Following the negative FDA panel hearings and safety review of diabetes drug Avandia and exchange rate movements against it, revenue fell 3% in the third quarter vs. last year. Operating profit and net income were down only 2% and 1%, respectively, thanks to cost-cutting measures. Earnings per share were up slightly to $0.48 for the quarter, thanks to share buybacks.
Because of the unexpected safety concerns about Avandia, GSK is dealing not only with generic competition against some of its former top drugs, like Wellbutrin XL, Coreg IR, and Zofran, it's also dealing with this new unexpected source of revenue decline. Sales of Avandia were down almost 40% in the third quarter. GSK's top franchise, asthma treatment Advair, has also been facing increasing competition from AstraZeneca's (NYSE: AZN ) Symbicort, which has partially stunted its sales growth.
Helping balance out the negative effects of Avandia sales was the first full quarter of revenue for over-the-counter (OTC) weight loss drug Alli. Sales in this first full quarter of Alli in present OTC form were less than half what they were during the one month it was available last quarter (meaning much of the hype over it has died down), but it still contributed a meaningful $69 million to GSK's top line despite its "unique" side effect profile.
Despite all its near-term product sales issues, GSK's future looks secure thanks to its robust drug pipeline. It has the potential for 25 new drug launches over the next three years, according to its own estimates, and a whopping 33 compounds in phase 3 development. Contrast that with other pharma giant Pfizer (NYSE: PFE ) , which had only 11 drugs in phase 3 development by the end of July.
GSK may be on the ropes until the end of 2008 fighting to grow its top-line revenue. With so many potential new drug launches and the continued ramp up of Cervarix, Tykerb, and Alli sales GSK will be fine in the long term.
Patient investors are getting a 3.8% yield while they wait for GSK's return to financial strength. While the timelines for its return to growth may have been extended because of the revenue shortfall from Avandia this year, I think GSK will win the rumble in the jungle and that its financials will start improving again by 2009. Don't be fooled by this weak quarter.