20-F 1 u54927_20f.htm  

As filed with the Securities and Exchange Commission on February 29, 2008

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F


   
   
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  OR
   
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
   
  OR
   
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  OR
   
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 1-15170

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

England
(Jurisdiction of incorporation or organization)

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

Simon Bicknell
Company Secretary
GlaxoSmithKline plc
980 Great West Road
Brentford
England
011 44 20 8047 5000
company.secretary@gsk.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

Title of Each Class Name of Each Exchange On Which Registered
American Depositary Shares, each representing 2 New York Stock Exchange
   Ordinary Shares, Par value 25 pence  

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

None
(Title of class)

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

None
(Title of class)


     Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.




Ordinary Shares of 25p each   5,508,392,868



     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 Securities Exchange Act of 1934. (Check one):

Large accelerated filer            Accelerated filer            Non-accelerated filer  

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

  U.S. GAAP        International Financial Reporting Standards as issued by the International Accounting Standards Board        Other

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.

  Item 17        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 Securities Exchange Act of 1934).

  Yes        No

 

   
   
   
   
   
   
   
 
   
  Annual Report 2007
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
 

 


Question How are you adapting your business model to
one succeed in the current healthcare environment?
  Answer page 4
   
Question Why do you have a Consumer Healthcare
two business? Answer page 5
   
Question Share prices in the sector haven’t performed well,
three what is the outlook for GSK? Answer page 6
   
Question How is your research and development pipeline
four performing? Answer page 7
   
Question What are you doing to improve healthcare in the
five developing world? Answer page 8

 

 

 

Website
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.

Notice regarding limitations on Director liability under English Law
Under the UK Companies Act 2006, a safe harbour limits the liability of Directors in respect of statements in and omissions from the Report of the Directors contained on pages 9 to 86, under English law the Directors would be liable to the company (but not to any third party) if the Report of the Directors contains errors as a result of recklessness or knowing misstatement or dishonest concealment of a material fact, but would not otherwise be liable.

Report of the Directors
Pages 9 to 86 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.

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 50 to 53 of this Annual Report.


Contents

     
  Mission  
  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 2007  1
   

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Annual Report and Annual Review
This report is the Annual Report of GlaxoSmithKline plc for the year ended 31st December 2007, prepared in accordance with United Kingdom requirements. It was approved by the Board of Directors on 27th February 2008 and published on 28th February 2008.

A summary report on the year, the Annual Review 2007, 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 GSK’s website.

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; an American Depositary Share (ADS) represents two GlaxoSmithKline shares.

Business performance
Business performance, which is a supplemental non-IFRS measure, is the primary performance measure used by management and is presented after excluding costs relating to the new Operational Excellence programme, which commenced in October 2007. Management believes that exclusion of these items provides a better reflection of the way in which the business is managed and gives a more useful indication of the underlying performance of the Group. This information, which is provided in addition to the total results prepared under IFRS, is given to assist shareholders to gain a clearer understanding of the underlying performance of the business and to increase comparability for the periods presented.

Exchange rates
The Group operates in many countries and earns revenues and incurs costs in many currencies. The results of the Group, as reported in Sterling, are affected by movements in exchange rates between Sterling and other currencies. Average exchange rates prevailing during the period are used to translate the results and cash flows of overseas subsidiaries, associates and joint ventures into Sterling. Period end rates are used to translate the net assets of those entities. 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.

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

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 114 countries, with products sold in over 140 countries. The principal research and development (R&D) facilities are in the UK, the USA, Belgium, Italy, Japan and Spain. Products are currently manufactured in some 38 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).

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.


 

2  GSK Annual Report 2007
   

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Review of 2007
 
Chairman and CEO summary
 
 

It is natural that our stakeholders want to know how we are facing the challenges of the fast-changing healthcare environment, and how we plan to convert our strategic direction into profitable results, which should return value to our shareholders.

Our 2007 Annual Report aims to answer these questions and demonstrate that our strategic focus on research and development, which is delivering improved pipeline productivity, will enhance returns to shareholders over the long-term. The success of our Consumer Healthcare business and the strong performance of many key pharmaceutical and vaccine products in our current portfolio are also providing strong contributions to growth and helped us to deliver 2007 business performance earnings per share (EPS) growth of 10% at constant exchange rates (CER); results that were at the high end of our guidance.

We also continue to balance the needs of our shareholders with our commitment to improve healthcare in communities across the world –we feel this is not just the right thing to do; but the only thing to do.

Financial performance and outlook
Total sales were £22.7 billion, up 2%, and business performance EPS was 99.1p, up 10% from 2006. The Board declared a dividend for the year of 53p, up from 48p in 2006.

Pharmaceutical turnover was level at £19.2 billion, impacted by generic competition in the USA and a decrease of 22% in Avandia sales globally. Among other key products, sales of Seretide/Advair for asthma and COPD rose by 10% to £3.5 billion while those for Lamictal, for epilepsy and bipolar disorder, increased by 18% to £1.1 billion. The Vaccines business grew by 20% to £2 billion. Consumer Healthcare generated strong sales growth, up 14% to almost £3.5 billion.

2007 also saw the launch of the largest share buy-back in the industry; share repurchases of £2.5 billion were made in 2007 under this programme and a further £6 billion are expected in 2008. We expect to repurchase £12 billion of shares under this programme by mid-2009.

In May 2007, an article in the New England Journal of Medicine suggested that there may be cardiovascular risk associated with Avandia, our second largest product. This was followed by intense media coverage and despite our efforts to explain the entirety of the data, which did not confirm this risk, sales of Avandia dropped significantly in the second half of 2007.

The decline in Avandia sales, together with increased generic competition in the USA, will adversely impact our earnings in 2008 and we expect a mid-single digit percentage decline in business performance EPS, at CER. Looking ahead we remain confident in GSK’s future. Our fast-growing vaccines business, the resurgence of our Consumer Healthcare division and the strong performance of key pharmaceutical products are all providing contributions to growth. The momentum of our late-stage pipeline continues to enhance our business and is producing a significant renewal of our product line.

Seeing results from our investment in R&D
Last year, GSK received a record 10 product approvals and filed 10 product applications. New products launched during 2007 were Tykerb, for breast cancer, Veramyst/Avamys, for allergic rhinitis, Altabax/Altargo for the treatment of skin infections and Cervarix our vaccine for the prevention of cervical cancer.

We currently have 13 new product opportunities filed with regulators and commenced nine new phase III clinical development programmes in 2007. There are at present 34 key assets in the phase III or registration stages.

Leading the way
Although the future remains challenging, GSK is determined to remain an industry leader across many fronts; not only through our pipeline progress but also through efficiency initiatives and by fulfilling our responsibilities to communities worldwide.

In October we announced a significant new £1.5 billion Operational Excellence programme to improve operational efficiency and productivity. We expect this to deliver annual pre-tax savings of £700 million by 2010.

During 2007, our global community investment contributions continued to deliver a positive influence on the lives of people worldwide and we are proud to play our part to the full.

We are grateful to our dedicated people for their efforts and passion which contributed so much to our success. We also extend the company’s thanks to you, our shareholders, for your continuing support.

There have been changes in the management team in the past 12 months including the departure of David Stout, President of Pharmaceutical Operations, and Rupert Bondy, Senior Vice President and General Counsel who will be leaving GSK at the end of March 2008. We thank them both for their contribution to GSK over many years. We also welcomed Professor Sir Roy Anderson to the Board as a Non-Executive Director and Andrew Witty and Chris Viehbacher as Executive Directors.

Overall, we are confident in GSK’s strength as an organisation and that we have the expertise to deal with the changing environment we face.

Thank you again for your support.

 
Sir Christopher Gent   JP Garnier
Chairman   Chief Executive Officer


 

Message from Sir Christopher Gent, Chairman
The AGM sees the retirement of our Chief Executive Officer JP Garnier, who has served GSK with great style and distinction since the merger in December 2000. JP brought wit, wisdom and hugely impressive business acumen to his role. He was directly responsible for many of the innovations of the last seven years, including the introduction of our Centres of Excellence in Drug Discovery, which have transformed the way we approach R&D, and driving a renewed focus and energy behind our vaccines business.


Thank you, JP, on behalf of the Board and the stakeholders of GSK.

Andrew Witty becomes our new Chief Executive Officer at the AGM. Having worked for us since 1985, Andrew is experienced, enthusiastic and well-respected both inside GSK and beyond. I have no doubt that he will ensure that GSK fulfils its rich potential, and I look forward to working alongside him.


 GSK Annual Report 2007  3
   

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We consult our stakeholders in many ways. From shareholders, patients, governments, non-government organisations, payers and employees we hear many different questions. For this year’s Annual Report we have focused on five key questions that lie at the heart of the business.


How are you adapting your
business model to succeed
in the current healthcare
environment?

Diversity and balance
We operate in a fast-changing market from both a regulatory and payer perspective. Regulators are becoming increasingly risk conscious and payers more cost conscious. It is imperative that pharmaceutical companies, including GSK, modernise and evolve to reflect these market changes.

As we move forward into this changing environment, we are well-positioned, relative to our peers. Why? Because we are a broad-based, geographically-diverse and well-balanced Group encompassing Pharmaceuticals, vaccines and Consumer Healthcare.

Through the intellectual property system, we have a relatively short patent exclusivity for traditional small molecule chemical pharmaceuticals. However, Biological Medicines, vaccines and Consumer Healthcare products generally have a significantly longer product life cycle. Our presence in all these sectors will continue to grow and enables us to better balance risk and sustain growth.

Growing the pipeline
In recent years, our pipeline has expanded and flowed more quickly than ever before. Seven years ago we had relatively few products in our late-stage pipeline. Today we have 157 projects in clinical development, of which 118 are NCEs or new vaccines; this includes 34 key assets in late stage development.

This is a significant transformation, driven largely by changes we have made to both our research and development (R&D) ‘hardware’ and ‘software’. We have radically changed the R&D infrastructure, breaking down the traditional big bureaucratic pharma model into R&D Centres of Excellence for Drug Discovery (CEDDs). At the same time, we are evolving and adapting our culture, helping our talented people to improve the quality of our science and management.

We will continue to ensure that we are creating new medicines targeted at unmet medical need, and we will focus on developing these medicines in a way that allows regulators to make a clear assessment about the relative risks and benefits.

     
    Summary
    Our markets are changing and we are evolving rapidly to reflect the new environment. We are well-positioned, relative to our peers.
     
  A broad-based, geographically-diverse and well- balanced business.
     
  Improved pipeline productivity.
     
  Innovative programmes to reduce expenditure and work more closely with customers.
     
  Positioned to take advantage of opportunities in the growing healthcare economies.
     

Reducing expenditure
Cost remains a major issue for our customers because the demand for healthcare continues to increase, driven by ageing populations and rising expectations. We are committed to working with governments to reduce total healthcare costs and to lowering our own expenditure so that we operate more efficiently and profitably in a lower priced environment – enabling us to continue our investment in R&D.

At the same time, we are adopting a more flexible and creative approach to product pricing. We are alert to opportunities to share risk with customers as a means of demonstrating that we have great belief in our medicines – and that we only expect to be rewarded when our medicines deliver the anticipated benefits.

Our Operational Excellence programmes, which are an important part of our strategy, mean we are improving efficiency year-on-year. We are also working hard to lower the cost of developing products and have already outsourced some areas of our business to lower-cost countries. We will continue to assess and capture other opportunities to reduce costs.

Seizing global opportunities
Globalisation is an increasingly important factor in the business landscape. In the past, we have derived most of our growth from the established economies of the USA, Europe and Japan. Countries such as Brazil, Russia, India and China – often known as the BRIC markets – have large populations. They are increasingly able to afford good quality healthcare, opening up significant new markets which will be important future growth areas for GSK.

Investing in our people
We will only reach our potential through the support and talent of highly motivated people. Our ambition is to be the place where great people apply their energy and passion to make a difference in the world. Their skills and intellect are key components in the successful implementation of our strategy. During 2007 we continued to invest in recruiting and training the best scientists and other professionals.


 

4  GSK Annual Report 2007
   

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Why do you have a Consumer Healthcare business?

A healthy performance
Consumer Healthcare is an important business to us. Not only does it provide an excellent balance with our Pharmaceuticals operation, it is also a thriving business in its own right which is delivering a strong performance for shareholders.

Consumer Healthcare has shown significant acceleration in top line performance, with sales growth up 14% in 2007. It has a powerful portfolio that includes Lucozade, Sensodyne, Panadol, Horlicks and Aquafresh, a brand which has benefited from investment and the launch of new brand extensions. 2007 also saw the successful US launch of alli, the first over-the-counter (OTC) weight loss aid approved by the Food and Drug Administration (FDA), which is currently being reviewed by European regulatory authorities. Through our Consumer Healthcare business, and its expertise in sales and marketing, we are well placed to be the partner of choice for ‘switch’ products, bringing them from the prescription to the OTC market.

Top five Consumer Healthcare products by turnover 2007

Products Turnover  
  2007  
  £m  

 
Lucozade 347  
Aquafresh 308  
Sensodyne 293  
Panadol 262  
Horlicks 174  

 

Capitalising on long-term potential
Global healthcare markets are in a state of change. For example, there is an increasing trend for governments to cut state healthcare costs by influencing a switch from prescription to generic or OTC products.

Looking ahead, healthcare is becoming more consumer-centred. People expect to be able to access medical knowledge and to influence their own treatments. For many, OTC products are their first destination for everyday healthcare.

We expect that the highest rates of growth for all healthcare businesses will be driven by the developing, emerging economies. OTC is the foundation of healthcare in these countries. In China, for example, OTC accounts for 36% of drug expenditure, compared to 8% in North America and 10% in Western Europe.

   
  Summary
     
  Our Consumer Healthcare business is a key part of GSK. It is a profitable, logical, complement to our Pharmaceutical operation with a powerful portfolio and a healthy pipeline.
     
  Outstanding performance in 2007, with double- digit sales growth.
     
  Excellent prospects, particularly in developing economies.
     
  Opportunity to share expertise and resources across the two businesses.
     
  Steady, long-term growth helps balance the Pharmaceutical business.
     

Sharing strengths
The Consumer Healthcare and Pharmaceuticals businesses are not stand alone entities, but are complementary and synergistic in a number of important areas. They are both backed by science endorsed strategies and a focus on R&D.

There is a growing trend worldwide for patients to manage their own healthcare, choosing OTC products, rather than relying on a prescription – a behaviour in which our Consumer Healthcare professionals are richly experienced. We are able to draw on these skills and knowledge in our Pharmaceutical business and share costs and resources. We also share expertise and resources in other areas, such as regulatory matters, R&D, marketing, distribution and procurement.

Getting the balance right
The Pharmaceuticals business operates in a tough climate. Increased legislation, cautious regulatory regimes and pricing pressures are among the key challenges that face any pharmaceutical company. At the same time, the patent framework for pharmaceutical products tends to result in a relatively short life cycle for even the most successful treatments.

In contrast, our Consumer Healthcare business offers long-term, steady cash flow. A broad portfolio of pharmaceutical and OTC products can help mitigate the impact of losses to generics and help smooth the more volatile nature of the pharmaceutical markets.


 

 GSK Annual Report 2007  5
   

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Share prices in the sector
haven’t performed well,
what is the outlook for GSK?

Sector challenges
After many years of sustained value creation for shareholders, the pharmaceutical sector has suffered a de-rating since the beginning of 2001. The main factor behind the de-rating is that R&D productivity, which is integral to the growth of the pharmaceutical industry, has declined. Share price valuations in the past also included more value for the longer-term potential of R&D pipelines than is currently the case.

At the same time, the level of generic competition has intensified. GSK has been able to withstand this pressure better than many of our peers because of the broad nature of our product line, a flow of new products from our pipeline and the greater protection we experience in our vaccines and Consumer Healthcare businesses.

In fact every year since the merger at the end of 2000 we have delivered increased sales, at CER, despite challenging market conditions. In financial terms, over the same period, total returns to shareholders for GSK’s peer group were down 29%. The total return to GSK shareholders over this period was down 15%, above the performance of the peer group.

2007 – the Avandia factor
In 2007 GSK’s share price fell by 5% compared to an increase in the FTSE 100 index of 4%. That was disappointing for our investors, a significant number of whom are also our employees.

We started 2007 strongly and achieved several important milestones including the launches of Tykerb and the FDA approval of alli. In the first quarter, we beat expectations and delivered EPS growth of 14%. As the market received this positive news our share price outperformed most of our peers. Then, in May 2007, an article in the New England Journal of Medicine (NEJM) suggested that there may be cardiovascular risk associated with Avandia, our second largest product. This was followed by intense media coverage and despite our efforts to explain the entirety of the data, which did not confirm this risk, doctors were reluctant to prescribe Avandia for new patients without further FDA guidance.

Sales of Avandia dropped significantly and this had a negative impact on our share price. Following clarification from the FDA in October 2007, we now have a new approved label and can move ahead with more clarity.

 

   
  Summary
     
 

To ensure that we remain an industry leader, we are addressing the issues which face the pharmaceutical sector.

     
  Investment to achieve industry leading R&D productivity.
     
  A new £1.5 billion Operational Excellence programme.
     
  A 10% increase in the dividend paid to our shareholders for 2007.
     
  The largest share buy-back programme in the industry.
     
  Attracting and retaining the best employees.
     

Taking action to create long-term value
The Board and management continually review GSK’s business strategy and the external environment with a view to achieving growth on a sustainable basis.

Our industry has a long-term investment cycle, driven primarily by the time it takes to develop a new pharmaceutical product – at least 10 years. The decisions taken over the last seven years that have improved R&D productivity at GSK, will still take time to have a major impact on our revenues. However, as investors become more confident in our strategy and key pipeline products make it to the market, this will begin to be factored into our share price.

