Glaxo (GSK) Reports In-Line Q1 Earnings, Reiterates View

GlaxoSmithKline plc’s (NYSE:GSK) first quarter results came roughly in line with expectations. Glaxo reported first-quarter 2017 core earnings of 62 cents per American Depositary Share (ADS), in line with the Zacks Consensus Estimate. Earnings were up 9% year over year at constant exchange rates (CER).

Quarterly revenues were up 5% at CER to $9.2 billion (£7.4 billion) on the back of strong performance at all the business segments and beat the Zacks Consensus Estimate of $9.1 billion.

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

Glaxo’s share price increased 5.2% this year compared to the 5.9% gain witnessed by the Zacks classified Large-Cap Pharma industry.

Quarterly Highlights

Glaxo reports results under three segments: Pharmaceuticals, Vaccines and Consumer Healthcare. Pharmaceuticals were up 4% while Consumer Healthcare up 2%. Vaccines segment was up 16%.

The Pharmaceuticals division registered revenues growth of 4% driven by strong growth of new products, particularly by Triumeq, Tivicay and Relvar/Breo Ellipta which was partly offset by the impact of divestments. Respiratory sales were up 5% driven by the Ellipta portfolio and Nucala while HIV sales grew 35% on the back of a continued increase in market share for Triumeq and Tivicay. Sales of Established Pharmaceuticals declined 6% due to recent divestments.

Vaccines sales increased 16% driven by strong performance from Meningitis vaccines and higher demand for Established Vaccines along with the phasing of shipments in Emerging Markets. The segment also experienced strong performance of the Established Vaccines driven by higher demand in Emerging Markets, including the benefit of the acceleration of a number of shipments, particularly Synflorix.

However, growth slowed in the Consumer Healthcare segment primarily due to the disposal of the Nigeria beverages business, challenging conditions in international markets and a delayed start to the allergy season. On a positive note, strong performances from power brands, particularly in Oral health and the Cold & flu resulted in 2% growth.

Sales of New Pharmaceutical and Vaccine products in the quarter grew 52% and accounted for roughly 27% of Pharmaceuticals and Vaccines turnover in the quarter.

Outlook

Assuming that the generic version of Advair will not be introduced in the markets in 2017, the company expects core earnings per share to grow around 5–7% accounting for a 15–20% decline in Advair sales in the U.S. in 2017. Assuming generic competition for Advair in the U.S. in mid-2017, the company expects Advair sales of £1 billion in the U.S. while core earnings per share are projected to be flat or decline slightly.

Our Take

Glaxo first quarter earnings came roughly in line with expectations. Although sales of new products (Tivicay and Triumeq, Relvar/Breo, Anoro, Incruse, and Nucala, and Bexsero and Menveo) will boost the top line, the potential entry for generics for Advair will impact performance.

We remind investors that Mylan’s (NASDAQ:MYL) efforts to bring a generic verison for Advair in the market suffered a blow as the FDA issued a complete response letter to its abbreviated new drug application (ANDA) for Advair. There are other companies too who are developing the generic for Advair. Hikma Pharmaceuticals PLC has also submitted its ANDA for its generic version of Advair to the FDA. A decision is expected on May 10.

Growth has slowed in a number of emerging markets, particularly India. Moreover, the HIV portfolio has its own set of challenges given the generics for Epzicom/Kivexa in most markets across the U.S. and Europe. Nevertheless, continued increase in market shares for Triumeq and Tivicay should combat this decline.

The company is currently focusing on near-term launches in respiratory, HIV and Vaccines franchises and will throw more light on its business priorities in the second-quarter call scheduled in Jul 2017. Hence, we expect investors to keep an eye for data read-outs and approval of new drugs/vaccines (regulatory decision on shingles vaccine Shingrix expected in fourth-quarter 2017) given Glaxo’s deep pipeline.

Zacks Rank & Key Picks

Glaxo currently carries a Zacks Rank #3 (Hold).

A couple of better-ranked stocks in the health care sector include Grifols, S.A. (NASDAQ:GRFS) and Infinity Pharmaceuticals, Inc. (NASDAQ:INFI) . Both Grifols and Infinity sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Grifols' earnings estimates increased 10.6% for 2017 over the last 60 days. The company’s shares have appreciated 31.4% so far this year.

Shares of Infinity have gained 58.5% this year so far, while the company’s loss estimates for 2017 narrowed almost 6% in the past 60 days.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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