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Glaxo (GSK) Beats Q3 Earnings Estimates, Raises '19 EPS View

Zacks Equity Research

GlaxoSmithKline plc GSK reported third-quarter 2019 adjusted earnings of 95 cents per American depositary share, which beat the Zacks Consensus Estimate of 83 cents. Adjusted earnings were up 9% reportedly and 1% at constant exchange rate (“CER”), year over year.

Shares of Glaxo were up almost 2.4% on Oct 30. The stock has gained 19.4% so far this year compared with the industry’s 2.5% increase.

Quarterly revenues rose 16% reportedly and 11% at CER to $11.56 billion (£9.4 billion), driven by strong performance across all segments. The top line beat the Zacks Consensus Estimate of $11.34 billion.                                                          

All growth rates mentioned below are on a year-over-year basis and at CER.

Glaxo reports financial figures under three segments: Pharmaceuticals, Vaccines and Consumer Healthcare.

Pharmaceuticals Recovers, Respiratory Drugs Sales Strong   

After a weak performance in the second quarter, the Pharmaceuticals division registered 3% increase in revenues at CER. However, sales in the United States were down 2%. The downside was due to lower sales of Established Pharmaceuticals, partially offset by strong growth of Respiratory segment. Sales in European and international markets were up 9% and 10%, respectively.

Respiratory sales were up 19% at CER mainly driven by increase in sales of Trelegy Ellipta and Nucala across European and international markets. Nucala sales were up 33% at CER during the quarter. Sales of Nucala grew 29% and 39% in the United States and Europe, respectively. In the International markets, sales of Nucala increased 56%. Trelegy Ellipta sales more than doubled year over year driven by an increase in market share in the United States.

In September, Nucala’s label expansion application to include severe eosinophilic asthma patients aged six to eleven was approved by the FDA. Glaxo stated that Nucala continues to be the leader in terms of total sales in the asthma biologics market across major markets worldwide.

Relvar/Breo Ellipta registered a decline of 8% in sales during the third quarter. Sales of Relvar/Breo Ellipta decreased 32% in the United States due to impact of Advair generic and competitive pricing pressure. The launch of generic versions of Glaxo key respiratory drug, Advair, is  has created significant pricing pressure in inhaled corticosteroid (“ICS”)/long-acting beta-agonist (“LABA”) market in the United States. However, sales of Relvar/Breo Ellipta increased 19% and 22% in European and international markets, respectively.

HIV sales remained flat year over year at CER as growth in the dolutegravir franchise was completely offset by decline in sales of remaining drugs in the HIV portfolio. The dolutegravir franchise comprises two three-drug regimens – Triumeq and Tivicay – and two two-drug regimens – Juluca and Dovato. Dovato was launched in the United States in April followed by launch in Europe in the third quarter of 2019. The growth in sales of Juluca and Dovato was more than offset by decline in sales of Triumeq and Tivicay due to transition of patients from three-drug regimens to two-drug regimens.

Sales of the dolutegravir franchise were flat in the U.S. market as transition to the new two-drug portfolio was offset by a net price benefit. However, sales of this franchise were up 3% in Europe and 9% in international markets, mainly driven by Tivicay in Europe and Triumeq in international markets. Please note that Glaxo markets Juluca in collaboration with J&J JNJ.

Sales of Established Pharmaceuticals declined 5% due to lower sales of Advair, partially offset by strong uptake of authorized generic version of Ventolin. Advair lost 64% of sales year over year in the United States while Seretide sales were down 9% in Europe due to generic competition. Glaxo moved Advair to its Established Pharmaceuticals portfolio starting first quarter of 2019. Sales of Ventolin were up 27% during the quarter.

We remind investors that Mylan MYL launched the first generic version of Advair, Wixela Inhub, in the United States in February. The steep decline in sales of Advair is expected to continue in the fourth quarter.

Immuno-inflammation drugs like Benlysta rose 35% in the quarter. In April, Benlysta’s label was expanded to include children with lupus aged five years or older in the United States. Earlier this week, the drug was approved in Europe for a similar indication.

Oncology sales were £64 million, comprising sales of PARP inhibitor, Zejula, which was acquired from TESARO this year, compared to £57 million in the second quarter.

Consumer Healthcare Sales Up

Sales in the Consumer Healthcare segment increased 25% at CER primarily driven by Pfizer’s PFE legacy brands. Glaxo has formed a new joint venture (“JV”) with Pfizer to create the world’s largest Consumer Healthcare business. Third-quarter sales of this segment include nine weeks of legacy Pfizer brand sales, arising after the creation of the JV. Sales of Wellness, Oral health and Skin health categories increased 22%, 10% and 9%, respectively, in the quarter. Nutrition sales more than doubled in the third quarter.

On a pro-forma basis, sales in the Consumer Health segment were up 3% at CER on the back of strong performance in Oral health. Pro-forma growth was negatively impacted by approximately one percentage point due to divestments and the phasing out of low margin contract manufacturing.

Vaccines Segment Growth Continues

Sales from the Vaccines segment were impressive, up 15% at CER, primarily driven by strong growth of new shingles vaccine, Shingrix and impressive performance of meningitis vaccine, Bexsero. Shingrix sales were up 76% to £535 million in the reported quarter, driven by strong uptake in the United States.

Although growth trend of Bexsero continued this quarter with sales increasing 19% on the back of strong demand across all markets, sales of another meningitis vaccine, Menveo fell 1% due to lower demand in international markets. Sales of influenza vaccine Fluarix were up 15% on the back of market share gain and reversal of provisions made for prior-year returns. Sales of Established vaccines declined 1% year over year.

Operating Expenses Up

Selling, general and administration (SG&A) costs increased 16% year over year to £2.8 billion. The rise in SG&A costs was driven by increased commercial activities to support launches and costs related to the acquisition of TESARO, partly offset by cost-saving initiatives and benefits of restructuring in Pharmaceuticals segment.

Research and development (R&D) expenses were up 18% to £1.16 billion, reflecting increased investments to support progress of clinical studies, especially those on Zejula. Glaxo has 41 new medicines, including 17 vaccines, in different development stages.

2019 Guidance

Glaxo raised its guidance for adjusted earnings in 2019. It currently expects earnings to remain flat year over year at CER, indicating an improvement over previous expectation of a decline of 3-5% at CER in 2019. The new guidance reflects improvement in operating performance, lower expected effective tax rate and increased investment in R&D.

Our Take

Glaxo beat on earnings and sales in the third quarter. The company’s new products from every segment performed well in the reported quarter, especially Shingrix. This prompted the company to raise its expectation for 2019 earnings.

We are encouraged by Glaxo’s restructuring initiatives to focus on strengthening its pharmaceutical portfolio. The company boosted its oncology portfolio with the acquisition of TESARO in January and a collaboration agreement with Germany-based Merck KgaA, in February. Following these two transactions, the company has 16 oncology pipeline candidates including in-house candidates.

These transactions along with restructuring initiatives related to the Consumer Health segment will help the company to offset slowdown in legacy businesses. However, loss of Advair sales due to generic competition and competitive pricing will continue to hamper revenues.

GlaxoSmithKline plc Price, Consensus and EPS Surprise


GlaxoSmithKline plc Price, Consensus and EPS Surprise

GlaxoSmithKline plc price-consensus-eps-surprise-chart | GlaxoSmithKline plc Quote

Zacks Rank

Glaxo currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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