EX-15.2 7 d268160dex152.htm GSK ANNUAL REPORT 2011 GSK Annual Report 2011

Exhibit 15.2

 

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Notice regarding limitations on Director Liability under English Law

Under the UK Companies Act 2006, a safe harbour limits the liability of Directors in respect of statements in and omissions from the Report of the Directors contained on pages 1–133 which includes the Business review on pages 1 to 77. Under English law the Directors would be liable to the company, but not to any third party, if the Report of the Directors contains errors as a result of recklessness or knowing misstatement or dishonest concealment of a material fact, but would not otherwise be liable.

Report of the Directors

Pages 1–133 inclusive comprise the Report of the Directors that has been drawn up and presented in accordance with and in reliance upon English company law and the liabilities of the Directors in connection with that report shall be subject to the limitations and restrictions provided by such law.

Website

GlaxoSmithKline’s website www.gsk.com gives additional information on the Group. Notwithstanding the references we make in this Annual Report to GlaxoSmithKline’s website, none of the information made available on the website constitutes part of this Annual Report or shall be deemed to be incorporated by reference herein.

Cautionary statement regarding forward-looking statements

The Group’s reports filed with or furnished to the US Securities and Exchange Commission (SEC), including this document and written information released, or oral statements made, to the public in the future by or on behalf of the Group, may contain forward-looking statements. Forward-looking statements give the Group’s current expectations or forecasts of future events. An investor can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as ‘anticipate’, ‘estimate’, ‘expect’, ‘intend’, ‘will’, ‘project’, ‘plan’, ‘believe’ and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. The Group undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Forward-looking statements involve inherent risks and uncertainties. The Group cautions investors that a number of important factors, including those in this document, could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, those discussed under ‘Risk factors’ on pages 72–77 of this Annual Report.

A number of adjusted measures are used to report the performance of our business. These measures are defined on page 51.

 

 

Contents

 

 

Overview

 

  

What we do

     2   

Where we do it

     3   

How we create value

     4   

How we deliver

     6   

How we performed

     8   

+    02 – 09

  

 

 

Strategic review

 

  

Chairman’s statement

     10   

Chief Executive’s review

     11   

Our marketplace

     13   

Our strategy for growth

        

Grow a diversified business

     16   

Deliver more products of value

     28   

Simplify the operating model

     38   

Our financial architecture

     42   

Responsible business

     44   

+    10 – 50

  

 

 

Financial review & risk

 

  

Financial review 2011

     51   

Financial position and resources

     60   

Financial review 2010

     67   

Risk factors

     72   

+    51 – 77

  

 

 

Governance & remuneration

 

  

Our Board

     78   

Our Corporate Executive Team

     80   

Governance and policy

     84   

Share capital and control

     95   

Committee reports

     97   

US law and regulation

     104   

Total remuneration for 2011

     108   

Remuneration policy for 2012

     110   

Directors’ emoluments and total remuneration

     124   

Directors and Senior Management

     133   

+    78 – 133

  

Financial statements

 

  

Directors’ statement of responsibilities

     134   

Independent Auditors’ report

     135   

Financial statements

     136   

Notes to the financial statements

     141   

Financial statements of GlaxoSmithKline plc prepared under UK GAAP

     216   

+    134 – 221

  

 

 

Shareholder information

 

  

Quarterly trend

     222   

Five year record

     232   

Product development pipeline

     235   

Share price and dividends

     242   

Nature of trading market

     243   

Annual General Meeting

     243   

Investor relations and registrars

     244   

Taxation information for shareholders

     245   

Glossary of terms

     247   

Index

     248   

+ 222 – 248

  

 

Front cover (clockwise from top)

Our PHASE programme educates groups about the importance of handwashing in reducing the spread of diseases. (Chris Martin)

A Diskus inhaler, one of the devices that we have developed to deliver inhaled medicines directly to the respiratory system. (Inpress Photography)

Early research into new biopharmaceuticals, including treatments based on antibodies, takes place at our large R&D centre in Stevenage, in the UK. (George Brooks)

Page 1

More than 12,500 people work in R&D in the search for new medicines, vaccines and consumer healthcare products. (Pierre Charbonneau)

Testing for signs of malaria in children in Tanzania. (Tom Whipps)

Sensodyne Repair & Protect has boosted performance in our Consumer Healthcare business. (Andy Robinson, Photofarm)

 
 


 

GSK Annual Report 2011

 

     01   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

We are a science-led global healthcare company

 

We make innovative medicines, vaccines and consumer healthcare products that are used by millions of people around the world, allowing them to do more, feel better and live longer.

 

The products we develop and manufacture and how we do this contributes directly to the health of patients and consumers, and indirectly to the wider well-being of the economy and society.

 

We have been fundamentally changing in recent years to create a more balanced business to address market challenges and deliver sustainable performance and returns for shareholders. We are committed to generating that performance in a responsible way.

 

+    visit our website: www.gsk.com

  

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02

 

   GSK Annual Report 2011

Overview

  
  

 

What we do

  

 

We are a science-led global healthcare company that researches

and develops a broad range of innovative products

Our business

 

 

We have three primary areas of business: Pharmaceuticals, Vaccines and Consumer Healthcare. Our objective is to deliver sustainable growth across this portfolio. In 2011, our total turnover was £27.4 billion.

£27.4bn Group turnover

 

Pharmaceuticals

         

Vaccines

         

Consumer Healthcare

   
£18.7bn    68%              £3.5bn    13%              £5.2bn    19%   
Turnover    of Group              Turnover    of Group              Turnover    of Group   
   

Our Pharmaceuticals business develops and makes available medicines to treat a broad range of serious and chronic diseases. Our portfolio is made up of established brands and newer innovative patent-protected medicines.

 

         

Our Vaccines business is one of the largest in the world, producing paediatric and adult vaccines against a range of infectious diseases. In 2011, we distributed 1.1 billion doses to 173 countries, of which over 80% were supplied to developing countries.

 

         

We develop and market a range of consumer health products based on scientific innovation. We have leading positions in three main categories: Over-the-counter (OTC) medicines, Oral healthcare and Nutritional healthcare. Our portfolio includes a number of well-known brands such as Panadol, Sensodyne, Lucozade and Horlicks.

 

Sales by therapy area    £m              Sales by vaccine    £m              Sales by category    £m

Respiratory

   7,298          

Boostrix

   192          

OTC

   2,453

Anti-virals

   807          

Cervarix

   506          

Oral healthcare

   1,717

Central nervous system

   1,721          

Fluarix, FluLaval

   230          

Nutritional healthcare

   1,025

Cardiovascular and urogenital

   2,740          

Flu pandemic

   18             

Metabolic

   362          

Hepatitis

   688             

Anti-bacterials

   1,390          

Infanrix, Pediarix

   690             

Oncology and emesis

   693          

Rotarix

   300             

Dermatology

   1,087          

Synflorix

   350             

ViiV Healthcare (HIV)

   1,569          

Other

   523             

Other

   1,028                          

 

R&D

 

Our business is sustained through investment in R&D. In 2011 we spent £3.9 billion before major restructuring*, £4.0 billion in total, in our search to develop new medicines, vaccines and innovative consumer products.

 

We allocate our R&D investment based on our view of the scientific opportunities in different disease areas, our ability to provide significant improvements on existing treatments and the level of returns we can generate.

 

We also have dedicated research programmes for diseases that affect the developing world. We are one of the few healthcare companies researching both new vaccines and new medicines for all three of the World Health Organization’s priority diseases: HIV/AIDS, malaria and tuberculosis.

         £4.0bn        

R&D expenditure allocation in 2011

         total R&D expenditure in 2011         LOGO
        

 

c.30

       
         assets in late stage pipeline        
        

 

12%

       
                      £m
         estimated internal rate of return from R&D expenditure        

1. Pharmaceuticals

   3,160
                

2. Vaccines

   599
                

3. Consumer Healthcare            

   153
                

4. Major restructuring

   97
                   
                    30 – 35    +  
                   

 

* The calculation of results before major restructuring is described in Note 1 to the financial statements, ‘Presentation of the financial statements’ and presented in the Consolidated income statement on pages 136 and 137.


 

  Where we do it

 

GSK Annual Report 2011

 

     03   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   
 

 

Our geographic presence covers more than

100 countries

Our global reach

 

Since 2008, we have been re-shaping our business to capitalise on the higher growth potential of markets outside Europe and the USA. These territories now account for 38% of our total sales. At the same time, we have restructured our developed markets business to reflect the challenging commercial environment in those markets.

We have a significant global manufacturing and R&D presence with a network of 74 manufacturing sites and large R&D centres in the UK, USA, Spain, Belgium and China.

 

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97,389 Employees

 

Employees by region

  

LOGO      
       No.   

1 USA

     16,707   

2 Europe

     38,696   

3 Emerging Markets

     29,466   

4 Asia Pacific

     7,039   

5 Japan

     3,573   

6 Other

     1,908   
  +    236   
  

 

Turnover by region

  

LOGO   
      £bn  

1 USA

     8.7   

2 Europe

     8.3   

3 Emerging Markets

     5.3   

4 Asia Pacific

     1.8   

5 Japan

     2.3   

6 Other

     1.0   
  +    234   
  
 

How we’re structured

 

Our commercial businesses are structured around regional units or areas of focus.

 

For Pharmaceuticals and Vaccines, we operate in geographical segments that combine these two businesses.

Our Consumer Healthcare business functions as a global unit, as does ViiV Healthcare, the specialist HIV company we founded with Pfizer in 2009.

 

Other trading turnover includes Canada, Puerto Rico, central vaccine tender sales and contract manufacturing sales.

      

Turnover by segment

  

             £bn  
      

US Pharmaceuticals and Vaccines

     7.0   
      

Europe Pharmaceuticals and Vaccines

     5.8   
      

Emerging Markets Pharmaceuticals and Vaccines             

     3.7   
      

Japan Pharmaceuticals and Vaccines

     2.1   
      

Asia Pacific Pharmaceuticals and Vaccines

     1.2   
      

ViiV Healthcare

     1.6   
      

Other trading

     0.8   
      

Consumer Healthcare

     5.2   
         
            149    +     
         


 

04

 

   GSK Annual Report 2011

Overview

  
  

How we

create value

  

 

Our business model relies on innovation, intellectual property

protection and brand allegiance to deliver sustainable growth

Our business model

 

New medicines and healthcare products are needed by people across the globe to address the many illnesses such as cancer, diabetes and heart disease that are still not well-controlled or treated. At the same time, scientific research is continuously uncovering new understandings about disease processes and technologies.

These two elements present us with the opportunity to investigate and develop new and improved treatments. We create value by applying science and technology to discover, develop, produce and distribute medicines, vaccines and consumer healthcare products.

Pharmaceuticals and Vaccines

 

The process of discovering and developing new medicines and vaccines is long and expensive and requires innovation and creativity. Industry development times are typically 10–15 years for new medicines and vaccines, with costs of up to £1 billion for each approved product. The R&D process often involves thousands of patients in trials to investigate the safety and efficacy of potential new treatments.

A critical element of our business model is the protection of the intellectual property we create in developing new treatments and technologies. This protection allows us to generate income for a set period of time, enabling us to recoup our R&D costs and invest in further research.

Patent protection for prescription medicines – as for other inventions – is around 20 years in most Western countries. However, by the time a new medicine is approved for use in patients, a significant proportion of this exclusivity period will have passed. Patents on our products also do not prevent the protection being challenged before they expire.

Once patent protection expires, a medicine is often subject to competition from generic manufacturers who do not have the same R&D overheads and so are able to offer their products at considerably lower prices. Declines in sales following patent expirations are particularly rapid in the USA and Europe. Generic pressures are different in emerging markets, where brand allegiance has a greater influence. In these markets, a known heritage or brand for existing medicines – whether on-patent or not – is valued and provides an opportunity to withstand generic competition.

Vulnerability to generic competition is less marked for vaccines and biopharmaceuticals, including enzymes and monoclonal antibodies. These large molecules are created through different development and manufacturing processes to that of small molecules, and these products are typically more difficult and expensive to manufacture.

The development of generic versions of vaccines and biopharmaceuticals is also subject to different regulatory requirements, such as the requirement to carry out trials in humans. This incurs an additional expense not required in the generic manufacture of small molecules, and therefore places a further barrier to generic competition.

Consumer Healthcare

 

Intellectual property protection is not the same for consumer healthcare products. Our Consumer Healthcare business relies on product innovation, brand loyalty and trademark protection to be competitive and create value. Development timelines for new consumer healthcare products are significantly shorter than for pharmaceuticals and vaccines and the pace of innovation is rapid. The application of science and consumer insights are key to driving successful product innovation for consumer brands.

 

 

Pharmaceutical discovery and development process

 

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GSK Annual Report 2011

 

     05   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

 

Why we are different

 

We have fundamentally changed our business and our culture to help us grow and improve our performance. Our approach is now one of openness to challenge and innovation. This affects the way we do business, the way we work with external groups and our relationship with our employees. For our employees, the positive impact their contribution makes to people’s lives is one of their key motivators to working at GSK.

Breadth of business

 

We have a broad-based and balanced business across pharmaceuticals, vaccines and consumer healthcare products. Our Pharmaceuticals and Vaccines businesses include both established brands and new innovative patent-protected medicines. We have many category-leading brands in our Consumer Healthcare business.

This diverse portfolio provides us with a range of products to drive our business in innovation-driven markets such as the USA and Japan. It also provides us with good opportunities for growth in emerging markets, where rapidly developing economies are expanding the number of people with access to healthcare treatments.

The changes we have made to the shape of our business are intended to provide broadly-sourced sales growth and provide greater resilience in the face of market challenges, such as the loss of patent protection or government austerity measures.

New ways of working

 

We have fundamentally changed our R&D organisation to deliver a large and diverse late-stage pipeline and a discovery organisation structure that can sustain a flow of innovative new medicines and vaccines.

To do this, we have broken up the traditional hierarchical pharmaceutical R&D business model, creating instead smaller units to encourage greater entrepreneurialism and accountability for our scientists.

We are striving to develop new partnerships and approaches, adopting a different mindset, that is more innovative, open-minded, flexible, and consultative. We value the new and different perspectives that other groups can bring to our thinking. We are open to working with research charities, academia, companies and non-governmental organisations. We are also increasing consultation with patients and payers to ensure the medicines we are developing provide improvements that healthcare systems will value and reward.

We are committed to researching new and better treatments for diseases that impact the developing world. Our research centre in Spain is dedicated to this discovery work and we are one of the few companies researching treatments and vaccines for malaria, TB and HIV. In 2011, we reported positive initial results for our malaria vaccine which if successful, would be the world’s first vaccine against this deadly disease. We are being more flexible with our intellectual property and know-how in areas of research such as diseases of the developing world, with the aim of stimulating progress in the search for new treatments.

In our commercial organisation, we have pioneered new sales models to align with the changing market and expectations of our customers. For example, we have introduced a new remuneration system for our US sales representatives based on the service they deliver to healthcare professionals rather than on individual sales targets.

Commitment to access

 

We are actively seeking new ways of delivering healthcare and making our products more available and affordable to people who need them wherever they live. We do this not only because society expects us to and it is the right thing to do, but also because it is good for our business.

In our effort to expand access to our products, we have led the industry in adopting a flexible approach to pricing of our medicines and vaccines, based on a country’s wealth and ability to pay. This has resulted in significant reductions in price and increases in demand for our products in emerging economies, representing a good outcome for patients, governments and our shareholders. In Western markets, we have developed new reimbursement approaches for our medicines, where we agree risk-sharing arrangements with payers.

We have established a special business unit that is responsible for increasing access to our products in the least developed countries in the world. The price of our patented medicines in this region is kept at no more than 25% of our developed world prices and we re-invest a fifth of the profits we make from sales in these territories back into local healthcare infrastructure projects.

We work with many agencies to distribute our vaccines to the people in these countries at the lowest price we can. Of the 1.1 billion vaccine doses we delivered in 2011, more than 80% were supplied to protect people in developing countries. We also have significant medicine donation programmes targeted at disease elimination.

 

 


 

06

 

   GSK Annual Report 2011

Overview

  
  

 

How we deliver

  

 

Our strategy is designed to deliver sustainable growth, reduce risk

and improve long-term financial performance and returns to shareholders

Our strategic priorities

 

1

Grow
a diversified global business

     

2

Deliver
more products of value

     

3

Simplify
the operating model

  +    16 – 27         +    28 – 37         +    38 – 41
                    
                    

We are creating a more balanced business and product portfolio capable of delivering sustainable sales growth. This is centred on our three business areas of Pharmaceuticals, Vaccines and Consumer Healthcare. As well as accessing growth markets, we are creating a business that is less vulnerable to market volatility, including generic pressures.

 

Over the past three years, we have substantially increased our investment in our Emerging Markets and Japanese operations as well as in our global Vaccines and Consumer Healthcare businesses.

 

We are also maximising the promotion and distribution synergies between our Pharmaceuticals, Vaccines and Consumer Healthcare businesses in rapidly growing emerging economies.

     

We have changed our R&D organisation so that it is better able to sustain an industry-leading pipeline of products that offer valuable improvements in treatment for patients and healthcare providers.

 

We have increased the level of externalisation of our research, allowing us to access new areas of science and to share the risk of development with our partners. We have also made decisions earlier around pipeline progressions, so that only those medicines which are significantly differentiated from existing therapies are progressed. We have broken up the traditional hierarchical business model and created smaller, more agile groups of scientists who are more accountable for delivering their projects.

