20-F 1 u08350e20vf.htm FORM 20-F e20vf
As filed with the Securities and Exchange Commission on March 01, 2010
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
     
 
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
   
For the fiscal year ended December 31, 2009
OR
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
o   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-15170
GlaxoSmithKline plc
(Exact name of Registrant as specified in its charter)
England
(Jurisdiction of incorporation or organization)
980 Great West Road, Brentford, Middlesex TW8 9GS England
(Address of principal executive offices)
Simon Bicknell
Company Secretary
GlaxoSmithKline plc
980 Great West Road
Brentford, TW8 9GS
England
+44 20 8047 5000
company.secretary@gsk.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange On Which Registered
     
American Depositary Shares, each representing 2 Ordinary Shares,
Par value 25 pence
  New York Stock Exchange
4.850% Notes due 2013   New York Stock Exchange
5.650% Notes due 2018   New York Stock Exchange
6.375% Notes due 2038   New York Stock Exchange
Floating Rate Notes due 2010   New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of class)
     
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
     
Ordinary Shares of Par value 25 pence each   5,190,934,201
     
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
þ Yes       o No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes       þ No
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes       o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes       o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
         
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
         
U.S. GAAP o   International Financial Reporting Standards as issued   Other o
    by the International Accounting Standards Board þ    
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o      Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes       þ No
 
 


 

(IMAGE)


 


(IMAGE)
 
 
 
 
 
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 43 to 47 of this Annual Report.


 

01

Contents

Business review
This discusses our financial
and non-financial activities, resources,
development and performance
during 2009 and outlines the
factors, including the trends and
the principal risks and uncertainties,
which are likely to affect future
development.
Governance and remuneration
This discusses our management
structures and governance
procedures. It also sets out the
remuneration policies operated
for our Directors and Corporate
Executive Team members.
Financial statements
The financial statements provide a
summary of the Group’s financial
performance throughout 2009 and
its position as at 31st December
2009. The consolidated financial
statements are prepared in
accordance with the IFRS as adopted
by the European Union and also
IFRS as issued by the International
Accounting Standards Board.
Shareholder information
This includes the full product
development pipeline and discusses
shareholder return in the form of
dividends and share price movements.
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 8 to 90. 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 6 to 90 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.

Business review
2009 Performance overview
Financial trends
Products, intellectual property and competition
Global manufacturing and supply
Research and development
Our employees
Our responsibility
Regulation
World market, economy and outlook
Financial review 2009
Financial position and resources
Risk factors
Financial review 2008
Governance and remuneration
Our Board
Our Corporate Executive team
Governance and policy
Dialogue with shareholders
Internal control framework
Committee reports
Remuneration policy
Director terms and conditions
Director and Senior Management remuneration
Directors’ interests
Directors’ interests in contracts
 
Financial statements
Directors’ statement of responsibilities
Report of Independent Registered Public Accounting Firm
Financial statements
Notes to the financial statements
 
 
 
 
 
 
 
 
Shareholder information
Quarterly trend
Five year record
Product development pipeline
Share price and dividends
Nature of trading market
Annual General Meeting
Investor relations and Registrar
Taxation information for shareholders
Glossary of terms

 
 


GSK Annual Report 2009


 

02

Chairman & CEO summary
Our strategy is delivering and we believe that GSK is now moving to a position where it can deliver long-term financial performance on a sustainable basis for shareholders.
     
(PHOTO OF SIR CHRISTOPHER GENT)
  (PHOTO OF ANDREW WITTY)
 


 

03

Chairman & CEO summary

Dear Shareholder
Since our last Annual Report, GSK has made significant progress to transform its business model.
Our strategy is delivering and we believe that GSK is now moving to a position where it can deliver long-term financial performance on a sustainable basis for shareholders.
Return to sales growth
In 2009, we saw GSK return to sales growth. Our strategic priority, to diversify and drive growth in key investment areas such as Emerging Markets, Consumer Healthcare and Vaccines, has supported this growth.
In doing so we have developed many more engines of growth for the company. This increased diversification is helping to reduce risk through lower sales volatility – evident in that GSK absorbed the impact of losing more than £1 billion of sales to genericisation in the US market in 2009.
Of course, sales of our influenza products to governments responding to the H1N1 pandemic also contributed to sales.
For many years, we have invested in developing our influenza capabilities. Five months after the WHO declared H1N1 a global flu pandemic, GSK was able to supply an approved vaccine for governments across the world. We are continuing to work closely with them to respond to their needs.
New product momentum sustained
We remain focused on broadening and strengthening our product portfolio. Last year, GSK received 12 product approvals and completed 11 new filings.
In the last 3 years, GSK has obtained more FDA approvals for new medicines and vaccines than any other company.
Over the next 18 months we have the potential to launch a number of brand new medicines and vaccines, including Benlysta, which would be the first new treatment for systemic lupus in over 50 years.
This momentum is set against a continued goal of maintaining around 30 assets in our late stage pipeline.
Improving return on investment
We remain mindful of the need to improve and demonstrate better returns on investment. Across the entire business, we continue to implement our restructuring programme to simplify operations and reduce costs. In 2009 this programme delivered £1 billion of annual savings.
In particular, in Research and Development we are strongly focused on allocating capital to areas where we can get the best return on investment.
We continue to look at how we can make better decisions around pipeline progression and maintain our strategy to increase the level of externally sourced compounds in our pipeline, through more option-based agreements.
In addition, we are reducing R&D investment and associated infrastructure in therapy areas where we believe the prospects for successful registration and launch of differentiated medicines are low.
Based on the investment made in our late stage pipeline and our long-term sales expectation, we estimate our projected rate of R&D return to be around 11%. We believe this is an improvement on the industry average over the last ten years. Our long-term goal is to go further and realise an aspirational rate of return for GSK’s R&D of around 14%.
More responsive, more flexible, more open
Equally important are GSK’s financial and social responsibilities to ensure the long-term success and sustainability of our business.
We are determined to make our company more responsive, more flexible and more open to society’s expectations.
We continue to make progress in many areas such as improving access to medicines, enhancing research opportunities for neglected tropical diseases, raising the ethical standards for conducting our research and our commercial activities, and being more transparent about the way we run our business.
Progressive dividend
As one of the FTSE 100’s top dividend payers, we strongly believe in the importance of returning funds to our shareholders. In line with GSK’s progressive dividend policy, the Board has approved a total dividend for the year of 61 pence, a 7% increase on last year’s dividend.
Improving long-term prospects
In conclusion, we are making progress against our strategic priorities. We have seen good progress in our sales performance; we are maintaining a strong focus on cost reduction; we are delivering more new medicines, vaccines and consumer healthcare products; and we continue to take new initiatives to build society’s trust. In accomplishing this, we would like to recognise the enormous contribution of our employees and our wide network of partners.
There is no doubt that we are operating in a challenging environment. However, with further successful execution of our strategy, we believe GSK’s long-term prospects are improving and that we will enhance our position as a leading-edge healthcare company.
     
-s- Sir Christopher Gent
  -s- Andrew Witty
Sir Christopher Gent
  Andrew Witty
Chairman
  Chief Executive Officer


GSK Annual Report 2009


 

04

Our strategy
 
We are focused on delivering three strategic priorities to transform GSK into a company that delivers more growth, has less risk and an improved long-term financial performance.
 
To be a successful and sustainable business we must also fulfil our social responsibilities. We are doing this by making our company more responsive, more flexible and more open.
Strategic priorities
  Grow a diversified global business – We are diversifying our business to create a more balanced product portfolio and move away from a reliance on traditional ‘white pill/ western markets’. We are investing in key growth areas such as Emerging Markets, Japan, Vaccines and our Consumer Healthcare business.
  Deliver more products of value – We aim to sustain an industry-leading pipeline of products, ensuring that they demonstrate value for healthcare providers. Our R&D strategy is built around focusing on the best science, diversifying through externalisation of research, and improving the returns on investment.
  Simplify the operating model – GSK is a large and complex organisation. We are transforming our operational model to reduce complexities, improve efficiency and reduce costs.
(IMAGE)


GSK Annual Report 2009


 

 

(IMAGE)


 

06

2009 performance overview

Key performance indicators
(IMAGE)
*   The calculation of results before major restructuring is described in Note 1 to the financial statements, ‘Presentation of the financial statements’.
 
+   The calculation of free cash flow is described on page 39.
 
  The calculation of CER growth is described on page 10.
Our strategies
We have focused the business around the delivery of three strategic priorities.
 
Grow a diversified global business
Broadening and balancing our portfolio, diversifying into new product areas and capturing opportunities that exist beyond our established geographic footprint.
 
 
Deliver more products of value
Transforming R&D to ensure we not only deliver the current pipeline but are also able to sustain the flow of products for years to come.
 
 
Simplifying the operating model
Simplifying our operating model to ensure that it is fit for purpose and able to support our business in the most cost efficient way.


GSK Annual Report 2009


 

07

2009 performance overview
             
Our measures   Our progress in 2009
     
We use a number of measures to track our progress against the strategic priorities over the medium to long term. These include the following:   We made good progress during the year, with a number of notable successes
     
     
  Performance of core pharmaceuticals and vaccines businesses     The core pharmaceuticals and vaccines businesses delivered sales of £19.1 billion and grew 5% in the year. This excludes genericised products, Avandia and influenza products. Including pandemic products, sales were £20.9 billion, up 12% for 2009.
     
     
  Diversification of sales     Sales from white pill/western markets fell from 36% of turnover in 2008 to 30% in 2009.
     
     
  Contribution of Emerging Markets to our overall sales and growth     Sales in the Emerging Markets pharmaceutical business grew 20% to nearly £3 billion, now representing 10% of Group turnover.
 
        We completed 10 bolt-on acquisitions in 2009.
     
     
  Growth of Consumer Healthcare market share     Consumer Healthcare market share gains were delivered in the OTC and Oral healthcare businesses, but share declined in Nutritional healthcare.
 
        Consumer Healthcare sales grew 7% to £4.7 billion, with growth in all categories: OTC up 8%; Oral healthcare up 7%; Nutritional healthcare up 3%.
     
     
  Expansion of Japanese business     Sales reached £1.6 billion in 2009, up 22%, driven by Adoair and Relenza.
 
        Products launched in the last three years contributed around £260 million sales in 2009.
     
     
  Build biopharmaceutical portfolio     Arzerra was launched in the USA, a positive opinion was received for Prolia and positive phase III data was announced for Benlysta in 2009.
 
        Around 17% of our pipeline now comprises biopharmaceutical assets.
     
     
  Contribution to sales of new products     New pharmaceutical products launched since 2007 contributed sales of £1.3 billion, or £2.1 billion including H1N1 pandemic vaccine.
     
     
  Number of reimbursable product approvals and filings     We received 12 product approvals and completed 11 new filings in 2009. In the last three years we have obtained more FDA approvals for new molecular entities and vaccines than any other company.
     
     
  Sustaining late-stage pipeline     We maintained around 30 assets in phase III and registration, with five new programmes entering phase III during 2009.
     
     
  Enhanced R&D productivity and increased externalisation for Drug Discovery     Our projected rate of return based on investment made in our late stage pipeline and expected future long-term sales performance is around 11%. Our long-term goal is to improve our rate of return for R&D to around 14%.
 
        We have ‘externalised’ approximately 30% of our discovery research with 47 external partners.
     
     
  Delivery of major restructuring programme     Annual cost savings of £1 billion have already been achieved. The programme has been expanded again to deliver annual savings of £2.2 billion by 2012.
GSK Annual Report 2009


 

08

Report of the Directors

         
 
       
    6  
    9  
    11  
    14  
    15  
    20  
    21  
    26  
    27  
    28  
    36  
    43  
    48  
 
       
    54  
    56  
    58  
    62  
    63  
    64  
    65  
    65  
    67  
    71  
    71  
 
       
    73  
    74  
    81  
    81  
    82  
    83  
    84  
    85  
    86  
    89  
    90  
    90  
 
       
This report is prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union and also with IFRS as issued by the International Accounting Standards Board.
       
 EX-1.1
 EX-4.5
 EX-12.1
 EX-12.2
 EX-13.1
 EX-15.1
The Report of the Directors provides users of the financial statements with a more complete picture of GSK. It supplements the information in the financial statements with a discussion of other aspects of our activities, our future and the environment in which we operate.
 
Business review
This discusses our financial and non-financial activities, resources, development and performance during 2009 and outlines the factors, including the trends and the principal risks and uncertainties, which are likely to affect future development.
Corporate governance
This discusses our management structures and governance procedures. It includes disclosures on compliance with the Combined Code on Corporate Governance of the Financial Reporting Council (Combined Code) and with US laws and regulation.
Remuneration Report
This sets out the remuneration policies operated for our Directors and the Corporate Executive Team (CET) members. There are disclosures on Directors’ remuneration including those required by The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.


GSK Annual Report 2009


 

09

Financial trends
                                                         
    2009     Growth*     2008     Growth*     2007  
Total results
  £m     CER%     £%     £m     CER%     £%     £m  
                                       
Turnover
    28,368       3       16       24,352       (3 )     7       22,716  
                                       
Cost of sales
    (7,380 )     6       15       (6,415 )     13       21       (5,317 )
Selling, general and administration
    (9,592 )     6       25       (7,656 )     2       10       (6,954 )
Research and development
    (4,106 )     1       12       (3,681 )     4       11       (3,327 )
Other operating income
    1,135                       541                       475  
                                       
Operating profit
    8,425       4       18       7,141       (20 )     (6 )     7,593  
                                       
Profit before taxation
    7,891       4       19       6,659       (24 )     (11 )     7,452  
Profit after taxation for the year
    5,669       6       20       4,712       (25 )     (11 )     5,310  
                                       
Profit attributable to minority interests
    138                       110                       96  
Profit attributable to shareholders
    5,531                       4,602                       5,214  
                                       
Basic earnings per share (pence)
    109.1p       8       23       88.6p       (21 )     (6 )     94.4p  
Diluted earnings per share (pence)
    108.2p                       88.1p                       93.7p  
                                     
 
                                                       
Results before major restructuring
                                                       
 
                                                       
                                       
Turnover
    28,368       3       16       24,352       (3 )     7       22,716  
                                       
Cost of sales
    (7,095 )     13       23       (5,776 )     4       11       (5,206 )
Selling, general and administration
    (9,200 )     6       25       (7,352 )           8       (6,817 )
Research and development
    (3,951 )     2       13       (3,506 )     2       8       (3,237 )
Other operating income
    1,135                       541                       475  
                                       
Operating profit
    9,257       (1 )     12       8,259       (10 )     4       7,931  
                                       
Profit before taxation
    8,726       (1 )     12       7,782       (14 )           7,790  
Profit after taxation for the year
    6,283             13       5,551       (14 )           5,571  
                                       
Profit attributable to minority interests
    138                       110                       96  
Profit attributable to shareholders
    6,145                       5,441                       5,475  
                                       
Basic earnings per share (pence)
    121.2p       2       16       104.7p       (9 )     6       99.1p  
Diluted earnings per share (pence)
    120.3p                       104.1p                       98.3p  
                                       
Research and development – total
                                                       
                                       
Pharmaceuticals
    3,947                       3,557                       3,215  
Consumer Healthcare
    159                       124                       112  
                                       
Total
    4,106                       3,681                       3,327  
                                       
Net finance cost cover – total
                                                       
                                       
Net finance costs
    713                       530                       191  
Cover
    12 times                 14 times                   40 times  
                                       
Net finance cost cover is profit before tax plus net finance costs, divided by net finance costs.                                
Tax rate – total
    28.2%                     29.2%                     28.7%
Tax rate – before major restructuring
    28.0%                     28.7%                     28.5%
                                     
Borrowings
                                                       
                                     
Net debt
    9,444                       10,173                       6,039  
Gearing
    88%                     122%                     61%
                                     
The gearing ratio is calculated as net debt as a percentage of total equity.
 
*   CER% represents growth at constant exchange rates. Sterling% or £% represents growth at actual exchange rates. See page 10.
    The calculation of results before major restructuring, is described in Note 1 to the financial statements, ‘Presentation of the financial statements’.
GSK Annual Report 2009


 

10

History and development of the company
GlaxoSmithKline plc is a public limited company incorporated on
6th December 1999 under English law. Its shares are listed on the London Stock Exchange and the New York Stock Exchange. On 27th December 2000 the company acquired Glaxo Wellcome plc and SmithKline Beecham plc, both English public limited companies, by way of a scheme of arrangement for the merger of the two companies. GSK and its subsidiary and associated undertakings constitute a major global healthcare group engaged in the creation, discovery, development, manufacture and marketing of pharmaceutical and consumer health-related products.
GSK has its corporate head office in London and has its US headquarters in Research Triangle Park, North Carolina, with operations in some 120 countries, and products sold in over
150 countries.
Annual Report and Summary
This report is the Annual Report of GlaxoSmithKline plc for the year ended 31st December 2009, prepared in accordance with United Kingdom requirements. It was approved by the Board of Directors on 24th February 2010 and published on 25th February 2010.
A summary of the year, intended for the shareholder not needing the full detail of the Annual Report, is produced as a separate document and issued to all shareholders. The summary does not constitute a set of summary financial statements as defined by section 428 of the Companies Act 2006. The Annual Report is issued to shareholders who have elected to receive it.
In this Report ‘GlaxoSmithKline’, the ‘Group’ or ‘GSK’ means GlaxoSmithKline plc and its subsidiary undertakings; the ‘company’ means GlaxoSmithKline plc; ‘GlaxoSmithKline share’ means an Ordinary Share of GlaxoSmithKline plc of 25p; American Depositary Shares (ADS) each represent two GlaxoSmithKline shares.
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 Baycol and Levitra, trademarks of Bayer, Benlysta, a trademark of Human Genome Science, Boniva/Bonviva, a trademark of Roche, Citrucel, a trademark of Merrell Pharmaceuticals, Volibris, a trademark of Gilead, NicoDerm, a trademark of Elan, Johnson & Johnson, Merrell, Novartis, Sanofi-Aventis or GlaxoSmithKline, Prolia, a trademark of Amgen and Vesicare, a trademark of Astellas Pharmaceuticals in many countries and of Yamanouchi Pharmaceuticals in certain countries, all of which are used in certain countries under licence by the Group.
Currencies
The currencies that most influence the Group’s results remain the US dollar, the Euro, the Yen and Sterling. Details of the exchange rates used by the Group are given in Note 5 ‘Exchange Rates’ on
page 106.
During 2009, average Sterling exchange rates were weaker against the US Dollar, the Euro and the Yen compared with 2008. However, and as a result of the significant currency movements seen in Q4 2008, year end Sterling exchange rates were actually stronger against all three currencies compared with those at
31st December 2008.
Results before major restructuring
In October 2007, the Board approved the implementation of a detailed formal plan for, and GSK announced, a significant new Operational Excellence programme to improve the effectiveness and productivity of its operations. A second formal plan, representing a significant expansion of the Operational Excellence programme, was approved by the Board and announced in February 2009. A further expansion was approved by the Board and announced in February 2010. Total costs for the implementation of the expanded programme are expected to increase from £3.6 billion to approximately £4.5 billion, to be incurred over the period from 2007 to 2012. The programme is now expected to deliver total annual pre-tax savings of approximately £2.2 billion by 2012, with savings realised across the business. GSK presents the restructuring costs incurred solely as a direct result of the Operational Excellence programme in a separate column in the income statement titled ‘Major restructuring’. In addition to the restructuring costs of the Operational Excellence programme, the major restructuring column in the income statement includes restructuring costs incurred solely as a direct result of any restructuring programmes that follow, and relate to, material acquisitions where the operations of the acquired business overlap extensively with GSK’s existing operations. The $1.65 billion (£814 million) acquisition of Reliant Pharmaceuticals in December 2007 and the $3.6 billion (£2.2 billion) acquisition of Stiefel Laboratories in July 2009 are the only acquisitions since October 2007 that meet these criteria.
The Group’s results before the costs of the Operational Excellence programme and acquisition-related restructuring programmes meeting the criteria described above are described as ‘Results before major restructuring’. This presentation, which GSK intends to apply consistently to future major restructuring programmes that have a material impact on GSK’s operating results and on the manner in which GSK’s business is conducted, has been adopted to show clearly the Group’s results both before and after the costs of these restructuring programmes. Management believes that this presentation assists shareholders in gaining a clearer understanding of the Group’s financial performance and in making projections of future financial performance, as results that include such costs, by virtue of their size and nature, have limited comparative value. This presentation is also consistent with the way management assesses the Group’s financial performance.
CER growth
In order to illustrate underlying performance, it is the Group’s practice to discuss its results in terms of constant exchange rate (CER) growth. This represents growth calculated as if the exchange rates used to determine the results of overseas companies in Sterling had remained unchanged from those used in the previous year. CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.
All commentaries in this Report are presented in terms of CER unless otherwise stated.
Exchange rates
The Group operates in many countries and earns revenues and incurs costs in many currencies. The results of the Group, as reported in Sterling, are affected by movements in exchange rates between Sterling and other currencies. Average exchange rates prevailing during the period are used to translate the results and cash flows of overseas subsidiaries, associates and joint ventures into Sterling. Period end rates are used to translate the net assets of those entities.


GSK Annual Report 2009


 

11

Products, intellectual property and competition

Pharmaceutical products
GSK’s principal pharmaceutical products are currently directed to nine main therapeutic areas including dermatologicals following the acquisition of Stiefel Laboratories in July 2009. A description of the products is on pages 12 to 13 and an analysis of sales by therapeutic area, is on page 29.
Competition
Our principal pharmaceutical competitors range from small to large pharmaceutical companies often with substantial resources. Some of these companies are:
  Abbott Laboratories
  Amgen
  AstraZeneca
  Bristol-Myers Squibb
  Eli Lilly
  Johnson & Johnson
  Merck
  Novartis
  Pfizer
  Roche Holdings
  Sanofi-Aventis
Pharmaceuticals may be subject to competition from other products during the period of patent protection and, once off patent, from generic versions. The manufacturers of generic products typically do not incur significant research and development or education and marketing development costs and consequently are able to offer their products at considerably lower prices than the branded competitors. As a research and development based company we will normally seek to achieve a sufficiently high profit margin and sales volume during the period of patent protection to repay the original investment, which is generally substantial, and to generate profits and fund research for the future. Competition from generic products generally occurs as patents in major markets expire. Increasingly patent challenges are made prior to patent expiry, claiming that the innovator patent is not valid and/or that it is not infringed by the generic product. Following the loss of patent protection, generic products rapidly capture a large share of the market, particularly in the USA.
We believe that remaining competitive is dependent upon the discovery and development of new products, together with effective marketing of existing products.
Within the pharmaceutical industry, the introduction of new products and processes by our competitors may affect pricing or result in changing patterns of product use. There is no assurance that products will not become outmoded, notwithstanding patent or trademark protection. In addition, increased government and other pressures for physicians and patients to use generic pharmaceuticals, rather than brand-name medicines, may increase competition for products that are no longer protected by a patent.
Intellectual property
Intellectual property is a key business asset for our company, and the effective legal protection of our intellectual property (via patents, trademarks, registered designs, copyrights and domain name registrations) is critical in ensuring a reasonable return on investment in R&D.
Patents
It is our policy to try to obtain patents on commercially important, protectable inventions discovered or developed through our R&D activities. Patent protection for new active ingredients is available in major markets and patents can also be obtained for new drug formulations, manufacturing processes, medical uses and devices for administering products. Although we may obtain patents for our products, this does not prevent them from being challenged before they expire. Further, the grant of a patent does not mean that the issued patent will necessarily be held valid and enforceable by a court. If a court determines that a patent we hold is invalid, non infringed or unenforceable, it will not protect the market from third party entry prior to patent expiry. Significant litigation concerning such challenges is summarised in Note 44 to the financial statements, ‘Legal proceedings’.
The life of a patent in most countries is 20 years from the filing date, however the long development time for pharmaceutical products may result in a substantial amount of this patent life being used up before launch. In some markets (including the USA and in Europe) it is possible to have some of this lost time restored and this leads to variations in the amount of patent life actually available for each product we market. Further, certain countries provide a period of data or market exclusivity that prevents a third party company from relying on our clinical trial data to enter the market with its copy for the period of exclusivity.
The patent expiry dates for our significant products are in the following table. Dates provided are for expiry of patents in the USA and major European markets on the active ingredient, unless otherwise indicated, and include extensions of patent term (including for paediatric use in the USA) where available.


