What To Expect At GlaxoSmithKline's Q1/2017 Results

| About: GlaxoSmithKline (GSK)

Summary

GlaxoSmithKline will report its Q1/2017 results on 26th April 2017.

I will preview the earnings report in comparison with sell-side expectations to show why I believe Q1/2017 expectations need to be revised down.

Consensus expectations for Q1/2017 sales growth and EPS should be downgraded by 5%.

I will look to any weakness related toQ1/2017 results as a potential entry point.

GlaxoSmithKline (NYSE:GSK) will report its Q1/2017 results on 26th April 2017. In this article, I will preview the earnings report in comparison with sell-side expectations to show why I believe Q1/2017 expectations need to be revised down.

Q1/2017 results

Investors could be disappointed by GlaxoSmithKline's Q1/2017 results:

  • Street expects £7.25B for Q1/2017 revenues, 16% growth over Q1/2016 sales, driven by 13% forex tailwind and 3% organic growth.
  • Street expects £2B for core EBIT (i.e. 27.6% margin), around 30% growth over Q1/2016 core EBIT, helped by around 20% of forex tailwind.
  • Street expects £0.26 for core EPS, around 36% growth over Q1/2016 EPS of £1.17, thanks to 20% of forex tailwind.
  • Investors expect that GSK will reiterate its existing FY17 guidance (i.e. Core EPS growth of 5-7% at constant exchange rates without generic Advair or flat to slightly down with a US generic Advair launch in H2’17).

What sell-side consensus is missing?

I believe Street expectations for GlaxoSmithKline’s first-quarter results are too high because consensus is missing the tough comps which the company faces in comparison with Q1/2016 in terms of profitability.

To explain my expectations, I started from the revenue in Q1/2016 and then I applied reasonable sales growth assumptions to take into account the dynamics of GlaxoSmithKline’s major growth drivers.

Source: My Own Valuation Model

Applying 0% sales growth to GlaxoSmithKline’s Pharma division, 3% growth to Vaccines, 4% growth to Consumer Healthcare and 13% forex tailwind, I estimate 1% sales growth for GSK in Q1/2017, which is 2% below consensus.

The main assumptions behind these estimates are:

  • About the Pharmaceutical division, GlaxoSmithKline will suffer from the erosion of Advair, driven by further pricing pressure in the highly competitive respiratory market, even before the potential approval of Advair generics in USA. In details, I assume -30% growth at constant exchange rates for Advair in Q1/2017 because I believe that GSK have offered further rebates to the PBMs to ensure a good formulary coverage for their respiratory products in 2017 and 2018, in anticipation of the potential approval of Advair generics from Mylan and Hikma.
  • I assume strong growth for Tivicay and Triumeq in Q1/2017 (i.e. 30/40%), as a result of a healthy volume dynamics and a stable pricing environment in the HIV market. A more detailed analysis of my expectations about the HIV market can be found here.
  • About the Vaccines and Consumer Healthcare Divisions, I assume a moderate mid single digit growth, in line with market trends.

To translate my top-line expectations into earnings estimate, I assume some improvement in the profitability for each GSK’s franchises, but despite these bullish assumptions, I found that consensus expectations are unreasonable.

Source: My Own Valuation Model

In details, I assumed:

- GSk’s Pharma EBIT margin up 80 bps, thanks to the strong performance of the HIV franchise which compensates the erosion in the Respiratory Division.

- CHC EBIT margin up 80 bps, driven by further synergies from the integration of NVS and GSK’s Consumer Healthcare franchises.

- Vaccines EBIT margin up 130 bps, driven by an improved product mix and some operating leverage from further synergies for the integration ofthe legacy Novartis’s business.

Putting everything together, I estimate £1.9B for GSK’s EBIT in Q1/2017, which is 5% below consensus and an EPS of £0.245, which is 6% below consensus.

Despite that, I don’t believe GlaxoSmithKline will revise down its FY 2017 guidance, because the issues in this quarter are largely related to phasing, and they aren’t reflecting any weakness in the underlying organic growth of the company.

It’s worth noting that I still believe that GSK’s 2017 guidance is still conservative, as discussed in my previous article.

In particular, on 29th March 2017 Mylan has announced to have received a CRL (Complete Response Letter) from the FDA related to its generic Advair. Mylan has not communicated what have been the main issues and when they expect to receive an approval. This news has increased the probability that Hikma will receive a similar CRL from the FDA for their Advair generic on 10th May 2017. In this scenario, consensus should go up of at least 5%.

Conclusion

In summary, consensus expectations for Q1/2017 EBIT and EPS should be downgraded by at least 5% because Street expectations seem ignoring the strong comps that GlaxoSmithKline is facing this quarter.

Despite that, I like the GSK’s underlying operating performance and I will look to any weakness related to Q1/2017 results as a potential entry point.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Not investment advice

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , Drug Manufacturers - Major, Earnings, United Kingdom
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here