GlaxoSmithKline : 1st Quarter Results

Core operating profit - Q1 2016

Core operating profit was £1,559 million, 13% higher in CER terms than in Q1 2015 on a turnover increase of 8%. The core operating margin of 25.0% was 1.8 percentage points higher than in Q1 2015 and 1.1 percentage points higher on a CER basis.

On a pro-forma basis, core operating profit was 28% higher in CER terms compared with Q1 2015 on turnover growth of 6%. The pro-forma core operating margin was 4.3 percentage points higher in CER terms, reflecting improved operating leverage driven by stronger sales growth and a more favourable mix across all three businesses as well as a strong start to the year in delivery of restructuring and integration benefits and tight control of ongoing costs, partially offset by continued price pressure, particularly in Respiratory, and supply chain investments.

Cost of sales as a percentage of turnover was 31.1%, up 0.2 percentage points in Sterling terms and 0.9 percentage points higher in CER terms than in Q1 2015. On a pro-forma basis, the cost of sales percentage decreased 1.5 percentage points compared with 2015 and 0.8 percentage points in CER terms. This reflected the more favourable product mix in the quarter, particularly the impact of higher HIV sales in Pharmaceuticals but also in Vaccines and Consumer Healthcare, as well as an increased contribution from integration and restructuring savings in all three businesses, partially offset by continued adverse pricing pressure in Pharmaceuticals, primarily Respiratory.

SG&A costs were 32.9% of turnover, 0.3 percentage points lower than in Q1 2015 and 0.2 percentage points lower on a CER basis. On a pro-forma basis, SG&A as a percentage of sales reduced by 1.7 percentage points and 1.6 percentage points on a CER basis. This primarily reflected tight control of ongoing costs as well as cost reductions in Global Pharmaceuticals, including the benefits of the Pharmaceuticals restructuring programme initiated in Q4 2014, and integration benefits in Vaccines and Consumer Healthcare, offset by reallocation of investment of promotional product support, particularly for new launches in Respiratory, HIV, Consumer Healthcare and Vaccines.

R&D expenditure was £775 million (12.4% of turnover), 5% lower than Q1 2015. On a pro-forma basis, R&D expenditure declined 7% reflecting the benefit of cost reduction programmes in Pharmaceuticals, Consumer Healthcare and Vaccines R&D.

Royalty income was £91 million (Q1 2015: £77 million) which included the benefit of a prior year catch-up adjustment.

Core operating profit by business - Q1 2016

Pharmaceuticals core operating profit was £1,153 million, 8% higher than in Q1 2015 in CER terms on a turnover decline of 1%. The core operating margin of 32.1% was 3.6 percentage points higher than in Q1 2015 and 2.6 percentage points higher on a CER basis. On a pro-forma basis, the core operating margin increased 3.7 percentage points on a CER basis, reflecting the more favourable product mix, primarily driven by the growth in HIV sales, and the cost reduction benefit of the Group's pharmaceuticals restructuring programme, partly offset by increased investment in new product support and the continued impact of lower prices, particularly in Respiratory, and the broader transition of the Respiratory portfolio.

Vaccines operating profit was £253 million, 56% higher than in Q1 2015 in CER terms on a turnover increase of 23%. The core operating margin of 28.7% was 5.7 percentage points higher than in Q1 2015 and 6.1 percentage points higher on a CER basis. On a pro-forma basis, the core operating margin improved 15.2 percentage points and 15.6 percentage points in CER terms, primarily driven by favourable product mix and enhanced operating leverage in the quarter from the phasing benefits to US and International sales together with reductions in supply chain costs, particularly in the former Novartis operations, as well as restructuring and integration benefits in Vaccines R&D.

Consumer Healthcare core operating profit was £303 million, 59% higher than in Q1 2015 in CER terms on a turnover increase of 26%. The core operating margin of 17.2% was 4.0 percentage points higher than in Q1 2015 and 3.5 percentage points higher on a CER basis. On a pro-forma basis, the Consumer Healthcare operating margin was 5.5 percentage points higher and 5.0 percentage points higher on a CER basis, primarily driven by favourable mix in the quarter, particularly in Wellness, and a strong contribution in the quarter from integration synergies benefiting both SG&A and R&D as a percentage of sales, as well as an improvement in gross margin reflecting benefits from improved supply volume and pricing.

