Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Interim Management Report)
Reporting Period: Second Quarter (Q2) and First Half (H1) ended 30 June 2014
Issued: 23 July 2014
GSK reported a challenging period characterized by a strategic transition in its respiratory portfolio, significant generic competition in the US, and supply chain disruptions in Consumer Healthcare. The company is executing a major three-part transaction with Novartis, expected to complete in H1 2015, to reshape its business model around Vaccines, Consumer Healthcare, and Pharmaceuticals.
Key Financial Metrics
| Metric | Q2 2014 (£m) | Q2 2013 (£m) | CER Growth % | H1 2014 (£m) | H1 2013 (£m) | CER Growth % |
|---|---|---|---|---|---|---|
| Turnover | 5,561 | 6,618 | (4) | 11,174 | 13,089 | (3) |
| Core Operating Profit | 1,407 | 1,878 | (14) | 2,937 | 3,754 | (7) |
| Core Operating Margin | 25.3% | 28.4% | - | 26.3% | 29.6% | - |
| Core EPS (pence) | 19.1p | 25.3p | (12) | 40.1p | 51.4p | (5) |
| Total EPS (pence) | 13.6p | 21.5p | (23) | 27.5p | 41.4p | (14) |
| Free Cash Flow (H1) | - | - | - | 507 | 1,712 | (70) |
| Net Debt (30 Jun 2014) | 14,423 | - | - | 14,423 | 15,720 | - |
Note: CER = Constant Exchange Rate. Turnover and profit figures exclude divestments completed in 2013 for growth comparisons.
Material Changes vs. Prior Period
- Revenue Decline: Group turnover fell 4% (CER) in Q2 and 3% (CER) in H1. The decline was driven by a 4% drop in Pharmaceuticals and Vaccines and a 4% drop in Consumer Healthcare.
- US Respiratory Pressure: US respiratory sales declined 14% in Q2 due to pricing and contracting pressures, with Advair sales down 19%. Underlying volume declined 11%.
- Generic Competition: Established Products sales fell 24% in Q2, heavily impacted by generic competition to Lovaza (down 81% in Q2) and other products like Seroxat/Paxil and Valtrex.
- Consumer Healthcare Supply Issues: Sales were down 4% in Q2 due to supply interruptions in the US and Europe, particularly affecting smoking control products. Management expects full-year sales to be broadly flat.
- Strong HIV Performance: ViiV Healthcare sales grew 13% in Q2, driven by the strong uptake of the new integrase inhibitor Tivicay, which achieved 11% market share in treatment-naive patients.
- Emerging Markets Growth: Emerging Markets Pharmaceuticals and Vaccines sales grew 11% in Q2, offsetting declines in the US and Japan.
- Currency Impact: A strong Sterling negatively impacted reported results. Q2 turnover declined 13% at actual rates vs. 4% at CER. Core EPS declined 25% at actual rates vs. 12% at CER.
Guidance, Outlook, and Risks
- Full Year 2014 Outlook: GSK now expects full-year 2014 core EPS (on a CER and ex-divestment basis) to be broadly similar to 2013. This is a reduction from previous expectations of growth.
- Share Repurchases: Due to the impact of strong Sterling on free cash flow, share repurchases for the remainder of 2014 are expected to be immaterial.
- Dividend: The Board declared a second interim dividend of 19 pence per share, a 6% increase year-over-year.
- Strategic Transaction: The 3-part transaction with Novartis (Consumer Healthcare JV, Vaccines acquisition, Oncology divestment) remains on track for completion in H1 2015.
- Pipeline: Over 40 New Molecular Entities (NMEs) are in late-stage development. Key upcoming milestones include FDA decisions on Breo for asthma and Triumeq for HIV.
- Risks and Contingencies:
- Legal Investigations: Ongoing investigations by Chinese authorities, the US DOJ, SEC, and UK SFO regarding commercial practices. No reliable estimate of financial impact can be made at this time.
- Supply Chain: Continued supply interruptions in Consumer Healthcare may impact performance for the rest of 2014.
- Respiratory Transition: The transition away from Advair/Seretide is expected to take 2-3 years, with new products (Breo, Anoro, Incruse) expected to drive future growth.
Investor Verification Checklist
- Respiratory Portfolio Transition: Verify the uptake rates of new products (Breo, Anoro, Incruse) against the decline of Advair to assess if the "step change" in market share is stabilizing.
- Consumer Healthcare Supply: Monitor the resolution of supply chain issues in the US and Europe to confirm if the "broadly flat" full-year sales guidance is achievable.
- Novartis Transaction Timeline: Track regulatory approvals and consultation processes to ensure the H1 2015 completion target remains viable.
- Legal Exposure: Review updates on the China investigation and UK SFO criminal investigation for any material provisions or settlements.
- Currency Hedging: Assess the impact of sustained Sterling strength on future cash flows and EPS, given the significant adverse currency translation noted in H1.
- Free Cash Flow Conversion: Analyze the drop in free cash flow conversion (52% in H1 2014 vs 87% in H1 2013) to understand working capital dynamics and legal settlement impacts.