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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Gsk Plc | LSE:GSK | London | Ordinary Share | GB00BN7SWP63 | ORD 31 1/4P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 9.00 | 0.55% | 1,648.50 | 1,648.50 | 1,649.00 | 1,656.00 | 1,637.00 | 1,650.50 | 2,776,465 | 16:16:20 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Pharmaceutical Preparations | 30.33B | 4.93B | 1.1970 | 13.73 | 67.66B |
TIDMGSK
RNS Number : 8735F
GlaxoSmithKline PLC
31 October 2018
Hot Features
Premium
Issued: Wednesday, 31 October 2018, London U.K.
GSK delivers Q3 sales of GBP8.1 billion, +3% AER, +6% CER
Total EPS 28.8p, +16% AER, +23% CER; Adjusted EPS 35.5p, +10% AER,
+ 14% CER
Financial highlights
-- Group sales GBP8.1 billion. Pharmaceuticals GBP4.2 billion, +1%
AER, +3% CER; Vaccines GBP1.9 billion, +14% AER, +17% CER; Consumer
Healthcare GBP1.9 billion, -1% AER, +3% CER
-- Adjusted Group operating margin of 31.2%, -0.3 percentage points
AER; +0.2 percentage points CER. Pharmaceuticals 32.2%; Vaccines
43.0%; Consumer Healthcare 22.0%
-- Total EPS 28.8p +16% AER, +23% CER
-- Adjusted EPS 35.5p +10% AER, +14% CER
-- YTD free cash flow GBP2,375 million (2017: GBP1,668 million)
-- 19p dividend declared for the quarter. Continue to expect 80p
for FY 2018
-- Now expect 2018 Adjusted EPS growth of 8-10% CER
Product and pipeline highlights
-- Total New Respiratory product sales GBP645 million, +39% AER,
+40% CER;
Ellipta sales GBP500 million, +34% AER, +35% CER; Nucala GBP145
million, +59% AER, +62% CER
-- Tivicay and Triumeq sales GBP1.1 billion +12% AER, +13% CER.
Juluca sales GBP37 million
-- Shingrix sales GBP286 million. Now expect GBP700-750 million
sales for FY 2018
-- New two-drug regimen dolutegravir (DTG) and lamivudine (3TC)
for HIV filed in US and Europe
-- Positive phase III study results received for new HIV therapy
cabotegravir+rilpivirine (FLAIR/ATLAS)
-- Clinical study initiated for use of BCMA in second line treatment
of multiple myeloma
-- New phase II efficacy and safety data for aGM-CSF in rheumatoid
arthritis presented at ACR and supports further clinical development
-- R&D prioritisation continues with resources reinvested in priority
projects following termination of several pipeline programmes
as data thresholds not met
-- Positive phase II data for candidate TB vaccine published in
NEJM
Q3 2018 results
9 months
Q3 2018 Growth 2018 Growth
------------ ------------
GBPm GBP% CER% GBPm GBP% CER%
-------- ----- ----- --------- ----- -----
Turnover 8,092 3 6 22,624 - 4
Total operating profit 1,910 2 7 3,929 10 22
Total earnings per
share 28.8p 16 23 49.0p 15 30
Adjusted operating
profit 2,524 2 6 6,549 - 7
Adjusted earnings per
share 35.5p 10 14 88.3p 4 12
Net cash from operating
activities 2,077 9 4,302 6
Free cash flow 1,554 21 2,375 42
Emma Walmsley, Chief Executive Officer, GSK said:
"GSK has made further good progress this quarter with CER sales growth
in all three businesses, improvements in the Group operating margin
at CER and Adjusted earnings per share growth of 14% (CER). Strong
commercial execution for key products and new launches, notably Shingrix,
together with an effective focus on cost control is driving this
improved performance and we now expect 2018 Adjusted EPS growth of
8-10% at CER. Looking further ahead, we remain confident in our ability
to deliver the Group outlooks for sales and EPS growth we previously
set for the period 2016-2020."
The Total results are presented under 'Income Statements' on page
40 and Adjusted results reconciliations are presented on pages 16,
24 and 58 to 61. Adjusted results are a non-IFRS measure that allows
key trends and factors in the Group's performance to be more easily
identified by shareholders. Non-IFRS measures may be considered in
addition to, but not as a substitute for, or superior to, information
presented in accordance with IFRS. The definitions of GBP% or AER%
growth, CER% growth, Adjusted results, free cash flow and other non-IFRS
measures are set out on page 37. All expectations and targets regarding
future performance should be read together with "Assumptions related
to 2018 guidance and 2016-2020 outlook" and "Assumptions and cautionary
statement regarding forward-looking statements" on page 38.
2018 guidance update
With continued strong trading in the first nine months of 2018, the
Group is tightening its full year guidance range towards the upper
end of previous expectations. The Group now expects full year 2018
Adjusted EPS growth of 8 to 10% at CER, whether or not a generic
competitor to Advair is launched in the US in 2018.
This revised guidance primarily reflects an increase in our expectations
for sales of Shingrix, which we now expect to be GBP700-750 million
in 2018.
We continue to expect the effective tax rate for 2018 to be approximately
19-20% of Adjusted profits after the impact of US tax reform.
If exchange rates were to hold at the closing rates on 30 September
2018 ($1.30/GBP1, EUR1.12/GBP1 and Yen 148/GBP1) for the rest of
2018, the estimated negative impact on full-year 2018 Sterling turnover
growth would be around 3% and if exchange gains or losses were recognised
at the same level as in 2017, the estimated negative impact on 2018
Sterling Adjusted EPS growth would be around 6%.
Total and Adjusted results
Total results represent the Group's overall performance. However,
these results can contain material unusual or non-operational items
that may obscure the key trends and factors determining the Group's
operational performance. As a result, GSK also reports Adjusted results,
which is a non-IFRS measure. GSK believes that Adjusted results allow
the Group's performance to be more easily and clearly identified
by shareholders. The definition of Adjusted results, as set out on
page 37, also aligns the Group's results with the majority of its
peer companies and how they report earnings.
Adjusted results may exclude significant costs such as those from
major restructuring programmes, significant legal charges or transaction
items. Major restructuring charges have been reported as an adjusting
item since the Group adopted its current reporting structure in 2012.
Estimated charges from the major restructuring programmes approved
by the Board, are set out on page 25. Adjusted results include the
benefits arising from the major restructuring programmes.
As Adjusted results may exclude significant costs, such as those
from major restructuring programmes or significant legal charges,
they should not be regarded as a complete picture of the Group's
financial performance which is presented in its Total results. When
restructuring charges are excluded, Adjusted earnings will be higher
than Total earnings. The exclusion of other Adjusting items may result
in Adjusted earnings being materially higher or lower than Total
earnings.
Reconciliations between Total and Adjusted results, as set out on
pages 16, 24 and 58 to 61, including detailed breakdowns of the key
adjusting items, are provided to shareholders to ensure full visibility
and transparency as they assess the Group's performance.
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.
In addition, it should be noted that contingent consideration cash
payments are made each quarter primarily to Shionogi by ViiV Healthcare
which reduce the balance sheet liability and are hence not recorded
in the income statement. The cash payments made to Shionogi by ViiV
Healthcare for the nine months to 30 September 2018 were GBP584 million.
An explanation of the acquisition-related arrangements with ViiV
Healthcare, including details of cash payments to Shionogi, is set
out on page 56.
Contents Page
Sales performance 4
Financial performance - Q3 2018 14
Financial performance - nine months ended 30 September 2018 21
Research and development 33
Reporting definitions 37
Outlook, assumptions and cautionary statements 38
Contacts 39
Income statements 40
Statement of comprehensive income - three months ended 30 September
2018 41
Statement of comprehensive income - nine months ended 30 September
2018 42
Pharmaceuticals turnover - three months ended 30 September
2018 43
Pharmaceuticals turnover - nine months ended 30 September 2018 44
Vaccines turnover - three months ended 30 September 2018 45
Vaccines turnover - nine months ended 30 September 2018 45
Balance sheet 46
Statement of changes in equity 47
Cash flow statement - nine months ended 30 September 2018 48
Segment information 49
Legal matters 51
Taxation 51
Additional information 52
Reconciliation of cash flow to movements in net debt 55
Net debt analysis 55
Free cash flow reconciliation 55
Non-controlling interests in ViiV Healthcare 56
Adjusted results reconciliations 58
Independent review report 62
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.
Cialis is a trademark of Eli Lilly and Company.
Sales performance
Group turnover by business and geographic region
Group turnover by business Q3 2018
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Pharmaceuticals 4,221 1 3
Vaccines 1,924 14 17
Consumer Healthcare 1,947 (1) 3
------ ------- -------
Group turnover 8,092 3 6
------ ------- -------
Group turnover was up 3% AER, 6% CER to GBP8,092 million, with CER
growth delivered by all three businesses.
Pharmaceuticals sales grew 1% AER, 3% CER, driven primarily by the
growth in sales of HIV and the new Respiratory products, Nucala
and the Ellipta portfolio. This was partly offset by lower sales
of Seretide/Advair and Established Pharmaceuticals. Overall Respiratory
sales were up 3% AER, 5% CER.
Vaccines sales were up 14% AER, 17% CER, driven primarily by sales
of Shingrix in the US and market growth of Bexsero, partly offset
by declines in some Established Vaccines.
Consumer Healthcare sales declined 1% AER but grew 3% CER reflecting
growth in Wellness, Oral health and Nutrition, partly offset by
a decline in Skin health, the divestments of some smaller brands
including Horlicks and MaxiNutrition in the UK as well as the final
quarter's impact of the implementation of the Goods & Services Tax
(GST) in India.
Group turnover by geographic region Q3 2018
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
US 3,405 11 13
Europe 1,952 (2) (2)
International 2,735 (2) 4
------ ------- -------
Group turnover 8,092 3 6
------ ------- -------
US sales grew 11% AER, 13% CER driven by strong performances from
Shingrix, HIV products and new Respiratory sales.
Europe sales declined 2% AER, 2% CER as growth from HIV and the
new Respiratory products was more than offset by continued generic
competition to Epzicom as well as a decrease in Bexsero sales largely
due to the completion of the vaccination of catch-up cohorts in
certain markets which benefited Q3 2017. Growth in new Respiratory
products more than offset the decline in Seretide.
In International, sales declined 2% AER but grew 4% CER reflecting
strong growth in the new Respiratory products as well as HIV sales.
Sales in Emerging Markets were flat AER, but grew 8% CER, driven
by strong growth of Cervarix in China and Horlicks in India.
Group turnover by business and geographic region
Group turnover by business 9 months 2018
-------------------------
Growth Growth
GBPm GBP% CER%
------- ------- -------
Pharmaceuticals 12,459 (2) 2
Vaccines 4,415 12 15
Consumer Healthcare 5,750 (2) 2
------- ------- -------
Group turnover 22,624 - 4
------- ------- -------
Group turnover was flat at AER but increased 4% CER to GBP22,624
million, with CER growth delivered by all three businesses.
Pharmaceuticals sales were down 2% AER but up 2% CER, driven primarily
by the growth in HIV sales and the new Respiratory products, Nucala
and the Ellipta portfolio. This was partly offset by lower sales
of Seretide/Advair and Established Pharmaceuticals. Overall Respiratory
sales declined 3% AER but grew 1% CER.
Vaccines sales were up 12% AER, 15% CER, primarily driven by sales
of Shingrix in the US, a competitor supply shortage in Hepatitis
and market growth for Bexsero, partly offset by declines in some
Established Vaccines.
Consumer Healthcare sales declined 2% AER but grew 2% CER with continued
strong broad-based growth in Oral health partly offset by a decline
in Panadol, the divestments of some smaller brands including Horlicks
and MaxiNutrition in the UK as well as the impact of the implementation
of the Goods & Services Tax (GST) in India.
Group turnover by geographic region 9 months 2018
-------------------------
Growth Growth
GBPm GBP% CER%
------- ------- -------
US 8,708 3 9
Europe 5,943 - (1)
International 7,973 (3) 4
------- ------- -------
Group turnover 22,624 - 4
------- ------- -------
US sales grew 3% AER, 9% CER driven by the growth of Shingrix and
Hepatitis vaccines as well as strong performances from HIV and the
new Respiratory products.
Europe sales were flat at AER but down 1% CER, as declines in Established
Pharmaceuticals and Meningitis vaccines more than offset growth
from Tivicay and Triumeq. Growth in the new Respiratory products
more than offset the decline in Seretide.
In International, sales declined 3% AER but grew 4% CER, reflecting
strong growth in Tivicay, Triumeq, the Respiratory portfolio and
Cervarix in China, following its recent launch. Sales in Emerging
Markets declined 3% AER, but grew 4% CER.
Turnover - Q3 2018
Pharmaceuticals
Q3 2018
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Respiratory 1,666 3 5
HIV 1,209 11 12
Immuno-inflammation 122 28 29
Established Pharmaceuticals 1,224 (12) (9)
4,221 1 3
------ ------- -------
US 1,893 3 4
Europe 951 1 -
International 1,377 (3) 2
4,221 1 3
------ ------- -------
Pharmaceuticals turnover in the quarter was GBP4,221 million, up
1% AER, 3% CER, driven primarily by growth in HIV and Respiratory.
HIV sales were up 11% AER, 12% CER, to GBP1,209 million, reflecting
further strong performances by Triumeq and Tivicay and continued
growth from Juluca. Respiratory sales were up 3% AER, 5% CER, to
GBP1,666 million, with growth from the Ellipta portfolio and Nucala
more than offsetting lower sales of Seretide/Advair. Sales of Established
Pharmaceuticals fell 12% AER, 9% CER, to GBP1,224 million.
In the US, sales grew 3% AER, 4% CER, with growth in HIV, Respiratory
and Benlysta more than offsetting declines in Established Pharmaceuticals.
In Europe, sales grew 1% AER but were flat at CER, with growth in
the Respiratory portfolio offsetting the continued impact of generic
competition to Epzicom and Avodart. International sales declined
3% AER but grew 2% CER, with growth driven by HIV and the new Respiratory
portfolio.
Respiratory
Total Respiratory sales were up 3% AER, 5% CER, with growth in all
regions. The US was up 4% AER, 5% CER, while in Europe sales grew
5% AER, 4% CER. International grew 1% AER, 6% CER, including Japan
up 5% AER, 2% CER. Growth from the Ellipta portfolio and Nucala more
than offset lower sales of Seretide/Advair, which declined 17% AER,
15% CER globally.
Sales of Nucala were GBP145 million in the quarter and grew 59% AER,
62% CER, continuing to benefit from the global rollout of the product.
US sales of Nucala grew 43% AER, 44% CER to GBP87 million.
Sales of Ellipta products were up 34% AER, 35% CER to GBP500 million
driven by continued growth in all regions. In the US, sales grew
34% AER, 36% CER, reflecting further market share gains, partly offset
by the impact of continued competitive and pricing pressures, particularly
for ICS/LABAs. In Europe, sales grew 37% AER, 36% CER. Sales of Trelegy
Ellipta, our new once daily closed triple product, contributed GBP42
million in the quarter, benefiting from an expanded label in the
US.
Relvar/Breo Ellipta sales grew 15% AER, 16% CER, to GBP258 million,
with Europe up 20% AER, 20% CER to GBP59 million, and International
up 22% AER, 24% CER to GBP60 million. In the US sales grew 9% AER,
11% CER to GBP139 million, with volume growth of 27% reflecting continued
market share growth and the benefit from lower prior period payer
rebate adjustments, partly offset by increased competitive pricing
pressures. Anoro Ellipta sales grew 34% AER, 34% CER to GBP115 million,
driven by gains in the US. All Ellipta products, Breo, Anoro, Incruse,
Arnuity and Trelegy, continued to grow market share in the US during
the quarter.
Sales of New Respiratory products, comprising Ellipta products and
Nucala, grew 39% AER, 40% CER to GBP645 million.
Seretide/Advair sales declined 17% AER, 15% CER to GBP619 million.
Sales of Advair in the US declined 20% AER, 19% CER (3% volume decline
and 16% negative impact of price) primarily reflecting increased
competitive pricing pressures. In Europe, Seretide sales were down
20% AER, 20% CER to GBP132 million (16% volume decline and a 4% price
decline). This reflected continued competition from generic products
and the transition of the Respiratory portfolio to newer products.
In International, sales of Seretide were down 7% AER, 2% CER, to
GBP178 million (3% volume decline and 1% positive impact of price),
with a decline in markets with generic competition partly offset
by growth from certain other developing markets.
HIV
HIV sales increased 11% AER, 12% CER to GBP1,209 million in the quarter,
with the US up 11% AER, 12% CER, Europe up 2% AER, 1% CER and International
up 27% AER, 34% CER. The growth was driven by Triumeq and Tivicay
which recorded sales of GBP669 million and GBP432 million, respectively,
in the quarter. Juluca sales were GBP37 million in the quarter, mainly
in the US.
This growth was partly offset by the impact of generic competition
to Epzicom/Kivexa, particularly in Europe. Sales declined 51% AER,
47% CER to GBP24 million.
Immuno-inflammation
Sales in the quarter were up 28% AER, 29% CER, primarily driven by
Benlysta which grew 29% AER, 31% CER to GBP121 million. In the US,
Benlysta grew 27% AER, 29% CER to GBP108 million.
Established Pharmaceuticals
Sales of Established Pharmaceuticals in the quarter were GBP1,224
million, down 12% AER, 9% CER. The Avodart franchise was flat at
AER but up 1% CER to GBP144 million, with growth in International
largely offset by the loss of exclusivity in Europe, with the US
generic impact now broadly annualised. Coreg franchise sales declined
76% AER, 78% CER to GBP9 million following a generic Coreg CR entrant
to the US market in Q4 2017. Augmentin sales declined 10% AER, 5%
CER to GBP133 million.
