GSK Posts Disappointing 2011 Sales Results But Margins Improve

GlaxoSmithKline (GSK, UK) posted a 2% reduction in revenue for the fourth quarter of 2011 and a 3% reduction for the full year amid challenging pricing and reimbursement conditions. Despite this decline, the company's operating income, as calculated by IHS Global Insight, more than doubled. The operating margin improved as well, reaching 27.8% for the fourth quarter and 16.8% for the full year. Although this increase is impressive, it should be seen in the context of the very disappointing 2010 performance: what GSK has achieved now is simply returning it to the operating margin levels it had prior to 2010. Worryingly, the cost of sales increased substantially in 2011 as the company moved away from the cheaper-to-produce pandemic influenza (flu) products as demand for those declined and increased its dependence on traditional pharmaceuticals. Research and development (R&D) expenditure as a share of sales remained flat, indicating the impact of the R&D reorganisation that the company has been undertaking.

The overall restructuring programme produced GBP2.2 billion (USD3.49 billion) of annual savings in 2011. It remains on track to achieve the full GBP2.5 billion of targeted annual savings by 2012, according to the company.

The reported sales decline is not unusual and has in fact been seen for other companies with high exposure to European markets, where there bulk of price cuts occurred in 2011. Given GSK's broad geographic exposure, however, and considering that European sales of pharmaceuticals and vaccines account for less than 26% of total sales in that business segment, there are other reasons behind the decline. The reduction in sales of vaccines of 22% was driven by a decline in demand as concerns over pandemic flu declined. This short-term effect has been exacerbated by patent expiries, however, affecting sales of Requip (ropinirole), Imigran/Imitrex (sumatriptan), and Wellbutrin (bupropion). Avandia (rosiglitazone) product sales continued to slide as well, following negative regulatory decisions before the start of 2011.

Outlook and Implications

GSK's results—despite its less-than-impressive sales in 2011—are overall positive. The key growth factors for the future are in place and it is clear that the company has successfully turned the corner following the hit from substantial post-pandemic decline in vaccine sales. Group sales outside the United States and Europe now account for 38% of turnover, while growth in emerging markets came to 15%, and Asia Pacific and Japan sales saw growth of 10% and 28%, respectively, on a reported basis. Although these markets are expected to continue boosting sales going forward, political risks in those should not be underestimated: in fact, political and economic risks have already affected emerging-market revenues.

Meanwhile, risks in Europe remain very significant as well. The company's group sales in Europe fell by 4% on a reported basis, largely as a result of austerity measures. Continuing uncertainty over the future of the Eurozone and the impact of austerity measures on healthcare and pharmaceutical spending remains high. As a pre-emptive move, the company has been withdrawing "tens of millions of pounds" from "most of the Eurozone" excluding Germany, chief executive officer Sir Andrew Witty has said, according to the Guardian newspaper. This appears to be a prudent move, but would only help part of the way: GSK can protect its cash but not its sources of revenue as desperate European governments initiate radical price cuts or delay payments for reimbursable pharmaceuticals. Against this background, GSK's guidance of "reported sales growth at CER in 2012" and gradual improvement in core operating margin from 2012 appears cautious and yet optimistic. The most certain way for the company to deliver on this guidance, amid pricing constraints, is by bringing new products to market. GSK expects that with its new R&D structure focused around a smaller, more nimble team, it will have 30 new drugs entering late-stage development in the next three years. Relovair for chronic obstructive pulmonary disease, Promacta for hepatitis, and MEK and Qflu are ready for filing in 2012, having secured sufficient clinical data. The big question remains whether this R&D work will pay off, not just in terms of securing marketing authorisation, but also in terms of obtaining a good price and positive reimbursement guidance in an increasingly challenging austerity climate.