Glaxo earnings outlook boosted by strong R&D and renewed focus

GlaxoSmithKline ($GSK) released its 2013 earnings report today, and made it abundantly clear that five new drug approvals in 2013 helped cushion the impact of increasing competition on older products and a bribery scandal in China. The company reported that sales for the year rose 1% to £26.5 billion ($43.1 billion), which is what analysts were expecting. Operating profits were flat year-over-year, coming in at £8 ($13 billion).

GSK CEO Andrew Witty

But it was Glaxo's forecast for this year that seemed to cheer investors. The company predicted sales would increase 2% in 2014 and earnings per share would grow between 4% and 8%. Glaxo's stock price bumped up nearly 2% in pre-market trading to $51.75.

Investors can credit the productivity of Glaxo's drug developers. In addition to the five new approved drugs--two for respiratory disease, two for melanoma, and one for HIV--the company plans to report Phase III data on six experimental products and start late-stage testing on an additional 10 products in 2014 and 2015, the press release said. The company added that its return on investment in R&D has reached 13%--up from 11% in 2010.

The procession of new products "is in line with our strategic approach of a continued flow of multiple product launches which will help us drive future competitive advantage by diversifying our portfolio and reducing reliance on any one drug," said CEO Andrew Witty in the earnings release.

The danger of relying on one blockbuster has come to light recently with Glaxo's Advair, a $7-billion-a-year respiratory drug that has been losing market share to Merck's ($MRK) Dulera and AstraZeneca's ($AZN) Symbicort. It's too early to call whether Glaxo's two new entrants to the market, Breo and Anoro, will be able to make up for Advair's decline.

In addition to broadening Glaxo's drug portfolio, Witty has been busy spinning off non-core assets, such as the two drink brands Lucozade and Ribena. "Over the last two years we have taken steps to streamline our Consumer product portfolio and we have divested more than 50 non-core products," Witty said. The consumer business grew 4% last year across all geographic regions, he added.

As for China, it remains a cloud over Glaxo's outlook. Chinese regulators continue to investigate allegations that Glaxo funneled about $490 million in bribes through travel agencies to Chinese doctors. Glaxo's sales of vaccines and pharmaceuticals were down 18% in China last year, and it could be a while before investors are convinced the issue is resolved. As Ishaq Siddiqi, market strategist at IG Index, told CNBC, "investors will continue to express their hesitancy until litigation cases are brought forward and GSK officially moves past the incident and restores reputational damage."

- here's the earnings release
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- here's Bloomberg's take