Results announcement for the first quarter 2010
GSK delivers Q1 EPS of 30.7p +16% CER before major restructuring
- Q1 sales £7.4bn up 13% CER
- Underlying sales (excluding pandemic products) up 4% CER
Results before major restructuring*
Q1 2010 Growth
£m CER% £%
Turnover 7,357 13 9
Earnings per share 30.7p 16 17
Total results
Q1 2010 Growth
£m CER% £%
Turnover 7,357 13 9
Restructuring charges 301
Earnings per share 26.4p 18 18
The full results are presented under ‘Income Statement' on page 8.
* For explanations of the measures ‘results before major restructuring' and ‘CER growth', see page 7.
Summary
- Good strategic progress delivers continued sales growth: Q1 sales £7.4bn up 13%
- Pharmaceutical sales +14% to £6.1bn: Emerging Markets (+43%), Asia Pacific/Japan
(+45%), Europe (+16%), USA (-1%), ViiV Healthcare (-7%)
- Consumer Healthcare sales +9% to £1.2bn, with market share gains across all
categories (OTC, oral care, nutritionals)
- Sales from ‘white pills/western markets': 27% of Q1 sales (32% in Q1 2009)
- Sustained new product momentum and pipeline delivery
- Sales of new products totalled £412m +65% (£1.1bn including pandemic products)
- EU approvals: Revolade, Arzerra and Duodart. EU positive opinion: Votrient
- Planned Q2 filings for Benlysta in USA and EU
- Phase III start for Relovair in asthma
- Operational Excellence programme on track to deliver £2.2bn of cumulative annual
cost savings by 2012, with £1.5bn expected by end of 2010
- Net cash inflow from operating activities £2.1bn up 22% in sterling terms
• Progressive dividend policy continues with Q1 dividend of 15p (+7%).
GSK's strategic priorities
GSK has focused its business around the delivery of three strategic priorities, which aim to
increase growth, reduce risk and improve GSK's long-term financial performance:
- Grow a diversified global business
- Deliver more products of value
- Simplify GSK's operating model
Chief Executive Officer's Review
LONDON, April 28, 2010 - With continued sales growth in the first quarter, I believe GSK is demonstrating sustained business performance and that we are making good progress in delivering our strategy.
Our sales growth is multi-sourced with good performances in our Pharmaceuticals business, driven by vaccines, respiratory and dermatology products and in our Consumer Healthcare business. In all of these areas, sales were especially dynamic across emerging markets where we continue to gain market share.
Group turnover grew 13% aided by sales of pandemic influenza products (pandemic vaccine and Relenza). Excluding these products, underlying sales grew 4% to £6.6 billion. Sales from ‘white pills/western markets' for the first quarter were approximately 27% (excluding sales of pandemic vaccine). This compares to 32% of sales in Q1 2009, a significant reduction and a reflection of the growing diversification of our business.
Established products such as Seretide/Advair and newer products, such as Cervarix, Synflorix and Tykerb helped to drive this good underlying performance. Total new product sales were over £400m (+65%) and including pandemic products were more than £1 billion.
Brand innovation, global expansion and continued investment in marketing, is also driving growth of our Consumer Healthcare business. This quarter sales grew 9%, significantly faster than estimated global market growth of 1%. Total sales were £1.2 billion, with brand innovations launched in the last 3 years representing approximately 14% of sales. All these strategies are helping to drive continued market share gains across all the business segments in which we operate.
Proactive succession planning in our key business areas is very important and in the last few months, we have made new appointments to maintain excellent leadership in both Vaccines and Consumer Healthcare over the longer-term.
This first quarter also saw some early signs of recovery for our US pharmaceuticals business, with sales down 1% (Q1 2009: -24%), as the balance within our portfolio between genericisation and new products begins to move in our favour.
We welcome the passage of healthcare reform in the USA this quarter, which will bring essential healthcare to millions of previously uninsured Americans and, for the industry, will provide greater certainty and stability. Clearly, the reform results in increased discounts for medicines particularly related to government programmes like Medicaid. In the first quarter we have been able to absorb this adverse financial impact and we expect to offset any further impact through continued operational performance. The transformation we have already instigated within our US business has been focused on ensuring that we are fit to compete in the environment created by this reform.
