GlaxoSmithKline plc (GSK) reported third quarter earnings of 87 cents per American Depository Share (ADS), a penny below the Zacks Consensus Estimate and well below the year-ago earnings of 93 cents. Revenues, which came in at $10,636 million, exceeded the Zacks Consensus Estimate of $10,406 million.
However, revenues declined 2% at constant exchange rates (CER). While Pharmaceuticals declined 3%, Consumer Healthcare grew 4%. Price cuts in the EU and the US healthcare reform affected revenues by 2%.
Pharmaceuticals sales in the US (down 8%) continued to be impacted by generics, lower Avandia sales and discontinuation of promotion of Boniva. Europe (down 9%) and Asia Pacific/Japan (down 2%) also recorded a decline in sales. Price cuts, delays in government vaccine tenders, lower Valtrex and Avandia sales, and an unfavorable year-over-year comparison for pandemic product sales impacted European revenue growth. Emerging Markets (up 14%) was the only region to record growth during the third quarter.
We were pleased to see growth in Consumer Healthcare revenues. Total Consumer Healthcare sales during the reported quarter were driven by strong growth in RoW markets (up 15%).
Detailed Segment Performance
Although vaccines (up 32%), Lovaza (up 20%), and the oncology segment (up 34%) performed well, US Pharmaceutical sales were negatively impacted by lower sales of Valtrex, Avandia and Boniva.
Valtrex revenues declined 75% following the entry of generic competition in November 2009. Several generics entered the market in May 2010 and we expect Valtrex revenues to decline significantly in 2010. Meanwhile, Boniva sales declined 70%, mainly due to the transfer of exclusive US promotion rights to Genentech from January 1, 2010.
Avandia revenues declined 65% during the third quarter. We expect Avandia sales to continue declining significantly with the European authorities suspending marketing authorization of all Avandia-containing products and the US Food and Drug Administration (FDA) recommending stringent safety measures with the use of the drug.
Other Pharmaceuticals segment products that performed well in the third quarter include Tykerb (up 26%), Avodart (up 16%), and Arixtra (up 17%). New product launches, Arzerra and Votrient, contributed £9 million and £11 million, respectively, to revenues.
Total vaccine sales increased 19% to £982 million thanks to strong performances in the US, Emerging Markets and Asia Pacific/Japan, which helped offset the decline in European vaccine revenues. Rotarix sales, which were affected by the product’s temporary suspension in several markets earlier this year, are yet to pick up. Rotarix revenues declined 40% during the quarter. Meanwhile, hepatitis vaccine sales improved 9% during the quarter.
Outlook
Glaxo continued to make progress with its cost-cutting initiative, which should help offset the impact of increasing generic competition in the next few years and help earnings grow faster than revenues. Glaxo said that it remains on track to deliver £2.2 billion in annual savings under its restructuring program by 2012. Glaxo expects to realize a majority of these savings in 2011.
Neutral on Glaxo
We currently have a Neutral recommendation on Glaxo, which is supported by a Zacks #3 Rank (short-term Hold rating). Glaxo’s diversified base and presence in different geographical areas should help support revenue growth.
Meanwhile, Glaxo’s restructuring initiative should help offset the impact of increasing generic competition in the next few years and help earnings grow faster than revenues. While we remain concerned about the looming generic competition, we are pleased with Glaxo’s progress with its late-stage pipeline.
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