TIDMGSK
RNS Number : 2693P
GlaxoSmithKline PLC
06 February 2019
Issued: Wednesday, 6 February 2019, London U.K.
GSK delivers sales, earnings and cash flow growth in 2018
Total EPS 73.7p, +>100% AER, +>100% CER; Adjusted EPS 119.4p +7%
AER, +12% CER
2018 financial, product and strategy highlights
-- Group sales GBP30.8 billion, +2% AER, +5% CER
-- Pharmaceuticals sales GBP17.3 billion, flat AER, +2% CER; Vaccines
sales GBP5.9 billion, +14% AER, +16% CER; Consumer Healthcare sales
GBP7.7 billion, -1% AER, +2% CER
-- Total new Respiratory product sales GBP2.6 billion, +35% AER, +38%
CER
-- Total HIV sales GBP4.7 billion, +9% AER, +11% CER. Dolutegravir-based
regimens GBP4.4 billion, +14% AER, +16% CER
-- Shingrix sales GBP784 million, +>100% AER, +>100% CER
-- Total Group operating margin 17.8%, +4.3 percentage points AER,
+5.0 percentage points CER
-- Adjusted Group operating margin 28.4%, flat AER, +0.5 percentage
points CER. (Pharmaceuticals: 33.3%; Vaccines 33.0%; Consumer Healthcare
19.8%)
-- Total EPS 73.7p, +>100% AER, +>100% CER, reflecting stronger operating
performance, lower restructuring and impairment charges as well
as a favourable comparison with impact of US tax reform in 2017
-- Adjusted EPS 119.4p, +7% AER, +12% CER, driven by improved operating
margin and continued financial efficiencies
-- Net cash flow from operations GBP8.4 billion. Free cash flow GBP5.7
billion, improvement reflecting greater focus on cash conversion,
particularly working capital
-- 23p dividend declared for the quarter; 80p for full year 2018
-- 4 major transactions, including new Consumer Healthcare JV, announced
in 2018 to support strategy and reshape of the Group's portfolio
2019 guidance
-- Expect Adjusted EPS to decline -5% to -9% CER reflecting recent
approval of a generic competitor to Advair in the US. Guidance
also reflects expected impact of Tesaro acquisition and assumes
Consumer Healthcare nutrition disposal and Consumer JV with Pfizer
close as previously indicated
-- Expect 80p dividend for 2019
Pipeline update and newsflow
-- Rebuild of Pharmaceuticals pipeline continues with 33* of the 46*
new medicines now in development targeting modulation of the immune
system
-- Major progress made in immuno-oncology pipeline with 16* assets
now in clinical development, reflecting organic progression, the
Tesaro acquisition and the alliance with Merck KGaA, Darmstadt,
Germany*
-- Major data readouts and other significant newsflow expected on
multiple new medicines in HIV, Oncology, Immuno-inflammation and
Respiratory in 2019:
- FDA approval decision expected for dolutegravir + lamivudine
in H1
- FDA filings planned for long-acting injectable cabotegravir +
rilpivirine in H1 and fostemsavir for highly treatment-experienced
patients in H2
- Pivotal stage data readouts expected for BCMA for 4L multiple
myeloma, Zejula for 1L maintenance ovarian cancer and PD1 dostarlimab
for endometrial cancer
- Updated phase I PFS data from DREAMM-1 study for BCMA to be published
in leading journal in H1
- Phase III start planned for anti-GMCSF for treatment of rheumatoid
arthritis in H2
- Results of pivotal CAPTAIN study to support filing of Trelegy
for use in asthma expected in H1
2018 results
2018 Growth Q4 2018 Growth
------------ ------------
GBPm GBP% CER% GBPm GBP% CER%
------- ----- ----- -------- ----- -----
Turnover 30,821 2 5 8,197 7 5
Total operating profit 5,483 34 43 1,554 >100 >100
Total earnings per
share 73.7p >100 >100 24.7p >100 >100
Adjusted operating
profit 8,745 2 6 2,196 8 4
Adjusted earnings per
share 119.4p 7 12 31.2p 14 10
Net cash from operating
activities 8,421 22 4,119 44
Free cash flow 5,692 63 3,317 83
The Total results are presented under 'Financial performance' on
pages 6 and 22 and Adjusted results reconciliations are presented
on pages 14, 15, 30 and 31. Adjusted results are a non-IFRS measure
that may be considered in addition to, but not as a substitute for,
or superior to, information presented in accordance with IFRS. Adjusted
results are defined on page 4 and GBP% or AER% growth, CER% growth,
free cash flow and other non-IFRS measures are defined on page 44.
GSK provides guidance on an Adjusted results basis only for the reasons
set out on page 5. All expectations, guidance and targets regarding
future performance and dividend payments should be read together
with "Outlook, assumptions and cautionary statements" on page 45.
* Includes M7824, the subject of the alliance with Merck KGaA, Darmstadt,
Germany, expected to close in Q1 2019.
Emma Walmsley, Chief Executive Officer, GSK said:
"GSK delivered improved operating performance in 2018 with Group
sales growth, strong commercial execution of new product launches,
especially Shingrix, continued cost discipline and better cash generation.
"It was also a significant year for the Group strategically, with
the launch of a new R&D strategy focused on immunology, genetics
and new technologies, together with a series of transactions that
support our strategy and reshape of the Group's portfolio.
"We are making good progress against our priority to rebuild our
Pharmaceuticals pipeline, particularly in oncology. Since July, we
have doubled the number of oncology assets in clinical development
to 16 through the advancement of our internal programmes and with
targeted business development including the recently completed acquisition
of Tesaro and our new alliance with Merck KGaA that is expected to
close in Q1 2019. During 2019, we expect to receive pivotal data
on three new cancer medicines, all of which have the potential to
be launched in the next two years.
"We are also focused on completing the transactions to divest our
Consumer Healthcare nutrition business to Unilever; and the formation
of our new joint venture with Pfizer that will create a new, world
leading Consumer Healthcare company and which provides a unique opportunity
to deliver substantial value for shareholders.
"Finally, I would like to thank all our customers, suppliers and
employees for their support and hard work in 2018 and look forward
to working with them in 2019, which will be an important year of
execution for GSK."
2019 guidance
In 2019, we now expect Adjusted EPS to decline in the range of -5%
to -9% at CER. This guidance reflects the recent approval of a substitutable
generic competitor to Advair in the US and the expected impact of
the Tesaro acquisition and assumes that the proposed Consumer Healthcare
nutrition disposal closes by the end of 2019 and the proposed Consumer
Healthcare Joint Venture with Pfizer closes during H2 2019.
GSK expects to maintain the dividend for 2019 at the current level
of 80p per share.
All expectations, guidance and targets regarding future performance
and dividend payments should be read together with "Outlook, assumptions
and cautionary statements" on page 45.
If exchange rates were to hold at the closing rates on 31 January
2019 ($1.31/GBP1, EUR1.14/GBP1 and Yen 143/GBP1) for the rest of
2019, the estimated positive impact on 2019 Sterling turnover growth
would be less than 1% and if exchange gains or losses were recognised
at the same level as in 2018, the estimated positive impact on 2019
Sterling Adjusted EPS growth would be around 1%.
Contents Page
Total and Adjusted results 4
Financial performance - year ended 31 December 2018 6
Financial performance - three months ended 31 December 2018 22
Cash generation and conversion 37
Returns to shareholders 39
Research and development 40
Reporting definitions 44
Outlook, assumptions and cautionary statements 45
Contacts 46
Income statements 47
Statement of comprehensive income - year ended 31 December
2018 48
Statement of comprehensive income - three months ended 31 December
2018 49
Pharmaceuticals turnover - year ended 31 December 2018 50
Pharmaceuticals turnover - three months ended 31 December 2018 51
Vaccines turnover - year ended 31 December 2018 52
Vaccines turnover - three months ended 31 December 2018 52
Balance sheet 53
Statement of changes in equity 54
Cash flow statement - year ended 31 December 2018 55
Segment information 56
Legal matters 58
Taxation 58
Additional information 59
Reconciliation of cash flow to movements in net debt 63
Net debt analysis 63
Free cash flow reconciliation 63
Non-controlling interests in ViiV Healthcare 64
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 and Gardasil is a
trademark of Merck Sharp & Dohme Corp.
Total and Adjusted results
Total reported results represent the Group's overall performance.
GSK also uses a number of adjusted, non-IFRS, measures to report
the performance of its business. Adjusted results and other non-IFRS
measures may be considered in addition to, but not as a substitute
for or superior to, information presented in accordance with IFRS.
Adjusted results are defined below and other non-IFRS measures are
defined on page 44.
GSK believes that Adjusted results, when considered together with
Total results, provide investors, analysts and other stakeholders
with helpful complementary information to understand better the
financial performance and position of the Group from period to period,
and allow the Group's performance to be more easily compared against
the majority of its peer companies. These measures are also used
by management for planning and reporting purposes. They may not
be directly comparable with similarly described measures used by
other companies.
GSK encourages investors and analysts not to rely on any single
financial measure but to review GSK's quarterly results announcements,
including the financial statements and notes, in their entirety.
GSK is committed to continuously improving its financial reporting,
in line with evolving regulatory requirements and best practice
and has made a number of changes in recent years. In line with this
practice, GSK expects in 2019 to continue to review its reporting
framework (including, where relevant, the use of alternative performance
measures).
Adjusted results exclude the following items from Total results,
together with the tax effects of all of these items:
-- amortisation of intangible assets (excluding computer software)
and goodwill
-- impairment of intangible assets (excluding computer software) and
goodwill
-- major restructuring costs, which include impairments of tangible
assets and computer software, (under specific Board approved programmes
that are structural, of a significant scale and where the costs
of individual or related projects exceed GBP25 million), including
integration costs following material acquisitions
-- transaction-related accounting or other adjustments related to
significant acquisitions
-- proceeds and costs of disposals of associates, products and businesses;
significant legal charges (net of insurance recoveries) and expenses
on the settlement of litigation and government investigations;
other operating income other than royalty income, and other items
-- 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 both Total and
Adjusted results.
As Adjusted results include the benefits of Major restructuring
programmes but exclude significant costs (such as significant legal,
major restructuring and transaction items) they should not be regarded
as a complete picture of the Group's financial performance, which
is presented in its Total results. The exclusion of other Adjusting
items may result in Adjusted earnings being materially higher or
lower than Total earnings. In particular, when significant impairments,
restructuring charges and legal costs are excluded, Adjusted earnings
will be higher than Total earnings.
GSK has undertaken a number of Major restructuring programmes in
recent years in response to significant changes in the Group's trading
environment or overall strategy, or following material acquisitions,
including the Novartis transaction in 2015. Costs, both cash and
non-cash, of these programmes are provided for as individual elements
are approved and meet the accounting recognition criteria. As a
result, charges may be incurred over a number of years following
the initiation of a Major restructuring programme.
Significant legal charges and expenses are those arising from the
settlement of litigation or government investigations that are not
in the normal course and materially larger than more regularly occurring
individual matters. They also include certain major legacy matters.
Reconciliations between Total and Adjusted results, providing further
information on the key Adjusting items, are set out on pages 14,
15, 30 and 31.
GSK provides earnings guidance to the investor community on the
basis of Adjusted results. This is in line with peer companies and
expectations of the investor community, supporting easier comparison
of the Group's performance with its peers. GSK is not able to give
guidance for Total results as it cannot reliably forecast certain
material elements of the Total results, particularly the future
fair value movements on contingent consideration and put options
that can and have given rise to significant adjustments driven by
external factors such as currency and other movements in capital
markets.
ViiV Healthcare
ViiV Healthcare is a subsidiary of the Group and 100% of its operating
results (turnover, operating profit, profit after tax) are included
within the Group income statement.
Earnings are allocated to the three shareholders of ViiV Healthcare
on the basis of their respective equity shareholdings (GSK 78.3%,
Pfizer 11.7% and Shionogi 10%) and their entitlement to preferential
dividends, which are determined by the performance of certain products
that each shareholder contributed. As the relative performance of
these products changes over time, the proportion of the overall earnings
allocated to each shareholder also changes. In particular, the increasing
sales of dolutegravir-containing products have a favourable impact
on the proportion of the preferential dividends that is allocated
to GSK. Adjusting items are allocated to shareholders based on their
equity interests. GSK was entitled to approximately 85% of the Total
earnings and 82% of the Adjusted earnings of ViiV Healthcare for
2018.
As consideration for the acquisition of Shionogi's interest in the
former Shionogi-ViiV Healthcare joint venture in 2012, Shionogi received
the 10% equity stake in ViiV Healthcare and ViiV Healthcare also
agreed to pay additional future cash consideration to Shionogi, contingent
on the future sales performance of the products being developed by
that joint venture, principally dolutegravir. Under IFRS 3 'Business
combinations', GSK was required to provide for the estimated fair
value of this contingent consideration at the time of acquisition
and is required to update the liability to the latest estimate of
fair value at each subsequent period end. The liability for the contingent
consideration recognised in the balance sheet at the date of acquisition
was GBP659 million. Subsequent re-measurements are reflected within
other operating income/expense and within Adjusting items in the
income statement in each period. At 31 December 2018, the liability,
which is discounted at 8.5%, stood at GBP5,937 million, on a post-tax
basis.
Cash payments to settle the contingent consideration are made to
Shionogi by ViiV Healthcare each quarter, based on the actual sales
performance of the relevant products in the previous quarter. These
payments reduce the balance sheet liability and hence are not recorded
in the income statement. The cash payments made to Shionogi by ViiV
Healthcare in 2018 were GBP793 million.
Because the liability is required to be recorded at the fair value
of estimated future payments, there is a significant timing difference
between the charges that are recorded in the Total income statement
to reflect movements in the fair value of the liability and the actual
cash payments made to settle the liability.
Further explanation of the acquisition-related arrangements with
ViiV Healthcare are set out on page 64.
Financial performance - 2018
Total results
2018 2017 Growth Growth
GBPm GBPm GBP% CER%
--------- --------- ------- -------
Turnover 30,821 30,186 2 5
Cost of sales (10,241) (10,342) (1) -
--------- --------- ------- -------
Gross profit 20,580 19,844 4 7
Selling, general and administration (9,915) (9,672) 3 5
Research and development (3,893) (4,476) (13) (12)
Royalty income 299 356 (16) (17)
Other operating income/(expense) (1,588) (1,965)
--------- --------- ------- -------
Operating profit 5,483 4,087 34 43
Finance income 81 65
Finance expense (798) (734)
Profit on disposal of associates 3 94
Share of after tax profits
of associates
and joint ventures 31 13
--------- --------- ------- -------
Profit before taxation 4,800 3,525 36 46
Taxation (754) (1,356)
Tax rate % 15.7% 38.5%
--------- --------- ------- -------
Profit after taxation 4,046 2,169 87 100
--------- --------- ------- -------
Profit attributable to non-controlling
interests 423 637
Profit attributable to shareholders 3,623 1,532
--------- --------- ------- -------
4,046 2,169 87 100
--------- --------- ------- -------
Earnings per share 73.7p 31.4p >100 >100
--------- --------- ------- -------
Sales performance - 2018
Group turnover by business 2018
-------------------------
Growth Growth
GBPm GBP% CER%
------- ------- -------
Pharmaceuticals 17,269 - 2
Vaccines 5,894 14 16
Consumer Healthcare 7,658 (1) 2
------- ------- -------
Group turnover 30,821 2 5
------- ------- -------
Group turnover was up 2% AER, 5% CER to GBP30,821 million.
Pharmaceuticals sales were flat at 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 1% AER but grew 1% CER.
Vaccines sales were up 14% AER, 16% CER, primarily driven by sales
of Shingrix in the US and growth in influenza and Hepatitis vaccines,
which also benefited from a competitor supply shortage, partly offset
by declines in some Established Vaccines.
Consumer Healthcare sales declined 1% AER but grew 2% CER with broad-based
growth in Oral health and Wellness partly offset by increased competitive
pressures in Europe, 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 2018
-------------------------
Growth Growth
GBPm GBP% CER%
------- ------- -------
US 11,982 6 9
Europe 7,973 - (1)
International 10,866 (1) 4
------- ------- -------
Group turnover 30,821 2 5
------- ------- -------
US sales grew 6% AER, 9% CER, driven by the growth of Shingrix and
Hepatitis vaccines as well as strong performances from HIV and Benlysta,
offset by declines in Established Pharmaceuticals and Respiratory.
Europe sales were flat at AER, but declined 1% CER, as declines
in Established Pharmaceuticals, older HIV products, Meningitis vaccines
and Consumer Healthcare more than offset growth from Tivicay and
Triumeq and the new Respiratory products.
In International, sales declined 1% AER, but grew 4% CER, reflecting
strong growth in Tivicay, Triumeq and the Respiratory portfolio.
Sales in Emerging Markets declined 2% AER, but grew 4% CER.
Pharmaceuticals
2018
-------------------------
Growth Growth
GBPm GBP% CER%
------- ------- -------
Respiratory 6,928 (1) 1
HIV 4,722 9 11
Immuno-inflammation 472 25 28
Established Pharmaceuticals 5,147 (7) (4)
17,269 - 2
------- ------- -------
US 7,453 (2) 1
Europe 4,072 2 1
International 5,744 - 5
17,269 - 2
------- ------- -------
Pharmaceuticals turnover in the year was GBP17,269 million, flat
at AER, but up 2% CER, driven primarily by the growth in HIV sales,
which were up 9% AER, 11% CER, to GBP4,722 million, reflecting share
growth over the year in the dolutegravir portfolio; Triumeq, Tivicay
and Juluca. Respiratory sales declined 1% AER, but grew 1% CER, to
GBP6,928 million, with growth from the Ellipta portfolio and Nucala
partly offset by lower sales of Seretide/Advair. Sales of Established
Pharmaceuticals were down 7% AER, 4% CER.
