Interim Results

GlaxoSmithKline PLC 28 July 2005 Issued: 28th July 2005, London Results Announcement for the Second Quarter 2005 GSK continues strong performance in 2005 with Q2 EPS up 10% CER to 20.4p GlaxoSmithKline plc (GSK) today announces its results for the second quarter ended 30th June 2005. The full results, which have been prepared on an IFRS basis, are presented under 'Income Statement' on pages 6 and 7, and are summarised below. FINANCIAL RESULTS* Q2 2005 Q2 2004 Growth H1 2005 H1 2004 Growth £m £m CER% £% £m £m CER% £% Turnover 5,246 4,971 6 6 10,282 9,826 5 5 Operating profit 1,711 1,525 13 12 3,458 3,018 16 15 Profit before tax 1,662 1,540 9 8 3,373 3,006 13 12 Earnings per share 20.4p 18.9p 10 8 41.5p 36.9p 14 12 Q2 2005 SUMMARY* • Strong financial performance: - Total pharmaceutical turnover up 6% to £4.5 billion; EPS growth of 10% - Strong cash generation: £1.5 billion cash inflow from operating activities in the quarter • Key products drive sales growth: - Seretide/Advair for asthma/COPD up 22% to £725 million - Avandia/Avandamet for diabetes up 16% to £352 million - Vaccines up 15% to £322 million - Lamictal for epilepsy/bipolar disorder, Coreg for heart disease and Valtrex for herpes together up 19% to £503 million • Pipeline momentum continues: - Boniva for osteoporosis and Requip for restless legs syndrome successfully launched in the USA - Aplaviroc ('140), GSK's CCR5 antagonist for the treatment of HIV, entered Phase lll clinical development - Five major new vaccines expected to be launched in the next five years - Orlistat, potentially the first FDA-approved over-the-counter weight loss product, filed in the USA. Commenting on the performance for the quarter and GSK's outlook, JP Garnier, Chief Executive Officer, said: "Another excellent performance this quarter reinforces the very positive outlook for GSK in 2005. Our key products, led by Seretide/Advair, continue to drive sales growth across all regions. Importantly, our pipeline momentum also continues - this quarter we launched two new products, confirmed the potential of our outstanding vaccines pipeline and made good progress in the development of promising new treatments for HIV." * The Group's practice is to discuss its results in terms of constant exchange rate (CER) growth. All commentaries compare 2005 results with 2004 in CER terms unless otherwise stated. See 'Accounting Presentation and Policies' on page 20 for fuller explanations of these matters. KEY GROWTH DRIVERS CONTINUE TO PERFORM STRONGLY Strong performance of key products drives 6% global pharmaceutical sales growth: • Pharmaceutical growth was 9% in both Europe and International. US growth of 3% was impacted by an interruption in Paxil CR supply. Excluding this factor, US growth was 7%. US wholesaler stock movements affected the reported growth of a number of individual products, but did not affect the overall growth of the US business. • Seretide/Advair, for asthma and COPD, had another strong quarter with sales up 22% to £725 million, driven by good performance across all regions. Reported sales growth in the USA (+34%) benefited from a favourable comparison to the second quarter of last year, which was impacted by wholesaler stocking patterns. Underlying growth in the USA was estimated to be 22% in the quarter. • Diabetes treatments (Avandia/Avandamet) rose 16% to £352 million in the quarter. US sales also increased 16% to £263 million, despite a four-month interruption in supply of Avandamet. Re-supply of Avandamet to the US market began in late June, and the product has already recaptured 59% of its previous share of weekly new prescriptions in the US oral anti-diabetic market. • Global sales of GSK's epilepsy and bi-polar disorder treatment, Lamictal, grew 28% to £216 million. In the USA, Lamictal continued to grow strongly with sales up 38% to £140 million, driven by its indication to treat bi-polar disorder. • Sales for the heart disease treatment Coreg rose 13% to £125 million and for the herpes treatment Valtrex increased 13% to £162 million. Reported US growth for both these products was adversely affected by wholesaler stocking patterns. Underlying US growth was estimated to be 36% for Coreg and 20% for Valtrex. • GSK's HIV franchise grew 6% to £386 million despite competition from newly launched products. • Sales of Avodart for benign prostatic hyperplasia (BPH) more than doubled in the quarter to £28 million. Avodart's share of new prescriptions in the US 5-Alpha Reductase Inhibitor market is now over 30%. Vaccine sales up 15%; strategic investments made to increase manufacturing capacity: • GSK's Vaccines business had a strong quarter with sales up 15% to £322 million. European sales rose 26% to £147 million, driven by the strong performance of the Infanrix franchise. During the quarter, GSK also received FDA approval for Boostrix, a new vaccine that adds protection against pertussis (whooping cough) to the routine tetanus/diphtheria booster administered to teenagers. • GSK has also taken steps to increase its vaccines manufacturing capacity. On 12th July GSK completed the acquisition of Corixa Corporation, a bio-pharmaceutical company based in the USA, which develops vaccine adjuvants including MPL, a component of the novel adjuvant used in Cervarix. Additionally, on 1st July GSK announced its intention to invest £63 million in its manufacturing plant in Dresden, Germany, to meet expected increased demand for Fluarix. Product line extensions mitigate impact of generic competition to anti-depressant franchises: • Total sales of the Paxil franchise declined 47% to £152 million and the Wellbutrin franchise was down 11% to £167 million in the quarter. Sales of Paxil IR (-33% to £126 million) and Wellbutrin SR/IR (-81% to £13 million) declined as a result of generic competition. Q2 sales of Paxil CR were down 73% (to £26 million) due to an interruption in product supply during the quarter. Paxil CR was re-supplied to the US market in late June, and has already recaptured 