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GSK turnaround coming good

Full year results from the pharma giant exceeded expectations
February 9, 2017

There is no question that GlaxoSmithKline (GSK) is good at what it currently does. In respiratory, consumer health and vaccines it is a global leader, and all three of these core divisions performed well in 2016. The question is whether GSK is doing the right thing to ensure long-term growth.

IC TIP: Hold at 1553p

The group's 2015 asset swap with Novartis (CH:NOVN) raised some eyebrows. Critics rejected the idea that toothpaste would be a better business venture than life-saving cancer drugs. But the consumer healthcare business, which was enhanced through this transaction, reported £7.2bn of revenue in 2016, a 9 per cent constant-currency rise on the previous year. By contrast, the cancer drugs GSK sold to Novartis are beginning to look dated as more effective immuno-oncology drugs (which stimulate a person's immune system) arrive on the market.

A lack of investment in new drugs also appears to be a somewhat unfair criticism. Core research and development expenditure rose 3 per cent to £3.5bn in 2016 - although this was still below the spend of smaller rival AstraZeneca (AZN) in the same period. Revenue from new products more than doubled to £4.5bn and new drugs helped the pharmaceuticals division report pro-forma revenue growth of 4 per cent, despite a drop in sales from former best-sellers.

At the group level, numbers have once again been affected by the £9.2bn profit from the Novartis deal felt in 2015, and the revaluation of assets within that joint venture. Strip out these and other one-off factors and core earnings rose 12 per cent to 102p on a constant currency basis.

It was a confident set of results for Sir Andrew Witty's swan-song: he will hand over the chief executive role to Emma Walmsley in March. But on the outlook management have delivered a word of warning. In 2017 GSK's former best-selling asthma drug Advair is likely to face competition from an unbranded version developed by US group Mylan (US:MYL). GSK is expecting the sales hit caused by the launch of generic Advair to leave 2017 earnings flat.

 

GLAXOSMITHKLINE (GSK)

ORD PRICE:1,553pMARKET VALUE:£76.3bn
TOUCH:1552.5-1553.5p12-MONTH HIGH:1,736pLOW: 1,318p
DIVIDEND YIELD:5.2%PE RATIO:83
NET ASSET VALUE:22.9p*NET DEBT278%

Year to 31 DecTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201226.46.69274.0
201326.56.611378.0
201423.03.05780.0
201523.910.517480.0
201627.91.91980.0
% change+17-82-89-

Ex-div: 23 Feb

Payment: 13 Apr

*Includes intangible assets of £24.7bn, or 504p a share