Business Context and Reporting Period
This Form 6-K filing summarizes GlaxoSmithKline plc's (GSK) Annual Review for the fiscal year ended December 31, 2006. The report was filed on March 22, 2007. GSK operates in two primary segments: Pharmaceuticals and Consumer Healthcare. The company focuses on four strategic objectives: optimizing key product performance, delivering a robust R&D pipeline, improving access to medicines globally, and maintaining a high-performance workforce.
Key Financial Metrics
| Metric | 2006 Value | 2005 Value | Growth (CER*) |
|---|---|---|---|
| Total Turnover | £23.2 billion | £21.7 billion | 9% |
| Pharmaceutical Turnover | £20.1 billion | £18.7 billion | 9% |
| Consumer Healthcare Turnover | £3.1 billion | £3.0 billion | 6% |
| Operating Profit | £7.8 billion | £6.9 billion | 17% |
| Operating Margin | 33.6% | 31.7% | +1.9 pp |
| Profit After Taxation | £5.5 billion | £4.8 billion | 17% |
| Earnings Per Share (Basic) | 95.5 pence | 82.6 pence | 19% |
| Net Cash Inflow from Operations | £4.4 billion | £6.0 billion | -27% |
| Free Cash Flow | £2.6 billion | £4.6 billion | -44% |
| Dividend Per Share | 48 pence | 44 pence | +9% |
*CER: Constant Exchange Rate growth excludes the impact of currency fluctuations.
Material Changes vs. Prior Period
- Revenue Growth: Total turnover increased 9% at constant exchange rates, driven by strong performance in the US pharmaceutical market (up 16%) and growth in key products like Seretide/Advair, Avandia, and vaccines.
- Profitability: Operating profit margin expanded by 1.9 percentage points to 33.6%, reflecting sales growth outpacing SG&A expenses.
- Cash Flow Impact: Net cash inflow from operations decreased significantly (£1.6 billion drop) primarily due to a one-off gross taxation payment of $3.3 billion (£1.8 billion) to settle a long-standing US transfer pricing dispute with the IRS.
- Product Performance:
- Pharmaceuticals: Seretide/Advair sales rose 11% to £3.3 billion; Avandia group sales grew 25% to £1.6 billion; Vaccines sales increased 23% to £1.7 billion.
- Consumer Healthcare: Sensodyne grew 19% and Lucozade 14%, while Aquafresh declined 3%.
- Share Price: Despite strong financial results, the share price fell 9% in 2006 due to US political climate concerns and investor anxiety over pipeline delays.
Guidance, Outlook, and Risks
2007 Outlook
GSK expects Earnings Per Share (EPS) growth of 8% to 10% in constant exchange rate terms for 2007. This outlook assumes continued growth from key products (Seretide/Advair, Avandia, vaccines) and new product launches, partially offset by generic competition for Zofran, Wellbutrin XL, and Flonase.
Key Launches and Pipeline
- 2007 Launches: Five major pharmaceutical products are planned: Tykerb (breast cancer), Cervarix (cervical cancer), Allermist/Avamys (allergic rhinitis), Coreg CR (heart conditions), and Trexima (migraine).
- Consumer Healthcare: Ten new products planned, including alli, the first FDA-approved OTC weight-loss treatment in the US.
- Pipeline Status: As of February 2007, GSK had 158 projects in clinical development, with 31 major opportunities in Phase III or registration.
Risks and Contingencies
- Generic Competition: Significant erosion expected for Zofran and Wellbutrin XL in the coming 12 months.
- Legal and Tax: The company resolved a major US tax dispute in September 2006 with a final net cash cost of approximately $3.1 billion. Other open tax issues exist in Japan and Canada.
- R&D Setbacks: The company noted the cancellation of Redona (diabetes) and brecanavir (HIV/AIDS) during the year, highlighting the inherent risks of drug development.
Investor Verification Checklist
- Tax Settlement Impact: Verify the full financial impact of the $3.1 billion US tax settlement on future cash flows and working capital.
- Generic Erosion: Monitor sales trends for Zofran and Wellbutrin XL to assess the accuracy of management's offsetting growth projections.
- Pipeline Execution: Track regulatory approval timelines for key 2007 launches (Tykerb, Cervarix) and the commercial uptake of alli.
- Avandia Safety Data: Review ongoing clinical data and regulatory stance regarding the Avandia group of products, given its significant contribution to revenue.
- Share Buyback: Confirm the execution of the new £6 billion share buy-back programme announced for a three-year period.