At the same time, we are very focused on taking action to enhance returns for shareholders by accelerating our efficiency programmes, and returning cash to shareholders through dividends and share buy-backs. The Board approved a 10% increase in its dividend for 2007 and in July, GSK announced the largest share buy-back programme in the industry.

After the third quarter, we announced a significant new £1.5 billion Operational Excellence programme to improve the efficiency and productivity of our operations. This is expected to deliver annual savings of up to £700 million by 2010.

Reducing costs does not mean cutting down on talent. GSK is respected worldwide as a Group where the best people can do their best work and we continue to attract, retain and reward the brightest employees, from sales teams on the front line to scientists who are at the forefront of discovering new therapies.


 

6  GSK Annual Report 2007
   

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How is your research
and development pipeline
performing?

The best year for pharmaceutical R&D since the merger
2007 saw GSK’s best year for R&D since the Group was formed in 2000. We have undoubtedly made great strides in the last seven years – but there remains more to achieve and more benefits which we can look forward to as our investment in the pipeline delivers.

During the year, three new chemical entities and one new vaccine were approved; Veramyst for allergic rhinitis, Tykerb for breast cancer, Altabax for skin infections and Cervarix to prevent cervical cancer.

We have progressed a range of products through the pipeline, positioning us well for the future. A total of nine new phase III programmes started. These are the large scale trials where we seek to ascertain safety and also to prove unequivocally the efficacy of the medicines before submitting them for approval.

Our initiative to in-license potential treatments continued. We brought three new late-stage programmes into GSK and moved a further four into late-stage development, improving our ability to reload and sustain the pipeline we need.

By its nature, R&D carries inherent risk. We were pleased that 2007 was a year of few disappointments, with the most notable termination being that of odiparcil, to prevent blood clots. A number of product line extensions were delayed which we had hoped would gain final regulatory approval in the USA, including Lamictal XR and Requip XL.

Promising progress in vaccines
We have a large and promising vaccines pipeline, with 24 projects in clinical development, including seven in phase III trials and another five filed with regulators.

Cervarix, our HPV vaccine to prevent cervical cancer, has now been approved in over 50 countries across the world. Further licensing applications have been submitted in 28 countries, including Japan. In the USA, the FDA issued a Complete Response letter for Cervarix in December 2007. We plan to submit our response to this letter in the second quarter of 2008 and continue our discussions regarding the application with the FDA.

While Cervarix is perhaps our most high-profile vaccine, several other vaccines made progress during 2007. Rotarix for rotavirus, a disease which causes severe childhood diarrhoea, was filed in the USA in June, following approval in over 100 countries worldwide. We also filed Synflorix, a vaccine to prevent pneumococcal disease, in Europe and International markets at the end of the year. Our meningitis vaccine Men-ACWY and our innovative Mage-A3 vaccine for the treatment of non small cell lung cancer both entered phase III trials in 2007.

   
  Summary
     
 

This has been a good year for our R&D team. A number of important products and potential products moved through our pipeline and we achieved several important objectives.

     
  34 key assets in phase III/registration.
     
  Three new chemical entities approved, and one new vaccine.
     
  10 new product opportunities filed with regulators.
     
  Nine new phase III clinical development programmes commenced.
     
  Three late-stage development programmes in-licensed.
     

In October 2007 we also received encouraging safety and efficacy data with our vaccine to protect against malaria, which is currently in phase II development. These results have given us the confidence to move into large scale phase III trials which are due to begin in the second half of 2008.

Adapting to the changing environment
We are responding in many ways to the challenges of R&D productivity that are faced by companies in the pharmaceutical sector. Our network of CEDDs focus skills and resources on targeted disease areas. The CEDDs create the spirit of a small R&D-led team within a very large pharmaceutical organisation and allow us to be more nimble, and therefore productive, in our approach. In 2007 we opened two new CEDDs, in Immuno-inflammation and Infectious Diseases, both of which are headed by world-class scientists.

An important element of our strategy is to access a broad diversity of thinking. One way we do this is by partnering with academic centres worldwide. In 2007, we opened our new clinical imaging centre at Hammersmith Hospital in London, where research is concentrating on cancer, stroke and neurological diseases. A second key strand is to make sure that GSK is well-represented wherever the most cutting edge science is practised. In 2007, we opened a new fully integrated research institute in China.

GSK has a very active external partnering strategy. In 2007 we entered into nine external product licensing collaborations, together with a number of other partnerships to develop further and utilise novel science and technologies in pharmaceutical and biological R&D.

We continue to review actively our therapeutic area strategies to examine all the areas in which we have a presence and prioritise those that demonstrate the most potential. We aim to derive 20% of our pipeline from biopharmaceuticals by 2015 – it is around 6% at present. We have also increased our investment in neurosciences, vaccines and oncology research.

Whilst it remains a tough challenge to discover medicines and vaccines, the level of understanding, scientific advancement and breakthrough is unprecedented. We believe that at GSK the opportunity to discover new products is now greater than ever.


 

 GSK Annual Report 2007  7
   

Back to Contents

What are you doing to
improve healthcare in the
developing world?

Getting the balance right
For a commercial organisation like GSK, there is a balance to be struck between the return to shareholders and our desire to improve access to our products, particularly for patients in the developing world.

HIV/AIDS has both worsened the healthcare crisis in sub-Saharan Africa and brought it worldwide attention. Poverty means that too many are denied education or die from malnutrition and a lack of clean drinking water. The ability of a pharmaceutical company to address the healthcare problems of the developing world must be seen in this broader context.

Where we offer our anti-retrovirals (ARVs) and anti-malarials at not-for-profit prices, this is in addition to our significant community investment activities. Our Corporate Responsibility Report has more details of our efforts to improve access to medicines, in both the developing and the developed world, and information about our other community partnership programmes.

Do more, feel better, live longer
HIV/AIDS, tuberculosis and malaria are killing around 20,000 people every day. We believe that playing our part is not just the right thing to do; it is the only thing to do.

We contribute through action in four areas: preferential pricing of our ARVs, anti-malarials and vaccines; investing in R&D into diseases of the developing world; community investment activities and partnerships that foster effective healthcare; and through innovative partnerships.

Sometimes, the healthcare crisis in Africa is used by some pressure groups to attack our industry or the intellectual property (IP) system. But it is important to understand that we rely on IP to generate the funds which enabled us to invest £3.2 billion in R&D during 2007. We will continue to stress this to those who would like to see the IP environment weakened.

Without investment in R&D we will not see the much-needed new medicines and vaccines. This requires a delicate balance – which we believe we achieve - to the benefit of shareholders and patients the world over.

   
  Summary
     
  GSK is an industry leader in providing access to medicines in the developing world.
     
  Preferential pricing ensures that the poorest can still benefit from our treatments and vaccines.
     
  Our investment in R&D is helping to build a rich pipeline which reflects the needs of the developing world.
     
  Innovative partnerships have created breakthroughs in treatments and vaccines for neglected diseases.
     
  Community investment activities help promote education and better healthcare.
     
  GSK is also actively involved in supporting patients in the developed world - see page 23.
     

Preferential pricing
We have provided our vaccines at preferential prices to the developing world for over 20 years.

Our HIV/AIDS and malaria treatments are offered at not-for-profit prices to public sector customers and not-for-profit organisations in all the Least Developed Countries and all of sub-Saharan Africa. Including Global Fund and other eligible programmes, our not-for-profit prices are now available in around 80 countries.

Innovative partnerships
For products with no viable commercial market, such as truly neglected tropical diseases, we work in public-private partnerships. We provide the R&D, technology, manufacturing and distribution expertise while academic institutions provide research and disease area knowledge. Public sector partners, governments, or organisations such as the Gates Foundation, help fund the project and assist in getting the medicines to the people who need them. Funds are usually channelled through organisations such as the TB Alliance and the Malaria Vaccine Initiative.

These programmes have transformed R&D in neglected diseases. For example, the pipeline for malaria treatments is now the richest the world has ever seen.

We have granted voluntary licenses to allow generic manufacturers to produce their own versions of our key ARVs for HIV/AIDS. There is now global capacity to manufacture enough ARVs to meet the world’s needs – the challenge is to get the medicines to the people who need them.

Community investment
January 2008 saw the 10th anniversary of our commitment to eliminate lymphatic filariasis (LF), also known as elephantiasis. To date we have reached over 130 million people, and 24 million children have been born in areas that are now LF-free.

We also currently support significant HIV/AIDS education programmes in Africa, India, China and Mexico. Each programme faces different challenges, but the importance of education among people marginalised by society is common to all.

Further community investment programmes include Personal Hygiene and Sanitation Education (PHASE), which focuses on how the simple act of washing hands can prevent diarrhoeal disease and save lives.


8  GSK Annual Report 2007
   


Back to Contents

   
REPORT OF THE DIRECTORS  
Business review  
   
   
 
Business review
 
 

The business review discusses GSK’s financial and non-financial activities, resources, developments and performance during 2007 and outlines the trends and factors which are likely to affect its future development.

2007 performance overview 10
Financial trends and ratios 12
Optimising the performance of marketed products 13
Delivering the product pipeline for patients 14
Being the best place for the best people to do their best work 22
Improving access to medicines 23
Corporate responsibility and community investment 24
Global manufacturing and supply 26
Regulatory environment 27
World market 31
Products and competition 32
Financial review 2007 36
Financial position and resources 45
Outlook and risk factors 50
Financial review 2006 54

Accounting presentation
This report is prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union and also with IFRS as issued by the International Accounting Standards Board.

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.

Business performance
Business performance, which is a supplemental non-IFRS measure, is the primary performance measure used by management and is presented after excluding costs relating to the new Operational Excellence programme, which commenced in October 2007. Management believes that exclusion of these items provides a better reflection of the way in which the business is managed and gives a more useful indication of the underlying performance of the Group. This information, which is provided in addition to the total results prepared under IFRS, is given to assist shareholders to gain a clearer understanding of the underlying performance of the business and to increase comparability for the periods presented.

Exchange rates
The Group operates in many countries and earns revenues and incurs costs in many currencies. The results of the Group, as reported in Sterling, are affected by movements in exchange rates between Sterling and other currencies. Average exchange rates prevailing during the period are used to translate the results and cash flows of overseas subsidiaries, associates and joint ventures into Sterling. Period end rates are used to translate the net assets of those entities. 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.

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


 

 GSK Annual Report 2007  9
   

Back to Contents

   
  REPORT OF THE DIRECTORS
  2007 performance overview
   
   
 
2007 performance overview
GSK’s performance is driven by a number of important strategies
 
   
  Key performance indicators
  Turnover, business performance* earnings per share growth and total shareholder return





   
   
   
  Strategies
     
     
  Optimising the performance of marketed 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.
     
     
     
     
   
  Maximising total shareholder return (TSR)
  GSK continues to work to maximise TSR through EPS growth, dividend increases and share repurchases.
     
     
     

 

*      The calculation of business performance, a supplemental non-IFRS measure, is described in Note 1 to the financial statements, ‘Presentation of the financial statements ’.
 
10  GSK Annual Report 2007
   

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REPORT OF THE DIRECTORS  
2007 performance overview  
   
   
  Key developments in 2007
         
         
  Group turnover was £22.7 billion, up 2% at constant exchange rates compared with 2006  
  Top ten Pharmaceutical products:    
    Seretide/Advair £3,499 million, up 10% Imigran/Imitrex £685 million, up 3%  
    Vaccines products £1,993 million, up 20% Flixotide/Flovent £621 million, down 1%  
    Avandia products £1,219 million, down 22% Coreg £587 million, down 18%  
    Lamictal £1,097 million, up 18% Seroxat/Paxil £553 million, down 6%  
    Valtrex £934 million, up 18% Augmentin £530 million, down 6%  
  Other key pharmaceutical growth drivers, Arixtra, Avodart, Boniva and Requip delivered combined sales of £892 million (up 47%)
  Top five Consumer Healthcare products:    
    Lucozade £347 million, up 16% Panadol £262 million, up 14%  
    Aquafresh £308 million, up 12% Horlicks £174 million, up 12%  
    Sensodyne £293 million, up 16%    
  The launch of alli in the USA in June was very successful, with sales of £150 million achieved  
  Business performance operating margin improved by 1.3 percentage points to 34.9% of turnover  
        More details on page 13.
         
  In February 2008, GSK had  157 pharmaceutical and vaccine projects in clinical development, compared with 158 in February 2007
  34 major product opportunities were in phase III development or registration, including:  
    elesclomol (metastatic melanoma) Promacta (thrombocytopenia)  
    Entereg (post-operative ileus) Rezonic (chemotherapy-induced nausea and vomiting)
    H5N1 (pandemic flu vaccine) Synflorix (S. pneumonia and non-typeable Haemophilus influenzae)
    ofatumumab (rheumatoid arthritis) Tykerb + Armala (inflammatory breast cancer)
  Late stage projects terminated included odiparcil for prevention of blood clots  
        More details on page 14.
         
  The Group carries out a global leadership survey of over 10,000 managers every two years  
  The last survey in 2006 showed a strong commitment to performance with integrity  
  Management has been working since then on addressing the areas for improvement  
   The Group is committed to encouraging diversity amongst its employees and in 2007 37% of the global management population was female (2006 – 36%)
        More details on page 22.
         
  Global community investment was valued at £282 million, 3.8% of total profit before tax  
   The lymphatic filariasis elimination programme continued with another 150 million albendazole treatments donated, making almost 750 million treatments in total
  GSK shipped 13 million Combivir tablets and nearly 72 million Epivir tablets to developing countries at not-for-profit prices. Approximately 183 million tablets were supplied by generic manufacturers licensed by GSK
  Other international humanitarian product donations totalled £16 million More details on page 23.
         
  Business performance EPS was 99.1p, up 10% CER    
  Total EPS was 94.4p, up 5% CER    
  Dividend declared for 2007 of 53p, up 10%    
   A new share buy-back programme of £12 billion over two years was announced in July, of which £2.5 billion was spent in 2007 and a further £6 billion is expected in 2008
     
 GSK Annual Report 2007  11
   

Back to Contents

   
  REPORT OF THE DIRECTORS
  Financial trends and ratios
   
   
Financial trends and ratios
   
   

                             
Total results 2007       Growth * 2006       Growth *  2005  
     


     


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














 
Turnover – Pharmaceuticals 19,233     (4 ) 20,078   9   8   18,661  
– Consumer Healthcare
3,483   14   11   3,147   6   5   2,999  














 
Total turnover 22,716   2   (2 ) 23,225   9   7   21,660  














 
Cost of sales (5,317 ) 8   6   (5,010 ) 6   5   (4,764 )
Selling, general and administration (6,954 )   (4 ) (7,257 )     (7,250 )
Research and development (3,327 ) (1 ) (4 ) (3,457 ) 11   10   (3,136 )
Other operating income 475           307           364  














 
Operating profit 7,593   3   (3 ) 7,808   17   14   6,874  














 
Profit before taxation 7,452   2   (4 ) 7,799   19   16   6,732  
Profit after taxation for the year 5,310   3   (3 ) 5,498   17   14   4,816  














 
Profit attributable to minority interests 96           109           127  
Profit attributable to shareholders 5,214           5,389           4,689  














 
Basic earnings per share (pence) 94.4 p 5   (1 ) 95.5 p 19   16   82.6 p
Diluted earnings per share (pence) 93.7 p         94.5 p         82.0 p














 
Business performance results                          














 
Turnover 22,716   2   (2 ) 23,225   9   7   21,660  














 
Cost of sales (5,206 ) 6   4   (5,010 ) 6   5   (4,764 )
Selling, general and administration (6,817 ) (2 ) (6 ) (7,257 )     (7,250 )
Research and development (3,237 ) (3 ) (6 ) (3,457 ) 11   10   (3,136 )
Other operating income 475           307           364  














 
Operating profit 7,931   8   2   7,808   17   14   6,874  














 
Profit before taxation 7,790   6     7,799   19   16   6,732  
Profit after taxation for the year 5,571   8   1   5,498   17   14   4,816  














 
Profit attributable to minority interests 96           109           127  
Profit attributable to shareholders 5,475           5,389           4,689  














 
Basic earnings per share (pence) 99.1 p 10   4   95.5 p 19   16   82.6 p
Diluted earnings per share (pence) 98.3 p         94.5 p         82.0 p














 
Research and development – total                          














 
Pharmaceuticals 3,219           3,353           3,030  
Consumer Healthcare 108           104           106  














 
Total 3,327           3,457           3,136  














 
Net finance cost cover                          














 
Net finance costs 191           65           194  
Cover 40 times           121 times           36 times  














 
Net finance cost cover is profit before tax plus net finance costs, divided by net finance costs.                
Tax rate – total 28.7%           29.5%           28.5%  
Tax rate – business performance 28.5%           29.5%           28.5%  














 
Borrowings                          














 
Net debt 6,039           2,450           1,237  
Gearing 61%           25%           16%  














 
                             
The gearing ratio is calculated as net debt as a percentage of total equity.  
                             
CER% represents growth at constant exchange rates. Sterling% or £% represents growth at actual exchange rates. See page 9.
The calculation of business performance, a supplemental non-IFRS measure, is described in Note 1 to the financial statements, ‘Presentation of the financial statements’.
 
12  GSK Annual Report 2007
   

Back to Contents

   
REPORT OF THE DIRECTORS  
Optimising the performance of key products  
   
   
Business review
Optimising the performance of marketed 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.  
     

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 80% 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
The US pharmaceutical businesses have 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.