In the US, sales declined 2% AER but grew 1% at CER, with growth
in the HIV portfolio and Benlysta offsetting declines in Established
Pharmaceuticals and Respiratory. In Europe, sales grew 2% AER, 1%
CER, with growth in the Respiratory portfolio offsetting the continued
impact of generic competition to Epzicom and Avodart. International
was flat at AER but grew 5% CER, with growth driven by HIV and the
new Respiratory portfolio.
Respiratory
Total Respiratory sales declined 1% AER, but grew 1% CER, with the
US down 5% AER, 3% CER. In Europe, sales grew 5% AER, 4% CER and
International grew 3% AER, 7% CER. Growth from the Ellipta portfolio
and Nucala was partly offset by lower sales of Seretide/Advair.
Sales of Nucala were GBP563 million in the year, up 64% AER, 66%
CER, continuing to benefit from the global rollout of the product.
US sales of Nucala grew 44% AER, 48% CER to GBP341 million, despite
increased competition, benefiting from continued market expansion.
Sales of Ellipta products were up 29% AER, 32% CER, driven by continued
growth in all regions. In the US, sales grew 24% AER, 27% CER, reflecting
further market share gains, partly offset by the impact of continued
competitive pricing pressures, particularly for ICS/LABAs. In Europe,
sales grew 42% AER, 41% CER. Sales of Trelegy Ellipta, our new once-daily
closed triple product, contributed GBP156 million to total Ellipta
sales, benefiting from an expanded label in the US.
Relvar/Breo Ellipta sales grew 8% AER, 10% CER, to GBP1,089 million,
primarily driven by growth in Europe, which was up 25% AER, 24% CER
to GBP253 million, and in International, which was up 26% AER, 31%
CER to GBP255 million. In the US, Breo Ellipta sales declined 3%
AER, 1% CER, with volume growth of 27%, reflecting continued market
share growth, offset by the combined impact of prior period payer
rebate adjustments and increased competitive pricing pressure. Anoro
Ellipta sales grew 39% AER, 42% CER to GBP476 million, driven primarily
by share gains in the US. All Ellipta products, Breo, Anoro, Incruse,
Arnuity and Trelegy, continued to grow market share in the US during
the year.
Sales of New Respiratory products, comprising Ellipta products and
Nucala, grew 35% AER, 38% CER to GBP2,612 million.
Seretide/Advair sales declined 23% AER, 21% CER to GBP2,422 million.
Sales of Advair in the US declined 32% AER, 30% CER (9% volume decline
and 21% negative impact of price) primarily reflecting increased
competitive pricing pressures. In Europe, Seretide sales were down
19% AER, 20% CER to GBP599 million (13% volume decline and a 7% 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, 4% CER, to
GBP726 million (5% volume decline and 1% positive impact of price),
with declines in markets with generic competition partly offset by
growth from other developing markets.
HIV
HIV sales increased 9% AER, 11% CER to GBP4,722 million in the year,
with the US up 8% AER, 10% CER, Europe up 7% AER, 6% CER and International
up 14% AER, 20% CER.
The growth was driven by the increase in market share over the year
in the dolutegravir products which grew 14% AER, 16% CER. This was
partly offset by the decline in the established portfolio, particularly
the impact of generic competition to Epzicom/Kivexa in Europe. Triumeq,
Tivicay and Juluca (which was approved in the US in November 2017),
recorded sales of GBP2,648 million, GBP1,639 million and GBP133 million,
respectively, in the year. Epzicom/Kivexa sales declined 50% AER,
48% CER to GBP117 million.
Immuno-inflammation
Sales in the year were up 25% AER, 28% CER, primarily driven by Benlysta,
which grew 26% AER, 29% CER to GBP473 million. In the US, Benlysta
grew 24% AER, 27% CER to GBP420 million, benefiting from the launch
of the sub-cutaneous formulation in the third quarter.
Established Pharmaceuticals
Sales of Established Pharmaceuticals were GBP5,147 million, down
7% AER, 4% CER, reflecting efforts to maximise the value from this
portfolio but also the benefit of certain post-divestment contract
manufacturing sales and the first instalment of a 12-month Relenza
supply contract in Europe.
The Avodart franchise was down 7% AER, 5% CER to GBP572 million,
primarily due to the loss of exclusivity in Europe, with the US impact
now broadly annualised. Coreg franchise sales declined 63% AER, 63%
CER following a generic Coreg CR entrant to the US market in Q4 2017.
Lamictal sales declined 5% AER, 3% CER to GBP617 million.
Vaccines
2018
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Meningitis 881 (1) 2
Influenza 523 7 10
Shingles 784 >100 >100
Established Vaccines 3,706 (1) -
------
5,894 14 16
------ ------- -------
US 2,701 45 48
Europe 1,561 (2) (4)
International 1,632 (3) -
------ ------- -------
5,894 14 16
------ ------- -------
Vaccines turnover grew 14% AER, 16% CER to GBP5,894 million, primarily
driven by growth in sales of Shingrix, Hepatitis vaccines, which
also benefited from a competitor supply shortage and higher sales
of influenza products. This was partly offset by 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, together with lower Synflorix
sales, reflecting lower pricing and demand in Emerging Markets.
Meningitis
Meningitis sales were down 1% AER but up 2% CER to GBP881 million.
Bexsero sales grew 5% AER, 9% 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 declined
15% AER, 12% CER, primarily reflecting supply constraints in Europe
and International as well as a strong comparator in 2017 and unfavourable
year-on-year CDC stockpile movements in the US, partly offset by
demand and share gains in the US.
Influenza
Fluarix/FluLaval sales grew 7% AER, 10% CER to GBP523 million, driven
by strong sales execution in the US and improved sales in Europe,
partly offset by increased price competition in the US.
Shingles
Shingrix recorded sales of GBP784 million, primarily 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 and Shingrix has now achieved a 98% market share.
Established Vaccines
Sales of DTPa-containing vaccines (Infanrix, Pediarix and Boostrix)
were down 8% AER, 7% CER. Infanrix, Pediarix sales were down 8% AER,
7% CER to GBP680 million, reflecting increased competitive pressures
in Europe as well as unfavourable year-on-year CDC stockpile movements
in the US, partly offset by stronger demand in International. Boostrix
sales declined 8% AER, 7% CER to GBP517 million, primarily driven
by the return to the market of a competitor in Europe and lower demand
in International.
Hepatitis vaccines grew 17% AER, 19% CER to GBP808 million, benefiting
from stronger demand in the US and Europe as well as a competitor
supply shortage in the US.
Rotarix sales were down 1% AER but up 1% CER to GBP521 million, reflecting
higher demand in Europe, partly offset by lower demand in International.
Synflorix sales declined 17% AER, 17% CER to GBP424 million, primarily
impacted by lower pricing and demand in Emerging Markets.
Consumer Healthcare
2018
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Wellness 3,940 (2) 1
Oral health 2,496 1 4
Nutrition 643 (5) 1
Skin health 579 (4) (1)
------
7,658 (1) 2
------
US 1,828 - 2
Europe 2,340 (1) (2)
International 3,490 (2) 4
------ ------- -------
7,658 (1) 2
------ ------- -------
Consumer Healthcare sales in the year declined 1% AER but grew 2%
CER to GBP7,658 million, with broad-based growth in Oral health and
Wellness partly offset by a decline in Panadol and lower sales of
smaller brands. International markets performed strongly, particularly
India and Brazil, whilst Europe was impacted by intensifying competitive
pressure in the second half of 2018.
The aggregate impact from generic competition on Transderm Scop in
the US, the divestment of Horlicks and MaxiNutrition in the UK and
other small non-strategic brands and implementation of the Goods
& Service Tax (GST) in India was to reduce overall sales growth by
approximately one percentage point.
Wellness
Wellness sales declined 2% AER but grew 1% CER to GBP3,940 million.
Respiratory sales grew in low single digits, led by Theraflu supported
by a strong cold and flu season earlier in the year as well as the
Theraflu PowerPods launch in the US in the second half of the year.
Otrivin grew in mid single digits, benefiting from new variants,
and Flonase returned to growth following a weaker allergy season
earlier this year.
Pain relief sales were flat as low single-digit growth in Voltaren
and double-digit growth in Fenbid were offset by a decline in Panadol
sales due to a 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 grew 1% AER, 4% CER to GBP2,496 million, as increased
competitive pressures in Europe were offset by double digit growth
from Sensodyne in a number of International markets, including India
and Turkey, and strong single-digit growth in the US driven by Sensodyne
Rapid. Denture care grew in high single digits through the launch
of Corega Max in Russia and Brazil and Gum health delivered double-digit
growth with continued strong Parodontax performance in the US. Growth
was also partly impacted by de-stocking in International.
Nutrition
Nutrition sales declined 5% AER but grew 1% CER to GBP643 million.
The Nutrition business in India performed strongly across the product
portfolio including new innovations such as Horlicks Protein+ which
was launched earlier in the year. The impact of divestments and India
GST implementation on growth was approximately eight percentage points.
Skin health
Skin health sales were down 4% AER, 1% CER to GBP579 million, largely
driven by a decline in Physiogel and the divestment of several small
non-strategic brands in the US, which had a negative impact on growth
of one percentage point.
Total results - 2018
Cost of sales
Cost of sales as a percentage of turnover was 33.2%, down 1.0 percentage
points at AER and 1.4 percentage points in CER terms compared with
2017. This primarily reflected a favourable comparison with GBP363
million of non-cash restructuring costs from the write-downs of assets
in 2017 related to the decision to withdraw Tanzeum progressively.
The year also benefited from a more favourable product mix in Vaccines
and Consumer Healthcare, particularly the launch of Shingrix, together
with a further contribution from integration and restructuring savings.
This was partly offset by continued adverse pricing pressure in Pharmaceuticals,
particularly in Respiratory, and in Established Vaccines, together
with increased input costs and an adverse comparison with the benefit
of a settlement for lost third party supply volume in 2017 in Vaccines.
Selling, general and administration
SG&A costs as a percentage of turnover were 32.2%, 0.1 percentage
points higher than in 2017 at both AER and CER, reflecting growth
of 3% AER, 5% CER. The increase in SG&A costs primarily reflected
higher restructuring costs, and 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 GBP3,893 million (12.6% of turnover), 13% AER,
12% CER lower than in 2017. This reflected reduced restructuring
costs primarily due to the comparison with the provision for obligations
as a result of the decision to withdraw Tanzeum in 2017 and lower
intangible impairments, a favourable comparison with the impact of
the Priority Review Voucher purchased and utilised in H1 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 use of a Priority Review Voucher
awarded in 2018.
Royalty income
Royalty income was GBP299 million (2017: GBP356 million), down 16%
AER and 17% CER, the reduction primarily reflecting the patent expiry
of Cialis, partly offset by an increase in the Gardasil royalty.
Other operating income/(expense)
Other operating expense of GBP1,588 million (2017: GBP1,965 million)
primarily reflected GBP1,846 million (2017: GBP1,517 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. The 2017 charges included the impact of US tax
reform, which increased the fair value of these liabilities by GBP666
million. This was partly offset by the profit on a number of asset
disposals, including tapinarof, as well as a gain arising from the
increase in value of the shares in Hindustan Unilever Limited to
be received on the disposal of Horlicks and other Consumer Healthcare
brands, net of disposal costs.
The accounting charges were driven primarily by a GBP758 million
re-measurement of the contingent consideration liability due to Shionogi,
largely related to the regular updates of exchange rate assumptions
to period end rates and sales forecasts following a number of studies
including the GEMINI study completed in Q2 2018, together with a
GBP430 million unwind of the discount. In addition, a net charge
of GBP658 million reflected the re-measurement of the valuation of
the Consumer Healthcare put option to reflect the price agreed with
Novartis to acquire its shareholding, together with movements in
exchange rates largely offset by gains on hedging contracts.
Operating profit
Total operating profit was GBP5,483 million in 2018 compared with
GBP4,087 million in 2017. The increase in operating profit primarily
reflected a favourable comparison with charges of GBP666 million
in 2017 arising from the impact of US tax reform on the valuation
of the Consumer Healthcare and HIV businesses and reduced restructuring
costs and asset impairments. In addition, there was a contribution
from sales growth, a more favourable mix, primarily in Vaccines and
Consumer Healthcare, benefits from the prioritisation of R&D expenditure
and comparison with the impact of the Priority Review Voucher utilised
and expensed in 2017, alongside continued tight control of ongoing
costs. This was partly offset by the increased impact of accounting
charges related to the re-measurement of the liabilities for contingent
consideration, put options and preferential dividends, continuing
pricing pressure, particularly in Respiratory, increased input costs,
the comparison with the benefit in Q2 2017 of a settlement for lost
third party supply volume in Vaccines, investments in new product
support, particularly for launches in Respiratory, HIV and Vaccines
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 2018 amounted to GBP1,137 million (2017: GBP685
million). This included a cash milestone paid to Novartis of $450
million (GBP317 million) as well as cash payments made to Shionogi
of GBP793 million (2017: GBP671 million).
Net finance costs
Net finance costs were GBP717 million compared with GBP669 million
in 2017. This reflected higher debt levels following the acquisition
from Novartis of its stake in the Consumer Healthcare Joint Venture
in June 2018 as well as additional interest on tax arising from a
historic tax settlement, recorded in Q3 2018, and an adverse comparison
with a provision release of GBP24 million in Q4 2017, 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
benefit from older bonds being refinanced at lower interest rates
and the translation impact of exchange rate movements on the reported
Sterling costs of foreign currency denominated interest-bearing instruments.
Taxation
The charge of GBP754 million represented an effective tax rate on
Total results of 15.7% (2017: 38.5%) and reflected the different
tax effects of the various Adjusting items. This includes the effect
of a reduced estimate of the 2017 impact of US tax reform of GBP125
million, following additional guidance being released by the IRS
and a re-assessment of estimates of uncertain tax positions following
the settlement of a number of open issues with tax authorities. The
reduction from the prior year effective tax rate on Total profits
was driven primarily by a favourable comparison with the impact of
US tax reform, which resulted in a number of charges in Q4 2017.
Non-controlling interests
The allocation of earnings to non-controlling interests amounted
to GBP423 million (2017: GBP637 million). The reduction was primarily
due to the lower allocation of Consumer Healthcare profits of GBP117
million (2017: GBP415 million) following the buyout of Novartis'
interest. This was partly offset by an increased allocation of ViiV
Healthcare profits and higher net profits in some of the Group's
other entities with non-controlling interests.
Earnings per share
Total earnings per share was 73.7p, compared with 31.4p in 2017.
The increase in earnings per share primarily reflected a favourable
comparison with charges in 2017 arising from the impact of US tax
reform, reduced restructuring costs and asset impairments, increased
operating profits, a lower tax rate and a reduced non-controlling
interest allocation of Consumer Healthcare profits, partly offset
by higher transaction-related charges arising from increases in the
valuation of the liabilities for contingent consideration, put options
and preferential dividends.
Currency impact on 2018 results
The results for 2018 are based on average exchange rates, principally
GBP1/$1.33, GBP1/EUR1.13 and GBP1/Yen 147. Comparative exchange rates
are given on page 59. The period-end exchange rates were GBP1/$1.27,
GBP1/EUR1.11 and GBP1/Yen 140.
In 2018, turnover increased 2% in AER terms and 5% CER. Total EPS
was 73.7p compared with 31.4p in 2017. The negative currency impact
primarily reflected the strength of Sterling, particularly against
the US Dollar, Yen and Emerging Market currencies, relative to 2017.
Adjusting items
The reconciliations between Total results and Adjusted results for
2018 and 2017 are set out below.
Year ended 31 December 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 30,821 30,821
Cost of sales (10,241) 536 69 443 15 - (9,178)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross profit 20,580 536 69 443 15 - 21,643
Selling, general
and
administration (9,915) 2 315 98 38 (9,462)
Research and
development (3,893) 44 45 49 20 (3,735)
Royalty income 299 299
Other operating
income/(expense) (1,588) 2 1,864 (278) -
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating profit 5,483 580 116 809 1,977 (220) 8,745
Net finance costs (717) 4 (3) 18 (698)
Profit on
disposal
of associates 3 (3) -
Share of after
tax
profits of
associates and
joint
ventures 31 31
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit before
taxation 4,800 580 116 813 1,974 (205) 8,078
Taxation (754) (109) (19) (170) (239) (244) (1,535)
Tax rate % 15.7% 19.0%
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit after
taxation 4,046 471 97 643 1,735 (449) 6,543
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit
attributable
to
non-controlling
interests 423 251 674
Profit
attributable
to
shareholders 3,623 471 97 643 1,484 (449) 5,869
------------ ------------ ------------ ------------ ------------ ------------ ------------
Earnings per
share 73.7p 9.6p 2.0p 13.1p 30.2p (9.2)p 119.4p
------------ ------------ ------------ ------------ ------------ ------------ ------------
Weighted average
number
of
shares
(millions) 4,914 4,914
------------ ------------
Year ended 31 December 2017
Divestments,
significant
legal
Intangible Intangible Major and
Total amort- impair- restruct- Transaction- other US tax Adjusted
results isation ment uring related items reform results
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Turnover 30,186 30,186
Cost of sales (10,342) 546 400 545 80 - (8,771)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross profit 19,844 546 400 545 80 - 21,415
Selling, general
and
administration (9,672) 248 83 (9,341)
Research and
development (4,476) 45 288 263 18 (3,862)
Royalty income 356 356
Other operating
income/
(expense) (1,965) 1,519 (220) 666 -
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating profit 4,087 591 688 1,056 1,599 (119) 666 8,568
Net finance
costs (669) 4 8 (657)
Profit on
disposal
of
associates 94 (94) -
Share of after
tax profits
of associates
and joint
ventures 13 13
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit before
taxation 3,525 591 688 1,060 1,599 (205) 666 7,924
Taxation (1,356) (134) (176) (209) (619) (251) 1,078 (1,667)
Tax rate % 38.5% 21.0%
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit after
taxation 2,169 457 512 851 980 (456) 1,744 6,257
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit
attributable
to
non-controlling
interests 637 42 114 793
Profit
attributable
to
shareholders 1,532 457 512 851 938 (456) 1,630 5,464
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Earnings per
share 31.4p 9.4p 10.5p 17.4p 19.2p (9.4)p 33.3p 111.8p
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Weighted average
number of
shares
(millions) 4,886 4,886
------------ ------------
Intangible asset amortisation and impairment
Intangible asset amortisation was GBP580 million compared with GBP591
million in 2017. Intangible asset impairments related to commercial
and Pharmaceuticals R&D development assets were GBP116 million (2017:
GBP688 million). The 2017 charge included impairments related to
the withdrawal of Tanzeum and a number of other commercial and Pharmaceuticals
R&D development assets. These charges were non-cash items.
