Glaxosmithkline Regulatory News (GSK)

Issued: Wednesday, 29 April 2020, London U.K.

GSK delivers strong Q1: sales £9.1 billion +19% AER, +19% CER (Proforma +10% CER*)

Total EPS 31.5p; +87% AER; +89% CER; Adjusted EPS 37.7p +25% AER, +26% CER

Financial and product highlights

·

Reported Group sales £9.1 billion +19% AER, +19% CER (Proforma +10% CER*). Pharmaceuticals £4.4 billion +6% AER, +6% CER; Vaccines £1.8 billion +19% AER, +19% CER; Consumer Healthcare £2.9 billion +44% AER, +46% CER (Proforma +11% CER*)

·

Sales growth reflects strong underlying performance and additional impact from increased demand including stock building for many products

·

Total Respiratory sales £871 million +38% AER, +38% CER. Trelegy sales £193 million +>100% AER, +>100% CER. Nucala sales £210 million +38% AER, +38% CER

·

Total HIV sales £1.2 billion, +8% AER, +8% CER. Two-drug regimen sales £186 million

·

Shingrix sales £647 million +81% AER, +79% CER

·

Total Group operating margin 22.2%. Adjusted Group operating margin 29.4%, reflecting strong operating leverage (Pharmaceuticals 26.9%; Vaccines 47.5%; Consumer Healthcare 26.8%)

·

Total EPS 31.5p +87% AER, +89% CER reflecting good operating performance and an increase in the value of shares in Hindustan Unilever relating to the disposal of Horlicks in India

·

Adjusted EPS 37.7p +25% AER; +26% CER reflecting operating performance and lower tax rate resulting from a non-recurring revaluation of deferred tax assets

·

Q1 net cash flow from operations £965 million. Free cash flow £531 million

·

19p dividend declared for the quarter

Guidance

·

Based on current assessment of COVID-19, guidance for 2020 Adjusted EPS maintained; to be updated if needed as more information becomes available

Pipeline highlights

·

Zejula submission accepted by FDA and EMA in first-line maintenance treatment for women with ovarian cancer

·

Belantamab mafodotin granted FDA priority review for patients with relapsed or refractory multiple myeloma based on data from the pivotal DREAMM-2 study. PDUFA date set for August 2020

·

Cabenuva, first long-acting regimen for HIV, approved in Canada. Expect submission of reply to FDA Complete Response Letter mid-year

·

Fostemsavir submitted for approval to EMA for the treatment of HIV in adults

·

Multiple collaborations underway to develop adjuvanted vaccines for use against COVID-19, including with Sanofi

·

Agreement with Vir Biotechnology to research and develop solutions for coronaviruses, including using their monoclonal antibody platform technology

Q1 2020 results

Q1 2020

Growth

£m

£%

CER%

Turnover

9,090 

19

19

Total operating profit

2,014 

41

42

Total earnings per share

31.5p

87

89

Adjusted operating profit

2,675 

24

24

Adjusted earnings per share

37.7p

25

26

Net cash from operating activities

965 

46

Free cash flow

531 

>100

The Total results are presented under 'Financial performance' on page 11 and Adjusted results reconciliations are presented on pages 21 and 22. Adjusted results are a non-IFRS measure that may be considered in addition to, but not as a substitute for, or superior to, information presented in accordance with IFRS. Adjusted results are defined on page 9 and £% or AER% growth, CER% growth, free cash flow and other non-IFRS measures are defined on page 40. GSK provides guidance on an Adjusted results basis only, for the reasons set out on page 10. All expectations, guidance and targets regarding future performance and dividend payments should be read together with 'Outlook, assumptions and cautionary statements' on pages 41 and 42.

*

Reported AER and CER growth rates include three months' results of former Pfizer consumer healthcare business. Pro-forma CER growth rates are calculated as if the equivalent three months of Pfizer consumer healthcare business results, as reported by Pfizer, were included in the comparative period of Q1 2019. See 'Pro-forma growth' on page 10.

Emma Walmsley, Chief Executive Officer, GSK said:

"Responding to the COVID-19 pandemic is at the heart of our purpose as a company and GSK's portfolio is both highly relevant and needed. We have mobilised efforts across the company and I want to thank all the GSK teams for their outstanding work to make sure our vital medicines, vaccines and everyday health products continue to be available to the people who need them. We have also taken action to deploy our science and technologies. Our primary aim is to develop multiple adjuvanted COVID-19 vaccines, and we are working with companies and institutions across the world to do so.

"Our business performed strongly in the quarter with growth in sales and earnings reflecting good underlying performance and increased demand, including stock-building, for many of our products. Looking ahead, we clearly face a period of considerable uncertainty, but we remain confident in the resilience and sustainability of GSK's business and our ability to deliver on our long-term priorities of Innovation, Performance and Trust."

GSK's response to COVID-19

GSK's businesses and portfolio are highly relevant to helping tackle the COVID-19 virus and we have mobilised across the company to respond to the pandemic, focusing on our people, business continuity and providing solutions to support the global response.

We are working hard to make sure our employees stay protected and supported, investing in high frequency employee engagement, as well as providing technology, resources and adjusted policies to support our people.

Our business is performing well and has demonstrated resilience in the face of significant demands. We have implemented business continuity plans across all our essential operations. The liquidity position of GSK remains strong and we have sufficient cash for our current operational needs and access to significant additional undrawn committed sources of finance if required. In our supply chains, we are closely monitoring all parts of our manufacturing network and have been able to respond quickly to fluctuations in demand. Within clinical trials we have implemented proactive measures to protect study participants, staff at clinical trial sites and our employees, while ensuring that regulatory compliance and the scientific integrity of our studies are maintained.

As we have seen elsewhere, recruitment for clinical trials has slowed due to disruption from the pandemic and diversion of resources to other clinical priorities. We are continuing to support enrolment of new patients into ongoing clinical studies, provided that investigators are confident they will be able to conduct the protocol required. Where necessary and based on our own assessments, we have proactively paused recruitment. We have a number of products undergoing regulatory review and, at this time, we do not anticipate any significant delays to regulatory approvals due to the pandemic.

However, this is clearly a very dynamic and uncertain situation and the ultimate severity, duration and impact of the pandemic remain unknown at this point. Despite the measures the company has taken, there are significant risks to business performance for the remainder of the year, and particularly over the next few months. These could include disruption to manufacturing activities and the supply chain including third parties, further restrictions in our ability to conduct clinical trials, limits on patients' and customers' ability to access certain elective or discretionary treatments, most notably vaccines such as Shingrix, while government containment measures are in place, and the impact of other government actions and restrictions in response to the pandemic. We continue to monitor these risks closely.

We are determined to support the global response to the pandemic by offering solutions, using our science, technology, portfolio and resources. Our primary aim is to develop multiple adjuvanted COVID-19 vaccines, using our innovative adjuvant technology, and we are collaborating with seven companies and institutions across the world, including in North America and China. The use of an adjuvant can be of particular importance in a pandemic situation since it may reduce the amount of vaccine protein required per dose, allowing more vaccine doses to be produced and therefore contributing to the protection of more people, sooner.

Alongside vaccines, we are also exploring therapeutic options. Earlier this month, we entered into a collaboration with Vir Biotechnology to identify and accelerate new anti-viral antibodies that could be used as therapeutic or preventative options for COVID-19 or future coronavirus outbreaks. Additionally, we are screening GSK marketed and pipeline assets for potential anti-viral activity or potential use in prevention or treatment of symptoms related to COVID-19.