Health literacy
To help patients understand basic information about their disease and treatment options, US pharma launched a Health literacy programme. Over 1,000 employees and agency staff have gone through training to learn how to improve the materials, with a goal of helping patients learn more about their disease and how to manage it. The result is obvious improvements to patient-directed materials by making them easier to read, trimming content, incorporating more user-friendly design and including step-by-step instructions on health behaviours. Health literacy is gaining ground in other parts of GSK as colleagues begin adopting the concepts of simpler, clearer patient communication.

Consumer Healthcare marketing excellence
Teams comprising marketing and R&D are dedicated to each of seven global brands and focused on delivering pipelines and global marketing programmes for in-country commercial teams to execute. These efforts are driving significant sales growth in many 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 local relevance.


 

 GSK Annual Report 2007  13
   

Back to Contents

   
  REPORT OF THE DIRECTORS
  Delivering the product pipeline for patients
   
   
Business review
Delivering the product pipeline for patients
   
   
     
  GSK spent over £3.2 billion on R&D in 2007 and employs over 16,000 staff in R&D. The number of major product opportunities in phase III or registration has increased each year since 2000 and now stands at 34.  
     

Research and development – Pharmaceuticals

GSK R&D has developed one of the most robust pipelines of potential new medicines in the industry. In 2007, Pharmaceutical R&D was actively managing over 150 projects in human clinical trials across the globe. Delivering this pipeline to patients safely and efficiently is the number one goal.

Focus on the patient
One objective unites the 15,000 people who work at GSK Pharmaceutical 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 the 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 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 2007, MDR progressed over 220 preclinical drug discovery programmes and in so doing performed hundreds of assays per week and provided the CEDDs with over 30 leads.

When GSK R&D designed the CEDDs, it integrated groups of scientists and clinicians and organised their work around specific disease areas, with the intent to produce nimble and entrepreneurial discovery units.

GSK’s 11 CEDDs, based in Europe and the USA, are:

   
Biopharmaceuticals – Stevenage, UK
Cardiovascular & Urogenital – Upper Merion, USA
Centre of Excellence for External Drug Discovery – Upper Merion, USA
Immuno-inflammation – Stevenage, UK
Infectious Disease – Upper Merion and Research Triangle Park, USA
Metabolic – Research Triangle Park, USA
Oncology – Upper Providence, USA
Macrolide Drug Discovery – Zagreb, Croatia
Neurology – Harlow, UK
Psychiatry – Verona, Italy
Respiratory – Stevenage, UK.

Each CEDD is responsible for identifying the targets of most relevance in its therapeutic area and building on the lead compounds transferred from MDR 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.

Once a candidate compound is selected, the CEDDs are responsible for undertaking the clinical studies necessary to demonstrate a beneficial effect sufficient to declare “proof of concept” – the first indication in patients that the new medicine works. Based on the programme’s profile of safety and efficacy a decision is then made on whether to progress the medicine into late-stage drug development.

As part of GSK’s commitment towards pursuing the best science anywhere in the world, the Centre of Excellence for External Drug Discovery (CEEDD) was established in 2005. The CEEDD has the same objective as the CEDDs: delivering medicines into late-stage development, but does so by establishing and managing long-term strategic collaborations with biotech and small to medium-sized pharmaceutical companies. In 2007, the CEEDD exercised its first option to bring in a compound to clinical development: XL880, an anti-cancer inhibitor from Exelixis.

As part of this same strategic intent, in 2007 GSK established a dedicated R&D centre in Shanghai. R&D in China will focus on research into neurodegeneration with the objective of creating new medicines for such severe disorders as multiple sclerosis, Parkinson’s disease and Alzheimer’s disease. The centre will eventually direct the global discovery and development activities within its therapeutic area, from drug-target identification to late-stage clinical studies, while collaborating with research institutions elsewhere in China and other countries. Establishing R&D China reflects GSK’s commitment to ally with talented researchers wherever they are located and to further encourage within R&D the contest of ideas needed to create new medicines.

Developing medicines for patients
Progression into late-stage development (referred to at GSK as ‘medicines development’), consists of optimising both the physical product properties of the medicine, that is, the chemical steps and formulation required to manufacture and deliver it, as well as the large scale confirming studies of efficacy and safety. The former activity is the responsibility of Preclinical Development, while the latter is the responsibility of the clinical development and development operations teams. The combination of the results of these two steps into a regulatory file for submission to regulatory agencies and approval for patient use is the responsibility of the regulatory team. The integration of all steps above into a coherent project is the responsibility of the project teams, which are grouped therapeutically into Medicine Development Centres. These roles are described in more detail as follows:


 

14  GSK Annual Report 2007
   

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REPORT OF THE DIRECTORS  
Delivering the product pipeline for patients  
   
 
Business review
Delivering the product pipeline for patients
continued 
   

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 16).

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.

Medicines Development is the collection of six therapeutically aligned 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:

Cardiovascular/Metabolic
Infectious Diseases including Diseases of the Developing World (DDW)
Musculoskeletal/Inflammation/Gastrointestinal/Urology
Neuroscience (Psychiatry/Neurology)
Oncology
Respiratory

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.

Development Operations drives operational excellence in the execution of the project’s clinical studies. This is done by establishing integrated planning to ensure consistent and predictable drug project plans and supplying clinical operations capabilities. In 2007, development operations managed clinical trials with over 30,000 active patients, handling everything from patient recruitment to data management to project planning.

The Office of the Chief Medical Officer 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’s Chief Medical Officer, working with the Global Safety Board, is 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 GSK’s website.

In-licensing
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 2007 included:

   
Xenoport (XP13512, phase III for RLS and phase II for neuropathic pain)
Sepracor (Lunesta/Lunivia (excluding USA, Canada, Mexico and Japan), GABA-A agonist, insomnia, pending EU filing)
Synta (STA-4783, HSP70 upregulation, melanoma, sarcoma, solid tumors, phase III)
ToleRx (anti-CD3 mAb for autoimmune diseases, phase II)
Targacept (TC-2696 in phase II for acute post-operative pain and novel leads for Central nervous system diseases)
Anacor (novel candidates for viral and bacterial diseases, preclinical)
OncoMed (cancer stem cell therapeutics, preclinical)
Galapagos (novel anti-bacterials and antivirals, preclinical)
Santaris (novel antiviral agents, preclinical)

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 18 to 21.

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 2007 included Ariflo for COPD and odiparcil for stroke prevention.


 

 GSK Annual Report 2007  15
   

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  REPORT OF THE DIRECTORS
  Delivering the product pipeline for patients
   
   
Business review
Delivering the product pipeline for patients
continued
   

Research and development – vaccines
GSK’s vaccine division activities 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’s vaccine division is also developing therapeutic immunotherapeutics aimed at educating the patient’s immune system to identify and attack cancer cells in a highly specific manner. 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 combinations of selected adjuvants 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 by developing its global manufacturing network (see page 26, 'Global manufacturing and supply').

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) priority infectious diseases. Recently, GSK has developed scored-tablets for its key anti-retroviral products to simplify the treatment of children living with HIV.

GSK currently has 12 clinical programmes of relevance to the developing world, seven of which are aimed at producing vaccines and medicines for diseases that disproportionately affect developing countries.

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 GSK’s website or from Secretariat.


 

16  GSK Annual Report 2007
   

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REPORT OF THE DIRECTORS  
Delivering the product pipeline for patients  
   
   
Business review
Delivering the product pipeline for patients
continued
 

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 healthcare and nutritional healthcare markets. To achieve a significant increase in innovation from internal and external sources, R&D has been remodelled to deliver a more valuable pipeline of products. With this change, specific tasks that can be performed at lower cost outside GSK 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 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 beginning of February 2008, GSK had nearly 210 pharmaceutical and vaccine projects in development. Of these, 157 are in the clinic comprising 96 NCEs, 37 PLEs and 24 vaccines, compared with 123 in 2001.

In the last 12 months, GSK commenced 9 new phase III clinical development programmes (including 2 vaccines) and now has 34 key assets in phase III/registration.

Compounds in phase III/registration


GSK has maintained momentum in delivering its late-stage pipeline, receiving 10 product approvals and filing 10 product applications in 2007. Currently it has 13 new product opportunities filed with regulators.

Development programmes progressed into phase III in 2007:
belimumab (LymphoStat B)
elesclomol
GSK 1838262 (XP13512)
MAGE-A3 therapeutic vaccine
MenACWY vaccine
ofatumumab (RA)
Promacta (Hep C)
Tykerb + Armala (IBC)
Tykerb (Head & Neck)
Products filed:
Avodart & alpha blocker co-prescription
Cervarix (USA & Japan)
Entereg POI
H5N1 vaccine (EU)
Kinrix (USA)
Lamictal XR (USA)
Lunivia (EU)
Promacta (USA)
Requip XL (USA)
Rotarix (USA)
Synflorix (EU & International)
Treximet 
Volibris (EU)

GSK expects a sustained flow of new products in the next two years. For further details of these developments, and information on other important launches/filings see GSK outlook on page 50.

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 28 ‘Intellectual property’.


 

 GSK Annual Report 2007  17
   

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

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.

                Estimated  
                submission dates
Compound   Type   Indication   Phase   MAA NDA

Cardiovascular & Metabolic              
Cardiovascular projects                  
256073   high affinity nicotinic acid receptor   dyslipidaemia   I      
    (HM74A) agonist              
rilapladib   Lp-PLA2 inhibitor   atherosclerosis   I      
681323   p38 kinase inhibitor   atherosclerosis (also chronic obstructive pulmonary   II      
        disease – COPD, neuropathic pain & rheumatoid arthritis)          
856553   p38 kinase inhibitor   atherosclerosis (also COPD, depression & rheumatoid arthritis)   II      
darapladib   Lp-PLA2 inhibitor   atherosclerosis   ll/III      
Coreg CR+ ACE inhibitor   beta blocker + angiotensin converting enzyme inhibitor   hypertension – fixed dose combination   III   N/A 2008
Volibris   endothelin A antagonist   pulmonary arterial hypertension   Submitted   S:Mar07 N/A
Arixtra   synthetic factor Xa inhibitor   treatment of acute coronary syndrome   Approved   A:Aug07 AL:Feb07
                  & Sep07
Metabolic projects                  
remoglifozin etabonate   sodium dependent glucose transport (SGLT2)   obesity   I      
(189075)   inhibitor              
376501   PPAR gamma partial agonist   type 2 diabetes   I      
756050   bile acid receptor agonist   type 2 diabetes   I      
otelixizumab (TRX4)   anti-CD3 monoclonal antibody   type 1 diabetes   II      
remoglifozin etabonate   SGLT2 inhibitor   type 2 diabetes   II      
(189075)                  
Syncria   glucagon-like peptide 1 agonist   type 2 diabetes   II      
Avandamet XR   PPAR gamma agonist + metformin   type 2 diabetes – extended release   III   N/A  
Avandia   PPAR gamma agonist   atherosclerosis in type 2 diabetes   III      
Avandia + simvastatin   PPAR gamma agonist + statin   type 2 diabetes   III   N/A  
Avandia   PPAR gamma agonist   prevention of disease progression   Submitted     S:Feb07

Infectious Diseases                  
580416   ribosome inhibitor   treatment of bacterial infections   I      
945237   topoisomerase ll inhibitor   treatment of bacterial infections   I      
1349572   HIV integrase inhibitor   HIV 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      

 
18  GSK Annual Report 2007
   

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REPORT OF THE DIRECTORS  
Delivering the product pipeline for patients  
   
   
Business review
Delivering the product pipeline for patients
continued
 
              Estimated  
              submission dates
Compound   Type   Indication   Phase MAA NDA

Musculoskeletal, Inflammation, Gastrointestinal & Urology        
315234   monoclonal antibody   rheumatoid arthritis   I    
768974    parathyroid hormone agonist   osteoporosis   I    
962040   motilin receptor agonist   delayed gastric emptying   I    
971086   androgen modulator   sarcopaenia   I    
1827771   interleukin 1 antagonist   rheumatoid arthritis   I    
belimumab   anti-B lymphocyte stimulator monoclonal antibody (s.c.)   systemic lupus erythematosus   I    
pazopanib   multi-kinase angiogenesis inhibitor   age-related macular degeneration (also cancer indications)   I    
221149   oxytocin antagonist   threatened pre-term labour   II    
232802   3G-selective oestrogen receptor modulator   treatment of menopausal symptoms   II    
274150   selective iNOS inhibitor   rheumatoid arthritis   II    
681323   p38 kinase inhibitor (oral)   rheumatoid arthritis (also atherosclerosis, COPD & neuropathic pain)   II    
856553   p38 kinase inhibitor (oral)   rheumatoid arthritis (also atherosclerosis, COPD & depression)   II    
876008    corticotrophin releasing factor (CRF1) antagonist   irritable bowel syndrome (also depression & anxiety)   II    
ronacaleret   calcium antagonist   osteoporosis & fracture healing   II    
solabegron   beta3 adrenergic agonist   irritable bowel syndrome   II    
solabegron   beta3 adrenergic agonist   overactive bladder   II    
Avodart   5-alpha reductase inhibitor   reduction in the risk of prostate cancer   III    
Avodart + alpha blocker   5-alpha reductase inhibitor + alpha blocker   benign prostatic hyperplasia – fixed dose combination   III 2008 2009
belimumab   anti-B lymphocycte stimulator monoclonal antibody (i.v.)   systemic lupus erythematosus   III    
Bosatria (mepolizumab)   anti-IL5 monoclonal antibody   hypereosinophilic syndrome (also severe asthma & nasal polyposis)   III 2008 2008
Entrareg/Entereg   peripheral mu-opioid antagonist   opioid-induced bowel dysfunction   III    
ofatumumab   anti-CD20 human monoclonal antibody   rheumatoid arthritis (also cancer indications)   III    
Entrareg/Entereg   peripheral mu-opioid antagonist   post operative ileus   Approvable   AL:Jul05 &
                AL:Nov06

Neurosciences                
163090   5HT1 antagonist   depression & anxiety   I    
239512   histamine H3 antagonist   dementia   I    
249320   monoclonal antibody   neuronal injury   I    
424887   NK1 antagonist/SSRI   depression & anxiety   I    
561679    CRF1 antagonist   depression & anxiety   I    
586529    CRF1 antagonist   depression & anxiety   I    
598809   dopamine D3 antagonist   drug dependency   I    
618334   dopamine D3 antagonist   drug dependency   I    
729327   AMPA receptor modulator   schizophrenia   I    
933776   monoclonal antibody   Alzheimer’s disease   I    
1014802   sodium channel inhibitor   bipolar disorder   I    
1018921   type 1 glycine transport inhibitor   schizophrenia   I    
orvepitant   NK1 antagonist   depression & anxiety   I    
189254   histamine H3 antagonist   narcolepsy   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 & rheumatoid arthritis)   II    
742457   5HT6 antagonist   dementia   II    
773812   mixed 5HT/dopaminergic antagonist   schizophrenia   II    
842166   non-cannabinoid CB2 agonist   inflammatory pain   II    
856553   p38 kinase inhibitor   depression (also atherosclerosis, COPD & rheumatoid arthritis)   II    
876008    CRF1 antagonist   depression & anxiety (also irritable bowel syndrome)   II    
1838262 (XP13512)    voltage-gated calcium channel modulator   migraine prophylaxis   II    
1838262 (XP13512)    voltage-gated calcium channel modulator   neuropathic pain   II    
casopitant   NK1 antagonist   depression & anxiety (also as Zunrisa/Rezonic for chemo-   II    
        therapy induced & postoperative nausea & vomiting)        
firategrast   dual alpha4 integrin antagonist (VLA4)   multiple sclerosis   II    
1838262 (XP13512)    voltage-gated calcium channel modulator   restless legs syndrome   III   2008
Lamictal XR   sodium channel inhibitor   epilepsy – partial generalised tonic-clonic seizures,   III N/A 2008
        once-daily        
rosiglitazone XR   PPAR gamma agonist   Alzheimer’s disease   III    
Lunivia   non-benzodiazepine GABA agonist   insomnia   Submitted S:Jul07 N/A
Lamictal XR   sodium channel inhibitor   epilepsy – partial seizures, once-daily   Approvable N/A AL:Sep07
Treximet   5HT1 agonist + naproxen   migraine – fixed dose combination   Approvable N/A AL:Jun06
                & Aug07
Requip Modutab/XL   non-ergot dopamine agonist   Parkinson’s disease – once-daily controlled release   Approved A:Mar07 AL:Dec07
        formulation        

 
 GSK Annual Report 2007  19
   

Back to Contents

   
  REPORT OF THE DIRECTORS
  Delivering the product pipeline for patients
   
   
Business review
Delivering the product pipeline for patients
continued
 
            Estimated  
            submission dates
Compound   Type   Indication Phase MAA NDA

