The health care sector has had a bumpy year so far to say the least. Mr. market appears unsure what to make of record high valuations across the sector, the newly implemented Affordable Care Act, and the host of geopolitical events unfolding right now.
AbbVie (ABBV 1.02%) and GlaxoSmithKline (GSK 0.78%) are two leading health care names that typify the sector's volatile year, demonstrated by the chart below. What's particularly interesting to note is that despite both companies expected to post double-digit growth in terms of earnings per share next year, their stocks haven't responded to these optimistic projections thus far. As we inch closer to their earnings releases for the second quarter, let's consider the key issues investors will be focusing on moving forward.
Key issues for AbbVie in the second quarter
The Street is expecting AbbVie to post quarter-over-quarter EPS growth of about 7%. Specifically, analysts were looking for an Adjusted EPS of $0.76 on $4.7 billion in revenue.
AbbVie's second quarter EPS estimates represent a 7.3% decrease from the same period a year ago. A closer look reveals that most of this drop is due to increasing operating costs stemming from the planned launch of the company's hepatitis C therapy in the first quarter of 2015, as well as markedly higher R&D costs. Indeed, revenue for the second quarter is expected to be essentially flat compared to a year ago ($4.692 vs. $4.70 billion).
Turning to specific products, investors should keep a close watch on the sales growth of Humira, Synthroid, Creon and Duodopa, which all posted double digit gains in the first quarter. Humira's global sales have been particularly strong in recent quarters, creating most of AbbVie's top-line growth of late -- making it a key product to keep tabs on moving forward.
GlaxoSmithKline's second quarter could be full of surprises
Glaxo investors haven't had much to cheer about lately and the forthcoming earnings release may not reverse this trend. Although the company is hoping to grow core earnings per share by 4% to 8% this year, I think it's increasingly unlikely that even the low end of this stated target will be met for a number of reasons.
Firstly, I expect the market will be paying close attention to any further details of the ongoing bribery investigations in China that might be made available in the release, and how management expects this scandal to impact its growth strategy in this key emerging market. In the first quarter, we saw Glaxo's pharmaceutical and vaccine products struggle in the U.S., placing a heavier emphasis on emerging markets in terms of top-line growth. Tighter regulations following this bribery probe might therefore hinder global sales growth this quarter.
Another key issue will be the surprisingly poor performance of its recently acquired vaccine portfolio from Novartis. Last week, Novartis reported that sales for this group dropped 14% to $240 million in the second quarter. While Novartis did couch these slumping sales in terms of "distribution issues" and not falling demand, investors will probably be looking for some sort of reassurance from Glaxo's management that they didn't just buy a box of rocks from Novartis.
Investors should also pay special attention to the sales of key pharma products like Lovaza and Glaxo's host of respiratory medicines like Anoro and Breo Ellipta. Lovaza's sales are likely to take another leg down this quarter following the introduction of generic competition. Glaxo's respiratory medicines haven't yet hit their commercial stride due to insurance issues -- so it'll be important to know whether the company has gotten these problems ironed out.
Foolish wrap-up
The second quarter could determine how these two health care stalwarts perform for the remainder of the year, giving investors ample reasons to tune in this week. AbbVie's release is sure to provide more clarity on its ongoing merger with Shire and perhaps key insights into the regulatory review of its hepatitis C therapy. Glaxo's second quarter looks bleak from the outside, but strong sales for key respiratory products could provide some much needed top-line growth this quarter.
