GSK delivers Q3 business performance EPS of 25.2p and increased dividend of 14p

For full reports, see attachment

LONDON, Oct. 22, 2008-Chief Executive Officer’s Review: We are managing a considerable transition to our product portfolio this year as several mature pharmaceutical brands encounter generic competition in the USA. In the short-term, this is having a significant impact on pharmaceutical sales, although we continue to see good growth from other areas of the pharmaceuticals portfolio, including a recent improvement in prescription volumes for Advair in the United States. Also helping offset the generic impact has been growth in other parts of our business, such as vaccines, emerging markets and consumer healthcare.

This diversification in sales is an inherent strength for GSK and one we are actively nurturing, through delivery and investment in our new strategic priorities. Ultimately, we are aiming to create a more balanced healthcare business with a lower overall risk profile.

Grow a diversified global business In Pharmaceuticals, we are making good progress to renew our product line, with 10 product launches so far this year in critical growth areas, such as oncology, and in existing franchises.

In the future, we want our portfolio to be more balanced with a lower concentration of sales in any one or two products. Clearly, our agenda must then be to maximise the value of this broader portfolio and we are therefore deliberately taking a more global approach to commercialisation than ever before.

The success of Advair in Japan is a good example of driving growth outside our more traditional markets. Advair is at the vanguard of multiple future product opportunities in Japan, with the next product launch expected to be Lamictal, following its approval last week.

Overall, we have the potential for more than 40 launches over the next 5 years in this market.

In emerging markets, we are starting to make some early progress in building a more tailored portfolio for patients and consumers. We have now formalised our trading agreement with Aspen Pharmaceuticals and have so far identified around 60 assets for prospective commercialisation.

We also recently acquired a broad range of pharmaceutical brands from BMS in Egypt. This is a fast growing market and we are now the market leader. Importantly, this acquisition also provides us with the opportunity to grow incremental sales in other markets in the Middle East and North Africa, through export of these products.

The dynamics of emerging markets are wholly different to traditional western pharmaceutical markets as there is less distinction between pharmaceutical, over-the-counter and retail market structures. Our capability to supply products and operate across this spectrum is, I believe, a competitive advantage for GSK.

On this basis, we are determined to globalise further our Consumer Healthcare business. In September, for example, we introduced Sensodyne – the fastest growing global toothpaste brand – into the Chinese market, our first major consumer product to launch there for a decade.

We also see multiple opportunities to build our consumer business through the switch of prescription products and the acquisition of new brands, which can complement and drive the growth of our key franchises. Our recent acquisition of Biotene, a dynamic oral healthcare brand, is evidence of this.
 

global economy will have on consumer demand for products. To date, we have seen only modest impact on GSK’s consumer products in certain territories. The strength of our diversified business model is that it helps to mitigate any potential impact on GSK as our multiple franchises operate in very different economic cycles.

In Vaccines, our sales continue to be dynamic with growth powered by a broad range of brands. We continue to expand this business and this quarter launched two new vaccines in the USA, Rotarix and Kinrix.

The potential of this business is significant, given our pipeline; the opportunity for global expansion, and payer needs that are increasingly directed towards preventative healthcare.

At the same time, we must compete effectively for what are often binary tender orders and supply agreements. This may produce some volatility in the vaccines sales line as this business grows. Regarding recent tenders we have made good progress, in particular with Cervarix, which has been successful in approximately 60% of competitive tenders, notably in the UK for the largest vaccination programme against HPV in Europe.

Deliver more products of value In R&D, we are continuing to make the changes necessary to deliver our pipeline going forward.

We have seen a step-change in the number of launches for GSK, and importantly we are replenishing these with new phase III entries. At present, we are maintaining a level of around 30 assets in late-stage development and our strategies in R&D are focused on sustaining this type of productivity.

Moreover, GSK continues to deliver innovative products with 6 novel medicines and vaccines either launched or filed in 2008. In fact, around 75% of assets in our pipeline are entirely new compounds or vaccines. By any standard, this is a strong bias towards innovation and demonstrates the value GSK can bring to patients and to payers.

We have seen good progress in our late-stage biopharmaceutical portfolio this quarter. New data for ofatumumab, a treatment for patients with chronic lymphocytic leukaemia, will be used to support a licence application planned for the end of the year. Our first in-house developed biopharmaceutical product, Bosatria, was filed for approval in Europe this quarter.

We hope this will be a valuable new treatment for patients with the rare, but potentially fatal disease, hypereosinophilic syndrome. Finally, otelixizumab, a new potential treatment for Type I diabetes, entered phase III development in August.

