Normally earning season is a catalyst that can push stocks higher, and which investors eagerly await. For GlaxoSmithKline (NYSE:GSK) shareholders, however, earnings season has been an utter nightmare in recent quarters as the company's lead COPD and asthma drug, Advair, is nearing its sunset and readying to give way to generic competition next year in the United States.
However, GlaxoSmithKline's fourth-quarter earnings report, which was released very early this morning, indicates that the company's woes, while ongoing, may finally be turning a corner for the positive.
GlaxoSmithKline's struggles continue
For the quarter, U.K.-based GlaxoSmithKline generated $9.41 billion in revenue, which was down 7% on a constant currency basis and 10% when you factor in the negative effect of currency translation. Adjusted earnings, which factor out one-time costs and benefits, came in at $0.42, or 27.3 pence, a 1% decline based on constant currency.
GlaxoSmithKine's performance from one operating segment to the next was all over the place. The company's oncology segment (which is in the process of being sold to Novartis in a $25 billion asset swap) saw sales increase by 30% to $510 million, while revenue from its HIV business ViiV Healthcare, co-owned with Pfizer and Shionogi, soared 25% to $703 million. Sales from the newly launched Tivicay came in at a robust $263 million.
On the other side of the coin, respiratory sales continued to be hammered by weak Advair sales in the U.S., which fell 25% in total. Overall, respiratory revenue sank 11% on a constant currency basis to $2.53 billion from Q4 2013. Additionally, GlaxoSmithKline witnessed further erosion in its established products segment as generic medications continue to take their toll on its branded therapies. Revenue in this segment fell to $1.18 billion, down 16% from the year-ago period.
GlaxoSmithKline may have turned a big corner
Where GlaxoSmithKline really showed improvement was with its new array of respiratory therapies, Breo Ellipta and Anoro Ellipta. Anoro Ellipta was only recently approved, so it's a bit unfair to pick on its $26 million in 2014 sales. Yet, with Breo Elliipta being approved in 2013, its annual sales run rate of roughly $102 million as of the third quarter disappointed Wall Street and investors. However, with GlaxoSmithKline's management team going on the offensive and scaling back prices on some of its new long-lasting COPD treatments, it's observed a notable uptick in insurer coverage. Shareholders will note a sizable uptick in sales.
During the quarter, Breo Elliipta sales shot up to $58 million after hitting just shy of $26 million in the previous quarter. This more than doubling in sales signals that Breo and Anoro, along with GlaxoSmithKline and Theravance's other LAMA/LABA COPD and asthma drugs, could be in line to fully replace Advair's soon-to-be-lost revenue by the end of the decade.
Two major catalysts to monitor
Although all eyes are on GlaxoSmithKline's next-generation COPD and asthma drugs, there are two other catalysts that investors should really be monitoring.
First, is whether or not GlaxoSmithKline will choose to spinoff a portion of ViiV Healthcare in 2015 or 2016. ViiV's unique position in HIV and its high-growth drug prospects, including Tivicay, could make for an attractive investment opportunity. For GlaxoSmithKline, it could be a smart way to free up capital, although its asset swap with Novartis should also do a good job of generating extra cash.
The other catalyst worth eyeing here is the performance of Glaxo's vaccine segment. GlaxoSmithKline is paying up to $7 billion for Novartis' vaccine division in an effort to boost its global vaccine market share and hopefully take advantage of the need for vaccines in emerging markets.
Of course, vaccine profit growth can be highly erratic. Take the fourth-quarter as a good example. Even with revenue flat in its vaccine segment year-over-year, profit in the division fell by 22% on a constant currency basis to $356 million. Yet, for the full-year, vaccine core operating profits rose 13% to $1.72 billion with full-year margins nearly 8% higher than where they were in Q4. It'll be interesting to see if the addition of Novartis' vaccine division helps Glaxo's margins stabilize and improves its pricing power.
Despite Glaxo's improved results for its next-generation respiratory drugs, I'm not entirely sold on this turnaround just yet. I don't believe it has the capacity to ramp up respiratory sales quickly enough to counteract the loss of Advair revenue and simultaneously support its exceptionally high dividend payment beyond 2016. Although GlaxoSmithKline's dividend is likely to remain well above the average yield for the S&P 500, I wouldn't rule out a dividend cut in its future.
Personally, I'd prefer to stick to the sidelines until well after Advair begins facing generic competition. Most investors are expecting Glaxo's profitability to take a hit from the loss of Advair, but the sticker shock could be more than some investors are truly prepared for.