Annual Report 2014
“ I am proud to work on
our respiratory portfolio
and know how important
these medicines are to
the lives of patients.”
Julie, GSK respiratory packaging
operator, Ware, UK
Overview of 2014
“ 2014 was a significant year for GSK. It was not without
its challenges and this was reflected in our trading
performance, although I am pleased with how the Group
responded. The standout event of the year was our proposed
three-part transaction with Novartis which will accelerate
our strategy of making GSK a simpler, stronger and more
balanced platform for long-term growth.”
Sir Andrew Witty
Chief Executive Officer
Read the CEO statement on page 4
Performance summary
£23.0bn
2014 Group turnover
(down 3% CERa)
£6.6bn
Core operating profitb
(down 6% CERa)
£3.6bn
2014 Total operating profit
(down 40% CER)
£4.1bn
Returned to shareholders via
dividends and share buybacks
95.4p
Core earnings per shareb
(down 1%)
57.3p
Total earnings per share
(down 40% primarily reflecting
non-cash adjustments)
40
Around 40 new molecular
entities in phase II and III
£1.5bn
New product sales
(up 84%)
1st
2014 Access to Medicine Index
100%
All countries have fully
implemented new sales
force compensation model
1st
Company to file for regulatory
approval for malaria vaccine
candidate
84%
Dow Jones Sustainability Index
score, putting us in top 2% of
the pharmaceutical sector
a Excluding divestments completed in 2013. A reconciliation of 2013
b A number of adjusted measures are used to report the performance of
core results excluding divestments completed in 2013 and total results
is set out on page 61.
our business. These measures are defined on page 52 and a reconciliation
of core results to total results is set out on page 61.
Front cover story
Julie, GSK respiratory
packaging operator
Ware, UK
GSK Annual Report 2014
Julie (pictured) has been with GSK for
32 years and works as a respiratory
packaging operator at our manufacturing
site in Ware in the UK. Over the years,
her role has been to help ensure that
our life-saving medicines for COPD
and asthma – from Ventolin to Seretide
and most recently our four new medicines
administered by the Ellipta inhaler,
Relvar/Breo, Anoro, Incruse and Arnuity
– are always of the highest quality and
are available to patients across the world
when they need them.
A key part of Julie’s role is to help colleagues
at GSK understand more about the patient
at the end of the supply chain and how
critical the contribution of every employee
is to delivering our medicines. She leads
a training programme which covers quality,
safety and patient impact – helping
employees to appreciate the importance
of GSK’s respiratory medicines to millions
of adults and children.
Julie is just one of the many people within
GSK who have helped us remain the leader
in respiratory medicine for over 40 years.
We are continuously striving to generate
scientific insights to help us develop new
medicines and inhalers that meet the needs
of patients and have launched more new
respiratory medicines in the past two years
than in the previous 15 years combined,
offering greater choice to healthcare
professionals and patients.
Our mission
At GSK our mission is to
improve the quality of human
life by enabling people to do
more, feel better, live longer.
We are doing this by developing innovative
products and improving access to healthcare
for patients around the world.
Cautionary statement regarding forward-looking statements
The Group’s reports filed with or furnished to the US Securities and Exchange Commission (SEC), including this document
and written information released, or oral statements made, to the public in the future by or on behalf of the Group, may
contain forward-looking statements. Forward-looking statements give the Group’s current expectations or forecasts of
future events. An investor can identify these statements by the fact that they do not relate strictly to historical or current facts.
They use words such as ‘anticipate’, ‘estimate’, ‘expect’, ‘intend’, ‘will’, ‘project’, ‘plan’, ‘believe’ and other words and terms of
similar meaning in connection with any discussion of future operating or financial performance. In particular, these include
statements relating to future actions, prospective products or product approvals, future performance or results of current
and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial
results. Other than in accordance with its legal or regulatory obligations (including under the UK Listing Rules and the
Disclosure and Transparency Rules of the Financial Conduct Authority), the Group undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future events or otherwise. The reader should, however,
consult any additional disclosures that the Group may make in any documents which it publishes and/or files with the SEC.
All readers, wherever located, should take note of these disclosures. Accordingly, no assurance can be given that any particular
expectation will be met and shareholders are cautioned not to place undue reliance on the forward-looking statements.
Forward-looking statements are subject to assumptions, inherent risks and uncertainties, many of which relate to factors
that are beyond the Group’s control or precise estimate. The Group cautions investors that a number of important factors,
including those in this document, could cause actual results to differ materially from those expressed or implied in any
forward-looking statement. Such factors include, but are not limited to, those discussed under ‘Risk factors’ on pages
232- 241 of this Annual Report. Any forward-looking statements made by or on behalf of the Group speak only as of the date
they are made and are based upon the knowledge and information available to the Directors on the date of this Annual Report.
A number of adjusted measures are used to report the performance of our business. These measures are defined on page 52
and a reconciliation of core results to total results is set out on page 61.
Contents
Strategic report
Chairman’s statement
CEO’s statement
What we do
Our global marketplace
Our business model
Our strategic priorities
How we performed
Risk management
Our businesses
Responsible business
Group financial review
2
4
6
8
11
12
14
16
18
36
48
Governance & remuneration
Our Board
Our Corporate Executive Team
Chairman’s letter
Board report to shareholders
Committee reports
Remuneration report
96
Chairman’s annual statement
Annual report on remuneration
97
2014 Remuneration policy report 119
72
76
78
80
86
Financial statements
Directors’ statement of
130
responsibilities
131
Independent Auditor’s report
Financial statements
136
Notes to the financial statements 140
Financial statements of
GlaxoSmithKline plc prepared
under UK GAAP
211
Investor information
218
Quarterly trend
222
Five year record
Product development pipeline 225
Product, competition and
229
intellectual property
232
Risk factors
242
Share capital and share price
Dividends
244
Tax information for shareholders 244
Annual General Meeting 2015 245
247
US law and regulation
Shareholder services
and contacts
Glossary of terms
249
251
Find out more www.gsk.com
GSK Annual Report 2014 1
Chairman’s statement
“ Returns to
shareholders
remain a key
priority for the
Board and in 2014
we set a dividend
of 80p per share,
an increase of 3%”
2 GSK Annual Report 2014
On behalf of the Board I am pleased
to report that 2014 saw good progress
against the Group’s strategy of building
a diversified business, delivering more
products of value and simplifying the
operating model.
Notwithstanding that, we also recognise
the fundamental changes in the trading
environment in which the Group operates,
particularly in the US, and how that has
impacted performance in 2014. However,
the Board continues to believe the
management team has put in place
the appropriate strategy to respond
to these challenges.
The Board was particularly pleased
to approve the proposed three-part
transaction with Novartis which will
transform the future shape of the Group
making it more balanced and providing
better opportunity for broadly based sales
growth. I was delighted that shareholders
overwhelmingly voted in favour of the
transaction in December.
Returns to shareholders remain a key
priority for the Board and management
team and despite the challenging trading
environment, a focus on cost and financial
efficiencies has allowed the Board to
set a dividend of 80p per share for 2014,
an increase of 3%. This year we expect to
maintain the dividend at 80p per share and
also return £4 billion of net proceeds from
the proposed Novartis transaction, once
appropriate approvals have been gained.
In total, since 2008 £34 billion has
been returned to shareholders through
dividends and share buybacks.
Risk management and commitment
to ethical behaviour
The Board aims to assure the integrity
of GSK’s business operations through
rigorous processes and systems and
during the year risk management was once
again a key part of the Board’s discussions.
The Audit & Risk Committee plays a critical
role in overseeing the issues and challenges
faced by the management team, including,
in 2014, the resolution of the investigation
by the Chinese authorities into our business
there. The illegal activities of GSK China
were a clear breach of GSK’s governance
and compliance procedures and are wholly
contrary to the values and standards
expected from GSK employees. We have
implemented substantial changes to our
Chinese business as a consequence.
The Board expects the Group to remain
vigilant on compliance issues and fully
supports management’s efforts to
encourage employees who have concerns
to speak up, to investigate all allegations
that are made and to continue to invest
in improved procedures.
I have no doubt that commercial success
is directly linked to operating in a responsible
way which meets the changing expectations
of society. In this respect, the Board
supports the action management has
taken to de-link compensation for sales
representatives from the number of
prescriptions written. The Board also
recognises the industry leading work
the Group is doing to fundamentally
change the relationship we have with
doctors and customers which is removing
any perception of a conflict of interest.
This forward looking approach is
exemplified in our work on the world’s
first malaria vaccine where we await news
from regulators and in our efforts as part
of the global response to the Ebola crisis.
Both examples show the dedication,
skill and expertise that we have in GSK
to make a real difference to people’s
lives worldwide.
Governance & remunerationFinancial statementsInvestor informationStrategic report This year, in further efforts to improve our
corporate reporting, we have incorporated
more information about our responsible
business approach and performance
within the Annual Report as we move
towards aligning with the principles of
Integrated Reporting. In addition, a
Responsible Business Supplement, will be
published in March, providing further detail
on these topics and setting out progress
the Group made during 2014 against its
responsible business commitments.
Governance and remuneration
As Chairman, I am committed to GSK
seeking to operate to the highest standards
of corporate governance. An independent
evaluation was undertaken of the Board
and our Committees in 2014. I’m pleased
to say the results were positive and
confirmed the Board operates in an
effective manner.
The Remuneration Committee has
operated in accordance with the binding
remuneration policy, which received
overwhelming shareholder support at
the 2014 AGM. It’s report can be found
on page 96.
Board changes and composition
There were a number of changes to the
Board during the year.
Following an extensive and rigorous
search, Sir Philip Hampton was appointed
as my successor. Sir Philip joined the
Board as a Non-Executive Director at the
start of January and will become Deputy
Chairman in April and Chairman from the
end of the 2015 AGM in May. Sir Philip
brings enormous expertise to the Board,
including chairing a number of global
companies operating in complex and
highly regulated environments.
He succeeded me as Nominations
Committee Chairman during January
to lead the refreshment of the Board
to reflect the requirements of the future
reshaped Group. I will continue to
provide Sir Philip and the Committee
with support and continuity, until I stand
down from the Board at the 2015 AGM.
As well as welcoming Sir Philip to the
Board, I was also pleased to announce in
October that Urs Rohner would join the
Board as a Non-Executive Director with
effect from 1 January 2015. He is already
bringing great value to the Board using his
experience as Chairman of Credit Suisse
Group AG and his broad business
background.
I would like to thank Sir Deryck Maughan
for agreeing to remain on the Board for
an additional year as Senior Independent
Director to assist with transitioning the role
of Chairman from myself to Sir Philip, and
to utilise his considerable experience and
knowledge of GSK’s businesses to provide
continuity and balance.
My thanks also go to Jing Ulrich for her
dedicated service to the Board. Jing has
decided not to seek re-election at our AGM.
Finally, Tom de Swaan stands down at
our AGM after nine years of valuable and
committed service, which has included his
exemplary chairmanship of the Audit & Risk
and Remuneration Committees. I would
like to thank Tom for his advice and
support over the years and wish him
well for the future.
Board diversity
12
10
08
06
04
02
0
10
10
10
5
5
5
2012
2013
2014
Male
Female
Prospects
In closing, on behalf of the Board I would
like to thank Sir Andrew and his executive
team for their continuing commitment
during a challenging year where they
have once again demonstrated their ability
to deliver against the Group’s strategy.
This will be my last report as Chairman
of GSK and I would like to thank
shareholders for their support throughout
my tenure. Through my time as Chairman,
I have seen many changes and much
progress, whether that is delivery from
the company’s R&D organisation, efforts
to improve access to our medicines,
or the evolution of the commercial model.
This has been coupled with a strong
commitment to shareholder returns.
As I look forward, with the integration of
new elements following the completion
of the proposed three-part Novartis
transaction and further restructuring and
innovation still to come in the R&D pipeline,
I remain confident GSK will deliver
considerable, long-term value and
returns for shareholders.
Sir Christopher Gent
Chairman
GSK Annual Report 2014 3
Governance & remunerationFinancial statementsInvestor informationStrategic report CEO’s statement
“ Our proposed
three-part
transaction with
Novartis will
fundamentally
reshape the Group
and is a major step
towards fulfilling
our strategy”
Since 2008 we have been reshaping
GSK to help us deliver more sustainable
sales and earnings performance,
increased innovation in our products
and better access to our medicines
for patients worldwide.
2014 marked further progress against
these objectives, most notably with our
proposed innovative three-part transaction
with Novartis. This will fundamentally
reshape the company and is a major step
towards fulfilling our strategy of creating
a simpler, stronger and more balanced
platform for long-term growth.
Trading conditions continue to be
challenging, particularly in the US primary
care market. This led to sales for the year
declining 3% CER* to £23 billion and
core earnings per share down 1% CER
to 95.4p, with some of the sales pressure
mitigated through delivery of cost and
financial efficiencies. We continue to make
returns to shareholders a priority and this
year increased the dividend 3% to 80p
per share and expect to hold it at this
level for 2015.
Future success for the Group will be
underpinned by our R&D organisation
which continues to be productive.
In addition to a substantial advanced
pipeline we have a large number of
exciting early phase assets in key
therapeutic areas which are rapidly
moving forward through the clinic.
During 2014, we also kept up the pace
on innovation of our business model,
continuing to evolve our relationships
with doctors and customers to ensure
we meet society’s expectations of
a global pharmaceutical company.
Trading performance is challenging
Pharmaceutical and Vaccines sales
grew in Emerging Markets by 5% and
Japan by 1%. Europe was flat. This
was offset by US sales declining 10%
as a result of continued pricing and
contracting pressure, particularly in
our respiratory business.
We have worked hard to improve our
formulary positioning and coverage in
the US and as we move into 2015, we
are starting to see some early encouraging
signs of how this will help us regain market
share and deliver improved performance
in respiratory. In addition we continue to
make good progress transitioning to our
new portfolio of respiratory medicines and
have recently launched two new products,
Incruse Ellipta for COPD and Arnuity
Ellipta for asthma and we await a regulatory
decision for mepolizumab, potentially
a very important product.
Within HIV, ViiV Healthcare grew 15%
with sales of Tivicay and Triumeq reaching
£339 million in 2014. The launches of
these products have been among the
best in class.
Performance in our Consumer Healthcare
business was impacted by some supply
issues with sales for the year falling 1%,
but increasing 2% in the last quarter
following progress in remediation of these
issues. We expect to see increasing benefit
through 2015 from an improved supply
situation and I remain confident in the
outlook for the business.
Reshaping the company for
a sustainable future
In April, we announced a proposed
innovative three-part transaction
with Novartis where we will acquire their
vaccines business, form a joint Consumer
Healthcare company and sell Novartis
our marketed oncology products.
4 GSK Annual Report 2014
* excluding divestments completed in 2013
Governance & remunerationFinancial statementsInvestor informationStrategic report The proposed transaction will give
substantial global scale to our Consumer
Healthcare business which will become
a market leader in more than 30 countries
as well as being the number one company
worldwide for over-the-counter medicines.
We are currently the world’s leading
vaccine manufacturer and the proposed
transaction further strengthens this position
while allowing us to expand our portfolio,
most notably in meningitis, build our
geographic reach, particularly in the US,
and bring together expertise in virology
and bacterial infection research.
In selling our marketed oncology assets
to Novartis for $16 billion we have realised
a very attractive price for a part of our
business which, while fast growing, was
sub-scale and will benefit from being part
of a more established oncology company.
We expect to complete the proposed
transaction in the week commencing
2 March 2015.
Sustainable R&D pipeline
to support future growth
Over the last few years, our R&D
organisation has had an exceptional
period of productivity and since 2009
we have achieved more FDA approvals
of new molecular entities (NMEs) than
any other company.
Following approvals received in 2013
for respiratory products Breo Ellipta
and Anoro Ellipta, Tafinlar and Mekinist
in oncology and Tivicay in HIV, we
received four further approvals in 2014:
Incruse Ellipta and Arnuity Ellipta in
respiratory, Triumeq in HIV and Tanzeum
for type 2 diabetes.
We are awaiting FDA decisions on Breo
Ellipta for use in asthma and mepolizumab,
our first-in-class anti-IL5 treatment for
severe eosinophilic asthma. We continue
to see significant organic pipeline delivery
and this year we expect up to 25 phase II
or III starts.
In our advanced pipeline we see significant
potential, for example, from our vaccine to
prevent shingles, our triple combination
therapy for COPD and our new long acting
HIV treatment, cabotegravir. In addition to
these we have a number of very exciting
early stage assets in therapy areas such
as immuno-inflammation, immuno-oncology
and cardiovascular disease and a number
of prophylactic and therapeutic vaccine
candidates.
Cost control and financial efficiencies
We remain focused on cost control and
improving financial efficiencies. During the
year we delivered around £400 million of
incremental savings compared with 2013
through our various restructuring initiatives
and ongoing cost reduction efforts.
In addition to these organic programmes,
the proposed Novartis transaction will
allow us to target synergies of £1 billion
per year by the fifth year following
completion. We have identified a further
£1 billion of annual cost savings to be
delivered over the next three years as
we also reshape our Pharmaceuticals
and R&D organisation.
The business remains cash generative
with net cash inflow from operations of
£5.2 billion for 2014, although this was
impacted by global currency fluctuations,
particularly the strength of Sterling in the
first half of 2014.
Evolution in our business model
As well as making financial savings,
our restructuring programmes are also
seeking to modernise our ways of working
and through 2014 we have continued
to challenge ourselves to do more on
this agenda.
We have made substantial progress rolling
out changes to how we compensate our
sales representatives. These changes build
on the reforms we started in the US more
than two years ago and I was pleased to
see our most recent healthcare practitioner
satisfaction research showing that GSK
now ranks first in the US among our
peer group for the value we bring to
practitioners’ work.
Adding to this, by 2016 we will have fully
implemented our commitment to stop
paying doctors to speak on our behalf and
instead will deliver a new multi-channel
system which will transform how doctors
receive information from us.
We are undertaking these reforms to
ensure patients are put first in everything
we do and to eliminate any perception
of conflict of interest. We believe these
changes are not only the right thing to
do, but that they will also be a competitive
advantage. They follow our initiatives on
clinical trial data transparency and other
companies are now also making more of
their clinical study results available.
Operating to our values
How we operate is as important to us as
delivering financial performance. That’s
why the issues we saw in China last year
have been wholly disappointing and caused
harm to the Group’s reputation. We have
taken significant steps to rectify the issues
identified in our Chinese business and to
apply appropriate lessons to our operations
elsewhere. Given the complexity of our
sector and the challenges of working in
global healthcare, we will continue to
face risks.
Operating in emerging markets is
especially challenging given the issues
many of these countries face with funding
and maturity of their respective healthcare
systems. However, we continue to believe
that with robust compliance systems and,
by working closely with local governments,
our presence in these markets can help
improve access to medicines and broader
healthcare.
Broadening access to our medicines
Enabling the broadest possible access
to our medicines remains a priority. I was
delighted in 2014 that we again topped
the Access To Medicine Index for the
fourth consecutive time. Nothing better
demonstrated our commitment to innovation
and access in everything we do than our
work on a vaccine for malaria which was
filed during 2014 and our very rapid
response to the Ebola crisis. In working on
our candidate Ebola vaccine, we have been
able to achieve in around ten months which
would otherwise have taken several years.
I pay tribute to everyone from GSK involved
in these two projects.
Outlook
Looking to 2015, we are focused on
successful execution of our strategic
priorities. Closing the proposed Novartis
transaction is clearly key, alongside
consolidating and building on the early
progress we are seeing in respiratory as
well as successfully launching other new
products. We will also need to ensure the
Consumer Healthcare business continues
to recover from its supply issues.
Some of the sales headwinds faced by the
Group in 2014 will continue to adversely
affect performance during 2015 with a
greater impact in the first half of the year.
However, with annualisation of these
factors and successful execution of our
priorities, we expect a stronger performance
in the second half of the year.
In 2015, we will also be making a decision
on whether to undertake a minority initial
public offering of ViiV Healthcare.
In addition, following the closure of the
proposed Novartis transaction we plan
to hold an Investor Day where we will issue
specific earnings guidance for the year and
profile the medium and long-term shape
and opportunities for GSK.
Finally, I would like to thank all our
employees, partners and suppliers for
their continued commitment and support.
Sir Andrew Witty
Chief Executive Officer
GSK Annual Report 2014 5
Governance & remunerationFinancial statementsInvestor informationStrategic report
What we do
Our business
We are a science-led global healthcare company that
researches and develops innovative Pharmaceuticals,
Vaccines and Consumer Healthcare products.
Our global reach
We have a significant global commercial
presence in more than 150 markets,
a network of 84 manufacturing sites
in 36 countries and large R&D centres
in the UK, USA, Belgium and China.
Since 2008 we have reshaped our global
footprint to improve access to high growth
potential markets including those in
Asia Pacific, Latin America and Japan.
£23.0bn
2014 Group turnover (down 3% CERa)
97,921
Employees
a Excluding divestments completed in 2013
Turnover by region
2014
6%
7%
32%
27%
USA
Europe
Emerging Markets
Japan
Other
Employees by region
2014
4%
28%
2%
17%
38%
USA
Europe
Emerging Markets
Japan
Other
How we are structured
While we have three primary areas of
business, our commercial operations
are structured as a combination of
regional units and areas of focus.
The businesses each benefit from
GSK’s global commercial infrastructure,
international supply networks, innovative
R&D and significant scale.
Pharmaceuticals and Vaccines operate
as a combined business in geographical
segments. Consumer Healthcare is
a global unit, as is ViiV Healthcare,
the specialist HIV company we majority
own with Pfizer and Shionogi as the
other shareholders.
Other trading turnover includes
Canada, Puerto Rico, Australasia,
central vaccine tender sales and
contract manufacturing sales.
39%
Turnover by segment
Pharmaceuticals and Vaccines
US
Europe
Emerging Markets
Japan
ViiV Healthcare
Established Products
Other trading
Consumer Healthcare
£bn
18.7
5.0
4.0
3.2
0.9
1.5
3.0
1.1
4.3
Research and
development
£3.1bn
Core R&D expenditure in 2014
80%
Preclinical to phase II NME’s have
novel mechanisms of action
We sustain and grow our business through
investment in R&D. Over 13,000 people
work in R&D roles across the group and
in 2014 we spent £3.1 billion before
non-coreb items, £3.5 billion in total, in
our search to develop innovative medicines,
vaccines and consumer products.
In Pharmaceuticals we have around
25 new molecular entities in phase II
and phase III in therapeutic areas such
as respiratory, immuno-inflammation,
HIV and cardiovascular disease.
We have 14 vaccines currently in phase I-III
to prevent shingles, hepatitis C, TB,
respiratory syncytial virus, exacerbations
in COPD, and malaria and Ebola.
Our Consumer Healthcare business
is also underpinned by science and
innovation. In 2014 we launched over
50 new to market products, including
Sensodyne True White and Horlicks
variations.
Core R&D expenditure
allocation in 2014
Pharmaceuticals
Vaccines
Consumer Healthcare
£m
2.5
0.4
0.2
%
81
14
5
b The calculation of core results and non-core
items is set out on page 52.
6 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Pharmaceuticals
Our Pharmaceuticals business develops and makes medicines to treat a broad range
of acute and chronic diseases. Our portfolio is made up of innovative and established
medicines and we have leading global positions in respiratory disease and HIV.
Read more on page 20
Sales by therapy area
Respiratory
Oncology
Cardiovascular, metabolic and urology
Immuno-inflammation
Other pharmaceuticals
ViiV Healthcare (HIV)
Established Products
£m
6,181
1,202
965
214
2,407
1,498
3,011
Our Vaccines business is one of the largest in the world. We have a broad portfolio
of over 30 paediatric, adolescent, adult and travel vaccines. In 2014, we distributed
approximately 800 million doses in 170 countries.
Read more on page 20
Sales by product line
Infanrix/Pediarix
Boostrix
Cervarix
Fluarix and FluLaval
Hepatitis
Rotarix
Synflorix
Other
£m
828
317
118
215
558
376
398
382
£15.5bn
Total turnover
67.3%
of Group turnover
Vaccines
£3.2bn
Total turnover
13.9%
of Group turnover
Consumer
Healthcare
Our Consumer Healthcare business is one of the largest in the world, driven
by science and values. We develop and market products in four categories
– Wellness, Oral health, Nutrition and Skin health – and our brands are available
in over 100 countries.
Read more on page 33
Sales by category
Wellness
Oral health
Nutrition
Skin health
£m
1,596
1,797
633
310
£4.3bn
Total turnover
18.8%
of Group turnover
GSK Annual Report 2014 7
Governance & remunerationFinancial statementsInvestor informationStrategic report Our global marketplace
Opportunities and challenges
Demand for medicines and healthcare treatments
will remain strong in coming years.
Global economic review
The global economy grew by 2.6% in 2014,
up slightly from 2.5% in 2013.
