GlaxoSmithKline forecasts better 2014 as drug R&D improves

* 2014 sales seen up 2 percent, EPS to grow 4-8 percent

* Expects to stay respiratory market leader post 2020

* Q4 sales 6.91 billion pounds vs consensus 6.84 billion

* Q4 core earnings 30.1 pence vs consensus 30.2p

* Shares gain 3 percent on upbeat outlook

By Ben Hirschler

LONDON, Feb 5 (Reuters) - GlaxoSmithKline (Other OTC: GLAXF - news) has predicted a pick-up in sales growth to around 2 percent this year as productivity in its drug research labs improves and pressure on sales in China moderates following a damaging bribery scandal.

Britain's biggest drugmaker also said on Wednesday that it would stay market leader in the respiratory medicine market - a category it has dominated since the launch of Ventolin in 1969 - despite generic threats to its top-selling Advair drug.

Like many of its rivals GSK has suffered from a lengthy period of patent expiries and increased pricing pressure and is slowly returning to growth.

Chief Executive Andrew Witty said the expected improvement in 2014 reflected the roll-out of new products, which would offset further potential competition from generics to older products such as the heart drug Lovaza.

He expects 2014 sales to increase by around 2 percent on an ex-divestment basis, at constant exchange rates, after a 1 percent rise in 2013. Earnings per share (EPS) are forecast to rise by 4 to 8 percent.

"The outlook for 2014 looks promising with more products being launched and the benefits of restructuring programmes coming through," said Edison (Milan: EDNR.MI - news) analyst Mick Cooper.

Shares in the group were up 2 percent at 1586 pence by 1340 GMT, having traded up to 1609 pence earlier in the session. The Stoxx Europe 600 healthcare sector index was up 0.6 percent.

Witty has been focusing the company in recent quarters by spinning off non-core assets like the Lucozade and Ribena drinks brands, together with certain older drugs, as he prepares for the introduction of new respiratory, cancer and HIV medicines.

Last year, GSK topped the industry league table by winning U.S. approval for five new drugs and the group said it planned to launch late-stage clinical trial on around 10 new drugs in the next two years.

While there have also been setbacks - a cancer vaccine and an experimental heart drug both failed clinical tests late last year - the company's overall returns on research and development (R&D) are improving.

GSK, which is the only major drugmaker to report its internal rate of return on R&D investment, said that returns had now reached 13 percent, up from 12 percent in 2012 and 11 percent in 2010. It has set a target of reaching 14 percent.

ADVAIR WORRIES

A big concern for GSK investors is its reliance on the inhaled lung drug Advair, which makes up a fifth of sales. It already faces competition from copycat versions in Europe, with generics in the United States perhaps a couple of years away.

Despite this - and the risk of new-drug competition from rivals like Novartis - Witty said GSK would remain market leader, thanks to the launch of new lung drugs such as Breo and Anoro and backed up by a strong pipeline of other products.

"A bit like Mark Twain, I think the demise of GSK respiratory has been often exaggerated," he told reporters in a conference call. "The Advair franchise continues to be extremely strong."

There would be some impact "on the margins" from generics in Europe, while U.S. generic competition was still "several years away, if ever", he said.

GSK's forecasts for the year ahead do not take into account the negative impact of a strengthening pound and volatility in emerging market currencies, which made themselves felt in the final quarter of 2013.

Reported sales in the fourth quarter rose 2 percent to 6.91 billion pounds ($11.3 billion), generating "core" EPS down 7 percent at 30.1 pence.

Analysts on average had forecast sales of 6.84 billion pounds and core EPS, which excludes certain items, of 30.2 pence, according to Thomson Reuters (Frankfurt: TOC.F - news) data.

EMERGING MARKETS

Witty, who has made investment in emerging markets a big priority, said his enthusiasm for developing economies remained undimmed, despite the recent upheaval and the company's specific problems in China.

GSK's sales in China continued to fall in the latest quarter, although the decline of 29 percent was less than the 61 percent slump recorded in the third quarter of 2013.

Sales have been hit hard by Chinese police allegations in July that the British group funnelled up to 3 billion yuan ($495 million) to travel agencies to facilitate bribes to doctors and officials.

That disrupted its ability to market products and also deterred doctors from seeing sales representatives for fear of being caught up in the widening scandal. GSK is still awaiting a resolution of the affair, which could result in fines or other sanctions.