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GSK - good start to the year

Charlie Huggins | 27 April 2016 | A A A
GSK - good start to the year

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GlaxoSmithKline shares rose by 2% in early morning trading as it reported a solid start to its 2016 financial year. 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), Q1 turnover was up 6% at constant exchange rates (CER), while core earnings per share rose 8% to 19.8p.

Highlights (pro-forma, CER basis):

Pharmaceutical sales rose 5%, Vaccines was up 14% and Consumer Healthcare up 4%. Sales of New Pharmaceutical and Vaccine products were £821 million in the quarter, an increase of £528 million; and now representing 20% of total Pharmaceutical sales.

HIV sales grew 57% in Q1. Respiratory sales in the US and International both grew, up 2% and 1% respectively, although total Respiratory sales declined 2%, primarily reflecting a 24% decline in Seretide in Europe.

Sales grew across every region, with the US strongest (up 10%), followed by Europe (+7%). International sales grew 1%.

The stronger sales growth and restructuring benefits drove a 4.3 percentage point increase in the operating margin and 28% rise in core operating profit. The restructuring and integration programme delivered incremental cost savings of £0.4 billion in Q1; and remains on track for £3 billion annual cost savings by end 2017.

The group has declared a first interim dividend of 19 pence per share, in line with Q1 2015, and reiterated that it expects to pay an annual ordinary dividend of 80p for each of the next two years (2016-2017).


GSK expects 2016 core EPS percentage growth to be 10-12% on a CER basis; with a c. 8% FX benefit if current exchange rates hold.

Our view:

For some time GSK has been very dependent on its respiratory treatment, Advair/ Seretide. This drug continued to experience significant pricing pressure in 2015, with sales having fallen 30% from their peak in 2013. However, GSK's reliance on Advair/ Seretide is slowly reducing - the drug accounted for c. 15% of group sales in FY15, versus c. 18% in FY14.

Recently launched pharmaceutical products and the HIV franchise are both growing strongly, which should help to offset pressures elsewhere in the portfolio, and return the group to top line growth in FY16. Within the Respiratory portfolio, the growth in sales of new products offset about 70% of the decline in Seretide/Advair in the first quarter. The group's integration and restructuring drive seems to be on track, which is helping to reduce costs and support margins.

For the first time in a long time GSK looks to be facing more tailwinds than headwinds, with earnings forecast to grow by double digits in 2016, and at a mid-to-high single digit rate out to 2020. The group's strategy of diversifying the business into vaccines and consumer health (now 40% of group sales combined), to reduce reliance on blockbuster drugs and strained western healthcare budgets, is sensible and should help to support the dividend (the current yield is 5.4%).

That said, the earnings quality is low at GSK. "Exceptional" restructuring and legal costs have been far from exceptional over recent years, while profits have not been well backed up by cash flow. Overall, we like the direction that GSK is going in, but we would like to see cash flow improve before becoming more positive on the business.

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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