GSK Annual Report 2009


 

12

Products, intellectual property and competition
                     
Products   Compounds   Indication(s)   Major   Patent expiry dates
            competitor brands   USA   EU
 
                   
Respiratory
                   
Seretide/Advair
  salmeterol xinafoate/   asthma/COPD   Singulair, Symbicort,   2010   20131
 
  fluticasone propionate       Spiriva, Asmanex, Pulmicort,   (combination)   (combination)
 
          Foster   2011-2016   2011
 
              (Diskus device)   (Diskus device)
 
                   
Flixotide/Flovent
  fluticasone propionate   asthma/COPD   Qvar, Singulair   2011-2025   2011-2017
 
              (devices)   (devices)
 
                   
Serevent
  salmeterol xinafoate   asthma/COPD   Foradil, Spiriva   2011-2016   2011-2019
 
              (Diskus device)   (devices)
 
                   
Veramyst
  fluticasone furoate   rhinitis   Nasacort   2021   2023
 
                   
Anti-virals
              2016   2016
Epzicom/Kivexa
  lamivudine and abacavir   HIV/AIDS   Truvada, Atripla   (combination)   (combination)
 
                   
Combivir
  lamivudine and zidovudine   HIV/AIDS   Truvada, Atripla   2012   2013
 
              (combination)   (combination)
 
                   
Trizivir
  lamivudine, zidovudine   HIV/AIDS   Truvada, Atripla   2016   2016
 
  and abacavir           (combination)   (combination)
 
                   
Agenerase
  amprenavir   HIV/AIDS   Prezista, Kaletra, Reyataz   2013   2014
 
                   
Lexiva
  fosamprenavir   HIV/AIDS   Prezista, Kaletra, Reyataz   2017   2019
 
                   
Epivir
  lamivudine   HIV/AIDS   Truvada, Atripla   2010   2011
 
                   
Ziagen
  abacavir   HIV/AIDS   Truvada, Atripla   2012   2014
 
                   
Valtrex
  valaciclovir   genital herpes, coldsores,   Famvir   expired   expired
 
      shingles            
 
                   
Zeffix
  lamivudine   chronic hepatitis B   Hepsera   2010   2011
 
                   
Relenza
  zanamivir   influenza   Tamiflu   2013   2014
 
                   
 
                   
Central nervous system
               
Lamictal
  lamotrigine   epilepsy, bipolar disorder   Keppra, Dilantin   expired   expired
 
                   
Imigran/Imitrex
  sumatriptan   migraine   Zomig, Maxalt, Relpax   expired   expired
 
                   
Seroxat/Paxil
  paroxetine   depression, various   Effexor, Cymbalta,   expired   expired
 
      anxiety disorders   Lexapro        
 
                   
Wellbutrin SR
  bupropion   depression   Effexor, Cymbalta,   expired   expired
 
          Lexapro        
 
                   
Requip
  ropinirole   Parkinson’s disease,   Mirapex   expired   2011
 
      restless legs syndrome           (use in
 
                  treating
 
                  Parkinson’s
 
                  disease)
 
                   
Treximet
  sumatriptan and naproxen   migraine   Zomig, Maxalt, Relpax   2017   NA
 
              (combination    
 
              and use)    
 
                   
Cardiovascular and urogenital
               
Avodart
  dutasteride   benign prostatic hyperplasia   Proscar, Flomax, finasteride   2015   2017
 
                   
Lovaza
  omega-3 acid ethyl esters   very high triglycerides   Tricor   2017   NA
 
              (Formulation)    
 
                   
Coreg CR
  carvedilol phosphate   mild-to-severe heart failure,   Toprol XL   20232   NA
 
      hypertension, left ventricular            
 
      dysfunction post MI            
 
                   
Fraxiparine
  nadroparin   deep vein thrombosis,   Lovenox, Fragmin   expired   expired
 
      pulmonary embolism   Innohep        
 
                   
Arixtra
  fondaparinux   deep vein thrombosis,   Lovenox, Fragmin   expired   expired
 
      pulmonary embolism   Innohep        
 
                   
Vesicare
  solifenacin   overactive bladder   Detrol, Detrol LA, Enablex,   2018   NA
 
          Sanctura        
 
                   
 
1 The UK and Irish patents have been revoked by the courts     2 Generic competition possible in 2010 following conclusion of patent proceedings
GSK Annual Report 2009


 

13

Products, intellectual property and competition
                     
Products   Compounds   Indication(s)   Major   Patent expiry dates
            competitor brands   USA   EU
 
                   
Metabolic
                   
Avandia
  rosiglitazone maleate   type 2 diabetes   Actos, Januvia   2012   2013
 
                   
Avandamet
  rosiglitazone maleate and   type 2 diabetes   Competact, Janumet   2012   2013
 
  metformin HCI       Actoplus met        
 
                   
Anti-bacterials
                   
Augmentin
  amoxicillin/clavulanate   common infections       expired       expired    
 
  potassium                
 
                   
Altabax
  retapamulin   skin infections       2021   2022
 
                   
 
                   
Oncology and emesis
               
Arzerra
  ofatumumab   refractory chronic   MabThera/Rituxan   2023   2023
 
      lymphocytic leukaemia            
 
                   
Hycamtin
  topotecan   ovarian cancer, small cell   Doxil, Gemzar   2010   2011
 
      lung cancer, cervical cancer          
 
                   
Promacta/
  eltrombopag   idiopathic thrombocytopenic   Nplate   2022   2024
Revolade
      purpura            
 
                   
Tykerb/Tyverb
  lapatanib   advanced and metastatic   Herceptin   2020   2023
 
      breast cancer in HER2            
 
      positive patients            
 
                   
Votrient
  pazopanib   metastatic renal cell carcinoma   Sutent, Nexavar   2023   2025
 
                   
 
                   
Vaccines
                   
Infanrix/Pediarix
  diphtheria, tetanus, pertussis,   diphtheria, tetanus, pertussis,   Pentavac, Pentaxim,   2017   2016
 
  polio, hepatitis B (HepB),   polio, hepatitis B (HepB),   Pediacel, Pentacel        
 
  inactivated antigens                
 
                   
Fluarix
  split inactivated influenza virus   seasonal influenza   Vaxigrip, Mutagrip, Fluzone,   2022   2022
 
  subtypes A and type B antigens       Influvac, Aggripal, Fluad        
 
                   
FluLaval
  split inactivated influenza virus   seasonal influenza   Vaxigrip, Mutagrip, Fluzone,   none   none
 
  subtypes A and type B antigens       Influvac, Aggripal, Fluad        
 
                   
Cervarix
  HPV 16 & 18 virus like particles   human papilloma virus
type 16 & 18
  Gardasil, Silgard   2026   2019
 
  (VLPs), AS04 adjuvant (MPL +                
 
  aluminium hydroxide)                
 
                   
Synflorix
  conjugated pneumococcal   invasive pneumococcal   Prevenar   NA   2020
 
  polysaccharide   disease            
 
                   
Rotarix
  live attenuated rotavirus   rotavirus gastroenteritis   Rotateq   2022   2020
 
  strain GIP(8)                
 
                   
Trademarks
All of GSK’s commercial products are protected by registered trademarks in major markets. There may be local variations, for example, in the USA the trademark Advair covers the same product sold in the EU as Seretide. Trademark protection may generally be extended as long as the trademark is used by renewing it when necessary. GSK’s trademarks are important for maintaining the brand identity of its products. GSK enforces its trademark rights to prevent infringements.
Consumer Healthcare products
Our portfolio comprises three main categories: Over-the-counter (OTC) medicines, Oral healthcare and Nutritional healthcare.
Sales of key Consumer Healthcare products in 2009 are shown on page 30.
Our leading Consumer Healthcare products include the following:
OTC medicines
  alli, the first licenced weight loss medicine to be available without a prescription, launched in the USA in 2007 and across Europe in 2009
  Panadol, the global paracetamol/acetaminophen analgesic
  Smoking control products NicoDerm, NiQuitin CQ, Nicabate and in the USA, Nicorette
  Other brands include Breathe Right nasal strips, Tums, Citrucel, Contac and FiberChoice.
GSK Annual Report 2009


 

14

Products, intellectual property and competition

Oral healthcare
  Aquafresh, a range of toothpastes, toothbrushes and mouthwashes
  Sensodyne, a range of toothpastes, toothbrushes and mouthwashes including Pronamel to protect from acid erosion
  Biotene, acquired late in 2008, the leading treatment for dry mouth
  Polident, Poligrip and Corega denture care cleansers and adhesives
  Other brands include Odol, Macleans and Dr Best.
Nutritional healthcare
  Lucozade, a range of energy and sports drinks
  Horlicks, a range of milk-based malted food and chocolate drinks
  Ribena, a blackcurrant juice-based drink.
Consumer Healthcare competition
GSK holds leading global positions in all its key consumer product areas. Worldwide it is the second largest in OTC medicines and the third largest in Oral healthcare. In Nutritional healthcare it holds the leading position in the UK, India and Ireland.
The environment in which the Consumer Healthcare business operates has become ever more challenging:
  consumers are demanding better quality, better value and improved performance
  retailers have consolidated and globalised which has strengthened their negotiation power
  cycle times for innovation have reduced.
The main competitors include the major international companies Colgate-Palmolive, Johnson & Johnson, Procter & Gamble, Unilever and Pfizer. In addition, there are many other smaller companies that compete with GSK in certain markets.
The major competitor products in OTC medicines are:
  in the USA: Metamucil (laxative), Pepcid (indigestion) and private label smoking control products
  in the UK: Lemsip (cold remedy), Nurofen and Anadin (analgesics), and Nicorette and Nicotinell (smoking control treatments).
In Oral healthcare the major competitors are Colgate-Palmolive’s Colgate and Procter & Gamble’s Crest.
In Nutritional healthcare the major competitors to Horlicks are Ovaltine and Milo malted food and chocolate drinks. Competitors to Ribena are primarily local fruit juice products, while Lucozade competes with other energy drinks.
Global manufacturing and supply (GMS)
More than 29,000 people work in GMS across our network of 78 sites in 33 countries. GMS supports the commercial ambition of GSK by delivering quality medicines and consumer products to patients and customers around the world.
The scale of manufacturing in GSK is huge, with the manufacture of over 4 billion packs per year in 28,000 different presentations (including tablets, creams/ointments, inhalers, injections, liquids and steriles), which are then supplied to over 150 markets. Over £3.7 billion was spent by GMS on production in 2009.
GMS operates a procurement operation on behalf of the Group. We spend over £2 billion annually with external suppliers, purchasing active ingredients, chemical intermediates, packaging components and part-finished and finished products.
During 2009, as our internal customers sought every opportunity to grow their businesses, we focused on the cost-competitive supply of quality product to meet their ambitions. We worked diligently to leverage our network of sites and contractors to give us built-in flexibility to sustain future growth and adapt to emerging commercial business models. In an increasingly rigorous external regulatory environment, we have continued to leverage technology in support of process understanding, control, and capability.
Our Primary supply sites supply high quality, competitively priced bulk actives and focus on improvements in primary technologies and processes. Our New Product and Global Supply sites work closely with R&D’s development teams to ensure that the right technical competencies are in place to support rapid and successful new product introduction. These sites serve as the focal point for developing and introducing new secondary manufacturing technologies. The sites in our Regional Pharma supply division focus on reducing costs, allowing GSK to compete more effectively in all its markets. Our Consumer Healthcare sites deliver high-quality, competitively priced products and support rapid new product introduction in a highly innovative and competitive business. New technologies have become a fundamental platform for driving innovation, lowering costs, and providing flexibility in operations.
We are embedding new ways of working that are simplifying the business and achieving greater efficiencies. It is our focus on customer service, including support for new product launches, our strong compliance culture, our commitment to health, safety and the environment, and our commitment to developing our people that have delivered strong results for GSK even as the external environment has become more demanding.
Vaccine manufacturing, which is managed as an integral part of the Biologicals business, is particularly complex as it requires the use of innovative technologies and living micro-organisms. Sophisticated quality assurance and quality control procedures are in place to ensure the vaccine’s quality and safety. This includes animal use according to health authorities’ requirements. Due to their biological nature, individual health authorities may subject vaccines to a second control to guarantee the highest quality standards.


GSK Annual Report 2009


 

15

Research and development

Research and development – Pharmaceuticals
GSK R&D has built one of the strongest pipelines of potential new medicines in the industry. In 2009, Pharmaceutical R&D was actively managing over 150 projects in human clinical trials across the globe. Delivering this pipeline to patients safely and efficiently is the number one goal.
Discovering potential medicines
  Our early research identifies the biological targets interfering with a particular disease, and creates small molecules or biopharmaceuticals that interact with these disease targets.
  A refocus on the best science led us to create an entrepreneurial environment in discovery, building on the success of the existing model of Centres of Excellence for Drug Discovery (CEDDs), groups focused around defined therapy areas. Taking the CEDD model one step further we created a number of smaller Discovery Performance Units (DPUs) within each CEDD. These are small, integrated groups of 5-70 scientists, who focus on a particular disease or pathway. There are now 36 DPUs in GSK. The number of DPUs in each CEDD varies according to the science, and some standalone DPUs were created to explore new therapy areas (such as Ophthalmology), or new ways of working (such as the academic DPU which forms drug discovery collaborations with academia).
  The CEDDs are now one year into their 3-year business plan defining overall budget and clear objectives. The business plans have been reviewed at the end of year 1, and our discovery organisation is on track to deliver GSK’s objectives.
  We continue to identify compounds from other companies that would enhance the portfolio and to create innovative collaborations to ensure that we are seen as a partner of choice for large and small companies. Our internal R&D expertise allows us to have a strong position in business development, and makes us able to complement our internal pipeline with acquisitions, in-licensing, co-marketing/ co-promotion deals, or future options collaborations.
Delivering these medicines to patients
  Progression into late-stage development consists of optimising both the physical product properties of the medicine, i.e. the chemical steps and formulation required to manufacture and deliver it as well as the much larger scale studies in humans confirming efficacy and safety. The combination of the results of these two steps into a regulatory file for submission to regulatory agencies and approval for patient use is the responsibility of the regulatory team.
  Medicines Development is organised by therapy areas in Medicine Development Centres (MDCs): Cardiovascular and Metabolic, Infectious Diseases, Neurosciences and Respiratory. Each MDC has ultimate accountability for developing experimental drugs into regulatory-approved medicines for patients. The MDCs are responsible for creating value through the execution of full product development plans and ensuring strong partnerships with the rest of R&D and GSK, in particular the CEDDs, preclinical development, the regulatory and commercial groups, and manufacturing.
  In 2009 emphasis was put on the simplification of the clinical development organisation, and on focusing investment on project spend versus infrastructure. This reflects the increased focus of R&D on return on investment.
Adapting our structure to maximise our chance to succeed
  R&D’s units in Oncology and Biopharmaceuticals are integrating the discovery and the late stage development group. This allows us to build critical mass in those two growth areas for GSK, and to focus on delivering a strong pipeline. Both integrated units are now fully set up, and have been very successful at progressing their pipeline in 2009 (see pipeline chart).
  Our China Discovery team focused on neurodegeneration and neuroinflammation celebrated its second anniversary in 2009. It has grown to approximately 280 employees in 2009, and has developed an impressive early stage portfolio. As products enter the clinic, the team is now establishing clinical capabilities.


GSK Annual Report 2009


 

16

Research and development

Governance
Key projects reaching significant milestones are reviewed each month by a product management board, responsible for determining if a medicine has met criteria for passing into the next phase of development.
GSK’s Chief Medical Officer, working with the Global Safety Board, is ultimately accountable for oversight of all major decisions regarding patient safety. Our Global Safety Board is responsible internally for approving pivotal studies and investigating any issues related to patient safety arising during the development programme and post-launch.
The oversight of strategic issues and budget management across R&D is owned by the R&D Executive team (RADEX).
Diseases of the developing world
Continued investment in research into diseases of the developing world is essential if there is to be a long-term improvement in the health of people who live in these regions. As part of our response to this challenge, we operate a drug discovery unit based at Tres Cantos (Spain), which focuses on malaria and tuberculosis. Additional R&D sites in the USA and the UK are focused on the development of new medicines to treat HIV/AIDS and drug resistant bacteria, while vaccine research is conducted in Rixensart (Belgium).
Through these R&D efforts, we are addressing the prevention and treatment of all three of the World Health Organization’s (WHO) priority infectious diseases.
Vaccines R&D
GSK is active in the fields of vaccine research, development and production and has a portfolio of over 30 vaccines approved for marketing. We have over 1,600 scientists devoted to discovering innovative vaccines that contribute to the health and well-being of people of all generations around the world. The discovery and development of a new vaccine is a complex process requiring long-term investment and with more than 20 vaccines in clinical development, we have one of the strongest vaccine pipelines in the industry. Although vaccines have traditionally been used to ward off illness, GSK’s vaccine division is working to develop therapeutic immunotherapeutics aimed at educating the patient’s immune system to identify and attack cancer cells in a highly specific manner.
Vaccine discovery involves many collaborations with academia and the biotech industry to identify new vaccine antigens which are then expressed in yeast, bacteria or mammalian cells and purified to a very high level. This is followed by formulation of the clinical lots of the vaccine. This may involve mixing antigens with selected GSK novel proprietary adjuvant systems, which are combinations of selected adjuvants designed to elicit the most appropriate immune response to a specific antigen. The right combination of antigen and adjuvant system can help the body mobilise the most effective immunological pathway, which is designed to provide maximum protection against specific diseases in targeted populations.
Once formulated, the candidate vaccine is evaluated from a safety and efficacy perspective through the different phases of preclinical testing, then through the clinical trials involving healthy individuals. These will range from safety analysis in a small group of volunteers in phase I, dose adjustment and proof of concept in phase II to
large-scale safety and efficacy analysis in phase III. The results obtained during clinical trials and data regarding the development of a quality and large-scale production process and facilities are then combined into a regulatory file which is submitted to the authorities in the countries where the vaccine will be made available.
After launch, post marketing studies of considerable size are set up to assess vaccination programmes and to monitor vaccine safety.


GSK Annual Report 2009


 

17

Research and development

Animals and research
For ethical, regulatory and scientific reasons, research using animals remains a small but vital part of research and development of new medicines and vaccines. We only use animals where there is no alternative and constantly strive to reduce the numbers used. We are committed to maintaining high standards for the humane care and treatment of all laboratory animals and undertake internal and external review to assure these standards.
The vast majority of the experimental methods do not use animals. We are actively engaged in research to develop and validate more tests that either avoid the use of animals in research or reduce the numbers needed. When animals are used in research, all due measures are taken to prevent or minimise pain and distress.
We decided not to initiate funding of studies using great apes after 28th October 2008. This is a voluntary decision and provides a tangible demonstration of our commitment to the 3Rs of animal research, which advocates the replacement and reduction of animals in research and refining of experiments to improve animal welfare.
We understand that use of animals for research purposes commands a high level of public interest.
Research and development – Consumer
Healthcare
The continuous creation and development of innovative products keeps our brands relevant, vibrant and valuable. Our portfolio spans three major categories: OTC medicines, Oral healthcare and Nutritional healthcare. For our major brands, dedicated R&D teams, including Regulatory, partner with and work alongside their commercial brand team colleagues in office-free hub environments that foster collaboration and fast decision-making. Hubs have quickly become a preferred way of working at our Innovation Centres in Weybridge, UK, and Parsippany, USA, and we are expanding this model rapidly into other key Consumer Healthcare territories, including China and India.
 


GSK Annual Report 2009


 

18

Research and development
We have a full and diverse product development pipeline. Our key late stage projects are highlighted here, comprising both new chemical entities and new combinations and formulations of existing assets. The most advanced status is shown and includes 2009 approvals.
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 189 to 192.
     
Therapeutic   Compound
 
   
Biopharmaceuticals
  Arzerra (ofatumumab)
 
   
 
  Arzerra (ofatumumab)
 
   
 
  Arzerra (ofatumumab)
 
   
 
  Benlysta (belimumab)
 
   
 
  ofatumumab
 
   
 
  otelixizumab
 
   
 
  Prolia (denosumab)
 
   
 
  Syncria
 
   
Cardiovascular& Metabolic
  Arixtra
 
   
 
  Avandamet XR
 
   
 
  Avandia + simvastatin
 
   
 
  darapladib
 
   
Neurosciences
  almorexant
 
   
 
  Horizant (1838262)*
 
   
 
  retigabine
 
   
Oncology
  Avodart
 
   
 
  Duodart (Avodart +
 
  alpha blocker)
 
   
 
  Votrient (pazopanib) +
 
  Tyverb/Tykerb
 
   
 
  Revolade/Promacta
 
   
 
  Revolade/Promacta
 
   
 
  Revolade/Promacta
 
   
 
  Tyverb/Tykerb
 
   
 
  Tyverb/Tykerb
 
   
 
  Tyverb/Tykerb
 
   
 
  Tyverb/Tykerb
 
   
 
  Votrient (pazopanib)
 
   
 
  Votrient (pazopanib)
 
   
 
  Votrient (pazopanib)
 
   
Respiratory
  642444
 
   
 
  Relovair (642444 +
 
  655698)
 
   
Vaccines
  Cervarix
 
   
 
  MAGE-A3 (ASCI)
 
   
 
  MAGE-A3 (ASCI)
 
   
 
  Menhibrix (Hib-MenCY-TT)
 
   
 
  Mosquirix
 
   
 
  New generation flu vaccine
 
   
 
  Nimenrix (MenACWY-TT)
 
   
 
  Simplirix
 
   
 
  In-license or other alliance relationship with a third party
 
*   See Note 40 to the financial statements, ‘Post balance sheet events’.
 
ASCI = Antigen Specific Cancer Therapeutic


GSK Annual Report 2009


 

19

Research and development
                         
Indication   Phase 3     Filed     Approved  
 
               
chronic lymphocytic leukaemia (refractory patients)   (GIF)
 
               
diffuse large B cell lymphoma (relapsed patients)
        (Gif)
 
               
follicular lymphoma (refractory patients)
        (Gif)
 
               
systemic lupus erythematosus
        (Gif)
 
               
rheumatoid arthritis
        (Gif)
 
               
type 1 diabetes
        (Gif)
 
               
post-menopausal osteoporosis
        (GIf)
 
               
type 2 diabetes
        (Gif)
 
               
treatment of acute coronary syndrome   (GIF)
 
               
type 2 diabetes – extended release
        (Gif)
 
               
type 2 diabetes
        (Gif)
 
               
atherosclerosis
        (Gif)
 
               
insomnia
        (Gif)
 
               
restless legs syndrome
        (GIf)
 
               
epilepsy – partial seizures
        (GIf)
 
               
reduction in the risk of prostate cancer
        (GIf)
 
               
benign prostatic hyperplasia – fixed dose combination
        (GIf)
 
 
               
inflammatory breast cancer
        (Gif)
 
 
               
idiopathic thrombocytopaenic purpura   (GIF)
 
               
chronic liver disease induced thrombocytopaenia
        (Gif)
 
               
hepatitis C induced thrombocytopaenia
        (Gif)
 
               
breast cancer, first line therapy   (GIF)
 
               
breast cancer, adjuvant therapy
        (Gif)
 
               
gastric cancer
        (Gif)
 
               
head & neck squamous cell carcinomas (resectable disease)
        (Gif)
 
               
renal cell cancer   (GIF)
 
               
ovarian cancer, maintenance therapy
        (Gif)
 
               
sarcoma
        (Gif)
 
               
COPD
        (Gif)
 
               
COPD
        (Gif)
 
 
               
cervical dysplasia and cancer prophylaxis caused by HPV 16/18   (GIF)
 
               
treatment of melanoma
        (Gif)
 
               
treatment of non-small cell lung cancer
        (Gif)
 
               
Neisseria meningitis groups C & Y disease & Haemophilus influenzae type b disease prophylaxis
        (GIf)
 
               
malaria prophylaxis (Plasmodium falciparum)
        (Gif)
 
               
seasonal influenza prophylaxis for the elderly
        (Gif)
 
               
Neisseria meningitis groups A, C, W & Y disease prophylaxis
        (Gif)
 
               
genital herpes prophylaxis
        (Gif)
 
               
GSK Annual Report 2009


 

20

Our employees

GSK Values and Behaviours
Changes in the healthcare market over the past decade necessitate the transformation of our business model to one that is more customer-centric and innovative; how we perform as a collective organisation will determine our success. In order to be effective with growing complexity and exponential speed of change in our external environment, GSK needs to create an internal learning culture that is embodied by GSK Values and Behaviours. For more details on GSK Values and Behaviours, see our Corporate Responsibility Report.
Recruitment, talent management and leadership development
In 2009, like every year, recruiting, retaining and developing our employees were critical to enhancing and sustaining our performance and reputation. Proactive talent acquisition initiatives underpin our ability to attract specialist and leadership talent externally. Our assessment process is aligned to a core set of competencies, of which ethics and integrity are central.
A global view of talent and strategic capabilities required looking at the quality, depth and breadth of our talent across the world. We need good succession plans, not just for senior roles but for all our critical positions across the organisation. We maintain a robust leadership strategy to identify and develop our highly skilled leadership cadre and use a systematic, disciplined approach to leadership development, providing tools and programmes to help leaders master skills needed to meet customer, employees and investor expectations. In 2009, we launched a First Line Leader programme for all new leaders – whether new to GSK or new to managing people. We also launched a GSK-wide mentoring scheme where each senior leader will mentor at least one individual in 2010.
Performance and reward
The performance and development planning (PDP) process means employees have business-aligned objectives and behavioural goals. Our reward systems support 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.
Communication and employee involvement
Our communication channels are designed to keep employees informed, engaged and involved in activities across all areas of our organisation. We encourage two-way, open and honest communication with employees, and in 2009 improvements in web usage technology engaged more employees.
Feedback and monitoring mechanisms are part of every major communication event, and Q&A and feedback facilities are a core feature of our web communications channels. Other broader processes include an internal online opinion survey where in 2009 more than 93,000 employees were invited to provide feedback on individual empowerment, employee engagement and our company values.
As our business evolves, there will be changes that affect employees and we remain committed to consulting on these changes via a number of internal consultation forums and discussions with the European Employee Consultation Forum and similar bodies in countries where this is national practice.
(PIE CHART)
Inclusion and diversity
We are committed to employment policies free from discrimination against existing or potential employees on the grounds of age, race, ethnic and national origin, gender, sexual orientation, faith or disability. GSK is committed to offering people with disabilities access to the full range of recruitment and career opportunities. Every effort is made to retain and support employees who become disabled while working at GSK. For more details on diversity measures, see our Corporate Responsibility Report.
Healthy and safe high performance
To meet our mission and strategy, Employee Health and Performance initiatives focus on the health factors that enable employees to perform at the highest level by sustaining energy and engagement. The programmes developed to deliver this health strategy range from the traditional – such as immunisations, smoking control, and weight management – to cutting-edge programmes in the areas of team and personal resilience, ergonomics and Energy for Performance. These programmes, available in many languages, are designed to address the root causes of excessive work pressure and low energy and engagement at work and at home. They are complimented by our commitment to flexible working that enables employees to do their best work in an environment that helps them integrate their work and personal lives. For more details on the scope and impact of these programmes, see our Corporate Responsibility Report.


