GSK

Business Context and Reporting Period

Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Unaudited Preliminary Results Announcement)
Reporting Period: Year ended 31 December 2012 and Quarter ended 31 December 2012
Issued: 6 February 2013

GSK reported 2012 results characterized by flat core earnings per share (EPS) on a constant exchange rate (CER) basis, driven by strong cash generation and cost efficiencies despite a challenging operating environment. The company returned £6.3 billion to shareholders and advanced its R&D pipeline with six new drug filings in 2012.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Group turnover declined 1% to £26.4 billion. Excluding disposals of OTC brands, sales were flat. Pharmaceuticals and Vaccines fell 2%, while Consumer Healthcare was flat (up 5% excluding divestments).
• Profitability: Core operating profit decreased 3% (CER) to £8.3 billion. Total operating profit fell 3% to £7.4 billion due to non-core items including intangible impairments and restructuring costs.
• EPS: Core EPS was flat (CER) at 112.7p. Total EPS dropped 11% to 92.9p, impacted by non-core charges of 19.8p.
• Debt: Net debt increased by £5.0 billion to £14.0 billion, primarily due to £1.9 billion in legal settlements and the £2.0 billion cash cost of the Human Genome Sciences (HGS) acquisition.
• Regional Performance:
  • EMAP: Strong growth of 10% (CER), driven by Latin America, China, and India.
  • Europe: Declined 7% (CER) due to austerity measures and pricing pressures.
  • US: Declined 2% (CER), reflecting product discontinuations and generic competition.
  • Japan: Declined 6% (CER), heavily impacted by the completion of the Cervarix catch-up program.

Guidance, Outlook, and Risks

• 2013 Guidance: GSK expects core EPS growth of 3-4% (CER) and turnover growth of around 1% (CER). This is calculated off an IAS 19R adjusted 2012 base of 111.4p.
• Shareholder Returns: Targeting share buy-backs of £1-2 billion in 2013. Dividend increased to 74p per share (+6%).
• Restructuring: Announced a new major change programme to deliver annual cost savings of at least £1 billion by 2016, with total charges of £1.5 billion. This includes restructuring in Europe and supply chain simplification.
• R&D Pipeline: 6 new drugs filed in 2012. Phase III data expected on 14 assets in 2013/14. Potential to launch ~15 new products globally over the next three years.
• Strategic Reviews: Initiating a strategic review of Lucozade and Ribena brands. Evaluating strategic options for the European pharmaceuticals business.
• Risks & Contingencies:
  • Legal: Aggregate provision for legal disputes is £0.5 billion. Significant US federal investigations were settled in 2012, but state litigation remains ongoing.
  • Taxation: Core tax rate reduced to 24.4% in 2012; targeting 24% in 2013. A non-cash tax charge of £420 million arose from centralizing IP ownership in the UK.
  • Accounting Changes: Implementation of IAS 19R in 2013 will increase pension costs, reducing core operating profit by an estimated £160 million and EPS by 2.5p.

Investor Verification Checklist

• IAS 19R Impact: Verify the retrospective restatement of 2012 results and the specific impact on 2013 guidance due to the new pension accounting standard.
• Legal Settlements: Confirm the finality of the £1.9 billion US federal settlement and monitor provisions for ongoing state litigation.
• Restructuring Execution: Track the booking of the £1.5 billion in charges for the new change programme and the realization of the targeted £1 billion annual savings by 2016.
• European Strategy: Monitor the outcome of the strategic review for the European pharmaceuticals business and the Lucozade/Ribena brands.
• Product Pipeline: Validate the timing and success of Phase III data readouts for the 14 assets expected in 2013/14, particularly for new oncology and respiratory drugs.