GSK have now released their half year results for 2014.
Revenues fell almost across the board with the exception of ViiV Healthcare, which was broadly flat when compared to the same period of last year. US sales, consumer healthcare and established products were hit particularly hard, down by £458M, £290M and £511M respectively. Cost of sales fell by £483M but Gross Profits were still down to the tune of £1.432BN. Royalty income was down £53M following the conclusion of a number of royalty agreements but fairly substantial decreases in admin and R&D costs meant that operating profits were £815M lower than in the first half of last year. Finance expenses and taxation also fell but the total profit for the half year was still some £692M lower than during the first half of 2013.
Overall total assets fell by a massive £3.236BN. This was driven by a £2.371BN collapse in the level of cash, a £539M reduction in goodwill, an £870M fall in other intangible assets and a £442M reduction in trade receivables, somewhat mitigated by a £1BN increase in assets held for sale relating predominantly to assets involved in the Novartis deal. Likewise, liabilities also fell when compared to the end point of last year as trade and payables fell by £1.368BN and borrowings were down by £595M. This was not enough to increase net assets, though as they were some £976M lower than last year with net assets without goodwill down by £437M to £3.170BN.
Before movements in working capital, cash profits were down £1.263BN at £2.660BN before an increase in working capital, predominantly due to stock building, and broadly similar taxes meant that net cash flow from operations was down £1.265BN at £1.693BN. The group then spent £473M on tangible assets and £270M on intangibles. A disposal of a business added £194M to the coffers but £669M was spent on non-controlling interests. The group managed to repay £204M in net borrowings and spent a net £124M on buying back shares. After all this, GSK also managed to pay out £2.169BN on dividends which is clearly not sustainable at these levels as the £2.332BN cash outflow for the six months attests. There is still £2.858BN of cash left but another six months like this will soon wipe that out.
Respiratory sales fell by 9% to £3.113BN. The group’s main drug, Seretide/Advair fell by 14% to £2.134BN, which is a little concerning. Flovent sales also fell but Ventolin sales were up 11% and Xycal also increased revenues. The bulk of this fall was due to a 24% decline in Advair sales in the US due to increased competition. Sales of Seretide in Europe fell by 4%, again on the back of increased competition whilst in emerging markets, respiratory sales were flat, although discounting China, emerging markets grew by 3%. In Japan respiratory sales fell by 4% as flat Advair revenues, increases in Xyzal sales and the launch of Revlar Ellipta were more than outweighed by falls in the rest of the Respiratory portfolio.
Oncology sales in the first half did well, up 33% to £556M. Votrient sales increased by 36% to £188M and Promacta sales were up 33% to £103M, partially counteracted by falls in Arzerra and Tykerb revenue. The division was also boosted by launches for Tafinlar and Mekinist. In the US, Oncology was up 36% driven by increases to Votrient and Promacta. In Europe, Oncology grew by 31%, led by an increase in Votrient sales. In Emerging Markets and Japan, sales in the first half grew by 42% and 10% respectively.
Cardiovascular, Metabolic and Urology sales fell by 2% to £474M as an increase in Duodart/Jalyn sales was counteracted by falls in Avodart and Levitra. On a regional basis, US sales collapsed by 19% whilst sales in Europe, Emerging Markets and Japan all increased. Immuno-inflammatory sales grew 42% from a low base to £88M, predominantly made up of US Benlysta sales, up 24%. Other therapy areas grew by 4% to £1.197BN, primarily reflecting government stockpiling of Relenza in Japan which more than doubled revenues during the half year. This growth was partially offset by generic competition to Dermatology products. ViiV Healthcare sales increased by 9% to £663M with the US up 20%, Emerging Markets down 6%, Japan up 17% and Europe down 1%. There were increases in Epzicom/Kivexa, Selzentry and Tivicay revenues, partially mitigated by declines in Combivir and Trizivir due to generic competition. Established product sales fell by 18% to £1.510BN with declines seen in all regions. Generic competition to Lovaza drove sales of that product down 54%. Other drivers to the decline were Seroxat/Paxil, Valtrex and Zeffix.
Sales of vaccines grew by 4% to £1.424BN with US revenues up 9%, Emerging Markets increasing by 10%, Europe sales down 1% and Japan revenues collapsing by 27%. US sales were flattered by favourable comparisons with the first half of last year whilst the emerging market performance primarily reflected the phasing of sales of Boostrix and Rotarix. Boostrix sales increased by 45% reflecting growth in all regions with sales in the US benefiting from competitor supply issues and in Emerging markets by phasing of tenders. Cervarix sales fell by 28% due to declines in Japan whilst sales of hepatitis vaccines fell by 9%, in part reflecting phasing of shipments in the US and Emerging Markets. Infanrix revenues grew by 9% where most of the growth came from the US which benefited from a favourable comparison with the first half of last year. Rotarix sales were up 24% to £189M due to tender shipments in Europe and Emerging Markets whilst Synflorix sales were up 7% reflecting the phasing of tenders in Emerging Markets.