41% of its previous share of weekly new prescriptions. Wellbutrin XL continued to perform strongly with sales up 34% to £154 million. PIPELINE UPDATE Two new products launched during the quarter: • Bonviva/Boniva, the only once-monthly oral bisphosphonate for the treatment of osteoporosis was launched in the USA in late April. In June Boniva had already achieved a 4.1% share of new prescriptions in the US bisphosphonate market, which was worth $3 billion and grew 20% in 2004. Bonviva also received a positive opinion from the European Committee for Medicinal Products for Human Use (CHMP) in June, and EU approval is expected in H2 2005. • Requip, the only product indicated for the treatment of moderate-to-severe restless legs syndrome (RLS), was launched into the US market in June. RLS is the third most common sleep disorder with an estimated 15 million US adults suffering from the condition. Initial performance has been very encouraging with a 79% increase in weekly new prescriptions since approval. Broad pipeline of novel vaccines reviewed at R&D seminar: • In June GSK profiled its innovative and expanding vaccines research pipeline. Among the highlights, the company announced that it expects to launch five major new vaccines within the next five years: - Cervarix, GSK's HPV vaccine for cervical cancer, which continues to progress well in clinical trials and is on track for European filing in H1 2006 - Rotarix, for rotavirus, received approval in Brazil in July. Rotarix has now been approved in 11 countries and filed for approval in Europe - Streptorix for pneumococcal disease - New combination vaccines against meningitis - An improved vaccine for influenza. Updates received on selected Phase II/III assets: • On 21st July, GSK and its partner Adolor Corporation received an approvable letter from the FDA for Entereg (alvimopan) which is currently under review for the management of post-operative ileus (POI) by acceleration of the time to recovery of gastrointestinal function following bowel resection surgery. Adolor will continue to work with the FDA to meet the agency's additional data requirements for approval. Entereg is currently in Phase II development for opiate-induced bowel dysfunction (OBD) and is due to enter Phase III development in Q3 2005. • Positive new data was published at ASCO on 16th May on lapatinib, GSK's dual kinase inhibitor for the treatment of solid tumours. Lapatinib showed a 35% response rate in women with advanced breast cancer in an initial trial of the drug as first-line treatment. GSK is on track to submit lapatinib for regulatory approval in late 2006 or early 2007. • '140 (aplaviroc), GSK's novel CCR5 antagonist for the treatment of HIV, progressed into Phase III development during the quarter and is expected to be filed in 2007. • Positive Phase II data from another new treatment for HIV, '385 a protease inhibitor, were received in the quarter and are due to be presented at ICAAC in September. • Phase II data on '634 (an nNRTI for HIV) were received in the quarter and presented at the third International AIDS Society Conference on 27th July. In a seven-day study, '634 showed potent anti-viral efficacy in previously treated, nNRTI-resistant HIV patients. Further analysis to assess the level of rash observed in this, and other, studies will be undertaken. • Phase III data on retapamulin, GSK's new topical antibiotic for skin infections, were received in the quarter and are due to be presented in H2 2005. Retapamulin is on track for FDA filing by the end of the year. • Phase II data on '797 and '901, GSK's long-acting bronchodilators for asthma were received and '797 has now been selected to go forward into Phase IIb trials, which will begin in October 2005. • Phase II data on '682 and '353, both for the treatment of diabetes, were received in the quarter. Results were inconclusive and further studies, evaluating alternative doses and treatment regimens, will now be undertaken. '353 also continues in development for over-active bladder and Phase II data for this indication are due to report in 2006. New Phase II compound in-licenced: • In July 2005, an option was exercised with Human Genome Sciences, to develop jointly and commercialise LymphoStat-B, a human monoclonal anti-body with potential utility as a treatment for rheumatoid arthritis (RA) and systemic lupus erythematosus (SLE), a serious auto-immune disease with high unmet medical need. The Phase II data for RA, received in April 2005, triggered the option, whilst Phase II SLE data is expected in H2 2005. CONSUMER HEALTHCARE UPDATE Consumer Healthcare sales grew 3%. Sales were up 9% in International markets, up 1% in Europe and level with last year in North America. Operating profit for the business grew 16% as the business continued to benefit from a favourable sales mix (growth from higher-margin products) and cost containment. Over-the-counter medicine sales were up 3% to £347 million. Smoking control products grew 7% with a strong performance in the USA (+9%). Sales of Analgesics including Panadol grew 5%, with good growth of 14% in International markets. Oral care sales grew 2% to £232 million. Sensodyne sales were up 15% with strong growth in all regions, helping to offset lower sales of other toothpaste products. Nutritional healthcare products sales grew 4% to £162 million, with strong sales of Horlicks (+11%) in International markets. In June, the Group filed an application with the FDA requesting approval to market orlistat for weight loss as an over-the-counter medicine. FINANCIAL REVIEW These results have been prepared under International Financial Reporting Standards (see 'Accounting Presentation and Policies' on page 20). Operating profit and earnings per share Operating profit for Q2 2005 was £1,711 million, a 13% increase in CER terms (12% in sterling terms) compared with Q2 2004. EPS of 20.4 pence increased 10% in CER terms (8% in sterling terms) compared with Q2 2004. The adverse currency impact of 2% on EPS reflected a weaker