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GSK publishes product sales reporting changes and the impact of IFRS 16 ‘Leases’

GSK keeps its financial reporting under regular review to ensure that it remains current and in line with both the latest regulatory requirements and developing best practice within the Pharmaceutical industry. 

Respiratory category for reported sales to be updated

Following the approval of a generic alternative to Advair in the US, GSK has reviewed the presentation of its respiratory product sales and will report the Ellipta products portfolio and Nucala under the "Respiratory" category and all other respiratory products under "Established Pharmaceuticals" (disclosed separately as an Established Respiratory section) with effect from the first quarter 2019 Results Announcement.  This reflects the different stages of the product life-cycle of the various respiratory products and ensures consistency of reporting for the sales of products with similar levels of strategic focus.

The revised Pharmaceutical turnover tables below set out the revised format for reporting Pharmaceutical product sales that will be used from the first quarter 2019 results, as applied to the 2018 reported Pharmaceutical product sales.

New accounting requirements - IFRS 16 "Leases"

IFRS 16 "Leases" was issued in January 2016 and has been implemented by the Group from 1 January 2019. The Standard replaces IAS 17 "Leases" and will require lease liabilities and 'right of use' assets to be recognised on the balance sheet for almost all leases. This has resulted in a significant increase in both assets and liabilities recognised. The costs of operating leases previously included within operating costs will be split and the financing element of the charge will be reported within finance expense.

GSK has implemented IFRS 16 by applying the modified retrospective approach. For larger leases, the right of use asset at 1 January 2019 has been calculated based on the original lease inception date and for smaller leases the right of use asset has been set equal to the lease liability, adjusted for any prepaid or accrued lease payments, onerous lease provisions and business combination fair value adjustments.

The table overleaf shows the amount of adjustment for each financial statement line item affected by the application of IFRS 16 at 1 January 2019.

 

As previously reported

IFRS 16 adjustments

As adjusted

 

£m

£m

£m

Property, plant and equipment

11,058

(98)

10,960

Right of use assets

-

1,071

1,071

Other non-current assets

1,576

(11)

1,565

Trade and other receivables

6,423

3

6,426

Deferred tax assets

3,887

39

3,926

 

 

 

 

Short-term borrowings

(5,793)

(229)

(6,022)

Long-term borrowings

(20,271)

(1,074)

(21,345)

 

 

 

 

Trade and other payables

(14,037)

10

(14,027)

Current and non-current provisions

(1,423)

35

(1,388)

Other non-current liabilities

(938)

160

(778)

Deferred tax liabilities

(1,156)

 1

(1,155)

       

Total effect on net assets

3,672

(93)

3,579

 

 

 

 

Retained earnings

(2,137)

 (93)

(2,230)

       

Total effect on equity

3,672

 (93)

3,579

The adoption of IFRS 16 will have no impact on overall cash flows for the Group although the presentation of the lease payments in the cash flow statement will change resulting in an increase to the net cash inflow from operating activities, and hence free cash flow, and a corresponding increase in the net cash outflow from financing items (split between interest paid and net repayment of obligations under finance leases).

The IFRS 16 impact tables below set out, on a pro forma basis, the impact of IFRS 16 on the Total and Adjusted results for the quarters of 2018 assuming the same transition adjustments were made as at 1 January 2018 instead of 1 January 2019. The impact of the change would have been to increase the operating profit on a Total basis by £18 million and on an Adjusted basis by £23 million in 2018 and to increase the net finance expense by £28 million on a Total basis and £30 million on an Adjusted basis.

The impact of IFRS 16 for the full years 2019 and 2020 is expected to be at a similar level to 2018, and so this change is not expected to affect the Group's previously announced guidance related to its expectations for Adjusted EPS growth in CER terms for 2019 or the Group's medium-term outlook for Adjusted EPS growth in CER terms for the five year period 2016-2020.

An Excel version of this data is available here

GSK - one of the world's leading research-based pharmaceutical and healthcare companies - is committed to improving the quality of human life by enabling people to do more, feel better and live longer. For further information please visit www.gsk.com/about-us

This Announcement does not constitute statutory accounts of the Group within the meaning of sections 434(3) and 435(3) of the Companies Act 2006.  The information for 2018 has been derived from the full Group accounts published in the Annual Report 2018.

