SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

For the month of September, 2020

Commission File Numbers: 001-15170; 001-35541

 

GlaxoSmithKline plc		GlaxoSmithKline Capital plc
(Name of registrant)		(Name of registrant)

 

 

 

980 Great West Road, Brentford, Middlesex, TW8 9GS		980 Great West Road, Brentford, Middlesex, TW8 9GS
(Address of principal executive offices)		(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F ☒                Form 40-F ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):             

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):             

THIS REPORT ON FORM 6-K SHALL BE DEEMED TO BE INCORPORATED BY REFERENCE IN THE PROSPECTUS INCLUDED IN THE REGISTRATION STATEMENT ON FORM F-3 (FILE NOS. 333-223982 AND 333-223982-02) OF GLAXOSMITHKLINE PLC AND GLAXOSMITHKLINE CAPITAL PLC AND TO BE A PART THEREOF FROM THE DATE ON WHICH THIS REPORT IS FURNISHED, TO THE EXTENT NOT SUPERSEDED BY DOCUMENTS OR REPORTS SUBSEQUENTLY FILED OR FURNISHED.

Second quarter 2020

 

This Report reflects the results of GlaxoSmithKline plc and its consolidated subsidiaries (“GSK”) for the second quarter of 2020, as previously announced by GSK on 29 July 2020 (the “Q2 2020 results announcement”).

This Report speaks as of the time of the Q2 2020 results announcement and does not reflect events that may have occurred subsequent to such announcement.

GSK delivers Q2 sales of £7.6 billion -2% AER, -3% CER

Total EPS 45.5p >100% AER; >100% CER; Adjusted EPS 19.2p -37% AER, -38% CER.

2020 guidance

At the time of announcing full-year 2019 results on 5 February 2020 we provided guidance with respect to expected full-year 2020 Adjusted EPS, being a decline in the range of -1% to -4% at CER.

This guidance reflected our expectations for growth in key new products, and the start of a two-year period in which we would continue to increase investment in these products and in our R&D pipeline, alongside implementation of our new programme which will prepare the Group for separation.

The guidance excluded any impact in 2020 from any further material divestments beyond those previously announced and any potential impact on our business from the Coronavirus outbreak.

The COVID-19 pandemic has impacted Group performance during the first half of 2020. As we anticipated, in Q2 2020 performance was disrupted, particularly in the Vaccines business, as visits to healthcare professionals were limited due to containment measures.

While we are maintaining our 2020 Adjusted EPS guidance, there remain notable risks to business performance over the balance of the year. In particular, the outcome is dependent on the timing of a recovery in vaccination rates, particularly in the US, which we anticipate in the third quarter. If we were to experience a delay in this recovery we could see a significant impact in 2020. In the case of, for example, a three month delay, the impact on adjusted EPS would be up to 5 percentage points.

All expectations, guidance and targets regarding future performance and dividend payments should be read together with ‘Outlook, assumptions and cautionary statements’ on pages 64 and 65. If exchange rates were to hold at the closing rates on 30 June 2020 ($1.23/£1, €1.10/£1 and Yen 132/£1) for the rest of 2020, the estimated impact on 2020 Sterling turnover growth would be around flat and if exchange gains or losses were recognised at the same level as in 2019, the estimated impact on 2020 Sterling Adjusted EPS growth would also be around flat.

 

 

The Total results are presented under ‘Financial performance’ on pages 10 and 24 and Adjusted results reconciliations are presented on pages 20, 21, 34 and 35. Adjusted results are a non-IFRS measure that may be considered in addition to, but not as a substitute for, or superior to, information presented in accordance with IFRS. Adjusted results are defined on page 8 and £% or AER% growth, CER% growth, free cash flow and other non-IFRS measures are defined on page 63 and reconciliations to the nearest IFRS measure are available on pages 20, 21, 34, 35 and 61. GSK provides guidance on an Adjusted results basis only, for the reasons set out on page 9. All expectations, guidance and targets regarding future performance and dividend payments should be read together with ‘Outlook, assumptions and cautionary statements’ on pages 64 and 65.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

1

 

 

Operating performance – Q2 2020

Turnover

		Q2 2020
		£m				Growth £%				Growth CER%
Pharmaceuticals			4,102				(5)				(5)
Vaccines			1,133				(29)				(29)
Consumer Healthcare			2,389				25				25
			7,624				(2)				(3)
Corporate and other unallocated turnover			-
Group turnover			7,624				(2)				(3)

Group turnover was £7,624 million in the quarter, down 2% AER, 3% CER. Sales decline reflects expected disruption from COVID-19, particularly in Vaccines as well as destocking from Q1 2020 in Pharmaceuticals and Consumer Healthcare.

Pharmaceuticals turnover in the quarter was £4,102 million, down 5% AER, 5% CER. HIV sales were down 2% AER, 3% CER, to £1,185 million, with growth in Juluca and Dovato offset by declines in Tivicay and Triumeq including destocking. Respiratory sales were up 17% AER, 16% CER, to £883 million, on growth of Trelegy and Nucala. Sales of Established Pharmaceuticals declined 17% AER, 17% CER, to £1,780 million, reflecting destocking and lower demand for antibiotics due to COVID-19.

Vaccines turnover declined 29% AER, 29% CER to £1,133 million, primarily driven by the adverse impact of the COVID-19 pandemic on DTPa-containing, Hepatitis, Shingles and Meningitis vaccines, together with the Rabipur and Encepur divestment.

Reported Consumer Healthcare sales grew 25% AER, 25% CER to £2,389 million in the quarter, largely driven by the inclusion of the Pfizer portfolio.

Operating profit

Total operating profit was £2,850 million in Q2 2020 compared with £1,484 million in Q2 2019. The total operating margin was 37.4%. Adjusted operating profit was £1,749 million, down 19% AER, 21% CER on a turnover decrease of 3% CER. The Adjusted operating margin was 22.9%.

The increase in Total operating profit reflected the profit on disposal of the Horlicks and other Consumer Healthcare brands and resultant sale of shares in Hindustan Unilever with increased income from asset disposals. This was partly offset by higher re-measurement charges on the contingent consideration liabilities.

Earnings per share

Total EPS was 45.5p, compared with 19.5p in Q2 2019. The increase in EPS primarily reflected the net profit on disposal of Horlicks and other Consumer Healthcare brands as well as increased income from asset disposals, partly offset by higher re-measurement charges on the contingent consideration liabilities and lower operating performance as a result of COVID-19 impact on the Vaccines business and destocking in Pharmaceuticals and Consumer Healthcare following a strong operating performance in Q1 2020.

Adjusted EPS was 19.2p compared with 30.5p in Q2 2019, down 37% AER, 38% CER. This reduction primarily resulted from lower sales and a higher non-controlling interest allocation of Consumer Healthcare profits and a higher effective tax rate.

Cash flow

The net cash inflow from operating activities for the quarter was £2,760 million (Q2 2019: £1,389 million) and free cash flow was £1,949 million (Q2 2019: £370 million). The increase primarily reflected a significant reduction in trade receivables as a result of collections following strong sales in Q1, the beneficial timing of payments for returns and rebates and taxes, higher disposals of intangible assets partly offset by reduced operating profits, increased inventory and higher dividends to non-controlling interests.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

2

 

 

Operating performance – H1 2020

Turnover

		H1 2020
		£m				Growth £%				Growth CER%
Pharmaceuticals			8,498				-				-
Vaccines			2,938				(5)				(6)
Consumer Healthcare			5,251				35				36
			16,687				8				8
Corporate and other unallocated turnover			27
Group turnover			16,714				8				8

Group turnover was £16,714 million in the six months up 8% AER, 8% CER. Sales performance reflects disruption from COVID-19 primarily in vaccines in Q2 2020.

