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RNS
GlaxoSmithKline PLC  -  GSK   

Half-year Report

Released 11:00 26-Jul-2017

RNS Number : 1405M
GlaxoSmithKline PLC
26 July 2017
 

Issued: Wednesday, 26 July 2017, London U.K.

 

GSK delivers further progress in Q2 and sets out new priorities for the Group

 

Q2 sales of £7.3 billion, +12% AER, +3% CER

Total loss per share of 3.7p, +59% AER, +29% CER; Adjusted EPS of 27.2p, +12% AER, -2% CER

 

Financial highlights



·

Pharmaceutical sales, £4.4 billion, +12% AER, +3% CER, Vaccines sales, £1.1 billion, +16% AER, +5% CER, Consumer Healthcare sales, £1.9 billion,+10% AER, flat at CER


·

Group operating margin 28.5%; Pharmaceuticals 33.6%; Vaccines 33.7%; Consumer 17.7%


·

Total Q2 loss per share of 3.7p reflecting charges resulting from increases in the valuation of Consumer and HIV businesses and new portfolio choices


·

Updated 2017 guidance: Adjusted EPS growth now expected to be 3% to 5% CER reflecting impact of Priority Review Voucher


·

H1 Free Cash Flow £0.4 billion (H1 2016: £0.1 billion)


·

19p dividend declared for Q2; continue to expect 80p for FY 2017


Product and pipeline highlights





·

New product sales of £1.7 billion, +62% AER, +47% CER


·

HIV two drug regimen (dolutegravir and rilpivirine) filed for approval in US and EU


·

Shingrix filed for approval in Japan


·

FDA approval received for subcutaneous Benlysta for treatment of SLE




New business priorities to 2020





·

New priorities to strengthen innovation, improve performance and build trust


·

Pharmaceutical R&D pipeline reviewed with target over time to allocate 80% of capital to priority assets in two current (Respiratory and HIV/infectious diseases) and two potential (Oncology and Immuno-inflammation) therapy areas; more than 30 pre-clinical and clinical programmes to be stopped


·

Extended cost reduction programme expected to deliver additional £1 billion annual cost savings by 2020 driven by new business priorities, improved supply chain efficiency and reduced administrative costs


·

Enhanced focus on improved cash generation and strengthening credit profile


·

Dividend of 80p expected for 2018 in conjunction with new dividend policy


·

Group outlook for 2020: Expected 5 year percentage CAGR to 2020 on a CER basis for sales of low-to-mid-single digits and Adjusted EPS of mid-to-high single digits


 

Q2 2017 results


Q2 2017


Growth


H1 2017


Growth


£m


£%


CER%


£m


£%


CER%













Turnover

7,320 


12 



14,704 


15 














Total operating (loss)/profit

(20)


87 


(45)


1,698 


>100 


>100 

Adjusted operating profit

2,083 


14 



4,062 


21 


4 













Total (loss)/earnings per share

(3.7)p


59 


29 


17.7p


>100 


>100 

Adjusted earnings per share

27.2p


12 


(2)


52.1p


20 


3 













Net cash from operations

1,008 


(18)




2,152 


24 



Free cash flow

(282)


>(100)




368 


>100 















 

Emma Walmsley, Chief Executive Officer, GSK said:

"Q2 was another quarter of progress for GSK with Group sales up 3% to £7.3 billion and Adjusted EPS of 27.2p.  Our priority for the second half of the year is to maintain this momentum and prepare for the successful execution of several important near-term launches in Respiratory, Vaccines and HIV.

 

"Today we are updating our full year earnings guidance to reflect the investments we have made to accelerate the review of our new two drug regimen in HIV.  We are also providing an update to investors on the longer-term outlook for the Group and our priorities to improve innovation, performance and trust in GSK."

 

The Total results are presented under 'Income Statement' on page 39 and Adjusted results reconciliations are presented on pages 19, 25 and 62 to 65.  The definitions of £% or AER% growth, CER% growth, Adjusted results, free cash flow, other non-IFRS measures are set out on page 36.

All expectations and targets regarding future performance should be read together with "Assumptions related to 2017 guidance and 2016-2020 outlook" and "Assumptions and cautionary statement regarding forward-looking statements" on page 37.

 

 

New business priorities

At a meeting in London today, GSK set out a series of new priorities and updated its financial outlook for the Group.

 

The Group affirmed its commitment to developing innovative healthcare products for patients and consumers across Pharmaceuticals, Vaccines and Consumer Healthcare.

 

These businesses have leadership positions in some of the world's biggest therapeutic areas and categories, a broad international reach, and together have strategic and operational synergies.  Earnings and cash flows from this combination of businesses offer balance to the Group and provide a level of sustainability to its performance, its ability to invest in future growth and in its returns to shareholders. 

 

The recent performance of these three businesses has demonstrated the benefits of the transaction with Novartis in 2015 as well as the impact of more effective introductions of new products, notably new Respiratory and HIV medicines and vaccines to prevent meningitis.  Better performance, together with cost savings has also resulted in improved margins and cash flows for all three businesses over the last 18 months.

 

Whilst this recent delivery is encouraging, the company highlighted that there are several key issues it needs to address, over the next three years, to make sure the Group delivers long-term competitive performance.

 

All three businesses need to perform but the priority for GSK is to improve in Pharmaceuticals.  Delivering full value from recent and imminent product launches, together with cost base improvements, is required to help mitigate the impact of pricing pressures to its current portfolio.  Strengthening the Pharmaceuticals pipeline is a key objective for the Group.

 

Beyond Pharmaceuticals, the Group aims to realise further benefits from its newly scaled Consumer Healthcare and Vaccines businesses.  The Group is also aiming to increase investment flexibility with a series of measures to improve cash generation and clearer capital allocation priorities.

 

Going forward, GSK intends to focus on three long-term priorities: Innovation, Performance and Trust.

 

Innovation is important for all three businesses but the Group's top priority is to improve in Pharmaceuticals.

 

A key near-term focus is to maximise value from new products and three other material new launch opportunities: Shingrix, a potential new vaccine for shingles; Closed Triple, a new 3-in-1 respiratory medicine; and new two drug regimens in HIV.

 

In its Pharmaceuticals pipeline, GSK has developed a priority list of assets to invest behind.  This priority list will evolve as data reads out.  The Group has also set a target to deploy over time 80% of its Pharmaceuticals R&D capital to priority assets in two current therapy areas: Respiratory and HIV/infectious diseases; and two potential areas: Oncology and Immuno-inflammation.  Significant data is expected from these priority assets over the next three years which will be used to inform R&D investment decisions and how best to generate value from these assets.  GSK also expects to pursue disciplined business development to augment its early-stage pipeline in these priority areas.

 

As part of its efforts to prioritise and allocate resources in R&D, GSK is terminating development programmes that are unlikely to generate sufficient returns.  GSK has so far made decisions to terminate, partner or divest more than 30 pre-clinical and clinical programmes.  The Group has also undertaken a strategic review of its Rare Diseases unit and is now considering options for future ownership of these assets.

 

In addition, the Group is taking steps to improve the partnership between R&D and its commercial organisation as well as its governance around pipeline decision-making with the establishment of a new Development Advisory Board and a new Board Scientific Committee.

 

GSK's second priority is a new company-wide focus on delivery of sustainable, ethical and more competitive performance.

 

The Group is making a number of choices to prioritise the strongest assets and markets in its portfolio and move capital and resources away from those that offer more limited opportunities.  It is prioritising investment to support commercial execution in the US market and is implementing a new operating model for Emerging Markets to increase competitiveness and support long-term profitable growth in these markets.  The Group has also decided to terminate its collaboration on sirukumab with Janssen Biologics and progressively withdraw its support for Tanzeum.

 

The Group is putting in place plans to improve its cash generation and is expanding its current cost saving programme.  It is targeting delivery of an additional £1 billion in annual cost savings by 2020 at constant exchange rates.  These new cost savings will be used to fund new product launches, R&D investments and to help mitigate pricing pressure on margins.

 

A key driver of the new savings will be through realising efficiency improvements in the Group's supply chain.  This will include changes to GSK's manufacturing network, divestment and exit of more than 130 non-core tail brands (£0.5 billion in annual sales), reductions in overheads, improved procurement savings and more strategic supplier relationships.

 

The Group is also seeking to strengthen its capabilities through investments in people and appointment of external talent.  One of the key areas for this will be in digital, data and analytics, with the Group aiming to leverage technology to improve clinical outcomes, develop real world data and make a step-change in its customer and consumer engagement.

 

GSK's third priority is to build Trust.  The Group recognises that levels of trust in the industry are not sufficient and, if not addressed, will impact long-term value creation.

 

GSK will continue to make very strong commitments to delivering on the fundamentals of Trust: quality and safety, reliability of supply and service levels and effective compliance.  It is also important that GSK's partners and customers trust the company's science and its intentions.  GSK continues to develop its Healthcare Practitioner engagement model to make sure it is competitive and trusted.

 

The Group is operating in an environment with sustained pressure to reduce prices and recognises the issues that are being faced by payers.  GSK has taken a balanced approach to pricing of its recently launched products and this will continue with the company looking to support payer needs whilst generating sufficient returns.  GSK will also continue to allocate resources to supporting major global health needs such as malaria and HIV and will be increasing its efforts to adopt modern, progressive employer practices.

 

In addition to these new priorities, GSK also set out its intentions for future uses of capital.

 

Firstly, free cash flow will be used to invest in the business and support in particular: the Pharmaceuticals pipeline; realisation of the Consumer Healthcare put option, if exercised; and expansion of capacity in the Vaccines business.  Secondly, free cash flow will be used to deliver returns to our shareholders through the payment of dividends.  Thirdly, cash will be used for disciplined business development.

 

As well as establishing these clearer priorities for the allocation of capital in the future, the Group intends to manage its investments so that it continues to strengthen its credit profile and protect its target short-term A1/P1 credit ratings.

 

GSK reiterated its outlook for sales and earnings performance to 2020 (first set out in 2015).

 

GSK expects sales to grow at CER at a low-to-mid single digits percentage CAGR and Adjusted EPS to grow at a mid-to-high single digits percentage CAGR for the period 2016-2020.  These outlooks are based on 2015 exchange rates and anticipate that at least one version of generic Advair will be launched in the US before 2020.  The outlook includes the divestments announced today and those executed since 2015 (£0.9 billion in annual sales).

 

Given the potential development options in GSK's pipeline, the outlook may be affected by additional data-driven R&D investment decisions.

 

The Group also announced its policy for future distributions from 2018 onwards and its expectations for the 2018 dividend.

 

GSK recognises the importance of dividends to shareholders and aims to distribute regular dividend payments that will be determined primarily with reference to the free cash flow generated by the business after funding the investment necessary to support the Group's future growth.  

 

The Board intends to maintain the dividend for 2018 at the current level of 80p per share, subject to any material change in the external environment or performance expectations.  Over time, as free cash flow strengthens, it intends to build free cash flow cover of the annual dividend to a target range of 1.25-1.50x, before returning the dividend to growth.

 

 

Contents

Page

 

 

Sales performance

6

Financial performance - Q2 2017

17

Financial performance - H1 2017

23

   2017 guidance

29

Research and development

33

Definitions

36

Outlook assumptions and cautionary statements

37

Contacts

38

 

 

Income statements

39

Statement of comprehensive income - three months ended 30 June 2017

40

Statement of comprehensive income - six months ended 30 June 2017

41

Pharmaceuticals turnover - three months ended 30 June 2017

42

Pharmaceuticals turnover - six months ended 30 June 2017

43

Vaccines turnover - three months ended 30 June 2017

44

Vaccines turnover - six months ended 30 June 2017

44

Balance sheet

45

Statement of changes in equity

46

Cash flow statement - six months ended 30 June 2017

47

Segment information

48

Legal matters

50

Taxation

50

Additional information

51

Reconciliation of cash flow to movements in net debt

59

Net debt analysis

59

Free cash flow reconciliation

59

Non-controlling interests in ViiV Healthcare

60

Adjusted results reconciliations

62

 

 

Principal risks and uncertainties

66

Directors' responsibility statement

67

Independent review report

68

 

 

Sales performance

 

Group turnover by business and geographic region - Q2 2017

 

Group turnover by business

Q2 2017





 

£m

 

Growth

£%

 

Growth

CER%







Pharmaceuticals

4,357

 

12

 

3

Vaccines

1,111

 

16

 

5

Consumer Healthcare

1,852

 

10

 

-







Group turnover

7,320

 

12

 

3







 

Group turnover increased 12% AER, 3% CER to £7,320 million driven by continued momentum and growth in Pharmaceuticals and Vaccines. 

 

Pharmaceuticals sales were up 12% AER, 3% CER, reflecting the continued strong growth of new products, driven particularly by Triumeq, Tivicay and Relvar/Breo Ellipta, partly offset by the impact of divestments.  Nucala also contributed significantly to total Respiratory growth of 14% AER, 4% CER. 

 

Vaccines sales were up 16% AER, 5% CER, reflecting a strong performance from Meningitis vaccines and higher demand for Established Vaccines as well as favourable year-on-year US CDC stockpile movements, partly offset by the reversal of the beneficial phasing of shipments in Emerging Markets in the first quarter. 

 

Consumer Healthcare sales were up 10% AER, but flat at CER, reflecting strong performances from power brands, particularly in Pain relief and Oral health, offset by a weaker US allergy performance, and a broader slow down in key categories, particularly in International markets.  In addition, reported growth was impacted by the Nigerian beverages business divestment and retailer de-stocking in India ahead of the Goods & Service Tax (GST) implementation on 1 July.

 

Sales of New Pharmaceutical and Vaccine products in the quarter were £1,703 million, up 62% AER, 47% CER.

 

 

Group turnover by geographic region

Q2 2017





 

£m

 

Growth

£%

 

Growth

CER%







US

2,720

 

15

 

5

Europe

1,966

 

11

 

2

International

2,634

 

10

 

1







Group turnover

7,320

 

12

 

3







 

The US sales growth of 15% AER, 5% CER was driven by continued strong performances from Triumeq and Tivicay, growth in the Respiratory portfolio and, in the US, a competitor supply shortage and higher demand for Hepatitis vaccines.

 

Europe sales grew 11% AER, 2% CER with growth from Triumeq, Tivicay, Meningitis vaccines and Voltaren.  This growth was partly offset by the decline in Established Pharmaceuticals, reflecting in part the disposal of the Romanian distribution business, and Respiratory sales, as the decline in Seretide more than offset the continued progress in transitioning to the new Respiratory products.

 

In International, sales growth of 10% AER, 1% CER reflected strong performances from Boostrix in Emerging Markets, benefiting from the phasing of tenders, as well as strong growth in Triumeq, Tivicay and the Respiratory portfolio, which was partly offset by the impact of divestments on Established Pharmaceuticals.  Growth in Emerging Markets of 11% AER, 2% CER was also impacted by the divestments.

 

 

Group turnover by business and geographic region - H1 2017

 

Group turnover by business

H1 2017





 

£m

 

Growth

£%

 

Growth

CER%







Pharmaceuticals

8,546

 

14

 

4

Vaccines

2,263

 

23

 

10

Consumer Healthcare

3,895

 

13

 

1







Group turnover

14,704

 

15

 

4







 

Group turnover increased 15% AER, 4% CER to £14,704 million with growth in all three businesses.

 

Pharmaceuticals sales were up 14% AER, 4% CER, reflecting the continued strong growth of new products, driven particularly by Triumeq, Tivicay and Relvar/Breo Ellipta, partly offset by the impact of recent divestments.  Nucala also contributed significantly to total Respiratory growth of 16% AER, 4% CER.

 

Vaccines sales were up 23% AER, 10% CER, with a strong performance from Meningitis vaccines and higher demand for Established Vaccines as well as the benefit of favourable year-on-year US CDC stockpile movements.

 

Consumer Healthcare sales grew 13% AER, 1% CER reflecting strong performances from power brands, particularly in Pain relief and Oral health, largely offset by a weaker US allergy performance, and a broader slow down in key categories, particularly in International markets.  In addition, reported growth was impacted by the Nigerian beverages business divestment and retailer de-stocking in India ahead of the Goods & Service Tax (GST) implementation on 1 July.

 

Sales of New Pharmaceutical and Vaccine products in the six months were £3,119 million, up 67% AER, 49% CER.

 

 

Group turnover by geographic region

H1 2017





 

£m

 

Growth

£%

 

Growth

CER%







US

5,341

 

20

 

8

Europe

3,961

 

10

 

1

International

5,402

 

14

 

3







Group turnover

14,704

 

15

 

4







 

The US sales growth of 20% AER, 8% CER was driven by continued strong performances from Triumeq and Tivicay and growth in the Respiratory portfolio, together with strong performances in the US from Pediarix and Boostrix.

 

Europe sales grew 10% AER, 1% CER as growth from Triumeq, Tivicay and Meningitis vaccines was partly offset by the decline in Established Pharmaceuticals, reflecting in part the disposal of the Romanian distribution business.  Respiratory sales were up 7% AER but down 2% CER as the decline in Seretide more than offset the continued progress in transitioning to the new Respiratory products.

