20-F 1 u52008-20f.htm  

As filed with the Securities and Exchange Commission on March 2, 2007

Washington D.C. 20549


Registration statement pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2006


Commission file number 1-15170

GlaxoSmithKline plc
(Exact name of Registrant as specified in its charter)

(Jurisdiction of incorporation or organization)

980 Great West Road, Brentford, Middlesex TW8 9GS England
(Address of principal executive offices)

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

Securities registered or to be registered to Section 12(g) of the Act:

(Title of class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

(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.

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

    Yes      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.

    Yes      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.

    Yes      No 

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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           Acccelerated filer           Non-accelerated filer  

Indicate by check mark which financial statement item the registrant has elected to follow.

  Item 17        Item 18

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).

  Yes        No

Back to Contents

Financial summary

  2006 2005 Sterling       CER% growth *      
  £m £m % growth   2006 2005 2004   2003 2002  


Turnover 23,225 21,660 7   9 7 1   5 7  

Research and development 3,457 3,136                  

Operating profit 7,808 6,874 14   17 16   8 13  

Profit before taxation 7,799 6,732                  

Profit after taxation for the year 5,498 4,816                  

Profit attributable to shareholders 5,389 4,689                  

  2006 2005                  
  pence pence                  

Earnings per share 95.5p 82.6p 16   19 18 2   10 13  

Diluted earnings per share 94.5p 82.0p                  

          2006 2005 2004   2003 2002  

Dividends per share 48p 44p     48p 44p 42p   41p 40p  

Cash flow            
  2006 2005        
  £m £m        

Net cash inflow from operating activities 4,357 5,958        

Capital expenditure 1,590 1,181        

Free cash flow 2,623 4,664        

Dividends to shareholders 2,598 2,390        

Purchase of GSK shares 1,348 999        

Net debt 2,450 1,237        

Share price            
  2006 2005        

Share price at 31st December £13.44 £14.69        


*CER% growth is on an IFRS basis for 2006 and 2005 and a UK GAAP, business performance basis for 2004 and earlier. 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. Sterling% or £% represents growth at actual exchange rates.

GlaxoSmithKline’s website www.gsk.com gives additional information on the Group. Information made available on the website does not constitute part of this Annual Report.

Report of the Directors
Pages 2 and 3 and pages 6 to 82 inclusive consist of a 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.

Notice regarding limitations on Director liability under English law
Under the UK Companies Act 2006, a new safe harbour limits the liability of Directors in respect of statements in and omissions from the Report of the Directors contained on pages 2 and 3 and 6 to 82, 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.

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 44 to 47 of this Annual Report.


Back to Contents

Review of 2006
Chairman’s and CEO’s summary


Every day we are involved in a race that unites more than 100,000 people at GSK: in finding new medicines and vaccines that meet unmet medical needs; in ensuring that patients have access to these new medicines regardless of their financial circumstances; and in meeting the expectations of our many stakeholders, including you – our shareholder. It is a race with many stages and we won’t win them all. But, as we take part, we never forget the real focus of our efforts: the human race.

2006 was a year of positive achievement for GSK as we continued to make progress on all fronts. Sales growth is coming from an ever-widening portfolio of fast-growing products that, combined with good cost control, has enabled us to deliver a strong financial performance. We also have very healthy momentum in our pipeline, with ten new products added to our late-stage development efforts in the last 12 months. For all these reasons, we look to the future with confidence.

Financial performance and outlook
Your company delivered a strong financial performance in 2006. Turnover of £23.2 billion is an increase of 9 per cent at constant exchange rates (CER)*. Earnings per share (EPS) were 95.5 pence, with growth of 19 per cent.

This performance was driven by sales of key pharmaceutical products including Seretide/Advair for asthma and chronic obstructive pulmonary disease (COPD), the Avandia group of products for diabetes, Coreg for heart disease, Lamictal for epilepsy and bipolar disorder, Valtrex for herpes, and our vaccines.

Although we performed well in a tough environment, the US political climate together with investor concern over pipeline delays resulted in our share price ending the year 9 per cent lower than at 1st January 2006.

Looking ahead, we expect new clinical data to help deliver growth from Seretide/Advair and the Avandia group of products, and continued good performance from our vaccines business. We plan to launch new products in both our pharmaceutical and Consumer Healthcare businesses. In addition, we expect to continue to achieve savings through improved operational efficiency. The combination of new products and enhanced efficiency will help offset the impact of generic competition to Zofran and Wellbutrin XL during the coming 12 months and we expect to deliver 2007 EPS growth of 8 to 10 per cent in CER terms.

Delivering our pipeline for patients
Our pipeline is significant, with 158 projects in clinical development at the end of February 2007.

Although we had some setbacks during the year, including cancellation of Redona for diabetes, we have a great ability to reload our pipeline. And it is beginning to flow strongly, delivering much-needed new treatments for patients and opportunities for us. We now have 31 major product opportunities in phase III development or registration and we plan to launch five major new pharmaceutical products in 2007: Tykerb for breast cancer, Cervarix to prevent cervical cancer, Allermist/Avamys for allergic rhinitis, Coreg CR for heart conditions and Trexima for migraine.

Our Consumer Healthcare portfolio will also be strengthened in 2007 with the launch of ten products, including alli, the first FDA-approved OTC treatment for weight loss in the USA.

Best place to work
We work hard to create a working environment where the best people can do their best work and the results of our biennial employee opinion survey demonstrated that we are enjoying real success. For overall satisfaction, GSK scored higher than any of our peers in the benchmark group of major companies and 90 per cent of managers are proud to work for GSK.

Playing our part
In 2006, our global community investment contributions were valued at £302 million, equivalent to 3.9 per cent of Group profit before tax. This is a significant sum, but such commitment is no less than should be expected from a company in our industry. We have the capability and the desire to reach out to patients and to find solutions to healthcare challenges worldwide, helping people do more, feel better and live longer.

A human race
For all our investment in technology, it is our people that make GSK so different. We could not succeed without their commitment, expertise and passion, and we thank them all for their outstanding efforts in 2006.

We also thank you, our shareholders, for your continued support during the year, together with our suppliers and business partners who work so hard on our behalf.

Our management team has again performed very well. In the past 12 months we welcomed to the Board Dr Moncef Slaoui, our new Chairman of R&D, on 17th May 2006, Dr Daniel Podolsky on 1st July 2006 and Dr Stephanie Burns on 12th February 2007. In addition to Moncef, the corporate executive team saw two changes. Jennie Younger left in June 2006 and was succeeded by Duncan Learmouth as Senior Vice President, Corporate Communications and Community Partnerships. Ford Calhoun retired in January 2007 and was succeeded by Bill Louv as Chief Information Officer. Our best wishes go to both Jennie and Ford and we thank them for the valuable skills, great contribution and good humour they brought to their roles over the years.


Sir Christopher Gent

  JP Garnier
Chief Executive Officer



GSK Annual Report 2006


Back to Contents

2006 performance overview

  Key performance indicators
  Turnover, earnings per share growth and total shareholder return
GSK’s performance and development are driven by a number of important strategies
  Optimising the performance of key products
  Both the Pharmaceutical and Consumer Healthcare businesses focus on ways to improve the return from the Group’s intellectual property by maximising sales of key products.
  GSK’s activities include:
  achieving worldwide sales force excellence
  achieving Pharmaceutical and Consumer Healthcare marketing excellence
  maintaining the highest ethical standards
  improving the cost-effectiveness of operations
  Delivering the product pipeline for patients
  GSK aims to create the best product pipeline in the industry for the benefit of society. This includes developing a focused strategy to support the pipeline and manage the full life cycle of compounds from launch as prescription medicines through to potentially becoming over-the-counter products.
  GSK measures R&D productivity by the number and level of innovation of the products it creates, and by the ability to address unmet patient needs.
  Being the best place for the best people to do their best work
  GSK is committed to creating the best place for the best people to do their best work by:
  recruiting and developing the best people in the industry
  supporting a culture of high reward for high performance
  ensuring good communication and employee involvement
  maintaining a diverse and healthy workforce
  Improving access to medicines
  GSK is finding innovative ways to bring medicines, vaccines and health education to patients in all countries, including those suffering from epidemics and neglected diseases.


GSK Annual Report 2006


Back to Contents

Key developments in 2006

  Total turnover grew 9% to £23.2 billion – Pharmaceuticals up 9% to £20.1 billion; Consumer Healthcare up 6% to £3.1 billion  
  Top ten Pharmaceutical products:      
    Seretide/Advair £3,313 million, up 11% Zofran £847 million, up 3%  
    Vaccines products £1,692 million, up 23% Valtrex £845 million, up 24%  
    Avandia group of products £1,645 million, up 25% Coreg £779 million, up 38%  
    Lamictal £996 million, up 19% Imigran/Imitrex £711 million, up 3%  
    Wellbutrin £900 million, up 24% Flixotide/Flovent £659 million, up 5%  
  High potential products Avodart, Requip and Boniva delivered combined sales of £579 million  
  Top five Consumer Healthcare products:  
    Lucozade £301 million, up 14% Panadol £207 million, up 6%  
    Aquafresh £283 million, down 3% Ribena £169 million, down 1%  
    Sensodyne £257 million, up 19%      
  Operating margin increased by 1.9 percentage points to 33.6% of turnover  
  Continuing financial strength enabled the 2006 dividend to be increased to 48 pence (2005 – 44 pence)  
  A new share buy-back programme of £6 billion over three years was announced  
        More details on page 31.  

  In February 2007, GSK had 158 pharmaceutical and vaccine projects in clinical development, compared with 149 in February 2006  
  31 major product opportunities were in phase III development or registration (13 NCEs, 6 new vaccines, 12 PLEs), including:  
    Cervarix (cervical cancer) Coreg CR (cardiovascular conditions)  
    Tykerb (breast cancer) Trexima (migraine)  
    Allermist (allergic rhinitis) H5N1 (pandemic ‘flu vaccine)  
  Late stage projects terminated included Redona for type 2 diabetes and brecanavir for HIV/AIDS  
    More details on page 12.  

  The Group’s biennial global leadership survey of over 10,000 managers in 2006 showed:  
    91% (2004 – 91%) of managers believed “people in their department show commitment to performance with integrity”  
    90% (2004 – 83%) of managers were “proud to be part of GlaxoSmithKline”  
    86% (2004 – 77%) of managers would “gladly refer a friend or family member to work for GlaxoSmithKline”  
  In 2006, 36.3% of the global management population was female (2005 – 35.5%)  
      More details on page 17.  

  Global community investment was valued at £302 million, 3.9% of profit before tax  
  The lymphatic filariasis elimination programme continued with another 155 million albendazole treatments donated, making almost 600 million treatments in total  
  GSK shipped over 27 million Combivir tablets and nearly 59 million Epivir tablets to developing countries at not-for-profit prices. Approximately 120 million tablets were supplied by generic manufacturers licensed by GSK  
  Other international humanitarian product donations totalled £22 million  
    More details on page 19.  



GSK Annual Report 2006


Back to Contents

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. Both Glaxo Wellcome and SmithKline Beecham were major global healthcare businesses.

GSK plc 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. It also has operational headquarters in Philadelphia and Research Triangle Park, USA, and operations in some 117 countries, with products sold in over 140 countries. The principal research and development (R&D) facilities are in the UK, the USA, Japan, Italy, Spain and Belgium. Products are currently manufactured in some 37 countries.

The major markets for the Group’s products are the USA, France, Japan, the UK, Italy, Germany and Spain.

Business segments
GSK operates principally in two industry segments:

Pharmaceuticals (prescription pharmaceuticals and vaccines)
Consumer Healthcare (over-the-counter medicines, oral care and nutritional healthcare)

Annual Report and Annual Review
This report is the Annual Report of GlaxoSmithKline plc for the year ended 31st December 2006, prepared in accordance with United Kingdom requirements. It was approved by the Board of Directors on 28th February 2007 and published on 2nd March 2007.

A summary report on the year, the Annual Review 2006, which is prepared in accordance with United Kingdom requirements and intended for the investor not needing the full detail of the Annual Report, is produced as a separate document. It includes the joint statement by the Chairman and the Chief Executive Officer, a summary review of operations, summary financial statements and a summary remuneration report. The Annual Review is issued to all shareholders. The Annual Report is issued to shareholders who have elected to receive it. Both documents are available on GlaxoSmithKline’s corporate website at www.gsk.com.

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 Share (ADS) represents two GlaxoSmithKline shares.

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, Boniva/Bonviva, a trademark of Roche, Citrucel, a trademark of Merrell Pharmaceuticals, Entereg, a trademark of Adolor Corporation in the USA, Hepsera, a trademark of Gilead Sciences in some countries including the USA, HuMax-CD20 a trademark of Genmab, Integrilin, a trademark of Millennium Pharmaceuticals, Lymphostat B, a trademark of Human Genome Sciences, Nicoderm, a trademark of Sanofi-Aventis, Pfizer Canada, Elan, Novartis, Merrell or GlaxoSmithKline, 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.



GSK Annual Report 2006


Back to Contents


  Our global quest is to improve the quality of human life by enabling people to do more, feel better and live longer.  
  Our Spirit  
  We undertake our quest with the enthusiasm of entrepreneurs, excited by the constant search for innovation. We value performance achieved with integrity. We will attain success as a world class global leader with each and every one of our people contributing with passion and an unmatched sense of urgency.  



GSK Annual Report 2006

Back to Contents

Financial trends and ratios

          Growth           Growth      
  £m   CER%   £%   £m   CER%   £%   £m  

Turnover – Pharmaceuticals 20,078   9   8   18,661   8   9   17,100  
                 – Consumer Healthcare 3,147   6   5   2,999   2   4   2,886  

Total 23,225   9   7   21,660   7   8   19,986  

Cost of sales (5,010 ) 6   5   (4,764 ) 8   9   (4,360 )
Selling, general and administration (7,257 )     (7,250 )   1   (7,201 )
Research and development (3,457 ) 11   10   (3,136 ) 8   8   (2,904 )
Other operating income 307           364           235  

Operating profit 7,808   17   14   6,874   16   19   5,756  

Profit before taxation 7,799   19   16   6,732   13   16   5,779  
Profit after taxation for the year 5,498   17   14   4,816   17   20   4,022  

Profit attributable to minority interests 109           127           114  
Profit attributable to shareholders 5,389           4,689           3,908  

Earnings per share (pence) 95.5 p 19   16   82.6 p 18   21   68.1 p
Diluted earnings per share (pence) 94.5 p         82.0 p         68.0 p

Research and development                            

Pharmaceuticals 3,353           3,030           2,797  
Consumer Healthcare 104           106           107  

Total 3,457           3,136           2,904  

Net finance cost cover                            

Net finance costs 65           194           186  
Cover 121 times           36 times           32 times  

Net finance cost cover is profit before tax plus net finance costs, divided by net finance costs.                  
Tax rate 29.5%           28.5%           30.4%  


Net debt 2,450           1,237           1,984  
Gearing 25%           16%           33%  


The gearing ratio is calculated as net debt as a percentage of total equity.

Exchange rates
The Group, as a multinational business, operates in many countries and earns revenues and incurs costs in many currencies. Its results are reported in Sterling and 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 subsidiary and associated undertakings and joint ventures into Sterling. Period end rates are used to translate the net assets of those undertakings. The currencies which most influence these translations are the US dollar, the Euro and the Japanese Yen.



GSK Annual Report 2006

Back to Contents

Business review


The business review discusses GSK’s financial and non-financial activities, resources, developments and performance during 2006 and outlines the trends and factors which are likely to affect its future development under the following headings:

Optimising the performance of key products 8
Delivering the product pipeline for patients 9
Being the best place for the best people to do their best work 17
Improving access to medicines 18
Corporate responsibility and community investment 19
Global manufacturing and supply 21
Regulatory environment 22
World market 26
Products and competition 27
Financial review 2006 31
Financial position and resources 39
Outlook and risk factors 44
Financial review 2005 48

The ‘2006 performance overview’ on pages 2 and 3 form part of this business review.

Discussion of the Group’s management structures and corporate governance procedures is set out in Corporate governance (pages 53 to 63).

The Remuneration Report gives details of the Group’s policies on Directors’ remuneration and the amounts earned by Directors and senior management in 2006 (pages 65 to 82).

The reconciliation to US accounting principles is set out in Note 41 to the financial statements.

Accounting presentation
This report is prepared under International Financial Reporting Standards (IFRS), as adopted by the European Union. GSK has taken advantage of an exemption which permits financial instruments to be accounted for and presented on a UK GAAP basis in 2004 and only in accordance with IAS 32 and IAS 39 from 1st January 2005.

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.

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 subsidiary and associated undertakings and joint ventures into Sterling. Period end rates are used to translate the net assets of those undertakings. The currencies which most influence these translations are the US dollar, the Euro and the Japanese Yen.

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.



GSK Annual Report 2006


Back to Contents

Business review
Optimising the performance of key products


GSK undertakes a range of activities to maximise the commercial potential of its intellectual property by introducing innovative products, accelerating the process of bringing them to as many markets as possible, increasing brand recognition and improving access to new medicines. Both the pharmaceutical and consumer healthcare businesses focus on ways to optimise performance of key products through a number of initiatives. Some of these are:

Worldwide pharmaceutical sales force excellence
GSK’s sales force has always ranked high in surveys with healthcare professionals. Worldwide Sales Force Excellence (WSFE) aims to improve customer satisfaction even further.

The time available for physicians to learn about new medicines and clinical studies is precious. Through the WSFE initiative, sales representatives strengthen product knowledge and learn to deliver patient-specific treatment options more efficiently and more effectively. Research shows that a sales visit is highly effective when a representative engages the physician in dialogue around patient types and supports the message with visual aids that illustrate clinical results.

A single global sales call model has been introduced that focuses on treating the patient through a dialogue about “when” a GSK medicine is appropriate, “why” it is effective and “how” to administer it safely. All field staff in GSK’s key markets have been trained in this new approach. The entire sales organisation is involved in WSFE to bring about a cultural change that raises ethical standards and helps build long-term, trusting relationships with the healthcare community. In addition, a dashboard of key performance indicators, a product knowledge certification process and an effective leadership training programme have been established.

Superior product knowledge is essential in serving the needs of healthcare professionals. Physicians rely on GSK to keep them abreast of changes in prescribing information or new clinical studies involving GSK medicines. As a key goal of WSFE, GSK expanded its Annual Certification program to all countries. Over 30,000 representatives passed certification tests on the pathology, prescribing information and key messages of their leading products. Scores were consistently around 98%, with many representatives achieving a perfect score.

Pharmaceutical marketing excellence
Large numbers of patients suffering the effects of disease continue to be unable to benefit from innovative medicines and treatments. For example within Europe, around 50% of patients suffering from Chronic Obstructive Pulmonary Disease (COPD) are diagnosed and of those, only 60% receive regular maintenance drug therapy.

GSK’s marketing initiative implements programmes to overcome the barriers to proper diagnosis and treatment, by providing accurate and balanced information on its products, to allow as many people as possible to benefit from GSK’s medical advances. While these programmes are beginning to show effects, more needs to be done before the societal costs of disease will decrease.

Marketing codes
GSK is committed to ethical, responsible and patient-centred marketing. The Group’s Pharmaceutical Marketing and Promotional Activity policy governs marketing activities and applies to all employees, suppliers, contractors and agents. This policy requires that all marketing and promotional activities are based on valid scientific evidence and comply with applicable laws and regulations.

This policy is supported by regional marketing practices codes in Europe, GSK’s International region, Japan and the USA. These codes apply the same ethical standards but reflect differences in market structures, national healthcare systems and regulations. They incorporate the principles of industry codes of practice such as the European Federation of Pharmaceutical Industries Associations, the International Federation of Pharmaceutical Manufacturers Associations, Japan Pharmaceutical Manufacturers Association and Pharmaceutical Research and Manufacturers of America marketing codes.

Next Generation Now
In 2006, US Pharmaceutical businesses created and implemented the Next Generation Now operating model for advertising agencies. Design of this model, which aims to improve creativity and productivity and achieve significant cost savings, involved a number of key areas. As a result professional brand accounts were consolidated under a single agency, which increased access to the best talent, streamlined account management and reduced rates. The team also instituted key changes for agency reviews and created financial parameters and resource guides to improve decision making and processes.

Consumer Healthcare marketing excellence
The recent restructuring that placed greater emphasis on the brands‘ opportunities is now a major factor in the improved performance of this business. Through this restructuring, a team called the Future Group was created to drive the pipelines and marketing programmes for global brands with significant sales in multiple markets. For other large brands that have one dominant market, but may be available in several territories, a dedicated team drives each of these lead market brands for their dominant market. The remaining assets, termed enterprise brands, are locally managed by in-market commercial teams to retain their entrepreneurial spirit and relevance.



GSK Annual Report 2006


Back to Contents

Business review
Delivering the product pipeline for patients


Research and Development – Pharmaceuticals
Since the merger, GSK R&D has developed one of the most robust pipelines of potential new medicines in the industry. In 2006 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 our number one goal.

Focus on the Patient
One objective unites the 15,500 people who work at GSK R&D, and that is staying focused on the patient. It drives them to discover potential treatments for disease and to develop innovative medicines that offer true benefit to patients. Reaching out to and speaking with patients and their families to understand the impact of disease on their lives, their work and their community are an essential part of this. GSK knows patients are waiting, and the focus on the patient is our driver to deliver the best every day.

Pharmaceutical R&D at GSK is organised around the discovery and development of medicines for patients. Discovery is conducted by Molecular Discovery Research and GSK’s Centres of Excellence for Drug Discovery (CEDDs), and development by GSK’s Medicine Development Centres (MDCs). Along the way, many other groups provide critical scientific input, conduct important experiments, and aid in managing the R&D process. These groups are described in more detail below.

Discovering potential medicines
Two components are needed in the discovery of new medicines –identification of the most important molecular targets that have potential to impact human disease and discovery of compounds that can modulate these targets to alleviate disease in an effective and safe way.

Molecular Discovery Research (MDR) produces the lead compounds that may interact with targets which form the basis of drug discovery efforts in GSK’s CEDDs. In 2006, MDR progressed over 220 preclinical drug discovery programmes and in so doing performed hundreds of assays per week and provided the CEDDs with over 70 high-quality new lead compounds.

When GSK R&D designed the CEDDs, they integrated groups of scientists and clinicians and organised their work around specific disease areas. At no more than 300-400 people, each CEDD is nimble and entrepreneurial. GSK’s nine therapeutically aligned CEDDs, based in Europe and the USA, are:

Biopharmaceuticals – Stevenage, UK
Cardiovascular – Upper Merion, USA
Infectious Disease – Upper Merion and Research Triangle Park, USA
Metabolic – Research Triangle Park, USA
Oncology – Upper Providence, USA
Macrolide Drug Discovery – Zagreb, Croatia (acquired Pliva Research Institute in May 2006)
Neurology & Gastrointestinal Diseases – Harlow, UK
Psychiatry – Verona, Italy
Respiratory and Inflammation – Stevenage, UK.

Each CEDD is responsible for identifying the targets of most relevance in its therapeutic area and building on the lead compounds to produce a potential medicine. The fundamental steps in turning a lead compound into a medicine are optimising it for potency, efficacy and safety and defining the biology in animals and humans so that the medicine can be tested for effects in the right patient groups. These inventive steps are underpinned through scientific research and the application of informed judgement to develop creative solutions to the problems and challenges that inevitably arise in discovery and early development.

Once a candidate compound is selected, the CEDDs are responsible for undertaking the clinical studies necessary to demonstrate an effect sufficient to declare “proof of concept” – the first indication in patients that the new medicine works. Based on the profile of safety and efficacy a decision is then made on whether to progress the medicine into late-stage drug development, where large-scale clinical trials are conducted to confirm the efficacy and safety and gain regulatory approval to commercialise the product.

