EX-15.2 9 d317042dex152.htm EX-15.2 EX-15.2
Table of Contents

Exhibit 15.2

 

 

LOGO

Annual Report 2016
2016 saw good sales momentum
across Pharmaceuticals, Vaccines
and Consumer Healthcare
and further pipeline progress


Table of Contents

    

 

 

We are a global science-led

healthcare company.

Our three world-leading businesses

research and deliver innovative

medicines, vaccines and consumer

healthcare products.

 

 

               
               
   

 

Front cover case study

           
   

 

   
   

 

LOGO

 

Arthur works at our Upper Providence R&D lab

 

    

 

At GSK, innovation underpins each of our three businesses

   
        

 

We are using next generation technology to develop new approaches to disease management and control. In addition to our own research and development, we gain insights through our network of collaborations with biotechs, other companies and academic institutions. This enables more efficient trial design and greater use of software, analytics and new technology, all of which is helping to increase our productivity, maximise our

 

 

  

 

return on R&D investment and accelerate the development of new products that can improve patients’ lives.

 

We have an active pipeline of innovative products across six core areas: respiratory, HIV and infectious diseases, vaccines, immuno-inflammation, oncology and rare diseases.

   
               

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. Other than in accordance with its legal or regulatory obligations (including under the UK Listing Rules and the Disclosure and Transparency Rules of the Financial Conduct Authority), the Group undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

The reader should, however, consult any additional disclosures that the Group may make in any documents which it publishes and/or files with the SEC. All readers, wherever located, should take note of these disclosures. Accordingly, no assurance can be given that any particular expectation will be met and shareholders and investors are cautioned not to place undue reliance on the forward-looking statements.

Forward-looking statements are subject to assumptions, inherent risks and uncertainties, many of which relate to factors that are beyond the Group’s control or precise estimate. The Group cautions investors that a number of important factors, including those in this document, could cause actual results to differ materially from those expressed or implied in any forward-looking statement. Such factors include, but are not limited to, those discussed under ‘Principal risks and uncertainties’ on pages 253-262 of this Annual Report. Any forward-looking statements made by or on behalf of the Group speak only as of the date they are made and are based upon the knowledge of and information available to the Directors on the date of this Annual Report.

All expectations and targets regarding future performance should also be read together with ‘Assumptions related to 2016-2020 outlook’ on the inside back cover of this document.

A number of adjusted measures are used to report the performance of our business. These measures are defined on page 57 and a reconciliation of core results to total results is set out on page 66.

 

 

 


Table of Contents
             
01   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

         
    2016 performance summary    
   

 

   

 

   
    £27.9bn     £4.5bn    
   

Group turnover

(up 17% AER; 6% CER;

5% pro-forma CER)a

   

New Pharmaceutical

and Vaccine salesb

(up >100% AER; >100% CER)a

   
   
   

 

   

 

   
    £2.6bn     £7.8bn    
   

Total operating profit

(down 75% AER; 86% CER)a,c

   

Core operating profit

(up 36% AER; 14% CER;

17% pro-forma CER)a

   
   
   

 

   

 

   
    18.8p     102.4p    
   

Total earnings per share

(down 89% AER; 99% CER)a,c

   

Core earnings per share

(up 35% AER; 12% CER)a

   
   
   

 

   

 

   
    £6.5bn     £3.1bn    
   

Net cash inflow from

operating activities

    Free cash flowa    
   
   

 

   

 

   
    £3.9bn     20-30    
   

Dividends declared

for 2016

   

Assets with data expected

by end of 2018

   
   
   

Delivering sustainable performance

 

   
   
    LOGO  

1st in the Access
to Medicine Index

 

since launch in 2008

 

   

3rd in the
pharmaceutical sector

 

for Dow Jones Sustainability Index

   
                     

 

Footnotes

 

a AER growth rates represent growth at actual exchange rates. We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER and pro-forma growth rates. These measures are used by management for planning and reporting purposes and may not be directly comparable with similarly described measures used by other companies. Core results exclude a number of items and are presented as management believes that core results allow the key trends and factors driving that performance to be more easily and clearly identified by shareholders. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS. A reconciliation of total results to core results is set out on page 66.

 

b New products defined as:
  Pharmaceuticals: Relvar/Breo Ellipta, Incruse Ellipta, Anoro Ellipta, Arnuity Ellipta, Eperzan/Tanzeum, Nucala, Tivicay, Triumeq.
  Vaccines: Menveo, Bexsero, Shingrix (not yet approved).
c Primarily reflecting impact of £9.2 billion profit in 2015 from disposal of Oncology business.

Strategic report

 

        

 

About us

     02   
Chairman’s statement      04   
CEO’s statement      05   
Our integrated approach      06   
The market in which we operate      08   
Our business model      12   
A clear strategy for growth      14   
How we measure success      16   
How we manage risks      18   
Pharmaceuticals      20   
Vaccines      28   
Consumer Healthcare      34   
Responsible business      40   
Group financial review      52   

Governance and remuneration

 

        

 

Chairman’s Governance statement

     80   
Our Board      82   
Our Corporate Executive Team      86   
Leadership and effectiveness      88   
Nominations Committee report      94   
Accountability      97   
Audit & Risk Committee report      97   
Relations with shareholders      107   
Corporate Responsibility Committee report      108   

Remuneration report

 

        
Chairman’s annual statement      112   
Annual report on remuneration      115   
Remuneration policy summary      137   
Remuneration policy report      138   

Financial statements

 

        

 

Directors’ statement of responsibilities

     148   
Independent Auditors’ report      149   
Financial statements      158   
Notes to the financial statements      162   
Financial statements of GlaxoSmithKline plc prepared under UK GAAP      232   

Investor information

 

        

 

Quarterly trend

     240   
Five year record      244   
Product development pipeline      247   
Product, competition and intellectual property      250   
Principal risks and uncertainties      253   
Share capital and share price      263   
Dividends      265   
Financial calendar      265   
Annual General Meeting 2017      266   
Tax information for shareholders      266   
Shareholder services and contacts      268   
US law and regulation      270   
Group companies      272   
Glossary of terms      283   
 


Table of Contents

 

 

02

 

 

GSK Annual Report 2016

  
    
    
    

About us

 

 

 

 

 

 

At GSK, our mission

is to improve the

quality of human life

by enabling people

to do more, feel better

and live longer.

 

 

   

 

 

 

 

Footnote

 

a We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS.

LOGO

Our Pharmaceuticals, Vaccines and Consumer Healthcare businesses generated combined turnover of £27.9 billion in 2016. Each business benefits from our global commercial infrastructure, integrated supply networks and innovative R&D.

 

LOGO   LOGO   LOGO

 

99,300

 

 

150+

 

 

87

Number of employees   Number of markets   Manufacturing sites

 

LOGO

In 2016, we invested £3.6 billion in R&D across our three businesses. External partnerships and collaborations enable us to develop and access knowledge, and increase our understanding in new areas of science.

We focus our research across six core areas and are using next generation technology to develop new approaches to disease management and control.

 

LOGO    Respiratory diseases   LOGO    HIV/infectious diseases    LOGO    Vaccines

 

LOGO    Immuno-inflammation   LOGO    Oncology    LOGO    Rare diseases

 

LOGO

We are focused on optimising our operations through restructuring, investment and modernisation to improve profitability and efficiency.

 

 

    

 

     

 

  
£1.4bn      9.3%       27.9%   
Incremental annual savings delivered in 2016 (including £0.2 billion currency benefit)      Total operating profit margin in 2016       Core operating profit margin in 2016a   
 


Table of Contents

LOGO

03 GSK Annual Report 2016 Investor information Financial statements Governance and remuneration Strategic report Our Pharmaceuticals business discovers, develops and commercialises medicines to treat a range of acute and chronic diseases. We have a broad portfolio of innovative and established medicines in respiratory and HIV, in which we are global leaders. We focus our research across respiratory, HIV and infectious diseases, immuno-inflammation, oncology and rare diseases. Read more on pages 20 to 27 Top three categories by sales £m Respiratory 6,510 HIV 3,556 Established products 2,541 £16.1bn Turnover % of Group turnover 58% 2bn packs of medicines produced in 2016 Our Vaccines business has the broadest portfolio of any company, with vaccines for people of all ages – from babies and adolescents to adults and older people. We deliver over two million vaccine doses per day to people living in over 160 countries. Read more on pages 28 to 33 Top three categories by sales £m Infanrix/Pediarix 769 Hepatitis 602 Meningitis 592 £4.6bn Turnover % of Group turnover 16% 833m vaccines delivered in 2016 Our Consumer Healthcare business develops and markets products in Wellness, Oral health, Nutrition and Skin health categories. Our seven global power brands – Otrivin, Panadol, parodontax, Poligrip, Sensodyne, Theraflu and Voltaren, include some of the most trusted and best-selling brands in the world. Read more on pages 34 to 39 Sales by category £m Wellness 3,726 Oral health 2,223 Nutrition 674 Skin health 570 £7.2bn Turnover % of Group turnover 26% 5bn Consumer Healthcare products produced in 2016 Pharmaceuticals Vaccines Consumer Healthcare


Table of Contents

 

04

 

 

GSK Annual Report 2016

  
    
    
    
    

Chairman’s statement

 

 

 

 

 

 

LOGO

 

GSK made further progress during 2016. Operating performance significantly improved and there was continued progress in the R&D pipeline.

 

 

 

  Read more

 

 

Governance report  

LOGO

 

  See pg 80

Our Corporate Governance report sets out our corporate governance practices and includes the reports of our Board Committees.

Remuneration  

LOGO

 

  See pg 112

Our Remuneration report sets out our remuneration arrangements for Executive and Non-Executive Directors and includes our new Remuneration policy for 2017.

Diversity statement  

LOGO

 

  See pg 96

Our Board’s Diversity policy, including gender, sets out measurable objectives which our Nominations Committee monitors and reports progress towards their achievement.

Viability statement  

LOGO

 

  See pg 56

Our viability statement sets out our assessment of the prospects of the Group over the next three years.

I am pleased to report that GSK made further good progress during 2016. Operating performance significantly improved in our three businesses and there was continued progress in the late and early stage R&D pipeline. In every important area, it has been a year of solid achievement.

2016 performance

Management continues to make strong progress in driving the sales and cost benefits from the integration of the Novartis businesses in Vaccines and Consumer Healthcare. These businesses have been transformed through the transaction and are now true global leaders in their respective markets, well positioned strategically and improving financially.

In Pharmaceuticals, new product sales have shown very good momentum, particularly in HIV and Respiratory. New products now make up around a quarter of total pharmaceutical sales. This is important given the pricing pressure faced generally by pharmaceutical companies and the potential introduction of generic competition to Advair – for many years the Group’s biggest single source of profits – in the US during 2017.

The Group’s improved operational performance also contributed to markedly increased cash generation. Operational cash flow also benefited strongly from the devaluation of Sterling following the Brexit vote in June, although the value of non-sterling liabilities for debt funding and contingent consideration, has also increased.

Ordinary dividends of 80p per share have been declared for 2016, the same level as 2015. The company expects to maintain the same payment in 2017, in accordance with the statements made in 2015. This level of distribution still exceeds the free cash flow generated by the business despite the material improvement in cash generated in 2016 referred to above. Given that 2017 is the last year of the three year dividend commitment made in 2015, the Board will be considering the appropriate dividend policy for 2018 and beyond during the course of the year.

CEO succession

A key area of focus for the Board through 2016 has been to manage the CEO succession as Sir Andrew steps down after 33 years with the company and into a tenth year as CEO. The Board conducted a thorough, global search for a successor, which included internal and external candidates.

The Board was unanimous in its decision to appoint Emma Walmsley, previously Head of GSK’s Consumer Healthcare business, as the new CEO. Emma has very strong leadership skills and a clear track record of delivery on performance. The Board believe Emma will bring new thinking to how the Group operates in today’s healthcare environment, whilst at the same time harnessing the momentum evident in current performance.

I want to thank Sir Andrew again for his dedicated service to GSK. Through his commitment and leadership GSK has built a balanced set of businesses with fine prospects and delivered very significant rewards to shareholders with substantial cash returns. He has also led efforts to address the most pressing concerns the industry faces, ranging from reforming our commercial model, increasing transparency of trial results, and ensuring medicines are priced more fairly and made more accessible to patients worldwide. He will be much missed within GSK and we wish him well in his future endeavours.

Board changes during the year

We continue to refresh the Board. In 2016 we welcomed two new Non-Executive Directors: Dr Jesse Goodman and Dr Vivienne Cox. Jesse is Professor of Medicine at Georgetown University and a leader in public health, and Vivienne brings many years experience in complex global manufacturing organisations. Meanwhile, Stacey Cartwright stepped down from the Board at the end of December. My thanks go to Stacey for nearly six years of dedicated service to the Board.

As we enter a critical period of pipeline activity, we have reflected this on the Board with the creation of a new Board Science Committee, chaired by Dr Goodman. In addition, Dr Patrick Vallance, President R&D, has joined the Board. Later this year, Moncef Slaoui will step down from the Board after 28 years with the company. Moncef is a scientist of global repute and has been a remarkable presence at GSK, particularly in the Vaccines business. We wish him, too, well in the future.

In closing, I would like to thank all GSK’s employees and partners for their hard work and dedication. The business has outstanding people and they have made 2016 a very successful year.

 

LOGO

Philip Hampton

Chairman

 


Table of Contents
             
05   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
CEO’s statement  

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

 

 

 

 

 

LOGO

 

GSK performed strongly in 2016, with good sales growth across all three businesses, excellent new product momentum and further pipeline progress.

 

 

 

 

 

 

Footnote

 

a We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS.

 

The Group executed strongly in 2016, delivering sales growth across all three businesses, remaining disciplined on costs and progressing our pipeline of innovative products.

Trading performance

Group sales rose 17% at actual rates, 6% CER (5% pro-forma) to £27.9 billion, despite the uncertainty and volatility experienced globally in 2016. Total earnings per share was 18.8p (down 89% at actual rates, 99% CER), primarily reflecting comparisons with the £9.2 billion profit in 2015 from the disposal of the marketed Oncology assets. Core earnings per share was 102.4pa – a 12% CER increase – and at the top end of our guidance for the year.

We saw growth across all three of the Group’s businesses in 2016, with a particular contribution from new Pharmaceuticals and Vaccine products. Sales from this portfolio more than doubled to £4.5 billion and in Pharmaceuticals, new products accounted for 24% of sales.

HIV products, Tivicay and Triumeq, continued to be the standout products with sales of £2.7 billion, while our new respiratory products – Relvar/Breo, Anoro, Incruse, Arnuity and Nucala – also grew strongly as did our meningitis vaccines, Bexsero and Menveo. We expect the momentum in this group of products to continue through 2017.

Our Consumer Healthcare business performed strongly, with sales up 19% at actual rates, 9% CER (5% pro-forma) to £7.2 billion, driven by power brands such as Sensodyne, Voltaren and Panadol as well as growth from Flonase which we switched from prescription to over-the-counter.

Strong R&D innovation pipeline

We filed four assets with regulators in 2016 which, if approved, have the potential to drive further growth in the business, including Shingrix, our candidate vaccine for shingles and our once-daily Closed Triple therapy for COPD. In addition, we also started a number of phase III trials for assets in HIV, respiratory and anaemia.

Investment in our R&D organisation continues to deliver significant innovation. For example, 2016 saw the European approval of Strimvelis, our first of its kind gene therapy for children with the very rare condition ADA-SCID. This remarkable technology has the potential to be a platform for a number of other gene therapies.

The next two years will be an exciting time for our R&D organisation, with key research data on 20-30 assets due by the end of 2018.

Delivering performance responsibly

GSK has a strong commitment to operating responsibly and playing our part in meeting some of society’s biggest healthcare challenges.

In 2016, we took further industry-leading steps by stopping all payments to healthcare professionals to speak about our medicines to other prescribers, and offered essential vaccines at our lowest price to organisations supporting refugees in acute need. We also introduced a new approach to filing and enforcing patents and IP based on a country’s economic maturity, and are working with partners to help the world better prepare for future epidemics such as Ebola and Zika.

I was very pleased that our efforts to operate as a values-based company were recognised when we came first in the Access to Medicine Index for the fifth consecutive time.

Outlook

The progress in 2016 highlights the investments we have made in the Group over the last several years to build scale and sustainability as well as develop new products. I expect the Group to make continued progress in 2017 and, as we enter a new period of leadership for the company, I believe GSK is well positioned to deliver long-term performance for shareholders.

Finally, as this is my last annual report before I retire, I would like to thank all our employees, partners and shareholders for their support during my time as CEO. GSK is a very special company that touches people’s lives across the world and which I have been enormously privileged to lead.

 

LOGO

Sir Andrew Witty

Chief Executive Officer

 


Table of Contents

    

LOGO

By understanding our operating environment and having
a clear strategy, against which we measure performance
and manage risks, we deliver long-term value for
shareholders and society.
We operate in a growing marketplace and our strategy
is designed to respond to the challenges and opportunities
in our sector.
R&D underpins our three businesses and we prioritise our investments
to where we see the most potential to develop innovative products for
unmet medical needs.
The market in which we operate
Demographic
change
Technological
and scientific
advances
Increased
expectations
of businesses
Increasing payer
emphasis on cost,
value and access
Our business model
Read more on page 8 Read more on page 12
06 GSK Annual Report 2016
Our integrated approach
Changing political
landscape
Manufacturing
Commercialisation
and distribution
Pharmaceuticals
Vaccines
Consumer
Healthcare
R&D


Table of Contents

LOGO

Our strategic priorities provide a framework
to create long-term value for shareholders
and society.
We assess our performance against
a set of financial and non-financial
measures, many of which form the
basis of our executive remuneration.
We manage a number of current and
emerging risks. Below, our Principal Risks
are mapped against the primary strategic
priority they are most likely to impact.
Intellectual property
Commercialisation
– Turnover growth
– Growth of earnings per share
Product quality
Research practices
Supply continuity and crisis management
– New Pharmaceuticals and Vaccines
product performance
Financial control and reporting
Information protection
– Operating profit and margin
– Free cash flow
– Dividends declared
– Net debt
Grow a balanced business and
product portfolio, centred on our
three global businesses.
Deliver more products of value to
offer improved treatment for patients,
consumers and healthcare providers.
Simplify the way we operate to reduce
complexity, increase efficiency and free
up resources to reinvest in the business
or return to shareholders, wherever we
see the most attractive returns.
Grow
Deliver
Simplify
A clear strategy for growth How we measure success How we manage risks
Read more on page 14 Read more on page 16 Read more on page 18
07 GSK Annual Report 2016
Investor information
Financial statements
Governance and remuneration
Strategic report
Patient safety
Anti-bribery and Corruption
Environment, Health and Safety
and Sustainability
– Access to Medicine Index
– Dow Jones Sustainability Index
Being a responsible business,
as how we deliver success is as
important as the results we achieve.
Responsible business


Table of Contents

 

08

 

 

GSK Annual Report 2016

  
    
  

 

 

 

We operate in a growing marketplace and

our strategy is designed to respond to the

challenges and opportunities we face.

