GSK GSK plc

By Denise Roland 

LONDON--The sharp drop in the value of sterling triggered by Britain's vote to leave the European Union both helped and hurt GlaxoSmithKline PLC's second-quarter earnings, illustrating the double-edged effect of the U.K.'s historic decision on corporate results.

The company separately announced on Wednesday it would invest GBP275 million ($302.1 million) to increase capacity at three of its U.K. factories, which Chief Executive Andrew Witty said was a vote of confidence in the face of the Brexit vote.

"The fundamental competitiveness of the U.K....remains exactly the same today as it did before the referendum," Mr. Witty said.

A weaker pound enhances Glaxo's financial results, as it reports results in sterling but generates most of its revenue overseas. That currency effect boosted core earnings per share by 21 percentage points and revenue by 7 percentage points in the second quarter.

By the same token, a falling pound increases the value of Glaxo's liabilities, forcing the company to take a GBP1.8 billion write-down and post a net loss of GBP435 million.

Those liabilities include a put option held by Novartis AG giving the Swiss drug giant the right to sell its stake in the pair's jointly owned consumer-health-care business to Glaxo. With a weaker pound, that stake is worth more, so it would cost Glaxo more to acquire.

The sharp currency effects muddied an otherwise strong quarter for Glaxo, which cheered investors by beating market expectations on revenue and core profit, sending shares up 1.8%.

Core operating profit, a measure that strips out one-time losses and gains, increased 36% to GBP1.8 billion, as revenue climbed 11% to GBP6.5 billion, beating analyst forecasts of GBP1.6 billion and GBP6.3 billion. Adjusting for currency effects, core operating profit climbed 15% and revenue rose 4%.

Glaxo also narrowed its full-year guidance to the upper end of earlier estimates. It now expects core earnings per share to increase 11% to 12% in 2016, compared with 10% to 12% previously. Mr. Witty said that adjustment reflected his "rock-solid" confidence that the company could hit the top end of its estimates.

Beyond the factory investment, Mr. Witty struck a further sanguine note on the broader impact of the June 23 Brexit vote, saying the company was "reasonably insulated" from any negative effects.

The upbeat results suggest Glaxo is reaping the fruits of its new structure after completing a $20 billion asset-swap deal with Novartis early last year. The deal involved Glaxo trading its cancer-drugs franchise for the Swiss company's vaccines business. The U.K. drugmaker also took control of a joint venture that pooled both companies' consumer-health-care businesses, which sell drugstore staples such as toothpaste and painkillers.

The company said sales increased across all three divisions: pharmaceuticals, vaccines and consumer health care. Its core earnings growth reflected cost savings arising from the Novartis transaction.

Glaxo backed earlier dividend guidance to say it expects to make a full-year payout of 80 pence a share in 2016 and 2017.

Write to Denise Roland at Denise.Roland@wsj.com

(END) Dow Jones Newswires

July 27, 2016 11:00 ET (15:00 GMT)

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