EX-15.2 7 d470564dex152.htm EX-15.2 EX-15.2
Table of Contents

Exhibit 15.2

 

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Table of Contents
   Our mission       
           
  

At GSK our mission is to improve the quality of human life by enabling people to do more, feel better and live longer.

 

 

Front cover image

    

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 1-136 and 239-244 which includes a business review on pages 1 to 86. 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 1-136 and 239-244 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 78-86 of this Annual Report.

 

A number of adjusted measures are used to report the performance of our business. These measures are defined on page 56.

 

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 Boniva/Bonviva, a trademark of Roche, NicoDerm, a trademark of 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, Xyzal, a trademark of UCB or GlaxoSmithKline and Zyrtec, a trademark of UCB or GlaxoSmithKline all of which are used in certain countries under licence by the Group.

 
  

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A child being seen by a doctor working for Brazil’s unified health system, which provides 95% of scheduled vaccinations in the country. We have a long-standing relationship with the government-funded science institution, Oswaldo Cruz Foundation, to manufacture vaccines for public health priorities in Brazil. This began with our first alliance in the 1980s on polio vaccines and continues through to recent technology transfers for products like our pneumococcal vaccine. Brazil is one of a number of large emerging market countries in which we are present and more than a quarter of the Group’s total revenues are now generated in these countries.

        
             
             
             
             
             
           


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GSK Annual Report 2012  |    1

 

Overview

 

GSK in 2012

 

As a global healthcare company, our commercial success depends on us creating innovative new medicines, vaccines and healthcare products and making these accessible to as many people who need them as possible.

2012 was characterised by a challenging global economic climate. Despite this, we have continued to make good progress in our strategy to grow our business in a sustainable way, deliver new medicines and healthcare products that are valued by those who use them, and simplify our operations.

All of this has allowed us to deliver significant returns to our shareholders.

 

LOGO Read more at www.gsk.com

Highlights

 

 

£26.4bn      £8.3bn      £7.4bn
Total Group turnover     

Core* operating

profit

    

Total operating

profit

£6.3bn      112.7p      92.9p

Returned to

shareholders

    

Core* earnings

per share

    

Total earnings

per share

6      1st     

Key medicines submitted

for regulatory approval

    

in Access to

Medicines Index

    

 

* The calculation of core results is described on page 56 and a reconciliation is provided on page 62.

 

LOGO   Strategic review           LOGO
  Chairman’s statement     2     
  CEO’s review     3     
  Strategic review     5     
  How we performed     6     
  What we do, Where we do it     8     
  Our market     12     
  How we deliver     16     
  Responsible business     49     
     
     
     

 

LOGO   Financial review & risk           LOGO
  Financial review     56     
  Financial position and resources     66     
  Financial review 2011     72     
  Risk factors     78     
     
     
     
     
     
     

 

LOGO   Governance & remuneration           LOGO
  Our Board     88     
  Our Corporate Executive Team     92     
  Chairman’s letter     94     
  Board report to shareholders     95     
  Committee reports     103     
  Remuneration Committee Chairman’s letter     109     
  Total remuneration for 2012     110     
  Pay for performance for 2012     111     
  Remuneration policy for 2013     113     
  Directors’ emoluments and total remuneration     127     
  Directors and Senior Management     136     

 

LOGO   Financial statements           LOGO
  Directors’ statement of responsibilities     138     
  Independent Auditors’ report     139     
  Financial statements     140     
  Notes to the financial statements     144     
  Financial statements of GlaxoSmithKline plc prepared under UK GAAP     218     
     
     
     
     

 

LOGO   Investor information           LOGO
  Product development pipeline     225     
  Products, competition and intellectual property     229     
  Quarterly trend     232     
  Five year record     236     
  Share capital and share price     239     
  Dividends     240     
  Annual General Meeting 2013     241     
  US law and regulation     242     
  Tax information for shareholders     243     
  Analysis of shareholdings     244     
  Shareholder services and contacts     245     
  Glossary of terms and index     247     
 


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2    |  GSK Annual Report 2012

 

Chairman’s statement

Despite a challenging environment, I believe 2012 marked another

year of progress for GSK in the delivery of our strategy and in

generating more sustainable returns to shareholders

 

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Over the past five years, under Sir Andrew’s leadership, the Group has been fundamentally changing to improve growth prospects, reduce risk and deliver enhanced returns to shareholders.

The benefits of this strategy were evident during the year, with strong performances in our emerging markets, and other growth businesses offsetting much of the impact of the significantly worsening outlook in Europe. At the same time, GSK’s R&D organisation delivered unparalleled output with six key new products submitted for approval and there is growing evidence that we can replenish the late stage pipeline on a sustainable basis. This is clearly of critical importance to the longer-term prospects of the Group.

Ultimately the aim of our strategy is to deliver sustainable earnings per share growth (EPS) and improved returns to shareholders. GSK delivered flat core EPS of 112.7p but returned £6.3 billion to shareholders via dividends and buybacks in 2012. This brings to nearly £25 billion the amount returned to shareholders since Sir Andrew joined the Board at the start of 2008.

Operating in a responsible and ethical way is essential for the commercial success of GSK. As Chairman of the Corporate Responsibility Committee, I was pleased to see the continued progress during the year in our efforts to improve global access to our medicines, with further agreements reached to supply our vaccines to the world’s poorest countries at low prices and to encourage research into neglected diseases. The Group also took industry-leading steps to improve transparency of its clinical trial research.

Oversight and management of risk remains a key focus for the Board. In July 2012, the Group successfully resolved a series of long-standing legal matters with the US Government. These primarily related to historical sales and marketing practices.

The Board recognises that these matters do not reflect the company that GSK is today. Fundamental changes have been made to compliance, marketing and selling procedures in recent years and significant progress made to embed a culture in the company that puts patients first and demands integrity in all behaviours and activities.

 

We continue to make changes to the Board as we plan for the future and implement proactive succession planning. I would like to thank both Sir Crispin Davis, who is standing down at this year’s AGM, and Larry Culp, who retired from the Board in September, for their outstanding contributions over recent years.

In April, we appointed Lynn Elsenhans and Jing Ulrich as Non-Executive Directors. Respectively Lynn and Jing have brought experience running global companies and deep knowledge of emerging markets to Board discussions. Additionally in January, we announced that Hans Wijers, currently chairman designate of Heineken and previously CEO of Akzo Nobel, will join GSK as a Non-Executive Director from this year’s AGM.

I would also like to thank Sir Robert Wilson for agreeing to remain on the Board for an additional year to provide continuity and advice as new Board members settle into their roles.

We have now met our original aspiration to have more than 25% female representation on the Board by 2013, and we remain committed to continuing to improve geographic and gender diversity at Board level.

In summary, while our operating environment remains challenging, it is also not without substantial opportunity for companies that deliver innovation and act with responsibility. The Board has every confidence in the strength and resilience of Sir Andrew and his senior management team, and believes the Group is taking all the necessary steps to build a stronger GSK that can generate sustainable value for shareholders and society.

 

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Sir Christopher Gent

Chairman

 


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GSK Annual Report 2012  |    3

 

CEO’s review

We have diversified our sources of growth, our R&D productivity

has significantly improved and our processes are simpler and more

efficient. We are confident that our strategy is delivering

 

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Five years ago we set out a strategy to re-shape GSK to increase growth, reduce risk and improve our long-term financial performance. We have made good progress and 2012 provided further evidence of this.

However, there is no doubt that we are operating in a very challenging environment and in 2012 this was particularly evident in Europe. Despite this, we were able to maintain core earnings per share (CER), generate net cash inflows from operating activities of £7 billion (before legal settlements) and return over £6.3 billion to shareholders.

We also made outstanding progress in research and development during the year to advance potential new medicines across multiple disease areas including respiratory, oncology, diabetes and HIV.

Investment in growth markets

 

Although reported sales for the year were down 1% (CER), sales were flat adjusting for the disposal of our non-core Consumer Healthcare brands. This reflects continued strong performance from our ‘growth’ businesses, helping to offset pressure in Western markets.

In emerging markets, the benefits of investments made to increase our exposure in Pharmaceuticals and Vaccines, as well as Consumer Healthcare, were very evident. Total sales in emerging markets now account for 26% of our business and grew 10% during the year. At a divisional level, Consumer Healthcare sales were flat, but grew 5%, excluding divested OTC products.

In Pharmaceutical and Vaccines, Japan’s sales fell 6%, reflecting the impact of the Cervarix vaccine sales for the catch up programme in the prior year. Excluding Cervarix, sales grew 5%. Sales in the USA were down 2%; this was an improvement over 2011 when sales declined 5%. We have been re-shaping our US business to reflect changing market dynamics and to prepare for the launch of multiple new products. We continue to view the USA and Japan very positively, as markets that reward and are willing to pay for healthcare innovation.

 

The clear adverse impact to our performance in 2012 was weaker than expected sales from our European business, down 7%. Here, government austerity measures adversely impacted growth by approximately 6 percentage points during the year.

R&D productivity

provides platform for growth

 

In R&D, the Group made significant progress in 2012. We now have six key new products under regulatory review and expect Phase III data on 14 assets in 2013 and 2014. In total, over the next three years, GSK has the potential to launch around 15 new medicines and vaccines globally.

We are also confident that we can sustain this level of productivity and that we can deliver our long-term goal of improving returns on R&D investment to around 14%.

Simplifying and changing our business

 

We continue to make changes to simplify our operating model. Our Operational Excellence programme has now delivered annual savings of £2.5 billion and remains on track to hit the target we set of £2.8 billion of annual savings by 2014. In February 2013 we announced a new major change programme, which we expect to produce incremental annual cost savings of at least £1 billion by 2016.

This programme will include a series of technological advances and opportunities to eliminate complexity, which we believe can transform our long-term cost competitiveness in both manufacturing and R&D. The programme will help us simplify our supply chain processes, shorten cycle times, lower inventory levels and reduce our carbon footprint.

 

 

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4    |  GSK Annual Report 2012

 

Strategic review

 

In addition, given the sustained shift we have witnessed in the European reimbursement and pricing environment, we plan to initiate further restructuring of our European pharmaceuticals business to reduce costs, improve efficiencies and reallocate resources to support identified growth opportunities in these markets. We are also evaluating further strategic options to ensure we are able to maximise the value of our current and future portfolio in Europe.

This additional restructuring supports our strategy to change the shape of our business and deliver sustainable long-term growth. In the short term, it will also help to offset some of the pressure we are seeing on our margin structure resulting from changes in our business mix. We remain confident that as our pipeline begins to contribute from the end of 2013, we can drive improvement in the core operating margin over the medium term.

Strengthening our core business

 

Our Consumer Healthcare business continues to make excellent progress as we increase focus around a core portfolio of healthcare brands and emerging markets, where we are seeing very positive consumption trends and benefit from sales and distribution synergies with pharmaceuticals.

Investments to maximise returns in these markets continue. Last year, we opened a new innovation centre in China and have now increased our shareholding in our Indian subsidiary. In line with this strategic focus, we have decided to initiate a review evaluating all strategic options for the Lucozade and Ribena drinks brands, which are primarily marketed in established Western markets. These brands are iconic and the review will look at the best ways to ensure their continued growth.

Outside Consumer Healthcare, we continue to strengthen our core business through acquisitions and equity investments. In 2012 we completed three significant transactions with Human Genome Sciences, Shionogi and Theravance to increase our share of the economics on key future growth assets. At the same time, we delivered targeted divestments at the periphery of the Group to realise value for shareholders, divesting Vesicare, multiple non-core OTC brands and Australian pharmaceutical ‘tail’ products.

Operating with responsibility

 

We remain committed to operating responsibly and during the year we made further advances on our agenda to ensure our behaviour and actions meet or exceed the expectations of society.

For example, we have taken several steps to increase transparency of our clinical research. We already publish all our trial results whether positive or negative. We have now committed to go further and enable independent researchers to access the very detailed data that lies behind these results. By being more open, we hope to help further scientific understanding and research.

We also continue to expand access to our medicines to people living in the poorest countries in the world. In 2012 GSK was again ranked number 1 in the Access to Medicines (ATM) Index which assesses healthcare companies’ activities in this field. In addition, we expanded our efforts to tackle neglected tropical diseases and supply low-price vaccines to the GAVI alliance for use in the world’s poorest countries. We also received further data on our candidate malaria vaccine. While additional analysis is needed, this vaccine continues to have the potential to save the lives of hundreds of thousands of children in Africa.

As the Chairman notes in his review, in July we also settled multiple investigations with the US Government and states, primarily relating to historical sales and marketing practices. These matters originated in a different era for the company, but we continue to take action at all levels to improve our procedures for compliance, marketing and selling and embed a values-based culture in GSK.

Outlook

 

GSK’s globally diversified sales base and improved R&D output provide a clear platform for growth, with 2013 marking the start of what should be a series of growth years for the Group.

Specifically we expect to deliver core EPS growth of 3-4% CER and sales growth of around 1% CER during the year.* We also expect to deliver further strong cash generation in 2013 and remain committed to using free cash flow to support increasing dividends, share repurchases or, where returns are more attractive, bolt-on acquisitions.

In closing, I would like to thank all our employees, partners and suppliers for their continued commitment and support. We are more confident than ever that GSK is well placed to succeed in emerging and pro-innovation markets and that our R&D model is working. This is creating clear, long-term capacity for GSK to deliver continued innovation and benefit to patients, and sustained performance and returns to shareholders.

 

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Sir Andrew Witty

Chief Executive Officer

 

 

* All forward looking statements are based on 2012 restated numbers adjusted for IAS 19R (EPS of 111.4p), at CER and barring unforeseen circumstances.
   See ‘Cautionary statement regarding forward-looking statements’ on the inside front cover and page 56 for an explanation of CER.


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GSK Annual Report 2012  |    5

 

 

Strategic

review

   
  How we performed     6   
  What we do, Where we do it     8   
  How we create value     10   
  Our market     12   
  How we deliver     16   
  Grow a diversified global business     18   
  Deliver more products of value     30   
  Simplify the operating model     42   
  Responsible business     49   
           

 

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6    |  GSK Annual Report 2012

 

Strategic review

How we performed

We measure our performance against a number of key indicators, and use core results for our planning and reporting purposes

 

Group turnover

 

£26.4bn

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Free cash flowb,c

 

£2.0bn

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Core operating profit and margina

 

£8.3bn

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Total operating profit and margin

 

£7.4bn

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Core earnings per sharea

 

112.7p

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Total earnings per share

 

92.9p

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GSK Annual Report 2012  |    7

 

 

Turnover in our major growth areasb

 

£14.3bn

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New Pharmaceuticals and Vaccines product performanceb

 

£1.4bn

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Cash returned to shareholders

 

£6.3bn

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Relative total shareholder returnb,d

 

 

 

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a  We use a number of adjusted measures to report the performance of our business. These include core results, which are used by management for planning and reporting purposes and may not be directly comparable with similarly described measures used by other companies. Core results exclude a number of items from total results. A full definition of core results can be found on page 56 and a reconciliation between core results and total results is provided on page 62.

 

b  The remuneration of our executives is linked to the marked key indicators. Further information on our executive pay policy can be found in our Remuneration report on page 109.

 

c  The calculation of free cash flow is described on page 56 and a reconciliation is provided on page 69. The calculation of CER is described on page 56.

 

d  The constituents of the Pharma Peers Return Index are listed on page 115.
 

 

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8    |  GSK Annual Report 2012

 

Strategic review

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.  

£26.4bn

Group turnover

 

Pharmaceuticals

    

Vaccines

    

Consumer Healthcare

£18.0bn

Turnover

 

  

    68%

          Of Group

 

       

£3.3bn

Turnover

 

  

    13%

          Of Group

 

       

£5.1bn

Turnover

 

  

    19%

          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 2012, we distributed nearly 900 million doses to 170 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 brands in four main categories: Total wellness, Oral care, Nutrition and Skin health.
Sales by therapy area      Sales by vaccine      Sales by category
            £m                    £m                    £m

Respiratory

   7,291     

Boostrix

   238     

Total wellness

   2,008

Anti-virals

   753     

Cervarix

   270     

Oral care

   1,797

Central nervous system

   1,670     

Fluarix, FluLaval

   200     

Nutrition

   1,050

Cardiovascular and urogenital

   2,431     

Hepatitis

   646     

Skin health

   255

Metabolic

   171     

Infanrix, Pediarix

   775        

Anti-bacterials

   1,247     

Rotarix

   360        

Oncology and emesis

   798     

Synflorix

   385        

Dermatology

   850     

Other

   451        

Rare diseases

   495                

Immuno-inflammation

   70                

ViiV Healthcare (HIV)

   1,374                

Other

   846             
                         
LOGO Read more on page 57      LOGO Read more on page 58      LOGO Read more on page 59

R&D

 

 

Our business is sustained through investment in R&D. In 2012 we spent £3.5 billion before non-core items*, £4.0 billion in total, in our search to develop new medicines, vaccines and innovative consumer products.

During the year we saw significant delivery from our late stage pipeline, with six key medicines filed with regulators.

We 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.

£3.5bn

Core R&D

expenditure

in 2012

 

c.30

Assets in late

stage pipeline

 

Core R&D expenditure allocation in 2012   
      £m      %  

Pharmaceuticals

     2,821         81   

Vaccines

     498         14   

Consumer Healthcare

     155         5   
                   
LOGO Read more on page 32   
 

 

* The calculation of core results and non-core items is set out on page 56.


