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    Do more, feel better, live longer Grow Deliver Simplify Annual Report 2008

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    Find out more about GSK online… www.gsk.com Website GlaxoSmithKline’s website www.gsk.com gives additional information on the Group. Information made available on the website does not constitute part of this Annual Report. Notice regarding limitations on Director liability under English Law Under the UK Companies Act 2006, a safe harbour limits the liability of Directors in respect of statements in and omissions from the Report of the Directors contained on pages 12 to 98. Under English law the Directors would be liable to the company (but not to any third party) if the Report of the Directors contains errors as a result of recklessness or knowing misstatement or dishonest concealment of a material fact, but would not otherwise be liable. Report of the Directors Pages 12 to 98 inclusive consist of a Report of the Directors that has been drawn up and presented in accordance with and in reliance upon English company law and the liabilities of the Directors in connection with that report shall be subject to the limitations and restrictions provided by such law. Cautionary statement regarding forward-looking statements The Group’s reports filed with or furnished to the US Securities and Exchange Commission (SEC), including this document and written information released, or oral statements made, to the public in the future by or on behalf of the Group, may contain forward-looking statements. Forward-looking statements give the Group’s current expectations or forecasts of future events. A shareholder can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as ‘anticipate’, ‘estimate’, ‘expect’, ‘intend’, ‘will’, ‘project’, ‘plan’, ‘believe’ and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. The Group undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements involve inherent risks and uncertainties. The Group cautions investors that a number of important factors, including those in this document, could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, those discussed under ‘Risk factors’ on pages 50 to 53 of this Annual Report.

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    GSK Annual Report 2008 1 Grow Contents a diversified global business Chairman and CEO summary Strategy 3 4 Deliver more products of value Report of the Directors Business review 12 Corporate governance 60 Remuneration Report 78 Simplify Financial statements the operating model Directors’ statement of responsibilities Independent Auditors’ report 100 101 Consolidated income statement 102 Consolidated balance sheet 103 Consolidated cash flow statement 104 Consolidated statement of recognised income and expense 105 Notes to the financial statements 106 Financial statements of GlaxoSmithKline plc 181 In 2008 we set out three new strategic Shareholder information Financial record 188 priorities that aim to improve our long-term Product development pipeline 199 financial performance. Shareholder information Taxation information for shareholders 203 206 Glossary of terms 207 We believe these priorities will enable us to Index 208 navigate the coming years successfully and retain our leading-edge as a company able to meet patients’ and payers’ needs into the future. Find out more about our priorities on the following pages.

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    2 GSK Annual Report 2008 Our mission We have a challenging and inspiring mission to improve the quality of human life by enabling people to do more, feel better and live longer. By focusing our business around our strategic priorities, we’re confident that we can fulfil this promise. Sir Christopher Gent Andrew Witty Chairman Chief Executive Officer

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    GSK Annual Report 2008 3 Chairman and CEO summary 2008 marked a turning point for GSK and we are now in a pivotal Strategic priorities period of change as we redefine our business model to increase In 2008 we established our three strategic priorities to: grow a sales growth, reduce risk and deliver long-term sustainable financial diversified global business; deliver more products of value; and performance to shareholders. simplify the operating model. Financial performance* These priorities are designed to radically transform our business by We are pleased with the response of the business to what we always reducing our relative dependence on small molecule pharmaceuticals knew would be a challenging 12 months, due to the adverse impact in developed Western markets. We expect to see an increase in of significant US patent expiries and further decline in Avandia sales. the relative importance of our emerging markets and Japanese As anticipated, these factors led to a decline in earnings per share businesses and an increasingly greater contribution to our business (EPS) for the year, which was compounded by an unexpected legal from vaccines and consumer products. We also anticipate a charge in the fourth quarter. growing capability to deliver more products of value from R&D which will not only deliver benefits to patients but will also more Total sales for the year were £24.4 billion, down 3% in constant readily meet payers’ needs and therefore enable us to achieve more exchange rate (CER) terms, and EPS excluding major restructuring rapid, reimbursed product approvals. Our expanded restructuring was 104.7p, a decrease of 9% over 2007 in CER terms. Cash programme, which is expected to deliver annual savings of generation remains strong, with net cash inflow from operating £1.7 billion by 2011, is a vital catalyst of this change. activities of £7.2 billion, up 17% in sterling terms. These priorities and the progress we made to implement them The Board declared a dividend for the year of 57p, up from 53p for during 2008 are explained on the following pages. You can find 2007. During the year we completed share repurchases of £3.7 billion. more information, including regular updates on progress as we We do not expect to make any significant repurchases in 2009. Our move through 2009, by visiting our website at www.gsk.com financial strategy remains to maintain an efficient balance sheet, while using cash resources to invest in our strategic priorities and increase Changes to the Board returns to shareholders through our progressive dividend policy. Sir Ian Prosser and Dr Ronaldo Schmitz will retire from the Board after the Annual General Meeting. We thank them for their The performance of our core pharmaceuticals business and the dedicated service to the Boards of GSK and our heritage companies increasing diversification of its sales base are important indicators of and for the valuable contributions they have made to our business. GSK’s progress. Our pharmaceutical turnover declined 3% in CER terms, reflecting the adverse impact of generic competition to our In May 2009, we welcome James Murdoch to the Board, as a Non- patented products and lower Avandia and pandemic product sales. Executive Director. As the Chairman and Chief Executive of News Excluding genericised products, Avandia and pandemic products, Corporation Europe and Asia, James brings great experience and which have significant sales volatility, the remaining pharmaceuticals expertise to our boardroom, which will be particularly evident in business delivered £16.4 billion in sales and grew by 10% in CER his role as a member of GSK’s Corporate Responsibility Committee. terms. Within this, vaccines sales rose by 20% to £2.47 billion. Outlook Our sales in emerging markets grew by 12% to £2.3 billion. Sales in Asia We enter 2009 with confidence and expect to make further good Pacific and Japan totalled £1.9 billion; we are now moving into a phase progress in implementing our strategic priorities that will enable of converting our extensive pipeline in Japan into approved medicines. us to meet our long-term objective of reducing risk and delivering sustainable growth to shareholders. In 2008, we continued the good work of the previous year and launched 12 pharmaceutical products including vaccines. We are Finally, we would especially like to recognise the enormous now also starting to see good traction with our new pharmaceutical contribution of our employees and our wide network of partners. products launched in the last two years, which contributed sales of Their willingness, energy and enthusiasm for change are strong almost £0.8 billion during the year. foundations on which to build our new business model. Improved productivity and disciplined allocation of capital are key elements of our R&D strategy. We currently have around 30 assets in our late-stage pipeline, a level we aim to sustain. The augmentation of our pipeline, over the past few years, has been accomplished without substantial increases in total R&D expenditure. Sir Christopher Gent Andrew Witty Sales in Consumer Healthcare were just under £4 billion and we are Chairman Chief Executive Officer making good progress with our strategy of investment in innovation, acquisitions and marketing excellence in this area of our business. To find out more visit us at * Constant exchange rates (CER) are explained on page 16. www.gsk.com

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    4 GSK Annual Report 2008 Our strategy The pharmaceutical industry is experiencing a time of unprecedented Corporate responsibility challenge. Patent expiries, regulatory issues and increased pressures Running our business in a responsible way is fundamental to from healthcare providers have combined to create an environment our success and inseparable from our strategic priorities. where our sector is associated with lower growth and higher risk. We operate in a way that reflects our values, seeks to understand We are addressing these challenges through three key strategic and respond to stakeholder views and connects our business decisions priorities which we believe will transform GSK into a company that to ethical, social and environmental concerns. In this way we aim delivers more growth, less risk and an improved financial performance. to minimise the negative impacts and maximise the positive benefits of our business. Key challenges The patents on many medicines that have driven sales growth in our Responsibility is vital in all parts of our business and we understand the industry over the last decade are coming to an end. These medicines need to be open about how we are operating. We also understand may not be replaced by products of equivalent financial size. that transparency is a key factor in building trust with our stakeholders and have implemented a number of initiatives to improve the In addition, there are increasing pressures on pharmaceutical transparency of our activities. companies to deliver products with demonstrable benefits over current treatments. No longer do we merely have to discover and Comprehensive information on our approach to responsibility develop products that help people do more, feel better and live issues can be found in our annual Corporate Responsibility Report longer. We now have to justify that our products represent the at www.gsk.com/responsibility greatest value for healthcare providers. At the same time, the pharmaceutical sector has been exposed to controversy regarding ethical and patient safety issues. As an industry, we are in danger of eroding what trust we already have when we actually need to be building stronger relationships with governments, regulators and the general public. These factors have combined to move the industry from one which was expected to deliver high growth at low risk, to the very opposite. Three strategic priorities In 2008 we established the following three strategic priorities: • Grow a diversified global business • Deliver more products of value • Simplify the operating model We believe these priorities will enable us to navigate the coming years successfully and retain our leading-edge as a company able to meet patients’ and healthcare providers’ needs into the future. Updates on our progress will be published on our website at www.gsk.com and also feature in our regular financial results.

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    GSK Annual Report 2008 5 Grow a diversified global business We are reducing risk by broadening and balancing our portfolio, diversifying into new product areas that show potential, while also fully capturing opportunities for our products across all geographic boundaries. The plans which underpin this strategic priority: • Drive growth in the pharmaceutical business in our core markets • Deliver our ambitious vaccines forecast • Fulfil the potential of emerging markets • Expand our business in Japan • Grow the Consumer Healthcare business To find out more go to page 6 Deliver more products of value We are striving to build one of the strongest pipelines in the industry. We are transforming R&D to ensure that we not only deliver the current pipeline but are also able to sustain a flow of new products for years to come. The plans which underpin this strategic priority: • Focus on the best science • Diversify through externalisation • Re-personalise R&D • Focus on return on investment To find out more go to page 8 Simplify the operating model Pharma Manufacturing R&D Vaccines Consumer healthcare GSK is a complex organisation. We recognise that we need to simplify our operating model further, changing the way we work, removing unnecessary processes and structures which slow us down and distract us from our mission. The plans which underpin this strategic priority: • Evolve our commercial model • Re-shape manufacturing • Streamline our processes • Reduce working capital To find out more go to page 10

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    6 GSK Annual Report 2008 We are reducing risk by broadening and balancing our portfolio, diversifying into new product areas that show potential, while also fully capturing opportunities for our products across all geographic boundaries. Specifically, we expect to generate future sales growth by strengthening our core pharmaceuticals business and supplementing it with increased investment in growth areas such as vaccines, biopharmaceuticals and consumer healthcare. We are also seeking to unlock the geographic potential of our businesses, particularly in emerging markets and Japan. We have made good progress on this priority during 2008, and we believe there remain many opportunities for GSK to diversify further. Grow a diversified global business Our plans We are targeting sustained growth in our vaccines portfolio, by launching new vaccines and working to expand our franchise in Drive growth in the pharmaceutical business in our Japan and emerging markets. core markets Our established strengths in the small molecule pharmaceutical During 2008, Cervarix our new cervical cancer vaccine, was sectors of larger markets such as the USA, UK, France, Germany, successful in approximately 60% of all tenders, achieving several Italy and Spain remain central to our business. During 2008, we notable successes including Europe’s largest vaccination programme received European approval for Tyverb for advanced breast cancer, against cervical cancer, which is taking place in the UK. The year also Volibris for the treatment of pulmonary arterial hypertension, saw Rotarix, Boostrix (adult indication) and Kinrix receive approval Avamys a new allergic rhinitis treatment and US approval for from the FDA. Promacta for the treatment of thrombocytopenia and Entereg for postoperative ileus. In our US pharmaceuticals business we have Fulfil the potential of emerging markets initiated a major change programme, refocusing marketing to Emerging markets feature a less-defined distinction between demonstrate value and introducing new product offerings which pharmaceutical, over-the-counter and retail market structure and focus on volume opportunities. our ability to operate across this spectrum is a clear competitive advantage. We have an opportunity to improve this capability and Deliver our ambitious vaccines forecast further energise our business in fast-growing emerging markets. Increasingly, healthcare providers recognise the important role that vaccines play in preventative healthcare. Our proven capability and strong pipeline, plus the high barriers to entry faced by our competitors, mean that this is expected to be a source of future growth for GSK.

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    GSK Annual Report 2008 7 In 2008, we entered into an alliance with Aspen Holdings Grow the Consumer Healthcare business of South Africa. This new relationship gives us priority access Our Consumer Healthcare business continues to commercialised products from a portfolio of over 1,000 to drive growth through a portfolio of powerful potential products. brands in three key segments: over-the-counter (OTC) medicines, Oral healthcare and Nutritional Healthcare. As the year ended we acquired a BMS portfolio in Egypt and reached agreement to acquire a BMS portfolio in Pakistan. The brand portfolio, which includes alli for weight loss, Panadol In early 2009 we also agreed with UCB to acquire its current a range of analgesics, Sensodyne toothpaste and Lucozade is marketed product portfolio in a range of territories. supported by a strategy focused on innovation, marketing excellence, geographic expansion and acquisitions. Expand our business in Japan Japan is a key market for GSK investment and growth. We have In September 2008 we launched Sensodyne into the Chinese an extensive product pipeline and expect to launch more than 40 market, our first major consumer launch in the country for a decade. products in this market over the next five years. We are now preparing to launch alli, the first OTC weight loss product approved by the European Commission, across Europe. Major approvals in this market recently were Lamictal for epilepsy and Adoair for COPD. To find out more visit us at www.gsk.com

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    8 GSK Annual Report 2008 We are striving to build one of the strongest pipelines in the Diversify through externalisation industry. We are transforming R&D to ensure that we not We recognise that we do not have a monopoly on the best science. only deliver our current pipeline of new pharmaceuticals, Therefore we have proactively expanded collaborations with vaccines and Consumer Healthcare products, but are also external partners as well as with academia to access innovation and able to sustain this flow of new products for years to come. strengthen our early pipeline. As we move towards a more diversified business we will Recent alliances with organisations such as Cellzome and the concentrate on developing a higher volume of mid-size Harvard Stem Cell Institute and acquisitions such as that of Sirtris and products for more clearly-defined patient populations. Genelabs are providing us with competitive advantage in important This will help develop a lower risk portfolio which is not areas of research. dependent on the performance of one or two large products. In the last year, we completed or expanded 21 new drug discovery Positive steps have already been taken, with 30 late-stage alliances adding significant breadth and scale to our R&D activities. assets currently in our pharmaceuticals and vaccines pipeline. There are currently 70 discovery units working either inside the Our objective is to sustain this throughput of products over company or externally. the long-term. Biopharmaceuticals will play an increasingly important role in our future portfolio. Offering a worldwide market of approximately Our plans £40 billion with projected compound annual growth of 18% over the next five years, biopharmaceuticals are compounds capable of Focus on the best science being manufactured by living organisms, usually cultured cells. Around 75% of assets in our pipeline are entirely new compounds or vaccines, demonstrating our strong drive Currently only 6% of our pipeline comprises biopharmaceuticals, towards innovation. which is below the industry average. We have significantly expanded our biopharmaceutical pipeline through in-house discovery, the During the year we rebalanced our Drug Discovery organisation acquisition of Domantis and by in-licensing late-stage products. to improve efficiency and focus on the areas of new science that There are currently 10 clinical research programmes underway we believe are most likely to lead to new medicines. Together including five assets in late-stage development. with vaccines, GSK’s R&D is now focused on eight therapy areas: Biopharmaceuticals, Immuno-inflammation, Infectious diseases, Metabolic pathways, Neuroscience, Oncology, Ophthalmology and Respiratory. Deliver more products of value

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    GSK Annual Report 2008 9 Re-personalise R&D Focus on return on investment We want to create an environment where there is no impediment We have adopted a more disciplined approach to how and where we to our best scientists making the kind of discoveries which will allocate resources within R&D. More than 35% of discovery projects transform the company’s future by delivering value to patients, have been terminated following our therapy area rebalancing exercise healthcare providers and shareholders. and reviews by the new Drug Discovery Investment Board. 2008 saw the creation of Discovery Performance Units (DPUs) within As part of the same process, all our 35 Discovery Performance Units our Centres of Excellence for Drug Discovery (CEDDs). Each DPU is a now have three year funding in place to develop their projects. compact, fully-empowered, focused and integrated team which has responsibility for a small part of the pipeline. We realise that reimbursement is the key to long-term financial performance and we are working hard to bring a health outcome We have also created new, integrated R&D Units for focus to R&D which will in turn deliver greater value to healthcare Biopharmaceuticals and Oncology. The R&D centre we established providers. For example, in Europe direct dialogue now exists in China in 2007 is now 200 people strong and has recruited between payer organisations and our R&D teams to improve our experienced scientists who are dedicated solely to GSK’s understanding of the perceived benefit and value of new products. neurodegenerative research. To find out more visit us at www.gsk.com iv ity ct du Pro Peo ple ucts Prod

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    10 GSK Annual Report 2008 GSK is a complex organisation. We recognise that we need to simplify our operating model further, changing the way we work, removing unnecessary processes and structures which slow us down and distract us from our mission. Our global restructuring programme is a vital catalyst of our strategy. We believe it will radically change our business model giving us the capability to support a more diverse, growing business that is also expected to be more profitable in the long-term. Pharma Simplify the operating model Our plans We continue to improve the efficiency of our sites, by applying benchmarked studies and seizing opportunities to do more with less. Evolve our commercial model In addition, we are simplifying our operating model to clarify roles We have reorganised so that we now have one single commercial and responsibilities, to improve prioritisation and decision making support structure for Europe, Emerging Markets and Asia and to introduce simpler, more efficient ways of working. Pacific/Japan. In the USA, we have radically restructured our pharmaceuticals business. This includes the transformation of the US Streamline our processes sales force as well as the decision to designate a single headquarters We are simplifying our organisation to speed up decision-making for US Pharmaceuticals, located at Research Triangle Park, North and improve alignment to our business priorities. There are Carolina to reduce complexity and streamline our US operations. many different programmes and initiatives across GSK including a comprehensive programme to simplify and reduce costs in IT. Re-shape manufacturing Through an innovative partnership with Microsoft Online we Manufacturing is a key capability at GSK and we are taking an will produce financial savings, improve productivity and enhance ambitious approach to re-shaping our operations. We are moving to collaboration internally and with our external partners. match network capacity more closely to volume and are leveraging our network of sites and contractors to ensure the flexibility to sustain growth and adapt to changing business models.