We also continue to re-shape the company through simplification and cost containment initiatives, which are on track to deliver annual cumulative cost savings of £2.2 billion by 2012 of which £1.5 billion is expected to be achieved by the end of this year. In addition, I am pleased with the progress we are making with the integration of Stiefel and we remain on track to deliver up to £155 million of savings from this programme by 2012.
This focus on cost control is guided by our strategy to improve returns on invested capital and is enabling us to invest effectively in growth markets. As a result, we still expect to deliver a broadly stable operating margin, before legal charges, for 2010.
Legal charges for this quarter increased versus the same quarter last year. This increase is a direct consequence of the progress we are making towards settlement of a number of existing cases.
Over these last few months, many companies have seen further public debate concerning drug safety and industry integrity. For GSK, this has related particularly to our diabetes medicine, Avandia. For us patient safety is an absolute priority and we continue to believe that the allegations made by some of our critics that we acted improperly around this medicine are unfounded. This debate is indicative of the pressures and challenges that our industry must face and reinforces the need for continued openness and transparency - an agenda GSK has strongly pursued since I took over as CEO. There is no question of us letting up on this as it is in the interest of patients and our business.
In conclusion, GSK has made a good start to 2010 and this provides further confirmation that our strategy is working. We have increased the dividend for the quarter to 15p and remain confident of our prospects for the year.
Andrew Witty Chief Executive Officer To hear more from Andrew on GSK's Q1 Results, please visit: www.gsk.com
Trading update
Turnover and key product movements impacting growth for the quarter Total Group turnover rose 13% to £7.4 billion, with pharmaceutical sales up 14% and Consumer Healthcare sales up 9%. Underlying sales performance in the quarter - excluding the benefit from significant sales of pandemic related products including H1N1 vaccine and Relenza - was also positive at 4%.
On a regional basis, a slight decline in US pharmaceutical sales (-1% to £1.9 billion) due to the continued impact of generic competition to several mature products, was offset by strong growth in all other regions: Europe (+16% to £1.9 billion), Emerging Markets (+43% to £866 million) and Asia Pacific/Japan (+45% to £885 million).
Sales of Seretide/Advair rose 9% to £1.3 billion, with strong growth in Europe (+10% to £423 million), Emerging Markets (+28% to £80 million) and Japan (+35% to £46 million). US Advair sales rose 4% to £630 million. Flovent sales (+5% to £196 million) benefited from the reinitiation of promotion in the USA where sales rose 8% to £99 million. Avamys/Veramyst sales increased 52% to £46 million, with strong growth in Europe more than offsetting a slight decline in the USA.
Total vaccine sales were £1.4 billion, including £698 million of H1N1 vaccine sales. Sales of Synflorix, which was launched in 2009, were £45 million, while Cervarix sales grew 60% to £77 million. Hepatitis vaccines also grew strongly (+38% to £197 million) benefiting from supply shortages of competitor products in the US market. Rotarix sales (+19% to £65 million) were not significantly impacted in the quarter by the FDA's decision in late March to suspend temporarily the product in the USA as a precautionary measure following the discovery of PCV-1 DNA material in the vaccine. An FDA advisory committee meeting to review this matter is scheduled for 7th May.
Dermatology sales, including heritage GSK products and those acquired through the acquisition of Stiefel in July 2009, totalled £265 million in the quarter (8% growth on a proforma basis). In addition, GSK's heritage consumer dermatology portfolio, reported within Consumer Healthcare, contributed sales of £62 million (+10%).
Other strong pharmaceutical performances in the quarter included Tykerb (+62% to £53 million), Avodart (+20% to £139 million), Lovaza (+9% to £107 million) and Arixtra (+25% to £70 million).
Sales of Valtrex declined 46% to £176 million, primarily as a result of generic competition to the product in the USA (-55% to £107 million) which began in November 2009. Sales of Wellbutrin fell 67% to £20 million, reflecting the sale of Wellbutrin XL in the USA to Biovail in Q2 2009. European sales of Wellbutrin rose 50% to £9 million. The decline in Boniva sales (-63% to £23 million) reflects the transfer on 1st January to Genentech of exclusive promotion of the product in the USA. GSK now records income from Genentech related to the product in Other operating income.
