Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Interim Management Report)
Reporting Period: Second Quarter (Q2) and First Half (H1) ended 30 June 2010
Issuance Date: 21 July 2010
GSK reported results for a period characterized by a strategic shift toward diversification, offsetting declines in US pharmaceutical sales due to generic competition. The company continues to execute its "Operational Excellence" program to reduce costs and improve returns on invested capital.
Key Financial Metrics
| Metric | Q2 2010 | H1 2010 | Q2 2009 (Prior Year) | H1 2009 (Prior Year) |
|---|---|---|---|---|
| Turnover | £7,025m | £14,382m | £6,747m | £13,516m |
| Operating Profit (Before Restructuring) | £641m | £3,036m | £2,381m | £4,357m |
| Operating Profit (Total) | £51m | £2,145m | £2,195m | £3,907m |
| Profit After Tax | £182m | £1,143m | £1,461m | £2,630m |
| EPS (Before Restructuring) | 2.6p | 33.3p | 31.0p | 57.3p |
| EPS (Total) | (6.0)p | 20.4p | 28.3p | 50.6p |
| Net Cash Inflow from Operations | N/A | £4,238m | N/A | £3,499m |
| Net Debt | £8.5bn (as of 30 Jun 2010) | £8.5bn | N/A | £9.4bn (as of 30 Jun 2009) |
Note: EPS figures are in pence. Negative values indicate a loss.
Material Changes vs. Prior Period
- Revenue Growth: H1 turnover grew 7% (CER) to £14.4 billion. Q2 turnover was flat (0% CER) at £7.0 billion. Growth was driven by Emerging Markets (+17% Q2, +30% H1) and Asia Pacific/Japan (+9% Q2, +27% H1), which offset a significant decline in US pharmaceutical sales (-13% Q2, -7% H1).
- Profit Decline: Operating profit before restructuring fell 80% in Q2 and 34% in H1 (CER). Total operating profit fell >100% in Q2 and 50% in H1 (CER). The primary driver was a pre-announced legal charge of £1.57 billion in Q2.
- Product Performance:
- Declines: Valtrex sales fell 59% in Q2 due to generic competition. Rotarix sales fell 49% in Q2 due to a temporary FDA suspension. Avandia sales declined 26% in Q2.
- Growth: Vaccine sales grew 17% in Q2 (driven by H1N1 pandemic vaccines). Consumer Healthcare sales grew 3% in Q2.
- Costs: SG&A costs increased significantly due to legal charges. Excluding legal costs, SG&A grew 5% in Q2. R&D expenditure was 14.1% of turnover in Q2.
Guidance, Outlook, and Risks
- Guidance: Management confirmed 2010 guidance for Cost of Sales, SG&A, and R&D remains unchanged. They expect a broadly stable operating profit margin for 2010 (excluding legal charges and the 2009 ViiV accounting gain). The expected full-year effective tax rate is 30.5%.
- Dividends: The Board declared a second interim dividend of 15p per share (up 7% from 14p in Q2 2009), totaling 30p for the half-year.
- Pipeline: GSK reported three new approvals (Prolia, Votrient, Jalyn) and the filing of Benlysta in the US and EU. Five new assets were progressed into Phase III development.
- Risks and Contingencies:
- Legal: A £1.57 billion charge was recorded in Q2 for legal and other disputes. The aggregate provision for legal disputes stands at £3.5 billion. Significant litigation remains regarding Avandia, Paxil, and manufacturing practices in Puerto Rico (settlement in principle reached for $750 million).
- Regulatory: Temporary suspension of Rotarix in the US (resolved late May). Patent revocation for Seretide in Germany (appeal filed).
- Market: Continued pressure from generic competition in the US and pricing pressures from healthcare reform.
Investor Verification Checklist
- Legal Provisions: Verify the sufficiency of the £3.5 billion legal provision against ongoing litigation outcomes, specifically the Puerto Rico settlement and Avandia liability.
- US Sales Trajectory: Monitor the extent of generic erosion on Valtrex and the impact of healthcare reform on US pharmaceutical pricing.
- Vaccine Volatility: Assess the sustainability of vaccine sales growth given the temporary nature of H1N1 demand and supply chain issues affecting Rotarix and Hepatitis vaccines.
- Restructuring Savings: Track the realization of the £2.2 billion cumulative annual cost savings target by 2012 under the Operational Excellence program.
- Pipeline Execution: Confirm the regulatory approval status of late-stage assets, particularly Benlysta and the new Phase III oncology candidates.