GlaxoSmithKline (GSK) reported third-quarter results largely in line with our expectations and those of consensus. However, top-line growth was a little soft due to higher-than-expected sales declines in China resulting from the on-going government investigation, offset on the bottom line by better-than-expected cost cuts.
We don't expect any significant changes to our fair value estimate, which at the current market price suggests the stock is undervalued. Core to our valuation and wide moat rating is the company's pipeline, which continues to make strong strides.
Finally transitioning from the minor innovation of a decade ago, Glaxo's pipeline is poised to accelerate growth over the next several years. The company's new respiratory drugs Anoro and Relvar not only offer advancements over current therapies, but also create a pathway for the company to reduce its dependence on Advair, which will eventually face generic competition.
Further, the company's new HIV drug Tivicay should help the company regain market share. However, we expect the launch trajectory to be slower with these drugs as the company battles challenging reimbursement negotiations and well-entrenched competition.
Cost-cutting is running ahead of our expectations. Both research and development and selling, general, and administrative expense fell faster than we expected. While we like to see the productivity improvements, we are somewhat concerned to see R&D as a percentage of sales fall to 12%, a low mark relative to peers. For Glaxo to continue to see strong pipeline progress, we would expect to see an increase in R&D spending.
Turning to China, government investigations of improper marketing caused sales in the region to fall 61% year over year, a more severe drop than we had expected. We plan to slightly lower our Chinese sales forecast in the near term, but continue to expect Glaxo will rebound in China over the longer term as the region is critical for long-term growth.
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