Beyond vaccines and medicines, we are also making other contributions using our capabilities and expertise, for example to support national testing centres. In addition, we are supporting global and local community funds, including the UN/WHO COVID-19 Solidarity Response Fund, to support distribution of essential supplies and PPE to health workers.

2020 guidance

At the time of announcing the full-year 2019 results on 5 February 2020 we provided guidance with respect to expected full-year 2020 Adjusted EPS, being a decline in the range of -1% to -4% at CER. This guidance reflected our expectations for growth in key new products, and the start of a two-year period in which we would continue to increase investment in these products and in our R&D pipeline, alongside implementation of our new programme which will prepare the Group for separation. This guidance excluded any impact in 2020 from any further material divestments beyond those previously announced and any potential impact on our business from the Coronavirus outbreak.

At this stage, we are unable to predict the ultimate disruptive impact of the COVID-19 pandemic on GSK's business performance for the full-year 2020. The company performed strongly in the first quarter. However, as set out in 'GSK's response to COVID-19' on page 2, there are significant internal and external risks to business performance for the remainder of the year, and particularly over the next few months. Based on our current assessment of the impact of COVID-19, we are maintaining our Adjusted EPS guidance for the year at this point, but we will, if needed, update guidance as more information becomes available to inform our expected financial performance for the full-year 2020.

All expectations, guidance and targets regarding future performance and dividend payments should be read together with 'Outlook, assumptions and cautionary statements' on pages 41 and 42.

If exchange rates were to hold at the closing rates on 31 March 2020 ($1.24/£1, €1.13/£1 and Yen 134/£1) for the rest of 2020, the estimated impact on 2020 Sterling turnover growth would be around flat and if exchange gains or losses were recognised at the same level as in 2019, the estimated impact on 2020 Sterling Adjusted EPS growth would also be around flat.

Results presentation

A webcast of the quarterly results presentation hosted by Emma Walmsley, GSK CEO, will be held at 2pm BST on 29 April 2020. Presentation materials will be published on www.gsk.com prior to the webcast and a transcript of the webcast will be published subsequently.

Information available on GSK's website does not form part of, and is not incorporated by reference into, this Results Announcement.

Operating performance - Q1 2020

Turnover

Q1 2020

£m

Growth

£%

Growth

CER%

Pro-forma

growth

CER%

Pharmaceuticals

4,396

6

6

6

Vaccines

1,805

19

19

19

Consumer Healthcare

2,862

44

46

11

9,063

18

19

10

Corporate and other unallocated turnover

27

Group turnover

9,090

19

19

10

Group turnover was £9,090 million in the quarter, up 19% AER, 19% CER and 10% CER on a pro-forma basis, with growth delivered by all three businesses.

Pharmaceuticals turnover in the quarter was £4,396 million, up 6% AER, 6% CER. Additional COVID-19 related demand and stock building in Europe and the US had a positive impact on growth. Respiratory sales were up 38% AER, 38% CER to £871 million on growth of Trelegy Ellipta and Nucala. HIV sales of £1,207 million grew 8% AER, 8% CER. Sales of Established Pharmaceuticals declined 7% AER, 6% CER to £2,086 million.

Vaccines turnover grew 19% AER, 19% CER to £1,805 million, primarily driven by growth in sales of Shingrix. Meningitis vaccines also contributed to growth, but Established Vaccines declined 3% AER, 3% CER to £912 million.

Reported Consumer Healthcare sales grew 44% AER, 46% CER to £2,862 million, largely driven by the inclusion of the Pfizer portfolio. Pro-forma sales grew 11% CER and 14% CER excluding brands divested/ under review. Growth was heavily impacted by consumer and government responses to the COVID-19 pandemic.

Operating profit

Total operating profit was £2,014 million in Q1 2020 compared with £1,428 million in Q1 2019. The Total operating margin was 22.2%. Adjusted operating profit was £2,675 million, up 24% AER, 24% CER on a turnover increase of 19% CER. The Adjusted operating margin was 29.4%. On a pro-forma basis, Adjusted operating profit was 14% higher at CER on a turnover increase of 10% CER. The Adjusted pro-forma operating margin was 29.4%.

An increase in value of the shares in Hindustan Unilever Limited to be received in connection with the disposal of Horlicks and other Consumer Healthcare brands as well as income from asset disposals were partly offset by higher re-measurement charges on the contingent consideration liabilities and increased charges for Major restructuring, including costs to integrate the Consumer Healthcare Joint Venture.

The increase in pro-forma Adjusted operating profit primarily reflected the benefit from strong sales growth across all three businesses, including stock building as a result of the COVID-19 pandemic in Pharmaceuticals and Consumer Healthcare, partly offset by continuing price pressure and investment in R&D.

Earnings per share

Total EPS was 31.5p, compared with 16.8p in Q1 2019. Adjusted EPS was 37.7p compared with 30.1p in Q1 2019, up 25% AER, 26% CER. The improvement primarily reflected strong operating performance, an increase in the value of the shares in Hindustan Unilever Limited to be received in connection with the disposal of Horlicks and other Consumer Healthcare brands and a reduced effective tax rate, partly offset by increased re-measurement charges on the contingent consideration liabilities and put option.

Cash flow

The net cash inflow from operating activities for the quarter was £965 million (Q1 2019: £663 million) and free cash flow was £531 million (Q1 2019: £165 million). The increase primarily reflected improved operating profits and the beneficial timing of payments for returns and rebates, partly offset by higher working capital.

R&D pipeline

37 medicines in development, 15 Vaccines

Pipeline news flow highlights since Q4 2019

Updates relating to COVID-19

Collaborations

·

Sanofi and GSK announced that they have signed a letter of intent to enter into a collaboration to develop an adjuvanted candidate vaccine for COVID-19, using innovative technology from both companies, to help address the ongoing pandemic. The companies plan to initiate Phase I clinical trials in the second half of 2020 and, if successful and subject to regulatory considerations, a vaccine could be available in H2 2021.

·

GSK and Vir Biotechnology announced they have entered into a collaboration to research and develop solutions for coronaviruses, including SARS-CoV-2, the virus that causes COVID-19. The collaboration will use Vir's proprietary monoclonal antibody platform technology to accelerate existing and identify new anti-viral antibodies that could be used as therapeutic or preventative options to help address the current COVID-19 pandemic and future outbreaks.

·

GSK has also entered several other collaborations on protein-based COVID-19 vaccine candidates including with the University of Queensland, Xiamen Innovax Biotech, Clover Biopharmaceuticals and Chongqing Zhifei. GSK has also entered into other collaborations that have not been announced with partners featuring other technologies, where GSK is supplying its pandemic adjuvant technology.

Oncology

Zejula (niraparib, PARP inhibitor)

·

The US FDA and the European Medicines Agency accepted submission of Zejula in first-line maintenance treatment for women with platinum-responsive advanced ovarian cancer based on data from the PRIMA study.

Belantamab mafodotin (GSK2857916, BCMA immunoconjugate)

·

The US FDA granted priority review of belantamab mafodotin for patients with relapsed/refractory multiple myeloma. The PDUFA date has been set for August 2020.

Dostarlimab (TSR-042, PD-1 antagonist)

·

The US FDA accepted submission of dostarlimab for the second line treatment of patients with dMMR/MSI-H recurrent endometrial cancer.

GSK'762 (BET inhibitor)

·

GSK'762 for cancer was terminated as data did not support progressing.

