Business Context and Reporting Period
This Form 6-K filing by GlaxoSmithKline plc (GSK) summarizes the company's Annual Review for the fiscal year ended December 31, 2003. The report was filed on April 15, 2004. GSK is a global pharmaceutical and consumer healthcare company headquartered in the UK. The filing details the company's financial performance, operational highlights, R&D pipeline progress, and corporate governance updates for the 2003 period.
Key Financial Metrics
| Metric | 2003 Value | 2002 Value | Change |
|---|---|---|---|
| Total Turnover | £21.4 billion | £21.2 billion | +5% |
| Pharmaceutical Turnover | £18.2 billion | £18.0 billion | +5% |
| Consumer Healthcare Turnover | £3.3 billion | £3.2 billion | +4% |
| Trading Profit (Business Performance) | £6.9 billion | £6.7 billion | +9% |
| Trading Margin | 32.3% | 31.6% | +0.7 pts |
| Operating Cash Flow | £7.0 billion | £7.3 billion | - |
| Business Performance EPS | 82.1 pence | 78.3 pence | +10% |
| Statutory EPS | 77.2 pence | 66.2 pence | +23% |
| Dividend per Share | 41 pence | 40 pence | +1 pence |
| Net Assets | £8.5 billion | £7.4 billion | - |
Note: Growth rates are presented at constant exchange rates (CER) unless otherwise stated. "Business performance" excludes merger items, restructuring costs, and disposal of businesses to reflect underlying operational results.
Material Changes vs. Prior Period
- Generic Competition Impact: Sales of key products Augmentin and Paxil declined significantly due to generic competition. Augmentin US sales fell 51%, and Paxil US sales fell 9%. Excluding these products, pharmaceutical turnover grew 9%.
- Product Growth: Ten major products recorded double-digit growth. Seretide/Advair grew 39% to £2.2 billion, becoming one of the top ten pharmaceutical brands globally. Avandia/Avandamet grew 24% to £0.9 billion.
- Consumer Healthcare: Trading profit rose 16% to £603 million, driven by growth in oral care and nutritional healthcare, offsetting declines in smoking control products in the US.
- Cost Management: Improved trading margins were achieved through cost savings from merger integration and manufacturing initiatives, despite higher pension costs.
Guidance, Outlook, and Risks
Outlook and Guidance
Management characterizes 2004 as a "year of transition" due to the full impact of generic competition on Paxil and the introduction of generic Wellbutrin. These two products represented £2.1 billion in US sales in 2003. GSK expects to deliver 2004 earnings per share (EPS) at least in line with 2003 business performance EPS (at constant exchange rates), with a return to growth expected in 2005.
Management Commentary
CEO JP Garnier highlighted the success of the redesigned R&D organization, which now features seven Centres of Excellence for Drug Discovery. The pipeline includes 148 projects in clinical development, with 46 new chemical entities in phases II and III/registration. The company expects a record number of filings over the next five years.
Risks and Contingencies
- Tax Disputes: GSK faces a significant tax dispute with the US IRS regarding legacy Glaxo Wellcome products (1989-1996). The IRS has issued a deficiency notice for $2.7 billion (£1.5 billion) in taxes, with estimated interest of $2.5 billion (£1.4 billion). The company disputes the claim.
- Legal Proceedings: The company is involved in patent litigation regarding generic versions of key products (Wellbutrin, Seretide, Avandia, etc.) and product liability lawsuits.
- Regulatory and Pricing Pressure: Continued pressure on pharmaceutical pricing in the US (Medicare reform) and Europe (healthcare budget constraints) poses a risk to returns.
Investor Verification Checklist
- Generic Erosion Mitigation: Verify the actual sales performance of Paxil and Wellbutrin in 2004 to confirm management's ability to "weather the impact" as projected.
- Tax Liability Resolution: Monitor the status of the US IRS tax dispute, as the potential liability (principal plus interest) exceeds £3 billion.
- R&D Pipeline Progression: Track the progression of the 46 new chemical entities in late-stage clinical trials to ensure the pipeline delivers the anticipated future growth.
- EPS Guidance Achievement: Compare Q1-Q4 2004 earnings results against the guidance of maintaining 2003 EPS levels despite patent expiries.
- Dividend Policy: Confirm the implementation of the proposed dividend rebalancing in 2004 (increasing interim dividends from 9p to 10p).