Mixed 1Q from Glaxo as Weak Sales Weigh on Growth

We expect sales and earnings growth to normalise as the company annualises the Valtrex patent loss as well as the H1N1 vaccine sales

Damien Conover, CFA 28 April, 2011 | 10:45AM
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GlaxoSmithKline (GSK) reported first-quarter results that largely matched our expectations, and we don't expect any changes to our fair value estimate. Total sales decreased 10% year over year, largely because of the patent loss on antiviral drug Valtrex and the lack of H1N1 vaccine sales. Excluding these anomalies, sales increased 4% year over year. Earnings per share increased 9% from the prior-year period. However, the disposal of Glaxo's Quest Diagnostics (DGX) ownership increased earnings about 14%. Excluding this disposal, earnings would have fallen close to 10%. We expect sales and earnings growth to normalise as the company annualises the Valtrex patent loss as well as the H1N1 vaccine sales.

Glaxo continues to implement its cost-saving programme, which is targeting more than £2 billion in annual cost savings. While we believe the programme will continue to yield improving margins, in the recent quarter cost improvements only partially materialised. As a percentage of total sales, selling, general, and administrative expense increased 2.8 percentage points from the prior-year period. Even though U.S. health-care reform increased some costs, we believe more room exists to decrease the company's SG&A rate. The reduction in SG&A is important as the company's gross margins come under pressure from the loss of high-margin drugs because of patent losses and increased penetration in lower-margin emerging markets.

Damien Conover, CFA is an Equity Analyst with Morningstar.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
GSK PLC1,493.00 GBX-0.33Rating

About Author

Damien Conover, CFA  is an equity analyst and associate director at Morningstar.

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