TIDMGSK
RNS Number : 6323R
GlaxoSmithKline PLC
30 October 2019
Issued: Wednesday, 30 October 2019, London U.K.
GSK delivers sales of GBP9.4 billion +16% AER, +11% CER (Pro-forma
+6% CER*)
Total EPS 31.4p +9% AER, -1% CER; Adjusted EPS 38.6p +9% AER, +1%
CER
Financial highlights
-- Reported Group sales GBP9.4 billion +16% AER, +11% CER (Pro-forma
growth +6% CER*); Pharmaceuticals GBP4.5 billion +7% AER, +3% CER;
Vaccines GBP2.3 billion +20% AER, +15% CER; Consumer Healthcare
GBP2.5 billion +30% AER, +25% CER (Pro-forma growth +3% CER*)
-- Total Group operating margin 22.9%; Adjusted Group operating margin
29.7% reflecting increased spending on R&D and priority assets,
and the impact of generic Advair in the US, partly offset by Vaccines
performance (Pharmaceuticals 24.1%; Vaccines 50.3%; Consumer Healthcare
24.3%)
-- Total EPS 31.4p +9% AER, -1% CER, Adjusted EPS 38.6p +9% AER, +1%
CER reflecting operating performance and lower effective tax rate
offset by increased profit allocation to non-controlling interests
-- 9 months net cash flow from operations GBP4.6 billion. Free cash
flow GBP2.5 billion
-- 19p dividend declared for the quarter, continue to expect 80p for
FY19
-- Consumer Healthcare JV with Pfizer completed 31 July creating new
world leader in Consumer Healthcare
-- 2019 Adjusted EPS guidance improved to expectation of around flat
at CER from a decline of -3% to -5%
Product and pipeline highlights
-- Shingrix sales GBP535 million +87% AER, +76% CER driven by continuing
strong execution in the US
-- Total Respiratory sales GBP806 million +25% AER, +19% CER. Nucala
GBP203 million +40% AER, +33% CER, Trelegy GBP139 million +>100%
AER, +>100% CER
-- Total HIV sales GBP1.3 billion, +5% AER, flat at CER. Two-drug
regimen sales GBP119 million
-- Continued progress to strengthen and advance R&D pipeline including:
Oncology:
- Positive data presented at ESMO from PRIMA trial of Zejula monotherapy
showing significant improvement in PFS in women with ovarian
cancer regardless of biomarker status. On track to file by end
2019
- Positive headline data from pivotal DREAMM-2 study of belantamab
mafodotin (GSK2857916) for multiple myeloma. On track to file
by end 2019
- Positive data from GARNET study of dostarlimab for advanced or
recurrent endometrial cancer. On track to file by end 2019
- Positive data presented at ESMO on GSK3359609 (ICOS receptor
agonist) plus pembrolizumab in head and neck squamous cell carcinoma.
Phase II/III registrational trial announced
Respiratory:
- Nucala approved in EU for self-administration by patients with
severe eosinophilic asthma
- Trelegy Ellipta submitted to the FDA for use in patients with
asthma
HIV:
- Long-acting injectable cabotegravir + rilpivirine submitted to
EMA as the first monthly treatment for HIV
- Positive phase III results from ATLAS-2M study of cabotegravir
+ rilpivirine administered every 8 weeks
Other:
- Phase III start for first-in-class antibiotic, gepotidacin, in
uncomplicated urinary tract infection and urogenital gonorrhoea
- Daprodustat filed in Japan for patients with renal anaemia due
to chronic kidney disease
Q3 2019 results
9 months
Q3 2019 Growth 2019 Growth
------------ ------------
GBPm GBP% CER% GBPm GBP% CER%
-------- ----- ----- --------- ----- -----
Turnover 9,385 16 11 24,855 10 7
Total operating profit 2,147 12 3 5,059 29 20
Total earnings per
share 31.4p 9 (1) 67.7p 38 28
Adjusted operating
profit 2,786 10 3 7,120 9 3
Adjusted earnings per
share 38.6p 9 1 99.2p 12 7
Net cash from operating
activities 2,515 21 4,567 6
Free cash flow 1,939 25 2,474 4
The Total results are presented under 'Financial performance' on
pages 11 and 24 and Adjusted results reconciliations are presented
on pages 20, 21, 34 and 35. Adjusted results are a non-IFRS measure
that may be considered in addition to, but not as a substitute for,
or superior to, information presented in accordance with IFRS. Adjusted
results are defined on page 9 and GBP% or AER% growth, CER% growth,
free cash flow and other non-IFRS measures are defined on page 58.
GSK provides guidance on an Adjusted results basis only, for the
reasons set out on page 10. All expectations, guidance and targets
regarding future performance and dividend payments should be read
together with "Outlook, assumptions and cautionary statements" on
pages 59 and 60.
* Reported AER and CER growth rates include two months' results of
former Pfizer consumer healthcare business. Pro-forma CER growth
rates are calculated as if the equivalent two months of Pfizer
consumer healthcare business results, as reported by Pfizer, were
included in the comparative
period of 2018. See "Pro-forma growth" on page 10.
Emma Walmsley, Chief Executive Officer, GSK said:
"GSK has made further good progress in Q3, with sales growth across
all three businesses, and we have today upgraded our full-year EPS
guidance. This quarter we have continued to strengthen our pipeline
and have advanced assets in Respiratory, HIV and, notably, Oncology,
where we are on track to file three innovative medicines by year
end, following positive pivotal trial data. We also achieved a significant
milestone with the completion of our new Consumer Healthcare Joint
Venture with Pfizer, to create a new world leading consumer healthcare
business."
2019 guidance
GSK now expects 2019 Adjusted EPS will be around flat at CER. This
new guidance represents a further improvement to that previously
given in July 2019 of an expected decline in Adjusted EPS in the
range of -3% to -5% at CER. The new guidance reflects operating performance
in the nine months, increased investment in R&D and priority assets
and a lower expected effective tax rate of around 17% for the year.
GSK expects to maintain the dividend for 2019 at the current level
of 80p per share.
All expectations, guidance and targets regarding future performance
and dividend payments should be read together with "Outlook, assumptions
and cautionary statements" on pages 59 and 60.
If exchange rates were to hold at the closing rates on 25 October
2019 ($1.28/GBP1, EUR1.15/GBP1 and Yen 139/GBP1) for the rest of
2019, the estimated positive impact on 2019 Sterling turnover growth
would be around 2% and if exchange gains or losses were recognised
at the same level as in 2018, the estimated positive impact on 2019
Sterling Adjusted EPS growth would be around 4%.
Results presentation
A webcast of the quarterly results presentation hosted by Emma Walmsley,
GSK CEO, will be held at 2pm GMT on 30 October 2019. Presentation
materials will be published on www.gsk.com prior to the webcast and
a transcript of the webcast will be published subsequently.
Information available on GSK's website does not form part of, and
is not incorporated by reference into, this Results Announcement.
Operating performance - Q3 2019
Turnover Q3 2019
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Pharmaceuticals 4,531 7 3
Vaccines 2,308 20 15
Consumer Healthcare 2,526 30 25
------ ------- -------
9,365 16 11
Corporate and other unallocated
turnover 20
------ ------- -------
Group turnover 9,385 16 11
------ ------- -------
Pro-forma growth 6
-------
Group turnover increased 16% AER, 11% CER to GBP9,385 million in
the quarter, with growth delivered by all three businesses, primarily
driven by Vaccines and the acquired Pfizer consumer healthcare business
to form the new Consumer Healthcare Joint Venture. Pro-forma turnover
growth for the Group was 6% CER.
Pharmaceuticals sales were up 7% AER, 3% CER with HIV sales of GBP1,267
million, up 5% AER, flat at CER, as growth in Juluca and Dovato
offset declines in Tivicay and Triumeq. Respiratory sales were up
25% AER, 19% CER to GBP806 million, on growth of Trelegy Ellipta
and Nucala. Sales of Established Pharmaceuticals declined 1% AER,
5% CER to GBP2,223 million including the impact of loss of exclusivity
of Advair.
Vaccines turnover grew 20% AER, 15% CER to GBP2,308 million, primarily
driven by growth in sales of Shingrix. Meningitis and Influenza
vaccines also contributed to growth.
Consumer Healthcare sales grew 30% AER, 25% CER to GBP2,526 million,
primarily reflecting the acquired Pfizer legacy brands. On a pro-forma
basis, turnover grew 3% CER, driven by strong performance in Oral
health.
Operating profit
Total operating profit was GBP2,147 million compared with GBP1,910
million in Q3 2018. Adjusted operating profit was GBP2,786 million,
up 10% AER, 3% CER on a turnover increase of 11% CER. The Adjusted
operating margin of 29.7% was down 1.5 percentage points at AER,
2.4 percentage points at CER and down 2.0 percentage points CER
on a pro-forma basis.
The unwind of the fair value uplift on Consumer Healthcare inventory
acquired from Pfizer and increased re-measurement charges on the
contingent consideration liabilities were partly offset by lower
charges for major restructuring and an increase in the value of
the shares in Hindustan Unilever Limited to be received on the disposal
of Horlicks and other Consumer Healthcare brands. GSK now expects
the transaction to complete in Q1 2020, subject to legal and regulatory
approvals.
Operating profit was also impacted by continuing price pressure,
including from the loss of exclusivity of Advair, investment in
R&D, including a significant increase in Oncology investment, and
investments in promotional product support, particularly for new
product launches. These were partly offset by the benefit from sales
growth, particularly in Vaccines, a more favourable mix in Vaccines
and Consumer Healthcare and continued tight control of ongoing costs
across all three businesses.
Earnings per share
Total earnings per share was 31.4p, compared with 28.8p in Q3 2018.
Adjusted EPS of 38.6p compared with 35.5p in Q3 2018, up 9% AER,
1% CER, on a 3% CER increase in Adjusted operating profit. The improvement
primarily resulted from a reduced tax rate and lower net finance
costs partly offset by the higher non-controlling interest allocation
of Consumer Healthcare profits.
Cash flow
Net cash inflow from operating activities was GBP2,515 million (Q3
2018: GBP2,077 million) and free cash flow was GBP1,939 million
(Q3 2018: GBP1,554 million). The increased free cash flow primarily
reflected improved operating profits, a lower seasonal increase
in trade receivables and inventory, and reduced dividend payments
to non-controlling interests.
Operating performance - nine months 2019
Turnover 9 months 2019
-------------------------
Growth Growth
GBPm GBP% CER%
------- ------- -------
Pharmaceuticals 12,996 4 1
Vaccines 5,415 23 19
Consumer Healthcare 6,424 12 10
------- ------- -------
24,835 10 7
Corporate and other unallocated
turnover 20
------- ------- -------
Group turnover 24,855 10 7
------- ------- -------
Pro-forma growth 5
-------
Group turnover increased 10% AER, 7% CER to GBP24,855 million in
the nine months, with growth delivered by all three businesses.
Pro-forma turnover growth for the Group was 5% CER.
Pharmaceuticals turnover was GBP12,996 million, up 4% AER, 1% CER.
HIV sales were up 4% AER, 1% CER, to GBP3,597 million, with growth
in Juluca and Dovato partly offset by a decline in Triumeq. Respiratory
sales were up 23% AER, 18% CER, to GBP2,189 million, on growth of
Trelegy Ellipta and Nucala. Established Pharmaceuticals sales declined
4% AER, 6% CER to GBP6,603 million, including the impact of loss
of exclusivity of Advair.
Vaccines turnover grew 23% AER, 19% CER to GBP5,415 million, primarily
driven by growth in sales of Shingrix. Meningitis and Influenza
vaccines also contributed to growth.
Consumer Healthcare sales grew 12% AER, 10% CER to GBP6,424 million.
On a pro-forma basis, sales grew 2% CER, driven largely by the International
region with double digit growth in India and China.
Operating profit
Total operating profit was GBP5,059 million in the nine months compared
with GBP3,929 million in 2018. Adjusted operating profit was GBP7,120
million, up 9% AER, 3% CER on a turnover increase of 7% CER. The
Adjusted operating margin of 28.6% was down 0.3 percentage points
at AER, 1.0 percentage points at CER and down 0.9 percentage points
CER on a pro-forma basis. Reduced re-measurement charges on the
contingent consideration liabilities and an increase in value of
the shares in Hindustan Unilever Limited to be received on the disposal
of Horlicks and other brands were partly offset by increased charges
for major restructuring, primarily arising from write-downs in manufacturing
sites.
Operating profit also benefited from sales growth in all three businesses,
particularly Vaccines, a more favourable mix in Vaccines and Consumer
Healthcare, a benefit from favourable inventory adjustments in Vaccines
and continued tight control of ongoing costs across all three businesses.
This was partly offset by continuing price pressure, particularly
in Respiratory, including the impact of the loss of exclusivity
of Advair, investment in R&D including a significant increase in
Oncology investment, and investments in promotional product support,
particularly for new launches.
Earnings per share
Total earnings per share for the nine months was 67.7p, compared
with 49.0p in 2018. Adjusted EPS of 99.2p compared with 88.3p in
2018, up 12% AER, 7% CER, on a 3% CER increase in Adjusted operating
profit. The improvement primarily resulted from the lower non-controlling
interest allocation of Consumer Healthcare profits, a reduced effective
tax rate and an increased share of after tax profits of associates,
partly offset by increased net finance costs.
Cash flow
Net cash inflow from operating activities was GBP4,567 million (2018:
GBP4,302 million) and free cash flow was GBP2,474 million (2018:
GBP2,375 million). The increase primarily reflected improved operating
profits, a lower seasonal increase in trade receivables, lower contingent
consideration payments and reduced dividend payments to non-controlling
interests.
R&D pipeline
41 new medicines in development, 17 Vaccines
Pipeline news flow highlights since Q2 2019:
Oncology
Zejula (niraparib)
-- Positive phase III results from the PRIMA study of Zejula in the
first line maintenance setting in women with advanced ovarian cancer
were presented at the 2019 European Society for Medical Oncology
(ESMO) Congress and simultaneously published in The New England
Journal of Medicine. Regulatory submissions are on track with US
submission expected before end 2019.
-- Zejula received FDA approval for an expanded indication for the
treatment of advanced ovarian, fallopian tube or primary peritoneal
cancer patients, who have been treated with three or more prior
chemotherapy regimens and whose cancer is associated with homologous
recombination deficiency positive status including a BRCA mutation.
-- The first patient was dosed in the pivotal phase II study (MOONSTONE)
evaluating the combination of Zejula and dostarlimab in patients
with platinum resistant ovarian cancer.
GSK3359609 (ICOS)
-- Data (INDUCE-1) presented at ESMO 2019 demonstrated promising anti-tumour
activity with GSK3359609, an ICOS receptor agonist, in combination
with pembrolizumab in head and neck squamous cell carcinoma (HNSCC).
These data support initiation of a phase II/III registrational
trial with pembrolizumab in first-line recurrent/ metastatic HNSCC
(INDUCE-3).
Belantamab mafodotin (GSK2857916 BCMA ADC)
-- Positive headline results from the pivotal DREAMM-2 study for multiple
myeloma were announced and will be presented at an upcoming medical
congress. Regulatory submissions are on track with US submission
expected before end 2019.
Dostarlimab (TSR-042)
-- The first patient was dosed in the pivotal RUBY study of dostarlimab
plus chemotherapy versus placebo plus chemotherapy in first line
treatment of endometrial cancer.
-- Final data from the pivotal GARNET study of dostarlimab are in-house.
Regulatory submissions are on track with US submission expected
before end 2019.
GSK3145095 (RIP1k inhibitor)
-- GSK'095 for pancreatic cancer was terminated as part of ongoing
portfolio prioritisation.
HIV/Infectious diseases
Cabotegravir + rilpivirine
-- Positive phase III results reported from the ATLAS-2M study of
cabotegravir plus rilpivirine administered every eight weeks.
-- Regulatory application was submitted to the European Medicines
Agency for cabotegravir plus rilpivirine, as the first once monthly
injectable treatment for HIV.
Dovato (dolutegravir + lamivudine)
-- A supplemental NDA was submitted to the US FDA for the use of Dovato
in Virologically Suppressed Adults with HIV-1.
GSK3389404/3228836 (HBV ASO)
-- Option exercised to license Ionis' antisense medicines for people
with chronic hepatitis B virus infection following phase II results.
Gepotidacin (GSK2140944)
-- The first patients were dosed in the two pivotal studies of gepotidacin
in uncomplicated urinary tract infection and urogenital gonorrhea.
Immuno-inflammation
Benlysta (belimumab)
-- Benlysta received European approval for intravenous use in children
with lupus aged five years and older.
GSK2831781 (LAG3)
-- The first patient was dosed in a phase II study of GSK'781 in ulcerative
colitis.
Respiratory
Trelegy Ellipta (FF/UMEC/VI)
-- A supplemental NDA was submitted to the US FDA seeking an additional
indication for the use of Trelegy Ellipta for the treatment of
asthma in adults.
Nucala (mepolizumab)
-- Nucala received European approval for self-administration by patients
with severe eosinophilic asthma.
-- Nucala received US FDA approval for use in children as young as
six years old who are living with severe eosinophilic asthma.
-- Results from interim analysis of REALITI-A, a prospective global
real-world study, were presented at the 2019 European Respiratory
Society Congress and showed Nucala significantly reduces exacerbations
in patients with severe eosinophilic asthma.
GSK2292767 (PI3Kd inhibitor)
-- GSK'767 for respiratory diseases was terminated as part of ongoing
portfolio prioritisation.
Other pharmaceuticals
Daprodustat
-- Japanese New Drug Application was submitted for daprodustat for
the treatment of patients with renal anaemia due to chronic kidney
disease.
Linerixibat (GSK2330672, IBAT)
-- US FDA granted Orphan Drug Designation for linerixibat for the
treatment of cholestatic pruritus in primary biliary cholangitis.
Vaccines
TB vaccine
-- The New England Journal of Medicine published the final 3-year
results of a phase IIb study for candidate TB vaccine M72/AS01(E)
. Results demonstrate overall efficacy of 50% over the duration
of at least three years after vaccination.
Ebola vaccines
-- Vaccines candidates against Ebola and Marburg viruses have been
transferred to the Sabin Vaccine Institute for clinical development.
C. Difficile vaccine
-- First time in human trials were started for a candidate vaccine
for the prevention of Clostridium difficile (C. difficile) infection
using the AS01 adjuvant.
SAM (rabies model) vaccine
-- First time in human trials were started for self-amplifying mRNA
platform technology with a rabies model antigen.
Contents Page
Total and Adjusted results 9
Financial performance - Q3 2019 11
Financial performance - nine months ended 30 September 2019 24
Cash generation 38
Returns to shareholders 39
Income statements 41
Statement of comprehensive income - three months ended 30 September
2019 42
Statement of comprehensive income - nine months ended 30 September
2019 43
Pharmaceuticals turnover - three months ended 30 September
2019 44
Pharmaceuticals turnover - nine months ended 30 September 2019 45
Vaccines turnover - three months ended 30 September 2019 46
Vaccines turnover - nine months ended 30 September 2019 47
Balance sheet 48
Statement of changes in equity 49
Cash flow statement - nine months ended 30 September 2019 50
Segment information 51
Legal matters 53
Additional information 54
Reconciliation of cash flow to movements in net debt 57
Net debt analysis 57
Free cash flow reconciliation 57
Reporting definitions 58
Outlook, assumptions and cautionary statements 59
Independent review report 61
Contacts
GSK - 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.
