Why do I like pharmaceutical companies with a well-balanced portfolio of approved products? Because you never know when an "event risk" will move from theory to reality. GlaxoSmithKline (NYSE: GSK) took a bit of a body blow when the Food and Drug Administration shut down its production of Paxil CR and Avandamet because of manufacturing failures. Nevertheless, the company managed to deliver respectable second-quarter results.
Revenue for the quarter climbed 6% on a constant currency basis, with pharmaceutical sales growing 9% outside the United States. Due to the problems with Paxil CR and Avandamet, U.S. drug sales were actually the laggard this quarter -- up 3%. It should be noted, though, that both drugs are once again available in sufficient quantities in the U.S.
Glaxo also continues to make laudable progress on operating efficiency and leverage. Operating profits climbed 13% (more than double the sales growth rate), and the company posted a year-on-year decrease in selling, general, and administrative expenses. Bravo! What's more, cash flow growth was also solid -- up 15% on an operating basis, and up 14% on a free cash flow basis.
One of the aspects of Glaxo that I really appreciate is the extent of candid information it provides with earnings. True, sometimes you have to take the extra step of going to the company website, but the info is there nonetheless. With that in mind, I would say that while the company's ultra-short-term drug outlook is little changed (few new drugs coming out immediately), the pipeline of drugs for which it can file FDA applications over the next two years looks quite solid.
I'm not one to get overly caught up in quarter-by-quarter stories, but the flu vaccine story probably bears a quick mention. Frankly, I have no idea what sort of flu season we will see this year; if I did, I should probably be working for the Centers for Disease Control instead of analyzing stocks. That said, Glaxo has stepped up its production for the Fluarix vaccine in anticipation of higher demand this year.
Things generally evolve slowly in the pharmaceutical space, so there's not much new about Glaxo from an investment perspective. If you liked the company before, I don't see why you wouldn't like it now. And if you didn't like the company before, I probably won't convince you to like it now. All the same, I feel this is a top-notch company -- strong internal rates of return, a good dividend, a solid pipeline, and a willingness to provide investors with detailed information all score well in my book.
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