Blueprint
 
FORM 6-K
 
 
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
 
 
Report of Foreign Issuer
 
 
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
 
 
 
For period ending 25 July 2018
 
GlaxoSmithKline plc
(Name of registrant)
 
 
 
980 Great West Road, Brentford, Middlesex, TW8 9GS
(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 x     Form 40-F
 
--
 
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934.
 
 
 
Yes      No x
 
 
Issued: Wednesday, 25 July 2018, London U.K.
 
GSK delivers improvements in sales (at CER), margins and cash flow in Q2 2018
Total EPS 9.0p, >100% AER, >100% CER; Adjusted EPS 28.1p, +3% AER, +10% CER
GSK sets out new approach to Research and Development and upgrades 2018 EPS guidance
 
 
Financial highlights
 
 
Group sales: £7.3 billion, flat AER, +4% CER. Pharmaceuticals sales £4.2 billion, -3% AER, +1% CER; Vaccines £1.3 billion, +13% AER, +16% CER; Consumer Healthcare £1.8 billion, -1% AER, +3% CER
 
Adjusted Group operating margin: 28.8%, +0.3 percentage points AER, +0.8 percentage points CER. Pharmaceuticals: 35.3%, Vaccines 28.5%, Consumer Healthcare 19.3%
 
Adjusted R&D £868 million, -18% AER, -15% CER reflecting benefits of prioritisation, comparison with utilisation of Priority Review Voucher in Q2 2017 and phasing of new investments
 
Total EPS: 9.0p (Q2 2017: loss per share 3.7p) reflecting reduced impairments and lower charges for restructuring and changes in valuations of Consumer Healthcare and HIV businesses
 
Adjusted EPS growth +3% AER, +10% CER driven by operating leverage, continued financial efficiencies and reduction in minorities following completion of Consumer Healthcare buyout on 1 June 2018
 
H1 2018 free cash flow £0.8 billion (H1 2017: £0.4 billion)
 
19p dividend declared for quarter. Continue to expect 80p for FY 2018
 
New major restructuring programme expected to deliver annual cost savings of £400 million by 2021. Charges expected to be £0.8 billion cash and £0.9 billion non-cash over next 3 years
 
Now expect 2018 Adjusted EPS growth of 7 to 10% at CER if no substitutable generic competitor to Advair introduced in US in 2018. If a substitutable generic competitor to Advair is introduced in the US from 1 October, expect 2018 Adjusted EPS growth of 4 to 7% at CER
 
Product and pipeline highlights
 
 
Sales of Ellipta products, including Trelegy, £509 million +20% AER, +26% CER. Nucala sales £141 million +93% AER, +>100% CER
 
Tivicay and Triumeq sales of £1.1 billion +10% AER, +15% CER. New launch Juluca £24 million
 
Positive results of GEMINI study of new 2-drug regimen dolutegravir+lamivudine supports use in treatment naïve patients
 
Shingrix sales £167 million. Now expect 2018 sales of £600-650 million
 
R&D update
 
 
 
 
New approach to R&D announced focusing on science related to the immune system, the use of genetics and investments in advanced technologies
 
Strategic collaboration with 23andMe announced to take advantage of novel genetic insights to enhance selection of drug targets and clinical development of new medicines
 
GSK currently has over 40 NMEs in its pharmaceutical pipeline with significant data readouts 2018-2020
 
Several assets expected to launch 2018-20 including two treatments for HIV: dolutegravir+lamivudine and cabotegravir+ripilvirine; and GSK’s most advanced new oncology treatment 2857916 (BCMA antibody-drug conjugate)
 
‘916 pivotal studies started for 4L use. Initial 2L study, for use in combination with standard of care, to start H2 2018
 
US FDA approval received for Krintafel (tafenoquine), a radical cure of P. vivax malaria
 
 
Q2 2018 results
 
Q2 2018
 
Growth
 
H1 2018
 
Growth
 
£m
 
£%
 
CER%
 
£m
 
£%
 
CER%
 
 
 
 
 
 
 
 
 
 
 
 
Turnover
7,310 
 
-
 
4
 
14,532 
 
(1)
 
4
 
 
 
 
 
 
 
 
 
 
 
 
Total operating profit
779 
 
>100
 
>100
 
2,019 
 
19 
 
39
Total earnings per share
9.0p
 
>100
 
>100
 
20.2p
 
14 
 
41
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted operating profit
2,102 
 
1
 
7
 
4,025 
 
(1)
 
8
Adjusted earnings per share
28.1p
 
3
 
10
 
52.7p
 
1 
 
11
 
 
 
 
 
 
 
 
 
 
 
 
Net cash from operating activities
1,362 
 
35
 
 
 
2,225 
 
3 
 
 
Free cash flow
492 
 
>100
 
 
 
821 
 
>100 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Total results are presented under ‘Income Statements’ on page 42 and Adjusted results reconciliations are presented on pages 19,27 and 64 to 67. Adjusted results are a non-IFRS measure that allows key trends and factors in the Group’s performance to be more easily identified by shareholders. Non-IFRS measures may be considered in addition to, but not as a substitute for, or superior to, information presented in accordance with IFRS. The definitions of £% or AER% growth, CER% growth, Adjusted results, free cash flow and other non-IFRS measures are set out on page 39. All expectations and targets regarding future performance should be read together with “Assumptions related to 2018 guidance and 2016-2020 outlook” and “Assumptions and cautionary statement regarding forward-looking statements” on page 40.
 
 
Q2 2018 Performance
 
Emma Walmsley, Chief Executive Officer, GSK said:
“GSK has delivered encouraging results across the company this quarter with CER sales growth in each of our three global businesses, an improved Group operating margin, Adjusted EPS growth of 10% (CER) and stronger free cash flow.
 
“Sales growth reflected strong commercial execution of the three new launches we have prioritised: Trelegy Ellipta which provides three medicines in a single inhaler to treat COPD;Juluca, the first 2-drug regimen, once-daily, single pill for HIV, helping to reduce the amount of medicines needed, and Shingrix, which represents a new standard for the prevention of shingles. We are increasing our expectations for sales of Shingrix in 2018 to £600-650 million.
 
“Focused improvements in operating performance have helped deliver increases in earnings and cash flow. Free cash flow for the year to date was £0.8 billion and we are announcing a dividend of 19p for the quarter. We continue to expect to pay a dividend of 80p for 2018.
 
“With the recent new product launches, development of the new R&D approach and the successful buyout of the Consumer business, we have evaluated the Group’s cost base and what is required to deliver competitive long-term growth and performance in each of the Group’s three businesses. As a result, we are today announcing a new major restructuring programme, which aims to significantly improve the competitiveness and efficiency of the Group’s cost base with savings delivered primarily through supply chain optimisation and reductions in administrative costs.
 
“We are today upgrading our guidance for CER growth in Adjusted earnings per share for 2018. This reflects increased sales expectations for Shingrix, the positive effect of the completed Consumer Healthcare buyout as well as the delay of a potential generic version of Advair in the US, partly offset by the continuing pricing pressures in Respiratory. We remain increasingly confident in our ability to deliver mid to high single digit growth in Adjusted EPS CAGR 2016-2020 (at 2015 CER).”
 
R&D Update
 
Alongside the Q2 results, at a presentation to investors in London today, GSK sets out the new approach it will take to Research and Development (R&D).
 
Emma Walmsley, Chief Executive Officer, GSK said:
“Innovation is the first of our three long-term strategic priorities I set out for GSK last year. Improving the performance of our Pharmaceuticals business and strengthening our R&D pipeline is fundamental to this. Today, we have announced the start of a new approach to R&D which aims to capitalise on the assets we have in our promising early-stage pipeline and build the next wave of growth for GSK.
 
“Under Hal Barron’s leadership, we are reallocating resources to support this new R&D approach, and savings realised from the new major restructuring programme will be used to help fund targeted increases in R&D spending as well as support new products. We believe the R&D approach outlined today will deliver the value we see in our pipeline for the benefit of patients and shareholders.”
 
Dr Hal Barron, Chief Scientific Officer and President R&D, GSK said:
“GSK has a long history of developing novel medicines that provide significant benefits for patients and today we are describing the next phase of innovation in R&D that will strengthen our pipeline and deliver a new generation of medicines and vaccines. At the core of this new approach is identifying new medicines by focusing on ways to modulate the immune system, leveraging the vast amounts of human genetic data now being generated, analysing this complex data with machine learning and creating an accountable culture where smart risk-taking is rewarded. This combination of science, technology and culture will generate new insights, improve our probability of success, enable us to focus and, most importantly, create new medicines that will have important benefits for patients.”
 
New R&D approach
Our understanding of the science related to the immune system in the development of human disease is rapidly advancing, suggesting a much broader clinical and commercial opportunity for novel immune modulatory therapies. In addition, access to large databases derived from carefully genotyped and phenotyped patient populations, coupled with technological advances in data analytics, now offer the opportunity to direct drug discovery and development to a new generation of targets with significantly increased probability of success.
 
1B1BScience
Going forward, GSK’s Research will have an even greater focus on the basic biology of the immune system as well as targets that have a high degree of validation based on human genetics. Medicines targeting mechanisms of action with strong human genetic validation have a higher (2-fold) probability of success. This means a shift to a genetics-driven (vs genetics-supported) portfolio.
 
GSK’s Pharmaceutical and Vaccines businesses have a deep history of developing novel and competitive assets targeting the immune system. The company currently has 27 immunomodulatory NMEs (new molecular entities) in the clinic, representing 60% of the total clinical pipeline. Of these 27 assets, more than half are potential first-in-class therapy options for a range of different diseases. In Oncology, GSK is developing a number of assets using different immune-based approaches: cell therapy, epigenetic modulators and antibodies targeting immune cells (agonists and antagonists).
 
Access to databases that can be used to assess the impact of genetic variation on human disease offers significant opportunities to improve drug development. Today GSK announced a major advance in this capability with the formation of a new collaboration with 23andMe, the world’s leading consumer genetics and research company. This collaboration offers GSK a transformational opportunity to utilise 23andMe's database and statistical analytics to identify disease-relevant genes and novel targets. 23andMe currently has 5 million customers and growing, making it the world’s largest genetic and phenotypic resource. GSK will also be able to benefit from 23andMe’s ability to identify patients with specific gene variations in specific diseases, helping significantly accelerate recruitment for new clinical studies. This new collaboration complements GSK’s existing investments in the EBI/Sanger Open Targets consortium, Altius Institute, and the UK Biobank.
 
2B2BTechnology
Investing in advanced technology platforms, such as machine learning, to support interpretation of genetics data will be an important part of enabling the new R&D approach. In addition, the Group will be investing in functional genomics to validate potential targets, applying techniques for gene modification such as CRISPR technology. GSK will also invest in computational design, automation and new capabilities to assess the indication potential, selection, sequencing and management of evidence generation for new assets over the lifecycle. These investments will supplement GSK’s existing strengths in other technologies, including a leading position in Cell and Gene Therapy.
 
3B3BCulture
Execution of this new approach will require investing in, and changing the culture within GSK R&D. A critical element of this will be through effective collaboration with external partners, investment in new talent and development of people. GSK also intends to promote a culture of increased accountability and smart risk-taking. This will include redefining success and fostering a culture of truth-seeking versus progression-seeking, and optimised portfolio decision-making, alongside implementation of a new robust governance model. Targeted business development to strengthen the Group’s pipeline and technology capabilities will also be part of the new R&D approach.
 
4B4BPipeline
GSK currently has over 40 NMEs in its pharmaceutical pipeline and expects a significant number of critical data readouts in 2018-2020. The Group has potential assets expected to launch in this period, including two new dual therapy treatments for HIV, dolutegravir+lamivudine and cabotegravir+ripilvirine, and GSK’s most advanced new oncology treatment, 2857916 (BCMA antibody-drug conjugate), for treatment of multiple myeloma. Beyond 2020, GSK expects to launch multiple medicines from its promising, early-stage and highly innovative R&D portfolio. Further details and updates on GSK’s R&D pipeline are presented on page 37.
 
 
2018 guidance update
 
Following an encouraging first half year of trading, GSK is upgrading its expectations for the full year:
 
in the event that no substitutable generic competitor to Advair is introduced to the US market in 2018, the Group now expects full year 2018 Adjusted EPS growth of 7 to 10% at CER, or
 
 
in the event of a 1 October introduction of a substitutable generic competitor to Advair in the US, the Group now expects full year 2018 Adjusted EPS growth of 4 to 7%, with US Advair sales of around £900 million at CER (US$1.30/£1).
 
 
This revised guidance reflects:
 
 
the successful launch of Shingrix, where we now expect to deliver sales of £600-650 million in 2018;
 
 
the additional contribution to earnings from the buyout of Novartis’ stake in the Consumer Healthcare Joint Venture.
 
It also adjusts for the delay in the launch of generic competition to Advair. In addition, the revised guidance incorporates our expectations of a continuation of the additional pricing pressures in Respiratory that we identified in Q1 2018 including the greater than originally expected decline in Advair sales before any US generic competition that we expect in 2018 of around 30%.
 
The effective tax rate for 2018 is expected to be approximately 19-20% of Adjusted profits after the impact of US tax reform which is expected to benefit the Group effective tax rate by two to three percentage points.
 
Total reported results represent the Group’s overall performance. However, these results can contain material unusual or non-operational items that may obscure the key trends and factors determining the Group’s operational performance. As a result, GSK also reports Adjusted results, which is a non-IFRS measure. GSK believes that Adjusted results allow the Group’s performance to be more easily and clearly identified by shareholders. The definition of Adjusted results, as set out on page 39, also aligns the Group’s results with the majority of its peer companies and how they report earnings.
 
Adjusted results may exclude significant costs such as those from major restructuring programmes, significant legal charges or transaction items. Major restructuring charges have been reported as an adjusting item since the Group adopted its current reporting structure in 2012. Estimated charges from the major restructuring programmes approved by the Board, are set out on page 28.
 
As Adjusted results may exclude significant costs, such as those from major restructuring programmes or significant legal charges, they should not be regarded as a complete picture of the Group’s financial performance which is presented in its Total results. When restructuring charges are excluded, Adjusted earnings will be higher than Total earnings. The exclusion of other Adjusting items may result in Adjusted earnings being materially higher or lower than Total earnings.
 
Reconciliations between Total and Adjusted results, as set out on pages 19, 27 and 64 to 67, including detailed breakdowns of the key adjusting items, are provided to shareholders to ensure full visibility and transparency as they assess the Group’s performance.
 
GSK is not able to give guidance for Total results as it cannot reliably forecast certain material elements of our 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.
 
