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GlaxoSmithKline - Vaccines provide shot in the arm

Nicholas Hyett | 25 July 2018 | A A A
GlaxoSmithKline - Vaccines provide shot in the arm

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GlaxoSmithKline plc Ordinary 25p

Sell: 1,510.60 | Buy: 1,511.20 | Change -29.20 (-1.90%)
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Second quarter sales rose 4% at constant exchange rates to £7.3bn, led by a very strong showing from Vaccines. Underlying operating profits of £2.1bn are up 7%, partly thanks to a lower Research & Development spend.

The quarterly dividend remains unchanged at 19p, with the full year payment expected to total 80p.

The shares rose 1.2% following the announcement.

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Our view

There's been some good news for GSK recently.

It looks like rival Mylan will see its generic version of GSK's Advair knocked back again by regulators, potentially not making it to market this year. Meanwhile GSK's recent HIV trials have delivered good results - strengthening an already attractive franchise.

Results show the smaller Vaccine business is growing up fast, and the deal to buy Novartis out of the consumer operation means GSK finally have full control of their crown jewel. Add steady revenue growth and some attractive profit numbers, thanks to cost control, and all looks rosy.

Unfortunately all is not quite what it seems.

Revenue growth is being driven by a handful of products and it's only a matter of time before generic versions of Advair make it past the regulator. Successful HIV treatments Tivicay and Triumeq, which account for over 25% of pharmaceutical revenue between them, share the same base drug, which is also present in recent trial successes. Meanwhile the bumper Vaccines result is almost entirely thanks to the launch of shingles vaccine Shingrix.

A shallow pool of revenue generators leaves GSK vulnerable to a towering patent cliff when protection expires years down the line. That makes progress in the pipeline critical to long term success, and the fact that R&D spending seems to be being slashed isn't reassuring.

If Glaxo is forced to look at M&A to refresh the pipeline, investors will be grateful CEOs Andrew Witty and Emma Walmsley kept the Consumer Healthcare business in house.

Increasing contributions from the Consumer Healthcare and Vaccines divisions (now over 40% of group sales combined), should reduce reliance on blockbuster drugs. And their more predictable cash flows could be key to funding the investment the group needs in the future.

It's a sensible strategy, and the recurring revenues should help support the dividend as well.

On that note, the group remains committed to holding the dividend steady - despite speculation it could be sacrificed in favour of a big Consumer deal. The Novartis buyout will put those rumours to bed for now, and GSK currently offers a prospective yield of 5.2%.

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 the company needs.

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Second Quarter Trading Update (Constant Exchange Rates)

The Pharmaceuticals business, which accounts for 58% of group sales, saw a 1% increase in second quarter revenues. That was led by good results from HIV and Immuno-inflammation treatments, up 11% and 29% respectively. Respiratory sales continue to shrink, as declines in Advair/Seretide - down 28% - more than offset growth in new drugs.

Revenue growth of 16% in Q2 means Vaccines now accounts for 17% of GSK sales. However, that growth was driven almost exclusively by the launch of shingles vaccine Shingirx, which recorded sales of £167m. Sales of Meningitis and Influenza vaccines both declined.

Consumer Healthcare sales, at 25% of group, rose 3% with growth across all divisions. Skin Health was the standout performer, up 8%, thanks to strong performances from Fenistil in Russia and Germany and Lamisil in Korea.

The group has made significant progress on costs, with group margin up 0.8 percentage points to 28.8%. GSK has launched a new restructuring programme that's expected to deliver cost savings of £400m a year by 2021. Cash costs associated with the restructuring are expected to be around £800m.

Lower costs reflects a 25% fall in R&D spending as the group announced a new, more focused approach to its pipeline. Going forwards efforts will focus on science relating to the immune system, use of genetics and advanced technology platforms like gene editing. There are over 40 drugs in the pipeline with significant readouts expected between 2018 and 2020.

Net debt has almost doubled from £13.2bn at the year end to £23.9bn. That reflects the £9.3bn acquisition of Novartis' stake in the joint venture Consumer Health business.

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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.

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.