Glaxo's 3Q Earnings Hit by Avandia Charges

GlaxoSmithKline reported third-quarter results that largely met our expectations, though earnings fell faster than sales

Damien Conover, CFA 22 October, 2010 | 9:15AM

GlaxoSmithKline (GSK) reported third-quarter results that largely met our expectations, and we don't anticipate any changes to our fair value estimate. Total sales fell 2% operationally versus the prior-year period as generic competition to antiviral Valtrex and lower sales from diabetes drug Avandia weighed on results. Earnings per share fell quicker than sales--6% year over year--largely because of inventory-impairment charges surrounding Avandia. Going forward, we expect earnings growth will largely mirror sales growth as the company's cost-cutting efforts mitigate the patent losses on high-margin drugs and increases in research and development spending.

Generic competition seen in the quarter will probably continue into 2011. The company's top drug, Advair for respiratory disease, increased 5% year over year in the quarter as generic launches are yet to materialise. While a key patent for Advair expired in September, the complexities of the drug's inhaled delivery combined with longer-term patents on the delivery device have kept generics at bay. However, we expect generics will find a way around weak device patents and launch in 2011.

Glaxo continues to reinvest for the long term. While sales and marketing costs as a percentage of total sales fell more than 100 basis points year over year, increases in research and development largely offset the gains. We believe Glaxo is taking the correct approach by investing in the development of innovative drugs and funding these costs by cutting out inefficiencies in administrative and marketing expenditures.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
GlaxoSmithKline PLC1,663.40 GBX-0.10

About Author

Damien Conover, CFA  is an equity analyst and associate director at Morningstar.

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