Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Preliminary Announcement of Results)
Reporting Period: Year ended 31st December 2004
Announcement Date: 10th February 2005
GSK reported full-year 2004 results under UK GAAP, noting a transition to International Financial Reporting Standards (IFRS) effective 1st January 2005. The company delivered earnings per share (EPS) in line with guidance despite significant generic competition and adverse currency movements.
Key Financial Metrics
| Metric | 2004 Full Year (£m) | 2004 Q4 (£m) | 2004 vs 2003 Growth (CER%) |
|---|---|---|---|
| Turnover | 20,359 | 5,333 | 1% |
| Trading Profit | 6,150 | 1,282 | (1%) |
| Profit Before Tax | 6,119 | 1,390 | 2% |
| Earnings Per Share (EPS) | 75.0 p | 16.8 p | 2% |
| Operating Cash Flow | 6,527 | 1,406 | N/A |
| Net Debt | (1,984) | (1,984) | N/A |
Note: CER = Constant Exchange Rate. Net Debt is presented as a negative figure indicating net debt position.
Material Changes vs. Prior Period
- Revenue: Global pharmaceutical sales grew 1% in 2004. Excluding the impact of generic competition on Paxil and Wellbutrin, turnover grew 10% in the USA and 7% globally.
- Profitability: Trading profit declined 1% on a CER basis (11% in sterling terms) due to higher R&D expenditure, increased cost of goods, and legal provisions. Trading margin declined 2.0 percentage points.
- Currency Impact: A weak US dollar adversely impacted performance, reducing EPS by 11 percentage points in sterling terms.
- Legal Provisions: A charge of £141 million was recorded in Q4 2004 for unasserted product liability claims using an IBNR (incurred but not reported) actuarial technique.
- Dividends: Total dividend for 2004 increased to 42 pence per share (up from 41 pence in 2003).
Guidance, Outlook, and Risks
Management Commentary and Guidance
CEO JP Garnier highlighted the company's ability to absorb over £1.5 billion in lost sales to generics while still growing the business. For 2005, GSK expects EPS percentage CER growth to be in the low double-digit range on an IFRS basis (equating to high single-digit growth in UK GAAP terms).
Pipeline and Product Outlook
- Key Drivers: Strong growth expected from Seretide/Advair, Avandia/Avandamet, Lamictal, and Vaccines.
- 2005 Launches: Vesicare (overactive bladder), Rotarix (rotavirus vaccine), and potential approval for Boniva (osteoporosis) and Avandaryl (diabetes).
- R&D: 45 New Chemical Entities (NCEs) in Phase II, with data expected on at least 15 in 2005.
Risks and Contingencies
- Generic Competition: Significant sales erosion for Paxil (-39%) and Wellbutrin (-12%) due to patent expirations, partially mitigated by line extensions (Paxil CR, Wellbutrin XL).
- Tax Disputes: Ongoing disputes with the US IRS regarding transfer pricing for years 1989-2000, with potential additional tax claims of $7.6 billion including interest if upheld. Similar issues exist with UK authorities.
- Legal Litigation: Aggregate provision for legal and other disputes (excluding tax) was just over £1 billion. Risks include product liability, anti-trust, and intellectual property challenges.
- Manufacturing: FDA inspections at the Cidra, Puerto Rico facility resulted in Forms 483; cooperation is ongoing but remedies are uncertain.
Investor Verification Checklist
- IFRS Transition: Verify the impact of the move to IFRS on 2005 comparability, noting a £394 million reduction in 2004 earnings under IFRS rules.
- Generic Erosion: Monitor the performance of line extensions (Wellbutrin XL, Paxil CR) to ensure they continue to offset patent cliff losses.
- Tax Liability: Review the status of the US IRS transfer pricing dispute and the potential for additional provisions beyond current estimates.
- Legal Provisions: Track the outcome of the IBNR actuarial technique implementation and any new product liability settlements.
- Pipeline Milestones: Confirm the timing of data readouts for Phase III assets (Cervarix, Rotarix, lapatinib) and regulatory approvals for 2005 launches.