Business Context and Reporting Period
Company: GSK Plc
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter (Q3) and Nine Months ended 30 September 2019
Issued Date: 30 October 2019
GSK reported sales growth across all three business segments (Pharmaceuticals, Vaccines, and Consumer Healthcare) in Q3 2019. A significant milestone was the completion of the Consumer Healthcare Joint Venture (JV) with Pfizer on 31 July 2019, creating a new world leader in the sector. The company also upgraded its full-year 2019 Adjusted EPS guidance.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Turnover (Sales) | £9.4 billion | £8.1 billion | £24.9 billion | £22.6 billion |
| Total Operating Profit | £2.1 billion | £1.9 billion | £5.1 billion | £3.9 billion |
| Adjusted Operating Profit | £2.8 billion | £2.5 billion | £7.1 billion | £6.5 billion |
| Total EPS | 31.4p | 28.8p | 67.7p | 49.0p |
| Adjusted EPS | 38.6p | 35.5p | 99.2p | 88.3p |
| Net Cash from Operations (9M) | £4.6 billion | £4.3 billion | ||
| Free Cash Flow (9M) | £2.5 billion | £2.4 billion | ||
| Net Debt (30 Sep 2019) | £28.1 billion | £23.8 billion (30 Sep 2018) |
Segment Performance (Q3 2019):
- Pharmaceuticals: £4.5 billion (+7% AER, +3% CER). Respiratory sales grew 25% AER driven by Trelegy and Nucala. HIV sales were flat at CER.
- Vaccines: £2.3 billion (+20% AER, +15% CER). Shingrix sales grew 87% AER.
- Consumer Healthcare: £2.5 billion (+30% AER, +25% CER). Pro-forma growth was +3% CER.
Material Changes vs. Prior Period
- Revenue Growth: Group turnover increased 16% at Actual Exchange Rates (AER) and 11% at Constant Exchange Rates (CER) in Q3. Growth was driven by Vaccines and the inclusion of Pfizer consumer healthcare brands.
- Profitability: Adjusted Group operating margin was 29.7% in Q3, down 2.4 percentage points at CER due to increased R&D spending and generic Advair impact, partly offset by strong Vaccines performance.
- EPS: Adjusted EPS grew 1% at CER in Q3, driven by a lower effective tax rate and operating performance, offset by higher profit allocation to non-controlling interests (Pfizer's share in the new JV).
- Debt: Net debt increased to £28.1 billion from £21.6 billion at year-end 2018, primarily due to the Tesaro acquisition (£3.9 billion), IFRS 16 implementation (£1.3 billion), and dividends paid.
Guidance, Outlook, and Risks
2019 Guidance Update:
GSK improved its 2019 Adjusted EPS guidance to expect results "around flat at CER," upgrading from a previous expectation of a decline of -3% to -5%. This reflects strong operating performance, a lower expected effective tax rate of ~17%, and increased investment in R&D.
Dividend:
A third interim dividend of 19p per share was declared. The company expects to maintain the full-year 2019 dividend at 80p per share.
Pipeline Highlights:
- Oncology: Positive data for Zejula (ovarian cancer), belantamab mafodotin (multiple myeloma), and dostarlimab (endometrial cancer). Regulatory filings expected by end of 2019.
- HIV: Submission to EMA for long-acting injectable cabotegravir + rilpivirine.
- Respiratory: Nucala approved for self-administration in EU; Trelegy Ellipta submitted to FDA for asthma indication.
Risks and Contingencies:
- Generic Competition: Continued impact from the loss of exclusivity of Advair in the US.
- Legal Matters: Aggregate provision for legal disputes is £0.4 billion. A trial date is set for November 2019 regarding claims by health insurers related to medicines manufactured at the former Cidra plant.
- Contingent Consideration: Liability for ViiV Healthcare contingent consideration to Shionogi stands at £5.7 billion (post-tax).
Investor Verification Checklist
- Pro-Forma Adjustments: Verify the impact of the Pfizer Consumer Healthcare JV on reported growth rates versus pro-forma growth rates (which adjust for the acquisition timing).
- Non-Controlling Interests: Review the allocation of profits to Pfizer (32% stake in Consumer Healthcare JV) and its impact on Adjusted EPS.
- Advair Impact: Assess the magnitude of revenue decline in Established Respiratory products due to US generic competition.
- Contingent Consideration: Monitor the re-measurement charges related to ViiV Healthcare liabilities, which fluctuate based on exchange rates and sales forecasts.
- IFRS 16 Impact: Confirm the effect of the new lease accounting standard on net debt and operating cash flow classifications.