26th Oct 2006 12:00
GlaxoSmithKline PLC26 October 2006 Issued: 26th October 2006, London Results announcement for the third quarter 2006 Strong GSK performance continues: Q3 EPS 24.7p up 21% CER (16% reported) Earnings guidance raised; Dividend increased; New share buy-back programme GlaxoSmithKline plc (GSK) today announces its results for the third quarter ended 30th September 2006. The fullresults are presented under 'Income Statement' on pages 8 and 9, and are summarised below. FINANCIAL RESULTS* 9 months 9 months Q3 2006 Q3 2005 Growth 2006 2005 Growth £m £m CER% £% £m £m CER% £% Turnover 5,642 5,471 7 3 17,266 15,753 9 10Operating profit 2,023 1,783 19 13 6,108 5,241 16 17Profit before tax 2,022 1,753 21 15 6,089 5,126 18 19 Earnings per share 24.7p 21.3p 21 16 74.5p 62.8p 18 19 Q3 2006 SUMMARY* • Pharmaceutical sales up 7% to £4.9 billion, led by US performance (up 14%): - Seretide/Advair +14% to £813 million - Lamictal +27% to £257 million - Avandia family +11% to £378 million - Valtrex +26% to £215 million - Vaccines +5% to £412 million - Coreg +32% to £195 million • Consumer Healthcare sales up 4% to £766 million: - Proposed acquisition of CNS Inc. to deliver two new high-growth consumer brands - Breathe Right strips and FiberChoice • Approvals and filing updates for several major new products: - Coreg CR & FluLaval - Two significant new product opportunities recently approved by the FDA - Tykerb - New oral treatment for breast cancer now filed for approval in the USA and Europe - Cervarix - Required number of phase III events achieved; US filing now expected by April 2007 • 2006 Earnings guidance raised to mid-teens EPS percentage growth (in CER terms) • Q3 dividend of 12p (2005: 10p). Expected full year dividend increased to 48p (2005: 44p) • New share buy-back programme of £2 billion per year; £6 billion expected over next 3 years Commenting on the performance in the quarter and GSK's outlook, JP Garnier, Chief Executive Officer, said: "GSK'sstrong performance this year continues, with EPS growth of 21% in CER terms this quarter. This has enabled us to raiseour earnings guidance and increase our expected dividend for the year. We have also announced today our intention tostart a new £6 billion share buy-back programme - doubling our current annual repurchases to £2 billion. In terms ofthe pipeline, we recently completed filings for Tykerb, our new breast cancer treatment, and reached the required numberof phase III events to enable us to file Cervarix in the USA, now expected by April 2007. We also received FDAapprovals for two significant future products - Coreg CR and FluLaval." * The Group's practice is to discuss its results in terms of constant exchange rate (CER) growth. All commentaries compare 2006 results with 2005 in CER terms unless otherwise stated. See 'Accounting Presentation and Policies' on page 23. PHARMACEUTICAL UPDATE Total pharmaceutical sales up 7% to £4.9 billion In the United States, sales were £2.6 billion up 14%, with a 2 percentage point benefit from the reversal of a provision following resolution of a rebate dispute. Sales in Europe were level at £1.3 billion, reflecting the impact of generic competition to Lamictal, Imigran and Zofran, which started earlier this year. In contrast, European sales of key products Seretide (+12%) and the Avandia family (+39%) continue to perform strongly. In International markets, sales grew 3% to nearly £1 billion. Seretide/Advair sales up 14% to £813 million; US Advair HFA inhaler launched in October Total sales of Seretide/Advair, for asthma and COPD, rose 14% to £813 million, with sustained growth seen across all regions. US sales were up 17% to £464 million, with some benefit from wholesaler stocking patterns; European sales grew 12% to £271 million. In October, GSK launched Advair HFA metered dose inhaler in the USA, and submitted a file to the FDA to include the positive results of TORCH, a COPD mortality study, in Advair's product label. The TORCH data were presented, in detail, for the first time, to US COPD specialists at the recent meeting of the American College of Chest Physicians. The data were filed with European regulators in September. Avandia family sales up 11%; DREAM study shows reduced risk of progression to type 2 diabetes The Avandia family of products, for the treatment of type 2 diabetes, continues to perform well with sales up 11% to £378 million in the quarter. Reported US sales growth of 6% was adversely impacted by wholesaler stocking patterns following the re-supply of Avandia and Avandamet during the second quarter of this year. In September, results of the landmark DREAM study were presented to the European Association for the Study of Diabetes. These data demonstrated that Avandia reduced the risk of developing type 2 diabetes by 62% relative to placebo, among