 

 

  The market in which we operate

 

 

LOGO


Table of Contents
             
09   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

             LOGO

 

         

 

 

 

 

  Our business model

 

 

 

 

 

 

 

 

LOGO

 

 

     

 

 

 

 

  A clear strategy for growth

 

 

 

 

 

 

 

 

LOGO

 

 

     

 

 

 

 

  How we measure success

 

 

 

 

 

 

 

 

LOGO

 

 

     

 

 

 

 

How we manage risks

 

 

 

 

                       
                                                                                                         
                        
              
 

 

In 2016, the global

healthcare market

continued to grow

against a backdrop

of a challenging global

economic environment.

  

 

Global pharmaceutical sales were £648 billion on a 12 month rolling basis (September 2015-2016), up from £605 billion during the equivalent period (September 2014-2015). North America remained the largest pharmaceuticals market with a 50% share of global sales. Europe represented 21%, Asia Pacific (including Japan) was 21% and emerging markets was 8%.b

 

Global vaccine sales totalled ~£18 billion in 2016 and are expected to grow 5% annually by 2022.c

 

The consumer healthcare markets in which GSK operates account for approximately $70 billion, and are projected to grow 3-4% annually over the next five years.d

 

Societal trends supported market growth, but are also contributing to challenges in the healthcare sector, particularly on price and affordability.

 

Demographic change

The world population continues to grow and, according to the United Nations, is predicted to reach 8.5 billion by 2030. The proportion of elderly people is growing and the number of people over the age of 60 is expected to reach 1.4 billion by 2030.e At the same time, developing countries are experiencing growth in their middle classes, and by 2030 it is expected that 60% of the world’s population will be middle class.f

 

In emerging markets, long-term economic growth, increasing expectations of healthcare provision, and changing diets and lifestyles are increasing demand for healthcare products, especially to treat chronic conditions including respiratory and cardiovascular disease. This demand is expected to grow significantly faster in these markets over the coming years than in more mature economies.

     

In developed economies, demand for healthcare provision continues to remain high, although the dynamics are becoming more complex. Trends such as higher life expectancy are contributing towards the increasing proportion of elderly people, and along with improvements in medical technology, are putting pressure on healthcare budgets.

 

 

The changing global political landscape

Shifting attitudes to globalisation and free trade, wage stagnation for many and concerns about inequality are causing significant volatility and uncertainty in western markets.

 

2016 was characterised by political uncertainty and this was exemplified by the vote to leave the EU in the UK and the result of the US Presidential Election. Political uncertainty in Europe is expected to continue in 2017 with national elections in France and Germany.

 

In the US there is also uncertainty as to how the new administration will shape healthcare, particularly with respect to repealing and replacing the Affordable Care Act, prescription drug pricing and regulation. This is coupled with questions over the impact of the new administration’s economic, tax and trade policies.

 

In the UK, it remains unclear how Brexit will affect the country’s trading relationships, corporate taxation policy, the movement of people, and regulatory affairs.

 

Footnotes

 

a   World Population Ageing 2015 Highlights. United Nations.

 

b   IMS data (latest available at time of publishing).

 

c   Internal data and EvaluatePharma, World Preview 2016.

 

 

d   Internal forecasts based on Nicholas Hall and Euromonitor.

 

e   World Population Ageing 2015 Highlights. United Nations.

 

f    Future State 2030: The global megatrends shaping government. KPMG.

 

   
                        


Table of Contents

 

10

 

 

GSK Annual Report 2016

  
    
  

 

 

    

 

 

  The market in which we operate continued

 

 
                        
              
   

Our strategy to create

a balanced business

and product portfolio

positions us well for

the changes in our

marketplace.

  

Increasing payer emphasis on cost, value and access

Demographic changes are contributing to increased demand for healthcare and in turn putting pressure on government budgets and payers. This has led to continued focus on, and public debate about, the industry’s approach to drug pricing across all key markets.

 

In the US the ultimately unsuccessful Proposition 61 vote, which called for medicine price controls in California, was the first of several drug pricing ballot initiatives expected in the US. There has also been increasing use of healthcare technology assessments to consider value for money as well as medical efficacy, by government-appointed bodies like the UK’s National Institute for Health and Care Excellence and Australia’s Pharmaceutical Benefits Advisory Committee.

 

As demand for healthcare in emerging markets rises, governments are continuing to reform healthcare systems to support access. In China, the government continues to work to realise the goals set out in the Healthy China 2030 plan, with significant measures taken during the year to reduce pharmaceutical prices through the National Price Negotiations.

 

During the year, the UN’s High-Level Panel on Access to Medicines report, reiterated the rights of countries to issue compulsory licences to access cheaper supplies of generic drugs.

 

We expect the political and public scrutiny on pricing to continue.

 

 

       

Technological and scientific advances

Key advances in the understanding of human biology and genomics are leading to fundamental changes in how we research diseases, and the pharmaceutical industry’s ability to develop treatments specifically to tackle them with innovative treatment approaches has increased substantially in recent years. Alongside these scientific advances, digital technology and data analytics are enabling researchers to explore and interpret larger volumes of biological data from genomics and disease biology than ever before. This is providing opportunities to increase the speed and efficiency of drug discovery and the development of novel therapies that could transform how diseases are managed.

 

Increasing expectations of companies

Beyond our sector-specific context, where value, cost and affordability are so important, society has increasing and changing expectations of companies, particularly of large global companies. Stakeholders – from employees to consumers to policy makers and influencers – expect companies to behave with integrity and fairness; operate transparently; be connected to their local communities; and play their part in addressing global challenges from health epidemics to climate change. Responding to this requires strong partnership and connectivity between public and private sector organisations.

 

   


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11   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

             LOGO

 

         

 

 

 

 

  Our business model

 

 

 

 

 

 

 

 

LOGO

 

 

     

 

 

 

 

  A clear strategy for growth

 

 

 

 

 

 

 

 

LOGO

 

 

     

 

 

 

 

  How we measure success

 

 

 

 

 

 

 

 

LOGO

 

 

     

 

 

 

 

How we manage risks      

 

 

 

 

                       
                                                                             
                             
 

Our strategic response

 

 

           
 

 

Three world-leading

businesses, underpinned

by innovative R&D

 

LOGO

 

             

 

GSK is well positioned to take advantage of demographic-led demand for new innovative products with our three world-leading businesses in Pharmaceuticals, Vaccines and Consumer Healthcare, and our global presence in more than 150 markets. For example, in emerging markets, where significant demographic changes and societal trends are increasing demand for healthcare, our Pharmaceuticals business sells 47% more volume than our nearest competitor. In emerging markets, we sell 70% of our vaccines, and the region represents one-third of our Consumer Healthcare business.

 

Our strategy to create three balanced businesses helps mitigate risk because we can access growth opportunities around the world and navigate changes both in our portfolio and the challenges we face in today’s operating environment.

 

       
               
             
 

 

A global company

with a significant

local presence

 

LOGO

 

             

 

As a global company, we understand the benefits of free trade and globalisation but also the importance of companies like ours having a significant local presence in the communities in which we operate. We have a large global footprint and can make an important contribution to the markets in which we operate in, for example, through the tax we pay and the jobs we create.

 

Engaging with government, both directly and through industry trade bodies such as ABPI and BIA, is an important way we can inform policy that will impact our sector. For example, through the UK EU Life Sciences Steering Group, GSK is working closely with our peers and the UK government to address the needs of our industry during the EU exit negotiations. Overall, we continue to believe that Brexit will not cause a material impact on our financial position in the long term, but may cause some disruption over the short-term.

 

       
               
             
 

 

Global and

sustainable

pricing

 

 

LOGO

 

             

 

Our strategy to focus on pricing our products at a level that provides attractive volume expansion opportunities means we are able to access patients and consumers around the world.

 

We understand payer and patient concerns about the affordability of healthcare, and we are leading efforts to develop sustainable solutions. Our equitable pricing strategy for medicines and vaccines is based on the country, disease area, product type and the patient’s ability to pay. In the US, we have launched our six newest products priced similar to or below those of the medicines we aim to replace. We are also pioneering efforts to show the impact our medicines can have in real-world clinical practice settings.

 

As a research-based company, we rely on the protection of patents, regulatory data exclusivity, and other rights, to ensure a reasonable return on our investment. However, we recognise the need for a flexible approach to patent protection. In 2016, we expanded our current approach to filing and enforcing patents by opting not to file for patent protection in least-developed and low-income countries and by granting licences to generic manufacturers to supply versions of our medicines in lower middle income countries (other than G20 countries).

 

       
               
             
 

Leading responsible
business approach

 

LOGO

 

             

Being a responsible business is fundamental to GSK. We understand that society requires businesses to behave with integrity. How we operate is as important as the financial results we deliver: we lead industry efforts on access to medicines; clinical trial data transparency; and the fight against anti-microbial resistance. In evolving our commercial model to ensure patients’ interests come first, we no longer pay healthcare professionals to speak on our behalf.

 

       
                             


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12

 

 

GSK Annual Report 2016

  
    
  

 

 

 

R&D underpins our three businesses and we prioritise our investments to where we see the most potential to develop innovative products for unmet medical needs.   

 

 

 

  The market in which            
  we operate

 

 

 

 

 

 

LOGO

 

 

      

 

Our business model

           
                  
                      
 
   

 

  Our resources                

 

 

   

 

  How we create value

 

 

  
 
          

 

LOGO

 

 

 


Table of Contents
             
13   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

                                                            LOGO

 

         

 

 

 

 

  A clear strategy for growth

 

 

 

 

 

 

 

 

LOGO

 

 

     

 

 

 

 

  How we measure success

 

 

 

 

 

 

 

 

LOGO

 

 

     

 

 

 

 

How we manage risks  

 

 

 

 

                 
                                                         
                      
   
     

 

  The value we create

 

 

    
   
               
 

 

 

With an efficient
global operating model...

 

 

Manufacturing

 

LOGO

 

 

Commercialisation
and distribution

 

LOGO

   

 

 

LOGO

 

         
                       
             
               

Footnote

 

a  We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS.

 

         


Table of Contents

 

14

 

 

GSK Annual Report 2016

  
    
  

 

 

 

Our strategic priorities provide a framework to

create long-term value for shareholders and society.

 

             

 

 

 

 

  The market in which we operate

 

 

 

 

 

 

 

 

LOGO

 

 

   

 

 

 

 

  Our business model

 

 

 

 

 

 

 

 

LOGO

 

 

     A clear strategy for growth
            
                                          
       
   

 

Strategic priorities

 

   

 

Progress in 2016

 

   
    LOGO    

  Global sales: £27.9 billion, up 17% AER; 6% CER; 5% pro-forma CER

 

  New Pharmaceutical and Vaccine product sales were £4.5 billion, up >100% AER; >100% CER

  

18.8p

Total earnings per share

(down 89% AER; 99% CER)

 

  
   

Grow a balanced business and product portfolio, centred on our three global businesses.

 

   

 

  Consumer Healthcare sales were £7.2 billion (up 19% AER; 9% CER; 5% pro-forma CER), with strong contributions from power brands

  

102.4p

Core earnings per share

(up 35% AER; 12% CER)a

 

22%

New Pharmaceutical and Vaccine product sales

 

  
       

 

   
    LOGO    

  Four filings with regulators, including Shingrix candidate vaccine and Closed Triple

 

  EU approval for Strimvelis, the first gene therapy for rare disease (ADA-SCID)

 

  13% of Consumer Healthcare innovation sales from products launched in the last three years

  

4

filings with regulators in 2016

  
   

Deliver more products of value to offer improved treatment for patients, consumers and healthcare providers.

 

 

 

         
       

 

   
    LOGO    

  Improved core operating leverage across all three businesses

 

  Incremental annual cost savings of £1.4 billion delivered (including £0.2 billion currency benefit)

 

  Continued to roll out new global systems and standardisation of our processes

  

9.3%

Total operating profit margin

 

27.9%

Core operating profit margin

(up 2.6 percentage points

pro-forma CER)a

  
   

Simplify the way we operate to reduce complexity, increase efficiency and free up resources to reinvest in the business or return to shareholders, wherever we see the most attractive returns.

 

 

 

 

         
       

 

   
    LOGO    

  Expanded graduated approach to patents and IP to widen access to medicines

 

  Committed to supply essential vaccines at the lowest price to civil society organisations for refugees

 

  EMA approval for chlorhexedine, our antiseptic gel for newborn umbilical cord infections in developing countries

  

1st

in the Access to Medicine Index

 

3rd

in our sector for Dow Jones Sustainability Index

  
   

Being a responsible business, as how we deliver success is as important as the results we achieve.

 

 

 

         
       

Footnote

 

a   We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER and

     pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not

     as a substitute for or superior to, information presented in accordance with IFRS.

  
                           


Table of Contents
             
15   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

             LOGO

 

         

 

 

 

 

  How we measure success

 

 

 

 

 

 

 

 

LOGO

 

 

     

 

 

 

 

How we manage risks  

 

 

 

 

           
                                     
   

 

Key challenges in 2016

 

     

 

Key priorities in 2017

 

        
   

 

 Continued pricing pressure in the US and Europe

 

 Volatility and slowing emerging market economies

   

 

LOGO

 

 

 

–  Deliver our 2017 guidance

 

–  Drive sales and market growth for respiratory, HIV, meningitis vaccines, and power brands

 

–  Progress the four regulatory filings made in 2016 and launch successfully if approved

 

–  Manage impact of possible generic competition to Advair in the US

    
   

 

 Continued prioritisation of the pipeline and appropriate deployment of resources

 

 Increasing global demand for vaccines and complex manufacturing process leading to supply pressures

   

 

LOGO

 

 

 

–  Deliver key data on 20-30 assets by the end of 2018 and manage prioritisation of capital allocation

 

–  Continue to improve efficiency and capacity of supply chain for new and existing products

    
   

 

 Integration of reporting systems and processes following Novartis transaction

   

 

LOGO

 

 

 

–  Continue to roll out new global systems and standardisation processes

 

–  Continue to focus on improving cash conversion and management of working capital

 

–  Continue to optimise capital expenditure

    
 

 

 Responding to stakeholder concerns on affordability and access

 

 Continue to strengthen values- based culture

   

 

LOGO

 

    

 

 

–  Ensure sustainable funding for biopreparedness organisation to enhance preparedness against future epidemics

 

–  Embed flexible approach to IP and patent protection

    
                      


Table of Contents

 

16

 

 

GSK Annual Report 2016

  
    
  

 

 

 

We assess our performance against a set of financial

and non-financial metrics, many of which form the

basis of our executive remuneration.

 

 

 

LOGO


Table of Contents

LOGO

17 GSK Annual Report 2016
Investor information
Financial statements
Governance and remuneration
Strategic report
£13.8bn
1st
We have been first since the
index began in 2008
Access to Medicine Index ranking
Net debt
How we manage risks
2016
2015
2014 14.4
10.7
13.8
Key R The remuneration of our executives is linked to the key indicators marked. See page 119.
2016
2015
2014
4.7e
2.6
2.5e
(44)
n/a
>100
3.9e
3.1
(0.2) £3.1bn
Free cash flowd
Growth £ %
R
Dow Jones Sustainability Index ranking
3rd
in the pharmaceutical industry
(2016: 95th percentile 2015: 89th percentile,
2014: 98th percentile)
See page 43 for more information See page 43 for more information
Footnotes
a Excluding divestments completed in 2013.
b New products defined as:
Pharmaceuticals: Relvar/Breo Ellipta, Anoro Ellipta, Incruse Ellipta, Arnutiy Ellipta, Eperzan/Tanzeum, Nucala, Tivicay, Triumeq.
Vaccines: Menveo, Bexsero, Shingrix (not yet approved).
c 2015 includes special dividend.
d We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER
and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS.
e Free cash flow excluding payments for legal costs, restructuring, tax on the Oncology disposal and the purchase of HIV clinical assets which are treated as
intangible asset purchases.
2016
2015
2014 3.8
2.0 3.9
3.9
1.0c
Dividends
£3.9bn
Dividends declared


Table of Contents

 

18

 

 

GSK Annual Report 2016

  
    
  

 

 

We manage current and emerging risks that may

impact our strategic priorities through rigorous and

consistent risk management processes.

 

 

 

  The market in which

  we operate

 

  

 

 

 

LOGO

 

 

      

 

Our business model        

 

  

 

 

 

LOGO

 

 

      

 

A clear strategy for growth

 

  

 

 

 

LOGO

 

 

      

 

How we measure success

 

  

 

 

 

LOGO

 

 

    
                             
                                                                     

 

Our principal risks are regularly reviewed by the Corporate Executive Team to assess whether they are reflective of the most significant risks facing the organisation, based on evolving internal and external factors. The table opposite lists the principal risks that were managed across the Group in 2016. It also includes our definition of each risk and our assessment of any change in the risk during the year, both at a macro level and after GSK’s mitigating activities.

 

 

 

Arrows key

 

LOGO  Increased risk

 

LOGO  No change to risk

 

LOGO  Decreased risk

 

       

 

Principal risk and description

 

Patient safety

 

Failure to appropriately collect, review, follow up, or report adverse events from all potential sources, and to act on any relevant findings in a timely manner.

    

 

Intellectual property

 

Failure to appropriately secure, maintain and enforce intellectual property rights.

    

 

 

Product quality

 

Failure to comply with current Good Manufacturing Practices (cGMP) or inadequate controls and governance of quality in the supply chain covering supplier standards, manufacturing and distribution of products.

    

 

Financial controls and reporting

 

Failure to comply with current tax law or incurring significant losses due to treasury activities; failure to report accurate financial information in compliance with accounting standards and applicable legislation; failure to maintain adequate governance and oversight over third-party relationships.

 

    

 

Anti-bribery and Corruption

 

Failure of GSK employees, consultants and third parties to comply with our Anti-bribery and Corruption (ABAC) principles and standards, as well as all applicable legislation.

 

    

 

Commercialisation

 

Failure to execute business strategies, or effectively manage competitive opportunities and threats in accordance with the letter and spirit of legal, industry or the Group’s requirements.

    

 

Research practices

 

Failure to adequately conduct ethical and sound pre-clinical and clinical research. In addition, failure to engage in scientific activities that are consistent with the letter and spirit of the law and industry, or the Group’s requirements.

    

 

Environment, Health and Safety and Sustainability

 

Failure to manage Environment, Health and Safety and Sustainability (EHS&S) risks in line with our objectives and policies and with relevant laws and regulations.

    

 

Information protection

 

The risk to GSK business activities if information becomes disclosed to those not authorised to see it, or if information or systems fail to be available or are corrupted.

    

 

 

Supply continuity and crisis management

 

Failure to deliver a continuous supply of compliant finished product; inability to respond effectively to a crisis incident in a timely manner to recover and sustain critical operations. This risk was previously called Crisis and continuity management.

    

 

 

LOGO

 

  

For more extensive information on GSK risks, including risk impact and mitigating activities, see pages 253 to 262.

 

See page 56 for our viability statement.

 

       


Table of Contents
             
19   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

   

 

How we manage risks

 

     
                                              
   

2016 assessment

 

     

 

Macro
environment

 

 
 

 

     

 

GSK exposure
post mitigation

 

 
 

 

    
   

 

   The macro environment has remained stable, with patient safety regulation and standards remaining consistent.

 

   We have improved safety data management, patient communications and product labelling. These improvements are being incorporated throughout the organisation, leaving the GSK exposure level unchanged.