During the year, 19 new projects entered Phase II clinical trials for the first time.

GSK is committed to developing clinical science to ensure the understanding of disease processes in humans and learning as much as possible about the medicines in development. The application of experimental medicine is a major opportunity for the industry to optimise the drug discovery process. Advances in clinical imaging are revolutionising experimental medicine and opening opportunities to visualise the effects of medicines in humans. In 2006, GSK opened the Clinical Imaging Centre (CIC) on the biomedical research campus of Imperial College, London. The new £46 million facility is staffed by clinical investigation research groups working with state-of-the-art magnetic resonance imaging and positron emission tomography imaging systems. Facilities include radiochemistry, biology, image analysis and neurophysiology laboratories. The formidable capabilities of the CIC are augmented through multiple, global collaborations with academic imaging centres, established by GSK over the last decade.

In addition to the nine CEDDs, GSK also created a Centre of Excellence for External Drug Discovery (CEEDD) in 2005. This small team is responsible for delivering compounds to the proof of concept stage by establishing and managing long-term strategic collaborations with biotechnology companies, small and medium-sized pharmaceutical companies and academic institutions. In 2006, the CEEDD established four new collaborations and currently oversees a portfolio of 58 drug discovery projects ranging from target selection through to human clinical trials.

Developing medicines for patients
Preclinical Development (PCD) includes a wide range of activities throughout the entire medicines development process. In addition, this function is involved in the enhancement of existing products by devising more convenient formulations. Early in the development process, the metabolism and safety of compounds are evaluated in laboratory animals before testing in humans. The testing required in animals is highly regulated (see Animals and research, page 12).

PCD researchers investigate appropriate dosage forms (for example, tablets or inhalers) and develop formulations to enhance a drug’s effectiveness and its ease of use by the patient.



GSK Annual Report 2006

Back to Contents

Business review
Delivering the product pipeline for patients


Processes and supporting analytical methods for drug synthesis and product formulation and delivery are scaled up to meet increasing supply requirements. This leads to the technical transfer of the processes and methods to manufacturing. The new product supply process, a partnership between R&D and Global Manufacturing and Supply, ensures that a robust product is developed for large-scale commercial manufacturing and launch.

In 2006, GSK redesigned the management of late-stage development by dividing the single large late-stage development organisation into three distinct, empowered entities. The first component, Medicines Development, is the collection of six therapeutically aligned Medicine Development Centres (MDCs). 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 GSK, in particular the CEDDs and the other late-stage development groups.

The MDCs are based at the major USA and UK sites and are aligned with the following therapeutic areas:

Infectious Diseases including Diseases of the Developing World (DDW)
Neuroscience (Psychiatry/Neurology)

The MDCs discharge their responsibilities through project teams for each medicine in development. These project teams are responsible for maximising the worldwide development opportunities for each product within their remit and to see that all the information needed to support the registration, safety programmes, pricing and formulary negotiations is available. Commercial input from Global Product Strategy and Commercial Operations ensures that regional marketing needs are integrated into development plans at an early stage.

The second component, Development Operations drives operational excellence in medicine delivery at the study, project and portfolio level. This is done by establishing integrated planning to ensure consistent and predictable drug project plans and supplying valued clinical development capabilities. In 2006, development operations managed clinical trials with over 30,000 active patients, handling everything from patient recruitment to data management to project planning. Development Operations is also responsible for helping to identify patients outside of traditional markets. In 2006, it identified more than 20,000 new patients, 39% of whom were outside of Western Europe and North America.

The Office of the Chief Medical Officer is the third component of late-stage development and is charged with the safety of patients involved in clinical trials, as well as the proper filing of the findings with regulatory authorities. All clinical trials sponsored by GSK, irrespective of where they take place, are conducted according to international standards of good clinical practice and applicable laws and regulations. The protocols are reviewed by the external regulatory agencies in the relevant countries where required and all protocols are considered by an ethics review committee, whose responsibilities cover the sites where the studies will take place.

Safety data are routinely collected throughout development programmes and are reported to national and regional regulatory agencies in line with applicable regulations.

GSK considers its Chief Medical Officer, working with the Global Safety Board, to be ultimately accountable for oversight of all major decisions regarding patient safety. The GSK Global Safety Board is responsible internally for approving pivotal studies and investigating any issues related to patient safety arising during the development programme. Information from GSK clinical trials is widely and easily available at the Clinical Trial Register on the website.

In 2006, GSK formed a dedicated pharmacogenetics group. GSK believes that pharmacogenetic research, correlating genetic data with response to medicine, will help its scientists understand how different people respond to the effects of a medicine, both those therapeutically intended and those causing adverse events. R&D is collecting DNA samples, under appropriate patient consent, in clinical studies to identify pharmacogenetic information which may help predict a patient’s response. This information is intended to define patient groups likely to gain benefit from treatment or to suffer a side effect. Pharmacogenetics promises to provide physicians with information to help them select the medicine and dose most likely to benefit the patient and, in the long run, may help to reduce pipeline attrition and improve productivity.

GSK continues to identify compounds from other companies that would enhance the portfolio and to create innovative collaborations to ensure that the Group is regarded as the partner of choice for large and small companies.

The subjects of acquisitions, in-licensing, co-marketing/co-promotion, or future options arrangements in 2006 were:

Genmab’s HuMax-CD20 (ofatumumab), anti CD20 Mab in oncology (Phase III) and rheumatoid arthritis (Phase II)
HGS’ LymphoStat B for lupus erythematosus (Phase III)
Gilead/Myogen’s ambrisentan (commercialisation, excluding USA), selective endothelin receptor antagonist for pulmonary arterial hypertension (Phase III), plus marketing and distribution agreement for GSK's Flolan (in the USA) by Myogen
Akros/Japan Tobacco’s JTP-74057, a MEK inhibitor (preclinical)
ChemoCentryx – options on preclinical assets and traficet (Phase II)
EPIX – options on discovery targets and 5HT4 agonist (Phase I)
Galapagos – options on discovery programmes in osteoarthritis (preclinical)
Kissei’s SGLT1 inhibitors for type 2 diabetes (preclinical)
Pharmacopeia – options on discovery programmes (preclinical)
Sirna’s RNAI-based therapeutics for respiratory diseases (preclinical)
Acquisition of the Pliva Research Institute

Extending the use of existing products
Once a product is launched, it is important to establish additional ways in which patients may be helped. This can be done through investigating whether other illnesses may be treated with the product or by the development of additional, more convenient dosage forms. Some developments reflect feedback from patients and medical professionals, while others are the result of continuing research into disease and its causes.



GSK Annual Report 2006

Back to Contents

Business review
Delivering the product pipeline for patients


In 2006, GSK received approval in the USA for a controlled-release version of Coreg, Coreg CR, which allows once-daily dosing for hypertension and mild to severe heart failure. The product will be launched in the USA in Q1 2007. GSK also began a novel investigation to determine whether its diabetes treatment, rosiglitazone XR is effective in Alzheimer’s Disease. The scientific basis for this programme was developed thanks to the pharmacogenetics work undertaken with rosiglitazone over the past seven years.

Managing the portfolio
Key projects reaching significant milestones are reviewed each month by the Product Management Board (PMB), which is responsible for determining if a medicine has met criteria for passing into the next phase of development.

Progress of the portfolio is communicated to investors and the media at regular intervals during the year. Details of GSK’s product development pipeline are given on pages 13 to 16.

Risk in R&D
Pharmaceutical R&D, by its very nature, is an inherently risky venture. From the time a potential medicine is discovered until it becomes an approved medicine can take 10-15 years. Further, only one in ten molecules that starts human clinical trials ever reaches regulatory approval. The nine out of ten that fail can be discontinued for a variety of reasons, from insufficient safety thresholds to lack of efficacy to manufacturing hurdles. These discontinuations occur despite extensive predictive testing. Late-stage projects terminated during 2006 included brecanavir for HIV and Redona for diabetes.

Research and development – vaccines
The majority of GSK’s vaccine activities are conducted at its biologicals headquarters in Rixensart and Wavre, Belgium. These include research, clinical development, regulatory strategy, commercial strategy, scaling up, vaccine production, packaging and all other support functions. The discovery and development of a new vaccine is a complex process requiring long-term investment. In R&D over 1,500 scientists are devoted to developing new vaccines and more cost-effective and convenient combination vaccines to prevent infections that cause serious medical problems worldwide. GSK is also targeting therapeutic vaccines that may prevent relapse in cancer patients. Thanks to the use of innovative technologies and its global business model, GSK is a fast-growing vaccine maker, delivering value by contributing to the health and well-being of people, in every generation around the world.

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 designed to enhance the immune response. The first step is to evaluate the safety and efficacy of the candidate vaccine in a preclinical setting, usually involving an animal model. The candidate vaccine is then tested in clinical trials in healthy individuals to evaluate safety and effectiveness in inducing an immune response to protect the body from infection encountered later in a natural setting (Phase I/II). Large-scale field trials in healthy individuals follow to establish safety and efficacy in a cross section of the population (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 (Phase IV).

Vaccine manufacturing 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 both quality and safety of the vaccines and this commonly 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 has been increasing its capacity to supply vaccines across the globe by developing a unique global manufacturing network based on three major regional hubs in Europe, North America and Asia. After the establishment of its North American hub in 2005 through three major acquisitions, GSK further strengthened in 2006 its vaccine capabilities in both Asia and Europe:

investing more than £100 million to set up a vaccine manufacturing site dedicated to the primary production of paediatric vaccines in Singapore
opening in Gödöllö, Hungary, its €100 million primary production facility for the manufacturing of diphtheria, tetanus and pertussis antigens used in several paediatric combinations vaccines
investing more than €500 million in its vaccine manufacturing plant in St Amand-les-Eaux, France, to increase production capacity in formulation, filing, freeze-drying and packaging.

Diseases of the developing world
Continued investment in research into diseases that disproportionately affect 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 GSK’s response to this challenge, it operates a drug discovery unit, based at Tres Cantos (Spain), primarily dedicated to finding new medicines for malaria and tuberculosis. Additional research sites in the USA and the UK are focused on discovering new medicines to treat HIV/AIDS and drug resistant bacteria, while vaccine research is conducted in Rixensart (Belgium).

Medicines and vaccines that enter clinical trials are taken through development and regulatory processes by dedicated groups based in the UK, USA and Belgium. Through these R&D efforts, GSK is addressing the prevention and treatment of all three of the World Health Organization’s (WHO) top priority diseases.

GSK currently has 14 clinical programmes of relevance to the developing world, 7 of which are aimed at producing vaccines and medicines for diseases that disproportionately affect developing countries.



GSK Annual Report 2006

Back to Contents

Business review
Delivering the product pipeline for patients


Public/Private Partnerships (PPPs) remain essential to fund research where there is no commercially viable market for a potential product. GSK is a leader in working in PPPs and continues to collaborate closely with many governments, academic centres, United Nations’ agencies and other global funding bodies in this area, to maximise expertise and knowledge. This has the dual benefit of encouraging research and development and accelerating access to the medicines in the developing world.

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. GSK only uses animals where there is no alternative and only in the numbers required for each test. The Group strives to exceed regulatory standards in the care and use of the animals it uses and undergoes internal and external review to assure these standards.

The vast majority of the experimental methods do not use animals. GSK is 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 unnecessary pain or suffering is scrupulously avoided.

GSK understands that use of animals for research purposes commands a high level of public interest. The GlaxoSmithKline Public Policy Position ‘The care and ethical use of animals in research’, and further information and reports, are available on the website, www.gsk.com or from Secretariat.

Research and development – Consumer Healthcare
The focus of R&D is to identify and develop novel products that benefit consumers in the over-the-counter (OTC), oral care and nutritional healthcare markets. To achieve a significant increase in innovation from internal and external sources, R&D has remodelled to deliver a more valuable pipeline of products. With this change, specific tasks that can be performed at lower cost outside the company have been transferred to external development partners. This transfer, along with other headcount reductions and savings, releases substantial funds for investment in additional innovation projects. The remodelling builds on the recently adopted Consumer Healthcare operating model whereby, for the Global brands, R&D mirrors the commercial structure, with brand-dedicated R&D teams paired with commercial brand teams and both located together at the Innovation Centres at Weybridge, UK or Parsippany, USA.

GSK’s pipeline
At the end of February 2007, GSK had nearly 210 pharmaceutical and vaccine projects in development. Of these, 158 are in the clinic comprising 94 NCEs, 41 PLEs and 23 vaccines, compared with 118 in 2001.

In the last 12 months, 4 NCEs, 3 new vaccines and 3 in-licenced assets entered late-stage development.

GSK now has 31 major product opportunities in phase III development or registration, comprising 13 new chemical entities (NCEs), 6 new vaccines and 12 product line extensions (PLEs).

Major NCEs and vaccines in phase III development:
  ambrisentan – for hypertension
Lymphostat-B* – for lupus
casopitant* – for post-operative and chemotherapy-induced  vomiting and nausea
pazopanib* – for prevention of tumour growth
mepolizumab – for hypereosinophilic syndrome
Promacta* – for patients with low platelet count
New generation ‘flu vaccine*
Globorix – a new combination paediatric vaccine against hepatitis B,  diphtheria, meningitis A and C
New meningitis vaccine against meningitis C and Y and Hib*
Synflorix – vaccine to prevent pneumococcal disease.
(* entered late-stage in the last 12 months)
Major NCEs and vaccines filed:
  Allermist/Avamys – for hay fever; US approval expected in first half  of 2007
  Altabax/Altargo – for skin infections; approval expected in 2007 
  Entereg – for post-operative ileus, approval expected in 2007 
  Tykerb – for breast cancer; US approval expected in first half of 2007 
  Cervarix – vaccine to prevent cervical cancer; European and 
  International launches expected in second half of 2007
  H5N1 pandemic vaccine. 
Late-stage assets in-licensed during the last 12 months:
  Hu-Max-CD20 – for the treatment of leukaemia and non-Hodgkin’s 
  gepirone ER – for major depressive disorder 
  XP13512 – for restless legs syndrome and treatment of neuropathic  pain.

In 2007, GSK expects to launch 5 major new pharmaceutical products. For further details of these developments, and information on other important launches/filings expected in 2007, see GSK outlook on page 44.

This maturity in the late stage pipeline is expected to lead to an increase in registrations in the coming years. The content of the drug development portfolio will change over time as new compounds progress from discovery to development and from development to the market. Owing to the nature of the drug development process, many of these compounds, especially those in early stages of investigation, may be terminated as they progress through development. Phase I NCEs with multiple indications are counted only once. NCEs in later phases are counted by each indication. For competitive reasons, new projects in pre-clinical development have not been disclosed and some project types may not have been identified.

GSK’s policy is to seek to obtain patent protection on all protectable inventions discovered or developed through its R&D activities. Patent protection for new active ingredients is available in all significant markets and protection can also be obtained, for example, on new pharmaceutical formulations, manufacturing processes, medical uses and special devices for administering products, see page 23.



GSK Annual Report 2006


Back to Contents

Business review
Delivering the product pipeline for patients

In-license or other alliance relationship with third party   NDA New drug application (USA)
S Date of first submission   Phase I Evaluation of clinical pharmacology, usually conducted in volunteers
A Date of first regulatory approval (for MAA, this is the first EU approval letter)   Phase II Determination of dose and initial evaluation of efficacy, conducted in a small number of patients
AL Approvable letter indicates that ultimately approval can be given subject to resolution of outstanding queries   Phase III Large comparative study (compound versus placebo and/or established treatment) in patients to establish clinical benefit and safety.
MAA Marketing authorisation application (Europe)      

Estimated submission dates are only disclosed where they are within 12 months of the date of the chart. This date represents the most likely year of submission where it is considered that there is a reasonably high probability of successfully meeting the date assuming the clinical data meets the expected end-points of the clinical trials.

              submission dates
Compound/Product   Type   Indication   Phase   MAA   NDA

Cardiovascular & Metabolic                
256073   high affinity nicotinic acid receptor   dyslipidaemia   I        
  (HM74A) agonist                
568859   lipoprotein-associated phospholipase A2 (Lp-PLA2) inhibitor   atherosclerosis   I        
813893   factor Xa inhibitor   prevention of stroke in atrial fibrillation   I        
856553   p38 kinase inhibitor   atherosclerosis (also rheumatoid arthritis & chronic obstructive pulmonary disease, COPD)   I        
rilapladib   Lp-PLA2 inhibitor   atherosclerosis   I        
501516   peroxisome proliferator-activator receptor (PPAR) delta agonist   dyslipidaemia   II        
681323   p38 kinase inhibitor   atherosclerosis (also COPD, neuropathic pain & rheumatoid arthritis)   II        
darapladib   Lp-PLA2 inhibitor   atherosclerosis   ll/III        
ambrisentan   endothelin A antagonist   pulmonary arterial hypertension   III   2007   N/A
Coreg CR+ ACE inhibitor   beta blocker + angiotensin converting   hypertension – fixed dose combination   III   N/A    
  enzyme inhibitor                
Arixtra   synthetic factor Xa inhibitor   treatment of acute coronary syndrome   Approvable   S:Jul06   AL:Feb07
Coreg CR   beta blocker   hypertension & congestive heart failure – once-daily   Approved   N/A   A:Oct06
Metabolic projects                    
189075   sodium dependent glucose transport (SGLT2) inhibitor   obesity   I        
376501   PPAR gamma partial agonist   type 2 diabetes   I        
625019   PPAR pan agonist   type 2 diabetes & metabolic syndrome   I        
189075   SGLT2 inhibitor   type 2 diabetes   II        
677954   PPAR pan agonist   type 2 diabetes, metabolic syndrome & dyslipidaemia   II        
869682   SGLT2 inhibitor   obesity   II        
albiglutide (716155)   glucagon-like peptide 1 agonist   type 2 diabetes   II        
Avandia   PPAR gamma agonist   atherosclerosis in type 2 diabetes   II        
Avandamet XR   PPAR gamma agonist + metformin   type 2 diabetes – extended release   III   N/A   2007
Avandia   PPAR gamma agonist   prevention of diabetes   III   N/A   2007
Avandia   PPAR gamma agonist   prevention of disease progression   III   N/A   2007
Avandia + simvastatin   PPAR gamma agonist + statin   type 2 diabetes   III   N/A   2007
Avandaryl/Avaglim   PPAR gamma agonist + sulphonylurea   type 2 diabetes – fixed dose combination   Approved   A:Jun06   A:Dec05

Infectious Diseases                    
565154   oral pleuromutilin   treatment of bacterial infections   I        
742510   oral pleuromutilin   treatment of bacterial infections   I        
farglitazar   PPAR gamma agonist   hepatic fibrosis   II        
sitamaquine   8-aminoquinoline   treatment of visceral leishmaniasis   II       N/A
tafenoquine   8-aminoquinoline   Plasmodium vivax malaria   II        
chlorproguanil, dapsone +   antifolate + artemisinin   treatment of uncomplicated malaria   IIl   2008   N/A
artesunate (CDA)                    
Altabax/Altargo   topical pleuromutilin   bacterial skin infections   Approvable   S:Jun06   AL:Dec06
625433   polymerase inhibitor   hepatitis C   I        
825780   DNA antiviral vaccine   HIV infection   I        
364735     integrase inhibitor   HIV infection   II        
Relenza   neuraminidase inhibitor   influenza prophylaxis   Approved   A:Aug06   A:Mar06



GSK Annual Report 2006


Back to Contents

Business review
Delivering the product pipeline for patients

                submission dates  
Compound/Product   Type   Indication   Phase   MAA   NDA  

Musculoskeletal, Inflammation, Gastrointestinal & Urology              
221149   oxytocin antagonist   threatened pre-term labour   I          
232802   3G-selective oestrogen receptor modulator   treatment of menopausal symptoms   I          
267268   vitronectin integrin antagonist   age-related macular degeneration   I          
315234   monoclonal antibody   rheumatoid arthritis   I          
366074   potassium channel opener   overactive bladder   I          
751689   calcium antagonist   osteoporosis   I          
768974   parathyroid hormone agonist   osteoporosis   I          
relacatib   cathepsin K inhibitor   osteoporosis & osteoarthritis (also bone metastases)   I          
274150   selective iNOS inhibitor   rheumatoid arthritis (also migraine)   II          
681323   p38 kinase inhibitor (oral)   rheumatoid arthritis (also atherosclerosis, COPD   II          
        & neuropathic pain)              
856553   p38 kinase inhibitor (oral)   rheumatoid arthritis (also atherosclerosis & COPD)   II          
876008   corticotrophin releasing factor (CRF1) antagonist   irritable bowel syndrome (also depression & anxiety)   II          
casopitant   NK1 antagonist   overactive bladder (also depression & anxiety,   II          
        chemotherapy induced & postoperative nausea & vomiting)              
dutasteride+ testosterone   5-alpha reductase inhibitor + testosterone   hypogonadism – fixed dose combination   II          
HuMax-CD20   human monoclonal antibody   rheumatoid arthritis (chronic lymphocytic leukaemia   II          
(ofatumumab)       & non-Hodgkin’s lymphoma)              
mepolizumab   anti-IL5 monoclonal antibody   eosinophilic esophagitis (also severe asthma & nasal polyposis)   II          
rosiglitazone XR   PPAR gamma agonist   rheumatoid arthritis (also Alzheimer’s disease)   II          
solabegron   beta3 adrenergic agonist   irritable bowel syndrome   II          
solabegron   beta3 adrenergic agonist   overactive bladder   II          
Avodart + alpha blocker   5-alpha reductase inhibitor + alpha blocker   benign prostatic hyperplasia – fixed dose combination   III          
Avodart   5-alpha reductase inhibitor   reduction in the risk of prostate cancer   III          
belimumab   anti-B lymphocycte stimulator monoclonal antibody   systemic lupus erythematosus   III          
Entereg/Entrareg   peripheral mu-opioid antagonist   opioid induced bowel dysfunction   III          
mepolizumab   anti-IL5 monoclonal antibody   hypereosinophilic syndrome (also severe asthma & nasal polyposis)   III          
Entereg/Entrareg   peripheral mu-opioid antagonist   post operative ileus   Approvable       AL:Jul05 &  
Boniva/Bonviva   bisphosphonate   treatment of postmenopausal osteoporosis – i.v. injection   Approved   A:Mar06   A:Jan06  

163090   5HT1 antagonist   depression & anxiety   I          
189254   histamine H3 antagonist   dementia   I          
239512   histamine H3 antagonist   dementia   I          
561679   CRF1 antagonist   depression & anxiety   I          
588045   5HT1 antagonist   depression & anxiety   I          
598809   dopamine D3 antagonist   drug dependency   I          
729327   AMPA receptor modulator   schizophrenia   I          
823296   NK1 antagonist   depression & anxiety   I          
274150   selective iNOS inhibitor   migraine (also rheumatoid arthritis)   II          
372475   triple (5HT/noradrenaline/dopamine) re-uptake inhibitor   depression   II          
468816   glycine antagonist   smoking cessation   II          
649868   orexin antagonist   sleep disorders   II          
681323   p38 kinase inhibitor   neuropathic pain (also atherosclerosis, COPD &   II          
        rheumatoid arthritis)              
683699   dual alpha4 integrin antagonist (VLA4)   multiple sclerosis   II          
742457   5HT6 antagonist   dementia   II          
773812   mixed 5HT/dopaminergic antagonist   schizophrenia   II          
842166   non-cannabinoid CB2 agonist   inflammatory pain   II          
876008   CRF1 antagonist   depression & anxiety (also irritable bowel syndrome)   II          
casopitant   NK1 antagonist   depression & anxiety (also overactive bladder,   II          
        chemotherapy induced & postoperative nausea & vomiting)              
talnetant   NK3 antagonist   schizophrenia   II          
gepirone ER   5HT1a agonist   major depressive disorder, once-daily   III       2007  
Lamictal XR   sodium channel inhibitor   epilepsy – partial generalised tonic-clonic seizures, once-daily   III   N/A   2007  
rosiglitazone XR   PPAR gamma agonist   Alzheimer's disease (also rheumatoid arthritis)   III          
Lamictal XR   sodium channel inhibitor   epilepsy – partial seizures, once-daily   Submitted   N/A   S:Nov06  
Requip extended release   non-ergot dopamine agonist   restless legs syndrome   Submitted   N/A   S:Oct06  
Requip Modutab/XL 24 hour   non-ergot dopamine agonist   Parkinson’s disease – once-daily controlled release formulation   Submitted   S:Dec05   S:Feb07  
Trexima   5HT1 agonist + naproxen   migraine – fixed dose combination   Approvable   N/A   AL:Jun06  
Wellbutrin XL   noradrenaline/dopamine re-uptake inhibitor   seasonal affective disorder   Approved   N/A   A:Jun06  
Wellbutrin XL/XR   noradrenaline/dopamine re-uptake inhibitor   depression   Approved   A:Dec06   A:Aug03  