people at high risk of developing type 2 diabetes. This highly statistically significant reduction of 62% (p100 21 24 3 50 ANTI-VIRALS 703 9 339 6 218 14 146 11HIV 363 (6) 168 (11) 149 - 46 (4)Combivir 125 (12) 57 (15) 52 (9) 16 (5)Trizivir 63 (16) 34 (19) 27 (10) 2 (25)Epivir 46 (25) 16 (23) 21 (33) 9 (8)Ziagen 28 (12) 11 (8) 10 (23) 7 -Agenerase, Lexiva 32 3 18 (10) 12 33 2 -Epzicom/Kivexa 63 88 31 38 26 >100 6 >100 Herpes 242 21 160 35 36 3 46 -Valtrex 215 26 158 36 28 12 29 -Zovirax 27 (6) 2 - 8 (20) 17 - Zeffix 42 16 4 - 6 50 32 13Relenza 30 - - - 24 >100 6 >100 METABOLIC 438 16 289 15 64 30 85 10Avandia 323 13 242 14 30 7 51 16Avandamet 44 (21) 13 (64) 25 100 6 -Avandaryl 11 - 10 - - - 1 -Bonviva/Boniva 27 >100 24 >100 3 >100 - - VACCINES 412 5 130 8 169 6 113 2Hepatitis 114 (2) 39 - 54 (5) 21 6Infanrix/Pediarix 122 6 45 (4) 65 16 12 -Boostrix 18 64 14 75 3 50 1 - CARDIOVASCULAR AND UROGENITAL 406 23 269 37 96 (6) 41 23Coreg 195 32 193 32 - - 2 100Levitra 11 22 11 71 - - - -Avodart 57 61 37 85 17 21 3 100Arixtra 13 100 7 >100 6 >100 - -Fraxiparine 49 2 - - 44 5 5 (17) ANTI-BACTERIALS 311 (8) 52 (2) 135 (13) 124 (5)Augmentin 121 (15) 20 (28) 54 (21) 47 (2)Zinnat/Ceftin 35 (10) 3 - 16 (16) 16 (5) ONCOLOGY AND EMESIS 279 11 223 18 37 (8) 19 (13)Zofran 223 8 185 16 25 (10) 13 (26)Hycamtin 28 12 17 - 10 29 1 100 OTHER 229 (7) 18 6 61 (18) 150 (2)Zantac 51 (11) 16 7 11 (31) 24 (10) -------------- -------------- -------------- -------------- 4,876 7 2,574 14 1,321 - 981 3 -------------- -------------- -------------- -------------- Pharmaceutical turnover includes co-promotion income. PHARMACEUTICAL TURNOVER Nine months ended 30th September 2006 Total USA Europe International -------------- --------------- ------------- ------------- £m CER% £m CER% £m CER% £m CER% ------ ----- ------ ----- ---- ----- ---- -----RESPIRATORY 3,726 1 1,845 (2) 1,264 3 617 6Seretide/Advair 2,451 13 1,377 13 840 11 234 12Flixotide/Flovent 487 4 219 13 131 (6) 137 1Serevent 217 (11) 64 (16) 107 (12) 46 2Flixonase/Flonase 263 (46) 167 (55) 40 (15) 56 (17) CENTRAL NERVOUS SYSTEM 2,727 16 1,928 29 458 (15) 341 5Seroxat/Paxil 457 1 126 23 114 (22) 217 8 Paxil IR 335 (6) 16 (11) 114 (22) 205 6 Paxil CR 122 32 110 30 - - 12 50Wellbutrin 688 30 674 30 2 100 12 20 Wellbutrin IR, SR 77 12 67 10 2 100 8 14 Wellbutrin XL 611 32 607 32 - - 4 33Imigran/Imitrex 537 4 413 11 93 (12) 31 (16)Lamictal 739 17 561 36 136 (22) 42 2Requip 192 79 124 >100 60 22 8 33 ANTI-VIRALS 2,121 10 1,021 7 645 11 455 18HIV 1,155 - 532 (7) 475 5 148 10Combivir 409 (7) 182 (14) 169 (2) 58 8Trizivir 207 (9) 109 (12) 88 (5) 10 (9)Epivir 159 (21) 54 (25) 72 (24) 33 (3)Ziagen 89 (14) 36 (12) 31 (28) 22 17Agenerase, Lexiva 97 20 55 8 36 50 6 -Epzicom/Kivexa 172 >100 92 60 68 >100 12 >100 Herpes 723 19 456 30 108 3 159 7Valtrex 633 24 450 30 82 11 101 12Zovirax 90 (5) 6 20 26 (16) 58 (2) Zeffix 120 15 10 - 17 13 93 16Relenza 54 >100 1 - 39 >100 14 >100 METABOLIC 1,401 24 956 26 183 36 262 14Avandia 1,075 22 822 24 95 14 158 17Avandamet 136 4 54 (40) 65 >100 17 33Avandaryl 28 - 26 - - - 2 -Bonviva/Boniva 61 >100 54 >100 7 >100 - - VACCINES 1,165 19 303 23 509 20 353 15Hepatitis 351 5 118 15 167 (1) 66 8Infanrix/Pediarix 375 29 125 14 209 41 41 24Boostrix 42 >100 28 >100 10 100 4 33 CARDIOVASCULAR AND UROGENITAL 1,215 24 791 42 294 (5) 130 22Coreg 580 38 575 38 - - 5 25Levitra 31 - 29 12 1 (67) 1 (100)Avodart 155 70 95 >100 50 25 10 67Arixtra 37 >100 20 >100 16 >100 1 -Fraxiparine 156 (1) - - 135 2 21 (13) ANTI-BACTERIALS 1,015 (10) 160 (16) 464 (13) 391 (2)Augmentin 425 (15) 69 (35) 201 (15) 155 (1)Zinnat/Ceftin 122 (15) 9 33 60 (28) 53 (2) ONCOLOGY AND EMESIS 856 13 674 20 120 (4) 62 (8)Zofran 682 11 549 17 86 (9) 47 (13)Hycamtin 85 14 54 8 26 19 5 50 OTHER 716 (7) 65 24 183 (22) 468 (3)Zantac 177 (1) 56 34 39 (17) 82 (9) -------------- -------------- -------------- -------------- 14,942 9 7,743 16 4,120 - 3,079 7 -------------- -------------- -------------- -------------- Pharmaceutical turnover includes co-promotion income. CONSUMER HEALTHCARE TURNOVER Three months ended 30th September 2006 Q3 2006 Growth £m CER% --------- ---------Over-the-counter medicines 348 4Analgesics 91 1Dermatological 37 12Gastrointestinal 61 (2)Respiratory tract 42 22Smoking control 73 (6)Natural wellness support 30 (3) Oral care 240 -Nutritional healthcare 178 8 --------- ---------Total 766 4 --------- --------- CONSUMER HEALTHCARE TURNOVER Nine months ended 30th September 2006 9 months Growth 2006 CER% £m --------- ---------Over-the-counter medicines 1,087 4Analgesics 285 6Dermatological 122 -Gastrointestinal 189 1Respiratory tract 118 16Smoking control 250 2Natural wellness support 94 (4) Oral care 735 5Nutritional healthcare 502 8 --------- ---------Total 2,324 5 --------- --------- FINANCIAL REVIEW - INCOME STATEMENT Operating profit Q3 2006 