ViiV Healthcare, the new speciality HIV company established by GSK and Pfizer was launched in November 2009. HIV product sales were £373 million, down 7% on Q1 2009, in part reflecting the impact of US healthcare reforms. In addition the impact of competition to established products such as Combivir (-23% to £82 million) was not fully offset by the inclusion of Selzentry and Viracept.
Total Consumer Healthcare sales rose 9% (to £1.2 billion), significantly ahead of estimated market growth of approximately 1%, with growth in all regions: North America (+3%), Europe (+9%), and Rest of World (+13%) and in all categories: OTC products (+11% to £617 million), Oral care (+5% to £381 million) and Nutritionals (+12% to £233 million).
Within OTC, launches of the new Niquitin/Nicorette Mini lozenge helped grow the smoking control franchise (+16% to £92 million). The launch of the Mini in the USA began at the end of March 2010. Sales of alli more than doubled to £63 million, benefiting significantly from the launch of the product in Europe which began at the end of March 2009. The Panadol franchise also grew strongly (+14% to £117 million), helped by the acquisition of Alvedon in 2009. Sales of respiratory tract products declined 8% to £94 million, in part due to a relatively weak flu season.
Within Oral care, Sensodyne franchise sales continued to grow strongly (+21% to £133 million), offsetting a decline in Poligrip sales (-29% to £15 million) following the company's decision in February to end production of the zinc-containing product and to move to zinc-free alternatives. Zinc-free alternatives are expected to be fully available in all major markets by May 2010.
Nutritionals performance was driven by sales growth of all major products including Horlicks (+17% to £87 million), Lucozade (+5% to £82 million) and Ribena (+11% to £42 million).
Operating profit and earnings per share commentary Results before major restructuring Operating profit before major restructuring for Q1 2010 was £2,395 million, a 21% growth in CER terms.
Cost of sales increased to 26.2% of turnover (Q1 2009: 24.3%), reflecting the impact of generic competition to higher margin products in the USA, principally Valtrex, changes in business and product mix and £94 million of stock write-offs in the quarter. The company continues to expect cost of sales as a percentage of turnover to be around 26% for the full year.
SG&A costs as a percentage of turnover were 31.2%, broadly in line with the prior year.
Legal costs of £210 million in the quarter reflected progress being made towards settlement of a number of existing cases. Excluding legal charges, SG&A costs were 28.3% of turnover and the company continues to expect SG&A costs excluding legal charges to be around 29% of turnover for the full year.
R&D expenditure decreased to 12.8% of turnover (Q1 2009: 15.9%), reflecting the phasing of project expenditure, good progress on efficiency savings and a positive comparison to the prior year which included significant intangible asset write-off costs. The company continues to expect R&D costs as a percentage of turnover to be around 14% for the full year.
Other operating income was £199 million in the quarter, including royalty income of £80 million (Q1 2009: £67 million). Other operating income also included a receipt relating to the transfer on 1st January 2010 to Genentech of exclusive promotion rights to Boniva in the USA. No further receipts from Genentech related to this transaction are expected this year.
Overall, the company continues to expect the operating profit margin in 2010 to be broadly similar to 2009 (excluding legal costs and the 2009 ViiV Healthcare one-time gain).
The charge for taxation on profit before major restructuring amounted to £618 million and represents an effective tax rate of 27.7% (Q1 2009: 29.0%). The effective tax rate for the full year is expected to be around 28%.
EPS before major restructuring of 30.7p increased 16% in CER terms (a 17% increase in sterling terms) compared with Q1 2009. A negative impact of 5% from currency movements was offset by exchange gains on the settlement of intercompany transactions in the quarter.
Total results after restructuring Operating profit after restructuring for Q1 2010 was £2,094 million, up 22% in both CER and sterling terms. This included £301 million of charges related to restructuring (Q1 2009: £264 million); £28 million was charged to cost of sales (Q1 2009: £143 million), £52 million to SG&A (Q1 2009: £71 million) and £221 million to R&D (Q1 2009: £50 million).
EPS after restructuring of 26.4p increased 18% in both CER and sterling terms compared with Q1 2009.
Cash flow and net debt Net cash inflow from operating activities for Q1 2010 was £2,122 million, up 22% in sterling terms. This was used to fund net interest of £21 million, capital expenditure on property, plant and equipment and intangible assets of £326 million, repayment of short-term loans of £625 million and the dividend paid to shareholders of £763 million.
