Has GlaxoSmithKline Finally Turned the Corner?
GlaxoSmithKline (NYSE: GSK) has had a rough go of it over the past couple of years. With respiratory drug Advair losing market share and supposed savior Breo and Anoro Ellipta not generating impressive uptake, it looked like the British drugmaker might be permanently in the doldrums. Add to that the massive bribery scandal that engulfed the company, and things looked even rougher.
Yet hope springs eternal -- and there's good reason to be hopeful about Glaxo's future. Let's check under the hood.
Image source: Getty Images.
Getting past Advair
With Advair's patent expiry, GlaxoSmithKline has been fighting a rearguard action to retain market share by cutting prices. (This without an actual Advair generic on the market -- although one is expected in the first half of 2016.) And it shows: In the third quarter of 2014, Advair brought in $1.6 billion -- that's down to $1.1 billion two years later. In fact, CEO Andrew Witty predicts that GlaxoSmithKline has "absorbed 50% of the ... economic effect of genericization already" (this and other quotes courtesy of S&P Market Intelligence).
But here's what's really interesting: The Elliptas, led by main products Breo and Anoro, are finally (finally!) starting to get some traction in the market. All told, they're generating 42% of the script volume that Advair is, and Breo Ellipta is annualizing at over $800 million based on the most recent quarter's sales. They still aren't big enough to plug the Advair-sized hole, but fortunately, GlaxoSmithKline has other irons in the fire.
Chief among them: HIV drugs Triumeq and Tivicay, which are combined annualizing to well over $3 billion based on last quarter's results and grew by a combined 72% in U.S. dollars year over year. Influenza vaccines FluLaval and Fluarix achieved 54% revenue growth and brought in almost $500 million last quarter, and meningitis vaccine Bexsero nearly tripled year over year to $180 million in revenue last quarter. Witty was particularly bullish on Bexsero, noting, "you're probably in the 10% territory, maybe not even that of the overall opportunity of this particular vaccine. So there's an awful lot of opportunity to go on a global basis."
Strategy comes into focus
When GlaxoSmithKline announced its big transaction with Novartis -- which gave GlaxoSmithKline Novartis' vaccines business, Novartis GlaxoSmithKline's oncology portfolio, and both companies a portion of a new joint consumer healthcare business -- I was skeptical. To be honest, I felt Novartis was clearly getting the better end of the deal, and that GlaxoSmithKline had sacrificed its growth opportunities in exchange for a little more stability, all but guaranteeing its relegation to "also-ran" status in the pharma space as it struggled along with subscale businesses.
So far, it looks like I was wrong.
GlaxoSmithKline's revenue and core operating profit this past quarter were excellent, and the trend lines are all in the right directions. What's more, all three of its divisions (pharmaceuticals, vaccines, and consumer healthcare) are growing and rapidly bringing a number of new products to market. And they've achieved that without slowing the pipeline -- GlaxoSmithKline is expecting a slew of data on 20-30 potential drugs over the next two years, which highlights both the company's optionality and diverse growth opportunities.
That's not to say it's all coming up roses. While GlaxoSmithKline has gradually reduced its debt, it's still sitting on over $20 billion in debt-- and its net debt position has actually worsened given that it has been drawing down its cash faster over the past six quarters. Management expects to reverse that over the next year or two, and I'm hopeful to see precisely that.
Here's what it all comes down to
Companies can look good on paper, and GlaxoSmithKline is actually edging back into that camp. But a great deal depends on what management's plans for the future are. With CEO Andrew Witty stepping down to be replaced by Emma Walmsley, I'm less certain about GlaxoSmithKline's planned way forward. And rightfully so -- she has not yet announced her planned capital allocation and growth strategies. Until those are in place, and we've seen her begin executing, it's unclear whether GlaxoSmithKline's recovery will be sustained over the longer term.
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