Major restructuring and integration
Within the Pharmaceuticals sector, the highly regulated manufacturing
operations and supply chains and long lifecycle of the business mean
that restructuring programmes, particularly those that involve the
rationalisation or closure of manufacturing or R&D sites, are likely
to take several years to complete.
Major restructuring costs are those related to specific Board approved
Major restructuring programmes. Major restructuring programmes, including
integration costs following material acquisitions, are those that
are structural and are of a significant scale where the costs of
individual or related projects exceed GBP25 million. Other ordinary
course smaller scale restructuring costs are retained within Total
and Adjusted results.
The Board approved a new Major restructuring programme in July 2018,
which is designed to significantly improve the competitiveness and
efficiency of the Group's cost base with savings delivered primarily
through supply chain optimisation and reductions in administrative
costs.
Total Major restructuring charges incurred in 2018 were GBP809 million
(2017: GBP1,056 million), analysed as follows:
2018 2017
------------------------- -------------------------
Cash Non-cash Total Cash Non-cash Total
GBPm GBPm GBPm GBPm GBPm GBPm
------ --------- ------ ------ --------- ------
Combined restructuring
and
integration programme 330 110 440 531 525 1,056
2018 major restructuring
programme 279 90 369 - - -
609 200 809 531 525 1,056
------ --------- ------ ------ --------- ------
Non-cash charges arising under the existing Combined restructuring
and integration programme primarily related to the write-down of
assets as part of the announced plans to reduce the manufacturing
network. Cash charges arose from restructuring in the Europe and
International Pharmaceuticals commercial operations and some manufacturing
sites. Non-cash charges under the 2018 major restructuring programme
primarily related to announced plans to restructure the manufacturing
network and cash charges to date under the 2018 major restructuring
programme primarily related to restructuring in the US Pharmaceuticals
commercial operation, as well as some manufacturing sites and central
functions.
Total cash payments for the two programmes made in the year were
GBP537 million (2017: GBP555 million).
The analysis of major restructuring charges by business was as follows:
2018 2017
GBPm GBPm
------ ------
Pharmaceuticals 563 682
Vaccines 104 177
Consumer Healthcare 72 137
------ ------
739 996
Corporate & central functions 70 60
------ ------
Total Major restructuring costs 809 1,056
------ ------
The analysis of Major restructuring charges by Income statement line
was as follows:
2018 2017
GBPm GBPm
------ ------
Cost of sales 443 545
Selling, general and administration 315 248
Research and development 49 263
Other operating income/(expense) 2 -
------ ------
Total Major restructuring costs 809 1,056
------ ------
The Combined restructuring and integration programme delivered incremental
annual cost savings in the year of GBP0.3 billion. Given its relatively
recent launch, the benefit delivery this year from the 2018 major
restructuring programme was not material.
The analysis of incremental annual cost savings in the year by Income
statement line was as follows:
2018 2017
GBPbn GBPbn
------- -------
Cost of sales 0.2 0.2
Selling, general and administration 0.1 0.4
Research and development - 0.1
Total Major restructuring savings 0.3 0.7
------- -------
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 an estimated
currency benefit of GBP0.3 billion. The programme is now expected
to deliver by 2020 total annual savings of GBP4.4 billion on a constant
currency basis, including an estimated benefit of GBP0.4 billion
from currency on the basis of 2018 average exchange rates.
The 2018 major restructuring 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 to help fund targeted increases
in R&D and commercial support of new products.
Transaction-related adjustments
Transaction-related adjustments resulted in a net charge of GBP1,977
million (2017: GBP1,599 million). This primarily reflected GBP1,846
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.
2018 2017
Charge/(credit) GBPm GBPm
------ ------
Consumer Healthcare Joint Venture put option 658 986
Contingent consideration on former Shionogi-ViiV
Healthcare
Joint Venture (including Shionogi preferential
dividends) 1,188 556
ViiV Healthcare put options and Pfizer preferential
dividends (58) (126)
Contingent consideration on former Novartis Vaccines
business 58 101
Other adjustments 131 82
------ ------
Total transaction-related charges 1,977 1,599
------ ------
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 valuation of $13
billion (GBP9.2 billion on signing), together with an increase due
to movements in exchange rates, which was largely offset by gains
on hedging contracts.
The GBP1,188 million charge relating to the contingent consideration
for the former Shionogi-ViiV Healthcare Joint Venture represented
a GBP758 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 GBP430 million unwind of the discount.
Other adjustments included a GBP51 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, as well as acquisition costs relating to the acquisition
of Tesaro completed in January 2019 and the announced agreement with
Pfizer to combine our consumer healthcare businesses.
Contingent consideration cash payments which are made to Shionogi
and other companies reduce the balance sheet liability and hence
are not recorded in the income statement. Total contingent consideration
cash payments in the year amounted to GBP1,137 million (2017: GBP685
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 GBP793 million
(2017: GBP671 million).
An explanation of the accounting for the non-controlling interests
in ViiV Healthcare is set out on page 64.
Divestments, significant legal charges and other items
Divestments and other items included the profit on a number of asset
disposals, including tapinarof, a gain arising from the increase
in value of the shares in Hindustan Unilever Limited to be received
on the disposal of Horlicks and other Consumer Healthcare brands,
which is expected to complete by the end of 2019, net of disposal
costs, as well as equity investment impairments and certain other
adjusting items. A charge of GBP33 million (2017: GBP68 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 GBP39 million (2017: GBP192
million).
Adjusted results
The reconciliations between Total results and Adjusted results for
2018 and 2017 are set out on pages 14 and 15.
2018
--------------------------------------
% of Growth Growth
GBPm turnover GBP% CER%
-------- ---------- ------- -------
Turnover 30,821 100 2 5
Cost of sales (9,178) (29.8) 5 6
Selling, general and administration (9,462) (30.7) 1 4
Research and development (3,735) (12.1) (3) (2)
Royalty income 299 1.0 (16) (17)
-------- ---------- ------- -------
Adjusted operating profit 8,745 28.4 2 6
-------- ---------- ------- -------
Adjusted profit before tax 8,078 2 6
Adjusted profit after tax 6,543 5 9
Adjusted profit attributable
to shareholders 5,869 7 12
-------- ------- -------
Adjusted earnings per share 119.4p 7 12
-------- ------- -------
Operating profit by business 2018
--------------------------------------
% of Growth Growth
GBPm turnover GBP% CER%
-------- ---------- ------- -------
Pharmaceuticals 8,420 48.8 (3) -
Pharmaceuticals R&D* (2,676) (2) (1)
Total Pharmaceuticals 5,744 33.3 (3) -
Vaccines 1,943 33.0 18 25
Consumer Healthcare 1,517 19.8 10 15
-------- ---------- ------- -------
9,204 29.9 3 7
Corporate & other unallocated
costs (459) 22 15
-------- ---------- ------- -------
Adjusted operating profit 8,745 28.4 2 6
-------- ---------- ------- -------
* Operating profit of Pharmaceuticals R&D segment, which is the responsibility
of the President, Pharmaceuticals R&D. It excludes ViiV Healthcare
R&D expenditure, which is reported within the Pharmaceuticals segment.
A more detailed breakdown of R&D expenses is set out on page 40.
Operating profit
Adjusted operating profit was GBP8,745 million, 2% higher at AER
compared with 2017 and 6% higher at CER on a turnover increase of
5%. The Adjusted operating margin of 28.4% was flat at AER compared
with 2017 but 0.5 percentage points higher on a CER basis. This reflected
the benefit from sales growth at CER in all three businesses, a more
favourable mix, primarily in Vaccines and Consumer Healthcare, 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 pricing
pressure, particularly in Respiratory, increased input costs, the
comparison with the benefit in Q2 2017 of a settlement for lost third
party supply volume in Vaccines, investments in promotional product
support, particularly for new launches in Respiratory, HIV and Vaccines
and a reduction in royalty income.
Cost of sales
Cost of sales as a percentage of turnover was 29.8%, up 0.7 percentage
points at AER, and 0.4 percentage points in CER terms compared with
2017. This primarily reflected continued adverse pricing pressure
in Pharmaceuticals, particularly in Respiratory, and Established
Vaccines, as well as increased input costs and an adverse comparison
with the benefit of a settlement for lost third party supply volume
in 2017 in Vaccines. This was partly offset by a more favourable
product mix in Vaccines and Consumer Healthcare, particularly with
the launch of Shingrix, as well as a further contribution from integration
and restructuring savings in all three businesses.
Selling, general and administration
SG&A costs as a percentage of turnover were 30.7%, 0.2 percentage
points lower at AER than in 2017 and 0.3 percentage points lower
on a CER basis. This reflected an increase of 1% AER, 4% CER, primarily
resulting from 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 GBP3,735 million (12.1% of turnover), 3% AER,
2% CER lower than 2017, primarily reflecting the favourable comparison
with the impact of the Priority Review Voucher purchased and utilised
in 2017 and 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 the costs
payable to a third party relating to the use of a Priority Review
Voucher awarded and utilised in 2018.
Royalty income
Royalty income was GBP299 million (2017: GBP356 million), the reduction
primarily reflecting the patent expiry of Cialis, partly offset by
an increase in the Gardasil royalty.
Operating profit by business
Pharmaceuticals operating profit was GBP5,744 million, down 3% AER
but flat at CER on a turnover increase of 2% CER. The operating margin
of 33.3% was 1.0 percentage points lower at AER than in 2017 and
0.9 percentage points lower on a CER basis. This primarily reflected
the continued impact of lower prices, particularly in Respiratory,
and the broader transition of the Respiratory portfolio, increased
investment in new product support and a reduction in royalty income.
This was partly offset by the benefits of prioritisation within R&D
and a favourable comparison with the impact of the Priority Review
Voucher purchased in 2017.
Vaccines operating profit was GBP1,943million, 18% AER, 25% CER higher
than in 2017 on a turnover increase of 16% CER. The operating margin
of 33.0% was 1.1 percentage points higher at AER than in 2017 and
2.5 percentage points higher on a CER basis. This was primarily driven
by enhanced operating leverage from strong sales growth, an improved
product mix, including the impact of 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 investments to support new launches and
business growth.
Consumer Healthcare operating profit was GBP1,517 million, up 10%
AER, 15% CER on a turnover increase of 2% CER. The operating margin
of 19.8% was 2.1 percentage points higher than in 2017 and 2.2 percentage
points higher on a CER basis. This primarily reflected improved product
mix and manufacturing restructuring and integration benefits, as
well as continued tight control of promotional and other operating
expenses.
Net finance costs
Net finance costs were GBP698 million compared with GBP657 million
in 2017. The increase reflected higher debt levels following the
acquisition from Novartis of its stake in the Consumer Healthcare
Joint Venture in June 2018 as well as a GBP23 million increase in
interest on tax arising from settlement of a historic tax matter
in Q3 2018 and an adverse comparison with a provision release of
GBP23 million in Q4 2017. This was 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 benefit from
older bonds and the facilities utilised to fund the acquisition of
Novartis' stake in the Consumer Healthcare JV being refinanced at
lower interest rates and fair value gains on hedging instruments.
Taxation
Tax on Adjusted profit amounted to GBP1,535 million and represented
an effective Adjusted tax rate of 19.0% (2017: 21.0%). The reduction
in the effective Adjusted tax rate in 2018 is primarily driven by
the reduction in the US federal tax rate. See 'Taxation' on page
58 for further details.
Non-controlling interests
The allocation of Adjusted earnings to non-controlling interests
amounted to GBP674 million (2017: GBP793 million). The reduction
was primarily due to the lower allocation of Consumer Healthcare
profits of GBP118 million (2017: GBP344 million) following the buyout
of Novartis' interest. This was partly offset by an increased allocation
of ViiV Healthcare profits of GBP501 million (2017: GBP414 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 due to higher net
profits in some of the Group's other entities with non-controlling
interests.
Earnings per share
Adjusted EPS of 119.4p was up 7% AER, 12% CER, compared with a 6%
CER increase in Adjusted operating profit, primarily as a result
of a reduced non-controlling interest allocation of Consumer Healthcare
profits and a lower Adjusted tax rate.
Currency impact on 2018 results
The results for 2018 are based on average exchange rates, principally
GBP1/$1.33, GBP1/EUR1.13 and GBP1/Yen147. Comparative exchange rates
are given on page 59. The period-end exchange rates were GBP1/$1.27,
GBP1/EUR1.11 and GBP1/Yen140.
In 2018, turnover increased 2% in AER terms and 5% CER. Adjusted
EPS was 119.4p compared with 111.8p in 2017, up 7% 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 five percentage points on Adjusted EPS.
Financial performance - Q4 2018
Total results
The Total results for the Group are set out below.
Q4 2018 Q4 2017 Growth Growth
GBPm GBPm GBP% CER%
-------- -------- ------- -------
Turnover 8,197 7,639 7 5
Cost of sales (2,904) (2,558) 14 13
-------- -------- ------- -------
Gross profit 5,293 5,081 4 1
Selling, general and administration (2,620) (2,533) 3 1
Research and development (1,076) (1,209) (11) (14)
Royalty income 79 69 14 6
Other operating income/(expense) (122) (896)
-------- -------- ------- -------
Operating profit 1,554 512 >100 >100
Finance income 24 16
Finance expense (209) (154)
Profit on disposal of associates - 66
Share of after tax profits
of associates
and joint ventures 5 2
-------- -------- ------- -------
Profit before taxation 1,374 442 >100 >100
Taxation (74) (805)
Tax rate % 5.4% >100%
-------- -------- ------- -------
Profit/(loss) after taxation 1,300 (363) >100 >100
-------- -------- ------- -------
Profit attributable to non-controlling
interests 85 183
Profit/(loss) attributable
to shareholders 1,215 (546)
-------- -------- ------- -------
1,300 (363) >100 >100
-------- -------- ------- -------
Earnings/(loss) per share 24.7p (11.2)p >100 >100
-------- -------- ------- -------
Sales performance - Q4 2018
Group turnover by business Q4 2018
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Pharmaceuticals 4,810 6 4
Vaccines 1,479 22 18
Consumer Healthcare 1,908 1 1
------ ------- -------
Group turnover 8,197 7 5
------ ------- -------
Group turnover was up 7% AER, 5% CER to GBP8,197 million, with growth
delivered by all three businesses.
Pharmaceuticals sales grew 6% AER, 4% CER, with growth in all therapy
areas. HIV sales were up 10% AER, 6% CER to GBP1,276 million, reflecting
strong performances by Tivicay and Juluca. Respiratory sales were
up 5% AER, 2% CER to GBP1,991 million, with growth from the Ellipta
portfolio and Nucala.
Vaccines sales were up 22% AER, 18% CER, driven primarily by growth
in sales of Shingrix in the US and influenza products, partly offset
by declines in Meningitis and Established Vaccines.
Consumer Healthcare sales grew 1% AER, 1% CER reflecting growth
in Oral health and Wellness, partly offset by increased competitive
pressures in Europe and by a decline in Nutrition and Skin health,
primarily following the divestments of some smaller brands, including
Horlicks and MaxiNutrition in the UK.
Group turnover by geographic region Q4 2018
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
US 3,274 15 8
Europe 2,030 2 1
International 2,893 3 6
------ ------- -------
Group turnover 8,197 7 5
------ ------- -------
US sales grew 15% AER, 8% CER driven by strong performances from
Shingrix, HIV products, Benlysta and new Respiratory products.
Europe sales grew 2% AER, 1% CER as growth from HIV and the new
Respiratory products was partly offset by a decline in Consumer
Healthcare sales and a decrease in Bexsero sales, largely due to
the completion of the vaccination of catch-up cohorts in certain
markets that benefited Q4 2017.
In International, sales grew 3% AER, 6% CER reflecting strong growth
in the new Respiratory products as well as HIV and Established Pharmaceutical
sales. Sales in Emerging Markets grew 1% AER, 5% CER, driven by
strong growth of Horlicks in India, Panadol in Latin America and
respiratory products.
Pharmaceuticals
Q4 2018
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Respiratory 1,991 5 2
HIV 1,276 10 6
Immuno-inflammation 136 40 34
Established Pharmaceuticals 1,407 1 1
------
4,810 6 4
------
US 2,119 4 (1)
Europe 1,110 7 6
International 1,581 7 9
------ ------- -------
4,810 6 4
------ ------- -------
Pharmaceuticals turnover in the quarter was GBP4,810 million, up
6% AER, 4% CER, with growth in all therapy areas. HIV sales were
up 10% AER, 6% CER, to GBP1,276 million, reflecting continued growth
of the dolutegravir portfolio, particularly Tivicay and Juluca. Respiratory
sales were up 5% AER, 2% CER, to GBP1,991 million, with growth from
the Ellipta portfolio and Nucala more than offsetting lower sales
of Seretide/Advair. Sales of Established Pharmaceuticals grew 1%
AER, 1% CER to GBP1,407 million.