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    GSK Annual Report 2008 11 Manufacturing R&D Vaccines Consumer Healthcare We are striving to ensure that cross-business processes and structures are simpler and more efficient. For example, a number of reviews are currently underway to simplify our support functions infrastructure and create a leaner corporate centre. Reduce working capital Our current working capital requirement is around £8 billion. In September 2008, we started a programme which has successfully delivered cash flow benefits of more than £500 million, which we are using to invest in our strategic priorities. To find out more visit us at www.gsk.com

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    12 GSK Annual Report 2008 Report of the Directors Financial trends and ratios 2008 Growth* 2007 Growth* 2006 Total results £m CER% £% £m CER% £% £m Turnover 24,352 (3) 7 22,716 2 (2) 23,225 Cost of sales (6,415) 13 21 (5,317) 8 6 (5,010) Selling, general and administration (7,656) 2 10 (6,954) – (4) (7,257) Research and development (3,681) 4 11 (3,327) (1) (4) (3,457) Other operating income 541 475 307 Operating profit 7,141 (20) (6) 7,593 3 (3) 7,808 Profit before taxation 6,659 (24) (11) 7,452 2 (4) 7,799 Profit after taxation for the year 4,712 (25) (11) 5,310 3 (3) 5,498 Profit attributable to minority interests 110 96 109 Profit attributable to shareholders 4,602 5,214 5,389 Basic earnings per share (pence) 88.6p (21) (6) 94.4p 5 (1) 95.5p Diluted earnings per share (pence) 88.1p 93.7p 94.5p Results before major restructuring Turnover 24,352 (3) 7 22,716 2 (2) 23,225 Cost of sales (5,776) 4 11 (5,206) 6 4 (5,010) Selling, general and administration (7,352) – 8 (6,817) (2) (6) (7,257) Research and development (3,506) 2 8 (3,237) (3) (6) (3,457) Other operating income 541 475 307 Operating profit 8,259 (10) 4 7,931 8 2 7,808 Profit before taxation 7,782 (14) – 7,790 6 – 7,799 Profit after taxation for the year 5,551 (14) – 5,571 8 1 5,498 Profit attributable to minority interests 110 96 109 Profit attributable to shareholders 5,441 5,475 5,389 Basic earnings per share (pence) 104.7p (9) 6 99.1p 10 4 95.5p Diluted earnings per share (pence) 104.1p 98.3p 94.5p Research and development – total Pharmaceuticals 3,557 3,215 Consumer Healthcare 124 112 Total 3,681 3,327 Net finance cost cover – total Net finance costs 530 191 Cover 14 times 40 times Net finance cost cover is profit before tax plus net finance costs, divided by net finance costs. Tax rate – total 29.2% 28.7% Tax rate – before major restructuring 28.7% 28.5% Borrowings Net debt 10,173 6,039 Gearing 122% 61% The gearing ratio is calculated as net debt as a percentage of total equity. * CER% represents growth at constant exchange rates. Sterling% or £% represents growth at actual exchange rates. See page 13. The calculation of results before major restructuring, is described in Note 1 to the financial statements, ‘Presentation of the financial statements’.

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    GSK Annual Report 2008 13 Report of the Directors Report of the Directors The Report of the Directors provides users of the financial Directors’ remuneration statements with a more complete picture of GSK. It supplements This sets out the remuneration policies operated for our the information in the financial statements with a discussion of Directors and the Corporate Executive Team (CET) members. other aspects of our activities, our future and the environment There are disclosures on Directors’ remuneration including those in which we operate. required by The Directors’ Remuneration Report Regulations The report is divided into a number of sections. These are: 2002 (the Regulations). The sections cover: Letter from the Chairman of the Remuneration Committee 78 Business review Remuneration policy 80-87 This discusses our financial and non-financial activities, Executive Director terms, conditions and remuneration 87 resources development and performance during 2008 and Non-Executive Director terms, conditions and fees 88 outlines the factors including the trends and the principal risks Directors and Senior Management remuneration 89 and uncertainties which are likely to affect future development. Annual remuneration 90 This is sub divided into: Non-Executive Directors’ remuneration 91 Financial trends and ratios 12 Directors’ interests 92 2008 Performance overview 14 Share options 92 Products, intellectual property and competition 17 Incentive plans 94 Global manufacturing and supply 20 Pensions 97 Research and development 21 Directors and Senior Management 98 Our employees 26 Directors’ interests in contracts 98 Our responsibility 27 Regulation 32 Accounting presentation Economy, world market and outlook 33 This report is prepared in accordance with International Financial Financial review 2008 34 Reporting Standards (IFRS), as adopted by the European Union Financial position and resources 43 and also with IFRS as issued by the International Accounting Risk factors 50 Standards Board. Financial review 2007 54 Data for market share and market growth rates are GSK estimates based Corporate governance on the most recent data from independent external sources, and where This discusses our management structures and governance appropriate, are valued in Sterling at relevant exchange rates. Figures procedures. It includes disclosures on compliance with the Combined quoted for product market share reflect sales by GSK and licensees. Code on Corporate Governance of the Financial Reporting Council Exchange rates (Combined Code) and with US laws and regulation. The Group operates in many countries and earns revenues and Biographies of our Board 60 incurs costs in many currencies. The results of the Group, as Biographies of our Corporate Executive Team 62 reported in Sterling, are affected by movements in exchange rates Governance and policy 64 between Sterling and other currencies. Average exchange rates Dialogue with shareholders 68 prevailing during the period are used to translate the results and Share capital and control 68 cash flows of overseas subsidiaries, associates and joint ventures Donations to EU political organisations and EU into Sterling. Period end rates are used to translate the net assets political expenditure 70 of those entities. Annual General Meeting 71 Internal control framework 71 Currencies The currencies that most influence the Group’s results remain Committee reports 73 the US dollar, the euro, the yen and the pound. The Combined Code 76 US law and regulation 76 In 2008 the pound weakened by 28% against the dollar, to $1.44/£1 at year-end. In addition, the pound weakened by 24% against the euro and by 40% against the yen. A new £/€ record low of 1.02 was set in December.

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    14 GSK Annual Report 2008 Report of the Directors 2008 Performance overview Key performance indicators Our strategies Turnover £bn CER growth % During 2008 we set out three new strategic priorities. 2008 24.4 (3) Full details are given on pages 4 to 11. 2007 22.7 2 2006 23.2 9 Grow a diversified global business Broadening and balancing our portfolio, diversifying into new product areas while also fully capturing opportunities for our products Earnings per share before major restructuring* pence CER growth % across all geographic boundaries. 2008 104.7 (9) 2007 99.1 10 2006 95.5 19 Total shareholder return 175 Deliver more products of value 150 Transforming R&D to ensure we not only deliver 125 the current pipeline but are also able to sustain 100 the flow of products for years to come. 75 31/12/03 31/12/04 31/12/05 31/12/06 31/12/07 31/12/08 GlaxoSmithKline Total Return Index • GlaxoSmithKline Pharma Peers Return Index • FTSE 100 Total Return • Index Free cash flow+ £m 5,000 4,000 4,679 Simplify the operating model 3,000 3,857 Simplifying our operating model to ensure that 2,000 2,623 it is fit for purpose and able to support our 1,000 business in the most efficient and effective way. 0 2006 2007 2008 * The calculation of results before major restructuring is described in Note 1 to the financial statements, ‘Presentation of the financial statements’. + Free cash flow is described on page 46.

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    GSK Annual Report 2008 15 Report of the Directors Our measures Progress in 2008 We are developing a number of measures to track We made good progress during the year, with our progress against the strategic priorities over the a number of notable successes medium to long term. These include the following: •฀ Performance of core pharmaceuticals business, • Excluding genericised products, Avandia and pre-pandemic including growth in vaccines preparations, our core pharmaceuticals business had turnover of £16.4 billion and grew by 10%. • Growth of Consumer Healthcare market share • Consumer Healthcare sales grew 3% to nearly £4 billion. Continued market share growth in Oral healthcare and Nutritional healthcare but sales fell in OTC due to lower sales of smoking cessation products. • Contribution of Emerging Markets to our overall • Sales in Emerging Markets grew 12% to £2.3 billion. sales and growth Transactions with Aspen and BMS executed to build broader and more geographically diverse portfolio. • Expansion of Japanese business • Major recent approvals in Japan for Lamictal for epilepsy and Adoair for COPD. Around 40 new product opportunities in development. Sales in Japan fell by 3% as a result of price cuts mandated by government. • Contribution to sales of new products • New product launches in the last two years contributed sales of almost £0.8 billion in 2008. • Number of reimbursable product approvals and filings • 12 key product launches, including Tyverb, Volibris and Avamys in Europe and Treximet, Entereg, Promacta, Kinrix and Rotarix in the USA. Secured 17% of all FDA approvals for new chemical entities and vaccines. • Sustaining late-stage pipeline of around 30 assets • Late stage pipeline maintained at around 30 assets. Five new assets moved into phase III development during 2008, including darapladib for atherosclerosis and Syncria for type 2 diabetes. • Enhanced productivity and increased externalisation for • Created 35 Discovery Performance Units, small teams Drug Discovery each with three-year funding in place. Entered or expanded 21 new drug discovery alliances. • Delivery of major restructuring programme • Annual cost savings of £390 million already achieved. Programme expanded to deliver annual savings of £1.7 billion by 2011. • Evolution of our commercial model • Rescaled and redeployed US pharmaceuticals sales force. Sales forces expanded in Emerging Markets. • Reshaping of Global Manufacturing and Supply • Manufacturing network rationalisation continuing with multiple site exits ongoing. • Reduction in working capital • Delivered more than £500 million of cash flow benefits from the working capital reduction programme which started in September 2008.

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    16 GSK Annual Report 2008 Report of the Directors History and development of the company Business segments GlaxoSmithKline plc is a public limited company incorporated on GSK operates in two industry segments: 6th December 1999 under English law. Its shares are listed on the • Pharmaceuticals (prescription pharmaceuticals and vaccines) London Stock Exchange and the New York Stock Exchange. On 27th December 2000 the company acquired Glaxo Wellcome plc • Consumer Healthcare (OTC medicines, Oral healthcare and and SmithKline Beecham plc, both English public limited companies, Nutritional healthcare). by way of a scheme of arrangement for the merger of the two companies. GSK and its subsidiary and associated undertakings Results before major restructuring constitute a major global healthcare group engaged in the creation, In October 2007, the Board approved the implementation of a discovery, development, manufacture and marketing of pharma- detailed formal plan for, and GSK announced, a significant new ceutical and consumer health-related products. Operational Excellence restructuring programme. A second formal plan, representing a significant expansion of the Operational GSK has its corporate head office in London and has its US Excellence programme, was approved by the Board and announced headquarters in Research Triangle Park, with operations in in February 2009. With an estimated total cost of approximately £3.6 some 114 countries, and products sold in over 150 countries. billion, the expanded programme is expected to deliver annual pre-tax savings of approximately £1.7 billion by the time it is substantially Annual Report and Summary complete in 2011. GSK presents the restructuring costs incurred This report is the Annual Report of GlaxoSmithKline plc for the solely as a direct result of the Operational Excellence programme in a year ended 31st December 2008, prepared in accordance with separate column in the income statement titled ‘Major restructuring’. United Kingdom requirements. It was approved by the Board of In addition to the restructuring costs of the Operational Excellence Directors on 3rd March 2009 and published on 4th March 2009. programme, the major restructuring column in the income statement A summary of the year, intended for the shareholder not needing includes restructuring costs incurred solely as a direct result of the full detail of the Annual Report, is produced as a separate any restructuring programmes that follow, and relate to, material document and issued to all shareholders. The summary does acquisitions where the operations of the acquired business overlap not constitute a set of summary financial statements as defined extensively with GSK’s existing operations. The $1.65 billion (£814 by section 251 of the Companies Act 1985. The Annual Report million) acquisition of Reliant Pharmaceuticals in December 2007 is is issued to shareholders who have elected to receive it. Both the only acquisition since October 2007 that meets these criteria. documents are available on GSK’s website. The Group’s results before the costs of the Operational Excellence In this Report ‘GlaxoSmithKline’, the ‘Group’ or ‘GSK’ means programme and acquisition-related restructuring programmes GlaxoSmithKline plc and its subsidiary undertakings; the ‘company’ meeting the criteria described above are described as ‘Results means GlaxoSmithKline plc; ‘GlaxoSmithKline share’ means an before major restructuring’. This presentation, which GSK intends Ordinary Share of GlaxoSmithKline plc of 25p; American Depositary to apply consistently to future major restructuring programmes Shares (ADS) each represents two GlaxoSmithKline shares. that have a material impact on GSK’s operating results and on the manner in which GSK’s business is conducted, has been Brand names adopted to show clearly the Group’s results both before and Brand names appearing in italics throughout this report are trademarks after the costs of these restructuring programmes. Management either owned by and/or licensed to GlaxoSmithKline or associated believes that this presentation assists shareholders in gaining a companies, with the exception of Baycol and Levitra, trademarks of clearer understanding of the Group’s financial performance and in Bayer, Boniva/Bonviva, a trademark of Roche, Citrucel, a trademark making projections of future financial performance, as results that of Merrell Pharmaceuticals, Entereg, a trademark of Adolor include such costs, by virtue of their size and nature, have limited Corporation in the USA, Volibris, a trademark of Gilead, NicoDerm, a comparative value. This presentation is also consistent with the trademark of Sanofi-Aventis, Pfizer Canada, Elan, Novartis, Merrell or way management assesses the Group’s financial performance. GlaxoSmithKline, and Vesicare, a trademark of Astellas Pharmaceuticals CER growth in many countries and of Yamanouchi Pharmaceuticals in certain In order to illustrate underlying performance, it is the Group’s countries, all of which are used in certain countries under licence by the practice to discuss its results in terms of constant exchange rate Group. (CER) growth. This represents growth calculated as if the exchange rates used to determine the results of overseas companies in Sterling had remained unchanged from those used in the previous year. CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates. All commentaries in this Report are presented in terms of CER unless otherwise stated.

  • Page 19

    GSK Annual Report 2008 17 Report of the Directors Products, intellectual property and competition Pharmaceutical products Within the pharmaceutical industry, the introduction of new GSK’s principal pharmaceutical products are currently directed to eight products and processes by our competitors may affect pricing or main therapeutic areas. A description of the products is on pages 18 result in changing patterns of product use. There is no assurance to 19 and an analysis of sales by therapeutic area, is on page 35. that products will not become outmoded, notwithstanding patent or trademark protection. In addition, increased government Competition and other pressures for physicians and patients to use generic Our principal pharmaceutical competitors range from small to pharmaceuticals, rather than brand-name medicines, may increase large pharmaceutical companies often with substantial resources. competition for products that are no longer protected by patent. Some of these companies are: Intellectual property • Abbott Laboratories Intellectual property is a key business asset for our company, • Amgen and the effective legal protection of our intellectual property (via • AstraZeneca patents, trademarks, registered designs, copyrights and domain name registrations) is critical in ensuring a reasonable return on • Bristol-Myers Squibb investment in R&D. • Eli Lilly • Johnson & Johnson Patents •฀Merck It is our policy to try to obtain patents on commercially important, protectable inventions discovered or developed through our R&D • Novartis activities. Patent protection for new active ingredients is available in • Pfizer most major markets and patents can also be obtained for new drug • Roche Holdings formulations, manufacturing processes, medical uses and devices • Sanofi-Aventis for administering products. Although we may obtain patents for our products, this does not prevent them from being challenged • Schering-Plough before they expire. Further, the grant of a patent does not provide • Wyeth assurance that the issued patent will be held valid and enforceable Pharmaceuticals may be subject to competition from other by a court. Significant litigation concerning such challenges products during the period of patent protection and, once is summarised in Note 44 to the financial statements, ‘Legal off patent, from generic versions. The manufacturers of proceedings’. If a court determines that a patent we hold is invalid, generic products typically do not bear significant research and non infringed or unenforceable, it will not protect the market from development or education and marketing development costs third party entry prior to patent expiry. and consequently are able to offer their products at considerably The life of a patent in most countries is 20 years from the filing date. lower prices than the branded competitors. As a research and Patents protecting new active ingredients are generally applied for development based company we will normally seek to achieve a early in the development process. The long development time for sufficiently high profit margin and sales volume during the period pharmaceutical products may result in a substantial amount of this of patent protection to repay the original investment, which is patent life being used up before launch. In some markets (including generally substantial, and to generate profits and fund research the USA and in Europe) it is possible to have some of this lost time for the future. Competition from generic products generally occurs restored and this leads to variations in the amount of patent life as patents in major markets expire. Increasingly patent challenges actually available for each product we market. Further, certain are made prior to patent expiry, claiming that the innovator patent countries provide a period of data or market exclusivity that prevents is not valid and/or that it is not infringed by the generic product. a third party company from relying on our clinical trial data to enter For details of some of the challenges to our products see legal the market with its copy for the period of exclusivity. proceedings on pages 172 to 180. Following the loss of patent protection, generic products rapidly capture a large share of the The patent expiry dates for our significant products are in the market, particularly in the USA. following table. Dates provided are for expiry of patents in the USA and major European markets on the active ingredient, unless We believe that remaining competitive is dependent upon the otherwise indicated, and include extensions of patent term (including discovery and development of new products, together with for paediatric use in the USA) where available. effective marketing of existing products.