Oncology              
461364   polo-like kinase inhibitor   cancer I    
690693   AKT kinase inhibitor   cancer I    
923295   centromere-associated protein E (CENP-E)   cancer I    
    inhibitor          
Armala (pazopanib)   multi-kinase angiogenesis inhibitor   colorectal cancer I    
iboctadekin+ rituximab
  lL18 immunomodulator + anti-CD20   non-Hodgkin’s lymphoma I    
    monoclonal antibody          
totrombopag   thrombopoietin agonist   thrombocytopaenia I    
1363089 (XL-880)   C-met kinase inhibitor   papillary renal cell carcinoma, gastric cancer and head & neck squamous cell carcinoma II    
ofatumumab   anti-CD20 human monoclonal antibody   relapsed diffuse large B cell lymphoma II    
Armala (pazopanib)   multi-kinase angiogenesis inhibitor   non-small cell lung cancer II    
Armala (pazopanib)   multi-kinase angiogenesis inhibitor   ovarian cancer II    
Armala (pazopanib)   multi-kinase angiogenesis inhibitor   sarcoma II    
Armala (pazopanib) +   multi-kinase angiogenesis inhibitor + ErbB-2   metastatic breast cancer II    
Tyverb/Tykerb   and epidermal growth factor receptor          
    (EGFR) dual kinase inhibitor          
Armala (pazopanib +   multi-kinase angiogenesis inhibitor + ErbB-2   other cancers II    
Tyverb/Tykerb   and EGFR dual kinase inhibitor          
Revolade/Promacta   thrombopoietin agonist   chemotherapy-induced thrombocytopaenia II    
Tyverb/Tykerb   ErbB-2 and EGFR dual kinase inhibitor   head & neck squamous cell carcinomas II    
        (unresectable disease)      
Tyverb/Tykerb   ErbB-2 and EGFR dual kinase inhibitor   refractory inflammatory breast cancer II    
Armala (pazopanib)   multi-kinase angiogenesis inhibitor   renal cell cancer III    
Armala (pazopanib) +   multi-kinase angiogenesis inhibitor + ErbB-2   inflammatory breast cancer III    
Tyverb/Tykerb   and EGFR dual kinase inhibitor          
elesclomol (STA-4783)   oxidative stress inducer   metastatic melanoma III    
Hycamtin   topoisomeraseI inhibitor   ovarian cancer first-line therapy III    
ofatumumab   anti-CD20 human monoclonal antibody   refractory chronic lymphocytic leukaemia III 2008 2008
        (also rheumatoid arthritis)      
ofatumumab   anti-CD20 human monoclonal antibody   refractory follicular lymphoma (also rheumatoid arthritis) III    
Revolade/Promacta   thrombopoietin agonist   hepatitis C III    
Revolade/Promacta   thrombopoietin agonist   long-term idiopathic thrombocytopaenic purpura III 2008 2008
Tyverb/Tykerb   ErbB-2 and EGFR dual kinase inhibitor   breast cancer, adjuvant therapy III    
Tyverb/Tykerb   ErbB-2 and EGFR dual kinase inhibitor   breast cancer, brain metastases III    
Tyverb/Tykerb   ErbB-2 and EGFR dual kinase inhibitor   breast cancer, first-line therapy III    
Tyverb/Tykerb   ErbB-2 and EGFR dual kinase inhibitor   head & neck squamous cell carcinomas (resectable disease) III    
Zunrisa/Rezonic   NK1 antagonist   chemotherapy induced & postoperative nausea & III 2008 2008
        vomiting (also depression & anxiety)      
Revolade/Promacta   thrombopoietin agonist   short-term idiopathic thrombocytopaenic purpura Submitted 2008 S:Dec07
Hycamtin   topoisomerase I inhibitor (oral)   small cell lung cancer, second-line therapy Approved S:May07 A:Oct07
Tyverb/Tykerb   ErbB-2 and EGFR dual kinase inhibitor   refractory breast cancer Approved S:Oct06 A:Mar07

Respiratory              
656933   interleukin 8 antagonist   cystic fibrosis I    
835726   histamine H1/H3 dual antagonist (oral)   allergic rhinitis I    
1004723   histamine H1/H3 dual antagonist (intranasal)   allergic rhinitis I    
2190914 (AM-103)   5 lipoxygenase activating protein (FLAP) inhibitor   respiratory diseases I    
159797   long-acting beta2 agonist   COPD, also COPD & asthma in combination with a glucocorticoid agonist II    
159802   long-acting beta2 agonist   COPD, also COPD & asthma in combination with a glucocorticoid agonist II    
256066   PDE IV inhibitor (inhaled)   COPD II    
256066   PDE IV inhibitor (inhaled)   asthma II    
256066   PDE IV inhibitor (intranasal)   allergic rhinitis II    
573719   muscarinic acetylcholine antagonist   COPD II    
642444   long-acting beta2 agonist   COPD, also COPD & asthma in combination with a glucocorticoid agonist II    
679586   monoclonal antibody   severe asthma II    
681323   p38 kinase inhibitor (oral)   COPD (also atherosclerosis, neuropathic pain & II    
        rheumatoid arthritis)      
685698   glucocorticoid agonist   asthma, also COPD & asthma in combination with a long-acting beta2 agonist (also as Avamys/Veramyst for allergic rhinitis) II    
856553   p38 kinase inhibitor (oral)   COPD (also atherosclerosis, depression & rheumatoid arthritis) II    
870086   novel glucocorticoid agonist   asthma II    
961081   muscarinic antagonist, beta2 agonist   COPD II    
darotropium (233705)   muscarinic acetylcholine antagonist   COPD II    
mepolizumab   anti-IL5 monoclonal antibody   severe asthma & nasal polyposis (also hypereosinophilic syndrome) II    
Avamys/Veramyst   glucocorticoid agonist   allergic rhinitis Approved A:Jan08 A:Apr07

 
20  GSK Annual Report 2007
   

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REPORT OF THE DIRECTORS  
Delivering the product pipeline for patients  
   
   
Business review
Delivering the product pipeline for patients
continued
 
            Estimated  
            submission dates
Vaccine   Type   Indication Phase MAA BLA

Paediatric Vaccines              
Hib-MenCY-TT   conjugated   Neisseria meningitis groups C & Y disease & III    
        Haemophilus influenzae type b disease prophylaxis      
MenACWY-TT   conjugated   Neisseria meningitis groups A, C, W & Y disease III    
        prophylaxis      
Infanrix-IPV/Kinrix    subunit – inactivated   diptheria, tetanus, pertussis + poliomyelitis prophylaxis (booster-5th dose) Submitted   S:Apr07
Synflorix    conjugated   Streptococcus pneumoniae disease and non-typeable Submitted S:Dec07  
        Haemophilus influenzae prophylaxis for children      
Rotarix    live attenuated (oral)   rotavirus-induced gastroenteritis prophylaxis Approved A:Feb06 S:Jun07
Other Vaccines              
Cytomegalovirus   recombinant   cytomegalovirus infection prophylaxis I    
HIV   recombinant   HIV infection prophylaxis I    
S. pneumoniae adult   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    
Flu pandemic    H5N1 inactivated split – monovalent   pandemic influenza prophylaxis III 2008  
    (Quebec)          
Flu pre-pandemic    H5N1 inactivated split – monovalent   pandemic influenza prophylaxis III 2008 2008
    (Quebec)          
New generation flu vaccine
  inactivated split – trivalent   seasonal influenza prophylaxis for the elderly III    
Simplirix    recombinant   genital herpes prophylaxis lll    
Boostrix    subunit   adult booster for diphtheria, tetanus & pertussis Submitted   S:Feb08
Flu pandemic    H5N1 inactivated split – monovalent   pandemic influenza prophylaxis Submitted S:Feb07  
    (Dresden)          
Flu pre-pandemic    H5N1 inactivated split – monovalent   pandemic influenza prophylaxis Submitted S:Jan07  
    (Dresden)          
Cervarix    recombinant   human papilloma virus infection prophylaxis Approved A:Sep07 AL:Dec07
Antigen Specific Cancer Immunotherapeutic (ASCI)          
MAGE-A3 ASCI   recombinant   treatment of melanoma II    
MAGE-A3 ASCI   recombinant   treatment of non-small cell lung cancer III    

 
 GSK Annual Report 2007  21
   

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  REPORT OF THE DIRECTORS
  Being the best place for the best people to do their best work
   
   
Business review
Being the best place for the best people to do their best work
 
 
   
  GSK employs over 100,000 people in more than 100 countries and is committed to creating the best place for the best people to do their best work.
   

Recruitment, talent management and leadership development
Attracting and recruiting the best people is critical to enhancing and sustaining GSK’s performance. Recruiters across GSK are focused on actively targeting the best talent and assessing their fit with the organisation for many key roles. GSK seeks to recruit people with the highest level of integrity. Interview questions with specific ethical and integrity components have been developed for inclusion in the standard interview questionnaire during 2008.

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 key talent is developed through tailored management and leadership programmes, 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 throughout the Group.

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 GSK’ and 86% would ‘gladly refer a friend or family member to work for GSK’. Each business 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 business with a European Employee Consultation Forum and similar bodies in countries where this is national practice.

Employee numbers by region

Business ethics and reputation
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. The 2006 GLS showed 91% believed that ‘people in their department showed commitment to performance with integrity’ and 82% agreed that they ‘can report unethical practices without fear of reprisal’. A half-day workshop on Ethical Decision-making has now been extended to three e-learning modules, which are being implemented across GSK.

Commitment to the GSK Code of Conduct is reinforced by a senior management certification programme, and each year over 12,000 managers certify that they have complied with ‘Performance with Integrity’ principles. GSK audits its operations regularly to ensure that relevant standards, such as those in marketing practices, are reached or exceeded.

Diversity
The diversity and inclusion initiatives focus on improving performance. In the fifth year of the annual Multicultural Marketing and Diversity Awards, award winning projects repeatedly demonstrated the business value of understanding diverse perspectives and leveraging those differences to make a positive difference in the workplace, with customers and in the communities served. In 2007, the global management population was 63% male and 37% female. For more details on diversity measures, see the Group’s 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.

Healthy high performance
Healthy, energised and engaged employees together with healthy and sustainable ways of working contribute to the performance of the Group. Global policies on employee health are supported by mandatory standards that integrate employee health and safety and environmental requirements. 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.

The Group’s Employee Health Management function is actively delivering and implementing team and personal resilience programmes which are now available in 13 languages. In 2007, in partnership with the Group’s Leadership and Development function, Energy for Performance training has been introduced in order to improve further the potential of employees.


22  GSK Annual Report 2007
   


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REPORT OF THE DIRECTORS  
Improving access to medicines  
   
   
Business review
Improving access to medicines
 
 
   
  GSK is committed to contributing to health improvements in a sustainable manner. In the developing world, this includes not-for-profit pricing, community investment programmes and other innovative solutions, while in the developed world the focus is on patient assistance programmes.
   

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 not-for-profit prices for its anti-retrovirals (ARVs), anti-malarials and vaccines, through its community investment programmes (see page 24) and through its willingness to seek innovative solutions, such as voluntary licensing 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).

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 2007, GSK shipped to developing countries 13 million tablets of not-for-profit-priced Combivir and 72 million tablets of not-for-profit-priced Epivir. Some of GSK’s 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 remains the only Group 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 access to medicines for people with limited financial resources and without prescription drug insurance.

2007 marked the launch of GSK’s newest patient assistance programme, GSK Access, for eligible patients enrolled in Medicare Part D prescription drug plans. Enrolment in this new programme was encouraged through a multi-million dollar national advertising campaign in major magazines and newspapers.

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 2007.

GSK also participates in the Partnership for Prescription Assistance (PPA), a national service that helps match people in need with prescription medicine access programmes. To date, PPA has provided patients in the USA with information about assistance to obtain necessary medicines.

Launched with Tykerb to help with access to this medicine, Tykerb CARES is a single point of contact for physicians and patients. Tykerb CARES provides reimbursement support and adherence support through services like pre-therapy counselling from a trained oncology nurse.

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 2007, GSK continued to work with patient groups to educate them on issues of mutual concern, to advocate for access to medicines and treatment and to improve its reputation with them, governments and the media through efforts to promote transparency. GSK is considered to be a trustworthy partner with patient groups, and has developed guidelines and procedures for working with patient groups that are being imitated throughout the industry.

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


 

 GSK Annual Report 2007  23
   

Back to Contents

   
  REPORT OF THE DIRECTORS
  Corporate responsibility and community investment
   
   
Business review
Corporate responsibility and community investment
 
 
In 2007, GSK made product, cash and other donations valued at £282 million to support over 100 community programmes around the world

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 GSK’s website.

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 2007 were valued at £282 million, equivalent to 3.8% of Group total profit before tax. This comprised product donations of £224 million, cash giving of £41 million, other in-kind donations of £3 million plus costs of £14 million to manage and deliver community programmes in over 100 countries. Product donations in 2007 were as follows:


All product donations valued at wholesale acquisition cost (WAC).

GSK’s cash giving was targeted primarily at health and education initiatives as follows:


In the UK, GSK contributed £6 million in 2007 to its continuing programme of charitable activities supporting over 70 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 $35 million. On National Philanthropy Day in the USA, GSK received the Excellence in Corporate Philanthropy Award from the Committee Encouraging Corporate Philanthropy (CECP).

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 2007 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 over 80 countries. In 2007, 150 million albendazole treatments, worth £14 million at wholesale acquisition cost, were donated to 19 countries. Since the global elimination programme started in 2000, a cumulative total of almost 750 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 2007, Positive Action worked with 16 partners to support programmes in 19 countries. Positive Action’s larger programmes operate in Mexico, Kenya, India, China, Cambodia and Vietnam.

The GlaxoSmithKline African Malaria Partnership
GSK’s malaria advocacy programme ‘Mobilising for Malaria’ has launched country Coalitions Against Malaria in the UK, Belgium, France, Ethiopia and Cameroon to increase awareness of malaria and mobilise resources. During 2007 Innovation Grants for Malaria Advocacy were awarded to four organisations in Africa, working in Nigeria, Congo, Senegal and Uganda. The benefits of GSK’s three previous behavioural development programmes targeting malaria in eight African countries continue to be seen.


 

24  GSK Annual Report 2007
   

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REPORT OF THE DIRECTORS  
Corporate responsibility and community investment  
   
   
Business review
Corporate responsibility and community investment
 
 

PHASE
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, Mexico, Tajikistan and Bangladesh to improve their health and hygiene to fight infectious diseases. In 2007, the Group committed three year funding of over $1.8 million to extend the programme to Indonesia and Bolivia in partnership with Save the Children, USA. This also includes funding to introduce PHASE to the Millennium Village project which employs science-based interventions to meet the Millennium Development Goals.

Humanitarian product donations
During 2007, GSK donated essential products, such as antibiotics, through non-profit partners including AmeriCares, Direct Relief International, MAP International and Project HOPE, to support humanitarian relief efforts and community healthcare. The total value of the Group’s international humanitarian product donations was £16 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 of valuation.

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.

2007 marked the tenth anniversary of the annual GlaxoSmithKline IMPACT Awards to recognise excellence in the work of non-profit community health organisations across the UK and in the Greater Philadelphia area of the USA. Each year 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 £490,000 was provided to three UK medical charities, Primary Immunodeficiency Association, Research into Ageing and WellChild.

Education initiatives
During 2007, GSK continued to support the Institute for a Competitive Workforce, a 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 for the future.

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 nearly $427,000. GSK has also been a major sponsor of the University of North Carolina’s travelling science laboratory, Destiny, since its inception in 1999. Destiny serves approximately 100 under-served secondary schools and reaches 4,000 students per year.

In 2007, GSK helped to launch the CREST Star Investigators education initiative. This programme has been developed in partnership with the British Association for the Advancement of Science to provide science activities and awards for after school clubs in UK primary schools. 5,000 schools and 55,000 children are expected to be taking part by 2010.

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.

Employee involvement
GSK employees are encouraged to contribute to their local communities through employee volunteering schemes. Support includes employee time, cash donations to charities where employees volunteer and matching gift programmes.

In 2007 in the USA, the Group matched 16,500 employee and retiree gifts at a value of $5 million. The Group also matched $1.1 million of employee donations to GSK’s annual United Way campaign. GSK’s GIVE program provided grants of over $390,000 to almost 380 organisations where US employees have volunteered.

GSK’s Making a Difference programme in the UK provided grants of almost £260,000 to nearly 380 non-profit organisations and registered charities based on employee involvement.


 

 GSK Annual Report 2007  25
   

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  REPORT OF THE DIRECTORS
  Global manufacturing and supply
   
   
Business review
Global manufacturing and supply
 
 
   
  GSK’s manufacturing operations comprise a network of 79 sites in 37 countries and employ over 33,000 people.
   

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.

Organisation

GMS operates as a single global network of 79 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 28 sites in 21 countries.

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.

Quality
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.

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 its supply chains from any disruption.

Procurement
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.

Vaccines supply chain
GSK’s global vaccine manufacturing network is managed from the vaccine division’s headquarters in Belgium. By being present in all the three major regions, GSK aims to ensure effective supply of vaccines across the globe:

in Europe, vaccine manufacturing is located primarily at Rixensart and Wavre in Belgium, with three other sites in France, Germany and Hungary where the site is being extended.
   
in North America, GSK established its vaccine production network in 2005 through three major acquisitions. It has a production site in Hamilton, Montana manufacturing MPL, a key component of GSK’s novel and proprietary adjuvant systems, a vaccine production site in Marietta, Pennsylvania and flu vaccine manufacturing facilities in Laval and Ste Foy, both in Quebec, Canada.
   
in the International region, new vaccine production facilities are being built in India, Singapore and China where some packaging activities are already performed in Shanghai.

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.

Production of bulk vaccines, filling and packaging activities are carefully balanced and planned. Storing of vaccines helps manage short-term increases in demand. Such increases can result from disease outbreaks or increased demand from the public prompted by disease awareness campaigns.


 

26  GSK Annual Report 2007
   

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REPORT OF THE DIRECTORS  
Regulatory environment  
   
   
Business review
Regulatory environment
 
 
   
  GSK operates in a highly regulated environment, encompassing product approval, pricing restrictions, maintenance of intellectual property and environmental, health and safety responsibilities.
   

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 the development.

