Generics hit Glaxo's 1Q
GlaxoSmithKline's first quarter largely met our expectations despite the hit from generic competition
Several of Glaxo's products are facing generic competition. In the quarter, generic competition to the company's neuroscience products caused the drugs to fall 53% year over year. While we expect the damage to this class to subside as the drugs pass the one-year mark of initial generic competition, a new generic threat to antiviral drug Valtrex will probably emerge later in the year. Therefore, we don't expect much top-line growth for the company until 2010.
Even though generics are hurting Glaxo's near-term growth, the company is laying the foundation for improved future growth with the launch of several vaccines. The company recently launched pneumococcal vaccine Synflorix in Europe, which we believe will develop into a blockbuster. Given its better efficacy than Wyeth's Prevnar for the European population, we expect the vaccine will take significant market share from Wyeth. However, Wyeth is likely to launch a more competitive vaccine over the next couple of years that will give Synflorix a run for the money. Glaxo's other recent vaccine launches that are likely to develop into blockbusters include human papillomavirus vaccine Cervarix and rotavirus vaccine Rotarix. We expect Cervarix will launch in the United States in 2010.
In reviewing the operating costs, we were a bit disappointed by the company's efforts to reduce costs. Both cost of goods sold and marketing expenses were higher as a percentage of sales versus the prior-year period. Since the company is losing major patents, we believe the company should follow Pfizer's lead and dramatically cut costs.
Additionally in the quarter, Glaxo took the unusual step in creating a joint venture with Pfizer that will solely focus on HIV. Both companies will contribute currently marketed products and pipeline drugs that treat HIV patients. Initially, Glaxo will hold an 85% equity interest in the new company, with Pfizer holding the remaining 15%. The ownership could shift on the basis of the approval of pipeline products. We believe the agreement highlights the challenges facing both companies' HIV platforms. Pfizer's new HIV drug Selzentry is not launching well, and Glaxo's well-entrenched HIV drugs are losing market share. We think the deal will help both organisations, as the joint venture should be able to cut costs and reinvest some of the savings in marketing and developing the next generation of HIV drugs.
Damien Conover, CFA is a senior stock analyst with Morningstar.com.