     

As we change the shape of our business, we are transforming our operating model to reduce complexity and make it more efficient. Over the past four years we have implemented a global restructuring programme which has delivered significant savings.

 

At the same time our manufacturing business unit has been relentlessly focused on streamlining production processes to improve efficiency and eliminate waste.

 

We have reorganised our global support functions such as facilities real estate, IT and procurement into one centralised group. This will allow us to become more streamlined and provide significant economies of scale.

£27.4bn    38%       3    c.30       £2.2bn    210 days
Group turnover    proportion of sales outside USA and Europe      

new product

approvals

  

assets in late

stage pipeline

     

annual benefits from

restructuring programme

   working capital cycle down from 221 in 2010
                    

Our financial architecture

 

In 2011 we established a new financial architecture. This aligns our planning, execution and performance measurement in order to maximise financial performance and returns to shareholders.

 

It is designed to drive improvements in operating margin, greater financial efficiency and enhanced cash conversion from the sales growth we are focused on delivering. This should lead to stronger growth in earnings per share and better free cash generation.

 

This expected cash flow is available for dividends, reinvestment in the business or share buy-backs depending on where returns are most attractive.

  

In addition, we have improved our financial reporting to align it more closely with our architecture. We are providing more data and insights into the progress we are making in each of our businesses and regions and on our progress against the key drivers of operational and financial efficiency.

 

Starting in 2012 we are transitioning our reporting to a core basis, enabling greater visibility of the underlying performance of the business.

   42 – 43    +  


 

GSK Annual Report 2011

 

     07   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

Our underlying operating principles

 

Strong governance

 

Our commitment to responsible, values-based business underlies everything we do. Our values are applied across the Group. These values are to operate with transparency, demonstrate respect for people, act with integrity and remain patient-focused. We have strong policy and compliance programmes and expect the same standards of our suppliers, contractors and business partners. Our Chairman and Board of Directors provide leadership on corporate governance, which is fundamental to sound decision making and supports our executive management in implementing our strategy. Our Risk Oversight and Compliance Council (ROCC) oversees the management of significant business risks including reputational and non-financial risks. It does this in compliance with laws and regulations as well as in coordination with our other governance bodies and in the spirit of our values and standards. Our Audit & Assurance group support the ROCC and the Board’s Audit & Risk Committee, providing an independent view of how significant risks are being managed across the organisation.

82 – 105    +  

Operating responsibly

 

We believe that only by being a responsible business can we grow and create value for our shareholders and for society in the long term. We think about our responsibilities in four areas: helping improve people’s health and well-being wherever they live or whatever their ability to pay; working to support the development of our people as well as communities around the world; behaving in an open and honest manner in all that we do, and growing our business while protecting the natural resources we all need for the future.

We continue to change the way we do business so we can be successful and sustainable in the longer term.

44 – 50    +  

 

Collaborative approach

 

Our business and our products touch many different groups, over and above the people who take our medicines and products. We aim to work with these groups in a transparent and collaborative manner to allow us to succeed with our partners. That approach applies to our interactions with payers, regulators and the healthcare professionals we work with, as well as our suppliers and business partners. Equally we seek to be a valuable participant in scientific research, through our collaborations with researchers and by sharing significant scientific developments and data through the appropriate routes. We actively seek to work in partnership with public bodies and non-governmental organisations to help progress health issues that present wider societal challenges, such as treatments for neglected tropical diseases and the prevention of childhood illnesses in the least developed countries.

44 – 50    +  

 


 

08

 

   GSK Annual Report 2011

Overview

  
  

 

How we

performed

  

 

We measure our performance against a number of key indicators and

the remuneration of our executives is based on many of these

 

Group turnover

£27.4bn

 

LOGO

 

Why it’s important

  

How we performed

A key objective of our strategy is to deliver sustainable broadly-sourced sales growth.   

While reported turnover fell by 3% in the year, over the past two years we have delivered average annual underlying turnover growth of 4%. Underlying turnover growth adjusts for the impact of the roll-off of sales of pandemic products, Avandia and Valtrex.

 

 

 

 

* The calculation of underlying turnover is described on page 27.

Operating profit and margin before major restructuring*+

£7.9bn

 

LOGO

 

 

Why it’s important

  

How we performed

A second key objective is to improve operating leverage in order to deliver stronger operating profit growth. The margin indicates how costs are being managed. We have included operating profit as a key measure for 2011.

 

   Operating profit excluding legal costs and other operating income has been significantly impacted this year by the roll-off of pandemic products, Avandia and Valtrex.

 

 

* excluding legal costs of £157 million (2010 – £4,001 million, 2009 – £591 million) and other operating income of £610 million (2010 – £493 million, 2009 – £1,135 million).

 

 

Earnings per share before major restructuring+

114.1P

 

LOGO

 

 

Why it’s important

  

How we performed

EPS shows the portion of our profit allocated to each share. It is a key indicator of our performance and the returns we are generating.

 

   In 2011, EPS grew significantly compared with 2010, primarily as a result of lower legal charges.

 

 

+ The calculation of results before major restructuring is described in Note 1 to the financial statements, ‘Presentation of the financial statements’.

Free cash flow*

 

£4.1bn

LOGO

 

 

Why it’s important

  

How we performed

This measure shows the cash we generate that is available to return to shareholders or reinvest in the business, as well as our effectiveness in converting our earnings to cash through effective working capital control and investment discipline.    Free cash flow in 2011 was impacted by the loss of sales of pandemic products, Avandia and Valtrex and the associated receivables and legal settlements of £1,466 million (2010 – £2,047 million, 2009 – £254 million).

 

* The calculation of free cash flow is described on page 51 and a reconciliation is provided on page 64.

 

# The calculation of CER growth is described on page 51.


 

GSK Annual Report 2011

 

     09   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

 

Turnover in our major growth areas

£14.8bn

 

LOGO

 

Why it’s important

  

How we performed

This measure focuses on our major growth areas: Vaccines, Consumer Healthcare, Emerging Markets, Asia Pacific and Japan and Dermatology. This performance highlights the progress we are making in delivering our strategy to create broad-based sales growth that is more resilient to volatility.

 

   Turnover in these business areas in 2011 totalled £14.8 billion, representing 54% of Group turnover. The decrease compared with 2010 reflects the loss of Avandia, Valtrex and flu pandemic sales.

 

New Pharmaceuticals and Vaccines product

performance

£2.5bn

 

 

 

 

LOGO

 

Why it’s important

  

How we performed

This measure shows the delivery of sales from newly launched products and creates incentives for improved R&D performance. New products are defined as products launched in the last five years. We have included this as a key measure for 2011.    2011 sales totalling £2.5 billion represented 11% of Pharmaceuticals and Vaccines turnover and included Cervarix (£506 million), Synflorix (£350 million) and Rotarix (£300 million).

 

 

 

 

 

Cash returned to shareholders

£5.6bn

 

LOGO

 

Why it’s important

  

How we performed

We continue to focus on delivering dividend growth and returning free cash flow to shareholders through share buy-backs where this offers a more attractive return than alternative investments.

 

 

 

   In 2011, we paid dividends of £3.4 billion and spent £2.2 billion on repurchasing shares.

Total shareholder return

 

 

LOGO

 

 

 


 

10

 

   GSK Annual Report 2011

Strategic review

  
  

Chairman’s

statement

  

 

On behalf of the Board, I am very pleased to report that GSK has made considerable progress in 2011, despite the challenging economic environment.

Our management team has driven fundamental change to the business over the last 3½ years to improve growth prospects, reduce risk and deliver enhanced financial performance. There is now demonstrable evidence that this strategy is starting to deliver and positively differentiate GSK’s outlook from other companies in the sector. I would particularly like to recognise here Sir Andrew’s vision and leadership in identifying early on the scale of change that was needed and in successfully starting to execute that change.

Ultimately the aim of our strategy is to deliver sustainable improved long-term value and returns to shareholders. During the year, we returned £5.6 billion to our shareholders in dividends and share buy-backs – an increase of 75% versus 2010.

In the current uncertain economic environment, management of risk remains a key focus for the Board and senior executive team. During 2011, we reached an agreement in principle to settle the Group’s outstanding litigation with the US Government on historic sales and marketing practices. This agreement adds to settlements made for other outstanding litigation and significantly reduces our overall legal exposure.

The Board will continue to focus on strengthening governance and compliance procedures to help reduce future litigation and minimise other risk for shareholders. Through the Audit and Risk Committee, we retain good visibility of the issues and challenges faced by management and their work to address them. In 2011, for example, we completed a thorough review of the Anti-Bribery and Corruption (ABAC) programme and associated training developed so as to ensure compliance with the 2010 UK Bribery Act.

It remains our strong belief that operating in a responsible and ethical way is essential for the success of GSK. As Chairman of the Corporate Responsibility Committee, I was pleased to see the progress we made during the year to improve global access to our medicines, including agreements to supply large quantities of a number of our vaccines to the poorest countries in the world at a fraction of Western prices.

Late in 2011 we also received very promising first data for our malaria vaccine which, if proved successful, has the potential to prevent the deaths of millions of African children from this terrible disease.

Maintaining good corporate governance is a key priority and I am pleased to introduce our Corporate Governance report on page 82, which sets out our approach to the regulations and guidelines underpinning our decision making. We are very mindful of the current environment around executive remuneration and we remain committed to linking pay to the delivery of performance. We set out more details on our approach in our Remuneration Report on page 106.

There have been several changes to the Board in 2011. Simon Dingemans succeeded Julian Heslop as Chief Financial Officer and Judy Lewent and Stacey Cartwright were appointed as Non-Executive Directors. Judy and Stacey have brought a wealth of experience from business and finance and their respective knowledge of the pharmaceutical industry and consumer brands represents strong additions to the Board. Going forward, James Murdoch has decided to step down from the Board at this year’s AGM and will not be offering himself for re-election. I would like to thank James for his contribution to the Board over the past three years.

We are committed to continuing to improve diversity at Board level and have an aspiration to have more than 25% female representation by 2013.

Finally, the Board was pleased that Sir Andrew was knighted in the 2012 New Years Honours for his services to the economy and the pharmaceutical industry. This is a well-deserved recognition of Sir Andrew’s contribution not only to GSK but also to the economy.

 

 

LOGO

Sir Christopher Gent

Chairman

 


  Chief Executive’s

  review

 

GSK Annual Report 2011

 

     11   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

 

GSK’s record in 2011 demonstrates that we are succeeding in our strategy to create a more balanced business, deliver sustainable financial performance and provide new value to patients and consumers.

 

 

 

 

 

 

 

During the year we delivered underlying sales growth, strong cash generation, significant R&D progress and we increased shareholder returns to £5.6 billion.

Underlying sales growth reflects portfolio breadth and mix

 

Underlying sales for the group grew 4%. This growth was broadly sourced, and we saw strong performances across all areas of our business with Pharmaceuticals up 2%, Vaccines up 11% and Consumer Healthcare up 5%.

As expected, we saw a transition in our reported sales performance during the year, as the effects of the loss of sales of Avandia, Valtrex and flu pandemic products diminished. Reported sales were down 3% in the year – down 6% in the first half but up 1% in the second half. This clearly reflects the changes we have made to create a business that is more balanced and less vulnerable to volatility, including generic pressures.

This performance has been achieved despite continued economic pressures and political instability in Europe and some emerging markets.

In Emerging Markets, future pricing pressure cannot be ruled out. However, as a result of organic investment and targeted bolt-on acquisitions we have completed, we continue to expect to deliver growth ahead of the market in the region.

Our business in Japan had an outstanding year. This market is innovation-driven and GSK’s launch profile here is exceptional. In the last three years, our Japanese sales have grown by 35% and we have launched eight new products, including Cervarix which did especially well in 2011 following implementation of the national immunisation programme.

Like Japan, the USA is a pro-innovation environment. Here, GSK is now emerging from a period of substantial patent expirations during which we have significantly re-shaped our business and redesigned our commercial organisation to align better with the changed payer environment. We are confident our US business is now well placed to deliver improved performance.

Overall, while our environment remains challenging, and some volatility is inevitable, we continue to expect underlying sales growth to translate to reported sales growth in 2012.

Driving cash generation and returns to shareholders

 

GSK continues to be highly cash generative. Before legal settlements of £1.5 billion, net cash inflow from operating activities was £7.7 billion in 2011. Free cash flow was £4.1 billion.

During the year, we announced a full year ordinary dividend of 70p, up 8%. We also completed £2.2 billion of share repurchases as part of our long-term programme.

We also announced that we will return the net proceeds from the sale of our non-core North American OTC brands to shareholders through payment of a supplemental dividend of 5p, which will be paid with the fourth quarter 2011 ordinary dividend.

 

LOGO

 


 

12

 

   GSK Annual Report 2011
 

Strategic review

   Chief Executive’s statement continued
  

 

Focus on R&D productivity and returns

 

A key element of our strategy has been to improve R&D returns and productivity and I am very pleased with the progress our R&D organisation is making towards achieving this.

Of the 15 medicines and vaccines in Phase III development that we highlighted at the start of 2011, we have now received some or all of the data on nine of them. We expect to complete development programmes on six late-stage assets and indications in 2012. Of course, not all of the readouts were positive, but the overall balance was. Importantly, we are seeing productivity translate into real filings and approvals with three new medicines approved in the USA or Europe in 2011 and four more ready with sufficient data in-house to file in 2012.

Since 2008, we have had 16 new drugs and vaccines approved in the USA, 11 of which were new molecular entities – this is more than any of our peers.

All of this comes with positive indications that we can replenish our pipeline on an ongoing basis.

In 2011 we completed the comprehensive reviews of our Discovery Performance Units; these units are comprised of 5-70 scientists, with each group focusing on early stage discovery in one particular disease or pathway. Based on this review, we now believe that we can progress up to 30 medicines into late-stage development over the next three years.

As part of our continued focus on improving returns, we have updated our calculation of our expected rate of return on R&D investment. This has now increased to 12% from 11% in 2010. We are the only healthcare company to publish this analysis. I am extremely encouraged by this progress and we are on track to deliver our long term goal of 14%.

Operating with transparency and responsibility

 

We remain committed to operating with transparency and responsibility. During the year we made multiple advances on our agenda to ensure that our behaviour and our actions meet or even exceed the expectations of society.

We continue to focus strongly on our procedures for compliance, marketing and selling, particularly in the USA. In 2011, for example, we established a new compensation system to reward our US sales representatives on their quality of service to customers rather than sales volumes delivered.

In our environmental strategy, I was very pleased to see that we are already making progress against the ambitious goals we set out in March across our entire value chain, from raw materials to product disposal.

Another priority is to align our commercial success with forming new partnerships to tackle the healthcare needs of people in developing countries. Early in 2011, GSK began supplying pneumococcal vaccines to Kenya through an innovative financing mechanism known as the Advance Market Commitment. This is the largest fund ever designed for a single vaccine and has dramatically increased sustainable access to this vaccine for babies across Africa.

In the summer we announced a new pricing structure for our vaccine against diarrhoeal disease, offering the GAVI Alliance our vaccine at a fraction of the cost of developed Western markets. This will save countless lives in the future and is sustainable as we are recouping the cost of goods and manufacture.

We are also on the cusp of creating the world’s first malaria vaccine. I know first-hand the devastating impact that this disease has on Africa, having lived there for several years in the 1990s while running our business in the region. In October 2011, late-stage trials confirmed the promise we have seen so far, showing that the vaccine reduces the risk of malaria by half in African children aged 5 to 17 months.

We also reiterated our commitment to price the vaccine at a level that covers costs and generates a small return of around 5% that will be ploughed back into research for the next generation of malaria medicines and vaccines.

Outlook

 

As we look ahead, we are clearly mindful of the potential pressures we face given the current global environment. However, we continue to expect to drive further shareholder returns as we seek to grow sales across our business and improve operational leverage and financial efficiency to deliver strong cash generation.

In conclusion, I would like to thank all of GSK’s employees and the many partners we work with around the world for their outstanding contribution and support in helping deliver a very successful 2011 and creating the new opportunities we see for growth and performance in 2012 and beyond.

 

LOGO

Sir Andrew Witty

Chief Executive Officer

 


 

  Our marketplace

 

GSK Annual Report 2011

 

     13   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

 

The difficult market conditions stemming from the international financial crisis continued to impact the world’s economies during 2011, while sales in world pharmaceutical markets showed significant regional variation.

General overview

 

Global economic growth was mixed in 2011, with events such as the tsunami and earthquake in Japan, political unrest in North Africa and the Middle East and turbulence in the Eurozone affecting the international economy. The economic environment through the year was particularly influenced by large budget deficits in the developed world, which required significant action in some countries such as Greece and Italy. In the latter part of 2011, these pressures prompted fears of recession in some countries despite improvements in a number of sectors, including sales in the world pharmaceutical market.

Share prices in the USA ended at about the same point as they started the year, but there were falls in Europe. The FTSE 100 index of leading UK shares ended the year 5.6% lower, while the DAX in Germany was 14.7% lower and the CAC 40 in France was 17% down. Japan’s main share index, the Nikkei, closed at its lowest end-of-year level since 1982 and China’s Shanghai Composite Index lost 22% in 2011.

Based on external assessments, the outlook for global economic growth in 2012 remains uncertain. Where it exists, recovery is likely to be slow and unbalanced. Risks to mature economies will be greater than in developing ones, and social and political unrest arising

from austerity measures taken to correct public deficits and debt may become more common.