GSK Annual Report 2009


 

21

Our responsibility

Commitment to corporate responsibility
GSK is committed to connecting business decisions to ethical, social and environmental concerns. Thus, corporate responsibility is an integral and embedded part of the way GSK does business.
Improving access to medicines
Access to healthcare in the developing world
There are no easy solutions to the challenge of providing sustainable access to healthcare in developing countries. Poverty is the single biggest barrier. In many countries people do not have enough food, access to a clean water supply, hospitals or clinics in which to receive treatment and healthcare professionals to care for them.
We are committed to playing a full part in addressing the healthcare challenges of the developing world by taking an innovative, responsible and, above all, sustainable approach. GSK is making a vital contribution to developing country healthcare through action in a number of areas including: preferential pricing of our anti-retrovirals and anti-malarials; tiered pricing of our vaccines; investing in R&D that targets diseases particularly affecting the developing world (see page 16); community investment activities and partnerships that foster effective healthcare (see page 22); and seeking innovative partnerships and solutions. We cover our contribution to improving access to medicines extensively in our Corporate Responsibility Report.
We were a clear leader in the first Access to Medicines (ATM) Index produced by the ATM Foundation in 2008. We will continue to build on our product, pricing and partnership commitments to help improve healthcare in the developing world. In February 2009, we announced a series of commitments for the UN defined list of least developed countries, including a more flexible approach to intellectual property for research into neglected diseases, a commitment to invest in healthcare infrastructure and price caps on our patented medicines. A significant increase in resources from the global community is still needed to support R&D and to provide access to the resultant medicines and vaccines.
While much has been achieved, sustainable progress will only occur if the significant barriers that stand in the way of better access to healthcare are tackled as a shared responsibility by all sectors of global society – governments, international agencies, charities, academic institutions, the pharmaceutical industry and others.
Access to medicines in the developed world
Programmes in the USA
We are working to provide access to medicines for people with limited financial resources and without prescription drug insurance.
For uninsured Americans who do not qualify for Medicare or Medicaid, GSK and nine other pharmaceutical companies created Together Rx Access, a programme for qualified individuals offering reductions in the pharmacy cost on more than 300 medicines. Over 2 million Together Rx Access cardholders saved about $20 million in 2009.
Programmes in other countries
We have also introduced Orange Cards providing discounts on certain GSK prescription medicines for eligible patients in a number of other countries. The nature of the discounts varies between countries and the ways in which the healthcare systems operate.
Patient Advocacy
The Patient Advocacy initiative has demonstrated significant progress since its inception in 2002. Initially launched as a US programme, it is now a critical initiative throughout GSK. Patient Advocacy teams in the USA and Europe share best practices and established processes to optimise interaction with patient groups. Typically these relationships provide mutual opportunities: to learn about patient needs and priorities and for patient groups to develop an understanding of drug development challenges.
In 2009, we continued to partner with patient groups on common issues: advocating for access to medicines and treatment, increasing funding for health programs and improving health care delivery. We are considered to be a trustworthy partner with patient groups and we have worked with patient groups and our trade associations to increase the transparency of all of our interactions.
Our work with communities
We work as a partner with under-served communities in the developed and developing world supporting programmes that are innovative, sustainable and bring real benefits to these communities. Our global community investment in 2009 was £163 million. This compares with £124 million in 2008 on a like for like basis. This increase is due to expansion of our US patient assistance programme, increased humanitarian product donations and scale up of our donation of albendazole for the Lymphatic Filariasis (LF) programme. Our 2009 giving comprised product donations of £101 million, cash giving of £43 million, in-kind donations of £2 million plus costs of £17 million to manage and deliver community programmes in almost 100 countries. The product donations include £80 million for GSK’s patient assistance programmes, £13 million worth of albendazole for the programme and £8 million for humanitarian product donations. Since 2008 our product donations have been valued at cost (average cost of goods) rather than wholesale price (WAC) as this is a more accurate reflection of the cost to GSK. We believe we are the first pharmaceutical company to adopt this practice. For comparative purposes the total value of donations in 2009 using WAC for products would be £467 million compared with £343 million in 2008.
We do not operate a single charitable foundation for our community investment programmes, but have a number of country-based foundations and their 2009 grants are included in the investment total.


GSK Annual Report 2009


 

22

Our responsibility

Our cash giving was targeted primarily at health and education initiatives as follows:
(PIE CHART)
Global Health Programmes
Eliminating lymphatic filariasis (LF)
Our effort to eliminate LF, one of the world’s most disabling diseases, continued in close partnership with the governments of countries where the disease is endemic, the World Health Organization and over 40 partner organisations. As a founding partner and leader in the global elimination effort, we are committed to donating as much of the anti-parasitic drug albendazole as required to reach the one billion people at risk in over 80 countries. In 2009, 425 million albendazole treatments were donated to 28 countries. We have donated over 1.4 billion albendazole treatments since the global elimination programme started in 2000.
Positive Action on HIV/AIDS
Positive Action is our pioneering global programme working with communities affected by AIDS. Started in 1992, it supports community-based organisations to deliver effective HIV and AIDS education, prevention and healthcare services. In July 2009 we announced the creation of a new Positive Action for Children Fund. The Fund will make £50 million available over ten years to help prevent mother-to-child transmission of HIV and to support orphans and vulnerable children. This new Fund will complement our ongoing work and support to the HIV community. With the launch of ViiV Healthcare, our Positive Action programmes will be managed by this new HIV-focused company.
The GlaxoSmithKline African Malaria Partnership
In 2009, Coalitions Against Malaria created by our malaria advocacy programme ‘Mobilising for Malaria’ continued to increase awareness of malaria and mobilise resources in the target countries: UK, Belgium, France, Ethiopia, Mozambique and Cameroon. This year we announced the launch of the next phase of the African Malaria Partnership with projects focused on community health workers and education/behaviour change in the community. Four new malaria grants were awarded in 2009, with a total commitment of £1.5 million over three years. They include partnerships with: Save the Children (UK) in Kenya; Family Health International in Ghana; African Medical and Research Foundation (AMREF) in Tanzania; and Planned Parenthood Federation of Nigeria.
PHASE
The PHASE programme (Personal Hygiene And Sanitation Education), initiated by us in 1998, is now providing education to hundreds of thousands of school children in 13 countries to improve their health and hygiene to fight infectious diseases. In 2009 we expanded our programme in Uganda, and extended PHASE to the slum areas of Mumbai, India. We have also brought PHASE to the UK and it is being piloted in three schools in Hounslow, near our global headquarters.
Humanitarian product donations
During 2009, we donated essential products, such as antibiotics, through non-profit partners including AmeriCares, Direct Relief International, MAP International and Project HOPE, to support humanitarian relief efforts and community healthcare. Following a series of natural disasters in the Asia-Pacific region and Central America, the total value of our international humanitarian product donations was £8 million at average cost.
Immediately following the devastating earthquake that struck Haiti in January 2010, GSK provided donations of medicines of over £1 million from stocks held in warehouses of several non-profit partners. We are continuing to donate requested medicines to support medium and longer-term needs. We have also donated £250,000 to the British Red Cross to support the deployment of a Mass Sanitation Unit for water and sanitation needs.
Community initiatives
We are dedicated to strengthening the fabric of communities through providing health and education initiatives and support for local civic and cultural institutions that improve the quality of life. In the UK, we contributed £5.6 million in 2009 to our continuing programme of charitable activities supporting over 80 organisations in health, medical research, science education, the arts and the environment.
Programmes in North America at a national and local level focused on improving public education, increasing access to healthcare for children and the homeless, and healthcare (prevention/access) for people dealing with breast or gynaecologic cancers. GSK’s IMPACT Awards recognise organisations that have significantly improved the health of their local communities and were expanded beyond UK and Philadelphia to reach communities near our Research Triangle Park, North Carolina facility. Total funding for our North American programmes was $20 million.
GSK continues to be a CommunityMark company – this award for excellence in community investment was awarded in 2008 for three years.


GSK Annual Report 2009


 

23

Our responsibility
Health initiatives
Our contribution to improve healthcare included the following grants:
         
Non-profit partner   Amount in 2009   Purpose of grant
 
       
Children’s Health Fund USA
   $1,461,000   To continue the Referral Management Initiative (RMI) which ensures continuity of specialist medical care for high-risk children who are often homeless and for general support
 
       
GSK IMPACT Awards UK and USA
   £787,000   To recognise excellence in non-profit community health organisations. Charities receive unrestricted grants for their work dealing with diverse and difficult social issues and access to healthcare
 
       
Medical Research Charities
UK
   £400,000   To support medical research programmes
 
       
 
Education initiatives
         
Non-profit partner   Amount in 2009   Purpose of grant
 
       
Institute for a Competitive Workforce
USA
  $100,000   To improve education and create a skilled workforce for the future, working in partnership with a broad business coalition and staffed by the US Chamber of Commerce
 
       
‘Science in the Summer’ Philadelphia, Pittsburgh and North Carolina
  $558,000   To teach basic scientific concepts and inspire school children through an enquiry-based science education programme
 
       
Project ENTHUSE
UK
  £200,000   To support Continuing Professional Development (CPD) for science teachers and ultimately encourage children to engage with science and pursue careers in science and technology
 
       
Royal Society of Chemistry
UK
  £100,000   To support a programme to target science teachers in the UK, who are not chemistry specialists, and provide them with the key skills and confidence to be effective in their chemistry teaching
 
       
Employee involvement
Our employees are encouraged to contribute to their local communities through employee volunteering schemes. Support includes employee time, cash donations to charities where employees volunteer and matching gift programmes.
Through the US GSK Matching Gift Program, we matched 15,000 employee and retiree gifts at a value of $4.7 million in 2009 plus over $1 million to the United Way campaign. GSK’s GIVE programme provided grants of over $314,000 to 353 organisations where US employees volunteered and £272,000 to 410 UK-based non-profit organisations via the GSK Making a Difference programme.
In 2009, our Group-wide volunteer initiative was launched to give every GSK employee one paid day off each year to volunteer for a good cause. Employees supported a wide range of charities and projects including work in local schools, shelters for the homeless, community gardens, nursing homes and aiding communities affected by natural disasters.
The GSK PULSE Volunteer Partnership is a new initiative launched in April 2009 that empowers high-performing employees to volunteer for a period of three to six months lending their professional expertise. PULSE volunteers work full-time with one of our partner non-governmental organisations (NGO) to create sustainable change for impoverished communities around the world. From our 2009 in-take, we had 58 PULSE volunteers, working in 18 different countries for 25 non-governmental organisations. Employees continue to receive their GSK salary during their placement and in 2009 this represented an in-kind donation of £428,000.
GSK Annual Report 2009


 

24

Our responsibility

Responsibility and the environment
GlaxoSmithKline’s environmental responsibility spans our demand for raw materials, through converting them into products, to their impacts after use.
Our vision for environmental sustainability is ultimately to transform how we do business following the principles of industrial ecology, using renewable resources and converting wastes to by-products that become inputs to other processes.
The first steps towards this goal are to optimise the efficiency of our processes, minimising the use of energy and other resources and the amount of waste we generate. In doing so, we also need to reduce carbon dioxide emissions from energy used, as a contribution to tackling climate change.
Our environmental activities are overseen by a Sustainability Council composed of senior executives. We manage environmental issues (as well as occupational health and safety) using a management system aligned with recognised international standards. Our central audit group includes environmental issues in its routine audits of our sites and processes.
Strategy and plans
Our strategy has three elements, beginning with embedding the environmental fundamentals such as energy management and waste reduction to eliminate adverse impacts from our operations. The second stage is to embrace sustainability in all of our businesses, developing a culture of product stewardship and sustainable resource use. The strategy also requires transparency, informing stakeholders of our actions and performance – we provide fuller disclosure in our Corporate Responsibility Report.
We have a ten-year strategic plan with targets that are refreshed every five years. In 2010 we will update the plan with new, more challenging targets to 2020. Key targets for 2010 that we have been pursuing since 2006, and progress towards them, include:
  a 20% reduction per unit of sales in energy use and emissions from operations and transport – we have achieved 6% reduction in energy use and 5% in emissions
  2% average material efficiency for products transferred from research and development – the current average is 2.8%
  2% annual reduction in water use per unit of sales – we have achieved 15% reduction since 2006
Mass efficiency
Increasing the efficiency with which we use materials is a priority. In 2009 we increased a target originally introduced in 2005, aiming for a 2.5% efficiency by 2015 for new products launched after 2010. For the first time, we also set a mass efficiency target for our manufacturing sites to achieve additional improvements after they take over processes from R&D. Our long-term aspiration is to achieve 5% efficiency by 2020 – five times the typical level in the pharmaceutical industry, which will reduce input materials and waste by 80%.
Mass efficiency (average 2005-2009)
(Graph)
Climate change
Our biggest direct climate impact comes from propellants used in inhalers for diseases such as asthma. We have reduced this impact by replacing CFC gases and continue to research ways to minimise greenhouse gases released by these products.
Since 2007 we have been implementing a climate change programme with ambitious targets for our emissions and energy use in operations and transport. We are aiming for a 20% reduction per unit of sales by 2010 and a cut of 45% by 2015 (from 2006 levels). In 2009 emissions and energy consumption per unit of sales fell by 5% and 6% respectively. These reductions follow two years of limited progress, which means that we need an outstanding performance in 2010 to meet our interim 20% target.
Energy reduction has been identified as a key objective for the business. As a result, energy consumption is now included in the key business metrics and in 2009 the remuneration of senior managers in manufacturing was linked to the achievement of energy reduction targets. We have also created a central fund to finance energy saving projects. A climate change team has identified more than 800 energy saving projects which have helped in the last two years to avoid around 85,000 tonnes of greenhouse gas emissions.


GSK Annual Report 2009


 

25

Our responsibility

As well as mitigating our climate change impact, we also aim to identify ways that we can respond to changing disease patterns caused by climate change.
GSK’s carbon footprint
(GRAPH)
Other environmental concerns
Sustainability requires a holistic view of everything that we do, especially relating to the optimal use of all resources. Water is a particularly important natural resource, and we recognise that businesses can play a positive role in managing it more sustainably. We endorsed the United Nations CEO Water Mandate in 2009. Water consumption in 2009 fell by 5% (per unit of sales), which exceeds our target.
We also have targets for improving the quality of wastewater, reducing waste disposal and emissions to air. In 2009 we exceeded targets in each of these areas and are on track to completely eliminate ozone-depleting CFCs by the end of 2010. Our environmental audit scores are also moving close to our 2010 targets.
Packaging provides opportunities to reduce resources use and we have several projects to reduce the environmental impact of packaging. For instance, we are now using lighter toothpaste caps, saving 90 tonnes of plastic a year.
 


GSK Annual Report 2009


 

26

Regulation

Regulation – Pharmaceuticals
Region and country-specific laws and regulations define the information needed to show the safety and efficacy of pharmaceutical products, as well as governing their testing, approval, manufacturing, labelling and marketing. These regulatory requirements are a major factor in determining whether a marketable product may be successfully developed and approved.
In this highly regulated environment, there is increasing cooperation and exchange of information among the major regulatory authorities. Consequently, in 2009 we have transformed the structure of our Regulatory Affairs department to better match the global regulatory environment in which we operate. The existing US, EU and International groups have been integrated into one department, Global Regulatory Affairs. This change enables us to more effectively formulate global strategies to obtain regulatory approvals for GSK products, based on regional expertise. The new structure will also make us better positioned to interact with our regulatory customers in this dynamic, globally-connected external environment.
Although the evaluation of benefit and risk continue to be paramount considerations for the approval of a new drug in the USA, there is an increased focus on the safety of medicines. The FDA Amendments Act of 2007 mandates a rigorous FDA review of safety from approval through the post-marketing phase of the product, and the FDA is examining better ways to identify counterfeit medicines and to communicate new risk information to the public. We remain engaged in these key areas of interest.
In Europe, new regulations aimed at strengthening the safety monitoring of medicines, improving citizens’ access to reliable information on medicines and strengthening EU laws to protect citizens better from the threats posed by fake medicines are under discussion by EU legislators. Meanwhile, preparation continues for the implementation in 2010 of new rules aimed at simplifying and harmonising the EU regulatory framework on changes to authorised medicinal products. It is hoped that these changes will minimise inefficiencies in the procedures, and reduce the overall administrative burden.
The regulatory environment in Emerging Markets and Asia-Pacific continues to evolve, with a number of countries continuing to develop their regulatory review systems. GSK actively participates in a number of specific regional and national regulatory initiatives, which provide opportunities for meaningful scientific and regulatory dialogue between industry, agencies and other stakeholders. GSK continues to include broader sets of patient populations from a number of these countries in medicine development programmes in order to increase global patient access to new innovative medicines, and optimise regulatory approvals.
Regulation – 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 approval process before a new product is launched.
January 2009 saw the history-making first for the OTC industry when the European Medicines Agency granted centralised approval of the weight loss medicine alli. This resulted in the pan-European launch of alli as the first licenced weight loss treatment available without a prescription across all 27 EU countries. With additional national licences, alli has now been granted approval in 38 countries.
Value for money
Payers around the world are concerned about the cost of healthcare and the pricing of medicines. The requirement to satisfy healthcare purchasers on value for money is becoming an additional hurdle for product acceptance over and above the regulatory tests of safety, efficacy and quality.
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 may bear a large part of the cost of supplying medicines to consumers.
Recent government healthcare reforms in countries such as France, Spain and Germany may restrict pricing and reimbursement.
Currently in the USA, there are no government price controls over private sector purchases, but federal law requires pharmaceutical manufacturers to pay prescribed rebates on certain drugs to be eligible for reimbursement under several state and federal healthcare programmes. In 2009, the US President and Congress dedicated much of the year’s legislative process to reforming America’s healthcare system to drive down cost, improve quality, and increase access to millions of Americans without health insurance. These reforms had the potential to create positive changes in the US healthcare system and expand access to GSK’s products. They also had the potential to increase prescribed rebates under government-run programmes and change the balance between private and public sector purchases. The pressure to control healthcare costs and the need for health reform will continue into 2010 and beyond. Issues such as cross-border trade, the acceleration of generics to market, comparative effectiveness research, and pharmaceutical pricing will continue to be part of the ongoing reform debate in the USA. Fortunately, GSK is positioned to be a constructive contributor to these debates since there has been increased recognition that chronic disease is the primary driver of healthcare spending and pharmaceutical products deliver important interventions that help hold down healthcare costs.


GSK Annual Report 2009


 

27

World market, economy and outlook

World market – pharmaceuticals
Global pharmaceutical sales in 2009 were £468 billion compared with £366 billion in 2008.
                 
World market by   Value     % of  
geographic region   £bn     total  
 
       
USA
    187       40  
Europe
    131       28  
France
    25       5  
Germany
    24       5  
Italy
    16       3  
UK
    12       3  
Rest of World
    150       32  
Emerging markets
    66       14  
Asia Pacific
    20       4  
Japan
    50       11  
Canada
    11       2  
 
       
Total
    468                 100  
 
       
Market growth on a CER basis was USA 3.6%, Europe 4% and Rest of World 9.9%.
At 30th September 2009, GSK had two of the world’s top 60 pharmaceutical products. These were Seretide/Advair and Valtrex.
                 
World market –   Value     % of  
top six therapeutic classes   £bn     total  
 
       
Central nervous system
    74       16  
Cardiovascular
    68       15  
Alimentary tract and metabolic
    57       12  
Antineoplastic/Immunomodulatory
    52       11  
Anti-infectives (bacterial, viral and fungal)
excluding vaccines
    50       11  
Respiratory
    32                      7  
 
       
 
(Note: data based on 12 months to 30th September 2009)
Data for market share and market growth rates are GSK estimates based on the most recent data from independent external sources, and where appropriate, are valued in Sterling at relevant exchange rates. Figures quoted for product market share reflect sales by GSK and licensees.
World economy
The world economy deteriorated further during the early part of 2009 as the international financial crisis deepened. The economies of many countries contracted during the year, although some emerging markets still showed growth.
Aggressive cuts in official interest rates, fiscal stimulus measures and national initiatives to support the international banking system led to some improvements towards the end of the year. However, the economic recovery during 2010 is likely to remain fragile and uneven, with the emerging markets providing the strongest growth.
Equity prices strengthened during 2009, with the FTSE 100 Index increasing by 22% and the Dow Jones Industrial Average by 19%. Inflationary pressures remained well under control, however, and only a modest increase in inflation is expected in 2010.
The potential healthcare reforms in the USA create some uncertainty for 2010 but our strategy is designed to put the Group in a position to be able to deliver long-term sustainable financial performance despite such uncertainties.
Outlook
In 2009, GSK returned to sales growth. The company’s strategy is delivering and it is confident of its prospects in 2010. GSK believes it is moving to a position where it can deliver its goal of long-term sustainable financial performance.


GSK Annual Report 2009


 

28

Financial review 2009

Pharmaceutical turnover
All growth rates included in the review of turnover are at constant exchange rates (CER) unless otherwise stated. Sterling growth rates may be found in the tables of pharmaceutical turnover by therapeutic areas on page 29 and by geographic region on page 30.
Pharmaceutical turnover grew 2% to £23.7 billion. Pharmaceuticals growth was helped by sales of pandemic related products, including Relenza and H1N1 vaccine products. On a regional basis, the USA declined 13% reflecting continued erosion of several products due to generic competition. Strong performances were delivered in Europe (up 9%), Emerging Markets (up 20%) and Asia Pacific/Japan (up 16%). The sales contribution of Stiefel, which was acquired on 22nd July 2009, totalled £248 million.
Pharmaceutical turnover by therapeutic area
GSK turnover grew by 2% in 2009 as the impact of US generic competition to a range of GSK’s products, lower Avandia sales and a declining HIV business was more than offset by strong growth of key products such as Seretide/Advair, Avodart, Lovaza, Relenza and the vaccines franchise including the H1N1 pandemic vaccine.
Respiratory
Respiratory sales increased 5% to £7.0 billion.
Seretide/Advair grew 5% to £5.0 billion, with especially strong growth in Emerging Markets (up 21% to £276 million) and Japan (up 79% to £195 million). Ventolin sales grew 26% to £477 million, driven by its performance in the USA where sales more than doubled to £153 million. Veramyst sales rose 72% to £142 million.
Anti-virals
Anti-virals increased 12% to £4.2 billion.
Relenza sales were £720 million in 2009 (2008 – £57 million) reflecting the successful capacity expansion to meet government orders across the world and a strong retail performance in Japan (£191 million). Sales of Valtrex declined 8% to £1.3 billion as a result of generic competition to the product in the USA which began in November 2009.
Sales of HIV medicines totalled £1.6 billion (down 7%) for the year. Epzicom sales grew 8% to £546 million but this was more than offset by declines across the rest of the portfolio. ViiV Healthcare, the new specialist HIV company established by GSK and Pfizer, was officially launched on 3rd November 2009.
CNS
CNS sales decreased 44% to £1.9 billion.
The majority of GSK’s CNS franchise is impacted by generic competition in the USA. The Wellbutrin decline of 67% primarily reflected the sale of Wellbutrin XL in the USA to Biovail in the second quarter of 2009.
Cardiovascular and urogenital
Cardiovascular and urogenital sales increased 8% to £2.3 billion.
Continued strong growth of key products such as Arixtra, up 29% to £254 million, Avodart, up 16% to £530 million, and Lovaza, up 31% to £450 million, were partly offset by generic competition to Coreg.
Metabolic
Metabolic sales decreased 14% to £1.2 billion.
Sales of Avandia, down 16% to £771 million, continued to decline across all regions. Bonviva/Boniva sales declined in the USA by 16% but grew in Europe and the Rest of the World.
Oncology and emesis
Oncology and emesis sales increased 10% to £0.6 billion.
Tyverb/Tykerb, up 45% to £169 million, grew strongly in Europe and the Rest of World following product approvals gained during 2008. Zofran declined 11% as a result of generic competition.
Vaccines
Vaccine sales increased 30% to £3.7 billion.
Pandemic vaccine sales of £883 million were recorded during the year, most of which were delivered in the fourth quarter, as GSK partnered with governments to respond to the H1N1 pandemic.
Sales of GSK’s new Synflorix vaccine totalled £73 million, reflecting launches in several markets and the beginning of shipments to the Brazilian Government as part of the 10-year, $1.5 billion agreement signed in August 2009. Other strong contributors to growth for the year included Boostrix (up 73% to £139 million), Cervarix (up 38% to £187 million) and Rotarix (up 50% to £282 million). Partially offsetting these performances, sales of Infanrix/Pediarix fell 15% to £649 million primarily as a result of the continued impact of increased competition in the DTPa sector in the USA. Hepatitis vaccines sales also fell (down 11% to £665 million) in part due to a competitor product returning to the US market.