However, the recovery has been uneven
across regions. Growth in some major
economies has been strong – the US grew
by 2.4%, up from 2.2% in 2013 and the
UK grew by 2.6%, up from 1.7% in 2013.
Growth was weaker in the Euro area at
0.8% (up from -0.4% in 2013) and Japan
at 0.2% (down from 1.5% in 2013).
Emerging markets showed stronger
economic growth than developed markets
in 2014, continuing this long-term trend.
China still shows robust growth, but
down to 7.4% compared to 7.7% in 2013.
Low income countries continued to grow
at a robust pace. For example, growth in
sub-Saharan Africa was 4.5%, up from
4.2% in 2013.
The global healthcare market
The global pharmaceutical market
continued to grow in 2014, with sales
of £393 billion (Jan-Sep), up from
£362 billion (Jan-Sep 13) (CER).a
North America remains the largest
pharmaceutical market, with a 45% share
of global sales (up from 43% in 2013).
Europe showed a slight decline from
25% to 24% over the same period,
while Emerging Markets and Asia Pacific
continued to represent 23% of global
sales. Japan represented 9%, down
from 10% the previous year.a
In 2014, the global vaccines market
increased 6% to around $25 billion.b
The market is expected to continue
growing and represent around $38 billion
by 2020.b
Total global sales of medicines
by regiona
9%
23%
24%
45%
USA
Europe
Emerging Markets and Asia Pacific
Japan
8 GSK Annual Report 2014
The consumer healthcare markets in
which GSK operates are estimated to be
worth over $100 billion, and are projected
to grow by 3-4% per annum over the next
five years.c
Global trends are impacting the healthcare
market. Economic growth and changing
demographics in emerging markets are
increasing demand for healthcare products.
This demand is expected to grow
significantly faster in these markets over
the longer term than in more mature
markets. As these countries become richer,
increased consumption of food, alcohol
and tobacco, combined with less exercise,
is leading to growth in chronic diseases,
such as respiratory and cardiovascular
disease. In Europe rising public debt and
government austerity programmes continue
to create pressure on healthcare spending.
In the US focus on cost and value, is
leading payers to reduce price, restrict
access and demand more differentiated
products, so manufacturers must develop
innovative products that offer significant
improvements on existing options.
Globally, populations are ageing and taking
an increasingly active role in managing their
own health which is creating more demand
for healthcare products. Rising individual
empowerment and growing expectations
from society also mean that patients and
consumers want healthcare companies
to operate with high standards in order
to build trust.
Pricing and regulation
Prescription medicines and vaccines are
highly regulated to ensure patients and users
have access to safe and effective medicines.
Individual governments determine which
products can be marketed in their countries
and many have state-regulated systems
governing product pricing.
USA
In the US, the Food and Drug Administration
(FDA) approves new medicines and in
2014 approved 41 novel medicines, an
increase from 27 in 2013.
The healthcare landscape in the USA
is undergoing substantial change, with
a much stronger focus on improving quality
and controlling costs. The impact of this
was particularly significant in 2014,
creating challenging conditions for
the industry.
The emphasis on cost has led to increased
pricing pressures and competitive intensity
– both within the private marketplace, as
well as for public programmes. This makes
it essential for manufacturers to
demonstrate the value medicines and
vaccines bring to patients and the
healthcare system in the USA and to
develop innovative products that offer
significant improvements on existing
options. Access to healthcare also remains
a key priority, as evidenced by initiatives
such as new health insurance marketplaces,
the expansion of the Medicaid programme
and financial penalties for people who do
not purchase insurance. However, while
more Americans now have access to
healthcare coverage, access to medicines
continues to be a challenge for some
patients across the healthcare system,
including the private marketplace.
Europe
In Europe, the European Medicines Agency
(EMA) regulates new medicines and in
2014 issued 36 positive opinions
recommending marketing authorisation
for medicines containing new active
substances (38 in 2013).
Given the public funding of healthcare
in most countries, the continued pressure
on government budgets led to flat or
reduced investment in healthcare and
pharmaceuticals across Europe. Spending
on hospital medicines increased, which was
mostly driven by increased use of oncology
and biological products, but decreased in
primary care. High-priced medicines
generated significant public debate,
with particular focus on oncology and
treatments for hepatitis C.
Inequality of access to medicines, both
between European countries and within
patient populations, remains a significant
concern. Despite much debate on how
a new pricing approach could reduce
inequality, concrete progress has been
limited and practical challenges such as
parallel trade and international reference
pricing remain. During the year, the EMA
launched the Adaptive Pathways Pilot to
help accelerate patient access to valuable
new medicines. Several countries, including
the UK and France, are also considering
this issue unilaterally.
Footnotes
a Reference: IMS data Jan-Sep 2014
b Reference: EvaluatePharma
c Reference: IMS, EvaluatePharma
and internal analysis
Governance & remunerationFinancial statementsInvestor informationStrategic report Responding to long-term global opportunities and challenges
Macro-economic and social trends
Population growth and ageing populations
Rapid technological advances
Rise of individual empowerment
Rising public debt in western markets
Economic growth in emerging markets
Climate change and resource depletion
Lifestyle changes
Global competition for talent
Opportunities and challenges for the healthcare sector
Changing lifestyles leading to new disease burden
Rising public debt leading to pressures
on healthcare spending
Growing demand in emerging markets
Payer focus on value leading to more demand
for differentiated products
Ageing population leading to increased demand
for healthcare
Rise of individual empowerment and meeting
society’s growing expectations
Our strategic response
Emerging markets a key focus
Since 2008 we have reshaped our business to enhance
access to high-growth markets such as Asia Pacific,
Latin America and Japan. Our Emerging Markets sales
have grown from c.16% of turnover in 2008 to 27% today.
Addressing affordability
We are committed to tackling affordability barriers.
In Least Developed Countries we cap the prices of
our patented medicines and vaccines at 25% of prices
charged in developed countries. In developed markets
we have pioneered novel reimbursement approaches
to widen access to our newer medicines and priced
these at below current treatments.
Creating innovative products
We are committed to developing innovative new products
that offer significant improvements over existing treatments
and so we focus our research efforts in areas where the
science presents the best opportunities to address unmet
medical need. 80% of our preclinical to phase II NME’s
have novel mechanisms of action.
Changing how we work with healthcare professionals
We are modernising how we work with healthcare
professionals (HCPs) to ensure our actions are always
in the interests of patients. Our sales staff who directly
interact with prescribing HCPs are incentivised on their
knowledge, expertise and business performance, rather
than individual sales targets. By 2016, we will have stopped
direct payments to HCPs to speak about our medicines
and vaccines.
GSK Annual Report 2014 9
Governance & remunerationFinancial statementsInvestor informationStrategic report Our global marketplace
Opportunities and challenges – continued
Adoption of new vaccines remains
slow in many countries and coverage
rates vary significantly.
Japan
In Japan, the Pharmaceutical and Medical
Device Agency (PMDA) regulates new
medicines and approved 33 from April
to December 2014.
In April 2014, the Japanese Ministry of
Health, Labour and Welfare conducted
its bi-yearly review of the pricing in medicines,
resulting in a 2.7% reduction (5.6% excluding
the impact of the consumption tax increase
from 5% to 8%) under the National Health
Insurance pricing scheme, based on the
government’s market price survey.
The premium for new drug development,
which was introduced in 2010 on a trial
basis, remained in place in 2014.
Emerging markets
In emerging markets, prescription
medicines are regulated in a variety of
ways. However, the approval process
continues to evolve and is aligning more
closely with the USA, Europe and Japan
both in terms of format and content.
Some countries, such as China, India,
Russia, Vietnam and Nigeria require
local clinical data in order to fulfil their
regulatory requirements.
Economic growth and changing
demographics in these markets is
increasing demand for healthcare products.
This demand is expected to grow significantly
faster in these markets over the longer
term than in more mature markets.
Governments across these regions
continue to seek ways to improve access
to healthcare while at the same time
manage healthcare expenditure, including
spending on medicines. Countries such
as Indonesia, China and India are looking
to expand the population covered by
government-funded health schemes.
This increases the opportunities for high-
volume tenders but also impacts pricing.
Intellectual property and
patent protection
The journey from scientific breakthrough
to approved new medicine or vaccine
takes years and can incur significant
costs. To ensure a reasonable return on
investment, research-based healthcare
companies rely on the protection of their
intellectual property through patents and
other rights.
Patents generally have a 20-year term from
filing and are sometimes challenged before
they expire. In these cases there are legal
proceedings (see ‘Legal proceedings’ in
Note 45 of the Financial Statements).
Patent expiry or the early loss of a patent
can lead to the availability of a generic
version of the product which is often
cheaper as the generic manufacturer does
not typically incur significant R&D costs.
In developed markets, generics can rapidly
capture a large share of the market. Market
erosion may be less in emerging markets
where automatic substitution methods are
not as developed. Patients may also have
quality and safety concerns and therefore
prefer an established medicine brand.
In some of the markets we operate in,
intellectual property rights, particularly
patents and data protection, are less
enforceable as governments seek to
control prices and increase access
to medicines by limiting such rights.
For example, India, Brazil and Argentina
have implemented, or are considering,
practices that restrict the availability of
patents. In addition, some countries are
considering more widespread use of
compulsory licensing where an individual
or company can use another’s patent
without their consent, and pays the patent
owner a set fee for the licence.
Vaccines and other biological products
do not currently face such a degree of
generic competition, partly due to the
more complex research and manufacturing
processes compared to medicines.
Consumer healthcare products
The development timeline for consumer
healthcare products is shorter than
for pharmaceuticals and vaccines.
While intellectual property protections
are available, their importance and
effectiveness are different. Consumer
healthcare products are also covered by
national regulation regarding the testing,
approval, manufacturing, labelling,
marketing and advertising.
Consumer healthcare products have strong
reliance on brand loyalty and trade mark
protection to create value, especially in
emerging markets. Brands play an important
role in our business. We have many leading
brands including Sensodyne, Panadol,
Horlicks, Polident, Paradontax, Tums,
ENO, NiQuitin/Nicorette, Abreva, Zovirax
and Aquafresh. Moreover, our brands have
a distinct heritage such as Horlicks (140
years old) and ENO (160 years old).
Competition
Competition for our prescription products
comes from other companies researching
and making patent-protected medicines
with indications to treat similar diseases
to our medicines. Our principal research-
based pharmaceutical and vaccines
competitors include: AbbVie, Amgen,
Astra Zeneca, Bayer, Bristol-Myers Squibb,
Eli Lilly, Johnson & Johnson, Merck & Co,
Novartis, Novo Nordisk, Pfizer, Roche
Holdings, Sanofi and Takeda.
Some of our main consumer healthcare
competitors include Colgate-Palmolive,
Johnson & Johnson, Procter & Gamble,
Reckitt Benckiser, and Novartis (see full
list on page 231).
In addition, many other locally operating
companies compete with GSK in
certain markets.
10 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Our business model
How we create value
Our success depends on our ability to research and
develop innovative healthcare products and make
them accessible to as many people as possible.
Our resources
Our businesses
Our mission is
underpinned by:
Our values
Our people
Financial resources
Strategic priorities
Partnerships
Our expertise
Pharmaceuticals
Vaccines
Consumer Healthcare
Our operating
model
R&D
Discovering and
developing innovative
healthcare products
Manufacturing
Making and shipping
quality products
around the world
Commercialisation
and distribution
Improving access
to our products
Outputs
Benefits to patients
and customers
Financial returns,
profits and cashflow
Shareholder value
Wider benefits to society
Reinvestment
Our mission is to improve the quality
of human life by enabling people to
do more, feel better and live longer.
Our resources
To deliver our mission we must align all our
resources behind our strategic priorities.
We depend on the expertise and
enthusiasm of our 98,000 employees to
embrace new ways of working and to forge
partnerships that can offer fresh insights
into how best to combat the world’s
healthcare challenges.
We expect everyone to put our values at
the heart of their decision making. This
means acting transparently, respectfully
and with integrity – and putting the
interests of patients and consumers first.
How we deliver success is just as
important as what we achieve.
We have made good progress against our
strategic priorities, established in 2008,
to grow a diversified, global business,
deliver more products of value, and
simplify our operating model.
Our businesses
We’re a science-led healthcare
company operating in three main areas
– Pharmaceuticals, Vaccines, and
Consumer Healthcare.
Our operating model
Innovation is key to our success and we
have transformed our R&D organisation
over recent years to be more agile. Since
2009, we’ve had more medicines approved
than any other healthcare company and
we have many more in development. We
have also implemented different ways of
supporting R&D, for example, opening up
access to our expertise, our facilities and
even some of our intellectual property to
collaborate with more than 3,000 external
organisations.
To bring these innovations to patients
and consumers, we manufacture billions
of products to high-quality standards and
supply them to more than 150 countries
worldwide.
Our commercial success depends on
market presence, customer understanding
and expanding access. We seek to make
our products accessible for countries at
all levels of income and development.
In the Least Developed Countries, this
includes capping prices at 25% of
developed market levels, and reducing
prices through high-volume contracts.
In developed markets, we have pioneered
novel reimbursement approaches to widen
access to our newer medicines and priced
these at or below current treatments.
Outputs
Developing innovative products and
maximising access to them delivers direct
benefit to patients and consumers.
If we do this successfully, it will lead to
profitable and sustainable performance.
In turn this allows us to generate value and
returns for our shareholders and enables
us to reinvest in the business so patients
and consumers continue to benefit.
Over and above this, wider society benefits
since healthy people and communities are
essential to building strong, sustainable
societies. We also create value by making
direct and indirect economic and social
contributions in the countries where we
operate, through tax, employment and
charitable support.
GSK Annual Report 2014 11
Governance & remunerationFinancial statementsInvestor informationStrategic report Our strategic priorities
How we deliver
Our strategy is designed to increase growth,
reduce risk and improve our long-term
financial performance.
Our strategic priorities
Progress since 2008
Progress in 2014
Key challenges in 2014
2014 Key performance
Our priorities in 2015
Grow
a diversified business
Our aim is to create a balanced
business and product portfolio,
capable of delivering sustainable
sales growth, centred on three
business areas of Pharmaceuticals,
Vaccines, and Consumer Healthcare.
Total group sales broadly stable,
despite significant sales losses to
generic competition.
Proposed major three-part transaction with
Novartis to bolster Vaccines and Consumer
Healthcare businesses announced.
Diversification delivering organic growth,
Emerging Market sales up from c. 16%
of turnover in 2008 to 27% today.
£34 billion in returns paid to shareholders,
including £24 billion of dividends and
£10 billion of buy-backs. Dividend up
from 57p in 2008 to 80p for 2014.
Transition to new respiratory portfolio
underway with launch of Relvar/Breo
Ellipta, Anoro Ellipta, Incruse Ellipta
and Arnuity Ellipta.
ViiV Healthcare sales up 15% in 2014 with
successful launches of Tivicay and Triumeq.
Increased pricing pressure in the US
from market changes, competitor
dynamics and contracting.
Continued pricing pressure in Europe
due to government austerity programmes.
Unanticipated supply continuity
challenges in Consumer Healthcare.
£23.0bn
Group turnover
£95.4p
core earnings per share*
Implement proposed transaction
with Novartis.
Improve commercialisation of new
respiratory, HIV and Consumer
Healthcare products.
Drive growth in Emerging Markets
across the three businesses.
Capitalise on product supply resumption
in Consumer Healthcare business.
Deliver
more products of value
Our aim is to research and develop
high quality products that offer
valuable improvements in treatment
for patients, consumers and
healthcare providers.
Created a more agile and productive
R&D organisation, with more product
approvals than any other healthcare
company since 2009.
Improved R&D investment rate of return
from 11% in 2010 to 13% in 2013.
Significant new product approvals in
respiratory diseases, HIV and diabetes.
Malaria candidate vaccine, RTS,S,
submitted for regulatory approval.
Positive phase III study results for
shingles candidate vaccine (HZ/su).
Disappointing phase III results for
MAGE A3 and darapladib programmes.
new product approvals in major markets
pipeline.
Continue to progress mid-stage pipeline
with 25 phase II/III starts expected.
Integrate proposed Novartis vaccines
Simplify
the operating model
Our aim is to reflect how our
business is changing by transforming
how we operate to reduce complexity
and become more efficient.
This frees up resources to reinvest
elsewhere in the business.
£3.5 billion cumulative annual cost
savings delivered through a range of
restructuring programmes since 2008.
£400 million of incremental savings
delivered through restructuring initiatives
and ongoing cost reduction.
Reduced complexity by disposing of
non-core brands, integrating supply
chains across our businesses and
introducing new workplace efficiencies
to speed decision making.
Global enterprise resource planning
system (ERP) rolled out to 19 markets.
Unanticipated supply continuity
challenges in Consumer Healthcare.
Complexity of rolling out new systems
at scale across many markets.
21
Responsible
business
Being a responsible business is
central to our strategy, and how we
deliver success is just as important
as what we achieve.
Ensuring our values are embedded
in our culture and decision making
helps us better meet the
expectations of society.
12 GSK Annual Report 2014
Relentless focus on access to healthcare
– first in the Access to Medicine Index
since 2008.
Evolved our commercial model,
changing ways of working with
healthcare professionals and incentives
for sales force.
Led on increasing transparency to clinical
trial data – first company to sign up to
AllTrials campaign.
Collaborated with partners to accelerate
development of Ebola vaccine candidate.
Delivered global roll-out of new sales force
compensation approach.
Launched new Africa strategy to reach
80% of the sub-Saharan African and Least
Developed Countries population by 2020.
In early 2015 we extended our price
freeze commitment to 10 years for
Gavi-graduating countries.
Rebuilding business in China following
criminal conviction of China affiliate for
violation of Chinese law.
Meeting value chain carbon emission
target while sales of products with
high carbon footprint, such as Ventolin,
are increasing.
* a reconciliation of core results to total results is
set out on page 61
4
40
In Pharmaceuticals and Vaccines we
have around 40 new molecular entities
in phase II and III
days increase in working capital*
£3.5bn
cumulative annual savings made through
restructuring programmes since 2008
* adjusted to exclude divestments completed in
2013 and the impact of intangible asset impairment
Execute Pharmaceuticals restructuring
programme to save £1 billion per annum
over three years.
Continue streamlining product portfolio
embedding common processes.
Continue roll-out of ERP system.
Execute restructuring programme
related to proposed Novartis transaction
to save £1 billion per annum by fifth year
from closing.
Continue to enhance governance,
compliance and quality through proactive
risk management and quality-led culture.
Deliver new commercial model globally
by changing the way we work with HCPs.
Improve leadership effectiveness and
quality of talent.
Continue to progress development
of Ebola vaccine candidate.
Governance & remunerationFinancial statementsInvestor informationStrategic report Our strategic priorities
Progress since 2008
Progress in 2014
Key challenges in 2014
2014 Key performance
Our priorities in 2015
Total group sales broadly stable,
despite significant sales losses to
generic competition.
Proposed major three-part transaction with
Novartis to bolster Vaccines and Consumer
Healthcare businesses announced.
Diversification delivering organic growth,
Emerging Market sales up from c. 16%
of turnover in 2008 to 27% today.
£34 billion in returns paid to shareholders,
including £24 billion of dividends and
£10 billion of buy-backs. Dividend up
from 57p in 2008 to 80p for 2014.
Transition to new respiratory portfolio
underway with launch of Relvar/Breo
Ellipta, Anoro Ellipta, Incruse Ellipta
and Arnuity Ellipta.
ViiV Healthcare sales up 15% in 2014 with
successful launches of Tivicay and Triumeq.
Created a more agile and productive
R&D organisation, with more product
approvals than any other healthcare
company since 2009.
Improved R&D investment rate of return
from 11% in 2010 to 13% in 2013.
Significant new product approvals in
respiratory diseases, HIV and diabetes.
Malaria candidate vaccine, RTS,S,
submitted for regulatory approval.
Positive phase III study results for
shingles candidate vaccine (HZ/su).
£3.5 billion cumulative annual cost
savings delivered through a range of
£400 million of incremental savings
delivered through restructuring initiatives
restructuring programmes since 2008.
and ongoing cost reduction.
Reduced complexity by disposing of
non-core brands, integrating supply
chains across our businesses and
introducing new workplace efficiencies
to speed decision making.
Global enterprise resource planning
system (ERP) rolled out to 19 markets.
Increased pricing pressure in the US
from market changes, competitor
dynamics and contracting.
Continued pricing pressure in Europe
due to government austerity programmes.
Unanticipated supply continuity
challenges in Consumer Healthcare.
£23.0bn
Group turnover
95.4p
core earnings per share*
Disappointing phase III results for
MAGE A3 and darapladib programmes.
* a reconciliation of core results to total results is
set out on page 61
4
new product approvals in major markets
40
In Pharmaceuticals and Vaccines we
have around 40 new molecular entities
in phase II and III
Unanticipated supply continuity
challenges in Consumer Healthcare.
Complexity of rolling out new systems
at scale across many markets.
21
days increase in working capital*
£3.5bn
cumulative annual savings made through
restructuring programmes since 2008
* adjusted to exclude divestments completed in
2013 and the impact of intangible asset impairment
Implement proposed transaction
with Novartis.
Improve commercialisation of new
respiratory, HIV and Consumer
Healthcare products.
Drive growth in Emerging Markets
across the three businesses.
Capitalise on product supply resumption
in Consumer Healthcare business.
Continue to progress mid-stage pipeline
with 25 phase II/III starts expected.
Integrate proposed Novartis vaccines
pipeline.
Execute Pharmaceuticals restructuring
programme to save £1 billion per annum
over three years.
Continue streamlining product portfolio
embedding common processes.
Continue roll-out of ERP system.
Execute restructuring programme
related to proposed Novartis transaction
to save £1 billion per annum by fifth year
from closing.
Relentless focus on access to healthcare
Collaborated with partners to accelerate
– first in the Access to Medicine Index
development of Ebola vaccine candidate.
since 2008.
Evolved our commercial model,
changing ways of working with
healthcare professionals and incentives
for sales force.
Led on increasing transparency to clinical
trial data – first company to sign up to
AllTrials campaign.
Delivered global roll-out of new sales force
compensation approach.
Launched new Africa strategy to reach
80% of the sub-Saharan African and Least
Developed Countries population by 2020.
In early 2015 we extended our price
freeze commitment to 10 years for
Gavi-graduating countries.
Rebuilding business in China following
criminal conviction of China affiliate for
violation of Chinese law.
Meeting value chain carbon emission
target while sales of products with
high carbon footprint, such as Ventolin,
are increasing.
1st
in 2014 Access to Medicine Index
84%
Dow Jones Sustainability Index score,
placing us in the top 2% of our sector
Continue to enhance governance,
compliance and quality through proactive
risk management and quality-led culture.
Deliver new commercial model globally
by changing the way we work with HCPs.
Improve leadership effectiveness and
quality of talent.
Continue to progress development
of Ebola vaccine candidate.
GSK Annual Report 2014 13
Governance & remunerationFinancial statementsInvestor informationStrategic report How we performed
Key performance indicators
We measure our performance against a number
of key performance indicators.
Group turnover
£23.0bn
(1)
(3)
26.4
1
–
26.5
25.6*
(3)*
(10)*
23.0
A
B
30
25
20
15
10
05
Turnover in our major growth areasb
New product approvals in major markets
product performanceb
New Pharmaceuticals and Vaccines
How we performed
Turnover was down 3%, excluding
divestments in the prior year. Lower
Pharmaceutical and Vaccines
sales in the US and in Established
Products only partly offset by growth
in Emerging Markets, Japan and ViiV
Healthcare. Consumer Healthcare
sales were lower.
Why it’s important
A key objective of our strategy is to
deliver sustainable, broadly-sourced
sales growth.
£12.3bn
A
54
53
53
14.3
14.1
13.5*
12.3
18
15
12
09
06
03
Definition
This measure focuses on major growth
areas: Vaccines, Consumer Healthcare,
Emerging Markets and Japan.
How we performed
We saw continued Pharmaceuticals
growth in Emerging Markets and Japan.
Vaccines and Consumer Healthcare
were broadly flat. Consumer Healthcare
sales were impacted by supply
interruptions.
Why it’s important
This highlights progress in delivering
our strategy to create broad-based
sales growth that is more resilient
to volatility.
0
2012
2013
2014
A Reported growth CER %
B Reported growth £ %
* excluding divestments completed in 2013
0
2012
2013
2014
A % share of total turnover
* excluding divestments completed in 2013
Core operating profit and margina
Total operating profit and margin
Cash returned to shareholders
£6.6bn
(4)
(6)
–
(3)
(6)*
(15)*
31.2%
8.2
30.4%*
8.0
7.8*
28.7%
6.6
A
B
12
10
08
06
04
02
0
2012
2013
2014
A Reported growth CER %
B Reported growth £ %
How we performed
Core operating profit was £6.6 billion.
Excluding currency effects, core
operating margin declined 0.8
percentage points to 28.7%, primarily
reflecting an increase in SG&A as
a percentage of sales despite the
2% decline in actual sales.
