GlaxoSmithKline a global healthcare company that develops, manufactures and markets pharmaceutical products, including vaccines, over-the-counter (OTC) medicines and health-related consumer products. I have a holding in my income portfolio (epic code: GSK).
Glaxo reported first quarter results on Wednesday with some disappointing news in their US market. Group turnover was down 2% on a constant exchange rate basis and excluding divestments to £5.6bn, on a reported basis turnover was down 13.3%.
Core operating profit was down 18% at £1.5bn and down 33% on a reported basis to £1.1bn. Core EPS was 20% down at 21.0p and on a reported diluted basis down 30.1% to 13.7p.
The major decline in sales came from the US which was down 11%, caused mainly by a 30% slide in Advair sales to £455m. Although loss of market share has been expected, due to loss of patent protection, this is a larger than expected decline in just one quarter. GSK have introduced Breo/Relvar, Anoro and Incruse to their respiratory portfolio and they state that there are six other drugs in late stage development, but it will take some time for these new drugs to compensate for the Advair/Seretide decline against generic competition.
It may well be that 2-3 years from now Glaxo will be a better balanced business, less reliant on just two or three block-buster drugs. The recent Novartis deal where Glaxo sell them their oncology business, take a 63.5% majority stake in a combined consumer healthcare business and buy Novartis's vaccine business, is a step in this direction.
Free cash flow for the quarter was down substantially to £522m from £897m last year, due to the decline in profitability and the effect of Sterling's strength against their trading currencies. After dividend payments and the purchase of increased shareholdings in their Indian pharmaceutical business and Indonesian consumer healthcare business, net debt increased £1bn from 31 December 2013 to £13.7bn.
I am not convinced by management's continued commitment to share buy-backs with a target of £1-2bn for this year. At a share price that is over 11 times book value, it will further distort the financing of the balance sheet and expose the company to eventual interest rate risk. I would judge the equity to debt cost differential for Glaxo at about 3% net of tax (GSK does have a much lower tax rate than many other large international companies).
For 2014, management continue to target core EPS growth of 4-8% CER ex-divestments. They also continue to expect to grow sales at CER and on an ex-divestment basis. Finally, reflecting management's confidence for the full year, the dividend was increased by 5.6% to 19p.
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