Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Interim Management Report)
Reporting Period: Second Quarter (Q2) and First Half (H1) ended 30th June 2011
Issuance Date: 26th July 2011
GSK reported a strong Q2 performance characterized by underlying sales growth of 5%, driven by Pharmaceuticals, Vaccines, and Consumer Healthcare divisions. The company is executing a strategy to grow a diversified global business, deliver new products, and simplify its operating model. A major restructuring program is nearing completion, with total expected annual savings of £2.5 billion by 2012.
Key Financial Metrics
| Metric | Q2 2011 (£m) | Q2 2010 (£m) | H1 2011 (£m) | H1 2010 (£m) |
|---|---|---|---|---|
| Turnover (Reported) | 6,720 | 7,025 | 13,305 | 14,382 |
| Turnover (Underlying) | +5% (CER) | - | +4% (CER) | - |
| Operating Profit (Before Restructuring) | 1,969 | 641 | 4,139 | 3,036 |
| Operating Profit (Total) | 1,778 | 51 | 3,813 | 2,145 |
| EPS (Before Restructuring) | 25.0p | 2.6p | 57.3p | 33.3p |
| EPS (Total) | 21.8p | (6.0p) | 51.8p | 20.4p |
| Net Debt (as of 30 Jun 2011) | £9.3 billion | - | - | - |
| Free Cash Flow (H1) | £1,227 million | - | - | £3,204 million |
Note: Reported sales declined due to the loss of £472 million in sales from pandemic products, Avandia, and Valtrex compared to the prior year.
Material Changes vs. Prior Period
- Revenue Mix: Reported turnover declined 2% in Q2 and 6% in H1. However, underlying sales grew 5% in Q2 and 4% in H1. Sales outside the USA and Europe now represent 37% of underlying turnover, growing 15% in Q2.
- Profitability: Operating profit before major restructuring increased significantly (>100% in Q2) primarily due to a reduction in legal charges (from £1,578m in Q2 2010 to £61m in Q2 2011) and lower R&D costs, partially offset by lower sales of high-margin pandemic products.
- Restructuring: Restructuring charges decreased to £191 million in Q2 2011 (from £590 million in Q2 2010). The company expects to deliver an additional £300 million in annual savings, bringing the total program savings to £2.5 billion by 2012.
- Divestments: GSK disposed of its remaining shares in Quest Diagnostics, generating a pre-tax profit of £584 million in H1 2011.
Guidance, Outlook, and Risks
- Dividends: The Board declared a second interim dividend of 16p per share (up 7% from 15p in Q2 2010).
- Share Repurchases: £892 million of shares repurchased in H1 2011. Total repurchases for 2011 are expected to be at the top end of the £1-2 billion range.
- Margin Outlook: Operating margin for 2011 is expected to be around one percentage point lower than 2010. Margins are expected to begin improving in 2012 as restructuring concludes.
- Tax Rate: The effective tax rate for the full year is expected to be around 29.5% (including the Quest disposal). Excluding the disposal and proposed Consumer Healthcare divestments, the rate is expected to be around 27%.
- Pipeline: New approvals include Benlysta (EU), Potiga (USA), and Rotarix (Japan). More than 30 Phase III read-outs are expected by the end of 2012.
- Risks: Principal risks include R&D failure to deliver commercial products, intellectual property challenges, litigation outcomes (including product liability and patent disputes), and regulatory controls on pricing.
Investor Verification Checklist
- Underlying vs. Reported Growth: Verify the distinction between reported sales (down due to Avandia/Valtrex/pandemic products) and underlying sales (up 5%) to assess core business health.
- Legal Provisions: Review the £3.3 billion provision for legal and other disputes and monitor ongoing litigation regarding Seretide, Lovaza, and HIV patents.
- Restructuring Savings: Confirm the realization of the additional £300 million in annual savings and the timeline for the completion of the restructuring program.
- Consumer Healthcare Divestment: Track progress on the divestment of non-core OTC assets in the USA and Europe, expected by late 2011.
- Working Capital: Monitor the working capital conversion cycle, which increased to 236 days in H1 2011 due to inventory stock-building.