Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Unaudited Preliminary Results Announcement)
Reporting Period: First Quarter ended 31 March 2014 (Announced 30 April 2014)
Strategic Context: GSK is executing a strategy to renew and diversify its respiratory portfolio and has announced a major three-part transaction with Novartis involving its Consumer Healthcare, Vaccines, and Oncology businesses, expected to complete in H1 2015.
Key Financial Metrics
| Metric | Q1 2014 (£m) | CER Growth % | Reported Growth % |
|---|---|---|---|
| Turnover | 5,613 | (2) | (10) |
| Core Operating Profit | 1,530 | - | (18) |
| Core Operating Margin | 27.3% | - | - |
| Total Operating Profit | 1,066 | (12) | (33) |
| Core Earnings Per Share (EPS) | 21.0p | 2 | (20) |
| Total EPS | 13.9p | (4) | (30) |
| Free Cash Flow | 467 | - | (40) |
| Net Debt | 13,660 | - | - |
Note: CER = Constant Exchange Rate. Core results exclude divestments completed in 2013.
Material Changes vs. Prior Period
- Revenue Decline: Group turnover fell 2% at CER and 10% at reported rates. The decline was driven by a 10% drop in US Pharmaceuticals and Vaccines sales due to wholesaler destocking and competition in the respiratory market (specifically Advair). Established Products sales fell 11% due to generic competition (Lovaza, Seroxat/Paxil).
- Regional Performance: Outside the US, growth was observed in Europe (+3%), Emerging Markets (+2%), and Japan (+13%). Japan growth was aided by government stockpiling of Relenza and wholesaler stocking prior to tax increases.
- Profitability: Core operating profit remained flat in CER terms despite revenue decline, supported by operating leverage and cost control. However, Total Operating Profit fell 33% due to non-core charges.
- Currency Impact: A stronger Sterling against the US Dollar, Euro, and Yen significantly impacted reported results. Core EPS fell 20% at actual rates but grew 2% at CER.
- Non-Core Charges: Total results included £464m in non-core charges, primarily legal costs (£108m), intangible asset amortisation (£170m), and restructuring costs (£79m).
Guidance, Outlook, and Risks
- Full Year Guidance: GSK reiterated its guidance for 2014 core EPS growth of 4-8% at CER (ex-divestments). Sales are expected to grow at CER and on an ex-divestment basis.
- Dividends and Buybacks: First interim dividend increased 6% to 19p. Share buybacks of £1-2 billion are targeted for 2014.
- Novartis Transaction: A three-part deal with Novartis was announced to strengthen the sales base. GSK will acquire Novartis' global vaccines business and create a new consumer healthcare joint venture, while divesting its marketed oncology portfolio.
- R&D Pipeline: Approximately 40 New Molecular Entities (NMEs) are in Phase II/III development. Key milestones include approvals for Tanzeum/Eperzan (diabetes) and positive CHMP opinions for Anoro and Incruse (respiratory).
- Risks and Contingencies:
- China Investigation: Ongoing investigation by Chinese authorities into GSK's operations; financial impact cannot be reliably estimated.
- Legal Matters: Significant provisions for legal disputes (£0.7bn) related to product liability, anti-trust, and government investigations.
- Competition: Continued generic competition impacting Established Products and respiratory franchises (Advair).
Investor Verification Checklist
- US Respiratory Recovery: Verify the trajectory of Breo Medicare Part D coverage (targeted >70% from May) and the impact of Anoro launch on offsetting Advair declines.
- Novartis Deal Approval: Monitor regulatory and shareholder approval status for the Novartis transaction, expected completion in H1 2015.
- China Investigation Status: Track developments in the PRC investigation and potential financial implications beyond current provisions.
- Consumer Healthcare Supply: Confirm resolution of temporary supply interruptions in the US and Europe affecting Wellness products.
- Currency Sensitivity: Assess the impact of Sterling strength on future reported earnings versus underlying CER performance.