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 2007
Announcement Date: 25th April 2007
Context: GSK reported unaudited results for Q1 2007, highlighting a 14% growth in Earnings Per Share (EPS) at constant exchange rates (CER) despite a 4% decline in reported turnover due to a stronger US dollar. The period included significant product launches and the acquisition of Domantis Limited.
Key Financial Metrics
| Metric | Q1 2007 (£m) | Q1 2006 (£m) | CER Growth % | Reported Growth % |
|---|---|---|---|---|
| Turnover | 5,592 | 5,813 | 4 | (4) |
| Operating Profit | 2,166 | 2,174 | 11 | - |
| Profit Before Tax | 2,143 | 2,170 | 10 | (1) |
| Profit After Tax | 1,533 | 1,530 | 11 | - |
| Earnings Per Share (Basic) | 27.0p | 26.5p | 14 | 2 |
| Operating Margin | 38.7% | 37.4% | - | - |
| Cash Generated from Operations | 1,806 | 2,062 | - | - |
| Net Debt | (3,001) | (372) | - | - |
Note: Net debt increased to £3.0 billion primarily due to share buy-backs and cash outflows for acquisitions.
Material Changes vs. Prior Period
- Currency Impact: A stronger sterling against the US dollar (average £1/$1.96 in Q1 2007 vs £1/$1.75 in Q1 2006) negatively impacted reported turnover by 4% and EPS by 12%, masking underlying organic growth.
- Pharmaceuticals: Turnover grew 3% CER to £4.8 billion. US sales grew 3% to £2.4 billion; excluding generic competition impacts, US sales grew 16%. Key drivers included Seretide/Advair (+11%) and Avandia (+19%).
- Consumer Healthcare: Sales grew 9% CER to £786 million, driven by new product launches and the acquisition of BreatheRight Strips and FiberChoice.
- Other Operating Income: Increased significantly to £207 million (from £71 million in Q1 2006), largely due to a settlement payment from Roche regarding carvedilol litigation and higher recurring royalties.
- Costs: SG&A costs decreased 1% in reported terms (3% CER growth excluding legal charges), benefiting from lower legal fees compared to the prior year.
Guidance, Outlook, and Risks
Guidance and Outlook
- Full Year 2007 EPS: GSK maintains guidance for 8% to 10% growth in CER terms.
- Share Buy-back: Repurchased £649 million in Q1; expects to repurchase at least £2 billion for the full year 2007.
- Dividend: First interim dividend declared at 12p per share (up from 11p in Q1 2006).
- Product Pipeline: Five major launches expected in 2007, including Tykerb (breast cancer), Coreg CR (cardiovascular), Veramyst (allergic rhinitis), Trexima (migraine), and Cervarix (cervical cancer vaccine).
Risks and Contingencies
- Legal Matters: Aggregate provision for legal disputes stands at £1.1 billion. Ongoing litigation includes patent challenges for Valtrex and Wellbutrin XL, and nominal pricing inquiries by the Delaware Attorney General.
- Taxation: Open transfer pricing issues with authorities in the UK, Canada, and Japan. A Japanese Tax Court decision was appealed; the company believes provisions are adequate.
- Generic Competition: Significant erosion in sales of Wellbutrin XL, Zofran, and Flonase in the USA due to generic entry.
Investor Verification Checklist
- Currency Sensitivity: Verify the impact of the strong sterling on future quarters, as management estimates a 6% adverse currency impact on full-year EPS if rates hold.
- Generic Erosion: Monitor the trajectory of sales for Wellbutrin XL, Zofran, and Flonase as generic competition intensifies in the US market.
- Legal Provisions: Review the status of the £1.1 billion legal provision, specifically the outcome of the Valtrex patent trial scheduled for July 2007 and the Wellbutrin XL settlement terms.
- Product Launches: Confirm the regulatory approval and commercial uptake of the five key 2007 launches (Tykerb, Coreg CR, Veramyst, Trexima, Cervarix).
- Share Buy-back Execution: Track the execution of the remaining £1.35 billion of the £2 billion share buy-back program.