Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Results Announcement)
Reporting Period: Second Quarter ended 30th June 2004 (Q2 2004) and First Half 2004 (H1 2004)
Announcement Date: 27th July 2004
GSK reported Q2 2004 results under UK GAAP. The company transitioned to reporting on a statutory basis only for 2004, having completed major merger and restructuring programs. Results are presented comparing 2004 statutory figures against 2003 business performance (restated) and 2003 statutory figures. The Group utilizes Constant Exchange Rate (CER) growth to illustrate underlying performance, excluding currency fluctuations.
Key Financial Metrics
| Metric | Q2 2004 (£m) | Q2 2003 (£m) | CER Growth % | H1 2004 (£m) | H1 2003 (£m) | CER Growth % |
|---|---|---|---|---|---|---|
| Turnover | 5,064 | 5,375 | 2% | 10,007 | 10,597 | 2% |
| Trading Profit | 1,712 | 1,885 | (1%) | 3,274 | 3,681 | (1%) |
| Profit Before Tax | 1,631 | 1,963 | (10%) | 3,207 | 3,726 | (5%) |
| Earnings Per Share (EPS) | 20.1 p | 23.9 p | (9%) | 39.5 p | 45.5 p | (4%) |
| Net Debt | (2,023) | (2,162) | - | (2,023) | (2,162) | - |
| Operating Cash Flow | 1,783 | 1,694 | - | 3,115 | 3,357 | - |
Note: Net Debt is presented as a negative figure indicating net debt position. Turnover and profit figures are in millions of GBP (£m).
Material Changes vs. Prior Period
- Revenue Decline: Total turnover declined 6% in sterling terms but grew 2% at constant exchange rates (CER). The decline was driven by a weak US dollar and significant generic competition for key CNS products.
- Profitability Pressure: Trading profit margin declined 1.3 percentage points in sterling terms (0.9 percentage points at CER). This was due to higher R&D expenditure (up 11% CER) and a less favorable product mix, partially offset by cost savings in SG&A.
- Generic Impact: Sales of Paxil IR and Wellbutrin SR declined significantly (64% and 76% respectively) due to generic entry. However, line extensions (Paxil CR and Wellbutrin XL) mitigated the total franchise decline to 41% and 7% respectively.
- Legal Provisions: Other operating expenses increased to £102 million (from £87 million income in Q2 2003) due to provisions for US anti-trust settlements (Augmentin) and other legal matters, partially offset by a £41 million profit on the disposal of Quest Diagnostics shares.
Guidance, Outlook, and Risks
Management Commentary and Guidance
- EPS Guidance: GSK reaffirmed its 2004 guidance, expecting EPS (at CER) to be at least in line with 2003 business performance EPS, despite substantial generic losses.
- Future Growth: Management anticipates a return to earnings growth in Q4 2004 and throughout 2005 as the impact of generics diminishes.
- Dividend: A second interim dividend of 10 pence per share was declared (up from 9 pence in Q2 2003). The total 2004 dividend is expected to increase by 1 penny per share compared to 2003.
- Share Buy-back: The company continued its £4 billion share buy-back program, purchasing £221 million of shares in Q2 2004.
Pipeline and Product Launches
- Key Drivers: Seretide/Advair sales grew 22% to £603 million; Avandia/Avandamet sales grew 59% to £307 million.
- Upcoming Launches: Vesicare (overactive bladder), Rotarix (rotavirus vaccine), Avandaryl (diabetes), and Epivir/Ziagen (HIV combination) are expected in the next 6 months.
- R&D Progress: Positive Phase II data received for '016 (cancer) and '698 (rhinitis); Phase III trials initiated for '016.
Risks and Contingencies
- Legal Litigation: Significant exposure remains regarding US anti-trust cases (Augmentin settlement of $92 million reached), pricing investigations (Medicare/Medicaid), and product liability claims. Aggregate provision for legal disputes (excluding tax) was £1.0 billion.
- Patent Challenges: GSK is seeking re-issuance of the Advair combination patent to strengthen protection; the patent remains effective during the process.
- Tax Disputes: Ongoing dispute with the IRS regarding transfer pricing for years 1989-1996 (claims of $2.7 billion additional tax) and open issues for 1997 to date.
- Currency: A weak US dollar adversely impacted sterling results. Further weakening could negatively impact full-year EPS growth by 9-10%.
Investor Verification Checklist
- Generic Erosion: Verify the sustainability of sales for Paxil CR and Wellbutrin XL as the primary offset to generic competition.
- Legal Provisions: Monitor the outcome of the Augmentin anti-trust settlement approval and the status of the New York lawsuit regarding Paxil/Seroxat pediatric data.
- IRS Dispute: Track developments in the US Tax Court regarding the $2.7 billion transfer pricing claim.
- Currency Sensitivity: Assess the impact of the US dollar exchange rate on future earnings, given the significant US revenue exposure.
- R&D Pipeline: Confirm the timeline and regulatory approval for upcoming launches (Vesicare, Rotarix, Avandaryl) and Phase III results for '016 and '698.