This article has been adapted from our sister site across the pond, Fool U.K.
Thursday's full-year results were therefore even more eagerly awaited than usual.
Profits down, shares up
Not that the results are easy to read, mind, given how the U.K. bellwether has produced multiple takes due to its multi-billion pound restructuring program and a terrifying 4 billion pounds in legal charges.
But the bottom line is Glaxo made a pre-tax loss of 476 million pounds in the fourth quarter of 2010, compared to 2.5 billion pounds profit last time. Full year pre-tax profits declined, too, down 60% to 3.2 billion pounds, and group sales fell 1% in 2010 to 28.4 billion pounds.
Despite this, the shares rose 3% on the back of some good news -- the resumption of share buybacks, suspended in 2008. The company plans to spend 1-2 billion pounds on repurchasing its own shares in 2011.
As well as boosting earnings per share and reducing the burden of future dividend payments, restarting share buybacks will come as a relief to fretful investors who feared Glaxo sold its stake Quest Diagnostics this week because it needed yet more money for legal bills. Rather, the $1.1 billion raised will likely go straight back out the door via share repurchases.
Glaxo also lifted its full-year dividend 7% to 65p. Income investors might have preferred the buyback funds went on a bigger dividend hike, but given the uncertainty around Glaxo's future earnings, the balance looks sensible to me.
The fact is life is hard for all the globe bestriding pharmaceutical companies. If the market isn't worrying about patents expiring and the lack of replacements in the pipeline, it fears whatever drugs the companies are still selling will only get them sued.
Just this Tuesday, GlaxoSmithKline settled with the family of a man who allegedly died as a result of its diabetes treatment, Avandia. That came in the wake of Glaxo's 19 January revelation it was taking an additional 2.2 billion pound charge for legal costs related to a U.S. investigation into the drug.
Investors must hope the charge proves prudent. CEO Andrew Witty admits:
There is no doubt that the scale of legal provisioning that has been required is significant. However, I continue to believe that it is in the company's best interests to resolve this inherent unpredictability and reduce our overall litigation exposure.
Right on cue, Thursday also saw the World Health Organization announce a review of the safety of Glaxo's flu drug Pandemrix. A Finnish study has suggested a link to narcolepsy in children.
Equally hard to predict is the success of Glaxo's drug development pipeline, which must replace current blockbusters like Advair, Ventolin, and Avodart as they expire.
Advair alone contributes over 5 billion pounds to Glaxo's 23.4 billion pound drug sales!
Glaxo has 30 potential new opportunities in late stage development, and Phase 3 data on 15 of its molecules and vaccines is due by the end of 2012.
That looks good compared to rival AstraZeneca
Glaxo has already slimmed down its own research arm; it's on track to make 2.2 billion pounds in annual savings by 2012. Investment has instead gone into emerging markets, vaccines, and Glaxo's consumer division, the home of Ribena, Horlicks, and Lucozade.
Consumer sales grew by 5% last year to 5 billion pounds -- 19% of Glaxo's turnover, and ameliorating a 2% decline in drug sales -- and such brands offer a different kind of moat to a patent. Together with vaccines and higher overseas sales, they've reduced Glaxo's exposure to "white pills and Western markets" from 40% of sales in 2007 to 25% in 2010, dampening the impact of expiring patents.
Glaxo is also spending money acquiring bolt-on products instead of conjuring them up in-house -- 354 million pounds in 2010, on top of 2.8 billion pounds in 2009. This effective outsourcing of R&D may be the future of big pharma, though I wonder how acquisition prices will escalate if it becomes standard practice.
In terms of the immediate outlook, Glaxo admits 2011 will be difficult. Even assuming no more legal surprises, margins will fall due to fading Avandia and Valtrex sales (worth 2 billion pounds), and the U.S. health-care reform levy.
The market has steadily de-rated GlaxoSmithKline's prospects, and given today's poor results it looks a good call.
But on a P/E of roughly 10 for 2011 earnings -- assuming no surprises -- and boasting a dividend yield in excess of 5.5%, there's little hope value left in Glaxo's share price now.
If management can hold earnings steady while replacing expiring revenue streams -- which analysts in aggregate expect -- then like renowned fund manager Neil Woodford, you can buy Glaxo for its inflation-busting income and take any growth as a bonus.
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Owain owns shares in GlaxoSmithKline and AstraZeneca.