Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: First Quarter ended March 31, 2008
Announcement Date: May 6, 2008
GSK reported its Q1 2008 results, utilizing a "Business Performance" metric that excludes restructuring charges related to the Operational Excellence programme and significant acquisitions to reflect underlying performance. Results are presented in Sterling, with commentary based on Constant Exchange Rate (CER) growth.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 | CER Growth | Sterling Growth |
|---|---|---|---|---|
| Total Turnover | £5,686 million | £5,592 million | (3)% | 2% |
| Pharmaceutical Turnover | £4,793 million | £4,806 million | (4)% | (0)% |
| Consumer Healthcare Turnover | £893 million | £786 million | 8% | 14% |
| Operating Profit (Business Performance) | £2,048 million | £2,166 million | (9)% | (5)% |
| Operating Profit (Total) | £1,963 million | £2,166 million | (13)% | (9)% |
| Profit After Tax (Total) | £1,332 million | £1,533 million | N/A | (13)% |
| Earnings Per Share (Business Performance) | 25.6 pence | 27.0 pence | (9)% | (5)% |
| Earnings Per Share (Total) | 24.4 pence | 27.0 pence | N/A | (10)% |
| Cash Generated from Operations | £2,108 million | £1,806 million | N/A | 17% |
| Net Debt (End of Period) | £6,541 million | £3,001 million | N/A | N/A |
Margins: Business performance operating margin decreased 2.7 percentage points to 36.0% (Q1 2007: 38.7%). Cost of sales increased to 22.8% of turnover, and R&D expenditure rose to 13.7% of turnover.
Material Changes vs. Prior Period
- Pharmaceutical Decline: Total pharmaceutical turnover fell 4% (CER) to £4.8 billion. This was driven by significant generic competition in the USA and a 56% drop in Avandia sales across all regions. US pharmaceutical sales declined 10%.
- Consumer Healthcare Growth: Sales grew 8% (CER) to £893 million, driven by innovation and expansion in Europe and International markets. North American sales declined 2% due to competition in smoking cessation products.
- Product Performance:
- Growth: Seretide/Advair (+10%), Vaccines (+10%), Arixtra (+70%), Avodart (+30%), and Lamictal (+16%).
- Decline: Avandia (-56%), Coreg (-77% due to generic competition), Zofran (-69%), and Flixonase/Flonase (-33%).
- Restructuring: Total results included £85 million in restructuring charges related to the Operational Excellence programme, compared to none in Q1 2007.
- Balance Sheet: Net assets decreased by £700 million to £9,210 million, primarily due to share buy-backs and dividend payments, partially offset by the elimination of the UK pension deficit.
Guidance, Outlook, and Risks
- Guidance: GSK expects a mid-single digit percentage decline in business performance EPS for the full year 2008 at constant exchange rates.
- Pipeline & Approvals:
- Received FDA approval for Rotarix (rotavirus vaccine) and Treximet (migraine treatment).
- Received positive EMEA opinion for Prepandrix (pre-pandemic flu vaccine) and Volibris (pulmonary arterial hypertension).
- Acquired Sirtris Pharmaceuticals (sirtuin research) and formed an alliance with Regulus Therapeutics.
- Capital Allocation: The company repurchased £986 million of shares for cancellation in Q1 2008, with total repurchases expected to reach £6 billion for the year. A first interim dividend of 13 pence per share was declared.
- Risks & Contingencies:
- Legal: Aggregate provision for legal disputes is £1.2 billion. Specific issues include Paxil CR settlement terms and a new anti-trust action regarding Wellbutrin XL.
- Taxation: Open issues with revenue authorities in the UK, USA, Canada, and Japan. The effective tax rate was 28.7%.
- Regulatory: Ongoing FDA discussions regarding Avandia safety and indications for Seretide/Advair and Arixtra.
Investor Verification Checklist
- Avandia Exposure: Verify the extent of ongoing litigation and sales decline related to Avandia, which fell 56% and significantly impacted the Metabolic segment.
- Generic Competition: Assess the long-term impact of patent expirations on Coreg, Zofran, and Flixonase/Flonase, which saw double-digit declines.
- Share Buy-back Impact: Confirm the remaining capacity of the £6 billion buy-back programme and its effect on future EPS dilution.
- Legal Provisions: Review the £1.2 billion legal provision for potential increases due to the new Wellbutrin XL anti-trust suit and Paxil CR settlement.
- Exchange Rate Sensitivity: Monitor the impact of Sterling strength against the US Dollar and weakness against the Euro/Yen on future reported earnings.