In addition, it should be noted that contingent consideration cash payments are made each quarter primarily to Shionogi by ViiV Healthcare which reduce the balance sheet liability and are hence not recorded in the income statement. The cash payments to be made to Shionogi by ViiV Healthcare for the six months to 30 June 2018 were £376 million. An explanation of the acquisition-related arrangements with ViiV Healthcare, including details of cash payments to Shionogi, is set out on page 62.
 
If exchange rates were to hold at the closing rates on 30 June 2018 ($1.32/£1, €1.13/£1 and Yen 146/£1) for the rest of 2018, the estimated negative impact on full-year 2018 Sterling turnover growth would be around 3% and if exchange gains or losses were recognised at the same level as in 2017, the estimated negative impact on 2018 Sterling Adjusted EPS growth would be around 6%.
 
 
Contents
Page
 
 
Sales performance
6
Financial performance – Q2 2018
16
Financial performance – H1 2018
24
Research and development
36
Reporting definitions
39
Outlook assumptions and cautionary statements
40
Contacts
41
 
 
Income statements
42
Statement of comprehensive income – three months ended 30 June 2018
43
Statement of comprehensive income – six months ended 30 June 2018
44
Pharmaceuticals turnover – three months ended 30 June 2018
45
Pharmaceuticals turnover – six months ended 30 June 2018
46
Vaccines turnover – three months ended 30 June 2018
47
Vaccines turnover – six months ended 30 June 2018
47
Balance sheet
48
Statement of changes in equity
49
Cash flow statement – six months ended 30 June 2018
50
Segment information
51
Legal matters
53
Taxation
53
Additional information
54
Reconciliation of cash flow to movements in net debt
61
Net debt analysis
61
Free cash flow reconciliation
61
Non-controlling interests in ViiV Healthcare
62
Adjusted results reconciliations
63
 
 
Principal risks and uncertainties
68
Directors’ responsibility statement
69
Independent review report
70
 
 
Brand names and partner acknowledgements
Brand names appearing in italics throughout this document are trademarks of GSK or associated companies or used under licence by the Group. Cialis is a trademark of Eli Lilly and Company.
 
 
Sales performance
 
Group turnover by business and geographic region
 
Group turnover by business
Q2 2018
 
 
 
 
 
£m
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
Pharmaceuticals
4,229
 
(3)
 
1
Vaccines
1,253
 
13 
 
16
Consumer Healthcare
1,828
 
(1)
 
3
 
 
 
 
 
 
Group turnover
7,310
 
 
4
 
 
 
 
 
 
 
Group turnover was flat at AER but increased 4% at CER to £7,310 million, with CER growth delivered by all three businesses.
 
Pharmaceuticals sales were down 3% AER but up 1% CER, driven primarily by the growth in sales of HIV products as well as growth in Nucala and the Ellipta portfolio. This was partly offset by lower sales of Seretide/Advair and Established Pharmaceuticals. Overall Respiratory sales declined 6% at AER and 2% at CER.
 
Vaccines sales were up 13% AER, 16% CER, driven primarily by sales of Shingrix in the US as well as increased demand for Hepatitis vaccines, partly offset by declines in some other Established Vaccines.
 
Consumer Healthcare sales declined 1% AER but grew 3% CER reflecting strong performances in the Oral health and Skin health categories. This was partly offset by slower growth in the Wellness and Nutrition categories, together with the ongoing impact of non-strategic brand divestments, generic competition to Transderm Scop in the US and the implementation of the Goods & Service Tax (GST) in India.
 
Group turnover by geographic region
Q2 2018
 
 
 
 
 
£m
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
US
2,785
 
 
Europe
1,950
 
(1)
 
(1)
International
2,575
 
(2)
 
 
 
 
 
 
 
Group turnover
7,310
 
 
 
 
 
 
 
 
 
US sales grew 2% AER, 7% CER driven by strong performances from Tivicay and Triumeq, as well as contributions from the growth of Shingrix and Hepatitis vaccines.
 
Europe sales decreased 1% AER, 1% CER as growth from Tivicay and Triumeq was more than offset by continued generic competition to Epzicom and Avodart as well as a decrease in Bexsero sales largely due to the completion of the vaccination of catch-up cohorts in certain markets which benefited Q2 2017. Growth in new Respiratory products offset the decline in Seretide.
 
In International, sales declined 2% AER, but grew 3% CER reflecting strong growth in Tivicay, Triumeq, and the Respiratory portfolio. Sales in Emerging Markets declined 6% AER, but grew 1% CER, reflecting, in particular, a decline in Vaccines sales which were impacted by pricing and phasing in the quarter.
 
 
Group turnover by business and geographic region
 
Group turnover by business
H1 2018
 
 
 
 
 
£m
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
Pharmaceuticals
8,238
 
(4)
 
1
Vaccines
2,491
 
10 
 
14
Consumer Healthcare
3,803
 
(2)
 
2
 
 
 
 
 
 
Group turnover
14,532
 
(1)
 
4
 
 
 
 
 
 
 
Group turnover declined 1% AER but increased 4% CER to £14,532 million, with CER growth delivered by all three businesses.
 
Pharmaceuticals sales were down 4% AER but up 1% CER, driven primarily by the growth in HIV sales and growth from Nucala and the Ellipta portfolio. This was partly offset by lower sales of Seretide/Advair and Established Pharmaceuticals. Overall Respiratory sales declined 6% AER, 1% CER.
 
Vaccines sales were up 10% AER, 14% CER, primarily driven by sales of Shingrix in the US as well as increased demand for Hepatitis vaccines, partly offset by declines in some Established Vaccines.
 
Consumer Healthcare sales declined 2% AER but grew 2% CER mainly led by strong performances from power brands in the Oral health category. This was partly offset by the ongoing impact of non-strategic brand divestments, generic competition to Transderm Scop in the US and the implementation of the Goods & Service Tax (GST) in India.
 
Group turnover by geographic region
H1 2018
 
 
 
 
 
£m
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
US
5,303
 
(1)
 
Europe
3,991
 
 
International
5,238
 
(3)
 
 
 
 
 
 
 
Group turnover
14,532
 
(1)
 
 
 
 
 
 
 
 
US sales declined 1% AER, but grew 7% CER driven by strong performances from Tivicay and Triumeq, as well as contributions from the growth of Shingrix and Hepatitis vaccines.
 
Europe sales grew 1% AER, but were flat at CER as growth from Tivicay and Triumeq was offset by continued generic competition to Epzicom and Avodart. Growth in the new Respiratory products offset the decline in Seretide.
 
In International, sales declined 3% AER, but grew 3% CER, reflecting strong growth in Tivicay, Triumeq, the Respiratory portfolio and Cervarix in China, following its recent launch. Sales in Emerging Markets declined 5% AER, but grew 2% CER.
 
 
Turnover – Q2 2018
 
Pharmaceuticals
 
 
Q2 2018
 
 
 
 
 
 
 
£m
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
Respiratory
1,696
 
(6)
 
(2)
HIV
1,189
 
 
11 
Immuno-inflammation
114
 
23 
 
29 
Established Pharmaceuticals
1,230
 
(9)
 
(5)
 
 
 
 
 
 
 
4,229
 
(3)
 
 
 
 
 
 
 
US
1,871
 
(5)
 
Europe
984
 
(1)
 
(1)
International
1,374
 
(1)
 
 
 
 
 
 
 
 
4,229
 
(3)
 
 
 
 
 
 
 
 
Pharmaceuticals turnover in the quarter was £4,229 million, down 3% AER, but up 1% CER, driven primarily by growth in HIV sales, which were up 7% AER, 11% CER, to £1,189 million, reflecting continued strong performances by Triumeq and Tivicay and continued growth from Juluca. Respiratory sales declined 6% AER, 2% CER, to £1,696 million, with growth from the Ellipta portfolio and Nucala more than offset by lower sales of Seretide/Advair. Sales of Established Pharmaceuticals fell 9% AER, 5% CER, to £1,230 million.
 
In the US, sales declined 5% AER, but flat at CER, with growth in the HIV portfolio and Benlysta more than offset by declines in Established Products and Respiratory. In Europe, sales declined 1% AER, 1% CER, reflecting continued generic competition to Epzicom and Avodart and the ongoing transition of the Respiratory portfolio. International declined 1% AER but grew 4% CER, driven primarily by the new Respiratory portfolio.
 
Respiratory
Total Respiratory sales declined 6% AER, 2% CER, with the US down 14% AER, 9% CER. In Europe, sales grew 5% AER, 5% CER and International grew 2% AER, 7% CER, with growth in both Japan and Emerging Markets. Growth from the Ellipta portfolio and Nucala was more than offset by lower sales of Seretide/Advair which declined 30% AER, 28% CER globally.
 
Sales of Nucala were £141 million in the quarter and grew 93% AER, >100% CER, continuing to benefit from the global rollout of the product. US sales of Nucala grew 76% AER, 86% CER to £88 million, benefiting from market growth and some re-stocking in the quarter.
 
Sales of Ellipta products were up 20% AER, 26% CER, driven by continued growth in all regions. In the US, sales grew 12% AER, 18% CER, reflecting further market share gains, partly offset by the impact of continued competitive pricing pressures, particularly for ICS/LABAs. In Europe, sales grew 36% AER, 36% CER. Sales of Trelegy Ellipta, our new once daily closed triple product, contributed £26 million in the quarter, benefiting from an expanded label in the US.
 
Relvar/Breo Ellipta sales declined 1% AER, but grew 4% CER, to £279 million, primarily driven by growth in Europe, which was up 22% AER, 24% CER to £61 million, and in International, which was up 29% AER, 35% CER to £62 million. In the US, Breo Ellipta sales declined 15% AER, 10% CER, with volume growth of 30% reflecting continued market share growth, offset by the combined impact of prior period payer rebate adjustments (primarily an unfavourable comparison with rebate levels in Q2 2017) and increased competitive pricing pressure. Anoro Ellipta sales grew 41% AER, 48% CER to £120 million, driven by gains in the US. All Ellipta products, Breo, Anoro, Incruse, Arnuity and Trelegy, continued to grow market share in the US during the quarter.
 
Sales of New Respiratory products, comprising Ellipta products and Nucala, grew 31% AER, 27% CER to £650 million.
 
Seretide/Advair sales declined 30% AER, 28% CER to £590 million. Sales of Advair in the US declined 45% AER, 43% CER (10% volume decline and 33% negative impact of price) primarily reflecting increased competitive pricing pressures. In Europe, Seretide sales were down 17% AER, 17% CER to £151 million (10% volume decline and a 7% price decline). This reflected continued competition from generic products and the transition of the Respiratory portfolio to newer products. In International, sales of Seretide were down 6% AER, 2% CER, to £179 million (3% volume decline and 1% positive impact of price), also reflecting generic competition in certain markets and the continuing transition to the newer Respiratory products.
 
HIV
HIV sales increased 7% AER, 11% CER to £1,189 million in the quarter, with the US up 7% AER, 13% CER, Europe up 3% AER, 4% CER and International up 11% AER, 16% CER. The growth was driven by continued increases in market share for Triumeq and Tivicay, partly offset by the impact of generic competition to Epzicom/Kivexa, particularly affecting the European market. The ongoing increase in patient numbers for both Triumeq and Tivicay resulted in sales of £682 million and £407 million, respectively, in the quarter. Juluca recorded sales of £24 million in the quarter.
 
Epzicom/Kivexa sales declined 59% AER, 56% CER to £26 million, reflecting ongoing generic competition.
 
Immuno-inflammation
Sales in the quarter were up 23% AER, 29% CER, primarily driven by Benlysta which grew 23% AER, 29% CER to £114 million. In the US, Benlysta grew 23% AER, 29% CER to £102 million.
 
Established Pharmaceuticals
Sales of Established Pharmaceuticals in the quarter were £1,230 million, down 9% AER, 5% CER, benefiting from favourable prior period payer rebate adjustments and some post-divestment inventory sales.
 
The Avodart franchise was down 14% AER, 11% CER to £138 million, primarily due to the loss of exclusivity in Europe, with the US impact now broadly annualised. Coreg franchise sales declined 69% AER, 67% CER following a generic Coreg CR entrant to the US market in Q4 2017. Augmentin sales declined 10% AER, 5% CER to £127 million.
 
 
Vaccines
 
 
Q2 2018
 
 
 
 
 
 
 
£m
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
Meningitis
184
 
(8)
 
(3)
Influenza
17
 
(19)
 
(14)
Shingles
167
 
 
Established Vaccines
885
 
(1)
 
 
 
 
 
 
 
 
1,253
 
13 
 
16 
 
 
 
 
 
 
US
486
 
54 
 
61 
Europe
393
 
 
International
374
 
(7)
 
(3)
 
 
 
 
 
 
 
1,253
 
13 
 
16 
 
 
 
 
 
 
 
Vaccines turnover grew 13% AER, 16% CER to £1,253 million, primarily driven by market expansion and share growth forShingrix, and a competitor supply shortage in Hepatitis. Established Vaccines growth was impacted by lower Synflorix sales, reflecting unfavourable phasing and lower pricing in Emerging Markets, and lower sales of DTPa-containing vaccines (Infanrix, Pediarix and Boostrix) due to unfavourable year-on-year phasing in International and increased competitive pressures, particularly in Europe.
 
Meningitis
Meningitis sales declined 8% AER, 3% CER to £184 million. Bexsero sales declined by 11% AER, 6% CER largely due to the completion of the vaccination of catch-up cohorts in certain markets in Europe which benefited 2017, partly offset by continued growth in private market sales in International. Menveo sales were down 12% AER, 7% CER, impacted by supply constraints in Europe and International.
 
Influenza
Fluarix/FluLaval sales declined 19% AER, 14% CER to £17 million, mainly driven by increased competition in International.
 
Shingles
Shingrix recorded sales of £167 million in the quarter in the US and Canada, driven by demand and share gains. US sales of Shingrix benefited from market growth in new patient populations now covered by immunisation recommendations and achieved a 98% market share in the quarter. Because of the high demand, an allocation process has been implemented in the US, to help manage inventory and deliveries and to ensure patients have the opportunity to complete the two-dose series.
 
Established Vaccines
Sales of the DTPa-containing vaccines (Infanrix, Pediarix and Boostrix) were down 12% AER, 10% CER. Boostrix sales declined 19% AER, 17% CER to £121 million, primarily driven by unfavourable year-on-year phasing in International and the return to the market of a competitor in Europe, partly offset by higher demand and share gains in the US. Infanrix, Pediarix sales were down 4% AER, 3% CER to £149 million, reflecting unfavourable year-on-year CDC stockpile movements in the US and increased competitive pressures, particularly in Europe, partly offset by stronger demand in International.
 
Hepatitis vaccines grew 35% AER, 41% CER to £210 million, benefiting from a competitor supply shortage and stronger demand in the US and Europe.
 