For further information please visit www.gsk.com.
GSK enquiries:
UK Media enquiries: Simon Steel +44 (0) 20 8047 (London)
5502
Tim Foley +44 (0) 20 8047 (London)
5502
Mary Hinks-Edwards +44 (0) 20 8047 (London)
5502
US Media enquiries: Kristen Neese +1 215 751 3335 (Philadelphia)
Analyst/Investor enquiries: Sarah Elton-Farr +44 (0) 20 8047 (London)
5194
James Dodwell +44 (0) 20 8047 (London)
2406
Danielle Smith +44 (0) 20 8047 (London)
7562
Jeff McLaughlin +1 215 751 7002 (Philadelphia)
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TW8 9GS
Total and Adjusted results
Total reported results represent the Group's overall performance.
GSK also uses a number of adjusted, non-IFRS, measures to report
the performance of its business. Adjusted results and other non-IFRS
measures may be considered in addition to, but not as a substitute
for or superior to, information presented in accordance with IFRS.
Adjusted results are defined below and pro-forma growth and other
non-IFRS measures are defined on page 58.
GSK believes that Adjusted results, when considered together with
Total results, provide investors, analysts and other stakeholders
with helpful complementary information to understand better the
financial performance and position of the Group from period to period,
and allow the Group's performance to be more easily compared against
the majority of its peer companies. These measures are also used
by management for planning and reporting purposes. They may not
be directly comparable with similarly described measures used by
other companies.
GSK encourages investors and analysts not to rely on any single
financial measure but to review GSK's quarterly results announcements,
including the financial statements and notes, in their entirety.
GSK is committed to continuously improving its financial reporting,
in line with evolving regulatory requirements and best practice
and has made a number of changes in recent years. In line with this
practice, GSK expects to continue to review its reporting framework.
Adjusted results exclude the following items from Total results,
together with the tax effects of all of these items:
-- amortisation of intangible assets (excluding computer software)
-- impairment of intangible assets (excluding computer software) and
goodwill
-- Major restructuring costs, which include impairments of tangible
assets and computer software, (under specific Board approved programmes
that are structural, of a significant scale and where the costs
of individual or related projects exceed GBP25 million), including
integration costs following material acquisitions
-- transaction-related accounting or other adjustments related to
significant acquisitions
-- proceeds and costs of disposal of associates, products and businesses;
significant legal charges (net of insurance recoveries) and expenses
on the settlement of litigation and government investigations;
other operating income other than royalty income, and other items
Costs for all other ordinary course smaller scale restructuring
and legal charges and expenses are retained within both Total and
Adjusted results.
As Adjusted results include the benefits of Major restructuring
programmes but exclude significant costs (such as significant legal,
major restructuring and transaction items) they should not be regarded
as a complete picture of the Group's financial performance, which
is presented in Total results. The exclusion of other Adjusting
items may result in Adjusted earnings being materially higher or
lower than Total earnings. In particular, when significant impairments,
restructuring charges and legal costs are excluded, Adjusted earnings
will be higher than Total earnings.
GSK has undertaken a number of Major restructuring programmes in
recent years in response to significant changes in the Group's trading
environment or overall strategy, or following material acquisitions.
Costs, both cash and non-cash, of these programmes are provided
for as individual elements are approved and meet the accounting
recognition criteria. As a result, charges may be incurred over
a number of years following the initiation of a Major restructuring
programme.
Significant legal charges and expenses are those arising from the
settlement of litigation or government investigations that are not
in the normal course and materially larger than more regularly occurring
individual matters. They also include certain major legacy matters.
Reconciliations between Total and Adjusted results, providing further
information on the key Adjusting items, are set out on pages 20,
21, 34 and 35.
GSK provides earnings guidance to the investor community on the
basis of Adjusted results. This is in line with peer companies and
expectations of the investor community, supporting easier comparison
of the Group's performance with its peers. GSK is not able to give
guidance for Total results as it cannot reliably forecast certain
material elements of the Total results, particularly the future
fair value movements on contingent consideration and put options
that can and have given rise to significant adjustments driven by
external factors such as currency and other movements in capital
markets.
Pro-forma growth
The acquisition of the Pfizer consumer healthcare business completed
on 31 July 2019 and so GSK's reported results include two months
of results of the former Pfizer consumer healthcare business from
1 August 2019.
The Group has presented pro-forma growth rates at CER for turnover,
Adjusted operating profit and operating profit by business taking
account of this transaction. Pro-forma growth rates for the quarter
are calculated comparing reported results for Q3 2019, calculated
applying the exchange rates used in the comparative period, with
the results for Q3 2018 adjusted to include the equivalent two months
of results of the former Pfizer consumer healthcare business during
Q3 2018, as consolidated (in US$) and included in Pfizer's US GAAP
results. Similarly, pro-forma growth rates at CER for the nine months
to 30 September 2019 are calculated comparing reported results for
the nine months to 30 September 2019, calculated applying the exchange
rates used in the comparative period, with the results for the nine
months to 30 September 2018, adjusted to include the equivalent
two months of results of the former Pfizer consumer healthcare business,
as consolidated (in US$) and included in Pfizer's US GAAP results.
ViiV Healthcare
ViiV Healthcare is a subsidiary of the Group and 100% of its operating
results (turnover, operating profit, profit after tax) are included
within the Group income statement.
Earnings are allocated to the three shareholders of ViiV Healthcare
on the basis of their respective equity shareholdings (GSK 78.3%,
Pfizer 11.7% and Shionogi 10%) and their entitlement to preferential
dividends, which are determined by the performance of certain products
that each shareholder contributed. As the relative performance of
these products changes over time, the proportion of the overall earnings
allocated to each shareholder also changes. In particular, the increasing
sales of dolutegravir-containing products have a favourable impact
on the proportion of the preferential dividends that is allocated
to GSK. Adjusting items are allocated to shareholders based on their
equity interests. GSK was entitled to approximately 85% of the Total
earnings and 82% of the Adjusted earnings of ViiV Healthcare for
2018.
As consideration for the acquisition of Shionogi's interest in the
former Shionogi-ViiV Healthcare joint venture in 2012, Shionogi received
the 10% equity stake in ViiV Healthcare and ViiV Healthcare also
agreed to pay additional future cash consideration to Shionogi, contingent
on the future sales performance of the products being developed by
that joint venture, principally dolutegravir. Under IFRS 3 'Business
combinations', GSK was required to provide for the estimated fair
value of this contingent consideration at the time of acquisition
and is required to update the liability to the latest estimate of
fair value at each subsequent period end. The liability for the contingent
consideration recognised in the balance sheet at the date of acquisition
was GBP659 million. Subsequent re-measurements are reflected within
other operating income/expense and within Adjusting items in the
income statement in each period. At 30 September 2019, the liability,
which is discounted at 8.5%, stood at GBP5,713 million, on a post-tax
basis.
Cash payments to settle the contingent consideration are made to
Shionogi by ViiV Healthcare each quarter, based on the actual sales
performance of the relevant products in the previous quarter. These
payments reduce the balance sheet liability and hence are not recorded
in the income statement. The cash payments made to Shionogi by ViiV
Healthcare in the nine months to September 2019 were GBP645 million.
Because the liability is required to be recorded at the fair value
of estimated future payments, there is a significant timing difference
between the charges that are recorded in the Total income statement
to reflect movements in the fair value of the liability and the actual
cash payments made to settle the liability.
Further explanation of the acquisition-related arrangements with
ViiV Healthcare are set out on pages 41 and 42 of the Annual Report
2018.
Financial performance - Q3 2019
Total results
The Total results for the Group are set out below.
Q3 2019 Q3 2018 Growth Growth
GBPm GBPm GBP% CER%
-------- -------- ------- -------
Turnover 9,385 8,092 16 11
Cost of sales (3,245) (2,636) 23 21
-------- -------- ------- -------
Gross profit 6,140 5,456 13 7
Selling, general and administration (2,892) (2,527) 14 11
Research and development (1,206) (988) 22 18
Royalty income 118 94 26 24
Other operating expense (13) (125)
-------- -------- ------- -------
Operating profit 2,147 1,910 12 3
Finance income 32 10
Finance expense (245) (233)
Profit on disposal of associates - 3
Share of after tax profits
of
associates and joint ventures 17 15
-------- -------- ------- -------
Profit before taxation 1,951 1,705 14 4
Taxation (235) (193)
Tax rate % 12.0% 11.3%
-------- -------- ------- -------
Profit after taxation 1,716 1,512 13 3
-------- -------- ------- -------
Profit attributable to non-controlling
interests 164 94
Profit attributable to shareholders 1,552 1,418
-------- -------- ------- -------
1,716 1,512 13 3
-------- -------- ------- -------
Earnings per share 31.4p 28.8p 9 (1)
-------- -------- ------- -------
Adjusted results
The Adjusted results for the Group are set out below. Reconciliations
between Total results and Adjusted results for Q3 2019 and Q3 2018
are set out on pages 20 and 21.
Q3 2019
----------------------------------------------------
Reported Pro-forma
% of Growth growth growth
GBPm turnover GBP% CER% CER%
-------- ---------- ------- --------- ----------
Turnover 9,385 100 16 11 6
Cost of sales (2,785) (29.7) 17 15 8
Selling, general and
administration (2,768) (29.5) 20 16 8
Research and development (1,164) (12.4) 21 17 15
Royalty income 118 1.3 26 24 25
-------- ---------- ------- --------- ----------
Adjusted operating
profit 2,786 29.7 10 3 (1)
-------- ---------- ------- --------- ----------
Adjusted profit before
tax 2,597 12 4
Adjusted profit after
tax 2,186 16 8
Adjusted profit attributable
to
shareholders 1,911 9 1
-------- ---------- ------- ---------
Adjusted earnings
per share 38.6 9 1
-------- ---------- ------- ---------
Operating profit by
business Q3 2019
--------------------------------------------------
Reported Pro-forma
% of Growth growth growth
GBPm turnover GBP% CER% CER%
------ ---------- ------- --------- ----------
Pharmaceuticals 1,986 43.8 (2) (7) (7)
Pharmaceuticals R&D* (893) 34 28 28
------ ---------- ------- --------- ----------
Total Pharmaceuticals 1,093 24.1 (20) (24) (24)
Vaccines 1,162 50.3 41 30 30
Consumer Healthcare 613 24.3 43 34 8
------ ---------- ------- --------- ----------
2,868 30.6 10 3 (1)
Corporate & other
unallocated
costs (82)
----------
Adjusted operating
profit 2,786 29.7 10 3 (1)
------ ---------- ------- --------- ----------
* Operating profit of Pharmaceuticals R&D segment, which is the responsibility
of the Chief Scientific Officer and President, R&D. It excludes
ViiV Healthcare R&D expenditure, which is reported within the Pharmaceuticals
segment.
Turnover
Pharmaceuticals turnover
Q3 2019
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Respiratory 806 25 19
HIV 1,267 5 -
Immuno-inflammation 171 40 33
Oncology 64 - -
Established Pharmaceuticals 2,223 (1) (5)
------
4,531 7 3
------
US 1,972 4 (2)
Europe 1,040 9 9
International 1,519 10 5
------ ------- -------
4,531 7 3
------ ------- -------
Pharmaceuticals turnover in the quarter was GBP4,531 million, up
7% AER, 3% CER. Respiratory sales were up 25% AER, 19% CER to GBP806
million, on growth of Trelegy Ellipta and Nucala. HIV sales of GBP1,267
million were up 5% AER but flat at CER, with growth in Juluca and
Dovato offset by declines in Tivicay and Triumeq. Sales of Established
Pharmaceuticals declined 1% AER, 5% CER to GBP2,223 million, with
lower Advair sales offset by favourable prior period payer rebate
adjustments and higher Ventolin authorised generic sales in the US,
and a European Relenza tender.
In the US, sales grew 4% AER, but declined 2% CER. Excluding Advair
and Relvar/Breo Ellipta, impacted by genericisation of the ICS/LABA
market, growth was 21% AER, 14% CER. Continued growth of Nucala,
Trelegy Ellipta and Benlysta was offset by the decline in Established
Products, including the loss of exclusivity of Advair. In Europe,
sales grew 9% AER, 9% CER, with strong growth in Respiratory and
from Zejula. International grew 10% AER, 5% CER, with growth in all
therapy areas.
Respiratory
Total Respiratory sales were up 25% AER, 19% CER, with strong growth
in Europe and International, which both saw growth in Ellipta products,
including Relvar/Breo and Trelegy, and Nucala, up 29% AER and CER
in Europe and 82% AER, 65% CER in International. In the US, Trelegy
Ellipta and Nucala growth was partly offset by a decline in Relvar/Breo
Ellipta as a result of post-generic ICS/LABA price pressure.
Sales of Nucala were GBP203 million in the quarter and grew 40% AER,
33% CER, continuing to benefit from the global rollout of the product.
US sales of Nucala grew 37% AER, 29% CER to GBP119 million.
Sales of Ellipta products were up 21% AER, 15% CER to GBP603 million
driven by growth in Europe and International regions. In the US,
sales grew 12% AER, 5% CER, reflecting growth in Trelegy Ellipta
and Anoro Ellipta, partly offset by continued competitive pricing
pressures for ICS/LABAs. In Europe, Ellipta product sales grew 34%
AER, 33% CER. Sales of Trelegy Ellipta contributed GBP139 million
globally in the quarter, driven by an increase in US market share.
Relvar/Breo Ellipta sales were down 3% AER, 8% CER. In the US, Relvar/Breo
Ellipta declined 26% AER, 32% CER impacted by US competitive pricing
pressures and the impact of generic Advair on the US ICS/LABA market.
In Europe and International, Relvar/Breo Ellipta continued to grow,
up 20% AER, 19% CER and 25% AER, 22% CER respectively.
HIV
HIV sales of GBP1,267 million grew 5% AER but were flat at CER in
the quarter. The dolutegravir franchise grew 6% AER, 2% CER, delivering
sales of GBP1,211 million in the quarter. The remaining portfolio,
with sales of GBP56 million (4% of total HIV sales), declined 21%
AER, 23% CER and reduced the overall growth of total HIV sales by
two percentage points in the quarter.
Sales of dolutegravir products were GBP1,211 million in the quarter,
with Triumeq and Tivicay delivering sales of GBP651 million and GBP441
million, respectively. The two-drug regimens, Juluca and Dovato,
delivered sales of GBP119 million in the quarter, with combined growth
more than offsetting the decline in the three-drug regimen, Triumeq,
as the business transitions to the new portfolio.
In the US, following the launch of Dovato in April 2019, combined
sales of the two-drug regimens were GBP98 million. Total dolutegravir
sales grew 6% AER but were flat at CER, reflecting a year-on-year
share decline as the business transitions to the new two-drug portfolio,
offset by a net price benefit. In Europe, Dovato was launched in
the quarter and, combined with Juluca, recorded sales of GBP19 million.
Total dolutegravir sales grew 3% AER, 3% CER, driven by Tivicay and
our two-drug regimens. International continued to grow strongly with
total dolutegravir sales growth of 13% AER, 9% CER, driven by Triumeq.
Oncology
Sales of Zejula, the newly acquired PARP inhibitor asset, were GBP64
million in the quarter, comprising GBP38 million in the US and GBP26
million in Europe.
Immuno-inflammation
Sales of Benlysta in the quarter were up 42% AER, 35% CER to GBP172
million, including sales of the sub-cutaneous formulation of GBP78
million. In the US, Benlysta grew 39% AER, 29% CER to GBP150 million.
Established Pharmaceuticals
Sales of Established Pharmaceuticals in the quarter were GBP2,223
million, down 1% AER, 5% CER.
Established Respiratory products declined 8% AER, 12% CER to GBP939
million. Advair in the US experienced its second full quarter of
generic competition, resulting in a 62% AER, 64% CER decline. Also
in the US, Ventolin benefited from strong uptake of an authorised
generic version launched in the year. In Europe, Seretide sales were
down 8% AER, 9% CER to GBP121 million, reflecting continued competition
from generic products and the transition of the Respiratory portfolio
to newer products. In International, sales of Seretide were up 1%
AER but down 2% CER.
The remainder of the Established Pharmaceuticals portfolio grew by
5% AER, 1% CER to GBP1,284 million with Lamictal down 1% AER, 4%
CER to GBP147 million on generic competition in the US and International,
more than offset by growth in Dermatology and Augmentin in the quarter,
and a European Relenza tender.
Vaccines turnover
Q3 2019
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Meningitis 371 13 9
Influenza 371 22 15
Shingles 535 87 76
Established Vaccines 1,031 3 (1)
------
2,308 20 15
------
US 1,441 36 28
Europe 396 (1) (2)
International 471 2 -
------ ------- -------
2,308 20 15
------ ------- -------
Vaccines turnover grew 20% AER, 15% CER to GBP2,308 million, primarily
driven by growth in sales of Shingrix. Meningitis vaccines also contributed
to growth, mainly due to Bexsero demand across all regions. Influenza
vaccines sales grew 22% AER, 15% CER to GBP371 million, primarily
due to share gains, phasing and the favourable impact of a prior-year
returns provision reversal in the US. Established Vaccines grew 3%
AER but declined 1% CER to GBP1,031 million, reflecting lower demand
for Cervarix in International and supply constraints in MMRV vaccines,
partly offset by favourable Infanrix, Pediarix US CDC stockpile movements
and strong demand and favourable phasing of Boostrix in International.
Meningitis
Meningitis sales grew 13% AER, 9% CER to GBP371 million. Bexsero
sales grew 23% AER, 19% CER to GBP255 million, driven by strong demand
across all regions and share gains in the US. Menveo grew 4% AER
but declined 1% CER, primarily reflecting lower demand in International.
Influenza
Fluarix/FluLaval sales were up 22% AER, 15% CER to GBP371 million,
primarily due to share gains, phasing and the favourable impact of
a prior-year returns provision reversal in the US.
Shingles
Shingrix recorded sales of GBP535 million in the quarter, driven
by continued strong uptake in the US. Germany and Canada also contributed
to growth.
Established Vaccines
Sales of DTPa-containing vaccines (Infanrix, Pediarix and Boostrix)
grew 22% AER, 17% CER. Infanrix, Pediarix sales were up 24% AER,
19% CER to GBP199 million, reflecting favourable year-on-year CDC
stockpile movements and increased channel inventory in the US, partly
offset by competitive pressures in Europe.
Boostrix sales grew 19% AER, 15% CER to GBP187 million, mainly due
to strong demand and favourable phasing in International, together
with share gains and higher demand in the US.
Hepatitis vaccines grew 1% AER but declined 2% CER to GBP216 million,
primarily due to the comparison with a strong Q3 2018, which benefited
from a competitor supply shortage, and lower demand in Europe.
Rotarix sales were up 10% AER, 7% CER to GBP167 million, reflecting
stronger demand and favourable phasing in International.
Synflorix sales declined 3% AER, 4% CER to GBP116 million due to
lower demand in International.
MMRV vaccines sales declined 30% AER, 31% CER to GBP57 million, mainly
driven by supply constraints in Europe and International.
Cervarix sales were down 73% AER, 73% CER to GBP15 million, mainly
reflecting competitive pressure in China and lower demand elsewhere
in International.
Consumer Healthcare turnover
Q3 2019
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Wellness 1,277 26 22
Oral health 709 14 10
Nutrition 382 >100 >100
Skin health 158 14 9
------ ------- -------
2,526 30 25
------ ------- -------
US 730 62 52
Europe 658 10 10
International 1,138 27 23
------ ------- -------
2,526 30 25
------ ------- -------
Pro-forma growth 3
-------
Consumer Healthcare turnover grew 30% AER, 25% CER in the quarter
to GBP2,526 million. On a pro-forma basis, sales grew 3% CER, driven
by strong performance in the Oral health category, partly offset
by a decline in the Skin health category.
