GlaxoSmithKline’s (GSK) CEO Andrew Wittyon Q2 2014 Results – Earnings Call Transcript

July 23, 2014 6:00 pm | By More

Source: Seeking Alpha

 

GlaxoSmithKline (NYSE:GSK)

Q2 2014 Earnings Conference Call

July 23, 2014 09:00 AM ET

Executives

Andrew Witty – CEO

Simon Dingemans – CFO

Analysts

Graham Parry – Bank of America Merrill Lynch

Tim Anderson – Sanford Bernstein

Alexandra Hauber – UBS

Andrew Baum – Citigroup

Mark Clark – Deutsche Bank

James Gordon – JPMorgan

Steve Scala – Cowen

Nicolas Guyon – Morgan Stanley

Seamus Fernandez – Leerink Swann LLC

Andrew Witty

Good afternoon, welcome to today’s call to everybody. GSK’s performance in the second quarter provides evidence of the very significant changes are taking place in the Group’s portfolio. As you know our strategy over the last six years has been to fundamentally reshape the Group and our R&D operations in particular, so that we can replace the significant sales we lost to generics and ensure that the Company can succeed in an environment where our biggest product Advair faces increasing competition.

It’s clear we are now in that period of transition and this is a critical moment to ensure we made the right strategic choices particularly around investment for the long-term health of GSK in the new products and this is reflected in some of the decisions we have taken during the quarter.

Group sales for the quarter declined 4% to £5.6 billion, largely driven by lower sales in the U.S. where we are seeing earlier and more significant generic competition to Lovaza than expected and continued pricing and contracting pressure in the respiratory market including for Advair. However, while Advair sales are now likely to continue to decline, we expect new respiratory products Breo, Anoro and Incruse to generate new sales growth. Already we are seeing some recovery in our overall respiratory volume share as new launches progress albeit at lower price points. These assets together with the six other respiratory products in development will diversify and strengthen our respiratory portfolio and we remain confident we can maintain our leadership position in this therapy area well into the next decade.

Outside the U.S. performance is more positive with emerging market sales up 11%, driven by a very strong vaccine performance in the quarter, up 26%. Europe with flat sales also performed strongly in a tough trading environment with continued negative price pressure. Japan was down 7% in the quarter, reflecting destocking following a consumption tax increase and sales for the year-to-date are up 5%.

I was particularly pleased by the performance of our HIV business, the healthcare where sales grew 13%. This has been driven by the extremely strong launch of Tivicay, our new integrase inhibitor which is on course to be one of our best launches so far.

As flagged in the last quarter, our consumer healthcare business has been affected by some supply interruptions to several brands particularly in the U.S. and Europe. This led to sales decline of 4% in the quarter. The supply situation is beginning to improve and for the year we expect total consumer sales to be broadly flat. Strategically we have decided to maintain support foreign investment in our substantial portfolio of new product launches as this is essential for the future health of the company. Ongoing investment behind these launches combined with lower sales led to earnings per share down 12% in CER terms. Taking all factors into account, it is unlikely we will now deliver sales growth for the year and we now expect full year core EPS on a constant exchange rate basis to be broadly similar to last year. The dividend is up 6% this quarter to £0.19. So we are clearly in the part of our long-term investment cycle where we are seeing the delivery of significant new product flow from R&D. What’s critical is for us to continue to stay focused on ensuring the launches of the first six products are successful.

Looking ahead I believe this existing strength will be supplemented both by further delivery from the pharmaceutical pipeline and the anticipated completion in the first half of 2015 of the three part transaction with Novartis that we announced in April.

Opportunities in the pipeline for our core therapy areas remain extensive. In respiratory, we filed Breo for asthma this quarter and expect to file our first respiratory biologic the anti-IL-5 monoclonal mepolizumab in the second half of the year. We expect to be first in class in that particular case. We also began phase III studies for the first triple combination product for COPD in the quarter. In HIV, we received a positive CHMP opinion for our combination HIV product Triumeq and we expect an FDA decision on this asset in the second half of the year. Overall, we have over 40 new molecular entities in late stage development and across the R&D pipeline we believe there are total of 30 drugs with the potential to be first in class in areas such as immuno-inflammation, epigenetics and cardiovascular disease.

This should lead to a regular flow of new product introduction over the next few years. The three part transaction with Novartis provides the opportunity to reshape the group and strengthen our positions in the long-term growth businesses of vaccine and consumer healthcare. Post completion these businesses will represent around half of group revenues over the coming years and should be capable of generating mid-single-digit sales growth on a consistent basis.

