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Glaxo has taken a few hits during 2010
During the downturn pharmaceutical giants like GlaxoSmithkline (LON:GSK) lived up to their reputations as defensive investments. The issue now is whether meaningful top-line growth can be achieved. With a sound product pipeline Glaxo has shown confidence in its future prospects by increasing dividends despite recent one-off charges.
It is fair to say that Glaxo has taken a few hits during 2010. These included legal charges – related to product marketing, product side-effects and plant manufacturing issues - and restructuring costs.
As such GSK produced a loss in the second quarter after one-off charges but such set backs are part of the landscape in the pharmaceutical industry. The long-term picture looks sound as the group appears set to return to revenue growth in 2012 on the back of new products and the recovering global economy.
The key drivers for higher profits at Glaxo are emerging markets, an ageing population and the product pipeline. This is counterbalanced by increased regulatory and litigation risks as well as more stringent Western health budgets due to austerity measures.
The emerging market potential is long-term in nature as although these markets are growing rapidly they represent about 14% of global pharma sales at present. This is not least because increased pharmaceutical spending often occurs when consumers have higher disposable income as is the case in developed markets.
Despite difficult economic conditions global pharmaceutical sales did increase from £468bn in 2009 to the figure of £476bn in 2010 – growth of 1.7%. Key events in 2010 included the implementation of US healthcare reforms and with price cuts for the industry. Government cut backs were also felt across the public sector to include health spending and are ongoing.
Turning to GlaxoSmithKline’s 2010 results and the picture is one of flat revenue and with earnings and cashflow hit by one-off charges. However, while reported sales were flat if pandemic products and the drugs Avandia and Valtrex were excluded sales would have been up 4.5%. This is relevant because pandemic drugs fluctuate while Avandia is seeing difficult sales on health concerns.
Earnings per share were hit by £4bn of legal costs but excluding this, and restructuring charges, EPS would have been 120.7p; albeit still down on 2009. Free cash flow was also hit by charges but before legal settlements would have been up on 2009 at £6.5bn. Good cashflow has enabled GSK to reduce its net debt over the last two years despite increasing the dividend payout.
Clearly Glaxo has had its challenges in recent years but the dividends from restructuring efforts, an improvement in the global economy and good product pipeline developments have given investors’ confidence. While the company is unlikely to return to sales growth this year it should do so by 2012 and in the meantime the stock is underpinned by a dividend yield of over 5%.
This article was produced by Senior Research Analyst Andrew Latto.