 

In International, sales growth of 14% AER, 3% CER reflected strong performances from Synflorix and Boostrix in Emerging Markets, boosted by the phasing of tenders, as well as strong growth in Triumeq, Tivicay and the Respiratory portfolio, which was partly offset by the impact of divestments on Established Pharmaceuticals.  Growth in Emerging Markets of 15% AER, 4% CER was also impacted by the divestments.

 

 

Turnover - Q2 2017

 

Pharmaceuticals

 


Q2 2017








£m


Growth

£%


Growth

CER%







Respiratory

1,801

 

14 

 

4 

HIV

1,116

 

29 

 

17 

Immuno-inflammation

93

 

19 

 

9 

Established Pharmaceuticals

1,347

 

(1)

 

(7)







 

4,357

 

12 

 

3 

 

 

 

 

 

 

US

1,974

 

18 

 

7 

Europe

993

 

6 

 

(4)

International

1,390

 

10 

 

3 







 

4,357

 

12 

 

3 







 

Pharmaceuticals turnover in the quarter was £4,357 million, up 12% AER, 3% CER.  Respiratory sales grew 14% AER, 4% CER to £1,801 million, driven by the Ellipta portfolio and Nucala, while HIV sales were up 29% AER, 17% CER to £1,116 million, driven by a continued increase in market share for Triumeq and Tivicay.  Sales of Established Pharmaceuticals were down 1% AER, 7% CER, reflecting the impact of recent divestments, which reduced overall Pharmaceuticals CER growth by two percentage points and also impacted the contribution from Emerging Markets.

 

In the US, sales growth of 18% AER, 7% CER was driven by the HIV portfolio and new Respiratory products.  Europe sales grew 6% AER but declined 4% CER reflecting continued generic competition to Seretide and the disposal of the Romanian distribution business in Q4 2016 which impacted Europe sales by four percentage points.  International sales growth was impacted by the disposal of the thrombosis and anaesthesia businesses to Aspen in Q1 2017, which reduced growth in Emerging Markets by two percentage points to 10% AER, 4% CER, including HIV.  Sales in Japan grew 10% AER, 3% CER.

 

Respiratory

Total Respiratory portfolio sales were up 14% AER, 4% CER, with the US up 19% AER, 9% CER, Europe up 4% AER but down 5% CER and International up 11% AER, 4% CER.  Growth of the new Respiratory products more than offset the decline in Seretide/Advair.

 

The new Respiratory products recorded combined sales of £497 million in the quarter with sales of Ellipta products up 90% AER, 73% CER driven by continued market share growth in all regions and the ongoing roll-out across Europe and International.  Sales of Nucala were £73 million in the quarter, a Sterling increase of £53 million over Q2 2016, including sales of £50 million in the US.

 

The aggregate growth of the Ellipta products was primarily driven by the contribution of the US, where sales more than doubled at AER, and grew 90% CER.  Relvar/Breo Ellipta sales grew 92% AER, 75% CER with the US more than doubling at both AER and CER to £183 million.  Sales of Relvar/Breo Ellipta in Europe grew 52% AER, 39% CER, and in International 45% AER, 30% CER, helped by ongoing launches.  Anoro Ellipta sales grew 85% AER, 67% CER to £85 million, reflecting market share gains in the US.  The Ellipta products Breo, Anoro and Incruse all continued to grow market share in the US during the quarter.

 

Seretide/Advair sales declined 6% AER, 14% CER to £848 million.  Sales of Advair in the US declined 2% AER, 11% CER (8% volume decline and a 3% negative impact of price) with payer rebate adjustments favourably impacting growth in the quarter.  In Europe, Seretide sales were down 15% AER, 21% CER to £182 million (10% volume decline and a 11% negative impact of price), reflecting continued competition from generics and the transition of the Respiratory portfolio to newer products.  In International, sales of Seretide were down 5% AER and 11% CER, at £190 million, reflecting increased generic competition and the transition to the newer Respiratory products.

 

Ventolin sales were flat at AER, but declined 8% CER to £179 million, primarily reflecting unfavourable RAR adjustments in the US.  Flixotide/ Flovent sales were up 7% AER, but decreased 1% CER to £145 million, with growth in International only partly offsetting the decline in the US.

 

The overall impact on growth of payer rebate adjustments related to prior periods across the US Respiratory portfolio was broadly neutral.

 

HIV

HIV sales increased 29% AER, 17% CER to £1,116 million in the quarter, with the US up 36% AER, 24% CER, Europe up 10% AER, but flat at CER and International up 40% AER, 27% CER.  The growth in all three regions was driven by the continued increase in market share for Triumeq and Tivicay, partly offset by the impact of generic competition to Epzicom/Kivexa particularly affecting the European market.  The ongoing increase in patient numbers for both Triumeq and Tivicay resulted in sales of £648 million and £340 million, respectively, in the quarter.

 

Epzicom/Kivexa sales declined 60% AER, 63% CER to £63 million, reflecting the continued increase in generic competition since Q3 2016. 

 

Immuno-inflammation

Benlysta sales, driven by a strong US performance, grew 19% AER, 9% CER to £93 million against a strong comparative period in Q2 2016.

 

Established Pharmaceuticals

Sales of Established Pharmaceuticals in the quarter were £1,347 million, down 1% AER, 7% CER, impacted by the disposals of the Romanian distribution business in Q4 2016 and the thrombosis and anaesthesia businesses to Aspen during the first quarter.  The impact of the disposals on the growth of the Established Pharmaceuticals portfolio was approximately four percentage points.

 

The Avodart franchise was down 10% AER, 19% CER to £160 million primarily due to loss of exclusivity in the US and the impact of favourable RAR adjustments in 2016.

 

Dermatology sales grew 26% AER, 17% CER to £111 million through improved supply in Emerging Markets, while Augmentin sales grew 5% AER, but declined 1% CER to £141 million.

 

 

Vaccines

 


Q2 2017








£m


Growth

£%


Growth

CER%







Meningitis

200

 

32

 

20 

Influenza

21

 

24

 

6 

Established Vaccines

890

 

12

 

2 







 

1,111

 

16

 

5 

 

 

 

 

 

 

US

316

 

22

 

12 

Europe

394

 

21

 

10 

International

401

 

6

 

(5)







 

1,111

 

16

 

5 







 

Vaccines turnover delivered growth of 16% AER, 5% CER to £1,111 million with continued momentum from Meningitis vaccines, notably Bexsero, across all regions.  Growth also benefited from the performance of Established Vaccines, which were driven by higher demand, particularly for Boostrix and Hepatitis, partly offset by the reversal of phasing benefits from Q1, and an increased returns provision for Rotarix, as well as increasing competitive pressures on Infanrix, Pediarix in the US and Europe.  Favourable year-on-year CDC purchases and stockpile movements in the US also contributed to growth.

 

Meningitis

Meningitis sales grew 32% AER, 20% CER to £200 million with Bexsero sales up 43% AER, 31% CER.  The Bexsero growth was primarily driven by private market sales, regional tenders, and new national immunisation programmes in Europe.  Growth also benefited from strong demand and continued share gains in the US, together with private market sales in International.  Menveo grew 19% AER, 6% CER due to strong demand mainly in the US, partly offset by supply constraints in International.

 

Influenza

Fluarix/FluLaval sales grew 24% AER, 6% CER to £21 million, mainly driven by rebate adjustments in Europe.

 

Established Vaccines

Sales of the DTPa-containing vaccines (Infanrix, Pediarix and Boostrix) were up 30% AER, 19% CER to £306 million. Boostrix was up 56% AER, 42% CER, benefiting from favourable phasing in International and higher demand in International and Europe.  Infanrix, Pediarix sales grew 11% AER, 3% CER mainly driven by improved supply and favourable year-on-year US CDC stockpile movements.  This growth was partly offset by increased competitive pressure in the US and Europe as well as unfavourable tender phasing in Europe.

 

Hepatitis vaccines grew 19% AER, 10% CER to £155 million due to a competitor supply shortage and higher demand in the US, partly offset by the impact of supply constraints in Europe and International.

 

Synflorix sales were up 10% AER, down 1% CER to £151 million, reflecting the reversal of favourable phasing in Q1 and lower pricing in developing countries, partly offset by stronger demand in International.

 

Rotarix sales decreased by 12% AER, 20% CER to £95 million, driven by unfavourable phasing and an increased returns provision in International, partly offset by stronger demand in Europe and International.

 

Priorix/Priorix Tetra/Varilrix sales were flat at AER and down 8% CER to £79 million, mainly due to lower demand in Europe.

 

 

Consumer Healthcare

 




Q2 2017












£m


Growth

£%


Growth

CER%









Wellness

 

 

925

 

9

 

- 

Oral health

 

 

605

 

12

 

3 

Nutrition

 

 

165

 

3

 

(8)

Skin health


 

157

 

8

 

(1)









 

 

 

1,852

 

10

 

- 

 

 

 

 

 

 

 

 

US

 

 

430

 

-

 

(8)

Europe

 

 

579

 

16

 

7 

International


 

843

 

10

 

- 









 

 

 

1,852

 

10

 

- 









 

Consumer Healthcare sales were up 10% AER, and were flat CER in the quarter at £1,852 million against a slower market backdrop.  A strong performance by the power brands in Pain relief and therapeutic Oral health was offset by a weaker US allergy performance and softer consumption in key categories, particularly in International markets but also in the US.  In addition, growth was impacted by the disposal of the Nigeria beverages business in 2016 and retailer de-stocking in India ahead of the Goods & Service Tax (GST) implementation on 1 July.  Together, the divestment and GST reduced overall Consumer Healthcare CER growth by approximately two percentage points.

 

Sales from new GSK innovations (product introductions within the last three years on a rolling basis) represented approximately 12% of sales in the quarter.  Notable launches within the quarter included the next generation Sensodyne Rapid, Pronamel Strong & Bright and the continued global roll out of Flonase OTC.

 

Wellness

Wellness sales grew 9% AER, and were flat CER at £925 million.  This reflected a challenging quarter for Respiratory sales, which were up 4% AER but down 4% CER due to heightened competitive pressure for Flonase OTC from private label and new market entrants.  Otrivin grew in double-digits, benefiting from new variant launches in Turkey and Belgium, backed by strong marketing execution.

 

Pain relief performed well in the quarter, up 16% AER, 5% CER.  Panadol returned to growth following the annualisation of the removal of Panadol Osteo from the prescription reimbursement scheme in Australia.  Voltaren grew in double-digits, with strong growth across Europe and in Germany and Southern Europe in particular, driven principally by the 12-hour variant, strong in-store activation, broader digital programmes and expert detailing.

 

Oral health

Oral health sales grew 12% AER, 3% CER to £605 million.  Sensodyne continued to drive performance, reporting growth of 13% AER, 5% CER, with strong delivery in Europe and International following the roll out of next generation Sensodyne Rapid and the launch of Pronamel Strong & Bright, partly offset by retailer de-stocking in the US in a softer consumer environment.  Sales of parodontax grew strongly, particularly in Europe and International, driven by dentist recommendations and share gains, as well the Q1 launch of the brand in the US.  Denture care grew in low single digits, with double-digit growth in emerging markets partly offset by slower consumption growth in the US and Japan.

 

Nutrition

Nutrition sales grew 3% AER but declined 8% CER to £165 million, adversely impacted by the sale of the Nigerian beverages business in 2016 and de-stocking in India ahead of the implementation of GST on 1 July as well as continued competitive pressures for Horlicks in India.  The divestment and GST reduced Nutrition CER growth by approximately 11 percentage points.

 

Skin health

Skin health sales grew 8% AER but declined 1% CER to £157 million with a good overall performance in Europe offset by a challenging quarter in the US and International.  Fenistil recorded double-digit growth, with strong seasonal sales in Europe and the Middle East.  The US consumer slowdown led to retailer de-stocking which impacted sales of Lamisil and Lip care.  Physiogel reported a strong quarter with distribution gains in Germany and new variant launches more than offsetting continued competitive pressure in Korea.

 

 

Turnover - H1 2017

 

Pharmaceuticals

 


H1 2017








£m


Growth

£%


Growth

CER%







Respiratory

3,484

 

16

 

4 

HIV

2,101

 

32

 

18 

Immuno-inflammation

185

 

29

 

15 

Established Pharmaceuticals

2,776

 

2

 

(6)







 

8,546

 

14

 

4 

 

 

 

 

 

 

US

3,705

 

22

 

9 

Europe

2,001

 

7

 

(3)

International

2,840

 

12

 

2 







 

8,546

 

14

 

4 







 

Pharmaceuticals turnover in the 6 months was £8,546 million, up 14% AER, 4% CER.  Respiratory sales grew 16% AER, 4% CER to £3,484 million, driven by the Ellipta portfolio and Nucala, while HIV sales were up 32% AER, 18% CER to £2,101 million, driven by increases in market share for Triumeq and Tivicay.  Sales of Established Pharmaceuticals were up 2% AER, but declined 6% CER, reflecting the impact of recent divestments, which reduced overall Pharmaceuticals CER growth by one percentage point and also impacted the contribution from Emerging Markets.

 

In the US, sales growth of 22% AER, 9% CER was driven by the HIV portfolio and new Respiratory products.  Europe sales grew 7% AER but declined 3% CER reflecting continued generic competition to Seretide and the disposal of the Romanian distribution business in Q4 2016.  International sales growth was impacted by the benefit to Q1 2016 of the accelerated sale of inventory under supply agreements to Novartis as well as the disposal of the thrombosis and anaesthesia businesses to Aspen in Q1 2017, which reduced growth in Emerging Markets (including HIV) by two percentage points to 12% AER, 4% CER.  Sales in Japan grew 16% AER, 3% CER.

 

Respiratory

Total Respiratory portfolio sales were up 16% AER, 4% CER, with the US up 20% AER, 7% CER, Europe up 7% AER but down 2% CER and International up 17% AER, 5% CER.  Growth of the new Respiratory products more than offset the decline in Seretide/Advair.

 

The new Respiratory products recorded combined sales of £864 million in the 6 months with sales of Ellipta products up 87% AER, 67% CER driven by continued market share growth in all regions and the ongoing roll-out across Europe and International.  Sales of Nucala were £132 million, a Sterling increase of £105 million over H1 2016, including sales of £92 million in the US.

 

The aggregate growth of the Ellipta products was primarily driven by the contribution of the US, where sales were up 96% AER, 75% CER.  Total Relvar/Breo Ellipta sales grew 89% AER, 69% CER with the US more than doubling at AER and up 92% CER to £294 million.  Sales of Relvar/Breo Ellipta in Europe grew 57% AER, 43% CER, and in International 61% AER, 42% CER, helped by ongoing launches.  Anoro Ellipta sales grew 86% AER, 67% CER to £147 million, reflecting particularly market share gains in the US.  The Ellipta products Breo, Anoro and Incruse all continued to grow market share in the US during the 6 months.

 

Seretide/Advair sales declined 3% AER, 13% CER to £1,600 million.  Sales in the US declined 1% AER, 12% CER (8% volume decline and a 4% negative impact of price), with payer rebate adjustments favourably impacting growth in the six months.  In Europe, Seretide sales were down 12% AER, 19% CER to £388 million (10% volume decline and a 9% negative impact of price), reflecting continued competition from generics and the transition of the Respiratory portfolio to newer products.  In International, sales of Seretide grew 2% AER but declined 8% CER to £397 million, also reflecting increased generic competition and the transition to the newer Respiratory products.

 

Ventolin sales grew 10% AER, but declined 1% CER to £393 million, primarily reflecting unfavourable RAR adjustments in the US.  Flixotide/ Flovent sales were up 7% AER, but decreased 3% CER to £309 million, with growth in International only partly offsetting the decline in the US.

 

The overall impact on growth of payer rebate adjustments related to prior periods across the US Respiratory portfolio was broadly neutral.

 

HIV

HIV sales increased 32% AER, 18% CER to £2,101 million in the period, with the US up 39% AER, 24% CER, Europe up 13% AER, 2% CER and International up 43% AER, 27% CER.  The growth in all three regions was driven by the continued increase in market share for Triumeq and Tivicay, offset by the impact of generic competition to Epzicom/Kivexa, particularly affecting the European market.  The ongoing increase in patient numbers for both Triumeq and Tivicay resulted in sales of £1,187 million and £641 million, respectively, in the 6 months.

 

Epzicom/Kivexa sales declined 55% AER, 59% CER to £141 million, reflecting the continued increase in generic competition since Q3 2016. 

 

Immuno-inflammation

Benlysta sales grew 29% AER, 15% CER to £184 million, driven by a strong US performance.

 

Established Pharmaceuticals

Sales of Established Pharmaceuticals in the 6 months were £2,776 million, up 2% AER, but down 6% CER, impacted by the accelerated sale of inventory under supply agreements to Novartis in Q1 2016 as well as the disposal of the thrombosis and anaesthesia businesses to Aspen in Q1 2017 and the disposal of the Romanian distribution business in Q4 2016.  The impact of these disposals on the growth of the Established Pharmaceuticals portfolio was approximately four percentage points.