In the US, sales grew 4% AER, but declined 1% CER, with growth in
HIV, Benlysta and new Respiratory products more than offset by declines
in Advair and Established Products. In Europe, sales grew 7% AER,
6% CER, with strong growth in the Respiratory and HIV portfolios,
as well as the benefit of the first instalment of a 12-month Relenza
supply contract. International grew 7% AER, 9% CER, with growth in
HIV, Respiratory and Established Pharmaceuticals.
Respiratory
Total Respiratory sales were up 5% AER, 2% CER. Growth from the Ellipta
portfolio and Nucala more than offset lower sales of Seretide/Advair
which declined 18% AER, 20% CER globally. The US was up 2% AER but
down 3% CER as the decline in Advair sales exceeded the growth in
the new Respiratory products in the quarter. In Europe, sales grew
9% AER, 7% CER and International grew 9% AER, 10% CER, including
Japan, up 7% AER, 5% CER.
Sales of Nucala were GBP173 million in the quarter and grew 43% AER,
38% CER, continuing to benefit from the global rollout of the product.
US sales of Nucala grew 29% AER, 23% CER to GBP107 million.
Sales of Ellipta products were up 36% AER, 33% CER to GBP654 million
driven by continued growth in all regions. In the US, sales grew
33% AER, 28% CER, reflecting further market share gains, partly offset
by the impact of continued competitive pricing pressures, particularly
for ICS/LABAs. In Europe, sales grew 52% AER, 51% CER. Sales of Trelegy
Ellipta, our new once-daily closed triple product, were GBP77 million
in the quarter, continuing to benefit from an expanded label in the
US.
Relvar/Breo Ellipta sales grew 13% AER, 9% CER, to GBP333 million,
with growth in Europe, which was up 31% AER, 28% CER to GBP71 million
and in International, which was up 25% AER, 26% CER to GBP76 million.
In the US, Relvar/Breo was up 3% AER, but down 2% CER to GBP186 million,
with volume growth of 16% reflecting continued market share growth,
offset by the impact of competitive pricing pressures in the ICS/LABA
market. Anoro Ellipta sales grew 32% AER, 28% CER to GBP144 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 38% AER, 34% CER to GBP827 million.
Seretide/Advair sales declined 18% AER, 20% CER to GBP647 million.
Sales of Advair in the US declined 27% AER, 31% CER (15% volume decline
and 16% negative impact of price) primarily reflecting increased
competitive pricing pressures. In Europe, Seretide sales were down
18% AER, 20% CER to GBP150 million (17% volume decline and a 3% 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 up 1% AER, 2% CER, to GBP198
million (2% volume decline and 4% positive impact of price), with
decline in markets with generic competition offset by growth from
other developing markets.
HIV
HIV sales increased 10% AER, 6% CER to GBP1,276 million in the quarter,
with the US up 10% AER, 3% CER, Europe up 9% AER, 7% CER and International
up 15% AER, 18% CER. US growth in the quarter was adversely impacted
by year end stocking patterns compared to 2017.
The growth was driven by the dolutegravir portfolio which grew 14%
AER, 9% CER. Triumeq ,Tivicay and Juluca sales were GBP691 million,
GBP452 million and GBP62 million, respectively, in the quarter. The
growth was partly offset by the decline in the established portfolio
and, in particular, Epzicom/Kivexa, which declined 29% AER, 31% CER
to GBP30 million, reflecting ongoing generic competition.
Immuno-inflammation
Sales in the quarter were up 40% AER, 34% CER, primarily driven by
Benlysta which grew 42% AER, 34% CER to GBP138 million. In the US,
Benlysta grew 39% AER, 31% CER to GBP121 million, benefiting from
the launch of the sub-cutaneous formulation in the third quarter
of 2017.
Established Pharmaceuticals
Sales of Established Pharmaceuticals in the quarter were GBP1,407
million, up 1% AER, 1% CER, reflecting efforts to maximise the value
from this portfolio but also the benefit of certain post-divestment
contract manufacturing sales and the first instalment of a 12-month
Relenza supply contract in Europe.
The Avodart franchise was flat at AER but declined 1% CER to GBP149
million, primarily due to the loss of exclusivity in Europe, with
the US impact now broadly annualised. Coreg franchise sales declined
39% AER, 43% CER following a generic Coreg CR entrant to the US market
in Q4 2017. Lamictal sales declined 5% AER, 8% CER to GBP159 million.
Vaccines
Q4 2018
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Meningitis 188 (6) (9)
Influenza 193 74 69
Shingles 221 >100 >100
Established Vaccines 877 - (3)
------
1,479 22 18
------
US 666 78 65
Europe 377 (2) (4)
International 436 (3) (2)
------ ------- -------
1,479 22 18
------ ------- -------
Vaccines turnover grew 22% AER, 18% CER to GBP1,479 million, primarily
driven by growth in Shingrix, and strong performances by influenza
products. Meningitis vaccines declined 6% AER, 9% CER driven primarily
by an adverse comparison with prior year CDC stockpile movements
on Menveo in the US. Established Vaccines were flat at AER but declined
3% CER, reflecting increased competition to Cervarix and supply phasing
in China, competitive pressures particularly in the EU on DTPa-containing
vaccines (Infanrix, Pediarix and Boostrix), partly offset by higher
sales of Hepatitis vaccines.
Meningitis
Meningitis sales declined 6% AER, 9% CER to GBP188 million. Bexsero
sales declined 1% AER, 3% CER largely due to the completion of vaccination
of catch-up cohorts in certain markets in Europe which benefited
2017, partly offset by demand and share gains in the US. Menveo sales
were down 32% AER, 37% CER, primarily reflecting the comparison with
strong growth in Q4 2017, which included favourable CDC stockpile
movements in the US.
Influenza
Fluarix/FluLaval sales were up 74% AER, 69% CER to GBP193 million,
primarily reflecting strong sales execution in the US and improved
sales in Europe.
Shingles
Shingrix recorded sales of GBP221 million in the quarter, primarily
in the US and Canada. US sales of Shingrix 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 up 4% AER but flat at CER. Infanrix, Pediarix sales were up
5% AER, 1% CER to GBP165 million, reflecting the benefit of US channel
stocking movements, partly offset by increased competitive pressures,
particularly in Europe. Boostrix sales were up 4% AER but down 1%
CER to GBP139 million, primarily driven by the return to the market
of a competitor in Europe, partly offset by stronger demand in the
US.
Hepatitis vaccines grew 18% AER, 14% CER to GBP190 million, driven
by stronger demand and competitor supply shortage in the US and Europe,
favourable year-on-year CDC stockpile movements in the US, partly
offset by supply constraints in International.
Rotarix sales increased 6% AER, 4% CER to GBP134 million, mainly
driven by favourable phasing of tenders in Emerging Markets, partly
offset by lower CDC purchases in the US.
Synflorix sales were down 5% AER, 6% CER to GBP106 million, mainly
due to lower tender volumes in Europe, and unfavourable year-on-year
phasing in International.
Cervarix sales declined 76% AER, 81% CER to GBP15 million, primarily
reflecting increased competition and year-on-year supply phasing
in China.
Consumer Healthcare
Q4 2018
------------------------
Growth Growth
GBPm GBP% CER%
------ ------- -------
Wellness 1,005 1 1
Oral health 623 3 3
Nutrition 154 (6) (2)
Skin health 126 (6) (5)
------
1,908 1 1
------
US 489 11 4
Europe 543 (5) (6)
International 876 - 3
------ ------- -------
1,908 1 1
------ ------- -------
Consumer Healthcare sales grew 1% AER, 1% CER in the quarter to GBP1,908
million as growth in Oral health and Wellness was partly offset by
declines in Nutrition and Skin health, primarily following the disposal
of a number of products. Growth in the US and International markets
was partly offset by a decline in Europe. The decline in Europe was
mainly driven by a slowdown in consumption and increased competitive
pressures.
The negative impact of the divestments of Horlicks and MaxiNutrition
in the UK and other smaller brands earlier in the year was offset
by growth in Transderm Scop in the US, which benefited from supply
shortages faced by the generic competition.
Wellness
Wellness sales grew 1% AER, 1% CER to GBP1,005 million. Respiratory
sales grew in mid-single digits, mainly driven by Flonase consumption
and Theraflu, which was supported by the US launch of Theraflu PowerPods.
Growth was partly offset by a decline in Pain relief, mainly the
result of lower volumes shipped for Voltaren to rebalance the distribution
channel, while Excedrin was impacted by a strong comparative performance
in Q4 2017. Panadol grew in double digits in Latin America but this
was offset by 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 grew 3% AER, 3% CER to GBP623 million, mainly driven
by Denture care and Sensodyne. Denture care grew high single-digit,
mainly in International markets, while Parodontax delivered broad-based
double digit growth. Strong momentum on Sensodyne in the quarter
in the US and India was largely offset as we made executional adjustments
to our marketing campaigns in Europe in response to intensified competitor
promotional activity in the category and completed the last of the
de-stocking in International markets. Oral Health growth was also
tempered by a decline in non-strategic brands.
Nutrition
Nutrition sales declined 6% AER, 2% CER to GBP154 million. The Horlicks
and MaxiNutrition divestments in the UK impacted growth by three
percentage points. The Nutrition business in India continued to grow
in mid single digits, partly offset by a weaker performance in the
Middle East.
Skin health
Skin health declined 6% AER, 5% CER to GBP126 million due to a weak
quarter for Physiogel and divestments of small non-strategic brands
in the US, which had a negative impact on growth of three percentage
points.
Total results - Q4 2018
Cost of sales
Cost of sales as a percentage of turnover was 35.4%, 1.9 percentage
points higher at AER and 2.6 percentage points higher in CER terms
compared with Q4 2017. This primarily reflected an increase in the
costs of manufacturing restructuring programmes and a higher proportion
of tenders and post-divestment contract manufacturing business in
the quarter, together with continued adverse pricing pressure in
Pharmaceuticals, particularly in Respiratory, and Established Vaccines
and an unfavourable product mix in Pharmaceuticals, primarily as
a result of the growth in some lower margin Established products
and increased input costs. This was partly offset by a more favourable
product mix in Vaccines and Consumer Healthcare, particularly the
impact of higher Vaccines sales, and a further contribution from
integration and restructuring savings in all three businesses.
Selling, general and administration
SG&A costs as a percentage of turnover were 32.0%, 1.2 percentage
points lower compared with Q4 2017 at AER and 1.2 percentage points
lower on a CER basis. The growth in SG&A costs of 3% AER, 1% CER
reflected increased investment in promotional product support, particularly
for new launches in Vaccines, Respiratory and HIV and targeted priority
markets, and a charge arising from the equalisation of UK Guaranteed
Minimum Pensions, as well as acquisition costs for Tesaro and the
announced agreement with Pfizer to combine our consumer healthcare
businesses. This was partly offset by the tight control of ongoing
costs, particularly in non-promotional spending across all three
businesses, and reduced restructuring costs.
Research and development
R&D expenditure was GBP1,076 million (13.1% of turnover), down 11%
AER, 14% CER, primarily reflecting lower intangible asset impairments
and the benefits of the re-prioritisation of the R&D portfolio as
well as the phasing of investment in late-stage programmes, particularly
in HIV. This was partly offset by increased investment in the progression
of a number of mid and late-stage programmes, particularly in Oncology.
Royalty income
Royalty income was GBP79 million (Q4 2017: GBP69 million), up 14%
AER, 6% CER, primarily reflecting increased royalties on sales of
Gardasil.
Other operating income/(expense)
Net other operating expense of GBP122 million (Q4 2017: GBP896 million)
reflected GBP229 million (Q4 2017: GBP884 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 GBP261 million for the
contingent consideration liability due to Shionogi, primarily arising
from changes in exchange rate assumptions and the unwind of the discount.
The 2017 charges included the impact of US tax reform, which increased
the fair value of these liabilities by GBP666 million. This was partly
offset by the profit on a number of asset disposals and a gain arising
from the increase in value of the shares in Hindustan Unilever Limited
to be received on the disposal of Horlicks and other Consumer Healthcare
brands, net of disposal costs.
Operating profit
Total operating profit was GBP1,554 million in Q4 2018 compared with
an operating profit of GBP512 million in Q4 2017. The increase in
operating profit reflected lower net other operating expenses compared
with the charges of GBP666 million in Q4 2017 arising from the impact
of US tax reform on the valuation of the Consumer Healthcare and
HIV businesses, as well as the benefit from sales growth in all three
businesses, a more favourable mix in Vaccines and Consumer Healthcare,
continued tight control of ongoing costs across all three businesses,
reduced intangible asset impairments, profit on a number of asset
disposals and a gain arising from the increase in value of the shares
in Hindustan Unilever Limited to be received on the disposal of Horlicks
and other Consumer Healthcare brands, net of disposal costs. This
was partly offset by increased restructuring costs compared with
Q4 2017, continuing price pressure, particularly in Respiratory,
increased input costs, an unfavourable product mix in Pharmaceuticals,
primarily as a result of a higher proportion of lower margin tenders
and post-divestment contract manufacturing and investments in promotional
product support, particularly for new launches in Vaccines, Respiratory
and HIV.
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 GBP222 million (Q4 2017:
GBP193 million). This included cash payments made to Shionogi of
GBP209 million (Q4 2017: GBP186 million).
Net finance costs
Net finance costs were GBP185 million compared with GBP138 million
in Q4 2017. The increase primarily reflected higher debt levels following
the acquisition from Novartis of its stake in the Consumer Healthcare
Joint Venture in June 2018 as well as an adverse comparison to a
provision release for interest on tax of GBP24 million in Q4 2017.
Taxation
The charge of GBP74 million represented an effective tax rate on
Total results of 5.4% (Q4 2017: >100%) and reflected the different
tax effects of the various Adjusting items. This includes the effect
of a reduced estimate of the 2017 impact of US tax reform of GBP101
million, following additional guidance being released by the IRS
and a re-assessment in the quarter of estimates of uncertain tax
positions following the settlement of a number of open issues with
tax authorities. The reduction from the Q4 2017 effective tax rate
(>100%) was driven primarily by a favourable comparison with the
impact of US tax reform, which resulted in a number of charges in
Q4 2017.
Non-controlling interests
The allocation of earnings to non-controlling interests amounted
to GBP85 million (Q4 2017: GBP183 million). The reduction was primarily
due to the ending of the allocation of Consumer Healthcare profits
(Q4 2017: GBP218 million) following the buyout of Novartis' interest.
This was partly offset by an increased allocation of ViiV Healthcare
profits as well as higher net profits in some of the Group's other
entities with non-controlling interests.
Earnings per share
Total earnings per share was 24.7p, compared with a loss per share
of 11.2p in Q4 2017. The increase in earnings per share primarily
reflected a favourable comparison with charges in 2017 arising from
the impact of US tax reform as well as an improved trading performance,
the reduced non-controlling interest allocation of Consumer Healthcare
profits and a lower tax rate.
Currency impact on Q4 2018 results
The Q4 2018 results are based on average exchange rates, principally
GBP1/$1.27, GBP1/EUR1.13 and GBP1/Yen144. Comparative exchange rates
are given on page 59. The period-end exchange rates were GBP1/$1.27,
GBP1/EUR1.11 and GBP1/Yen140.
In the quarter, turnover increased 7% AER, 5% CER. Total EPS was
24.7p compared with a loss per share of 11.2p in Q4 2017. The positive
currency impact primarily reflected the weakness of Sterling, particularly
against the US Dollar, partly offset by weakness in emerging market
currencies, relative to Q4 2017.
Adjusting items
The reconciliations between Total results and Adjusted results for
2018 and 2017 are set out below.
Three months ended 31 December 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 8,197 8,197
Cost of sales (2,904) 136 232 4 (2,532)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross profit 5,293 136 232 4 5,665
Selling, general
and
administration (2,620) 48 37 6 (2,529)
Research and
development (1,076) 14 12 22 9 (1,019)
Royalty income 79 79
Other operating
income/(expense) (122) 1 230 (109) -
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating profit 1,554 150 12 303 271 (94) 2,196
Net finance costs (185) 2 (3) 13 (173)
Profit on
disposal
of associates - -
Share of after
tax
losses of
associates and
joint
ventures 5 5
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit before
taxation 1,374 150 12 305 268 (81) 2,028
Taxation (74) (24) (4) (48) (38) (167) (355)
Tax rate % 5.4% 17.5%
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit after
taxation 1,300 126 8 257 230 (248) 1,673
------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit
attributable
to
non-controlling
interests 85 54 139
Profit
attributable
to
shareholders 1,215 126 8 257 176 (248) 1,534
------------ ------------ ------------ ------------ ------------ ------------ ------------
Earnings per
share 24.7p 2.6p 0.2p 5.2p 3.6p (5.1)p 31.2p
------------ ------------ ------------ ------------ ------------ ------------ ------------
Weighted average
number
of
shares
(millions) 4,920 4,920
------------ ------------
Three months ended 31 December 2017
Divestments,
significant
legal
Intangible Intangible Major and
Total amort- impair- restruct- Transaction- other US tax Adjusted
results isation ment uring related items reform results
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Turnover 7,639 7,639
Cost of sales (2,558) 136 66 79 19 - (2,258)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross profit 5,081 136 66 79 19 - 5,381
Selling, general
and
administration (2,533) 96 17 (2,420)
Research and
development (1,209) 11 201 10 (5) (992)
Royalty income 69 69
Other operating
income/
(expense) (896) (1) 222 9 666 -
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating profit 512 147 267 184 241 21 666 2,038
Net finance
costs (138) 1 2 (135)
Profit on
disposal
of
associates 66 (66) -
Share of after
tax profits
of associates
and joint
ventures 2 2
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit before
taxation 442 147 267 185 241 (43) 666 1,905
Taxation (805) (34) (51) 40 (467) (142) 1,078 (381)
Tax rate % >100% 20.0%
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(Loss)/profit
after
taxation (363) 113 216 225 (226) (185) 1,744 1,524
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit
attributable
to
non-controlling
interests 183 (105) 114 192
(Loss)/profit
attributable
to shareholders (546) 113 216 225 (121) (185) 1,630 1,332
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(Loss)/earnings
per
share (11.2)p 2.3p 4.4p 4.6p (2.5)p (3.7)p 33.3p 27.2p
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Weighted average
number of
shares
(millions) 4,891 4,891
------------ ------------
Intangible asset amortisation and impairment
Intangible asset amortisation was GBP150 million compared with GBP147
million in Q4 2017. There were also intangible asset impairments
of GBP12 million (Q4 2017: GBP267 million) relating to R&D assets.
