REG - GlaxoSmithKline PLC - 1st Quarter Results <Origin Href="QuoteRef">GSK.L</Origin> - Part 2
26/04/2017 12:05
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movements on the reported Sterling costs of foreign currency denominated interest-bearing instruments. TaxationTax on Adjusted profit amounted to £399 million and represented an effective Adjusted tax rate of
22.0% (Q1 2016: 21.4%). The increase in the effective rate reflected the Group's changing earnings mix. See 'Taxation' on page 33 for further details. Non-controlling interestsThe allocation of Adjusted earnings to non-controlling interests amounted to £199 million (Q1 2016: £147 million), including the non-controlling interest allocations of Consumer Healthcare profits of £74 million (Q1 2016: £46 million) and the allocation of ViiV Healthcare profits, which increased to £113 million (Q1 2016: £66
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. The allocation also reflected the impact of net losses in some of the Group's other entities with non-controlling interests, primarily the Galvani bioelectronics joint venture. Earnings per shareAdjusted EPS of 25.0p was up 31% AER, 9% CER compared with a 9% CER increase in operating profit.
Currency impact on Q1 2017 resultsThe Q1 2017 results are based on average exchange rates, principally £1/$1.25, £1/E1.17 and £1/Yen 141. Comparative exchange rates are given on page 35. The period-end exchange rates were £1/$1.25, £1/E1.17 and £1/Yen 139. In the quarter, turnover increased 19% in Sterling terms and 5% CER. Total EPS was 21.4p compared with 5.8p in Q1 2016 and Adjusted EPS was 25.0p compared with 19.1p in Q1 2016, up 31% AER, 9% CER. The positive currency impact reflected the weakness
of Sterling against the majority of the Group's trading currencies relative to Q1 2016. Settlement of intercompany transactions had less than 1 percentage point negative impact on the positive currency impact of 22 percentage points on adjusted EPS. 2017 guidance for Adjusted EPSIn the event that no generic version of Advair is introduced to the US market in 2017, the Group expects 2017 Adjusted EPS growth of 5-7% at CER. This is based on an expected decline in 2017 US Advair sales of 15-20%. In the event
of a mid-year introduction of a substitutable generic competitor to Advair in the US, the Group expects full year 2017 US Advair sales of around £1 billion at CER (US$1.36/£1), with Adjusted EPS flat to a slight decline in percentage terms at CER. We are not able to give guidance for Total results as we cannot reliably forecast certain material elements of our Total results such as the future fair value movements on contingent consideration and put options. 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. An explanation of the acquisition-related arrangements with ViiV Healthcare, including details of cash payments to Shionogi, is set out on page 39. If exchange rates were to hold at the closing rates on 21 April 2017 ($1.28/£1, E1.19/£1 and Yen 139/£1) for the rest of 2017, the estimated positive impact on full-year 2017 Sterling turnover
growth would be around 5% and if exchange losses were recognised at the same level as in 2016, the estimated positive impact on 2017 Sterling Adjusted EPS growth would be around 8%.
Cash generation and conversion
Cash flow and net debt
Q1 2017 Q1 2016
Net cash inflow from operating activities (£m) 1,144 503
Free cash flow* (£m) 650 (240)
Free cash flow growth (%) >100% >(100)%
Free cash flow conversion* (%) 62% (85)%
Net debt (£m) 13,743 12,495
* Free cash flow and free cash flow conversion are defined on page 22.
Q1 2017The net cash inflow from operating activities for the quarter was £1,144 million (Q1 2016: £503 million). The increase primarily reflected the improved operating performance across all segments, as well as a positive currency benefit, reduced tax payments (following a payment of £117 million in Q1 2016 on the sale of the Oncology business to Novartis) and the timing of payments for returns and rebates. Total cash payments to Shionogi in relation to the ViiV Healthcare contingent consideration
liability in the quarter were £159 million, of which £137 million was recognised in cash flows from operating activities and £22 million was recognised in purchases of businesses within investing cash flows. These payments are deductible for tax purposes. Free cash flow was £650 million for the quarter. The improvement primarily reflected the improved operating performance across all segments, as well as a positive currency benefit, the timing of payments for returns and rebates and reduced tax payments
on the sale of the Oncology business to Novartis (£117 million in Q1 2016). Q1 2016 free cash flow was also impacted by the costs of acquiring the HIV Clinical assets from BMS for £221 million, which were treated as intangible assets purchases. Net debtAt 31 March 2017, net debt was £13.7 billion, compared with £13.8 billion at 31 December 2016, comprising gross debt of £18.3 billion and cash and liquid investments of £4.6 billion. Net debt reduced slightly as the improved free cash flow of £650 million
and disposal proceeds of £229 million, together with favourable translation movements, more than offset the cost of dividends paid to shareholders of £925 million. At 31 March 2017, GSK had short-term borrowings (including overdrafts) repayable within 12 months of £3,740 million with loans of £2,199 million repayable in the subsequent year.