GSK Annual Report 2009


 

29

Financial review 2009
Pharmaceutical turnover by therapeutic area 2009
                                                                                                                 
    Total     USA     Europe     Rest of World  
Therapeutic area/   % of     2009     2008             Growth     2009             Growth     2009             Growth     2009             Growth  
major products   total     £m     £m     CER%     £%     £m     CER%     £%     £m     CER%     £%     £m     CER%     £%  
                                                                               
Respiratory
    29       6,977       5,817       5       20       3,323       3       22       2,201       3       11       1,453       14       30  
Avamys/Veramyst
            142       72       72       97       68       2       21       45       >100       >100       29       >100       >100  
Flixonase/Flonase
            171       186       (20 )     (8 )     27       (56 )     (48 )     43       (21 )     (17 )     101       2       23  
Flixotide/Flovent
            775       677             14       396       5       25       178       (4 )     2       201       (6 )     9  
Seretide/Advair
            4,977       4,137       5       20       2,592       1       20       1,609       5       14       776       23       39  
Serevent
            236       263       (19 )     (10 )     73       (14 )     1       116       (18 )     (15 )     47       (31 )     (15 )
Ventolin
            477       339       26       41       153       >100       >100       150       1       9       174       2       12  
Zyrtec
            75       38       58       97                                           75       58       97  
                                                                               
Anti-virals
    18       4,150       3,206       12       29       1,897             19       1,074       16       26       1,179       32       56  
HIV
            1,605       1,513       (7 )     6       716       (6 )     12       635       (10 )           254       (3 )     7  
Agenerase, Lexiva
            178       160       (4 )     11       99       1       19       62       (8 )     2       17       (13 )     6  
Combivir
            425       433       (13 )     (2 )     187       (12 )     4       151       (17 )     (9 )     87       (7 )      
Epivir
            129       139       (19 )     (7 )     48       (13 )     2       49       (24 )     (16 )     32       (18 )     (6 )
Epzicom/Kivexa
            546       442       8       24       223       6       25       244       6       17       79       25       44  
Trizivir
            201       212       (17 )     (5 )     104       (17 )     (2 )     82       (21 )     (11 )     15             7  
Ziagen
            105       106       (13 )     (1 )     51       (4 )     13       35       (14 )     (3 )     19       (28 )     (24 )
 
Valtrex
            1,294       1,195       (8 )     8       942       (9 )     8       160             11       192       (13 )     6  
 
Relenza
            720       57       >100       >100       137       >100       >100       212       >100       >100       371       >100       >100  
Zeffix
            217       188       (1 )     15       17       (7 )     13       29       (4 )     7       171             17  
                                                                               
Central nervous system
    8       1,870       2,897       (44 )     (35 )     651       (69 )     (64 )     574       (7 )     2       645       4       25  
Imigran/Imitrex
            266       687       (65 )     (61 )     123       (79 )     (78 )     96       (8 )           47       (2 )     15  
Lamictal
            500       926       (53 )     (46 )     267       (68 )     (62 )     154       (4 )     5       79       6       16  
Requip
            209       266       (30 )     (21 )     26       (78 )     (75 )     138       (5 )     4       45       16       45  
Requip XL
            123       43       >100       >100       32       >100       >100       89       >100       >100       2              
Seroxat/Paxil
            523       514       (15 )     2       42       (51 )     (47 )     99       (21 )     (14 )     382       (5 )     19  
Treximet
            55       25       88       >100       55       84       >100                                      
Wellbutrin, Wellbutrin XL
            132       342       (67 )     (61 )     88       (76 )     (72 )     30       50       67       14       (7 )      
                                                                               
Cardiovascular and urogenital
    10       2,298       1,847       8       24       1,415       8       28       583       3       14       300       18       32  
Arixtra
            254       170       29       49       141       35       60       95       18       34       18       55       64  
Avodart
            530       399       16       33       319       11       32       148       13       25       63       51       62  
Coreg
            172       203       (29 )     (15 )     171       (28 )     (15 )                       1       (67 )     (67 )
Fraxiparine
            229       226       (7 )     1                         173       (10 )     (3 )     56       6       17  
Levitra
            75       60       7       25       70       4       23       4       33       33       1              
Lovaza
            450       290       31       55       448       31       55                         2       100       100  
Vesicare
            104       71       24       46       104       24       46                                      
Volibris
            19       2       >100       >100                         18       >100       >100       1              
                                                                               
Metabolic
    5       1,181       1,191       (14 )     (1 )     581       (17 )     (2 )     275       (15 )     (6 )     325       (8 )     6  
Avandia products
            771       805       (16 )     (4 )     425       (17 )     (2 )     171       (21 )     (14 )     175       (9 )     1  
Avandia
            462       512       (21 )     (10 )     276       (22 )     (8 )     67       (24 )     (18 )     119       (18 )     (9 )
Avandamet
            268       256       (8 )     5       122       (6 )     12       99       (19 )     (11 )     47       19       31  
Bonviva/Boniva
            255       237       (7 )     8       155       (16 )     (1 )     89       7       20       11       57       57  
                                                                               
Anti-bacterials
    7       1,592       1,429       2       11       173       (16 )     (1 )     662       (4 )     4       757       13       22  
Augmentin
            667       587       4       14       45       (22 )     (8 )     295             8       327       14       23  
                                                                               
Oncology and emesis
    3       629       496       10       27       308       7       27       204       10       21       117       23       39  
Hycamtin
            172       140       7       23       100       4       23       59       10       20       13       20       30  
Promacta
            13                         13                                                  
Tyverb/Tykerb
            169       102       45       66       54       (4 )     15       75       62       79       40       >100       >100  
Zofran
            109       110       (11 )     (1 )     9       >100       >100       52       (24 )     (17 )     48       (5 )     9  
                                                                               
Vaccines
    16       3,706       2,539       30       46       815       9       30       1,744       37       51       1,147       37       52  
Boostrix
            139       70       73       99       73       77       >100       40       38       54       26       >100       >100  
Cervarix
            187       125       38       50       4                   138       23       33       45       100       >100  
Fluarix/FluLaval
            211       215       (13 )     (2 )     73       (27 )     (14 )     71       (18 )     (9 )     67       17       29  
Flu pandemic
            883       66       >100       >100       187       >100       >100       525       >100       >100       171       >100       >100  
Hepatitis (Engerix/
            665       665       (11 )           257       (21 )     (7 )     262       (8 )           146       2       15  
Fendrix, Havrix, Twinrix)
                                                                                                               
Infanrix, Pediarix
            649       682       (15 )     (5 )     134       (47 )     (37 )     406       (3 )     8       109       5       17  
Rotarix
            282       167       50       69       76       >100       >100       53       14       23       153       33       49  
Synflorix
            73                                           32                   41              
                                                                               
Other
    4       1,063       959       1       11       17             6       364       7       13       682       (2 )     10  
                                                                               
 
            23,466       20,381       1       15       9,180       (13 )     3       7,681       9       18       6,605       16       32  
                                                                               
Stiefel products
            248                                                                                      
 
                                                                                           
 
    100       23,714               2       16                                                                          
 
                                                                                                     
 
CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates. Turnover by quarter is given in the financial record on pages 180 to 183.
GSK Annual Report 2009


 

30

Financial review 2009

Regional analysis
The turnover reported in the table below represents sales invoiced by GSK’s local entity to its customers in the local market plus co-promotion income within each market.
                                 
    2009     2008     Growth*  
    £m     £m     CER%     £%  
                   
USA
    9,180       8,894       (13 )     3  
Europe
    7,681       6,483       9       18  
Emerging Markets
    2,973       2,290       20       30  
Asia Pacific/Japan
    2,700       1,918       16       41  
Other trading
    1,180       796                31                48  
                   
 
    23,714       20,381       2       16  
                   
 
*   CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.
 
  Including Stiefel
USA
Sales in the USA declined 13% to £9.2 billion, principally reflecting continued decline of Avandia (down 22%), competition to Infanrix/Pediarix (down 47%), a return to market of a competitor to the Hepatitis franchise (down 21%) and generic competition to significant products such as Lamictal (down 68%), Imigran (down 79%), Valtrex (down 9%), Requip (down 78%) and Coreg (down 28%). In addition, Wellbutrin XL (down 82%), was sold to Biovail in Q2 2009. These declines were partly offset by significant sales of Relenza and pandemic vaccines, a doubling of Ventolin sales, good growth of Lovaza (up 31%) and contributions from recently launched products such as Boostrix and Rotarix.
Europe
Sales in Europe increased 9% to £7.7 billion with continued growth of Seretide and Relenza and particularly strong vaccines growth, driven by pandemic vaccine, offsetting the impact of generic competition to a number of products and continued price cuts from governments across the region.
Emerging Markets
Sales in Emerging Markets increased 20% to £3.0 billion with strong growth across the region and all therapeutic areas, helped by the acquisitions of the UCB and BMS businesses in different countries of the region.
Asia Pacific/Japan
Sales in Asia Pacific/Japan grew 16% to £2.7 billion reflecting continued Seretide/Advair growth, strong Relenza sales, particularly to the retail market in Japan, and strong vaccines growth.
Consumer Healthcare turnover
                                         
    % of     2009     2008     Growth*  
    total     £m     £m     CER%     £%  
                         
Over-the-counter medicines
    50       2,319       1,935       8       20  
alli
            203       75       >100       >100  
Breathe Right
            92       81       (1 )     14  
Cold sore franchise
            96       89       (3 )     8  
Nicotine replacement therapy
            339       299       (1 )     13  
Panadol franchise
            393       324       10       21  
Tums
            106       91       (1 )     16  
 
                                       
Oral healthcare
    32       1,484       1,240       7       20  
Aquafresh franchise
            496       452       (1 )     10  
Biotene
            26       1       >100       >100  
Denture care
            336       271       8       24  
Sensodyne franchise
            457       363       13       26  
 
                                       
Nutritional healthcare
    18       851       796       3       7  
Lucozade
            376       382       (3 )     (2 )
Horlicks
            255       204       17       25  
Ribena
            160       161       (4 )     (1 )
                         
 
    100       4,654       3,971       7       17  
                         
 
*   CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates. Turnover by quarter is given in the financial record on pages 184 to 185.
Total Consumer Healthcare sales for the year rose 7% to £4.7 billion, with growth in all regions and categories.
OTC medicines
OTC product sales grew 8% to £2.3 billion in 2009, driven by sales of Panadol (up 10% to £393 million) and alli, which more than doubled to £203 million, as a result of launches throughout Europe which began in April 2009. Sales of nicotine replacement therapy products declined by 1%.
Oral healthcare
Sales of Oral healthcare products rose 7% to £1.5 billion. Sensodyne performed strongly with sales up 13% to £457 million. Denture care sales grew 8% to £336 million. Sales of Aquafresh declined 1%, as a reduction in the US ‘white trays’ market offset growth of 5% in the US Aquafresh toothpaste brands, which were helped by the launch of the new iso-active product.
Nutritional healthcare
Nutritional healthcare sales grew 3% to £0.9 billion, driven by the very strong performance of Horlicks (up 17% to £255 million) partly offset by a decline in Lucozade sales (down 3% to £376 million) which was impacted by lower sales in the ‘impulse’ market of the UK market.


GSK Annual Report 2009


 

31

Financial review 2009

Results before major restructuring and
total results
In October 2007 the Board approved the implementation of a detailed formal plan for, and GSK announced, a significant new Operational Excellence restructuring programme. A second formal plan, representing a significant expansion of the Operational Excellence programme, was approved by the Board and announced in February 2009. Having conducted a further series of business reviews, GSK has announced a further expansion of the restructuring programme to deliver £0.5 billion of incremental pre-tax savings by 2012. Approximately 70% of these savings will be directed to the bottom line to enhance profitability, with the remainder being reinvested in the business. The charges for this incremental programme are expected to total £0.9 billion and be phased: 65% in 2010 and 30% in 2011, with the balance mostly in 2012. In total, approximately 70% will be cash expenditures and 30% will be asset write-downs. Cumulative savings for the new programme will be phased approximately as follows: £150 million in 2010, £350 million in 2011 and the majority of the balance in 2012.
The restructuring programme, comprising these detailed formal plans, covers all areas of GSK’s business, including manufacturing, selling, R&D and infrastructure. With an estimated total cost of approximately £4.5 billion, the expanded programme is expected to deliver annual pre-tax savings of approximately £2.2 billion by the time it is substantially complete in 2012. Approximately 50% of these costs were incurred by 31st December 2009, approximately 30% are expected to be incurred in 2010 and the balance mostly in 2011. In total, approximately 75% of these costs are expected to be cash expenditures and 25% are expected to be accounting write-downs.
Uncertainties exist over the exact amount and timing of cash outflows, as a result of potential future exchange rate fluctuations and as many elements of the restructuring programme are subject to employee consultation procedures, making it difficult to predict with precision when these procedures will be completed. However, the majority of the remaining cash payments are expected to be made in 2010 and 2011. Given the extent and cost of the Operational Excellence restructuring programme, management believes it has a material impact on GSK’s operating results and on the manner in which GSK’s business is conducted. GSK presents the restructuring costs incurred solely as a direct result of the Operational Excellence restructuring programme, which in 2009 amounted to £764 million before tax (2008 – £1,089 million), in a separate column in the income statement titled ‘Major restructuring’.
In addition to the restructuring costs of the Operational Excellence programme, the major restructuring column in the income statement includes restructuring costs incurred solely as a direct result of any restructuring programmes that follow, and relate to, material acquisitions where the operations of the acquired business overlap extensively with GSK’s existing operations.
The restructuring activities that follow, and relate to, such acquisitions are of the same nature as those undertaken under the Operational Excellence programme and are also carried out following a detailed formal plan. Management therefore considers it appropriate to present the costs of these restructuring activities in the same manner. The acquisition of Stiefel Laboratories, Inc. in July 2009 is the only acquisition during the year that meets the criteria set out above. This is the only acquisition during the year where the costs incurred as a direct result of a related restructuring programme has been included in the major restructuring column. The restructuring costs expected to be incurred as a direct result of this acquisition are estimated to be approximately £205 million, of which £71 million was charged in 2009. The restructuring costs incurred as a direct result of the acquisition of Reliant Pharmaceuticals Inc., the only other acquisition since October 2007 that meets the criteria set out above, were all charged and paid in 2008.
The Group’s results before the costs of the Operational Excellence programme and acquisition-related restructuring programmes meeting the criteria described above are also presented in a separate column in the income statement and are described as ‘Results before major restructuring’. This presentation, which GSK intends to apply consistently to future major restructuring programmes that have a material impact on GSK’s operating results and on the manner in which GSK’s business is conducted, has been adopted to show clearly the Group’s results both before and after the costs of these restructuring programmes. Management believes that this presentation assists shareholders in gaining a clearer understanding of the Group’s financial performance and in making projections of future financial performance, as results that include such costs, by virtue of their size and nature, have limited comparative value. This presentation is also consistent with the way management assesses the Group’s financial performance.
Only the restructuring costs incurred solely as a direct result of the Operational Excellence programme and the restructuring programmes following the Reliant and Stiefel acquisitions have been reported in the major restructuring column in the income statement. These restructuring costs principally have arisen from impairments to property, plant and equipment and the termination of the employment contracts of staff made redundant as part of the restructuring activities. As set out in Note 7 to the financial statements, ‘Major restructuring programme’, asset impairments and staff redundancies together accounted for £574 million of the £835 million restructuring costs incurred in 2009 and reported in the major restructuring column.
The remaining costs of £261 million in 2009 arose from miscellaneous expenditures incurred solely as a direct result of the restructuring programmes, including the termination of leases, accelerated depreciation, site closure costs and consultancy and project management fees. No costs arising from GSK’s ongoing operating activities have been reported in the major restructuring column.


GSK Annual Report 2009


 

32

Financial review 2009

Any restructuring costs that do not arise solely as a direct result of the Operational Excellence programme and restructuring programmes following, and relating to, acquisitions meeting the criteria described above continue to be reported in operating expenses within results before major restructuring. These costs included restructuring costs related to minor acquisitions and £4 million of costs in 2009 (2008 – £20 million) that related to restructuring activity initiated before the commencement of the Operational Excellence programme. None of this restructuring activity had a material impact on GSK’s operating results or on the manner in which its business is conducted.
During the anticipated duration of the Operational Excellence programme, GSK does not currently expect to incur any material restructuring costs except those related to that programme and acquisitions meeting the criteria described above. If any further, unanticipated material restructuring costs were to arise during this period, GSK would expect to include them also in the major restructuring column.
GSK’s operating profit, profit before taxation, taxation and profit for the year are discussed below in terms of both total results, which include major restructuring costs, and results before major restructuring.
Operating profit – total results
Total results include restructuring costs related to the Operational Excellence programme and the acquisitions of Reliant and Stiefel.
                                                 
    2009     2008     Growth  
    £m     %     £m     %     CER%     £%  
                               
Turnover
    28,368       100       24,352       100       3       16  
                               
Cost of sales
    (7,380 )     (26.0 )     (6,415 )     (26.3 )     6       15  
Selling, general and administration
    (9,592 )     (33.8 )     (7,656 )     (31.4 )     6       25  
Research and development
    (4,106 )     (14.4 )     (3,681 )     (15.2 )     1       12  
Other operating income
    1,135       3.9       541       2.2       95       110  
                               
Operating profit
    8,425       29.7       7,141       29.3       4       18  
                               
Cost of sales
Cost of sales as a percentage of turnover reduced marginally to 26.0% of turnover (2008 – 26.3%), principally reflecting the impact of generic competition to higher margin products in the USA and changes to the product mix, offset by benefits from the restructuring programme and lower restructuring costs of £285 million (2008 – £639 million).
Selling, general and administration
SG&A costs as a percentage of turnover increased by 2.4 percentage points to 33.8%. This included full year legal charges of £591 million (2008 – £611 million) and charges related to the major restructuring programme of £392 million (2008 – £304 million). Excluding legal and restructuring costs, SG&A costs were 30.3% of turnover (2008 – 27.7%). This reflected investment in growth markets, the acquisition of Stiefel, increased pension costs, the donation of H1N1 product to WHO and exchange losses on inter-company transactions (compared with exchange gains last year), partially offset by the benefits of the current restructuring programme.
Research and development
R&D expenditure was 14.4% (2008 – 15.2%) of total turnover, which included £167 million of intangible asset write-offs (2008 – £85 million) partially offset by lower charges relating to the major restructuring programme of £155 million (2008 – £175 million) and a provision release due to reassessment of a receivable balance. Increased investment in vaccines R&D and late stage pharmaceutical R&D were broadly offset by savings from the restructuring programme.
Other operating income
Other operating income was £1,135 million including gains from asset disposals of £579 million (2008 – £293 million) primarily reflecting the disposal of Wellbutrin XL and various assets to Aspen Pharmacare, royalty income of £296 million (2008 – £307 million), a royalty dispute settlement gain of £78 million, and a one-time accounting gain of £296 million on the creation of ViiV Healthcare, partially offset by equity investment impairments of £135 million.
Operating profit – total results
Total operating profit for the year was £8,425 million, an increase of 4% CER and 18% in Sterling terms, compared with 2008. The operating profit margin increased 0.4 percentage points reflecting higher other operating income and broadly flat R&D expenditure, partially offset by increases in cost of sales and SG&A.
Profit before taxation – total results
Net finance costs
                 
    2009     2008  
Finance income   £m     £m  
       
Interest and other finance income
    67       321  
Unwinding of discounts on assets
    2       1  
Fair value adjustments and hedges
    1       (9 )
       
 
    70       313  
       
 
               
Finance costs
               
       
Interest costs
    (770 )     (829 )
Unwinding of discounts on liabilities
    (11 )     (16 )
Fair value adjustments and hedges
    (2 )     2  
       
 
    (783 )              (843 )
       


GSK Annual Report 2009


 

33

Financial review 2009
Profit on disposal of interest in associate
Profit on disposal of interest in associate was £115 million as 5.7 million shares from the Group’s holding in Quest Diagnostics Inc. were sold in the first quarter of 2009.
Share of after tax profits of associates and joint ventures
The share of after tax profits of associates of £64 million (2008 – £48 million) arises principally from the Group’s holding in Quest.
Profit before taxation – total results
Taking account of net finance costs, the profit on disposal of interest in associates and the share of profits of associates, total profit before taxation was £7,891 million compared with £6,659 million in 2008, a 4% CER increase and a 19% sterling increase.
Operating profit – results before major
restructuring
The results before major restructuring are set out below:
                                                 
    2009     2008     Growth  
    £m     %     £m     %     CER%     £%  
                               
Turnover
    28,368       100       24,352       100       3       16  
                               
Cost of sales
    (7,095 )     (25.0 )     (5,776 )     (23.7 )     13       23  
Selling, general and administration
    (9,200 )     (32.4 )     (7,352 )     (30.2 )     6       25  
Research and development
    (3,951 )     (13.9 )     (3,506 )     (14.4 )     2       13  
Other operating income
    1,135       3.9       541       2.2       95       110  
                               
Operating profit
    9,257       32.6       8,259       33.9       (1 )     12  
                               
Cost of sales
Cost of sales increased to 25.0% of turnover (2008 – 23.7%), principally reflecting the impact of generic competition to higher margin products in the USA and changes to the product mix, partly offset by benefits from the restructuring programme. In 2010 cost of sales as a percentage of turnover is expected to be around 26%.
Selling, general and administration
SG&A costs as a percentage of turnover increased by 2.2 percentage points to 32.4%, including full year legal charges of £591 million. The increase reflected investment in growth markets, the acquisition of Stiefel, increased pension costs, the donation of H1N1 product to WHO and exchange losses on inter-company transactions (compared with exchange gains last year), partially offset by the benefits of the current restructuring programme. In 2010 SG&A costs excluding legal charges are expected to be around 29% of turnover.
Research and development
R&D expenditure was 13.9% (2008 – 14.4%) of total turnover, which included £167 million of intangible asset write-offs
(2008 – £85 million) partially offset by a provision release due to reassessment of a receivable balance. Increased investment in vaccines R&D and late-stage pharmaceutical R&D were broadly offset by savings from the restructuring programme. In 2010 R&D costs as a percentage of turnover are expected to remain at around 14%.
Other operating income
Other operating income was £1,135 million including gains from asset disposals of £579 million (2008 – £293 million) primarily reflecting the disposal of Wellbutrin XL and various assets to Aspen Pharmacare, royalty income of £296 million (2008 – £307 million), a royalty dispute settlement gain of £78 million, and a one-time accounting gain of £296 million on the creation of ViiV Healthcare, partially offset by equity investment impairments of £135 million.
In 2009 other operating income and profit on disposal of associates amounted to £1,250 million. An equivalent overall income of around £800-900 million is expected for 2010.
Operating profit – results before major restructuring
Operating profit before major restructuring for the year was £9,257 million, a 1% CER decline, but up 12% in Sterling terms, compared with 2008. The operating profit margin was 32.6% compared with a 2008 margin of 33.9%. The decline in margin was primarily due to generic competition in the USA which impacted cost of goods and increased investment to support the Group’s diversification strategy which impacted SG&A, partly offset by a higher level of other operating income.
As the impact of generic competition reduces and SG&A investment levels stabilise, GSK’s operating profit margin in 2010 is currently expected to be broadly similar to 2009 (excluding legal costs and the ViiV Healthcare accounting gain).
Further information on operating profit before major restructuring is provided in Note 6, ‘Segment information’.
Profit before taxation – results before major restructuring
Net finance costs
                    
    2009     2008  
Finance income   £m     £m  
       
Interest and other income
    67       321  
Unwinding of discounts on assets
    2       1  
Fair value adjustments and hedges
    1       (9 )
       
 
    70       313  
       
 
               
Finance costs
               
       
Interest costs
    (770 )     (829 )
Unwinding of discounts on liabilities
    (8 )     (11 )
Fair value adjustments and hedges
    (2 )     2  
       
 
    (780 )        (838 )
       
Profit on disposal of interest in associate
Profit on disposal of interests in associates was £115 million as 5.7 million Quest shares were sold in the first quarter of 2009.


GSK Annual Report 2009


 

34

Financial review 2009

Share of after tax profits of associates and joint ventures
The share of after tax profits of associates of £64 million (2008 – £48 million) arises principally from the Group’s holding in Quest Diagnostics Inc.
Profit before taxation – results before major restructuring
Taking account of net finance costs, the profit on disposal of interests in associates and the share of profits of associates, profit before tax before major restructuring was £8,726 million compared with £7,782 million in 2008, a 1% CER decline but 12% increase in sterling terms.
Taxation
                 
    2009     2008  
    £m     £m  
       
UK corporation tax
    456       289  
Overseas taxation
    1,958       1,589  
       
Current taxation
    2,414       1,878  
Deferred taxation
    (192 )     69  
       
Taxation on total profits
    2,222            1,947  
       
The charge for taxation on total profits amounted to £2,222 million and represented an effective tax rate of 28.2% (2008 – 29.2%). The charge for taxation on profit before major restructuring charges amounting to £2,443 million represents an effective tax rate of 28.0% (2008 – 28.7%). GSK currently expects a similar effective tax rate in 2010. The Group’s balance sheet at 31st December 2009 included a tax payable liability of £1,451 million and a tax recoverable asset of £58 million.
On 19th November 2009 the IRS conceded all asserted tax deficiencies and penalties arising from its reclassification of an intercompany financing arrangement from debt to equity resulting in no additional tax cost to GSK. The IRS claim had previously been estimated at $864 million for 2001–2003. GSK and the IRS are now in the process of finalising the tax computations for the 2001–2003 tax years. It is anticipated that resolution of the issue in the years 2004 to 2008 will be reflected in a closing agreement. Resolution of the issue had no impact on the Group’s results.
GSK continues to believe that it has made adequate provision for the liabilities likely to arise from open assessments. The ultimate liability for such matters may vary from the amounts provided and is dependent upon the outcome of litigation proceedings and negotiations with the relevant tax authorities.
Profit for the year
                                 
    2009     2008     Growth  
    £m     £m     CER%     £%  
                   
Total profit after taxation for the year
    5,669       4,712       6       20  
Total profit attributable to shareholders
    5,531       4,602       6       20  
Basic earnings per share (pence)
    109.1 p     88.6 p                
Basic earnings per ADS (US$)
  $3.40     $3.28                  
                   
Results before major restructuring profit after taxation for the year
    6,283       5,551             13  
Results before major restructuring profit attributable to shareholders
    6,145       5,441             13  
Adjusted earnings per share (pence)
    121.2 p     104.7 p     2            16  
Adjusted earnings per ADS (US$)
  $3.78     $3.87                  
Weighted average number of shares (millions)
    5,069       5,195                  
                   
Diluted total earnings per share (pence)
    108.2 p     88.1 p                
Diluted total earnings per ADS (US$)
  $3.38     $3.26                  
Diluted weighted average number of shares (millions)
    5,108       5,226                  
                   
Total results including restructuring costs produced a basic EPS of 109.1p compared with 88.6p in 2008. This was an 8% growth In CER terms and a 23% growth in sterling terms. Excluding major restructuring costs, EPS was 121.2p compared with 104.7p. This was a 2% growth at CER and a 16% increase in sterling terms. The 14 percentage point currency benefit arose from the weakness of Sterling against most major currencies during the year.
Dividend
The Board has declared a fourth interim dividend of 18 pence per share resulting in a dividend for the year of 61 pence; a four pence increase over the 57 pence per share for 2008. The equivalent interim dividend receivable by ADR holders is 57.3696 cents per ADS based on an exchange rate of £1/$1.5936. The ex-dividend date was 10th February 2010, with a record date of 12th February 2010 and a payment date of 8th April 2010.
Critical accounting policies
The consolidated financial statements are prepared in accordance with IFRS, as adopted for use in the European Union, and also with IFRS as issued by the IASB, following the accounting policies approved by the Board and described in Note 2 to the financial statements, ‘Accounting principles and policies’. Management is required to make estimates and assumptions that affect the amounts of assets, liabilities, revenue and expenses reported in the financial statements. Actual amounts and results could differ from those estimates.