Both of these charges were non-cash items.
Major restructuring and integration
Within the Pharmaceuticals sector, the highly regulated manufacturing
operations and supply chains and long lifecycle of the business mean
that restructuring programmes, particularly those that involve the
rationalisation or closure of manufacturing or R&D sites are likely
to take several years to complete.
Major restructuring costs are those related to specific Board approved
Major restructuring programmes and are excluded from Adjusted Results.
Major restructuring programmes, including integration costs following
material acquisitions, are those that are structural and are of a
significant scale where the costs of individual or related projects
exceed GBP25 million. Other ordinary course smaller scale restructuring
costs are retained within Total and Adjusted results.
The Board approved a new Major restructuring programme in July 2018,
which is designed to significantly improve the competitiveness and
efficiency of the Group's cost base with savings delivered primarily
through supply chain optimisation and reductions in administrative
costs.
Total Major restructuring charges incurred in the quarter were GBP303
million (Q4 2017: GBP184 million), analysed as follows:
Q4 2018 Q4 2017
------------------------- -------------------------
Cash Non-cash Total Cash Non-cash Total
GBPm GBPm p GBPm GBPm p
------ --------- ------ ------ --------- ------
Combined restructuring
and
integration programme 52 10 62 34 150 184
2018 major restructuring
programme 151 90 241 - - -
203 100 303 34 150 184
------ --------- ------ ------ --------- ------
Non-cash charges arising under the existing Combined restructuring
and integration programme primarily related to the write-down of
assets as part of the announced plans to reduce the manufacturing
network. Cash charges arose from restructuring of the manufacturing
organisation and some administrative functions. Non-cash charges
under the 2018 major restructuring programme primarily related to
announced plans to restructure the manufacturing network, and cash
charges arose from restructuring in some manufacturing sites and
some administrative functions.
Total cash payments for the two programmes made in the quarter were
GBP184 million, GBP175 million for the existing Combined restructuring
and integration programme (Q4 2017: GBP106 million) and GBP9 million
under the 2018 major restructuring programme including the settlement
of certain charges accrued in previous quarters.
The analysis of Major restructuring charges by business was as follows:
Q4 2018 Q4 2017
GBPm GBPm
-------- --------
Pharmaceuticals 269 55
Vaccines 28 62
Consumer Healthcare (28) 42
-------- --------
269 159
Corporate & central functions 34 25
-------- --------
Total Major restructuring costs 303 184
-------- --------
The credit of GBP28 million in Consumer Healthcare includes a profit
on disposal of several manufacturing sites in the quarter.
The analysis of Major restructuring charges by Income statement line
was as follows:
Q4 2018 Q4 2017
GBPm GBPm
-------- --------
Cost of sales 232 79
Selling, general and administration 48 96
Research and development 22 10
Other operating income/(expense) 1 (1)
-------- --------
Total Major restructuring costs 303 184
-------- --------
The Combined restructuring and integration programme delivered incremental
annual cost savings in the quarter of less than GBP0.1 billion. Given
its relatively recent launch, the benefit delivery in the quarter
from the 2018 major restructuring programme was not material.
Transaction-related adjustments
Transaction-related adjustments resulted in a net charge of GBP271
million (Q4 2017: GBP241 million). This primarily reflected GBP229
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.
Q4 2018 Q4 2017
Charge/(credit) GBPm GBPm
-------- --------
Consumer Healthcare Joint Venture put option - 163
Contingent consideration on former Shionogi-ViiV
Healthcare Joint Venture
(including Shionogi preferential dividends) 261 151
ViiV Healthcare put options and Pfizer preferential
dividends (40) (40)
Contingent consideration on former Novartis Vaccines
business 8 (56)
Other adjustments 42 23
-------- --------
Total transaction-related charges 271 241
-------- --------
The GBP261 million charge relating to the contingent consideration
for the former Shionogi-ViiV Healthcare Joint Venture represented
GBP145 million arising primarily from updated exchange rate assumptions,
together with a GBP116 million unwind of the discount. A credit of
GBP40 million relating to a decrease in the put option liability
to Pfizer primarily reflected adjustments to the current multiples
of market comparables, partly offset by revised exchange rate assumptions.
Other adjustments included acquisition costs relating to the acquisition
of Tesaro completed in January 2019 and the announced agreement with
Pfizer to combine our consumer healthcare businesses.
Contingent consideration cash payments which are made to Shionogi
and other companies reduce the balance sheet liability and hence
are not recorded in the income statement. Total contingent consideration
cash payments in the quarter amounted to GBP222 million (Q4 2017:
GBP193 million). This included cash payments made by ViiV Healthcare
to Shionogi in relation to its contingent consideration liability
(including preferential dividends) which amounted to GBP209 million
(Q4 2017: GBP186 million).
An explanation of the accounting for the non-controlling interests
in ViiV Healthcare is set out on page 64.
Divestments, significant legal charges and other items
Divestments and other items included the profit on a number of asset
disposals, and a gain arising from the increase in value of the shares
in Hindustan Unilever Limited to be received on the disposal of Horlicks
and other Consumer Healthcare brands, which is expected to complete
by the end of 2019, net of disposal costs, as well as equity investment
impairments and certain other Adjusting items. A charge of GBP4 million
(Q4 2017: GBP8 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 GBP15
million (Q4 2017: GBP8 million).
Adjusted results
The reconciliations between Total results and Adjusted results for
2018 and 2017 are set out on pages 30 and 31.
Q4 2018
--------------------------------------
% of Growth Growth
GBPm turnover GBP% CER%
-------- ---------- ------- -------
Turnover 8,197 100 7 5
Cost of sales (2,532) (30.9) 12 12
Selling, general and administration (2,529) (30.9) 5 3
Research and development (1,019) (12.4) 3 (1)
Royalty income 79 1.0 14 6
-------- ---------- ------- -------
Adjusted operating profit 2,196 26.8 8 4
-------- ---------- ------- -------
Adjusted profit before tax 2,028 6 2
Adjusted profit after tax 1,673 10 6
Adjusted profit attributable
to shareholders 1,534 15 11
-------- ------- -------
Adjusted earnings per share 31.2p 14 10
-------- ------- -------
Operating profit by business Q4 2018
------------------------------------
% of Growth Growth
GBPm turnover GBP% CER%
------ ---------- ------- -------
Pharmaceuticals 2,340 48.6 1 (3)
Pharmaceuticals R&D* (778) 9 5
Total Pharmaceuticals 1,562 32.5 (2) (6)
Vaccines 420 28.4 82 71
Consumer Healthcare 352 18.4 17 14
------ ---------- ------- -------
2,334 28.5 10 5
Corporate & other unallocated
costs (138) 50 36
------ ---------- ------- -------
Adjusted operating profit 2,196 26.8 8 4
------ ---------- ------- -------
* Operating profit of Pharmaceuticals R&D segment, which is the responsibility
of the President, Pharmaceuticals R&D. It excludes ViiV Healthcare
R&D expenditure, which is reported within the Pharmaceuticals segment.
A more detailed breakdown of R&D expenses is set out on page 40.
Operating profit
Adjusted operating profit was GBP2,196 million, 8% higher than Q4
2017 at AER and 4% higher at CER on a turnover increase of 5% CER.
The Adjusted operating margin of 26.8% was 0.1 percentage points
higher at AER but 0.4 percentage points lower on a CER basis than
in Q4 2017. This primarily reflected an increase in cost of sales
due to continuing pricing pressure, particularly in Respiratory,
increased input costs, an unfavourable product mix in Pharmaceuticals,
primarily as a result of a higher proportion of tenders and post-divestment
contract manufacturing business in the quarter, together with investments
in promotional product support, particularly for new launches in
Vaccines, Respiratory and HIV. This was partly offset by the benefit
from sales growth in all three businesses, a more favourable mix
in Vaccines and Consumer Healthcare and continued tight control of
ongoing costs across all three businesses.
Cost of sales
Cost of sales as a percentage of turnover was 30.9%, up 1.3 percentage
points at AER, and 1.9 percentage points higher at CER compared with
Q4 2017. This primarily reflected continued adverse pricing pressure
in Pharmaceuticals, particularly in Respiratory, and Established
Vaccines, an unfavourable product mix in Pharmaceuticals, primarily
as a result of the growth in some lower margin Established products,
and increased input costs. This was partly offset by a more favourable
product mix in Vaccines and Consumer Healthcare, particularly the
impact of higher Vaccines sales, and a further contribution from
integration and restructuring savings in all three businesses.
Selling, general and administration
SG&A costs as a percentage of turnover were 30.9%, 0.8 percentage
points lower at AER than in Q4 2017 and 0.8 percentage points lower
on a CER basis. The 5% AER, 3% 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 and a charge arising from the equalisation of UK Guaranteed
Minimum Pensions, partly offset by tight control of ongoing costs,
particularly in non-promotional spending, across all three businesses.
Research and development
R&D expenditure was GBP1,019 million (12.4% of turnover), 3% higher
at AER, but 1% lower at CER than Q4 2017, primarily reflecting the
benefits of the re-prioritisation of the R&D portfolio as well as
the phasing of investment in late-stage programmes, particularly
HIV, partly offset by increased investment in the progression of
a number of early and mid stage programmes, particularly in Oncology.
Royalty income
Royalty income was GBP79 million (Q4 2017: GBP69 million), an increase
of 14% AER, 6% CER, primarily reflecting increased royalties on sales
of Gardasil.
Operating profit by business
Pharmaceuticals operating profit was GBP1,562 million, down 2% AER,
6% CER on a turnover increase of 4% CER. The operating margin of
32.5% was 2.7 percentage points lower at AER than in Q4 2017 and
3.3 percentage points lower on a CER basis. This primarily reflected
the growth in cost of sales due to the continued impact of lower
prices, particularly in Respiratory, an unfavourable product mix
primarily as a result of the growth in some lower margin established
products and increased input costs, together with investment in new
product support and targeted priority markets and lower royalty income,
partly offset by continued tight control of ongoing costs and the
benefits of re-prioritisation of the R&D portfolio.
Vaccines operating profit was GBP420 million, 82% higher than Q4
2017 at AER and 71% higher at CER on a turnover increase of 18% CER.
The operating margin of 28.4% was 9.3 percentage points higher than
in Q4 2017 at AER and 8.5 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, with
higher SG&A investment increased broadly in line with sales to support
new launches and business growth.
Consumer Healthcare operating profit was GBP352 million, up 17% AER,
14% CER, on a turnover increase of 1% CER. The operating margin of
18.4% was 2.5 percentage points higher than in Q4 2017 at AER, and
2.0 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 Q4 2017.
Net finance costs
Net finance costs were GBP173 million compared with GBP135 million
in Q4 2017. The increase primarily reflected higher debt levels following
the acquisition from Novartis of its stake in the Consumer Healthcare
Joint Venture in June 2018, as well as an adverse comparison to a
provision release for interest on tax of GBP23 million in Q4 2017.
Taxation
Tax on Adjusted profit amounted to GBP355 million and represented
an effective Adjusted tax rate of 17.5% (Q4 2017: 20.0%). The reduction
in the effective Adjusted tax rate in Q4 2018 is primarily driven
by the reduction in the US federal tax rate. See 'Taxation' on page
58 for further details.
Non-controlling interests
The allocation of Adjusted earnings to non-controlling interests
amounted to GBP139 million (Q4 2017: GBP192 million). The reduction
was primarily due to the ending of the allocation of Consumer Healthcare
profits (Q4 2017: GBP85 million) following the buyout of Novartis'
interest. This was partly offset by an increased allocation of ViiV
Healthcare profits of GBP130 million (Q4 2017: GBP103 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.
Earnings per share
Adjusted EPS of 31.2p was up 14% AER, 10% CER, compared with a 4%
CER increase in Adjusted operating profit, primarily as a result
of the reduced non-controlling interest allocation of Consumer Healthcare
profits and a lower Adjusted tax rate.
Currency impact on Q4 2018 results
The Q4 2018 results are based on average exchange rates, principally
GBP1/$1.27, GBP1/EUR1.13 and GBP1/Yen144. Comparative exchange rates
are given on page 59. The period-end exchange rates were GBP1/$1.27,
GBP1/EUR1.11 and GBP1/Yen140.
In the quarter, turnover increased 7% AER, 5% CER. Adjusted EPS was
31.2p compared with 27.2p in Q4 2017, up 14% AER, 10% CER. The positive
currency impact primarily reflected the weakness of Sterling, particularly
against the US Dollar, partly offset by weakness in emerging market
currencies, relative to Q4 2017. Exchange gains or losses on the
settlement of intercompany transactions had a negligible impact on
the positive currency impact of four percentage points on Adjusted
EPS.
Cash generation and conversion
Cash flow and net debt
2017
2018 (revised) Q4 2018
------- ----------- --------
Net cash inflow from operating activities
(GBPm) 8,421 6,918 4,119
Free cash flow* (GBPm) 5,692 3,485 3,317
Free cash flow growth (%) 63% 6% 83%
Free cash flow conversion* (%) >100% >100% >100%
Net debt** (GBPm) 21,621 13,178 21,621
------- ----------- --------
* Free cash flow and free cash flow conversion are defined on page
44.
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 63. Comparative
figures have been revised accordingly.
** Net debt is analysed on page 63.
2018
The net cash inflow from operating activities for the year was GBP8,421
million (2017: GBP6,918 million). The increase primarily reflected
improved operating profits, a smaller increase in working capital
as a result of a reduction of inventory balances and a strong focus
on collections, the favourable timing of payments for returns and
rebates, and reduced legal settlement and restructuring payments,
partly offset by a negative currency impact on operating profit.
Total cash payments to Shionogi in relation to the ViiV Healthcare
contingent consideration liability in the year were GBP793 million
(2017: GBP671 million), of which GBP703 million was recognised in
cash flows from operating activities and GBP90 million was recognised
in contingent consideration paid within investing cash flows. These
payments are deductible for tax purposes.
Free cash flow was GBP5,692 million for the year (2017: GBP3,485
million). The increase primarily reflected improved operating profits,
a smaller increase in working capital following a reduction of inventory
balances and a strong focus on collections, the favourable timing
of payments for returns and rebates, reduced legal settlement costs
and restructuring payments, lower capital expenditure, including
a favourable comparison with the impact of the Priority Review Voucher
in 2017, increased disposals of intangible assets of GBP256 million
(2017: GBP48 million), primarily relating to the disposal of tapinarof,
and reduced dividend payments to non-controlling interests. This
was partly offset by a negative currency impact on operating profit
and increased contingent consideration payments including the $450
million (GBP317 million) milestone to Novartis paid in Q1 2018.
Q4 2018
The net cash inflow from operating activities for the quarter was
GBP4,119 million (Q4 2017: GBP2,869 million). The increase primarily
reflected improved operating profits, including a positive currency
impact, a larger seasonal reduction in working capital following
a strong focus on collections and a reduction of inventory balances,
the favourable timing of payments for returns and rebates and the
phasing of tax payments, partly offset by increased restructuring
payments.
Total cash payments to Shionogi in relation to the ViiV Healthcare
contingent consideration liability in the quarter were GBP209 million,
of which GBP186 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 GBP3,317 million for the quarter (Q4 2017: GBP1,817
million). The increase primarily reflected improved operating profits,
including a positive currency impact, a larger seasonal reduction
in working capital following a strong focus on collections and a
reduction of inventory balances, the favourable timing of payments
for returns and rebates, the phasing of tax payments and reduced
dividend payments to non-controlling interests. This was partly offset
by increased restructuring payments.
Net debt
At 31 December 2018, net debt was GBP21.6 billion, compared with
GBP13.2 billion at 31 December 2017, comprising gross debt of GBP26.1
billion and cash and liquid investments of GBP4.5 billion, including
GBP0.5 billion reported within Assets held for sale. 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, GBP0.8 billion
of unfavourable exchange impacts from the translation of non-Sterling
denominated debt, and dividends paid to shareholders of GBP3.9 billion,
partly offset by increased free cash flow of GBP5.7 billion after
the milestone payment to Novartis.
At 31 December 2018, GSK had short-term borrowings (including overdrafts)
repayable within 12 months of GBP5.8 billion with loans of GBP1.8
billion repayable in the subsequent year.