HIV/Infectious diseases

Cabenuva (cabotegravir + rilpivirine)

·

Cabenuva received Health Canada approval as the first complete, long-acting, regimen for the treatment of HIV. Submission of a reply to the FDA's Complete Response Letter is expected by the middle of the year.

·

Positive long-term data from the Phase III FLAIR study demonstrating efficacy and safety of cabotegravir and rilpivirine in adults living with HIV were presented at the 2020 Conference on Retroviruses and Opportunistic Infections (CROI).

·

Positive 48-week data from the Phase III ATLAS-2M study showing the every-two-month regimen of cabotegravir and rilpivirine has similar efficacy to once-monthly dosing were presented at the 2020 Conference on Retroviruses and Opportunistic Infections (CROI).

Fostemsavir (attachment inhibitor)

·

A regulatory application was submitted to the European Medicines Agency for fostemsavir for heavily treatment-experienced adults with multi-drug resistant HIV-1 infection who are unable to form a suppressive regimen.

QURA Therapeutics

·

ViiV Healthcare and UNC-Chapel Hill announced the five-year renewal of the innovative HIV cure partnership, QURA Therapeutics.

Immuno-inflammation

Benlysta (belimumab)

·

The US FDA granted Breakthrough Therapy Designation for Benlysta for the treatment of lupus nephritis. Regulatory submission is expected in Q2 2020.

Respiratory

Trelegy Ellipta (FF/UMEC/VI)

·

The European Medicines Agency accepted the regulatory submission of Trelegy Ellipta for the treatment of asthma in adults supported by the Phase III CAPTAIN study.

Nucala (mepolizumab)

·

Positive data has been received in-house from a Phase III study of Nucala in patients with nasal polyps. Nucala is the first anti-IL5 compound to show a benefit in this indication in a Phase III study. Regulatory submission is expected in H2 2020.

Other pharmaceuticals

Tuberculosis

·

A collaboration, called "PAN-TB", with philanthropic, non-profit and private sector organisations was launched to accelerate the development of novel tuberculosis drug regimens.

GR121619 (oxytocin)

·

GR121619 rights for postpartum haemorrhage were returned to Monash University.

Vaccines

Rotarix

·

The European Medicines Agency approved the "PCV (Porcine Circovirus) free" variant of Rotarix.

Contents

Page

Total and Adjusted results

9

Financial performance

11

Cash generation

26

Returns to shareholders

27

Income statement

28

Statement of comprehensive income

29

Pharmaceuticals turnover

30

Vaccines turnover

31

Balance sheet

32

Statement of changes in equity

33

Cash flow statement

34

Segment information

35

Legal matters

36

Additional information

36

Reconciliation of cash flow to movements in net debt

39

Net debt analysis

39

Free cash flow reconciliation

39

Reporting definitions

40

Outlook, assumptions and cautionary statements

41

Independent review report

43

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:

Simon Steel

+44 (0) 20 8047 5502

(London)

Tim Foley

+44 (0) 20 8047 5502

(London)

Mary Hinks-Edwards

+44 (0) 20 8047 5502

(London)

US Media enquiries:

Kristen Neese

+1 215 751 3335

(Philadelphia)

Kathleen Quinn

+1 202 603 5003

(Washington)

Analyst/Investor enquiries:

Sarah Elton-Farr

+44 (0) 20 8047 5194

(London)

James Dodwell

+44 (0) 20 8047 2406

(London)

Danielle Morris

+44 (0) 20 8047 7562

(London)

Jeff McLaughlin

+1 215 751 7002

(Philadelphia)

Frannie DeFranco

+1 215 751 4855

(Philadelphia)

Registered in England & Wales:

No. 3888792

Registered Office:

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Brentford, Middlesex

TW8 9GS

Total and Adjusted results

Total reported results represent the Group's overall performance.

GSK also uses a number of adjusted, non-IFRS, measures to report the performance of its business. Adjusted results and other non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS. Adjusted results are defined below and pro-forma growth and other non-IFRS measures are defined on page 40.

GSK believes that Adjusted results, when considered together with Total results, provide investors, analysts and other stakeholders with helpful complementary information to understand better the financial performance and position of the Group from period to period, and allow the Group's performance to be more easily compared against the majority of its peer companies. These measures are also used by management for planning and reporting purposes. They may not be directly comparable with similarly described measures used by other companies.

GSK encourages investors and analysts not to rely on any single financial measure but to review GSK's quarterly results announcements, including the financial statements and notes, in their entirety.

GSK is committed to continuously improving its financial reporting, in line with evolving regulatory requirements and best practice. In line with this practice, GSK expects to continue to review and refine its reporting framework.

Adjusted results exclude the following items from Total results, together with the tax effects of all of these items:

·

amortisation of intangible assets (excluding computer software)

·

impairment of intangible assets (excluding computer software) and goodwill

·

Major restructuring costs, which include impairments of tangible assets and computer software, (under specific Board approved programmes that are structural, of a significant scale and where the costs of individual or related projects exceed £25 million), including integration costs following material acquisitions

·

transaction-related accounting or other adjustments related to significant acquisitions

·

proceeds and costs of disposal of associates, products and businesses; significant legal charges (net of insurance recoveries) and expenses on the settlement of litigation and government investigations; other operating income other than royalty income, and other items

Costs for all other ordinary course smaller scale restructuring and legal charges and expenses are retained within both Total and Adjusted results.

As Adjusted results include the benefits of Major restructuring programmes but exclude significant costs (such as significant legal, major restructuring and transaction items) they should not be regarded as a complete picture of the Group's financial performance, which is presented in Total results. The exclusion of other Adjusting items may result in Adjusted earnings being materially higher or lower than Total earnings. In particular, when significant impairments, restructuring charges and legal costs are excluded, Adjusted earnings will be higher than Total earnings.

GSK is undertaking a number of Major restructuring programmes in response to significant changes in the Group's trading environment or overall strategy, or following material acquisitions. Costs, both cash and non-cash, of these programmes are provided for as individual elements are approved and meet the accounting recognition criteria. As a result, charges may be incurred over a number of years following the initiation of a Major restructuring programme.

Significant legal charges and expenses are those arising from the settlement of litigation or government investigations that are not in the normal course and materially larger than more regularly occurring individual matters. They also include certain major legacy matters.

Reconciliations between Total and Adjusted results, providing further information on the key Adjusting items, are set out on pages 21 and 22.

GSK provides earnings guidance to the investor community on the basis of Adjusted results. This is in line with peer companies and expectations of the investor community, supporting easier comparison of the Group's performance with its peers. GSK is not able to give guidance for Total results as it cannot reliably forecast certain material elements of the Total results, particularly the future fair value movements on contingent consideration and put options that can and have given rise to significant adjustments driven by external factors such as currency and other movements in capital markets.

Pro-forma growth

The acquisition of the Pfizer consumer healthcare business completed on 31 July 2019 and so GSK's reported results for Q1 2020 include three months of results of the former Pfizer consumer healthcare business from 1 January 2020.

The Group has presented pro-forma growth rates at CER for turnover, Adjusted operating profit and operating profit by business taking account of this transaction. Pro-forma growth rates for the quarter are calculated comparing reported results for Q1 2020, calculated applying the exchange rates used in the comparative period, with the results for Q1 2019 adjusted to include the equivalent three months of results of the former Pfizer consumer healthcare business during Q1 2019, as consolidated (in US$) and included in Pfizer's US GAAP results.

ViiV Healthcare

ViiV Healthcare is a subsidiary of the Group and 100% of its operating results (turnover, operating profit, profit after tax) are included within the Group income statement. 

