GSK

Business Context and Reporting Period

This Form 6-K, dated April 2, 2019, serves as a Circular to Shareholders and Notice of General Meeting for GlaxoSmithKline plc (GSK). The filing details a proposed transaction to combine GSK's Consumer Healthcare business with Pfizer Inc.'s Consumer Healthcare business into a new Consumer Healthcare Joint Venture (CHJV). GSK will hold a 68% controlling equity interest, while Pfizer will hold 32%. The transaction is conditional upon shareholder approval at a General Meeting scheduled for May 8, 2019, and various antitrust clearances. The filing also outlines the strategic intent to separate the CHJV from GSK via a demerger and listing within three years of completion.

Key Financial Metrics

The filing provides financial data for the businesses contributing to the Joint Venture for the fiscal years ended December 31, 2018 (FY2018) and December 31, 2017 (FY2017). Specific consolidated group metrics for GSK are not provided in this document, only the carve-out data for the relevant businesses.

Transaction Costs and Synergies: The transaction is expected to generate annual cost savings of £0.5 billion by 2022. Total cash costs for integration are estimated at £0.9 billion, with non-cash charges of £0.3 billion. Planned divestments targeting approximately £1 billion in net proceeds are expected to cover these cash costs.

Material Changes and Performance Drivers

• Pfizer CH Business: FY2018 turnover grew 3% at actual exchange rates (AER) and 3% at constant exchange rates (CER). Growth was driven by the Core Supplements category (+9% AER), led by Centrum and Emergen-C. The Pain Management category grew 1%, while Other Categories declined 2% due to the loss of exclusivity for Nexium 24HR in the US.
• GSK CH Business: FY2018 turnover declined 1% AER but grew 2% CER. Total operating profit increased significantly (27% AER) due to reduced restructuring and impairment charges compared to the prior year. Adjusted operating profit declined slightly (1% AER) in line with turnover.
• Strategic Shift: The transaction aims to create the world's largest consumer healthcare business by market share (7.3% combined global OTC share in FY2017), targeting an Adjusted Operating Margin in the "mid-to-high 20s" by 2022.

Guidance, Outlook, and Risks

Outlook and Guidance:

• The transaction is expected to be accretive to GSK's Adjusted Earnings and free cash flow in the first full year following completion.
• GSK continues to expect to pay a dividend of 80p per share in FY2019.
• The CHJV is expected to separate from GSK within three years of completion via a demerger and listing on the UK equity market.

Risks and Contingencies:

• Break Fee: Pfizer is entitled to a break fee of $900 million if the transaction is terminated due to a change in the GSK Board recommendation, shareholder rejection, or failure to approve by September 30, 2019 (extendable to March 31, 2020).
• Regulatory Approval: Completion is conditional on antitrust clearances in multiple jurisdictions (EU, US, China, etc.). Authorities may require divestitures, which could reduce anticipated benefits.
• Integration Risks: Challenges in integrating IT systems, supply chains, and cultures could delay synergy realization or disrupt operations.
• Product Liability: The CHJV will assume ongoing multi-district product liability litigation regarding Nexium 24HR in the US.
• China Operations: The Pfizer CH Business has significant exposure to China, facing regulatory changes regarding generic medicine registration and heightened anti-bribery risks.

Key Facts for Investor Verification

• Shareholder Approval: The transaction is a related party transaction requiring shareholder approval at the General Meeting on May 8, 2019.
• Ownership Structure: Post-completion, GSK will own 68% and Pfizer 32% of the CHJV. GSK will appoint 6 of the 9 directors.
• Exit Strategy: GSK has the right to initiate a separation (demerger/listing) of the CHJV at any time after completion. Pfizer has the right to initiate a separation after five years.
• Financial Impact: The deal is projected to be accretive to earnings and free cash flow, with £0.5 billion in annual cost synergies targeted by 2022.
• Divestments: GSK intends to divest certain assets (including Horlicks to Unilever) and may be required to make further divestitures to satisfy antitrust regulators.