Glaxo Cuts Jobs, Guidance -- and the Kitchen Sink
By
Brian Orelli, Ph.D.
February 5, 2009
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GlaxoSmithKline (NYSE: GSK) was all about cuts today -- and for good reason. Revenue was up 16% in the quarter, but that gain was entirely due to a weaker pound sterling, which the foreign company reports in. At constant currencies, sales dropped 3%.
That's just not going to cut it -- the dollar can't keep getting stronger forever. Glaxo didn't say how many jobs would be cut, but some level seems inevitable. The company is hoping to save about $2.5 billion per year, up from a previous goal of around $1 billion per year.
The problem is that Glaxo continues to have issues with patent expirations and new drugs can't make up for the lost sales. For instance, Glaxo's human papillomavirus (HPV) vaccine, Cervarix, logged just $231 million in sales last year since it's not approved for use in the U.S. yet and has to compete with Merck's (NYSE: MRK) Gardasil in Europe. Likewise, new offerings Entereg and Promacta, which Glaxo licensed from Adolor (Nasdaq: ADLR) and Ligand Pharmaceuticals (Nasdaq: LGND), respectively, have yet to really take off.
Glaxo has done a good job of cutting costs where it can so far, so I suspect it'll be able to continue the trend with its new initiative. For instance, the company went from spending 35% of its revenue on selling, general, & administrative costs in 2001 to just 27.7% last year. That's savings that gets pushed right down to the bottom line.
The company has also decided to stop giving guidance for investors. I'm all for companies not giving guidance -- neither Schering-Plough (NYSE: SGP) nor Gilead Sciences (Nasdaq: GILD) gives earnings guidance so it's not unheard of in the industry. And what Fool doesn't like the idea of making the job harder for short-sighted analysts? But the timing may be bad to cut off guidance since it'll be harder for investors to know how quickly the cost-cutting measures are being implemented. I imagine we'll see a lot of post-earnings volatility from Glaxo's stock over the next several quarters.
Glaxo can't cut costs forever, but hopefully it shouldn't have to. The drugmaker has a well-stocked pipeline -- much of which it established through partnerships -- which should be able to boost earnings in the future. In the meantime, investors get to collect a healthy dividend check -- which hopefully won't get cut -- yielding around 5% while they wait for things to turn around.
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