Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Third quarter ended 30th September 2007 (unaudited)
Announcement Date: 24th October 2007
GSK reported third-quarter results amidst significant challenges in its pharmaceutical division, primarily driven by generic competition in the USA and a sharp decline in Avandia sales. The company announced a new "Operational Excellence" programme to improve productivity and reduce costs.
Key Financial Metrics
| Metric | Q3 2007 (£m) | Q3 2006 (£m) | CER Growth % | 9M 2007 (£m) | 9M 2006 (£m) | 9M CER Growth % |
|---|---|---|---|---|---|---|
| Turnover | 5,476 | 5,642 | 1% | 16,742 | 17,266 | 3% |
| Operating Profit | 1,910 | 2,023 | (1%) | 6,005 | 6,108 | 6% |
| Profit Before Tax | 1,882 | 2,022 | (2%) | 5,921 | 6,089 | 5% |
| Profit After Tax | 1,346 | 1,426 | (1%) | 4,234 | 4,293 | 7% |
| Earnings Per Share (Basic) | 23.7p | 24.7p | 1% | 74.7p | 74.5p | 9% |
| Operating Margin | 34.9% | 35.9% | - | - | - | - |
Cash Flow (Q3 2007): Cash generated from operations was £2,238 million. Net cash inflow from operating activities was £1,842 million, compared to an outflow of £52 million in Q3 2006.
Debt and Liquidity: Net debt at 30th September 2007 was £3,745 million (increase of £1,295 million from the beginning of the period). Cash and cash equivalents stood at £2,050 million.
Material Changes vs. Prior Period
- Pharmaceutical Turnover: Declined 2% (CER) to £4.6 billion. The US market fell 7% due to generic competition and a 38% drop in Avandia sales. Conversely, Vaccine sales surged 49% to £593 million, and Seretide/Advair grew 7% to £835 million.
- Consumer Healthcare: Delivered strong growth of 16% (CER) to £871 million, driven by OTC sales (up 24%) and the launch of the weight loss treatment alli.
- Cost Structure: Operating profit margin decreased by 1 percentage point. Cost of sales as a percentage of turnover increased by 0.8 percentage points due to unfavourable product mix.
- Legal and Restructuring: Legal charges increased to £64 million (from £22 million in Q3 2006). Fair value movements on financial instruments resulted in a £31 million charge.
Guidance, Outlook, and Management Commentary
Operational Excellence Programme
GSK announced a new programme targeting annual pre-tax cost savings of up to £700 million by 2010. Approximately £350 million in savings are expected in 2008. Total one-off implementation costs are estimated at £1.5 billion over 2007-2010. This initiative includes manufacturing streamlining, sales model adaptation, and R&D infrastructure efficiency, which will involve job reductions.
Earnings Guidance
GSK expects business performance earnings per share growth of 8% to 10% at constant exchange rates for the full year 2007, excluding charges related to the new Operational Excellence programme.
Dividends and Share Buybacks
- Dividend: Q3 dividend declared at 13p per share (up from 12p in 2006). Full-year 2007 dividend expected to be 53p (up from 48p in 2006).
- Share Repurchase: £1.7 billion of shares repurchased between 1st August and 23rd October 2007 as part of a £12 billion programme.
Risks and Contingencies
- Avandia: Sales declined 38% following an FDA Advisory Committee meeting on cardiovascular risks. The FDA is reviewing recommendations.
- Patent Expirations: Significant generic competition impacted Zofran (-86%), Wellbutrin XL (-41%), and Coreg IR (-37%). Settlements with Teva and Mylan allow generic entry for Avandia (late 2012), Lamictal (mid-2008), and Paxil CR (Oct 2008).
- Tax Matters: Open issues with revenue authorities in the UK, Canada, and Japan. A Japanese Tax Court decision was announced in March 2007; an appeal is pending before the High Court.
Key Facts for Investor Verification
- Avandia Exposure: Verify the extent of future sales decline for Avandia products following FDA reviews and the impact on 2008 earnings.
- Operational Excellence Costs: Monitor the timing and magnitude of the £1.5 billion in one-off charges versus the realization of the £700 million annual savings.
- Generic Competition Timeline: Confirm the impact of upcoming generic launches for Lamictal (mid-2008) and Paxil CR (Oct 2008) on revenue streams.
- Currency Impact: Assess the adverse impact of the strong sterling (approx. 5% on Q3 EPS) on future full-year results if exchange rates remain at Q3 2007 levels.
- Legal Provisions: Review the adequacy of the £1.1 billion provision for legal and other disputes, particularly regarding product liability and patent litigation.