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.