GlaxoSmithKline (GSK) reported second quarter core earnings of 64 cents per American depositary share (ADS), down 12% year over year at constant exchange rates (CER). Weak performance of the respiratory portfolio, generic competition for Lovaza and ongoing probe in China affected results. Earnings missed the Zacks Consensus Estimate of 71 cents. Investors reacted negatively to the news with the stock falling 5.98%.
On an ex-divestment basis, revenues were down 4% year over year at CER to $9.3 billion. Revenues were below the Zacks Consensus Estimate of $10.1 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. Both Pharmaceuticals and Vaccines sales and Consumer Healthcare sales were down 4%. While Pharmaceuticals revenues decreased 6%, Vaccines revenues grew 5% on the back of strong Emerging Markets performance.
The Pharma and Vaccines segment disappointed in Japan (down 7%) and the U.S. (down 10%), partially offset by a 11% increase in Emerging Markets. Revenues in Europe remained flat.
Sales were affected by increasing competition for Advair and generic competition for Lovaza in the U.S. Additionally, ongoing investigation in China continued to cast a shadow on Glaxo.
In the Consumer Healthcare division, sales were negatively impacted by temporary supply interruptions in the U.S. and Europe. Sales increased in the Rest of the World (up 3%) and decreased in Europe (down 10%) and the U.S. (down 11%). On a segmental basis, turnover increased in Nutrition (up 7%), which was more than fully offset by a decrease in sales in Wellness (down 9%) and Skin Health (down 19%). Oral Health revenues remained flat.
Although the supply position is improving, Consumer Healthcare sales for the full year are expected to be broadly flat.
The company bought back shares worth £210 million during the second quarter of 2014 and £238 million year to date. Share repurchases in 2014 are expected to be immaterial.
The company declared an interim dividend of about 65 cents per ADS. The company increased the dividend by approximately 6%.
2014 Outlook
Glaxo no longer expects to report revenue growth in 2014. Additionally, the company expects 2014 core earnings to be broadly in line (at CER) with the year-ago period on an ex-divestment basis. Earlier, Glaxo had expected to report revenue growth along with core earnings growth of 4%–8% (both at CER). The pre-earnings Zack Consensus Estimate was $3.47 per share for 2014.
Glaxo continues to pursue restructuring and cost-cutting initiatives. The company expects to generate incremental cost savings of approximately £400 million in 2014.
Meanwhile, Glaxo is also working on divesting certain U.S. and European brands in its established products portfolio with expected total 2014 sales of approximately £1 billion.
Glaxo is on track to complete the major three-part inter-conditional transaction related to its Consumer Healthcare, Vaccines and Oncology businesses with Novartis (NVS) in the first half of 2015 (read more: Novartis Signs Deals With GlaxoSmithKline & Eli Lilly).
Our Take
Glaxo’s second quarter results were below expectations with both earnings and revenues missing the Zacks Consensus Estimate. We are concerned about the challenges faced by the company in the guise of increasing competition and pricing pressure. Additionally, we believe that any strict action enforced by the Chinese government will significantly impact Glaxo’s top line.
The deal with Novartis is encouraging and is expected to be accretive to earnings. New products including HIV drug, Tivicay, should boost revenues in the coming quarters and partially offset the dismal performance by the respiratory product portfolio.
Glaxo carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the health care sector include AstraZeneca (AZN) and AbbVie Inc. (ABBV). Both sport a Zacks Rank #2 (Buy).
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