Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Preliminary Results Announcement)
Reporting Period: Year ended 31 December 2007 and Quarter ended 31 December 2007
Issuance Date: 7 February 2008
GSK reported full-year 2007 results, highlighting a "Business Performance" metric that excludes significant one-off restructuring charges. The company delivered 10% growth in Business Performance Earnings Per Share (EPS) at constant exchange rates (CER), meeting the high end of its guidance despite a significant setback in Avandia sales.
Key Financial Metrics
| Metric | 2007 Full Year (GBPm) | 2007 Q4 (GBPm) | 2007 Growth (CER%) |
|---|---|---|---|
| Turnover | 22,716 | 5,974 | 2% |
| Operating Profit (Business Performance) | 7,931 | 1,926 | 8% |
| Operating Profit (Total Results) | 7,593 | 1,588 | 3% |
| Profit After Tax (Total Results) | 5,310 | 1,076 | 6% |
| Earnings Per Share (Business Performance) | 99.1p | 24.4p | 10% |
| Earnings Per Share (Total Results) | 94.4p | 19.6p | 5% |
| Operating Margin (Business Performance) | 34.9% | 32.2% | +1.3 pp |
| Cash Generated from Operations | 8,080 | 1,928 | -2% |
| Net Debt | (6,039) | N/A | N/A |
Note: "Business Performance" excludes GBP338 million in restructuring charges related to the Operational Excellence programme. Total Results include these charges.
Material Changes vs. Prior Period
- Revenue: Total turnover grew 2% at CER but declined 2% in sterling terms due to currency headwinds. Pharmaceutical turnover was flat at GBP19.2 billion, while Consumer Healthcare sales rose 14% to GBP3.5 billion.
- Profitability: Business Performance operating profit increased 8% at CER, driven by lower SG&A and R&D costs and higher other operating income. Total operating profit grew 3% at CER.
- Restructuring: A new GBP1.5 billion Operational Excellence programme commenced in October 2007, resulting in GBP338 million of one-off charges in Q4 2007.
- Product Performance:
- Avandia: Sales fell 29% to GBP1.2 billion (down 55% in Q4) following a meta-analysis publication.
- Seretide/Advair: Sales grew 10% to GBP3.5 billion.
- Vaccines: Sales surged 20% to GBP2 billion, driven by strong US performance.
- Generic Competition: Significant declines in Wellbutrin (-37%), Flonase (-34%), and Zofran (-77%) due to US generic entry.
- Balance Sheet: Net debt increased by approximately GBP5 billion to GBP6.0 billion, primarily to fund a GBP12 billion share buy-back programme.
Guidance, Outlook, and Risks
Outlook and Guidance
For 2008, GSK expects a mid-single digit percentage decline in Business Performance EPS at constant exchange rates. This outlook is driven by the continued impact of lower Avandia sales and increased generic competition in the USA. The company expects to repurchase an additional GBP6 billion of shares in 2008.
Management Commentary
CEO JP Garnier noted that despite the Avandia setback, the broad portfolio delivered 10% EPS growth. The company highlighted a strong pipeline with 10 product approvals in 2007 (including Tykerb, Cervarix, and Veramyst) and 13 new product opportunities currently filed with regulators.
Risks and Contingencies
- Tax Disputes: Significant ongoing disputes with tax authorities in the UK (HMRC), US (IRS), and Japan. The IRS has proposed adjustments of $680 million for 2001-2003; GSK contests this. Japanese courts upheld a Yen 39 billion claim, though GSK is pursuing a refund.
- Legal Matters: Aggregate provision for legal and other disputes (excluding tax) was GBP1.2 billion. Active litigation includes patent infringement cases regarding Coreg CR, Avodart, and Combivir.
- Avandia: Continued sales decline and potential regulatory restrictions remain a key risk.
- Currency: Sterling strength adversely impacted 2007 EPS growth by 6 percentage points.
Investor Verification Checklist
- Avandia Trajectory: Verify the extent of the sales decline in Q4 2007 and the specific regulatory status in the US and EU.
- Restructuring Costs: Confirm the GBP338 million charge is fully recognized and review the timeline for the GBP700 million annual savings target from the Operational Excellence programme.
- Tax Liability Exposure: Assess the potential financial impact of the IRS $680 million claim and the UK HMRC transfer pricing disputes, noting the company's belief that provisions are adequate.
- Pipeline Execution: Monitor the regulatory decisions expected in 2008 for key assets like Promacta, Rotarix, and Treximet.
- Share Buy-back Funding: Review the impact of the increased net debt (GBP6.0 billion) on liquidity and interest coverage ratios.