Divestments and the phasing out of low margin contract manufacturing
had a negative impact of approximately one percentage point on pro-forma
growth in the quarter.
Sales of the Consumer Healthcare business include nine weeks of legacy
Pfizer brand sales arising after the creation of the Joint Venture.
The legacy Pfizer brands have been included in the existing categories
and geographic regions used to report Consumer Healthcare sales.
GSK expects to revise this category structure for reporting from
Q1 2020 onwards.
Wellness
Wellness sales grew 26% AER, 22% CER to GBP1,277 million in the quarter.
On a pro-forma basis, sales grew in low single digits, with strong
performance in Pain relief partly offset by a decline in Respiratory
and the phasing out of low margin contract manufacturing. In the
Pain relief category, Panadol continued to perform strongly, particularly
in the Middle East and Africa, and benefited from 2018 regulatory
and distribution changes. Voltaren grew in mid-single digits, while
Advil was flat, reflecting a partial recovery from historical supply
issues.
Oral health
Oral health sales grew 14% AER, 10% CER to GBP709 million. Sensodyne
delivered double-digit, broad based growth, led by the US, with some
benefit from prior-year destocking in China. Double-digit growth
in Gum health was achieved, while Denture care grew in mid-single
digits. Oral health growth was also impacted by a decline in non-strategic
brands.
Nutrition
Nutrition sales more than doubled to GBP382 million, largely due
to the inclusion of the Pfizer vitamins, minerals and supplements
portfolio. On a pro-forma basis, sales grew in low single digits,
reflecting strong performances of Horlicks and Caltrate, partly offset
by a decline in Centrum.
Skin health
Skin health sales grew 14% AER, 9% CER to GBP158 million, largely
due to the addition of Chapstick from the Pfizer portfolio. On a
pro-forma basis, sales declined in mid-single digits, largely due
to divestments of small tail brands in the US and UK, which had a
negative impact on pro-forma growth of the category of six percentage
points.
Operating performance
Cost of sales
Total cost of sales as a percentage of turnover was 34.6%, 2.0 percentage
points higher at AER and 2.8 percentage points higher in CER terms
compared with Q3 2018. This reflected the unwind of the fair market
value uplift on inventory arising on completion of the Consumer Healthcare
Joint Venture with Pfizer as well as an increase in the costs of
manufacturing restructuring programmes, primarily as a result of
write downs in a number of manufacturing sites, and increased amortisation
of intangible assets.
Excluding these and other Adjusting items, Adjusted cost of sales
as a percentage of turnover was 29.7%, 0.2 percentage points higher
at AER, and 0.9 percentage points higher at CER compared with Q3
2018. On a pro-forma basis, Adjusted cost of sales as a percentage
of turnover was 29.7%, 0.5% percentage points higher at CER compared
with Q3 2018. The increase reflected continued adverse pricing pressure
in Pharmaceuticals, particularly in Respiratory, an unfavourable
product mix in Pharmaceuticals and a non-restructuring related write
down in a manufacturing site. This was partly offset by a more favourable
product mix in Vaccines, primarily due to the growth of Shingrix
in the US, and favourable year-on-year inventory adjustments.
Selling, general and administration
Total SG&A costs as a percentage of turnover were 30.8%, 0.4 percentage
points lower at AER and 0.2 percentage points lower on a CER basis
compared with Q3 2018. This included reduced major restructuring
costs partly offset by acquisition costs related to the Consumer
Healthcare Joint Venture with Pfizer.
Excluding these and other Adjusting items, Adjusted SG&A costs as
a percentage of turnover were 29.5%, 0.9 percentage points higher
at AER than in Q3 2018 and 1.1 percentage points higher on a CER
basis. On a pro-forma basis, Adjusted SG&A costs as a percentage
of turnover were 29.5%, 0.7 percentage points higher at CER compared
with Q3 2018. The growth in Adjusted SG&A costs of 20% AER, 16% CER,
(8% CER pro-forma) reflected increased investment resulting from
the acquisition of Tesaro and in promotional product support, particularly
for new launches in Respiratory, HIV and Vaccines, as well as increased
costs for a number of legal settlements in the quarter. This was
partly offset by the continuing benefit of restructuring in Pharmaceuticals
and the tight control of ongoing costs, particularly in non-promotional
spending across all three businesses.
Research and development
Total R&D expenditure was GBP1,206 million (12.9 % of turnover),
up 22% AER, 18% CER. Adjusted R&D expenditure was GBP1,164 million
(12.4% of turnover), 21% higher at AER, 17% higher at CER than Q3
2018. On a pro-forma basis, Adjusted R&D expenditure was 15% higher
at CER compared with Q3 2018.
Pharmaceuticals R&D expenditure was GBP899 million, up 24% AER, 19%
CER, reflecting a significant increase in Oncology study and clinical
trial material investments including on the assets from the Tesaro
acquisition, primarily Zejula and TSR-042, and a number of other
mid and late-stage programmes, including BCMA, NY-ESO and ICOS, as
well as increased spending on the progression of key assets such
as aGM-CSF for rheumatoid arthritis. This was partly offset by a
favourable comparison with Q3 2018, which included a provision for
costs payable to a third party relating to the use of a Priority
Review Voucher for Dovato and other projects that were terminated
as part of the R&D prioritisation at the end of 2018, including danirixin
and nemiralisib. R&D expenditure in Vaccines and Consumer Healthcare
was GBP191 million and GBP74 million, respectively.
Royalty income
Royalty income was GBP118 million (Q3 2018: GBP94 million), up 26%
AER, 24% CER, primarily reflecting increased royalties on sales of
Gardasil.
Other operating expense
Net other operating expense of GBP13 million (Q3 2018: GBP125 million)
primarily reflected accounting charges of GBP305 million (Q3 2018:
GBP248 million) arising from the re-measurement of the contingent
consideration liabilities related to the acquisitions of the former
Shionogi-ViiV Healthcare joint venture and the former Novartis Vaccines
business and the liabilities for the Pfizer put option and Pfizer
and Shionogi preferential dividends in ViiV Healthcare.
This included a re-measurement charge of GBP255 million (Q3 2018:
GBP214 million) for the contingent consideration liability due to
Shionogi, primarily arising from changes in exchange rate assumptions
and the unwind of the discount. These accounting charges were partly
offset by an increase in value of the shares in Hindustan Unilever
Limited to be received on the disposal of Horlicks and other Consumer
Healthcare brands of GBP295 million in the quarter. The cumulative
increase in value since the signing of the proposed transaction was
GBP345 million.
Operating profit
Total operating profit was GBP2,147 million in Q3 2019 compared with
GBP1,910 million in Q3 2018. The unwind of the fair market value
uplift on inventory arising on completion of the Consumer Healthcare
Joint Venture with Pfizer as well as increased re-measurement charges
on the contingent consideration liabilities and reduced profit on
disposals were partly offset by an increase in the value of the shares
in Hindustan Unilever Limited to be received on the disposal of Horlicks
and other Consumer Healthcare brands and reduced restructuring costs.
Excluding these and other Adjusting items, Adjusted operating profit
was GBP2,786 million, 10% higher than Q3 2018 at AER and 3% higher
at CER on a turnover increase of 11% CER. The Adjusted operating
margin of 29.7% was 1.5 percentage points lower at AER, 2.4 percentage
points lower on a CER basis than in Q3 2018. On a pro-forma basis,
Adjusted operating profit was 1% lower at CER on a turnover increase
of 6% CER. The Adjusted pro-forma operating margin of 29.7% was 2.0
percentage points lower on a CER basis than in Q3 2018.
The reduction in Adjusted operating profit primarily reflected continuing
price pressure, particularly in Respiratory, including the impact
of the launch of a generic version of Advair in the US in February
2019, investment in R&D, including a significant increase in Oncology
investment, partly on the assets from the Tesaro acquisition, investments
in promotional product support, particularly for new launches in
Vaccines, HIV and Respiratory as well as increased costs for a number
of legal settlements in the quarter. This was partly offset by the
benefit from sales growth, particularly in Vaccines, a more favourable
mix in Vaccines and continued tight control of ongoing costs across
all three businesses.
Contingent consideration cash payments which are made to Shionogi
and other companies reduce the balance sheet liability and hence
are not recorded in the income statement. Total contingent consideration
cash payments in the quarter amounted to GBP217 million (Q3 2018:
GBP213 million). This included cash payments made to Shionogi of
GBP206 million (Q3 2018: GBP208 million).
Operating profit by business
Pharmaceuticals operating profit was GBP1,093 million, down 20% AER,
24% CER on a turnover increase of 3% CER. The operating margin of
24.1% was 8.1 percentage points lower at AER than in Q3 2018 and
8.5 percentage points lower on a CER basis. This primarily reflected
the continued impact of lower prices, particularly in Respiratory,
including the impact of the launch of a generic version of Advair
in the US in February 2019, an unfavourable product mix, primarily
as a result of the growth in some lower margin established products
and a non-restructuring related write down in a manufacturing site
together with a significant increase in Oncology R&D investment and
investment in new product support and targeted priority markets as
well as increased costs for a number of legal settlements in the
quarter. This was partly offset by continued benefit of restructuring
and tight control of ongoing costs and the benefits of re-prioritisation
of the R&D portfolio.
Vaccines operating profit was GBP1,162 million, 41% higher than Q3
2018 at AER and 30% higher at CER on a turnover increase of 15% CER.
The operating margin of 50.3% was 7.4 percentage points higher than
in Q3 2018 at AER and 5.7 percentage points higher on a CER basis.
This was primarily driven by enhanced operating leverage from strong
sales growth, particularly Shingrix in the US, improved product mix,
favourable year-on-year inventory adjustments and higher royalty
income.
Consumer Healthcare operating profit was GBP613 million, up 43% AER,
34% CER on a turnover increase of 25% CER. On a pro-forma basis operating
profit of GBP613 million was up 8% CER on a turnover increase of
3% CER. The operating margin of 24.3% was 2.2 percentage points higher
at AER and 1.6 percentage points higher on a CER basis. The pro-forma
operating margin of 24.3% was 1.2 percentage points higher on a CER
basis than in Q3 2018. This primarily reflected continued manufacturing
restructuring savings, improved growth from higher margin power brands,
which included some seasonal sell-ins, and tight control of promotional
and other operating expenses.
Net finance costs
Total net finance costs were GBP213 million compared with GBP223
million in Q3 2018. Adjusted net finance costs were GBP206 million
compared with GBP221 million in Q3 2018. The decrease primarily reflected
a favourable comparison with Q3 2018, which included interest of
GBP23 million on an historic tax settlement, together with a fair
value gain on interest rate swaps in Q3 2019, partly offset by higher
debt levels reflecting the acquisition of Tesaro in January 2019.
Following the introduction of IFRS 16, 'Leases', finance costs included
an unwind of the discount on the lease liability of GBP9 million
in the quarter.
Share of after tax profits of associates and joint ventures
The share of after tax profits of associates was GBP17 million (Q3
2018: GBP15 million).
Taxation
The charge of GBP235 million represented an effective tax rate on
Total results of 12.0% (Q3 2018: 11.3%) and reflected the different
tax effects of the various Adjusting items, including the non-taxable
gain arising from the increase in value of the shares in Hindustan
Unilever Limited to be received on the disposal of Horlicks and other
Consumer Healthcare brands. Tax on Adjusted profit amounted to GBP411
million and represented an effective Adjusted tax rate of 15.8% (Q3
2018: 18.6%), reflecting the impact of the settlement of a number
of open issues with tax authorities.
Issues related to taxation are described in Note 14, 'Taxation' in
the Annual Report 2018. The Group continues to believe it has made
adequate provision for the liabilities likely to arise from periods
which are open and not yet agreed by tax authorities. The ultimate
liability for such matters may vary from the amounts provided and
is dependent upon the outcome of agreements with relevant tax authorities.
Non-controlling interests
The allocation of Total earnings to non-controlling interests amounted
to GBP164 million (Q3 2018: GBP94 million). The increase was primarily
due to the allocation of Pfizer's interest in the profits of the
Consumer Healthcare Joint Venture (GBP47 million), an increased allocation
of ViiV Healthcare profits to GBP86 million (Q3 2018: GBP78 million)
including charges for movements in contingent consideration liabilities
and higher net profits in some of the Group's other entities with
non-controlling interests.
The allocation of Adjusted earnings to non-controlling interests
amounted to GBP275 million (Q3 2018: GBP141 million). The increase
in allocation was primarily due to the allocation of Pfizer's interest
in the profits of the Consumer Healthcare Joint Venture (GBP103 million),
an increased allocation of ViiV Healthcare profits of GBP141 million
(Q3 2018: GBP125 million) and higher net profits in some of the Group's
other entities with non-controlling interests.
Earnings per share
Total earnings per share was 31.4p, compared with 28.8p in Q3 2018.
The increase in earnings per share primarily reflected an increase
in the value of the shares in Hindustan Unilever Limited to be received
on the disposal of Horlicks and other Consumer Healthcare brands,
a reduced effective tax rate and reduced restructuring costs.
Adjusted EPS of 38.6p compared with 35.5p in Q3 2018, up 9% AER,
1% CER, on a 3% CER increase in Adjusted operating profit. This reflected
a reduced effective tax rate and reduced net finance costs partly
offset by an increased non-controlling interest allocation of Consumer
Healthcare profits following the creation of the new Consumer Healthcare
Joint Venture in Q3 2019.
Currency impact on Q3 2019 results
The Q3 2019 results are based on average exchange rates, principally
GBP1/$1.23, GBP1/EUR1.11 and GBP1/Yen 133. Comparative exchange rates
are given on page 55. The period-end exchange rates were GBP1/$1.23,
GBP1/EUR1.13 and GBP1/Yen 133.
In the quarter, turnover increased 16% AER, 11% CER. Total EPS was
31.4p compared with 28.8p in Q3 2018. Adjusted EPS was 38.6p compared
with 35.5p in Q3 2018, up 9% AER, 1% CER. The positive currency impact
primarily reflected the weakness of Sterling, particularly against
the US$ and Yen, partly offset by weakness in emerging market currencies,
relative to Q3 2018. Exchange gains or losses on the settlement of
intercompany transactions had a negligible impact on the positive
currency impact of eight percentage points on Adjusted EPS.
Adjusting items
The reconciliations between Total results and Adjusted results for
Q3 2019 and Q3 2018 are set out below.
Three months ended 30 September 2019
Divestments,
significant
legal
Intangible Intangible Major and
Total amort- impair- restruct- Transaction- other Adjusted
results isation ment uring related items results
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ------------ ------------ ------------ ------------ ------------ ------------
Turnover 9,385 9,385
Cost of sales (3,245) 191 10 108 151 (2,785)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross profit 6,140 191 10 108 151 6,600
Selling, general
and
administration (2,892) (1) 77 30 18 (2,768)
Research and
development (1,206) 14 17 12 (1) (1,164)
Royalty income 118 118
Other operating
(expense)/income (13) 2 300 (289) -
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating profit 2,147 205 26 199 481 (272) 2,786
Net finance costs (213) 3 4 (206)
Share of after
tax
profits of
associates and
joint
ventures 17 17
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit before
taxation 1,951 205 26 202 481 (268) 2,597
Taxation (235) (39) (6) (33) (86) (12) (411)
Tax rate % 12.0% 15.8%
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit after
taxation 1,716 166 20 169 395 (280) 2,186
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit
attributable
to
non-controlling
interests 164 111 275
Profit
attributable
to
shareholders 1,552 166 20 169 284 (280) 1,911
------------ ------------ ------------ ------------ ------------ ------------ ------------
Earnings per
share 31.4p 3.4p 0.4p 3.4p 5.7p (5.7)p 38.6p
------------ ------------ ------------ ------------ ------------ ------------ ------------
Weighted average
number
of
shares
(millions) 4,951 4,951
------------ ------------
Three months ended 30 September 2018
Divestments,
significant
legal
Intangible Intangible Major and
Total amort- impair- restruct- Transaction- other Adjusted
results isation ment uring related items results
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ------------ ------------ ------------ ------------ ------------ ------------
Turnover 8,092 8,092
Cost of sales (2,636) 133 41 69 5 (2,388)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross profit 5,456 133 41 69 5 5,704
Selling, general
and
administration (2,527) 209 (9) 14 (2,313)
Research and
development (988) 10 8 4 5 (961)
Royalty income 94 94
Other operating
(expense)/income (125) 1 251 (127) -
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating profit 1,910 143 49 283 247 (108) 2,524
Net finance costs (233) 2 (221)
Profit on
disposal
of associates 3 (3) -
Share of after
tax
profits of
associates and
joint
ventures 15 15
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit before
taxation 1,705 143 49 283 247 (109) 2,318
Taxation (193) (29) (6) (67) (24) (111) (430)
Tax rate % 11.3% 18.6%
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit after
taxation 1,512 114 43 216 223 (220) 1,888
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit
attributable
to
non-controlling
interests 94 47 141
Profit
attributable
to
shareholders 1,418 114 43 216 176 (220) 1,747
------------ ------------ ------------ ------------ ------------ ------------ ------------
Earnings per
share 28.8p 2.3p 0.9p 4.4p 3.6p (4.5)p 35.5p
------------ ------------ ------------ ------------ ------------ ------------ ------------
Weighted average
number
of
shares
(millions) 4,917 4,917
------------ ------------
Major restructuring and integration
Within the Pharmaceuticals sector, the highly regulated manufacturing
operations and supply chains and long lifecycle of the business mean
that restructuring programmes, particularly those that involve the
rationalisation or closure of manufacturing or R&D sites are likely
to take several years to complete.
Major restructuring costs are those related to specific Board approved
Major restructuring programmes and are excluded from Adjusted results.
Major restructuring programmes, including integration costs following
material acquisitions, are those that are structural and are of a
significant scale where the costs of individual or related projects
exceed GBP25 million. Other ordinary course smaller scale restructuring
costs are retained within Total and Adjusted results.
Total Major restructuring charges incurred in the quarter were GBP199
million (Q3 2018: GBP283 million), analysed as follows:
Q3 2019 Q3 2018
------------------------- -------------------------
Cash Non-cash Total Cash Non-cash Total
GBPm GBPm GBPm GBPm GBPm GBPm
------ --------- ------ ------ --------- ------
2018 major restructuring
programme (incl. Tesaro) 68 45 113 128 - 128
Consumer Healthcare
Joint
Venture integration
Programme 104 - 104 - - -
Combined restructuring
and
integration programme (30) 12 (18) 136 19 155
142 57 199 264 19 283
------ --------- ------ ------ --------- ------
Cash charges arose from restructuring of the manufacturing organisation,
R&D and some administrative functions, and the integration of Tesaro
under the 2018 major restructuring programme, as well as initial
integration costs under the Consumer Healthcare Joint Venture integration
programme. The reduction in cash charges under the Combined restructuring
and integration programme arose from a profit on sale of land. Non-cash
charges arising under the 2018 major restructuring programme primarily
related to the write-down of assets as part of the plans to reduce
the manufacturing network. Non-cash charges under the Combined restructuring
and integration programme primarily related to announced plans to
restructure the manufacturing network.