Working capital
31 31
December 30 September 30 June 31 March December
2018 2018 2018 2018 2017
---------- ------------- -------- --------- ----------
Working capital conversion
cycle* (days) 201 230 223 204 191
Working capital percentage
of turnover (%) 23 29 26 24 22
---------- ------------- -------- --------- ----------
Working capital and working capital conversion cycle are defined
* on page 44.
The increase of 10 days in 2018 compared with 2017 was predominately
due to an adverse impact from exchange of approximately five days
as well as a reduced denominator due to lower restructuring and impairment
costs in 2018. Excluding these factors, significant improvements
were made in working capital relative to the growth in the business,
with reduced inventory as a result of tight control of inventory
levels and stronger collections of receivables.
Returns to shareholders
Quarterly dividends
The Board has declared a fourth interim dividend for 2018 of 23 pence
per share (Q4 2017: 23 pence per share).
GSK recognises the importance of dividends to shareholders and aims
to distribute regular dividend payments that will be determined primarily
with reference to the free cash flow generated by the business after
funding the investment necessary to support the Group's future growth.
The Board intends to maintain the dividend for 2019 at the current
level of 80p per share, subject to any material change in the external
environment or performance expectations. Over time, as free cash
flow strengthens, it intends to build free cash flow cover of the
annual dividend to a target range of 1.25-1.50x, before returning
the dividend to growth.
Payment of dividends
The equivalent interim dividend receivable by ADR holders will be
calculated based on the exchange rate on 9 April 2019. An annual
fee of $0.03 per ADS (or $0.0075 per ADS per quarter) (2018: $0.02
per ADS; $0.005 per ADS per quarter) is charged by the Depositary.
The ex-dividend date will be 21 February 2019, with a record date
of 22 February 2019 and a payment date of 11 April 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
Fourth interim 11 April 2019 23 1,132
80 3,935
---------- ------
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 year. The company issued
6.5 million shares under employee share schemes for proceeds of GBP74
million (2017: GBP56 million).
The weighted average number of shares for 2018 was 4,914 million,
compared with 4,886 million in 2017.
The weighted average number of shares for Q4 2018 was 4,920 million,
compared with 4,891 million in Q4 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 2017 was to reduce Discovery costs by GBP13 million
and Development costs by GBP27 million and increase Technology, facilities
and functional support costs by GBP40 million. The impact on Q4 2017
was to reduce Discovery costs by GBP45 million and increase Technology,
facilities and functional support costs by GBP14 million and Development
costs by GBP31 million.
2017
2018 (revised) Growth Growth
GBPm GBPm GBP% CER%
------ ----------- ------- -------
Discovery 892 1,007 (11) (10)
Development 1,332 1,423 (6) (5)
Technology, facilities and
functional support 600 576 4 6
------ ----------- ------- -------
Pharmaceuticals 2,824 3,006 (6) (5)
Vaccines 673 621 8 8
Consumer Healthcare 238 235 1 3
------ ----------- ------- -------
Adjusted R&D 3,735 3,862 (3) (2)
Amortisation and impairment
of intangible
assets 89 333
Major restructuring costs 49 263
Other items 20 18
Total Research and development 3,893 4,476 (13) (12)
------ ----------- ------- -------
Q4 2017
Q4 2018 (revised) Growth Growth
GBPm GBPm GBP% CER%
-------- ----------- ------- -------
Discovery 275 245 12 9
Development 354 366 (3) (8)
Technology, facilities and
functional support 165 154 7 5
-------- ----------- ------- -------
Pharmaceuticals 794 765 4 -
Vaccines 164 161 2 -
Consumer Healthcare 61 66 (8) (11)
-------- ----------- ------- -------
Adjusted R&D 1,019 992 3 (1)
Amortisation and impairment
of intangible
assets 26 212
Major restructuring costs 22 10
Other items 9 (5)
Total Research and development 1,076 1,209 (11) (14)
-------- ----------- ------- -------
In 2018, Adjusted R&D expenditure declined 3% AER, 2% CER with Pharmaceuticals
down 6% AER, 5% CER. The decline in Discovery reflected the transfer
of certain Oncology assets to the Development phase. The decline
in Development primarily reflects the comparison with the impact
of the utilisation of the Priority Review Voucher in 2017 and 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,
and the provision for costs payable to a third party relating to
the use of a Priority Review Voucher awarded in 2018. The growth
in Technology, facilities and functional support costs primarily
reflected increased investments in data analytics.
In Q4 2018, Adjusted R&D expenditure increased 3% AER, but declined
1% CER, with Pharmaceuticals up 4% AER, but flat at CER reflecting
the benefits of the prioritisation initiatives, offset by the increased
investment in the progression of a number of mid and late-stage programmes,
particularly in Oncology and functional genomics. The significant
growth in Discovery primarily reflected the investment in Oncology,
ViiV and functional genomics collaborations aligned with our new
R&D strategy. The decline in Development reflected lower expenditure
on ViiV Healthcare assets following launches during the year and
the benefits of the re-prioritisation of R&D that started in the
second half of 2017 partly offset by higher expenditure on Oncology
development assets.
R&D pipeline
Pipeline news flow since Q3 2018:
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, cancer epigenetics and
genetic medicine. 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.
Tesaro
-- On 22 January, the acquisition of Tesaro, an oncology focused biotech
company, was completed. This acquisition adds the PARP inhibitor
Zejula to our portfolio. Zejula is currently approved as a treatment
for patients with recurrent ovarian cancer regardless of BRCA mutation
or biomarker status and being investigated in "all-comers" population
in monotherapy and combination for first line maintenance treatment
of ovarian cancer. The acquisition also bring dostarlimab (TSR-042)
an anti-PD-1 antibody and several other oncology assets including
antibodies directed against TIM-3 and LAG-3.
Bi-functional TGF-<BETA> and PD-L1 fusion protein (M7824)
-- On 5 February, GSK and Merck KGaA, Darmstadt, Germany announced
a global alliance to jointly develop and commercialise M7824, a
novel immunotherapy with potential in multiple difficult-to-treat
cancers. This transaction is subject to regulatory clearances in
Brazil and Germany (or confirmation that no filing is required)
and is expected to close in Q1 2019.
BCMA antibody-drug conjugate (GSK2857916)
-- Updated phase I PFS data from DREAMM-1 study for BCMA is expected
to be published in a leading journal in H1.
-- Enrolment of patients in the 4L monotherapy pivotal study of GSK'916
(DREAMM-2) was achieved ahead of schedule during the quarter. Results
are expected in H2 2019.
-- In Q4, the POC study of GSK'916 (DREAMM-6) in 2L started. Data
are expected in H1 2019.
ICOS agonist (GSK3359609)
-- In Q4, encouraging clinical data were received for GSK'609 in combination
with pembrolizumab. Data will be shared at an upcoming conference.
-- In December, the first patient was dosed in a phase I/II study
of GSK'609 in combination with CTLA-4 (tremelimumab) in patients
with advanced solid tumours.
-- In January, the first patient was dosed in a phase II study of
GSK'609 in NSCLC post-PD-1 patients.
RIP-1 kinase inhibitor (GSK3145095)
-- In Q4, first time in human trials started for GSK'095 as monotherapy
and in combination with other
anti-cancer agents including pembrolizumab in patients with pancreatic
ductal adenocarcinoma (PDAC) and other solid tumours.
PRMT1 inhibitor (GSK3368715)
-- In Q4, first time in human trials started for GSK'715, a first
in class PRMT1 inhibitor, as monotherapy in patients with solid
tumours and diffuse large B-cell lymphoma (DLBCL).
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).
Juluca (dolutegravir + rilpivirine)
-- On 26 November, the Japan Ministry of Health, Labour and Welfare
granted marketing authorisation for Juluca (dolutegravir/rilpivirine)
for the maintenance treatment of human immunodeficiency virus type
1 (HIV-1) infection.
Dolutegravir + lamivudine
-- On 16 November, the Committee for Medicinal Products for Human
Use adopted a positive opinion for Tivicay (dolutegravir) EU label
update with GEMINI study data for the 2-drug regimen of Tivicay
+ lamivudine.
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.
Anti-GM-CSF antibody (GSK3196165)
-- In December, following the results from the phase II programme
and discussions with regulators, a decision was made to progress
to phase III clinical development with GSK'165 in patients with
rheumatoid arthritis. This programme is expected to start in H2
2019.
Respiratory
GSK has led the way in developing innovative modern inhaled medicines
to advance the management of asthma and COPD for 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 9 November, Trelegy (FF/UMEC/VI) gained an expanded COPD indication
in Europe for patients not adequately treated with dual bronchodilation,
making it the first single inhaler triple therapy indicated for
patients with moderate to severe COPD.
Nucala severe asthma
-- On 19 November, a US regulatory submission was made to expand the
use of Nucala (mepolizumab) in children (aged 6-11 years) with
severe eosinophilic asthma.
Nemiralisib (GSK2269557)
-- A planned interim analysis of the phase IIb study of nemiralisib
in patients with acutely exacerbating COPD showed no discernible
benefit in patients when added to standard of care. Neither the
primary endpoint or secondary endpoints were met. As a result of
these findings a decision has been made to terminate progression
of the acute COPD indication.
TRPV4 (GSK2798745)
-- A second interim analysis of the phase I experimental medicine
study of GSK'745 in support of an indication in Acute Respiratory
Distress Syndrome (ARDS) has reduced confidence in successfully
meeting the primary endpoint. As a result of these findings a decision
has been made to terminate the ARDS indication and return the molecule
to research.
aVb6 (GSK3008348)
-- Following an interim analysis of the phase Ib data a decision has
been made to terminate GSK'348 in idiopathic pulmonary fibrosis
due to a lack of confidence in developability and portfolio considerations.
Other pharmaceuticals
Daprodustat (GSK1278863)
-- On 22 November, GSK and Kyowa Hakko Kirin signed a strategic commercialisation
deal in Japan for daprodustat, a potential new oral treatment for
anaemia associated with chronic kidney disease. This followed positive
results from two phase III studies in dialysis dependent Japanese
patients. Results from the final Japanese phase III study in non-dialysis
dependent patients are anticipated in H1 2019, with filing anticipated
in H2 2019.
Krintafel/Kozenis (tafenoquine)
-- On 17 January, two positive phase III studies, DETECTIVE and GATHER,
of tafenoquine for the radical cure of Plasmodium vivax malaria
were published in The New England Journal of Medicine.
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. 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.
Respiratory Syncytial Virus (RSV) Vaccines
-- In December, the FDA granted Older Adult and Maternal RSV vaccine
candidates Fast Track Designation.
Reporting definitions
Total and Adjusted results
Total reported results represent the Group's overall performance.
GSK also uses a number of adjusted, non-IFRS, measures to report
the performance of its business. Adjusted results and other non-IFRS
measures may be considered in addition to, but not as a substitute
for or superior to, information presented in accordance with IFRS.
Adjusted results are defined on page 4 and other non-IFRS measures
are defined below.
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 63.
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
2019 guidance
In 2019, GSK expects Adjusted EPS to decline in the range of -5%
to -9% at CER. This guidance reflects the recent announcement of
a substitutable generic competitor to Advair and the expected impact
of the Tesaro acquisition and assumes that the proposed Consumer
Healthcare nutrition disposal closes by the end of 2019 and the proposed
Consumer Healthcare Joint Venture with Pfizer closes during H2 2019.
2016-2020 outlook
In May 2015, GSK announced that it expected Group sales to grow at
CER at a low-to-mid single digits percentage CAGR and Adjusted EPS
to grow at CER at a mid-to-high single digit percentage CAGR for
the period 2016-2020. On 3 December 2018, GSK announced that it continued
to expect to deliver on its previously published Group outlooks to
2020, but, following the acquisition of Tesaro, expected Adjusted
EPS growth at CER for the period 2016-2020 to be at the bottom end
of the mid-to-high single digit percentage CAGR range. These outlooks
are based on 2015 exchange rates.
Assumptions related to 2019 guidance and 2016-2020 outlook
In outlining the expectations for 2019 and the five-year period 2016-2020,
the Group has made certain assumptions about the healthcare sector,
the different markets in which the Group operates and the delivery
of revenues and financial benefits from its current portfolio, pipeline
and restructuring programmes.
For the Group specifically, over the period to 2020, GSK expects
further declines in sales of Seretide/Advair. The introduction of
a generic alternative to Advair in the US has been factored into
the Group's assessment of its future performance. The Group assumes
no premature loss of exclusivity for other key products over the
period.
The assumptions for the Group's revenue, earnings and dividend expectations
assume no material interruptions to supply of the Group's products,
no material mergers, acquisitions or disposals, except for the acquisition
of Tesaro, the proposed divestment of Horlicks and other Consumer
Healthcare products to Unilever and the proposed formation of a new
Consumer Healthcare Joint Venture with Pfizer, all announced in December
2018, no material litigation or investigation costs for the Company
(save for those that are already recognised or for which provisions
have been made), no share repurchases by the Company, and no change
in the Group's shareholdings in ViiV Healthcare. The assumptions
also assume no material changes in the macro-economic and healthcare
environment. The 2019 guidance and 2016-2020 outlook have factored
in all divestments and product exits since 2015, including the divestment
and exit of more than 130 non-core tail brands (GBP0.5 billion in
annual sales) as announced on 26 July 2017 and the product divestments
planned in connection with the proposed Consumer Healthcare transaction
with Pfizer.
The Group's expectations assume successful delivery of the Group's
integration and restructuring plans over the period 2016-2020, including
the extension and enhancement to the combined programme announced
on 26 July 2017 as well as the new major restructuring plan announced
on 25 July 2018. They also assume that the proposed Consumer Healthcare
nutrition disposal closes by the end of 2019 and the proposed Consumer
Healthcare Joint Venture with Pfizer closes during H2 2019 and that
the integration and investment programmes following the Tesaro acquisition
and the proposed Consumer Healthcare Joint Venture with Pfizer over
this period are delivered successfully. Material costs for investment
in new product launches and R&D have been factored into the expectations
given. Given the potential development options in the Group's pipeline,
the outlook may be affected by additional data-driven R&D investment
decisions. The expectations are given on a constant currency basis
(2016-2020 outlook at 2015 CER).
Subject to material changes in the product mix, the Group's medium-term
effective tax rate is expected to be around 19% 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, macro-economic activity,
changes in regulation, government actions or intellectual property
protection, actions by our competitors, and other risks inherent
to the industries in which we operate.
This document contains statements that are, or may be deemed to be,
"forward-looking statements". Forward-looking statements give the
Group's current expectations or forecasts of future events. An investor
can identify these statements by the fact that they do not relate
strictly to historical or current facts. They use words such as 'anticipate',
'estimate', 'expect', 'intend', 'will', 'project', 'plan', 'believe',
'target' and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance.
In particular, these include statements relating to future actions,
prospective products or product approvals, future performance or
results of current and anticipated products, sales efforts, expenses,
the outcome of contingencies such as legal proceedings, dividend
payments and financial results. Other than in accordance with its
legal or regulatory obligations (including under the Market Abuse
Regulation, the UK Listing Rules and the Disclosure and Transparency
Rules of the Financial Conduct Authority), the Group undertakes no
obligation to update any forward-looking statements, whether as a
result of new information, future events or otherwise. The reader
should, however, consult any additional disclosures that the Group
may make in any documents which it publishes and/or files with the
SEC. All readers, wherever located, should take note of these disclosures.
Accordingly, no assurance can be given that any particular expectation
will be met and investors are cautioned not to place undue reliance
on the forward-looking statements.
Forward-looking statements are subject to assumptions, inherent risks
and uncertainties, many of which relate to factors that are beyond
the Group's control or precise estimate. The Group cautions investors
that a number of important factors, including those in this document,
could cause actual results to differ materially from those expressed
or implied in any forward-looking statement. Such factors include,
but are not limited to, those discussed under Item 3.D 'Risk Factors'
in the Group's Annual Report on Form 20-F for 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 annual results presentation hosted by Emma Walmsley,
GSK CEO, will be held at 2.00pm GMT on 6 February 2019. Presentation
materials will be published on www.gsk.com prior to the webcast and
a transcript of the webcast will be published subsequently.
Information available on GSK's website does not form part of, and
is not incorporated by reference into, this Results Announcement.
Contacts
GSK - one of the world's leading research-based pharmaceutical and
healthcare companies - is committed to improving the quality of human
life by enabling people to do more, feel better and live longer.
For further information please visit www.gsk.com.
