Core operating profit - Q2 2015
Core operating profit was £1,349 million, 3% higher in CER terms than in Q2 2014 on a turnover increase of 7%. The core operating margin of 22.9% was 2.4 percentage points lower than in Q2 2014 and 1.0 percentage point lower on a CER basis. The decrease included a 3.5 percentage point impact from the Novartis transaction, reflecting the disposal of GSK's higher margin Oncology business and the acquisition of lower margin Vaccines and Consumer Healthcare businesses from Novartis.
On a pro-forma basis core operating profit grew 14% in CER terms compared to Q2 2014 on a turnover increase of 2%. The core operating margin increased on a pro-forma basis by 2.5 percentage points in CER terms, primarily benefiting from the initial phases of the Pharmaceuticals restructuring programme, although an improved product mix offset continued pricing pressure on the cost of sales margin.
Cost of sales as a percentage of turnover was 30.2%, up 2.5 percentage points in sterling terms and 2.6 percentage points higher in CER terms than in Q2 2014. On a pro-forma basis the cost of sales percentage decreased 0.1 percentage points and was flat in CER terms. This reflected a more favourable product mix in the quarter driven by strong growth in new products, particularly Tivicay and Triumeq, and a benefit from the Group's cost reduction programmes, offset by adverse price pressure in Pharmaceuticals, primarily respiratory, and increased investments in Vaccines to improve the reliability and capacity of the supply chain.
SG&A costs were 35.5% of turnover, 0.9 percentage points higher than in Q2 2014 but 0.2% lower on a CER basis. On a pro-forma basis, SG&A as a percentage of sales decreased by 0.4 percentage points and 1.5 percentage points on a CER basis. This primarily reflected savings in Global Pharmaceuticals, including the initial benefits of the Pharmaceuticals cost reduction programme, partly offset by the inherited costs in Consumer Healthcare where synergies are still in the very early stages of delivery.
R&D expenditure declined 6% CER to £731 million (12.4% of turnover) compared with £766 million (13.8% of turnover) in Q2 2014. On a pro-forma basis, R&D expenditure declined 10% reflecting the benefit of cost reduction programmes in Pharmaceuticals and Vaccines as well as the phasing of ongoing project spending.
Royalty income was £62 million (Q2 2014: £72 million).
Core operating profit by business - Q2 2015
Following the completion of the transaction with Novartis, GSK has reorganised the Group to reflect the greater balance between its Pharmaceuticals, Vaccines and Consumer Healthcare businesses and responsibilities for some parts of these respective businesses have been realigned. GSK is reporting these three businesses separately with corporate costs reallocated to each accordingly so that the profitability of each business is reflected more accurately.
Pharmaceuticals core operating profit was £1,116 million, 1% lower than in Q2 2014 in CER terms on a turnover decrease of 6%. The core operating margin of 31.5% was 1.0 percentage points higher than in Q2 2014 and 1.7 percentage points higher on a CER basis. On a pro-forma basis, core operating margin increased 2.5 percentage points on a CER basis, primarily reflecting strong growth in HIV, partly offset by continued pricing pressure in Global Pharmaceuticals, primarily respiratory products, and the initial benefits of the restructuring programmes in Pharmaceuticals and R&D.
Vaccines operating profit was £177 million, 32% lower than in Q2 2014 in CER terms on a turnover increase of 11%. The core operating margin of 21.7% was 10.7 percentage points lower than in Q2 2014 and down 12.5% on a CER basis, primarily driven by the cost base of the former Novartis Vaccines business. The pro-forma margin declined 1.3 percentage points which primarily reflected mix changes in the quarter and additional supply chain investments, partly offset by reductions in R&D.
Consumer Healthcare core operating profit was £108 million, 41% higher than in Q2 2014 in CER terms on a turnover increase of 51%. The core operating margin of 7.2% was 2.9 percentage points lower than in Q2 2014, and 0.7 percentage points lower on a CER basis. On a pro-forma basis, the Consumer Healthcare operating margin was 0.6 percentage points lower, driven by a one-off sales tax settlement which impacted the operating margin by 1.3%, along with the net effect of the inherited Novartis cost base and the limited integration benefits to date, given the early stage of this programme.