Earnings are allocated to the three shareholders of ViiV Healthcare on the basis of their respective equity shareholdings (GSK 78.3%, Pfizer 11.7% and Shionogi 10%) and their entitlement to preferential dividends, which are determined by the performance of certain products that each shareholder contributed. As the relative performance of these products changes over time, the proportion of the overall earnings allocated to each shareholder also changes. In particular, the increasing proportion of sales of dolutegravir-containing products has a favourable impact on the proportion of the preferential dividends that is allocated to GSK. Adjusting items are allocated to shareholders based on their equity interests. GSK was entitled to approximately 85% of the Total earnings and 82% of the Adjusted earnings of ViiV Healthcare for 2019.

As consideration for the acquisition of Shionogi's interest in the former Shionogi-ViiV Healthcare joint venture in 2012, Shionogi received the 10% equity stake in ViiV Healthcare and ViiV Healthcare also agreed to pay additional future cash consideration to Shionogi, contingent on the future sales performance of the products being developed by that joint venture, principally dolutegravir. Under IFRS 3 'Business combinations', GSK was required to provide for the estimated fair value of this contingent consideration at the time of acquisition and is required to update the liability to the latest estimate of fair value at each subsequent period end. The liability for the contingent consideration recognised in the balance sheet at the date of acquisition was £659 million. Subsequent re-measurements are reflected within other operating income/expense and within Adjusting items in the income statement in each period. At 31 March 2020, the liability, which is discounted at 8.5%, stood at £5,325 million, on a post-tax basis.

Cash payments to settle the contingent consideration are made to Shionogi by ViiV Healthcare each quarter, based on the actual sales performance of the relevant products in the previous quarter. These payments reduce the balance sheet liability and hence are not recorded in the income statement. The cash payments made to Shionogi by ViiV Healthcare in Q1 2020 were £213 million. 

Because the liability is required to be recorded at the fair value of estimated future payments, there is a significant timing difference between the charges that are recorded in the Total income statement to reflect movements in the fair value of the liability and the actual cash payments made to settle the liability.

Further explanation of the acquisition-related arrangements with ViiV Healthcare are set out on pages 51 and 52 of the Annual Report 2019.

Financial performance - Q1 2020

Total results

The Total results for the Group are set out below.

Q1 2020

£m

Q1 2019

£m

Growth

£%

Growth

CER%

Turnover

9,090 

7,661 

19 

19 

Cost of sales

(3,199)

(2,733)

17 

18 

Gross profit

5,891 

4,928 

20 

20 

Selling, general and administration

(2,916)

(2,477)

18 

19 

Research and development

(1,187)

(1,006)

18 

18 

Royalty income

67 

73 

(8)

(5)

Other operating income/(expense)

159 

(90)

Operating profit

2,014 

1,428 

41 

42 

Finance income

41 

34 

Finance expense

(229)

(224)

Share of after tax profits of

associates and joint ventures

9 

57 

Profit before taxation

1,835 

1,295 

42 

42 

Taxation

(156)

(310)

Tax rate %

8.5%

23.9%

Profit after taxation

1,679 

985 

70 

71 

Profit attributable to non-controlling

interests

114 

155 

Profit attributable to shareholders

1,565 

830 

1,679 

985 

70 

71 

Earnings per share

31.5p

16.8p

87 

89 

Adjusted results

The Adjusted results for the Group are set out below. Reconciliations between Total results and Adjusted results for Q1 2020 and Q1 2019 are set out on pages 21 and 22.

Q1 2020

£m

% of

turnover

Growth

£%

Reported

growth

CER%

Pro-forma

growth

CER%

Turnover

9,090 

100 

19 

19 

10 

Cost of sales

(2,610)

(28.7)

18 

20 

9 

Selling, general and

administration

(2,786)

(30.6)

16 

18 

8 

Research and development

(1,086)

(11.9)

12 

11 

9 

Royalty income

67 

0.6 

(8)

(5)

(5)

Adjusted operating profit

2,675 

29.4 

24 

24 

14 

Adjusted profit before tax

2,497 

23 

23 

Adjusted profit after tax

2,155 

32 

32 

Adjusted profit attributable to

shareholders

1,873 

26 

27 

Adjusted earnings per share

37.7p

25 

26 

Operating profit by business

Q1 2020

£m

% of

turnover

Growth

£%

Reported

growth

CER%

Pro-forma

growth

CER%

Pharmaceuticals

2,018 

45.9 

3 

2 

2 

Pharmaceuticals R&D*

(835)

14 

14 

14 

Total Pharmaceuticals

1,183 

26.9 

(4)

(5)

(5)

Vaccines

858 

47.5 

40 

39 

39 

Consumer Healthcare

766 

26.8 

78 

82 

26 

2,807 

30.9 

23 

23 

14 

Corporate & other unallocated

costs

(132)

Adjusted operating profit

2,675 

29.4 

24 

24 

14 

*

Operating profit of Pharmaceuticals R&D segment, which is the responsibility of the Chief Scientific Officer and President, R&D. It excludes ViiV Healthcare R&D expenditure, which is reported within the Pharmaceuticals segment.

Turnover

Pharmaceuticals turnover

Q1 2020

£m

Growth

£%

Growth

CER%

Respiratory

871

38 

38 

HIV

1,207

8 

8 

Immuno-inflammation

151

25 

24 

Oncology

81

88 

88 

Established Pharmaceuticals

2,086

(7)

(6)

4,396

6 

6 

US

1,758

4 

3 

Europe

1,142

14 

15 

International

1,496

2 

4 

4,396

6 

6 

Pharmaceuticals turnover in the quarter was £4,396 million, up 6% AER, 6% CER. Respiratory sales were up 38% AER, 38% CER to £871 million on growth of Trelegy Ellipta and Nucala. HIV sales of £1,207 million grew 8% AER, 8% CER, with growth of Juluca and Dovato exceeding the decline of Triumeq. Sales of Established Pharmaceuticals declined 7% AER, 6% CER to £2,086 million, reflecting lower Advair sales in the US.

Towards the end of the quarter, additional demand and customer stock building in Europe and the US related to the COVID-19 pandemic had a positive impact on the growth of HIV and Respiratory products. This was partly offset by lower sales in China, reflecting different stages in the progress of the pandemic and different government and market responses.

In the US, sales grew 4% AER, 3% CER. Continued growth of Nucala, Trelegy Ellipta and Benlysta was partly offset by the decline in Established Products, including the ongoing impact of the loss of exclusivity of Advair. In Europe, sales grew 14% AER, 15% CER, with strong growth in Respiratory and HIV, including the impact of COVID-19 related customer stock building. International grew 2% AER, 4% CER, with Respiratory and HIV growth partly offset by lower Established Pharmaceutical sales, including the impact of a weaker allergy season in Japan and market disruption from COVID-19 in China.

Respiratory

Total Respiratory sales were up 38% AER, 38% CER, with strong growth from Nucala, Trelegy and Relvar/Breo in all regions. In the US, Trelegy and Nucala growth continued and Relvar/Breo benefited from the impact of a prior period RAR adjustment. In Europe, Respiratory sales growth of 40% AER, 42% CER, reflected strong growth of Relvar/Breo, Trelegy and Nucala. International Respiratory sales grew 36% AER, 36% CER, including Nucala, up 50% AER, 55% CER, and Relvar/Breo, up 19% AER, 16% CER to £83 million.

