Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Results Announcement)
Reporting Period: Year ended December 31, 2003
Filing Date: March 4, 2004
GSK is a leading research-based pharmaceutical and healthcare company. The 2003 results were significantly influenced by exchange rate movements, with the British pound strengthening against the US dollar and Yen but weakening against the Euro. The company reports results in both actual sterling terms and at Constant Exchange Rates (CER) to illustrate underlying performance.
Key Financial Metrics
| Metric | 2003 (£m) | 2002 (£m) | Growth (CER%) | Growth (£%) |
|---|---|---|---|---|
| Turnover | 21,441 | 21,212 | 5% | 1% |
| Trading Profit | 6,525 | 5,662 | 21% | 15% |
| Operating Profit | 6,392 | 5,551 | 21% | 15% |
| Profit Before Tax | 6,329 | 5,506 | 21% | 15% |
| Earnings (Net Profit) | 4,484 | 3,915 | 20% | 15% |
| Earnings Per Share (Basic) | 77.2p | 66.2p | 23% | 17% |
| Operating Cash Flow | 7,005 | 7,255 | - | - |
| Net Debt | (1,648) | (2,335) | - | - |
Dividends: Total dividends declared for 2003 were 41 pence per share (2002: 40 pence). A fourth interim dividend of 14 pence per share was declared, payable April 15, 2004.
Material Changes vs. Prior Period
- Revenue Growth: Total turnover grew 5% at CER, driven by strong performance in new products (29% CER growth) and franchise products, which offset declines in older products facing generic competition.
- Profitability: Trading profit margin improved by 3.7 percentage points to 30.4% of turnover. This was achieved through cost reductions in selling, general, and administration (SG&A) and R&D, despite a slight increase in cost of sales as a percentage of turnover in Q4.
- Product Performance:
- Growth Drivers: Seretide/Advair (+39% CER), Avandia/Avandamet (+24% CER), Lamictal (+31% CER), and Wellbutrin (+18% CER) were key growth contributors.
- Declines: Seroxat/Paxil sales fell 4% CER (down 40% in Q4) and Augmentin fell 29% CER due to generic competition entering the US market.
- Cost Structure: Merger integration and restructuring costs decreased significantly to £395 million in 2003 from £1,032 million in 2002.
Outlook, Risks, and Contingencies
Guidance and Outlook
- 2004 Expectations: GSK expects R&D expenditure to increase slightly more than in 2003. The company anticipates an adverse effect on cost of sales as a percentage of turnover in 2004 due to the loss of high-margin Paxil and Wellbutrin sales and potential currency movements.
- Dividends: GSK expects a similar increase in the total dividend for 2004 as declared in 2003, with a rebalancing of quarterly payments (increasing the first three interim dividends to 10p).
- Product Pipeline: Key launches and filings expected in 2004 include solifenacin succinate (over-active bladder), Avandaryl (diabetes), Epivir/Ziagen (HIV), and Requip (Restless Legs Syndrome).
Risks and Contingencies
- US Tax Dispute: The IRS issued a statutory notice of deficiency for $2.7 billion (£1.5 billion) in taxes plus approximately $2.5 billion in interest for the years 1989–1996 regarding transfer pricing. GSK plans to contest this in US Tax Court, with a trial expected in 2005 or 2006. Further claims for 1997–2003 are anticipated.
- Legal Proceedings:
- Antitrust: GSK agreed to pay $175 million to settle antitrust claims regarding Relafen. Litigation continues regarding Paxil and Augmentin.
- Patent Litigation: Ongoing disputes regarding Paxil, Wellbutrin, Zofran, and Avandia patents. A CAFC decision on Paxil patent validity is expected within 3–6 months of a January 2004 hearing.
- Product Liability: Class certification for Paxil addiction claims was denied in California.
- Regulatory: The FDA is investigating the Cidra, Puerto Rico manufacturing facility regarding production controls and process validation. No indication of supply disruption has been received.
- Pensions: The Group reported a net pension deficit of approximately £1.3 billion after deferred taxation. Special cash contributions of £314 million were made in Q4 2003.
Investor Verification Checklist
- Generic Impact: Verify the extent of market share loss for Paxil and Augmentin in the US and the success of new formulations (Paxil CR, Augmentin ES/XR) in mitigating these losses.
- Tax Liability: Monitor the status of the US IRS transfer pricing dispute and the potential for additional tax assessments for years 1997–2003.
- Patent Expirations: Track the outcomes of patent litigation for key products (Paxil, Wellbutrin, Zofran) and the timeline for generic entry.
- Cost of Sales: Watch for the projected increase in cost of sales as a percentage of turnover in 2004 due to product mix changes.
- Regulatory Compliance: Follow the resolution of the FDA investigation at the Cidra facility and any potential impact on US supply chains.