) reported second quarter earnings of 79 cents per American
Depository Share (ADS), well below the Zacks Consensus Estimate of
84 cents. Earnings fell 2.5% year over year. Revenues decreased
7.3% year over year to $10.2 billion. Revenues came in below the
Zacks Consensus Estimate of $10.4 billion.
The Quarter in Detail
While the Pharmaceuticals and Vaccines sales fell 3%, the Consumer
Healthcare sales remained flat. Price cuts in the EU affected the
Pharmaceuticals and Vaccines revenues by 7% during the quarter.
While Pharmaceuticals and Vaccines sales increased in Japan (6%)
and Emerging Markets and Asia Pacific/EMAP (9%), sales declined in
the US (6%) and Europe (8%). Worldwide sales were affected by a
number of factors including European austerity measures and weaker
performance in the US due to generic competition and
discontinuation of certain products.
In the Consumer Healthcare division, growth in Oral care (8%) and
Nutritional (6%) was offset by a decline in the Total Wellness (8%)
and Skin Health (2%) segments. Sales decreased in the US (11%) and
Europe (5%) and increased in the Rest of the World (10%).
Glaxo continues to make progress with its cost-cutting initiative,
which should help reduce the impact of increasing generic
competition over the next few years and help earnings grow. The
company remains on track to deliver £2.8 billion (of which £2.5
billion is already realized) in annual savings under its
restructuring program by 2014. Apart from this, the company plans
to generate annual cost savings of £500 million by the end of 2015
by improving operating efficiency.
Meanwhile, the company bought back shares worth £882 million during
the second quarter of 2012. The company declared a dividend of
about 53 cents per ADS. Total share repurchases in 2012 are
expected to be between £2 billion and £2.5 billion.
Glaxo is all set to complete its acquisition of
Human Genome Sciences
) in the third quarter of 2012 for $14.25 per share in cash. With
this acquisition, Glaxo will gain full control over Benlysta and
late-stage candidates such as darapladib (cardiovascular disease)
and albiglutide (type II diabetes). Glaxo expects the acquisition
to positively impact core earnings from 2013.
Glaxo expects revenues to remain flat year-over year (at CER). We
note that earlier Glaxo was expecting revenues to grow from 2011
levels. Guidance was lowered due to EU pricing pressure. Going
forward, Glaxo expects negative revenue growth in the third quarter
of 2012 and positive revenue growth in the fourth quarter. Overall
revenue growth in the second half of 2012 is expected to remain
flat. Foreign exchange translations are expected to impact revenues
by 1.5% in 2012. Additionally, core operating margin is expected to
remain flat as compared with the year-ago figure. Previously, Glaxo
had expected it to pick up in 2012.
The pipeline is expected to advance significantly with the
potential launch of 8 candidates planned over a span of 2 years,
two of which Nimenrix and Menhibrix have already received approval.
The company is seeking or planning to seek regulatory approval for
several candidates including Breo (regulatory review), albiglutide
(regulatory submission planned in the first quarter of 2013),
dabrafenib and trametinib (filing expected on July 30th).
A major part of Glaxo's revenues will be exposed to generic
competition as multiple drugs are scheduled to lose exclusivity in
the next few years. We expect the company's top line and gross
margins to remain under pressure in the coming quarters. The US
health care reform and EU pricing pressure will continue to affect
We currently have an Underperform recommendation on Glaxo. The
stock carries a Zacks #4 Rank (Sell rating) in the short run.
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