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GSK Annual Report 2012  |    9

 

Where we do it

Our geographic presence covers more than 100 countries

Our global reach

 

 

The shape of our business is shifting to capitalise on markets with high-growth potential including those in Asia Pacific, Latin America and Japan. Territories outside the USA and Europe now account for 40% of our total sales.

 

We have a significant global manufacturing and R&D presence with a network of 87 manufacturing sites and large R&D centres in the UK, USA, Spain, Belgium and China.

 

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    99,488
   

 

Employees

 

    Employees by region
   

 

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          No.
    1 USA    17,201
    2 Europe    38,788
    3 EMAP    36,738
    4 Japan    3,515
    5 Other    3,246
   

 

Turnover by region

   

 

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          £m
   

1 USA

   8,446
   

2 Europe

   7,320
   

3 EMAP

   6,780
   

4 Japan

   2,225
   

5 Other

   1,660

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,
Australasia, central vaccine tender sales and
contract manufacturing sales.

 

Turnover by segment

 

   £bn
 

US Pharmaceuticals and Vaccines

   7.0
 

Europe Pharmaceuticals and Vaccines

   5.0
 

EMAP Pharmaceuticals and Vaccines

   4.7
 

Japan Pharmaceuticals and Vaccines

   2.0
 

ViiV Healthcare

   1.4
 

Other trading

   1.2
 

Consumer Healthcare

   5.1
        
  LOGO  Read more on page 151   

 

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10    |  GSK Annual Report 2012

 

Overview

How we create value

By delivering innovation and expanding access to our

products we create value for society and our shareholders

The context

 

 

We see both opportunities and challenges in our operating environment. Scientific research is continuously uncovering new understandings about disease processes and technologies.

 

Meanwhile, the world’s population continues to grow as do pressures on healthcare costs, with a notable intensification in developed markets following the recent macro-economic downturn.

 

 

Innovation

 

At the core of our business model is the use of knowledge and development of intellectual property. We create value by researching, manufacturing and making available products that improve people’s health and well-being.

A healthier society enables people to live life to its fullest, allowing them and their communities to prosper. A sustained flow of innovative products enables our business to grow profits and deliver improved returns to our shareholders.

We aim to develop new products that offer significant improvements over existing treatment options and therefore provide value to patients and those who pay for them such as governments, insurers or other third parties.

In 2012, we invested £3.5 billion in core research and development of new medicines, vaccines and consumer products, and we are currently evaluating around 50 investigational medicines for diseases such as cancer, diabetes, heart disease and respiratory illnesses. Over the next three years, we have the potential to bring around 15 new medicines to patients.

LOGO   For more on our R&D and the discovery process see pages 30 to 41.

Access

 

We manufacture and distribute more than 4 billion packs of products to over 150 countries around the world. With this extensive global presence, we are striving to make our products as widely accessible as possible.

In Western markets, we have developed new reimbursement approaches for our medicines where we agree risk-sharing arrangements with payers.

We have adopted more flexible pricing approaches to reflect countries’ wealth and ability to pay. This has resulted in significant increases in demand for our products in emerging economies.

To increase access to our products in the world’s least-developed countries, we have held the price of our patented medicines in this region 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.

Sustainable

 

Developing a new medicine takes many years and substantial investment. We are able to bring the scale, significant resources and expertise required. On average each successful medicine will require significant investment over a 10-12 year period.

Sustainability in our business performance is critically important if we are to deliver continued innovation and access to our products. We must produce profitable performance to ensure we remain competitive and have the funds to invest in our people and assets. A key element of this is an environment that appropriately rewards innovation across both patent-protected and branded products.

LOGO  For more on our approach to intellectual property see page 15.

How we do it

 

We can only achieve our objectives by utilising our assets, executing our strategic priorities and operating our business responsibly.

In the past five years, we have made significant progress in the delivery of our strategic priorities.

We have developed a balanced business with geographic diversity and new platforms for growth, in particular through advancement of our late-stage pipeline and changes to our R&D model. At the same time, we have also simplified our business to reduce costs and ensure we retain long-term competitiveness.

Our commitment to be a responsible, values-based business underlies everything we do. Our values are applied across the Group and we are focused on integrating them into our culture, decision-making and how we work. These values are to operate with transparency, demonstrate respect for people, act with integrity and be patient-focused. We ask every one of our employees to embody these values.

LOGO  For more on our approach to responsible business see page 49 to 54.

 


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GSK Annual Report 2012  |    11

 

 

How we create value

 

 

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Wider contributions

 

While our primary contribution is to develop new products that improve people’s health, we also create value as a global company by making direct and indirect economic and social contributions in the countries in which we operate.

We have a global and diverse employee base consisting of close to 100,000 employees, and we contract goods and services on a significant scale. Last year, our manufacturing supply chain spent around £9 billion with 6,000 suppliers across 73 countries.

The company also contributes to the countries in which we operate through the tax system. In 2012, the charge for taxation on our profits amounted to £1.95 billion. Direct contributions to support the health and well-being of local communities relevant to GSK are also made via our global community programmes which amount to over £200 million a year.

Finally, we believe we can create value by acting as a catalyst or partner for other organisations. 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.

 

Progress highlights

 

£25bn

Amount returned to shareholders via dividends and buybacks over past five years

23

Number of new product approvals in the USA and Europe in past five years

1st

in Access to Medicines Index

 

 

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12    |  GSK Annual Report 2012

 

Strategic review

Our market

While our environment remains challenging we are optimistic

about the long-term future of the healthcare market

 

General overview

 

There remains a significant need for medicines and healthcare treatments around the world, and we are optimistic about our ability to grow our business in the long-term by researching, manufacturing and selling innovative healthcare treatments, especially given the work we have done to re-shape and geographically rebalance our business.

Nevertheless, many factors can affect the performance and success of our sector and our business. The exact impact of these is difficult to forecast.

Global economic overview

 

The difficult market conditions stemming from the international financial crisis continued to impact the world’s economies during 2012, while sales growth in world pharmaceutical markets showed significant regional variation.

Economies across the globe remained weak in 2012 as governments continued to struggle with the long-term effects of the 2008 financial crisis. Overall growth for 2012 slowed to 3.2%, according to the International Monetary Fund (IMF).*

In the USA, markets stagnated at the end of the year, ahead of fears about the “fiscal cliff” created by federal budget legislation. Though the crisis was averted, significant uncertainty remains over the strength of the economy and over the likely impact of legislation intended to stimulate economic growth.

In Japan, the economy contracted as demand for Japanese exports was impacted by the global economic slowdown, particularly in Europe. In the Eurozone, economies continued to contract as the recession deepened, and even revised growth forecasts proved optimistic. For the first time since the single currency was launched, the region failed to grow in any quarter during the calendar year. Growth in emerging markets was weaker than expected. China continued to grow, but at 7.8% was the lowest level for more than a decade, according to the IMF.

Based on IMF assessments, the outlook for global economic growth in 2013 is 3.5%. There is no immediate sign of an end to the weak global economy or to improvements in budget deficits among many of the world’s richest nations. Other factors such as political turbulence within the European Union and instability in the Middle East, are likely to affect the international business environment.

Healthcare market

 

While the healthcare industry remains one of the world’s largest industries, it has felt the effects of government austerity measures such as mandated price reductions in Europe, Japan and a number of emerging markets. As a result of these developments, companies faced significant pressure in growing sales, although new products and growth elsewhere in the emerging markets helped to partly offset the challenges.

Sales in the world pharmaceutical market were worth £516 billion at constant exchange rates (CER) in the 12 months to the end of September 2012, increasing from £503 billion in the previous year. The share of global sales grew to 42.8% in North America, which remained the top pharmaceutical market, and declined in Europe (to 23.3%), while emerging markets also increased their share to 21.7%.**

During the year many of the largest pharmaceutical companies encountered generic competition for a significant number of products. It is estimated that $35 billion in sales were lost as products lost patent protection and experienced competition from generics.

 

 

Figure 1

 

        

World pharmaceutical market

by geographic region

   Value
£bn
     % of
total
    

% compound growth

Sep 2007–Sep 2012

 

North America

     221         42.8         3.4   

Europe

     120         23.3         2.6   

EMAP

     112         21.7         14.7   

Japan

     63         12.2         3.8   

Total

     516         100.0         5.1   
World market – top therapeutic classes   

Sales

£bn

    

% of

total

        

Central nervous system

     78         15.1      

Antineoplastic/Immunomodulatory

     76         14.7      

Cardiovascular

     69         13.4      

Alimentary tract and metabolic

     63         12.2      

Anti-infectives (bacterial, viral and fungal

excluding vaccines)

     52         10.1      

Respiratory

     36         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 based at CER (constant exchange rate).

 

* IMF data taken from World Economic Outlook Update, January 2013.


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Population growth

According to the United Nation’s 2010 revision to its population projections, world population will peak at 10.1 billion in 2100 compared with 7 billion in 2011. While some countries are seeing declining birth rates – particularly those in Europe and Japan – many other regions have seen a sharp rise in populations, particularly in the Middle East and southern Asia.

These countries with rising populations are the same economies that are experiencing improved economic outlooks. The IMF forecasts that emerging markets will grow 5.5% in 2013 and 5.9% in 2014 compared with figures of 1.4% and 2.2%, respectively, for developed markets.

Governments in developing countries are under pressure to improve healthcare infrastructure and provide basic universal coverage and many have made significant commitments to do this. However, where strong healthcare systems are missing, people in developing countries buy their medicines directly. As a result, households in emerging markets spend a significantly higher proportion of their personal income on medicines than is spent by richer countries. Pharma Futures report ‘Perspectives from Emerging Markets’ estimates this can be as high as 40% in China and India, and 25% in Brazil, for example.

Demand for medicines, vaccines and consumer healthcare products is expected to continue to grow significantly faster than in more mature markets over the next few years.

Lifestyle changes

As populations increase, people are also living longer, partly aided by the success of medical interventions treating and preventing diseases that previously caused significant mortality in infants (see figure 2). With this increasing age, comes increasing infirmity and illness.

Other lifestyle changes are affecting health risks as well. As people become less physically active and alter their consumption of food, alcohol and tobacco, there is a growing incidence of chronic, non-communicable conditions such as type 2 diabetes and heart disease.

In emerging markets, where increasingly people are moving away from a subsistence/agricultural lifestyle to find paid work in the cities, there is a growth in disposable incomes and expansion of the middle-class sections of populations. This is significant as a large proportion of healthcare spending in these countries comes directly from the patient.

 

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.

In Europe, governments are responding to increasing austerity pressures. Healthcare reforms in countries such as France, Spain and Germany have restricted pricing and mandated generic substitutions.

In Japan the government implemented its mandatory bi-annual price review of pharmaceutical products in 2012.

In the USA there are 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 and were expanded in 2011 as an affect of the Affordable Care Act (ACA). In 2012 and continuing into 2013, the government is finalising additional details for implementing the ACA. Expansion of the government’s insurance programme for low-income Americans, new health insurance marketplaces, and a financial penalty for certain Americans who choose not to purchase health insurance are scheduled for 2014.

 

 

Figure 2

Estimated change to world population (millions)

 

 

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14    |  GSK Annual Report 2012

 

Strategic review

Our market continued

 

 

Additionally, cross-border trade, the acceleration of generics to market, comparative effectiveness research, value-based care delivery, 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 important in determining whether a product can be successfully developed and approved.

The number and impact of regulatory agency requirements is increasing, particularly across aspects of product quality and safety. The evaluation of benefit and risk continues to be of paramount consideration in the approval of a new medicine, and regulatory authorities are increasingly focusing on the safety of medicines in the post-approval phase.

Regulatory agencies’ criteria for evaluating benefit and risk can also vary widely, making it challenging for pharmaceutical companies to meet the requirements for each country.

Figure 3

US FDA approvals of new molecular entities

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Nature Reviews Drug Discovery 12, 87-90 (February 2013)
| doi:10.1038/nrd3946

USA

In the USA, the fifth reauthorisation of the Prescription Drug User Fee Act (PDUFA) was passed in 2012 with the signing into law of the Food and Drug Administration Safety and Innovation Act (FDASIA). The law establishes new user-fee statutes for generic medicines and follow-on versions of biopharmaceuticals, commonly referred to as biosimilars. It also equips the FDA with tools intended to accelerate the development and review of innovative new medicines, and gives the agency new authority concerning drug shortages.

The FDA approved 39 new molecular entities in 2012 with the majority of these representing the first market approval. (See figure 3).

Europe

In the European Union (EU), 2012 saw significant new legislation and regulatory requirements. Implementation of the revised EU pharmacovigilance legislation, which brings in new measures aimed at strengthening the safety monitoring of medicines, started in July 2012.

The European Medicines Agency (EMA) approved 31 novel medicines in 2012. Of these approvals, nine were medicines for rare diseases.

The European Commission adopted proposals in July for a new regulation aimed at boosting clinical research in Europe by simplifying the rules for conducting trials. The proposals are currently under review and industry will be seeking to ensure that new legislation – expected to come into effect in 2016 – will create a favourable environment for R&D in Europe.

The new Falsified Medicines Directive became effective on 2 January 2013 and introduced measures to prevent the entry of falsified medicines into the legal supply chain. These include requirements for the importation of active substances into the EU from third countries (non-EU member states), which may present challenges to pharmaceutical manufacturers.

Emerging markets

As the demand for patient access to new drugs in emerging markets grows, so does the importance of conducting clinical trials in these countries to provide data on a medicine’s profile in local populations.

A growing number of emerging markets are requiring that studies be conducted in-country to assess any variation in ethno-sensitivity to new medicines. This is in addition to evidence that a highly regulated authority such as the EMA or FDA has approved a new medicine before they initiate their own review.

The regulatory requirements in these markets can be challenging, both in terms of the volume and pace of change, and the consistency of guidance. Nevertheless, we continue to take part in regional and national regulatory initiatives that provide opportunities for scientific and regulatory dialogue between industry, agencies and other stakeholders. We aim to include broader sets of patient populations from countries in medicine development programmes to increase global patient access to new innovative medicines, and optimise regulatory approvals.

 


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Consumer Healthcare

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, which can delay product launches.

Intellectual property and trademarks

 

The process of discovering and developing a new medicine or vaccine takes many years and can cost up to £1 billion.

Intellectual property 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 reward for innovation and to fund R&D. (See pages 33 to 38 for the pharmaceutical and vaccines development process.)

Patent protection for new active ingredients is available in major markets, and patents can often be obtained for new drug formulations, manufacturing processes, medical uses and devices for administering products.

Emerging markets are not all aligned on their approach to recognising patent-protected medicines.

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 it will 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 our innovation in that legal jurisdiction. Significant litigation concerning such patent challenges is summarised in Note 44 to the Financial statements, ‘Legal proceedings’.

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 before 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 available for each product we market.

In addition all of our commercial products are protected by registered trademarks in major markets, and our trademarks are important for maintaining the brand identity of our products. 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. We enforce our trademark rights to prevent infringements.

Generic pressures

 

When patents expire on medicines, 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. As generic manufacturers typically do not incur significant costs for R&D, 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, or to products where patents exist on both active ingredients and the delivery device, such as inhaled respiratory medicines.

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 and Takeda.

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

 

GSK’s globally diversified sales base and improved R&D output provides a clear platform for growth, with 2013 marking the start of what should be a series of growth years for the Group.

Specifically we expect to deliver core EPS growth of 3-4% CER and sales growth of around 1% CER during the year (based on the IAS 19 (Revised) adjusted EPS for 2012 of 111.4p). We also expect to deliver further strong cash generation in 2013 and remain committed to using free cash flow to support increasing dividends, share repurchases or, where returns are more attractive, bolt-on acquisitions.

We are more confident than ever that GSK is well placed to succeed in emerging and pro-innovation markets and that our R&D model is working. This is creating clear, long-term capacity for GSK to deliver continued innovation and benefit to patients, and sustained performance and returns to shareholders. For risks to this outlook, see ‘Risk factors’ on pages 78 to 86.

 

 

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Strategic review

How we deliver

Our strategy is designed to deliver sustainable growth,

reduce risk and improve long-term financial performance

and returns to shareholders

 

 

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Grow

a diversified

global business

  

 

How we will grow

    
     

 

Over the past five years we have created 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, which provide us with
significant competitive advantages and
opportunities for synergy.

 

We have substantially increased our
investment in higher-growth areas such as
emerging markets and Japan and in our
global Vaccines and Consumer Healthcare
businesses.

  

 

At the same time, we have re-shaped our
US Pharmaceuticals and Vaccines
business to reflect the changing market
dynamics there and to prepare for the
launch of multiple new products. In
Europe, we are restructuring to improve
efficiency and focus resources to growth
opportunities in what continues to be a
challenging market environment.

    

 

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Deliver

more products

of value

  

 

How we will deliver

    
     

 

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

 

We have increased the 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 changed our processes to make decisions earlier, so that only those medicines which are significantly differentiated from existing therapies are progressed.

  

 

We have broken up the traditional hierarchical R&D business model and created smaller, more agile groups of scientists who are accountable for their projects.

 

All of this has been underpinned with a focus on improving the rates of return in R&D and being more rigorous in how we allocate investment across Pharmaceuticals, Vaccines and Consumer Healthcare R&D.

  

 

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Simplify

the operating

model

  

 

How we will simplify

    
     

 

As our business continues to change shape, we are transforming how we operate so that we can reduce complexity and become more efficient.

 

Over the past four years we have implemented a global restructuring programme designed to deliver significant savings to support investment in our priority growth businesses as well as offset pressures on the Group’s margin resulting from changes in the shape and mix of our business.

