Advair takes a hit
One of the major concerns for GSK in the last few years has been encroaching competition to asthma drug Advair. Despite the fact that the medicine lost its patent protection in 2010, it has remained uncontested since then, mainly due to the fact that the delivery device Diskus has its own separate patent. But as Diskus approaches patent expiration, Advair has begun to see a drop off, with sales in the period totalling £1.7bn, a 16 per cent constant-currency fall from the first half of 2015.
In January, US generics group Mylan registered the first unbranded version of Advair, while London listed companies Hikma (HIK) and Vectura (VEC) both have generic versions of the drug in the pipeline. As such competition enters the market, Advair sales are expected to continue to decline, with broker ShoreCap anticipating 2016 full-year revenue of £3.4bn, falling to £2.7bn in 2017.
New products deliver the goods
GSK - previously widely criticised for lacking innovation - has, however, been quietly developing new drugs. Products launched within the last six months generated over £1bn of sales in the period, the first time ever that the company has achieved this target.
In respiratory, these new products helped to offset the decline in revenue from Advair, and with the upcoming filing of the closed triple cardiovascular drug - which has the potential to reach blockbuster status, according to some analysts - things are looking good for the next generation of respiratory products.
Novartis and currency sway results
The heavy US sales weighting has had a big impact on the profit and loss account from the last six months, as the value of the dollar has strengthened against the group's reported currency - sterling. At constant currencies, revenue actually increased 6 per cent, compared with the 11 per cent reported rise.
Profit has not only been swayed by these currency movements but also by the fact that the asset swap with Novartis was completed in the comparable period of the prior year. The first half of 2015 saw the group record £8.5bn of operating income, whereas the integration of those assets in the first half of 2016 contributed towards a £2bn expense. Strip these out and operating profit actually more than doubled in H1 2016 to £2.6bn at constant currencies.
Earnings hit
The first half saw GSK report a loss per share of 9p, with the major hit to the bottom line coming from a one-off £1.8bn accounting charge, a result of the revaluation of the assets held in the group's two majority owned joint ventures, ViiV and Consumer Healthcare. As well as a reflection of the ventures' progress, this is also down to that pesky currency movement: as both of these joint ventures receive a lot of revenue denominated in dollars, their value rises and so do GSK's liabilities in respect of the minority stakeholders. In the core results - which omit intangible asset amortisation and impairment, major restructuring costs, legal costs and divestments - EPS was up 28 per cent to 44.3p.
Net asset value diminished
Perhaps the most complicated component of these results, however, is the balance sheet, which records shareholders' equity at the period end at £574m, compared with £5.1bn at the December year-end. While this is partly due to a fall in net cash and rising borrowings - a result of the continued integration of the Novartis products - the standout figure comes in retained earnings, where a whopping £6bn deficit dragged.
A chunk was taken out of last year's equity reserves by those higher liabilities and put options taken in association with the two joint ventures, in the event that GSK is called upon to buy out the minority holders. These were passed through retained earnings, along with a special dividend and the post-tax loss.
Sustainability of the dividend?
The diminished shareholders' equity does call into question where the money will come from to continue to pay out the dividend so highly sought after by GSK's investors. But its distributable reserves are not reflected in the consolidated accounts, but the solus accounts of GSK plc, with details found in the annual report. This pot equated to about £15bn at the year-end, which should see the group comfortably through their promise to sustain the payout at 80p until 2018.
