A Different Pharma Story Altogether

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Glaxo Smithkline (NYSE: GSK) is expected to report its 4Q12 results on Wednesday 6th February. The sell-side forecasts sales of $11.02 billion (-3% YoY), core EBIT of $3.62 billion (-2% YoY), and basic core EPS of 50 cents (-1% YoY). FX will be a 3% and 4% headwind on sales and EPS. For FY13E, the basic core EPS estimate stands at $1.97 (+9% YoY). The sell-side expects no new important headwinds in 4Q12 and will focus on 2013+ signals.

Pressures that concerned me in 3Q12 results have stabilized in 4Q12

I have fewer concerns into 4Q12 results:

1) FX headwinds are stable;

2) Loss of the Japanese Cervarix catch-up was seen already in 2Q and 3Q;

3) A later, more competitive flu vaccine season pressures 4Q lesser;

4) Disposal of consumer brands already affected 1Q-3Q results;

5) Tail and generics-related commoditization (e.g. Lamictal XR) is better appreciated;

6) EU pricing is stable; and

7) Consolidation of Human Genome Sciences (HGSI) already had a $0.98 impact in 3Q with $0.8 more due in 4Q.

Expect pressures in early 2013; Long term guidance, if affirmed, is still a positive

There are some early (1Q) 2013 issues:

1) Filling of a vaccines backlog flatters 4Q12, but weakens 1Q13,

2) Vesicare, Cervarix, and Consumer Healthcare segment annualize at 1Q13,

3) FX is a -3% headwind for FY13, and

4) The EU restructuring is still due.

The associates and minorities lines, after changes to JVs, are expected to benefit the company. Mid-2013+ catalysts are interesting: The following drug approvals are on the horizon:

a) Relvar/Breo (On 7-Mar, the FDA panel will discuss the new drug application; Decision date has been set in May),

b) Zephyr FDA review acceptance (in Feb),

c)  MAGE-A3 / Tyrisa data (to be reviewed anytime in 2013).

Moreover, the long-term guidance is still robust.

Peers

Johnson & Johnson (NYSE: JNJ) reported its 4Q last Tuesday. The company topped the analyst estimates, but missed the revenues forecasts. Also, the company lowered its revenue guidance for 2013. Given that the company acts as a bellwether for the healthcare sector, this says a lot about the overall situation of this sector. The highlight of the earnings was the forecasted market for the company’s new products like Xarelto, Zytiga and Incivo. Innovations in this sector are the key drivers of growth.

Similarly, the investors were least amused from Forest Laboratories’ (NYSE: FRX) recent earnings release on Jan. 15. The company not only witnessed a YoY drop in sales, but also saw net profit turning into loss. However, again, the new product innovations keep the investors’ interested in the stock. Also, the company has a solid balance sheet with zero debt and sufficient cash reserves to be used in its projects.

Conclusion

Both J&J and Forest Labs haven’t sent bullish signals to the market. GlaxoSmithKline's earnings will tell us a lot about the future of the healthcare industry. 


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