GlaxoSmithKline reported first-quarter results that slightly exceeded our expectations largely due to one-time sales of H1N1 vaccines. However, we don't expect any changes to our 1,626p fair value estimate based on the minor outperformance. Excluding the impact of foreign exchange rates, total sales increased 13% year-over-year, with H1N1 vaccine sales contributing close to 9% of the growth. On the bottom line, earnings per share increased 16% operationally versus the prior year period, as low research and development costs supported the gains. Overall, Glaxo left its 2010 guidance largely unchanged. Regarding US healthcare reform, the company appears to be absorbing the costs through improvements to operational efficiencies.
The company's pharmaceutical division posted a 14% year-over-year operational gain as H1N1 vaccine sales drove the majority of the quarter's growth. We expect a rapid decline in H1N1 vaccine sales through the remainder of the year, as the pandemic has dissipated. The surprisingly strong vaccine sales during the quarter helped offset the expected generic competition to anti-viral drug Valtrex, which will likely face three more quarters of major declines as generics just launched in November of 2009. The company's largest-selling drug, Advair, for respiratory indications, grew 9% operationally year-over-year, in line with our expectations. Looking ahead, we view the patent risk on Advair as one of the company's biggest challenges. While the company holds patents on the Advair's delivery device that go out until 2017, we believe generics will launch following the drug's patent expiration in late 2010.
Glaxo continues to make strides in developing its product portfolio outside the developed countries. Sales grew 43% versus the prior year period in emerging markets. We believe Glaxo's wide diversification across geographies led the company to digest the costs of US healthcare reform more easily than its competitors. Also, we believe the company's large exposure to these fast growing markets will help mitigate the company's patent expirations in developed counties, especially Advair.
On the cost front, we were surprised to see the company's cost-cutting programme, titled Operational Excellence, not show up as much as we expected. While the company stated that the programme is on track to achieve £1.5 billion of cuts by the end of 2010, we are concerned that the majority of these savings will be reinvested in the company, and not fall to the bottom line. As a percentage of total sales, gross margins fell close to 200 basis points year-over-year, as generics competition to the high-margin drug Valtrex weighed on the margins. While the marketing and administrative margin fell year-over-year excluding legal costs, lower research and development expenses represented the primary cost containment. This concerns us a little, given that new products drive Glaxo's long-term growth.