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    18 GSK Annual Report 2008 Report of the Directors Products, intellectual property and competition continued Product Compounds Indication Major Patent expiry dates competitor brands USA EU Respiratory Seretide/Advair salmeterol xinafoate / asthma/COPD Singulair, Symbicort, 2010 20132 fluticasone propionate Spiriva, Asmanex, Pulmicort (combination) (combination) Flixotide/Flovent fluticasone propionate asthma/COPD Qvar, Singulair expired expired Serevent salmeterol xinafoate asthma/COPD Foradil, Spiriva expired expired Veramyst fluticasone furoate rhinitis Nasacort 2021 2023 Flixonase/Flonase fluticasone propionate rhinitis Nasonex, Rhinocort expired expired Anti-virals 2016 2019 Epzicom/Kivexa lamivudine and abacavir HIV/AIDS Truvada, Atripla (combination) (combination) Combivir lamivudine and zidovudine HIV/AIDS Truvada, Atripla 2012 2013 (combination) (combination) Trizivir lamivudine, zidovudine HIV/AIDS Truvada, Atripla 2016 2016 and abacavir (combination) (combination) Agenerase amprenavir HIV/AIDS Prezista, Kaletra, Reyataz 2013 2014 Lexiva fosamprenavir HIV/AIDS Prezista, Kaletra, Reyataz 2017 2019 Epivir lamivudine HIV/AIDS Truvada, Atripla 2010 2011 Ziagen abacavir HIV/AIDS Truvada, Atripla 2012 2014 Valtrex valaciclovir genital herpes, coldsores, Famvir 2009 2009 shingles Zeffix lamivudine chronic hepatitis B Hepsera 2010 2011 Relenza zanamivir influenza Tamiflu 2013 2014 Central nervous system Lamictal lamotrigine epilepsy, bipolar disorder Keppra, Dilantin expired expired Imigran/Imitrex sumatriptan migraine Zomig, Maxalt, Relpax expired expired Seroxat/Paxil paroxetine depression, various Effexor, Cymbalta, expired expired anxiety disorders Lexapro Wellbutrin SR bupropion depression Effexor, Cymbalta, expired 2009 Lexapro Requip ropinirole Parkinson’s disease, Mirapex expired 2011 restless legs syndrome (use in treating Parkinson’s disease) Treximet sumatriptan and naproxen migraine Zomig, Maxalt, Relpax 2017 NA (combination and use) Cardiovascular and urogenital Avodart dutasteride benign prostatic hyperplasia Proscar, Flomax, finasteride 2015 2017 Lovaza formulation of omega-4 acid very high triglycerides Tricor 2017 ethyl esters (Formulation) Coreg CR carvedilol phosphate mild-to-severe heart failure, Toprol XL 20231 NA hypertension, left ventricular dysfunction post MI Fraxiparine nadroparin deep vein thrombosis, Lovenox expired expired pulmonary embolism Arixtra fondaparinux deep vein thrombosis, Lovenox, Fragmin expired expired pulmonary embolism Innohep Vesicare solifenacin overactive bladder Detrol, Detrol LA, Enablex, 2018 NA Sanctura 1 Generic competition possible in 2010 as a result of patent settlement 2 The UK patent has been revoked by the UK courts

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    GSK Annual Report 2008 19 Report of the Directors Products, intellectual property and competition continued Product Compounds Indication Major Patent expiry dates competitor brands USA EU Metabolic Avandia rosiglitazone maleate type 2 diabetes Actos, Januvia 2012 2013 Avandamet rosiglitazone maleate and type 2 diabetes Competact, Janumet 2012 2013 metformin HCI Actoplus met Bonviva/Boniva ibandronate osteoporosis Actonel, Fosamax 2012 2011 Anti-bacterials Augmentin amoxicillin/clavulanate common infections expired expired potassium Altabax retapamulin skin infections 2021 2022 Oncology and emesis Hycamtin topotecan ovarian cancer, small cell Doxil, Gemzar 2010 2011 lung cancer Zofran ondansetron nausea and vomiting Kytril, Emend, Aloxi expired expired from cancer Tykerb lapatanib advanced and metastatic Herceptin 2020 2023 breast cancer in HER2 positive patients Vaccines Infanrix/Pediarix diphtheria, tetanus, pertussis, diphtheria, tetanus, pertussis, Pentavac, Pentaxim, 2017 2016 polio, hepatitis B (HepB), polio, hepatitis B (HepB), Pediacel, Pentacel inactivated antigens Fluarix split inactivated influenza virus seasonal influenza Vaxigrip, Mutagrip, Fluzone, none none subtypes A and type B antigens Influvac, Aggripal, Fluad FluLaval split inactivated influenza virus seasonal influenza Vaxigrip, Mutagrip, Fluzone, none none subtypes A and type B antigens Influvac, Aggripal, Fluad Cervarix HPV 16 & 18 virus like particles human papilloma virus Gardasil, Silgard 2026 2019 (VLPs), AS04 adjuvant (MPL + type 16 & 18 aluminium hydroxide) Rotarix live attenuated rotavirus rotavirus gastroenteritis Rotateq 2022 2020 strain GIP(8) Trademarks All of GSK’s commercial products are protected by registered trademarks in major markets. There may be local variations, for example, in the USA the trademark Advair covers the same product sold in the EU as Seretide. Trademark protection may generally be extended as long as the trademark is used by renewing it when necessary. GSK’s trademarks are important for maintaining the brand identity of its products. GSK enforces its trademark rights to prevent infringements. Consumer Healthcare products Our portfolio comprises three main categories: OTC medicines, Oral healthcare and Nutritional healthcare. Sales of key Consumer Healthcare products in 2008 are shown on page 37. Our leading Consumer Healthcare products include the following: OTC medicines •฀alli, the first licenced weight loss medicine to be available without a prescription, launched in the USA in 2007 and has now won approval to launch across Europe in 2009 •฀Panadol, the global paracetamol/acetaminophen analgesic •฀฀Smoking control products NicoDerm, NiQuitin CQ, Nicabate and in the USA, Nicorette •฀฀Other brands include Breathe Right nasal strips, Tums, Citrucel, Contac and FiberChoice.

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    20 GSK Annual Report 2008 Report of the Directors Products, intellectual property and competition continued Oral healthcare Global manufacturing and supply (GMS) •฀Aquafresh, a range of toothpastes, toothbrushes More than 31,000 people work in GMS across our network of and mouthwashes 78 sites in 37 countries. GMS supports the commercial ambition •฀Sensodyne, a range of toothpastes and toothbrushes, including of GSK by delivering quality medicines and consumer products to Pronamel to protect from acid erosion patients and customers around the world. •฀Biotene, acquired late in 2008 and the leading treatment for The scale of manufacturing in GSK is staggering, with the dry mouth manufacture of over 4 billion packs per year in 28,000 different presentations (including tablets, creams/ointments, inhalers, •฀Polident, PoliGrip and Corega, the denture care cleansers and injections, liquids and steriles), which are then supplied to over adhesives 150 markets. Over £3.6 billion is spent on production each year. •฀฀Other brands include Odol, Macleans and Dr Best. GMS operates a procurement operation on behalf of the Group. Nutritional healthcare We spend over £2 billion annually with external suppliers, •฀Lucozade, a range of energy and sports drinks purchasing active ingredients, chemical intermediates, packaging components and part-finished and finished products. •฀Horlicks, a range of milk-based malted food and chocolate drinks During 2008, as our commercial customers sought every •฀Ribena, a blackcurrant juice-based drink. opportunity to grow their business, we focused on the cost- competitive supply of quality product to meet their ambition. We Consumer Healthcare competition began adapting to the emerging commercial model by leveraging GSK holds leading global positions in all its key consumer product our network of sites and contractors to give us built-in flexibility areas. Worldwide it is the third largest in Oral healthcare and to sustain future growth and adapt to emerging commercial in OTC medicines. In Nutritional healthcare it holds the leading business models. In an increasingly rigorous external regulatory position in the UK, India and Ireland. environment, we have continued to leverage technology in The environment in which the Consumer Healthcare business support of process understanding, control, and capability. operates has become ever more challenging: Our Primary supply sites supply high quality, competitively priced •฀฀consumers are demanding better quality, better value and bulk actives and focus on improvements in primary technologies improved performance and processes. Our new product and global supply sites work closely with R&D’s development teams to ensure that the right technical •฀฀retailers have consolidated and globalised which has competencies are in place to support rapid and successful new product strengthened their negotiation power introduction. These sites serve as the focal point for developing and •฀฀cycle times for innovation have reduced. introducing new secondary manufacturing technologies. The sites in our Regional Pharma supply division focus on reducing costs, allowing GSK The main competitors include the major international companies to compete more effectively in all its markets. Our Consumer Healthcare Colgate-Palmolive, Johnson & Johnson, Procter & Gamble, Unilever sites deliver high-quality, competitively priced products and support and Wyeth. In addition, there are many other smaller companies rapid new product introduction in a highly innovative and competitive that compete with GSK in certain markets. business. New technologies have become a fundamental platform for The major competitor products in OTC medicines are: driving innovation, lowering costs, and providing flexibility in operations. •฀฀in the USA: Metamucil (laxative), Pepcid (indigestion) and private We are embedding new ways of working that are simplifying label smoking control products the business and achieving greater efficiencies. It is our focus on customer service, including support for new product launches, our •฀฀in the UK: Lemsip (cold remedy), Nurofen and Anadin strong compliance culture, our commitment to health, safety and (analgesics), and Nicorette and Nicotinell (smoking control the environment, and our commitment to developing our people treatments). that have delivered strong results for GSK even as the external In Oral healthcare the major competitors are Colgate-Palmolive’s environment has become more demanding. Colgate and Procter & Gamble’s Crest. Vaccine manufacturing is particularly complex as it requires the use In Nutritional healthcare the major competitors to Horlicks of innovative technologies and living micro-organisms. Sophisticated are Ovaltine and Milo malted food and chocolate drinks. The quality assurance and quality control procedures are in place to competitors to Ribena are primarily local fruit juice products, ensure the vaccine’s quality and safety. This includes animal use while Lucozade competes with other energy drinks. according to health authorities’ requirements. Due to their biological nature, individual health authorities may subject vaccines to a second control to guarantee the highest quality standards.

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    GSK Annual Report 2008 21 Report of the Directors Research and development Research and development – Pharmaceuticals •฀฀We continue to identify compounds from other companies that would enhance the portfolio and to create innovative GSK R&D is striving to build one of the strongest pipelines of collaborations to ensure that we are seen as a partner of choice potential new medicines in the industry. In 2008, Pharmaceutical for large and small companies. Our internal R&D expertise allows R&D was actively managing over 150 projects in human clinical us to have a strong position in business development, and makes trials across the globe. Delivering this pipeline to patients safely us able to complement our internal pipeline with acquisitions, and efficiently is the number one goal. in-licensing, co-marketing/co-promotion deals, or future Discovering potential medicines options collaborations. Late Stage •฀The early research identifies the biological targets interfering Project Team MDC Development with a particular disease, and creates small molecules or biopharmaceuticals that interact with these disease targets. Drug Discovery (DD) is formed of the Centres of Excellence for Drug Discovery (CEDDs), groups focused around defined Therapy Areas. •฀฀A Therapy Area Review exercise conducted in 2007 and early 2008 helped R&D refocus its discovery effort around well identified promising areas of science that are more likely to deliver products R&D Unit of value. R&D invested in growth areas such as ophthalmology and ceased less promising areas of science such as urology. The focus of Drug Discovery at GSK is summarised in the table below. •฀฀Following this Therapy Area Review, a major transformation of Drug Discovery was conducted in our company in 2008 to create an even more nimble, creative, and entrepreneurial environment, building Discovery CEDD Drug on the success of the existing CEDD model. Each CEDD created Performance Discovery Discovery Performance Units (DPU), gathering small integrated and Unit empowered groups of scientists (size ranging from 5 to 70 people), focusing on a particular disease or pathway, taking the CEDD model Delivering these medicines to patients one step further. The number of DPUs in each CEDD varies according •฀฀Progression into late-stage development consists of optimising to the science, and some standalone DPUs were created to explore both the physical product properties of the medicine, (the new therapy areas (such as Ophthalmology), or new ways of working. chemical steps and formulation required to manufacture and deliver it), as well as the much larger scale studies in humans •฀฀Each of the CEDDs and standalone DPUs submits a 3-year business confirming efficacy and safety. The combination of the results of plan with overall budget and clearly defined objectives. The CEDDs these two steps into a regulatory file for submission to regulatory are accountable for the production of quality proofs of concept, agencies and approval for patient use is the responsibility of the and are tackling this challenge through internal discovery as well regulatory team. as extensive collaborations with academia and biotech companies. •฀฀Medicines Development is the collection of four therapeutically Centres of Excellence for Drug Discovery (CEDD) aligned Medicine Development Centres (MDCs): Cardiovascular and Metabolic (CVM), Infectious Diseases (ID), Neurosciences All include several Discovery Performance Units (DPU) and Respiratory. Each MDC has ultimate accountability for • Immuno-Inflammation developing experimental drugs into regulatory-approved • Infectious Diseases medicines for patients. The MDCs are responsible for creating • Metabolic Pathways value through the execution of full product development plans • Neurosciences and ensuring strong partnerships with the rest of R&D and GSK, • Respiratory in particular the CEDDs, preclinical development, the regulatory • Centre of Excellence for External Drug Discovery (CEEDD) and commercial groups, and manufacturing. Additional standalone Discovery Performance Units (DPU) •฀฀In 2008, emphasis was put on the creation of strongly • Macrolides empowered project teams, with the creation of Medicine • Opthiris (focusing on ophthalmology) Development Leader roles for all the key late stage assets. • Virtual PoC The Centre for Clinical Study Excellence was also created as a • Sirtris professional organisation providing study operations capabilities • Academic DPU which, in partnership with the MDCs and the CEDDs, delivers GSK clinical trials.

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    22 GSK Annual Report 2008 Report of the Directors Research and development continued Major opportunity in oncology – creation of an R&D employees Oncology R&D unit in 2008 R&D employs staff with a wide variety of educational backgrounds, In 2008, we created an integrated Oncology unit, spanning from with biologists, chemists, clinical scientists and physicians being drug target identification through to late stage development. Its some of the more prominent qualifications. Given the number of strong pipeline of cancer medicines, as well as unique aspects of structural changes in 2008, we are ensuring that staff retention is oncology medicines development, were behind the creation of the a top priority, through personal development programmes, staff Oncology R&D unit. Oncology is an important investment area for engagement strategies and active talent management. GSK and 2008 has seen its late stage pipeline flourish. Diseases of the developing world Future growth in biopharmaceuticals – creation of a Continued investment in research into diseases of the developing Biopharm R&D unit in 2008 world is essential if there is to be a long-term improvement in With the goal of becoming a leader in biopharmaceuticals, we the health of people who live in these regions. As part of our created the Biopharm R&D unit in 2008. Biopharmaceuticals are response to this challenge, we operate a drug discovery unit based large molecules such as antibodies, proteins or peptides which are at Tres Cantos (Spain), which focuses on malaria and tuberculosis. manufactured using living cells. Because they are very different Additional R&D sites in the USA and the UK are focused on to small molecules (which are made by chemical synthesis), the the development of new medicines to treat HIV/AIDS and drug R&D process requires quite specific treatment from a discovery, resistant bacteria, while vaccine research is conducted in development and manufacturing perspective. The Biopharm R&D Rixensart (Belgium). unit brings all of these functions together in a single cohesive Through these R&D efforts, we are addressing the prevention and group with discovery, biopharmaceutical process development and treatment of all three of the World Health Organization’s (WHO) late stage development forming part of one organisation. priority infectious diseases. Investment in global R&D: growth of R&D China Public/Private Partnerships (PPPs) remain essential to fund research In line with our aim to access the best science and to ensure GSK where there is no commercially viable market for a potential is a truly global company, we announced in 2007 the creation of product. We remain a leader in working in PPPs and continue to R&D China. In 2008, this group grew to 200 employees focusing collaborate closely with many governments, academic centres, on neurodegeneration and has created three DPUs during the year. United Nations’ agencies and other global funding bodies in this R&D China is currently focusing on discovery, but as the unit grows area, to maximise expertise and knowledge. and the pipeline matures, it will expand its capabilities to be a fully integrated R&D centre. Governance Key projects reaching significant milestones are reviewed each month by the Product Management Board (PMB), which is responsible for determining if a medicine has met criteria for passing into the next phase of development. GSK’s Chief Medical Officer, working with the Global Safety Board, is ultimately accountable for oversight of all major decisions regarding patient safety. Our Global Safety Board is responsible internally for approving pivotal studies and investigating any issues related to patient safety arising during the development programme. Information from GSK clinical trials is widely and easily available at the Clinical Trial Register on GSK’s website. The oversight of strategic issues, organisation choices and budget management across R&D is owned by RADEX, the R&D Executive team.

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    GSK Annual Report 2008 23 Report of the Directors Research and development continued Vaccines R&D Animals and research GSK is active in the fields of vaccine research, development and For ethical, regulatory and scientific reasons, research using production and has a portfolio of over 30 vaccines approved animals remains a small but vital part of research and development for marketing. We have over 1,600 scientists devoted to of new medicines and vaccines. We only use animals where there discovering innovative vaccines that contribute to the health and is no alternative and only in the numbers required for each test. well-being of people of all generations around the world. The We strive to exceed regulatory standards in the care and use of the discovery and development of a new vaccine is a complex process animals used and undertake internal and external review to assure requiring long-term investment and with more than 20 vaccines these standards. in clinical development, we have one of the strongest vaccine The vast majority of the experimental methods do not use animals. pipelines in the industry. Although vaccines have traditionally We are actively engaged in research to develop and validate more been used to ward off illness, GSK’s vaccine division is developing tests that either avoid the use of animals in research or reduce the therapeutic immunotherapeutics aimed at educating the patient’s numbers needed. When animals are used in research, unnecessary immune system to identify and attack cancer cells in a highly pain or suffering is scrupulously avoided. specific manner. We decided not to initiate funding of studies using great apes Vaccine discovery involves many collaborations with academia after 28th October 2008. This is a voluntary decision and provides and the biotech industry to identify new vaccine antigens which a tangible demonstration of our commitment to the 3Rs of are then expressed in yeast, bacteria or mammalian cells and animal research, which advocates the replacement and reduction purified to a very high level. This is followed by formulation of of animals in research and refining of experiments to improve the clinical lots of the vaccine. This may involve mixing antigens animal welfare. with selected GSK novel proprietary adjuvant systems, which are combinations of selected adjuvants designed to elicit the most We understand that use of animals for research purposes appropriate immune response to a specific antigen. The right commands a high level of public interest. Our Public Policy Position combination of antigen and adjuvant system can help the body ‘The care and ethical use of animals in research’, and further mobilise the most effective immunological pathway, which is information and reports, are available on our website. designed to provide maximum protection against specific diseases in targeted populations. Research and development – Consumer Healthcare Once formulated, the candidate vaccine is evaluated from a safety The continuous creation and development of innovative and efficacy perspective through the different phases of preclinical products keeps our brands relevant, vibrant and valuable. Our testing, then through the clinical trials involving healthy individuals. portfolio spans three major categories: over-the-counter (OTC) These will range from safety analysis in a small group of volunteers medicines, Oral healthcare and Nutritional healthcare. For our in phase I, dose adjustment and proof of concept in phase II to major brands, dedicated R&D teams partner with and work large-scale safety and efficacy analysis in phase III. The results alongside their commercial brand team colleagues in office-free obtained during clinical trials and data regarding the development hub environments that foster collaboration and fast decision- of a quality and large-scale production process and facilities are making. Hubs have quickly become a preferred way of working at then combined into a regulatory file which is submitted our Innovation Centres in Weybridge, UK and Parsippany, USA. to the authorities in the countries where the vaccine will be made available. After launch, post marketing studies of considerable size are set up to assess vaccination programmes and to monitor vaccine safety.

