One of the less endearing, if not outright annoying, traits of those who make up Wall Street is their tendency to harp on whatever a company doesn't have at the moment. In the case of Big Pharma, good current quarterly results are often waved off with skepticism about generic competition and/or the pipeline. For GlaxoSmithKline (GSK) it looks like the reverse is true. Forget the solid pipeline and good recent Phase 3 results, it's this quarter's bad performance that somehow proves Glaxo isn't a good company.
Second Quarter Results Were Disappointing
Now, it's true that Glaxo's second quarter numbers were uninspiring, as revenue and operating profit both came in a little soft.
Revenue fell 4% this quarter and missed the consensa-guess by about 3%. Sales in the EU were weak (down more than 7% in constant currency) on tough pricing, while U.S. sales disappointed on weaker sales of so-called "tail products" (that is, products in decline, either due to generic competition or more effective/dynamic branded competitors). The company's core respiratory franchise was flat, while CNS, cardiology, and cancer all saw growth. The company's large vaccine business was also down 3% this quarter.
Glaxo's margins were actually okay. Gross margin declined two points, but the company's core operating profit margin of 31% was just slightly higher than analyst estimates.
Good Progress From The Labs
As management noted in its earnings release, the company had scheduled 15 Phase 3 reports for the year. Of those, 12 are in hand and 10 of them have been positive. That's a pretty solid record all on its own.
Importantly, it looks like Glaxo may have two blockbusters on its hands. While the company's respiratory drug candidate Relovair hasn't had the efficacy numbers that investors hoped for, Zephyr (also partnered with Theravance (THRX)) looks like the real deal. Even here, though, the data has been frustratingly inconsistent, and that creates a large range of potential sales outcomes -- anything from a $750 million "nice to have" drug to a $2 billion-plus blockbuster. With Novartis (NVS) and Forest Labs (FRX) having their own challenges with their COPD drugs, this will be an interesting market to watch.
Elsewhere, the data on dolutegravir in HIV was quite a bit more positive -- not only did the drug show nearly 10% better efficacy than Gilead's (GILD) Atripla (in a trial designed to show non-inferiority), but the safety and tolerability profile was much better (2% dropouts versus 10%). This puts the drug at least on a par with Merck's (MRK) Isentress, and the results of this study may have vaulted the sales potential from around $750 million to maybe $3 billion. Keep in mind, though, that this is shared through the company's HIV joint venture with Pfizer (PFE) (called ViiV), which is also partnered with Shionogi.
That's not all. There are still some oncology drug candidates with meaningful potential, as well as the Human Genome pipeline.
Speaking Of HGSI...
As I wrote about a week ago, Glaxo and Human Genome Sciences (HGSI) have found a common ground in a $3 billion-plus deal.
In the relative short term, this deal will give Glaxo improved economics on Benlysta -- the heretofore disappointing lupus drug. Longer term, there is still sizable potential in darapladib as a cardiovascular drug, and some potential in albiglutide as an also-ran competitor to currently marketed GLP-1 drugs from Amylin (AMLN) and Novo Nordisk (NVO), as well as likely-to-be-approved versions from Lilly (LLY) and Sanofi (SNY).
The Bottom Line
With Glaxo lowering full-year guidance and pricing pressures intensifying in Europe, the best short-term advice on the stock may be to avoid fighting the tape. The market is down on this name and if Europe's economic situation gets even worse, investors and analysts may assume even worse price pressure on the company's European business.
Longer term, though, this is a name that interests me. While there is a big spread in the potential revenue of several key pipeline drugs, the assumptions now seem to be on the lower end of that spread, and it wouldn't surprise me if this is a case where the gloomy short-term environment is influencing those numbers down (even though they won't be on the market for a long time). My mid-single digit growth expectations support a mid-$50s fair value, and with a sizable dividend yield, Glaxo could be a name to watch.
Disclosure: I am long AMLN.