Rotarix sales grew 11% AER, 12% CER to £105 million, mainly driven by the phasing of tenders and a favourable comparison with a higher returns provision in Q2 2017 in International.
 
Synflorix sales were down 34% AER, 33% CER to £100 million, primarily impacted by unfavourable phasing and lower pricing in Emerging Markets.
 
 
Consumer Healthcare
 
 
Q2 2018
 
 
 
 
 
 
 
£m
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
Wellness
901
 
(3)
 
Oral health
611
 
 
Nutrition
154
 
(7)
 
Skin health
162
 
 
 
 
 
 
 
 
 
1,828
 
(1)
 
 
 
 
 
 
 
US
428
 
- 
 
4 
Europe
573
 
(1)
 
(1)
International
827
 
(2)
 
 
 
 
 
 
 
 
1,828
 
(1)
 
 
 
 
 
 
 
 
Consumer Healthcare sales declined 1% AER but grew 3% CER in the quarter to £1,828 million as strong performances in Oral health and Skin health were partly offset by slower growth in the Wellness and Nutrition categories. Strong performances in the US and International markets, particularly Brazil and India, were partly offset by lower growth in Europe and Australia.
 
The divestments of small tail brands and Horlicks and MaxiNutrition in the UK, generic competition to Transderm Scop in the US and the ongoing impact of the implementation of the Goods & Service Tax (GST) in India in aggregate impacted growth in the quarter by approximately one percentage point.
 
Wellness
Wellness sales declined 3% AER but grew 1% CER to £901 million, reflecting growth in Gastro-intestinal sales. Respiratory declined 3% AER, but was flat at CER as double-digit growth in China and Brazil was offset by lower Flonase growth in the US due to the delayed and shorter allergy season compared with last year.
 
Pain relief was down 4% AER, 2% CER largely due to a double-digit decline in Panadol, which reflected a change in the route to market model in South East Asia and the discontinuation of slow-release Panadol products in the Nordic countries. Voltaren sales declined slightly, affected by tougher competition in major European markets and promotional phasing in Germany compared with last year.
 
Oral health
Oral health sales grew 1% AER, 5% CER to £611 million with Sensodyne growing in high-single to low-double digits across most major markets, partly offset by destocking in China. Denture care grew in mid-single digits through continued performance of Poligrip in the US and the launch of Corega into the mass market channel in Russia, partly offset by a decline in Europe due to strong competition. Gum health delivered double-digit growth with continued strong Parodontax performance in the US.
 
Nutrition
Nutrition sales declined 7% AER but grew 1% CER to £154 million, including a nine percentage point impact of divestments and the GST implementation in India. The Nutrition business in India continued to perform strongly, benefiting from new products including Horlicks Protein+ which was launched earlier in the year.
 
Skin health
Skin health grew 3% AER 8% CER to £162 million led by double-digit growth in Fenistil in Russia and Germany as retailers built seasonal stocks, Lamisil in Korea and mid-single digit growth in Lip care.
 
 
Pharmaceuticals
 
 
H1 2018
 
 
 
 
 
 
 
£m
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
Respiratory
3,271
 
(6)
 
(1)
HIV
2,237
 
 
12 
Immuno-inflammation
214
 
16 
 
24 
Established Pharmaceuticals
2,516
 
(9)
 
(5)
 
 
 
 
 
 
 
8,238
 
(4)
 
 
 
 
 
 
 
US
3,441
 
(7)
 
Europe
2,011
 
 
(1)
International
2,786
 
(2)
 
 
 
 
 
 
 
 
8,238
 
(4)
 
 
 
 
 
 
 
 
Pharmaceuticals turnover in the six months was £8,238 million, down 4% AER, but up 1% CER, driven primarily by growth in HIV sales, which were up 7% AER, 12% CER, to £2,237 million, reflecting continued strong performances by Triumeq and Tivicay and continued growth from Juluca. Respiratory sales declined 6% AER, 1% CER, to £3,271 million, with growth from the Ellipta portfolio and Nucala offset by lower sales of Seretide/Advair. Sales of Established Pharmaceuticals fell 9% AER, 5% CER, with the decline mitigated by some one-off contract sales in the six months.
 
In the US, sales declined 7% AER but were flat at CER, with growth in the HIV portfolio and Benlysta offsetting declines in Established Products and Respiratory. In Europe, sales were flat at AER but declined 1% CER, reflecting continued generic competition to Epzicom and Avodart and the ongoing transition of the Respiratory portfolio. International declined 2% AER but grew 5% CER, reflecting growth in the new Respiratory and HIV portfolios.
 
Respiratory
Total Respiratory sales declined 6% AER, 1% CER, with the US down 14% AER, 7% CER. In Europe, sales grew 3% AER, 2% CER and International was flat at AER but grew 6% CER, driven primarily by higher sales in Japan. Growth from the Ellipta portfolio and Nucala was offset by lower sales of Seretide/Advair.
 
Sales of Nucala were £245 million in the six months, up 86% AER, 95% CER, continuing to benefit from the global rollout of the product. US sales of Nucala grew 60% AER, 73% CER to £147 million, despite increased competitive pressures from a new market entrant.
 
Sales of Ellipta products were up 22% AER, 29% CER, driven by continued growth in all regions. In the US, sales grew 13% AER, 22% CER, reflecting further market share gains, partly offset by the impact of continued competitive pricing pressures, particularly for ICS/LABAs. In Europe, sales grew 39% AER, 37% CER. Sales of Trelegy Ellipta, our new once daily closed triple product, contributed £37 million to total Ellipta sales, benefiting from an expanded label in the US.
 
Relvar/Breo Ellipta sales grew 3% AER, 8% CER, to £498 million, primarily driven by growth in Europe, which was up 24% AER, 23% CER to £123 million, and in International, which was up 29% AER, 37% CER to £119 million. In the US, Breo Ellipta sales declined 13% AER, 6% CER, with volume growth of 36%, reflecting continued market share growth, offset by the combined impact of prior period payer rebate adjustments (primarily an unfavourable comparison with rebate levels in the first half of 2017) and increased competitive pricing pressure. Anoro Ellipta sales grew 48% AER, 56% CER to £217 million, driven by gains in the US. All Ellipta products, Breo, Anoro, Incruse, Arnuity and Trelegy, continued to grow market share in the US during the six months.
 
Sales of New Respiratory products, comprising Ellipta products and Nucala, grew 32% AER, 39% CER to £1,140 million.
 
Seretide/Advair sales declined 28% AER, 24% CER to £1,156 million. Sales of Advair in the US declined 40% AER, 35% CER (8% volume decline and 27% negative impact of price) primarily reflecting increased competitive pricing pressures. In Europe, Seretide sales were down 18% AER, 19% CER to £317 million (10% volume decline and a 9% price decline). This reflected continued competition from generic products and the transition of the Respiratory portfolio to newer products. In International, sales of Seretide were down 12% AER, 7% CER, to £350 million (6% volume decline and 1% negative impact of price), also reflecting generic competition in certain markets and the continuing transition to the newer Respiratory products.
 
Pricing pressures also affected other Respiratory products, with Ventolin sales declining 11% AER, 5% CER to £350 million.
 
HIV
HIV sales increased 7% AER, 12% CER to £2,237 million in the six months, with the US up 5% AER, 14% CER, Europe up 9% AER, 8% CER and International up 7% AER, 14% CER. The growth was driven by continued increases in market share for Triumeq and Tivicay, partly offset by the impact of generic competition to Epzicom/Kivexa, particularly affecting the European market. The ongoing increase in patient numbers for both Triumeq and Tivicay resulted in sales of £1,288 million and £755 million, respectively, in the six months. Juluca was approved in the US in November 2017, and recorded sales of £34 million in the six months.
 
Epzicom/Kivexa sales declined 56% AER, 54% CER to £63 million, reflecting ongoing generic competition.
 
Immuno-inflammation
Sales in the six months were up 16% AER, 24% CER, primarily driven by Benlysta, which grew 16% AER, 25% CER to £214 million. In the US, Benlysta grew 15% AER, 23% CER to £191 million.
 
Established Pharmaceuticals
Sales of Established Pharmaceuticals were £2,516 million, down 9% AER, 5% CER, benefiting from favourable prior period payer rebate adjustments and some post-divestment inventory sales.
 
The Avodart franchise was down 13% AER, 10% CER to £279 million, primarily due to the loss of exclusivity in Europe, with the US impact now broadly annualised. Coreg franchise sales declined 64% AER, 61% CER following a generic Coreg CR entrant to the US market in Q4 2017. Augmentin sales declined 2% AER, but grew 4% CER to £291 million with improved demand in Emerging Markets.
 
 
Vaccines
 
 
H1 2018
 
 
 
 
 
 
 
£m
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
Meningitis
364
 
(7)
 
(2)
Influenza
26
 
(24)
 
(18)
Shingles
277
 
 
Established Vaccines
1,824
 
(1)
 
 
 
 
 
 
 
 
2,491
 
10 
 
14 
 
 
 
 
 
 
US
975
 
44 
 
55 
Europe
782
 
 
(1)
International
734
 
(8)
 
(5)
 
 
 
 
 
 
 
2,491
 
10 
 
14 
 
 
 
 
 
 
 
Vaccines turnover grew 10% AER, 14% CER to £2,491 million, primarily driven by growth in sales of Shingrix, Hepatitis vaccines, which benefited from a competitor supply shortage, and the launch of Cervarix in China. Established Vaccines growth was impacted by lower Synflorix sales, reflecting unfavourable phasing and lower pricing in Emerging Markets, and lower sales of DTPa-containing vaccines (Infanrix, Pediarix and Boostrix) due to unfavourable year-on-year phasing in International and increased competitive pressures, particularly in Europe.
 
Meningitis
Meningitis sales declined 7% AER, 2% CER to £364 million. Bexsero sales were down 1% AER but up 3% CER due to demand and share gains in the US, together with continued growth in private market sales in International, partly offset by the completion of the vaccination of catch-up cohorts in certain markets in Europe which benefited H1 2017. Menveo sales decreased by 23% AER, 16% CER, primarily reflecting a strong comparator performance in H1 2017 and supply constraints in Europe and International.
 
Influenza
Fluarix/FluLaval sales declined 24% AER, 18% CER to £26 million, due to increased competition in International.
 
Shingles
Shingrix recorded sales of £277 million in the first six months in the US and Canada, driven by demand and share gains. US sales benefited from market growth in new patient populations now covered by immunisation recommendations.
 
Established Vaccines
Sales of DTPa-containing vaccines (Infanrix, Pediarix and Boostrix) were down 12% AER, 8% CER. Boostrix sales declined 15% AER, 12% CER to £221 million, primarily driven by unfavourable year-on-year phasing in International and the return to the market of a competitor in Europe, partly offset by higher demand and share gains in the US. Infanrix, Pediarix sales were down 9% AER, 5% CER to £355 million, reflecting increased competitive pressures in Europe and the US as well as unfavourable year-on-year CDC stockpile movements in the US, partly offset by stronger demand in International.
 
Hepatitis vaccines grew 26% AER, 32% CER to £405 million, benefiting from a competitor supply shortage and stronger demand in the US and Europe.
 
Rotarix sales were down 2% AER but up 1% CER to £235 million.
 
Synflorix sales declined 30% AER, 30% CER to £199 million, primarily impacted by unfavourable phasing and lower pricing in Emerging Markets.
 
Cervarix sales increased by 94% AER, 97% CER to £68 million, primarily driven by its recent launch in China.
 
 
Consumer Healthcare
 
 
H1 2018
 
 
 
 
 
 
 
£m
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
Wellness
1,918
 
(4)
 
Oral health
1,249
 
 
Nutrition
322
 
(7)
 
Skin health
314
 
(2)
 
 
 
 
 
 
 
 
3,803
 
(2)
 
 
 
 
 
 
 
US
887
 
(7)
 
Europe
1,198
 
 
International
1,718
 
(2)
 
 
 
 
 
 
 
 
3,803
 
(2)
 
 
 
 
 
 
 
 
Consumer Healthcare sales in the six months declined 2% AER but grew 2% CER to £3,803 million, mainly led by broad-based strong growth in Oral health. The impact of generic competition on Transderm Scop in the US, divestment of tail brands and Horlicks and MaxiNutrition in the UK and implementation of the Goods & Service Tax (GST) in India, in aggregate impacted overall growth by one and a half percentage points.
 
Wellness
Wellness sales declined 4% AER but grew 1% CER to £1,918 million. Respiratory sales were down 5% AER, 1% CER. Although Theraflu delivered double-digit growth due to the strong cold and flu season, this was offset by a decline in Flonase resulting from the delayed and shorter allergy season in the US, and the comparison with the launch of Flonase Sensimist last year.
 
Pain relief declined 1% AER but grew 2% CER to £726 million as low-single digit growth of Voltaren was partly offset by a weaker performance in Panadol. Panadol continued to grow in most International markets, but this was offset by a change in the route to market model in South East Asia as well as the discontinuation of slow-release Panadol products in the Nordic countries.
 
Generic competition to Transderm Scop and tail brand divestments impacted Wellness growth by approximately one percentage point.
 
Oral health
Oral health sales grew 1% AER, 6% CER to £1,249 million as Sensodyne continued to deliver high-single to low-double digit growth across most major markets. Denture care grew in high-single digits through a strong Poligrip performance in the US and the launch of Corega Max in Russia, while Gum health grew in double digits, largely driven by momentum behind Parodontax in the US.
 
Nutrition
Nutrition sales declined 7% AER but were flat at CER at £322 million. The impact of divestments and India GST implementation on growth was approximately 10 percentage points. Horlicks in India continued to grow consumption, benefitting from the launch of Horlicks Protein+ in Q1 2018.
 
Skin health
Skin health sales were down 2% AER but up 2% CER to £314 million, driven by double-digit growth from Fenistil, particularly in Europe, and mid-single digit growth from Lip care.
 
 
Financial performance – Q2 2018
 
Total results
 
The Total results for the Group are set out below.
 