Total cash payments made in the quarter were GBP105 million, GBP28
million for the existing Combined restructuring and integration programme
(Q3 2018: GBP140 million) and GBP39 million under the 2018 major
restructuring programme including the settlement of certain charges
accrued in previous quarters and a further GBP38 million relating
to the Consumer Healthcare Joint Venture integration programme.
The analysis of Major restructuring charges by business was as follows:
Q3 2019 Q3 2018
GBPm GBPm
-------- --------
Pharmaceuticals 47 191
Vaccines 31 29
Consumer Healthcare 125 36
-------- --------
203 256
Corporate & central functions (4) 27
-------- --------
Total Major restructuring costs 199 283
-------- --------
The analysis of Major restructuring charges by Income statement line
was as follows:
Q3 2019 Q3 2018
GBPm GBPm
-------- --------
Cost of sales 108 69
Selling, general and administration 77 209
Research and development 12 4
Other operating expense 2 1
Total Major restructuring costs 199 283
-------- --------
The Major restructuring programmes delivered incremental cost savings
in the quarter of GBP0.1 billion.
Transaction-related adjustments
Transaction-related adjustments resulted in a net charge of GBP481
million (Q3 2018: GBP247 million). This primarily reflected GBP305
million of accounting charges for the re-measurement of the contingent
consideration liabilities related to the acquisitions of the former
Shionogi-ViiV Healthcare joint venture and the former Novartis Vaccines
business and the liabilities for the Pfizer put option and Pfizer
and Shionogi preferential dividends in ViiV Healthcare.
Q3 2019 Q3 2018
Charge/(credit) GBPm GBPm
-------- --------
Contingent consideration on former Shionogi-ViiV
Healthcare joint venture
(including Shionogi preferential dividends) 255 214
ViiV Healthcare put options and Pfizer preferential
dividends (10) (20)
Contingent consideration on former Novartis Vaccines
business 60 54
Other adjustments 176 (1)
-------- --------
Total transaction-related charges 481 247
-------- --------
The GBP255 million charge relating to the contingent consideration
for the former Shionogi-ViiV Healthcare joint venture represented
an increase in the valuation of the contingent consideration due
to Shionogi, primarily as a result of updated exchange rate assumptions
and a GBP109 million unwind of the discount.
Other adjustments included the unwind of the fair market value uplift
on inventory (GBP148 million) as well as transaction costs arising
on completion of the Consumer Healthcare Joint venture with Pfizer.
An explanation of the accounting for the non-controlling interests
in ViiV Healthcare is set out on page 10.
Divestments, significant legal charges and other items
Divestments and other items included a gain in the quarter of GBP295
million arising from the increase in value of the shares in Hindustan
Unilever Limited to be received on the disposal of Horlicks and other
Consumer Healthcare brands. This was partly offset by certain other
Adjusting items. A charge of GBP18 million (Q3 2018: GBP12 million)
for significant legal matters included the benefit of the settlement
of existing matters as well as provisions for ongoing litigation.
Significant legal cash payments were GBP5 million (Q3 2018: GBP12
million).
Financial performance - nine months 2019
Total results
The Total results for the Group are set out below.
9 months 9 months
2019 2018 Growth Growth
GBPm GBPm GBP% CER%
--------- --------- ------- -------
Turnover 24,855 22,624 10 7
Cost of sales (8,615) (7,337) 17 17
--------- --------- ------- -------
Gross profit 16,240 15,287 6 2
Selling, general and administration (7,959) (7,295) 9 7
Research and development (3,325) (2,817) 18 14
Royalty income 269 220 22 22
Other operating expense (166) (1,466)
--------- --------- ------- -------
Operating profit 5,059 3,929 29 20
Finance income 87 57
Finance expense (706) (589)
Profit on disposal of associates - 3
Share of after tax profits
of associates
and joint ventures 70 26
--------- --------- ------- -------
Profit before taxation 4,510 3,426 32 22
Taxation (759) (680)
Tax rate % 16.8% 19.8%
--------- --------- ------- -------
Profit after taxation 3,751 2,746 37 27
--------- --------- ------- -------
Profit attributable to non-controlling
interests 405 338
Profit attributable to shareholders 3,346 2,408
--------- --------- ------- -------
3,751 2,746 37 27
--------- --------- ------- -------
Earnings per share 67.7p 49.0p 38 28
--------- --------- ------- -------
Adjusted results
The Adjusted results for the Group are set out below. Reconciliations
between Total results and Adjusted results for the nine months 2019
and the nine months 2018 are set out on pages 34 and 35.
9 months 2019
----------------------------------------------------
Reported Pro-forma
% of Growth growth growth
GBPm turnover GBP% CER% CER%
-------- ---------- ------- --------- ----------
Turnover 24,855 100 10 7 5
Cost of sales (7,231) (29.1) 9 8 6
Selling, general and
administration (7,598) (30.6) 10 7 5
Research and development (3,175) (12.8) 17 13 12
Royalty income 269 1.1 22 22 22
-------- ---------- ------- --------- ----------
Adjusted operating
profit 7,120 28.6 9 3 2
-------- ---------- ------- --------- ----------
Adjusted profit before
tax 6,577 9 3
Adjusted profit after
tax 5,466 12 7
Adjusted profit attributable
to
shareholders 4,904 13 7
-------- ---------- ------- ---------
Adjusted earnings
per share 99.2p 12 7
-------- ---------- ------- ---------
Operating profit by
business 9 months 2019
----------------------------------------------------
Reported Pro-forma
% of Growth growth growth
GBPm turnover GBP% CER% CER%
-------- ---------- ------- --------- ----------
Pharmaceuticals 6,029 46.4 (1) (5) (5)
Pharmaceuticals R&D* (2,442) 29 24 24
-------- ---------- ------- --------- ----------
Total Pharmaceuticals 3,587 27.6 (14) (17) (17)
Vaccines 2,388 44.1 57 47 47
Consumer Healthcare 1,434 22.3 23 19 9
-------- ---------- ------- --------- ----------
7,409 29.8 8 3 2
Corporate & other
unallocated
costs (289)
Adjusted operating
profit 7,120 28.6 9 3 2
-------- ---------- ------- --------- ----------
* Operating profit of Pharmaceuticals R&D segment, which is the responsibility
of the Chief Scientific Officer and President, R&D. It excludes
ViiV Healthcare R&D expenditure, which is reported within the Pharmaceuticals
segment.
Turnover
Pharmaceuticals turnover
9 months 2019
-------------------------
Growth Growth
GBPm GBP% CER%
------- ------- -------
Respiratory 2,189 23 18
HIV 3,597 4 1
Immuno-inflammation 443 32 25
Oncology 164 - -
Established Pharmaceuticals 6,603 (4) (6)
-------
12,996 4 1
-------
US 5,444 2 (4)
Europe 3,077 4 4
International 4,475 7 6
------- ------- -------
12,996 4 1
------- ------- -------
Pharmaceuticals turnover in the nine months was GBP12,996 million,
up 4% AER, 1% CER. Respiratory sales were up 23% AER, 18% CER, to
GBP2,189 million, on growth of Trelegy Ellipta and Nucala. HIV sales
were up 4% AER, 1% CER, to GBP3,597 million, with growth in Juluca
and Dovato partly offset by a decline in Triumeq. Sales of Established
Pharmaceuticals were GBP6,603 million, down 4% AER, 6% CER, including
the impact of loss of exclusivity of Advair.
In the US, sales grew 2% AER but declined 4% CER. Excluding Advair
and Relvar/Breo Ellipta, impacted by genericisation of the ICS/LABA
market, growth was 15% AER, 9% CER. Continued growth of Nucala, Trelegy
Ellipta and Benlysta was offset by the decline in Established Products
including the loss of exclusivity of Advair. In Europe, sales grew
4% AER, 4% CER, with strong growth in Respiratory partly offset by
a decline in Established Pharmaceuticals. International grew 7% AER,
6% CER, with growth in all therapy areas.
Respiratory
Total Respiratory sales were up 23% AER, 18% CER, with strong growth
in all regions. Ellipta product sales grew 17% AER, 13% CER, with
Europe up 30% AER, 30% CER and International up 33% AER, 30% CER
on Trelegy and Relvar/Breo growth. Nucala was up 39% AER, 39% CER
in Europe and 65% AER, 56% CER in International. In the US, Trelegy
Ellipta and Nucala growth more than offset the decline in Relvar/Breo
Ellipta on post generic ICS/LABA price pressure.
Sales of Nucala were GBP550 million in the nine months and grew 41%
AER, 35% CER, continuing to benefit from the global rollout of the
product. US sales of Nucala grew 37% AER, 29% CER to GBP321 million.
Sales of Ellipta products were up 17% AER, 13% CER to GBP1,639 million,
driven by growth in Europe and International regions. In the US,
sales grew 8% AER, 2% CER, reflecting continued competitive pricing
pressures for ICS/LABAs, post generic Advair. Sales of Trelegy Ellipta
contributed GBP346 million globally in the nine months, driven by
an increase in US market share.
Relvar/Breo Ellipta sales were down 7% AER, 10% CER. This was driven
by the US, where Relvar/Breo Ellipta declined 31% AER, 35% CER as
a result of competitive pricing pressures and the impact of generic
Advair on the ICS/LABA market. In Europe and International, Relvar/Breo
Ellipta continued to grow, up 14% AER, 14% CER in Europe, and 23%
AER, 21% CER in International.
HIV
HIV sales grew 4% AER, 1% CER to GBP3,597 million in the nine months.
The dolutegravir franchise grew 7% AER, 3% CER, delivering sales
of GBP3,425 million. The remaining portfolio, with sales of GBP172
million (5% of total HIV sales), declined 26% AER, 26% CER and reduced
the overall HIV growth by two percentage points.
Sales of dolutegravir products were GBP3,425 million, with Triumeq
and Tivicay delivering sales of GBP1,911 million and GBP1,236 million,
respectively. The two-drug regimens, Juluca and Dovato, delivered
sales of GBP278 million in the nine months with combined growth more
than offsetting the decline in the three-drug regimen, Triumeq, as
the business transitions to the new portfolio.
In the US, following the launch of Dovato in April 2019, combined
sales of the two-drug regimens were GBP234 million. US dolutegravir
sales grew 5% AER but declined 1% CER, reflecting a year-on-year
share decline as the business transitions to the new two-drug portfolio,
partly offset by a net price benefit. In Europe, Dovato and Juluca
reported combined sales of GBP40 million, and total dolutegravir
sales grew 1% AER, 1% CER, with growth in market share more than
offsetting price erosion and the timing of clawback payments. International
performed strongly with total dolutegravir sales growth of 27% AER,
26% CER, driven by Tivicay and Triumeq.
Oncology
Sales of Zejula, were GBP163 million in the period from the date
of acquisition, comprising GBP97 million in the US and GBP66 million
in Europe.
Immuno-inflammation
Sales of Benlysta in the nine months were up 32% AER, 26% CER to
GBP443 million, including sales of the sub-cutaneous formulation
of GBP189 million. In the US, Benlysta grew 29% AER, 22% CER to GBP387
million.
Established Pharmaceuticals
Sales of Established Pharmaceuticals in the nine months were GBP6,603
million, down 4% AER, 6% CER.
Established Respiratory products declined 7% AER, 9% CER to GBP2,935
million, with the decline in Advair/Seretide partly offset by higher
sales of Ventolin and allergy products. In the US, a generic version
of Advair was launched in February, resulting in a 50% AER, 53% CER
decline in the nine months. In Europe, Seretide sales were down 15%
AER, 15% CER to GBP383 million, reflecting continued competition
from generic products and the transition of the Respiratory portfolio
to newer products. In International, sales of Seretide grew 1% AER
but were flat at CER. Globally, Ventolin grew by 36% AER, 32% CER,
driven by the strong uptake of an authorised generic version in the
US.
The remainder of the Established Pharmaceuticals portfolio declined
2% AER, 3% CER to GBP3,668 million, with Lamictal down 8% AER, 11%
CER to GBP421 million on generic competition in the US and International,
partly offset by growth in Augmentin in the nine months and a European
Relenza tender.
Vaccines turnover
9 months 2019
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Meningitis 815 18 16
Influenza 403 22 16
Shingles 1,278 >100 >100
Established Vaccines 2,919 3 1
------
5,415 23 19
------
US 2,996 47 39
Europe 1,138 (4) (4)
International 1,281 7 7
------ ------- -------
5,415 23 19
------ ------- -------
Vaccines turnover grew 23% AER, 19% CER to GBP5,415 million, primarily
driven by growth in sales of Shingrix. Meningitis vaccines also contributed
to growth mainly due to Bexsero demand and share gains in the US
together with stronger demand in International. Influenza vaccines
sales were up 22% AER, 16% CER to GBP403 million, primarily due to
share gains in the US and International together with the favourable
impact of phasing and a prior-year returns provision reversal in
the US. Established Vaccines grew 3% AER, 1% CER to GBP2,919 million,
primarily reflecting strong growth in Boostrix, Infanrix, Pediarix
and Hepatitis, partly offset by supply constraints in MMRV vaccines
and lower Cervarix demand in International.
Meningitis
Meningitis sales grew 18% AER, 16% CER to GBP815 million. Bexsero
sales grew 21% AER, 19% CER to GBP567 million, driven by demand and
share gains in the US together with stronger demand in International
and Europe, partly offset by the completion of the vaccination of
catch-up cohorts in certain markets in Europe. Menveo grew 7% AER,
3% CER, primarily reflecting improved supply in International.
Influenza
Fluarix/FluLaval sales were up 22% AER, 16% CER to GBP403 million,
primarily due to share gains in the US and International together
with the favourable impact of phasing and a prior-year returns provision
reversal in the US.
Shingles
Shingrix recorded sales of GBP1,278 million, primarily driven by
continued strong uptake and the favourable benefit of prior-period
rebate adjustments in the US. Germany and Canada also contributed
to growth.
Established Vaccines
Sales of DTPa-containing vaccines (Infanrix, Pediarix and Boostrix)
grew 15% AER, 12% CER. Boostrix sales were up 20% AER, 17% CER to
GBP454 million mainly due to strong demand and favourable phasing
in International together with share gains and higher demand in the
US.
Infanrix/Pediarix sales grew 12% AER, 9% CER to GBP577 million, reflecting
favourable US CDC stockpile movements and stronger demand in International,
partly offset by competitive pressures in Europe.
Hepatitis vaccines grew 10% AER, 6% CER to GBP679 million, primarily
due to favourable CDC stockpile movements and the continued benefit
from a competitor supply shortage in the US, partly offset by supply
constraints and lower demand in Europe.
Synflorix sales grew 8% AER, 8% CER to GBP344 million, primarily
due to stronger demand in both International and Europe.
Rotarix sales were up 8% AER, 6% CER to GBP417 million, reflecting
stronger demand in International.
MMRV vaccines sales declined 33% AER, 33% CER to GBP162 million,
largely driven by supply constraints in Europe and International.
Cervarix sales were down 49% AER, 49% CER to GBP63 million, reflecting
competitive pressure in China and lower demand elsewhere in International.
Consumer Healthcare turnover 9 months 2019
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Wellness 3,232 10 8
Oral health 2,022 8 6
Nutrition 713 46 43
Skin health 457 1 -
------ ------- -------
6,424 12 10
------ ------- -------
US 1,694 27 19
Europe 1,835 2 2
International 2,895 11 10
------ ------- -------
6,424 12 10
------ ------- -------
Pro-forma growth 2
-------
Consumer Healthcare sales grew 12% AER, 10% CER to GBP6,424 million
in the nine months. On a pro-forma basis, sales grew 2% CER, driven
largely by the International region with double digit growth in India
and China. At a category level, strong growth in Oral health was
partly offset by a decline in Skin health.
Divestments and the phasing out of low margin contract manufacturing
had a negative impact of approximately one percentage point on pro-forma
growth.
Sales of the Consumer Healthcare business include nine weeks of legacy
Pfizer brand sales arising after the creation of the Joint Venture.
The legacy Pfizer brands have been included in the existing categories
and geographic regions used to report Consumer Healthcare sales.
GSK expects to revise this category structure for reporting from
Q1 2020 onwards.
Wellness
Wellness sales grew 10% AER, 8% CER to GBP3,232 million. On a pro-forma
basis, sales grew in low single digits, with a strong performance
in Pain relief partly offset by a decline in Respiratory and the
phasing out of low margin contract manufacturing. In the Pain relief
category, Panadol continued to perform strongly, particularly in
the Middle East and Africa, and benefited from 2018 regulatory and
distribution changes. Voltaren sales grew in low single-digits, reflecting
a stronger Q3 performance. Respiratory sales declined as Flonase
growth was offset by a decline in Theraflu, following a strong cold
and flu season comparator in 2018. Growth was also impacted by weak
performances in other Respiratory brands.
Oral health
Oral health grew 8% AER, 6% CER to GBP2,022 million. Sensodyne reported
broad-based, double-digit growth, benefiting from major innovation
launches. Gum health sales saw double digit-growth, reflecting strong
performances in Europe and the US. Denture care grew in low single-digits.
Oral health growth was also impacted by a decline in non-strategic
brands.
Nutrition
Nutrition sales grew 46% AER, 43% CER to GBP713 million, largely
due to the inclusion of the Pfizer vitamins, minerals and supplements
portfolio. On a pro-forma basis, sales grew in low single digits,
with India growing in high single digits.
Skin health
Skin health sales of GBP457 million grew 1% AER, but were flat at
CER, largely due to the addition of Chapstick from the Pfizer portfolio,
offset by declines in other Skin health brands. On a pro-forma basis,
sales declined in mid-single digits, largely due to divestments of
small tail brands in the US and UK, which had a negative impact on
pro-forma growth of the category of four percentage points.
Operating performance
Cost of sales
Total cost of sales as a percentage of turnover was 34.7%, 2.2 percentage
points higher at AER and 2.9 percentage points higher in CER terms
compared with 2018. This reflected an increase in the costs of manufacturing
restructuring programmes, primarily as a result of write downs in
a number of manufacturing sites, the unwind of the fair market value
uplift on inventory arising on completion of the Consumer Healthcare
Joint Venture with Pfizer as well as increased amortisation of intangible
assets.
Excluding these and other Adjusting items, Adjusted cost of sales
as a percentage of turnover was 29.1%, down 0.3 percentage points
at AER, but 0.3 percentage points higher at CER compared with 2018.
On a pro-forma basis, Adjusted cost of sales as a percentage of turnover
was 29.1%, 0.2 percentage points higher at CER, compared with 2018.
This reflected continued adverse pricing pressure in Pharmaceuticals,
particularly in Respiratory, an unfavourable product mix in Pharmaceuticals
and a non-restructuring related write down in a manufacturing site.
This was partly offset by a more favourable product mix in Vaccines,
primarily due to growth of Shingrix in the US and in Consumer Healthcare,
a favourable impact of inventory adjustments in Vaccines and a further
contribution from integration and restructuring savings in Pharmaceuticals
and Consumer Healthcare.
Selling, general and administration
Total SG&A costs as a percentage of turnover were 32.0%, 0.2 percentage
points lower at AER but flat on a CER basis. This included increased
significant legal costs, costs related to the acquisition of the
Pfizer consumer healthcare business, as well as a reversal of an
indemnity receivable from Novartis following a tax settlement, with
an equivalent release of a tax provision which was reflected in the
tax charge, partly offset by reduced restructuring costs.
Excluding these and other Adjusting items, Adjusted SG&A costs as
a percentage of turnover were 30.6%, 0.1 percentage points lower
at AER than in 2018 but 0.1 percentage points higher on a CER basis.
