Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Third Quarter (Q3) and Nine Months ended 30 September 2014
Announcement Date: 22 October 2014
GSK reported Q3 2014 results characterized by a strategic transition. The company is executing a major restructuring to refocus its pharmaceutical business following the divestment of its oncology portfolio and changing market dynamics in US respiratory products. A proposed three-part transaction with Novartis, expected to close in H1 2015, aims to strengthen the Vaccines and Consumer Healthcare businesses while divesting the marketed oncology portfolio.
Key Financial Metrics
| Metric | Q3 2014 (£m) | Q3 2013 (£m) | CER Growth % | 9M 2014 (£m) | 9M 2013 (£m) | CER Growth % |
|---|---|---|---|---|---|---|
| Turnover | 5,646 | 6,510 | (3) | 16,820 | 19,599 | (3) |
| Core Operating Profit | 1,887 | 1,997 | (1) | 4,824 | 5,751 | (5) |
| Core Operating Margin | 33.4% | 30.8% | - | 28.7% | 30.4% | - |
| Total Operating Profit | 703 | 1,569 | (52) | 2,906 | 4,587 | (24) |
| Core EPS (pence) | 27.9p | 28.0p | 5 | 68.0p | 79.4p | (2) |
| Total EPS (pence) | 8.3p | 20.0p | (56) | 35.8p | 61.4p | (28) |
| Net Debt | 14,788 | 15,088 | - | 14,788 | 15,088 | - |
| Free Cash Flow (9M) | 1,293 | 3,223 | (48) | 1,293 | 3,223 | (60) |
Note: CER = Constant Exchange Rate. Core results exclude divestments, intangible amortisation/impairment, major restructuring, legal costs, and acquisition accounting adjustments.
Material Changes vs. Prior Period
- Turnover Decline: Group turnover fell 3% at CER. Pharmaceuticals and Vaccines sales declined 3%, driven by a 10% drop in the US (primarily respiratory) and a 14% decline in Established Products due to generic competition. This was partially offset by growth in Emerging Markets (+12%), Japan (+6%), and ViiV Healthcare (+18%).
- Respiratory Headwinds: Respiratory sales fell 8% in Q3, with Advair sales down 25% in the US due to significant pricing and volume pressures. The company expects total global respiratory sales to return to growth in 2016.
- Consumer Healthcare: Sales declined 3% due to ongoing supply interruptions, though recovery is on track for full-year sales to be broadly flat.
- Profitability: Core operating profit declined 1% in Q3, but Core EPS grew 5% at CER due to targeted cost reductions in SG&A and R&D, and financial efficiencies. Total operating profit dropped 52% due to significant non-core charges.
- Legal Charges: A significant legal charge of £301 million was recorded in Q3 related to a fine payable to the Chinese government regarding bribery investigations.
Guidance, Outlook, and Management Commentary
- Full Year 2014 Outlook: GSK expects full-year 2014 Core EPS to be broadly similar to 2013 (on a CER and ex-divestment basis).
- Novartis Transaction: The proposed transaction is on track for completion in H1 2015. It involves creating a new Consumer Healthcare business (GSK 63.5% stake), acquiring Novartis Vaccines, and divesting GSK's marketed oncology portfolio for approximately $16 billion.
- Restructuring: A new restructuring programme is underway to refocus the global pharmaceuticals business, targeting approximately £1 billion in annual cost savings over three years (50% expected in 2016).
- ViiV Healthcare: Management intends to explore an IPO of a minority shareholding in ViiV Healthcare to enhance strategic flexibility and visibility.
- Dividends: Q3 dividend maintained at 19p per share. Full-year 2014 dividend expected to be 80p (+3%). 2015 dividend expected to be maintained at the 2014 level, with an additional £4 billion return to shareholders via a B-share scheme post-Novartis transaction.
- Risks: Key risks include the impact of US respiratory pricing, supply chain recovery in Consumer Healthcare, currency fluctuations (strong Sterling), and the successful regulatory approval and integration of the Novartis transaction.
Investor Verification Checklist
- Novartis Deal Closure: Verify the timeline and regulatory approvals for the H1 2015 completion of the three-part transaction with Novartis.
- Respiratory Recovery: Monitor the sales trajectory of new respiratory products (Breo, Anoro, Incruse) to confirm the return to growth projected for 2016.
- Consumer Supply Chain: Assess the progress of the supply recovery plan to ensure full-year sales remain broadly flat as guided.
- Cost Savings Realization: Track the delivery of the new £1 billion annual cost savings programme and its impact on margins.
- Legal Contingencies: Review updates on the Chinese government fine and any ongoing investigations by US/UK authorities.
- ViiV IPO Progress: Monitor developments regarding the potential minority IPO of ViiV Healthcare.