Q3 2005 Growth ---------------------- -------------------- ---------------- % of % of £m turnover £m turnover CER% £% ------ ------ ------ ------ ------ -----Turnover 5,642 100.0 5,471 100.0 7 3 Cost of sales (1,222) (21.7) (1,184) (21.6) 5 3Selling, general and administration (1,617) (28.6) (1,884) (34.4) (10) (14)Research and development (871) (15.4) (803) (14.7) 11 8Other operating income 91 1.6 183 3.3 ------ ------ ------ ------ ------ ----Operating profit 2,023 35.9 1,783 32.6 19 13 ------ ------ ------ ------ ------ ---- Overall, the operating margin increased 3.3 percentage points as sterling operating profit increased 13% on a sterlingturnover growth of 3% reflecting lower SG&A costs, partially offset by an increase in R&D expenditure and lower otheroperating income. Cost of sales grew below the rate of turnover growth. This reflected a number of factors including favourable price andregional mix changes, and the adverse impact of higher charges related to restructuring programmes. SG&A costs were 10% lower than last year owing to lower legal charges. Excluding legal charges SG&A costs were 1% lowerthan the previous year reflecting the continuing benefits of cost saving programmes. R&D expenditure increased 11% and was adversely impacted by higher charges related to restructuring programmes butbenefited from lower intangible write-offs. This resulted in the R&D margin increasing 0.7 percentage points to 15.4%.Excluding these items, R&D grew 7%. Pharmaceuticals R&D expenditure represented 17.4% of pharmaceutical turnover. Other operating income includes royalty income, equity investment disposals and impairments, product disposals and fairvalue adjustments to the Quest collar and Theravance options. Other operating income was £91 million in Q3 2006compared with £183 million in Q3 2005. The decrease is primarily due to lower product and asset disposal profits. Taxation The charge for taxation on profit amounting to £596 million, represents an effective tax rate of 29.5%, which is theexpected rate for the year (2005 - 28.5%). The 'Taxation' note to the Financial Statements included in the Annual Report 2005 set out in detail the transferpricing issues affecting the group. The current status relating to these issues is set out below. GSK and the US Internal Revenue Service agreed to a resolution of their transfer pricing dispute on 11th September 2006. As at 30th September 2006, GSK had made gross payments to the IRS of $3.3 billion under this agreement. The Groupexpects to discharge the remaining liabilities arising out of this agreement by the end of 2006. Under the agreementthe final net cash cost to GSK will be approximately $3.1 billion which covers federal, state and local taxes, interestand also the benefit of tax relief on the payments made. The settlement resolved all the transfer pricing issues whichwere in dispute for the period 1989 - 2000, which was due to go to trial in February 2007, and also covers thesubsequent years 2001 - 2005. GSK had previously made provision for the dispute and this settlement will not have anysignificant impact on the company's reported earnings or tax rate for the year. The Group has remaining open taxation issues with the UK, Japan and Canada. Discussions continue with HMRC in respectof the UK dispute; in Japan court hearings are expected to be completed before the end of the year with a decisionexpected in the first half of 2007; and in Canada a court hearing ended in July and a decision is expected this year. GSK uses the best advice in determining its transfer pricing methodology and seeking to manage transfer pricing andother taxation issues to a satisfactory conclusion, and on the basis of external professional advice, continues tobelieve that it has made adequate provision for the liabilities likely to arise from open assessments. The ultimateliability for such matters may vary from the amounts provided and is dependent on the outcome of litigation proceedingsand negotiations with the relevant tax authorities. Weighted average number of shares Q3 2006 Q3 2005 millions millions ---- ----Weighted average number of shares - basic 5,641 5,668Dilutive effect of share options and share 70 44awards ---- ----Weighted average number of shares - diluted 5,711 5,712 ---- ---- 9 months 9 months 2006 2005 2005 millions millions millions ---- ---- ----Weighted average number of shares - basic 5,652 5,680 5,674Dilutive effect of share options and share awards 70 42 46 ---- ---- ---- 5,722 5,722 5,720 ---- ---- ---- The number of shares in issue, excluding those held by the ESOP Trusts and those held as Treasury shares at 30thSeptember 2006, was 5,632 million (30th September 2005: 5,658 million). Dividends Paid/ Pence per payable share £m ---- ---- ----2006First interim 6th July 2006 11 619Second interim 5th October 2006 11 