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GlaxoSmithKline - Profits tick up following huge year for M&A

Nicholas Hyett | 6 February 2019 | A A A
GlaxoSmithKline - Profits tick up following huge year for M&A

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GlaxoSmithKline plc Ordinary 25p

Sell: 1,403.20 | Buy: 1,403.80 | Change 6.80 (0.49%)
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GSK saw underlying sales rise 5% in 2018 to £30.8bn, driven by strong growth in Vaccines and more moderate growth in Pharmaceuticals and Consumer Healthcare. Underlying operating profit rose 6% to £8.7bn.

The final dividend remains unchanged year-on-year at 23p, and the company expects to pay 80p in 2019 as a whole.

The shares were broadly unmoved in early trading.

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Our view

Emma Walmsley was seen as a continuity candidate when Sir Andrew Witty, a long term defender of the status quo at Glaxo, departed in 2017. A year of major surgery at GSK has really shaken up that impression.

In recent years the strategy has been to use the Consumer division to pay the dividend, where the yield currently sits at 5.3%, while rebuilding the more volatile pharmaceutical pipeline. That seems like a long time ago.

The Consumer Healthcare division has grown, shrunk and grown again in the last year as the Novartis stake was bought out, Horlicks business sold off and then the Pfizer merger was announced.

Meanwhile a more focused approach to R&D has seen a small fortune poured into the oncology portfolio - including the $5.1bn acquisition of TESARO and a tie up with Merck that could set Glaxo back EUR3.7bn.

Glaxo's portfolio is stronger as a result, even if it's also carrying considerably more debt. However, Walmsley's shake-up doesn't end there.

Within three years of the joint venture with Pfizer being established, the new consumer healthcare giant will be going its own way as an independently listed company.

In general, we think the move makes sense. Simply put, two businesses with a sharper focus should be more efficient than one conglomerate. But it also means investors are buying into what will be two radically different businesses.

The consumer division will be a 'steady eddie' with comparatively predictable returns. Thanks to its position as one of the world's largest over-the-counter medicines business it should be able to deliver some sizable cost savings, boosting margins.

For the pharma group, losing the steady cash flows of the consumer business means there's more pressure on the men and women in white coats to deliver the next generation of blockbusters.

That's what really counts over the next couple of years. While pharma's growing at the moment, that's being driven by a relatively shallow pool of drugs. That's left the group vulnerable to a towering patent cliff when drug exclusivity expires, and means the expanded and expensive oncology pipeline really needs to deliver.

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Full Year Results (at constant exchange rate)

Full year Pharmaceutical sales rose 2% to £17.3bn. The Immuno-inflammatory and HIV portfolios delivered strong growth from Benlysta and Tivicay respectively. Respiratory, the largest pharmaceutical therapy area, managed to deliver overall sales growth of 1% as Ellipta and Nucala sales offset lower Advair/Seretide sales.

In Vaccines, sales rose 16% to £5.9bn as shingles vaccine Shingrix saw sales soar to £784m, accounting for 98% of the US shingles vaccine market. More established vaccines saw sales remain unchanged year on year, while the group's influenza vaccine delivered 10% growth.

Sales in Consumer Healthcare rose 2% to £7.7bn, largely thanks to Sensodyne, with Wellness and Nutrition sales broadly flat year-on-year. India and Brazil performed strongly in the period while Europe continued to suffer from rising competition.

Good cost control and a more focussed approach to R&D meant overall operating costs were broadly unchanged year-on-year, improving operating margins.

Glaxo completed 4 major deals in the year. That includes the acquisition of oncology specialist TESARO, an oncology partnership with Merck, a new Consumer joint venture with Pfizer and the sale of the Horlicks business to Unilever.

Free cash flow rose 63% to £5.7bn. However, GSK finished the year with net debt of £21.6bn, substantially higher than 2017's £13.2bn, following the significant acquisitions in the year.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.