New GSK Group
Through application of the strategy set out in 2008 and the recently completed transaction with Novartis, GSK has created a new balanced group of world-leading businesses in Vaccines, Pharmaceuticals and Consumer Healthcare, which has broadened GSK’s scope to improve human health. In an update to investors today, GSK set out prospects for the newly shaped Group.
The Company also reported its results for the first quarter ended 31 March 2015.
Sir Andrew Witty, Chief Executive Officer, GSK said:
“With the completion of the Novartis transaction, we have reviewed future prospects for the newly shaped Group, including the opportunities offered through the integration and our cash allocation strategy.
“We have done so recognising that our operating environment is shifting radically, particularly in relation to pricing and that we must be prepared for specific uncertainties, including the possible introduction of generic Advair in the US and the potential exercise of put options from partners in ViiV Healthcare and our Consumer Healthcare Business.
“Having done so, and with the substantial growth and synergy opportunities we have going forward, we are today setting out to shareholders our expectations for the Group over the medium-term and announcing a series of decisions which support delivery of this performance and future shareholder returns.
“For 2015, our financial performance will be impacted by the dilutive effect of the transaction and flow through of headwinds encountered in 2014. We then expect to see a sustained improvement in performance with revenues and earnings expected to grow in CAGR terms over the five year period 2016 to 2020 on a CER basis.
“We believe the Group’s new composition strengthens our ability to offer cost effective healthcare options to payors and governments and enables us to increase access for patients and consumers to our products.
“The importance of R&D to all three global businesses is demonstrated by the launch of Flonase OTC, the approval of Breo for asthma, the filing of a gene therapy to treat a rare disease and the publication of positive phase III data for Shingrix, all seen in the last few months.
“Driven by science-led innovation and a clear determination to realise the volume opportunities in the broad healthcare markets of the world, we believe GSK’s three businesses are well placed to deliver significant future value to patients, consumers and shareholders.”
Three World-leading Businesses
GSK’s product portfolio is now well diversified with 10 products generating annual revenues of more than £500 million per year. As a result of the transaction, total annual revenues are increased by £1.2 billion on a full-year 2014 historic pro-forma basis, and the Group is more balanced with revenues split across Pharmaceuticals 59%, Consumer Healthcare 25% and Vaccines 16% on the same basis.
The Group is positively exposed to broad areas of future healthcare demand and growth and present in more than 150 markets around the world. The transaction has significantly strengthened GSK’s positions in the US, Russia, Germany and a number of emerging markets, including China.
With three world leading businesses, GSK believes the Group is strongly positioned to meet the challenges of increasing demand for healthcare and sustained pressure to reduce prices of new medicines.
Specifically, the Group expects volume demand for its products to increase, particularly in Emerging Markets, and as governments and payors focus on cost effective interventions to support healthcare needs, such as Vaccines and OTC medicines. At the same time, the breadth of the Group’s overall portfolio provides substantial opportunities to develop flexible pricing responses to fluctuating economic pressures.
R&D innovation underpins all three of GSK’s global businesses. The Group has a pipeline of around 40 NMEs (drugs and vaccines) in phase II/III development and more than 80% of pre-clinical to phase-II NME projects can be classified as having novel mechanism of action. All three businesses are also supported by proprietary technologies and manufacturing capabilities in areas such as devices, adjuvants, bio-electronics and formulations. The Group will profile many of these opportunities at an R&D event for investors on 3 November 2015.
Revenue and Portfolio Opportunities
With the newly acquired products from Novartis, GSK has the most comprehensive Vaccines portfolio in the industry offering paediatric, adolescent, adult, elderly and travel vaccines. Prevention of meningitis represents one of the most significant new opportunities for GSK, with the acquisition of Bexsero and Menveo. The new portfolio will benefit GSK in many markets, notably with the ability to offer the ex-Novartis vaccines in Emerging Markets and expand the portfolio GSK can offer in the US. Since completion, GSK has announced the establishment of a new global Vaccines R&D and Commercial centre in Rockville, Maryland.
