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All eyes on big pharma in key year

The UK's three largest pharmaceuticals groups reported first-quarter figures at the end of April
May 12, 2016

With 2016 being such a pivotal year for the UK's largest listed pharmaceutical companies, the recent first-quarter updates will have been keenly watched to see how each business is dealing with the sector's challenges.

It has been a tough few years for the UK's pharma giants GlaxoSmithKline (GSK) and AstraZeneca (AZN), as pricing pressures, cheap competition and innovative biotechs have all threatened sales growth. Not to mention fast-growing Shire (SHP) vying for a top spot in UK pharma.

In an attempt to smooth out income streams in years when drug sales are knocked by the loss of exclusivity, GSK has bulked up its lower- risk (but also less lucrative) healthcare business. The strategy has been criticised and we have expressed concerns that this lower-margin business will not provide a high enough cash flow to cover the generous dividend.

However, first-quarter results were significantly ahead of expectations, with core operating profit up 13 per cent. Revenue was buoyed by the good performance of the consumer healthcare division, but more notably GSK made £821m from new drugs (launched within the past five years), the highest contribution in the past six years. While cash flow does remain a concern, the dividend is being maintained at 80p this year and next.

AstraZeneca's first-quarter revenue was hit as sales from more mature franchises slowed. Last year, Nexium - which generated $3.7bn sales in 2014 - lost its exclusivity and the drug's sales were down 28 per cent in the first quarter this year. Exclusivity of its best-selling drug Crestor will also be lost in the second half. But from 2017 the outlook is more positive, as acquisitions made in 2015 to stock the previously thinning pipeline are expected to come to fruition.

The strategy of buying in growth through the acquisition of smaller companies has been much more widely heralded than GSK's strategy and analysts are bullish on Astra's prospects, despite short-term challenges.

Shire's revenue is already benefiting from acquisitions made in 2015. Sales were up 14 per cent in the first quarter to $1.6bn (£1.1bn), including a $52m contribution from a new drug from recently acquired NPS Pharmaceuticals.

However, as these acquisitions were largely funded by extended bank facilities, Shire's net debt position has stretched and interest paid in the period increased fourfold. This year will be one of transformation for Britain's fastest-growing pharma company. At the end of this month, it will learn whether shareholders have given the go-ahead to the $32bn acquisition of Baxalta. If the deal gets the green light, Shire will overtake Astra as the second largest UK pharma company by revenue and the largest worldwide with a focus on rare diseases.