In the USA, the FDA continues to seek to encourage innovation in drug development via its Critical Path Initiative and new tools and processes are being pursued to enhance development of safe and effective drugs. GSK and others in the pharmaceutical industry are collaborating with the FDA and National Institutes of Health in a number of these areas, including evaluation of new biomarkers and benefit/risk assessments.

Drug safety remains a primary focus of the FDA and congressional oversight committees and, as in Europe, evaluation of benefit and risk continues to be a paramount consideration for approval of a new drug. New legislation passed in 2007, the FDA Amendments Act, renews the User Fee system for drug reviews and mandates a rigorous FDA review of safety from approval through the post-marketing phase of the product. The legislation also provides the FDA with new tools to require sponsors to complete post-marketing studies and to make labelling changes.

Regulations requiring development of prescription drugs and biologics for paediatric populations were reauthorised by the US Congress in 2007. Similarly in Europe new paediatrics regulation has now been implemented. GSK fully supports the objective of ensuring the development of better medicines for children.

In Europe, pharmaceutical companies and government regulators continue to implement the new medicines legislation introduced at the end of 2005. This involves significant changes to the EU regulatory system, including changes to product approval procedures, post-marketing requirements, manufacturing controls, labelling requirements, pharmacovigilance processes and increased transparency of regulatory processes.

EU regulators are also engaged in ‘Better Regulation’ initiatives to cut red tape and over-regulation of the pharmaceutical industry. GSK welcomes the recognition that unnecessarily burdensome regulatory requirements can damage competitiveness and may negatively impact public health, and is therefore active in supporting these initiatives.

The regulatory environment in the International region continues to evolve. GSK is participating in a number of regional regulatory initiatives, for example in China where proposed changes to the regulatory framework have provided GSK with an opportunity to work directly with the State Food Drug Administration (SFDA). GSK continues to include broader sets of patient populations from the International region in global development programmes in order to increase global patient access to new innovative medicines and optimise regulatory approvals.

Price controls
In many countries the prices of pharmaceutical products are controlled by law. Governments may also influence prices through their control of national healthcare organisations, which may bear a large part of the cost of supplying medicines to consumers.

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

In the USA, recent legislative proposals on healthcare reform, cross-border trade, the acceleration of generics to market, and comparative effectiveness 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 to be eligible for reimbursement under Medicaid and other state and federal healthcare programmes. For the 2008 Presidential elections healthcare is one of the leading domestic issues. Though prices are part of the discussions, increasingly the leading candidates are proposing health reforms to address chronic disease as the primary healthcare cost driver.

Medicare
From 2006, the US Medicare program, a federally funded healthcare insurance programme benefiting senior citizens and certain disabled Americans, included coverage for prescription medicines. 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 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 health insurance 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 co-payments for their prescriptions.

The benefit has proved to be a marked success. Competition has reduced the estimate of total costs made by the Congressional Budget Office by $387 billion over a ten year period. Recent polls of Medicare beneficiaries enrolled in the new benefit show satisfaction rates of 85-89%.

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.


 

 GSK Annual Report 2007  27
   

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  REPORT OF THE DIRECTORS
  Regulatory environment
   
   
Business review
Regulatory environment
continued
 

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.

Payers must also allocate their resources efficiently to provide the best health outcomes. Attention should be focused 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 44 to the financial statements, ‘Legal proceedings’.

Patents
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:

Advair/Seretide. The patent on the specific combination of salmeterol xinafoate and fluticasone propionate is not due to expire until 2010 (USA) and 2013b (Europe). The US Patent has been re-issued by the US Patent and Trademark Office (USPTO)e. Litigation under patents protecting the product is ongoing in certain European marketse. The UK patent has been revoked by the UK courts. Patents on the individual ingredients have expired except the patents on salmeterol xinafoate in the USA (August 2008), France (December 2008), and Italy (2009).

Avandia, Avandamet and Avandaryl. 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 in the USAe has been settled on terms allowing for generic entry late in the first quarter 2012e.

Avodart. The patent on dutasteride is not due to expire until 2015a (USA) and 2017b (Europe). Litigation challenging the validity of the patent protecting this product in the USA is ongoinge.

Avamys/Veramyst. The patent on fluticasone furoate is not due to expire until 2021 in the USA and 2022 in Europe.

Boniva. GSK has co-promotion rights under the patent on ibandronate which is not due to expire until 2012a (USA) and 2011b (Europe). Litigation challenging the validity of the patent protecting this product is ongoing in the USAe.

Combivir. The patent on the specific combination of lamivudine and zidovudine is not due to expire until 2012 (USA) and 2013b (Europe). Litigation challenging the validity of the patent protecting the combination is ongoing in the USAe.

Coreg. GSK is the exclusive licensee under the US patent on carvedilol, which expired in 2007a,c. Coreg CR is protected by a formulation patent that is not due to expire in the USA until 2016, and a patent on the active form carvedilol phosphate that is not due to expire until 2023. Litigation challenging the validity of the patent on the active form is ongoing in the USAe.

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 Italy (December 2008)). Litigation challenging the validity of the patent protecting this product in the USA has been settled allowing generic entry in the fourth quarter 2008.

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 on terms allowing for generic entry of tablet forms in mid-2008. In Europe, the corresponding patent has expired and generic competition exists.


 

28  GSK Annual Report 2007
   

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REPORT OF THE DIRECTORS  
Regulatory environment  
   
   
Business review
Regulatory environment
continued
   

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).

Lovaza. The formulation of omega-3 acid ethyl esters is protected by a patent that expires in the USA in 2018.

Paxil/Seroxat. The patent on the commercial form of paroxetine has expired and generic competition exists on Paxil instant release (IR) forms in the USA, Europe and other markets. Litigation relating to patents protecting the product is ongoing in the USAe. Paxil CR is protected by a patent issued in June 2007 relating to a delayed and controlled release formulation of paroxetine hydrochloride. Litigation relating to this patent has been settled on terms allowing for generic entry on all strengths of Paxil CR no later than fourth quarter 2008e.

Requip. The patent on ropinirole expired in 2007a in the USA and is due to expire in November 2008b in Europe. A patent relating to the use of ropinirole in Parkinson’s disease is not due to expire until May 2008 (USA) and 2011b (Europe). Litigation challenging the validity of the Parkinson’s use patent in the USA has been dismissed by the court, and generic entry is not expected until after expiry of the patent in May 2008e.

Serevent. The patent on salmeterol xinafoate expires in August 2008 in the USA. In Europe, the patent has expired, except in France (December 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).

Tykerb/Tyverb. The Patent on lapatinib is not due to expire until 2020a in the USA and 2022b in Europe.

Valtrex. The patent on valaciclovir is not due to expire until 2009a (USA) and 2009b (Europe, except Greece and Spain (August 2008)). Litigation challenging the validity of the patent in the USA has been settled on terms allowing for generic entry in late 2009e.

Wellbutrin SR, Wellbutrin XL and Zyban. The patent on the active ingredient has expired. There is now generic competition for the sustained release (SR) instant release (IR) and 300mg dosage form of Wellbutrin XL in the USA. Litigation in the USA relating to formulation patents covering Wellbutrin XL has been settled on terms allowing generic entry for the 150mg form in 2008. In Europe, regulatory data exclusivity provides protection until 2009 in some markets.

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 Italy (November 2008b)). A patent on use in treating emesis has also expired. Generic competition exists in the USA, Europe and other markets.

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 44 to financial statements ‘Legal proceedings’.

Trademarks
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 oriented 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 department reporting to the General Counsel that has overall responsibility for providing governance and leadership on EHS issues. The head of this department makes regular reports to the Corporate Executive Team (CET) and the Audit and Corporate Responsibility Committees of the Board. Within the businesses all executives and managers are responsible for EHS and are supported by site-based EHS and occupational medical staff.

EHS strategy and plan
GSK has a 10-year strategic plan for EHS that extends to 2015 with annual action plans. The plan is aligned with the GSK business drivers and includes management objectives with performance measures and targets. In 2007, GSK’s progress was evaluated against the targets set in 2006.

The focus for 2007 was EHS Stewardship which is about building a sustainable business. It involves caring for the present while thinking to the future in making decisions. This supports all three aspirations in the 2006 to 2015 plan – embedding EHS in the business, environmental sustainability and open and transparent stakeholder relations.

Accomplishments in 2007

Climate change: A comprehensive strategy on climate change and energy efficiency was approved and is available on GSK’s website. A climate change and energy reduction team has been formed to manage a special fund which is used to support climate change projects. The team identified more than 400 projects for 2007 and 2008 to reduce energy consumption and to increase GSK’s use of renewable energy.
   
Manufacturing efficiency: In the ongoing effort to improve the efficiency of manufacturing processes and therefore significantly decrease both the purchase of raw materials and the production of waste, GSK has selected the best candidate medicines for improvement. The mass efficiency of processes in development continues to improve and progress is being made to achieve the target to double mass efficiency and thereby halve the waste per unit of product for the manufacturing processes for all phase III compounds by 2010. Late stage products have been evaluated since 2005 for efficiency with an improvement to 2.8% on average. Certain marketed products, with a known market potential, have also been selected for improvement of the efficiency of their manufacturing processes.

 


 GSK Annual Report 2007  29
   


Back to Contents

   
  REPORT OF THE DIRECTORS
  Regulatory environment
   
   
Business review
Regulatory environment
continued
 
Workplace chemical exposure: Occupational hygiene measurements have been completed for over 50% of GSK tasks involving exposure to the most potent materials. Most results show that exposures are adequately controlled by the respiratory protective equipment worn, with 9% verified as “respirator free” meaning respiratory protection is not necessary. Immediate action was taken to control exposures in the few instances where levels were found to be higher than predicted. Manufacturing sites have a target of 80% respirator free by the end of 2010.
   
Process safety: GSK’s Process Safety Management System is being enhanced, with new engineering standards and training programmes under development. The standards will be used to design new process plant and to upgrade existing plants where needed. The training programmes will increase process safety awareness and competencies for engineers, chemists and managers.
   
External stakeholders: In addition to the ongoing UK stakeholder group meeting in March, a panel of US stakeholders met in October to provide input on EHS issues from a US perspective. In a benchmark assessment of environmental programmes, carried out by the UK charity, Business in the Environment, GSK was ranked with the top companies. GSK is also included in both the FTSE 4Good index and the Dow Jones Sustainability Index.

EHS audits
As part of its governance responsibility, GSK conducts EHS audits of its sites, operating entities and key suppliers, assessing the management of key risks and impacts and performance against GSK’s global EHS standards. This includes providing audited sites with quantitative performance information as well as highlighting areas for risk reduction and improvement. In 2007, 33 operating entities were audited, 17 of these achieved audit scores of 80% or better, which reflects our long term goal to have all of our sites score above 95%. No site scored less than 50% but seven critical findings were raised. These have been corrected. To ensure continuous improvement, progress was monitored on corrective and preventive action plans arising from all audits.

As part of the commitment to corporate responsibility and the pro-active management of the GSK manufacturing and supply base, 55 current and potential suppliers were also assessed. This process evaluated the management of key EHS risks and impacts, including fire and explosion risks, aspects of process safety and loss prevention, control of exposure to hazardous substances and environmental protection as well as core human rights issues, based on the Group’s requirements for suppliers. Recommendations were made for improvements where needed and 75% of the potential suppliers failed to achieve GSK’s recommendations. GSK plans to partner only with the successful candidates to improve their overall environment, health, safety and loss prevention performance.

EHS targets
As part of the EHS plan, targets are set every five years with 2006 as the baseline year for the targets to 2010.

GSK selected its measures of performance improvement based on the potential for adverse impact on people, 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 chlorofluorocarbons (CFCs) from all uses by 2010 and each year to reduce non-hazardous waste disposed by 1%, reduce water use and volatile organic compound (VOC) releases to air by 2%, reduce pollution of wastewater, measured as chemical oxygen demand, by 3% and reduce energy usage and greenhouse gas emissions by 1%. During the year, a further target was set to reduce energy usage and greenhouse gas emissions by 20% by 2010 and 45% by 2015. All targets are normalised by sales based on a constant exchange rate.

In 2007, GSK remained on track to eliminate the use of CFCs by 2010 and to meet its 2010 targets for energy use and related greenhouse gas emissions. Progress towards the 2010 energy and related greenhouse gas emissions target is expected to accelerate in 2008 and beyond. The annual targets were met for reduction in water use and wastewater pollution. GSK did not meet its targets for non-hazardous waste disposal or VOC releases to air. In the case of non-hazardous waste disposal, this was because there was an 83% increase in solid waste disposal in the vaccines business due to its expansion programme in the development and launch of new vaccines. In the case of VOC releases, this was because, due to product mix changes, solvent recovery equipment at some of the manufacturing sites was inadequate to completely capture and recycle certain solvents used in the manufacturing process.

Final EHS performance data for 2007 with explanations of the trends will be published in the Corporate Responsibility report on GSK’s website.

Sustainability
In working towards sustainability, GSK is addressing the economic, environmental and social issues in research, manufacturing, sales and distribution of its medicines and consumer healthcare and nutritionals products. Sustainability starts with healthcare solutions found by R&D and continues with innovations to improve the efficiency of manufacturing processes for new products. This reduces resource use which in turn lowers waste and cost. With lower cost our products can be available to a wider population around the world. In the future, the EHS plan for excellence proposes investigating the use of renewable resources in manufacturing.

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 GSK’s website.


 

30  GSK Annual Report 2007
   

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REPORT OF THE DIRECTORS  
World market  
   
   
Business review
World market
   
   

World economy

The global economy continued to be broadly positive during 2007, buoyed by growth in developing markets such as China, although the mortgage-related issues in the USA had an adverse effect in several countries. World Gross Domestic Product (GDP) growth eased from 3.9% in 2006 to 3.6%. The International Monetary Fund forecasts global GDP growth to be 4.1% in 2008.

Equity markets struggled in 2007, against a backdrop of record-breaking oil prices and continued concerns over the situations in Iraq and Afghanistan. Oil prices, which averaged $71 per barrel throughout the year, rose to $100 later in the year. Inflation in the OECD countries was 1.9% but is expected to increase to 2.5% in 2008.

The US economy weakened significantly, led by a slump in new housing starts and exacerbated by the sub-prime lending crisis. GDP growth slowed from 2.9% in 2006 to 2.2% in 2007 and many analysts expect it to fall below the 2% mark during 2008. The Dow Jones Industrial Index gained 6.4% over the period while interest rates dropped by 1% to 4.25% before a significant cut in January 2008 took them down to 3%. In 2007, the US dollar continued to decline against both the Euro and Sterling. Having fallen throughout the year, the US dollar was worth less than 50p in November, its lowest point since 1992.

The Chinese economy continued to make sound progress, growing by 11.3% during 2007. Growth is forecast to dip slightly in 2008, particularly as problems in the USA may impact on demand for Chinese exports. In Japan, GDP was 1.9% and the Nikkei 225 fell by 11.1% during the year, marking its first annual decline in five years. The Indian and Brazilian economies both achieved double-digit growth in 2007.

In the Eurozone, GDP growth slowed from 3.3% in 2006 to 2.7% and is expected to fall to 1.9% in 2008. France expanded by 1.8% in 2007, Germany by 2.5%, the UK by 3.1% and Spain by 3.3% . European Central Bank interest rates closed the year at 4%, up 0.5% on the end of 2006. UK rates started the year at 5%, rose in three steps to 5.75% and fell back to 5.5% at the year-end while the FTSE 100 Index gained just 3.8%, its weakest annual performance since 2003.

Exchange

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

In 2007, the US dollar fell by 2% against Sterling, to $1.99 at the year-end. The year-end rates for the Euro strengthened by 8% and the Japanese Yen by 5% against Sterling.

World market – pharmaceuticals

Global pharmaceutical sales in 2007 were £329 billion compared with £328 billion in 2006.

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






 
USA 140.8   43   (3 )
Europe 97.6   30   5  
 France 18.6   6   5  
 Germany 17.2   5   3  
 UK 11.3   3   5  
 Italy 10.3   3   (2 )
Japan 28.6   9   (9 )
Asia Pacific 24.6   7   10  
Latin America 16.5   5   7  
Middle East, Africa 12.4   4   4  
Canada 8.3   2    






 
Total 328.8   100    






 

The US market has decreased by 3%, but it still represents 43% of the global prescription pharmaceutical market compared with 30% a decade ago.

At 30th September 2007, GSK held second position in the world pharmaceutical market with a market share of 5.9%, behind Pfizer with a market share of 7%. GSK had four of the world’s top 60 pharmaceutical products. These were Avandia, Lamictal, Seretide/Advair and Valtrex.

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






 
Central nervous system 54.4   17   1  
Cardiovascular 50.7   15   (6 )
Alimentary tract and metabolic 39.7   12   (1 )
Antineoplastic/Immunomodulatory 35.6   11   8  
Anti-infectives (bacterial, 32.9   10   (1 )
 viral and fungal) excluding            
 vaccines            
Respiratory 22.1   7   2  






 

(Note: data based on 12 months to 30th September 2007)


 

 GSK Annual Report 2007  31
   

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  REPORT OF THE DIRECTORS
  Products and competition 
   
   
Business review
Products and competition
   
   
     
  Both the prescription pharmaceutical and consumer healthcare industries are highly competitive. Despite being the second largest pharmaceutical company in the world, GSK has only a 5.9% share of the world market.  
     

Pharmaceutical products

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

  2007 2006 2005  
Turnover by therapeutic area £m £m £m  




 
Respiratory 5,032 4,995 5,054  
Central nervous system 3,348 3,642 3,219  
Anti-virals 3,028 2,827 2,598  
Metabolic 1,514 1,875 1,495  
Vaccines 1,993 1,692 1,389  
Cardiovascular and urogenital 1,554 1,636 1,331  
Anti-bacterials/anti-malarials 1,330 1,369 1,519  
Oncology and emesis 477 1,069 1,016  
Other 957 973 1,040  




 
  19,233 20,078 18,661  




 

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

Respiratory
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.

