New business priorities
At a
meeting in London today, GSK set out a series of new priorities and
updated its financial outlook for the Group.
The Group affirmed its commitment to developing innovative
healthcare products for patients and consumers across
Pharmaceuticals, Vaccines and Consumer Healthcare.
These
businesses have leadership positions in some of the world’s
biggest therapeutic areas and categories, a broad international
reach, and together have strategic and operational synergies.
Earnings and cash flows from this combination of businesses offer
balance to the Group and provide a level of sustainability to its
performance, its ability to invest in future growth and in its
returns to shareholders.
The
recent performance of these three businesses has demonstrated the
benefits of the transaction with Novartis in 2015 as well as the
impact of more effective introductions of new products, notably new
Respiratory and HIV medicines and vaccines to prevent meningitis.
Better performance, together with cost savings has also resulted in
improved margins and cash flows for all three businesses over the
last 18 months.
Whilst this
recent delivery is
encouraging, the company highlighted that there are several key
issues
it needs to address, over the
next three years, to make sure the Group
delivers long-term
competitive performance.
All three businesses need to perform but the priority for GSK is to
improve in Pharmaceuticals. Delivering full value from recent and
imminent product launches, together with cost base improvements, is
required to help mitigate the impact of pricing pressures to its
current portfolio. Strengthening the Pharmaceuticals pipeline is a
key objective for the Group.
Beyond Pharmaceuticals, the Group aims to realise further benefits
from its newly scaled Consumer Healthcare and Vaccines businesses.
The Group is also aiming to increase investment flexibility with a
series of measures to improve cash generation and clearer capital
allocation priorities.
Going forward, GSK intends to focus on three long-term priorities:
Innovation, Performance and Trust.
Innovation is important for all three businesses but the
Group’s top priority is to improve in
Pharmaceuticals.
A key
near-term focus is to maximise value from new products and three
other material new launch opportunities:
Shingrix
, a potential new vaccine for
shingles; Closed Triple, a new 3-in-1 respiratory medicine; and new
two drug regimens in HIV.
In its
Pharmaceuticals pipeline, GSK has developed a priority list of
assets to invest behind. This priority list will evolve as data
reads out. The Group has also set a target to deploy over time 80%
of its Pharmaceuticals R&D capital to priority assets in two
current therapy areas: Respiratory and HIV/infectious diseases; and
two potential areas: Oncology and Immuno-inflammation. Significant
data is expected from these priority assets over the next three
years which will be used to inform R&D investment decisions and
how best to generate value from these assets. GSK also expects to
pursue disciplined business development to augment its early-stage
pipeline in these priority areas.
As part
of its efforts to prioritise and allocate resources in R&D, GSK
is terminating development programmes that are unlikely to generate
sufficient returns. GSK has so far made decisions to terminate,
partner or divest more than 30 pre-clinical and clinical
programmes. The Group has also undertaken a strategic review of its
Rare Diseases unit and is now considering options for future
ownership of these assets.
In
addition, the Group is taking steps to improve the partnership
between R&D and its commercial organisation as well as its
governance around pipeline decision-making with the establishment
of a new Development Advisory Board and a new Board Scientific
Committee.
GSK’s second priority is a new company-wide focus on delivery
of sustainable, ethical and more competitive
performance.
The
Group is making a number of choices to prioritise the strongest
assets and markets in its portfolio and move capital and resources
away from those that offer more limited opportunities. It is
prioritising investment to support commercial execution in the US
market and is implementing a new operating model for Emerging
Markets to increase competitiveness and support long-term
profitable growth in these markets. The Group has also decided to
terminate its collaboration on sirukumab with Janssen Biologics and
progressively withdraw its support for
Tanzeum
.
The
Group is putting in place plans to improve its cash generation and
is expanding its current cost saving programme. It is targeting
delivery of an additional £1 billion in annual cost savings by
2020 at constant exchange rates. These new cost savings will be
used to fund new product launches, R&D investments and to help
mitigate pricing pressure on margins.
A key
driver of the new savings will be through realising efficiency
improvements in the Group’s supply chain. This will include
changes to GSK’s manufacturing network, divestment and exit
of more than 130 non-core tail brands (£0.5 billion in annual
sales), reductions in overheads, improved procurement savings and
more strategic supplier relationships.
The
Group is also seeking to strengthen its capabilities through
investments in people and appointment of external talent. One of
the key areas for this will be in digital, data and analytics, with
the Group aiming to leverage technology to improve clinical
outcomes, develop real world data and make a step-change in its
customer and consumer engagement.
GSK’s third priority is to build Trust. The Group recognises
that levels of trust in the industry are not sufficient and, if not
addressed, will impact long-term value creation.
GSK
will continue to make very strong commitments to delivering on the
fundamentals of Trust: quality and safety, reliability of supply
and service levels and effective compliance. It is also important
that GSK’s partners and customers trust the company’s
science and its intentions. GSK continues to develop its Healthcare
Practitioner engagement model to make sure it is competitive and
trusted.
The
Group is operating in an environment with sustained pressure to
reduce prices and recognises the issues that are being faced by
payers. GSK has taken a balanced approach to pricing of its
recently launched products and this will continue with the company
looking to support payer needs whilst generating sufficient
returns. GSK will also continue to allocate resources to supporting
major global health needs such as malaria and HIV and will be
increasing its efforts to adopt modern, progressive employer
practices.
In addition to these new priorities, GSK also set out its
intentions for future uses of capital.
Firstly,
free cash flow will be used to invest in the business and support
in particular: the Pharmaceuticals pipeline; realisation of the
Consumer Healthcare put option, if exercised; and expansion of
capacity in the Vaccines business. Secondly, free cash flow will be
used to deliver returns to our shareholders through the payment of
dividends. Thirdly, cash will be used for disciplined business
development.
As well
as establishing these clearer priorities for the allocation of
capital in the future, the Group intends to manage its investments
so that it continues to strengthen its credit profile and protect
its target short-term A1/P1 credit ratings.
GSK reiterated its outlook for sales and earnings performance to
2020 (first set out in 2015).
GSK
expects sales to grow at CER at a low-to-mid single digits
percentage CAGR and Adjusted EPS to grow at a mid-to-high single
digits percentage CAGR for the period 2016-2020. These outlooks are
based on 2015 exchange rates and anticipate that at least one
version of generic
Advair
will be launched in the US before 2020. The outlook includes the
divestments announced today and those executed since 2015
(£0.9 billion in annual sales).
Given
the potential development options in GSK’s pipeline, the
outlook may be affected by additional data-driven R&D
investment decisions.
The Group also announced its policy for future distributions from
2018 onwards and its expectations for the 2018
dividend.
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.
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