Investeringskommentar, Damien Connover, Sector Director, 27/4/2016
Buoyed by strong vaccine sales, GlaxoSmithKline posted first-quarter results slightly above our expectations, but we don’t expect any major changes to our fair value estimate based on the minor outperformance, and we view the shares as modestly undervalued. The steady gains from across Glaxo’s three operating segments of drugs, vaccines, and consumer products along with margin improvement reinforce our conviction in the company’s wide moat.
The corporate restructuring announced with Novartis (gaining vaccines and creating a joint venture in consumer) close to two years ago is starting to bear fruit, with solid margin gains partly due to the increased scale Glaxo achieved. In particular, vaccine and consumer operating margins of 29% (up 700 basis points) and 17% (up 600 basis points), respectively, increases our confidence in Glaxo achieving its long-term margin guidance of over 30% and 20% for the divisions by 2020. While the margin improvement is solid, strong one-time sales phasing for vaccines likely abnormally boosted vaccine sales and margins slightly in the quarter.
Within the drug group (58% of sales), Glaxo posted a 5% gain, in line with our expectations, with declines in respiratory drug sales offset by HIV drug gains. We expect this trend to continue through 2016, followed by an acceleration of increased generic Advair competition in 2017 and 2018, particularly in the U.S. The increased generic competition and lack of a deep pipeline of new drugs will likely translate into close to 3% drug sales growth over the next five years. However, the steady expected sales growth in vaccines and consumer products along with margin improvement should drive 7% annual earnings growth over the next three years, largely in line with consensus expectations. Further, these gains should continue to support a steady dividend, which is looking increasingly secure.
Bulls Say
- Glaxo's next-generation respiratory drugs should help mitigate branded and generic competition to the company's top drug, Advair.
- Outside of the eventual generic competition to respiratory Advair, the company faces only minor near-term patent losses.
- The company's recently launched HIV drugs are gaining market share quickly and carry high margins.
Bears Say
- Even though device patents may hold off generic Advair competition until 2016, these patents are weaker than composition-of-matter patents, which opens the door to generics in the near term.
- Pricing pressure from payers is hurting Glaxo's key respiratory franchise as competition is increasing from products offering similar benefits as Glaxo's key drugs.
- Glaxo's dividend is under pressure with the majority of earnings going to fund the dividend, opening up the risk of a dividend cut.
