Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: First Quarter 2010 (Three months ended 31st March 2010)
Announcement Date: 28th April 2010
GSK reported continued sales growth driven by strong performance in Emerging Markets, Asia Pacific/Japan, and Europe, alongside a diversified product portfolio. The company highlighted strategic progress in its Operational Excellence programme and the integration of the Stiefel acquisition.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 | Growth (CER%) |
|---|---|---|---|
| Turnover | £7,357m | £6,769m | +13% |
| Operating Profit (Before Restructuring) | £2,395m | £1,976m | +21% |
| Operating Profit (Total) | £2,094m | £1,712m | +22% |
| Profit After Tax | £1,395m | £1,169m | +19% |
| Earnings Per Share (Before Restructuring) | 30.7p | 26.3p | +16% |
| Earnings Per Share (Total) | 26.4p | 22.3p | +18% |
| Net Cash Inflow from Operations | £2,122m | £1,736m | +22% |
| Net Debt | £9.0bn | £9.4bn | -4% |
Segment Performance:
- Pharmaceuticals: Sales £6.1bn (+14% CER). Growth driven by vaccines (including H1N1), respiratory, and dermatology products.
- Consumer Healthcare: Sales £1.2bn (+9% CER), outpacing global market growth of 1%.
- ViiV Healthcare: Sales £373m (-7% CER), impacted by US healthcare reforms and competition.
Material Changes vs. Prior Period
- Revenue Mix: Sales from "white pills/western markets" decreased to 27% of total sales (from 32% in Q1 2009), reflecting successful diversification into Emerging Markets (+43% CER) and Asia Pacific/Japan (+45% CER).
- Product Performance:
- Positive: Seretide/Advair (+9%), Cervarix (+60%), Synflorix (new launch), and H1N1 pandemic vaccine sales (£698m).
- Negative: Valtrex (-46%) and Wellbutrin (-67%) declined due to generic competition and asset sales/transfers.
- Cost Structure: Cost of sales increased to 26.2% of turnover (from 24.3%) due to generic competition on high-margin products and £94m in stock write-offs. R&D expenditure decreased to 12.8% of turnover (from 15.9%) due to project phasing and lower intangible asset write-offs.
- Legal Costs: Increased significantly to £210m (from £51m in Q1 2009) due to progress in settling existing cases.
Guidance, Outlook, and Risks
- Operational Excellence: On track to deliver £2.2bn in cumulative annual cost savings by 2012, with £1.5bn expected by end of 2010.
- Margin Outlook: Management expects a broadly stable operating margin for 2010 (excluding legal charges).
- Dividend: First interim dividend declared at 15p per share (+7% vs. prior year).
- Pipeline: EU approvals received for Revolade, Arzerra, and Duodart. Positive opinion for Votrient. Planned Q2 filings for Benlysta (USA/EU). Phase III start for Relovair.
- Risks and Contingencies:
- Legal: Aggregate provision for legal disputes is £2.3bn. Specific litigation includes a patent infringement suit regarding Arzerra filed by Genentech/Biogen Idec.
- Regulatory: FDA temporarily suspended Rotarix sales in the USA pending review of PCV-1 DNA material discovery.
- US Healthcare Reform: Expected to increase discounts for government programmes; GSK absorbed the initial impact in Q1.
Investor Verification Checklist
- Pandemic Product Impact: Verify the sustainability of growth excluding H1N1 vaccine sales (£698m) and Relenza, which drove a significant portion of the 13% revenue increase.
- Generic Erosion: Monitor the trajectory of sales for mature products like Valtrex and Wellbutrin as generic competition intensifies in the US market.
- Legal Provisions: Assess the adequacy of the £2.3bn legal provision given the increase in legal charges and ongoing litigation (e.g., Arzerra, Avandia safety debates).
- Cost Savings Realization: Track the delivery of the £1.5bn cost savings target for 2010 to ensure margin stability.
- Rotarix Status: Confirm the outcome of the FDA advisory committee meeting regarding the Rotarix suspension scheduled for May 2010.