Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: First Quarter 2009 (Three months ended 31st March 2009)
Announcement Date: 22nd April 2009
GSK reported Q1 2009 results characterized by a "year of two halves" outlook. Performance was heavily impacted by generic competition in the US pharmaceutical market, offset by strong growth in Emerging Markets, Asia Pacific/Japan, Europe, and Consumer Healthcare. The company announced the acquisition of Stiefel Laboratories and a strategic partnership with Pfizer to create a new specialist HIV business.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 | Growth (CER%) |
|---|---|---|---|
| Turnover | £6,769 million | £5,686 million | (5)% |
| Operating Profit (Before Restructuring) | £1,976 million | £2,048 million | (31)% |
| Operating Profit (Total) | £1,712 million | £1,963 million | (40)% |
| Profit After Tax (Shareholders) | £1,131 million | £1,307 million | (13)% |
| Earnings Per Share (Before Restructuring) | 26.3p | 25.6p | (28)% |
| Earnings Per Share (Total) | 22.3p | 24.4p | (39)% |
| Net Cash Inflow from Operations | £1,736 million | £1,801 million | (4)% |
| Net Debt (at 31 Mar 2009) | £9.8 billion | £10.2 billion (Dec 2008) | Decreased £0.4bn |
Segment Performance:
- Pharmaceuticals: £5.6 billion (-6% CER). US sales fell 22% to £2.3 billion due to generic competition. Non-US sales grew 7%.
- Consumer Healthcare: £1.1 billion (+4% CER). Driven by 12 new product launches and growth in Oral Healthcare and OTC.
- Vaccines: £625 million (+18% CER). Strong growth in Europe and Rest of World.
Material Changes vs. Prior Period
- US Pharmaceutical Decline: US sales dropped 22% (CER) primarily due to generic competition affecting heritage CNS products (Lamictal, Imitrex, Wellbutrin XL) and respiratory products. This reduced gross margins significantly.
- Restructuring Charges: Total restructuring charges were £264 million (vs. £85 million in Q1 2008), related to the Operational Excellence programme.
- R&D Write-offs: R&D expenditure included £115 million in intangible asset write-offs, primarily related to the elesclomol programme.
- Acquisitions: Completed three acquisitions totaling £515 million (Genelabs, BMS Pakistan, UCB portfolio) compared to no major acquisitions in Q1 2008.
- Dividend Increase: Interim dividend raised to 14p per share (+8% vs. 13p in Q1 2008).
Guidance, Outlook, and Risks
Management Commentary & Outlook:
CEO Andrew Witty described 2009 as a "year of two halves." The first half is expected to be heavily impacted by US generic entries. The second half is projected to see reduced generic impact and increased sales contributions from new product launches (e.g., Cervarix, Synflorix, alli).
Strategic Priorities:
- Acquisitions: Stiefel Laboratories acquisition (expected Q3 2009) to diversify into dermatology.
- HIV Business: Creation of a new specialist HIV company with Pfizer (expected Q4 2009).
- Cost Savings: Restructuring programme on track to deliver £1 billion annual savings by end of 2009 and £1.7 billion by end of 2011.
Risks and Contingencies:
- Legal Matters: Aggregate provision for legal disputes is £1.9 billion. Significant proceedings include antitrust claims regarding Wellbutrin XL and Flonase, and patent challenges to Lovaza.
- R&D Productivity: Disappointing Phase III results for elesclomol and rosiglitazone XR in Alzheimer's disease highlight ongoing R&D challenges.
- Pension Deficit: Net pension deficit increased to £1.954 billion due to reduced asset values and higher inflation estimates.
Investor Verification Checklist
- US Generic Exposure: Verify the timeline for the reduction of generic competition impacts on CNS and respiratory portfolios in H2 2009.
- Stiefel Acquisition: Confirm completion date and integration synergies for the Stiefel Laboratories deal (up to $3.6 billion).
- HIV Joint Venture: Monitor the progress of the Pfizer partnership and the formation of the new HIV specialist company.
- Legal Provisions: Track developments in the Wellbutrin XL and Flonase antitrust cases and Lovaza patent litigation.
- R&D Pipeline: Review upcoming regulatory decisions for key assets like Cervarix (US filing), Synflorix, and Promacta.
- Margin Recovery: Assess whether SG&A and gross margins stabilize in Q2 as anticipated by management.