US dollar partially offset by a stronger Euro. EPS growth of 10% was above sales growth of 6% primarily reflecting lower legal charges and improvements in operating efficiencies, only partly offset by lower asset sale profits. Currencies The second quarter 2005 results are based on average exchange rates, principally £1/$1.85, £1/Euro 1.48 and £1/Yen 199. The period-end exchange rates were £1/$1.79, £1/Euro 1.48 and £1/Yen 199. Since the period-end, the US dollar has further strengthened versus sterling to a current rate of approximately $1.75. If the exchange rate were to hold at this level for the remainder of 2005, the currency impact on earnings per share growth would be up to 1% favourable for the full year 2005. Dividend On 28th July 2005 the Board declared a second interim dividend of 10 pence per share. This compares with a dividend of 10 pence per share for Q2 2004. The equivalent dividend receivable by ADR holders is 34.7780 cents per ADS based on an exchange rate of £1/$1.7388. The dividend will have an ex-dividend date of 3rd August 2005 and will be paid on 6th October 2005 to shareholders and ADR holders of record on 5th August 2005. Under IFRS the liability for an interim dividend is only recognised in the period when it is paid, so the Q2 2005 financial statements do not reflect this dividend (see 'Dividends' on page 13). Earnings guidance On an IFRS basis, 2005 EPS percentage CER growth is expected to be in the low double-digit range. Share buy-back programme In October 2002, GSK commenced a new £4 billion share buy-back programme. At 31st December 2004 £2,199 million of shares had been repurchased under this programme. A further £390 million was invested in H1 2005 on purchasing shares to be held as Treasury shares. The exact amount and timing of future purchases, and the extent to which repurchased shares will be held as Treasury shares rather than being cancelled, will be determined by the company and is dependent on market conditions and other factors. GlaxoSmithKline - 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 company information including a copy of this announcement and details of the company's updated product development pipeline, visit GSK at www.gsk.com. Enquiries: UK Media Philip Thomson (020) 8047 5502 David Mawdsley (020) 8047 5502 Chris Hunter-Ward (020) 8047 5502 US Media Nancy Pekarek (215) 751 7709 Mary Anne Rhyne (919) 483 2839 Patricia Seif (215) 751 7709 European Analyst / Investor Duncan Learmouth (020) 8047 5540 Anita Kidgell (020) 8047 5542 Jen Hill (020) 8047 5543 US Analyst / Investor Frank Murdolo (215) 751 7002 Tom Curry (215) 751 5419 Brand names appearing in italics throughout this document are trade marks of GSK or associated companies with the exception of Levitra, a trade mark of Bayer, Vesicare, a trade mark of Astellas, Entereg, a trade mark of Adolor and Bonviva/Boniva, a trade mark of Roche, which are used under licence by the Group. Cautionary statement regarding forward-looking statements Under the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995, the company cautions investors that any forward-looking statements or projections made by the company, including those made in this Announcement, are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Factors that may affect the Group's operations are described under 'Risk Factors' in the Operating and Financial Review and Prospects in the company's Annual Report 2004. INCOME STATEMENT Three months ended 30th June 2005 Q2 2005 Growth Q2 2004 £m CER% £m --- --- --- Turnover: Pharmaceuticals 4,505 6 4,255 Consumer Healthcare 741 3 716 --- --- TURNOVER 5,246 6 4,971 Cost of sales (1,155) 10 (1,044) --- --- Gross profit 4,091 4 3,927 Selling, general and administration (1,681) (6) (1,783) Research and development (702) 1 (696) Other operating income 3 77 --- --- Operating profit: Pharmaceuticals 1,540 13 1,380 Consumer Healthcare 171 16 145 --- --- OPERATING PROFIT 1,711 13 1,525 Finance income 56 54 Finance expense (115) (100) Share of after tax profits of joint ventures and associates 10 16 Profit on disposal of interest in associates - 45 --- --- PROFIT BEFORE TAXATION 1,662 9 1,540 Taxation (473) (426) Tax rate % 28.5% 27.7% --- --- PROFIT AFTER TAXATION FOR THE PERIOD 1,189 8 1,114 --- --- Profit attributable to minority interests 31 25 Profit attributable to shareholders 1,158 8 1,089 --- --- EARNINGS PER SHARE 20.4p 10 18.9p --- --- Diluted earnings per share 20.2p 18.9p --- --- INCOME STATEMENT Six months ended 30th June 2005 H1 2005 Growth H1 2004 2004 £m CER% £m £m --- --- --- --- Turnover: Pharmaceuticals 8,844 6 8,423 17,100 Consumer Healthcare 1,438 3 1,403 2,886 --- --- --- TURNOVER 10,282 5 9,826 19,986 Cost of sales (2,282) 10 (2,079) (4,360) --- --- --- Gross profit 8,000 4 7,747 15,626 Selling, general and administration (3,326) (4) (3,508) (7,201) Research and development (1,365) 2 (1,355) (2,904) Other operating income 149 134 235 --- --- --- Operating profit: Pharmaceuticals 3,166 16 2,775 5,126 Consumer Healthcare 292 19 243 630 --- --- --- OPERATING PROFIT 3,458 16 3,018 5,756 Finance income 105 97 176 Finance expense (213) (184) (362) Share of after tax profits of joint ventures and associates 23 30 60 Profit on disposal of interest in associates - 45 149 --- --- --- PROFIT BEFORE TAXATION 3,373 13 3,006 5,779 Taxation (961) (832) (1,757) Tax rate % 28.5% 27.7% 30.4% --- --- --- PROFIT AFTER TAXATION FOR THE PERIOD 2,412 12 2,174 4,022 --- --- --- Profit attributable to minority interests 52 48 114 Profit attributable to shareholders 2,360 12 2,126 3,908 --- --- --- EARNINGS PER SHARE 41.5p 14 36.9p 68.1p --- --- --- Diluted earnings per share 41.2p 36.9p 68.0p --- --- --- PHARMACEUTICAL TURNOVER Three months ended 30th June 2005 Total USA Europe International -------------- --------------- ------------- ------------- £m CER% £m CER% £m CER% £m CER% ------ ----- ------ ----- ---- ----- ---- ----- RESPIRATORY 1,214 13 605 21 420 5 189 6 Seretide/Advair 725 22 397 34 259 9 69 12 Flixotide/Flovent 