Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Preliminary Announcement of Results)
Reporting Period: Year ended December 31, 2002
Announcement Date: February 12, 2003
GSK reported full-year 2002 results, highlighting a diverse pharmaceutical portfolio driving earnings growth despite generic competition. The company utilizes "Business Performance" metrics (excluding merger, integration, and restructuring costs) as its primary measure of operational success, alongside statutory UK GAAP results.
Key Financial Metrics
| Metric | 2002 Full Year | 2001 Full Year (Restated) | Change (CER%) |
|---|---|---|---|
| Sales | £21,212 million | £20,489 million | +7% |
| Trading Profit (Business Performance) | £6,694 million | £6,053 million | +15% |
| Trading Profit (Statutory) | £5,662 million | £4,697 million | +21% |
| Profit Before Tax (Business Performance) | £6,517 million | £6,169 million | +11% |
| Earnings Per Share (Business Performance) | 78.3 pence | 72.3 pence | +13% |
| Earnings Per Share (Statutory) | 66.2 pence | 50.3 pence | +32% |
| Free Cash Flow | £5,387 million | £4,599 million | N/A |
| Net Debt (End of Period) | £2,335 million | £2,101 million | N/A |
Dividend: Total dividend for 2002 declared at 40 pence per share (up from 39 pence in 2001).
Material Changes vs. Prior Period
- Pharmaceutical Sales: Grew 8% to nearly £18 billion. US pharmaceutical sales grew 13%, while Europe grew 2% and International markets grew 4%.
- Generic Competition Impact: Anti-bacterial sales declined 12% globally and 22% in the USA due to generic competition for Augmentin and Ceftin. Augmentin US sales fell 20% following patent invalidation rulings.
- Margin Expansion: Business performance trading margin improved by 2.1 percentage points to 31.6%, driven by cost-saving programs and manufacturing rationalization.
- Restructuring Costs: Net costs of £1,011 million were incurred for merger and manufacturing restructuring in 2002, compared to £1,652 million in 2001.
- Currency Impact: A weak US dollar and other currencies negatively impacted sterling results. The adverse currency impact on EPS was 5%.
Guidance, Outlook, and Risks
Guidance and Outlook
- 2003 EPS Guidance: Re-confirmed as high single-digit percentage growth in business performance EPS at constant exchange rates (CER).
- Assumptions: Guidance assumes successful defense of intellectual property surrounding Paxil in the USA.
- Share Buy-Back: A new £4 billion share buy-back program commenced in October 2002. £2,220 million was spent in 2002.
Risks and Contingencies
- Legal Proceedings (Patents):
- Augmentin: US District Court held patents invalid; four generic versions launched. Appeal hearing scheduled for March 5, 2003.
- Paxil: Ongoing infringement proceedings against Apotex. Trial ongoing in Northern District of Illinois; summary judgment motions pending in Eastern District of Pennsylvania.
- Wellbutrin SR: Appeal pending at the US Court of Appeals for the Federal Circuit (CAFC) regarding a summary judgment that a generic version does not infringe.
- Product Liability: Significant litigation regarding Fastin, PPA, thimerosal-containing vaccines, Baycol, Paxil, and Lotronex. Bayer agreed to pay 95% of settlements for Baycol.
- Government Investigations: Responding to US government investigations into pricing, marketing, and reimbursement of prescription drugs, which may lead to restitution or civil false claims litigation.
- Pensions: Net pension deficit of approximately £1.3 billion (after deferred tax). Special cash contributions of £320 million were made in Q4 2002.
Investor Verification Checklist
- Patent Litigation Outcomes: Verify the status of the Augmentin appeal (March 2003 hearing) and Paxil/Wellbutrin patent defenses, as these are critical to the 2003 guidance.
- Generic Erosion: Monitor the extent of sales loss for Augmentin and Ceftin in the US market post-patent expiration.
- Transfer Pricing Disputes: Review ongoing negotiations with US and UK tax authorities regarding Zantac transfer pricing, which could impact future tax liabilities.
- Product Launches: Track the commercial performance of new launches (Levitra, Avodart, Pediarix) and line extensions (Paxil CR, Augmentin XR) expected in 2003.
- Pension Funding: Assess future cash requirements for pension contributions given the disclosed £1.3 billion deficit.