 

   

 

 

 

LOGO

 

 

   

 

 

 

LOGO

 

 

    
   

 

   The macro risk is unchanged due to no significant changes that affect our ability to secure, maintain and enforce patents.

 

   The GSK exposure level is stable, based on the maturity of our risk management processes and general ability to enforce and defend patents where appropriate.

 

   

 

 

 

LOGO

 

 

   

 

 

 

LOGO

 

 

    
   

 

   The macro risk is higher, with increasing regulatory scrutiny of data integrity, supply continuity and drug shortages, accompanied by new guidance and revised legislation.

 

   Despite the challenging macro environment, the GSK exposure level is unchanged, reflecting effective responses to external regulatory reviews during 2016, a greater focus on data integrity and improved governance.

 

   

 

 

 

LOGO

 

 

   

 

 

 

LOGO

 

 

    
   

 

   The macro environment has remained stable, due to no material change in financial reporting requirements.

 

   The unchanged GSK exposure level is reflective of the significant IT systems and operating model changes that are being implemented throughout the organisation, as well as continued risk from third-party relationships. While we expect that these system and model changes will reduce risk in the future, the risk impact from these changes is being mitigated through strong risk management and governance, as well as the continued progress of the global Third Party Oversight programme.

 

   

 

 

 

LOGO

 

 

   

 

 

 

LOGO

 

 

    
   

 

   The macro environment has remained stable, with the regulatory environment and global attitude towards Anti-bribery and Corruption remaining within expectations.

 

   The GSK exposure level is lower as our risk management practices have gained strength and are embedded deeper across the organisation through our ABAC programme, which builds on the Group’s values and standards and has enabled us to manage the risk more effectively.

 

   

 

 

 

LOGO

 

 

   

 

 

 

LOGO

 

 

    
   

 

   The macro risk level has increased due to greater industry pricing pressures and increased regulatory scrutiny in respect of sales and promotional activities.

 

   The GSK exposure level is unchanged, as we implement industry-leading changes in our operating model and in particular in the compensation model for sales representatives and our relationships with healthcare professionals.

 

   

 

 

 

LOGO

 

 

   

 

 

 

LOGO

 

 

    
   

 

   The macro risk level is elevated due to increased regulatory scrutiny of Good Clinical Practices.

 

   The GSK exposure level is unchanged based on mature internal control processes and an enhanced governance programme, designed to promote best practice across the business units.

 

   

 

 

 

LOGO

 

 

   

 

 

 

LOGO

 

 

    
   

 

   The macro risk level is higher due to greater focus and increased regulatory activity on environmental issues.

 

   The GSK exposure level is unchanged due to our controls and governance being well established and capable of allowing for the increased focus and regulatory activity.

 

   

 

 

 

LOGO

 

 

   

 

 

 

LOGO

 

 

    
   

 

   The macro risk has increased as the threat has become more sophisticated and targeted, with a higher volume of incidents.

 

–   The GSK exposure level is unchanged while we see the effects of the substantial progress we have made in upgrading our level protection against cyber attacks and safeguarding our critical and sensitive data.

 

   

 

 

 

LOGO

 

 

   

 

 

 

LOGO

 

 

    
   

 

   Macro factors such as regulatory focus on contract manufacturers outside of the US and EU and increased data integrity expectations, are increasing supply risk.

 

   The GSK exposure level is stable, based on the significant improvements delivered through our ongoing supply remediation programmes and our increased monitoring and supervision of third parties.

 

   

 

 

 

LOGO

 

 

   

 

 

 

LOGO

 

 

    
              
                                              


Table of Contents

LOGO

20 GSK Annual Report 2016
Pharmaceuticals
Our Pharmaceuticals business discovers,
develops and commercialises medicines
to treat a broad range of the world’s most
common acute and chronic diseases.
As a leader in
respiratory, GSK has
been at the forefront
of research in this area
for over 45 years.


Table of Contents

LOGO

21 GSK Annual Report 2016
Investor information
Financial statements
Governance and remuneration
Strategic report
Grow
£16.1bn
2016 Pharmaceutical
reported sales were up
14% AER and 3% CERa
(4% pro-forma CER).
Sales of new products
were 24% of
Pharmaceutical sales.
Deliver
3
There were three filings
with regulators in 2016
for Closed Triple, Benlysta
subcutaneous and
sirukumab.
Responsible
business
6 We have launched our
last six new products in
the US priced similar to
or below those we aim
to replace.
Simplify
34.1%
Operating profit margin
in 2016 was 34.1%,
3.7 percentage points
higher than in 2015 and
1.2 percentage points higher
on a CER pro-forma basis.
Footnote
a We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including
core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not
as a substitute for or superior to, information presented in accordance with IFRS.


Table of Contents

 

22

 

 

GSK Annual Report 2016

  
    
  

 

Pharmaceuticals

 

 

 

LOGO

Overview

Our Pharmaceuticals business has a portfolio of innovative and established medicines across a broad range of therapy areas, including respiratory and HIV, in which we are global leaders, as well as immuno-inflammation, anti-infectives, urology and rare diseases. Around a quarter of Pharmaceutical sales come from products launched over the past four years.

Respiratory

We have the industry’s broadest range of inhaled respiratory products. Our respiratory portfolio is the largest contributor to Pharmaceutical sales and our expectation is that by 2020, nine products will account for approximately 90% of respiratory sales, compared to four in 2015.

In the past four years, we have launched a new generation of respiratory products including Nucala (mepolizumab) and our Ellipta portfolio.

HIV

Our global HIV business is managed through ViiV Healthcare, a company 78.3% owned by GSK, with Pfizer and Shionogi the other shareholders.

ViiV Healthcare is growing rapidly, and accounts for over 20% of Pharmaceutical sales. This was led by strong demand for Tivicay (dolutegravir), an innovative integrase strand transfer inhibitor, and Triumeq, a single-pill treatment combining dolutegravir, abacavir and lamivudine.

Specialty products

Our Specialty products portfolio includes medicines such as Benlysta, a treatment for lupus disease, and Tanzeum/Eperzan, for Type 2 diabetes.

Classic and Established products

Our Classic and Established products include over 400 post-patent medicines in the areas of anti-infectives, allergy, neurosciences, dermatology, respiratory and urology. Many of these medicines continue to be the top-selling brand in their therapy area. These products are an important part of our emerging markets business, where we sell 47% more volume than our nearest competitor.

 

 

 

   

 

A leader in respiratory

    

         
   

 

    
   

 

LOGO

  

 

As a leader in respiratory, GSK has been at the forefront

of research in this area for over 45 years.

    
      

 

Today we have over 13,500 patients in clinical studies investigating chronic obstructive pulmonary disease (COPD) in almost 40 countries. We believe that insights from this research, alongside our early phase scientific discovery, will help us meet patient needs well into the future.

 

Our new generation of inhaled respiratory medicines are clear evidence of the benefits of our research. This range – including Anoro Ellipta, the world’s leading long-acting muscarinic antagonist/long-acting beta-agonist against COPD by value – is giving physicians the unprecedented choice to provide the right treatment to the right patient.

 

This year, we filed for regulatory approval for our Closed Triple therapy in the US and Europe. If approved, this will be the first COPD treatment to combine three vital once-daily treatments in a single inhaler.

 

  

 

This will ensure patients get the full benefits, in one inhalation, from all their treatments. Research shows that patients taking the medicine experienced improved lung function, a higher quality of life and fewer exacerbations compared to a leading twice-daily treatment.

 

Looking beyond inhaled medicines, we are now tackling the areas of highest unmet need in respiratory diseases. In 2015 we launched Nucala, our first injectable biologic treatment for severe eosinophilic asthma. Study results showed that, for patients using Nucala, the risk of experiencing an asthma attack requiring emergency hospital care was half that of those receiving the current standard of care.

    


Table of Contents
             
23   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

 

Grow    LOGO

 

Sales of our Respiratory products returned to growth of 2% in 2016.

  

 

 

 

 

 

 

All growth rates are at CER, a non-IFRS measure as described on page 57, unless otherwise stated.

 

2016 performance summary

Reported Pharmaceutical sales were £16,104 million, up 14% at actual rates and 3% CER. Adjusting for the disposal of the Oncology business to Novartis in 2015, pro-forma turnover was up 4% CER.

Performance reflected a return to growth of the respiratory business, which grew 2%. Sales of new Respiratory products launched over the last four years, including our Ellipta based products Breo, Anoro, Arnuity and Incruse as well as biologic Nucala, more than doubled to £1,052 million. HIV sales increased 37% to £3,556 million, with the US up 46%. This was driven primarily by strong performances from both Triumeq and Tivicay, with sales of £1,735 million and £953 million.

Sales of new Pharmaceutical products were £3,861 million and now account for 24% of total Pharmaceutical sales.

US Pharmaceutical sales were £4,705 million and declined 1% on a reported basis (up 1% pro-forma). Respiratory sales grew 7%, and sales of new Respiratory products were £654 million, exceeding the decline in Advair.

In Europe, Pharmaceutical reported sales declined 8% (5% pro-forma). Respiratory sales declined by 10%, reflecting the ongoing transition to the new Respiratory portfolio and generic competition to Seretide. This was partly offset by growth in the new Respiratory products, which recorded sales of £225 million. Established products were down 4% to £513 million.

International sales were £4,976 million, down 5% (4% pro-forma). Sales in Emerging Markets were impacted by the decline in the China business, primarily as a result of the ongoing reshaping programme and broader Healthcare reforms, including price reductions.

Worldwide HIV sales increased 37% to £3,556 million, with the US up 46%, Europe up 29% and International up 21%. This growth was primarily driven by strong performance from Triumeq and Tivicay.

In 2016, we continued to implement our new commercial model. We stopped payments to HCPs to speak on our behalf in January and continued our drive to recruit HCPs as internal medical experts. In addition, we continued to roll out digital tools to further our medical education efforts. Following medical product information sessions with GSK experts in over 60 countries, 92% of more than 42,000 HCPs agreed that the interaction helped them make a more informed decision benefiting patient care. Around 79% rated their experience as superior to similar interactions with other pharmaceutical companies.

 

 

   

 

We are working hard in early stage research to find a cure for HIV/AIDS

 

   
   

 

   
   

 

LOGO

 

 

We have formed a unique partnership to accelerate the search
for an HIV cure.

 

   
   

More than 36 million men, women and children around the world live with HIV. As a leading research-based pharmaceutical and healthcare company, we have a legacy of success in developing treatments for HIV.

 

GSK has a strong pipeline of new medicines and our HIV scientists continue to work towards the goal of one day finding a cure for the HIV/AIDS epidemic.

 

We continue to invest in the HIV Cure Center and Qura Therapeutics, our unique joint- ownership collaboration created in 2015 with The University of North Carolina (UNC-Chapel Hill), with a single focus on finding a cure for HIV/AIDS.

 

 

  This partnership is recruiting top talent from around the world and redefining the traditional way of conducting research in HIV/AIDS. One of the approaches being investigated is known as ‘shock and kill’ which seeks to reveal the hidden virus that persists in people with HIV infection despite successful drug therapy, and augment the patient’s immune system to clear these last traces of the virus and infected cells.    


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24

 

 

GSK Annual Report 2016

  
    
  

 

Pharmaceuticals continued

 

 

 

 

 

 

 

Deliver   LOGO

 

In 2016, we achieved accelerated filing for the first once-daily Closed Triple therapy for COPD, received approval in Europe for our first gene therapy medicine and obtained positive data to support a new single tablet two-drug HIV regimen.

Our Pharmaceuticals R&D organisation drives discovery and development in several areas of research, including respiratory, HIV, infectious diseases, immuno-inflammation, oncology and rare diseases.

2016 progress

We continued to see progress across all stages of our R&D pipeline. In respiratory, we filed our once-daily Closed Triple therapy for COPD for regulatory approval in both Europe and the US, bringing forward our original US filing date by 18 months. We also announced positive results from the pioneering COPD Salford Lung Study. The study showed that, compared to those receiving usual standard of care, COPD patients using Relvar/Breo Ellipta achieved a superior reduction in exacerbations in an everyday clinical practice setting.

We also strengthened the prospects for our next wave of respiratory medicines with the in-licensing of a novel anti-IL33R antibody for severe asthma, and new data supporting the progression of a potential oral treatment, danirixin, into phase IIb clinical development for potential use in treating patients with COPD.

Our HIV pipeline contains a number of promising medicines and regimens, with innovative formulations, mode of action and delivery methods. We announced positive results from two phase III studies evaluating a two-drug regimen combining dolutegravir and rilpivirine (Edurant, a Janssen medicine). By breaking the mould of conventional three-drug treatments, this therapy could reduce and streamline HIV medication in the future.

We have three further HIV programmes in phase III: a new attachment inhibitor; another two-drug regimen, combining dolutegravir and lamivudine; and cabotegravir, a once-monthly injectable therapy, which combined with long-acting rilpivirine could also make HIV treatment simpler and easier to adhere to. In addition, we announced the start of a phase III study to evaluate long-acting cabotegravir as an injection every two months, for prevention in men who have sex with men at risk of HIV infection. We also completed the acquisitions of the BMS HIV pipeline and discovery teams and programmes, which have now been fully integrated into ViiV Healthcare’s R&D organisation.

 

 

 

 

LOGO


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25   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

 

 

  20-30
 

assets with data expected

by the end of 2018.

 

We continued to strengthen our emerging immuno-inflammation portfolio, with regulatory filings in Europe and the US; a subcutaneous formulation of Benlysta, our treatment for systemic lupus disease currently available as an IV formulation; and sirukumab, an investigational IL-6 treatment for rheumatoid arthritis which we are co-developing with Janssen. If approved, both treatments will be self-administered at home, making them a convenient treatment option for patients.

In 2016, we also gained approval of Strimvelis, the first corrective gene therapy for children suffering from the very rare disease ADA-SCID (adenosine deaminase severe combined immunodeficiency) – see case study below.

We started several phase II studies including: one to evaluate an anti-GM-CSF (anti-granulocyte macrophage colony-stimulating factor) monoclonal antibody for inflammatory hand osteoarthritis; the other assessing an oral RIP1 kinase inhibitor, for rheumatoid arthritis and psoriasis patients.

We also received positive phase II data for our first-in-class antibacterial gepotidacin, in treating gonorrhoea, for which the US Food and Drug Administration (FDA) has granted fast-track status on the basis of the serious unmet need for new medicines in this area.

In oncology, we have 11 assets in clinical development and have seen encouraging developments in our core areas of immuno-oncology, cell therapy and epigenetics. During the year, the FDA granted breakthrough therapy status to the affinity enhanced T-cell therapy, which targets the antigen NY-ESO in synovial cancer that we are developing with Adaptimmune.

During 2016, we terminated the development of Iosmapimod for COPD following analysis of phase II results, and halted development of the HIV maturation inhibitor 3532795 in favour of other maturation inhibitors in our pipeline that may have a better profile.

2017/2018 milestones

The coming two years will be significant for the pharmaceutical pipeline, marking the start of another intense period of R&D activity for the company, as we expect important data on between 20 and 30 assets in areas including HIV, respiratory, immuno-inflammation and oncology.

 

 

   

 

Approval of GSK’s first gene therapy opens new chapter in treatment of rare diseases

     

   
   

 

LOGO

  

 

The application of groundbreaking technology has resulted in the world’s first corrective gene therapy for children.

 

   
    

The European Commission’s approval of Strimvelis, a one-time treatment for ADA-SCID (adenosine deaminase severe combined immunodeficiency) is the first authorisation of a corrective stem cell gene therapy for children and a major milestone in our commitment to developing innovative transformative medicines.

 

  

Working together, we took an experimental medicine procedure and developed rigorous manufacturing and quality control systems to ensure it could be evaluated by regulators.

 

A 100% survival rate three years after treatment was observed for all children in the pivotal study. Every child receiving Strimvelis who contributed to the marketing authorisation data package is alive today. Patients referred for treatment will receive the gene therapy at Ospedale San Raffaele.

 

We hope Strimvelis will be the first of a number of innovative gene therapy medicines that we will bring to patients over the next few years.

 

Two further programmes using the same platform, in metachromatic leukodystropy and Wiskott-Aldrich syndrome, are both in clinical trials.

   
     ADA-SCID, which is caused by a faulty gene inherited from both parents, affects around 15 newborns in Europe each year. A child born with ADA-SCID does not have a healthy, fully-functioning immune system and, as a consequence, is unable to fight off everyday infections. The treatment involves correcting this often fatal disorder using the patient’s own cells.       
      

 

The development of Strimvelis follows a collaboration between GSK and the original Italian developers, the San Raffaele Telethon Institute for Gene Therapy in Milan, Italy.

      
                          


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26

 

 

GSK Annual Report 2016

  
    
  

 

Pharmaceuticals continued

 

 

 

 

Deliver continued

 

 

 

  1,500
 

Our range of partners includes academic institutions, public-private partnerships, and pharmaceutical and biotechnology companies.

 

Pharmaceuticals R&D approach

We focus our investment on areas where we believe there are the most attractive opportunities, having considered patient need, market opportunity and scientific understanding. We concentrate on mechanisms that might slow down or reverse the course of diseases and present opportunities to achieve remission or cure.

Our early research efforts centre on around 30 discovery performance units. These nimble units have their own budgets and project accountability, so are different from the traditional hierarchical R&D model. They help us to maintain flexibility, create agility, and enable us to focus on the most promising early opportunities.

As a treatment advances, Medicines Development Teams of multi-disciplinary specialists ensure its progress from investigational medicine and later stage development to filing with regulators and ongoing evidence generation.

Strategic issues and overall budget management are overseen by the R&D management team. Robust governance boards manage investment, technical, scientific and commercial decisions throughout a molecule’s lifecycle.

Collaboration with external partners is an important part of our approach. We partner with more than 1,500 organisations around the world, including academic institutions, public-private partnerships, and other pharmaceutical and biotechnology companies.

 

 

 

 

 

 

   

 

Collaborating with the Francis Crick Institute

     

   
   

 

LOGO

  

 

GSK joins forces with world-leading biomedical research centre.

   
    

 

A landmark collaboration between GSK and the Francis Crick Institute aims to achieve new breakthroughs in understanding and treating diseases.

 

The open innovation collaboration combines our pharmaceutical R&D expertise with the Crick’s deep knowledge of disease biology.

 

Our mutual aim is to explore new avenues of medical research and drug discovery across a range of diseases. The collaboration takes a ‘LinkLabs’ approach to working, with teams of scientists from each organisation working side-by-side in integrated teams at the Crick’s world-leading centre of biomedical research in the heart of London and GSK’s global R&D hub in Stevenage. GSK and the Crick believe this fluid interchange of skills and ideas benefits both sides, introducing new ways of working and stimulating the development of

 

  

 

novel approaches to problems. By pooling our knowledge and resources we hope the collaboration will ultimately improve the success rate for discovering new medicines.

 

In the spirit of open innovation, research

findings from the collaboration will be shared externally, via joint publication in peer-reviewed journals. This will enable important discoveries to be applied across the research community, maximising the potential to progress scientific understanding and accelerate the development of treatments for patients.

 

The Francis Crick Institute is a charity funded by the Medical Research Council, Cancer Research UK, the Wellcome Trust, University College London, Imperial College London and King’s College London.

