GlaxoSmithKline (GSK) reported third-quarter core earnings of 93 cents per American depositary share (ADS), up 5% year over year at constant exchange rates (CER) driven by cost reductions and financial efficiencies. Earnings beat the Zacks Consensus Estimate of 79 cents. Investors reacted positively to the news with the stock rising 1.8%. Overall the stock has gained 4% on the news.
Revenues were however down 3% year over year at CER to $9.4 billion. Revenues were below the Zacks Consensus Estimate of $9.7 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 3%. While Pharmaceuticals revenues decreased 4%, Vaccines revenues remained flat.
The Pharma and Vaccines segment disappointed in Europe (down 2%) and the U.S. (down 10%), partially offset by increase in Japan (up 6%) and Emerging Markets (up 12%). Sales were affected by increasing competition for Advair.
In the Consumer Healthcare division, sales were negatively impacted by temporary supply interruptions and a slowdown in Rest of the World. Sales increased in the Rest of the World (up 1%) and decreased in Europe (down 5%) and the U.S. (down 7%). On a segmental basis, turnover increased in Nutrition (up 4%) and Oral Health (up 2%), which was more than fully offset by a decrease in sales in Wellness (down 8%) and Skin Health (down 13%).
Although the supply position is improving, it will be affected for the rest of the year. Consumer Healthcare sales for the full year are expected to be broadly flat.
The company did not repurchase any shares during the third quarter of 2014. Share repurchases for the rest of 2014 are expected to be immaterial.
The company declared an interim dividend of about 61 cents per ADS. The company expects to maintain its 2015 dividend at 2014 levels and return £4 billion to shareholders in 2015 via a B share scheme post completion of the Novartis transaction.
2014 Outlook Maintained
The company continues to expect 2014 core earnings to be broadly in line (at CER) with the year-ago period on an ex-divestment basis. The Zack Consensus Estimate is $3.09 per share for 2014.
The company expects total global respiratory sales, which have been suffering due to lower Advair sales, will return to growth in 2016.
Meanwhile, Glaxo is also working on divesting certain U.S. and European brands in its established products portfolio and could reach agreements for the same by the end of the year.
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.
The transaction is expected to increase Glaxo’s revenues by £1.3 billion on a 2013 pro forma basis. Meanwhile, Glaxo is also targeting total annual savings of £1 billion by the fifth year from the closing of the transaction.
Additionally, Glaxo is exploring the option of an IPO of a minority stake in ViiV Healthcare, a company jointly owned by Glaxo, Pfizer (PFE) and Shionogi. Glaxo owns an almost 80% stake in ViiV Healthcare. On its third quarter conference call, Glaxo stated that the IPO is likely to be launched in 2016, if at all.
Glaxo continues to pursue restructuring and cost-cutting initiatives. The company intends to refocus its global pharmaceuticals business following the divestment of oncology products and increased competition in the U.S. respiratory market.
Glaxo plans to rescale commercial operations and research and development, manufacturing and support functions. The company expects to generate incremental cost savings of approximately £1 billion over the next three years with half of it expected to be recognized by 2016.
Our Take
Glaxo’s third-quarter results were mixed with the company beating on earnings but missing the revenue estimates. Lower revenues notwithstanding, cost control efforts helped the company to beat on the bottom line.
We are concerned about the challenges faced by the company in the form of increasing competition, genericization and pricing pressure. Other factors like weak sales in the U.S., bribery investigations in various regions and supply interruptions in the consumer business will affect results.
Total global respiratory sales continue to be weak given declining Advair sales and disappointing Anoro and Breo sales.
The deal with Novartis is encouraging and is expected to be accretive to earnings. We are also positive on Glaxo’s restructuring, divestment and cost cutting plans.
We believe the IPO of ViiV Healthcare, if it materializes, will be well received by investors given the successful launches of new HIV drugs, Tivicay and Triumeq.
Glaxo carries a Zacks Rank #5 (Strong Sell). Allergan Inc. (AGN) is a better-ranked stock in the health care sector carrying a Zacks Rank #2 (Buy).
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