The company sees significant opportunity in the Group’s new vaccines pipeline. The most advanced is Shingrix, for prevention of shingles. Phase III data for the vaccine which has been published in the NEJM demonstrated overall efficacy of 97.2% in adults over 50 years which did not diminish in older age groups. Altogether, the Group has more than 20 new vaccines in development including potential vaccines to protect against, hepatitis C, RSV, typhoid, Group B strep and MenABCWY.
Within Pharmaceuticals, GSK remains confident of maintaining its global leadership in respiratory well into the next decade. The company continues to expect sales of Advair to decline, but with the ongoing transition to newer products, total respiratory sales are expected to return to growth in 2016. By 2020, the Group expects total respiratory sales to be at or above the level of sales in 2015, whether or not there is generic competition to Advair in the US in the period, with more than 90% of revenues generated from nine products (compared to four products currently).
HIV is the other key therapeutic franchise in the current pharmaceutical portfolio. Five years ago, GSK created ViiV Healthcare, a standalone global HIV business that has become a highly successful venture with equity partners Pfizer and Shionogi. The recent launches of Tivicay and Triumeq have continued to surpass expectations and there is clear scope to develop multiple dolutegravir-based regimens for treatment of HIV over the next few years. Progress has also been made to develop ViiV Healthcare’s pipeline with several promising assets in development including the long-acting integrase inhibitor, cabotegravir.
Having reviewed this very positive outlook, GSK has concluded that retaining its full, existing holding in ViiV Healthcare is in the best interests of the Group and GSK will not now be initiating an IPO of a minority stake.
In addition to the Respiratory and HIV businesses, the balance of the Pharmaceuticals business, including the Established Pharmaceuticals Portfolio, represents 2014 sales of £6.6 billion and includes over 15 products generating sales of at least £100 million. This portfolio provides a broad and cash generative business for the Group, with particular strength and growth opportunities in Emerging Markets driven by brands such as Augmentin and Zinnat. Approximately 60% of this portfolio is being promoted to drive volume whilst 40% is being managed to generate cash for reinvestment into other parts of the Pharmaceuticals portfolio.
GSK Consumer Healthcare is now the world’s largest supplier of over-the-counter (OTC) medicines, and holds category leading positions in Wellness (pain relief, respiratory, GI), Oral health, Nutrition and Skin health. The business has strengthened its positions in multiple markets through the transaction, particularly in Eastern Europe and emerging markets.
GSK will concentrate global development on seven power brands: Sensodyne, Voltaren, Theraflu, Poligrip, Panadol, Otrivin, and Paradontax, which have a strong track record of innovation success and the potential to grow well ahead of respective category growth. 12 core brands, such as Horlicks, will be invested and developed on a regional basis.
Innovation is expected to contribute more than 10% of revenues per year, with an R&D pipeline built around consumer insight and science. Switch of pharmaceutical products to OTC will also be an important component of growth for the business.
Restructuring
The Group has three major restructuring programmes now underway: the transaction integration; restructure of its global pharmaceuticals business; and the Group-wide major change programme, started in 2012.
GSK continues to expect to deliver total transaction synergies of £1 billion annually. Following closure of the transaction in March and having reviewed the businesses acquired, GSK has identified opportunities to accelerate delivery of the overall programme. As a result, over 50% of total savings are now expected in 2016 (versus 2017) and the programme is expected to be substantially complete in 2017 (versus 2019).
In Consumer Healthcare, cost savings of £400 million are expected as a result of the transaction and together with supply chain efficiencies, are expected to drive profitability improvements. GSK is targeting a Consumer Healthcare operating profit margin of at least 20% by 2020 which would place it in the top quartile of comparable businesses.
In Vaccines, transaction cost savings of £400 million are expected with volume improvements also expected to benefit cost of sales. Following completion of the transaction, it is clear that the inherited vaccines business has a higher than anticipated cost base. GSK is confident it can address this as part of the overall integration programme. GSK is targeting a Vaccines operating profit margin of at least 30% by 2020.
As previously announced, the Group has commenced restructuring of its global Pharmaceuticals business with approximately £1 billion of annual cost savings to be delivered by 2017. Approximately 50% of savings are expected in 2016. These costs savings will help to mitigate ongoing changes to the Group’s Pharmaceutical margin and support investment in recent and new launches.