Data on several other important assets this quarter further highlighted the potential of GSK’s pipeline. New data for cancer treatments, Armala and Tykerb, demonstrated positive effects against several tumour types with high, unmet medical need. In addition, we presented results from a clinical imaging study of darapladib. These data support our belief that Lp-PLA2 inhibition may be an important therapeutic target and we plan to begin phase III clinical studies shortly.

When I outlined our new strategic priorities last quarter, I said that GSK has a very clear ambition to realise value in R&D through better allocation of capital. Here, we have made progress through reshaping our R&D organisation and the introduction of new initiatives such as our Drug Discovery Investment Board. This Board has now reviewed 75% of our 3-year investment plans for drug discovery, with the remainder expected by year-end. 
 

We are also seeking to improve productivity and value through externalisation of R&D. This enables us to capture scientific diversity and balance expenditure with risk. We believe new alliances formed this quarter with Cellzome and the Harvard Stem Cell Institute will provide competitive advantage in researching areas such as inflammatory disease, neuroscience and oncology.

With all its option-based collaborations, GSK now has access to products and pipelines of 16 companies, bringing further significant breadth and scale to our R&D activities. Combining this capacity with our own organic efforts provides us opportunities for complementary and synergistic research.

Staying with this theme, Sirtris, our recent R&D acquisition is now effectively integrated into our discovery organisation. Like Domantis, it will continue to operate as an independent unit, but we have also established numerous research collaborations in the field of sirtuins across GSK, including in our new R&D China organisation.

Simplify GSK’s operating model
Activities to improve our overall efficiency and create a new operating model for our business are well underway. Our current operational excellence programme is progressing well and we are on track to realise annual savings of at least £350 million in 2008 and £700 million by 2010. We have also commenced a series of reviews to simplify further our business, in particular, with attention to our above-country support infrastructure.

Financial strategy
We continue to benefit from strong cash generation with net cash inflow from operating activities of over £5 billion, up 6% in sterling terms in the first nine months of this year.

Our financial strategy is focused on maintaining an efficient balance sheet, retaining flexibility to invest in our strategic priorities and increasing returns to our shareholders through our progressive dividend policy. This quarter’s dividend increased by 8% to 14 pence and we have completed share repurchases of £3.3 billion in the 9 months to 30th September 2008.

We expect to have completed around £4 billion of repurchases by the year-end, subject to market conditions.

With the recent changes in financial markets we now expect more investment opportunities to arise that will allow us to invest in support of our strategic priorities. To ensure we have sufficient flexibility to take advantage of these opportunities we do not currently expect to make significant share repurchases in 2009. Investment opportunities will continue to be assessed against strict financial criteria.

Outlook
In summary then, our performance is in line with our expectations and I am pleased with how we have so far responded to what is undoubtedly a challenging year for GSK. Nevertheless, we remain focused on improving our short-term performance. We have also, I believe, started to take some initial steps in the right direction to deliver our strategic agenda to improve longterm sales growth and reduce risk for the company.

Andrew Witty Chief Executive Officer 
Trading Update 
Turnover and key product movements impacting turnover growth for the Quarter  Total pharmaceutical turnover for the quarter declined 4% to £4.9 billion, with US turnover down 13% to £2.1 billion, impacted by generic competition to mature brands. In Europe, sales grew 6% to £1.6 billion, emerging markets sales grew 9% to £581 million and Asia Pacific/Japan sales grew 5% to £464 million.

Seretide/Advair sales were up 7% to £982 million for the quarter, with sales up 5% in the USA to £515 million and in Japan sales more than doubled to £25 million. Sales growth was also driven by Valtrex, up 21% to £303 million and Lovaza, with US sales of £75 million.

Sales of Avandia products were £191 million, a decline of 23% compared with 2007. There continues to be controversy surrounding the appropriate use of Avandia and consequently the sales outlook for the product remains negative. Lamictal sales declined 59% to £136 million following introduction of generic competition in the US market in July. Sales of Wellbutrin (down 67% to £53 million) and Coreg IR (down 93% to £9 million) also declined due to generic competition in the US market.

Vaccines sales grew 12% to £730 million, with hepatitis vaccines up 11% to £174 million, Infanrix/Pediarix up 9% to £168 million and Fluarix/FluLaval up 11% to £144 million. In the USA, this quarter’s performance reflected a difficult comparison to particularly strong sales growth in Q3 2007. Cervarix generated £43 million of sales for the quarter.

Consumer Healthcare sales grew 3% to £994 million during the quarter, compared with 16% growth in Q3 2007, which benefited from launch-stocking of alli. Excluding sales of alli, Consumer Healthcare sales grew 5% this quarter.

Sales of oral care brands, Aquafresh and Sensodyne, grew 5% and 8% respectively during the quarter, contributing sales of £206 million. Sales of Panadol grew 9% to £82 million, whilst sales of Tums declined 17% to £21 million. Sales of Horlicks grew 10% to £53 million and sales of Lucozade grew 2% to £100 million, principally due to a poor summer in the UK.

