Glaxo Up on Q2 Earnings Beat, Revenues Rise, View Same - Analyst Blog

GlaxoSmithKline plc GSK reported second-quarter 2015 core earnings of 53 cents per American depositary share, beating the Zacks Consensus Estimate by 3 cents. Earnings were, however, flat year over year at a constant exchange rate (CER).

Glaxo’s shares were up 2.2% following the release of the second-quarter results. This was the company’s first full quarter update following the closure of the Novartis NVS transaction on Mar 2, 2015.

Revenues increased 7% year over year (CER) to £5.9 billion driven by the impressive performance of new products across all segments including Tivicay and Triumeq.

All growth rates mentioned below are on a year-on-year basis and at CER.

The Quarter in Detail

Glaxo informed that its reported results include four months of contribution to sales and profits from Novartis Vaccines and Consumer Healthcare products and exclude sales from its Oncology products. Following the completion of the deal, Glaxo is focused completely on its three core businesses – Pharmaceuticals, Vaccines and Consumer Healthcare.

While the Vaccines and Consumer Healthcare segments were up 11% and 51%, respectively, the Pharmaceuticals segment was down 6%. All three business segments reflected the impact of the Novartis transaction.

New Pharmaceutical and Vaccine products (like Anoro Ellipta and Eperzan/Tanzeum among others), which are expected to deliver revenues of at least £6 billion by 2020, registered sales of £446 million in the second quarter of 2015.

Moreover, within Pharmaceuticals, Global Pharmaceuticals fell 12%, mainly due to a 6% decline in Respiratory sales and a 5% decline in sales of Established Products. The performance of the segment was also disappointing in the U.S. (down 16%), Europe (down 18%) and International (down 4%) markets. However, results were partially offset by strong performance of the ViiV Healthcare segment which soared 59%. HIV segment sales benefited from sales of Tivicay (£145 million) and Triumeq (£149 million).

Glaxo’s best-selling respiratory drug, Advair, continued to decline (13%) due to increased pressure as a result of contracting changes in the U.S. and generic competition in the European and International markets. The company expects Advair sales to continue to decline at similar rates in the second half of 2015.

In the Consumer Healthcare division, sales increased in the U.S. (66%), Europe (90%) and international markets (27%). On a segmental basis, turnover increased substantially in the Wellness and Skin Health segments (>100%) Oral Health and Nutrition segments registered sales increase of 11% and 7%, respectively.

Meanwhile, the Vaccines segment benefited from the continued uptake of newly acquired meningitis vaccines, Bexsero and Menveo, from Novartis. The segment is expected to remain volatile on a quarterly basis due to factors like timing of government tenders.

Reiterates 2015 and 2016 Outlook

Glaxo maintained its 2015 earnings guidance and outlook for 2016. The company continues to expect 2015 core earnings to decline at a high teen percentage rate mainly due to factors like continued pricing pressure on Advair in the U.S. and Europe, the dilutive effect of the Novartis transaction and the inherited cost base of the Novartis businesses.

The company still expects to see core earnings growth in the double digits in 2016.

Other Details

Glaxo is on track to deliver annual cost-saving benefits of £3 billion from its restructuring program. Glaxo also plans to return approximately £1 billion (20 pence per share) to shareholders through a special dividend to be paid with the fourth-quarter 2015 ordinary dividend payment. The ordinary dividend will amount to 80 pence a share in each of the three years through 2017.

Our Take

Glaxo’s second-quarter 2015 results were better than expected with earnings beating expectations and revenues growing year over year. Glaxo’s diversified portfolio and new product launches expected over the next several quarters, along with the newly acquired products from Novartis, should support revenues and lessen the impact of the loss of Advair sales. We are also positive on Glaxo’s efforts to increase cost efficiency. The company’s capital allocation plans should also help drive long-term growth.

Glaxo currently carries a Zacks Rank #4 (Sell). Actelion Ltd. ALIOF and Isis Pharmaceuticals, Inc. ISIS are some better-ranked stocks in the health care sector, each carrying a Zacks Rank #1 (Strong Buy).

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