British drugmaker GlaxoSmithKline plc (GSK 1.83%) turned in the latest in a string of good quarters. The restructuring set in motion in 2015 continues to take hold, and revenue is on the rise. But management tamped down the enthusiasm by warning that the long-awaited generic competition for its most important drug, Advair, is likely to appear this year.
Image source: GlaxoSmithKline plc.
What happened with GlaxoSmithKline this quarter?
The company continued its recent string of positive quarters when it reported strong profit growth and cash generation for Q4. Sales came in at $9.7 billion, roughly flat from last year in dollar terms, but up 21% in pounds sterling. The company results have benefited from the devaluation of the pound since the Brexit decision, but even in constant currency terms, sales were up 3% year over year.
The standout sales performer this quarter was the HIV business, fueled by the highly successful drugs Tivicay and Triumeq. HIV pharmaceuticals delivered $1.3 billion in sales in the full year, up 47% in sterling and 25% in constant currency.
Last quarter, the standout business was vaccines, with 20% growth. That figure included a U.S. flu vaccine that had shipped mostly in Q4 last year but was pulled up into Q3 this year. As a result, the year-over-year comparison for vaccines was flat in Q4, but for the year, sales by that business surged 12% on a constant currency, pro forma basis.
The consumer business grew sales 2% in constant-currency terms, but the important story there is the continued improvements in profitability. The operating margin last quarter was three percentage points higher than Q4 2015, and three-tenths of a percentage point higher at a constant exchange rate. For the full year, the consumer business delivered $1.4 billion in operating profit, 42% more than 2015 in constant currency.
Good news for income investors
Putting it all together, the combination of single-digit top-line growth and the streamlining of the business as part of the restructuring plan is driving significant growth in profits and cash generation. "Core" earnings per share -- profits minus intangibles and one-time charges such as restructuring costs -- rose 11% for the quarter and 12% for the year.
Of particular importance for those investing in GSK for the 5% yield, free cash flow more than covered the dividend payout for the second quarter in a row. In fact, cash generation has marched higher steadily for the whole year.
| Quarter | Free Cash Flow Minus Restructuring Charges |
|---|---|
| Q1 | $232 million |
| Q2 | $1,361 million |
| Q3 | $1,905 million |
| Q4 | $2,600 million |
Data source: GlaxoSmithKline plc.
Looking forward
In his last earnings call before retiring as CEO, Sir Andrew Witty threw in a little buzzkill by forecasting the potential impact of generic competition for Glaxo's blockbuster drug Advair. He said:
Clearly, this year we face some uncertainty as to the level of our earnings performance, given the possibility of substitutable generic competition to Advair in the U.S., and this is reflected in the guidance we have issued today. This event is something we have anticipated and prepared for, and while there will be an inevitable financial impact to absorb, we fully expect to maintain leadership in this therapy area given our new product portfolio and the innovation we have in our pipeline.
Analysts have been questioning Witty on this issue for years and hearing mostly optimism in response. But this was the first quarter that he supplied specific guidance on the impact of a generic version of the drug in the U.S. around mid-year, implying that the company suspects the appearance of the drug on the market is finally imminent.
Management gave two projections for EPS. If an Advair generic does not appear during the year, the company expects core EPS growth to be 5% to 7% for 2017. In the event of a mid-year U.S. introduction of a generic, we can expect Advair sales in the U.S. to drop from $1.8 billion in 2016 to $1.0 billion in 2017, and for EPS to be flat to slightly down.
On the conference call, Witty said these were probably the two extremes of the possibilities, and the reality could be somewhere in between, but clearly, the company is planning for this event.
The market basically yawned at the news, though. The event has been anticipated for so long that the loss of sales was priced into the stock months ago. Looking beyond the issue, GlaxoSmithKline continues to make progress on restructuring for higher growth, and that dividend is looking more affordable every quarter.