159 2 64 1 48 1 47 3 Serevent 85 (9) 26 (27) 43 1 16 2 Flixonase/Flonase 148 13 113 15 19 4 16 13 CENTRAL NERVOUS SYSTEM 769 (12) 471 (17) 181 (6) 117 8 Seroxat/Paxil 152 (47) 30 (80) 46 (30) 76 5 Paxil IR 126 (33) 6 (88) 46 (30) 74 5 Paxil CR 26 (73) 24 (75) - - 2 12 Wellbutrin 167 (11) 164 (12) 1 35 2 >100 Wellbutrin IR, SR 13 (81) 11 (83) 1 35 1 >100 Wellbutrin XL 154 34 153 33 - - 1 >100 Imigran/Imitrex 162 3 112 5 37 (1) 13 (1) Lamictal 216 28 140 38 62 11 14 18 Requip 34 21 15 25 17 17 2 16 ANTI-VIRALS 634 7 305 5 199 9 130 10 HIV 386 6 187 (1) 157 11 42 16 Combivir 148 6 70 4 60 6 18 15 Trizivir 75 (13) 40 (18) 32 (5) 3 (6) Epivir 68 (11) 24 (37) 33 14 11 17 Ziagen 36 (6) 15 (20) 16 1 5 23 Retrovir 10 (4) 4 (9) 4 (6) 2 8 Agenerase, Lexiva 26 72 16 37 8 >100 2 46 Epzicom/Kivexa 23 >100 18 - 4 >100 1 - Herpes 195 8 107 15 34 (3) 54 3 Valtrex 162 13 106 15 24 5 32 14 Zovirax 33 (11) 1 6 10 (17) 22 (10) Zeffix 37 7 3 17 7 6 27 6 ANTI-BACTERIALS 348 (10) 55 (37) 155 (7) 138 5 Augmentin 155 (14) 29 (45) 70 (7) 56 10 Augmentin IR 129 (3) 7 (31) 67 (9) 55 11 Augmentin ES, XR 26 (44) 22 (44) 3 55 1 (22) Zinnat/Ceftin 40 (19) 1 (66) 22 (22) 17 (9) METABOLIC 393 17 267 18 45 45 81 3 Avandia, Avandamet 352 16 263 16 39 55 50 (5) Boniva 4 - 4 - - - - - VACCINES 322 15 66 2 147 26 109 11 Hepatitis 116 10 33 (3) 62 18 21 11 Infanrix/Pediarix 102 18 32 2 51 34 19 11 ONCOLOGY AND EMESIS 248 6 184 10 42 (6) 22 (1) Zofran 204 7 154 12 32 (8) 18 2 Hycamtin 23 (8) 14 (10) 7 (5) 2 (4) CARDIOVASCULAR AND UROGENITAL 312 43 168 21 104 98 40 48 Coreg 125 13 124 13 - - 1 (29) Levitra 11 35 10 >100 1 (77) - - Avodart 28 >100 12 70 14 >100 2 >100 Arixtra 5 - 3 - 2 - - - Fraxiparine 55 - - - 45 - 10 - Vesicare 1 - 1 - - - - - OTHER 265 7 16 (32) 80 8 169 12 Zantac 60 (15) 13 (35) 15 (23) 32 3 -------------- -------------- -------------- ------------- 4,505 6 2,137 3 1,373 9 995 9 -------------- -------------- -------------- ------------- Pharmaceutical turnover includes co-promotion income. PHARMACEUTICAL TURNOVER Six months ended 30th June 2005 Total USA Europe International -------------- --------------- ------------- ------------- £m CER% £m CER% £m CER% £m CER% ------ ----- ------ ----- ---- ----- ---- ----- RESPIRATORY 2,412 12 1,196 17 836 7 380 12 Seretide/Advair 1,415 22 777 29 510 14 128 11 Flixotide/Flovent 313 1 125 1 97 (2) 91 4 Serevent 164 (10) 50 (29) 83 (3) 31 14 Flixonase/Flonase 319 13 233 6 33 1 53 70 CENTRAL NERVOUS SYSTEM 1,527 (13) 949 (18) 365 (6) 213 (2) Seroxat/Paxil 315 (45) 80 (72) 98 (29) 137 (4) Paxil IR 248 (35) 17 (82) 98 (29) 133 (5) Paxil CR 67 (65) 63 (67) - - 4 39 Wellbutrin 330 (18) 324 (18) 1 56 5 12 Wellbutrin IR, SR 45 (77) 41 (79) 1 56 3 (7) Wellbutrin XL 285 43 283 43 - - 2 >100 Imigran/Imitrex 329 2 235 3 70 (3) 24 (1) Lamictal 411 29 260 38 125 16 26 14 Requip 64 18 28 20 32 16 4 15 ANTI-VIRALS 1,237 8 606 10 385 4 246 9 HIV 749 6 365 4 301 6 83 14 Combivir 288 4 138 4 116 2 34 9 Trizivir 149 (10) 79 (12) 63 (8) 7 (6) Epivir 134 (9) 49 (29) 63 8 22 18 Ziagen 69 (9) 28 (22) 30 (2) 11 19 Retrovir 21 2 8 (2) 8 (6) 5 24 Agenerase, Lexiva 48 >100 30 75 15 >100 3 73 Epzicom/Kivexa 40 >100 33 - 6 >100 1 - Herpes 392 12 221 23 70 (3) 101 2 Valtrex 326 20 218 25 49 9 59 12 Zovirax 66 (16) 3 (32) 21 (23) 42 (10) Zeffix 66 4 6 12 11 2 49 3 ANTI-BACTERIALS 765 (5) 131 (32) 377 4 257 3 Augmentin 347 (9) 75 (41) 168 5 104 11 Augmentin IR 283 3 19 (23) 162 3 102 12 Augmentin ES, XR 64 (41) 56 (46) 6 >100 2 (18) Zinnat/Ceftin 102 (7) 4 (27) 64 (4) 34 (10) METABOLIC 712 19 482 19 85 38 145 10 Avandia, Avandamet 639 20 478 18 71 54 90 9 Boniva 4 - 4 - - - - - VACCINES 570 10 120 2 261 18 189 4 Hepatitis 210 7 59 (7) 110 16 41 12 Infanrix/Pediarix 185 14 60 10 91 23 34 (1) ONCOLOGY AND EMESIS 483 7 355 11 85 (3) 43 2 Zofran 393 8 293 11 65 (5) 35 4 Hycamtin 48 (1) 31 - 14 (2) 3 - CARDIOVASCULAR AND UROGENITAL 622 50 344 32 207 100 71 44 Coreg 260 30 257 31 - - 3 (29) Levitra 21 (15) 19 67 2 (78) - - Avodart 54 >100 24 88 26 >100 4 >100 Arixtra 9 - 5 - 4 - - - Fraxiparine 107 - - - 90 - 17 - Vesicare 4 - 4 - - - - - OTHER 516 2 33 (26) 160 5 323 5 Zantac 119 (14) 26 (27) 31 (21) 62 (2) -------------- -------------- -------------- ------------- 8,844 6 4,216 4 2,761 9 1,867 7 -------------- -------------- -------------- ------------- Pharmaceutical turnover includes co-promotion income. CONSUMER HEALTHCARE TURNOVER Three months ended 30th June 2005 Growth £m CER% --------- --------- Over-the-counter medicines 347 3 Analgesics 88 5 Dermatological 46 (6) Gastrointestinal 61 1 Respiratory tract 30 12 Smoking control 78 7 Natural wellness support 33 3 Oral care 232 2 Nutritional healthcare 162 4 --------- --------- Total 741 3 --------- --------- CONSUMER HEALTHCARE TURNOVER Six months ended 30th June 2005 Growth £m CER% --------- --------- Over-the-counter medicines 690 4 Analgesics 172 4 Dermatological 85 (7) Gastrointestinal 119 1 Respiratory tract 68 12 Smoking control 161 12 Natural wellness support 66 (1) Oral care 451 - Nutritional healthcare 297 3 --------- --------- Total 1,438 3 --------- --------- FINANCIAL REVIEW - INCOME STATEMENT Operating profit Q2 2005 Q2 2004 ---------------------- -------------------- % of % of Growth £m turnover £m turnover CER% £% ------ ------ ------ ------ ------ ----- Turnover 5,246 100.0 4,971 100.0 6 6 Cost of sales (1,155) (22.0) (1,044) (21.0) 10 11 Selling, general and administration (1,681) (32.0) (1,783) (35.8) (6) (6) Research and development (702) (13.4) (696) (14.0) 1 1 Other operating income 3 - 77 1.5 ------ ------ ------ ------ ------ ---- Operating profit 1,711 32.6 1,525 30.7 13 12 ------ ------ ------ ------ ------ ---- Overall the operating margin increased 1.9 percentage points as sterling operating profit increased 12% on a sterling turnover growth of 6%. At constant exchange rates operating profit increased 13% and the margin increased 2.3 percentage points, reflecting a 6% decrease in selling, general and administration (SG&A) and only a 1% increase in R&D, partly offset