GlaxoSmithKline (LSE: GSK) has made a great start to 2016. The company’s first-quarter results released at the end of last week, showed that Glaxo is on course to increase earnings by 10% to 12% this year, which is slightly ahead of market expectations.
During the first quarter, growth in HIV drugs, vaccines, and consumer healthcare helped offset a further decline in respiratory medicines while benefits of cost cuts and restructuring contributed to improving profit margins across the group. Overall sales increased by 11% to £6.23bn. Earnings per share excluding exceptional items and adjusted for currency rose 8% to 19.8p ahead of City forecasts which were calling for earnings per share of 18.2p.
A fifth of pharma sales during the quarter came from new brands, putting the group on course for its target to reach £6bn of annual revenues from new products by 2018.
There’s no denying that these first quarter results from Glaxo are extremely encouraging. The group seems to be on track to hit its growth forecast for this year and a strong performance across all of the company’s divisions shows that management’s turnaround plan is working.
Struggling to gain traction
On the other hand, it appears as if AstraZeneca’s (LSE: AZN) recovery is struggling to gain traction. The company’s first-quarter results showed that core profit fell in the first three months of the year, even as revenues rose.
Higher research spending was to blame for the underlying drop in profitability. Research spending climbed 15% year-on-year to $1.4bn, core operating profit fell by 12% to $1.6bn and revenues increased by 1% to $6.13bn.
On the face of it, these figures don’t seem too bad. However, Astra’s Q1 numbers were bolstered by some accounting factors, which helped the company boost its bottom line.
For example, net profit for the period increased 17% to $646m as a result of lower amortisation charges. Also, the company received a huge boost from its so-called externalisation deals which raised $550m in proceeds during the first quarter, up from $309m a year earlier. Without this revenue boost, Astra would have reported a near 5% year-on-year decline in sales. Management expects total revenue and core earnings per share to decrease by a low-to-mid-single-digit percentage in 2016.
The bottom line
All in all, the first quarter results from Glaxo and Astra tell two different stories. Glaxo’s turnaround is starting to gain traction as sales of the company’s new treatments pick up. But Astra is still struggling to report any real organic growth; the company is relying on externalisation revenues or one-off asset sales to improve its quarterly figures.
And if you’re looking for income, you can’t go wrong with Glaxo. The company’s shares currently support a dividend yield of 5.6% and trade at a forward P/E of 16.5. Astra’s shares support a yield of 5% and trade at a forward PE of 14.1.