   


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27   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

 

 

Simplify

Our supply chain transformation programme has delivered significant reductions in manufacturing costs and streamlined our external supply network.

  LOGO     

 

In 2016, we continued to reshape our Pharmaceuticals business and reduce complexity in our supply chain while maintaining our commitment to quality.

 

Cost savings generated in the Pharmaceutical business have contributed to the delivery of £3 billion of annual savings (including £0.2 billion of currency benefit) for the Group by the end of 2016. Operating profit margin for Pharmaceuticals was 34.1%, 3.7 percentage points higher on a CER basis than in 2015 and 1.2 percentage points higher on a pro-forma CER basis.

 

In 2016, we completed our three-year transformation programme to move to an end-to-end supply chain. This has delivered improvements in customer service, quality and productivity which, combined with simplification of our portfolio, has delivered a significant reduction in manufacturing costs and streamlined our external supply network by more than 40%.

 

As part of our commitment to creating a world-class supply chain, in 2016 we agreed a five-year global logistics contract with an international freight company. This contract has been a key enabler to reduce our site costs in the year.

 

 

 

    

 

Our enterprise resource planning (ERP) system is enabling better sharing of data to improve planning capabilities. By the end of 2016, the system was live in 10 of our 40 Pharmaceuticals manufacturing sites.

 

Committed to quality

We are committed to meeting the highest standards through stringent quality control and quality assurance processes. Our medicines and vaccines are manufactured according to current Good Manufacturing Practice (cGMP) regulations, and our internal quality management system. In 2016, our Pharmaceutical manufacturing sites had 66 regulatory inspections; six had findings which we are resolving. In July, we received a Warning Letter from the US Food and Drug Administration (FDA) relating to an inspection carried out 12 months earlier at GSK’s Worthing, UK, primary manufacturing site. We responded promptly to the FDA to address the points raised and advised them of a programme of work which is now well advanced.

   
                 
   

 

Responsible

business

 

 

LOGO

    

 

 

Leading the fight against antimicrobial resistance

 

 

   
        

 

 
        

 

We demonstrated our continuing commitment to tackling antimicrobial resistance by signing up to a landmark industry roadmap.

 

 
 

 

 

LOGO

    

Resistance to antibiotics is becoming a major public health crisis, with 700,000 people dying every year from drug resistant infections. The roadmap commits us, and other participating pharmaceutical companies, to achieving four significant targets by 2020. These include reducing the environmental impact of antibiotics production and ensuring they are only used by patients who need them. The roadmap builds on our January 2016 commitment to the Davos Declaration to combat antibiotic resistance.

 

We have been active in discovering and developing antibiotics for more than 70 years. Today, our pharmaceuticals focus is on developing new antibiotics and we have an active pipeline of new medicines. In addition, our Vaccines business researches and develops new vaccines to prevent bacterial infections, so saving lives and reducing dependence on antibiotics.

 

    

Our most advanced asset in the antibiotics pipeline is gepotidacin, which we developed in collaboration with the US government’s Biomedical Advanced Research Development Authority (BARDA). Gepotidacin is now moving towards phase III studies, following positive phase II results in 2016.

 

The global health threat of antimicrobial resistance requires a multi-stakeholder response, as seen in the industry collaboration beyond last year’s roadmap and our work with BARDA. We also partner with other governments and companies to progress research and development into new antibiotics. We are a member of the Innovative Medicines Initiative’s NewDrugs4BadBugs, and are a long-term partner of the Defence Threat Reduction Agency.

 


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LOGO

28 GSK Annual Report 2016
Vaccines
We have the broadest vaccines portfolio
of any company, with vaccines for people
of all ages – from babies and adolescents
to adults and older people.
Following impressive clinical
trial results, we have filed
our candidate shingles
vaccine with regulators in
the US, Canada and Europe.


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LOGO

Grow
£4.6bn
Vaccines sales were up
26% AER and 14% CERa
(12% pro-forma CER) in
2016 with growth across
the US, Europe and
International markets.
Deliver
14
In 2016, we filed our
candidate shingles vaccine,
Shingrix, and have 14
candidate vaccines in
our pipeline for a range
of diseases.
Responsible
business
We are working with
partners to help the world
be better prepared for
global health epidemics.
Simplify
>30%
Operating profit margin
was 31.7% in 2016, 5.3
percentage points higher
than in 2015 and 7.6
percentage points higher
on a CER pro-forma basis.
29 GSK Annual Report 2016
Investor information
Financial statements
Governance and remuneration
Strategic report
Footnote
a We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including
core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not
as a substitute for or superior to, information presented in accordance with IFRS.


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30

 

 

GSK Annual Report 2016

  
    
  

 

 

Vaccines

 

 

 

 

LOGO

    

Our Vaccines business has a portfolio of 41 paediatric, adolescent, adult, older people and travel vaccines that offer protection against 22 different diseases. These include Bexsero, our meningitis B vaccine; Menveo for meningitis A, C, W and Y; Flu; Hepatitis; Synflorix for pneumococcal disease; Rotarix for rotavirus gastroenteritis; and vaccines against diphtheria, tetanus and whooping cough, namely, Infanrix/Pediarix and Boostrix.

 

Demand for vaccines continues to increase as the world’s population grows and changes. To meet this demand, we must deliver reliable, high quality vaccines and push the boundaries of science and technology to develop innovative vaccines.

 

 

 

 

 

 

          

Behind our commercial portfolio is our robust research pipeline, which reflects our expertise in virology and bacterial infection, and across different technological platforms. We have more than 2,000 scientists dedicated to discovering and developing vaccines across our three global R&D centres in the US and Europe. As well as our internal research, we have more than 180 R&D partnerships with external scientists and leading academic and public health institutions.

 

To help more people benefit from vaccine protection, we use a ‘tiered pricing’ approach, based on nations’ gross national income per head and ability to pay. We are also one of the largest contributors to Gavi, the Vaccine Alliance, a public-private partnership that aims to improve access to vaccines in developing countries.

   
   
   

 

Candidate shingles vaccine filed

 

             
   

 

   
   

 

 

LOGO

    

 

Following impressive clinical trial results, we have filed our candidate shingles vaccine Shingrix with regulators in the US, Canada and Europe.

 

   
      

We are seeking approval for Shingrix, our candidate vaccine, for use in preventing shingles – a common but potentially serious condition – and its complications in people over 50. Shingles sufferers develop a painful itchy rash, with up to 30% also getting postherpetic neuralgia (PHN), an intense pain that can last for at least three months.

 

More than one in three people over 50 are likely to have shingles in their lifetime. Individuals with compromised immune systems, such as cancer patients undergoing chemotherapy, are especially susceptible.

 

A study published in 2016 found Shingrix had 90% efficacy for people over 70, maintained for up to four years, while earlier research showed 97% efficacy in those over 50.

 

    

This is the first time such high efficacy has been demonstrated in a candidate vaccine for older people, whose weakened immune systems often leave them more susceptible to disease. There is a possibility therefore that the technology it is based on may open up effective treatments for other conditions affecting older adults.

 

In 2017, we expect the results of clinical studies with Shingrix both in people at high risk of shingles, due to the weakening of their immune systems, and in patients revaccinated with our candidate vaccine who have previously received the existing vaccine.

 

 

   
                             


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31   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

 

Grow

Vaccines sales grew 14% on a reported basis (12% pro-forma) to £4.6 billion, from strong performance from our meningitis and flu vaccines.

  LOGO     

2016 performance summary

Vaccines sales grew 26% at actual rates, 14% CER and 12% pro-forma CER to £4,592 million during 2016. Performance was driven by sales of new products including meningitis vaccines Bexsero and Menveo which contributed £592 million. There was also strong demand for Fluarix/ FluLaval which had sales of £414 million.

 

US sales grew 13% (12% pro-forma) with Bexsero, Menveo and Boostrix all seeing market and share growth while Infanrix and Pediarix both benefited from competitor supply issues in the market.

 

In Europe, sales grew 18% (16% pro-forma), driven primarily by Bexsero sales through the UK Government’s immunisation programme and in private market channels in several other countries. Boostrix sales in Europe benefited from higher demand and competitor supply issues.

    

Sales in International markets grew 10% (8% pro-forma), with growth primarily driven by Synflorix, due to market expansion in Asia and certain African countries. Menveo sales also contributed to growth driven by a significant tender award in Argentina. Vaccine sales increased in Brazil due to strong demand for Bexsero, Menjugate and Boostrix.

 
             
             
               
               

 

All growth rates are at CER, a

non-IFRS measure as described on

page 57, unless otherwise stated.

           
               
               
         
   

 

UK infants benefit from meningitis B vaccine

 

        
   

 

   
   

 

 

LOGO

    

 

The number of cases of meningitis B reported in the UK fell significantly after babies were vaccinated with our Bexsero meningococcal vaccine.

 

   
      

The UK became the first country in the world to introduce a national infant immunisation programme against meningitis B in late 2015, with children being vaccinated at two and four months and receiving a booster at one-year-old.

 

Just ten months after the programme was launched, Public Health England (PHE) figures showed 83% percent effectiveness of Bexsero against meningitis B.

    

Invasive meningococcal B disease is the leading cause of meningitis in the industrialised world. It develops rapidly, typically among previously healthy children and adolescents. About one in ten of those who contract the disease die, with a further 20% suffering a major physical or neurological disability, such as limb or hearing loss.

 

Bexsero is the only meningococcal B vaccine licensed in Europe. In the past two years, the numbers of doses of Bexsero produced has grown from two million to a cumulative total of ten million.

 

   
                                       


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32

 

 

GSK Annual Report 2016

  
    
    
    
    

Vaccines continued

 

 

 

 

 

Deliver    LOGO

Our broad pipeline includes vaccines targeting shingles, meningitis, respiratory syncytial virus, group B streptococcus, and a new vaccine concept for COPD.

Our Vaccines R&D work focuses on discovering and developing vaccines to help protect people against a broad range of diseases and conditions across all age groups. We have a pipeline of 14 candidate vaccines in early, mid and late stage development against a range of diseases.

In 2016, we received regulatory approval to expand the indication for FluLaval in the US to cover infants from six months of age, rather than from three years. We obtained approval in Europe for a label update for Boostrix and Boostrix Polio with human safety data to support use in pregnant women. We also launched our Hiberix vaccine in the US.

In 2016, we filed for regulatory approval in North America and Europe for our candidate vaccine for the prevention of shingles and its complications. (See case study on page 30.) In 2017, we plan to file for its use in Japan.

We have a number of promising earlier assets in our pipeline. For example, the candidate vaccines in phase II, are for meningococcal A,B,C,W,Y, respiratory syncytial virus (RSV), group B streptococcus and exacerbations in chronic obstructive pulmonary disease (COPD).

Following the positive scientific opinion from European regulators for our infant malaria vaccine Mosquirix, the World Health Organization will start pilot implementation of the vaccine in three sub-Saharan Africa countries in 2018. With our partners at the non-profit organisation PATH, we will donate doses of Mosquirix for the pilots.

In a bid to assist with the Zika virus, we are evaluating a new vaccine technology known as SAM (self-amplifying mRNA), with the National Institutes of Health. We believe this technology may potentially induce protective immunity against Zika.

Investment and governance

Our priorities are meeting patient needs and addressing global health challenges for which no vaccines yet exist, or where significant improvements could be made. Our vaccine R&D investment in 2016 was £597 million, up 2% from £525 million in 2015.

In R&D, we complemented our existing global hubs, in Siena, Italy and Wavre, Belgium, with the opening of a third centre, in Rockville, Maryland, close to our major US public health stakeholders. Our three global centres each have their own area of expertise in vaccine discovery and specific assets in development while also benefiting from scientific exchange between the three world-class teams.

 

 

 

 

LOGO


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33   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

 

Simplify   LOGO

We have continued to simplify our operating model and realised significant savings.

In 2016, we continued to further simplify our operating model, strengthen our manufacturing network, and reduce supply costs.

During the year, we completed the majority of the Novartis Vaccines business integration. Cost savings generated in the Vaccines business have contributed to the delivery of £3 billion of annual savings for the Group by the end of 2016 (including £0.2 billion currency benefit). These savings, combined with strong sales growth, delivered improved operating leverage and a profit margin of 31.7%. This was 5.3 percentage points higher than in 2015 and 7.6 percentage points higher on a pro-forma CER basis.

Investing in our supply chain

We have 16 vaccine manufacturing sites in 11 countries. This international presence enables us to manufacture our vaccines with greater capacity, efficiency and flexibility. We aim to keep critical production steps in-house wherever possible, and during the year we invested in new production facilities at our Marburg site in Germany. This will enable us to produce all of the active components of our Bexsero vaccine in-house, and adds a new mumps production line for our combined measles, mumps, rubella and varicella vaccine.

Committed to quality

The discovery and development of new vaccines is a complex process. Our vaccines are manufactured to the highest quality standards, according to current Good Manufacturing Practice (cGMP) regulations. In 2016, we had 45 regulatory inspections and 38 had minor or no findings. In all cases, we worked with regulators to address their observations.

 

 

 

   

 

 

Responsible     LOGO

business

 

LOGO

     

 

 

Preparing for public health emergencies    

 

GSK is committed to helping whenever we can when public health crises occur.

 

         
     

When Ebola broke out in West Africa, we accelerated the development of our candidate Ebola vaccine and, following the outbreak of Zika, we employed our novel technology platforms to start a vaccine discovery programme with the US National Institutes of Health.

 

However, responding after a life-threatening disease surfaces is not enough. Vaccine research and discovery is a lengthy process, typically taking 10 to 15 years. To have the best chance to save lives, the global community has to prepare itself in advance.

 

For this reason, we are proposing to create a dedicated and permanent ‘biopreparedness organisation’ (BPO) at our Global Vaccines R&D Centre in Rockville. The planned facility would design, develop and manufacture new vaccines against potential public health

 

      

threats, with targeted pathogens selected and prioritised with guidance from independent experts. It would have dedicated and permanent R&D and pilot production facilities, and the capacity to respond rapidly to future global health emergencies.

 

The BPO would operate on a no-profit, no-loss basis, with funding from both governments and non-governmental organisations.

 

We also strongly support the Coalition for Epidemic Preparedness Innovations (CEPI) and its focus on vaccines development as a solution to protecting against infectious disease outbreaks. We stand ready to partner with CEPI to advance epidemic preparedness.

 

 

 

         


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34 GSK Annual Report 2016
Consumer Healthcare
Our Consumer Healthcare business develops and
markets products in Wellness, Oral health, Nutrition
and Skin health. Our portfolio includes some of the
world’s most trusted and best-selling brands, such
as Sensodyne, Voltaren and Panadol.


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LOGO

35 GSK Annual Report 2016
Investor information
Financial statements
Governance and remuneration
Strategic report
A migraine is more than
just a headache. Excedrin
is helping people in the US
manage their symptoms.
Responsible
business
Our Panadol power brand
is helping raise awareness
of dengue fever.
Grow
£7.2bn
Sales increased 19%
AER and 9% CERa (5%
pro-forma CER) in 2016,
with growth broadly
balanced across the
US, Europe and
International markets.
Deliver
13%
of sales in 2016 were
from product innovations
launched over past
three years.
Simplify
15.5%
Operating profit margin
was 15.5% in 2016, 4.2
percentage points higher
than in 2015 and 3.7
percentage points higher
on a CER pro-forma basis.
Footnote
a We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including
core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not
as a substitute for or superior to, information presented in accordance with IFRS.


Table of Contents

 

36

 

 

GSK Annual Report 2016

  
    
    

Consumer Healthcare

 

 

 

 

LOGO

Our Consumer Healthcare business* is split almost equally between over-the-counter (OTC) medicines and fast moving consumer goods (FMCG), across our four categories of Wellness, Oral health, Nutrition and Skin health.

Wellness

We are the global leader in Wellness, which is our largest category, and number one in 36 countries by retail sales. We have leading global positions in respiratory, cold and flu, nasal decongestants, allergy, smoking cessation, and pain management, where we have two of the top four brands, Panadol and Voltaren.

Oral health

We are a top three company, globally, by sales in toothpaste and the number one in specialist oral health, globally and in 50 countries, with leading positions in sensitivity, acid erosion, denture care and gum health. In 2016, Sensodyne became our first £1 billion consumer healthcare brand, making it the third-largest product by sales in the whole GSK portfolio.

Nutrition

Our Nutrition business includes Horlicks, the long established wheat, milk and malted barley drink.

Skin health

We are in the top three, by sales, globally in medicated skin health which treats such conditions as cold sores and dry and sensitive skin. Our Abreva and Zovirax brands hold leading positions in some of the world’s largest markets.

Power brands

We prioritise seven global power brands – Otrivin, Panadol, Parodontax, Poligrip, Sensodyne, Theraflu and Voltaren – and 12 regional core brands, including Flonase, Horlicks and Tums. These brands, including Physiogel, benefit from our broad geographic footprint and a combined focus on scientific expertise and consumer insight.

 

 

* Represents the Consumer Healthcare Joint Venture with Novartis together with the GSK Consumer Healthcare listed businesses in India and Nigeria.
 

 

      

 

Managing migraine symptoms

 

           
   

 

   
   

 

LOGO

  

 

Excedrin brought home the painful reality of migraines

with a recent virtual reality campaign.

   
    

 

Excedrin, one of the top over-the-counter brands in sales in the US, launched a virtual reality (VR) campaign to correct misunderstandings of migraines. The campaign, which included multi-channel media activity, an expert celebrity panel discussion and a high profile New York event, was launched in March 2016. Product sales rose 15% during the campaign and have shown double digit growth over the year.

 

Excedrin created the campaign after its customer insight research showed that 88% of sufferers felt misunderstood. The documentary-style film featured a ‘migraine simulator’, developed with the help of four migraine sufferers.

 

  

 

The four worked with VR experts to create the visual effects they experience during attacks, including blurred vision, flashes, object ‘auras’, room spinning and partial blindness.

 

The campaign made an enormous impact on social media, with over 17 million views and almost 500,000 engagements, such as shares of the film, comments and re-tweets.

   
                      


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37   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

 

 

Grow    LOGO

Strong growth in our Oral health and Wellness power brands helped Consumer Healthcare to a 9% increase in reported sales (+5% pro-forma), to £7.2 billion.

 

 

 

All growth rates are at CER, a non-IFRS measure as described on page 57, unless otherwise stated.

 

        

2016 performance summary

Consumer Healthcare sales grew 19% at actual rates, 9% CER and 5% on a pro-forma basis to £7,193 million.

On a category basis there was growth in Wellness (15%), Oral health (8%) and Skin health (4%). This was partly offset by Nutrition which declined 8%.

At a brand level, Sensodyne, Panadol and Otrivin performed strongly. Sales of Sensodyne reached £1 billion for the first time. Sales from innovation within the last three years represented 13% of sales, with a particular contribution from Flonase, which was switched to OTC in Q1 2015. Other notable launches in 2016 included Sensodyne True White and Excedrin Gel-tabs in the US.

Growth was broadly balanced across our three global geographies. US sales grew 9% to £1,761 million (5% pro-forma) driven primarily by Sensodyne delivering double-digit growth following the launch of True White combined with strong momentum from Pronamel. Within Wellness, Flonase OTC grew strongly in the first half following line extensions.