Vaccines
Q3 2018
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Meningitis 329 10 15
Influenza 304 (11) (7)
Shingles 286 - -
Established Vaccines 1,005 (4) (3)
------
1,924 14 17
------ ------- -------
US 1,060 30 34
Europe 402 (7) (8)
International 462 5 9
------ ------- -------
1,924 14 17
------ ------- -------
Vaccines turnover grew 14% AER, 17% CER to GBP1,924 million, primarily
driven by market expansion and share growth for Shingrix, and market
growth for Bexsero. Established Vaccines declined 4% AER, 3% CER
reflecting lower sales of DTPa-containing vaccines (Infanrix, Pediarix
and Boostrix) due to increased competitive pressures, particularly
in Europe, and unfavourable CDC stockpile movements in the US.
Meningitis
Meningitis sales grew 10% AER, 15% CER to GBP329 million. Bexsero
sales increased 18% AER, 24% CER largely due to demand and share
gains in the US and continued growth in private market sales in International,
partly offset by the completion of vaccination of catch-up cohorts
in certain markets in Europe which benefited 2017. Menveo sales were
up 4% AER, 8% CER, also driven by demand and share gains in the US,
partly offset by supply constraints in Europe and International.
Influenza
Fluarix/FluLaval sales declined 11% AER, 7% CER to GBP304 million,
driven by increased price competition in the US, partly offset by
stronger sales in Europe.
Shingles
Shingrix recorded sales of GBP286 million in the quarter in the US
and Canada, driven by demand and share gains. US sales of Shingrix
benefited from market growth in new patient populations now covered
by immunisation recommendations and achieved a 99% market share in
the quarter. An allocation process has been implemented in the US
to help manage inventory and supply to ensure patients have the opportunity
to complete the two-dose series.
Established Vaccines
Sales of the DTPa-containing vaccines (Infanrix, Pediarix and Boostrix)
were down 12% AER, 11% CER. This was primarily driven by Infanrix,
Pediarix sales, down 18% AER, 17% CER to GBP160 million, reflecting
unfavourable CDC stockpile movements in the US and increased competitive
pressures, particularly in Europe, partly offset by stronger demand
in International.
Hepatitis vaccines grew 1% AER, 3% CER to GBP213 million, benefiting
from a competitor supply shortage and stronger demand in the US and
Europe, partly offset by unfavourable CDC stockpile movements in
the US.
Rotarix sales declined 3% AER, 2% CER to GBP152 million, mainly driven
by an unfavourable comparison with the reversal of a returns provision
in International in Q3 2017, partly offset by the favourable phasing
of tenders.
Synflorix sales grew 4% AER, 4% CER to GBP119 million, mainly due
to higher demand in International and favourable year-on-year phasing,
partly offset by lower pricing in Emerging Markets.
Cervarix sales increased 49% AER, 51% CER to GBP55 million, primarily
driven by market expansion in China.
Consumer Healthcare
Q3 2018
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Wellness 1,017 - 3
Oral health 624 (1) 2
Nutrition 167 (2) 5
Skin health 139 (7) (4)
------
1,947 (1) 3
------
US 452 5 6
Europe 599 (2) (2)
International 896 (3) 4
------ ------- -------
1,947 (1) 3
------ ------- -------
Consumer Healthcare sales declined 1% AER but grew 3% CER in the
quarter to GBP1,947 million as growth in Wellness, Oral health and
Nutrition was partly offset by a decline in Skin health. Strong performances
in the US, Central & Eastern Europe and International markets were
partly offset by a decline in Western Europe due to challenging trading
conditions and increased competition.
The divestments of a number of tail brands, including Horlicks and
MaxiNutrition in the UK, generic competition to Transderm Scop in
the US and the final quarter's impact of the implementation of the
Goods & Service Tax (GST) in India in aggregate adversely impacted
growth by approximately one percentage point in the quarter.
Wellness
Wellness sales were flat at AER but grew 3% CER to GBP1,017 million,
mainly due to Flonase benefiting from promotional phasing in the
US, high-single digit growth in Voltaren due to new launches and
favourable shipment phasing as well as seasonal sell-in of Otrivin.
Panadol sales declined, reflecting the impact of the continuing change
in the route-to-market model in South-East Asia and the discontinuation
of slow-release Panadol products in the Nordic countries.
Oral health
Oral health sales declined 1% AER but grew 2% CER to GBP624 million,
primarily reflecting growth of Sensodyne and Denture care. Oral health
was impacted by slower growth in International markets but the US
portfolio grew strongly, supported by Sensodyne Rapid which launched
earlier this year. Denture care delivered mid-single digit growth
through broad-based market performance.
Nutrition
Nutrition sales declined 2% AER but grew 5% CER to GBP167 million.
The Nutrition business in India performed strongly across the product
portfolio, benefiting from new innovations including Horlicks Protein+
which was launched earlier in the year. Divestments and GST impacted
Nutrition growth by eight percentage points.
Skin health
Skin health declined 7% AER, 4% CER to GBP139 million with strong
growth in China more than offset by a weaker performance in Europe
following a strong second quarter.
Pharmaceuticals
9 months 2018
-------------------------
Growth Growth
GBPm GBP% CER%
------- ------- -------
Respiratory 4,937 (3) 1
HIV 3,446 8 12
Immuno-inflammation 336 20 26
Established Pharmaceuticals 3,740 (10) (6)
-------
12,459 (2) 2
-------
US 5,334 (4) 2
Europe 2,962 1 (1)
International 4,163 (2) 4
------- ------- -------
12,459 (2) 2
------- ------- -------
Pharmaceuticals turnover in the nine months was GBP12,459 million,
down 2% AER but up 2% CER, driven primarily by the growth in HIV
sales, which were up 8% AER, 12% CER to GBP3,446 million, reflecting
further strong performances by Triumeq and Tivicay and continued
growth from Juluca. Respiratory sales declined 3% AER but grew 1%
CER, to GBP4,937 million, with growth from the Ellipta portfolio
and Nucala partly offset by lower sales of Seretide/Advair. Sales
of Established Pharmaceuticals fell 10% AER, 6% CER.
In the US, sales declined 4% AER but grew 2% CER, with growth in
the HIV portfolio and Benlysta offsetting declines in Established
Pharmaceuticals and Respiratory. In Europe, sales grew 1% AER but
declined 1% CER, with growth in the Respiratory portfolio only partly
offsetting the continued impact of generic competition to Epzicom
and Avodart. International sales declined 2% AER but grew 4% CER,
driven by HIV and the new Respiratory portfolio.
Respiratory
Total Respiratory sales declined 3% AER but grew 1% CER, with the
US down 8% AER, 3% CER. In Europe, sales grew 4% AER, 3% CER and
International sales were flat at AER but up 6% CER, driven primarily
by higher sales in Japan. Growth from the Ellipta portfolio and Nucala
was offset by lower sales of Seretide/Advair.
Sales of Nucala were GBP390 million in the nine months, up 75% AER,
81% CER, continuing to benefit from the global rollout of the product.
US sales of Nucala grew 53% AER, 61% CER to GBP234 million.
Sales of Ellipta products were up 26% AER, 31% CER, driven by continued
growth in all regions. In the US, sales grew 20% AER, 27% CER, reflecting
further market share gains, partly offset by the impact of continued
competitive and pricing pressures, particularly for ICS/LABAs. In
Europe, sales grew 38% AER, 37% CER, and International sales grew
34% AER, 42% CER. Sales of Trelegy Ellipta, our new once daily closed
triple product, contributed GBP79 million to total Ellipta sales,
benefiting from an expanded label in the US.
Relvar/Breo Ellipta sales grew 6% AER, 11% CER, to GBP756 million,
primarily driven by growth in Europe, which was up 23% AER, 22% CER
to GBP182 million, and in International, which was up 27% AER, 33%
CER to GBP179 million. In the US, Breo Ellipta sales declined 6%
AER, 1% CER, with volume growth of 32%, reflecting continued market
share growth, more than offset by the combined impact of prior period
payer rebate adjustments and increased competitive pricing pressures.
Anoro Ellipta sales grew 42% AER, 48% CER to GBP332 million, driven
by gains in the US. All Ellipta products, Breo, Anoro, Incruse, Arnuity
and Trelegy, continued to grow market share in the US during the
nine months.
Sales of New Respiratory products, comprising Ellipta products and
Nucala, grew 34% AER, 40% CER to GBP1,785 million.
Seretide/Advair sales declined 24% AER, 21% CER to GBP1,775 million.
Sales of Advair in the US declined 34% AER, 30% CER (6% volume decline
and 24% negative impact of price) primarily reflecting increased
competitive pricing pressures. In Europe, Seretide sales were down
19% AER, 20% CER to GBP449 million (12% volume decline and an 8%
price decline). This reflected continued competition from generic
products and the transition of the Respiratory portfolio to newer
products. In International, sales of Seretide were down 10% AER,
5% CER, to GBP528 million (5% volume decline and no price impact),
with a decline in markets with generic competition partly offset
by growth from certain other developing markets.
HIV
HIV sales increased 8% AER, 12% CER to GBP3,446 million in the nine
months, with the US up 7% AER, 13% CER, Europe up 7% AER, 6% CER
and International up 14% AER, 21% CER. The growth was driven by increased
market share for Triumeq and Tivicay with sales of GBP1,957 million
and GBP1,187 million, respectively, in the nine months. Juluca was
approved in the US in November 2017 and recorded sales of GBP71 million
in the nine months.
This growth was partly offset by the impact of generic competition
to Epzicom/Kivexa, particularly in Europe. Sales declined 54% AER,
52% CER to GBP87 million.
Immuno-inflammation
Sales in the nine months were up 20% AER, 26% CER, primarily driven
by Benlysta, which grew 21% AER, 27% CER to GBP335 million. In the
US, Benlysta grew 19% AER, 25% CER to GBP299 million.
Established Pharmaceuticals
Sales of Established Pharmaceuticals were GBP3,740 million, down
10% AER, 6% CER, with the decline partly mitigated by favourable
prior period payer rebate adjustments and some post-divestment inventory
sales.
The Avodart franchise was down 9% AER, 6% CER to GBP423 million,
primarily due to the loss of exclusivity in Europe, with the US generic
impact now broadly annualised. Coreg franchise sales declined 68%
AER, 67% CER to GBP36 million following a generic Coreg CR entrant
to the US market in Q4 2017. Augmentin sales declined 5% AER but
grew 1% CER to GBP424 million with improved demand in Emerging Markets.
Vaccines
9 months 2018
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Meningitis 693 1 5
Influenza 330 (12) (8)
Shingles 563 - -
Established Vaccines 2,829 (2) -
------
4,415 12 15
------
US 2,035 36 44
Europe 1,184 (2) (4)
International 1,196 (4) -
------ ------- -------
4,415 12 15
------ ------- -------
Vaccines turnover grew 12% AER, 15% CER to GBP4,415 million, primarily
driven by growth in sales of Shingrix, Hepatitis vaccines, which
benefited from a competitor supply shortage, the launch of Cervarix
in China and market growth for Bexsero. This was partly offset by
lower Synflorix sales, reflecting lower pricing and demand in Emerging
Markets, and lower sales of DTPa-containing vaccines (Infanrix, Pediarix
and Boostrix) due to increased competitive pressures, particularly
in Europe, and unfavourable year-on-year CDC stockpile movements
in the US.
Meningitis
Meningitis sales grew 1% AER, 5% CER to GBP693 million. Bexsero sales
were up 7% AER, 12% CER driven by demand and share gains in the US,
together with continued growth in private market sales in International,
partly offset by the completion of vaccination of catch-up cohorts
in certain markets in Europe. Menveo sales fell 10% AER, 5% CER,
primarily reflecting a strong comparator performance and supply constraints
in Europe and International, partly offset by demand and share gains
in the US.
Influenza
Fluarix/FluLaval sales declined 12% AER, 8% CER to GBP330 million,
driven by increased price competition in the US, partly offset by
stronger sales in Europe.
Shingles
Shingrix recorded sales of GBP563 million in the first nine months
in the US and Canada, driven by demand and share gains. US sales
benefited from market growth in new patient populations now covered
by immunisation recommendations.
Established Vaccines
Sales of DTPa-containing vaccines (Infanrix, Pediarix and Boostrix)
were down 12% AER, 9% CER. Boostrix sales declined 11% AER, 8% CER
to GBP378 million, primarily driven by lower demand in International
and the return to the market of a competitor in Europe. Infanrix,
Pediarix sales were down 12% AER, 9% CER to GBP515 million, reflecting
increased competitive pressures in Europe and the US as well as unfavourable
year-on-year CDC stockpile movements in the US, partly offset by
stronger demand in International.
Hepatitis vaccines grew 16% AER, 20% CER to GBP618 million, benefiting
from a competitor supply shortage and stronger demand in the US and
Europe, partly offset by unfavourable CDC stockpile movements in
the US.
Rotarix sales were down 3% AER and flat at CER to GBP387 million.
Synflorix sales declined 20% AER and 20% CER to GBP318 million, primarily
impacted by lower pricing and demand in Emerging Markets.
Cervarix sales increased 71% AER, 74% CER to GBP123 million, primarily
driven by its recent launch in China.
Consumer Healthcare
9 months 2018
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Wellness 2,935 (2) 2
Oral health 1,873 - 5
Nutrition 489 (5) 2
Skin health 453 (3) -
------
5,750 (2) 2
------
US 1,339 (3) 2
Europe 1,797 - -
International 2,614 (3) 5
------ ------- -------
5,750 (2) 2
------ ------- -------
Consumer Healthcare sales in the nine months declined 2% AER but
grew 2% CER to GBP5,750 million, with continued broad-based growth
in Oral health partly offset by a decline in Panadol and lower sales
of tail brands.
The aggregate impact from generic competition on Transderm Scop in
the US, the divestment of a number of tail brands, including Horlicks
and MaxiNutrition in the UK, and implementation of the Goods & Service
Tax (GST) in India on overall growth was around one percentage point.
Wellness
Wellness sales declined 2% AER but grew 2% CER to GBP2,935 million.
Voltaren grew in mid-single digits due to new launches while Theraflu
growth was supported by a strong cold and flu season earlier in the
year. Panadol delivered a weaker performance as a result of the change
in the route-to-market model in South-East Asia and the discontinuation
of slow-release Panadol products in the Nordic countries.
Oral health
Oral health sales were flat at AER but grew 5% CER to GBP1,873 million,
as Sensodyne delivered high single-digit growth in the US and a number
of International markets, driven by Sensodyne Rapid, partly offset
by destocking in China. Denture care grew in high single digits through
a strong Poligrip performance in the US and the launch of Corega
Max in Russia.
Nutrition
Nutrition sales declined 5% AER but grew 2% CER to GBP489 million.
The Nutrition business in India performed strongly across the product
portfolio, benefiting from new innovations including Horlicks Protein+
which was launched earlier in the year. The impact of divestments
and India GST implementation on Nutrition growth was approximately
nine percentage points.
Skin health
Skin health sales were down 3% AER but flat at CER at GBP453 million,
with high single-digit growth in Fenistil offset by a decline in
tail brands.
Financial performance - Q3 2018
Total results
The Total results for the Group are set out below.
Q3 2018 Q3 2017 Growth Growth
GBPm GBPm GBP% CER%
-------- -------- ------- -------
Turnover 8,092 7,843 3 6
Cost of sales (2,636) (2,652) (1) -
-------- -------- ------- -------
Gross profit 5,456 5,191 5 8
Selling, general and administration (2,527) (2,308) 9 12
Research and development (988) (1,047) (6) (5)
Royalty income 94 107 (12) (13)
Other operating income/(expense) (125) (66)
-------- -------- ------- -------
Operating profit 1,910 1,877 2 7
Finance income 10 13
Finance expense (233) (194)
Profit on disposal of associates 3 8
Share of after tax profits
of
associates and joint ventures 15 7
-------- -------- ------- -------
Profit before taxation 1,705 1,711 - 5
Taxation (193) (316)
Tax rate % 11.3% 18.5%
-------- -------- ------- -------
Profit after taxation 1,512 1,395 8 14
-------- -------- ------- -------
Profit attributable to non-controlling
interests 94 183
Profit attributable to shareholders 1,418 1,212
-------- -------- ------- -------
1,512 1,395 8 14
-------- -------- ------- -------
Earnings per share 28.8p 24.8p 16 23
-------- -------- ------- -------
Cost of sales
Cost of sales as a percentage of turnover was 32.6%, down 1.2 percentage
points at AER and 1.7 percentage points in CER terms compared with
Q3 2017. This primarily reflected the phasing of costs of manufacturing
restructuring programmes, as well as the comparison with a number
of non-cash write downs in Q3 2017 as a result of plant closures,
together with a more favourable product mix in all three businesses,
particularly the impact of higher Vaccines and HIV sales, and a further
contribution from integration and restructuring savings in all three
businesses. This was partly offset by continued adverse pricing pressure
in Pharmaceuticals, particularly in Respiratory and Established Vaccines,
inventory adjustments and increased input costs.
Selling, general and administration
SG&A costs as a percentage of turnover were 31.2%, 1.8 percentage
points higher than in Q3 2017 at AER and 1.9 percentage points higher
on a CER basis. This reflected a 12% increase, at CER, in SG&A costs
compared with Q3 2017 due to increased restructuring costs mainly
in the Pharmaceuticals business as well as increased investment in
promotional product support, particularly for new launches in Vaccines,
Respiratory and HIV and targeted priority markets, partly offset
by tight control of ongoing costs, particularly in non-promotional
and back office spending across all three businesses.
Research and development
R&D expenditure was GBP988 million (12.2% of turnover), down 6% AER,
5% CER, primarily reflecting lower restructuring costs, particularly
in comparison to the charges in Q3 2017 related to the termination
of rights to sirukumab and the benefits of the re-prioritisation
of the R&D portfolio. This was partly offset by increased investment
in the progression of a number of mid and late-stage programmes,
particularly in Oncology and provision for the costs payable to a
third party relating to the expected use of a Priority Review Voucher.
Royalty income
Royalty income was GBP94 million (Q3 2017: GBP107 million), down
12% AER, 13% CER, primarily reflecting the patent expiry of Cialis.