Working capital
31 March2017 31 December2016 30 September2016 30 June2016 31 March2016
Working capital conversion cycle* (days) 203 193 216 217 209
Working capital percentage of turnover (%) 23 22 27 26 25
* Working capital conversion cycle is defined on page 22.
The increase in Q1 2017 of 10 days compared to December 2016 was predominantly due to a 2 day increase in the cycle from adverse exchange rates, as well as increases in inventory levels reflecting seasonal factors and building of inventory in advance of new product launches. Trade receivables have increased as a result of higher sales and timing of collections, with trade payables reducing as a result of lower costs in the quarter.
Returns to shareholders
Quarterly dividendsThe Board has declared a first interim dividend for 2017 of 19 pence per share (Q1 2016: 19 pence per share). GSK expects to pay an annual ordinary dividend of 80p for 2017. Future returns to shareholders of surplus capital will be subject to the Group's strategic progress, visibility on the put options associated with ViiV Healthcare and the Consumer Healthcare joint venture and other capital requirements. Payment of dividendsThe equivalent interim dividend receivable by ADR holders will
be calculated based on the exchange rate on 11 July 2017. 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 11 May 2017 (10 May 2017 for ADR holders), with a record date of 12 May 2017 and a payment date of 13 July 2017.
Paid/payable Pence pershare £m
2017
First interim 13 July 2017 19 928
2016
First interim 14 July 2016 19 923
Second interim 13 October 2016 19 925
Third interim 12 January 2017 19 925
Fourth interim 13 April 2017 23 1,124
80 3,897
GSK made no share repurchases during the quarter. The company issued 2.2 million shares under employee share schemes amounting to £32 million (Q1 2016: £9 million). The weighted average number of shares for Q1 2017 was 4,877 million, compared with 4,847 million in Q1 2016.
Group strategy and outlook
GSK has created a Group of three world-leading businesses in Pharmaceuticals, Vaccines and Consumer Healthcare, which aims to deliver growth and improving returns to shareholders through development of innovative healthcare options for patients and consumers. GSK has a strong portfolio of innovative products across its three businesses with a presence in more than 150 markets. Revenues are split across Pharmaceuticals 58%, Consumer Healthcare 26% and Vaccines 16% based on 2016 turnover. R&D innovation
underpins all three businesses. In November 2015, the Group profiled to investors an R&D portfolio of ~40 assets focused on Oncology, Immuno-inflammation, Vaccines, HIV and Infectious diseases, Respiratory and Rare diseases. All three businesses are supported by proprietary technologies and manufacturing capabilities in areas such as devices, adjuvants, bio-electronics and formulations. The Group aims to improve returns from its R&D innovation by striking a balance between pricing and volume generation.
Details of the Group's innovative R&D portfolio and the progress of assets in development can be found on pages 18 to 21 of this Announcement. At its Investor Day on 6 May 2015, GSK outlined a series of expectations for its performance over the five-year period 2016-2020. This included an expectation that Group Adjusted EPS would grow at a CAGR of mid-to-high single digits on a CER basis. The introduction of a generic alternative to Advair in the US was factored into the Group's assessment of its future
performance. The Group also stated it expects to pay an annual ordinary dividend of 80p for each of the years 2015-2017.
Research and development
GSK remains focused on delivering an improved return on its investment in R&D. Sales contribution, reduced attrition and cost reduction are all important drivers of an improving 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 operations of Pharmaceuticals R&D are broadly split into Discovery activities (up to the completion of Phase IIa trials) and
Development work (from Phase IIb onwards) each supported by specific and common infrastructure and other shared services where appropriate. With effect from 1 January 2017, depreciation within Pharmaceuticals R&D is now reported within the central support functions rather than against individual business units. Comparative information has been revised accordingly. R&D expenditure for Q1 2017 is analysed below.
