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 30 June 2009
Issuance Date: 22 July 2009
GSK reported results for the second quarter and half-year 2009, highlighting a strategic shift toward a diversified global business. Performance was characterized by significant generic competition in the US pharmaceutical market, offset by strong growth in Consumer Healthcare, Vaccines, and Emerging Markets. The company is executing a major restructuring program aimed at cost savings and operational simplification.
Key Financial Metrics
| Metric | Q2 2009 | H1 2009 | Q2 2008 (Prior Year) | H1 2008 (Prior Year) |
|---|---|---|---|---|
| Turnover (£m) | 6,747 | 13,516 | 5,874 | 11,560 |
| Turnover Growth (CER%) | (2)% | (3)% | - | - |
| Operating Profit Before Restructuring (£m) | 2,381 | 4,357 | 2,126 | 4,174 |
| Operating Profit After Restructuring (£m) | 2,195 | 3,907 | 1,939 | 3,902 |
| EPS Before Restructuring (pence) | 31.0p | 57.3p | 27.2p | 52.9p |
| EPS After Restructuring (pence) | 28.3p | 50.6p | 24.6p | 49.0p |
| Net Debt (£m) | 8,616 (as of 30 Jun) | 8,616 (as of 30 Jun) | 10,173 (as of 30 Jun) | 10,173 (as of 30 Jun) |
| Operating Cash Flow (£m) | - | 3,499 | - | 3,174 |
Note: CER% represents Constant Exchange Rate growth. Net debt decreased by £1.6 billion during H1 2009, largely due to exchange movements.
Material Changes vs. Prior Period
- US Pharmaceuticals Decline: US pharmaceutical turnover fell 15% in Q2 and 19% in H1 due to extensive generic competition affecting mature brands (e.g., Lamictal, Imigran, Flonase, Wellbutrin).
- Consumer & Vaccine Growth: Consumer Healthcare sales grew 9% in Q2 and 7% in H1. Vaccine sales grew 14% in Q2 and 16% in H1, driven by new products (Cervarix, Rotarix) and pandemic influenza demand.
- Emerging Markets: Sales in Emerging Markets grew 14% in Q2 and 16% in H1, now representing 13% of pharmaceutical revenue.
- Restructuring Charges: Q2 included £186 million in restructuring charges; H1 totalled £450 million. These charges relate to the Operational Excellence programme.
- Asset Disposals: Gains from asset disposals were £346 million in Q2 and £347 million in H1, primarily reflecting the sale of Wellbutrin XL commercial rights in the US.
- Legal Costs: Legal costs increased significantly to £85 million in Q2 and £136 million in H1 compared to prior year periods.
Guidance, Outlook, and Risks
Management Commentary & Outlook
CEO Andrew Witty indicated that performance is expected to improve in the second half of 2009 as the year-on-year impact of US generic competition reduces and new product contributions increase. The company expects SG&A costs (excluding legal charges) to be around 29% of turnover for the full year 2009.
Strategic Priorities
- Diversification: Reducing reliance on "white pill/western market" products (down to 31% of sales in Q2 from 38% in Q2 2008).
- Product Pipeline: Menhibrix (meningitis vaccine) filing expected in H2 2009; Horizon programme entering Phase III for COPD in October 2009.
- Influenza Response: Relenza capacity expected to triple to 190 million doses by end of 2009. Contracts secured for 195 million doses of H1N1 vaccine.
Risks and Contingencies
- Legal Proceedings: Aggregate provision for legal disputes is £1.7 billion. Significant matters include antitrust litigation regarding Wellbutrin XL and Flonase, and patent challenges to Seretide (Irish patent found invalid, appeal pending) and Lovaza.
- Patent Expirations: Risks associated with the loss of patent protection for key products.
- Pension Deficit: The net deficit on pension plans increased to £2.517 billion at 30 June 2009 due to inflation rate changes and lower discount rates.
Investor Verification Checklist
- US Generic Impact: Verify the sustainability of the US pharmaceutical decline and the timeline for new product launches to offset lost revenue.
- Restructuring Progress: Confirm the realization of the targeted £1.7 billion annual pre-tax cost savings by 2011.
- Legal Exposure: Monitor the outcome of the Wellbutrin XL antitrust case and Seretide patent challenges, which could impact future cash flows.
- Influenza Revenue: Assess the timing and volume of H1N1 vaccine shipments and Relenza sales to ensure they meet the projected revenue contribution.
- Stiefel Acquisition: Track the completion of the Stiefel Laboratories acquisition (announced Q2, expected Q3 2009) and its integration impact.