Why it’s important
Our objective remains to improve
operating leverage to ensure operating
profit growth performs ahead of sales
performance. The margin indicates
how costs are being managed as a
percentage of sales.
* excluding divestments completed in 2013
£3.6bn
(3)
(6)
(1)
(4)
(40)
(49)
27.6% 26.5%
7.3
7.0
15.6%
3.6
A
B
12
10
08
06
04
02
0
2012
2013
2014
A Reported growth CER %
B Reported growth £ %
How we performed
Total operating profit was £3.6 billion.
Excluding currency effects, the
total operating margin declined 9.4
percentage points to 15.6%, primarily
reflecting higher SG&A costs, lower
profits on the disposal of business and
products, and non-cash adjustments to
the contingent consideration in relation
to ViiV Healthcare as a result of higher
sales outlook for Tivicay and Triumeq.
Core earnings per sharea
Total earnings per share
95.4p
–
(3)
4
1
(1)*
(12)*
111.4
112.2
108.4*
95.4
A
B
150
125
100
75
50
25
0
2012
2013
2014
A Reported growth CER %
B Reported growth £ %
14 GSK Annual Report 2014
Definition
Core results exclude a number of items
from total results. A full definition of
core results can be found on page
52 and a reconciliation between core
results and total results is provided
on page 61.
How we performed
Core EPS decreased 1% (CER)
compared with a 3% (CER) decline
in turnover as a result of cost and
financial efficiencies.
Why it’s important
Earnings per share is a key indicator
of our performance and the returns
we are generating for shareholders.
* excluding divestments completed in 2013
57.3p
(9)
(12)
27
23
(40)
(49)
112.5
91.6
57.3
A
B
150
125
100
75
50
25
0
2012
2013
2014
A Reported growth CER %
B Reported growth £ %
How we performed
Total earnings per share was 57.3p,
compared with 112.5p in 2013 primarily
reflecting non-cash adjustments to the
contingent consideration in relation to
ViiV Healthcare as a result of higher
sales outlook for Tivicay and Triumeq
as well as an unfavourable comparison
with product and asset disposal gains
in 2013.
4 approvals
07
06
05
04
03
02
01
A
B
06
05
04
03
02
01
6
2
0
2012
2013
2014
Free cash flowb
£2.6bn
(51)
>100
(44)
(17)
2
(30)
4.7
2.6
2.0
0
2012
2013
2014
Definition
Major market is defined as USA,
EU and/or Japan.
How we performed
First regulatory approvals for
Tanzeum, Incruse Ellipta, Arnuity
Ellipta and Triumeq.
Why it’s important
This measure shows how the R&D
organisation is delivering new products
to drive the growth of the Group.
4
£1.5bn
A
34
33
84
Definition
New products launched in the last
five years on a rolling basis. In 2014
the following products were no longer
included in the calculation: Arzerra,
Lamictal XR, Potiga, Prolia, Votrient.
1.4
1.4
How we performed
1.5
Sales of new products were £1.5 billion
in 2014, grew 84% and represented
8% of Pharmaceutical and Vaccines
turnover.
Why it’s important
This measure shows the delivery of
sales in each year from products
launched in the prior five years on a
rolling basis, and creates incentives
for improved R&D performance.
1.50
1.25
1.00
0.75
0.50
0.25
0
2012
2013
2014
A Reported growth CER %
£4.1bn
A
07
06
05
04
03
02
01
13
6.3
3.8
s
d
n
e
d
i
v
i
D
5.2
3.7
s
d
n
e
d
i
v
i
D
4.1
3.8
s
d
n
e
d
i
v
i
D
0
2012
2013
2014
A Reported growth £ %
(18)
(21)
Why it’s important
How we performed
During 2014, GSK returned £4.1 billion
to shareholders via dividends and share
buy-backs.
We continue to focus on delivering
dividend growth over the long term and
returning free cash flow to shareholders
through share buy-backs where this
offers a more attractive return than
alternative investments.
Definition
The calculation of free cash flow
is described on page 52 and a
reconciliation is provided on
page 68. The calculation of CER
is described on page 52.
How we performed
Free cash flow was £2.6 billion. The
decline reflecting the impact of the
strength of Sterling and lower profits,
including the impact of divestments.
Why it’s important
This measure shows the cash we
generate that is available to return
to shareholders or reinvest in the
business, as well as our effectiveness in
converting our earnings to cash through
effective working capital control and
investment discipline.
Governance & remunerationFinancial statementsInvestor informationStrategic report How we performed
Turnover was down 3%, excluding
divestments in the prior year. Lower
Pharmaceutical and Vaccines
sales in the US and in Established
Products only partly offset by growth
in Emerging Markets, Japan and ViiV
Healthcare. Consumer Healthcare
sales were lower.
Why it’s important
A key objective of our strategy is to
deliver sustainable, broadly-sourced
sales growth.
Group turnover
£23.0bn
(1)
(3)
26.4
1
–
26.5
25.6*
(3)*
(10)*
23.0
A
B
30
25
20
15
10
05
0
2012
2013
2014
A Reported growth CER %
B Reported growth £ %
£12.3bn
A
54
53
53
How we performed
14.3
14.1
13.5*
12.3
interruptions.
Definition
This measure focuses on major growth
areas: Vaccines, Consumer Healthcare,
Emerging Markets and Japan.
We saw continued Pharmaceuticals
growth in Emerging Markets and Japan.
Vaccines and Consumer Healthcare
were broadly flat. Consumer Healthcare
sales were impacted by supply
Why it’s important
This highlights progress in delivering
our strategy to create broad-based
sales growth that is more resilient
to volatility.
Total operating profit and margin
0
2012
2013
2014
A % share of total turnover
£3.6bn
(3)
(6)
(1)
(4)
(40)
(49)
How we performed
Total operating profit was £3.6 billion.
Excluding currency effects, the
total operating margin declined 9.4
percentage points to 15.6%, primarily
reflecting higher SG&A costs, lower
profits on the disposal of business and
products, and non-cash adjustments to
the contingent consideration in relation
to ViiV Healthcare as a result of higher
sales outlook for Tivicay and Triumeq.
18
15
12
09
06
03
A
B
12
10
08
06
04
02
A
B
150
125
100
75
50
25
27.6% 26.5%
7.3
7.0
15.6%
3.6
0
2012
2013
2014
A Reported growth CER %
B Reported growth £ %
Total earnings per share
57.3p
(9)
(12)
27
23
(40)
(49)
112.5
91.6
57.3
0
2012
2013
2014
A Reported growth CER %
B Reported growth £ %
How we performed
Total earnings per share was 57.3p,
compared with 112.5p in 2013 primarily
reflecting non-cash adjustments to the
contingent consideration in relation to
ViiV Healthcare as a result of higher
sales outlook for Tivicay and Triumeq
as well as an unfavourable comparison
with product and asset disposal gains
in 2013.
Turnover in our major growth areasb
New product approvals in major markets
New Pharmaceuticals and Vaccines
product performanceb
4 approvals
Definition
Major market is defined as USA,
EU and/or Japan.
How we performed
First regulatory approvals for
Tanzeum, Incruse Ellipta, Arnuity
Ellipta and Triumeq.
£1.5bn
A
34
33
84
6
Why it’s important
This measure shows how the R&D
organisation is delivering new products
to drive the growth of the Group.
4
1.4
1.4
1.5
1.50
1.25
1.00
0.75
0.50
0.25
07
06
05
04
03
02
01
2
Definition
New products launched in the last
five years on a rolling basis. In 2014
the following products were no longer
included in the calculation: Arzerra,
Lamictal XR, Potiga, Prolia, Votrient.
How we performed
Sales of new products were £1.5 billion
in 2014, grew 84% and represented
8% of Pharmaceutical and Vaccines
turnover.
Why it’s important
This measure shows the delivery of
sales in each year from products
launched in the prior five years on a
rolling basis, and creates incentives
for improved R&D performance.
0
2012
2013
2014
Free cash flowb
£2.6bn
(51)
>100
(44)
(17)
2
(30)
4.7
2.6
2.0
A
B
06
05
04
03
02
01
0
2012
2013
2014
Definition
The calculation of free cash flow
is described on page 52 and a
reconciliation is provided on
page 68. The calculation of CER
is described on page 52.
How we performed
Free cash flow was £2.6 billion. The
decline reflecting the impact of the
strength of Sterling and lower profits,
including the impact of divestments.
Why it’s important
This measure shows the cash we
generate that is available to return
to shareholders or reinvest in the
business, as well as our effectiveness in
converting our earnings to cash through
effective working capital control and
investment discipline.
A Reported growth £ %
B Growth excluding legal settlements £ %
Footnotes
a We use a number of adjusted measures to report the performance of our
business. These include core results, which are used by management for
planning and reporting purposes and may not be directly comparable with
similarly described measures used by other companies. A reconciliation of
core results to total results is set out on page 61.
Relative total shareholder return table is on page 107.
Responsible business: external benchmarking
0
2012
2013
2014
A Reported growth CER %
Cash returned to shareholders
How we performed
During 2014, GSK returned £4.1 billion
to shareholders via dividends and share
buy-backs.
Why it’s important
We continue to focus on delivering
dividend growth over the long term and
returning free cash flow to shareholders
through share buy-backs where this
offers a more attractive return than
alternative investments.
£4.1bn
A
07
06
05
04
03
02
01
(18)
(21)
13
6.3
5.2
3.8
3.7
4.1
3.8
s
d
n
e
d
v
D
i
i
s
d
n
e
d
v
D
i
i
s
d
n
e
d
v
D
i
i
0
2012
2013
2014
A Reported growth £ %
b The remuneration of our executives is linked to the marked key indicators.
Further information on our executive pay policy can be found in our
Remuneration policy report on page 119.
First in 2014 Access to Medicine
Index and have topped the bi-annual
index since it began in 2008.
Retained our position in CDP’s
FTSE 350 Climate Disclosure
Leadership Index for the seventh year.
Member of FTSE4Good
since 2004.
Scored 84% in the Dow
Jones Sustainability Index,
putting GSK in top 2% of
our sector.
GSK Annual Report 2014 15
Governance & remunerationFinancial statementsInvestor informationStrategic report Risk management
Our approach to risk
Rigorous risk management processes and
systems help us assure the integrity of our
business operations.
We are committed to conducting business
in accordance with all applicable laws and
regulations and in a manner that is
consistent with our values. We have an
established risk management framework to
address operational, legal and compliance
risks, both those inherent to the nature of
our business and those specific to our
strategic ambitions. Risk management,
coupled with our internal control framework
helps us maintain our focus on product
quality, safety and sustainability.
How we manage risk across GSK
Company policies, standards and internal
controls, together with our company values
underpin our approach to risk management.
We are committed to being a responsible,
values-based business and our leaders are
responsible for embedding this into our
culture, decision making and how we work.
Ensuring product quality, safety and
sustainability are fundamental to our
business model.
Employees are accountable for working
to established standards and for identifying
and escalating encountered risks so that
they can be appropriately managed. The
company has comprehensive learning
programmes to ensure employees are
suitably trained including mandatory
training on the GSK Code of Conduct
and Anti-Bribery and Corruption policies.
Progress in 2014
We have learnt lessons from compliance
issues experienced over recent years and
continue to look for ways to strengthen
further our internal control framework
so that we can more proactively manage
our Principal risks. For example,
in China we have implemented a new
governance model, increased dedicated
compliance resources and put in place
additional controls and monitoring local
ways of working and financial transactions.
We have a central dedicated Anti-Bribery
and Corruption team who provide external
insight, standards, training and expertise
to our business globally. In 2014, we also
strengthened our internal investigations
team to create three regional hubs to provide
a consistent approach to investigations
across the group, allowing us to respond
more quickly and consistently to
emerging issues.
We have enhanced our approach to
independent business monitoring to detect
abnormal or inappropriate financial flows
better within Europe and Emerging Markets.
16 GSK Annual Report 2014
In Europe and Emerging Markets we
initiated a wide-ranging review of our
internal controls to confirm that our
company standards, local laws and
regulations are understood and adhered to.
All countries in these regions took part in
the review and are implementing any
required improvement plans to address
risks and strengthen controls. We have also
continued to satisfy our Corporate Integrity
Agreement obligations for the Office of the
Inspector General in North America.
Our internal control framework
E n t e r p r ise Oversight
d e p e n d ent Assurance
n d e n t Business Monitorin
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Discipline a n d
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Risk
A s s essment
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W
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&
Business
Activities
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C o m m u
Our internal control
framework, in conjunction
with our values, helps to
ensure that we effectively
manage risks as we conduct
our business activities.
We are subject to
inspections and audits
conducted by external
parties, including regulatory
agencies, to assess the
adequacy of our internal
control framework. We
actively address findings
from these activities and
take appropriate corrective
actions to improve our
internal controls across
the Group.
GSK Val u e s
Key
Individual Accountability
Line Management Accountability with Compliance
Governance structure of risk management
Business Management Accountability with Compliance
Audit & Assurance
Board of
Directors
Responsible for our system of corporate
governance, strategy, risk management and
financial performance
Audit & Risk
Committee
Responsible for reviewing and approving
the adequacy and effectiveness of our risk
management and internal controls
Corporate
Executive Team
Supports the CEO in managing our business
and activities
Risk Oversight
and Compliance
Council
Authorised by the Board to assist the Audit & Risk
Committee in overseeing the risk management
and internal control activities of the Group
Business units
Responsible for identifying, assessing
and managing risks within their businesses
g
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s
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R
Risk Management
and Compliance
Boards
Ensure that appropriate internal controls
for effective risk management are implemented
Complemented by Country Executive Risk Boards
to ensure a consistent approach to risk management
across local geographies
Governance & remunerationFinancial statementsInvestor informationStrategic report
Principal risks
The Principal risks listed below are those we believe could cause our results to differ materially from expected and historical results.
They are not listed in order of significance. A full description of the definition, context, potential impact and mitigating activities for
these Principal risks is set out on pages 232.
Principal risk
Patient safety
Definition
How we manage risk
Failure to appropriately collect, review, follow up,
or report adverse events from all potential sources,
and to act on any relevant findings in a timely
manner.
The Chief Medical Officer leads a large Global
Safety and Pharmacovigilance team and maintains
applicable global policies to guide staff worldwide.
Intellectual property
Failure to appropriately secure and protect
intellectual property rights.
Product quality
Failure to comply with current Good Manufacturing
Practices or inadequate controls and governance
of quality.
Supply chain continuity
Failure to deliver a continuous supply of compliant
finished product.
Financial reporting
and disclosure
Failure to report accurate financial information
in compliance with accounting standards and
applicable legislation.
Tax and treasury
Failure to comply with current tax law or incurring
significant losses due to treasury activities.
Anti-Bribery and
Corruption (ABAC)
Failure to comply with applicable local and
international ABAC legislation.
Commercial practices and
scientific engagement
Failure to engage in commercial and/or scientific
activities that are consistent with the letter and
spirit of legal, industry, or the Group’s requirements
relating to marketing and communications about
our medicines and therapeutic areas.
Research practices
Failure to protect and inform patients involved in
human clinical trial research and, generally, to
conduct clinical trials in compliance with law.
Environment, health &
safety and sustainability
(EHSS)
Failure to manage EHSS consistent with the
Group’s objectives, policies and relevant laws
and regulations.
Information protection
Failure to protect and maintain access to critical
or sensitive computer systems or information.
Crisis and continuity
management
Inability to recover and sustain critical operations
following a disruption or to respond to a crisis
incident in a timely manner.
Third-party oversight
Failure to maintain adequate governance and
oversight over third-party relationships.
Our Global Patents group continually analyses and
ensures that changes in patent laws and regulations
are incorporated into its processes for obtaining,
maintaining and enforcing global patent protection.
Our Chief Product Quality Officer leads our
global network of Quality Councils, implements
applicable policies and assures our single Quality
Management System that defines quality across
our businesses.
We closely monitor the inventory status and
delivery of our products to help ensure that our
customers have the medicines, vaccines and
consumer products they need through the Supply
Chain Governance Committees.
Our internal controls over financial information
and reporting are overseen by regional management
and then reviewed with the Financial Controller
and the Chief Financial Officer (CFO), and our
external auditors.
Tax risk is managed by a set of policies and
procedures to help ensure consistency and
compliance with tax legislation. Where appropriate
we engage advisors and legal counsel to review
tax legislation and the applicability to our business.
We have an extensive global ABAC programme,
policy and procedures overseen by a top-level
ABAC Oversight Committee. As part of the
programme, significant training is provided to
employees globally regarding anti-bribery and
corruption and compliance with the Group’s
ABAC policies.
We have harmonised policies and standards
which govern promotional activities and Scientific
Engagement undertaken by the Group or on its
behalf. Employees worldwide are trained on the
policies and implications for failure to comply with
such policies.
We implement systems of governance and
controls to oversee our clinical trial research,
use of biological samples, and data integrity
in all of our key systems.
We have Global EHSS Standards which support
our EHSS policy and are overseen by members of
the CET. Employees globally are routinely trained
on the Group’s EHSS policies.
Our Chief Information Security Officer oversees
our global information policy and programme and
regularly assesses changes by closely monitoring
our systems and through external briefings.
We have established a Crisis and Continuity
Management (CCM) governance board and
a team of CCM experts to ensure critical business
operations have crisis and continuity plans in place.
Our Chief Procurement Officer oversees our policy
framework governing how we buy goods and services
and management of third-party relationships.
GSK Annual Report 2014 17
Governance & remunerationFinancial statementsInvestor informationStrategic report Our businesses
We have leading capabilities in
Pharmaceuticals, Vaccines and
Consumer Healthcare, driven
by science-led innovation.
S
t
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a
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c
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Innovative science is at the forefront of all we do, whether
that is investigating potential new treatments for respiratory
patients or conducting research to develop the world’s first
malaria vaccine. Rhiannon (pictured) works in our laboratory
in Ware, in the UK, researching potential treatments for
leishmaniasis – a disease that currently affects around
12 million people in some of the world’s poorest countries.
18 GSK Annual Report 2014
S
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p
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GSK Annual Report 2014 19
Pharmaceuticals and Vaccines
Growth in Emerging Markets, Japan and
ViiV Healthcare was offset by a challenging
environment in the USA.
We have leading Pharmaceuticals and
Vaccines businesses, underpinned by
a substantial R&D organisation. We have
a significant commercial presence in the
USA, Europe, Japan and Emerging
Markets. Since 2008, we have increased
our investment in emerging markets, which
now account for c. 19% of Group turnover,
up from c. 13%. In recent years we have
launched important new medicines and
vaccines in respiratory, HIV, oncology,
diabetes and influenza.
Pharmaceuticals
Our Pharmaceuticals business develops
and makes medicines to treat a broad
range of acute and chronic diseases.
Our portfolio is made up of innovative
and established medicines and we have
leading global positions in respiratory
disease and HIV.
We have been a leader in respiratory
disease for over 40 years and have a
portfolio of mature products such as
Seretide/Advair, Ventolin and Flovent.
In recent years, we have strengthened and
broadened our respiratory portfolio with
the addition of new medicines Relvar/Breo
Ellipta, an inhaled corticosteroid (ICS) and
long-acting beta2 agonist (LABA)
combination, Anoro Ellipta, a long-acting
muscarinic antagonist (LAMA) and LABA
dual bronchodilator, Incruse Ellipta (LAMA)
and Arnuity Ellipta (ICS).
We have a number of other respiratory
products in our pipeline, including
mepolizumab, an investigational anti-IL5
monoclonal antibody, to treat severe
eosinophilic asthma, and our ‘closed’
triple combination treatment to treat
COPD. We remain confident that we
can maintain our leadership in respiratory
disease well into the next decade.
Our HIV business is managed through
ViiV Healthcare, a global specialist
company in HIV that we majority own,
with Pfizer and Shionogi as the other
shareholders. ViiV Healthcare is now
a leading global company in HIV and
has had significant recent success with
regulatory approval and industry leading
launches of its dolutegravir-based
medicines, Tivicay and, the single-pill
treatment Triumeq. ViiV Healthcare has
a number of other antiretroviral medicines
in clinical development, including
cabotegravir. For more detail see
ViiV Healthcare on page 31.
Beyond respiratory and HIV, we have
a portfolio of other Pharmaceutical
products for the treatment of conditions
such as lupus (Benlysta), benign prostatic
hyperplasia (Avodart/Jalyn), type 2 diabetes
(recently launched Tanzeum/Eperzan) and
bacterial infections (Augmentin).
Over the past six years we have built a
significant oncology business. In recent
years we have had multiple regulatory
approvals and global product launches
including Tykerb/Tyverb, Votrient,
Promacta/Revolade, Arzerra, Tafinlar
and Mekinist.
As part of the proposed Novartis
transaction, we have agreed to divest our
marketed oncology portfolio, related R&D
activities and rights to our AKT inhibitors
currently in development for $16 billion.
This represents a unique opportunity to
crystallise value for shareholders and
leverage the global scale that Novartis
has in this therapy area to improve
patient outcomes.
In addition, we have an Established
Products Portfolio (EPP) which includes
over 50 off-patent products, as well as our
branded generics business and other local
products. These products are an important
part of our Emerging Markets business
where the GSK brand is an important
differentiator.
Vaccines
Our Vaccines business is one of the largest
in the world. We have a broad portfolio of
over 30 paediatric, adolescent, adult and
travel vaccines. Our four largest Vaccines
by sales are Infanrix (diphtheria and
tetanus), Hepatitis, Rotarix (rotavirus)
and Synflorix (pneumonia).
The Vaccines business is particularly
strong in the developing world – of the
vaccines we produce, over 80% are
distributed in developing countries, which
includes the least developed, low and
middle income countries.
Our ‘tiered pricing’ approach, based on
countries’ Gross National Income, enables
countries to maintain and expand their
commitment to immunisation as their
economies grow. GSK is also one of the
largest contributors to Gavi, the Vaccine
Alliance, a public-private partnership to
improve access to vaccines in developing
countries. By 2020, 22 countries with
growing economies will graduate from
Gavi support. In January 2015, we
announced a 10-year price freeze
to Gavi graduating countries.
The proposed Novartis transaction will
further strengthen our Vaccines portfolio
through the acquisition of Novartis’s
vaccines business (excluding influenza),
adding a number of vaccines for meningitis
and several travel vaccines, as well as
strengthening our manufacturing network.
The combined business will also benefit
from increased exposure in key markets
such as the USA where Novartis has a
strong presence and track record of
regulatory approvals. The proposed
Novartis transaction will further enhance
GSK’s vaccine R&D pipeline bringing
together expertise in virology, bacterial
infection and different adjuvant platforms.
20 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Grow
Our strategy remains to grow the business
through broadly based sales. Challenging
trading conditions in 2014, most notably in
the US, meant Group turnover declined 3%
to £23 billion. However there were positive
performances for the year in Emerging
Markets and Japan, while Europe was flat.
Regional performance
Global sales of our Pharmaceuticals
and Vaccines fell by 4% in 2014 to
£18,670 million. Pharmaceuticals
turnover declined 5% as growth in
Emerging Markets, Japan and ViiV
Healthcare was more than offset by
lower sales in the US and in Established
Products. Pharmaceuticals sales in Europe
were flat in 2014. Global Vaccines sales
declined 1% due to lower reported sales
in Europe and Japan. This was despite
a positive performance from Emerging
Markets. US Vaccines sales were flat
for the year.
In the US, Pharmaceuticals and Vaccines
turnover was down 10% at £4,980 million,
with Pharmaceuticals down 12% and
Vaccines flat. Pharmaceutical sales were
impacted by continued price and
contracting pressures in the primary care
market, primarily affecting respiratory sales,
which were down 18%. Sales of Advair
were down 25% (14% decline in volume
and 11% decline from price and mix).
We continue to increase access to our
new portfolio of respiratory medicines.
As at 1 January 2015, Medicare Part D
coverage for Breo Ellipta, was 74%, and
65% for Anoro Ellipta. We are starting
to see some early indications of how
increased coverage and our new portfolio
will help us regain market share and deliver
improved performance in respiratory
Oncology products made a strong
contribution to US performance with sales
up 41% to £509 million, benefiting from
good performances from Votrient and
Promacta, and the recent launches of
Tafinlar and Mekinist. Sales of immuno-
inflammation treatment Benlysta grew
22% to £155 million. Generic competition
in the US continued to impact sales of
Dermatology products, which were down
56% to £49 million. Mepron reported
a sales decline of 49% to £40 million.
US sales of Infanrix/Pediarix vaccines
grew 15% to £297 million, benefiting from
favourable CDC stockpiling compared with
2013, and the absence of a competitor,
particularly in the first half of the year.
Sales of hepatitis vaccines were down
6% to £234 million due to supply
constraints. Boostrix was down 7%
to £163 million due to a competitor
returning to the market during the year
and some supply constraints. Rotarix
sales declined 16% to £86 million as
a result of a CDC stockpile withdrawal
during Q4 2014.