Pharmaceuticals turnover in the six months was £8,498 million, flat at both AER and CER. HIV sales were up 3% AER, 2% CER, to £2,392 million, with growth in Juluca and Dovato partly offset by declines in Tivicay and Triumeq. Respiratory sales were up 27% AER, 26% CER, to £1,754 million, on growth of Trelegy and Nucala. Sales of Established Pharmaceuticals declined 12% AER, 11% CER to £3,866 million, reflecting lower demand for antibiotics in the COVID-19 period.

Vaccines turnover declined 5% AER, 6% CER to £2,938 million, primarily driven by the adverse impact of the COVID-19 pandemic on Hepatitis, DTPa-containing, Meningitis and Shingles vaccines, partially offset by growth in Shingrix in Q1 2020.

Reported Consumer Healthcare sales grew 35% AER, 36% CER to £5,251 million in the six months, largely driven by the inclusion of the Pfizer portfolio.

Operating profit

Total operating profit was £4,864 million compared with £2,912 million in H1 2019. Adjusted operating profit was £4,424 million, up 2% AER, 2% CER on a turnover increase of 8% CER. The Adjusted operating margin of 26.5% was 1.5 percentage points lower at AER, and 1.7 percentage points lower on a CER basis than in H1 2019.

Earnings per share

Total EPS was 77.0p, compared with 36.3p in H1 2019. The increase in EPS primarily reflected the net profit on disposal of Horlicks and other Consumer Healthcare brands as well as increased income from asset disposals, partly offset by higher re-measurement charges on the contingent consideration liabilities and a one-off benefit in H1 2019 from the increased share of after tax profits of the associate Innoviva.

Adjusted EPS was 56.9p compared with 60.6p in H1 2019, down 6% AER, 6% CER. The reduction primarily resulted from a higher non-controlling interest allocation of Consumer Healthcare profits, reduced share of after tax profits of associates resulting from a non-recurring income tax benefit in Innoviva partly offset by a reduced effective tax rate.

Cash flow

The net cash inflow from operating activities for the six months was £3,725 million (H1 2019: £2,052 million) and free cash flow was £2,480 million for the six months (H1 2019: £535 million). The increase primarily reflected a reduction in trade receivables as a result of collections following strong sales in Q1 2020, the beneficial timing of payments for returns and rebates and taxes, a lower seasonal increase of inventory, improved operating profits and higher disposals of intangible assets and milestone income.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

3

 

 

R&D pipeline news flow highlights since Q1 2020

35 medicines in development, 15 Vaccines

COVID-19

Collaborations

•

COVID-19 vaccine development collaboration with Clover Biopharmaceuticals began clinical trials with a Phase I study using GSK’s pandemic adjuvant in combination with COVID-19 vaccine candidate SCB-2019.

•

Announced the intention to produce 1 billion doses of pandemic vaccine adjuvant in 2021 to support COVID-19 vaccine collaborations.

•

Agreement reached with UK Government to supply up to 60 million doses of candidate Sanofi-GSK vaccine. Discussions underway with US and EU

•

Announced collaboration with Medicago to develop a novel adjuvanted COVID-19 candidate vaccine. Collaboration will also explore vaccine development opportunities for other infectious diseases.

Otilimab (aGM-CSF antibody)

•

The first patient was dosed in the Phase IIa proof of concept OSCAR study of otilimab, an anti GM-CSF antibody, in patients with severe pulmonary COVID-19 related disease. Data are expected in H1 2021.

Oncology

Zejula (niraparib, PARP inhibitor)

•

The US FDA approved Zejula as the only once-daily PARP inhibitor in first-line monotherapy maintenance treatment for women with platinum-responsive advanced ovarian cancer regardless of biomarker status.

Belantamab mafodotin (GSK2857916, BCMA immunoconjugate)

•

The EMA’s Committee for Medicinal Products for Human Use issued a positive opinion for belantamab mafodotin in patients with relapsed/refractory multiple myeloma.

•

An FDA Advisory Committee meeting voted 12-0 in favour of the positive benefit/risk profile of belantamab mafodotin for patients with relapsed/refractory multiple myeloma.

•

The first patient was dosed in the pivotal second line multiple myeloma study, DREAMM-7, of belantamab mafodotin in combination with bortezomib and dexamethasone.

•

The first patient was dosed in the pivotal third line multiple myeloma study, DREAMM-3, of belantamab mafodotin monotherapy.

•

The first patient was dosed in a Phase Ib combination study evaluating belantamab mafodotin with SpringWorks investigational gamma secretase inhibitor, nirogacestat, in patients with relapsed/refractory multiple myeloma. This combination is being evaluated as a sub-study in the ongoing DREAMM-5 platform trial.

•

16 presentations, including new analyses from the pivotal DREAMM-2 study and initial results from the DREAMM-4 study, were shared at the European Hematology Association (EHA) Annual Congress.

•

DREAMM-2 and DREAMM-6 data reinforcing the potential of investigational belantamab mafodotin in patients with relapsed/refractory multiple myeloma were shared at the American Society of Clinical Oncology (ASCO). Please note the mOS from the DREAMM-2 13-month analysis has been corrected to 13.7 months following the identification of discrepancies in patient data used to calculate survival.

Bintrafusp alfa (TGF beta trap/anti-PDL1)

•

Two-year follow-up data for first-in-class bifunctional immunotherapy bintrafusp alfa targeting TGF-b/PD-L1, in second-line NSCLC, were shared at ASCO.

GSK’609 (ICOS receptor agonist)

•

Reported findings from ongoing studies into the anti-tumour potential of targeting the ICOS receptor through GSK’609 alone and in combination with immune checkpoint therapies for the treatment of head and neck squamous cell carcinoma were shared at ASCO.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

4

 

 

IDEAYA partnership

•

A broad partnership with IDEAYA was announced in synthetic lethality, an emerging field in precision medicine oncology covering three IDEAYA synthetic lethality programmes – MAT2A, Pol Theta and Werner Helicase, which are projected to reach clinical trials within the next three years.

GSK’608 (CD96)

•

The first patient was dosed in a Phase I study of GSK’608 in monotherapy and in combination with dostarlimab for patients with advanced solid tumour cancers.

GSK’091 (TLR4 agonist)

•

GSK’091 for cancer was terminated due to portfolio prioritisation.

HIV/Infectious diseases

Cabenuva (cabotegravir + rilpivirine)

•

Cabenuva was resubmitted in the US as a treatment for HIV; regulatory decision is anticipated in Q1 2021.

•

Positive data from the CUSTOMIZE trial, the first ever implementation research study on how best to integrate an investigational once-monthly injectable HIV treatment in US healthcare practices, were presented at AIDS 2020.

Cabotegravir (long acting integrase inhibitor)

•

Final data from the HPTN 083 study presented at AIDS 2020 showed investigational long acting injectable cabotegravir administered every two months is 66% more effective than daily pills in preventing HIV-1 acquisition.