by a 10% increase in cost of sales and lower other operating income. Cost of sales increased as a percentage of turnover by 1 percentage point. At constant exchange rates the increase was 0.9 percentage points, principally reflecting an adverse product mix. SG&A as a percentage of turnover declined 3.8 percentage points. At constant exchange rates the decline was 3.9 percentage points, reflecting lower legal charges which declined from £186 million in Q2 2004 to £33 million in Q2 2005 and improvements in operating efficiencies. R&D expenditure as a percentage of turnover declined 0.6 percentage points, largely reflecting the phasing of clinical trial expenditure. Pharmaceuticals R&D expenditure represented 15.0% of pharmaceutical turnover. Other operating income includes royalty income, equity investment disposals and impairments, product disposals and fair value adjustments to the Quest collar and Theravance options. Other operating income was £3 million in Q2 2005 compared with £77 million in Q2 2004. The reduced income in 2005 is predominantly due to lower asset disposals compared with Q2 2004, a charge of £9 million related to the Quest collar and Theravance options and equity investment impairments of £11 million in the quarter. As reported at Q1 2005, all legal costs are accounted for within SG&A. Operating profit is unaffected by this reallocation. See 'Accounting Presentation and Policies' on page 20 for further details. Taxation The charge for taxation on profit amounting to £473 million represents an effective tax rate of 28.5%, which is the expected rate for the year. Transfer pricing issues are described in the 'Taxation' note to the Financial Statements included in the Annual Report 2004. Developments since the date of that report are as follows. With respect to the claims of the Internal Revenue Service (IRS) for the years 1997-2000, which are described in the note, the Group contested these claims for additional taxes of $1.9 billion by filing a petition in the US Tax Court on 12th April to which the IRS filed its statutory Answer on 7th June. The Group is also seeking to consolidate the IRS claims for 1997-2000 with those for 1989-1996 into a single trial. The total claims for these periods amount to $4.6 billion of additional taxes and related interest of $3.2 billion, net of federal tax relief, giving a total of $7.8 billion. The Group's petitions against the IRS claims include counter-claims for repayment of taxes totalling $1.8 billion, based partly by reference to an Advance Pricing Agreement (APA) between SmithKline Beecham and the IRS covering the transfer pricing of Tagamet between 1991 and 1993. On 23rd December 2004 the IRS filed a motion for summary judgement to exclude any evidence relating to APAs from the court proceedings. On 31st March 2005 the trial judge denied the IRS motion and reserved ruling on the admissibility of APA evidence until full trial. A trial date for the 1989-1996 claims has been scheduled for October 2006. GSK continues to believe that the profits reported by its US subsidiaries for the period 1989 to date, on which it has paid taxes in the USA, are more than sufficient to reflect the activities of its US operations. GSK is in continuing discussions with the Inland Revenue in respect of UK transfer pricing disputes. GSK uses the best advice in determining its transfer pricing methodology and in seeking to manage transfer pricing issues to a satisfactory conclusion and, on the basis of external professional advice, continues to believe that it has made adequate provision for the liabilities likely to arise from open assessments. However, there continues to be a wide difference of views between the Group, the IRS, the Inland Revenue and other relevant taxation authorities where open issues exist. The ultimate liability for such matters may vary from the amounts provided and is dependent upon the outcome of litigation proceedings and negotiations with the relevant tax authorities. Weighted average number of shares Q2 2005 Q2 2004 millions millions ---- ---- Weighted average number of shares - basic 5,680 5,773 Dilutive effect of share options and share 42 12 awards ---- ---- Weighted average number of shares - diluted 5,722 5,785 ---- ---- H1 2005 H1 2004 2004 millions millions millions ---- ---- ---- Weighted average number of shares - basic 5,686 5,756 5,736 Dilutive effect of share options and share 39 13 12 awards ---- ---- ---- Weighted average number of shares - diluted 5,725 5,769 5,748 ---- ---- ---- The number of shares in issue, excluding those held by the ESOP Trusts and those held as Treasury shares at 30th June 2005, was 5,672 million (30th June 2004: 5,732 million). Dividends Paid/ Pence per payable/ share £m ---- ---- ---- 2005 First interim 7th July 2005 10 570 Second interim 6th October 2005 10 567 2004 First interim 1st July 2004 10 575 Second interim 30th September 2004 10 573 Third interim 6th January 2005 10 571 Fourth interim 7th April 2005 12 683 ---- ---- 42 2,402 ---- ---- Guidance recently issued by the Institute of Chartered Accountants in England and Wales has clarified when an interim dividend should be recognised for accounting purposes where the accounts are prepared under IFRS. Interim dividends are now only recognised in the accounts when paid, and not when declared. GSK normally pays a dividend two quarters after the quarter to which it relates and one quarter after it is declared. An adjustment is required, therefore, to recognise a further quarter's time lag in the recording of dividends. This change has been effected in the transition balance sheet at 1st January 2003 and subsequent balance sheets. STATEMENT OF RECOGNISED INCOME AND EXPENSE H1 2005 H1 2004 2004 £m £m £m ---- ---- ---- Exchange movements on overseas net assets 11 (212) (30) Deferred tax on exchange movements 38 (46) (73) Fair value movements on available-for-sale investments (28) - - Deferred tax on fair value movements 2 - - Loss from own shares held for employee share schemes (34) (37) (55) Revaluation of goodwill due to exchange 5 10 6 Actuarial (losses)/gains on defined benefit plans (351) (275) 108 Deferred tax on actuarial (losses)/gains on defined benefit plans 119 108 (17) ---- ---- ---- Net losses recognised directly in equity (238) (452) (61) Profit for the period 2,412 2,174 4,022 ---- ---- ---- Total recognised income and expense for the period 2,174 1,722 3,961 ---- ---- ---- Attributable to: Shareholders 2,122 1,674 3,847 Minority interests 52 48 114 ---- ---- ---- 2,174 1,722 3,961 ---- ---- ---- BALANCE SHEET 30th June 30th June 31st December 2005 2004 2004 £m £m £m ASSETS ---- ---- ---- Non-current assets Property, plant and equipment 6,225 6,092 6,197 Goodwill 165 152 165 Other intangible assets 2,592 2,172 2,513 Investments in associates and joint ventures 241 227 209 Other investments 328 309 298 Deferred tax assets 2,102 2,153 2,032 Other non-current assets 528 286 248 ---- ---- ---- Total non-current assets 12,181 11,391 11,662 ---- ---- ---- Current assets Inventories 2,168 2,133 2,193 Trade and other receivables 4,883 4,676 4,814 Liquid investments 288 1,452 1,512 Cash and cash equivalents 5,371 2,529 2,467 Assets held for sale 3 - 2 ---- ---- ---- Total current assets 12,713 10,790 10,988 ---- ---- ---- TOTAL ASSETS 24,894 22,181 22,650 ---- ---- ---- LIABILITIES Current liabilities Short-term borrowings (1,708) (1,096) (1,582) Trade and other payables (4,272) (3,917) (4,267) Current tax payable (1,812) (1,807) (1,598) Short-term provisions (943) (996) (962) ---- ---- ---- Total current liabilities (8,735) (7,816) (8,409) ---- ---- ---- Non-current liabilities Long-term borrowings (5,212) (4,908) (4,381) Deferred tax provision (259) (102) (377) Pensions and other post-employment benefits (3,017) (3,238) (2,519) Other provisions (572) (457) (569) Other non-current liabilities (300) (265) (244) ---- ---- ---- Total non-current liabilities (9,360) (8,970) (8,090) ---- ---- ---- TOTAL LIABILITIES (18,095) (16,786) (16,499) ---- ---- ---- NET ASSETS 6,799 5,395 6,151 ---- ---- ---- EQUITY Share capital 1,486 1,483 1,484 Share premium account 350 279 304 Other reserves (465) (721) (606) Retained earnings 5,181 4,137 4,697 ---- ---- ---- Shareholders' equity 6,552 5,178 5,879 Minority interests 247 217 272 ---- ---- ---- TOTAL EQUITY 6,799 5,395 6,151 ---- ---- ---- RECONCILIATION OF MOVEMENTS IN EQUITY H1 2005 H1 2004 2004 £m £m £m ---- ---- ---- Total equity at beginning of period, adjusted for charges in the timing 6,151 5,816 5,816 of recognition of dividends (see 'Dividends' on page 13) Implementation of accounting for financial instruments under IAS 39 (12) - - ---- ---- ---- Total equity at beginning of period, as adjusted 6,139 5,816 5,816 Total recognised income and expense attributable to shareholders 2,122 1,674 3,847 Dividends paid (1,255) (1,328) (2,476) Ordinary shares issued 48 16 42 Ordinary shares purchased and cancelled - (201) (201) Ordinary shares purchased and held as Treasury shares (390) (299) (799) Ordinary shares issued by ESOP Trusts 53 49 78 Share-based payments 122 191 312 Changes in minority interest shareholdings (11) - - Minority interests (29) (523) (468) ---- ---- ---- Total equity at end of period 6,799 5,395 6,151 ---- ---- ---- FINANCIAL REVIEW - BALANCE SHEET Net assets The book value of net assets increased by £648 million from £6,151 million at 31st December 2004 to £6,799 million at 30th June 2005. This was principally attributable to a reduction in net debt, partly offset by an increase in pension and other post-employment liabilities in the period, as a result of weakening long-term interest rates. The carrying value of investments in associates and joint ventures at 30th June 2005 was £241 million with a market value of £1,116 million. Equity At 30th June 2005 total equity had increased from £6,151 million at 31st December 2004 to £6,799 million. The increase arises from retained earnings partially offset by purchases of Treasury shares and further actuarial losses on defined benefit pension plans in the quarter. At 30th June 2005 the ESOP Trusts held 171.8 million GSK ordinary shares at a book value of £2,461 million and a market value of £2,320 million against the future exercise of share options and share awards, which have been deducted from other reserves. At 30th June 2005 GSK also held 99.9 million shares as Treasury shares, at a value of £1,189 million, which have been deducted from retained earnings. CASH FLOW STATEMENT Three months ended 30th June 2005 Q2 2005 Q2 2004 £m £m ---- ---- Operating profit 1,711 1,525 Depreciation and other non-cash items 269 306 Decrease/(increase) in working capital 11 (37) Increase/(decrease) in other net liabilities 82 (11) ---- ---- 2,073 1,783 Taxation paid (543) (454) ---- ---- Net cash inflow from operating activities 1,530 1,329 ---- ---- Cash flow from investing activities Purchase of property, plant and equipment (192) (189) Proceeds from sale of property, plant and equipment 10 12 Purchase of intangible assets (97) (48) Proceeds from sale of intangible assets 5 - Purchase of equity investments (3) (67) Proceeds from sale of equity investments 8 34 Share transactions with minority shareholders (32) - Disposal of businesses and interest in associates - 56 Investment in joint ventures and associated undertakings (1) (2) Interest received 68 60 Dividends from joint ventures and associated undertakings 2 2 (234) ---- Net cash outflow from investing activities (232) (142) ---- ---- Cash flow from financing activities Decrease in liquid investments 1,210 10 Proceeds from own shares for employee share options 8 8 Issue of share capital 25 6 Share capital purchased for cancellation - (23) Purchase of Treasury shares (214) (195) Redemption of preference shares issued by subsidiary - (49) Increase in long-term loans 982 1,365 Repayment of long-term loans (51) - Net increase in/(repayment of) of short-term loans 2 (475) Net repayment of obligations under finance leases (3) - Interest paid (108) (101) Dividends