Equity Research; GSK
GSK Q4 and FY2016
- GSK split out its Q4 and financial year 2016 (FY2016) results into i) total results representing overall performance (containing material, unusual or non-operational items) and ii) core results that exclude one off costs, legal charges, asset disposals and goodwill charges. Using the core results, GSK reported FY2016 EPS of 102.4p but on the basis of total results EPS were 18.8p.
- GSK Q4 revenues (£7.58bn) were up 3% but US revenues (+10%) were the star performer, EU revenue growth rose 3% but international revenues (-4%) were poor. This amply demonstrates GSK’s reliance on the US for revenue growth. A similar dependence is seen over FY2016.
- Advair GSK’s main “blockbuster” (a drug with annual sales> US$1bn) for asthma and bronchitis saw sales decline 13% to £1.83bn. Advair is key to GSK’s profit guidance (described below) but is clearly in managed decline.
- HIV remains a reliable growth area for GSK – global sales jumped 25% due to higher demand for Triumeq and Tivicay (both are treatments for HIV in adults).
- Consumer healthcare revenue growth (+2%) at £1.87bn for Q4 was impacted by the sale of the Nigeria beverages (Sept 2016), slower nutrition products, and Indian de-monetisation. Consumer health product markets are saturated the world over as Reckitt Benckiser and Unilever have said.
- GSK has kept its promise of an 80p dividend for FY2016 – and will pay 23p in Q4 as planned. It confirmed the same 80p dividend for FY2017.
- Ahead of the introduction of generic Advair in 2017 GSK expects 5-7% growth in core earnings assuming a 17.5% decline in Advair revenues. However if generic Advair arrives mid 2017 GSK envisages flat or slight decline in core earnings. This is further complicated by the FX rate, GSK revenues are mostly in USD but it reports in sterling. If sterling remains at January 2017 average USD rates for the remainder of 2017 core EPS growth would be 9%.
Conclusion
GSK is a combine of i) Pharmaceuticals (normally a growth area assuming periodic blockbuster drugs ii) Vaccines (lower margin/ steady growth) and iii) Consumer healthcare (increasingly commoditized and price sensitive). The GSK business mix is far lower risk and less pipeline dependent than its peers. GSK keep open the option of a demerger of consumer healthcare or vaccines at some point.
President Trump has said US pharmaceuticals reform is on his agenda. As elsewhere, we are ahead of precise reform proposals or a legislative agenda. The US is the only major pharmaceutical market with unregulated pricing. The key fight will come when the Trump reforms emerge. Only then can we estimate the timing and revenue hit. For GSK, US derived revenues were £10.2bn in 2016 (36.55% group revenue) so this is a worry going forward.
GSK was a major beneficiary of Brexit’s toxic effect on sterling in FY2016. The reverse holds true, there is earnings risk in FY2017 if sterling rallies, generic Advair arrives early and President Trump starts competitive tenders for drug purchases.