GSK results announcement for the fourth quarter

GSK results announcement for the fourth quarter

Strategic progress drives positive underlying sales growth*,increasing pipeline potential and improved cash generation


Increased dividend and new long-term share buy-back programme enhance returns to shareholders

GSK's strategic priorities GSK has focused its business around the delivery of three strategic priorities, which aim to increase growth, reduce risk and improve GSK's long-term financial performance: • Grow a diversified global business • Deliver more products of value • Simplify GSK's operating model Chief Executive Officer's Review

LONDON, Feb. 3, 2011-We have substantially re-engineered GSK's business model over the last two and a half years, through major restructuring and a rigorous returns-based approach to capital allocation.

We are also having to deal with long-standing legal cases. There is no doubt that the scale of legal provisioning that has been required is significant. However, I continue to believe that it is in the company's best interests to resolve this inherent unpredictability and reduce our overall litigation exposure.

The changes we have made are delivering diversified underlying sales growth, increasing pipeline potential and improved cash generation.

These elements are at the core of our strategy to address the market challenges we identified and to deliver sustained financial performance. They also speak to what we have created - a balanced, synergistic business with a lower risk profile and the option for significant potential upside from the pipeline.

All of this is being done with the direct aim of enhancing returns to shareholders through continued dividend growth and other measures such as the new long-term share buy-back programme we initiated today.

Continuing focus on ROI and capital allocation Reinvestment of costs saved through our restructuring programme has enabled us to diversify and strengthen GSK's sales base. £1.7 billion of cost has been extracted from our developed country sales & marketing, support functions, R&D and manufacturing infrastructure since 2008. We are on track to deliver £2.2 billion of annual savings by 2012.

We have taken cost out from lower returning activities and reinvested it in areas such as Emerging Markets, Vaccines and Consumer Healthcare. The benefit of this reinvestment is evident. 2010 reported sales for these businesses were up 22%, 15% and 5% respectively.

Excluding sales of pandemic products, Avandia and Valtrex underlying sales in Emerging Markets were up 20%, and Vaccines sales were up 10%.

Bolt-on acquisitions are also contributing meaningfully to sales in these areas. In 2010, we spent £354 million on acquisitions. This compares with £2.8 billion in 2009 and reflects our disciplined approach to investment in what is a highly competitive market. We continue to evaluate returns from these investments. Assessment of earlier acquisitions such as Stiefel and the emerging market portfolios of UCB and BMS all indicate that they are on track to meet, or exceed, the targets we set at acquisition.

All this is fundamentally reducing GSK's dependency on sales of products in ‘white pills/western markets.' Sales generated from these markets and products have decreased from 40% in 2007, to 25% in 2010. Over time, this should help to reduce the adverse impact of patent expirations on the Group.

Reinvestment and cost reduction has also helped to mitigate the impact of what has been a significant ‘patent cliff' for GSK with more than £4 billion of patented sales being lost to generic competition over the last 4 years. This is in addition to the £1 billion of Avandia sales decline over the same period.

Our drive for change, and to improve returns on investment through restructuring and effective capital allocation, will not stop.

Today, we are announcing our intention to accelerate growth and focus our Consumer Healthcare business around a portfolio of ‘priority' brands and the emerging markets. These two dimensions represent around 90% of our current sales base. We intend to divest the remaining 10% of sales (£500 million) which consist of European and American non-core OTC brands. Our aim is to divest these products by late 2011, subject to interest and realising appropriate value for shareholders. We expect to use the proceeds to fund increased returns to shareholders.

Divestments of non-core assets to create value for shareholders will continue. This week, we completed the divestment of our total shareholding in Quest Diagnostics for net proceeds after tax of $1.1 billion (£0.7 billion) and the sale of our remaining interests in Zovirax cream and ointment formulations in North America to Valeant Pharmaceuticals for $300 million (£190 million).

Delivering diversified underlying sales growth In 2010, reported sales were down 1%; however, underlying sales growth (sales excluding pandemic products, Avandia and Valtrex) was 4.5%. This growth was achieved despite the ongoing impacts of US healthcare reform and EU government austerity measures which reduced sales by approximately £380 million.

In 2011, we expect underlying sales momentum to continue and translate into sustainable reported growth in 2012. This expectation includes our assessment for further pricing reductions in the USA and Europe which is expected to amount to an incremental £325 million in 2011.

We recognise that tracking GSK's performance in 2011 will be difficult. The ‘washout' of pandemic products, Avandia and Valtrex, which altogether represented sales of more than £2 billion in 2010, will clearly impact our reported sales and margin for the year and especially during the first half.

