Pharmaceutical investors tend to frown upon the keywords "generic," "pivot," and "restructuring." So when British pharma giant GlaxoSmithKline (GSK -2.17%) rolled out a first-quarter earnings report that prominently featured all three terms yesterday, the market's initial negative reaction (the stock fell by 1.75%) was basically a foregone conclusion.
Did the market overreact to Glaxo's first-quarter earnings? Let's take a look at each side of the argument to see if this titan of the pharma industry is worth buying on this dip.
Glaxo's Q1 report gave investors several reasons to be optimistic about the future. Chief among them was the company's new shingles vaccine, Shingrix, which continues to be a bright spot. With strong demand in key geographies, the vaccine appears poised to quickly replace the former star respiratory medicine, Advair, as the company's flagship product.
Another upbeat note is the fact that Glaxo and Pfizer's consumer healthcare joint venture is unfolding according to plan. That's particularly great news for shareholders, as Glaxo's consumer healthcare unit has basically flat-lined in recent quarters. This tie-up with Pfizer's consumer healthcare segment should thus provide a much-needed jolt.
On the pharmaceutical front, Glaxo noted that its newer HIV treatments, respiratory medicines, and fledgling oncology portfolio should act in concert to return the company to growth by next year. That said, the company does have a number of clinical, regulatory, and payer issues to overcome before this turnaround can be officially etched in stone.
Finally, Glaxo calmed the nerves of income investors by announcing that it would maintain the dividend program at current levels for the remainder of 2019. The company's anemic top line, appetite for costly late-stage pharma assets, and heavy debt load have been major concerns for shareholders attracted by Glaxo's top-notch dividend yield. For now at least, the dividend is safe, allowing income-investors to breathe a sigh of relief.
Mylan's U.S. launch of its deeply discounted generic version of Advair known as Wixela Inhub turned out to be seriously bad news for Glaxo. While Glaxo fully expected a generic rival to capture a good slice of Advair's market share, Mylan's copycat version reportedly captured 24% of the market only a few weeks into its launch. As third-party payers are rapidly adopting Mylan's product, Advair seems destined to fall even further from a revenue standpoint.
Glaxo's $5.1 billion acquisition of Tesaro for the ovarian cancer medicine Zejula also stood out as a problematic area. Apart from the additional debt this transaction placed on Glaxo's balance sheet, Zejula's sales came in at a paltry $47 million since January 22, when this acquisition was completed. The long and short of it is that this class of new cancer drugs known as PARP inhibitors has largely failed to live up to expectations from a sales standpoint. Glaxo expects this situation to improve as Zejula closes in on additional high-value indications. But so far, this new oncology asset simply hasn't lived up to its stately price tag.
In keeping with this theme, the Tesaro acquisition is partly to blame for Glaxo's unsightly debt-to-equity ratio, which now stands at 709. That's a sky-high amount of leverage for a company of any size.
Glaxo, as an investing vehicle, is a black box. The company's growth profile over the next 10 years is a complete mystery, and the long-term sustainability of its dividend -- at least at current levels -- is now in doubt. If Glaxo is unable to bring some top-flight pharma candidates to market organically, the company's restructuring plan could take a big hit.
The drugmaker does have some promising assets in cancer in late-stage development, but the jury is still out on its pivot to oncology as a primary growth driver. Glaxo, after all, is well-behind the leaders in immuno-oncology, and it lacks a bona-fide franchise-level oncology product candidate. As a result, investors are arguably better off avoiding this big pharma stock during this ongoing transitional period.