619Third interim 4th January 2007 12 676 2005First interim 7th July 2005 10 568Second interim 6th October 2005 10 567Third interim 5th January 2006 10 568Fourth interim 6th April 2006 14 791 ---- ---- 44 2,494 ---- ---- The liability for an interim dividend is only recognised when it is paid, which is usually after the accountingperiod to which it relates. The second and third interim dividends for 2006 have not been recognised in theseresults. STATEMENT OF RECOGNISED INCOME AND EXPENSE 9 months 9 months 2005 2006 2005 £m £m £m ---- ---- ----Exchange movements on overseas net assets (293) 128 203Tax on exchange movements (141) 56 99Fair value movements on available-for-sale investments 23 (5) (1)Deferred tax on fair value movements (8) (5) (10)Exchange movements on goodwill in reserves 20 7 9Actuarial gains/(losses) on defined benefit plans 409 (462) (794)Deferred tax on actuarial movements in defined benefit plans (137) 156 257Fair value movements on cash flow hedges (5) (1) (4)Deferred tax on fair value movements on cash flow hedges 2 (2) 1 ---- ---- ----Net losses recognised directly in equity (130) (128) (240) Profit for the period 4,293 3,665 4,816 ---- ---- ----Total recognised income and expense for the period 4,163 3,537 4,576 ---- ---- ---- Total recognised income and expense for the period attributable to:Shareholders 4,101 3,422 4,423Minority interests 62 115 153 ---- ---- ---- 4,163 3,537 4,576 ---- ---- ---- BALANCE SHEET 30th September 2006 30th September 2005 31st December 2005 £m £m £mASSETS ---- ---- ----Non-current assetsProperty, plant and equipment 6,795 6,332 6,652Goodwill 679 334 696Other intangible assets 3,194 2,641 3,383Investments in associates and joint ventures 292 256 276Other investments 379 350 362Deferred tax assets 2,054 2,140 2,214Other non-current assets 565 529 438 ---- ---- ----Total non-current assets 13,958 12,582 14,021 ---- ---- ----Current assetsInventories 2,493 2,200 2,177Current tax recoverable 758 409 416Trade and other receivables 5,252 4,854 5,348Liquid investments 1,043 336 1,025Cash and cash equivalents 2,344 6,093 4,209Assets held for sale 4 3 2 ---- ---- ----Total current assets 11,894 13,895 13,177 ---- ---- ----TOTAL ASSETS 25,852 26,477 27,198 ---- ---- ----LIABILITIESCurrent liabilitiesShort-term borrowings (653) (1,616) (1,200)Trade and other payables (4,611) (4,579) (5,147)Current tax payable (1,100) (2,231) (2,269)Short-term provisions (929) (1,005) (895) ---- ---- ----Total current liabilities (7,293) (9,431) (9,511) ---- ---- ----Non-current liabilitiesLong-term borrowings (4,852) (5,212) (5,271)Deferred tax provision (587) (425) (569)Pensions and other post-employment benefits (2,613) (3,164) (3,069)Other provisions (655) (572) (741)Other non-current liabilities (448) (495) (467) ---- ---- ----Total non-current liabilities (9,155) (9,868) (10,117) ---- ---- ----TOTAL LIABILITIES (16,448) (19,299) (19,628) ---- ---- ----NET ASSETS 9,404 7,178 7,570 ---- ---- ---- EQUITYShare capital 1,497 1,487 1,491Share premium account 804 382 549Other reserves (79) (410) (308)Retained earnings 6,940 5,486 5,579 ---- ---- ----Shareholders' equity 9,162 6,945 7,311 Minority interests 242 233 259 ---- ---- ----TOTAL EQUITY 9,404 7,178 7,570 ---- ---- ---- RECONCILIATION OF MOVEMENTS IN EQUITY 9 months 9 months 2005 2006 2005 £m £m £m ---- ---- ----Total equity at beginning of period 7,570 5,925 5,925Total recognised income and expense for the period 4,163 3,537 4,576Dividends to shareholders (1,978) (1,823) (2,390)Shares issued 261 81 252Shares purchased and held as Treasury shares (828) (638) (1,000)Consideration received for shares transferred by ESOP Trusts 120 23 68Share-based incentive plans net of tax 175 183 265Changes in minority interest shareholdings 2 (32) (40)Distributions to minority shareholders (81) (78) (86) ---- ---- ----Total equity at end of period 9,404 7,178 7,570 ---- ---- ---- FINANCIAL REVIEW - BALANCE SHEET Net assets The book value of net assets increased by £1,834 million from £7,570 million at 31st December 2005 to £9,404 million at30th September 2006. Net debt increased and the overall tax creditor position decreased following the payment of £1.8billion under the transfer pricing dispute settlement with the US Internal Revenue Service (see 'Taxation' on page 14)and the pension and other post-employment liabilities decreased following a strengthening of long-term interest rates,including an increase in the rate used to discount UK pension liabilities from 4.75% to 5.0%. The carrying value of investments in associates and joint ventures at 30th September 2006 was £292 million, with amarket value of £1,224 million. Equity At 30th September 2006, total equity had increased from £7,570 million at 31st December 2005 to £9,404 million. Theincrease arises principally from retained earnings and actuarial