GSK Annual Report 2006


Back to Contents

Business review
Delivering the product pipeline for patients

                submission dates  
Compound/Product   Type   Indication   Phase   MAA   NDA  

559448   thrombopoietin agonist   thrombocytopaenia   I          
626616   human kinase inhibitor   chemoprotection   I          
pazopanib   vascular endothelial growth factor   non-small cell lung cancer & colorectal cancer   I          
    (VEGF) tyrosine kinase inhibitor   (in combination with other treatment regimens)              
relacatib   cathepsin K inhibitor   bone metastases (also osteoporosis & osteoarthritis)   I          
pazopanib + Tykerb   VEGF tyrosine kinase inhibitor + ErbB-2 and epidermal growth factor receptor (EGFR) dual kinase inhibitor   breast cancer   II          
pazopanib + Tykerb   VEGF tyrosine kinase inhibitor + ErbB-2   other cancers   II          
    and EGFR dual kinase inhibitor                  
Promacta (eltrombopag)   thrombopoietin agonist   chemotherapy induced thrombocytopaenia   II          
Promacta (eltrombopag)   thrombopoietin agonist   hepatitis C   II          
casopitant   NK1 antagonist   chemotherapy induced & postoperative* nausea &   III          
        vomiting (*USA only)              
        (also overactive bladder, depression & anxiety)              
HuMax-CD20   human monoclonal antibody   chronic lymphocytic leukaemia & non-Hodgkin’s   III          
(ofatumumab)       lymphoma (also rheumatoid arthritis)              
Hycamtin   topo-isomerase I inhibitor   ovarian cancer first-line therapy   III          
Hycamtin   topo-isomerase I inhibitor   small cell lung cancer second-line therapy –   III   2007   2007  
        oral formulation              
pazopanib   VEGF tyrosine kinase inhibitor   renal cell cancer   III          
Promacta (eltrombopag)   thrombopoietin agonist   long-term idiopathic thrombocytopaenic purpura   III          
Promacta (eltrombopag)   thrombopoietin agonist   short-term idiopathic thrombocytopaenic purpura   III       2007/08  
Tykerb   ErbB-2 and EGFR dual kinase inhibitor   breast cancer, adjuvant therapy   III          
Tykerb   ErbB-2 and EGFR dual kinase inhibitor   breast cancer, first-line therapy   III          
Tykerb   ErbB-2 and EGFR dual kinase inhibitor   head & neck squamous cell carcinomas   III          
Tykerb   ErbB-2 and EGFR dual kinase inhibitor   refractory breast cancer   Submitted   S:Oct06   S:Sep06  
Arranon/Atriance   guanine arabinoside prodrug   acute lymphoblastic leukaemia & lymphomas   Approved   S:May06   A:Oct05  
Hycamtin   topo-isomerase I inhibitor   cervical cancer, second-line therapy   Approved   A:Nov06   A:Jun06  

256066   PDE IV inhibitor (inhaled)   COPD   I          
573719   muscarinic acetylcholine antagonist   COPD   I          
679586   monoclonal antibody   severe asthma   I          
961081   muscarinic antagonist, beta2 agonist   COPD   I          
159797   long-acting beta2 agonist   COPD, also COPD & asthma in combination with a   II          
        glucocorticoid agonist              
159802   long-acting beta2 agonist   COPD, also COPD & asthma in combination with a   II          
        glucocorticoid agonist              
233705   muscarinic acetylcholine antagonist   COPD   II          
256066   PDE IV inhibitor (inhaled)   asthma   II          
256066   PDE IV inhibitor (intranasal)   allergic rhinitis   II          
597901   long-acting beta2 agonist   COPD, also COPD & asthma in combination with a   II          
        glucocorticoid agonist              
642444   long-acting beta2 agonist   COPD, also COPD & asthma in combination with a   II          
        glucocorticoid agonist              
678007   long-acting beta2 agonist   COPD, also COPD & asthma in combination with a   II          
        glucocorticoid agonist              
681323   p38 kinase inhibitor (oral)   COPD (also atherosclerosis, neuropathic pain &   II          
        rheumatoid arthritis)              
685698   glucocorticoid agonist   asthma & COPD in combination with a long-acting   II          
        beta2 agonist (also as Avamys/Allermist for allergic rhinitis)              
784568   glucocorticoid agonist (intranasal)   allergic rhinitis   II          
799943   glucocorticoid agonist   asthma & COPD in combination with a long-acting   II          
        beta2 agonist              
856553   p38 kinase inhibitor (oral)   COPD (also atherosclerosis & rheumatoid arthritis)   II          
870086   novel glucocorticoid agonist   asthma   II          
mepolizumab   anti-IL5 monoclonal antibody   severe asthma & nasal polyposis (also hypereosinophilic   II          
        syndrome & eosinophilic esophagitis)              
Avamys/Allermist   glucocorticoid agonist   allergic rhinitis   Submitted   S:Jul06   S:Jun06  
Seretide/Advair   beta2 agonist/inhaled corticosteroid   COPD – mortality claim   Submitted   S:Sep06   S:Oct06  
Ariflo   PDE IV inhibitor (oral)   COPD   Approvable       AL:Oct03  
Seretide   beta2 agonist/inhaled corticosteroid   asthma – initial maintenance therapy   Approved   A:Jul06   N/A  
Seretide/Advair   beta2 agonist/inhaled corticosteroid   asthma – non-CFC inhaler   Approved   A:Jun00   A:Jun06  



GSK Annual Report 2006


Back to Contents

Business review
Delivering the product pipeline for patients

                submission dates  
Compound/Product   Type   Indication   Phase   MAA   NDA  

Paediatric Vaccines                      
MenACWY-TT   conjugated   Neisseria meningitis groups A, C, W & Y disease   II          
Globorix    conjugated   diptheria, tetanus, pertussis, hepatitis B, Haemophilus    lll   2007      
        influenzae type b disease, Neisseria meningitis groups              
        A & C disease prophylaxis              
Hib-MenCY-TT   conjugated   Neisseria meningitis groups C & Y disease &   III          
        Haemophilus influenzae type b disease prophylaxis              
Infanrix-IPV    subunit – inactivated   diptheria, tetanus, pertussis + poliomyelitis prophylaxis   III       2007  
        (booster 5th dose)              
Synflorix    conjugated   Streptococcus pneumoniae disease and non-typeable   lll   2007      
        Haemophilus influenzae prophylaxis for children              
Priorix-Tetra    live attenuated   measles, mumps, rubella & varicella prophylaxis   Approved   A:Jul06      
Rotarix    live attenuated – oral   rotavirus induced gastroenteritis prophylaxis   Approved   A:Feb06   2007  

Other Vaccines                      
HIV   recombinant   HIV infection prophylaxis   l          
S. pneumoniae elderly   recombinant – conjugated   Streptococcus pneumoniae disease prophylaxis   l          
Dengue fever   attenuated tetravalent vaccine   Dengue fever prophylaxis   ll          
Epstein-Barr virus    recombinant   EBV infection prophylaxis   ll          
Hepatitis E virus    recombinant   hepatitis E prophylaxis   ll          
Mosquirix    recombinant   malaria prophylaxis   ll          
Tuberculosis   recombinant   tuberculosis prophylaxis   II          
Varicella Zoster virus   recombinant   Varicella Zoster prevention   II          
New generation ‘flu vaccine   inactivated split-trivalent   seasonal influenza prophylaxis for the elderly   III          
Simplirix    recombinant   genital herpes prophylaxis   lll          
Daronrix    inactivated whole-aluminium salt –   pandemic influenza prophylaxis   Submitted   S:Dec05      
‘Flu pre-pandemic   H5N1 inactivated split- monovalent   pandemic influenza prophylaxis   Submitted   S:Jan07      
Cervarix    recombinant   human papilloma virus infection prophylaxis   Submitted   S:Mar06   2007  
FluLaval    inactivated split   influenza prophylaxis   Approved   2007   A:Oct06  

P501   recombinant   treatment of prostate cancer   l          
MAGE-A3   recombinant   treatment of non-small cell lung cancer & melanoma   ll          



GSK Annual Report 2006


Back to Contents

Business review
Being the best place for the best people to do their best work


GlaxoSmithKline people

GlaxoSmithKline is committed to creating the best place for the best people to do their best work to deliver the Group’s business strategy. The Group employs over 100,000 people in more than 117 countries.

Recruitment, talent management and leadership development
Attracting the best people in the industry is critical to enhancing and sustaining GSK’s performance. The Group’s Talent Solutions recruiters in the USA and UK are focused on pro-active identification of talented external candidates for key jobs.

The annual performance and development planning (PDP) process ensures that employees set business aligned objectives and behavioural goals. PDPs are reviewed throughout the year, culminating with an end of year review that is factored into compensation decisions.

The annual talent management cycle identifies the highest performing people in each business and function and key talent is developed through tailored management and leadership programmes (for more detail see the Group’s Corporate Responsibility Report), exposure to top management through programmes such as the Chief Executive Forum and stretch assignments. A pool of potential successors is identified for each Vice-President position and other critical roles in the organisation.

Performance and reward
Reward systems are designed to support a culture of high performance and to attract and retain the best people. Performance based pay and bonuses, share awards and share options align employee interests with the meeting of business targets.

Communication and employee involvement
The Group conducts a Global Leadership Survey (GLS) every two years. The most recent survey was conducted in 2006 among more than 10,000 managers to gauge opinions on critical issues such as culture and confidence in the Group’s future. Scores on morale and engagement have steadily increased since 2002 and compare very favourably with global benchmarks (42 top-ranked companies). In the 2006 survey, 90% of managers were “proud to be part of GlaxoSmithKline” and 86% would “gladly refer a friend or family member to work for GlaxoSmithKline”. Each business and function develops action plans to address areas for improvement based on results from the GLS and other surveys.

The Group also consults employees on changes that affect them and discusses developments in the businesses with a European Employee Consultation Forum and similar bodies in countries where this is national practice. In 2006 in the UK, a new national consultation forum was created. The UK Information and Consultation Forum is made up of 15 elected employee representatives and seven management representatives. It meets regularly so that employee views can be taken into account before major changes affecting all employees are implemented.

Business ethics and reputation
Performance with integrity is central to operating at GSK. The 2006 GLS showed 91% believe that “people in their department show commitment to performance with integrity”and 82% agree that they “can report unethical practices without fear of reprisal”.

To engage a wider range of managers, the half-day workshop on Ethical Decision-making (attended by 479 leaders in 2005) has been extended to three e-learning modules, which are being implemented across the businesses. So far, over 400 people have completed at least one of the three modules.

Maintaining Standards
GSK expects employees to meet high ethical standards in all aspects of business by conducting activities with honesty and integrity, adhering to corporate responsibility principles and complying with applicable laws and regulations. GSK audits its operations to ensure relevant standards expected, such as those in marketing practices, are reached or exceeded.

Commitment to the GSK Code of Conduct is reinforced each year by a senior management certification programme, and in 2006 over 12,000 managers certified they had complied with “Performance with Integrity” principles.

The PDP process includes an assessment of how well employees have implemented the GSK Spirit, the principles used to define GSK’s culture. This may have a significant impact on bonus payments and may also affect future career development. In this way the Group holds employees accountable for delivering performance with high standards of integrity to protect and enhance GSK’s reputation.

The diversity and inclusion initiatives focus on improving performance by responding to the diverse needs of employees, customers and external stakeholders. In the fifth year of the annual Multicultural Marketing and Diversity Awards, 14 teams from around the world highlighted innovative activities that demonstrated business impact. In 2006, the global management population was 63.7% male and 36.3% female. For more details on diversity measures, see the Employment Practices section of the Corporate Responsibility report.

The Group is committed to employment policies free from discrimination against existing or potential staff 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 with the Group.

Health and well-being
Healthy employees and healthy ways of working contribute to the sustained performance of the Group. Global policies on employee health are supported by mandatory standards that integrate employee health and safety and environmental requirements. These standards are applied to all the Group’s facilities and operations worldwide.

A commitment to flexible working through flexi-time, tele-conferencing, remote working and flexible work schedules, recognises that employees work best in an environment that helps them integrate their work and personal lives.

During 2006, the Group’s Employee Health Management function developed a resilience programme which has now been translated into 11 languages and adopted in 12 countries.



GSK Annual Report 2006


Back to Contents

Business review
Improving access to medicines


Access to healthcare in the developing world

Access to healthcare in developing countries remains a major challenge to the global community. The problem, which is rooted in poverty, demands a significant mobilisation of political will, additional resources and a true spirit of partnership. GSK continues to play a vital role, through its commitment to R&D into diseases particularly prevalent in the developing world, through its programme of preferential pricing for its anti-retrovirals (ARVs), anti-malarials and vaccines, through its community investment programmes (see page 19) and through its willingness to seek innovative solutions, such as voluntary licencing arrangements.

Preferential pricing programme
GSK has offered its vaccines to key organisations for vaccination programmes in developing countries at preferential prices for over 20 years. The Group also sets a single not-for-profit price for each of its ARVs and anti-malarials to a wide range of customers in the Least Developed Countries (UN definition) and sub-Saharan Africa, as well as Country Coordinating Mechanism-projects fully funded by the Global Fund to Fight AIDS, TB, and Malaria and the US President’s Emergency Plan for AIDS Relief (PEPFAR). In July 2006, GSK introduced two new ARVs, Kivexa and Telzir, to its not-for-profit offering and reduced prices to GSK’s abacavir-containing products by up to 30%.

GSK is committed to contributing to health improvements in a sustainable manner. The prices for its ARVs and anti-malarials are therefore set at levels at which no profit is made, but direct costs are covered, allowing supply to be sustained for as long as required. During 2006, GSK shipped to developing countries over 27 million tablets of not-for-profit-priced Combivir and nearly 59 million tablets of not-for-profit-priced Epivir. Some of our licensees are now supplying key markets in a more significant way.

The offer of not-for-profit prices requires a sustainable framework, combining GSK’s commitment to preferential pricing with commitments from governments of the developed world to avoid price referencing against preferentially priced medicines and from all governments to help prevent product diversion. GSK has taken steps to minimise the threat of diversion with the registration of specific access packs or access tablets (differentiated red tablet as opposed to the traditional white) for its key ARVs. GSK is the only company to have registered its ARVs under the European Union’s Anti-Diversion Regulation.

Innovative solutions
GSK has shown industry leadership in granting voluntary licences to eight generic companies for the manufacture and supply of ARVs to both the public and private sectors in sub-Saharan Africa. GSK is also a leader in collaborating in Public-Private Partnerships to enable new drug discovery and development to take place more effectively.

Looking ahead
GSK will continue to build on its product, pricing and partnership commitments to help improve healthcare in the developing world. However, a significant increase in funding from the global community is still needed. It is also important to maintain incentives for R&D through protection of intellectual property.

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
GSK is working to provide meaningful access to medicines for people with limited financial resources and without prescription drug insurance. In 2006, GSK’s US patient assistance programmes provided $370 million worth of medicines, valued at wholesale acquisition cost, to 402,000 qualifying low income US residents.

GSK has worked to expand its patient assistance programme and created “GSK Access” to include those enrolled in Medicare Part D. Beginning in 2007, GSK Access will help eligible Part-D-enrolled patients who have spent at least $600 of their own money during the current year on outpatient medicines and may qualify to receive GSK medicines free.

For uninsured Americans who do not qualify for Medicare or Medicaid, GSK and 11 other pharmaceutical companies created Together Rx Access, a programme for qualified individuals offering reductions in the pharmacy cost on more than 300 medicines. Over 820,000 Together Rx Access cardholders, saved about $24 million in 2006.

GSK participates in the Partnership for Prescription Assistance (PPA), the largest national programme dedicated to helping people in need access prescription medicines. PPA has helped more than 3 million US patients in need find programmes providing significant help. GSK and other US pharmaceutical companies launched the programme in 2005 working with healthcare, physician and patient advocacy organisations.

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 2006, Patient Advocacy Leaders Summits were held in the USA, Brazil and Japan, with over 1,000 attending GSK sponsored meetings. In the USA, GSK partnered with the Centers for Medicaid and Medicare Services to develop 12 regional meetings to educate patient groups on the new Medicare Drug Benefit and increase programme participation.

Programmes in other countries
The Group has also introduced Orange Cards providing discounts on certain GSK prescription medicines for eligible patients in Bulgaria, Lithuania and Ukraine. The nature of the discounts varies between countries and the way in which the healthcare system operates.

In September 2006, GSK announced an agreement with the Russian Government to supply anti-retroviral medicines, for the treatment of HIV/AIDS, at discounted prices. The agreement is the first direct, federal purchase of anti-retroviral medicines in Russia.

Preparing for a ‘flu pandemic
As part of its commitment to support governments and health authorities to prepare for the threat of an influenza pandemic, GSK announced in 2006 promising data on the immunogenicity of its new generation H5N1 pandemic influenza vaccine. This innovative pandemic vaccine candidate is also believed to have the potential to offer protection against drifted variants of the H5N1 virus allowing a proactive pre-pandemic vaccination approach to be considered.



GSK Annual Report 2006


Back to Contents

Business review
Corporate responsibility and community investment


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.

In 2003, GSK published a set of Corporate Responsibility principles to provide guidance on the standards to which the Group is committed. This sets out the approach to 10 areas: standards of ethical conduct, research and innovation, products and customers, access to medicines, employment practices, human rights, community investment, caring for the environment, leadership and advocacy, and engagement with stakeholders. The Group reports annually on progress in upholding these principles in its Corporate Responsibility Report, which is available on the website at www.gsk.com.

Partnership success
GSK works as a partner with under-served communities in the developed and developing world. It supports programmes that are innovative and sustainable and that bring real benefits to these communities. The Group engages with numerous external stakeholders, funds community-led initiatives around the world and donates medicines to support humanitarian efforts and community-based healthcare.

Community investment
GSK’s global community investment activities in 2006 were valued at £302 million, equivalent to 3.9% of Group profit before tax. This comprised product donations of £238 million, cash giving of £46 million, other in-kind donations of £3 million and costs of £15 million to manage and deliver community programmes in 109 countries.

Product donations and cash giving in 2006 were as follows:

1. Product donations

GSK’s cash giving was targeted primarily at health and education initiatives.

2. Breakdown of cash giving

In the UK, GSK contributed £7 million in 2006 to its continuing programme of charitable activities supporting over 100 organisations in health, medical research, science education, the arts and the environment.

Programmes in North America focused on improving public education and access to better healthcare for children and seniors both nationally and locally with funding of $34 million.

GSK does not operate a single charitable foundation for its community investment programmes, but has a number of country based foundations. The grants made by these foundations in 2006 are included in the investment total.

Global Health Programmes
Eliminating lymphatic filariasis

The Group’s effort to eliminate the disabling disease, lymphatic filariasis (LF) from the world, continued in close partnership with the governments of countries where the disease is endemic, the WHO and over 40 partner organisations. GSK is committed to donate as much of the anti-parasitic drug albendazole as required to treat the one billion people at risk in 80 countries. In 2006, 155 million albendazole treatments, worth £16 million at wholesale acquisition cost, were donated to 34 countries. Since the global elimination programme started in 2000, a cumulative total of almost 600 million albendazole treatments have been donated.

Positive Action on HIV/AIDS
Positive Action is GSK’s 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. During 2006, Positive Action worked with 26 partners to support programmes in 17 countries. Positive Action was the principal sponsor of the community section (The Global Village) at the International AIDS Conference held in Toronto.

The GlaxoSmithKline African Malaria Partnership
Since 2002, this partnership has supported three behavioural development programmes working in eight African countries. The programmes have targeted nearly two million people, focusing particularly on young children and pregnant women, encouraging effective prevention measures, prompt treatment and antenatal malaria management. In addition, GSK’s malaria advocacy programme ‘Mobilising for Malaria’ launched country Coalitions Against Malaria in the UK, Belgium, France, Ethiopia and Cameroon to increase awareness of malaria and mobilise resources.



GSK Annual Report 2006


Back to Contents

Business review
Corporate responsibility and community investment


The PHASE programme (Personal Hygiene And Sanitation Education), initiated by GSK in 1998, is now providing education to thousands of school children in Kenya, Uganda, Zambia, Nicaragua, Peru and Bangladesh to improve their health and hygiene to fight infectious diseases. In 2006 the Group committed three year funding of $0.9 million to extend the programme to Mexico and Tajikistan in partnership with Save the Children, USA.

Humanitarian product donations
During 2006, GSK donated essential products, such as antibiotics, through non-profit partners including AmeriCares, MAP International and Project HOPE, to support humanitarian relief efforts and community healthcare. The total value of the Group’s international humanitarian product donations was £22 million. This excludes albendazole donated as part of the Group’s commitment to the lymphatic filariasis elimination programme. Product donations are valued at wholesale acquisition cost, which is the wholesale list price, not including discounts, and is a standard industry method.

Community initiatives
GSK is 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.

GSK’s contribution to improve healthcare includes a grant of almost $3 million over three years to the Children’s Health Fund to expand their Referral Management Initiative (RMI) to sites in Philadelphia, including the Delaware Valley Community Health Center. The RMI ensures continuity of specialist medical care for high-risk children who are often homeless.

The annual GlaxoSmithKline IMPACT Awards recognise excellence in the work of non-profit community health organisations across the UK and in the Greater Philadelphia area of the USA. Over 20 charities receive unrestricted awards for their work dealing with diverse and difficult social issues such as domestic violence, sexual health services for young people, community health support and counselling services.

To further medical research, over £592,000 was provided to four UK medical charities, Asthma UK, the British Retinitis Pigmentosa Society, Deafness Research UK and the Muscular Dystrophy Campaign.

Education initiatives
GSK’s efforts to improve public and science education included a $1 million endowment to the National Board for Professional Teaching Standards to increase the number of science teachers attaining certification initially in the North Carolina and Philadelphia areas, but extending to all 50 states.

During 2006, GSK supported the Institute for a Competitive Workforce, a new business coalition staffed by the Business Civic Leadership Center of the US Chamber of Commerce. This is aimed at improving education and creating a skilled workforce.

GSK also supports a range of local initiatives in the USA. For example ‘Science in the Summer’, a free library-based science education programme in the Philadelphia area teaching basic scientific concepts, continued to receive support with a grant of almost $400,000.

In 2006, GSK helped to launch PUPPETS: Talking Science, Engaging Science into UK primary schools, with grants of over £480,000 over four years. The puppets and their supporting materials increase children’s engagement and motivate them to talk about science. GSK’s support will enable 9,000 teachers to attend subsidised training over the next four years, and provide a set of puppets and training materials to each of the participating schools.

Only 25% of secondary school science teachers in England are chemistry specialists. Chemistry for Non-Specialists has been developed by the Royal Society of Chemistry to train teachers to teach chemistry with confidence, flair and enthusiasm. GSK is supporting the programme with a donation of £450,000 over three years starting in 2006.

