Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Second Quarter ended 30th June 2007 (Q2 2007) and First Half 2007 (H1 2007)
Announcement Date: 25th July 2007
GSK reported unaudited results for Q2 2007. The company operates in Pharmaceuticals and Consumer Healthcare. Performance was reported in sterling, with commentary primarily based on Constant Exchange Rate (CER) growth to exclude currency fluctuations.
Key Financial Metrics
| Metric | Q2 2007 (£m) | Q2 2006 (£m) | CER Growth % | H1 2007 (£m) | H1 2006 (£m) | CER Growth % |
|---|---|---|---|---|---|---|
| Turnover | 5,674 | 5,811 | 3% | 11,266 | 11,624 | 3% |
| Operating Profit | 1,929 | 1,911 | 9% | 4,095 | 4,085 | 10% |
| Profit Before Tax | 1,896 | 1,897 | 8% | 4,039 | 4,067 | 9% |
| Profit After Tax | 1,355 | 1,337 | 10% | 2,888 | 2,867 | 11% |
| Earnings Per Share (EPS) | 24.0p | 23.3p | 11% | 51.0p | 49.8p | 12% |
| Operating Margin | 34.0% | 32.9% | - | - | - | - |
Cash Flow (Q2 2007): Net cash inflow from operating activities was £1,385 million. Cash generated from operations was £2,108 million.
Debt & Liquidity: Net debt at 30 June 2007 was £3,282 million (increase from £2,450 million at year-end 2006). Cash and cash equivalents stood at £1,894 million.
Material Changes vs. Prior Period
- Revenue Mix: Total turnover grew 3% CER. Pharmaceutical turnover was flat (£4.8 billion), while Consumer Healthcare grew 18% CER to £899 million.
- Product Performance:
- Avandia: Sales declined 22% to £349 million following a meta-analysis raising cardiovascular concerns. US sales fell 31%.
- Growth Drivers: Seretide/Advair (+12%), Lamictal (+18%), Vaccines (+6%), Valtrex (+14%), and Coreg (+37%) offset declines.
- Consumer Healthcare: Record quarterly growth driven by the US launch of alli (weight loss, £76m sales) and strong performance of Lucozade, Aquafresh, and Sensodyne.
- Costs: R&D expenditure declined 4% to £789 million, primarily due to lower asset write-offs. SG&A costs remained flat as a percentage of turnover.
- Currency Impact: Reported sterling growth was adversely impacted by the strength of the pound against the US dollar and other major currencies (approx. 8% adverse impact on EPS).
Guidance, Outlook, and Risks
- Shareholder Returns:
- Dividend: Q2 2007 dividend declared at 12p per share (up from 11p in Q2 2006).
- Buy-back: Share buy-back programme increased to £12 billion (a £7.7 billion net increase), expected to be completed over two years.
- Guidance: GSK maintains its 2007 earnings guidance of 8% to 10% EPS growth at constant exchange rates, despite uncertainty surrounding Avandia sales.
- Pipeline: Five major pharmaceutical launches expected in 2007, including Tykerb, Coreg CR, Veramyst, Cervarix, and Trexima (FDA action date 1st August).
- Risks & Contingencies:
- Avandia Litigation: Product liability lawsuits filed in the US following the NEJM meta-analysis. GSK disputes the conclusions and cites its own clinical data showing comparable cardiovascular profiles to other anti-diabetics.
- Legal Provisions: Aggregate provision for legal and other disputes (excluding tax) was £1.1 billion as of 30 June 2007.
- Patent Disputes: Ongoing litigation regarding Valtrex (settled with Ranbaxy for late 2009 entry) and Avandia (dismissed claims against Dr. Reddy's; trial against Teva postponed to November 2007).
- Regulatory: SEC investigation into sales practices in Italy; class action complaint regarding Avandia meta-analysis disclosure.
Investor Verification Checklist
- Avandia Exposure: Verify the trajectory of Avandia sales and the status of the FDA Advisory Committee meeting scheduled for 30th July 2007 regarding cardiovascular risks.
- Buy-back Execution: Monitor the execution of the new £12 billion share buy-back programme and its impact on net debt levels.
- Consumer Healthcare Growth: Assess the sustainability of the 18% growth in Consumer Healthcare, specifically the contribution of the new alli launch.
- Legal Provisions: Review the adequacy of the £1.1 billion legal provision given the early stages of Avandia product liability lawsuits and ongoing patent disputes.
- Currency Sensitivity: Evaluate the impact of a strengthening sterling on future reported earnings, as the company noted a potential 6% adverse currency impact on full-year EPS growth.