On a pro-forma basis, Adjusted SG&A costs as a percentage of turnover
was 30.6%, flat at CER, compared with 2018.
The growth in Adjusted SG&A costs of 10% AER, 7% CER and 5% CER on
a pro-forma basis reflected increased investment resulting from the
acquisition of Tesaro and in promotional product support, particularly
for new launches in Vaccines, Respiratory and HIV as well as increased
costs for a number of legal settlements in Q3 2019. This was partly
offset by the continuing benefit of restructuring in Pharmaceuticals
and the tight control of ongoing costs, particularly in non-promotional
spending across all three businesses.
Research and development
Total R&D expenditure was GBP3,325 million (13.4 % of turnover),
up 18% AER, 14% CER. Adjusted R&D expenditure was GBP3,175 million
(12.8% of turnover), 17% higher at AER, 13% higher at CER than the
same period in 2018. On a pro-forma basis, Adjusted R&D expenditure
grew 12% CER compared with 2018.
Pharmaceuticals R&D expenditure was GBP2,449 million, up 21% AER,
16% CER, reflecting a significant increase in study and clinical
trial material investment in Oncology compared with the 9 months
to September 2018, reflecting the progression of assets from the
Tesaro acquisition, primarily Zejula and TSR-042, and a number of
other programmes, including BCMA, NY-ESO and ICOS. R&D expenditure
in Vaccines and Consumer Healthcare was GBP532 million and GBP194
million, respectively.
Royalty income
Royalty income was GBP269 million (2018: GBP220 million), up 22%
AER, 22% CER, primarily reflecting increased royalties on sales of
Gardasil.
Other operating expense
Net other operating expense of GBP166 million (2018: GBP1,466 million)
primarily reflected accounting charges of GBP408 million (2018: GBP1,617
million) arising from the re-measurement of the contingent consideration
liabilities related to the acquisitions of the former Shionogi-ViiV
Healthcare joint venture and the former Novartis Vaccines business
and the liabilities for the Pfizer put option and Pfizer and Shionogi
preferential dividends in ViiV Healthcare.
This included a re-measurement charge of GBP421 million (2018: GBP927
million) for the contingent consideration liability due to Shionogi,
primarily arising from changes in exchange rate assumptions and the
unwind of the discount. 2018 also included a re-measurement charge
of GBP658 million in relation to the Consumer Healthcare put option.
In addition there was an increase in value of the shares in Hindustan
Unilever Limited to be received on the disposal of Horlicks and other
Consumer Healthcare brands of GBP247 million in the nine months.
The cumulative increase in value since the signing of the proposed
transaction was GBP345 million. This was partly offset by the profit
on a number of asset disposals.
Operating profit
Total operating profit was GBP5,059 million in the nine months compared
with GBP3,929 million in 2018. Reduced re-measurement charges on
the contingent consideration liabilities, no Consumer Healthcare
put option charge and an increase in value of the shares in Hindustan
Unilever Limited to be received on the disposal of Horlicks and other
Consumer Healthcare brands were partly offset by increased charges
for major restructuring, primarily arising from write downs in a
number of manufacturing sites.
Excluding these and other Adjusting items, Adjusted operating profit
was GBP7,120 million, 9% higher than 2018 at AER and 3% higher at
CER on a turnover increase of 7% CER. The Adjusted operating margin
of 28.6% was 0.3 percentage points lower at AER, and 1.0 percentage
points lower on a CER basis than in 2018. On a pro-forma basis, Adjusted
operating profit was 2% higher at CER on a turnover increase of 5%
CER. The Adjusted pro-forma operating margin of 28.6% was 0.9 percentage
points lower on a CER basis than in 2018.
The increase in Adjusted operating profit primarily reflected the
benefit from sales growth in all three businesses, particularly Vaccines,
a more favourable mix in Vaccines and Consumer Healthcare, a benefit
from favourable inventory adjustments in Vaccines, the continued
benefit of restructuring and tight control of ongoing costs across
all three businesses. This was partly offset by continuing price
pressure, particularly in Respiratory, including the impact of the
launch of a generic version of Advair in the US in February 2019,
investment in R&D including a significant increase in Oncology investment,
partly on the assets from the Tesaro acquisition, and investments
in promotional product support, particularly for new launches in
Vaccines, HIV and Respiratory.
Contingent consideration cash payments which are made to Shionogi
and other companies reduce the balance sheet liability and hence
are not recorded in the income statement. Total contingent consideration
cash payments in the nine months amounted to GBP660 million (2018:
GBP915 million). This included cash payments made to Shionogi of
GBP645 million (2018: GBP584 million).
Operating profit by business
Pharmaceuticals operating profit was GBP3,587 million, down 14% AER,
17% CER on a turnover increase of 1% CER. The operating margin of
27.6% was 6.0 percentage points lower at AER than in 2018 and 6.2
percentage points lower on a CER basis. This primarily reflected
the increase in cost of sales percentage due to the continued impact
of lower prices, particularly in Respiratory, including the impact
of the launch of a generic version of Advair in the US in February
2019, an unfavourable product mix, primarily as a result of the growth
in some lower margin established products, a non-restructuring related
write down in a manufacturing site in Q3 and higher legal costs,
together with a significant increase in Oncology R&D investment and
investment in new product support and targeted priority markets.
This was partly offset by the continued benefit of restructuring
and tight control of ongoing costs and the benefits of re-prioritisation
of the R&D portfolio.
Vaccines operating profit was GBP2,388 million, 57% AER, 47% CER
higher than in 2018 on a turnover increase of 19% CER. The operating
margin of 44.1% was 9.6 percentage points higher at AER than in 2018
and 8.2 percentage points higher on a CER basis. This was primarily
driven by enhanced operating leverage from strong sales growth, particularly
Shingrix in the US, improved product mix and higher royalty income.
Increased SG&A investment to support business growth was partly offset
by income from one-off settlements.
Consumer Healthcare operating profit was GBP1,434 million, up 23%
AER, 19% CER higher on a turnover increase of 10% CER. On a pro-forma
basis, operating profit was GBP1,434 million, 9% CER higher on a
turnover increase of 2% CER. The operating margin of 22.3% was 2.1
percentage points higher at AER and 1.7 percentage points higher
on a CER basis than in 2018. The pro-forma operating margin of 22.3%
was 1.4 percentage points higher on a CER basis. This primarily reflected
continued manufacturing restructuring savings, improved growth from
higher margin power brands and divestment of lower margin tail products
as well as tight control of promotional and other operating expenses.
Net finance costs
Total net finance costs were GBP619 million compared with GBP532
million in 2018. Adjusted net finance costs were GBP613 million compared
with GBP525 million in 2018. The increase primarily reflected higher
debt levels following the acquisition from Novartis of its stake
in the Consumer Healthcare Joint Venture in June 2018 and the acquisition
of Tesaro in January 2019, as well as an adverse comparison with
a one-off accounting adjustment of GBP20 million to amortisation
of interest charges in 2018. This was partly offset by the benefit
from older bonds being refinanced at lower interest rates, a fair
value gain on interest rate swaps and interest of GBP23 million in
Q3 2018 on an historic tax settlement. Following the introduction
of IFRS 16, 'Leases', finance costs included an unwind of the discount
on the lease liability of GBP29 million in the nine months.
Share of after tax profits of associates and joint ventures
The share of after tax profits of associates was GBP70 million (2018:
GBP26 million). This included a one-off adjustment of GBP51 million
to reflect GSK's share of increased after tax profits of Innoviva
primarily as a result of a non-recurring income tax benefit.
Taxation
The charge of GBP759 million represented an effective tax rate on
Total results of 16.8% (2018: 19.8%) and reflected the different
tax effects of the various Adjusting items, including the non-taxable
profit arising from the increase in value of the shares in Hindustan
Unilever Limited to be received on the disposal of Horlicks and other
Consumer Healthcare brands as well as recognition of a deferred tax
liability as a result of disposal of a manufacturing site. Tax on
Adjusted profit amounted to GBP1,111 million and represented an effective
Adjusted tax rate of 16.9% (2018: 19.5%), reflecting the impact of
the settlement of a number of open issues with tax authorities.
Issues related to taxation are described in Note 14, 'Taxation' in
the Annual Report 2018. The Group continues to believe it has made
adequate provision for the liabilities likely to arise from periods
which are open and not yet agreed by tax authorities. The ultimate
liability for such matters may vary from the amounts provided and
is dependent upon the outcome of agreements with relevant tax authorities.
Non-controlling interests
The allocation of Total earnings to non-controlling interests amounted
to GBP405 million (2018: GBP338 million). The increase was primarily
due to an increased allocation of ViiV Healthcare profits to GBP290
million (2018: GBP175 million) and higher net profits in some of
the Group's other entities with non-controlling interests. This was
partly offset by the lower allocation of Consumer Healthcare profits
of GBP47 million (2018: GBP117 million) following the buyout of Novartis'
interest in June 2018 and the completion of the new Consumer Healthcare
Joint Venture with Pfizer on 31 July 2019.
The allocation of Adjusted earnings to non-controlling interests
amounted to GBP562 million (2018: GBP535 million). The increase in
allocation was again primarily due to increased allocation of ViiV
Healthcare profits of GBP391 million (2018: GBP371 million) and higher
net profits in some of the Group's other entities with non-controlling
interests, partly offset by the lower allocation of Consumer Healthcare
profits of GBP103 million (2018: GBP118 million).
Earnings per share
Total earnings per share was 67.7p, compared with 49.0p in 2018.
The increase in earnings per share primarily reflected reduced re-measurement
charges on the contingent consideration liabilities and put options,
an increase in the value of the shares in Hindustan Unilever Limited
to be received on the disposal of Horlicks and other Consumer Healthcare
brands, an improved trading performance, a reduced effective tax
rate and the increased share of after tax profit of the associate
Innoviva.
Adjusted EPS of 99.2p compared with 88.3p in 2018, up 12% AER, 7%
CER, on a 3% CER increase in Adjusted operating profit. The improvement
primarily resulted from the lower non-controlling interest allocation
of Consumer Healthcare profits, a reduced effective tax rate and
an increased share of after tax profits of associates as a result
of a non-recurring income tax benefit in Innoviva, partly offset
by increased net finance costs.
Currency impact on nine months 2019 results
The results for the nine months to September 2019 are based on average
exchange rates, principally GBP1/$1.27, GBP1/EUR1.13 and GBP1/Yen
139. Comparative exchange rates are given on page 55. The period-end
exchange rates were GBP1/$1.23, GBP1/EUR1.13 and GBP1/Yen 133.
In the nine months, turnover increased 10% AER, 7% CER. Total EPS
was 67.7p compared with 49.0p in 2018. Adjusted EPS was 99.2p compared
with 88.3p in 2018, up 12% AER, 7% CER. The positive currency impact
primarily reflected the weakness of Sterling, particularly against
the US$ and Yen, partly offset by weakness in emerging market currencies,
relative to 2018. Exchange gains or losses on the settlement of intercompany
transactions had a negligible impact on the positive currency impact
of five percentage points on Adjusted EPS.
Adjusting items
The reconciliations between Total results and Adjusted results for
the nine months 2019 and the nine months 2018 are set out below.
Nine months ended 30 September 2019
Divestments,
significant
legal
Intangible Intangible Major and
Total amort- impair- restruct- Transaction- other Adjusted
results isation ment uring related items results
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ------------ ------------ ------------ ------------ ------------ ------------
Turnover 24,855 24,855
Cost of sales (8,615) 550 27 647 160 (7,231)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross profit 16,240 550 27 647 160 17,624
Selling, general
and
administration (7,959) 5 169 100 87 (7,598)
Research and
development (3,325) 48 30 71 1 (3,175)
Royalty income 269 269
Other operating
(expense)/income (166) 1 415 (250) -
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating profit 5,059 598 62 888 675 (162) 7,120
Net finance costs (619) 4 2 (613)
Share of after
tax
profits of
associates and
joint
ventures 70 70
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit before
taxation 4,510 598 62 892 675 (160) 6,577
Taxation (759) (115) (11) (150) (139) 63 (1,111)
Tax rate % 16.8% 16.9%
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit after
taxation 3,751 483 51 742 536 (97) 5,466
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit
attributable
to
non-controlling
interests 405 157 562
Profit
attributable
to
shareholders 3,346 483 51 742 379 (97) 4,904
------------ ------------ ------------ ------------ ------------ ------------ ------------
Earnings per
share 67.7p 9.8p 1.0p 15.0p 7.7p (2.0)p 99.2p
------------ ------------ ------------ ------------ ------------ ------------ ------------
Weighted average
number
of
shares
(millions) 4,945 4,945
------------ ------------
Nine months ended 30 September 2018
Divestments,
significant
legal
Intangible Intangible Major and
Total amort- impair- restruct- Transaction- other Adjusted
results isation ment uring related items results
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ------------ ------------ ------------ ------------ ------------ ------------
Turnover 22,624 22,624
Cost of sales (7,337) 400 69 211 11 (6,646)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross profit 15,287 400 69 211 11 15,978
Selling, general
and
administration (7,295) 2 267 61 32 (6,933)
Research and
development (2,817) 30 33 27 11 (2,716)
Royalty income 220 220
Other operating
(expense)/income (1,466) 1 1,634 (169) -
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating profit 3,929 430 104 506 1,706 (126) 6,549
Net finance costs (532) 2 5 (525)
Profit on
disposal
of associates 3 (3) -
Share of after
tax
profits of
associates and
joint
ventures 26 26
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit before
taxation 3,426 430 104 508 1,706 (124) 6,050
Taxation (680) (85) (15) (122) (201) (77) (1,180)
Tax rate % 19.8% 19.5%
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit after
taxation 2,746 345 89 386 1,505 (201) 4,870
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit
attributable
to
non-controlling
interests 338 197 535
Profit
attributable
to
shareholders 2,408 345 89 386 1,308 (201) 4,335
------------ ------------ ------------ ------------ ------------ ------------ ------------
Earnings per
share 49.0p 7.0p 1.8p 7.9p 26.6p (4.0)p 88.3p
------------ ------------ ------------ ------------ ------------ ------------ ------------
Weighted average
number
of
shares
(millions) 4,911 4,911
------------ ------------
Major restructuring and integration
Within the Pharmaceuticals sector, the highly regulated manufacturing
operations and supply chains and long lifecycle of the business mean
that restructuring programmes, particularly those that involve the
rationalisation or closure of manufacturing or R&D sites are likely
to take several years to complete.
Major restructuring costs are those related to specific Board approved
Major restructuring programmes and are excluded from Adjusted results.
Major restructuring programmes, including integration costs following
material acquisitions, are those that are structural and are of a
significant scale where the costs of individual or related projects
exceed GBP25 million. Other ordinary course smaller scale restructuring
costs are retained within Total and Adjusted results.
The Board approved a new Major restructuring programme in July 2018,
which is designed to significantly improve the competitiveness and
efficiency of the Group's cost base with savings delivered primarily
through supply chain optimisation and reductions in administrative
costs.
The Group acquired Tesaro in January 2019, and is expected to incur
around GBP50 million of integration and restructuring cash costs,
leading to annual cost-saving benefits of around GBP50 million. This
has been added to and reported as part of the 2018 Major restructuring
programme.
The completion of the new Consumer Healthcare Joint Venture with
Pfizer is expected to realise substantial cost synergies, generating
total annual cost savings of GBP0.5 billion by 2022 for expected
total major restructuring cash costs of GBP0.9 billion and non-cash
charges of GBP0.3 billion. Up to 25% of the cost savings are intended
to be reinvested in the business to support innovation and other
growth opportunities.
Total Major restructuring charges incurred in the nine months were
GBP888 million (2018: GBP506 million), analysed as follows:
9 months 2019 9 months 2018
------------------------- -------------------------
Cash Non-cash Total Cash Non-cash Total
GBPm GBPm GBPm GBPm GBPm GBPm
------ --------- ------ ------ --------- ------
2018 major restructuring
programme (incl. Tesaro) 179 549 728 128 - 128
Consumer Healthcare
Joint
Venture integration
programme 135 - 135 - - -
Combined restructuring
and
integration programme (8) 33 25 278 100 378
306 582 888 406 100 506
------ --------- ------ ------ --------- ------
Non-cash charges arising under the 2018 major restructuring programme
primarily related to the write-down of assets as part of the plans
to reduce the manufacturing network. Cash charges arose from restructuring
of the manufacturing organisation, R&D and some administrative functions
as well as the integration of Tesaro under the 2018 major restructuring
programme, and initial integration costs under the Consumer Healthcare
Joint Venture integration programme. Non-cash charges under the Combined
restructuring and integration programme primarily related to announced
plans to restructure the manufacturing network, and the reduction
in cash charges arose from a profit on sale of land.
Total cash payments made in the nine months were GBP390 million,
GBP247 million for the existing Combined restructuring and integration
programme (2018: GBP353 million) and GBP85 million under the 2018
major restructuring programme including the settlement of certain
charges accrued in previous quarters and a further GBP58 million
relating to the Consumer Healthcare Joint Venture integration programme.
The analysis of Major restructuring charges by business was as follows:
9 months 9 months
2019 2018
GBPm GBPm
--------- ---------
Pharmaceuticals 615 295
Vaccines 48 76
Consumer Healthcare 187 100
--------- ---------
850 471
Corporate & central functions 38 35
--------- ---------
Total Major restructuring costs 888 506
--------- ---------
The analysis of Major restructuring charges by Income statement line
was as follows:
9 months 9 months
2019 2018
GBPm GBPm
--------- ---------
Cost of sales 647 211
Selling, general and administration 169 267
Research and development 71 27
Other operating expense 1 1
--------- ---------
Total Major restructuring costs 888 506
--------- ---------
The Combined restructuring and integration programme delivered incremental
annual cost savings in the nine months of GBP0.2 billion. The 2018
major restructuring programme delivered incremental cost savings
in the nine months of GBP0.2 billion.
Total cash charges for the Combined restructuring and integration
programme are now expected to be approximately GBP4.1 billion with
non-cash charges up to GBP1.6 billion. The programme has now delivered
approximately GBP4.1 billion of annual savings, including an estimated
currency benefit of GBP0.3 billion. The programme is now expected
to deliver by 2020 total annual savings of GBP4.4 billion on a constant
currency basis, including an estimated benefit of GBP0.4 billion
from currency on the basis of the nine months 2019 average exchange
rates.
The 2018 major restructuring programme, now including Tesaro, is
expected to cost GBP1.75 billion over the period to 2021, with cash
costs of GBP0.85 billion and non-cash costs of GBP0.9 billion, and
is expected to deliver annual savings of around GBP450 million by
2021 (at September 2019 rates). These savings will be fully re-invested
to help fund targeted increases in R&D and commercial support of
new products.
Transaction-related adjustments
Transaction-related adjustments resulted in a net charge of GBP675
million (2018: GBP1,706 million). This primarily reflected GBP421
million of accounting charges for the re-measurement of the contingent
consideration liabilities related to the acquisitions of the former
Shionogi-ViiV Healthcare joint venture and the former Novartis Vaccines
business and the liabilities for the Pfizer put option and Pfizer
and Shionogi preferential dividends in ViiV Healthcare.