gains on defined benefit pension plans in the periodpartially offset by further purchases of Treasury shares. At 30th September 2006, the ESOP Trusts held 156.5 million GSK ordinary shares against the future exercise of shareoptions and share awards. The carrying value of £2,091 million has been deducted from other reserves. The market valueof these shares was £2,225 million. At 30th September 2006, GSK also held 198.1 million shares as Treasury shares, at acost of £2,627 million, which has been deducted from retained earnings. CASH FLOW STATEMENT Three months ended 30th September 2006 Q3 2006 Q3 2005 £m £m ---- ----Operating profit 2,023 1,783Depreciation and other non-cash items 303 253(Increase)/decrease in working capital (289) 9Increase in other net liabilities 77 280 ---- ---- 2,114 2,325 Taxation paid (2,166) (469) ---- ----Net cash (outflow)/inflow from operating activities (52) 1,856 ---- ----Cash flow from investing activitiesPurchase of property, plant and equipment (368) (237)Proceeds from sale of property, plant and equipment 15 36Purchase of intangible assets (74) (33)Proceeds from sale of intangible assets 76 54Purchase of equity investments (22) (10)Proceeds from sale of equity investments 6 11Share transactions with minority shareholders (158) -Purchase of businesses, net of cash acquired 7 (143)Investment in associates and joint ventures (1) -Interest received 58 71Dividends from associates and joint ventures 6 5 ---- ----Net cash outflow from investing activities (455) (246) ---- ----Cash flow from financing activities(Increase)/decrease in liquid investments (59) 2Proceeds from own shares for employee share options 17 4Issue of share capital 37 33Purchase of Treasury shares (309) (235)Repayment of long-term loans - (69)Net increase in/(repayment of) short-term loans 43 (8)Net repayment of obligations under finance leases (10) (7)Interest paid (74) (117)Dividends paid to shareholders (619) (568)Dividends paid to minority interests (15) (5)Other financing cash flows (50) 109 ---- ----Net cash outflow from financing activities (1,039) (861) ---- ---- (Decrease)/increase in cash and bank overdrafts in the period (1,546) 749 Exchange adjustments 11 66Cash and bank overdrafts at beginning of period 3,543 5,050 ---- ----Cash and bank overdrafts at end of period 2,008 5,865 ---- ---- Cash and bank overdrafts at end of period comprise: Cash and cash equivalents 2,344 6,093 Overdrafts (336) (228) ---- ---- 2,008 5,865 ---- ---- CASH FLOW STATEMENT Nine months ended 30th September 2006 9 months 9 months 2005 2006 2005 £m £m £m ---- ---- ----Operating profit 6,108 5,241 6,874Depreciation and other non-cash items 887 669 1,103Increase in working capital (460) (68) (323)(Decrease)/increase in other net liabilities (278) 103 11 ---- ---- ---- 6,257 5,945 7,665 Taxation paid (3,405) (1,272) (1,707) ---- ---- ----Net cash inflow from operating activities 2,852 4,673 5,958 ---- ---- ----Cash flow from investing activitiesPurchase of property, plant and equipment (896) (555) (903)Proceeds from sale of property, plant and equipment 32 63 54Purchase of intangible assets (155) (185) (278)Proceeds from sale of intangible assets 183 224 221Purchase of equity investments (35) (18) (23)Proceeds from sale of equity investments 22 22 35Share transactions with minority shareholders (158) (32) (36)Purchase of businesses, net of cash acquired (17) (143) (1,026)Disposals of businesses and interests in associates 3 - (2)Investment in associates and joint ventures (8) (2) (2)Interest received 197 200 290Dividends from associates and joint ventures 13 8 10 ---- ---- ----Net cash outflow from investing activities (819) (418) (1,660) ---- ---- ----Cash flow from financing activities(Increase)/decrease in liquid investments (49) 1,234 550Proceeds from own shares for employee share options 120 23 68Issue of share capital 261 81 252Purchase of Treasury shares (814) (625) (999)Increase in long-term loans - 982 982Repayment of long-term loans - (124) (70)Net repayment of short-term loans (874) (314) (857)Net repayment of obligations under finance leases (27) (25) (36)Interest paid (247) (321) (381)Dividends paid to shareholders (1,978) (1,823) (2,390)Dividends paid to minority interests (81) (78) (86)Other financing cash flows (100) 32 53 ---- ---- ----Net cash outflow from financing activities (3,789) (958) (2,914) ---- ---- ---- (Decrease)/increase in cash and bank overdrafts in the period (1,756) 3,297 1,384 Exchange adjustments (208) 213 233Cash and bank overdrafts at beginning of period 3,972 2,355 2,355 ---- ---- ----Cash and bank overdrafts at end of period 2,008 5,865 3,972 ---- ---- ---- Cash and bank overdrafts at end of period comprise: Cash and cash equivalents 2,344 6,093 4,209 Overdrafts (336) (228) (237) ---- ---- ---- 2,008 5,865 3,972 ---- ---- ---- RECONCILIATION