To give you more details on the quarter, now I would now like to handover to Simon Dingemans, the CFO.

Simon Dingemans

Thanks, Andrew. This has clearly been a challenging quarter, one that has made us even more convinced that our strategy to build a more balanced set of growth drivers across the group is both the right one but also one that is showing visible progress despite the significant headwinds we are currently facing. Clearly the most significant step forward in the quarter was the agreement with Novartis of a major three part transaction which we believe accelerates our strategy significantly and strengthens the long-term durability of our key franchises. We continue to expect the transaction to complete in the first half of 2015 subject to regulatory and shareholder approval.

More immediately, our core results in the second quarter are particularly impacted by the shift in U.S. pricing and contracting that we have been discussing with you for some time. This is a specially effected Advair which has now seen a step change in its outlook exacerbated net out of the transition to our new respiratory portfolio is underway.

Reported sales for the quarter were also impacted by a number of other factors included supply interruptions impacting several parts of our consumer business which we now believe will take somewhat longer to fully resolve than we originally anticipated and earlier and sharper generic competition to Lovaza. The impact of these issues on the quarter (most) [ph] important momentum in other parts of the business. We continued to deliver strong growth in several strategic areas where we’d be investing in emerging markets the vaccines especially in the emerging markets. And our oncology portfolio also delivered further progress.

We’ve continued to see greater stability from the business in Europe and our portfolio of new products is starting to make a material contribution with Tivicay, Mekinist and Tafinlar are doing particularly well and Breo and Anora are beginning to build. While the respiratory launches are clearly developing more slowly, we’ve always expected that it would take time and investment to build them to their full potential compared to the relatively rapid uptake of a more special allergy launches.

In the mean time looking at the second half of 2014 and as always there are a number of variables that increase the degree of uncertainty caused during the quarter including stocking patents and securing and delivering on large tenders and at the same time we expect Advair in the U.S. the consumer supply issues in Lovaza to continue to impact our reported growth. As a result and given where we are year-to-date we no longer expect to grow sales this year.

We continue to manage our cost base tightly and still expect to deliver at least £400 million of incremental restructuring savings during 2014, including the benefit of the structural savings of £200 million I have previously highlighted. And it looks likely that these will now fall into Q3.

As we’ve discussed in the past our plan has always been for most of these savings and other cost control measures to be reinvested behind our new launches and other growth opportunities as well as in new capacity and technology for our manufacturing operations.

Continuing with these investments is key to delivering the full potential of our pipeline and securing the future growth drivers for our key pharma vaccines in consumers businesses. As a result given our revised sales expectations we now expect full year core EPS to be broadly similar to 2013 on a constant currency basis and ex-divestments.

Before commenting on the detail of the Q2 core performance, I should point out that the sustained strength of sterling against most currencies is negatively impacting our reported top line growth and given the large proportion of our manufacturing and R&D cost base is located in the UK, the negative impacted currency is even more pronounced on our earnings, it’s also up impacting our sterling cash flows.

We currently estimate the full year adverse impact of currency if rates remain at their current levels to be around 7% on the top line and around 12% core at EPS level. This is a bit lower than the first half negative currency impact in part because in the second half of last year we had exchange losses of around £63 million.

Turning to the quarter, group sales down 4% reflecting the challenges we’ve already discussed. And in particular in the U.S., US pharma and vaccine sales are down 10% in the quarter and this primarily reflects a 21% reduction in the underlying performance of Advair.

Price pressure remains significant with price impacting Advair sales in the quarter by 7%. Volume reductions of 14% reflected the contracting changes we discussed at Q1, but also the early impact of our new launches which together have adjusted Advair on to a new trend line that would likely see it continue to decline in sales over the next two to three years while we transition to our new respiratory portfolio.

Oncology sales in the U.S. continues to do very well growing 42% in the quarter. In Europe pharma and vaccine and sales were flatter than last year despite increasing competition in the respiratory market particularly. Growth from oncology products Avodart and [indiscernible] all help to offset lower Seretide sales which were down 4% mainly due to price reductions. Vaccines down 5% due in part to a number of shipments to several products that are now expected in the second half.

In emerging markets total sales of our pharma and vaccines business grew 11% or 15% excluding the China effect. Sales in China were down 25% including the established products, showing further stability in the quarter-on-quarter trend that we’ve reported on over the last several quarters. Growth in the region was led by 26% growth in vaccines with significant tender wins for Synflorix and pediatric vaccines.

In Japan sales were down 7% as a result of wholesalers destocking following their Q1 stock build ahead of a tax increase and year-to-date Japan is up 5% despite a weaker allergy season.

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