GSK Annual Report 2009


 

35

Financial review 2009

The critical accounting policies adopted relate to the following areas:
  Turnover
  Taxation
  Legal and other disputes
  Property, plant & equipment
  Goodwill
  Other intangible assets
  Pensions and other post-employment benefits.
Information on the judgements and estimates made in these areas is given in Note 3 to the financial statements, ‘Key accounting judgements and estimates’.
In respect of the Turnover accounting policy, the Group’s largest business is US pharmaceuticals, and the US market has the most complex arrangements for rebates, discounts and allowances. The following briefly describes the nature of the arrangements in existence in the Group’s US pharmaceuticals business.
  GSK has arrangements with certain indirect customers whereby the customer is able to buy products from wholesalers at reduced prices. A chargeback represents the difference between the invoice price to the wholesaler and the indirect customer’s contractual discounted price. Accruals for estimating chargebacks are calculated based on the terms of each agreement, historical experience and product growth rates.
  Customer rebates are offered to key managed care and group purchasing organisations (GPO) and other direct and indirect customers. These arrangements require the customer to achieve certain performance targets relating to value of product purchased, formulary status or pre-determined market shares relative to competitors. The accrual for customer rebates is estimated based on the specific terms in each agreement, historical experience and product growth rates.
  The US Medicaid programme is a state-administered programme providing assistance to certain poor and vulnerable patients. In 1990, the Medicaid Drug Rebate Program was established to reduce state and federal expenditure on prescription drugs. GSK participates by providing rebates to states. Accruals for Medicaid rebates are calculated based on the specific terms of individual state agreements using a combination of historical experience, product and population growth, anticipated price increases and the impact of contracting strategies.
  Cash discounts are offered to customers to encourage prompt payment. These are accrued for at the time of invoicing and adjusted subsequently to reflect actual experience.
  Where there is historical experience of customer returns, GSK records an accrual for estimated sales returns by applying historical experience of customer returns to the amounts invoiced, together with market related information such as stock levels at wholesalers, anticipated price increases and competitor activity.
A reconciliation of gross turnover to net turnover for the US pharmaceuticals business is as follows:
                                                 
    2009     2008     2007  
    £m     %     £m     %     £m     %  
                               
Gross turnover
    12,504       100       11,602       100       11,826       100  
 
                                               
Chargebacks
    (1,193 )     10       (892 )     8       (917 )     8  
Managed care, Medicare Part D and GPO rebates
    (917 )     7       (764 )     6       (727 )     6  
US government and state programmes
    (663 )     5       (554 )     5       (481 )     4  
Cash discounts
    (219 )     2       (207 )     2       (208 )     2  
Customer returns
    (179 )     1       (126 )     1       (131 )     1  
Prior year adjustments
    30             38             73        
Other items
    (183 )     2       (203 )     1       (162 )     1  
                               
Total deductions
    (3,324 )     27       (2,708 )     23       (2,553 )     22  
                               
Net turnover
    9,180       73       8,894       77       9,273       78  
                               
Sterling values have increased by approximately 16% compared with 2008 as a result of average exchange rate movements.
Chargebacks have increased in 2009 as a result of higher direct chargebacks on Relenza sales. Managed care, Medicare Part D and GPO rebates increased slightly as a result of higher contracting discounts arising from competitive pressures in the market place.
The total accruals for rebates, discounts, allowances and returns in the US pharmaceuticals business were as follows:
                 
    At 31st     At 31st  
    December     December  
    2009     2008  
    £m     £m  
       
Chargebacks
    46       50  
Managed care, Medicare Part D
and GPO rebates
    429       474  
US government and state programmes
    354       345  
Cash discounts
    20       25  
Customer returns
    205       259  
Other
    27       50  
       
Total
    1,081       1,203  
       
Sterling values have decreased largely as a result of year-end exchange rate movements; in dollar terms, the 2009 provision is largely unchanged from 2008.
A monthly process is operated to monitor inventory levels at wholesalers for any abnormal movements. This process uses gross sales volumes, prescription volumes based on third party data sources and information received from key wholesalers. The aim of this is to maintain inventories at a consistent level from year to year based on the pattern of consumption.
On this basis, US pharmaceutical inventory levels at wholesalers and in other distribution channels at 31st December 2009 were estimated to amount to approximately one month of turnover. This calculation uses third party information, the accuracy of which cannot be totally verified, but is believed to be sufficiently reliable for this purpose.


GSK Annual Report 2009


 

36

Financial position and resources

Financial position
                 
    2009     2008  
    £m     £m  
       
Assets
               
Non-current assets
               
Property, plant and equipment
    9,374       9,678  
Goodwill
    3,361       2,101  
Other intangible assets
    8,183       5,869  
Investments in associates and joint ventures
    895       552  
Other investments
    454       478  
Deferred tax assets
    2,374       2,760  
Derivative financial instruments
    68       107  
Other non-current assets
    583       579  
       
Total non-current assets
    25,292       22,124  
       
Current assets
               
Inventories
    4,064       4,056  
Current tax recoverable
    58       76  
Trade and other receivables
    6,492       6,265  
Derivative financial instruments
    129       856  
Liquid investments
    268       391  
Cash and cash equivalents
    6,545       5,623  
Assets held for sale
    14       2  
       
Total current assets
    17,570       17,269  
       
Total assets
    42,862       39,393  
       
Liabilities
               
Current liabilities
               
Short-term borrowings
    (1,471 )     (956 )
Trade and other payables
    (6,772 )     (6,075 )
Derivative financial instruments
    (168 )     (752 )
Current tax payable
    (1,451 )     (780 )
Short-term provisions
    (2,256 )     (1,454 )
       
Total current liabilities
    (12,118 )     (10,017 )
       
Non-current liabilities
               
Long-term borrowings
    (14,786 )     (15,231 )
Deferred tax liabilities
    (645 )     (714 )
Pensions and other post-employment benefits
    (2,981 )     (3,039 )
Other provisions
    (985 )     (1,645 )
Derivative financial instruments
          (2 )
Other non-current liabilities
    (605 )     (427 )
       
Total non-current liabilities
    (20,002 )     (21,058 )
       
Total liabilities
    (32,120 )     (31,075 )
       
Net assets
    10,742       8,318  
       
Equity
               
Share capital
    1,416       1,415  
Share premium account
    1,368       1,326  
Retained earnings
    6,321       4,622  
Other reserves
    900       568  
       
Shareholders’ equity
    10,005       7,931  
       
Minority interests
    737       387  
       
Total equity
    10,742       8,318  
       
Property, plant and equipment
GSK’s business is science-based, technology-intensive and highly regulated by governmental authorities. The Group allocates significant financial resources to the renewal and maintenance of its property, plant and equipment to minimise risks of interruption of production and to achieve compliance with regulatory standards. A number of its processes use chemicals and hazardous materials.
The total cost of the Group’s property, plant and equipment at 31st December 2009 was £18,757 million, with a net book value of £9,374 million. Of this, land and buildings represented £3,762 million, plant and equipment £3,433 million and assets in construction £2,179 million. In 2009, GSK invested £1,423 million in new and renewal property, plant and equipment. This is mainly related to a large number of projects for the renewal, improvement and expansion of facilities at various worldwide sites. Property is mainly held freehold. New investment is financed from Group liquid resources. At 31st December 2009, GSK had capital contractual commitments for future expenditure of £416 million and operating lease commitments of £337 million. GSK believes that its facilities are adequate for its current needs.
The Group observes stringent procedures and uses specialist skills to manage environmental risks from these activities. Environmental issues, sometimes dating from operations now modified or discontinued, are reported under ‘Responsibility and the environment’ (page 24) and in Note 44 to the financial statements, ‘Legal proceedings’.
Goodwill
Goodwill has increased during the year from £2,101 million at 31st December 2008 to £3,361 million. The increase primarily reflects the goodwill arising on the acquisition of Stiefel Laboratories, Inc. of £885 million, the Pfizer HIV business of £255 million and certain businesses from UCB S.A. of £87 million.
Other intangible assets
Other intangible assets include the cost of intangibles acquired from third parties and computer software. The net book value of other intangible assets as at 31st December 2009 was £8,183 million (2008 – £5,869 million). The increase in 2009 reflects additions of £3,167 million partly offset by currency movements and the amortisation and impairment of existing intangibles. The largest element of the additions is £1,513 million relating to the acquisition of Stiefel Laboratories, Inc. reflecting the brands acquired together with the Stiefel trade name. In addition, £595 million relates to the fair value of the Pfizer HIV intellectual property acquired following the creation of the ViiV Healthcare business during the year and a further £445 million arises from the acquisition of certain businesses from UCB S.A.


GSK Annual Report 2009


 

37

Financial position and resources

Investments
GSK held investments, including associates and joint ventures, with a carrying value at 31st December 2009 of £1,349 million (2008 – £1,030 million). The market value at 31st December 2009 was £2,225 million (2008 – £1,883 million). The largest of these investments are in two associates: Quest Diagnostics Inc., which had a book value at 31st December 2009 of £410 million (2008 – £463 million) and Aspen Pharmacare Holdings Limited, acquired this year, which had a book value at 31st December 2009 of £372 million. The investments include equity stakes in companies where the Group has research collaborations, which provide access to biotechnology developments of potential interest and interests in companies that arise from business divestments.
Derivative financial instruments: assets
GSK had both non-current and current derivative financial instruments held at fair value of £197 million (2008 – £963 million). The decrease primarily reflects lower currency volatility in Euro, US dollar and Yen market rates.
Inventories
Inventory of £4,064 million has increased by £8 million during the year. The increase arises from H1N1 vaccine and Synflorix stock-builds following regulatory approval in key markets; the acquisition of Stiefel Laboratories, Inc.; strategic stock building to support growth in Emerging Markets and Japan, offset by a weakening of overseas currencies and improvements following implementation of the working capital reduction programme.
Trade and other receivables
Trade and other receivables of £6,492 million have increased from 2008 reflecting the relatively high vaccine sales of H1N1 in the last quarter together with the Stiefel acquisition, partly offset by the impact of a weakening of overseas currencies on the translation of foreign currency receivables, the sale of long outstanding debt in certain European markets and Taiwan and reductions in overdue receivables in certain European and Asian markets.
Derivative financial instruments: liabilities
GSK held current derivative financial instruments held at fair value of £168 million (2008 – £752 million current and £2 million non-current) relating primarily to hedging exchange on translation of currency assets on consolidation. The decrease again reflects lower currency volatility on the Euro, US dollar and Yen.
Trade and other payables
Trade and other payables amounting to £6,772 million have increased from 2008 primarily reflecting working capital improvement initiatives to extend supplier terms towards the Group’s 60 day term objective and the acquisition of Stiefel Laboratories Inc., partly offset by a weakening of year-end foreign exchange rates.
Provisions
The Group carried deferred tax provisions and other short-term and non-current provisions of £3,886 million at 31st December 2009 (2008 – £3,813 million) in respect of estimated future liabilities, of which £2,020 million related to legal and other disputes. Provision has been made for legal and other disputes, indemnified disposal liabilities and the costs of restructuring programmes to the extent that at the balance sheet date an actual or constructive obligation existed and could be reasonably estimated.
Pensions and other post-employment benefits
The Group accounts for pension and other post-employment arrangements in accordance with IAS 19. The deficits, net of surpluses before allowing for deferred taxation were £1,745 million (2008 – £1,697 million) on pension arrangements and £1,213 million (2008 – £1,303 million) on unfunded post-employment liabilities. The pension liabilities increased following a weakening of long term interest rates, including a reduction in the rate used to discount UK pension liabilities from 6.20% to 5.70% and an increase in the estimated long term inflation rate in the UK, partly offset by a positive impact of exchange movements and higher asset values.
Net debt
                 
    2009     2008  
    £m     £m  
       
Cash, cash equivalents and liquid investments
    6,813       6,014  
Borrowings – repayable within one year
    (1,471 )     (956 )
Borrowings – repayable after one year
    (14,786 )     (15,231 )
       
Net debt
    (9,444 )     (10,173 )
       
Net debt decreased by £729 million primarily from a weakening of the foreign currencies in which Group debt is denominated.
Total equity
A summary of the movements in equity is set out below.
                 
    2009     2008  
    £m     £m  
       
Total equity at beginning of year
    8,318       9,910  
Total comprehensive income for the year
    4,996       4,829  
Dividends to shareholders
    (3,003 )     (2,929 )
Ordinary Shares issued
    43       62  
Ordinary Shares purchased and cancelled
          (3,706 )
Changes in minority shareholdings
    338        
Put option over minority interest
    (2 )      
Consideration received for shares transferred by ESOP Trusts
    13       10  
Ordinary Shares acquired by ESOP Trusts
    (57 )     (19 )
Share-based incentive plans
    171       241  
Tax on share-based incentive plans
    14       (1 )
Distributions to minority interests
    (89 )     (79 )
       
Total equity at end of year
    10,742       8,318  
       
At 31st December 2009, total equity had increased from £8,318 million at 31st December 2008 to £10,742 million. The increase arises principally from retained profit for the year partly offset by actuarial losses on defined benefit pension plans.


GSK Annual Report 2009


 

38

Financial position and resources

Share purchases
In 2009, the Employee Share Ownership Plan (ESOP) Trusts acquired £57 million of shares in GSK plc (2008 – £19 million). Shares are held by the Trusts to satisfy future exercises of options and awards under the Group share option and award schemes. A proportion of the shares held by the Trusts are in respect of awards where the rules of the scheme require GSK to satisfy exercises through market purchases rather than the issue of new shares. The shares held by the Trusts are matched to options and awards granted.
At 31st December 2009, the ESOP Trusts held 118 million
(2008 – 129 million) GSK shares against the future exercise of share options and share awards. The carrying value of £1,138 million
(2008 – £1,445 million) has been deducted from other reserves. The market value of these shares was £1,554 million (2008 – £1,657 million).
GSK did not repurchase any shares for cancellation in 2009
(2008 – £3,706 million) or any shares to be held as Treasury shares
(2008 – £nil). In order to ensure that GSK has sufficient flexibility to deliver its strategic priorities the company does not expect to make any significant repurchases under the existing share buy-back programme during 2010. The exact amount and timing of future purchases, and the extent to which repurchased shares will be held as Treasury shares rather than being cancelled, will be determined by the company and is dependent on market conditions and other factors. At 31st December 2009, GSK held 474.2 million shares as Treasury shares (2008 – 474.2 million shares), at a cost of £6,286 million (2008 – £6,286 million), which has been deducted from retained earnings.
There have been no purchases since 31st December 2009 under the existing programme.
Commitments and contingent liabilities
Financial commitments are summarised in Note 39 to the financial statements, ‘Commitments’. Other contingent liabilities and obligations in respect of short and long-term debt are set out in Note 31 to the financial statements, ‘Contingent liabilities’ and Note 32 to the financial statements, ‘Net debt’.
Amounts provided for pensions and post-retirement benefits are set out in Note 28 to the financial statements, ‘Pensions and other post-employment benefits’. Amounts provided for restructuring programmes and legal, environmental and other disputes are set out in Note 29 to the financial statements, ‘Other provisions’.
Contractual obligations and commitments
The following table sets out the Group’s contractual obligations and commitments at 31st December 2009 as they fall due for payment.
                                         
    Total     Under 1 yr     1-3 yrs     3-5 yrs     5 yrs+  
    £m     £m     £m     £m     £m  
             
Loans
    16,127       1,431       2,647       2,538       9,511  
Interest on loans
    10,733       757       1,507       1,130       7,339  
Finance lease obligations
    130       40       56       19       15  
Finance lease charges
    16       4       8       3       1  
Operating lease commitments
    337       111       122       35       69  
Intangible assets
    12,280       694       1,189       2,022       8,375  
Property, plant & equipment
    416       300       74       42        
Investments
    86       37       12       37        
Purchase commitments
    82       60       21       1        
Pensions
    1,460       365       730       365        
Other commitments
    52       8       17       22       5  
             
Total
    41,719       3,807       6,383       6,214       25,315  
             
Commitments in respect of loans and future interest payable on loans are disclosed before taking into account the effect of derivatives. The Group has entered into a number of research collaborations to develop new compounds with other pharmaceutical companies. The terms of these arrangements can include upfront fees, equity investments, loans and commitments to fund specified levels of research. In addition, the Group will often agree to make further payments if future ‘milestones’ are achieved. As some of these agreements relate to compounds in the early stages of development, milestone payments will continue for a number of years if the compounds move successfully through the development process. Generally the closer the product is to marketing approval the greater the possibility of success. The payments shown above within intangible assets represent the maximum that would be paid if all milestones are achieved.
A number of new commitments were made in 2009 under licensing and other agreements, including arrangements with Chroma Therapeutics Limited, Concert Pharmaceuticals, Inc., Idenix Pharmaceuticals, Inc. Prosensa B.V. and Seattle Genetics, Inc.
In 2009, GSK reached an agreement with the trustees of the UK pension schemes to make additional contributions over a five year period, to eliminate the pension deficit identified at the 31st December 2008 actuarial funding valuation. The table above shows this commitment but excludes the normal ongoing annual funding requirement of approximately £150 million. For further information on pension obligations, see Note 28 to the financial statements, ‘Pensions and other post-employment benefits’.


GSK Annual Report 2009


 

39

Financial position and resources

Contingent liabilities
The following table sets out contingent liabilities, comprising discounted bills, performance guarantees, letters of credit and other items arising in the normal course of business, and when they are expected to expire.
                                         
    Total     Under 1 yr     1-3 yrs     3-5 yrs     5 yrs+  
    £m     £m     £m     £m     £m  
     
Guarantees
    110       72       28             10  
Other contingent liabilities
    40       5       12       2       21  
     
Total
    150       77       40       2       31  
     
In the normal course of business, GSK has provided various indemnification guarantees in respect of business disposals in which legal and other disputes have subsequently arisen. A provision is made where an outflow of resources is considered probable and a reasonable estimate can be made of the likely outcome of the dispute and this is included in Note 29 to the financial statements, ‘Other provisions’.
It is the Group’s policy to provide for the settlement costs of asserted claims and environmental disputes when an outflow of resources is considered probable and a reasonable estimate may be made. Prior to this point no liability is recorded. Legal and environmental costs are discussed in ‘Risk factors’ on pages 43 to 47 and Note 44 to the financial statements, ‘Legal proceedings’. GSK continues to believe that it has made adequate provision for the liabilities likely to arise from open taxation assessments. The ultimate liability for such matters may vary significantly from amounts provided and is dependent upon the outcome of litigation proceedings and negotiations with the relevant tax authorities. This is discussed further in Note 14 to the financial statements, ‘Taxation’.
Cash flow
A summary of the consolidated cash flow is set out below.
                 
    2009     2008  
    £m     £m  
       
Net cash inflow from operating activities
    7,841       7,205  
Net cash outflow from investing activities
    (4,013 )     (1,149 )
Net cash outflow from financing activities
    (2,774 )     (4,908 )
       
Increase in cash and bank overdrafts
    1,054       1,148  
Exchange adjustments
    (158 )     1,103  
Cash and bank overdrafts at beginning of year
    5,472       3,221  
       
Cash and bank overdrafts at end of year
    6,368       5,472  
       
 
               
Cash and bank overdrafts at end of year comprise:
               
Cash and cash equivalents
    6,545       5,623  
Overdrafts
    (177 )     (151 )
       
 
    6,368       5,472  
       
The net cash inflow from operating activities after taxation paid was £7,841 million, an increase of £636 million over 2008 reflecting higher profit before tax, excluding the impact of the significant increase in non-cash charges made in the year, primarily from the major restructuring programmes.
The net cash outflow from investing activities was £4,013 million, an increase of £2,864 million which primarily reflected a significant increase in the cost of business purchases during 2009, including Stiefel Laboratories, Inc. for £1,993 million net of cash acquired of £74 million, certain businesses from UCB S.A. for £472 million net of cash acquired of £5 million, and AZ Tika for £146 million. In 2008, the comparable acquisitions comprised Sirtris Pharmaceuticals for £324 million net of cash acquired of £52 million, and the Egyptian business of BMS for £130 million net of deferred consideration of £10 million. In addition sales of liquid investments realised cash of £905 million in 2008.
Free cash flow
(BAR GRAPH)
Free cash flow is the amount of cash generated by the business after meeting its obligations for interest, tax and dividends paid to minority interests, and after capital expenditure on non-current tangible and intangible assets. For 2009 free cash flow was £5,254 million, an increase of 12% over 2008. This principally reflected the higher operating profit before non-cash charges (primarily from the major restructuring programmes) and lower expenditure on intangible assets. This was partly offset by higher levels of net interest paid as a result of the debt issuance during the year of 1.6 billion under the EMTN programme and reduced interest income on deposits.
Free cash flow is used by GSK’s management for planning and reporting purposes and in discussions with and presentations to investment analysts and rating agencies. GSK’s free cash flow measure is not defined in IFRS. This measure may not be directly comparable with similarly described measures used by other companies. A reconciliation of net cash inflow from operating activities, which is the closest equivalent IFRS measure, to free cash flow is shown below.
Reconciliation of free cash flow
                 
    2009     2008  
    £m     £m  
       
Net cash inflow from operating activities
    7,841       7,205  
Purchase of property, plant and equipment
    (1,418 )     (1,437 )
Purchase of non-current intangible assets
    (455 )     (632 )
Disposal of property, plant and equipment
    48       20  
Interest paid
    (780 )     (730 )
Interest received
    90       320  
Dividends received from joint ventures and associated undertaking
    17       12  
Dividends paid to minority interests
    (89 )     (79 )
       
Free cash flow
    5,254               4,679  
       


GSK Annual Report 2009


 

40

Financial position and resources

Movements in net debt
                 
    2009     2008  
    £m     £m  
       
Net debt at beginning of year
    (10,173 )     (6,039 )
Increase in cash and bank overdrafts
    1,054       1,148  
Cash inflow from liquid investments
    (87 )     (905 )
Net increase in long-term loans
    (1,358 )     (5,523 )
Net repayment of short-term loans
    102       3,059  
Debt of subsidiary undertakings acquired
    (9 )      
Exchange movements
    1,041       (1,918 )
Other movements
    (14 )     5  
       
Net debt at end of year
    (9,444 )     (10,173 )
       
Investment appraisal
GSK has a formal process for assessing potential investment proposals in order to ensure decisions are aligned with the Group’s overall strategy. This process includes an analysis of the impact of the project on earnings, its return on invested capital and an assessment of the return based on discounted cash flows. The discount rate used to perform financial analysis is decided internally, to allow determination of the extent to which investments cover the Group’s cost of capital. For specific investments the discount rate may be adjusted to take into account country or other risk weightings.
Capital expenditure and financial investment
Cash payments for tangible and intangible fixed assets amounted to £1,873 million (2008 – £2,069 million; 2007 – £2,143 million). Disposals realised £404 million (2008 – £191 million; 2007 – £44 million). Cash payments to acquire equity investments of £154 million (2008 – £87 million; 2007 – £186 million) were made in the year and sales of equity investments realised £59 million (2008 – £42 million; 2007 – £45 million).
Future cash flow
The Group expects that future operating cash flow will be sufficient to fund its operating and debt service costs, to satisfy normal levels of capital expenditure, to meet obligations under existing licensing agreements, to meet the expenditure arising from the major restructuring programmes (the precise timing of which is uncertain) outlined in Note 7 to the financial statements, ‘Major restructuring programmes’ and to meet other routine outflows including tax and dividends, subject to the ‘Risk factors’ discussed on pages 43 to 47. GSK may from time to time have additional demands for finance, such as for acquisitions. It has access to other sources of liquidity from short and long-term capital markets and banks and other financial institutions, in addition to the cash flow from operations, for such needs.
Payment policies
Group companies are responsible for monitoring and managing their working capital. The terms of sales collections and supplier payments reflect local commercial practice.
In the UK, the company and each of its UK subsidiaries have policies to ensure that suppliers are paid on time. In particular, the UK companies seek:
  to settle terms of payment with suppliers when agreeing the terms of the transaction
 
  to ensure that suppliers are made aware of the agreed terms of payment
 
  to abide by the terms of payment.
The policy permits arrangements for accelerated payment to small suppliers.
Payment performance
At 31st December 2009, the average number of days’ payable outstanding represented by trade payables of the parent company was nil (2008 – nil) and in respect of the company and its UK subsidiaries in aggregate was 44 days (2008 – 20 days).
Treasury policies
GSK reports in Sterling and pays dividends out of Sterling profits. The role of Corporate Treasury is to manage and monitor our external and internal funding requirements and financial risks in support of our strategic objectives. Treasury activities are governed by policies and procedures approved by the Board of Directors, most recently on 1st October 2009.
A Treasury Management Group (“TMG”) chaired by our Chief Financial Officer, meets on a monthly basis to review treasury activities. Its members receive management information relating to treasury activities.
Capital management
GSK operates on a global basis, primarily through subsidiary companies established in the markets in which we trade. With significant levels of patent or trademark protection, our products compete largely on product efficacy or differentiation rather than on price. Selling margins are sufficient to cover normal operating costs and our operating subsidiaries are generally cash generative.
Operating cash flow is used to fund investment in research and development of new products. It is also used to make the routine outflows of capital expenditure, tax, dividends, repayment of maturing debt and, to the extent determined by the Board, share repurchases.
Our policy is to borrow centrally using a variety of capital market issues and borrowing facilities to meet anticipated funding requirements.
These borrowings, together with cash generated from operations, are on-lent, contributed as equity to certain subsidiaries or used to pay dividends and make acquisitions. GSK did not make any share repurchases in 2009.