In total, the Group expects all restructuring (transaction, pharmaceuticals and major change) to deliver annual cost savings benefits of £3 billion. The total cash charges to deliver these benefits are expected to be approximately £3.65 billion and the non-cash charges up to £1.35 billion. Charges to-date are £1.3 billion, predominantly cash. The delivery of the £3 billion of annual benefits is expected to be largely complete by the end of 2017. Going forward, the Group will report its restructuring as a single programme.
2015 Guidance
In 2015, core EPS is expected to decline at a percentage rate in the high teens on a CER basis, primarily due to continued pricing pressure on Advair in US/Europe, the dilutive effect of the transaction and the inherited cost base of the Novartis businesses.
2016-2020 Outlook
In 2016, GSK expects to see a significant recovery in Core EPS with percentage growth expected to reach double-digits on a CER basis as the adverse impacts seen in 2015 diminish and the sales and the synergy benefits of the transaction contribute more meaningfully.
The new balance of the Group provides a better basis for generating long-term sustainable growth. GSK expects annual Group revenues to grow at a CAGR of low-to-mid single digits on a CER basis over the five year period 2016-2020.
New product launches, the timing of vaccine tender agreements, pharmaceutical genericisation (in particular a possible US generic Advair) and overall market conditions will lead to revenue growth variances year to year.
Over the same financial period 2016-2020 and on a CER basis, GSK expects Vaccines sales to grow at a CAGR of mid-to-high single digits and Consumer Healthcare at a CAGR of mid single digits. Pharmaceutical sales are expected to grow at a CAGR of low single digits.
New Pharmaceutical and Vaccine products, recently launched and which are expected to be launched over the next five years are expected to generate sales of at least £6 billion per annum by 2020 on a CER basis.
GSK expects earnings to grow faster than sales with Group core EPS expected to grow at a CAGR of mid-to-high single digits on a CER basis over the five year period 2016-2020.
In outlining these expectations for the five year period 2016-2020, the Group has made certain assumptions about the healthcare sector, the different markets in which the Group operates and the delivery of revenues and financial benefits from its current portfolio, pipeline and restructuring programmes.
The Group continues to expect the next several years to be challenging for the healthcare industry with continued pressure on pricing of pharmaceuticals. For the Group specifically, over the period to 2020 GSK expects further declines in sales of Seretide/Advair. The introduction of a generic alternative to Advair in the US has been factored into the Group’s assessment of its future performance. The Group assumes no premature loss of exclusivity for other key products over the period. The Group’s expectation of at least £6 billion of revenues per annum on a CER basis by 2020 from products launched in the last three years includes contributions from current pipeline assets mepoluzimab and Shingrix. The Group also expects volume demand for its products to increase, particularly in Emerging Markets.
The assumptions for the Group’s revenue and earnings expectations assume no material mergers, acquisitions, disposals, litigation costs or share repurchases for the Company; and no change in the Group’s shareholdings in ViiV Healthcare or Consumer Healthcare.
The Group’s expectations assume successful delivery of the Group’s integration and restructuring plans over the period 2016-2020. Material costs for investment in new product launches and R&D have been factored into the expectations given. The expectations are given on a constant currency basis and assumes no material change to the Group’s effective tax rate.
Shareholder Returns and Capital Investments
Since the completion of the transaction and receipt of the first monthly results from the former Novartis businesses during April, the Group has reviewed in detail its integration plans and has developed a five year outlook for the Group, which includes an updated view of ViiV Healthcare. In doing so, GSK has also reviewed its capital allocation strategy. The Group’s commitment to its current credit ratings has been a key consideration in this review.
Going forward, GSK has decided to prioritise use of cash for return of ordinary dividends and accelerated investment to support more rapid delivery of synergy benefits and other new growth opportunities identified in the portfolio.
As a result of the review, GSK is announcing that it expects to pay an annual ordinary dividend of 80p for each of the next three years (2015-2017).
