Fourth quarter revenues rose 11% at constant exchange rates to £8.9bn, driven by strong growth in Vaccines and the Pfizer consumer acquisition. However, underlying operating profits fell 11% to £1.9bn, while underlying earnings per share fell 16% as additional costs hit margins. Despite the significant improvement sales, operating profits were slightly below market expectations.
The group declared a final dividend of 23p per share taking the full year payment to 80p.
The shares were trading down 1.6% following the announcement.d
GlaxoSmithKline is midway through a major shake-up.
The Consumer Healthcare division has grown, shrunk and grown again as the Novartis stake was bought out, Horlicks business sold off and then the Pfizer merger was announced.
Meanwhile a more focused approach to Research & Development has seen a small fortune poured into the oncology portfolio - including the $5.1bn acquisition of TESARO and a tie up with Merck that could set Glaxo back EUR3.7bn.
Glaxo's portfolio is stronger as a result, even if the business is also carrying considerably more debt. However, CEO Emma Walmsley's reshuffle doesn't end there. Within three years of the joint venture with Pfizer being established, the new consumer healthcare giant will be going its own way as an independently listed company.
In general, we think all the moves make sense. Simply put, two businesses with a sharper focus should be more efficient than one conglomerate. But it also means investors are buying into what will one day be two radically different businesses.
The consumer division should be a 'steady eddie' with comparatively predictable returns. Thanks to its position as one of the world's largest over-the-counter medicines businesses, it should be able to deliver some sizable cost savings, boosting margins. Having said that we'd expect it to get saddled with a disproportionally large share of the group's debt and growth has been anaemic in recent times. That combination could hamper shareholder returns.
For the pharma group, losing the steady cash flows of the consumer business means there's more pressure on the labs. When drugs lose patent protection sales quickly collapse. That's already a problem for Glaxo, so it's vital its research teams deliver the next generation of blockbusters.
So far things look promising - with the group managing to negotiate the decline in sales of blockbuster Advair relatively painlessly. HIV, Oncology and Vaccines are all delivering new drugs and the pipeline has got plenty of other opportunities too.
Unfortunately with drug trials there's no guarantee of success, and even the most promising drugs can fall at the final hurdle. That will leave income investors wondering if the group's 4.4% prospective dividend yield can be sustained once the split is complete.
Fourth Quarter Results (Constant Exchange Rates)
Pharmaceuticals sales fell 4% in in the fourth quarter to £4.6bn. The decline was largely driven by the continued slide in Seretide/Advair sales, down 35% in the quarter to £414m, offset by growth in new respiratory products, particularly Trelegy Ellipta. The introduction of generic Advair in the US also had a knock on effect on margins in the division.
In Vaccines shingles vaccine Shingrix continues to perform well, with sales more than doubling compared to this time last year. That drove a 21% increase in overall Vaccine divisional revenue. Meningitis vaccines also performed well (up 14% year-on-year) while flu vaccines fell 26%.
The Consumer Healthcare business benefited from the acquisition of Pfizer's consumer operation, with reported sales up 37% in the quarter. Excluding the effect of the acquisition sales were flat with growth in Sensodyne offset by weakness elsewhere.
Fourth quarter operating costs were higher than analysts had expected. The increase in costs was largely driven by acquisition related costs and higher legal expenses, however increased investment in new launches also contributed.
Free cash flow during the quarter fell 21.6% to £2.6bn, reflecting the generally lower operating profits and significant legal payments made during the quarter.Net debt at year end stood at $25.2bn, up 16.6% year-on-year.
Underlying earnings per share are expected to fall by 1%-4% next year, while management plan to leave the dividend unchanged at 80p per year.
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