GlaxoSmithKline: “Goodbye” to Dodgy European Banks, “Hello” to Rising Profits

Published Fri, Feb 10th, 2012   Martin Denholm

Earlier this week, British drugmaker, GlaxoSmithKline (NYSE: GSK), reported a pre-tax profit of $2.7 billion during the fourth quarter of 2011. It was an eye-catching turnaround from a $306.4 million loss a year earlier.

It meant that for the full year, Glaxo’s pre-tax earnings rolled in at $12.2 billion – a 140% jump from 2010.

This came despite flat sales in the United States and a 5% sales drop in Europe, due to drug price pressure. But a strong performance in Japan and emerging markets, plus vigorous restructuring and cost-cutting, helped offset the weakness.

While both the quarterly and full-year results thrashed the corresponding ones from 2010, the revenue and earnings per share numbers still fell short of analysts’ expectations.

But I don’t put too much weight on what analysts think. Especially when we’re dealing with a company competing in the European minefield – and one in full-on revival mode.

The man behind that revival? Forty-seven year-old Chief Executive Officer, Sir Andrew Witty…

Witty By Name… Brilliant By Nature

Based just down the road from where I went to university in West London, GSK’s hulking headquarters are responsible for churning out drugs that treat all manner of diseases.

From serious ones like HIV, cancer, hepatitis A and B, polio and meningitis, to everyday ailments like asthma, infections, dermatological issues and common colds/flu, GSK is a drug powerhouse.

Some top names include: Wellbutrin (for depression), Advair (a lung treatment), Benlysta (for lupus), diet drug, Alli, and anti-smoking therapies, NicoDerm and Nicorette. It also makes a host of everyday products like Aquafresh and Sensodyne.

Knighted in Britain’s 2012 New Year Honours List for his services to the pharmaceutical industry, Witty was named as Glaxo’s CEO in May 2008, having worked his way up the company’s ranks since 1985. And under his leadership, GSK has embarked on a two-pronged revival plan.

In addition to cutting existing costs (which doesn’t involve cutting staff, by the way – the company is actually hiring and keeping its drug production in Britain), Witty has reorganized and restructured its drug research operations into what the Guardian reveals are smaller, more targeted groups of between five and 70 scientists, with each group focusing specifically on one disease.

The plan is working, too.

Witty recently said that 15 drugs and vaccines made it to late-stage clinical trials last year, with nine of them ready for filing with regulators. And the Guardian says GSK expects an impressive 30 new drugs to make their way to late-stage clinical development over the next three years.

If successful, the strong drug pipeline should not only help boost GSK’s sales, but will also put the company in a healthy position to combat the “patent cliff” trend occurring across the healthcare sector. (This basically refers to the vast number of drug companies’ patents that will soon expire – a development that poses a real threat to drugmakers, as it opens the door to generic competition.)

One of those treatments in development – the lung drug, Relovair, which will replace bestselling Advair – is due for completion by the middle of the year.

But Witty is proving that his business acumen extends beyond the healthcare sector – and it’s reaping rewards for investors, too…

GSK Yanks Cash From Euro Banks… and Puts it into Shareholders’ Hands

While Witty and his executive team can’t do anything about the economic crisis that’s engulfed Europe – which, along with drug price pressures, contributed to GSK’s 5% European sales decline last year – they can control what they do with the company’s $8.9 billion cash horde.

And the top priority: Get it out of dodgy European banks.

While he praised the European Central Bank’s recent efforts to boost liquidity and confidence, Witty told GSK’s annual results conference:

“My biggest concern vis-a-vis the eurozone is continued uncertainty. In many cases the uncertainty is worse than many of the ifs.”

He’s right. Uncertainty is the market’s nemesis. And as a result, Witty says that GSK has yanked “tens of millions” from the eurozone over the past year, stating simply:

“You don’t have money in banks you’re nervous about.”

And what’s he doing with the cash instead? Churning it back to GSK shareholders. The company’s dividend rose by 8% this year and U.S. investors can expect an annual $2.17 per share (4.8% yield).

It should be a pivotal year for GSK – and I’ll be keeping an eye on the company’s performance as it pushes its robust-looking drug pipeline through the development stages.

Best regards,

Martin Denholm