Net debt decreased by £0.4 billion during the period to £9.0 billion at 31st March 2010, comprising gross debt of £16.2 billion and cash, cash equivalents and liquid investments of £7.2 billion. At 31st March 2010, GSK had short-term borrowings (including overdrafts) repayable within 12 months of only £1 billion with no further borrowings repayable in the subsequent year.
Dividends The Board has declared a first interim dividend of 15 pence per share (Q1 2009: 14 pence).
The equivalent interim dividend receivable by ADR holders is 46.0320 cents per ADS based on an exchange rate of £1/$1.5344. The ex-dividend date will be 5th May 2010, with a record date of 7th May 2010 and a payment date of 8th July 2010.
Currency impact The Q1 results are based on average exchange rates, principally £1/$1.56, £1/€1.13 and £1/Yen 143. Comparative exchange rates are given on page 20. The period end exchange rates were £1/$1.52, £1/€1.12 and £1/Yen 142. If exchange rates were to hold at these period end levels for the rest of 2010 and there were no exchange gains or losses in subsequent quarters, the estimated positive impact on 2010 sterling EPS growth before major restructuring would be approximately 5 percentage points.
Additional P&L information To improve transparency and understanding of our increasingly diversified business additional detailed financial information is provided for the first time on pages 22 to 23.
GlaxoSmithKline (GSK) together with its subsidiary undertakings, the ‘Group' - one of the world's leading research-based pharmaceutical and healthcare companies - is committed to improving the quality of human life by enabling people to do more, feel better and live longer.
GlaxoSmithKline's website www.gsk.com gives additional information on the Group.
Information made available on the website does not constitute part of this document.
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Results before major restructuring Results before major restructuring is a measure used by management to assess the Group's financial performance and is presented after excluding restructuring charges relating to the Operational Excellence programme, which commenced in October 2007 and the acquisitions of Reliant Pharmaceuticals in December 2007 and Stiefel in July 2009. Management believes that this presentation assists shareholders in gaining a clearer understanding of the Group's financial performance and in making projections of future financial performance, as results that include such costs, by virtue of their size and nature, have limited comparative value.
CER growth In order to illustrate underlying performance, it is the Group's practice to discuss its results in terms of constant exchange rate (CER) growth. This represents growth calculated as if the exchange rates used to determine the results of overseas companies in Sterling had remained unchanged from those used in the comparative period. All commentaries are presented in terms of CER growth, unless otherwise stated.
Brand names and partner acknowledgements Brand names appearing in italics throughout this document are trademarks of GSK or associated companies or used under licence by the Group.
Cautionary statement regarding forward-looking statements Under the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995, the company cautions investors that any forward-looking statements or projections made by the company, including those made in this Announcement, are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Factors that may affect the Group's operations are described under ‘Risk Factors' in the ‘Business Review' in the company's Annual Report on Form 20-F for 2009.
GlaxoSmithKline plc, 980 Great West Road, Brentford, Middlesex TW8 9GS, United Kingdom Registered in England and Wales. Registered number: 3888792
For charts link to http://www.gsk.com/investors/reports/q12010/q12010.pdf
Independent review report to GlaxoSmithKline plc Introduction We have been engaged by the company to review the condensed financial information in the Results Announcement for the three months ended 31st March 2010 which comprises the income statement, statement of comprehensive income, balance sheet, cash flow statement, statement of changes in equity and related notes (excluding the late-stage pharmaceuticals and vaccines pipeline table and the additional P&L information). We have read the other information contained in the Results Announcement and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed financial information.
Directors' responsibilities The Results Announcement is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Results Announcement in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
The annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed financial information included in the Results Announcement for the three months ended 31 March 2010 has been prepared in accordance with International Accounting Standard 34, ‘Interim Financial Reporting', as adopted by the European Union.
Our responsibility Our responsibility is to express to the company a conclusion on the condensed financial information in the Results Announcement based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Scope of review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ‘Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed financial information in the Results Announcement for the three months ended 31st March 2010 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
PricewaterhouseCoopers LLP Chartered Accountants 28th April 2010 London Notes: (a) The maintenance and integrity of the GlaxoSmithKline plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the condensed financial information since it was initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.