Glaxo Misses Q3 Earnings, Keeps Guidance

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GlaxoSmithKline (GSK) 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 at CER.

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 Europe.

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 practices.

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.

Other Details

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 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.

Outlook Unchanged

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 2014.

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, companies like Roche (RHHBY), Bayer (BAYRY) and Johnson and Johnson (JNJ) 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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