GlaxoSmithKline 3rd qtr results

GlaxoSmithKline a global healthcare company that develops, manufactures and markets pharmaceutical products, including vaccines, over-the-counter (OTC) medicines and health-related consumer products.  I have a holding in my income portfolio (epic code: GSK). 

GlaxoSmithKline announced their third quarter results yesterday, showing sales declining by -13.3% to £5.6bn, although excluding divestments this was -10% and -3% at constant exchange rates (CER).  For the nine months sales were down -14.2% to £16.8bn and -7% at CER.

 

US pharmaceutical products were the major contributors to the sales decline, falling by -13% as the respiratory segment fell -17%.  Advair lead the way with a -24% decline, as generic competition took market share from GSK and also forced through price reductions on contracts.

 

Operating profit was £2.9bn, down 36.6% from last year with underlying operating profit at £4.8bn down 16.1%.  Reported EPS was 35.3p for the nine months a decline of 41.5%; on an adjusted basis the decline was 14.2% to 66.9p.  The quarterly dividend was maintained at 19p and management have said that the fourth quarter dividend will also be maintained at 23p, producing a full year pay-out of 80p - a 2.6% increase on last year.  The company have also stated that the 2015 dividend will be maintained at this year's level. 

 

Free cash flow was down substantially for the nine months from £3.5bn last year to £1.5bn, reflecting lower profitability in the business and weaker trading currencies.  Consequently after dividend payments and stock repurchases totaling £3.2bn and £0.7bn spent increasing their shareholding in their Indian pharmaceutical subsidiary from 50.7% to 75% and the acquisition of the remaining 30% of their Indonesian Consumer Healthcare business, the net debt was increased by £2.1bn to £14.8bn.

 

For the current year management have stated that "...In 2014, GSK expects to deliver full year core EPS on a CER and ex-divestment basis broadly similar to last year..."

The key message from the company is the freezing of the dividend for next year, which probably reflects their view of the execution risks associated with the changes the company is embarking on.  To list just a few:

Respiratory drug transition - as their new drugs gain traction and the decline in Advair/Seretide stabilises.  Management have targeted growth for this segment by 2016.

Novartis deal - which is expected to complete in the first half of next year - embedding in the purchased Vaccines business and managing the Consumer Healthcare JV.  In addition the sale of the Oncology business to Novartis this will entail the return of £4bn to shareholders, approximately 80p per share.

Cost savings - seeking to deliver £1bn over the next three years, 50% of that saving in 2016.

ViiV IPO - management will seek a listing of a minority stake in this business.

Divestments - They are continuing to seek a divestment for certain North American and European pharmaceutical products within their Established Products Portfolio.

Include some of the regulatory and legal issues and it is clear that Witty has a lot on his plate.  Management may have felt pressured to embark on such a large number of initiatives, as a catalyst for change in the direction of momentum of the SP, but it will require some strong execution skills.