GSK's turnover rises 6% in Q2, expects earnings to return to growth in 2016

UK-based pharma major GlaxoSmithKline (GSK) issued financial results for the second quarter of 2015, with the company's turnover amounting to GBP5.888 billion (USD9.917 billion), a 6% year-on-year (y/y) increase on a reported basis, and a 7% y/y increase in constant currencies. GSK also reported y/y growth rates on a pro-forma basis, which the company calculated by comparing the reported turnover and core-operating profit for the second quarter of this year (2015) versus turnover and core-operating profit for the analogous period last year. This was adjusted to include the equivalent three months' sales of the vaccines and consumer healthcare products that were formerly Novartis's businesses, while at the same time excluding the sales of the former GSK oncology business during the second quarter last year. This comes following the completion of the three-part transaction between GSK and Novartis in March this year (see United Kingdom - Switzerland: 3 March 2015: GSK, Novartis complete USD20-bil. asset exchange transaction and Switzerland - United Kingdom: 22 April 2014: Novartis acquires GSK's oncology products, divests vaccines, and two firms create Consumer Health JV).

On a pro-forma basis, the company's turnover increased 2% y/y. Looking at the divisions specifically, the pharmaceuticals division turnover was down 6% y/y on a reported basis, while increasing 2% y/y on a pro-forma basis; vaccines were up 11% y/y on a reported basis but down 2% on a pro-forma basis; and consumer healthcare turnover was up 51% y/y on a reported basis, while increasing 6% pro-forma basis.

During the second quarter of the year, GSK's total operating profit declined from GBP1.137 billion in the second quarter of 2014 to GBP335 million during the second quarter of 2015. This was attributed, among other things, to restructuring costs as a result of the Novartis transaction as well as the pharmaceuticals division restructuring programme. As calculated by IHS, the company's operating income declined almost 46% y/y.

For the first half of the year, the company's turnover increased 3% y/y on a reported basis or 4% y/y on a constant exchange rate (CER) basis to GBP11.51 billion. This represents a 1% y/y rise on a pro-forma basis. It is noteworthy that for the first half of the year, GSK's total operating profits amounted to GBP9.551 billion, in comparison to GBP2.203 billion total operating profits for the first half of 2014. This was attributed to non-core items resulting in a net credit of GBP6.897 billion, mainly relating to the impact of the Novartis transaction.

When considering the pharmaceutical division's performance during the second quarter of the year, the sales of respiratory drug Advair/Seretide (fluticasone + salmeterol) continued to decline, reflecting the negative price impact in Europe and the United States, as well as generic competition in Europe. The company noted that the fall in sales of Advair in the US included the price and mix impact of new contracts agreed to last year as a result of competitive pressures in the ICS/LABA (inhaled corticosteroid/long-acting beta2-agonist) combination market – a market that includes Advair as well as Breo Ellipta (fluticasone furoate + vilanterol [FF/VI]), the sales of which amounted to USD19 million in the US.

Separately, the HIV business (ViiVHealthcare) reported a sales increase of 59% y/y, mainly driven by the strong growth in sales of Tivicay (fluticasone + salmeterol) and Triumeq (dolutegravir + abacavir + lamivudine)

Outlook and implications

When it comes to the performance in the second quarter of the year, the company maintained its outlook for 2016, expecting the company's earnings to return to growth. Specifically, GSK noted that it anticipated "a significant recovery in core EPS with percentage growth expected to reach double digits on a CER basis as the adverse impacts seen in 2015 diminish, and the sales and synergy benefits of the Novartis transaction contribute more meaningfully". In terms of the full year 2015, the company anticipates the pricing pressure on Advair/Seretide in both the US and Europe to have a negative impact on its performance, and so when considering the "dilutive effect of the Novartis transaction and the inherited cost base of the Novartis businesses", GSK expects its core EPS to decrease at a percentage rate in the high teens at CER.

In terms of the company's product portfolio, while the meningitis vaccines acquired through the Novartis transaction added to the performance of the vaccines division, the positive impact was offset by a decline in the sales of some of its other vaccines such as Infanrix/Pediarix, the sales of which were driven down by competitive pressures. However, the second quarter of the year also marked a positive development for the company's vaccines division, with candidate malaria vaccine Mosquirix (RTS,S) receiving a positive recommendation from the European Medicines Agency's committee for medicinal products for human use (see World: 24 July 2015: GSK's malaria vaccine receives positive opinion from EMA's CHMP). The candidate vaccine is now set to undergo reviews by the Strategic Advisory Group of Experts (SAGE) on immunisation and the Malaria Policy Advisory Committee (MPAC) of the World Health Organization (WHO).

It is of further note that GSK reported in its second-quarter financial results that it had around 40 new molecular entities (NMEs) under Phase II or Phase III development. The company noted that its new pharmaceutical and vaccine products are anticipated to contribute at least GBP6 billion to annual revenues on a CER basis by 2020.