 

The Avodart franchise was up 3% AER, but declined 8% CER to £320 million primarily due to the loss of exclusivity in the US and the impact of favourable RAR adjustments in 2016.

 

Dermatology sales grew 22% AER, 11% CER to £224 million, through improved supply in Emerging Markets, while Augmentin sales grew 8% AER, 1% CER to £296 million.

 

 

Vaccines

 


H1 2017








£m


Growth

£%


Growth

CER%







Meningitis

391

 

49

 

33

Influenza

34

 

31

 

8

Established Vaccines

1,838

 

18

 

6







 

2,263

 

23

 

10

 

 

 

 

 

 

US

679

 

31

 

17

Europe

783

 

18

 

7

International

801

 

22

 

8







 

2,263

 

23

 

10







 

Vaccines turnover delivered strong growth of 23% AER, 10% CER to £2,263 million with continued momentum from Meningitis vaccines across all regions.  Growth also benefited from the performance of Established Vaccines, driven by higher demand, particularly Boostrix, Synflorix and Hepatitis, partly offset by increasing competitive pressures on Infanrix, Pediarix.  Favourable year-on-year CDC purchases and stockpile movements in the US also contributed to growth.

 

Meningitis

Meningitis sales grew 49% AER, 33% CER to £391 million.  Bexsero sales growth of 67% AER, 50% CER was primarily driven by private market sales, regional tenders, and new national immunisation programmes in Europe as well as growing demand and share gains in the US, together with continued progress in private market sales in International.  Menveo sales were up 25% AER, 11% CER driven by tenders awarded in International, partly offset by some supply constraints.

 

Influenza

Fluarix/FluLaval sales grew 31% AER, 8% CER to £34 million, mainly driven by rebate adjustments in Europe.

 

Established Vaccines

Sales of the DTPa-containing vaccines (Infanrix, Pediarix and Boostrix) were up 27% AER, 14% CER to £651 million.  Boostrix was up 42% AER, 27% CER, benefiting from higher demand and share gains in the US and phasing in International.  Higher demand in International and Europe also contributed to the growth.  Infanrix, Pediarix sales were up 19% AER, 7% CER, boosted by favourable year-on-year US CDC stockpile movements, which were partly offset by increasing competitive pressures in Europe and the US.

 

Hepatitis vaccines grew 21% AER, 9% CER to £322 million due to a competitor supply shortage and higher demand in the US, partly offset by the impact of supply constraints in Europe and International.

 

Synflorix sales were up 25% AER, 12% CER to £284 million due to stronger demand and favourable phasing in International.

 

 

Consumer Healthcare

 




H1 2017












£m


Growth

£%


Growth

CER%









Wellness

 

 

1,995

 

13

 

1 

Oral health

 

 

1,233

 

16

 

5 

Nutrition

 

 

347

 

3

 

(9)

Skin health


 

320

 

12

 

1 









Total

 

 

3,895

 

13

 

1 

 

 

 

 

 

 

 

 

US

 

 

957

 

10

 

(1)

Europe

 

 

1,177

 

14

 

4 

International


 

1,761

 

14

 

1 









 

 

 

3,895

 

13

 

1 









 

Consumer Healthcare sales were up 13% AER, 1% CER in the 6 months at £3,895 million, partly impacted by more challenging market conditions.  A strong performance of the power brands in Pain relief and therapeutic Oral health and good Cold & flu seasonal sales were offset by a weaker US allergy performance and slower consumption in key categories, particularly in International markets but also in the US.  In addition, growth was impacted by the disposal of the Nigeria beverages business in 2016 and retailer de-stocking in India ahead of the Goods & Service Tax (GST) implementation on 1 July.  The divestment and GST reduced overall Consumer Healthcare CER growth by approximately one percentage point.

 

Sales from new GSK innovations (product introductions within the last three years on a rolling basis) represented approximately 14% of sales in the period.  Notable launches this year included parodontax and Flonase Sensimist in the US, the continued global roll out of Flonase OTC and next generation Sensodyne Rapid.

 

Wellness

Wellness sales grew 13% AER, 1% CER to £1,995 million.  This reflected a strong performance from Voltaren and Cold & flu seasonal products partly offset by a weaker US allergy performance.  Respiratory sales were up 10% AER but down 1% CER as heightened competitive pressure in the US for Flonase OTC from private label and new market entrants offset strong growth on Theraflu and Otrivin, particularly in Europe.

 

Pain relief sales were up 15% AER, 3% CER, driven by a strong performance on Voltaren which saw growth across the regions, benefitting from momentum in the 12-hour variant, strong in-store and marketing activation and expansion of expert detailing.  Panadol returned to growth in Q2 following the annualisation of the removal of Panadol Osteo from the prescription reimbursement scheme in Australia.

 

Oral health

Oral health sales grew 16% AER, 5% CER to £1,233 million with Sensodyne continuing to drive performance, reporting growth of 19% AER, 8% CER, with strong delivery in all regions following the roll out of next generation Sensodyne Rapid and the launch of Pronamel Strong & Bright.  Sales of parodontax continued to grow strongly, reflecting double-digit performances in Europe and International, driven by dentist recommendations and share gains, as well the US launch in the first quarter.  Denture care grew in low single digits with double-digit growth in emerging markets partly offset by slower consumption growth in the US and Japan.

 

Nutrition

Nutrition sales grew 3% AER but declined 9% CER to £347 million, adversely impacted by the sale of the Nigeria beverages business in 2016 and de-stocking in India ahead of the implementation of GST on 1 July, as well as continued competitive pressures for Horlicks in India.  The divestment of the Nigeria beverages business and the de-stocking ahead of GST reduced Nutrition CER growth by approximately nine percentage points.

 

Skin health

Skin health sales grew 12% AER, 1% CER to £320 million with low single-digit growth in Europe and International partly offset by de-stocking in the US.  Fenistil sales grew in double digits, with strong performances in Central & Eastern Europe, Germany and the Middle East following digital activation and new media campaigns.  The slowdown in US consumption led to retailer de-stocking which impacted Lip care.  Physiogel sales were impacted by competitive pressure in Korea.

 

 

Sales from new Pharmaceuticals and Vaccine products

 

 

Q2 2017


H1 2017













 

£m

 

Growth

£%


Growth

CER%


£m

 

Growth

£%


Growth

CER%













Pharmaceuticals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Respiratory

 

 

 

 

 

 

 

 

 

 

 

Anoro Ellipta

85

 

85 

 

67 

 

147

 

86 

 

67 

Arnuity Ellipta

8

 

>100 

 

>100 

 

16

 

>100 

 

>100 

Incruse Ellipta

50

 

80 

 

65 

 

84

 

68 

 

52 

Nucala

73

 

>100 

 

>100 

 

132

 

>100 

 

>100 

Relvar/Breo Ellipta

281

 

92 

 

75 

 

485

 

89 

 

69 













CVMU

 

 

 

 

 

 

 

 

 

 

 

Eperzan/Tanzeum

23

 

(21)

 

(28)

 

51

 

(6)

 

(15)













HIV

 

 

 

 

 

 

 

 

 

 

 

Tivicay

340

 

51 

 

37 

 

641

 

55 

 

39 

Triumeq

648

 

58 

 

44 

 

1,187

 

61 

 

44 













 

1,508

 

67 

 

51 

 

2,743

 

69 

 

51 













Vaccines

 

 

 

 

 

 

 

 

 

 

 

Bexsero

139

 

43 

 

31 

 

265

 

67 

 

50 

Menveo

56

 

19 

 

6 

 

111

 

25 

 

11 













 

195

 

35 

 

23 

 

376

 

52 

 

36 













Total

1,703

 

62 

 

47 

 

3,119

 

67 

 

49 













 

In 2015, GSK identified a series of New Pharmaceutical and Vaccine products that were expected to deliver at least £6 billion of revenues per annum on a CER basis by 2020.  Those products, plus current pipeline asset, Shingrix, are as set out above.  The Group has decided to withdraw Tanzeum progressively, see page 20.

 

Sales of the New Pharmaceutical Vaccine products are now expected to reach £6 billion of revenues per annum on a CER basis in 2018.

 

Q2 2017

Sales of New Pharmaceutical and Vaccine products were £1,703 million, grew £653 million in Sterling terms (62% AER, 47% CER) and represented approximately 31% of Pharmaceuticals and Vaccines turnover in the quarter.

 

H1 2017

Sales of New Pharmaceutical and Vaccine products were £3,119 million, grew £1,248 million in Sterling terms (67% AER, 49% CER) and represented approximately 29% of Pharmaceuticals and Vaccines turnover in the half-year.

 

 

Financial performance - Q2 2017

 

Total results

 

The Total results for the Group are set out below.

 


Q2 2017

£m


Q2 2016

£m


Growth

£%


Growth

CER%









Turnover

7,320 

 

6,532 

 

12 

 

3 









Cost of sales

(2,619)

 

(2,124)

 

23 

 

16 









Gross profit

4,701 

 

4,408 

 

7 

 

(4)









Selling, general and administration

(2,379)

 

(2,174)

 

9 

 

- 

Research and development

(1,260)

 

(888)

 

42 

 

34 

Royalty income

98 

 

83 

 

18 

 

12 

Other operating income/(expense)

(1,180)

 

(1,580)

 

 

 

 









Operating loss

(20)

 

(151)

 

87 

 

(45)









Finance income

15 

 

18 

 

 

 

 

Finance expense

(192)

 

(183)

 

 

 

 

Profit on disposal of associates

20 

 

- 

 

 

 

 

Share of after tax losses of associates

   and joint ventures

(1)

 

(2)

 

 

 

 









Loss before taxation

(178)

 

(318)

 

44 

 

(18)









Taxation

92 

 

(174)

 

 

 

 

Tax rate %

51.7%

 

(54.7)%

 

 

 

 









Loss after taxation

(86)

 

(492)

 

83 

 

50 









Profit/(loss) attributable to non-controlling

   interests

94 

 

(57)

 

 

 

 

Loss attributable to shareholders

(180)

 

(435)

 

 

 

 









 

(86)

 

(492)

 

83 

 

50 









Loss per share

(3.7)p

 

(9.0)p

 

59 

 

29 









 

Cost of sales

Cost of sales as a percentage of turnover was 35.8%, up 3.3 percentage points in Sterling terms and up 4.3 percentage points in CER terms compared with Q2 2016.  This primarily reflected the phasing of costs of manufacturing restructuring programmes and £363 million of non-cash write downs of assets related to the decision to withdraw Tanzeum progressively, as well as continued adverse pricing pressure in Pharmaceuticals, primarily Respiratory, and continued supply chain investments.  This was partly offset by a more favourable product mix in Pharmaceuticals in the quarter, particularly the impact of higher HIV sales and the disposal of the distribution business in Romania.  There was also a benefit from a settlement for lost third party supply volume and a favourable year-on-year comparison to inventory adjustments in Q2 2016 in Vaccines, together with a further contribution from integration and restructuring savings in all three businesses.

 

Selling, general and administration

SG&A costs were 32.5% of turnover, 0.8 percentage points lower than in Q2 2016 in Sterling terms and 0.7 percentage points lower on a CER basis.  This primarily reflected lower restructuring costs as well as tight control of ongoing costs, particularly in Consumer Healthcare, continued cost reductions in Pharmaceuticals, including the benefits of the Pharmaceuticals restructuring programme, and integration benefits in Vaccines and Consumer Healthcare.  The cost reductions were partly offset by an increased investment in promotional product support, particularly for new launches in Respiratory, HIV and Vaccines.

 

Research and development

R&D expenditure was £1,260 million (17% of turnover), 42% higher than in Q2 2016 on a Sterling basis and 34% higher on a CER basis.  This reflected the impact of the previously announced Priority Review Voucher (£106 million) utilised and expensed on filing of the dolutegravir and rilpivirine two drug regimen as well as increased investment in the progression of a number of mid and late-stage programmes in HIV, respiratory and anaemia.  In addition, there were higher restructuring costs, primarily as a result of the provision for obligations as a result of the decision to withdraw Tanzeum progressively.

 

Royalty and other operating income/(expense)

Net other operating expense of £1,082 million (Q2 2016: £1,497 million expense) primarily reflected the £1,211 million net total of further accounting charges arising from the re-measurement of the contingent consideration liabilities related to the former Shionogi-ViiV Healthcare joint venture and the acquisition of the former Novartis Vaccines business, the value attributable to the Consumer Healthcare Joint Venture put option and the liabilities for the Pfizer put option and Pfizer and Shionogi preferential dividends in ViiV Healthcare.  These re-measurement charges were driven primarily by updated trading forecasts and changes in exchange rate assumptions and increased multiples on the Consumer Healthcare Joint Venture put option as well as the unwinding of the discount applied to these future liabilities.  This compares with £1,778 million of equivalent transaction-related charges in Q2 2016.  Royalty income was £98 million (Q2 2016: £83 million).

 

Operating loss

Total operating loss was £20 million in Q2 2017 compared with a £151 million loss in Q2 2016.  The reduction in operating loss reflected the reduced impact of accounting charges related to re-measurement of the liabilities for contingent consideration, put options and preferential dividends, together with an improved operating margin driven by strong sales growth, particularly in Vaccines, and a more favourable mix in the Pharmaceutical business, continued benefits from restructuring and integration and tight control of ongoing costs across all three businesses.  This was partly offset by continued price pressure, particularly in Respiratory, supply chain investments and increased restructuring costs and asset impairments, including a charge of £448 million in aggregate relating to the progressive withdrawal of Tanzeum.

 

Net finance costs

Net finance expense was £177 million compared with £165 million in Q2 2016, the increase reflecting the translation impact of exchange rate movements on the reported Sterling costs of foreign currency denominated interest-bearing instruments.

 

Taxation

A tax credit of £92 million on the Total loss represented an effective tax rate of 51.7% (Q2 2016: (54.7%)) and reflected the differing tax effects of the various adjusting items.

 

Non-controlling interests

The allocation of earnings to non-controlling interests amounted to £94 million (Q2 2016: £(57) million), including the non-controlling interest allocations of Consumer Healthcare profits of £57 million (Q2 2016: £44 million) and the allocation of ViiV Healthcare profits, which increased to £24 million (Q2 2016: £(77) million) including the impact of changes in the proportions of preferential dividends due to each shareholder.  The increase in allocation also reflected comparison with the reduction in the allocation to non-controlling interests due to higher net losses in some of the Group's other entities with non-controlling interests in Q2 2016.

 

Loss per share

The Total loss per share was 3.7p, compared with a loss per share of 9.0p in Q2 2016.  The reduced loss primarily reflected a reduced impact of charges arising from increases in the valuations of the liabilities for contingent consideration and the put options associated with increases in the Sterling value of the Group's HIV and Consumer Healthcare businesses, as well as improved performance and reduced restructuring costs, partly offset by the impact of the Priority Review Voucher in the quarter.

 

 

Adjusting items

 

GSK presents Total results and Adjusted results in order to assist shareholders in better understanding the Group's operational performance.

 

Total results represent the Group's overall performance.  However, these results can contain material unusual or non-operational items that may obscure the key trends and factors determining the Group's operational performance.  GSK therefore also reports Adjusted results to help shareholders identify and assess more clearly the key drivers of the Group's performance.  This approach aligns the presentation of the Group's results more closely with the majority of GSK's peer group.

 

From Q1 2017, Adjusted results have been amended to exclude, instead of all legal charges, only significant legal charges, as set out in 'Accounting policies and basis of preparation' on page 51.  Comparative information has been revised accordingly.

 

Adjusted results exclude the following items from Total results: amortisation and impairments of intangible assets and goodwill; major restructuring costs; significant legal charges and expenses; transaction-related accounting adjustments; disposals and other operating income other than royalty income, together with the tax effects of all of these items.

 

The adjusting items that reconcile Total operating profit, profit after tax and earnings per share to Adjusted results are as follows:

 


Q2 2017


Q2 2016

(revised)














Operating

(loss)/

profit

£m


(Loss)/

profit

after tax

£m


(Loss)/

earnings

per

share

p


Operating

(loss)/

profit

£m


(Loss)/

profit

after tax

£m


(Loss)/

earnings

per

share

p













Total results

(20)

 

(86)

 

(3.7)

 

(151)

 

(492)

 

(9.0)

 

 

 

 

 

 

 

 

 

 

 

 

   Intangible asset amortisation

153 

 

117 

 

2.4 

 

135 

 

105 

 

2.2 

   Intangible asset impairment

295 

 

198 

 

4.1 

 

- 

 

- 

 

- 

   Major restructuring costs

440 

 

290 

 

5.9 

 

234 

 

179 

 

3.7 

   Transaction-related items

1,226 

 

1,128 

 

21.5 

 

1,798 

 

1,629 

 

29.9 

   Divestments, significant legal

   and other items

(11)

 

(146)

 

(3.0)

 

(194)

 

(117)

 

(2.5)













   Adjusting items

2,103 

 

1,587 

 

30.9 

 

1,973 

 

1,796 

 

33.3 













Adjusted results

2,083 

 

1,501 

 

27.2 

 

1,822 

 

1,304 

 

24.3 













 

Full reconciliations between Total results and Adjusted results are set out on pages 62 to 65 and the definition of Adjusted results is set out on page 36.

