costs. The second chart shows the change (growth or decline) in that return from quarter to quarter. It gives you a magnified idea of where the company is headed.

Note the cliff-like plummet in Q4 2008. In the fall, GSK was getting $3.54 in revenues for ever $1 of SG&A. Now it's down to $2.53 -- that's a 29 percent decline in the productivity of its staffing investment. That's almost unheard of for a pharma company that size. And it came despite the fact that Q4 revenues were actually up a little bit compared to the year before.