Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2017
Filing Date: March 16, 2018
Accounting Basis: International Financial Reporting Standards (IFRS)
GSK is a global science-based healthcare company operating in three main segments: Pharmaceuticals, Vaccines, and Consumer Healthcare. The 2017 results reflect the ongoing integration of the Novartis Consumer Healthcare joint venture and the Vaccines business acquired in 2015, alongside significant strategic shifts in the HIV and Respiratory portfolios.
Key Financial Metrics (2017)
| Metric | 2017 Total Results | 2017 Adjusted Results |
|---|---|---|
| Turnover | £27,889 million | £27,889 million |
| Operating Profit | £4,087 million | £8,568 million |
| Profit Before Taxation | £3,525 million | £7,924 million |
| Profit After Taxation | £2,169 million | £6,257 million |
| Earnings Per Share (EPS) | 31.4p | 111.8p |
| Net Debt | £13.8 billion | £13.8 billion |
| Dividends Declared | 80 pence per share | 80 pence per share |
Note: "Total Results" include significant non-operational items such as intangible asset impairments, restructuring costs, and transaction-related adjustments. "Adjusted Results" exclude these items to reflect underlying operational performance.
Material Changes vs. Prior Period (2016)
- Turnover Growth: Group turnover increased 17% at actual exchange rates (AER) and 6% at constant exchange rates (CER) compared to 2016.
- Pharmaceuticals: Up 14% AER / 3% CER, driven by HIV sales growth (53% AER) and new Respiratory products.
- Vaccines: Up 26% AER / 14% CER, led by Bexsero and Menveo.
- Consumer Healthcare: Up 19% AER / 9% CER, benefiting from the full-year inclusion of Novartis products.
- Profitability: Adjusted operating profit rose 36% AER (14% CER) to £8,568 million. Adjusted operating margin improved to 30.7% (27.5% in 2016). Total operating profit was significantly lower than Adjusted due to large non-cash charges.
- Adjusting Items: Total results were impacted by £1,599 million in major restructuring costs, £688 million in intangible asset impairments, and £1,060 million in transaction-related adjustments (primarily remeasurement of contingent consideration and put options).
- Net Debt: Increased from £10.7 billion in 2016 to £13.8 billion in 2017, driven by dividends paid (£4.9 billion) and adverse exchange impacts, partially offset by free cash flow.
Guidance, Outlook, and Risks
2018 Guidance
Management provided guidance for 2018 Adjusted Earnings Per Share (EPS) growth contingent on the timing of generic competition for Advair in the US:
- Scenario A (No generic entry in 2018): Adjusted EPS growth of 4-7% at CER, assuming a 20-25% decline in US Advair sales.
- Scenario B (Mid-year generic entry): Adjusted EPS flat to down 3% at CER, with full-year US Advair sales estimated at £750 million.
- Tax Rate: Expected effective tax rate on Adjusted profits of 19-20%, reflecting benefits from US tax reform.
The company stated it could not provide guidance for Total Results due to the unpredictability of fair value movements on contingent consideration and put options.
Principal Risks
- Regulatory and Legal: Exposure to product liability litigation, patent disputes, and government investigations (including ongoing inquiries in China and the US regarding anti-bribery and corruption).
- Commercial Practices: Risks related to marketing compliance and interactions with healthcare professionals.
- Patent Expiry: Significant revenue erosion expected from the loss of exclusivity for key products like Advair and Seretide.
- Supply Chain: Risks regarding product quality, Brexit impacts on UK-EU supply chains, and third-party oversight.
- Financial Reporting: Risks associated with complex tax laws, transfer pricing, and the valuation of contingent consideration liabilities.
Investor Verification Checklist
- Advair Generic Competition: Verify the actual timing and market impact of generic Advair entry in the US, as this is the primary variable in 2018 earnings guidance.
- Contingent Consideration Liabilities: Review Note 45 and the reconciliation of Total to Adjusted results to understand the volatility caused by remeasuring put options (ViiV Healthcare, Consumer Healthcare JV) and contingent consideration.
- US Tax Reform Impact: Confirm the realized effective tax rate in 2018 against the 19-20% guidance, considering the repatriation of foreign earnings.
- Legal Provisions: Monitor updates on significant legal proceedings, particularly the US anti-bribery settlement monitoring period (ending September 2018) and China investigations.
- Consumer Healthcare JV: Assess the performance of the Novartis joint venture and the potential exercise of the put option by Novartis.