Glaxo has now released their half year results for the year ending 2013.
In the first half of the year, revenues in US and European pharmaceuticals ticked up slightly, along with Consumer Healthcare revenues. Emerging market pharmaceutical revenues were up substantially but this was counteracted by a big fall in Japanese Pharmaceutical revenues with ViiV healthcare continuing its decline. Overall revenues were almost flat, down by just £13M. An increase in cost of sales drove Gross profit down £143M. Selling and admin costs reduced, but this was more than mitigated by an increase in R&D expenditure. Royalty Income increased by £57M but an “other” operating income of £545M in the first half of last year turned into and expense of £69M which had an adverse effect on operating profit, down £709M to £3B. There was a £29M profit on disposal of associate and income from associates and joint ventures increased to £18M, added to this, taxation was lower than last year which gave a profit for the period of £2.1B, down by £563M on the first half of last year. Due to a huge actuarial gain on the pension scheme, total comprehensive income was £2.9B.
Overall assets were up by more than half a billion pounds to £42.1B. The largest increases were the £488M extra in assets held for sale which relates to the anticoagulant and Lucozade/Ribena operations which are being held for divestment, the £451M increase in other investments and the £341M increase in trade and other receivables. This was partially counteracted by the £1.3B reduction in cash levels. Liabilities were also up, driven by a £300M increase in loans and a £269M hike in provisions. Overall net assets were up £534M to £7.3B but when goodwill is taken off, they are up a bit less (£394M to £2.8B).
Cash profits showed an improvement of £247M over the first six months of last year and after adverse movements in working capital caused mainly by increased inventories to support growth businesses, the cash generated from operations was £109M more than last year at£3.6B, which after tax became £2.96B. Capital expenditure was higher than last year and there was a net outflow of cash on the purchase of intangibles of £135M as opposed to a net income of £672M during the first half of last year. There was also £205M spent on the purchase of new business which meant that the cash flow before financing activities was £2.18B, £596M down on 2012. There was £366M of shares purchased and cancelled but £426M of new share capital issued – not sure how that makes sense! There was also £588M spent on the purchase of non-controlling interests, a net £458M repayment of loans and £1.94B of dividends paid to shareholders. This all meant that there was a cash outflow of £1.37B during the half year. This sounds disappointing and seems to basically be as a result of keeping the high payments of dividends to shareholders.
The group reached settlements in principle with the Attorneys General of eight states to resolve lawsuits relating to the marketing of Avandia as well as the separate action brought by the Attorney General of Louisianna relating to other products. The total settlement was $229M and was within existing provisions. As soon as one legal issue seems to be becoming resolved, another one rears its head, though. The Ministry of Public Security in China has confirmed an ongoing investigation into alleged serious economic crimes by GSK China which is a real blow as China is one of the areas that GSK is performing well. The outcome at this time is not known.
During the year, the group completed the acquisition of Okairos AG, a European based biopharmaceutical company focused on the development of a specific vaccine technology in the prophylactic and therapeutic fields. The total consideration was £205M which represented a goodwill payment of £37M. An offer of £700M was received for the two anticoagulant products and the related manufacturing site from Aspen Group during the period.
Excluding the impact of disposals, turnover was up by 2% during the half year. There was a differing performance for each sector. Worldwide vaccines fell by 5% due to the reduction in Cervarix sales in Japan. Discounting this, vaccines increased sales by 1% reflecting strong growth Infanrix in the US due to a competitor supply issue. Consumer healthcare sales grew by 6% discounting the divested OCT brands. In the US, Pharmaceutical sales fell by 2% mainly due to the conclusion of the co-promotion Vesicare agreement. Sales of respiratory products fared well and grew by 8% and Oncology sales were even stronger, up by 17% but was partially offset by a 21% decrease in Lamictal sales due to increased generic competition and a 35% fall in dermatology sales. US vaccine sales were up 7% primarily due to a 19% hike in Infanrix sales.
European pharmaceutical sales were down by 3% as good sales of Oncology products were counteracted by lower sales of older products and price reductions of Avodart. Vaccines grew sales by 5% due to improved tender performance and beneficial tender phasing. EMAP pharmaceutical sales grew by 7% with the Middle East, African and China showing particularly good contributions. Augmentin sales were up 18% and Setetide was up 11% but augmentin sales had a favourable comparison with a poor half last year that was affected by supply problems. EMAP vaccine sales were down 5% due to phasing issues. In Japan there was a 4% increase in pharmaceutical sales as strong growth in respiratory products Avodart, Lamictal and Relenza were partially offset by an erosion in Paxil sales. Japanese vaccine sales collapsed by half and ViiV healthcare sales fell by 5% as increased sales of Epzicom and Selzentry were more than counteracted by falls in sales of older products. Not including the divestments, consumer healthcare turnover was up by 6%. Growth in the US and Europe was driven by Sensodyne and the restocking of Alli. In the rest of the world, strong growth in India, the Middle East and Latin America was mitigated by falls in Chinese sales. US and European pharmaceuticals still make up the majority of profits.
