GSK cuts full year earnings target and sets out new 2020 priorities

GlaxoSmithKline cut its full year guidance for earnings per share to 3-5% at constant exchange rates from the previous 5-7% after sales growth slowed in the second quarter, while a new strategic rejig will see a flat dividend next year.

After taking £1.2bn of accounting charges due to increases in the valuations of liabilities for the HIV and consumer businesses, GSK reported a second-quarter loss per share of 3.7p compared with a 9p loss in the same quarter last year, up 59% or 29% at CER.

The pharmaceutical behemoth generated second-quarter sales of £7.3bn, which was up 12% on last year or 3% at CER thanks to strength in key pharma franchises, respiratory and HIV, taking first-half sales to £14.7bn, a 4% CER increase on the same period last year.

Adjusted operating profits of £2.08bn in Q2 were up 12% or down 2% at CER, taking the first-half to £4.06bn, which was up 21% on last year, or 4% at CER, with adjusted EPS of 27.2p up 12% or down 2% CER.

The consensus forecast for Q2 revenue was £7.27bn and for EPS of 26.3p.

A 19p dividend was declared for the quarter, with management continuing to expect to pay out 80p for the full year.

Chief executive Emma Walmsley said it was a quarter "of progress" but the priority for the second half "is to maintain this momentum and prepare for the successful execution of several important near-term launches in Respiratory, Vaccines and HIV.

"Today we are updating our full year earnings guidance to reflect the investments we have made to accelerate the review of our new two drug regimen in HIV."

Walmsley, who was promoted from head of the consumer division to take over from retiring Andrew Witty in March, also provided an update to investors on the longer-term outlook for the group, including an intention to build free cash flow cover of the annual dividend to a target range of 1.25-1.50x, before returning the dividend to growth.

Following the recent announcement that the group would sell Horlicks in the UK, a new set of "new business priorities" for the years to 2020 was revealed on Wednesday, with the board targeting a compound annual growth rate for sales of "low-to-mid-single digits" on a CER basis and adjusted EPS of "mid-to-high single digits".

GSK's top priority will be to improve the pharmaceuticals division, maximising value from product launches, strengthening the product pipeline and cutting the cost base, and is considering its options for its rare diseases unit after a strategic review.

A review of the pharmaceutical R&D pipeline will see more than 30 pre-clinical and clinical programmes stopped, while a new target will be to allocate 80% of capital to priority assets in two current areas -- respiratory and HIV/infectious diseases -- and two "potential" therapy areas, oncology and immuno-inflammation.

Beyond pharmaceuticals, the group "aims to realise further benefits" from the consumer healthcare and vaccines businesses, with 130 smaller brands put up for sale on top of Horlicks.

Glaxo shares fell when results were announce late on Wednesday morning, sliding 1.4% to 1,563.5p by mid afternoon.

Analysts at Investec said the second quarter result was "strong" and

"Although the FY20 outlook was ‘reiterated’, within the release, management talk to their expectation of a 5 year CER percentage sales CAGR to 2020 of ‘low-to-mid-single digits’ and Adjusted EPS growth of ‘mid-to-high single digits’. Crudely adjusting for FX, current consensus looks to be around the mid-single digit level for EPS, suggesting to us potential for small outer year upgrades," they said.

Analyst Nicholas Hyett at Hargreaves Lansdown said Walmsley "seems to have taken on the role of new broom with a certain relish", with the Horlicks sale just the start of her plans.

"When Ms Walmsley was appointed, some were concerned she did not have the necessary Pharmaceutical experience to run the UK’s largest drugs business. At the time we felt a good head for capital allocation would likely be more important and that does seem to be where GSK’s new management will be focusing their efforts.

"The group has narrowed its investment focus, with cost savings funneled back into R&D and the potential for selective M&A to support the pipeline.

"The focus is firmly on improving free cash flow. Given the recent problems GSK has had in that area it is very welcome, free cash didn’t even come close to covering the dividend expense last year. The decision to link future dividend increases to an improved free cash flow coverage ratio may push growth further down the line, but we see it as a positive for the group’s long term future.”