Core operating profit – Q2 2016
Core operating profit was £1,831 million, 15% higher in CER terms than in Q2 2015 on a turnover increase of 4%. The core operating margin of 28.0% was 5.1 percentage points higher than in Q2 2015 and 2.5 percentage points higher on a CER basis, reflecting improved operating leverage driven by sales growth and a more favourable mix across all three businesses as well
as continued delivery of restructuring and integration benefits and tight control of ongoing costs, partly offset by continued price pressure, particularly in Respiratory, supply chain investments and inventory adjustments.
Cost of sales as a percentage of turnover was 29.6%, down 0.6 percentage points in Sterling terms and flat in CER terms compared to Q2 2015. This reflected a more favourable product mix in the quarter, particularly the impact of higher HIV sales in Pharmaceuticals, but also in Vaccines and Consumer Healthcare, as well as a continued contribution from integration and restructuring
savings in all three businesses, offset by continued adverse pricing pressure in Pharmaceuticals, primarily Respiratory, inventory adjustments in Vaccines and continued investments in the supply chain.
SG&A costs were 31.4% of turnover, 4.1 percentage points lower than in Q2 2015 and 2.2 percentage points lower on a CER basis. This primarily reflected tight control of ongoing costs as well as cost reductions in Global Pharmaceuticals, including the benefits of the Pharmaceuticals restructuring programme initiated in Q4 2014, integration benefits in Vaccines and Consumer
Healthcare compared to Q2 2015 when synergies were at an early stage of delivery, offset by continued reallocation of investment in promotional product support, particularly for new launches in Respiratory, HIV, Consumer Healthcare and Vaccines.
R&D expenditure was £800 million (12.2% of turnover), 9% higher than Q2 2015 and 4% higher on a CER basis, reflecting increased investment in the pipeline, including the BMS HIV acquisitions in Q1 2016, offset by continued benefits from cost reduction programmes in Pharmaceuticals, Consumer Healthcare and Vaccines R&D.
Royalty income was £83 million (Q2 2015: £62 million) reflecting increased royalty income primarily from Gardasil sales.
Core operating profit by business – Q2 2016
Pharmaceuticals core operating profit was £1,348 million, 4% higher than in Q2 2015 in CER terms on a turnover increase of 2%. The core operating margin of 34.7% was 2.8 percentage points higher than in Q2 2015. On a CER basis the core operating margin was 0.4 percentage points higher, reflecting a more favourable product mix, primarily driven by the growth in HIV
sales, and the continued cost reduction benefit of the Group’s pharmaceuticals restructuring programme, partly offset by investment in new product support and the impact of lower prices, particularly in Respiratory, and the broader transition of the Respiratory portfolio.
Vaccines operating profit was £270 million, 39% higher than in Q2 2015 in CER terms on a turnover increase of 11%. The core operating margin of 28.1% was 6.4 percentage points higher than in Q2 2015 and 5.6 percentage points higher in CER terms, primarily driven by favourable product mix and enhanced operating leverage in the quarter from the benefits to International
sales of tender phasing, together with a reduction in SG&A and R&D costs delivered through restructuring and integration benefits. This was partly offset by an increase in the cost of sales due to a number of inventory adjustments and additional supply chain investments net of integration benefits.
Consumer Healthcare core operating profit was £238 million, more than double the level in Q2 2015 in CER terms on a turnover increase of 7%. The core operating margin of 14.1% was 7.0 percentage points higher than in Q2 2015 and 6.5 percentage points higher on a CER basis. This primarily reflected a favourable comparison with Q2 2015, which was impacted by the early
stages of integration and the acquired Novartis cost base, but also an improvement in gross margin reflecting mix benefits from the power brand strategy and pricing as well as continued strong contributions from integration synergies that benefited both SG&A and R&D as a percentage of sales.
Core operating profit – H1 2016
Core operating profit was £3,390 million, 14% higher in CER terms than in H1 2015 on a turnover increase of 6%. The core operating margin of 26.6% was 3.5 percentage points higher than in H1 2015 and 1.7 percentage points higher on a CER basis.
On a pro-forma basis, core operating profit was 21% higher in CER terms compared with H1 2015 on turnover growth of 5%. The pro-forma core operating margin was 3.3 percentage points higher in CER terms, reflecting improved operating leverage driven by sales growth and a more favourable mix across all three businesses as well as a strong half year of delivery of restructuring
and integration benefits as well as tight control of ongoing costs, partly offset by continued price pressure, particularly in Respiratory, supply chain investments and inventory adjustments.
Cost of sales as a percentage of turnover was 30.3%, down 0.3 percentage points in Sterling terms but 0.4 percentage points higher in CER terms than in H1 2015. On a pro-forma basis, the cost of sales percentage decreased 1.1 percentage points compared with H1 2015 and was down 0.4 percentage points in CER terms. This reflected improved product mix, particularly the impact
of higher HIV sales in Pharmaceuticals, but also in Vaccines and Consumer Healthcare, as well as an increased contribution from integration and restructuring savings in all three businesses, partially offset by continued adverse pricing pressure in Pharmaceuticals, primarily Respiratory, as well as inventory adjustments in Vaccines.
