GlaxoSmithKline (GSK) reported fourth-quarter results that largely matched our expectations, and we don't anticipate any changes to our fair value estimate of 1462p. Glaxo announced a £1 billion-£2 billion long-term share buyback programme as well as a 7% increase in the dividend. Despite major legal costs in 2010 of £2 billion, the company still generated £6.8 billion of cash inflows, which gives us confidence that Glaxo can implement its share-buyback programme relatively quickly. Further, given the company's robust pipeline, we believe Glaxo doesn't need large stockpiles of cash to aggressively acquire smaller companies.
Total fourth-quarter sales fell 13% year over year, as expected, because of the increased generic competition for antiviral drug Valtrex and reduced Avandia sales following regulatory setbacks. Also, the prior-year period benefited from a bolus of almost £1 billion in H1N1 vaccine sales, which fell almost 90% in the recent quarter. Offsetting these headwinds, the company's top drug Advair for respiratory disease increased 4% year over year. However, we expect limited generic competition to Advair will begin to emerge later in the year, which will probably create a negative drag on the company's overall growth. Despite these challenges, the company's growth prospects look solid in emerging markets and consumer products, which were up 14% and 4%, respectively, in the quarter versus the prior-year period.
Glaxo also announced its intention to divest itself of noncore products that represent 10% of overall sales. We expect the company will use the proceeds to help fund small tuck-in acquisitions in core areas, especially emerging markets. Additionally, we believe the divestiture of these assets should improve the cost structure at the company. While the current quarter's operating costs were up significantly, the majority of the increased costs were due to the loss of high-margin H1N1 vaccine sales. Going forward, we expect cost-cutting efforts will increase the bottom line at a faster rate than the company's total sales growth.
Damien Conover, CFA is an equity analyst with Morningstar.