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Glaxo Beats Q4 Earnings, Shares Up

Zacks Equity Research

GlaxoSmithKline (GSK) reported fourth quarter earnings of $1.64 per American depositary shares (ADS), beating the Zacks Consensus Estimate of $1.00 and the year-ago earnings of 57 cents per ADS. Investors reacted positively to the news with the stock gaining 1.55%.

Revenues were up 5% year over year at constant exchange rates (:CER) to $11.2 billion. Revenues were above the Zacks Consensus Estimate of $11.1 billion.

Earnings in 2013 were $3.47 per ADS compared with $2.91 in the year-ago period. Full year earnings were below the Zacks Consensus Estimate of $3.68. Revenues for the year inched up 1% year over year (at CER) to $41.6 billion. The Zacks Consensus Estimate for 2013 stood at $42.3 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 were up 6% while Consumer Healthcare sales remained flat. Pharmaceuticals revenues increased 5%.  Vaccines revenues grew 12% on the back of strong performances in the U.S. and Emerging Markets and Asia Pacific (:EMAP).

The Pharma and Vaccines segment performed well in the U.S. (up 5%), Japan (up 17%) and EMAP (up 5%). Segmental sales were disappointing in Europe with sales falling 2%.

Sales benefited from re-stocking by wholesalers and retailers in the U.S. Sales in Europe fell due to pricing pressure and generic competition. In EMAP, favorable vaccine tender phasing more than offset the impact of ongoing investigation in China.

In the Consumer Healthcare division, turnover increased in Oral Care (4%), Nutrition (6%) and Skin Health (5%), which was completely offset by a decrease in sales in Total Wellness (6%). Sales increased in the Rest of the World (5%) and decreased in Europe (4%) and the U.S. (2%).

The company bought back shares worth £1,504 million during 2013. Share repurchases in 2014 are expected in the range of £1–£2 billion.

The company declared an interim dividend of about 75 cents per ADS.

2014 Outlook

Glaxo expects to report revenue growth of approximately 2% with core earnings growth of 4%–8% (both at CER) for 2014 from the year-ago period on an ex-divestment basis. The pre-earnings Zack Consensus Estimate was $3.73 per share for 2014.

The company generated incremental cost savings of approximately £400 million in 2013 benefiting primarily from the ongoing structural initiatives. As Glaxo continues to pursue restructuring and cost-cutting initiatives, the company expects to generate incremental cost savings of approximately £400 million in 2014 as well.

The company is also focusing on its core assets and pursuing the divestment of non-core assets. Glaxo raised £2.5 billion through divestments (thrombosis brands, Arixtra and Fraxiparine and nutritional drinks brands Lucozade and Ribena) in 2013. The company plans to continue to divest in 2014.

Multiple pipeline related news are expected, including six phase III data readouts, before the end of 2015. In this time period the company also plans to initiate phase III studies for 10 candidates targeting key areas including respiratory, oncology and immuno-inflammation.

Glaxo received U.S. Food and Drug Administration (:FDA) approvals and launched several drugs in the reported year including Breo Ellipta, Tafinlar, Mekinist andTivicay among others. New product approvals have strengthened Glaxo’s respiratory, vaccines, HIV and oncology portfolio. The company plans to launch Anoro Ellipta in the U.S. shortly.

Our Take

Glaxo’s fourth quarter results were above expectations with both earnings and revenues beating the Zacks Consensus Estimate. New products should continue to boost revenues in coming quarters. We are encouraged by the progress in Glaxo’s pipeline. We are also pleased with the company’s efforts to control cost and restructure operations. However, we remain concerned about the challenges faced by the company in the form of generic competition and pricing pressure. Additionally, we believe that any strict action enforced by the Chinese government will significantly impact Glaxo’s top line.

Glaxo carries a Zacks Rank #4 (Sell). Some better-ranked stocks include Actelion Ltd. (ALIOF), Salix Pharmaceuticals Ltd. (SLXP) and Allergan Inc. (AGN). While Actelion and Salix carry a Zacks Rank #1 (Strong Buy), Allergan holds a Zacks Rank #2 (Buy).

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