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Glaxo (GSK) Q1 Earnings: What's in Store for the Stock?

GlaxoSmithKline plc GSK is scheduled to report first-quarter 2016 results on Apr 27. Last quarter, Glaxo delivered a positive earnings surprise of 5.77%. Let’s see how things are shaping up for the company this quarter.

Factors to Impact Q1 Results

Glaxo expects double-digit core earnings growth (at constant exchange rate) in 2016.

As far as the business segments are concerned, the company expects the Pharmaceuticals segment to return to growth this year driven by new products – Anoro Ellipta, Nucala, Tanzeum/Eperzan and others – as well as HIV products – Tivicay and Triumeq. This will likely more than offset the declines in Seretide/Advair, established products and Avodart. While Seretide/Advair sales are expected to continue declining due to pricing and competitive pressures, Avodart went generic in the U.S. at the start of fourth-quarter 2015.

However, challenges in the form of capacity constraints and economic conditions in emerging markets could hurt the segment’s performance. Biennial price cuts in Japan in April (expected in the 5–7% range) will negatively impact the whole year, especially the first quarter. Moreover, returning the rights of Prolia to Amgen Inc. AMGN last December may hurt the segment’s performance in Europe.

The Vaccines segment is expected to remain volatile on a quarterly basis (particularly in emerging markets) due to factors like the timing of government tenders. Though it is expected to benefit from the continued uptake of meningitis vaccines, Bexsero and Menveo (acquired from Novartis AG NVS), Bexsero could be hit by supply constraints in the first half of the year, especially in the first quarter.

Lastly, growth of Consumer Healthcare business is expected to be sluggish in the first quarter due to the year-over-year comparison in Flonase’s performance.

Notably, currency movement is expected to provide tailwinds and boost first-quarter sales by around 2–3%.

Meanwhile, Glaxo is on track to deliver annual cost saving benefits of £3 billion from its restructuring program, which is largely expected to be complete by 2017 end. In 2016, Glaxo expects the program to deliver £800 million in annual savings.

On the first quarter call, focus will be on the company’s performance, sales ramp-up of newly launched drugs and pipeline updates.

Surprise History

Glaxo’s performance has been pretty good with earnings surpassing expectations in three of the last four quarters. Overall, the company has delivered an average positive surprise of 4.34%.

Earnings Whispers

Our proven model does not conclusively show that Glaxo is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below.

Zacks ESP: The Earnings ESP for Glaxo is 0.00% since the Most Accurate estimate stands in line with the Zacks Consensus Estimate of 63 cents.

Zacks Rank: Glaxo currently carries a Zacks Rank #3, which when combined with a breakeven ESP of 0.00%, makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are a couple of health care stocks that you may want to consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter.

Amgen has an Earnings ESP of +3.52% and a Zacks Rank #3. It is scheduled to report first-quarter results on Apr 28.

The Earnings ESP for BioMarin Pharmaceutical Inc. BMRN is +22.35% and it carries a Zacks Rank #3. The company is scheduled to release first-quarter results on Apr 28.

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