Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Unaudited Preliminary Results Announcement)
Reporting Period: Year ended 31 December 2011 and Quarter ended 31 December 2011
Issued: 7 February 2012
GSK reported continued underlying sales growth, R&D progress, and improved financial returns for 2011. The company is transitioning its business model to reduce vulnerability to generic pressures in Western markets, with 38% of sales now generated outside the USA and Europe. Strategic priorities include growing a diversified global business, delivering more products of value, and simplifying the operating model.
Key Financial Metrics
| Metric | 2011 Full Year (£m) | Q4 2011 (£m) | 2010 Full Year (£m) | Q4 2010 (£m) |
|---|---|---|---|---|
| Turnover | 27,387 | 6,978 | 28,392 | 7,197 |
| Operating Profit (Before Restructuring) | 8,397 | 2,079 | 5,128 | (37) |
| Operating Profit (Total) | 7,807 | 1,879 | 3,783 | (320) |
| Profit After Tax | 5,458 | 1,284 | 1,853 | (633) |
| Earnings Per Share (Total) | 104.6p | 25.2p | 32.1p | (13.6p) |
| EPS (Before Restructuring) | 114.1p | 28.4p | 53.9p | (7.5p) |
| Net Debt | 9,003 | 9,003 | 8,859 | N/A |
| Free Cash Flow | 4,141 | 1,366 | 4,486 | N/A |
Margins (2011): Operating margin before major restructuring was 31% (29.0% excluding legal and other operating income). Core operating margin was 32.1%.
Material Changes vs. Prior Period
- Sales Performance: Reported turnover declined 3% to £27.4 billion, driven by the loss of sales from pandemic flu products, Avandia, and Valtrex. However, underlying sales grew 4%, reflecting portfolio breadth. Pharmaceuticals grew 2% (underlying), Vaccines 11% (underlying), and Consumer Healthcare 5%.
- Profitability: Operating profit before major restructuring surged 65% in constant exchange rate (CER) terms to £8.4 billion, primarily due to significantly lower legal costs compared to 2010 (£157m vs £4.0bn).
- Geographic Mix: Growth was driven by Emerging Markets (+15% underlying), Japan (+28% underlying), and Asia Pacific (+10% underlying). This offset declines in Europe (-4% underlying) and flat performance in the USA.
- Restructuring: Restructuring charges were £590 million in 2011, down from £1.345 billion in 2010. The Operational Excellence programme delivered £2.2 billion in annual savings.
Guidance, Outlook, and Risks
Outlook for 2012
- Sales: Management expects underlying sales growth to translate to reported sales growth in 2012.
- Pipeline: Phase III development is expected to complete for six assets: Relovair (asthma), LABA/LAMA, albiglutide, BRAF, dolutegravir, and Mosquirix.
- Margins: Core operating margin is expected to begin improving gradually from 2012.
- Shareholder Returns: Continued ordinary dividend growth and share buy-backs of £1-2 billion are expected.
Risks and Contingencies
- Legal Settlement: GSK reached an agreement in principle with the US Government for a $3 billion settlement regarding sales practices, Medicaid Rebate Program issues, and Avandia marketing. The final settlement is expected in 2012 and is covered by existing provisions.
- Patent Expirations: Continued generic competition in the USA and Europe remains a headwind, though the portfolio is becoming less vulnerable.
- Regulatory: Sandoz filed a Paragraph IV certification challenging patents for Veramyst; GSK has filed suit to block generic approval until at least May 2014.
- Divestment: The disposal of North American OTC brands (completed Jan 2012) will impact reported growth for 11 months of 2012.
Investor Verification Checklist
- Underlying vs. Reported Growth: Verify the 4% underlying sales growth against the -3% reported decline to understand the impact of legacy product losses (Avandia, Valtrex, Pandemic flu).
- Legal Provision Adequacy: Confirm that the $3 billion US settlement is fully covered by the £2.8 billion aggregate provision for legal disputes.
- R&D Pipeline Progress: Monitor the filing status of the four medicines ready for filing in 2012 (Relovair, Promacta, MEK inhibitor, Qflu) and the completion of Phase III for the six assets highlighted for 2012.
- OTC Divestment Impact: Assess the impact of the North American OTC brand sale on 2012 revenue comparisons and the timing of the supplemental dividend.
- Core Tax Rate: Track the progress toward the target core tax rate of approximately 25% by 2014 (2011 rate was 26.2% excluding Quest disposal).