GSK GSK plc

By Denise Roland 

LONDON-- GlaxoSmithKline PLC said core earnings rose in the first quarter of the year, in an early sign the company is returning to growth after two years of falling profits.

The British drugs giant's transition to a lower-margin business following a $20 billion asset swap with Novartis AG, combined with falling sales of blockbuster respiratory drug Advair, have taken a toll on the company's earnings growth recently.

But now that Glaxo's integration of the businesses it acquired from Novartis is well under way, its prospects are brightening. Core earnings per share (EPS), a measure which strips out one-time gains or impairments, climbed 14% to 19.8 pence in the three months ending March 31, while revenue rose 11% to GBP6.2 billion ($9.04 billion), up from GBP5.6 billion a year ago. Stripping out exchange rate movements, revenue and core EPS both increased 8%.

Last year, Glaxo completed a major transaction with Novartis in which it traded its portfolio of high-margin cancer drugs for the Swiss company's lower-margin vaccines franchise, and took control of a joint venture pooling the companies' consumer health care arms, which sell low-margin drugstore staples from over-the-counter remedies to toothpaste.

That deal was devised to reduce Glaxo's exposure to the risk-laden drug development part of the business, which succeeds or fails on the outcomes of lengthy and expensive clinical trials, patent life cycles and the willingness of governments and health insurers to spent ever-tighter budgets on medicines. Vaccines and consumer health care products are cheaper to develop and are considered more stable businesses.

Chief Executive Andrew Witty has promised Glaxo will bear the first fruits of that transaction this year. He told investors to expect a 10% to 12% percentage increase in core EPS in 2016, at constant exchange rates, as he reported the company's first quarter results on Wednesday. That would be the first increase in core EPS since 2013.

He said the improved profitability in the first quarter reflected stronger top-line growth, in part thanks to the promotion of "power brands" in the consumer health care division. Combining its consumer health care division with Novartis's has enabled Glaxo to pick winners while leaving behind brands that don't make the cut in an expanded portfolio, he said.

Mr. Witty added that the improved margins also reflected work that predated the Novartis transaction, such as investments into more efficient manufacturing and a new IT platform.

Those moves were reflected in a strong performance from the consumer health care division, which posted a 26% increase in revenue to GBP1.8 billion in the first quarter while core operating profit increased 59% to GBP303 million.

The expanded vaccines division also delivered strong earnings growth thanks to the integration of the Novartis business and strong sales growth of two newly-launched meningitis vaccines. Core operating profit increased 56% to GBP253 million, on a revenue increase of 23% to GBP882 million.

In Glaxo's drug development arm, still the largest part of the business, revenue fell 1% to GBP3.6 billion. That was partly because the year-earlier quarter included one month of sales from the now-divested cancer franchise. Stripping that out, sales increased 5% as revenue from newly launched drugs in HIV and respiratory medicine more than offset that lost from Advair. Core operating profit for that division increased 8% to GBP1.2 billion, largely thanks to those new drugs, which can command higher margins than Glaxo's aging blockbusters.

The company also provided more clarity on its 2016 outlook, saying it expected core EPS to grow 10-12% at constant exchange rates. Previously, it had guided for a double-digit increase. The company also confirmed plans to pay a full-year dividend of 80 pence.

Write to Denise Roland at Denise.Roland@wsj.com

(END) Dow Jones Newswires

April 27, 2016 10:49 ET (14:49 GMT)

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