We wrote about GlaxoSmithKline (GSK) a few weeks back and stated that we remained watchful of the firm's dividend. Glaxo has plenty of debt on its balance sheet so the $4 billion dividend it needs to shell out every year will continue to come under scrutiny. We have consistently stated that Glaxo's dividend is safe as long as it can keep its momentum going. Furthermore, now that we have year-end numbers, we have more clarity as to where we believe earnings are headed in fiscal 2019.
In saying this, there is still some uncertainty regarding how much sales will be affected by the pending sales drop-off in Advair. The fall-off here though has been earmarked for some time now meaning Glaxo has had ample time to pivot. We can see solid fundamentals for example in areas such as HIV, Vaccines, Respiratory and obviously the pipeline.
In 2019, top line sales grew by 5% and adjusted earnings per share increased by 12%. These numbers really helped free cash flow numbers in 2018. Free cash flow grew by 60%+ on a rolling year basis. This growth obviously took a lot of pressure off that multibillion-dollar dividend payout.
As long as the forward-looking fundamentals remain intact, we will remain long this stock. Here are three areas we continue to remain encouraged about.
- Shingrix led the way in the vaccines segment with sales of 784 million GPB in fiscal 2018. Management expects growth of about 7% in this key segment per year going forward. That growth (along with fast-growing Shingrix) will come from both the market and the firm's meningitis portfolios. In the meningitis segment, sales of the Bexsero and Menveo vaccines actually fell in the fourth quarter which was discouraging considering how well they did in Q3. Management stated that sales of both these vaccines should come back roaring to life in 2019. Therefore, the first few quarters of the new year will be very important for the meningitis portfolio as we need renewed growth here for management's growth expectations to come to fruition.
- There will also potentially be plenty of volatility in the HIV portfolio so we have to be watchful of any potential adverse trends here. Sales increased by 6% thanks to impressive numbers by Tivicay, Triumeq and Juluca. However, investors saw again how competitive this market is in Q4 with sales of Epzicom/Kivexa suffering badly. Furthermore, competition for Tivicay and Triumeq is expected this year which is why investors will be looking to the firm's next-generation drugs to offset some of the expected declines here.
- Due to the Advair situation though, most investors will be very much keeping their eyes on the Respiratory division and for good reason. A generic competitor to Advair has already been approved in the US so significant market share will most likely be lost in this market this year. Trelegy and Nucala performed well in the fourth quarter and we maintain Glaxo (due to its experience in the key segment) should be able to offset Advair losses to a large degree here. Why? Because if Glaxo's next-generation drugs in Respiratory have the same complexity as Advair for example, generic versions will find it difficult to attain rapid approval.
Therefore, to sum up, although we do not see any alarm bells at present, Glaxo operates in a sector where things change at a rapid pace. With respect to the pipelines, it is all about the numbers. The firm now has 16 candidates in the oncology segment which again brings diversification to the table. We will remain watchful of trends but there was nothing in Q4 that would make us doubt the stability of the dividend or potential capital appreciation of the share price from here. Remaining long.
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Disclosure: I am/we are long GSK. 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.