GlaxoSmithKline rebound gathers pace as underlying profit jumps 14%

Improving margins and growing demand for new drugs lifted GlaxoSmithKline’s underlying earnings a better-than-expected 14 per cent in the first quarter, keeping it on course to achieve a promised return to growth in 2016.

The results help vindicate the claims of outgoing chief executive Andrew Witty that the British drugmaker is on the road to recovery, with demand for new respiratory and HIV medicines offsetting a decline in sales of ageing lung treatment Advair.

Mr Witty, who bows out in March next year, told reporters he expected a successor to be named towards the end of 2016. Both internal and external candidates are being considered and the choice of new CEO is seen signalling GSK’s future direction.

Mr Witty has been under pressure over the last three years as profits have flagged and some investors have questioned his focus on consumer health products, which range from headache pills to toothpaste, leading to calls for a break-up of GSK.

But Wednesday’s results suggest GSK is delivering on a pledge to stabilise its core pharmaceuticals business and boost profitability in its non-prescription operation, which was recently expanded through a $20 billion three-way asset swap with Novartis.

"A rebound has started, if measured from the rather deep hole that had been dug," said Bernstein analyst Tim Anderson, who rates the shares market-perform.

Consumer profit margins jumped to 17 per cent, from 12 per cent in the previous three months, and Mr Witty said the company could well achieve its target of 20 per cent or more ahead of its current 2020 goal.

Vaccines also did well, helped by some early orders from governments, while Mr Witty predicted the core respiratory medicine business, where GSK is market leader, would grow this year, driven by new drugs like Breo, Anoro and Nucala.

Sales, in sterling terms, rose 11 per cent to £6.23 billion in the three months to March, generating core earnings per share (EPS) of 19.8 pence, helped by a weaker pound.

Analysts, on average, had forecast sales of £6.01 billion and core EPS, which excludes certain items, of 17.9p.

GSK also said it believes it has proved that raising the ethical bar on marketing practices doesn’t necessarily reduce competitiveness.

Mr Witty said the better-than-expected first quarter results coincided with a period where the entire group had operated under a new policy that bans payments to doctors who speak on behalf of GSK.

“It convinces us that the moves we’ve made are both good for our business and also good for improving the reputation of the industry,” Mr Witty told reporters.

GSK, which was fined nearly $500 million in 2014 for bribing doctors in China, is the first drug company to implement such a broad clampdown on payments to prescribers and competitors are watching closely to assess the commercial fallout. In China,

GSK’s business there is still struggling, with sales down 28 percent in the first quarter, due to disposals of some products and lower prices, but Witty said he expected GSK to return to growth in China in the second half of 2016.

Overall, GSK said it expected 10 to 12 per cent growth in 2016 core EPS at constant currencies and confirmed that the dividend, one of the stock’s main attractions with a yield of nearly 6 percent, would be held steady through 2017. – Reuters