) reported third quarter earnings of approximately 61 cents per
ADS, missing the Zacks Consensus Estimate of 90 cents and the
year-ago earnings of 71 cents per American depositary shares
(ADS). Revenues were up 1% year over year at constant exchange
rates (CER) to $10.1 billion. Revenues were below the Zacks
Consensus Estimate of $10.6 billion.
All growth rates mentioned below are on a year-on-year basis and
The Quarter in Detail
The company operates through two segments: Pharmaceuticals and
Vaccines and Consumer Healthcare. Pharmaceuticals and Vaccines
sales remained flat while Consumer Healthcare sales were up 4%.
Pharmaceuticals revenues decreased 1%. Vaccines revenues
grew by 3% on the back of strong performances in the U.S. and
The Pharma and Vaccines segment performed well in the U.S. (up
2%), Japan (up 2%) and Europe (up 5%). Segmental sales were
disappointing in the Emerging Markets and Asia Pacific (EMAP)
with sales falling 9%. The downcast in EMAP sales reflects the
ongoing investigation in China (down 61%). Glaxo is facing
investigations and charges of fraudulent behavior and ethical
misconduct leveled by Chinese government authorities. The
investigation is in early stage, however it is likely that a
number of employees working in Glaxo were engaged in fraudulent
In the Consumer Healthcare division, growth was witnessed in Oral
Care (6%) and Nutrition (10%). Sales in the Skin Health and Total
Wellness segments remained flat in the third quarter of 2013.
Sales increased in the Rest of the World (4%) and in Europe (6%)
and remained flat in the U.S.
The company bought back shares worth £560 million during the
third quarter of 2013. Share repurchases in 2013 are still
expected in the range of £1 - £2 billion out of which £979
million have already been repurchased.
The company declared an interim dividend of about 62 cents per
The company remains on track to deliver £2.8 billion (of which
£2.6 billion has already been realized) in annual savings under
its restructuring program by 2014. Glaxo has undertaken the Major
Change program which focuses on restructuring the company's
business in Europe, improving efficiency in supply process,
manufacturing and research and development (R&D). The program
is expected to yield annual savings of at least £1 billion by
Glaxo still expects to report revenue growth of approximately 1%
with core earnings growth of 3%-4% (both at CER) for 2013 from
the year-ago period.
We are pleased with Glaxo's efforts to control cost and
restructure operations. The company is also focusing on its core
assets and pursuing divestment of non-core assets. Glaxo entered
into an agreement with Japanese consumer goods company, Suntory
Beverage & Food Ltd., to divest its nutritional drinks
brands, Lucozade and Ribena, for £1.35 billion in cash. The
company has also entered into an agreement with a South
African pharma company, Aspen Group, to divest two thrombosis
products, Fraxiparine and Arixtra, and the related manufacturing
sites for £700 million.
We are also encouraged by the progress in Glaxo's pipeline.
Multiple pipeline related news is expected in the coming quarters
including 8 phase III data readouts expected before the end of
Glaxo received U.S. Food and Drug Administration (FDA) approval
for several drugs in the reported quarter including Tivicay (HIV)
and flu vaccine Flulaval Quadrivalent. In Europe, the company
received approval for its oncology drug, Tafinlar. However, we
remain concerned about the challenges faced by the company in the
form of generic competition. Additionally, we believe that any
strict action enforced by the Chinese government will
significantly impact Glaxo's top-line.
Glaxo carries a Zacks Rank #3 (Hold) in the short run. Right now,
Johnson and Johnson
) look well positioned.
While Roche is a Zacks Rank #1 (Strong Buy) stock, Johnson and
Johnson and Bayer are Zacks Rank #2 (Buy) stocks.
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