Rukobia (fostemsavir, attachment inhibitor)

•

The US FDA approved Rukobia, a first-in-class treatment for HIV in adults with few treatment options available.

Tivicay (dolutegravir)

•

The US FDA approved the first-ever dispersible tablet formulation of dolutegravir, Tivicay PD, a once-daily treatment for children living with HIV.

GSK’394 (combinectin, entry inhibitor)

•

GSK’394 for HIV was terminated due to portfolio prioritisation.

Immuno-inflammation

Benlysta (belimumab)

•

Regulatory submissions to the US FDA and EMA were made for Benlysta in lupus nephritis.

Respiratory

Nucala (mepolizumab)

•

The US FDA granted a priority review of Nucala for patients with hypereosinophilic syndrome (HES).

GSK’078 (SARM)

•

GSK’078 for COPD muscle weakness was terminated as data did not support progression in this indication.

GSK’557 (nemiralisib, PI3Kd inhibitor)

•

GSK’557 for activated phosphoinositide 3-kinase delta syndrome was terminated due to portfolio prioritisation.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

5

 

 

Other pharmaceuticals

Duvroq (daprodustat, HIF-PHI)

•

The first regulatory approval for Duvroq was received in Japan for patients with anaemia due to chronic kidney disease.

Vaccines

Shingrix

•

The EMA’s Committee for Medicinal Products for Human Use issued a positive opinion for Shingrix immuno compromised patients.

RSV older adults vaccine

•

A Phase I/II study of RSV older adult vaccine achieved its primary endpoint and supports progression to Phase III.

RSV maternal vaccine

•

A Phase I/II study of RSV maternal vaccine achieved its primary endpoint and supports progression to Phase III.

COPD vaccine

•

Initial data of the proof-of-concept study on the COPD candidate vaccine showed it did not meet the primary endpoint. Work is ongoing to better understand the data; no progression to Phase III is planned.

Staphylococcus aureus

•

The first patient was dosed in a Phase I study seeking to develop a vaccine for the prevention of primary and recurrent soft-skin-tissue infections caused by S.aureus.

CureVac

•

A strategic mRNA technology collaboration with CureVac was announced for the research, development, manufacturing and commercialisation of up to five mRNA-based vaccines and monoclonal antibodies (mAbs) targeting infectious disease pathogens.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

6

 

 

Contents			Page
Total and Adjusted results			8
Financial performance – Q2 2020			10
Financial performance – H1 2020			24
Cash generation			39
Returns to shareholders			40
Income statements			42
Statement of comprehensive income – three months ended 30 June 2020			43
Statement of comprehensive income – six months ended 30 June 2020			44
Pharmaceuticals turnover – three months ended 30 June 2020			45
Pharmaceuticals turnover – six months ended 30 June 2020			46
Vaccines turnover – three months ended 30 June 2020			47
Vaccines turnover – six months ended 30 June 2020			48
Balance sheet			49
Statement of changes in equity			50
Cash flow statement – six months ended 30 June 2020			51
Segment information			52
Legal matters			54
Additional information			55
Reconciliation of cash flow to movements in net debt			61
Net debt analysis			61
Free cash flow reconciliation			61
Principal risks and uncertainties			62
Reporting definitions			63
Outlook, assumptions and cautionary statements			64

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

7

 

 

Total and Adjusted results

Total reported results represent the Group’s overall performance.

GSK also uses a number of adjusted, non-IFRS, measures to report the performance of its business. Adjusted results and other non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS. Adjusted results are defined below and other non-IFRS measures are defined on page 63.

GSK believes that Adjusted results, when considered together with Total results, provide investors, analysts and other stakeholders with helpful complementary information to understand better the financial performance and position of the Group from period to period, and allow the Group’s performance to be more easily compared against the majority of its peer companies. These measures are also used by management for planning and reporting purposes. They may not be directly comparable with similarly described measures used by other companies.

GSK encourages investors and analysts not to rely on any single financial measure but to review GSK’s quarterly results announcements, including the financial statements and notes, in their entirety.

GSK is committed to continuously improving its financial reporting, in line with evolving regulatory requirements and best practice. In line with this practice, GSK expects to continue to review and refine its reporting framework.

Adjusted results exclude the following items from Total results, together with the tax effects of all of these items:

 

•

amortisation of intangible assets (excluding computer software)

•

impairment of intangible assets (excluding computer software) and goodwill

•

Major restructuring costs, which include impairments of tangible assets and computer software, (under specific Board approved programmes that are structural, of a significant scale and where the costs of individual or related projects exceed £25 million), including integration costs following material acquisitions

•

transaction-related accounting or other adjustments related to significant acquisitions

•

proceeds and costs of disposal of associates, products and businesses; significant legal charges (net of insurance recoveries) and expenses on the settlement of litigation and government investigations; other operating income other than royalty income, and other items

•

separation costs

Costs for all other ordinary course smaller scale restructuring and legal charges and expenses are retained within both Total and Adjusted results.

As Adjusted results include the benefits of Major restructuring programmes but exclude significant costs (such as significant legal, major restructuring and transaction items) they should not be regarded as a complete picture of the Group’s financial performance, which is presented in Total results. The exclusion of other Adjusting items may result in Adjusted earnings being materially higher or lower than Total earnings. In particular, when significant impairments, restructuring charges and legal costs are excluded, Adjusted earnings will be higher than Total earnings.

GSK has undertaken a number of Major restructuring programmes in response to significant changes in the Group’s trading environment or overall strategy, or following material acquisitions. Costs, both cash and non-cash, of these programmes are provided for as individual elements are approved and meet the accounting recognition criteria. As a result, charges may be incurred over a number of years following the initiation of a Major restructuring programme.

Significant legal charges and expenses are those arising from the settlement of litigation or government investigations that are not in the normal course and materially larger than more regularly occurring individual matters. They also include certain major legacy matters.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

8

 

 

Reconciliations between Total and Adjusted results, providing further information on the key Adjusting items, are set out on pages 20, 21, 34 and 35.

GSK provides earnings guidance to the investor community on the basis of Adjusted results. This is in line with peer companies and expectations of the investor community, supporting easier comparison of the Group’s performance with its peers. GSK is not able to give guidance for Total results as it cannot reliably forecast certain material elements of the Total results, particularly the future fair value movements on contingent consideration and put options that can and have given rise to significant adjustments driven by external factors such as currency and other movements in capital markets.

ViiV Healthcare

ViiV Healthcare is a subsidiary of the Group and 100% of its operating results (turnover, operating profit, profit after tax) are included within the Group income statement.

Earnings are allocated to the three shareholders of ViiV Healthcare on the basis of their respective equity shareholdings (GSK 78.3%, Pfizer 11.7% and Shionogi 10%) and their entitlement to preferential dividends, which are determined by the performance of certain products that each shareholder contributed. As the relative performance of these products changes over time, the proportion of the overall earnings allocated to each shareholder also changes. In particular, the increasing proportion of sales of dolutegravir-containing products has a favourable impact on the proportion of the preferential dividends that is allocated to GSK. Adjusting items are allocated to shareholders based on their equity interests. GSK was entitled to approximately 85% of the Total earnings and 82% of the Adjusted earnings of ViiV Healthcare for 2019.