SG&A costs were 32.2% of turnover, 2.2 percentage points lower than in H1 2015 and 1.2 percentage points lower on a CER basis. On a pro-forma basis, SG&A as a percentage of sales reduced by 2.9 percentage points and 1.9 percentage points on a CER basis. This primarily reflected tight control of ongoing costs as well as cost reductions in Global Pharmaceuticals,
including the benefits of the Pharmaceuticals restructuring programme initiated in Q4 2014, and integration benefits in Vaccines and Consumer Healthcare compared to the first half of 2015 when synergies were in the very early stages of delivery, offset by reallocation of investment in promotional product support, particularly for new launches in Respiratory, HIV, Consumer Healthcare and Vaccines.
R&D expenditure was £1,575 million (12.3% of turnover), 4% higher than H1 2015 but 1% lower on a CER basis. On a pro-forma basis, R&D expenditure declined 2% on a CER basis reflecting the benefit of cost reduction programmes in Pharmaceuticals, Consumer Healthcare and Vaccines R&D partly offset by increased investment, primarily in HIV.
Royalty income was £174 million (H1 2015: £139 million) reflecting increased royalty income primarily from Gardasil sales as well as benefiting from a prior year catch-up adjustment.
Core operating profit by business – H1 2016
Pharmaceuticals core operating profit was £2,501 million, 6% higher than in H1 2015 in CER terms on a turnover increase of 1%. The core operating margin of 33.5% was 3.3 percentage points higher than in H1 2015 and 1.6 percentage points higher on a CER basis. On a pro-forma basis, the core operating margin increased 2.1 percentage points on a CER basis, reflecting
the more favourable product mix, primarily driven by the growth in HIV sales, and the cost reduction benefit of the Group’s pharmaceuticals restructuring programme, partly 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.
Vaccines operating profit was £523 million, 47% higher than in H1 2015 in CER terms on a turnover increase of 16%. The core operating margin of 28.4% was 6.1 percentage points higher than in H1 2015 and 5.9 percentage points higher on a CER basis. On a pro-forma basis, the core operating margin improved 10.5 percentage points and 10.3 percentage points in CER terms,
primarily driven by favourable product mix and enhanced operating leverage together with restructuring and integration benefits in CGS, SG&A and R&D, partly offset by a number of inventory adjustments and additional supply chain investments.
Consumer Healthcare core operating profit was £541 million, 76% higher than in H1 2015 in CER terms on a turnover increase of 16%. The core operating margin of 15.7% was 5.6 percentage points higher than in H1 2015 and 5.1 percentage points higher on a CER basis. On a pro-forma basis, the Consumer Healthcare operating margin was 5.6 percentage points higher on a CER
basis, primarily driven by improvements in gross margin reflecting mix benefits from the power brand strategy and pricing as well as a strong contribution from integration synergies benefiting both SG&A and R&D as a percentage of sales.
Core profit after tax and core earnings per share – Q2 2016
Net finance expense was £163 million compared with £178 million in Q2 2015, benefiting from the maturity of a number of higher interest-bearing long term debt instruments.
Tax on core profit amounted to £354 million and represented an effective core tax rate of 21.3% (Q2 2015: 20.0%). The increase in the effective rate primarily reflected the Group’s changing earnings mix to the US, and also adverse movements following the recent decline in Sterling. See ‘Taxation’ on page 47 for further details.
The allocation of earnings to non-controlling interests amounted to £121 million (Q2 2015: £99 million), including the non-controlling interest allocations of Consumer Healthcare profits of £67 million (Q2 2015: £29 million) and the allocation of ViiV Healthcare profits, which increased to £79 million (Q2 2015: £62 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. The allocation also reflects higher losses, including bad debt provisions, in other entities with non-controlling interests.
Core EPS of 24.5p was up 16% in CER terms compared with a 15% increase in operating profit, primarily reflecting the reduction in net finance expense offset by greater contribution to growth from businesses in which there are significant non-controlling interests as well as the increased tax rate in the quarter compared with Q2 2015.
Core profit after tax and core earnings per share – H1 2016
Net finance expense was £322 million compared with £334 million in H1 2015, reflecting maturity of a number of higher interest-bearing long term debt instruments.
Tax on core profit amounted to £648 million and represented an effective core tax rate of 21.1% (H1 2015: 20.0%). The increase in the effective rate reflected the Group’s momentum and changing earnings mix in favour of the US in particular. See ‘Taxation’ on page 47 for further details.
The allocation of earnings to non-controlling interests amounted to £268 million (H1 2015: £190 million), including the non-controlling interest allocations of Consumer Healthcare profits of £112 million (H1 2015: £41 million) and the allocation of ViiV Healthcare profits, which increased to £145 million (H1 2015: £113 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. The allocation also reflects higher losses, including bad debt provisions, in other entities with non-controlling interests.
Core EPS of 44.3p was up 12% in CER terms compared with a 14% increase in operating profit, primarily reflecting the greater contribution to growth from businesses in which there are significant non-controlling interests as well as the increased tax rate in the quarter compared with H1 2015, partly offset by reduction in net finance expense.
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