Business Context and Reporting Period
Company: GSK Plc
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Second Quarter (Q2) and First Half (H1) ended 30 June 2017
Issued Date: 26 July 2017
GSK reported Q2 sales of £7.3 billion, representing a 12% increase at actual exchange rates (AER) and 3% at constant exchange rates (CER). The period was characterized by strong growth in Pharmaceuticals and Vaccines, offset by flat Consumer Healthcare sales at CER. Management announced new strategic priorities focusing on Innovation, Performance, and Trust, alongside a restructuring of the R&D pipeline.
Key Financial Metrics
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Turnover (£m) | 7,320 | 6,532 | 14,704 | 12,761 |
| Total Operating Profit/Loss (£m) | (20) | (151) | 1,698 | 572 |
| Adjusted Operating Profit (£m) | 2,083 | 1,822 | 4,062 | 3,346 |
| Adjusted Operating Margin | 28.5% | 27.9% | 27.6% | 26.2% |
| Total Loss/Earnings Per Share (p) | (3.7) | (9.0) | 17.7 | (3.2) |
| Adjusted Earnings Per Share (p) | 27.2 | 24.3 | 52.1 | 43.5 |
| Net Cash from Operations (£m) | 1,008 | 1,236 | 2,152 | 1,739 |
| Free Cash Flow (£m) | (282) | 303 | 368 | 63 |
| Net Debt (£m) | 14,800 | 14,910 | 14,800 | 14,910 |
Segment Performance (Q2 2017)
- Pharmaceuticals: Sales £4.4 billion (+12% AER, +3% CER). Adjusted operating margin 33.6%.
- Vaccines: Sales £1.1 billion (+16% AER, +5% CER). Adjusted operating margin 33.7%.
- Consumer Healthcare: Sales £1.9 billion (+10% AER, flat CER). Adjusted operating margin 17.7%.
Material Changes vs. Prior Period
- Revenue Growth: Group turnover grew 3% at CER in Q2, driven by Pharmaceuticals (+3% CER) and Vaccines (+5% CER). Consumer Healthcare was flat at CER due to weaker US allergy performance and retailer de-stocking in India ahead of GST implementation.
- Profitability: Total operating loss narrowed significantly to £20 million from £151 million in Q2 2016, primarily due to reduced transaction-related accounting charges. Adjusted operating profit remained flat at CER (+0%) despite revenue growth, impacted by the £106 million Priority Review Voucher expense and increased R&D investment.
- Product Mix: New Pharmaceutical and Vaccine product sales reached £1.7 billion in Q2, up 47% at CER, representing 31% of Pharma/Vaccine turnover. Key growth drivers included Triumeq, Tivicay, and the Ellipta respiratory portfolio.
- Divestments: The impact of divestments (including the Romanian distribution business and thrombosis/anaesthesia businesses) reduced Established Pharmaceuticals CER growth by approximately 2 percentage points in Q2.
Guidance, Outlook, and Management Commentary
Updated Guidance
- 2017 Adjusted EPS: Guidance revised to expect growth of 3% to 5% at CER. This reduction from previous expectations reflects the impact of the Priority Review Voucher and accelerated launch costs for the HIV two-drug regimen.
- 2016-2020 Outlook: GSK expects sales to grow at a low-to-mid single-digit CAGR and Adjusted EPS at a mid-to-high single-digit CAGR on a CER basis.
New Business Priorities
- Innovation: R&D capital will be allocated over time to 80% priority assets in Respiratory, HIV/infectious diseases, Oncology, and Immuno-inflammation. More than 30 pre-clinical and clinical programs are being terminated, partnered, or divested.
- Performance: An extended cost reduction program aims to deliver an additional £1 billion in annual cost savings by 2020. This includes exiting over 130 non-core tail brands (£0.5 billion annual sales) and supply chain efficiencies.
- Trust: Enhanced focus on quality, safety, and compliance to rebuild industry trust.
Risks and Contingencies
- Contingent Consideration: Significant liabilities exist related to the Shionogi-ViiV Healthcare joint venture and Novartis Vaccines acquisition. Re-measurement charges of £1.2 billion impacted Q2 results. These liabilities are sensitive to exchange rates and sales forecasts.
- Legal Matters: GSK is involved in various proceedings including product liability and patent disputes (e.g., Flovent HFA). Aggregate provision for legal disputes was £0.3 billion as of 30 June 2017.
- Brexit: Currency volatility has weakened Sterling, providing a translation benefit to reported results but increasing the Sterling value of foreign currency liabilities (put options and contingent consideration).
Investor Verification Checklist
- Adjusted vs. Total Results: Verify the reconciliation between Total and Adjusted results, specifically the £1.2 billion transaction-related charge and £295 million intangible impairment in Q2.
- Free Cash Flow Volatility: Note the Q2 free cash outflow of £282 million compared to H1 inflow of £368 million, driven by working capital increases for new product launches and seasonal factors.
- Dividend Sustainability: Confirm the Board's intention to maintain the 2018 dividend at 80p per share, targeting a free cash flow cover of 1.25-1.50x before returning to dividend growth.
- R&D Pipeline Rationalization: Review the list of terminated programs (e.g., Tanzeum, sirukumab) and the strategic shift toward priority therapy areas.
- Exchange Rate Sensitivity: Assess the impact of Sterling weakness on the valuation of contingent consideration liabilities and put options, which increased significantly in the period.