As consideration for the acquisition of Shionogi’s interest in the former Shionogi-ViiV Healthcare joint venture in 2012, Shionogi received the 10% equity stake in ViiV Healthcare and ViiV Healthcare also agreed to pay additional future cash consideration to Shionogi, contingent on the future sales performance of the products being developed by that joint venture, principally dolutegravir. Under IFRS 3 ‘Business combinations’, GSK was required to provide for the estimated fair value of this contingent consideration at the time of acquisition and is required to update the liability to the latest estimate of fair value at each subsequent period end. The liability for the contingent consideration recognised in the balance sheet at the date of acquisition was £659 million. Subsequent re-measurements are reflected within other operating income/expense and within Adjusting items in the income statement in each period. At 30 June 2020, the liability, which is discounted at 8.5%, stood at £5,436 million, on a post-tax basis.

Cash payments to settle the contingent consideration are made to Shionogi by ViiV Healthcare each quarter, based on the actual sales performance of the relevant products in the previous quarter. These payments reduce the balance sheet liability and hence are not recorded in the income statement. The cash payments made to Shionogi by ViiV Healthcare in H1 2020 were £445 million.

Because the liability is required to be recorded at the fair value of estimated future payments, there is a significant timing difference between the charges that are recorded in the Total income statement to reflect movements in the fair value of the liability and the actual cash payments made to settle the liability.

Further explanation of the acquisition-related arrangements with ViiV Healthcare are set out on pages 50 and 51 of the Annual Report 2019.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

9

 

 

Financial performance – Q2 2020

Total results

The Total results for the Group are set out below.

 

		Q2 2020 £m				Q2 2019 £m				Growth £%				Growth CER%
Turnover			7,624				7,809				(2)				(3)
Cost of sales			(2,449)				(2,637)				(7)				(7)
Gross profit			5,175				5,172				-				(1)
Selling, general and administration			(2,709)				(2,590)				5				5
Research and development			(1,301)				(1,113)				17				15
Royalty income			75				78				(4)				(10)
Other operating income/(expense)			1,610				(63)
Operating profit			2,850				1,484				92				90
Finance income			1				21
Finance expense			(229)				(237)
Share of after tax profits/(losses) of associates and joint ventures			19				(4)
Profit before taxation			2,641				1,264				>100				>100
Taxation			(201)				(214)
Tax rate %			7.6%				16.9%
Profit after taxation			2,440				1,050				>100				>100
Profit attributable to non-controlling interests			177				86
Profit attributable to shareholders			2,263				964
			2,440				1,050				>100				>100
Earnings per share			45.5p				19.5p				>100				>100

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

10

 

 

Adjusted results

The Adjusted results for the Group are set out below. Reconciliations between Total results and Adjusted results for Q2 2020 and Q2 2019 are set out on pages 20 and 21.

 

		Q2 2020
		£m				% of turnover				Growth £%				Reported growth CER%
Turnover			7,624				100				(2)				(3)
Adjusted cost of sales			(2,249)				(29.5)				-				-
Adjusted selling, general and administration			(2,530)				(33.2)				4				4
Adjusted research and development			(1,171)				(15.4)				13				11
Royalty income			75				1.0				(4)				(10)
Adjusted operating profit			1,749				22.9				(19)				(21)
Adjusted profit before tax			1,541								(21)				(22)
Adjusted profit after tax			1,225								(26)				(27)
Adjusted profit attributable to shareholders			958								(37)				(37)
Adjusted earnings per share			19.2p								(37)				(38)
Adjusted operating profit by business		Q2 2020
		£m				% of turnover				Growth £%				Reported growth CER%
Pharmaceuticals			1,886				46.0				(9)				(10)
Pharmaceuticals R&D*			(910)								11				9
Total Pharmaceuticals			976				23.8				(22)				(23)
Vaccines			265				23.4				(57)				(58)
Consumer Healthcare			521				21.8				33				33
			1,762				23.1				(22)				(23)
Corporate & other unallocated costs			(13)
Adjusted operating profit			1,749				22.9				(19)				(21)

 

*	Adjusted operating profit of Pharmaceuticals R&D segment, which is the responsibility of the Chief Scientific Officer and President, R&D. It excludes ViiV Healthcare R&D expenditure, which is reported within the Pharmaceuticals segment.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

11

 

 

Turnover

Pharmaceuticals turnover

		Q2 2020
		£m				Growth £%				Growth CER%
Respiratory			883				17				16
HIV			1,185				(2)				(3)
Immuno-inflammation			177				17				15
Oncology			77				35				33
Established Pharmaceuticals			1,780				(17)				(17)
			4,102				(5)				(5)
US			1,801				1				(1)
Europe			931				(10)				(11)
International			1,370				(8)				(7)
			4,102				(5)				(5)

Pharmaceuticals turnover in the quarter was £4,102 million, down 5% AER, 5% CER. HIV sales were down 2% AER, 3% CER, to £1,185 million, with growth in Juluca and Dovato offset by declines in Tivicay and Triumeq. Respiratory sales were up 17% AER, 16% CER, to £883 million, on growth of Trelegy and Nucala. Sales of Established Pharmaceuticals declined 17% AER, 17% CER, to £1,780 million.

In the quarter, as expected, the COVID-19 related first quarter customer stockbuilding, which predominantly impacted Europe and the US, broadly reversed with only a minor dolutegravir impact in Europe and the US remaining. The quarter also saw lower levels of new patient prescriptions in the US and Europe, reduced market demand for allergy and antibiotic products in International and pressure on net prices in the US.

In the US, sales grew 1% AER but declined 1% CER. Continued growth of Nucala, Trelegy, Benlysta and the HIV two-drug regimens was more than offset by the decline and COVID-19 destocking in Tivicay, Triumeq and Established Pharmaceuticals, including the impact of generic albuterol substitutes.

In Europe, sales declined 10% AER, 11% CER, reflecting the impact of destocking and generic competition and almost fully offsetting the additional demand experienced in the first quarter related to COVID-19.

International declined 8% AER, 7% CER, with Respiratory growth offset by lower Established Pharmaceutical sales including the impact of a weaker allergy season in Japan, lower Augmentin sales across the region and lower sales in China.

Respiratory

Total Respiratory sales were up 17% AER, 16% CER, with strong growth from Trelegy and Nucala in all regions. International Respiratory sales grew 17% AER, 17% CER, including Nucala, up 42% AER, 31% CER, and Relvar/Breo up 8% AER, 12% CER to £81 million. In Europe, Respiratory sales grew 13% AER, 13% CER despite the impact of the reversal of the customer stockbuilding in Q1 2020 related to the COVID-19 pandemic. In the US, Trelegy and Nucala growth continued while Relvar/Breo sales were down 11% AER, 12% CER, impacted by competitive pricing pressures and the impact of generic Advair on the US ICS/LABA market.

Sales of Nucala were £241 million in the quarter and grew 24% AER, 21% CER, with US sales up 28% AER, 26% CER to £150 million. Europe sales of £54 million grew 4% AER, 6% CER and International sales of £37 million grew 42% AER, 31% CER including growth of the at-home use application.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

12

 

 

Trelegy sales were up 62% AER, 58% CER to £194 million with strong growth in all regions. In the US, sales grew 65% AER, 60% CER, reflecting continued market share growth. In Europe, sales grew 64% AER, 59% CER and in International sales grew 38% AER, 46% CER.

