Glaxo Back on a Neutral Path

GlaxoSmithKline plc (GSK - Analyst Report) performed disappointingly in the second quarter of 2012, missing the Zacks Consensus Estimate both in terms of revenues and earnings. Results were negatively impacted by a number of factors including European austerity measures and weaker performance in the US due to generic competition and discontinuation of certain products.

Following the disappointing results, management at Glaxo lowered their revenue guidance for 2012. The company now expects revenues to remain flat year-over-year (at constant exchange rate) mainly due to EU pricing pressure. Earlier, Glaxo was expecting revenues to grow from 2011 levels.

We believe the current price reflects the negative news and are reverting to a Neutral recommendation from Underperform. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

In addition to facing generic competition, most of Glaxo’s products face significant competition from small as well as large pharmaceutical companies. Glaxo’s Consumer Healthcare segment faces competition from big companies like Colgate-Palmolive (CL - Analyst Report), Johnson & Johnson (JNJ - Analyst Report), Procter & Gamble (PG - Analyst Report), Pfizer (PFE - Analyst Report) and Novartis (NVS - Snapshot Report).

Although Glaxo continues to face challenges in the form of EU pricing pressure, US health care reform, generic competition and currency fluctuations, we are pleased with the company’s efforts to combat the situation by inking deals/making acquisitions. Glaxo has also made significant progress with its late-stage pipeline.

We think the company possesses one of the stronger late-stage pipelines in large-cap pharma. Late-stage candidates include Breo (chronic obstructive pulmonary disease: regulatory review), albiglutide (regulatory submission planned in early 2013), dabrafenib (oncology: regulatory review), trametinib (oncology: regulatory review) and sirukumab (rheumatoid arthritis, phase III initiated in August 2012). The successful development and commercialization of these candidates should boost the company’s top line.