Given the minimal sales and marketing support for these products, we expect this to reduce our operating margin (excluding legal charges and other operating income) during 2011 by around 1 percentage point. This reduction also takes into account the industry levy associated with US healthcare reform. We expect the Group margin (on the same basis) to improve from 2012 onwards reflecting delivery of our underlying sales momentum and cost savings realised through our restructuring programme.

Offsetting this impact to SG&A expenditure, would require us to reduce investment in growth areas of the business, and we do not believe this is in the long-term interests of the business.

Increasing pipeline potential GSK has a peer-leading portfolio of around 30 opportunities in phase III and registration.

This portfolio is diverse with 5 biopharmaceuticals and 5 vaccines in addition to NCEs, all targeting multiple disease areas. The portfolio is also innovative with more than 20 assets not currently on the market for any indication.

Importantly, we are delivering sustained asset progression with 10 NCEs and new vaccines entering phase III since the start of 2010. 7 assets are filed with regulators or pending filing.

By the end of 2012, we expect Phase III data on around 15 additional assets, including treatments for type 1 and 2 diabetes, rare diseases and multiple cancer types.

Looking at asset progression, one particular area I want to mention here is our respiratory pipeline. Today, we are announcing that a new LAMA/LABA combination product (‘719/'444), will join Relovair in Phase III development. We have also announced the initiation of an extensive clinical outcomes study to assess the potential for Relovair to improve survival in patients with COPD. With more than 50 years of experience in this field, respiratory remains a very important part of GSK's research.

Improving returns on investment is key to how we are running our R&D operations. Our previously announced target is to deliver an aspirational rate of return for GSK's R&D of around 14%. We have made fundamental changes to how we allocate our R&D expenditure, directing it to our late stage pipeline and reducing cost and risk through externalising parts of early-stage discovery; dismantling infrastructure; and terminating development in areas with low financial and scientific return.

Improved cash generation Improvements in business efficiency are also helping drive cash generation. Adjusted 2010 net cash inflow before legal settlements was £8.8 billion, up 9% in sterling terms, reflecting the benefits of our ongoing restructuring programme and the success of our working capital initiatives. During 2010, working capital reduced by £1.3 billion (including £600 million of cash from lower pandemic receivables).

Cash outflow in respect of the settlement of legal matters was £2 billion in the year, resulting in net cash inflow from operating activities of £6.8 billion.

Net debt was £8.9 billion, £0.6 billion lower than the previous year. This positions the Group well to accommodate the already provided for legal costs as they become payable, whilst continuing to support our ongoing investment programmes and delivery of targeted returns to shareholders.

Increasing returns to shareholders With improvements in our cash position, we are increasing returns to shareholders.

We increased GSK's dividend by 7% to 65p in 2010 and our priority is to deliver further growth in the dividend. Since 2005, dividends have increased each year with average growth of 8% over the five-year period.

Today, we are announcing that we will buy back shares again. In 2011, as part of a new long-term share buy-back programme and depending on market conditions, we expect to repurchase £1-2 billion of shares.

Our commitment is to use free cash flow to support increasing dividends, undertake share repurchases or, where returns are more attractive, invest in bolt-on acquisitions.

Summary In conclusion, whilst our operating environment remains challenging, I believe we have made significant progress through restructuring and a rigorous returns-based approach to capital allocation. Our business is more balanced and is generating underlying sales growth. Our broad and diverse pipeline is generating increasing potential. Our cash generation is strong and we are enhancing returns to shareholders. With the rest of GSK's management team, I remain confident that we can generate increased value for shareholders and deliver even better outcomes to patients and consumers.

Andrew Witty Chief Executive Officer A short video interview with Andrew Witty discussing today's results and GSK's strategic progress is available on and Issued: Thursday, 3rd February 2011, London, U.K. 5 Full year trading update Turnover and key product movements impacting growth for full year 2010 Total Group turnover for the year declined 1% to £28.4 billion, with pharmaceutical turnover down 2% to £23.4 billion and Consumer Healthcare sales up 5% to £5.0 billion. Excluding pandemic products, Valtrex and Avandia, Group sales were up 4.5% for the year.

Regional pharmaceutical turnover US pharmaceuticals sales declined 11% to £7.6 billion, primarily due to generic competition to Valtrex, a significant reduction in sales of pandemic related products and lower sales of Avandia. Excluding these products, sales grew 3%, despite the discontinuation of GSK's promotion of Boniva, the sale of Wellbutrin XL in May 2009, and the impact of US healthcare reform across the product range. New products launched since 2007 grew 29% and contributed 8% of 2010 sales.