In Europe, Pharmaceuticals and
Vaccines turnover was flat at £4,035
million. Pharmaceutical sales were flat
at £3,057 million, as strong growth in
Oncology sales (up 29% to £417 million),
led by Votrient, Promacta and the newly
launched Tafinlar and the Avodart
franchise (up 8% to £280 million) was
offset by a 3% fall in Respiratory sales
to £1,675 million. While newly launched
Relvar Ellipta recorded sales of £18 million
in the year, Seretide sales declined, down
5% to £1,330 million as a result of
increasing competitive pressures and
the transition of our respiratory portfolio
to the newer products, particularly in
the latter part of the year.
Vaccines sales in Europe fell 2%, with
lower sales of Infanrix, Cervarix and
flu vaccines reflecting increased
competitive pressures, which were only
partly offset by sales growth in other
products such as Boostrix, which was
up 26% due in part to a competitor
supply issue in the first half of the year.
In Emerging Markets, Pharmaceuticals
and Vaccines turnover increased 5%
to £3,203 million, with Pharmaceuticals
up 7% and Vaccines up 1%. Most markets
outside Asia showed strong growth, with
notable performances from Brazil (up
12% to £380 million) and the rest of
Latin America (up 9% to £593 million).
Sales in China fell 1% due to the effects
of the government investigation during
the year. There was continued growth
from Respiratory and Oncology products,
up 3% and 30% respectively, and the
Avodart franchise, which grew 20%.
In Vaccines, growth from strong tender
sales of Boostrix, Rotarix and Synflorix
was largely offset by lower sales of
Cervarix, as a result of some lost tenders,
and some supply constraints.
Putting patients and customers first
We are also investing in our own
healthcare professionals and will stop
paying external experts to speak on our
behalf about our prescription medicines
by 2016. Medical Science Liaisons or
(MSLs) are already stepping up to
deliver talks to physicians about our
recently launched medicines in the US.
One benefit of this new way of working
is that our internal experts may have
more direct knowledge of the clinical
trials which led to approval of the
medicine. Customers who attended
talks about Anoro Ellipta delivered by
GSK’s medical staff have given these
presentations high marks, at times rating
them even more effective than those
led by external speakers. Thus far the
programmes are attracting the same
number of attendees as the external-led
presentations of the past.
All of these changes allow us to continue
to better meet the needs of healthcare
professionals and their patients.
We are fundamentally transforming and
modernising the way we sell and market
our medicines to meet the information
needs of healthcare professionals and
ensure we put patients’ interests first.
We believe these changes are not only
the right thing to do but can be a
competitive advantage for us.
GSK has led the industry by
changing the way we reward our
sales representatives – focusing on
the quality of the information we’re
sharing with healthcare professionals
and overall business performance,
rather than individual sales targets.
This approach has now been rolled-out
to 150 countries where we operate.
In the USA, more than 10,000
healthcare professionals surveyed
in 2014 ranked GSK first among
major pharmaceutical companies
on the value we bring.
Our customers tell us we are a valuable
source of information and we want to
provide that information in ways that
better meet their needs. So we are
exploring digital and real-time channels
to provide information in the way our
customers want it, when they want it.
GSK Annual Report 2014 21
Governance & remunerationFinancial statementsInvestor informationStrategic report In Japan, Pharmaceuticals and Vaccines
turnover grew 1% to £937 million,
with Pharmaceuticals sales up 2%,
while Vaccines were down 14%.
Pharmaceuticals sales benefited from
strong growth of our Oncology products
and Avodart, which were up 17% and 14%
respectively. This was partially offset by
lower sales in the Respiratory portfolio
(down 2%) which was in turn affected by
a weaker allergy season at the beginning
of the year and increased competitive
pressures. Our new prescription share has
increased to 56.5% following substantial
increases in new prescriptions for Relvar
Ellipta after the lifting of the ‘Ryotan’
prescribing restrictions. Sales for the year
for Relvar Ellipta were £17 million. Overall,
Respiratory sales fell 2% to £475 million.
The lower Vaccines sales reflected the
impact on Cervarix of the continued
suspension of the recommendation for use
of HPV vaccines, although higher sales of
Rotarix partly compensated for this.
Respiratory
We continue to develop and enhance
our respiratory portfolio with new product
launches and we await FDA decisions
on Breo Ellipta for use in asthma and
mepolizumab, our first-in-class anti-IL5
treatment for severe asthma. Overall,
we continue to expect total sales of our
respiratory portfolio to return to growth
in 2016.
Respiratory sales in 2014 fell 10%
to £6,181 million during the year.
Seretide/Advair sales were down 15%
to £4,229 million, Flixotide/Flovent sales
fell 6% to £702 million while Ventolin sales
grew 11% to £665 million. Xyzal sales,
almost exclusively made in Japan, were
up 7% to £130 million.
In the USA, Respiratory sales fell by 18% in
the face of continued price and contracting
pressures in the market. Sales of Advair
were down 25% to £1,972 million (14% fall
in volume and an 11% decline of price and
mix). Flovent sales were down 6% while
Ventolin sales were up 18%. Our newly
launched products, Breo Ellipta recorded
sales of £29 million while Anoro Ellipta
sold £14 million in the year.
Pharmaceuticals and Vaccines
continued
Leading the way in respiratory
GSK has been at the forefront of many
advances in respiratory disease since
the launch of Ventolin over 40 years ago.
years than in the previous 15 years
combined, offering greater choice to
healthcare professionals and patients.
We have the broadest portfolio of
marketed respiratory medicines globally,
with the potential to add two further
‘first-in-class’ medicines in the
coming years.
In 2014, we transformed our respiratory
pipeline and years of scientific research
into approved medicines that have the
potential to benefit some of the millions
of patients living with asthma and COPD.
During the year we gained approval for
Incruse Ellipta in the USA and Europe,
and Arnuity Ellipta in the USA. We also
gained EU approval for Anoro Ellipta in
Europe, following US approval in 2013.
This success builds on the approval of
Relvar/Ellipta in 2013, which was the first
medicine to be delivered in the Ellipta
inhaler. This achievement was even more
significant given that we amassed an
unprecedented 37 regulatory approvals
for Relvar Ellipta in 2014.
We are committed to helping people
with respiratory disease optimise their
treatment to achieve the best possible
clinical outcome, and now we have
expanded our portfolio of respiratory
medicines, we are enabling clinicians
to tailor treatment to patients’ individual
needs. In fact the recent approvals
mean that we have launched more new
respiratory medicines in the past two
These medicines add to the strength
of our respiratory portfolio and with a
number of assets currently in late stage
development, we are confident that
our respiratory pipeline will continue
to deliver new treatment options that
are able to meet the evolving needs
of patients well into the next decade.
Meanwhile we continue to work hard
to ensure mainstay treatments such
as Seretide and Ventolin, remain
important treatments for millions of
patients across the world. We want
to ensure these are accessed by the
broadest number of patients, for
example, by reducing pack sizes to
enable smaller amounts to be
purchased and creating low-cost
formulations.
We recognise that there is still much
more to be achieved to overcome the
global burden of respiratory disease.
Through our ongoing commitment and
investment into scientific research and
by working in collaboration with external
experts, we will remain at the forefront
of respiratory medicine. Only through
this commitment and our scientific
leadership can we help transform the
lives of patients, enabling them to do
more, feel better and live longer.
22 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Other categories
Sales in our Cardiovascular, metabolic
and urology category were down 3% to
£965 million for the year. The Avodart
franchise grew 1% to £805 million, with
a 17% increase in sales of Duodart/Jalyn,
although Avodart sales declined by 4%.
Sales of Levitra fell 28% to £100 million
in the year, while sales of Prolia were
down 10% to £41 million, following an
agreement with Amgen to terminate joint
commercialisation in selected markets.
Regionally, sales in the USA were
down 16% to £364 million, although
Emerging Markets grew 20% to £145
million while Japan also grew with sales
up 14% to £114 million. Europe was flat
at £293 million.
Sales of our Immuno-inflammation
products grew 40% to £214 million, helped
by a 25% sales increase for Benlysta to
£173 million for the year. Our other therapy
areas were down 2% to £2,407 million,
largely reflecting generic competition
to Dermatology products.
Established Products
Sales of our Established Products fell 16%
to £3,011 million. Generic competition to
Lovaza (down 57% to £240 million),
Seroxat/Paxil (down 19% to £210 million)
and Valtrex (down 24% to £154 million),
all contributed to the fall in this category.
Regionally, sales in the USA were down
31% to £854 million, while sales in Europe
and Japan fell 13% to £601 million and
15% to £444 million respectively. In
Emerging Markets, the performance of this
category declined 1% to £1,050 million.
Vaccines
Vaccines sales were down 1% at
£3,192 million for the year, although
declines in Europe (down 2%) and Japan
(down 14%) were partly offset by growth
of 1% in Emerging Markets, while sales in
the USA were flat. Emerging Markets were
helped by the strong performances of
Synflorix, Boostrix and Rotarix.
Infanrix/Pediarix grew 2% to £828 million,
with growth in the USA offset by sales
decline in Europe and Emerging Markets.
Boostrix sales increased 16% to £317
million, with growth in all regions except
the US, where sales fell 7% largely due
to the return of a competitor product.
Rotarix sales grew 7% to £376 million,
driven by tender shipments in Europe and
Emerging Markets, although there was a
decrease in the USA, which was impacted
by a CDC stockpile withdrawal in the fourth
quarter. Synflorix sales were also up, 4%
to £398 million, mainly due to a strong
tender performance in Emerging Markets.
Sales of our hepatitis vaccines fell 6%
to £558 million, partly due to supply
constraints affecting the US and Emerging
Markets. Fluarix and FluLaval sales were
down 9% at £215 million due to lower
production levels for 2014 and increased
competition. Cervarix sales declined 26%
to £118 million in 2014, largely due to a fall
in sales in Emerging Markets and Japan as
well as increasing competitive pressures.
European Respiratory sales declined
3%, largely due to increased competition.
Seretide sales fell 5% at £1,330 million
(1% decrease in volume and a 4% negative
impact of price), as a result of increasing
competitive pressures and the transition
of our Respiratory portfolio to the newer
products in the latter part of the year.
Relvar Ellipta recorded sales of £18 million
in the year.
Respiratory sales in Emerging Markets
grew 3%. Sales of Seretide were up 3%
to £400 million, helped by an improved
performance in China. Sales growth for
Ventolin (up 8% to £165 million) and
Veramyst (up 15% to £73 million) was
offset by Flixonase, sales of which fell
33%, largely due to a sales decline
in China.
In Japan, Respiratory sales fell 2% to
£475 million. Sales of £17 million for
Relvar Ellipta offset the impact of
increasing competitor action on Adoair,
which fell 6% to £228 million. The growth
in Xyzal, up 8% to £114 million, was more
than offset by lower sales elsewhere in the
Respiratory portfolio. However, our new
prescription share has increased to 56.5%
following substantial increases in new
prescriptions for Relvar after the lifting
of the ‘Ryotan’ prescribing restrictions.
Oncology
Oncology sales grew 33% to £1,202 million
for the year with contributions from
Votrient (sales up 33% to £410 million) and
Promacta (sales up 34% to £231 million).
Sales of Arzerra fell 24% to £54 million,
while Tykerb/Tyverb sales declined 11% to
£171 million. New launches compensated
for generic competition to both Hycamtin
and argatroban, with Tafinlar and Mekinist
recording sales of £135 million and
£68 million respectively.
In the US, Oncology grew 41% to
£509 million with contributions from
Votrient (£181 million), Promacta
(£91 million), Tafinlar (£58 million)
and Mekinist (£67 million).
In Europe, Oncology sales grew 29%
to £417 million, led by Votrient, sales of
which were up 23% to £153 million, while
in Emerging Markets, sales were up 30%
to £169 million and in Japan, sales grew
17% to £65 million.
GSK Annual Report 2014 23
Governance & remunerationFinancial statementsInvestor informationStrategic report Pharmaceuticals and Vaccines
continued
Deliver
In 2014, our R&D organisation delivered
a number of new medicines and vaccines
for patients and expanded treatment
options through additional indications for
several existing products. We also filed a
number of late-stage assets with regulators
and significant new assets progressed
to final stages of development.
This progress gives us continued confidence
that our pipeline of potential new medicines
remains strong and sustainable, and can
continue to deliver value for patients and
GSK. In Pharmaceuticals and Vaccines
we currently have around 40 new molecular
entities (NMEs) in phase II/III clinical
development.
Product approvals in 2014
Respiratory
Within respiratory, Anoro Ellipta, our
once-daily medicine combining two
bronchodilators – a long-acting muscarinic
antagonist (LAMA), and a long-acting beta2
agonist (LABA) – in a single inhaler, was
approved in Europe for chronic obstructive
pulmonary disease (COPD). This followed
its approval in the USA at the end of 2013.
Incruse Ellipta, our first monotherapy LAMA,
was approved as a once-daily treatment for
COPD, including chronic bronchitis and/or
emphysema, in the USA and Europe, and
launched in the USA in the first quarter of
2015. Finally, Arnuity Ellipta, a once-daily
inhaled corticosteroid medicine to treat
asthma, was approved in the USA – the first
asthma treatment from our new respiratory
portfolio to have gained approval there.
All these respiratory medicines are
administered using our innovative,
patented dry powder inhaler, Ellipta.
Oncology
Mekinist, our MEK inhibitor, gained
European approval for the treatment of
BRAF mutant metastatic melanoma –
the first medicine in its class to be licensed
in Europe. This oral targeted therapy also
received approval in the USA, under the
FDA’s accelerated approval process, for
use in combination with Tafinlar, a
previously approved oral targeted therapy.
This accelerated approval is contingent
on the results of a phase III trial, which is
designed to evaluate the clinical benefits
of the combination. Positive overall survival
results were announced in February 2015
from the phase III COMBI-d study. These
results will be submitted to regulatory
authorities for review.
New indications were also approved by
regulators for existing oncology medicines:
Arzerra as a first-line treatment for chronic
lymphocytic leukaemia, in combination with
chemotherapy treatments in the USA and
Europe; and Promacta in the USA as a
treatment for severe aplastic anaemia.
HIV/AIDS
ViiV Healthcare gained EU approval for
Tivicay (dolutegravir), an integrase inhibitor.
This followed its approval in the USA in
2013. Approval was also given for Triumeq
in the USA and Europe in 2014. Triumeq
is a single-pill regimen for the treatment
of HIV, combining dolutegravir with the
nucleoside reverse transcriptase inhibitors
(NRTIs) abacavir and lamivudine.
Diabetes
Tanzeum, a new GLP-1 treatment for type
2 diabetes, received approval in the USA
offering a once-weekly injectable option
for patients. The same product, under
the name Eperzan, was also approved
in Europe.
Other pipeline newsflow
Pharmaceuticals
Regulatory files were submitted in the
USA and Europe for our first biologic in
respiratory, mepolizumab, an investigational
anti-IL5 monoclonal antibody administered
every four weeks to treat patients with
severe eosinophilic asthma. The same asset
is also being evaluated in two phase III
studies, one for the treatment of eosinophilic
granulomatosis with polyangiitis (EGPA), a
rare disease characterised by widespread
inflammation in the walls of small blood
vessels (vasculitis) and as an adjunctive
therapy for adults who have severe COPD.
Breo Ellipta, our once-daily fixed dose
combination of an inhaled corticosteroid
(ICS) and a long-acting beta2 agonist,
approved in the USA in 2013 for COPD,
was filed in the USA as a treatment for
asthma. We also announced the start
of a phase III programme to evaluate the
efficacy and safety of our ‘closed’ triple
combination treatment of a ICS/LAMA/
LABA in patients with COPD, the first to
evaluate a once-daily triple combination
treatment of an inhaled corticosteroid
and two long-acting bronchodilators in
a single inhaler.
A phase III study began to evaluate the
effects of losmapimod for acute coronary
syndrome. Losmapimod is an inhibitor
of p38 mitogen activated protein (MAP)
kinase, an enzyme understood to play
a central role in the acute inflammation
that occurs during a heart attack. It is being
developed as a short-term treatment to be
administered as quickly as possible after
a heart attack to reduce the risk of a
subsequent cardiac event.
Darapladib, also an investigational
cardiovascular medicine, was not
successful in phase III studies and its
development has been terminated.
Along with our partners MMV, we started
a phase III study to investigate the safety
and efficacy of tafenoquine – a single-dose
investigational radical cure for Plasmodium
vivax malaria. This form of the disease
occurs primarily in South and South East
Asia, Latin America and the horn of Africa.
In 2014 we also continued to pursue
new indications for existing medicines.
Within Oncology, a phase III study began,
evaluating Promacta/Revolade in patients
with myelodysplastic syndromes (MDS),
a type of cancer in which the bone marrow
does not make enough healthy blood cells.
We also submitted regulatory files seeking
additional indications for this medicine –
severe aplastic anaemia in Europe
and chronic immune (idiopathic)
thrombocytopenia (ITP) in the paediatric
setting in the USA. A phase III study
of subcutaneous ofatumumab in patients
with pemphigus vulgaris, a rare autoimmune
skin disorder, also began.
We also submitted a regulatory file to
the EMA, for a variation to the marketing
authorisation for Volibris – our medicine
for pulmonary arterial hypertension (PAH)
– to include its use in initial combination
therapy in PAH patients.
Alongside these advances, in our late-
stage pipeline we also see significant
potential for cabotegravir in HIV (see
page 32 for more information); sirukumab,
an anti-IL6 monoclonal antibody for
rheumatoid arthritis; ‘863, our prolyl
hydroxylase inhibitor for anaemia and an
ex-vivo stem cell gene therapy treatment
and potential cure for ADA-SCID, a rare
disease affecting children. This would be
GSK’s first product using cell and gene
therapy technology, a fast-moving area
of science and one which, we believe,
has the potential to deliver a number of
transformational medicines.
Vaccines
Within our Vaccines business, we
announced pivotal phase III study results
for our shingles candidate vaccine (HZ/su)
that showed it reduced the risk of shingles
by 97.2 % in adults aged 50 years and
older compared with placebo. The study,
which started in August 2010, is ongoing
in 18 countries and involves more than
16,000 individuals. We are now evaluating
the filing strategy for this vaccine.
24 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report We reached a major milestone in the
development programme of our malaria
candidate vaccine, RTS,S, with the
submission of a regulatory file in July
to the European Medicines Agency
(see case study).
Since the Ebola crisis began in March
2014, GSK has been working closely
with the World Health Organization
(WHO), regulators and other partners to
respond to the outbreak and to accelerate
development of our investigational Ebola
vaccine. We are also contributing to the
overall humanitarian effort and taking steps
to support the small number of employees
we have in the region. In phase I studies,
our investigational Ebola vaccine
demonstrated an acceptable safety profile
and produced an immunological response
in healthy adult volunteers. It is now being
tested in a large phase III clinical trial
sponsored by the US National Institutes
of Health (NIH) in Liberia.
In April, we announced our decision to
stop development of an investigational
MAGE-A3 antigen-specific cancer
immunotherapeutic for the treatment of
non-small cell lung cancer, after a phase III
study failed to meet its efficacy endpoints.
Following a strategic review of our vaccines
immunotherapeutics unit which included
all available data, developments in the
current environment and the investigation
of additional technologies, we decided
not to pursue any new research efforts
in antigen specific immunotherapy.
Early-stage pipeline
In Pharmaceuticals we continue to see
substantial improvements in the novelty
of our early-stage Pharmaceutical research
programmes with over 80% of our
preclinical to phase II NME projects
having novel mechanisms of action.
We are developing multiple early-stage
assets in therapeutic areas where we
see significant opportunity. In immuno-
inflammation, and specifically in diseases
such as rheumatoid arthritis, inflammatory
bowel disease and psoriatic arthritis,
we have multiple assets in development
including a GM-CSF monoclonal antibody;
a number of RIP 1 and 2 kinase inhibitors
and an IL-7 receptor monoclonal antibody.
In immuno-oncology, we have a range
of assets targeting haematological
cancers and solid tumours including
OX-40, iCOS, and TLR-4 as well as
a cell therapy partnership with the
biotechnology company Adaptimmune.
In cancer epigenetics we have three
clinical programmes addressing the BET-i,
EZH2 and LSD-1 targets.
Submitting regulatory application for our candidate
malaria vaccine
RTS,S’s development involved one
of the biggest vaccine trials ever
conducted in Africa. While a number
of additional steps still need to be
completed, we anticipate that the
vaccine could be available for
implementation in early adopter
SSA countries in 2017.
GSK has invested hundreds of millions
of dollars to date in RTS,S and the
programme has also received funding
from the Bill & Melinda Gates
Foundation, while the international
non-profit organisation PATH has
contributed financial, scientific,
managerial and field expertise to the
development of RTS,S. We have
committed that the price of RTS,S
will cover the cost of manufacturing
the vaccine together with a small return
of around 5% that will be reinvested
in R&D for second generation malaria
vaccines, or vaccines against other
tropical diseases.
In July, we reached a major milestone
with the submission of a regulatory
application for our candidate malaria
vaccine, RTS,S, to the European
Medicines Agency (EMA). This is a key
moment in GSK’s 30-year journey to
develop the world’s first malaria vaccine.
This submission follows our 2013
announcement of phase III data showing
that RTS,S almost halved the number
of cases of clinical malaria in young
children (aged 5-17 months at first
vaccination) in the 18 months after
vaccination.
RTS,S is intended exclusively for use
against the Plasmodium falciparum
malaria parasite, which is most prevalent
in sub-Saharan Africa (SSA). Around
90% of estimated deaths from malaria
occur in SSA, and 77% of these are
in children under the age of five.
To date there is no licensed vaccine
available for the prevention of malaria.
If a positive opinion from the
EMA is granted, the World Health
Organization has indicated that
a policy recommendation may
be possible by the end of 2015.
A positive opinion from EMA will
also be the basis for marketing
authorisation applications (NRAs)
in SSA.
GSK Annual Report 2014 25
Governance & remunerationFinancial statementsInvestor informationStrategic report Pharmaceuticals and Vaccines
continued
In Vaccines we continue to integrate some
early-stage assets following our acquisition
of the biotechnology company, Okairos, in
2013. The novel adenovector platform has
shown potential in diseases such as Ebola,
hepatitis C and respiratory syncytial virus
(RSV). RSV is one of the remaining
paediatric infectious diseases for which
a vaccine does not yet exist and recent
phase I data for our vaccine candidate
demonstrated the value of further
exploratory work.
Pharmaceuticals R&D approach
Our Pharmaceuticals R&D business is
a dynamic organisation which we believe
has built a sustainable pipeline of innovative
new medicines through its focus on
cutting-edge science.
We are highly selective with our R&D
investments and concentrate only on areas
where we believe the science presents us
with opportunities most likely to deliver
significant medical advances. It is essential
that we continue to challenge the areas in
which we work. Recognising this, in 2014,
we announced a programme to further
sharpen the focus of our R&D activities,
eliminating areas of low probability of
success. We also announced plans to
change our geographical R&D footprint by
bringing our significant R&D operations
together into two global centres – one in
Philadelphia in the USA and the other in the
Stevenage area of the UK. We believe this
is vital to enable our scientists to work in
world-class facilities.
Collaborating with external partners has
become a critical component of our R&D
strategy in recent years. We are now
involved in more partnerships with external
companies, individuals and academics than
ever before, which enables us to access
and increase our understanding of new
areas of science and to share the risk of
development.
Our Pharmaceuticals R&D business
employs approximately 10,000 people.
In 2014, our Pharmaceuticals core R&D
expenditure was £2.5 billion, a decline
of 4% compared to the previous year,
resulting from execution of changes leading
to continued efficiency improvements.
Early-stage research
In early-stage research (drug discovery)
the crucial first step in exploring new
medicines – and one of the greatest
challenges – is to identify the biological
mechanisms involved in the development
of diseases. We then create small
molecules or biopharmaceuticals that
interact with these disease targets,
ultimately leading to new medicines.
Through our own research and working
with external scientists we are making
progress improving our understanding
of disease targets, and believe this will
improve the success rate for discovering
new medicines (see case study on p27).
Our Discovery Performance Units
(DPUs) are responsible for discovery
and development of potential new
medicines through to early-stage clinical
trials (up to the completion of phase IIa).
We have over 30 DPUs, each with between
5 and 70 scientists working on a particular
disease pathway or area of science.
Core Pharmaceutical investment
19%
29%
52%
Discovery
Development
Facilities and central support
These nimble, personalised units are a
fundamental step away from the traditional
hierarchical R&D business model and help
us to maintain flexibility in our research
investment, while focusing on the most
promising scientific opportunities. They
have their own budget and so greater
accountability for their projects. Progress
against DPU business plans is regularly
reviewed by the Discovery Investment
Board (DIB), a group from senior R&D
and commercial management, alongside
external individuals with life science
investment expertise and an understanding
of payer perspectives.
Late-stage development
When a compound has demonstrated a
potential proof of concept for how it works,
we must decide whether to advance it into
later-stage development. Our Portfolio
Investment Board (PIB) assesses the
technical, commercial and investment
case for each project to progress in
development.
