Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Annual Review 2004)
Reporting Period: Year ended December 31, 2004
Filing Date: March 24, 2005
GSK reported a challenging 2004 characterized by significant generic competition, specifically the loss of patent protection on Paxil and Wellbutrin. Despite losing over £1.5 billion in sales to generics, the company achieved its financial objectives through a broad portfolio of fast-growing products and operational cost controls. The company is transitioning its financial reporting from "business performance" (excluding merger/restructuring items) to a statutory basis only, as major integration programs have concluded.
Key Financial Metrics
| Metric | 2004 (Statutory) | 2003 (Business Performance) | Growth (CER*) |
|---|---|---|---|
| Total Turnover | £20,359 million | £21,441 million | 1% |
| Pharmaceutical Turnover | £17,146 million | £18,181 million | 1% |
| Consumer Healthcare Turnover | £3,213 million | £3,260 million | 3% |
| Trading Profit | £6,150 million | £6,904 million | (1%) |
| Profit Before Tax | £6,119 million | £6,703 million | 2% |
| Profit After Tax | £4,418 million | £4,865 million | 1% |
| Earnings Per Share (EPS) | 75.0 pence | 82.0 pence | 2% |
| Dividends Per Share | 42.0 pence | 41.0 pence | N/A |
| Net Cash Inflow from Operations | £7,005 million | £6,527 million | N/A |
| Capital Employed | £5,804 million | £6,202 million | N/A |
*CER = Constant Exchange Rates. Growth rates are calculated comparing 2004 statutory results to 2003 business performance results.
Material Changes vs. Prior Period
- Generic Impact: The company absorbed a loss of over £1.5 billion in sales due to generic competition for Paxil (sales down 39%) and Wellbutrin (sales down 12%).
- Product Growth: Key products offset generic losses. Seretide/Advair grew 19% to £2.5 billion; Avandia/Avandamet grew 32% to £1.1 billion; Lamictal grew 32% to £0.7 billion; and Vaccines grew 11% to £1.2 billion.
- Accounting Basis: For the first time, results are reported on a statutory basis only, removing the "business performance" measure used previously to exclude merger and restructuring costs.
- IFRS Adoption: The company completed its conversion to International Financial Reporting Standards (IFRS), effective January 1, 2005. Under IFRS, 2004 Profit Before Tax was £5,779 million and EPS was 68.1 pence.
- Share Buy-back: The company purchased £1,000 million of shares in 2004 as part of a £4 billion program.
Guidance, Outlook, and Risks
Outlook and Guidance
Management expects faster growth in 2005, with EPS percentage growth at constant exchange rates in the "low double-digit range" on an IFRS basis. This is driven by strong key product performance and operational efficiencies. The company anticipates the launch of six new products in 2005, including Rotarix, Vesicare, Boniva, Avandaryl, Requip, and Entereg.
Pipeline
As of February 2005, GSK had 140 projects in clinical development (88 New Chemical Entities, 32 Product Line Extensions, 20 vaccines). Notable pipeline highlights include Cervarix (cervical cancer vaccine), which showed 100% efficacy in Phase II trials, with a filing expected in 2006.
Risks and Contingencies
- Tax Disputes: Significant open issues with tax authorities in the US, UK, Japan, and Canada. The US IRS issued Notices of Deficiency for 1989-2000 claiming additional taxes of $4.6 billion plus estimated interest of $3.0 billion (total potential liability ~$7.6 billion). GSK disputes these claims and has filed petitions in US Tax Court.
- Legal Proceedings: The company is a defendant in patent litigation regarding generic versions of key products (Wellbutrin, Seretide, Avandia, etc.), product liability lawsuits, and anti-trust actions. It is also responding to US government investigations into pricing and marketing practices.
- Healthcare Financing: Management cites the crisis of healthcare financing and pricing pressures due to aging populations in the developed world as a primary industry challenge.
Investor Verification Checklist
- Tax Liability Exposure: Verify the status of the US IRS tax dispute and the potential $7.6 billion liability, including the timeline for the Tax Court trial (provisional date October 2006).
- Generic Erosion: Monitor the continued impact of generic competition on Paxil and Wellbutrin franchises versus the growth trajectory of replacement products like Seretide/Advair and Avandia.
- IFRS Impact: Review the full Annual Report 2004 for detailed reconciliation between UK GAAP and IFRS figures, particularly regarding share-based payments and pension adjustments.
- Pipeline Milestones: Track the progress of Phase III trials for Cervarix and the commercial performance of the six new product launches scheduled for 2005.
- Legal Investigations: Monitor outcomes of US federal and state investigations into pricing and marketing practices.