CER growth

In order to illustrate underlying performance, it is the Group's practice to discuss its results in terms of constant exchange rate (CER) growth. This represents growth calculated as if the exchange rates used to determine the results of overseas companies in Sterling had remained unchanged from those used in the comparative period.

Assumptions related to 2019 guidance and 2016-2020 outlook

In outlining the expectations for 2019 and the five-year period 2016-2020, the Group has made certain assumptions about the healthcare sector, the different markets in which the Group operates and the delivery of revenues and financial benefits from its current portfolio, pipeline and restructuring programmes.

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 Group assumes no premature loss of exclusivity for other key products over the period.

The assumptions for the Group's revenue, earnings and dividend expectations assume no material interruptions to supply of the Group's products, no material mergers, acquisitions or disposals, except for the acquisition of Tesaro, the proposed divestment of Horlicks and other Consumer Healthcare products to Unilever and the proposed formation of a new Consumer Healthcare Joint Venture with Pfizer, all announced in December 2018, no material litigation or investigation costs for the Company (save for those that are already recognised or for which provisions have been made), no share repurchases by the Company, and no change in the Group's shareholdings in ViiV Healthcare. The assumptions also assume no material changes in the macro-economic and healthcare environment. The 2019 guidance and 2016-2020 outlook have factored in all divestments and product exits since 2015, including the divestment and exit of more than 130 non-core tail brands (£0.5 billion in annual sales) as announced on 26 July 2017 and the product divestments planned in connection with the proposed Consumer Healthcare transaction with Pfizer.

The Group's expectations assume successful delivery of the Group's integration and restructuring plans over the period 2016-2020, including the extension and enhancement to the combined programme announced on 26 July 2017 as well as the new major restructuring plan announced on 25 July 2018.

They also assume that the proposed Consumer Healthcare nutrition disposal closes by the end of 2019 and the proposed Consumer Healthcare Joint Venture with Pfizer closes during H2 2019 and that the integration and investment programmes following the Tesaro acquisition and the proposed Consumer Healthcare Joint Venture with Pfizer over this period are delivered successfully.

Material costs for investment in new product launches and R&D have been factored into the expectations given. Given the potential development options in the Group's pipeline, the outlook may be affected by additional data-driven R&D investment decisions. The expectations are given on a constant currency basis (2016-2020 outlook at 2015 CER).

Subject to material changes in the product mix, the Group's medium-term effective tax rate is expected to be around 19% of Adjusted profits. This incorporates management's best estimates of the impact of US tax reform on the Group based on the information currently available. As more information on the detailed application of the US Tax Cuts and Jobs Act becomes available, the assumptions underlying these estimates could change with consequent adjustments to the charges taken that could have a material impact on the results of the Group.

Cautionary statement regarding forward-looking statements

The Group's reports filed with or furnished to the US Securities and Exchange Commission (SEC), including this document and written information released, or oral statements made, to the public in the future by or on behalf of the Group, may contain forward-looking statements. Forward-looking statements give the Group's current expectations or forecasts of future events. An investor can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as 'anticipate', 'estimate', 'expect', 'intend', 'will', 'project', 'plan', 'believe' and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. Other than in accordance with its legal or regulatory obligations (including under the UK Listing Rules and the Disclosure and Transparency Rules of the Financial Conduct Authority), the Group undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The reader should, however, consult any additional disclosures that the Group may make in any documents that it publishes and/or files with the SEC. All readers, wherever located, should take note of these disclosures. Accordingly, no assurance can be given that any particular expectation will be met and shareholders and investors are cautioned not to place undue reliance on the forward-looking statements.

Forward-looking statements are subject to assumptions, inherent risks and uncertainties, many of which relate to factors that are beyond the Group's control or precise estimate. The Group cautions investors that a number of important factors, including those in this document, could cause actual results to differ materially from those expressed or implied in any forward-looking statement. Such factors include, but are not limited to, those discussed under 'Principal risks and uncertainties' on pages 257-266 of the GSK 2018 Annual Report. Any forward-looking statements made by or on behalf of the Group speak only as of the date they are made and are based upon the knowledge of and information available to the Directors on the date of this report.