9 months 9 months
2019 2018
Charge/(credit) GBPm GBPm
--------- ---------
Consumer Healthcare Joint Venture put option - 658
Contingent consideration on former Shionogi-ViiV
Healthcare joint venture
(including Shionogi preferential dividends) 421 927
ViiV Healthcare put options and Pfizer preferential
dividends (81) (18)
Contingent consideration on former Novartis Vaccines
business 68 50
Other adjustments 267 89
--------- ---------
Total transaction-related charges 675 1,706
--------- ---------
The GBP421 million charge relating to the contingent consideration
for the former Shionogi-ViiV Healthcare joint venture represented
an increase in the valuation of the contingent consideration due
to Shionogi, primarily as a result of a GBP323 million unwind of
the discount and updated exchange rate assumptions, partly offset
by adjustments to sales forecasts.
Other adjustments included an unwind of the fair market value uplift
on inventory of GBP148 million and transaction costs arising on completion
of the Consumer Healthcare Joint Venture with Pfizer, as well as
a reversal of an indemnity receivable from Novartis following a tax
settlement, with an equivalent release of a tax provision.
An explanation of the accounting for the non-controlling interests
in ViiV Healthcare is set out on page 10.
Divestments, significant legal charges and other items
Divestments and other items included a gain in the nine months of
GBP247 million arising from the increase in value of the shares in
Hindustan Unilever Limited to be received on the disposal of Horlicks
and other Consumer Healthcare brands, as well as equity investment
impairments and certain other Adjusting items together with the profit
on a number of asset disposals. A charge of GBP87 million (2018:
GBP29 million) for significant legal matters included the benefit
of the settlement of existing matters as well as provisions for ongoing
litigation. Significant legal cash payments were GBP13 million (2018:
GBP24 million).
Cash generation
Cash flow
9 months 9 months
Q3 2019 2019 2018
-------- --------- ---------
Net cash inflow from operating activities
(GBPm) 2,515 4,567 4,302
Free cash flow* (GBPm) 1,939 2,474 2,375
Free cash flow growth (%) 25% 4% 42%
Free cash flow conversion* (%) >100% 74% 99%
Net debt** (GBPm) 28,139 28,139 23,837
-------- --------- ---------
* Free cash flow and free cash flow conversion are defined on page
58.
** Net debt is analysed on page 57.
Q3 2019
Net cash inflow from operating activities for the quarter was GBP2,515
million (Q3 2018: GBP2,077 million). The increase primarily reflected
improved operating profits, a lower seasonal increase in trade receivables
and the reclassification of lease payments from operating to financing
activities following the transition to IFRS 16, partly offset by
the adverse timing of payments for returns and rebates.
Total cash payments to Shionogi in relation to the ViiV Healthcare
contingent consideration liability in the quarter were GBP206 million
(Q3 2018: GBP208 million), of which GBP182 million was recognised
in cash flows from operating activities and GBP24 million was recognised
in contingent consideration paid within investing cash flows. These
payments are deductible for tax purposes.
Free cash flow was GBP1,939 million for the quarter (Q3 2018: GBP1,554
million). The increase primarily reflected improved operating profits,
a lower seasonal increase in trade receivables and inventory, lower
dividends to non-controlling interests and the reclassification of
lease payments from operating to financing activities following the
transition to IFRS 16. This was partly offset by the adverse timing
of payments for returns and rebates and lower disposals of intangible
assets compared with Q3 2018.
9 months 2019
The net cash inflow from operating activities for the nine months
was GBP4,567 million (2018: GBP4,302 million). The increase primarily
reflected improved operating profits, a lower seasonal increase in
trade receivables, lower contingent consideration payments compared
with 2018, which included a milestone payment to Novartis, and the
reclassification of lease payments from operating to financing activities
following the transition to IFRS 16, partly offset by the adverse
timing of payments for returns and rebates and the initial step-down
impact from US Advair generic competition.
Total cash payments to Shionogi in relation to the ViiV Healthcare
contingent consideration liability in the nine months were GBP645
million (2018: GBP584 million), of which GBP572 million was recognised
in cash flows from operating activities and GBP73 million was recognised
in contingent consideration paid within investing cash flows. These
payments are deductible for tax purposes.
Free cash flow was GBP2,474 million in the nine months (2018: GBP2,375
million). The increase primarily reflected improved operating profits,
a lower seasonal increase in trade receivables, lower contingent
consideration payments compared with 2018 which included a milestone
payment to Novartis, reduced dividend payments to non-controlling
interests and the reclassification of lease payments from operating
to financing activities following the transition to IFRS 16. This
was partly offset by the adverse timing of payments for returns and
rebates, as well as the initial step-down impact from US Advair generic
competition, increased capital expenditure including the acquisition
of intangible assets and increased interest payments.
Net debt
At 30 September 2019, net debt was GBP28.1 billion, compared with
GBP21.6 billion at 31 December 2018, comprising gross debt of GBP33.0
billion and cash and liquid investments of GBP4.9 billion, including
GBP0.5 billion reported within Assets held for sale. Net debt increased
due to the GBP3.9 billion acquisition of Tesaro Inc as well as GBP0.2
billion of Tesaro net debt, together with the GBP1.3 billion impact
from the implementation of IFRS 16, the dividend paid to shareholders
of GBP3.0 billion and GBP0.4 billion of unfavourable exchange impacts
from the translation of non-Sterling denominated debt, partly offset
by GBP2.5 billion of free cash flow.
At 30 September 2019, GSK had short-term borrowings (including overdrafts
and lease liabilities) repayable within 12 months of GBP8.2 billion
with loans of GBP3.4 billion repayable in the subsequent year.
Returns to shareholders
Quarterly dividends
The Board has declared a third interim dividend for 2019 of 19 pence
per share (Q3 2018: 19 pence per share).
GSK recognises the importance of dividends to shareholders and aims
to distribute regular dividend payments that will be determined primarily
with reference to the free cash flow generated by the business after
funding the investment necessary to support the Group's future growth.
The Board intends to maintain the dividend for 2019 at the current
level of 80p per share, subject to any material change in the external
environment or performance expectations. Over time, as free cash
flow strengthens, it intends to build free cash flow cover of the
annual dividend to a target range of 1.25-1.50x, before returning
the dividend to growth.
Payment of dividends
The equivalent interim dividend receivable by ADR holders will be
calculated based on the exchange rate on 7 January 2020. An annual
fee of $0.03 per ADS (or $0.0075 per ADS per quarter) (2018: $0.02
per ADS; $0.005 per ADS per quarter) is charged by the Depositary.
The ex-dividend date will be 14 November 2019, with a record date
of 15 November 2019 and a payment date of 9 January 2020.
Paid/ Pence per
payable share GBPm
-------------- ---------- -----
2019
First interim 11 July 2019 19 940
10 October
Second interim 2019 19 941
9 January
Third interim 2020 19 941
2018
First interim 12 July 2018 19 934
11 October
Second interim 2018 19 934
10 January
Third interim 2019 19 935
Fourth interim 11 April 2019 23 1,137
--- ------
80 3,940
--- ------
Weighted average number of shares
Q3 2019 Q3 2018
millions millions
---------- ----------
Weighted average number of shares
- basic 4,951 4,917
Dilutive effect of share options
and share awards 56 55
---------- ----------
Weighted average number of shares
- diluted 5,007 4,972
---------- ----------
Weighted average number of shares
9 months 9 months
2019 2018
millions millions
---------- ----------
Weighted average number of shares
- basic 4,945 4,911
Dilutive effect of share options
and share awards 56 55
---------- ----------
Weighted average number of shares
- diluted 5,001 4,966
---------- ----------
At 30 September 2019, 4,952 million shares (30 September 2018: 4,919
million) were in free issue (excluding Treasury shares and shares
held by the ESOP Trusts). GSK made no share repurchases during the
period. The company issued 0.6 million shares under employee share
schemes in the quarter for proceeds of GBP8 million (Q3 2018: GBP8
million).
At 30 September 2019, the ESOP Trust held 36.8 million GSK shares
against the future exercise of share options and share awards. The
carrying value of GBP201 million has been deducted from other reserves.
The market value of these shares was GBP649 million.
At 30 September 2019, the company held 393.5 million Treasury shares
at a cost of GBP5,505 million, which has been deducted from retained
earnings.
Financial information
Income statements
9 months 9 months
Q3 2019 Q3 2018 2019 2018
GBPm GBPm GBPm GBPm
-------- -------- --------- ---------
TURNOVER 9,385 8,092 24,855 22,624
Cost of sales (3,245) (2,636) (8,615) (7,337)
-------- -------- --------- ---------
Gross profit 6,140 5,456 16,240 15,287
Selling, general and administration (2,892) (2,527) (7,959) (7,295)
Research and development (1,206) (988) (3,325) (2,817)
Royalty income 118 94 269 220
Other operating expense (13) (125) (166) (1,466)
-------- -------- --------- ---------
OPERATING PROFIT 2,147 1,910 5,059 3,929
Finance income 32 10 87 57
Finance expense (245) (233) (706) (589)
Profit on disposal of associates - 3 - 3
Share of after tax profits
of
associates and joint ventures 17 15 70 26
-------- -------- --------- ---------
PROFIT BEFORE TAXATION 1,951 1,705 4,510 3,426
Taxation (235) (193) (759) (680)
Tax rate % 12.0% 11.3% 16.8% 19.8%
-------- -------- --------- ---------
PROFIT AFTER TAXATION 1,716 1,512 3,751 2,746
-------- -------- --------- ---------
Profit attributable to non-controlling
interests 164 94 405 338
Profit attributable to shareholders 1,552 1,418 3,346 2,408
-------- -------- --------- ---------
1,716 1,512 3,751 2,746
-------- -------- --------- ---------
EARNINGS PER SHARE 31.4p 28.8p 67.7p 49.0p
-------- -------- --------- ---------
Diluted earnings per share 31.0p 28.5p 66.9p 48.5p
-------- -------- --------- ---------
Statement of comprehensive income
Q3 2019 Q3 2018
GBPm GBPm
-------- --------
Profit for the period 1,716 1,512
Items that may be reclassified subsequently to income
statement:
Exchange movements on overseas net assets and net
investment hedges (150) 4
Fair value movements on cash flow hedges (33) 3
Reclassification of cash flow hedges to income statement 2 1
(181) 8
-------- --------
Items that will not be reclassified to income statement:
Exchange movements on overseas net assets of non-controlling
interests 38 (11)
Fair value movements on equity investments 52 115
Deferred tax on fair value movements on equity investments 3 -
Re-measurement (losses)/gains on defined benefit
plans (619) 189
Tax on re-measurement (losses)/gains on defined
benefit plans 113 (35)
-------- --------
(413) 258
-------- --------
Other comprehensive (expense)/income for the period (594) 266
-------- --------
Total comprehensive income for the period 1,122 1,778
-------- --------
Total comprehensive income for the period attributable
to:
Shareholders 920 1,695
Non-controlling interests 202 83
-------- --------
1,122 1,778
-------- --------
Statement of comprehensive income
9 months 9 months
2019 2018
GBPm GBPm
--------- ---------
Profit for the period 3,751 2,746
Items that may be reclassified subsequently to income
statement:
Exchange movements on overseas net assets and net
investment hedges (195) (368)
Fair value movements on cash flow hedges (106) 182
Reclassification of cash flow hedges to income statement 3 (164)
Deferred tax on fair value movements on cash flow
hedges - (24)
Deferred tax reversed on reclassification of cash
flow hedges - 20
(298) (354)
--------- ---------
Items that will not be reclassified to income statement:
Exchange movements on overseas net assets of non-controlling
interests 28 (19)
Fair value movements on equity investments 96 268
Deferred tax on fair value movements on equity investments (27) (13)
Re-measurement (losses)/gains on defined benefit
plans (1,192) 1,103
Tax on re-measurement (losses)/gains on defined
benefit plans 215 (205)
--------- ---------
(880) 1,134
--------- ---------
Other comprehensive (expense)/income for the period (1,178) 780
--------- ---------
Total comprehensive income for the period 2,573 3,526
--------- ---------
Total comprehensive income for the period attributable
to:
Shareholders 2,140 3,207
Non-controlling interests 433 319
--------- ---------
2,573 3,526
--------- ---------
Pharmaceuticals turnover - three months ended 30 September 2019
Total US Europe International
--------------------------------------- --------------------------------------- --------------------------------------- ---------------------------------------
Growth Growth Growth Growth
------------------------ ------------------------ ------------------------ ------------------------
GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER%
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Respiratory 806 25 19 465 18 10 200 32 32 141 42 35
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Ellipta products 603 21 15 346 12 5 147 34 33 110 34 29
Anoro Ellipta 143 24 19 94 22 16 30 25 25 19 36 29
Arnuity Ellipta 12 20 10 10 11 11 - - - 2 100 -
Incruse Ellipta 60 (20) (24) 34 (33) (37) 18 - - 8 33 17
Relvar/Breo
Ellipta 249 (3) (8) 103 (26) (32) 71 20 19 75 25 22
Trelegy Ellipta 139 >100 >100 105 >100 >100 28 >100 >100 6 >100 >100
Nucala 203 40 33 119 37 29 53 29 29 31 82 65
HIV 1,267 5 - 797 6 (1) 293 1 1 177 7 3
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Dolutegravir
products 1,211 6 2 780 6 - 275 3 3 156 13 9
Tivicay 441 2 (3) 268 (1) (7) 102 10 10 71 4 -
Triumeq 651 (3) (7) 414 (3) (9) 154 (10) (10) 83 19 14
Juluca 101 >100 >100 83 >100 >100 16 >100 >100 2 >100 >100
Dovato 18 - - 15 - - 3 - - - - -
Epzicom/Kivexa 19 (21) (25) 1 - - 6 (33) (33) 12 (14) (21)
Selzentry 25 (4) (12) 14 - (7) 7 (12) (12) 4 - (25)
Other 12 (43) (33) 2 (67) (50) 5 (17) (17) 5 (44) (33)
Immuno-
inflammation 171 40 33 150 39 30 12 33 33 9 80 >100
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Benlysta 172 42 35 150 39 29 12 20 20 10 >100 >100
Oncology 64 - - 38 - - 26 - - - - -
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Zejula 64 - - 38 - - 26 - - - - -
Established
Pharmaceuticals 2,223 (1) (5) 522 (18) (22) 509 2 2 1,192 8 3
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Established
Respiratory 939 (8) (12) 364 (19) (24) 185 (8) (8) 390 5 -
Seretide/Advair 418 (32) (35) 117 (62) (64) 121 (8) (9) 180 1 (2)
Flixotide/Flovent 171 46 38 110 86 76 18 (5) (5) 43 10 3
Ventolin 231 34 27 136 64 53 27 (7) (7) 68 13 8
Avamys/Veramyst 66 10 3 - - - 15 - - 51 13 4
Other Respiratory 53 - (4) 1 >100 >100 4 (20) - 48 - (6)
Dermatology 118 8 6 - - - 40 - - 78 15 12
Augmentin 151 14 10 - - - 38 (5) (3) 113 22 15
Avodart 150 4 - 2 (33) (33) 51 (14) (15) 97 18 12
Imigran/Imitrex 36 9 6 15 15 8 13 - - 8 14 14
Lamictal 147 (1) (4) 74 - (7) 31 3 - 42 (5) (2)
Seroxat/Paxil 42 - (5) - - - 10 11 11 32 (3) (9)
Valtrex 28 (13) (16) 4 (33) (50) 9 12 12 15 (17) (17)
Other 612 5 2 63 (28) (28) 132 29 31 417 6 1
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Pharmaceuticals 4,531 7 3 1,972 4 (2) 1,040 9 9 1,519 10 5
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Pharmaceuticals turnover - nine months ended 30 September 2019
Total US Europe International
--------------------------------------- --------------------------------------- --------------------------------------- ---------------------------------------
Growth Growth Growth Growth
------------------------ ------------------------ ------------------------ ------------------------
GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER%
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Respiratory 2,189 23 18 1,221 15 8 569 32 32 399 38 35
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Ellipta products 1,639 17 13 900 8 2 419 30 30 320 33 30
Anoro Ellipta 373 12 8 233 6 - 87 21 21 53 33 30
Arnuity Ellipta 33 6 - 28 - (4) - - - 5 67 33
Incruse Ellipta 185 (6) (10) 109 (13) (19) 55 2 2 21 24 24
Relvar/Breo
Ellipta 702 (7) (10) 274 (31) (35) 208 14 14 220 23 21
Trelegy Ellipta 346 >100 >100 256 >100 >100 69 >100 >100 21 >100 >100
Nucala 550 41 35 321 37 29 150 39 39 79 65 56
HIV 3,597 4 1 2,222 4 (2) 860 (2) (2) 515 17 16
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Dolutegravir
products 3,425 7 3 2,170 5 (1) 808 1 1 447 27 26
Tivicay 1,236 4 - 733 (3) (9) 295 8 8 208 31 30
Triumeq 1,911 (2) (6) 1,203 (3) (9) 473 (10) (10) 235 22 21
Juluca 255 >100 >100 214 >100 >100 37 >100 >100 4 >100 >100
Dovato 23 - - 20 - - 3 - - - - -
Epzicom/Kivexa 60 (31) (31) 3 - - 18 (45) (45) 39 (24) (24)
Selzentry 74 (12) (14) 40 (5) (10) 22 (15) (15) 12 (25) (25)
Other 38 (37) (37) 9 (50) (50) 12 (33) (33) 17 (29) (29)
Immuno-
inflammation 443 32 25 387 29 22 34 31 31 22 >100 >100
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Benlysta 443 32 26 387 29 22 34 26 26 22 >100 >100
Oncology 164 - - 97 - - 67 - - - - -
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Zejula 163 - - 97 - - 66 - - - - -
Established
Pharmaceuticals 6,603 (4) (6) 1,517 (18) (22) 1,547 (5) (5) 3,539 3 2
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Established
Respiratory 2,935 (7) (9) 1,074 (16) (21) 611 (11) (11) 1,250 5 4
Seretide/Advair 1,316 (26) (27) 398 (50) (53) 383 (15) (15) 535 1 -
Flixotide/Flovent 443 3 - 253 6 - 66 (1) (1) 124 1 -
Ventolin 712 36 32 423 75 64 89 (5) (5) 200 8 8
Avamys/Veramyst 252 11 8 - - - 54 (5) (5) 198 16 12
Other Respiratory 212 7 2 - - - 19 (10) (5) 193 8 3
Dermatology 333 4 4 3 50 50 119 1 1 211 6 6
Augmentin 444 5 4 - - - 125 (5) (5) 319 9 9
Avodart 434 3 1 4 (56) (56) 160 (11) (12) 270 15 12
Imigran/Imitrex 103 2 - 44 13 8 39 (9) (9) 20 5 5
Lamictal 421 (8) (11) 211 (7) (12) 84 1 - 126 (15) (15)
Seroxat/Paxil 122 (2) (3) - - - 28 (3) (3) 94 (1) (3)
Valtrex 80 (11) (13) 10 (29) (36) 23 - - 47 (11) (13)
Other 1,731 (4) (5) 171 (37) (40) 358 8 8 1,202 1 (1)
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Pharmaceuticals 12,996 4 1 5,444 2 (4) 3,077 4 4 4,475 7 6
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Vaccines turnover - three months ended 30 September 2019
Total US Europe International
--------------------------------------- --------------------------------------- --------------------------------------- ---------------------------------------
Growth Growth Growth Growth
------------------------ ------------------------ ------------------------ ------------------------
GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER%
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Meningitis 371 13 9 234 22 14 90 8 10 47 (13) (11)
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Bexsero 255 23 19 145 33 24 84 9 10 26 24 29
Menveo 106 4 (1) 89 7 1 4 - - 13 (13) (13)
