Sir Andrew Witty's last quarter as CEO of GlaxoSmithKline plc (NYSE:GSK) produced positive results, and incoming leader Emma Walmsley gave some clues as to how things will be changing...or not.
Q1 2017 marked the eighth reporting period since the closure of a $20 billion asset swap with Novartis, and was the latest in a series of encouraging quarters. The post-Brexit devaluation of the British pound continues to be a powerful tailwind for Glaxo's business, with sales up 19% and adjusted earnings per share up 31% year over year. Subtracting the effect of currency, sales were up 5% and EPS was up 9%. Free cash flow was $813 million as compared to negative $343 million the year earlier.
After two years of restructuring, Glaxo has achieved some balance and consistency across its three operating units. Pharmaceutical sales, comprising 57% of the total, were up 4% in constant currency, and consumer products were up 2%, both matching growth rates from last quarter. The vaccine business was a standout, up 31% in pounds sterling and 16% in constant currency.
Vaccines should get a further boost in 2018 when Glaxo's potential blockbuster shingles vaccine Shingrix gets the go-ahead from the FDA. The company shared still more good news about Shingrix when it announced positive results from an in-house study of patients who had already been vaccinated with Merck's Zostavax, which is only 51% effective compared with Shingrix's efficacy of over 90%.
Glaxo is continuing to do well with HIV drugs, which delivered sales of $1.23 billion, a 19% boost in constant currency thanks to the highly successful Trivicay and Triumeq. The HIV market is very competitive, but the company could get another boost from a new two-drug combination treatment that will be submitted for regulatory approval later this year.
Good news on Advair
The biggest worry for Glaxo investors has been the expected arrival of generic competition for blockbuster respiratory drug Advair. But newer drugs in the company's pipeline have been doing very well, and recent events have brought good news for Glaxo investors.
Advair sales declined 12% in constant currency as pricing pressures have presaged the introduction of a generic. But growth in newer products more than made up for the losses, resulting in overall respiratory drug growth of 5% in constant currency.
Even better for GlaxoSmithKline investors has been news that approval of a generic Advair is going to be tougher than the competition expected. In April, Mylan received the dreaded Complete Response Letter from the FDA, stating that the application for its generic Advair had been rejected in its current form. Then, earlier this month, Jordanian drug company Hikma Pharmaceuticals received an even worse notification from the FDA about its Advair knockoff, a rejection categorized as "major," leading Hikma to conclude there will be a low likelihood of approval this year.
Steady as she goes
Walmsley's first appearance as leader of the quarterly conference call gave analysts a chance to probe for clues as to where she will steer the company as she takes the helm. Some themes were clear from her comments.
Significantly, Walmsley affirmed the strategy of maintaining the three distinct operating units combined into a diversified healthcare company. She cited the role of the vaccine and consumer businesses in providing more certain and reliable cash flows compared with the higher-margin but more volatile pharmaceutical business. Those words are music to the ears of dividend investors, who like Glaxo's stock for its generous yield, currently 4.8%.
The other priorities the new CEO highlighted were a stronger focus on execution and on improving the value of the pipeline and a desire to shift the culture of the company to be more disciplined and performance oriented.
None of these pronouncements is particularly shocking, to say the least. What incoming CEO wouldn't want to improve a company's execution, culture, and the value of its assets? But simply the fact that Walmsley is signaling that the company will be staying the course with a strategy that has yielded several quarters of success was reassuring to the market, with the stock rising 6% since the announcement.
Some investors may have wondered whether an executive whose experience has been in consumer businesses -- Walmsley came from L'Oreal to Glaxo's consumer unit -- would have the chops to lead a company that is over half pharmaceuticals. But Novartis CEO Joseph Jimenez had previously worked for H.J. Heinz Company before moving to the Swiss drug giant a decade ago and taking over in 2010, so there is a evidence that it could work.
GlaxoSmithKline continues to produce consistent results and improving profits and cash flow. Walmsley is taking over a healthcare company that is itself quite healthy, and she intends to build on the success of Witty. Investors looking for income and modest but steady growth should find the stock worthy of consideration.