 
Q2 2018
£m
 
Q2 2017
£m
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
 
 
Turnover
7,310 
 
7,320 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(2,310)
 
(2,619)
 
(12)
 
(10)
 
 
 
 
 
 
 
 
Gross profit
5,000 
 
4,701 
 
 
11 
 
 
 
 
 
 
 
 
Selling, general and administration
(2,457)
 
(2,379)
 
 
Research and development
(925)
 
(1,260)
 
(27)
 
(25)
Royalty income
73 
 
98 
 
(26)
 
(23)
Other operating income/(expense)
(912)
 
(1,180)
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit/(loss)
779 
 
(20)
 
>100 
 
>100 
 
 
 
 
 
 
 
 
Finance income
27 
 
15 
 
 
 
 
Finance expense
(194)
 
(192)
 
 
 
 
Profit on disposal of associates
- 
 
20 
 
 
 
 
Share of after tax profits/(losses) of
   associates and joint ventures
2 
 
(1)
 
 
 
 
 
 
 
 
 
 
 
 
Profit/(loss) before taxation
614 
 
(178)
 
>100 
 
>100 
 
 
 
 
 
 
 
 
Taxation
(139)
 
92 
 
 
 
 
Tax rate %
22.6%
 
51.7%
 
 
 
 
 
 
 
 
 
 
 
 
Profit/(loss) after taxation
475 
 
(86)
 
>100 
 
>100 
 
 
 
 
 
 
 
 
Profit attributable to non-controlling
  interests
34 
 
94 
 
 
 
 
Profit/(loss) attributable to shareholders
441 
 
(180)
 
 
 
 
 
 
 
 
 
 
 
 
 
475 
 
(86)
 
>100 
 
>100 
 
 
 
 
 
 
 
 
Earnings/(loss) per share
9.0p
 
(3.7)p
 
>100 
 
>100 
 
 
 
 
 
 
 
 
 
Cost of sales
Cost of sales as a percentage of turnover was 31.6%, down 4.2 percentage points at AER and 4.7 percentage points in CER terms compared with Q2 2017. This primarily reflected a favourable comparison with Q2 2017 which was impacted by £363 million of non-cash write downs related to the decision to withdraw Tanzeum progressively. The quarter also benefited from a more favourable product mix in Pharmaceuticals, particularly due to the impact of higher HIV sales, as well as a further contribution from integration and restructuring savings in all three businesses. This was partly offset by an adverse comparison with the benefit of a settlement for lost third party supply volume in Q2 2017 in Vaccines, as well as continued adverse pricing pressure in Pharmaceuticals, particularly in Respiratory, and in Established Vaccines.
 
Selling, general and administration
SG&A costs as a percentage of turnover were 33.6%, 1.1 percentage points higher than in Q2 2017 at AER and 1.2 percentage points higher on a CER basis. This primarily reflected increased investment in promotional product support, particularly for new launches in Vaccines, Respiratory and HIV, partly offset by tight control of ongoing costs, particularly in non-promotional spending across all three businesses.
 
Research and development
R&D expenditure was £925 million (12.7% of turnover), 27% lower than in Q2 2017 at AER and 25% lower at CER. This reflected a favourable comparison with the impact of the Priority Review Voucher in Q2 2017 and lower restructuring costs, together with the benefit of the prioritisation initiatives started in Q3 2017, partly offset by increased investment in the progression of a number of mid and late-stage programmes, particularly in Oncology.
 
Royalty income
Royalty income was £73 million (Q2 2017: £98 million), primarily reflecting the patent expiry of Cialis.
 
Other operating income/(expense)
Net other operating expense of £912 million (Q2 2017: £1,180 million) primarily reflected £953 million (Q2 2017: £1,211 million) of accounting charges 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, the value attributable to the Consumer Healthcare Joint Venture put option previously held by Novartis and the liabilities for the Pfizer put option and Pfizer and Shionogi preferential dividends in ViiV Healthcare.
 
These charges were driven primarily by a re-measurement of £744 million for the contingent consideration liability due to Shionogi, as well as the valuation of the put option liability to Pfizer, primarily related to changes in exchange rate assumptions and changes to HIV sales forecasts following the GEMINI study completed in Q2 2018. In addition, following the agreement to acquire Novartis’ interest in the Consumer Healthcare Joint Venture announced on 27 March 2018, a net charge of £163 million has been taken in the quarter, primarily representing a £108 million unwind of the discounted liability until settlement on 1 June 2018 as well as movements on exchange rates largely offset by hedging gains.
 
Operating profit
Total operating profit was £779 million in Q2 2018 compared with an operating loss of £20 million in Q2 2017. The increase in operating profit primarily reflected the reduced impact of accounting charges related to re-measurement of the liabilities for contingent consideration, put options and preferential dividends, as well as reduced restructuring costs and asset impairments in comparison to the non-cash charges in Q2 2017 relating to the progressive withdrawal of Tanzeum and a favourable comparison with the impact of the Priority Review Voucher utilised and expensed in Q2 2017. Operating profit also benefited from sales growth in all three businesses, a more favourable mix, benefits in the quarter from prioritisation of R&D expenditure and continued tight control of ongoing costs across all three businesses. This was partly offset by continuing price pressure, particularly in Respiratory, supply chain investments, the comparison with the benefit in Q2 2017 of a settlement for lost third party supply volume in Vaccines and investments in promotional product support, particularly for new launches in Respiratory, HIV and Vaccines, as well as a reduction in royalty income.
 
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 the quarter amounted to £185 million (Q2 2017: £143 million). This included cash payments made by ViiV Healthcare to Shionogi in relation to its contingent consideration liability (including preferential dividends) which amounted to £179 million (Q2 2017: £140 million).
 
Net finance costs
Net finance expense was £167 million compared with £177 million in Q2 2017. The reduction primarily reflected the maturity of older bonds refinanced at lower interest rates as well as the translation impact of exchange rate movements on the reported Sterling costs of foreign currency denominated interest-bearing instruments.
 
Taxation
The charge of £139 million represented an effective tax rate of 22.6% (Q2 2017: 51.7%) and reflected the differing tax effects of the various adjusting items.
 
Non-controlling interests
The allocation of earnings to non-controlling interests amounted to £34 million (Q2 2017: £94 million), including the non-controlling interest allocations of Consumer Healthcare profits of £28 million (Q2 2017: £57 million) for the period up to 3 May 2018 when the buyout of Novartis’ interest became unconditional, and the allocation of ViiV Healthcare losses of £13 million (Q2 2017: allocation of profits of £24 million). The allocation of ViiV Healthcare losses included the impact of changes in the proportions of preferential dividends due to each shareholder and higher re-measurement charges in the quarter.
 
Earnings per share
Total earnings per share was 9.0p, compared with a loss per share of 3.7p in Q2 2017. The increase in earnings per share primarily reflected the reduced impact of charges arising from increases in the valuation of the liabilities for contingent consideration, put options and preferential dividends, as well as reduced restructuring costs and asset impairments. In addition there was a favourable comparison with the impact of the Priority Review Voucher utilised and expensed in Q2 2017 and the non-cash charges in Q2 2017 relating to the progressive withdrawal of Tanzeum.
 
 
Adjusting items
GSK presents Total results and Adjusted results in order to assist shareholders in better understanding the Group’s operational performance. Adjusted results, which is a non-IFRS measure, may be considered in addition to, but not as a substitute for, or superior to, information presented in accordance with IFRS.
 
Total results represent the Group’s overall performance. However, these results can contain material unusual or non-operational items that may obscure the key trends and factors determining the Group’s operational performance. GSK therefore also reports Adjusted results to help shareholders identify and assess more clearly the Group’s performance. This approach aligns the presentation of the Group’s results more closely with the majority of GSK’s peer group.
 
Adjusted results exclude the following items from Total results: amortisation and impairments of intangible assets and goodwill; major restructuring costs (under specific Board approved programmes that are structural and of a significant scale), including integration costs following material acquisitions; significant legal charges and expenses; transaction-related accounting adjustments; disposals and other operating income other than royalty income, together with the tax effects of all of these items and the impact of the implementation of the US Tax Cuts and Jobs Act in 2017. Costs for all other ordinary course smaller scale restructuring and legal charges and expenses are retained within Total and Adjusted results.
 
The adjusting items that reconcile Total operating profit, profit after tax and earnings per share to Adjusted results are as follows:
 
 
Q2 2018
 
Q2 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating
profit
£m
 
Profit
after tax
£m
 
Earnings
per
share
p
 
Operating
(loss)/
profit
£m
 
(Loss)/
profit
after tax
£m
 
(Loss)/
earnings
per
share
p
 
 
 
 
 
 
 
 
 
 
 
 
Total results
779 
 
475 
 
9.0 
 
(20)
 
(86)
 
(3.7)
 
 
 
 
 
 
 
 
 
 
 
 
   Intangible asset amortisation
138 
 
114 
 
2.3 
 
153 
 
117 
 
2.4 
   Intangible asset impairment
28 
 
23 
 
0.4 
 
295 
 
198 
 
4.1 
   Major restructuring costs
158 
 
121 
 
2.5 
 
440 
 
290 
 
5.9 
   Transaction-related items
1,022 
 
825 
 
14.0 
 
1,226 
 
1,128 
 
21.5 
   Divestments, significant
      legal and other items
(23)
 
(7)
 
(0.1)
 
(11)
 
(146)
 
(3.0)
 
 
 
 
 
19.1 
 
 
 
 
 
 
   Adjusting items
1,323 
 
1,076 
 
19.1 
 
2,103 
 
1,587 
 
30.9 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted results
2,102 
 
1,551 
 
28.1 
 
2,083 
 
1,501 
 
27.2 
 
 
 
 
 
 
 
 
 
 
 
 
 
Full reconciliations between Total results and Adjusted results are set out on pages 64 to 67 and the definition of Adjusted results is set out on page 39.
 
 
Intangible asset amortisation and impairment
Intangible asset amortisation was £138 million, compared with £153 million in Q2 2017. There were also intangible asset impairments of £28 million (Q2 2017: £295 million) related to Pharmaceuticals R&D development assets, reflecting a favourable comparison with Q2 2017 which included an impairment related to the progressive withdrawal of Tanzeum and a number of other impairments to commercial assets. Both of these charges were non-cash items.
 
Major restructuring and integration
Major restructuring costs related to specific Board approved programmes that are structural and of a significant scale, including those integration costs following material acquisitions, are excluded from Adjusted results. Other ordinary course smaller scale restructuring costs are retained within Total and Adjusted results.
 
Major restructuring and integration charges incurred in the quarter under the existing combined programme were £158 million (Q2 2017: £440 million). Non-cash charges were £64 million (Q2 2017: £277 million) and cash charges were £94 million (Q2 2017: £163 million). Cash payments made in the quarter were £109 million (Q2 2017: £119 million) including the settlement of certain charges accrued in previous quarters. The programme delivered incremental annual cost savings in the quarter of £0.1 billion.
 
The Board has approved a new major restructuring programme, which is designed to significantly improve the competitiveness and efficiency of the Group’s cost base with savings delivered primarily through supply chain optimisation and reductions in administrative costs. The new programme is expected to cost £1.7 billion over the period to 2021, comprising cash costs of £0.8 billion and non-cash costs of £0.9 billion, and is expected to deliver annual savings of around £400 million by 2021. These savings will be fully re-invested in the Group to help fund targeted increases in R&D and commercial support of new products.
 
Transaction-related adjustments
Transaction-related adjustments resulted in a net charge of £1,022 million (Q2 2017: £1,226 million). This primarily reflected £953 million of accounting charges 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, the value attributable to the Consumer Healthcare Joint Venture put option held by Novartis and the liabilities for the Pfizer put option and Pfizer and Shionogi preferential dividends in ViiV Healthcare.
 
Charge/(credit)
Q2 2018
£m
 
Q2 2017
£m
 
 
 
 
Consumer Healthcare Joint Venture put option
163 
 
730 
Contingent consideration on former Shionogi-ViiV Healthcare Joint Venture
  (including Shionogi preferential dividends)
744 
 
298 
ViiV Healthcare put options and Pfizer preferential dividends
63 
 
66 
Contingent consideration on former Novartis Vaccines business
(17)
 
116 
Other adjustments
69 
 
16 
 
 
 
 
Total transaction-related charges
1,022 
 
1,226 
 
 
 
 
 
Following the agreement to acquire Novartis’ interest in the Consumer Healthcare Joint Venture announced on 27 March 2018, a net charge of £163 million was taken in the quarter, primarily representing £108 million of unwind of the discounted liability until settlement on 1 June 2018. Between 31 March 2018 and settlement, the liability increased by £0.5 billion due to movements in exchange rates but the additional charge to reflect this increase was largely offset by gains on hedging contracts.
 
The £744 million charge relating to the contingent consideration for the former Shionogi-ViiV Healthcare Joint Venture represented £644 million arising from updated exchange rate assumptions and changes to sales forecasts following the GEMINI study completed in Q2 2018, together with a £100 million unwind of the discount. A charge of £56 million relating to an increase in the put option liability to Pfizer reflected revised exchange rate assumptions on forecasts as well as adjustments to pipeline forecasts. Other adjustments included a £70 million charge reflecting the release of an indemnity asset relating to the tax treatment of inventory acquired as part of the Novartis Vaccines acquisition, with a corresponding offset in the tax charge.
 
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 the quarter amounted to £185 million (Q2 2017: £143 million). This included cash payments made by ViiV Healthcare to Shionogi in relation to its contingent consideration liability (including preferential dividends) which amounted to £179 million (Q2 2017: £140 million).
 
An explanation of the accounting for the non-controlling interests in ViiV Healthcare is set out on page 62.
 
Divestments, significant legal charges and other items
Divestments and other items included the profit on a number of asset disposals, equity investment impairments and certain other adjusting items. A charge of £12 million (Q2 2017: £6 million) for significant legal matters included the benefit of the settlement of existing matters as well as provisions for ongoing litigation. Significant legal cash payments were £7 million (Q2 2017: £42 million).
 
 
Adjusted results
GSK uses Adjusted results, which is a non-IFRS measure, to report the performance of the Group as it believes that it allows the key trends and factors in the Group’s performance to be more easily and clearly identified. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS.
 