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    24 GSK Annual Report 2008 Report of the Directors Research and development continued Therapeutic area Compound We have a full and diverse product development pipeline. Biopharmaceuticals belimumab1 Our key late stage projects are highlighted here, comprising both otelixizumab1 new chemical entities and new combinations and formulations of Syncria† existing assets. The most advanced status is shown and includes ofatumumab1 2008 approvals in at least one major market. Key: Bosatria (mepolizumab) Phase III 3 Large comparative study (compound versus placebo and/or Cardiovascular & Metabolic Avandamet XR established treatment) in patients to establish clinical benefit Avandia + simvastatin and safety. darapladib1 Arixtra Filed F Following successful Phase III trials, we file the product for approval Neurosciences almorexant1 by the regulatory authorities. retigabine1 Approval A rosiglitazone XR Only when approval is granted can we begin to market the Lamictal XR medicine or vaccine. Lunivia1 Our full pipeline is on pages 199 to 202 and on our website Solzira (1838262)1 www.gsk.com Oncology Avodart . elesclomol1 2 pazopanib + Tyverb/Tykerb Tyverb/Tykerb pazopanib Duodart (Avodart + alpha blocker) Zunrisa/Rezonic Revolade/Promacta† Vaccines Hib-MenCY-TT MAGE-A3 ASCI MenACWY-TT New generation flu vaccine Simplirix Synflorix Cervarix1 Prepandrix (Flu pre-pandemic)1 1 In-licence or other alliance relationship with third party. 2 See Note 40 to the financial statements, ‘Post balance sheet events’

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    GSK Annual Report 2008 25 Report of the Directors Research and development continued Ap Ph pr as Fi ov e le ed Indication 3 d Systematic lupus erythematosus 3 Type 1 diabetes 3 Type 2 diabetes 3 1. Follicular lymphoma 3 2. Rheumatoid arthritis 3 3. Refractory chronic lymphocytic leukaemia F Hypereosinophilic syndrome F Type 2 diabetes – extended release 3 Type 2 diabetes 3 Atherosclerosis 3 Treatment of acute coronary syndrome A Insomnia 3 Epilepsy – partial seizures 3 Alzheimer’s disease 3 Epilepsy – partial seizures, once-daily F Insomnia F Restless legs syndrome F Reduction in the risk of prostate cancer 3 Metastatic melanoma 3 Inflammatory breast cancer 3 1. Breast cancer, adjuvant therapy 3 2. Breast cancer, first line therapy 3 3. Gastric cancer 3 4. Head & neck squamous cell carcinoma (resectable disease) 3 1. Sarcoma 3 2. Renal cell cancer F Benign prostatic hyperplasia - fixed dose combination F Chemotherapy-induced & postoperative nausea & vomiting F 1. Chronic liver disease induced thrombocytopaenia 3 2. Hepatitis C induced thrombocytopaenia 3 3. Idiopathic thrombocytopaenic purpura A Neisseria meningitis groups C & Y disease & Haemophilus influenzae type b disease prophylaxis 3 1. Treatment of non-small cell lung cancer 3 2. Treatment of melanoma 3 Neisseria meningitis groups A, C, W & Y disease prophylaxis 3 Seasonal influenza prophylaxis for the elderly 3 Genital herpes prophylaxis 3 Streptococcus pneumoniae disease prophylaxis in infants and children F Human papilloma virus infection prophylaxis A Pre-pandemic influenza prophylaxis A

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    26 GSK Annual Report 2008 Report of the Directors Our employees Recruitment, talent management and • Face to face communications activities – town hall presentations leadership development led by senior executives, lunches with CET and senior executives. In 2008, as with every year, recruiting, retaining and developing To ensure our communications activities are effective and to our employees was critical to enhancing and sustaining our enable us to continue to improve, there are a number of performance and reputation. Some areas of focus: evaluation processes. Feedback and monitoring mechanisms are part of every major communication event, and Q&A and feedback • Our recruiters proactively identify, engage and attract top external facilities are a core feature of our web communications channels. talent and assess their potential fit with the organisation. This Other broader processes include a Global Leadership Survey takes places across all functions, businesses and geographical every two to three years. The survey asks over 10,000 managers areas. Our assessment process is aligned to a core set of worldwide to comment on critical issues such as culture and competencies, of which ethics and integrity are central. confidence in GSK’s future. • Our streamlined annual performance and development planning As our business evolves, there will be changes that affect (PDP) process means employees have business-aligned objectives employees and we remain committed to consulting on these and behavioural goals. With regular reviews, the progress is changes via a number of internal consultation forums and ongoing, culminating with an end-of-year review. discussions with the European Employee Consultation Forum and • We have an annual talent management cycle to identify the similar bodies in countries where this is national practice. highest performing people in each business, followed up with tailored management and leadership programmes for key talent. 5 6 Employee numbers by region 1 4 1 USA (21,176) Performance and reward 2 Europe (44,677) Our reward systems support high performance and help to attract 3 Emerging Markets (8,631) and retain the best people. Performance-based pay and bonuses, 4 Asia Pacific (18,983) share rewards and share options align employee interests with 3 5 Japan (3,174) business targets. 6 Canada (2,362) Communication and employee involvement 2 When new full-time employees join our organisation, they have the opportunity to take part in the GSK Experience, an interactive Diversity induction programme offered at many locations across the UK We are committed to employment policies free from discrimination and USA. Programme modules are also provided to support against existing or potential employees on the grounds of age, local induction and awareness seminars around the world. This race, ethnic and national origin, gender, sexual orientation, faith experience gives employees a flavour of the communications and or disability. GSK is committed to offering people with disabilities engagement activities on offer throughout GSK. access to the full range of recruitment and career opportunities. Every effort is made to retain and support employees who become Our communication channels are designed to keep employees disabled while working at GSK. For more details on diversity informed, engaged and involved in activities across all areas of measures, see our Corporate Responsibility Report. our organisation. We encourage two-way, open and honest communication with employees, and in 2008 web technology was Healthy high performance used increasingly to engage more employees in a more immediate To be able to meet our mission and strategy, our Employee Health way. New or updated communication channels in 2008 include: and Performance initiatives focus on the health factors that • myCEO – an area on the GSK intranet that allows employees to enable employees to perform at the highest level by sustaining engage directly with the CEO via discussion and Q&A energy and engagement. The programmes developed to deliver this health strategy range from the traditional – such as • The Ambassador community – provides slides, statements and immunisations, smoking control, and weight management – to films which give employees company information and keep cutting-edge programmes in the areas of team and personal them up-to-date on the issues affecting GSK and the resilience, ergonomics and Energy for Performance. These pharmaceutical industry programmes, available in many languages, are designed to address • GSKtv – a web-based library of all GSK’s video assets including the root causes of excessive work pressure and low energy and presentations on strategy and employee broadcasts engagement at work and at home. They are complimented by our commitment to flexible working that enables employees to do • Interactive multimedia events such as web broadcasts, multi-site their best work in an environment that helps them integrate their Q&A sessions – give regular updates globally from CEO, business work and personal lives. For more details on scope and impact of or function leaders these programmes, see our Corporate Responsibility Report.

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    GSK Annual Report 2008 27 Report of the Directors Our responsibility Improving access to medicines Programmes in other countries Access to healthcare in the developing world We have also introduced Orange Cards providing discounts There are no easy solutions to the challenge of providing on certain GSK prescription medicines for eligible patients in sustainable access to healthcare in developing countries. Poverty a number of other countries. The nature of the discounts is the single biggest barrier. In many countries people do not have varies between countries and the ways in which the healthcare enough food, access to a clean water supply, hospitals or clinics systems operate. in which to receive treatment and healthcare professionals to care for them. Patient Advocacy The Patient Advocacy initiative has demonstrated significant We are committed to playing a full part in addressing the progress since its inception in 2002. Initially launched as a US healthcare challenges of the developing world by taking an programme, it is now a critical initiative throughout GSK. Patient innovative, responsible and, above all, sustainable approach. GSK Advocacy teams in the USA and Europe share best practices and is making a vital contribution to developing country healthcare established processes to optimise interaction with patient groups. through action in a number of areas including: preferential Typically these relationships provide mutual opportunities: to pricing of our anti-retrovirals and anti-malarials; tiered pricing of learn about patient needs and priorities and for patient groups our vaccines; investing in R&D that targets diseases particularly to develop an understanding of drug development challenges. affecting the developing world (see page 28); community investment activities and partnerships that foster effective In 2008, we continued to partner with patient groups on healthcare (see page 29); and seeking innovative partnerships common issues: advocating for access to medicines and treatment, and solutions. We cover our contribution to improving access to increasing funding for health programs and improving health medicines extensively in our Corporate Responsibility Report. care delivery. We are considered to be a trustworthy partner with patient groups and we have worked with patient groups and In 2008, we were a clear leader in the first Access to Medicines our trade associations to increase the transparency of all of Index produced by the ATM Foundation. We will continue to build our interactions. on our product, pricing and partnership commitments to help improve healthcare in the developing world. In February 2009, Our work with communities we announced a new approach to pricing in the UN defined list We work as a partner with under-served communities in the of least developed countries. However, a significant increase in developed and developing world supporting programmes that funding from the global community is still needed to support are innovative, sustainable and bring real benefits to these R&D and to provide access to the resultant medicines communities. Our global community investment in 2008 was and vaccines. £124 million. This compares with £109 million in 2007 on a While much has been achieved, sustainable progress will only like for like basis, an increase of 13%. This comprised product occur if the significant barriers that stand in the way of better donations valued at £68 million, cash giving of £37 million, access to healthcare are tackled as a shared responsibility by all in-kind donations of £4 million plus costs of £15 million to sectors of global society – governments, international agencies, manage and deliver community programmes in over 100 charities, academic institutions, the pharmaceutical industry countries. The product donations include £56 million for GSK’s and others. patient assistance programmes, £7 million worth of albendazole for the Lymphatic filariasis (LF) programme and £5 million for Access to medicines in the developed world humanitarian product donations. Product donations are for the Programmes in the USA first time valued at cost (average cost of goods) rather than We are working to provide access to medicines for people wholesale price (WAC). Our new approach to valuing donations with limited financial resources and without prescription is a more accurate reflection of the cost to GSK and is therefore drug insurance. more transparent. We believe we are the first pharmaceutical company to adopt this practice. For comparative purposes the For uninsured Americans who do not qualify for Medicare or total value of donations in 2008 using WAC for products would Medicaid, GSK and 11 other pharmaceutical companies created be £343 million compared with £282 million in 2007. Together Rx Access, a programme for qualified individuals offering reductions in the pharmacy cost on more than 300 medicines. We do not operate a single charitable foundation for our Over 820,000 Together Rx Access cardholders saved about community investment programmes, but have a number of $24 million in 2008. country based foundations and their 2008 grants are included in the investment total.

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    28 GSK Annual Report 2008 Report of the Directors Our responsibility continued Our cash giving was targeted primarily at health and education PHASE initiatives as follows: The PHASE programme (Personal Hygiene And Sanitation Education), initiated by us in 1998, is now providing education to thousands of 5 school children in 13 countries to improve their health and hygiene to 4 1 Health (55%) fight infectious diseases. In 2008, we committed three years funding 3 2 Education (22%) of £320,000 to extend the programme into India. 3 Arts and Culture (5%) 1 Humanitarian product donations 4 Environment (2%) During 2008, we donated essential products, such as antibiotics, 2 5 Other (16%) through non-profit partners including AmeriCares, Direct Relief International, MAP International and Project HOPE, to support humanitarian relief efforts and community healthcare. The total value of our international humanitarian product donations was Global Health Programmes £5 million at average cost. Eliminating lymphatic filariasis Community initiatives Our effort to eliminate the disabling disease, LF from the world, We are dedicated to strengthening the fabric of communities continued in close partnership with the governments of countries through providing health and education initiatives and support where the disease is endemic, the WHO and over 40 partner for local civic and cultural institutions that improve the quality organisations. We are committed to donating as much of the of life. In the UK, we contributed £6 million in 2008 to our anti-parasitic drug albendazole as required to treat the one continuing programme of charitable activities supporting over 70 billion people at risk in over 80 countries. In 2008, 266 million organisations in health, medical research, science education, the albendazole treatments were donated to 30 countries. We have arts and the environment. donated over one billion albendazole treatments since the global elimination programme started in 2000. Programmes in North America at a national and local level focused on improving public education, increasing access to healthcare Positive Action on HIV/AIDS for children and healthcare (prevention and access) for breast or Positive Action is our pioneering global programme working gynaecologic cancers. Funding for these was of $24 million. with communities affected by AIDS. Started in 1992, it supports community-based organisations to deliver effective HIV and AIDS GSK was one of 21 companies, and the only manufacturing education, prevention and healthcare services. During 2008, company, to be awarded the new CommunityMark, following Positive Action worked with 16 partners to support programmes independent assessment. The Mark created by Business in the in 21 countries. Positive Action’s larger programmes operate in Community (BitC) was given for our work at local and national Mexico, Kenya, India, China, Cambodia and Vietnam. level in the UK as well as for our larger international programmes. The GlaxoSmithKline African Malaria Partnership Our malaria advocacy programme ‘Mobilising for Malaria’ has launched country Coalitions Against Malaria in the UK, Belgium, France, Ethiopia and Cameroon to increase awareness of malaria and mobilise resources. During 2008, GSK co-sponsored The Guardian International Development Journalism Awards to recognise the work of NGOs in addressing the UN Millennium Development Goals – which included a focus on malaria.

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    GSK Annual Report 2008 29 Report of the Directors Our responsibility continued Health initiatives Our contribution to improve healthcare included the following grants: Non Profit partner Amount in 2008 Purpose of grant Children’s Health Fund $888,000 To extend the Referral Management Initiative (RMI) which ensures USA continuity of specialist medical care for high-risk children who are often homeless Pittsburgh Mercy Foundation $450,000 To provide access to healthcare for homeless men and women in USA Pittsburgh, USA GSK IMPACT Awards £489,000 To recognise excellence in non-profit community health UK and Philadelphia organisations. Charities receive unrestricted grants for their work dealing with diverse and difficult social issues Medical Research Charities £449,000 To support medical research programmes UK Education initiatives Non Profit partner Amount in 2008 Purpose of grant Institute for a Competitive Workforce $100,000 To improve education and create a skilled workforce for the future, USA working in partnership with a broad business coalition and staffed by the US Chamber of Commerce ‘Science in the Summer’ $575,000 To teach basic scientific concepts and inspire school children Philadelphia, Pittsburgh and North Carolina through a library-based science education programme Project ENTHUSE £200,000 To support Continuing Professional Development (CPD) for science UK teachers and ultimately encourage children to engage with science and pursue careers in science and technology CREST Star Investigators £120,000 To provide science activities and awards for after school clubs in UK 5,000 UK primary schools, working in partnership with the British Association for the Advancement of Science Further information about GSK grants and programmes are available on gsk.com. Employee involvement Our employees are encouraged to contribute to their local communities through employee volunteering schemes. Support includes employee time, cash donations to charities where employees volunteer and matching gift programmes. Through the US GSK Matching Gift Program, we matched 17,000 employee and retiree gifts at a value of $5 million in 2008 plus $1 million to the United Way campaign. GSK’s GIVE programme provided grants of over $416,000 to 437 organisations where US employees volunteered and £244,000 to 400 UK-based non-profit organisations via the GSK Making a Difference programme.