Pharmaceutical market

 

Sales in the world pharmaceutical market were worth £503 billion at constant exchange rates (CER) in the 12 months to the end of September 2011, up from £481 billion in the prior year.

This represented growth of 4.5%, down from 5.4% growth a year earlier. The share of global sales fell in the USA, which remained the top pharmaceutical market, and also in Europe, while there was a rise in the rest of the world.

The world pharmaceutical market is expected to continue to grow, although growth in mature markets will be limited compared to emerging markets, where double-digit growth may be expected.

Factors influencing growth

 

There is a significant need for medicines and healthcare treatments around the world. A number of factors give us reason to be optimistic about our ability to grow our business by researching, manufacturing and selling healthcare treatments, particularly with the new shape of our business. However, other factors can affect the performance and success of research-based healthcare companies and the exact impact is difficult to predict.

 

 

 

World pharmaceutical market by geographic region    Value
£bn
     % of
total
     % compound growth
Sep 2006–Sep 2011
 

USA

     195         38.8         4.0   

Europe

     132         26.2         3.8   

Rest of World

     176         35.0         9.9   

Emerging markets

     86         17.1         17.6   

Asia Pacific

     16         3.2         8.2   

Japan

     58         11.5         3.7   

Canada

     13         2.6         5.0   

Total

     503         100         5.8   
World market – top therapeutic classes    Sales
£bn
     % of
total
        

Central nervous system

     80         15.9      

Antineoplastic/Immunomodulatory

     70         13.9      

Cardiovascular

     70         13.9      

Alimentary tract and metabolic

     60         11.9      

Anti-infectives (bacterial, viral and fungal excluding vaccines)

     50         9.9      

Respiratory

     35         7.0      
Data for market share and market growth rates are GSK estimates based on the most recent data from independent external sources including IMS Health. Values are at CER (constant exchange rate).     

4.5%

sales growth in world

pharmaceutical market

in 2011

 

 

 


 

14

 

   GSK Annual Report 2011
 

Strategic review

   Our marketplace continued
  

 

Growth of emerging markets/increased access to medicines and treatments

 

Fast-developing economies, and the wealth this creates, are expanding the opportunities for people to benefit from medicines, vaccines and consumer healthcare products. Emerging markets such as China and India have large populations and these markets are expected to grow significantly more than mature markets in the next few years.

Lifestyle changes and population growth

 

The world’s population is rapidly increasing in number and people are living longer (see World population). Against this background, health risks are changing. The success of treating infectious diseases is having an impact on life expectancy and patterns of physical activity and food, alcohol and tobacco consumption are changing. Low and middle-income countries face a double burden of increasing chronic, non-communicable conditions, as well as the communicable diseases that traditionally affect the poor.

The prevalence of chronic disease is increasing in middle-income countries and is beginning to have an impact in the least developed countries.

Advances in science and technology

 

Scientific advances continue to translate into new medicines and technologies, although it is difficult to predict which ones and at what rate. For instance, following the development of monoclonal antibodies and biopharmaceutical manufacturing techniques of the past two decades, many new ‘biopharmaceuticals’ medicines have been approved.

 

LOGO

LOGO

 

The relative percentage of these biopharmaceuticals to newly approved medicines has continued to rise (see rise of biotechnology).

Price controls

 

In many countries the prices of pharmaceutical products are controlled by law. Governments may also influence prices through their control of national healthcare organisations, which can bear a large part of the cost of supplying medicines to consumers. Recent government healthcare reforms in countries such as France, Spain and Germany may restrict pricing and reimbursement.

In the USA there are currently no government price controls over private sector purchases, but federal law requires pharmaceutical manufacturers to pay rebates on certain medicines to be eligible for reimbursement under several state and federal healthcare programmes. Those rebates increased in 2011 as the health reform law, the Affordable Care Act (ACA), came into effect.

The pressure to control healthcare costs will continue in 2012 and beyond. US Government spending on healthcare programmes, cross-border trade, the acceleration of generics to market, comparative effectiveness research, pharmaceutical pricing and other issues of importance to our industry are part of the continuing healthcare debate in the USA.

Regulatory pressures

 

The pharmaceuticals and vaccines industry is highly regulated. Regional and country-specific laws and regulations are major factors in determining whether a product can be developed and approved.

The number and impact of regulatory agency requirements continue to grow, particularly around aspects of product quality and safety. In addition, the evaluation of benefit and risk continue to be paramount consideration for the approval of a new medicine. In the USA, the Food and Drug Administration (FDA) has increasingly focused on the safety of medicines from approval through to the post-marketing phase of the product.

In 2011 the FDA approved the highest number of new molecular entities since 2004, and nearly a third of these approvals were for therapies to treat rare diseases. This is in line with the FDA’s priority to address the public health needs of special populations. Enforcement and compliance activity increased in the manufacturing and global supply chain, as well as in drug advertising and promotion. The FDA developed its goals for the renewal in 2012 of the Prescription Drug User Fee Act (PDUFA)with a focus on enhancing the science of drug development, improving the quality of evidence in applications, providing a more efficient and predictable review process, and maintaining public confidence.

In Europe, following the adoption of revised European Union (EU) legislation, new measures aimed at strengthening the safety monitoring of medicines are under discussion and will be implemented from July 2012.

New EU laws to protect citizens from the threats posed by fake medicines have been adopted. Discussions continue on draft legislation on improving citizens’ access to reliable information on medicines. The European Medicines Agency (EMA) has published more information on

 
 


 

GSK Annual Report 2011

 

     15   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

how the vision outlined in its five-year strategic plan, Road Map to 2015, is expected to be developed. The EU Commission continued with its review of the regulation of clinical trials in Europe and legislative proposals are expected in 2012.

The regulatory environment in emerging markets and Asia Pacific continues to evolve, with a number of countries revising their regulatory review systems. We participate in a number of specific regional and national regulatory initiatives which provide opportunities for meaningful scientific and regulatory dialogue between industry, agencies and other stakeholders. We continue to include broader sets of patient populations from a number of these countries in medicine development programmes in order to increase global patient access to new innovative medicines, and optimise regulatory approvals. For example, China, Russia, India and other emerging market countries are updating their regulations to have local clinical experience in their populations as part of the registration packages for new chemical entities.

The consumer healthcare industry is subject to national regulation comparable to that for prescription medicines for the testing, approval, manufacturing, labelling and marketing of products. High standards of technical appraisal frequently involve a lengthy review and approval process before a new product may be launched.

Generic pressures

 

When patents expire on a medicine, these medicines can be subject to competition from generic products. The effect of this is particularly acute in Western markets, where generic products can rapidly capture a large share of the market following patent expiration. As generic manufacturers typically do not incur significant costs for research and development, education or market development, they are able to offer their products at considerably lower prices than branded competitors. The same pressures do not apply as significantly to vaccines.

Intellectual property

 

Intellectual property (IP) is an important aspect of our business, and the effective legal protection of our intellectual property – via patents, trademarks, registered designs, copyrights and

domain name registrations – is critical in ensuring a reasonable return on investment in R&D.

It is our policy to try to obtain patents on commercially important, protectable inventions discovered or developed through our R&D activities. Patent protection for new active ingredients is available in major markets and patents can also be obtained for new drug formulations, manufacturing processes, medical uses and devices for administering products.

Although we may obtain patents for our products, this does not prevent them from being challenged before they expire. Further, the grant of a patent does not mean that the issued patent will necessarily be held valid and enforceable by a court. If a court determines that a patent we hold is invalid, non-infringed or unenforceable, it will not protect the market from third party entry prior to patent expiry. Significant litigation concerning such challenges is summarised in Note 44 to the financial statements, ‘Legal proceedings’.

The treatment of many neglected tropical diseases has little or no commercial market to stimulate research or reward innovation. In these areas we are taking a more flexible approach to help speed up R&D for new medicines. This includes being more flexible with our patents and providing access to our know-how and resources, and sharing our data with the research community. Our objective is to ensure that IP is not seen as a barrier to much-needed research that could spur the development of new and better treatments against neglected tropical diseases.

The life of a patent in most countries is 20 years from the filing date. However, the long development time for new medicines can mean that a substantial amount of this patent life has been eroded prior to launch. In some markets it is possible to have some of this lost time restored and this leads to variations in the amount of patent life actually available for each product we market.

Trademarks

 

All of our commercial products are protected by registered trademarks in major markets. There may be local variations, for example, in the USA the trademark Advair covers the same

product sold in the EU as Seretide. Trademark protection may generally be extended as long as the trademark is used by renewing it when necessary. GSK’s trademarks are important for maintaining the brand identity of our products. We enforce our trademark rights to prevent infringements.

Competition

 

Within the pharmaceutical industry, competition can come from other companies making patent-protected medicines with indications to treat similar diseases to our medicines, or from manufacturers making generic copies of our medicines following patent expiration.

Our principal pharmaceutical and vaccines competitors include: Abbott Laboratories, Amgen, AstraZeneca, Bristol-Myers Squibb, Eli Lilly, Johnson & Johnson, Merck, Novartis, Pfizer, Roche Holdings, Sanofi, Takeda and Teva Pharmaceuticals.

The Consumer Healthcare market has become more challenging. Consumers are demanding better quality and better value. Retailers have consolidated and globalised, which has strengthened their negotiation power. Our principle competitors in these markets include: Colgate-Palmolive, Johnson & Johnson, Procter & Gamble, Unilever, Pfizer and Novartis.

In addition, many other smaller companies compete with GSK in certain markets.

Outlook

 

While our operating environment remains challenging, we have made significant progress through restructuring and a rigorous returns-based approach to capital allocation. We expect underlying sales momentum to translate into reported growth in 2012 at constant exchange rates, despite further anticipated pricing reductions in many markets.

The outlook for the timing and impact of substitutable competition to Seretide/Advair in both Europe and the USA is uncertain. This uncertainty is in part due to significant regulatory and manufacturing requirements that need to be satisfied to produce an inhaled medicine such as Seretide/Advair. In addition, patents over the delivery devices for Seretide/Advair are referenced on page 239. See also ‘Risk factors’ on pages 72 to 77.

 


 

16

 

   GSK Annual Report 2011
 

Strategic review

   Our strategy for growth
  

 

    1     

Grow a diversified

global business

 

Overview

 

We are creating a more balanced business and product portfolio capable of delivering sustainable sales growth. This is centred on our three business areas of Pharmaceuticals, Vaccines and Consumer Healthcare.

 

We have substantially increased our investment in higher-growth areas such as our operations in Emerging Markets and Japan and in our global Vaccines and Consumer Healthcare businesses. As well as accessing these newer markets, the broadly-based business we are creating is less vulnerable to volatility, including generic pressures.

 

We also see significant competitive advantage and synergy through our ability to distribute pharmaceuticals, vaccines and consumer healthcare products particularly in rapidly growing emerging economies.

 

  
  
  

Progress

 

Our record demonstrates the success of this approach. Although reported turnover fell 3% in 2011, we have delivered underlying sales growth of 4% in each of the past two years. We anticipate that underlying sales growth will translate into reported sales growth in 2012. (For details of underlying growth see page 27).

 

In addition, 38% of Group turnover is now generated outside the USA and Europe. The shift in sales away from a reliance on ‘white pills in Western markets’ to a broader base including Emerging Markets, Vaccines and Consumer Healthcare is clear.

 

 

     +    17 - 27
  


 

GSK Annual Report 2011

 

     17   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

Priorities and progress

 

 

Group turnover

 

                     27    +     

LOGO

 

        How we performed                   
     Reported turnover declined 3% in 2011, however underlying turnover rose 4% for the second consecutive year.       £27.4bn

2010: £28.4bn

 
            
            
            
            
            
            
            
                     

Diversify sales away from

white pills in Western markets

 

                     51    +     
LOGO         How we performed                   
     We continue to see the proportion of our sales from ‘white pills in Western markets’ decline, reducing our susceptibility to generic pressures in these markets.       22%

of Group
turnover

2010: 24%

 
            
            
            
            
            
                     

Turnover in major growth areas

 

                  
LOGO         How we performed                   
     Turnover in our major growth areas (Vaccines, Consumer Healthcare, Emerging Markets, Asia Pacific and Japan Pharmaceuticals and Dermatology) totalled £14.8 billion, 54% of Group turnover.       £14.8bn

2010: £15.1bn

 
            
            
            
            
            
                     

Create a more balanced

business

 

                     52    +     

LOGO

 

        How we performed                   
     Sales in markets outside the USA and Europe increased to 38% of total sales in 2011.       £10.4bn

2010: £10.0bn

 
            
            
            
            
            
            
            

* The calculation of underlying turnover is described on page 27.


 

18

 

   GSK Annual Report 2011

Strategic review  

   1. Grow a diversified global business continued
  

USA

Pharmaceuticals and Vaccines 

  
 
 

 

We have made good progress in our aim to generate sustainable sales growth in a challenging market environment and to do so in keeping with our values.

 

Turnover
£7.0bn
LOGO
Operating profit            
£4.9bn
LOGO

 

Pharmaceuticals and Vaccines

turnover 2011

     

LOGO

       £m        
 
Growth
CER %
  
  

1 Respiratory

     3,301         1   

2 Anti-virals

     149         (58

3 Central nervous system

     474         (3

4 Cardiovascular and urogenital

     1,564         3   

5 Metabolic

     90         (61

6 Anti-bacterials

     54         (25

7 Oncology and emesis

     272         (19

8 Vaccines

     814         11   

9 Dermatology

     287         (17

Marketplace

 

The US healthcare market continues to change significantly in response to government reforms. Patients, healthcare providers and payers are demanding higher-quality care, lower costs and better health outcomes.

With the passage of healthcare reform legislation, the government now pays for the majority of US healthcare. Over the next few years, as the reforms continue to be implemented, healthcare providers and payers will further change how they provide and pay for healthcare.

Payers are demanding more evidence of value through studies that compare the economics and effectiveness of treatment regimens and therapies. They are also increasingly linking provider reimbursement with health outcomes.

Among healthcare providers, physicians are consolidating into group practices, which are joining integrated delivery networks. Hospitals are consolidating in an effort to obtain the scale and resources needed to perform effectively in a system that rewards value rather than volume.

Patient behaviour is changing too. As payers institute higher co-payment for doctor visits and prescription drugs, patients are becoming more involved and interested in the cost and quality of the care they receive.

These are far-reaching changes to the environment in which we operate but we see them as an opportunity to work with patients, payers and healthcare providers to meet their evolving needs.

 

Performance

 

Our Pharmaceuticals and Vaccines business is emerging from a period of substantial patent expirations in the USA which has seen a 31% fall in sales over the past three years. Our focus in 2011 has been to re-shape our business to resource new areas of growth, such as oncology, and rescale our presence in primary care. We have also redesigned our commercial organisation to align it better with the changed payer environment.

For the year, reported sales declined by 5% compared with 2010, marked by lower sales of pandemic products, Avandia and Valtrex. Underlying sales for the year were flat at £6.9 billion, despite the impact of healthcare reform.

Despite a 5% fall in reported sales, our US operating profit increased by 1% as our efforts to simplify and standardise work processes produced efficiencies that helped control costs and offset the decline in sales of certain products combined with higher asset disposal income.

In our Pharmaceuticals business, reported turnover declined by 6% and underlying turnover declined by 1%. Sales of our largest product, Advair, declined 1%. This follows the drop in the US market for ICS/ LABA combination products following the revised class labelling implemented by the Food and Drug Administration (FDA) in 2010. Hycamtin sales declined 92% due to generic competition and Zovirax sales declined 79% following the divestment of the brand in January 2011.

Our established promoted products – which account for 80% of our business – have on the whole performed strongly. This included contributions from our respiratory business, in particular Ventolin (up 39%); the cardiovascular drug Lovaza (up 12%); our neuroscience medicine Lamictal (up 12%) and our new oncology products, Promacta (up 36%), Arzerra (up 23%) and Votrient (up 76%).

In our Vaccines business, reported turnover increased by 11% reflecting the strong performances of FluLaval (up 25%), Infanrix/Pediarix (up 16%) and Rotarix (up 55%), partly offset by a 31% decline in Cervarix sales.

In 2011 we had a number of FDA approvals: Potiga, Benlysta and Horizant, along with new indications for Boostrix and Lamictal XR. Benlysta was developed by GSK and Human Genome Sciences.

We have achieved these results while working hard to transform our business, including implementing an industry-leading incentive compensation system for sales professionals who work directly with healthcare providers (see ‘Changing the way we incentivese our sales teams’).

 


 

GSK Annual Report 2011

 

     19   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

Changing the way we incentivise our sales teams

 

We altered the way we reward our customer-facing pharmaceutical and vaccine sales professionals in 2011.

 

This new system rewards sales professionals for the quality of their interactions with healthcare professionals, including an element of customer evaluation, rather than for achieving individual sales targets.

 

This approach aligns with our core value of putting the interests of patients first and the goal we share with healthcare providers of improving patient health.

           LOGO
           

 

In 2011 we had a substantial number of FDA approvals: Potiga, Benlysta and Horizant, along with new indications for Boostrix and Lamictal XR.”

        

To further increase transparency in how we conduct our business, we added to our voluntary disclosures regarding payments made to healthcare practitioners by including payments to healthcare professionals conducting clinical research for us. This built on the commitment we made in 2009 to publish payments to healthcare professionals for their work as speakers and advisers.