 

Intangible asset amortisation and impairment

Intangible asset amortisation was £153 million, compared with £135 million in Q2 2016.  Intangible asset impairments of £295 million (Q2 2016: £nil) included an impairment of £229 million related to the progressive withdrawal of Tanzeum as a result of the new business priorities for the Group and other impairments to a number of commercial assets.  Both of these charges were non-cash items.

 

Major restructuring and integration

Major restructuring and integration charges incurred in the quarter were £440 million (Q2 2016: £234 million), primarily reflecting £134 million of non-cash charges for the write down of assets and a £71 million provision for future R&D obligations as a result of the decision to withdraw Tanzeum.  Cash charges were £163 million in the quarter.  The Group will cease manufacturing, complete clinical studies as agreed with regulators and work with healthcare professionals to transition patients to alternative treatments.  Cash payments made in the quarter were £119 million (Q2 2016: £333 million) including the settlement of certain charges accrued in previous quarters.  The programme delivered incremental cost savings in the quarter of £0.1 billion.

 

Transaction-related adjustments

Transaction-related adjustments resulted in a net charge of £1,226 million (Q2 2016: £1,798 million).  This primarily reflected accounting charges for the re-measurement of the liability and the unwinding of the discounting effects on the contingent consideration related to the acquisition of the former Shionogi-ViiV Healthcare joint venture, the contingent consideration related to the acquisition of the former Novartis Vaccines business, and the value attributable to the Consumer Healthcare Joint Venture put option held by Novartis.

 

Charge/(credit)

Q2 2017

£m

 

Q2 2016

£m





Consumer Healthcare Joint Venture put option

730

 

594

Contingent consideration on former Shionogi-ViiV Healthcare Joint Venture

   (including Shionogi preferential dividends)

298

 

850

ViiV Healthcare put options and Pfizer preferential dividends

66

 

316

Contingent consideration on former Novartis Vaccines business

116

 

13

Other adjustments

16

 

25





Total transaction-related charges

1,226

 

1,798





 

The aggregate impact of unwinding the discount on these future and potential liabilities was £242 million (Q2 2016: £212 million), including £128 million on the Consumer Healthcare Joint Venture put option and £100 million on the contingent consideration related to the former Shionogi-ViiV Healthcare Joint Venture.  The remaining charge of £984 million was driven by adjustments to trading forecasts and the impact of updated exchange rate assumptions on those forecasts for the relevant businesses as well as changes to the multiples used in the valuation of the Consumer Healthcare Joint Venture put option.

 

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 £143 million (Q2 2016: £79 million).  This included cash payments made by ViiV Healthcare to Shionogi in relation to its contingent consideration liability (including preferential dividends) which amounted to £140 million (Q2 2016: £70 million).

 

An explanation of the accounting for the non-controlling interests in ViiV Healthcare is set out on page 60.

 

Divestments, significant legal charges and other items

Divestments and other items included the profit on disposal of a number of other asset disposals, equity investment impairments and certain other adjusting items.  Significant legal charges of £6 million (Q2 2016: £13 million) included the benefit of the settlement of existing matters as well as provisions for ongoing litigation.  Significant legal cash payments were £42 million (Q2 2016: £6 million).  

 

 

Adjusted results

 


Q2 2017










£m


% of

turnover


Growth

£%


Growth

CER%









Turnover

7,320 

 

100 

 

12 

 

3 

 

 

 

 

 

 

 

 

Cost of sales

(1,988)

 

(27.2)

 

3 

 

(2)

Selling, general and administration

(2,294)

 

(31.3)

 

11 

 

2 

Research and development

(1,053)

 

(14.4)

 

32 

 

24 

Royalty income

98 

 

1.4 

 

18 

 

12 









Adjusted operating profit

2,083 

 

28.5 

 

14 

 

- 









Adjusted profit before tax

1,906 

 


 

15 

 

- 

Adjusted profit after tax

1,501 

 


 

15 

 

- 

Adjusted profit attributable to shareholders

1,327 

 


 

12 

 

(2)









Adjusted earnings per share

27.2p

 

 

 

12 

 

(2)









 

Adjusted operating profit by business

Q2 2017










£m


% of

turnover


Growth

£%


Growth

CER%









Pharmaceuticals

2,152 

 

49.4 

 

11 

 

- 

Pharmaceuticals R&D

(688)

 


 

18 

 

11 









Total Pharmaceuticals

1,464 

 

33.6 

 

8 

 

(5)

Vaccines

374 

 

33.7 

 

42 

 

30 

Consumer Healthcare

328 

 

17.7 

 

38 

 

16 









 

2,166 

 

29.6 

 

17 

 

3 

Corporate & other unallocated costs

(83)

 


 

>100 

 

>100 









Adjusted operating profit

2,083 

 

28.5 

 

14 

 

- 









 

Adjusted operating profit

Adjusted operating profit was £2,083 million, 14% AER higher than in Q2 2016 and flat in CER terms on a turnover increase of 3%.  The Adjusted operating margin of 28.5% was 0.6 percentage points higher than in Q2 2016 and 0.6 percentage points lower on a CER basis.  This primarily reflected the impact of the Priority Review Voucher (£106 million) as well as an overall increase in R&D investment, continuing price pressure, particularly in Respiratory, and supply chain investments.  This was partly offset by improved operating leverage, driven by sales growth in Pharmaceuticals and Vaccines and a more favourable mix in all three businesses, the benefit of a settlement for lost third party supply volume and a favourable year-on-year comparison with inventory adjustments in Q2 2016 in Vaccines, as well as continued tight control of ongoing costs across all three businesses and benefits from restructuring and integration.

 

Cost of sales

Cost of sales as a percentage of turnover was 27.2%, down 2.4 percentage points in Sterling terms and down 1.5 percentage points in CER terms compared with Q2 2016.  This reflected a more favourable product mix in Pharmaceuticals in the quarter, particularly the impact of higher HIV sales and the disposal of the distribution business in Romania, as well as in Vaccines the benefit of a settlement for lost third party supply volume in Q2 2017 and a favourable year-on-year comparison with inventory adjustments in Q2 2016.  There was also a further contribution from integration and restructuring savings in all three businesses, offset by continued adverse pricing pressure in Pharmaceuticals, primarily Respiratory, and additional supply chain investments.

 

Selling, general and administration

SG&A costs were 31.3% of turnover, 0.2 percentage points lower in Sterling terms than in Q2 2016 and 0.2 percentage points lower on a CER basis.  This primarily reflected tight control of ongoing costs, particularly in Consumer Healthcare, continued cost reductions in Pharmaceuticals, including the benefits of the Pharmaceuticals restructuring programme, and integration benefits in Vaccines and Consumer Healthcare.  This was partly offset by an increased investment in promotional product support, particularly for new launches in Respiratory, HIV and Vaccines.

 

Research and development

R&D expenditure was £1,053 million (14.4% of turnover), 32% AER higher than Q2 2016 and 24% higher in CER terms than Q2 2016, primarily reflecting the impact of the previously announced Priority Review Voucher as well as increased investment in the progression of a number of mid and late-stage programmes in HIV, respiratory and anaemia.

 

Royalty income

Royalty income was £98 million (Q2 2016: £83 million).

 

Operating profit by business

Pharmaceuticals operating profit was £1,464 million, 8% AER higher than in Q2 2016 but 5% lower in CER terms on a turnover increase of 3% CER.  The operating margin of 33.6% was 1.2 percentage points lower than in Q2 2016 on a Sterling basis and 2.8 percentage points lower on a CER basis.  This primarily reflected increased R&D investment including the impact of the Priority Review Voucher.  The Adjusted operating margin also reflected a more favourable product mix, primarily driven by the growth in HIV sales, as well as the continued cost reduction benefit of the Group's Pharmaceuticals restructuring programme, offset by increased investment in new product support and the continued impact of lower prices, particularly in Respiratory, and the broader transition of the Respiratory portfolio.

 

Vaccines operating profit was £374 million, 42% AER higher than in Q2 2016 and 30% higher in CER terms on a turnover increase of 5% CER.  The operating margin of 33.7% was 6.2 percentage points higher than in Q2 2016 on a Sterling basis and 6.4 percentage points higher on a CER basis.  This was primarily driven by improved product mix, the benefit of a settlement for lost third party supply volume and a favourable year-on-year comparison with inventory adjustments in Q2 2016, together with continued restructuring and integration benefits in SG&A and R&D.  This was partly offset by increased SG&A investment to support business growth and increased supply chain investments.

 

Consumer Healthcare core operating profit was £328 million, 38% AER higher than in Q2 2016 and 16% higher in CER terms on flat turnover.  The operating margin of 17.7% was 3.6 percentage points higher than in Q2 2016 on a Sterling basis and 2.2 percentage points higher on a CER basis, reflecting an improvement in gross margin, including benefits from pricing, integration synergies (principally in SG&A), earlier phasing of promotional expenditure to Q1 2017 and later phasing of R&D expenditure.

 

Net finance costs

Net finance expense was £176 million compared with £163 million in Q2 2016, the increase reflecting the translation impact of exchange rate movements on the reported Sterling costs of foreign currency denominated interest-bearing instruments.

 

Taxation

Tax on Adjusted profit amounted to £405 million and represented an effective Adjusted tax rate of 21.2% (Q2 2016: 21.3%).  See 'Taxation' on page 50 for further details.

 

Non-controlling interests

The allocation of Adjusted earnings to non-controlling interests amounted to £174 million (Q2 2016: £121 million), including the non-controlling interest allocations of Consumer Healthcare profits of £80 million (Q2 2016: £67 million) and the allocation of ViiV Healthcare profits, of £81 million (Q2 2016: £79 million) including the impact of changes in the proportions of preferential dividends due to each shareholder based on the relative performance of different products in the quarter, as well as the non-controlling interest allocation of the Priority Review Voucher expensed in Q2 2017.  The increase in allocation also reflected comparison with the reduction in the allocation to non-controlling interests due to higher net losses in some of the Group's other entities with non-controlling interests in Q2 2016.

 

Earnings per share

Adjusted EPS of 27.2p was up 12% AER, but down 2% CER, compared with flat Adjusted operating profit at CER.

 

 

Financial performance - H1 2017

 

The Total results for the Group are set out below.

 


H1 2017

£m


H1 2016

£m


Growth

£%


Growth

CER%









Turnover

14,704 

 

12,761 

 

15 

 

4 









Cost of sales

(5,132)

 

(4,257)

 

21 

 

12 









Gross profit

9,572 

 

8,504 

 

13 

 

- 









Selling, general and administration

(4,831)

 

(4,363)

 

11 

 

- 

Research and development

(2,220)

 

(1,703)

 

30 

 

21 

Royalty income

180 

 

174 

 

3 

 

(2)

Other operating income/(expense)

(1,003)

 

(2,040)

 

 

 

 









Operating profit

1,698 

 

572 

 

>100 

 

>100 









Finance income

36 

 

36 

 

 

 

 

Finance expense

(386)

 

(364)

 

 

 

 

Profit on disposal of associates

20 

 

- 

 

 

 

 

Share of after tax profits/(losses) of associates

   and joint ventures

 

(2)

 

 

 

 









Profit before taxation

1,372 

 

242 

 

>100 

 

>100 









Taxation

(235)

 

(382)

 

 

 

 

Tax rate %

17.1%

 

>100%

 

 

 

 









Profit/(loss) after taxation

1,137 

 

(140)

 

>100 

 

>100 









Profit attributable to non-controlling interests

271 

 

13 

 

 

 

 

Profit/(loss) attributable to shareholders

866 

 

(153)

 

 

 

 









 

1,137 

 

(140)

 

>100 

 

>100 









Earnings/(loss) per share

17.7p

 

(3.2)p

 

>100 

 

>100 









 

Cost of sales

Cost of sales as a percentage of turnover was 34.9%, up 1.5 percentage points in Sterling terms and up 2.7 percentage points in CER terms compared with H1 2016.  This primarily reflected the phasing of costs of manufacturing restructuring programmes and the write down of assets related to the progressive withdrawal of Tanzeum, as well as continued adverse pricing pressure in Pharmaceuticals, primarily Respiratory, and continued supply chain investments.  This was partly offset by a more favourable product mix in Pharmaceuticals, particularly the impact of higher HIV sales and the disposal of the distribution business in Romania, as well as in Vaccines the benefit of a settlement for lost third party supply volume and a favourable year-on-year comparison to inventory adjustments in H1 2016 and a continued contribution from integration and restructuring savings in all three businesses.

 

Selling, general and administration

SG&A costs were 32.9% of turnover, 1.3 percentage points lower than in H1 2016 in Sterling terms and 1.3 percentage points lower on a CER basis.  This primarily reflected lower restructuring costs and tight control of ongoing costs, particularly in Consumer Healthcare, as well as continued cost reductions in Pharmaceuticals, including the benefits of the Pharmaceuticals restructuring programme, and integration benefits in Vaccines and Consumer Healthcare.  This was partly offset by an increased investment in promotional product support, particularly for new launches in Respiratory, HIV and Vaccines.

 

Research and development

R&D expenditure was £2,220 million (15% of turnover), 30% higher than in H1 2016 on a Sterling basis and 21% higher on a CER basis.  This reflected the impact of the Priority Review Voucher as well as increased investment in the progression of a number of mid and late-stage programmes in HIV, respiratory and anaemia.  In addition, there were higher restructuring costs, primarily as a result of the provision for future clinical obligations as a result of the progressive withdrawal of Tanzeum.

 

Royalty and other operating income/(expense)

Net other operating expense of £823 million (H1 2016: £1,866 million expense) primarily reflected the £1,281 million net total of further accounting charges arising from the re-measurement of the contingent consideration liabilities related to the former Shionogi-ViiV Healthcare joint venture and the acquisition of the former Novartis Vaccines business, the value attributable to the Consumer Healthcare Joint Venture put option and the liabilities for the Pfizer put option and Pfizer and Shionogi preferential dividends in ViiV Healthcare.  These re-measurement charges were driven primarily by updated trading forecasts and changes in exchange rate assumptions as well as the unwinding of the discount applied to these future liabilities.  This compares with £2,267 million of equivalent transaction-related charges in H1 2016.  These charges were partly offset by the gain of £247 million on disposal of the anaesthesia business to Aspen and royalty income of £180 million (H1 2016: £174 million).

 

Operating profit

Total operating profit was £1,698 million in H1 2017 compared with £572 million in H1 2016.  Operating profit benefited from improved operating leverage driven by sales growth across all three businesses, but particularly Vaccines, and a more favourable mix in all three businesses.  There was also a favourable year-on-year comparison with inventory adjustments in H1 2016 and the benefit of a one-off settlement in cost of sales in Vaccines as well as continued tight control of ongoing costs across all three businesses and benefits from restructuring and integration.  This was offset by the impact of the Priority Review Voucher, as well as an overall increase in R&D investment, continuing price pressure, particularly in Respiratory, and supply chain investments.  In addition, H1 2017 reflected the gain on the disposal of the anaesthesia business and a reduced impact from accounting charges related to re-measurement of the liabilities for contingent consideration, put options and preferential dividends.

 

Net finance costs

Net finance expense was £350 million compared with £328 million in H1 2016, the increase reflecting the translation impact of exchange rate movements on the reported Sterling costs of foreign currency denominated interest-bearing instruments.

 

Taxation

A tax charge of £235 million on Total profit represented an effective tax rate of 17.1% (H1 2016: >100%) and reflected the differing tax effects of the various adjusting items, including restructuring charges.

 

Non-controlling interests

The allocation of earnings to non-controlling interests amounted to £271 million (H1 2016: £13 million), including the non-controlling interest allocations of Consumer Healthcare profits of £120 million (H1 2016: £55 million) and the allocation of ViiV Healthcare profits, which increased to £126 million (H1 2016: £(53) million) including the impact of changes in the proportions of preferential dividends due to each shareholder.  The increase in allocation also reflected comparison with the reduction in the allocation to non-controlling interests due to higher net losses in some of the Group's other entities with non-controlling interests in H1 2016.

 

Earnings per share

The Total earnings per share was 17.7p, compared with a loss per share of 3.2p in H1 2016.  The increase primarily reflected a reduced impact of charges arising from increases in the valuations of the liabilities for contingent consideration and the put options associated with increases in the Sterling value of the Group's HIV and Consumer Healthcare businesses, as well as improved performance and the benefit of the disposal of the anaesthesia business to Aspen.