Consumer Healthcare sales were down 2% to £2.149BN reflecting the impact of supply issues, comparison to a strong cold and flu season in Q1 2013 and slowing in some Rest of World markets in part due to economic pressures. Wellness sales were down 8%, primarily due to supply issues and product recalls that significantly impacted sales of products for Smokers Health, down 31%. Oral Health revenues were up 2% as the continued growth of Sensodyne was offset by a 17% decline in Aquafresh, impacted by supply issues in both Europe and the US together with competitive pressures. Nutrition sales grew 10% with Horlicks up 9% due to strong growth in India and Boost, up 12%. Sales of Skin Health products were down 11% primarily due to lower sales of Bactroban in China.
Over the half the year the group has seen another step change reduction in Advair market share and it is apparently clear that these pressures are likely to continue. Therefore there is some urgency in the desire to diversify the Respiratory portfolio with recent releases of Breo, Anoro and Incruse. So far Breo has a 70% Medicare coverage and Anoro a 30% coverage.
As announced earlier as part of the transaction with Novartis, there will be a new joint venture created that will include the Consumer Healthcare brands of both businesses with GSK having 63.5% of the ownership. Additionally, GSK will acquire Novartis’ vaccines business (excluding the flu vaccines) for $5.25BN with a potential milestone payment of $1.8BN plus ongoing royalties. GSK will also divest its Oncology portfolio and partner rights for future oncology products to Novartis for $16BN, $1.5BN of which depending on the results of an ongoing clinical trial. The transaction is expected to complete during the first half of 2015.
The investigation in China is continuing and it seems that the US department of Justice and the UK Serious Fraud Office are also investigating the group with the SFO opening a criminal investigation into the group’s commercial activities. Overall the provision for legal disputes was £500M and the legal charges for the half year stood at £155M. The group is also battling the strong pound and if exchange rates were to stay the same, the group predict an adverse impact of EPS in 2014 of 12%.
During Q2, there were a number of developments in the drug pipeline. Breo for asthma was filed in the US and in the second half of the year, the group expect an FDA regulatory decision on the ICS monotherapy product for asthma and the IL-5 antagonist mepolizumab will be filed with regulators for severe asthma. Also, Eperzan/Tanzeum was approved in the US and EU and other approvals include FDA approval of Incruse for COPD in the US, EMA approval of Anoro for COPD in Europe, EMA approval of Arzerra for first line treatment of CLL in Europe and Japan approval of Anoro for COPD and EMA approval of Mekinist for melanoma in Europe.
This week, Tanzeum, the new weekly treatment for diabetes will be launched in the US and good progress is being seen for the recent oncology launches, Tafinlar and Mekinist. There are apparently 30 assets that have the potential to be first in class drugs and management are confident that they can deliver a regular flow of new products over the next few years as the group becomes less dependent on Seretide/Advair. The group have started a process to divest some US and European assets in the established products portfolio, which currently account for sales of about £1BN.
Net debt at the end of the half stood at £14.423BN which was an increase of £1.778BN from the end of last year. This is certainly very disappointing and quite a substantial amount which has been caused by both the strength of Sterling and lower profits. Also, the group have now stated that they will be unlikely to deliver sales growth this year and that core EPS will be broadly similar to last year. Also, due to the poor cash flow expected, there will be no more share repurchases this year. The quarterly dividend this quarter is 6% higher at 19p to give a rolling dividend yield of 5.5%, which if sustainable, and the cash flow seems to suggest it’s not, is a good return. Overall, though, this has been a very disappointing half year for the group. The decline of Advair is particularly worrying and it is imperative that GSK find drugs to replace it. The Novartis deal is interesting but it is a shame that the main performer so far this year, the Oncology products, will be flogged off. Overall, I am less comfortable holding this share than ever before but for now I will continue holding.
On the 22nd August, the group announced that it had received FDA approval for Triumeq, a new single pill regiment for the treatment of HIV for use in the US. The drug interferes with the way that the virus replicates and GSK are waiting for approval from a number of other markets too.
On the 3rd September the group announced that the EU had followed the FDA in giving approval for Triumeq for the treatment of HIV in Europe.
On the 8th September the group announced the results of two phase III asthma studies of mepolizumab. The objective of the MENSA and SIRIUS studies was to evaluate the impact of the drug on a number of key end points, with patients receiving mepolizumab achieving a statistically significant reduction in the frequency of significant asthma attacks compared to a placebo in MENSA, and a statistically significant reduction of daily oral corticosteroid dose in SIRIUS. Treatment with mepolizumab also enabled patients to experience improved quality of life and improved asthma control. GSK is looking towards global filings of mepolizumab for severe eosinophilic asthma before the end of the year, so these results look good.
On the 19th September the group announced that a Chinese court had found that GSK has offered money or property to non-government personnel in order to obtain improper commercial gains, and had been found guilty of bribing non-government personnel. As a result, GSK must pay a fine of £297M to the Chinese government which will be funded through cash reserves. GSK have apparently taken steps to rectify the issues at the Chinese subsidiary, including changing the incentive program for its sales force by decoupling sales targets from compensation and significantly reducing engagement activities with healthcare professionals. Whilst this is a sizeable fine, I believe it is very good that it has been sorted out so quickly. Hopefully GSK can now put this behind them and that the damage done to them in China is reparable.
On the 25th September the group announced that Sir Philip Hampton will join the board as Non exec director from January 2015. The idea is that he will eventually succeed Christopher Gent as Chairman from September. Philip has been chairman RBS since 2009 and has previously been Chairman of Sainsbury and Finance director at LloydsTSB, BT, BG and British Steel.