GSK

Business Context and Reporting Period

Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Second Quarter (Q2) and Half-Year (H1) ended 30 June 2015
Key Event: This is the first full quarter of performance following the completion of the three-part transaction with Novartis on 2 March 2015. The transaction involved the disposal of GSK's Oncology business and the acquisition of Novartis' Vaccines and Consumer Healthcare businesses.

Key Financial Metrics

Note: Total results for H1 2015 include a £9,247m profit on the disposal of the Oncology business.

Material Changes vs. Prior Period

• Turnover Growth: Group turnover increased 7% on a reported basis and 2% on a pro-forma basis (constant exchange rate) in Q2. Pharmaceuticals declined 6% reported (up 2% pro-forma), Vaccines grew 11% reported (down 5% pro-forma), and Consumer Healthcare grew 51% reported (up 6% pro-forma).
• Profitability: Core operating profit margin was 22.9% in Q2, down 2.4 percentage points from Q2 2014, primarily due to the lower margin profile of the acquired Vaccines and Consumer Healthcare businesses compared to the disposed Oncology business.
• Segment Performance:
  • HIV: Turnover grew 59% to £559m, driven by Tivicay (£145m) and Triumeq (£149m).
  • Respiratory: Sales declined 6% to £1,467m, impacted by a 13% drop in Seretide/Advair sales due to generic competition.
  • Consumer Healthcare: Strong growth driven by the launch of Flonase OTC in the US and improved supply in Oral Health.
• Currency Impact: Sterling strength against the Euro and Yen negatively impacted reported results, though this was partially offset by a weaker Sterling against the US Dollar.

Guidance, Outlook, and Risks

• 2015 Guidance: GSK expects full-year 2015 core EPS to decline at a high-teen percentage rate (CER) due to pricing pressure on Seretide/Advair and the dilutive effect of the Novartis transaction.
• 2016 Outlook: Management expects core EPS growth to reach double digits (CER) in 2016 as the adverse impacts of 2015 diminish and synergy benefits materialize.
• Dividends: A second interim dividend of 19p per share was declared. The company expects to pay an annual ordinary dividend of 80p for 2015, 2016, and 2017. A special dividend of approximately £1 billion (20p per share) is planned for Q4 2015.
• Restructuring: The group is on track to deliver targeted annual cost savings of £3 billion from restructuring programs, with total cash charges expected to be approximately £3.65 billion.
• Risks: Key risks include the transition of the respiratory portfolio, generic competition (specifically for Advair), integration of acquired businesses, and contingent liabilities related to the Novartis transaction (including put options for Consumer Healthcare and ViiV Healthcare).

Investor Verification Checklist

• Pro-Forma Adjustments: Verify the pro-forma growth rates which adjust for the Novartis transaction to understand underlying organic performance.
• Advair/Seretide Decline: Monitor the rate of sales decline for Seretide/Advair as generic competition intensifies in the US and Europe.
• Restructuring Costs: Track the realization of the targeted £3 billion in annual cost savings against the £3.65 billion in total expected cash charges.
• Contingent Consideration: Review the sensitivity of the £2.96 billion contingent consideration liability (primarily for ViiV Healthcare) to changes in sales forecasts and interest rates.
• Dividend Sustainability: Assess the ability to maintain the 80p annual dividend and the £1 billion special dividend given the cash outflows from restructuring and integration.