GSK Net Profit Rises 14%, Pipeline Excitement Builds Over Bird 'Flu Candidate

GSK: OK, but Not Great

U.K. drug giant GlaxoSmithKline (GSK) yesterday presented second-quarter (Q2) and first-half (H1) results for 2006, telling what was, for the most part, a robust story. Sales were up at a double-digit rate (11%) to £5.8 billion (US$10.8 billion) for the quarter, leading to half-year sales of £11.6 billion (up 13%). Expenditure increased across the board, including cost of sales (5%), selling, general and administrative costs (SGA, 12%) and research and development (R&D, 22%), but sales growth held up the bottom line. Operating income increased by 9.3% y/y to £1.9 billion and net profits increased at 14% to £1.3 billion, with the discrepancy largely accounted for by tax and related one-off factors.

Geographically, GSK performance is driven largely by the U.S. market, which grew by a full 20% to £2.6 billion in the quarter. The domestic European market (up by 2% to £1.4 billion) and international markets (up by 7% to £1.1 billion) told less glamorous stories, largely due to generic penetration of the firm's portfolio. GSK’s sales performance was held up by its metabolic (up at 35% to £529 million), central nervous system (CNS; up by 19% to £918 million) and cardio-urogenital (up by 23% to £383 million) franchises. Generic competition has decimated the company's anti-bacterials portfolio (down by 6% to £326 million).

On the product front, Seretide/Advair led from the front, increasing at 13% y/y to£822 million, driven by a strong performance in the U.S. market (up by 14% to £453 million). On a half-year basis, sales are up by 16%. The rest of GSK's mainstay respiratory franchise told a different story, with asthma-drug Servent (salmeterol) and allergy-treatment Flixonase (fluticasone) decreasing by 13% and 54% y/y, respectively. Generic competition has also decimated GSK’s Augmentin (amoxicillin/clavulanate potassium), which decreased at 13% y/y to £134 million.

However, diabetes-drug Avandia continued to show impressive growth, again particularly in the United States (up by 27%), leading to overall 26% y/y growth to £408 million. Also, GSK’s core CNS products grew substantially, led by anti-depressant Wellbutrin (bupropion), which increased at 42% y/y to £237 million. Hypertension-drug Coreg (carvedilol) was another notable grower, maintaining double-digit 28% y/y growth to £160 million.

Outlook and Implications

While company CEO Jean-Pierre Garnier presented a strong operational performance for the most part, he cut a notably cautious and self-admittedly “conservative” figure at the conference call. GSK raised its guidance from 10% growth in earnings per share to 12%, but investors and analysts alike were expecting, for the most part, a more robust revision into the mid-teens. That said, GSK is forecasting from a position of strength, and, given the litigation risks surrounding the company, Global Insight is inclined to believe that an incremental approach to guidance is more sensible. GSK’s approach is almost the precise opposite of its Big Pharma rival Pfizer (U.S.), from which the former failed to acquire a consumer-health business last quarter. Pfizer maintains what is generally considered an overly-ambitious guidance for 2006, expecting—unrealistically in most views—that its mainstay Lipitor (atorvastatin) will drive growth. With a relatively strong cash flow, we expect that GSK may make another move into consumer-health consolidation in the second half, backed up by a major licensing deal.

The conference call was dominated by headline-grabbing news regarding GSK's H5N1 avian influenza (bird ‘flu)-vaccine candidate. While GSK will present complete late-stage data later this year, trials so far have indicated that over 80% of participants demonstrated a strong immune response, nearly doubling the figure demonstrated earlier this year by Sanofi-Aventis’ (France) rival candidate. The company expects to file the data with the FDA in “the coming months”, and fast-tracked action is likely to come by mid-2007. The data far exceeded expectations, and confirm a bullish blockbuster-potential outlook.

However, the conference call was noteworthy for what was not mentioned. In particular, Global Insight remains frustrated by the lack of data for Phase II DPP-IV inhibitor denogliptin. Clearly, GSK is significantly behind Merck & Co (U.S.), Novartis (Switzerland) and even Takeda (Japan) in the DPP-IV development stakes—these rival treatments are either filed or in Phase III. That said, denogliptin could still hold important competitive advantages, but company management remains silent on the matter.

Also, ongoing litigation proceedings prove a significant burden on GSK. Litigation costs are likely to increase in the second half of 2006, as GSK faces up to trials relating to Wellbutrin XL as well as Parkinson’s treatment Requip (ropinirole; Teva (Israel)), nausea drug Zofran (ondansetron; Kali (U.S.)) and Imitrex (sumatriptan; Dr. Reddy’s (India) and Spectrum (U.S.))—a settlement with Biovail (Canada) on the Wellbutrin XL front can be expected in the third quarter. Taken together, these drugs accounted for £678 million—or 14%—of GSK’s sales in the last quarter.

Related Articles

• United Kingdom: 12 July 2006: GSK Clinches U.S. Approval for Avandament as Front-line Diabetes Treatment
  
  
• United Kingdom: 26 June 2006: GSK to Seek EU Approval for Bird 'Flu Vaccine by October 2006
  
  
• United Kingdom: 28 April 2006: GSK Confident over Pipeline, as Q1 Revenue Grows
  
  
• Canada: 18 January 2006: Biovail Receives Approval from Health Canada for Wellbutrin XL