Employee involvement
GSK employees are encouraged to contribute to their local communities through employee volunteering schemes. Support varies around the world, but includes employee time, cash donations to charities where employees volunteer and a matching gifts programme.

In 2006 in the USA, the Group matched more than 17,500 employee and retiree gifts at a value of over $5 million. The Group also matched more than $1.3 million of employee donations to GSK’s annual United Way campaign. GSK’s GIVE program provided grants of almost $340,000 to more than 365 organisations where US employees have volunteered.

GSK’s Making a Difference programme in the UK provided grants of £225,000 to over 380 non-profit organisations and registered charities based on employee involvement.



GSK Annual Report 2006


Back to Contents

Business review
Global manufacturing and supply


GSK manufactures a large portfolio of products, ranging from tablets and toothpaste to inhalers and complex capsules, in over 28,000 different pack sizes and presentations.

Manufacture of medicines starts with the development of a therapeutic active ingredient (bulk active) in a selected formulation. Global Manufacturing and Supply (GMS) develops manufacturing processes for full scale volume production of active compounds at primary manufacturing sites. Secondary sites then convert these active compounds into finished medicines.

Each year GMS produces around 6,000 tonnes of bulk actives and more than four billion packs, which are sold in over 140 countries. It also supports about 2,000 new product and line extension launches every year.

By adopting leading edge practices and developing its people, GMS provides:

a secure source of supply of high quality products
compliance with regulatory requirements and customer expectations
best in class cost.


GMS operates as a single global network of 80 sites in 37 countries. The sites are grouped into four supply divisions, based on common business drivers, areas of expertise and the commercial activities that they support.

Primary supply
Primary supply has 12 sites in six countries, supplying high quality, competitively priced bulk actives. The division is focused on improvements in primary technologies and processes.

New product and global supply
There are 10 new product and global supply sites in seven countries. Sites work closely with R&D’s development team to ensure that the right technical competencies are in place to support rapid and successful new product introduction. These sites also ensure secure supply of key brands that are sold across many markets. This division is the focal point for developing and introducing new secondary manufacturing technologies for GMS.

Regional pharma supply
Regional pharma supply operates to supply key products in particular regions or markets and tailor packaging to meet specific local requirements. This division focuses on reducing costs, allowing GSK to compete more effectively in all its markets. There are 29 regional pharma supply sites in 22 countries.

Consumer Healthcare supply
Consumer Healthcare supply delivers high-quality, competitively priced products and supports rapid new product introduction in a highly innovative and competitive business with far shorter time frames than pharmaceuticals. New technologies have become a fundamental platform for driving innovation, lowering costs and providing flexibility in operations. There are 29 sites in 21 countries in Consumer Healthcare supply.

Operational excellence
Within GMS, Operational Excellence provides the capability to drive improvements in process robustness, quality, performance and customer service. Operational Excellence is underpinned by extensive education and a culture of continuous improvement.

Vision Factory
GSK introduced the Vision Factory initiative to work towards a simpler, more efficient operating model within GMS. Vision Factory is enabling manufacturing operations to accelerate the improvement in performance and cost control.

The quality organisation oversees product quality across the supply chain, from suppliers and third party manufacturers through manufacturing to the supply operations that deliver products into the market. The quality organisation focuses on improving quality and compliance by increasing product quality understanding, and harmonising the quality approach across all sites. GSK continues to work with the FDA on Good Manufacturing Practice for the 21st Century and other initiatives.

External suppliers
GMS spends over £2 billion annually with many external suppliers, purchasing active ingredients, chemical intermediates, packaging components, and part-finished and finished products. It takes appropriate steps to protect our supply chains from any disruption.

Widely recognised by industry analysts as a best practice leader, procurement works collaboratively to develop and implement sourcing strategies which ensures that GSK receives best value when buying goods and services. GSK leverages its procurement activities across the Group structure.

Vaccines supply chain
GSK biologicals’ manufacturing network is based on three major regional hubs in Europe, North America and Asia. In Europe, vaccine manufacturing is located primarily at Rixensart and Wavre in Belgium, with three other sites in France, Germany and Hungary. In North America, GSK established its vaccine production network in 2005 through three major acquisitions: US based Corixa Corporation, with a production site in Hamilton, Montana, which manufactures MPL, a key component of GSK’s adjuvant systems, a vaccine production site in Marietta, Pennsylvania and ID Biomedical with ‘flu vaccine manufacturing facilities in Laval and Quebec, Canada. In Asia, new vaccine production facilities are being built in India and Singapore. Managing the vaccine supply chain involves anticipating market needs and using a flexible approach to be able to meet fluctuations in demand. These are based on forecasts from the different markets and firm orders from health authorities for mass vaccination campaigns.

Bulk, filling and packaging are carefully balanced and stocking of vaccines helps manage short-term increases in demand. Such increases result from disease outbreaks or increased demand from the public owing to disease awareness campaigns.



GSK Annual Report 2006


Back to Contents

Business review
Regulatory environment


Regulation – Pharmaceuticals

GSK operates within a highly regulated environment. Regional and country-specific laws and regulations define the data required to show safety and efficacy of pharmaceutical products, as well as govern testing, approval, manufacturing, labelling and marketing of drugs. These regulatory requirements are a major factor in determining whether a marketable product may be successfully developed and the amount of time and expense associated with this development.

In Europe, pharmaceutical firms and regulators are managing a transition following the implementation of new medicines legislation at the end of 2005. Significant changes are being implemented including approval procedures, post marketing requirements, manufacturing controls, labelling requirements, pharmacovigilance processes and an increased emphasis on transparency of regulatory processes.

The climate of change is set to continue, with the finalisation of a new Paediatric Regulation at the end of 2006. This Regulation is aimed at stimulating industry research into paediatric indications, via intellectual property incentives. Implementation activities will continue during 2007/08, and the new provisions will become operational in 2008.

The EU Commission is championing a ‘Better Regulation’ initiative to cut red tape and over-regulation of Industry. GSK is actively supporting this initiative and a similar one in the UK. For example in the UK, GSK has made 50 wide ranging better regulation proposals to the government, covering significant areas of interest to the Group. Many have been positively received and some are being considered for incorporation into new regulations.

In the USA, the safety of prescription drugs remains a primary focus of the FDA and congressional oversight committees are evaluating the ability and resourcing of the FDA to continue to provide this important role. New safety-related legislation has been proposed by Congress which may be enacted in 2007, with likely impact on the pharmaceutical industry. As in Europe, evaluation of benefit and risk continues to be an important consideration for approval of a new drug by the FDA.

The FDA is in the second year of its Critical Path Initiative to facilitate innovation in drug development. New tools and processes such as pharmacogenomics, surrogate markers of efficacy and manufacturing innovations are being pursued to enhance development of safe and effective drugs. The pharmaceutical industry, including GSK, is collaborating with the FDA and National Institutes of Health in a number of these areas, including evaluation of new biomarkers.

The US government is making information about the benefits and risks of prescription drugs more readily available via the Internet, including the full prescribing information which is posted within one day of approval. GSK is now providing product labelling to the FDA in an electronic format which allows easier access to the key details in the prescribing information.

GSK is well placed to manage effectively these changes in the external regulatory environment.

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 products to consumers.

Recent government healthcare reforms in countries such as France, Spain and Germany may restrict pricing and reimbursement.

In the USA, recent legislation on healthcare reform, cross-border trade, the acceleration of generics to market and increased patient contributions have further increased the focus on pricing. Currently, there are no government price controls over private sector purchases, but federal law requires pharmaceutical manufacturers to pay prescribed rebates on certain drugs in order to be eligible for reimbursement under Medicaid and other federal healthcare programmes.

In 2006, the US Medicare program, a federally funded healthcare insurance program benefiting senior citizens and certain disabled Americans, included coverage for prescription medicines. This is a new benefit under the Medicare program and the most dramatic change in the program since its inception in the 1960s. The coverage is voluntary, includes brand-name and generic drugs and is open to the 41 million Americans with Medicare coverage.

A number of competing private organisations provide the new benefit with premiums subsidised by the government. Benefits must satisfy a minimum standard outlined in federal law. While the law provides incentives for manufacturers to negotiate prices with private plans, it does not provide for government price controls. The government provides additional help to more than 14 million people on Medicare with limited incomes and resources. Those qualifying beneficiaries pay no or reduced premiums and deductibles, and low copayments for their prescriptions.

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.

While it is appropriate for payers to seek value for money when purchasing medicines, this often translates into cost-containment measures that delay patient access to new medicines and make it difficult even for significantly improved therapies to achieve a price that reflects added value. Healthcare budgets could be managed in a more strategic and long-term manner. Focus should shift to value not cost and pricing should reflect value. Value should be defined broadly. What matters is whether a medicine works and responds to medical and patient needs. If so, it should be rewarded appropriately.



GSK Annual Report 2006


Back to Contents

Business review
Regulatory environment


Payers must also allocate their resources efficiently to provide the best health outcomes. Attention should be focussed in three areas: prevention, innovation and better management of chronic diseases. As part of this triple solution, innovative medicines and vaccines will play a key role by preventing, or providing better treatments for expensive diseases such as cervical cancer, breast cancer, asthma, Alzheimer’s and diabetes.

It is not possible to predict whether and to what extent, the Group’s business will be affected by future legislative and regulatory developments relating to specific pharmaceutical products or their price.

Regulation – Consumer Healthcare

The consumer healthcare industry is subject to national regulation for the testing, approval, manufacturing, labelling and marketing of products. In many countries, high standards of technical appraisal involve a lengthy approval process before a new product is launched.

National regulatory authorisation is also required to approve the switch of products from prescription to OTC. The requirements include long-term experience of the quality, safety and efficacy of the product in a wide patient population and data to confirm that the relevant condition is both self-limiting and easily diagnosed by the consumer.

Intellectual property

Intellectual property is a key business asset for GSK. The effective legal protection of intellectual property is critical in ensuring a reasonable return on investment in R&D. Intellectual property can be protected by patents, trademarks, registered designs, copyrights and domain name registrations.

Certain markets, including the USA, the EU and Canada also provide a period of regulatory data exclusivity to qualifying drugs which are new chemical entities or which are new formulations or uses of marketed drugs. Manufacturers of generic drugs may, following any period of data exclusivity, launch, or attempt to launch, generic versions of patented drugs prior to normal patent expiry, arguing that the relevant patents are invalid and/or are not infringed by their product. Significant litigation concerning these challenges is summarised in Note 43 to the financial statements, ‘Legal proceedings’.

GSK’s policy is to seek to obtain patent protection on all protectable inventions discovered or developed through its R&D activities. Patent protection for new active ingredients is available in most significant markets, and protection can also be obtained for example for new pharmaceutical formulations, manufacturing processes, medical uses and special devices for administering products. Patents protecting new active ingredients are generally applied for early in the development process. Since the term of a patent in most countries is a set period from the filing date, typically 20 years, the effective term depends on how long a product is in development before launch. This leads to a variation in patent term on a product by product basis, although in a number of markets, including the USA and Europe, it is possible in certain circumstances to obtain a partial restoration of patent term to compensate for the length of the development process.

The patent position with respect to the active ingredients in significant products is as follows:

Avandia and Avandamet. The patent on rosiglitazone is not due to expire until 2012a,c (USA) and 2013b (Europe). Patents on the commercial form of the active ingredient rosiglitazone maleate are not due to expire until 2015 (USA) and 2014b (Europe). Litigation challenging the validity of the patents protecting these products is ongoing in the USAe.

Avodart. The patent on dutasteride is not due to expire until 2015a (USA) and 2017b (Europe).

Boniva. The patent on ibandronate is not due to expire until 2012a,b (USA and Europe).

Combivir. The patent on the specific combination of lamivudine and zidovudine is not due to expire until 2012 (USA) and 2013b (Europe).

Coreg. GSK is the exclusive licensee under the US patent on carvedilol, which is due to expire in 2007a,c.

Epivir. The patent on lamivudine is not due to expire until 2010a,c (USA) and 2011b (Europe).

Imigran/Imitrex. The patent on sumatriptan is not due to expire until 2009c (USA) and has expired in Europe (except Cyprus (2007), Italy and Switzerland (2008)). Litigation challenging the validity of the patent protecting this product in the USA has been settlede.

Lamictal. The patent on lamotrigine is not due to expire until 2009a,c (USA). Litigation challenging the validity of this patent in the USA has been settled. In Europe, the corresponding patent has expired and generic competition exists.

Levitrad. GSK has co-promotion rights under the US patent on vardenafil, which is not due to expire until 2018.

Lexiva/Telzir. GSK is the exclusive licensee under the patent on fosamprenavir, which is not due to expire until 2017 (USA) and 2019b (Europe).

Paxil/Seroxat. The patent on the commercial form of paroxetine expired in 2006 in Europe and is due to expire in 2007c in the USA. Litigation relating to the validity and infringement of a patent directed to a method of manufacture of paroxetine hydrochloride anhydrate is ongoing in the USAe. Generic competition on Paxil instant release (IR) and oral suspension has commenced in the USA, Europe and certain other markets. Paxil CR is protected by a formulation patent that is not due to expire until 2012. A generic manufacturer has applied for FDA approval of a generic form of Paxil CR asserting non-infringement of this patente.

Requip. The patent on ropinirole is not due to expire until 2007a (USA) and 2008b (Europe). A patent relating to the use of ropinirole in Parkinson’s disease is not due to expire until 2008 (USA) and 2011b (Europe). Litigation challenging the validity of the Parkinson’s use patent is ongoing in the USAe.

Seretide/Advair. The patent on the specific combination of salmeterol xinafoate and fluticasone propionate is not due to expire until 2010 (USA) and 2013b (Europe). An application for re-issue of the US patent has been allowed by the US Patent and Trademark Office (USPTO)e. The UK patent has been revoked by the UK courts. Patents on the individual ingredients have expired in the UK. In the USA, the patent on salmeterol xinafoate does not expire until 2008.



GSK Annual Report 2006


Back to Contents

Business review
Regulatory environment


Serevent. The patent on salmeterol xinafoate is not due to expire until 2008 in the USA. In Europe, the patent has expired, except France (2008b) and Italy (2009b).

Trizivir. The patent on the method of treatment using a combination of lamivudine, zidovudine and abacavir does not expire until 2016 (USA) and 2016 (Europe).

Valtrex. The patent on valaciclovir is not due to expire until 2009a (USA) and 2009b (Europe, except Greece and Spain 2008). Litigation challenging the validity of the patent in the USAe is ongoing.

Wellbutrin SR, Wellbutrin XL and Zyban. The patent on the active ingredient has expired. There is now generic competition for the sustained release (SR) and instant release (IR) forms in the USA, and generic competition for the 300mg dosage form of Wellbutrin XL commenced in the USA in December 2006. In Europe, regulatory data exclusivity provides protection until 2009 in some markets. Litigation is ongoing in the USA relating to formulation patents covering Wellbutrin XL that expire in 2018e.

Ziagen. The patent on abacavir is not due to expire until 2012a,c (USA) and 2014b (Europe).

Zofran. The patent on ondansetron has expired in the USA and Europe, (except France (2007b) and Italy (2008b)). A patent on use in treating emesis expired in 2006. In the USA, generic entry of ondansetron injection and oral solution dosage forms commenced in November 2006 and on tablet and orally disintegrating tablet dosage forms in December 2006. Generic competition has also now commenced in a number of countries in Europe.

a) Including granted or pending patent term restoration under the Hatch-Waxman Act
b) Including granted or pending extension of term by national or European supplementary protection certificates
c) Including granted or pending extension of term for paediatric exclusivity
d) A registered trademark of Bayer AG
e) See Note 43 to financial statements ‘Legal proceedings’.

All of GSK’s pharmaceutical products are protected by registered trademarks in major markets. There may be local variations, for example, in the USA the trademark Paxil is used instead of Seroxat and Advair is used instead of Seretide.

Trademark protection may generally be extended for as long as the trademark is used by renewing it when necessary. GSK’s trademarks on pharmaceutical products are important for maintaining the brand identity of the product upon expiration of the patent.

The Consumer Healthcare trademarks are particularly important, as the business is very brand orientated and many products do not have patent protection.

Responsibility for environment, health and safety

Environment, health and safety (EHS) is a key element of corporate responsibility for the Group and has a high priority. Responsibility for EHS is at the highest level. There is a corporate group reporting to the General Counsel that has overall responsibility for providing governance and leadership on EHS issues. The head of this group makes regular reports to the Corporate Executive Team (CET) and the Audit and Corporate Responsibility Committees of the Board. Within the businesses operations managers are responsible for EHS and are supported by site-based EHS and occupational health staff.

EHS strategy and plan
GSK has a strategic planning process for EHS that looks forward 10 years but is reviewed every year. The plan is aligned with the GSK business drivers and includes management objectives with performance measures and targets. In 2006, GSK’s progress in the first five years of the EHS Plan for Excellence was evaluated and a 10 year plan extending to 2015 was developed.

The first five years had focused on establishing the fundamentals and preparing programmes that would contribute to the environmental sustainability of the business. Successes in 2006 included greater integration of EHS into the manufacturing planning process, introduction of EHS directors in manufacturing executive teams, establishment of new performance targets, establishment of new targets for audit scores, that will be the same for GSK’s own manufacturing sites and contract manufacturers, publication of positions on pharmaceuticals in the environment, the selection of hazardous chemicals in manufacturing and energy conservation. The next phase of the plan strengthens the focus on operational efficiency and renews the commitment to stakeholder engagement. The three aspirations for 2006 to 2015 are embedding EHS in the business, environmental sustainability and open and transparent stakeholder relations.

Strategic focus in 2006
The plan provides an area of special focus each year. In 2006, the focus was on embedding EHS in the business, making EHS an integral part of GSK’s business processes and continuous improvement culture with the participation of all employees. The goal is to develop a culture where every employee is mindful of the importance of safe working and protecting the environment. While this was the 2006 focus it will take more than one year to accomplish.



GSK Annual Report 2006


Back to Contents

Business review
Regulatory environment


Part of embedding EHS in GSK meant each business developed its own plan for moving EHS forward based on its own risks and opportunities. Some accomplishments against the objectives that contributed to the overall focus were:

to reduce the need for respiratory protective equipment occupational hygiene monitoring data were utilised to focus attention on the processes in most need of improvement
to improve the efficiency of manufacturing processes it was agreed that all new products launched from 2006 to 2010 will be evaluated using green chemistry tools with a target to double the manufacturing efficiency, which will result in waste per tonne of product from new processes being reduced by half in comparison to existing processes
to improve EHS management systems a target was set to improve audit scores and all pharmaceutical manufacturing sites will be required to be certified to ISO 14001 and OHSAS 18001 by 2010
to minimise EHS risks arising from new product introduction and process changes EHS requirements and sustainability principles were incorporated into the product development process
to improve EHS performance of R&D processes novel technologies will be explored.

EHS audits
As part of its governance responsibility, GSK conducts EHS audits of its sites, assessing performance against the EHS standards and assigning quantitative performance scores. In 2006, 32 sites were audited, 12 of these achieved audit scores of 80% or better. No site scored less than 50%. As part of the continuous improvement process, progress was monitored on actions arising from issues raised on all audits.

As part of the commitment to corporate responsibility and the pro-active management of the GSK manufacturing and supply base, 36 suppliers were also assessed, representing about 10% of priority suppliers. This process evaluated the management of key EHS risks and impacts, as well as human rights issues, based on the Group’s requirements for priority suppliers. Recommendations were made for improvements where needed.

EHS targets
As part of the EHS plan, targets are set every five years. 2006 was the baseline year for the next group of five-year targets. In the 2005 EHS report achievements against the targets for 2001-2005 were reported.

Progress towards meeting the targets for 2006-2010 will be tracked every year. Final data for 2006 will be published on the website www.gsk.com.

GSK selected its measures of performance improvement based on the potential for adverse impact on people or the environment, business continuity or business reputation. Most of the measures selected are similar to those reported by other companies and are recommended by the Global Reporting Initiative, a long-term, multi-stakeholder, international undertaking, to develop and disseminate globally applicable sustainability reporting guidelines. Targets have been set to eliminate CFCs from all uses by 2010 and each year to reduce energy use and non-hazardous waste disposed by 1%, reduce water use and Volatile organic compound (VOC) releases by 2% and reduce chemical oxygen demand of wastewater by 3%. All targets are normalised by sales.

EHS performance
The performance in 2006 was:

CFC emissions from patient use of inhalers down 36% per £ sales
volatile organic compound emissions down 22% per £ sales
chemical oxygen demand in wastewater down 21% per £ sales
non-hazardous waste disposed down 15% per £ sales
energy use down 8% per £ sales
water use down 5% per £ sales

In the work towards sustainability, GSK is addressing the economic, environmental and social issues in research, manufacturing, sales and distribution of its medicines. Sustainability starts with healthcare solutions found by R&D and continues with sustainable solutions in manufacturing and sales. R&D is considering improving operational efficiency for new products. In the future, the EHS plan for excellence proposes investigating the use of renewable resources. The Group seeks dialogue with external stakeholders and considers their views when developing approaches to sustainable development. More information on EHS programmes and performance may be found on the GSK website.



GSK Annual Report 2006


Back to Contents

Business review
World Market


World economy

The global economy remained relatively robust in 2006, with positive growth in many markets such as the USA and China. World Gross domestic product was estimated at 3.9%, up from 3.5% in 2005. Analysts expect it to fall back in 2007 and towards the end of 2006, the OECD trimmed its 2007 global growth forecast to 2.5%, the lowest rate since 2003.

Equity markets rose during 2006 and concerns regarding inflation started to recede as the year progressed only to return in some regions later in the year. Global oil prices hit $78-a-barrel highs in mid-July following the crisis between Israel and Lebanon. As 2006 closed oil fell towards the $60 mark, a level around which many analysts feel it will trade through 2007, barring unforeseen events.

In the USA, GDP slipped from a two year high of 5.5% in the first quarter of 2006 to 2.2% in the fourth quarter. This performance was impacted to a significant extent by a weakening housing market and a drop in new housing starts that is expected to continue throughout 2007. During 2006, US interest rates rose from 4.29% to 5.25%, the seventeenth rise in two and half years. In December, the US dollar fell to its lowest level for almost two years against the Euro and a 14-year low against Sterling. In 2007, the US economy is expected to experience a soft-landing rather than a major slowdown, with growth predicted to be in a range 2.5% to 3%.

After its rapid expansion in 2004 and 2005, the Chinese economy grew by over 10% in 2006, while India reported growth of 9.1% . India’s Sensex Index gained 46% in value while Japan’s Nikkei 225 Index moved ahead by 7% for the year. Japan is currently experiencing the longest period of uninterrupted growth since the Second World War, reporting GDP growth of 3.8% at the year-end.

Eurozone interest rates began the year at 2.25% before rising in five separate steps to 3.5% at the year end. Economic growth was 3.3% across the continent, up from 1.4% in 2005. Germany expanded by 3.7%, France by 2% and Spain by 4.0% . In the UK, interest rates rose to 5% in November, with the FTSE 100 gaining almost 11% in 2006. Economic growth was 2.7%, with the Treasury and the Bank of England expecting growth of more than 3% in 2007.


The currencies that most influence the Group’s results are the US dollar, the Euro and the Japanese Yen.

In 2006, the US dollar fell by 14% against the pound, to $1.96 at the year-end. The year-end rates for the Euro weakened by 1% and the Japanese Yen by 15% against Sterling.

World market – pharmaceuticals

Global pharmaceutical sales increased by 8% in 2006 to £328 billion.

World market by Value   % of   Growth  
geographic region £bn   total   £%  

USA 145.0   44   9  
Europe 92.8   28   6  
   France 17.6   5   4  
   Germany 16.6   5   3  
   UK 10.8   3   3  
   Italy 10.5   3   7  
Japan 31.3   10   (3 )
Asia Pacific 23.3   7   14  
Latin America 15.9   5   21  
Middle East, Africa 11.3   3   13  
Canada 8.3   3   19  

Total 327.9   100   8  


Growth in the US market has increased to 9%, but it still represents 44% of the global prescription pharmaceutical market compared with 30% a decade ago.

