Higher valuations emerge for Pfizer, Novartis and Shionogi as pound drops in Q2: GSK


GlaxoSmithKline ($GSK) cautioned that complex equity agreements for its ViiV Healthcare unit HIV business marked by Tivicay (dolutegravir)‎ and Triumeq (abacavir/dolutegravir/lamivudine) and its product swap with Novartis ($NVS) could cause an unspecified hit to the books because of a sharply weaker pound.

Chief Financial Officer Simon Dingemans in comments related to the aftermath of the U.K. Brexit vote outlined a scenario where agreements with Pfizer ($PFE) and Japan's Shionogi could cost the company more than expected if financial options are exercised--leading to a charge of £1.8 billion in the quarter.

The pound has reached more than a three-decade low since the late June Brexit referendum to support leaving the U.K.

"As increasing the overall value of the businesses to us, what the decline in sterling has also done has increased the liability we have for the potential exercise of the put Novartis has to us for its share of the consumer business, and the liability for the puts and associated preference shares Shionogi and Pfizer have in relation to their equity interests in our HIV business," he said.

"The increase in the sterling value of ViiV also drives an increase in the value of the future contingent consideration payable to Shionogi, given that all of the puts, preference shares, and the contingent consideration are valued and would be settled in sterling."

Dingemans conversely said that a weaker pound has aided earnings in the currency as cash flows from abroad are exchanged.

The potential liability came as HIV sales gained 44% in the quarter led by Triumeq and Tivicay in all regions with momentum seen sustained in the rest of the year.

However, China played spoilsport again for emerging markets where overall sales were down 9%, "with further declines in our China business."

Outside of China, emerging market sales declined 8%, but this is primarily due to the sale of Prolia (denosumab)‎ back to Amgen ($AMGN), and the winding down of the trading in Venezuela, Dingemans said on the July 27 earnings call.

However, CEO Andrew Witty detailed the source of the pain and a timeframe for when things might get better.

"(Emerging markets) actually are improving under line, but we've had a number of disposals this year and the Venezuela situation and continued reshaping of China," he said.

"So I'd expect, as we come through this year, you're going to start to see much better underlying, getting us into the mid-single-digit type territory as we move into next year."

He also mentioned a recent approval in China that may bolster sales--Cervarix (HPV vaccine)--and getting Viread (tenofovir) put onto the national pricing list. Witty said several products have been divested--about one-quarter to one-third of the portfolio--in the country in the past 6 months that have changed the business, which is still profitable and should gain next year.

"We're seeing some very significant positives as a result of that. We were already seeing some stabilization. You've got to remember, a number of--we decided to divest ourselves of a number of products in China in the last 6 months or so. So an awful lot of the suppression that you're seeing in structural reshaping of the company rather than anything else."

Price revisions in Japan also bit in Asia with sales in the country down 3%, Dingemans said.

- here's the release

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