 

We have continued our long-standing commitments to provide patients with access to our medicines. To improve access to oncology and speciality medications, we launched CARES by GSK, a comprehensive programme that not only offers speciality reimbursement services and free medicine, but also an oncology co-pay assistance programme to provide further help to eligible patients with limited insurance coverage gain better access to our oral oncology and speciality medicines.

  

To support our communities, we made a $5 million grant to the City of Philadelphia for youth development, and at a White House meeting on US education reforms we pledged $10 million over the next five years. This is in keeping with our long-term support of science education.

 

Our new environmentally friendly facilities in the Philadelphia Navy Yard area are being constructed with the highest possible international designation for a green building, and will be highly efficient in energy and water use. Our manufacturing site in Zebulon, North Carolina has reduced its water consumption by almost 20% over the past four years and is working to achieve its goal of sending zero waste to landfill.


 

20

 

   GSK Annual Report 2011

 

Strategic review  

  

 

1. Grow a diversified global business continued

  

Europe

Pharmaceuticals and Vaccines 

  

 

The economic climate and government austerity measures have impacted sales revenues, but we continue to focus on expanding our range of products and enhancing transparency of the way we operate.

 

Turnover

 

£5.8bn

LOGO

Operating profit

 

£3.2bn

LOGO

 

Pharmaceuticals and Vaccines

turnover 2011

 

LOGO

 

      £m      Growth
CER %
 

1 Respiratory

     2,115         (2)   

2 Anti-virals

     82         (26)   

3 Central nervous system

     480         (12)   

4 Cardiovascular and urogenital

     656         6   

5 Metabolic

     67         (60)   

6 Anti-bacterials

     513         (5)   

7 Oncology and emesis

     249         22   

8 Vaccines

     1,091         (36)   

9 Dermatology

     251         1   

Marketplace

 

Many healthcare systems across Europe face a dilemma: ageing populations and increases in chronic illness and lifestyle diseases are creating a growing demand for improved healthcare, while the economic climate is forcing governments to tighten healthcare budgets.

As a result, government-led price cuts and cost-saving initiatives created challenges for us in 2011, and the impact of these austerity measures more than doubled compared with 2010.

With the outlook for the European economy highly uncertain, we expect further pressure on pricing. In addition, as governments and regulators add to their requirements for the evidence of value of new medicines, we are seeing longer lead times in bringing products to market.

We think current pricing and reimbursement policies need to be redesigned to achieve a sustainable framework that ensures patients have access to effective treatments, payers have financial stability and the pharmaceutical industry is encouraged to continue to invest in research.

Performance

 

In our European business, sales are composed of large contributions from our respiratory and cardiovascular/urogenital products and vaccines.

Our European management team has remained resilient in a challenging environment. Reported turnover for 2011 fell by 13% to £5.8 billion. Underlying turnover, excluding revenues from pandemic products, Avandia and Valtrex, declined 4%. Continued government austerity measures impacted underlying growth in the region by approximately 5 percentage points in 2011.

Our performance was underpinned by reduced operating costs of 8% compared with 2010 while continuing to invest in our products and recent launches. Despite these initiatives, operating profit fell by 16% primarily due to the loss of sales of pandemic products, Avandia and Valtrex.

In our Pharmaceuticals business, reported turnover declined 5% and underlying turnover declined by 2%. Sales by volume of Seretide – our asthma and COPD product – increased, but revenue declined 2% because of price cuts and a mild flu season. The flu season also impacted anti-bacterial portfolio sales, which declined 5%. Our new oncology products – Votrient, Promacta and Arzerra – performed well, and sales of Duodart and Avodart, which treat benign prostatic hyperplasia, grew more than 26%, despite Duodart not having market access approval in France and Italy in 2011.

While gaining approval from governments to market new products continues to be a challenge, our new products Prolia, a treatment for osteoporosis, and Benlysta, for lupus, have been launched in the majority of markets in Europe.

In our Vaccines business, reported turnover declined by 36% and underlying turnover by 11%, reflecting austerity-driven price cuts and fewer tender orders for Cervarix.

The first implementation of GSK’s new global standard Enterprise Resource Planning system, designed to standardise and improve financial and commercial processes, was completed successfully in Germany, and the deployment of our new European supply chain continues.

We have continued our focus on evolving our business towards greater transparency in the way we operate. We have introduced new global standards governing how we share scientific and clinical data on our medicines, to ensure a clear distinction between scientific dialogue and promotional activity.

We have also changed the way we reward pharmaceuticals field sales staff, replacing individual sales targets as the basis for reward with qualitative criteria, overall business financial achievement and individual-indexed performance measures.

We continue to work with our local communities to support charitable programmes that are innovative, sustainable and that strengthen healthcare infrastructure. Our financial support each year totals more than €1 million in Europe (excluding the UK).

 


    1. Grow a diversified global business continued

 

  Emerging Markets

  Pharmaceuticals and Vaccines

 

GSK Annual Report 2011

 

     21   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

 

Our underlying growth in Emerging Markets is outpacing growth in the pharmaceutical market as we work to bring a diverse range of relevant, affordable medicines to as many people as possible through a flexible pricing approach.

 

Turnover
£3.7bn
LOGO
Operating profit
£1.2bn
LOGO

 

Pharmaceuticals and Vaccines

turnover 2011

 

LOGO

     £m      Growth
CER %

1 Respiratory

     642       8

2 Anti-virals

     242       9

3 Central nervous system

     248       14

4 Cardiovascular and

      urogenital

     174       34

5 Metabolic

     67       (23)

6 Anti-bacterials

     649       11

7 Oncology and emesis

     76       27

8 Vaccines

     810       (12)

9 Dermatology

     354       28

Marketplace

 

The commercial environment in Emerging Markets presented diverse challenges in 2011 including political instability in parts of North Africa and the Middle East and toughening competition and more aggressive pricing controls in some countries, including Russia and Turkey.

Further pricing pressure cannot be ruled out. However, as a result of organic investment and the targeted bolt-on acquisitions we have completed, we continue to expect to deliver growth ahead of the market in this region.

Performance

 

Our approach in Emerging Markets is based on growing our Pharmaceuticals and Vaccines businesses through increasing access to our newer patent-protected brands and our off-patent branded medicines and vaccines.

We have established a broad portfolio of affordable international brands across Pharmaceuticals and Vaccines. We believe this offers us significant competitive advantage and is a key strength of our business in emerging markets.

Reported turnover growth in the year was 6%, but underlying growth of 15% outpaced growth in the market for the third consecutive year. The underlying growth was driven by relatively consistent pharmaceuticals growth during the year, of 14%. Operating profit fell 3%, reflecting the loss of sales of pandemic products, Avandia and Valtrex.

Our Latin American businesses were especially strong, growing reported sales by 3%, 24% on an underlying basis, while India grew reported and underlying sales by 16%. There was significant market disruption in some Middle Eastern countries because of social unrest, and as a result our Middle East/Africa business grew reported sales by only 5%, 8% on an underlying basis.

Sales from our patent-protected medicines improved to approximately £1.3 billion up 13% on a reported basis, 16% underlying.

We are continuing to scale up business around our off-patent products, and reported sales grew 13% to £1.5 billion in 2011, helped by the acquisition of Phoenix in Argentina in 2010. Our flagship heritage medicine, the antibiotic Augmentin, celebrated 30 years on the market by turning in growth of 11%. Other anti-infectives and our CNS portfolio are also contributing to growth in this area.

Although reported vaccine sales were down 12% to £810 million, underlying sales rose 17% to £810 million. Synflorix had a successful launch in Emerging Markets, with sales of £276 million in 2011.

We have further consolidated recent acquisitions such as Nanjing MeiRui Pharma Co. Ltd in China, expanded our portfolio through in-licensing arrangements, and strengthened our business through signing innovative technology agreements. Earlier in the year we transformed the vaccine joint venture with Neptunus in China into a wholly-owned operation.

We are adopting a range of flexible pricing models in Emerging Markets based on a country’s ability to pay. Since we introduced our approach on flexible pricing to Avamys and Avodart in 2009, we have seen volume sales increases in our key markets of 388% and 76% respectively. The introduction of flexible pricing for Cervarix in 2010 has enabled us to deliver double the number of doses of this vaccine against cervical cancer to women throughout the region while seeing attractive returns.

In 2011 we announced two significant commitments to accelerate access to vaccines against childhood illness through our long-standing partnership with the GAVI Alliance. In June, we committed to supply our rotavirus vaccines to GAVI at a fraction of developing world prices. We also announced an extension to our pneumococcal vaccines agreement with GAVI (more on page 45).

 


 

22

 

   GSK Annual Report 2011

 

Strategic review  

  

 

1. Grow a diversified global business continued

  

Japan

Pharmaceuticals and Vaccines 

  

 

GSK Japan achieved significant underlying growth in 2011 despite the major earthquake and tsunami in March. We responded quickly to provide financial and product donations and to organise employee volunteers.

 

Turnover
£2.1bn
LOGO      
Operating profit            
£1.2bn
LOGO      

 

Pharmaceuticals and Vaccines

turnover 2011

 

LOGO

      £m      Growth 
CER % 

1 Respiratory

     586       14 

2 Anti-virals

     210       (17) 

3 Central nervous system

     397      

4 Cardiovascular and urogenital

     195       59 

5 Metabolic

     90       (2) 

6 Anti-bacterials

     31       (14) 

7 Oncology and emesis

     42       21 

8 Vaccines

     347       (26) 

9 Dermatology

     63       (2) 

Marketplace

 

The Japanese pharmaceutical market grew by around 7% in 2011. Growth was helped partly because there were no government price revisions to its drug pricing scheme. The government has announced its intention to continue the provisional drug pricing scheme introduced in 2010, with the next price revision due in 2012.

Also helping the market in 2011 was the implementation of funding for disease preventation through cervical cancer and pneumoccocal vaccines.

Performance

 

The market in Japan encourages innovation and GSK performed strongly in both Pharmaceuticals and Vaccines. In the past three years we have launched eight product indications and we have the potential to launch a number of new product indications in the next three years.

Reported turnover of £2.1 billion was flat compared with 2010, while underlying turnover grew 30%. Operating profit fell 6%, reflecting the loss of sales of pandemic products.

Our reported Pharmaceutical sales grew 8% to £1.7 billion reflecting strong growth of Adoair (Seretide/Advair), which rose 11% and the performance of newly launched products such as Avolve/Avodart and Xyzal, an anti-histamine licensed from UCB.

In CNS, Paxil remained a leader in the anti-depressants market, although sales fell 7%. The recent introduction of other anti-depressant medicines has provided a range of other prescribing options for physicians.

During 2011, we also received approval for Lamictal for bipolar disorder, and Arixtra received an additional indication for treatment of venous thrombo-embolism. At the end of 2011, our development pipeline consisted of more than 50 projects, with five under regulatory review, five preparing for new product approval submission, and 34 in Phase III. This pipeline includes treatments for rare diseases with 15 orphan-designated compounds.

Our Vaccines business recorded sales of £347 million in 2011 (2010 – £57 million, excluding sales of flu pandemic vaccines of £383 million). This performance was driven by sales of Cervarix, which reached £344 million following the introduction of the government’s national funding programme for cervical cancer prevention.

In July 2011, Japanese regulators approved Rotarix, marking the second approval of a GSK vaccine (excluding pandemic vaccine) in the country. Rotarix was launched in November as the first vaccine in Japan for the prevention of rotavirus gastroenteritis in infants. It is co-promoted with Daiichi-Sankyo.

Following the natural disaster of the earthquake and tsunami in March 2011, we supported people affected by providing substantial financial and product donations, and establishing teams of volunteers – named ‘Team Orange’ – who in the initial stage provided critical supplies to the affected areas.

Later, the volunteers provided labour and teamed up with medical professionals to offer medical and counselling support. Supporting activities such as scholarships for students in pharmaceutical studies will be maintained to contribute to the region’s recovery.

 


    1. Grow a diversified global business continued

 

  Asia Pacific

  Pharmaceuticals and Vaccines

 

GSK Annual Report 2011

 

     23   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

 

 

The Asia Pacific region is a contributor to GSK’s success, and showed positive underlying growth for most markets in 2011, with particularly strong performances from Malaysia and Vietnam.

 

Turnover

£1.2bn

LOGO

Operating profit              

£567m

LOGO

     
Pharmaceuticals and Vaccines
turnover 2011
       

LOGO

 

   £m     

Growth 

CER% 

1 Respiratory

     311       12 

2 Anti-virals

     112       (21) 

3 Central nervous system

     91      

4 Cardiovascular and urogenital

     92       18 

5 Metabolic

     26       (34) 

6 Anti-bacterials

     99       (3) 

7 Oncology and emesis

     28       – 

8 Vaccines

     300       18 

9 Dermatology

     81       10 

Marketplace

 

Economic growth across the region continues to exceed the global average, with both the pharmaceutical market and gross domestic product growth exceeding that of the world’s developed economies.

Pricing pressures in a number of countries across the region, as well as manufacturing and intellectual property challenges, are likely to be offset by growing populations and increasing incomes for the emerging middle classes.

As with our Emerging Markets business, we continue to expect to deliver growth ahead of the market in the region.

Performance

 

Our business in Asia Pacific is based on three main pillars: vaccines, off-patent established pharmaceutical products, such as Augmentin and Ventolin and recently launched medicines such as Votrient, Tyverb and Duodart/Avodart.

Strong performance was seen across all three pillars of the Asia Pacific business.

Reported sales in our Asia Pacific business grew 5% and reached £1.2 billion in 2011. With underlying sales growth of 9% (excluding pandemic products, Avandia and Valtrex), the business once again outperformed the market growth in the region, which was 6%.

Asia Pacific operating profit increased by 7% on a turnover increase of 5%, reflecting favourable operating leverage.

In our portfolio of newer brands, sales of Seretide reached £186 million, a rise of 10%, with other products such as Tykerb (up 43%) and Avamys (up 30%), contributing significantly to growth.

There was continued strong performance by established brands such as Ventolin, which achieved sales of £71 million, up 13%, and Augmentin, which reached £48 million, up 2%.

We are the leading vaccines provider across the Asia Pacific region. Reported Vaccines sales growth was 18% and underlying growth was 22%, supported primarily through sales of our newer vaccines Rotarix (£30 million, up 45%), Cervarix (£44 million, up 47%), and Synflorix (£21 million, up 75%).

Public market performance was particularly strong with the continuing supply of Cervarix to the National Immunisation Programme in Malaysia, and the successful award of the New Zealand national pneumococcal vaccine tender to Synflorix.

Being flexible in our pricing is helping build our business in the Asia Pacific region by increasing the overall volume of products we sell.

In Indonesia, we reduced prices (15 – 80% across 15 brands) to ensure our medicines reached more people in need of them. This resulted in volume increases of up to 50%. In neighbouring Singapore, a 45% price reduction for our antibiotic Augmentin led to a three-fold increase in volume sales.

Thailand has also launched an initiative to reach more patients through an access programme for two leading brands, Seretide and Augmentin. Coupled with a price reduction of 20 – 40% for both products, access was also increased by addressing distribution channels; government hospitals introduced a more flexible reimbursement policy and private hospitals agreed to reduce the price paid by patients.

 


 

24

 

   GSK Annual Report 2011
 

Strategic review  

   1. Grow a diversified global business continued  
  

Consumer

Healthcare

  

 

 

 

Our Consumer Healthcare business performed well in the face of economic uncertainty. Turnover was boosted by strong key brand performance and growth in emerging markets.

 

Turnover

£5.2bn

LOGO

Operating profit            

£1.1bn

LOGO

     
Breakdown of turnover 2011  

LOGO

 

 
      £m     

Growth 

CER% 

 

1 Over-the-counter medicines

             2,453         –    

2 Oral healthcare

     1,717           

3 Nutritional healthcare

     1,025         10    

Marketplace

 

In developed markets, the recent economic turmoil has weakened consumer demand, slowed growth in the consumer healthcare market and increased competitive pressure. Our main competitors have increased spending on marketing and have begun to discount aggressively in an effort to gain market share.

Investment in our brands, including consumer-driven scientific innovation and industry-leading consumer marketing, is critical to differentiating our products and maintaining profitable growth in these markets.

Emerging markets continue to register strong economic and consumer healthcare category growth as an unprecedented number of households enter the consumer segment. Nearly 90% of world consumer healthcare growth is forecast to come from these markets over the next five years.

Performance

 

Our Consumer Healthcare business in 2011 was based on a global approach in the three main areas where we have leading brands: Over-the-counter (OTC) medicines, Oral healthcare and Nutritional healthcare. Turnover growth was 5% for the year, compared with estimated market growth of 4%, driven by our continued focus on innovation and geographic expansion. Operating profit for the year grew 8%.

We had strong growth in emerging markets including Africa and the Middle East (both up 22%), China (16%) and India (up 19%). We are well positioned for success in emerging markets, which make up more than one-third of our global Consumer Healthcare sales. We have leadership positions in key categories in India, China and other Asian, African and Middle Eastern markets.

Sales in developed markets were flat. Strong performances in Japan and Australia were offset by declines in North America and Europe, which both posted falls of 2%.

OTC sales for the year were flat. The Panadol franchise registered growth of 7% while in gastrointestinal health, the core brands Tums and Eno were up 17% and 15% respectively. These performances were offset by a decline in sales of alli.