Other operating income/(expense)
Net other operating expense of GBP125 million (Q3 2017: GBP66 million)
reflected GBP248 million (Q3 2017: GBP19 million) of accounting charges
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. The largest element was a re-measurement of GBP214
million for the contingent consideration liability due to Shionogi,
primarily arising from changes in exchange rate assumptions. This
was partly offset by the profit on a number of asset disposals, including
tapinarof.
Operating profit
Total operating profit was GBP1,910 million in Q3 2018 compared with
an operating profit of GBP1,877 million in Q3 2017. The increase
in operating profit primarily reflected the benefit from sales growth
in all three businesses, a more favourable mix and continued tight
control of ongoing costs across all three businesses, as well as
profit on a number of asset disposals, including tapinarof. This
was partly offset by the increased impact of accounting charges related
to re-measurement of the liabilities for contingent consideration,
put options and preferential dividends, as well as increased restructuring
costs, compared with Q3 2017. Operating profit was also impacted
by continuing price pressure, particularly in Respiratory, supply
chain investments, increased R&D investment including a provision
for the costs expected to be payable to a third party relating to
the future use of a Priority Review Voucher, investments in promotional
product support, particularly for new launches in Vaccines, Respiratory
and HIV, and a reduction in royalty income.
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 GBP213 million (Q3 2017:
GBP189 million). This included cash payments made to Shionogi of
GBP208 million (Q3 2017: GBP186 million).
Net finance costs
Net finance expense was GBP223 million compared with GBP181 million
in Q3 2017. The increase primarily reflected higher debt following
the acquisition from Novartis of its stake in the Consumer Healthcare
Joint Venture in June 2018 as well as additional interest on a historic
tax settlement.
Taxation
The charge of GBP193 million represented an effective tax rate of
11.3% (Q3 2017: 18.5%) and reflected the differing tax effects of
the various adjusting items, including the reassessment of estimates
of uncertain tax positions following the settlement of a number of
open issues with tax authorities in key jurisdictions.
Non-controlling interests
The allocation of earnings to non-controlling interests amounted
to GBP94 million (Q3 2017: GBP183 million). The reduction in allocation
was primarily due to the ending of allocations of Consumer Healthcare
profits (Q3 2017: GBP77 million) following the buyout of Novartis'
interest in Q2 2018, and a lower allocation of ViiV Healthcare profits
of GBP78 million (Q3 2017: GBP100 million), including the impact
of changes in the proportions of preferential dividends due to each
shareholder based on the relative performance of different products
in the quarter and higher remeasurement charges. This was partly
offset by an increased allocation due to higher net profits in some
of the Group's other entities with non-controlling interests.
Earnings per share
Total earnings per share was 28.8p, compared with 24.8p in Q3 2017.
The increase in earnings per share primarily reflected increased
profit on disposals as well as an improved trading performance, reduced
non-controlling interest allocation of Consumer Healthcare profits
and a reduced tax rate. This was partly offset by the impact of charges
arising from increases in the valuation of the liabilities for contingent
consideration, put options and preferential dividends.
Adjusting items
GSK presents Total results and Adjusted results in order to assist
shareholders in better understanding the Group's operational performance.
Adjusted results, which is a non-IFRS measure, may be considered
in addition to, but not as a substitute for, or superior to, information
presented in accordance with IFRS.
Total results represent the Group's overall performance. However,
these results can contain material unusual or non-operational items
that may obscure the key trends and factors determining the Group's
operational performance. As a result, GSK also reports Adjusted results.
GSK believes that Adjusted results allow the key trends and factors
driving the Group's performance to be more easily and clearly identified
by shareholders. This approach also aligns Group's results with the
majority of its peer companies and how they report earnings.
Adjusted results exclude the following items from Total results:
amortisation and impairments of intangible assets and goodwill; major
restructuring costs (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 those integration
costs following material acquisitions; significant legal charges
(net of insurance recoveries) and expenses on the settlement of litigation
and government investigations; transaction-related accounting adjustments
for significant acquisitions, and other items, including; disposals
of associates, products and businesses and other operating income
other than royalty income, together with the tax effects of all of
these items and the impact of the enactment of the US Tax Cuts and
Jobs Act in 2017. Costs for all other ordinary course smaller scale
restructuring and legal charges and expenses are retained within
Total and Adjusted results.
The adjusting items that reconcile Total operating profit, profit
after tax and earnings per share to Adjusted results are as follows:
Q3 2018 Q3 2017
------------------------------ -------------------------------
(Loss)/
Profit Earnings profit Earnings
Operating after per Operating after per
profit tax share profit tax share
GBPm GBPm p GBPm GBPm p
---------- ------- --------- ---------- -------- ---------
Total results 1,910 1,512 28.8 1,877 1,395 24.8
Intangible asset amortisation 143 114 2.3 149 116 2.4
Intangible asset impairment 49 43 0.9 82 67 1.4
Major restructuring
costs 283 216 4.4 266 207 4.2
Transaction-related
items 247 223 3.6 40 12 (0.7)
Divestments, significant
legal and other items (108) (220) (4.5) 54 19 0.4
Adjusting items 614 376 6.7 591 421 7.7
---------- ------- --------- ---------- -------- ---------
Adjusted results 2,524 1,888 35.5 2,468 1,816 32.5
---------- ------- --------- ---------- -------- ---------
Full reconciliations between Total results and Adjusted results are
set out on pages 58 to 61 and the definition of Adjusted results
is set out on page 37.
Intangible asset amortisation and impairment
Intangible asset amortisation was GBP143 million, compared with GBP149
million in Q3 2017. There were also intangible asset impairments
of GBP49 million (Q3 2017: GBP82 million) reflecting a number of
impairments to commercial and R&D assets. Both of these charges were
non-cash items.
Major restructuring and integration
Major restructuring costs related to specific Board approved Major
restructuring 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,
are excluded from Adjusted results. 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.
Total Major restructuring and integration charges incurred in the
quarter were GBP283 million (Q3 2017: GBP266 million). These included
GBP155 million under the existing combined integration programme
(Q3 2017: GBP266 million) and GBP128 million relating to the 2018
major restructuring programme. Total non-cash charges were GBP19
million (Q3 2017: GBP77 million) all arising under the existing combined
integration programme and primarily relating to the write-down of
assets largely as a result of announced plans to reduce the manufacturing
network. Total cash charges were GBP264 million, including GBP136
million under the existing combined programme (Q3 2017: GBP189 million)
relating to restructuring in the Europe and International Pharmaceuticals
commercial operations as well as some manufacturing sites, and GBP128
million under the 2018 major restructuring programme, primarily relating
to restructuring in the US Pharmaceuticals commercial operation.
Cash payments made in the quarter were GBP140 million (Q3 2017: GBP117
million) including the settlement of certain charges accrued in previous
quarters. The existing combined programme delivered incremental annual
cost savings in the quarter of less than GBP0.1 billion.
Transaction-related adjustments
Transaction-related adjustments resulted in a net charge of GBP247
million (Q3 2017: GBP40 million). This primarily reflected GBP248
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 2018 Q3 2017
Charge/(credit) GBPm GBPm
-------- --------
Consumer Healthcare Joint Venture put option - (28)
Contingent consideration on former Shionogi-ViiV
Healthcare Joint Venture
(including Shionogi preferential dividends) 214 59
ViiV Healthcare put options and Pfizer preferential
dividends (20) (38)
Contingent consideration on former Novartis Vaccines
business 54 26
Other adjustments (1) 21
-------- --------
Total transaction-related charges 247 40
-------- --------
The GBP214 million charge relating to the contingent consideration
for the former Shionogi-ViiV Healthcare Joint Venture represented
GBP101 million arising primarily from updated exchange rate assumptions,
together with a GBP113 million unwind of the discount. A credit of
GBP21 million relating to a decrease in the put option liability
to Pfizer reflected revised exchange rate assumptions on forecasts
as well as adjustments to pipeline forecasts.
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 GBP213 million (Q3 2017:
GBP189 million). This included cash payments made by ViiV Healthcare
to Shionogi in relation to its contingent consideration liability
(including preferential dividends) which amounted to GBP208 million
(Q3 2017: GBP186 million).
An explanation of the accounting for the non-controlling interests
in ViiV Healthcare is set out on page 56.
Divestments, significant legal charges and other items
Divestments and other items included the profit on a number of asset
disposals, including tapinarof, equity investment impairments and
certain other adjusting items. A charge of GBP12 million (Q3 2017:
GBP1 million credit) 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 GBP12 million (Q3
2017: GBP137 million).
Adjusted results
GSK uses Adjusted results, which is a non-IFRS measure, to report
the performance of the Group as it believes that it allows the key
trends and factors in the Group's performance to be more easily and
clearly identified. Non-IFRS measures may be considered in addition
to, but not as a substitute for, or superior to, information presented
in accordance with IFRS.
Q3 2018
--------------------------------------
% of Growth Growth
GBPm turnover GBP% CER%
-------- ---------- ------- -------
Turnover 8,092 100 3 6
Cost of sales (2,388) (29.5) 4 5
Selling, general and administration (2,313) (28.6) 1 4
Research and development (961) (11.9) 7 8
Royalty income 94 1.2 (12) (13)
-------- ---------- ------- -------
Adjusted operating profit 2,524 31.2 2 6
-------- ---------- ------- -------
Adjusted profit before tax 2,318 1 5
Adjusted profit after tax 1,888 4 8
Adjusted profit attributable
to shareholders 1,747 10 15
-------- ------- -------
Adjusted earnings per share 35.5p 10 14
-------- ------- -------
Operating profit by business Q3 2018
------------------------------------
% of Growth Growth
GBPm turnover GBP% CER%
------ ---------- ------- -------
Pharmaceuticals 2,028 48.0 (3) (1)
Pharmaceuticals R&D* (667) 2 3
Total Pharmaceuticals 1,361 32.2 (5) (2)
Vaccines 827 43.0 18 26
Consumer Healthcare 429 22.0 9 16
------ ---------- ------- -------
2,617 32.3 4 8
Corporate & other unallocated
costs (93) 94 >100
------ ---------- ------- -------
Adjusted operating profit 2,524 31.2 2 6
------ ---------- ------- -------
* Operating profit of Pharmaceuticals R&D segment, which is the responsibility
of the President, Pharmaceuticals R&D. It excludes ViiV Healthcare
operating profit, which is reported within the Pharmaceuticals
segment. A more detailed breakdown of R&D expenses is set out on
page 33.
Operating profit
Adjusted operating profit was GBP2,524 million, 2% higher than Q3
2017 at AER and 6% higher at CER on a turnover increase of 6% CER.
The Adjusted operating margin of 31.2% was 0.3 percentage points
lower at AER but 0.2 percentage points higher on a CER basis than
in Q3 2017. This primarily reflected the benefit from sales growth
in all three businesses, a more favourable mix and continued tight
control of ongoing costs across all three businesses. This was partly
offset by continuing price pressure, particularly in Respiratory,
supply chain investments, increased R&D investment including the
provision for costs expected to be payable to a third party relating
to the future use of a Priority Review Voucher, investments in promotional
product support, particularly for new launches in Vaccines, Respiratory
and HIV, as well as a reduction in royalty income.
Cost of sales
Cost of sales as a percentage of turnover was 29.5%, up 0.1 percentage
points at AER, but down 0.3 percentage points at CER compared with
Q3 2017. This primarily reflected a more favourable product mix in
all three businesses, particularly the impact of higher Vaccines
and HIV sales, and a further contribution from integration and restructuring
savings in all three businesses. This was partly offset by continued
adverse pricing pressure in Pharmaceuticals, particularly in Respiratory
and Established Vaccines, inventory adjustments and increased input
costs.
Selling, general and administration
SG&A costs as a percentage of turnover were 28.6%, 0.5 percentage
points lower at AER than in Q3 2017 and 0.5 percentage points lower
on a CER basis. The 1% AER, 4% CER increase in SG&A costs primarily
reflected increased investment in promotional product support, particularly
for new launches in Vaccines, Respiratory and HIV and targeted priority
markets partly offset by tight control of ongoing costs, particularly
in non-promotional spending across all three businesses.
Research and development
R&D expenditure was GBP961 million (11.9% of turnover), 7% AER, 8%
CER higher than Q3 2017, primarily reflecting increased investment
in the progression of a number of mid and late-stage programmes,
particularly in Oncology as well as the provision for costs expected
to be payable to a third party relating to the future use of a Priority
Review Voucher partly offset by the benefits of the re-prioritisation
of the R&D portfolio.
Royalty income
Royalty income was GBP94 million (Q3 2017: GBP107 million), a reduction
of 12% AER, 13% CER, primarily reflecting the patent expiry of Cialis.
Operating profit by business
Pharmaceuticals operating profit was GBP1,361 million, down 5% AER,
2% CER on a turnover increase of 3% CER. The operating margin of
32.2% was 1.8 percentage points lower at AER than in Q3 2017 and
1.6 percentage points lower on a CER basis. This primarily reflected
increased R&D investment including the costs payable to a third party
relating to the future use of a Priority Review Voucher awarded in
Q3 2018, investment in new product support and targeted priority
markets, as well as the continued impact of lower prices, particularly
in Respiratory, and the reduction in royalty income, partly offset
by a more favourable product mix, primarily driven by the growth
in HIV sales.
Vaccines operating profit was GBP827 million, 18% higher than Q3
2017 at AER and 26% higher at CER on a turnover increase of 17% CER.
The operating margin of 43.0% was 1.7 percentage points higher than
in Q3 2017 at AER and 3.2 percentage points higher on a CER basis.
This was primarily driven by enhanced operating leverage from strong
sales growth, improved product mix and higher royalty income, partly
offset by inventory adjustments and increased SG&A resources to support
new launches and business growth.
Consumer Healthcare operating profit was GBP429 million, up 9% AER,
16% CER, on a turnover increase of 3% CER. The operating margin of
22.0% was 2.0 percentage points higher than in Q3 2017 at AER, and
2.5 percentage points higher on a CER basis. This primarily reflected
continued manufacturing restructuring and integration benefits and
improved product mix as well as tight control of promotional and
other operating expenses compared with Q3 2017.
Net finance costs
Net finance expense was GBP221 million compared with GBP177 million
in Q3 2017. The increase primarily reflected higher debt following
the acquisition from Novartis of its stake in the Consumer Healthcare
Joint Venture in June 2018 as well as additional interest of GBP23
million on a historic tax settlement.
Taxation
Tax on Adjusted profit amounted to GBP430 million and represented
an effective Adjusted tax rate of 18.6% (Q3 2017: 21.0%). See 'Taxation'
on page 51 for further details.
Non-controlling interests
The allocation of Adjusted earnings to non-controlling interests
amounted to GBP141 million (Q3 2017: GBP228 million). The reduction
in allocation was primarily due to the ending of non-controlling
interest allocations of Consumer Healthcare profits (Q3 2017: GBP105
million) following the buyout of Novartis' interest in Q2 2018. This
was partly offset by increases in the allocation of ViiV Healthcare
profits of GBP125 million (Q3 2017: GBP117 million), including the
impact of changes in the proportions of preferential dividends due
to each shareholder based on the relative performance of different
products in the quarter, as well as increases in the allocation to
non-controlling interests due to higher net profits in some of the
Group's other entities with non-controlling interests.
Earnings per share
Adjusted EPS of 35.5p was up 10% AER, 14% CER, compared with a 6%
CER increase in Adjusted operating profit, primarily as a result
of the reduced non-controlling interest allocation of Consumer Healthcare
profits and a reduced Adjusted tax rate.
Currency impact on Q3 2018 results
The Q3 2018 results are based on average exchange rates, principally
GBP1/$1.31, GBP1/EUR1.11 and GBP1/Yen 146. Comparative exchange rates
are given on page 52. The period-end exchange rates were GBP1/$1.30,
GBP1/EUR1.12 and GBP1/Yen 148.
In the quarter, turnover increased 3% AER, 6% CER. Total EPS was
28.8p compared with 24.8p in Q3 2017 and Adjusted EPS was 35.5p compared
with 32.5p in Q3 2017, up 10% AER, 14% CER. The negative currency
impact primarily reflected the strength of Sterling, particularly
against the US Dollar and Emerging Market currencies, relative to
Q3 2017. Exchange gains or losses on the settlement of intercompany
transactions had a negligible impact on the negative currency impact
of four percentage points on Adjusted EPS.
Financial performance - nine months 2018
Total results
The Total results for the Group are set out below.
9 months 9 months
2018 2017 Growth Growth
GBPm GBPm GBP% CER%
--------- --------- ------- -------
Turnover 22,624 22,547 - 4
Cost of sales (7,337) (7,784) (6) (4)
--------- --------- ------- -------
Gross profit 15,287 14,763 4 9
Selling, general and administration (7,295) (7,139) 2 6
Research and development (2,817) (3,267) (14) (11)
Royalty income 220 287 (23) (23)
Other operating income/(expense) (1,466) (1,069)
--------- --------- ------- -------
Operating profit 3,929 3,575 10 22
Finance income 57 49
Finance expense (589) (580)
Profit on disposal of associates 3 28
Share of after tax profits
of
associates and joint ventures 26 11
--------- --------- ------- -------
Profit before taxation 3,426 3,083 11 25
Taxation (680) (551)
Tax rate % 19.8% 17.9%
--------- --------- ------- -------
Profit after taxation 2,746 2,532 8 22
--------- --------- ------- -------
Profit attributable to non-controlling
interests 338 454
Profit attributable to shareholders 2,408 2,078
--------- --------- ------- -------
2,746 2,532 8 22
--------- --------- ------- -------
Earnings per share 49.0p 42.5p 15 30
--------- --------- ------- -------
Cost of sales
Cost of sales as a percentage of turnover was 32.4%, down 2.1 percentage
points at AER and 2.8 percentage points in CER terms compared with
2017. This primarily reflected a favourable comparison with GBP363
million of non-cash write-downs of assets in 2017 related to the
decision to withdraw Tanzeum progressively. The nine months also
benefited from a more favourable product mix in all three businesses,
particularly the impact of higher HIV sales and the launch of Shingrix,
together with a further contribution from integration and restructuring
savings. This was partly offset by an adverse comparison with the
benefit of a settlement for lost third party supply volume in 2017
in Vaccines, as well as continued adverse pricing pressure in Pharmaceuticals,
particularly in Respiratory and Established Vaccines, and increased
input costs.
