Business Context and Reporting Period
This Form 6-K filing presents the Unaudited Preliminary Results for GlaxoSmithKline plc (GSK) for the year ended 31st December 2009, issued on 4th February 2010. The report details the company's return to sales growth, driven by a diversification strategy focusing on Emerging Markets, Consumer Healthcare, and vaccines, while absorbing significant generic competition in the US pharmaceutical market.
Key Financial Metrics
| Metric | 2009 Full Year | 2008 Full Year | Growth (CER%) |
|---|---|---|---|
| Turnover | £28,368 million | £24,352 million | +3% |
| Operating Profit (Before Restructuring) | £9,257 million | £8,259 million | -1% |
| Operating Profit (Total) | £8,425 million | £7,141 million | +4% |
| Profit After Tax | £5,669 million | £4,712 million | N/A |
| Earnings Per Share (Before Restructuring) | 121.2p | 104.7p | +2% |
| Earnings Per Share (Total) | 109.1p | 88.6p | +8% |
| Dividend Per Share | 61p | 57p | +7% |
| Net Debt | £9.4 billion | £10.2 billion | Decreased £0.7bn |
| Operating Cash Flow | £7,841 million | £7,205 million | +9% |
Material Changes vs. Prior Period
- Revenue Growth: Total turnover grew 3% (CER) to £28.4 billion. Pharmaceuticals grew 2% to £23.7 billion, while Consumer Healthcare grew 7% to £4.7 billion.
- Regional Performance: The US pharmaceutical market declined 13% due to generic competition (loss of £1.4 billion in sales). This was offset by strong growth in Emerging Markets (+20%), Europe (+9%), and Asia Pacific/Japan (+16%).
- Product Mix: Sales of pandemic-related products (Relenza and H1N1 vaccines) contributed significantly, with Relenza sales reaching £720 million (up from £57 million in 2008). Vaccine sales rose 30% to £3.7 billion.
- Cost Structure: Cost of sales increased to 25.0% of turnover (from 23.7%) due to generic competition. SG&A costs rose to 32.4% (including £591 million in legal charges), though excluding legal costs, SG&A was 30.3%.
- Restructuring: Total restructuring charges were £832 million in 2009, down from £1,118 million in 2008. The company announced an expansion of the restructuring program to deliver an additional £500 million in annual savings by 2012.
Guidance, Outlook, and Risks
- Outlook: Management expects 2010 operating profit margins (excluding legal costs and one-time gains) to be broadly similar to 2009. The effective tax rate is expected to remain around 28%.
- R&D Strategy: GSK is proposing to cease discovery research in selected neuroscience areas (depression and pain) to focus on neurodegeneration and neuroinflammation. A new rare diseases unit is being established. The company aims to improve R&D returns to an aspirational rate of 14%.
- Legal Contingencies: The aggregate provision for legal and other disputes was £2.0 billion as of 31 December 2009. Significant ongoing matters include the Apotex patent infringement/anti-trust trial (set for April 2010) and various vaccine patent disputes with Novartis (recently resolved in GSK's favor in the UK and Belgium).
- Unusual Items: Results included a one-time accounting gain of £296 million from the formation of ViiV Healthcare (joint venture with Pfizer) and a Q4 legal charge of £392 million.
Investor Verification Checklist
- Generic Erosion: Verify the sustainability of US pharmaceutical sales given the loss of £1.4 billion to generic competition in 2009 and the specific impact on products like Valtrex, Imitrex, and Lamictal.
- Legal Provisions: Review the adequacy of the £2.0 billion legal provision, particularly regarding the Apotex counterclaim which could involve trebled damages under federal anti-trust laws.
- Vaccine Sales Normalization: Assess the impact of the H1N1 pandemic on 2009 revenue, noting management's expectation that 2010 vaccine sales will be roughly the same level as 2009.
- R&D Pipeline Execution: Monitor the progress of the 6 new medicine/vaccine launch opportunities over the next 18 months, including Benlysta and Horizant, to validate the R&D productivity claims.
- Restructuring Savings: Track the realization of the additional £500 million annual savings targeted for 2012, specifically the split between R&D (50%) and SG&A (50%) reductions.