Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Second Quarter ended June 30, 2003 (Q2 2003) and First Half 2003 (H1 2003)
Announcement Date: July 23, 2003
GSK reported strong earnings growth for the second quarter, driven by pharmaceutical sales growth despite the loss of significant Augmentin sales to generic competition in the USA. Management utilizes "Business Performance" metrics, which exclude merger, integration, and restructuring costs, as the primary measure of operational results.
Key Financial Metrics
| Metric | Q2 2003 (Business Perf.) | Q2 2002 (Business Perf.) | CER Growth % | H1 2003 (Business Perf.) | H1 2002 (Business Perf.) | CER Growth % |
|---|---|---|---|---|---|---|
| Turnover | £5,375m | £5,415m | 3% | £10,597m | £10,525m | 6% |
| Trading Profit | £1,891m | £1,819m | 8% | £3,698m | £3,434m | 15% |
| Profit Before Tax | £1,969m | £1,827m | 13% | £3,743m | £3,420m | 18% |
| Earnings Per Share (EPS) | 23.9p | 21.9p | 15% | 45.7p | 40.9p | 20% |
| Trading Margin | 35.2% | 33.6% | +1.6 pts | 34.9% | 32.6% | +2.3 pts |
Cash Flow and Liquidity:
- Free Cash Flow (Q2 2003): £1,017 million.
- Net Debt (End of Q2 2003): £2,162 million (decrease of £111 million from beginning of period).
- Share Buy-backs: £275 million spent in Q2 2003 under a £4 billion program.
- Dividend: Second interim dividend declared at 9 pence per share.
Material Changes vs. Prior Period
- Revenue Growth: Total turnover grew 3% in Q2 and 6% in H1 on a constant exchange rate (CER) basis. Pharmaceutical turnover grew 3% in Q2 despite a £300 million loss in US Augmentin sales due to generic competition.
- Product Performance: Seretide/Advair sales exceeded £1 billion in H1 (+39%), becoming the Group's largest and fastest-growing product. Conversely, global Augmentin sales declined 42% in Q2.
- Cost Efficiency: Trading margin improved by 1.6 percentage points in Q2. Cost of sales declined 4% and SG&A costs declined 1%, offsetting a 12% increase in R&D expenditure.
- Currency Impact: Exchange rates reduced sterling turnover growth by 4% and EPS growth by 6% in Q2. Management expects a broadly neutral currency impact in H2 2003 if rates hold.
Guidance, Outlook, and Risks
Guidance Update: GSK upgraded its 2003 earnings guidance to expect business performance EPS growth of "high single digits or better" at constant exchange rates. This outlook is maintained regardless of potential generic competition to Paxil in the USA.
Product Pipeline and Launches:
- Levitra: Expected FDA approval in H2 2003 for erectile dysfunction.
- Wellbutrin XL: FDA action date set for September 3, 2003, for depression treatment.
- Bexxar: FDA approval received; launch expected end of July 2003 for non-Hodgkin's lymphoma.
- Ariflo: FDA advisory committee meeting scheduled for September 5, 2003, for COPD treatment.
Risks and Contingencies:
- Legal Proceedings: Ongoing litigation regarding Paxil (paroxetine) patents with Apotex and others. GSK voluntarily requested delisting of three patents from the FDA Orange Book, terminating Hatch-Waxman stays but continuing infringement claims. A settlement was reached with Novartis regarding Augmentin ITC complaints, securing single-digit royalties on generic sales.
- Taxation: Dispute with the US IRS regarding transfer pricing for years 1989-2000. Discussions for 1995-2000 are ongoing, while the 1989-1994 dispute proceeds to US Tax Court.
- Generic Competition: Continued pressure on Augmentin and potential future competition for Paxil and Avandia.
Investor Verification Checklist
- Augmentin Decline: Verify the extent of the 42% sales drop and the effectiveness of Augmentin ES/XR in mitigating generic losses.
- Paxil Litigation: Monitor the outcome of the UK High Court trial against Apotex (decision expected October 2003) and the impact of the Orange Book delisting on US generic entry.
- IRS Tax Dispute: Review the status of the transfer pricing dispute with the US IRS, specifically the move to Tax Court for the 1989-1994 period.
- New Product Approvals: Confirm FDA approval dates for Levitra, Wellbutrin XL, and Ariflo in H2 2003 to validate revenue projections.
- Share Buy-back Execution: Track the remaining balance of the £4 billion buy-back program and its impact on share count and EPS.