Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: First Quarter ended March 31, 2018
Filing Date: May 10, 2018
Context: This report reflects Q1 2018 results previously announced on April 25, 2018. Results are presented in Sterling (£) and include both Total results (IFRS) and Adjusted results (non-IFRS). The period was significantly impacted by strong Sterling exchange rates and specific transaction-related accounting charges.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Growth (AER) | Growth (CER) |
|---|---|---|---|---|
| Turnover | £7,222m | £7,384m | -2% | +4% |
| Operating Profit (Total) | £1,240m | £1,718m | -28% | -15% |
| Operating Profit (Adjusted) | £1,923m | £1,979m | -3% | +9% |
| Profit After Tax (Total) | £759m | £1,223m | -38% | -24% |
| Profit After Tax (Adjusted) | £1,431m | £1,416m | +1% | +13% |
| EPS (Total) | 11.2p | 21.4p | -48% | -33% |
| EPS (Adjusted) | 24.6p | 25.0p | -2% | +11% |
| Free Cash Flow | £324m | £650m | -50% | N/A |
| Net Debt | £13,377m | £13,743m | N/A | N/A |
Note: AER = Actual Exchange Rates; CER = Constant Exchange Rates.
Material Changes vs. Prior Period
- Currency Impact: A strong Sterling (avg £1/$1.39 vs £1/$1.25 in Q1 2017) negatively impacted reported turnover by 2% AER, masking underlying 4% CER growth.
- Transaction Charges: Total results were significantly depressed by £437m in transaction-related adjustments, primarily a £495m charge for the re-measurement of the Consumer Healthcare Joint Venture put option liability following the agreement to buy out Novartis's interest.
- Segment Performance:
- Pharmaceuticals: Turnover down 4% AER (+2% CER). HIV sales grew 14% CER (driven by Triumeq and Tivicay), offset by declines in Respiratory (Seretide/Advair) and Established Pharmaceuticals.
- Vaccines: Turnover up 7% AER (+13% CER), driven by Shingrix (first full quarter in US/Canada) and Bexsero.
- Consumer Healthcare: Turnover down 3% AER (+2% CER). Growth in Oral Health and Pain Relief offset by generic competition (Transderm Scop) and GST impacts in India.
- Costs: Adjusted operating margin improved to 26.6% (up 1.3pp CER) due to cost control and restructuring savings, despite price pressures in Respiratory.
Guidance, Outlook, and Risks
- 2018 Guidance:
- Base Case: If no substitutable generic competitor to Advair enters the US market in 2018, GSK expects Adjusted EPS growth of 4% to 7% at CER.
- Generic Risk: If a generic Advair enters mid-year, GSK expects full-year US Advair sales of ~£750m and Adjusted EPS flat to down 3% at CER.
- Tax Rate: Expected effective tax rate for 2018 is 19-20% on Adjusted profits, benefiting from US tax reform.
- Key Risks & Contingencies:
- Advair Patent Expiry: Significant uncertainty regarding the timing and impact of generic competition in the US respiratory market.
- Legal Matters: Aggregate provision for legal disputes is £0.2 billion; ultimate liability may vary.
- Contingent Consideration: Significant liabilities exist for ViiV Healthcare (Shionogi) and Vaccines (Novartis) acquisitions, subject to re-measurement based on sales performance and exchange rates.
- Dividends: First interim dividend declared at 19p per share. Board intends to maintain 2018 annual dividend at 80p per share.
Investor Verification Checklist
- Advair Exposure: Verify the current status of US generic competition for Advair/Seretide and its potential impact on full-year respiratory revenue.
- Consumer Healthcare Buyout: Confirm the completion of the Novartis share buyout (expected June 1, 2018) and the final valuation impact on the balance sheet.
- Currency Sensitivity: Assess the impact of Sterling strength on future earnings, particularly given the significant US revenue exposure.
- Free Cash Flow Conversion: Review the decline in Free Cash Flow (down 50% YoY) driven by the £317m milestone payment to Novartis and dividend payments.
- Adjusted vs. Total Results: Ensure analysis focuses on Adjusted results to exclude non-recurring transaction charges (£437m) that distort Total EPS.