  

 

Savings from this programme have been generated across the business. As this programme comes to an end, we are continuing to examine ways to simplify our operating model and increase efficiencies.

 

We have therefore begun a new, major change programme across manufacturing, R&D and Europe to deliver further savings. The new programme includes a series of technological advances and opportunities to eliminate complexities and improve our competitiveness further.

  

 

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GSK Annual Report 2012  |    17

 

 

 

£26.4bn

Group turnover

26%

of sales from

emerging markets

 

 

6

Key product filings

£1.4bn

New product sales

 

 

£2.5bn

Annual benefits from restructuring

194days

Working capital cycle down

from 202 days in 2011

Financial architecture

 

Our financial architecture is designed to support the delivery and execution of the Group’s strategy, and drive sustainable growth in core earnings per share and free cash flow in order to maximise total returns to shareholders.

The architecture has established four key financial priorities for GSK in delivering sustainable sales growth, improving our operating leverage, improving our financial efficiency and converting more of our earnings into cash.

By applying this framework we can drive better and more consistent decision making across the company and improve delivery of our key financial objectives of earnings per share growth and free cash flow generation. This can then be returned to shareholders or reinvested in bolt-on acquisitions, wherever the most attractive returns are available. Our decisions are rigorously benchmarked using a cash flow return on investment (CFROI) returns based framework.

We have also 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.

In 2012 we transitioned our reporting to a core basis, enabling greater visibility of the underlying performance of the business.

 

 

 

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Our values and behaviours

 

As we work towards our goals, how we deliver success is just as important as what we achieve. There are many ethical issues associated with the research and development, manufacture and sale of our products, and our relationships with healthcare professionals, patients and regulators. Ethical conduct is a priority for GSK and we put the interests of patients and consumers first and are driven by our values – transparency, respect, integrity, patient-focus – in everything we do.

We understand that without the application of these values by a talented, diverse and engaged workforce, we cannot execute our strategy. We are focused on supporting our employees and creating a culture where values-based decision making guides all business practices. These values are backed up by a clear Code of Conduct, robust compliance systems, and training and support that help employees make the right decisions.

Our strong policy and compliance programmes help to embed these behaviours, as does the leadership from our Board and Central Executive Team. Our board is active in ensuring corporate governance that oversees and informs sound decision making by executive management.

 

 

 

 

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18    |  GSK Annual Report 2012

 

Strategic review

 

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Grow

a diversified

global business

 

  

Overview

 

Over the past five years we have created 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, which we believe offer significant competitive advantage and opportunity for synergies.

 

We have substantially increased our investment in higher-growth areas such as emerging markets and Japan and in our global Vaccines and Consumer Healthcare businesses.

 

At the same time, we have re-shaped our US Pharmaceuticals and Vaccines business to reflect changing market dynamics and to prepare for the launch of multiple new products. In Europe, we are restructuring to improve efficiencies and focus resources on growth opportunities in what continues to be a challenging environment.


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GSK Annual Report 2012  |    19

 

   Progress   
  

 

Reported turnover for the year was down 1% but was flat adjusting for the disposal of our non-core OTC brands. Overall, strong performances in EMAP and other growth businesses largely offset declines in the USA and Europe.

 

Total sales in emerging markets now account for 26% of our business and grew 10% during the year.

 

Our vulnerability to generic competition has been declining, with sales of ‘White pills in Western markets’ now accounting for only 21% of turnover, down from 36% in 2008.

  

Group turnover £bn

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White pills in Western markets £bn*

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Turnover in major growth areas £bn**

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Sales in emerging markets £bn

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   Priorities   
  

 

Our globally diversified sales base, coupled with strong R&D output, provides us with a platform for sustainable future growth.

 

We will continue to invest in our key growth businesses such as emerging markets and Consumer Healthcare to support this outlook.

 

In pro-innovation markets like the USA and Japan, our priority during the year is to prepare for the launch of multiple new products from the pipeline.

 

In Europe, our focus is on restructuring our pharmaceutical business to reduce costs and reallocate resources. We are also considering other strategic options to maximise the value of our portfolio in the region.

 

*  See page 56 (Financial Review) ** See page 7

 

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Strategic review Grow a diversified global business

US

Pharmaceuticals and Vaccines

 

Turnover £bn

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Operating profit £bn

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Pharmaceuticals and Vaccines turnover 2012

      £m    

 

Growth
CER %

 

  1 Respiratory

     3,388        1   

  2 Anti-virals

     57        (42

  3 Central nervous system

     510        6   

  4 Cardiovascular and
  urogenital

     1,461        (5

  5 Metabolic

     (12       

  6 Anti-bacterials

     20        (63

  7 Oncology and emesis

     321        18   

  8 Vaccines

     826          

  9 Dermatology

     228        (14

10 Rare diseases

     117        10   

11 Immuno-inflammation

     65        >100   

 

The fundamentals of our US business are strong despite pressure from generics and product discontinuations.

We remain confident in our ability to deliver growth through our pipeline of new medicines and performance of newly launched products.

Marketplace

The US healthcare market continued to change rapidly in 2012 as patients, providers and payers sought improved care and lower costs. This drive for value, along with the implementation of healthcare reform, has spurred consolidation among healthcare organisations and providers, including hospitals, health maintenance organisations, preferred provider organisations, home health agencies and hospices. This is changing the way care is provided and paid for in the USA.

In this environment, decisions on purchasing and prescribing increasingly are being made at a central point, and the pharmaceutical industry is having to adapt its approach to product marketing if it is to continue to work effectively with healthcare providers and payers.

Performance

Throughout the year, we have continued to transform our business so that we can effectively market and sell our medicines and vaccines and provide the value our customers demand in this challenging healthcare environment.

The business has demonstrated its underlying strength with strong performance from products serving the respiratory, neuroscience, vaccine and oncology markets. Overall sales were down 2%, although excluding the impact of Avandia, sales were flat.

Operating profit increased 1% to £4.8 billion as a result of our continuing efforts to simplify our processes and produce efficiencies in our operations.

In the respiratory market, sales of medicines increased and our business grew 1% as the respiratory controller segment returned to overall prescription volume growth during the year. This followed a decline in 2011 after the Food and Drug Administration revised its class labeling of controllers. Sales of Advair, our largest product, increased 1%, while Flovent sales declined 1%. Sales of Ventolin were up 14%.

Strong performances by Lovaza (up 5%), Lamictal (up 18%), Promacta (up 66%), Votrient (up 59%) and Arzerra (up 23%), also helped us offset the loss of patent exclusivity for Arixtra and argatroban and the loss of Avandia sales. Our new treatment for lupus, Benlysta, contributed sales of £65 million during the year.

In our Vaccines business, turnover was flat. A decline in flu vaccine sales was offset by sales of Pediarix, which increased 32% and Boostrix which grew by 35%.

During the year, our pipeline continued its strong momentum with several products receiving FDA approval including: Votrient for sarcoma, Promacta for hepatitis C thrombocytopenia, MenHibrix vaccine for meningitis (C&Y) and infuenza type b, raxibacumab for anthrax inhalation and Fabior foam in dermatology. In addition during the year, we submitted five medicines to the FDA: respiratory medicines Breo and Anoro; oncology medicines dabrafenib and trametinib (BRAF and MEK), and albiglutide for diabetes.

The year was also significant as we completed settlements with the US Government on a broad range of longstanding legal cases. Over the past several years, we have taken actions at all levels of the business to change our procedures for compliance, marketing and selling to embed a new way for the business to operate. By instilling a values-based culture within our organisation, we are committed to operating our business with transparency, integrity and respect and to focus on the best interests of patients. Throughout the year, we continued to transform our business model.

In 2012, we also provided £100 million worth of GSK medicines and vaccines to over 350,000 uninsured or under insured patients enrolled in our patient assistance programmes.

 

 


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GSK Annual Report 2012  |    21

 

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Europe

Pharmaceuticals and Vaccines

 

Turnover £bn

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Operating profit £bn

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Pharmaceuticals and Vaccines turnover 2012

 

      £m      Growth
CER %
 

  1 Respiratory

     1,906         (5

  2 Anti-virals

     74         (23

  3 Central nervous system

     386         (15

  4 Cardiovascular
  and urogenital

     504         1   

  5 Metabolic

     29         (49

  6 Anti-bacterials

     403         (17

  7 Oncology and
  emesis

     256         11   

  8 Vaccines

     980         (4

  9 Dermatology

     156         5   

10 Rare diseases

     123         (6

11 Immuno-
  inflammation

     4         >100   

The economic climate and government austerity measures continue to impact our performance. We maintain our determination to develop our business and build on the opportunity provided by the flow of new products from our pipeline.

Marketplace

The economic climate in Europe continues to pose challenges for pharmaceutical companies and a wide range of businesses and industries. Austerity programmes are pressuring governments to find new ways of tightening healthcare budgets. The stringent austerity measures implemented by some countries affected not only the pricing of medicines but also patients’ access to new treatments.

One particular concern is that the operation of reference pricing, where prices are set in reference to those charged in other countries, could create additional pressure if levels set for a country under severe austerity measures are adopted by others.

Performance

Our European business continued to be affected by austerity measures, with overall sales down 7%.

To respond to the challenging business climate, we continued to invest in our products while reducing operating costs by 3% compared with 2011. Despite these initiatives, operating profit fell by 11%, primarily owing to the loss of sales.

In our Pharmaceuticals business, turnover declined 8%. Sales by volume of Seretide, our asthma and COPD product, increased but revenue declined 4% because of price cuts. Our oncology products – Votrient, Promacta and Arzerra – performed well, and sales of Duodart and Avodart, which treat benign prostatic hyperplasia, grew 9%, even though Duodart did not have market access approval in France and Italy.

While gaining approval from governments to market products continues to be a challenge, we did see improvements in 2012. Prolia, a treatment for osteoporosis, and Benlysta, for lupus, have now been launched in almost all markets in Europe.

In our Vaccines business, reported turnover declined by 4%, reflecting the austerity-driven price cuts and the introduction of national tenders in several countries.

Throughout Europe, we have sought to work with those governments implementing austerity measures to find ways to manage both patient demand and healthcare expenditure. Over 2012, this partnership approach resulted in no interruption to supply to those countries and an overall reduction in our overdue receivables.

Our support for charitable programmes that strengthen healthcare in the communities and regions where we operate remains an important part of our business. Our financial support each year totals more than €1 million in Europe (excluding the UK).

Following a review in 2012, we will be further restructuring our European business to reduce costs, improve efficiency and re-allocate resource to support growth opportunities in Europe. As we reduce our European cost base, we will also be evaluating further strategic options to ensure we are able to maximise the value of our current and future portfolio.

 

 

 

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Strategic review Grow a diversified global business

EMAP

Pharmaceuticals and Vaccines

 

Turnover £bn

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Operating profit £bn

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Pharmaceuticals and Vaccines turnover 2012

      £m      Growth
CER %
 

1   Respiratory

     858         13   

2   Anti-virals

     360         2   

3   Central nervous system

     329         8   

4   Cardiovascular and urogenital

     292         18   

5   Metabolic

     65         10   

6   Anti-bacterials

     735         5   

7   Oncology and emesis

     131         48   

8   Vaccines

     1,107         14   

9   Dermatology

     388         7   

10 Rare diseases

     48         20   

 

Despite volatility across the region, our Emerging Markets and Asia Pacific business continues to perform very strongly with growth across both vaccines and pharmaceuticals.

Marketplace

In 2012 overall market growth in the EMAP region slowed somewhat. Global economic factors played a part, but increasing price controls, funding constraints and aggressive local competition also contributed.

However, we believe the business environment in the region remains strong, with growing populations, expanding middle classes and higher spending on healthcare, and we are confident that the region will continue to provide a significant contribution to growth in the pharmaceutical industry over the long term.

Performance

We have a strong presence in many high-growth EMAP markets across both our Vaccines and Pharmaceuticals businesses.

We made good progress in 2012 with Pharmaceuticals and Vaccines turnover growth of 10%. Throughout the region, growth was strong across the three main pillars of our business: innovative brands (up 15%), classic brands (up 5%) and vaccines (up 14%).

Regionally, we saw strong growth in Latin America (up 11% to £1,257 million), China (up 17% to £759 million) and India (up 10% to £304 million) partly offset by the effect of mandatory price reductions in a number of markets, including Turkey and Korea.

Our Developing Countries Market Access (DCMA) unit, which manages our commercial business in the world’s 50 poorest countries and focuses on volume rather than profit growth, also performed well. DCMA unit sales increased 61% in 2012 to £158 million.

Overall, EMAP Pharmaceuticals turnover increased 8%, with improved momentum after a slow first quarter, as strong growth in respiratory combined with good performances in a number of established brands and the newer oncology portfolio.

Sales of our innovative brands continue to outpace the market with Seretide, Avodart/Duodart and Avamys all gaining market share. We have also seen a number of very promising product launches across the region, with strong uptake of Duodart in the Philippines and Prolia in Brazil, Russia and Argentina.

Benlysta, our treatment for lupus, is now approved in ten countries in the region including Russia and Taiwan and launched in four. We are also preparing for the launch of several products within our late-stage pipeline, with regulatory filings completed for Relvar in the Philippines, Taiwan and Brazil.

Our classic brands business grew 5% with strong performances from Augmentin (up 8%) Ventolin (up 10%) and Zeffix (up 3%) including successful tender wins for medicines such as Augmentin and Ventolin in Saudi Arabia, Russia, South Korea and Kazakhstan.

Despite some quarterly volatility, Vaccines growth of 14% was driven by Synflorix, Rotarix and Cervarix. Synflorix has proven to be a particularly successful launch and we also saw solid performance from our base paediatric Vaccines business.

 

 


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Operating profit grew 9% to £1.6 billion, broadly in line with sales growth.

Our commitment to increase access to our medicines across the EMAP region while sustaining operating profit growth was demonstrated by the continuing expansion of our flexible pricing initiatives and affordability partnerships. For example in 2012 we launched a new, lower-cost pack of four Ventolin rotacaps with a low-cost inhaler in Indonesia. This will provide patients with an affordable and effective treatment and will now be rolled out across other EMAP markets.

GSK’s contracts with the GAVI Alliance are central to our strategy to increase access to vaccines in developing countries.

We anticipate that the programmes resulting from this partnership will vaccinate more than 75 million children against gastrointestinal diarrhoea caused by rotavirus over the coming five years, and 160 million children against pneumococcal disease by 2020. (See page 24 for more information on this programme in Yemen).

We have committed to supply to GAVI 132 million doses of Rotarix over five years and 480 million doses of Synflorix over ten years. During 2012, six new GAVI-eligible countries introduced Rotarix and two additional countries, Pakistan and Madagascar, introduced Synflorix.

 

This represents a substantial contribution to the United Nation’s Millennium Development Goal to reduce child mortality.

In the 49 least-developed countries covered by our DCMA unit, we price GSK medicines at 25% of developed market prices for innovative brands and vaccines. We also reinvest 20% of the profits we make in those countries back into local healthcare infrastructure.

 

 

 

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Strategic review Grow a diversified global business

EMAP Pharmaceuticals and Vaccines continued

 

Case study

 

Wider access to vaccines

 

In August the government of Yemen introduced rotavirus vaccines in its national immunisation programme to help prevent thousands of children’s deaths from severe diarrhoea. This programme was made possible through our commitment to the GAVI Alliance.

 

We committed to supply GAVI with up to 132 million doses of our rotavirus vaccine over the next five years and a minimum of 480 million doses of our pneumococcal vaccine over the next ten years. The vaccines are priced at a small fraction of developed world prices, as they are intended to reach children in the world’s poorest countries where the burden of illness is often the highest.

 

By partnering with GAVI, our vaccines can reach more children. The arrangement provides us with security around high volume and long term supply, allowing us to operate a sustainable business model.

 

Pictured: Infant receiving a vaccine in Yemen.

    

 

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Japan

Pharmaceuticals and Vaccines

 

Turnover £bn

 

 

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Operating profit £bn

 

 

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Pharmaceuticals and Vaccines turnover 2012

 

 

            Growth  
      £m      CER %  

1   Respiratory

     624           

2   Anti-virals

     221         (9)   

3   Central nervous system

     391         (3)   

4   Cardiovascular and urogenital

     116         32    

5   Metabolic

     72         (20)   

6   Anti-bacterials

     29         (6)   

7   Oncology and emesis

     56         38    

8   Vaccines

     176         (50)   

9   Dermatology

     33         –    

10 Rare diseases

     188         15    

Despite scheduled government price revisions and the completion of the cervical cancer vaccine catch up programme in March, our Japanese business performed strongly during 2012.

Marketplace

Japan’s pharmaceutical market grew by about 2% in 2012, affected by the government’s scheduled reimbursement price revisions, which take place every two years.

A state-funded cervical cancer vaccination programme for girls, and Hib and pneumococcal vaccine for infants and young children, also had an impact on pharmaceutical companies’ earnings during the year.

Performance

The market in Japan continues to encourage innovation, and our business performed strongly. While our turnover fell 6% in 2012 to £1,969 million, this largely reflected an adverse comparison with 2011 which benefited from particularly strong Cervarix sales due to an HPV vaccination catch up programme. Excluding Cervarix, turnover increased by 5%.

The price revision was conducted under the new provisional drug pricing system, which provides premiums to patent-protected medicines so that prices are maintained during the exclusivity period. The new system means pharmaceutical manufacturers with off-patent products suffer a larger reduction in the reimbursement prices compared with manufacturers with strong innovation portfolios.

