GlaxoSmithKline: word to the wise The word "underlying" can clarify or confuse. Or in GlaxoSmithKline's case, both. On Tuesday, chief executive Sir Andrew Witty unveiled a drop of 4 per cent in 2011 sales at the UK drugmaker, prompting investors to cut 1 per cent from its shares. But on an underlying basis, he said, sales grew 4 per cent. The difference is that in the latter calculation, strong sales of certain drugs in 2010 were excluded. From one point of view this makes sense. The trouble is that underlying sales included unusually strong sales of certain drugs from 2011 - further flattering the result. Essentially, a cervical cancer immunisation programme implemented last year in Japan - where GSK generates almost a 10th of its sales - was the main reason behind a revenue boost in the country of 30 per cent (excluding currency effects). And while this pace of growth may remain intact in 2012, once the programme is fully running sales growth of the Cervarix vaccine will stall. That is a worry: despite the sales boost in 2011, operating profit in Japan still fell 6 per cent on a constant currency basis. No matter how GSK cuts its numbers, the company is still in decent shape. Many of its drugs are hard to replicate so, although about two-fifths of its sales are exposed to expiring patents over the next four years, estimates Goldman Sachs, revenue should not fall precipitously. For example, generic copies of respiratory drugs, which generate one-quarter of Glaxo's revenues, face additional regulatory scrutiny. For this reason, shares in GSK trade at about 11 times this year's expected earnings, a little lower than Roche, but a premium of one-tenth to Novartis and one-third to AstraZeneca and Sanofi-Aventis. This seems justified. But as GSK further expands abroad, investors should watch not only the underlying numbers, but the headline ones too.