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GlaxoSmithKline - healthy sales and profit growth

Nicholas Hyett, Equity Analyst | 29 April 2020 | A A A
GlaxoSmithKline - healthy sales and profit growth

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GlaxoSmithKline plc Ordinary 25p

Sell: 1,385.60 | Buy: 1,386.00 | Change 11.20 (0.81%)
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Group sales rose 19% in the first quarter to £9.1bn, or 10% once you adjust for the recently acquired Pfizer consumer business. That reflects growth across all three divisions and a particularly strong showing from vaccines.

Underlying operating profits, adjusting for the Pfizer deal, rose 14% to £2.7bn.

GSK announced a 19p dividend for the quarter and full year guidance remains unchanged.

The shares were broadly flat following the announcement.

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Our view

Pharmaceutical companies are generally considered defensive investments. The medicines and vaccines they provide are essential and so sales weather wider economic downturns relatively well. GSK has performed accordingly, with guidance for the full year unchanged and dividends intact.

In fact the coronavirus outbreak has provided a modest tailwind, and together with recent drug launches and good cost control that's done wonders for profits. Some of that money is being recycled into fighting the virus - with multi-million pound investments in Covid-19 vaccine research.

However, investors and policy makers alike should note these are very early stage trials. A vaccine is a year or more away at the earliest and that's assuming the trials are successful, which in pharmaceuticals is never guaranteed.

For all the progress made this quarter, and we should stress these are very reassuring results, there is plenty of room for improvement. And GSK is midway through a major shake-up.

The Consumer Healthcare division has grown been bulked out with the Pfizer merger. Meanwhile a more focused approach to Research & Development has seen a fortune poured into the oncology portfolio - including the $5.1bn acquisition of TESARO and a tie up with Merck that could set GSK back EUR3.7bn.

GSK'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 hopefully more predictable returns. 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 they quickly collapse. That's already a problem for GSK, 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 4.7% prospective dividend yield can be sustained once the split is complete.

First Quarter Results (Constant Exchange Rates)

Pharmaceutical sales rose 6% in the quarter to £4.4bn. That reflects strong growth in new Respiratory and HIV treatments in particular, partially offset by ongoing declines in US Advair/Seretide sales which fell 40% in the quarter following the launch of generic competition. The divisions saw some coronavirus related increases in demand in its respiratory drugs.

The Vaccines business was GSK's strongest performer, with revenues up 19% to £1.8bn. Shingles vaccine Shingrix was the star performer once again, with sales up 79% to £647m. Flu vaccines also performed well, although from a much lower base.

Revenues in the Consumer business rose 46% to £2.9bn, up 14% once you adjust for acquisitions and disposals, with increased demand coronavirus related demand in some areas. Respiratory and Vitamins, Minerals & Supplements were the two best performing categories, although all categories showed growth.

GSK has entered into several partnerships to work on a COVID-19 vaccine, with most advanced research planned for Phase-1 trials in the second half of this year. The group received other trial results and regulatory updates across its Oncology, HIV, Immuno-inflammation and Respiratory businesses.

The group generated free cash of £531m during the quarter, up from £165m in the same quarter of last year, with net debt falling 1.4% year-on-year to £26.7bn.

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