Source: Seeking Alpha
Q2 2014 Earnings Conference Call
July 23, 2014 09:00 AM ET
Andrew Witty – CEO
Simon Dingemans – CFO
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
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.
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.