Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Third Quarter ended September 30, 2003 (and nine months ended September 30, 2003)
Announcement Date: October 22, 2003
GSK reported a strong quarterly performance driven by pharmaceutical sales growth, particularly in the US market. The company presented results on a "Business Performance" basis (excluding merger, integration, and restructuring costs) as the primary measure, alongside statutory UK GAAP results.
Key Financial Metrics
| Metric | Q3 2003 (Business Perf.) | Q3 2002 (Business Perf.) | CER Growth % | Reported Growth % |
|---|---|---|---|---|
| Turnover | £5,466m | £5,019m | 9% | 9% |
| Trading Profit | £1,752m | £1,555m | 13% | 13% |
| Profit Before Tax | £1,693m | £1,388m | 20% | 22% |
| Earnings Per Share (EPS) | 20.7p | 16.7p | 21% | 24% |
| Free Cash Flow | £1,849m | £1,600m | - | - |
| Net Debt | £1,442m | £2,100m | - | - |
Note: CER = Constant Exchange Rate. Statutory EPS for Q3 2003 was 20.2p.
Material Changes vs. Prior Period
- Pharmaceutical Turnover: Increased 10% to £4.6 billion, driven by a 14% growth in US sales. European sales grew 3%, while International markets grew 9%.
- Product Performance:
- Seretide/Advair: Sales up 40% to £552m; US sales up 57%.
- Avandia/Avandamet: US sales up 60% to £197m; International sales up 66%.
- Wellbutrin XL: Captured 19% of new Wellbutrin prescriptions in its 5th week.
- Levitra: Captured over 12% of new prescriptions in its 6th week in the US.
- Paxil/Seroxat: Sales up 10% to £542m, though generic competition began in the US on September 8, 2003.
- Consumer Healthcare: Sales up 4% to £832m. Oral care (+5%) and nutritional healthcare (+11%) offset declines in smoking control (-10%) and gastro-intestinal products (-8%).
- Costs: Cost of sales as a percentage of turnover improved by 1.3 percentage points. SG&A costs grew 12% due to new product launches and legal provisions.
Guidance, Outlook, and Risks
- Guidance: GSK maintains earnings guidance for 2003 of "high single digit or better" percentage growth in business performance EPS at constant exchange rates.
- Dividend: Declared a third interim dividend of 9 pence per share (payable January 6, 2004).
- Share Buy-back: £299 million spent in Q3 under a £4 billion program initiated in 2002.
- Risks and Contingencies:
- Generic Competition: Generic Paxil in the US is expected to adversely affect Q4 2003 sales. Generics captured 72% of US Paxil IR prescriptions by mid-October.
- Legal Proceedings: Ongoing patent litigation regarding Wellbutrin, Avandia, Zofran, and Levitra. A trial against Synthon Pharmaceuticals regarding Paxil patents is scheduled for January 2004.
- Regulatory: FDA investigation initiated in October 2003 into the Cidra, Puerto Rico manufacturing facility (records from 2001-2002). No indication of supply disruption at the time of filing.
- Taxation: Ongoing dispute with the US IRS regarding transfer pricing for years 1989-2000; the 1989-1996 dispute is proceeding to US Tax Court.
Investor Verification Checklist
- Verify the impact of generic Paxil on Q4 2003 sales and the performance of Paxil CR in maintaining market share.
- Monitor the outcome of the FDA investigation at the Cidra, Puerto Rico facility and potential supply chain implications.
- Track the progress of patent litigation, specifically the Synthon trial (Jan 2004) and the Pfizer re-examination of the Levitra patent.
- Confirm the sustainability of US pharmaceutical growth (14%) excluding initial stocking effects of new products.
- Review the status of the IRS transfer pricing dispute and potential tax liabilities.