Respiratory sales in the first half of the year were up 5% with strong growth in all regions with the exception of Europe. Seretide sales were up 5%, Flixotide sales were up 6%, Xyzal sales were up 28% (albeit from a small base) and Ventolin was up 5%. In the US, sales were up an impressive 8%, European sales were down 2% reflecting ongoing austerity measures, EMAP sales increased by 8% with strong growth in China, Turkey and Brazil and Japanese sales were up 10%. Anti-viral sales were down by 8% due to declines in Valtrex and Relenza; Central Nervous System sales were down by 12% with Seroxat, Requip and Lamictal sales all suffering from generic competition; Cardiovascular sales were down 12% due to the conclusion of the Vesicare co-promotion agreement in the first quarter of 2012. Not including Vesicare, sales were up 1% due to strong increases in Avodart and Duodart revenues. Metabolic sales were up 19% but still represent a small sector for the group.
Anti-bacterial sales were up 4% driven by an 8% hike in Augmentin sales as strong growth in EMAP was helped in part by the phasing of shipments in H1 2012 as a result of some earlier supply interruptions. Oncology sales did well, increasing by 20% as Votrient sales more than doubled, Promacta sales grew 51% and Arzerra sales grew 41% which were mitigated slightly by a 13% fall in Tykerb and generic competition for Hycamtin in Europe and Argatroban in the US. Dermatology sales were down 4% with US sales crashing by 35%. Rare Disease sales were up 17% which were mostly driven by Volibris, up 24% and Mepron up 62%. Flolan sales were down 16% as a result of the biennial price reduction in Japan and continued generic competition in Europe. Immuno-inflammation sales were £67M, up from nothing this time last year – all these sales were for Benlysta. ViiV healthcare sales were down 5% as a 10% hike in Epzicom and an 18% increase in Selzentry sales were not enough to halt the decline in the more mature portfolio.
Vaccine sales fell by 5% due to the comparison with the final stages of the HPV vaccination catch up programme in the same period of last year. Excluding Japanese Cervarix sales, vaccines were actually up by 1% reflecting strong performance in Europe and the US offset by the impact of the phasing of tender orders in EMAP. Synflorix sales fell by 8%, largely reflecting phasing order timing; Infanrix sales increased by 14% due to stronger orders in Europe and EMAP along with competitor supply issues in the US. Sales of Hepatitis vaccines fell by 5% due to the return to the market of a competitor in the US.
Consumer healthcare sales were up 1% but when the sold OTC brands are discounted, turnover was up 6%. The strong performance in oral healthcare was driven by a 14% hike for Sensodyne and a 9% increase for denture care brands. Total Wellness brand sales were up 4% on a like for like basis which was partially driven by the favourable comparison for Alli, which was out of stock for a period in the first half of last year for both the US and Europe. A severe cold and flu season in early 2013 helped Coldrex, Panadol and Beechams increase sales but there was a 45% reduction in sales of Contac, due to new shelving requirements in China. Nutrition sales were up 6% as strong growth in emerging markets, led by Horlicks in India more than offset a 2% decline in Europe. Skin health sales were up 9% led by Abreva in the US.
At the end of the half year, the group had a net debt position of £15.72B, which was a whole £1.683B more than at the start of the year (£800M of this is being blamed on adverse dollar to sterling exchange rates and another £800M due to the acquisition of further shares in Glaxo India and the acquisition of Okairos). Glaxo need to be careful not to let this get carried away. The group are targeting share repurchases of between £1-2B during the year.
During the half year there was a £48M amortisation of the Benlysta intangible asset acquired as part of the HSG acquisition. Other one-off costs were the £151M under the Operational Excellence Programme, £90M under the Major Change Programme and £18M related to the HSG acquisition. There was also £90M of legal charges principally related to provisions for existing product liability matters.
There have been a number of changes to the pipeline of new drugs. Quadrivalent flu vaccine was approved in Q1 but there was less good news for IPX066 as the collaboration with Impax was terminated. In Q2 there was FDA approval for COPD treatment Breo Ellipta and Mekinist and Tafinlar for Metastatic Melanoma. All three of these treatments have subsequently also been filed for use in the EU.
Overall then, revenues were flat on the same period of last year with decent performances in the US, Europe and EMAP were counteracted by lower revenues in Japan due to the comparison last year with the end of the Cervarix vaccination programme and falls in ViiV sales due to the mature portfolio. R&D and other cost of sales were also up which meant that profit for the half year was down £563M to £2.1B. Net assets ticked up a decent amount due to new investments and cash from operations also did well despite a large investment in inventories. Cash flow was impacted by higher capital expenditure, the purchase of acquisitions and a lack of any intangible asset sales which meant there was a cash outflow of £1.37B. When it is considered that £1.94B was spent on dividends, this outflow isn’t a total disaster. Progress has been made on the Avandia lawsuits which seems to be mostly behind the group now but the new investigation in China is a real blow considering how important the country was becoming to Glaxo. Disappointingly net debt was up considerably which was blamed on adverse exchange rates and acquisitions. I would like to see net debt come down somewhat in future as it seems a bit high to me. The board announced a dividend of 18p (the same as for the last quarter) for the quarter which makes the rolling annual yield 4.7% which is pretty decent. I still rate these shares as a hold given the dividend income.