Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: First Quarter ended 31st March 2011 (Announced 27th April 2011)
Business Overview: GSK is a leading research-based pharmaceutical and healthcare company. The quarter reflects continued progress in underlying sales growth and cash generation, despite a significant decline in reported sales due to the loss of pandemic product sales, Avandia, and Valtrex.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Growth (CER%) |
|---|---|---|---|
| Turnover | £6,585 million | £7,357 million | (10%) |
| Underlying Sales Growth | +4% (Excluding pandemic products, Avandia, Valtrex) | ||
| Operating Profit (Before Restructuring) | £2,170 million | £2,395 million | (5%) |
| Operating Profit (Total) | £2,035 million | £2,094 million | (2%) |
| Profit After Tax | £1,584 million | £1,395 million | 14% |
| Earnings Per Share (Before Restructuring) | 32.2p | 29.5p | +9% |
| Earnings Per Share (Total) | 30.0p | 26.4p | +14% |
| Net Debt | £8.4 billion | £8.859 billion | Down £440 million |
| Cash Flow from Operations (Adjusted) | £1.4 billion | £2.1 billion | (34%) |
Note: CER% represents Constant Exchange Rate growth. Adjusted cash flow excludes £451 million legal outflows.
Material Changes vs. Prior Period
- Revenue Decline: Reported turnover fell 10% primarily due to a £1 billion reduction in sales of pandemic products, Avandia, and Valtrex compared to Q1 2010.
- Regional Performance:
- Emerging Markets: Underlying pharmaceutical sales grew 23%.
- Japan: Underlying pharmaceutical sales surged 53%, driven by Cervarix and respiratory medicines.
- USA & Europe: Underlying pharmaceutical sales declined 4% and 5% respectively, impacted by US Healthcare reform and EU austerity measures.
- Consumer Healthcare: Sales grew 7% to £1,321 million, outpacing market growth, with strong performance in Oral Healthcare (+12%) and Nutritional Healthcare (+9%).
- Asset Disposals: GSK sold its shareholding in Quest Diagnostics and commercial interests in Zovirax (North America) for £1.2 billion, contributing £584 million pre-tax profit.
Guidance, Outlook, and Risks
Management Commentary & Guidance
- Cost & Margins: Cost and operating margin expectations for 2011 remain unchanged. Operating margin is expected to be around 1 percentage point lower than 2010 due to the loss of high-margin pandemic sales.
- Restructuring: On track to deliver £2.2 billion in annual restructuring savings by 2012.
- Shareholder Returns:
- Dividend increased 7% to 16p per share.
- Share buybacks expected to be at the top end of the £1-2 billion range for 2011.
- Pipeline: Three product approvals year-to-date (Benlysta, Trobalt, Horizant). Positive Phase III data for IPX066 (Parkinson's) and Votrient (sarcoma); however, the Phase III study for otelixizumab (Type 1 diabetes) failed to show efficacy.
Risks and Contingencies
- Legal Matters: Aggregate provision for legal and other disputes stands at £3.5 billion. Significant proceedings include product liability, intellectual property, and tax matters. A subpoena was received regarding the marketing of Lovaza.
- Regulatory & Tax: US Healthcare reform and EU austerity measures continue to impact pricing and sales volumes. UK Corporation tax system changes announced in March 2011 may impact future tax rates.
- Divestments: Proposed divestment of non-core OTC assets (approx. £500 million annual sales) is expected towards the end of 2011.
Investor Verification Checklist
- Underlying vs. Reported Growth: Verify the sustainability of the +4% underlying sales growth once the one-time impact of pandemic product losses fully normalizes.
- Legal Provisions: Monitor the £3.5 billion legal provision and the outcome of the Lovaza patent litigation and US government investigation.
- Pipeline Execution: Track the commercial launch of new approvals (Benlysta, Horizant) and the status of the failed otelixizumab trial.
- Capital Allocation: Confirm the execution of the top-end share buyback target (£2 billion) and the timing of the non-core OTC divestment.
- Margin Pressure: Assess the impact of US Healthcare reform levies and European austerity on full-year operating margins.