Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Third Quarter ended 30 September 2004 (Q3 2004) and Nine Months ended 30 September 2004.
Context: GSK reported results on a statutory basis only for 2004, having completed major restructuring programs. The company absorbed over £1.2 billion in lost sales due to generic competition for Paxil and Wellbutrin while maintaining overall pharmaceutical sales levels through strong performance in respiratory and metabolic products.
Key Financial Metrics
| Metric | Q3 2004 (£m) | Q3 2003 (£m) | 9 Months 2004 (£m) | 9 Months 2003 (£m) |
|---|---|---|---|---|
| Turnover | 5,019 | 5,466 | 15,026 | 16,063 |
| Trading Profit | 1,594 | 1,753 | 4,868 | 5,434 |
| Profit Before Tax | 1,522 | 1,694 | 4,729 | 5,420 |
| Earnings Per Share (Basic) | 18.7 p | 20.7 p | 58.2 p | 66.2 p |
| Net Debt | (2,391) | (1,442) | (2,391) | (1,442) |
| Operating Cash Flow | 2,006 | 2,341 | 5,121 | 5,698 |
Note: Q3 2003 figures are restated. Growth rates in the filing are often presented at Constant Exchange Rates (CER). At CER, Q3 2004 Trading Profit grew 5% and EPS grew 5% compared to Q3 2003 business performance.
Material Changes vs. Prior Period
- Revenue: Total turnover remained flat in Q3 2004 compared to Q3 2003 (-8% in sterling, flat at CER). Excluding Paxil and Wellbutrin, turnover grew 12% in the US and 8% globally.
- Profitability: Trading profit declined 9% in sterling terms but grew 5% at CER. The trading margin declined 0.3 percentage points due to adverse currency movements, higher R&D, and a less favorable product mix.
- Generic Impact: Sales of Wellbutrin products fell 30% (IR/SR fell 79%) and Paxil franchise sales fell 51% (IR fell 65%) due to generic competition. These losses were partially offset by the launch of Wellbutrin XL and Paxil CR.
- Product Growth: Seretide/Advair sales rose 20% to £609m. Avandia/Avandamet sales rose 31% to £284m. Lamictal sales rose 29% to £172m.
- Balance Sheet: Net debt increased from £1,442m to £2,391m (increase of £949m) primarily due to share buy-backs (£250m in Q3) and acquisitions (£306m for Fraxiparine/Arixtra rights).
Guidance, Outlook, and Risks
- Guidance: GSK remains on track to deliver 2004 EPS (at CER) at least in line with 2003 business performance EPS. Management expects a return to EPS growth in CER terms in 2005 as the impact of generics diminishes.
- Dividends: A third interim dividend of 10 pence per share was declared (up from 9 pence in Q3 2003). The total 2004 dividend is expected to increase by 1 penny per share compared to 2003.
- Pipeline: Key upcoming launches include Vesicare (overactive bladder), Avandaryl (diabetes), and Requip (restless leg syndrome). Cervarix (cervical cancer vaccine) filing moved forward to 2006.
- Risks & Contingencies:
- Legal: Aggregate provision for legal disputes is nearly £1 billion. Significant matters include IRS transfer pricing claims (potential liability of $2.7bn + interest), Paxil anti-trust settlements ($165m), and Relafen settlements ($75m).
- Patents: Ongoing litigation regarding Zofran and Lamictal patents. A loss could materially affect future results.
- Currency: Stronger sterling against the US dollar, Euro, and Yen negatively impacted reported earnings by approximately 15 percentage points on EPS.
Investor Verification Checklist
- Generic Erosion: Verify the sustainability of sales growth in Seretide/Advair and Avandia to offset the continued decline in Paxil and Wellbutrin.
- Legal Provisions: Monitor the outcome of the US Tax Court trial (scheduled for Oct 2006) regarding IRS transfer pricing claims and the finalization of Paxil/Relafen settlements.
- Currency Sensitivity: Assess the impact of the strong pound on future earnings, as the filing notes a potential 9-10% negative currency impact on full-year EPS growth.
- Pipeline Execution: Track the approval timelines for Avandaryl, Vesicare, and Requip, which are critical for 2005 growth.
- Capital Allocation: Review the remaining balance of the £4 billion share buy-back programme and the impact of the £306m acquisition of Fraxiparine/Arixtra rights.