OF CASH FLOW TO MOVEMENTS IN NET DEBT 9 months 9 months 2005 2006 2005 £m £m £m ---- ---- ----Net debt at beginning of the period (1,237) (1,984) (1,984) (Decrease)/increase in cash and bank overdrafts (1,756) 3,297 1,384Cash outflow/(inflow) from liquid investments 49 (1,234) (550)Net increase in long-term loans - (858) (912)Net repayment of short-term loans 874 314 857Net repayment of obligations under finance leases 27 25 36Net non-cash funds of businesses acquired - (23) (68)Exchange adjustments (12) 83 39Other non-cash movements (63) (19) (39) ---- ---- ----(Increase)/decrease in net debt (881) 1,585 747 ---- ---- ----Net debt at end of the period (2,118) (399) (1,237) ---- ---- ---- FINANCIAL REVIEW - CASH FLOW Operating cash flow was £2,114 million in Q3 2006. This represents a decrease of £211 million over Q3 2005, principallydue to higher operating profits which were more than offset by an increase in working capital and a lower increase inother net liabilities. Taxation paid during the quarter included the payment of £1.8 billion under the transfer pricingdispute settlement with the US Internal Revenue Service (see 'Taxation' on page 14). Excluding this payment theoperating cash flow is in excess of the funds needed for the routine cash flows of tax, capital expenditure on property,plant and equipment and dividend payments, together amounting to nearly £1.4 billion. Receipts of £54 million arosefrom the exercise of share options: £17 million from shares held by the ESOP Trusts and £37 million from the issue ofnew shares. In addition, £309 million was spent in the quarter on purchasing the company's shares to be held asTreasury shares. EXCHANGE RATES The results and net assets of the Group, as reported in sterling, are affected by movements in exchange rates betweensterling and overseas currencies. GSK uses the average of exchange rates prevailing during the period to translate theresults and cash flows of overseas Group subsidiary and associated undertakings into sterling and period-end rates totranslate the net assets of those undertakings. The currencies which most influence these translations, and therelevant exchange rates, are: 9 months 9 months 2006 2005 2005Average rates: ---- ---- ---- £/US$ 1.82 1.85 1.82 £/Euro 1.46 1.46 1.46 £/Yen 211.00 199.00 200.00Period-end rates: £/US$ 1.87 1.77 1.72 £/Euro 1.47 1.47 1.46 £/Yen 221.00 201.00 203.00 During the period to 30th September 2006, average sterling exchange rates were weaker against the US dollar, levelagainst the Euro and stronger against the Yen compared with the same period in 2005. Comparing Q3 2006 period-end rateswith Q3 2005 period-end rates, sterling was level against the Euro and stronger against the US dollar and the Yen. LEGAL MATTERS The Group is involved in various legal and administrative proceedings, principally product liability, intellectualproperty, tax, anti-trust and governmental investigations and related private litigation concerning sales, marketing andpricing. The Group makes provision for those proceedings on a regular basis and may make additional significantprovisions for such legal proceedings, as required in the event of further developments in those matters, consistentwith generally accepted accounting principles. Litigation, particularly in the USA, is inherently unpredictable andexcessive awards that may not be justified by the evidence can occur. The Group could in the future incur judgements orenter into settlements of claims that could result in payments that exceed its current provisions by an amount thatwould have a material adverse effect on the Group's financial condition, results of operations and cash flows. Intellectual property claims include challenges to the validity of the patents on various of the Group's products orprocesses and assertions of non-infringement of those patents. A loss in any of these cases could result in loss ofpatent protection for the product at issue. The consequence of any such loss could be a significant decrease in salesof that product and could materially affect future results of operations for the Group. At 30th September 2006, the Group's aggregate provision for legal and other disputes (not including tax mattersdescribed under 'Taxation' on page 14) was over £1.1 billion. The ultimate liability for legal claims may vary from theamounts provided and is dependent upon the outcome of litigation proceedings, investigations and possible settlementnegotiations. Developments since the date of the Annual Report as previously updated by the Legal matters section of the ResultsAnnouncement for the first and second quarters of 2006 include: Intellectual property With respect to Biovail's patent infringement action against Anchen Pharmaceuticals in respect of Wellbutrin XL, on 1stAugust 2006 the judge granted Anchen's motion and