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Stockwatch: Consumerise, genericise, and buy back in anger – Q2 earnings

This article was originally published in Scrip

Executive Summary

The second quarter 2011 earnings season is now in full swing one week into the usual plethora of announcements. GlaxoSmithKline (GSK) just missed analysts’ consensus estimates when it reported sales of £6.7 billion, down four percent from the previous quarter in 2010. GSK’s profit was up to £1.1 billion from a £300 million loss in the second quarter of 2010 (, 26 July 2011). Behind the figures, there is a theme that may start to worry investors. GSK’s margins have always been lower than other pharmaceutical companies because of its Consumer Healthcare division. It is continued growth in GSK’s consumer products, and in emerging markets that is likely to erode margins further. While many healthcare companies diversify their sales over divisions like consumer healthcare and nutritionals (, 2 May 2011), GSK’s headlong rush into these lower margin areas risks cutting off the return path to high growth, high margin pharmaceutical business that typified Glaxo and SmithKline Beecham at the end of the last century. Indeed, like most other big pharmaceutical companies, GSK appears to be burning its bridges as it closes pharmaceutical development and manufacturing sites and fires R&D staff in order to soften the margin fall. Investors’ attention on the core business has been diverted by two aspects of GSK’s performance that it shares with businesses such as tobacco companies – rising dividends and share buy-backs. GSK has bought back just under £900 million worth of its own shares at the half year point and increased its dividend over six percent from the first quarter.

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