Europe pharmaceuticals sales declined 6% to £6.5 billion, primarily due to the impact of a significant reduction in sales of pandemic related products, generic competition to Valtrex and lower sales of Avandia. Excluding these products, sales were flat, reflecting the impact of government austerity measures.

Emerging Markets pharmaceutical sales grew 22% to £3.6 billion, with strong growth across most product categories and also helped by pandemic related product sales of £227 million (2009: £89 million). Asia Pacific/Japan pharmaceutical sales grew 9% to £3.1 billion.

Excluding pandemic related products, Valtrex and Avandia, sales grew 20% in Emerging Markets and 7% in Asia Pacific/Japan.

Pharmaceutical products Seretide/Advair sales grew 2% to £5.1 billion, with strong growth in Japan (+17% to £246 million) and Emerging Markets (+16% to £328 million). Sales in the USA were level at £2.6 billion and grew 2% in Europe to £1.6 billion.

Several other respiratory products delivered growth including Avamys/Veramyst (+33% to £193 million), Ventolin (+8% to £522 million) and Flovent (+2% to £804 million).

Total vaccine sales grew 15% to £4.3 billion, including £1.2 billion of pandemic vaccine sales (2009: £883 million). Several new vaccines contributed to this growth including Synflorix (more than doubling to £221 million), Boostrix (+29% to £181 million) and Cervarix (+26% to £242 million). Sales of Hepatitis vaccines grew 7% to £720 million, Infanrix/Pediarix grew 8% to £700 million and seasonal flu sales grew 14% to £241 million. Rotarix sales were down 18% to £235 million, as the product continues to recover market share lost following its temporary suspension from several markets earlier in the year.

Relenza sales were £121 million (2009: £720 million), down 84%, against the previous year where significant government orders were received.

Dermatology sales were £1,087 million, including heritage GSK products and those acquired through business acquisitions, principally Stiefel in July 2009. The estimated sales growth in 2010 for the business on a pro-forma basis (excluding 2010 acquisitions) is approximately 6%.

In addition, GSK's heritage consumer dermatology portfolio, reported within Consumer Healthcare, contributed sales of £256 million (+8%).

Other strong pharmaceutical performances during the year included Tykerb (+34% to £227 million), Arixtra (+19% to £301 million), Avodart (+18% to £629 million), and Lovaza (+17% to £530 million). Newly launched oncology products Votrient and Arzerra delivered sales of £38 million and £31 million, respectively.

Valtrex sales (-60% to £532 million) were impacted by generic competition in the USA and Europe. Boniva's reported sales of £78 million were down 69%, primarily reflecting the transfer to Genentech of the exclusive promotion rights in the USA on 1st January 2010. Reported sales of Wellbutrin declined 39% to £81 million, reflecting the sale of Wellbutrin XL in the USA to Biovail in Q2 2009.

Avandia sales declined by 44% to £440 million. On 23rd September 2010 the European Medicines Agency suspended marketing authorisation for all Avandia containing products and the US Food and Drug Administration announced additional measures to ensure continued safe use of Avandia, including a Risk Evaluation and Mitigation Strategy (REMS) programme. As a result, GSK expects global sales of Avandia containing products to be minimal in the future.

Sales of HIV products by ViiV Healthcare were down 3% to £1.6 billion. Sales of the former Pfizer products Selzentry and Viracept (combined sales of £118 million) and growth from Epzicom/Kivexa (+1% to £555 million) partially offset reductions in the sales from other HIV products including Trizivir (-28% to £144 million) and Combivir (-16% to £363 million).

Consumer Healthcare Total Consumer Healthcare sales were up 5% to £5.0 billion, significantly outgrowing market growth estimated to be approximately 2%.

Sales in the Rest of World grew 13% to £2.0 billion, driven by strong growth in India and China, which grew by 19% and 18%, respectively. Europe sales were level with last year with sales of £2.0 billion and the business in the USA grew 1% to £1.0 billion.

On a category basis, global Oral care sales grew 6% to £1,602 million led by growth of Sensodyne in all regions and Nutritional healthcare sales grew 9% to £952 million. Sales of OTC medicines were £2,456 million, up 3%, with strong growth of Panadol and smoking control products partly offset by lower sales of alli in both the USA and Europe and lower sales of respiratory tract products due in part to a relatively weak flu season earlier in 2010.