 

 

Adjusting items

 


H1 2017


H1 2016

(revised)














Operating

profit

£m


Profit

after tax

£m


EPS

p


Operating

profit

£m


Profit

after tax

£m


EPS

p













Total results

1,698 

 

1,137 

 

17.7 

 

572 

 

(140)

 

(3.2)

 

 

 

 

 

 

 

 

 

 

 

 

   Intangible asset amortisation

295 

 

228 

 

4.7 

 

279 

 

220 

 

4.6 

   Intangible asset impairment

339 

 

229 

 

4.7 

 

- 

 

- 

 

- 

   Major restructuring costs

606 

 

419 

 

8.6 

 

422 

 

340 

 

7.0 

   Transaction-related items

1,318 

 

1,194 

 

22.4 

 

2,258 

 

2,042 

 

36.8 

   Divestments, significant legal

   and other items

(194)

 

(290)

 

(6.0)

 

(185)

 

(85)

 

(1.7)













   Adjusting items

2,364 

 

1,780 

 

34.4 

 

2,774 

 

2,517 

 

46.7 













Adjusted results

4,062 

 

2,917 

 

52.1 

 

3,346 

 

2,377 

 

43.5 













 

Full reconciliations between Total results and Adjusted results are set out on pages 62 to 65 and the definition of Adjusted results is set out on page 36.

 

Intangible asset and amortisation and impairment

Intangible asset amortisation was £295 million, compared with £279 million in H1 2016.  Intangible asset impairments of £339 million (H1 2016: £nil) included impairments related to the progressive withdrawal of Tanzeum and a number of commercial assets.  Both of these charges were non-cash items.

 

Major restructuring and integration

Major restructuring and integration charges incurred in the 6 months were £606 million (H1 2016: £422 million), reflecting increased non-cash charges for the write down of assets as well as provisions for R&D obligations as a result of the decision to withdraw Tanzeum progressively arising from the establishment of the Group's new business priorities.  Cash payments made were £332 million (H1 2016: £600 million) including the settlement of certain charges accrued in previous quarters.

 

Charges for the combined restructuring and integration programme to date are £4.3 billion, of which cash charges are £3.2 billion, including £163 million in the quarter.  Cash payments of £2.9 billion have been made to date.  Non-cash charges are £1.1 billion, including £277 million in the quarter.

 

An extension to the existing combined programme has been agreed by the Board, with total cash charges of the combined programme now expected to be approximately £4.1 billion and non-cash charges up to £1.6 billion.  The programme has now delivered approximately £3.4 billion of annual savings on a moving annual total basis, including a currency benefit of £0.3 billion.  The extended programme is now expected to deliver by 2020 total annual savings of £4.0 billion on a constant currency basis, together with an estimated £0.4 billion of currency benefits.  In 2017, approximately £600 million of cash charges are expected in addition to the settlement of cash charges accrued at the end of 2016, along with some non-cash charges.

 

Transaction-related adjustments

Transaction-related adjustments resulted in a net charge of £1,318 million (H1 2016: £2,258 million).  This primarily reflected accounting charges for the re-measurement of the liability and the unwinding of the discounting effects on the contingent consideration related to the acquisition of the former Shionogi-ViiV Healthcare joint venture, the contingent consideration related to the acquisition of the former Novartis Vaccines business, and the value attributable to the Consumer Healthcare Joint Venture put option held by Novartis.

 

Charge/(credit)

H1 2017

£m

 

H1 2016

£m





Consumer Healthcare Joint Venture put option

851 

 

854 

Contingent consideration on former Shionogi-ViiV Healthcare Joint Venture

   (including Shionogi preferential dividends)

346 

 

1,062 

ViiV Healthcare put options and Pfizer preferential dividends

(48)

 

320 

Contingent consideration on former Novartis Vaccines business

131 

 

26 

Other adjustments

38 

 

(4)





Total transaction-related charges

1,318 

 

2,258 





 

The aggregate impact of unwinding the discount on these future and potential liabilities was £474 million (H1 2016: £409 million), including £253 million on the Consumer Healthcare Joint Venture put option and £199 million on the contingent consideration related to the former Shionogi-ViiV Healthcare Joint Venture.  The remaining charge of £844 million was driven by adjustments to trading forecasts and the impact of updated exchange rate assumptions on those forecasts for the relevant businesses as well as changes to the multiples used in the valuation of the Consumer Healthcare Joint Venture put option.

 

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 6 months amounted to £303 million (H1 2016: £168 million).  This included cash payments made by ViiV Healthcare to Shionogi in relation to its contingent consideration liability (including preferential dividends) which amounted to £299 million (H1 2016: £159 million).

 

An explanation of the accounting for the non-controlling interests in ViiV Healthcare is set out on page 60.

 

Divestments, significant legal charges and other items

Divestments and other items included the profit on disposal of the anaesthesia business to Aspen of £247 million, a number of other asset disposals, equity investment impairments and certain other adjusting items.  Significant legal charges of £61 million (H1 2016: £4 million) included the benefit of the settlement of existing matters as well as provisions for ongoing litigation.  Significant legal cash payments were £47 million (H1 2016: £54 million).  

 

 

Adjusted results

 


H1 2017










£m


% of

turnover


Growth

£%


Growth

CER%









Turnover

14,704 

 

100 

 

15 

 

4 

 

 

 

 

 

 

 

 

Cost of sales

(4,209)

 

(28.6)

 

9 

 

1 

Selling, general and administration

(4,641)

 

(31.6)

 

12 

 

1 

Research and development

(1,972)

 

(13.4)

 

25 

 

16 

Royalty income

180 

 

1.2 

 

3 

 

(2)









Adjusted operating profit

4,062 

 

27.6 

 

21 

 

4 









Adjusted profit before tax

3,721 

 


 

23 

 

5 

Adjusted profit after tax

2,917 

 


 

23 

 

5 

Adjusted profit attributable to shareholders

2,544 

 


 

21 

 

3 









Adjusted earnings per share

52.1p

 

 

 

20 

 

3 









 

Adjusted operating profit by business

H1 2017










£m


% of

turnover


Growth

£%


Growth

CER%









Pharmaceuticals

4,270 

 

50.0 

 

18 

 

4 

Pharmaceuticals R&D

(1,366)

 


 

21 

 

12 









Total Pharmaceuticals

2,904 

 

34.0 

 

16 

 

- 

Vaccines

715 

 

31.6 

 

40 

 

26 

Consumer Healthcare

679 

 

17.4 

 

26 

 

6 









 

4,298 

 

29.2 

 

21 

 

5 

Corporate & other unallocated costs

(236)

 


 

19 

 

5 









Adjusted operating profit

4,062 

 

27.6 

 

21 

 

4 









 

Adjusted operating profit

Adjusted operating profit was £4,062 million, 21% AER higher than in H1 2016 and 4% higher in CER terms on a turnover increase of 4%.  The Adjusted operating margin of 27.6% was 1.4 percentage points higher than in H1 2016 and 0.2 percentage points higher on a CER basis.  This reflected improved operating leverage driven by sales growth across all three businesses, but particularly Vaccines, and a more favourable mix in all three businesses, together with the benefit of a settlement for lost third party supply volume and a favourable year-on-year comparison to inventory adjustments in Q2 2016 in Vaccines, continued tight control of ongoing costs across all three businesses and benefits from restructuring and integration.  This was offset by the impact of the Priority Review Voucher as well as increased R&D investment, continuing price pressure, particularly in Respiratory, and supply chain investments.

 

Cost of sales

Cost of sales as a percentage of turnover was 28.6%, down 1.7 percentage points in Sterling terms and down 0.7 percentage points in CER terms compared with H1 2016.  This reflected a more favourable product mix in Pharmaceuticals, particularly the impact of higher HIV sales and the disposal of the distribution business in Romania, as well as the benefit of a settlement for lost third party supply volume and a favourable year-on-year comparison to inventory adjustments in H1 2016 in Vaccines.  There was also a further contribution from integration and restructuring savings in all three businesses, offset by continued adverse pricing pressure in Pharmaceuticals, primarily Respiratory, and additional supply chain investments.

 

Selling, general and administration

SG&A costs were 31.6% of turnover, 0.9 percentage points lower in Sterling terms than in H1 2016 and 0.9 percentage points lower on a CER basis.  This primarily reflected tight control of ongoing costs, particularly in Consumer Healthcare, continued cost reductions in Pharmaceuticals, including the benefits of the Pharmaceuticals restructuring programme, and integration benefits in Vaccines and Consumer Healthcare.  This was partly offset by an increased investment in promotional product support, particularly for new launches in Respiratory, HIV and Vaccines.

 

Research and development

R&D expenditure was £1,972 million (13.4% of turnover), 25% AER higher than H1 2016 and 16% higher in CER terms, reflecting the impact of the Priority Review Voucher as well as increased investment in the progression of a number of mid and late-stage programmes in HIV, respiratory and anaemia and the costs of the BMS HIV programmes acquired in February 2016.

 

Royalty income

Royalty income was £180 million (H1 2016: £174 million).

 

Operating profit by business

Pharmaceuticals operating profit was £2,904 million, 16% AER higher than in H1 2016 and flat in CER terms on a turnover increase of 4% CER.  The operating margin of 34.0% was 0.6 percentage points higher than in H1 2016 on a Sterling basis but 1.2 percentage points down on a CER basis.  This primarily reflected increased R&D investment including the impact of the Priority Review Voucher.  The operating margin also reflected a more favourable product mix, primarily driven by the growth in HIV sales, and the continued cost reduction benefit of the Group's Pharmaceuticals restructuring programme, offset by increased investment in new product support and R&D, as well as the continued impact of lower prices, particularly in Respiratory, and the broader transition of the Respiratory portfolio.

 

Vaccines operating profit was £715 million, 40% AER higher than in H1 2016 and 26% higher in CER terms on a turnover increase of 10% CER.  The operating margin of 31.6% was 3.9 percentage points higher than in H1 2016 on a Sterling basis and 3.9 percentage points higher on a CER basis.  This was primarily driven by enhanced operating leverage from the strong sales growth, the benefit of a settlement for lost third party supply volume and a favourable year-on-year comparison with inventory adjustments in H1 2016, together with continued restructuring and integration benefits.  This was partly offset by increased SG&A resources to support business growth, increased supply chain costs and lower royalty income.

 

Consumer Healthcare operating profit was £679 million, 26% AER higher than in H1 2016 and 6% higher in CER terms on a turnover increase of 1%.  The operating margin of 17.4% was 1.7 percentage points higher than in H1 2016 and 0.7 percentage points higher on a CER basis, reflecting tight control of costs, integration synergies, principally in SG&A, and the later phasing of R&D expenditure, partly offset by increased investment in power brands.

 

Net finance costs

Net finance expense was £345 million compared with £322 million in H1 2016, the increase reflecting the translation impact of exchange rate movements on the reported Sterling costs of foreign currency denominated interest-bearing instruments.

 

Taxation

Tax on Adjusted profit amounted to £804 million and represented an effective Adjusted tax rate of 21.6% (H1 2016: 21.3%).  The increase in the effective rate reflected the Group's changing earnings mix.  See 'Taxation' on page 50 for further details.

 

Non-controlling interests

The allocation of Adjusted earnings to non-controlling interests amounted to £373 million (H1 2016: £268 million), including the non-controlling interest allocations of Consumer Healthcare profits of £154 million (H1 2016: £112 million) and the allocation of ViiV Healthcare profits, which increased to £194 million (H1 2016: £145 million) including the impact of changes in the proportions of preferential dividends due to each shareholder.  The increase in allocation also reflected comparison with the reduction in the allocation to non-controlling interests due to higher net losses in some of the Group's other entities with non-controlling interests in H1 2016.

 

Earnings per share

Adjusted EPS of 52.1p was up 20% AER, 3% CER compared with a 4% CER increase in Adjusted operating profit.

 

Currency impact on Q2 2017 and H1 2017 results

The Q2 2017 results are based on average exchange rates, principally £1/$1.29, £1/€1.15 and £1/Yen 143.  Comparative exchange rates are given on page 52.  The period-end exchange rates were £1/$1.30, £1/€1.14 and £1/Yen 146.

 

In the quarter, turnover increased 12% in Sterling terms and 3% CER.  Total loss per share was 3.7p compared with a loss per share of 9.0p in Q2 2016 and Adjusted EPS was 27.2p compared with 24.3p in Q2 2016, up 12% AER, but down 2% CER.  The positive currency impact reflected the weakness of Sterling against the majority of the Group's trading currencies relative to Q2 2016.  Settlement of intercompany transactions had around one percentage point negative impact on the positive currency impact of 14 percentage points on adjusted EPS.

 

In H1 2017, turnover increased 15% in Sterling terms and 4% CER.  Total EPS was 17.7p compared with a loss per share of 3.2p in H1 2016 and Adjusted EPS was 52.1p compared with 43.5p in H1 2016, up 20% AER, 3% CER.  The positive currency impact reflected the weakness of Sterling against the majority of the Group's trading currencies relative to H1 2016.  Settlement of intercompany transactions had around one percentage point negative impact on the positive currency impact of 17 percentage points on adjusted EPS.

 

2017 guidance for Adjusted EPS

 

The utilisation of the Priority Review Voucher, together with other accelerated launch costs for the HIV two drug regimen, has impacted GSK's previous expectations for growth in Adjusted EPS by around two percentage points.  With no Advair generic expected in the US in 2017, GSK now expects 2017 Adjusted EPS growth to be 3% to 5% CER.

 

GSK is not able to give guidance for Total results as it cannot reliably forecast certain material elements of our Total results such as the future fair value movements on contingent consideration and put options.  It should be noted that contingent consideration cash payments are made each quarter primarily to Shionogi by ViiV Healthcare which reduce the balance sheet liability and are hence not recorded in the income statement.  An explanation of the acquisition-related arrangements with ViiV Healthcare, including details of cash payments to Shionogi, is set out on page 60.

 

If exchange rates were to hold at the closing rates on 30 June 2017 ($1.30/£1, €1.14/£1 and Yen 146/£1) for the rest of 2017, the estimated positive impact on full-year 2017 Sterling turnover growth would be around 5% and if exchange losses were recognised at the same level as in 2016, the estimated positive impact on 2017 Sterling Adjusted EPS growth would be around 8%.

 

 

Cash generation and conversion

 

Cash flow and net debt

 


Q2 2017


H1 2017


H1 2016







Net cash inflow from operating activities (£m)

1,008 

 

2,152 

 

1,739 

Free cash flow* (£m)

(282)

 

368 

 

63 

Free cash flow growth (%)

>(100)%

 

>100%

 

6%

Free cash flow conversion* (%)

>(100)%

 

42%

 

>100%

Net debt (£m)

14,800 

 

14,800 

 

14,910 

 

*

Free cash flow and free cash flow conversion are defined on page 36.

 

Q2 2017

The net cash inflow from operating activities for the quarter was £1,008 million (Q2 2016: £1,236 million).  The reduction reflected flat operating profit, after the impact of the Priority Review Voucher, as well as a positive currency benefit, more than offset by an increase in inventory in support of new product launches and seasonal sales, as well as the timing of payments for returns and rebates.

 

Total cash payments to Shionogi in relation to the ViiV Healthcare contingent consideration liability in the quarter were £140 million, of which £124 million was recognised in cash flows from operating activities and £16 million was recognised in purchases of businesses within investing cash flows.  These payments are deductible for tax purposes.

 

Free cash outflow was £282 million for the quarter (Q2 2016: £303 million inflow).  The reduction primarily reflected flat operating performance, including the impact of the Priority Review Voucher, increased working capital, reflecting seasonal factors and building of inventory in advance of new product launches, together with the timing of payments for returns and rebates and higher dividends to non-controlling interests, which included a catch up adjustment.

 

 

H1 2017

The net cash inflow from operating activities for the six months was £2,152 million (H1 2016: £1,739 million).  The increase reflected improved operating profit performance, as well as a positive currency benefit, partly offset by increased working capital reflecting seasonal factors and building of inventory in advance of new product launches.

 

Total cash payments to Shionogi in relation to the ViiV Healthcare contingent consideration liability in the six months were £299 million, of which £261 million was recognised in cash flows from operating activities and £38 million was recognised in purchases of businesses within investing cash flows.  These payments are deductible for tax purposes.

 

Free cash flow was £368 million for the six months (H1 2016: £63 million).  The increase primarily reflected improved operating profit performance, as well as a positive currency benefit, partly offset by increased working capital reflecting seasonal factors and building of inventory in advance of new product launches and increased dividends to non-controlling interests.  H1 2016 free cash flow was also impacted by the costs of acquiring the HIV Clinical assets from BMS for £221 million.

 

Net debt

At 30 June 2017, net debt was £14.8 billion, compared with £13.8 billion at 31 December 2016, comprising gross debt of £18.9 billion and cash and liquid investments of £4.1 billion.  Net debt increased as the cost of dividends paid to shareholders of £2,049 million more than offset the improved free cash flow of £368 million and disposal proceeds of £322 million, together with favourable translation movements.

 

At 30 June 2017, GSK had short-term borrowings (including overdrafts) repayable within 12 months of £6,612 million with no loans repayable in the subsequent year.