The Group wishes to ensure that it maintains the flexibility to deploy capital in response to certain events, which may or may not occur in the next five years, including the potential exercise of ‘put’ options by partners in ViiV Healthcare and Consumer Healthcare; and the possible introduction of a generic version of Advair in the US. The Group has also factored into its view the impact of a continued low interest rate environment on pensions, other employee related liabilities and potential company contributions.
Accordingly, the Group has decided to reduce the planned return to shareholders from the net proceeds generated from the Novartis transaction. GSK now plans to return approximately £1 billion (20p per share) to shareholders via a special dividend to be paid alongside GSK’s Q4 2015 ordinary dividend payment.
Any future returns to shareholders of surplus capital will be subject to the Group’s strategic progress, visibility on the put options and other capital requirements.
Q1 2015
For the quarter, reported Group sales increased 1% to £5.6 billion with positive contributions from Vaccines, +10% and Consumer Healthcare, +24% offsetting a decline in Total Pharmaceuticals of 7%. Total Pharmaceutical turnover represents a combination of very strong growth from ViiV Healthcare +42% offset by Oncology divestments and sales declines in Advair and Established Products.
Advair/Seretide sales continued to decline given sustained price pressure in the US and Europe and generic competition in Europe. Transition of the portfolio continues with an additional indication for use of Breo to treat adults with asthma from the FDA.
Pro-forma sales for Vaccines were up 3% and Consumer Healthcare up 8%. Consumer Healthcare benefited particularly from the launch of Flonase OTC in the quarter and strong Oral health performance.
In R&D, in addition to positive phase III data for Shingrix published in the quarter, GSK yesterday filed a regulatory submission to the European Medicines Agency seeking approval for a gene therapy (GSK2696273) to treat patients with the rare disease adenosine deaminase severe combined immunodeficiency syndrome (ADA-SCID).
Core EPS for the quarter was 17.3p (-16%) CER, declining primarily as a result of mix pressures on the Pharmaceuticals margin and the dilutive impact of the transaction. The decline was partly offset by ongoing cost reductions and a lower tax rate (20%). Q1 2015 total EPS of 167.8p benefited from the pre-tax transaction gain of £9.3 billion.
A Q1 2015 dividend of 19 pence has been declared by the Group.
Assumptions and cautionary statement regarding forward-looking statements
The Group’s management believes that the assumptions outlined above are reasonable, and that the aspirational targets described in this report are achievable based on those assumptions. However, given the longer term nature of these expectations and targets, they are subject to greater uncertainty, including potential material impacts if the above assumptions are not realised, and other material impacts related to foreign exchange fluctuations, macroeconomic activity, changes in regulation, government actions or intellectual property protection, actions by our competitors, and other risks inherent to the industries in which we operate.
This document contains statements that are, or may be deemed to be, “forward-looking statements”. Forward-looking statements give the Group’s current expectations or forecasts of future events. An investor can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as ‘anticipate’, ‘estimate’, ‘expect’, ‘intend’, ‘will’, ‘project’, ‘plan’, ‘believe’, ‘target’ and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. Other than in accordance with its legal or regulatory obligations (including under the UK Listing Rules and the Disclosure and Transparency Rules of the Financial Conduct Authority), the Group undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The reader should, however, consult any additional disclosures that the Group may make in any documents which it publishes and/or files with the SEC. All readers, wherever located, should take note of these disclosures. Accordingly, no assurance can be given that any particular expectation will be met and investors are cautioned not to place undue reliance on the forward-looking statements.
Forward-looking statements are subject to assumptions, inherent risks and uncertainties, many of which relate to factors that are beyond the Group’s control or precise estimate. The Group cautions investors that a number of important factors, including those in this document, could cause actual results to differ materially from those expressed or implied in any forward-looking statement. Such factors include, but are not limited to, those discussed under Item 3.D ‘Risk factors’ in the Group’s Annual Report on Form 20-F for 2014 and those discussed in Part 2 of the Circular to Shareholders and Notice of General Meeting furnished to the SEC on Form 6-K on 24 November 2014. Any forward looking statements made by or on behalf of the Group speak only as of the date they are made and are based upon the knowledge and information available to the Directors on the date of this report.
A number of adjusted measures are used to report the performance of our business. These measures are defined on page 26 and a reconciliation of core results to total results is set out on page 40.
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