At 30th September 2006, GSK held second position in the world pharmaceutical market with a market share of 6.3%, behind Pfizer with a market share of 8%. GSK had six of the world’s top 60 pharmaceutical products. These were Avandia, Lamictal,Seretide/Advair, Valtrex, Wellbutrin and Zofran.

World market –             Growth  
top five therapeutic classes  Value    % of  
  £bn   total   CER%   £%  

Cardiovascular 54.5   17   6   7  
Central nervous system 54.0   16   7   8  
Alimentary tract and metabolic 39.8   12   7   9  
Anti-infectives (bacterial,                
viral and fungal) excluding                
   vaccines 33.2   10   1   3  
Respiratory 21.7   7   5   6  

(Note: data based on 12 months to 30th September 2006.)  



GSK Annual Report 2006


Back to Contents

Business review
Products and competition


Pharmaceutical products

GlaxoSmithKline’s principal pharmaceutical products are currently directed to eight main therapeutic areas. An analysis of sales by these therapeutic areas, and a description of the principal products, are set out below:

  2006   2005   2004  
Turnover by therapeutic area £m   £m   £m  

Respiratory 4,995   5,054   4,394  
Central nervous system 3,642   3,219   3,462  
Anti-virals 2,827   2,598   2,359  
Metabolic 1,875   1,495   1,251  
Vaccines 1,692   1,389   1,194  
Cardiovascular and urogenital 1,636   1,331   932  
Anti-bacterials/anti-malarials 1,369   1,519   1,547  
Oncology and emesis 1,069   1,016   934  
Other 973   1,040   1,027  

  20,078   18,661   17,100  


Products and all their formulations may not be approved for all indications in all markets where they are available.

Seretide/Advair, a combination of Serevent and Flixotide, offers a long-acting bronchodilator and an anti-inflammatory in a single inhaler. It is approved for the treatment of asthma and COPD.

Flixotide/Flovent and Becotide/Beclovent are inhaled steroids for the treatment of inflammation associated with asthma and COPD.

Serevent is a long-acting bronchodilator used to treat asthma and COPD, and Ventolin is a selective short-acting bronchodilator used to treat bronchospasm.

Flixonase/Flonase and Beconase are steroid intra-nasal preparations for the treatment of perennial and seasonal rhinitis.

Central nervous system (CNS)
Seroxat/Paxil is a selective serotonin re-uptake inhibitor (SSRI) for the treatment of major depressive disorder, panic, obsessive compulsive disorder, post traumatic stress disorder, social anxiety disorder, and generalised anxiety disorder. A controlled release formulation, Paxil CR, is also available in the USA.

Wellbutrin is an anti-depressant, available in the USA and some international markets in normal, sustained-release (SR) and once-daily (XL) formulations.

Imigran/Imitrex is a 5HT1 receptor agonist used for the treatment of severe or frequent migraine and cluster headache and has become the reference product in this sector. Naramig/Amerge is also a 5HT1 receptor agonist indicated for the treatment of migraine.

Lamictal, a well established treatment for epilepsy, is also indicated for bipolar disorder.

Requip is a specific dopamine D2/D3 receptor agonist indicated for the treatment of Parkinson’s disease and Restless Legs Syndrome (RLS).

Combivir, a combination of Retrovir and Epivir, has consolidated the position of these two reverse transcriptase inhibitors as the cornerstone of many multiple anti-HIV product regimens. Physician acceptance has clearly demonstrated the value placed on minimising the pill burden faced by patients.

Ziagen is a reverse transcriptase inhibitor. The product’s potency, ease of use and resistance profile allow it to play a significant role in a variety of highly active, well tolerated and simplified HIV treatment regimens.

Trizivir is a combination of Combivir and Ziagen, combining three anti-HIV therapies in one tablet, for twice daily administration.

Epzicom/Kivexa, approved for use in the USA and Europe, is a combination of Epivir and Ziagen that is taken as one tablet with once-daily dosing for HIV/AIDS in combination with at least one other anti-HIV drug.

Lexiva/Telzir is a protease inhibitor for the treatment of HIV that is well tolerated and more convenient than Agenerase, which it supersedes. Lexiva may be taken twice daily or once daily when boosted with ritonavir.

Zeffix has been approved for marketing in the USA, Europe, China and other markets for the treatment of chronic hepatitis B.

Valtrex is a treatment for episodic genital herpes as well as the long term suppression and reduction of transmission of genital herpes, zoster (shingles), cold sores and chicken pox. Valtrex supersedes Zovirax, which is also used to treat herpes infections.

Avandia is a potent insulin sensitising agent which acts on the underlying pathophysiology of type 2 diabetes.

Avandamet is a combination of Avandia and metformin HCI, it is the first medicine that targets insulin resistance and decreases glucose production in one convenient pill.

Avandaryl is a combination of Avandia and Amaryl, a Sanofi-Aventis product. Avandaryl targets insulin resistance and stimulates pancreatic insulin production.

Bonviva/Boniva is a long-acting bisphosphonate available in once-monthly oral and quarterly injection forms for the treatment of osteoporosis.

GSK markets over 30 vaccines worldwide, of which more than half are combination vaccines to protect children, adolescents and/or adults against up to six diseases at the same time.

Infanrix is GSK’s range of paediatric vaccine combinations. Infanrix provides protection against diphtheria, tetanus and pertussis (whopping cough). Infanrix penta (Europe)/Pediarix (USA, Canada) provides additional protection against hepatitis B and polio, and Infanrix hexa further adds protection against Haemophilus influenzae type b, which is a cause of meningitis. In the USA, Boostrix is available to add protection against pertussis (whopping cough) to the routine tetanus/diptheria booster administered to teenagers.

In GSK’s hepatitis vaccines range, Havrix protects against hepatitis A and Engerix-B against hepatitis B.



GSK Annual Report 2006


Back to Contents

Business review
Products and competition


Twinrix is the only available combined hepatitis A and B vaccine, protecting against both diseases with one vaccine and available in both adult and paediatric strengths. In Europe, FENDrix, a vaccine to prevent hepatitis B in patients with renal insufficiency including high-risk groups such as pre-haemodialysis and haemodialysis patients, is available from 15 years of age onwards.

GSK added Fluviral to its portfolio of products when it acquired the Canadian vaccine manufacturer ID Biomedical Corporation in December 2005. Fluviral is marketed in Canada. In 2006, the same ‘flu vaccine was approved by the US Food and Drug Administration (FDA) for the active immunisation of adults 18 years and older against influenza disease under the brand FluLaval. Fluviral and FluLaval add to Fluarix GSK’s seasonal ‘flu vaccine, which is distributed in 79 countries including the USA.

GSK also markets Priorix, a measles, mumps and rubella vaccine, Typherix, a vaccine for protection against typhoid fever, and Varilrix, a vaccine against varicella or chicken pox. Priorix-Tetra, GSK’s new combination vaccine to prevent measles, mumps, rubella and varicella (MMRV) was first launched in Germany in August 2006. In addition, the Group markets a range of vaccines to prevent meningitis under the umbrella name Mencevax. GSK’s new Hib-MenC vaccine, Menitorix is now available in the UK. GSK’s meningitis vaccine portfolio will be complimented by new meningitis conjugate vaccines in the near future.

As part of its paediatric franchise, GSK continued to roll out the launch of its vaccine against rotavirus induced gastroenteritis, Rotarix which is now launched in 90 countries worldwide. Rotavirus vaccination has been included in the national vaccination calendar of five Latin American countries where Rotarix will be available free at public health clinics, as part of governmental paediatric immunisation programmes.

Cardiovascular and urogenital
Coreg is an alpha/beta blocker which has been proven to be effective in treating patients with mild, moderate and severe heart failure, heart attack or hypertension. GSK has sole marketing rights in the USA and Canada. Generic versions of the product are available in Canada.

Levitra is a PDE-5 inhibitor indicated for male erectile dysfunction. GSK has co-promotion rights in the USA and more than 20 other markets.

Avodart is a 5-ARI inhibitor currently indicated for benign prostatic hyperplasia. A large clinical outcome study is underway examining its efficacy in the prevention of prostate cancer.

Arixtra, a selective Factor Xa inhibitor, is indicated for the prophylaxis of deep vein thrombosis, which may lead to pulmonary embolism, in hip fracture surgery, knee replacement, hip replacement surgery and abdominal surgery. It is also indicated for the treatment of deep vein thrombosis and pulmonary embolism.

Fraxiparine is a low-molecular weight heparin indicated for prophylaxis of thromboembolic disorders (particularly deep vein thrombosis and pulmonary embolism) in general surgery and in orthopedic surgery, treatment of deep vein thrombosis and prevention of clotting during hemodialysis.

Integrilin is a GP IIb-IIIa inhibitor, approved in the EU for the prevention of early myocardial infarction in patients with unstable angina or non-Q-wave MI.

Anti-bacterials and anti-malarials
Augmentin is a broad-spectrum antibiotic suitable for the treatment of a wide range of common bacterial infections and is particularly effective against respiratory tract infections. Augmentin ES-600 is an extra strength suspension specifically designed to treat children with recurrent or persistent middle ear infections. Augmentin XR is an extra strength tablet form for adults to combat difficult to treat infections.

Ceftin/Zinnat is an oral antibiotic used primarily for community-acquired infections of the lower respiratory tract.

Malarone is an oral anti-malarial used for the treatment and prophylaxis of malaria caused by Plasmodium falciparum.

Lapdap is an effective and well tolerated therapy for the treatment of malaria, which has been developed through a public/private collaboration.

Oncology and emesis
Zofran is used to prevent nausea and vomiting associated with chemotherapy and radiotherapy for cancer, and is available in both oral and injectable forms. It is also approved for use in the prevention and treatment of post-operative nausea and vomiting.

Hycamtin is a second line treatment for ovarian, cervical and small cell lung cancer.

Bexxar is a treatment for patients with CD20 follicular, non-Hodgkin’s lymphoma with and without transformation whose disease is refractory to rituximab and who have relapsed following chemotherapy.

Arranon (nelarabine) a treatment for patients with T-cell acute lymphoblastic leukaemia and T-cell lymphoblastic lymphoma, received US approval in 2005 and was submitted for European approval in 2006.

This category includes Betnovate, the higher potency Dermovate and the newer Cutivate, which are anti-inflammatory steroid products used to treat skin diseases such as eczema and psoriasis, Relafen, a non-steroidal anti-inflammatory drug for the treatment of arthritis, and Zantac, for the treatment of peptic ulcer disease and a range of gastric acid related disorders.



GSK Annual Report 2006


Back to Contents

Business review
Products and competition


Pharmaceuticals competition

The pharmaceutical industry is highly competitive. GSK’s principal competitors range from small to large pharmaceutical companies often with substantial resources. Some of these companies and their major products are mentioned below.

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 bear 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. A research and development based pharmaceutical company 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 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.

GSK believes 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 competitors may affect pricing levels or result in changing patterns of product use. There can be 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 patent.

GSK’s respiratory franchise is driven by the growth of Seretide/Advair. Major respiratory competitors are Singulair from Merck, especially in the USA, Symbicort from AstraZeneca and Spiriva from Pfizer/ Boehringer Ingelheim.

CNS disorders
Major competitors in the USA to Paxil are its generic forms, as well as generic fluoxetine, the generic form of Eli Lilly’s Prozac, generic sertraline, the generic form of Pfizer’s Zoloft, Cymbalta from Eli Lilly, Forest Laboratories’ Celexa and Lexapro, and Effexor XR from Wyeth. The principal competitors in the USA for Wellbutrin are generic forms of bupropion, the generic forms of SSRIs, Lexapro, Effexor XR, and Cymbalta. Paxil CR and the once-daily Wellbutrin XL help to retain a strong presence in the anti-depressant market, given the availability of both generic paroxetine and bupropion in the USA. Generic competition for Seroxat/Paxil has also occurred in a number of other markets.

The major competitors for Lamictal in epilepsy are J&J’s Dilantin and generic phenytoin, Novartis’s Tegretol/Tegretol XR and generic carbamazepine. UCB’s Keppra and Abbot’s Depakote/Depakote ER. In Bipolar the major competitors are generic Lithium, other anti-epileptics including Abbott’s Depakote/Depakote ER and the atypical anti-psychotics including AstraZeneca’s Seroquel. The major competitors for Imitrex/Imigran are AstraZeneca’s Zomig, Merck’s Maxalt and Pfizer’s Relpax.

GSK is a pioneer in the HIV market, launching AZT (Retrovir) in 1987 and Epivir in 1995, which today are available as Combivir in a single tablet, a cornerstone of HIV combination therapy. The launches of Ziagen, Agenerase, Trizivir, Lexiva and Epzicom have broadened the Group’s portfolio of HIV products. Major competitors in the HIV market include Gilead, Bristol Myers Squibb, Abbott, Roche and Boehringer Ingelheim.

Valtrex has strengthened the Group’s position in the anti-herpes area, where GSK’s Valtrex and Zovirax compete with Novartis’ Famvir. Valtrex is a market leader, whilst Zovirax faces competition from generic acyclovir. In the hepatitis B market, GSK’s Zeffix was the first anti-viral on the market. Gilead’s Hepsera was the second. The Group has secured marketing rights to Hepsera in some key markets.

The major competitor for Avandia is Takeda Chemical’s Actos, which is co-promoted with Eli Lilly in the USA. Takeda also market ActoplusMet (a combination of Metformin HCI and Actos) in the USA.

Monthly Boniva/Bonviva competes with Merck’s weekly Fosamax and Proctor & Gamble/Sanofi-Aventis’s weekly Actonel. Generic Fosamax (alendronate) is now available in several EU markets including UK and Germany, and also in Canada.

The vaccine market is dominated by five key players. GSK’s major competitors include Sanofi Pasteur (SP), Merck, Novartis and Wyeth. Within the paediatric vaccine field, Infanrix’s main competitor is SP’s range of DTPa-based combination vaccines, although the Infanrix hexa combination is the only available hexavalent paediatric combination in Europe.

Cardiovascular and urogenital
GSK markets Coreg in the USA where its major competitors are Toprol XL and generic betablockers. Avodart competes directly with Merck’s Proscar within the BPH market. The Group has co-promotion rights in the USA for Levitra, which faces competition from Pfizer’s Viagra and Lilly’s Cialis.

Anti-bacterials and anti-malarials
Generic versions of both Augmentin and Ceftin/Zinnat are available in the USA. Augmentin also faces generic competition in various European countries. Augmentin XR and Augmentin ES compete against a broad range of other branded and generic antibiotics. Malarone’s safety profile and convenient dosing regimen have helped put this product in a strong position versus mefloquine for malaria prophylaxis.

Oncology and emesis
Zofran provided GSK with a leadership position in the anti-emetic market where competitor companies include Roche, Sanofi-Aventis and more recently MGI and Merck. Generic competitors became available late in 2006. Zofran now has full generic competition in the USA. Major competitors in the diverse cytotoxic market include Bristol Myers Squibb, Sanofi-Aventis, Novartis and Roche/Genentech. GSK’s cytotoxic portfolio, led by Hycamtin, currently holds a relatively small market position.



GSK Annual Report 2006


Back to Contents

Business review
Products and competition


Consumer Healthcare products

GlaxoSmithKline’s principal consumer healthcare products are in three major areas. An analysis of sales by these areas is set out below:

  2006   2005   2004  
  £m   £m   £m  

OTC medicines 1,496   1,437   1,400  
Oral care 993   943   913  
Nutritional healthcare 658   619   573  

  3,147   2,999   2,886  


Major products, which are not necessarily sold in all markets, are:

Category Product

Over-the-counter medicines  
Analgesics Panadol
Dermatologicals Zovirax
External nasal dilators Breathe Right
Gastro-intestinal Tums
Respiratory tract Contac
Smoking control Commit
  NicoDerm CQ
  NiQuitin CQ
  Nicabate CQ
Natural wellness support Abtei

Oral care Aquafresh
  Dr Best
  Odol Med 3

Nutritional healthcare Lucozade

Over-the-counter medicines
The leading products are Panadol, a widely available paracetamol/ acetaminophen analgesic, Nicorette gum in the USA, the NicoDerm, NiQuitin CQ and Nicabate range of smoking control products, Tums, a calcium-based antacid, Citrucel laxative, Contac for the treatment of colds, Abtei, a natural medicines and vitamin range, and Zovirax and Abreva for the treatment of cold sores. In December 2006, the company acquired Breathe Right nasal strips that gently lift open nasal passages to provide better breathing, and FiberChoice daily fibre supplements, through the acquisition of CNS, Inc.

GSK’s portfolio will be strengthened further in 2007 with the US launch of alli, a new treatment for weight-loss.


Oral care
The leading Oral care products are toothpastes and mouthwashes under the Aquafresh, Odol, Sensodyne and Macleans brand names, and a range of toothbrushes sold under the Aquafresh and Dr Best names. In addition, denture care products are available principally under the Polident, Poligrip and Corega brand names.

Nutritional healthcare
The leading products in this category are Lucozade energy and sports drinks, Ribena, a blackcurrant juice-based drink, and Horlicks, a range of milk-based malted food and chocolate drinks.

Consumer Healthcare competition

GSK holds leading global positions in all its key consumer product areas. Worldwide it is the third largest in Oral care and in OTC medicines. 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
manufacturers are consolidating, leading to more aggressive competition across all elements of the marketing mix
cycle times for innovation have reduced.

The main competitors include the major international companies Colgate-Palmolive, Johnson & Johnson, Procter & Gamble, Unilever and Wyeth. In addition, there are many other 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 care 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. The competitors to Ribena are primarily local fruit juice products, while Lucozade competes with other energy drinks.



GSK Annual Report 2006


Back to Contents

Business review
Financial review 2006


Pharmaceutical turnover

All growth rates included in the review of turnover are at constant exchange rates (CER) unless otherwise stated. The sterling growth rates may be found in the tables of pharmaceutical turnover by therapeutic area on page 32 and by geographic region on page 33. Total pharmaceutical turnover in 2006 was £20,078 million compared with £18,661 million in 2005, an increase of 9% CER. Within the Group’s portfolio, turnover of new products first launched in a major market within the last five years accounted for 27% (2005 – 24%) of total turnover and grew by 20% to £5,333 million (2005 – £4,478 million). Turnover of the more established, franchise products amounted to £11,709 million (2005 – £10,933 million), representing 58% of total turnover, and increased 9% compared with last year. Turnover of older products, now less actively promoted, was £3,036 million (2005 – £3,250 million), representing 15% of total turnover, and declined by 5%. In sterling terms total pharmaceutical turnover increased 8%, 1% less than CER due principally to the strength of Sterling against major International currencies.

Pharmaceutical turnover by therapeutic area

GSK’s ability in 2006 to deliver continued pharmaceutical turnover growth was primarily due to an exceptionally broad product portfolio of high-value growth products coupled with sales and marketing excellence. These growth products include Seretide/Advair, the Avandia product group, Vaccines, Lamictal, Valtrex, Coreg, Requip, Avodart and Boniva.

GSK continues to be the global leader in respiratory pharmaceuticals with sales of its three key products, Seretide/Advair, Flixotide/Flovent and Serevent amounting to £4.3 billion, up 9%. Total sales of Seretide/Advair, for asthma and COPD, rose 11% to £3.3 billion. In the USA, sales grew 13% to £1.9 billion. In Europe, sales grew 10% to £1.1 billion and in International markets, sales grew 9% to over £300 million. Market share by value in the anti-asthma and COPD therapy class was 29% in Europe and 33% in the USA, an increase of 2 percentage points in Europe and a flat market share growth in the USA (reflecting lower prescription volumes due to a label change in early 2006 that restricted GSK’s ability to promote the product, offset by favourable pricing changes).

The positive results of the TOwards a Revolution in COPD Health (TORCH) study, the largest of its kind, were filed with regulators early in 2007 and in February were published in the ‘New England Journal of Medicine’. The results of the three year study, sponsored by GSK, showed important benefits of Seretide in the treatment of patients with COPD.

Central nervous system (CNS)
CNS sales increased 15% to £3.6 billion. Sales increased in the USA and International, but declined in Europe due to generic competition. Total Seroxat/Paxil sales grew 4% to £620 million, due to strong growth of Paxil CR in the USA and Paxil IR in Japan partly offset by generic competition to Paxil IR in Europe.

Total Wellbutrin sales grew 24% to £900 million. Sales of Wellbutrin XL, a once-daily product, grew 25% to £798 million. In December 2006, generic competition to the Wellbutrin XL 300mg tablet (approximately 60% of Wellbutrin sales) entered the US market.

Sales of Lamictal, for the treatment of epilepsy and bipolar disorder, grew 19% to just under £1 billion, benefiting from its new indication to treat one of the most serious forms of epilepsy – primary generalised tonic-clonic seizures. Lamictal is also the only medicine with long-term clinical data that demonstrates that it can delay the onset of depressive episodes of bipolar disorder. In November, GSK submitted Lamictal XR, a new once daily treatment, to the FDA for treatment of epilepsy. The company intends to present data on Lamictal XR at the American Academy of Neurology meeting in April 2007.

Sales of Requip, for Parkinson’s disease and Restless Legs Syndrome (RLS), grew 74% to £268 million and, in December, the FDA accepted GSK’s file for approval of the new formulation Requip CR.

Total sales of HIV products were £1.5 billion, down 1%. Competition to older products, Combivir down 9% to £528 million and Epivir down 21% to £202 million, was mostly offset by strong sales growth of new products Epzicom/Kivexa which more than doubled to £241 million and Lexiva/Agenerase up 18% to £131 million.

Sales of Valtrex, rose 24% to £845 million, with US sales up 30% to £600 million driven by patients switching to suppression therapy.

GSK launched Avandia for the treatment of type 2 diabetes in 1999 and a combination product, Avandamet, for blood sugar control in 2002. The product group was expanded further in February 2006 with the launch in the USA of a fixed-dose combination treatment, Avandaryl, which combines Avandia with a sulfonylurea.

In 2006, sales of the Avandia product group grew 24% to £1.2 billion in the USA. In Europe, sales grew 39% to £217 million driven by the increasing use of Avandamet. Sales in International markets rose 17% to £234 million. The Avandia product group achieved in 2006 a market share by value in oral anti-diabetics of 37% in the USA and 19% in Europe, up 2 and 5 percentage points, respectively. In the USA, Avandamet prescription volume growth was adversely impacted by product supply issues during the year which have now been resolved.

In December, GSK presented data from the landmark ADOPT study, which demonstrated that Avandia is more effective than metformin, or a sulphonylurea, in long-term blood sugar control in type 2 diabetes. These data are in addition to those recently presented from the DREAM study, which showed that Avandia can reduce the risk of progression to type 2 diabetes. Data from both these studies are expected to be filed with regulatory agencies during the first half of 2007.

GSK recorded in turnover a £95 million share of co-promotion income for Boniva/Bonviva, a new once-monthly oral bisphosphonate for the treatment of postmenopausal osteoporosis, which was developed with Roche, and launched in 2005.



