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GlaxoSmithKline plc (GSK) declared its fourth quarter and full year 2012 results on February 6, 2013. The results failed to make an impact on the price of its ADRs in the U.S. stock market despite the company returning £6.3 billion to shareholders. Despite average results, the markets felt that the company had failed to deliver what was expected from a big pharmaceutical like GlaxoSmithKline.

There has been some positive news indicating that the company's R&D operations are delivering results but it seems that the market is sort of immune to what is going on the company. There has been negative news as well.

A Brief Look at Fiscal Year 2012 Results

Revenue was down by 1% - $42.02 billion from $42.56% in prior year. Net income dropped from $8.2 billion to $7.54 billion. In fact, both revenue and net income have been going down since 2009. Total revenue in 2009 was $45.81 billion and net income at $8.93 billion. Earnings per share stood at $1.477 and the company expects a growth of 3-4% in core EPS.

Sales of the company's flagship drug Advair, which accounts for 20% of sales, dropped by 3%. Advair is a combination preparation (fluticasone/salmeterol ) that is used in the management of asthma and chronic obstructive pulmonary disease (COPD). GSK's all other offerings dropped either 3% or less. Overall pharmaceutical sales dropped by more than 2%.

Busy Year Ahead

GlaxoSmithKline filed 6 new drugs in 2012 and expects Phase III data on 14 "assets" including 9 new drugs and vaccines in 2013/2014. In addition, the company plans to continue its focus on its healthcare brands and emerging markets and plans to start a strategic review for its energy and sports and health drinks, Lucozade and Ribena. According to a Reuters report, the company will decide the future of these by the middle of this year.

GSK's two COPD drugs are up for approval. While regulatory application for Breo/Relvar, seen as a next generation medication of the blockbuster Advair, was filed in July 2012, the company announced last week the acceptance for further review of its application for once-daily LAMA/LABA combination medicine (UMEC/VI - proposed trade name: ANORO ELLIPTA) for COPD. In both medications, GSK is partnering Theravance, Inc. (THRX).

The other drugs that are in different phases of development and clinical trials include dolutegravir (HIV), albiglutide (diabetes), trametinib (melanoma), and dabrafenib (also for melanoma).

Dolutegravir had shown positive and encouraging data in July 2012. In trials to show non-inferiority, the drug showed better efficacy as compared to Atripla of Gilead Sciences (GILD). In addition, its safety and tolerability profile was also better with 2% dropouts as compared to 10%. This places the drug in a comparable position with Merck & Co's (MRK) antiretroviral drug, Raltegravir (brand name Isentress). It is important to note here that the drug is being developed by ViiV Healthcare Ltd., GSK's joint venture with New York-based Pfizer Inc. (PFE) and Japan's Shionogi & Co. Last week, the company announced that the drug will get a speedier review by the USFDA.

However, the company suffered a setback in the case of drisapersen, a drug in clinical trial stage for treatment of Duchenne muscular dystrophy (DMD). Four DMD patients being treated with drisapersen had to be hospitalized due to kidney toxicity and thrombocytopenia (a blood disease marked by abnormally small number of platelets in the blood) and an unspecified number due to proteinuria (presence of excess protein in urine).

GSK -Partner and Competitors

GSK is a global healthcare company engaged in discovery and development, manufacture and marketing of a wide range of pharmaceutical products, including vaccines, over-the-counter medications and healthcare consumer products. The company core area of operations include therapeutic drugs for respiratory, cardiovascular, central nervous system, urogenital, and metabolic conditions and anti-virals, including human immunodeficiency virus (HIV), anti-bacterials, and dermatologicals and oncology and emesis and vaccines.

  1. Partners

Theravance Inc., the company with which GSK is partnering for development of COPD drugs, is a biopharmaceutical company that focuses on discovery, development and commercialization of small molecule medicines for respiratory disease, bacterial infections, overactive bladder, and gastrointestinal disorders. A mid-cap company, THRX has only one approved drug, Vibativ in the market. Apart from COPD drugs in partnership with GSK, the company has five pipeline programs in different phases of development for treatment of bacterial infections, CNS/pain and gastrointestinal motility dysfunction.

Pfizer, the company with whom GSK has a joint venture for development of Dolutegravir for treatment of human immunodeficiency virus (HIV), can be considered a competitor of sorts. Pfizer is a research-based biopharmaceutical company and with a market cap of $201.51 billion, double the size of GSK valuation wise. Although its gross and operating margins are 9 and 5 basis points (respectively) higher, Pfizer's EPS is $1 lower than GSK's.

  1. Competitors

GSK's major competitors include Merck & Co and Novartis (NVS). In as far as financials are concerned, it compares well with both on all counts except on the revenue front.

Ticker

GSK

MRK

NVS

Market Cap: $ billion

106.27

129.9

164.12

Qtrly Rev Growth (yoy):

-0.03

-0.05

0.01

Revenue (TTM): $ billion

42.48

47.27

57.5

Gross Margin :

0.72

0.66

0.68

EBITDA : $ billion

13.8

17.77

16.88

Operating Margin :

0.28

0.23

0.21

Net Income : $ billion

7.34

6.66

9.5

EPS :

2.94

2.16

3.89

P/E :

14.97

19.75

17.43

PEG - price/earnings to growth ratio

2.39

3.53

2.51

P/S :

2.51

2.76

2.83

Source: finance.yahoo.com

Bottom Line

COPD has been GSK's mainstay and as mentioned earlier in the article, Advair forms a large percentage of its revenue and in turn, profits. In addition, GSK also has a drug or an ongoing clinical program in all metabolic pathways relating to treatment of COPD. However, that does not guarantee GSK's position as Novartis is already vying for entry in this therapeutic space. Forest Laboratories (FRX) is another company looking to challenge GSK's supremacy in this nonreversible lung disease.

GSK's revenues, already under pressure, faces another challenge by way of its medications going off-patent in the coming months/years. It may become difficult for GSK to maintain its revenue stream in face of these challenges.

With regulators becoming stricter and insisting on better risk-to-reward (benefits vs. side effects) over existing drugs, there is a lot that can go wrong with pharmaceutical companies.

While the risk is there of failure to improve drugs such as Benlysta and Phase III trials of high profile drugs, the company has a good record of delivering on late stage trials and also of culling failures quickly.

There is also no reason to disbelieve future guidance of a 3-4% growth in core EPS issued by a company that has returned £6.3 billion to its shareholders despite dropping revenues. Such an action indicates belief by the management in the company's future performance. If you have a long term horizon like me, I would buy GSK at every dip.

Source: GlaxoSmithKline - Against All Odds