Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Annual Review 2007)
Reporting Period: Year ended 31 December 2007
Filing Date: 18 March 2008
GSK reported a challenging 2007 characterized by a severe decline in sales of Avandia (its second-largest product) following media coverage of potential cardiovascular risks, alongside increased generic competition in the US. Despite these headwinds, the company delivered earnings per share (EPS) growth at the high end of guidance, driven by strong performance in Consumer Healthcare, vaccines, and key respiratory products.
Key Financial Metrics
| Metric | 2007 Value | 2006 Value | Change (CER*) |
|---|---|---|---|
| Total Turnover | £22.7 billion | £23.2 billion | +2% |
| Pharmaceutical Turnover | £19.2 billion | £20.1 billion | Level |
| Consumer Healthcare Turnover | £3.5 billion | £3.1 billion | +14% |
| Vaccines Turnover | £2.0 billion | £1.7 billion | +20% |
| Operating Profit (Business Performance) | £7.9 billion | £7.3 billion | +8% |
| Operating Margin (Business Performance) | 34.9% | 33.6% | +1.3 pts |
| Profit After Tax (Total) | £5.3 billion | £5.5 billion | +3% |
| EPS (Business Performance) | 99.1p | 95.5p | +10% |
| EPS (Total) | 94.4p | 95.5p | +5% |
| Dividend per Share | 53p | 48p | +10% |
| Free Cash Flow | £3.9 billion | £2.6 billion | +47% |
*CER = Constant Exchange Rates. Business Performance excludes restructuring costs related to the new Operational Excellence programme.
Material Changes vs. Prior Period
- Avandia Decline: Sales of the Avandia product group fell 22% to £1.2 billion, with a 29% drop in the US following a May 2007 New England Journal of Medicine article suggesting cardiovascular risks.
- Generic Competition: Significant erosion in sales of Coreg (-18%), Wellbutrin (-37%), and Zofran (-77%) due to US generic entry.
- Consumer Healthcare Growth: Recorded double-digit growth (+14%), driven by the US launch of the weight-loss aid alli (£150 million sales) and strong performance of Lucozade, Sensodyne, and Panadol.
- Vaccine Expansion: Vaccine sales grew 20% to £2 billion, supported by Rotarix (doubled to £91 million) and Cervarix (£10 million).
- Operational Excellence: Announced a £1.5 billion cost-saving programme in October 2007, expected to deliver £700 million in annual pre-tax savings by 2010. Restructuring costs of £338 million were incurred in 2007.
- Share Buy-back: Launched the industry's largest buy-back programme (£12 billion total). £2.5 billion was spent in 2007, with a further £6 billion expected in 2008.
Guidance, Outlook, and Risks
Outlook and Guidance
Management expects a mid-single digit percentage decline in business performance EPS for 2008 at constant exchange rates. This forecast accounts for the sustained impact of lower Avandia sales and continued generic competition. Growth is expected to be driven by Seretide/Advair, vaccines, Valtrex, and new product launches including Cervarix, Tykerb, and Rotarix.
Management Commentary
CEO-designate Andrew Witty (succeeding JP Garnier in May 2008) emphasized a focus on R&D productivity, engaging with payers to prove value, and investing in growth areas like vaccines, biopharmaceuticals, and emerging markets. The Board highlighted a record 10 product approvals in 2007 and a robust pipeline with 34 key assets in Phase III or registration.
Risks and Contingencies
- Product Liability & Litigation: Ongoing legal proceedings regarding Avandia cardiovascular risks, product liability, intellectual property, and antitrust matters.
- Regulatory Environment: Increased scrutiny from regulators and payers regarding pricing and safety.
- Patent Expirations: Continued pressure from generic competition on key products.
- Avandia Uncertainty: While the FDA issued a new label in October 2007, sales recovery remains uncertain.
Investor Verification Checklist
- Avandia Sales Trajectory: Verify the extent of sales recovery in 2008 following the FDA label clarification and ongoing litigation status.
- Operational Excellence Savings: Monitor the realization of the £700 million annual savings target from the £1.5 billion restructuring programme.
- Pipeline Progress: Track regulatory approvals for key late-stage assets, particularly Cervarix (US response to FDA), Rotarix, and Promacta.
- Consumer Healthcare Momentum: Assess the sustainability of double-digit growth in the Consumer division, specifically the performance of alli in the US and Europe.
- Share Buy-back Execution: Confirm the pace of the remaining £9.5 billion share repurchase programme through 2009.