GSK Annual Report 2009


 

41

Financial position and resources

Liquidity
As at 31st December 2009, our cash and liquid investments were held as follows:
                 
    2009     2008  
    £m     £m  
       
Bank balances and deposits
    5,206       3,778  
US Treasury and Treasury repo
only money market funds
    1,305       1,852  
Corporate debt instruments
    10       75  
Government securities
    292       309  
       
 
    6,813               6,014  
       
 
£4.9 billion of this amount is managed centrally and available within three months. We had net debt at 31st December 2009 of £9.4 billion. The table below summarises cash and gross debt after the effects of hedging.
 
    2009     2008  
    £m     £m  
       
Cash and liquid investments
    6,813       6,014  
Gross debt – fixed
    (13,706 )     (13,814 )
– floating
    (2,550 )     (2,373 )
– non-interest bearing
    (1 )      
       
Net debt
    (9,444 )             (10,173 )
       
At 31st December 2009, we had centrally available cash reserves of £4.9 billion and committed undrawn bank facilities of $3.9 billion. As at that date we had short-term debt and bank overdrafts and loans repayable within one year of £1.5 billion.
We manage our net borrowing requirements through a portfolio of long-term borrowings, including bonds, together with short-term finance under a $10 billion commercial paper programme. The commercial paper programme is backed by $3.9 billion of committed facilities. The facilities were last renewed in October 2009. We consider this level of committed facilities to be adequate given our current cash holdings. For further information on these facilities, see Note 32 to the financial statements, ‘Net debt’. We also benefit from strong positive cash flow from operating units.
We have a European Medium Term Note programme of £15 billion. At 31st December 2009, we had £8.5 billion of notes in issue under this programme. We also have a US shelf registration statement. At 31st December 2009, we had $11 billion (£6.9 billion) of notes in issue under this programme. The TMG monitors the cash flow forecast on a monthly basis.
The long-term borrowings mature at dates between 2012 and 2042. Our long-term debt ratings have remained stable since February 2008. Currently we are rated A+ stable outlook by Standard and Poor’s and A1 stable outlook by Moody’s. Our short-term debt ratings are A-1 and P-1 with Standard and Poor’s and Moody’s respectively.


The maturity profile of gross debt is shown in the table below:
Maturity profile of gross debt
(BAR GRAPH)
GSK Annual Report 2009


 

42

Financial position and resources

Treasury operations
The objective of treasury activity is to manage the post-tax net cost or income of financial operations to the benefit of earnings. Corporate Treasury does not operate as a profit centre. We use a variety of financial instruments to finance our operations and derivative financial instruments to manage market risks from these operations. These derivatives, principally comprising forward foreign currency contracts, interest rate and currency swaps, are used to swap borrowings and liquid assets into our required currencies and to manage exposure to funding risks from changes in foreign exchange and interest rates.
We do not hold or issue derivatives for speculative purposes. Our treasury policies specifically prohibit such activity. All transactions in financial instruments are undertaken to manage the risks arising from underlying business activities, not for speculation.
Foreign exchange management
Foreign currency transaction exposures arising on internal and external trade flows are not hedged. The exposure of overseas operating subsidiaries to transaction risk is minimised by matching local currency income with local currency costs.
For this purpose, our internal trading transactions are matched centrally and we manage intercompany payment terms to reduce foreign currency risk. Exceptional foreign currency cash flows are hedged selectively under the management of Corporate Treasury.
We manage the short-term cash surpluses or borrowing requirements of subsidiary companies centrally using forward contracts to hedge future repayments back into the originating currency.
We seek to denominate borrowings in the currencies of our principal assets and cash flows. These are primarily denominated in US dollars, Euros and Sterling. Certain borrowings are swapped into other currencies as required.
Borrowings denominated in, or swapped into, foreign currencies that match investments in our overseas assets may be treated as a hedge against the relevant assets. Forward contracts are also used in major currencies to reduce our exposure to our investment in overseas Group assets (see ‘Net Investment Hedges’ section of Note 41 for further details). The TMG reviews the ratio of borrowings to assets for major currencies.
Interest rate risk management
The policy on interest rate risk management limits the amount of floating interest payments to a prescribed percentage of trading profit.
We use an interest rate swap to re-denominate one of our external borrowings into the interest rate coupon required by GSK. The duration of this swap matches the duration of the principal instrument. Interest rate derivative instruments are accounted for as fair value or cash flow hedges of the relevant assets or liabilities.
Counterparty risk management
Our policy on counterparty risk management is to work with a select group of relationship banks. Global counterparty limits are assigned to each of GSK’s banking and investment counterparties based on long-term credit ratings from Moody’s and Standard and Poor’s. Corporate Treasury’s usage of these limits is monitored daily by a Corporate Compliance Officer (CCO) who operates independently of Corporate Treasury. Any breach of these limits is reported to the CFO immediately. The CCO also monitors the credit rating of these counterparties and, when changes in ratings occur, notifies Corporate Treasury so that changes can be made to investment levels or authority limits as appropriate. A full counterparty analysis is presented to the TMG annually for approval.
Financial assets and liabilities
An analysis of net debt is given in Note 32 to the financial statements, ‘Net debt’. An analysis of financial assets and liabilities at carrying value and fair value is given in Note 41 to the financial statements, ‘Financial instruments and related disclosures’.
We continue to benefit from strong positive cash flow from operating activities. Our net debt has decreased in the year to 31st December 2009, despite GSK’s acquisition activities in the period which totalled approximately £2.8 billion. For further information on these activities, see Note 38 to the financial statements, ‘Acquisitions and Disposals’.
The financial assets and liabilities at 31st December 2009 are representative of our treasury policies and strategies applied since July 2007. In 2009 GSK raised approximately £1.4 billion (2008 – £6.3 billion) in the Capital Markets. We did not make any share repurchases in 2009.


GSK Annual Report 2009


 

43

Risk factors

There are risks and uncertainties relevant to the Group’s business, financial condition and results of operations that may affect the Group’s performance and ability to achieve its objectives. The factors below are among those that the Group thinks, based on the CET’s most recent annual workshop to identify the most significant risks facing the Group, could cause its actual results to differ materially from expected and historical results. There are other risks and uncertainties not currently known to the Group or which are deemed immaterial.
For each of the risks described below, the Group has implemented a system of internal control that involves policies and procedures, communication and training programmes, supervision and monitoring and processes for escalating issues to the appropriate level of senior management. Such a system helps facilitate the Group’s ability to respond appropriately to risks and to achieve Group objectives and helps ensure compliance with applicable laws, regulations and internal policies. It is not possible, however, for the Group to implement controls to respond to all the risks that it may face, and there can be no assurance that the steps the Group has taken to address certain risks will manage these risks effectively or at all.
The Group’s management of these risks is further discussed on page 66 ‘Corporate Governance’.
The major risks that might affect GSK’s business are:
Risk that R&D will not deliver commercially successful
new products
Continued development of commercially viable new products as well as the development of additional uses for existing products is critical to the Group’s ability to replace sales of older products that decline upon expiration of exclusive rights, and to increase overall sales. Developing new products is a costly, lengthy and uncertain process.
A new product candidate can fail at any stage of the process, and one or more late stage product candidates could fail to receive regulatory approval.
New product candidates may appear promising in development but, after significant investment, fail to reach the market or have only limited commercial success. This, for example, could be as a result of efficacy or safety concerns, an inability to obtain necessary regulatory approvals, difficulty manufacturing or excessive manufacturing costs, erosion of patent terms as a result of a lengthy development period, infringement of patents or other intellectual property rights of others or an inability to differentiate the product adequately from those with which it competes. Furthermore, health authorities such as the US FDA, the European Medicines Agency and the Japan Pharmaceuticals and Medicines Device Agency have increased their focus on safety when assessing the benefit/risk balance of drugs, which has made it more difficult for pharmaceutical products to gain regulatory approval.
There is also increasing pressure on healthcare budgets as the average age of the population in developed markets increases and the absolute population in developing markets grows. Payers have therefore increasingly demanded greater incremental benefit from drugs before agreeing to reimburse suppliers at prices suppliers consider appropriate. A failure to develop commercially successful products or develop additional uses for existing products for any of these reasons could materially and adversely affect the Group’s financial results.
Patent infringement litigation
The Group’s patents, in common with all patents, can be challenged at any time. Efforts by generic manufacturers may involve challenges to the validity or enforceability of a patent or assertions that their generic product does not infringe the Group’s patents. If GSK is not successful in defending an attack on its patents and maintaining exclusive rights to market one or more of its major products, particularly in the USA where the Group has its highest turnover and margins, the Group’s financial results may be materially and adversely affected. See Note 44 to the financial statements, ‘Legal proceedings’, for a discussion of patent-related proceedings in which the Group is involved and page 12 for a description of the resolutions of prior proceedings which affect the dates on which generic versions of the Group’s products may be introduced.
Generic drug manufacturers are seeking to market generic versions of many of the Group’s most important products, prior to the expiration of the Group’s patents, and have exhibited a readiness to do so for other products in the future. The US launch of generic products competing with Lamictal, Imitrex, Paxil CR, Requip, Wellbutrin XL and Valtrex had a significant impact on the Group’s overall turnover and earnings for 2009.
Potential changes in intellectual property laws and
regulations
Proposals to change existing patent and data exclusivity laws and regulations in major markets in which the Group sells its products are a continuing feature of the political process in those countries. These include proposals that could have the effect of making prosecution of patents for new products more difficult and time-consuming or adversely affect the exclusivity period for the Group’s products, including biological products. Should such proposals be enacted they may materially and adversely affect the Group’s financial results.
Weakness of intellectual property protection in
certain countries
In some of the countries in which the Group operates, patent protection may be significantly weaker than in the USA or the European Union. Some developing countries have reduced, or threatened to reduce, effective patent protection for pharmaceutical products generally, or in particular therapeutic areas, to facilitate early competition within their markets from generic manufacturers. Any loss of patent protection, including reducing the scope of patent rights or compulsory licensing, could materially and adversely affect the Group’s financial results in those national markets but is not expected to be material to the Group overall. Absence of adequate patent protection could limit the opportunity to look to such markets for future sales growth.
Risk of substantial adverse outcome of litigation and
government investigations
See Note 44 to the financial statements, ‘Legal proceedings’, for a discussion of proceedings and governmental investigations - involving matters which if proven could give rise to civil and/or criminal liabilities – in which the Group is currently involved. Unfavourable resolution of these and similar future proceedings or investigations may have a material adverse effect on the Group’s financial condition and results of operations. The Group has made material provisions in 2009 and prior years related to legal proceedings and investigations which reduced its earnings.


GSK Annual Report 2009


 

44

Risk factors

The Group may also make additional significant provisions related to legal proceedings and investigations in the future, which would reduce its earnings. In many cases the practice of the plaintiff bar is to claim damages in amounts that bear no relationship to the underlying harm. Accordingly it may be potentially misleading for the Group to quantify, based on the amount of damages claimed, its potential exposure to claims, proceedings and investigations of the type described in Note 44 to the financial statements, ‘Legal proceedings’.
Recent insurance loss experience, including pharmaceutical product liability exposures, has increased the cost of, and narrowed the coverage afforded by, insurance for pharmaceutical companies generally, including the Group.
In order to contain insurance costs in recent years the Group has continued to adjust its coverage profile, accepting a greater degree of un-insured exposure. In addition, where claims are made under insurance policies, insurers may reserve the right to deny coverage on various grounds. If denial of coverage is ultimately upheld on these claims, this could result in additional charges that may materially and adversely affect the Group’s financial results.
Product liability litigation
Pre-clinical and clinical trials are conducted during the development of potential products to determine the safety and efficacy of products for use by humans following approval by regulatory bodies. Notwithstanding these efforts, when drugs and vaccines are introduced into the marketplace, unanticipated side effects may become evident.
In other instances third parties may perform analyses of published clinical trial results which, although not necessarily accurate or meaningful, may raise questions regarding the safety of pharmaceutical products which may be publicised by the media and may result in product liability claims. The Group is currently a defendant in a number of product liability lawsuits, including class actions, that involve substantial claims for damages related to the Group’s pharmaceutical products. Litigation, particularly in the USA, is inherently unpredictable and excessive verdicts that are not justified by the evidence can occur. Class actions that sweep together all persons who were prescribed the Group’s products can inflate the potential liability by the force of numbers. Claims for pain and suffering and punitive damages are frequently asserted in product liability actions and, if allowed, can represent potentially open ended exposure and thus could materially and adversely affect the Group’s financial results.
Anti-trust litigation
In the USA it has become increasingly common for patent infringement actions to prompt claims that anti-trust laws have been violated during the initial prosecution of the patent or during litigation involving the defence of that patent. Such claims by direct and indirect purchasers and other payers are typically filed as class actions. The relief sought may include treble damages and restitution claims. Damages in adverse anti-trust verdicts are subject to automatic trebling in the USA. Similarly, anti-trust claims may be brought following settlement of patent litigation, alleging that such settlements are anti-competitive and in violation of anti-trust laws. A successful anti-trust claim against the Group could materially and adversely affect the Group’s financial results.
Sales, marketing and regulation
The Group operates globally in complex legal and regulatory environments that often vary among jurisdictions. The failure to comply with applicable laws, rules and regulations in these jurisdictions may result in civil and criminal legal proceedings. As those rules and regulations change or as governmental interpretation of those rules and regulations evolve, prior conduct may be called into question.
In the USA, for example, the Group is responding to federal and state governmental investigations into pricing, marketing and reimbursement of its prescription drug products. These investigations could result in related restitution or civil false claims act litigation on behalf of the federal or state governments, as well as related proceedings initiated against the Group by or on behalf of consumers and private payers. Such proceedings may result in trebling of damages awarded or fines in respect of each violation of law. Criminal proceedings may also be initiated against the Group. Any of these consequences could materially and adversely affect the Group’s financial results.
Third party competition
The Group operates in highly competitive markets. In the pharmaceuticals business, it faces competition both from proprietary products of large international manufacturers and producers of generic pharmaceuticals. Significant product innovations, technical advances or the intensification of price competition by competitors may materially and adversely affect the Group’s financial results. The Group cannot predict the timing or impact of competitive products or their potential impact on sales of the Group’s products. Continued consolidation in the pharmaceutical industry may adversely affect the Group’s competitive position, while continued consolidation among the Group’s customers may increase pricing pressures.
The Group had nine pharmaceutical products with over £500 million in annual global sales in 2009. Among these products are Augmentin IR and ES, Lamictal IR, Paxil and Valtrex for which there is generic competition in the USA.
If any of the Group’s major products were to become subject to a problem such as unplanned loss of patent protection, unexpected side effects, regulatory proceedings, publicity affecting doctor or patient confidence or pressure from competitive products, or if a new, more effective treatment should be introduced, the Group’s financial results may be materially and adversely affected.
In particular, the Group faces intense competition from manufacturers of generic pharmaceutical products in all of its major markets. Generic products often enter the market upon expiration of patents or data exclusivity periods for the Group’s products. Introduction of generic products typically leads to a dramatic loss of sales and reduces the Group’s revenues and margins for its proprietary products. The expiration dates for patents for the Group’s major products and a description of litigation settlements which may affect the dates on which generic versions of the Group’s products may be introduced are set out on page 12. Legal proceedings involving patent challenges are set out in Note 44 to the financial statements, ‘Legal proceedings’.
Governmental and payer controls
Pharmaceutical products are subject to price controls or pressures and other restrictions in many markets, including Japan, Germany, Spain, France and Italy. Some governments intervene directly in setting prices.


GSK Annual Report 2009


 

45

Risk factors

In addition, in some markets major purchasers of pharmaceutical products (whether governmental agencies or private health care providers) have the economic power to exert substantial pressure on prices or the terms of access to formularies.
The Group cannot accurately predict whether existing controls, pressures or restrictions will increase or whether new controls, pressures or restrictions will be introduced. Such measures may materially and adversely affect the Group’s ability to introduce new products profitably and its financial results.
For example, in the USA, where the Group has its highest margins and the most sales for any country, pricing pressures could significantly increase as experience continues to develop under the outpatient pharmaceutical programme covering Medicare beneficiaries that began in 2006. Also, changes to the related enabling legislation could afford the US government a direct role in negotiating prices under the Medicare programme.
In addition, the US Congress is considering comprehensive health care reform legislation that could significantly expand the scope of government health care programs that include specific price control mechanisms or that could increase the Group’s rebate liability with respect to those programs.
Additionally, a number of states have proposed or implemented various schemes to control prices for their low-income and senior citizens’ programmes, including increasing the rebate liability of pharmaceutical companies, importation from other countries and bulk purchases of drugs. The growth in the number of patients covered through large managed care institutions in the USA, which has increased with implementation of the Medicare benefit, also increases pricing pressures on the Group’s products. Any of these trends may materially and adversely affect the Group’s financial results.
Regulatory controls
The Group must comply with a broad range of regulatory controls on the testing, approval, manufacturing and marketing of many of its pharmaceutical and consumer healthcare products, particularly in the USA and countries of the European Union, that affect not only the cost of product development but also the time required to reach the market and the uncertainty of successfully doing so. Health authorities have increased their focus on safety when assessing the benefit risk/balance of drugs in the context of not only initial product approval but also in the context of approval of additional indications and review of information regarding marketed products. Stricter regulatory controls also heighten the risk of changes in product profile or withdrawal by regulators on the basis of post-approval concerns over product safety, which could reduce revenues and can result in product recalls and product liability lawsuits. There is also greater regulatory scrutiny, especially in the USA, on advertising and promotion and in particular on direct-to-consumer advertising.
In addition, in some cases the Group may voluntarily cease marketing a product or face declining sales based on concerns about efficacy or safety (for example, the decline in sales of Avandia beginning in 2007 following publicity around questions regarding risks associated with the product), whether or not scientifically justified, even in the absence of regulatory action. The development of the post-approval adverse event profile for a product or the product class may materially and adversely affect the Group’s financial results.
Risk of interruption of product supply
The manufacture of pharmaceutical products and their constituent materials requires compliance with good manufacturing practice regulations. The Group’s manufacturing sites are subject to review and approval by the FDA and other regulatory agencies. Compliance failure by suppliers of key services and materials or the Group’s own manufacturing facilities could lead to product recalls and seizures, interruption of production and delays in the approvals of new products pending resolution of manufacturing issues. Non-compliance can also result in fines and disgorgement of profits. Any interruption of supply or the incurrence of fines or disgorgement could materially and adversely affect the Group’s financial results.
Although the Group undertakes business continuity planning, single sourcing for certain components, bulk active materials and finished products creates a risk of failure of supply in the event of regulatory non-compliance or physical disruption at the manufacturing sites.
Risk from concentration of sales to wholesalers
In the USA, in line with other pharmaceutical companies, the Group sells its products through a small number of wholesalers in addition to hospitals, pharmacies, physicians and other groups. Sales to the three largest wholesalers amounted to approximately 85% of the Group’s US pharmaceutical sales in 2009. At 31st December 2009 the Group had trade receivables due from these three wholesalers totalling £867 million (31st December 2008 – £1,067 million). The Group is exposed to a concentration of credit risk in respect of these wholesalers such that, if one or more of them is affected by financial difficulty, it could materially and adversely affect the Group’s financial results.
Global political and economic conditions
As described on page 27, many of the world’s largest economies, including the major markets in which the Group operates, and financial institutions have recently faced extreme financial difficulty, including a decline in asset prices, liquidity problems and limited availability of credit. Many of these economies have experienced sharp recessions. While some economies have shown signs of recovery, the rate of recovery may be slow.
Continued economic weakness may have a material adverse effect on the Group’s sales, results of operations, financial condition and ability to raise capital. Some of the Group’s businesses, including Consumer Healthcare, may be particularly sensitive to declines in consumer spending. In addition, further or renewed declines in asset prices may result in a lower return on the Group’s financial investments and may cause the value of the Group’s investments in its pension plans to decrease, requiring the Group to increase its funding of those pension plans.
The Group conducts a substantial portion of its operations outside the UK. The Group’s management of foreign exchange rates is discussed in Business Review, ‘Foreign exchange management’ (see page 42). Fluctuations in exchange rates between Sterling and other currencies, especially the US dollar, the Euro and the Japanese Yen, could materially and adversely affect the Group’s financial results.
The Group has no control over changes in inflation and interest rates, foreign currency exchange rates and controls or other economic factors affecting its businesses or the possibility of political unrest, legal and regulatory changes or nationalisation in jurisdictions in which the Group operates.


GSK Annual Report 2009


 

46

Risk factors

Taxation and treasury
The Group’s effective tax rate is driven by rates of tax in jurisdictions that are both higher and lower than that applied in the UK. In addition, many jurisdictions such as the UK, Belgium and the USA currently offer regimes that encourage innovation and new scientific endeavours by providing tax incentives, for example R&D tax credits. Furthermore, given the scale and international nature of the Group’s business, intra-group transfer pricing is an inherent tax risk as it is for other international businesses. Changes in tax laws or in their application with respect to matters such as transfer pricing, foreign dividends, controlled companies, R&D tax credits or a restriction in tax relief allowed on the interest on intra-Group debt, could increase the Group’s effective tax rate and materially and adversely affect its financial results.
The tax charge included in the financial statements is the Group’s best estimate of its tax liability but, until such time as audits by tax authorities are concluded, there is a degree of uncertainty regarding the final tax liability for the period. The Group’s policy is to submit tax returns within the statutory time limits and engage tax authorities to ensure that the Group’s tax affairs are as current as possible and that any differences in the interpretation of tax legislation and regulation are resolved as quickly as possible. In exceptional cases where matters cannot be settled by agreement with tax authorities GSK may have to resolve disputes through formal appeals or other proceedings. The Group is currently appealing a court decision in respect of transfer pricing with the Canadian Tax Authorities as discussed in Note 14 to the financial statements, ‘Taxation’.
The Group deals in high value transactions on a frequent basis which may result in an increased risk of financial loss due to the mismanagement of cash or entering into high risk positions on hedge transactions, any of which could materially and adversely affect the Group’s financial results.
Pandemic influenza
The market for pandemic influenza vaccines is experiencing significant volatility given changes in risk perception, developing epidemiology and the relative mild nature of the virus, which was not anticipated by governments or the medical community. Some governments that have placed orders for the pandemic vaccine or that have announced changes in their planned immunisation programmes have renegotiated their contracts, and other governments are seeking, or may in the future seek, to renegotiate their contracts. While deliveries of pandemic vaccines provided significant contributions to the Group’s results in 2008 (H5N1 vaccines) and 2009 (H1N1 vaccines), and the Group expects the level of sales in 2010 (H1N1, possibly stockpile agreements) to be roughly the same as in 2009, there can be no assurance that sales of influenza vaccines will meet these estimates or contribute significantly to the Group’s results in 2011 or beyond.
Environmental liabilities
The environmental laws of various jurisdictions impose actual and potential obligations on the Group to remediate contaminated sites. The Group has also been identified as a potentially responsible party under the US Comprehensive Environmental Response Compensation and Liability Act at a number of sites for remediation costs relating to the Group’s use or ownership of such sites.
Failure to manage properly the environmental risks could result in additional remedial costs that may materially and adversely affect the Group’s financial results. See Note 44 to the financial statements, ‘Legal proceedings’, for a discussion of environmental-related proceedings in which the Group is involved.
Accounting standards
New or revised accounting standards, rules and interpretations circulated from time to time by an international standard setting board could result in changes to the recognition of income and expense that may materially and adversely affect the Group’s financial results.
International standard changes in the market valuation of certain financial instruments are reflected in the Group’s reported results before those gains or losses are actually realised and could have a significant impact on the income statement in any given period. Accounting for deferred taxation on inter-company inventory may give rise to volatility depending upon the ownership of the inventory.
Regulators regularly review the financial statements of listed companies for compliance with accounting and regulatory requirements.
The Group believes that it complies with the appropriate regulatory requirements concerning its financial statements and disclosures. However, other companies have experienced investigations into potential non-compliance with accounting and disclosure requirements that have resulted in restatements of previously reported results and sometimes significant penalties, which may materially and adversely affect the Group’s financial results.
Failure of third party providers
Unaffiliated third-party suppliers provide a number of goods and services to the Group’s operations. Many of these services, for example services provided by clinical research organisations to support development of key products, are very important to the operations of the Group’s businesses. Materials provided by third-party suppliers are necessary for the commercial production of our products, including speciality chemicals, commodities and components necessary for the manufacture, fill-finish and packaging of many of the Group’s pharmaceutical and Consumer Healthcare products. While the Group does not believe that any of these third-party relationships are individually significant in the context of the overall Group, the failure of any third-party supplier to fulfil its contractual obligations in a timely manner may result in delays or service interruptions, which may materially and adversely affect the Group’s financial results.
Protection of electronic information and assets
The Group relies on critical and sensitive data, such as personally identifiable information, trade secrets, intellectual property and corporate strategic plans. The security of such data is exposed to increasing threats. The Group is also subject to various standards for the protection of personally identifiable information. Failure to implement appropriate safeguards to adequately protect against any unauthorised or unintentional access, acquisition, use, modification, loss or disclosure of this critical or sensitive data may adversely affect the Group’s operations.