ruled that Anchen's ANDA product did not infringe Biovail's patent.Biovail has appealed that decision to the US Court of Appeals for the Federal Circuit. At the date of this report nogeneric version of Wellbutrin XL has been launched in the USA. With respect to Biovail's infringement action againstAbrika Pharmaceuticals in respect of Wellbutrin XL, oral argument on Abrika's motion for summary judgement was held inApril 2006 but at the date of this report no decision has been announced. With respect to Biovail's infringement actionagainst Impax Laboratories in respect of Wellbutrin XL, Impax filed a summary judgement motion of non-infringement on14th August 2006 but at the date of this report no decision has been announced. With respect to the counterclaim basedon FDA Orange Book listing activities filed against the Group by Watson Laboratories in connection with Biovail'sinfringement action against Watson, on 19th October 2006 that counterclaim was dismissed. With respect to the Group's patent infringement actions in respect of Imitrex oral tablets, the Group has reached asettlement with Dr. Reddy's Laboratories. The settlement, which remains subject to review by the US Federal TradeCommission (FTC) and the Department of Justice (DOJ), provides that Dr. Reddy's may exclusively distribute authorisedgeneric versions of sumatriptan tablets in the USA with an expected launch date late in the fourth quarter of 2008. Thetrial date for the Group's infringement action against Cobalt Pharmaceuticals on the same compound patent as the Dr.Reddy's case, and also for oral tablets, has been rescheduled for 27th November 2006. The trial date for the Group'sinfringement action against Spectrum Pharmaceuticals regarding Imitrex subcutaneous injection is set for 14th November2006. A second infringement action against Spectrum Pharmaceuticals was filed in September 2006 regarding Imitrexpre-filled syringes; this action is on the same compound patent as the other Imitrex infringement actions but no trialdate has been set. With respect to the appeal by Kali Laboratories from the district court decision in favour of the Group in respect ofinfringement of the Group's method of use patents relating to Zofran, the parties have reached a settlement agreementwhich is subject to review by the FTC and the DOJ. Kali has filed a motion to withdraw its appeal. Terms of thesettlement remain confidential. Sales and marketing and regulation On 10th August 2006, the Group reached civil settlements to resolve most of the litigation about the Average WholesalePrice (AWP) of certain of the Group's prescription drugs. The Group agreed to a nationwide settlement (subject tocourt approval) of $70 million to resolve class-action claims filed on behalf of certain individuals, health plans andinsurance companies, including all claims filed against the Group in a consolidated Multidistrict Litigation pending inthe US District Court for the District of Massachusetts. In addition, the Group reached civil settlements in AWPlitigation filed by the Attorneys General of New York, California, Connecticut, Nevada, Montana and Arizona as well aspotential AWP claims by 34 other states and the District of Columbia. The total amount of the settlements was coveredby the Group's existing legal provision. Anti-trust With respect to the ongoing investigation by the European Commission concerning enforcement of patent rights,litigation surrounding regulatory approvals and marketing of Seroxat in Europe, the Commission made a formal requestfor further information on 5th October 2006. The Group continues to co-operate fully with the Commission. On 4th September 2006, GSK received a favourable decision from the Greek Competition Authority (GCA) regarding GSK'srefusal to supply unlimited quantities of pharmaceutical products, at Greek regulated prices, to distributors, whichwere likely to be exported to other EU member states, where prices were higher. The GCA ruled that there was no abuseby GSK in refusing to supply unlimited quantities of the drugs to wholesalers and pharmacy co-operatives in Greece. On 27th September 2006, the European Court of First Instance (CFI) ruled in GSK's favour that a distribution scheme,that involved different prices depending on the destination of a medicine, set up by a pharmaceutical company to reduceparallel trade between EU member states, is not per se prohibited under EU competition law. In coming to thisdecision, the CFI took account of the differences in national pricing regimes in the EU, which create significant pricedifferences between member states. Commercial and corporate With respect to the securities class action filed against the Group in the US District Court for the Southern Districtof New York, on 6th October 2006 the US district court judge entered an order dismissing the