Sales of Nucala were £210 million in the quarter and grew 38% AER, 38% CER, with US sales up 35% AER, 33% CER to £115 million. Europe sales of £62 million grew 38% AER, 38% CER and International sales of £33 million grew 50% AER, 55% CER, benefiting from new at-home use application launches worldwide.

Sales of Ellipta products were up 38% AER, 38% CER to £661 million, driven by growth in all regions. In the US, sales grew 38% AER, 37% CER, reflecting continued strong growth of Trelegy Ellipta and the benefit of a prior period RAR adjustment to Relvar/Breo. In Europe, Ellipta products grew 41% AER, 44% CER. Sales of Trelegy Ellipta contributed £193 million globally in the quarter, driven by an increase in US market share.

Relvar/Breo Ellipta sales were up 33% AER, 32% CER to £285 million. In the US, Relvar/Breo grew 47% AER, 45% CER, benefiting from a prior period RAR adjustment. In Europe and International, Relvar/Breo continued to grow strongly, up 30% AER, 33% CER and 19% AER, 16% CER, respectively.

HIV

HIV sales were £1,207 million with growth of 8% AER, 8% CER in the quarter. The dolutegravir franchise grew 9% AER, 9% CER to £1,161 million. The remaining portfolio, with sales of £46 million, 4% of total HIV sales, declined 15% AER, 13% CER and reduced the overall growth of total HIV by one percentage point.

Sales of dolutegravir products were £1,161 million. Sales benefited from customer stock building due to COVID-19, mainly on Tivicay and Triumeq, with Tivicay delivering sales of £412 million, up 8% AER, 8% CER. Sales of Triumeq declined 8% AER, 8% CER to £563 million. The two-drug regimens, Juluca and Dovato, delivered combined sales of £186 million, with growth more than offsetting the decline in Triumeq.

In the US, total dolutegravir sales grew 3% AER, 2% CER and in Europe dolutegravir sales grew 16% AER, 18% CER. The growth was driven by two-drug regimen share growth and increased COVID-19 related customer stock building. Following recent launches of Dovato, sales of the two-drug regimens were £139 million in the US and £43 million in Europe, with combined growth offsetting the decline in Triumeq. International continued to grow strongly with total dolutegravir sales growth of 22% AER, 25% CER, driven by Tivicay tender business.

Oncology

Sales of Zejula were £81 million in the quarter, with growth of 93% AER, 93% CER benefiting from a favourable comparison with Q1 2019 as the product was acquired part way through that quarter. Sales comprised £48 million in the US and £33 million in Europe.

Immuno-inflammation

Sales of Benlysta in the quarter were up 25% AER, 24% CER to £151 million, including sales of the sub-cutaneous formulation of £67 million. In the US, Benlysta grew 20% AER, 18% CER to £126 million.

Established Pharmaceuticals

Sales of Established Pharmaceuticals were £2,086 million, down 7% AER, 6% CER.

Established Respiratory products declined 11% AER, 11% CER to £965 million. The rate of decline of US Advair sales reduced to 40% AER, 40% CER, reflecting the start of generic competition in Q1 2019. Also in the US, Ventolin sales were up 1% AER, but down 1% CER to £147 million, including the benefit of strong uptake of the authorised generic version launched in Q1 2019. Established Respiratory sales in the US were adversely impacted by prior period RAR adjustments in the quarter, but the overall, impact on total Pharmaceuticals growth from US prior period RAR adjustments was not significant. In Europe, Seretide sales were £127 million, with the decline slowing to 5% AER, 3% CER, reflecting continued competition from generic products partly offset by increased COVID-19 related demand. Ventolin sales grew 15% AER, 18% CER to £38 million. In International, sales of Seretide were down 8% AER, 7% CER.

The remainder of the Established Pharmaceuticals portfolio declined by 3% AER, 2% CER to £1,121 million, including the impact of Zantac withdrawal, declines in Viread and Tykerb in China and the impact of a European Relenza tender in Q1 2019. These declines were partly offset by growth in Augmentin in Europe and International and in Dermatology products in International.

Vaccines turnover

Q1 2020

£m

Growth

£%

Growth

CER%

Meningitis

225

8 

11 

Influenza

21

40 

53 

Shingles

647

81 

79 

Established Vaccines

912

(3)

(3)

1,805

19 

19 

US

1,013

30 

29 

Europe

348

3 

4 

International

444

9 

13 

1,805

19 

19 

Vaccines turnover grew 19% AER, 19% CER to £1,805 million, primarily driven by growth in sales of Shingrix. Meningitis vaccines also contributed to growth, with strong demand for Bexsero and Menveo. Established Vaccines declined 3% AER, 3% CER to £912 million, primarily due to lower channel inventory and unfavourable year-on-year US CDC stockpile movements for Hepatitis vaccines together with the divestment of Rabipur and Encepur, partly offset by favourable phasing on Rotarix in Emerging Markets and stronger demand elsewhere in International.

Meningitis

Meningitis sales grew 8% AER, 11% CER to £225 million. Bexsero sales grew 5% AER, 8% CER to £164 million, driven by strong demand and favourable timing of tenders in Europe together with market growth in the US. Menveo grew 21% AER, 24% CER, reflecting higher demand and favourable phasing in Europe and strong demand in the US.

Influenza

Fluarix/FluLaval sales were £21 million, up 40% AER, 53% CER, reflecting favourable phasing and higher demand in International.

Shingles

Shingrix sales grew 81% AER, 79% CER to £647 million, primarily driven by continued strong uptake in the US. Germany and Canada also contributed to growth.

Established Vaccines

Sales of DTPa-containing vaccines (Infanrix, Pediarix and Boostrix) declined by 5% AER, 4% CER. Infanrix/Pediarix sales declined 2% AER, 1% CER to £180 million, reflecting lower channel inventory and unfavourable year-on-year CDC stockpile movements in the US, partly offset by the favourable timing of tenders in Europe, together with stronger demand and favourable phasing in International. Boostrix sales were down 9% AER, 9% CER to £112 million primarily due to unfavourable phasing in International and lower channel inventory in the US.

Hepatitis vaccines declined 11% AER, 11% CER to £213 million, primarily due to lower channel inventory and unfavourable year-on-year US CDC stockpile movements, partly offset by lower returns and rebates in the US and improved supply in Europe.

Synflorix sales grew 2% AER, 3% CER to £123 million, primarily due to stronger demand in International and the favourable timing of tenders in Europe.

Rotarix sales were up 13% AER, 13% CER to £151 million, reflecting favourable phasing in Emerging Markets and stronger demand elsewhere in International.

MMRV vaccines sales grew 4% AER, 7% CER to £57 million, largely driven by improved supply in Europe.

Consumer Healthcare turnover

Q1 2020

£m

Growth

£%

Growth

CER%

Oral health

733

11 

13 

Pain relief

611

65 

68 

Vitamins, minerals and supplements

363

>100 

>100 

Respiratory health

439

51 

51 

Digestive health and other

452

29 

31 

2,598

53 

55 

Brands divested/under review

264

(6)

(4)

2,862

44 

46 

US

969

98 

96 

Europe

746

25 

27 

International

1,147

28 

33 

2,862

44 

46 

Pro-forma growth

11 

On a reported basis, sales grew 44% AER, 46% CER to £2,862 million, largely driven by the inclusion of the Pfizer portfolio. On a pro-forma basis, sales grew 11% CER and 14% CER excluding brands divested/under review. Overall growth was heavily impacted by consumer and government responses to the COVID-19 pandemic.

