GSK

Business Context and Reporting Period

Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Second Quarter (Q2) and First Half (H1) ended June 30, 2013
Announcement Date: July 24, 2013

GSK reported Q2 2013 core earnings per share (EPS) growth of 4% on sales growth of 2% (Constant Exchange Rate - CER). The company continues to execute a strategy focused on reshaping the business to deliver sustainable sales growth, increase financial returns, and improve R&D productivity. Key strategic actions include targeted divestments of non-core assets and significant pipeline approvals.

Key Financial Metrics

Note: Total EPS declined significantly compared to the prior year due to the absence of significant asset disposal profits recognized in H1 2012.

Material Changes vs. Prior Period

• Revenue Mix: Pharmaceuticals and Vaccines sales grew 1% (CER), driven by US (+5%) and EMAP (+2%) growth, offset by declines in Japan (-5%) and flat performance in Europe. Consumer Healthcare grew 2% (5% excluding divestments).
• Profitability: Core operating profit was flat in Q2 (CER) but down 5% in H1 (CER). Margins decreased slightly due to the unwinding of prior year one-off benefits (pension adjustments, royalty settlements) and increased cost of sales, partially offset by cost management and higher royalty income.
• Product Performance:
  • US: Strong growth in Respiratory (Advair, Flovent, Ventolin) and Oncology (Votrient, Promacta). Vaccines grew 14% due to competitor supply shortages.
  • Japan: Declines driven by generic erosion of Paxil and competitive pressure on vaccines (Cervarix, Rotarix).
  • Europe: Flat turnover reflecting price cuts and austerity measures.
• Divestments: Received an offer from Aspen Group for two anticoagulant products and a manufacturing site for approx. £700 million. Divestment of Lucozade and Ribena remains on track.

Guidance, Outlook, and Risks

Guidance and Outlook

• 2013 Core EPS: Expected growth of 3-4% (CER).
• 2013 Turnover: Expected growth of around 1% (CER).
• Dividends: Second interim dividend declared at 18p per share (+6% vs prior year).
• Share Repurchases: Target of £1-2 billion for 2013.
• Tax Rate: Full year core tax rate expected to be around 24%.

Risks and Contingencies

• China Investigation: The Ministry of Public Security in China confirmed an ongoing investigation into alleged serious economic crimes by GSK China's pharmaceutical operations. The company is cooperating fully, but the financial impact cannot currently be quantified.
• Legal Matters: Reached settlements in principle regarding Avandia marketing lawsuits totaling $229 million, within existing provisions.
• Regulatory Pipeline: While three major US approvals were received (Breo Ellipta, Tafinlar, Mekinist), the company notes risks regarding the delivery of commercially successful new products and intellectual property protection.

Investor Verification Checklist

• China Investigation Impact: Monitor updates on the Ministry of Public Security investigation to assess potential financial or operational disruptions in the Chinese market.
• Divestment Execution: Verify the closing of the £700 million anticoagulant sale to Aspen Group and the Lucozade/Ribena divestment to confirm cash proceeds and asset removal.
• Pipeline Commercialization: Track the launch and uptake of newly approved assets (Breo Ellipta, Tafinlar, Mekinist) to validate the projected growth in Oncology and Respiratory segments.
• Japan Market Recovery: Assess whether generic erosion of Paxil and vaccine competition will stabilize or continue to impact regional performance.
• Cost Management: Review the progress of the "Operational Excellence" and "Major Change" programs to ensure projected annual savings (£2.8 billion and £1.0 billion respectively) are realized.