 
Q2 2018
 
 
 
 
 
 
 
 
 
£m
 
% of
turnover
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
 
 
Turnover
7,310 
 
100 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(2,079)
 
(28.4)
 
 
Selling, general and administration
(2,334)
 
(31.9)
 
 
Research and development
(868)
 
(11.9)
 
(18)
 
(15)
Royalty income
73 
 
1.0 
 
(26)
 
(23)
 
 
 
 
 
 
 
 
Adjusted operating profit
2,102 
 
28.8 
 
 
 
 
 
 
 
 
 
 
Adjusted profit before tax
1,939 
 
 
 
 
Adjusted profit after tax
1,551 
 
 
 
 
10 
Adjusted profit attributable to shareholders
1,381 
 
 
 
 
11 
 
 
 
 
 
 
 
 
Adjusted earnings per share
28.1p
 
 
 
 
10 
 
 
 
 
 
 
 
 
 
Operating profit by business
Q2 2018
 
 
 
 
 
 
 
 
 
£m
 
% of
turnover
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
 
 
Pharmaceuticals
2,111 
 
49.9 
 
(2) 
 
Pharmaceuticals R&D*
(619)
 
 
 
(10)
 
(7)
 
 
 
 
 
 
 
 
Total Pharmaceuticals
1,492 
 
35.3 
 
 
Vaccines
357 
 
28.5 
 
(5)
 
Consumer Healthcare
352 
 
19.3 
 
 
13 
 
 
 
 
 
 
 
 
 
2,201 
 
30.1 
 
 
Corporate & other unallocated costs
(99)
 
 
 
19 
 
23 
 
 
 
 
 
 
 
 
Adjusted operating profit
2,102 
 
28.8 
 
 
 
 
 
 
 
 
 
 
 
* Operating profit of Pharmaceuticals R&D segment, which is the responsibility of the President, Pharmaceuticals R&D. It excludes ViiV Healthcare operating profit, which is reported within the Pharmaceuticals segment. A more detailed breakdown of R&D expenses is set out on page 36
 
Operating profit
Adjusted operating profit was £2,102 million, 1% higher than Q2 2017 at AER and 7% higher at CER on a turnover increase of 4% CER. The Adjusted operating margin of 28.8% was 0.3 percentage points higher at AER and 0.8 percentage points higher on a CER basis than in Q2 2017. This primarily reflected the impact of the Priority Review Voucher utilised and expensed in Q2 2017. The quarter also benefited from sales growth in all three businesses, a more favourable mix, the benefits of prioritisation of R&D expenditure and continued tight control of ongoing costs across all three businesses. This was partly offset by continuing price pressure, particularly in Respiratory, supply chain investments, the benefit of a settlement for lost third party supply volume in Vaccines in Q2 2017 and investments in promotional product support, particularly for new launches in Vaccines, Respiratory and HIV, as well as a reduction in royalty income.
 
Cost of sales
Cost of sales as a percentage of turnover was 28.4%, up 1.3 percentage points at AER, and up 0.8 percentage points at CER compared with Q2 2017, the growth of 7% in CER terms primarily reflected an adverse year-on-year comparison with the benefit of a settlement for lost third party supply volume in Q2 2017 in Vaccines, as well as continued adverse pricing pressure in Pharmaceuticals, particularly in Respiratory, and in Established Vaccines. This was partly offset by a more favourable product mix in Pharmaceuticals in the quarter, particularly the impact of higher HIV sales, and a further contribution from integration and restructuring savings in all three businesses.
 
Selling, general and administration
SG&A costs as a percentage of turnover were 31.9%, 0.6 percentage points higher at AER than in Q2 2017 and 0.7 percentage points higher on a CER basis. The 6% (at CER) increase in SG&A costs primarily reflected increased investment in promotional product support, particularly for new launches in Vaccines, Respiratory and HIV and targeted priority markets partly offset by tight control of ongoing costs, particularly in non-promotional spending across all three businesses.
 
Research and development
R&D expenditure was £868 million (11.9% of turnover), 18% AER lower than Q2 2017 and 15% lower on a CER basis, primarily reflecting a favourable comparison with the impact of the Priority Review Voucher in Q2 2017, but also the benefits of the prioritisation initiatives started in Q3 2017. This was partly offset by increased investment in the progression of a number of mid and late-stage programmes, particularly in Oncology.
 
Royalty income
Royalty income was £73 million (Q2 2017: £98 million), a reduction of 26% AER, 23% CER, primarily reflecting the patent expiry of Cialis.
 
Operating profit by business
Pharmaceuticals operating profit was £1,492 million, up 2% AER, 7% CER on a turnover increase of 1% CER. The operating margin of 35.3% was 1.7 percentage points higher at AER than in Q2 2017 and 2.1 percentage points higher on a CER basis. This primarily reflected the benefit of a favourable comparison with the impact of the Priority Review Voucher in Q2 2017. The Adjusted operating profit margin also reflected increased investment in new product support and the targeted priority markets and the continued impact of lower prices, particularly in Respiratory, and the reduction in royalty income partly offset by a more favourable product mix, primarily driven by the growth in HIV sales, as well as the benefits of prioritisation within R&D.
 
Vaccines operating profit was £357 million, 5% lower than Q2 2017 at AER but 3% higher at CER on a turnover increase of 16% CER. The operating margin of 28.5% was 5.2 percentage points lower than in Q2 2017 at AER and 4.0 percentage points lower on a CER basis. This was primarily driven by an unfavourable comparison with the benefit of a settlement for lost third party supply volume in Q2 2017, increased supply chain investments and increased SG&A resources particularly in support of the launch of Shingrix. This was partly offset by improved product mix and continued restructuring and integration benefits.
 
Consumer Healthcare operating profit was £352 million, up 7% AER, 13% CER, on a turnover increase of 3% CER. The operating margin of 19.3% was 1.6 percentage points higher than in Q2 2017 at AER, and 1.7 percentage points higher on a CER basis. This primarily reflected continued manufacturing restructuring and integration benefits and improved product mix as well as tight control of promotional and other operating expenses compared with Q2 2017.
 
Net finance costs
Net finance expense was £165 million compared with £176 million in Q2 2017. The reduction primarily reflected maturity of older bonds refinanced at lower interest rates as well as the translation impact of exchange rate movements on the reported Sterling costs of foreign currency denominated interest-bearing instruments.
 
Taxation
Tax on Adjusted profit amounted to £388 million and represented an effective Adjusted tax rate of 20.0% (Q2 2017: 21.2%). See ‘Taxation’ on page 53 for further details.
 
Non-controlling interests
The allocation of Adjusted earnings to non-controlling interests amounted to £170 million (Q2 2017: £174 million), including the non-controlling interest allocations of Consumer Healthcare profits of £16 million (Q2 2017: £80 million) for the period up to 3 May 2018 when the buyout of Novartis’ interest became unconditional, and the allocation of ViiV Healthcare profits of £135 million (Q2 2017: £81 million), including the impact of changes in the proportions of preferential dividends due to each shareholder based on the relative performance of different products in the quarter. Q2 2017 also included the non-controlling interest allocation of the costs of the Priority Review Voucher expensed in that quarter.
 
Earnings per share
Adjusted EPS of 28.1p was up 3% AER, 10% CER, compared with a 7% CER increase in Adjusted operating profit, primarily as a result of the reduced non-controlling interest allocation of Consumer Healthcare profits and a reduced Adjusted tax rate.
 
 
Financial performance – H1 2018
 
Total results
 
The Total results for the Group are set out below.
 
 
H1 2018
£m
 
H1 2017
£m
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
 
 
Turnover
14,532 
 
14,704 
 
(1)
 
 
 
 
 
 
 
 
 
Cost of sales
(4,701)
 
(5,132)
 
(8)
 
(6)
 
 
 
 
 
 
 
 
Gross profit
9,831 
 
9,572 
 
 
 
 
 
 
 
 
 
 
Selling, general and administration
(4,768)
 
(4,831)
 
(1)
 
Research and development
(1,829)
 
(2,220)
 
(18)
 
(14)
Royalty income
126 
 
180 
 
(30)
 
(28)
Other operating income/(expense)
(1,341)
 
(1,003)
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
2,019 
 
1,698 
 
19 
 
39 
 
 
 
 
 
 
 
 
Finance income
47 
 
36 
 
 
 
 
Finance expense
(356)
 
(386)
 
 
 
 
Profit on disposal of associates
- 
 
20 
 
 
 
 
Share of after tax profits of
  associates and joint ventures
11 
 
 
 
 
 
 
 
 
 
 
 
 
 
Profit before taxation
1,721 
 
1,372 
 
25 
 
49 
 
 
 
 
 
 
 
 
Taxation
(487)
 
(235)
 
 
 
 
Tax rate %
28.3%
 
17.1%
 
 
 
 
 
 
 
 
 
 
 
 
Profit after taxation
1,234 
 
1,137 
 
 
31 
 
 
 
 
 
 
 
 
Profit attributable to non-controlling
  interests
244 
 
271 
 
 
 
 
Profit attributable to shareholders
990 
 
866 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,234 
 
1,137 
 
 
31 
 
 
 
 
 
 
 
 
Earnings per share
20.2p
 
17.7p
 
14 
 
41 
 
 
 
 
 
 
 
 
 
Cost of sales
Cost of sales as a percentage of turnover was 32.3%, down 2.6 percentage points at AER and 3.4 percentage points in CER terms compared with H1 2017. This primarily reflected a favourable comparison with £363 million non-cash write downs of assets in H1 2017 related to the decision to withdraw Tanzeum progressively. The six months also benefited from a favourable product mix in Pharmaceuticals, particularly the impact of higher HIV sales, and a further contribution from integration and restructuring savings in all three businesses. This was partly offset by an adverse comparison with the benefit of a settlement for lost third party supply volume in Q2 2017 in Vaccines, as well as continued adverse pricing pressure in Pharmaceuticals, particularly in Respiratory, and in Established Vaccines.
 
Selling, general and administration
SG&A costs as a percentage of turnover were 32.8%, 0.1 percentage points lower than in H1 2017 at AER and 0.2 percentage points lower on a CER basis. This primarily reflected tight control of ongoing costs, particularly in non-promotional spending across all three businesses, and reduced major legal, restructuring and integration costs, partly offset by. increased investment in promotional product support, particularly for new launches in Respiratory, HIV and Vaccines.
 
Research and development
R&D expenditure was £1,829 million (12.6% of turnover), 18% lower than in H1 2017 at AER and 14% lower at CER. This reflected a favourable comparison with the impact of the Priority Review Voucher in H1 2017, as well as reduced restructuring costs primarily as a result of the provision for obligations as a result of the decision to withdraw Tanzeum progressively and the benefit of the prioritisation initiatives started in Q3 2017. This was partly offset by increased investment in the progression of a number of mid and late-stage programmes, particularly in Oncology.
 
Royalty income
Royalty income was £126 million (H1 2017: £180 million), primarily reflecting the patent expiry of Cialis.
 
Other operating income/(expense)
Net other operating expense of £1,341 million (H1 2017: £1,003 million) primarily reflected £1,369 million (H1 2017: £1,281 million) of accounting charges 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, the value attributable to the Consumer Healthcare Joint Venture put option previously held by Novartis and the liabilities for the Pfizer put option and Pfizer and Shionogi preferential dividends in ViiV Healthcare.
 
These charges were driven primarily by a £713 million re-measurement of the contingent consideration liability due to Shionogi, primarily related to changes in exchange rate assumptions and sales forecasts following the GEMINI study completed in Q2 2018. In addition, a net charge of £658 million reflected the re-measurement of the valuation of the Consumer Healthcare put option, together with movements in exchange rates largely offset by gains on hedging contracts.
 
Operating profit
Total operating profit was £2,019 million in H1 2018 compared with £1,698 million in H1 2017. The increase in operating profit primarily reflected reduced restructuring costs and asset impairments in comparison with the non-cash charges in H1 2017 relating to the progressive withdrawal of Tanzeum, as well as a favourable comparison from the impact of the Priority Review Voucher utilised and expensed in H1 2017. In addition, there was a contribution from sales growth on a CER basis in all three businesses, a more favourable mix, benefits from prioritisation of R&D expenditure and continued tight control of ongoing costs across all three businesses. This was partly offset by continuing price pressure, particularly in Respiratory, supply chain investments, the favourable comparison with a settlement for lost third party supply volume in Vaccines in H1 2017 and investments in new product support, particularly for launches in Respiratory, HIV and Vaccines, as well as a reduction in royalty income.
 
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 the six months amounted to £702 million (H1 2017: £303 million). This included a cash milestone paid to Novartis of $450 million (£317 million) as well as cash payments made by ViiV Healthcare to Shionogi in relation to its contingent consideration liability (including preferential dividends) which amounted to £376 million (H1 2017: £299 million).
 
Net finance costs
Net finance expense was £309 million compared with £350 million in H1 2017. The reduction reflected the benefit of a one-off accounting adjustment to the amortisation of long term bond interest charges of approximately £20 million, the maturity of older bonds refinanced at lower interest rates as well as the translation impact of exchange rate movements on the reported Sterling costs of foreign currency denominated interest-bearing instruments.
 
Taxation
The charge of £487 million represented an effective tax rate of 28.3% (H1 2017: 17.1%) and reflected the differing tax effects of the various adjusting items.
 
Non-controlling interests
The allocation of earnings to non-controlling interests amounted to £244 million (H1 2017: £271 million), including the non-controlling interest allocations of Consumer Healthcare profits of £117 million (H1 2017: £120 million) for the period up to 3 May 2018 when the buyout of Novartis’ interest became unconditional, and the allocation of ViiV Healthcare profits of £97 million (H1 2017: £126 million). The allocation of ViiV Healthcare profits included the impact of changes in the proportions of preferential dividends due to each shareholder and the impact of re-measurement charges.
 
Earnings per share
Total earnings per share was 20.2p, compared with 17.7p in H1 2017. The increase in earnings per share primarily reflected reduced restructuring costs and asset impairments in comparison with the non-cash charges in H1 2017 relating to the progressive withdrawal of Tanzeum, as well as a favourable comparison from the impact of the Priority Review Voucher utilised and expensed in H1 2017.
 
 
Adjusting items
GSK presents Total results and Adjusted results in order to assist shareholders in better understanding the Group’s operational performance. Adjusted results, which is a non-IFRS measure, may be considered in addition to, but not as a substitute for, or superior to, information presented in accordance with IFRS.
 
Total results represent the Group’s overall performance. However, these results can contain material unusual or non-operational items that may obscure the key trends and factors determining the Group’s operational performance. GSK therefore also reports Adjusted results to help shareholders identify and assess more clearly the Group’s performance. This approach aligns the presentation of the Group’s results more closely with the majority of GSK’s peer group.
 
Adjusted results exclude the following items from Total results: amortisation and impairments of intangible assets and goodwill; major restructuring costs under specific Board approved programmes that are structural and of a significant scale, including integration costs following material acquisitions; significant legal charges and expenses; transaction-related accounting adjustments; disposals and other operating income other than royalty income, together with the tax effects of all of these items and the impact of the implementation of the US Tax Cuts and Jobs Act in 2017. Costs for all other ordinary course smaller scale restructuring and legal charges and expenses are retained within the Adjusted results.
 