We benefited from this revision system, with 23 compounds, 51 formulations receiving the premium.

Pharmaceuticals turnover grew 3% with strong growth from the recently launched products, Lamictal, Avodart and Volibris, partly offset by the impact of the mandatory biennial price cuts, which impacted growth by approximately 4 percentage points, and increasing generic competition to Paxil. The respiratory portfolio grew 6% to £624 million, with strong contributions from Adoair sales (6%) and Xyzal offsetting declines in Flixonase and Zyrtec.

Paxil, our leading CNS product, faced strong challenges from newly launched anti-depressants and from a generic version entering the market in June. While sales fell 20%, Paxil together with newly introduced Paxil CR, remains a leader in the anti-depressants market.

On the approval of ReQuip CR, the Ministry of Health, Labour and Welfare recommended switching patients from regular ReQuip based on the benefits the new formulation offered.

We have had 72 regulatory approvals since 2000, and six of those approvals coming in 2012. New approvals granted in the year include: Samtirel for pneumocystis pneumonia, Paxil CR for depression, ReQuip CR for Parkinson’s disease, Votrient for soft tissue sarcoma, Botox for hyperhydrosis and Malaron for malaria. New product filings were made for Relvar in asthma/COPD and Arzerra for chronic lymphocytic leukemia.

Our Vaccines business recorded sales of £176 million, boosted by the government-funded immunisation programmes, though the completion of the HPV catch-up programme impacted total sales. Rotarix, which launched in late 2011, contributed sales of £44 million.

 

 

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Strategic review Grow a diversified global business

Japan Pharmaceuticals and Vaccines continued

 

Operating profit of £1.2 billion fell 7%, reflecting the loss of sales compared with 2011.

 

GSK and Daiichi Sankyo Co., Ltd started a new vaccines joint venture, Japan Vaccine Co Ltd (JVC). The venture, in which GSK has a 50% stake, will hold the commercial rights in the market for existing vaccines from both parent companies and is responsible for late-stage development. It creates significant economies of scale in the development and distribution of vaccines in the Japanese market.

 

The country continues to recover from the earthquake and tsunami of March 2011. Our employees’ volunteer team, Team Orange, which formed following the catastrophe, continued to provide help and support to people in the affected areas. We also worked to raise funds for a scholarship programme targeting students impacted by the disaster.

 

The year ended with GSK Japan being designated 2012 company of the year by the British Chamber of Commerce in Japan.

   

Case study

 

Japan: a market rewarding innovation

 

Japan is a market that rewards healthcare innovation and we have significantly grown sales and market share in the country over recent years as we have launched multiple new products.

 

In 2012, we had six approvals, bringing our total number of regulatory approvals to 72 since 2000. We have the potential for approximately 30 more launches in Japan over the next three years.

 

A key focus for our Japanese business has been to reduce the time lag between the submission of new medicines in the USA/EU and submissions to the Japanese regulatory authorities. Previously, this time frame had been several years, but through better global collaboration on development and safety studies, we have been able to reduce this to a matter of months.

 

Our new asthma/COPD medicine Relvar, for example, was filed in Japan only three months after its first western submission by taking this global approach. If approved, it will add to our established respiratory medicine portfolio in the country.

   
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Consumer Healthcare

 

 

Turnover £bn

 

 

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Operating profit £bn

 

 

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Breakdown of turnover

 

 

            Growth  
      £m      CER %  

1 Total wellness

     2,008         (10)   

2 Oral care

     1,797         8   

3 Nutrition

     1,050         8   

4 Skin health

     255         (1)   

Our Consumer Healthcare business continues to perform strongly, particularly in emerging markets.

Marketplace

The market for consumer healthcare products operated at two distinct speeds in 2012, with strong growth in emerging economies contrasting sharply with challenging environments in western Europe and North America. Competition was intense as companies sought to outpace market growth in developed economies and improve their presence in the emerging markets.

Performance

Our Consumer Healthcare business was restructured in late 2011 into four large, high-value categories: Total wellness, Oral care, Nutrition and Skin health. The benefit of this new structure began to be realised in 2012. Total turnover, excluding the sales of the non-core OTC brands, increased 5% to £5.1 billion with relatively consistent performance over the quarters. This reflected continued growth in Oral care, Nutrition and Total wellness, partly offset by a small decline in Skin health. In addition, we took steps to increase the global availability of our brands with 44 innovations that reached nearly 90 countries.

On a regional basis, US sales grew 2% and European sales were flat, both impacted by continuing economic pressures and the drag from supply interruptions to alli during the year. The rest of world markets grew 12%, with India, the Middle East and China making strong contributions. By early 2013, we had completed our plans to increase our stake in our Indian Consumer Healthcare subsidiary from 43.2% to 72.5%, increasing our presence in this important and fast-growing market.

Sales from our Total wellness business fell 10%, but when sales from the divested non-core OTC brands were excluded, sales grew 2%. Within this business, our gastro-intestinal products registered 11% growth through the launch of Tums Freshers in the USA and strong performance of ENO in emerging

markets. In 2012, our weight-loss product alli experienced a major interruption from our supplier, impacting our sales.

Our smoking reduction and cessation products also performed well in the year, gaining share in both North America and Europe. Another contributor was our pain management category. Sales in this category continued to benefit from the roll-out of our patented Optizorb technology to Panadol concept brands, including Panadol in Europe, Asia and Latin America, Dolex in Colombia and Crocin in India.

The Oral care category led growth at 8% versus market growth of approximately 4%. Sensodyne became the business’s first ‘billion-dollar brand’ in 2012, boosted by the global roll-out of Sensodyne Repair & Protect and the launch of Sensodyne Repair & Protect Whitening and Extra Fresh. Our denture care business also registered strong growth in 2012 (up 12%), with particularly positive results from expansion in emerging markets (up 17%).

In Nutrition, which registered global growth of 8%, Horlicks continued to grow in the Indian sub-continent. In 2012, the Horlicks Family Nutrition range sold close to 300 million sachets in India.

The Maxinutrition range, which we acquired in 2011, continued strong growth in 2012 of 21%. We have announced a review evaluating strategic options for our Lucozade and Ribena drinks brands, which are primarily marketed in established western markets. These brands are iconic and the review will look at the best ways to ensure their continued growth.

Our Skin health business registered a 1% decline in 2012. Strong performances in wound care with Bactroban in China and good growth on lip care with Zovirax and the introduction of Abreva Conceal in the USA were offset by declines on Hinds in Latin America and Oilatum in the UK.

Operating profit of £0.9 billion fell 9%, reflecting the disposal of the non-core OTC brands.

 

 

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Strategic review Grow a diversified global business

Consumer Healthcare continued

 

Case study

 

Reaching into rural communities

 

Our Indian business is our fastest-growing Consumer Healthcare business, with average sales growth of 18% over the past five years. The business generated revenues of over £400 million in 2012.

 

Operating across Nutrition, Total wellness and Oral care categories we have a number of leading brands in India, but the biggest by far is Horlicks. In 2012, we sold close to 150 million drink sachets of Horlicks.

 

But in India, Horlicks is more than a drink. We have evolved this iconic household brand into a range of nutritional products, including breakfast cereals, biscuits and instant noodles. The original trademark product has diversified into specialised formulations for different consumers including Junior Horlicks, Women’s Horlicks and Mother’s Horlicks.

 

We have been increasing availability of Horlicks in rural markets, reaching an additional 10,000 villages in 2012. In addition, harnessing the popularity and strong reputation with Indian consumers of the brand, we are working with community organisations, schools, mothers’ groups, local doctors, pharmacies, and mobile vans to provide advice and education on health and nutrition in remote rural communities where up to 70% of the population lives.

 

Through this network, we are also working with local healthcare providers to increase these communities’ access to key medicines to treat diseases that greatly worsen the blight of malnutrition. We are concentrating efforts on improving access to medicines such as Zentel for worm infestations, Fesovit for iron deficiency, other vitamin and mineral supplements and treatments for respiratory problems.

 

    

 

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ViiV Healthcare

 

Turnover £bn

 

 

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Operating profit £bn

 

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Breakdown of turnover

 

            Growth  
      £m      CER %  

1 Combivir

     179         (43

2 Epivir

     49         (54

3 Epzicom/Kivexa

     665         10   

4 Lexiva

     127         (9

5 Selzentry

     128         20   

6 Trizivir

     107         (13

Our HIV/AIDS business withstood generic competition on a number of products, finishing the year with a significant filing.

Marketplace

In 2012 an estimated 34 million people worldwide were reported as living with HIV.

The market for HIV medicines is highly competitive with multiple new market entrants and an increasing number of generic competitors in the USA and Europe. Scientific progress in HIV is marked by new therapies that can provide benefits over existing medicines’ efficacy, tolerability and resistance profiles.

Performance

In 2012, turnover for ViiV Healthcare was £1.4 billion, down 10% from the previous year. The decline in sales was anticipated as our mature product portfolio including Combivir, Epivir and Ziagen in the USA experienced generic competition. This impact was partly offset by strong performances from Epzicom/Kivexa and Selzentry/Celsentri.

Sales of Epzicom/Kivexa grew by 10% to £665 million, while sales of Selzentry/Celsentri were £128 million, up 20%. This was driven by increasing early-line use in the USA and broader uptake of genotypic tropism testing in Europe. Rapid expansion of Selzentry/Celsentri continued in the international region with first-line approvals in several large markets including Japan, Argentina and Australia.

Despite the fall in sales, operating profit of £0.8 billion was flat in CER terms, primarily reflecting robust cost control and changes in the mix of products sold.

ViiV Healthcare was established by GSK and Pfizer in 2009. In October 2012 ViiV Healthcare and Shionogi agreed that ViiV Healthcare would acquire exclusive global rights to the co-developed portfolio of investigational integrase inhibitors, including dolutegravir.

The new agreement enables ViiV Healthcare to advance the portfolio most effectively and efficiently while maximising the full potential long-term value of the assets. In return Shionogi receives representation on the ViiV Healthcare board and becomes a 10% shareholder in the company.

Regulatory submissions for our investigational integrase inhibitor dolutegravir in Europe, the USA and Canada were completed following receipt of Phase III data from the comprehensive trial programme in naive and treatment-experienced patients. The FDA has now granted this priority review. Submission of regulatory files for a dolutegravir fixed-dose combination with Epzicom/Kivexa is anticipated in 2013.

Providing a comprehensive, sustainable approach to improving access to HIV medicines remains a key priority for ViiV Healthcare. This commitment covers 135 countries including middle-income countries, low-income countries, least-developed countries and sub-Saharan Africa. We offer royalty-free voluntary licences and not-for-profit pricing in all low-income and least-developed countries and in sub-Saharan Africa, where 75% of all people with HIV currently live. 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. All marketed and pipeline HIV medicines are covered by our access policy.

ViiV Healthcare also spearheaded initiatives to address paediatric HIV in 2012. These include a collaboration with the Clinton Health Access Initiative (CHAI) and Mylan Pharmaceuticals to produce a taste-masked, dispersible medicine for paediatric use in resource-limited settings. Significant unrestricted educational grants were also provided to five organisations to support the collection of paediatric data, information and research. Through the Positive Action programme and Positive Action for Children Fund, ViiV Healthcare also continued to make important progress in supporting the community response to HIV/AIDS.

 

 

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Strategic review

 

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Deliver

more products

of value

 

  

Overview

 

We have changed our R&D organisation so that it is better able to sustain a 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 changed our processes to make decisions earlier around pipeline progressions, so that only those medicines that are significantly differentiated from existing therapies are progressed.

 

We have broken up the traditional hierarchical R&D business model and created smaller, more agile groups of scientists who are accountable for delivering their projects.

 

All of this has been underpinned with a focus on improving the rates of return in R&D and being more rigorous in how we allocate investment across Pharmaceutical, Vaccine and Consumer Healthcare R&D.


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Progress

During 2012, new vaccines were approved for flu, meningitis and meningitis-Hib. We received two significant new indications for existing medicines treating cancer and hepatitis.

 

We also filed six key new products for approval with regulators, including treatments for respiratory disease, cancer, HIV and diabetes. This is an unprecedented level of late-stage pipeline delivery for the company.

 

Overall, our return on R&D investment has been increasing and we remain confident we can reach our long-term goal of 14%.

  

Sales of new Pharmaceuticals

and Vaccines products £bn

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Core R&D expenditure £bn

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New product approvals in the USA

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Estimated rate of return in R&D %

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Priorities

A key focus for 2013 will be to successfully progress the six key product filings we have made, although clearly decisions on approval of these assets will be made by regulators.

 

We are increasingly confident in our ability to sustain pipeline delivery and we expect to receive Phase III data on a further 14 assets in 2013 and 2014. Delivery of this data-flow over the next two years is a priority for the Group.

 

We will also continue to drive improvements in ways of working across the R&D organisation, so that the increasing levels of output can be maintained without increased expenditure.

 

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Strategic review Deliver more products of value

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.

Core R&D expenditure 2012

 

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      £m  

1 Pharmaceuticals

     2,821   

2 Vaccines

     498   

3 Consumer Healthcare

     155   

Our primary goal in R&D is to develop our pipeline products safely and efficiently to produce innovative new medicines that provide improved treatments that are valued by both patients and payers.

More than 12,500 people work across our R&D organisation, with many of these based in our large R&D centres in the UK, USA, Belgium and China. In 2012, our R&D expenditure before non-core items was £3.5 billion, representing 13.1% of total turnover.

Our R&D expenditure is split into three parts, with proportions devoted to our three areas of business: Pharmaceuticals, Vaccines and Consumer Healthcare. We allocate R&D investment consistently and rationally across the three businesses. Investment in R&D is based on where we see the best opportunities in both the market and the science, rather than as a fixed proportion of sales. Overall, our R&D budget has remained relatively flat for the past four years.

The discovery and development process is long, expensive and uncertain – especially in Pharmaceuticals and Vaccines R&D – and it is not possible to predict which projects will succeed or fail. Further information is discussed in pages 33 to 41.

Rate of return in R&D

Declining R&D productivity is an issue that the pharmaceutical industry as a whole has faced in the past decade. As a result it has become more important for companies to provide a greater level of transparency on the returns that their R&D organisations make to determine capital investment allocation.

The returns generated from R&D are primarily determined by the commercial success of new medicines and vaccines as they achieve regulatory approval and are launched.

In 2010, GSK became the first major pharmaceutical company to publish an internal rate of return (IRR) on our R&D investment, to indicate the positive value being realised from our choices within the R&D organisation. IRR provides a measurement offering an insight into how we manage our R&D business. This is based on a complex methodology that weighs the R&D costs incurred to discover and develop our late stage pipeline projects against the profits of new medicines and vaccines as they achieve regulatory approval and are made available to patients. It incorporates actual and predicted sales figures on probabilities of success for medicines in the pipeline. We also take into account an estimate of attributable R&D costs, estimated profit margins, capital investment and working capital requirements.

We have stated our long-term aim of increasing our rate of return on R&D investment to 14%. In February 2012 we announced an IRR of around 12%. This was an increase from an 11% IRR calculated in February 2010. The IRR figure will be updated every 2-3 years, with the next published figure in 2014.

The calculation at February 2012 of the estimated rate of return on R&D spending included products launched from 1 January 2009 to 31 December 2011 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 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 working capital requirements are factored into the calculation, based on our historical performance.

We are confident we are on track to deliver our long-term goal to improve returns to around 14%.

Details of the full product development pipeline, made up of both pharmaceutical and vaccine assets, are set out on pages 225 to 228 and on our website. The performance of marketed products is discussed in detail under ‘Financial review 2012’ on pages 57 to 59.

 


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Pharmaceuticals R&D

 

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

 

 

  Two new significant indications for existing medicines Promacta and Votrient

 

  Filing for six new medicines, treating respiratory disease, cancer, HIV and diabetes, submitted to regulators

 

  New areas for early stage research identified following investment review

Core Pharmaceutical R&D investment in 2012

 

 

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      £m  

1 Discovery

     800   

2 Development

     1,655   

3 Facilities and central support

     366   

2012 was a year of significant progress for our R&D organisation.

In the course of the year, we received two new significant indications for existing medicines; Promacta for thrombocytopenia associated with hepatitis C and Votrient for the treatment of soft tissue sarcoma. In addition, we submitted six key new medicines to regulators: respiratory medicines Relvar/Breo and Anoro; oncology medicines dabrafenib and trametinib (BRAF and MEK); dolutegravir for HIV; and albiglutide for diabetes.

Two new chemical entities moved into Phase III development in 2012, while no assets were terminated from Phase III development, as listed on page 40.

Our Core Pharmaceuticals R&D expenditure was £2.8 billion in 2012, a decline of 5% from 2011. We continue to move towards sustainable replenishment of our late-stage pipeline.

More than 10,000 people work in Pharmaceuticals R&D, and we view our research projects as early stage – discovery – or late-stage – development.

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 sheer scale 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.

Over the last six years, we have transformed our R&D organisation to become more efficient and productive.

The process began in 2007, when all therapy areas were reviewed to seek the most scientifically promising areas for drug discovery and to move the organisation from a culture predisposed to reinvest in existing areas. In 2008, as a result of this therapy area rebalancing process, we changed our business model, moving to smaller, more agile and focused Discovery Performance Units (DPUs) of between five and 70 scientists. Each DPU works on a particular disease or pathway, and is responsible for discovery and development of 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 or option-based.

