Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Preliminary Announcement of Results)
Reporting Period: Year ended 31st December 2005
Issuance Date: 8th February 2006
Accounting Standard: International Financial Reporting Standards (IFRS)
GSK reported an "excellent" 2005 performance driven by strong growth in key pharmaceutical products and vaccines. The company operates globally with significant exposure to the USA, Europe, and International markets.
Key Financial Metrics
| Metric | 2005 Full Year (£m) | 2005 Growth (CER%) | 2005 Growth (£%) | Q4 2005 (£m) | Q4 Growth (CER%) |
|---|---|---|---|---|---|
| Turnover | 21,660 | 7% | 8% | 5,907 | 8% |
| Operating Profit | 6,874 | 16% | 19% | 1,633 | 20% |
| Profit Before Tax | 6,732 | 13% | 16% | 1,606 | 11% |
| Profit After Tax | 4,816 | 17% | 17% | 1,151 | 31% |
| Earnings Per Share (EPS) | 82.6p | 18% | 21% | 19.8p | 33% |
| Operating Margin | 31.7% | +2.9pp | - | - | - |
| Effective Tax Rate | 28.5% | - | - | 28.3% | - |
Cash Flow & Liquidity:
- Net cash inflow from operating activities: £5,958 million (2004: £4,944 million).
- Net debt reduced from £1,984 million to £1,237 million.
- Cash and cash equivalents at year-end: £4,209 million.
- Capital expenditure (purchase of property, plant, and equipment): £903 million.
Material Changes vs. Prior Period
- Revenue Growth: Total turnover grew 7% at constant exchange rates (CER). Pharmaceutical turnover grew 8% to £18.7 billion, while Consumer Healthcare grew 2% to £3.0 billion.
- Profitability Expansion: Operating profit grew 16% CER, outpacing revenue growth due to flat SG&A costs (excluding legal matters) and higher gains from asset disposals. Operating margin improved by 2.5 percentage points on a CER basis.
- Product Performance:
- Seretide/Advair: Sales exceeded £3 billion (+22% CER), driven by US market share gains.
- Avandia/Avandamet: Sales rose 18% to £1.3 billion.
- Vaccines: Sales increased 15% to £1.4 billion, aided by the acquisition of ID Biomedical.
- Declines: Paxil sales fell 42% due to generic competition and supply interruptions. Wellbutrin IR/SR sales fell 68% due to generics, though Wellbutrin XL grew 38%.
- Acquisitions: GSK acquired ID Biomedical Corporation for approximately £0.9 billion and Corixa Corporation for £150 million.
- Legal Costs: Costs for legal matters decreased to £430 million (2004: £595 million), contributing to margin expansion.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
CEO JP Garnier highlighted strong growth in key products and a robust pipeline. The company expects 2006 EPS growth of around 10% in CER terms. Eight major assets are scheduled to enter Phase III development in 2006, doubling the late-stage pipeline.
Key Pipeline Events:
- Cervarix: HPV vaccine filing expected in EU (March 2006) and USA (end of 2006).
- Pandemic Flu Vaccine: Filing expected in Europe in 2006.
- Rotarix: EU launch expected Q2 2006.
- Allermist: Filing expected mid-2006.
Dividends & Buybacks:
- 2005 Dividend: 44p per share (increase of 2p from 2004).
- Share Buyback: Repurchased £1 billion in 2005; expects to repurchase a further £1 billion in 2006.
Risks and Contingencies:
- Tax Disputes: Significant ongoing disputes with the US IRS and UK HMRC regarding transfer pricing. Total claims from the IRS for 1989-2000 amount to $8.3 billion (tax and interest). GSK has filed counter-claims for $1.8 billion. A trial is scheduled for October 2006.
- Legal Provisions: Aggregate provision for legal and other disputes (excluding tax) was over £1.1 billion. Litigation outcomes remain unpredictable.
- Patent Challenges: Ongoing intellectual property disputes regarding Wellbutrin XL and Advair patents. The USPTO rejected a re-issue application for the Advair combination patent in January 2006; GSK plans to seek reconsideration.
Investor Verification Checklist
- Tax Liability Exposure: Verify the status of the consolidated US Tax Court trial (October 2006) regarding the $8.3 billion IRS claim and the adequacy of current provisions.
- Patent Protection: Monitor the outcome of the USPTO reconsideration for the Advair combination patent and ongoing litigation regarding Wellbutrin XL patents.
- Pipeline Execution: Track the regulatory filing and approval timelines for Cervarix, the pandemic flu vaccine, and the 8 assets entering Phase III in 2006.
- Generic Erosion: Assess the long-term impact of generic competition on Paxil and Wellbutrin IR/SR sales versus the growth of newer formulations (Wellbutrin XL).
- Acquisition Integration: Review the financial contribution and integration progress of ID Biomedical and Corixa in 2006.