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    30 GSK Annual Report 2008 Report of the Directors Our responsibility continued Responsibility for environment, health EHS and sustainability strategy and plan and safety The 10-year strategic plan for EHS that extends to 2015 is aligned Caring for the environment and the health and safety (EHS) of with our strategic priorities and includes management objectives employees is a key part of our drive to be a sustainable company. with performance measures and targets. In 2008, GSK’s progress was evaluated against the targets set in 2006. Traditional environmental control programmes address risks and impacts from wastes generated by manufacturing and other The focus for 2008 was embedding EHS in the business which activities. We meet this responsibility with treatment and waste is fundamental to making GSK a sustainable business. It involves disposal systems that comply with laws, regulations and our own caring for the present while thinking to the future in making standards of performance. This was the standard of practice for decisions. This supports all three aspirations in the 2006 to 2015 most companies beginning in the 1970’s and 1980’s. Even now plan – embedding EHS in the business, environmental sustainability we continue to improve our handling of waste but we recognise and open and transparent stakeholder relations. In 2008 we that these changes are incremental rather than transformative. reviewed our EHS and sustainability priorities with our external and internal stakeholders. This review identified the following In the early 1990’s, the concept of sustainability was emerging. key issues: Sustainability means we need to be concerned not only with the short term impacts of pollution but also with the long term •฀Manufacturing efficiency: The mass efficiency of processes in impact of resource consumption, the types of materials used development continues to improve and progress is being made and the persistence of waste in the environment. Our journey to achieve the target to double mass efficiency and thereby halve to sustainability started with looking holistically at continuing to the waste per unit of product for the manufacturing processes treat the waste while also finding ways to prevent waste from for all phase III compounds by 2010. Late stage products have being produced. This requires what is now called sustainable been evaluated since 2005 for efficiency and we are making technologies – more efficient chemistries and more efficient progress toward our goal. processes. We recognise that sustainability principles apply to • Climate change: A comprehensive strategy on climate change all aspects of our operations. They apply to minimising waste and energy efficiency was approved and is available on GSK’s and consumption of natural resources and possibly using website. A climate change and energy reduction team has been renewable materials in discovering, manufacturing, packaging formed to manage a special fund which is used to support and selling our products and even the impacts from consumers’ climate change projects. The team identified more than 400 use of our products. projects for 2007 and 2008 to reduce energy consumption and While traditional environmental programmes are seen as a to increase our use of renewable energy. cost without a financial return, a sustainable approach, using • Pharmaceuticals in the Environment: We apply product less resource, being concerned with the social impact of our stewardship principles to the issue of pharmaceuticals in operations, also has a financial benefit. By using less resource, the environment – principally unmetabolised drugs excreted we spend less money on operations. from patients. We need to continue to address traditional environmental issues at • Process safety: Our Process Safety Management System is the same time as we integrate sustainability into all aspects of our being enhanced, with new engineering standards and training business from discovering and developing to manufacturing and programmes under development. The standards will be used selling pharmaceutical and consumer healthcare products, all of to design new process plant and to upgrade existing plants which use energy and resources and produce emissions and waste. where needed. The training programmes will increase process safety awareness and competencies for engineers, chemists and managers.

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    GSK Annual Report 2008 31 Report of the Directors Our responsibility continued EHS management In 2008, GSK remained on track to eliminate the use of CFCs by Responsibility for EHS is at the highest level. The Corporate 2010 and to meet its target for water consumption. Progress was Responsibility Committee of the Board of Directors provides made to meet its 2010 targets for wastewater pollution, disposal oversight and a Sustainability Council was formed in 2008 with of waste and emissions of volatile organic compounds to air representatives from all areas of the company. There is a corporate due to a combination of conservation programmes and reduced department reporting to the Chief of Staff that has overall production of several products. The rate of injuries and illnesses responsibility for providing governance and leadership on EHS and also improved in line with the target due to continued emphasis sustainability issues. The head of this department makes regular on employee safety behaviours. reports to the Corporate Executive Team (CET) and the Audit and There was no progress towards the 2010 energy and related Corporate Responsibility Committees of the Board. Within the greenhouse gas emissions targets and therefore our carbon businesses all executives and managers are responsible for EHS and footprint remained unchanged. Our energy efficiency projects are supported by site-based EHS and occupational medical staff. continue with 171 projects completed in 2008 and another 600 As part of our governance responsibility, we conduct EHS audits identified. The gains from the 2008 projects will be fully realised of our sites, operating entities and key suppliers, assessing the in 2009 and beyond. The gains experienced in 2008 in some parts management of key risks and impacts and performance against of the business were offset by the continued expansion of the our global EHS standards. This includes providing audited sites and vaccines business. suppliers with quantitative performance information as well as Final EHS performance data for 2008 with explanations of the highlighting areas for risk reduction and improvement. trends will be published in the Corporate Responsibility report. EHS targets Sustainability As part of the EHS plan, targets are set every five years with 2006 In working towards sustainability, we are addressing the economic, as the baseline year for the targets to 2010. environmental and social issues in research, manufacturing, We selected our measures of performance improvement based sales and distribution of our medicines and consumer healthcare on the potential for adverse impact on people, the environment, products. Sustainability starts with healthcare solutions found by business continuity or business reputation. R&D and continues with innovations to improve the efficiency of manufacturing processes for new products. This reduces resource Most of the measures selected are similar to those reported use which in turn lowers waste and cost. With lower costs our by other companies and are recommended by the Global products may be available to a wider population around the world. Reporting Initiative, a long-term, multi-stakeholder, international In the future, the EHS plan for excellence proposes investigating undertaking, to develop and disseminate globally applicable the use of renewable resources in manufacturing. sustainability reporting guidelines. We seek dialogue with external stakeholders and consider their Targets have been set to eliminate chlorofluorocarbons (CFCs) from views when developing approaches to sustainable development. all uses by 2010 and each year to reduce non-hazardous waste More information on EHS programmes and performance may be disposed by 1%, reduce water use and volatile organic compound found on GSK’s website. (VOC) releases to air by 2%, reduce pollution of wastewater, measured as chemical oxygen demand, by 3% and reduce energy usage and related greenhouse gas emissions by 20% by 2010 and 45% by 2015. All targets are normalised by sales based on constant exchange rates.

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    32 GSK Annual Report 2008 Report of the Directors Regulation Regulation – Pharmaceuticals Generally, national regulatory authorisation is also required GSK operates within a highly regulated environment. Regional and to approve the switch of products from prescription to OTC. country-specific laws and regulations define the data required to However, in a history-making first for the OTC industry, the show safety and efficacy of pharmaceutical products, as well as weight loss medicine alli received a centralised European positive govern testing, approval, manufacturing, labelling and marketing opinion from the Committee for Medicinal Products for Human of drugs. These regulatory requirements are a major factor in Use (CHMP) in October. This resulted in approval to market alli determining whether a marketable product may be successfully across all 27 EU member countries as the first licensed weight loss developed and the amount of time and expense associated with treatment available without a prescription. the development. Price controls Drug safety remains a primary focus of the FDA and US In many countries the prices of pharmaceutical products are congressional oversight committees and, as in Europe, evaluation controlled by law. Governments may also influence prices through of benefit and risk continues to be a paramount consideration for their control of national healthcare organisations, which may bear approval of a new drug. The FDA Amendments Act, US legislation a large part of the cost of supplying medicines to consumers. passed in 2007, renewed the User Fee system for drug reviews and mandates a rigorous FDA review of safety from approval Recent government healthcare reforms in countries such as France, through the post-marketing phase of the product. The legislation Spain and Germany may restrict pricing and reimbursement. also provides the FDA with the authority to convene Advisory In the USA, recent legislative proposals on healthcare reform, Committees to review all new drugs prior to approval decisions by cross-border trade, the acceleration of generics to market and FDA, to require sponsors to complete post-marketing studies and comparative effectiveness have further increased the focus on to direct companies to make product labelling changes. The FDA pricing. Currently, there are no government price controls over are routinely exercising these new authorities. private sector purchases, but federal law requires pharmaceutical Regulations requiring development of prescription drugs and manufacturers to pay prescribed rebates on certain drugs to be biologics for paediatric populations are now in place in the US and eligible for reimbursement under Medicaid and other state and EU. GSK fully supports the objective of ensuring the development federal healthcare programmes. Healthcare remains a leading of better medicines for children. domestic issue. During the 2008 US Presidential elections the candidates focused on health reforms to address chronic disease In Europe, proposals for further legislative change were announced as the primary healthcare cost driver, rather than focusing on drug by the European Commission during 2008. These aim to prices alone. strengthen the EU system for the safety monitoring of medicines, improve citizen’s access to reliable information on medicines and Medicare strengthen EU laws to protect citizens better from the threats From 2006, the US Medicare program, a federally funded posed by fake medicines. healthcare insurance programme benefiting senior citizens and The regulatory environment in Emerging Markets and Asia-Pacific certain disabled Americans, included coverage for prescription continues to evolve, with a number of countries continuing to medicines. The coverage is voluntary, includes brand-name and develop their regulatory review systems. GSK actively participates generic drugs and is open to the 41 million Americans with in a number of specific regional and national regulatory initiatives, Medicare coverage. which provide opportunities for meaningful scientific and regulatory Value for money dialogue between industry, agencies and other stakeholders. GSK Payers around the world are concerned about the cost of continues to include broader sets of patient populations from a healthcare and the pricing of medicines. The requirement to number of these countries in medicine development programmes in satisfy healthcare purchasers on value for money is becoming order to increase global patient access to new innovative medicines an additional hurdle for product acceptance over and above the and optimise regulatory approvals. regulatory tests of safety, efficacy and quality. Regulation – Consumer Healthcare The consumer healthcare industry is subject to national regulation comparable to that for prescription medicines for the testing, approval, manufacturing, labelling and marketing of products. High standards of technical appraisal frequently involve a lengthy approval process before a new product is launched.

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    GSK Annual Report 2008 33 Report of the Directors Economy, world market and outlook World economy World market – pharmaceuticals The world economy deteriorated sharply during 2008 as the financial Global pharmaceutical sales in 2008 were £366 billion compared crisis deepened, particularly following the bankruptcy of Lehman with £329 billion in 2007. Brothers in September. Despite aggressive cuts in official interest rates, fiscal stimulus measures and national initiatives to support World market by Value % of Growth the international banking system, the International Monetary Fund geographic region £bn total £% forecasts that global growth will slow from an estimated 3.4% in USA 145 39 1 2008 to a mere 0.5% in 2009, the lowest rate since World War II. Europe 112 31 18 The advanced economies are expected to contract by 2% in 2009, France 21 6 18 the first annual contraction in the post-war period. Germany 20 6 20 Italy 13 3 19 The slump in global demand led to a collapse in equity prices, with UK 12 3 2 the FTSE 100 Index falling by 31% and the Dow Jones Industrial Rest of World 109 30 19 Average by 33% in 2008, and also a collapse in commodity Emerging markets 49 13 24 prices. Weak economic activity and lower commodity prices have Asia Pacific 17 5 16 dampened inflationary pressures. In the advanced economies the Japan 33 9 16 headline inflation rate is forecast by the IMF to decline from an Canada 10 3 17 estimated 3.5% in 2008 to a record low of 0.3% in 2009. Total 366 100 11 In order to engender economic recovery, the Federal Open Market The US market has increased by 1%. This represents 39% of the Committee (FOMC) decided in December to cut the target for the global prescription pharmaceutical market compared with 30% federal funds rate from 1% to 0-0.25%. The decision signalled a decade ago. that the FOMC would effectively target the supply of credit rather than the price of credit. Nonetheless, the IMF forecasts that real At 30th September 2008, GSK held second position in the world GDP in the USA will contract by 2% in 2009. The housing market pharmaceutical market with a market share of 5.3%, behind Pfizer remains of particular concern. with a market share of 6.4%. GSK had three of the world’s top 60 pharmaceutical products. These were Lamictal, Seretide/Advair Like the FOMC, the Monetary Policy Committee of the Bank of England and Valtrex. aggressively eased its monetary stance in 2008, cutting the bank rate from 5.5% to 2%. The bank rate has already been cut further World market – Value % of Growth in 2009 to 1%. To reinforce the impact of the cuts in the bank rate, top six therapeutic classes £bn total £% the Government has empowered the Bank of England to purchase Central nervous system 60 16 11 high quality assets like corporate bonds and commercial paper from Cardiovascular 54 15 4 commercial banks. The IMF forecasts that real GDP in the UK will Alimentary tract and metabolic 44 12 10 contract by 2.8% in 2009, more than in any other advanced economy. Antineoplastic/Immunomodulatory 40 11 20 Anti-infectives (bacterial, 38 10 11 The European Central Bank maintained a more cautious approach viral and fungal) excluding to monetary relaxation, cutting the refinancing rate from 4.25% to vaccines 2.5% in 2008. The refinancing rate was cut another 0.5 percentage Respiratory 25 7 8 point in January 2009. Additional monetary easing is anticipated. The IMF forecasts that real GDP in the euro-zone will contract by (Note: data based on 12 months to 30th September 2008) 2% in 2009, with real GDP in Germany plunging by 2.5%. Outlook Like the other major industrialised economies, Japan fell into recession 2008 marked a turning point and those factors which impacted in 2008. The prime factor was the downturn in external demand. our performance, in particular declines in Avandia sales, are The Bank of Japan cut the overnight call money rate from 0.5% to now starting to reduce. 2008 also saw the first steps towards 0.1%. Real GDP is forecast by the IMF to contract by 2.6% in 2009. a radical transformation of our business model. We enter 2009 China and India remained on a path of economic expansion with confidence and expect to make further good progress in in 2008. However, the pace of expansion decelerated. Further implementing our strategic priorities that will enable us to meet deceleration is expected in 2009. Economic activity in Brazil our long-term objective of reducing risk and delivering sustainable remained buoyant in 2008 but is expected to slow markedly growth to shareholders. in 2009. Uncertainties surrounding the economic outlook are unusually large, with downside risks continuing to dominate.

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    34 GSK Annual Report 2008 Report of the Directors Financial review 2008 Pharmaceutical turnover CNS All growth rates included in the review of turnover are at constant CNS sales decreased 21% to £2.9 billion. exchange rates (CER) unless otherwise stated. Sterling growth The majority of GSK’s CNS franchise is now impacted by generic rates may be found in the tables of pharmaceutical turnover by competition in the USA, as generic competition to Lamictal, Imigran therapeutic areas on page 35 and by geographic region on and the remaining presentation of Wellbutrin started during page 36. the course of 2008. There was, however, some positive news as Total pharmaceutical turnover declined 3% for the year to Treximet was approved for migraine by the FDA in April 2008. £20.4 billion, driven largely by US performance, down 11% to £8.9 billion, which was impacted by expected generic competition Cardiovascular and urogenital to several mature brands and further declines in Avandia sales. Cardiovascular and urogenital sales increased 8% to £1.8 billion. Sales in Asia Pacific and Japan fell 1% to £1.9 billion, reflecting Strong growth across most of the portfolio of products was partly lower government orders for Relenza and the impact of offset by generic competition to Coreg IR. Lovaza, for very high pharmaceutical price cuts in Japan. These declines were partly triglycerides, which was acquired from Reliant Pharmaceuticals offset by growth in Europe, up 3% to £6.5 billion, and Emerging in 2007, grew 71% on a proforma basis to £290 million and Markets, up 12% to £2.3 billion. In sterling terms, pharmaceutical grew its US market share by 33%. Avodart, for benign prostatic turnover grew by 6%, reflecting the weakness of Sterling against hyperplasia (enlarged prostate), grew 27% to £399 million taking most major currencies. a further percentage point of market share, Arixtra, for deep vein thrombosis and pulmonary embolism, grew 53% to £170 million Pharmaceutical turnover by therapeutic area and Coreg CR grew 73% to £165 million. GSK turnover declined by 3% in 2008 as the impact of lower Metabolic Avandia sales, US generic competition to a range of GSK’s Metabolic sales decreased 28% to £1.2 billion. products and lower flu pre-pandemic sales was partly offset by strong growth of key products such as Advair, Valtrex, Epzicom, Strong growth of Bonviva/Boniva, for postmenopausal osteoporosis, Avodart, Lovaza and the vaccines franchise. up 34% to £237 million was not enough to offset a full year impact to Avandia whose sales started to fall in May 2007 (see Financial Respiratory review 2007 on page 54). Avandia product sales declined 40% Respiratory sales increased 5% to £5.8 billion. during the year to £805 million, with US sales falling 49% to Sales of Seretide/Advair for asthma and COPD rose 8% to £434 million and European sales down 22% to £198 million. In £4.1 billion. In the USA, Advair sales rose 6% to £2.2 billion, with Emerging Markets, Avandia product sales returned to growth in the a return to volume growth in the second half of the year. During second half of the year (Q4 sales were up 12%). 2008, the FDA granted Advair an indication in COPD for prevention Oncology and emesis of exacerbations and this has helped grow the COPD segment of Oncology and emesis sales decreased 6% to £0.5 billion. our Advair business. In Europe, sales increased by 4% to £1.4 billion. Advair performance was particularly strong in Tykerb, for breast cancer, continued to grow following approval Emerging Markets, up 26% to £215 million, and Japan, where in the USA last year. Approvals in other countries were achieved sales of the product more than doubled to £83 million following throughout 2008, with the European approval being achieved its launch in 2007. in June. Anti-virals Vaccines Anti-virals decreased 4% to £3.2 billion. Vaccine sales increased 15% to £2.5 billion. GSK’s HIV business continues to experience strong competition. Within the vaccines portfolio, there were strong performances Epzicom/Kivexa grew by 23% to £442 million but this was more from Hepatitis vaccines (up 14% to £665 million) and combination than offset by declines across the rest of the portfolio. Sales of paediatric vaccines Infanrix/Pediarix (up 12% to £682 million). Valtrex, for herpes, rose 16% to £1.2 billion with US sales up 20% Rotarix, for rotavirus gastroenteritis, rose 71% to £167 million, fuelling the growth. Sales of flu anti-viral Relenza fell 80% largely driven by government tender orders in Latin America and to £57 million reflecting fewer government orders for the launch of the product in the USA in August. New cervical pre-pandemic stockpiling. cancer vaccine, Cervarix, recorded sales of £125 million for the year, following several tender wins, including national government orders in the UK and the Netherlands.