The three-year mark for most DPUs was reached in late 2011/early 2012 and their business plans were reviewed by the Discovery Investment Board (DIB), which identified areas for improvement and suggested agreed progress targets and investment levels. Membership of the DIB comprises senior R&D and commercial management, and external individuals with expertise including life science investment experience and understanding of payer perspectives. It is chaired by the President of R&D.

The overall review of the DPUs was positive and led to a number of new investment allocations in discovery research. Over the course of 2012, four new DPUs have been created and three have been closed. In addition, scientists submitted more than 50 proposals for new discovery performance units.

 

 

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Strategic review Deliver more products of value

Pharmaceuticals R&D continued

 

This outcome is consistent with our intentions of the DPU structure and DIB review – to retain flexibility in our discovery research investment and to ensure we remain focused on where the scientific opportunity remains greatest. This will be our way of working in the future so we can remain flexible as the landscape changes.

Overall our discovery expenditure remained flat at approximately £800 million. No individual project has annual expenditure of more than 10% of the total annual R&D expenditure. Investment decisions have been made where the science presents a compelling case and there remains a need for new treatments.

We have learned a great deal from the first DIB review and we now expect to deliver up to 30 assets to ‘commit to medicine development’ (typically Phase IIb) over the next three years.

This increase in productivity would mean GSK is moving towards sustainable replenishment of its late-stage pipeline, with no increase in cost.

Developing medicines for patients

A compound that advances into late-stage 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 regulatory file for submission to regulatory agencies.

Medicines Development Teams (MDTs) are small units of six to ten people who have responsibility for a compound through the later stages of development to filing with the regulatory agencies. There are over 30 assets in late-stage development.

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

The Portfolio Investment Board (PIB) assesses 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 Pharma R&D investments (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 certain 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.

 

 

Timeline and development stages for pharmaceutical research

 

 

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Case study

 

Concentrating on development

 

It is estimated that it takes between nine and 15 years to take a medicine from initial research to the point it is approved by regulators and made available to patients. Our R&D organisation has been working to reduce this time.

 

Two cancer medicines recently submitted to regulatory authorities, dabrafenib, our BRAF inhibitor, and tramatenib, our MEK inhibitor, both for malignant melanoma have shown that this can be done. Submissions to regulators took place less than seven years from the time our teams selected these compounds as potential anti-cancer treatments. We were able to do this by developing a deep understanding of how these compounds worked so that we could design clinical trials to include patients whose tumours had a specific genetic mutation that made them susceptible to these investigational medicines.

 

Because both compounds worked against tumours with a genetic mutation, we collaborated with another company to develop a diagnostic test to identify tumours carrying this mutation.

 

Pictured: Representation of melanoma cells.

 

    

 

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36    |  GSK Annual Report 2012

 

Strategic review Deliver more products of value

Pharmaceuticals R&D continued

 

Sales of new pharmaceutical products launched over the last 5 years grew by 34% and represented 7% of total pharmaceutical sales.

 

Governance

The R&D governance structure has been developed to ensure clearer accountabilities and product reviews. The oversight of strategic issues and overall budget management across R&D is owned by the R&D Executive team (RADEX). DIB and PIB control investment decisions in early and late-stage R&D, as described above.

 

The Scientific Review Board (SRB) is the governing body accountable for the scientific assessment of the R&D portfolio to support investment decision making at the Portfolio Investment Board (PIB). At the SRB, there will be a debate, review and endorsement of a unified R&D view on the scientific aspects of all assets. The SRB establishes 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. The SRB view is the formal R&D position communicated at PIB.

 

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

 

In 2012 we developed and launched 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 organisation is led by the Chief Regulatory Officer.

    

Case study

 

Opening up access to trial data

 

Clinical trials are a vital part of the development process for all new medicines and vaccines. We recognise the importance of sharing research from trials to help advance scientific understanding and inform medical judgment.

 

Access to patient-level data from clinical trials can be valuable for researchers who want to learn about existing medicines and improve patient care. For a number of years GSK has responded to external requests for patient-level data on a case-by-case basis. Now we will be more proactive, allowing researchers to request anonymised patient-level data from our published clinical trials of approved or terminated medicines. This will enable researchers to examine trial data more closely or combine data from different studies to conduct further research.

 

Researchers will be able to submit their requests via a dedicated website. To ensure these requests have a valid scientific basis we have established a fully independent panel to oversee requests and grant access.

 

Expanding on this, in 2013, we were the first company to sign up to the AllTrials campaign, which calls for registration of clinical trials, the disclosure of clinical trial results and publication of clinical study reports which detail the design, methods and results of clinical trials and form the basis of submissions to regulators.

 

We also announced plans to make clinical study reports for our medicines publically available through the GSK Clinical Study Register once the medicines have been approved or discontinued from development and the results have been published. We will put in place a dedicated team to work back over time to post reports for all approved medicines dating back to the formation of GSK, starting with those most commonly prescribed. Patient data in the clinical study reports will be removed to ensure patient confidentiality is maintained.

 

These steps further advance our long standing commitment to openness and transparency of clinical trials. We already publish summary results – whether these are perceived to be positive or negative – of every research trial on the GSK Clinical Study Register. Almost 5,000 clinical trial result summaries are now available and the site receives on average almost 11,000 visitors each month.

 

Individuals participate in our research in the hope they might bring advances in healthcare. Our new plans acknowledge their commitment and reflect our desire to ensure that their contribution can lead to health gains, while safeguarding their confidentiality.

    


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Vaccines 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.

 

Highlights

 

  Three newly approved vaccines in Nimenrix, MenHibrix and Fluarix Quadrivalent

 

  Additional Phase III data on malaria vaccine announced

We invested £498 million in core vaccines R&D in 2012 and we have more than 1,600 scientists working on the development of new vaccines.

During the year three new vaccines were approved; Nimenrix for meningitis and MenHibrix for menigitis Hib and a quadrivalent flu vaccine.

In addition 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, MMR (USA) and our therapeutic vaccine MAGE-A3.

In November we published the latest results from the Phase III study into our adjuvanted malaria vaccine candidate (RTS,S) which is ongoing in seven countries in Africa.

Our R&D effort is focused on the development of new prophylactic and therapeutic vaccines.

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.

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 later stage clinical trials usually take another 8-10 years.

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 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 immunotherapeutic concept against a variety of tumour types.

 

 

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38    |  GSK Annual Report 2012

 

Strategic review Deliver more products of value

Vaccines R&D continued

 

Governance

In 2012 we further consolidated 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 day-to-day progress, including identifying and developing new products.

There are several key decision points in the vaccine development process: commit to research (decide to initiate full research program), commit to candidate development (decide to invest resources to move to clinical development); commit to early clinical development; commit to Phase III; registration and launch.

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.

 

 

Vaccines research and development cycle

 

 

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GSK Annual Report 2012  |    39

 

Consumer Healthcare R&D

 

While innovation timelines in consumer healthcare products are significantly shorter than those in Pharmaceuticals, satisfying the needs of the consumer remains our central focus.

 

Highlights

 

  44 new product-market combinations

 

  Total proportion of sales from innovation products was 13%

 

  New R&D centre in China based on meeting the needs of the Chinese consumer market

Investment in our core Consumer Healthcare R&D was £155 million in 2012, up from £146 million in 2011. With more than 600 people in the UK, USA, India and China working on consumer R&D, our intention is to develop innovative, category-defining products, differentiated by science and informed by consumer insights.

Our innovation portfolio is a critical element of our Consumer Healthcare strategy, ensuring a sustainable flow of new, scientifically-differentiated products. These often include new technologies and formulations as well as product line extensions.

Sales from our innovative products launched in recent years were 13% of Consumer Healthcare global sales in 2012, with key contributions coming from Sensodyne Repair & Protect, Panadol Extra Advance and Smoking reduction and Cessation Mini Lozenges.

Innovative new products launched in 2012 included:

 

  Tums Freshers – developed following consumer insights, this first-of-its-kind product combines the therapeutic benefits of calcium carbonate for heartburn relief with effective breath fresheners.

 

  Abreva Conceal – a clear, non-medicated patch that instantly conceals cold sores, met consumer desire to address appearance concerns from a troubling, recurring condition. Designed to be used over Abreva cream, the patented MicroAir technology in the patch provides a protective barrier against contaminants for eight hours while allowing air in to promote healing.

 

  Horlicks Growth+ – this new addition to the Horlicks range contains 100% milk protein, 30 micronutrients, a balanced macronutrient energy profile and other ingredients important for growth. The formulation was developed following research on the impact of nutritional supplementation in children, including a major study testing the benefits of Horlicks.

Through our partnership with the McLaren Group, our nutrition scientists developed two bespoke Lucozade formulations to support the specific nutritional needs of their Formula One drivers. The Lucozade Hydration Formulation contains a determined mix of essential hydration salts, carbohydrates and proteins to support optimal performance; the Lucozade Race Formulation enhances performance in high temperatures while addressing needs for weight management, mental focus and speed of absorption. These formulations will be launched in 2013, targeting the unique needs of athletes, serious sports people, and those involved in high-intensity endurance exercise.

Given the importance of the Chinese market we have opened an R&D Innovation Centre in the country that will be concentrating on developing new products for this fast-growing market. Researchers will focus on innovations specifically developed to meet the needs of consumers in China.

 

 

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Strategic review Deliver more products of value

Late stage pipeline summary

We have a full and diverse product development pipeline

We identified below 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 2013 approvals.

 

8

     

6

     

14

     

2

approvals in USA or EU since January 2012

     

key medicines filed since January 2012

     

Phase III assets delivered key data during 2011 and 2012

     

new first Phase III starts since January 2012

•  Fabior for acne vulgaris (USA)

 

•  MenHibrix for N.meningitis (C&Y) and H.influenza type b disease prophylaxis (USA)

 

•  Nimenrix for N.meningitis (A,C, W &Y) disease prophylaxis (EU)

 

•  Promacta for hepatitis C induced thrombocytopaenia (USA)

 

•  Quadrivalent flu vaccine for seasonal influenza prophylaxis (USA)

 

•  raxibacumab for treatment & prophylaxis of anthrax inhalation (USA)

 

•  Sorilux for scalp psoriasis (USA)

 

•  Votrient for sarcoma (USA & EU)

     

•  albiglutide for type II diabetes

 

•  Anoro for COPD

 

•  dabrafenib for metastatic melanoma

 

•  dolutegravir for HIV

 

•  Relvar/Breo for COPD and asthma

 

•  trametinib for metastatic melanoma

     

•  Anoro for COPD

 

•  albiglutide for type II diabetes

 

•  dabrafenib for metastatic melanoma

 

•  dolutegravir for HIV

 

•  drisapersen for Duchenne muscular dystrophy

 

•  Patrome (IPX066) for Parkinson’s disease

 

•  migalastat for Fabry disease

 

•  Mosquirix for malaria

 

•  otelixizumab for type I diabetes

 

•  Promacta for hepatitis C induced thrombocytopaenia

 

•  Relvar/Breo for COPD and asthma

 

•  trametinib for metastatic melanoma

 

•  Tykerb for adjuvant breast cancer

 

•  Votrient for sarcoma

     

•  mepolizumab for severe asthma

 

•  sirukumab for rheumatoid arthritis

 

                 

0

                 

medicines in Phase III development or registration terminated

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 225 to 228 and on our website.

 

  In-licence or other alliance relationship with a third party
 


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Phase III/registration Pharmaceuticals and Vaccines pipeline summary
Therapeutic area   Compound    Indication    Phase III    Filed    Approved
Biopharmaceuticals   Arzerra (ofatumumab)    chronic lymphocytic leukaemia, first line therapy & use in relapsed patients             
    Arzerra (ofatumumab)    diffuse large B cell lymphoma (relapsed patients)             
    Arzerra (ofatumumab)    follicular lymphoma (refractory & relapsed patients)             
    Benlysta (belimumab)    systemic lupus erythematosus             
    Benlysta (belimumab)    vasculitis             
    mepolizumab    severe asthma             
    sirukumab    rheumatoid arthritis             
    albiglutide    type 2 diabetes             
    raxibacumab    inhalation anthrax             
Cardiovascular & metabolic   darapladib    atherosclerosis             
Immuno-inflammation   vercirnon (1605786)    Crohn’s disease             
Infectious diseases   Relenza i.v. (zanamivir)    influenza             
Neurosciences   Patrome (IPX066)    Parkinson’s disease             
Oncology   trametinib + dabrafenib    metastatic melanoma, adjuvant therapy             
    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             
    dabrafenib    metastatic melanoma             
    trametinib    metastatic melanoma             
    trametinib + dabrafenib    metastatic melanoma             
    Tyverb/Tykerb (lapatinib)    metastatic breast cancer, in combination with trastuzumab             
    Votrient (pazopanib)    sarcoma             
    Revolade/Promacta (eltrombopag)    hepatitis C induced thrombocytopaenia             
Respiratory &   fluticasone furoate (685698)    asthma             
immuno-inflammation   Relvar/Breo    COPD – mortality outcomes         
    (vilanterol + fluticasone furoate)                    
    umeclidinium (573719)    COPD             
    vilanterol    COPD             
  Relvar/Breo    asthma         
    (vilanterol + fluticasone furoate)                    
  Relvar/Breo    COPD         
    (vilanterol + fluticasone furoate)                    
    Anoro (umeclidinium + vilanterol)    COPD             
Paediatric vaccines   MMR    measles, mumps, rubella prophylaxis             
    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             
Antigen-Specific Cancer   MAGE-A3 immunotherapeutic    treatment of melanoma             
Immunotherapeutic   MAGE-A3 immunotherapeutic    treatment of non-small cell lung cancer             
Rare diseases   drisapersen (2402968)    Duchenne muscular dystrophy             
    2696273    adenosine deaminase severe combined immune deficiency (ADA-SCID)             
    migalastat HCl    Fabry disease             
Dermatology   alitretinoin    chronic hand eczema             
    Duac low dose    acne vulgaris             
    Fabior (tazarotene foam)    acne vulgaris             
    Sorilux    scalp psoriasis             
HIV   dolutegravir + abacavir sulphate    HIV infections – fixed dose combination         
    + lamivudine                    
    dolutegravir    HIV infections             

In-licence or other alliance relationship with third party

 

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Strategic review

 

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Simplify

the operating model

 

  

 

Overview

 

As our business continues to change shape, we are transforming how we operate so that we can reduce complexity and become more efficient.

 

Over the past four years we have implemented a global restructuring programme designed to deliver significant savings to support investment in our priority growth businesses as well as offset pressures on the Group’s margin resulting from changes in the shape and mix of our business. Savings from this programme have been generated across the business, including in R&D, manufacturing and through the centralisation and streamlining of our support functions such as finance, HR and IT.

 

As this programme comes to an end, we are continuing to examine further ways to simplify our operating model and increase efficiencies.

 

We have begun a new major change programme across manufacturing, R&D and Europe to deliver further savings and build capabilities. The new programme includes a series of technological advances and opportunities to eliminate complexities and further improve our competitiveness.

 


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GSK Annual Report 2012  |    43

 

 

  

Progress

 

Our restructuring programme has now delivered annual savings of
£2.5 billion and remains on track to hit the target we set of
£2.8 billion of annual savings by 2014.

 

Costs for support functions have been reduced by one-fifth since
2008. We have also reduced our fixed infrastructure R&D footprint
by 50% while increasing productivity and output from the pipeline.

 

Despite reducing our carbon footprint from energy use by 15%
since 2010, our total carbon footprint (excluding that from raw
materials) increased by 7% compared to 2010 driven by higher
inhaler sales. However, current carbon reduction projects should
enable us to reach our interim target to cut our value chain carbon
footprint by 10% to 13.5 million tonnes of CO2 equivalent by 2015.

  

 

Operational Excellence annual savings £bn

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Major change programme anticipated savings £bn

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Working capital days

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Pharmaceuticals R&D footprint 000m2

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Priorities

Through our new major change programme, we have identified
£1 billion of additional annual savings by 2016 across manufacturing, R&D and our European pharmaceutical business. Delivering this programme is a key priority over the next three years.

 

During 2013 we will also be focused on the reform of our supply chain to simplify processes and reduce inventory, cost and complexity.

 

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Strategic review simplify the operating model

Reducing cost and

increasing efficiency

 

In 2012 we continued to transform our operating model to reduce costs and complexity, and improve efficiency.

 

The transformation of our operating model and processes has been a key business strategy, enabling us to standardise and streamline important aspects of our business, including our supply chain.

We have been implementing a restructuring programme to deliver significant savings to support investment in our priority growth businesses as well as offset pressures on the Group’s margin resulting from changes in the shape and mix of our business.

Restructuring programme

 

A key objective of the Operational Excellence restructuring programme that we began in 2007 was to release resources to invest in our growth strategy. To date, the restructuring programme has delivered approximately £2.5 billion of annual savings and remains on track to deliver £2.8 billion of annual savings by 2014.

A significant portion of the savings generated has 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 costs have been reinvested back into discovery and development research.

The existing Operational Excellence programme is coming to a close and will be superseded by a new major change programme. This will focus on opportunities to simplify our supply chain processes, as previously announced in 2012 and on building the Group’s capabilities in manufacturing and R&D, as well as restructuring our European business.

2012 also saw £165 million of restructuring charges relating to the acquisition of Human Genome Sciences (HGS). Total restructuring charges related to HGS are expected to be approximately £204 million, of which most is expected to be a cash cost. The majority of the remaining HGS restructuring charges will be booked in 2013.

