GSK Plans to Accelerate Restructuring Plan

GlaxoSmithKline (GSK) reported overall growth of 1% in the first-quarter of 2015, which included a 7% decline in pharmaceutical revenues. The company also announced an acceleration of its restructuring program, which includes integration of its recent three-part transaction with Novartis as well as previously announced restructuring. In March 2015, GSK closed on its deal with Novartis under which the companies combined their consumer healthcare businesses into a new joint venture company, GSK divested its oncology assets to Novartis, and GSK acquired Novartis’ vaccine business (excluding influenza).

For the quarter, reported GSK’s overall sales increased 1% to £5.6 billion ($8.7 billion) with positive contributions from vaccines with revenues up 10% to £699 million ($1.09 billion) and revenues of consumer healthcare up 24% to £1.381 billion ($2.153 billion), offsetting a 7% decline in total pharmaceutical revenues to £3.523 ($5,491 billion). Total pharmaceutical turnover represents a combination of very strong growth of 42% from ViiV Healthcare, an HIV specialty company, offset by GSK’s divestments in oncology products to Novartis, and sales declines in the company’s respiratory drug portfolio as well as established products. Sales of Advair/Seretide (fluticasone/salmeterol), the company’s lead respiratory drug, continued to decline given sustained price pressure in the US and Europe and generic competition in Europe. Excluding the contribution of Viiv Healthcare of £466 million ($726 million), the company’s pharmaceutical sales declined 12% on a CER basis to £3.077 billion ($4.796 billion), reflecting a 9% decline in respiratory sales and a 20% decline in sales of established products.

Commenting on the results, GSK Chief Executive Officer Sir Andrew Witty 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 recognizing 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.”

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 company 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). Respiratory products are the company’s largest product franchise. In the first-quarter of 2015, sales from respiratory products decreased 9% to £1.408 billion ($2.194 billion). Seretide/Advair sales were down 14% to £898 million ($1.4 billion). 

GSK also said that it will not be initiating an initial public offering of its minority stake in ViiV Healthcare, the HIV specialty company in which Pfizer and Shionogi have stakes, due to the positive performance of the company. ViiV Healthcare was established in November 2009 by GSK and Pfizer with a specific focus on HIV treatments. Shionogi joined as a shareholder in October 2012.

GSK has three major restructuring programs now underway: the integration of its three-part transaction with Novartis; restructuring of its global pharmaceuticals business; and the group-wide major change program, started in 2012. GSK continues to expect to deliver total transaction synergies of £1 billion ($1.56 billion) annually. Following closure of its transaction with Novartis in March 2015 and having reviewed the businesses acquired, GSK has identified opportunities to accelerate delivery of the overall program. As a result, over 50% of total savings are now expected in 2016 (versus 2017) and the program is expected to be substantially complete in 2017 (versus 2019).

The major change program focuses on opportunities to simplify the company’s supply-chain processes, build the company’s capabilities in manufacturing and R&D, and restructure its European Pharmaceuticals business. The program is expected to cost £1.5 billion ($2.34 billion), of which non-cash charges are expected to be £350 million ($545 million). It has delivered approximately £800 million ($1.25 billion) of annual savings and remains on track to complete delivery of annual pre-tax savings of at least £1.0 billion ($1.56 billion) by 2016. The new pharmaceuticals restructuring program, announced in October 2014, will rescale commercial operations, global support functions and the relevant R&D/manufacturing operations across the company’s pharmaceuticals business. The program is expected to cost £1.5 billion ($2.34 billion), predominantly in cash charges. It has delivered approximately £100 million ($156 million) of annual savings and remains on track to deliver approximately £1 billion ($1.56 billion) of annual cost savings over the next three years, with around 50% delivered in 2016. The Novartis transaction is expected to deliver approximately £1 billion ($1.56 billion)  of annual cost savings, the majority of which will be delivered in three years at a cost of approximately £2 billion ($3.11 billion). Approximately 50% of the costs will be cash charges.

In consumer healthcare, cost savings of £400 million ($623 million) are expected as a result of the Novartis 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 caccines, transaction cost savings of £400 million ($623 million) are expected with volume improvements also expected to benefit cost of sales. Following completion of is transaction with Novartis, GSK said that the inherited vaccines business has a higher-than- anticipated cost base, which GSK said it can address s as part of the overall integration program. GSK is targeting a vaccines operating profit margin of at least 30% by 2020.

As previously announced, GSK has commenced restructuring of its global pharmaceuticals business with approximately £1 billion ($1.56 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 company expects all restructuring (the Novartis transaction, pharmaceuticals and major change programs) to deliver annual cost savings benefits of £3 billion ($4.7 billion). The total cash charges to deliver these benefits are expected to be approximately £3.65 billion ($5.68 billion) and the non-cash charges up to £1.35 billion ($2.19 billion). Charges to-date are £1.3 billion ($2.02 billion), predominantly cash. The delivery of the £3 billion ($4.7 billion) of annual benefits is expected to be largely complete by the end of 2017.

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 company assumes no premature loss of exclusivity for other key products over the period. The company’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.

In addition to the respiratory and HIV businesses, the balance of the pharmaceuticals business, including the established pharmaceuticals portfolio, represented 2014 sales of £6.6 billion ($10.3 billion) and includes over 15 products generating sales of at least £100 million ($156 million). This portfolio provides a broad and cash generative business for the group, with particular strength and growth opportunities in emerging markets. Approximately 60% of this portfolio is being promoted to drive volume while 40% is being managed to generate cash for reinvestment into other parts of the pharmaceuticals portfolio.

In 2016, GSK expects to see a significant recovery in core earnings per share 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 Novartis transaction contribute more meaningfully. GSK expects annual group revenues to grow at a compound annual growth rate (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 genericization (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.

Source: GlaxoSmithKline

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