paid to shareholders (684) (807) Dividends paid to minority interests (15) (9) Other financing cash flows (43) (58) ---- ---- Net cash inflow/(outflow) from financing activities 1,109 (328) ---- ---- Increase in cash and bank overdrafts in the period 2,407 859 Exchange adjustments 134 28 Cash and bank overdrafts at beginning of period 2,509 1,411 ---- ---- Cash and bank overdrafts at end of period 5,050 2,298 ---- ---- Cash and bank overdrafts at end of period comprise: Cash and cash equivalents 5,371 2,529 Overdrafts (321) (231) ---- ---- 5,050 2,298 ---- ---- CASH FLOW STATEMENT Six months ended 30th June 2005 H1 2005 H1 2004 2004 £m £m £m ---- ---- ---- Operating profit 3,458 3,018 5,756 Depreciation and other non-cash items 416 619 1,227 Increase in working capital (77) (84) (158) Decrease in other net liabilities (177) (438) (298) ---- ---- --- 3,620 3,115 6,527 Taxation paid (803) (725) (1,583) ---- ---- ---- Net cash inflow from operating activities 2,817 2,390 4,944 ---- ---- ---- Cash flow from investing activities Purchase of property, plant and equipment (318) (310) (788) Proceeds from sale of property, plant and equipment 27 14 53 Purchase of intangible assets (152) (73) (255) Proceeds from sale of intangible assets 170 - - Purchase of equity investments (8) (71) (103) Proceeds from sale of equity investments 11 37 58 Share transactions with minority shareholders (32) - - Purchase of businesses, net of cash acquired - - (297) Disposal of businesses and interest in associates - 56 230 Investment in joint ventures and associated undertakings (2) (2) (2) Interest received 129 94 173 Dividends from joint ventures and associated undertakings 3 4 11 ---- ---- ---- Net cash outflow from investing activities (172) (251) (920) ---- ---- ---- Cash flow from financing activities Decrease/(increase) in liquid investments 1,232 3 (53) Proceeds from own shares for employee share options 19 12 23 Issue of share capital 48 16 42 Share capital purchased for cancellation - (201) (201) Purchase of Treasury shares (390) (285) (799) Redemption of preference shares issued by subsidiary - (489) (489) Increase in long-term loans 982 1,365 1,365 Repayment of long-term loans (55) (4) (15) Net repayment of short-term loans (306) (485) (407) Net repayment of obligations under finance leases (18) - (22) Interest paid (204) (171) (350) Dividends paid to shareholders (1,255) (1,327) (2,475) Dividends paid to minority interests (73) (62) (75) Other financing cash flows (77) (25) 49 ---- ---- ---- Net cash outflow from financing activities (97) (1,653) (3,407) ---- ---- ---- Increase in cash and bank overdrafts in the period 2,548 486 617 Exchange adjustments 147 (19) (93) Cash and bank overdrafts at beginning of period 2,355 1,831 1,831 ---- ---- ---- Cash and bank overdrafts at end of period 5,050 2,298 2,355 ---- ---- ---- Cash and bank overdrafts at end of period comprise: Cash and cash equivalents 5,371 2,529 2,467 Overdrafts (321) (231) (112) ---- ---- ---- 5,050 2,298 2,355 ---- ---- ---- RECONCILIATION OF CASH FLOW TO MOVEMENTS IN NET DEBT H1 2005 H1 2004 2004 £m £m £m ---- ---- ---- Net debt at beginning of the period (1,984) (1,648) (1,648) Increase in cash and bank overdrafts in the period 2,548 486 617 Cash (inflow)/outflow from liquid investments (1,232) (3) 53 Net increase in long-term loans (927) (1,361) (1,350) Net repayment of short-term loans 306 485 407 Net repayment of obligations under finance leases 18 - 22 Exchange adjustments 52 21 24 Other non-cash movements (42) (3) (109) ---- ---- ---- Movement in net debt 723 (375) (336) ---- ---- ---- Net debt at end of the period (1,261) (2,023) (1,984) ---- ---- ---- FINANCIAL REVIEW - CASH FLOW Operating cash flow was £2,073 million in Q2 2005. This represents an increase of £290 million over Q2 2004 principally due to higher operating profits. The operating cash flow is in excess of the funds needed for the routine cash flows of tax, capital expenditure on property, plant and equipment and dividend payments, together amounting to £1,419 million. Receipts of £33 million arose from the exercise of share options: £8 million from shares held by the ESOP Trusts and £25 million from the issue of new shares. In addition, £214 million was spent on purchasing the company's shares to be held as Treasury shares. LEGAL MATTERS The Group is involved in various legal and administrative proceedings, principally product liability, intellectual property, tax, anti-trust, governmental investigations and related private litigation. The Group makes provision for those proceedings on a regular basis and may make additional significant provisions for such legal proceedings, as required in the event of further developments in those matters, consistent with generally accepted accounting principles. Litigation, particularly in the USA, is inherently unpredictable and excessive awards that may not be justified by the evidence can occur. The Group could in the future incur judgments or enter into settlements of claims that could result in payments that exceed its current provisions by an amount that would have a material adverse effect on the Group's financial condition and results of operations. Intellectual property claims include challenges to the validity of the patents on various of the Group's products or processes, and assertions of non-infringement of those patents. A loss in any of these cases could result in loss of patent protection for the product at issue. The consequence of any such loss could be a significant decrease in sales of that product and could materially affect future results of operations for the Group. At 30th June 2005 the Group's aggregate provision for legal and other disputes (not including tax matters described under 'Taxation' on page 12) was just over £1 billion. 