 

Core Business Services

 

In early 2011, we created the Core Business Services (CBS) group to centralise our support functions. This brought together functions such as facilities management, HR, IT, finance and procurement in one centralised team, allowing us to streamline those elements and standardise processes. Our intention was to increase our productivity and free up time in the businesses to focus on the execution of business strategy in their local markets.

In 2012 there has been steady progress on the implementation of the CBS platform. A key element of the CBS strategy is the creation of a series of regional multifunctional business service centres (BSCs) to improve service delivery. Three of a planned six centres went online in 2012 and the remainder are expected to be established in 2013. This will mean we need fewer support staff globally while providing more standard and cost effective processes to the Group.

We have also been standardising our processes through the introduction of an enterprise-wide resource planning (ERP) system. By the end of 2012, nine European pharmaceutical markets were enrolled on the commercial ERP system, equating to 43% of our turnover in Europe. We anticipate adding further markets in 2013, covering most of the European markets by the end of the year.

We also introduced improved forecasting and planning processes to 40 Latin American markets, with expected reduction in supply chain operating costs, reduced inventory levels and improved forecasting. The roll-out of the platform across the Group is being accelerated in 2013.

Supply chain and global manufacturing

 

We have 87 sites in 34 countries manufacturing our vaccines, pharmaceuticals and consumer healthcare products. A large part of our network – 74 sites – is the responsibility of Global Manufacturing and Supply (GMS) with more than 27,000 people involved in the manufacture and supply of our pharmaceutical and consumer healthcare products. A further 13 sites are operated by our Vaccines business.

 

 


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A key focus within our manufacturing organisation has been supply chain restructuring to create better end-to-end processes which reduce costs and are more responsive to customer demand. In 2012, our Consumer Healthcare business established a fully integrated supply chain, a first for GSK. Significantly greater operating flexibility is already apparent and has allowed the business to respond more effectively to some supply related challenges during the year. We are now extending this approach to our pharmaceuticals and vaccines supply chains.

 

Our Inventory Reduction Programme, which is focused on the improvement of our manufacturing and supply processes, helped to reduce our days inventory outstanding by 9% (calculated on a CER basis) over the course of the year.

 

Throughout 2011 and 2012 we have also sought to reduce cost through simplification of our product portfolio by removing small volume, least commercially important packs and standardising pack presentation formats. We have now set a revised target to remove a further 25% of packs by 2016 and to achieve a 50% improvement in standardisation in the same period.

 

Over the past five years, our manufacturing organisation has restructured and rationalised its network, streamlined the operating model and improved site performance to deliver savings of approximately £930 million per annum.

 

Environmental efficiencies

 

Environmental sustainability is a priority for GSK. By reducing our footprint, using resources more efficiently, and working with others to tackle these challenges, we can reduce costs, build competitiveness and create trust in our business.

 

Despite reducing our carbon from energy use by 15% since 2010, our total carbon footprint (excluding that from raw materials) has increased by 7% from 2010 driven by higher inhaler sales. (More on page 54).

 

Case study

 

Squeezing production times

Our manufacturing network is a lynchpin in our ability to both make and distribute products around the world. It also offers an important opportunity to make efficiencies, as work done at our toothpaste manufacturing plant in Maidenhead in the UK last year has demonstrated.

 

Through a step-by-step analysis of the process involved in changing from the manufacture of one product to another, our staff on the production line identified changes that could cut the time taken to changeover by 60%, saving 250 hours of production time per year. Shaving this time off freed-up production time, helping to provide manufacturing capacity to produce an additional 6.7 million tubes of toothpaste per year.

 

We’re now looking at ways that we can share this learning to create a standard of performance excellence across all of our supply chains.

 

 

 

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Strategic review simplify the operating model

Our financial architecture

 

Our financial architecture is designed to support the execution of the Group’s strategy, and to enhance the returns it delivers to shareholders.

 

GSK’s financial architecture has established four key financial priorities for GSK in delivering sustainable sales growth, improving our operating leverage, improving financial efficiency and converting more of our earnings into cash. By applying this framework we can drive better and more consistent decision making across the company and improve delivery of our key financial objectives of earnings per share growth and free cash flow generation, which can then be returned to shareholders or reinvested in bolt on acquisitions, wherever the most attractive returns are available. Our decisions are rigorously benchmarked using a CFROI returns based framework.

Sales growth

 

Although reported sales for the year were down 1% for 2012, sales were flat adjusting for the disposal of our non-core Consumer Healthcare brands. This reflects continued strong performance from our ‘growth’ businesses in the emerging markets helping to offset pressure in western markets, especially weaker than expected performance in Europe. As we move into 2013 we expect to deliver sales growth of around 1% CER.

Operating leverage

 

In 2012 the core operating margin declined by 0.6 percentage points to 31.5%, of which 0.3 percentage points was due to the expected impact of the HGS acquisition. The remaining 0.3 percentage points was due primarily to the impact of maintaining flat SG&A on lower turnover, partially mitigated by lower R&D expenditure. We remain focused on managing our cost base more effectively. Our Operational Excellence programme started in 2008 and has now delivered annual savings of £2.5 billion. We have also launched a new change programme to deliver further annual savings of £1 billion by 2016.

 

We continue to balance cost savings with continued investment in the business to support preparedness to launch our R&D pipeline which will be a key driver of future sales growth. With increasing pipeline sales contribution from the end of 2013, we remain confident that we can drive improvement in the core operating margin over the medium term.

Financial efficiency

 

Despite the pressure on the operating margin in 2012, financial efficiencies delivered significant value in 2012 and contributed positive leverage to the Group’s reported earnings per share for the year.

In 2011 we set out a target to reduce by 200 basis points our net funding costs which were over 8% in 2010. We have delivered this a year earlier than expected. Our net funding costs for 2012 were around 6%, despite our net debt position growing from £9 billion to £14 billion. This has enabled net interest payments for the year to remain broadly flat.

We also continue to develop our tax strategy and a number of moves to update our structure and settle outstanding claims have allowed us to reduce our 2012 core tax rate to 24.4%, a rate that delivered our target of 25% two years earlier than expected. We expect a core rate of 24% in 2013.

We continue to focus on the alignment of our tax strategy with our future business and have implemented a number of measures to centralise our Pharmaceutical intellectual property and product inventory ownership in the UK.

Earnings per share

 

In 2012, the significant progress in improving our financial efficiency, together with our reinitiated share buyback programme, enabled us to maintain flat core EPS compared with 2011 (on a CER basis), despite the decline in sales. In 2013, we expect to deliver core EPS growth of 3-4% CER, based on the IAS 19 (Revised) adjusted EPS for 2012 of 111.4p.

 

 


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Financial architecture to drive improved returns

 

 

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Cash conversion

 

We see significant opportunity to enhance cash conversion through greater focus on cash generation and capital allocation. A particular focus is on our working capital and in 2012 we made significant progress. We reduced the working capital cash conversion cycle from 202 to 194 days. We have already made good progress on payables and receivables and are now focused on addressing the Group’s inventory position in a sustainable and secure way. We are developing an end-to-end supply chain that joins our manufacturing and commercial businesses and increases visibility to improve flexibility and responsiveness, reducing the inventory required and releasing cash we can reinvest in the business.

 

Returns to shareholders

 

Free cash flow is available to invest in the business or to return to shareholders consistent with maintaining our targeted credit profile. The priority is to cover the dividend but we intend free cash flow above and beyond this requirement to be available for share buybacks or bolt-on acquisitions, wherever the most attractive returns are available. The decision as to how to allocate such cash flow is rigorously benchmarked using a returns-based framework based on CFROI comparisons.

In 2012 we returned £6.3 billion of cash to shareholders. We paid £3.8 billion in dividends, with our ordinary dividend up 6% to 74p per share. In addition we bought back £2.5 billion of shares as part of the long term programme we started in 2011.

In 2013 we expect to deliver continued dividend growth and we are targeting share repurchases of £1–2 billion.

 

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. From 2012, we transitioned 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 56.

 

 

 

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Strategic review simplify the operating model

Identifying and managing risk

 

We manage risk to our business by embedding clear processess to do this in our management practices.   

Our risk management processes

 

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We have a clear framework for identifying and managing risk, both at an operational and strategic level. Our risk identification and mitigation processes have been designed to be responsive to the constantly changing environment.

 

The Group’s key risks are categorised as follows and full descriptions and specific mitigating activities are set out on pages 78 to 86.

 

•   Delivering commercially successful new products

 

•   Protecting intellectual property rights

 

•   Ensuring product quality

 

•   Maintaining product supply

 

•   Securing adequate pricing and reimbursement

 

•   Compliance with relevant laws and regulations

  

•   Changing global political and economic conditions

 

•   Managing alliances and acquisitions

 

•   Compliance with financial reporting and disclosure requirements

 

•   Compliance with tax law and managing treasury investments

 

•   Compliance with anti-bribery and corruption legislation

 

•   Potential litigation

 

•   Managing environmental, health, safety and sustainability compliance

 

•   Concentration of sales to wholesalers

 

•   Protecting our information


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GSK Annual Report 2012  |    49

 

Responsible business

 

In 2012, we made substantive moves to increase access and transparency.

 

 

1st

in ATM index

 

For the third consecutive report, GSK scored highest in the bi-annual Access to Medicines (ATM) Index, released in 2012. The index, prepared by the Access to Medicines Foundation, provides a ranking of pharmaceutical companies’ access to medicine activities, measuring seven technical aspects such as R&D activities, pricing schemes and patents & licensing policies.

 

 

 

LOGO See our Corporate responsibility report.

Our commercial success is directly linked to operating in a trustworthy and responsible way. We report our approach and the progress we are making across four areas:

 

  Health for all – Innovating to address currently unmet health needs; improving access to our products, irrespective of where people live or their ability to pay; controlling or eliminating diseases affecting the worlds’ most vulnerable people.

 

  Our behaviour – Putting the interests of patients and consumers first, driven by our values in everything we do and backed by robust policies and strong compliance processes.

 

  Our people – Enabling our people to thrive and develop as individuals to deliver our mission.

 

  Our planet – Growing our business while reducing our environmental impact across our value chain.

Highlights about our approach and examples of progress in these four areas follow. Additional information on our approach and performance is published in our Corporate Responsibility Report, which can be found on our website.

Health for all

 

We are working to make our medicines and healthcare products available and affordable to as many people who need them as possible. We aim to do this while also generating the returns we need to sustain our business and invest in R&D.

We continue to evolve our business model to address the increasing need for new and existing treatments. The way we price our products is more flexible and more reflective of different healthcare needs in developed and developing countries and we have changed the way we conduct R&D to be more open than ten years ago.

 

Using innovative science to create value

The biggest contribution we can make to improving health is through scientific innovation. In 2012 we announced further initiatives in open innovation, where we seek to share intellectual property and knowledge with external researchers to help stimulate R&D into areas where traditional commercial approaches have met difficulties. These include:

 

  Submitting for publication 200 promising inhibitors for tuberculosis (TB) from our library of compounds to help stimulate research. TB still kills 1.5 million people each year.

 

  Awarding a further £5 million to the Tres Cantos ‘Open Lab’ Foundation to help independent researchers advance their own projects. There are now 16 research projects in the portfolio

 

  Joining forces on NewDrugs4BadBugs – an innovative public-private collaboration launched to tackle antibiotic resistance. Supported by the European Innovative Medicines Initiative (IMI), the project will be funded by a joint budget of £180m.

Improving access to our products and to healthcare

Access to medicines and healthcare is a priority for us, and we recognise that there can be challenges to providing sustainable access to healthcare across the world.

Cost can be a barrier to people in both developed and developing countries. Having a flexible approach to pricing is one way to create access and build our business by increasing the overall volume of products we sell. We offer tiered pricing for our vaccines and medicines, capped prices in the UN’s Least Developed Countries (LDCs) and preferential pricing by ViiV Healthcare of our anti-retrovirals for HIV/AIDS in LDCs, sub-Saharan Africa and all low-income countries.

 

 

LOGO

 


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50    |  GSK Annual Report 2012

 

Strategic review simplify the operating model

Responsible business continued

 

 

Case study

Giving children a better start

 

Soil-transmitted helminths – commonly known as intestinal worms – affect more than two billion people worldwide and are one of the biggest causes of ill health in school-age children. The World Health Organization estimates that 890 million children are at risk of infection. Infection with worms can cause stomach pain, sickness and malnutrition, as well as stunting physical growth and long-term brain development.

Through our membership of a global coalition of pharmaceutical companies and non-government organisations – including the Bill & Melinda Gates Foundation and the World Bank – as well as governments and global health organisations, we committed to work together to control or eliminate ten of the 17 neglected tropical diseases by 2020.

Our contribution includes donating our anti-parasitic treatment, albendazole to help fight intestinal worms in school-age children. Healthier children are more likely to attend school and get a better education – giving them a better chance of getting good jobs and becoming productive members of society.

In 2012, the first year of this donation programme, we provided albendazole treatment for over 120 million school age children – including these children in Ghana (pictured).

 

 

LOGO

 

 

Through our Developing Countries and Market Access (DCMA) unit we have created a business group dedicated to increasing patient access to GSK medicines in the world’s poorest countries. In these countries we invest 20% of the profits made there back into community programmes to strengthen local healthcare infrastructure. This investment – in resources like clinics, hospitals, doctors, nurses, and training programmes – increases the number of people who can get much-needed healthcare and medicines. By October 2012, we had a programme in place in all 34 of the LDCs where our business had made a profit.

The 20% reinvestment programme is delivered through our partnership with three non-governmental organisations (NGOs) with regional expertise. We work with Save the Children in West Africa, AMREF in East and Southern Africa, and CARE International in Asia.

Increasing people’s access to medicines is also about the availability of the medicines or products in a country. To address this, we are increasing registration of new and existing products across markets and using local manufacturing options whenever possible to make sure people in a range of countries can get the medicines they need.

Targeting neglected tropical diseases

Neglected tropical diseases (NTDs) threaten more than one billion people in developing countries. In 2012, GSK united with other private and public partners to create the London Declaration Initiative to control or eliminate ten of the 17 neglected tropical diseases by the end of the decade. Our initial focus is extending access to medicines for five diseases where treatments already exist, including lymphatic filariasis and intestinal worms. In 2012, we donated our three billionth albendazole tablet in the fight against this disfiguring disease.

 


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Malaria is responsible for more than 655,000 deaths a year, mainly among children in sub-Saharan Africa. Our holistic approach to malaria control includes vaccine development, promoting preventive measures such as bed nets and mosquito control, and preferential pricing for anti-malarials in LDCs. In 2012 we published late-stage clinical trial results showing that our RTS,S vaccine candidate can help protect African children against malaria.

Supporting health and well-being in our communities

We fund and support local programmes that make a significant contribution to the health and well-being of communities. Our contributions support disaster relief, medicine donations, engagement programmes to change behaviour and improve health and science education to help develop our health professionals, scientists and engineers of the future.

Our giving in 2012

 

 

LOGO

 

      £m  

1 Product and in-kind

     131   

2 Cash

     54   

3 Management

     19   

4 Time

     3   

Cash giving by type of programme

supported in 2012

 

 

LOGO

 

      %  

1 Health

     56   

2 Education

     28   

3 Other

     16   

In 2012 GSK donated medicines valued at £131 million (at cost) and £54 million in cash. Product donations of £3.3 million were distributed to 86 countries for humanitarian aid. Supplies of antibiotics, basic medicines and oral hygiene items were distributed to those affected by conflicts, a cholera epidemic in Niger, floods in the Philippines and hurricanes Isaac and Sandy in the USA.

We continue to invest in a programme to prevent diarrhoea and pneumonia by teaching children the importance of hand washing. The programme has been running for 15 years, and has reached 1.5 million children in 16 countries. In 2012, we began integrating oral health education and school de-worming into the programme.

Our behaviour

 

How we deliver success is just as important to us as what we achieve. We will put the interests of patients and consumers first and be driven by our values of:

 

  Transparency

 

  Respect for people

 

  Integrity

 

  Patient-focused.

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.

In 2012 we revised and simplified our Code of Conduct to make it very clear to employees how to apply GSK Values and Behaviours. The code is available in 28 languages and supported by a new Policy Resource Centre on the company’s intranet that provides information, support and training.

Our Annual Business Ethics Certifications for managers is being revised and will be re-launched in 2013. Over 33,000 managers will be asked to undertake this training, confirming their compliance with the code of conduct.

Our employee survey results from 2012 reflect our efforts to integrate a values-based culture at GSK. More than 90% of respondents stated they understand what constitutes ethical business practices and conduct in their job, and more than 80% agreed that their work environment encourages ethical behaviour in the face of pressures to meet business objectives.

All GSK employees have access to whistleblowing mechanisms that they can use to get advice, and to report suspected cases of misconduct – anonymously if required. Our global confidential reporting line is available in 70 different languages.

We continue to support the Guiding Principles on Business and Human Rights endorsed by the United Nations Human Rights Council in 2011. Our aim is to apply the guiding principles across our own operations and our supplier relationships.

Sales and marketing

We launched a new Global Code of Practices for Promotion and Customer Interactions last year. The code covers payments to health care professionals, samples, hospitality, grants and donations. Activities must conform to our ethical, medical and scientific standards and all applicable laws, regulations and industry codes. All sales and marketing employees are being trained on the revised code.

In 2012 we entered into a settlement with the US federal government related to past sales and marketing practices. While the actions triggering these issues originated in a different era for our company, they cannot and will not be ignored. In the USA, we have taken action at all levels and improved our procedures for compliance, marketing and selling. As part of the settlement we entered into a Corporate Integrity Agreement with the US Department of Health and Human Services, under which we are building improvements into our existing compliance programmes.

