US competition overshadows GSK progress
RESULTS for GlaxoSmithKline in 2016 were ahead of what the market was expecting, with sales up 6 per cent and core operating profits up 14 per cent.
Unfortunately, worries about the future meant the shares still struggled on the day of the announcement.
Loss of patent protection, allowing rivals to develop competing drugs, is the bane of all pharmaceuticals companies.
GSK has seen several patent expiries, and current fears involve the blockbuster Advair drug, which recently accounted for 18 per cent of group revenue.
Advair, an asthma treatment, is already seeing competition in Europe, and generic alternatives look set to turn up in the US in the near future. If competition emerges in mid-2017 it could knock 45 per cent off the drug’s US sales this year.
Fortunately, GSK hasn’t been standing still as the patent cliff loomed.
The group’s laboratories have been hard at work and GSK’s suite of new drugs is growing rapidly.
HIV treatments are an area of strength, with the Tivicay/Triumeq treatment generating £2.7billion of sales in 2016. However, outgoing CEO Sir Andrew Witty has also been working hard to shift the group’s focus away from multi-billion dollar drugs to more reliable sources of revenue. Increasing contributions from the consumer healthcare and vaccines divisions, which now account for more than 40 per cent of group sales combined, should reduce reliance on blockbuster drugs and strained western healthcare budgets. It’s a sensible strategy and helps to support the dividend (the current yield is about 5 per cent).
GSK has also been busy streamlining its operations, with cost savings of £3billion so far. That is boosting margins across all three major divisions.
There are wider economic tailwinds blowing in the group’s favour as well. Huge international sales mean GSK has been a beneficiary of the weaker pound, and current year’s earnings by as much as 9 per cent. Overall, we think GSK is in a significantly improved position to where it was a few years ago. The diversified model is firmly established, while new drugs are performing well.