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LONDON (Alliance News) - GlaxoSmithKline PLC Wednesday posted a sharp fall in pretax profit in its third quarter, as sales of its key respiratory product Advair continued to fall and it paid a GBP301 million fine in China over bribery investigations, and it announced a restructuring of its global pharmaceutical business with the aim of producing GBP1 billion in savings over three years.
The pharmaceuticals giant also said it plans to return GBP4 billion to shareholders via a b-share scheme when it completes its three part deal with Novartis International AG, which is on track to complete in the first half of 2015. That will be on top of an expected 80 pence dividend for that year.
Glaxo reiterated its expectations that full year core earnings per share will be broadly similar to 2013 at constant currencies. This was maintained from its lowered full year expectations at the time of its interim results in July. Previously it had guided between 4% to 8% earnings per share growth at constant exchange rates.
The company is also planning to explore an initial public offering of a minority shareholding in its joint venture specialist HIV company ViiV Healthcare, in order to "enhance future strategic flexibility and visibility within the group." Although this is at an early stage and the company hasn't decided how much of the venture would be listed, Chief Executive Andrew Witty told journalists that were ViiV to separate it would be "in the top third of the FTSE 100."
Glaxo posted a pretax profit of GBP548 million for the third quarter of 2014, down from GBP1.40 billion a year before, as revenue fell to GBP5.65 billion from GBP6.51 billion. This was compounded by a GBP301 fine in China following the conclusion of investigations by Chinese authorities over allegations that it had paid up to GBP500 million to doctors and hospital executives.
At that time Glaxo said it fully accepted "the facts and evidence of the investigation, and the verdict of the Chinese judicial authorities."
Although it has cleared this hurdle, it is still under investigations for similar allegations across other areas of its operations, with smaller claims having since surfaced Poland, Iraq, Jordan, Lebanon and Syria. It is also under investigation by the UK's Serious Fraud Officer, and the US Department of Justice.
The company said that the impact of formulary and contract changes to its key product, asthma and chronic obstructive pulmonary disease Advair, has been greater than it anticipated and hit its US sales performance in the quarter. This led to a 25% drop of sales of Advair, which dragged down US pharmaceutical and vaccine revenues 10%.
Its core EPS at constant exchange rates, its preferred earnings measure, rose 5% to 27.9 pence in the quarter, and hence it was able to maintain its full-year guidance for the figure. It cited targeted cost reduction and financial efficiencies for the rise in core EPS compared with pretax profit.
Global respiratory drug revenue fell 8% in the third quarter, reflecting significant changes to pricing and volumes for Advair in the US. Sales of Advair were down by a quarter in the US, comprising 10% volume declines and a 15% impact from price declines. It has recent concluded new contracts for Advair in the US, and expects sales to continue to decline in line with recent trends as some volume recovery is offset by the lower prices it set.
It expects its entire respiratory portfolio to return to growth in 2016 as other drugs make up the Advair losses. Witty said Glaxo isn't expecting any one single drug to replace the lost Advair sales.
US oncology revenues rose 44%, driven by strong performances from renal cell carcinoma treatment Votrient and low blood platelet treatment Promacta, and the recently launches of melanoma treatments Tafinlar and Mekinist. Generic competition continued to hit US dermatology sales, which dropped 68%. US vaccine revenues fell 10%, hit by the return of a competitor vaccine had had supply issues in 2013, and supply constraints hitting sales of hepatitis vaccines.
In Europe pharmaceuticals and vaccines sales dropped 2%, despite strong growth in its oncology business and prostatic hyperplasia treatment Avodart. Sales of asthma treatment Seretide fell 5%, due to ongoing pricing pressure, and vaccine sales were flat.
This offset growth in Emerging Markets, Japan, and from ViiV. In Emerging Markets pharmaceutical and vaccine revenue rose 12%, due to strong sales of its Synflorix pneumococcal vaccine and Boostrix vaccine for tetanus, diptheria and pertussis. It saw strong growth in Brazil, the rest of Latin America and China as the effects of the government investigation annualised.
ViiV revenues rose 18%, as growth in its Tivicay and Epzicom products more than offset the effect of generic competition on its older products.
Established products revenue fell 14% as generic competition continued to hit high triglyceride treatment Lovaza, and other products in the portfolio.
Consumer healthcare revenue fell 3%, as growth in Rest of World markets was hampered by some supply interruptions and weaker market conditions, and sales in Europe and the US fell.
Glaxo signed a three-part deal with Novartis in April, under which it will sell the Swiss company its oncology portfolio, acquire Novartis' global vaccines business, and create a joint consumer healthcare business. It expects this deal to close in the first half of 2015, subject to consultation and necessary approvals.
The company said that following this transaction it is confident it will have "substantial opportunity to generate sustainable, broadly sourced sales growth and improved long-term earnings." It is hoping to strengthen its vaccines and consumer healthcare business, and said that upon completion around 40% of its revenues will be generated from products in these areas.
It is expecting the Novartis deal to result in annual savings of GBP1 billion by the fifth year after it closes, with about half of that delivered by year three.
However, it now also intends to save a further GBP1 billion a year over the next three years by restructuring its global pharmaceuticals business, at a cost of GBP1.5 billion. It hopes to deliver half of these savings by 2016.
Glaxo is racing to produce a vaccine for Ebola, even though the development of the drug may be too late to handle the current epidemic. On a call with journalists, Witty said that assuming nothing goes wrong, it fully expects to have the first doses of this vaccine available before the end of the year.
US drug giant Johnson & Johnson is also looking to start testing its Ebola vaccine candidate in January, and Witty said that Glaxo has had a number of discussions with its peer, and is looking for a "sensible, appropriate collaboration" with Johnson & Johnson to tackle Ebola.
Liberum reiterated its Sell rating on the company, saying it remains "concerned about the further risk of underinvestment by cutting selling, general and administrative costs too aggressively."
"We also don't expect global respiratory sales to grow in 2016 as management do, therefore we believe that the dividend in 2016 remains at risk," Liberum said.
Still, shares in Glaxo were trading up 2.8% at 1,380.00 Wednesday afternoon, the second-best performing stock on the FTSE 100 as its core EPS figure beat analysts' expectations.
By Hana Stewart-Smith; hanassmith@alliancenews.com; @HanaSSAllNews
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