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    GSK Annual Report 2008 35 Report of the Directors Financial review 2008 continued Pharmaceutical turnover by therapeutic area 2008 Total USA Europe Rest of World Therapeutic area/ % of 2008 2007 Growth 2008 Growth 2008 Growth 2008 Growth major products total £m £m CER% £% £m CER% £% £m CER% £% £m CER% £% Respiratory 29 5,817 5,032 5 16 2,720 6 14 1,982 2 14 1,115 9 22 Seretide/Advair 4,137 3,499 8 18 2,161 6 14 1,416 4 17 560 29 42 Flixotide/Flovent 677 621 (2) 9 317 3 12 175 (4) 11 185 (9) 3 Serevent 263 269 (12) (2) 72 (9) (3) 136 (9) 1 55 (23) (10) Veramyst 72 21 >100 >100 56 >100 >100 11 – – 5 >100 >100 Flixonase/Flonase 186 199 (15) (7) 52 (29) (28) 52 (6) 6 82 (8) 5 Anti-virals 16 3,206 3,027 (4) 6 1,600 (1) 7 850 (12) – 756 (1) 10 HIV 1,513 1,442 (5) 5 640 (7) – 636 (6) 7 237 4 13 Epzicom/Kivexa 442 324 23 36 178 15 25 209 25 40 55 48 67 Combivir 433 455 (14) (5) 180 (14) (8) 166 (19) (8) 87 1 10 Trizivir 212 233 (18) (9) 106 (18) (12) 92 (18) (6) 14 (20) (7) Agenerase, Lexiva 160 141 2 13 83 (1) 6 61 – 15 16 40 60 Epivir 139 156 (20) (11) 47 (19) (11) 58 (22) (9) 34 (18) (13) Ziagen 106 109 (11) (3) 45 (9) – 36 (11) – 25 (14) (11) Valtrex 1,195 934 16 28 870 20 30 144 9 25 181 4 20 Zeffix 188 168 – 12 15 8 15 27 – 17 146 (1) 11 Relenza 57 262 (80) (78) 20 (86) (85) 6 (92) (92) 31 (49) (44) Central nervous system 14 2,897 3,348 (21) (13) 1,815 (29) (24) 565 (1) 12 517 (3) 11 Lamictal 926 1,097 (22) (16) 711 (26) (20) 147 (8) 3 68 2 10 Imigran/Imitrex 687 685 (8) – 550 (9) (1) 96 (3) 8 41 (8) 8 Seroxat/Paxil 514 553 (19) (7) 79 (49) (45) 115 (14) (4) 320 (7) 10 Wellbutrin 342 529 (40) (35) 310 (44) (39) 18 >100 >100 14 8 8 Requip 266 346 (31) (23) 102 (60) (57) 133 29 46 31 65 82 Requip XL 43 – – – 9 – – 34 – – – – – Treximet 25 – – – 25 – – – – – – – – Cardiovascular and urogenital 9 1,847 1,554 8 19 1,107 6 14 512 10 28 228 15 25 Avodart 399 285 27 40 242 27 38 118 21 39 39 48 56 Lovaza 290 5 >100 >100 289 >100 >100 – – – 1 – – Coreg 203 587 (68) (65) 200 (68) (66) – – – 3 (67) (50) Coreg CR 165 88 73 88 163 72 85 – – – 2 – – Coreg IR 38 499 (93) (92) 37 (93) (92) – – – 1 (83) (83) Fraxiparine 226 184 7 23 – – – 178 – 18 48 36 45 Arixtra 170 100 53 70 88 49 60 71 56 82 11 67 83 Vesicare 71 50 32 42 71 32 42 – – – – – – Levitra 60 49 12 22 57 11 21 3 – 50 – – – Metabolic 6 1,191 1,508 (28) (21) 590 (39) (34) 294 (11) 1 307 (14) (5) Avandia products 805 1,219 (40) (34) 434 (49) (44) 198 (22) (12) 173 (25) (19) Avandia 512 877 (46) (42) 299 (53) (49) 82 (33) (26) 131 (30) (25) Avandamet 256 292 (21) (12) 109 (32) (26) 111 (13) – 36 – 6 Bonviva/Boniva 237 161 34 47 156 25 36 74 48 68 7 >100 >100 Anti-bacterials 7 1,429 1,323 (2) 8 174 (17) (11) 635 (6) 8 620 7 15 Augmentin 587 530 – 11 49 (31) (27) 272 – 14 266 11 18 Altabax 16 11 36 45 15 27 36 1 – – – – – Oncology and emesis 2 496 477 (6) 4 243 (17) (11) 169 9 25 84 9 20 Hycamtin 140 119 7 18 81 7 16 49 5 23 10 11 11 Zofran 110 196 (51) (44) 3 (97) (96) 63 (21) (10) 44 (17) (8) Tykerb 102 51 80 100 47 22 31 42 >100 >100 13 >100 >100 Vaccines 12 2,539 1,993 15 27 629 (7) – 1,155 28 44 755 21 34 Hepatitis 665 529 14 26 275 28 38 263 - 14 127 16 27 Infanrix/Pediarix 682 543 12 26 212 1 8 377 21 39 93 11 22 Fluarix, FluLaval 215 174 11 24 85 (20) (13) 78 63 90 52 37 49 Flu-prepandemic 66 146 (55) (55) 1 (99) (99) 64 25 25 1 - - Cervarix 125 10 >100 >100 – – – 104 >100 >100 21 >100 >100 Rotarix 167 91 71 84 21 – – 43 61 87 103 46 51 Boostrix 70 66 (5) 6 35 (20) (13) 26 21 37 9 14 29 Other 5 959 901 (3) 6 16 (78) (75) 321 14 26 622 (1) 7 100 20,381 19,163 (3) 6 8,894 (11) (4) 6,483 3 17 5,004 5 16 CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates. Turnover by quarter is given in the Financial record on pages 190 to 193.

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    36 GSK Annual Report 2008 Report of the Directors Financial review 2008 continued Regional analysis The following table gives the adjustments made in order to restate the turnover for markets within Europe on a turnover Pharmaceutical turnover by geographic region in 2008 created basis. on an invoiced basis 2008 2007 The turnover reported in the table below represents sales invoiced Region/ Invoiced Adjustment Created Invoiced Adjustment Created by GSK’s local entity to its customers in the local market plus major markets £m £m £m £m £m £m co-promotion income within each market. Europe 6,483 – 6,483 5,560 – 5,560 France 1,069 (55) 1,014 991 (43) 948 Region/ % of 2008 2007 Growth* major markets total £m £m CER% £% UK 900 83 983 822 101 923 Italy 757 (19) 738 620 (14) 606 USA 44 8,894 9,273 (11) (4) Germany 707 107 814 602 87 689 Europe 32 6,483 5,560 3 17 Spain 700 (10) 690 605 (12) 593 France 1,069 991 (7) 8 Other Europe 2,350 (106) 2,244 1,920 (119) 1,801 UK 900 822 9 9 Italy 757 620 5 22 These adjustments are GSK’s estimates based on the most recent Germany 707 602 2 17 data from independent external sources, valued in Sterling at Spain 700 605 – 16 relevant exchange rates. Management believes that this turnover Other Europe 2,350 1,920 6 22 created basis of reporting turnover by market provides a better Rest of World 24 5,004 4,330 5 16 reflection of the performance of the businesses in each market Emerging Markets 2,290 1,895 12 21 within Europe. Japan 1,027 867 (3) 18 The total turnover for the Europe region is unaffected by Asia Pacific 891 834 1 7 these adjustments. Canada 503 477 (4) 5 Other 293 257 4 14 Parallel trade occurs occasionally elsewhere in the world, but it is 100 20,381 19,163 (3) 6 not sufficiently material to affect significantly the turnover data by market presented on an invoiced basis. * CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates. Pharmaceutical turnover by geographic region in 2008 on a turnover created basis Individual governments determine the pricing of medicines in most countries within Europe, which can result in wide price variations Turnover by market within Europe has been adjusted for the for the same product. Parallel trade occurs when third parties effects of parallel trade to show turnover on the basis of the exploit this price differential by purchasing products in markets country where the product is finally consumed, not where the where low prices are enforced and selling them to governments product was sold by GSK. and other purchasers in those markets where higher prices have Region/ % of 2008 2007 Growth* been agreed. This parallel trade is permitted under the single major markets total £m £m CER% £% market rules in the European Union. GSK does not derive any USA 44 8,894 9,273 (11) (4) benefit from the profit on resale at the higher price. Europe 32 6,483 5,560 3 17 As a result, management believes that within the European region, France 1,014 948 (8) 7 turnover by market, on an invoiced basis as presented above, UK 983 923 7 7 does not properly represent the consumption of the products Italy 738 606 5 22 within each market. GSK employees based in each market are Germany 814 689 2 18 instrumental in the promotion of the Group’s products within the Spain 690 593 1 16 market, thereby creating a product sale and final consumption Other Europe 2,244 1,801 7 25 in that market. Rest of World 24 5,004 4,330 5 16 Emerging Markets 2,290 1,895 12 21 Japan 1,027 867 (3) 18 Asia Pacific 891 834 1 7 Canada 503 477 (4) 5 Other 293 257 4 14 100 20,381 19,163 (3) 6 * CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates. Turnover by quarter is given in the Financial record on pages 190 to 193.

  • Page 39

    GSK Annual Report 2008 37 Report of the Directors Financial review 2008 continued USA OTC medicines Sales in the USA declined 11% to £8.9 billion, principally reflecting OTC product sales declined 2% to £1.9 billion in 2008, with sales of a full year impact on Avandia (down 49%) and generic competition smoking cessation products down 12% to £299 million. Panadol sales to significant products such as Lamictal (down 26%), Imigran (down grew 12% to £324 million, twice the global average in 2008. 9%), Wellbutrin XL (down 45%), Requip (down 60%) and Coreg IR (down 93%). These declines were partly offset by Advair (up 6%), Oral healthcare Valtrex (up 20%) and Lovaza (up 71% on proforma basis). Sales of Oral healthcare products rose 6% to £1.2 billion, whereas the market grew just 2%. There were strong performances from Sensodyne, Europe up 12% to £363 million, and Aquafresh, up 3% to £452 million. Sales in Europe increased 3% to £6.5 billion with continued growth Sensodyne’s growth represented 35% of world toothpaste growth in of Seretide and particularly strong vaccines growth offsetting 2008 in markets where GSK competes. the impact of generic competition to a number of products and continued price cuts from governments across the region. Nutritional healthcare Within Nutritionals, Horlicks sales rose 13% to £204 million, Lucozade Emerging Markets sales rose 7% to £382 million and Ribena sales were flat at £161 million, Sales in Emerging Markets increased 12% to £2.3 billion with strong although sales of Lucozade and Ribena in the second half of the year growth in Russia (up 36%), China (up 22%) and Latin America (up declined slightly, largely as a result of poor weather in the UK. 16%). The growth was fuelled primarily by vaccines, up 32% to £0.5 billion, and the respiratory franchise, up 16% to £0.4 billion. Results before major restructuring and total results Asia Pacific/Japan Increased sales of Seretide/Advair (up 48% to £204 million) were In October 2007 the Board approved the implementation of offset by lower Government orders for Relenza in Japan and some a detailed formal plan for, and GSK announced, a significant price cuts. new Operational Excellence restructuring programme. A second formal plan, representing a significant expansion of Consumer Healthcare turnover the Operational Excellence programme, was approved by the Board and announced in February 2009. This restructuring % of 2008 2007 Growth programme, comprising these detailed formal plans, covers all total £m £m CER% £% areas of GSK’s business, including manufacturing, selling, R&D Over-the-counter medicines 49 1,935 1,788 (2) 8 and infrastructure. With an estimated total cost of approximately Panadol franchise 324 263 12 23 £3.6 billion, the expanded programme is expected to deliver Smoking cessation products 299 314 (12) (5) annual pre-tax savings of approximately £1.7 billion by the time Tums 91 88 (5) 3 it is substantially complete in 2011. Approximately 40% of these Cold sore franchise 89 79 3 13 costs were incurred by 31st December 2008, and approximately Breathe Right 81 63 17 29 35% are expected to be incurred in 2009, 20% in 2010 and the alli 75 150 (53) (50) balance mostly in 2011. In total, approximately 75% of these Oral healthcare 31 1,240 1,049 6 18 costs are expected to be cash expenditures and 25% are expected Aquafresh franchise 452 398 3 14 to be accounting write-downs. Uncertainties exist over the exact Sensodyne franchise 363 293 12 24 amount and timing of cash outflows, as a result of potential Dental care 271 222 8 22 future exchange rate fluctuations and as many elements of the Nutritional healthcare 20 796 716 8 11 restructuring programme are subject to employee consultation Lucozade 382 347 7 10 procedures, making it difficult to predict with precision when Horlicks 204 174 13 17 these procedures will be completed. However, the majority Ribena 161 156 – 3 of the remaining cash payments are expected to be made in 2009 and 2010. Given the extent and cost of the Operational 100 3,971 3,553 3 12 Excellence programme, management believes it has a material * CER% represents growth at constant exchange rates. £% represents growth impact on GSK’s operating results and on the manner in which at actual exchange rates. Turnover by quarter is given in the Financial record GSK’s business is conducted. GSK presents the restructuring costs on pages 194 to 195. incurred solely as a direct result of the Operational Excellence Total Consumer Healthcare sales for the year rose 3% to £4 billion. programme, which in 2008 amounted to £1,089 million before This compares with growth of 14% in 2007, which benefited from tax (2007 – £338 million), in a separate column in the income launch stocking of new anti-obesity treatment alli. 2008 sales of alli statement titled ‘Major restructuring’. were £75 million, down 53%. Excluding alli, Consumer Healthcare sales rose 5% in 2008 (up 9% in 2007).

  • Page 40

    38 GSK Annual Report 2008 Report of the Directors Financial review 2008 continued In addition to the restructuring costs of the Operational Excellence The remaining costs of £236 million in 2008 arose from programme, the major restructuring column in the income miscellaneous expenditures incurred solely as a direct result of statement includes restructuring costs incurred solely as a direct the restructuring programmes, including consultancy and project result of any restructuring programmes that follow, and relate management fees, the termination of leases, site closure costs and, to, material acquisitions where the operations of the acquired with respect to 2008, the recognition of foreign exchange losses business overlap extensively with GSK’s existing operations. following the liquidation of a subsidiary in Puerto Rico. No costs arising from GSK’s ongoing operating activities have been reported The restructuring activities that follow, and relate to, such in the major restructuring column. acquisitions are of the same nature as those undertaken under the Operational Excellence programme and are also carried out Any restructuring costs that do not arise solely as a direct result following a detailed formal plan. Management therefore considers of the Operational Excellence programme and restructuring it appropriate to present the costs of these restructuring activities programmes following, and relating to, acquisitions meeting the in the same manner. The $1.65 billion (£814 million) acquisition criteria described above continue to be reported in operating of Reliant Pharmaceuticals Inc. in December 2007 is the only expenses within results before major restructuring. These costs acquisition since October 2007 that meets the criteria set out included restructuring costs related to minor acquisitions and above and thus is the only acquisition where the costs incurred £20 million of costs in 2008 (2007 – £92 million) that related to as a direct result of a related restructuring programme have restructuring activity initiated before the commencement of the been included within the major restructuring column. The total Operational Excellence programme. None of this restructuring restructuring costs incurred as a direct result of this acquisition activity had a material impact on GSK’s operating results or on the were £34 million, all of which have been charged and paid manner in which its business is conducted. in 2008. During the anticipated duration of the Operational Excellence The Group’s results before the costs of the Operational Excellence programme, GSK does not currently expect to incur any material programme and acquisition-related restructuring programmes restructuring costs except those related to that programme and meeting the criteria described above are also presented in a acquisitions meeting the criteria described above. If any further, separate column in the income statement and are described as unanticipated material restructuring costs were to arise during ‘Results before major restructuring’. This presentation, which this period, GSK would expect also to include them in the major GSK intends to apply consistently to future major restructuring restructuring column. programmes that have a material impact on GSK’s operating GSK’s operating profit, profit before taxation, taxation and profit results and on the manner in which GSK’s business is conducted, for the year are discussed below in terms of both total results, has been adopted to show clearly the Group’s results both which include major restructuring costs, and results before major before and after the costs of these restructuring programmes. restructuring. Management believes that this presentation assists shareholders in gaining a clearer understanding of the Group’s financial Operating profit – total results performance and in making projections of future financial Total results include restructuring costs related to the new performance, as results that include such costs, by virtue of their Operational Excellence programme, which commenced in size and nature, have limited comparative value. This presentation October 2007, and the Reliant restructuring programme. is also consistent with the way management assesses the Group’s financial performance. 2008 2007 Growth £m % £m % CER% £% Only the restructuring costs incurred solely as a direct result of the Operational Excellence programme and the restructuring Turnover 24,352 100 22,716 100.0 (3) 7 programme following the Reliant acquisition have been reported Cost of sales (6,415) (26.3) (5,317) (23.4) 13 21 in the major restructuring column in the income statement. Selling, general These restructuring costs principally have arisen from impairments and administration (7,656) (31.4) (6,954) (30.6) 2 10 to property, plant and equipment and the termination of the Research and development (3,681) (15.2) (3,327) (14.7) 4 11 employment contracts of staff made redundant as part of the Other operating restructuring activities. As set out in Note 7 to the financial income 541 2.2 475 2.1 11 14 statements, ‘Major restructuring programmes’, asset impairments and staff redundancies together accounted for £887 million of the Operating profit 7,141 29.3 7,593 33.4 (20) (6) £1,123 million restructuring costs incurred in 2008 and reported in the major restructuring column (2007 – £338 million).

