Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Preliminary Announcement of Results)
Reporting Period: Year ended 31st December 2003
Announcement Date: 12th February 2004
GSK reported full-year results for 2003, presenting both "Business Performance" (excluding merger, integration, and restructuring costs) and "Statutory" results. The company operates primarily in Pharmaceuticals and Consumer Healthcare sectors.
Key Financial Metrics
| Metric | 2003 Full Year (Business Performance) |
2003 Full Year (Statutory) |
Q4 2003 (Business Performance) |
|---|---|---|---|
| Turnover | £21,441 million | £21,441 million | £5,378 million |
| Trading Profit | £6,920 million | £6,525 million | £1,470 million |
| Profit Before Tax | £6,719 million | £6,329 million | £1,283 million |
| Earnings Per Share (EPS) | 82.1p | 77.2p | 15.7p |
| Free Cash Flow | £4,858 million | N/A | £918 million |
| Net Debt | £1,648 million (End of Year) | N/A | N/A |
| Dividend Per Share | 41p (Total for 2003) | N/A | N/A |
Margins: Business performance trading margin improved to 32.3% (up 0.7 percentage points from 2002).
Material Changes vs. Prior Period
- Revenue Growth: Total turnover increased 5% in Constant Exchange Rate (CER) terms. Pharmaceutical turnover grew 5% to £18.2 billion, while Consumer Healthcare sales grew 4% to £3.3 billion.
- Profitability: Business performance EPS grew 10% in CER terms. Statutory EPS grew 23% in sterling terms, driven by lower merger and restructuring costs compared to 2002.
- Q4 Performance: Q4 2003 trading profit fell 8% (CER) and EPS fell 19% (CER) compared to Q4 2002. This decline was primarily due to generic competition for Paxil (sales down 40% in Q4) and one-off charges.
- Product Mix: Strong double-digit growth in 10 major products (totaling £7.6 billion sales), led by Seretide/Advair (+39%) and Avandia/Avandamet (+24%). This offset declines in Augmentin (-29%) and Paxil (-4% full year).
- Costs: Q4 included £223 million in legal costs (primarily Relafen anti-trust settlements) and £178 million in cost-saving programme charges.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- 2004 Guidance: GSK expects to deliver EPS (at constant exchange rates) at least in line with 2003 business performance EPS, despite substantial expected sales losses from generic competition to Paxil and Wellbutrin.
- 2005 Outlook: Management anticipates a return to EPS growth in CER terms in 2005 as the impact of generics diminishes.
- Dividends: A similar dividend increase is expected for 2004. The quarterly allocation will be rebalanced, with the first three interim dividends increasing from 9p to 10p.
- Share Buy-back: The £4 billion share buy-back programme continues in 2004.
Risks and Contingencies
- Generic Competition: Significant erosion of sales for Paxil (Seroxat) and Wellbutrin due to generic launches in the US and UK. Paxil generics held a 52% share of US prescriptions in January 2004.
- Legal Proceedings:
- US Tax Dispute: The IRS issued a claim for $2.7 billion (£1.5 billion) in back taxes for 1989-1996 regarding transfer pricing. GSK plans to contest this in US Tax Court; interest on the claim is estimated at $2.5 billion.
- Antitrust: Settlement of $175 million reached for Relafen antitrust claims; litigation continues for indirect purchasers. Paxil antitrust trials scheduled for December 2004.
- Patent Litigation: Ongoing appeals and trials regarding patents for Paxil, Wellbutrin, Zofran, and Avandia.
- Regulatory: FDA issued observations (Form 483) regarding manufacturing practices at the Cidra, Puerto Rico facility. A US Attorney's office subpoena was received in February 2004 regarding sales practices.
Investor Verification Checklist
- Generic Impact: Verify the actual market share loss for Paxil and Wellbutrin in Q1 2004 against the projected "substantial loss of sales."
- US Tax Liability: Monitor the status of the $2.7 billion IRS transfer pricing claim and the potential for additional claims for years 1997-present.
- Legal Settlements: Track the outcome of the Relafen indirect purchaser trial (June 2004) and Paxil antitrust trials (December 2004).
- Product Pipeline: Confirm the timing and success of key 2004 launches/filings, including solifenacin succinate, Avandaryl, and Epivir/Ziagen.
- Currency Exposure: Assess the impact of the strengthening sterling (approx. 7% negative impact on EPS growth if rates hold) on 2004 results.