GSK plc — 2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019; filed March 6, 2020. This is an annual report, not a standalone fourth-quarter filing. Figures are in pounds sterling unless stated otherwise. GSK reports under IFRS as issued by the IASB.
Business context and financial performance
GSK operates Pharmaceuticals, Vaccines and Consumer Healthcare. The Pfizer consumer healthcare business joined a GSK-controlled joint venture on July 31, 2019; GSK held 68% and Pfizer 32%. Reported 2019 Consumer Healthcare results include five months of Pfizer brand sales.
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Turnover | £33.754bn | £30.821bn | +10% reported; +8% at constant exchange rates (CER) |
| Total operating profit | £6.961bn | £5.483bn | Up; includes adjusting items |
| Adjusted operating profit | £8.972bn | £8.745bn | +3% reported; flat CER |
| Total profit after tax | £5.268bn | £4.046bn | Up |
| Adjusted profit after tax | £6.918bn | £6.543bn | Up |
| Total / adjusted EPS | 93.9p / 123.9p | 73.7p / 119.4p | Adjusted EPS +4% reported; +1% CER |
| Net cash from operations | £8.020bn | £8.421bn | Down |
| Free cash flow | £5.073bn | £5.692bn | Down |
| Net debt at year-end | £25.215bn | £21.621bn | Increased |
Total gross profit was £21.891bn; adjusted gross profit was £23.675bn. Adjusted operating margin was 26.6%, down 2.1 percentage points CER. Adjusted cost of sales was 29.9% of turnover, up 0.5 points CER. Total R&D expense was £4.568bn (13.5% of turnover); adjusted R&D was £4.339bn.
Business trends and changes versus 2018
- Pharmaceuticals: turnover £17.554bn, flat CER. Respiratory grew 15% CER and HIV 1%; Established Pharmaceuticals declined 8%, including pressure from generic Advair. Pharmaceuticals operating profit fell 22% CER.
- Vaccines: turnover £7.157bn, up 19% CER, led by Shingrix; meningitis vaccines also contributed. Operating profit rose 46% CER.
- Consumer Healthcare: turnover £8.995bn, up 17% CER, primarily reflecting the Pfizer portfolio. Operating profit rose 22% CER.
- Adjusted operating profit grew more slowly than turnover, and adjusted margin contracted, reflecting pricing pressure, product mix and increased R&D and launch investment. Total operating profit rose partly because of lower remeasurement charges, disposal gains and other items; it is not directly comparable with adjusted performance.
Cash, liquidity, debt and capital allocation
Cash and liquid investments were £5.293bn at year-end; gross debt was approximately £30.5bn, with £6.918bn of short-term borrowings and £23.590bn of long-term borrowings. Net debt rose by £3.594bn, reflecting the Tesaro acquisition, IFRS 16 lease adoption, shareholder dividends and other factors, partly offset by free cash flow and favorable currency movements. Current assets were £19.491bn versus current liabilities of £24.050bn.
Operating cash flow and free cash flow declined, with the company citing rebate and returns payment timing, the Advair generic impact, higher restructuring and legal payments, and increased capital expenditure. The 2019 dividend was 80p per share, unchanged from 2018; the Board intended to maintain 80p in 2020, subject to external conditions and performance. Longer term, GSK aims for free-cash-flow dividend cover of 1.25–1.50x before resuming dividend growth.
Outlook, management commentary and unusual items
- For 2020, management guided to an adjusted EPS decline of 1%–4% CER, reflecting expected product growth alongside increased R&D and commercial investment and separation preparation. Guidance excludes further material divestments beyond those announced and any coronavirus impact; the filing said the outbreak had not materially affected trading through the report date, but future effects were uncertain.
- GSK said it could not provide guidance for total results because certain material items, including impairment and fair-value movements on contingent consideration and put options, could not be reliably forecast.
- Major restructuring charges were £1.105bn, versus £809m in 2018. The Pfizer joint-venture integration programme was expected to generate £0.5bn annual savings by 2022, with £0.7bn cash costs, £0.3bn non-cash charges and £0.2bn additional capital expenditure.
- A two-year separation-preparation programme targets £0.7bn annual savings by 2022 and £0.8bn by 2023; estimated costs are £2.4bn, including £1.6bn cash costs. Additional one-time Consumer Healthcare separation-preparation costs were estimated at £600m–£700m, excluding transaction costs.
- Significant legal charges were £251m and related cash payments £294m. Other notable items included disposal gains, acquisition-related costs, and a £366m charge from the release of the fair-value uplift on acquired Pfizer inventory.
- The Shionogi ViiV contingent-consideration liability was £5.103bn at year-end; £865m of cash payments to Shionogi were made in 2019. The filing identifies this liability’s valuation as a key estimate.
Risks, contingencies and controls
Principal risks include patient safety, product quality and supply continuity; clinical research and data integrity; pricing, competition and loss of exclusivity; litigation and regulation; tax and financial reporting; anti-bribery compliance; privacy and cybersecurity; and third-party oversight. GSK identified risks around integrating the Pfizer business, delayed jurisdictional transfers, achieving synergies, indemnity exposure and timing or feasibility of a future Consumer Healthcare separation. It also warned that legal and tax outcomes can exceed recorded provisions. The filing reported £97m of specified contingent liabilities, separate from potentially uncertain legal, tax and other disputes for which a reliable outflow estimate was not possible.
Deloitte issued an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor excluded the acquired Pfizer Consumer Healthcare business from the 2019 internal-control assessment; it represented 22% of year-end assets and 4% of annual turnover. The filing notes no material cybersecurity incident causing substantial harm during the year.
Important facts for investors to verify
- How much of turnover and growth is attributable to acquisitions, particularly the five months of Pfizer consumer healthcare sales, versus underlying growth.
- The sensitivity of adjusted earnings and cash flow to Advair-related generic competition, pricing, rebates and returns accruals; the US Pharmaceuticals and Vaccines year-end accrual was £4.2bn.
- Debt trajectory, near-term maturities, interest costs and the ability to sustain the 80p dividend while funding investment and separation costs.
- Whether restructuring and Consumer Healthcare integration savings are achieved on schedule and within disclosed cost estimates.
- Potential changes in the £5.103bn Shionogi contingent-consideration estimate, unresolved litigation and tax exposures, and the eventual integration of Pfizer controls.
- Progress and financing conditions for the proposed Consumer Healthcare separation, including regulatory approvals and market access.