GSK delivers strong Q2 performance with underlying sales growth* of 5%, increased pipeline visibility and dividend of 16p, up 7%
Q2 reported sales -2%; EPS before major restructuring* 25p
? Underlying sales growth across Pharmaceuticals, Vaccines and Consumer:
– Underlying Group sales +5%. Underlying Pharmaceuticals and Vaccines sales growth in Emerging
Markets (+20%), Japan (+12%) and USA (+3%), offsets decline in Europe (-1%)
– Consumer Healthcare sales +4%; sales excluding brands proposed for divestment +6%
– Underlying Group sales outside USA and Europe now £2.4 billion (+15%), representing 37% of
– Reported sales -2% due to loss of £472 million sales of pandemic products, Avandia and Valtrex
? Further cost reduction and new opportunities for financial efficiencies:
– Existing restructuring programme to deliver additional savings of approximately £300 million, bringing
total savings to £2.5 billion by 2012. Charges relating to the programme remain unchanged
– Operating margin expectations for 2011 unchanged; margin expected to begin to improve in 2012
– New opportunities identified to drive financial efficiency, including reduction in effective interest rate
and a 2 percentage point improvement to the tax rate by 2014
? Enhancing returns to shareholders:
– Q2 dividend up 7% to 16p
– £892 million of share repurchases in H1
? Increased pipeline visibility:
– New approvals: Benlysta for lupus (EU), Potiga for epilepsy (USA), Rotarix for prevention of rotavirus
(Japan); Votrient filed for sarcoma (USA and EU)
– Positive Phase III data for Promacta (Hep C) and Relovair (6 month data in COPD) in the quarter
– More than 30 further Phase III read-outs on 14 assets expected by end of 2012
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
We have had a strong second quarter, with continued underlying
sales growth, new product delivery,
pipeline visibility and cash generation. This progress is very much in line with our expectations and
it is clear that our strategy is delivering.
As we go forward sales trends improvements together with
operational leverage, financial
efficiencies and cash conversion provide the basis for improving returns to shareholders through
enhanced EPS and cash generation.
Underlying sales growth across Pharmaceuticals, Vaccines and
Reported sales were down 2% reflecting the loss of £472 million of sales of pandemic products, Avandia and
Valtrex compared with a year ago. As we have previously indicated, however, the drag from these three
factors is now set to decline significantly. We therefore continue to expect underlying sales growth to
translate into sustainable reported sales growth as we move into 2012.
Underlying sales grew 5% in the quarter, and have grown at an
average of 4.5% over the last six quarters.
In our Pharmaceuticals and Vaccines businesses, sales benefited from strong underlying performances in
Emerging Markets and Japan. Our US business also grew 3% on an underlying basis in the quarter, helped
by favourable Advair stocking patterns, as well as encouraging performances across the portfolio including
newly launched products.
Underlying sales in Europe declined 1% in the quarter. This was
a creditable performance given price
reductions enacted by governments, which adversely impacted sales growth by approximately six
percentage points. Given current economic circumstances, further pricing pressure in Europe cannot be
Sales of Vaccines were up 19% on an underlying basis, following
the successful launches of Synflorix in
Emerging Markets and Cervarix in Japan.
Consumer Healthcare sales grew 4% led by strong growth in emerging markets. The divestment of non-core
OTC assets in the USA and Europe will further aid our strategy to accelerate growth and increase the focus
of our Consumer Healthcare business. We are making progress to divest these products by late 2011,
subject to realising appropriate value for shareholders, and we continue to expect to use the net proceeds to
fund increased returns to shareholders.
In Q2 2011, 37% of GSK’s underlying sales were generated
in markets outside the USA and Europe, and
grew at 15% on an underlying basis. This rebalancing of the Group’s sales profile is a direct result of
investments and restructuring we have undertaken in the last three years. The Group’s ability to distribute
pharmaceuticals, vaccines and consumer healthcare products in these rapidly growing emerging economies
provides GSK with significant competitive advantage and synergies to access markets and customers.
CEO review Group performance Divisional performance Research
& development Financial information
Issued: Tuesday, 26th July 2011, London, U.K 3
Further cost reduction and new opportunities for financial efficiencies
Alongside our objective of delivering sustainable reported sales growth, we are also focused on how we can
deliver improving EPS and returns to shareholders through operational leverage, financial efficiencies and
improved cash conversion.
Our ongoing restructuring programme is near to completion but with savings delivery higher than originally
forecast. Following a review we now expect to deliver additional annual savings of approximately
£300 million, bringing the total annual savings expected from the programme to £2.5 billion a year by 2012.
These incremental savings will be generated with no increase to the previously disclosed restructuring
charges of £4.5 billion, the majority of which have already been taken.
In 2012, with our programme of major restructuring coming to an end, we intend to stop separately disclosing
restructuring charges in a ‘middle column’.
Going forward we continue to apply sustained pressure to GSK’s cost base to realise further savings,
through improvements in areas such as support functions, supply chain and procurement efficiency.