GSK Annual Report 2009


 

47

Risk factors

Alliances and acquisitions
As part of the Group’s strategy to diversify into new product areas and markets, the Group has grown, and expects to continue to grow, in part through acquisitions and business alliances. There is intense competition for alliance and acquisition candidates in the pharmaceutical industry, and, as such, the Group may be unable to make these deals on acceptable terms or at all. In acquiring or forming alliances with companies, the Group may assume significant debt, become subject to unknown or contingent liabilities or fail to realise the benefits expected from these transactions. For example, most pharmaceutical companies, including those that the Group may consider acquiring, are involved in patent disputes, product liability litigation, government investigations and other legal proceedings whose outcome is subject to considerable uncertainty. The assumption of debt or unknown or contingent liabilities or the failure to realise the expected benefits may materially and adversely affect the Group’s financial results.
The process of integrating companies the Group may acquire may result in disruption to the ongoing business as the effort of integrating organisations in different locations and with, among other things, differing systems and corporate cultures may divert attention and resources, result in the loss of key employees or have other adverse consequences, any of which may materially and adversely affect the Group’s financial results.
Attraction and retention
The Group relies heavily on recruiting and retaining talented employees with a range of skills to meet its objectives. The Group faces intense competition for qualified individuals, as the supply of people with specific skills or in specific geographic regions may be limited, particularly given the Group’s plans to expand its operations in emerging markets, Biologicals and Consumer Healthcare.
The inability to attract staff with specific technical and leadership skills, retain key employees or ensure effective succession planning for critical positions may materially and adversely affect the Group’s financial results.
Implementing the Group’s strategic priorities
The Group has established three strategic priorities: to grow a diversified business, deliver more products of value and simplify its operating model. There can be no assurance that the Group will be able to implement its strategic priorities fully or that the strategic priorities will deliver the expected benefits.
For example, the strategic priority to grow a diversified business involves expanding the Group’s business into emerging markets. The Group’s pharmaceutical sales in emerging markets grew 20% in 2009 to nearly £3 billion, which represents 10% of the Group’s 2009 turnover. There is no guarantee that the Group’s sales in emerging markets will continue to grow or that these markets will continue to experience relatively high growth rates. Some emerging markets may be especially vulnerable to the after-effects of the recent global financial crisis, or may have very limited resources to spend on healthcare. Competition in these markets for staff with the skills and training suitable for employment at an enterprise such as the Group’s may be intense. In some emerging markets, the Group may be required to rely on third-party agents, which may put the Group at risk of liability, and some emerging markets lack sufficient protection against crimes such as counterfeiting. A failure to continue to expand its business in emerging growth markets could materially and adversely affect the Group’s financial results.
In addition, the Group is undertaking an Operational Excellence restructuring programme that has an estimated cost of approximately £4.5 billion and is expected to deliver annual pre-tax savings of approximately £2.2 billion by the time it is substantially complete in 2012. There can be no assurance that the Group will be able to execute fully this transformation of its business. Furthermore, changes in the Group’s structure, operations, revenues, costs or efficiency resulting from these restructuring activities or other strategic initiatives could result in higher than expected costs or other difficulties. Failure to realise the expected cost savings by the end of the restructuring programme or to achieve and maintain a competitive cost base could materially and adversely affect the Group’s financial results.


GSK Annual Report 2009


 

48

Financial review 2008

In accordance with US SEC disclosure requirements, the following discussion compares results for the year to 31st December 2008 with the results for the year to 31st December 2007.
Exchange
The currencies that most influence the Group’s results remain the US dollar, the Euro and the Japanese Yen.
In 2008, the pound weakened by 28% against the US dollar, to $1.44/£1 at year-end. In addition, the pound weakened by 24% against the Euro and by 40% against the Yen. A new £/ record low of 1.02 was set in December.
World market – pharmaceuticals
Global pharmaceutical sales in 2008 were £366 billion compared with £329 billion in 2007.
                    
World market by   Value     % of  
geographic region   £bn     total  
       
USA
    145       39  
Europe
    112       31  
France
    21       6  
Germany
    20       6  
Italy
    13       3  
UK
    12       3  
Rest of World
    109       30  
Emerging markets
    49       13  
Asia Pacific
    17       5  
Japan
    33       9  
Canada
    10       3  
       
Total
    366               100  
       
At 30th September 2008, GSK had three of the world’s top 60 pharmaceutical products. These were Lamictal, Seretide/Advair and Valtrex.
                    
World market -   Value     % of  
top six therapeutic classes   £bn     total  
       
Central nervous system
    60       16  
Cardiovascular
    54       15  
Alimentary tract and metabolic
    44       12  
Antineoplastic/Immunomodulatory
    40       11  
Anti-infectives (bacterial, viral and fungal) excluding vaccines
    38               10  
Respiratory
    25       7  
       
 
(Note: data based on 12 months to 30th September 2008.)
Pharmaceutical turnover
All growth rates included in the review of turnover are at constant exchange rates (CER) unless otherwise stated. Sterling growth rates may be found in the tables of pharmaceutical turnover by therapeutic areas on page 49.
Total pharmaceutical turnover declined 3% for the year to £20.4 billion, driven largely by US performance, down 11% to £8.9 billion, which was impacted by expected generic competition to several mature brands and further declines in Avandia sales. Sales in Asia Pacific and Japan fell 1% to £1.9 billion, reflecting lower government orders for Relenza and the impact of pharmaceutical price cuts in Japan. These declines were partly offset by growth in Europe, up 3% to £6.5 billion, and Emerging Markets, up 12% to £2.3 billion. In sterling terms, pharmaceutical turnover grew by 6%, reflecting the weakness of Sterling against most major currencies.
Pharmaceutical turnover by therapeutic area
GSK turnover declined by 3% in 2008 as the impact of lower Avandia sales, US generic competition to a range of GSK’s products and lower flu pre-pandemic sales was partly offset by strong growth of key products such as Advair, Valtrex, Epzicom, Avodart, Lovaza and the vaccines franchise.
Respiratory
Respiratory sales increased 5% to £5.8 billion.
Sales of Seretide/Advair for asthma and COPD rose 8% to £4.1 billion. In the USA, Advair sales rose 6% to £2.2 billion, with a return to volume growth in the second half of the year. During 2008, the FDA granted Advair an indication in COPD for prevention of exacerbations and this has helped grow the COPD sector of our Advair business. In Europe, sales increased by 4% to £1.4 billion. Advair performance was particularly strong in Emerging Markets, up 26% to £215 million, and Japan, where sales of the product more than doubled to £83 million following its launch in 2007.
Anti-virals
Anti-virals decreased 4% to £3.2 billion.
GSK’s HIV business continues to experience strong competition. Epzicom/Kivexa grew by 23% to £442 million but this was more than offset by declines across the rest of the portfolio. Sales of Valtrex, for herpes, rose 16% to £1.2 billion with US sales up 20% fuelling the growth. Sales of flu anti-viral Relenza fell 80% to £57 million reflecting fewer government orders for pre-pandemic stockpiling.


GSK Annual Report 2009


 

49

Financial review 2008
Pharmaceutical turnover by therapeutic area 2008
                                                                                                                 
    Total     USA     Europe     Rest of World  
Therapeutic area/   % of     2008     2007             Growth     2008             Growth     2008             Growth     2008             Growth  
major products   total     £m     £m     CER%     £%     £m     CER%     £%     £m     CER%     £%     £m     CER%     £%  
                                                                               
Respiratory
    29       5,817       5,032       5       16       2,720       6       14       1,982       2       14       1,115       9       22  
Seretide/Advair
            4,137       3,499       8       18       2,161       6       14       1,416       4       17       560       29       42  
Flixotide/Flovent
            677       621       (2 )     9       317       3       12       175       (4 )     11       185       (9 )     3  
Serevent
            263       269       (12 )     (2 )     72       (9 )     (3 )     136       (9 )     1       55       (23 )     (10 )
Veramyst
            72       21       >100       >100       56       >100       >100       11                   5       >100       >100  
Flixonase/Flonase
            186       199       (15 )     (7 )     52       (29 )     (28 )     52       (6 )     6       82       (8 )     5  
                                                                               
Anti-virals
    16       3,206       3,027       (4 )     6       1,600       (1 )     7       850       (12 )           756       (1 )     10  
HIV
            1,513       1,442       (5 )     5       640       (7 )           636       (6 )     7       237       4       13  
Epzicom/Kivexa
            442       324       23       36       178       15       25       209       25       40       55       48       67  
Combivir
            433       455       (14 )     (5 )     180       (14 )     (8 )     166       (19 )     (8 )     87       1       10  
Trizivir
            212       233       (18 )     (9 )     106       (18 )     (12 )     92       (18 )     (6 )     14       (20 )     (7 )
Agenerase, Lexiva
            160       141       2       13       83       (1 )     6       61             15       16       40       60  
Epivir
            139       156       (20 )     (11 )     47       (19 )     (11 )     58       (22 )     (9 )     34       (18 )     (13 )
Ziagen
            106       109       (11 )     (3 )     45       (9 )           36       (11 )           25       (14 )     (11 )
 
Valtrex
            1,195       934       16       28       870       20       30       144       9       25       181       4       20  
 
Zeffix
            188       168             12       15       8       15       27             17       146       (1 )     11  
Relenza
            57       262       (80 )     (78 )     20       (86 )     (85 )     6       (92 )     (92 )     31       (49 )     (44 )
                                                                               
Central nervous system
    14       2,897       3,348       (21 )     (13 )     1,815       (29 )     (24 )     565       (1 )     12       517       (3 )     11  
Lamictal
            926       1,097       (22 )     (16 )     711       (26 )     (20 )     147       (8 )     3       68       2       10  
Imigran/Imitrex
            687       685       (8 )           550       (9 )     (1 )     96       (3 )     8       41       (8 )     8  
Seroxat/Paxil
            514       553       (19 )     (7 )     79       (49 )     (45 )     115       (14 )     (4 )     320       (7 )     10  
Wellbutrin
            342       529       (40 )     (35 )     310       (44 )     (39 )     18       >100       >100       14       8       8  
Requip
            266       346       (31 )     (23 )     102       (60 )     (57 )     133       29       46       31       65       82  
Requip XL
            43                         9                   34                                
Treximet
            25                         25                                                  
                                                                               
Cardiovascular and urogenital
    9       1,847       1,554       8       19       1,107       6       14       512       10       28       228       15       25  
Avodart
            399       285       27       40       242       27       38       118       21       39       39       48       56  
Lovaza
            290       5       >100       >100       289       >100       >100                         1              
Coreg
            203       587       (68 )     (65 )     200       (68 )     (66 )                       3       (67 )     (50 )
Coreg CR
            165       88       73       88       163       72       85                         2              
Coreg IR
            38       499       (93 )     (92 )     37       (93 )     (92 )                       1       (83 )     (83 )
Fraxiparine
            226       184       7       23                         178             18       48       36       45  
Arixtra
            170       100       53       70       88       49       60       71       56       82       11       67       83  
Vesicare
            71       50       32       42       71       32       42                                      
Levitra
            60       49       12       22       57       11       21       3             50                    
                                                                               
Metabolic
    6       1,191       1,508       (28 )     (21 )     590       (39 )     (34 )     294       (11 )     1       307       (14 )     (5 )
Avandia products
            805       1,219       (40 )     (34 )     434       (49 )     (44 )     198       (22 )     (12 )     173       (25 )     (19 )
Avandia
            512       877       (46 )     (42 )     299       (53 )     (49 )     82       (33 )     (26 )     131       (30 )     (25 )
Avandamet
            256       292       (21 )     (12 )     109       (32 )     (26 )     111       (13 )           36             6  
Bonviva/Boniva
            237       161       34       47       156       25       36       74       48       68       7       >100       >100  
                                                                               
Anti-bacterials
    7       1,429       1,323       (2 )     8       174       (17 )     (11 )     635       (6 )     8       620       7       15  
Augmentin
            587       530             11       49       (31 )     (27 )     272             14       266       11       18  
Altabax
            16       11       36       45       15       27       36       1                                
                                                                               
Oncology and emesis
    2       496       477       (6 )     4       243       (17 )     (11 )     169       9       25       84       9       20  
Hycamtin
            140       119       7       18       81       7       16       49       5       23       10       11       11  
Zofran
            110       196       (51 )     (44 )     3       (97 )     (96 )     63       (21 )     (10 )     44       (17 )     (8 )
Tykerb
            102       51       80       100       47       22       31       42       >100       >100       13       >100       >100  
                                                                               
Vaccines
    12       2,539       1,993       15       27       629       (7 )           1,155       28       44       755       21       34  
Hepatitis
            665       529       14       26       275       28       38       263             14       127       16       27  
Infanrix/Pediarix
            682       543       12       26       212       1       8       377       21       39       93       11       22  
Fluarix, FluLaval
            215       174       11       24       85       (20 )     (13 )     78       63       90       52       37       49  
Flu pandemic
            66       146       (55 )     (55 )     1       (99 )     (99 )     64       25       25       1              
Cervarix
            125       10       >100       >100                         104       >100       >100       21       >100       >100  
Rotarix
            167       91       71       84       21                   43       61       87       103       46       51  
Boostrix
            70       66       (5 )     6       35       (20 )     (13 )     26       21       37       9       14       29  
                                                                               
Other
    5       959       901       (3 )     6       16       (78 )     (75 )     321       14       26       622       (1 )     7  
                                                                               
 
    100       20,381       19,163       (3 )     6       8,894       (11 )     (4 )     6,483       3       17       5,004       5       16  
                                                                               
 
CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.
GSK Annual Report 2009


 

50

Financial review 2008

CNS
CNS sales decreased 21% to £2.9 billion.
The majority of GSK’s CNS franchise is now impacted by generic competition in the USA, as generic competition to Lamictal, Imigran and the remaining presentation of Wellbutrin started during the course of 2008. There was, however, some positive news as Treximet was approved for migraine by the FDA in April 2008.
Cardiovascular and urogenital
Cardiovascular and urogenital sales increased 8% to £1.8 billion.
Strong growth across most of the portfolio of products was partly offset by generic competition to Coreg IR. Lovaza, for very high triglycerides, which was acquired from Reliant Pharmaceuticals in 2007, grew 71% on a proforma basis to £290 million and grew its US market share by 33%. Avodart, for benign prostatic hyperplasia (enlarged prostate), grew 27% to £399 million taking a further percentage point of market share, Arixtra, for deep vein thrombosis and pulmonary embolism, grew 53% to £170 million and Coreg CR grew 73% to £165 million.
Metabolic
Metabolic sales decreased 28% to £1.2 billion.
Strong growth of Bonviva/Boniva, for postmenopausal osteoporosis, up 34% to £237 million was not enough to offset a full year impact to Avandia whose sales started to fall in May 2007. Avandia product sales declined 40% during the year to £805 million, with US sales falling 49% to £434 million and European sales down 22% to £198 million. In Emerging Markets, Avandia product sales returned to growth in the second half of the year (Q4 sales were up 12%).
Oncology and emesis
Oncology and emesis sales decreased 6% to £0.5 billion.
Tykerb, for breast cancer, continued to grow following approval in the USA last year. Approvals in other countries were achieved throughout 2008, with the European approval being achieved in June.
Vaccines
Vaccine sales increased 15% to £2.5 billion.
Within the vaccines portfolio, there were strong performances from Hepatitis vaccines (up 14% to £665 million) and combination paediatric vaccines Infanrix/Pediarix (up 12% to £682 million). Rotarix, for rotavirus gastroenteritis, rose 71% to £167 million, largely driven by government tender orders in Latin America and the launch of the product in the USA in August. New cervical cancer vaccine, Cervarix, recorded sales of £125 million for the year, following several tender wins, including national government orders in the UK and the Netherlands.
Regional analysis
USA
Sales in the USA declined 11% to £8.9 billion, principally reflecting a full year impact on Avandia (down 49%) and generic competition to significant products such as Lamictal (down 26%), Imigran (down 9%), Wellbutrin XL (down 45%), Requip (down 60%) and Coreg IR (down 93%). These declines were partly offset by Advair (up 6%), Valtrex (up 20%) and Lovaza (up 71% on proforma basis).
Europe
Sales in Europe increased 3% to £6.5 billion with continued growth of Seretide and particularly strong vaccines growth offsetting the impact of generic competition to a number of products and continued price cuts from governments across the region.
Emerging Markets
Sales in Emerging Markets increased 12% to £2.3 billion with strong growth in Russia (up 36%), China (up 22%) and Latin America (up 16%). The growth was fuelled primarily by vaccines, up 32% to £0.5 billion, and the respiratory franchise, up 16% to £0.4 billion.
Asia Pacific/Japan
Increased sales of Seretide/Advair (up 48% to £204 million) were offset by lower orders for Relenza in Japan and some price cuts.
Consumer Healthcare turnover
                                         
    % of     2008     2007     Growth  
    total     £m     £m     CER%     £%  
                         
Over-the-counter
    49       1,935       1,788       (2 )     8  
medicines
                                       
Panadol franchise
            324       263       12       23  
Smoking cessation products
          299       314       (12 )     (5 )
Tums
            91       88       (5 )     3  
Cold sore franchise
            89       79       3       13  
Breathe Right
            81       63       17       29  
alli
            75       150       (53 )     (50 )
                         
Oral healthcare
    31       1,240       1,049       6       18  
Aquafresh franchise
            452       398       3       14  
Sensodyne franchise
            363       293       12       24  
Dental care
            271       222       8       22  
                         
Nutritional healthcare
    20       796       716       8       11  
Lucozade
            382       347       7       10  
Horlicks
            204       174       13       17  
Ribena
            161       156             3  
                         
 
    100       3,971       3,553       3       12  
                         
 
*   CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.
Total Consumer Healthcare sales for the year rose 3% to £4 billion. This compares with growth of 14% in 2007, which benefited from launch stocking of new anti-obesity treatment alli. 2008 sales of alli were £75 million, down 53%. Excluding alli, Consumer Healthcare sales rose 5% in 2008 (up 9% in 2007).


GSK Annual Report 2009


 

51

Financial review 2008

OTC medicines
OTC product sales declined 2% to £1.9 billion in 2008, with sales of smoking cessation products down 12% to £299 million. Panadol sales grew 12% to £324 million, twice the global average in 2008.
Oral healthcare
Sales of Oral healthcare products rose 6% to £1.2 billion, whereas the market grew just 2%. There were strong performances from Sensodyne, up 12% to £363 million, and Aquafresh, up 3% to £452 million. Sensodyne’s growth represented 35% of world toothpaste growth in 2008 in markets where GSK competes.
Nutritional healthcare
Within Nutritionals, Horlicks sales rose 13% to £204 million, Lucozade sales rose 7% to £382 million and Ribena sales were flat at £161 million, although sales of Lucozade and Ribena in the second half of the year declined slightly, largely as a result of poor weather in the UK.
Results before major restructuring and total
results
In October 2007, GSK announced a significant new Operational Excellence restructuring programme. A second plan, representing a significant expansion of the Operational Excellence programme, was approved by the Board and announced in February 2009. This restructuring programme covers all areas of GSK’s business, including manufacturing, selling, R&D and infrastructure. With an estimated total cost of approximately £3.6 billion, the expanded programme had been expected to deliver annual pre-tax savings of approximately £1.7 billion by the time it was expected to be substantially complete in 2011. Approximately 40% of these costs were incurred by 31st December 2008. Given the extent and cost of the Operational Excellence programme, GSK presents the restructuring costs incurred solely as a direct result of the Operational Excellence programme, which in 2008 amounted to £1,089 million before tax (2007 – £338 million), in a separate column in the income statement titled ‘Major restructuring’.
In addition to these restructuring costs, this column in the income statement includes restructuring costs incurred solely as a direct result of any restructuring programmes that follow, and relate to material acquisitions where the operations of the acquired business overlap extensively with GSK’s existing operations.
The $1.65 billion (£814 million) acquisition of Reliant Pharmaceuticals Inc. in December 2007 is the only acquisition since October 2007 that meets these criteria. The total restructuring costs incurred as a direct result of this acquisition were £34 million, all of which have been charged and paid in 2008.
As set out in Note 7 to the financial statements, ‘Major restructuring programme’, asset impairments and staff redundancies together accounted for £887 million of the £1,123 million restructuring costs incurred in 2008 and reported in the major restructuring column (2007 – £338 million).
The remaining costs of £236 million in 2008 arose from miscellaneous expenditures incurred solely as a direct result of the restructuring programmes, including consultancy and project management fees, the termination of leases, site closure costs and, with respect to 2008, the recognition of foreign exchange losses following the liquidation of a subsidiary in Puerto Rico.
No costs arising from GSK’s ongoing operating activities have been reported in the major restructuring column.
Any restructuring costs that do not arise solely as a direct result of the Operational Excellence programme and restructuring programmes following, and relating to, acquisitions meeting the criteria described above were reported in operating expenses within results before major restructuring. These costs included restructuring costs related to minor acquisitions and £20 million of costs in 2008 (2007 – £92 million) that related to restructuring activity initiated before the commencement of the Operational Excellence programme. None of this restructuring activity had a material impact on GSK’s operating results or on the manner in which its business is conducted.
GSK’s operating profit, profit before taxation, taxation and profit for the year are discussed below in terms of both total results, which include major restructuring costs, and results before major restructuring.
Operating profit – total results
Total results include restructuring costs related to the new Operational Excellence programme, which commenced in October 2007, and the Reliant restructuring programme.
                                                 
    2008     2007     Growth  
    £m     %     £m     %     CER%     £%  
                               
Turnover
    24,352       100       22,716       100.0       (3 )     7  
                               
Cost of sales
    (6,415 )     (26.3 )     (5,317 )     (23.4 )     13       21  
Selling, general and administration
  (7,656 )     (31.4 )     (6,954 )     (30.6 )     2       10  
Research and development
    (3,681 )     (15.2 )     (3,327 )     (14.7 )     4       11  
Other operating income
    541       2.2       475       2.1       11       14  
                               
Operating profit
    7,141         29.3       7,593       33.4          (20 )        (6 )
                               
Cost of sales
Cost of sales increased to 26.3% of turnover (2007 – 23.4%). At constant exchange rates, cost of sales as a percentage of turnover increased by 3.8 percentage points to 27.2%, reflecting charges related to the major restructuring programmes of £639 million (2007 – £111 million) and unfavourable product and regional mix compared with 2007, partly offset by savings from the restructuring programmes.
Selling, general and administration
SG&A costs, including legal charges, were 31.4% of turnover (2007 – 30.6%), an increase of 0.8 percentage points. At constant exchange rates, the increase was 1.4 percentage points. Legal costs of £611 million (2007 – £255 million) included a £278 million charge announced in January 2009 related to the US investigation into GSK’s marketing and promotional practices which originated in Colorado. SG&A costs included charges of £304 million (2007 – £137 million) related to the major restructuring programmes. Excluding legal costs, SG&A decreased by 1.6%.


GSK Annual Report 2009


 

52

Financial review 2008

Research and development
R&D expenditure increased 4% and included charges related to the major restructuring programmes of £175 million (2007 – £90 million). Excluding these charges, R&D expenditure increased 2% in CER terms as investment in the late stage pipeline was partly offset by restructuring savings.
Other operating income
Other operating income of £541 million (2007 – £475 million) included strong growth in royalty income to £307 million (2007 - £216 million). Product, intellectual property and equity investment disposals realised £230 million in 2008 compared with £90 million in 2007. The Roche litigation settlement was included in 2007.
Operating profit – total results
Total operating profit of £7,141 million decreased by 6% in sterling terms and 20% in CER terms compared with 2007. Pharmaceuticals operating profit was £6,331 million, down 21%, while Consumer Healthcare operating profit fell by only 2% to £810 million.
In the year, gains from asset disposals and settlements were £293 million (2007 – £213 million), costs for legal matters were £611 million (2007 – £255 million), fair value movements on financial instruments resulted in a charge of £10 million (2007 - income of £41 million) and charges relating to previous restructuring programmes were £20 million (2007 – £92 million). Charges related to the major restructuring programmes were £1,118 million (2007 – £338 million). The impact of all these items on total operating profit was a £1,466 million charge in 2008 compared with a £431 million charge in 2007.
Profit before taxation – total results
Net finance costs
                 
    2008     2007  
Finance income  
£m
   
£m
 
       
Interest and other finance income
    322       255  
Fair value adjustments and hedges
    (9 )     7  
       
 
    313       262  
       
 
               
Finance costs
               
       
Interest costs
    (829 )     (434 )
Unwinding of discount on liabilities
    (16 )     (27 )
Fair value adjustments and hedges
    2       8  
       
 
    (843 )             (453 )
       
Share of after tax profits of associates and joint ventures
The share of after tax profits of associates of £48 million (2007 – £50 million) arises principally from the Group’s holding in Quest Diagnostics Inc.
Profit before taxation – total results
Taking account of net finance costs and the share of profits of associates, total profit before taxation was £6,659 million compared with £7,452 million in 2007, a 24% CER decline and an 11% sterling decline.
Operating profit – results before major
restructuring
The results before major restructuring are set out below:
                                                 
    2008     2007     Growth  
    £m     %     £m     %     CER%     £%  
                               
Turnover
    24,352       100       22,716       100.0       (3 )     7  
                               
Cost of sales
    (5,776 )     (23.7 )     (5,206 )     (22.9 )     4       11  
Selling, general and administration
    (7,352 )     (30.2 )     (6,817 )     (30.0 )           8  
Research and development
    (3,506 )     (14.4 )     (3,237 )     (14.3 )     2       8  
Other operating income
    541       2.2       475       2.1       11       14  
                               
Operating profit
    8,259          33.9       7,931       34.9         (10 )          4  
                               
Cost of sales
Cost of sales increased by 0.8 percentage points to 23.7% of turnover. At constant exchange rates the increase was 1.5 percentage points of turnover, principally reflecting the impact of generic competition to higher margin products in the USA, lower Avandia sales and a higher proportion of sales generated in lower margin vaccines, brands sold in Emerging Markets and Consumer Healthcare products. This was partly offset by savings from the restructuring programmes.
Selling, general and administration
SG&A costs, including legal charges, were 30.2% of turnover (2007 – 30.0%). At constant exchange rates, SG&A costs increased by 0.7 percentage points to 30.7% of turnover. Legal costs of £611 million (2007 – £255 million) included a £278 million charge announced in January 2009 related to the US investigation into GSK’s marketing and promotional practices which originated in Colorado. Excluding legal costs, SG&A as a percentage of turnover fell 1.2 percentage points to 27.7% (2007 – 28.9%). This was a 3% growth in sterling terms, but a 4% reduction at constant exchange rates, reflecting the benefits of the restructuring programmes. Selling and distribution fell by 1%, advertising and promotion by 5% and general and administration expenditure, excluding legal charges, by 7%.
Research and development
R&D expenditure increased by 2% to 14.4% of turnover (2007 – 14.3%) as investment in the late stage pipeline was partly offset by restructuring savings.


