Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Unaudited Preliminary Results Announcement)
Reporting Period: Year ended 31 December 2013 and Quarter ended 31 December 2013
Issuance Date: 5 February 2014
GSK reported 2013 results in line with financial guidance, delivering core earnings per share (EPS) growth of 4% at constant exchange rates (CER). The year was characterized by significant R&D delivery, including six major product approvals, and continued portfolio reshaping through divestments totaling £2.5 billion.
Key Financial Metrics
| Metric | 2013 Full Year (£m) | 2013 Growth (CER%) | Q4 2013 (£m) | Q4 Growth (CER%) |
|---|---|---|---|---|
| Turnover | 26,505 | 1% | 6,906 | 5% |
| Core Operating Profit | 8,015 | 0% | 2,088 | -1% |
| Core Operating Margin | 30.2% | -1.0 pp | 30.2% | -3.1 pp |
| Core EPS | 112.2p | 4% | 30.1p | 1% |
| Total EPS | 112.5p | 23% | 51.3p | >100% |
| Adjusted Net Cash Inflow (Ops) | 7,337 | 5% | 2,355 | 15% |
| Adjusted Free Cash Flow | 4,772 | 2% | 1,602 | 37% |
| Net Debt | 12,645 | -10% | 12,645 | -17% |
Material Changes vs. Prior Period
- Revenue: Total turnover grew 1% CER to £26.5 billion. Excluding divestments, turnover grew 3%. Pharmaceuticals and Vaccines turnover grew 1% CER, while Consumer Healthcare grew 2% CER (4% excluding divested brands).
- Profitability: Core operating profit remained flat in CER terms despite revenue growth, driven by a 1.0 percentage point decline in core operating margin. This was due to higher cost of sales (unwinding of manufacturing volume shortfalls, adverse mix) partially offset by lower R&D spend and restructuring savings of ~£400 million.
- EPS: Core EPS increased 4% CER. Total EPS rose 23% year-over-year, significantly boosted by non-core credits of £1,068 million in 2013 (primarily gains on disposals) compared to charges in 2012.
- Divestments: GSK completed the sale of the Lucozade and Ribena business (£1.35 billion) and anti-coagulant products (£700 million+), raising £2.5 billion in total.
- Regional Performance: US Pharmaceuticals and Vaccines grew 1% CER (4% ex-divestments). Europe was flat. EMAP grew 2% CER (adversely affected by the China investigation). Japan grew 2% CER.
Guidance, Outlook, and Risks
2014 Guidance
Management expects 2014 core EPS growth of 4% to 8% CER on turnover growth of around 2% CER (on an ex-divestment basis). The 2013 base for EPS guidance is 108.4p.
Management Commentary
- R&D Pipeline: 2013 was the most productive period in company history with 6 major approvals (Breo, Anoro, Tafinlar, Mekinist, Tivicay, and others). Estimated R&D internal rate of return (IRR) improved to 13% (target 14%).
- Portfolio Strategy: Continued focus on Respiratory, Vaccines, HIV, and Oncology. A new "Established Products Portfolio" segment will be reported separately starting in 2014 to optimize value of tail brands.
- Capital Allocation: Returned £5.2 billion to shareholders via dividends (78p total, +5%) and share buybacks (£1.5 billion). Targeting £1-2 billion in share repurchases in 2014.
Risks and Contingencies
- China Investigation: Ongoing investigation by Chinese authorities into GSK China operations. Sales in China were down 18% in 2013. The financial impact remains uncertain and cannot be reliably estimated.
- Legal Matters: Aggregate provision for legal and other disputes is £0.6 billion. Significant litigation includes patent challenges to Epzicom and Trizivir (ViiV Healthcare), though a US court recently upheld the validity of the relevant patent.
- Currency: Strengthening Sterling against the Yen and other currencies negatively impacted reported results. If January 2014 rates hold, estimated adverse impact on 2014 turnover is ~5% and on core EPS is ~6%.
Investor Verification Checklist
- China Investigation Status: Monitor updates on the financial impact and operational restrictions resulting from the Chinese government investigation.
- Divestment Adjustments: Verify the "ex-divestment" base figures (Turnover £25.6bn, EPS 108.4p) used for 2014 guidance to ensure accurate year-over-year comparisons.
- New Product Launches: Track commercial uptake of 2013/2014 launches (Breo, Anoro, Tivicay, Tafinlar/Mekinist) to validate the 4-8% EPS growth guidance.
- Established Products Portfolio: Review the new segment reporting structure starting in 2014 to understand the performance of the "tail" brands separated from the core innovative portfolio.
- Legal Provisions: Review the £0.6 billion legal provision and potential exposure from product liability and patent litigation.