Core operating profit - H1 2015
Core operating profit was £2,654 million, 6% lower than in H1 2014 in CER terms on a turnover increase of 4%. The core operating margin of 23.1% was 3.2 percentage points lower than in H1 2014, 2.5 percentage points lower on a CER basis. This decline included a 2.4 percentage point impact of the Novartis transaction reflecting the disposal of GSK's higher margin Oncology business and the acquisition of lower margin Vaccines and Consumer Healthcare businesses from Novartis.
On a pro-forma basis the operating margin declined 0.1 percentage points which primarily reflected an increase in cost of sales as a percentage of turnover partly offset by reduced SG&A and R&D percentages.
Cost of sales as a percentage of turnover was 30.6%, 2.9 percentage points higher than in H1 2014. On a pro-forma basis, the cost of sales percentage increased 1.1 percentage points and 1.3 percentage points on a CER basis. This reflected adverse price movements, particularly in US Global Pharmaceuticals, increased investments in Vaccines to improve the reliability and capacity of the supply chain and an adverse comparison to the reduced cost of sales in Vaccines in H1 2014, which benefited from a number of inventory adjustments. These declines were partly offset by improved product mix, as a result of the growth in HIV products, and the benefits of the Group's ongoing cost reduction programmes.
SG&A costs as a percentage of sales were 34.4%, 1.0 percentage points higher than in H1 2014 and 0.5 percentage points higher on a CER basis. On a pro-forma basis, SG&A costs increased 0.1 percentage point, but decreased 0.4 percentage points on a CER basis, This primarily reflected declines in Global Pharmaceuticals, including the initial benefits of the Pharmaceuticals cost reduction programme, partly offset by the inherited costs in the Novartis Consumer Healthcare businesses where synergies are still in the early stages of delivery.
R&D expenditure declined 4% CER to £1,520 million (13.2% of turnover) compared with £1,550 million (13.9% of turnover) in H1 2014. On a pro-forma basis, R&D expenditure declined 7% reflecting the benefit of cost reduction programmes in Pharmaceuticals and Vaccines as well as the phasing of ongoing project spending.
Royalty income was £139 million (H1 2014: £142 million).
Core operating profit by business - H1 2015
Pharmaceuticals core operating profit was £2,109 million, 9% lower than in H1 2014 in CER terms on a turnover decrease of 7%. The core operating margin of 29.9% was 1.6 percentage points lower than in H1 2014 and 0.8 percentage points lower on a CER basis. Excluding the impact of the Novartis transaction, on a pro-forma basis, the core operating margin declined 0.5 percentage points on a CER basis, which reflected an increase in cost of sales as a percentage of turnover primarily due to adverse price movements partly offset by favourable mix from growth in HIV products, and declines in the SG&A and R&D percentages, reflecting the benefits of the cost reduction programmes.
Vaccines operating profit was £338 million, 32% lower than in H1 2014 in CER terms on a turnover increase of 11%. The core operating margin of 22.3% was 10.1 percentage points lower than in H1 2014 and 12.3% lower on a CER basis, primarily driven by the cost base of the former Novartis Vaccines business. The pro-forma margin declined 3.8 percentage points which reflected an increase in cost of sales as a percentage of turnover due to mix changes in the six months, additional supply chain investments and the benefit to H1 2014 of a number of inventory adjustments.
Consumer Healthcare core operating profit was £290 million, 47% higher than in H1 2014 in CER terms on a turnover increase of 37%. The core operating margin of 10.0% was 0.6 percentage points lower than in H1 2014, but improved 0.9 percentage points on a CER basis. On a pro-forma basis the operating margin increased 1.0 percentage points on a CER basis, due to a significant improvement in gross margin, reflecting benefits from both improved supply and pricing and the US Flonase launch, partly offset by increased investment in SG&A behind new product launches, with synergies on track but still in the early stages of delivery.
Core profit after tax and core earnings per share - Q2 2015
Net finance expense was £178 million compared with £156 million in Q2 2014, reflecting the change in the mix of gross debt. The share of losses of associates and joint ventures was £2 million (Q2 2014: £8 million profit).
Tax on core profit amounted to £233 million and represented an effective core tax rate of 20.0% (Q2 2014: 22.0%).
The allocation of earnings to non-controlling interests amounted to £99 million (Q2 2014: £61 million), the increase reflecting the Consumer Healthcare non-controlling interest allocation together with an increase in the allocation of ViiV Healthcare profits.
Core EPS of 17.3p was flat in CER terms compared with a 3% increase in the operating profit primarily as a result of the increased non-controlling interest allocation, partly offset by a lower tax charge.
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