5 Things GlaxoSmithKline PLC's Management Wants You to Know

Source: GlaxoSmithKline, Facebook.

The fourth quarter was another rough one for U.K.-based pharmaceutical giant GlaxoSmithKline .

During the quarter, GlaxoSmithKline saw its revenue tumble 10% to $9.41 billion, inclusive of negative foreign currency effects, while its EPS declined by just single digits year over year to $0.42. GlaxoSmithKline continues to grapple with increasing levels of competition in global markets and, more importantly, faces imminent biosimilar competition against its biggest drug Advair in the U.S. by 2016. As a refresher, Advair/Seretide for asthma or COPD is one of the best-selling drugs in the world. Once generic competition enters the market, Glaxo will be kissing billions of dollars goodbye in a relatively short period of time.

An earnings report doesn't tell the full story of what's going on behind the scenes at GlaxoSmithKline, though. In order to get that story, you have to be willing to dig deep into a company's quarterly conference call and listen to what its management team has to say.

With that in mind, here are the five things GlaxoSmithKline's management team believes investors need to know.

Catalyst alert!

Circle your calendars, investors, because GlaxoSmithKline is going to drop a mound of early-stage clinical data and update the progress of its pipeline during its R&D day in October.

Source: GlaxoSmithKline via Flickr.

GlaxoSmithKline has been largely criticized for its lack of product development in recent years in lieu of the expected loss of Advair/Seretide by mid-decade. This event would mark an opportunity for Glaxo and its management team to really showcase what it has up its sleeve. Without question, it'll entail its quadfecta of respiratory drugs -- Breo, Anoro, Incruse, and Arnuity -- which are long-term treatments for either COPD or asthma.

However, we'll also get to look under the hood at some of the company's other promising drug candidates, including sirukumab, which is being co-developed with Johnson & Johnson. Previous trials have suggested this drug and its target of IL-6 could play a key role in moderate-to-severe cases of rheumatoid arthritis.

Lowering prices helped our market share and access...

You may have noticed that sales of Breo Ellipta and Anoro Ellipta, the company's inhaled COPD products that were co-developed with Theravance, saw sales jumped dramatically in the fourth quarter. Breo, for example, delivered $58 million in revenue compared to a measly $26 million in the sequential third quarter.

How was this accomplished? As CEO Witty notes, GlaxoSmithKline proactively and aggressively pushed its pricing down to boost insurer coverage of its respiratory therapies. The end result was a significant uptick in accessibility to around 85%-87% for Advair in the commercial market, 75%-76% for Breo in Medicare Part D, and just below 70% for Anoro in Medicare Part D, according to Witty. Better acceptance should help boost Breo and Anoro's profiles with physicians and could be the kick-start these two drugs need to get on track. If anything, it's extended Glaxo's advantage over its peers for the time being in access.

...but it's going to sting our margins

However, the downside to proactively lowering respiratory prices is that it's going to put substantial pressure on Glaxo's margins -- especially in the first half of 2015. Advair sales are already forecast to fall between 20% and 25% in the U.S. this year, and that's after Witty noted that coverage for Advair actually improved during Q4!

Source: GlaxoSmithKline, Facebook.

It's not just Advair's sales that could struggle. GlaxoSmithKline was obviously not seeing the uptick in sales with Breo and Anoro that it expected after their launch, so more competitive prices could constrain peak sales estimates for both drugs. GlaxoSmithKline's management is clear that it still expects this new series of long-lasting respiratory drugs to eclipse Advair/Seretide's peak sales, but I'm still a bit skeptical after witnessing the launches of Breo and Anoro.

Our shareholders are getting a big payday... eventually

The Novartis-GlaxoSmithKline asset swap that entails Novartis purchasing Glaxo's oncology business for up to $16 billion, Glaxo buying Novartis' vaccine business for around $7 billion, and the two groups forming a joint-venture for their consumer healthcare operations, is a big catalyst for GlaxoSmithKline. It's also a big cash producer!

When the dust settles, GlaxoSmithKline is going to walk away with a lot of cash from this asset swap since Novartis is forking over more than double what Glaxo is paying for Novartis' vaccine division. Ultimately, that means a substantial payday for GlaxoSmithKline shareholders. According to estimates when the deal was announced, Glaxo's plans were to return around $4 billion to investors. Yet, based on CFO Dingemans' commentary, Glaxo is still unsure what the best way is to get that money to investors.

Many have frankly hoped for a special dividend, but Glaxo could opt to repurchase shares in lieu of its falling EPS in order to lower its shares outstanding and provide itself an EPS boost. This could make Glaxo shares appear cheaper and might buoy its share price. It's definitely worth keeping your eyes peeled to see how Glaxo handles this shareholder payout.

An overlooked advantage of the Novartis deal

Source: GlaxoSmithKline via Flickr.

Lastly, one of the most overlooked aspects of the Novartis deal that CEO Witty reminds shareholders will be unbelievably positive is the fact that GlaxoSmithKline will no longer be as reliant on the U.S. for revenue. Instead, it'll have greater access to emerging markets via its dominant vaccine segment, which should lead to better long-term growth prospects and help stem its sales downtrend sooner rather than later.

Of course, we should also factor in (at least for the time being) that exposure to foreign markets could be a bad thing in terms of currency translation. Although currency translation has essentially no effect on Glaxo's long-term business model, it could make the company's reported revenue and profits look worse than they really are.

A long road to recoveryFollowing this conference call, I do still believe management has the company on the right track and is positioned to reward shareholders as best as possible over the remainder of the decade. However, I also suspect that Glaxo is still years away from seeing any transformational growth. The loss of Advair/Seretide is simply going to be too much to overcome over the next couple of years, and I suspect it could even result in a dividend cut from current levels. For now, I'm perfectly content to watch this pharmaceutical giant from the sidelines.

The article 5 Things GlaxoSmithKline PLC's Management Wants You to Know originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns shares of, and recommends Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.