Shares of GlaxoSmithKline (NYSE:GSK), a U.K.-based pharmaceutical giant, had $3 billion in market cap wiped away in April, according to data from S&P Global Market Intelligence. Though it was a generally quiet month on the news front, the company's first-quarter earnings report appears to be the culprit for its disappointing monthly performance.
For the quarter, GlaxoSmithKline generated $9.5 billion in sales, which was up 5% on a constant currency basis, but up 19% in British pounds. Weakness in the British pound tremendously helped boost Glaxo's quarterly revenue (the company reports in GBP).
Growth was seen across all core operating segments. On a constant currency basis, vaccines led the way with 16% year-over-year sales growth (although this is Glaxo's smallest segment by sales), followed by pharmaceuticals with 4% revenue growth, and consumer healthcare at 2%. The company attributed strong growth in its HIV drugs, Triumeq and Tivicay, as well as its next-generation COPD and asthma therapeutics Breo Ellipta and Anoro Ellipta, for its steady pharma sales growth in light of ongoing weakness from blockbuster drug Advair.
In terms of its bottom line, GlaxoSmithKline saw its net cash from operations more than double and free cash flow more than triple from Q1 2016, with total earnings growth on a constant currency basis of 9%. Comparatively, the company topped Wall Street's EPS and sales expectations by roughly 4% and 2%, respectively.
So why the down month? Management made it clear during the conference call that a generic competitor to Advair had finally hit pharmacy shelves, which would begin noticeably affecting sales of its mature blockbuster in the second half of 2017. GlaxoSmithKline has had somewhat of a free ride with Advair being off patent for so long, but that gravy train is about to come to an end. This is the reason behind investors' pessimism in April.
There are two very divergent storylines at play with GlaxoSmithKline.
On one hand, we've got a company that's instituted multiple cost-saving initiatives through its supply chain and pharmaceutical segment, which has translated into a more efficient company. We're also seeing strong growth from its HIV segment -- Triumeq sales grew 45% on a constant currency basis -- and from its newer lung drugs. It was especially encouraging to see 61% constant currency growth from Breo and 67% constant currency growth from Anoro, given the struggles both inhaled drugs had initially in getting insurer coverage and penetrating a market dominated by mature COPD and asthma medications.
At the same time, Advair still makes up almost $3.9 billion in annual extrapolated sales. Despite a 12% constant currency sales decline in Q1, investors could be looking at considerably steeper declines of 30% to perhaps 50% year over year once the effect of generic Advair is really felt. Even though Glaxo's core therapies and new vaccines are growing at a quicker pace than the expected decline in Advair's sales, it's nonetheless the end of an era.
However, the company anticipates holding to its robust dividend yield of nearly 5%, and its management team believes a number of larger drug launches could be coming in the near to intermediate term. At around 15 times its estimated 2017 EPS, the company looks reasonably inexpensive, but just understand that it won't be without its occasional hiccup.