GSK enquiries:
UK Media enquiries: Simon Steel +44 (0) 20 8047 (London)
5502
Tim Foley +44 (0) 20 8047 (London)
5502
Mary Hinks-Edwards +44 (0) 20 8047 (London)
5502
US Media enquiries: 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)
Registered in England & Wales:
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TW8 9GS
Financial information
Income statements
2018 2017 Q4 2018 Q4 2017
GBPm GBPm GBPm GBPm
--------- --------- -------- --------
TURNOVER 30,821 30,186 8,197 7,639
Cost of sales (10,241) (10,342) (2,904) (2,558)
--------- --------- -------- --------
Gross profit 20,580 19,844 5,293 5,081
Selling, general and administration (9,915) (9,672) (2,620) (2,533)
Research and development (3,893) (4,476) (1,076) (1,209)
Royalty income 299 356 79 69
Other operating income/(expense) (1,588) (1,965) (122) (896)
--------- --------- -------- --------
OPERATING PROFIT 5,483 4,087 1,554 512
Finance income 81 65 24 16
Finance expense (798) (734) (209) (154)
Profit on disposal of associates 3 94 - 66
Share of after tax profits
of associates
and joint ventures 31 13 5 2
PROFIT BEFORE TAXATION 4,800 3,525 1,374 442
Taxation (754) (1,356) (74) (805)
Tax rate % 15.7% 38.5% 5.4% >100%
--------- --------- -------- --------
PROFIT/(LOSS) AFTER TAXATION
FOR THE PERIOD 4,046 2,169 1,300 (363)
--------- --------- -------- --------
Profit attributable to non-controlling
interests 423 637 85 183
Profit/(loss) attributable
to shareholders 3,623 1,532 1,215 (546)
4,046 2,169 1,300 (363)
--------- --------- -------- --------
EARNINGS/(LOSS) PER SHARE 73.7p 31.4p 24.7p (11.2)p
--------- --------- -------- --------
Diluted earnings/(loss) per
share 72.9p 31.0p 24.4p (11.2)p
--------- --------- -------- --------
Statement of comprehensive income
2018 2017
GBPm GBPm
------ ------
Profit for the year 4,046 2,169
Items that may be reclassified subsequently to income
statement:
Exchange movements on overseas net assets and net
investment hedges (480) 462
Reclassification of exchange on liquidation or disposal
of overseas subsidiaries - 109
Fair value movements on equity investments (14)
Reclassification of fair value movements on equity
investments - (42)
Deferred tax on fair value movements on equity investments 47
Deferred tax reversed on reclassification of equity
investments - (18)
Fair value movements on cash flow hedges 140 (10)
Reclassification of cash flow hedges to income statement (175) -
Deferred tax on fair value movements on cash flow
hedges (22) -
Deferred tax reversed on reclassification of cash
flow hedges 20 -
(517) 534
------ ------
Items that will not be reclassified to income statement:
Exchange movements on overseas net assets of non-controlling
interests (1) (149)
Fair value movements on equity investments 180
Deferred tax on fair value movements on equity investments 10
Re-measurement gains on defined benefit plans 728 549
Tax on re-measurement gains on defined benefit plans (146) (221)
------ ------
771 179
------ ------
Other comprehensive income for the year 254 713
------ ------
Total comprehensive income for the year 4,300 2,882
------ ------
Total comprehensive income for the year attributable
to:
Shareholders 3,878 2,394
Non-controlling interests 422 488
------ ------
4,300 2,882
------ ------
Statement of comprehensive income
Q4 2018 Q4 2017
GBPm GBPm
-------- --------
Profit/(loss) for the period 1,300 (363)
Items that may be reclassified subsequently to income
statement:
Exchange movements on overseas net assets and net
investment hedges (112) (76)
Reclassification of exchange on liquidation or disposal
of overseas subsidiaries - 109
Fair value movements on equity investments (29)
Reclassification of fair value movements on equity
investments - (4)
Deferred tax on fair value movements on equity investments 62
Deferred tax reversed on reclassification of equity
investments - (28)
Fair value movements on cash flow hedges (42) (5)
Reclassification of cash flow hedges to income statement (11) (2)
Deferred tax on fair value movements on cash flow
hedges 2 1
(163) 28
-------- --------
Items that will not be reclassified to income statement:
Exchange movements on overseas net assets of non-controlling
interests 18 (2)
Fair value movements on equity investments (88)
Deferred tax on fair value movements on equity investments 23
Re-measurement gains on defined benefit plans (375) 109
Tax on re-measurement gains on defined benefit plans 59 (119)
-------- --------
(363) (12)
-------- --------
Other comprehensive (expense)/income for the period (526) 16
-------- --------
Total comprehensive income/(expense) for the period 774 (347)
-------- --------
Total comprehensive income/(expense) for the period
attributable to:
Shareholders 671 (528)
Non-controlling interests 103 181
-------- --------
774 (347)
-------- --------
Pharmaceuticals turnover - year ended 31 December 2018
Total US Europe International
------------------------------------- ------------------------------------- ------------------------------------- -------------------------------------
Growth Growth Growth Growth
----------------------- ----------------------- ----------------------- -----------------------
GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER%
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Respiratory 6,928 (1) 1 3,368 (5) (3) 1,533 5 4 2,027 3 7
Seretide/Advair 2,422 (23) (21) 1,097 (32) (30) 599 (19) (20) 726 (7) (4)
Ellipta products 2,049 29 32 1,245 24 27 457 42 41 347 33 38
Anoro Ellipta 476 39 42 318 36 39 101 46 45 57 46 54
Arnuity Ellipta 44 26 29 39 22 25 - - - 5 67 67
Incruse Ellipta 284 41 44 186 39 42 74 45 45 24 50 56
Relvar/Breo
Ellipta 1,089 8 10 581 (3) (1) 253 25 24 255 26 31
Trelegy Ellipta 156 >100 >100 121 >100 >100 29 >100 >100 6 - -
Nucala/Mepolizumab 563 64 66 341 44 48 152 >100 >100 70 84 89
Avamys/Veramyst 300 7 10 - - - 74 (3) (4) 226 11 16
Flixotide/Flovent 595 - 3 333 3 6 93 (2) (3) 169 (5) 1
Ventolin 737 (4) (1) 352 (7) (5) 130 (2) (2) 255 - 7
Other 262 (9) (7) - - - 28 4 - 234 (9) (7)
HIV 4,722 9 11 2,913 8 10 1,194 7 6 615 14 20
Dolutegravir
products 4,420 14 16 2,830 11 13 1,091 18 17 499 28 35
Tivicay 1,639 17 19 1,036 12 15 377 20 18 226 37 47
Triumeq 2,648 8 9 1,670 2 5 706 17 15 272 21 25
Juluca 133 >100 >100 124 >100 >100 8 - - 1 - -
Epzicom/Kivexa 117 (50) (48) 7 (74) (74) 44 (61) (61) 66 (28) (24)
Selzentry 115 (10) (9) 58 (12) (11) 35 (17) (17) 22 10 15
Other 70 (41) (40) 18 (59) (59) 24 (35) (38) 28 (26) (21)
Immuno-inflammation 472 25 28 420 24 27 36 33 33 16 45 64
Benlysta 473 26 29 420 24 27 37 37 33 16 60 80
Established
Pharmaceuticals 5,147 (7) (4) 752 (23) (21) 1,309 (5) (7) 3,086 (4) 2
Dermatology 435 (4) - 3 (57) (57) 161 (1) (2) 271 (5) 2
Augmentin 570 (3) 2 - - - 181 (1) (2) 389 (4) 3
Avodart 572 (7) (5) 12 (20) (20) 240 (19) (20) 320 6 11
Coreg 50 (63) (63) 50 (63) (63) - - - - - -
Eperzan/Tanzeum 31 (64) (64) 30 (64) (63) 1 (60) (61) - - -
Imigran/Imitrex 141 (16) (16) 58 (25) (23) 57 (12) (14) 26 - -
Lamictal 617 (5) (3) 310 (7) (5) 113 6 5 194 (8) (4)
Requip 85 (23) (21) 5 (58) (58) 28 (3) (7) 52 (25) (20)
Serevent 82 (15) (14) 43 (17) (15) 30 (9) (9) 9 (18) (18)
Seroxat/Paxil 170 (8) (5) - - - 39 - - 131 (10) (7)
Valtrex 123 (4) (1) 21 5 5 30 3 3 72 (9) (4)
Zeffix 69 (22) (22) 1 - - 5 (17) (17) 63 (23) (23)
Other 2,202 (2) 1 219 (10) (6) 424 (2) (3) 1,559 (1) 4
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Pharmaceuticals 17,269 - 2 7,453 (2) 1 4,072 2 1 5,744 - 5
-------- -------- -------- -------- ---------- -------- -------- --------- -------- -------- --------- --------
Pharmaceuticals turnover - three months ended 31 December 2018
Total US Europe International
------------------------------------- ------------------------------------- ------------------------------------- -------------------------------------
Growth Growth Growth Growth
----------------------- ----------------------- ----------------------- -----------------------
GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER%
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Respiratory 1,991 5 2 1,023 2 (3) 415 9 7 553 9 10
Seretide/Advair 647 (18) (20) 299 (27) (31) 150 (18) (20) 198 1 2
Ellipta products 654 36 33 413 33 28 135 52 51 106 33 31
Anoro Ellipta 144 32 28 98 27 21 29 45 45 17 42 50
Arnuity Ellipta 13 8 - 11 10 10 - - - 2 - (50)
Incruse Ellipta 87 43 38 60 46 39 20 33 33 7 40 40
Relvar/Breo
Ellipta 333 13 9 186 3 (2) 71 31 28 76 25 26
Trelegy Ellipta 77 >100 >100 58 >100 >100 15 >100 >100 4 - -
Nucala/Mepolizumab 173 43 38 107 29 23 44 83 79 22 57 57
Avamys/Veramyst 73 12 12 - - - 17 - - 56 17 17
Flixotide/Flovent 166 2 - 94 3 (2) 26 - (4) 46 2 7
Ventolin 215 - (1) 110 (1) (6) 36 - (3) 69 1 7
Other 63 (5) (5) - - - 7 17 33 56 (2) (4)
HIV 1,276 10 6 786 10 3 317 9 7 173 15 18
Dolutegravir
products 1,205 14 9 766 11 5 291 15 13 148 28 29
Tivicay 452 14 10 281 10 3 104 20 18 67 24 28
Triumeq 691 5 1 429 - (6) 182 10 8 80 29 29
Juluca 62 >100 >100 56 >100 >100 5 - - 1 - -
Epzicom/Kivexa 30 (29) (31) 4 - (25) 11 (35) (35) 15 (29) (29)
Selzentry 31 3 (3) 16 - (13) 9 (10) (10) 6 50 50
Other 10 (63) (52) - - - 6 (50) (50) 4 (56) (33)
Immuno-inflammation 136 40 34 121 39 31 10 43 43 5 67 >100
Benlysta 138 42 34 121 39 31 10 43 43 7 >100 >100
Established
Pharmaceuticals 1,407 1 1 189 (16) (20) 368 4 2 850 5 7
Dermatology 115 (1) 2 1 (80) (80) 43 8 5 71 - 6
Augmentin 146 2 3 - - - 49 7 7 97 - 2
Avodart 149 - (1) 3 - (67) 60 (6) (8) 86 5 7
Coreg 14 (39) (43) 14 (39) (43) - - - - - -
Eperzan/Tanzeum 4 (74) (80) 4 (72) (78) - - - - - -
Imigran/Imitrex 40 11 8 19 27 27 14 (7) (13) 7 17 17
Lamictal 159 (5) (8) 83 (2) (9) 30 15 15 46 (19) (18)
Requip 23 (18) (21) 1 (50) (50) 9 - (11) 13 (24) (24)
Serevent 22 (8) (12) 12 (8) (15) 8 - - 2 (33) (33)
Seroxat/Paxil 46 (2) (4) - - - 10 - - 36 (3) (5)
Valtrex 33 6 6 7 75 50 7 17 17 19 (10) (5)
Zeffix 16 (20) (25) - - - 1 (50) (50) 15 (17) (22)
Other 640 8 10 45 (27) (24) 137 6 5 458 14 16
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Pharmaceuticals 4,810 6 4 2,119 4 (1) 1,110 7 6 1,581 7 9
-------- -------- -------- -------- ---------- -------- -------- --------- -------- -------- --------- --------
Vaccines turnover - year ended 31 December 2018
Total US Europe International
------------------------------------- ------------------------------------- ------------------------------------- -------------------------------------
Growth Growth Growth Growth
----------------------- ----------------------- ----------------------- -----------------------
GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER%
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Meningitis 881 (1) 2 374 10 13 336 (14) (15) 171 7 22
Bexsero 584 5 9 200 32 34 311 (9) (11) 73 18 52
Menveo 232 (15) (12) 174 (7) (5) 17 (50) (50) 41 (23) (15)
Other 65 8 7 - - - 8 (47) (47) 57 27 24
Influenza 523 7 10 385 7 9 66 35 33 72 (8) (1)
Fluarix,
FluLaval 523 7 10 385 7 9 66 35 33 72 (8) (1)
Shingles 784 >100 >100 733 >100 >100 2 - - 49 - -
Shingrix 784 >100 >100 733 >100 >100 2 - - 49 - -
Established
Vaccines 3,706 (1) - 1,209 5 8 1,157 - (1) 1,340 (8) (6)
Infanrix,
Pediarix 680 (8) (7) 296 (10) (8) 266 (16) (17) 118 20 28
Boostrix 517 (8) (7) 265 1 3 162 (12) (14) 90 (20) (19)
Hepatitis 808 17 19 458 21 24 245 22 21 105 (7) -
Rotarix 521 (1) 1 126 (5) (2) 110 16 15 285 (4) (2)
Synflorix 424 (17) (17) - - - 58 (13) (13) 366 (17) (18)
Priorix,
Priorix
Tetra,
Varilrix 305 1 2 - - - 159 (3) (4) 146 6 9
Cervarix 138 3 2 - - - 20 (31) (34) 118 12 12
Other 313 6 6 64 45 49 137 32 30 112 (24) (25)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Vaccines 5,894 14 16 2,701 45 48 1,561 (2) (4) 1,632 (3) -
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Vaccines turnover - three months ended 31 December 2018
Total US Europe International
------------------------------------- ------------------------------------- ------------------------------------- -------------------------------------
Growth Growth Growth Growth
----------------------- ----------------------- ----------------------- -----------------------
GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER% GBPm GBP% CER%
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Meningitis 188 (6) (9) 50 (25) (39) 78 (9) (10) 60 25 33
Bexsero 114 (1) (3) 23 44 13 72 (6) (8) 19 (14) 5
Menveo 44 (32) (37) 27 (47) (55) 4 (20) (20) 13 44 56
Other 30 43 38 - - - 2 (50) (50) 28 65 59
Influenza 193 74 69 135 90 83 31 82 82 27 17 17
Fluarix,
FluLaval 193 74 69 135 90 83 31 82 82 27 17 17
Shingles 221 >100 >100 205 >100 >100 1 - - 15 - -
Shingrix 221 >100 >100 205 >100 >100 1 - - 15 - -
Established
Vaccines 877 - (3) 276 29 18 267 (6) (7) 334 (11) (11)
Infanrix,
Pediarix 165 5 1 75 39 30 60 (20) (21) 30 7 7
Boostrix 139 4 (1) 64 31 20 37 (27) (29) 38 12 12
Hepatitis 190 18 14 103 34 23 60 22 22 27 (23) (17)
Rotarix 134 6 4 25 (11) (21) 28 12 12 81 11 11
Synflorix 106 (5) (6) - - - 21 (16) (16) 85 (1) (3)
Priorix,
Priorix
Tetra,
Varilrix 64 (3) (4) - - - 32 (17) (18) 32 17 15
Cervarix 15 (76) (81) - - - 5 (17) (33) 10 (82) (86)
Other 64 12 10 9 46 (3) 24 80 75 31 (17) (11)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Vaccines 1,479 22 18 666 78 65 377 (2) (4) 436 (3) (2)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Balance sheet
31 December 31 December
2018 2017
GBPm GBPm
------------ ------------
ASSETS
Non-current assets
Property, plant and equipment 11,058 10,860
Goodwill 5,789 5,734
Other intangible assets 17,202 17,562
Investments in associates and
joint ventures 236 183
Other investments 1,322 918
Deferred tax assets 3,887 3,796
Derivative financial instruments 69 8
Other non-current assets 1,576 1,413
------------ ------------
Total non-current assets 41,139 40,474
------------ ------------
Current assets
Inventories 5,476 5,557
Current tax recoverable 229 258
Trade and other receivables 6,423 6,000
Derivative financial instruments 188 68
Liquid investments 84 78
Cash and cash equivalents 3,874 3,833
Assets held for sale 653 113
------------ ------------
Total current assets 16,927 15,907
------------ ------------
TOTAL ASSETS 58,066 56,381
------------ ------------
LIABILITIES
Current liabilities
Short-term borrowings (5,793) (2,825)
Contingent consideration liabilities (837) (1,076)
Trade and other payables (14,037) (20,970)
Derivative financial instruments (127) (74)
Current tax payable (965) (995)
Short-term provisions (732) (629)
------------ ------------
Total current liabilities (22,491) (26,569)
------------ ------------
Non-current liabilities
Long-term borrowings (20,271) (14,264)
Corporation tax payable (272) (411)
Deferred tax liabilities (1,156) (1,396)
Pensions and other post-employment
benefits (3,125) (3,539)
Other provisions (691) (636)
Derivative financial instruments (1) -
Contingent consideration liabilities (5,449) (5,096)
Other non-current liabilities (938) (981)
------------ ------------
Total non-current liabilities (31,903) (26,323)
------------ ------------
TOTAL LIABILITIES (54,394) (52,892)
------------ ------------
NET ASSETS 3,672 3,489
------------ ------------
EQUITY
Share capital 1,345 1,343
Share premium account 3,091 3,019
Retained earnings (2,137) (6,477)
Other reserves 2,061 2,047
------------ ------------
Shareholders' equity 4,360 (68)
Non-controlling interests (688) 3,557
------------ ------------
TOTAL EQUITY 3,672 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
year 3,623 3,623 423 4,046
Other
comprehensive
income
for the year 124 131 255 (1) 254
------------ ------------ ------------ ------------ ------------
Total
comprehensive
income
for the year 3,747 131 3,878 422 4,300
------------ ------------ ------------ ------------ ------------
Distributions to
non-controlling
interests (570) (570)
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 (3,927) (3,927) (3,927)
Shares issued 2 72 74 74
Realised after
tax profits
on disposal of
equity
investments 56 (56) -
Share of
associates and
joint ventures
realised
profits on
disposal
of
equity
investments 38 (38) -
Write-down on
shares held
by ESOP Trusts (265) 265 -
Share-based
incentive plans 360 360 360
Tax on
share-based
incentive
plans 2 2 2
------------ ------------ ------------ ------------ ------------ ------------ ------------
At 31 December
2018 1,345 3,091 (2,137) 2,061 4,360 (688) 3,672
------------ ------------ ------------ ------------ ------------ ------------ ------------
At 1 January
2017 1,342 2,954 (5,392) 2,220 1,124 3,839 4,963
Profit for the
year 1,532 1,532 637 2,169
Other
comprehensive
income
for the year 899 (37) 862 (149) 713
------------ ------------ ------------ ------------ ------------
Total
comprehensive
income
for the year 2,431 (37) 2,394 488 2,882
------------ ------------ ------------ ------------ ------------
Distributions to
non-controlling
interests (789) (789)
Contribution
from
non-controlling
interests 21 21
Dividends to
shareholders (3,906) (3,906) (3,906)
Changes in
non-controlling
interests (2) (2)
Shares issued 1 55 56 56
Shares acquired
by ESOP
Trusts 10 581 (656) (65) (65)
Write-down on
shares held
by ESOP Trusts (520) 520 -
Share-based
incentive plans 333 333 333
Tax on
share-based
incentive
plans (4) (4) (4)
------------ ------------ ------------ ------------ ------------ ------------ ------------
At 31 December
2017 1,343 3,019 (6,477) 2,047 (68) 3,557 3,489
------------ ------------ ------------ ------------ ------------ ------------ ------------
Cash flow statement - year ended 31 December 2018
2018 2017
GBPm GBPm
-------- --------
Profit after tax 4,046 2,169
Tax on profits 754 1,356
Share of after tax profits of associates and
joint ventures (31) (13)
Profit on disposal of interest in associates (3) (94)