 

 

Working capital

 


30 June

2017


31 March

2017


31 December

2016


30 September

2016


30 June

2016











Working capital conversion cycle* (days)

207


203


193


216


217

Working capital percentage of turnover (%)

24


23


22


27


26











 

*

Working capital conversion cycle is defined on page 36.

 

The increase of four days in Q2 2017 was predominantly due to an increase in inventory levels reflecting seasonal factors and building of inventory in advance of new product launches.

 

The reduction of ten days compared with June 2016 reflected a five day reduction in the cycle primarily due to reduced inventory days and improved collections, together with a five day reduction from exchange rates.

 

 

Returns to shareholders

 

Quarterly dividends

The Board has declared a second interim dividend for 2017 of 19 pence per share (Q2 2016: 19 pence per share).

 

GSK expects to pay an annual ordinary dividend of 80p for 2017.

 

GSK recognises the importance of dividends to shareholders and aims to distribute regular dividend payments that will be determined primarily with reference to the free cash flow generated by the business after funding the investment necessary to support the Group's future growth.  

 

The Board intends to maintain the dividend for 2018 at the current level of 80p per share, subject to any material change in the external environment or performance expectations.  Over time, as free cash flow strengthens, it intends to build free cash flow cover of the annual dividend to a target range of 1.25-1.50x, before returning the dividend to growth.

 

Payment of dividends

The equivalent interim dividend receivable by ADR holders will be calculated based on the exchange rate on 10 October 2017.  An annual fee of $0.02 per ADS (or $0.005 per ADS per quarter) is charged by the Depositary.

 

The ex-dividend date will be 10 August 2017 (9 August 2017 for ADR holders), with a record date of 11 August 2017 and a payment date of 12 October 2017.

 


Paid/

payable


Pence per

share


£m







2017

 

 

 

 

 

First interim

13 July 2017

 

19

 

928

Second interim

12 October 2017

 

19

 

929







2016

 

 

 

 

 

First interim

14 July 2016

 

19

 

923

Second interim

13 October 2016

 

19

 

925

Third interim

12 January 2017

 

19

 

925

Fourth interim

13 April 2017

 

23

 

1,124







 

 

 

80

 

3,897







 

GSK made no share repurchases during the quarter.  The company issued 1.1 million shares under employee share schemes amounting to £13 million (Q2 2016: £18 million).

 

The weighted average number of shares for Q2 2017 was 4,887 million, compared with 4,859 million in Q2 2016.

 

 

Research and development

 

GSK remains focused on delivering an improved return on its investment in R&D.  Sales contribution, reduced attrition and cost reduction are all important drivers of an improving internal rate of return.  R&D expenditure is not determined as a percentage of sales but instead capital is allocated using strict returns based criteria depending on the pipeline opportunities available.

 

The operations of Pharmaceuticals R&D are broadly split into Discovery activities (up to the completion of Phase IIa trials) and Development work (from Phase IIb onwards) each supported by specific and common infrastructure and other shared services where appropriate.  With effect from 1 January 2017, depreciation within Pharmaceuticals R&D is now reported within the central support functions rather than against individual business units.  Comparative information has been revised accordingly.  R&D expenditure for Q2 2017 and H1 2017 is analysed below.

 




Q2 2017

£m


Q2 2016

(revised)

£m


Growth

£%


Growth

CER%











Discovery

 

 

259

 

200

 

30 

 

23 

Development

 

 

451

 

296

 

52 

 

44 

Facilities and central

   support functions

 

 

130

 

109

 

19 

 

15 











Pharmaceuticals R&D

 

 

840

 

605

 

39 

 

32 

Vaccines

 

 

160

 

140

 

14 

 

3 

Consumer Healthcare

 

 

53

 

55

 

(4)

 

(9)











Adjusted R&D

 

 

1,053

 

800

 

32 

 

24 

Amortisation and impairment

   of intangible assets

 

 

27

 

10

 

 

 

 

Major restructuring costs

 

 

170

 

73

 

 

 

 

Other items

 

 

10

 

5

 

 

 

 











Total R&D

 

 

1,260

 

888

 

42 

 

34 











 




H1 2017

£m


H1 2016

(revised)

£m


Growth

£%


Growth

CER%











Discovery

 

 

509

 

381

 

34 

 

25 

Development

 

 

776

 

549

 

41 

 

31 

Facilities and central

   support functions

 

 

277

 

250

 

11 

 

4 











Pharmaceuticals R&D

 

 

1,562

 

1,180

 

32 

 

23 

Vaccines

 

 

296

 

279

 

6 

 

(5)

Consumer Healthcare

 

 

114

 

116

 

(2)

 

(9)











Adjusted R&D

 

 

1,972

 

1,575

 

25 

 

16 

Amortisation and impairment

   of intangible assets

 

 

47

 

20

 

 

 

 

Major restructuring costs

 

 

185

 

100

 

 

 

 

Other items

 

 

16

 

8

 

 

 

 











Total R&D

 

 

2,220

 

1,703

 

30 

 

21 











 

In Q2 2017, Adjusted R&D expenditure increased 32% AER, 24% CER and in H1 2017 Adjusted R&D expenditure increased 25% AER, 16% CER.  The increase in Discovery expenditure reflected further investment in the early stage Oncology portfolio.  The growth in Development expenditure reflected the utilisation of the Priority Review Voucher, the progression of a number of mid and late-stage programmes in HIV, respiratory and anaemia and the costs of the HIV programmes acquired from BMS in February 2016.

 

 

R&D pipeline


Pipeline news flow since Q1 2017

·

Announced data from the SALFORD LUNG STUDY showing that Relvar Ellipta significantly improved asthma control compared with usual care (5 May);

·

Announced headline data from two Phase III studies of mepolizumab in COPD (10 May);

·

Announced publication in NEJM of data from Phase III study of mepolizumab in patients with EGPA (17 May);

·

Presented data at ATS of effect of Nucala for severe asthma according to blood eosinophil levels (22 May);

·

Announced EU and US filings for two drug regimen of dolutegravir and rilpivirine for HIV maintenance (1 June);

·

Announced positive headline results for a Phase III study showing that tafenoquine reduces risk of relapse in Plasmodium Vivax malaria (12 June);

·

Announced results of 10 year continuation study showing sustained disease control with Benlysta in SLE (16 June);

·

Announced positive results from Phase III re-vaccination study with Shingrix (21 June);

·

Announced CHMP positive opinion for 4 dose vial of Synflorix (27 June);

·

Announced start of Phase III programme for mepolizumab in patients with nasal polyps (27 June);

·

Announced US filing for mepolizumab in patients with EGPA (28 June);

·

Positive data in-house from head-to-head study of Anoro Ellipta vs Stiolto Respimat.  To be reported at future scientific forum (July);

·

Received FDA approval for a new self-injectable formulation of Benlysta for SLE (21 July);

·

Announced EU filing for extended use of Relvar Ellipta in patients with controlled asthma on an ICS/LABA combination (21 July);

·

Announced data from Phase II study presented at IAS showing comparable HIV suppression rates at 96 weeks for a two drug regimen of long-acting cabotegravir and rilpivirine and a three drug regimen (24 July);

·

Announced US filing of Arnuity Ellipta for children with asthma (24 July);

·

Announced positive interim results from a Phase IIIb study showing superior efficacy of dolutegravir in second-line HIV treatment in resource-limited settings (25 July);

·

Announced results from a study showing that switching to a dolutegravir regimen from a boosted protease inhibitor regimen maintained viral suppression and improved lipid fractions in patients with HIV and high cardiovascular risk (25 July).

 

Key Pharmaceuticals assets

At our Business update to investors on 26 July, we confirmed an increased focus on delivery of several key assets in our Pharmaceuticals pipeline:

 

Therapy area

Asset

Indication

Phase

Respiratory

Closed triple (ICS/LABA/LAMA)1

COPD (also in Ph III for asthma)

Filed

danirixin (CXCR2 antagonist)

COPD

Ph II

nemiralisib (2269557, PI3Kδ inhibitor)

COPD (acute and chronic)

Ph II

HIV

cabotegravir (long-acting, parenteral HIV integrase inhibitor)

HIV pre-exposure prophylaxis (monotherapy) and HIV infection (in two drug regimen with rilpivirine)

Ph III

dolutegravir + rilpivirine1

HIV infections - two drug maintenance regimen

Filed

dolutegravir + lamivudine

HIV infections

Ph III

Oncology

3174998 (OX40 agonist mAb)1

Solid tumours and haematological malignancies

Ph I/II

3359609 (ICOS agonist mAb)

Cancer

Ph I/II

525762 (BET inhibitor)

Solid tumours and haematological malignancies

Ph I/II

2857916 (BCMA-ADC)1

Multiple myeloma

Ph I/II

3377794 (NY-ESO-1 TCR)2

Sarcoma, multiple myeloma, non-small cell lung cancer, melanoma, ovarian cancer.

Ph II

Immuno-

inflammation

tapinarof (2894512, topical non-steroidal anti-inflammatory)1

Atopic dermatitis and psoriasis

Ph II

2982772 (RIP-1 kinase inhibitor)

Psoriasis, rheumatoid arthritis and ulcerative colitis

Ph II

3196165 (anti-GM-CSF)1

Rheumatoid arthritis and osteoarthritis

Ph II

Other

daprodustat (oral PHI)

Anaemia associated with chronic renal disease

Ph III

2398852 + 2315698 (anti-SAP mAb + SAP depleter)1

Amyloidosis

Ph II

 

1

In-licence or other alliance relationship with third party

2

Option-based alliance with Adaptimmune Ltd.

 

Programmes to be terminated, partnered or divested

Also at our Business update on 26 July, we confirmed that around 30 programmes are to be terminated or divested with additional programmes under review.  Clinical programmes include the following:

 

Therapy area

Asset

Indication

Phase

Infectious diseases

2878175 (NS5B polymerase inhibitor)

Hepatitis C

Ph II

danirixin i.v. (CXCR2 antagonist)

Influenza

Ph I

Oncology

tarextumab (notch 2/3 mAb)2

SCLC

Ph II

2816126 (EZH2 inhibitor)

Solid tumours and haematological malignancies

Ph I

2879552 (LSD1 inhibitor)*

SCLC

Ph I

Immuno-inflammation

sirukumab (IL6 mAb)**1

Rheumatoid arthritis

Filed

3050002 (CCL20 mAb)1

Psoriatic arthritis

Ph I

Metabolic

retosiban (oxytocin antagonist)

Spontaneous pre-term labour

Ph III

2330672 (iBAT inhibitor)

Cholestatic pruritis

Ph II

2798745 (TRPV4 antagonist)

Heart failure

Ph II

daprodustat (topical PHI)

Wound healing

Ph I

3008356 (DGAT 1 inhibitor)

Non-alcoholic steatohepatitis

Ph I

Dermatology

2981278 (topical ROR gamma inverse agonist)

Psoriasis

Ph II

 

*

Studies in AML & MDS to continue

**

Rights to other indications also returned to Janssen

1

In-licence or other alliance relationship with third party

2

Option-based alliance with OncoMed Pharmaceuticals

 

In addition, another ~20 programmes in pre-clinical development have been identified for termination, partnering or divestment.

 

 

Definitions

 

Adjusted results

Total reported results represent the Group's overall performance.  However, these results can contain material unusual or non-operational items that may obscure the key trends and factors determining the Group's operational performance.  As a result, GSK also reports adjusted results.

 

As announced on 11 April 2017 in the 'Change to financial reporting framework' press release, from Q1 2017 core results has been renamed Adjusted results and, instead of all legal charges and expenses, only significant legal charges and expenses are excluded in order to present Adjusted results.  All other legal charges and expenses are included in Adjusted results.  Significant legal charges and expenses are those arising from the settlement of litigation or a government investigation that are not in the normal course and materially larger than more regularly occurring individual matters.  They also include certain major legacy legal matters.  Any new significant legal matters excluded in order to present Adjusted results will be disclosed at the time.

 

Adjusted results now exclude the following items from Total results: amortisation and impairment of intangible assets (excluding computer software) and goodwill; major restructuring costs, including those costs following material acquisitions; significant legal charges (net of insurance recoveries) and expenses on the settlement of litigation and government investigations, transaction-related accounting adjustments for significant acquisitions, and other items, including disposals of associates, products and businesses and other operating income other than royalty income, together with the tax effects of all of these items.

 

GSK believes that Adjusted results are more representative of the performance of the Group's operations and allow the key trends and factors driving that performance to be more easily and clearly identified by shareholders.  The definition of Adjusted results, as set out above, also aligns the Group's results with the majority of its peer companies and how they report earnings.

 

Reconciliations between Total and Adjusted results, as set out on pages 19, 25 and 62 to 65, including detailed breakdowns of the key adjusting items, are provided to shareholders to ensure greater visibility and transparency as they assess the Group's performance.

 

CER and AER 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. £% or AER% represents growth at actual exchange rates.

 

Free cash flow

From Q1 2017, adjusted free cash flow is no longer being reported and the free cash flow definition has been amended to include all contingent consideration payments made during the period.

 

Free cash flow is now defined as the net cash inflow from operating activities less capital expenditure, contingent consideration payments, net interest, and dividends paid to non-controlling interests plus proceeds from the sale of property, plant and equipment, and dividends received from joint ventures and associated undertakings.  It is used by management for planning and reporting purposes and in discussions with and presentations to investment analysts and rating agencies.  Free cash flow growth is calculated on a reported basis.

 

Free cash flow conversion

Free cash flow conversion is free cash flow as a percentage of earnings.

 

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.

 

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.

 

 

Outlook assumptions and cautionary statements

 

Assumptions related to 2017 guidance and 2016-2020 outlook

In outlining the expectations for 2017 and the five-year period 2016-2020, the Group has made certain assumptions about the healthcare sector, the different markets in which the Group operates and the delivery of revenues and financial benefits from its current portfolio, pipeline and restructuring programmes.

 

For the Group specifically, over the period to 2020 GSK expects further declines in sales of Seretide/Advair.  The introduction of a generic alternative to Advair in the US has been factored into the Group's assessment of its future performance.  The Group assumes no premature loss of exclusivity for other key products over the period.  The Group expects at least £6 billion of revenues per annum on a CER basis in 2018 from products launched since 2013 including contributions from the current pipeline asset Shingrix

 

The assumptions for the Group's revenue and earnings expectations assume no material interruptions to supply of the Group's products and no material mergers, acquisitions, disposals, litigation costs or share repurchases for the Company; and no change in the Group's shareholdings in ViiV Healthcare or Consumer Healthcare.  They also assume no material changes in the macro-economic and healthcare environment.  The 2017 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 (£0.5 billion in annual sales) as announced on 26 July 2017.

 

The Group's expectations assume successful delivery of the Group's integration and restructuring plans over the period 2016-2020 including the extension and enhancement to the combined programme announced on 26 July 2017.  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).  Some moderate upward pressure on the Group's effective tax rate is expected over the next few years.

 

Assumptions and cautionary statement regarding forward-looking statements

The Group's management believes that the assumptions outlined above are reasonable, and that the aspirational targets described in this report are achievable based on those assumptions.  However, given the longer term nature of these expectations and targets, they are subject to greater uncertainty, including potential material impacts if the above assumptions are not realised, and other material impacts related to foreign exchange fluctuations, macroeconomic activity, changes in regulation, government actions or intellectual property protection, actions by our competitors, and other risks inherent to the industries in which we operate.

 

This document contains statements that are, or may be deemed to be, "forward-looking statements".  Forward-looking statements give the Group's current expectations or forecasts of future events.  An investor can identify these statements by the fact that they do not relate strictly to historical or current facts.  They use words such as 'anticipate', 'estimate', 'expect', 'intend', 'will', 'project', 'plan', 'believe', 'target' and other words and terms of similar meaning in connection with any discussion of future operating or financial performance.  In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.  Other than in accordance with its legal or regulatory obligations (including under the Market Abuse Regulation, the UK Listing Rules and the Disclosure and Transparency Rules of the Financial Conduct Authority), the Group undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.  The reader should, however, consult any additional disclosures that the Group may make in any documents which it publishes and/or files with the SEC.  All readers, wherever located, should take note of these disclosures.  Accordingly, no assurance can be given that any particular expectation will be met and investors are cautioned not to place undue reliance on the forward-looking statements.

 

Forward-looking statements are subject to assumptions, inherent risks and uncertainties, many of which relate to factors that are beyond the Group's control or precise estimate.  The Group cautions investors that a number of important factors, including those in this document, could cause actual results to differ materially from those expressed or implied in any forward-looking statement.  Such factors include, but are not limited to, those discussed under 'Principal risks and uncertainties' on pages 253-262 of the GSK 2016 Annual Report.  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.

