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GlaxoSmithKline Shares Slump

The U.K. drug giant braces for a hit from generic competition.

Shares of

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stumbled Thursday after the U.K-based drug giant said 2004 would be a "transition year" in which earnings per share would be "at least in line" with that of 2003.

In afternoon trading, the company's shares were down $1.90, or 4.2%, to $43.25, after trading as $42.66.

The company said this year's results would be severely affected by the fact that three major drugs have lost or will lose patent protection. Those drugs are the antibiotic Augmentin, which went off patent in mid-2002, the antidepressant Paxil which lost U.S. patent protection last September and the antidepressant Wellbutrin, which becomes vulnerable to generic competition in mid-2004.

"The first nine months will be challenging as we absorb the erosion from Paxil and Wellbutrin generics," said J.P. Garnier, the company's chief executive. But starting in the fourth quarter, "we expect to return to growth as the impact of generics diminishes and our underlying business strength shows through," he said.

John Coombe, GSK's chief financial officer, said some companies can lose 90% of a brand name drug's sales within a few months from the time a drug is attacked by generic competitors. Garnier said GlaxoSmithKline is trying to take steps to slow the anticipated revenue loss of the antidepressants by making improved versions of these drugs. "We will come out of this transition year stronger than ever," he said.

As an illustration of generic competition, the company noted that worldwide sales of Paxil (sold as Seroxat in Europe) fell 4% in 2003 compared to 2002, with U.S. sales dropping 9%. But in the fourth quarter alone, global sales sank 40% and U.S. sales plunged 58%, following the September expiration of the drug's U.S. patent.

Garnier said he was "not looking" to divest products, adding that he would "not comment on the specifics" of the French drug giant


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hostile bid for European rival



. GlaxoSmithKline is one of several drugmakers that analysts have speculated might make a white-knight bid for Aventis.

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"Our goal is not to go through a major merger," said Garnier. He said the company's first priority is to nurture its drug research pipeline whose mixture of early stage and late stage experimental products he likened to a "promising teenager" who has the prospects for becoming "a person of standing in the community."

Garnier said his company's size and its promising pipeline will enable it to take the heavy revenue hits of major drugs coming off patent.

GlaxoSmithKline "has delivered on its 2003 growth forecast of high-single digit or better," said Vikram Sahu, a Goldman Sachs analyst based in London. "This is a creditable achievement," given the impact of generic sales last year on Paxil and Augmentin, he added in his research report.

Sahu has been predicting 2004 earnings per share growth in the mid-single digits; but even though the company said 2004 EPS would be flat relative to last year, Sahu maintained his outperform rating. (He doesn't own shares, but his firm expects to receive or seek compensation for investment banking services in the next three months from the company.)

Mark Clark, a London-based analyst for Deutsche Bank, is keeping his hold recommendation, saying he might have to reduce his 2004 prediction by 7% or so, assuming the British remains at an exchange rate of $1.90 . (GlaxoSmithKline's 2003 year-end and fourth-quarter calculations use a conversion rate of $1.64 to the pound.).

Clark said the company's comments about 2004 represent "a much more conservative outlook than we had expected." He added that the downside risks to the stock, in addition to the impact of generic drugs, include research and development setbacks and tougher European health care policies. (Clark doesn't own shares, although his firm has an extensive investment banking relationship with GlaxoSmithKline.

For the full year, GlaxoSmithKline earned $7.35 billion, or $1.26 a share, on revenue of $35.2 billion. The figure excludes several one-time charges, which, if added to the total. Otherwise, earnings would have been $7.8 billion, or $1.35 a share.

Full-year EPS was 3% below the consensus estimate of analysts polled by Thomson First Call. Still, that performance, when measured in terms of a constant exchange rate, was 10% better than the EPS for 2002. Last year's revenue exceeded 2002's revenue by 5%.

For the three months ended Dec. 31, the company earned $1.41 billion, or 25 cents a share, excluding one-time charges. Otherwise, the company would have earned $1.6 billion, or 28 cents a share, on sales of $9.3 billion.

Using a constant exchange rate, the company's fourth quarter sales slipped 1% from the same period last year. Earnings per share fell 8% if one-time charges were excluded. EPS fell 19% if charges are included.

The company's fourth quarter was hurt by a settlement, announced last week, in which GlaxoSmithKline agreed to pay $175 million to wholesalers and other purchasers of the company's nonsteroidal anti-inflammatory drug Relafen. The company said the settlement ? in which plaintiffs alleged antitrust violations ? has been submitted to a district court in Massachusetts where the case has been pending since 2001.

GlaxoSmithKline, which said it believes it acted properly to protect its patent on Relafen, explained that it is taking a fourth-quarter charge of $361 million. That will cover this settlement, plus previous settlements with two drug companies and with chain drugstores. The charge also will apply to a pending Relafen antitrust case which is scheduled for trial in June.

The company also reported that it has received a subpoena from prosecutors Colorado regarding sales and promotional efforts for products between 1997 and 2004. The company didn't identify the products or provide details of the complaint. It said it was cooperating with the investigation which is "in its early stages."

The company reiterated Thursday that it has received a notice from the Internal Revenue Service stating that it owes $2.7 billion in back taxes relating to profits on certain products sold between 1989 and 1996. GlaxoSmithKline said that if it is forced to pay the full claim it also would be on the hook for $2.5 billion in interest. The company said similar tax issues remain for the 1997-2000.

GlaxoSmithKline said the IRS assessment, delivered to the company last month, is part of a long-running dispute between American and British tax authorities governing the activity of multinational companies. GlaxoSmithKline said negotiations on this matter between the two nations broke down in July. The company said it has failed in all administrative appeals, so it plans to file a petition in U.S. Tax Court in 2005 or 2006.