On February 7, 2018 GSK reported improvements in sales, margins and cash flow in 2017 (Press release, GlaxoSmithKline, FEB 7, 2018, View Source [SID1234523795]).
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Total EPS 31.4p, +67% AER, +36% CER; Adjusted EPS 111.8p, +11% AER, +4% CER
2017 financial highlights
Turnover £30.2 billion, +8% AER, +3% CER
Sales growth across all 3 businesses: Pharmaceuticals £17.3 billion, +7% AER, +3%, CER; Vaccines £5.2 billion, +12% AER, +6% CER; Consumer Healthcare £7.8 billion, +8% AER, +2% CER
Improved Adjusted Group operating margin of 28.4% (2016: 27.5%). Pharmaceuticals 34.3%; Vaccines 31.9%; Consumer Healthcare 17.7%
Total EPS 31.4p, after accounting charges of £1.6 billion related to US tax reform
Adjusted EPS 111.8p, +11% AER, +4% CER, in line with 2017 guidance
2017 free cash flow of £3.4 billion (2016: £3.0 billion)
23p dividend declared for quarter; 80p for 2017
2018 financial guidance
2018 Adjusted EPS Guidance: Growth is subject to uncertainty of timing and impact of possible generic competition to Advair in the US:
In the event of no substitutable generic competitor to Advair in the US, expect 2018 Adjusted EPS growth to be 4 to 7% CER
In the event of a mid-year introduction of a substitutable generic competitor to Advair in the US, expect full year 2018 US Advair sales of around £750 million at CER (US$1.30/£1) with Adjusted EPS flat to down 3% CER
Both scenarios reflect the benefit of US tax reform with expected 2018 effective tax rate on Adjusted profits of 19-20%
Continue to expect 80p dividend for 2018
Product and pipeline highlights
New product sales of £6.7 billion, +51% AER, +44% CER, driven by strong performances from Tivicay and Triumeq in HIV, the inhaled Ellipta portfolio and Nucala in Respiratory and meningitis vaccines
Three key approvals: Shingrix vaccine for shingles; Trelegy Ellipta, once-daily single inhaler triple therapy for COPD; Juluca (dolutegravir and rilpivirine), first 2-drug regimen, once-daily, single pill for HIV
Preferential recommendation for Shingrix received from US CDC
Trelegy Ellipta approved in Europe for COPD
Nucala filed in US for eosinophilic COPD
Phase III HIV treatment study initiated investigating long-acting 2-drug regimen of cabotegravir plus rilpivirine administered every two months
In Oncology, Breakthrough Therapy Designation received from FDA for BCMA antibody-drug conjugate for relapsed and refractory multiple myeloma. Positive BCMA data presented at ASH (Free ASH Whitepaper) meeting.
Emma Walmsley, Chief Executive Officer, GSK said:
"In 2017 GSK delivered encouraging results from across the company with sales growth in each of our three global businesses, an improved Group operating margin, Adjusted EPS growth of 4% (CER) and stronger free cash flow.
"We are focused on competing effectively across our current portfolio and delivering three new launches which bring significant benefits to patients: Trelegy Ellipta which provides three medicines in a single inhaler to treat COPD; Juluca, the first 2-drug regimen, once-daily, single pill for HIV, helping to reduce the amount of medicines needed, and Shingrix, our new vaccine which represents a new standard for the prevention of shingles.
"Improving our Pharmaceuticals business remains our main priority and we are strengthening our pipeline with a focus on priority assets in two current therapy areas, Respiratory and HIV, and two potential areas, Oncology and Immuno-inflammation. We will provide a further update to investors at Q2 on our plans for R&D.
"We continue to make changes across GSK to drive improvements in performance and we have made several new appointments to key leadership positions.
"Looking ahead, in 2018 we could see a potential generic version of Advair in the US and our 2018 guidance reflects this. With the sales momentum we anticipate from new and recent launches and focused improvements in operating performance we are increasingly confident in our ability to deliver mid to high single digit growth in Adjusted EPS CAGR (2016-2020 at 2015 CER).
"Cash generation also continues to be a key focus with free cash flow for the year improving to £3.4 billion. We met our commitment to pay a total dividend of 80p for 2017 and continue to expect to pay 80p for 2018.
"Finally, I would like to thank all our customers, suppliers and employees for their support and hard work in 2017 and look forward to working with them in 2018 and beyond to deliver our strategic priorities and improved performance for GSK."
2018 guidance
The Group expects to make continued progress in 2018, although the expectation for Adjusted EPS growth is impacted by a number of factors including, in particular, uncertainties relating to the timing and extent of potential generic competition to Advair in the US.
In the event that no substitutable generic competitor to Advair is introduced to the US market in 2018, the Group expects 2018 Adjusted EPS growth of 4 to 7% at CER. This is based on an expected decline in 2018 US Advair sales of 20-25% at CER.
In the event of a mid-year introduction of a substitutable generic competitor to Advair in the US, the Group expects full year 2018 US Advair sales of around £750 million at CER (US$1.30/£1), with Adjusted EPS flat to down 3% at CER.
The effective tax rate for 2018 is expected to be approximately 19-20% of Adjusted profits after the impact of US tax reform which is expected to benefit the Group effective tax rate by two to three percentage points.
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 59.
If exchange rates were to hold at the average rates for January 2018 ($1.39/£1, €1.13/£1 and Yen 154/£1) for the rest of 2018, the estimated negative impact on full-year 2018 Sterling turnover growth would be around 4% and if exchange gains or losses were recognised at the same level as in 2017, the estimated negative impact on 2018 Sterling Adjusted EPS growth would be around 6%.
US tax reform
The enactment of the US Tax Cuts and Jobs Act in December 2017 is expected to have a positive impact on the future after tax earnings of GSK’s US businesses. This is primarily due to the reduction in Federal corporation tax rates from 1 January 2018, which is expected to benefit the Group effective tax rate on Adjusted profits in 2018 by two to three percentage points.
The implementation of the new law has resulted in a number of additional charges in 2017, which reduced Total earnings by £1,630 million.
Firstly, increased valuations of the HIV and Consumer Healthcare businesses due to lower US tax rates resulted in an increase in the related liabilities for contingent consideration and the put options of £666 million.
Secondly, an additional tax charge of £1,078 million comprised a reduction in the value of US deferred tax assets held against future liabilities, such as pensions, of £730 million, and a charge of £348 million arising on the reserves of subsidiaries of US entities in the Group. The cash impact of this latter charge will be spread over eight years from 2018, with approximately 60% expected to be payable in years six to eight.
These charges were partly offset by an allocation to non-controlling interests amounting to £114 million, as many of the adjustments related to ViiV Healthcare and the Consumer Healthcare Joint Venture.
These charges represent management’s estimates of the impact of US tax reform on the Group based on the information currently available. As more information on the detailed application of the Act becomes available, the assumptions underlying these estimates could change, with consequent adjustments to the charges taken that could have a material impact on the results of the Group.