Selling, general and administration
SG&A costs as a percentage of turnover were 32.2%, 0.5 percentage
points higher than in 2017 at AER and 0.5 percentage points higher
on a CER basis. This reflected a 6% increase, at CER, in SG&A costs
compared with 2017 primarily due to increased restructuring and integration
costs, as well as increased investment in promotional product support,
particularly for new launches in Respiratory, HIV and Vaccines, partly
offset by tight control of ongoing costs, particularly in non-promotional
and back office spending across all three businesses.
Research and development
R&D expenditure was GBP2,817 million (12.5% of turnover), 14% AER,
11% CER lower than in 2017. This reflected a favourable comparison
with the impact of the Priority Review Voucher in 2017, as well as
reduced restructuring costs primarily due to the comparison with
the provision for obligations as a result of the decision to withdraw
Tanzeum progressively in Q3 2017 and the benefit of the R&D prioritisation
initiatives started in the second half of last year. This was partly
offset by increased investment in the progression of a number of
mid and late-stage programmes, particularly in Oncology, as well
as provisions for the costs payable to a third party relating to
the expected use of a Priority Review Voucher awarded in 2018.
Royalty income
Royalty income was GBP220 million (2017: GBP287 million), down 23%
AER and CER, the reduction primarily reflecting the patent expiry
of Cialis.
Other operating income/(expense)
Net other operating expense of GBP1,466 million (2017: GBP1,069 million)
primarily reflected GBP1,617 million (2017: GBP1,299 million) of
accounting charges 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, the value attributable to the Consumer Healthcare Joint
Venture put option previously held by Novartis and the liabilities
for the Pfizer put option and Pfizer and Shionogi preferential dividends
in ViiV Healthcare. This was partly offset by the profit on a number
of asset disposals, including tapinarof.
The accounting charges were driven primarily by a GBP927 million
re-measurement of the contingent consideration liability due to Shionogi,
primarily related to changes in exchange rate assumptions and sales
forecasts following the GEMINI study completed in Q2 2018. In addition,
a net charge of GBP658 million reflected the re-measurement of the
valuation of the Consumer Healthcare put option, together with movements
in exchange rates largely offset by gains on hedging contracts.
Operating profit
Total operating profit was GBP3,929 million in the nine months compared
with GBP3,575 million in 2017. The increase in operating profit primarily
reflected reduced restructuring costs and asset impairments in comparison
with the non-cash charges in 2017 relating to the progressive withdrawal
of Tanzeum. In addition, there was a contribution from sales growth
on a CER basis in all three businesses, a more favourable mix, benefits
from prioritisation of R&D expenditure and comparison with the impact
of the Priority Review Voucher utilised and expensed in 2017 and
continued tight control of ongoing costs. This was partly offset
by continuing price pressure, particularly in Respiratory, supply
chain investments, the comparison with the benefit in Q2 2017 of
a settlement for lost third party supply volume in Vaccines and investments
in new product support, particularly for launches in Respiratory,
HIV and Vaccines, as well as a reduction in royalty income.
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 GBP915 million (2017:
GBP492 million). This included a cash milestone paid to Novartis
of $450 million (GBP317 million) as well as cash payments made to
Shionogi of GBP584 million (2017: GBP485 million).
Net finance costs
Net finance expense was GBP532 million compared with GBP531 million
in 2017. This reflected higher debt following the acquisition from
Novartis of its stake in the Consumer Healthcare Joint Venture in
June 2018 as well as additional interest on a historic tax settlement
in Q3 2018, offset by the benefit of a one-off accounting adjustment
to the amortisation of long term bond interest charges of GBP20 million
in Q1 2018, the maturity of older bonds refinanced at lower interest
rates as well as the translation impact of exchange rate movements
on the reported Sterling costs of foreign currency denominated interest-bearing
instruments.
Taxation
The charge of GBP680 million represented an effective tax rate of
19.8% (2017: 17.9%) and reflected the differing tax effects of the
various adjusting items.
Non-controlling interests
The allocation of earnings to non-controlling interests amounted
to GBP338 million (2017: GBP454 million). The reduction in allocation
was primarily due to the ending of further non-controlling interest
allocation of Consumer Healthcare profits of GBP117 million (2017:
GBP197 million) after 3 May 2018 when the buyout of Novartis' interest
became unconditional, as well as a lower allocation of ViiV Healthcare
profits of GBP175 million (Q3 2017: GBP226 million), including the
impact of the impact of re-measurement charges and changes in the
proportions of preferential dividends due to each shareholder. This
was partly offset by an increased allocation to non-controlling interests
due to higher net profits in some of the Group's other entities with
non-controlling interests.
Earnings per share
Total earnings per share was 49.0p, compared with 42.5p in 2017.
The increase in earnings per share primarily reflected an increase
in Adjusted operating profit, reduced restructuring costs and asset
impairments in comparison with the non-cash charges in 2017 relating
to the progressive withdrawal of Tanzeum and a reduced non-controlling
interest allocation of Consumer Healthcare profits. This was partly
offset by the impact of charges arising from increases in the valuation
of the liabilities for contingent consideration, put options and
preferential dividends.
Adjusting items
GSK presents Total results and Adjusted results in order to assist
shareholders in better understanding the Group's operational performance.
Adjusted results, which is a non-IFRS measure, may be considered
in addition to, but not as a substitute for, or superior to, information
presented in accordance with IFRS.
Total results represent the Group's overall performance. However,
these results can contain material unusual or non-operational items
that may obscure the key trends and factors determining the Group's
operational performance. GSK therefore also reports Adjusted results
to help shareholders identify and assess more clearly the Group's
performance. This approach also aligns the presentation of the Group's
results more closely with the majority of GSK's peer group.
Adjusted results exclude the following items from Total results:
amortisation and impairments of intangible assets and goodwill; major
restructuring costs (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; significant legal charges
and expenses; transaction-related accounting adjustments; disposals
and other operating income other than royalty income, together with
the tax effects of all of these items and the impact of the implementation
of the US Tax Cuts and Jobs Act in 2017. Costs for all other ordinary
course smaller scale restructuring and legal charges and expenses
are retained within the Adjusted results.
The adjusting items that reconcile Total operating profit, profit
after tax and earnings per share to Adjusted results are as follows:
9 months 2018 9 months 2017
------------------------------ ------------------------------
Profit Earnings Profit Earnings
Operating after per Operating after per
profit tax share profit tax share
GBPm GBPm p GBPm GBPm p
---------- ------- --------- ---------- ------- ---------
Total results 3,929 2,746 49.0 3,575 2,532 42.5
Intangible asset amortisation 430 345 7.0 444 344 7.1
Intangible asset impairment 104 89 1.8 421 296 6.1
Major restructuring
costs 506 386 7.9 872 626 12.8
Transaction-related
items 1,706 1,505 26.6 1,358 1,206 21.7
Divestments, significant
legal
and other items (126) (201) (4.0) (140) (271) (5.6)
Adjusting items 2,620 2,124 39.3 2,955 2,201 42.1
---------- ------- --------- ---------- ------- ---------
Adjusted results 6,549 4,870 88.3 6,530 4,733 84.6
---------- ------- --------- ---------- ------- ---------
Full reconciliations between Total results and Adjusted results are
set out on pages 58 to 61 and the definition of Adjusted results
is set out on page 37.
Intangible asset amortisation and impairment
Intangible asset amortisation was GBP430 million, compared with GBP444
million in 2017. There were also lower intangible asset impairments
of GBP104 million (2017: GBP421 million) related to commercial and
Pharmaceuticals R&D development assets, reflecting a favourable comparison
with 2017 which included an impairment related to the progressive
withdrawal of Tanzeum and a number of other impairments to commercial
assets. Both of these charges were non-cash items.
Major restructuring and integration
Major restructuring costs related to specific Board approved Major
restructuring 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,
are excluded from Adjusted results. Other ordinary course smaller
scale restructuring costs are retained within Total and Adjusted
results.
The Board approved in July 2018 a new major restructuring programme,
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.
Total Major restructuring and integration charges incurred in the
nine months were GBP506 million (2017: GBP872 million). These included
GBP378 million under the existing combined integration programme
and GBP128 million relating to the 2018 major restructuring programme.
Total non-cash charges were GBP100 million (2017: GBP375 million)
all under the existing combined integration programme primarily relating
to write down of assets in manufacturing sites. Total cash charges
were GBP406 million (2017: GBP497 million), including GBP278 million
under the existing combined programme, primarily relating to restructuring
in Europe and International Pharmaceuticals commercial operations,
as well as some manufacturing sites and GBP128 million under the
new 2018 programme, primarily relating to restructuring in the US
Pharmaceuticals commercial operation. Cash payments made in the nine
months were GBP353 million (2017: GBP449 million) including the settlement
of certain charges accrued in previous quarters. The programmes delivered
incremental annual cost savings in the nine months of GBP0.2 billion.
Charges for the existing combined restructuring and integration programme
to date are GBP5.1 billion, of which cash charges were GBP3.7 billion.
Cash payments of GBP3.5 billion have been made to date. Non-cash
charges were GBP1.4 billion.
Estimated charges for 2018 under the existing combined restructuring
and integration programme are GBP0.5 billion, with cash charges of
around GBP0.3 billion and non-cash charges of around 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 GBP3.9 billion of annual savings, including a currency
benefit of GBP0.4 billion. The programme is now expected to deliver
by 2020 total annual savings of GBP4.0 billion on a constant currency
basis, together with an estimated benefit of GBP0.4 billion from
currency on the basis of September 2018 average exchange rates.
The 2018 programme is expected to cost GBP1.7 billion over the period
to 2021, with cash costs of GBP0.8 billion and non-cash costs of
GBP0.9 billion, and is expected to deliver annual savings of around
GBP400 million by 2021 (at 2018 rates). These savings will be fully
re-invested in the Group to help fund targeted increases in R&D and
commercial support of new products.
Estimated charges under the new programme for 2018 are GBP0.4 billion,
with cash charges of around GBP0.3 billion and non-cash charges of
around GBP0.1 billion.
Transaction-related adjustments
Transaction-related adjustments resulted in a net charge of GBP1,706
million (2017: GBP1,358 million). This primarily reflected GBP1,617
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, the value attributable to the Consumer Healthcare Joint
Venture put option held by Novartis and the liabilities for the Pfizer
put option and Pfizer and Shionogi preferential dividends in ViiV
Healthcare.
9 months 9 months
2018 2017
Charge/(credit) GBPm GBPm
--------- ---------
Consumer Healthcare Joint Venture put option 658 823
Contingent consideration on former Shionogi-ViiV
Healthcare Joint Venture
(including Shionogi preferential dividends) 927 405
ViiV Healthcare put options and Pfizer preferential
dividends (18) (86)
Contingent consideration on former Novartis Vaccines
business 50 157
Other adjustments 89 59
--------- ---------
Total transaction-related charges 1,706 1,358
--------- ---------
A net charge of GBP658 million relating to the Consumer Healthcare
Joint Venture represented the re-measurement of the valuation of
the Consumer Healthcare put option to the agreed undiscounted valuation
of $13 billion (GBP9.2 billion on signing), together with an increase
due to movements in exchange rates, largely offset by gains on hedging
contracts.
The GBP927 million charge taken relating to the contingent consideration
for the former Shionogi-ViiV Healthcare Joint Venture represented
a GBP613 million increase in the valuation of the contingent consideration
due to Shionogi, primarily as a result of updated exchange rate assumptions
and sales forecasts following the GEMINI study completed in Q2 2018,
together with a GBP314 million unwind of the discount.
Other adjustments included a GBP61 million charge reflecting the
release of an indemnity asset relating to the tax treatment of inventory
acquired as part of the Novartis Vaccines acquisition, with a corresponding
offset in tax.
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 GBP915 million (2017:
GBP492 million). This included a cash milestone paid to Novartis
of $450 million (GBP317 million) as well as cash payments made by
ViiV Healthcare to Shionogi in relation to its contingent consideration
liability (including preferential dividends) which amounted to GBP584
million (2017: GBP485 million).
An explanation of the accounting for the non-controlling interests
in ViiV Healthcare is set out on page 56.
Divestments, significant legal charges and other items
Divestments and other items included the profit on a number of asset
disposals, including tapinarof, equity investment impairments and
certain other adjusting items. A charge of GBP29 million (2017: GBP60
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 GBP24 million (2017:
GBP184 million).
Adjusted results
GSK uses Adjusted results, which is a non-IFRS measure, to report
the performance of the Group, as it believes that it allows the key
trends and factors in the Group's performance to be more easily and
clearly identified. Non-IFRS measures may be considered in addition
to, but not as a substitute for or superior to, information presented
in accordance with IFRS.
9 months 2018
--------------------------------------
% of Growth Growth
GBPm turnover GBP% CER%
-------- ---------- ------- -------
Turnover 22,624 100 - 4
Cost of sales (6,646) (29.4) 2 4
Selling, general and administration (6,933) (30.6) - 4
Research and development (2,716) (12.0) (5) (3)
Royalty income 220 0.9 (23) (23)
-------- ---------- ------- -------
Adjusted operating profit 6,549 28.9 - 7
-------- ---------- ------- -------
Adjusted profit before tax 6,050 1 8
Adjusted profit after tax 4,870 3 10
Adjusted profit attributable
to shareholders 4,335 5 13
-------- ------- -------
Adjusted earnings per share 88.3p 4 12
-------- ------- -------
Operating profit by business 9 months 2018
--------------------------------------
% of Growth Growth
GBPm turnover GBP% CER%
-------- ---------- ------- -------
Pharmaceuticals 6,080 48.8 (4) -
Pharmaceuticals R&D* (1,898) (6) (3)
Total Pharmaceuticals 4,182 33.6 (3) 2
Vaccines 1,523 34.5 8 18
Consumer Healthcare 1,165 20.3 9 15
-------- ---------- ------- -------
6,870 30.4 1 7
Corporate & other unallocated
costs (321) 13 9
-------- ---------- ------- -------
Adjusted operating profit 6,549 28.9 - 7
-------- ---------- ------- -------
* Operating profit of Pharmaceuticals R&D segment, which is the responsibility
of the President, Pharmaceuticals R&D. It excludes ViiV Healthcare
operating profit, which is reported within the Pharmaceuticals
segment. A more detailed breakdown of R&D expenses is set out on
page 33.
Operating profit
Adjusted operating profit was GBP6,549 million, flat at AER compared
with 2017 but 7% CER higher on a turnover increase of 4%. The Adjusted
operating margin of 28.9% was 0.1 percentage points lower at AER
than in 2017 but 0.7 percentage points higher on a CER basis. This
reflected the benefit from sales growth in all three businesses,
a more favourable mix, the benefits of prioritisation of R&D expenditure
and the comparison with the impact of the Priority Review Voucher
utilised and expensed in 2017 as well as continued tight control
of ongoing costs across all three businesses. This was partly offset
by continuing price pressure, particularly in Respiratory, supply
chain investments, the comparison with the benefit in Q2 2017 of
a settlement for lost third party supply volume in Vaccines and investments
in promotional product support, particularly for new launches in
Respiratory, HIV and Vaccines, as well as a reduction in royalty
income.
Cost of sales
Cost of sales as a percentage of turnover was 29.4%, up 0.5 percentage
points at AER, but down 0.1 percentage points in CER terms compared
with 2017. This primarily reflected a more favourable product mix
in all three businesses, particularly the impact of higher HIV sales
and the launch of Shingrix, as well as a further contribution from
integration and restructuring savings in all three businesses, offset
by an adverse comparison with the benefit of a settlement for lost
third party supply volume in 2017 in Vaccines, as well as continued
adverse pricing pressure in Pharmaceuticals, particularly in Respiratory,
and in Established Vaccines, and increased input costs.
Selling, general and administration
SG&A costs as a percentage of turnover were 30.6%, 0.1 percentage
points lower at AER than in 2017 and 0.1 percentage points lower
on a CER basis. The 4% CER increase primarily reflected increased
investment in promotional product support, particularly for new launches
in Respiratory, HIV and Vaccines, offset by tight control of ongoing
costs, particularly in non-promotional spending across all three
businesses.
Research and development
R&D expenditure was GBP2,716 million (12.0% of turnover), 5% AER,
3% CER lower than 2017, primarily reflecting the comparison with
the impact of the Priority Review Voucher in H1 2017, as well as
the benefit of the prioritisation initiatives started in the second
half of 2017. This was partly offset by increased investment in the
progression of a number of mid and late-stage programmes, particularly
in Oncology, as well as the provision for costs expected to be payable
to a third party relating to the future use of a Priority Review
Voucher awarded in 2018.
Royalty income
Royalty income was GBP220 million (2017: GBP287 million), primarily
reflecting the patent expiry of Cialis.
Operating profit by business
Pharmaceuticals operating profit was GBP4,182 million, down 3% AER
but up 2% CER on a turnover increase of 2% CER. The operating margin
of 33.6% was 0.4 percentage points lower at AER than in 2017 but
flat on a CER basis. This primarily reflected the favourable comparison
with the impact of the Priority Review Voucher in 2017, as well as
a more favourable product mix, primarily driven by the growth in
HIV sales, as well as benefits of prioritisation within R&D. This
was offset by increased investment in new product support, the continued
impact of lower prices, particularly in Respiratory, and the broader
transition of the Respiratory portfolio, the cost payable to a third
party relating to the future use of a Priority Review Voucher awarded
in 2018 as well as a reduction in royalty income.
Vaccines operating profit was GBP1,523 million, 8% AER, 18% CER higher
than in 2017 on a turnover increase of 15% CER. The operating margin
of 34.5% was 1.3 percentage points lower at AER than in 2017 but
0.7 percentage points higher on a CER basis. This was primarily driven
by an improved product mix including the launch of Shingrix, together
with further restructuring and integration benefits. This was partly
offset by the comparison with the benefit of a settlement for lost
third party supply volume recorded in 2017, increased supply chain
costs and increased SG&A resources to support new launches and business
growth.
