Business Context and Reporting Period
Company: GSK Plc
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Full Year ended 31 December 2017 and Quarter ended 31 December 2017
Issued Date: 7 February 2018
GSK reported full-year 2017 results characterized by sales growth across all three business segments (Pharmaceuticals, Vaccines, and Consumer Healthcare), improved operating margins, and stronger free cash flow. The company delivered Adjusted EPS growth in line with guidance, despite significant one-time charges related to US tax reform.
Key Financial Metrics
| Metric | 2017 Full Year | 2016 Full Year | 2017 Q4 | 2016 Q4 |
|---|---|---|---|---|
| Turnover | £30.2 billion (+8% AER, +3% CER) | £27.9 billion | £7.6 billion (+1% AER, +4% CER) | £7.6 billion |
| Total Operating Profit | £4.1 billion (+57% AER) | £2.6 billion | £0.5 billion (-14% AER) | £0.6 billion |
| Adjusted Operating Profit | £8.6 billion (+12% AER, +5% CER) | £7.7 billion | £2.0 billion (+1% AER, +5% CER) | £2.0 billion |
| Adjusted Operating Margin | 28.4% | 27.5% | 26.7% | 26.7% |
| Total EPS | 31.4p (+67% AER) | 18.8p | (11.2)p | 5.3p |
| Adjusted EPS | 111.8p (+11% AER, +4% CER) | 100.6p | 27.2p (+7% AER, +11% CER) | 25.5p |
| Free Cash Flow | £3.4 billion | £3.0 billion | £1.8 billion | £1.7 billion |
| Net Debt | £13.2 billion | £13.8 billion | £13.2 billion | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Turnover increased 3% at Constant Exchange Rates (CER) for the full year, driven by growth in all three businesses. Pharmaceuticals grew 3% CER, Vaccines 6% CER, and Consumer Healthcare 2% CER.
- Profitability: Adjusted Group operating margin improved to 28.4% from 27.5% in 2016. Segment margins improved across the board: Pharmaceuticals (34.3%), Vaccines (31.9%), and Consumer Healthcare (17.7%).
- US Tax Reform Impact: The enactment of the US Tax Cuts and Jobs Act resulted in a £1.6 billion charge in 2017, significantly impacting Total EPS and Total Operating Profit. This included a £1.1 billion tax charge and £0.7 billion in increased contingent consideration liabilities.
- Q4 Volatility: Q4 2017 Total results showed a loss per share of 11.2p compared to earnings of 5.3p in Q4 2016, primarily due to the timing of the US tax reform charges and re-measurement of contingent consideration liabilities.
Guidance, Outlook, and Risks
2018 Guidance
Guidance for 2018 Adjusted EPS growth is contingent on the timing of generic competition for Advair in the US:
- Scenario A (No Generic): If no substitutable generic competitor is introduced, GSK expects Adjusted EPS growth of 4% to 7% CER.
- Scenario B (Mid-Year Generic): If a generic is introduced mid-year, GSK expects full-year US Advair sales of ~£750 million, resulting in Adjusted EPS flat to down 3% CER.
The company expects an effective tax rate on Adjusted profits of 19-20% in 2018, reflecting the benefit of US tax reform. The dividend is expected to remain at 80p per share for 2018.
Management Commentary
CEO Emma Walmsley highlighted strong performance from new products (Tivicay, Triumeq, Ellipta portfolio, Nucala) and three key approvals: Shingrix, Trelegy Ellipta, and Juluca. The company remains focused on strengthening its pipeline in Respiratory, HIV, Oncology, and Immuno-inflammation.
Risks and Contingencies
- Advair Generic Competition: The primary risk to 2018 guidance is the potential loss of exclusivity for Advair in the US.
- Legal Proceedings: Ongoing investigations by the UK Serious Fraud Office (SFO) regarding commercial operations in China and other countries. No provision has been made as the financial effect cannot be reliably estimated.
- US Tax Reform Estimates: The charges taken in 2017 are based on current estimates; future adjustments could materially impact results as detailed application of the Act becomes clear.
Investor Verification Checklist
- Advair Patent Status: Monitor FDA decisions and market entry of generic Advair in the US to determine which 2018 guidance scenario applies.
- US Tax Reform Implementation: Verify the final effective tax rate and any adjustments to the £1.6 billion charge as the IRS provides further guidance.
- Shingrix Adoption: Track sales performance following the CDC's preferential recommendation and EMA approval.
- Legal Settlements: Review updates on the SFO investigation and other significant litigation for potential future provisions.
- Free Cash Flow Conversion: Assess the ability to maintain the 80p dividend given the target free cash flow cover of 1.25-1.50x.