GSK

Business Context and Reporting Period

Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Unaudited Preliminary Results Announcement)
Reporting Period: Year ended 31 December 2014 and Quarter ended 31 December 2014
Issuance Date: 4 February 2015

GSK reported full-year 2014 results characterized by a strategic transition. The Group is executing a major three-part transaction with Novartis involving its Consumer Healthcare, Vaccines, and Oncology businesses, expected to close in H1 2015. The year was marked by challenging trading conditions in the US primary care market, particularly for respiratory products, offset by growth in Emerging Markets and strong performance in HIV (ViiV Healthcare).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total turnover fell 3% on a constant exchange rate (CER) basis. The US market declined 10% (CER) due to formulary and contract changes affecting Advair, while Emerging Markets grew 5% and Japan grew 1%.
• Profitability Divergence: Core EPS declined only 1% (CER) due to cost efficiencies and financial management, whereas Total EPS fell 40%. The Total EPS decline was driven by non-cash adjustments, primarily a £768 million charge related to contingent consideration for ViiV Healthcare (due to better-than-expected sales of Tivicay and Triumeq) and a lack of asset disposal gains compared to 2013.
• Segment Performance:
  • Pharmaceuticals: Down 5% (CER). Respiratory sales fell 10% (Advair down 25%), while Oncology grew 33% and ViiV Healthcare grew 15%.
  • Vaccines: Down 1% (CER), impacted by the suspension of HPV vaccines in Japan and competitive pressures in the US.
  • Consumer Healthcare: Down 1% (CER) for the year but returned to growth (+2%) in Q4 following the remediation of manufacturing supply issues.
• Cost Structure: Restructuring programs delivered approximately £400 million in incremental annual cost savings in 2014. R&D expenditure declined 4% to £3,113 million.

Guidance, Outlook, and Risks

• Novartis Transaction: The transaction is on track for completion in H1 2015. GSK expects to return £4 billion of net proceeds to shareholders in 2015, subject to regulatory approvals and potential adjustments related to the COMBI-d clinical trial.
• Dividend Policy: A full-year 2014 dividend of 80p per share (+3%) was declared. Management expects to maintain the 2015 dividend per share at the same level.
• 2015 Outlook: Management anticipates headwinds in the first half of 2015 (including continued respiratory declines and currency impacts) but expects a stronger performance in the second half as these factors annualize and new products gain traction.
• R&D Pipeline: Key milestones include the launch of OTC Flonase, FDA decisions on Breo Ellipta and mepolizumab, and data readouts for the SUMMIT COPD study and COMBI-d melanoma trial.
• Risks:
  • Currency: Strength of Sterling significantly impacted reported results (-11 percentage points on Core EPS).
  • Legal: Ongoing legal proceedings, including a £301 million fine paid to the Chinese government and product liability claims.
  • Regulatory: Potential repayment of consideration for the Oncology disposal if the COMBI-d trial results are unfavorable.

Investor Verification Checklist

• Novartis Deal Closure: Verify the completion date of the three-part transaction and the final regulatory conditions attached.
• Respiratory Portfolio Transition: Monitor the uptake of new respiratory products (Breo Ellipta, Anoro Ellipta) versus the continued decline of Advair/Seretide in the US and Europe.
• COMBI-d Trial Results: Confirm the outcome of the COMBI-d trial, as it directly impacts the £1.5 billion contingent consideration for the Oncology divestment and the £4 billion shareholder return.
• Consumer Supply Chain: Assess whether Q4 growth in Consumer Healthcare is sustainable now that supply issues have been remediated.
• Legal Provisions: Review updates on the aggregate provision for legal disputes (£0.5 billion) and potential exposure from ongoing investigations.