Relvar/Breo sales were up 2% AER, 2% CER to £242 million in the quarter. In the US, Relvar/Breo declined 11% AER, 12% CER, reflecting competitive pricing pressures and the impact of generic Advair on the US ICS/LABA market. In Europe and International, Relvar/Breo continued to grow, up 11% AER, 9% CER and 8% AER, 12% CER, respectively.

HIV

HIV sales were £1,185 million, down 2% AER, 3% CER in the quarter. The dolutegravir franchise declined 1% AER, 2% CER, delivering sales of £1,140 million. The remaining portfolio, with sales of £45 million and 4% of total HIV sales, declined 27% AER, 32% CER and reduced the overall growth of total HIV by one percentage point.

Sales of dolutegravir products were £1,140 million in the quarter. Sales were impacted by customer destocking following the customer stockbuilding in Q1 2020 due to COVID-19, mainly on Tivicay and Triumeq. Tivicay delivered sales of £373 million and declined 9% AER, 10% CER. Triumeq delivered sales of £586 million and declined 9% AER, 11% CER. The two-drug regimens, Juluca and Dovato delivered sales of £181 million in the quarter, with combined growth more than offsetting the decline of the three-drug regimen Triumeq.

In the US, dolutegravir sales grew 1% AER, but declined 2% CER and in Europe sales declined 4% AER, 5% CER impacted by customer destocking following the customer stockbuilding in Q1 2020 due to COVID-19. Following recent launches of Dovato, combined sales of the two-drug regimens were £139 million in the US and £38 million in Europe, with growth more than offsetting the decline in Triumeq. International was flat at AER, but grew 4% CER, driven by Tivicay.

Oncology

Sales of Zejula, the PARP inhibitor asset acquired from Tesaro in Q1 2019 were £77 million in the quarter, up 35% AER, 32% CER. Sales comprised £47 million in the US and £30 million in Europe.

Immuno-inflammation

Sales of Benlysta in the quarter were up 18% AER, 15% CER to £177 million, including sales of the sub-cutaneous formulation of £89 million. In the US, Benlysta grew 16% AER, 14% CER to £153 million.

Established Pharmaceuticals

Sales of Established Pharmaceuticals in the quarter were £1,780 million, down 17% AER, 17% CER.

Established Respiratory products declined 12% AER, 12% CER to £805 million. This reflected the impact of generic albuterol substitutes on Ventolin in the US, the impact of COVID-19 pandemic related destocking in Europe and allergy market contraction in Japan. In the US, sales of Advair/Seretide grew 36% AER, 34% CER to £143 million, reflecting a spike in the ICS/LABA class during April and May. In Europe and International, Seretide sales were down 12% AER, 13% CER and 7% AER, 6% CER, respectively, impacted by generic competition in Europe, COVID-19 related destocking.

The remainder of the Established Pharmaceuticals portfolio declined 20% AER, 20% CER to £975 million on lower demand for Dermatology products and Antibiotics during the COVID-19 pandemic period, the impact of government mandated changes increasing the use of generics in China, and comparison with a strong Q2 2019, which included a European Relenza contract.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

13

 

 

Vaccines turnover

 

		Q2 2020
		£m				Growth £%				Growth CER%
Meningitis			167				(29)				(29)
Influenza			15				(12)				(6)
Shingles			323				(16)				(19)
Established Vaccines			628				(34)				(34)
			1,133				(29)				(29)
US			448				(42)				(45)
Europe			288				(29)				(29)
International			397				(2)				-
			1,133				(29)				(29)

Vaccines turnover declined 29% AER, 29% CER to £1,133 million, primarily driven by the adverse impact of the COVID-19 pandemic on DTPa-containing, Hepatitis, Shingles and Meningitis vaccines, together with the Rabipur and Encepur divestment.

Vaccines performance in the second quarter across all regions was affected by lower demand due to limited visits to healthcare practitioners and points of vaccination during the pandemic and government stay-at-home directives. In areas where government restrictions were lifted, wellness visits and vaccination rates have started to recover, with paediatric vaccinations returning to near pre-COVID-19 levels by the end of the quarter, while adolescent and adult immunisations improved at a slower pace.

Meningitis

Meningitis sales declined 29% AER, 29% CER to £167 million. Bexsero and Menveo sales decreased 31% AER, 30% CER to £108 million and 39% AER, 39% CER to £38 million respectively, reflecting lower demand across all regions due to de-prioritisation of vaccination during the COVID-19 pandemic. In the US, Bexsero maintained and Menveo grew market share.

Influenza

Fluarix/FluLaval sales were £15 million, down 12% AER, 6% CER.

Shingles

Shingrix sales declined 16% AER, 19% CER to £323 million, primarily driven by lower adult wellness visits and vaccination rates related to the COVID-19 pandemic stay-at-home directives in the US, partly offset by favourable return and rebate movements in the US. Total US prescriptions for Shingrix reflected partial recovery of demand by the end of the quarter. In Europe, a strong performance was recorded in Germany due to robust underlying demand in post-lockdown conditions.

Established Vaccines

Sales of DTPa-containing vaccines (Infanrix, Pediarix and Boostrix) declined 42% AER, 43% CER. Infanrix/Pediarix sales declined 39% AER, 40% CER to £119 million, reflecting lower demand due to the COVID-19 pandemic conditions in the US, unfavourable year-on-year US CDC stockpile movements and supply constraints in Europe.

Boostrix sales were down 47% AER, 47% CER to £76 million primarily due to the negative impact of COVID-19 restrictions on vaccination rates across all regions.

Hepatitis vaccines declined 62% AER, 62% CER to £86 million, adversely impacted in the US and Europe by the COVID-19 pandemic and related travel restrictions, together with competition returning to market in the US.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

14

 

 

Synflorix sales declined by 4% AER, 5% CER to £103 million, primarily due to lower tender volume demand in Europe.

Rotarix sales were up 10% AER, 9% CER to £128 million, reflecting favourable phasing in Emerging Markets and in International, partly offset by lower demand in the US due to COVID-19 confinement measures.

MMRV vaccines sales grew 8% AER, 8% CER to £54 million, largely driven by improved supply in Europe.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

15

 

 

Consumer Healthcare turnover

 

		Q2 2020
		£m				Growth £%				Growth CER%
Oral health			639				(2)				(1)
Pain relief			529				38				38
Vitamins, minerals and supplements			404				>100				>100
Respiratory health			214				9				8
Digestive health and other			487				22				22
			2,273				37				37
Brands divested/under review			116				(55)				(54)
			2,389				25				25
US			829				75				70
Europe			602				4				4
International			958				11				15
			2,389				25				25

On a reported basis, sales grew 25% AER, 25% CER to £2,389 million in the quarter, largely driven by the inclusion of the Pfizer portfolio.

At a regional level, China returned to growth as the mandated retailer shutdowns were lifted, but weaker performance resulted due to the expected unwinding of accelerated purchases seen in the previous quarter, particularly in Europe and to a lesser extent in the US. Quarterly sales growth also benefited by approximately two percentage points, largely in the Digestive health and Pain relief categories, from increased retailer stocking ahead of a systems cutover in North America which is expected to reverse in the third quarter. The majority of the benefit from the accelerated purchasing related to COVID-19 seen in the first quarter has now reversed, although Vitamins, minerals and supplements continued to benefit from an increased consumer focus on health and wellness.

