Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Results Announcement)
Reporting Period: Third Quarter (Q3) and Nine Months ended 30 September 2015
Key Context: Results reflect the completion of the Novartis transaction on 2 March 2015, which involved the disposal of the Oncology business and the acquisition of the Vaccines and Consumer Healthcare businesses. The Group now operates three core segments: Pharmaceuticals, Vaccines, and Consumer Healthcare.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9 Months 2015 | 9 Months 2014 |
|---|---|---|---|---|
| Turnover (£m) | 6,127 | 5,646 | 17,637 | 16,820 |
| Core Operating Profit (£m) | 1,718 | 1,887 | 4,372 | 4,824 |
| Core Operating Margin (%) | 28.0% | 33.4% | 24.8% | 28.7% |
| Core EPS (pence) | 23.0p | 27.9p | 57.7p | 68.0p |
| Total EPS (pence) | 11.1p | 8.3p | 181.7p | 35.8p |
| Net Debt (£m) | 10,551 | 14,788 | 10,551 | 14,788 |
| Free Cash Flow (£m) | (33) | 1,293 | (708) | 1,293 |
Note: Total EPS for the nine months includes a significant non-core gain from the disposal of the Oncology business.
Material Changes vs. Prior Period
- Revenue Growth: Q3 Turnover increased 11% on a reported basis and 11% on a Constant Exchange Rate (CER) basis. Pro-forma growth (adjusting for the Novartis transaction) was 5% CER.
- Pharmaceuticals: Reported down 7% (CER), driven by the Oncology disposal and declines in Seretide/Advair. Pro-forma up 1% CER. HIV sales were a standout, up 65% CER.
- Vaccines: Reported up 32% CER, driven by new acquisitions (Bexsero, Menveo) and strong Flu sales. Pro-forma up 13% CER.
- Consumer Healthcare: Reported up 55% CER due to the Novartis acquisition. Pro-forma up 7% CER, driven by Flonase and Sensodyne.
- Profitability: Core Operating Profit declined 5% CER in Q3 and 6% CER for the nine months. Margins were impacted by the lower-margin mix of acquired businesses and a one-off £219m credit in SG&A in Q3 2014.
- Non-Core Items: Total Operating Profit for the nine months surged >100% due to a £9.2bn gain on the disposal of the Oncology business, offset by restructuring and acquisition accounting charges.
- Cash Flow: Free cash flow was negative for the nine months (-£708m) compared to a positive £1.293bn in the prior year, primarily due to increased working capital (seasonal vaccine receivables) and restructuring payments.
Guidance, Outlook, and Risks
- 2015 Guidance: Reiterated expectation for Core EPS to decline at a high-teen percentage rate (CER) for the full year, reflecting pricing pressure on Seretide/Advair and the dilutive effect of the Novartis transaction.
- 2016 Outlook: Management expects a significant recovery in Core EPS with double-digit percentage growth (CER) as adverse 2015 impacts diminish and synergy benefits materialize.
- Dividends: Declared Q3 dividend of 19p. Maintains expectation for a full-year dividend of 80p for 2015, 2016, and 2017. Plans a special dividend of 20p per share to be declared in February 2016.
- Pipeline Highlights: Positive CHMP opinion for Nucala (severe asthma); positive Phase III data for Shingrix (shingles vaccine); FDA decision expected for Nucala in November 2015.
- Risks & Contingencies:
- Legal: Aggregate provision for legal disputes is £0.4 billion. No significant new developments reported since Q2.
- Put Options: Recognized a £6.382 billion liability for the potential exercise of Novartis' put option on the Consumer Healthcare joint venture.
- Patent Expiry: Continued decline in Seretide/Advair sales due to generic competition in the US and Europe.
Investor Verification Checklist
- Pro-Forma Adjustments: Verify the specific adjustments made to 2014 comparables to calculate pro-forma growth rates, as these significantly alter the perceived performance of the Vaccines and Consumer Healthcare segments.
- Non-Core Items: Review the reconciliation of Core vs. Total results to understand the impact of the £9.2bn Oncology disposal gain and the £1.1bn restructuring charges on the bottom line.
- Working Capital: Investigate the increase in receivables and inventory, which contributed to negative free cash flow, to assess if this is purely seasonal or indicative of broader collection issues.
- Put Option Liability: Assess the financial impact of the £6.382 billion liability recorded for the Consumer Healthcare joint venture put option and the conditions under which it would be triggered.
- HIV Portfolio Performance: Confirm the sustainability of the 65% growth in HIV sales (Triumeq/Tivicay) as a counterbalance to the declining Respiratory portfolio.