U.K.-based pharmaceutical giant GlaxoSmithKline (NYSE:GSK) released its much anticipated third-quarter earnings results during Wednesday's trading session. While Wall Street appears pleased with the results (GlaxoSmithKline's stock rose 4% following the news), they also seem to imply that Glaxo has a long road to recovery ahead.
GlaxoSmithKline Q3, by the numbers
For the quarter, GlaxoSmithKline reported $9.36 billion in revenue (Glaxo reports in British pounds, so this is being converted at a rate of $1 U.S. being equal to 0.655 pounds), which excluding currency movements translated into growth of 11% from the prior-year quarter.
However, profits for GlaxoSmithKline diverged, dropping 5% on a constant currency basis to $2.62 billion. Core earnings per share also dove 13% on a constant currency basis (primarily as a result of a one-time tax benefit absent in this year's profit calculations) to 23 pence, or $0.35. Although Glaxo's headline numbers went in diverging directions in Q3, they both edged out Wall Street's estimates, which had called for $9.28 billion in sales and 19.3 pence (which did exclude some items), or nearly $0.30.
Looking ahead, GlaxoSmithKline reiterated its 2015 EPS guidance calling for EPS to decline "at a high-teen percentage rate" based on constant currency. It also stood firm that EPS growth will reach a double-digit percentage in 2016 on a constant currency basis. Finally, GlaxoSmithKline reiterated its intention to maintain an 80-pence dividend for the full-year.
Three segments lead the way for Glaxo
GlaxoSmithKline's third-quarter sales growth of 11% comes courtesy of strength in three segments: HIV, consumer healthcare, and vaccines.
Within HIV, the combination of Triumeq and Tivicay continue to kick butt and take names. Sales of this dynamic duo grew to $240 million for Tivicay and $322 million for Triumeq, representing around 100% growth from the prior-year period for these therapies and helping push HIV revenue up 65% as a whole. With the World Health Organization estimating that 35 million people are living with AIDS as of 2013, HIV therapies like Tivicay and Triumeq offer plenty of growth potential.
Glaxo's consumer healthcare segment has also benefited from the joint-venture tie-up with Novartis (NYSE:NVS). As a refresher, last year the two companies announced a three-part asset swap that sent Glaxo's oncology segment to Novartis, Novartis' vaccine segment (sans influenza) to Glaxo, and allowed the two to form a joint-venture with their consumer healthcare segment. The synergies and diversified product lineup of that combination appears to be paying off, with constant currency growth of 55% year-over-year in Glaxo's consumer health operations.
Lastly, Glaxo's push to grow its vaccines portfolio helped push sales up 32% on a constant currency basis from the prior-year period. Though there were numerous highlights, I'd point to influenza vaccines Fluarix and FluLaval as standouts. Quarterly sales of the flu vaccines grew 46% year-over-year to $290 million.
Not everything is moving in the right direction
On the other side of the coin, not every figure is moving in the right direction for GlaxoSmithKline.
It probably comes as no big surprise for anyone following GlaxoSmithKline stock, but inhaled COPD and asthma therapy Advair continues to weigh heavily on the company's results. Once an $8 billion per year drug, Advair's sales continue to slump in anticipation of generic competitors entering the field within a year or two, and insurers in the U.S. pushing for lower prices since Advair's patent has expired. Sales of Advair/Seretide (as it's known overseas) sank 19% to $1.21 billion in the latest quarter from Q3 2014. If you recall, Glaxo's management team expects Advair/Seretide to lose about $3 billion in annual sales by the end of the decade due to generic competition.
However, what investors may not have anticipated is that GlaxoSmithKline's shift away from oncology and toward vaccines has the potential to more immediately boost its sales volume, but it's a lower margin product. The result is that Glaxo's core operating margin sank 5.4% to 28% from Q3 2014. It just means GlaxoSmithKline needs to work even harder and sell more to keep its profits consistent.
Finally, GlaxoSmithKline's new respiratory therapies are still struggling to gain traction. These COPD and asthma therapies -- Breo Ellipta, Anoro Ellipta, Arnuity Ellipta, and Incruse Ellipta -- are expected to be the cornerstones behind the $9 billion-plus in sales the company anticipates it can generate from its 11 newest and experimental therapies by the end of the decade. Thus far, though, Glaxo's next-generation, long-acting respiratory products have disappointed.
Breo Ellipta managed a decent quarter with $98 million in sales, and it appears to have safely moved over its insurance coverage hump, which dominated investors' concerns in 2014. What's worrisome now is the slow start for Anoro Ellipta, which managed only $34 million in sales during the quarter. GlaxoSmithKline's management has stated previously that Anoro's sales could languish as the process to educate physicians about new treatment options available is a slow one.
The road to recovery is long and windy
If GlaxoSmithKline's quarterly results imply anything, it's that long-term growth is possible, but the ride to achieve those results could be extremely bumpy.
Gaining insurance coverage and educating physicians about their long-term respiratory care options isn't something that happens overnight, and Glaxo has to hope that long-term-minded shareholders take comfort in its superior dividend while waiting for growth. Investors also have to get used to the new GlaxoSmithKline, which is heavily reliant on vaccines and is likely to see its operating margins fall over the coming quarters.
I believe this is really a feeling-out period for Wall Street and investors with GlaxoSmithKline, and would suggest (even with Glaxo's management remaining bullish) that your best course of action is to remain on the sidelines until we see definitive signs of growth from its respiratory franchise.