Veramyst/Avamys, 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 available in the USA.

Wellbutrin is an anti-depressant, available in the USA and many European and 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).

Anti-virals
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.

Metabolic
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 that targets insulin resistance and decreases glucose production in one convenient pill.

Avandaryl/Avaglim is a combination of Avandia and Amaryl, a Sanofi-Aventis product. Avandaryl/Avaglym 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 (co-promoted with Roche).

Vaccines
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 (whooping cough). Infanrix penta (Europe)/Pediarix (USA, Canada) provides additional protection against hepatitis B and polio. Infanrix hexa adds protection against Haemophilus influenzae type b, which is a cause of meningitis. 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.


 

32  GSK Annual Report 2007
   

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REPORT OF THE DIRECTORS  
Products and competition  
   
 
Business review
Products and competition
continued
 

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 and, following FDA approval, the USA where it is approved 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 complemented 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. A controlled release formulation, Coreg CR is also available in the USA. Generic versions of Coreg are available in the USA and 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 study is underway examining its efficacy in reducing the risk of prostate cancer.

Vesicare is an anti-muscarinic indicated for overactive bladder. GSK has co-promotion rights with Astellas in the USA. Its major competitors are Detrol LA, Ditropan XL/generic oxybutynin, and Enablex.

Arixtra, a selective Factor Xa inhibitor, is indicated for the treatment of deep vein thrombosis (DVT) and pulmonary embolism (PE) and for the prevention of DVT and PE in patients undergoing major orthopaedic surgery, abdominal surgery and acutely ill medical patients (EU only). Also in the EU, Arixtra is indicated for the treatment of patients with acute coronary (unstable angina, NSTEMI and STEMI).

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 haemodialysis.

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 extended release formulation for the treatment of patients with community acquired pneumonia or acute bacterial sinusitis.

Altabax/Altargo, approved in 2007 for the topical treatment of certain bacterial skin infections, represents the first new class of topical antibiotics approved by the FDA in nearly two decades. Altabax/Altargo co

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.

Oncology and emesis
Tykerb is an oral treatment for patients with advanced or metastatic breast cancer whose tumours overexpress HER2 and who have received prior therapy including an anthracycline, a taxane and trastuzumab. Tykerb was approved in the USA in 2007 and is submitted for European approval.

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.

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.

Other
This category includes Betnovate, the higher potency Dermovate and the newer Cutivate, which are topical 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 2007  33
   

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  REPORT OF THE DIRECTORS
  Products and competition
   
 
Business review
Products and competition
continued
 

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.

Respiratory
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. 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’ egretol/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.

Anti-virals
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.

Metabolic
The major competitor for Avandia is Takeda Chemical’s Actos, whose co-promotion with Eli Lilly in the USA ended in 2007. Takeda also market Actoplusmet/Competact (a combination of metformin HCI and Actos) in the USA and some EU markets and DuetAct (a combination of glimepiride and Actos) in the USA.

Monthly Boniva/Bonviva competes with Merck’s weekly Fosamax and Proctor & Gamble/Sanofi-Aventis’ twice-monthly Actonel, and Novartis’ Reclast/Aclasta which is dosed as an annual infusion. Generic Fosamax (alendronate) is now available in many markets, including the USA, UK, Germany and Canada.

Vaccines
The vaccine market is dominated by five key players. GSK’s major competitors are SanofiPasteur (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. Merck and the joint venture between Merck and SP in Europe market two new vaccines against rotavirus induced infection and HPV, that respectively compete against Rotarix and Cervarix.

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 (enlarged prostate) market. The Group has co-promotion rights in the USA for Levitra, which faces competition from Pfizer’s Viagra and Lilly’s Cialis. The major competitor for Arixtra is the low molecular weight heparin enoxaparin, a product marketed by Sanofi-Aventis.

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.

Altabax/Altargo competes in the topical antibiotic market against a number of generic competitors, including generic mupirocin and fusidic acid. Altabax/Altargo’s offers less frequent and shorter duration of therapy and lack of cross resistance to other established classes of anti-bacterials.


 

34  GSK Annual Report 2007
   

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REPORT OF THE DIRECTORS  
Products and competition  
   
   
Business review
Products and competition
continued
 
 

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

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:

  2007 2006 2005  
  £m £m £m  




 
OTC medicines 1,718 1,496 1,437  
Oral care 1,049 993 943  
Nutritional healthcare 716 658 619  




 
  3,483 3,147 2,999  




 

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

Category Product  


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


 
Weight control alli  


 
Oral healthcare Aquafresh  
  Dr Best  
  Macleans  
  Odol  
  Polident  
  Poligrip  
  Sensodyne  


 
Nutritional healthcare Lucozade  
  Ribena  
  Horlicks  


 

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. Recent additions to the portfolio include 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. in 2006, and the switch of orlistat from prescription-only status in the United States to over-the-counter, marketed as the weight control product, alli.

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 2007  35
   

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  REPORT OF THE DIRECTORS
  Financial review 2007
   
   
Business review
Financial review 2007
continued
 
 
   
  GSK turnover grew 2% in 2007, and
business performance EPS grew 10% to
99.1p. The dividend was raised 10% to 53p.
Share repurchases were £3.8 billion in 2007,
with a further £6 billion expected in 2008.
   

Pharmaceutical turnover

All growth rates included in the review of turnover are at constant exchange rates (CER) unless otherwise stated. Sterling growth rates may be found in the tables of pharmaceutical turnover by therapeutic area on page 37 and by geographic region on page 38. Total pharmaceutical turnover in 2007 was £19,233 million compared with £20,078 million in 2006, in line with 2006 turnover at CER. In sterling terms total pharmaceutical turnover decreased 4%, four percentage points less than CER, principally due to the strength of Sterling against the US dollar.

Pharmaceutical turnover by therapeutic area

GSK’s turnover in 2007 was in line with 2006 as high-value growth products were offset by lower Avandia sales and US generic competition to Coreg IR, Flonase, Wellbutrin XL and Zofran. The high-value growth products included Seretide/Advair, vaccines, Lamictal, Valtrex, Requip, Avodart and Boniva.

Respiratory
GSK continues to be a global leader in respiratory pharmaceuticals with sales of its three key products, Seretide/Advair, Flixotide/Flovent and Serevent amounting to £4.4 billion, up 8%. Total sales of Seretide/Advair, for asthma and COPD, rose 10% to £3.5 billion. In the USA, sales grew 9% to £1.9 billion. In Europe sales grew 9% to £1.2 billion and in International markets sales grew 23% to £372 million, enhanced by its launch in Japan in June.

Market share by value in the anti-asthma and COPD therapy class was 29% in Europe and 31% in the USA.

Market share by value for Seretide/Advair


GSK continues to see increased use of Seretide/Advair in the treatment of COPD and is in ongoing discussions with the FDA to expand the indication for use in this patient group, including assessment of data supporting a claim for reduction of exacerbations.

CNS
CNS sales decreased 2% to £3.3 billion. Sales decreased in the USA and Europe, reflecting generic competition to Seroxat/Paxil in both regions. International sales grew 6% which included 4% growth in Paxil in Japan. Total Seroxat/Paxil sales declined 6% to £553 million. Total Wellbutrin sales declined 37% to £529 million, owing to US generic competition to Wellbutrin SR/IR and Wellbutrin XL 300mg tablet.

Sales of Lamictal, for the treatment of epilepsy and bipolar disorder, grew 18% to £1.1 billion, driven by sales in the USA which were up 26% to £892 million, benefiting from its new indication. 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. GSK expects to respond to the US FDA’s approvable letter for Lamictal XR in the middle of 2008.

Sales of Requip, for Parkinson’s disease and Restless Legs Syndrome (RLS), grew 36% to £346 million. Requip XL, a new once-daily formulation for Parkinson’s disease, has now been approved in 13 European countries and launched in seven markets. Further European approvals are anticipated during 2008. In the USA, GSK expects a response from the FDA on its application for Requip XL during the first half of 2008.

Anti-virals
Total sales of HIV products were £1.4 billion, down 1%. Competition to older products, Combivir down 10% to £455 million and Epivir down 20% to £156 million, was largely offset by strong sales growth of new products Epzicom/Kivexa, which grew 39% to £324 million and Lexiva/Agenerase, up 13% to £141 million. Sales of Valtrex, for herpes, rose 18% to £934 million, with US sales up 20% to £668 million driven by increased use of the product for prevention of disease transmission. Sales in Europe grew 9% to £120 million and in International grew 13% to £146 million. Sales of Relenza, an antiviral treatment for flu, were £262 million (2006 – £91 million), driven primarily by one-off government orders for stockpiling against a possible flu pandemic.

Metabolic
In 2007, sales of the Avandia product group, for type 2 diabetes, declined 22% to £1.2 billion. In the USA sales fell 29% to £780 million, with fourth quarter sales down 55% to £130 million following publication of an article in the New England Journal of Medicine. This article suggested that there may be cardiovascular risk associated with Avandia. Despite GSK’s efforts, doctors became reluctant to start new patients on Avandia without further guidance from the FDA. Following clarification from the FDA in October, there is now a new approved label for Avandia. Outside the USA, sales in Europe grew 4% for the year to £227 million, and in International markets, sales declined 7% to £212 million.

GSK recorded in turnover a £161 million share of co-promotion income for Boniva/Bonviva, a once-monthly oral bisphosphonate for the treatment of postmenopausal osteoporosis.

Vaccines
Vaccine sales increased 20% to £2.0 billion, with good performances in all regions: US sales rose 44% to £628 million; European sales grew 14% to £814 million and sales in International were up 8% to £551 million. Sales of hepatitis vaccines grew 14% to £529 million, driven by US growth of 33%.


 

36  GSK Annual Report 2007
   

Back to Contents

   
REPORT OF THE DIRECTORS  
  Financial review 2007  
   
   
Business review
Financial review 2007
continued

Pharmaceutical turnover by therapeutic area 2007

Total       USA       Europe       International    








 



 



 

Therapeutic area/ % of 2007 2006           Growth 2007           Growth 2007           Growth 2007           Growth
major products total £m £m CER% £% £m CER% £% £m CER% £% £m CER% £%


























 
Respiratory 26 5,032 4,995   5   1   2,377   4   (3 ) 1,772   4   4   883   10   5  
Seretide/Advair    3,499 3,313   10   6   1,891   9   1   1,236   9   9   372   23   20  
Flixotide/Flovent    621 659   (1 ) (6 ) 284   3   (5 ) 161   (8 ) (7 ) 176   (2 ) (6 )
Serevent    269 291   (4 ) (8 ) 74   (7 ) (14 ) 134   (5 ) (4 ) 61     (6 )
Flixonase/Flonase    199 311   (34 ) (36 ) 72   (60 ) (61 ) 51       76   5    


























 
Central nervous system 17 3,348 3,642   (2 ) (8 ) 2,377   (1 ) (8 ) 513   (14 ) (14 ) 458   6    
Seroxat/Paxil    553 620   (6 ) (11 ) 143   (12 ) (18 ) 122   (19 ) (18 ) 288   5   (3 )
   Paxil IR    400 448   (6 ) (11 ) 7   (63 ) (63 ) 122   (19 ) (18 ) 271   4   (3 )
   Paxil CR    153 172   (4 ) (11 ) 136   (6 ) (13 )       17   13   6  
Wellbutrin    529 900   (37 ) (41 ) 512   (38 ) (42 ) 4   100   100   13   (13 ) (19 )
   Wellbutrin IR, SR    75 102   (23 ) (26 ) 63   (26 ) (29 ) 2       10   -   (9 )
   Wellbutrin XL    454 798   (39 ) (43 ) 449   (39 ) (43 ) 2       3   (40 ) (40 )
Imigran/Imitrex    685 711   3   (4 ) 558   9   1   89   (25 ) (25 ) 38   (2 ) (10 )
Lamictal    1,097 996   18   10   892   26   17   145   (18 ) (17 ) 60   13   7  
Requip    346 268   36   29   238   46   35   91   11   12   17   64   55  


























 
Anti-virals 16 3,028 2,827   13   7   1,494   19   10   870   1   2   664   13   7  
HIV   1,442 1,515   (1 ) (5 ) 637   (2 ) (9 ) 612   (2 ) (1 ) 193   5   (1 )
Combivir    455 528   (10 ) (14 ) 195   (11 ) (18 ) 192   (12 ) (12 ) 68   (1 ) (7 )
Trizivir    233 268   (9 ) (13 ) 120   (8 ) (15 ) 99   (13 ) (12 ) 14   7    
Epivir    156 202   (20 ) (23 ) 53   (16 ) (23 ) 67   (26 ) (26 ) 36   (14 ) (16 )
Ziagen    109 117   (3 ) (7 ) 45   2   (6 ) 37   (10 ) (10 ) 27   (4 ) (4 )
Agenerase, Lexiva    141 131   13   8   78   14   5   53   10   10   10   22   11  
Epzicom/Kivexa    324 241   39   34   142   23   14   149   54   54   33   74   74  
Herpes   1,041 965   15   8   678   20   11   151   4   5   212   6    
Valtrex    934 845   18   11   668   20   11   120   9   10   146   13   7  
Zovirax    107 120   (8 ) (11 ) 10       31   (11 ) (11 ) 66   (7 ) (12 )
Zeffix    168 162   8   4   13   8     24   4   4   131   9   4  
Relenza    262 91   >100   >100   131       76   21   23   55   >100   90  


























 
Metabolic 8 1,514 1,875   (15 ) (19 ) 895   (24 ) (30 ) 294   15   17   325   (2 ) (6 )
Avandia    877 1,399   (34 ) (37 ) 592   (40 ) (45 ) 113   (10 ) (10 ) 172   (14 ) (17 )
Avandamet    292 204   49   43   147   85   71   111   20   21   34   35   31  
Avandaryl    50 42   26   19   41   10   3   3       6   >100   >100  
Bonviva/Boniva    161 95   79   69   115   49   39   45   >100   >100   1      


























 
Vaccines 10 1,993 1,692   20   18   628   44   35   814   14   15   551   8   6  
Hepatitis   529 479   14   10   199   33   24   235   3   4   95   8   4  
Influenza   320 170   93   88   193   >100   >100   93   >100   >100   34   (19 ) (21 )
Infanrix, Pediarix    543 511   9   6   196   23   14   275   (3 ) (2 ) 72   26   24  
Boostrix    66 60   15   10   40   5   (2 ) 19   27   27   7   75   75  
Rotarix    91 44   >100   >100         23   >100   >100   68   79   74  
Cervarix    10             9       1      


























 
Cardiovascular and urogenital   8 1,554 1,636     (5 ) 970   (2 ) (10 ) 412   3   4   172   7   2  
Coreg    587 779   (18 ) (25 ) 581   (19 ) (25 )       6   17    
Levitra    49 43   23   14   47   24   15   2   100   100        
Avodart    285 216   38   32   175   44   34   86   23   25   24   56   50  
Arixtra    100 58   81   72   55   88   72   39   70   70   6   100   100  
Fraxiparine    184 209   (12 ) (12 )       160   (12 ) (11 ) 24   (17 ) (20 )
Vesicare    50 32   69   56   50   69   56              


























 
Anti-bacterials 7 1,330 1,369   (1 ) (3 ) 195   (3 ) (10 ) 612   (3 ) (3 ) 523   3    
Augmentin    530 570   (6 ) (7 ) 67   (23 ) (29 ) 250   (7 ) (7 ) 213   5   2  


























 
Oncology and emesis 2 477 1,069   (54 ) (55 ) 272   (65 ) (67 ) 139   (10 ) (9 ) 66   (14 ) (18 )
Zofran    196 847   (77 ) (77 ) 78   (88 ) (89 ) 71   (34 ) (34 ) 47   (21 ) (23 )
Hycamtin    119 113   10   5   70   6   (3 ) 42   21   24   7      
Tykerb    51       36       13       2      


























 
Other 6 957 973   1   (2 ) 65   (18 ) (22 ) 266     1   626   4    
Zantac    168 232   (24 ) (28 ) 33   (51 ) (54 ) 42   (19 ) (19 ) 93   (8 ) (14 )


























 
  100 19,233 20,078     (4 ) 9,273   (3 ) (10 ) 5,692   2   3   4,268   6   2  


























 

CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates. Turnover by quarter is given in the Financial record on pages 162 to 165.

 GSK Annual Report 2007  37
   

Back to Contents

   
  REPORT OF THE DIRECTORS
  Financial review 2007
   
   
Business review
Financial review 2007
continued
 

Infanrix/Pediarix grew 9% to £543 million, again driven by US growth of 23%. Sales of the new two-dose vaccine, Rotarix, to prevent rotavirus gastroenteritis, doubled to £91 million, with strong growth in both Europe and International. Sales of Cervarix, GSK’s vaccine to prevent cervical cancer, were £10 million. It has been approved in over 50 countries and licensing applications have been submitted in 28 countries including Japan. GSK’s pre-pandemic influenza vaccine achieved sales of £146 million. Discussions regarding further orders continue with a number of governments.

Cardiovascular and urogenital
Sales of Coreg, for heart disease, fell 18% to £587 million, following the introduction of US generic competition to Coreg IR in September. Sales of Coreg CR, which was launched in March 2007, were £88 million. Avodart, for benign prostatic hyperplasia (enlarged prostate), continued to perform strongly with sales up 38% to £285 million. Positive data from the CombAT study, (assessing use of Avodart and the alpha-blocker, tamsulosin, as combination therapy), were recently published in the Journal of Urology. GSK has filed for a co-prescription indication in the USA, Europe and some International markets. A response is expected from the FDA during the second quarter of 2008.

