Glaxo Misses Estimates by a Mile

GlaxoSmithKline (GSK - Analyst Report) reported fourth quarter earnings of 90 cents per ADS, below the Zacks Consensus Estimate of 95 cents but above the year-ago loss of 24 cents per ADS. Revenues fell 2% year over year at constant exchange rates (“CER”) to $11.2 billion. Revenues came in below the Zacks Consensus Estimate of $11.5 billion.

Fiscal 2011 earnings were $3.62 per ADS as compared with $1.66 in the year-ago period. Full-year earnings were above the Zacks Consensus Estimate of $3.52. Revenues for the year dropped 3% year over year (at CER) to $44.1 billion, below the Zacks Consensus Estimate of $43.7 billion.

The Quarter in Detail

While Pharmaceuticals and Vaccines sales fell 3%, Consumer Healthcare grew 3%. Price cuts in the EU and the US Healthcare Reform affected revenues by about £85 million during the quarter. Performance of the Vaccines segment (down 18%) reflected the phasing of shipments of Cervarix in Japan and lower tender volumes in emerging markets.

While Pharmaceuticals and Vaccines sales increased in Japan (6%), Emerging Markets (5%) and Asia Pacific (4%), sales remained flat in the US and declined in Europe (11%).

Worldwide sales were affected by a number of factors, including generic competition for Valtrex, lower Avandia and pandemic flu sales and European austerity measures.

Total Consumer Healthcare sales during the quarter reflected growth in Oral healthcare (4%) and Nutritional healthcare (12%) which was partially offset by a decline in the over-the-counter (OTC) segment (2%). OTC sales were impacted by a mild flu season and economic pressure in developed markets. The company remains on-track with its plans to divest its non-core OTC brands and intends to return the net proceeds to shareholders.

Glaxo continues to make progress with its cost-cutting initiative, which should help offset the impact of increasing generic competition over the next few years and help earnings grow. The company increased its annual saving target by £300 million and now expects to deliver £2.8 billion in annual savings under its restructuring program by 2014. To this point, the program has delivered annual savings of £2.2 billion.

Meanwhile, the company bought back shares worth £365 million during the fourth quarter of 2011. The company declared a dividend of about 82 cents per ADS. The total repurchases in 2012 are expected to be between £1 billion and £2 billion.

2012 Outlook

Glaxo expects to report positive revenue growth (at CER) with core operating margin picking up from 2012. The pipeline is expected to advance significantly with six candidates (Relovair, LABA/LAMA, albiglutide, BRAF, dolutegravir and Mosquirix) scheduled to complete phase III development in 2012.

Neutral on Glaxo

We currently have a Neutral recommendation on Glaxo, which carries a Zacks #3 Rank (short-term Hold rating). While several products in the Pharmaceuticals segment are facing generic competition, the Consumer side of the business is performing well and should help drive top-line growth. Moreover, Glaxo’s diversified base and presence in different geographical areas should help support revenue growth.

Meanwhile, Glaxo’s restructuring initiative should help offset the impact of increasing generic competition in the next few years and help earnings grow faster than revenues. Share buybacks should also drive bottom-line growth.

Read the full analyst report on GSK