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GlaxoSmithKline - On course for the full year

Nicholas Hyett | 25 October 2017 | A A A
GlaxoSmithKline - On course for the full year

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GlaxoSmithKline plc Ordinary 25p

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The third quarter saw revenues grow 2% on a constant exchange rate (CER) basis, hitting £7.8bn. Adjusted operating profits rose 5%, to £2.5bn, with reported profits of £1.9bn, up 27%.

The shares were broadly flat following the announcement.

Our View

After the half year saw GSK's new CEO announce sweeping disposals and plans for £1bn of cost savings, results are little more relaxed this time round.

Planned cost savings are underway, and initial signs are good. The savings are being channelled back into R&D across the new target therapy areas - Respiratory, HIV/infectious diseases, Oncology and Immuno-inflammation. Given that GSK's recent batch of "new" products now account for 22% of revenues and are growing rapidly you can see the attraction.

The steady decline in revenues from Advair, the blockbuster respiratory drug, has been painful. Rivals have yet to get a generic version to market in the US, so there's more pain to come before that process is over.

However, the varied portfolio has been delivering broad-based growth in recent quarters. In particular the increasing contributions from the Consumer Healthcare and Vaccines divisions (now over 40% of group sales combined), should reduce reliance on blockbuster drugs and strained Western healthcare budgets.

It's a sensible strategy and the recurring revenues should help support the dividend. The shares currently offer a prospective yield of 5.4%.

Despite Ms Walmsley's shake-up, 2020 earnings targets remain unchanged and the focus is firmly on improving free cash flow. Given the recent problems GSK has had in that area, this is very welcome. Free cash was less than 40 % of core operating profits last year and didn't even come close to covering the dividend expense.

GSK has some way to go before it's fully out of the woods, but early signs suggest the new CEO is willing to make the tough decisions when required.

Third quarter results (CER)

Revenue growth was driven by steady Pharmaceuticals and Consumer Healthcare performances, with Vaccines flat year-on-year.

The group demonstrated good cost control, with Selling, General and Administration expenses falling 2%, as well as benefiting from increased scale. However, research and development spending increased 11% to £1bn. Overall adjusted operating margin improved by one percentage point to 31.5%.

Revenues rose 2% in the Pharma division to £4.2bn. New respiratory products more than offset declines in Seretide/Advair, while HIV products also performed well, growing 13%.

Consumer Healthcare saw revenues climb 2% to £2bn, driven by the Pain and Oral health categories. This was partly offset by the disposal of the Nigerian beverages business and the implementation of a new tax regime in India. Senosdyne delivered a particularly notable performance with sales rising 11%.

Revenues were flat in Vaccines at £1.7bn. This follows a reversal of beneficial Emerging Markets shipment phasing seen earlier in the year, and competition in the older Infanrix and Pediarix products. Meningitis vaccines continue to perform strongly, with sales up 25%.

Total new product sales across all categories are up 40% on the previous year at £1.7bn, while the pipeline continues to make progress. Shingles vaccine Shingrix has recently received regulatory approval in the US and Canada, as has COPD treatment Trelegy Ellipta.

The group announced a 19p dividend for the quarter, and continues expect a payment of 80p across the year as a whole. Net debt of £14.2bn is 3% lower than last year.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.