complaint. Developments with respect to tax matters are described in 'Taxation' on page 14. ACCOUNTING PRESENTATION AND POLICIES This unaudited Results Announcement containing condensed financial information for the three and nine months ended 30thSeptember 2006 is prepared in accordance with IAS 34 'Interim Financial Reporting' and the accounting policies set outin the Annual Report 2005, except that IFRIC Interpretation 4 'Determining whether an arrangement contains a lease' andan amendment to IAS 39 'Financial guarantee contracts' have been implemented in 2006. Neither change has had amaterial effect on the current or prior periods. Adjustments have been made to the balance sheet at 30th September 2005 from that published in the Q3 2005 ResultsAnnouncement in order to reflect the presentation subsequently adopted in the Annual Report 2005. The adjustments havebeen made to deferred tax and minority interests and they have decreased net assets and total equity at 30th September2005 by £214 million compared with the previously reported balances. The adjustments had no impact on the profitsreported in Q3 2005. The income statement, statement of recognised income and expense and cash flow statement for the year ended, and thebalance sheet at, 31st December 2005 have been derived from the full Group accounts published in the Annual Report 2005,which have been delivered to the Registrar of Companies and on which the report of the independent auditors wasunqualified and did not contain a statement under either section 237(2) or section 237(3) of the Companies Act 1985. Data for market share and market growth rates are GSK estimates based on the most recent data from independent externalsources and, where appropriate, are valued in sterling at relevant exchange rates. Figures quoted for product marketshare reflect sales by GSK and licensees. In order to illustrate underlying performance, it is the Group's practice to discuss its results in terms of constantexchange rate (CER) growth. This represents growth calculated as if the exchange rates used to determine the results ofoverseas companies in sterling had remained unchanged from those used in the previous year. All commentaries arepresented in terms of CER unless otherwise stated. INVESTOR INFORMATION Approval of results for Q3 2006 This Announcement was approved by the Board of Directors on Thursday 26th October 2006. Financial calendar The company will announce preliminary results for 2006 and fourth quarter results on 8th February 2007. The fourthinterim dividend for 2006 will have an ex-dividend date of 14th February 2007 and a record date of 16th February 2007.It will be paid on 12th April 2007. Internet This Announcement and other information about GSK is available on the company's website at: http://www.gsk.com. INDEPENDENT REVIEW REPORT TO GLAXOSMITHKLINE PLC Introduction We have been instructed by the company to review the financial information for the three and nine months ended 30thSeptember 2006 which comprises the consolidated interim balance sheet as at 30th September 2006 and the relatedconsolidated interim statements of income, cash flows and recognised income and expense for the three and nine monthsthen ended and related notes. We have read the other information contained in the interim report and considered whetherit contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has beenapproved by the directors. This interim report has been prepared in accordance with the International Accounting Standard 34, 'Interim FinancialReporting', which requires that the accounting policies and presentation applied to the interim figures should beconsistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons forthem, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial data and, based thereon, assessing whetherthe disclosed accounting policies have been applied. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially less in scope than an audit and thereforeprovides a lower level of assurance. Accordingly we do not express an audit opinion on the financial information. Thisreport, including the conclusion, has been prepared for and only for the company for the purpose of this ResultsAnnouncement and for no other purpose. We do not, in producing this report, accept or assume responsibility for anyother purpose or to any other person to whom this report is shown or into whose hands it may come save where expresslyagreed by our prior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financialinformation as presented for the three and nine months ended 30th September 2006. PricewaterhouseCoopers LLP Chartered Accountants London 26th October 2006 Notes: (a) The maintenance and integrity of the GlaxoSmithKline plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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