Major job cuts are on the cards for GlaxoSmithKline after the UK giant posted lower profits hit by generic competition and a slump in sales of its controversial diabetes drug Avandia.

Operating profit for the third quarter fell 6% to £1.88 billion and turnover slipped 3% to £5.48 billion, with pharmaceutical sales decreasing 2% to £4.60 million. The most significant decline was a 38% drop in revenues, to £225 million, for Avandia (rosiglitazone) which has suffered ever since a meta-analysis that was published in May by the New New England Journal of Medicine alleged a link between the drug and the risk of cardiovascular disease, claims which have not died away.

Other drugs were savaged by generic competition, notably Zofran (ondansetron), GSK’s nausea treatment for patients undergoing chemotherapy for cancer, which fell 86% to £32 million, the allergy drug Flixonase/Flonase (fluticasone), down 23% to £49 million and the antidepressant Wellbutrin XL, a sustained-release form of bupropion, which sank 41% to £114 million. Sales of the heart disease drug Coreg (carvedilol) were down 20% to £145 million.

It was not all doom and gloom, however, and Advair/Seretide (salmeterol and fluticasone) for asthma and chronic obstructive pulmonary disease grew 7% to £835 million. GSK's vaccine sales soared 49% to £593 million, and were up 97% in the USA to £237 million, driven by orders for the flu vaccines Fluarix and FluLaval. Sales of Lamictal (lamotrigine) for epilepsy were up 14% to £275 million, while Valtrex (valaciclovir) for herpes infections also performed well with a 13% rise in sales to £229 million. ReQuip (pramipexole), for Parkinson’s disease and restless legs syndrome (RLS), grew 31% to £87 million.

”Operational excellence” plan will cost £1.5 billion

Nevertheless there is no disguising that GSK is finding things tough, hence the announcement of a £1.5 billion restructuring plan, or an “operational excellence programme” as the firm prefers to call it. The paln is expected to cut costs by £350 million next year and by £700 million by 2010. The cuts will come in manufacturing (40%), selling and administration (40%) and R&D (20%).

On a conference call, chief executive Jean-Pierre Garnier declined to give specific figures about the number of jobs that will go (though some estimates have put the figure at around 5,000). Earlier he had said that “we are very conscious that these initiatives will impact our staff in certain areas of our business and we regret that job reductions will be a necessary part of this programme.”

However, Dr Garnier went on to say that “by making the changes we envision, GSK will be better placed to address the challenges we face in 2008,” adding that the firm remains on track to meet its earnings guidance for the year “despite significant challenges”. He also noted that 15 products have been launched, approved or filed so far this year, and despite the restructuring programme, “we are also increasing R&D investment in key areas of future growth, such as biopharmaceuticals, oncology, vaccines and neuroscience.

On the whole analysts were reasonably pleased to hear about the cost-cutting measures. Navid Malik at Collins Stewart said that the move improve productivity and hence reduce costs, by externalising the manufacture of older products “and reducing the dependence on a large and expensive sales force” by employing new initiatives in that field.

Mr Malik, who has a buy rating on the stock, also preferred to focus on the pipeline. This year, there have been five new launches and GSK expects to potentially launch 25 products over the next three years, “which should dampen concerns over top-line growth in the short-term’, he said. Importantly, he went on, the filing date for Promacta (eltrombopag) for idiopathic thrombocytopenia purpura will definitely be before the end of the year and “this product has the potential to generate peak sales of $3 billion in a market with no significant competition”.