Other 10 (50) (50) - - - 2 - - 8 (56) (56)
Influenza 371 22 15 318 26 19 34 3 3 19 - (5)
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Fluarix,
FluLaval 371 22 15 318 26 19 34 3 3 19 - (5)
Shingles 535 87 76 496 80 69 16 >100 >100 23 >100 >100
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Shingrix 535 87 76 496 80 69 16 >100 >100 23 >100 >100
Established
Vaccines 1,031 3 (1) 393 16 9 256 (10) (11) 382 1 (1)
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Infanrix,
Pediarix 199 24 19 106 61 53 55 (10) (10) 38 15 6
Boostrix 187 19 15 101 7 2 42 (2) (2) 44 >100 >100
Hepatitis 216 1 (2) 131 6 - 57 (14) (14) 28 22 17
Rotarix 167 10 7 36 (3) (8) 28 - - 103 18 15
Synflorix 116 (3) (4) - - - 11 (8) (8) 105 (2) (4)
Priorix,
Priorix
Tetra,
Varilrix 57 (30) (31) - - - 23 (45) (45) 34 (12) (15)
Cervarix 15 (73) (73) - - - 5 67 67 10 (81) (81)
Other 74 9 6 19 - (21) 35 17 10 20 4 25
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Vaccines 2,308 20 15 1,441 36 28 396 (1) (2) 471 2 -
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Vaccines turnover - nine months ended 30 September 2019
Total US Europe International
--------------------------------------- --------------------------------------- --------------------------------------- ---------------------------------------
Growth Growth Growth Growth
------------------------ ------------------------ ------------------------ ------------------------
GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER%
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Meningitis 815 18 16 405 25 18 260 1 1 150 35 43
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Bexsero 567 21 19 248 40 32 243 2 2 76 41 54
Menveo 201 7 3 157 7 1 12 (8) (8) 32 14 21
Other 47 34 34 - - - 5 (17) (17) 42 45 45
Influenza 403 22 16 320 28 20 34 (3) (3) 49 9 9
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Fluarix,
FluLaval 403 22 16 320 28 20 34 (3) (3) 49 9 9
Shingles 1,278 >100 >100 1,175 >100 >100 35 >100 >100 68 >100 91
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Shingrix 1,278 >100 >100 1,175 >100 >100 35 >100 >100 68 >100 91
Established
Vaccines 2,919 3 1 1,096 17 11 809 (9) (9) 1,014 1 -
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Infanrix,
Pediarix 577 12 9 292 32 25 169 (18) (18) 116 32 30
Boostrix 454 20 17 233 16 9 122 (2) (2) 99 90 90
Hepatitis 679 10 6 418 18 11 178 (4) (4) 83 6 5
Rotarix 417 8 6 106 5 (1) 84 2 4 227 11 10
Synflorix 344 8 8 - - - 44 19 19 300 7 6
Priorix,
Priorix
Tetra,
Varilrix 162 (33) (33) - - - 74 (42) (42) 88 (23) (23)
Cervarix 63 (49) (49) - - - 16 7 7 47 (56) (56)
Other 223 (11) (12) 47 (15) (24) 122 8 7 54 (33) (30)
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Vaccines 5,415 23 19 2,996 47 39 1,138 (4) (4) 1,281 7 7
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Balance sheet
30 September 30 September 31 December
2019 2018 2018
GBPm GBPm GBPm
------------- ------------- ------------
ASSETS
Non-current assets
Property, plant and equipment 10,668 10,923 11,058
Right of use assets 1,032 - -
Goodwill 11,046 5,848 5,789
Other intangible assets 32,455 17,263 17,202
Investments in associates and
joint ventures 334 221 236
Other investments 1,592 1,393 1,322
Deferred tax assets 3,909 3,412 3,887
Derivative financial instruments 161 51 69
Other non-current assets 1,058 2,075 1,576
------------- ------------- ------------
Total non-current assets 62,255 41,186 41,139
------------- ------------- ------------
Current assets
Inventories 6,776 5,788 5,476
Current tax recoverable 169 257 229
Trade and other receivables 8,173 7,292 6,423
Derivative financial instruments 518 56 188
Liquid investments 86 80 84
Cash and cash equivalents 4,305 3,793 3,874
Assets held for sale 963 152 653
------------- ------------- ------------
Total current assets 20,990 17,418 16,927
------------- ------------- ------------
TOTAL ASSETS 83,245 58,604 58,066
------------- ------------- ------------
LIABILITIES
Current liabilities
Short-term borrowings (8,216) (2,902) (5,793)
Contingent consideration liabilities (838) (818) (837)
Trade and other payables (14,737) (13,093) (14,037)
Derivative financial instruments (310) (63) (127)
Current tax payable (610) (813) (965)
Short-term provisions (803) (706) (732)
------------- ------------- ------------
Total current liabilities (25,514) (18,395) (22,491)
------------- ------------- ------------
Non-current liabilities
Long-term borrowings (24,833) (24,808) (20,271)
Corporation tax payable (273) (272) (272)
Deferred tax liabilities (3,914) (1,223) (1,156)
Pensions and other post-employment
benefits (3,793) (3,079) (3,125)
Other provisions (686) (652) (691)
Derivative financial instruments - - (1)
Contingent consideration liabilities (5,288) (5,414) (5,449)
Other non-current liabilities (884) (1,038) (938)
------------- ------------- ------------
Total non-current liabilities (39,671) (36,486) (31,903)
------------- ------------- ------------
TOTAL LIABILITIES (65,185) (54,881) (54,394)
------------- ------------- ------------
NET ASSETS 18,060 3,723 3,672
------------- ------------- ------------
EQUITY
Share capital 1,345 1,344 1,345
Share premium account 3,165 3,049 3,091
Retained earnings 5,265 (2,081) (2,137)
Other reserves 1,997 2,164 2,061
------------- ------------- ------------
Shareholders' equity 11,772 4,476 4,360
Non-controlling interests 6,288 (753) (688)
------------- ------------- ------------
TOTAL EQUITY 18,060 3,723 3,672
------------- ------------- ------------
Statement of changes in equity
Share- Non-
Share Share Retained Other holder's controlling Total
capital premium earnings reserves equity interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ------------ ------------ ------------ ------------ ------------ ------------
As previously
reported 1,345 3,091 (2,137) 2,061 4,360 (688) 3,672
Implementation of
IFRS 16 - - (93) - (93) - (93)
------------ ------------ ------------ ------------ ------------ ------------ ------------
At 1 January 2019,
as adjusted 1,345 3,091 (2,230) 2,061 4,267 (688) 3,579
Profit for the
period 3,346 3,346 405 3,751
Other
comprehensive
(expense)/income
for the period (1,171) (35) (1,206) 28 (1,178)
------------ ------------ ------------ ------------ ------------
Total
comprehensive
income/(expense)
for the period 2,175 (35) 2,140 433 2,573
------------ ------------ ------------ ------------ ------------
Distributions to
non-controlling
interests (313) (313)
Changes to
non-controlling
interests 10 10
Dividends to
shareholders (3,012) (3,012) (3,012)
Recognition of
interest
in Consumer
Healthcare Joint
Venture 8,082 8,082 6,846 14,928
Shares issued - 41 41 41
Realised after tax
profits
on disposal of
equity
investments (4) 4 -
Shares acquired by
ESOP
Trusts 33 295 (328) -
Write-down on
shares held
by ESOP Trusts (295) 295 -
Share-based
incentive plans 254 254 254
------------ ------------ ------------ ------------ ------------ ------------ ------------
At 30 September
2019 1,345 3,165 5,265 1,997 11,772 6,288 18,060
------------ ------------ ------------ ------------ ------------ ------------ ------------
As previously
reported 1,343 3,019 (6,477) 2,047 (68) 3,557 3,489
Implementation of
IFRS 15 (4) (4) (4)
Implementation of
IFRS 9 277 (288) (11) (11)
------------ ------------ ------------ ------------ ------------ ------------ ------------
At 1 January 2018,
as adjusted 1,343 3,019 (6,204) 1,759 (83) 3,557 3,474
Profit for the
period 2,408 2,408 338 2,746
Other
comprehensive
income/(expense)
for the period 541 258 799 (19) 780
------------ ------------ ------------ ------------ ------------
Total
comprehensive
income
for the period 2,949 258 3,207 319 3,526
------------ ------------ ------------ ------------ ------------
Distributions to
non-controlling
interests (532) (532)
Contributions from
non-controlling
interests 21 21
Derecognition of
non-controlling
interests
in Consumer
Healthcare
Joint Venture 4,056 4,056 (4,118) (62)
Dividends to
shareholders (2,993) (2,993) (2,993)
Shares issued 1 30 31 31
Realised profits
on disposal
of equity
investments 54 (54) -
Write-down on
shares held
by ESOP Trusts (201) 201 -
Share-based
incentive plans 258 258 258
------------ ------------ ------------ ------------ ------------ ------------ ------------
At 30 September
2018 1,344 3,049 (2,081) 2,164 4,476 (753) 3,723
------------ ------------ ------------ ------------ ------------ ------------ ------------
Cash flow statement - nine months ended 30 September 2019
9 months 9 months
2019 2018
GBPm GBPm
--------- ---------
Profit after tax 3,751 2,746
Tax on profits 759 680
Share of after tax profits of associates and
joint ventures (70) (26)
Profit on disposal of interest in associates - (3)
Net finance expense 619 532
Depreciation, amortisation and other adjusting
items 2,472 1,169
Increase in working capital (1,477) (1,927)
Contingent consideration paid (577) (792)
Increase in other net liabilities (excluding
contingent consideration paid) 149 2,936
--------- ---------
Cash generated from operations 5,626 5,315
Taxation paid (1,059) (1,013)
--------- ---------
Net cash inflow from operating activities 4,567 4,302
--------- ---------
Cash flow from investing activities
Purchase of property, plant and equipment (785) (842)
Proceeds from sale of property, plant and equipment 86 70
Purchase of intangible assets (613) (319)
Proceeds from sale of intangible assets 88 165
Purchase of equity investments (239) (298)
Proceeds from sale of equity investments 51 87
Purchase of businesses, net of cash acquired (3,548) -
Contingent consideration paid (83) (123)
Disposal of businesses (2) 28
Proceeds from disposal of interest in associates - 3
Investment in associates and joint ventures (6) (5)
Interest received 66 55
Decrease in liquid investments 1 -
Dividends from associates and joint ventures - 39
--------- ---------
Net cash outflow from investing activities (4,984) (1,140)
--------- ---------
Cash flow from financing activities
Issue of share capital 41 31
Increase in short-term loans 4,350 2,050
Increase in long-term loans 4,822 10,090
Repayment of short-term loans (4,253) (2,037)
Repayment of lease liabilities (159) (17)
Purchase of non-controlling interests (7) (9,321)
Interest paid (539) (458)
Dividends paid to shareholders (3,012) (2,993)
Distributions to non-controlling interests (313) (535)
Contributions from non-controlling interests - 21
Other financing items (11) 26
--------- ---------
Net cash inflow/(outflow) from financing activities 919 (3,143)
--------- ---------
Increase in cash and bank overdrafts in the
period 502 19
--------- ---------
Cash and bank overdrafts at beginning of the
period 4,087 3,600
Exchange adjustments 20 (32)
Increase in cash and bank overdrafts 502 19
--------- ---------
Cash and bank overdrafts at end of the period 4,609 3,587
--------- ---------
Cash and bank overdrafts at end of the period
comprise:
Cash and cash equivalents 4,305 3,793
Cash and cash equivalents reported in assets
held for sale 519 -
--------- ---------
4,824 3,793
Overdrafts (215) (206)
--------- ---------
4,609 3,587
--------- ---------
Segment information
Operating segments are reported based on the financial information
provided to the Chief Executive Officer and the responsibilities
of the Corporate Executive Team (CET). GSK reports results under
four segments: Pharmaceuticals; Pharmaceuticals R&D; Vaccines and
Consumer Healthcare, and individual members of the CET are responsible
for each segment.
The Pharmaceuticals R&D segment is the responsibility of the Chief
Scientific Officer and President, R&D and is reported as a separate
segment. The operating profit of this segment excludes the ViiV Healthcare
operating profit (including R&D expenditure) that is reported within
the Pharmaceuticals segment.
The Group's management reporting process allocates intra-Group profit
on a product sale to the market in which that sale is recorded, and
the profit analyses below have been presented on that basis.
Corporate and other unallocated turnover and costs include the results
of certain Consumer Healthcare products which are being held for
sale in a number of markets in order to meet anti-trust approval
requirements, together with the costs of corporate functions.
Turnover by segment
Q3 2019 Q3 2018 Growth Growth
GBPm GBPm GBP% CER%
-------- -------- ------- -------
Pharmaceuticals 4,531 4,221 7 3
Vaccines 2,308 1,924 20 15
Consumer Healthcare 2,526 1,947 30 25
-------- -------- ------- -------
9,365 8,092 16 11
Corporate and other unallocated
turnover 20 -
-------- -------- ------- -------
Total turnover 9,385 8,092 16 11
-------- -------- ------- -------
Operating profit by segment
Q3 2019 Q3 2018 Growth Growth
GBPm GBPm GBP% CER%
-------- -------- ------- -------
Pharmaceuticals 1,986 2,028 (2) (7)
Pharmaceuticals R&D (893) (667) 34 28
-------- -------- ------- -------
Pharmaceuticals including R&D 1,093 1,361 (20) (24)
Vaccines 1,162 827 41 30
Consumer Healthcare 613 429 43 34
-------- -------- ------- -------
Segment profit 2,868 2,617 10 3
Corporate and other unallocated
costs (82) (93)
-------- -------- ------- -------
Adjusted operating profit 2,786 2,524 10 3
Adjusting items (639) (614)
-------- -------- ------- -------
Total operating profit 2,147 1,910 12 3
Finance income 32 10
Finance costs (245) (233)
Profit on disposal of associates - 3
Share of after tax profits of
associates and joint ventures 17 15
-------- -------- ------- -------
Profit before taxation 1,951 1,705 14 4
-------- -------- ------- -------
Turnover by segment
9 months 9 months
2019 2018 Growth Growth
GBPm GBPm GBP% CER%
--------- --------- ------- -------
Pharmaceuticals 12,996 12,459 4 1
Vaccines 5,415 4,415 23 19
Consumer Healthcare 6,424 5,750 12 10
--------- --------- ------- -------
24,835 22,624 10 7
Corporate and other unallocated
turnover 20 -
--------- --------- ------- -------
Total turnover 24,855 22,624 10 7
--------- --------- ------- -------
Operating profit by segment
9 months 9 months
2019 2018 Growth Growth
GBPm GBPm GBP% CER%
--------- --------- ------- -------
Pharmaceuticals 6,029 6,080 (1) (5)
Pharmaceuticals R&D (2,442) (1,898) 29 24
--------- --------- ------- -------
Pharmaceuticals including R&D 3,587 4,182 (14) (17)
Vaccines 2,388 1,523 57 47
Consumer Healthcare 1,434 1,165 23 19
--------- --------- ------- -------
Segment profit 7,409 6,870 8 3
Corporate and other unallocated
costs (289) (321)
--------- --------- ------- -------
Adjusted operating profit 7,120 6,549 9 3
Adjusting items (2,061) (2,620)
--------- --------- ------- -------
Total operating profit 5,059 3,929 29 20
Finance income 87 57
Finance costs (706) (589)
Profit on disposal of associates - 3
Share of after tax profits of
associates
and joint ventures 70 26
--------- --------- ------- -------
Profit before taxation 4,510 3,426 32 22
--------- --------- ------- -------
Legal matters
The Group is involved in significant legal and administrative proceedings,
principally product liability, intellectual property, tax, anti-trust
and governmental investigations as well as related private litigation,
which are more fully described in the 'Legal Proceedings' note in
the Annual Report 2018.
At 30 September 2019, the Group's aggregate provision for legal and
other disputes (not including tax matters described on page 32) was
GBP0.4 billion (31 December 2018: GBP0.2 billion). The Group may
become involved in significant legal proceedings in respect of which
it is not possible to make a reliable estimate of the expected financial
effect, if any, that could result from ultimate resolution of the
proceedings. In these cases, the Group would provide appropriate
disclosures about such cases, but no provision would be made.
A significant matter since the date of the Annual Report 2018 is
as follows: a trial date of 12 November 2019 has been set in the
US federal courts with respect to claims by 38 health insurance companies
against the Group, relating to reimbursements the insurers made for
17 medicines manufactured at the Group's former Cidra plant in Puerto
Rico.
The ultimate liability for legal claims may vary from the amounts
provided and is dependent upon the outcome of litigation proceedings,
investigations and possible settlement negotiations. The Group's
position could change over time, and, therefore, there can be no
assurance that any losses that result from the outcome of any legal
proceedings will not exceed by a material amount the amount of the
provisions reported in the Group's financial accounts.
Additional information
Accounting policies and basis of preparation
This unaudited Results Announcement contains condensed financial
information for the three and nine months ended 30 September 2019,
and should be read in conjunction with the Annual Report 2018, which
was prepared in accordance with International Financial Reporting
Standards as adopted by the European Union. This Results Announcement
has been prepared applying consistent accounting policies to those
applied by the Group in the Annual Report 2018, except for the implementation
of IFRS 16 'Leases' from 1 January 2019.
IFRS 16 'Leases' was implemented by the Group from 1 January 2019.
The new standard replaces IAS 17 'Leases' and requires lease liabilities
and right of use assets to be recognised on the balance sheet for
almost all leases. GSK has applied the modified transition approach
on adoption with no restatement of comparative information. The adjustment
made on the transition date of 1 January 2019 to each balance sheet
line item is as follows:
31 December
2018 1 January
as previously IFRS 16 2019
reported adjustments as adjusted
GBPm GBPm GBPm
--------------- ------------- -------------
Property, plant and equipment 11,058 (98) 10,960
Right of use assets - 1,071 1,071
Other non-current assets 1,576 (11) 1,565
Trade and other receivables 6,423 3 6,426
Deferred tax assets 3,887 39 3,926
Short-term borrowings (5,793) (229) (6,022)
Long-term borrowings (20,271) (1,074) (21,345)
Trade and other payables (14,037) 10 (14,027)
Current and non-current provisions (1,423) 35 (1,388)
Other non-current liabilities (938) 160 (778)
Deferred tax liabilities (1,156) 1 (1,155)
--------------- ------------- -------------
Total effect on net assets 3,672 (93) 3,579
--------------- ------------- -------------
Retained earnings (2,137) (93) (2,230)
--------------- ------------- -------------
Total effect on equity 3,672 (93) 3,579
--------------- ------------- -------------
The new Standard has not had a material impact on the Group's Income
statement or Cash flow statement.
The Group assesses whether a contract is or contains a lease at inception
of the contract. The Group recognises a right of use asset and a
corresponding lease liability with respect to all lease arrangements
in which it is the lessee, except for short--term leases (defined
as leases with a lease term of 12 months or less) and leases of low
value assets. For these leases, the Group recognises the lease payments
as an operating expense on a straight--line basis over the term of
the lease. The lease liability is initially measured at the present
value of the lease payments that are not paid at the commencement
date. The discount rate applied is the rate implicit in the lease.
If this rate cannot be readily determined, the Group uses its incremental
borrowing rate.
The lease liability is subsequently measured by increasing the carrying
amount to reflect interest on the lease liability (using the effective
interest method) and by reducing the carrying amount to reflect the
lease payments made.