Oral health

Oral health sales declined 2% AER, 1% CER to £639 million. Sensodyne grew in low single-digits but continued to gain share, with growth negatively impacted by the unwind of prior quarter accelerated purchases which also affected Denture care and Gum health, and which has now largely reversed. Overall growth was also impacted by a decline in non-strategic brands.

Pain relief

Pain relief grew 38% AER, 38% CER to £529 million. Continued strong performance of Panadol, the successful Rx to OTC switch and launch of Voltaren OTC in the US, as well as from the inclusion of Advil sales from the Pfizer portfolio, were partly offset by a weaker performance of Voltaren in Europe. Overall performance was also impacted by the unwinding of accelerated purchases seen in the prior quarter.

Vitamins, minerals and supplements

Vitamins, minerals and supplements more than doubled at AER and CER to £404 million, driven by the inclusion of the Pfizer portfolio with particularly strong performance from Centrum and Emergen -C, reflecting continued strong consumer demand for the category, particularly in the US and China

Respiratory health

Respiratory health sales grew 9% AER, 8% CER to £214 million. Continued growth of Theraflu was offset by the unwinding of accelerated purchases seen in the previous quarter and reduced demand for seasonal nasal spray products.

Digestive health and other

Digestive health and other brands grew 22% AER, 22% CER to £487 million, driven by the inclusion of the Pfizer portfolio, partly offset by weaker Skin health performance, the expected unwinding of accelerated purchases of Digestive health and other products and the impact of lower footfall, reducing impulse purchases in retail stores due to the ongoing pandemic.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

16

 

 

Operating performance

Cost of sales

Total cost of sales as a percentage of turnover was 32.1%, 1.6 percentage points lower at AER and 1.5 percentage points lower in CER terms compared with Q2 2019. This reflected a reduction in the costs of Major restructuring programmes, primarily as a result of lower write downs in a number of manufacturing sites.

Excluding these and other Adjusting items, Adjusted cost of sales as a percentage of turnover was 29.5%, 0.8 percentage points higher at AER and 1.0 percentage points higher at CER compared with Q2 2019. This reflected unfavourable product mix in Vaccines, primarily due to the decline of Shingrix in the US and in Consumer Healthcare and continued adverse pricing pressure in Pharmaceuticals, particularly in Respiratory, partly offset by lower inventory adjustments in Vaccines and a further contribution from integration and restructuring savings in Pharmaceuticals and Consumer Healthcare.

Selling, general and administration

Total SG&A costs as a percentage of turnover were 35.5%, 2.4 percentage points higher at AER and 2.5 percentage points higher at CER compared with Q2 2019. This included increased major restructuring costs partly offset by lower significant legal and transaction costs.

Excluding these and other Adjusting items, Adjusted SG&A costs as a percentage of turnover were 33.2%, 2.0 percentage points higher at AER than in Q2 2019 and 2.2 percentage points higher on a CER basis.

Adjusted SG&A costs grew 4% AER, 4% CER, which reflected increased costs as a result of the acquisition of the former Pfizer consumer healthcare business, increased investment for new launches in Respiratory and HIV and an adverse comparison to income from favourable settlements in Vaccines in Q2 2019, partly offset by reduced promotional and variable spending across all three business as a result of the COVID-19 lockdowns as well as the continuing benefit of restructuring in Pharmaceuticals and Consumer Healthcare and the tight control of ongoing costs.

Research and development

Total R&D expenditure was £1,301 million (17.1% of turnover), up 17% AER, 15% CER, including an increase in impairment charges. Adjusted R&D expenditure was £1,171 million (15.4% of turnover), 13% higher at AER, 11% higher at CER than in Q2 2019.

Pharmaceuticals R&D expenditure was £922 million, up 15% AER, 13% CER, reflecting a continued significant increase in Oncology investment across multiple mid and late-stage assets including the legacy Tesaro portfolio and a number of other programmes including belantamab mafodotin, ICOS and bintrafusp alfa. In addition to the Oncology investment there has also been increased spending on the progression of key assets in the Specialty and primary care portfolio such as otilimab for RA, the initiation of several COVID-19 programmes as well as on daprodustat which recently received approval in Japan. These increases in investment were partly offset by reduced spending in HIV and the ongoing benefits of the R&D portfolio re-prioritisation decisions in 2019. R&D expenditure in Vaccines and Consumer Healthcare was £175 million and £74 million, respectively.

Royalty income

Royalty income was £75 million (Q2 2019: £78 million), down 4% AER, 10% CER, primarily reflecting adverse movements in Consumer Healthcare.

Other operating income/(expense)

Net other operating income of £1,610 million (Q2 2019: £63 million expense) primarily reflected the net profit on disposal in the quarter of the Horlicks and other Consumer Healthcare brands of £2,304 million in Q2 2020, which was after reversal of £776 million of embedded derivative gains on the value of the shares taken in prior years and Q1 2020. This was partly offset by the related loss on sale of the shares in Hindustan Unilever in Q2 2020 of £476 million. Other operating income also included an increase in profit and milestone income from a number of asset disposals.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

17

 

 

The gains were partly offset by accounting charges of £368 million (Q2 2019: £188 million) arising from the re-measurement of the contingent consideration liabilities related to the acquisitions of the former Shionogi-ViiV Healthcare joint venture and the former Novartis Vaccines business and the liabilities for the Pfizer put option and Pfizer and Shionogi preferential dividends in ViiV Healthcare. This included a re-measurement charge of £343 million (Q2 2019: £226 million) for the contingent consideration liability due to Shionogi, primarily arising from changes in sales forecasts and exchange rate assumptions as well as the unwind of the discounting.

Operating profit

Total operating profit was £2,850 million in Q2 2020 compared with £1,484 million in Q2 2019. This reflected the profit on disposal of the Horlicks and other Consumer Healthcare brands and resultant sale of shares in Hindustan Unilever as well as increased income from asset disposals. This was partly offset by higher re-measurement charges on the contingent consideration liabilities.

Excluding these and other Adjusting items, Adjusted operating profit was £1,749 million, 19% lower than Q2 2019 at AER and 21% lower at CER on a turnover decrease of 3% CER. The Adjusted operating margin of 22.9% was 4.9 percentage points lower at AER, and 5.1 percentage points lower on a CER basis than in Q2 2019.

The reduction in Adjusted operating profit primarily reflected the adverse impact from reduction in sales as a result of the COVID-19 pandemic, including a reduction in customer demand primarily in Vaccines and destocking in the quarter in Pharmaceuticals and Consumer Healthcare and increased investment in R&D including a significant increase in Oncology investments and initiation of several COVID-19 programmes. In addition, there was adverse mix in Vaccines and Consumer Healthcare, continuing price pressure, particularly in Respiratory and increased investment for new launches in Respiratory and HIV. This was partly offset by reduced promotional and variable spending overall across all three businesses as a result of the COVID-19 lockdowns and the continued benefit of restructuring and tight control of ongoing costs across all three businesses.

Contingent consideration cash payments which are made to Shionogi and other companies reduce the balance sheet liability and hence are not recorded in the income statement. Total contingent consideration cash payments in Q2 2020 amounted to £240 million (Q2 2019: £226 million). This included cash payments made to Shionogi of £232 million (Q2 2019: £220 million).

