The U.S. stock market has risen substantially over the trailing year, but don't tell that to GlaxoSmithKline (NYSE:GSK) shareholders who've witnessed their stock give up about 20% of its value over the past 12-month period.
Like most Big Pharma stocks, GlaxoSmithKline is dealing with the prospect of losing some of its most profitable drugs to generic competition. Thus, its immediate growth prospects aren't exactly rosy, as was demonstrated by the release of its first-quarter earnings results on Wednesday.
GlaxoSmithKline: by the numbers
For the quarter, GlaxoSmithKline reported sales (which it refers to as "turnover" in its quarterly press releases) of £5.62 billion, up 1% from the year-ago period, as its adjusted earnings per share dropped 16% on a constant currency basis to the equivalent of $0.53 per share.
If you are looking for a temporary bright spot in Glaxo's latest earnings release, it did report a one-time transaction gain of £9.3 billion tied to its transformative asset swap with Novartis (NYSE:NVS). This swap saw GlaxoSmithKline sell its oncology operations to Novartis, acquire Novartis' vaccine division, and form a joint-venture with Novartis to create a significantly larger consumer health division.
Both its revamped vaccine operations and consumer healthcare joint venture demonstrated strong growth during Q1. Total vaccine sales grew 10% to £699 million on a constant currency basis, including 14% growth within the United States. Specifically, hepatitis vaccines drove 17% growth.
Within its joint-venture consumer healthcare segment GlaxoSmithKline reported £1.38 billion in revenue, up 24% on a constant currency basis from the prior-year period, and driven most by its wellness and skin health segments.
The drag, as should come as no surprise, was GlaxoSmithKline's higher margin pharmaceuticals business which is preparing for the entry of generic competition to COPD and asthma drug Advair. The divestiture of its oncology division naturally weakened its sales results, however, a 20% decline in its established products -- a fancy term for drugs that have either lost patent exclusivity or are nearing that point -- and a 9% drop in sales for its flagship respiratory segment really accelerated the declines and led to an overall 12% tumble in global pharmaceutical sales.
Ignore the Q1 results behind the curtain
If there was one set theme throughout GlaxoSmithKline's quarterly report, it's that you should essentially ignore its Q1 results and any subsequent results over the next couple of quarters and instead focus on the long-term where GlaxoSmithKline offered a more favorable forecast.
In issuing its first long-term forecast in quite some time, GlaxoSmithKline suggested that, on a constant currency basis between 2016 and 2020, it would be targeting mid-to-high single-digit sales growth in vaccines, mid-single-digit revenue growth in its consumer healthcare segment, and low-single-digit sales growth in its pharmaceutical division, representative of expected weakness from sales of Advair.
According to its own forecasts, GlaxoSmithKline should be considerably more diversified due to its recent reorganization, such that by 2020 it should have nine pharmaceutical products generating 90% of its total pharma revenue as opposed to the just four that are currently generating the bulk of its pharma sales.
Additionally, GlaxoSmithKline drew a line in the sand and forecast that it would continue to pay out 80 pence in dividends to investors between 2015 and 2017. This removed any intermediate doubt that weakening respiratory revenue would cause the company to drastically cut its dividend. Also, considering its £9.3 billion transaction gain, GlaxoSmithKline announced a £1 billion cash return to be paid as a special dividend in the fourth quarter of this year.
This is still hard to overlook
Although GlaxoSmithKline's outlook paints a far better picture than its recent results would suggest, I personally have a hard time overlooking the still slow uptake of its COPD/asthma maintenance therapies designed to replace Advair.
During the quarter, Breo Ellipta produced £41 million in revenue, or about $63 million. Extrapolating this out, Breo after nearly two full years on the market is pacing at just $250 million in annual sales. The more recently launched Anoro Ellipta and Incruse Ellipta generated the equivalent of $18 million and $1.5 million in sales during the quarter.
By comparison, Advair sales tumbled 14% on a constant currency basis to £898 million, including a steep drop-off of 21% in the United States. I find it difficult to suggest that it and partner Theravance, which assisted in the development of Breo, Anoro, Incruse, and Arnuity, are going to be able to counter Advair's sales declines with these four relatively slow-launching COPD and asthma therapies.
What this investor thinks
Overall, GlaxoSmithKline's quarterly results went as planned. The company managed to grow its vaccines and consumer healthcare revenue on the heels of its transformative agreement with Novartis, and Advair weakness continued to plague its highest-margin operations. Perhaps the only real surprise was Glaxo's staunch stand to continue paying a substantial dividend, at least through 2017 (although its one-time agreement gain with Novartis certainly helped that decision).
Unfortunately, I need to see a lot more than a steady dividend before I'm convinced of the health of Glaxo's long-term business model. I'm skeptical that its COPD/asthma therapies can fill Advair's shoes by even 2020, and I remain worried that it could be years before shareholders see true, organic, year-over-year profit growth. As such, I'd suggest keeping Glaxo on your radar, but sticking to the sidelines until we see actual signs of respiratory product portfolio growth.