Cost savings, together with improving sales growth and reduced re-investment requirements, mean we will
have the opportunity to drive operational leverage and we expect the Group operating margin (excluding
legal charges and other operating income) to begin to improve from 2012 onwards. Clearly, the rate of this
improvement will be determined by further pipeline delivery and new product launches.
We have also identified new opportunities to realise financial efficiencies through changes to our funding and
tax strategies. These will be executed whilst continuing to target a short-term credit rating of A-1/P-1. We
believe this rating profile offers an effective balance between optimal access to the capital markets and
delivery of returns to shareholders.
In particular, we will be seeking to improve the efficiency of our funding mix. It is our intention to reduce our
average annual effective net funding rates by reducing our gross cash balances and improving the funding
profile of the Group as net debt increases over the next two years. By 2013 we expect to reduce average
effective annual net funding rates by approximately 200 basis points from 2010 levels.
In addition, we are implementing a more proactive approach to managing our global tax affairs, aligning them
more closely to the changing shape of our business and our long-term investment strategy. We have
identified a number of measures that are expected to reduce the Group’s overall tax rate by around two
percentage points by 2014.
Enhancing cash conversion is also a key priority. While we have made some progress improving our
working capital position, there is clearly more we can do. This is a significant focus area for us, particularly
in inventory management where we are targeting a number of fundamental changes to the management of
our supply chain to improve inventory turn as well as reduce costs.
Enhancing returns to shareholders
Returns have been delivered through continued growth in the dividend which rose 7% to 16p in the quarter
and the repurchase of £0.9 billion of shares in the first half. We continue to expect repurchases for 2011 to
be at top end of our previously disclosed range of £1-2 billion.
Our priorities for use of free cash flow continue to be directed towards supporting increasing dividends, share
repurchases or, where returns are more attractive, re-investment in the business including bolt-on
To ensure shareholders have clearer visibility of our anticipated progress in 2012 and beyond, we will be
moving to reporting core earnings next year. This will bring our reporting into line with the majority of our
peer group. This core earnings metric will better illustrate the underlying earnings delivery of GSK by
excluding items such as amortisation and write-offs of intangible assets, legal charges and profits on
disposal of assets. These changes to reporting will be accompanied by other metrics demonstrating cash
generation/conversion performance, working capital progress and returns on investments.
CEO review Group performance Divisional performance Research
& development Financial information
Issued: Tuesday, 26th July 2011, London, U.K 4
Increased pipeline visibility
We are seeing sustained delivery from the late stage pipeline, with FDA approval for Potiga for epilepsy,
European approval for Benlysta for lupus and the approval of Rotarix for the prevention of rotavirus in Japan
since the last quarterly announcement.
Additionally, we filed Votrient for sarcoma in the USA and Europe and received data from two Phase III 6
month Relovair studies which support ongoing development in COPD. Today we are also announcing that
we have received positive data from the first of two Phase III studies assessing the use of Promacta in
relation to treatment of hepatitis C.
Overall, as we highlighted in February, we expect data on 15 Phase III assets to read-out by the end of 2012.
We have now reported data on 5 of these, 4 of which have been positive. By the end of 2012 we expect
more than 30 further Phase III read-outs (on 14 of these 15 assets).
We are continuing to drive further efficiencies and focus R&D investment on areas where we believe we
have the greatest potential to deliver improved returns on investment. Today, we are introducing additional
disclosures on R&D spending to illustrate more clearly how GSK manages investment allocation between
Discovery and Development activities and across Pharmaceuticals, Vaccines and Consumer Healthcare
Regarding our early stage pipeline, performance and funding reviews are now being conducted across all
programmes by our Drug Discovery Investment Board. This follows completion of the first 3 year business
cycles by the Discovery Performance Units (specialist research units comprising 5 to 70 scientists). These
reviews, which will be completed by the end of the year, will inform subsequent allocation of capital to
It is essential with the scale and breadth of our late stage pipeline that sufficient focus is maintained to deliver
maximum returns from every asset. Our commercial organisation is focused primarily on driving value
across our 7 key therapy areas: Respiratory, Oncology, Neuro and immuno-inflammation, Infectious
Diseases, Cardiovascular and Metabolic Diseases, Dermatology and Vaccines.
Outside of this core, where necessary we have created focused delivery units around specific disease areas
such as HIV (ViiV Healthcare) and Rare Diseases. I am delighted with the progress of these units and they
serve as a model for future opportunities outside our core therapeutic areas.
We are well on track in the delivery of our strategy. As much of the major restructuring which has taken
place over recent years comes to an end, and the shape of the re-balanced Group becomes clear, I want to
recognise the sustained commitment of our employees and thank them for their efforts in helping to deliver
this change. I believe GSK’s outlook is very positive and we will continue to seek to deliver improved
outcomes for patients and enhanced returns for shareholders.
Chief Executive Officer
Posted: July 2011