Timeline and development stages for pharmaceutical research
Drug
discovery
Pre-clinical
Clinical trials
Regulatory
review
Approval and
launch
Post-marketing
surveillance
Phase 1
Phase 2
Phase 3
5,000-10,000
compounds
250 compounds
5 compounds
20-100
100-500
Number of patients
1,000-5,000
3-6 years
6-7 years
1 approved new medicine
0.5-2 years
26 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report This stage is called ‘commit to medicine
development’ and typically takes place
after phase IIa trials, when the compound
is tested in a small number of patients with
a particular condition or disease. Then
there are phase III studies, which are
larger-scale studies in patients to further
examine the compound’s efficacy and
safety, often at different therapeutic doses
to determine which may be most appropriate.
If all of these stages are successful, we use
the results of these studies combined with
other key scientific information to submit
a regulatory file for review and possible
approval with regulatory agencies.
At the same time, we work to optimise the
compound’s physical properties and its
formulation so that it can be produced
efficiently and in sufficient quantities
through the manufacturing process.
In some cases, our research may include
developing new inhalers or other devices
to deliver these medicines.
The responsibility for guiding an
investigational medicine through these later
stages of development to filing rests with
our Medicines Development Teams (MDTs),
which are small units of 6 to 10 people.
In Pharmaceuticals we now have 25 new
molecular entities (NMEs) in phase II/III
clinical development.
Governance
The length of time and costs involved in
drug discovery and development make
it essential that we are highly selective in
where we invest and focus our resources.
The R&D Executive Team has oversight
of strategic issues and overall budget
management across R&D, and a number
of governance boards manage investment
decisions through the life cycle of R&D and
early commercialisation. These investment
decisions begin during the discovery
phase, with the DIB, and continue in the
PIB as described earlier.
PIB is co-chaired by the President of
Pharmaceutical R&D and the President
of Global Pharmaceuticals, and also
includes the heads of each Pharmaceutical
region along with the head of global
manufacturing and legal counsel.
Additional governance committees also
assess technical, scientific, commercial
and investment decisions for projects
through development, into commercial
operations, and once a new medicine
has launched.
Harnessing advances in technology to drive
drug discovery and development
We continue to build scientific and
technical capabilities that enable us
to make better decisions earlier in drug
discovery and development, increasing
our probability of success and reducing
our attrition rate. We have significantly
improved the proportion of high quality
drug candidates that progress to clinical
development by ensuring we select
the best candidates and prioritising
resources to progress the most
promising potential medicines.
We are also capitalising on major
technology advances to help our
researchers take the crucial first step
in exploring new medicines – finding
where to start. In 2014, we launched
the Centre for Therapeutic Target
Validation (CTTV) with the European
Bioinformatics Institute and the
Wellcome Trust Sanger Institute –
a pioneering research initiative
harnessing ‘big data’ and genome
sequencing to improve the success
rate for discovering new medicines.
Currently, an estimated 90% of
compounds entering clinical trials never
reach patients as medicines. This is
often because the biological target for a
drug is not well understood – one of the
greatest challenges in drug discovery.
We need to understand better the
mechanisms in our body related to
disease to improve how we can develop
the most effective medicines.
CTTV scientists are combining their
expertise to explore and interpret large
volumes of data with the aim of improving
our ability to define the biological targets
in a range of diseases. The Wellcome
Trust Sanger Institute is contributing its
unique understanding of the role of
genetics in health and disease. The
European Bioinformatics Institute is
integrating huge streams of experimental
data to create bioinformatics insights.
We are contributing expertise in disease
biology, translational medicine and drug
discovery. We have also made a
multi-million pound contribution to
fund an initial wave of projects.
Investment in R&D
Focus on productivity
We remain committed to improving
productivity in R&D, so we can develop
more innovative new products with
greater efficiency.
We continue to improve the financial
efficiency of our R&D and in February
2014 announced an estimated IRR
of 13%. We continue to target 14%
on a longer-term basis.
Our R&D investment decisions are
based on where we see the best
opportunities, having considered patient
need, the market opportunity and
scientific understanding. We believe
this is more effective than determining
investment requirements on the basis
of a fixed proportion of sales.
R&D productivity is a key challenge
for our industry and we believe it is
important to provide a greater level of
transparency regarding R&D decision
making and our R&D returns.
This rate of return for R&D is determined
by assessing the costs involved in
discovering and developing late-stage
pipeline projects against the profits
of medicines and vaccines as they
are approved and launched.
In 2010, we calculated that our
estimated R&D internal rate of return
(IRR) was 11% and stated a long-term
aim of increasing this to 14%.
Our estimated IRR is an important
measure of our financial discipline and
our strategic progress to improve the
economics of R&D. It also underpins our
strategy to create more flexibility around
the pricing of our new medicines.
Calculation of our most recent IRR for
2013 included products launched from
1 January 2012 to 31 December 2013
and compounds that were in phases IIb
and III of the development process at
year-end 2013. The calculation was
based on actual sales from 2011 to
2013, and forecast sales up to 2034,
adjusted to reflect expected failure rates,
which are broadly in line with standard
industry failure rates. The cost base
used in this calculation comprised an
estimate of attributable R&D costs, and
actual and projected milestone payments
where appropriate.
GSK Annual Report 2014 27
Governance & remunerationFinancial statementsInvestor informationStrategic report Pharmaceuticals and Vaccines
continued
Vaccines R&D approach
Our vaccine R&D work focuses on
discovering and developing new
prophylactic and therapeutic vaccines
to help protect and treat people against
infectious diseases, cancers and chronic
disorders. We also look at life cycle
management to maximise the potential of
existing vaccines, through broadening their
geographic availability, and advancing their
formulation. This approach allows us to
increase the value our products can bring,
by extending their reach and adapting them
to ensure they meet the needs of patients.
We manage and prioritise our investment
decisions to best meet the needs of our
customers and help address some of the
remaining global health challenges. Our
core vaccine R&D investment in 2014 was
£443 million, down 6% against 2013, this
reflects our decision to stop development
of MAGE-A3 (see page 25). We have more
than 2,000 scientists working across our
vaccine R&D organisation and currently
have 14 vaccines in development for a
range of diseases.
We also continue to explore the potential
of some early stage assets acquired from
Okairos in 2013. The novel adenovector
platform complements our existing vaccine
adjuvant technology and expertise, enabling
us to continue our work developing the next
generation of vaccines and may allow for
the tackling of new diseases.
Discovery and development
The discovery and development of a new
vaccine is a complex process that typically
takes between 10 and 12 years. Vaccine
discovery begins by identifying new
antigens, which are specific structures on
pathogens (viruses, bacteria or parasites)
or on cancer cells that are recognised
by the immune system. We then produce
these pathogens in yeast, bacteria or
mammalian cells and genetically manipulate
them so that they can be purified and
formulated into a vaccine. It is the antigen
that creates the body’s immune response.
In some cases, formulation of the vaccine
involves mixing antigens with GSK
proprietary adjuvant systems. We use
adjuvants to improve the immune system’s
response to antigens contained in vaccines
and we have been innovating in the area
of adjuvant systems for more than 20 years.
The formulations of candidate vaccines are
usually a combination of several antigens,
and the final composition of the vaccine
(antigens and adjuvant) may change
over time.
Governance
There are several key decision points in
the vaccine development process: commit
to research (decide to initiate full research
programme) commit to candidate
development (decide to invest resources
towards exploring potential of vaccine in
number of clinical trials); commit to early
clinical development (phase I and II),
commit to phase III; commit to registration
and launch.
Oversight of these key decisions rests
with two bodies. The Vaccine Development
and Commercial Board (VDCB) and the
Vaccine Investment Board (VIB).
The VDCB reviews the research and
development project strategy and advises
on its scientific, technical and commercial
opportunity assessment. It has an overall
view of both early, advanced and life cycle
development projects. All VDCB
‘recommendations to progress’ projects
from one stage to the next are submitted
to the VIB.
The VIB is co-chaired by our President
of Vaccines and the Chairman for Global
Vaccines. This board makes the final
decision on whether to invest in a project,
by evaluating the VDCB’s recommendation
alongside public health benefit, business
opportunity, development costs and risks,
project timing and overall evolution of our
portfolio of vaccines.
Vaccines research development cycle
Identify
antigens
Produce
antigens
Pre-clinical
testing
Phase I
Phase II
Proof of
concept
Phase III
File
Registration/
Post-marketing
surveillance
Research (including immunology)
Pre-clinical development
Clinical development (including post-marketing surveillance)
Transfer process to manufacturing
1-10 years
2-3 years
2-4 years
>1 year
28 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Late-stage pipeline
Our pipeline remains extensive. A summary of Pharmaceuticals and Vaccines in phase III
and regulatory is set out below. A more comprehensive list of our medicines and vaccines
in phases I to III of development is available on pages 225 to 228.
Compound
Indication
US
EU
Respiratory
Relvar/Breo Ellipta (FF/VI)
vilanterol (VI)
mepolizumab
FF+UMEC+VI
Vaccines
Nimenrix (MenACWY)
MAGE-A3
Herpes zoster
Mosquirix (RTS,S)
Oncology
Arzerra (ofatumumab)
Mekinist (trametinib) + Tafinlar
(dabrafenib) in combination use
Promacta/Revolade
Asthma
COPD
Severe eosinophilic asthma
COPD
COPD
MenACWY prophylaxis
Melanoma
Shingles prophylaxis
Malaria prophylaxis
CLL (relapsed/relapsed maintenance)
NHL (FL)
Metastatic melanoma
Adjuvant melanoma
Myelodysplastic syndrome (MDS)
Severe aplastic anaemia
Cardiovascular and metabolic
retosiban
losmapimod
Threatened pre-term labour
Acute coronary syndrome (ACS)
Systemic lupus erythematosus
Vasculitis
Rheumatoid arthritis
Immuno-inflammation
Benlysta (s.c.)
Benlysta (i.v.)
sirukumab
Rare diseases
2696273
(Ex-vivo stem cell gene therapy)
mepolizumab
Infectious diseases
tafenoquine
Dermatology
ofatumumab (s.c.)
Adenosine deaminase severe combined immune deficiency
(ADA-SCID)
Eosinophilic granulomatosis with polyangiitis (EGPA)
Ph II/III
Ph III
Treatment and relapse prevention of Plasmodium vivax malaria Ph III
Pemphigus vulgaris
Ph III
Filed June 2014
Ph III
Filed Nov 2014
Ph III
Ph III
Approved Nov 2013
Ph III
Filed Nov 2014
Ph III
Ph III
Ph II
Ph III
Ph III
n/a
Ph III
Ph III
Approved Apr 2012
Ph III
Ph III
Filed July 2014
Ph III
Ph III
Approved Jan 2014
Ph III
Ph III
Approved Aug 2014 Filed Nov 2014
Ph III
Ph III
Ph III
Ph III
Ph III
Ph III
Ph III
Ph III
Ph III
Ph III
Ph III
Ph III
Ph III
Ph II/III
Ph III
n/a
Ph III
GSK Annual Report 2014 29
Governance & remunerationFinancial statementsInvestor informationStrategic report Pharmaceuticals and Vaccines
continued
Simplify
We are committed to reducing complexity
in our business. This helps us be more
efficient and allows us to respond to the
needs of patients and consumers more
quickly and effectively.
Over the last few years we have
undertaken a broad range of restructuring
and simplification programmes across
the Group which have both reduced
operational complexity and delivered a total
of £3.5 billion in annual savings to date.
Reshaping our business
We have identified significant simplification
and synergy opportunities for our
Consumer Healthcare and Vaccine
businesses when the proposed Novartis
transaction completes. We are targeting
total annual savings from the transaction
of £1 billion by the fifth year from closing,
including those related to oncology. We
expect approximately 50% of this to be
delivered by year three.
We are also undertaking a restructuring
programme to refocus our global
Pharmaceuticals business following
the divestment of our oncology products
and the changing dynamics in the US
respiratory market and cost base. This will
rescale our commercial operations, global
support functions and relevant R&D and
manufacturing across Pharmaceuticals and
is intended to improve our performance by
establishing a more streamlined and agile
business. We expect it to deliver annual
cost savings of £1 billion over three years,
with 50% of this expected in 2016.
As part of this programme we will reshape
our global Pharmaceutical operations to
create two franchises: Respiratory and
Speciality Pharmaceuticals, which will
sit alongside our Established Products
Portfolio and other global businesses.
The Respiratory franchise will continue
to focus on our existing and emerging
respiratory portfolio, while the newly
created Specialty Pharmaceuticals
business will comprise the late-stage
pipeline assets and newly launched
global medicines in Cardiovascular,
Metabolic and Neurosciences (CVM&NS),
Immuno- inflammation & Infectious
Diseases (II-ID), Oncology discovery
and Dermatology. This will create a leaner
commercial operation, simplify processes
and eliminate duplication.
Manufacturing and supply
GSK has 43 Pharmaceutical and
14 Vaccine sites in 26 countries making
pharmaceutical and vaccines products,
with more than 27,000 people involved
in manufacture and supply activities.
Within our Pharmaceuticals and Vaccines
manufacturing organisations, our aim is
consistently to deliver outstanding quality,
service and value to our patients and
customers.
During 2014, the sales performances
of certain pharmaceuticals and vaccines
were impacted by supply constraints.
Manufacturing network
We continue to review our global
pharmaceuticals manufacturing and
supply network to ensure effectiveness
and efficiencies.
During the year, we continued to invest
in our network to ensure capacity in key
areas. For example, in respiratory, we have
committed to build a new manufacturing
facility in Montrose, Scotland, to provide
additional capacity for our newest
products, Relvar/Breo Ellipta, Anoro
Ellipta, Incruse Ellipta and Arnuity Ellipta.
In antibiotics, we continued to invest in
manufacturing capacity for both active
ingredients and the finished products.
In 2014, the site at Notre Dame de
Bondeville in France left the network,
a change that was announced in 2013.
End-to-end supply chain
Our end-to-end supply chain programme,
which began in 2013, is designed to
reform and simplify our supply chain.
In 2014, we introduced processes to
improve coordination across each stage
of production from sourcing and
manufacturing to more efficient delivery
of our products to patients and consumers.
In 2014, we introduced the GSK Production
System (GPS) across our Pharmaceutical
manufacturing sites. The GPS is a standard
way of working to identify and eliminate
the root causes of accidents, defects and
waste. This standardised way of working
will improve our processes and performance.
For example, at our site in Cairo, Egypt,
deployment of the programme has resulted
in a 26% increase in production with a
decrease in manufacturing interruptions
of more than 40%.
Common processes
Across our Pharmaceuticals and Vaccines
business we continued to streamline core
processes and boost efficiency. A key step
has been the establishment of our Core
Commercial Cycle programme – a key
enterprise-wide planning and decision-
making process which brings together
commercial, finance and supply chain
to ensure we can meet the expected
demand for our products.
Consolidation of our supply base also
helps to simplify our Pharmaceutical
manufacturing and supply chain operations
and during 2014 we reduced the number of
third-party suppliers who manufacture
medicines on behalf of GSK, by a further
8%, compared with 2013. We have also
continued to reduce complexity in our
supply base by standardising specifications
for goods and materials that we buy and
pursuing integrated sourcing processes.
We continued our initiative to reduce the
complexity of our Pharmaceutical product
portfolio, which allows us to simplify both
supply chain and commercial operations
and reduce risk and complexity while
increasing service levels. In 2014, we
achieved a 19% reduction (against our
2012 baseline) which equates to more
than 4,000 discontinued packs.
Commitment to quality
We are strongly committed to meeting the
highest quality standards through stringent
quality control and quality insurance
processes. Our medicines and vaccines
are manufactured according to current
Good Manufacturing Practice (cGMP)
regulations, the approved file which
includes our commitments to the authorities
and our own internal quality standard
procedures. Two GSK sites (at Cork in
Ireland and Ste. Foy in Canada) received
warning letters from the US Food and
Drug Administration (FDA) this year.
We are taking comprehensive actions
to resolve these issues.
Procurement
Our procurement organisation continues
to support the delivery of greater value
from our external expenditure. The
procurement savings performance on core
external operating expenditure increased
by 19% in 2014 from 2013. Additionally,
in September, we launched category
councils comprising business, finance
and procurement leaders to further
enhance our procurement process and
accelerate performance. This will drive
the right rigour in buying decisions, help
strengthen our relationships with those
external partners who are a critical part
of our business and modify processes
that are causing inefficiencies.
30 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
Pharmaceuticals and Vaccines
ViiV Healthcare
The growing dolutegravir-based HIV portfolio that
includes Tivicay and Triumeq contributed to a very
strong year for ViiV Healthcare.
ViiV Healthcare is a specialist global
HIV company delivering advances in
treatment and care for people living with
HIV. Established in 2009, and majority-
owned by GSK, with Pfizer and Shionogi
as the other shareholders, the company
focuses 100% on HIV. ViiV Healthcare
delivered a very strong performance in
2014 and, having proven its ability to
deliver as a standalone company, GSK
has announced its intention to explore
the potential to undertake an initial
public offering of a minority share of
the ViiV Healthcare business.
Around 35 million people worldwide are
still living with HIV, according to latest
available figures from UNAIDS, and
1.5 million died from AIDS-related causes
in 2013. However, global efforts have
helped to reduce the rate of new HIV
infections by 38% since 2001 and
AIDS-related deaths by 37% since 2005.
Today, the disease is most prevalent in
sub-Saharan Africa with some 5% of the
adult population infected. With nearly
90% of all people infected with HIV living
in low-income countries and sub-Saharan
Africa, increasing access to treatment
is a priority.
Grow
ViiV Healthcare turnover for 2014 was up
15% at £1.5 billion. Growth generated by
Tivicay and Epzicom/Kivexa, together with
the newly launched Triumeq, more than
offset the impact of generic competition
to older ViiV Healthcare products, including
Combivir and Trizivir. Core operating profit
grew 20%. ViiV Healthcare’s growth is
outpacing the HIV global market growth
of 12%. ViiV Healthcare’s core operating
profit includes R&D costs, and excludes
non-core items such as the contingent
consideration payable to Shionogi in
relation to sales of Tivicay and Triumeq.
Tivicay recorded sales of £282 million
in 2014. Uptake of Tivicay has led the
industry in the USA and other markets
including Germany and Japan, compared
with recent HIV medicine launches.
Sales of Triumeq, the new single-pill
treatment that was launched in the USA
in August and in some European countries
in September, were £57 million in 2014.
Epzicom/Kivexa (abacavir, lamivudine)
grew by 8% to £768 million and
Celsentri/Selzentry (maraviroc) was
flat at £136 million.
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Increasing access to HIV treatments
For adults, the MPP collaboration
includes two approaches. First ViiV
Healthcare will apply the established
royalty-free voluntary licensing to
dolutegravir. Second, for specific
middle-income countries including
India, the company has established
the first-ever MPP licence with a tiered
royalty structure, where a country pays
only a small percentage of the sale
price based on GDP.
For children, ViiV Healthcare has
granted MPP a voluntary licence in
121 countries for generic manufacturers
to develop paediatric formulations of
dolutegravir without paying a royalty.
In 2014, the company continued to
support more than 300 community
projects worldwide through Positive
Action, Positive Action for Children
Fund, Positive Action Southern Initiative
and the Paediatric Innovation Seed Fund.
Access to HIV treatments is a major
focus for ViiV Healthcare. During 2014,
the company supported people living
with HIV in 139 countries through a
variety of approaches, to address the
needs of people living with HIV in
different parts of the world.
The company offers royalty-free
voluntary licences and access pricing
in all low-income and least-developed
countries and in all sub-Saharan Africa
countries, where 70.5% of all people
with HIV currently live. For middle-income
countries, ViiV Healthcare takes a
case-by-case approach based on the
burden of the disease and GDP per
person. All its medicines, including
those in the pipeline and new treatments
such as Tivicay and Triumeq, are
covered by this access policy.
In April, just months after approval
of Tivicay in the EU and USA,
ViiV Healthcare announced new
collaborations with the Medicines
Patent Pool (MPP) to increase access
to dolutegravir in the countries where
99% of the children and 93.4% of adults
with HIV in the developing world live.
GSK Annual Report 2014 31
Governance & remunerationFinancial statementsInvestor informationStrategic report
Pharmaceuticals and Vaccines
ViiV Healthcare – continued
HIV treatment regimens often combine
three different antiretrovirals to improve
convenience for patients. Triumeq is
the only drug to combine dolutegravir
and NRTIs, abacavir and lamivudine,
in a single-pill regimen.
ViiV Healthcare entered a collaboration
with Janssen in 2014 to develop a two-
drug single tablet combining dolutegravir
with Janssen’s rilpivirine, a non-nucleoside
reverse transcriptase inhibitor. The
research will compare the efficacy of
this two-drug regimen compared to a
three-drug regimen, in maintaining viral
suppression for patients already virally
suppressed on a three-drug regimen.
In 2014, we also began two phase II studies
on the experimental long-acting injectable
integrase inhibitor, cabotegravir, previously
known as GSK744. One of these studies
is investigating the potential of cabotegravir
for prevention in HIV negative men, the
other, in combination with long-acting
rilpivirine, for the treatment of people living
with HIV. Cabotegravir offers the possibility
of treatment via injection and might allow
people to switch from daily oral use to a
monthly (or potentially less frequent) form
of treatment.
Simplify
The decision to create ViiV Healthcare as
a company with a 100% focus on HIV has
allowed everyone in the company to be totally
dedicated to innovating for, and making
a difference to, people living with HIV.
ViiV Healthcare has also maintained a
nimble model through which, while being
a specialist organisation focused on its
core capabilities, it relies on relationships
with its three shareholders, in particular
GSK, allowing them to operate in a
simplified operating model.
Combining this model with a lean
management structure globally and locally,
the company has reduced complexity and
maximised efficiency. ViiV Healthcare pays
for the services provided by the three
shareholders under arms-length contracts.
This model extends to how the organisation
conducts research in partnership with
GSK’s HIV Discovery Performance Unit,
pharmaceutical and biotech companies,
as well as academic researchers.
Regionally, sales in North America grew
28%, driven by strong performances of
Tivicay and Triumeq as well as continued
growth from Epzicom. Tivicay and Triumeq
are performing strongly in the dynamic
segments (patients initiating and switching
therapy), achieving a joint 18% share of
treatment in naive patients, and 31% in
switch patients.
In Europe, for the first time since ViiV
Healthcare’s creation, sales are growing
faster than the market as a result of the
excellent performance of Tivicay
(approved in January 2014 and achieving
reimbursements in most European markets),
the successful initial uptake of Triumeq in
countries where it has been launched, and
the continued growth of Kivexa.
In the International region, sales also grew
owing to the growth portfolio of Celsentri,
Kivexa and Tivicay, which now contribute
over two-thirds of the region’s revenue.
Japan and Australia, which launched
Tivicay in the second half of the year,
have seen particularly impressive sales
performances.
Deliver
There were important regulatory approvals
for our dolutegravir-based portfolio during
the year. Tivicay (dolutegravir) was
approved in the EU in 2014 following its
US approval in 2013. Triumeq, combining
dolutegravir with two nucleoside reverse
transcriptase inhibitors (NRTIs), was also
approved in the USA and EU in 2014.
The innovative antiretroviral treatment,
Tivicay, is an integrase inhibitor used with
other antiretroviral medicines for treatment
of adults and adolescents living with HIV.
Tivicay’s clinical development programme
included people living with HIV who were
new to treatment (naive), as well as those
who had already been treated with other
HIV medicines (experienced) and those
who were infected with a virus that had
developed resistance to previously available
integrase inhibitors. The WHO has cited
dolutegravir as one of the long-term
developmental priorities for child
antiretroviral treatments.
32 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Consumer Healthcare
Strong innovation and a focus on geographic
expansion and new routes to market have
led to continued growth in several key categories.
GSK’s Consumer Healthcare business
is already among the largest in the world.
Our products reach millions of people
every day in more than 100 countries, with
top-selling brands including Sensodyne,
Panadol and Horlicks.
Across our four categories of Wellness,
Oral health, Nutrition, and Skin health,
our brands exist to help people to do more,
feel better and live longer.
Our Wellness category focuses on
pain management, respiratory health,
gastrointestinal health and smokers’ health.
Panadol is the top-selling paracetamol
brand globally and Tums is the #1 antacid
brand in the USA.
We are the global leader in specialist Oral
health, with leading positions in Sensitivity
(Sensodyne), Acid Erosion (Pronamel),
Denture Care and Gum Health.
In Nutrition, our Horlicks brand – over
140 years old – is the leading nutritional
supplement in the Indian subcontinent.
Finally, our Skin health brands Abreva
and Zovirax hold leading positions in
some of the world’s largest markets.
Our focus is to combine the best of
our Pharmaceutical and Fast Moving
Consumer Goods (FMCG) capabilities
to become the world’s first and best,
Fast Moving Consumer Healthcare
(FMCH) company, driven by science
and values. To realise this vision, we
are implementing a strategy with five
key growth levers:
• Building category defining brands our
consumers love. This means building
strong global brands with leadership
positions.