Nutritional healthcare grew 10% in 2011, driven by strong Rest of the world results (up 17%) and the acquisition of Europe’s leading sports nutrition brand, Maxinutrition, early in the year. Horlicks continued to register strong growth in India. Functional beverages registered strong results in emerging markets, led by double-digit growth of Lucozade and Ribena in Africa where the business benefited from enhanced consumer availability and innovative specific packaging for these markets.

Oral healthcare sales grew 8% on the back of strong performances from brands like the Sensodyne Sensitivity & Acid Erosion business, which grew 16%, driven by the launch of Sensodyne Repair & Protect, and the brand’s ongoing roll-out in emerging markets. Denture care delivered high single-digit growth, with double-digit growth in key emerging markets bolstered by good growth in Japan and the USA.

To build on our growth in 2011, we evaluated the structure of our consumer business and re-shaped it to enable us to create sustainable growth in a changing market.

Most significantly, we refocused our brand portfolio and identified four large, high-value categories to define the business footprint: Wellness, Oral health, Nutrition and Skin health. Our aim is to become the world’s most successful fast-moving consumer healthcare company, driven by science and values.

As part of this initiative, we announced our intention to divest non-core products predominantly in the USA and Europe with aggregate annual sales of approximately £500 million. The aim of the divestment is to realise value for shareholders, simplify the business and allow us to focus on priority brands and markets.

On 31 January 2012 we completed the divestment of brands in the USA and Canada to Prestige Brands Holdings for £426 million in cash. The brands included BC, Goody’s, Beano, Ecotrin, FiberChoice and Tagamet, and generated sales of approximately £126 million in 2011. This divestment will impact our reported growth for 11 months of 2012.

 


 

GSK Annual Report 2011

 

     25   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

The net cash proceeds from the transaction will be returned to shareholders as a supplemental dividend of 5 pence per share to be paid at the same time as the fourth interim dividend for 2011. The process for divestment of the remaining non-core OTC brands continues, subject to delivering appropriate shareholder value.

 

We have shifted responsibility for category and brand strategy to the category teams, which share profit and loss accountability with geographic regions.

    

The shift will allow us to build stronger global brands, enhance our global consumer insight, design and retail marketing capabilities, and enable the development of category strategies focused on emerging markets.

 

Building on GSK’s partnership with McLaren, in September 2011 Lucozade announced a five-year performance partnership with the Vodafone McLaren Mercedes Formula 1 motor racing team.

     In addition to branding on the car and drivers’ overalls, Lucozade will supply sports nutrition products that will play an integral role in the drivers’ preparation, performance and recovery. We will also work with McLaren to develop analytical and performance management tools to improve our ability to make faster decisions about longer-term investment allocations for new product development and innovations.
LOGO


 

26

 

   GSK Annual Report 2011
 

Strategic review  

   1. Grow a diversified global business continued  
  

 

ViiV Healthcare

  

 

 

ViiV Healthcare has a comprehensive portfolio and pipeline of medicines and a distinctive operating model that enables it to be flexible and responsive to the needs of the HIV community.

 

Turnover       

£1.6bn

LOGO  

  

  

 
Operating profit                     

£824m

LOGO  

  

  

 
                   
Breakdown of turnover 2011       
LOGO       
       £m        

 

Growth    

CER %    

  

  

   

1 Combivir

     322         (10)           

2 Epivir

     110         (3)           

3 Epzicom/Kivexa

     617         12           

4 Lexiva

     142         (7)           

5 Selzentry

     110         39           

6 Trizivir

     126         (11)           

7 Other

     142         (6)           

Marketplace

 

Since its recognition 30 years ago, the HIV epidemic has become one of the biggest public health challenges. Approximately 34 million people worldwide are living with HIV and 25 million have died from AIDS-related illnesses.

However, scientific progress, improvements in public health programmes and commitments to universal access have created improvements in the quality and availability of care.

In recent years, with multiple new market entrants and an increasing number of generic competitors in the USA and Europe, HIV treatment remains a competitive and dynamic marketplace.

Performance

 

ViiV Healthcare, an independent company focused on HIV founded by GSK and Pfizer, grew reported turnover by 1% in 2011 to £1.6 billion. This performance was driven primarily by the growth brands, Epzicom/Kivexa and Selzentry/Celsentri. The strong performance of these brands was also complemented by the later than anticipated entry of a generic form of Epivir in the USA, which softened the expected decline in sales among ViiV Healthcare’s mature product portfolio.

In 2011 sales of Epzicom/Kivexa grew by 12% to £617 million. Sales of Selzentry/Celsentri were £110 million, a growth of 39% over 2010. This was driven by increasing early-line use in the USA and broader uptake of genotypic tropism testing in Europe. Expansion for Selzentry/Celsentri also continued in other regions, with a first-line usage launch in Japan and market authorisation in Russia.

This expansion reflects an important strategic focus for ViiV Healthcare in international markets – all countries excluding Europe and North America – where growth continues to build at 6%.

A key focus for this region has been to establish and strengthen local partnerships. An example of this is our partnership with JSC Binnopharm to deliver local secondary manufacturing of a number of ViiV Healthcare anti-retroviral products in Russia.

ViiV Healthcare’s operating profit declined by 2%, reflecting increased investment in R&D to support four major ongoing Phase III trials for the integrase inhibitor, dolutegravir.

A comprehensive approach to improving access to medicines in countries hardest hit by HIV remains critical to ViiV Healthcare. A multifaceted global access to medicines approach covers 135 countries including middle-income countries, low-income countries, least developed countries and sub-Saharan Africa. In all low-income and least developed countries and in sub-Saharan Africa, where 75% of all people with HIV currently live, ViiV Healthcare offers royalty-free voluntary licences and not-for-profit pricing. In middle-income countries the approach is on a case-by-case basis, taking into account the local needs, with a tiered-pricing policy based on Gross Domestic Product and the burden of the epidemic to improve affordability.

ViiV Healthcare has made great progress through its community partnerships, connections and collaborations with the broader HIV community. The Positive Action Vida Digna programme in Central America which tackles stigma and discrimination against communities vulnerable to HIV continues to grow, and covered five additional countries.

In the USA, the Positive Action Southern Initiative was extended to a total of eight states. Additionally, in support of the global effort to reduce mother-to-child transmission of HIV by 2015, ViiV Healthcare has broadened the reach and scope of donations for its Positive Action for Children Fund (PACF) (see ‘Responsible business’ on page 44).

 


    1. Grow a diversified global business continued

 

  Sales performance

 

GSK Annual Report 2011

 

     27   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

 

We have been disclosing both reported turnover growth and underlying growth, which shows more clearly the operational performance of the business.

A reconciliation of reported turnover to underlying turnover, which excludes pandemic products, Avandia and Valtrex is set out below. We believe this underlying measure assists shareholders in gaining a clearer understanding of our turnover performance and prospects because of the size and nature of the loss of sales of those products.

 

      2011
£m
    2010
£m
    Growth
CER%
 

Group turnover

     27,387        28,392        (3

Pandemic products, Avandia and Valtrex

     (507     (2,285        

Underlying Group turnover

     26,880        26,107        4   
      2011
£m
    2010
£m
    Growth
CER%
 

Pharmaceuticals and Vaccines turnover

     22,192        23,385        (4

Pandemic products, Avandia and Valtrex

     (507     (2,285        

Underlying Pharmaceuticals and Vaccines turnover

     21,685        21,100        4   
      2011
£m
    2010
£m
    Growth
CER%
 

Pharmaceuticals turnover

     18,695        19,059        (1

Pandemic products, Avandia and Valtrex

     (489     (1,093        

Underlying Pharmaceuticals turnover

     18,206        17,966        2   
      2011
£m
    2010
£m
    Growth
CER%
 

Vaccines turnover

     3,497        4,326        (19

Pandemic products

     (18     (1,192        

Underlying Vaccines turnover

     3,479        3,134        11   

Sales of these products by geographic region and segment were:

 

2011    USA
£m
     Europe
£m
   

Emerging
Markets

£m

     Asia Pacific
£m
     Japan
£m
     Other trading
and unallocated
£m
     Total
£m
 

Pandemic products

     2         13                12         11         7         45   

Avandia

     91         (3     16         6                 13         123   

Valtrex

     72         48        31         35         147         6         339   
2010    USA
£m
     Europe
£m
    Emerging
Markets
£m
     Asia Pacific
£m
     Japan
£m
     Other trading
and unallocated
£m
     Total
£m
 

Pandemic products

     44         494        227         25         437         86         1,313   

Avandia

     237         88        42         24                 49         440   

Valtrex

     252         68        28         43         133         8         532   

 

 


 

28

 

   GSK Annual Report 2011
 

Strategic review

   Our strategy for growth
  

 

    2     

Deliver more

products of value

 

Overview

 

We have changed our R&D organisation so that it is better able to develop and sustain an industry-leading pipeline of products that offer valuable improvements in treatments for patients and healthcare providers.

 

We have increased the level of externalisation of our research, allowing us to access new areas of science and to share the risk of development with our partners. We have also made decisions earlier around pipeline progressions, so that only those medicines that we believe will be significantly differentiated from existing therapies are progressed. We are ensuring our early stage research investments are made where the science suggests there is greatest opportunity. We have created smaller, more agile groups of scientists who are accountable for progressing their projects through discovery and development.

 

All of this has been underpinned with a focus on improving the rates of return in R&D and being more rigourous in how we allocate investment across pharmaceutical, vaccine and consumer healthcare R&D.

  
  
  

Progress

 

We are confident that we have the right model to improve R&D productivity and returns.

 

Over the past four years we have had 16 new drugs and vaccines approved in the USA, which is more than any of our peers.

 

We have sustained a significant late-stage pipeline of around 30 assets, and signs from our recent review of discovery research gives us confidence that we can replenish this pipeline on an ongoing basis.

 

 

     +     29 - 37
  


 

GSK Annual Report 2011

 

     29   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

Priorities and progress

 

 

Contribution to sales of new products

 

 

                     54    +     

 

LOGO

        How we performed                   
    

Total sales from those products

launched over the past five years,

excluding pandemic vaccine, grew

by 47% in 2011.

      £2.5bn

2010: £1.7bn

 
            
            
            
            
                     
                     

Investment in R&D

 

                     30 – 33    +     

LOGO

 

        How we performed                   
    

The proportion of investment in our

late-stage portfolio continues to

grow, while total R&D expenditure

remains relatively flat.

      £3.2bn

2010: £3.3bn

 
            
            
            
            
                     
                     

New product approvals

 

                     54    +     

 

LOGO

        How we performed                   
    

In 2011, we gained product

approvals in the USA for Benlysta,

Potiga and Horizant.

      9

new drugs and vaccines
approved in USA in last
3 years

 
            
            
            
            
                     
                     

Improving returns on R&D

 

                     30    +     

LOGO

 

        How we performed                   
    

We are encouraged by our progress

in projected rate of return from our

investment in R&D and we are on

track to reach our long-term goal

of 14%.

      12%

2010: 11%

 
            
            
            
            
                     


 

30

 

   GSK Annual Report 2011

Strategic review

   2. Deliver more products of value continued
  

 

Investment in R&D

  

 

Research and development is critical to ensuring we have a sustainable business, and that we can continue to offer new medicines, vaccines and consumer products that can help people live longer and healthier lives.

 

Highlights

 

Data received for nine out of 15

Phase III assets

Total R&D investment held

constant

Rate of return on R&D investment

rises

 

R&D expenditure allocation in 2011*

 

LOGO

 

         £m  

1.

 

Pharmaceuticals

     3,160   

2.

 

Vaccines

     599   

3.

 

Consumer Healthcare

     153   

 

* before major restructuring

Our primary goal in R&D is to develop innovative new medicines safely and efficiently. We are concentrating on developing new medicines that will offer significant improvements over existing treatment options and will therefore provide value to both patients and those who pay for the medicines.

More than 12,500 people work in R&D, with the majority based in our large R&D centres in the UK, USA, Spain, Belgium and China.

We split our R&D budget between Pharmaceuticals, Vaccines and Consumer Healthcare. We aim to allocate R&D expenditure consistently across each of these areas. Levels of investment are based on where we see the best opportunities in both the market and the science, rather than as a fixed proportion of sales.

The pharmaceuticals and vaccines discovery and development process is long, expensive and uncertain and it is not possible to predict which projects will succeed or fail. The risks inherent in the R&D process are described more fully in the ‘Risk factors’ section, under ‘Risk that R&D will not deliver commercially successful products’ on page 72.

In 2011 our R&D expenditure before major restructuring was £3.9 billion. In monetary terms, this amount has remained relatively flat for the past three years. However, we have been working to reduce fixed costs through rationalisation of our infrastructure and reinvest some of the surplus back into discovery and development research. We are also shifting the balance of our spending from early stage projects to fund our growing late stage pipeline. Our R&D expenditure is discussed in the sections that follow in respect of our three businesses and in the Financial review on page 56.

We allocate our R&D investment with reference to the potential returns available from the target therapeutic markets and the technical and commercial risks associated with products in the pipeline. Those factors are reviewed at each phase of the development process and are central in the decision to proceed to the next stage.

Costs incurred at each stage are carefully managed to maximise the likely future return, consistent with our overall objective of increasing our IRR from R&D activities from its current level. The returns generated are, however, primarily determined by the eventual commercial impact of new products as they achieve regulatory approval and are launched.

The start of 2011 marked the beginning of a critical two-year period for our pharmaceuticals and vaccines pipeline. By the end of 2012, we expect to have reported Phase III data on 15 late-stage assets. We discuss the progress of this in the following pages. Details of our late-stage development pipeline, made up of both pharmaceutical and vaccine assets, are set out on pages 36 and 37 with a full pipeline chart on pages 235 to 238 and on our website.

Rate of return

 

We remain focused on improving returns on investment in R&D. In 2010 we became the first major pharmaceutical company to publish an internal rate of return (IRR) on R&D investment, to indicate the value being realised from our investment choices within the R&D organisation.

In early 2010, our estimated rate of return on the investment made in our recently launched and late-stage pipeline was approximately 11%. We have now updated this analysis and calculate that the rate of return has increased to 12% on an equivalent basis. We are on track to deliver our long-term goal to improve returns to around 14%.

This projected rate of return includes products launched from 1 January 2009 and compounds in Phases IIb and III of the development process. The calculation is based on actual sales from 2009 to 2011 and forecast sales for the relevant products up to 2032, adjusted to reflect expected failure rates, which are broadly in line with standard industry failure rates. The cost base used in this calculation comprises an estimate of attributable R&D costs and actual and projected milestone payments where appropriate. Estimated profit margins, capital investment and working capital requirements are factored into the calculation, based on our historical performance.

 


    2. Deliver more products of value continued

 

  Pharmaceuticals R&D

 

GSK Annual Report 2011

 

     31   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

 

To be successful over the long-term we need the investments we are making in our pipeline to lead to new medicines that will be valued by patients and those who pay for the treatments.

 

Highlights

 

Three newly approved medicines

in Benlysta, Horizant and Trobalt

Early stage progress reviewed

Seven new collaborations signed

  

 

Pharmaceutical R&D investment in 2011

 

LOGO

 

         £m  

1.

 

Discovery

     853   

2.

 

Development

     1,720   

3.

 

Facilities and central support

     587   

In 2011, our Pharmaceuticals R&D expenditure was £3.2 billion before major restructuring. More than 10,000 people work in our Pharmaceuticals R&D business, and we view our research projects as early stage (discovery) or late stage (development).

In 2011 we launched three new medicines: Benlysta for the treatment of systemic lupus erythematosus, Horizant for the treatment of moderate-to-severe restless legs syndrome and Trobalt/Potiga, an adjunctive treatment for epilepsy.

Since 2008, we have had 16 new medicines and vaccines approved in the USA, 11 of which were new molecular entities. This is more than any other pharmaceutical company. This year was an active period of late-state pipeline activity, with data for nine late-stage medicines announced. In 2012, we anticipate we will have sufficient data in-house to file for: Promacta for hepatitis C, Relovair for COPD, and our MEK inhibitor, a new potential treatment for melanoma.

The year also saw some failure, with the termination of otelixizumab in Type 1 diabetes, but overall the balance of progression versus failure was positive. In 2012, we expect to complete development programmes for another five late-stage assets and indications.

While our Pharmaceuticals R&D spending has remained relatively flat, we have been shifting our investment from discovery to development to reflect the increasing number of late-stage assets in our portfolio. The proportion of total expenditure made in development of the late-stage portfolio continues to grow from 49% in 2009 to 54% in 2011.

Discovering new medicines

 

Our early stage R&D (drug discovery) seeks to identify the biological targets involved with the development of diseases, and then to create small molecules or biopharmaceuticals that interact with these disease targets, ultimately leading to new medicines. The wide range of scientific discoveries makes it essential that we are highly selective in where we invest our drug discovery resources. We focus on those areas we consider most likely to lead to significant medical advances.

In 2007, all therapy areas were reviewed to identify the most scientifically promising areas for drug discovery and to move the organisation from a static culture of reinvestment in existing areas. As a result of this therapy area rebalancing process, we changed our business model in 2008, moving away from industrial-sized therapy groups to smaller, more agile and focused Discovery Performance Units (DPUs) of 5–70 scientists. Each DPU works on a particular disease or pathway, and is responsible for potential new medicines through to early stage clinical trials (up to the completion of Phase lla).

