Q4 2016 Real-Time Call Brief

Highlights

Total group sales were ₤27.9 billion, up 6% CER and core EPS up was 102.4 pence up 12% CER.

In sterling terms core EPS was up 35% reflecting the significant movement in currency in 2016 and if sterling rates were to remain in line with January average rates for the rest of '17, we would expect a 9% benefit to core EPS during the year.

Total EPS for Group was 18.8 pence down on last year primarily as a consequence of the comparative to the ₤9.2 billion gain in the Novartis transaction during 2015.

We've declared a dividend of 23 pence for the quarter bringing a total dividend of 80 pence for 2016 and we continue to expect to pay dividend of 80 pence for 2017.

The positive momentum we saw in 2016 delivered pharmaceuticals sales of 16.1 billion, up 3%.Vaccines sales of 4.6 billion up 14% and Consumer Healthcare of 7.2 billion up 9%.

On a pro-forma basis, sales growth was respectively plus 4, plus 12 and plus 5.

On a geographic basis, US accounted a 10 billion, Europe 7.5 billion and international 10 billion.

Operating margins also improved in all three businesses reflecting good cost control and delivery of organic and transaction related savings with the group core profit margin of 27.9%, up 3.9 points on last year.

Sales of 11 pharmaceutical and vaccine products we have launched in the last four years more than doubled to $4.5 billion in 2016, and in the fourth quarter alone sales were $1.4 billion.

In pharmaceuticals new products in the fourth quarter accounted for 27% of sales.

We've maintained our focus on financial efficiency and P&L and in the allocation of our capital allowing us to deliver core EPS growth ahead of sales in the top end of our EPS guidance as well as a significant improvements in our cash generation on a dividend of ₤0.80 per share.

Group sales up 6% reported, 5% pro-forma.

Core EPS up 12%.

On currency specifically the weakness in the sterling results in a tailwind of 11% to sales. The tailwind on EPS was higher, 23%.

If FX rates remain in line with January average rates for the rest of 2017, we expect a 9% tailwind core EPS.

The year-on-year decline in earnings is primarily driven by the comparison with the $9.2 billion profit we made in 2015 on the disposal of our Oncology business.

We have recently restructured the shareholders' agreement which to remove that put option and the associated estimated liability of $1.2 billion.

We continue to carry the Pfizer option on the balance sheet of $1.2 billion.

Pharma was up 4% pro-forma with new products now significantly more than offsetting the decline in Seretide/Advair sales.

At overall we expect Seretide/Advair to be down around 15% to 20% globally, similar to the trend of the last couple of the year, with the US in line with this range, the Europe more than 20% and given the different stage of transition in our portfolio.

The products being sold to Aspen contributed approximately ₤100 million of sales to 2016 that will act as a further drag to the established products business during 2017 of around 4%.

Moving to Vaccines sales up 12% pro-forma.

We also had a very successful flu season especially in the US driving overall pro forma growth for vaccines to 12%.

Moving to Consumer, we delivered a strong performance in the portfolio of the joint venture sales up 5% pro forma consistent with our medium term outlook for this business.

The pro forma margins was up 460 basis points in total 200 from currency and 260 points from operation improvements.

We expect total royalties to be around ₤300 million in 2017.

In Consumer, we expect continued progress on margins and we remain on track to achieve our 20% plus target by 2020.

We've now delivered annualized benefits of 2.8 billion excluding 200 million of currency benefits.

We are confident in delivering the remaining 200 million during 2017.

The cost we have incurred to get to this stage have also been better than originally expected with total cash cost accrued to-date of 2.9 billion compared to the initial estimates of 3.65 billion.

Delivery of the remaining 200 million of benefits is also expected to cost less than originally we have anticipated at around additional 300 million of cash cost to be charged in 2017 to deliver the full total of benefits.

In 2017 we expect a modest uptick in interest cost reflecting the higher debt levels and as for tax rate, we expect a core rate of 21% to 22%, again reflecting the changing geographical mix of our business.

On cash flow and net debt, reported free cash for the group was ₤3.1 billion.

Tangible and intangible CapEx in 2016 was 2.35 billion, including 0.2 billion spent on acquiring the late-stage BMS HIV assets and in 2017, we expect total CapEx to be slightly lower at around 2.2 billion.

Restructuring spend that came in under our original expectations with cash spend in 2016 at 1.1 billion compared to the 1.3 billion we previously indicated.

Cash spend on the integration and restructuring program is expected to decline sharply in 2017 to around 300 million, as the program completes the delivery of its targeted benefits.

Net debt increased by ₤3.1 billion driven by an aggregate currency impact of ₤2.2 billion.

Excluding the exchange effect, net borrowings increased 0.9 billion reflecting the payments of dividends during the year of ₤4.9 billion including the special dividend of ₤1 billion declared in 2015, offset by free cash flow ₤3.1 billion and asset disposals of ₤1 billion.

If there's no generic launch in the US this year, then we would expect core EPS growth of 5% to 7% on a constant currency basis and again this is based on an expected ongoing decline in 2017 US Advair sales of 15% to 20% again on constant currency basis.

In this event, we would expect that US Advair sales for 2017 as a whole would decline to around a billion at constant exchange rates, 1.36 to the pound.