GSK

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 2008
Announcement Date: 23rd April 2008

GSK reported unaudited results for Q1 2008, presenting both "Business Performance" (non-IFRS, excluding restructuring and significant acquisitions) and "Statutory" (IFRS) results. Management utilizes Business Performance as the primary measure of underlying operational results.

Key Financial Metrics

Segment Performance:
- Pharmaceuticals: Turnover £4.793 billion (down 4% CER).
- Consumer Healthcare: Turnover £893 million (up 8% CER).

Cash Flow & Liquidity:
- Cash generated from operations: £2,108 million.
- Net cash outflow from financing activities: £2,825 million (driven by share buybacks and dividends).
- Net debt increased to £6,541 million at period end.

Material Changes vs. Prior Period

• Revenue Decline: Total turnover fell 3% at constant exchange rates (CER). Pharmaceutical sales declined 4% due to generic competition in the USA and significant drops in Avandia sales, offset by growth in key products like Seretide/Advair and vaccines.
• Profit Compression: Business performance operating profit fell 9% CER. Margins decreased 2.7 percentage points due to higher R&D costs, lower other operating income, and the impact of generic competition on higher-margin products.
• Restructuring Charges: Statutory results included £85 million in restructuring charges related to the "Operational Excellence" programme, reducing statutory operating profit to £1,963 million.
• Product Specifics:
  • Avandia: Sales fell 56% to £191 million.
  • Coreg: Sales fell 77% to £48 million due to generic competition.
  • Seretide/Advair: Sales rose 10% to £954 million.
  • Vaccines: Sales rose 10% to £436 million.

Guidance, Outlook, and Risks

Guidance: GSK maintains its expectation of a mid-single digit percentage decline in business performance EPS for the full year 2008 at constant exchange rates.

Capital Allocation:

• Dividends: First interim dividend declared at 13 pence per share (up 8% from Q1 2007).
• Share Buybacks: £986 million of shares repurchased and cancelled in Q1 2008. Total buybacks expected to reach £6 billion for 2008.

Pipeline & Acquisitions:

• Received FDA approval for Rotarix (vaccine) and Treximet (migraine).
• Positive EU opinion for Volibris and Prepandrix.
• Announced agreement to acquire Sirtris Pharmaceuticals (sirtuin research).
• Strategic alliance with Regulus Therapeutics for microRNA-targeted therapeutics.

Risks & Contingencies:

• Legal: Aggregate provision for legal disputes stands at £1.2 billion. Notable issues include Paxil CR settlement terms and a new anti-trust action regarding Wellbutrin XL.
• Tax: Open issues with revenue authorities in the UK, USA, Canada, and Japan. Management believes provisions are adequate but ultimate liability may vary.
• Generic Competition: Continued erosion of sales for products like Coreg, Zofran, and Flixonase/Flonase.

Investor Verification Checklist

• Avandia Exposure: Verify the extent of ongoing sales declines and potential future litigation or regulatory impacts on the diabetes portfolio.
• Generic Erosion: Assess the timeline and financial impact of generic entry for Coreg, Zofran, and Flixonase/Flonase.
• Operational Excellence Savings: Monitor the realization of the projected £700 million annual pre-tax savings from the restructuring programme.
• Regulatory Approvals: Track the status of pending FDA decisions for Seretide/Advair (COPD indication), Promacta, and Requip XL.
• Share Buyback Execution: Confirm the pace of the £6 billion share repurchase programme and its impact on net debt levels.