Business Context and Reporting Period
Company: GSK Plc
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter (Q2) and First Half (H1) ended 30 June 2020
Issued Date: 29 July 2020
GSK reported Q2 2020 results amidst significant disruption from the COVID-19 pandemic. The company is currently executing a strategic separation of its Consumer Healthcare business into a joint venture with Pfizer. Performance was heavily impacted by reduced vaccination rates due to lockdowns and customer destocking in Pharmaceuticals and Consumer Healthcare following Q1 stockpiling.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Turnover | £7.6 billion | £7.8 billion | £16.7 billion | £15.5 billion |
| Turnover Growth (CER) | -3% | - | +8% | - |
| Total Operating Profit | £2.85 billion | £1.48 billion | £4.86 billion | £2.91 billion |
| Adjusted Operating Profit | £1.75 billion | £2.17 billion | £4.42 billion | £4.33 billion |
| Total EPS | 45.5p | 19.5p | 77.0p | 36.3p |
| Adjusted EPS | 19.2p | 30.5p | 56.9p | 60.6p |
| Net Cash from Operations | £2.76 billion | £1.39 billion | £3.73 billion | £2.05 billion |
| Free Cash Flow | £1.95 billion | £0.37 billion | £2.48 billion | £0.54 billion |
| Net Debt | £23.4 billion | £28.7 billion | £23.4 billion | £28.7 billion |
Material Changes vs. Prior Period
- Revenue Decline in Q2: Group sales fell 3% at constant exchange rates (CER) in Q2, driven by a 29% drop in Vaccines sales due to pandemic-related lockdowns and a 5% decline in Pharmaceuticals due to destocking. Consumer Healthcare sales rose 25% reported (driven by Pfizer portfolio inclusion) but fell 6% on a pro-forma CER basis.
- Profit Volatility: Total EPS surged to 45.5p (up >100%) primarily due to a £2.3 billion net profit on the disposal of Horlicks and other Consumer Healthcare brands to Unilever. Conversely, Adjusted EPS fell 38% to 19.2p, reflecting lower underlying sales and higher non-controlling interest allocations.
- Segment Performance:
- Pharmaceuticals: Respiratory sales grew 17% (driven by Trelegy and Nucala), while HIV sales declined 3% (destocking impact on Tivicay/Triumeq offset by growth in Juluca/Dovato).
- Vaccines: Sales dropped 29% across all regions due to reduced healthcare visits. Shingrix sales fell 19%.
- Consumer Healthcare: Pro-forma sales declined 6% due to the unwinding of Q1 stockpiling.
- Cash Flow: Free cash flow improved significantly to £1.95 billion in Q2, aided by strong collections of trade receivables and asset disposals.
Guidance, Outlook, and Risks
- 2020 Guidance: GSK maintained its full-year 2020 Adjusted EPS guidance of a decline in the range of -1% to -4% at CER. However, management warned this is highly dependent on the timing of a recovery in vaccination rates, particularly in the US, expected in Q3.
- Key Risk: A three-month delay in the recovery of vaccination rates could negatively impact Adjusted EPS by up to 5 percentage points.
- Pipeline Highlights:
- Approvals: Zejula (ovarian cancer), Rukobia (HIV), and Duvroq (anaemia in Japan).
- COVID-19: Multiple collaborations underway for adjuvanted vaccines (Clover, Medicago, Sanofi). Phase II/III studies for Vir antibody and otilimab initiated.
- Strategic: New mRNA collaboration with CureVac announced.
- Dividend: A second interim dividend of 19p per share was declared. The Board intends to maintain the 2020 annual dividend at 80p per share.
Investor Verification Checklist
- Vaccination Recovery Timing: Verify the actual recovery trajectory of US vaccination rates in Q3 and Q4 to assess the risk to the maintained EPS guidance.
- Destocking Normalization: Monitor Q3 Pharmaceuticals and Consumer Healthcare sales to confirm the full reversal of Q1 stockpiling and Q2 destocking effects.
- Consumer Healthcare Separation: Track progress on the separation preparation programme and the integration of the Pfizer joint venture, including synergy realization.
- Contingent Consideration: Review the re-measurement charges related to the Shionogi-ViiV Healthcare contingent consideration liability, which impacted Total results significantly.
- Legal Proceedings: Monitor developments regarding the Zantac (ranitidine) investigations and other product liability claims.