Consumer Healthcare operating profit was GBP1,165 million, up 9%
AER, 15% CER on a turnover increase of 2% CER. The operating margin
of 20.3% was 2.0 percentage points higher than in 2017 and 2.3 percentage
points higher on a CER basis. This primarily reflected continued
manufacturing restructuring and integration benefits, improved product
mix as well as continued tight control of promotional and other operating
expenses.
Net finance costs
Net finance expense was GBP525 million compared with GBP522 million
in 2017. The increase reflected higher debt following the acquisition
from Novartis of its stake in the Consumer Healthcare Joint Venture
in June 2018 as well as additional interest of GBP23 million on a
historic tax settlement in Q3 2018, partly offset by the benefit
of a one-off accounting adjustment to the amortisation of long term
bond interest charges of GBP20 million in Q1 2018, the maturity of
older bonds refinanced at lower interest rates as well as the translation
impact of exchange rate movements on the reported Sterling costs
of foreign currency denominated interest-bearing instruments.
Taxation
Tax on Adjusted profit amounted to GBP1,180 million and represented
an effective Adjusted tax rate of 19.5% (2017: 21.4%). See 'Taxation'
on page 51 for further details.
Non-controlling interests
The allocation of Adjusted earnings to non-controlling interests
amounted to GBP535 million (2017: GBP601 million). The reduction
in allocation of GBP118 million (2017: GBP259 million) was primarily
due to the ending of non-controlling interest allocation of Consumer
Healthcare profits after 3 May 2018 when the buyout of Novartis'
interest became unconditional. This was partly offset by increases
in the allocation of ViiV Healthcare profits of GBP371 million (Q3
2017: GBP311 million), and the changes in the proportions of preferential
dividends due to each shareholder based on the relative performance
of different products, as well as increases in the allocation to
non-controlling interests due to higher net profits in some of the
Group's other entities with non-controlling interests.
Earnings per share
Adjusted EPS of 88.3p was up 4% AER, 12% CER, compared with a 7%
CER increase in Adjusted operating profit, primarily as a result
of a reduced non-controlling interest allocation of Consumer Healthcare
profits and a reduced Adjusted tax rate.
Currency impact on nine months 2018 results
The results for the nine months to September 2018 are based on average
exchange rates, principally GBP1/$1.35, GBP1/EUR1.13 and GBP1/Yen
148. Comparative exchange rates are given on page 52. The period-end
exchange rates were GBP1/$1.30, GBP1/EUR1.12 and GBP1/Yen 148.
In the nine months to September 2018, turnover was flat in AER terms
but increased 4% CER. Total EPS was 49.0p compared with EPS of 42.5p
in 2017 and Adjusted EPS was 88.3p compared with 84.6p in 2017, up
4% AER, 12% CER. The negative currency impact primarily reflected
the strength of Sterling, particularly against the US Dollar, Yen
and Emerging Market currencies, relative to 2017. Exchange gains
or losses on the settlement of intercompany transactions had a negligible
impact on the negative currency impact of eight percentage points
on Adjusted EPS.
Cash generation and conversion
Cash flow and net debt
9 months
2017
9 months
Q3 2018 2018 (revised)
-------- --------- -----------
Net cash inflow from operating activities
(GBPm) 2,077 4,302 4,049
Free cash flow* (GBPm) 1,554 2,375 1,668
Free cash flow growth (%) 21% 42% 7%
Free cash flow conversion* (%) >100% 99% 80%
Net debt** (GBPm) 23,837 23,837 14,209
-------- --------- -----------
* Free cash flow and free cash flow conversion are defined on page
37.
As announced at Q2 2018, with the introduction of the new R&D strategy,
GSK has revised its definition of free cash flow to include proceeds
from disposals of intangible assets, as set out on page 55. Comparative
figures have been revised accordingly.
** Net debt is analysed on page 55.
Q3 2018
The net cash inflow from operating activities for the quarter was
GBP2,077 million (Q3 2017: GBP1,897 million). The increase primarily
reflected improved operating profits, the phasing of tax payments
and reduced legal settlement costs, partly offset by a negative currency
impact on operating profit, and a larger increase in working capital,
primarily seasonal and other receivables, compared with Q3 2017 particularly
related to the growth in Vaccines sales.
Total cash payments to Shionogi in relation to the ViiV Healthcare
contingent consideration liability in the quarter were GBP208 million,
of which GBP185 million was recognised in cash flows from operating
activities and GBP23 million was recognised in contingent consideration
paid within investing cash flows. These payments are deductible for
tax purposes.
Free cash flow was GBP1,554 million for the quarter (Q3 2017: GBP1,282
million). The increase primarily reflected improved operating profits,
the phasing of tax payments, reduced legal settlement costs and increased
disposals of intangible assets of GBP142 million primarily relating
to the disposal of tapinarof (Q3 2017: GBP6 million). This was partly
offset by a negative currency impact on operating profit and increased
working capital primarily reflecting a larger increase in seasonal
and other receivables compared with Q3 2017, particularly related
to the growth in Vaccines sales.
9 months 2018
The net cash inflow from operating activities for the nine months
was GBP4,302 million (2017: GBP4,049 million). The increase primarily
reflected improved operating profits, reduced legal settlement costs
and restructuring payments and favourable timing of payments for
returns and rebates, partly offset by a negative currency impact
on operating profit and a larger increase in working capital, primarily
seasonal and other receivables compared with 2017, particularly related
to the growth in Vaccines sales.
Total cash payments to Shionogi in relation to the ViiV Healthcare
contingent consideration liability in the nine months were GBP584
million, of which GBP517 million was recognised in cash flows from
operating activities and GBP67 million was recognised in contingent
consideration paid within investing cash flows. These payments are
deductible for tax purposes.
Free cash flow was GBP2,375 million for the nine months (2017: GBP1,668
million). The increase primarily reflected improved operating profits,
reduced legal settlement costs and restructuring payments, favourable
timing of payments for returns and rebates, lower capital expenditures
including a favourable comparison to the impact of the Priority Review
Voucher in 2017, increased disposals of intangible assets of GBP165
million (2017: GBP24 million), primarily relating to the disposal
of tapinarof, as well as reduced dividend payments to non-controlling
interests. This was partly offset by a negative currency impact on
operating profit, increased contingent consideration payments including
the $450 million (GBP317 million) milestone to Novartis paid in Q1
2018 and increased working capital reflecting a larger increase in
seasonal and other receivables compared with 2017 particularly related
to growth in Vaccines sales.
Net debt
At 30 September 2018, net debt was GBP23.8 billion, compared with
GBP13.2 billion at 31 December 2017, comprising gross debt of GBP27.7
billion and cash and liquid investments of GBP3.9 billion. Net debt
increased due to the GBP9.3 billion acquisition from Novartis of
the remaining stake in the Consumer Healthcare Joint Venture in June
2018, the GBP0.2 billion acquisition of the investment in 23andMe,
GBP0.6 billion of unfavourable exchange impacts from the translation
of non-Sterling denominated debt, and dividends paid to shareholders
of GBP3.0 billion, partly offset by increased free cash flow of GBP2.4
billion after the milestone payment to Novartis.
At 30 September 2018, GSK had short-term borrowings (including overdrafts)
repayable within 12 months of GBP2.9 billion with loans of GBP6.6
billion repayable in the subsequent year.
Working capital
30 September 30 June 31 March 30 December 30 September
2018 2018 2018 2017 2017
------------- -------- --------- ------------ -------------
Working capital conversion
cycle* (days) 230 223 204 191 210
Working capital percentage
of turnover (%) 29 26 24 22 25
------------- -------- --------- ------------ -------------
Working capital and working capital conversion cycle are defined
* on page 37.
The increase of 7 days in Q3 2018 was predominantly due to an increase
in receivables reflecting increased seasonal and other sales in Q3,
particularly related to the growth in Vaccines sales partly offset
by reduced inventory levels.
The increase of 20 days compared with September 2017 primarily reflected
the increase in trade receivables as a result of recent sales growth,
particularly new launches, and the full year impact of inventory
for new product launches. It was also affected by reduced denominator
due to lower restructuring and impairment costs in 2018 and an increase
due to exchange rates (compared with a reduction impacting September
2017).
Returns to shareholders
Quarterly dividends
The Board has declared a third interim dividend for 2018 of 19 pence
per share (Q3 2017: 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 2018 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 8 January 2019. An annual
fee of $0.02 per ADS (or $0.005 per ADS per quarter) is charged by
the Depositary.
The ex-dividend date will be 15 November 2018, with a record date
of 16 November 2018 and a payment date of 10 January 2019.
Paid/ Pence per
payable share GBPm
--------------- ---------- ------
2018
First interim 12 July 2018 19 934
11 October
Second interim 2018 19 934
10 January
Third interim 2019 19 935
2017
First interim 13 July 2017 19 928
12 October
Second interim 2017 19 929
11 January
Third interim 2018 19 929
Fourth interim 12 April 2018 23 1,130
---------- ------
80 3,916
---------- ------
GSK made no share repurchases during the quarter. The company issued
0.6 million shares under employee share schemes for proceeds of GBP8
million (Q3 2017: GBP3 million).
The weighted average number of shares for Q3 2018 was 4,917 million,
compared with 4,890 million in Q3 2017.
Research and development
GSK remains focused on delivering an improved return on its investment
in R&D. Sales contribution, reduced attrition, cost reduction and
time to market are all important drivers of improving our internal
rate of return. R&D expenditure is not determined as a percentage
of sales but instead capital is allocated using strict returns based
criteria depending on the pipeline opportunities available.
The R&D operations in Pharmaceuticals are broadly split into Discovery
activities and Development work, each supported by specific and common
infrastructure and other shared services where appropriate. The new
R&D strategy has redefined the allocation of costs between Discovery
and Development such that Discovery now includes all activities up
to and including phase I. Development includes phase II activities
onwards (previously phase IIa activities were included within Discovery).
In addition, the methodology of allocating projects by phase has
been revised. Comparative information has been revised accordingly.
The impact on Q3 2017 was to increase Discovery costs by GBP24 million
and Technology, facilities and functional support costs by GBP13
million and reduce Development costs by GBP37 million. The impact
on the nine months to September 2017 was to increase Discovery costs
by GBP31 million and Technology, facilities and functional support
costs by GBP27 million and reduce Development costs by GBP58 million.
Q3 2017
Q3 2018 (revised) Growth Growth
GBPm GBPm GBP% CER%
-------- ----------- ------- -------
Discovery 216 245 (11) (10)
Development 356 302 18 19
Technology, facilities and
functional support 151 132 14 14
-------- ----------- ------- -------
Pharmaceuticals 723 679 6 8
Vaccines 176 164 7 6
Consumer Healthcare 62 55 13 15
-------- ----------- ------- -------
Adjusted R&D 961 898 7 8
Amortisation and impairment
of
intangible assets 18 74
Major restructuring costs 4 68
Other items 5 7
Total Research and development 988 1,047 (6) (5)
-------- ----------- ------- -------
9 months
2017
9 months
2018 (revised) Growth Growth
GBPm GBPm GBP% CER%
--------- ----------- ------- -------
Discovery 617 761 (19) (16)
Development 978 1,057 (7) (4)
Technology, facilities and
functional support 435 423 3 6
--------- ----------- ------- -------
Pharmaceuticals 2,030 2,241 (9) (6)
Vaccines 509 460 11 11
Consumer Healthcare 177 169 5 8
--------- ----------- ------- -------
Adjusted R&D 2,716 2,870 (5) (3)
Amortisation and impairment
of
intangible assets 63 121
Major restructuring costs 27 253
Other items 11 23
Total Research and development 2,817 3,267 (14) (11)
--------- ----------- ------- -------
In Q3 2018, Adjusted R&D expenditure increased 7% AER, 8% CER, with
Pharmaceuticals up 6% AER, 8% CER primarily reflecting an increased
investment in the progression of a number of mid and late stage programmes,
particularly in Oncology, as well as the provision for costs expected
to be payable to a third party relating to the future use of a Priority
Review Voucher. The decline in Discovery primarily reflected the
phasing of expenditure on specific programmes, including the transfer
of certain Oncology assets into the development phase as well as
the benefits of the re-prioritisation of R&D that started in the
second half of 2017. The growth in Technology, facilities and functional
support costs primarily reflected increased investments in data analytics.
In the nine months to 30 September 2018, Adjusted R&D expenditure
declined 5% AER, 3% CER with Pharmaceuticals down 9% AER, 6% CER,
primarily reflecting the comparison with the impact of the utilisation
of the Priority Review Voucher in 2017 and the benefit of the prioritisation
initiatives started in Q3 2017. This was partly offset by increased
investment in the progression of a number of mid and late stage programmes,
particularly in Oncology, and the provision for costs expected to
be payable to a third party relating to the future use of a Priority
Review Voucher.
R&D pipeline
Pipeline news flow since Q2 2018:
Respiratory
GSK has led the way in developing innovative medicines to advance
the management of asthma and COPD for nearly 50 years. Over the last
five years we have launched six innovative medicines responding to
continued unmet patient need, despite existing therapies.
Trelegy Ellipta
-- On 21 September, the European Medicines Agency's Committee for
Medicinal Products for Human Use issued a positive opinion supporting
the use of Trelegy Ellipta (FF/UMEC/VI) in patients not adequately
treated by a long-acting muscarinic receptor antagonist and long-acting
<BETA>2-agonist. It also referenced the effect on exacerbations
based on data from the InforMing the PAthway of COPD Treatment
(IMPACT) study.
Anoro and Incruse Ellipta
-- In July, regulatory submissions were made to the US FDA to support
potential updates to the relevant sections of the labelling for
both Anoro Ellipta (UMEC/VI) and Incruse Ellipta (UMEC). These
were primarily based on data from the landmark IMPACT trial which
showed the contribution of umeclidinium on reduction in exacerbations
(FF/UMEC/VI compared with FF/VI). Similar submissions to regulators
in the EU were made in October 2018.
Nucala severe asthma
-- On 30 August, the European Commission approved Nucala (mepolizumab)
as an add-on treatment for severe refractory eosinophilic asthma
in paediatric patients aged six up to 17 years. As a result of
this licence extension, Nucala is now approved for use for severe
refractory eosinophilic asthma in both adult and paediatric patients
in the 31 European countries covered by the EMA.
-- On 10 September, results from an indirect treatment comparison
of the licensed doses of Nucala (mepolizumab), versus benralizumab
and reslizumab in patients with severe eosinophilic asthma were
published in The Journal of Allergy and Clinical Immunology. The
data showed that in patients with similar blood eosinophil counts,
mepolizumab significantly reduced clinically significant exacerbations
and improved asthma control compared with both benralizumab and
reslizumab.
-- In the third quarter, a regulatory filing was submitted in both
EU and US for a liquid formulation of Nucala (mepolizumab) to be
administered subcutaneously via an autoinjector or a safety syringe
device. Updates regarding regulatory actions in 2019 will be provided
in due course.
Nucala COPD
-- On 7 September, the US FDA issued a complete response letter (CRL)
for the use of Nucala (mepolizumab) as an add-on treatment to inhaled
corticosteroid-based maintenance treatment for the reduction of
exacerbations in patients with COPD, guided by blood eosinophil
counts. The CRL stated that more clinical data are required to
support an approval.
Danirixin (GSK1325756)
-- In October, a planned interim analysis of the phase IIb dose-ranging
study of danirixin in patients with COPD was undertaken. This interim
analysis showed danirixin did not achieve the primary efficacy
endpoint and this has changed the understanding of the risk/benefit
profile of this asset in COPD. Based on these data GSK has taken
the decision to stop development in COPD.
TRPV4 (GSK2798745)
-- In September, data from a planned interim analysis of the ongoing
clinical phase II study of the TRPV4 blocker GSK'745 in patients
with chronic cough showed it had met the pre-defined criteria for
futility. Based on these data, GSK has taken the decision to stop
ongoing development of GSK'745 for cough due to lack of efficacy.
The phase I programme in acute respiratory distress syndrome is
continuing.
TLR7 (GSK2245035)
-- In September 2018, data from a phase II study of GSK'035 in mild
asthmatic patients showed it did not meet its pre-determined success
criteria. Based on these data, GSK has taken the decision to stop
ongoing development of GSK'035 in asthma due to lack of efficacy.
HIV/Infectious diseases
GSK has a long-standing commitment to HIV and infectious diseases
- our scientists discovered amoxicillin, the widely used antibiotic,
over 40 years ago, and developed the first medicines approved to
treat HIV (AZT), HBV (lamivudine), herpes viruses (acyclovir) and
influenza (zanamivir). Today, we are investigating new medicines
to treat, prevent and possibly, ultimately cure HIV and other infectious
diseases. Our scientists are committed to developing medicines that
advance HIV care by exploring new treatment paradigms (two-drug regimens),
new modalities (long-acting injectables) and new mechanisms of actions
(including maturation inhibitors and broadly neutralising antibodies).
Cabotegravir + rilpivirine
-- On 30 October, positive 48-week results for FLAIR, the second global
phase III study of long-acting, injectable two-drug regimen for
the treatment of HIV were announced.
-- On 29 October, three-year results from LATTE-2, a phase IIb study
showing high rates of virus suppression from first long-acting
injectable, two-drug HIV regimen were presented at HIV Glasgow
Drug Therapy meeting in Scotland.
-- On 15 August, positive headline results from the global, phase
III ATLAS study of a long-acting, injectable two-drug regimen for
the treatment of HIV were announced.
Dolutegravir + lamivudine
-- On 18 October, a regulatory application was submitted to the US
FDA for a single-tablet, two-drug regimen of dolutegravir and lamivudine
for treatment of HIV.
-- On 14 September, a regulatory application was submitted to the
European Medicines Agency for a single-tablet, two-drug regimen
of dolutegravir and lamivudine for treatment of HIV.
