Vaccines Drive Glaxo's Revenues - Analyst Blog

GlaxoSmithKline Plc. (GSK) reported fourth quarter earnings of $1.14 per American Depository Share (ADS), beating the Zacks Consensus Estimate by 2 cents and 39% above the year-ago earnings of 82 cents. For the full year, Glaxo reported earnings of $3.75 per ADS, well below the Zacks Consensus Estimate of $3.84 and the year-ago EPADS of $3.85. 

Fourth quarter 2009 revenue increased 13% at constant exchange rates (CER), with pharmaceuticals and consumer healthcare growing 15% and 5%, respectively. While pharmaceuticals sales in the US (down 4%) continued to be impacted by generics, Glaxo reported strong growth in Europe (up 23%), Emerging Markets (up 22%) and Asia Pacific/Japan (up 28%). 

Moreover, strong sales of pandemic related products including Relenza and the H1N1 vaccine helped drive growth. Total Consumer Healthcare sales during the reported quarter were driven by strong growth in Europe (up 6%) and international markets (up 11%) that was partially offset by a decline in North American sales (down 5%). 

Full year revenues increased 3% at CER with performance being driven by Consumer Healthcare (up 7%), Emerging Markets (up 20%), and Japan (up 22%). Pharmaceuticals sales in the US (down 13%) continued to be impacted by generics. However, the company reported strong growth in Europe (up 9%), Emerging Markets (up 20%) and Asia Pacific/Japan (up 16%). Total Consumer Healthcare sales during the year were driven by growth across all regions. We were pleased to see growth in Consumer Healthcare revenues despite the global slowdown. 

Detailed Segment Performance 

Fourth quarter pharmaceuticals sales were boosted by strong performances by products like Advair/Seretide (up 7%), Ventolin (up 28%), Relenza ($408 million), Lovaza (up 29%), Avodart (up 16%), and Arixtra (up 31%). Total vaccine sales increased a whopping 78% to £1.5 billion ($2.4 billion), including pandemic vaccine sales of £836 million ($1.3 billion). 

Other growth drivers in the vaccine segment include Synflorix, Boostrix and Rotarix. These strong performances were partially offset by vaccines like Infanrix/Pediarix (down 24% due to increased competition), hepatitis vaccines (down 19% due to competition), and Cervarix (down 33% due to timing of tender shipments). 

Sales of products like Imigran (down 50%), Lamictal (down 27%), and Requip (down 31%) continued to be impacted by generic competition. Valtrex revenues declined 34% following the entry of generic competition in November 2009. 

Pharmaceuticals sales for the year were boosted by strong performances by products like Advair/Seretide (up 5%), Ventolin (up 26%), Relenza ($1.1 billion), Lovaza (up 31%), Avodart (up 16%), and Arixtra (up 29%). Total vaccine sales increased 30% to £3.7 billion ($5.8 billion), including pandemic vaccine sales of £883 million ($1.4 billion). 

Other growth drivers in the vaccine segment include Synflorix, Boostrix, Cervarix, and Rotarix. These strong performances were partially offset by vaccines like Infanrix/Pediarix (down 15% due to increased competition), and hepatitis vaccines (down 11% due to competition). Sales of products like Imigran (down 65%), Lamictal (down 53%), Wellbutrin XL (down 73%), and Requip (down 30%) continued to be impacted by generic competition. Valtrex revenues declined 8% following the entry of generic competition in November 2009. We expect Valtrex revenues to decline significantly in 2010. 

Outlook 

Glaxo announced that it intends to stop pursuing research activity in certain areas including depression and pain. The company instead intends to focus its research activities in higher growth areas like neurodegenerative and neuro-inflammatory diseases like Alzheimer’s disease, multiple sclerosis and Parkinson’s disease. Glaxo is also setting up a standalone unit that will specialize in the development and commercialization of rare disease medicines for which there is significant unmet medical need. 

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. The company’s restructuring program is expected to deliver £1.7 billion in annual savings. 

Glaxo announced that it has achieved annualized cost savings of about £1 billion and stated that it has expanded its existing restructuring program so as to achieve additional annual pre-tax savings of £500 million by 2012. R&D and SG&A are expected to contribute equally to the additional savings. 

Our Expectations 

We currently have an Underperform recommendation on Glaxo. Although Glaxo boasts of a diversified base and presence in different geographical areas, we remain concerned about the patent challenges being faced by several of its products. With several products expected to lose exclusivity and the swine flu opportunity likely to miss expectations, we expect the company’s top-line to remain under pressure in the coming quarters. 

Glaxo’s pipeline needs to deliver in order to make up for lost revenues and any development or regulatory setbacks would be a major disappointment for the company.
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