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GlaxoSmithKline - Broad based sales growth

Nicholas Hyett | 25 April 2018 | A A A
GlaxoSmithKline - Broad based sales growth

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GlaxoSmithKline plc Ordinary 25p

Sell: 1,402.60 | Buy: 1,402.80 | Change -12.60 (-0.89%)
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Turnover of £7.2bn was up 4% in the first quarter, once the effect of exchange rates are excluded. Growth was spread across all three divisions, with Vaccines the standout performer.

Underlying operating profits rose 9% to £1.9m, and the quarterly dividend remains unchanged at 19p a share.

The shares fell 1.6% following the announcement.

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Our View

The recently-announced purchase of Novartis' $13bn stake in the consumer healthcare business comes six months after GSK's new CEO announced a sweeping shake-up.

Large parts of the business are under "strategic review" - read "up for sale" - and plans have been laid out for £1bn in cost savings.

These measures are now underway. 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 accounted for 22% of revenues last year and are growing rapidly, you can see the attraction.

The steady decline in Advair revenues has been painful. However, with rivals struggling to get a generic version past the US regulator, the respiratory blockbuster is holding up better than expected. Nonetheless, the launch of generic competition remains a ticking time bomb, and at some point will inevitably blow a hole in the GSK income statement.

Fortunately, 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.

On that note, the group remains committed to holding the dividend steady - following speculation that it could be sacrificed in favour of a big Consumer Healthcare acquisition. The deal to buy out joint venture partner Novartis will put those rumours to bed for now, and GSK currently offers a prospective yield of 5.5%.

Going forwards 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.

Clearly there's some way to go before it's fully out of the woods, but early signs suggest Emma Walmsley is willing to make the tough decisions required.

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First Quarter Results (Constant Exchange Rates)

Pharmaceuticals remains the largest contributor to group performance, with turnover of £4bn up 2%.

HIV drugs continue to perform strongly, with sales up 14%, while new respiratory drugs such as Nucala and the Ellipta portfolio offset the decline in Advair and Ventolin. However, the group has also noted increased competition in the US inhaled respiratory market this quarter, which is expected to negatively impact sales going forwards.

The launch of shingles vaccines Shingrix drove Vaccine sales up 13% on last year, reaching £1.2bn. That growth was confined to the US, with vaccine sales declining both in Europe and the rest of the world.

Sales in Consumer rose 2% to £2bn. However, growth was limited to Oral health (where sales rose 7%) with the smaller Nutrition and Skin health divisions both seeing sales fall, and Wellness remaining flat. Sensodyne remained the standout performer.

Net debt is 3% lower than this time last year at £13.4bn.

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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.