Operating profit and earnings per share commentary  Business performance  Business performance operating profit for Q3 2008 was £1,979 million, a 10% decline in CER terms. This was greater than the turnover decline of 3% in CER terms, primarily due to higher cost of sales as a percentage of turnover.

Cost of sales increased to 24.8% of turnover (Q3 2007: 22.5%), principally reflecting the anticipated generic competition to higher margin products in the USA. SG&A costs as a percentage of turnover fell 1.2 percentage points to 28.3% compared with Q3 2007, reflecting the benefits of the current operational excellence programme and other ongoing cost control.

R&D expenditure at 14.2% of turnover was broadly unchanged from last year.

Pharmaceuticals R&D expenditure in the quarter was 16.4% (Q3 2007: 16.1%) of pharmaceutical turnover.

In the quarter, gains from assets disposals were £21 million (Q3 2007: £22 million), costs for legal matters were £58 million (Q3 2007: £64 million), fair value movements on financial instruments, principally the Quest collar which was closed out in the quarter, resulted in a charge of £37 million (Q3 2007: £32 million) and charges related to previous restructuring programmes were £7 million (Q3 2007: £13 million). The impact of these items on business performance operating profit was broadly neutral, compared with Q3 2007. 
 

Business performance EPS of 25.2p decreased 9% in CER terms (a 6% increase in sterling terms) compared with Q3 2007. The favourable currency impact of 15 percentage points reflected a weakening of sterling against most major currencies.

Statutory performance Statutory operating profit for Q3 2008 was £1,657 million, down 13% in sterling terms and down 26% CER compared with Q3 2007. This included £322 million of restructuring charges related to the current operational excellence programme; £130 million was charged to cost of sales, £157 million to SG&A and £35 million to R&D. There were no such charges in Q3 2007. Statutory performance EPS of 20.1p decreased 30% in CER terms (15% in sterling terms) compared with Q3 2007.

Cash flow Net cash inflow from operating activities in Q3 2008 was £1,893 million, up 3% in sterling terms. For the nine months net cash inflow from operating activities was £5,067 million, a 6% increase in sterling terms over the previous year. This was used to fund net interest payable of £55 million, capital expenditure on property, plant and equipment and intangible assets of £1,284 million, and acquisitions of £324 million.

In addition, dividends paid to shareholders totalled £2,250 million (up 6% compared with 2007) and share repurchases amounted to £3,324 million.

Net debt Net debt increased by £2.6 billion during the nine month period to £8.6 billion at 30th September 2008, comprising gross debt of £14.2 billion and cash and liquid investments of £5.6 billion.

The Group is well placed financially having completed its debt financing programme earlier in the year. At 30th September 2008, GSK had short-term borrowings (including overdrafts) repayable within 12 months of only £1.4 billion with a further £0.6 billion repayable in the subsequent 12-month period.

Dividends The Board has declared a third interim dividend of 14 pence per share (Q3 2007: 13p). The equivalent interim dividend receivable by ADR holders is 47.4796 cents per ADS based on an exchange rate of £1/$1.6957. The ex-dividend date will be 29th October 2008, with a record date of 31st October 2008 and a payment date of 8th January 2009.

Currency impact If exchange rates were to hold at the average Q3 2008 levels for the rest of the year, the positive currency impact on business performance EPS growth for the full year would be around 10 percentage points.

2008 earnings guidance GSK continues to expect a mid-single digit percentage decline in business performance EPS at constant exchange rates. 

Philip Thomson

Claire Brough

Alice Hunt

Gwenan White

(020) 8047 5502

(020) 8047 5502

(020) 8047 5502

(020) 8047 5502

US Media

Sarah Alspach

Mary Anne Rhyne

(919) 483 2839

(215) 751 7709

(919) 483 2839

European Analyst / Investor

Sally Ferguson

Gary Davies

(020) 8047 5564

(020) 8047 5543

(020) 8047 5503

US Analyst / Investor

Brand names

Brand names appearing in italics throughout this document are trademarks of GSK or associated companies with the

exception of

Corporation in the USA and

Pharmaceuticals in certain countries, all of

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 2007.

GlaxoSmithKline plc, 980 Great West Road, Brentford, Middlesex TW8 9GS, United Kingdom

Registered in England and Wales. Registered number: 3888792

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.

Enquiries:

UK Media

Latest Pharma Industry News...

Pharma Industry News Archive

More News Resources

Daily MedNews
Pharma Industry News
New Drug Applications
New Drug Approvals
Clinical Trial Results
Generic Drug Approvals
Monthly Update Archive