Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Preliminary Results Announcement)
Reporting Period: Year ended 31st December 2007 and Quarter ended 31st December 2007
Announcement Date: 7th February 2008
GSK reported unaudited results for 2007, highlighting a "Business Performance" metric that excludes significant one-off restructuring charges to illustrate underlying operational trends. The company delivered earnings per share (EPS) growth at the high end of its guidance despite a significant setback in Avandia sales.
Key Financial Metrics
| Metric | 2007 Full Year (Business Performance) | 2007 Q4 (Business Performance) | 2007 Full Year (Total Results) |
|---|---|---|---|
| Turnover | £22,716 million | £5,974 million | £22,716 million |
| Operating Profit | £7,931 million | £1,926 million | £7,593 million |
| Profit After Tax | £5,571 million | £1,337 million | £5,310 million |
| Earnings Per Share (EPS) | 99.1p | 24.4p | 94.4p |
| Operating Margin (Business Perf.) | 34.9% | 32.2% | 33.4% (Total) |
| Dividend Per Share | 53p (Total for 2007) | N/A | N/A |
| Cash Generated from Operations | £8,080 million | £1,928 million | N/A |
| Net Debt | £6,039 million (End of Year) | N/A | N/A |
Note: "Business Performance" excludes £338 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 constant exchange rates (CER) but declined 2% in sterling terms due to currency movements. Pharmaceutical turnover was flat (£19.2 billion), while Consumer Healthcare sales rose 14% to £3.5 billion.
- Profitability: Business performance operating profit increased 8% CER. Total operating profit (including restructuring) was £7,593 million, down 3% in sterling terms compared to 2006.
- Earnings: Business performance EPS grew 10% CER (99.1p). Total EPS was 94.4p, a 5% increase CER but a 1% decline in sterling terms.
- Product Performance:
- Avandia: Sales fell 29% to £780 million in the US (down 55% in Q4) following a meta-analysis publication.
- Seretide/Advair: Sales rose 10% to £3.5 billion.
- Vaccines: Sales grew 20% to £2 billion, driven by US performance.
- Generic Competition: Significant declines in Flonase (-34%), Wellbutrin (-37%), and Zofran (-77%) due to generic entry.
- Balance Sheet: Net debt increased by approximately £5 billion to £6.0 billion, primarily to fund a £12 billion share buy-back programme. Net assets increased to £9.9 billion.
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 US. The company expects to repurchase a further £6 billion of shares in 2008 under its buy-back programme.
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
- Legal and Tax Disputes:
- IRS: The US IRS has challenged deductions for 2001-2003, estimating a claim of $680 million. GSK disputes this and expects a court decision no earlier than 2010.
- HMRC (UK): Ongoing disputes regarding transfer pricing and Controlled Foreign Companies (CFC) matters for years 1994 to date.
- Japan: Lower courts upheld tax authority claims of Yen 39 billion (£177 million); GSK is pursuing a refund at the Supreme Court.
- Patent Litigation: Active litigation regarding patents for Advair, Coreg CR, Avodart, and Combivir against generic manufacturers (e.g., Barr Laboratories, Teva).
- Operational Excellence: A £1.5 billion restructuring programme commenced in October 2007, with £338 million charged in 2007. The programme aims to deliver £700 million in annual pre-tax savings by 2010.
Investor Verification Checklist
- Avandia Trajectory: Verify the extent of the sales decline in Q4 2007 (down 55% in US) and its projected impact on 2008 earnings.
- Generic Erosion: Assess the long-term revenue impact of patent expirations for Flonase, Wellbutrin, and Zofran.
- Restructuring Costs: Confirm the £338 million one-off charge and the timeline for realizing the projected £700 million annual savings from the Operational Excellence programme.
- Share Buy-backs: Monitor the execution of the remaining £6 billion share repurchase programme in 2008.
- Tax Contingencies: Review the status of the $680 million IRS claim and UK HMRC transfer pricing disputes, as these could materially affect future tax provisions.
- Pipeline Approvals: Track regulatory decisions on key filings including Promacta, Rotarix, Treximet, and Synflorix.