Adjusted operating profit by business

Pharmaceuticals adjusted operating profit was £976 million, down 22% AER, 23% CER on a turnover decrease of 5% CER. The adjusted operating margin of 23.8% was 5.4 percentage points lower at AER than in Q2 2019 and 5.4 percentage points lower on a CER basis. This primarily reflected the negative operating leverage from the COVID-19 related sales decline, a significant increase in Oncology R&D and initiation of several COVID-19 programmes, increase in cost of sales percentage due to the continued impact of lower prices, particularly in Respiratory, and investment in new product support and targeted priority markets. This was partly offset by reduced promotional and variable spending as a result of the COVID-19 lockdowns and tight control of ongoing costs.

Vaccines adjusted operating profit was £265 million, down 57% AER, 58% CER on a turnover decrease of 29% CER. The adjusted operating margin of 23.4% was 15.2 percentage points lower at AER than in Q2 2019 and 15.7 percentage points lower on a CER basis. This was primarily driven by the negative operating leverage from the significant COVID-19-related sales decline, as well as adverse mix and an adverse comparison to income from one-off settlements in Q2 2019, partly offset by lower inventory adjustments.

Consumer Healthcare adjusted operating profit was £521 million, up 33% AER, 33% CER on a turnover increase of 25% CER. The adjusted operating margin of 21.8% was 1.4 percentage points higher at AER and 1.3 percentage points higher on a CER basis than in Q2 2019. This was primarily driven by the acquisition of the former Pfizer consumer healthcare business, synergy benefits from the Pfizer integration and targeted areas of lower promotional investment, partly offset by reduced leverage from a decline in sales growth in the quarter due to COVID-19 customer destocking and lower customer footfall.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

18

 

 

Net finance costs

Total net finance costs were £228 million compared with £216 million in Q2 2019. Adjusted net finance costs were £227 million compared with £220 million in Q2 2019. The increase primarily reflected reduced swap interest income on foreign currency hedges and lower interest income on reduced overseas cash following the divestment of Horlicks and other Consumer Healthcare nutrition products in India and a number of other countries. The increase was partly offset by favourable refinancing of term debt.

Share of after tax profits of associates and joint ventures

The share of after tax profits of associates and joint ventures was £19 million (Q2 2019: £4 million losses).

Taxation

The charge of £201 million represented an effective tax rate on Total results of 7.6% (Q2 2019: 16.9%) and reflected the different tax effects of the various Adjusting items, including the disposal of Horlicks and other Consumer Healthcare brands to Unilever and the subsequent disposal of shares received in Hindustan Unilever. Tax on Adjusted profit amounted to £316 million and represented an effective Adjusted tax rate of 20.5% (Q2 2019: 15.4%), reflecting delays in settlement of open periods and an updated forecast profit mix for the year.

Issues related to taxation are described in Note 14, ‘Taxation’ in the Annual Report 2019. The Group continues to believe it has made adequate provision for the liabilities likely to arise from periods which are open and not yet agreed by tax authorities. The ultimate liability for such matters may vary from the amounts provided and is dependent upon the outcome of agreements with relevant tax authorities.

Non-controlling interests

The allocation of Total earnings to non-controlling interests amounted to £177 million (Q2 2019: £86 million). The increase was primarily due to the allocation of Consumer Healthcare profits of £137 million (Q2 2019: £nil) following the completion of the new Consumer Healthcare Joint Venture with Pfizer on 31 July 2019, partly offset by reduced allocation of ViiV Healthcare profits of £24 million (Q2 2019: £75 million), including increased charges for re-measurement of contingent consideration liabilities.

The allocation of Adjusted earnings to non-controlling interests amounted to £267 million (Q2 2019: £138 million). The increase in allocation primarily reflected an increased allocation of Consumer Healthcare profits of £138 million (Q2 2019: £nil) following the completion of the new Consumer Healthcare Joint Venture with Pfizer on 31 July 2019 partly offset by a reduced allocation of ViiV Healthcare profits of £113 million (Q2 2019: £127 million).

Earnings per share

Total EPS was 45.5p, compared with 19.5p in Q2 2019. The increase in EPS primarily reflected the net profit on disposal of Horlicks and other Consumer Healthcare brands as well as increased income from asset disposals, partly offset by higher re-measurement charges on the contingent consideration liabilities and lower operating performance as a result of the COVID-19 impact on the Vaccines business and destocking in Pharmaceuticals and Consumer Healthcare following a strong operating performance in Q1 2020.

Adjusted EPS was 19.2p compared with 30.5p in Q2 2019, down 37% AER, 38% CER, on a 21% CER decrease in Adjusted operating profit. This reduction primarily resulted from a higher effective tax rate and a higher non-controlling interest allocation of Consumer Healthcare profits.

Currency impact on Q2 2020 results

The results for Q2 2020 are based on average exchange rates, principally £1/$1.25, £1/€1.13 and £1/Yen 134. Comparative exchange rates are given on page 55. The period-end exchange rates were £1/$1.23, £1/€1.10 and £1/Yen 132.

In the quarter, turnover decreased 2% AER, 3% CER. Total EPS was 45.5p compared with 19.5p in Q2 2019. Adjusted EPS was 19.2p compared with 30.5p in Q2 2019, down 37% AER, 38% CER. The marginally positive currency impact primarily reflected the weakness in Sterling, particularly against the US$ and Yen, partly offset by weakness in emerging market currencies relative to Q2 2019. Exchange gains or losses on the settlement of intercompany transactions had a negligible impact on the positive currency impact of one percentage point on Adjusted EPS.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

19

 

 

Adjusting items

The reconciliations between Total results and Adjusted results for Q2 2020 and Q2 2019 are set out below.

Income statement – Adjusted results reconciliation

Three months ended 30 June 2020

 

		Total results £m				Intangible amort- isation £m				Intangible impair- ment £m				Major restruct- uring £m				Transaction- related £m				Divestments, significant legal and other items £m				Separation costs £m				Adjusted results £m
Gross profit			5,175				180				(2)				12				10												5,375
Operating profit			2,850				197				117				193				349				(1,975)				18				1,749
Profit before taxation			2,641				197				117				193				349				(1,974)				18				1,541
Profit after taxation			2,440				163				95				146				293				(1,927)				15				1,225
Profit attributable to shareholders			2,263				163				95				146				203				(1,927)				15				958
Earnings per share			45.5p				3.2p				1.9p				2.9p				4.1p				(38.7)p				0.3p				19.2p
Weighted average number of shares (millions)			4,977																												4,977
The following adjustments are made in arriving at Adjusted gross profit
Cost of sales			(2,449)				180				(2)				12				10												(2,249)
The following adjustments are made in arriving at Adjusted operating profit
Selling, general and administration			(2,709)								3				182				(20)				(4)				18				(2,530)
Research and development			(1,301)				17				116				(2)								(1)								(1,171)
Other operating income			1,610												1				359				(1,970)								-
The following adjustments are made in arriving at Adjusted profit before tax
Net finance costs			(228)																				1								(227)
The following adjustments are made in arriving at Adjusted profit after tax
Taxation			(201)				(34)				(22)				(47)				(56)				47				(3)				(316)
The following adjustments are made in arriving at Adjusted profit attributable to shareholders
Profit attributable to non-controlling interests			177																90												267

Adjusted results exclude the above items from Total results as GSK believes that Adjusted results are more representative of the performance of the Group’s operations and allow the key trends and factors driving performance to be more easily and clearly identified by shareholders. For a fuller explanation of Adjusted results, see page 8.