The adjusting items that reconcile Total operating profit, profit after tax and earnings per share to Adjusted results are as follows:
 
 
H1 2018
 
H1 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating
profit
£m
 
Profit
after tax
£m
 
Earnings
per
share
p
 
Operating
profit
£m
 
Profit
after tax
£m
 
Earnings
per
share
p
 
 
 
 
 
 
 
 
 
 
 
 
Total results
2,019 
 
1,234
 
20.2
 
1,698 
 
1,137 
 
17.7
 
 
 
 
 
 
 
 
 
 
 
 
   Intangible asset amortisation
287 
 
231
 
4.7
 
295 
 
228 
 
4.7 
   Intangible asset impairment
55 
 
46
 
0.9
 
339 
 
229 
 
4.7 
   Major restructuring costs
223 
 
170
 
3.5
 
606 
 
419 
 
8.6 
   Transaction-related items
1,459 
 
1,282
 
23.0
 
1,318 
 
1,194 
 
22.4 
   Divestments, significant legal
     and other items
(18)
 
19
 
0.4
 
(194)
 
(290)
 
(6.0)
 
 
 
 
 
 
 
 
 
 
 
 
   Adjusting items
2,006 
 
1,748
 
32.5
 
2,364 
 
1,780 
 
34.4 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted results
4,025 
 
2,982
 
52.7
 
4,062 
 
2,917 
 
52.1 
 
 
 
 
 
 
 
 
 
 
 
 
 
Full reconciliations between Total results and Adjusted results are set out on pages 64 to 67 and the definition of Adjusted results is set out on page 39.
 
Intangible asset amortisation and impairment
Intangible asset amortisation was £287 million, compared with £295 million in H1 2017. There were also lower intangible asset impairments of £55 million (H1 2017: £339 million) related to commercial and Pharmaceuticals R&D development assets, reflecting a favourable comparison with H1 2017 which included an impairment related to the progressive withdrawal of Tanzeum and a number of other impairments to commercial assets. Both of these charges were non-cash items.
 
Major restructuring and integration
Major restructuring costs related to specific Board approved programmes that are structural and of a significant scale, including those integration costs following material acquisitions, are excluded from Adjusted results. Other ordinary course smaller scale restructuring costs are retained within Total and Adjusted results.
 
Major restructuring and integration charges incurred in the six months were £223 million (H1 2017: £606 million). Non-cash charges were £81 million (H1 2017: £297 million) and cash charges were £142 million (H1 2017: £309 million). Cash payments made in the six months were £213 million (H1 2017: £332 million) including the settlement of certain charges accrued in previous quarters. The programme delivered incremental annual cost savings in the six months of £0.2 billion.
 
Charges for the combined restructuring and integration programme to date are £5.0 billion, of which cash charges were £3.6 billion. Cash payments of £3.3 billion have been made to date. Non-cash charges were £1.4 billion.
 
Estimated charges for 2018 under the existing programmes are £0.5 billion, with cash charges of around £0.3 billion and non-cash charges of around £0.2 billion.
 
Total cash charges for the existing programme are now expected to be approximately £4.1 billion with non-cash charges up to £1.6 billion. The programme has now delivered approximately £3.8 billion of annual savings, including a currency benefit of £0.4 billion. The programme is now expected to deliver by 2020 total annual savings of £4.0 billion on a constant currency basis, together with an estimated benefit of £0.4 billion from currency on the basis of H1 2018 average exchange rates.
 
The Board has approved a new major restructuring programme, which is designed to significantly improve the competitiveness and efficiency of the Group’s cost base with savings delivered primarily through supply chain optimisation and reductions in administrative costs. The new programme is expected to cost £1.7 billion over the period to 2021, comprising cash costs of £0.8 billion and non-cash costs of £0.9 billion, and is expected to deliver annual savings of around £400 million by 2021. These savings will be fully re-invested in the Group to help fund targeted increases in R&D and commercial support of new products.
 
Estimated charges under the new programme for 2018 are £0.4 billion, with cash charges of around £0.3 billion and non-cash charges of around £0.1 billion.
 
Transaction-related adjustments
Transaction-related adjustments resulted in a net charge of £1,459 million (H1 2017: £1,318 million). This primarily reflected £1,369 million of accounting charges 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, the value attributable to the Consumer Healthcare Joint Venture put option held by Novartis and the liabilities for the Pfizer put option and Pfizer and Shionogi preferential dividends in ViiV Healthcare.
 
Charge/(credit)
H1 2018
£m
 
H1 2017
£m
 
 
 
 
Consumer Healthcare Joint Venture put option
658 
 
851 
Contingent consideration on former Shionogi-ViiV Healthcare Joint Venture
  (including Shionogi preferential dividends)
713 
 
346 
ViiV Healthcare put options and Pfizer preferential dividends
2 
 
(48)
Contingent consideration on former Novartis Vaccines business
(4)
 
131 
Other adjustments
90 
 
38 
 
 
 
 
Total transaction-related charges
1,459 
 
1,318 
 
 
 
 
 
A net charge of £658 million relating to the Consumer Healthcare Joint Venture represented the re-measurement of the valuation of the Consumer Healthcare put option to the agreed undiscounted valuation of $13 billion (£9.2 billion on signing), together with an increase due to movements in exchange rates, largely offset by gains on hedging contracts.
 
The £713 million charge taken relating to the contingent consideration for the former Shionogi-ViiV Healthcare Joint Venture represented a £512 million increase in the valuation of the contingent consideration due to Shionogi, primarily as a result of updated exchange rate assumptions and sales forecasts following the GEMINI study completed in Q2 2018, together with a £201 million unwind of the discount.
 
Other adjustments included a £70 million charge reflecting the release of an indemnity asset relating to the tax treatment of inventory acquired as part of the Novartis Vaccines acquisition, with a corresponding offset in tax.
 
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 the six months amounted to £702 million (H1 2017: £303 million). This included a cash milestone paid to Novartis of $450 million (£317 million) as well as cash payments made by ViiV Healthcare to Shionogi in relation to its contingent consideration liability (including preferential dividends) which amounted to £376 million (H1 2017: £299 million).
 
An explanation of the accounting for the non-controlling interests in ViiV Healthcare is set out on page 62.
 
Divestments, significant legal charges and other items
Divestments and other items included the profit on a number of asset disposals, equity investment impairments and certain other adjusting items. A charge of £17 million (H1 2017: £61 million) for significant legal matters included the benefit of the settlement of existing matters as well as provisions for ongoing litigation. Significant legal cash payments were £12 million (H1 2017: £47 million).
 
 
Adjusted results
GSK uses Adjusted results, which is a non-IFRS measure, to report the performance of the Group. as it believes that it allows the key trends and factors in the Group’s performance to be more easily and clearly identified Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS
 
 
H1 2018
 
 
 
 
 
 
 
 
 
£m
 
% of
turnover
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
 
 
Turnover
14,532 
 
100 
 
(1)
 
 
 
 
 
 
 
 
 
Cost of sales
(4,258)
 
(29.3)
 
 
Selling, general and administration
(4,620)
 
(31.8)
 
 
Research and development
(1,755)
 
(12.1)
 
(11)
 
(7)
Royalty income
126 
 
0.9 
 
(30)
 
(28)
 
 
 
 
 
 
 
 
Adjusted operating profit
4,025 
 
27.7 
 
(1)
 
 
 
 
 
 
 
 
 
Adjusted profit before tax
3,732 
 
 
 
 
Adjusted profit after tax
2,982 
 
 
 
 
12 
Adjusted profit attributable to shareholders
2,588 
 
 
 
 
11 
 
 
 
 
 
 
 
 
Adjusted earnings per share
52.7p
 
 
 
 
11 
 
 
 
 
 
 
 
 
 
Operating profit by business
H1 2018
 
 
 
 
 
 
 
 
 
£m
 
% of
turnover
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
 
 
Pharmaceuticals
4,052 
 
49.2 
 
(5) 
 
Pharmaceuticals R&D*
(1,231)
 
 
 
(10)
 
(5)
 
 
 
 
 
 
 
 
Total Pharmaceuticals
2,821 
 
34.2 
 
(3)
 
Vaccines
696 
 
27.9 
 
(3)
 
10 
Consumer Healthcare
736 
 
19.4 
 
 
15 
 
 
 
 
 
 
 
 
 
4,253 
 
29.3 
 
(1)
 
Corporate & other unallocated costs
(228)
 
 
 
(3)
 
(11)
 
 
 
 
 
 
 
 
Adjusted operating profit
4,025 
 
27.7 
 
(1)
 
 
 
 
 
 
 
 
 
 
* Operating profit of Pharmaceuticals R&D segment, which is the responsibility of the President, Pharmaceuticals R&D. It excludes ViiV Healthcare operating profit, which is reported within the Pharmaceuticals segment. A more detailed breakdown of R&D expenses is set out on page 36
 
Operating profit
Adjusted operating profit was £4,025 million, 1% AER lower than in H1 2017 but 8% CER higher on a turnover increase of 4%. The Adjusted operating margin of 27.7% was 0.1 percentage points higher at AER than in H1 2017 and 1.1 percentage points higher on a CER basis. This primarily reflected the impact of the Priority Review Voucher utilised and expensed in H1 2017. Operating profit also benefited from sales growth in all three businesses, a more favourable mix, the benefits of prioritisation of R&D expenditure and continued tight control of ongoing costs across all three businesses. This was partly offset by continuing price pressure, particularly in Respiratory, supply chain investments, the comparison with the benefit in Q2 2017 of a settlement for lost third party supply volume in Vaccines and investments in promotional product support, particularly for new launches in Respiratory, HIV and Vaccines, as well as a reduction in royalty income.
 
Cost of sales
Cost of sales as a percentage of turnover was 29.3%, up 0.7 percentage points at AER, but down 0.1 percentage points in CER terms compared with H1 2017. This primarily reflected a more favourable product mix in Pharmaceuticals, particularly the impact of higher HIV sales as well as a further contribution from integration and restructuring savings in all three businesses, offset by an adverse comparison with the benefit of a settlement for lost third party supply volume in H1 2017 in Vaccines, as well as continued adverse pricing pressure in Pharmaceuticals, particularly in Respiratory, and in Established Vaccines.
 
Selling, general and administration
SG&A costs as a percentage of turnover were 31.8%, 0.2 percentage points higher at AER than in H1 2017 but flat on a CER basis. The 4% (CER) increase primarily reflected increased investment in promotional product support, particularly for new launches in Respiratory, HIV and Vaccines, offset by tight control of ongoing costs, particularly in non-promotional spending across all three businesses.
 
Research and development
R&D expenditure was £1,755 million (12.1% of turnover),11% AER lower than H1 2017 and 7% lower on a CER basis, primarily reflecting the comparison with the impact of the Priority Review Voucher in H1 2017, as well as the benefit of the prioritisation initiatives started in Q3 2017. This was partly offset by increased investment in the progression of a number of mid and late-stage programmes, particularly in Oncology.
 
Royalty income
Royalty income was £126 million (H1 2017: £180 million), primarily reflecting the patent expiry of Cialis.
 
Operating profit by business
Pharmaceuticals operating profit was £2,821 million, down 3% AER but up 4% CER on a turnover increase of 1% CER. The operating margin of 34.2% was 0.2 percentage points higher at AER than in H1 2017 and 0.8 percentage points higher on a CER basis. This primarily reflected the favourable comparison with the impact of the Priority Review Voucher in H1 2017, as well as a more favourable product mix, primarily driven by the growth in HIV sales, as well as benefits of prioritisation within R&D. This was offset by increased investment in new product support and the continued impact of lower prices, particularly in Respiratory, and the broader transition of the Respiratory portfolio as well as the reduction in royalty income.
 
Vaccines operating profit was £696 million, 3% AER lower than in H1 2017 and 10% higher at CER on a turnover increase of 14% CER. The operating margin of 27.9% was 3.7 percentage points lower at AER than in H1 2017 and 1.2 percentage points lower on a CER basis. This was primarily driven by an unfavourable comparison with the benefit of a settlement for lost third party supply volume recorded in H1 2017, increased supply chain costs, and increased SG&A resources to support new launches and business growth. This was partly offset by improved product mix and continued restructuring and integration benefits.
 
Consumer Healthcare operating profit was £736 million, up 8% AER and 15% CER higher on a turnover increase of 2% CER. The operating margin of 19.4% was 2.0 percentage points higher than in H1 2017 and 2.2 percentage points higher on a CER basis. This primarily reflected continued manufacturing restructuring and integration benefits and improved product mix as well as tight control of promotional and other operating expenses.
 
Net finance costs
Net finance expense was £304 million compared with £345 million in H1 2017. The reduction primarily reflected the benefit of a one-off accounting adjustment to the amortisation of long term bond interest charges of £20m in Q1 2018, the maturity of older bonds refinanced at lower interest rates as well as the translation impact of exchange rate movements on the reported Sterling costs of foreign currency denominated interest-bearing instruments.
 
Taxation
Tax on Adjusted profit amounted to £750 million and represented an effective Adjusted tax rate of 20.1% (H1 2017: 21.6%). See ‘Taxation’ on page 53 for further details.
 
Non-controlling interests
The allocation of Adjusted earnings to non-controlling interests amounted to £394 million (H1 2017: £373 million), including the non-controlling interest allocations of Consumer Healthcare profits of £118 million (H1 2017: £154 million) for the period up to 3 May 2018 when the buyout of Novartis’ interest became unconditional, and the allocation of ViiV Healthcare profits, of £246 million (H1 2017: £194 million) including the impact of changes in the proportions of preferential dividends due to each shareholder based on the relative performance of different products in the six months. H1 2017 also included the non-controlling interest allocation of the Priority Review Voucher expensed in the six months.
 
Earnings per share
Adjusted EPS of 52.7p was up 1% AER, 11% CER, compared with an 8% CER increase in Adjusted operating profit, primarily as a result of a reduced non-controlling interest allocation of Consumer Healthcare profits and a reduced Adjusted tax rate.
 
Currency impact on Q2 2018 and H1 2018 results
The Q2 2018 results are based on average exchange rates, principally £1/$1.35, £1/€1.15 and £1/Yen 147. Comparative exchange rates are given on page 54. The period-end exchange rates were £1/$1.32, £1/€1.13 and £1/Yen 146.
 
In the quarter, turnover was flat in AER terms but increased 4% CER. Total EPS was 9.0p compared with a loss per share of 3.7p in Q2 2017 and Adjusted EPS was 28.1p compared with 27.2p in Q2 2017, up 3% AER, and up 10% CER. The negative currency impact primarily reflected the strength of Sterling, particularly against the US$ and Yen, relative to Q2 2017. Exchange gains or losses on the settlement of intercompany transactions had a negligible impact of the negative currency impact of seven percentage points on Adjusted EPS.
 
In H1 2018, turnover reduced 1% in AER terms but increased 4% CER. Total EPS was 20.2p compared with EPS of 17.7p in H1 2017 and Adjusted EPS was 52.7p compared with 52.1p in H1 2017, up 1% AER, and up 11% CER. The negative currency impact primarily reflected the strength of Sterling, particularly against the US$ and Yen, relative to H1 2017. Exchange gains or losses on the settlement of intercompany transactions had less than one percentage point negative impact of the negative currency impact of ten percentage points on Adjusted EPS.
 
