Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Second Quarter (Q2) and First Half (H1) ended 30th June 2004
Filing Date: 5th August 2004
Context: GSK is a leading research-based pharmaceutical and healthcare company. Results are reported in sterling and are significantly influenced by exchange rate movements, particularly the US dollar, Euro, and Japanese Yen. The company reports growth in Constant Exchange Rate (CER) terms to isolate operational performance from currency fluctuations.
Key Financial Metrics
| Metric | Q2 2004 (£m) | Q2 2003 (£m) | H1 2004 (£m) | H1 2003 (£m) |
|---|---|---|---|---|
| Turnover | 5,064 | 5,375 | 10,007 | 10,597 |
| Trading Profit | 1,712 | 1,795 | 3,274 | 3,486 |
| Operating Profit | 1,610 | 1,882 | 3,207 | 3,553 |
| Profit Before Taxation | 1,631 | 1,876 | 3,207 | 3,534 |
| Earnings (Net Profit) | 1,157 | 1,327 | 2,276 | 2,513 |
| Earnings Per Share (Diluted) | 20.1 p | 22.7 p | 39.5 p | 43.0 p |
| Operating Cash Flow | 1,783 | 1,694 | 3,115 | 3,357 |
| Net Debt (End of Period) | (2,023) | (2,162) | (2,023) | (2,162) |
Note: Negative values in Net Debt indicate a net debt position. Figures for 2003 have been restated following the implementation of UITF 17 (revised) and UITF 38.
Material Changes vs. Prior Period
- Revenue Decline: Total turnover decreased by 6% in sterling terms for Q2 2004, though it grew by 2% at constant exchange rates (CER). The decline was driven by a strong sterling against the US dollar and significant generic competition for key products.
- Profitability: Trading profit margin improved by 0.4 percentage points to 33.8% despite the revenue decline. Earnings per share (EPS) fell 12% in sterling terms (4% CER) primarily due to currency headwinds.
- Product Performance:
- Pharmaceuticals: Turnover was down 7% in sterling (up 1% CER). Strong growth was seen in Seretide/Advair (+22% CER), Avandia (+59% CER), Lamictal (+38% CER), and Coreg (+50% CER). Conversely, Wellbutrin IR/SR and Paxil IR faced severe generic competition, declining 76% and 64% respectively, though new formulations (Wellbutrin XL, Paxil CR) and supply agreements mitigated total franchise declines.
- Consumer Healthcare: Turnover grew 4% CER (down 1% sterling). Growth was led by International and European markets, with strong performance in Oral Care and Nutritional Healthcare (Lucozade). Dermatological sales fell 13% due to generic competition.
- Costs: Selling, general, and administration (SG&A) costs declined 3% due to cost-saving initiatives. R&D expenditure increased 9% reflecting higher clinical trial activity.
Guidance, Outlook, Risks, and Unusual Items
- Dividends: The Board declared a second interim dividend of 10 pence per share (up from 9 pence in Q2 2003). The total dividend for 2004 is expected to increase in line with the 2003 increase of 1 penny per share.
- Pipeline and Launches:
- Upcoming Launches: Vesicare (overactive bladder), Avandaryl (diabetes), and Epivir/Ziagen (HIV) are expected in the second half of 2004.
- Acquisitions: The acquisition of Sanofi-Synthelabo's injectable anti-thrombotic agents (Fraxiparine and Arixtra) is expected to be completed later in the year.
- Strategic Alliance: GSK consolidated Theravance Inc. in May 2004 following a strategic alliance, increasing ownership to 19%.
- Legal and Tax Risks:
- IRS Dispute: GSK is contesting US tax claims for 1989-1996 totaling $2.7 billion plus interest. A trial is expected in 2005-2006. Similar issues remain open for 1997 to date.
- Antitrust: GSK reached a settlement of $92 million regarding Augmentin antitrust litigation in July 2004.
- Paxil Litigation: Lawsuits were filed in New York and California regarding the promotion of Paxil/Seroxat for children. An investigation by the UK MHRA is also pending.
- Patent Re-issue: GSK is applying to re-issue the Advair combination patent to strengthen protection, a process expected to take 1-2 years.
- Currency Outlook: Management noted that if exchange rates held at late July 2004 levels, the negative currency impact on full-year EPS growth would be approximately 9% to 10%.
Key Facts for Investor Verification
- Currency Sensitivity: Verify the impact of the strong sterling on reported revenue and EPS, as the company explicitly states a 9-10% negative currency impact on full-year EPS growth if current rates hold.
- Generic Erosion: Monitor the trajectory of the Paxil and Wellbutrin franchises as generic competition continues to impact immediate-release formulations, despite the growth of controlled-release versions.
- Legal Provisions: Review the adequacy of the £1.0 billion provision for legal disputes and the potential exposure from the ongoing IRS tax dispute and Paxil litigation.
- US GAAP Reconciliation: Note the significant difference between UK GAAP and US GAAP earnings due to amortization of intangible assets and pension accounting; US GAAP diluted EPS for H1 2004 was 28.5 p compared to 39.5 p under UK GAAP.
- Debt Management: Confirm the utilization of the $2.5 billion US dollar global bond issued in April 2004, which was used to refinance debt and redeem preference shares.