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Glaxo Misses on Both Counts - Analyst Blog

By: Zacks.com
Posted: 11/1/2012 1:52:00 PM
Referenced Stocks: ADS;FOLD;GSK;PFE;THRX

GlaxoSmithKline ( GSK ) reported third quarter 2012 earnings of 71 cents per American Depository Share (ADS), well below the Zacks Consensus Estimate of 89 cents. Earnings fell 21.1% from the year-ago period. Revenues decreased 8.8% year over year to $10.3 billion. Revenues came in below the Zacks Consensus Estimate of $10.6 billion.

All growth rates mentioned below are on a year-on-year basis and at CER

The Quarter in Detail

The Pharmaceuticals and Vaccines sales dropped 6% and the Consumer Healthcare sales fell 2%. Price cuts in the EU affected the Pharmaceuticals and Vaccines revenues by 7%, while volume decline accounted for 2% during the quarter.

Except for Emerging Markets and Asia Pacific/EMAP (11%), Pharmaceuticals and Vaccines sales decreased in all other regions including Japan (25%), US (6%) and Europe (9%). 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 (6%) and Nutritional (6%) was more than offset by a decline in the Total Wellness (12%) segment. Skin Health segment remained flat year over year. Sales decreased in the US (13%) and Europe (9%) and increased in the Rest of the World (9%).

Meanwhile, the company bought back shares worth £787 million during the third quarter of 2012. Total share repurchases in 2012 are expected to be between £2 billion and £2.5 billion (of which £1.9 billion is already repurchased). The company declared an interim dividend of about 58 cents per ADS.

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.

Other Details

Glaxo completed the acquisition of Human Genome Sciences on August 3, 2012. With this acquisition, Glaxo gained full control over lupus drug Benlysta, which contributed £19 million to sales. Glaxo has identified potential cost savings of up to $250 million.

The deal is expected to be accretive 2014 onwards. The 2012 core earnings will be slightly impacted, while the impact on 2013 core earnings is expected to be neutral.

Recently, the specialist HIV company, ViiV Healthcare and Shionogi & Co. revised their agreement effective from October 31, 2012. ViiV Healthcare was originally established by Glaxo and Pfizer ( PFE ).

As per the amended agreement ViiV Healthcare acquired exclusive worldwide rights to all Shionogi-ViiV Healthcare LLC joint venture assets which include dolutegravir, a phase III candidate. The deal expected to negatively impact earnings by £0.01 in both 2013 and 2014.

We note that, Glaxo, Pfizer and Shionogi own 76.5%, 13.5% and 10% of ViiV Healthcare respectively.

2012 Outlook

Glaxo reiterated its guidance and expects revenues to remain flat year over year (at CER). Going forward, Glaxo expects a positive revenue growth in the fourth quarter of 2012. Foreign exchange translations are expected to impact earnings by 2% in 2012. Additionally, core operating margin is expected to remain flat as compared with the year-ago figure.

The company is seeking approval for several candidates including Breo (chronic obstructive pulmonary disease/COPD), dabrafenib (oncology) and trametinib (oncology). The company is planning to seek regulatory approval for several other candidates including albiglutide (type II diabetes), LAMA/LABA (COPD) and dolutegravir (HIV) later this year.

The company is expected to provide a detailed update on the pipeline in an investor event scheduled for December 3, 2012.

Our Recommendation

We currently have a Neutral recommendation on Glaxo. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

Several products in Glaxo's portfolio including Valtrex, Arixtra, Evoclin, Lamictal, Imitrex, Requip, Combivir and Epivir are facing declining sales due to intense generic competition. We expect the company's top line and gross margins to remain under pressure in the coming quarters. The EU pricing pressure will continue to affect sales.

Glaxo is aiming to maximize the potential return from its pipeline. The company is looking towards deals and acquisitions to drive growth. The company is focusing on increasing the rights on its partnered products and promising pipeline candidates, so that it stands to benefit more from their success.

Glaxo's acquisition of Cellzome and Human Genome Sciences, increasing investment in Theravance Inc. ( THRX ) and Amicus Therapeutics ( FOLD ) and amended agreement between ViiV Healthcare and Shionogi indicate its efforts to expand the pipeline.

Apart from this, 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.



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