 
Cash generation and conversion
 
Cash flow and net debt
 
 
Q2 2018
 
H1 2018
 
H1 2017
(revised)
 
 
 
 
 
 
Net cash inflow from operating activities (£m)
1,362
 
2,225
 
2,152
Free cash flow* (£m)
492
 
821
 
386
Free cash flow growth (%)
>100
 
>100
 
>100
Free cash flow conversion* (%)
>100
 
83
 
45
Net debt** (£m)
23,935
 
23,935
 
14,800
 
*
Free cash flow and free cash flow conversion are defined on page 39.
**
Net debt is analysed on page 61.
 
Q2 2018
The net cash inflow from operating activities for the quarter was £1,362 million (Q2 2017: £1,008 million). The increase primarily reflected improved operating profits and the phasing of payments for returns and rebates, partly offset by a negative currency impact on operating profit and increased working capital, primarily reflecting a larger increase in seasonal and other inventories compared with Q2 2017 particularly related to new launches, as well as increased receivables following recent sales growth.
 
Total cash payments to Shionogi in relation to the ViiV Healthcare contingent consideration liability in the quarter were £179 million, of which £158 million was recognised in cash flows from operating activities and £21 million was recognised in contingent consideration paid within investing cash flows. These payments are deductible for tax purposes.
 
With the introduction of the new R&D strategy, GSK has revised its definition of free cash flow to include proceeds from disposals of intangible assets, as set out on page 39. Comparative figures have been revised accordingly. Free cash flow was £492 million for the quarter, including proceeds from disposals of intangible assets of £18 million (Q2 2017: £264 million outflow, including proceeds from disposals of intangible assets of £18 million). The increase primarily reflected improved operating profit, the favourable timing of payments for returns and rebates, lower capital expenditure and the favourable comparison to the impact of the Priority Review Voucher in Q2 2017 as well as reduced dividend payments to non-controlling interests. This was partly offset by a negative currency impact on operating profit and increased working capital, primarily reflecting a larger increase in seasonal and other inventories compared with Q2 2017 particularly related to new product launches as well as increased receivables following recent sales growth.
 
H1 2018
The net cash inflow from operating activities for the six months was £2,225 million (H1 2017: £2,152 million). The increase primarily reflected improved operating profits, reduced restructuring payments and the phasing of payments for returns and rebates, partly offset by a negative currency impact on operating profit and increased working capital, primarily reflecting a larger increase in seasonal and other inventories compared with H1 2017 particularly related to new launches, as well as increased receivables following recent sales growth.
 
Total cash payments to Shionogi in relation to the ViiV Healthcare contingent consideration liability in the quarter were £376 million, of which £332 million was recognised in cash flows from operating activities and £44 million was recognised in contingent consideration paid within investing cash flows. These payments are deductible for tax purposes.
 
Free cash flow was £821 million for the six months, including proceeds from disposals of intangible assets of £23 million (H1 2017: £386 million, including proceeds from disposals of intangible assets of £18 million). The increase primarily reflected improved operating profits, reduced restructuring payments, favourable timing of payments for returns and rebates, lower capital expenditures including the favourable comparison to the impact of the Priority Review Voucher in Q2 2017 as well as reduced dividend payments to non-controlling interests. This was partly offset by a negative currency impact on operating profit, increased contingent consideration payments including the $450 million (£317 million) milestone to Novartis in Q1 2018 and increased working capital reflecting a larger increase in seasonal and other inventories compared with H1 2017 particularly related to new product launches, as well as increased receivables following recent sales growth.
 
Net debt
At 30 June 2018, net debt was £23.9 billion, compared with £13.2 billion at 31 December 2017, comprising gross debt of £28.0 billion and cash and liquid investments of £4.1 billion. Net debt increased due to the £9.3 billion acquisition from Novartis of its stake in the Consumer Healthcare Joint Venture in June 2018, an unfavourable exchange impact of £0.4 billion from the translation of non-Sterling denominated debt, and dividends paid to shareholders of £2.1 billion, partly offset by increased free cash flow of £0.8 billion including the milestone payment to Novartis.
 
At 30 June 2018, GSK had short-term borrowings (including overdrafts) repayable within 12 months of £3.5 billion with loans of £2.0 billion repayable in the subsequent year.
 
Working capital
 
 
30 June
2018
 
31 March
2018
 
30 December
2017
 
30 September
2017
 
30 June
2017
 
 
 
 
 
 
 
 
 
 
Working capital conversion cycle* (days)
223
 
204
 
191
 
210
 
207
Working capital percentage of turnover (%)
26
 
24
 
22
 
25
 
24
 
 
 
 
 
 
 
 
 
 
 
*
Working capital and working capital conversion cycle are defined on page 39.
 
The increase of 19 days in Q2 2018 primarily reflected seasonal and other inventory build behind recent launches, as well as an increase in trade receivables as a result of recent sales growth, particularly of new launches. It also reflects a reduced denominator due to lower restructuring and impairment costs in 2018 and an increase of two days as a result of exchange rates.
 
The increase of 16 days compared with June 2017 primarily reflected the increase in trade receivables as a result of recent sales growth, particularly of new launches, as well as the full year impact of the building of inventory for new product launches. In addition, it was also impacted by the reduced denominator due to lower restructuring and impairment costs in 2018 and an increase due to exchange rates (compared with a five day reduction impacting June 2017).
 
 
Returns to shareholders
 
Quarterly dividends
The Board has declared a second interim dividend for 2018 of 19 pence per share (Q2 2017: 19 pence per share).
 
GSK recognises the importance of dividends to shareholders and aims to distribute regular dividend payments that will be determined primarily with reference to the free cash flow generated by the business after funding the investment necessary to support the Group’s future growth.
 
The Board intends to maintain the dividend for 2018 at the current level of 80p per share, subject to any material change in the external environment or performance expectations. Over time, as free cash flow strengthens, it intends 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.
 
Payment of dividends
The equivalent interim dividend receivable by ADR holders will be calculated based on the exchange rate on 9 October 2018. An annual fee of $0.02 per ADS (or $0.005 per ADS per quarter) is charged by the Depositary.
 
The ex-dividend date will be 9 August 2018, with a record date of 10 August 2018 and a payment date of 11 October 2018.
 
 
Paid/
payable
 
Pence per
share
 
£m
 
 
 
 
 
 
2018
 
 
 
 
 
First interim
12 July 2018
 
19
 
934
Second interim
11 October 2018
 
19
 
934
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
First interim
13 July 2017
 
19
 
928
Second interim
12 October 2017
 
19
 
929
Third interim
11 January 2018
 
19
 
929
Fourth interim
12 April 2018
 
23
 
1,130
 
 
 
 
 
 
 
 
 
80
 
3,916
 
 
 
 
 
 
 
GSK made no share repurchases during the quarter. The company issued 0.9 million shares under employee share schemes for proceeds of £12 million (Q2 2017: £13 million).
 
The weighted average number of shares for Q2 2018 was 4,914 million, compared with 4,887 million in Q2 2017.
 
 
Research and development
 
GSK remains focused on delivering an improved return on its investment in R&D. Sales contribution, reduced attrition, cost reduction and time to market are all important drivers of an improving internal rate of return. R&D expenditure is not determined as a percentage of sales but instead capital is allocated using strict returns based criteria depending on the pipeline opportunities available.
 
The R&D operations in Pharmaceuticals are broadly split into Discovery activities and Development work, each supported by specific and common infrastructure and other shared services where appropriate. The new R&D strategy has redefined the allocation of costs between Discovery and Development such that Discovery now includes all phase I activities and Development includes phase II activities onwards. Previously phase IIa activities were included within Discovery. In addition, the methodology of allocating projects by phase has been revised. Comparative information has been revised accordingly. The impact on Q2 2017 was to increase Discovery costs by £22 million and Facilities and central support functions costs by £7 million and reduce Development costs by £29 million. The impact on H1 2017 was to increase Discovery costs by £7 million and Facilities and central support functions costs by £13 million and reduce Development costs by £20 million. R&D expenditure for Q2 2018 and H1 2018 is analysed below.
 
 
Q2 2018
£m
 
Q2 2017
(revised)
£m
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
 
 
Discovery
203
 
281
 
(28)
 
(25)
Development
300
 
422
 
(29)
 
(27)
Facilities and central support functions
138
 
137
 
1
 
4
 
 
 
 
 
 
 
 
Pharmaceuticals
641
 
840
 
(24)
 
(21)
Vaccines
172
 
160
 
 
Consumer Healthcare
55
 
53
 
 
 
 
 
 
 
 
 
 
Adjusted R&D
868
 
1,053
 
(18)
 
(15)
Amortisation and impairment of
  intangible assets
35
 
27
 
 
 
 
Major restructuring costs
20
 
170
 
 
 
 
Other items
2
 
10
 
 
 
 
 
 
 
 
 
 
 
 
Total Research and development
925
 
1,260
 
(27)
 
(25)
 
 
 
 
 
 
 
 
 
 
H1 2018
£m
 
H1 2017
(revised)
£m
 
Growth
£%
 
Growth
CER%
 
 
 
 
 
 
 
 
Discovery
401
 
516
 
(22)
 
(19)
Development
622
 
756
 
(18)
 
(13)
Facilities and central support functions
284
 
290
 
(2)
 
3
 
 
 
 
 
 
 
 
Pharmaceuticals
1,307
 
1,562
 
(16)
 
(12)
Vaccines
333
 
296
 
13 
 
13 
Consumer Healthcare
115
 
114
 
 
 
 
 
 
 
 
 
 
Adjusted R&D
1,755
 
1,972
 
(11)
 
(7)
Amortisation and impairment of
  intangible assets
45
 
47
 
 
 
 
Major restructuring costs
23
 
185
 
 
 
 
Other items
6
 
16
 
 
 
 
 
 
 
 
 
 
 
 
Total Research and development
1,829
 
2,220
 
(18)
 
(14)
 
 
 
 
 
 
 
 
 
In Q2 2018, Adjusted R&D expenditure declined 18% AER, 15% CER, with Pharmaceuticals down 24% AER, 21% CER primarily reflecting a favourable comparison with the impact of the Priority Review Voucher in Q2 2017. The decline in Discovery primarily reflected the phasing of expenditure on specific programmes, including the transfer of certain oncology assets into the development phase. The increase in Vaccines R&D primarily reflected the benefit of comparison with favourable phasing of expenditure in Q2 2017.
 
R&D pipeline
 
Pipeline news flow since Q1 2018:
 
Vaccines
Our Vaccines business is one of the largest in the world with the broadest portfolio of any company. The focus of GSK Vaccines pipeline is to maintain GSK’s meningococcal meningitis market leadership with both licensed and candidate vaccines. In addition, we are pursuing a full RSV portfolio for infants, older adults and maternal immunisation, with different approaches tailored to the specific segments. This portfolio has the potential to deliver a series of first and/or best in class vaccines. In addition, we continue to leverage our unique technology platforms to target new, emerging or remaining medical needs.
 
Bexsero
On 27 June 2018, GSK announced that the European Commission had approved an alternative Bexsero immunisation schedule requiring one less injection.
 
 
Respiratory
GSK has led the way in developing innovative medicines to advance the management of asthma and COPD for nearly 50 years. Over the last five years we have launched six innovative medicines responding to continued unmet patient need, despite existing therapies. This is an industry-leading portfolio in terms of breadth, depth and innovation, and we continue to invest to ensure we can bring the right medicines to the right patients globally.
 
Trelegy Ellipta
On 29 May 2018, GSK and Innoviva announced the submission of a regulatory application to the Japanese Ministry of Health, Labour and Welfare for once-daily Trelegy Ellipta for adults with COPD. This is the first regulatory filing to be made in Japan for a triple COPD therapy in a single inhaler;
 
 
On 30 May 2018, Trelegy Ellipta was filed in China for the treatment of adults with COPD.
 
Nucala
On 21 May 2018, GSK presented new data from the longest study of an anti-IL5 biologic treatment in severe eosinophilic asthma to be reported. The study showed consistent reductions in exacerbations and improvements in asthma control, with a safety profile similar to previous clinical studies, in severe eosinophilic asthma patients treated with Nucala over the long-term study period;
 
 
In May 2018, Nucala was approved in Japan for eosinophilic granulomatosis and polyangiitis (EGPA).
 
 
Arnuity Ellipta
On 21 May 2018, GSK announced US approval of Arnuity Ellipta for use in children from 5 years old who suffer from asthma.
 
HIV/Infectious diseases
GSK has a long-standing commitment to HIV and infectious diseases – our scientists discovered amoxycillin, the widely used antibiotic, over 40 years ago, and developed the first medicines approved to treat HIV (AZT), HBV (lamivudine), herpes viruses (acyclovir) and influenza (zanamivir). Today, we are investigating new medicines to treat, prevent and possibly, ultimately cure HIV and other infectious diseases. Our scientists are committed to developing medicines that advance HIV care by exploring new treatment paradigms (2-drug regimens), new modalities (long-acting injectables) and new mechanisms of actions (including maturation inhibitors and broadly neutralising antibodies).
 
Juluca
On 21 May 2018, ViiV Healthcare announced that the European Committee had granted marketing authorisation for Juluca (dolutegravir/rilpivirine) for the treatment of HIV. Juluca regulatory approvals were also received from Health Canada in May and from the Australian Therapeutic Goods Administration in June.
 
On 24 July 2018, ViiV Healthcare presented the SWORD 100-week data for Juluca at the International AIDS Conference in Amsterdam.
 
Dolutegravir + lamivudine
On 14 June 2018, ViiV Healthcare reported positive headline results from its phase III GEMINI study programme. The studies are designed to evaluate the safety and efficacy of a two-drug regimen (DTG+3TC) compared with a three-drug regimen (DTG+TDF+FTC) in treatment naive HIV-1 infected adults with baseline viral loads less than 500,000 copies per ml. The studies met their primary endpoint for non-inferiority and no patient who experienced virologic failure in either treatment arm developed treatment-emergent resistance.
 
 
On 24 July 2018, ViiV Healthcare presented the 48 week GEMINI 1 and 2 studies at the International AIDS Conference in Amsterdam.
 
 
Immuno-inflammation
Immuno-inflammatory diseases are relatively common, chronic, debilitating conditions. While diverse in presentation, they are collectively hallmarked by impairment of quality of life and can lead to premature mortality. There is significant unmet need for improved treatment options for immuno-inflammatory diseases.
 
Benlysta
On 13 June 2018, GSK announced results from two new analyses showing low rates of organ damage progression in patients with active systemic lupus erythematosus (SLE) treated with Benlysta. These data were presented at the 2018 Annual European College of Rheumatology (EULAR).
 
 
Benlysta phase II data in paediatric patients with childhood-onset systemic lupus erythematosus are in house and were consistent with the adult IV and subcutaneous Benlysta studies. These data are expected to be presented at a future scientific congress.
 