In Europe, sales grew 12% to £2,191 million (4% pro-forma). Good momentum across Germany, Scandinavia and Italy was partly offset by the impact of challenging economic conditions in the Commonwealth of Independent States. Voltaren grew in double-digits as a result of the continued success of the 12-hour variant, while in Oral health, Sensodyne and the Gum health portfolio also recorded strong growth.

In International markets, sales grew 8% (5% pro-forma) to £3,241 million. Growth was impacted by the sale of the Nigerian beverages business on 30 September 2016 and the effective cessation of trade in Venezuela at the end of 2015. Demonetisation implemented in India in November also impacted the Indian business. Sales in the Middle East, Latin America and China grew particularly strongly as a result of better pricing and new product introductions.

 

 

      

 

New over-the-counter launch extends Flonase brand

 

           
   

 

   
   

 

 

LOGO

 

  

 

We continue to see success in switching products from

prescription-only to over-the-counter.

   
    

 

In 2016 the FDA approved Flonase Sensimist Allergy Relief for seasonal and perennial allergies. This builds on our success in moving products from prescription-only to over-the-counter (OTC) in the USA. The product was launched in February 2017, in time for the allergy season. In making the product available OTC, we are meeting consumer demand for greater control over their personal healthcare.

 

The product was formerly available only on prescription as Veramyst. In managing the switch to OTC, we drew on the regulatory insights of our Pharmaceuticals business which helped us navigate through the highly regulated pharmaceutical environment.

 

  

 

The new product acts on multiple inflammatory substances and has additional features such as being suitable for children as young as two years old, being scent and alcohol-free, and causing little or no drip while it is being applied.

 

By bringing Sensimist under the Flonase Allergy Relief umbrella, we aim to build on Flonase’s market success.

   
                      


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38

 

 

GSK Annual Report 2016

  
    
    

 

Consumer Healthcare continued

 

 

 

 

 

 

Deliver    LOGO

Our success in delivering consumer-driven, science-led innovation enabled us to generate our best-ever sales from recent launches.

 

 

13%

 

of our sales were generated from innovations launched over the past three years.

 

   

The success of our Consumer Healthcare business is built on our ability to understand customer needs and meet them with effective products from our strong research pipeline. In 2016, we refocused our investment in innovation to ensure we achieve a high return and delivered 30 new-to-market product launches. During 2016, 13% of our sales were generated from innovations launched over the past three years – our highest level ever.

In 2016, R&D investment in Consumer Healthcare was £243 million (2015 – £258 million). We prioritise investment on our power and core brands, with our strategic focus now on fewer but bigger innovations. In 2016, examples included Sensodyne True White, Excedrin Gel-tabs, a new Eno ajwain herb flavour variant in India and Otrivin Oxy which was launched a record six months from conception.

We continue to see success in moving products from prescription-only to over-the-counter, with the approval and launch of Flonase Sensimist Allergy Relief in the US in 2017. (See case study on page 37).

Understanding consumers’ everyday healthcare needs, views and product preferences is an integral part of our new product development process. As digital technology becomes central to all our lives, we are exploring ways – both internally and in discussion with external entrepreneurs and inventors – of harnessing digital capability to improve consumer health. We continued to invest in state-of-the-art digital and real life innovation by opening new US shopper and sensory labs. (See case study below).

In 2016, we strengthened our commitment to R&D in India, building headcount to ~200 people – a significant increase versus both legacy organisations. Our increased focus on innovation in this area is already paying off, with seven market-first innovations launched in the region over the course of the year. Two of our six R&D hubs are now based in emerging markets, a region that represents over a third of our business.

 

 

      

 

The science of consumer insight

 

           
   

 

   
   

 

LOGO

  

 

Our new innovation labs in the US increased our ability to understand and deliver unmet consumer needs.

   
    

 

Following the success of our UK innovation labs we launched three labs based at our new US Consumer Healthcare HQ in Warren. They enable us to integrate customer insights into all stages of product development, from the original inception of an idea to an item’s positioning on the store shelf. They include:

 

  An R&D suite combining flexible work spaces with rapid prototyping capabilities; allowing us to move swiftly from concept to manufacture, whether of tablets, liquids, powders or creams.

 

  Consumer sensory capabilities to assess how people use products. It includes simulated environments where our products are often found, for example, the bathroom, doctor’s consulting room, a shop and pharmacy.

 

  

 

  A shopper science facility that enables us to work with our retail partners on the best way to present products in store.

 

Together, the labs are enabling us to discover fresh insights and develop tailor-made products to meet the needs of our consumers and retailers. This helps us to meet our ambition of becoming first choice for shoppers and customers.

   
                      


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39   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

 

 

Simplify    LOGO

We continued to further simplify and streamline our Consumer Healthcare business and increased our operating profit margin.

During 2016, we completed the majority of the integration enabling us to increase our emphasis on core innovation and to deliver stronger growth from our brands. Incremental annual cost savings in 2016 helped to increase the operating profit margin by 4.2 percentage points to 15.5%. This was 3.4 percentage points higher than in 2015 on a CER basis and 3.7 percentage points higher on a CER pro-forma basis. We remain on track to deliver the annual cost savings anticipated, and to deliver our target operating margin of at least 20% by 2020.

Our consolidation activities over the year resulted in a reduction of costs and overheads. We established common distribution routes and shared enterprise resource planning platforms, enabling access to data across the organisation and more informed decision making.

In 2016, unified branding was rolled out to all integrated sites and more than 10,000 artwork changes were delivered.

Our streamlining efforts also involved 59 markets moving to standardised platforms over the course of the year, and we are on track to deliver against our synergy targets.

Committed to quality

Our Consumer Healthcare products are manufactured to the highest quality standards, according to current Good Manufacturing Practice (cGMP) regulations. In 2016, we had 56 regulatory inspections, all with satisfactory outcomes.

 

 

         
      

Responsible

business

 

 

LOGO

 

  LOGO   

 

Helping communities to better identify, prevent and treat dengue fever

 

      
        

 

   
        

 

A GSK-led health campaign encouraged better understanding of how to manage the disease.

   
      

 

Mosquito-borne dengue fever causes around 400 million infections and 20,000 deaths each year. It is endemic in more than 100 countries, particularly across the South East Asia and Western Pacific regions.

 

Paracetamol, in Panadol, can help treat some of the symptoms of dengue fever, so GSK Consumer Healthcare launched the Allied Against Dengue campaign in 2016 in Malaysia, Indonesia and the Philippines. It brought together GSK and our Panadol power brand with doctors, pharmacy chains, governments and non-government organisations.

 

The campaign has helped educate seven million people about the disease.

  

 

It included 48 ‘train the trainer’ sessions, to refresh physicians’ and pharmacists’ knowledge of the virus; the recruitment of 21,000 voluntary ‘dengue warriors’ to spread the word about prevention and treatment; and the distribution of ‘dengue proficiency kits’ to healthcare professionals.

 

Assisted by wide media coverage, the campaign’s impact was dramatic. In Malaysia, after three years of rising mortality rates, the campaign contributed towards the number of deaths falling by 39%.

 

The campaign also helped increase our regional Consumer Healthcare product sales. In the Philippines alone, net sales increased by 48% in Q3 2016, versus the same period in 2015.

 

   
                          


Table of Contents

LOGO

40 GSK Annual Report 2016
Responsible business
Being a responsible business is central
to our strategy, how we deliver success
is as important as the results we achieve.


Table of Contents

LOGO

41 GSK Annual Report 2016 Strategic report Governance and remuneration Financial statements Investor information
We have expanded our graduated approach to filing and enforcing patents and intellectual property to widen access to medicines in the poorest countries. Health for all Our be haviour Our people Our planet 1.3m 99% 75 countries 18% Our partnership with Our mandatory annual Our Partnership for We have cut operational Save the Children reached training on our code of Prevention programme carbon emissions (Scope an additional 1.3 million conduct was completed is being rolled out 1 and 2) by 18% since children in 2016 with by 99% of our employees globally and is offering 2010. Total value chain treatments, immunisations and complementary unprecedented access to emissions have risen by and other interventions. workers in 2016.a preventive healthcare for 1% as we extend access almost 100,000 employees to our medicines, and we and their family members are working to address this. in 75 countries. Footnote a The remaining 1% represents employees who did not complete the training in the required timeframe and are subject to disciplinary action (see page 47) and employees still within the completion timeframe (e.g. new starters)


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42

 

 

GSK Annual Report 2016

  
    
  

 

Responsible business

 

 

 

 

 

By being commercially successful and operating responsibly, we will improve people’s health and benefit society, as well as create value for our shareholders.

Creating value for society

By developing innovative healthcare products, we directly benefit patients and consumers. Our equitable pricing strategy, which allows prices to reflect a country’s ability to pay, and global footprint enables greater access to our medicines, vaccines and consumer healthcare products. By delivering profitable and sustainable business performance, we generate value and returns for our shareholders and can reinvest in the business. Over and above this, wider society benefits as healthy people are essential to building strong and sustainable communities.

We make significant direct and indirect economic contributions to the countries and communities where we operate through tax, our employment of 99,300 people and charitable support.

Our responsible business priorities

GSK’s responsible business priorities sit within the context of the macro-economic and social trends that affect all companies and wider society. These trends present both opportunities and challenges for global healthcare companies like GSK (see page 8).

We report our progress across four areas: Health for all, Our behaviour, Our people, and Our planet. We identified our priorities in these areas by understanding the issues that are most important to our business and to our stakeholders.

Our longer-term commitments across the four areas reflect global health needs and align with GSK’s strategic priorities and our values. We detail our progress against these commitments in our responsible business supplement available at www.gsk.com/responsibility.

 

 

 

 

   

 

A graduated approach to intellectual property

 

        
   

 

   
   

 

LOGO

  

 

We have expanded our approach to filing and enforcing patents to reflect a country’s economic maturity.

   
      

 

In 2016, we announced that we would adapt our current approach to filing and enforcing patents to ensure that we balance the need to protect our intellectual property with a country’s economic maturity.

 

This means that we will no longer file patents for medicines in the least-developed countries and low-income countries. In lower middle income countries, we will apply for patents when we think it appropriate but also offer licences that allow supplies of generic versions of our medicines to these countries (other than G20 countries) for ten years.

 

In line with this approach, in 2016 ViiV Healthcare expanded its licence agreement with the Medicines Patent Pool for the adult formulation of their HIV drug dolutegravir to include the vast majority of lower middle income countries.

 

 

  

 

The agreement enables dolutegravir to be made available for adults through generic manufacturers, with royalty fees tiered depending on national gross domestic product, following approval from regulators. This means that 94% of people living with HIV in the developing world are now covered by the licence agreement.

 

We have also outlined our intent to commit our future portfolio of cancer treatments to patent pooling and will work with the Medicines Patent Pool to explore how this can help address the increasing burden of cancer in developing countries.

   


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43   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

Measuring progress

We have well-established, long-term responsible commitments which sit across four areas: Health for all, Our behaviour, Our people and Our planet. We also measure our performance in the Access to Medicine Index and Dow Jones Sustainability Index.

Access to Medicine Index

In 2016, GSK topped the Access to Medicine Index for the fifth consecutive time. This means we have led every edition of the biannual index since its 2008 launch.

The Access to Medicine Index is funded by the Bill & Melinda Gates Foundation and the UK and Dutch governments. It measures the top 20 pharmaceutical companies’ efforts to improve access to healthcare in developing countries. We led our peers in three of the 2016 index’s seven categories: research and development; pricing, manufacturing and distribution; and product donations.

The index describes GSK as ‘the most access-oriented company’ and recognises our clear strategy on increasing access to medicines, which is aligned with our corporate strategy.

It also cites our company-wide ownership for access as a key strength, together with our commitment to research and development for low and middle income countries and high-priority medical needs.

At the beginning of 2017 we also performed well in the first ever Access to Vaccines Index, leading in all three categories under consideration.

Dow Jones Sustainability Index

In 2016, we came third in our sector in the Dow Jones Sustainability Index. The Index analyses the economic, environmental and social performance of the world’s leading companies. Our overall percentile ranking increased from 89th in 2015 to 95th in 2016, meaning we scored within the top 5% of our sector.

We led the industry in code of business conduct, climate strategy, environmental reporting and health outcome contributions, and had strong performance in corporate governance, marketing practices, risk and crisis management, tax and corporate citizenship.

 

 

 

 

 

Progress against our responsible business commitments

 

 
 

 

 
 

Our 2016 assessment shows that three of our commitments are complete, 14 are progressing well, five are on track, and one has more work to do. For more details about our performance, see our Responsible Business Supplement at www.gsk.com/responsibility.

 

 
 

LOGO

 

    

LOGO

 

 

 

      

Progress

 

         

Progress

 

 
 

 

Innovation for unmet medical needs

 

  

 

LOGO

 

    

 

 

Ethical conduct

 

  

 

LOGO

 

 
 

 

Better access to medicines and vaccines

 

  

 

LOGO

 

    

 

Promoting values in sales and

  

 

LOGO

 

 
 

 

Building products to better meet needs

 

  

 

LOGO

 

    

marketing practices

 

      
 

 

Strengthening healthcare infrastructure

 

  

 

LOGO

 

    

 

Transparency in clinical trial data

 

  

 

LOGO

 

 
 

 

Fighting malaria

 

  

LOGO

 

    

 

Rigorous patient and consumer safety

 

  

 

 

LOGO

 

 
 

 

Eliminating and controlling neglected

  

 

LOGO

    

 

Minimising animal testing

 

  

 

LOGO

 

 
 

tropical diseases

 

         

 

Ensuring ethical interactions

 

  

 

LOGO

 

 
 

 

Eradicating polio

 

  

 

LOGO

 

    

 

Promoting human rights

 

  

 

LOGO

 

 
 

 

Access to antiretroviral treatment for HIV

 

  

 

LOGO

 

    

 

Working with third parties

 

  

 

LOGO

 

 
 

 

Reducing child mortality

 

  

 

LOGO

 

         
 

 

LOGO

 

    

 

LOGO

 

 
      

Progress

 

         

Progress

 

 
 

Developing our people in inspiring

and healthy workplaces

  

 

LOGO

    

 

Aiming to be carbon neutral

 

  

 

LOGO

 

 
           

 

Reducing our water impact

 

  

 

LOGO

 

 
 

Promoting inclusion and diversity

 

  

 

LOGO

 

    

 

Reducing our waste

 

  

 

LOGO

 

 
 

 

Community volunteering to create

change

 

  

 

LOGO

         
              


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44

 

 

GSK Annual Report 2016

  
    
  

 

Responsible business continued

 

 

 

 

 

 

LOGO

Our approach

We are tackling some of the greatest global health challenges by innovating to meet unmet needs, making our medicines and vaccines more accessible, and strengthening healthcare systems.

Innovating for unmet needs

We aim to develop innovative products for diseases that disproportionately affect the world’s poorest people and where need is greatest.

In 2016, we committed to working with governments, multinational organisations and NGOs to enhance preparedness against potential future outbreaks of diseases such as Ebola and Zika. We are supporting the Coalition for Epidemic Preparedness Innovation (CEPI) (see case study on page 33) and are proposing to create a permanent ‘biopreparedness organisation’ (BPO) at our Rockville, Maryland Vaccines site.

In 2016, our gel to help prevent umbilical cord infections in newborns received a positive scientific opinion from the European Medicines Agency (EMA). Three million babies die each year from infection, often when the newly-cut umbilical cord attracts bacteria – a particular issue in developing countries. If approved by local regulators, we will make the gel available at a not-for-profit price and share manufacturing knowledge so it can be widely made.

Our Mosquirix vaccine targets a significant health threat – malaria. Phase III trials of the vaccine, which received a positive opinion from the EMA in 2015, have shown the vaccine could have a considerable public health impact when used in combination with malaria control measures.

In 2016, the World Health Organization confirmed that full funding has been committed to enable the pilot implementation of Mosquirix in three settings in sub-Saharan Africa due to begin in early 2018.

 

 

 

 

 

    

 

 

Protecting refugees with essential vaccines

 

   
    

 

   
    

 

LOGO

 

 

Photo: Nour Wahid/Save the Children

     

 

We are supplying essential vaccines at our lowest price to civil society organisations for use in acute humanitarian situations.

   
            

 

Along with their homes, livelihoods and communities, refugees often lose easy access to healthcare, leaving them potentially vulnerable to vaccine-preventable disease.

 

In response, GSK has committed to supply essential vaccines to internationally recognised civil society organisations (CSOs) – such as Médecins Sans Frontières and Save the Children – at our lowest prices, for use in acute humanitarian situations where governments are unable to assist.

 

The first vaccine to be covered by this commitment is Synflorix, our pneumococcal vaccine that protects children against diseases such as pneumonia. Working with partners such as Gavi, the Vaccine Alliance, we will provide Synflorix at a deeply discounted price to charities that fund and deliver immunisation programmes to refugees and displaced people. In the future, we will explore extending this offer to other essential vaccines.

 

      

 

Our commitment is designed to help maintain stable vaccination programmes during times of great humanitarian need where governments are unable to assist, by developing a reliable and predictable supply to CSOs that have stepped in. At the same time, we will continue to work with partners to strengthen the long-term capacity of local health systems to support refugees and host communities.

 

This pledge comes as tens of thousands of refugees continue to flee conflict in Syria, South Sudan and elsewhere. It builds on decades of effort by GSK, working with partners, to increase access to our vaccines through charities responding to emergencies.

   


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45   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

 

 

 

£21m

 

Since 2009, we have invested £21 million in 39 countries and trained 43,000 frontline health workers who have reached 17.5 million people.

 

 

 

 

 

 

Our charitable giving in 2016 totalled

£210.2 million (2015 – £208.3 million)

 

 

LOGO

 

LOGO   Product & in-kind £127.2m
LOGO   Cash £67.3m
LOGO   Management £12.3m
LOGO   Time (PULSE) £3.4m

We also share our expertise, resources and intellectual property with external researchers. Our open innovation lab in Tres Cantos, Spain, has built up a portfolio of 63 research projects looking at diseases of the developing world since 2010. It had 20 visiting scientists in 2016 and results from the lab have led to papers in more than 50 scientific publications. Our Africa Non-Communicable Diseases Open Lab is currently focusing on cardiovascular disease, oncology, chronic respiratory disease, chronic kidney disease and diabetes. Its first project looks at severe asthma across East Africa, led by Uganda’s Makerere University.

Extending affordability and availability

We are committed to widening access to our medicines and vaccines. Our equitable pricing strategy is based on the country, disease area, product type, and patient’s ability to pay.

Since 2010, we have capped the prices of our patented medicines and vaccines in the least-developed countries (LDCs) at 25% of the prices in the EU5 (France, Germany, Italy, Spain and the UK), as long as our manufacturing costs are covered.

We offer our lowest vaccine prices to organisations such as Gavi, the Vaccine Alliance, which supports countries with a low gross national income. In 2016, we delivered more than 74 million doses of our Synflorix vaccine against pneumoccal disease and more than 35 million doses of Rotarix, our vaccine against rotavirus gastroenteritis.

In middle-income countries, where many still live in poverty, our equitable pricing approach enables more people to access our products. In Egypt, we offer a portfolio of prices to meet the needs of all levels of income, including a price reduction of Seretide inhaler devices targeted to middle and lower income groups.