 

 

LOGO

 


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52    |  GSK Annual Report 2012

 

Strategic review simplify the operating model

Responsible business continued

 

 

Working with healthcare professionals

Healthcare professionals (HCPs) are valuable partners for GSK, providing us with scientific and medical expertise and insights into patient care. Our work with HCPs can include conducting research on our behalf or acting in an advisory and consulting capacity such as providing expertise at GSK advisory boards or speaking on our behalf about diseases or therapy areas relevant to us. We believe HCPs should be fairly compensated and we have clear standards, aligned with industry codes of practice and appropriate laws and regulations, which govern these payments. We have committed to publishing the payments we make to HCPs and were one of the first companies to start to do this in the USA, commencing in 2009.

Transparency of research

We are committed to reporting the results of our clinical research, irrespective of whether the outcomes are perceived to be positive or negative for our medicines. To further increase this transparency, we announced plans in 2012 to enable researchers to access anonymised patient-level data from published clinical trials of our medicines. Requests for data will be reviewed by an independent panel of experts to evaluate the scientific merit of each proposal. We already publish summary results of every research trial on the GSK Clinical Study Register, and in early 2013 we outlined our plans to add Clinical Study Reports onto the Register in the future (see page 36).

We conduct regular clinical-quality assurance assessments to confirm that the conduct of trials upholds our standards. In 2012 we conducted 293 assessments, including review of investigator sites, GSK local operating companies and clinical research organisations carrying out clinical trials on our behalf. GSK fully investigates any concerns identified, and performed 47 investigations in 2012 in response to suspected irregularities, taking corrective action where appropriate.

Manufacturing and supply

Suppliers to GSK are required to adhere to our Third Party Code of Conduct and must demonstrate ethical standards within their business and their own supply chains. In 2012 we carried out in-depth environment, health and safety audits of critical suppliers to improve sustainability in the supply chain and strengthen supplier relationships. We also conducted assessments to understand geographical risks and plan for any potential interruptions to supply. Supply continuity was assessed for 20 key suppliers in 2012 and another 20 are scheduled for 2013.

We continue to address the problem of counterfeit medicines. In China, we added serial numbers to 31 products, resulting in a significant reduction in the number of reports of counterfeit medicines. This ‘track and trace’ technology will help us implement similar initiatives elsewhere in the world.

Our people

 

GSK wants to be an employer of choice. Our ability to attract, retain and motivate the best people is essential to achieving our objectives and executing our strategy. Our employment practices are designed to help us create the right workplace culture in which all employees feel valued, respected, empowered and inspired.

Recruiting, developing and rewarding our people

GSK is committed to supporting employees to perform to their best and we ensure that appropriate programmes and mechanisms are in place to deliver overall performance. Individuals meet 90% of their development needs through challenging on-the-job projects, mentoring and coaching, with 10% derived from formal development such as training programmes.

Our performance and development planning process means employees have business-aligned objectives and behavioural goals. Reward systems promote high performance and help to attract and retain the best people.

Performance-based pay, bonuses and share-based equity plans align employee interests with business targets.

We have invested significantly in the development of our leadership through interventions at every stage of the pipeline from our most senior executives to first line leaders.

Our early career development programmes include graduate schemes, internships, industrial placements, apprenticeships and ESPRIT, our global MBA programme. In 2012 we employed 52 apprentices and recruited 317 graduates.

A diverse workforce

We focus on creating an inclusive, engaging environment that empowers employees to continually contribute to the organisation that enables us to achieve our strategic business objectives. An inclusive environment is good for business as it brings together 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 percentage of women in higher-level positions grew in 2012, reflecting our goal to increase the proportion at the most senior levels.

 

  The number of people we employ in our Emerging Markets, Asia Pacific and Japan regions represent 42% of our total workforce.

 

  Ethnic minorities accounted for 20% of UK and 22.1% of US employees in 2012.

Women in management positions (%)

 

 

      2012      2011      2010      2009      2008  

SVP, VP

     27         26         25         25         25   

Director

     39         38         37         36         36   

Manager

     43         42         42         42         41   

Total

     40         39         38         38         38   

Ethnic minorities – UK and USA employees (%)

 

 

      2012      2011      2010      2009      2008  

UK

     20.0         19.6         19.4         19.4         19.2   

USA

     22.1         21.9         20.4         20.4         20.5   
 


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  LOGO      

Case study

 

Fair play in sport

 

We were proud to play an important role in the London 2012 Olympic and Paralympic Games as the Official Laboratory Services Provider – using our scientific expertise and facilities to support the integrity of the Games and the health of competing athletes.

 

Working with King’s College London, we provided the facilities and equipment that allowed the expert analysts from King’s to independently operate a World Anti-Doping Agency (WADA) accredited laboratory.

 

More than 6,000 anti-doping tests were carried out, which was more than at any other Games. By the end of the Olympics, every medalist who stepped on the podium and up to half of all competing athletes had been tested.

 

Being a science-led organisation, we were well placed to provide the testing facilities, offering one of our research and development sites located about 45 minutes north of the Olympic Park. This was the first time a pharmaceutical company had been involved in the provision of anti-doping services for an Olympic or Paralympic Games.

       
       
       
       
       
       
       
       
       
       
       
       
       

 

LOGO

 


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Strategic review simplify the operating model

Responsible business continued

 

 

 

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.

Engaging our employees

In 2012 we maintained a rate of 85% of employees saying they are proud to work for GSK based on a 72% participation rate in our global employee survey.

Our volunteering programmes continue to provide employees with a strong sense of purpose. PULSE gives employees the chance to join a charity or non governmental organisation (NGO) for three or six month, full-time placements. The GSK Orange Day allows all employees to commit a day of their time to a local charity either individually or as part of a team.

As a corporate partner for the London 2012 Olympic Games, all our allocated tickets went to our employees. We ran a global ‘Golden Ticket’ competition asking employees to nominate colleagues who demonstrated actions in their daily lives or work showing the Olympic values of friendship, equality, integrity and excellence.

Managing change

We are very conscious of the effect restructuring has on employees. We aim to achieve organisational and financial goals without eliminating positions and to redeploy employees where possible. We remain committed to consulting on changes via a number of consultation forums, as well as discussions with the European Works Council and similar bodies in countries where this is national practice. If jobs are lost through business change, we offer compensation and other support such as outplacement in line with local requirements and employment legislation. We also offer employees support through resilience training and an Employee Assistance Programme.

A healthy high-performing workforce with zero harm

To improve the quality of life of our employees and their families, in 2012 we piloted a groundbreaking Preventative Health programme, to be phased in globally across GSK over the next five years. This partnership with our employees and their families is designed to reduce personal health risks through access to a set of core preventive health services.

We continue to aim for zero harm to our employees and we continue to develop risk reduction programmes, including upgrades to guard equipment on machinery, and dust-reduction activities in our manufacturing sites in 2012.

Our employee injury and illness rate reduced by 10%.

Our planet

 

Environmental sustainability is a priority for GSK. Our focus is to reduce carbon, water and waste. We have set ambitious targets in these areas and we are working to create change, from our use of raw materials, to the use and disposal of our products by consumers.

Carbon

Our goal is to reduce our value chain carbon footprint by 10% in 2015 and by 25% by 2020. Our carbon footprint excluding the contribution from raw materials (which we cannot currently measure on an annual basis) has increased by 7% compared to 2010, however we remain confident on hitting our 2015 target.

 

  We have reduced our carbon footprint from energy for operations by 15%.

 

  Increased sales of metered dose inhalers have resulted in a 12% rise in greenhouse gas emissions from inhaler use.

 

  For our 2011 performance, we achieved global certification to the Carbon Trust Standard, which certifies that we are making year-on-year overall reductions in emissions associated with operations and transport. GSK is the only multinational to have achieved this standard to date.

Water

Our goal is to reduce our water impact across the value chain by 20% relative to 2010. In 2012 we reduced water consumption in our operations by 14% (compared to 2010). We recognise that water is an important natural resource and that we can play a positive role in managing our use of it more sustainably. We have begun to develop longer-term strategies with input from several international organisations. We have also signed the UN CEO Water Mandate, an initiative designed to help companies develop, implement and disclose sustainable water practices.

Waste

Our goal is for zero waste to be sent to landfill by 2020 from our operations. In 2012 we reduced waste generation in our operations by 9% and reduced the waste sent to landfill by 41% (compared to 2010). We established an inhaler collection service (Complete the Cycle) in the UK that has collected over 90,000 inhalers to date. We have recently expanded a pilot inhaler collection service in the USA from five to 31 cities.

Managing other impacts

Alongside our priority issues of carbon, water and waste, we also manage a range of other important environmental issues. One is ‘green chemistry’ which aims to replace the use of hazardous chemicals and processes with those that have a lower environmental impact. In 2012 we created a Green Chemistry Performance Unit to put green chemistry theories into practice. The unit has published 12 internal guides that help employees make better chemical choices when designing or developing new products.

 


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Financial
review & risk

   
  Financial review     56   
  Financial position and resources     66   
  Financial review 2011     72   
  Risk factors     78   
   
   
   
   
   
           

 

LOGO

 

 

LOGO

 


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56    |  GSK Annual Report 2012

 

Financial review

 

Group performance

 

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 and on a CER basis. In this review we discuss the results on both a core basis and a total basis.

All growth rates included in this Report are at constant exchange rates (CER) unless otherwise stated. CER growth is discussed below.

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.

Core results reporting

 

Core results exclude the following items from total results: amortisation and impairment of intangible assets (excluding computer software) and goodwill; major restructuring costs, including those costs following material acquisitions; legal charges (net of insurance recoveries) on the settlement of litigation and government investigations; other operating income other than royalty income; disposals of associates, products and businesses, and acquisition accounting adjustments for material acquisitions, together with the tax effects of these items.

Major restructuring costs charged in arriving at operating profit include costs arising under the Operational Excellence restructuring programme, initiated in 2007 and expanded in 2009, 2010 and 2011, and restructuring costs following the acquisitions of Human Genome Sciences, Inc. in August 2012 and Stiefel Laboratories, Inc. in July 2009.

Reconciliations of core results to total results are presented on page 62.

Core results reporting aligns business performance reporting around the underlying trading performance of the Group and its primary growth drivers by removing the volatilty inherent in many of the non-core items. Core results reporting is utilised as the basis for internal performance reporting and the core results are presented and discussed in this Financial review as management believes that this approach provides investors with a clearer view of the underlying trading performance of the Group. Management also believes that this approach should make the Group’s results more comparable with the majority of its peers, many of which use similar forms of underlying performance reporting to discuss their results, although the precise calculations may differ. The Financial review also presents and discusses the total results of the Group.

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 69.

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.

Restatement of comparative information

 

As set out in Note 6 to the Financial statements, ‘Segment information’ the segments for which turnover and operating profit are disclosed have been amended to reflect changes in the Group’s internal management structure together with certain changes to the therapeutic classifications of turnover by product. In addition, charges for amortisation and impairment of intangible assets related to marketed products are now reported in cost of sales rather than in SG&A. Comparative information has been restated accordingly. The adjustment for 2011 increases cost of sales and decreases SG&A by £316 million from the amounts previously reported.

Financial review 2012

 

Group turnover by business

 

 

     

2012

£m

    

2011

(restated)

£m

    

Growth

CER%

   

Growth

£%

 

Pharmaceuticals

     17,996         18,615         (2     (3

Vaccines

     3,325         3,497         (2     (5

Pharmaceuticals and Vaccines

     21,321         22,112         (2     (4

Consumer Healthcare

     5,110         5,275                (3
       26,431         27,387         (1     (3

 

* CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.

Total Group turnover for 2012 was broadly in line with last year (down 1% to £26,431 million), with a 2% decline in Pharmaceuticals and Vaccines turnover partly offset by flat reported turnover in Consumer Healthcare. Pharmaceuticals turnover was down 2%, primarily as a result of the increased pressure from austerity measures in Europe. Vaccines turnover declined 2%, reflecting the impact of lower sales of Cervarix in Japan (2012 – £132 million; 2011 – £344 million) following the completion of the 2011 HPV vaccination catch-up programme. Excluding Cervarix, Vaccines turnover increased 4%. Reported Consumer Healthcare turnover was flat at £5,110 million, but excluding the non-core OTC brands divested in early 2012, Consumer Healthcare turnover grew 5%.

Group turnover by geographic region

 

 

     

2012

£m

    

2011

(restated)

£m

    

Growth

CER%

   

Growth

£%

 

USA

     8,446         8,684         (4     (3

Europe

     7,320         8,271         (7     (11

EMAP

     6,780         6,403         10        6   

Japan

     2,225         2,318         (5     (4

Other

     1,660         1,711         (3     (3
       26,431         27,387         (1     (3

Group sales outside the USA and Europe accounted for 40% of total turnover and reported growth of 5%.

 


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Group turnover by segment

 

     

2012

£m

    

2011

(restated)

£m

    

Growth

CER%

   

Growth

£%

 

Pharmaceuticals and Vaccines:

          

USA

     7,000         7,022         (2       

Europe

     5,001         5,700         (7     (12

EMAP

     4,736         4,459         10        6   

Japan

     1,969         2,082         (6     (5

ViiV Healthcare

     1,374         1,569         (10     (12

Other trading and unallocated

     1,241         1,280         (3     (3

Pharmaceuticals and Vaccines

     21,321         22,112         (2     (4

Consumer Healthcare

     5,110         5,275                (3
       26,431         27,387         (1     (3

US Pharmaceuticals and Vaccines turnover declined 2%. Excluding the impact of Avandia, Pharmaceuticals and Vaccines sales were flat. Pharmaceuticals turnover fell 2%, as sales declines for Avandia as well as a number of older products including Arixtra and Valtrex, were partly offset by an encouraging performance from new products, particularly in Oncology which grew 18%, a £65 million sales contribution from Benlysta and improved Respiratory sales, which grew 1%. Turnover also benefited from the net effect of the incremental revenue from the conclusion of the Vesicare co-promotion agreement in the first quarter of 2012. Vaccines sales were flat as the growth in sales of Infanrix/Pediarix and Boostrix was offset by lower flu vaccines sales and adverse comparisons for Hepatitis vaccines and Rotarix, which benefited from significant stockpile purchases by the US Centers for Disease Control (CDC) in 2011.

Europe Pharmaceuticals and Vaccines turnover declined 7%, primarily driven by the impact of various ongoing government austerity measures including price cuts, parallel trade and generic substitution. This decline resulted from adverse pricing effects of 6% and a 1% volume decline. Pharmaceuticals sales declined 8% and Vaccines sales declined 4%. Despite a slight reduction in the rate of decline in the fourth quarter, the underlying economic environment continued to be challenging.

EMAP Pharmaceuticals and Vaccines turnover increased 10% as strong growth in Latin America (up 11% to £1,257 million), China (up 17% to £759 million) and India (up 10% to £304 million) was partly offset by the effect of mandatory price reductions in a number of markets, including Turkey and Korea. Pharmaceuticals turnover increased 8%, with improved momentum after a slow first quarter, as strong growth in Respiratory combined with good performances in a number of established brands and the newer Oncology portfolio. The Vaccines business recorded a strong performance but with expected uneven delivery across the quarters, reflecting the phasing of tender sales and a particular concentration towards the end of the year.

Japan Pharmaceuticals and Vaccines turnover fell 6% reflecting an adverse comparison with strong Cervarix sales in 2011 despite a material contribution from the third phase of the programme benefiting the first quarter of 2012. The catch-up programme is now complete. Excluding Cervarix, Japan Pharmaceuticals and Vaccines turnover increased 5%. Pharmaceuticals turnover grew 3% with strong growth from the recently launched products, Lamictal, Avodart and Volibris, partly offset by the impact of the mandatory biennial price cuts, which impacted growth by approximately four percentage points, and increasing generic competition to Paxil. The Respiratory portfolio grew 6%, driven by a strong performance from Xyzal, offsetting declines in Flixonase and Zyrtec. Adoair (Seretide) grew 6% to £309 million. In Vaccines, Rotarix, which launched in the fourth quarter of 2011, contributed sales of £44 million.

 

ViiV Healthcare turnover declined by 10% primarily reflecting generic competition in the USA to Combivir and Epivir offsetting growth generated by Epzicom and Selzentry.

Consumer Healthcare turnover, excluding the sales of the non-core OTC brands that were divested in early 2012, increased 5% with relatively consistent performance over the quarters. This reflected continued growth in Oral care, Nutrition and Wellness, partly offset by a small decline in Skin health. On a regional basis, US sales grew 2% and Europe sales were flat, both impacted by continuing economic pressures and the drag from alli. The Rest of World markets, particularly India, the Middle East and China, continued to make a strong contribution and grew 12%. Reported turnover for Consumer Healthcare was flat at £5,110 million.

Pharmaceuticals turnover

 

    

2012

£m

   

2011

(restated)

£m

   

Growth

CER%

   

Growth

£%

 

Respiratory

    7,291        7,298        1          

Anti-virals

    753        842        (11     (11

Central nervous system

    1,670        1,721        (2     (3

Cardiovascular and urogenital

    2,431        2,454               (1

Metabolic

    171        331        (47     (48

Anti-bacterials

    1,247        1,390        (7     (10

Oncology and emesis

    798        683        19        17   

Dermatology

    850        898        (2     (5

Rare diseases

    495        463        8        7   

Immuno-inflammation

    70        15        >100        >100   

Other pharmaceuticals

    846        951        (6     (11

ViiV Healthcare (HIV)

    1,374        1,569        (10     (12
      17,996        18,615        (2     (3

Respiratory

 

Respiratory sales increased 1%, with growth in the USA, EMAP and Japan offset by a decline in Europe. Total sales of Seretide/Advair grew 1% to £5,046 million, Ventolin sales increased 6% to £631 million while Flixotide/Flovent sales fell 4% to £779 million. Xyzal sales, almost exclusively made in Japan, doubled to £129 million.

