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Glaxo Changes Course

It's often scary when a drugmaker starts talking about deviating from its historical performance and going to plan B. But in conjunction with its second-quarter earnings this week, GlaxoSmithKline (NYSE: GSK  ) talked about doing just that.

Glaxo announced another relatively dour quarter for its financial fortunes, with revenue up 4% and earnings per share gaining 13% year over year, excluding restructuring charges. Without the added benefit of a falling British pound sterling (relative to most currencies besides the dollar), Glaxo would have recorded a 2% decline in revenue, and only a 5% increase in earnings for the quarter.

The problems for Glaxo's pharmaceuticals business are the same ones currently plaguing or fast approaching other large-cap drugmakers like Pfizer (NYSE: PFE  ) , Wyeth (NYSE: WYE  ) , Forest Labs (NYSE: FRX  ) , and Merck (NYSE: MRK  ) . Namely, the company hasn't gotten new compounds onto the market fast enough to compensate for generic erosion of former blockbuster therapies like heart failure treatment Coreg or oncology therapy Zofran.

In addition, Glaxo's still recovering from the sudden, rapid decline in sales of diabetes treatment Avandia, after potential safety issues with the drug surfaced last year. Avandia sales collapsed 44% year over year this quarter; excluding Avandia, Glaxo's pharmaceutical sales would have been up a much healthier 7%.

The changes that Glaxo's CEO announced with its earnings release related mostly to a renewed focus on increasing the company's presence in emerging markets, where demand for new drugs is still growing rapidly. Glaxo also announced that it will look to other "new growth areas" like biopharmaceuticals (biologics), rather than focusing only on small-molecule drugs.

Since Glaxo lacks significant internal biopharmaceutical R&D expertise, more acquisitions are likely around the corner if it truly wants to bump up its biopharma focus. This strategy resembles the one fellow British drugmaker AstraZeneca (NYSE: AZN  ) kicked off last year with a gargantuan purchase of MedImmune.

The unstated benefit of shifting away from small molecules is that biologics and vaccines are significantly harder to copy and genericize, and thus can have more profitable product lives. If it wants to dive into this new strategy, though, Glaxo had better hurry; biopharma assets have been selling like hotcakes lately.

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Pfizer and GlaxoSmithKline are active Income Investor picks. To see how dividend-paying stocks can offer both secure income and the opportunity for growth, take a free look at this newsletter with a 30-day free trial.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. Pfizer is also an active Inside Value pick. The Fool has an A+ disclosure policy.

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