Operating profit and earnings per share commentary - year ended 31st December 2010 Results before major restructuring Operating profit before major restructuring for the year ended 31st December 2010 was £5,128 million, a 48% decline in CER terms (a decrease of 45% in sterling terms). Excluding legal costs of £4,001 million, operating profit was £9,129 million, an 11% decline in CER terms (a decrease of 7% in sterling terms) principally reflecting a 1% decline in turnover, higher cost of sales and lower other operating income partly offset by reduced SG&A costs. Operating profit margin excluding legal costs and other operating income was 30.4% in 2010. The company expects the operating profit margin excluding legal costs and other operating income to be around 1 percentage point lower in 2011.

Cost of sales increased to 26.1% of turnover (2009: 25.0%) reflecting the impact of generic competition to higher margin products in the USA (principally Valtrex), lower Avandia sales, US healthcare reforms and European austerity price cuts, and inventory and other asset write-downs, partially offset by savings from the Operational Excellence programme. The company expects cost of sales as a percentage of turnover in 2011 to remain around 26%.

SG&A costs as a percentage of turnover increased by 11.2 percentage points to 43.6%.

Excluding legal costs of £4,001 million (2009: £591 million), SG&A costs were 29.5% of turnover (2009: 30.3%). This reflected operational excellence savings in the USA and Europe and lower exchange losses on inter-company transactions, partially offset by investment in growth markets and the full year impact of the acquisition of Stiefel. The company expects SG&A costs excluding legal charges to be around 30.5% of turnover in 2011.

R&D expenditure was 14.0% of total turnover (2009: 13.9%) and included savings from the Operational Excellence programme, partially offset by higher ViiV R&D investment. The comparison to prior year was unfavourably impacted by the one-off recognition of a recoverable balance in 2009, partly offset by lower intangible asset impairments of £126 million (2009: £167 million). The company expects R&D costs as a percentage of turnover to remain around 14% in 2011.

Other operating income was £493 million (2009: £1,135 million) primarily reflecting royalty income of £296 million (2009: £296 million), income from the transfer to Genentech of the exclusive promotion rights to Boniva in the USA, and asset disposals of £134 million (2009: £875 million), partially offset by equity investment impairments of £65 million (2009: £135 million). The 2009 income included the disposal of Wellbutrin XL, various asset disposals to Aspen Pharmacare, a royalty dispute settlement gain of £78 million and the accounting gain of £296 million on the creation of ViiV Healthcare. In 2011 the company expects other operating income to be around £600 million, excluding the profit arising on the proposed Consumer Healthcare divestments of non-core OTC brands.

Net interest payable for the year was £712 million (2009: £710 million) and the company expects a similar charge in 2011.

Profit on disposal of interests in associates was £8 million. The 2009 profit of £115 million arose from the sale of 5.7 million Quest shares. Subsequent to the year-end, the company sold its entire shareholding in Quest, which will give rise to a pre-tax profit on disposal of associates of approximately £600 million (£250 million after tax).

The charge for taxation on profit before major restructuring charges amounted to £1,544 million and represents an effective tax rate of 34.3% (2009: 28.0%). The company currently expects an underlying tax rate in 2011 of around 27%. The tax due on the profit realised on the disposal of the shareholding in Quest will increase the overall tax rate for 2011 to around 29.5%. This excludes the effect of any tax that may arise on the proposed Consumer Healthcare divestments of non-core brands.

EPS before major restructuring of 53.9p decreased 59% in CER terms (a 56% decrease in sterling terms) compared with 2009. Excluding legal costs EPS before major restructuring decreased 11% in CER terms. The favourable currency impact of three percentage points reflected the weakness of Sterling against most major international currencies compared with last year, partially offset by the strengthening of Sterling against the Euro.

Total results after restructuring Operating profit after restructuring for the year ended 31st December 2010 was £3,783 million, a decrease of 59% CER (a decrease of 55% in sterling terms) compared with 2009. This included £1,345 million of restructuring charges (2009: £832 million); £187 million was charged to cost of sales (2009: £285 million), £665 million to SG&A (2009: £392 million) and £493 million to R&D (2009: £155 million). EPS after restructuring of 32.1p decreased 75% in CER terms (a decrease of 71% in sterling terms) compared with 2009.

The current £4.5 billion Operational Excellence restructuring programme delivered £1.7 billion of cumulative annual savings in 2010, and remains on track to deliver full year savings of £2.2 billion by 2012. The cumulative charge incurred to 31st December 2010 was £3.6 billion which includes £0.2 billion of charges for integration of new businesses.