The impact of COVID-19 varied across regions as a result of differing government actions and consumer behaviour. The US, UK, Australia and a number of other markets benefited from increased demand and shopper activity in both traditional retail and e-commerce channels which resulted in accelerated purchases across all categories, while some markets, including India and China, were negatively impacted by mandated retailer shut-downs.

Oral health

Oral health sales grew 11% AER, 13% CER to £733 million in the quarter. Sensodyne continued to perform strongly, reporting mid-teens growth. This primarily reflected the underlying strength of the brand, but also benefited from increased shopper activity across both traditional retail and e-commerce channels in the US. Gum health grew in double digits, with broad-based growth, while Denture care grew in mid-single digits.

Pain relief

Pain relief grew 65% AER, 68% CER to £611 million. On a pro-forma basis, sales grew in the mid-teens per cent, with significant growth of Advil and Panadol reflecting accelerated purchases as a result of COVID-19. This was partly offset by Voltaren, which was flat for the quarter.

Vitamins, minerals and supplements

Vitamins, minerals and supplements more than doubled to £363 million. On a pro-forma basis, sales grew in the high-teens per cent, with strong performances from Centrum and Emergen-C, reflecting increased demand for wellbeing products.

Respiratory health

Respiratory health sales grew 51% AER, 51% CER to £439 million in the quarter. On a pro-forma basis, sales grew in the mid-twenties per cent, with broad-based growth across the category, primarily reflecting a combination of accelerated purchases and increased consumption in response to the COVID-19 pandemic.

Digestive health and other

Digestive health and other brands grew 29% AER, 31% CER to £452 million. On a pro-forma basis, sales grew in low-single digits. The strong performance of Digestive health, with growth driven largely by Tums in the US, was partly offset by a weaker Skin health performance.

Operating performance

Cost of sales

Total cost of sales as a percentage of turnover was 35.2%, 0.5 percentage points lower at AER and 0.5 percentage points lower in CER terms compared with Q1 2019. This reflected a reduction in the costs of Major restructuring programmes, primarily as a result of lower write downs in a number of manufacturing sites, partly offset by the unwinding of the fair market value uplift on inventory arising on completion of the Consumer Healthcare Joint Venture with Pfizer.

Excluding these and other Adjusting items, Adjusted cost of sales as a percentage of turnover was 28.7%, flat at AER, flat at CER compared with Q1 2019. On a pro-forma basis, Adjusted cost of sales as a percentage of turnover was 28.7%, 0.3 percentage points lower at CER, compared with Q1 2019. This reflected a more favourable product mix in Vaccines, primarily due to the growth of Shingrix in the US and a further contribution from integration and restructuring savings in Pharmaceuticals and Consumer Healthcare, offset by unfavourable product mix and continued adverse pricing pressure in Pharmaceuticals, particularly in Respiratory. 

Selling, general and administration

Total SG&A costs as a percentage of turnover were 32.1%, 0.3 percentage points lower at AER and 0.1 percentage points lower at CER compared with Q1 2019. This included increased major restructuring costs partly offset by lower significant legal and transaction costs.

Excluding these and other Adjusting items, Adjusted SG&A costs as a percentage of turnover were 30.6%, 0.6 percentage points lower at AER than in Q1 2019 and 0.4 percentage points lower on a CER basis. On a pro-forma basis, Adjusted SG&A costs as a percentage of turnover were 30.6%, 0.6 percentage points lower at CER, compared with Q1 2019.

The growth in Adjusted SG&A costs of 16% AER, 18% CER and 8% CER on a pro-forma basis reflected increased investment resulting from the acquisition of Tesaro and in promotional product support, particularly for new launches in Vaccines, Respiratory and HIV as well as increased costs for a number of legal settlements. This was partly offset by the continuing benefit of restructuring in Pharmaceuticals and Consumer Healthcare and the tight control of ongoing costs, particularly in non-promotional spending across all three businesses.

Research and development

Total R&D expenditure was £1,187 million (13.1% of turnover), up 18% AER, 18% CER, including an increase in major restructuring costs. Adjusted R&D expenditure was £1,086 million (11.9% of turnover), 12% higher at AER, 11% higher at CER than in Q1 2019. On a pro-forma basis, Adjusted R&D expenditure grew 9% CER compared with Q1 2019.

Pharmaceuticals R&D expenditure was £853 million, up 14% AER, 13% CER, reflecting a continued significant increase in Oncology investment across multiple mid and late-stage assets including the legacy Tesaro portfolio and a number of other programmes, including belantamab mafodotin, ICOS and bintrafusp alfa. In addition to the Oncology investment there has also been increased spending on the progression of key assets in the specialty and primary care portfolio, including otilimab for rheumatoid arthritis, mepolizumab for COPD and gepotidacin for urogenital gonorrhoea and uncomplicated urinary tract infection. These increases in investment were partly offset by reduced spend in ViiV Healthcare and on daprodustat, where the significant costs related to clinical trial materials have now ended. R&D expenditure in Vaccines and Consumer Healthcare was £158 million and £75 million, respectively.

Royalty income

Royalty income was £67 million (Q1 2019: £73 million), down 8% AER, 5% CER, primarily reflecting adverse movements in Consumer Healthcare.

Other operating income/(expense)

Net other operating income of £159 million (Q1 2019: £90 million expense) primarily reflected an increase in value of the shares in Hindustan Unilever Limited to be received in connection with the disposal of Horlicks and other Consumer Healthcare brands. The cumulative increase in value since the signing of the proposed transaction was £780 million. The majority of this transaction completed on 1 April 2020. Other operating income also included an increase in profit and milestone income from a number of asset disposals.

This was partly offset by accounting charges of £473 million (Q1 2019: £85 million credit) arising from the re-measurement of the contingent consideration liabilities related to the acquisitions of the former Shionogi-ViiV Healthcare joint venture and the former Novartis Vaccines business and the liabilities for the Pfizer put option and Pfizer and Shionogi preferential dividends in ViiV Healthcare. This included a re-measurement charge of £435 million (Q1 2019: £60 million credit) for the contingent consideration liability due to Shionogi, primarily arising from changes in exchange rate assumptions as well as the unwind of the discounting.

Operating profit

Total operating profit was £2,014 million in Q1 2020 compared with £1,428 million in Q1 2019. An increase in value of the shares in Hindustan Unilever Limited to be received in connection with the disposal of Horlicks and other Consumer Healthcare brands as well as income from asset disposals were partly offset by higher re-measurement charges on the contingent consideration liabilities and increased charges for Major restructuring, primarily arising from restructuring in the Vaccines business and costs to integrate the Consumer Healthcare Joint Venture.

Excluding these and other Adjusting items, Adjusted operating profit was £2,675 million, 24% higher than Q1 2019 at AER and 24% higher at CER on a turnover increase of 19% CER. The Adjusted operating margin of 29.4% was 1.2 percentage points higher at AER, and 1.1 percentage points higher on a CER basis than in Q1 2019. On a pro-forma basis, Adjusted operating profit was 14% higher at CER on a turnover increase of 10% CER. The Adjusted pro-forma operating margin of 29.4% was 0.9 percentage points higher on a CER basis than in Q1 2019.