Q1 2017£m Q1 2016(revised)£m Growth£% GrowthCER%
Discovery 250 181 38 27
Development 325 253 28 16
Facilities and central support functions 147 141 4 (4)
Pharmaceuticals R&D 722 575 26 15
Vaccines 136 139 (2) (12)
Consumer Healthcare 61 61 - (8)
Adjusted R&D 919 775 19 8
Amortisation and impairment of intangible assets 20 10
Major restructuring costs 15 27
Other items 6 3
Total R&D 960 815 18 7
Adjusted R&D expenditure increased 19% AER and 8% on a CER basis reflecting increased investment in Pharmaceuticals R&D. The increase in Discovery expenditure reflected further investment in the early stage Oncology portfolio. The growth in Development expenditure reflected the progression of a number of mid and late-stage programmes in HIV, respiratory and anaemia, as well as the costs of the HIV programmes acquired from BMS in February 2016.
R&D pipeline
At a presentation to investors in New York on 3 November 2015, GSK described a deep portfolio of innovation, focused across six core areas of scientific research and development: HIV & infectious diseases, Respiratory, Vaccines, Immuno-inflammation, Oncology and Rare diseases. Around 40 new potential medicines and vaccines were profiled, supporting the Group's outlook for growth in the period 2016-2020 and the significant opportunity the Group has to create value beyond 2020.
HIV and infectious diseases - including new options for long-term control and prevention of HIV and opportunities designed to cure or induce long-term remission in both Hepatitis B and C
News since Q4 2016:
· GSK and ViiV announced positive results from the SWORD1 and SWORD2 Phase III studies presented at CROI showing that suppressed HIV patients could maintain virologic suppression after switching from a 3 or 4 drug regimen to a 2 drug regimen of dolutegravir and rilpivirine (13 February).
Respiratory - including the next generation of respiratory medicines beyond inhaled treatments
News since Q4 2016:
· Announced positive results from the MUSCA study presented at AAAAI, showing that Nucala significantly improves quality of life and lung function in patients with severe asthma (6 March);
· Announced start of a Phase III study of mepolizumab in patients with severe hypereosinophilic syndrome (HES) (31 March).
Vaccines - including a novel maternal immunisation platform for vaccines
News since Q4 2016:
· Positive results reported in-house from ZOSTER-048 study of Shingrix in individuals previously vaccinated with Zostavax. Data will be presented at an upcoming meeting;
· Announced Japan regulatory submission for Shingrix in prevention of shingles (18 April).
Immuno-inflammation-a portfolio of new antibodies & novel orals for inflammatory diseases including rheumatoid arthritis, Sjögren's syndrome, osteoarthritis and inflammatory bowel disease
News since Q4 2016:
· Data published in The Lancet from SIRROUND-T Phase III study of sirukumab in patients with active RA refractory to anti-TNF therapy (15 February);
· Started Phase II programme for 2982772 (oral RIP1 kinase inhibitor) in patients with ulcerative colitis
(19 April).
Oncology - leading-edge molecules in the field of epigenetics and immuno-oncology for the treatment of cancer
News since Q4 2016:
· OncoMed announced Phase II trial of tarextumab in small cell lung cancer did not meet endpoints (17 April).
Rare diseases - breakthrough cell and gene therapies for treatment of rare diseases
No news since Q4 2016.
Other pharmaceuticals profiled at investor event
No news since Q4 2016.
Pipeline news flow since Q4 2016 for other assets not profiled at the Investor event:
· Started Phase I programme for 1795091 (TLR4 agonist) in cancer (26 January);
· Data published in The Lancet from Phase IIa study of 2330670 (iBAT inhibitor) on pruritus in primary biliary cholangitis (7 February);
· Started Phase II programme for 3117391 (ESM-HDAC inhibitor) in severe rheumatoid arthritis (14 February);
· Announced positive data from a study showing that patients with well-controlled asthma were able to switch to once-daily Relvar Ellipta from twice-daily Seretide Diskus without compromising their lung function
(23 February);
· Announced US regulatory submission for use of Fluarix Quadrivalent influenza vaccine in infants 6 months and older (15 March);
· FDA granted Fast Track designation to danirixin for treatment of hospitalised patients with complicated influenza (20 March);
· Approval in Japan of once daily Arnuity Ellipta (ICS mono) for asthma (30 March);
· Started Phase II programme for 2838232 (HIV maturation inhibitor) in HIV (17 April).
