GSK GSK plc

By Denise Roland 

LONDON -- While Brexit provided an expected boost to core earnings for GlaxoSmithKline PLC, it also led to a big write-down -- the latest in a series of surprises stemming from Britain's vote to leave the European Union.

The U.K.-based drug giant said it recorded a GBP1.8 billion pound ($2.4 billion) charge to earnings, resulting in a net loss for the second quarter. The charge came after the company revalued its liabilities in line with the steeply lower pound. Sterling fell sharply after the Brexit vote last month and hasn't recovered much.

Investors and analysts shrugged off the big charge and net loss, with the stock finishing up 1.8% in London. They had been expecting the lower pound to sharply boost the company's so-called core earnings, which strip out one-time items. It did -- increasing core earnings by 21 percentage points for the second quarter. Revenue rose seven percentage points.

Glaxo also narrowed its earnings guidance for the full year to the upper end of its previous range.

The company separately said it would invest GBP275 million to increase capacity at three of its U.K. factories, which Chief Executive Andrew Witty said was a vote of confidence in the face of the Brexit vote.

Mr. Witty said Wednesday that going forward the company was "reasonably insulated" from any Brexit fallout. He said his U.K. investment decision, taken after the June 23 referendum, was a sign that Glaxo believed Britain was just as competitive today as it was before the vote.

The big charge was the latest in a series of unexpected Brexit consequences that have roiled boardrooms. Most have stemmed from the steep slide in sterling.

Earlier this week, Anheuser-Busch InBev NV boosted its offer for SABMiller PLC in their $100-billion-plus proposed beer megamerger. The move was an attempt to quell some angry investors who say pound weakness has made the deal less attractive. It came after the two have spent months trying to win regulatory approval around the world, agreeing to sell off big chunks of their businesses in the process.

Shares have soared for companies like Glaxo, which report in sterling but derive most of their sales in other currencies. After the steep fall in the pound, analysts have been expecting a big currency tailwind in profit for these firms, as those overseas sales translated into more pounds than they would have before the vote.

Glaxo's core operating profit, boosted by the currency tailwind, increased 36% to GBP1.8 billion. Revenue climbed 11% to GBP6.5 billion, beating analyst forecasts of GBP1.6 billion and GBP6.3 billion, respectively. Adjusting for currency effects, core operating profit climbed 15%, and revenue rose 4%.

But the falling pound also increases the value of Glaxo's liabilities, forcing the company to take the GBP1.8 billion write-down and post a net loss of GBP435 million for the three months to June 30. That compared with a GBP149 million net profit reported a year earlier.

Those liabilities include a put option held by Novartis AG giving the Swiss drug giant the right to sell its stake in the pair's jointly owned consumer-health-care business to Glaxo. With a weaker pound, that stake is worth more, so it would cost Glaxo more to acquire.

Glaxo also narrowed its full-year guidance to the upper end of earlier estimates. It now expects core earnings per share to increase 11% to 12% in 2016, compared with 10% to 12% previously.

Write to Denise Roland at Denise.Roland@wsj.com

(END) Dow Jones Newswires

July 28, 2016 02:48 ET (06:48 GMT)

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