Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Date: March 28, 2019
Context: This filing announces changes to product sales reporting categories and the implementation of the new accounting standard IFRS 16 "Leases" effective January 1, 2019. It also provides pro forma financial data for 2018 to illustrate the impact of these changes.
Key Financial Metrics and Adjustments
Revenue and Profit (Pro Forma 2018 Impact of IFRS 16):
The filing does not report actual 2019 results but provides pro forma adjustments to 2018 data to show the impact of IFRS 16 adoption:
- Operating Profit: Expected to increase by £18 million (Total basis) and £23 million (Adjusted basis) for the full year 2018.
- Net Finance Expense: Expected to increase by £28 million (Total basis) and £30 million (Adjusted basis) for the full year 2018 due to the financing element of lease charges.
- Balance Sheet Impact (as of Jan 1, 2019):
- Assets: Recognition of £1,071 million in "Right of use assets".
- Liabilities: Increase in short-term borrowings by £229 million and long-term borrowings by £1,074 million.
- Equity: Net decrease in retained earnings of £93 million.
Cash Flow: The adoption of IFRS 16 has no impact on overall cash flows. However, presentation changes will increase net cash inflow from operating activities and increase net cash outflow from financing activities.
Material Changes and Reporting Updates
1. Respiratory Category Restructuring:
Following the US approval of a generic alternative to Advair, GSK is revising its sales reporting effective Q1 2019:
- New "Respiratory" Category: Will include the Ellipta products portfolio and Nucala.
- New "Established Pharmaceuticals" Category: Will include all other respiratory products (e.g., Seretide/Advair, Flixotide/Flovent, Ventolin), disclosed separately as an "Established Respiratory" section.
- Rationale: To reflect different product life-cycle stages and ensure consistency in reporting strategic focus.
2. IFRS 16 "Leases" Implementation:
GSK adopted IFRS 16 using the modified retrospective approach. This requires recognizing lease liabilities and right-of-use assets on the balance sheet for almost all leases, replacing the previous off-balance-sheet treatment for operating leases.
Guidance, Outlook, and Risks
Guidance and Outlook:
GSK states that the IFRS 16 change is not expected to affect its previously announced guidance for:
- 2019 Adjusted EPS growth in Constant Exchange Rate (CER) terms.
- Medium-term outlook for Adjusted EPS growth in CER terms for the five-year period 2016-2020.
Key Assumptions for Outlook:
The outlook assumes successful delivery of restructuring plans, the closure of the Consumer Healthcare nutrition disposal by end-2019, and the formation of the Consumer Healthcare Joint Venture with Pfizer in H2 2019. It also factors in expected declines in Seretide/Advair sales due to generic competition.
Risks and Contingencies:
- US Tax Reform: The medium-term effective tax rate is expected to be around 19% of Adjusted profits. This estimate is subject to change as detailed application of the US Tax Cuts and Jobs Act becomes available.
- Forward-Looking Statements: Results may differ materially due to factors beyond GSK's control, including litigation, supply interruptions, and macro-economic changes.
Investor Verification Checklist
- Verify the specific impact of the generic Advair launch on Q1 2019 respiratory sales under the new reporting structure.
- Confirm the timing and financial terms of the proposed Consumer Healthcare Joint Venture with Pfizer and the Horlicks divestment to Unilever.
- Monitor updates regarding the final effective tax rate as US tax reform details are finalized.
- Review the Q1 2019 results announcement to see the first application of the revised Pharmaceutical turnover tables.
- Assess the impact of the increased reported debt (lease liabilities) on future credit ratings and covenants.