  • Page 41

    GSK Annual Report 2008 39 Report of the Directors Financial review 2008 continued Cost of sales Profit before taxation – total results Cost of sales increased to 26.3% of turnover (2007 – 23.4%). At constant exchange rates, cost of sales as a percentage of turnover Net finance costs increased by 3.8 percentage points to 27.2%, reflecting charges 2008 2007 related to the major restructuring programmes of £639 million Finance income £m £m (2007 – £111 million) and unfavourable product and regional Interest and other finance income 322 255 mix compared with 2007, partly offset by savings from the Fair value adjustments and hedges (9) 7 restructuring programmes. 313 262 Selling, general and administration Finance costs SG&A costs, including legal charges, were 31.4% of turnover Interest costs (829) (434) (2007 – 30.6%), a increase of 0.8 percentage points. At constant Unwinding of discount on liabilities (16) (27) exchange rates, the increase was 1.4 percentage points. Legal Fair value adjustments and hedges 2 8 costs of £611 million (2007 – £255 million) included a (843) (453) £278 million charge announced in January 2009 related to the US investigation into GSK’s marketing and promotional practices Share of after tax profits of associates and joint ventures which originated in Colorado. SG&A costs included charges of The share of after tax profits of associates of £48 million £304 million (2007 – £137 million) related to the major (2007 – £50 million) arises principally from the Group’s holding restructuring programmes. Excluding legal costs, SG&A decreased in Quest Diagnostics Inc. by 1.6%. Profit before taxation – total results Research and development Taking account of net finance costs and the share of profits of R&D expenditure increased 4% and included charges related to associates, total profit before taxation was £6,659 million compared the major restructuring programmes of £175 million with £7,452 million in 2007, a 24% CER decline and an 11% (2007 – £90 million). Excluding these charges, R&D expenditure sterling decline. increased 2% in CER terms as investment in the late stage pipeline was partly offset by restructuring savings. Operating profit – results before major restructuring Other operating income Other operating income of £541 million (2007 – £475 million) The results before major restructuring are set out below: included strong growth in royalty income to £307 million 2008 2007 Growth (2007 – £216 million). Product, intellectual property and equity £m % £m % CER% £% investment disposals realised £230 million in 2008 compared with Turnover 24,352 100 22,716 100.0 (3) 7 £90 million in 2007. The Roche litigation settlement was included in 2007. Cost of sales (5,776) (23.7) (5,206) (22.9) 4 11 Selling, general Operating profit – total results and administration (7,352) (30.2) (6,817) (30.0) – 8 Total operating profit of £7,141 million decreased by 6% in sterling Research and terms and 20% in CER terms compared with 2007. Pharmaceuticals development (3,506) (14.4) (3,237) (14.3) 2 8 Other operating operating profit was £6,331 million, down 21%, while Consumer income 541 2.2 475 2.1 11 14 Healthcare operating profit fell by only 2% to £810 million. Operating profit 8,259 33.9 7,931 34.9 (10) 4 In the year, gains from asset disposals and settlements were £293 million (2007 – £213 million), costs for legal matters were Cost of sales £611 million (2007 – £255 million), fair value movements on financial Cost of sales increased by 0.8 percentage points to 23.7% of instruments resulted in a charge of £10 million (2007 – income turnover. At constant exchange rates the increase was 1.5 percentage of £41 million) and charges relating to previous restructuring points of turnover, principally reflecting the impact of generic programmes were £20 million (2007 – £92 million). Charges competition to higher margin products in the USA, lower Avandia related to the major restructuring programmes were £1,118 million sales and a higher proportion of sales generated in lower margin (2007 – £338 million). The impact of all these items on total vaccines, brands sold in Emerging Markets and Consumer operating profit was a £1,466 million charge in 2008 compared Healthcare products. This was partly offset by savings from the with a £431 million charge in 2007. restructuring programmes.

  • Page 42

    40 GSK Annual Report 2008 Report of the Directors Financial review 2008 continued Selling, general and administration Profit before taxation – results before SG&A costs, including legal charges, were 30.2% of turnover major restructuring (2007 – 30.0%). At constant exchange rates, SG&A costs increased by 0.7 percentage points to 30.7% of turnover. Legal costs of Net finance costs £611 million (2007 – £255 million) included a £278 million charge 2008 2007 announced in January 2009 related to the US investigation into Finance income £m £m GSK’s marketing and promotional practices which originated in Interest and other income 322 255 Colorado. Excluding legal costs, SG&A as a percentage of turnover Fair value adjustments and hedges (9) 7 fell 1.2 percentage points to 27.7% (2007 – 28.9%). This was a 313 262 3% growth in sterling terms, but a 4% reduction at constant exchange rates, reflecting the benefits of the restructuring Finance costs programmes. Selling and distribution fell by 1%, advertising and Interest costs (829) (434) promotion by 5% and general and administration expenditure, Unwinding of discount on liabilities (11) (27) excluding legal charges, by 7%. Fair value adjustments and hedges 2 8 (838) (453) Research and development R&D expenditure increased by 2% to 14.4% of turnover Taking account of net finance costs and the share of profits of (2007 – 14.3%) as investment in the late stage pipeline was partly associates, profit before tax before major restructuring was offset by restructuring savings. £7,782 million compared with £7,790 million in 2007, a 14% CER decline but flat in sterling terms. Other operating income Other operating income of £541 million (2007 – £475 million) Taxation included strong growth in royalty income to £307 million (2007 – £216 million). Product, intellectual property and equity 2008 2007 £m £m investment disposals realised £230 million in 2008 compared UK corporation tax 289 452 with £90 million in 2007. The Roche litigation settlement was Overseas taxation 1,589 1,962 included in 2007. Current taxation 1,878 2,414 Operating profit – results before major restructuring Deferred taxation 69 (272) Operating profit before major restructuring of £8,259 million for Taxation on total profits 1,947 2,142 the year increased by 4% in sterling terms but decreased by 10% in CER terms compared with 2007. Pharmaceuticals The charge for taxation on profit before major restructuring operating profit was £7,427 million, down 11%, while Consumer charges, amounting to £2,231 million (2007 – £2,219 million), Healthcare operating profit was flat in CER terms at £832 million. and represents an effective tax rate of 28.7% (2007 – 28.5%). Excluding legal costs, operating profit decreased by 6%, which The charge for taxation on total profits amounted to was greater than the turnover decline of 3%, primarily due to £1,947 million (2007 – £2,142 million) and represented an higher cost of sales as a percentage of turnover. effective tax rate of 29.2% (2007 – 28.7%). The Group’s balance sheet at 31st December 2008 included a tax payable liability of In the year, gains from asset disposals and settlements were £780 million and a tax recoverable asset of £76 million. £293 million (2007 – £213 million), costs for legal matters were £611 million (2007 – £255 million), fair value movements The Group’s main open tax issues are in the USA, Canada and Japan. on financial instruments resulted in a charge of £10 million In July, following discussions with HMRC, the Group settled (2007 – income of £41 million) and charges relating to previous substantially all outstanding UK tax issues for all periods up to and restructuring programmes were £20 million (2007 – £92 million). including 31st December 2006. The impact of these items on operating profit before major restructuring was a £348 million charge in 2008 Following its audit of the period 2001 to 2003, the IRS issued (2007 – £93 million). Statutory Notices of Deficiency to GSK asserting income and withholding tax deficiencies, and associated penalties, arising from its reclassification of an intercompany financing arrangement in those years from debt to equity, and its consequent recharacterisation of the amounts paid as dividends subject to withholding tax under the US – UK treaty. All amounts due under the financing arrangement were timely paid, with the final payment made in April 2008.

  • Page 43

    GSK Annual Report 2008 41 Report of the Directors Financial review 2008 continued The IRS commenced its audit of the period 2004 to 2006 in June Total results including restructuring costs produced a basic EPS 2008, and is examining the issue for these years. GSK disagrees of 88.6p compared with 94.4p in 2007. This was a 21% decline with the IRS’s position and, in August 2008, initiated actions in at CER and a 6% decline in sterling terms. Excluding major the United States Tax Court to contest the Statutory Notices of restructuring costs, EPS was 104.7p compared with 99.1p. Deficiency. GSK estimates that the IRS claim for tax, penalties, and This was a 9% decline at CER but a 6% increase in sterling terms. interest at 31st December 2008, net of federal tax relief, for 2001 The 15 percentage point currency benefit arose from the weakness through 2003 is $864 million. GSK believes that this claim has no of Sterling against most major currencies. merit and that no adjustment is warranted. If, contrary to GSK’s view, the IRS prevailed in its argument before a court in respect Dividend of the years 2001-2003, GSK would expect to have an additional The Board has declared a fourth interim dividend of 17 pence per liability for the five year period 2004-2008 in the amount of share resulting in a dividend for the year of 57 pence, a four pence $1,059 million in tax, penalties, and interest at 31st December increase over the dividend of 53 pence per share for 2007. 2008, net of federal tax relief for those years. In the event that The equivalent fourth interim dividend receivable by ADR holders is the company is not able to resolve this issue with the IRS, a court 49.4564 cents per ADS based on an exchange rate of £1/$1.4546. decision would not be expected before 2011. The ex-dividend date will be 11th February 2009, with a record date of 13th February 2009 and a payment date of 9th April 2009. Lower courts in Japan have upheld claims by the tax authorities for Yen 39 billion (£177 million) relating to Japanese CFC Critical accounting policies legislation. The company has paid and fully provided for the full tax but is pursuing a claim for refund to the Japanese Supreme The consolidated financial statements are prepared in accordance Court. In Canada a court decision in respect of transfer pricing with IFRS, as adopted for use in the European Union, and also in the early 1990s was completed in May 2008. GSK filed an with IFRS as issued by the IASB, following the accounting policies appeal in June and a court date is awaited. approved by the Board and described in Note 2 to the financial statements, ‘Accounting principles and policies’. Management GSK continues to believe that it has made adequate provision is required to make estimates and assumptions that affect the for the liabilities likely to arise from open assessments. The amounts of assets, liabilities, revenue and expenses reported in the ultimate liability for such matters may vary from the amounts financial statements. Actual amounts and results could differ from provided and is dependent upon the outcome of litigation those estimates. The critical accounting policies adopted relate to proceedings and negotiations with the relevant tax authorities. the following areas: Profit for the year •฀Turnover • Taxation 2008 2007 Growth £m £m CER% £% • Legal and other disputes Total profit after taxation • Property, plant & equipment for the year 4,712 5,310 (25) (11) • Goodwill Total profit attributable to • Other intangible assets shareholders 4,602 5,214 (26) (12) Basic earnings per share (pence) 88.6p 94.4p (21) (6) • Pensions and other post-employment benefits. Basic earnings per ADS (US$) $3.28 $3.77 Information on the judgements and estimates made in these areas Results before major restructuring is given in Note 3 to the financial statements, ‘Key accounting profit after taxation for the year 5,551 5,571 (14) – judgements and estimates’. Results before major restructuring In respect of the Turnover accounting policy, the Group’s largest profit attributable to shareholders 5,441 5,475 (15) (1) business is US pharmaceuticals, and the US market has the most Adjusted earnings per share (pence) 104.7p 99.1p (9) 6 complex arrangements for rebates, discounts and allowances. Adjusted earnings per ADS (US$) $3.87 $3.96 The following briefly describes the nature of the arrangements in Weighted average number existence in the Group’s US pharmaceuticals business. of shares (millions) 5,195 5,524 Diluted total earnings per share (pence) 88.1p 93.7p • GSK has arrangements with certain indirect customers whereby Diluted total earnings per ADS (US$) $3.26 $3.75 the customer is able to buy products from wholesalers at Diluted weighted average number reduced prices. A chargeback represents the difference of shares (millions) 5,226 5,567 between the invoice price to the wholesaler and the indirect customer’s contractual discounted price. Accruals for estimating chargebacks are calculated based on the terms of each agreement, historical experience and product growth rates.

  • Page 44

    42 GSK Annual Report 2008 Report of the Directors Financial review 2008 continued • Customer rebates are offered to key managed care and group Chargebacks have decreased in 2008 as a result of sales of purchasing organisations (GPO) and other direct and indirect products into US government stockpiles during 2007, which did customers. These arrangements require the customer to achieve not arise in 2008. Managed care, Medicare Part D and GPO rebates certain performance targets relating to value of product purchased, were flat in dollar terms, despite additional Tricare prescription formulary status or pre-determined market shares relative to rebates. In January 2008, the National Defense Authorisation Act competitors. Rebates given under Medicare, Part D are included in this was approved, which authorises the Department of Defense to category. The Medicare, Part D programme was introduced in 2006 access discounted federal pricing on drugs dispensed at Tricare and replaced the Government Medicaid subsidies for some individuals network retail pharmacies to members of the US armed forces, with subsidised coverage provided through private prescription plans. their dependants and military retirees. Rebates given under the The accrual for these rebates is estimated based on the specific terms US government and state programmes have risen in 2008 mainly in each agreement, historical experience and product growth rates. due to pricing adjustments on Imitrex and Lamictal following the introduction of generic competition, together with the inclusion of • The US Medicaid programme is a state-administered programme new products from the Reliant Pharmaceuticals acquisition. providing assistance to certain poor and vulnerable patients. In 1990, the Medicaid Drug Rebate Program was established to The total accruals for rebates, discounts, allowances and returns reduce state and federal expenditure on prescription drugs. in the US pharmaceuticals business were as follows: GSK participates by providing rebates to states. Accruals for At 31st At 31st Medicaid rebates are calculated based on the specific terms of December December individual state agreements using a combination of historical 2008 2007 £m £m experience, product and population growth, anticipated price Chargebacks 50 38 increases and the impact of contracting strategies. Managed care, Medicare Part D • Cash discounts are offered to customers to encourage prompt and GPO rebates 474 340 payment. These are accrued for at the time of invoicing and US government and state programmes 345 240 adjusted subsequently to reflect actual experience. Cash discounts 25 21 Customer returns 259 194 • Where there is historical experience of customer returns, Other 50 37 GSK records an accrual for estimated sales returns by applying Total 1,203 870 historical experience of customer returns to the amounts invoiced, together with market related information such as stock levels at Sterling values have increased largely as a result of exchange wholesalers, anticipated price increases and competitor activity. rate movements. In dollar terms, the 2008 provision is largely unchanged from 2007. A monthly process is operated to monitor A reconciliation of gross turnover to net turnover for the US inventory levels at wholesalers for any abnormal movements. pharmaceuticals business is as follows: This process uses gross sales volumes, prescription volumes 2008 2007 2006 based on third party data sources and information received £m % £m % £m % from key wholesalers. The aim of this is to maintain inventories Gross turnover 11,602 100 11,826 100 13,131 100 at a consistent level from year to year based on the pattern of consumption. On this basis, US pharmaceutical inventory levels at Chargebacks 892 8 917 8 846 6 wholesalers and in other distribution channels at 31st December Managed care, Medicare Part D and GPO 2008 were estimated to amount to approximately one month of rebates 764 6 727 6 912 7 turnover. This calculation uses third party information, the accuracy US government and of which cannot be totally verified, but is believed to be sufficiently state programmes 554 5 481 4 507 4 reliable for this purpose. Cash discounts 207 2 208 2 248 2 Customer returns 126 1 131 1 140 1 Prior year adjustments (38) – (73) – (69) – Other items 203 1 162 1 194 1 Total deductions 2,708 23 2,553 22 2,778 21 Net turnover 8,894 77 9,273 78 10,353 79 Sterling values have increased by approximately 8% compared with 2007 as a result of exchange rate movements.

  • Page 45

    GSK Annual Report 2008 43 Report of the Directors Financial position and resources Financial position Property, plant and equipment 2008 2007 GSK’s business is science-based, technology-intensive and highly £m £m regulated by governmental authorities. The Group allocates significant Assets financial resources to the renewal and maintenance of its property, Non-current assets plant and equipment to minimise risks of interruption of production Property, plant and equipment 9,678 7,821 and to achieve compliance with regulatory standards. A number of its Goodwill 2,101 1,370 processes use chemicals and hazardous materials. Other intangible assets 5,869 4,456 Investments in associates and joint ventures 552 329 The total cost of the Group’s property, plant and equipment Other investments 478 517 at 31st December 2008 was £18,987 million, with a net book Deferred tax assets 2,760 2,196 value of £9,678 million. Of this, land and buildings represented Derivative financial instruments 107 1 £3,756 million, plant and equipment £3,644 million and assets in Other non-current assets 579 687 construction £2,278 million. In 2008, GSK invested £1,444 million Total non-current assets 22,124 17,377 in new and renewal property, plant and equipment. This is mainly related to a large number of projects for the renewal, improvement Current assets and expansion of facilities at various worldwide sites. Property is Inventories 4,056 3,062 mainly held freehold. New investment is financed from Group liquid Current tax recoverable 76 58 resources. At 31st December 2008, GSK had capital contractual Trade and other receivables 6,265 5,495 Derivative financial instruments 856 475 commitments for future expenditure of £489 million and operating Liquid investments 391 1,153 lease commitments of £448 million. GSK believes that its facilities are Cash and cash equivalents 5,623 3,379 adequate for its current needs. Assets held for sale 2 4 The Group observes stringent procedures and uses specialist skills Total current assets 17,269 13,626 to manage environmental risks from these activities. Environmental Total assets 39,393 31,003 issues, sometimes dating from operations now modified or discontinued, are reported under ‘Responsibility for environment, Liabilities health and safety’ (page 30) and in Note 44 to the financial Current liabilities statements, ‘Legal proceedings’. Short-term borrowings (956) (3,504) Trade and other payables (6,075) (4,861) Goodwill Derivative financial instruments (752) (262) Goodwill has increased during the year from £1,370 million at Current tax payable (780) (826) 31st December 2007 to £2,101 million. The increase primarily reflects Short-term provisions (1,454) (892) the goodwill arising on the acquisition of Sirtris Pharmaceuticals Total current liabilities (10,017) (10,345) Inc. of £242 million and that arising on the acquisition of the BMS Non-current liabilities Egypt business of £52 million as well as a significant strengthening Long-term borrowings (15,231) (7,067) of overseas currencies on the translation of existing foreign currency Deferred tax provision (714) (887) goodwill balances. Pensions and other post-employment benefits (3,039) (1,383) Other provisions (1,645) (1,035) Other intangible assets Derivative financial instruments (2) (8) Other intangible assets include the cost of intangibles acquired from Other non-current liabilities (427) (368) third parties and computer software. The net book value of other Total non-current liabilities (21,058) (10,748) intangible assets as at 31st December 2008 was £5,869 million (2007 – £4,456 million). The increase in 2008 reflects additions of Total liabilities (31,075) (21,093) £847 million and currency movements partly offset by the amortisation Net assets 8,318 9,910 and impairment of existing intangibles. The largest element of Equity the additions is £106 million relating to the acquisition of Sirtris Share capital 1,415 1,503 Pharmaceuticals Inc., reflecting the existence of the technology and a Share premium account 1,326 1,266 large patent application portfolio covering areas of sirtuin biology. Retained earnings 4,622 6,475 Other reserves 568 359 Shareholders’ equity 7,931 9,603 Minority interests 387 307 Total equity 8,318 9,910

