GlaxoSmithKline ( GSK ) reported second quarter earnings of approximately 65 cents per ADS, missing the Zacks Consensus Estimate of 85 cents and the year-ago earnings of 82 cents per ADS. Revenues were up 2% year over year at constant exchange rates (CER) to $10.2 billion. Revenues were above the Zacks Consensus Estimate of $10.0 billion.
All growth rates mentioned below are on a year-on-year basis and at CER.
The Quarter in Detail
The company operates through two segments: Pharmaceuticals and Vaccines and Consumer Healthcare. Pharmaceuticals and Vaccines sales inched up 1% while Consumer Healthcare sales were up 2%. Pharmaceuticals revenues increased 2%. Vaccines revenues remained flat as strong performance in the U.S. and Europe was offset by weak performance in other territories.
The Pharma and Vaccines segment performed well in the U.S. and the Emerging Markets and Asia Pacific (EMAP) with sales rising 5% and 2%, respectively. In the U.S. revenues were driven by strong growth in Respiratory, Oncology and Vaccines. Segmental sales were disappointing in other areas including Japan (5%) and Europe remaining flat.
In the Consumer Healthcare division, growth in Oral Care (8%), Nutrition (7%) and Skin Health (11%) was partially offset by a decline in the Total Wellness (7%) segment. Sales increased in the U.S. (5%) and Rest of the World (4%) and decreased in Europe (2%).
The company bought back shares worth £367 million during the second quarter of 2013. Share repurchases in 2013 are expected in the range of £1 - £2 billion.
The company declared an interim dividend of about 55 cents per ADS.
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 2016.
Glaxo still expects to report revenue growth of approximately 1% (at CER) with core earnings growth of 3%-4% 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 remains on track to divest Lucozade and Ribena assets by the end of the year. Additionally, the company has also received an offer from Aspen Group of £700 million for two anticoagulant products, Fraxiparine and Arixtra, and the related manufacturing sites.
We are also encouraged by the progress in Glaxo's pipeline. Multiple pipeline related news is expected in the coming quarters.
Glaxo received U.S. Food and Drug Administration (FDA) approval for several drugs in the reported quarter including Breo Ellipta (chronic obstructive pulmonary disease) and oncology drugs Tafinlar and Mekinist. Tafinlar and Mekinist are already available in the U.S., while Breo Ellipta is expected to be launched later this year. The above mentioned drugs have multi-million dollar sales potential.
However, we remain concerned about the challenges faced by the company in the form of generic competition.
Additionally, Glaxo is facing investigations and charges of fraudulent behavior and ethical misconduct leveled by Chinese government authorities. The company is taking a number of steps to address the issue including review of all third party agency relationships and compliance procedures in China.
We note that the EMAP market - of which China is a major part - contributed more than 26% of Glaxo's revenues in the reported quarter. Glaxo's revenues from China increased 14% in the second quarter as compared to the prior-year period. 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. Companies that currently look attractive include Jazz Pharmaceuticals ( JAZZ ), Sarepta Therapeutics, Inc. ( SRPT ) and Cadence Pharmaceuticals Inc. ( CADX ). While Sarepta and Cadence Pharma carry a Zacks Rank #2 (Buy), Jazz Pharma carries a Zacks Rank #1 (Strong Buy).