Immuno-inflammation
Immuno-inflammatory diseases are relatively common, chronic, debilitating
conditions. While diverse in presentation, they are collectively
hallmarked by impairment of quality of life and can lead to premature
mortality. There is significant unmet need for improved treatment
options for immuno-inflammatory diseases.
Benlysta
-- On 23 October, data on Benlysta (belimumab) phase II study (PLUTO)
in paediatric patients with childhood-onset systemic lupus erythematosus
were presented at American College of Rheumatology (ACR).
-- In September, data from the Benlysta (belimumab) phase IV study
(EMBRACE) in adult patients of black race with active, autoantibody-positive,
systemic lupus erythematosus who received standard therapy were
received in-house. Data to be presented at a future scientific
congress.
Anti-GM-CSF antibody (GSK3196165)
-- On 22 October, data from the phase II study (BAROQUE) of anti-GM-CSF
antibody (GSK'165) were presented at ACR supporting its efficacy
and safety in patients with rheumatoid arthritis. The patient benefit
supports further clinical development for RA.
-- On 22 October, data from the phase IIa study of anti-GM-CSF antibody
(GSK'165) in patients with inflammatory hand osteoarthritis were
presented at ACR. As a result of these data, development of the
asset for potential use in treatment of hand osteoarthritis was
terminated during the second quarter.
Oncology
Cancer is one of the leading causes of death in the developed world.
GSK is focused on delivering transformational therapies for cancer
patients that may help to maximise their survival. GSK's pipeline
is focused on immuno-oncology, cell therapy, and epigenetics. Our
goal is to achieve a sustainable flow of new treatments for cancer
patients based on a diversified portfolio of investigational medicines
utilising modalities such as small molecules, antibodies, multi-specific
molecules, adjuvants and cells, either alone or in combination.
ICOS agonist (GSK3359609)
-- On 22 October, phase I safety, pharmacokinetic and pharmacodynamic
data for GSK'609 (monotherapy and combination with pembrolizumab)
were presented at the European Society for Medical Oncology meeting.
BCMA antibody-drug conjugate (GSK2857916)
-- On 12 October, the phase II study of GSK'916 in combination with
standard of care in 2nd line multiple myeloma was started; primary
results are anticipated in 2020. Interim data from this study will
be used to inform the start of two phase III studies in 2nd line
multiple myeloma in 2019.
Other pharmaceuticals
Kozenis (tafenoquine)
-- On 12 September, Kozenis (tafenoquine) was approved by the Australian
Therapeutic Goods Administration for the radical cure of P. vivax
malaria.
Daprodustat (GSK1278863)
-- In October, positive results from the open-label, phase III study
in 28 Japanese patients with anaemia associated with chronic kidney
disease were presented at Kidney Week/the American Society for
Nephrology annual meeting.
-- On 29 October, positive phase III data were announced from the
second of three pivotal studies of daprodustat in 271 Japanese
patients on dialysis with anaemia associated with chronic kidney
disease.
Miridesap (GSK2315698) and dezamizumab (GSK2398852)
-- On 16 October, further development of miridesap and dezamizumab
(SAP antagonist) for systemic amyloidosis was terminated due to
data that has changed the risk/benefit profile of the dual therapy.
Vaccines
Our Vaccines business is one of the largest in the world with the
broadest portfolio of any company. The focus of GSK Vaccines pipeline
is to maintain GSK's meningococcal meningitis market leadership with
both licensed and candidate vaccines. In addition, we are pursuing
a full RSV portfolio for infants, older adults and maternal immunisation,
with different approaches tailored to the specific segments. This
portfolio has the potential to deliver a series of first and/or best
in class vaccines. In addition, we continue to leverage our unique
technology platforms to target new, emerging or remaining medical
needs.
Tuberculosis vaccine
-- On 25 September 2018, GSK and Aeras announced that GSK's M72/AS01
candidate vaccine significantly reduced the incidence of pulmonary
tuberculosis disease in HIV-negative adults with latent tuberculosis
infection in an ongoing phase IIb clinical trial testing. These
primary results were published in the New England Journal of Medicine.
Reporting definitions
GSK uses a number of adjusted, non-IFRS, measures to report the performance
of its business. These measures are used by management for planning
and reporting purposes and in discussions with and presentations
to investment analysts and rating agencies and may not be directly
comparable with similarly described measures used by other companies.
Non-IFRS measures may be considered in addition to, but not as a
substitute for or superior to, information presented in accordance
with IFRS.
Total results
Total reported results represent the Group's overall performance.
However, these results can contain material unusual or non-operational
items that may obscure the key trends and factors determining the
Group's operational performance. As a result, GSK also reports Adjusted
results, which is a non-IFRS measure.
Adjusted results
GSK believes that Adjusted results allow the key trends and factors
driving the Group's performance to be more easily and clearly identified
by shareholders. The definition of Adjusted results, as set out below,
also aligns the Group's results with the majority of its peer companies
and how they report earnings.
Adjusted results exclude the following items from Total results:
amortisation and impairment of intangible assets (excluding computer
software) and goodwill; major restructuring costs (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 those integration costs following material acquisitions;
significant legal charges (net of insurance recoveries) and expenses
on the settlement of litigation and government investigations, transaction-related
accounting adjustments for significant acquisitions, and other items,
including disposals of associates, products and businesses and other
operating income other than royalty income, together with the tax
effects of all of these items and the impact of the enactment of
the US Tax Cuts and Jobs Act in 2017. Costs for all other ordinary
course smaller scale restructuring and legal charges and expenses
are retained within Total and Adjusted results.
As Adjusted results may exclude significant costs, such as those
from major restructuring programmes or significant legal charges,
they should not be regarded as a complete picture of the Group's
financial performance which is presented in its Total results.
Reconciliations between Total and Adjusted results, as set out on
pages 16, 24 and 58 to 61, including detailed breakdowns of the key
adjusting items, are provided to shareholders to ensure full visibility
and transparency as they assess the Group's performance.
Free cash flow
With the introduction of the new R&D strategy in Q2 2018, GSK has
revised its definition of free cash flow, a non-IFRS measure, to
include proceeds from the sale of intangible assets. This balances
with the expenditure on purchases of intangible assets, which is
deducted in calculating free cash flow, and makes the treatment of
intangible assets consistent with property, plant and equipment.
Free cash flow is now 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 55.
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.
Working capital conversion cycle
The working capital conversion cycle is calculated as the number
of days sales outstanding plus days inventory outstanding, less days
purchases outstanding.
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.
Outlook, assumptions and cautionary statements
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 digits percentage CAGR for
the period 2016-2020. These outlooks are based on 2015 exchange rates.
Assumptions related to 2018 guidance and 2016-2020 outlook
In outlining the expectations for 2018 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 and earnings expectations
assume no material interruptions to supply of the Group's products
and no material mergers, acquisitions, disposals, litigation costs
or share repurchases for 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 2018 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.
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. 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). Subject to material changes in the product
mix, and following the enactment of US tax reform, the Group's medium-term
effective tax rate is expected to be in the region of 19-20% of Adjusted
profits. This incorporates management's best estimates of the impact
of US tax reform on the Group based on the information currently
available. As more information on the detailed application of the
US Tax Cuts and Jobs Act becomes available, the assumptions underlying
these estimates could change with consequent adjustments to the charges
taken that could have a material impact on the results of the Group.
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, macroeconomic 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, 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 2017. 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.
Results presentation
A webcast of the quarterly results presentation hosted by Emma Walmsley,
GSK CEO, will be held at 2.30pm on 31 October 2018. 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.
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
US Media enquiries: Sarah Spencer +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
Financial information
Income statements
9 months 9 months
Q3 2018 Q3 2017 2018 2017
GBPm GBPm GBPm GBPm
-------- -------- --------- ---------
TURNOVER 8,092 7,843 22,624 22,547
Cost of sales (2,636) (2,652) (7,337) (7,784)
-------- -------- --------- ---------
Gross profit 5,456 5,191 15,287 14,763
Selling, general and administration (2,527) (2,308) (7,295) (7,139)
Research and development (988) (1,047) (2,817) (3,267)
Royalty income 94 107 220 287
Other operating income/(expense) (125) (66) (1,466) (1,069)
-------- -------- --------- ---------
OPERATING PROFIT 1,910 1,877 3,929 3,575
Finance income 10 13 57 49
Finance expense (233) (194) (589) (580)
Profit on disposal of associates 3 8 3 28
Share of after tax profits
of
associates and joint ventures 15 7 26 11
PROFIT BEFORE TAXATION 1,705 1,711 3,426 3,083
Taxation (193) (316) (680) (551)
Tax rate % 11.3% 18.5% 19.8% 17.9%
-------- -------- --------- ---------
PROFIT AFTER TAXATION
FOR THE PERIOD 1,512 1,395 2,746 2,532
-------- -------- --------- ---------
Profit attributable to non-controlling
interests 94 183 338 454
Profit attributable to shareholders 1,418 1,212 2,408 2,078
1,512 1,395 2,746 2,532
-------- -------- --------- ---------
EARNINGS PER SHARE 28.8p 24.8p 49.0p 42.5p
-------- -------- --------- ---------
Diluted earnings per share 28.5p 24.6p 48.5p 42.1p
-------- -------- --------- ---------
Statement of comprehensive income
Q3 2018 Q3 2017
GBPm GBPm
-------- --------
Profit for the period 1,512 1,395
Items that may be reclassified subsequently to income
statement:
Exchange movements on overseas net assets and net
investment hedges 4 (24)
Fair value movements on equity investments (38)
Reclassification of fair value movements on equity
investments - (11)
Deferred tax on fair value movements on equity investments (11)
Deferred tax reversed on reclassification of equity
investments - 1
Fair value movements on cash flow hedges 3 (3)
Reclassification of cash flow hedges to income statement 1 -
8 (86)
-------- --------
Items that will not be reclassified to income statement:
Exchange movements on overseas net assets of non-controlling
interests (11) (146)
Fair value movements on equity investments 115
Re-measurement gains on defined benefit plans 189 255
Tax on re-measurement gains on defined benefit plans (35) (53)
-------- --------
258 56
-------- --------
Other comprehensive income/(expense) for the period 266 (30)
-------- --------
Total comprehensive income for the period 1,778 1,365
-------- --------
Total comprehensive income for the period attributable
to:
Shareholders 1,695 1,328
Non-controlling interests 83 37
-------- --------
1,778 1,365
-------- --------
Statement of comprehensive income
9 months 9 months
2018 2017
GBPm GBPm
--------- ---------
Profit for the period 2,746 2,532
Items that may be reclassified subsequently to income
statement:
Exchange movements on overseas net assets and net
investment hedges (368) 538
Fair value movements on equity investments 15
Reclassification of fair value movements on equity
investments - (38)
Deferred tax on fair value movements on equity investments (15)
Deferred tax reversed on reclassification of equity
investments - 10
Fair value movements on cash flow hedges 182 (5)
Reclassification of cash flow hedges to income statement (164) 2
Deferred tax on fair value movements on cash flow
hedges (24) (1)
Deferred tax reversed on reclassification of cash
flow hedges 20 -
(354) 506
--------- ---------
Items that will not be reclassified to income statement:
Exchange movements on overseas net assets of non-controlling
interests (19) (147)
Fair value movements on equity investments 268
Deferred tax on fair value movements on equity investments (13)
Re-measurement gains on defined benefit plans 1,103 440
Tax on re-measurement gains on defined benefit plans (205) (102)
--------- ---------
1,134 191
--------- ---------
Other comprehensive income for the period 780 697
--------- ---------
Total comprehensive income for the period 3,526 3,229
--------- ---------
Total comprehensive income for the period attributable
to:
Shareholders 3,207 2,922
Non-controlling interests 319 307
--------- ---------
3,526 3,229
--------- ---------
Pharmaceuticals turnover - three months ended 30 September 2018
Total US Europe International
------------------------------------- ------------------------------------- ------------------------------------- -------------------------------------
Growth Growth Growth Growth
----------------------- ----------------------- ----------------------- -----------------------
GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER%
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Respiratory 1,666 3 5 846 4 5 351 5 4 469 1 6
Seretide/Advair 619 (17) (15) 309 (20) (19) 132 (20) (20) 178 (7) (2)
Ellipta products 500 34 35 308 34 36 110 37 36 82 28 33
Anoro Ellipta 115 34 34 77 33 34 24 33 33 14 40 30
Arnuity Ellipta 10 43 43 9 50 50 - - - 1 - -
Incruse Ellipta 75 34 38 51 31 33 18 38 38 6 50 75
Relvar/Breo
Ellipta 258 15 16 139 9 11 59 20 20 60 22 24
Trelegy Ellipta 42 - - 32 - - 9 - - 1 - -
Nucala/Mepolizumab 145 59 62 87 43 44 41 >100 >100 17 70 80
Avamys/Veramyst 60 - 2 - - - 15 - (7) 45 5 9
Flixotide/Flovent 117 (6) (6) 59 (9) (11) 19 6 6 39 (7) (2)
Ventolin 172 8 12 83 26 29 29 (6) (3) 60 (3) 2
Other 53 (10) (10) - - - 5 (17) (33) 48 (8) (4)
HIV 1,209 11 12 754 11 12 290 2 1 165 27 34
Epzicom/Kivexa 24 (51) (47) 1 (50) - 9 (65) (65) 14 (33) (29)
Juluca 37 - - 35 - - 2 - - - - -
Selzentry 26 (16) (13) 14 (18) (18) 8 (27) (27) 4 33 67
Tivicay 432 19 21 271 11 12 93 16 15 68 70 85
Triumeq 669 8 9 427 5 6 172 9 8 70 23 26
Other 21 (30) (37) 6 (54) (54) 6 (25) (37) 9 - (11)
Immuno-inflammation 122 28 29 108 27 28 9 29 29 5 67 67
Benlysta 121 29 31 108 27 29 10 43 29 3 50 100
Established
Pharmaceuticals 1,224 (12) (9) 185 (27) (26) 301 (7) (7) 738 (10) (5)
Dermatology 109 (5) - 1 (50) (50) 40 - - 68 (7) 1
Augmentin 133 (10) (5) - - - 40 (2) (2) 93 (13) (7)
Avodart 144 - 1 3 - 33 59 (11) (12) 82 9 12
Coreg 9 (76) (78) 9 (76) (78) - - - - - -
Eperzan/Tanzeum 3 (85) (86) 3 (83) (85) - - - - - -
Imigran/Imitrex 33 (13) (13) 13 (19) (19) 13 (19) (19) 7 17 17
Lamictal 148 (11) (10) 74 (14) (13) 30 11 11 44 (19) (17)
Requip 19 (27) (23) - - - 6 - 17 13 (28) (28)
Serevent 19 (17) (17) 9 (31) (31) 7 (13) (12) 3 50 50
Seroxat/Paxil 42 (9) (4) - - - 9 (10) - 33 (8) (6)
Valtrex 32 (6) (3) 6 (14) (14) 8 - - 18 (5) -
Zeffix 18 (14) (14) 1 - - 1 - - 16 (20) (20)
Other 515 (10) (7) 66 (4) (3) 88 (10) (13) 361 (11) (6)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Pharmaceuticals 4,221 1 3 1,893 3 4 951 1 - 1,377 (3) 2
-------- -------- -------- -------- ---------- -------- -------- --------- -------- -------- --------- --------
Pharmaceuticals turnover - nine months ended 30 September 2018
Total US Europe International
------------------------------------- ------------------------------------- ------------------------------------- -------------------------------------
Growth Growth Growth Growth
----------------------- ----------------------- ----------------------- -----------------------
GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER%
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Respiratory 4,937 (3) 1 2,345 (8) (3) 1,118 4 3 1,474 - 6
Seretide/Advair 1,775 (24) (21) 798 (34) (30) 449 (19) (20) 528 (10) (5)
Ellipta products 1,395 26 31 832 20 27 322 38 37 241 34 42
Anoro Ellipta 332 42 48 220 40 48 72 47 45 40 48 56
Arnuity Ellipta 31 35 43 28 27 32 - - - 3 >100 >100
Incruse Ellipta 197 41 46 126 35 43 54 50 50 17 55 64
Relvar/Breo
Ellipta 756 6 11 395 (6) (1) 182 23 22 179 27 33
Trelegy Ellipta 79 - - 63 - - 14 - - 2 - -
Nucala/Mepolizumab 390 75 81 234 53 61 108 >100 >100 48 100 >100
Avamys/Veramyst 227 5 9 - - - 57 (3) (5) 170 9 15
Flixotide/Flovent 429 (1) 4 239 3 9 67 (3) (3) 123 (8) (2)
Ventolin 522 (5) - 242 (10) (5) 94 (2) (2) 186 (1) 7
Other 199 (10) (8) - - - 21 - (10) 178 (11) (7)
HIV 3,446 8 12 2,127 7 13 877 7 6 442 14 21
Epzicom/Kivexa 87 (54) (52) 3 (87) (83) 33 (66) (66) 51 (28) (23)
Juluca 71 - - 68 - - 3 - - - - -
Selzentry 84 (14) (10) 42 (16) (10) 26 (19) (19) 16 - 6
Tivicay 1,187 18 23 755 13 19 273 20 18 159 43 56
Triumeq 1,957 8 12 1,241 3 9 524 19 18 192 19 24