 

Q2 Results summary

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Quarterly performance

YTD performance

Financial information

20

 

 

Income statement – Adjusted results reconciliation

Three months ended 30 June 2019

 

		Total results £m				Intangible amort- isation £m				Intangible impair- ment £m				Major restruct- uring £m				Transaction- related £m				Divestments, significant legal and other items £m				Adjusted results £m
Gross profit			5,172				188				4				198				4								5,566
Operating profit			1,484				205				17				309				247				(91)				2,171
Profit before taxation			1,264				205				17				309				247				(95)				1,947
Profit after taxation			1,050				166				15				250				186				(20)				1,647
Profit attributable to shareholders			964				166				15				250				134				(20)				1,509
Earnings per share			19.5p				3.3p				0.3p				5.1p				2.7p				(0.4)p				30.5p
Weighted average number of shares (millions)			4,947																								4,947
The following adjustments are made in arriving at Adjusted gross profit
Cost of sales			(2,637)				188				4				198				4								(2,243)
The following adjustments are made in arriving at Adjusted operating profit
Selling, general and administration			(2,590)								2				67				41				47				(2,433)
Research and development			(1,113)				17				11				44								1				(1,040)
Other operating income			(63)																202				(139)				-
The following adjustments are made in arriving at Adjusted profit before tax
Net finance costs			(216)																				(4)				(220)
The following adjustments are made in arriving at Adjusted profit after tax
Taxation			(214)				(39)				(2)				(59)				(61)				75				(300)
The following adjustments are made in arriving at Adjusted profit attributable to shareholders
Profit attributable to non-controlling interests			86																52								138

Adjusted results exclude the above items from Total results as GSK believes that Adjusted results are more representative of the performance of the Group’s operations and allow the key trends and factors driving performance to be more easily and clearly identified by shareholders. For a fuller explanation of Adjusted results, see page 8.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

21

 

 

Major restructuring and integration

Within the Pharmaceuticals sector, the highly regulated manufacturing operations and supply chains and long lifecycle of the business mean that restructuring programmes, particularly those that involve the rationalisation or closure of manufacturing or R&D sites are likely to take several years to complete.

Total Major restructuring charges incurred in Q2 2020 were £193 million (Q2 2019: £309 million), analysed as follows:

 

		Q2 2020												Q2 2019
		Cash £m				Non-cash £m				Total £m				Cash £m				Non-cash £m				Total £m
2018 major restructuring programme (incl. Tesaro)			30				15				45				87				192				279
Consumer Healthcare Joint Venture integration programme			82				15				97				21				-				21
Separation Preparation restructuring programme			42				3				45				-				-				-
Combined restructuring and integration programme			(3)				9				6				-				9				9
			151				42				193				108				201				309

Cash charges primarily arose from restructuring of Vaccines Manufacturing and R&D functions as well as commercial pharmaceuticals restructuring under the Separation Preparation programme, integration costs under the Consumer Healthcare Joint Venture integration programme and restructuring of the manufacturing organisation, R&D and some administrative functions as well as the integration of Tesaro under the 2018 major restructuring programme. Non-cash charges under the 2018 major restructuring programme primarily related to write down of sites on disposal of sites as part of plans to restructure the manufacturing network.

Total cash payments made in Q2 2020 were £163 million (Q2 2019: £111 million), £31 million for the existing Combined restructuring and integration programme (Q2 2019: £63 million), £47 million (Q2 2019: £28 million) under the 2018 major restructuring programme including the settlement of certain charges accrued in previous quarters, a further £65 million (Q2 2019: £20 million) relating to the Consumer Healthcare Joint Venture integration programme and £20 million relating to the Separation Preparation restructuring programme.

The analysis of Major restructuring charges by business was as follows:

 

		Q2 2020 £m				Q2 2019 £m
Pharmaceuticals			44				232
Vaccines			(14)				17
Consumer Healthcare			105				41
			135				290
Corporate & central functions			58				19
Total Major restructuring costs			193				309

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

22

 

 

The analysis of Major restructuring charges by Income statement line was as follows:

 

		Q2 2020 £m				Q2 2019 £m
Cost of sales			12				198
Selling, general and administration			182				67
Research and development			(2)				44
Other operating expense			1				-
Total Major restructuring costs			193				309

The benefit in the quarter from the 2018 major restructuring programme was £0.1 billion and the benefit from the Consumer Healthcare Joint Venture integration was £0.1 billion. Given its early stage the benefit from the Separation Preparation restructuring programme was less than £0.1 billion.

Transaction-related adjustments

Transaction-related adjustments resulted in a net charge of £349 million (Q2 2019: £247 million). This included a net £368 million accounting charge for the re-measurement of the contingent consideration liabilities related to the acquisitions of the former Shionogi-ViiV Healthcare joint venture and the former Novartis Vaccines business and the liabilities for the Pfizer put option and Pfizer and Shionogi preferential dividends in ViiV Healthcare.

 

Charge/(credit)		Q2 2020 £m				Q2 2019 £m
Contingent consideration on former Shionogi-ViiV Healthcare joint venture (including Shionogi preferential dividends)			343				226
ViiV Healthcare put options and Pfizer preferential dividends			10				(47)
Contingent consideration on former Novartis Vaccines business			15				9
Other adjustments			(19)				59
Total transaction-related charges			349				247

The £343 million charge relating to the contingent consideration for the former Shionogi-ViiV Healthcare joint venture represented an increase in the valuation of the contingent consideration due to Shionogi, primarily as a result of a £99 million unwind of the discount and a £244 million charge primarily from adjustments to sales forecasts as well as updated exchange rate assumptions.

The ViiV Healthcare contingent consideration liability is valued on a long-term basis. The potential impact of the COVID-19 pandemic remains uncertain and at 30 June 2020, it has been assumed that there will be no significant impact on the long-term value of the liability. This position remains under review and the amount of the liability will be updated in future quarters as further information on the impact of the pandemic becomes available. An explanation of the accounting for the non-controlling interests in ViiV Healthcare is set out on page 9.

Divestments, significant legal charges and other items

Divestments and other items included a gain in the period of £1,828 million arising from the net profit on disposal in the quarter of the Horlicks and other Consumer Healthcare brands of £2,304 million in Q2 2020, partly offset by the related loss on sale of the shares in Hindustan Unilever in Q2 2020 of £476 million. The net profit on disposal in the quarter was net of reversal of £776 million of embedded derivative gains on the value of the shares taken in prior years and Q1 2020. Divestments and other items also included a gain from a number of asset disposals and certain other Adjusting items. A charge of £1 million (Q2 2019: £47 million) for significant legal matters included the settlement of existing matters as well as provisions for ongoing litigation. Significant legal cash payments were £1 million (Q2 2019: £4 million).

Separation costs

From Q2 2020, the Group has started to report additional costs to prepare for Consumer Healthcare separation.

 

Q2 Results summary

Total and Adjusted results

Quarterly performance

YTD performance

Financial information

23