The increase in pro-forma Adjusted operating profit primarily reflected the benefit from strong sales growth across all three businesses, including an uplift from the impact of increased customer demand and stock building as a result of the COVID-19 pandemic in Pharmaceuticals and Consumer Healthcare, a more favourable mix in Vaccines, the continued benefit of restructuring and tight control of ongoing costs across all three businesses. This was partly offset by continuing price pressure, particularly in Respiratory, including the impact of the launch of a generic version of Advair in the US in February 2019, investment in R&D including a significant increase in Oncology investment, partly on the assets from the Tesaro acquisition, and investments in promotional product support, particularly for new launches in Vaccines, HIV and Respiratory. 

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 Q1 2020 amounted to £215 million (Q1 2019: £217 million). This included cash payments made to Shionogi of £213 million (Q1 2019: £219 million).

Operating profit by business

Pharmaceuticals operating profit was £1,183 million, down 4% AER, 5% CER on a turnover increase of 6% at CER. The operating margin of 26.9% was 2.9 percentage points lower at AER than in Q1 2019 and 3.1 percentage points lower on a CER basis. This primarily reflected the increase in cost of sales percentage due to the continued impact of lower prices, particularly in Respiratory, including the impact of the launch of a generic version of Advair in the US in February 2019, a significant increase in Oncology R&D and investment in new product support and targeted priority markets, together with higher provisions for legal settlements and costs in the quarter. This was partly offset by the continued benefit of restructuring and tight control of ongoing costs.

Vaccines operating profit was £858 million, up 40% AER, 39% CER on a turnover increase of 19% CER. The operating margin of 47.5% was 7.2 percentage points higher at AER than in Q1 2019 and 6.7 percentage points higher on a CER basis. This was primarily driven by enhanced operating leverage from strong sales growth, particularly Shingrix in the US, improved product mix and higher royalty income.

Consumer Healthcare operating profit was £766 million, up 78% AER, 82% CER on a turnover increase of 46% CER. On a pro-forma basis, operating profit was £766 million, 26% CER higher on a turnover increase of 11% CER. The operating margin of 26.8% was 5.1 percentage points higher at AER and 5.3 percentage points higher on a CER basis than in Q1 2019. The pro-forma operating margin of 26.8% was 3.2 percentage points higher on a CER basis. The higher margins were primarily driven by significantly higher than normal sales growth due to COVID-19 buying patterns, as well as strong sales performance from a number of power brands. This growth was partially reduced by increased promotional investment and unfavourable movements in other income.

Net finance costs

Total net finance costs were £188 million compared with £190 million in Q1 2019. Adjusted net finance costs were £187 million compared with £187 million in Q1 2019.  During Q1 2020, favourable fair value gains on interest rate swaps more than offset lower interest income on cash and adverse foreign exchange. The impact of higher debt levels was offset by favourable refinancing of term debt during 2019.

Share of after tax profits of associates and joint ventures

The share of after tax profits of associates was £9 million (Q1 2019: £57 million). Q1 2019 included a one-off adjustment of £51 million to reflect GSK's share of increased after tax profits of Innoviva primarily as a result of a non-recurring income tax benefit.

Taxation

The charge of £156 million represented an effective tax rate on Total results of 8.5% (Q1 2019: 23.9%) and reflected the different tax effects of the various Adjusting items, including the non-taxable gain arising from the increase in value of the shares in Hindustan Unilever Limited to be received in connection with the disposal of Horlicks and other Consumer Healthcare brands. Tax on Adjusted profit amounted to £342 million and represented an effective Adjusted tax rate of 13.7% (Q1 2019: 19.7%), primarily reflecting the cancellation by the UK Government of a reduction in the UK corporation tax rate from 19% to 17% resulting in an increase in the value of balance sheet deferred tax assets.

Issues related to taxation are described in Note 14, 'Taxation' in the Annual Report 2019. 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.

Non-controlling interests

The allocation of Total earnings to non-controlling interests amounted to £114 million (Q1 2019: £155 million). The reduction was primarily due to a reduced allocation of ViiV Healthcare profits of £40 million (Q1 2019: £129 million), including increased charges for re-measurement of contingent consideration liabilities. This was partly offset by an increased allocation of Consumer Healthcare profits of £59 million (Q1 2019: £nil) following the completion of the new Consumer Healthcare Joint Venture with Pfizer on 31 July 2019, and which included the unwind of the fair value uplift on acquired inventory and major restructuring costs.

The allocation of Adjusted earnings to non-controlling interests amounted to £282 million (Q1 2019: £149 million). The increase in allocation primarily reflected an increased allocation of Consumer Healthcare profits of £139 million (Q1 2019: £nil) following the buyout of Novartis' interest in June 2018 and the completion of the new Consumer Healthcare Joint Venture with Pfizer on 31 July 2019 as well as an increased allocation of ViiV Healthcare profits of £128 million (Q1 2019: £123 million), partly offset by lower net profits in some of the Group's other entities with non-controlling interests.

Earnings per share

Total earnings per share was 31.5p, compared with 16.8p in Q1 2019. The increase in earnings per share primarily reflected strong operating performance, an increase in the value of the shares in Hindustan Unilever Limited to be received in connection with the disposal of Horlicks and other Consumer Healthcare brands and a reduced effective tax rate, partly offset by increased re-measurement charges on the contingent consideration liabilities and put options and a one-off benefit in Q1 2019 from increased share of after tax profits of the associate Innoviva.

Adjusted EPS was 37.7p compared with 30.1p in Q1 2019, up 25% AER, 26% CER, on a 24% CER increase in Adjusted operating profit. The improvement primarily resulted from a reduced effective tax rate partly offset by reduced share of after tax profits of associates resulting from a non-recurring income tax benefit in Innoviva and a higher non-controlling interest allocation of Consumer Healthcare profits.

Currency impact on Q1 2020 results

The results for Q1 2020 are based on average exchange rates, principally £1/$1.29, £1/€1.17 and £1/Yen 140. Comparative exchange rates are given on page 37. The period-end exchange rates were £1/$1.24, £1/€1.13 and £1/Yen 134.

In the quarter, turnover increased 19% AER, 19% CER. Total EPS was 31.5p compared with 16.8p in Q1 2019. Adjusted EPS was 37.7p compared with 30.1p in Q1 2019, up 25% AER, 26% CER. The marginally negative currency impact primarily reflected the weakness in Euro and emerging market currencies offset by weakness of Sterling, particularly against the US$ and Yen, relative to Q1 2019. Exchange gains or losses on the settlement of intercompany transactions had a negligible impact on the negative currency impact of one percentage point on Adjusted EPS.

Adjusting items

The reconciliations between Total results and Adjusted results for Q1 2020 and Q1 2019 are set out below.