Other 60 (35) (37) 18 (53) (55) 18 (28) (32) 24 (17) (17)
Immuno-inflammation 336 20 26 299 19 25 26 30 30 11 37 50
Benlysta 335 21 27 299 19 25 27 35 30 9 29 71
Established
Pharmaceuticals 3,740 (10) (6) 563 (25) (21) 941 (9) (10) 2,236 (6) -
Dermatology 320 (6) (1) 2 - - 118 (3) (4) 200 (7) 1
Augmentin 424 (5) 1 - - - 132 (3) (4) 292 (5) 3
Avodart 423 (9) (6) 9 (25) (8) 180 (23) (24) 234 7 12
Coreg 36 (68) (67) 36 (68) (67) - - - - - -
Eperzan/Tanzeum 27 (62) (60) 26 (63) (60) 1 (60) (61) - - -
Imigran/Imitrex 101 (23) (23) 39 (37) (35) 43 (14) (14) 19 (5) (5)
Lamictal 458 (5) (1) 227 (8) (3) 83 2 1 148 (4) 1
Requip 62 (24) (21) 4 (60) (60) 19 (5) (5) 39 (25) (19)
Serevent 60 (17) (14) 31 (21) (15) 22 (12) (12) 7 (13) (13)
Seroxat/Paxil 124 (9) (6) - - - 29 - - 95 (12) (7)
Valtrex 90 (7) (3) 14 (12) (6) 23 - - 53 (9) (3)
Zeffix 53 (23) (22) 1 - - 4 - - 48 (25) (23)
Other 1,562 (6) (2) 174 (7) (4) 287 (5) (7) 1,101 (7) (1)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Pharmaceuticals 12,459 (2) 2 5,334 (4) 2 2,962 1 (1) 4,163 (2) 4
-------- -------- -------- -------- ---------- -------- -------- --------- -------- -------- --------- --------
Vaccines turnover - three months ended 30 September 2018
Total US Europe International
------------------------------------- ------------------------------------- ------------------------------------- -------------------------------------
Growth Growth Growth Growth
----------------------- ----------------------- ----------------------- -----------------------
GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER%
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Meningitis 329 10 15 192 34 39 83 (19) (20) 54 4 21
Bexsero 207 18 24 109 58 64 77 (18) (19) 21 62 >100
Menveo 102 4 8 83 12 16 4 (33) (33) 15 (17) (11)
Other 20 (17) (17) - - - 2 (33) (33) 18 (14) (14)
Influenza 304 (11) (7) 252 (14) (10) 33 22 19 19 (17) (4)
Fluarix,
FluLaval 304 (11) (7) 252 (14) (10) 33 22 19 19 (17) (4)
Shingles 286 - - 276 - - 1 - - 9 - -
Shingrix 286 - - 276 - - 1 - - 9 - -
Established
Vaccines 1,005 (4) (3) 340 (11) (9) 285 (5) (6) 380 4 5
Infanrix,
Pediarix 160 (18) (17) 66 (30) (30) 61 (24) (25) 33 50 64
Boostrix 157 (5) (3) 94 (5) (3) 43 (2) (2) 20 (9) (5)
Hepatitis 213 1 3 124 (6) (5) 66 25 21 23 (8) 8
Rotarix 152 (3) (2) 37 9 12 28 12 12 87 (11) (10)
Synflorix 119 4 4 - - - 12 (29) (29) 107 10 10
Priorix,
Priorix
Tetra,
Varilrix 81 2 5 - - - 42 (11) (12) 39 22 30
Cervarix 55 49 51 - - - 3 (62) (63) 52 79 83
Other 68 (24) (28) 19 (10) - 30 11 17 19 (54) (70)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Vaccines 1,924 14 17 1,060 30 34 402 (7) (8) 462 5 9
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Vaccines turnover - nine months ended 30 September 2018
Total US Europe International
------------------------------------- ------------------------------------- ------------------------------------- -------------------------------------
Growth Growth Growth Growth
----------------------- ----------------------- ----------------------- -----------------------
GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER%
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Meningitis 693 1 5 324 19 25 258 (15) (17) 111 (1) 17
Bexsero 470 7 12 177 30 37 239 (10) (11) 54 35 77
Menveo 188 (10) (5) 147 8 14 13 (55) (55) 28 (36) (30)
Other 35 (10) (10) - - - 6 (45) (45) 29 4 4
Influenza 330 (12) (8) 250 (14) (9) 35 9 6 45 (18) (9)
Fluarix,
FluLaval 330 (12) (8) 250 (14) (9) 35 9 6 45 (18) (9)
Shingles 563 - - 528 - - 1 - - 34 - -
Shingrix 563 - - 528 - - 1 - - 34 - -
Established
Vaccines 2,829 (2) - 933 - 6 890 1 1 1,006 (7) (4)
Infanrix,
Pediarix 515 (12) (9) 221 (20) (16) 206 (14) (15) 88 26 36
Boostrix 378 (11) (8) 201 (6) - 125 (7) (7) 52 (34) (32)
Hepatitis 618 16 20 355 18 24 185 22 20 78 - 8
Rotarix 387 (3) - 101 (3) 3 82 17 16 204 (9) (7)
Synflorix 318 (20) (20) - - - 37 (12) (12) 281 (21) (21)
Priorix,
Priorix
Tetra,
Varilrix 241 2 3 - - - 127 1 - 114 4 7
Cervarix 123 71 74 - - - 15 (35) (35) 108 >100 >100
Other 249 4 5 55 45 58 113 25 24 81 (26) (30)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Vaccines 4,415 12 15 2,035 36 44 1,184 (2) (4) 1,196 (4) -
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Balance sheet
30 September 30 September 31 December
2018 2017 2017
GBPm GBPm GBPm
------------- ------------- ------------
ASSETS
Non-current assets
Property, plant and equipment 10,923 10,633 10,860
Goodwill 5,848 5,764 5,734
Other intangible assets 17,263 17,921 17,562
Investments in associates and
joint ventures 221 175 183
Other investments 1,393 941 918
Deferred tax assets 3,412 4,380 3,796
Derivative financial instruments 51 - 8
Other non-current assets 2,075 1,313 1,413
------------- ------------- ------------
Total non-current assets 41,186 41,127 40,474
------------- ------------- ------------
Current assets
Inventories 5,788 5,661 5,557
Current tax recoverable 257 239 258
Trade and other receivables 7,292 6,491 6,000
Derivative financial instruments 56 163 68
Liquid investments 80 82 78
Cash and cash equivalents 3,793 4,743 3,833
Assets held for sale 152 277 113
------------- ------------- ------------
Total current assets 17,418 17,656 15,907
------------- ------------- ------------
TOTAL ASSETS 58,604 58,783 56,381
------------- ------------- ------------
LIABILITIES
Current liabilities
Short-term borrowings (2,902) (4,740) (2,825)
Contingent consideration liabilities (818) (917) (1,076)
Trade and other payables (13,093) (19,840) (20,970)
Derivative financial instruments (63) (210) (74)
Current tax payable (813) (1,061) (995)
Short-term provisions (706) (670) (629)
------------- ------------- ------------
Total current liabilities (18,395) (27,438) (26,569)
------------- ------------- ------------
Non-current liabilities
Long-term borrowings (24,808) (14,294) (14,264)
Corporation tax payable (272) - (411)
Deferred tax liabilities (1,223) (1,916) (1,396)
Pensions and other post-employment
benefits (3,079) (3,652) (3,539)
Other provisions (652) (671) (636)
Derivative financial instruments - (1) -
Contingent consideration liabilities (5,414) (5,000) (5,096)
Other non-current liabilities (1,038) (982) (981)
------------- ------------- ------------
Total non-current liabilities (36,486) (26,516) (26,323)
------------- ------------- ------------
TOTAL LIABILITIES (54,881) (53,954) (52,892)
------------- ------------- ------------
NET ASSETS 3,723 4,829 3,489
------------- ------------- ------------
EQUITY
Share capital 1,344 1,343 1,343
Share premium account 3,049 3,011 3,019
Retained earnings (2,081) (5,349) (6,477)
Other reserves 2,164 2,289 2,047
------------- ------------- ------------
Shareholders' equity 4,476 1,294 (68)
Non-controlling interests (753) 3,535 3,557
------------- ------------- ------------
TOTAL EQUITY 3,723 4,829 3,489
------------- ------------- ------------
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 1,343 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
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
------------ ------------ ------------ ------------ ------------ ------------ ------------
At 1 January
2017 1,342 2,954 (5,392) 2,220 1,124 3,839 4,963
Profit for the
period 2,078 2,078 454 2,532
Other
comprehensive
income
for the period 876 (32) 844 (147) 697
------------ ------------ ------------ ------------ ------------
Total
comprehensive
income
for the period 2,954 (32) 2,922 307 3,229
------------ ------------ ------------ ------------ ------------
Distributions to
non-controlling
interests (621) (621)
Contribution
from
non-controlling
interests 21 21
Dividends to
shareholders (2,977) (2,977) (2,977)
Changes in
non-controlling
interests (11) (11)
Shares issued 1 47 48 48
Shares acquired
by ESOP
Trusts 10 70 (140) (60) (60)
Write-down on
shares held
by ESOP Trusts (241) 241 -
Share-based
incentive plans 237 237 237
------------ ------------ ------------ ------------ ------------ ------------ ------------
At 30 September
2017 1,343 3,011 (5,349) 2,289 1,294 3,535 4,829
------------ ------------ ------------ ------------ ------------ ------------ ------------
Cash flow statement - nine months ended 30 September 2018
9 months 9 months
2018 2017
GBPm GBPm
--------- ---------
Profit after tax 2,746 2,532
Tax on profits 680 551
Share of after tax profits of associates and
joint ventures (26) (11)
Profit on disposal of interest in associates (3) (28)
Net finance expense 532 531
Depreciation, amortisation and other adjusting
items 1,169 2,097
Increase in working capital (1,927) (1,553)
Contingent consideration paid (792) (427)
Increase in other net liabilities (excluding
contingent consideration paid) 2,936 1,250
--------- ---------
Cash generated from operations 5,315 4,942
Taxation paid (1,013) (893)
--------- ---------
Net cash inflow from operating activities 4,302 4,049
--------- ---------
Cash flow from investing activities
Purchase of property, plant and equipment (842) (1,011)
Proceeds from sale of property, plant and equipment 70 142
Purchase of intangible assets (319) (513)
Proceeds from sale of intangible assets 165 24
Purchase of equity investments (298) (64)
Proceeds from sale of equity investments 87 55
Contingent consideration paid (123) (65)
Disposal of businesses 28 223
Proceeds from disposal of interest in associates 3 54
Investment in associates and joint ventures (5) (8)
Interest received 55 49
Dividends from associates and joint ventures 39 6
--------- ---------
Net cash outflow from investing activities (1,140) (1,108)
--------- ---------
Cash flow from financing activities
Issue of share capital 31 48
Shares acquired by ESOP Trusts - (60)
Increase/(decrease) in short-term loans 13 (1,444)
Increase in long-term loans 10,090 2,233
Net repayment of obligations under finance leases (17) (18)
Purchase of non-controlling interests (9,321) -
Interest paid (458) (423)
Dividends paid to shareholders (2,993) (2,977)
Distributions to non-controlling interests (535) (611)
Contributions from non-controlling interests 21 21
Other financing items 26 108
--------- ---------
Net cash outflow from financing activities (3,143) (3,123)
--------- ---------
Increase/(decrease) in cash and bank overdrafts
in the period 19 (182)
--------- ---------
Cash and bank overdrafts at beginning of the
period 3,600 4,605
Exchange adjustments (32) (77)
Increase/(decrease) in cash and bank overdrafts 19 (182)
--------- ---------
Cash and bank overdrafts at end of the period 3,587 4,346
--------- ---------
Cash and bank overdrafts at end of the period
comprise:
Cash and cash equivalents 3,793 4,743
Overdrafts (206) (397)
--------- ---------
3,587 4,346
--------- ---------
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 President,
Pharmaceuticals R&D and is reported as a separate 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.
Turnover by segment
Q3 2018 Q3 2017 Growth Growth
GBPm GBPm GBP% CER%
-------- -------- ------- -------
Pharmaceuticals 4,221 4,190 1 3
Vaccines 1,924 1,689 14 17
Consumer Healthcare 1,947 1,964 (1) 3
-------- -------- ------- -------
Total turnover 8,092 7,843 3 6
-------- -------- ------- -------
Operating profit by segment
Q3 2018 Q3 2017 Growth Growth
GBPm GBPm GBP% CER%
-------- -------- ------- -------
Pharmaceuticals 2,028 2,083 (3) (1)
Pharmaceuticals R&D (667) (657) 2 3
-------- -------- ------- -------
Pharmaceuticals including R&D 1,361 1,426 (5) (2)
Vaccines 827 698 18 26
Consumer Healthcare 429 392 9 16
-------- -------- ------- -------
Segment profit 2,617 2,516 4 8
Corporate and other unallocated
costs (93) (48) 94 >100
-------- -------- ------- -------
Adjusted operating profit 2,524 2,468 2 6
Adjusting items (614) (591)
-------- -------- ------- -------
Total operating profit 1,910 1,877 2 7
Finance income 10 13
Finance costs (233) (194)
Profit on disposal of associates 3 8
Share of after tax profits of
associates
and joint ventures 15 7
-------- -------- ------- -------
Profit before taxation 1,705 1,711 - 5
-------- -------- ------- -------
Turnover by segment
9 months 9 months
2018 2017 Growth Growth
GBPm GBPm GBP% CER%
--------- --------- ------- -------
Pharmaceuticals 12,459 12,736 (2) 2
Vaccines 4,415 3,952 12 15
Consumer Healthcare 5,750 5,859 (2) 2
--------- --------- ------- -------
Total turnover 22,624 22,547 - 4
--------- --------- ------- -------
Operating profit by segment
9 months 9 months
2018 2017 Growth Growth
GBPm GBPm GBP% CER%
--------- --------- ------- -------
Pharmaceuticals 6,080 6,353 (4) -
Pharmaceuticals R&D (1,898) (2,023) (6) (3)
--------- --------- ------- -------
Pharmaceuticals including R&D 4,182 4,330 (3) 2
Vaccines 1,523 1,413 8 18
Consumer Healthcare 1,165 1,071 9 15
--------- --------- ------- -------
Segment profit 6,870 6,814 1 7
Corporate and other unallocated
costs (321) (284) 13 9
--------- --------- ------- -------
Adjusted operating profit 6,549 6,530 - 7
Adjusting items (2,620) (2,955)
--------- --------- ------- -------
Total operating profit 3,929 3,575 10 22
Finance income 57 49
Finance costs (589) (580)
Profit on disposal of associates 3 28
Share of after tax profits of
associates
and joint ventures 26 11
--------- --------- ------- -------
Profit before taxation 3,426 3,083 11 25
--------- --------- ------- -------
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 2017.
At 30 September 2018, the Group's aggregate provision for legal and
other disputes (not including tax matters described under 'Taxation'
below) was GBP0.2 billion (31 December 2017: 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.
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.
There have been no significant legal development since the date of
the Annual Report 2017 and the Q2 2018 results.
Developments with respect to tax matters are described in 'Taxation'
below.
Taxation
Issues related to taxation are described in the 'Taxation' note in
the Annual Report 2017. 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.
In the quarter, tax on Adjusted profits amounted to GBP430 million
and represented an effective Adjusted tax rate of 18.6% (Q3 2017:
21.0%). The tax on Total profits amounted to GBP193 million and represented
an effective tax rate of 11.3% (Q3 2017: 18.5%).
In the nine months, tax on Adjusted profits amounted to GBP1,180
million and represented an effective Adjusted tax rate of 19.5% (2017:
21.4%). The charge for taxation on Total profits amounted to GBP680
million and represented an effective tax rate of 19.8% (2017: 17.9%).
The Group's balance sheet at 30 September 2018 included a current
tax payable liability of GBP813 million, a non-current tax payable
liability of GBP272 million and a tax recoverable asset of GBP257
million.
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 2018,
and should be read in conjunction with the Annual Report 2017, 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 2017, except for the implementation
of IFRS 15 'Revenue from contracts with customers' and IFRS 9 'Financial
instruments' from 1 January 2018. These new Standards have not had
a material impact on the reported results of the Group.
GSK has adopted IFRS 15 applying the modified retrospective approach,
with a cumulative adjustment to decrease equity at 1 January 2018
by GBP4 million. In accordance with the requirements of the standard,
where the modified retrospective approach is adopted, prior year
results are not restated. IFRS 15 provides a single, principles-based
approach to the recognition of revenue from all contracts with customers.
It focuses on the identification of performance obligations in a
contract and requires revenue to be recognised when or as those performance
obligations are satisfied.
GSK has adopted IFRS 9 retrospectively, but with certain permitted
exceptions. As a result, prior year results are also not restated,
but a cumulative adjustment has been made to decrease equity at 1
January 2018 by GBP11 million, primarily reflecting an increase in
the expected credit loss provision on trade receivables of GBP15
million. A net transfer of GBP288 million between retained earnings
and other reserves has also been made. This primarily reflects prior
impairments of equity investments that had previously been charged
to the income statement. IFRS 9 replaces the majority of IAS 39 and
covers the classification, measurement and de-recognition of financial
assets and financial liabilities, introduces a new impairment model
for financial assets based on expected losses rather than incurred
losses and provides a new hedge accounting model.
IFRS 16 'Leases' is required to be implemented by the Group from
1 January 2019. The new standard will replace IAS 17 'Leases' and
will require lease liabilities and "right of use" assets to be recognised
on the balance sheet for almost all leases. This is expected to result
in a significant increase in both assets and liabilities recognised
on the balance sheet. The costs of operating leases currently included
within operating costs will be split and the financing element of
the charge will be reported within finance expense. The Group is
assessing the potential impact of the new standard.
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 2017 were published
in the Annual Report 2017, 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 2018 Q3 2017 2018 2017 2017
-------- -------- --------- --------- -----
Average rates:
US$/GBP 1.31 1.30 1.35 1.28 1.30
Euro/GBP 1.11 1.13 1.13 1.15 1.15
Yen/GBP 146 148 148 144 145
Period-end rates:
US$/GBP 1.30 1.34 1.30 1.34 1.35
Euro/GBP 1.12 1.13 1.12 1.13 1.13
Yen/GBP 148 151 148 151 152
During Q3 2018, average Sterling exchange rates were stronger against
the US Dollar, but weaker against the Euro and Yen compared with
the same period in 2017. During the nine months ended 30 September
2018, average Sterling exchange rates were stronger against the US
Dollar and the Yen, but weaker against the Euro, compared with the
same period in 2017. Period-end Sterling exchange rates were weaker
against the US Dollar, the Euro and Yen compared with the 2017 year
end rates.