GSK Annual Report 2006


Back to Contents

Business review
Financial review 2006


Pharmaceutical turnover by therapeutic area 2006

  Total   USA   Europe        International  




               Growth           Growth          Growth          Growth  
Therapeutic area/major  % of    2006    2005  




products total   £m   £m   CER  %  £%   £m   CER  %  £%   £m   CER  %  £%   £m   CER  %  £%  

Respiratory 27   4,995   5,054     (1 ) 2,461   (3 ) (5 ) 1,697   3   2   837   4   3  
Seretide/Advair     3,313   3,003   11   10   1,870   13   11   1,133   10   10   310   9   10  
Flixotide/Flovent     659   638   5   3   298   16   14   173   (8 ) (8 ) 188   2    
Serevent     291   330   (10 ) (12 ) 86   (16 ) (17 ) 140   (13 ) (13 ) 65   5   (2 )
Flixonase/Flonase     311   656   (52 ) (53 ) 184   (63 ) (64 ) 51   (15 ) (15 ) 76   (14 ) (16 )

Central Nervous System 17   3,642   3,219   15   13   2,588   28   26   595   (15 ) (15 ) 459   2   (1 )
Seroxat/Paxil     620   615   4   1   175   35   32   149   (20 ) (20 ) 296   5    
   Paxil IR     448   488   (5 ) (8 ) 19   11   6   149   (20 ) (20 ) 280   4   (1 )
   Paxil CR     172   127   37   35   156   38   36         16   25   33  
Wellbutrin     900   739   24   22   882   24   22   2       16   7   14  
   Wellbutrin IR, SR     102   92   12   11   89   14   11   2       11     10  
   Wellbutrin XL     798   647   25   23   793   25   23         5   25   25  
Imigran/Imitrex     711   697   3   2   551   11   9   118   (18 ) (18 ) 42   (12 ) (14 )
Lamictal     996   849   19   17   765   37   35   175   (22 ) (23 ) 56   2   2  
Requip     268   156   74   72   176   > 100   > 100   81   21   19   11   25   38  

Anti-virals 14   2,827   2,598   10   9   1,354   7   5   855   11   11   618   16   14  
HIV     1,515   1,554   (1 ) (3 ) 700   (7 ) (9 ) 621   3   2   194   8   7  
Combivir     528   583   (9 ) (9 ) 238   (14 ) (16 ) 217   (4 ) (4 ) 73      
Trizivir     268   303   (11 ) (12 ) 141   (13 ) (15 ) 113   (7 ) (8 ) 14   (7 )  
Epivir     202   261   (21 ) (23 ) 69   (25 ) (26 ) 90   (26 ) (26 ) 43   (2 ) (7 )
Ziagen     117   136   (13 ) (14 ) 48   (11 ) (13 ) 41   (24 ) (24 ) 28   4   4  
Agenerase, Lexiva     131   112   18   17   74   7   6   48   40   37   9   14   29  
Epzicom/Kivexa     241   118   > 100   > 100   125   49   47   97   > 100   > 100   19   > 100   > 100  
Herpes     965   826   19   17   610   30   28   144   4   4   211   3    
Valtrex     845   695   24   22   600   30   28   109   12   11   136   10   7  
Zovirax     120   131   (6 ) (8 ) 10   67   67   35   (15 ) (15 ) 75   (7 ) (11 )
Zeffix     162   145   12   12   13   8   8   23   10   10   126   13   13  
Relenza     91   5   > 100   > 100         62   > 100   > 100   29   > 100   > 100  

Metabolic 8   1,875   1,495   27   25   1,277   30   28   252   33   33   346   12   12  
Avandia     1,399   1,154   23   21   1,068   26   24   125   13   12   206   13   16  
Avandamet     204   175   17   17   86   (22 ) (24 ) 92   > 100   > 100   26   41   53  
Avandaryl     42         40             2      
Bonviva/Boniva     95   18   > 100   > 100   83   > 100   > 100   12   > 100   > 100        

Vaccines 8   1,692   1,389   23   22   465   40   38   709   20   20   518   13   13  
Hepatitis     479   444   9   8   161   21   18   227   2   2   91   8   10  
Infanrix, Pediarix     511   431   29   28   172   20   18   281   40   39   58   12   12  
Boostrix     60   29   > 100   > 100   41   > 100   > 100   15   88   88   4   67   33  

Cardiovascular and                                                      
urogenital   7   1,636   1,331   24   23   1,072   42   40   395   (4 ) (5 ) 169   13   13  
Coreg     779   573   38   36   773   38   36         6   20   20  
Levitra     43   40   8   8   41   20   17   1   (75 ) (75 ) 1      
Avodart     216   129   69   67   131   > 100   > 100   69   25   25   16   67   78  
Arixtra     58   24   > 100   > 100   32   > 100   > 100   23   > 100   > 100   3   > 100   > 100  
Fraxiparine     209   211   (1 ) (1 )       179       30   (6 ) (6 )

Anti-bacterials 8   1,369   1,519   (9 ) (10 ) 217   (15 ) (17 ) 628   (12 ) (13 ) 524   (2 ) (3 )
Augmentin     570   666   (14 ) (14 ) 94   (31 ) (32 ) 268   (15 ) (15 ) 208     (1 )
Zinnat/Ceftin     164   197   (16 ) (17 ) 12   20   20   82   (27 ) (27 ) 70   (5 ) (7 )

Oncology & emesis 5   1,069   1,016   7   5   836   12   10   153   (7 ) (7 ) 80   (11 ) (12 )
Zofran     847   837   3   1   679   8   6   107   (14 ) (14 ) 61   (16 ) (18 )
Hycamtin     113   99   15   14   72   11   9   34   26   26   7   17   17  

Other 6   973   1,040   (5 ) (6 ) 83   19   19   263   (19 ) (18 ) 627   (1 ) (3 )
Zantac     232   244   (2 ) (5 ) 72   28   24   52   (19 ) (19 ) 108   (7 ) (11 )

  100   20,078   18,661   9   8   10,353   16   14   5,547   1     4,178   6   4  

CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates. Turnover by quarter is given in the Financial record on pages 168 to 171.  



GSK Annual Report 2006


Back to Contents

Business review
Financial review 2006


Overall vaccine sales increased 23% to £1.7 billion, with good performances from all regions: US sales rose 40% to £465 million; European sales grew 20% to £709 million and sales in International were up 13% to £518 million. Key contributors were: Infanrix/Pediarix, GSK’s combination vaccines for children, with sales up 29% to £511 million; and sales of hepatitis vaccines, which grew 9% to £479 million, benefiting from a strong US performance of Havrix, following approval last year for broader paediatric use.

Sales of new vaccines also helped drive overall sales growth. Total sales of Rotarix, for rotavirus, Boostrix, for prevention of diphtheria, tetanus and whooping cough, and influenza vaccines, Fluarix/FluLaval, reached £274 million, up 91%. This was the first full year sales of FluLaval following the acquisition of ID Biomedical in late 2005.

Oncology and emesis
Sales of Zofran grew 3% to £847 million, driven by the US market, up 8% to £679 million. Europe and International sales declined 14% and 16% respectively due to generic competition. A generic competitor to Zofran entered the US market in November 2006.

Cardiovascular and urogenital
Sales of Coreg, for heart disease, grew 38% to £779 million. Avodart, for benign prostatic hyperplasia (enlarged prostate), had a very strong year, with sales increasing 69% to £216 million.

Anti-bacterial sales declined 9% reflecting generic competition and a weaker ‘flu season.

Other therapeutic areas
Sales of Zantac fell 2% to £232 million, with declines in Europe and International partially offset by a 28% growth in the USA .

Regional analysis

Pharmaceutical turnover by geographic region in 2006 on an invoiced basis
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.

  % of    2006    2005   

Region/ major markets total   £m   £m   CER%   £%  

USA 52   10,353   9,106   16   14  

Europe 27   5,547   5,537   1    
France     967   975     (1 )
UK     788   762   3   3  
Italy     665   662   1    
Germany     595   554   8   7  
Spain     577   586   (1 ) (2 )
Other Europe     1,955   1,998   (2 ) (2 )

International 21   4,178   4,018   6   4  
Asia Pacific     1,377   1,324   4   4  
Japan     860   854   8   1  
Middle East, Africa     744   746   3    
Latin America     714   651   10   10  
Canada     483   443   4   9  

  100   20,078   18,661   9   8  

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

Individual governments determine the pricing of medicines in most countries within Europe, which can result in wide price variations for the same product. Parallel trade occurs when third parties exploit this price differential by purchasing products in markets where low prices are enforced and selling them to governments and other purchasers in those markets where higher prices have been agreed. This parallel trade is permitted under the single market rules in the European Union. GSK does not derive any benefit from the profit on resale at the higher price.

As a result, management believes that within the European region, turnover by market, on an invoiced basis as presented above, does not properly represent the consumption of the products within each market. GSK employees based in each market are instrumental in the promotion of the Group’s products within their market, thereby creating a product sale and final consumption in that market.

The following table gives the adjustments made in order to restate the turnover for markets within Europe on a turnover created basis.

Pharmaceutical turnover for Europe region in 2006 on a turnover created basis

  2006   2005  


  Invoiced   Adjustment   Created   Invoiced   Adjustment   Created  
Region/major markets £m   £m   £m   £m   £m   £m  

Europe 5,547     5,547   5,537     5,537  
France 967   (66 ) 901   975   (47 ) 928  
UK 788   101   889   762   91   853  
Italy 665   (25 ) 640   662   (13 ) 649  
Germany 595   71   666   554   57   611  
Spain 577   (14 ) 563   586   (15 ) 571  
Other Europe 1,955   (67 ) 1,888   1,998   (73 ) 1,925  


These adjustments are GSK’s estimates based on the most recent data from independent external sources, valued in Sterling at relevant exchange rates. Management believes that this turnover created basis of reporting turnover by market provides a better reflection of the performance of the businesses in each market within Europe.

The total turnover for the Europe region is unaffected by this restatement.

Parallel trade occurs occasionally elsewhere in the world, but it is not sufficiently material to affect significantly the turnover data by market presented on an invoiced basis.



GSK Annual Report 2006


Back to Contents

Business review
Financial review 2006


Pharmaceutical turnover by geographic region in 2006 on a turnover created basis
Turnover by market within Europe has been adjusted for the effects of parallel trade to show turnover on the basis of the country where the product is finally consumed, not where the product was sold by GSK.

                  Growth *
Region/ % of   2006   2005  

major markets total   £m   £m   CER%   £%  

USA 52   10,353   9,106   16   14  

Europe 27   5,547   5,537   1    
France     901   928   (2 ) (3 )
UK     889   853   4   4  
Italy     640   649   (1 ) (1 )
Germany     666   611   10   9  
Spain     563   571   (1 ) (1 )
Other Europe     1,888   1,925   (2 ) (2 )

International 21   4,178   4,018   6   4  
Asia Pacific     1,377   1,324   4   4  
Japan     860   854   8   1  
Middle East, Africa     744   746   3    
Latin America     714   651   10   10  
Canada     483   443   4   9  

  100   20,078   18,661   9   8  

* CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates. Turnover by quarter is given in the Financial record on pages 168 to 171.

A strong sales performance in the USA, up 16% to £10.4 billion, was the main contributor to total pharmaceutical turnover growth of 9% in 2006.

Advair sales grew 13% to £1,870 million. Flovent sales increased by 16%. Flonase, indicated for the treatment of perennial rhinitis, declined 63% following the launch of a generic competitor in Q1 2006.

Sales of Wellbutrin products grew 24% to £882 million reflecting the performance of Wellbutrin XL, a new once-daily product, which grew 25% to £793 million .

Total sales of Paxil were up 35% to £175 million largely due to the rectification of supply issues experienced in 2005 at the Cidra plant in Puerto Rico.

Sales in the anti-virals therapeutic area grew 7% with HIV products down 7% and herpes products up 30%. Competition to older products, Combivir down 14% and Epivir down 25%, was partly offset by the growth of new products Epzicom/Kivexa up 49% and Lexiva up 7%. Valtrex, for herpes, grew 30% to £600m driven by patients switching to suppression therapy.

Sales of the Avandia product group increased by 24% reflecting the re-supply of product following supply disruption at the Cidra plant in Puerto Rico in 2005 and price increases.

Vaccines grew 40% reflecting the good performance of Pediarix and Boostrix, Fluarix and the launch of Flulaval in 2006.

Coreg sales increased 38% to £773 million as it continued to benefit from its wide range of indications in heart disease. Zofran sales increased 8% to £679 million. A generic competitor to Zofran entered the market in November 2006.

Anti-bacterial sales declined 15% as a result of generic competition.

The discussion of individual market performance in the Europe region is on a turnover created basis.

Sales in Europe contributed 27% of pharmaceutical turnover and grew 1%, to over £5.5 billion, with strong sales from Seretide, Avandia/Avandamet and vaccines offsetting the impact of generic competition to a number of products and continued price cuts resulting from government healthcare reforms.

Markets which recorded good growth included Germany, the UK, Central and South/East Europe whilst growth in France, the Netherlands, Poland, Italy and Spain was adversely impacted by pricing and generics.

Major growth drivers were Seretide, GSK’s largest selling product in Europe, with growth of 10%, Avandia/Avandamet which grew 39%, and the vaccines franchise, up 20%. Sales of anti-virals grew 11% primarily due to government orders of Relenza as a measure in the event of a potential ‘flu pandemic.

Generic competition negatively impacted sales of Seroxat down 20%, Lamictal down 22%, Zofran down 14% and Imigran, down 18%. Sales of anti-bacterials decreased 12% due to a combination of a weaker ‘flu season than in 2005 and generic competition.

The International region reported year on year turnover growth of 6%. Strong growth in Japan, up 8% (despite the biennial price reductions), China/Hong Kong, up 7% and Latin America, up 10%, was partly offset by modest sales growth of 4% in Canada and 3% in Australia. The Canadian sales performance reflected generic competition for Imigran and Zofran whilst the Australian business was negatively impacted by Government pricing reforms and generic competition to Lamictal and Paxil.

The performance in Japan was driven by the sales of Paxil, up 15%, Serevent, up 16% and Anti-virals, up 8% and the full year impact of Zyrtec, an allergy product in-licenced from UCB in 2005. These were partially offset by declines in the older products Zantac and Zovirax. Flonase also declined due to a low pollen season.

Across all markets in International, the key products driving growth were Seretide, which grew 9% to record sales of £310 million, the Avandia range of products which grew 17% to £234 million, HIV products which grew 8% and the vaccines franchise, which recorded growth of 13% and achieved sales of £518 million.



GSK Annual Report 2006

Back to Contents

  Business review
  Financial review 2006


Consumer Healthcare sales
An analysis of Consumer Healthcare sales is set out in the following table:

  2006   2005  

  £m   £m   CER%   £%  

OTC medicines 1,496   1,437   5   4  
     Analgesics 380   362   7   5  
     Dermatological 165   161   4   2  
     Gastro-intestinal 252   249   2   1  
     Respiratory tract 172   154   12   12  
     Smoking control 353   336   7   5  
     Natural wellness support 132   133     (1 )
Oral care 993   943   6   5  
Nutritional healthcare 658   619   7   6  

  3,147   2,999   6   5  


Consumer Healthcare sales grew 6% to £3.1 billion, with sales in International up 10% and Europe up 7%, performing well. Total sales in the USA were flat, with an improved performance in the fourth quarter, with sales up 7%.

OTC medicines
Over-the-counter medicine sales grew 5% to £1.5 billion with Panadol and smoking control performing well.

Oral care
Oral care sales grew 6% to £993 million. Sensodyne grew strongly, up 19% for the year to £257 million. Sales of Aquafresh were down 3% to £283 million.

Nutritional healthcare
Nutritional healthcare products sales grew 7% to £658 million. Lucozade, grew 14% to £301 million, and Horlicks, grew 6% to £156 million. Ribena sales were down 1% to £169 million.

Operating profit

The analysis below of operating profit and subsequent discussion compares the 2006 results with 2005 results.

      2006       2005   Growth  
  £m   %   £m   %   CER%   £%  

Turnover 23,225   100.0   21,660   100.0   9   7  

Cost of sales (5,010 ) (21.6 ) (4,764 ) (22.0 ) 6   5  
Selling, general and administration
(7,257 ) (31.2 ) (7,250 ) (33.5 )    
Research anddevelopment (3,457 ) (14.9 ) (3,136 ) (14.5 ) 11   10  
Other operating income 307   1.3   364   1.7          

Operating profit 7,808   33.6   6,874   31.7   17   14  


Cost of sales
Cost of sales declined as a percentage of turnover by 0.4 percentage points. At constant exchange rates the decline was 0.6 percentage points reflecting favourable price and regional mix impact.

Selling, general and administration
Selling, general and administration (SG&A) costs as a percentage of turnover reduced 2.3 percentage points. At constant exchange rates, the decrease was 2.5 percentage points, reflecting flat expenditure compared with prior year on a turnover growth of 9%. SG&A costs were flat due to higher advertising, promotion and selling expenditure offset by lower general and administration expenditure. Advertising, promotion and selling increased 3% and accounted for a 2% increase in total SG&A. General and administration expenditure declined 5% and accounted for a 2% decline in total SG&A, of which one percentage point was due to lower charges related to legal matters and one percentage point was due to lower costs related to programmes to deliver future cost savings.

Research and development
R&D expenditure increased 11% partly as a result of higher charges related to restructuring programmes. Excluding restructuring costs R&D grew 8%, broadly in-line with turnover. Pharmaceuticals R&D expenditure, excluding restructuring costs, represented 16.2% (2005 – 16.2%) of pharmaceutical turnover.

Other operating income
Other operating income includes royalty income, equity investment disposals and impairments, product disposals and fair value adjustments to the Quest collar and Theravance options. Other operating income was £307 million in 2006 compared with £364 million in 2005. The decrease is primarily due to lower product and asset disposal profits partially offset by the favourable fair value movement to the Quest collar and Theravance options.

Operating profit
Overall,the operating profit margin increased 1.9 percentage points as operating profit increased 14% in sterling terms to £7,808 million. Operating profit increased 17% at constant exchange rates and the margin increased 2.4 percentage points, reflecting SG&A growth below the rate of turnover growth, partially offset by higher costs related to programmes to deliver future cost savings and lower other operating income.

Gains from asset disposals were £169 million (2005 – £290 million), costs for legal matters were £333 million (2005 – £430 million), the fair value movements on the Quest collar and Theravance options resulted in an income of £29 million (2005 – £19 million) and charges relating to cost-saving programmes were £205 million (2005 – £141 million). The total operating profit impact of these items was a £340 million charge in 2006, compared with a £262 million charge in 2005.

Profit before taxation

The discussion below compares the 2006 results with the 2005 results.

Share of profits/(losses) of joint ventures and associated undertakings
The share of profits of associates arises principally from the Group’s holding in Quest Diagnostics Inc.

Disposal of interest in associates
There were no disposals of interests in associates in 2006 and 2005. The Group’s shareholding in Quest as at 31st December 2006 was 18.7% .


GSK Annual Report 2006


Back to Contents

Business review
Financial review 2006

Net finance costs        
  2006   2005  
Finance income £m   £m  

Interest income 285   276  
Fair value adjustments and hedges 2   (19 )

  287   257  

Finance costs        

Interest costs (314 ) (427 )
Unwinding of discount on liabilities (36 ) (25 )
Fair value adjustments and hedges (2 ) 1  

  (352 ) (451 )


Finance income increased compared with 2005 predominantly due to increased income on extended credit on receivables and increased interest income due to higher US dollar interest rates. Finance costs reduced due to the refinancing of two expensive bonds in December 2005 and January 2006 as well as lower swap costs resulting from reduced interest rate differentials.

  2006   2005  
  £m   £m  

UK corporation tax 400   172  
Overseas taxation 2,310   1,847  

Current taxation 2,710   2,019  
Deferred taxation (409 ) (103 )

Total 2,301   1,916  


The charge for taxation on profit amounting to £2,301 million, represents an effective tax rate of 29.5% (2005 – 28.5%) . The Group balance sheet at 31st December 2006 included a tax payable liability of £621 million and a tax recoverable asset of £186 million.

As reported last year, GSK’s largest unresolved tax issues were with the US Internal Revenue Service (IRS) and UK HM Revenue and Customs (HMRC) in respect of transfer prices related to the Glaxo heritage products.

On 11th September 2006, GSK and the IRS agreed to a resolution of their dispute. Under the agreement, GSK has made gross payments to the IRS of approximately $3.3 billion. The final net cash cost to the Group is approximately $3.1 billion, which covers federal, state and local taxes, interest and the benefit of tax relief on the payments made. The settlement resolved all the transfer pricing issues in dispute for the period 1989 – 2000, which were due to go to trial in February 2007, and also covers the subsequent years 2001 – 2005. GSK had previously made provision for the dispute and this settlement did not have any significant impact on the Group’s reported earnings or tax rate for the year.

GSK continues to be in dispute with HMRC primarily in respect of transfer pricing and Controlled Foreign Companies legislation matters for the years 1994 to date and the parties are now preparing for litigation. HMRC has not formally quantified its claims in respect of these matters but there continues to be a wide difference between the Group and HMRC positions on these matters.

GSK has open issues in Japan and Canada, which were the subject of court proceedings in 2006. In Japan the tax authorities are claiming approximately Yen 39 billion (£169 million) in respect of transactions in 1998. GSK has paid the tax claimed, as required by law, and applied for a refund. A court decision is expected in late March 2007.

A court decision in the Group’s dispute with the Canadian Revenue Authority over the pricing of Zantac in the years 1989 – 1993 is expected in the first half of 2007.

GSK uses the best advice in determining its transfer pricing methodology and in seeking to manage transfer pricing issues to a satisfactory conclusion and, on the basis of external professional advice, 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                    
    2006     2005  

    £m     £m   CER%   £%  

Profit after taxation for the year   5,498     4,816   17   14  

Profit attributable to shareholders   5,389     4,689   18   15  
Earnings per share (pence)   95.5 p   82.6 p 19   16  
Earnings per ADS (US$) $ 3.53   $ 3.00          
Weighted average number of shares (millions)
  5,643     5,674          

Diluted earnings per share (pence)   94.5 p   82.0 p        
Diluted earnings per ADS (US$) $ 3.50   $ 2.98          
Weighted average number of shares (millions)
  5,700     5,720          


Profit for the year was £5,498 million, an increase of 17% (14% in sterling terms). Profit attributable to minority interests was £109 million and profit attributable to shareholders was £5,389 million, an increase of 18% (15% in sterling terms). Earnings per share increased 19%, reflecting higher profits and also the reduction in the weighted average number of shares resulting from the Group’s share buy-back programme. The interest cost of this programme also adversely impacts the Group’s earnings. At actual rates of exchange, earnings per share increased 16%. The unfavourable currency impact on EPS of three percentage points reflects a strengthening of Sterling against other major currencies and compares with a two percentage point unfavourable currency impact on turnover.

The Board has declared a fourth interim dividend of 14 pence per share resulting in a dividend for the year of 48 pence, a four pence increase over the dividend of 44 pence per share for 2005. The equivalent interim dividend receivable by ADR holders is 55.1628 cents per ADS based on an exchange rate of £1/$1.9701. The dividend had an ex-dividend date of 14th February 2007, a record date of 16th February 2007 and will be paid on 12th April 2007. The liability for an interim dividend is only recognised when it is paid, which is usually after the accounting period to which it relates. The 2006 financial statements recognise the dividends paid in 2006, namely the third and fourth interim dividends for 2005 and the first and second interim dividends for 2006, which total £2,598 million (2005: £2,390 million).



GSK Annual Report 2006


Back to Contents

Business review
Financial review 2006


Critical accounting policies

The consolidated ffinancial statements are prepared in accordance with International Financial Reporting Standards, as adopted for use in the European Union, following the accounting policies approved by the Board and described in Note 2 to the financial statements, ‘Accounting 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. The following are considered to be the critical accounting policies adopted.

Revenue is recognised when title and risk of loss is passed to the customer and reliable estimates can be made of relevant deductions. Gross turnover is reduced by rebates, discounts, allowances and product returns given or expected to be given, which vary by product arrangements and buying groups. These arrangements with purchasing organisations are dependent upon the submission of claims some time after the initial recognition of the sale. Accruals are made at the time of sale for the estimated rebates, discounts or allowances payable or returns to be made, based on available market information and historical experience. Because the amounts are estimated they may not fully reflect the final outcome, and the amounts are subject to change dependent upon, amongst other things, the types of buying group and product sales mix. The level of accrual is reviewed and adjusted regularly in the light of contractual and legal obligations, historical trends, past experience and projected market conditions. Market conditions are evaluated using wholesaler and other third-party analyses, market research data and internally generated information. Future events could cause the assumptions on which the accruals are based to change, which could affect the future results of the Group.