As part of this new model, DPUs were given their own budgets and a three-year window to complete specific tasks. The business plans of each DPU identified specific targets and investment across multiple years. The plans also included opportunities for collaboration with external organisations such as large and small companies and academia. Our internal R&D expertise gives us a strong basis in identifying and forming these collaborations which in drug discovery are typically in-licensing – when we acquire ownership of an asset for further development and commercialisation – or option-based – when we have an exclusive opportunity to license the asset depending on its performance at different development stages.

The original business plans of each DPU were initially reviewed by the Discovery Investment Board (DIB), a panel created to advise on investment decisions. The DIB evaluated the proposals, identified areas for improvement and suggested agreed progress targets and investment levels. Membership of the DIB comprises senior management from R&D and commercial and external individuals with expertise in areas such as life science investment and payer perspectives. It is chaired by our SVP of Medicines Discovery and Development.

The three-year mark for most DPUs was reached in 2011, and progress of all 38 DPUs was reviewed by the DIB. Our approach has been driven by assessments of potential returns on investment, scientific quality and opportunity.

 


 

32

 

   GSK Annual Report 2011
 

Strategic review

 

  

2. Deliver more products of value continued

    Pharmaceuticals R&D continued

  

 

LOGO     

 

While our budget has remained relatively flat, we have been shifting our spend from discovery to development to reflect the increasing number of late-stage assets in our portfolio.”

    
    

>50

 

External discovery engines

 

In 2011 we had more than 50 external discovery engines, compared to 17 in 2007. This enhances our discovery efforts by opening up new areas of science to us and sharing our risk with our partners. We hope it will reduce the time to get a breakthrough into the clinic.


 

GSK Annual Report 2011

 

     33   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

The overall review was positive. This has led to new investment allocations in discovery research and as a result, four new DPUs have been created and three have been closed. Of the remaining DPUs, six have received increased investment and five have had investment decreased.

Across R&D, we form alliances with external organisations to accelerate the discovery of new medicines as well as to share scientific understanding and ultimately to improve patient care. We signed seven new collaborations in 2011, taking us to over 50 alliances with external groups to complement our internal discovery units.

No individual discovery project has annual expenditure of more than 10% of the total annual R&D expenditure. Decisions on investments continue to be made where the science presents a compelling case and there remains a need for new treatments.

Developing medicines for patients

 

A compound that advances into late-stage R&D (development) – typically after Phase IIa – will undergo much larger scale studies in humans to investigate further its efficacy and safety. At the same time, we work to optimise the compound’s physical properties and its formulation so that it can be produced efficiently and in sufficient quantities through the manufacturing process. We then convert the results of these activities into a file for submission to regulatory agencies.

Medicine Development Teams are small units of 6–10 people who have responsibility for a compound through the later stages of development to filing with the regulatory agencies. There are about 30 assets in late-stage development, comprising more than 50 individual projects.

We also actively seek opportunities to add products to our late-stage portfolio through alliances with other companies. For late-stage assets, these typically take the form of in-licensing deals or co-promotion arrangements with other companies and are most likely to be aligned to existing areas of therapy expertise or investment.

The Portfolio Investment Board (PIB) has replaced pipeline governance boards in assessing the technical, commercial and investment case for each project to progress in development. The PIB is co-chaired by the Chairman of R&D and the President of North America Pharmaceuticals, and includes the heads of each pharmaceutical region along with the head of global manufacturing.

The PIB is accountable for investment decisions and funding allocation across all late-stage Pharmaceutical R&D Medicines Discovery and Development, Biopharm R&D, Oncology, Stiefel, Rare Diseases and Emerging Markets R&D. This allows investment decisions to be made in a holistic way, ensuring a balance and diversity of assets of differing risk profile, novelty, opportunity, development cost and potential to be reimbursed by payers.

Projects are reviewed by the PIB at three key decision points: commit to medicine development, commit to Phase III and commit to file and launch. Funding is generally allocated up to the next key decision point, typically between two and four years ahead. The PIB also carries out an annual late-stage funding review, where investment in all projects is reviewed, adjusted if necessary and prioritised. No individual late-stage project has incurred annual expenditure of more than 10% of the total annual R&D expenditure.

Governance

 

Changes have been made to the R&D governance structure to ensure clearer accountabilities. The oversight of strategic issues and overall budget management across R&D is owned by the R&D Executive team. DIB and PIB control investment decisions in early and late-stage R&D, as described previously.

The Scientific Review Board (SRB) is the governing body accountable for the scientific assessment of the R&D portfolio to support investment decisions made at the PIB. The SRB will establish a view on the overall scientific promise of the asset; development plan to deliver the asset; cost effectiveness of the clinical plan; opportunities and risks to the likely product profile; and gaps where evidence is missing or remains uncertain.

There are two other important governance boards in R&D. The Technology Investment Board makes investment decisions for new platform technologies and licencing or options-based collaborations up to the point of entry into clinical trials. The New Product Supply Board is the governing body accountable for the technical feasibility and infrastructure assessments covering all aspects of the physical product and supply chain.

GSK’s Chief Medical Officer, as Chair of the Global Safety Board, is accountable for overseeing all major decisions regarding patient safety. The Global Safety Board is responsible for approving pivotal studies and investigating any issues related to patient safety arising during the development programme and post-launch. Information from GSK clinical trials is available at the Clinical Study Register on GSK’s website and at www.clinicaltrials.gov.

In 2011 we announced that we were developing a Global Regulatory Board to enhance compliance with company-wide standards, make regulatory services more efficient and agile, and further align capabilities with business needs at global and local levels. This will be led by the new role of Chief Regulatory Officer.

 


 

34

 

   GSK Annual Report 2011

Strategic review

   2. Deliver more products of value continued
  

 

Vaccines and

Consumer R&D

  

 

Our vaccines R&D is centred on discovering and developing prophylactic and therapeutic vaccines to protect people against infectious diseases, cancers and chronic disorders.

 

Key highlights

 

 

Filings in USA and Europe for MenHibrix and Nimenrix

 

Phase III data announced on malaria vaccine

We invested nearly £600 million in vaccines R&D in 2011 and we have more than 1,600 scientists working on the development of new vaccines.

We currently have around 20 vaccines in development for a range of diseases, from malaria to tuberculosis and cancer. We currently have four vaccine candidates in late stage development: with trials in zoster, malaria, quadrivalent influenza vaccine and our therapeutic vaccine MAGE-A3. We also have two vaccine candidates in regulatory filing against meningitis (MenHibrix and Nimenrix) in the USA and Europe.

The highlight of 2011 for vaccines R&D has been the results from our adjuvanted malaria vaccine candidate (RTS,S) in a Phase III study conducted in seven countries in Africa. After 25 years of work, we presented promising results from the initial Phase III data on this candidate (see Milestone in malaria on page 35).

Our R&D effort is focused on the development of new prophylactic and therapeutic vaccines, alongside the lifecycle management of vaccines already on the market.

In vaccines, our R&D investment has increased by 62% since 2008, in line with our investment in high growth areas.

Discovery research

 

The discovery and development of a new vaccine is a complex process requiring long-term investment. Typically it takes 10–12 years to develop a new vaccine.

Vaccine discovery begins by identifying new antigens, which are specific structures on pathogens (viruses, bacteria or parasites) or on cancer cells that are recognised by the immune system. We then produce these pathogens in yeast, bacteria or mammalian cells and genetically manipulate them so that they can be purified and formulated into a vaccine. It is the antigen that creates the body’s immune response.

We often work with academia and the biotech industry to identify these new vaccine antigens. In some cases, formulation of the vaccine into clinical lots involves mixing antigens with GSK proprietary adjuvant systems.

 

 

Consumer Healthcare R&D         

 

More than 600 people in the UK, USA, India and China are dedicated to our R&D efforts in Consumer Healthcare. We invested £153 million in 2011, up from £124 million in 2008.

 

Developing a sustainable flow of new, scientifically-differentiated products – our ‘innovation portfolio’ – is a critical element of our Consumer Healthcare strategy. These can include new technologies and formulations as well as product line extensions. We also carry out ongoing research to assess the efficacy and value of our products so that we can make validated claims to consumers.

 

Our innovation products launched in the past three years contributed sales of £821 million in 2011, 16% of Consumer Healthcare sales. Key contributing products included Sensodyne Repair & Protect, Sensodyne Rapid Relief, Horlicks Biscuits and Panadol Extra Advance.

   

Examples of innovation in 2011 included:

 

•  In Oral healthcare, the business launched a new breakthrough in dental care through Sensodyne Repair & Protect. The Repair & Protect formulation is the first everyday fluoride toothpaste to contain patented NovaMin technology.

 

•  In our Nutrition category we expanded the products offered in our Maxinutrition range to include Maximilk Chocolate and Strawberry and three new flavours of Cyclone in one muscle growth shake. GSK acquired Maxinutrition, which makes products based around protein- enhanced functional nutritionals, at the beginning of the year.

 

  In OTC, we continued to roll out Panadol Advance across 28 markets and launched Panadol Extra Advance in the UK. Both these brands contain Optizorb – a superior patented dissolution technology which we have

    

developed to drive a differentiating speed-of-action claim aimed at alleviating stronger pain.

 

We are now implementing new programmes to increase the flow, pace and value of our innovation portfolio, aligned with the new fast-moving consumer healthcare model we are developing.

 

This model aims to combine industry- leading scientific capability with superior consumer insights to develop a value-driving global pipeline across our four newly formed global categories: Oral health, Wellness, Nutrition and Skin health.

 

We have also established a new global regulatory structure whereby local regulatory staff report centrally, enabling us to drive more rapid and efficient roll-out of innovation.

 


 

GSK Annual Report 2011

 

     35   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

Vaccine manufacturers use adjuvants to improve the specific immune system’s response to antigens contained in vaccines. We have been innovating in the area of adjuvant systems for more than 20 years.

Our proprietary adjuvant systems combine adjuvants to give the most appropriate immune response to a specific antigen. Our expertise allows us to understand which combinations of antigen and adjuvant system can help the body mobilise the most effective immunological pathway, and so provide maximum protection against specific diseases in targeted populations.

Candidate vaccines are usually a combination of several antigens, and the final composition of the vaccine (antigens and adjuvant) may change over time. The preclinical research usually takes two to five years and failure in the discovery process is relatively low. Failures are more likely in later stage clinical trials, where around 30% of candidates can be expected to fail.

As well as the discovery of new vaccines in early development projects, R&D supports late-stage projects such as the inclusion of new antigens in existing vaccines to create new generation vaccines.

Traditionally, vaccines have been used to prevent illness. However, we are pioneering a different approach with our Antigen Specific Cancer Immunotherapies (ASCIs). This approach is designed to programme the body’s immune system to fight existing diseases and so represents a new treatment model as a therapeutic vaccine. We are evaluating the ASCI concept against a variety of tumour types.

Governance

 

In 2011 we revised the organisation of vaccine discovery and development teams, to simplify the infrastructure, focus on timely decision-making and enhance clarity and accountability. Vaccines research and development are led by Project Teams and Vaccine Leadership Teams, which are responsible for the day-to-day progress, including identifying and developing new products.

LOGO

 

There are five key decision points in the vaccine development process: commit to research (decide to invest resources); early clinical development; commit to Phase III; registration and launch; and commit to life-cycle management where we consider whether to pursue a next-generation product or to extend the viability of the product.

Oversight of these key decisions rests with two bodies: the Vaccine Development and Commercial Board (VDCB) and the Vaccine Investment Board (VIB). The VDCB reviews the research project strategy and advises on its scientific, technical and commercial feasibility.

The board has an overall view on all projects, from early to advanced projects. The VDCB’s core members come from across the organisation. The VDCB recommendation to progress a project is submitted to the VIB.

The VIB has the final decision on whether to invest in a project, taking into account the scientific and commercial perspectives reviewed by the VDCB. The VIB evaluates the public health benefit, business opportunity, development costs and risks, the project timing and the overall evolution of our portfolio of vaccines. The VIB is also responsible for assessing the overall fit of the project in our vaccines portfolio.

 
 


 

36

 

   GSK Annual Report 2011

Strategic review

   2. Deliver more products of value continued
   Late stage pipeline summary
  

 

We have a full and diverse product development pipeline. We highlight here our projects comprising new chemical entities, biological entities or vaccines, new combinations and new indications for existing compounds that are in Phase III, have been filed for approval or have been recently approved. The most advanced status is shown and includes 2011 and 2012 approvals.      
           

7

 

assets moving into Phase III from January 2011

 

  1605786 for Crohn’s disease

 

•  dolutegravir (S/GSK1394572) + abacavir sulphate + lamivudine for HIV infections

 

•  dabrafenib (2118436) for metastatic melanoma

 

•  trametinib (1120212) for metastatic melanoma

 

•  573719 + vilanterol for COPD

 

•  2402968 for Duchenne muscular dystrophy

 

•  685698 for asthma

 

     

3

 

approvals in USA or EU

 

 

  Benlysta (belimumab), for systemic lupus erythematosus (USA and EU)

 

  Trobalt/Potiga (retigabine/ezogabine), for epilepsy, partial seizures (USA and EU)

 

  Horizant (gabapentin enacarbil), for restless legs syndrome (USA)

     

5

 

development or registration terminated

 

•  almorexant for primary insomnia

 

•  otelixizumab, for type 1 diabetes

 

  Revolade/Promacta (eltrombopag), for chronic liver disease induced thrombocytopaenia

 

  Votrient (pazopanib) + Tykerb/Tyverb (lapatinib), for inflammatory breast cancer

 

  Avodart, for reduction in the risk of prostate cancer

           
           

Key:

Phase III

Large comparative study (compound versus placebo and/or established treatment) in patients to establish clinical benefit and safety.

 

Filed

Following successful Phase III trials, we file the product for approval by the regulatory authorities.

 

Approval

Only when approval is granted can we begin to market the medicine or vaccine.

 

Our full pipeline is on pages 235 to 238 and on our website.

 

In-licence or other alliance relationship with a third party


 

GSK Annual Report 2011

 

     37   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

Phase III/registration Pharmaceuticals and Vaccines pipeline summary

 

Therapeutic area    Compound    Indication    Phase III      Filed      Approved  
Biopharmaceuticals    albiglutide    type 2 diabetes                          
     Arzerra (ofatumumab)    chronic lymphocytic leukaemia, first line therapy                          
     Arzerra (ofatumumab)    diffuse large B cell lymphoma (relapsed patients)                          
     Arzerra (ofatumumab)    follicular lymphoma (refractory & relapsed patients)                          
     Benlysta (belimumab)    systemic lupus erythematosus (s.c.)                          
     Benlysta (belimumab)    systemic lupus erythematosus (i.v.)                          
     Xgeva (denosumab)    bone metastatic disease                          
Cardiovascular & metabolic    darapladib    atherosclerosis                          
Immuno-inflammation    1605786    Crohn’s disease                          
Infectious diseases    Relenza i.v. (zanamivir)    influenza                          
Neurosciences    587124 (IPX066)    Parkinson’s disease                          
     Horizant (gabapentin enacarbil)    post-herpetic neuralgia                          
     Horizant (gabapentin enacarbil)    restless legs syndrome                          
     Trobalt/Potiga (retigabine/ ezogabine)    epilepsy, partial seizures                          
Oncology    dabrafenib (2118436)    metastatic melanoma                          
     trametinib (1120212)    metastatic melanoma                          
     Revolade/Promacta (eltrombopag)    hepatitis C induced thrombocytopaenia                          
     Tyverb/Tykerb (lapatinib)    breast cancer, adjuvant therapy                          
     Tyverb/Tykerb (lapatinib)    gastric cancer                          
     Tyverb/Tykerb (lapatinib)    head & neck squamous cell carcinoma (resectable disease)                          
     Votrient (pazopanib)    ovarian cancer, maintenance therapy                          
     Votrient (pazopanib)    renal cell cancer, adjuvant therapy                          
     Tyverb/Tykerb (lapatinib)    metastatic breast cancer, in combination with trastuzumab                          
     Votrient (pazopanib)    sarcoma                          

Respiratory &

immuno-inflammation

   573719    COPD                          
   573719 + vilanterol    COPD                          
     685698    asthma                          
     vilanterol    COPD                          
     Relovair (vilanterol† + 685698)    asthma                          
     Relovair (vilanterol+ 685698)    COPD                          
Paediatric vaccines    Mosquirix (Malaria RTS,S)    malaria prophylaxis (plasmodium falciparum)                          
     MenHibrix (Hib-MenCY-TT)    Neisseria meningitis groups C & Y & Haemophilus influenzae type b disease prophylaxis                          
     Nimenrix (MenACWY-TT)    Neisseria meningitis groups A, C, W & Y disease prophylaxis                          
Other vaccines    Zoster    herpes zoster prevention                          
     Flu (pre-) pandemic    pre-pandemic & pandemic influenza prophylaxis                          
     Flu vaccine    seasonal influenza prophylaxis                          
     Pumarix    pandemic influenza prophylaxis                          

Antigen Specific Cancer

Immunotherapeutic (ASCI)

   MAGE-A3    treatment of melanoma                          
   MAGE-A3    treatment of non-small cell lung cancer                          
Rare diseases    2402968    Duchenne muscular dystrophy                          
     2696273    adenosine deaminase severe combined immune deficiency                          
     migalastat HCl    Fabry disease                          
Dermatology    Duac low dose    acne vulgaris                          
     Sorilux    mild to moderate scalp psoriasis                          
     tazarotene foam    acne vulgaris                          
HIV    dolutegravir (S/GSK1349572)    HIV infections                          
     dolutegravir (S/GSK1349572)† + abacavir sulphate + lamivudine    HIV infections                          

In-licence or other alliance relationship with a third party


 

38

 

   GSK Annual Report 2011
 

Strategic review

   Our strategy for growth
  

 

 

    3     

Simplify the

operating model

 

Overview

 

As our business continues to change shape, we are transforming our operating model to reduce its complexity and improve our efficiency.