• Improving lives through scientific
innovation with a strong pipeline
of new products.
• Becoming first choice for shoppers,
retail partners and experts.
• Delivering high quality products
at the right time and cost.
• Living our values and developing our
people in a high performance culture.
In April, we announced a proposed major
three-part transaction with Novartis, which
once completed, will create a new joint
venture Consumer Healthcare Company
with significant scale and reach making
it one of the world’s largest Consumer
Healthcare companies, operating in
markets estimated to grow at approximately
3-4% per annum over the next five years.
The new GSK Consumer Healthcare
business will be geographically well
matched with a strong presence in
the US, emerging markets and in the
CIS, Central and Eastern Europe.
The combined business will be a world
leading Consumer Healthcare company
with number one positions in specialist
oral health and in OTC across 36 markets
Flonase Allergy Relief –
expanding access to proven medicines
Our Consumer Healthcare business is
focused on helping more people all over
the world to improve their everyday health.
One way we are doing this is by making
our prescription medications (Rx)
more easily available to consumers by
switching them to over-the-counter (OTC)
products – an ‘Rx to OTC switch.’ By
removing the need for people to see their
healthcare professional in order to get
the medicines they need, these switches
can reduce the overall cost of healthcare.
In addition, Rx to OTC switches can
enable people to manage a variety of
everyday health conditions themselves.
Over the past 20 years we have drawn on
the specialist knowledge of the scientists
and researchers in both our Consumer
Healthcare and Pharmaceuticals
businesses to make these switches
possible, expanding access to widely-
used products for Smokers’ health,
Weight loss, Skin conditions and Pain.
We have now used our strong heritage
and scientific strength in discovering and
developing respiratory products used by
patients worldwide to bring prescription
Flonase to consumers in the USA as an
over-the-counter medicine.
Flonase contains the #1-prescribed
allergy treatment ingredient as an OTC
treatment for temporary relief of the
symptoms of hay fever or other upper
respiratory allergies. It is the first and
only OTC nasal spray that provides relief
of both nasal and ocular symptoms.
Flonase inhibits six key substances that
are part of the allergic response, unlike
most common OTC allergy pills that
target one histamine alone.
In the USA, some 50 million people
suffer from serious nasal allergies, and
an estimated 70% of them treat their
symptoms with prescription or OTC
treatments. However, half of these
sufferers report they are not completely
satisfied with their current method of
treatment, presenting a significant
opportunity for GSK to provide an
additional new option to consumers.
We expect Flonase Allergy Relief to
be a growth driver for the Consumer
Healthcare business in 2015, and to
provide a well-established allergy
treatment to consumers as we continue
to launch the brand as an OTC product
in more markets.
GSK Annual Report 2014 33
Governance & remunerationFinancial statementsInvestor informationStrategic report Consumer Healthcare
continued
and leading positions in skin health and
family nutrition with key brands like
Sensodyne, parodontax, Polident, Voltaren,
Theraflu, Panadol, Otrivin, Horlicks, Zovirax
and Abreva. In total, the new company will
have 19 major brands each with annual
revenues in excess of US$100 million.
Approximately half of the business will be
OTC medicines creating the world’s #1
OTC business. The other half of the new
company will comprise FMCG brands in
the areas of Oral health, Nutrition and
Skin health. With increased speed to
market and investment in new products,
this business will have greater
opportunities to deliver revenue growth
consistently above market rates.
Grow
Overall, Consumer Healthcare turnover
was down 1% at £4,336 million in 2014.
This was primarily a result of supply
disruptions, however we began to see
early signs of supply recovery in the fourth
quarter, with growth of 2% generating
positive momentum for the business as
we move into 2015.
Category performance
Oral health sales grew 4% to £1,797 million.
This was driven by strong growth of
Sensodyne in Sensitivity and acid erosion
which was up 11% and Gum health which
grew 11%. In 2014, Sensodyne maintained
its leading position in the sensitive teeth
category, and consumption grew ahead of
the market in all regions. Growth was seen
across both emerging and developed
markets with most notable successes in
China and North America. Sensodyne
Repair & Protect and Sensodyne
Complete were key drivers in this growth.
A combination of strong brand innovation
and a successful marketing approach using
dentist testimonials continues to drive the
brand’s success.
Our Nutrition category grew 10% to
£633 million, led by Horlicks and Boost
which grew 11% and 9% respectively,
reflecting a strong innovation-driven
performance and continued focus on
expanded rural distribution in India. Our
leading UK protein brand, MaxiNutrition,
was up 10% driven by strong innovation
and increased distribution.
In Wellness, sales were down 7% to
£1,596 million, impacted significantly
by supply particularly in Smokers’ Health.
Our Gastro-intestinal products grew 4%
and even though we were impacted by
some supply constraints, ENO saw very
strong growth in Emerging Markets,
especially in India and Brazil. Pain
management grew 2% driven by double-
digit growth of Fenbid in China, but offset
by some supply interruption to Bactroban
in China.
Skin health sales were down 11% to
£310 million driven primarily by Bactroban
supply interruption in China. Physiogel
sales were up 10%.
Regional performance
At a regional level, the US business
declined 8% to £836 million, impacted
by supply disruptions primarily in Wellness.
Oral health grew 4% led by very strong sales
of Sensodyne and the successful launches
of Pronamel Multi-Action and Sensodyne
Repair & Protect.
In Europe, sales fell by 5% to £1,242
million. This was due to a combination
of factors including supply, competitive
pressures particularly in Oral health,
and political disruption in Central and
Eastern Europe, where market growth
rates slowed during the year.
Our Rest of World markets including India,
China, Latin America, Middle East and
Africa were up 4% to £2,258 million despite
an overall slowdown in emerging markets.
Of particular note was our India business
which grew 12% during the year. Here, we
executed a successful re-stage of Horlicks
focusing on its increased nutritional benefit
if consumed every day and an improved
formula which dissolves more easily in hot
and cold milk. We also launched a new
variant, Horlicks Kesar Badam (Saffron
& Almond) in India, specifically designed
to meet the unique tastes of Indian
consumers. We continue to focus on new
routes to market, expanding our distribution
model to better reach rural consumers with
products from across our brand portfolio.
This is helping to maintain Horlicks’ position
as India’s leading nutritional supplement.
Latin America sales were up 4% with strong
performances in Oral health and Wellness.
Deliver
Our ‘innovation’ portfolio – comprising
new products or unique line extensions
launched in the last three years – is critical
to the growth of our Consumer Healthcare
business.
We are focused on creating a continued
pipeline of new, scientifically differentiated
products across our four categories,
launching over 50 new-to-market products
throughout the year. In 2014, our innovation
portfolio accounted for 12% of our
Consumer Healthcare global sales and
we invested £159 million in core Consumer
Healthcare R&D.
Our key innovation launches in 2014
included Horlicks Kesar Badam,
Sensodyne True White, Sensodyne
Complete, Pronamel Multi-Action and
Fenbid 400mg sustained release.
Other major contributors to our innovation
sales, include Sensodyne Repair & Protect,
NiQuitin Flash Strips, Panadol Extra,
Panadol Advance and Zovirax Duo.
We continue to benefit from the scientific
strengths of our Pharmaceutical business.
The US FDA approval of Flonase Allergy
Relief allergy spray for OTC use was based
on a New Drug Application (NDA) which
included data from over 43 clinical studies
and global post-marketing experience from
prescription and non-prescription markets.
As part of our focus on ensuring
consumers are at the heart of our business,
this year we invested in the roll-out of a
new fully-integrated platform for single
point of consumer contact across phone,
social media and digital. This will allow
us to listen better and interact with our
consumers and to gather insights which
will ultimately drive product improvement,
marketing strategy and innovation. In 2014,
we deployed this new platform in 47
countries, collecting nearly two million data
points which led to the creation of multiple
new marketing and promotional campaigns.
During the year we began the process
of adding the GSK branding to all of our
Consumer Healthcare products and to
our advertising and promotional materials.
Research has shown this work has proven
value for our brands. We expect the
majority of our product packaging to carry
the GSK branding by the end of 2015.
34 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Simplify
We have faced challenges during the year
with several of our Consumer Healthcare
manufacturing sites primarily in North
America. However, affected supply lines
are now fully operational and we expect
to see increasing benefit from resumption
in supply during 2015.
We have undertaken a comprehensive
operational review of our supply network
and are investing heavily in a multi-year
programme to ensure future sustainable
supply including improvements in systems
and capacity, more training for our people
and addition of new roles, particularly in
key areas such as quality and engineering.
We are also working to reduce our
exposure to single source supply.
In 2014, we continued to roll-out GSK’s
commercial Enterprise Resource Planning
(ERP) system across the Consumer
Healthcare business. This new platform
allows us to make better commercial
decisions and drive financial efficiencies
as we standardise and consolidate data,
forecast and plan on the same system,
save time and money on system
maintenance and upgrades, and become
more efficient in how we do business
with our customers. With 11 Consumer
Healthcare markets added in 2014, 26%
of global consumer healthcare revenue is
now on the system and we expect to fully
complete the roll-out by 2020.
In order to deliver high quality products
to our customers at the right time and
cost, we are focusing on reducing the
number of packs within our product
portfolio. This provides shoppers with
simpler and easier choices based on
clear brand propositions.
It also simplifies our supply chain resulting
in easier and better forecasting, less
inventory resulting in lower warehousing
costs, increased capacity in our factories
and lower cost of goods. In 2014, we
achieved a net pack reduction of 14%.
Going forward, we also expect to deliver
an estimated total annual cost saving of
£400 million as a result of the proposed
Novartis transaction. The delivery of these
savings is phased over five years with
50% being achieved by year three.
Our innovative approach to rural distribution in India
In the short span of three years we have
built a huge distribution network and
today we cover 20,000 villages directly,
supplying products across our range
of Wellness, Oral health and Nutritional
products at the right size and price.
In small to medium-sized villages with
about eight to ten retail outlets, we’ve
created a network of over 13,000 rural
sub-distributors who are regularly
delivering GSK’s products to over
200,000 village retailers. In even smaller
villages with populations under 2,500
with few or no retail outlets, we have
created a distribution channel that goes
directly to homes. For this, we have
trained local women to set up their
own distribution business selling directly
to households and helping to build a
sustainable income source for them.
At the end of 2014, 435 women have
been trained though this programme.
In Consumer Healthcare we are
constantly innovating to give our
consumers access to the widest
available range of high quality healthcare
products. We are committed to
expanding our geographic reach and
achieving greater flexibility around our
product offering, format and price in
order to reach more consumers.
The traditional distribution model used
to build business in India has not worked
in the rural, hard-to-reach villages which
currently represent 70% of India’s
1.2 billion population.
Our goal was to build a strong
infrastructure while at the same time
improving consumer awareness of
health and nutrition information in these
markets, thereby building a more
sustainable business.
We wanted to go beyond our existing
direct distribution network and cover
villages which were previously only
serviced by distributors giving little
insight into the products purchased
by retailers or the communication our
customers received.
GSK Annual Report 2014 35
Governance & remunerationFinancial statementsInvestor informationStrategic report Responsible
business
Our success depends on our ability
to research and develop innovative
medicines, vaccines and consumer
healthcare products and make them
accessible for more people worldwide
in a responsible way.
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Our partnership with Save the Children aims to help save
the lives of one million children. One of our programmes is
in the Democratic Republic of Congo, where health workers
like Head Nurse Jacqueline Mankenda (pictured), are directly
reaching thousands of children, including those in the hardest
to reach communities.
36 GSK Annual Report 2014
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GSK Annual Report 2014 37
Responsible business
Our approach
How we conduct our business is just
as important as financial performance.
Being a responsible business is central
to our strategy, and how we conduct our
business is just as important to us as the
financial results we achieve. We strive
to put our values at the heart of every
decision we make and to meet or exceed
the expectations of society.
Our commitment starts at the top, with
our CEO and Corporate Executive Team,
and a dedicated Board-level Corporate
Responsibility Committee (CRC) led by
our Chairman (see page 94 for the 2014
report from the CRC).
Creating value for society
Developing innovative products and
maximising access to them delivers direct
benefit to patients and consumers. If we do
this successfully, this will deliver profitable
and sustainable business performance.
In turn this allows us to generate value and
returns for our shareholders and to reinvest
in the business. Over and above this, wider
society benefits, since healthy people and
communities are essential to building
strong, sustainable societies.
We also contribute significant value by
making direct and indirect economic
contributions in the countries and
communities where we operate through
tax (see box), our employment of 98,000
people and charitable support. Our total
charitable contributions for the year are
set out on page 40. Further details about
our corporate tax charges for the year
are on page 63 and we publish full details
about our position on tax.
Responsible business priorities
The priorities for our responsible business
approach sit within the context of macro-
economic and social trends that are
impacting wider society and all companies.
These trends present both opportunities
and challenges for global healthcare
companies like GSK (see page 8).
We report our progress across four areas:
Health for all, Our behaviour, Our people,
and Our planet. Our responsible business
priorities have been identified through our
understanding of the issues that are most
important to our business success and to
our stakeholders. For more detail on this
analysis see our responsible business
supplement at gsk.com/responsibility.
In 2012, we developed longer-term
commitments across the four areas.
These reflect global health needs and
are aligned with our strategic priorities
and our values of transparency, respect
for people, integrity, and patient focus.
We report detailed progress against
these commitments in our responsible
business supplement, available on
gsk.com/responsibility. In 2014 we
assessed 14 of these commitments
as progressing well, six as on track,
two with more work to do and one
under review.
Tax
Businesses are increasingly being
challenged to ensure they contribute
through the tax system to the societies
in which they operate, and to provide
information on their tax management
principles and policies. We understand
our responsibility to pay an appropriate
amount of tax. We fully support efforts
to ensure companies are appropriately
transparent about how their tax
affairs are managed.
We have a substantial business
and employment presence in many
countries around the globe and
we pay a significant amount of tax,
including corporation and other
business taxes, as well as tax
associated with our employees.
At the same time we have a
responsibility to our shareholders
to be financially efficient and deliver
a sustainable tax rate. As part of
this approach, we look to align our
investment strategies to those
countries where we already have
substantial economic activity and
where government policies promote
tax regimes which are attractive to
business investment.
We pay a considerable amount of
tax in the UK because a significant
proportion of our global corporate
functions and R&D and manufacturing
activities are located in the UK.
This includes corporation tax on
profits generated, as well as indirect
tax and employment taxes, although
the precise amounts fluctuate from
year to year.
38 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Access to healthcare
Ensuring access for all
We are determined to drive access to our products
to reach more patients and consumers, no matter
where they live or their ability to pay.
Our medicines, vaccines and consumer
health products are improving quality of
life for patients and consumers around the
world. But millions of people are still not
getting the vaccines and treatments they
need because they cannot afford them,
and there are still many diseases that
impact the poorest for which treatments
do not exist.
To play our part in tackling this global
health challenge and to drive access
to our products to more people, we
are pioneering new business models,
collaborating to strengthen healthcare
infrastructure and innovating to tackle
diseases that disproportionately affect
the poorest.
Affordability and availability
Improving access to healthcare is central
to our business, and we have evolved
our approach to increase access to
more patients and consumers by tackling
affordability and availability barriers.
To maximise patient benefits and sustain
our business in Least Developed Countries
(LDCs), we have a lower price/higher
volume approach and have capped prices
of our products at 25% of developed
market levels.
We seek regulatory approvals for our
established products in developing
countries through our ‘catch up’
programme to bridge the gap in access
compared with developed countries.
Our investment in local manufacturing
and capability building also increases
the availability of locally relevant vaccines
and medicines.
We supply vaccines to Gavi, the Vaccine
Alliance, at significantly reduced prices
for use in the world’s poorest countries.
We have committed to provide Gavi with
more than 850 million vaccine doses at
reduced prices to help protect 300 million
children in the developing world by 2024.
We have also committed to a 10-year
price freeze to Gavi graduating countries.
By 2020, 22 countries with growing
economies will graduate from Gavi support.
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Responding to the Ebola outbreak
If it protects volunteers as hoped,
it could contribute significantly to
controlling this outbreak. Its future
use in mass vaccination campaigns
will depend on whether WHO,
regulators and other stakeholders are
satisfied that the vaccine candidate
provides protection against Ebola
without causing significant side effects
and how quickly large quantities of
vaccine can be made.
We are actively exploring with
relevant organisations and partners
all opportunities to accelerate the
development of manufacturing at an
industrial scale so that if the trials are
successful, we will be in a position to
significantly ramp-up production of the
vaccine candidate to help combat this
or future Ebola outbreaks.
Since the Ebola crisis began in March
2014, GSK has been working closely
with the World Health Organization
(WHO), regulators and other partners
to respond to the outbreak and to
accelerate development of our
investigational Ebola vaccine. We
are also contributing to the overall
humanitarian effort and taking steps
to support the small number of
employees we have in the region.
In phase I studies, our investigational
Ebola vaccine demonstrated an
acceptable safety profile and produced
an immunological response in healthy
adult volunteers. It is now being tested in
a large phase III clinical trial sponsored
by the National Institute of Health (NIH)
which began in Liberia in February 2015.
This trial is expected to involve up to
30,000 people, one-third of whom will
receive GSK’s candidate Ebola vaccine.
It will compare the candidate vaccine to
a control vaccine to assess whether the
immune response seen in phase I trials
actually translates into meaningful
protection against Ebola.
GSK Annual Report 2014 39
Governance & remunerationFinancial statementsInvestor informationStrategic report
Access to healthcare
continued
In the UK, we have taken a considered
approach to the pricing of Relvar Ellipta,
Anoro Ellipta and Incruse Ellipta, which
are priced and in line with, or less than,
other alternatives.
Strengthening healthcare systems
In the world’s poorest countries, the lack
of trained healthcare workers to diagnose
diseases and administer treatment is
preventing many patients from accessing
our life-saving medicines and vaccines,
regardless of the cost.
By reinvesting 20% of our profits in LDCs
to train front line healthcare workers, we
aim to improve access to healthcare for
20 million people by 2020. We have invested
£6 million in 2014 (based on 2013 profits)
and a total of more than £21 million since
the reinvestment programme began in
2009. The 25,000 healthcare workers
trained by our partners, Amref Health
Africa, CARE International and Save the
Children, in collaboration with country
ministries of health, have improved access
to healthcare for over 6.5 million people.
In addition to this, we have committed to
train an additional 10,000 health workers
in Kenya, Ghana and Nigeria by 2017, and
are currently supporting the UN-backed
One Million Community Health Workers
Campaign run by the Earth Institute at
Columbia University with a grant of
£500,000.
We provide additional support for
vulnerable communities through product
and financial donations. In 2014, our
contributions totalled £201 million
(£221 million in 2013). This included:
support for nearly 183,000 people through
Patient Assistance Programs in the USA;
858 million tablets of albendazole to
prevent lymphatic filariasis and soil-
transmitted helminths as part of our
commitment to combat neglected tropical
diseases, and £5.5 million of products
(valued at cost) to support humanitarian
aid in 78 countries, distributed through
our non-profit partners.
1st
GSK topped the Access to Medicine Index
for the fourth consecutive time. The Index
measures the performance of the top 20
pharmaceutical companies on their efforts
to improve access to medicines and
healthcare in developing countries.
Since the last Index in 2012, we have
taken further steps to help widen access
to our medicines. These include filing our
malaria vaccine candidate for regulatory
approval; forming a groundbreaking
five-year partnership with Save the
Children; launching an Africa NCD
Open Lab; and putting patients at the
centre of our sales and marketing efforts.
The overall 2014 total contribution
represents a decline, largely due to fewer
US patients enrolling in GSK’s patient
assistance programs, which is primarily
a result of new coverage options available
for patients via the Affordable Care Act.
Even with the new coverage options in
the USA, GSK continues to help support
patient access to our medicines and also
provides services to help interested and
potentially eligible enrollees understand
these alternative coverage options.
Partnership with Save the Children
Our partnership with Save the Children,
formed in 2013, aims to help save the
lives of one million children in the world’s
poorest countries by combining our
scientific expertise and global reach with
the charity’s on-the-ground knowledge.
Together we established two signature
programmes in Democratic Republic of
Congo (DRC) and Kenya that aim to tackle
challenges in the supply and demand of
effective healthcare and contribute to a
reduction in maternal, newborn and under
five deaths. We are exploring how an
antiseptic used in our Corsodyl mouthwash
can be reformulated to prevent infected
umbilical cords in newborns.
We are also investing in new formulations,
smaller packs and different distribution
models to make products more affordable
and available. Since we introduced
single-dose capsules to help respiratory
patients spread the cost for inhalers,
Ventolin Rotacaps has become the most
widely distributed GSK product in the
Philippines.
We have a tiered pricing approach for
prescription medicines and vaccines,
where countries pay different prices based
on their ability to pay, as determined by
Gross National Income (GNI) per person,
which will enable broad access to GSK
medicines and vaccines globally.
In middle income countries like Brazil,
Mexico, Indonesia and India, we work
with governments and other healthcare
providers to provide reimbursement or
payment assistance for patients who
cannot afford medicines such as Relvar
Ellipta, Benlysta or Revolade.
In developed markets, we have pioneered
novel reimbursement approaches to widen
access to our newer medicines and have
priced these at or below current treatments.
For example, in the USA the list price
for our diabetes medicine, Tanzeum, is
lower than medicines in the same class.
Diabetes affects nearly 21 million adults
age 20 and over, and nearly 60% of
patients with type 2 diabetes are on
multiple treatment therapies, each with
their own separate cost. We aim to be
mindful of healthcare costs, as we work
to increase access and affordability and
reflect the value our innovative, quality
medicines bring to patients.
Our giving in 2014
2%
7%
25%
66%
Cash
Product and in-kind
Time
Management
Total
£m
51
133
4
13
201
40 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
We are investing £25 million to create the
world’s first Africa Non-Communicable
Diseases Open Lab, where GSK
scientists and external researchers will
work together to improve understanding
of non-communicable disease variations
seen in African patients. It is hoped this
will enable researchers across academia
and industry to develop new medicines
to address the specific needs of African
patients. We will invest in up to 25
academic chairs or other forms of support
for students, programmes and research
across a range of healthcare related
disciplines. These initiatives are all to
promote the expansion of pharmaceutical
sciences, public health, engineering and
logistics at African universities.
To increase local capability and
capacity to manufacture medicines,
we are investing up to £100 million to
expand our existing facilities in Kenya
and Nigeria and build new factories
elsewhere to ensure the sustainable
production of medicines in Africa for
African people. These facilities will
make locally relevant products, including
antibiotics and respiratory and HIV
medicines, create jobs and boost
long-term economic prospects.
We will also work with partners to train
10,000 healthcare workers in Kenya,
Ghana and Nigeria in addition to
those trained in LDC’s through our
20% reinvestment programme.
We know that by sharing our insights and
collaborating with partners we have the
potential to make progress faster. Our open
innovation strategy offers external scientists
access to our compound library for TB and
malaria, and to our resources to promote
research into diseases of the developing
world. Since 2010, 50 external researchers
have worked alongside GSK scientists at
our Open Lab in Spain and have built up
a portfolio of 42 research projects.
Now we are applying the same open
innovation model to target other areas
of need where the traditional commercial
model is not appropriate. In 2014, we
announced plans to create the world’s
first Africa NCD Open Lab. We also
continue to collaborate with partners to
accelerate the development of new drugs
for Alzheimer’s disease and new antibiotics
to combat growing resistance.
Investing in Africa
GSK is investing in Africa to increase
access to medicines, build capacity
and deliver sustainable growth. Our
vision is to make GSK products available
to 80% of the population in sub-Saharan
Africa and least developed countries by
2020. This is not just philanthropy, it is
a new way of doing business.
Over the next five years, we will invest
£130 million in Africa. Working with
partners, we aim to provide a portfolio
of relevant products, support African
R&D expertise and increase local
manufacturing capacity and capability.
Innovation for diseases impacting
the developing world
We are committed to innovation for
diseases that disproportionately affect
the world’s poorest, even when there is
not the same potential for commercial
return on our R&D investment.
Our pipeline includes the world’s first
malaria vaccine candidate, filed for
regulatory approval in 2014, as well as
a vaccine candidate for tuberculosis (TB).
We are also accelerating the development
of an Ebola vaccine at an unprecedented
rate (see page 39). We received regulatory
approvals in respiratory, oncology, HIV/
AIDS and diabetes in 2014, which will
help address the changing health burden
in developing countries. All of these
innovations promise to deliver treatments
needed by some of the world’s most
vulnerable people.
GSK Annual Report 2014 41
Governance & remunerationFinancial statementsInvestor informationStrategic report Our behaviour
Putting the needs of patients and consumers first
We are changing the way we work to further
embed our values in everything we do.
We expect all of our employees to act
transparently, respectfully and with integrity
– and to put the interests of patients and
consumers first at all times.
We aim to put these core values at the
heart of everything we do and every
decision we make: from the way we
conduct our research, to our approach to
sales and marketing to the way we interact
with patients, doctors and policymakers.