Anti-bacterials
Anti-bacterial sales declined 1% to £1,330 million reflecting generic competition in all regions.

Oncology and emesis
Tykerb achieved sales of £51 million in its first year, £36 million of which arose in the USA following its launch in March. Sales of Zofran declined 77% to £196 million, reflecting generic competition in the USA, Europe and International where sales declined 88%, 34% and 21% respectively.

Other therapeutic areas
Sales of Zantac fell 24% to £168 million, with declines in all regions.

Regional analysis

Pharmaceutical turnover by geographic region in 2007 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.

Region/ % of 2007 2006   Growth*  
major markets total £m £m   CER%   £%  








 
USA 48 9,273 10,353   (3 ) (10 )








 
Europe 30 5,692 5,547   2   3  
France   991 967   2   2  
UK   822 786   5   5  
Italy   620 664   (7 ) (7 )
Germany   602 592   1   2  
Spain   605 577   4   5  
Other Europe   2,052 1,961   4   5  








 
International 22 4,268 4,178   6   2  
Asia Pacific   1,441 1,377   6   5  
Japan   867 860   10   1  
Middle East, Africa   774 744   7   4  
Latin America   709 714   4   (1 )
Canada   477 483   2   (1 )








 
  100 19,233 20,078   0   (4 )








 
*

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

Sales and constant exchange rate growth by region

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 2007 on a turnover created basis

        2007         2006  
 



 



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










 
Europe 5,692   5,692   5,547   5,547  
France 991 (43 ) 948   967 (66 ) 901  
UK 822 101   923   786 102   888  
Italy 620 (14 ) 606   664 (25 ) 639  
Germany 602 87   689   592 72   664  
Spain 605 (12 ) 593   577 (14 ) 563  
Other Europe 2,052 (119 ) 1,933   1,961 (69 ) 1,892  










 

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.


 

38  GSK Annual Report 2007
   

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REPORT OF THE DIRECTORS  
Financial review 2007  
   
   
Business review
Financial review 2007
continued
 

Pharmaceutical turnover by geographic region in 2007 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.

Region/ % of 2007 2006   Growth*  
major markets total £m £m   CER%   £%  








 
USA 48 9,273 10,353   (3 ) (10 )








 
Europe 30 5,692 5,547   2   3  
France   948 901   5   5  
UK   923 888   4   4  
Italy   606 639   (6 ) (5 )
Germany   689 664   3   4  
Spain   593 563   5   5  
Other Europe   1,933 1,892   1   2  








 
International 22 4,268 4,178   6   2  
Asia Pacific   1,441 1,377   6   5  
Japan   867 860   10   1  
Middle East, Africa   774 744   7   4  
Latin America   709 714   4   (1 )
Canada   477 483   2   (1 )








 
  100 19,233 20,078     (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 162 to 165.

USA
Sales in the USA declined 3% to £9.3 billion, reflecting generic competition to Wellbutrin, Zofran, Flonase and Coreg IR which declined 38%, 88%, 60% and 31% respectively and a decline in the sales of Avandia products, partly offset by growth in sales of Advair, anti-virals, vaccines, Lamictal and Requip.

Sales of the Avandia product group declined 29% following the publication of an article in the New England Journal of Medicine in May, which suggested there may be a cardiovascular risk associated with Avandia. Following clarification from the FDA in October, there is now a new approved label for Avandia.

Advair sales grew 9% to £1,891 million owing to the increased use in the treatment of COPD.

Sales in the anti-virals therapeutic area grew 19% to £1,494 million with herpes products up 20% and HIV products down 2%. Within HIV, competition to older products, Combivir down 11% and Epivir down 16%, was partly offset by the growth of new products Epzicom/Kivexa up 23% and Lexiva up 14%. Valtrex, for herpes, grew 20% to £668 million, driven by patients switching to suppression therapy. Sales of Relenza, an anti-viral treatment for flu, were £131 million, primarily driven by one-off government orders for stockpiling against a possible flu pandemic.

Vaccines grew 44% to £628 million reflecting the good performance of the Hepatitis family of products, Pediarix, Fluarix/Flulaval and the launch of Boostrix.

Sales of Lamictal, for the treatment of epilepsy and bipolar disorder, grew 26% to £892 million, benefiting from its new indication to treat one of the most serious forms of epilepsy – primary generalised tonic-clonic seizures.

Sales of Requip, for Parkinson’s disease and Restless Legs Syndrome (RLS), grew 46% to £238 million following launch of the RLS indication in 2006.

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

Sales in Europe contributed 30% of pharmaceutical turnover and grew 2% to £5.7 billion, with strong sales of Seretide and vaccines offsetting the impact of generic competition to a number of products and continued price cuts resulting from government healthcare reforms.

All major markets recorded growth with the exception of Italy, which was adversely impacted by pricing restrictions and generic competition. Major growth drivers were Seretide, GSK’s largest selling product in Europe, with growth of 9%, and the vaccines franchise, up 14%.

Generic competition adversely impacted sales of Seroxat, down 19%, Lamictal, down 18%, Zofran, down 34% and Imigran, down 25%. Sales of anti-bacterials decreased 3% due to a combination of a weaker ‘flu season than in 2006 and generic competition.

Sales of Avandia/Avandamet grew 4%.

International
The International region reported year on year turnover growth of 6%. Faster growing markets included Japan, up 10%, China, up 24% and Middle East/Africa, up 7%, while there was more modest sales growth of 2% in Canada, 3% in Australia and 4% in Latin America. The Canadian sales performance reflected lower sales of Avandia and generic competition for Zofran whilst the Australian business was adversely impacted by government pricing and lower government orders for Relenza.

The good performance in Japan was driven by the launch in the year of Adoair and strong demand for Relenza. These were partially offset by declines in the older products Zantac and Zovirax.

Across the remaining markets in International, the key products driving growth were Seretide, which grew 23% to record sales of £372 million, Valtrex which grew 13% to £146 million, the vaccines franchise, which recorded growth of 8% and achieved sales of £551 million, and the HIV products which grew 5% to £193 million. The Avandia range of products declined 7% to £212 million, with declines in Canada and Korea, partly offset by growth in Australia.

Consumer Healthcare sales

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

  2007 2006   Growth  
  £m £m   CER%   £%  







 
OTC medicines 1,718 1,496   20   15  
   Analgesics 410 380   11   8  
   Dermatological 175 165   10   6  
   Gastro-intestinal 262 252   9   4  
   Respiratory tract 244 172   45   42  
   Smoking control 314 353   (6 ) (11 )
   Natural wellness support 125 132   (3 ) (5 )
   Weight management 150      
Oral care 1,049 993   8   6  
Nutritional healthcare 716 658   9   9  







 
  3,483 3,147   14   11  







 

 GSK Annual Report 2007  39
   


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  REPORT OF THE DIRECTORS
  Financial review 2007
   
   
Business review
Financial review 2007
continued
 

OTC medicines
Over-the-counter medicine sales grew 20% to £1.7 billion, with Panadol up 14% to £262 million and alli sales of £150 million since launch in the USA in June. Smoking control products declined 6% to £314 million due to strong competition in the US market. Breathe Right and FiberChoice, added to the portfolio with the acquisition of CNS in December 2006, achieved combined sales of £81 million.

Oral care
Oral care sales grew 8% to over £1 billion. Sales of Aquafresh were up 12% to £308 million, helped by the success of the new Aquafresh White Trays. Sensodyne also grew strongly, up 16% for the year to £293 million, driven by a successful launch of Sensodyne ProNamel.

Nutritional healthcare
Nutritional healthcare product sales grew 9% to £716 million. Lucozade grew 16% to £347 million, and Horlicks grew 12% to £174 million. Ribena sales were down 7% to £156 million.

Operating profit – total results

Total results include restructuring costs related to the new Operational Excellence programme, which commenced in October 2007.

      2007       2006       Growth  
 


 


 


 
  £m   %   £m   %   CER%   £%  












 
Turnover 22,716   100.0   23,225   100.0   2   (2 )












 
Cost of sales (5,317 ) (23.4 ) (5,010 ) (21.6 ) 8   6  
Selling, general and administration
(6,954 ) (30.6 ) (7,257 ) (31.2 )   (4 )
Research and development
(3,327 ) (14.7 ) (3,457 ) (14.9 ) (1 ) (4 )
Other operating income 475   2.1   307   1.3      












 
Operating profit 7,593   33.4   7,808   33.6   3   (3 )












 

Cost of sales
Cost of sales as a percentage of turnover increased by 1.8 percentage points. At constant exchange rates, cost of sales as a percentage of turnover increased by 1.3 percentage points, reflecting charges related to the new Operational Excellence programme of £111 million (2006 – £nil) and unfavourable product and regional mixes compared with 2006.

Selling, general and administration
Selling, general and administration (SG&A) costs as a percentage of turnover reduced 0.6 percentage points. At constant exchange rates, the decrease was 0.7 percentage points, reflecting flat expenditure compared with the prior year on a turnover growth of 2%. SG&A costs included charges related to the new Operational Excellence programme of £137 million (2006 – £nil). Advertising and promotion increased by 2%, selling and distribution increased by 2%, and general and administration expenditure declined 5%.

Research and development
R&D expenditure declined 1% and included charges related to the new Operational Excellence programme of £90 million (2006 – £nil). The benefit arose from lower impairment charges and the winding-down of previous restructuring activities. Excluding these items, R&D expenditure declined 2% on last year. Pharmaceutical R&D expenditure represented 16.7% (2006 – 16.7%) of pharmaceutical turnover.

Other operating income
Other operating income includes royalty income, equity investment disposals and impairments, product disposals and fair value adjustments to financial instruments. Other operating income was £475 million in 2007 (2006 – £307 million). The increase is primarily due to higher royalty income (£216 million in 2007 compared with £94 million in 2006), favourable fair value movements on financial instruments (£41 million in 2007 compared with £29 million in 2006), and the Roche litigation settlement relating to carvedilol, partially offset by lower asset disposal profits.

Operating profit
Overall, the operating profit margin decreased 0.2 percentage points as operating profit decreased 3% in sterling terms to £7,593 million. Operating profit increased 3% at constant exchange rates and the CER margin increased 0.5 percentage points, reflecting flat SG&A expenditure and higher other operating income, partially offset by an increase in cost of sales.

In the year, gains from asset disposals were £109 million (£169 million in 2006), costs for legal matters were £255 million (£333 million in 2006), fair value movements on financial instruments resulted in an income of £41 million (income of £29 million in 2006), charges related to old restructuring activity were £92 million (£205 million in 2006) and charges related to the new Operational Excellence programme were £338 million (2006 – £nil). The total operating profit impact of these items was a £535 million charge in 2007 (£340 million charge in 2006).

Profit before taxation – total results

Net finance costs

  2007   2006  
Finance income £m   £m  




 
Interest and other finance income 255   285  
Fair value adjustments and hedges 7   2  




 
  262   287  




 
     
Finance costs    




 
Interest costs (432 ) (314 )
Unwinding of discount on liabilities (27 ) (36 )
Fair value adjustments and hedges 6   (2 )




 
  (453 ) (352 )




 

Finance costs increased owing to increased levels of debt to finance the share buy-back programme.


 

40  GSK Annual Report 2007
   

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REPORT OF THE DIRECTORS  
Financial review 2007  
   
   
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Financial review 2007
continued
 

Share of after tax profits of associates and joint ventures
The share of profits of associates arises principally from the Group’s holding in Quest Diagnostics Inc.

Profit before taxation – total results
Taking account of net finance costs and the contribution from associates, total profit before taxation was £7,452 million compared with £7,799 million in 2006, an increase of 2% at constant exchange rates, but a 4% sterling decline.

Operational Excellence

In October 2007, GSK announced a significant new £1.5 billion Operational Excellence programme to improve the effectiveness and productivity of its operations.

This new programme is expected to deliver annual pre-tax savings of £700 million by 2010. GSK expects to realise the majority of annual savings within the first two years of the programme, with approximately £350 million expected by 2008 and £550 million by 2009. These savings will partly mitigate the expected impact to 2008 earnings from generic competition and lower Avandia sales and the associated adverse impact on GSK’s gross margin. One-off charges of £338 million before tax relating to the programme were recorded in Q4 2007. There were no significant acquisition-related restructuring costs incurred in 2006 or 2007.

Because of the significance of this new programme, a columnar presentation has been adopted in the income statement in order to illustrate GSK’s underlying performance in 2007. The analysis below of operating profit and the subsequent discussion excludes restructuring costs related to the new Operational Excellence programme, which commenced in October 2007. Management believes that exclusion of these items provides a more useful reflection of the way in which the business is managed, and accordingly this supplemental information is provided in addition to that contained in the consolidated income statement on page 90 prepared in accordance with IFRS.

Operating profit – business performance

    2007     2006     Growth  



 


 


 
  £m   %   £m   %   CER%   £%  












 
Turnover 22,716   100.0   23,225   100.0   2   (2 )












 
Cost of sales (5,206 ) (22.9 ) (5,010 ) (21.6 ) 6   4  
Selling, general and administration
(6,817 ) (30.0 ) (7,257 ) (31.2 ) (2 ) (6 )
 
Research and development
(3,237 ) (14.3 ) (3,457 ) (14.9 ) (3 ) (6 )
Other operating income
475   2.1   307   1.3          












 
Operating profit 7,931   34.9   7,808   33.6   8   2  












 

Cost of sales
Cost of sales as a percentage of turnover increased by 1.3 percentage points. At constant exchange rates, cost of sales as a percentage of turnover increased by 0.8 percentage points, reflecting unfavourable product and regional mix.

Selling, general and administration
Selling, general and administration (SG&A) costs as a percentage of turnover reduced 1.2 percentage points and at constant exchange rates, the decrease was 1.3 percentage points, reflecting a 2% decline in expenditure compared with prior year on a turnover growth of 2%. SG&A costs were down 2% due to lower selling and general and administration expenditure partly offset by higher advertising and promotion. Advertising and promotion increased 2% and accounted for less than a 1% increase in total SG&A. Selling and distribution declined 1% and general and administration expenditure declined 7%. Collectively these items accounted for a 2% decline in total SG&A, of which one percentage point was due to lower charges related to legal matters.

Research and development
R&D expenditure decreased 3% partly as a result of lower impairment charges and the winding-down of previous restructuring activities. Excluding these items, R&D expenditure was flat. Pharmaceutical R&D expenditure represented 16.2% (2006 – 16.7%) of pharmaceutical turnover.

Other operating income
Other operating income includes royalty income, equity investment disposals and impairments, product disposals and fair value adjustments to financial instruments. Other operating income was £475 million in 2007 (2006 – £307 million). The increase is primarily due to higher royalty income (£216 million in 2007 compared with £94 million in 2006), favourable fair value movements on financial instruments (£41 million in 2007 compared with £29 million in 2006), and the Roche litigation settlement relating to carvedilol, partially offset by lower asset disposal profits.

Operating profit
Overall, the operating profit margin increased 1.3 percentage points as operating profit increased 2% in sterling terms to £7,931 million. Operating profit increased 8% at constant exchange rates and the margin increased 2 percentage points, reflecting declines in SG&A and R&D expenditure on turnover growth of 2%, and higher other operating income.

In the year, gains from asset disposals were £109 million (2006 – £169 million), costs for legal matters were £255 million (2006 – £333 million), fair value movements on financial instruments resulted in an income of £41 million (2006 – £29 million) and charges related to old restructuring activity were £92 million (2006 – £205 million). The operating profit impact of these items was a £197 million charge in 2007 (2006 – £340 million).

Profit before taxation – business performance

Net finance costs

  2007   2006  
Finance income £m   £m  




 
Interest and other income 255   285  
Fair value adjustments and hedges 7   2  




 
  262   287  




 
Finance costs        




 
Interest costs (432 ) (314 )
Unwinding of discount on liabilities (27 ) (36 )
Fair value adjustments and hedges 6   (2 )




 
  (453 ) (352 )




 

 

 GSK Annual Report 2007  41
   

Back to Contents

   
  REPORT OF THE DIRECTORS
  Financial review 2007
   
   
Business review
Financial review 2007
continued
 

Share of after tax profits of associates and joint ventures
The share of profits of associates arises principally from the Group’s holding in Quest Diagnostics Inc.

Profit before taxation – business performance
Taking account of net finance costs and the contribution from associates, business performance profit before taxation was £7,790 million compared with £7,799 million in 2006, an increase of 6% CER, but flat in sterling terms.

Taxation

  2007   2006  
  £m   £m  




 
UK corporation tax 452   400  
Overseas taxation 1,962   2,310  




 
Current taxation 2,414   2,710  
Deferred taxation (272 ) (409 )




 
  2,142   2,301  




 

The charge for taxation on total profit amounting to £2,142 million, represents an effective tax rate of 28.7% (2006 – 29.5%) . The charge for taxation on business performance profit, amounting to £2,219 million, represents an effective tax rate of 28.5% (2006 – 29.5%) . The Group balance sheet at 31st December 2007 included a tax payable liability of £826 million and a tax recoverable asset of £58 million.

The Group’s main open tax issues are in the UK, USA, Canada and Japan.

GSK continues to be in dispute with HM Revenue & Customs (‘HMRC’) primarily in respect of transfer pricing and Controlled Foreign Companies (‘CFC’) matters for the years 1994 to date. HMRC have not yet formalised claims in respect of these matters and GSK is seeking to resolve them in discussions with HMRC. There continues, however, to be a wide difference between the Group and HMRC positions, which may ultimately have to be settled by litigation.

