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GSK - 'good progress' on restructuring efforts

Charles Huggins | 28 October 2015 | A A A
GSK - 'good progress' on restructuring efforts

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GSK has announced third quarter results which contain few surprises. Core earnings per share fell by 13% in Q3 at constant exchange rates (CER), reflecting dilution from the Novartis transaction, partly offset by "good progress" on restructuring and integration programmes during the quarter. The commitment to the dividend was reiterated, with an unchanged 19p third quarter payment declared, and earnings guidance was maintained. The shares rose by 3-4% in afternoon trading.

Key highlights (CER):

On a pro-forma basis (adjusted to include a full contribution from the Novartis Vaccines and Consumer Healthcare products and to exclude sales of the former GSK Oncology products), group turnover increased 5% in Q3 (9 months: +2%), while core operating profit was flat in Q3 and the first nine months of the year.

All three divisions showed improving sales trends in the third quarter (pro-forma basis):

  • Pharmaceutical sales rose by 1% (9 months: -1%), driven by 65% growth in HIV. Respiratory sales fell by 9% reflecting further declines in Seretide/Advair in the US and Europe and increased competitive pressures in the International region.
  • Vaccines grew by 13% in Q3 (9 months: +4%), with particularly strong growth in the USA, up 22% in the quarter.
  • Consumer Healthcare was again stable, with sales up 7% in Q3 and the first nine months, boosted by new product launches and recovery from last year's supply disruptions.

New products and pipeline:

GSK has identified a series of New Pharmaceutical and Vaccine products that are expected to deliver at least £6 billion of revenues per annum by 2020. Sales of these new products rose to £591 million in Q3 (c. 13% of Pharmaceuticals and Vaccines turnover) and £1,306 million in the nine months, a growth rate of >200% from a very low base. The group has 40 new drugs and vaccines in Phase II/III clinical development. GSK will be hosting an R&D event on 3 November to update the market on the prospects for its drug pipeline.

Guidance:

GSK's 2015/16 earnings guidance remains unchanged (CER):

  • 2015 core EPS to decline at a high teen percentage rate
  • 2016 core EPS percentage growth expected to reach double digits


Thereafter, GSK has guided for mid-to-high single digit EPS growth over the five year period 2016-2020.

Our view:

GSK aims to reduce its reliance on blockbuster drugs, by expanding into consumer healthcare, vaccines and emerging markets. The Novartis transaction accelerates this strategy. Vaccines and consumer healthcare now account for 40% of sales (combined). Margins for both divisions are well below the pharmaceutical business, but are expected to grow strongly over the next six years, driven by cost-savings from the Novartis deal.

Currently, the group is still very dependent on its respiratory treatment, Advair, which is experiencing significant pricing pressure in the US and Europe. However, GSK's reliance on Advair is slowly reducing. Recently launched pharmaceutical products and the HIV franchise are both growing strongly. It remains to be seen what will come out of the drug pipeline, but it's fair to say investor expectations are low. This means GSK could spring a positive surprise during the upcoming R&D day.

If GSK's diversification strategy succeeds, it should become a more stable, broadly-based business, with less reliance on strained Western healthcare budgets. In the near term, the group still has headwinds to overcome and must show that it can deliver the anticipated synergies from the Novartis deal, in order to win investors over. The dividend is the key attraction in the meantime. GSK aims to hold the payout flat until 2017 , underpinning a yield of 5.7% (variable and not guaranteed).

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.


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