Net finance expense 717 669
Depreciation, amortisation and other adjusting
items 1,763 2,981
Increase in working capital (247) (737)
Contingent consideration paid (984) (594)
Increase in other net liabilities (excluding
contingent consideration paid) 3,732 2,521
-------- --------
Cash generated from operations 9,747 8,258
Taxation paid (1,326) (1,340)
-------- --------
Net cash inflow from operating activities 8,421 6,918
-------- --------
Cash flow from investing activities
Purchase of property, plant and equipment (1,344) (1,545)
Proceeds from sale of property, plant and equipment 168 281
Purchase of intangible assets (452) (657)
Proceeds from sale of intangible assets 256 48
Purchase of equity investments (309) (80)
Proceeds from sale of equity investments 151 64
Contingent consideration paid (153) (91)
Disposal of businesses 26 282
Proceeds from disposal of interest in associates 3 196
Investment in associates and joint ventures (10) (15)
Decrease in liquid investments - 4
Interest received 72 64
Dividends from associates and joint ventures 39 6
-------- --------
Net cash outflow from investing activities (1,553) (1,443)
-------- --------
Cash flow from financing activities
Issue of share capital 74 56
Shares acquired by ESOP Trusts - (65)
Decrease in short-term loans (1,986) (3,200)
Increase in long-term loans 10,138 2,233
Net repayment of obligations under finance leases (28) (23)
Purchase of non-controlling interests (9,320) (29)
Interest paid (766) (781)
Dividends paid to shareholders (3,927) (3,906)
Distributions to non-controlling interests (570) (779)
Contributions from non-controlling interests 21 21
Other financing items (25) 93
-------- --------
Net cash outflow from financing activities (6,389) (6,380)
-------- --------
Increase/(decrease) in cash and bank overdrafts
in the year 479 (905)
-------- --------
Cash and bank overdrafts at beginning of the
year 3,600 4,605
Exchange adjustments 8 (100)
Increase/(decrease) in cash and bank overdrafts 479 (905)
-------- --------
Cash and bank overdrafts at end of the year 4,087 3,600
-------- --------
Cash and bank overdrafts at end of the year
comprise:
Cash and cash equivalents 3,874 3,833
Cash and cash equivalents reported in assets
held for sale 485 -
-------- --------
4,359 3,833
Overdrafts (272) (233)
-------- --------
4,087 3,600
-------- --------
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
2018 2017 Growth Growth
GBPm GBPm GBP% CER%
------- ------- ------- -------
Pharmaceuticals 17,269 17,276 - 2
Vaccines 5,894 5,160 14 16
Consumer Healthcare 7,658 7,750 (1) 2
------- ------- ------- -------
Total turnover 30,821 30,186 2 5
------- ------- ------- -------
Operating profit by segment
2018 2017 Growth Growth
GBPm GBPm GBP% CER%
-------- -------- ------- -------
Pharmaceuticals 8,420 8,667 (3) -
Pharmaceuticals R&D (2,676) (2,740) (2) (1)
-------- -------- ------- -------
Pharmaceuticals including R&D 5,744 5,927 (3) -
Vaccines 1,943 1,644 18 25
Consumer Healthcare 1,517 1,373 10 15
-------- -------- ------- -------
Segment profit 9,204 8,944 3 7
Corporate and other unallocated
costs (459) (376) 22 15
-------- -------- ------- -------
Adjusted operating profit 8,745 8,568 2 6
Adjusting items (3,262) (4,481)
-------- -------- ------- -------
Total operating profit 5,483 4,087 34 43
Finance income 81 65
Finance costs (798) (734)
Profit on disposal of associates 3 94
Share of after tax profits of
associates
and joint ventures 31 13
-------- -------- ------- -------
Profit before taxation 4,800 3,525 36 46
-------- -------- ------- -------
Turnover by segment
Q4 2018 Q4 2017 Growth Growth
GBPm GBPm GBP% CER%
-------- -------- ------- -------
Pharmaceuticals 4,810 4,540 6 4
Vaccines 1,479 1,208 22 18
Consumer Healthcare 1,908 1,891 1 1
-------- -------- ------- -------
Total turnover 8,197 7,639 7 5
-------- -------- ------- -------
Operating profit by segment
Q4 2018 Q4 2017 Growth Growth
GBPm GBPm GBP% CER%
-------- -------- ------- -------
Pharmaceuticals 2,340 2,314 1 (3)
Pharmaceuticals R&D (778) (717) 9 5
-------- -------- ------- -------
Pharmaceuticals including R&D 1,562 1,597 (2) (6)
Vaccines 420 231 82 71
Consumer Healthcare 352 302 17 14
-------- -------- ------- -------
Segment profit 2,334 2,130 10 5
Corporate and other unallocated
costs (138) (92) 50 36
-------- -------- ------- -------
Adjusted operating profit 2,196 2,038 8 4
Adjusting items (642) (1,526)
-------- -------- ------- -------
Total operating profit 1,554 512 >100 >100
Finance income 24 16
Finance costs (209) (154)
Profit on disposal of associates - 66
Share of after tax profits of
associates
and joint ventures 5 2
-------- -------- ------- -------
Profit before taxation 1,374 442 >100 >100
-------- -------- ------- -------
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 31 December 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 developments since the date
of the Annual Report 2017.
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 2018, the charge for taxation on Total profits amounted to GBP754
million and represented an effective tax rate of 15.7% (2017: 38.5%).
Tax on Adjusted profits amounted to GBP1,535 million and represented
an effective Adjusted tax rate of 19.0% (2017: 21.0%).
In the quarter, the tax on Total profits amounted to GBP74 million
and represented an effective tax rate of 5.4% (Q4 2017: >100%). Tax
on Adjusted profits amounted to GBP355 million and represented an
effective Adjusted tax rate of 17.5% (Q4 2017: 20.0%).
The reduction from the prior year effective tax rate on Total profits
was driven primarily by a favourable comparison with the impact of
US tax reform, which resulted in a number of charges in Q4 2017.
The Total tax charge in 2018 included the effect of a reduced estimate
of the 2017 impact of US tax reform of GBP125 million (GBP101 million
in Q4 2018), following additional guidance being released by the
IRS and a re-assessment of estimates of uncertain tax positions following
the settlement of a number of open issues with tax authorities. The
reduction from the prior year effective tax rate on Adjusted profit
was driven primarily by the reduction in the US Federal tax rate.
The Group's balance sheet at 31 December 2018 included a current
tax payable liability of GBP965 million, a non-current tax payable
liability of GBP272 million and a tax recoverable asset of GBP229
million.
Additional information
Accounting policies and basis of preparation
This unaudited Results Announcement contains condensed financial
information for the year and three months ended 31 December 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 will 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 audit of the statutory accounts for the
year ended 31 December 2018 is not yet complete. 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:
2018 2017 Q4 2018 Q4 2017
----- ----- -------- --------
Average rates:
US$/GBP 1.33 1.30 1.27 1.36
Euro/GBP 1.13 1.15 1.13 1.15
Yen/GBP 147 145 144 148
Period-end rates:
US$/GBP 1.27 1.35 1.27 1.35
Euro/GBP 1.11 1.13 1.11 1.13
Yen/GBP 140 152 140 152
During Q4 2018, average Sterling exchange rates were weaker against
the US Dollar, the Euro and Yen compared with the same period in
2017. During the year ended 31 December 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 period-end rates.
Weighted average number of shares
2018 2017
millions millions
---------- ----------
Weighted average number of shares - basic 4,914 4,886
Dilutive effect of share options and share awards 57 55
---------- ----------
Weighted average number of shares - diluted 4,971 4,941
---------- ----------
Weighted average number of shares
Q4 2018 Q4 2017
millions millions
---------- ----------
Weighted average number of shares - basic 4,920 4,891
Dilutive effect of share options and share awards 58 -
---------- ----------
Weighted average number of shares - diluted 4,978 4,891
---------- ----------
Because the Group reported losses attributable to shareholders in
Q4 2017, there is no dilution effect of share options and share awards.
At 31 December 2018, 4,923 million shares were in free issue (excluding
Treasury shares and shares held by the ESOP Trusts). This compares
with 4,891 million shares at 31 December 2017.
Net assets
The book value of net assets increased by GBP183 million from GBP3,489
million at 31 December 2017 to GBP3,672 million at 31 December 2018.
This primarily reflected the Total profit for the year and re-measurement
gains on defined benefit plans exceeding dividends paid in the year.
The carrying value of investments in associates and joint ventures
at 31 December 2018 was GBP236 million (31 December 2017: GBP183
million), with a market value of GBP487 million (31 December 2017:
GBP372 million).
At 31 December 2018, the net deficit on the Group's pension plans
was GBP995 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%, partly offset
by lower UK assets.
At 31 December 2018, the post-retirement benefits provision was GBP1,379
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 31 December 2018, trade and other payables were GBP14,037 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 primarily funded by utilising the proceeds of bonds issued with
maturity dates 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 GBP1,240 million (31 December
2017: GBP1,304 million).
Contingent consideration amounted to GBP6,286 million at 31 December
2018 (31 December 2017: GBP6,172 million), of which GBP5,937 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 GBP252 million in respect
of preferential dividends. The liability for preferential dividends
due to Pfizer at 31 December 2018 was GBP15 million (31 December
2017: GBP17 million). An explanation of the accounting for the non-controlling
interests in ViiV Healthcare is set out on page 64.
Of the contingent consideration payable (on a post-tax basis) at
31 December 2018, GBP837 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 31 December 2018 have been calculated based on the period-end
exchange rates, primarily US$1.27/GBP1 and EUR1.11/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 36 176 (6)
5 cent depreciation of
US Dollar (33) (163) 6
10 cent appreciation of
US Dollar 75 367 (13)
10 cent depreciation of
US Dollar (64) (313) 11
5 cent appreciation of
Euro 21 54 14
5 cent depreciation of
Euro (19) (49) (13)
10 cent appreciation of
Euro 44 114 29
10 cent depreciation of
Euro (37) (95) (25)
---------------- ----------------- ---------------
Movements in contingent consideration are as follows:
2018 2017
GBPm GBPm
------ ------
Contingent consideration at beginning of the
year 6,172 5,896
Re-measurement through income statement 1,251 961
Cash payments: operating cash flows (984) (594)
Cash payments: investing activities (153) (91)
Contingent consideration at end of the year 6,286 6,172
------ ------
The re-measurements of contingent consideration in the year reflected
updated forecasts, exchange rate movements and the unwind of the
discounts on the liabilities. The cash settlement in the period included
GBP793 million (2017: GBP671 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 31 December 2018, the ESOP Trust held 41.6 million GSK shares
against the future exercise of share options and share awards. The
carrying value of GBP161 million has been deducted from other reserves.
The market value of these shares was GBP619 million.
At 31 December 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 31 December 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 58.
Business acquisitions and disposals
On 3 December 2018, GSK announced the agreement to acquire Tesaro,
Inc., an oncology focused biopharmaceutical company, for $5.1 billion
(approximately GBP4.0 billion). The transaction completed on 22 January
2019.
On 3 December 2018, GSK announced the agreement to divest Horlicks
and a number of other Consumer Healthcare Nutrition brands plus the
Group's 82% stake in GlaxoSmithKline Bangladesh Limited to Unilever
plc, and to merge one of the Group's Indian subsidiaries, GSK Consumer
Healthcare Limited, with Hindustan Unilever Limited. Proceeds comprise
approximately GBP0.6 billion in cash and approximately 133.8 million
shares in Hindustan Unilever Limited with a value at 31 December
2018 of GBP2.75 billion. The relevant assets and liabilities have
been moved to Assets held for sale in the Group's balance sheet.
This transaction is expected to complete by the end of 2019.
On 19 December 2018, GSK announced the agreement with Pfizer, Inc.
to combine the two groups' consumer healthcare businesses into one
joint venture. GSK will have a majority equity interest of 68% and
Pfizer will have an equity interest of 32%. The transaction is subject
to approval by GSK shareholders and is expected to complete by end
of 2019.
Reconciliation of cash flow to movements in net debt
2018 2017
GBPm GBPm
--------- ---------
Net debt at beginning of the year (13,178) (13,804)
Increase/(decrease) in cash and bank overdrafts 479 (905)
Decrease in liquid investments - (4)
Repayment of short-term loans 1,986 3,200
Increase in long-term loans (10,138) (2,233)
Net repayment of obligations under finance leases 28 23
Exchange adjustments (776) 585
Other non-cash movements (22) (40)
--------- ---------
Increase in net debt (8,443) 626
--------- ---------
Net debt at end of the year (21,621) (13,178)
--------- ---------
Net debt analysis
2018 2017
GBPm GBPm
--------- ---------
Liquid investments 84 78
Cash and cash equivalents 3,874 3,833
Cash and cash equivalents reported in assets
held for sale 485 -
Short-term borrowings (5,793) (2,825)
Long-term borrowings (20,271) (14,264)
Net debt at end of the period (21,621) (13,178)
--------- ---------
Free cash flow reconciliation
2017
2018 (revised) Q4 2018
GBPm GBPm GBPm
-------- ----------- --------
Net cash inflow from operating activities 8,421 6,918 4,119
Purchase of property, plant and
equipment (1,344) (1,545) (502)
Proceeds from sale of property,
plant and equipment 168 281 98
Purchase of intangible assets (452) (657) (133)
Proceeds from disposals of intangible
assets 256 48 91
Net finance costs (694) (717) (291)
Dividends from joint ventures and
associates 39 6 -
Contingent consideration paid (reported
in investing
activities) (153) (91) (30)
Distributions to non-controlling
interests (570) (779) (35)
Contributions from non-controlling
interests 21 21 -
--------
Free cash flow 5,692 3,485 3,317
-------- ----------- --------
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 dolutegravir-containing products have a favourable impact on the
proportion of the preferential dividends that is allocated to GSK.
Adjusting items are allocated to shareholders based on their equity
interests. GSK was entitled to approximately 85% of the Total earnings
and 82% of the Adjusted earnings of ViiV Healthcare for 2018. Re-measurements
of the liabilities for the preferential dividends allocated to Pfizer
and Shionogi are included within other operating income.
Acquisition-related arrangements
As consideration for the acquisition of Shionogi's interest in the
former Shionogi-ViiV Healthcare joint venture in 2012, Shionogi received
the 10% equity stake in ViiV Healthcare and ViiV Healthcare also
agreed to pay additional future cash consideration to Shionogi, contingent
on the future sales performance of the products being developed by
that joint venture, principally dolutegravir. Under IFRS 3 'Business
combinations', GSK was required to provide for the estimated fair
value of this contingent consideration at the time of acquisition
and is required to update the liability to the latest estimate of
fair value at each subsequent period end. The liability for the contingent
consideration recognised in the balance sheet at the date of acquisition
was GBP659 million. Subsequent re-measurements are reflected within
other operating income/expense and within Adjusting items in the
income statement in each period, and at 31 December 2018, the liability,
which is discounted at 8.5%, stood at GBP5,937 million.
Cash payments to settle the contingent consideration are made to
Shionogi by ViiV Healthcare each quarter, based on the actual sales
performance of the relevant products in the previous quarter. These
payments reduce the balance sheet liability and hence are not recorded
in the income statement. The cash payments made to Shionogi by ViiV
Healthcare in 2018 were GBP793 million.
Because the liability is required to be recorded at the fair value
of estimated future payments, there is a significant timing difference
between the charges that are recorded in the Total income statement
to reflect movements in the fair value of the liability and the actual
cash payments made to settle the liability.
The cash payments 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:
2018 2017
GBPm GBPm
------ ------
Contingent consideration at beginning of the
year 5,542 5,304
Re-measurement through income statement 1,188 909
Cash payments: operating cash flows (703) (587)
Cash payments: investing activities (90) (84)
Contingent consideration at end of the year 5,937 5,542
------ ------
Of the contingent consideration payable (on a post-tax basis) to
Shionogi at 31 December 2018, GBP815 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:
2018 2017
GBPm GBPm
------ ------
Pfizer put option 1,240 1,304
Pfizer preferential dividend 15 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.
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
FR CKADNDBKDPBK
(END) Dow Jones Newswires
February 06, 2019 07:01 ET (12:01 GMT)
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