GlaxoSmithKline warned on Wednesday that sales in 2012 would be flat as pressure on drug prices intensifies in Europe, due to government austerity measures aimed at curbing healthcare budgets.

The worsening situation in Europe is a challenge for Britain's biggest drugmaker, which had previously set itself a goal of a return to sales growth this year after putting patent expiries and a record-breaking mis-selling fine in the U.S. behind it.

Chief Executive Andrew Witty said he saw a delay in the company's return to growth rather than a change in the shape of its future growth curve as it overcomes past problems.

"It's a question of timing - two or three quarters, if you will, being muted by the macro-economic effect of pricing in Europe," he told reporters.

Sales in Europe slumped 8% in the quarter, reflecting a 1% volume decline and an unprecedented 7% fall in pricing. That year-on-year price decline might be at its worst point now, assuming there are no further shock moves by governments, Witty said.

Overall turnover was down 4% from the same period a year ago at 6.46 billion pounds ($10.0 billion), generating "core" earnings per share (EPS) down 5% at 26.4 pence.

Analysts, on average, had forecast sales of 6.70 billion pounds and core EPS of 27.4p, according to Thomson Reuters I/B/E/S. Core earnings exclude certain non-cash charges.

"Like Europe itself, Glaxo continues to kick the can down the road," said Keith Bowman, Equity Analyst at Hargreaves Lansdown Stockbrokers.

GSK already missed forecasts for sales in the first quarter of 2012 and the last three months of 2011, underlining the difficulties faced by Witty in achieving the hoped-for return to growth.

The disappointing performance in recent quarters is also taking a toll on profit margins and the group now expects operating margin in 2012 to be broadly in line with last year's level of 32.1%.

Cutting costs

GSK is taking further action to reduce costs in the face of the tough environment and said it expected new manufacturing process improvements to generate annual cost savings of around 500 million pounds by the end of 2015.

While drug companies have endured falling prices in Europe for several years, the situation has deteriorated markedly in recent months due to draconian budget cuts - particularly in southern Europe - triggered by the euro crisis.

Europe is now the toughest region for drug pricing anywhere in the world, Novartis pharmaceuticals head David Epstein told analysts last week.

Witty is diversifying GSK to reduce reliance on "white pills in Western markets", the part of the business most vulnerable to price cuts and generic competition.

The strategy involves a major push into both emerging markets and non-prescription consumer healthcare.

The long-term growth of the company, however, depends on the prescription drug pipeline, where investor expectations are pinned on a range of experimental medicines for diseases ranging from HIV/AIDS to chronic lung disease.

In particular, GSK hopes a new once-daily combination lung drug, known as Breo or Relvar, will eventually replace its current ageing top-seller Advair, which is taken twice a day.

The new drug was filed for approval earlier this month but industry analysts doubt it will replicate Advair's $8 billion annual sales, given mixed results in clinical trials.

Witty has also increased his pipeline bet on biotech drugs, as highlighted by last week's deal to buy Human Genome Sciences for $3 billion, giving GSK full control of recently launched lupus medicine Benlysta and other experimental drugs.