Following its audit of the period 2001 to 2003, the US Internal Revenue Service (‘IRS’) has in Notices of Proposed Adjustment challenged deductions arising from intercompany financing arrangements for those years, with which GSK disagrees and which it will vigorously contest. GSK estimates that the IRS claim for tax and interest at 31st December 2007, net of federal tax relief for these years, is $680 million. GSK believes, supported by external professional advice, that this claim has no merit and that no adjustment is warranted. If, contrary to GSK’s view, the IRS prevailed in its argument before a court, GSK would expect to have an additional liability for the four year unaudited period 2004-2007 proportionate to its liability for the three year audited period 2001-2003. In the event that GSK is not able to resolve this issue with the IRS, a court decision would not be expected before 2010.

Lower courts in Japan have upheld claims by the tax authorities for Yen 39 billion (£177 million) relating to Japanese CFC legislation. GSK has paid and fully provided for the full tax but is pursuing a claim for refund to the Japanese Supreme Court. In Canada a court hearing in respect of transfer pricing in the early 1990s was completed in July 2006. GSK is still awaiting the court’s judgement.

GSK uses the best advice in determining its transfer pricing methodology and in seeking to manage transfer pricing and other taxation 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

  2007   2006     Growth  
  £m   £m   CER% £%  







 
 
Total profit after taxation for the year
 
5,310   5,498   3 (3 )
 
Total profit attributable to shareholders
 
5,214   5,389   3 (3 )
Basic earnings per share (pence) 94.4 p 95.5 p 5 (1 )
Basic earnings per ADS (US$) $3.77   $3.53        







 
Business performance profit after taxation for the year
5,571   5,498   8   1  
Business performance profit attributable to shareholders
5,475   5,389   8 2  
Adjusted earnings per share (pence)
99.1 p 95.5 p 10 4  
Adjusted earnings per ADS (US$) $3.96   $3.53        
Weighted average number of shares (millions)
5,524   5,643        







 
Diluted total earnings per share (pence)
93.7 p 94.5 p      
Diluted total earnings per ADS (US$)
$3.75   $3.50        
Weighted average number of shares (millions)
5,567   5,700        







 

Total results including restructuring costs related to the new Operational Excellence programme produced a basic EPS of 94.4p compared with 95.5p in 2006. This was a 5% increase in CER terms compared with 2006, but a 1% decline in sterling terms.

Business performance profit for the year was £5,571 million, an increase of 8% (1% in sterling terms). Profit attributable to minority interests was £96 million and profit attributable to shareholders was £5,475 million, an increase of 8% (2% in sterling terms). The interest cost of the share buy-back programme adversely impacts the Group’s profits but benefits EPS. Business performance EPS increased 10%, reflecting higher profits and also the reduction in the weighted average number of shares resulting from the Group’s share buy-back programme. At actual rates of exchange, earnings per share increased 4%. The unfavourable currency impact on EPS of six percentage points reflected a strengthening of Sterling against the US dollar and compared with a four percentage point unfavourable currency impact on turnover.

Dividend
The Board has declared a fourth interim dividend of 16 pence per share resulting in a dividend for the year of 53 pence, a five pence increase over the dividend of 48 pence per share for 2006. The equivalent fourth interim dividend receivable by ADR holders is 62.7264 cents per ADS based on an exchange rate of £1/$1.9602. The ex-dividend date will be 13th February 2008, with a record date of 15th February 2008 and a payment date of 10th April 2008.


 

42  GSK Annual Report 2007
   

Back to Contents

   
REPORT OF THE DIRECTORS  
Financial review 2007  
   
   
Business review
Financial review 2007
continued
 

Critical accounting policies

The consolidated financial statements are prepared in accordance with IFRS, as adopted for use in the European Union, and also with IFRS as issued by the IASB, following the accounting policies approved by the Board and described in Note 2 to the financial statements, ‘Accounting 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 critical accounting policies adopted relate to the following areas:

Turnover
   
Taxation
   
Legal and other disputes
   
Impairment of property, plant & equipment
   
Intangible assets
   
Pensions and other post-employment benefits

Information on the judgements and estimates made in these areas is given in Note 3 to the financial statements, ‘Key accounting judgements and estimates’.

In respect of the Turnover accounting policy, the Group’s largest business is US pharmaceuticals, and the US market has the most complex arrangements for rebates, discounts and allowances. The following briefly describes the nature of the arrangements in existence in the Group’s US pharmaceuticals business.

GSK has arrangements with certain indirect customers whereby the customer is able to buy products from wholesalers at reduced prices. A chargeback represents the difference between the invoice price to the wholesaler and the indirect customer’s contractual discounted price.
Accruals for estimating chargebacks are calculated based on the terms
of each agreement, historical experience and product growth rates.
   
Customer rebates are offered to key managed care and group purchasing organisations (GPO) and other direct and indirect customers. These arrangements require the customer to achieve certain performance targets relating to value of product purchased, formulary status or pre-determined market shares relative to competitors. Rebates given under Medicare, Part D are included in this category. The Medicare, Part D programme was introduced in 2006 and replaced 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.
   
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:
   
    2007     2006     2005  



 


 


 
  £m   %   £m   %   £m   %  












 
Gross turnover 11,826   100   13,131   100   11,875   100  
Chargebacks 917   8   846   6   786   7  
Managed care, GPO rebates and Medicare Part D
727   6   912   7   686   6  
US government and state programmes
481   4   507   4   775   6  
Cash discounts 208   2   248   2   227   2  
Customer returns 131   1   140   1   155   1  
Prior year adjustments (73 )   (69 )   (34 )  
Other items 162   1   194   1   174   1  












 
Total deductions 2,553   22   2,778   21   2,769   23  












 
Net turnover 9,273   78   10,353   79   9,106   77  












 

Chargebacks have increased in 2007 as a result of significant sales of product into US government stockpiles. Customer rebates have fallen compared with 2006 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  
  2007   2006  
  £m   £m  




 
Chargebacks 38   50  
Managed care, GPO and Medicare, Part D rebates 340   435  
US government and state programmes 240   283  
Cash discounts 21   24  
Customer returns 194   184  
Other 37   69  




 
Total 870   1,045  




 

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 2007 were estimated to amount to approximately one month of turnover. This calculation uses third party information, the accuracy of which cannot be totally verified, but is believed to be sufficiently reliable for this purpose.


 

 GSK Annual Report 2007  43
   

Back to Contents

   
  REPORT OF THE DIRECTORS
  Financial position and resources
   
   
Business review
Financial position and resources
 
 
Financial position  
  2007   2006  
  £m   £m  





Assets        
Non-current assets        
Property, plant and equipment 7,821   6,930  
Goodwill 1,370   758  
Other intangible assets 4,456   3,293  
Investments in associates and joint ventures 329   295  
Other investments 517   441  
Deferred tax assets 2,196   2,123  
Derivative financial instruments 1   113  
Other non-current assets 687   608  





Total non-current assets 17,377   14,561  





Current assets        
Inventories 3,062   2,437  
Current tax recoverable 58   186  
Trade and other receivables 5,495   5,237  
Derivative financial instruments 475   80  
Liquid investments 1,153   1,035  
Cash and cash equivalents 3,379   2,005  
Assets held for sale 4   12  





Total current assets 13,626   10,992  





Total assets 31,003   25,553  





Liabilities        
Current liabilities        
Short-term borrowings (3,504 ) (718 )
Trade and other payables (4,861 ) (4,831 )
Derivative financial instruments (262 ) (40 )
Current tax payable (826 ) (621 )
Short-term provisions (892 ) (1,055 )





Total current liabilities (10,345 ) (7,265 )





Non-current liabilities        
Long-term borrowings (7,067 ) (4,772 )
Deferred tax provision (887 ) (595 )
Pensions and other post-employment benefits (1,383 ) (2,339 )
Other provisions (1,035 ) (528 )
Derivative financial instruments (8 ) (60 )
Other non-current liabilities (368 ) (346 )





Total non-current liabilities (10,748 ) (8,640 )





Total liabilities (21,093 ) (15,905 )





Net assets 9,910   9,648  





Equity        
Share capital 1,503   1,498  
Share premium account 1,266   858  
Retained earnings 6,475   6,965  
Other reserves 359   65  





Shareholders’ equity 9,603   9,386  
Minority interests 307   262  





Total equity 9,910   9,648  





Property, plant and equipment
GSK’s business is science-based, technology-intensive and highly regulated by governmental authorities. The Group allocates significant financial resources to the renewal and maintenance of its property, plant and equipment to minimise risks of interruption of production and to achieve compliance with regulatory standards. A number of its processes use chemicals and hazardous materials.

The total cost of the Group’s property, plant and equipment at 31st December 2007 was £15,087 million, with a net book value of £7,821 million. Of this, land and buildings represented £2,978 million, plant and equipment £2,968 million and assets in construction £1,875 million. In 2007, GSK invested £1,583 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 2007, GSK had capital contractual commitments for future expenditure of £597 million and 2008 operating lease commitments of £360 million. GSK believes that its facilities are adequate for its current needs.

The Group observes stringent procedures and uses specialist skills to manage environmental risks from these activities. Environmental issues, sometimes dating from operations now modified or discontinued, are reported under ‘Responsibility for environment, health and safety’ (page 29) and in Note 44 to the financial statements, ‘Legal proceedings’.

Goodwill
Goodwill has increased during the year from £758 million at 31st December 2006 to £1,370 million. The increase reflects the goodwill arising on the acquisition of Reliant Pharmaceuticals of £350 million and Domantis of £181 million as well as a strengthening of overseas currencies on the translation of existing foreign currency goodwill balances.

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 2007 was £4,456 million (2006 – £3,293 million). The increase in 2007 reflects additions of £1,298 million and currency movements partly offset by the amortisation and impairment of existing intangibles. The largest element of the additions is £613 million relating to the acquisition of Reliant Pharmaceuticals Inc., which added a range of speciality medicines combating heart disease to the GSK portfolio, including the US marketing rights to Lovaza.

Investments
GSK held investments, including associates and joint ventures, with a carrying value at 31st December 2007 of £846 million (2006 – £736 million). The market value at 31st December 2007 was £1,517 million (2006 – £1,461 million). The largest of these investments is in an associate, Quest Diagnostics Inc., which had a book value at 31st December 2007 of £299 million (2006 – £262 million). The investments include equity 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.


 

44  GSK Annual Report 2007
   

Back to Contents

   
REPORT OF THE DIRECTORS  
Financial position and resources  
   
   
Business review
Financial position and resources
continued
 

Derivative financial instruments: assets
GSK held both non-current and current derivative financial instruments held at fair value of £476 million (2006 – £193 million). The increase primarily reflects fluctuations in far forward valuations on foreign exchange contracts hedging inter-company loans and deposits. Exchange movements are largely due to changes in Euro, US dollar and Yen market rates.

Trade and other receivables
Trade and other receivables of £5,495 million have increased from 2006 reflecting the impact of strengthing overseas currencies on the translation of foreign currency receivables partly offset by lower VAT recoverables.

Derivative financial instruments: liabilities
GSK held both non-current and current derivative financial instruments held at fair value of £270 million (2006 – £100 million) relating primarily to hedging exchange on translation of currency assets on consolidation. The increase again reflects the impact from Euro, US dollar and Yen currency fluctuations.

Trade and other payables
Trade and other payables amounting to £4,861 million have marginally increased from 2006 with the impact of strengthening overseas currencies on the translation of foreign currency payables partly offset by a decrease in customer return and rebate accruals.

Provisions
The Group carried deferred tax provisions and other short-term and non-current provisions of £2,814 million at 31st December 2007 (2006 – £2,178 million) in respect of estimated future liabilities, of which £1,152 million related to legal and other disputes.

Provision has been made for legal and other disputes, indemnified disposal liabilities and the costs of restructuring programmes to the extent that at the balance sheet date an actual or constructive obligation existed and could be reasonably estimated.

Pensions and other post-employment benefits
The Group accounts for pension and other post-employment arrangements in accordance with IAS 19. The net deficits before allowing for deferred taxation were £411 million (2006 – £1,276 million) on pension arrangements and £972 million (2006 – £1,063 million) on unfunded post-employment liabilities. The pension liabilities decreased following improvements in asset values, further special funding contributions to the UK pension funds of £285 million (2006 – £346 million to the UK and US pension schemes) and a strengthening of long-term interest rates, including an increase in the rate used to discount UK pension liabilities from 5.0% to 5.75% . These benefits were partly offset by an improvement in mortality rates and a higher inflation assumption in the UK.

Net debt

  2007   2006  
  £m   £m  





Cash, cash equivalents and liquid investments 4,532   3,040  
Borrowings – repayable within one year (3,504 ) (718 )
Borrowings – repayable after one year (7,067 ) (4,772 )





Net debt (6,039 ) (2,450 )





Net debt increased by £3,589 million primarily due to the higher share repurchases and acquisition of businesses partly offset by increased cash inflows from operating activities.

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

  2007   2006  
  £m   £m  





Total equity at beginning of year 9,648   7,570  
Total recognised income and expense for the year 6,134   5,395  
Dividends to shareholders (2,793 ) (2,598 )
Ordinary shares issued 417   316  
Ordinary shares purchased and held as Treasury shares (3,537 ) (1,348 )
Ordinary shares purchased and cancelled (213 )  
Consideration received for shares transferred by ESOP Trusts 116   151  
Ordinary shares acquired by ESOP Trusts (26 )  
Share-based incentive plans 237   226  
Tax on share-based incentive plans 4   21  
Changes in minority interest shareholdings   2  
Minority interests (77 ) (87 )





Total equity at end of year 9,910   9,648  





At 31st December 2007, total equity had increased from £9,648 million at 31st December 2006 to £9,910 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 2007, the Employee Share Ownership Plan (ESOP) Trusts acquired £26 million of shares in GSK plc (2006 – £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 GSK to satisfy exercises through market purchases rather than the issue of new shares. The shares held by the Trusts are matched to options and awards granted.

At 31st December 2007, the ESOP Trusts held 134.5 million GSK shares against the future exercise of share options and share awards. The carrying value of £1,617 million has been deducted from other reserves. The market value of these shares was £1,721 million.

GSK repurchased £3,537 million of shares in 2007, to be held as Treasury shares and purchased a further £213 million for cancellation. In July 2007, GSK announced an increased buy-back programme to £12 billion, representing a £7.7 billion increase compared with continuation of the existing programme. This new programme is expected to be completed over a two year period including £6 billion in 2008. 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 2007, GSK held 504.2 million shares as Treasury shares, at a cost of £6,683 million, which has been deducted from retained earnings.

28.9 million shares have been purchased in the period 1st January 2008 to 22nd February 2008 at a cost of £323 million. All purchases were made through the publicly announced buy-back programme.


 

 GSK Annual Report 2007  45
   

Back to Contents

   
  REPORT OF THE DIRECTORS
  Financial position and resources
   
   
Business review
Financial position and resources
continued
 

Commitments and contingent liabilities
Financial commitments are summarised in Note 39 to the financial statements, ‘Commitments’. Other contingent liabilities and obligations in respect of short and long-term debt are set out in Note 31 to the financial statements, ‘Contingent liabilities’ and Note 32 to the financial statements, ‘Net debt’.

Amounts provided for pensions and post-retirement benefits are set out in Note 28 to the financial statements, ‘Pensions and other post-employment benefits’. Amounts provided for restructuring programmes and legal, environmental and other disputes are set out in Note 29 to the financial statements, ‘Other provisions’.

Contractual obligations and commitments
The following table sets out the Group’s contractual obligations and commitments at 31st December 2007 as they fall due for payment.

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






 
Loans 10,448 3,474 370 2,195 4,409  
Interest on loans 5,170 393 646 634 3,497  
Finance lease obligations 123 40 61 13 9  
Finance lease charges 14 5 5 3 1  
Operating lease commitments 360 101 134 74 51  
Intangible assets 5,730 618 745 805 3,562  
Property, plant & equipment 597 459 137 1  
Investments 65 38 27  
Purchase commitments 159 72 54 24 9  
Pensions 650 325 325  
Other commitments 32 20 7 5  






 
Total 23,348 5,545 2,511 3,749 11,543  





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

The Group has entered into a number of research collaborations to develop new compounds with other pharmaceutical companies. The terms of these arrangements can include 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 new commitments were made in 2007 under licensing and other agreements, including arrangements with Anacor Pharmaceuticals, Inc., Oncomed Pharmaceuticals, Inc., Santaris Pharma A/S and Targacept, Inc.

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 opposite 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. For further information on pension obligations, see Note 28 to the financial statements, ‘Pensions and other post-employment benefits’.

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 166 37 10 119  
Other contingent liabilities 40 13 9 4 14  






 
Total 206 50 19 4 133  






 

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 29 to the financial statements, ‘Other provisions’.

It is the Group’s policy to provide for the settlement costs of asserted claims and environmental disputes when 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 50 to 53 and Note 44 to the financial statements, ‘Legal proceedings’.

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 14 to the financial statements, ‘Taxation’.


 

46  GSK Annual Report 2007
   

Back to Contents

   
REPORT OF THE DIRECTORS  
Financial position and resources  
   
   
Business review
Financial position and resources
continued
 

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

  2007   2006  
  £m   £m  




 
Net cash inflow from operating activities 6,161   4,357  
Net cash outflow from investing activities (3,009 ) (1,521 )
Net cash outflow from financing activities (1,741 ) (4,792 )




 
Increase/(decrease) in cash and bank overdrafts 1,411