We also understand payer and patient concerns about affordability in developed markets and we are leading efforts to develop sustainable solutions. For example, in the USA, the last six GSK pharmaceutical products were launched similar to or below prices to the medicines we aim to supersede. In 2016, we integrated three of our US patient assistance programmes into one GSK Patient Assistance Program, which is designed to simplify and improve the programme experience for eligible uninsured patients and patients with a Medicare Part D prescription Drug Plan.

In Europe, we continue to engage with payers in all EU markets to balance affordable cost to healthcare systems through funding solutions which also support ongoing innovation for medicines. We have achieved reimbursement for our Ellipta portfolio in most EU markets by finding local solutions when issues of affordability challenged the introduction of new innovation.

Strengthening healthcare systems

We reinvest 20% of our profits from the sales of our Pharmaceuticals and Consumer Healthcare products in LDCs to strengthen healthcare infrastructure in these nations. Since 2009, working with Amref Health Africa, CARE International and Save the Children, we have invested £21 million in 39 countries, reached 17.5 million people and trained 43,000 frontline health workers.

Through our pioneering partnership with Save the Children, we reached 1.3 million children with live-saving interventions in 2016, bringing the total number to 2.6 million. Since 2013, over one million children have been screened for malnutrition, more than 86,500 under-fives have been immunised, over 290,000 children have been vaccinated against measles or polio, and over 183,000 have been treated for diarrhoea, malaria or pneumonia.

 


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46

 

 

GSK Annual Report 2016

  
    
  

 

Responsible business continued

 

 

 

 

 

 

LOGO

 

 

GSK values

 

LOGO  

Be patient

focused

   
LOGO  

Act with

integrity

   
LOGO  

Demonstrate

respect for people

   
LOGO  

Operate with

transparency

 

We expect all employees to act in line with our values.

 

 

Our approach

We aim to have a values-based culture by training our people on the standards we expect, encouraging the reporting of any concerns and embedding our values into the way we measure employee performance.

Patient and consumer safety

We manufacture our medicines and vaccines according to current Good Manufacturing Practice regulations and our internal Quality Management System.

In 2016, we had 167 regulatory inspections of our manufacturing sites and 86% of these received no observations or minor observations.a Eleven of the inspections were conducted by the US Food and Drug Administration (FDA), of which five resulted in a Form 483 being issued to sites, citing deficiencies to current Good Manufacturing Practices (cGMP). None of these observations had any direct impact on product supply from our sites, and corrective action plans to mitigate the observations have been submitted to the FDA in all cases.

Transparency in clinical trial data

GSK was the first company to sign up to AllTrials, which campaigns for every clinical trial to be registered and its results reported. We have been leading the industry in clinical study transparency over the past decade. In 2016, we publicly posted more than 1,900 clinical study reports and more than 6,000 result summaries.

Researchers can submit proposals to request access to the details of around 2,000 of our clinical trials through the www.clinicalstudydatarequest.com website. An independent panel reviews proposals for scientific merit and to ensure patient privacy and confidentiality are protected. In 2016, 88 proposals were approved and 66 research teams were granted access to anonymised patient-level data.

We have also begun providing plain language summaries of our clinical studies on our online clinical study register.

Working with third parties

We expect our suppliers to share our high ethical standards. In 2016, we increased our use of preferred suppliers, bringing them to more than 90% of our global purchase order spend. We continued the roll-out of our global third-party oversight programme, which reached a total of 43 countries across Latin America and South East Asia. The programme aims to drive improvements in our supply chain and distributor network and ensure that the third parties we engage with support our values.

In 2016, we also completed over 70 third-party audits on health and safety, ethics, environment and labour rights. We also conducted a further 1,850 audits focused specifically on quality processes. Where we identify areas for improvement, we engage with the respective third parties to develop improvement plans and track their completion with the overall aim of enhancing performance in the supply chain. We may also suspend or terminate work with a third-party if significant issues are identified.

Training our people

In 2016, we updated our Code of Conduct and accompanying annual training to give people a deeper understanding of how to apply our values in their everyday activities.

In 2016, 99%b of our employees and complementary workers completed mandatory training on the code. The code of conduct training enables the learner to understand and manage the risks associated with our business activities. This includes anti-bribery and corruption risk, to which we maintain a zero tolerance approach. More than 70,000 people working in high risk roles completed additional in-depth anti-bribery and corruption training to help them understand how to manage particular challenges they may face in their daily work.

Reporting and investigating concerns

We centrally track misconduct allegations and concerns through our multiple Speak Up channels. In 2016, our investigations team received 2,568 reports, a 21% reduction since 2015.

 

Footnotes

 

a At this time we are still awaiting 11 reports from 2016 inspections.

 

b The remaining 1% represents employees who did not complete the training in the required time and are subject to disciplinary action, as well as those who are still within the completion timeframe (e.g. new starters).
 


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47   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

 

 

Employees disciplined in 2016:

breakdown of types of policy violation

 

LOGO

 

LOGO   Attendance and payroll   LOGO   Marketing and promotional activities
LOGO   Training completion   LOGO   Code of conduct
LOGO  

Good manufacturing and distribution

practices

  LOGO  

Falsification of documents

 

    LOGO   Travel and expense
LOGO   Local work regulations violations   LOGO   Environment, health and safety
    LOGO   Other

Disciplinary action

We take action when employees fail to act in line with our policies. During the year, 3,600 employees were disciplined for policy violations (2015 – 3,574), including 499 employees for failing to complete mandatory training (Code of Conduct and Anti-bribery and Corruption) within the required timeframe. Of the total disciplined, 2,499 employees received a documented warning (2015 – 2,890), 547 had verbal warnings (2015 – 297) and 221 were dismissed or agreed to leave the company voluntarily (2015 – 387). Most of these were related to attendance and payroll which included disciplinary actions related to employee absence, punctuality or misstating hours worked.

Human rights

GSK is a signatory to the UN Global Compact, which sets out key principles for business on human rights. We are committed to upholding the Universal Declaration of Human Rights and the International Labour Organisation’s core labour standards.

We focus on those areas where our operations have the biggest potential impact on human rights. We manage human rights risks in the supply chain by reinforcing our requirements on labour rights and health and safety and ensuring

these are communicated consistently through our revised third-party contracts. We monitor existing suppliers and screen new ones.

Our approach to tax

We understand our responsibility to pay an appropriate amount of tax and we fully support efforts to ensure companies are transparent about how they manage their tax affairs.

We pay a significant amount of tax in the UK, where most of our global corporate functions and significant manufacturing and R&D facilities are located, and in other countries around the world where we have a substantial business and employment presence.

Over the past 16 years, we have paid £28.9 billion in corporation tax globally. Of this, £2.8 billion, nearly 10% of the global total, was paid in the UK. Read more on page 178.

We do not engage in artificial tax arrangements – those without business or commercial substance. At the same time, we have a responsibility to our shareholders to be financially efficient and deliver a sustainable tax rate.

Further details on our approach to tax and our tax disclosures can be found on page 55.

 

 

   

 

Putting patients’ interests first

 

   
   

 

   
   

 

LOGO

 

 

We continue to lead the industry in modernising the way we market and sell our medicines.

 

   
     

Since January 2016, we stopped paying healthcare professionals (HCPs) to speak to other prescribers about our medicines and vaccines. Instead, we have strengthened our online resources to supplement information provided by our salesforce.

 

We have also significantly expanded our global team of in-house medical experts to provide information about our medicines and vaccines to HCPs in ways that are convenient to them. We now have around 400 medical experts dedicated exclusively to supporting HCPs, and a further 900 who also engage with them as part of their roles.

 

Where we do pay HCPs – for activities such as clinical or market research that help us develop medicines and vaccines to meet patients’ needs – we are transparent about these transactions. We now disclose all payments made to HCPs in 32 markets across Europe (including Russia and Ukraine), Australia, Japan and the US.

 

     

We have also changed the way GSK sales teams are compensated. Since January 2015, our pharmaceutical medical sales representatives are no longer compensated for individual sales targets. Instead they are rewarded on their technical skills, scientific knowledge, quality of service, and broader business performance.

 

Our new approach is being well received: following medical product information sessions with GSK experts in over 60 countries, 92% of more than 42,000 HCPs agreed the interaction helped them make a more informed decision, benefiting patient care. Around 79% rated their experience as superior to similar interactions with other pharmaceutical companies. We have also seen an improvement in customer trust. In a survey of US HCPs in 2016, GSK ranked first for customer trust for the fourth year in a row, and for customer value for the third time.

   

 


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48

 

 

GSK Annual Report 2016

  
    
  

 

Responsible business continued

 

 

 

 

LOGO

Our approach

We need a talented and motivated workforce to deliver against our strategy. To achieve this, we strive to attract the best people and to create an environment that empowers and inspires. Our people strategy focuses on talent, leadership, performance and engagement.

Talent and leadership

Our talent and leadership programmes focus on developing our employees at all levels with the skills they need to advance their careers.

In 2016, we welcomed 465 graduates and postgraduates onto our Future Leaders and Esprit programmes, including 164 from emerging markets. GSK was voted top graduate employer for Research and Development in The Times Top 100 Graduate Employers 2016 (for the 19th successive year) and ranked 13th overall.

We put particular emphasis on leadership development. In 2016, we trained around 3,500 people to support their promotion to first and second line leader roles; continued to evolve our global leadership development programmes; and have found that managers who complete them show significant improvement in effectiveness based on feedback from their teams.

We also trained 245 leaders as coaches, with our strategic use of coaching being recognised as world-class by the International Coach Federation’s Prism Award.

Performance and engagement

Our global performance system centres on a set of clear expectations that emphasises not just the results people achieve, but the way they achieve them in line with our values.

Listening to our people is essential for employee engagement. Responding even more so. During the year, we responded to the insights from our 2015 global employee survey, which 78% of employees completed. Members of our CET hosted five ‘listening sessions’ with over 200 senior leaders. They then conducted discussions on the topics raised, including how we evaluate performance.

 

 

 

 

   

 

Future Leaders programme

 

   
   

 

   
   

 

 

LOGO

 

441

graduates joined our Future Leaders programme in 2016

 

 

 

 

Building the next generation of leaders.

 

   
     

Our Future Leaders programme is delivering the fresh ideas and talent needed to continue driving our success across key markets.

 

It provides graduates with a breadth of potential career pathways – from R&D and finance, to marketing and procurement – with the option to move between functions during several job rotations.

 

Such job rotations make up 70% of the programme, with feedback, mentoring and coaching constituting a further 20%, and formal training the remainder. This balance enables graduates to develop the specific skills to be effective in their individual role and business, while getting a broad grasp of the company and learning GSK’s distinctive global leadership approach.

 

 

     

The programme is rated highly by participants. A recent survey of alumni from the Future Leaders programme found that 89% of respondents felt the rotations helped them to develop relevant skills and experience for their career at GSK.

 

The benefits to the business are also clear. The number and geographical spread of the intake means we have home-grown leaders rooted in all our markets, including emerging countries. In 2016, we had 441 new recruits representing 59 nationalities from 58 countries – up from 130 from eight nations in 2012.

   

 

 


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49   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

 

Women in management (%)

 

      2014      2015     

 

2016

 

SVP/VP

     29        29        30  

Director

     40        40        42  

Manager

     45        45        46  

Total

     42        42        43  

Employees by gender (number)

 

 

      Male      Female     

 

Total

 

Board

     9        4        13  

Management*

     9,537        7,337        16,874  

Total

     56,104        43,196        99,300  

 

* Management: senior managers as defined in the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 which includes persons responsible for planning, directing or controlling the activities of the company, or a strategically significant part of the company, other than the Board, including directors or undertakings included in the consolidated accounts.

 

73

 

GSK employees from 25 countries spent up to six months with 31 non-profit organisations to share their skills.

 

To monitor progress, we have also introduced ‘pulse’ surveys to evaluate the impact of engagement efforts at more regular intervals than our annual survey.

Promoting inclusion and diversity

The diverse perspectives and experiences of our global workforce strengthen our business and help us meet the needs of our patients and consumers.

The percentage of women in management rose to 43% in 2016, and women represented 15% of our Corporate Executive Team (CET) and 31% of our Board (this compares with an average of 26% among FTSE100 boards, according to the Cranfield Board report).

In 2016, more than 200 women began our Accelerating Difference programme, which helps female leaders progress to senior roles. The programme was recognised as best practice in Cranfield University’s The Female FTSE Board Report 2016.

We are a global organisation and we want our leaders to represent the varied markets we serve. Five nationalities are currently represented on the CET and the Board.

As part of our efforts to promote an environment where everyone feels included, in 2016, we established a Lesbian, Gay, Bisexual and Transgender (LGBT) Council. The Council is chaired by our President of Pharmaceuticals R&D, endorsed by the CET, and aims to engage and educate employees on LGBT issues. We achieved a 100% score in the Human Rights Campaign Foundation’s Corporate Equality Index which rates workplaces on LGBT equality in the US.

Making GSK a more accessible place to work for people with disabilities is a priority for us. We are working with the Global Disability Council to develop an online accessibility portal which allows employees to find information on support or adjustments to their working environments. We are committed to removing barriers, increasing understanding and ensuring that those with disabilities have the same opportunities.

Employee volunteering

In 2016, 73 GSK employees from 25 countries contributed £3.4 million worth of skilled services to 31 non-profit partners in 27 countries, through our PULSE Volunteer Partnership. They worked on assignments aligned to worldwide healthcare challenges and the UN Sustainable Development Goals.

Health and wellbeing

As a healthcare company we think hard about how we can best support not only the health of our patients and consumers but also our employees. Through our global energy and resilience training programmes and our innovative and ambitious Partnership for Prevention programme (P4P), we have created strong foundations.

Through P4P we now offer almost 100,000 employees and family members in 75 countries unprecedented access to preventive healthcare services, such as immunisations and cancer screening, at little or no extra cost. In 2016 we extended these services to India, Russia and the Commonwealth of Independent States, keeping us on track to achieve our goal of global coverage by 2018.

Protecting our people

We want to prevent incidents before they occur; however, as a global business operating in more than 150 markets, injuries do occur.

In 2016, we had a reportable injury and illness rate of 0.26 per 100,000 hours worked which, according to Pharmaceutical Safety Group (PSG) data, is comparable to other leading companies in our sector. Sadly, we had one fatality in 2016, a sales representative died as a result of a road traffic incident in India. To try to prevent road incidents we have driver safety programmes in India, Indonesia and Vietnam, with 4,000 people taking part in 2016.

 


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50

 

 

GSK Annual Report 2016

  
    
    

 

Responsible business continued

 

 

 

 

 

LOGO

Our approach

We aim to reduce our environmental impacts across our value chain while extending access to our products, by minimising our carbon footprint, water use and operational waste.

Carbon

In 2016, our operational emissions (Scope 1 and 2) totalled 1.6 million tonnes of CO2e; this is broadly the same as the previous year and represents an 18% decrease against our 2010 baseline. We reduced our emissions through a continued focus on energy efficiency, renewable energy and investment in sustainable buildings.

In 2016, we revised our calculation method for our Scope 3 emissions with the current GHG protocol methodology which now includes the impact of purchased services, capital investments, fuel and energy related activities, logistics upstream in the supply chain, and all business travel and commuting. Based on this latest methodology, we increased our 2010 baseline figure to 18.7 million tonnes of CO2e from 15 million tonnes of CO2e.

In 2015a, our overall carbon footprint (Scope 1, 2 and 3) increased from 17.8 million tonnes CO2e in 2014 to 20.3 million tonnes of CO2e due to the Novartis integration. This represents an 8.5% increase to our overall footprint versus our 2010 baseline. Excluding Novartis, our footprint has remained flat from 2010-2015 despite the volume of medicines, vaccines and consumer healthcare products shipped from our factories having increased by approximately 40% over the same period.

Our supply chain represents the largest part of our value chain footprint (51%) followed by the use of our products (30%). Our own operations, logistics and end of life disposal make up the remaining 19%.

As our largest value chain impact, we focus on helping our suppliers make environmental improvements. For example, 188 suppliers (covering £1 billion of our spend on direct raw materials) disclose information through Ecodesk, an online platform to monitor and promote environmental improvements in our supply chain. In addition, more than 350 suppliers use our online sustainability collaboration platform, the GSK Supplier Exchange, to share best practice.

Certain products have a disproportionate effect on our value chain emissions, particularly our Ventolin propellant-based inhalers, which emit greenhouse gases during use. We continue to research solutions to this issue, including changing the way we manufacture, to reduce the amount of propellant used, while maintaining efficacy for patients.

 

 

Footnote

 

a Our most recently available Scope 3 data is from 2015. We will publish 2016 data online in late 2017.
 

 

   

Carbon emissions plus intensity ratios (as per regulations)

 

 

   

 

               
    Tonnes CO2 ea      2013        2014        2015b     

 

2016 

   

 

    Scope 1 emissions      1,040,928        851,113        885,155      893,418 
   

 

   

 

Scope 2 emissions

     788,149        744,973        730,168      716,448 
   

 

    Scope 3 emissions      16,630,521        16,093,060        18,690,183     

Data available 

May 2017 

   

 

               
    Intensity ratios      2013        2014        2015     

 

2016 

   

 

   

Scope 1 and 2 emissions/sales revenue

(tonnes CO2e/£m)

     69.0        69.4        67.5      57.7 
   

 

   

Scope 1 and 2/FTE

(tonnes CO2e/FTE)

     18.4        16.3        16.0      16.2 
   

 

   

 

a   Carbon emissions are calculated according to the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (revised edition).

 

b   Data includes former Novartis sites’ emissions and headcount.


Table of Contents
             
51   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

 

 

 

~70%

 

of our sites have successfully achieved zero waste to landfill by re-purposing materials that would otherwise go to waste, or by using waste-to-energy services.

 

Water

Our new Water Stewardship Policy reinforces our commitment to reduce GSK’s water impact across the value chain. We continue to look for ways to use water more efficiently and reduce consumption. We used 14.5 million m3 of water across our operations in 2016, a 23% reduction on 2010 and 3% less than 2015.

The amount we use is just one aspect of our overall water impact across our value chain, which includes factors such as local water scarcity and quality, and health, social, regulatory and reputational risks.

We focus our efforts on a small number of high-impact GSK sites in water-scarce regions, and on the agricultural supply chain for our Horlicks products, which makes up the biggest portion of our total value chain water footprint.

An innovative project in Rajasthan, an arid region of India, is now replenishing the water source for the village of Sawaipura with around a quarter of the amount of water that our three Horlicks factories located across India use in their operations. Together with Alternative Development Initiatives, an Indian NGO, we are also supporting communities around the Horlicks supply chain to improve water management and agricultural yields.

Waste

We aim to reduce our operational waste by 50% by 2020, compared with 2010. In 2016, our operations produced 137 thousand tonnes of waste – 4% less than the previous year and 23% below our 2010 baseline. The majority (73%) was recycled or incinerated to recover energy, with only 5% sent to landfill. Around 70% of our sites have now achieved zero waste to landfill by repurposing materials that would otherwise go to waste, or by using waste-to-energy services.

 

 

 

 

   

 

GSK recognised by CDP as leaders in climate change and water        

 

   

 

LOGO

    

 

GSK included in prestigious CDP ‘A list’ for climate and water.