Tapinarof
On 12 July 2018, GSK announced an agreement with Roivant Sciences and Dermavant Sciences to divest tapinarof for the treatment of psoriasis and atopic dermatitis and back-up programmes for a total consideration of £250 million, including an initial payment of £150 million and a potential future milestone payment of £100 million.
 
 
3196165 (anti-GM-CSF)
Positive phase IIb results for GSK3196165 in rheumatoid arthritis are expected to be presented at a future scientific congress. The Osteoarthritis indication has been terminated.
 
Oncology
Cancer is one of the leading causes of death in the developed world. GSK is focused on delivering transformational therapies for cancer patients that may help to maximise their survival. GSK’s pipeline is focused on immuno-oncology, cell therapy, and epigenetics. Our goal is to achieve a sustainable flow of new treatments for cancer patients based on a diversified portfolio of investigational medicines utilising modalities such as small molecules, antibodies, multi-specific molecules, adjuvants and cells, either alone or in combination.
 
2857916 (BCMA antibody-drug conjugate)
In July 2018, the first potential medicine from GSK’s emerging oncology pipeline advanced to late-stage development with the start of DREAMM-2, the pivotal phase II study for GSK ‘916 in 4L relapsed/ refractory multiple myeloma. Announced initial 2L study, for use in combination with standard of care, to start in H2 2018.
 
 
3377794 (NY-ESO T-cell therapy)
On 24 July 2018, GSK and Adaptimmune announced the transition of the development programme for GSK 3377794 , an NY-ESO SPEAR T-cell therapy, to GSK. As a result of the transition, GSK assumes full responsibility for future research, development, and potential commercialisation of this pioneering therapy, and Adaptimmune will receive $27.5 million (£21.2 million) from GSK.
 
 
Other
 
 
Daprodustat
In June 2018, enrolment completed in GSK’s phase III ASCEND-D study of daprodustat (HIF-PHI) in dialysis patients with anaemia associated with chronic kidney disease.
 
 
Tafenoquine
On 20 July 2018, GSK and Medicines for Malaria Venture announced that the US FDA had approved, under priority review, single dose Krintafel (tafenoquine) for the radical cure of P. vivax malaria, the first new medicine for this indication in 60 years.
 
 
Reporting definitions
 
GSK uses a number of adjusted, non-IFRS, measures to report the performance of its business. These measures are used by management for planning and reporting purposes and in discussions with and presentations to investment analysts and rating agencies and may not be directly comparable with similarly described measures used by other companies. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS.
 
Total results
Total reported results represent the Group’s overall performance. However, these results can contain material unusual or non-operational items that may obscure the key trends and factors determining the Group’s operational performance. As a result, GSK also reports Adjusted results, which is a non-IFRS measure.
 
Adjusted results
GSK believes that Adjusted results allow the key trends and factors driving the Group’s performance to be more easily and clearly identified by shareholders. The definition of Adjusted results, as set out below, also aligns the Group’s results with the majority of its peer companies and how they report earnings.
 
Adjusted results exclude the following items from Total results: amortisation and impairment of intangible assets (excluding computer software) and goodwill; major restructuring costs,(under specific Board approved programmes that are structural and of a significant scale), including those integration costs following material acquisitions; significant legal charges (net of insurance recoveries) and expenses on the settlement of litigation and government investigations, transaction-related accounting adjustments for significant acquisitions, and other items, including disposals of associates, products and businesses and other operating income other than royalty income, together with the tax effects of all of these items and the impact of the enactment of the US Tax Cuts and Jobs Act in 2017. Costs for all other ordinary course smaller scale restructuring and legal charges and expenses are retained within Total and Adjusted results.
 
As Adjusted results may exclude significant costs, such as those from major restructuring programmes or significant legal charges, they should not be regarded as a complete picture of the Group’s financial performance which is presented in its Total results.
 
Reconciliations between Total and Adjusted results, as set out on pages 19, 27 and 64 to 67, including detailed breakdowns of the key adjusting items, are provided to shareholders to ensure full visibility and transparency as they assess the Group’s performance.
 
Free cash flow
With the introduction of the new R&D strategy in Q2 2018, GSK has revised its definition of free cash flow, a non-IFRS measure, to include proceeds from the sale of intangible assets. This balances with the expenditure on purchases of intangible assets, which is deducted in calculating free cash flow, and makes the treatment of intangible assets consistent with property, plant and equipment. Free cash flow is now defined as the net cashinflow from operating activities less capital expenditure on property, plant and equipment and intangible assets, contingent consideration payments, net interest, and dividends paid to non-controlling interests plus proceeds from the sale of property, plant and equipment and intangible assets, and dividends received from joint ventures and associates. It is used by management for planning and reporting purposes and in discussions with and presentations to investment analysts and rating agencies. Free cash flow growth is calculated on a reported basis. A reconciliation of net cash inflow from operations to free cash flow is set out on page 61.
 
Free cash flow conversion
Free cash flow conversion is free cash flow as a percentage of earnings.
 
Working capital
Working capital represents inventory and trade receivables less trade payables.
 
Working capital conversion cycle
The working capital conversion cycle is calculated as the number of days sales outstanding plus days inventory outstanding, less days purchases outstanding.
 
CER and AER 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. CER% represents growth at constant exchange rates. £% or AER% represents growth at actual exchange rates.
 
 
 
Outlook assumptions and cautionary statements
 
Assumptions related to 2018 guidance and 2016-2020 outlook
In outlining the expectations for 2018 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 and earnings expectations assume no material interruptions to supply of the Group’s products and no material mergers, acquisitions, disposals, litigation costs or share repurchases for 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 2018 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.
 
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 today. 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, and following the enactment of US tax reform, the Group’s medium-term effective tax rate is expected to be in the region of 19-20% 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.
 
Assumptions and cautionary statement regarding forward-looking statements
The Group’s management believes that the assumptions outlined above are reasonable, and that the aspirational targets described in this report are achievable based on those assumptions. However, given the longer term nature of these expectations and targets, they are subject to greater uncertainty, including potential material impacts if the above assumptions are not realised, and other material impacts related to foreign exchange fluctuations, macroeconomic activity, changes in regulation, government actions or intellectual property protection, actions by our competitors, and other risks inherent to the industries in which we operate.
 
This document contains statements that are, or may be deemed to be, “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’, ‘target’ 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 Market Abuse Regulation, 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 which 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 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 Item 3.D ‘Risk Factors’ in the Group’s Annual Report on Form 20-F for 2017. 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 and information available to the Directors on the date of this report.
 
 
Contacts
 
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.
 
GSK enquiries:
 
 
 
 
UK Media enquiries:
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+44 (0) 20 8047 5502
(London)
 
Tim Foley
+44 (0) 20 8047 5502
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Analyst/Investor enquiries:
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James Dodwell
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(Philadelphia)
 
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Financial information
 
Income statements
 
 
Q2 2018
£m
 
Q2 2017
£m
 
H1 2018
£m
 
H1 2017
£m
 
 
 
 
 
 
 
 
TURNOVER
7,310 
 
7,320 
 
14,532 
 
14,704 
 
 
 
 
 
 
 
 
Cost of sales
(2,310)
 
(2,619)
 
(4,701)
 
(5,132)
 
 
 
 
 
 
 
 
Gross profit
5,000 
 
4,701 
 
9,831 
 
9,572 
 
 
 
 
 
 
 
 
Selling, general and administration
(2,457)
 
(2,379)
 
(4,768)
 
(4,831)
Research and development
(925)
 
(1,260)
 
(1,829)
 
(2,220)
Royalty income
73 
 
98 
 
126 
 
180 
Other operating income/(expense)
(912)
 
(1,180)
 
(1,341)
 
(1,003)
 
 
 
 
 
 
 
 
OPERATING PROFIT/(LOSS)
779 
 
(20)
 
2,019 
 
1,698 
 
 
 
 
 
 
 
 
Finance income
27 
 
15 
 
47 
 
36 
Finance expense
(194)
 
(192)
 
(356)
 
(386)
Profit on disposal of associates
- 
 
20 
 
- 
 
20 
Share of after tax profits/(losses) of
   associates and joint ventures
2 
 
(1)
 
11 
 
 
 
 
 
 
 
 
 
PROFIT/(LOSS) BEFORE TAXATION
614 
 
(178)
 
1,721 
 
1,372 
 
 
 
 
 
 
 
 
Taxation
(139)
 
92 
 
(487)
 
(235)
Tax rate %
22.6%
 
51.7%
 
28.3%
 
17.1%
 
 
 
 
 
 
 
 
PROFIT/(LOSS) AFTER TAXATION
   FOR THE PERIOD
475 
 
(86)
 
1,234 
 
1,137 
 
 
 
 
 
 
 
 
Profit attributable to non-controlling
  interests
34 
 
94 
 
244 
 
271 
Profit/(loss) attributable to shareholders
441 
 
(180)
 
990 
 
866 
 
 
 
 
 
 
 
 
 
475 
 
(86)
 
1,234 
 
1,137 
 
 
 
 
 
 
 
 
EARNINGS/(LOSS) PER SHARE
9.0p
 
(3.7)p
 
20.2p
 
17.7p
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings/(loss) per share
8.9p
 
(3.7)p
 
20.0p
 
17.6p
 
 
 
 
 
 
 
 
 
 
Statement of comprehensive income
 
 
Q2 2018
£m
 
Q2 2017
£m
 
 
 
 
Profit for the period
475 
 
(86)
 
 
 
 
Items that may be reclassified subsequently to income statement:
 
 
 
Exchange movements on overseas net assets and net investment hedges
(438)
 
366 
Fair value movements on equity investments
 
 
Reclassification of fair value movements on equity investments
- 
 
(23)
Deferred tax on fair value movements on equity investments
 
 
(2)
Deferred tax reversed on reclassification of equity investments
- 
 
10 
Fair value movements on cash flow hedges
157 
 
Reclassification of cash flow hedges to income statement
(134)
 
Deferred tax on fair value movements on cash flow hedges
(24)
 
Deferred tax reversed on reclassification of cash flow hedges
20 
 
 
 
 
 
 
(419)
 
353 
 
 
 
 
Items that will not be reclassified to income statement:
 
 
 
Exchange movements on overseas net assets of non-controlling interests
20 
 
(28)
Fair value movements on equity investments
56 
 
 
Deferred tax on fair value movements on equity investments
(4)
 
 
Re-measurement gains/(losses) on defined benefit plans
728 
 
(49)
Tax on re-measurement gains/(losses) on defined benefit plans
(132)
 
 
 
 
 
 
668 
 
(71)
 
 
 
 
Other comprehensive income for the period
249 
 
282 
 
 
 
 
Total comprehensive income for the period
724 
 
196 
 
 
 
 
 
 
 
 
Total comprehensive income for the period attributable to:
 
 
 
   Shareholders
670 
 
130 
   Non-controlling interests
54 
 
66 
 
 
 
 
 
724 
 
196 
 
 
 
 
 
 
Statement of comprehensive income
 
 
H1 2018
£m
 
H1 2017
£m
 
 
 
 
Profit for the period
1,234 
 
1,137 
 
 
 
 
Items that may be reclassified subsequently to income statement:
 
 
 
Exchange movements on overseas net assets and net investment hedges
(372)
 
562 
Fair value movements on equity investments
 
 
53 
Reclassification of fair value movements on equity investments
- 
 
(27)
Deferred tax on fair value movements on equity investments
 
 
(4)
Deferred tax reversed on reclassification of equity investments
- 
 
Fair value movements on cash flow hedges
179 
 
(2)
Reclassification of cash flow hedges to income statement
(165)
 
Deferred tax on fair value movements on cash flow hedges
(24)
 
(1)
Deferred tax reversed on reclassification of cash flow hedges
20 
 
 
 
 
 
 
(362)
 
592 
 
 
 
 
Items that will not be reclassified to income statement:
 
 
 
Exchange movements on overseas net assets of non-controlling interests
(8)
 
(1)
Fair value movements on equity investments
153 
 
 
Deferred tax on fair value movements on equity investments
(13)
 
 
Re-measurement gains on defined benefit plans
914 
 
185 
Tax on re-measurement gains on defined benefit plans
(170)
 
(49)
 
 
 
 
 
876 
 
135 
 
 
 
 
Other comprehensive income for the period
514 
 
727 
 
 
 
 
Total comprehensive income for the period
1,748 
 
1,864 
 
 
 
 
 
 
 
 
Total comprehensive income for the period attributable to:
 
 
 
   Shareholders
1,512 
 
1,594 
   Non-controlling interests
236 
 
270 
 
 
 
 
 
1,748 
 
1,864 
 
 
 
 
 
 
Pharmaceuticals turnover – three months ended 30 June 2018
 
 
Total
US
Europe
International
 
–––––––––––––––––––––––––––––––––––––
                              –––––––––––––––––––––––––––––––––––––
     –––––––––––––––––––––––––––––––––––––
–––––––––––––––––––––––––––––––––––––
 
 
Growth
 
Growth
 
Growth
 
Growth
 
 
–––––––––––––––––––––––
 
–––––––––––––––––––––––
 
–––––––––––––––––––––––
 
–––––––––––––––––––––––
 
£m
£%
CER%
£m
£%
CER%
£m
£%
CER%
£m
£%
CER%
 
––––––––
––––––––
––––––––
––––––––
––––––––
––––––––
––––––––
––––––––
––––––––
––––––––
––––––––
––––––––
Respiratory
1,696
(6)
(2)
837 
(14)
(9)
379
5 
5 
480
2 
7 
Seretide/Advair
590
(30)
(28)
260 
(45)
(43)
151
(17)
(17)
179
(6)
(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
Ellipta products
509
20 
26 
317 
12 
18 
109
36 
36 
83
38 
50 
   Anoro Ellipta
120
41 
48 
83 
41 
47 
24
41 
35 
13
44 
78 
   Arnuity Ellipta
10
25 
38 
13 
13 
-
1
   Incruse Ellipta
74
48 
54 
48 
41 
50 
20
54 
54 
6
100 
100 
   Relvar/Breo Ellipta
279
(1)
156 
(15)
(10)
61
22 
24 
62
29 
35 
   Trelegy Ellipta
26
21 
4
1
 
 
 
 
 
 
 
 
 
 
 
 
 
Nucala
141
93 
>100 
88 
76 
86 
36
>100 
>100 
17
>100 
>100 
Avamys/Veramyst
69
11 
22
(4)
47
14 
Flixotide/Flovent
154
12 
94 
21 
27 
21
(9)
(4)
39
(11)
(7)
Ventolin
170
(5)
78 
(9)
(6)
31
61
(3)
Other
63
(6)
(10)
9
29 
54
(14)