GSK Annual Report 2009


 

53

Financial review 2008

Other operating income
Other operating income of £541 million (2007 – £475 million) included strong growth in royalty income to £307 million (2007 – £216 million). Product, intellectual property and equity investment disposals realised £230 million in 2008 compared with £90 million in 2007. The Roche litigation settlement was included in 2007.
Operating profit – results before major restructuring
Operating profit before major restructuring of £8,259 million for the year increased by 4% in sterling terms but decreased by 10% in CER terms compared with 2007. Pharmaceuticals operating profit was £7,427 million, down 11%, while Consumer Healthcare operating profit was flat in CER terms at £832 million. Excluding legal costs, operating profit decreased by 6%, which was greater than the turnover decline of 3%, primarily due to higher cost of sales as a percentage of turnover.
In the year, gains from asset disposals and settlements were £293 million (2007 – £213 million), costs for legal matters were £611 million (2007 – £255 million), fair value movements on financial instruments resulted in a charge of £10 million (2007 – income of £41 million) and charges relating to previous restructuring programmes were £20 million (2007 – £92 million). The impact of these items on operating profit before major restructuring was a £348 million charge in 2008 (2007 – £93 million).
Profit before taxation – results before major
restructuring
Net finance costs
                 
    2008     2007  
Finance income   £m     £m  
       
Interest and other income
    322       255  
Fair value adjustments and hedges
    (9 )     7  
       
 
    313       262  
       
 
               
Finance costs
               
       
Interest costs
    (829 )     (434 )
Unwinding of discount on liabilities
    (11 )     (27 )
Fair value adjustments and hedges
    2       8  
       
 
    (838 )     (453 )
       
Taking account of net finance costs and the share of profits of associates, profit before tax before major restructuring was £7,782 million compared with £7,790 million in 2007, a 14% CER decline but flat in sterling terms.
Taxation
                     
    2008     2007  
    £m     £m  
       
UK corporation tax
    289       452  
Overseas taxation
    1,589       1,962  
       
Current taxation
    1,878               2,414  
Deferred taxation
    69       (272 )
       
Taxation on total profits
    1,947       2,142  
       
The charge for taxation on profit before major restructuring charges, amounting to £2,231 million (2007 – £2,219 million), and represents an effective tax rate of 28.7% (2007 – 28.5%). The charge for taxation on total profits amounted to £1,947 million (2007 – £2,142 million) and represented an effective tax rate of 29.2% (2007 – 28.7%). The Group’s balance sheet at 31st December 2008 included a tax payable liability of £780 million and a tax recoverable asset of £76 million.
The Group’s main open tax issues are in the USA, Canada and Japan.
For the latest position on Taxation see ‘Taxation’ in the 2009 Financial Review on page 34.
Profit for the year
                                 
    2008     2007     Growth  
    £m     £m     CER%     £%  
                   
Total profit after taxation for the year
    4,712       5,310       (25 )     (11 )
Total profit attributable to shareholders
    4,602       5,214       (26 )     (12 )
Basic earnings per share (pence)
    88.6 p     94.4 p     (21 )     (6 )
Basic earnings per ADS (US$)
    $3.28       $3.77                  
                   
Results before major restructuring profit after taxation for the year
    5,551       5,571       (14 )      
Results before major restructuring profit attributable to shareholders
    5,441       5,475       (15 )     (1 )
Adjusted earnings per share (pence)
    104.7 p     99.1 p     (9 )     6  
Adjusted earnings per ADS (US$)
    $3.87       $3.96                  
Weighted average number of shares (millions)
    5,195       5,524                  
                   
Diluted total earnings per share (pence)
    88.1 p     93.7 p                
Diluted total earnings per ADS (US$)
    $3.26       $3.75                  
Diluted weighted average number of shares (millions)
    5,226       5,567                  
                   
Total results including restructuring costs produced a basic EPS of 88.6p compared with 94.4p in 2007. This was a 21% decline at CER and a 6% decline in sterling terms.
Dividend
The Board has declared a fourth interim dividend of 17 pence per share resulting in a dividend for the year of 57 pence, a four pence increase over the dividend of 53 pence per share for 2007.


GSK Annual Report 2009


 

54

Our Board
             
(PHOTO OF SIR CHRISTOPHER GENT)
  (PHOTO OF PROFESSOR SIR ROY ANDERSON)   (PHOTO OF LARRY CULP)   (PHOTO OF JULIAN HESLOP)
Sir Christopher Gent
(Aged 61)

Appointed on 1st June 2004.
Chairman.
Sir Christopher is a Non-Executive Director of Ferrari SpA and was the Chief Executive Officer of Vodafone Group plc, until his retirement in July 2003. He is a Non-Executive Director of Lehman Brothers Holdings Inc, a member of KPMG’s Chairman’s Advisory Group, a Senior Adviser at Bain & Co. and a member of the Advisory Board of Reform.
 
Professor Sir Roy Anderson
(Aged 62)

Appointed on 1st October 2007.
Non-Executive Director.
Professor Anderson is Professor of Infectious Disease Epidemiology in the Faculty of Medicine, Imperial College, London. He is a member of the International Advisory Board of Hakluyt & Co. Ltd. He is a fellow of the Royal Society and a Foreign Associate Member of the Institute of Medicine at the US National Academy of Sciences and the French Academy of Sciences. His former positions include Rector of Imperial College and Chief Scientific Adviser at the Ministry of Defence in the UK.
 
Larry Culp (Aged 46)
Appointed on 1st July 2003.
Non-Executive Director.
Mr Culp is President and Chief Executive Officer of Danaher Corporation. Prior to joining Danaher, he held positions in Accenture, previously Andersen Consulting.
 
Julian Heslop (Aged 56)
Appointed on 1st April 2005.
Chief Financial Officer.
Mr Heslop joined Glaxo Wellcome as Financial Controller in April 1998. In January 2001 he was appointed Senior Vice President, Operations Controller. Prior to joining the Group he held senior finance roles at Grand Metropolitan.
             
(PHOTO OF ANDREW WITTY)
  (PHOTO OF DR STEPHANIE BURNS)   (PHOTO OF SIR CRISPIN DAVIS)   (PHOTO OF SIR DERYCK MAUGHAN)
Andrew Witty (Aged 45)
Appointed on 31st January 2008. Chief Executive Officer.
Mr Witty was named Chief Executive Officer Designate for GSK in October 2007 and was appointed Chief Executive Officer (CEO) on 21st May 2008. He joined the Group in 1985 and has held senior positions in Asia, Africa and the USA. Immediately prior to being appointed CEO, Andrew was President, Pharmaceuticals Europe, a position he held from January 2003. He is a member of the Business Council for Britain, a Board Member of PhRMA, President of EFPIA, a Member of the Singapore Economic Development Board’s International Advisory Council and an Adviser to the Governor of Guangzhou, China.
 
Dr Stephanie Burns
(Aged 55)

Appointed on 12th February 2007.
Non-Executive Director.
Dr Burns is Chairman, President and Chief Executive Officer of Dow Corning Corporation. She is also a member of the American Chemical Society and sits on the Executive Committee of the Society of Chemical Industry, America Section, serves on the Board of Directors of the American Chemistry Council, and on the Board of Directors for the Society for Women’s Health Research. Dr Burns holds a PhD in organic chemistry from Iowa State University.
 
Sir Crispin Davis (Aged 60)
Appointed on 1st July 2003.
Non-Executive Director.
Until March 2009 Sir Crispin was Chief Executive Officer of Reed Elsevier PLC. Prior to that appointment, he was Chief Executive of Aegis Group plc, which he joined from Guinness plc, where he was a member of the main Board and Group Managing Director of United Distillers. He spent his early career with Procter & Gamble, including as President of the company’s US Food Division.
 
Sir Deryck Maughan
(Aged 62)

Appointed on 1st June 2004.
Non-Executive Director.
Sir Deryck is a Partner of Kohlberg Kravis Roberts & Co, and a Non-Executive Director of Thomson Reuters and BlackRock Inc. He was formerly Chairman and Chief Executive Officer of Citigroup International and of Salomon Brothers Inc.
GSK Annual Report 2009


 

55

Our Board
             
(PHOTO OF JAMES MURDOCH)
  (PHOTO OF DR MONCEF SLAOUI)   (PHOTO OF SIR ROBERT WILSON)    
James Murdoch (Aged 37)
Appointed on 20th May 2009.
Non-Executive Director.
Mr Murdoch is Chairman and Chief Executive, Europe and Asia of News Corporation. He is also Non-Executive Chairman of BSkyB and a member of the Board of News Corporation. He served as Chief Executive Officer of BSkyB from 2003 to 2007 and was also previously Chairman and Chief Executive Officer of Star TV. He also serves on the Leadership Council of The Climate Group.
 
Dr Moncef Slaoui (Aged 50)
Appointed on 17th May 2006.
Chairman, Research & Development.
Dr Slaoui joined GSK Biologicals in 1988 where he engineered the development of a robust vaccines pipeline and subsequently led Worldwide Business Development for pharmaceuticals before his appointment to lead R&D. He is a member of the Board of the Agency for Science, Technology & Research (A*STAR) and has a PhD in Molecular Biology and Immunology from Université Libre de Bruxelles.
 
Sir Robert Wilson
(Aged 66)

Appointed on 1st November 2003.
Non-Executive Director & Senior Independent Director.
Sir Robert is Non-Executive Chairman of BG Group plc. He was previously Executive Chairman of Rio Tinto plc until his retirement in October 2003 and Chairman of The Economist Group between 2003 and 2009.
   
 
           
(PHOTO OF DR DANIEL PODOLSKY)
  (PHOTO OF TOM DE SWAAN)        
Dr Daniel Podolsky
(Aged 56)

Appointed on 1st July 2006.
Non-Executive Director.
Dr Podolsky is President of the University of Texas Southwestern Medical Center in Dallas and holds the Phillip O’Bryan Montgomery, Jr., M.D. Distinguished Presidential Chair in Academic Administration, and the Doris and Bryan Wildenthal Distinguished Chair in Medical Science. He is a member of the Institute of Medicine of the US National Academy of Sciences. He is also Chairman of the Board and Scientific Co-Founder of the GI Company.
 
Tom de Swaan (Aged 63)
Appointed on 1st January 2006.
Non-Executive Director.
Mr de Swaan is Chairman of the Supervisory Board of VanLanschot Bankiers and a member of the Board of Directors of Zurich Financial Services. He is also Vice Chairman of the Supervisory Board and Chairman of the Audit Committee of Royal Ahold and a member of the Supervisory Board of Royal DSM. Until January 2006, he was a member of the Managing Board and Chief Financial Officer of ABN AMRO.
 
Other Directors
Sir Ian Prosser and Dr Ronaldo Schmitz both retired from the Board on 20th May 2009.
   
GSK Annual Report 2009


 

56

Our Corporate Executive Team (CET)

(PHOTO OF ANDREW WITTY)
Andrew Witty
Chief Executive Officer
Andrew was appointed Chief Executive Officer in May 2008. He joined Glaxo UK in 1985. During his career with the company he has held the roles of Managing Director South Africa, Vice President and General Manager Marketing in the USA and Senior Vice President, Asia Pacific. He was appointed President, Pharmaceuticals Europe for GlaxoSmithKline in January 2003.
(PHOTO OF SIMON BICKNELL)
Simon Bicknell
Senior Vice President,
Company Secretary & Corporate Compliance Officer

Simon ensures that compliance and risk management are effectively embedded within the business and oversees corporate governance for the Group. He is also responsible for internal audit and assurance. Simon joined the Corporate Secretariat in 1984. He was appointed Deputy Company Secretary of Glaxo Wellcome in 1995 and Company Secretary of GlaxoSmithKline plc in 2000.
(PHOTO OF JOHN CLARKE)
John Clarke
President, Consumer Healthcare
John is responsible for the Consumer Healthcare business which produces oral healthcare, over-the-counter and nutritional healthcare products. He joined Beecham in 1976 and was the President of the Future Group before his current appointment in January 2006.
(PHOTO OF DEIRDRE CONNELLY)
Deirdre Connelly
President, North America Pharmaceuticals
Deirdre joined GSK in February 2009 after working at Eli Lilly and Company for 24 years. She held a variety of positions including sales professional, General Manager of Puerto Rico, Executive Director of Human Resources and most recently President of US Operations.
(PHOTO OF MARC DUNOYER)
Marc Dunoyer
President, Pharmaceuticals Asia Pacific/Japan
Marc was appointed President, Pharmaceuticals Asia Pacific/ Japan in May 2008. In addition to his current role he was appointed Chairman GSK Japan in January 2010 and in February 2010 to lead the rare diseases business of GSK from R&D to commercialisation. He joined the Group in 1999 and was President, Pharmaceuticals Japan from January 2000 until his current appointment.
(PHOTO OF EDDIE GRAY)
Eddie Gray
President, Pharmaceuticals Europe
Eddie became responsible for the Group’s operations in Europe in January 2008. He joined Beecham in 1988 and, prior to his current appointment, was Senior Vice President and General Manager, Pharmaceuticals UK.
(PHOTO OF JULIAN HESLOP)
Julian Heslop
Chief Financial Officer
Julian became Chief Financial Officer in April 2005. As head of the finance function he is responsible for activities such as financial reporting and control, tax and treasury, finance systems and insurance. He joined Glaxo Wellcome as Financial Controller in April 1998.
(PHOTO OF ABBAS HUSSAIN)
Abbas Hussain
President, Emerging Markets
Abbas joined GSK in June 2008 from Eli Lilly and Company, where he spent 20 years overseeing markets throughout Europe, Africa/Middle East and Australasia.
(PHOTO OF DUNCAN LEARMOUTH)
Duncan Learmouth
Senior Vice President, Global Communications
Duncan is responsible for the Group’s investor relations, internal and external communications, corporate responsibility and partnerships with communities. He joined Glaxo in 1991 and was Vice President, Global Investor Relations, before appointment to his current position in July 2006.
(PHOTO OF BILL LOUV)
Bill Louv
Chief Information Officer
Bill was appointed Chief Information Officer in January 2007. He is responsible for information technology across GSK. Bill joined Glaxo in 1994 as Vice President, Medical Data Sciences. Prior to his current role, Bill was Senior Vice President, R&D Information Technology.


GSK Annual Report 2009


 

57

Our Corporate Executive Team (CET)

(PHOTO OF DAN PHELAN)
Dan Phelan
Chief of Staff
Dan is responsible for Corporate Strategy and Development, IT, HR, Real Estate and Facilities, Environmental Health and Safety, and Global Security. He joined Smith Kline & French in 1981 and previously held the role of Senior Vice President, Human Resources until his appointment as Chief of Staff in May 2008.
(PHOTO OF DAVID PULMAN)
David Pulman
President, Global
Manufacturing and Supply

David is responsible for the Global Manufacturing and Supply organisation and Global Procurement. He joined Glaxo in 1978. He has broad experience of manufacturing operations having previously led the Primary Supply, European manufacturing, North American manufacturing, Global Logistics and Manufacturing Strategy organisations.
(PHOTO OF DAVID REDFERN)
David Redfern
Chief Strategy Officer
David is responsible for proactive exploration of new business opportunities and strategic planning. He began his career with GSK in 1994 in Corporate Development before being appointed Finance Director of Europe Pharmaceuticals in 1999. He was appointed Area Director for Central Europe in 2003 and Northern Europe in 2005.
(PHOTO OF MONCEF SLAOUI)
Moncef Slaoui
Chairman, Research & Development
Moncef leads the Group’s drug discovery and development activities. He joined the Group in 1988 and was a key player in building GSK’s vaccines pipeline. In 2003 he was appointed Senior Vice President, Worldwide Business Development until his current appointment in June 2006.
(PHOTO OF Jean Stéphenne)
Jean Stéphenne
President and General Manager, Biologicals
Jean has led GSK’s global vaccines business since 1989. Previously he was Vice President of Human Vaccines Research and Development and Production. He joined the company in 1974 as Head of Bacterial and Viral Vaccines production. Jean was named Baron by King Albert II of the Belgians in 2000 in recognition of his leading contribution to R&D and industry in Belgium.
(PHOTO OF CLAIRE THOMAS)
Claire Thomas
Senior Vice President, Human Resources
Claire leads the global Human Resources (HR) function. Previously, she oversaw HR in Pharmaceuticals International and in Pharmaceuticals Europe. Claire joined the company in 1996 and was appointed Director of Human Resources for UK Pharmaceuticals in 1997. Claire was honoured as an Outstanding European Woman of Achievement in 2007.
(PHOTO OF DAN TROY)
Dan Troy
Senior Vice President and General Counsel
Dan joined GSK as Senior Vice President and General Counsel in September 2008. Previously he was a Partner at the Washington law firm Sidley Austin LLP and Chief Counsel for the FDA. From 2006-2007 he chaired the America Bar Association’s Section of Administrative Law, and was previously adjunct scholar at the American Enterprise Institute in Washington, DC.


GSK Annual Report 2009


 

58

Corporate governance

Governance and policy
This section discusses GSK’s management structures and governance procedures. The section, together with the Remuneration Report on pages 73 and 90, includes details of how the company applies and complies with the principles and provisions of the Combined Code on Corporate Governance of the Financial Reporting Council (Combined Code) and with US laws and regulation.
The Board and Corporate Executive Team
The Directors are listed under ‘Our Board’ on pages 54 to 55.
The Board is responsible for the Group’s system of corporate governance and is ultimately accountable for the Group’s activities, strategy, risk management and financial performance.
Independence
The Board considers all its Non-Executive Directors to be independent in character and judgement.
Dr Schmitz served on the Board for more than ten years until his retirement as a Director on 20th May 2009, having been appointed to the Board of Glaxo Wellcome plc on 1st January 1997. During consideration of the Annual Review of Board effectiveness at its meeting in January 2009, the Board concluded that Dr Schmitz remained independent, notwithstanding his length of service. In the opinion of the Board, Dr Schmitz continued to demonstrate the characteristics of independence, such as objectively challenging management and taking part in rigorous debate, while at the same time possessing an outstanding knowledge of the company’s business and affairs, together with his experience gained as Chairman of the Audit Committee. In a long cycle investment business, such as GSK, it was considered to be particularly important to have experienced members on the Board. Sir Ian Prosser was also considered to be independent in accordance with the recommendations of the Combined Code prior to his retirement from the Board.
When Sir Christopher Gent was appointed to the Board as Deputy Chairman, he was determined by the Board to be independent. Upon taking up the chairmanship of the Board on 1st January 2005, in accordance with the Combined Code, he was excluded from the determination of whether at least half the Board are independent Non-Executive Directors. Sir Christopher Gent is a member of the Remuneration Committee, as permitted by the Combined Code, in light of his independence upon appointment as Chairman.
The Board considers that Professor Sir Roy Anderson, Dr Burns, Mr Culp, Sir Crispin Davis, Sir Deryck Maughan, Mr Murdoch, Dr Podolsky, Mr de Swaan and Sir Robert Wilson are independent in accordance with the recommendations of the Combined Code.
At the date of publication and throughout 2009, a majority of the Board members, excluding the Chairman, were independent Non-Executive Directors.
Chairman and CEO
Sir Christopher Gent has chaired the company since 1st January 2005 and was Chairman throughout 2009.
Mr Witty is the Chief Executive Officer (CEO). Mr Witty’s biographical details can be found on pages 54 and 56. The Chairman leads the Board, and represents the Board to the CEO and other CET members as necessary between Board meetings. The CEO manages the Group and implements the strategy and policies adopted by the Board. The Chairman and the Chairmen of Board Committees communicate regularly with the CEO and other CET members. The division of responsibilities between the role of Chairman and the CEO has been set out in writing, and agreed by the Board.
The CEO is responsible for executive management of the Group and is assisted by the CET. The CET meets at least 11 times per year and otherwise as necessary. The members and their responsibilities are listed under ‘Our Corporate Executive Team’ (pages 56 to 57).
Senior Independent Director
Sir Robert Wilson was appointed Senior Independent Director (SID) on 20th May 2009, following Sir Ian Prosser’s retirement from the Board on that date. Sir Ian had held the role since January 2005.
Board process
The Board has the authority, and is accountable to shareholders, for ensuring that the Group is appropriately managed and achieves the strategic objectives it sets. The Board discharges those responsibilities through an annual programme of meetings which includes the approval of overall budgetary planning and business strategy. The Board reviews the Group’s internal controls and risk management policies and approves its governance structure and code of ethics.
The Board appraises and approves major financing, investment and licensing decisions in excess of defined thresholds. In addition, the Board evaluates and monitors the performance of the Group as a whole. This includes:
  engaging at Board meetings with the CEO, the other Executive Directors and members of the CET as appropriate, on the financial and operating performance of GSK and external issues material to the Group’s prospects
  evaluating progress towards the achievement of the Group’s financial and business objectives and annual plans
  monitoring, through reports received directly or from various committees, the significant risks facing the Group.


GSK Annual Report 2009


 

59

Corporate governance

The Board has overall responsibility for succession planning for the CEO and the other Executive Directors. The Board has given the CEO broad authority to operate the business of the Group, and the CEO is accountable for, and reports to the Board on, the performance of the business. CET members make regular presentations to the Board on their areas of responsibility, and the Board meets with all the CET members on an annual basis to discuss collectively the Group’s strategy.
A primary element of the induction process for new Non-Executive Directors is undertaken by members of the CET, and all Non-Executive Directors are encouraged to have separate informal discussions at their discretion with any CET members.
The Board met six times in 2009, with each member attending as follows:
                 
    Number of meetings        
    held whilst a Board     Number of  
    member         meetings attended  
       
Sir Christopher Gent
    6       6  
Mr A Witty
    6       6  
Mr J Heslop
    6       6  
Dr M Slaoui
    6       6  
Professor Sir Roy Anderson
    6       6  
Dr S Burns
    6       6  
Mr L Culp
    6       6  
Sir Crispin Davis
    6       6  
Sir Deryck Maughan
    6       6  
Mr J Murdoch*
    4       4  
Dr D Podolsky
    6       6  
Mr T de Swaan
    6       6  
Sir Robert Wilson
    6       6  
Sir Ian Prosser*
    3       3  
Dr R Schmitz*
    3       3  
       
 
*   Mr James Murdoch was appointed to the Board on 20th May 2009. Sir Ian Prosser and Dr Ronaldo Schmitz retired from the Board on 20th May 2009.
In addition to the six scheduled meetings, the Board also met on a quorate basis on six occasions.
Business environment development
To ensure that the Board is kept up-to-date on important matters, including legal, governance and regulatory developments, presentations are made on a regular basis by both external and internal advisers.
In addition, Non-Executive Directors gain greater insight and understanding of the business through visits to Group operational facilities and attendance at various internal management meetings, including CET, Research & Development Executive and Product Marketing Board meetings, on an ad hoc basis.
A customised induction process is conducted for each of the new Non-Executive Directors focusing on their particular experience and taking account of their different backgrounds. This process includes meeting members of the CET and other senior executives and visiting particular operational facilities of the Group.
Independent advice
The Board recognises that there may be occasions when one or more of the Directors feel it is necessary to take independent legal and/or financial advice at the company’s expense. There is an agreed procedure to enable them to do so.
Indemnification of Directors
Qualifying third party indemnity provisions (as defined in section 234 of the Companies Act 2006) are in force for the benefit of the Directors and former Directors who held office during 2009.
Directors’ conflicts of interest
Directors have a duty to avoid a situation in which they have, or can have, a direct or indirect conflict of interest or possible conflict of interest with the company. The duty applies in particular to the exploitation of any property, information or opportunity, whether or not GSK could take advantage of it. The company’s Articles of Association include a general power for the Board to authorise such conflicts. There is no breach of duty if the relevant matter has been so authorised in advance.
The Board has established procedures for handling situational conflicts of interest, which are in line with the best practice guidance issued by the General Counsel 100 Group and in accordance with the company’s Articles. It has authorised the Nominations Committee to grant and review periodically, but in any event annually, any potential or actual conflict authorisations. Directors are not counted in the quorum for the authorisation of their own actual or potential conflicts. The Company Secretary minutes the consideration of any conflict. Authorisations granted are recorded by the Company Secretary in a register of conflict authorisations which are noted by the Board at its next meeting. On an ongoing basis, the Directors are responsible for informing the Company Secretary of any new, actual or potential conflicts that may arise or, if there are any changes in circumstances that may affect an authorisation previously given. Even when provided with authorisation, a Director is not absolved from his or her duty to promote the success of the company. If an actual conflict arises post authorisation, the Board will choose to exclude the Director from the relevant information and debate, or suspend the Director from the Board, or, as a last resort, require the Director to resign.
Company Secretary
The Company Secretary is responsible to the Board and is available to individual Directors in respect of Board procedures. The Company Secretary is Mr Simon Bicknell, who was appointed in May 2000. He is a barrister and joined the Group in 1984. He is Secretary to all of the Board Committees except the Remuneration Committee. The Deputy Company Secretary, Mrs Victoria Whyte, was appointed Secretary to the Remuneration Committee with effect from 27th January 2009. She is a solicitor and a Fellow of the Institute of Chartered Secretaries and Administrators.
Board Committees
The Board has established a number of committees and provides sufficient resources to enable them to undertake their duties. Executive Directors are not members of the Audit & Risk, Remuneration, Nominations or Corporate Responsibility Committees, although they may be invited to attend meetings. Each Director is a member of the Corporate Administration & Transactions and Finance Committees.


GSK Annual Report 2009


 

60

Corporate governance
Corporate governance framework
(FLOW CHART)
Current membership of these Committees is shown in the table below.
                                 
                            Corporate  
    Audit & Risk         Remuneration         Nominations         Responsibility  
                   
Sir Christopher Gent
          M       C       C  
Professor Sir Roy Anderson
    M                    
Dr S Burns
                      M  
Mr L Culp