Business Context and Reporting Period
Company: GSK Plc
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: First Quarter (Q1) ended March 31, 2019
Issued Date: May 1, 2019
GSK reported a strong start to 2019 with growth in sales, operating margins, and earnings per share. The quarter included the completion of the Tesaro acquisition on January 22, 2019, and the implementation of IFRS 16 'Leases' from January 1, 2019. Management reaffirmed its 2019 guidance and expects to complete the proposed Consumer Healthcare Joint Venture with Pfizer in the second half of 2019.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Growth (AER) | Growth (CER) |
|---|---|---|---|---|
| Turnover | £7,661 million | £7,222 million | +6% | +5% |
| Total Operating Profit | £1,428 million | £1,240 million | +15% | +10% |
| Adjusted Operating Profit | £2,163 million | £1,923 million | +12% | +9% |
| Total EPS | 16.8p | 11.2p | +50% | +42% |
| Adjusted EPS | 30.1p | 24.6p | +22% | +18% |
| Net Cash from Operations | £663 million | £863 million | -23% | N/A |
| Free Cash Flow | £165 million | £329 million | -50% | N/A |
| Net Debt | £27.1 billion | £13.4 billion | N/A | N/A |
Segment Performance (Turnover Growth CER):
- Pharmaceuticals: £4.2 billion (+2%)
- Vaccines: £1.5 billion (+20%)
- Consumer Healthcare: £2.0 billion (+1%)
Margins: Adjusted Group operating margin was 28.2% (+1.0 percentage points CER). Segment adjusted margins were Pharmaceuticals 29.8%, Vaccines 40.3%, and Consumer Healthcare 21.7%.
Material Changes vs. Prior Period
- Revenue Growth: Driven by strong performance in Vaccines (Shingrix) and new Respiratory products (Trelegy, Nucala). HIV sales grew 4% CER. Established Pharmaceuticals declined 6% CER due to the loss of exclusivity for Advair in the US.
- Profitability: Adjusted operating profit increased 9% CER, benefiting from sales growth, favorable product mix, and inventory adjustments. This was partially offset by price pressure and investments in new product launches.
- Cash Flow: Net cash from operations and free cash flow declined significantly compared to Q1 2018. This was primarily due to the adverse timing of payments for returns and rebates, increased trade receivables from strong sales, and the initial impact of Advair generic competition.
- Debt: Net debt increased to £27.1 billion from £21.6 billion at year-end 2018, driven by the £3.6 billion Tesaro acquisition, IFRS 16 implementation, and dividend payments.
- Acquisitions: Completed the acquisition of Tesaro Inc. for approximately £3.9 billion, adding Zejula to the oncology portfolio.
Guidance, Outlook, and Risks
2019 Guidance: GSK reaffirmed its expectation for Adjusted EPS to decline in the range of -5% to -9% at Constant Exchange Rate (CER). This guidance assumes the closure of the Consumer Healthcare nutrition disposal and the Pfizer Joint Venture in 2019, and factors in the impact of generic competition for Advair.
Dividend: A quarterly dividend of 19p per share was declared. The Board intends to maintain the full-year 2019 dividend at 80p per share.
Pipeline Highlights:
- HIV: Dovato approved in the US; long-acting cabotegravir+rilpivirine filed in the US.
- Oncology: Positive data for dostarlimab (GARNET study) and belantamab mafodotin (DREAMM-1 study).
- Respiratory: Trelegy Ellipta authorized in Japan.
Risks and Contingencies:
- Generic Competition: Continued impact from the loss of exclusivity for Advair/Seretide.
- Legal Matters: Aggregate provision for legal disputes was £0.2 billion. The ultimate liability may vary based on litigation outcomes.
- Transaction Execution: Guidance assumes the successful closure of the Pfizer Consumer Healthcare Joint Venture and the Unilever nutrition disposal.
- Exchange Rates: Weakness in Sterling against the US Dollar and Yen provided a positive currency impact, but future fluctuations remain a risk.
Investor Verification Checklist
- Advair Impact: Verify the magnitude of sales erosion from generic Advair in the US and the effectiveness of authorized generic launches.
- Consumer Healthcare Transaction: Monitor regulatory approvals and closing timelines for the Pfizer Joint Venture and Unilever nutrition disposal.
- Tesaro Integration: Assess the integration progress and cost-saving realization from the Tesaro acquisition.
- Cash Flow Conversion: Review the sustainability of free cash flow given the significant decline in Q1 2019 due to working capital movements.
- Contingent Consideration: Track the re-measurement of contingent consideration liabilities (notably Shionogi/ViiV), which impacted earnings but not cash flow in the quarter.