  • Page 46

    44 GSK Annual Report 2008 Report of the Directors Financial position and resources continued Investments Pensions and other post-employment benefits GSK held investments, including associates and joint ventures, The Group accounts for pension and other post-employment with a carrying value at 31st December 2008 of £1,030 million arrangements in accordance with IAS 19. The net deficits (2007 – £846 million). The market value at 31st December 2008 before allowing for deferred taxation were £1,736 million was £1,883 million (2007 – £1,517 million). The largest of these (2007 – £411 million) on pension arrangements and £1,303 million investments is in an associate, Quest Diagnostics Inc., which (2007 – £972 million) on unfunded post-employment liabilities. had a book value at 31st December 2008 of £463 million The pension liabilities increased following declines in asset values and (2007 – £299 million). The investments include equity stakes a negative impact of exchange movements only partially offset by in companies where the Group has research collaborations, which further special funding contributions to the UK pension funds provide access to biotechnology developments of potential interest of £200 million (2007 – £285 million to the UK pension schemes); or interests in companies that arise from business divestments. a strengthening of long-term interest rates, including an increase in the rate used to discount UK pension liabilities from 5.75% to 6.20% Derivative financial instruments: assets and a decrease in the estimated long term inflation rate in the UK. GSK had both non-current and current derivative financial instruments held at fair value of £963 million (2007 – £476 million). The increase Net debt primarily reflects fluctuations in far forward valuations on foreign 2008 2007 exchange contracts hedging inter-company loans and deposits. £m £m Exchange movements are largely due to changes in Euro, Cash, cash equivalents and US dollar and Yen market rates. liquid investments 6,014 4,532 Borrowings – repayable within one year (956) (3,504) Inventories Borrowings – repayable after one year (15,231) (7,067) Inventory of £4,056 million has increased by £994 million during the year. The majority of this increase arises from a strengthening Net debt (10,173) (6,039) of overseas currencies, with the remainder caused partly by Net debt increased by £4,134 million primarily due to share strategic stock building to support growth in specific products. repurchases, further acquisition of businesses and a significant strengthening of the foreign currencies in which group debt Trade and other receivables is denominated, partly offset by increased cash inflows from Trade and other receivables of £6,265 million have increased from operating activities. 2007 reflecting the impact of strengthening overseas currencies on the translation of foreign currency receivables partly offset by the Total equity completion of non-recourse factoring arrangements in Japan and A summary of the movements in equity is set out below. reductions in overdue receivables in certain European markets. 2008 2007 Derivative financial instruments: liabilities £m £m GSK held both non-current and current derivative financial Total equity at beginning of year 9,910 9,648 instruments held at fair value of £754 million (2007 – £270 Total recognised income and expense million) relating primarily to hedging exchange on translation of for the year 4,829 6,134 currency assets on consolidation. The increase again reflects the Dividends to shareholders (2,929) (2,793) impact from Euro, US dollar and Yen currency fluctuations. Ordinary Shares issued 62 417 Ordinary Shares purchased and held as Trade and other payables Treasury shares – (3,537) Trade and other payables amounting to £6,075 million have Ordinary Shares purchased and cancelled (3,706) (213) increased from 2007 primarily reflecting the strengthening of Consideration received for shares transferred overseas currencies. by ESOP Trusts 10 116 Ordinary Shares acquired by ESOP Trusts (19) (26) Provisions Share-based incentive plans 241 237 Tax on share-based incentive plans (1) 4 The Group carried deferred tax provisions and other short-term and Distributions to minority interests (79) (77) non-current provisions of £3,813 million at 31st December 2008 (2007 – £2,814 million) in respect of estimated future liabilities, of Total equity at end of year 8,318 9,910 which £1,903 million related to legal and other disputes. Provision At 31st December 2008, total equity had decreased from £9,910 has been made for legal and other disputes, indemnified disposal million at 31st December 2007 to £8,318 million. The decrease liabilities and the costs of restructuring programmes to the extent arises principally from actuarial losses on defined benefit pension that at the balance sheet date an actual or constructive obligation plans in the year and further share repurchases, partially offset by existed and could be reasonably estimated. recognised income and expenses for the year.

  • Page 47

    GSK Annual Report 2008 45 Report of the Directors Financial position and resources continued Share purchases Contractual obligations and commitments In 2008, the Employee Share Ownership Plan (ESOP) Trusts acquired The following table sets out the Group’s contractual obligations and £19 million of shares in GSK plc (2007 – £26 million). Shares are held commitments at 31st December 2008 as they fall due for payment. by the Trusts to satisfy future exercises of options and awards under the Group share option and award schemes. A proportion of the Total Under 1 yr 1-3 yrs 3-5 yrs 5 yrs+ £m £m £m £m £m shares held by the Trusts are in respect of awards where the rules of Loans 16,051 911 703 4,600 9,837 the scheme require GSK to satisfy exercises through market purchases Interest on loans 11,868 782 1,525 1,339 8,222 rather than the issue of new shares. The shares held by the Trusts are Finance lease obligations 136 48 62 19 7 matched to options and awards granted. Finance lease charges 18 5 7 4 2 At 31st December 2008, the ESOP Trusts held 129 million GSK shares Operating lease against the future exercise of share options and share awards. The commitments 448 140 185 76 47 carrying value of £1,445 million (2007 – £1,617 million) has been Intangible assets 13,048 660 1,269 1,556 9,563 deducted from other reserves. The market value of these shares was Property, plant & equipment 489 388 100 1 – £1,657 million (2007 – £1,721 million). Investments 56 46 10 – – Purchase commitments 145 70 74 1 – GSK repurchased £3,706 million of shares for cancellation in 2008 Business combinations 227 227 – – – (2007 – £213 million) and £nil of shares to be held as Treasury shares Pensions 597 334 132 131 – (2007 – £3,537 million). In order to ensure that GSK has sufficient Other commitments 46 17 19 5 5 flexibility to deliver its strategic priorities the company does not expect Total 43,129 3,628 4,086 7,732 27,683 to make any significant repurchases under the existing share buy-back programme during 2009. The exact amount and timing of future Commitments in respect of loans and future interest payable on loans purchases, and the extent to which repurchased shares will be held as are disclosed after taking into account the effect of derivatives. The Treasury shares rather than being cancelled, will be determined by the Group has entered into a number of research collaborations to develop company and is dependent on market conditions and other factors. new compounds with other pharmaceutical companies. The terms of At 31st December 2008, GSK held 474.2 million shares as Treasury these arrangements can include up-front fees, equity investments, loans shares (2007 – 504.2 million shares), at a cost of £6,286 million and commitments to fund specified levels of research. In addition, the (2007 – £6,683 million), which has been deducted from Group will often agree to make further payments if future ‘milestones’ retained earnings. are achieved. As some of these agreements relate to compounds in the early stages of development, milestone payments will continue for There have been no purchases since 31 December 2008 under the a number of years if the compounds move successfully through the existing programme. development process. Generally the closer the product is to marketing approval the greater the possibility of success. The payments shown above Commitments and contingent liabilities within intangible assets represent the maximum that would be paid if all Financial commitments are summarised in Note 39 to the financial milestones are achieved. statements, ‘Commitments’. Other contingent liabilities and obligations in respect of short and long-term debt are set out in Note 31 to the A number of new commitments were made in 2008 under financial statements, ‘Contingent liabilities’ and Note 32 to the financial licensing and other agreements, including arrangements with statements, ‘Net debt’. Actelion Pharmaceuticals Limited, Archemix Corporation, Dynavax Technologies Corporation, and Mpex Pharmaceuticals, Inc. The Amounts provided for pensions and post-retirement benefits are set commitments relating to business combinations reflect agreements to out in Note 28 to the financial statements, ‘Pensions and other post- acquire the issued share capital of Genelabs Technologies, Inc., Bristol employment benefits’. Amounts provided for restructuring programmes Myers Squibb Pakistan (Private) Limited and AZ Tika SNC, the latter and legal, environmental and other disputes are set out in Note 29 to being subject to clearance by the Swedish Competition Authority. the financial statements, ‘Other provisions’. In 2006, GSK formalised an agreement with the trustees of the UK pension schemes to make additional contributions, in addition to the normal contributions, over a four year period ending 31st December 2009 in order to eliminate the then funded pension deficits on an IAS 19 basis by that point. The table above shows this commitment, net of £166 million of additional contributions made in 2008, but excludes the normal ongoing annual funding requirement of approximately £150 million. GSK has also committed to eliminate any future deficits that may arise over a rolling five-year period. This agreement will be reviewed during 2009. For further information on pension obligations, see Note 28 to the financial statements, ‘Pensions and other post-employment benefits’.

  • Page 48

    46 GSK Annual Report 2008 Report of the Directors Financial position and resources continued Contingent liabilities The net cash outflow from investing activities was £1,149 million, a The following table sets out contingent liabilities, comprising discounted decrease of £1,899 million which reflected marginally lower capital bills, performance guarantees, letters of credit and other items arising expenditure, repayments of liquid investments and a reduced cost of in the normal course of business, and when they are expected to expire. business purchases during 2008, including Sirtris Pharmaceuticals for £324 million, net of cash acquired of £52 million, and the Egyptian Total Under 1 yr 1-3 yrs 3-5 yrs 5 yrs+ £m £m £m £m £m business of BMS for £130 million, net of deferred consideration of £10 million. In 2007, the comparable acquisitions comprised of Reliant Guarantees 98 73 14 – 11 Pharmaceuticals for £794 million and Domantis for £218 million, net Other contingent liabilities 36 3 12 3 18 of cash acquired. Total 134 76 26 3 29 Free cash flow In the normal course of business GSK has provided various indemnification guarantees in respect of business disposals in which £m 5,000 legal and other disputes have subsequently arisen. A provision 3,751 3,706 is made where a reasonable estimate can be made of the likely 4,679 4,000 outcome of the dispute and this is included in Note 29 to the 3,857 3,000 financial statements, ‘Other provisions’. 2,000 It is the Group’s policy to provide for the settlement costs of asserted claims and environmental disputes when a reasonable estimate 1,000 may be made. Prior to this point no liability is recorded. Legal and 0 environmental costs are discussed in ‘Risk factors’ on pages 50 to 53 2008 2007 and Note 44 to the financial statements, ‘Legal proceedings’. GSK continues to believe that it has made adequate provision for the Free cash flow is the amount of cash generated by the business after liabilities likely to arise from open taxation assessments. The ultimate meeting its obligations for interest, tax and dividends paid to minority liability for such matters may vary significantly from amounts provided interests, and after capital expenditure on non-current tangible and and is dependent upon the outcome of litigation proceedings and intangible assets. It was £4,679 million, an increase of 21% over 2007, negotiations with the relevant tax authorities. This is discussed further principally reflecting the higher operating profit before non-cash charges, in Note 14 to the financial statements, ‘Taxation’. primarily from the major restructuring programmes, and working capital improvements, partly offset by higher levels of interest paid as a result of Cash flow the significant debt issuances during the year of US $9 billion under the A summary of the consolidated cash flow is set out below. US shelf registration and £0.7 billion under the EMTN programme. 2008 2007 Free cash flow is used by GSK’s management for planning and reporting £m £m purposes and in discussions with and presentations to investment analysts Net cash inflow from operating activities 7,205 6,161 and rating agencies. GSK’s free cash flow measure is not defined in IFRS. Net cash outflow from investing activities (1,149) (3,048) This measure may not be directly comparable with similarly described Net cash outflow from financing activities (4,908) (1,702) measures used by other companies. A reconciliation of net cash inflow Increase/(decrease) in cash and bank overdrafts 1,148 1,411 from operating activities, which is the closest equivalent IFRS measure, to free cash flow is shown below. Exchange adjustments 1,103 48 Cash and bank overdrafts at beginning of year 3,221 1,762 Reconciliation of free cash flow Cash and bank overdrafts at end of year 5,472 3,221 2008 2007 £m £m Cash and bank overdrafts at end of year comprise: Net cash inflow from operating activities 7,205 6,161 Cash and cash equivalents 5,623 3,379 Purchase of non-current tangible assets (1,437) (1,516) Overdrafts (151) (158) Purchase of non-current intangible assets (632) (627) Disposal of non-current tangible fixed assets 20 35 5,472 3,221 Interest paid (730) (378) The net cash inflow from operating activities after taxation paid was Interest received 320 247 £7,205 million, an increase of £1,044 million over 2007 reflecting an Dividends received from joint ventures and unchanged profit before tax (excluding the impact of the significant associated undertaking 12 12 increase in non-cash charges made in the year, primarily from the major Dividends paid to minority interests (79) (77) restructuring programmes), together with improved working capital Free cash flow 4,679 3,857 management.

  • Page 49

    GSK Annual Report 2008 47 Report of the Directors Financial position and resources continued Movements in net debt Payment policies 2008 2007 Group companies are responsible for monitoring and managing £m £m their working capital. The terms of sales collections and supplier Net debt at beginning of year (6,039) (2,450) payments reflect local commercial practice. Increase in cash and bank overdrafts 1,148 1,411 Cash (inflow)/outflow from liquid investments (905) 39 In the UK, the company and each of its UK subsidiaries have Net increase in long-term loans (5,523) (3,276) policies to ensure that suppliers are paid on time. In particular, Net repayment of/(increase in) short-term loans 3,059 (1,632) the UK companies seek: Exchange movements (1,918) (88) •฀฀to settle terms of payment with suppliers when agreeing the Other movements 5 (43) terms of the transaction Net debt at end of year (10,173) (6,039) •฀฀to ensure that suppliers are made aware of the agreed terms Investment appraisal of payment GSK has a formal process for assessing potential investment •฀฀to abide by the terms of payment. proposals in order to ensure decisions are aligned with the Group’s overall strategy. This process includes an analysis of The policy permits arrangements for accelerated payment to the impact of the project on earnings, its return on invested small suppliers. capital and an assessment of the return based on discounted cash flows. The discount rate used to perform financial analysis Payment performance is decided internally, to allow determination of the extent to At 31st December 2008, the average number of days’ payable which investments cover the Group’s cost of capital. For specific outstanding represented by trade payables of the parent company investments the discount rate may be adjusted to take into was nil (2007 – nil) and in respect of the company and its UK account country or other risk weightings. subsidiaries in aggregate was 20 days (2007 – 21 days). Capital expenditure and financial investment Treasury policies Cash payments for tangible and intangible fixed assets GSK reports in Sterling and pays dividends out of Sterling profits. amounted to £2,069 million (2007 – £2,143 million; The role of Corporate Treasury is to manage and monitor our 2006 - £1,590 million). Disposals realised £191 million external and internal funding requirements and financial risks (2007 – £44 million; 2006 - £218 million). Cash payments to in support of our corporate objectives. Treasury activities are acquire equity investments of £87 million (2007 – £186 million; governed by policies and procedures approved by the Board of 2006 - £57 million) were made in the year and sales of equity Directors, most recently on 25th September 2008. investments realised £42 million (2007 – £45 million; 2006 - £32 million). A Treasury Management Group (TMG) chaired by our Chief Financial Officer, meets on a monthly basis to review treasury Future cash flow activities. Its members receive management information relating The Group expects that future operating cash flow will be sufficient to treasury activities. to fund its operating and debt service costs, to satisfy normal levels of capital expenditure, to meet obligations under existing licensing Capital management agreements, to meet the expenditure arising from the major Our operations are global, primarily through subsidiary companies restructuring programmes (the precise timing of which is uncertain) established in the markets in which we trade. With significant outlined in Note 7 to the financial statements, ‘Major restructuring levels of patent protection, our products compete largely on programmes’ and to meet other routine outflows including tax and product efficacy rather than on price. Selling margins are sufficient dividends, subject to the ‘Risk factors’ discussed on pages 50 to 53. to cover normal operating costs and our operating subsidiaries are GSK may from time to time have additional demands for finance, generally cash generative. such as for acquisitions. It has access to other sources of liquidity Operating cash flow is used to fund investment in research and from short and long-term capital markets and banks and other development of new products. It is also used to make the routine financial institutions, in addition to the cash flow from operations, outflows of capital expenditure, tax, dividends, repayment of for such needs. maturing debt and, to the extent determined by the Board, share repurchases. Our policy is to borrow centrally using a variety of capital market issues and borrowing facilities to meet anticipated funding requirements.

  • Page 50

    48 GSK Annual Report 2008 Report of the Directors Financial position and resources continued These borrowings, together with cash generated from operations, At 31st December 2008, we had centrally available cash reserves are on-lent, contributed as equity to certain subsidiaries or used to of £4.3 billion and committed undrawn bank facilities of pay dividends, make acquisitions or fund share buy-backs. $3.9 billion. As at that date we had short-term debt and bank overdrafts and loans repayable within one year of £1.0 billion. For further details of GSK’s share buy-back programme, please see Note 33, ‘Share capital and share premium account’. We manage our net borrowing requirements through a portfolio of long-term borrowings, including bonds, together with short- Liquidity term finance under a $10 billion commercial paper programme. As at 31st December 2008, our cash and liquid investments were During the year, our committed undrawn bank facilities reduced held as follows: from $5 billion to $3.9 billion as a consequence of Royal Bank of Scotland’s acquisition of ABN AMRO and the collapse of Lehman 2008 2007 £m £m Brothers. The facilities were renewed in October 2008. We Bank balances and deposits 3,778 1,431 consider this level of committed facilities to be adequate given our Treasuries and treasury-repo only money current cash holdings. For further information on these facilities, market funds 1,852 1,713 please refer to Note 32 to the financial statements, ‘Net debt’. We Corporate debt instruments 75 1,170 also benefit from strong positive cash flow from operating units. Government securities 309 218 We have a European Medium Term Note programme of 6,014 4,532 £10 billion. At 31st December 2008, we had £7.9 billion of notes in issue under this programme. We also have a US shelf £4.3 billion of this amount is managed centrally and available registration statement. At 31st December 2008, we had within three months. We had net debt at 31st December 2008 of $11.1 billion (£7.7 billion) of notes in issue under this programme. £10.2 billion. The table below summarises cash and gross debt. The TMG monitors the cash flow forecast on a monthly basis. 2008 2007 £m £m The long-term borrowings mature at dates between 2010 and Cash and liquid investments 6,014 4,532 2042. Our long-term debt ratings have remained stable since Gross debt – fixed (13,814) (6,254) February 2008. Currently we are rated A+ stable outlook by – floating (2,373) (4,317) Standard and Poor’s and A1 negative outlook by Moody’s. Our short-term debt ratings are A-1 and P-1 with Standard and Poor’s Net debt (10,173) (6,039) and Moody’s respectively. The maturity profile of gross debt is shown in the table below: MATURITY PROFILE OF GROSS DEBT £m equivalent 3,500 3,000 2,500 2,000 1,500 1,000 500 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2025 2033 2034 2038 2039 2042 • USD • EUR • GBP • Other

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