 

Over the past three years we have implemented a global restructuring programme designed to deliver significant savings to support investment in our higher growth markets as well as offset significant pressures. The savings have been derived through improvements to our manufacturing operations, consolidation and streamlining of our support functions and increased efficiencies in R&D.

  
  
  

Progress

 

To date, our restructuring programme has taken £2.2 billion of annual costs out of the business. During 2011 we identified further annual savings of approximately £600 million. This brings the total annual savings expected from this programme to £2.8 billion by 2014.

 

Our restructuring programme has also allowed us to reduce spending in our global functions by 23% since 2008. In our aim to streamline our organisation, we have significantly reduced our footprint in manufacturing and Pharmaceuticals R&D since 2006.

 

     +    39 - 41
  

 


 

GSK Annual Report 2011

 

     39   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

 

Priorities and progress

 

 

Restructuring savings

 

                       40+     

LOGO

 

       

 

How we performed

The restructuring programme we
introduced in 2008 continues to
deliver savings. It is expected to
cost £4.85 billion and realise
annual savings of £2.8 billion by
the time it is complete in 2014.

        

 

£2.2bn

annual savings

2010: £1.7bn

           
              
              
              
              
              
                       

R&D footprint

 

                       40+     

LOGO

 

       

 

How we performed

We have been making
Pharmaceuticals R&D
operations more efficient by
centralising our activities and
reducing fixed costs where
possible.

        

 

295000m

R&D footprint

2010: 388,000m2

 

 

2

 

      
              
              
              
              
              
                       
                       

Support functions costs

 

                       41+     

LOGO

 

       

 

How we performed

We have reduced our support
functions costs by 23% since
2008.

        

 

£1.6bn

2010: £1.7bn

           
              
              
              
              
              
                       
                       

Manufacturing footprint

 

                       41+     

LOGO

 

       

 

How we performed

We are seeking to create a
streamlined global
manufacturing function. We
exited four sites in the year and
added one through a business
acquisition.

        

 

74

sites

2010: 77

           
              
              
              
              
              
                       


 

40

 

   GSK Annual Report 2011

Strategic review

   3. Simplify the operating model continued
  

Reducing cost and

increasing efficiency

  

 

 

We have made substantial progress in our objective to simplify our operations and reduce inefficiencies.

 

Highlights

 

Annual restructuring savings of

  £2.2 billion now achieved

Global support function spending

  down 23% compared with 2008

The transformation of our operating model to reduce costs and complexity and improve efficiency continued in 2011. The significant savings we have generated through our restructuring programme have been reinvested back into the business and used to offset the pressure resulting from the loss of sales to generics in the USA and Europe.

Restructuring our business

 

A key element of the re-shaping of our business has been implemented through our global Operational Excellence (OE) restructuring programme, which was initiated at the end of 2007.

We have met our original target of £2.2 billion in annual cost savings. During 2011, we identified additional annual savings of approximately £600 million, bringing total annual savings expected from the programme to £2.8 billion by 2014. The programme is now expected to cost £4.85 billion.

The biggest cost savings from this programme have been generated in our manufacturing, R&D and support function organisations.

Within R&D, we have focused on reducing fixed costs through rationalisation of our infrastructure footprint. Our Pharmaceutical R&D footprint has been cut by more than 45% over the past three years from 494,000 m2 to 295,000 m2.

Over the same period our manufacturing organisation has achieved annual savings of approximately £600 million through restructuring and rationalising its network, streamlining the operating model and improving site performance. Since 2006, we have exited 19 manufacturing sites, including selling or closing four factories in 2011. This has reduced the total number of manufacturing sites to 74.

 

 

Reduced costs through recycling

 

A pilot project to recycle waste plastic is on track to provide up to £1 million in carbon rebates and reduced shipping costs next year, at the same time as cutting our carbon footprint.

 

The project, which we kicked off in 2011 at our UK Ribena bottling plant, converts post-industrial plastic waste from other sites into material that can be used to make new bottles.

 

Our Coleford site used about 4,300 tonnes of rPET (recycled polyethylene terephthalate) last year in the bottling of Ribena. At the same time, manufacturing sites in the UK and France were producing about 1,150 tonnes of waste material suitable for recycling through the disposal of PET trays used in the delivery of materials.

 

Initial results suggest that we can reduce our raw materials for Ribena bottles by 27% annually. In addition, we anticipate a cut of up to 3,000 tonnes of annual carbon dioxide emissions, through reductions in shipping costs and material use.

   

LOGO


 

GSK Annual Report 2011

 

     41   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

The third key source of savings from the OE programme has been in global support functions, such as Finance, HR, IT and Facilities. The reporting for these functions was centralised in 2008/9 to allow for better budgetary oversight and control. Significant savings have since been generated, including through greater use of shared services and outsourcing. Within facilities, for example, we have outsourced technical, workplace and security to three global vendors (from 45) reducing costs by almost 20%.

Overall, support function costs have been reduced by 23% compared with 2008.

A key objective of the OE programme is to release resources to invest behind our growth strategy. A significant portion of the savings generated has, therefore, been reinvested into business areas that offer potential for future profitable growth, such as Emerging Markets, Vaccines and Consumer Healthcare. Similarly, some of the savings in R&D fixed costs have been reinvested back into discovery and development research.

The balance of the savings have been used to offset the pressure on the Group margin resulting from the loss of significant sales in the USA and Europe to generics over the period.

We are conscious of the impact on employees of the changes outlined above and we remain committed to full consultation via internal forums and with external groups where appropriate. Where possible we have attempted to re-deploy affected employees to other parts of the business.

Focus on simplification

 

Over the next few years, we plan to build on the infrastructure and footprint rationalisation already achieved to simplify our business further.

Following support function centralisation, in early 2011 we created a Core Business Services (CBS) group to direct further streamlining and economies of scale for those elements of our global support functions where the services provided to our businesses can be standardised.

The first year of CBS has delivered promising early results, and we expect to see further savings over the next three years.

Global Manufacturing and Supply

With a network of 74 sites in 32 countries, Global Manufacturing and Supply (GMS) is responsible for producing and delivering medicines and consumer products around the world.

 

More than 26,000 people work in GMS, and its network of internal and external manufacturing sites helps us compete in a large range of markets, ensuring that patients and customers receive quality products at fair prices.

 

Our supply chain model is designed to ensure the supply, quality and security of all our products to every region of the world, and we closely monitor the delivery of our products to ensure that our customers are never out of stock of the medicines and products they need.

  

In 2011, we announced our intention to build a new manufacturing facility in the UK for the supply of biopharmaceutical products. Subject to the introduction of ‘patent box’ legislation by the UK Government in 2012, this facility could be built at one of four existing GSK sites – Barnard Castle or Ulverston in the north of England, or Irvine or Montrose in Scotland – representing an investment of several hundred million pounds.

 

GMS has a comprehensive global anti-counterfeiting strategy and is an industry leader in anti-counterfeiting packaging features such as holograms, security seals and complex background patterns that are difficult to photocopy and scan.

 

In part, this will be achieved through the implementation of a ‘service delivery model’, with more focused partnering with GSK business units. Standardisation should increase productivity, as our businesses will have more time to focus on their operations and performance rather than coordinating internal processes. Standardisation of data and systems should provide better decision-making information.

 

A key enabler for the delivery of benefits from CBS will be the enterprise-wide Enterprise Resource Planning (ERP) system. The significant investment we are making in the Global ERP programme over the next five years will enable CBS to create standard business processes, systems and data to support the growth and change agenda across multiple businesses. As part of the ERP programme we are converting country-based commercial IT systems to a single SAP IT system and replacing numerous fragmented and non-standardised applications.

 

In 2011 the system went live in Germany, marking the start of ERP deployment across the whole of GSK.

 

In 2011, we implemented changes to our supply chain processes. To help supply chain efficiency we have significantly simplified our product portfolio by

  

reducing the number of packs or ‘SKUs’ by 25% in Europe, 15% in Japan and up to 24% in Emerging Markets. We are now focused on standardising the remaining pack formats to improve packaging efficiency and costs.

 

In addition, our manufacturing organisation is actively seeking to improve procurement processes and in particular our purchasing of active ingredients, chemical intermediates, packaging components and part-finished and finished products. This is releasing further cost efficiencies and allowing us to reduce working capital.

 

In our Consumer Healthcare business, we are redesigning our supply chain to form an integrated, end-to-end process that is more aligned with our customers and the commercial operations of the business. This process is also being configured to support the high-growth regions of emerging markets. These changes are expected to reduce cost and free-up working capital.

 

Our European pharmaceuticals and vaccines supply chain has also been redesigned to simplify operations and consolidate distribution locations to reduce inventory, increase service levels and cut operating costs.

 


 

42

 

   GSK Annual Report 2011

Strategic review

  
  

 

Our financial

architecture

  

 

 

One of our key objectives has been to deliver sustainable sales growth. Our new financial architecture is designed to enhance returns to shareholders from this strategy.

In 2011, we established a new financial architecture. This aligns our planning, execution and performance measurement in order to maximise financial returns from our strategy. It is designed to drive improvements in our operating margin, greater financial efficiency and enhanced cash conversion from the sales growth we are focused on delivering.

This should drive stronger growth in earnings per share and better free cash generation. The expected cash flow and enhanced cash conversion is then available for dividends, share buy-backs or for reinvestment in the business depending on where returns are most attractive.

Sales growth

 

One of the key objectives of our strategy has been delivery of sustainable broadly sourced sales growth. While reported sales fell by 3% in the year, over the last two years we have delivered average annual underlying sales growth of 4%. As we move into 2012 we expect underlying sales growth to translate into reported sales growth as the sales headwinds from the loss of sales of Avandia, Valtrex and pandemic products diminish.

Operating leverage and financial efficiencies

 

We also want to drive operating leverage and financial efficiencies in our business. In order to maximise the operating profit, earnings and cash generated from our sales growth we remain focused on managing our cost base more effectively and improving financial efficiency throughout the organisation.

We expect the Group’s core operating margin to begin to improve gradually in 2012 with further improvement over the next two to three years. The rate and the extent of this will depend on the precise mix of our businesses and the delivery rate of our pipeline which will drive sales growth in high margin innovation-led markets.

In addition to improving the core operating margin, enhancing our financial efficiency is also a key driver of earnings and cash flow growth.

In 2011 we reviewed how we manage our cash balances relative to our debt portfolio and the sources of the debt that we access. We intend to make a number of changes and believe that by taking advantage of current interest rates as well as reducing our cash balances, we can reduce our effective net interest cost. As a result, our overall effective financing rate is expected to reduce to below 6% by 2013.

Tax is a second area where we have opportunities to improve efficiency. The shape of the Group has changed materially over recent years and by aligning our tax strategy more tightly with that changing shape, we have identified opportunities that will allow us to reduce the tax rate down from approximately 27% at the beginning of 2011 to approximately 25% by 2014. During 2011 we made good progress, reducing our tax rate to 26.2% (excluding the disposal of Quest).

 

 


 

GSK Annual Report 2011

 

     43   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

Financial architecture to drive returns

 

LOGO

 

Cash conversion

 

We also see significant opportunity to enhance cash conversion through greater focus on cash generation and capital allocation.

A particular focus is on the working capital programme. During 2011 we reduced the cash conversion cycle from 221 to 210 days and working capital as a percentage of turnover from 23% to 21%. We are focused on delivering further improvements in this cycle in the medium term.

 

LOGO

 

Earnings and cash flow generation

 

Sales growth, operational leverage, greater financial efficiency and cash conversion, should together drive enhanced earnings per share and free cash flow that will support our objective of enhancing the returns to shareholders from our strategy.

In 2012 free cash flow is expected to be further enhanced as the cash charges associated with our long-standing restructuring programme continue to decline. From 2013 free cash flow is also expected to benefit as the demand on cash to fund previously announced legal settlements diminishes.

Focus on return on investment and returns to shareholders

 

Cash generated is deployed to invest in our business and deliver returns to shareholders.

We have improved our capital allocation process so that it is more consistently and rigorously based on return on investment metrics, particularly cash flow return on investment (CFROI). In doing this, we are able to benchmark opportunities for internal and external investment across the business more consistently, with the returns available through share buyback and other returns to shareholders.

In 2011 we returned all of our free cash flow to shareholders. We paid £3.4 billion in dividends, and our ordinary dividend grew 8% to 70p. In addition we bought back £2.2 billion of shares as part of the long term programme we started last year. We will also return the proceeds from the sale of our non-core North American OTC brands to shareholders via a supplemental dividend of 5p payable with the fourth quarter 2011 ordinary dividend.

In 2012 we expect to deliver continued dividend growth. In addition, given current market conditions, we intend to repurchase £1–2 billion of shares.

Measurement and reporting

 

We have improved our financial reporting to align it more closely with our financial architecture. We are providing more data and insights into the progress we are making in each of our businesses and regions and on our progress against the key drivers of operational and financial efficiency. Starting in 2012 we are transitioning our reporting to a core basis, enabling greater visibility of the underlying performance of the business.

More details on the transition to core reporting are provided on page 51.

 


 

44

 

   GSK Annual Report 2011

Strategic review

  
  

 

Responsible

business

  

 

We believe that being a responsible business is good for GSK and society. It helps us to create the products that patients and healthcare payers need and value. It also helps us to operate efficiently, to gain the trust of our stakeholders and to foster the right conditions for the growth of our business.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No.1

 

in the Access to Medicines Index

Our comprehensive approach helped us to be rated the leader in the bi-annual Access to Medicines (ATM) Index published by the ATM Foundation in 2008 and 2010.

We recognise that the research, development, manufacture and sale of our products can raise ethical issues, and we aim to be open about how we address these. We also understand that it is important we communicate with the groups and individuals our business affects. We seek to understand their views and be transparent about any setbacks we experience, as well as the progress we have made.

We are growing our business through a culture that ensures all our decisions are guided by our values: commit to transparency; show respect for people; demonstrate the highest integrity in our conduct and be patient-focused.

To grow our business in a sustainable and responsible way, we focus on four areas:

 

 

Health for all – helping improve people’s health and well-being regardless of where they live or their ability to pay

 

 

Our people & communities – working to support the development of our people and communities around the world

 

 

Our behaviour – behaving in an open and honest manner in all that we do, guided by our values

 

 

Our planet – growing our business while protecting the natural resources we all need for the future.

We have a Board Committee, chaired by the Chairman which regularly review’s the company’s CR policy and performance. More details are given in the Corporate Responsibility Committee Report on page 103.

More on our approach to these key areas follows. We also publish information on our approach and performance in our Corporate Responsibility Report which can be found on our website. Our 2011 Report will be published in March 2012.

Health for all

 

We are working to make our medicines, vaccines and consumer healthcare products available and affordable to as many of the people who need them as possible, irrespective of where they live or their ability to pay. We aim to do this while generating a return, as we need to be able to sustain our business and invest in research for new products.

We recognise there are many barriers and obstacles on the path to better health and we are committed to finding new and innovative ways of tackling them. By working in partnership with others, by challenging the way things are and by being prepared to change the way we do business, we aim to find innovative solutions that create value for society as well as our shareholders and allow us to be a successful, sustainable business.

Access to healthcare in the developing world

 

There are no easy solutions to the challenge of providing sustainable access to healthcare in developing countries. Poverty is the single biggest barrier. In many countries people do not have enough food or access to a supply of clean water. They also cannot access hospitals or clinics that provide professional help and treatments. These challenges make it all the more important that we contribute where we can.

We are committed to playing a full part in addressing the healthcare challenges of the developing world by taking an innovative, responsible and sustainable approach. GSK is making a contribution to developing country healthcare in a number of areas. These include:

 

 

tiered pricing of our vaccines and medicines and capped prices in Least Developed Countries (LDCs)

 

 

investing in R&D that targets diseases particularly affecting the developing world

 

 

being flexible with our intellectual property and pursuing an open innovation strategy

 

 

community investment activities and partnerships that foster effective healthcare and capacity building

 

 

seeking innovative partnerships and solutions, including re-investment of profits into healthcare infrastructure in LDCs

 

 

preferential pricing by ViiV Healthcare of anti-retrovirals for HIV/AIDS.

 


 

GSK Annual Report 2011

 

     45   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

 

Vaccines for the developing world

 

Organisations such as UNICEF, the Pan American Health Organization (PAHO) and the GAVI Alliance are helping to save children’s lives and protect people’s health by increasing access to immunisations in poor countries.

 

We are a leading vaccine supplier to these organisations. Of the 1.1 billion vaccine doses our business shipped in 2011, just over 80% of these went to developing countries, including least developed low- and middle-income countries.

 

In June 2011, we offered to supply 125 million doses of our rotavirus vaccine Rotarix to GAVI at $2.50 per dose, a small fraction of developed world prices. We will also supply up to 480 million doses of our pneumococcal vaccine, Synflorix, to GAVI at a heavily discounted price to help expand immunisation programmes to 72 developing countries.

