The world's second-largest pharmaceuticals group is to abandon its big-is-beautiful model and run its businesses more like small biotech outfits.

Andrew Witty, who took over as chief executive of GlaxoSmithKline in May, unveiled the change in strategy yesterday as he said that profits had fallen from £1.3 billion in the second quarter last year to £1.2 billion this time.

The company will also make its first move into the branded generics market through an alliance with Aspen Pharmacare Holdings, a South African group, in a sign that it is trying to target emerging markets as the West becomes more challenging.

Although GSK's revenue rose 3.5 per cent to £5.9 billion for the three months to June 30, sales were hit by cheaper generic versions of some of its drugs. Sales of Coreg, the heart medication, fell 97 per cent to £5 million after the introduction of generic competition in September.

Mr Witty expressed concern for the state of the pharmaceuticals industry, saying: “I can't help but see that the sector has lower ratings by shareholders and that anxiety exists about where the sector is going.”

GSK is trying to tackle the problem by dividing its research and development, which is in seven centres, into smaller groups of up to 80 scientists. The groups will have to apply for funding to a central investment board.

Rather than the traditional model of chasing blockbuster drugs that achieve more than $1 billion in annual sales, GSK hopes that its new approach will lead to more drugs that earn a modest amount being developed by the company, reducing the risk of relying on a few big sellers.

Ten medicines account for 65 per cent of GSK's business. When one of these drugs - Avandia, the diabetes treatment - was linked with an increased risk of heart attacks last year, GSK lost $18 billion (£9 billion) from its market value.

Mr Witty refused to be drawn on whether the strategy would lead to more job cuts. GSK has already announced a programme of several thousand job losses that will run until 2010. It will set up a venture capital-style fund to invest in small early stage companies, or set up smaller companies using drugs in development at GSK.

The company will also get advice from healthcare bodies such as the National Institute for Health and Clinical Excellence (NICE), which helps to decide which drugs the government will pay for, on whether GSK drugs will be cost-effective and sufficiently different from others on the market. The deal with Aspen illustrates GSK's tilt towards new sales areas and one of Mr Witty's first acts as chief executive was to hire Abbas Hussein, from Eli Lilly, to take charge of the emerging markets division.

Under the terms of the Aspen tie-up, GSK will gain access to a range of low-cost branded but unpatented drugs. The alliance is a departure from the company's strategy of focusing on high-cost patented drugs that can be sold in the United States and Europe, which have higher margins than generics but suffer when patents expire.

Emerging markets are forecast to grow by 13 per cent a year - triple the rate in the West - and account for 40 per cent of growth in the worldwide pharmaceutical market by 2020. GSK will register the drugs in markets where they have not been approved and expects to start selling them from 2010. Aspen will continue to market them in sub-Saharan Africa.

The South African company will receive limited upfront payments from GSK, but most payments will be made through a profit-sharing arrangement based on sales. Aspen has a long-standing relationship with GSK and already produces more than 40 of its medicines for South Africa, including anti-retroviral HIV medicines.

Analysts had a largely positive reaction to the plans. Kevin Wilson, at Citigroup, said: “We got the strategic update that we expected and we think it makes good sense.”

GSK delays £12bn share buyback plan

GlaxoSmithKline said that it would delay its £12 billion share buyback programme to ensure that it had cash available for acquisitions.

Andrew Witty said that the company remained committed to the buyback scheme, but he refused to set a date for its completion. Its original plan, announced as sales fell after a controversy over Avandia, was to buy back £12billion of shares by July 2009.

The company still plans to buy back another £1 billion of shares from shareholders this year, bringing the total since July 2007 to £6.5 billion by the end of the year. GSK will have about £5.5 billion to play with until it decides to recommence buybacks.

Mr Witty played down rumours that GSK might seek a large acquisition with the cash and said that the company needed flexibility for small bolt-on acquisitions, particularly given the turmoil in the debt markets, as he did not want to have to raise more equity at present.

“We want to be in a position with the buyback where we have taken every opportunity to ensure that we have flexibility and take advantage of investment opportunities that come along,” Mr Whitty said.

Like many of its peers, GSK has made a number of acquisitions in recent years as it tries to bolster its pipeline. In June it bought Sirtris Pharmaceuticals, an American company specialising in age-related diseases, for about $720 million in cash.

After the announcement this week that Roche, the Swiss drugs company, would pay £22 billion in cash for the remaining stake in Genentech, the cancer drugs specialist, that it does not own, there has been renewed speculation that more large acquisitions are on the horizon as pharmaceutical companies struggle with declining sales.

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