 

 

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:

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+44 (0) 20 8047 5502

(London)


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+1 202 715 1048

(Washington)


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Analyst/Investor enquiries:

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(London)


Gary Davies

+44 (0) 20 8047 5503

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+44 (0) 20 8047 2406

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Financial information

 

Income statements

 


Q2 2017

£m


Q2 2016

£m


H1 2017

£m


H1 2016

£m









TURNOVER

7,320 

 

6,532 


14,704 


12,761 

 








Cost of sales

(2,619)


(2,124)


(5,132)


(4,257)









Gross profit

4,701 

 

4,408 


9,572 


8,504 

 








Selling, general and administration

(2,379)


(2,174)


(4,831)


(4,363)

Research and development

(1,260)


(888)


(2,220)


(1,703)

Royalty income

98 

 

83 


180 


174 

Other operating income/(expense)

(1,180)


(1,580)


(1,003)


(2,040)









OPERATING (LOSS)/PROFIT

(20)

 

(151)

 

1,698 

 

572 

 

 

 

 

 

 

 

 

Finance income

15 

 

18 

 

36 

 

36 

Finance expense

(192)

 

(183)

 

(386)

 

(364)

Profit on disposal of associates

20 

 

- 

 

20 

 

- 

Share of after tax (losses)/profits of

   associates and joint ventures

(1)

 

(2)

 

 

(2)









(LOSS)/PROFIT BEFORE TAXATION

(178)

 

(318)

 

1,372 

 

242 

 

 

 

 

 

 

 

 

Taxation

92 

 

(174)

 

(235)

 

(382)

Tax rate %

51.7%

 

(54.7)%

 

17.1%

 

>100%









(LOSS)/PROFIT AFTER TAXATION FOR

   THE PERIOD

(86)

 

(492)

 

1,137 

 

(140)









 

 

 

 

 

 

 

 

Profit/(loss) attributable to non-controlling

   interests

94 

 

(57)

 

271 

 

13 

(Loss)/profit attributable to shareholders

(180)

 

(435)

 

866 

 

(153)









 

(86)

 

(492)

 

1,137 

 

(140)









 

 

 

 

 

 

 

 

(LOSS)/EARNINGS PER SHARE

(3.7)p

 

(9.0)p

 

17.7p

 

(3.2)p

















Diluted (loss)/earnings per share

(3.7)p

 

(9.0)p

 

17.6p

 

(3.2)p









 

 

Statement of comprehensive income - three months ended 30 June 2017

 

 

Q2 2017

£m

 

Q2 2016

£m





Loss for the period

(86)

 

(492)

 

 

 

 

Items that may be reclassified subsequently to income statement:

 

 

 

Exchange movements on overseas net assets and net investment hedges

366 

 

239 

Fair value movements on available-for-sale investments

 

230 

Reclassification of fair value movements on available-for-sale investments

(23)

 

(133)

Deferred tax on fair value movements on available-for-sale investments

(2)

 

(28)

Deferred tax reversed on reclassification of available-for-sale investments

10 

 

42 

Fair value movements on cash flow hedges

 

9 

Deferred tax on fair value movements on cash flow hedges

 

(1)

Reclassification of cash flow hedges to income statement

 

(4)

Share of other comprehensive income of associates and joint ventures

 

2 





 

353 

 

356 





Items that will not be reclassified to income statement:

 

 

 

Exchange movements on overseas net assets of non-controlling interests

(28)

 

288 

Re-measurement losses on defined benefit plans

(49)

 

(219)

Deferred tax on re-measurement losses on defined benefit plans

 

50 





 

(71)

 

119 





Other comprehensive income for the period

282 

 

475 





Total comprehensive income/(expense) for the period

196 

 

(17)





 

 

 

 

Total comprehensive income/(expense) for the period attributable to:

 

 

 

   Shareholders

130 

 

(248)

   Non-controlling interests

66 

 

231 





 

196 

 

(17)





 

 

Statement of comprehensive income - six months ended 30 June 2017

 

 

H1 2017

£m

 

H1 2016

£m





Profit/(loss) for the period

1,137 

 

(140)

 

 

 

 

Items that may be reclassified subsequently to income statement:

 

 

 

Exchange movements on overseas net assets and net investment hedges

562 

 

922 

Fair value movements on available-for-sale investments

53 

 

159 

Reclassification of fair value movements on available-for-sale investments

(27)

 

(135)

Deferred tax on fair value movements on available-for-sale investments

(4)

 

15 

Deferred tax reversed on reclassification of available-for-sale investments

 

44 

Fair value movements on cash flow hedges

(2)

 

9 

Deferred tax on fair value movements on cash flow hedges

(1)

 

(2)

Reclassification of cash flow hedges to income statement

 

(6)

Share of other comprehensive income of associates and joint ventures

 

2 





 

592 

 

1,008 





Items that will not be reclassified to income statement:

 

 

 

Exchange movements on overseas net assets of non-controlling interests

(1)

 

431 

Re-measurement gains/(losses) on defined benefit plans

185 

 

(756)

Deferred tax on re-measurement gains/(losses) on defined benefit plans

(49)

 

184 





 

135 

 

(141)





Other comprehensive income for the period

727 

 

867 





Total comprehensive income for the period

1,864 

 

727 





 

 

 

 

Total comprehensive income for the period attributable to:

 

 

 

   Shareholders

1,594 

 

283 

   Non-controlling interests

270 

 

444 





 

1,864 

 

727 





 

 

Pharmaceuticals turnover - three months ended 30 June 2017

 


Total

US

Europe

International


------------------------------------------------------------

-----------------------------------------------------------

-----------------------------------------------------------

-----------------------------------------------------------



Growth


Growth


Growth


Growth



-------------------------------------


-------------------------------------


-------------------------------------


-------------------------------------


£m

£%

CER%

£m

£%

CER%

£m

£%

CER%

£m

£%

CER%


--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

Respiratory

1,801

14 

4 

970 

19 

9 

360

4 

(5)

471

11 

4 

Anoro Ellipta

85

85 

67 

59 

90 

71 

17

89 

78 

9

50 

33 

Arnuity Ellipta

8

>100 

>100 

8 

>100 

>100 

-

- 

- 

-

- 

- 

Avamys/Veramyst

65

- 

(8)

(1)

>(100)

>(100)

23

5 

(5)

43

16 

8 

Flixotide/Flovent

145

7 

(1)

78 

4 

(5)

23

5 

(5)

44

13 

8 

Incruse Ellipta

50

80 

65 

34 

61 

46 

13

>100 

>100 

3

>100 

>100 

Nucala

73

>100 

>100 

50 

>100 

>100 

15

>100 

>100 

8

>100 

>100 

Relvar/Breo Ellipta

281

92 

75 

183 

>100 

>100 

50

52 

39 

48

45 

30 

Seretide/Advair

848

(6)

(14)

476 

(2)

(11)

182

(15)

(21)

190

(5)

(11)

Ventolin

179

- 

(8)

86 

(9)

(17)

30

- 

(3)

63

17 

6 

Other

67

7 

4 

(3)

>(100)

(25)

7

(9)

(48)

63

18 

12 














HIV

1,116

29 

17 

694 

36 

24 

280

10 

- 

142

40 

27 

Epzicom/Kivexa

63

(60)

(63)

7 

(88)

(88)

32

(54)

(59)

24

(23)

(28)

Selzentry

29

(3)

(13)

13 

(15)

(21)

11

(6)

(14)

5

52 

21 

Tivicay

340

51 

37 

223 

49 

36 

78

41 

28 

39

96 

75 

Triumeq

648

58 

44 

440 

62 

47 

148

39 

26 

60

>100 

80 

Other

36

(20)

(25)

11 

(30)

(36)

11

(3)

(12)

14

(22)

(23)














Immuno-inflammation

93

19 

9 

83 

17 

8 

7

40 

20 

3

50 

- 

Benlysta

93

19 

9 

83 

17 

8 

7

40 

20 

3

50 

- 














Established

Pharmaceuticals

1,347

(1)

(7)

227 

(20)

(27)

346

3 

(5)

774

5 

- 

Dermatology

111

26 

17 

- 

- 

- 

41

24 

15 

70

25 

16 

Augmentin

141

5 

(1)

- 

- 

- 

42

11 

- 

99

3 

(1)

Avodart

160

(10)

(19)

4 

(91)

(91)

84

9 

(3)

72

31 

20 

Coreg

39

30 

17 

39 

30 

17 

-

- 

- 

-

- 

- 

Eperzan/Tanzeum

23

(21)

(28)

22 

(21)

(29)

1

- 

- 

-

- 

- 

Imigran/Imitrex

41

14 

8 

16 

(6)

(6)

18

29 

14 

7

40 

40 

Lamictal

149

(1)

(9)

72 

(8)

(15)

28

12 

4 

49

2 

(4)

Requip

29

(3)

(10)

4 

(20)

(60)

8

- 

(13)

17

- 

6 

Serevent

23

5 

(5)

11 

10 

- 

8

(11)

(11)

4

33 

- 

Seroxat/Paxil

46

(2)

(9)

- 

- 

- 

10

(9)

(18)

36

- 

(6)

Valtrex

32

7 

(3)

5 

25 

- 

8

33 

17 

19

(5)

(10)

Zeffix

22

(21)

(25)

1 

>(100)

>(100)

2

100 

100 

19

(30)

(33)

Other

531

(4)

(8)

53 

(18)

(25)

96

(14)

(20)

382

2 

(2)


--------

--------

--------

--------

----------------

--------

--------

---------(3)-------

--------

--------

----------------

--------

Pharmaceuticals

4,357

12 

3 

1,974 

18 

7 

993

6 

(4)

1,390

10 

3 


--------

--------

--------

--------

----------

--------

--------

---------

--------

--------

---------

--------














 

 

Pharmaceuticals turnover - six months ended 30 June 2017

 


Total

US

Europe

International


-----------------------------------------------------------

----------------------------------------------------------

----------------------------------------------------------

----------------------------------------------------------



Growth


Growth


Growth


Growth



------------------------------------


------------------------------------


------------------------------------


------------------------------------


£m

£%

CER%

£m

£%

CER%

£m

£%

CER%

£m

£%

CER%


--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

Respiratory

3,484

16 

4 

1,737 

20 

7 

742

7 

(2)

1,005 

17 

5 

Anoro Ellipta

147

86 

67 

99 

83 

63 

31

94 

81 

17 

89 

67 

Arnuity Ellipta

16

>100 

>100 

16 

>100 

>100 

-

- 

- 

- 

- 

- 

Avamys/Veramyst

156

9 

(3)

(1)

>(100)

>(100)

44

10 

- 

113 

24 

9 

Flixotide/Flovent

309

7 

(3)

167 

2 

(9)

51

9 

(2)

91 

17 

8 

Incruse Ellipta

84

68 

52 

54 

36 

23 

23

>100 

>100 

7 

>100 

>100 

Nucala

132

>100 

>100 

92 

>100 

>100 

26

>100 

>100 

14 

>100 

>100 

Relvar/Breo Ellipta

485

89 

69 

294 

>100 

92 

99

57 

43 

92 

61 

42 

Seretide/Advair

1,600

(3)

(13)

815 

(1)

(12)

388

(12)

(19)

397 

2 

(8)

Ventolin

393

10 

(1)

203 

9 

(3)

65

7 

- 

125 

14 

4 

Other

162

15 

4 

(2)

>(100)

>(100)

15

9 

(13)

149 

18 

7 














HIV

2,101

32 

18 

1,302 

39 

24 

539

13 

2 

260 

43 

27 

Epzicom/Kivexa

141

(55)

(59)

21 

(82)

(84)

71

(49)

(54)

49 

(16)

(25)

Selzentry

67

12 

- 

33 

7 

(4)

21

(9)

(16)

13 

97 

71 

Tivicay

641

55 

39 

423 

54 

38 

148

42 

29 

70 

>100 

83 

Triumeq

1,187

61 

44 

800 

64 

46 

282

46 

32 

105 

91 

68 

Other

65

(11)

(20)

25 

(13)

(22)

17

4 

(5)

23 

(19)

(29)














Immuno-inflammation

185

29 

15 

167 

28 

15 

13

30 

20 

5 

67 

- 

Benlysta

184

29 

15 

166 

28 

15 

13

30 

20 

5 

67 

- 














Established

Pharmaceuticals

2,776

2 

(6)

499 

(7)

(16)

707

2 

(7)

1,570 

5 

(3)

Dermatology

224

22 

11 

- 

- 

- 

82

15 

7 

142 

34 

21 

Augmentin

296

8 

1 

- 

- 

- 

95

9 

(1)

201 

8 

3 

Avodart

320

3 

(8)

9 

(83)

(85)

167

8 

(3)

144 

40 

23 

Coreg

74

19 

6 

74 

19 

6 

-

- 

- 

- 

- 

- 

Eperzan/Tanzeum

51

(6)

(15)

50 

(6)

(17)

2

>100 

>100 

(1)

- 

- 

Imigran/Imitrex

94

22 

14 

46 

31 

26 

34

13 

3 

14 

17 

8 

Lamictal

315

9 

(2)

161 

9 

(3)

54

8 

- 

100 

9 

(2)

Requip

56

2 

(7)

8 

- 

(25)

14

(7)

(13)

34 

6 

- 

Serevent

49

11 

- 

26 

30 

15 

17

(6)

(11)

6 

- 

(17)

Seroxat/Paxil

91

(5)

(14)

- 

- 

- 

19

(5)

(15)

72 

4 

(4)

Valtrex

63

11 

(2)

9 

- 

(11)

15

25 

17 

39 

8 

(6)

Zeffix

48

(19)

(24)

1 

- 

- 

3

- 

- 

44 

(20)

(25)

Other

1,095

(6)

(12)

115 

(14)

(21)

205

(13)

(20)

775 

(3)

(9)


--------

--------

--------

--------

----------------

--------

--------

---------(3)-------

--------

--------

----------------

--------

Pharmaceuticals

8,546

14 

4 

3,705 

22 

9 

2,001

7 

(3)

2,840 

12 

2 


--------

--------

--------

--------

----------

--------

--------

---------

--------

--------

---------

--------














 

 

Vaccines turnover - three months ended 30 June 2017

 


Total

US

Europe

International


----------------------------------------------------------

----------------------------------------------------------

---------------------------------------------------------

----------------------------------------------------------



Growth


Growth


Growth


Growth



-----------------------------------


-----------------------------------


-------------------------------------


------------------------------------


£m

£%

CER%

£m

£%

CER%

£m

£%

CER%

£m

£%

CER%


--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

Meningitis

200

32 

20 

83 

28 

17 

98

44 

32 

19

6 

(17)

Bexsero

139

43 

31 

40 

29 

16 

88

47 

33 

11

83 

83 

Menveo

56

19 

6 

43 

26 

18 

7

40 

40 

6

(25)

(62)

Other

5

(29)

(43)

- 

- 

- 

3

- 

- 

2

(50)

(75)














Influenza

21

24 

6 

- 

- 

- 

4

>100 

>100 

17

(6)

(22)

Fluarix, FluLaval

21

24 

6 

- 

- 

- 

4

>100 

>100 

17

(6)

(22)














Established Vaccines

890

12 

2 

233 

20 

10 

292

14 

3 

365

7 

(3)

Infanrix, Pediarix

156

11 

3 

57 

8 

2 

77

20 

8 

22

(4)

(9)

Boostrix

150

56 

42 

60 

9 

- 

51

82 

64 

39

>100 

>100 














Hepatitis

155

19 

10 

85 

52 

37 

48

(2)

(10)

22

(12)

(12)














Rotarix

95

(12)

(20)

16 

(11)

(11)

23

35 

29 

56

(23)

(34)














Synflorix

151

10 

(1)

- 

- 

- 

11

- 

(9)

140

11 

- 














Priorix, Priorix Tetra, Varilrix

79

- 

(8)

- 

- 

- 

41

(2)

(12)

38

2 

(3)

Cervarix

18

6 

(6)

- 

- 

- 

8

- 

(12)

10

25 

12 

Other

86

1 

(12)

15 

36 

9 

33

(14)

(23)

38

6 

(6)


--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

Vaccines

1,111

16 

5 

316 

22 

12 

394

21 

10 

401

6 

(5)


--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------














 

Vaccines turnover - six months ended 30 June 2017

 


Total

US

Europe

International


----------------------------------------------------------

-----------------------------------------------------------

----------------------------------------------------------

----------------------------------------------------------



Growth


Growth


Growth


Growth



-----------------------------------


------------------------------------


------------------------------------


-------------------------------------


£m

£%

CER%

£m

£%

CER%

£m

£%

CER%

£m

£%

CER%


--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

Meningitis

391

49 

33 

129 

25 

13 

202

59 

44 

60

82 

55 

Bexsero

265

67 

50 

67 

43 

28 

171

69 

53 

27

>100 

>100 

Menveo

111

25 

11 

62 

11 

- 

23

28 

17 

26

73 

47 

Other

15

- 

(13)

- 

- 

- 

8

- 

(12)

7

- 

(14)














Influenza

34

31 

8 

(3)

>100 

>100 

5

>100 

>100 

32

23 

- 

Fluarix, FluLaval

34

31 

8 

(3)

>100 

>100 

5

>100 

>100 

32

23 

- 














Established Vaccines

1,838

18 

6 

553 

33 

18 

576

7 

(2)