Three months ended 31 March 2020

Total

results

£m

Intangible

amort-

isation

£m

Intangible

impair-

ment

£m

Major

restruct-

uring

£m

Transaction-

related

£m

Divestments,

significant

legal and

other items

£m

Adjusted

results

£m

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

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

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

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

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

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

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

Turnover

9,090 

9,090 

Cost of sales

(3,199)

171 

29 

293 

96 

(2,610)

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

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

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

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

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

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

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

Gross profit

5,891 

171 

29 

293 

96 

6,480 

Selling, general and administration

(2,916)

14 

106 

10 

(2,786)

Research and development

(1,187)

17 

84 

(1,086)

Royalty income

67 

67 

Other operating income/(expense)

159 

473 

(632)

- 

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

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

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

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

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

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

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

Operating profit

2,014 

188 

43 

483 

569 

(622)

2,675 

Net finance costs

(188)

1 

(187)

Share of after tax profits of

associates and joint ventures

9 

9 

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

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

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

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

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

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

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

Profit before taxation

1,835 

188 

43 

484 

569 

(622)

2,497 

Taxation

(156)

(39)

(6)

(105)

(58)

22 

(342)

Tax rate %

8.5%

13.7%

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

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

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

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

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

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

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

Profit after taxation

1,679 

149 

37 

379 

511 

(600)

2,155 

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

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

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

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

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

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

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

Profit attributable to

non-controlling interests

114 

168 

282 

Profit attributable to

shareholders

1,565 

149 

37 

379 

343 

(600)

1,873 

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

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

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

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

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

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

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

Earnings per share

31.5p

3.0p

0.8p

7.6p

6.9p

(12.1)p

37.7p

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

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

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

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

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

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

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

Weighted average number of

shares (millions)

4,965 

4,965 

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

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

Three months ended 31 March 2019

Total

results

£m

Intangible

amort-

isation

£m

Intangible

impair-

ment

£m

Major

restruct-

uring

£m

Transaction-

related

£m

Divestments,

significant

legal and

other items

£m

Adjusted

results

£m

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

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

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

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

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

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

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

Turnover

7,661 

7,661 

Cost of sales

(2,733)

171 

13 

341 

5 

(2,203)

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

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

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

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

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

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

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

Gross profit

4,928 

171 

13 

341 

5 

5,458 

Selling, general and administration

(2,477)

4 

25 

29 

22 

(2,397)

Research and development

(1,006)

17 

2 

15 

1 

(971)

Royalty income

73 

73 

Other operating (expense)/income

(90)

(1)

(87)

178 

- 

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

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

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

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

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

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

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

Operating profit

1,428 

188 

19 

380 

(53)

201 

2,163 

Net finance costs

(190)

1 

(3)

2 

(187)

Share of after tax profits of

associates and joint ventures

57 

57 

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

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

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

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

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

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

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

Profit before taxation

1,295 

188 

19 

381 

(53)

203 

2,033 

Taxation

(310)

(37)

(3)

(58)

8 

(400)

Tax rate %

23.9%

19.7%

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

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

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

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

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

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

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

Profit after taxation

985 

151 

16 

323 

(45) 

203 

1,633 

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

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

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

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

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

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

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

Profit attributable to

non-controlling interests

155 

(6) 

149 

Profit attributable to

shareholders

830 

151 

16 

323 

(39)

203 

1,484 

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

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

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

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

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

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

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

Earnings per share

16.8p

3.1p

0.3p

6.5p

(0.7)p

4.1p

30.1p

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

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

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

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

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

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

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

Weighted average number of

shares (millions)

4,936 

4,936 

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

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

Major restructuring and integration

Within the Pharmaceuticals sector, the highly regulated manufacturing operations and supply chains and long lifecycle of the business mean that restructuring programmes, particularly those that involve the rationalisation or closure of manufacturing or R&D sites are likely to take several years to complete.

Total Major restructuring charges incurred in Q1 2020 were £483 million (Q1 2019: £380 million), analysed as follows:

Q1 2020

Q1 2019

Cash

£m

Non-cash

£m

Total

£m

Cash

£m

Non-cash

£m

Total

£m

2018 major restructuring

programme (incl. Tesaro)

26

155

181

24

312

336

Consumer Healthcare Joint

Venture integration

programme

57

2

59

10

-

10

Separation Preparation restructuring programme

237

-

237

-

-

-

Combined restructuring and

integration programme

3

3

6

22

12

34

323

160

483

56

324

380

Cash charges primarily arose from restructuring of Vaccines Manufacturing and R&D functions as well as commercial pharmaceuticals restructuring under the Separation Preparation programme, integration costs under the Consumer Healthcare Joint Venture integration programme and restructuring of the manufacturing organisation, R&D and some administrative functions as well as the integration of Tesaro under the 2018 major restructuring programme. Non-cash charges under the 2018 major restructuring programme primarily related to write down of sites on disposal of sites as part of plans to restructure the manufacturing network.

Total cash payments made in Q1 2020 were £168 million (Q1 2019: £174 million), £34 million for the existing Combined restructuring and integration programme (Q1 2019: £121 million), £53 million (Q1 2019: £53 million) under the 2018 major restructuring programme including the settlement of certain charges accrued in previous quarters, a further £70 million relating to the Consumer Healthcare Joint Venture integration programme and £11 million relating to the Separation Preparation restructuring programme.

The analysis of Major restructuring charges by business was as follows:

Q1 2020

£m

Q1 2019

£m

Pharmaceuticals

172

336

Vaccines

210

-

Consumer Healthcare

74

21

456

357

Corporate & central functions

27

23

Total Major restructuring costs

483

380

The analysis of Major restructuring charges by Income statement line was as follows:

Q1 2020

£m

Q1 2019

£m

Cost of sales

293

341

Selling, general and administration

106

25

Research and development

84

15

Other operating expense

-

(1)

Total Major restructuring costs

483

380

The benefit in the quarter from the 2018 major restructuring programme was £0.1 billion. Given their early stages, the benefits from the Consumer Healthcare Joint Venture integration and Separation Preparation restructuring programmes were less than £0.1 billion.

The 2018 major restructuring programme, including Tesaro, is expected to cost £1.75 billion over the period to 2021, with cash costs of £0.85 billion and non-cash costs of £0.9 billion, and is expected to deliver annual savings of around £450 million by 2021 (at 2019 rates). These savings are intended to be fully re-invested to help fund targeted increases in R&D and commercial support of new products.

The completion of the new Consumer Healthcare Joint Venture with Pfizer is expected to realise substantial cost synergies, generating total annual cost savings of £0.5 billion by 2022 for expected cash costs of £0.7 billion and non-cash charges of £0.3 billion, plus additional capital expenditure of £0.2 billion. Up to 25% of the cost savings are intended to be reinvested in the business to support innovation and other growth opportunities.

The Group initiated in Q1 2020 a two-year Separation Preparation programme to prepare for the separation of GSK into two companies: New GSK, a biopharma company with an R&D approach focused on science related to the immune system, the use of genetics and new technologies, and a new leader in Consumer Healthcare. The programme aims to:

·

Drive a common approach to R&D with improved capital allocation

·

Align and improve the capabilities and efficiency of global support functions to support New GSK

·

Further optimise the supply chain and product portfolio, including the divestment of non-core assets. A strategic review of prescription dermatology is underway

·

Prepare Consumer Healthcare to operate as a standalone company

The programme will target delivery of £0.7 billion of annual savings by 2022 and £0.8 billion by 2023, with total costs estimated at £2.4 billion, of which £1.6 billion is expected to be cash costs. The proceeds of anticipated divestments are largely expected to cover the cash costs of the programme.

Additional one-time costs to prepare Consumer Healthcare for separation are estimated at £600-700 million, excluding transaction costs. 

Transaction-related adjustments

Transaction-related adjustments resulted in a net charge of £569 million (Q1 2019: £53 million credit). This included a net £473 million accounting charge for the re-measurement of the contingent consideration liabilities related to the acquisitions of the former Shionogi-ViiV Healthcare joint venture and the former Novartis Vaccines business and the liabilities for the Pfizer put option and Pfizer and Shionogi preferential dividends in ViiV Healthcare.

Charge/(credit)

Q1 2020

£m

Q1 2019

£m

Contingent consideration on former Shionogi-ViiV Healthcare joint venture

(including Shionogi preferential dividends)

435 

(60)

ViiV Healthcare put options and Pfizer preferential dividends

49 

(24)

Contingent consideration on former Novartis Vaccines business

(11)