Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter (Q2) and First Half (H1) ended June 30, 2019
Issuance Date: July 24, 2019
GSK reported sales and earnings growth for Q2 2019, driven by strong performance in Vaccines and Respiratory products, despite the loss of exclusivity for Advair in the US. The company is proceeding with the separation of its Consumer Healthcare business into a joint venture with Pfizer and the integration of its recent acquisition of Tesaro.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Turnover | £7.8 billion | £7.3 billion | £15.5 billion | £14.5 billion |
| Total Operating Profit | £1.5 billion | £0.8 billion | £2.9 billion | £2.0 billion |
| Adjusted Operating Profit | £2.2 billion | £2.1 billion | £4.3 billion | £4.0 billion |
| Total EPS | 19.5p | 9.0p | 36.3p | 20.2p |
| Adjusted EPS | 30.5p | 28.1p | 60.6p | 52.7p |
| Net Cash from Operations | £1.4 billion | £1.4 billion | £2.1 billion | £2.2 billion |
| Free Cash Flow | £0.4 billion | £0.5 billion | £0.5 billion | £0.8 billion |
| Net Debt (as of June 30, 2019) | £28.7 billion |
Segment Performance (Q2 2019 Turnover Growth at CER):
- Vaccines: +23% (Driven by Shingrix)
- Consumer Healthcare: +4%
- Pharmaceuticals: -1% (Offset by Respiratory growth)
Material Changes vs. Prior Period
- Revenue Growth: Group turnover increased 7% at Actual Exchange Rates (AER) and 5% at Constant Exchange Rates (CER) in Q2. Vaccines were the primary growth driver (+26% AER), while Pharmaceuticals declined slightly (-1% CER) due to the impact of generic competition for Advair.
- Earnings Volatility: Total EPS increased >100% year-over-year, primarily due to a significantly lower charge for the quarterly revaluation of the HIV business contingent consideration and the absence of the Consumer Healthcare put option charge present in Q2 2018.
- Adjusted Margins: Adjusted Group operating margin decreased to 27.8% (down 1.4 percentage points CER) due to increased R&D investment (up 16% CER) and restructuring costs, despite sales growth.
- Debt Levels: Net debt increased to £28.7 billion from £21.6 billion at year-end 2018, reflecting the £3.9 billion acquisition of Tesaro, the impact of IFRS 16 lease accounting, and dividend payments.
Guidance, Outlook, and Risks
2019 Guidance Update:
GSK improved its 2019 Adjusted EPS guidance. The company now expects a decline of -3% to -5% at CER, an improvement from the previous guidance of -5% to -9%. This reflects better operating performance, lower interest expenses, and a one-off benefit from associates.
Dividend:
A quarterly dividend of 19p per share was declared. The company expects to maintain the full-year 2019 dividend at 80p per share.
Pipeline Highlights:
- Oncology: Positive Phase III PRIMA trial results for Zejula (ovarian cancer); FDA accepted sNDA for priority review.
- HIV: Dovato approved in Europe; positive data for switching patients to two-drug regimens.
- Respiratory: Nucala approved for self-administration in the US; positive CAPTAIN study results for Trelegy Ellipta in asthma.
- Vaccines: Shingrix approved in China for adults 50+.
Risks and Contingencies:
- Generic Competition: Continued price pressure and volume decline from generic Advair in the US.
- Restructuring: Ongoing major restructuring programs (manufacturing rationalization, Tesaro integration) incurring significant costs.
- Legal/Tax: Significant contingent consideration liabilities (approx. £6.0 billion) related to ViiV Healthcare and Novartis Vaccines acquisitions, subject to re-measurement based on sales forecasts and exchange rates.
- Transaction Execution: Risks associated with the proposed Consumer Healthcare joint venture with Pfizer and the divestment of Horlicks to Unilever.
Investor Verification Checklist
- Advair Impact: Verify the trajectory of US Respiratory sales decline as generic competition matures beyond the first full quarter.
- Adjusted vs. Total EPS: Reconcile the significant divergence between Total EPS (driven by accounting adjustments) and Adjusted EPS (operational performance) to understand underlying profitability.
- Contingent Consideration: Review the sensitivity of the £6.0 billion contingent liability to changes in exchange rates and sales forecasts for ViiV Healthcare products.
- Free Cash Flow Conversion: Monitor the recovery of free cash flow conversion, which dropped to 30% in H1 2019 due to capital expenditure and timing of rebate payments.
- Transaction Closing: Confirm the timeline and regulatory approval status for the Pfizer Consumer Healthcare joint venture and the Tesaro integration progress.