The right of use assets primarily comprise property and reflect the
initial measurement of the corresponding lease liability, lease payments
made at or before the commencement day and any initial direct costs.
They are subsequently measured at cost less accumulated depreciation
and impairment losses.
This Results Announcement does not constitute statutory accounts
of the Group within the meaning of sections 434(3) and 435(3) of
the Companies Act 2006. The full Group accounts for 2018 were published
in the Annual Report 2018, which has been delivered to the Registrar
of Companies and on which the report of the independent auditors
was unqualified and did not contain a statement under section 498
of the Companies Act 2006.
Exchange rates
GSK operates in many countries, and earns revenues and incurs costs
in many currencies. The results of the Group, as reported in Sterling,
are affected by movements in exchange rates between Sterling and
other currencies. Average exchange rates, as modified by specific
transaction rates for large transactions, prevailing during the period,
are used to translate the results and cash flows of overseas subsidiaries,
associates and joint ventures into Sterling. Period-end rates are
used to translate the net assets of those entities. The currencies
which most influenced these translations and the relevant exchange
rates were:
9 months 9 months
Q3 2019 Q3 2018 2019 2018 2018
-------- -------- --------- --------- -----
Average rates:
US$/GBP 1.23 1.31 1.27 1.35 1.33
Euro/GBP 1.11 1.11 1.13 1.13 1.13
Yen/GBP 133 146 139 148 147
Period-end rates:
US$/GBP 1.23 1.30 1.23 1.30 1.27
Euro/GBP 1.13 1.12 1.13 1.12 1.11
Yen/GBP 133 148 133 148 140
During Q3 2019 average Sterling exchange rates were weaker against
the US Dollar and Yen and flat against the Euro compared with the
same period in 2018. Similarly, during the nine months ended 30 September
2019, average Sterling exchange rates were weaker against the US
Dollar and the Yen and flat against the Euro. Period-end Sterling
exchange rates were weaker against the US Dollar and Yen but stronger
against the Euro compared with the 2018 period-end rates.
Net assets
The book value of net assets increased by GBP14,388 million from
GBP3,672 million at 31 December 2018 to GBP18,060 million at 30 September
2019. This primarily reflected the acquisition of the Pfizer consumer
healthcare business partly offset by the re-measurement losses on
defined benefit plans during the period.
The carrying value of investments in associates and joint ventures
at 30 September 2019 was GBP334 million (31 December 2018: GBP236
million), with a market value of GBP348 million (31 December 2018:
GBP487 million).
At 30 September 2019, the net deficit on the Group's pension plans
was GBP2,110 million compared with GBP995 million at 31 December
2018. The increase in the net deficit primarily arose from decreases
in the rates used to discount UK pension liabilities from 2.9% to
1.8%, and US pension liabilities from 4.2% to 3.1%, partly offset
by higher UK assets and a reduction in the UK inflation rate from
3.2% to 3.1%.
The estimated present value of the potential redemption amount of
the Pfizer put option related to ViiV Healthcare, recorded in Other
payables in Current liabilities, was GBP1,157 million (31 December
2018: GBP1,240 million).
Contingent consideration amounted to GBP6,126 million at 30 September
2019 (31 December 2018: GBP6,286 million), of which GBP5,713 million
(31 December 2018: GBP5,937 million) represented the estimated present
value of amounts payable to Shionogi relating to ViiV Healthcare
and GBP359 million (31 December 2018: GBP296 million) represented
the estimated present value of contingent consideration payable to
Novartis related to the Vaccines acquisition.
Of the contingent consideration payable (on a post-tax basis) to
Shionogi at 30 September 2019, GBP805 million (31 December 2018:
GBP815 million) is expected to be paid within one year.
Movements in contingent consideration were as follows:
ViiV Healthcare Group
9 months 2019 GBPm GBPm
---------------- ------
Contingent consideration at beginning of the
period 5,937 6,286
Re-measurement through income statement 421 500
Cash payments: operating cash flows (572) (577)
Cash payments: investing activities (73) (83)
Contingent consideration at end of the period 5,713 6,126
---------------- ------
ViiV Healthcare Group
9 months 2018 GBPm GBPm
---------------- ------
Contingent consideration at beginning of the
period 5,542 6,172
Re-measurement through income statement 927 975
Cash payments: operating cash flows (517) (792)
Cash payments: investing activities (67) (123)
Contingent consideration at end of the period 5,885 6,232
---------------- ------
Contingent liabilities
There were contingent liabilities at 30 September 2019 in respect
of guarantees and indemnities entered into as part of the ordinary
course of the Group's business. No material losses are expected to
arise from such contingent liabilities. Provision is made for the
outcome of legal and tax disputes where it is both probable that
the Group will suffer an outflow of funds and it is possible to make
a reliable estimate of that outflow. Descriptions of the significant
legal disputes to which the Group is a party are set out on page
53.
Business acquisition
The acquisition of the Pfizer consumer healthcare business completed
on 31 July 2019.
GSK and Pfizer have contributed their respective Consumer Healthcare
businesses into a new Consumer Healthcare Joint Venture in a non-cash
transaction, whereby GSK has acquired Pfizer's consumer healthcare
business in return for shares in the Joint Venture. GSK has an equity
interest of 68% and majority control of the Joint Venture and Pfizer
has an equity interest of 32%.
The non-controlling interest in the Consumer Healthcare Joint Venture,
calculated applying the partial goodwill method, represents Pfizer's
share of the net assets of the Joint Venture.
The goodwill in the business acquired from Pfizer represents the
potential for further synergies arising from combining the acquired
business with GSK's existing business together with the value of
the workforce acquired. The goodwill recognised is not expected to
be deductible for tax purposes.
Since acquisition on 31 July 2019, turnover of GBP0.5 billion arising
from the Pfizer consumer healthcare business has been included in
Group turnover and there has been no material impact on Group operating
profit.
The fair values of the net assets acquired, including goodwill, are
as follows:
GBPbn
------
Net assets acquired:
Intangible assets 12.5
Inventory 1.0
Other net assets 0.2
Deferred tax liabilities (2.7)
------
11.0
Non-controlling interest (3.5)
Goodwill 3.9
------
Total consideration 11.4
------
These amounts are provisional and subject to change.
Reconciliation of cash flow to movements in net debt
9 months 9 months
2019 2018
GBPm GBPm
--------- ---------
Net debt, as previously reported (21,621) (13,178)
Implementation of IFRS 16 (1,303) -
--------- ---------
Net debt at beginning of the period, as adjusted (22,924) (13,178)
Increase in cash and bank overdrafts 502 19
Decrease in liquid investments (1) -
Net increase in short-term loans (97) (13)
Increase in long-term loans (4,822) (10,090)
Repayment of lease liabilities 159 17
Debt of subsidiary undertakings acquired (518) -
Exchange adjustments (406) (590)
Other non-cash movements (32) (2)
--------- ---------
Increase in net debt (5,215) (10,659)
--------- ---------
Net debt at end of the period (28,139) (23,837)
--------- ---------
Net debt analysis
30 September 30 September 31 December
2019 2018 2018
GBPm GBPm GBPm
------------- ------------- ------------
Liquid investments 86 80 84
Cash and cash equivalents 4,305 3,793 3,874
Cash and cash equivalents reported
in assets
held for sale 519 - 485
Short-term borrowings (8,216) (2,902) (5,793)
Long-term borrowings (24,833) (24,808) (20,271)
-------------
Net debt at end of the period (28,139) (23,837) (21,621)
------------- ------------- ------------
Free cash flow reconciliation
9 months 9 months
Q3 2019 2019 2018
GBPm GBPm GBPm
-------- --------- ---------
Net cash inflow from operating activities 2,515 4,567 4,302
Purchase of property, plant and
equipment (284) (785) (842)
Proceeds from sale of property,
plant and equipment 16 86 70
Purchase of intangible assets (175) (613) (319)
Proceeds from disposals of intangible
assets 76 88 165
Net finance costs (60) (473) (403)
Dividends from joint ventures and
associates - - 39
Contingent consideration paid (reported
in investing
activities) (32) (83) (123)
Distributions to non-controlling
interests (117) (313) (535)
Contributions from non-controlling
interests - - 21
Free cash flow 1,939 2,474 2,375
-------- --------- ---------
Reporting definitions
Total and Adjusted results
Total reported results represent the Group's overall performance.
GSK also uses a number of adjusted, non-IFRS, measures to report
the performance of its business. Adjusted results and other non-IFRS
measures may be considered in addition to, but not as a substitute
for or superior to, information presented in accordance with IFRS.
Adjusted results are defined on page 9 and other non-IFRS measures
are defined below.
Free cash flow
Free cash flow is defined as the net cash inflow from operating activities
less capital expenditure on property, plant and equipment and intangible
assets, contingent consideration payments, net interest, and dividends
paid to non-controlling interests plus proceeds from the sale of
property, plant and equipment and intangible assets, and dividends
received from joint ventures and associates. It is used by management
for planning and reporting purposes and in discussions with and presentations
to investment analysts and rating agencies. Free cash flow growth
is calculated on a reported basis. A reconciliation of net cash inflow
from operations to free cash flow is set out on page 57.
Free cash flow conversion
Free cash flow conversion is free cash flow as a percentage of earnings.
Working capital
Working capital represents inventory and trade receivables less trade
payables.
CER and AER 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.
CER% represents growth at constant exchange rates. GBP% or AER% represents
growth at actual exchange rates.
Pro-forma growth
The acquisition of the Pfizer consumer healthcare business completed
on 31 July 2019 and so GSK's reported results include two months
of results of the former Pfizer consumer healthcare business from
1 August 2019.
The Group has presented pro-forma growth rates at CER for turnover,
Adjusted operating profit and operating profit by business taking
account of this transaction. Pro-forma growth rates for the quarter
are calculated comparing reported results for Q3 2019, calculated
applying the exchange rates used in the comparative period, with
the results for Q3 2018 adjusted to include the equivalent two months
of results of the former Pfizer consumer healthcare business during
Q3 2018, as consolidated (in US$) and included in Pfizer's US GAAP
results. Similarly, pro-forma growth rates at CER for the nine months
to 30 September 2019 are calculated comparing reported results for
the nine months to 30 September 2019, calculated applying the exchange
rates used in the comparative period, with the results for the nine
months to 30 September 2018, adjusted to include the equivalent two
months of results of the former Pfizer consumer healthcare business,
as consolidated (in US$) and included in Pfizer's US GAAP results.
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.
Gardasil is a trademark of Merck Sharp & Dohme Corp.
Outlook, assumptions and cautionary statements
2016-2020 outlook
In May 2015, GSK announced that it expected Group sales to grow at
CER at a low-to-mid single digits percentage CAGR and Adjusted EPS
to grow at CER at a mid-to-high single digit percentage CAGR for
the period 2016-2020. On 3 December 2018, GSK announced that it continued
to expect to deliver on its previously published Group outlooks to
2020, but, following the acquisition of Tesaro, expected Adjusted
EPS growth at CER for the period 2016-2020 to be at the bottom end
of the mid-to-high single digit percentage CAGR range. These outlooks
are based on 2015 exchange rates.
Assumptions related to 2019 guidance and 2016-2020 outlook
In outlining the expectations for 2019 and the five-year period 2016-2020,
the Group has made certain assumptions about the healthcare sector,
the different markets in which the Group operates and the delivery
of revenues and financial benefits from its current portfolio, pipeline
and restructuring programmes.
For the Group specifically, over the period to 2020, GSK expects
further declines in sales of Seretide/Advair. The introduction of
a generic alternative to Advair in the US has been factored into
the Group's assessment of its future performance. The Group assumes
no premature loss of exclusivity for other key products over the
period.
The assumptions for the Group's revenue, earnings and dividend expectations
assume no material interruptions to supply of the Group's products,
no material mergers, acquisitions or disposals, except for the acquisition
of Tesaro, the proposed divestment of Horlicks and other Consumer
Healthcare products to Unilever and the formation of a new Consumer
Healthcare Joint Venture with Pfizer, all announced in December 2018,
no material litigation or investigation costs for the Company (save
for those that are already recognised or for which provisions have
been made), no share repurchases by the Company, and no change in
the Group's shareholdings in ViiV Healthcare. The assumptions also
assume no material changes in the macro-economic and healthcare environment.
The 2019 guidance and 2016-2020 outlook have factored in all divestments
and product exits since 2015, including the divestment and exit of
more than 130 non-core tail brands (GBP0.5 billion in annual sales)
as announced on 26 July 2017 and the product divestments planned
in connection with the proposed Consumer Healthcare transaction with
Pfizer.
The Group's expectations assume successful delivery of the Group's
integration and restructuring plans over the period 2016-2020, including
the extension and enhancement to the combined programme announced
on 26 July 2017 as well as the new major restructuring plan announced
on 25 July 2018. They also assume that the proposed divestment of
Horlicks and other Consumer Healthcare products to Unilever closes
in Q1 2020 and that the integration and investment programmes following
the Tesaro acquisition and the Consumer Healthcare Joint Venture
with Pfizer over this period are delivered successfully. Material
costs for investment in new product launches and R&D have been factored
into the expectations given. Given the potential development options
in the Group's pipeline, the outlook may be affected by additional
data-driven R&D investment decisions. The expectations are given
on a constant currency basis (2016-2020 outlook at 2015 CER).
Due to the progress made in settling historic disputes together with
the changing product mix we expect the effective tax rate for the
year to be 17%.
Assumptions and cautionary statement regarding forward-looking statements
The Group's management believes that the assumptions outlined above
are reasonable, and that the aspirational targets described in this
report are achievable based on those assumptions. However, given
the longer term nature of these expectations and targets, they are
subject to greater uncertainty, including potential material impacts
if the above assumptions are not realised, and other material impacts
related to foreign exchange fluctuations, macro-economic activity,
changes in regulation, government actions or intellectual property
protection, actions by our competitors, and other risks inherent
to the industries in which we operate.
This document contains statements that are, or may be deemed to be,
"forward-looking statements". Forward-looking statements give the
Group's current expectations or forecasts of future events. An investor
can identify these statements by the fact that they do not relate
strictly to historical or current facts. They use words such as 'anticipate',
'estimate', 'expect', 'intend', 'will', 'project', 'plan', 'believe',
'target' and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance.
In particular, these include statements relating to future actions,
prospective products or product approvals, future performance or
results of current and anticipated products, sales efforts, expenses,
the outcome of contingencies such as legal proceedings, dividend
payments and financial results. Other than in accordance with its
legal or regulatory obligations (including under the Market Abuse
Regulation, the UK Listing Rules and the Disclosure and Transparency
Rules of the Financial Conduct Authority), the Group undertakes no
obligation to update any forward-looking statements, whether as a
result of new information, future events or otherwise. The reader
should, however, consult any additional disclosures that the Group
may make in any documents which it publishes and/or files with the
SEC. All readers, wherever located, should take note of these disclosures.
Accordingly, no assurance can be given that any particular expectation
will be met and investors are cautioned not to place undue reliance
on the forward-looking statements.
Forward-looking statements are subject to assumptions, inherent risks
and uncertainties, many of which relate to factors that are beyond
the Group's control or precise estimate. The Group cautions investors
that a number of important factors, including those in this document,
could cause actual results to differ materially from those expressed
or implied in any forward-looking statement. Such factors include,
but are not limited to, those discussed under Item 3.D 'Risk Factors'
in the Group's Annual Report on Form 20-F for 2018. Any forward looking
statements made by or on behalf of the Group speak only as of the
date they are made and are based upon the knowledge and information
available to the Directors on the date of this report.
Cautionary statement regarding pro-forma growth rates
The pro-forma growth rates at CER in this Results Announcement have
been provided to illustrate the position in Q3 2019 relative to the
position in Q3 2018 as if, for the purposes of the Q3 2018 results,
the acquisition of the Pfizer consumer healthcare business had taken
place as at 31 July 2018 and that, accordingly, two months of results
of the former Pfizer consumer healthcare business were included in
Q3 2018. Similarly, pro-forma growth rates have been provided to
illustrate the position for the nine months to 30 September 2019
relative to the position for the nine months to 30 September 2018
as if, for the purposes of the nine months to 30 September 2018 results,
the acquisition of the Pfizer consumer healthcare business had taken
place as at 31 July 2018 and that, accordingly, two months of results
of the former Pfizer consumer healthcare business were included in
the nine months to 30 September 2018. The results of the former Pfizer
consumer healthcare business included for Q3 2018 and the nine months
to 30 September 2018 are as consolidated (in US$) and included in
Pfizer's US GAAP results. The results for Q3 2019 and the nine months
to 30 September 2019 used to calculate the pro-forma growth rates
are as reported at CER.
The pro-forma growth rates have been provided for illustrative purposes
only and, by their nature, address a hypothetical situation and therefore
do not represent the Group's actual growth rates. The pro-forma growth
rates do not purport to represent what the Group's results of operations
actually would have been if the Pfizer acquisition had been completed
on the date indicated, nor do they purport to represent the results
of operations at any future date. In addition, the pro-forma growth
rates do not reflect the effect of anticipated synergies and efficiencies
or accounting and reporting differences associated with the acquisition
of the Pfizer consumer healthcare business.
Independent review report to GlaxoSmithKline plc
We have been engaged by GlaxoSmithKline plc ("the Company") to review
the condensed financial information in the Results Announcement for
the three and nine months ended 30 September 2019.
What we have reviewed
The condensed financial information comprises:
-- the income statement and statement of comprehensive income for
the three and nine month periods ended 30 September 2019 on pages
41 to 43;
-- the balance sheet as at 30 September 2019 on page 48;
-- the statement of changes in equity for the nine month period then
ended on page 49;
-- the cash flow statement for the nine month period then ended on
page 50 and;
-- the accounting policies and basis of preparation and the explanatory
notes to the condensed financial information on pages 51 to 57
that have been prepared applying consistent accounting policies
to those applied by the Group in the Annual Report 2018, which
was prepared in accordance with International Financial Reporting
Standards ("IFRS") as adopted by the European Union, except for
the implementation of IFRS 16 "Leases" and IFRIC 23 "Uncertainty
over Income Tax Treatments" from 1 January 2019.
We have read the other information contained in the Results Announcement,
including the non-IFRS measures contained on pages 51 to 57,and considered
whether it contains any apparent misstatements or material inconsistencies
with the information in the condensed set of financial statements.
This report is made solely to the Company 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. Our work has been
undertaken so that we might state to the Company those matters we
are required to state to it in an independent review report and for
no other purpose. To the fullest extent permitted by law, we do not
accept or assume responsibility to anyone other than the Company,
for our review work, for this report, or for the conclusions we have
formed.
Directors' responsibilities
The Results Announcement of GlaxoSmithKline plc, including the condensed
financial information, is the responsibility of, and has been approved
by, the directors. The directors are responsible for preparing the
Results Announcement by applying consistent accounting policies to
those applied by the Group in the Annual Report 2018, which was prepared
in accordance with IFRS as adopted by the European Union, except
for the implementation of IFRS 16 "Leases" and IFRIC 23 "Uncertainty
over Income Tax Treatments" from 1 January 2019.
Our responsibility
Our responsibility is to express to the Company a conclusion on the
interim financial information in the Results Announcement based on
our review.
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 inquiries,
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 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 interim financial information in
the Results Announcement for the three and nine months ended 30 September
2019 are not prepared, in all material respects in accordance with
the accounting policies set out in the accounting policies and basis
of preparation section on page 54.
Deloitte LLP
Statutory Auditor
London, United Kingdom
30 October 2019
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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