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 2010 and Quarter ended 31 December 2010
Issuance Date: 3 February 2011

GSK reported a year of strategic transition, focusing on restructuring, capital allocation, and pipeline development. The results were significantly impacted by the "washout" of pandemic products, the decline of Avandia and Valtrex due to generic competition and regulatory actions, and substantial legal provisions.

Key Financial Metrics

Note: Adjusted operating cash flow excludes legal settlements of £2.0 billion. Reported net cash inflow from operating activities was £6.8 billion.

Material Changes vs. Prior Period

• Revenue Decline: Full-year turnover decreased 1% to £28.4 billion. Q4 turnover fell 13% to £7.2 billion. Reported declines were driven by the loss of pandemic vaccine sales, generic competition for Valtrex, and the suspension of Avandia.
• Underlying Growth: Excluding pandemic products, Avandia, and Valtrex, underlying sales grew 4.5% for the full year and 2% in Q4.
• Profitability Impact: Total EPS fell 71% to 32.1p. This was primarily due to £4.0 billion in legal charges and £1.3 billion in restructuring charges. Excluding legal charges, EPS remained relatively stable at 120.7p.
• Segment Performance:
  • Pharmaceuticals: Turnover down 2%. US sales fell 11%, Europe down 6%. Emerging Markets grew 22%.
  • Consumer Healthcare: Turnover up 5% to £5.0 billion, outperforming market growth.
  • Vaccines: Total sales up 15% to £4.3 billion, though pandemic sales dropped significantly in Q4.
• Cost Structure: Cost of sales increased to 26.1% of turnover. SG&A costs (excluding legal) were 29.5% of turnover, reflecting restructuring savings offset by investment in growth markets.

Guidance, Outlook, and Management Commentary

• 2011 Outlook: Management expects underlying sales momentum to continue in 2011. However, reported sales and margins will be negatively impacted by the "washout" of pandemic products, Avandia, and Valtrex (representing over £2 billion in 2010 sales).
• Margin Guidance: Operating profit margin (excluding legal charges) is expected to be around 1 percentage point lower in 2011 due to the sales mix shift. Margins are expected to improve from 2012 onwards.
• Restructuring: The Operational Excellence programme delivered £1.7 billion in savings in 2010 and is on track to deliver £2.2 billion by 2012.
• Shareholder Returns:
  • Dividend increased 7% to 65p per share for 2010.
  • Initiated a new long-term share buy-back programme, expecting to repurchase £1-2 billion of shares in 2011.
• Pipeline: Approximately 30 opportunities in late-stage development. 10 new molecules/vaccines entered Phase III in the last 12 months. Phase III data expected on ~15 assets by end of 2012.
• Divestments: Plans to divest non-core OTC brands with annual sales of around £500 million by late 2011. Recently completed sale of Quest Diagnostics stake for net proceeds of $1.1 billion.

Investor Verification Checklist

• Legal Provisions: Verify the adequacy of the £4.0 billion provision for legal disputes, specifically regarding Avandia product liability and US sales practices investigations.
• Avandia Status: Monitor the impact of the EMA suspension and FDA REMS programme on future sales, which are expected to be minimal.
• Restructuring Savings: Track the realization of the remaining £0.5 billion in savings required to meet the £2.2 billion 2012 target.
• Divestment Execution: Confirm the timeline and valuation for the sale of non-core OTC brands (£500 million sales base).
• Pipeline Milestones: Watch for Phase III data readouts on key assets (e.g., Relovair, Tykerb, MAGE-A3) expected by end of 2012.
• Currency Exposure: Assess the impact of Sterling fluctuations, as a weaker pound provided a favorable currency impact of 3 percentage points on EPS in 2010.