Weighted average number of shares
Q3 2018 Q3 2017
millions millions
---------- ----------
Weighted average number of shares - basic 4,917 4,890
Dilutive effect of share options and share awards 55 45
---------- ----------
Weighted average number of shares - diluted 4,972 4,935
---------- ----------
Weighted average number of shares
9 months 9 months
2018 2017
millions millions
---------- ----------
Weighted average number of shares - basic 4,911 4,884
Dilutive effect of share options and share awards 55 47
---------- ----------
Weighted average number of shares - diluted 4,966 4,931
---------- ----------
At 30 September 2018, 4,919 million shares were in free issue (excluding
Treasury shares and shares held by the ESOP Trusts). This compares
with 4,890 million shares at 30 September 2017.
Net assets
The book value of net assets increased by GBP234 million from GBP3,489
million at 31 December 2017 to GBP3,723 million at 30 September 2018.
This primarily reflected the Total profit for the period and re-measurement
gains on defined benefit plans exceeding dividends paid in the period.
The carrying value of investments in associates and joint ventures
at 30 September 2018 was GBP221 million (31 December 2017: GBP183
million), with a market value of GBP411 million (31 December 2017:
GBP372 million).
At 30 September 2018, the net deficit on the Group's pension plans
was GBP488 million compared with GBP1,505 million at 31 December
2017. The decrease in the net deficit primarily arose from increases
in the rates used to discount UK pension liabilities from 2.5% to
2.9%, and US pension liabilities from 3.6% to 4.2%.
At 30 September 2018, the post-retirement benefits provision was
GBP1,387 million compared with GBP1,496 million at 31 December 2017.
The decrease in the provision was primarily due to the increase in
the US discount rate from 3.6% to 4.2%.
At 30 September 2018, trade and other payables were GBP13,093 million
compared with GBP20,970 million at 31 December 2017. The decrease
primarily reflected the elimination of the Consumer Healthcare Joint
Venture put option following the buyout of Novartis' interest in
the Consumer Healthcare Joint Venture on 1 June 2018. The buyout
was funded by issuing bonds with maturity rates of between two and
twelve years, in both the US and Europe, which raised $6 billion
and EUR2.5 billion respectively. Committed bank facilities financed
the remaining amount of the $13 billion transaction.
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 GBP1,278 million (31 December
2017: GBP1,304 million).
Contingent consideration amounted to GBP6,232 million at 30 September
2018 (31 December 2017: GBP6,172 million), of which GBP5,885 million
(31 December 2017: GBP5,542 million) represented the estimated present
value of amounts payable to Shionogi relating to ViiV Healthcare
and GBP296 million (31 December 2017: GBP584 million) represented
the estimated present value of contingent consideration payable to
Novartis related to the Vaccines acquisition following a milestone
payment of $450 million made to Novartis in January 2018.
The liability due to Shionogi included GBP242 million in respect
of preferential dividends. The liability for preferential dividends
due to Pfizer at 30 September 2018 was GBP17 million (31 December
2017: GBP17 million). An explanation of the accounting for the non-controlling
interests in ViiV Healthcare is set out on page 56.
Of the contingent consideration payable (on a post-tax basis) at
30 September 2018, GBP818 million (31 December 2017: GBP1,076 million)
is expected to be paid within one year. The consideration payable
for the acquisition of the Shionogi-ViiV Healthcare joint venture
and the Novartis Vaccines business is expected to be paid over a
number of years. As a result, the total estimated liabilities are
discounted to their present values, on a post-tax basis using post-tax
discount rates. The Shionogi-ViiV Healthcare contingent consideration
liability is discounted at 8.5% and the Novartis Vaccines contingent
consideration liability is discounted partly at 8% and partly at
9%.
The liabilities for the Pfizer put option and the contingent consideration
at 30 September 2018 have been calculated based on the closing exchange
rates, primarily US$1.30/GBP1 and Euro EUR1.12/GBP1. The sensitivities
for each of the largest contingent consideration liabilities and
the Pfizer put option are set out below.
Shionogi- Novartis
ViiV Healthcare Vaccines
Increase/(decrease) in ViiV Healthcare contingent contingent
liability put option consideration consideration
GBPm GBPm GBPm
---------------- ----------------- ---------------
5 cent appreciation of
US Dollar 36 179 (6)
5 cent depreciation of
US Dollar (33) (166) 7
10 cent appreciation of
US Dollar 75 372 (12)
10 cent depreciation of
US Dollar (64) (317) 13
5 cent appreciation of
Euro 23 55 15
5 cent depreciation of
Euro (21) (51) (13)
10 cent appreciation of
Euro 46 117 31
10 cent depreciation of
Euro (39) (96) (24)
---------------- ----------------- ---------------
Movements in contingent consideration are as follows:
9 months 9 months
2018 2017
GBPm GBPm
--------- ---------
Contingent consideration at beginning of the
period 6,172 5,896
Re-measurement through income statement 975 513
Cash payments: operating cash flows (792) (427)
Cash payments: investing activities (123) (65)
Contingent consideration at end of the period 6,232 5,917
--------- ---------
The re-measurements of contingent consideration in the nine months
reflected updated forecasts, exchange rate movements and the unwind
of the discounts on the liabilities. The cash settlement in the period
included GBP584 million (2017: GBP485 million) of payments to Shionogi
in relation to ViiV Healthcare and the GBP317 million milestone payment
to Novartis relating to the non-US sales of Bexsero. These payments
are deductible for tax purposes.
At 30 September 2018, the ESOP Trust held 41.9 million GSK shares
against the future exercise of share options and share awards. The
carrying value of GBP214 million has been deducted from other reserves.
The market value of these shares was GBP650 million.
At 30 September 2018, the company held 414.6 million Treasury shares
at a cost of GBP5,800 million, which has been deducted from retained
earnings.
Contingent liabilities
There were contingent liabilities at 30 September 2018 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 and tax disputes to which the Group is a party are set out
on page 51.
Reconciliation of cash flow to movements in net debt
9 months 9 months
2018 2017
GBPm GBPm
--------- ---------
Net debt at beginning of the period (13,178) (13,804)
Increase/(decrease) in cash and bank overdrafts 19 (182)
Net (increase in)/repayment of short-term loans (13) 1,444
Increase in long-term loans (10,090) (2,233)
Net repayment of obligations under finance
leases 17 18
Exchange adjustments (590) 571
Other non-cash movements (2) (23)
--------- ---------
Increase in net debt (10,659) (405)
--------- ---------
Net debt at end of the period (23,837) (14,209)
--------- ---------
Net debt analysis
30 September 30 September 31 December
2018 2017 2017
GBPm GBPm GBPm
------------- ------------- ------------
Liquid investments 80 82 78
Cash and cash equivalents 3,793 4,743 3,833
Short-term borrowings (2,902) (4,740) (2,825)
Long-term borrowings (24,808) (14,294) (14,264)
-------------
Net debt at end of the period (23,837) (14,209) (13,178)
------------- ------------- ------------
Free cash flow reconciliation
9 months
2017
9 months
Q3 2018 2018 (revised)
GBPm GBPm GBPm
-------- --------- -----------
Net cash inflow from operating activities 2,077 4,302 4,049
Purchase of property, plant and
equipment (301) (842) (1,011)
Proceeds from sale of property,
plant and equipment 48 70 142
Purchase of intangible assets (130) (319) (513)
Proceeds from disposals of intangible
assets 142 165 24
Net finance costs (71) (403) (374)
Dividends from joint ventures and
associates - 39 6
Contingent consideration paid (reported
in investing
activities) (26) (123) (65)
Distributions to non-controlling
interests (185) (535) (611)
Contributions from non-controlling
interests - 21 21
--------
Free cash flow 1,554 2,375 1,668
-------- --------- -----------
With the introduction of the new R&D strategy in Q2 2018, GSK has
revised its definition of free cash flow, a non-IFRS measure, to
include proceeds from the sale of intangible assets.
Non-controlling interests in ViiV Healthcare
Trading profit allocations
Because ViiV Healthcare is a subsidiary of the Group, 100% of its
operating results (turnover, operating profit, profit after tax)
are included within the Group income statement and then a portion
of the earnings is allocated to the non-controlling interests owned
by the other shareholders, in line with their respective equity shareholdings
(Pfizer 11.7% and Shionogi 10%). Each of the shareholders, including
GSK, is also entitled to preferential dividends 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 of ViiV Healthcare allocated
to each shareholder will change. In particular, the increasing sales
of Tivicay and Triumeq have a favourable impact on the proportion
of the preferential dividends that is allocated to GSK. GSK was entitled
to approximately 80% of the Adjusted earnings of ViiV Healthcare
for 2017. Re-measurements of the liabilities for the preferential
dividends allocated to Pfizer and Shionogi are included within other
operating income.
Acquisition-related arrangements
As part of the agreement reached to acquire Shionogi's interest in
the former Shionogi-ViiV Healthcare joint venture in 2012, ViiV Healthcare
agreed to pay additional consideration to Shionogi contingent on
the performance of the products being developed by that joint venture,
principally dolutegravir. The liability for this contingent consideration
was estimated and recognised in the balance sheet at the date of
acquisition. Subsequent re-measurements are reflected within other
operating income/expense and within Adjusting items in the income
statement.
Cash payments are made to Shionogi by ViiV Healthcare each quarter
which reduce the balance sheet liability and are hence not recorded
in the income statement. The payments are calculated based on the
sales performance of the relevant products in the previous quarter
and are reflected in the cash flow statement partly in operating
cash flows and partly within investing activities. The tax relief
on these payments is reflected in the Group's Adjusting items as
part of the tax charge. The part of each payment relating to the
original estimate of the fair value of the contingent consideration
on the acquisition of the Shionogi-ViiV Healthcare joint venture
in 2012 of GBP659 million is reported within investing activities
in the cash flow statement and the part of each payment relating
to the increase in the liability since the acquisition is reported
within operating cash flows.
Movements in contingent consideration payable to Shionogi are as
follows:
9 months 9 months
2018 2017
GBPm GBPm
--------- ---------
Contingent consideration at beginning of the
period 5,542 5,304
Re-measurement through income statement 927 405
Cash payments: operating cash flows (517) (424)
Cash payments: investing activities (67) (61)
Contingent consideration at end of the period 5,885 5,224
--------- ---------
Of the contingent consideration payable (on a post-tax basis) to
Shionogi at 30 September 2018, GBP794 million (31 December 2017:
GBP724 million) is expected to be paid within one year.
Exit rights
Pfizer may request an IPO of ViiV Healthcare at any time and if either
GSK does not consent to such IPO or an offering is not completed
within nine months, Pfizer could require GSK to acquire its shareholding.
Under the original agreements, GSK had the unconditional right, so
long as it made no subsequent distribution to its shareholders, to
withhold its consent to the exercise of the Pfizer put option and,
as a result, in accordance with IFRS, GSK did not recognise a liability
for the put option on its balance sheet. However, during Q1 2016,
GSK notified Pfizer that it had irrevocably given up this right and
accordingly recognised the liability for the put option on the Group's
balance sheet during Q1 2016 at an initial value of GBP1,070 million.
Consistent with this revised treatment, at the end of Q1 2016 GSK
also recognised liabilities for the future preferential dividends
anticipated to become payable to Pfizer and Shionogi on the Group's
balance sheet.
The closing balances of the liabilities related to Pfizer's shareholding
are as follows:
30 September 31 December
2018 2017
GBPm GBPm
------------- ------------
Pfizer put option 1,278 1,304
Pfizer preferential dividend 17 17
Under the original agreements, Shionogi could also have requested
GSK to acquire its shareholding in ViiV Healthcare in six month windows
commencing in 2017, 2020 and 2022. GSK had the unconditional right,
so long as it made no subsequent distribution to its shareholders,
to withhold its consent to the exercise of the Shionogi put option
and, as a result, GSK did not recognise a liability for the put option
on its balance sheet. However, during Q1 2016, GSK notified Shionogi
that it had irrevocably given up this right and accordingly recognised
the liability for the put option on the Group's balance sheet during
Q1 2016 at an initial value of GBP926 million. In Q4 2016, Shionogi
irrevocably agreed to waive its put option and as a result GSK de-recognised
the liability for this put option on the Group's balance sheet directly
to equity. The value of the liability was GBP1,244 million when it
was de-recognised.
GSK also has a call option over Shionogi's shareholding in ViiV Healthcare,
which under the original agreements was exercisable in six month
windows commencing in 2027, 2030 and 2032. GSK has now irrevocably
agreed to waive the first two exercise windows, but the last six
month window in 2032 remains. As this call option is at fair value,
it has no value for accounting purposes.
Adjusted results reconciliations
The reconciliations between Total results and Adjusted results for
Q3 2018 and Q3 2017 and also nine months 2018 and nine months 2017
are set out below.
Income statement - Adjusted results reconciliation
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
income/(expense) (125) 1 251 (127) -
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating profit 1,910 143 49 283 247 (108) 2,524
Net finance costs (223) 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
------------ ------------
Adjusted results exclude the above items from Total results as GSK
believes that Adjusted results are more representative of the performance
of the Group's operations and allow the key trends and factors driving
performance to be more easily and clearly identified by shareholders.
For a fuller explanation of Adjusted results, see 'Reporting definitions'
on page 37.
Income statement - Adjusted results reconciliation
Three months ended 30 September 2017
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 7,843 7,843
Cost of sales (2,652) 137 20 167 24 (2,304)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross profit 5,191 137 20 167 24 5,539
Selling, general
and
administration (2,308) 30 (2) (2,280)
Research and
development (1,047) 12 62 68 7 (898)
Royalty income 107 107
Other operating
income/(expense) (66) 1 16 49 -
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating profit 1,877 149 82 266 40 54 2,468
Net finance costs (181) 1 3 (177)
Profit on
disposal
of associates 8 (8) -
Share of after
tax
losses of
associates and
joint
ventures 7 7
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit before
taxation 1,711 149 82 267 40 49 2,298
Taxation (316) (33) (15) (60) (28) (30) (482)
Tax rate % 18.5% 21.0%
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit after
taxation 1,395 116 67 207 12 19 1,816
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit
attributable
to
non-controlling
interests 183 45 228
Profit
attributable
to
shareholders 1,212 116 67 207 (33) 19 1,588
------------ ------------ ------------ ------------ ------------ ------------ ------------
Earnings per
share 24.8p 2.4p 1.4p 4.2p (0.7)p 0.4p 32.5p
------------ ------------ ------------ ------------ ------------ ------------ ------------
Weighted average
number
of
shares
(millions) 4,890 4,890
------------ ------------
Adjusted results exclude the above items from Total results as GSK
believes that Adjusted results are more representative of the performance
of the Group's operations and allow the key trends and factors driving
performance to be more easily and clearly identified by shareholders.
For a fuller explanation of Adjusted results, see 'Reporting definitions'
on page 37.
Income statement - Adjusted results reconciliation
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
income/(expense) (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
------------ ------------
Adjusted results exclude the above items from Total results as GSK
believes that Adjusted results are more representative of the performance
of the Group's operations and allow the key trends and factors driving
performance to be more easily and clearly identified by shareholders.
For a fuller explanation of Adjusted results, see 'Reporting definitions'
on page 37.
Income statement - Adjusted results reconciliation
Nine months ended 30 September 2017
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 22,547 22,547
Cost of sales (7,784) 410 334 466 61 (6,513)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross profit 14,763 410 334 466 61 16,034
Selling, general
and
administration (7,139) 152 66 (6,921)
Research and
development (3,267) 34 87 253 23 (2,870)
Royalty income 287 287
Other operating
income/(expense) (1,069) 1 1,297 (229) -
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating profit 3,575 444 421 872 1,358 (140) 6,530
Net finance costs (531) 3 6 (522)
Profit on
disposal
of associates 28 (28) -
Share of after
tax
profits of
associates and
joint
ventures 11 11
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit before
taxation 3,083 444 421 875 1,358 (162) 6,019
Taxation (551) (100) (125) (249) (152) (109) (1,286)
Tax rate % 17.9% 21.4%
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit after
taxation 2,532 344 296 626 1,206 (271) 4,733
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit
attributable
to
non-controlling
interests 454 147 601
Profit
attributable
to
shareholders 2,078 344 296 626 1,059 (271) 4,132
------------ ------------ ------------ ------------ ------------ ------------ ------------
Earnings per
share 42.5p 7.1p 6.1p 12.8p 21.7p (5.6)p 84.6p
------------ ------------ ------------ ------------ ------------ ------------ ------------
Weighted average
number
of
shares
(millions) 4,884 4,884
------------ ------------
Adjusted results exclude the above items from Total results as GSK
believes that Adjusted results are more representative of the performance
of the Group's operations and allow the key trends and factors driving
performance to be more easily and clearly identified by shareholders.
For a fuller explanation of Adjusted results, see 'Reporting definitions'
on page 37.
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 2018.
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 2018 on pages
40 and 41 to 42 respectively;
-- the balance sheet as at 30 September 2018 on page 46;
-- the statement of changes in equity for the nine month period then
ended on page 47;
-- the cash flow statement for the nine month period then ended on
page 48 and;
-- the accounting policies and basis of preparation and the explanatory
notes to the condensed financial information on pages 49 to 57
that have been prepared applying consistent accounting policies
to those applied by the Group in the Annual Report 2017, which
was prepared in accordance with International Financial Reporting
Standards ("IFRS") as adopted by the European Union, except for
the implementation of IFRS 15 "Revenue from Contracts with Customers"
and IFRS 9 "Financial Instruments" from 1 January 2018.
We have read the other information contained in the Results Announcement,
including the non-IFRS measures contained on pages 49 to 57, and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed 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 2017, which was prepared
in accordance with IFRS as adopted by the European Union, except
for the implementation of IFRS 15 "Revenue from Contracts with Customers"
and IFRS 9 "Financial Instruments" from 1 January 2018.
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
2018 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 52.
Deloitte LLP
Statutory Auditor
London, United Kingdom
31 October 2018
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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