Ana Nicholls asks whether GSK’s revenue drop is a short-term blip or a sign of bigger problems

GlaxoSmithKline is already feeling the indirect effects of Brexit on its bottom line. As a company with a big cost base in the UK and a sales profile heavily weighted towards the US, GSK’s results are often swayed by the sterling-dollar exchange rate. So the effect of the 2016 slump in the pound following the Brexit vote and its subsequent recovery was still apparent in the company’s first-quarter results this year – along with several other longer-lasting factors, such as US tax reforms, a revaluation of its consumer health business and imminent generic competition for its blockbuster asthma treatment Adair.

These factors together explain why in the first quarter of 2018, GSK reported a 2 percent year-on-year drop in revenues at actual exchange rates (AER) to £7.2 billion, but a 4 percent rise in constant exchange rates (CER). Its adjusted operating profits, meanwhile, were also impacted by exchange rates, dropping by 3 percent at CER but rising by 9 percent at AER to £1.9 billion. GSK reckons that if exchange rates continue at end-March levels, then it will see revenues drop by 5 percent for the full year. When it came to the bottom line of earnings per share (EPS), however, it was the revaluation of its consumer health business that was decisive in the first quarter of 2018. GSK bought the remaining stake in the venture from its partner, Novartis, in March, and the revaluation related to put options that were in place.

To some extent, then, these results are a blip, attributable to short-term problems. Certainly, they contradict the trends shown in the strong annual results GSK reported back in February. For 2017 its net profit more than doubled to £2.2 billion ($3 billion) in 2017 as it cut its operating expenses and realised some one-off gains by selling assets. It also posted an 8 percent rise in total sales to £30.2 billion for the full year, helped by higher demand for its new pharmaceutical drugs and vaccines. It was the fourth year running of revenue growth and the second year for profit growth – although far below 2015 levels.

Lagging behind its rivals

In the longer term, however, GSK has certainly seen a decline relative to its peers. Back in 2000, when it was created by the £130 billion merger of GlaxoWellcome and SmithKline, GSK was the biggest pharma company in the world by pharmaceutical revenues. In 2017, it was ranked at number nine. Unlike Pfizer and co, it has played only a smallish role in the mega-merger deals of recent years, other than its 2015 asset swap with Novartis. And unlike Gilead and co its pipeline of innovative drugs has delivered steady rather than spectacular growth. Given that Emma Walmsley, GSK’s chief executive, has made beating competitors her goal, that’s a situation she will want to reverse.

Moreover, GSK does face a major challenge if generic competition emerges for Advair, which accounted for nearly 8 percent of its revenues in the first quarter of 2018. Although the drug’s US patent actually expired back in 2010, competition has been kept at bay partly by a patent on the Diskus inhaler that delivers the drug. That protection ended in early 2017, but competitors such as Mylan and Novartis have so far failed to get their rival products approved by the US Food and Drug Administration.

How soon they manage that will make a big difference to GSK’s results this year. If generic copies are introduced around mid-2018, GSK’s core earnings per share are expected to fall by as much as 3 percent in constant-currency terms. However, in the absence of any generic competition to Advair, core profit is expected to rise by 4 to 7 percent. GSK’s anti-HIV drug, Juluca, also faces rising competition following the approval of Gilead’s rival drug, Biktarvy. Juluca registered £964 million in sales during the first quarter of 2018.

On the upside, though, GSK’s newer products have made a good start. The company saw three key approvals in 2017 which are expected to be very successful in the coming years: Shingrix to treat the shingles virus, Trelegy Ellipta inhaler for COPD and Juluca, a once-daily HIV pill. Shringrix in particular has helped to drive up GSK’s vaccines business into some robust growth, regardless of exchange rates. Vaccines are also one of the core areas for GSK’s pipeline development, too, with the others being respiratory, HIV/infectious diseases, immuno-inflammation and oncology.

The company claims that pharmaceuticals and R&D remain its strategic focus. Yet the fact remains that GSK’s R&D spending is low compared with its peers, and according to its first-quarter filings is getting lower. Moreover, although GSK has a relatively good record at getting products to approval, its earnings from those new drugs have on occasion been disappointing. All these are challenges that Ms Walmsley is well aware of and is starting to tackle. Yet GSK will continue to be buffeted by factors over which she has less control, such as exchange rates and Brexit.

Ana Nicholls is director, industry operations at the Economist Intelligence Unit