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.

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. Rebates given under Medicare, Part D are included in this category. The Medicare, Part D programme was introduced during 2006 and replaces the Government Medicaid subsidies for some individuals with subsidised coverage provided through private prescription plans. The accrual for these rebates is estimated based on the specific terms in each agreement, historical experience and product growth rates.
GSK has arrangements with certain key parties, whereby the party is able to buy products from wholesalers at lower 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.
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:

      2006       2005       2004  



  £m   %   £m   %   £m   %  

Gross turnover 13,131   100   11,875   100   10,835   100  
Managed care, GPO rebates and Medicare, Part D
912   7   686   6   575   5  
Chargebacks 846   6   786   7   732   7  
US Government and State programmes
507   4   775   6   734   7  
Cash discounts 248   2   227   2   208   2  
Customer returns 140   1   155   1   86   1  
Prior year adjustments (69 )   (34 )   (51 ) (1 )
Other items 194   1   174   1   126   1  

Total deductions 2,778   21   2,769   23   2,410   22  

Net turnover 10,353   79   9,106   77   8,425   78  


Rebates given under the US Government Medicaid programme have fallen in 2006 and been replaced with rebates granted under the Medicare, Part D programme. The overall level of rebates has fallen slightly, partly as a result of products with traditionally higher rebate percentages becoming subject to generic competition and being replaced with sales of newer products with lower rebate percentages.

The total accruals for rebates, discounts, allowances and returns in the US pharmaceuticals business were as follows:

  At 31st   At 31st  
  December   December  
  2006   2005  
  £m   £m  

Managed care, GPO rebates and        
 Medicare, Part D 435   401  
Chargebacks 50   56  
US Government and State programmes 283   417  
Cash discounts 24   27  
Customer returns 184   146  
Other 69   53  

Total 1,045   1,100  




GSK Annual Report 2006


Back to Contents

Business review
Financial review 2006


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 2006 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.

Current tax is provided at the amounts expected to be paid, and deferred tax on temporary differences between the tax bases of assets and liabilities and their carrying amounts, at the rates that have been enacted or substantially enacted by the balance sheet date.

The Group has open tax issues with a number of revenue authorities, principally in relation to transfer pricing disputes. GSK uses the best advice in determining its transfer pricing methodology and in seeking to manage transfer pricing issues to a satisfactory conclusion and, on the basis of external professional advice, continues to believe that it has made adequate provision for the liabilities likely to arise from open assessments. However, there continues to be a wide difference of views where open issues exist. 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.

Legal and other disputes
GSK provides for anticipated settlement costs where a reasonable estimate may be made of the likely outcome of the dispute and legal and other expenses arising from claims against the Group. The company’s Directors, having taken legal advice, have established provisions after taking into account the relevant facts and circumstances of each matter and in accordance with accounting requirements. Provisions for product liability claims on certain products have been made on an ‘incurred but not reported’ basis where sufficient history of claims made and settlements is available. No provisions have been made for other unasserted claims or for claims for which no reasonable estimate of the likely outcome can yet be made. The ultimate liability for pending and unasserted claims may vary from the amounts provided, if any, and is dependent upon the outcome of litigation proceedings, investigations and possible settlement negotiations.

Impairment of fixed assets
The carrying values of fixed assets subject to depreciation and amortisation are reviewed for impairment when there is an indication that the values of the assets might be impaired. Impairment is determined by reference to the higher of net realisable value and value in use, measured by reference to risk-adjusted future cash flows discounted using appropriate interest rates. These future cash flows are based on business forecasts and are therefore inherently judgemental. Future events could cause the assumptions used in these impairment reviews to change with a consequent adverse effect on the future results of the Group.

Intangible assets
Where intangible assets are acquired by GlaxoSmithKline from third parties the costs of acquisition are capitalised. Licences to compounds in development are amortised from the point at which they are available for use, over their estimated useful lives, up to 20 years. Estimated useful lives are reviewed annually and impairment tests are undertaken if events occur which call into question the carrying values of the assets. Brands acquired with businesses are capitalised independently where they are separable and have an expected life of more than one year. Brands are amortised over their estimated useful lives, not exceeding 20 years, except where the end of the useful economic life cannot be foreseen. Where brands are not amortised, they are subject to annual impairment tests. Impairment tests are based on risk-adjusted future cash flows discounted using appropriate interest rates. These future cash flows are based on business forecasts and are therefore inherently judgemental. Future events could cause the values of these intangible assets to be impaired and this would have an adverse effect on the future results of the Group.

Pensions and other post-employment benefits
The costs of providing pensions and other post-retirement benefits are charged to the income statement in accordance with IAS 19 over the period during which benefit is derived from the employee’s services. The costs are assessed in accordance with advice received from independent actuaries on the basis of assumptions selected by management for use under both IFRS and US GAAP. These assumptions include future earnings and pension increases, discount rates and expected long term rates of return on assets and are disclosed in Note 26 to the financial statements, ‘Pensions and other post-employment benefits’. The expected long term rates of return on bonds are determined based on the portfolio mix of index-linked, government and corporate bonds. An equity risk premium is added to this for equities. Discount rates are based on appropriate long-term indices, including the iBoxx over 15 year AA index for the UK, and Moody’s Aa index for the USA. Sensitivity analysis is provided in Note 26, but a 0.25% reduction in the discount rate would lead to an increase in the net pension deficit of approximately £369 million and an increase in the annual pension cost of approximately £4 million. The selection of different assumptions could affect the future results of the Group.

Product rights and goodwill
In addition to the critical accounting policies outlined above, the accounting policy for product rights and goodwill is deemed to be important in respect of the balance sheet prepared in accordance with US generally accepted accounting principles. Under US GAAP the merger of Glaxo Wellcome and SmithKline Beecham in 2000 was accounted for as an acquisition which gave rise to product rights of £24 billion and goodwill of £16 billion being recognised. Goodwill and those product rights determined to have indefinite lives are not amortised but rather reviewed annually for impairment. These impairment reviews assess business projections prepared as part of the Group’s annual budgeting and planning process to determine whether or not an impairment in value has occurred. The business projections include assumptions about future events. Changes in future events could cause the assumptions in the business projections to change with a consequent adverse effect on the future results of the Group as reported under US GAAP.



GSK Annual Report 2006


Back to Contents

Business review
Financial position and resources

Financial position    
  2006   2005  
  £m   £m  

Non-current assets        
Property, plant and equipment 6,930   6,652  
Goodwill 758   696  
Other intangible assets 3,293   3,383  
Investments in associates and joint ventures 295   276  
Other investments 441   362  
Deferred tax assets 2,123   2,214  
Other non-current assets 721   438  

Total non-current assets 14,561   14,021  

Current assets        
Inventories 2,437   2,177  
Current tax recoverable 186   416  
Trade and other receivables 5,317   5,348  
Liquid investments 1,035   1,025  
Cash and cash equivalents 2,005   4,209  
Assets held for sale 12   2  

Total current assets 10,992   13,177  

Total assets 25,553   27,198  

Current liabilities        
Short-term borrowings (718 ) (1,200 )
Trade and other payables (4,871 ) (5,147 )
Current tax payable (621 ) (2,269 )
Short-term provisions (1,055 ) (895 )

Total current liabilities (7,265 ) (9,511 )

Non-current liabilities        
Long-term borrowings (4,772 ) (5,271 )
Deferred tax provision (595 ) (569 )
Pensions and other post- employment benefits (2,339 ) (3,069 )
Other provisions (528 ) (741 )
Other non-current liabilities (406 ) (467 )

Total non-current liabilities (8,640 ) (10,117 )

Total liabilities (15,905 ) (19,628 )

Net assets 9,648   7,570  

Share capital 1,498   1,491  
Share premium account 858   549  
Retained earnings 6,965   5,579  
Other reserves 65   (308 )

Shareholders’ equity 9,386   7,311  
Minority interests 262   259  

Total equity 9,648   7,570  


Property, plant and equipment
The total cost of the Group’s property, plant and equipment at 31st December 2006 was £13.3 billion, with a net book value of £6.9 billion. Of this, land and buildings represented £2.8 billion, plant and equipment £2.7 billion and assets in construction £1.4 billion. In 2006, GSK invested £1,485 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 2006, GSK had capital contractual commitments for future expenditure of some £521 million and 2007 operating lease commitments of £374 million.

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 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 for environment, health and safety’ (page 24) and in Note 43 to the financial statements, ‘Legal proceedings’. GSK believes that its facilities are adequate for its current needs.

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 2006 was £3,293 million (2005 – £3,383 million). The decrease in 2006 reflects currency movements and amortisation of existing intangibles, partly offset by additions of £444 million. The largest element of the additions relates to the acquisition of CNS, Inc. which added to the GSK portfolio Breathe Right nasal strips and FiberChoice dietary products.

GSK held investments, including associates and joint ventures, with a carrying value at 31st December 2006 of £736 million (2005 – £638 million). The market value at 31st December 2006 was £1,461 million (2005 – £1,487 million). The investments are mainly in equity shares where the holding derives directly from the Group’s business. The largest of these investments is in the associate, Quest Diagnostics Inc., which had a book value at 31st December 2006 of £262 million (2005 – £244 million). The investments include stakes in companies where the Group has research collaborations, which provide access to biotechnology developments of potential interest or interests in companies that arise from business divestments.

Trade and other receivables
Trade and other receivables include £80 million (2005 – £180 million) of derivative financial instruments now held at fair value. The remaining increase from 2005 reflects increased sales and higher VAT recoverables partly offset by the impact of weakening overseas currencies on the translation of foreign currency receivables.

Trade and other payables
Trade and other payables include £41 million (2005 – £171 million) of derivative financial instruments now held at fair value. The remaining decrease reflects the impact of weakening overseas currencies on the translation of foreign currency payables.


GSK Annual Report 2006


Back to Contents

Business review
Financial position and resources


The Group carried deferred tax provisions and other short-term and non-current provisions of £2,178 million at 31st December 2006 (2005 – £2,205 million) in respect of estimated future liabilities, of which £1,105 million related to legal and other disputes.

Provision has been made for legal and other disputes, indemnified disposal liabilities and the costs of manufacturing restructuring and merger integration 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 net deficit before allowing for deferred taxation was £2,338 million (2005 – £3,069 million). The pension and other post-employment liabilities decreased following improvements in asset values, further special funding contributions to the UK and US pension funds of £346 million (2005 – £366 million) and a strengthening of long-term interest rates, including an increase in the rate used to discount UK pension liabilities from 4.75% to 5.0% .

Net debt    
  2006   2005  
  £m   £m  

Cash, cash equivalents and liquid investments 3,040   5,234  
Borrowings – repayable within one year (718 ) (1,200 )
Borrowings – repayable after one year (4,772 ) (5,271 )

Net debt (2,450 ) (1,237 )


Net debt increased by £1,213 million primarily due to the gross payment of $3.3 billion (£1.8 billion) under the transfer pricing dispute settlement with the US Internal Revenue Service (see ‘Taxation’ on page 36) and higher share repurchases partly offset by increased operating profits.

Total equity
A summary of the movements in equity is set out below.

  2006   2005  
  £m   £m  

Total equity at beginning of year 7,570   5,937  
Implementation of accounting for financial instruments under IAS 39   (12 )

Total equity at beginning of year, as adjusted 7,570   5,925  
Total recognised income and expense for the year 5,395   4,576  
Dividends to shareholders (2,598 ) (2,390 )
Ordinary shares issued 316   252  
Ordinary shares purchased and held as Treasury shares (1,348 ) (1,000 )
Ordinary shares issued by ESOP Trusts 151   68  
Share-based payments 247   265  
Changes in minority interest shareholdings 2   (40 )
Minority interests (87 ) (86 )

Total equity at end of year 9,648   7,570  


At 31st December 2006, total equity had increased from £7,570 million at 31st December 2005 to £9,648 million. The increase arises principally from retained earnings and actuarial gains on defined benefit pension plans in the year, partially offset by further purchases of Treasury shares.

Share purchases
In 2006, the ESOP Trusts did not make any market purchases of shares in GSK plc (2005 – nil). 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 the company 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 and diminish the dilutive effect of new share issues on shareholders’ equity and earnings.

At 31st December 2006, the ESOP Trusts held 153.5 million GSK shares against the future exercise of share options and share awards. The carrying value of £1,999 million has been deducted from other reserves. The market value of these shares was £2,062 million.

GSK repurchased £1,348 million of shares in 2006, to be held as Treasury shares. The company completed its second £4 billion share repurchase programme in September, and in October commenced a new share buy-back programme totalling £6 billion. This programme is expected to be completed over a three year period including £2 billion in 2007. 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 2006, GSK also held 235.5 million shares as Treasury shares, at a cost of £3,147 million, which has been deducted from retained earnings.

Commitments and contingent liabilities
Financial commitments are summarised in Note 37 to the financial statements, ‘Commitments’. Other contingent liabilities and obligations in respect of short and long-term debt are set out in Note 29 to the financial statements, ‘Contingent liabilities’ and Note 30 to the financial statements, ‘Net debt’.

Amounts provided for pensions and post-retirement benefits are set out in Note 26 to the financial statements, ‘Pensions and other post-employment benefits’. Amounts for restructuring and integration plans and legal, environmental and other disputes are set out in Note 27 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 2006 as they fall due for payment.

  Total   Under 1 yr   1-3 yrs   3-5 yrs   5 yrs+  
  £m   £m   £m   £m   £m  

Loans 5,351   676   1,505   11   3,159  
Interest on loans 2,875   215   344   307   2,009  
Finance lease obligations 139   42   63   22   12  
Operating lease commitments 374   94   129   74   77  
Intangible assets 3,219   558   465   645   1,551  
Property, plant & equipment 521   381   140      
Investments 196   192   4      
Business combinations 258   258        
Purchase commitments 299   151   128   20    
Pensions 975   325   650      
Theravance put option agreement 258   258        
Other commitments 65   31   25   4   5  

Total 14,530   3,181   3,453   1,083   6,813  



GSK Annual Report 2006


Back to Contents

Business review
Financial position and resources


Commitments in respect of future interest payable on loans are disclosed after taking into account the effect of interest rate swaps.

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 up-front 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 commitments were made in 2006 under licensing and other agreements, including with ChemoCentryx Inc., EPIX Pharmaceuticals Inc. and Genmab A/S.

In 2006, GSK formalised an agreement with the trustees of the UK pension schemes to make additional contributions of up to £325 million per year, in addition to the normal contributions, over a four-year period ending 31st December 2009 in order to eliminate the then pension deficits on an IAS 19 basis by that point. The table on page 40 shows this commitment, but excludes the normal ongoing annual funding requirement of approximately £200 million. GSK has also committed to eliminate any future deficits that may arise over a rolling five-year period. No other commitments have been made past 31st December 2009.

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 221   74   28   5   114  
Other contingent liabilities 37   12   10   4   11  

Total 258   86   38   9   125  


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 a reasonable estimate can be made of the likely outcome of the dispute and this is included in Note 27 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 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 44 to 47.

GSK uses the best advice in determining its transfer pricing methodology and, on the basis of external professional advice, 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 12 to the financial statements, ‘Taxation’.

Cash flow

A summary of the consolidated cash flow statement is set out below:

  2006   2005  
  £m   £m  

Net cash inflow from operating activities 4,357   5,958  
Net cash outflow from investing activities (1,521 ) (1,660 )
Net cash outflow from financing activities (4,792 ) (2,914 )

Decrease/Increase in cash and bank overdrafts (1,956 ) 1,384  
Exchange adjustments (254 ) 233  
Cash and bank overdrafts at beginning of year 3,972   2,355  

Cash and bank overdrafts at end of year 1,762   3,972  

Cash and bank overdrafts at end of year        
Cash and cash equivalents 2,005   4,209  
Overdrafts (243 ) (237 )

  1,762   3,972  


The net cash inflow from operating activities after taxation paid was £4,357 million, a decrease of £1,601 million over 2005, arising mainly from the gross taxation payment of $3.3 billion (£1.8 billion) under the transfer pricing dispute settlement (see page 36), partially offset by higher operating profits.

The net cash outflow from investing activities was £1,521 million, a decrease of £139 million which reflected increased capital expenditure and the purchase of businesses including CNS in 2006 for £273 million (purchases of businesses in 2005 were over £1 billion reflecting the purchase of Corixa and ID Biomedical).

Free cash flow was £2,623 million, a decrease of 44% over 2005, principally reflecting the US tax settlement and higher levels of capital expenditure. 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.

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

  2006   2005  
  £m   £m  

Net cash inflow from operating activities 4,357   5,958  
Purchase of non-current tangible assets (1,366 ) (903 )
Purchase of non-current intangible assets (224 ) (278 )
Disposal of non-current tangible fixed assets 43   54  
Interest paid (414 ) (381 )
Interest received 299   290  
Dividends received from joint ventures and associated undertaking 15   10  
Dividends paid to minority interests (87 ) (86 )

Free cash flow 2,623   4,664  



GSK Annual Report 2006


Back to Contents

Business review
Financial position and resources


Reconciliation of net cash flow to movement in net debt

  2006   2005  
  £m   £m  

Net debt at beginning of year (1,237 ) (1,984 )
(Decrease)/increase in cash and        
 bank overdrafts (1,956 ) 1,384  
Cash outflow/(inflow) from liquid investments 55   (550 )
Net increase in long-term loans -   (912 )
Net repayment of short-term loans 739   857  
Exchange and other movements (51 ) (32 )

Net debt at end of year (2,450 ) (1,237 )


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 £1,590 million (2005 – £1,181 million). Disposals realised £218 million (2005 – £275 million). Cash payments to acquire equity investments of £57 million (2005 – £23 million) were made in the year and sales of equity investments realised £32 million (2005 – £35 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 and to meet other routine outflows including tax and dividends, subject to the risk factors discussed on pages 44 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 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 includes arrangements for accelerated payment of small suppliers.

Payment performance
At 31st December 2006, the average number of days’ purchases represented by trade and fixed asset creditors of the parent company was nil (2005 – nil) and in respect of the company and its UK subsidiaries in aggregate was 24 days (2005 – 22 days).

Treasury policies

GlaxoSmithKline plc reports in Sterling and pays dividends out of sterling profits. The role of Corporate Treasury in GSK is to manage and monitor the Group’s external and internal funding requirements and financial risks in support of Group corporate objectives. Treasury activities are governed by policies and procedures approved by the Board and monitored by a treasury management group.

GSK maintains treasury control systems and procedures to monitor foreign exchange, interest rate, liquidity, credit and other financial risks.

GSK operates globally, primarily through subsidiary companies established in the markets in which the Group trades. Due to the nature of GSK’s business, with patent protection on many of the products in its portfolio, the Group’s products compete largely on product efficacy rather than on price. Selling margins are sufficient to exceed normal operating costs and the Group’s operating subsidiaries are substantially cash generative.

Operating cash flow is used to fund investment in the research and development of new products as well as routine outflows of capital expenditure, tax, dividends and repayment of maturing debt. The Group may, from time to time, have additional demands for finance, such as for share purchases and acquisitions.

GSK operates with a high level of interest cover and at low levels of net debt relative to its market capitalisation. In addition to the strong positive cash flow from normal trading activities, additional liquidity is readily available via its commercial paper programme and short-term investments. The Group also has a European Medium Term Note programme of £10 billion, of which £3.5 billion was in issue at 31st December 2006. In 2004, the Group established a US Shelf Registration of $5 billion; at 31st December 2006 $2.4 billion (£1.2 billion) was in issue.

Treasury operations
The objective of treasury activity is to manage the post-tax net cost/income of financial operations to the benefit of Group earnings. Corporate Treasury does not operate as a profit centre. GSK uses a variety of financial instruments, including derivatives, to finance its operations and to manage market risks from those operations.

Derivatives, principally comprising forward foreign currency contracts, interest rate and currency swaps, are used to swap borrowings and liquid assets into the currencies required for Group purposes and to manage exposure to funding risks from changes in foreign exchange rates and interest rates.


GSK Annual Report 2006

Back to Contents

Business review
Financial position and resources


GSK balances the use of borrowings and liquid assets having regard to the cash flow from operating activities, the currencies in which it is earned, the tax cost of intra-Group distributions, the currencies in which business assets are denominated, and the post-tax cost of borrowings compared with the post-tax return on liquid assets.

Liquid assets surplus to the immediate operating requirements of Group companies are generally invested and managed centrally by Corporate Treasury. Requirements of Group companies for operating finance are met whenever possible from central resources.

External borrowings, mainly managed centrally by Corporate Treasury, comprise a portfolio of long and medium-term instruments and short-term finance.

GSK does not hold or issue derivative financial instruments for trading purposes and the Group’s 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.

Funding, maturity and counterparty risk
The Group invests centrally managed liquid assets in government bonds, short-term corporate debt instruments with a minimum short-term credit rating of A-1/P-1, money market funds with a credit rating of AAA/Aaa and other structured investments (credit ratings shown are from Standard and Poor’s and Moody’s Investors’ Services, respectively).

The Group manages its net borrowing requirements through a portfolio of long-term borrowings, including bonds, together with short-term finance under the US$10 billion commercial paper programme.

The Group’s long-term borrowings mature at dates between 2007 and 2034. These include a private financing which, although maturing in 2032, may be redeemed by GSK at any time and, in particular, in the event of any accelerating event that would increase the cost of funding for the Group. GSK’s long-term debt rating is AA from Standard and Poor’s and Aa2 from Moody’s Investors’ Services. The agencies’ short-term ratings for paper issued under the Group’s commercial paper programme are A-1+ and P-1 respectively.

Foreign exchange risk management
In GSK foreign currency transaction exposure arising on normal trade flows, in respect of both external and intra-Group trade, is not hedged. The policy is to minimise the exposure of overseas operating subsidiaries to transaction risk by matching local currency income with local currency costs. For this purpose, intra-Group trading transactions are matched centrally and intra-Group payment terms are managed to reduce risk. Exceptional foreign currency cash flows are hedged selectively under the management of Corporate Treasury.

The Group seeks to denominate borrowings in the currencies of its principal assets and cash flows. These are primarily denominated in US dollars, Euros and Sterling. Certain of these and other borrowings are swapped into other currencies as required for Group purposes.

Borrowings denominated in, or swapped into, foreign currencies that match investments in overseas Group assets are treated as a hedge against the relevant net assets.

Based on the composition of net debt at 31st December 2006, a 10% appreciation in Sterling against major currencies would result in a reduction in the Group’s net debt of approximately £210 million. A 10% weakening in Sterling against major currencies would result in an increase in the Group’s net debt of approximately £256 million.

Interest rate risk management
GSK’s policy on interest rate risk management requires that the amount of net borrowings at fixed rates increases with the ratio of forecast net interest payable to trading profit.

The Group uses a limited number of interest rate swaps to redenominate external borrowings into the interest rate coupon required for Group purposes. The duration of these swaps matches the duration of the principal debt instruments. Interest rate derivative instruments are accounted for as fair value or cash flow hedges of the relevant assets or liabilities.

The Group manages centrally the short-term cash surpluses or borrowing requirements of subsidiary companies and uses forward contracts to hedge future repayments back into the originating currency.

Sensitivity analysis considers the sensitivity of the Group’s net debt to hypothetical changes in market rates and assumes that all other variables remain constant. Based on the composition of net debt and financing arrangements at 31st December 2006, and taking into consideration all fixed rate borrowings in place, a one percentage point (100 basis points) decrease in average interest rates would result in an increase in the Group’s annual net interest charge of approximately £5 million.

