GSK

Business Context and Reporting Period

Company: GlaxoSmithKline plc (GSK)
Reporting Period: Fiscal year ended December 31, 2003
Business Overview: GSK is a major global healthcare group engaged in the discovery, development, manufacture, and marketing of pharmaceuticals (prescription medicines and vaccines) and Consumer Healthcare products (OTC medicines, oral care, and nutritional healthcare). The company operates in over 130 countries with a strategic intent to become the indisputable leader in the pharmaceutical industry.

Key Financial Metrics (2003)

Note: "Business Performance" excludes merger, restructuring, and disposal items to reflect underlying operational results.

Material Changes vs. Prior Period

• Revenue Growth: Total turnover increased by 1% in sterling terms (5% at constant exchange rates) to £21.4 billion. Pharmaceutical turnover grew 5% (CER) to £18.2 billion, while Consumer Healthcare grew 4% (CER) to £3.3 billion.
• Profitability: Statutory trading profit rose 15% to £6.5 billion. Business performance trading profit increased 3% to £6.9 billion. The improvement was driven by cost savings from merger integration and manufacturing restructuring, partially offset by higher pension costs and operational excellence charges.
• Generic Competition Impact: Significant sales erosion occurred in the US due to the launch of generic versions of Paxil (Seroxat) in September 2003 and Augmentin (which began in 2002). US pharmaceutical sales declined 4% in sterling terms.
• Product Performance: Strong growth was recorded for Seretide/Advair (+39%), Avandia/Avandamet (+24%), Lamictal (+31%), and Trizivir (+22%).
• Balance Sheet: Net debt decreased by £687 million to £1.6 billion, primarily due to lower share buy-back activity compared to 2002, despite an increase in working capital.

Guidance, Outlook, and Risks

• 2004 Outlook: Management characterizes 2004 as a "year of transition." The first nine months are expected to be challenging due to the full impact of generic competition to Paxil and the introduction of generic Wellbutrin. The company expects to deliver 2004 earnings per share (at constant exchange rates) at least in line with 2003 business performance EPS, with a return to growth expected in 2005.
• Dividend Policy: The total dividend for 2003 was 41 pence per share. For 2004, the company expects a similar increase in the total dividend, with a rebalancing of quarterly payments (increasing the first three interim dividends to 10 pence).
• Key Risks:
  • Patent Expiry and Generics: Continued erosion of sales for major products like Paxil, Wellbutrin, and Augmentin due to generic entry.
  • Legal Proceedings: Significant ongoing litigation regarding patent validity (e.g., Paxil, Wellbutrin, Zofran) and product liability claims (e.g., Baycol, Fen-Phen, Paxil withdrawal reactions).
  • Taxation: A major dispute with the US Internal Revenue Service (IRS) regarding transfer pricing for legacy Glaxo products (1989–1996), involving a claim of approximately $2.7 billion in taxes plus interest.
  • R&D Productivity: The risk that the R&D pipeline may not deliver commercially successful new products to replace declining sales.

Investor Verification Checklist

• Generic Erosion: Verify the actual sales impact of generic Wellbutrin in 2004 against management's "transition year" guidance.
• US Tax Dispute: Monitor the status of the IRS transfer pricing claim and the potential for further assessments for years 1997–2003.
• Patent Litigation Outcomes: Track the results of ongoing patent infringement lawsuits for Paxil, Wellbutrin, and Zofran, as adverse rulings could accelerate generic entry.
• R&D Pipeline: Assess the progress of Phase III compounds (e.g., Avandaryl, solifenacin) to ensure they can offset patent expiries by 2005.
• Share Buy-backs: Confirm the extent of remaining capital allocated to the £4 billion share buy-back programme and its impact on EPS.