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. Developments since the date of the Annual Report as previously updated by the Legal matters section of the results announcement for the first quarter of 2005 are set out below. Intellectual property With respect to the appeal by Teva from the US District Court decision finding infringement and affirming the validity of the Group's method of use patents for ondansetron (the active ingredient in Zofran), the later of which expires in December 2006, the US Court of Appeals for the Federal Circuit heard the appeal in June 2005. No decision has been announced, but the Court could rule at any time. With respect to the trial over infringement by Dr Reddy's Laboratories and West-ward Pharmaceuticals of the Group's method of use and process patents for ondansetron, closing arguments were heard in May 2005. The judge could rule at any time. With respect to the Group's claim against Kali Laboratories (now Par Pharmaceutical Companies) for infringement of the Group's method of use patents, the trial judge granted the Group's summary judgement motions on 27th July, affirming the validity of those patents and finding that Kali's proposed generic product would infringe those patents. Developments with respect to tax matters are described in 'Taxation' on page 12. EXCHANGE RATES The results and net assets of the Group, as reported in sterling, are affected by movements in exchange rates between sterling and overseas currencies. GSK uses the average of exchange rates prevailing during the period to translate the results and cash flows of overseas Group subsidiary and associated undertakings into sterling and period end rates to translate the net assets of those undertakings. The currencies which most influence these translations, and the relevant exchange rates, are: H1 2005 H1 2004 2004 Average rates: ---- ---- ---- £/US$ 1.88 1.82 1.83 £/Euro 1.46 1.48 1.47 £/Yen 199.00 196.00 197.00 Period end rates: £/US$ 1.79 1.81 1.92 £/Euro 1.48 1.49 1.41 £/Yen 199.00 198.00 197.00 During H1 2005 average sterling exchange rates were stronger against the US dollar and the Yen and weaker against the Euro compared with the same period in 2004. Comparing Q2 2005 period end rates with Q2 2004 period end rates, sterling was weaker against the US dollar and the Euro and stronger against the Yen. ACCOUNTING PRESENTATION AND POLICIES With effect from 1st January 2005, GSK has moved to reporting its financial results in accordance with International Financial Reporting Standards (IFRS) as required by a European Union Regulation issued in 2002. This unaudited Results Announcement for the three months ended 30th June 2005 is prepared in accordance with IAS 34 'Interim Financial Reporting' and the IFRS accounting policies expected to apply in 2005. These IFRS policies are unchanged from those set out in the Annual Report 2004 on pages 164 to 166, except that GSK now accounts for all legal costs within SG&A. In addition, following a clarification of the timing of recognition of dividends under IFRS, a prior period adjustment is recorded to reflect a further quarter's delay in recognition - see 'Dividends' on page 13 for further details. Comparative figures have been amended accordingly. A number of presentational changes have been made, starting in Q1 2005, to conform with best practice under IFRS: • Legal costs have been reclassified so that all legal costs are now reported within SG&A. Consequently, trading profit is no longer reported separately • Except where expressly permitted, IFRS does not allow offsetting of income and expenses. Consequently, finance income and expense are reported separately. None of these presentational changes has any impact on operating profit or EPS in this quarter or the comparative periods in 2004. All comparative figures are presented on this basis, except that GSK has taken advantage of an exemption which permits financial instruments to be accounted for and presented on a UK GAAP basis in 2004 and only in accordance with IAS 32 and IAS 39 from 1st January 2005. Full details of the major differences from UK GAAP as they apply to GSK are given in the unaudited IFRS financial information section of the Annual Report 2004 on page 163. The income statement, statement of recognised income and expense and cash flow statement for the year ended, and the balance sheet at, 31st December 2004 have been derived from the unaudited IFRS financial information published in the Annual Report 2004, taking account of the changes noted above. Data for market share and market growth rates relate to the year ended 31st March 2005 (or later where available). These are GSK estimates based on the most recent data from independent external sources, valued in sterling at relevant exchange rates. Figures quoted for product market share reflect sales by GSK and licensees. 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 previous year. All commentaries are presented in terms of CER unless otherwise stated. UK GAAP to IFRS reconciliations GSK published financial information in accordance with International Financial Reporting Standards for 2003 and 2004 on the London Stock Exchange on 10th February 2005. That document included explanations of the main UK GAAP to IFRS differences and UK GAAP to IFRS reconciliations for: • total equity at 1st January 2003, 31st December 2003 and each quarter end in 2004 • profit attributable to shareholders for 2003 and each quarter in 2004 • cash flows for 2003 and each quarter in 2004. The document is available on the company's website. INVESTOR INFORMATION Announcement of Q2 2005 Results This Announcement was approved by the Board of Directors on Thursday 28th July 2005. Financial calendar The company will announce third quarter 2005 results on 27th October 2005. The third interim dividend for 2005 will have an ex-dividend date of 2nd November 2005 and a record date of 4th November 2005 and will be paid on 5th January 2006. Internet This Announcement and other information about GSK is available on the company's website at: http://www.gsk.com. This information is provided by RNS The company news service from the London Stock Exchange

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