Listed below are the ~40 pipeline assets profiled at our R&D event in November 2015 which are in active clinical development and/or other assets acquired since the R&D event.
Respiratory Phase
3772847A (IL33R mAb) Severe asthma Ph I
3008348 (Alpha V beta 6 integrin antagonist) Idiopathic pulmonary fibrosis Ph I
2862277 (TNFR1 dAb) Acute lung injury Ph II
danirixin (CXCR2 antagonist) COPD Ph II
2269557 (PI3 kinase delta inhibitor) COPD & asthma Ph II
2245035 (TLR7 agonist) Asthma Ph II
Nucala (mepolizumab) Nasal polyposis Ph II
COPD Ph III
Hypereosinophilic syndrome Ph III
FF+UMEC+VI (Closed Triple) COPD US: Filed Nov 2016EU: Filed Dec 2016
Asthma Ph III
HIV/Infectious diseases Phase
3389404 (HBV LICA antisense oligonucleotide)1 Hepatitis B Ph I
3228836 (HBV antisense oligonucleotide)1 Hepatitis B Ph I
2878175 + RG-101 (NS5B inhibitor + anti-Mir122 antisense oligonucleotide) Hepatitis C Ph II
gepotidacin (Type 2 topoisomerase inhibitor) Bacterial infections Ph II
cabotegravir + rilpivirine (Integrase inhibitor + NNRTI, both long-acting parenteral formulations) HIV infections Ph III
cabotegravir (long-acting integrase inhibitor) HIV pre-exposure prophylaxis Ph III
fostemsavir (3684934) (HIV attachment inhibitor) HIV infections Ph III
dolutegravir + lamivudine HIV infections Ph III
dolutegravir + rilpivirine (Integrase inhibitor + NNRTI) HIV infections - two drug maintenance regimen Ph III
Immuno-inflammation Phase
2982772 (RIP1 kinase inhibitor) Ulcerative colitis Ph II
Psoriasis and rheumatoid arthritis Ph II
2618960 (IL7 receptor mAb) Sjögren's syndrome Ph I
3050002 (CCL20 mAb) Psoriatic arthritis Ph I
2831781 (LAG3 mAb) Autoimmune diseases Ph I
2330811 (OSM mAb) Systemic sclerosis Ph I
3196165 (GM-CSF mAb) Rheumatoid arthritis and hand osteoarthritis Ph II
Benlysta + Rituxan (BLyS mAb, s.c. + CD20 mAb) Sjögren's syndrome Ph II
Benlysta (BLyS mAb, s.c.) Systemic lupus erythematosus Filed in EU & USSept 2016
sirukumab (IL6 human mAb) Giant cell arteritis Ph III
Rheumatoid arthritis Filed in EU & USSept 2016
Oncology Phase
3359609 (ICOS agonist mAb) Solid tumours and haematological malignancies Ph I
525762 (BET inhibitor) Solid tumours and haematological malignancies Ph I
2879552 (LSD1 inhibitor) Acute myeloid leukaemia and small cell lung cancer Ph I
3174998 (OX40 agonist mAb) Solid tumours and haematological malignancies Ph I
3377794 (NY-ESO-1 T-cell receptor)2 Sarcoma, multiple myeloma, non-small cell lung cancer, melanoma and ovarian cancer Ph II
tarextumab (Notch 2/3 mAb)3 Small cell lung cancer Ph II
Vaccines Phase
RSV Respiratory syncytial virus prophylaxis Ph II
RSV Respiratory syncytial virus prophylaxis (maternal immunisation) Ph II
Group B Streptococcus Group B streptococcus prophylaxis (maternal immunisation) Ph II
Men ABCWY Meningococcal A,B,C,W,Y disease prophylaxis in adolescents Ph II
COPD Reduction of COPD exacerbations associated with non-typeable Haemophilus influenzae and Moraxella catarrhalis Ph II
Shingrix* (Zoster vaccine) Shingles prophylaxis US: Filed Oct 2016EU: Filed Nov 2016
Rare diseases Phase
2696277 (ex-vivo stem cell gene therapy)4 Beta thalassemia Ph I
2398852 + 2315698 (SAP mAb + SAP depleter) Amyloidosis Ph II
2696274 (ex-vivo stem cell gene therapy) Metachromatic leukodystrophy Ph III
2696275 (ex-vivo stem cell gene therapy) Wiscott-Aldrich syndrome Ph III
Strimvelis (ex-vivo stem cell gene therapy) Adenosine deaminase severe combined immune deficiency (ADA-SCID) EU: Approved May 2016US: Ph II/III
2998728 (TTR production inhibitor)1 Transthyretin amyloidosis Ph III
mepolizumab (IL5 mAb) Eosinophilic granulomatosis with polyangiitis Ph III
Other pharmaceuticals Phase
daprodustat (1278863) (Prolyl hydroxylase inhibitor) Wound healing Ph I
daprodustat (1278863) (Prolyl hydroxylase inhibitor) Anaemia associated with chronic renal disease Ph III