In the USA, sales of Advair were £2,533 million, up 1% compared with 2% estimated underlying growth for the year (5% volume decline more than offset by a 7% positive impact of price and mix). Flovent sales declined 1% to £448 million, compared with estimated underlying growth of 3% (4% volume increase partly offset by a 1% negative impact of price and mix). Ventolin grew 14% to £277 million, while estimated underlying growth was 11%, driven mostly by volume.

European Respiratory sales were down 5% reflecting the impact of ongoing austerity measures. Seretide sales were down 4% to £1,447 million, as price cuts more than offset volume growth of approximately 2%.

In EMAP, Respiratory sales grew 13%, with growth across most products in the portfolio. Seretide grew 12% to £417 million with strong growth in China and Latin America offsetting the impact of some price reductions, principally in Turkey. Ventolin sales increased 10% to £171 million.

Anti-virals

 

The 11% decline in Anti-virals sales largely resulted from generic competition to Valtrex, which was down 25% to £252 million.

 

 

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Table of Contents

58    |  GSK Annual Report 2012

 

Financial review

 

 

 

Central nervous system (CNS)

 

Declines in Seroxat/Paxil sales of 14% to £374 million and Requip sales of 22% to £164 million, primarily as a result of generic competition, were only partially offset by the 14% growth of Lamictal to £610 million.

In the USA, the Lamictal franchise increased 18% to £332 million as strong growth of Lamictal XR, approximately 45% of the US franchise, more than offset the impact of generic competition to the immediate release (twice a day) formulation. Generic competition to Lamictal XR began during the first quarter of 2013. In Japan, sales of Lamictal IR grew 88% to £78 million, in part due to sales for the recently launched bipolar indication.

Cardiovascular and urogenital

 

Sales in the category were flat as the net benefit of the conclusion of the Vesicare co-promotion agreement combined with growth in sales of Avodart and Lovaza were offset by the impact of generic competition to Arixtra and Coreg.

The Avodart franchise grew 7% to £790 million with growth driven by strong contributions from the recent launches of the combination product Duodart/Jalyn in Europe and of Avodart in Japan. In the USA, the decline in Avodart sales, in part due to the impact of labelling changes implemented in 2011 and the availability of a generic competitor in the same class, was partially offset by growth in Jalyn, and combined sales fell 5%.

Lovaza grew 5% to £607 million primarily reflecting the benefit of improved pricing. Lovaza continues to hold broadly flat market share in a market which has declined approximately 7% compared with 2011, as economic pressures have resulted in fewer doctor visits and reduced testing for asymptomatic conditions such as very high triglycerides.

Metabolic

 

The decline in Metabolic product sales continued to reflect the loss of sales of Avandia, and the impact of declining sales of Bonviva in Europe following the change in the deal structure.

Anti-bacterials

 

Anti-bacterials sales grew 5% in EMAP, primarily from Augmentin, but this was more than offset by the impact of austerity measures in Europe, which encouraged pharmacy-level generic substitution, and generic competition in both Europe and the USA.

Oncology and emesis

 

Three new products, Votrient (up 88% to £183 million), Promacta (up 76% to £130 million) and Arzerra (up 36% to £60 million) all continued to grow strongly in the USA, Europe and EMAP. Tykerb/Tyverb also grew (up 6% to £239 million), with growth in the USA, EMAP and Japan offsetting a small decline in Europe. Both Hycamtin in Europe and argatroban in the USA were adversely affected by generic competition.

In the USA, Votrient (up 59% to £91 million) benefited from the launch of a new indication for use in advanced soft-tissue sarcoma. Sales of Promacta grew 66% to £54 million, reflecting the continued effect of longer-term use data that was added to the label in 2011.

 

Dermatology

 

Sales declined 2% to £850 million, primarily as a result of the decline in the USA (down 14% to £228 million) which suffered from the impact of generic competition to Evoclin, Extina and Duac. European sales (up 5% to £156 million) benefited from the acquisition of Toctino in the second half of the year. EMAP sales grew 7% to £388 million, reflecting strong growth in the promoted brands of Dermovate and Bactroban.

Rare diseases

 

Volibris grew 35% to £127 million, led by a strong performance in Japan. Mepron sales increased 26% to £93 million primarily as a result of a favourable adjustment to US accruals for returns and rebates recorded in the fourth quarter. Flolan sales fell 25% to £135 million, largely as a result of the biennial price reduction in Japan and generic competition in Europe.

Immuno-inflammation

 

In August 2012, we acquired Human Genome Sciences, Inc. (‘HGS’) and from that time recorded all sales of Benlysta. Prior to acquisition, in the USA we recorded as turnover our share of gross profit under the co-promotion agreement with HGS. Reported Benlysta turnover was £70 million, of which £65 million arose in the USA. Total in-market sales of Benlysta in the USA for the year were £96 million.

ViiV Healthcare (HIV)

 

ViiV Healthcare sales declined by 10%, with the USA down 22%, Europe down 3%, and EMAP up 3%. Sales growth in Epzicom/ Kivexa (up 10% to £665 million) and Selzentry (up 20% to £128 million) were more than offset by a 30% decline in the mature portfolio, primarily as a result of generic competition in the USA to Combivir and Epivir.

Vaccines turnover

 

     

2012

£m

    

2011

£m

    

Growth

CER%

   

Growth

£%

 

Total Vaccines sales

     3,325         3,497         (2     (5

Performance of the Vaccines business improved towards the end of the year, with a significant increase in tender sales in the fourth quarter. The 2% overall decline in sales was primarily attributable to the adverse comparison with strong Cervarix sales in 2011, which benefited from the HPV vaccination catch-up programme in Japan, now complete. Cervarix sales declined 46% to £270 million. Excluding Cervarix, Vaccines sales increased by 4%.

Infanrix/Pediarix sales increased 17% to £775 million, primarily reflecting strong tender orders in EMAP and growth in the USA, which benefited from a competitor supply shortage.

Rotarix sales grew 21% to £360 million, with strong sales growth throughout EMAP as well as initial launch sales in Japan. In the USA, despite market share gains, sales declined 11%, primarily due to a comparison with a very strong 2011, when sales benefited from a large stockpile purchase from the CDC.

Synflorix sales increased 17% to £385 million, largely reflecting continued strong growth in EMAP.

Boostrix sales increased 25% to £238 million, largely driven by the USA where the product continues to benefit from the expanded indication for use in adults of 65 and older.

 


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GSK Annual Report 2012  |    59

 

 

 

Sales of hepatitis vaccines fell 5% to £646 million as declines in mature markets, partly the result of reduced government funding, offset growth in EMAP of 21%.

Fluarix/Flulaval sales were down 11% to £200 million, primarily the result of a 35% decline in the USA, which reflected a reduction in the number of doses sold (approximately 21 million doses) compared with 2011 (approximately 34 million doses). Sales grew 15% in Europe and 35% in EMAP.

The previously announced Japanese Vaccines joint venture between GSK and Daiichi Sankyo Co., Ltd started operations on 2 July. The JV holds the development and commercial rights for existing preventative vaccines from both parent companies. We sell vaccines into the JV at an agreed upon price, and this is reflected in turnover in the second half of 2012, which was reduced by approximately £12 million by the change in structure. Both companies have an equal stake in the joint venture and share the profits equally.

Sales from new pharmaceutical and vaccine launches

 

     

2012

£m

    

2011

£m

    

Growth

CER%

   

Growth

£%

 

Arzerra

     60         44         36        36   

Benlysta

     70         15         >100        >100   

Duodart/Jalyn

     157         104         57        51   

Lamictal XR

     148         109         34        36   

Nimenrix

     1                          

Potiga/Trobalt

     7         1         >100        >100   

Prolia

     26         11         >100        >100   

Promacta

     130         75         76        73   

Requip XL

     89         139         (32     (36

Synflorix

     385         350         17        10   

Treximet

     49         57         (14     (14

Volibris

     127         97         35        31   

Votrient

     183         100         88        83   

Dermatology

     7         8         (15     (13
       1,439         1,110         34        30   

New products in 2012 are those launched in the last five years (2008 to 2012 inclusive). Total sales of new products were £1,439 million, grew 34% in the year and represented 7% of Pharmaceuticals and Vaccines turnover.

Nimenrix was approved by the European Medicines Agency in April 2012 for active immunization against invasive meningococcal disease caused by Neisseria meningitides serogroups A,C, W-135 and Y. Launches are now underway in several countries throughout Europe including the UK, Germany and the Netherlands.

MenHibrix, a combination vaccine to help prevent meningococcal serogroups C and Y and Hib disease, was approved by the FDA in June 2012. In October 2012, the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention voted for a limited recommendation for immunisation of infants at an increased risk for meningococcal disease. The product is not yet available.

Fluarix Quadrivalent, the first four-strain intramuscular influenza vaccine to help prevent disease caused by seasonal influenza, was approved by the FDA in December 2012 for use in adults and children (three years and older). Launch of Fluarix Quadrivalent is expected in time for the 2013/14 influenza season.

 

Consumer Healthcare turnover

 

     

2012

£m

    

2011

(restated)

£m

    

Growth

CER%

   

Growth

£%

 

Total wellness

     2,008         2,278         (10     (12

Oral care

     1,797         1,711         8        5   

Nutrition

     1,050         1,025         8        2   

Skin health

     255         261         (1     (2
       5,110         5,275                (3
     

2012

£m

    

2011

(restated)

£m

    

Growth

CER%

   

Growth

£%

 

USA

     926         1,002         (9     (8

Europe

     1,796         1,997         (6     (10

ROW

     2,388         2,276         9        5   
       5,110         5,275                (3

Consumer Healthcare turnover was flat for the year. Excluding the non-core OTC brands that were divested in early 2012, turnover increased by 5%, reflecting strong growth in Rest of World markets (47% of 2012 sales) of 12%, while the USA, excluding the non-core OTC brands, grew 2% for the year and Europe was flat.

Total wellness

 

Total wellness sales were down 10% to £2,008 million, but excluding the non-core OTC brands that were divested in early 2012, the category delivered 2% growth despite a number of supply interruptions. Gastro-intestinal health, including Tums and Eno, led category growth at 11%. Pain Management, including Panadol, also registered strong growth of 8% driven by growth in emerging markets. The Smoking reduction and cessation and Respiratory health categories both delivered 4% growth. Sales of alli declined by 72% as a result of the supply interruption that was not resolved until late in the third quarter of 2012.

Oral care

 

Oral care sales grew 8% to £1,797 million. The Sensodyne Sensitivity & Acid Erosion was the strongest performing brand, with sales up 15% to £706 million. Strong results from Denture care products also helped to offset a 2% decline in Aquafresh sales.

Nutrition

 

Nutrition sales grew 8%. Family nutrition (Horlicks) grew 14% due to strong growth in India. The Maxinutrition adult nutrition business delivered 21% sales growth for the year. Strong emerging market growth of Lucozade offset declines in Europe.

Skin health

 

Skin health sales declined 1% to £255 million. Strong Bactroban growth in China and solid results in Lip care (including Abreva) were offset by a decline in sales of Hinds in Mexico.

Regional performance

 

Growth in Rest of World markets of 12% excluding the non-core OTC products that were divested in early 2012 was broadly based with strong growth across most categories. In Europe overall growth in Oral care and Wellness brands was almost entirely offset by the loss of alli sales due to a supply issue. In the USA growth in Oral care, Gastro-intestinal health and Smoking reduction and cessation brands was also significantly offset by a decline in alli sales as a result of the supply interruption.

 

 

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Table of Contents

60    |  GSK Annual Report 2012

 

Financial review

 

 

 

Core results

 

We use the core reporting basis to manage the performance of the Group and the definition of core results is set out on page 56. A review of the Group’s total results is set out on pages 63 to 64. The reconciliation of total results to core results is presented on page 62.

 

 

           2012            2011            Growth  
     £m    

% of

turnover

   

(restated)

£m

   

% of

turnover

    CER%     £%  

Turnover

    26,431        100.0        27,387        100.0        (1     (3

Cost of sales

    (7,078     (26.8     (7,259     (26.5     1        (2

Selling, general and administration

    (7,855     (29.7     (7,956     (29.1            (1

Research and development

    (3,474     (13.1     (3,678     (13.4     (5     (6

Royalty income

    306        1.1        309        1.1               (1

Core operating profit

    8,330        31.5        8,803        32.1        (3     (5

Net finance costs

    (724       (707      

Share of after tax profits of associates and joint ventures

    29                15                           

Core profit before tax

    7,635          8,111          (4     (6

Taxation

    (1,864             (2,104                        

Core profit after tax

    5,771          6,007          (2     (4

Core profit attributable to shareholders

    5,536                5,810                           

Core earnings per share

    112.7             115.5                    (2

Cost of sales

 

Core cost of sales increased to 26.8% of turnover (2011 – 26.5%). This primarily reflected the impact of lower sales, lower volumes and adverse regional and product mix partially offset by ongoing cost management and one-off royalty and pension adjustments.

Selling, general and administration

 

Core SG&A costs as a percentage of sales were 29.7% compared with 29.1% in 2011 reflecting flat costs on a turnover decline of 1%. Investments in growth businesses and new product launches as well as additional HGS costs were funded by ongoing cost management and one-off benefits.

Advertising and promotion decreased 4%, Selling and distribution was flat and general administration increased 5%.

Research and development

 

We remain focused on delivering an improved return on our investment in R&D and sales contribution, reduced attrition and cost reduction are all important drivers of an improving internal rate of return. R&D expenditure is not determined as a percentage of sales, but instead capital is allocated using strict returns based criteria.

The operations of Pharmaceuticals R&D are broadly split into Discovery activities (up to the completion of Phase IIa trials) and Development work (from Phase IIb onwards).

 

The table below analyses the Group R&D expenditure by these categories:

 

 

     

2012

£m

    

2011

(restated)

£m

 

Discovery

     800         822   

Development

     1,655         1,669   

Facilities and central support functions

     366         477   

Pharmaceuticals R&D

     2,821         2,968   

Vaccines R&D

     498         564   

Consumer Healthcare R&D

     155         146   

Core R&D

     3,474         3,678   

Amortisation and impairment of
intangible assets

     483         234   

Major restructuring

     11         97   

Total R&D

     3,968         4,009   

The proportion of Pharmaceuticals R&D investment made in the late-stage portfolio continues to grow from 56% of the total Pharmaceuticals R&D costs in 2011 to 59% in 2012.

Core R&D expenditure declined 5% to £3,474 million (13.1% of turnover) compared with £3,678 million in 2011 (13.4% of turnover). Ongoing cost management, including one-off benefits, and some beneficial phasing effects, more than funded additional HGS costs.

Royalty income

 

Royalty income was £306 million compared with £309 million in 2011.

Operating profit

 

Core operating profit was £8,330 million, a 3% decrease in CER terms on a turnover decline of 1% CER. The operating margin declined by 0.6 percentage points to 31.5% compared with the 12 months to December 2011 of which 0.3 percentage points was due to the expected impact of the HGS acquisition. The remaining 0.3 percentage points arose from flat SG&A on lower turnover, partially mitigated by lower R&D expenditure. Operating profit also benefited from a number of one-off items which were recognised in cost of sales, SG&A and R&D including favourable adjustments totalling £395 million related to the capping of future pensionable salary increases and a change in the basis of future discretionary pension increases from RPI to CPI in certain legacy plans.

Core operating profit by business

 

           2012            2011            Growth  
     £m    

Margin

%

   

(restated)

£m

   

Margin

%

    CER%     £%  

Pharmaceuticals

    6,622        36.8        7,155        38.4        (6     (7

Vaccines

    1,169        35.2        1,184        33.9        (1     (1

Pharmaceuticals and Vaccines

    7,791        36.5        8,339        37.7        (5     (7

Consumer Healthcare

    938        18.4        1,084        20.5        (9     (13
    8,729        33.0        9,423        34.4        (5     (7

Corporate & other unallocated costs

    (399             (620             (32     (36

Core operating profit

    8,330        31.5        8,803        32.1        (3     (5
 


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GSK Annual Report 2012  |    61

 

 

 

Core operating profit by segment

 

           2012            2011     Growth  
     £m    

% of

turnover

   

(restated)

£m

   

% of

turnover

    CER%     £%  

Pharmaceuticals and Vaccines

           

USA

    4,786        68.4        4,646        66.2        1        3   

Europe

    2,629        52.6        3,154        55.3        (11     (17

EMAP

    1,564        33.0        1,481        33.2        9        6   

Japan

    1,179        59.9        1,249        60.0        (7     (6

ViiV Healthcare

    849        61.8        882        56.2               (4

Pharmaceutical R&D

    (2,778       (2,801       (1     (1

Other trading and unallocated pharmaceuticals

    (438     (35.3     (272     (21.5     75        61   

Pharmaceuticals and Vaccines

    7,791        36.5        8,339        37.7        (5     (7

Consumer Healthcare

    938        18.4        1,084        20.5        (9     (13
    8,729        33.0        9,423        34.4        (5     (7

Corporate & other unallocated costs

    (399             (620             (32