 

We have also signed an agreement to supply Synflorix, Cervarix and Rotarix to PAHO, expanding the protection of women against the virus that leads to cervical cancer and protecting more children against pneumonia and gastrointestinal diarrhoeas cause by rotavirus.

      LOGO
           
     

We will continue to build on these product, pricing and partnership commitments to help improve healthcare in the developing world. We report fully on our progress in our Corporate Responsibility Report, but some highlights from 2011 follow.

 

In October we published encouraging initial Phase III results of our malaria vaccine candidate which showed that it reduces malaria by half in young African children aged 5–17 months.

   Also in October, we became a founder member of the WIPO Re:Search consortium, a group of over 20 companies, academic institutions and government research bodies established to provide access to intellectual property for pharmaceutical compounds, technologies, and – most importantly – know-how and data available for research and development for neglected tropical diseases, tuberculosis, and malaria.


 

46

 

   GSK Annual Report 2011

Strategic review

   Responsible business continued
  
  

 

The Tres Cantos Open Lab opened in 2011 at our Spanish medicines development campus, dedicated to research into diseases of the developing world. By the end of the year, we had seven projects with 11 visiting scientists from both the developed and developing world.

A significant increase in resources from the global community is still needed to support R&D and to provide access to the resultant medicines and vaccines. Sustainable progress will only be made if the significant barriers that stand in the way of better access to healthcare are tackled as a shared responsibility by all sectors of global society – governments, international agencies, charities, academic institutions, the pharmaceutical industry and others.

 

 

 

 

 

 

 

 

 

 

11

visiting scientists working

on projects in the Tres

Cantos Open Lab

 

Our people and communities

 

Investing in our people and communities will help us to ensure the long-term sustainability of our business. Our employment practices are designed to help us create the right workplace culture in which all employees feel valued, respected, empowered and inspired.

We also want the many communities we work in to prosper as our business grows. Our community investment strengthens our business by supporting the local economies where we operate, helping us build relationships based on mutual understanding and also boosting employee morale.

Recruiting, developing and

engaging employees

 

We want GSK to be an employer of choice and we are investing significantly in our talent development at every level. Recruiting, developing and engaging employees is critical to meeting and sustaining our business objectives and overall performance. Our assessment processes are aligned to a core set of competencies, of which ethics and integrity are central.

We take a global view of talent and strategic capabilities, looking at the quality, depth and breadth of our talent across the world. We strive to have good succession plans in place for critical positions across the organisation. We have proactive initiatives in place to recruit specialist and leadership talent, and we maintain a robust leadership strategy to identify and develop our highly skilled leadership group. We offer all employees a range of learning opportunities and tailored development programmes.

Our performance and development planning process means employees have business-aligned objectives and behavioural goals. Reward systems are focused on promoting high performance and helping to attract and retain the best people. Performance-based pay, bonuses and share-based equity plans align employee interests with business targets.

Employees by region  

LOGO

 

   No.  

1 USA

     16,707   

2 Europe

     38,696   

3 Emerging Markets

     29,466   

4 Asia Pacific

     7,039   

5 Japan

     3,573   

6 Other

     1,908   
  

As our business evolves, there will be changes that affect employees. We remain committed to consulting on these changes via a number of internal consultation forums, as well as discussions with the European Works Council and similar bodies in countries where this is national practice.

Diversity at GSK

 

We focus on creating an inclusive, engaging environment that empowers employees to continually contribute to the organisation and enables us to achieve our strategic business objectives. An inclusive environment is good for business because it brings different knowledge, perspectives, experiences and working styles that enhance creativity and innovation. We aim to attract a diverse workforce that reflects the communities in which we operate.

The proportion of people we employ in Emerging Markets, Asia Pacific and Japan is growing, increasing from 28% in 2007 to 41% of our total employees in 2011. Around 10% of senior managers who report to our executive team also come from these regions.

 


 

GSK Annual Report 2011

 

     47   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

We are committed to employment policies free from discrimination and to an environment that does not tolerate harassment or discrimination of: actual or perceived race, colour, ethnic or national origin, age, gender, sexual orientation, gender identity and/or expression, religion or belief, physical ability/disability and/or chronic health conditions, genetic make-up or other protected characteristics as relevant in a country.

 

A healthy, high-performing workforce with zero harm

To meet our mission and strategy, employee health and safety initiatives focus on the factors that enable employees to perform at the highest level by sustaining energy and engagement and drive towards zero harm in the workplace.

 

We provide resources, tools and programmes to employees to support them in adopting healthier lifestyles and managing the pressures of work and life. These are available in many languages and range from options such as immunisations, smoking control, weight management and process safety to cutting-edge programmes for team and personal resilience, ergonomics, driver safety and Energy for Performance.

 

Our company-wide programme Living Safety is designed to build a culture of zero harm, with a goal of no serious environment, health and safety incidents.

       

 

LOGO

 

       

Positive Action for Children Fund

In support of the global effort to eliminate mother-to-child transmission of HIV by 2015, ViiV Healthcare has broadened the reach and scope of donations for its Positive Action for Children Fund (PACF). One highlight of this programme was a £500,000 grant to Care International for the ‘Our Future’ project which seeks to empower communities to address the effects of sexual violence and reduce stigma in North Kivu, Democratic Republic of Congo. It is doing this through the promotion of services and the empowerment of community-based campaigns on the ground.

 

Another highlight was the new £1.5 million ‘small grants scheme’, supporting 82 community based projects in 21 countries across the globe. The projects selected to receive funding through this effort are specifically aimed at improving the health and welfare of women, children and families affected by HIV.

 

For more on ViiV Healthcare see page 26.

 


 

48

 

   GSK Annual Report 2011

 

Strategic review

  

 

Responsible business continued

  

 

Our work with communities

 

Through our investment in communities, we aim to improve health education and to increase access to medicines and healthcare services, targeting our support where it is needed most.

Our approach includes funding innovative programmes that improve health through community engagement and behavioural change, donating medicines and expertise, and reinvesting some of our profits to improve healthcare infrastructure. We also invest in science education and support relief efforts following natural disasters.

We maximise the benefits of our community investment by working in partnership with non-governmental organisations and by selecting projects that enable us to apply our expertise and resources.

As well as benefiting communities, our investment strengthens our business by improving our reputation, boosting employee morale and helping us build relationships based on mutual understanding with a range of groups.

 

 

 

 

 

Our community investment by

type

 

LOGO

 

   £m  

1 Cash

     57   

2 Product

     126   

3 In kind

     4   

4 Management

     17   
       

The programmes we support are designed to have a long-term, sustainable impact. We set ambitious commitments and work with experienced partners. We also encourage employees to get involved through our volunteering initiatives such as the Orange Day programme and the longer-term PULSE scheme.

Our global community investment was £204 million in 2011. Overall giving has remained constant after excluding our donation of 24 million doses of H1N1 vaccination to WHO in 2010. This total includes donations of products worth £126 million, which we value using an average cost of goods rather than the higher wholesale acquisition price as we believe it is a more accurate reflection of the true cost to GSK.

Our product donation is primarily made through three programmes: Patient Assistance Programs (£96 million), humanitarian product donations (£4 million) and donation of albendazole tablets for the lymphatic filariasis (LF) elimination programme (£19 million). Our cash giving of £57 million is also included in this total and is targeted primarily at health and education initiatives, including our reinvestment of 20% of profits we make in Least Developed Countries back into healthcare infrastructure (£3.9 million).

 

 

How our cash donations are
allocated
 

LOGO

 

   %  

1 Health

     52   

2 Education

     22   

3 Arts & Culture

     9   

4 Environment

     2   

5 Other

     15   

Our behaviour

 

Our commitment to responsible, values-based business underlies everything we do. We have strong policy and compliance programmes and expect the same standards of our suppliers, contractors and business partners. Most importantly, we are building a stronger culture based on our values of Transparency, Respect for People, Integrity and Patient focus.

We recognise that we need to be open about what we do, how we do it and the challenges we face.

We know that the research and development, manufacture and sale of our products can raise ethical issues. We must meet consistently high quality and ethical standards for research and development in all parts of our business, and in all the countries where we operate. We recognise there are aspects of our research that can raise ethical concerns, including those relating to animal research and studies of experimental medicines in people. We build trust with our stakeholders by meeting their expectations on our behaviour, and by being transparent and open to challenge and discussion.

Ethical conduct

 

Ethical conduct is a priority for GSK. Failure to uphold high ethical standards can erode trust in our company and our products, damage our reputation and result in serious financial or legal consequences. Our Code of Conduct sets out fundamental standards for all employees. It is supported by the Employee Guide to Business Conduct, which is available in 22 languages and helps employees make ethical decisions with an emphasis on our values.

Our internal compliance systems are designed to identify and address breaches of our codes and reinforce GSK’s values. There is continual external pressure to enhance these systems and our compliance oversight and internal audits are helping to drive this change. Our compliance programmes are designed to embed a values-based culture at GSK.

 


 

GSK Annual Report 2011

 

     49   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

In 2011 we launched ‘One Compliance’, an initiative to improve consistency in policy, implementation and monitoring across all our business units and the different countries where we operate. We fully investigate suspected breaches and take appropriate disciplinary action, including dismissal, where appropriate.

We have a zero-tolerance approach to bribery and corruption, set out in our Preventing Corrupt Practices policy. In 2011 we established an Anti-Bribery and Corruption Expert Forum which meets weekly to answer employee questions and advise on anti-bribery and corruption issues. Members of the forum include representatives from our legal and compliance functions, as well as external consultants. Answers are posted on our intranet which all employees can visit.

To reflect our commitment to consistently high standards in sales and marketing, we reviewed and expanded our Global Code of Practice for Promotion and Customer Interactions in 2011. The code, which covers areas such as providing information to healthcare professionals, samples, payments to healthcare professionals, gifts and hospitality, grants and donations, will be deployed in 2012. All sales and marketing employees will be trained on the revised code.

Our planet

 

In 2010 we revised our environmental sustainability strategy focusing on carbon, water, waste and environmental stewardship, not just for our own operations but also across our full value chain, from raw materials to product disposal. As part of the strategy we set ambitious 2020 goals for key impacts, including a 25% reduction in our carbon footprint, a 20% reduction in water use across the value chain, zero waste to landfill, and almost doubling our mass efficiency – the efficiency with which we use materials in our new pharmaceutical products. By 2050, we aim to be carbon neutral across our entire supply chain.

 

Carbon

 

Our long-term vision is for our entire value chain to be carbon neutral by 2050. Around 40% of our carbon footprint results from our supply chain and a further 40% from propellants released from our inhalers.

Less than a fifth of our total impact comes directly from our operations, so while we continue to increase energy efficiency and the use of renewable energy at our sites, we are also focusing on our supply chain and the use of products, especially inhalers.

In 2011 we began footprinting key products to identify the priorities, and have developed site-based events to analyse local carbon reduction potential and act on the opportunities. In 2011 we reduced energy consumption from our operations by 5.2%. Greenhouse gas emissions from the use of inhalers rose by 2.9%.

 


 

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   GSK Annual Report 2011

 

Strategic review

  

 

Responsible business continued

  
  

 

Water

 

Water is a particularly important natural resource, and we recognise that GSK can play a positive role in managing it more sustainably. We endorsed the United Nations CEO Water Mandate in 2009 and are working with some other signatories to develop a disclosure methodology. The aim is to agree how to measure a company’s water impact across the value chain, as an essential first step in managing GSK’s total water impact. In 2011 we reduced water consumption in our operations by 6.9%.

Waste

 

Our goal is for zero waste going to landfill by 2020. In 2011 we reduced waste generation in our operations by 1.2% and reduced the waste sent to landfill by 25%. Also during the year we continued trials of a ‘take-back’ scheme to recycle used inhalers. Following success in the USA, we extended an initial trial with the Co-operative supermarket chain in the UK.

 

We aim to reduce the volume of packaging and use recycled materials where possible, and to encourage consumers to recycle after use. In 2011 we revised our Green Packaging Guide to help designers choose the most sustainable option. We began using our own waste plastic to make Ribena bottles, which will provide more than a quarter of our annual bottle requirement, saving approximately £700,000 and 3,000 tonnes of CO2 emissions a year.

Environmental stewardship

 

Increasing the efficiency with which we use materials is a priority. Our target is to achieve 2.5% mass efficiency for new pharmaceutical products transferred from R&D to manufacturing by 2015, with the long-term aspiration to achieve 5% mass efficiency by 2020. This is five times the typical level in the pharmaceutical industry and will reduce input materials and waste by 80%. The average mass efficiency for new products transferred to manufacturing in 2011 reached 2.2%.

We have continued to improve our understanding of the environmental impacts of some of our purchased materials and begun to work with key suppliers. We have held detailed discussions with leading suppliers on developing carbon footprints for materials and are using these data to improve environmental performance.

Environmental management

 

The new Environmental Sustainability Steering Team is responsible for shaping our environmental sustainability strategy so that it is integrated into the business strategy and is both realistic and stretching. We manage environmental issues (as well as occupational health and safety) using a management system aligned with recognised international standards. Environmental, health and safety data are subject to external assurance. You can read more about our environmental strategy and performance in our Corporate Responsibility Report.

 

 

Cutting our carbon

Around 40% of our carbon footprint comes from propellants released from our inhalers. This year, we extended a ‘take-back’ scheme for inhalers from the USA to the UK.

 

Working with pharmacists, we seek to encourage patients to return empty inhalers when they collect a new one.

 

The used inhalers are recycled and the plastics sent for re-manufacturing. Any remaining aerosol propellant is reused in non-medical applications.

 

Saving the propellant has avoided the equivalent of 35 tonnes of CO2 emissions.

       LOGO


 

  Financial review

 

GSK Annual Report 2011

 

     51   

  Overview

     02   

  Strategic review

     10   

  Financial review & risk

     51   

  Governance & remuneration

     78   

  Financial statements

     134   

  Shareholder information

     222   

 

 

We use a number of adjusted measures to report the performance of our business. These measures are used by management for planning and reporting purposes and in discussions with and presentations to investment analysts and rating agencies and are defined below. These measures are not defined in IFRS and may not be comparable with similarly described measures used by other companies.

Underlying turnover

 

Underlying turnover excludes sales of pandemic products, Avandia and Valtrex. We believe this underlying measure assists shareholders in gaining a clearer understanding of our turnover performance and prospects because of the size and nature of the loss of sales of those products. A reconciliation is presented on page 27.

Free cash flow

 

Free cash flow is the net cash inflow from operating activities less capital expenditure, interest and dividends paid to non-controlling interests plus proceeds from the sale of property, plant and equipment and dividends received from joint ventures and associated undertakings. Free cash flow growth is calculated on a sterling basis. A reconciliation is presented on page 64.

Working capital conversion cycle

 

The working capital conversion cycle is calculated as the number of days sales outstanding plus days inventory outstanding, less days purchases outstanding.

White pills in Western markets

 

White pills in Western markets refers to sales of tablets and simple injectables (excluding biopharmaceuticals and vaccines) in North America and Europe.

CER growth

 

In order to illustrate underlying performance, it is our practice to discuss the results in terms of constant exchange rate (CER) growth. This represents growth calculated as if the exchange rates used to determine the results of overseas companies in Sterling had remained unchanged from those used in the previous year. CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.

All commentaries in this Report are presented in terms of CER unless otherwise stated.

 

Transition to core measures for 2012 reporting

 

We announced in 2011 our intention to introduce core measures for both operating profit and earnings per share to report the performance of the Group from 2012 onwards. The primary purpose of this approach is to remove the volatility created by various items such as the impairment of intangible assets, legal charges and asset disposal gains and losses. We believe this will provide a clearer view of the underlying performance of our core business and expect it to make us more comparable with the majority of our peers.

In addition, in 2012 the Emerging Markets and Asia Pacific Pharmaceuticals and Vaccines regions will be amalgamated into one region for segmental reporting purposes and various non-prescription Stiefel brands will be transferred from the Pharmaceuticals business to Consumer Healthcare.

Brand names

 

Brand names appearing in italics throughout this report are trademarks either owned by and/or licensed to GlaxoSmithKline or associated companies, with the exception of Benlysta, a trademark of Human Genome Sciences, Boniva/Bonviva, a trademark of Roche, Levitra, a trademark of Bayer, NicoDerm, a trademark of Elan, Johnson & Johnson, Merrell, Novartis, Sanofi or GlaxoSmithKline, Potiga, a trademark of Valeant, Prolia and Xgeva trademarks of Amgen, Vesicare, a trademark of Astellas Pharmaceuticals in many countries and of Yamanouchi Pharmaceuticals in certain countries, Volibris, a trademark of Gilead and Xyzal, a trade mark of UCB or GlaxoSmithKline, all of which are used in certain countries under licence by the Group.

Revolaire is a trade mark of the GlaxoSmithKline group of companies. The use of the brand name Revolaire for FF/VI is not approved by regulatory authorities around the world.

 


 

52

 

   GSK Annual Report 2011

 

Financial review

& risk

  

 

Financial review continued

  
  

 

Financial review 2011

 

Our financial review discusses the operating and financial performance of the Group, the financial outlook and our financial resources. We compare the results for each year primarily with results of the preceding year. Our performance is explained using a variety of measures. In this review we discuss the results on both a before major restructuring basis and a total basis.

All growth rates included in the financial review are at constant exchange rates (CER) unless otherwise stated. The calculation of underlying turnover is described on page 27.

Group turnover by division

 

 

                Reported turnover