Source: GlaxoSmithKline.
Late last month U.K.-based pharmaceutical giant GlaxoSmithKline (GSK 1.39%) reported its second-quarter results, and for a change they didn't cause investors to run for the hills.
As a refresher, in case you missed it, GlaxoSmithKline reported £5.89 billion in sales, 7% higher than what it produced in the year-ago period when currency fluctuations are stripped out of the equation, while its core operating profit rose 3% to £1.35 billion. This translated to a year-over-year profit of 17.3 pence per share, which was flat from the prior-year quarter. In comparison, Wall Street analysts had only been looking for a 16.7 pence per share profit.
On the surface these results look solid, but in reality they don't tell us something important: how GlaxoSmithKline achieved its top- and bottom-line results, and whether or not its business model is in good shape over the long run. To answer these questions we need to take a closer look at what its management team had to say during its quarterly conference call.
With that in mind, here are the five most important things that GlaxoSmithKline wants its investors to know following its Q2 results.
Our pharma business has finally turned the corner
"Stepping back, it's clear 2 things are happening in the Pharma business. First, the continued successful implementation of the restructuring program is under way and on track to deliver GBP 1 billion of annual cost savings by 2017; and second, there is growing momentum in the new products...Importantly, the growth of new pharmaceutical products is now more than offsetting sales declines in Seretide and Advair" -- Andrew Philip Witty, CEO
The biggest concern hanging over GlaxoSmithKline has been the inevitable introduction of generic versions of COPD/asthma maintenance therapy Advair. Although Advair lost its patent exclusivity years ago, the Food and Drug Administration didn't outline what generic drug developers would need to demonstrate, clinically, in order to get a generic version of Advair approved until Sept. 2013. With those points now laid out, it's only a matter of time (likely 2017-2018) before a generic version of Advair hits the market and half of Advair's roughly $6 billion in annual sales comes under immediate attack.
Source: GlaxoSmithKline.
The good news here is that GlaxoSmithKline has been successfully pulling levers to reduce its costs, and its new product growth is finally outpacing the slowdown in Advair/Seretide sales.
Glaxo's transformative asset swap deal with Novartis should generate about $1.55 billion in annual savings, and an internal restructuring of its pharmaceutical business, along with a restructuring of its supply chain, offers the chance to save a cumulative $3 billion-plus.
Furthermore, growth in its HIV franchise vis-à-vis ViiV Healthcare and from vaccines have helped to offset Advair/Seretide's precipitous sales decline.
Mark this down on your calendar
"[I]t looks more and more likely we're going to deliver at least that GBP 6 billion from the products we launched in the last couple of years." -- Andrew Philip Witty
Source: GlaxoSmithKline.
Mark your calendar in ink, because GlaxoSmithKline is standing by its assessment that its new products, predominantly led by its COPD and asthma franchise -- Breo Ellipta, Anoro Ellipta, Incruse Ellipta, and Arnuity Ellipta -- should generate as much as £6 billion in sales by the end of the decade.
This is a bold prediction considering that Advair/Seretide generated around $8 billion in sales at its peak. In other words, Glaxo has bet big that its next-generation therapies, which were developed in collaboration with Theravance, will more than cancel out one of the best-selling therapies in the world. If Glaxo can achieve its robust sales target by 2020, it's possible that, with its concurrent cost cuts and transaction synergies, it could produce $4 or more in annual EPS, based on my best estimate.
Our pipeline is probably stronger than you realize
"More broadly, we now have around 40 NMEs [new molecular entities], both drugs and vaccines, and advanced clinical development across 6 therapy areas, including Respiratory, HIV, Oncology, Vaccines, Cardiovascular and Immuno-inflammation." -- Andrew Philip Witty
Investors have rightly focused on the importance of Glaxo's next-generation respiratory launches, but they've completely forgotten that GlaxoSmithKline has a robust pipeline beyond just respiratory. Per Glaxo, it has about 40 midstage and late-stage new molecular entities in its clinical pipeline which are going to be critical to driving growth once Advair sales really begin to plummet.
As we recently highlighted, one thing to keep a close eye on is Shingrix, its experimental herpes zoster (shingles) vaccine, which provided protection against the virus for a tad over 97% of patients in the first of seven clinical studies. Glaxo certainly isn't going to keep investors hanging when it comes to clinical catalysts in the coming years.
We've solved Breo's issues, but Anoro is now a concern
"Anoro's progress in the market continues to be more difficult. As we've explained before, Anoro represents a significant change in the treatment options available to physicians for COPD, and it appears it's going to take some time to move current approaches to treatment." -- Simon Dingemans, CFO
Breo Ellipta finally found its stride in the second-quarter, with sales of the inhaled COPD therapy rising from £41 million to £53 million on a sequential quarter basis. Improved coverage with insurers and physician education have played big roles in getting Breo over its sluggish start.
However, it looks like Glaxo may have even more pressing concerns with Anoro Ellipta, its once-daily dual bronchodilator. CEO Andrew Philip Witty noted shortly after Dingeman's commentary that Anoro's uptake has been particularly tough due to primary care physicians not wavering from treatment pathways they've used for years. Witty traced the problem to PCPs prescribing Advair and then potentially adding in or switching to Spiriva, or prescribing Spiriva and then switching to, or adding in, Advair, and not realizing that a dual bronchodilator like Anoro is now at their disposal. It looks as if it could take many quarters before Glaxo works its way around this "education" problem with physicians.
Source: GlaxoSmithKline.
This segment could really surprise this year
"We also expect the U.S. Vaccines business to benefit from higher flu sales in 2015. Early approval in shipment this year should see that benefit land mainly in the third quarter compared to last year when shipments were more weighted to Q4. All of the doses supplied to the U.S. this year will be for our new quadrivalent vaccines, which attract better pricing. Last year, only 70% of our flu doses in the U.S. were for quadrivalent." -- Simon Dingemans
Lastly, while discussing nooks and crannies of its respiratory and vaccine business, Dingemans commentary about Glaxo's flu vaccines got my attention. Expectations for higher flu sales and a push into higher-margin quadrivalent vaccines could genuinely benefit Glaxo's bottom-line.
We often forget that influenza/pneumonia is one of the top 10 killers in the U.S., and while we're busy spending time trying to cure Ebola, we're forgetting about one of the most prevalent and under-treated diseases on the planet: the flu. If Glaxo truly devotes R&D capital to influenza research, there's no reason it can't regularly generate $500 million, or more, in annual influenza vaccine sales, and maintain the No. 2 spot in influenza sales behind Sanofi.
Is it time to buy GlaxoSmithKline?
The real question that needs to be asked here is whether or not GlaxoSmithKline should be on your buy list.
While the company does have a concrete plan to lower its costs, and it would appear to have a deep product line, I'm just not sold yet on its respiratory products being able to counteract the imminent drop in Advair/Seretide sales. Anoro's slow uptake and the fact that it took Breo two years to really get going don't bode well for Incruse or Arnuity as they ramp up. Glaxo has been able to rely on strength in HIV and vaccines, but these segments alone aren't going to be enough to counteract ongoing sale erosion for Advair.
With that being said, I'd suggest taking the wait-and-see approach and allowing GlaxoSmithKline's top- and bottom-line to do the talking over the next couple of years.
