Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Second Quarter (Q2) and Half-Year (H1) ended 30 June 2016
Issuance Date: 27 July 2016
GSK reported strong operational performance driven by growth in new product sales across Pharmaceuticals, Vaccines, and Consumer Healthcare. The results reflect the impact of the Novartis transaction completed in March 2015, with the Oncology business excluded from the current reporting structure. The company presented both "Total Results" (GAAP) and "Core Results" (non-GAAP), with significant divergence due to non-cash transaction-related accounting adjustments.
Key Financial Metrics
| Metric | Q2 2016 (£m) | Q2 2016 Growth (CER%) | H1 2016 (£m) | H1 2016 Growth (CER%) |
|---|---|---|---|---|
| Turnover | 6,532 | 4% | 12,761 | 6% |
| Core Operating Profit | 1,831 | 15% | 3,390 | 14% |
| Total Operating Profit/(Loss) | (151) | >(100)% | 572 | (98)% |
| Core Earnings Per Share (EPS) | 24.5p | 16% | 44.3p | 12% |
| Total Loss Per Share | (9.0)p | >(100)% | (3.2)p | >(100)% |
| Net Cash Inflow from Operations | 1,236 | N/A | 1,739 | N/A |
| Net Debt (at 30 June 2016) | 14,910 | N/A | 14,910 | N/A |
Note: CER = Constant Exchange Rate. Growth rates are calculated against the prior year period.
Material Changes vs. Prior Period
- Revenue Growth: Group turnover increased 4% on a CER basis in Q2, driven by Pharmaceuticals (+2%), Vaccines (+11%), and Consumer Healthcare (+7%). New product sales reached £1.05 billion in Q2, up from £446 million in Q2 2015.
- Profitability Divergence: While Core Operating Profit grew 15% (CER) in Q2, Total Operating Profit swung to a loss of £151 million. This was primarily due to a £1.8 billion charge related to the re-measurement of liabilities (put options and contingent consideration) associated with the Consumer Healthcare and ViiV Healthcare businesses.
- Currency Impact: The weakening of Sterling following the Brexit vote resulted in a favorable translation impact on reported turnover (+11% reported vs +4% CER) but increased the Sterling value of liabilities attributable to minority interests, driving the non-core charges.
- Segment Performance:
- Pharmaceuticals: HIV sales grew 44% (driven by Tivicay and Triumeq). Respiratory sales were flat as growth in new products offset declines in Seretide/Advair.
- Vaccines: Sales grew 11% (CER), driven by Bexsero and Synflorix.
- Consumer Healthcare: Sales grew 7% (CER), with strong performance from Sensodyne, Voltaren, and Flonase OTC.
Guidance, Outlook, and Risks
- 2016 Guidance: GSK raised its full-year 2016 Core EPS growth guidance to 11-12% (CER). Management noted that if exchange rates held at Q2 period-end levels, the estimated positive impact on 2016 Sterling Core EPS growth would be approximately 19%.
- Dividends: A quarterly dividend of 19p was declared. The Board expects to pay an annual ordinary dividend of 80p for both 2016 and 2017.
- R&D Pipeline: Progress includes EU approval for Strimvelis (gene therapy) and expected filings in H2 2016 for Closed Triple (COPD), Shingrix (shingles), Benlysta SC (lupus), and sirukumab (RA).
- Risks and Contingencies:
- Brexit: The vote to leave the EU has introduced currency volatility and uncertainty. While the weaker Sterling boosted reported revenue, it increased the value of contingent liabilities.
- Transaction-Related Adjustments: Significant volatility in total results is expected due to the quarterly re-measurement of liabilities related to the Novartis Consumer Healthcare joint venture and ViiV Healthcare.
- Legal Matters: The company faces ongoing litigation regarding product liability, intellectual property, and anti-trust matters, though no significant new developments were reported in the quarter.
Investor Verification Checklist
- Core vs. Total Results: Verify the reconciliation between Core EPS (24.5p) and Total Loss per share (-9.0p) to understand the magnitude of non-cash transaction adjustments (£1.8 billion charge in Q2).
- Liability Re-measurement: Review the specific assumptions regarding exchange rates and sales forecasts used to value the put options and contingent consideration for ViiV Healthcare and Consumer Healthcare.
- Advair/Seretide Decline: Monitor the rate of decline in Seretide/Advair sales against the growth of new respiratory products (Relvar/Breo, Anoro, Incruse) to assess the success of the portfolio transition.
- Net Debt Trajectory: Confirm the impact of dividends (£3.0 billion paid in H1) and currency translation on the Net Debt position, which rose to £14.9 billion.
- China Operations: Assess the impact of ongoing healthcare sector reforms and price reductions in China on the Pharmaceuticals segment, which saw a 14% decline in that region.