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Morningstar | Glaxo Posts Solid 2Q, Buoyed by Strong Vaccine Sales that Look Poised for Continued Growth

Glaxo reported second-quarter results that were slightly ahead of both our and consensus expectations, driven by robust vaccine sales, but we don't plan to change our fair value estimate based on the minor outperformance. We continue to view the stock as modestly undervalued, with potential long-term growth not fully factored into the share price. Strong growth in the vaccine unit, steady gains in consumer products, and the ability to mitigate generic Advair competition in the quarter helps reinforce our long-term growth outlook as well as our wide moat rating.

In the vaccine unit (20% of sales), strong demand for shingles vaccine Shingrix helped drive total vaccine sales up 23% operationally year over year. We expect continued robust demand for the vaccine, given the significant efficacy improvement over the competing shingles vaccine from Merck (97% effective versus 50%). However, supply limitations will likely weigh on global growth potential, with the majority of initial vaccine supplies likely targeting the United States, where pricing is strongest. We expect Shingrix sales to reach close to GBP 2 billion by 2020. The strong vaccine growth should help mitigate the competitive pressures in the drug segment.

The drug unit (55% of sales) posted a slight sales decline of 1% operationally, largely due to generic Advair and branded HIV competition. The lost Advair sales also created an amplified impact on the bottom line due to the drug's strong margins. While we expect these pressures to continue, the annualization of the U.S. generic Advair launch will likely occur in early 2020, and the recent launch of HIV drug Dovato should help return the drug division to growth in 2020. Longer term, we expect the new HIV drug launches of fostemsavir and cabotegravir to help drive HIV sales. Also, the firm's renewed focus on cancer development should yield important growth drivers, including expanding indications for Zejula and multiple myeloma drug GSK2857916.

On the research and development side, Glaxo continues to make progress with its pipeline. The most important upcoming events over the next six months are the drug filings of Trelegy in asthma (positive top-line data reported) and Zejula (positive top-line data reported in a wide range of patients) in first-line ovarian cancer. For a complete review of Glaxo's pipeline and currently marketed portfolio, please see "Annual Drug Pipeline Report: Moats Remain Secure as Innovation Counters Pricing and Generic Headwinds, but M&A Accelerating."