Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Date: April 11, 2017
Subject: Change to financial reporting framework effective Q1 2017.
GSK is revising its financial reporting methodology to align with industry best practices. The primary change involves renaming "Core results" to "Adjusted results" and altering the treatment of legal charges. Going forward, only "Significant legal charges" (arising from litigation settlements or government investigations outside the normal course) will be excluded from Adjusted results. Ordinary course legal charges will now be included in Adjusted results. Historical data for 2015 and 2016 has been restated to reflect this change.
Key Financial Metrics (Restated Adjusted Results)
The following metrics reflect the revised "Adjusted results" methodology, which excludes significant legal charges, restructuring costs, and intangible asset amortization/impairment.
| Period | Turnover (£m) | Adjusted Operating Profit (£m) | Adjusted Operating Margin | Adjusted Profit After Tax (£m) | Adjusted EPS (p) |
|---|---|---|---|---|---|
| Full Year 2016 | 27,889 | 7,671 | 27.5% | 5,526 | 100.6 |
| Q4 2016 | 7,586 | 2,027 | 26.7% | 1,452 | 25.5 |
| 9 Months 2016 | 20,303 | 5,644 | 27.8% | 4,074 | 75.1 |
| Full Year 2015 | 23,923 | 5,659 | 23.7% | 4,045 | 74.6 |
Segment Performance (Full Year 2016 Adjusted Operating Profit):
- Pharmaceuticals: £5,463m (33.9% margin)
- Vaccines: £1,454m (31.7% margin)
- Consumer Healthcare: £1,116m (15.5% margin)
Impact of Reporting Change: The revision reduces the amount of legal charges excluded from Adjusted pre-tax profit by £100 million for 2016 and £70 million for 2015 compared to previously reported "Core results."
Material Changes vs. Prior Period
- Reporting Methodology: The most significant change is the inclusion of "ordinary course" legal charges in Adjusted results. Previously, these were excluded in "Core results."
- Historical Restatement: Adjusted results for 2015 and 2016 have been revised downward slightly to ensure comparability with future periods. For example, Full Year 2016 Adjusted Operating Profit decreased from £7,771m (previously reported core) to £7,671m (revised adjusted).
- Reconciliation Structure: Significant legal charges will now be aggregated into a new reconciliation column titled "Divestments, Significant legal charges and other items."
Guidance, Outlook, and Risks
Guidance and Outlook:
- 2017 Guidance: The change in reporting framework is not expected to affect the Group's previously announced guidance for 2017.
- 2016-2020 Outlook: The five-year outlook remains unchanged. GSK expects to meet its target of at least £6 billion in annual revenues (CER basis) from products launched since 2013 up to two years earlier than previously anticipated, driven by assets like Shingrix.
- Product Assumptions: The outlook factors in expected declines in Seretide/Advair sales due to generic competition in the US. It assumes no premature loss of exclusivity for other key products.
- Legal Costs: Ongoing legal charges for 2017 are expected to be at broadly similar levels to 2016 and 2015.
Risks and Contingencies:
- Forward-Looking Statements: The filing includes a standard caution that actual results may differ materially due to factors beyond GSK's control, including macro-economic conditions, healthcare environment changes, and litigation outcomes.
- Supply and M&A: Guidance assumes no material interruptions to supply and no material mergers, acquisitions, or disposals.
Investor Verification Checklist
- Restated Historicals: Verify that financial models have been updated to use the revised "Adjusted results" for 2015 and 2016, as the "Core results" figures are no longer comparable.
- Legal Charge Classification: Monitor future filings to distinguish between "Significant legal charges" (excluded) and "ordinary course" legal charges (included in Adjusted results).
- Advair/Seretide Impact: Track the actual decline in sales of these products against the guidance assumptions regarding generic competition in the US.
- Shingrix Performance: Verify the contribution of Shingrix to the £6 billion revenue target from post-2013 launches.
- Executive Compensation: Note that the Remuneration Committee is reviewing the impact of this accounting change on senior executive incentive awards.