Cash flow and net debt The adjusted net cash inflow from operating activities before legal settlements of £2,047 million (2009: £254 million) was £8,844 million, a 9% increase in sterling terms over 2009. The 2010 cash flow benefited from a net working capital reduction of £1,297 million. This net inflow was used to fund net interest of £668 million, capital expenditure on property, plant and equipment and intangible assets of £1,635 million, equity investments of £279 million, acquisitions of £354 million, repayment of short-term loans of £1,296 million and the dividends paid to shareholders of £3,205 million.

Net debt decreased by £585 million during the year to £8.9 billion, comprising gross debt of £15.1 billion and cash and liquid investments of £6.2 billion.

At 31st December 2010, GSK had short-term borrowings (including overdrafts) repayable within 12 months of £291 million with loans of £2,559 million repayable in the subsequent year.

Dividends The Board has declared a fourth interim dividend of 19 pence per share resulting in a dividend for the year of 65 pence, a 4 pence increase on the 61 pence per share for 2009. The equivalent interim dividend receivable by ADR holders is 61.5296 cents per ADS based on an exchange rate of £1/$1.6192. The ex-dividend date will be 9th February 2011, with a record date of 11th February 2011 and a payment date of 7th April 2011.

Currency impact The 2010 results are based on average exchange rates, principally £1/$1.55, £1/€1.16 and £1/Yen 136. Comparative exchange rates are given on page 31. The period end exchange rates were £1/$1.56, £1/€1.17 and £1/Yen 127. If exchange rates were to hold at these period end levels for the rest of 2011 and there were no exchange gains or losses, the estimated positive impact on 2011 sterling EPS before major restructuring would be approximately 0.9p.

Additional income statement information To improve transparency and understanding of our increasingly diversified business additional detailed financial information is provided on pages 32 to 35.

GlaxoSmithKline (GSK) together with its subsidiary undertakings, the ‘Group' - one of the world's leading research-based pharmaceutical and healthcare companies - is committed to improving the quality of human life by enabling people to do more, feel better and live longer.

GlaxoSmithKline's website gives additional information on the Group.

Information made available on the website does not constitute part of this document.

Enquiries: UK Media David Mawdsley Claire Brough Alexandra Harrison Stephen Rea (020) 8047 5502 (020) 8047 5502 (020) 8047 5502 (020) 8047 5502 USA Media Nancy Pekarek Mary Anne Rhyne Kevin Colgan Jennifer Armstrong (919) 483 2839 (919) 483 2839 (919) 483 2839 (919) 483 2839 European Analyst / Investor Sally Ferguson Gary Davies Ziba Shamsi (020) 8047 5543 (020) 8047 5503 (020) 8047 3289 US Analyst / Investor Tom Curry (215) 751 5419 Results before major restructuring Results before major restructuring is a measure used by management to assess the Group's financial performance and is presented after excluding restructuring charges relating to the Operational Excellence programme, which commenced in October 2007 and the acquisitions of Reliant Pharmaceuticals in December 2007 and Stiefel in July 2009. Management believes that this presentation assists shareholders in gaining a clearer understanding of the Group's financial performance and in making projections of future financial performance, as results that include such costs, by virtue of their size and nature, have limited comparative value.

CER growth In order to illustrate underlying performance, it is the Group's practice to discuss its results in terms of constant exchange rate (CER) growth. This represents growth calculated as if the exchange rates used to determine the results of overseas companies in Sterling had remained unchanged from those used in the comparative period.

All commentaries are presented in terms of CER growth, unless otherwise stated.

Underlying sales growth Underlying sales growth excludes the sales of pandemic products, Avandia and Valtrex. Management believes this measure assists shareholders in gaining a clearer understanding of the Group's sales performance and prospects because of the size and nature of the loss of sales from these products in 2010 and 2011. Sales of these products were: 2010 2009 £m £m Pandemic products 1,313 1,603 Avandia 440 771 Valtrex 532 1,294 Brand names and partner acknowledgements Brand names appearing in italics throughout this document are trademarks of GSK or associated companies or used under licence by the Group.

White pills/western markets White pills/western markets refers to sales of tablets and simple injectables (excluding biopharmaceuticals and vaccines) in North America and Europe.

Cautionary statement regarding forward-looking statements Under the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995, the company cautions investors that any forward-looking statements or projections made by the company, including those made in this Announcement, are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Factors that may affect the Group's operations are described under ‘Risk Factors' in the ‘Business Review' in the company's Annual Report on Form 20-F for 2009.