Code of Conduct
Our Code of Conduct and accompanying
training, seeks to ensure everyone at
GSK understands how to put our values
into practice. Mandatory training on the
Code helps our employees gain the
confidence to make the right decisions
and report any concerns through our
Speak up programme.
Our Speak up programme offers people
within and outside GSK a range of
channels to voice concerns and report
misconduct without fear of reprisal.
These include telephone and internet
channels run by independent external
operators to enable anonymous reporting.
In 2014, we standardised how we monitor
contacts made to our global compliance
management system to report potential
allegations and ask questions, and we
significantly increased our monitoring
activities globally. This has led to an
increase from 1,865 contacts made
in 2013 to 3,203 contacts in 2014.
We updated the Code of Conduct in
2014 to reinforce the critical role our
values play in protecting our reputation
and commercial success, and we extended
it to cover our complementary workforce
who will be required to complete training
in 2015.
Suppliers are also expected to follow our
standards and we are increasing our focus
on responsible procurement with a new
initiative that will simplify and standardise
our approach to managing third-party risk
globally. This focus on supply chain risk
is also one of the key areas we need
to address as part of our ongoing
commitment to the UN Guiding Principles
on Business and Human Rights.
Rigorous patient and consumer safety
Patient safety is our number one priority
in the development, testing, manufacturing
and use of our products.
42 GSK Annual Report 2014
All medicines have potential risks as well
as benefits. Our robust policies and
governance framework help us detect
and act on any side effects that may be
associated with our medicines and we
put patient safety first in our clinical trials
wherever they take place.
All our trial protocols are reviewed by an
independent ethics committee that has
the power to reject or stop a trial, and we
maintain a global risk register to help our
research teams around the world monitor
quality and safety controls appropriately.
In 2014, we conducted 234 audits of our
trial sites and third parties carrying out trials
on our behalf to ensure high ethical quality
and safety standards.
We maintain strict quality and safety
standards at all our manufacturing sites.
Our quality culture puts the patient at the
centre of our efforts to deliver ‘right first
time’. It is also essential that the ingredients
and materials that go into our products
are safe and of high quality.
We expect our suppliers to uphold the
same high standards we set ourselves
and we monitor their performance through
our compliance processes and quality
risk assessments.
Counterfeit medicines, vaccines and other
healthcare products pose a significant
threat to patient and consumer safety as
well as to our reputation. Counterfeiting
is a crime and we work closely with
appropriate law enforcement and customs
agencies to combat large-scale, often
highly organised, counterfeiters.
In 2014, we introduced Fingerprint, an
end-to-end supply chain serialisation
programme that will apply unique serial
‘fingerprints’ on many of our products.
The unique identifiers will be recorded
in a database so the product can then
be scanned and verified against the
database at any point in the supply chain.
By the end of 2014, 48 packaging lines at
14 of our sites had serialisation capability.
Modernising sales and marketing
We are modernising the way we sell and
market our medicines, transforming the
business model the industry has had for
many years. We are changing how we
reward our sales representatives and
engage with healthcare professionals
(HCPs), to meet customer needs and
to ensure patients interests come first.
In 2014, we made good progress against
our commitments in three key areas,
announced in December 2013.
Our values
• Patient focus
• Integrity
• Respect for people
• Transparency
Firstly, in January 2015 we completed
the roll-out of changes to the way our
sales teams are compensated. Our sales
professionals around the world no longer
have individual sales targets, but instead,
are assessed and rewarded primarily based
on their technical skills, scientific
knowledge, quality of service they deliver
to HCPs, and broader business
performance. In the USA, GSK was
ranked first among major pharmaceutical
companies by HCPs on the value we
bring in our 2014 customer satisfaction
survey (see case study on page 21).
Secondly, we are changing how we support
education for doctors. Our commitment to
medical education remains unchanged, but
we will move away from direct sponsorship
of individual HCPs to arm’s length funding,
for example via third-party independent
medical organisations.
Thirdly, by 2016, we will no longer pay
HCPs to speak to other prescribers about
our medicines. Instead we are using other
channels, including digital and real-time
applications, to provide information about
our medicines and vaccines in the way
HCPs want it, when they want it.
The expert medical doctors we have within
GSK will also take on a role to talk and
answer questions about our medicines
with their peers. They will be responsible
for, and measured on, providing the right
information to support the safe and effective
use of our medicines.
Clinical research transparency
Sharing information on our clinical research
helps to build trust and supports further
research to benefit medical science and
patient care.
Since 2004, we have shared information
on our trials and results, regardless of
whether the outcomes might be considered
positive or negative, through an online
clinical study register.
Governance & remunerationFinancial statementsInvestor informationStrategic report Addressing misconduct
As part of our commitment to
transparency, we report annually on how
we have addressed misconduct within
our business. In 2014, we standardised
how we capture the number of contacts
made to our global compliance
management system which employees
can use to report potential allegations
and ask questions. This has led to an
increase from 1,800 contacts made
in 2013 to 3,200 contacts in 2014.
In 2014, 3,947 employees were
disciplined for policy violations (3,128
in 2013), the majority of these were for
attendance or payroll violations. Of the
total disciplined, 373 (375 in 2013)
were dismissed or agreed to leave the
company voluntarily. Policy violations
related to sales and marketing codes
accounted for 233 dismissals (161 in
2013). Of the total disciplined, 3,131
employees received a documented
warning (2,753 in 2013).
The primary reason for the increase
in the number of disciplinary cases
(particularly documented warnings
related to Code of Conduct violations)
was the increased number of reports
from China (652 in 2014, 48 in 2013).
The increases in China were related
to the investigation by the Chinese
authorities, the strengthening of
monitoring systems, and the introduction
of a quarterly knowledge test for sales
representatives. Failure to pass the test
results in the employee receiving a
documented warning. Employees in the
sales force who receive a documented
warning are disqualified from the sales
incentive programme for 12 months.
Employees who remain with the
company following a policy violation
receive retraining and increased
monitoring or support.
In some cases retraining is extended
to an employee’s colleagues to prevent
them from making similar mistakes.
Breaches of external codes
GSK was found to be in breach of
external industry or government
promotional codes 39 times in 2014
compared with 36 times in 2013.
23 breaches were for our Consumer
Healthcare products and were primarily
breaches of country specific regulations/
codes regarding local advertising
guidelines. The remaining breaches were
for our prescription products including
breaches for promotional materials and
advertising and breaches of local country
specific regulations/codes.
We investigate every breach of an
external code and take steps to prevent
a reoccurrence, which may include
retraining or other corrective action,
such as disciplinary action.
Types of policy violations
2014
3%
3%
6%
5%
5%
6%
8%
10%
11%
43%
Attendance/payroll
Code of conduct
Good manufacturing
practices/good
distribution practices
Local work regulation
violations
Marketing and
promotional activities
Training completion
Falsification of
documents
Travel and expenses
Fraud
Other
In 2013, GSK became the first company
to publish formal reports that are the basis
of submissions to regulatory agencies
known as Clinical Study Reports (CSRs).
The register now includes over 5,500
summaries and 180 CSRs.
expanded to include data from nine other
companies in 2014. Researchers must
submit their proposals to an independent
review panel to ensure the data will be
used appropriately and commit to
publishing the results of their work.
Following improvements to the design
and utility of the register, we have seen
an increase in the number of pages viewed
per visit and the duration of each visit.
We were the first company to provide
researchers with the detailed data that sit
behind clinical trials results. Researchers
can request access to detailed anonymised
patient-level data from over 1,000 of our
trials through an online system, which we
Anti-Bribery and Corruption
We are exposed to bribery and
corruption risk through our global
business operations. In some markets,
the government structure and the rule
of law are less developed, and this
has a bearing on our bribery and
corruption risk exposure. In addition
to the global nature of our business,
the healthcare sector is highly
competitive and subject to regulation.
This increases the instances where we
are exposed to activities and interactions
with bribery and corruption risk.
Given the complexity of our sector and the
challenges of working in global healthcare,
we will continue to face risks. Operating in
emerging markets is especially challenging
given the issues many of these countries
face with funding and maturity of their
respective healthcare systems. However,
we continue to believe that with robust
compliance systems and, by working closely
with local governments, our presence in
these markets can help improve access
to medicines and broader healthcare.
Our Anti-Bribery and Corruption (ABAC)
programme is designed to prevent
non-compliance through controls, practical
guidance and mandatory training. During the
year, all GSK employees and complementary
workers completed basic level training and
over 72,000 in high risk-roles completed
advanced ABAC training.
Our governance structures and strong
focus on responsible behaviour are designed
to prevent ethical breaches. But sometimes
things can still go wrong. If that happens,
we act promptly and decisively.
In September 2014, GSK China Investment
Co. Ltd (GSKCI) was found guilty,
according to Chinese law, of bribing
non-government personnel. This verdict
followed investigations initiated by China’s
Ministry of Public Security in June 2013
and included a fine of £301 million.
This has been a deeply disappointing
matter for us. The illegal activities of
GSKCI are a clear breach of GSK’s
governance and compliance procedures.
They are wholly contrary to the values and
standards expected from our employees.
We have published a statement of apology
to the Chinese government and its people
on our website.
Our focus is on learning from this issue.
We have taken steps to comprehensively
rectify the issues identified at GSKCI,
including changing engagement activities
with healthcare professionals and expanding
our review and monitoring of invoicing and
payments. We will use robust compliance
systems and work closely with government
to continue to innovate, improve access to
medicines and establish GSKCI as a model
for reform in China’s healthcare industry.
We have also sought to apply appropriate
lessons to our operations elsewhere, but,
given the complex global environment in
which we operate, we will continue to
face risks.
GSK Annual Report 2014 43
Governance & remunerationFinancial statementsInvestor informationStrategic report Our people
Respect for people is one of GSK’s core values
To ensure we have the right people with the right
skills, we focus on talent, leadership, performance
and engagement.
Engaging employees in our mission,
values and strategy gives everyone at
GSK a clear sense of how they can help
drive the business forward. Our CEO
and members of the Corporate Executive
Team (CET) keep employees informed
about our strategy and progress throughout
the year. We also encourage employee
feedback to improve their experience.
In 2014, we conducted interim surveys
covering around 33,000 employees that
indicated our managers were leading our
people more effectively.
Engagement and formal consultation with
employees and representatives, such as
unions and works councils, is particularly
important during periods of restructuring.
We continue to work closely with these
groups during the proposed three-part
transaction with Novartis which will lead
to considerable change. Around 12,000
Novartis employees will join our business
and employee transfers will take place
in around 80 countries. A key priority
is to limit the number of redundancies,
offer support where redundancies are
unavoidable and assist in cases where
employees need to find new employment.
Health, safety and resilience
We take a progressive approach to
protecting the health and wellbeing
of our people with a focus on sustaining
a strong health and safety culture.
Over the last ten years, we have more
than halved our reportable injury and
illness rate. In 2014, we reduced this
figure by 4% to 0.26 incidents per
100,000 hours worked. This means we
have achieved our 2015 target a year early.
Our health and safety culture seeks to
ensure employees are aware of health
and safety risks. In 2014, we continued
to invest in leadership training to help
leaders from 30 countries manage such
risks more effectively.
Recognising the challenge of balancing
personal and professional responsibilities,
we run Energy & Resilience programmes
globally to help our employees lead
healthier lives, at home and at work.
Since 2012, 16% of our global workforce
across 45 countries have participated in
this initiative. We plan to increase
participation in 2015.
42%
Women in management positions
50%
reduction in injury and illness rate
over the last 10 years
Our groundbreaking global Partnership
for Prevention (P4P) programme aims
to create a healthier workforce and
differentiate GSK as an employer.
P4P offers up to 40 preventive healthcare
services – such as immunisations, cancer
screenings and preventive examinations
– to employees and their families. We
are the only multinational company to offer
such benefits on this scale and we are
making good progress towards our target
to implement P4P globally by 2018.
Inclusion and diversity
As an inclusive employer we value the
different perspectives, experiences and
working styles of our global workforce.
We aim to improve gender balance at
all levels of our organisation. In 2014,
we focused on creating opportunities
for women in management. The proportion
of women in management continued to
increase to 42% (see page 45). Women
continued to represent 21% of our CET
and 31% of our Board. GSK ranked joint
fifth in the UK Government’s 2014 report
on women’s representation on the boards
of FTSE 100 companies.
Our employee-led Women’s Leadership
Initiative brought together, both virtually
and at regional hubs, 1,500 people and
over 20 GSK senior leaders at an inaugural
global conference in 2014 to encourage
action on women’s career development.
Our coaching and sponsorship programme
supported 118 female managers complete
individual and group coaching sessions.
We also encourage senior leaders to
sponsor female managers to support
their career development.
Talent and leadership
We are working hard to attract, develop
and retain the skilled and talented people
we need at all levels of our organisation.
For employees in the early stage of their
careers, we offer many opportunities,
including apprenticeships, internships
and graduate schemes. We are on track
to achieve our global target to recruit
450 students a year onto our early
talent programmes by 2015.
Acknowledging our global commitment
to increasing our apprentice population,
we have decided to include them in our
early talent community, alongside our
Future Leaders (graduates) and Esprit
(post-graduate) programme participants.
Our leadership development programmes
provide employees at all levels with the
skills they need to become effective
leaders – from Management Essentials,
for those new to management, to the
more advanced Leading Business for
our experienced leaders. Our coaching
programmes helped 4,034 participants
strengthen their leadership capabilities
in 2014. See our case study on page 45
for more information on our approach
to leadership.
In addition, our flagship PULSE Volunteer
Partnership enables employees to work
full time with a non-profit organisation
or charity for three or six months. This
experience adds a new dimension to the
development of our people and provides
insights and expertise to organisations
working to address major healthcare
challenges. Since 2009, we have sent
482 employees from 51 countries to work
with 94 non-profits and provided over
£16 million worth of skilled services to
our partners. In 2014, 98 employees
volunteered with 39 organisations.
Performance and engagement
We are improving the way we manage
employees’ performance. Our new global
performance system sets clear objectives,
aligns with delivering our strategy and is
underpinned by the six GSK Expectations
that promote individual responsibility
by defining what we require of everyone
at GSK. By putting more emphasis on
results and the way results are achieved,
it strengthens the connection between
individual performance and reward.
44 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Creating a pipeline of strong leaders at all levels of our business
We support our leaders in developing
best-practice management capabilities
and values-based decision making,
through a range of leadership
programmes. These clarify what is
expected of our leaders in delivering
our strategy of helping our patients
and customers do more, feel better
and live longer.
Strengthened by the common language
created through our GSK Leadership
Expectations, our leadership programmes
also ensure we have exceptional and
diverse leaders at all levels of the business.
Our Management Essentials and First
Line Leader programmes provide new
managers with a thorough grounding
in essential management responsibilities.
The Leading Delivery programme helps
our middle managers – those ‘leading
managers’ – to translate our business
strategy into action, drive performance,
build capabilities and enhance trust with
their team members and colleagues.
For experienced, high-potential leaders,
our Leading Business programme equips
them to manage and support diverse,
cross-cultural and high-performing
teams, while translating our strategy into
effective actions for their business units.
Over an 18-month period, participants
undertake an immersive experience in
Mumbai and London focusing on
balancing their numerous leadership
responsibilities.
The small number of leaders
demonstrating the business acumen
and leadership capabilities to be
appointed to our CET or one of its
direct reports, participate in our
Enterprise Leadership programme,
a highly customised two-year global
learning experience.
In 2014, we introduced a new
programme to enable our female leaders
to enhance their network, clarify their
career ambitions and build their
confidence to become strong senior
leaders. We believe this programme
helps our organisation to make better
decisions by further reducing risk and
increasing innovation.
Women in management positions (%)
SVP/VP
Director
Manager
Total
2010 2011 2012 2013 2014
29
40
45
42
26
38
42
39
25
37
42
38
27
39
43
40
28
40
44
41
Employees by gender (number)
Board
Managementa
Total
Male Female
5
7,201
55,620 42,301
10
9,899
Total
15
17,100
97,921
a Management: senior managers as defined in
the Companies Act 2006 (Strategic Report
and Directors’ Report) Regulations 2013,
which includes persons responsible for planning,
directing or controlling the activities of the
company, or a strategically significant part
of the company, other than the Board,
including directors of undertakings included
in the consolidated accounts.
The people we employ in Emerging
Markets, Asia Pacific and Japan represent
44% of our workforce. In 2014, our
consumer healthcare business in India
and pharmaceutical business in Latin
America made particularly good progress
in attracting and developing local talent.
We also increased the proportion of people
from emerging markets participating in
our development programmes and joining
the company through our graduate and
MBA programmes.
We are also working hard to ensure we
understand the needs of people with
disabilities when developing employment
opportunities and have established a Global
Disability Council to support our aim to
become a disability confident organisation.
As a founding member of business
disability international, a social enterprise
involving other global businesses, GSK
is helping develop global standards to
measure business’s disability performance.
To ensure our leadership teams represent
the diverse markets we serve, we are
building a talent pipeline that includes
people from a range of cultural and ethnic
backgrounds. Currently, eight nationalities
are represented on the Corporate
Executive Team and Board.
GSK Annual Report 2014 45
Governance & remunerationFinancial statementsInvestor informationStrategic report
Our planet
Reducing our environmental impacts
We have set ambitious goals to reduce carbon,
water and waste across our value chain.
Carbon
We aim to achieve a carbon neutral
value chain by 2050. We are reducing
operational carbon emissions and
engaging suppliers, patients and
consumers to cut emissions associated
with sourcing raw materials and use
of our products.
In 2014, we reduced our Scope 1 and
2 emissions, those within our operations,
by 11% to 1.6 million tonnes of CO2e.
This is a 19% reduction compared with
2010. Our Scope 3 emissions, such as
those associated with raw materials,
logistics, business travel and use of our
metered dose inhalers (that use an HFA
propellant), increased by 2% in 2014.
This is an increase of 17% compared to
2010. Tackling our Scope 3 emissions
continues to be a challenge as the sales
of our propellant-based inhalers continue
to grow.
Reducing energy use and the carbon
emissions associated with generating
the energy we purchase, is key to cutting
our operational carbon impact. To address
this, we are investing in renewable energy
infrastructure and using waste as fuel for
energy. For example, at our Cork site in
Ireland we have installed a 150-metre wind
turbine that will cut the site’s electrical
carbon footprint by 30% and which has
already saved over £900,000 in energy
costs in 2014.
Helping our suppliers reduce their
carbon emissions is critical to achieving
our value chain carbon goal and to better
understand the impacts here. In 2014,
we collected carbon, as well as water
and waste, data from over 200 of our
largest materials suppliers.
Patient or consumer use of our products,
such as metered dose inhalers, accounts
for 46% of carbon emissions across
our value chain. Our inhaler recycling
scheme, Complete the Cycle, now running
in six countries, allows us to reduce waste
sent to landfill and prevent any remaining
inhaler propellant being released as
greenhouse gas.
Water
In 2014, we cut our operational water use
by a further 5%. This represents a 20%
reduction from the 2010 baseline and
means we have met our 2015 target to cut
operational water use by 20% a year early.
Measuring and reducing our wider water
impact across the value chain – not just
the amount we use – is more challenging
but in 2014 we completed an extensive
assessment to prioritise our future efforts
in this regard.
We use just under 15 million m3 of
water per year in our operations and
systematically audit our sites to identify
opportunities to cut usage. In 2014, we
cut water use by an average of 10% at
four of our higher-use sites. We have
worked with the Carbon Trust to pilot
new ways to reduce water impacts in
our sites, and piloted this approach
in eight sites in 2014.
External benchmarking
GSK is the only pharmaceutical company
to have achieved the Carbon Trust’s
standards for cutting carbon emissions
and water use.
REDUCING WATER
YEAR ON YEAR
GSK is one of only two pharmaceutical
companies to be included in CDP’s FTSE
350 Climate Disclosure Leadership Index.
Our supply chain, particularly where
we are sourcing raw materials, uses
an estimated 1,200 million m3 of water.
We have partnered with TERI, an NGO
in India, to develop a diagnostic water
impact tool. In 2014, we used this to
identify opportunities for 10 of our largest
suppliers to reduce their water impacts.
In 2015, we will work with our suppliers
and TERI to extend this process to
a further 20 suppliers.
Tonnes CO2ea
Scope 1 emissions
Scope 2 emissions
Scope 3 emissions
2011
2012
2010
2013
1,011,180 1,035,856 1,016,983 1,040,928
767,710
2014
877,037
726,469
777,669
11,712,125 11,857,189 12,299,391 12,397,550 12,526,801
964,215
881,101
Intensity ratios
Scope 1 and 2 emissions/
sales revenue (tonnes CO2e/£m)
Scope 1 and 2/FTE
(tonnes CO2e/FTE)
2010
2011
2012
2013
2014
69.6
70.0
67.9
68.2
20.5
19.7
18.0
18.2
69.7
16.4
a Carbon emissions are calculated according to the Greenhouse Gas Protocol: A Corporate Accounting
and Reporting Standard (revised edition).
46 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Waste
With a goal to halve operational waste
by 2020, we are actively eliminating,
reusing and recycling waste, as well as
generating energy from waste. In 2014,
we generated 159,000 tonnes of waste
from our operations, 4% less than in 2013
and 11% less than 2010. We continue to
explore ways to cut waste to bring us back
on track to achieve our target.
Only 6% of our total waste went to landfill
in 2014, and three more sites achieved zero
waste to landfill status, bringing the total to
48. This means 50% of our manufacturing
and major research and development sites
send zero waste to landfill. We are on track
to hit our 2015 waste-to-landfill target, but
we have more work to do to achieve zero
to landfill at all our sites by 2020. While
we recognise the need to continue
reducing waste, complex regulatory
environments can mean it takes several
years to make the required improvements
to manufacturing processes.
Rather than sending waste to landfill,
we focus on reusing waste where possible,
or recycling it or incinerating it to generate
energy. The proportion of waste that is
recycled or disposed of with a positive
benefit has increased from 71% in 2010
to 75% in 2014.
Reducing environmental impacts while improving
access to medicines
At our amoxicillin production site,
Quality Road, in Singapore, we are
introducing a new process that will
eliminate chlorinated solvents, cut the
amount of waste produced and reduce
carbon emissions. We are using
unrecoverable solvent waste as fuel
to generate electricity and steam at
Jurong, our other factory in Singapore.
At our site in Worthing UK, we formulate
and package the antibiotic, Augmentin,
from amoxicillin and clavulanic acid.
By putting six tablets in each foil blister
strip, instead of four, we have reduced
foil use by 30% and pack size by 25%,
enabling us to put more packs on
each pallet.
Antibiotics have the third biggest
carbon footprint of our products based
on volume sold. We have been on a
journey to change the way we make
them, looking for ways to save energy,
cut water impact and waste, improve
yields and reduce costs. We have
achieved a 15% reduction in our
antibiotics carbon footprint per pack
over the last five years, while increasing
production volumes by 40%.
In Irvine, Scotland, where fermentation
takes place to make penicillin and
clavulanic acid, we have introduced
wind turbines and two combined heat
and power plants to reduce carbon
emissions from energy use. We have
also installed an anaerobic digester that
treats fermentation waste to generate
biogas used to fuel a 1MW combined
heat and power plant that will save the
site £1.4 million a year. Together, these
changes mean Irvine is now producing
around 40% more product using just
5% more energy and the same amount
of water as in 2010, with a 10%
reduction in carbon emissions.
GSK Annual Report 2014 47
Governance & remunerationFinancial statementsInvestor informationStrategic report Group financial
review
Our Group financial review discusses
the financial architecture, the operating
and financial performance of the Group,
our financial resources and returns
to shareholders.
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hundreds of thousands of doses of Synflorix each year for
use around the world.
48 GSK Annual Report 2014
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GSK Annual Report 2014 49
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Group financial review
CFO’s statement
Our financial architecture
is designed to support the
execution of our strategy
and to enhance returns
to shareholders.
2014 highlights
£23.0bn
Sales
Down 3% CER excluding divestments
(Down 7% CER including divestments)
95.4p
Core earnings per share
Down 1% CER excluding divestments
57.3p
Total earnings per share
Down 40% CER
2014 simplification
highlights
£3.5bn
Cumulative annual savings from
restructuring achieved since 2008
93 markets
Already supported by Core Business
Services, representing 65% of GSK sales
26%
Proportion of GSK sales that is already
running on the new global ERP platform
50 GSK Annual Report 2014
2014 was clearly a challenging year with
a number of factors combining to create
significant headwinds for us, particularly
the greater than expected contracting and
competitive pressure in our US respiratory
business, the launch of Lovaza generics
and the supply disruption we saw in our
Consumer Healthcare business through
most of the year.
Despite these pressures, we saw strong
performances from a number of other
areas of the business, further progress
in R&D delivery, multiple new product
launches as well as continued delivery
of operating and financial efficiencies
through the restructuring of our cost base.
At the same time, we also protected the
investments we need to make across our
business behind our new launches and
other future growth drivers.
