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GlaxoSmithKline - strong Q3 revenue growth

George Salmon | 31 October 2018 | A A A
GlaxoSmithKline - strong Q3 revenue growth

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GlaxoSmithKline plc Ordinary 25p

Sell: 1,213.20 | Buy: 1,213.60 | Change -1.80 (-0.15%)
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GlaxoSmithKline's third quarter results saw all three main divisions deliver underlying growth. That helped sales rise to £8.1bn up 6% and ahead of consensus forecasts by around £90m.

A small improvement in underlying operating margins saw operating profit rise 7% to £1.9bn.

The shares moved marginally higher on the news.

The quarterly dividend remains unchanged at 19p, and GSK continues to target an 80p full year payment.

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Our view

There's been some good news for GSK recently.

Mylan has seen its generic version of GSK's Advair knocked back again by regulators, so that might not make 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 good cost control, and all looks rosy.

Still, there's one or two lingering worries.

It's only a matter of time before generic versions of Advair make it past the regulator, and scratch the surface on GSK's revenue growth, and it quickly becomes clear progress is being driven by a handful of products. For example, successful HIV trials and treatments share the same base drug, while 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. GSK targets holding the dividend steady and 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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Trading details (changes at constant exchange rates)

Pharmaceuticals delivered sales of £4.2bn, up 3%. £1.7bn of that came in respiratory, where sales of new products rose 40% to £645m, more than offsetting the continued decline in Seretide/Advair. Triumeq and Tivicay, which together were responsible for over 90% of the £1.2bn in HIV treatment sales, also grew strongly. Immuno-inflammation sales were up 28% to £122m, while established pharmaceutical product sales fell 9% to £1.2bn.

GSK's Vaccines division brought in sales of £1.9bn, up 17% as £286m of Shingrix sales, and strong growth in meningitis offset declining Influenza and established Vaccine sales.

Consumer Healthcare sales rose 3% to £1.9bn, reflecting broad based growth in Wellness, Oral health and Nutrition.

Year-to-date, free cash flow is £2.4bn, up from £1.7bn last year. That reflects the increased profits, lower capital expenditure of £842m and asset sales totalling £235m. Third quarter R&D spend of £988m is in-line with expectations.

Net debt is £23.8bn, up from £14.2bn. That increase is due to the extra debt taken on to fund the Novartis deal.

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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.