Business Context and Reporting Period
Company: GSK Plc
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Full Year ended 31 December 2018 and Quarter ended 31 December 2018
Issuance Date: 6 February 2019
GSK reported improved operating performance in 2018, characterized by sales growth, strong commercial execution of new product launches (notably Shingrix), and continued cost discipline. The year was strategically significant, marked by the launch of a new R&D strategy focused on immunology and genetics, and the announcement of major transactions to reshape the portfolio, including a new Consumer Healthcare joint venture with Pfizer and the acquisition of Tesaro.
Key Financial Metrics
| Metric | 2018 Full Year | 2017 Full Year | Growth (AER) | Growth (CER) |
|---|---|---|---|---|
| Turnover | £30.8 billion | £30.2 billion | +2% | +5% |
| Total Operating Profit | £5.5 billion | £4.1 billion | +34% | +43% |
| Adjusted Operating Profit | £8.7 billion | £8.6 billion | +2% | +6% |
| Total EPS | 73.7p | 31.4p | >100% | >100% |
| Adjusted EPS | 119.4p | 111.8p | +7% | +12% |
| Net Cash from Operations | £8.4 billion | £6.9 billion | +22% | - |
| Free Cash Flow | £5.7 billion | £3.5 billion | +63% | - |
| Net Debt | £21.6 billion | £13.2 billion | - | - |
Note: AER = Actual Exchange Rates; CER = Constant Exchange Rates.
Segment Performance (2018)
- Pharmaceuticals: Sales £17.3 billion (Flat AER, +2% CER). Driven by HIV (+9% AER) and new Respiratory products, offset by declines in Seretide/Advair.
- Vaccines: Sales £5.9 billion (+14% AER, +16% CER). Driven by Shingrix (+>100% AER) and Hepatitis vaccines.
- Consumer Healthcare: Sales £7.7 billion (-1% AER, +2% CER). Impacted by competitive pressures and divestments, offset by growth in Oral Health and Wellness.
Material Changes vs. Prior Period
- Profitability Surge: Total EPS more than doubled compared to 2017, primarily due to a favorable comparison with the impact of US tax reform charges in 2017, lower restructuring costs, and reduced asset impairments.
- Margin Expansion: Total Group operating margin increased by 4.3 percentage points AER to 17.8%. Adjusted operating margin remained flat AER at 28.4%.
- Debt Increase: Net debt rose to £21.6 billion from £13.2 billion, largely due to the £9.3 billion acquisition of Novartis' stake in the Consumer Healthcare Joint Venture and dividends paid.
- Product Mix Shift: Significant growth in new products (Shingrix, Ellipta portfolio, Nucala) offset declines in established products (Advair, Epzicom/Kivexa) due to generic competition.
Guidance, Outlook, and Risks
2019 Guidance
- Adjusted EPS: Expected to decline between -5% and -9% at CER.
- Dividend: Expected to maintain the 2019 dividend at 80p per share.
- Key Assumptions: Guidance reflects the recent approval of a generic competitor to Advair in the US, the impact of the Tesaro acquisition, and the assumption that the Consumer Healthcare nutrition disposal and the Pfizer joint venture will close as planned.
- R&D Focus: Rebuilding the Pharmaceuticals pipeline with 33 of 46 new medicines targeting the immune system. Oncology assets in clinical development doubled to 16 following the Tesaro acquisition and a new alliance with Merck KGaA.
- Key Milestones: FDA approval decisions expected for dolutegravir + lamivudine (H1) and pivotal data readouts for BCMA (multiple myeloma), Zejula (ovarian cancer), and dostarlimab (endometrial cancer).
- Generic Competition: Continued pressure on Respiratory products (Advair) and Established Pharmaceuticals.
- Transaction Execution: Reliance on the successful closing of the Pfizer Consumer Healthcare JV and the Unilever nutrition disposal.
- Legal and Tax: Ongoing litigation and government investigations; potential adjustments to tax charges based on US tax reform guidance.
- Advair Impact: Verify the magnitude of sales erosion from the new US generic competitor to Advair in 2019.
- Transaction Closing: Confirm the regulatory approval and closing dates for the Pfizer Consumer Healthcare Joint Venture and the Unilever nutrition divestment.
- Contingent Consideration: Monitor the re-measurement of the ViiV Healthcare contingent consideration liability to Shionogi, which fluctuates with exchange rates and sales forecasts.
- Net Debt Trajectory: Assess the company's ability to service increased debt levels (£21.6bn) while maintaining the dividend and funding R&D.
- Shingrix Growth: Validate the sustainability of Shingrix growth rates as market penetration increases and competitor supply issues resolve.