GlaxoSmithKline's Q3 sales drop 13 percent; mulls IPO for ViiV Healthcare shareholding

GlaxoSmithKline said Wednesday that third-quarter sales slipped 13 percent year-over-year to 5.6 billion pounds ($9 billion), missing analyst forecasts of about 5.7 billion pounds ($9.2 billion), as revenue from prescription drugs was affected by "changed dynamics" in the US respiratory market. Sales in the company's pharmaceutical unit fell 4 percent on a constant exchange rate basis to 3.7 billion pounds ($5.9 billion), with revenue from vaccines flat at 922 million pounds ($1.5 billion).

"The impact of formulary and contract changes we have seen this year to Advair have been greater than we anticipated and directly affected our US sales performance in the quarter," commented CEO Andrew Witty. The executive noted that as a result of changes in the US respiratory field, along with the previously announced deal with Novartis, GlaxoSmithKline will undertake a restructuring programme aimed at realising annual cost savings of 1 billion pounds ($1.6 billion) over the next three years, with around 50 percent delivered in 2016. Witty said that the restructuring will "of course...affect jobs worldwide," but he suggested that the total number of staff in the UK "will not be going down."

Under the transaction with Novartis, GlaxoSmithKline will divest its oncology assets to the Swiss drugmaker, while buying the former's vaccine unit. In addition, the companies will create a consumer health joint venture (JV). GlaxoSmithKline said that following the deal, Moncef Slaoui, formerly chairman of global R&D and vaccines, will take over the vaccines unit, while Emma Walmsley will become CEO of the consumer health care JV. Meanwhile, Abbas Hussain, previously head of emerging markets and the Asia-Pacific area, will be appointed to lead the global pharmaceutical business, with Patrick Vallance leading R&D for medicines.

Witty added that GlaxoSmithKline will also explore an initial public offering (IPO) of a minority shareholding in ViiV Healthcare, which the company created alongside partners Pfizer and Shionogi. "The business has made very significant progress in both R&D and commercial execution, culminating in the recent successful launches of Tivicay and Triumeq," Witty remarked, adding that the move "will provide greater visibility of the intrinsic value we see in its currently marketed assets and future pipeline."

According to Witty, ViiV is on track to record profit of 1 billion pounds ($1.6 billion) this year, with the unit posting third-quarter sales of 373 million pounds ($600 million), up 8 percent year-over year. The executive suggested that an IPO for the business, in which GlaxoSmithKline owns an 80-percent stake, was unlikely before 2016. Jefferies analysts said the division has a value of about 17 billion pounds ($27.3 billion).

GlaxoSmithKline reported third-quarter sales of 1.4 billion pounds ($2.3 billion) for respiratory products, a decline of 14 percent versus the prior-year period, including a 19-percent drop in Advair revenue to 976 million pounds ($1.6 billion). The product's sales fell by 30 percent year-over-year in the US to 441 million pounds ($709 million), while revenue from Europe and Japan dropped by 9 percent and 13 percent, respectively, to 314 million pounds ($505 million) and 54 million pounds ($87 million). Meanwhile, sales of Breo Ellipta, which was cleared last year in the US and Europe for the treatment of chronic obstructive pulmonary disorder, totalled 15 million pounds ($24 million).

According to GlaxoSmithKline, quarterly sales of pharmaceutical and vaccine products in the US fell 10 percent on a constant exchange rate basis to 1.3 billion pounds ($2.1 billion), while revenue in Europe declined 2 percent to 972 million pounds ($1.6 billion). Meanwhile, sales in emerging markets climbed 12 percent versus the year-ago period to 799 million pounds ($1.3 billion). The company added that net income in the quarter reached 401 million pounds ($645 million), down from 969 million pounds ($1.6 billion) in the same period of 2013.

Commenting on the results, Leerink Research analyst Seamus Fernandez said "Breo sales continue to disappoint in the face of declining Advair sales and the prospect of substitutable Advair generics as early as mid-2016." However, Richard Hunter of Hargreaves Lansdown suggested that the results could represent a "turning point" for GlaxoSmithKline. "The drive towards containing costs is also in evidence, whilst the company anticipates significant savings as a result of the restructure," Hunter remarked, adding "in the medium to long term, [GlaxoSmithKline] is also predicting a potentially lucrative pipeline, which should underpin prospects."

Witty conceded that "2014 has been a difficult year, a challenging year, but it hasn’t been a strategically destabilising year at all." Last month, a Chinese court fined GlaxoSmithKline 297 million pounds ($477 million), after finding the company guilty of bribing non-government personnel. "I’m confident about the strategy of the group," Witty said, adding "we also plan to return 4 billion pounds to shareholders in 2015." GlaxoSmithKline indicated that full-year earnings for this year will be "broadly similar to 2013," after lowering its forecast earlier this year.

For related analysis, see ViewPoints: GlaxoSmithKline sees calmer skies ahead, but was it braced for pricing storm?

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