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Glaxo First-Quarter Net Rises on Gain From Quest Stake Sale

The headquarters of GlaxoSmithKline Plc stand in Brentford. Source: GlaxoSmithKline Plc via Bloomberg
The headquarters of GlaxoSmithKline Plc stand in Brentford. Source: GlaxoSmithKline Plc via Bloomberg

GlaxoSmithKline Plc, the U.K.’s biggest drugmaker, reported a 14 percent increase in first-quarter profit, helped by a gain from the sale of its stake in Quest Diagnostics Inc.

Net income rose to 1.53 billion pounds ($2.53 billion) from 1.34 billion pounds in a year earlier, London-based Glaxo said in a statement today. Earnings excluding reorganization costs totaled 32.2 pence a share. Analysts predicted a profit of 31.6 pence a share on that basis, according to the average of 12 estimates compiled by Bloomberg.

Profit increased even as the Valtrex antiviral drug faced generic competition and Glaxo lost influenza-related sales after the end of the flu pandemic in August. Revenue from the Avandia diabetes medicine plunged after Glaxo stopped promoting it worldwide because of an increased risk of heart attacks.

“They had a tough quarter, with quite a few headwinds, but revenue growth in emerging markets, Japan, consumer health care was very nice,” Navid Malik, a drug-industry analyst at Matrix Corporate Capital in London, said today in a phone interview. “We will be seeing better EPS growth going forward this year.”

Glaxo rose 26 pence, or 2.1 percent, to 1,286.5 in London trading. The stock has returned 12 percent in the past year including reinvested dividends, compared with an 8.9 percent return for the Bloomberg Europe Pharmaceutical Index.

Revenue Drops

Glaxo disposed of its stake in Quest in February, generating a profit of 246 million pounds after tax in the quarter. The drugmaker also sold its U.S. and Canadian rights to the Zovirax cream against herpes to Mississauga, Ontario-based Valeant Pharmaceuticals International Inc.

Revenue fell 10 percent to 6.59 billion pounds, in line with the average analyst estimate of 6.6 billion pounds.

Sales of pandemic-related products, Valtrex and Avandia plunged to 140 million pounds from 1.13 billion pounds a year earlier, the company said. Excluding those medicines, overall sales rose 4 percent in the quarter.

“GSK is making good progress against our strategic priorities and we had a very positive start to the year this year,” Chief Executive Officer Andrew Witty said on a conference call with reporters. “We are continuing to see good underlying sales growth momentum, driven by growth from a broad range of businesses that we’ve been investing in in the last three years.”

Consumer Health-Care

Consumer health-care sales rose 7 percent to 1.32 billion pounds, led by products such as Sensodyne toothpaste. Pharmaceutical sales in emerging markets grew 23 percent to 830 million pounds. Revenue in Japan jumped 53 percent to 465 million pounds, helped by the Cervarix cervical-cancer shot.

Total vaccine sales, excluding pandemic products, climbed 5 percent to 753 million pounds.

Revenue from pandemic-flu products sank 98 percent to 14 million pounds. The Valtrex antiviral drug, which has faced competition from generic versions since November 2009, recorded a 49 percent drop in sales to 90 million pounds. Avandia sales tumbled 79 percent to 36 million pounds in the quarter.

“Given the generic washout is now broadly complete and Avandia sales are declining, we now see a stable baseline from which GSK can grow its revenues,” Matrix’s Malik wrote in a note to clients yesterday. He recommends buying Glaxo stock.

Benlysta’s U.S. Prospects

Three Glaxo products have been approved this year, including Benlysta, a therapy for the auto-immune disease lupus that was approved by U.S. regulators in March. “The initial feedback we are getting from the marketplace in the United States is very encouraging” for Benlysta, Witty said.

Since taking the helm of the company in 2008, Witty has been reorganizing Glaxo’s research and development, building up its vaccines, emerging-market and consumer health-care businesses and selling assets that aren’t related to its main operations. He has avoided large acquisitions, focusing on smaller to medium-sized deals such as the $2.9 billion purchase in 2009 of closely held U.S. drugmaker Stiefel Laboratories Inc.

“The disposal of non-core assets is enabling us to release value for the business,” Witty told reporters today. Glaxo continues to look for “bolt-on acquisitions” to further expand in consumer health care, emerging markets and vaccines, he said.

“We may do some” such deals, “but I wouldn’t expect to do too much,” Witty said. There are “relatively few and pretty difficult to find” candidates that would make sense for Glaxo to buy at acceptable prices, he told reporters. The company has “zero interest in very big transactions.”

Share Buyback

Glaxo in February announced its first share buyback since 2008 in a bid to reassure investors that expenses for investigations and lawsuits are under control.

The company posted a loss in the fourth quarter last year because of legal costs tied to a U.S. investigation into sales practices, as well as product-liability cases related to Avandia. Glaxo said today that it’s responding to a subpoena from the U.S. Department of Health and Human Services Office of Inspector General regarding the marketing and promotion of the Lovaza treatment for heart disease.

The level of legal provisioning is “sufficient for what we believe to be our liabilities,” Witty said. He declined to comment on the U.S. subpoena beyond saying the company will “dig into” what led to it.

Stock buybacks this year will be at the “top end” of the 1 billion pounds to 2 billion pounds that the company announced in February, Glaxo said. The drugmaker raised its first-quarter dividend 7 percent to 16 pence a share.

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