Profit Up, Revenues Down at Glaxo

GlaxoSmithKline ( GSK - Analyst Report ) reported first quarter earnings of $1.02 per American Depository Share (ADS), a couple of cents above the Zacks Consensus Estimate and 10.5% above the year-ago earnings. Revenues, however, declined to $10.5 billion, down 10% at constant exchange rates (CER). Revenues missed the Zacks Consensus Estimate of $10.9 billion.

The Quarter in Detail

While Pharmaceuticals sales declined 14%, Consumer Healthcare grew 7%. Price cuts in the EU and the US healthcare reform affected revenues by approximately £85 million. Pharmaceuticals sales continued to be impacted by generic competition for Valtrex, lower Avandia and pandemic flu sales. These three factors affected sales by £1 billion.

While Pharmaceutical sales declined in the US (down 4%) and Europe (down 5%), sales increased in Emerging Markets (up 23%) and Japan (up 53%) during the quarter. US sales were down due to the impact of the healthcare reform, the genericization of Hycamtin, and the impact of the divestment of Zovirax, which was sold to Valeant Pharmaceuticals ( VRX - Snapshot Report ) .

Total vaccine sales declined 46%. Performance was affected by lower pandemic flu sales. While Rotarix sales increased 20% during the quarter, hepatitis vaccine sales declined 19%. Relenza sales dropped 89%.

Total Consumer Healthcare sales during the reported quarter were driven by strong growth in RoW markets (up 15%). Glaxo intends to accelerate growth in this segment by divesting non-core brands and focusing on “priority” brands and the emerging markets. Glaxo will be focusing primarily on three categories: Oral Health, Wellness/OTC, and Nutrition. The core focus areas represent about 90% of Glaxo's Consumer Health sales base. The balance, consisting of European and American non-core OTC brands, is to be divested by late 2011.

The products which will be divested include Solpadeine, BC, Goody’s, Abtei, Lactacyd and Alli among others. These products posted £500 million in 2010 representing 10% of Glaxo’s total Consumer Healthcare turnover.

US healthcare reform and Europe austerity measures are expected to impact 2011 revenues by £325 million. Second quarter sales will continue to be impacted by lower sales of pandemic flu products, Avandia and Valtrex.

Glaxo continued to make progress with its cost-cutting initiative, which should help offset the impact of increasing generic competition in the next few years and help earnings grow faster than revenues. Glaxo said that it remains on track to deliver £2.2 billion in annual savings under its restructuring program by 2012. The company bought back shares worth £317 million during the first quarter and expects to repurchase shares towards the higher end of the £1-2 billion range provided by the company.

Neutral on Glaxo

We currently have a Neutral recommendation on Glaxo, supported by a Zacks #3 Rank (short-term “Hold” rating). While several products in the Pharmaceuticals segment are facing generic competition, the Consumer side of the business is performing well and should help drive top-line growth. Moreover, the company’s diversified base and presence in different geographical areas should help support revenue growth. Meanwhile, Glaxo’s restructuring initiative should help offset the impact of increasing generic competition in the next few years and help earnings grow faster than revenues. Share buybacks should also drive bottom-line growth.