GlaxoSmithKline half-year

GlaxoSmithKline a global healthcare company that develops, manufactures and markets pharmaceutical products, including vaccines, over-the-counter (OTC) medicines and health-related consumer products.  I have a holding in my income portfolio (epic code: GSK). 

Glaxo reported their interim results yesterday and much like their first quarter results (see here) made uncomfortable reading.  Sales for the half-year were down 3% in constant currency and 12% reported to £11.2bn, with the US showing a 10% decline mainly due to Seretide/Advair that was down 24% in that territory.

 

Core operating profit at £2.9bn was down 7% in constant currency and 22% in actual currency, reported operating profit was £2.2bn down 10% in constant currency and 27% as reported with the US proving the greatest drag on profits

 

Core EPS was 40.1p down 5% in constant currency and 22% in actual currency with reported EPS at 27.1p down 33.7%.

 

The Board has declared a second interim dividend of 19p making 38p for the half year, an increase of 5.6%.

 

Free cash flow (FCF) was down substantially at £0.7bn from £2.0bn last year; in addition to the lower operating performance, the adverse foreign exchange environment from a strong Sterling currency would have had an effect.  The company reflecting on the underlying weak FCF and the sustained strength of Sterling state that "...it is likely that share repurchases over the balance of 2014 will be immaterial..."  Well thank goodness for that, as I commented here "...I am not convinced by management's continued commitment to share buy-backs with a target of £1-2bn for this year.  At a share price that is over 11 times book value, it will further distort the financing of the balance sheet and expose the company to eventual interest rate risk.  I would judge the equity to debt cost differential for Glaxo at about 3% net of tax (GSK does have a much lower tax rate than many other large international companies)..." 
 

Although much is being done at Glaxo to realign the business, the progress on newly launched products is insufficient to offset pricing and contracting pressures in the US and generic competition to Seretide/Advair and Lovaza, that has hit the company harder than expected.  It was also disappointing to see Consumer Healthcare down 2%, mainly due to supply issues that are now beginning to improve.

 

The recent transaction with Novartis should reshape the Group and strengthen its position in the long-term growth businesses of Vaccines and Consumer Healthcare.  Management state that "...these businesses will represent around half of Group revenues over the coming years and are expected to be capable of generating mid-single digit sales growth on a more consistent basis..."

 

For this year management have reduced their guidance from 4-8% growth in core EPS (CER ex-divestments), to broadly similar to last year.  The expected dividend still looks safe at those levels, but there will be further pain on the Seretide/Advair and Lovaza front and it will be a year or two before their substantial pipeline compensates.  Within two years though Glaxo should be a more balanced business not reliant on one or two block-buster drugs, with Vaccines and Consumer Healthcare representing ~50% rather than ~33% today and a broader Respiratory offering replacing the unbalanced ~70%+ contribution from Seretide/Advair.