We're smack dab in the middle of earnings season, which means it's time to grab that cup of coffee and dig right in. On Wednesday, U.K.-based pharmaceutical giant GlaxoSmithKline (NYSE:GSK) reported its fourth-quarter results, and while its top- and bottom-line met Wall Street's expectations, it was some of the commentary and numbers below the surface that stole the show.
GlaxoSmithKline's Q4, by the numbers
For the quarter, GlaxoSmithKline generated $9.18 billion in sales, a 2% increase on a year-over-year basis. However, currency moves in markets outside of the U.K. hurt sales by 2%, meaning on an operating basis GlaxoSmithKline's top-line grew by 4%. Wall Street had been expecting just shy of $9.2 billion in sales, so GSK's quarter was spot on with expectations.
Despite the increase in sales, GSK's core operating profits fell 18% on a constant currency basis to $1.98 billion. On an adjusted basis GSK delivered earnings of $0.27 per share, which was also in-line with what analysts had been expecting.
Digging a little deeper, we saw markedly different operating results based on segment. Vaccines and consumer healthcare grew by 19% and 44%, respectively, or 3% and 6% on an operating constant currency basis. On the flipside, pharmaceutical sales sank 7%, or 1% on an operating basis, as weakness in Advair/Seretide sales continued to weigh on GSK's results.
These headline numbers might suggest a rather ho-hum quarter for GSK, but four numbers that weren't necessarily discussed among the headlines really stood out -- in both a good and bad way.
1. 6 billion British pounds in new product sales by 2018
This may have been a pretty lackluster report based on the headline numbers, but the announcement from GSK that it's ahead of schedule on new products (defined as products brought to market over the past three years) hitting 6 billion pounds in sales (about $8.8 billion) might be the best news from GSK in years! Originally, GSK had been forecasting that its new products would hit this benchmark by 2020, so to shift that time frame forward by two full years is pretty incredible.
What caused this shift? While GSK didn't get too much into the specifics, it seems to be driven by growth in its HIV franchise, meningitis vaccines, and next-generation respiratory products, such as Breo Ellipta, which generated $145 million in Q4 sales. Based on the roughly 2 billion pounds generated by new products in 2015, GSK sees sales tripling in these products, as a whole, over the next three years.
2. $676 million in HIV sales
Among new products, all the glory recently has gone to GSK's HIV franchise, comprised of Tivicay and next-generation HIV product Triumeq. In the fourth quarter, the two therapies combined for $676 million in sales, and they totaled $2.5 billion for the full-year. Both drugs were actually developed by ViiV Healthcare, which GSK has a majority stake in.
What really makes Triumeq stand out as a potential HIV-treatment giant is its combination of efficacy and safety. As one of only four once-daily HIV regimens on pharmacy shelves, Triumeq went head-to-head with Gilead Sciences' (NASDAQ:GILD) Atripla (another once-daily HIV therapy) and outperformed it in terms of efficacy and patient drop-outs in the SINGLE study. Also, Triumeq doesn't use a booster component in its formulation, unlike Gilead's blockbuster Stribild, which does use cobicstat to elevate blood levels of elvitegravir. Elvitegravir has a number of adverse drug interactions, meaning Triumeq could become the clear once-daily choice among physicians for the treatment of HIV.
3. Core operating margin in Q4 of 21.6%
Everyone knew that GSK's operating margins were going to drop, with a greater emphasis being placed on vaccines and consumer healthcare, but I'm not sure a seven percentage point drop from the prior-year quarter was expected. Even on a constant currency basis we're still talking about a 6.2% decline in operating margins on a year-over-year basis.
The cause for this plunge in operating margin stems from GSK's asset-swap with Novartis. This deal sent GSK's oncology product portfolio and small-molecule pipeline to Novartis in exchange for Novartis' vaccine business (minus influenza) and about $9 billion in cash. The two companies also formed a joint venture for their consumer healthcare segments. Ridding itself of its higher margin and faster growing oncology segment and taking on a lower margin and volume-dependent segment like vaccines set GSK up for substantial margin contraction in the year following the deal's completion.
On the bright side, operating margins are likely to rise from here, but for now they remain a brutal eyesore for shareholders.
4. Q4 respiratory sales down 3%
Finally, we also learned that respiratory sales are still shrinking.
To some extent this shouldn't be a surprise considering the pricing pressure inhaled COPD and asthma therapy Advair/Seretide is dealing with. This pressure is only expected to get worse throughout the latter half of the decade, with a generic version of Advair expected to be introduced over the next one to three years.
However, the real disappointment has been the slow start for Anoro Ellipta and Incruse Ellipta. Although Anoro managed to generate about $44 million in Q4 sales, and $115 million for the full-year, its launch has been considerably weaker than expected. The problem, as GSK's management has stated previously, is that physicians aren't aware that Anoro is a new once-daily bronchodilator option to replace Spiriva or Advair. It's going to take time for Anoro to really penetrate this market, which means respiratory sales declines may continue into 2016.
What's next for GlaxoSmithKline?
Investors actually learned a lot about where GSK is headed based on its Q4 report. We learned that HIV sales are going to play a big role in pushing new products sales higher over the coming three years. We also know that, based on GSK's guidance, we can expect adjusted EPS growth to return in 2016.
On the flipside, investors can likely expect more weakness in GSK's respiratory franchise as Anoro continues to underwhelm. Additionally, there's the real possibility that growth could be tempered as GSK and investors adjust to its new, lower operating margin.
As a whole, GSK does offer a superior dividend to the broader market, and its new product growth certainly implies that it could soon be delivering for investors. However, without respiratory growth or margin stabilization, I, personally, have a hard time getting behind GSK. For now it's a company I'd suggest investors monitor from the sidelines.