1 Option-based alliance with Ionis Pharmaceuticals
2 Option-based alliance with Adaptimmune Ltd.
3 Option-based alliance with OncoMed Pharmaceuticals
4 Option-based alliance with Telethon and Ospedale San Raffaele
* The name Shingrix has not yet been approved for use by any regulatory authority
The full version of the GSK product development pipeline chart (updated in March 2017) with all clinical assets in Phase I to Phase III can be found at: http://www.gsk.com/en-gb/investors/product-pipeline/
Definitions
Adjusted resultsTotal 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. As announced on 11 April 2017 in the 'Change to financial reporting framework' press release, from Q1 2017 core results has been renamed Adjusted results and, instead of all legal charges and expenses, only
significant legal charges and expenses are excluded in order to present Adjusted results. All other legal charges and expenses are included in Adjusted results. Significant legal charges and expenses are those arising from the settlement of litigation or a government investigation that are not in the normal course and materially larger than more regularly occurring individual matters. They also include certain major legacy legal matters. Any new significant legal matters excluded in order to present
Adjusted results will be disclosed at the time. Adjusted results now exclude the following items from total results: amortisation and impairment of intangible assets (excluding computer software) and goodwill; major restructuring costs, including those 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. GSK believes that adjusted results are more representative of the performance of the Group's operations and allow the key trends and factors driving that performance to be more easily and clearly identified by shareholders. The definition of Adjusted results, as set out above, also aligns the Group's results with the majority of its
peer companies and how they report earnings. Reconciliations between Total and Adjusted results, as set out on pages 11 and 41 to 42, including detailed breakdowns of the key adjusting items, are provided to shareholders to ensure greater visibility and transparency as they assess the Group's performance. CER and AER growthIn 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. £% or AER% represents growth at actual exchange rates. Free cash flowFrom Q1 2017, adjusted free cash flow will no longer be reported and the free cash flow definition has been amended to include all contingent consideration payments made during the period. Free cash flow is now defined as the net cash inflow
from operating activities less capital expenditure, contingent consideration payments, net interest, and dividends paid to non-controlling interests plus proceeds from the sale of property, plant and equipment, and dividends received from joint ventures and associated undertakings. 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. Free cash flow
conversionFree cash flow conversion is free cash flow as a percentage of earnings. Working capital conversion cycleThe working capital conversion cycle is calculated as the number of days sales outstanding plus days inventory outstanding, less days purchases outstanding. Brand names and partner acknowledgementsBrand names appearing in italics throughout this document are trademarks of GSK or associated companies or used under licence by the Group. Zostavax is a trademark of Merck & Co., Inc and Trumenba is
a trademark of Pfizer, Inc.
Outlook assumptions and cautionary statements
Assumptions related to 2017 guidance and 2016-2020 outlookIn outlining the expectations for 2017 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 Group's expectation of at least £6 billion of revenues per annum on a CER basis in 2018 from products launched since 2013 includes contributions from the current pipeline asset Shingrix. The Group also expects volume demand for its products to increase, particularly in Emerging Markets. 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 or Consumer Healthcare. They also assume no material changes in the macro-economic and healthcare environment. The Group's expectations assume successful delivery of the Group's integration and restructuring plans over the period
2016-2020. Material costs for investment in new product launches and R&D have been factored into the expectations given. The expectations are given on a constant currency basis and assume no material change to the Group's effective tax rate.
Assumptions and cautionary statement regarding forward-looking statementsThe 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
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