Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: First Quarter ended March 31, 2003
Announcement Date: April 30, 2003
GSK reported a strong start to 2003, driven by a broad pharmaceutical portfolio and effective cost control. The company presents results on a "Business Performance" basis (excluding merger, integration, and restructuring costs) as its primary measure, alongside statutory UK GAAP results. Commentary focuses on Constant Exchange Rate (CER) growth to neutralize currency fluctuations.
Key Financial Metrics
| Metric | Q1 2003 (£m) | Q1 2002 (£m) | CER Growth % | Sterling Growth % |
|---|---|---|---|---|
| Turnover | 5,222 | 5,110 | 8% | 2% |
| Trading Profit (Business Performance) | 1,807 | 1,615 | 23% | 12% |
| Profit Before Tax (Business Performance) | 1,774 | 1,593 | 22% | 11% |
| Earnings Per Share (Business Performance) | 21.8p | 19.0p | 26% | 15% |
| Trading Profit (Statutory) | 1,702 | 1,440 | 30% | 18% |
| EPS (Statutory) | 20.5p | 17.1p | 32% | 20% |
| Net Debt | (2,051) | (2,221) | - | - |
| Free Cash Flow | 1,074 | 1,133 | - | - |
Segment Performance:
- Pharmaceuticals: Turnover £4,466m (up 9% CER).
- Consumer Healthcare: Turnover £756m (up 6% CER).
Material Changes vs. Prior Period
- Revenue Growth: Pharmaceutical sales grew 9% to nearly £4.5 billion, offsetting a 42% decline in Augmentin sales due to generic competition. Consumer Healthcare sales rose 6%.
- Profitability: Trading margin improved by 3 percentage points to 34.6% (from 31.6% in Q1 2002) due to a 4% reduction in cost of sales and controlled SG&A expenses.
- Currency Impact: A weak US dollar significantly impacted sterling results. The adverse currency impact on EPS was 11%.
- Restructuring Costs: Merger and manufacturing restructuring costs decreased to £99 million in Q1 2003 from £165 million in Q1 2002.
- Net Debt: Net debt decreased by £284 million to £2,051 million, driven by strong operating cash flow of £1,663 million.
Guidance, Outlook, and Risks
Guidance and Outlook
- 2003 EPS Guidance: GSK forecasts high single-digit percentage growth in business performance EPS at constant exchange rates.
- Condition: This guidance assumes no generic competition to Paxil in the USA. Management stated they would reassess guidance if a generic launch became imminent.
- Dividend: First interim dividend declared at 9 pence per share (unchanged from Q1 2002).
- Share Buy-back: £262 million spent in Q1 2003 under the £4 billion programme initiated in October 2002.
Risks and Contingencies
- Legal Proceedings:
- Paxil: Settlement reached with Pentech/Par regarding patent infringement; generic distribution allowed in Puerto Rico. Litigation continues against other generic manufacturers in the US.
- Augmentin: US International Trade Commission rejected a recommendation to dismiss the complaint regarding patent infringement.
- Wellbutrin SR: Appeal hearing set for June 2003 regarding summary judgements of non-infringement.
- Best Price Investigation: Civil settlement reached with US authorities for $87.6 million regarding "best price" compliance.
- Generic Competition: Significant sales decline in Augmentin (down 64% in the US) due to generic entry.
Investor Verification Checklist
- Paxil Patent Status: Verify the timeline for the expiration of Hatch-Waxman stays for remaining generic competitors (Zenith and Alphapharm) and the potential impact on US sales.
- Currency Sensitivity: Assess the impact of the weak US dollar (average £1/$1.60) on future earnings if rates do not recover.
- Augmentin Replacement: Confirm the growth trajectory of Augmentin ES and XR to ensure they continue to mitigate the loss of branded Augmentin sales.
- Restructuring Savings: Monitor progress toward the £1.8 billion annual merger and manufacturing restructuring savings target.
- Legal Settlements: Review the terms of the $87.6 million "best price" settlement and any ongoing antitrust or product liability litigation.