Equity risk management
Equity investments classified as current assets are available-for-sale and the Group manages disposals to meet overall business requirements as they arise. The Group regularly monitors the value of its equity investments and only enters into hedges selectively with the approval of the Board.

Financial assets and liabilities
An analysis of net debt is given in Note 30 to the financial statements, ‘Net debt’. An analysis of financial assets and liabilities at carrying value and fair value and a reconciliation to net debt are given in Note 39 to the financial statements, ‘Financial instruments and related disclosures’, together with a discussion of derivative financial instruments and quantitative disclosures about market risk in accordance with the requirements of IAS 32 and IAS 39.

The Group continues to benefit from strong positive cash flow. Group net debt would have decreased significantly in the year to 31st December 2006, but for the Group’s purchase of its own shares in the market of £1.3 billion, the gross US tax settlement of US$3.3 billion (£1.8 billion) and acquisitions of approximately £0.3 billion.

The financial assets and liabilities at 31st December 2006 are representative of the treasury policies and strategies of GSK, applied consistently during the year. There were no significant changes in such policies throughout the year.


GSK Annual Report 2006

Back to Contents

Business review
Outlook and risk factors



Sales growth of existing products and launch of new products are key drivers of GSK’s business performance. The sales growth seen from key products such as Seretide/Advair, the Avandia group of products, Vaccines, Lamictal, Valtrex, Coreg and the high potential products, Requip, Avodart and Boniva is expected to continue in 2007.

Typically, sales of existing products decline dramatically when generic competition is introduced either on patent expiry or earlier if there is a successful challenge to the Group’s patent. In Q4 2006, generic competitors to Wellbutrin XL 300mg tablet (approximately 60% of Wellbutrin sales) and Zofran entered the US market. GSK is engaged in legal proceedings regarding the validity and infringement of the Group’s patents relating to many of its products. These are discussed in ‘Risk factors’ below and in Note 43 to the financial statements, ‘Legal proceedings’.

Five major new pharmaceutical product launches are expected in 2007. These include Tykerb, for breast cancer, Cervarix, for cervical cancer (in Europe), Allermist, for allergic rhinitis, Coreg CR, for heart failure and Trexima, for migraine.

GSK also expects to launch several other important products during the year including: Arixtra, to treat acute coronary syndromes (ACS); Altabax/Altargo, for skin infections, and Entereg, for the management of post-operative ileus.

GSK’s consumer brand portfolio will be strengthened further in 2007, with the launch of 10 products, including alli, a new treatment for weight-loss in the USA. Two more brands, Breathe Right, nasal strips and FiberChoice, dietary fibre supplements, were added to the portfolio, following the acquisition of CNS, Inc. which was completed in December 2006.

Several new products are expected to be filed for approval with the regulatory authorities in 2007, including vaccine opportunities: US filing of Cervarix, for cervical cancer and Rotarix, for rotavirus and the European filing of Synflorix, a vaccine for pneumococcal disease. GSK continues to progress development of vaccines for use before, and in the event of, a ’flu pandemic. In January 2007, GSK submitted its H5N1 vaccine to European regulators for approval for pre-pandemic use.

GSK now has 31 major product opportunities in phase III development or registration, comprising 13 NCEs, 6 new vaccines and 12 product line extensions.

GSK’s published earnings guidance for 2007 is that earnings per share growth is expected to be 8% to 10% in CER terms.

The Group has net debt of £2.5 billion, which is low relative to its market capitalisation, and this positions it to take advantage of any opportunities that might arise to build the business.

There are risks and uncertainties inherent in the business that may affect future performance including R&D projects, anticipated sales growth and expected earnings growth. These are discussed in ‘Risk factors ‘ below.

Risk factors

There are risks and uncertainties relevant to the Group’s business. The factors listed below are among those that the Group thinks could cause the Group’s actual results to differ materially from expected and historical results.

Risk that R&D will not deliver commercially successful new products
Continued development of commercially viable new 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, inability to obtain necessary regulatory approvals, difficulty or excessive costs to manufacture, erosion of patent term as a result of a lengthy development period, infringement of patents or other intellectual property rights of others or inability to differentiate the product adequately from those with which it competes.

Risk of unplanned loss of patents
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 of a patent or assertions that their generic product does not infringe the Group’s patents. If the Group 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 turnover and margins would be adversely affected. See Note 43 to the financial statements, ‘Legal proceedings’, for a discussion of patent-related proceedings in which the Group is involved.

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 Paxil IR and Wellbutrin had a significant impact on the Group’s overall turnover and earnings.

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. In addition, in an effort to control public health crises, some developing countries, such as South Africa and Brazil, have considered plans for substantial reductions in the scope of patent protection for pharmaceutical products. In particular, these countries could facilitate competition within their markets from generic manufacturers who would otherwise be unable to introduce competing products for a number of years.



GSK Annual Report 2006

Back to Contents

Business review
Outlook and risk factors


Any loss of patent protection, including abrogation of patent rights or compulsory licensing, is likely to affect adversely the Group’s operating 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 43 to the financial statements, ’Legal proceedings’, for a discussion of proceedings and governmental investigations 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 results. The Group has made material provisions in 2004, 2005 and 2006 related to legal proceedings and investigations which reduced its earnings. 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 – compensatory, punitive and statutory – in amounts that bear no relationship to the underlying harm. Accordingly it is potentially misleading to quantify the potential exposure to claims, proceedings and investigations of the type described in Note 43.

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 material additional charges to the Group’s earnings.

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. 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.

Anti-trust litigation
In the USA it has become increasingly common that following publicity around government investigations or an adverse outcome in prosecution of patent infringement actions, the defendants and direct and indirect purchasers and other payers initiate anti-trust actions as well. Claims by direct and indirect purchasers and other payers are typically filed as class actions and 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.

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 Group companies or individuals.

Risks of competition, price controls and limitations on sales
Third party competition
The Group operates in highly competitive businesses. 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 could adversely affect the Group’s operating results. Continued consolidation in the pharmaceutical industry could adversely affect the Group’s competitive position, while continued consolidation among the Group’s customers may increase pricing pressures. The Group had 13 products with over £500 million in annual global sales in 2006.

Among these products is Augmentin IR, with respect to which the Group has generic competition, and Avandia, Valtrex, and Wellbutrin XL, with respect to which the Group’s intellectual property rights in the USA are currently the subject of litigation, and two others – Zofran and the 300 mg tablet version of Wellbutrin XL – with respect to which the Group has had generic competition since the fourth quarter of 2006.



GSK Annual Report 2006


Back to Contents

Business review
Outlook and risk factors


If these or any of the Group’s other 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 adverse impact on the Group’s revenues and operating results could be significant. 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 are set out on page 23 and legal proceedings involving patent challenges are set out in Note 43 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, France and Italy. Some governments intervene directly in setting prices. 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 predict whether existing controls will increase or new controls will be introduced that will reduce the Group’s margins or affect adversely its ability to introduce new products profitably.

For example, in the USA, where the Group has its highest margins and most sales for any country, pricing pressures could significantly increase following implementation of the pharmaceutical benefit under Medicare or in the event that other state programmes to control the cost of prescription drugs are adopted. As experience develops under the Medicare programme outpatient pharmaceutical coverage for its beneficiaries that began in 2006, the US government, or the private insurers through which coverage is offered, through their enormous purchasing power under the programme could demand discounts that may implicitly create price controls on prescription drugs. Changes to the enabling legislation could afford the US government a direct role in negotiating prices under the Medicare programme. Additionally a number of states have proposed or implemented various schemes to control prices for their own senior citizens’ programmes, including 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 is likely to increase with implementation of the Medicare benefit, also increases pricing pressures on the Group’s products. These trends may adversely affect the Group’s revenues and margins from sales in the USA.

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. Stricter regulatory controls also heighten the risk of withdrawal by regulators on the basis of post-approval concerns over product safety, which would reduce revenues and can result in product recalls and product liability lawsuits.

In addition, in some cases the Group may voluntarily cease marketing a product (for example, the withdrawal of Lotronex in 2000 shortly after its initial launch in the USA) or face declining sales based on concerns about efficacy or safety, 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 have a major impact on the marketing and sale of the product.

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 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 fines or disgorgement remedy could materially and adversely affect the Group’s financial results. The Group’s Cidra, Puerto Rico facility has worked at resolution of FDA observations of deficiencies in manufacturing practices and is subject to a consent decree entered into with the FDA during 2005, as referred to in Note 43 to the financial statements, ‘Legal proceedings’. As a consequence of those discussions, supplies of certain products manufactured at Cidra were curtailed or constricted which had an adverse impact on sales in 2005 and 2006.

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 wholesales amounted to approximately 80% of the Group’s US pharmaceutical sales. At 31st December 2006 the Group had trade receivables due from these three wholesalers totalling £1,044 million (31st December 2005 – £1,051 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.



GSK Annual Report 2006


Back to Contents

Business review
Outlook and risk factors


Reliance on information technology
The Group is increasingly dependent on information technology systems, including Internet-based systems, for internal communication as well as communication with customers and suppliers. Any significant disruption of these systems, whether due to computer viruses or other outside incursions, could materially and adversely affect the Group’s operations.

The effective tax rate on the Group’s earnings benefits from the fact that a portion of its earnings is taxed at more favourable rates in some jurisdictions outside the UK. Changes in tax laws or in their application with respect to matters such as transfer pricing and the risk of double taxation that relate to the portion of the Group’s earnings taxed at more favourable rates, or a restriction in tax relief allowed on the interest on intra-Group debt, could increase the Group’s effective tax rate and adversely affect its financial results. In 2006 the Group resolved the claims by the US Internal Revenue Service related to Glaxo heritage products. The Group has open issues with the revenue authorities in the UK, Japan and Canada. These matters are discussed in Note 12 to the financial statements, ‘Taxation’.

Disruption from pandemic influenza
In the event of pandemic influenza, the Group could be subject to disruption from a range of factors. National governments may be more willing to abrogate intellectual property rights for medicines that might otherwise be in short supply. In a country afflicted by pandemic ‘flu, there would be a risk that employees and their families will be affected with the consequence that sales and distribution and manufacturing activities could be shut down and supply continuity – for active ingredients and finished goods – affected.

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 could materially and adversely affect the Group’s operations. See Note 43 to the financial statements, ‘Legal proceedings’, for a discussion of environmental-related proceedings in which the Group is involved.

Global political and economic conditions
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 risk management’ (see page 43). Fluctuations in exchange rates between Sterling and other currencies, especially the US dollar, the Euro and the Japanese Yen, could materially 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. These factors could materially affect the Group’s future results of operations.

Accounting standards
New or revised accounting standards, rules and interpretations promulgated from time to time by international or US accounting standard setting boards could result in changes to the recognition of income and expense that may adversely impact the Group’s reported financial results. International and US accounting standards changes in the market valuation of certain financial instruments (such as the equity collar linked to the Group’s investment in Quest Diagnostics, the put and call options linked to the Group’s strategic alliance with Theravance and impairments of equity investments) 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. Also, under international accounting standards, accounting for deferred taxation on inter-company inventory may give rise to volatility depending upon the ownership of the inventory at the balance sheet date.

Regulators regularly review the financial statements of listed companies like GSK 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.

Human resources
The Group has approximately 100,000 employees around the world and is subject to laws and regulations concerning its employees – ranging from discrimination and harassment to personal privacy to labour relations – that vary significantly from jurisdiction to jurisdiction. Failure to continue to recruit and retain the right people and maintain a culture of compliance could have a significant adverse effect on the Group.



GSK Annual Report 2006


Back to Contents

Business review
Financial review 2005


In accordance with US SEC disclosure requirements, the following discussion compares results for the year to 31st December 2005 with the results for the year to 31st December 2004. The information has been prepared under IFRS.

All growth rates are at constant exchange rates (CER) unless otherwise stated. The sterling growth rates may be found in the tables of pharmaceutical turnover by therapeutic area on page 50.


The currencies that most influence the Group’s results are the US dollar, the Euro and the Japanese Yen.

In 2005, the US dollar strengthened by over 10% against the pound, rising to $1.72 at the year-end following two years of weakness. Both the Euro and Japanese Yen year-end rates weakened against the pound by just over 3%.

World market – pharmaceuticals

Global pharmaceutical sales increased by 6% in 2005 to £302 billion.

World market by Value   % of   Growth  
geographic region £bn   total   £%  

USA 132.0   44   3  
Europe 86.8   29   8  
     Germany 16.4   5   8  
     France 15.9   5   9  
     UK 10.5   3    
     Italy 9.9   3   3  
Japan 32.5   11   4  
Asia Pacific 20.5   7   13  
Latin America 13.7   4   15  
Middle East, Africa 9.8   3   17  
Canada 7.0   2   14  

Total 302.3   100   6  


Growth in the US market has slowed to 3%, but it still represents 44% of the global prescription pharmaceutical market compared with 30% a decade ago.

At 30th September 2005, GSK held second position in the world pharmaceutical market with a market share of 6.3%, behind Pfizer with a market share of 8.9% . GSK had eight of the world’s top 60 pharmaceutical products. These were Avandia, Flixonase, Imigran/Imitrex, Lamictal, Seretide/Advair, Seroxat/Paxil, Wellbutrin and Zofran.

World market – Value % of  

top five therapeutic classes £bn   total   CER%   £%  

Cardiovascular 50.7   17   7   6  
Central nervous system 49.7   16   6   4  
Alimentary tract and metabolic 36.6   12   6   5  
Anti-infectives (bacterial, viral and fungal) excluding vaccines
32.2   11   7   5  
Respiratory 20.7   7   8   7  

(Note: data based on 12 months to 30th September 2005.)

Pharmaceutical turnover

Total pharmaceutical turnover in 2005 was £18,661 million compared with £17,100 million in 2004, an increase of 8% CER. In sterling terms turnover increased 9%, principally due to the strength of the Euro and other International currencies.

Pharmaceutical turnover by therapeutic area

GSK’s ability to continue to deliver pharmaceutical turnover growth is primarily due to an exceptionally broad product portfolio of fast-growing, high-value products. Sales of GSK’s largest product, Seretide/Advair, were up 22% to £3.0 billion and continued to gain market share across all regions. Market share by value in the anti-asthma and COPD therapy class was 27% in Europe and 33% in the USA, an increase of 2 percentage points in both cases compared with 2004. Sales of diabetes treatments were also strong, with Avandia/Avandamet up 18% to £1.3 billion. GSK launched Avandia for the treatment of type 2 diabetes in 1999 and a combination product, Avandamet, for blood sugar control in 2002. The product group was expanded further in February 2006 with the launch in the USA of a fixed-dose combination treatment, Avandaryl, which combines Avandia with a sulfonylurea. In 2005, Avandia/Avandamet achieved a market share by value in oral anti-diabetics of 14% in Europe and 35% in the USA, up 3 and 6 percentage points, respectively.

Other fast growing products were Lamictal for epilepsy/bipolar disorder, up 24% (£0.8 billion), Valtrex for herpes, up 21% (£0.7 billion), Coreg for heart disease, up 32% (£0.6 billion) and vaccines, up 15% (£1.4 billion).

In addition, in 2005 there was a rapid uptake of a number of high potential products such as Requip, for restless legs syndrome (sales up 34% to £156 million), Avodart for benign prostatic hyperplasia (sales doubled to £129 million) and Boniva/Bonviva for the treatment of osteoporosis, which was launched in 2005 and captured a 10% share of new prescriptions for oral bisphosphonates in the US market.

GSK continues to be the global leader in respiratory pharmaceuticals with sales of its three key products, Seretide/Advair, Flixotide/Flovent and Serevent, amounting to £4.0 billion, up 15%. Seretide/Advair sales rose 26% to £1.7 billion in the USA. Sales were also strong in both European and International markets, which were up 16% to £1 billion and £0.3 billion, respectively.

Central nervous system (CNS)
CNS sales declined 8% to £3.2 billion. Sales declined in the USA and Europe, with a small gain in International. Total Paxil sales fell 42% to £615 million, due to generic competition and the interruption in supply to Paxil CR during the year. See ‘Product supply’ on page 49. Partially mitigating this decline was the strong performance of Paxil in Japan, up 17% to £197 million.



GSK Annual Report 2006


Back to Contents

Business review
Financial review 2005 


Total Wellbutrin turnover fell 2% to £739 million. Wellbutrin IR and SR sales fell 68% to £92 million due to generic competition, but this was largely offset by the very strong performance of Wellbutrin XL (up 38% to £647 million).

The strong growth of GSK’s epilepsy and bi-polar disorder treatment Lamictal continued, with sales up 24% to £849 million, driven by the indication for the maintenance treatment of bi-polar disorder.

Requip sales rose 34% to £156 million. By Q1 2006, weekly new prescriptions for the product have quadrupled in the USA since it was launched for restless legs syndrome (RLS) in Q2 2005.

Global HIV product sales grew 5% to £1.6 billion, with sales from new products
Epzicom/Kivexa and Lexiva (together more than doubling to £226 million) offsetting the performance of Trizivir (down 6% to £303 million) and Epivir (down 12% to £261 million). Sales of the herpes treatment Valtrex grew 21% to £695 million. Performance is being driven by the USA (up 26% to £470 million) where the product is the clear market leader in treatments for genital herpes.

Anti-bacterial sales declined 3% worldwide. In the USA the decline was 27% reflecting increased generic competition.

The diabetes treatments Avandia/Avandamet continued to perform very strongly, with overall sales of £1.3 billion, up 18%. In the USA, sales grew 14% to £977 million. Avandia/Avandamet are also establishing strong positions in Europe, with sales rising 52% to £157 million, helped by the launch of Avandamet. Sales in International markets rose 13% to £195 million.

Boniva/Bonviva, a new once-monthly oral bisphosphonate for the treatment of osteoporosis, which was developed with Roche, had a strong launch in the USA and in February 2006 had a 10% share of new prescriptions for oral bisphosphonates. Boniva injection, the first-ever quarterly treatment for osteoporosis, was approved in the USA in January 2006 and received a positive opinion from the CHMP in Europe on 27th January 2006.

The vaccines business performed well, with total sales rising 15% to £1.4 billion, led by Infanrix. Vaccine sales were particularly strong in the USA, where turnover rose 26% to £338 million, helped by the launch of two new products, Fluarix and Boostrix.

In July, GSK acquired Corixa Corporation for £150 million and in December, completed the acquisition of ID Biomedical Corporation for £0.9 billion.

Oncology and emesis
Sales of Zofran grew 9% to £837 million, driven by the US market, up 12% to £639 million.

Cardiovascular and urogenital
Sales of Coreg for heart disease grew 32% to £573 million.

Avodart for benign prostatic hyperplasia (enlarged prostate) had a very strong year, with sales doubling to £129 million. By January 2006 the product accounted for 42% of new prescriptions in the US 5-Alpha Reductase Inhibitor market.

Other therapeutic areas
Sales of Zantac fell 12% to £244 million, with declines in all regions.

Product supply
Following FDA inspections in October 2003 and November 2004, which identified possible deficiencies in manufacturing practices at the Group’s facility at Cidra in Puerto Rico, the FDA halted distribution of supplies of Paxil CR and Avandamet in March 2005. This site is engaged in tableting and packaging for a range of GSK products, primarily for the US market including Paxil, Paxil CR, Coreg, Avandia and Avandamet. In April 2005, the Group reached agreement with the FDA on a Consent Decree, which provides for an independent expert to review manufacturing processes at the site for compliance with FDA Good Manufacturing Practice requirements. The Decree also allows for potential future penalties, up to a maximum of $10 million a year, if GSK fails to meet its terms.

In June 2005, the Group began re-supplying the US and other markets with both Paxil CR and Avandamet. The sales of these products were significantly impacted in 2005 by this interruption in supply. The impact on Avandamet was mitigated by the switching of patients to Avandia. In 2005, the Group also established a provision for the external costs required to rectify the manufacturing issues at the plant. For further details see Risk factors on pages 44 to 47 and Note 43 to the financial statements, ‘Legal proceedings’.

Consumer Healthcare sales            
  2005   2004  
  £m £m CER% £%

OTC medicines 1,437   1,400   1   3  
     Analgesics 362   333   6   9  
     Dermatological 161   180   (12 ) (11 )
     Gastro-intestinal 249   241   1   3  
     Respiratory tract 154   145   5   6  
     Smoking control 336   327   2   3  
     Natural wellness support 133   136   (4 ) (2 )
Oral care 943   913   2   3  
Nutritional healthcare 619   573   7   8  

  2,999   2,886   2   4  


The growth in Consumer Healthcare sales of 2% to £3.0 billion comprised an OTC medicines sales increase of 1%, a Nutritional healthcare sales increase of 7% and an Oral care sales increase of 2%.



GSK Annual Report 2006


Back to Contents

Business review
Financial review 2005


Pharmaceutical turnover by therapeutic area 2005

Total USA Europe International

Growth Growth Growth Growth
Therapeutic area/ % of 2005 2004
major products total £m £m CER% £% £m CER% £% £m CER% £% £m CER% £%

Respiratory 27   5,054   4,394     14     15   2,580     17     18   1,660     8     9   814     13     17  
Seretide/Advair     3,003   2,441     22     23   1,687     26     27   1,033     16     17   283     16     24  
Flixotide/Flovent     638   618     2     3   262     4     4   188     (3 )   (1 ) 188     3     6  
Serevent     330   349     (7 )   (5 ) 104     (20 )   (19 ) 160     (3 )   (1 ) 66     12     14  
Flixonase/Flonase     656   578     13     13   506     12     12   60     (1 )   2   90     27     30  

Central Nervous System 17   3,219   3,462     (8 )   (7 ) 2,051     (10 )   (10 ) 704     (7 )   (6 ) 464     2     5  
Seroxat/Paxil     615   1,063     (42 )   (42 ) 133     (75 )   (74 ) 187     (26 )   (25 ) 295         1  
   Paxil IR     488   667     (27 )   (27 ) 18     (87 )   (87 ) 187     (26 )   (25 ) 283     (1 )   (1 )
   Paxil CR     127   396     (68 )   (68 ) 115     (70 )   (70 )           12     40     50  
Wellbutrin     739   751     (2 )   (2 ) 723     (2 )   (2 ) 2     42     100   14     (14 )   (7 )
   Wellbutrin IR, SR     92   284     (68 )   (68 ) 80     (70 )   (70 ) 2     42     100   10     (35 )   (23 )
   Wellbutrin XL     647   467     38     39   643     37     38             4     >100     100  
Imigran/Imitrex     697   682     1     2   504     2     2   144     1     1   49     (2 )   2  
Lamictal     849   677     24     25   568     36     37   226     3     4   55     15     22  
Requip     156   116     34     34   80     50     51   68     21     21   8     22     14  

Anti-virals 14   2,598   2,359     9     10   1,285     10     10   773     6     7   540     12     15  
HIV     1,554   1,462     5     6   766     2     3   607     8     9   181     12     15  
Combivir     583   570     1     2   283     1     1   227         1   73     8     12  
Trizivir     303   322     (6 )   (6 ) 166     (7 )   (6 ) 123     (5 )   (5 ) 14     (8 )   (7 )
Epivir     261   294     (12 )   (11 ) 93     (33 )   (33 ) 122     4     6   46     12     15  
Ziagen     136   155     (14 )   (12 ) 55     (26 )   (25 ) 54     (8 )   (10 ) 27     11     23  
Retrovir     41   43     (6 )   (5 ) 14     (17 )   (18 ) 16     (6 )     11     12     10  
Agenerase, Lexiva     112   63     77     78   70     50     52   36     >100     >100   6     46     20  
Epzicom/Kivexa     118   1     >100     >100   85           29     >100     >100   4     >100     >100  
Herpes     826   718     14     15   476     24     25   139         1   211     4     6  
Valtrex     695   571     21     22   470     26     27   98     9     9   127     12     13  
Zovirax     131   147