    
          

 

Our efforts to reduce carbon emissions were acknowledged with inclusion in the CDP ‘Climate A List’. CDP assessed companies globally from across ten industry sectors, we were one of only 193 companies (9% of applicants) and seven healthcare companies to be A-listed.

 

Our high rating reflects the significant steps we have taken to help meet our goal of becoming carbon neutral by 2050, while continuing to grow our business and meet the healthcare needs of more people.

      

 

This has included reducing emissions during the manufacture of inhalers and launching our Complete the Cycle scheme, the first of its kind to work with pharmacists and patients to recover and recycle inhalers. Such steps have helped us to reduce our operational emissions by 18% since 2010.

 

We were also one of only 24 (3% of applicants) companies, and the only healthcare company to be included in the Water A List. This success reflects our achievements in reducing water usage by 23% since 2010 and our commitment to water stewardship.

 

             


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52

 

 

GSK Annual Report 2016

  
    
    
    
    

 

 

 

 

                
  

 

Group financial review

 

     
   In this section         
   CFO’s statement    53      
   Approach to tax    55      
   Viability statement    56      
   Reporting framework    57      
   Non-controlling interests in ViiV Healthcare    58      
   Segmental review    59      
   Total results    64      
   Core results    68      
   Pro-forma growth rate reconciliations    70      
   Cash generation and conversion    71      
   Financial position and resources    72      
   Critical accounting policies    76      
   Treasury policies    77      
           
  

 

    

        
  

 

 

 

    

        


Table of Contents
             
53   GSK Annual Report 2016  

 

Strategic report

 

   

 

Group financial review

 

 

Governance and remuneration

 

   
 

 

Financial statements

 

   
 

 

Investor information

 

   

 

 

 

 

 

 

 

 

   LOGO

 

We continued to make progress in delivering against our strategy as well as the financial goals we have set out in our financial architecture.

 

 

 

 

Viability statement

Our viability statement sets out our assessment of the prospects of the Group over the next three years and is presented on page 56.

 

In 2016, we continued to make progress in delivering against our strategy as well as the financial goals we have set out in our financial architecture. All three of our businesses contributed to the delivery of more broadly-based revenue growth. Our continued focus on the execution of our integration and restructuring programmes accelerated the delivery of the targeted benefits, allowing us to improve margins and operating leverage, while still making substantial investments behind new products, and supply chain improvements, as well as progressing the R&D pipeline.

We have also maintained our focus on financial efficiency and in the allocation of our capital, allowing us to deliver core EPS growtha ahead of sales growth and at the top end of our financial guidance, as well as a significant improvement in our cash generation and a dividend of 80 pence per share.

Financial architecture

Our financial architecture is designed to support the consistent execution of our strategy and to enhance the returns we deliver to shareholders. It is focused on delivering more sustainable sales growth across the company, improving operating leverage, or profitability, and enhancing our financial efficiency. This is with the objective of driving growth in EPS ahead of our sales performance and then converting more of those earnings into cash that can be used to invest in the business or returned to shareholders, wherever we see the most attractive returns.

This clear set of priorities ensures consistency in how capital is allocated across and between the different businesses within GSK, with relative returns from each business benchmarked to relevant external comparatives using a Cash Flow Return on Investment (CFROI) based framework of metrics. Specific capital investments are also benchmarked in a similar way.

Reporting framework

In addition to total or reported results, prepared under IFRS, the Annual Report makes reference to a number of core performance measures which are used by management for planning and reporting purposes. These are non-IFRS measures adjusted for a number of items management believe it is useful to separate so that the key trends driving the performance of the business can be more clearly identified by shareholders. Core results may, however, vary significantly from total results as some of the adjustments may be material, as was the case in 2016.

The items adjusted for between total and core results are consistent each year but those that were most significant in 2016 include re-measurement charges related to the liabilities for future contingent consideration, most significantly the consideration due to Shionogi related to its former interest in dolutegravir, and the value of future put options as well as major restructuring charges.

IFRS requires us to provide for contingent consideration liabilities related to previous business acquisitions on the basis of the estimated present value of any potential future payments. These estimates could have a broad range of outcomes. The effect of the IFRS accounting treatment is that GSK recognises these fair value liabilities in the balance sheet, with any charges for re-measurement of them reflected immediately in other operating income. GSK will make cash payments in the future to discharge these liabilities but as the liabilities were established on acquisition or through subsequent re-measurement charges to the income statement, the payments will not be charged to future earnings.

Sales growth

All three of our businesses delivered growth in line with or above the medium- term growth expectations we laid out for them at our Capital Markets Day in 2015. Pharmaceuticals sales were up 14% at actual rates and 3% CER (4% pro-forma CER) with growth from new products more than offsetting the decline in Seretide/Advair sales. In addition to strong growth in HIV, the respiratory portfolio returned to growth in 2016, up 13% at actual rates and 2% CER.

Vaccines sales were up 26% at actual rates and 14% CER (12% pro-forma CER), driven by strong execution across the business, particularly around the flu and meningitis franchises, and Bexsero in particular.

Consumer Healthcare delivered a strong performance in the first full year of the joint venture with sales up 19% at actual rates and 9% CER (5% pro-forma CER) as growth from the seven power brands more than offset some tough comparators and headwinds in international markets.

Operating leverage

The total operating margin was 9.3% of sales compared with 43.1% in 2015, the movement primarily reflecting the combination of higher remeasurement charges for the Consumer Healthcare put option and the ViiV Healthcare contingent consideration liability in 2016, and the benefit to 2015 of the profit on the disposal of the Oncology business in that year.

 

Footnote

 

a  We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS.

     


Table of Contents

 

54

 

 

GSK Annual Report 2016

  
    
  

 

Group financial review continued

 

 

 

 

 

LOGO

 

Our core operating margin improved, driven by increased leverage in all three businesses. The pro-forma core margina was up 460 basis points in total, with 200 points coming from currency, and 260 points from operational improvements. This was driven by a combination of leverage from stronger growth in the top line, and £1.4 billion (including £200 million of currency benefits) of additional integration and restructuring benefits, as well as continued tight cost control that allowed us to deliver the margin improvements while continuing to make important investments in all three businesses.

Accelerating the delivery of the targeted benefits of the integration and restructuring programme has been a key objective and we are pleased with the progress made this year through a sustained focus across the Group on executing this programme. By the end of 2016 we had delivered annual benefits of £2.8 billion, (excluding £200 million of currency benefits), almost the full target of the programme a year earlier than originally planned. We are confident in delivering the remaining £200 million during 2017 to bring the total benefits delivered to £3 billion of annual savings on a constant currency basis.

Financial efficiency

We continue to focus on improving our financial efficiency and overall funding costs while protecting our credit profile and, in particular, our short-term target credit ratings. Net finance costs were up slightly, mainly due to currency.

Earnings per share

Total EPS was 18.8p (2015 – 174.3p). The decline primarily reflected the comparison with the £9.2 billion profit from the sale of our marketed Oncology assets to Novartis in 2015, but also the impact in 2016 of charges arising from increases in the valuations of the liabilities for contingent consideration and the put options associated with increases in the sterling value of the Group’s HIV and Consumer Healthcare businesses.

The impact on the decline in total EPS was partly offset by the benefit of the improved operating performance and reduced restructuring charges in the year.

Core EPS of 102.4pa was up 35% at actual exchange rates and up 12% at constant exchange rates.

Contingent consideration

At the end of 2016, GSK had liabilities for contingent consideration payments of £5.9 billion, of which £5.3 billion related to the estimated present value of future payments to Shionogi by ViiV Healthcare. The payments to Shionogi are calculated each quarter based on a high-teens percentage of the revenues of the relevant products, principally dolutegravir, with the discounted fair value of the total future payments reflecting the current expectations of total future sales of those products. Further details are provided in Note 39, ‘Contingent consideration liabilities’.

Free cash flow

Net cash inflow from operating activities was £6.5 billion and free cash flow for the Group was £3.1 billiona, significantly improved on the small outflow we saw in 2015. This was driven by our improved operating performance, including continued tight control of capital expenditure and restructuring expenditure, as well as the benefit of currency tail winds. We continue to make progress towards our objective of rebuilding the cash generating capacity of the Group post the completion of the restructuring and integration programme.

Net debt

Net debt at the end of 2016 was £13.8 billion, £3.1 billion higher than the net debt at the end of 2015. Currency was a significant factor with adverse translation effects driving £2.2 billion of the increase. The remaining increase of £0.9 billion reflected the impact of dividends paid during the year of £4.9 billion, including the special dividend of £1.0 billion declared in 2015, being only partly offset by disposal proceeds of approximately £1.0 billion and free cash flow of £3.1 billion.

2017 guidance

We expect continued progress in 2017, with all three businesses expected to continue to benefit from recent new product launches and from the investments we made during 2016.

The expectation for 2017 core EPS growth is dependent on a number of factors including, in particular, uncertainties relating to the timing and extent of potential generic competition to Advair in the US.

In the event that no generic version of Advair is introduced to the US market in 2017, the Group expects 2017 core EPS growth of 5-7% at CERa. This is based on an expected decline in 2017 in US Advair sales of 15-20%.

In the event of a mid-year introduction of a substitutable generic competitor to Advair in the US, the Group expects full-year 2017 US Advair sales of around £1 billion at CER (US$1.36/£1), with core EPS flat to a slight decline in percentage terms at CERa.

We are not able to give guidance for total results as we cannot reliably forecast certain material elements of our total results such as the future fair value movements on contingent consideration and put options.

Returns to shareholders

In 2016, we maintained our ordinary dividend at 80p per share, the same level as we paid in 2015. This is in line with the commitment we made to shareholders at the time we closed the Novartis transaction in early 2015 to maintain the dividend as we completed the integration and reshaping of the Group, despite the short-term pressures in free cash flow that the restructuring costs would create.

A fuller review of the financial results is set out on pages 55 to 78.

 

LOGO

Simon Dingemans

Chief Financial Officer

 

 


Table of Contents
             
55   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

 

Approach to tax

 

We understand our responsibility to pay an appropriate amount of tax while being financially efficient and delivering a sustainable tax rate.

 

 

 

 

Footnote

 

a  We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS.

     

 

We understand our responsibility to pay an appropriate amount of tax, and fully support efforts to ensure companies are transparent about how their tax affairs are managed. Tax is an important element of the economic contribution we bring to the countries in which we operate. We do not engage in artificial tax arrangements – those without business or commercial substance. We do not seek to avoid tax by the use of ‘tax havens’ or transactions we would not fully disclose to a tax authority.

 

At the same time, we have a responsibility to our shareholders to be financially efficient and deliver a sustainable tax rate. As part of this approach, we look to align our investment strategies to those countries where we already have substantial economic activity, and where government policies promote tax regimes which are attractive to business investment, transparent in their intent and available to all relevant tax payers such as the UK Patent Box.

 

In 2016, the Group corporate tax charge was £877 million (2015 – £2,154 million) on profits of £1,939 million (2015 – £10,526 million) representing an effective tax rate of 45.2% (2015 – 20.5%). The increase in the total tax rate primarily reflected higher non-deductible remeasurement charges related to the put option liabilities and lower credits from the re-assessment of prior years’ tax charges. We made cash tax payments of £1,609 million in the year (2015 – £2,062 million).

 

In addition to the taxes we pay on our profits, we pay duties, levies, transactional and employment taxes.

 

The ongoing alignment of our Group structure to reflect our mix of operations and geographies has helped us maintain an efficient effective tax rate. Our core tax rate for 2016 was 21.2%a (2015 – 19.5%). The core tax rate for 2017 is expected to be in the range of 21-22%a. Given the Group’s momentum, changing earnings mix and the challenging and uncertain tax environment, (due to the factors described below) some moderate upward pressure on the rate is expected over the next few years.

 

Tax risk is managed by a set of policies and procedures to seek to ensure consistency and compliance with tax legislation. Our Audit & Risk Committee and the Board are responsible for approving our tax policies and risk management.

 

  

 

We seek to maintain open, positive relationships with governments and tax authorities worldwide and we welcome constructive debate on taxation policy.

 

There continued to be a significant focus on tax reform during 2016, including the OECD’s Base Erosion and Profit Shifting (‘BEPS’) project and European Commission initiatives such as the increased use of fiscal state aid investigations. The OECD BEPS reports clarify the important principle that tax should be paid on profits throughout the supply chain, where the profit making activity takes place.

 

GSK supports this approach, in particular the implementation of the OECD’s recommendations on ‘Country by Country Reporting’, including the exchange of this data between tax authorities, as being key to its success. This data, validated against existing information held on taxpayers, will support their ability to ensure multinational groups pay the right amount of tax.

 

While the scope and timeline for US tax reform remain uncertain at present, GSK would be supportive of any steps to simplify the US tax code and to provide a clear roadmap to make the US tax system more efficient and competitive.

 

The tax implications of Brexit are dependent on the outcome of negotiations between the UK and EU, and are therefore currently unknown. However, we continue to work closely with the ABPI and BIA to analyse implications for the industry in order to highlight key focus areas for the government as part of its Brexit negotiations. The direct tax implications are expected to be limited for GSK while the indirect tax implications may be more significant, including potential customs duty costs and additional transaction or administrative costs associated with managing import and export obligations on the movement of goods between the UK and EU.

 

Our approach to tax is set out in detail within the Public Policy positions section of our website. Further details about our corporate tax charges for the year are set out on page 178.


Table of Contents

 

56

 

 

GSK Annual Report 2016

  
    
  

 

Group financial review continued

 

 

 

 

Viability statement

 

 

         

 

In accordance with provision C.2.2 of the 2014 revision of the Code, GSK has assessed the prospects of the Company over a longer period than the 12 months required by the ‘Going Concern’ provision. The Directors confirm that they have a reasonable expectation that GSK will continue to operate and meets its liabilities, as they fall due, over the next three years. The Directors’ assessment has been made with reference to GSK’s current position and prospects, our strategy, the Board’s risk appetite and GSK’s principal risks and how these are managed, as detailed on pages 18 and 19 in the Strategic report.

The Board reviews our internal controls and risk management policies and approves our governance structure and code of conduct. It also appraises and approves major financing, investment and licensing decisions, and evaluates and monitors the performance and prospects of GSK as a whole. The focus is largely on improving our long-term financial performance through simplifying the operating model, growing a diversified global business, and delivering more products of value.

The Board reviews GSK’s strategy and makes significant capital investment decisions over a long term time horizon, based on a multi-year assessment of return on capital, the performance of business units, and the market opportunity in the pharmaceutical, vaccines and consumer sectors. This approach is aligned to GSK’s model of achieving balanced growth by investing in high quality, innovative products for patients, consumers and healthcare providers. However, since many internal and external parameters become increasingly unpredictable over longer time horizons, GSK focuses its detailed, bottom-up Plan on a three year cycle. The Plan is reviewed at least annually by the Directors, who approve business forecasts showing expected financial impact. The Directors believe that a three year assessment period for the Viability statement is most appropriate as it aligns with the Company’s well established business planning processes that balance the long term nature of investments in the pharmaceutical, vaccines and consumer sectors with an assessment of the period over which analysis of near term business performance is realistically visible.

The Plan has been stress tested in a series of robust operational and principal risk downside scenarios as part of the Board’s review on risk. The downside scenarios consider GSK’s cash flows, sustainability of dividends, funding strategy, insurance provision and recovery as well as other key financial ratios over the period. These metrics have been subject to sensitivity analyses, which involve flexing a number of the main assumptions underlying the forecasts both individually and in combination, along with mitigating actions that could realistically be taken to avoid or reduce the impact or occurrence of the underlying risk.

The following hypothetical downside scenarios have been evaluated:

Scenario 1: Business performance risks. These include key performance risks, including lower sales from new products; the possible impact of a generic alternative to Seretide/Advair in the US; greater adverse impact from generic competition to other GSK products; as well as possible supply and manufacturing challenges.

Scenario 2: External and macroeconomic risks. This scenario reflects incremental risks to the business driven by outside factors, such as more intense competition, increased pricing pressure in both the US and Europe as well as the potential impact of material negative changes in the macro-economic and healthcare environment.

Scenario 3: Principal risks. This scenario includes a severe assessment of the potential loss impact from the Principal Risks set out on pages 253 to 262 related to patient safety, product quality, supply chain continuity as well as anti-bribery and corruption, all of which could fundamentally threaten our operations. These risks are managed through mitigating activities described on pages 253 to 262.

Scenario 4: Put option exercise. This scenario evaluates the additional funding requirements assuming the earliest potential exercise of the outstanding put options held by our partners in the HIV and consumer businesses.

The three year review also makes certain assumptions about the normal level of capital recycling likely to occur and considers whether additional financing facilities will be required and the respective level of funding flexibility and headroom.

The results of this stress testing show that certain combinations of these hypothetical scenarios could increase funding demands on GSK and require mitigating changes to the Group’s funding strategy. However, in light of the liquidity available to the Group and based on this analysis, the Directors have a reasonable expectation that, even under these most severe stress tests, the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period of assessment.

 


Table of Contents
             
57   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

Reporting framework

 

 

         

 

Presentation of Group results

Our Group financial review discusses the operating and financial performance of the Group, cash flows and our financial position and resources. We compare the results for each year primarily with the results of the preceding year.

Total results

Total reported results represent the Group’s overall performance. However, these results can contain material unusual or non-operational items that may obscure the key trends and factors determining the Group’s operational performance. As a result, we also report core results, which is a non-IFRS measure.

Core results

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

These items are excluded from core results either because their impact can be significant or because their exclusion improves comparabilities and consistency of reporting with the majority of our peer companies. This definition of core results aligns the Group’s results better with the majority of our peer companies and how they report earnings.

Core results reporting is utilised as one of the bases for internal performance reporting alongside total results, cash flow generation and a number of other metrics. Core results are presented and discussed in this Group financial review as we believe that core results are more representative of the performance of the Group’s operations and allow the key trends and factors driving that performance to be more easily and clearly identified by shareholders. For the same reasons, the results of our four segments: Pharmaceuticals, Pharmaceuticals R&D, Vaccines and Consumer Healthcare are reported and measured on the same basis.

Reconciliations between total and core results, including detailed breakdowns of the key non-core items, are set out on page 66, and are provided to shareholders to ensure full visibility and transparency as they assess the Group’s performance.

We also use a number of other adjusted, non-IFRS, measures to report the performance of our business. These measures are used by management for planning and reporting purposes and in discussions with and presentations to investment analysts and rating agencies and may not be directly comparable with similarly described measures used by other companies. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS.

Pro-forma growth rates

The Novartis transaction completed on 2 March 2015 and so GSK’s reported results include the results of the former Novartis Vaccines and Consumer Healthcare businesses and exclude the results of the former GSK Oncology business, both from 2 March 2015. For the Vaccines and Consumer Healthcare segments, pro-forma growth rates are calculated comparing reported turnover and core operating profits for the year ended December 2016 with the turnover and operating profit for the year ended December 2015 adjusted to include the two months of sales of the former Novartis Vaccines and Consumer Healthcare products, respectively.

For the Pharmaceuticals segment, the turnover and operating profit for the year ended December 2015 is adjusted to exclude the two months of sales of the former GSK Oncology business for January and February 2015.