709

18 

6 

Infanrix, Pediarix

390

19 

7 

182 

39 

24 

160

3 

(6)

48

14 

- 

Boostrix

261

42 

27 

114 

25 

12 

90

34 

21 

57

>100 

96 














Hepatitis

322

21 

9 

170 

44 

28 

99

1 

(7)

53

6 

(4)














Rotarix

241

11 

(1)

70 

17 

5 

45

29 

20 

126

3 

(10)














Synflorix

284

25 

12 

- 

- 

- 

25

14 

- 

259

26 

13 














Priorix, Priorix Tetra, Varilrix

156

10 

(1)

- 

- 

- 

78

- 

(10)

78

23 

11 

Cervarix

35

3 

(9)

- 

- 

- 

15

- 

(13)

20

11 

- 

Other

149

(4)

(12)

17 

6 

(6)

64

(4)

(11)

68

(5)

(15)


--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

Vaccines

2,263

23 

10 

679 

31 

17 

783

18 

7 

801

22 

8 


--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------

--------














 

 

Balance sheet

 


30 June 2017

£m


30 June 2016

£m


31 December 2016

£m

ASSETS

 

 

 

 

 

Non-current assets

 

 

 

 

 

Property, plant and equipment

10,662 

 

10,539 

 

10,808 

Goodwill

5,864 

 

5,747 

 

5,965 

Other intangible assets

18,465 

 

18,317 

 

18,776 

Investments in associates and joint ventures

250 

 

232 

 

263 

Other investments

1,013 

 

1,358 

 

985 

Deferred tax assets

4,348 

 

3,545 

 

4,374 

Other non-current assets

1,205 

 

1,009 

 

1,199 







Total non-current assets

41,807 

 

40,747 

 

42,370 







Current assets

 

 

 

 

 

Inventories

5,743 

 

5,494 

 

5,102 

Current tax recoverable

196 

 

156 

 

226 

Trade and other receivables

6,196 

 

5,843 

 

6,026 

Derivative financial instruments

65 

 

598 

 

156 

Liquid investments

85 

 

83 

 

89 

Cash and cash equivalents

3,986 

 

4,590 

 

4,897 

Assets held for sale

155 

 

116 

 

215 







Total current assets

16,426 

 

16,880 

 

16,711 







TOTAL ASSETS

58,233 

 

57,627 

 

59,081 







LIABILITIES

 

 

 

 

 

Current liabilities

 

 

 

 

 

Short-term borrowings

(6,612)

 

(4,485)

 

(4,129)

Contingent consideration liabilities

(855)

 

(458)

 

(561)

Trade and other payables

(19,580)

 

(10,422)

 

(11,964)

Derivative financial instruments

(96)

 

(620)

 

(194)

Current tax payable

(929)

 

(1,139)

 

(1,305)

Short-term provisions

(716)

 

(983)

 

(848)







Total current liabilities

(28,788)

 

(18,107)

 

(19,001)







Non-current liabilities

 

 

 

 

 

Long-term borrowings

(12,259)

 

(15,098)

 

(14,661)

Deferred tax liabilities

(1,971)

 

(1,710)

 

(1,934)

Pensions and other post-employment benefits

(3,886)

 

(4,196)

 

(4,090)

Other provisions

(713)

 

(550)

 

(652)

Derivative financial instruments

(1)

 

 

Contingent consideration liabilities

(5,188)

 

(4,516)

 

(5,335)

Other non-current liabilities

(1,003)

 

(9,224)

 

(8,445)







Total non-current liabilities

(25,021)

 

(35,294)

 

(35,117)







TOTAL LIABILITIES

(53,809)

 

(53,401)

 

(54,118)







NET ASSETS

4,424 

 

4,226 

 

4,963 







EQUITY

 

 

 

 

 

Share capital

1,343 

 

1,341 

 

1,342 

Share premium account

3,008 

 

2,857 

 

2,954 

Retained earnings

(5,854)

 

(6,081)

 

(5,392)

Other reserves

2,314 

 

2,457 

 

2,220 







Shareholders' equity

811 

 

574 

 

1,124 







Non-controlling interests

3,613 

 

3,652 

 

3,839 







TOTAL EQUITY

4,424 

 

4,226 

 

4,963 







 

 

Statement of changes in equity

 


Share

capital

£m

Share

premium

£m

Retained

earnings

£m

Other

reserves

£m

Share-

holder's

equity

£m

Non-

controlling

interests

£m

Total

equity

£m


------------

------------

------------

------------

------------

------------

------------

 








At 1 January 2017

1,342 

2,954 

(5,392)

2,220 

1,124 

3,839 

4,963 









   Profit for the period



866 


866 

271 

1,137 

   Other comprehensive income/(expense)

   for the period



698 

30 

728 

(1)

727 




------------

------------

------------

------------

------------

Total comprehensive income for the period



1,564 

30 

1,594 

270 

1,864 




------------

------------

------------

------------

------------

Distributions to non-controlling interests






(494)

(494)

Dividends to shareholders



(2,049)


(2,049)


(2,049)

Changes in non-controlling interests






(2)

(2)

Shares issued

44 



45 


45 

Shares acquired by ESOP Trusts


10 

70 

(141)

(61)


(61)

Write-down on shares held by ESOP Trusts



(205)

205 


Share-based incentive plans



158 


158 


158 


------------

------------

------------

------------

------------

------------

------------

At 30 June 2017

1,343 

3,008 

(5,854)

2,314 

811 

3,613 

4,424 


------------

------------

------------

------------

------------

------------

------------

 

 








At 1 January 2016

1,340 

2,831 

(1,397)

2,340 

5,114 

3,764 

8,878 









   (Loss)/profit for the period



(153)


(153)

13 

(140)

   Other comprehensive income for the

   period



351 

85 

436 

431 

867 




------------

------------

------------

------------

------------

Total comprehensive income for the

   period



198 

85 

283 

444 

727 




------------

------------

------------

------------

------------

Distributions to non-controlling interests






(278)

(278)

Dividends to shareholders



(3,002)


(3,002)


(3,002)

Recognition of liabilities with non-controlling

   interests



(2,013)


(2,013)

(159)

(2,172)

Changes in non-controlling interests



54 


54 

(119)

(65)

Shares issued

26 



27 


27 

Shares acquired by ESOP Trusts




(58)

(58)


(58)

Write-down on shares held by ESOP Trusts



(90)

90 


Share-based incentive plans



169 


169 


169 


------------

------------

------------

------------

------------

------------

------------

At 30 June 2016

1,341 

2,857 

(6,081)

2,457 

574 

3,652 

4,226 


------------

------------

------------

------------

------------

------------

------------

 

 

Cash flow statement - six months ended 30 June 2017

 


H1 2017

£m


H1 2016

£m





Profit/(loss) after tax

1,137 

 

(140)

Tax on profits

235 

 

382 

Share of after tax profits of associates and joint ventures

(4)

 

Profit on disposal of interest in associates

(20)

 

Net finance expense

350 

 

328 

Depreciation and other adjusting items

1,413 

 

959 

Increase in working capital

(976)

 

(643)

Contingent consideration paid

(263)

 

(138)

Increase in other net liabilities (excluding contingent consideration paid)

837 

 

1,816 





Cash generated from operations

2,709 

 

2,566 

Taxation paid

(557)

 

(827)





Net cash inflow from operating activities

2,152 

 

1,739 





Cash flow from investing activities

 

 

 

Purchase of property, plant and equipment

(639)

 

(612)

Proceeds from sale of property, plant and equipment

125 

 

11 

Purchase of intangible assets

(389)

 

(484)

Proceeds from sale of intangible assets

18 

 

62 

Purchase of equity investments

(56)

 

(58)

Proceeds from sale of equity investments

44 

 

147 

Contingent consideration paid

(40)

 

(30)

Purchase of businesses, net of cash acquired

- 

 

(24)

Disposal of businesses

223 

 

Proceeds from disposal of interest in associates

37 

 

Investment in associates and joint ventures

(6)

 

(7)

Interest received

35 

 

34 

Dividends from associates and joint ventures

2 

 

40 





Net cash outflow from investing activities

(646)

 

(921)





Cash flow from financing activities

 

 

 

Issue of share capital

45 

 

27 

Shares acquired by ESOP Trusts

(61)

 

(58)

Increase in short-term loans

1,930 

 

2,079 

Repayment of short-term loans

(1,544)

 

(880)

Net repayment of obligations under finance leases

(13)

 

(10)

Interest paid

(384)

 

(357)

Dividends paid to shareholders

(2,049)

 

(3,002)

Distributions to non-controlling interests

(494)

 

(278)

Other financing items

96 

 

(5)





Net cash outflow from financing activities

(2,474)

 

(2,484)





Decrease in cash and bank overdrafts in the period

(968)

 

(1,666)





 

 

 

 

Cash and bank overdrafts at beginning of the period

4,605 

 

5,486 

Exchange adjustments

(46)

 

144 

Decrease in cash and bank overdrafts

(968)

 

(1,666)





Cash and bank overdrafts at end of the period

3,591 

 

3,964 





Cash and bank overdrafts at end of the period comprise:

 

 

 

 

Cash and cash equivalents

3,986 

 

4,590 

 

Overdrafts

(395)

 

(626)





 

3,591 

 

3,964 





 

 

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.

 

From Q1 2017, Adjusted results have been amended to exclude, instead of all legal charges, only significant legal charges, as set out in 'Accounting policies and basis of preparation' on page 51.  Comparative information has been revised accordingly.

 

 

Turnover by segment

 

Q2 2017

£m

 

Q2 2016

£m

 

Growth

£%


Growth

CER%









Pharmaceuticals

4,357 

 

3,882 

 

12 

 

3 

Vaccines

1,111 

 

960 

 

16 

 

5 

Consumer Healthcare

1,852 

 

1,690 

 

10 

 

- 









Total turnover

7,320 

 

6,532 

 

12 

 

3 









 

 

Operating profit by segment


Q2 2017

£m

 

Q2 2016

(revised)

£m

 

Growth

£%


Growth

CER%









Pharmaceuticals

2,152 

 

1,934 

 

11 

 

- 

Pharmaceuticals R&D

(688)

 

(583)

 

18 

 

11 









Pharmaceuticals including R&D

1,464 

 

1,351 

 

8 

 

(5)

Vaccines

374 

 

264 

 

42 

 

30 

Consumer Healthcare

328 

 

238 

 

38 

 

16 









Segment profit

2,166 

 

1,853 

 

17 

 

3 

Corporate and other unallocated costs

(83)

 

(31)

 

>100 

 

>100 









Adjusted operating profit

2,083 

 

1,822 

 

14 

 

- 

Adjustments

(2,103)

 

(1,973)

 

 

 

 









Total operating loss

(20)

 

(151)

 

87 

 

(45)

 

 

 

 

 

 

 

 

Finance income

15 

 

18 

 

 

 

 

Finance costs

(192)

 

(183)

 

 

 

 

Profit on disposal of associates

20 

 

- 

 

 

 

 

Share of after tax losses of associates

   and joint ventures

(1)

 

(2)

 

 

 

 









Loss before taxation

(178)

 

(318)

 

44 

 

(18)









 

 

Turnover by segment

 

H1 2017

£m

 

H1 2016

£m

 

Growth

£%


Growth

CER%









Pharmaceuticals

8,546 

 

7,468

 

14 

 

4 

Vaccines

2,263 

 

1,842

 

23 

 

10 

Consumer Healthcare

3,895 

 

3,451

 

13 

 

1 









Total turnover

14,704 

 

12,761

 

15 

 

4 









 

 

Operating profit by segment


H1 2017

£m

 

H1 2016

(revised)

£m

 

Growth

£%


Growth

CER%









Pharmaceuticals

4,270 

 

3,624 

 

18 

 

4 

Pharmaceuticals R&D

(1,366)

 

(1,130)

 

21 

 

12 









Pharmaceuticals including R&D

2,904 

 

2,494 

 

16 

 

- 

Vaccines

715 

 

510 

 

40 

 

26 

Consumer Healthcare

679 

 

541 

 

26 

 

6 









Segment profit

4,298 

 

3,545 

 

21 

 

5 

Corporate and other unallocated costs

(236)

 

(199)

 

19 

 

5 









Adjusted operating profit

4,062 

 

3,346 

 

21 

 

4 

Adjustments

(2,364)

 

(2,774)

 

 

 

 









Total operating profit

1,698 

 

572 

 

>100 

 

>100 

 

 

 

 

 

 

 

 

Finance income

36 

 

36 

 

 

 

 

Finance costs

(386)

 

(364)

 

 

 

 

Profit on disposal of associates

20 

 

- 

 

 

 

 

Share of after tax profits/(losses) of associates

   and joint ventures

 

(2)

 

 

 

 









Profit before taxation

1,372 

 

242 

 

>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 2016.

 

At 30 June 2017, the Group's aggregate provision for legal and other disputes (not including tax matters described under 'Taxation' below) was £0.3 billion (31 December 2016: £0.3 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. 

 

Significant developments since the Annual Report 2016 and the Q1 2017 Results Announcement are as follows:

 

In February 2017, Teva Pharmaceuticals (Teva) sent the Group a notification under the US Hatch-Waxman Act challenging three Group patents covering Flovent HFA.  On 31 March 2017, the Group filed suit against Teva on the two challenged patents covering dose-counter devices that expire in 2023 and 2026.  The Group did not sue Teva under the third patent (the '413 patent) and has requested that the FDA delist the '413 patent from the Orange Book.  On 20 June 2017, the Group voluntarily dismissed the entire case against Teva.

 

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 2016. 

 

The Group's tax rate on Total profits of 17.1% has been influenced by transaction-related charges arising on the Group's put option liabilities, costs associated with the withdrawal of Tanzeum and the reassessment of estimates of uncertain tax positions following the settlement of a number of open issues with tax authorities in various jurisdictions. 

 

The Group continues to believe it has made adequate provision for the liabilities likely to arise from periods which are open and not yet agreed by tax authorities.  The ultimate liability for such matters may vary from the amounts provided and is dependent upon the outcome of agreements with relevant tax authorities.

 

In the quarter, tax on Adjusted profits amounted to £405 million and represented an effective Adjusted tax rate of 21.2% (Q2 2016: 21.3%).  The credit for taxation on Total losses amounted to £92 million and represented an effective tax rate of 51.7% (Q2 2016: (54.7)%).

 

In H1 2017, tax on Adjusted profits amounted to £804 million and represented an Adjusted tax rate of 21.6% (H1 2016: 21.3%).  The charge for taxation on Total profits amounted to £235 million and represented an effective tax rate of 17.1% (H1 2016: >100%).

 

The Adjusted tax rate for the full year is expected to be in the range of 21-22%.  The Group's balance sheet at 30 June 2017 included a tax payable liability of £929 million and a tax recoverable asset of £196 million.

 

 

Additional information

 

Accounting policies and basis of preparation

This unaudited Results Announcement contains condensed financial information for the three and six months ended 30 June 2017, is prepared in accordance with the Disclosure and Transparency Rules (DTR) of the Financial Conduct Authority and IAS 34 'Interim financial reporting' and should be read in conjunction with the Annual Report 2016, 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 2016.

 

As detailed in the definition of Adjusted results on page 36, from Q1 2017 core results has been renamed Adjusted results and only significant legal charges and expenses are excluded, together with the other Adjusting items, in order to present Adjusted results.  A reconciliation of Total to the revised Adjusted results for Q2 2016 and H1 2016 are presented on pages 63 and 65.  The revision had the effect of decreasing Adjusted H1 2016 operating profit by £44 million due to the inclusion of non-significant legal charges and expenses in the Pharmaceuticals segment (£20 million) and in Corporate & other unallocated costs (£24 million).

 

From Q1 2017, adjusted free cash flow is no longer being reported and the free cash flow definition has been amended to include all contingent consideration payments made during the period.  The impact of the change on the free cash flow for H1 2016 was to increase the free cash outflow by £30 million.

 

The Group is required to implement a new accounting standard, IFRS 15 'Revenue from contracts with customers', from 1 January 2018.  Although GSK continues to assess the impact of IFRS 15 on the results of the Group, in particular in relation to certain licensing and government stockpile transactions, it does not expect that the new standard will have a material impact on product sales.

 

The Group is also required to implement IFRS 9 'Financial instruments' from 1 January 2018.  The new standard requires all fair value movements on equity investments to be recognised either in the income statement or in other comprehensive income, on a case-by-case basis, and also introduces a new impairment model for financial assets based on expected losses rather than incurred losses.  Although GSK continues to assess the impact of IFRS 9, it does not expect that the new impairment approach will have a material impact on the results of the Group.  

 

IFRS 16 'Leases' is required to be implemented by the Group from 1 January 2019.  The Group is assessing the potential impact of the new standard.

 

This Results Announcement does not constitute statutory accounts of the Group within the meaning of sections 434(3) and 435(3) of the Companies Act 2006.  The full Group accounts for 2016 were published in the Annual Report 2016, 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:

 


Q2 2017


Q2 2016


H1 2017


H1 2016


2016