GSK's Q3 Sales Down 2%, But Year-to-Date Growth Remains Strong

U.K. pharma giant GlaxoSmithKline (GSK) has reported a relatively flat performance for the third quarter of the year, with total revenue down by 2% year-on-year (y/y) in constant exchange rate (CER) terms, but up almost 1% y/y on a reported basis to £6.8 billion (US$10.7 billion). The bulk of this revenue was derived from pharmaceutical sales, which stood at £5.5 billion over the reported period, down about 1% y/y on a reported basis, and 3% y/y in CER. In consumer health, sales growth was strong, at 7.7% y/y on a reported basis and 4% in CER, well above current market growth rates.

On the expenses side, cost of sales and research and development (R&D) spending were up by 8.2% y/y to £1.9 billion and 10% y/y to £948 million, respectively. Selling, general, and administration (SG&A) expenses fell by 5.2% y/y to £1.96 billion. Operating income as calculated by IHS Global Insight was down by 3% y/y; however, the company managed to register flat net profit growth on a reported basis (down 5% y/y in CER).

In terms of regional-level performance within the pharmaceuticals segment, sales in the United States and Europe were down by 3.8% y/y and 10.7% y/y on a reported basis. However, the full effect of this sales decline was mitigated by strong sales growth in the Asia Pacific/Japan and Emerging markets, which amounted to 10.3% y/y and 17.0% y/y, respectively. A similar pattern was seen in consumer health, where sales dropped by 4% y/y in the United States and 2% y/y in Europe, but increased by 15% y/y in the rest of the world.

Looking at product-level pharmaceutical performance, GSK's respiratory franchise reigned supreme, with sales of £1.7 billion, up 8.3% y/y. Within this franchise, sales were primarily driven by Seretide/Advair (fluticasone + salmeterol), with sales of £1.2 billion, up 7.9% y/y. The second most lucrative franchise was vaccines, which brought in sales of £982 million, up 22.4% y/y. Vaccine sales were driven by a number of products, most notably Hepatitis, with sales of £189 million (up 11.2% y/y); Cervarix, with sales of £48 million (up 71.4% y/y); and Boostrix, with sales of £59 million (up 51.3% y/y). Another franchise that saw strong growth was Cardiovascular and Urogenital, with total sales of £650 million, up 17.7% y/y, boosted by sales of Avodart (dutasteride), Lovaza (omega-3-acid ethyl esters), and Arixtra (fondaparinux sodium), all of which had double-digit growth. Sales growth in oncology was also encouraging, up 15.4% y/y, with a strong performance from Tykerb/Tyverb (lapatinib).

As expected, the metabolic franchise has suffered heavy losses, with sales down by 56% y/y, driven by both Avandia (rosiglitazone) and Boniva (ibandronate sodium) sales declines, which stood at 62.2% y/y and 71.7% y/y, respectively. The anti-viral franchise was also hard hit, with sales down 41% y/y as a result of generic competition to Valtrex (valacyclovir) and the lack of recurring sales of Relenza (valacyclovir), which was boosted last year by the A/H1N1 influenza (swine flu) crisis).

Outlook and Implications

Although these results are somewhat underwhelming, GSK insists that its underlying growth stands at 6% y/y. However, this growth rate only applies when you remove the effects of macro factors such as the healthcare reform in the United States, austerity measure in Europe, and internal factors such as generic competition to Valtrex, the Avandia saga, and the absence of pandemic sales. Although this may provide some reassurance to the market that the company is in good shape, it raises the question of how long the company expects these factors to affect overall growth. On a more positive note, GSK's strong focus on diversification is evident, both in terms of product diversification and regional diversification, with the share of sales from "white pill/Western markets" declining from one quarter to the next. This should in turn provide a strong platform for growth, going forward.

Over the first three quarters, GSK has undoubtedly been plagued by speculation over the future of Avandia, and it now appears that the Avandia controversy is slowly winding down. Last month, the European Medicines Agency (EMA) made the bold move of suspending the marketing authorisation of all products from the Avandia family, after concluding that the benefit-risk profile is not favourable. The U.S. FDA also made a final decision on the drug, ruling that it will "significantly restrict" access to the drug, so that it is only permitted for use in patients with Type 2 diabetes who are unable to control their condition using other drugs such as Actos (pioglitazone; Takeda, Japan). The FDA also ordered a review of the RECORD trial by independent scientists, as well as suspending the TIDE trial, which seeks to compare Avandia with Actos (see United Kingdom: 24 September 2010: EMA Moves to Suspend Avandia MA as FDA Imposes Tight Restrictions on Its Use). The regulatory backlash on Avandia has not been confined to the advanced markets. Regulatory authorities in Brazil, Colombia, Argentina, South Korea, Saudi Arabia, the United Arab Emirates, Bahrain, Egypt, Turkey, India, and most Sub-Saharan African countries have taken similar steps to ban or limit use of the drugs (see Middle East and North Africa: 28 September 2010: Mixed Reactions for Avandia in Emerging and Developing Markets).