Core profit after tax and core earnings per share - Q1 2016

Net finance expense was £159 million compared with £156 million in Q1 2015.

Tax on core profit amounted to £294 million and represented an effective core tax rate of 21.0% (Q1 2015: 20.0%). The increase in the effective rate reflected the Group's momentum and changing earnings mix in favour of the US in particular. See 'Taxation' on page 36 for further details.

The allocation of earnings to non-controlling interests amounted to £147 million (Q1 2015: £91 million), including the non-controlling interest allocations of Consumer Healthcare profits of £46 million (Q1 2015: £12 million) and the allocation of ViiV Healthcare profits, which increased to £66 million (Q1 2015: £51 million) including the impact of changes in the proportions of preferential dividends due to each shareholder based on the relative performance of different products in the quarter.

Core EPS of 19.8p was up 8% in CER terms compared with a 13% increase in operating profit, primarily reflecting the greater contribution to growth from businesses in which there are significant non-controlling interests as well as the increased tax rate in the quarter compared with Q1 2015.

Total operating profit and total earnings per share - Q1 2016

Total operating profit was £723 million in Q1 2016 compared with a total operating profit of £9,216 million in Q1 2015, which benefited from the net disposal gains recorded following the disposal of the Oncology business as part of the Novartis transaction. Non-core items in the quarter resulted in an aggregate net charge of £836 million (Q1 2015: net credit of £7,911 million), primarily reflecting the continued impact of charges for restructuring costs related to the integration of the former Novartis businesses and the Pharmaceuticals restructuring programme as well as the impact of further non-cash charges related to re-measurements of the contingent consideration related to the former Shionogi-ViiV Healthcare joint venture and the Novartis Vaccines business, along with re-measurement of the value attributable to the Consumer Healthcare put option, and certain other adjusting items.

Intangible asset amortisation was £144 million compared to £151 million in Q1 2015. There were no intangible asset impairments (Q1 2015: £102 million). Both are non-cash items.

Major restructuring and integration charges accrued in the quarter were £188 million (Q1 2015: £366 million), reflecting the phasing of planned restructuring projects following the completion of the Novartis transaction in Q1 2015, as well as reduced charges for Pharmaceuticals restructuring projects as this programme enters its later stages. Cash payments made in the quarter were £267 million (Q1 2015: £254 million) including the settlement of certain charges accrued in previous quarters.

Charges for the combined restructuring and integration programme to date are £2.9 billion. The total cash charges of the combined programme are expected to be approximately £3.65 billion and the non-cash charges up to £1.35 billion. The programme delivered incremental cost savings of £0.4 billion in the quarter and has now delivered approximately £2 billion of annual savings on a moving annual total basis. It remains on track to deliver £3 billion of annual savings in total. The programme is expected to be largely complete by the end of 2017.

Legal charges of £26 million (Q1 2015: £85 million) included the benefit of the settlement of existing anti-trust matters as well as provisions for ongoing litigation. Legal cash payments in the quarter were £73 million (Q1 2015: £162 million).

Transaction-related adjustments resulted in a net non-cash charge of £460 million (Q1 2015: £864 million). This included re-measurement of the liability and the unwinding of the discounting effects on the contingent consideration related to the acquisition of the former Shionogi-ViiV Healthcare joint venture, the contingent consideration related to the acquisition of the former Novartis Vaccines business, and the value attributable to the Consumer Healthcare Joint Venture put option held by Novartis. The aggregate re-measurement of the liability across all these items was £253 million and the aggregate impact of unwind of the discount was £197 million. The liabilities for put options and preferential dividends payable to Pfizer and Shionogi related to ViiV Healthcare were recognised directly to equity in the quarter. An explanation of the accounting for the non-controlling interests in ViiV Healthcare is set out in the 'Group financial review' section of the Annual Report 2015.

Other items included equity investment impairments, a number of other asset disposals, and certain other adjusting items.

A tax charge of £208 million on total profit represented an effective tax rate of 37.1% (Q1 2015: 19.0%) and reflected the differing tax effects of the various non-core items and the non-deductibility of the re-measurement and other acquisition related adjustments.

The total earnings per share was 5.8p, compared with earnings per share of 167.8p in Q1 2015. The decrease primarily reflected the benefit to Q1 2015 of the Novartis transaction in Q1 2015.