Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: First Quarter ended 31st March 2004
Announcement Date: 29th April 2004
GSK reported Q1 2004 results, marking a transition year where the company expects to report on a statutory basis only, moving away from the "business performance" metrics used in 2003. The results reflect a year of transition characterized by significant generic competition for key products like Paxil and Wellbutrin, offset by strong growth in respiratory, diabetes, and cardiovascular franchises.
Key Financial Metrics
| Metric | Q1 2004 (£m) | Q1 2003 (£m) Restated | CER Growth % | Sterling Growth % |
|---|---|---|---|---|
| Turnover | 5,222 | 4,943 | 2% | (5%) |
| Trading Profit | 1,796 | 1,562 | (2%) | (13%) |
| Profit Before Tax | 1,763 | 1,576 | 1% | (11%) |
| Earnings Per Share (EPS) | 21.6p | 19.4p | 1% | (10%) |
| Operating Cash Flow | 1,332 | 1,663 | N/A | N/A |
| Net Debt | (2,003) | (2,051) | N/A | N/A |
Note: CER = Constant Exchange Rate. Statutory results for Q1 2004 show Trading Profit of £1,691m and EPS of 20.3p.
Material Changes vs. Prior Period
- Currency Impact: A weak US dollar significantly impacted sterling results. While turnover grew 2% at constant exchange rates (CER), it declined 5% in sterling terms. EPS declined 10% in sterling terms but grew 1% at CER.
- Generic Competition: Sales of Seroxat/Paxil fell 36% (US sales down 48%) due to generic entry in September 2003. However, the new formulation Paxil CR grew 37%.
- Product Mix: Trading margins declined 2.8 percentage points in sterling terms (1.2 percentage points at CER) due to higher R&D expenditure and a less favorable product mix (loss of high-margin Paxil sales), partially offset by lower manufacturing costs.
- Accounting Changes: Implementation of UITF 17 (revised) and UITF 38 resulted in a reclassification of own shares to equity, reducing net assets at 31 Dec 2003 by £2,661 million and restating prior period earnings.
Guidance, Outlook, and Risks
Management Commentary and Guidance
CEO JP Garnier stated GSK is "on track to deliver 2004 financial guidance," expecting EPS at constant exchange rates to be at least in line with 2003 business performance EPS. Management anticipates a return to EPS growth in CER terms in 2005 as the impact of generics diminishes.
Key Growth Drivers and Pipeline
- Strong Performers: Seretide/Advair (+22%), Avandia/Avandamet (+18%), Lamictal (+29%), Valtrex (+31%), and Coreg (+27%).
- Upcoming Launches: Epivir/Ziagen (HIV), Avandaryl (Diabetes), and Vesicare (Over-active bladder) expected in the next 9 months.
- Dividend: First interim dividend declared at 10 pence per share (up from 9 pence in Q1 2003).
Risks and Contingencies
- Legal Proceedings:
- Patents: UK High Court ruled GSK's Seretide combination patent invalid; GSK is evaluating an appeal. US Court of Appeals ruled Paxil patent invalid based on 'public use' in clinical trials; GSK is evaluating an appeal.
- Antitrust: Settlement approved for Relafen direct purchasers; litigation continues with indirect purchasers.
- Taxation: GSK filed a petition in US Tax Court contesting IRS claims for additional taxes of $2.7 billion and interest of $2.5 billion for years 1989-1996. Trial expected in 2005-2006.
- Generic Erosion: Continued pressure from generic versions of Paxil IR and Wellbutrin SR expected to impact future quarters.
Investor Verification Checklist
- Generic Impact Trajectory: Verify the extent of sales erosion for Paxil and Wellbutrin in Q2 and Q3 to confirm if the "return to growth" in Q4 is achievable.
- Currency Sensitivity: Monitor exchange rates (specifically USD/GBP) as a weak dollar could materially impact full-year EPS guidance despite underlying growth.
- Patent Litigation Outcomes: Track the status of appeals regarding Seretide (UK) and Paxil (US) patents, as invalidation could significantly alter future revenue streams.
- Tax Liability Provision: Review the adequacy of provisions for the US IRS transfer pricing dispute, given the potential $5.2 billion total exposure.
- New Product Launch Execution: Confirm the successful commercial rollout of Epivir/Ziagen, Avandaryl, and Vesicare to offset legacy product declines.