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Earnings Miss at Glaxo

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GlaxoSmithKline (GSK - Free Report) reported first quarter earnings of 61 cents per ADS, missing the Zacks Consensus Estimate of 77 cents and the year-ago earnings of 87 cents per ADS. Revenues declined 2% year over year at constant exchange rates (CER) to $10.1 billion. Revenues were in line with the Zacks Consensus Estimate. Revenues primarily declined due to divestment of Vesicare and non-core over-the-counter (OTC) brands.

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 dropped 2% while Consumer Healthcare sales inched up 1%. Pharmaceuticals revenues fell 1% primarily due to the divestiture of Vesicare to Astellas Pharma Inc. following the conclusion of their co-promotion agreement in the first quarter of 2012. Vaccines revenues decreased 11%. Revenues in the first quarter of 2013 were boosted by the HPV (human papillomavirus virus) vaccination program in Japan.

The Pharma and Vaccines segment performed well only in the Emerging Markets and Asia Pacific (EMAP) market with sales rising 8% there. Segmental sales were disappointing in all other areas including Japan (8%), US (6%) and Europe (3%).

In the Consumer Healthcare division, growth in Oral Care (5%), Nutrition (6%) and Skin Health (6%) was partially offset by a decline in the Total Wellness (5%) segment. Sales increased in the US (3%) and Rest of the World (5%) and decreased in Europe (5%).

Other Details

The company bought back shares worth £52 million during the first quarter of 2013. Share repurchases in 2013 are expected in the range of £1 – £2 billion.

The company declared an interim dividend of about 55 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 initiated a new 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% (at CER) with core earnings growth of 3%-4% for 2013 from the year-ago period. The company is working hard to develop its pipeline. Multiple pipeline related news is expected in the coming quarters.

We are pleased with Glaxo’s efforts to control cost and restructure operations. We are also encouraged by the progress in Glaxo’s pipeline. However, we remain concerned about the challenges faced by the company in the form of generic competition.

Glaxo carries a Zacks Rank #3 (Hold) in the short run. Companies that currently look attractive include UCB (UCBJF - Free Report) and Catalyst Pharmaceuticals Partners Inc. (CPRX - Free Report) . Both stocks carry a Zacks Rank #1 (Strong Buy).

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