Reconciliations between the reported growth rates and pro-forma growth rates, which are non-IFRS measures, are set out on page 70.

Contingent consideration

GSK has recognised a significant liability for contingent consideration (£5,896 million at 31 December 2016 on a fair value discounted basis) of which £5,304 million represented the estimated present value of future amounts payable to Shionogi relating to ViiV Healthcare, discounted at 8.5%. The payments to Shionogi are calculated based on the sales performance over the life of the relevant products, principally dolutegravir, as described on page 58. The effect of the IFRS accounting treatment is that GSK recognises these fair value liabilities in the balance sheet, with remeasurement charges reflected immediately in other operating income. These charges are adjusted from total results to present core results. GSK will make cash payments in the future to discharge this liability which will not be recorded in the profit and loss account and future earnings.

Changes to segment reporting

The completion of the Novartis transaction on 2 March 2015 changed the balance of the Group and GSK has changed its segment reporting to reflect this. With effect from 1 January 2016, GSK has reported results under four segments: Pharmaceuticals, which includes HIV, Pharmaceuticals R&D, Vaccines and Consumer Healthcare. In addition, a number of minor product reclassifications between the segments have been made. Comparative information has been restated accordingly.

Free cash flow

Free cash flow, which is a non-IFRS measure, is the net cash inflow from operating activities less capital expenditure, interest and dividends paid to non-controlling interests plus proceeds from the sale of property, plant and equipment and dividends received from joint ventures, associated undertakings and equity investments. It is used by management for planning and reporting purposes and in discussions with and presentations to investment analysts and rating agencies. Free cash flow growth is calculated on a reported basis. A reconciliation of net cash inflow from operations to free cash flow is presented on page 71.

Adjusted free cash flow

Adjusted free cash flow, which is a non-IFRS measure, excludes payments made to settle legal disputes. Such payments could fluctuate significantly between reporting periods and removing them allows the trends in free cash flow to be more easily identified by shareholders. A reconciliation of net cash inflow from operations to adjusted free cash flow is presented on page 71.

Working capital conversion cycle

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

CER growth

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

All growth rates included in this Report are at CER unless otherwise stated.

 


Table of Contents

 

58

 

 

GSK Annual Report 2016

  
    
  

 

Group financial review continued

 

 

 

Non-controlling interests in ViiV Healthcare

 

 

         

 

Trading profit allocations

Because ViiV Healthcare is a subsidiary of the Group, 100% of its operating results (turnover, operating profit, profit after tax) are included within the Group income statement and then a portion of the earnings is allocated to the non-controlling interests owned by the other shareholders, in line with their respective equity shareholdings (Pfizer 11.7% and Shionogi 10%). Each of the shareholders, including GSK, is also entitled to preferential dividends determined by the performance of certain products that each shareholder contributed. As the relative performance of these products changes over time, the proportion of the overall earnings of ViiV Healthcare allocated to each shareholder will change. In particular, the increasing sales of Tivicay and Triumeq have a favourable impact on the proportion of the preferential dividends that is allocated to GSK. GSK was entitled to approximately 80% of the core earnings of ViiV Healthcare for 2016. This does not take account of the cash payments made to Shionogi by ViiV Healthcare which are not recorded in earnings. Remeasurements of the liabilities for the preferential dividends allocated to Pfizer and Shionogi are included within other operating income.

Acquisition-related arrangements

As part of the agreement reached to acquire Shionogi’s interest in the former Shionogi-ViiV Healthcare joint venture in 2012, ViiV Healthcare agreed to pay additional consideration to Shionogi contingent on the performance of the products being developed by that joint venture, principally dolutegravir. The liability for this contingent consideration was estimated and recognised in the Group’s balance sheet at the date of acquisition. Subsequent remeasurements are reflected within other operating income.

Cash payments are made to Shionogi by ViiV Healthcare each quarter which reduce the balance sheet liability for the contingent consideration and as a result are not recorded in the income statement. In 2016, the total cash payments made to Shionogi in respect of the contingent consideration amounted to £417 million. The payments are calculated based on the sales performance of the relevant products in the previous quarter and are reflected in the cash flow statement partly in operating cash flows and partly in purchases of businesses, within investing activities. The tax relief on these payments is reflected in the Group’s non-core and total tax charge. The part of each payment relating to the original estimate of the fair value of the contingent consideration on the acquisition of the Shionogi-ViiV Healthcare joint venture in 2012 of £659 million is reported within investing activities in the cash flow statement and the part of each payment relating to the increase in the liability since the acquisition is reported within operating cash flows.

Movements in contingent consideration payable to Shionogi were as follows:

 

     

 

2016 
£m 

     2015 
£m 
 

Contingent consideration at beginning of the year

     3,409         1,684   

 

Additions

     154         –   

 

Remeasurement through income statement

     2,162         1,874   

 

Cash payments: operating cash flows

     (351)        (121)  

 

Cash payments: purchases of businesses

     (66)        (38)  

 

Other movements

 

     (4)        10   

Contingent consideration at end of the year

 

    

 

5,304 

 

 

 

    

 

3,409 

 

 

 

The additions represented the recognition in 2016 of the preferential dividends payable to Shionogi.

Exit rights

Pfizer may request an IPO of ViiV Healthcare at any time and if either GSK does not consent to such IPO or an offering is not completed within nine months, Pfizer could require GSK to acquire its shareholding. Under the original agreements, GSK had the unconditional right, so long as it made no subsequent distribution to its shareholders, to withhold its consent to the exercise of the Pfizer put options and, as a result, in accordance with IFRS, GSK did not recognise a liability for the put option on its balance sheet. In Q1 2016, GSK notified Pfizer that it had irrevocably given up this right and accordingly recognised the liability for the put option on the Group’s balance sheet at an initial value of £1,070 million. Consistent with this revised treatment, at the end of Q1 2016 GSK also recognised liabilities for the future preferential dividends anticipated to become payable to Pfizer and Shionogi on the Group’s balance sheet.

The closing balances of the liabilities related to Pfizer’s shareholding are as follows:

 

     

 

2016
£m

       2015
£m
 

Pfizer put option

     1,319           

 

Pfizer preferential dividend

     23           

Under the original agreements, Shionogi could also have requested GSK to acquire its shareholding in ViiV Healthcare in six month windows commencing in 2017, 2020 and 2022. GSK had the unconditional right, so long as it made no subsequent distribution to its shareholders, to withhold its consent to the exercise of the Shionogi put option and, as a result, GSK did not recognise a liability for the put option on its balance sheet. In Q1 2016, GSK notified Shionogi that it had irrevocably given up this right and accordingly recognised the liability for the put option on the Group’s balance sheet at an initial value of £926 million. In Q4 2016, Shionogi irrevocably agreed to waive its put option and as a result GSK de-recognised the liability for this put option on the Group’s balance sheet directly to equity. The value of the liability was £1,244 million when it was de-recognised.

GSK also has a call option over Shionogi’s shareholding in ViiV Healthcare, which under the original agreements was exercisable in six month windows commencing in 2027, 2030 and 2032. GSK has now irrevocably agreed to waive the first two exercise windows, but the last six month window in 2032 remains. As this call option is at fair value, it has no value for accounting purposes.

 


Table of Contents
             
59   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

Group turnover

 

 

         
   

 

LOGO

   

 

Group turnover

 

              
        

2016  

£m  

   

 

2015

(restated)

£m

    

Growth 

£%

     Growth
CER%
      
   

 

    
   

 

Pharmaceuticals

   

 

16,104  

 

 

 

   

 

14,157

 

 

 

    

 

14

 

 

 

  

3

 

    
   

 

Vaccines

   

 

4,592  

 

 

 

   

 

3,656

 

 

 

    

 

26

 

 

 

  

14

 

    
   

 

Consumer Healthcare

 

   

 

7,193  

 

 

 

   

 

6,038

 

 

 

    

 

19

 

 

 

  

9

 

    
   

 

    
   

Segment turnover

   

 

27,889  

 

 

 

   

 

23,851

 

 

 

    

 

17

 

 

 

  

6

 

    
   

Corporate and other

unallocated turnover

   

 

–  

 

 

 

   

 

72

 

 

 

          
   

 

    
   

 

Group turnover

 

 

 

 

  27,889  

 

 

 

 

 

 

23,923

 

 

  

 

 

 

17

 

 

  

 

6

    
   

 

    
   

    

                                      

Group turnover for the year increased 17% at actual rates and 6% CER to £27,889 million, with Pharmaceuticals up 3%, Vaccines up 14% and Consumer Healthcare up 9%, the growth in all three businesses still reflecting the impact of the Novartis transaction which completed on 2 March 2015. On a pro-forma basis, Group turnover was up 5%, with Pharmaceuticals up 4%, Vaccines up 12% and Consumer Healthcare up 5%. Sales of New Pharmaceutical and Vaccine products were £4,453 million, a Sterling increase of £2,465 million.

Group turnover by geographic region    

 

    

 

2016  

£m  

   

2015

£m

    

Growth

£%

    

Growth

CER%

 

 

US

    10,197         8,222        24        10  

 

Europe

    7,498         6,450        16        6  

 

International

    10,194         9,251        10        1  
        27,889         23,923        17        6  

 

Group turnover outside of the US and Europe represented 37% of total Group turnover in 2016 (2015 – 39%).

 

Sales from new Pharmaceutical and Vaccine products

 

 

 

    

 

  2016  

£m  

   

2015

£m

    

Growth

£%

    

Growth

CER%

 

Respiratory

         

Relvar/Breo Ellipta

    620         257        >100        >100  

Anoro Ellipta

    201         79        >100        >100  

Arnuity Ellipta

    15         3        >100        >100  

Incruse Ellipta

    114         14        >100        >100  

Nucala

    102         1        >100        >100  

CVMU

         

Eperzan/Tanzeum

    121         41        >100        >100  

HIV

         

Tivicay

    953         588        62        45  

Triumeq

 

   

 

1,735  

 

 

 

   

 

730

 

 

 

    

 

>100

 

 

 

    

 

>100

 

 

 

 

Pharmaceuticals

    3,861         1,713        >100        >100  

Bexsero

    390         115        >100        >100  

Menveo

    202         160        26        16  

 

Vaccines

 

   

 

592  

 

 

 

   

 

275

 

 

 

    

 

>100

 

 

 

    

 

96

 

 

 

   

 

 

 

 

  4,453  

 

 

 

 

   

 

  1,988

 

 

 

    

 

>100

 

 

 

    

 

>100

 

 

 

In 2015, we identified a series of New Pharmaceutical and Vaccine products that were expected to deliver at least £6 billion of revenues per annum on a CER basis by 2020. Those products, plus current clinical pipeline asset, Shingrix, are as set out above and, as a group are defined as New Pharmaceutical and Vaccine products. Sales of the New Pharmaceutical Vaccine products are now expected to reach £6 billion of revenues per annum on a CER basis up to two years earlier (2018).

Sales of New Pharmaceutical and Vaccine products were £4,453 million and represented approximately 22% of Pharmaceuticals and Vaccines turnover.

 


Table of Contents

 

60

 

 

GSK Annual Report 2016

  
    
  

 

Group financial review continued

 

 

 

 

  Pharmaceuticals

 

        

 

LOGO

 

Pharmaceuticals turnover

 

 

    
        

2016 

£m 

    

 

2015

(restated)

£m

    

Growth

£%

    

Growth

CER%

       
   

 

      
   

 

Respiratory

 

 

 

 

6,510 

 

 

  

 

 

 

5,741

 

 

  

 

 

 

13 

 

 

  

 

 

 

 

 

    
   

 

Cardiovascular, metabolic

and urology

    860         858        –         (11)       
   

 

Immuno-inflammation

    340         263        29         15        
   

 

Other pharmaceuticals

    2,297         2,445        (6)        (14)       
   

 

Established products

    2,541         2,528               (8)       
   

 

HIV

    3,556         2,322        53         37        
   

 

      
     

 

 

 

 

16,104 

 

 

 

 

  

 

 

 

 

14,157

 

 

 

 

  

 

 

 

 

14 

 

 

 

 

  

 

 

 

 

 

 

 

 

    
   

 

      
                                             

Pharmaceuticals

Pharmaceuticals turnover was £16,104 million, up 14% at actual rates and 3% CER, but adjusting for the disposal of the Oncology business to Novartis, up 4% pro-forma. HIV sales grew 37%. The Respiratory portfolio returned to growth with sales up 2%, continuing the transition globally to newer products. Respiratory sales grew 7% in the US and 3% in International, but declined 10% in Europe. Sales of New Pharmaceutical products were £3,861 million, a Sterling increase of £2,148 million, which more than offset the Sterling decline in Seretide/Advair sales of £196 million. Sales of Established products declined 8%, with declines in all regions, but particularly International, reflecting the loss of exclusivity for Valtrex in Canada, the impact of market reforms and the continued reshaping of the business in China and the impact of biennial price revisions in Japan. The overall impact of pricing to net sales of Pharmaceuticals was around -1%.

US Pharmaceuticals turnover of £4,705 million declined 1% in 2016 on a reported basis and grew 1% on a pro-forma basis. The pro-forma performance reflected a 7% growth in the Respiratory portfolio, partly offset by the impact of generic competition to Avodart, down 63% to £70 million, and Lovaza, down 59% to £43 million. Relenza sales were also down 91% to £7 million following a reallocation of government funding. Sales of new Respiratory products totalled £654 million and the growth of these products exceeded the decline in Advair. Advair sales fell 13% to £1,829 million, representing a 7% volume decline and a 6% negative impact of price. Ventolin sales were up 23% to £421 million, benefiting from competitor supply constraints early in the year, while Flovent sales declined 11% to £378 million, reflecting pricing pressures in the ICS market. Benlysta sales increased 18% to £277 million with ongoing demand growth.

In Europe, Pharmaceuticals turnover declined 8% to £2,867 million on a reported basis and 5% on a pro-forma basis. Respiratory sales declined 10% to £1,383 million reflecting the ongoing transition to the new Respiratory portfolio and generic competition to Seretide which declined 24% (16% volume decline and an 8% negative impact of price) to £835 million. This was partly offset by growth in the new Respiratory products, which recorded sales of £225 million. Established products sales were down 4% to £513 million.

International Pharmaceuticals sales of £4,976 million were down 5% on a reported basis and 4% on a pro-forma basis. Sales in Emerging Markets declined 4% reported and 3% on a pro-forma basis, impacted by the decline in the China business (down 12% primarily as a result of the ongoing reshaping programme and broader Healthcare reforms including price reductions) but also by recent divestments in the International region, and the limitation of trading in Venezuela. In Japan, Pharmaceutical sales were down 5% on a reported basis and 5% pro-forma to £1,425 million, impacted by biennial price revisions on older products as well as supply interruptions to Avodart early in the year. Respiratory sales in Japan grew 3% with strong growth of the new Respiratory products, up 57% to £118 million, more than offsetting the decline in Adoair sales.

 


Table of Contents
             
61   GSK Annual Report 2016  

 

Strategic report

 

   
   

 

Governance and remuneration

 

   
   

 

Financial statements

 

   
   

 

Investor information

 

   

 

 

 

 

 

Respiratory

Respiratory sales in 2016 increased 2% to £6,510 million, reflecting the continuing transition of the Respiratory portfolio to newer products. Growth in the new Respiratory products, which recorded combined sales of £1,052 million, including Relvar/Breo Ellipta sales of £620 million, more than offset the decline in Seretide/Advair. Flixotide/Flovent sales decreased 8% to £637 million and Ventolin sales grew 15% to £785 million.

In the US, Respiratory sales increased 7% to £3,306 million (14% volume growth and a 7% negative impact of price). The growth of new Respiratory products more than offset the 13% decline in Advair (7% volume decline and a 6% negative impact of price). The new Ellipta products recorded combined sales of £583 million, including Breo Ellipta sales of £344 million, with Nucala, the treatment for severe asthma, reporting sales of £71 million. Established Respiratory assets included Ventolin, with sales up 23% to £421 million, and Flovent, which declined 11% to £378 million. Ventolin sales benefited from competitor supply constraints early in the year, while Flovent continued to be impacted by ongoing pricing pressures in the ICS market.

European Respiratory sales were down 10% to £1,383 million, with Seretide sales down 24% to £835 million (16% volume decline and an 8% negative impact of price), reflecting continued competition from generics and the transition of the Respiratory portfolio to newer products. The new Respiratory products recorded combined sales of £225 million in 2016, including Relvar Ellipta sales of £140 million.

Respiratory sales in the International region increased 3% to £1,821 million with Emerging Markets up 7% and Japan up 3%. In Emerging Markets, sales of Seretide were down 3% at £476 million, while Ventolin grew 13% to £219 million. In Japan, the growth in the new Respiratory products offset the Adoair decline of 12%.

Cardiovascular, metabolic and urology

Sales in the category were down 11% to £860 million. The Avodart franchise was down 14% to £635 million, primarily due to a 63% decline in the US following the launch of generic competition in Q4 2015. Sales of Eperzan/Tanzeum were £121 million, primarily in the US. Prolia was divested at the end of 2015 and therefore no sales were recorded in 2016, compared with £43 million in 2015.

Immuno-inflammation

Immuno-inflammation sales grew 15% to £340 million. Sales of Benlysta were £306 million, up 19%, with sales in the US of £277 million, up 18%.

Other pharmaceuticals

Sales in other therapy areas decreased 14% to £2,297 million. Dermatology sales declined 12% to £393 million, adversely affected by supply constraints, while Augmentin sales were flat at £563 million. Sales of products for Rare diseases were flat at £423 million, and included sales of Volibris, which were up 1% to £172 million.

Established products

Established products turnover fell 8% to £2,541 million, with Valtrex sales down 37% to £118 million driven by a decline in Canada, down 91% to £5 million, following the loss of exclusivity. Zeffix sales were down 24% to £111 million and Lovaza sales in the US fell 59% to £43 million.

HIV

HIV sales increased 37% to £3,556 million, with the US up 46%, Europe up 29% and International up 21%. The growth in all three regions was driven by Triumeq and Tivicay.

Triumeq and Tivicay sales were £1,735 million and £953 million, respectively. Epzicom/Kivexa sales declined 27% to £568 million, and Selzentry sales declined 9% to £125 million. There were also continued declines in the mature portfolio, mainly driven by generic competition to both Combivir, down 38% to £23 million, and Lexiva, down 26% to £51 million.

 


Table of Contents

 

62

 

 

GSK Annual Report 2016

  
    
  

 

Group financial review continued

 

 

 

 

  Vaccines

 

        
   

 

LOGO

 

    
               2016
£m
    2015
  (restated)
£m
          Growth
£%
          Growth 
CER% 
        
   

 

      
   

Rotarix

    469       417       12             
   
   

Synflorix

    504       381       32       19        
   
   

Fluarix, FluLaval

    414       268       54       38        
   
   

Bexsero

    390       115       >100       >100        
   
   

Menveo

    202       160       26       16        
   
   

Boostrix

    470       358       31       18        
   
   

Infanrix, Pediarix

    769       733       5       (5)       
   
   

Hepatitis

    602       540       11             
   
   

Priorix, Priorix Tetra, Varilrix 

    300       260       15             
   
   

Cervarix

    81       88       (8     (14)       
   
   

Other

    391       336       17