Financial architecture
Our financial architecture is designed
to support the consistent execution of
our strategy and to enhance the returns
it delivers to shareholders.
It is focused on delivering more sustainable
sales growth across the company, improving
our operating leverage or profitability and
enhancing our financial efficiency. This is
in order to drive growth in EPS ahead of
our sales performance and then convert
more of those earnings into cash that we
can use to invest in the business or return
to shareholders wherever we see the most
attractive returns.
This clear set of priorities ensures
consistency in how we allocate our capital
across the different businesses within
GSK. Investment decisions are rigorously
benchmarked using a Cash Flow Return
on Investment (CFROI) framework.
Sales performance
Sales in 2014 declined by 3% CER
excluding divestments. This decline
reflects the significant headwinds from
US respiratory, Lovaza generics and
some supply disruption in Consumer.
On the positive side, we saw strong
progress in several parts of the business
that we have been investing in, especially
ViiV Healthcare, up 15%, and Emerging
Markets, up 5%. Our oncology portfolio,
boosted by new product launches, also
grew strongly, up 33%.
Operating leverage
Our ability to deliver operating leverage or
improved profitability is heavily impacted by
the overall trend in sales, but it is particularly
affected by changes in the mix of regional
or product contributions. These were a
significant factor in 2014, with the sales
decline driven primarily by higher margin
US products such as Advair and Lovaza.
As a result, core operating profit in 2014
was 6% lower than in 2013 in CER terms
on a turnover decline of 3%, despite
around £400 million of incremental cost
savings being delivered in the year from our
various restructuring initiatives and ongoing
cost reduction efforts.
Some of these savings were reinvested
into new launches and improvements to
our manufacturing capabilities and capacity,
in line with our strategic priorities. The
balance was not sufficient however to offset
the impact of mix changes and lower sales.
As a result, the core operating margin of
28.7% was 1.7 percentage points lower
than in 2013 and excluding currency effects,
the margin decreased 0.8 percentage
points. This primarily reflected the increase
in SG&A as a percentage of sales despite
the 2% decline in actual spend.
We remain focused on managing our
cost base more effectively. Our Operational
Excellence programme initiated in 2007
has now been completed, delivering
£2.9 billion of annual savings. Together
with our major change programme
announced in 2013, we have delivered
£3.5 billion of annual savings to date.
In October 2014, we announced a further
programme to refocus our pharmaceuticals
business to deliver an additional £1.0 billion
of annual savings by 2017.
GSK financial architecture: driving improved returns to shareholders
Sales growth
Operating leverage
EPS
Financial efficiency
Free cash flow
Cashflow growth
Returns to
shareholders
Reducing complexity in our business
remains central to our strategy as it
allows us to enhance our efficiency,
reduce operating costs and improve
our consistency of execution. Reducing
complexity also allows us to create more
flexibility in our cost base so that as well
as releasing savings we can more easily
reallocate resources behind key
investment opportunities such as
our multiple new launches.
You can find details of simplification
initiatives throughout this report, from
the implementation of an end-to-end
supply chain to organisational redesign.
In addition to these initiatives, we have
been establishing Core Business Services
(CBS) to bring together our support
functions in order to streamline and
standardise functional support to the
business. Six CBS regional business
centres already support 93 markets,
representing 65% of GSK sales. Further,
the enterprise resource planning (ERP)
platform that we are implementing is
replacing a large number of separate
outdated IT systems across the company,
giving us common databases and
standard business processes that will
help us simplify our operations, drive
efficiencies and give us detailed analytics
to improve our day-to-day operations and
decision making.
Financial efficiency
In 2014, financial efficiencies delivered
significant value and contributed positive
leverage to our reported core EPS.
We have continued to take advantage of
an era of low interest rates to secure more
attractive long-term funding, without losing
flexibility. Overall we have reduced net
funding costs by 3 percentage points
since 2010. We continue to target a credit
rating of A1/P1. We believe this target
balances equity returns with the interests
of other stakeholders, including our bond
holders, while optimising our access to
the capital markets.
We also continue to align our tax strategy
with our evolving business profile and have
implemented a number of measures to
centralise our Pharmaceutical intellectual
property and product inventory ownership
in the UK. This has helped us to reduce our
core tax rate from 23.0% in 2013 to 19.6%
in 2014. The lower tax rate in 2014 also
reflects the resolution of a number of
matters that benefited the year.
Returns to shareholders
GSK’s commitment is to use free cash
flow to support increasing dividends over
the long term, undertake share repurchases
or, where returns are more attractive,
reinvest in the business, including bolt-on
acquisitions. The decision as to how to
allocate such cash flow is rigorously
benchmarked using a returns-based
framework based on CFROI comparisons.
Earnings per share
The increased flexibility that our
restructuring programmes and financial
efficiencies have delivered allowed us to
offset a substantial proportion of the top
line pressure during the year and deliver
core EPS down 1% while also protecting
investments in the business.
Total EPS 57.3p (down 40%) primarily
reflects non-cash adjustments to the
contingent consideration due in relation to
ViiV Healthcare as a result of the improved
sales outlook for Tivicay and Triumeq as
well as an unfavourable comparison with
product and asset disposal gains in 2013.
Cash conversion
The business remains highly cash-generative
and we continue to focus on improving
conversion of earnings into cash through
greater focus on cash generation, working
capital control and capital allocation.
Net cash inflow from operations was
£5.2 billion for the year (down 28% in
Sterling terms). This reflected the negative
impact of the strength of Sterling as well
as lower profits, including the impact of
divestments. The currency effect abated
in the fourth quarter, which also saw an
improved working capital position.
In 2014, we returned £4.1 billion of cash
to shareholders, including £3,843 million
in dividends and £238 million in share
repurchases. The total ordinary dividend
declared for 2014 is 80p per share, a 3%
increase over 2013. The dividend per share
for the full year 2015 is expected to be
maintained at the same level as 2014.
Following the completion of the Novartis
transaction, GSK intends to return to
shareholders £4 billion of the net
proceeds. The company does not expect
to make any ordinary share repurchases
in 2015.
Future shape of the business
The proposed three-part transaction with
Novartis accelerates our strategy and also
clearly meets the objectives of the financial
architecture. In particular, it will provide
a better balanced and broader range of
growth drivers, significant synergy and
operating leverage efficiencies, continued
financial efficiencies and a more balanced
and sustainable cashflow.
The closure of the transaction remains
on track for completion in the week
commencing 2 March 2015.
A fuller review of the financial results
is set out on pages 52 to 70.
Simon Dingemans
Chief Financial Officer
GSK Annual Report 2014 51
S
t
r
a
t
e
g
c
i
r
e
p
o
r
t
G
o
v
e
r
n
a
n
c
e
&
r
e
m
u
n
e
r
a
t
i
o
n
F
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
I
n
v
e
s
t
o
r
i
n
f
o
r
m
a
t
i
o
n
Core CER growth rates for 2014 are calculated compared with
2013 core results excluding divestments unless otherwise stated.
Reconciliations of core results to total results are presented
on page 61.
Core results reporting aligns business performance reporting
around the underlying trading performance of the Group and its
primary growth drivers by removing the volatility inherent in many
of the non-core items.
Core results reporting is utilised as the basis for internal
performance reporting and the core results are presented and
discussed in this Group financial review as we believe that this
approach provides investors with a clearer view of the underlying
trading performance of the Group. We also believe that this
approach should make the Group’s results more comparable
with the majority of our peers, many of which use similar forms
of underlying performance reporting to discuss their results,
although the precise calculations may differ. The Group financial
review also presents and discusses the total results of the Group.
Free cash flow
Free cash flow is the net cash inflow from operating activities less
capital expenditure, interest and dividends paid to non-controlling
interests plus proceeds from the sale of property, plant and
equipment and dividends received from joint ventures and
associated undertakings. Free cash flow growth is calculated
on a Sterling basis. A reconciliation is presented on page 68.
Working capital conversion cycle
The working capital conversion cycle is calculated as the number
of days sales outstanding plus days inventory outstanding, less
days purchases outstanding.
In order to illustrate underlying performance, it is our practice
to discuss the results in terms of constant exchange rate (CER)
growth. This represents growth calculated as if the exchange
rates used to determine the results of overseas companies in
Sterling had remained unchanged from those used in the previous
year. CER% represents growth at constant exchange rates. £%
represents growth at actual exchange rates.
Group financial review
Group performance
Our Group financial review discusses the operating and financial
performance of the Group, the financial outlook and our financial
resources. We compare the results for each year primarily with
results of the preceding year.
In order to illustrate underlying performance, it is our practice
to discuss the results in terms of constant exchange rate (CER)
growth. This represents growth calculated as if the exchange
rates used to determine the results of overseas companies in
Sterling had remained unchanged from those used in the previous
year. CER% represents growth at constant exchange rates.
£% represents growth at actual exchange rates.
All growth rates included in this Report are at constant
exchange rates (CER) unless otherwise stated. CER growth
is discussed below.
We use a number of adjusted measures to report the performance
of our business. These measures are used by management for
planning and reporting purposes and in discussions with and
presentations to investment analysts and rating agencies and
are defined below. These measures are not defined in IFRS and
may not be comparable with similarly described measures used
by other companies.
Core results reporting
During 2014, we have reported core results performance
measured against 2013 core results excluding divestments
completed during 2013.
Core results exclude the following items from total results:
amortisation and impairment of intangible assets (excluding
computer software) and goodwill; major restructuring costs,
including those costs following material acquisitions; legal
charges (net of insurance recoveries) and expenses on the
settlement of litigation and government investigations; other
operating income other than royalty income; disposals of
associates, products and businesses, and acquisition
accounting adjustments for material acquisitions, together
with the tax effects of all of these items.
In addition, the charge for an additional year of the US Branded
Prescription Drug fee, in accordance with the final regulations
issued by the IRS during the year, has been recorded as a
non-core item. The normal ongoing charge remains in core
results.
Major restructuring costs charged in arriving at operating
profit include:
• costs arising under the Operational Excellence restructuring
programme, initiated in 2007 expanded in 2009, 2010
and 2011 and substantially complete at the end of 2014
• the Major Change restructuring programme initiated in 2013
• restructuring costs following the acquisitions of Human
Genome Sciences, Inc. in August 2012 and Stiefel
Laboratories, Inc. in July 2009
• a Pharmaceuticals restructuring programme, announced
in October 2014, which will rescale commercial operations,
global support functions and the relevant R&D/manufacturing
operations across Pharmaceuticals following the proposed
divestment of Oncology products and the changed dynamics
in the US respiratory market.
52 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Financial review 2014
Group turnover by business
Pharmaceuticals and Vaccines – USA
Turnover £bn
Growth
CER%
Growth
£%
2012
2013
2014
Pharmaceuticals
Vaccines
Pharmaceuticals
and Vaccines
Consumer Healthcare
Divestments
Total
2013
(restated)
£m
2014
£m
15,478
3,192
17,426
3,420
18,670
4,336
23,006
–
23,006
20,846
4,756
25,602
903
26,505
Growth
CER%
Growth
£%
(5)
(1)
(4)
(1)
(3)
–
(3)
(11)
(7)
(10)
(9)
(10)
–
(10)
CER% represents growth at constant exchange rates. £% represents
growth at actual exchange rates.
Total Group turnover for 2014 declined 3% to £23,006 million.
Pharmaceuticals and Vaccines turnover fell by 4%.
Pharmaceuticals turnover declined 5% as growth in Emerging
Markets, Japan and ViiV Healthcare was more than offset by
lower sales in the US and in Established Products. Europe
Pharmaceuticals was flat for the year. Worldwide Vaccines
turnover declined 1%, as a positive performance in Emerging
Markets was more than offset by lower reported sales in Europe
and Japan. US Vaccines sales were flat. Consumer Healthcare
turnover was £4,336 million in the year, down 1% compared
with 2013.
Group turnover by geographic region
US
Europe
Emerging Markets
Japan
Other
2013
(restated)
£m
2014
£m
7,340
6,412
6,193
1,608
1,453
23,006
8,620
6,862
6,579
1,886
1,655
25,602
(11)
(2)
4
(3)
(4)
(3)
(15)
(7)
(6)
(15)
(12)
(10)
Group sales outside the USA and Europe accounted for 40% of
total turnover and reported growth of 2%, adversely impacted by
a sales decline in Japan and weaker market conditions and some
supply constraints in Emerging Markets.
Group turnover by segment
2013
(restated)
£m
2014
£m
Growth
CER%
Growth
£%
4,980
4,035
3,203
937
1,498
3,011
Pharmaceuticals and Vaccines:
US
Europe
Emerging Markets
Japan
ViiV Healthcare
Established products
Other trading and
unallocated pharmaceuticals 1,006
Pharmaceuticals
and Vaccines
Consumer Healthcare
18,670
4,336
23,006
5,817
4,226
3,370
1,058
1,386
3,874
1,115
20,846
4,756
25,602
(10)
–
5
1
15
(16)
(1)
(4)
(1)
(3)
(14)
(5)
(5)
(11)
8
(22)
(10)
(10)
(9)
(10)
Total Group turnover for 2014, including divestments completed
in 2013, was down 7%, with Pharmaceuticals and Vaccines down
6% and Consumer Healthcare down 11%.
5.5
5.8
5.0
08
07
06
05
04
03
02
01
0
2012
2013
2014
Operating profit £bn
08
07
06
05
04
03
02
01
0
3.7
4.0
3.2
22%
of Group turnover
(10)%
CER growth
£3.2bn
Operating profit
(16)%
CER growth
Breakdown of turnover
Respiratory
Oncology
Cardiovascular, metabolic and urology
Immuno-inflammation
Other pharmaceuticals
Vaccines
£m
2,810
509
364
196
171
930
Growth
CER %
(18)
41
(16)
39
(31)
–
Performance
In the US, Pharmaceuticals and Vaccines turnover declined 10%
to £4,980 million, with Pharmaceuticals down 12% and Vaccines
flat. Pharmaceutical sales were impacted by continued price and
contracting pressures, primarily affecting respiratory sales, which
were down 18% (11% volume decline and a 7% negative impact
of price and mix). Sales of Advair were down 25% (14% decline
in volume and an 11% decline from price and mix).
Oncology products in the US contributed strongly in the year,
with sales up 41% to £509 million, benefiting from strong
performances from Votrient and Promacta, and the recent
launches of Tafinlar and Mekinist. Benlysta sales grew 22% to
£155 million. Generic competition in the US continued to impact
sales of Dermatology products, which declined 56% to £49 million
and Mepron, which declined 49% to £40 million. Sales of Infanrix/
Pediarix grew 15% to £297 million, benefiting from favourable
CDC stockpile movements compared with 2013 and the absence
of a competitor, particularly in the first half of the year. Sales
of hepatitis vaccines were down 6% to £234 million impacted
by supply constraints. Boostrix was down 7% to £163 million
reflecting the return to the market of a competitor during the
year and some supply constraints. Rotarix fell 16% to £86 million
as a result of a CDC stockpile withdrawal during Q4 2014.
GSK Annual Report 2014 53
Governance & remunerationFinancial statementsInvestor informationStrategic report
Group financial review
continued
Pharmaceuticals and Vaccines – Europe
Pharmaceuticals and Vaccines –
Emerging Markets
Turnover £bn
Turnover £bn
08
07
06
05
04
03
02
01
0
4.0
4.2
4.0
18%
of Group turnover
Flat
CER growth
08
07
06
05
04
03
02
01
0
3.3
3.4
3.2
2012
2013
2014
2012
2013
2014
Operating profit £bn
Operating profit £bn
08
07
06
05
04
03
02
01
0
2.1
2.3
2.2
2012
2013
2014
£2.2bn
Operating profit
2%
CER growth
08
07
06
05
04
03
02
01
0
1.1
1.0
1.0
2012
2013
2014
14%
of Group turnover
5%
CER growth
£1.0bn
Operating profit
16%
CER growth
Breakdown of turnover
Respiratory
Oncology
Cardiovascular, metabolic and urology
Immuno-inflammation
Other pharmaceuticals
Vaccines
£m
1,675
417
293
12
660
978
Breakdown of turnover
Growth
CER %
(3)
29
–
63
(4)
(2)
Respiratory
Oncology
Cardiovascular, metabolic and urology
Immuno-inflammation
Other pharmaceuticals
Vaccines
£m
777
169
145
3
1,053
1,056
Growth
CER %
3
30
20
>100
5
1
Performance
Europe Pharmaceuticals and Vaccines turnover was flat at
£4,035 million. Pharmaceutical sales were flat at £3,057 million,
as strong growth in Oncology and the Avodart franchise up 8%
to £280 million, was offset by a 3% decline in Respiratory sales.
The newly launched Relvar Ellipta recorded sales of £18 million
in the year but these were more than offset by lower sales of
Seretide, down 5% to £1,330 million (1% volume decline and a
4% negative impact of price), reflecting increasing competitive
pressures and the transition of the Respiratory portfolio to the
newer products, particularly in the latter part of the year. Oncology
sales were up 29% to £417 million, led by Votrient, Promacta and
the newly launched Tafinlar. Vaccines sales fell 2%, with lower
sales of Infanrix, Cervarix and flu vaccines, reflecting increased
competitive pressures, being only partly offset by sales growth
in a number of other products, including Boostrix, which was
up 26%, due in part to a competitor supply issue in the first half
of the year.
Performance
Emerging Markets Pharmaceuticals and Vaccines turnover
increased 5% to £3,203 million, with Pharmaceuticals up 7% and
Vaccines up 1%. Most markets outside Asia showed strong growth,
with notable performances from Brazil, up 12% to £380 million,
and the rest of Latin America, up 9% to £593 million. Sales in
China fell 1%, reflecting the effects of the government investigation
during the year. There was continued growth from Respiratory
products, up 3%, Oncology, up 30%, and the Avodart franchise,
up 20%. In Vaccines, growth from strong tender sales of Boostrix,
Rotarix and Synflorix was largely offset by lower sales of Cervarix,
as a result of some lost tenders, and some supply constraints.
54 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Pharmaceuticals and Vaccines – Japan
ViiV Healthcare
Turnover £bn
Turnover £bn
08
07
06
05
04
03
02
01
0
1.2
1.1
0.9
2012
2013
2014
4%
of Group turnover
1%
CER growth
08
07
06
05
04
03
02
01
0
1.4
1.4
1.5
2012
2013
2014
Operating profit £bn
Operating profit £bn
08
07
06
05
04
03
02
01
0
0.7
2012
0.6
2013
0.5
2014
£0.5bn
Operating profit
(2)%
CER growth
08
07
06
05
04
03
02
01
0
0.8
2012
0.9
1.0
2013
2014
7%
of Group turnover
15%
CER growth
£1.0bn
Operating profit
20%
CER growth
Breakdown of turnover
Respiratory
Oncology
Cardiovascular, metabolic and urology
Other pharmaceuticals
Vaccines
£m
475
65
114
256
27
Growth
CER %
(2)
17
14
1
(14)
Performance
Japan Pharmaceuticals and Vaccines turnover grew 1% to
£937 million, with Pharmaceuticals sales increasing 2% and
Vaccines sales declining by 14%. Pharmaceuticals sales benefited
from strong growth in Avodart, up 14% and Oncology products,
up 17%. This growth was partially offset by lower sales in the
Respiratory portfolio, down 2%, which was affected by a
weaker allergy season at the beginning of the year and increased
competitive pressures. The decline in Vaccines sales reflected
the impact on Cervarix of the continued suspension of the
recommendation for use of HPV vaccines, partly offset by
higher sales of Rotarix.
Breakdown of turnover
Combivir
Epzicom/Kivexa
Lexiva/Agenerase
Selzentry
Tivicay
Triumeq
Trizivir
Other products
£m
59
768
87
136
282
57
36
73
Growth
CER %
(46)
8
(17)
–
>100
–
(61)
(39)
Performance
ViiV Healthcare turnover grew 15% to £1,498 million as the growth
generated by Tivicay and Epzicom, together with the newly launched
Triumeq, more than offset the impact of generic competition to older
ViiV Healthcare products, including Combivir and Trizivir.
GSK Annual Report 2014 55
Governance & remunerationFinancial statementsInvestor informationStrategic report Group financial review
continued
Established Products
Turnover £bn
Consumer Healthcare
Turnover £bn
13%
of Group turnover
4.4
3.9
3.0
(16)%
CER growth
08
07
06
05
04
03
02
01
0
08
07
06
05
04
03
02
01
0
4.7
4.8
4.3
2012
2013
2014
2012
2013
2014
Operating profit £bn
Operating profit £bn
£1.8bn
Operating profit
(17)%
CER growth
08
07
06
05
04
03
02
01
0
0.8
2012
0.8
2013
0.7
2014
19%
of Group turnover
(1)%
CER growth
£0.7bn
Operating profit
(6)%
CER growth
08
07
06
05
04
03
02
01
0
2.5
2.4
1.8
2012
2013
2014
Breakdown of turnover
Imigran/Imitrex
Lamictal
Lovaza
Seroxat/Paxil
Valtrex
Zeffix
Other products
£m
172
531
240
210
154
166
1,538
Growth
CER %
(4)
3
(57)
(19)
(24)
(3)
(11)
Breakdown of turnover
Wellness
Oral health
Nutrition
Skin health
£m
1,596
1,797
633
310
Growth
CER %
(7)
4
10
(11)
Performance
Consumer Healthcare turnover was £4,336 million in 2014,
down 1% compared with 2013, reflecting the impact of a number
of supply interruptions during the year. Growth in Rest of World
markets of 4% was also affected by weaker market conditions,
while sales in Europe, down 5%, and the US, down 8%, were
more directly the result of supply issues.
Performance
Established Products turnover fell 16% to £3,011 million. Sales in
the US were down 31% to £854 million, Europe was down 13%
to £601 million, Emerging Markets was down 1% to £1,050 million
and Japan was down 15% to £444 million.
Generic competition to Lovaza, down 57% to £240 million,
Seroxat/Paxil, down 19% to £210 million and Valtrex, down
24% to £154 million, all contributed to the decline in the category.
56 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report In Europe, Oncology grew 29% to £417 million, led by sales
of Votrient, which increased by 23% to £153 million in the year.
Promacta grew 36% to £71 million and sales of Tafinlar were
£67 million.
In Emerging Markets and Japan, Oncology sales in the year
grew 30% to £169 million and 17% to £65 million, respectively.
Cardiovascular, metabolic and urology
Sales in the category fell 3% to £965 million. The Avodart
franchise grew 1% to £805 million, with 17% growth in sales
of Duodart/Jalyn and a 4% decline in sales of Avodart. Levitra
fell 28% to £100 million in the year. Sales of Prolia fell 10% to
£41 million due to the agreement in Q2 2014 with Amgen to
terminate the joint commercialisation in a number of European
markets, Mexico and Russia.
On a regional basis, the decline in the US of 16% to £364 million,
was partly offset by Emerging Markets, up 20% to £145 million,
and Japan, up 14% to £114 million. Europe was flat at £293 million.
Immuno-inflammation
Immuno-inflammation sales grew 40% to £214 million. Benlysta
turnover in the year was £173 million, up 25%. In the US, Benlysta
sales were £155 million, up 22%.
Other pharmaceuticals
Other therapy areas were down 2% at £2,407 million, principally
reflecting generic competition to Dermatology products, which
primarily affected sales of Soriatane in the US, and by a decline
in sales of Mepron in the Rare diseases category. These declines
were partly offset by growth in Relenza sales of 39%, primarily
in the US, and the inclusion of Theravance milestone income of
£57 million (2013 – £78 million).
ViiV Healthcare (HIV)
ViiV Healthcare sales increased 15%, with the US up 28%,
Europe up 6%, Japan up 35% and Emerging Markets down 4%.
Tivicay recorded sales of £282 million, Epzicom/Kivexa sales
increased 8% to £768 million but Selzentry sales were flat at
£136 million. The launch of Triumeq is well underway and it
recorded sales of £57 million in the year. This growth was partly
offset by declines in the mature portfolio, mainly driven by generic
competition to both Combivir, down 46% to £59 million, and
Trizivir, down 61% to £36 million.
Established Products
Established Products turnover fell 16% to £3,011 million. Sales in
the US were down 31% to £854 million, Europe was down 13%
to £601 million, Emerging Markets was down 1% to £1,050 million
and Japan was down 15% to £444 million.
Generic competition to Lovaza, down 57% to £240 million,
Seroxat/Paxil, down 19% to £210 million and Valtrex, down 24%
to £154 million, all contributed to the decline in the category.
Pharmaceuticals turnover
Respiratory
Oncology
Cardiovascular, metabolic
and urology
Immuno-inflammation
Other pharmaceuticals
ViiV Healthcare (HIV)
Established Products
2014
£m
6,181
1,202
2013
(restated)
£m
7,289
969
965
214
2,407
1,498
3,011
15,478
1,073
161
2,674
1,386
3,874
17,426
Growth
CER%
Growth
£%
(10 )
33
(3)
40
(2)
15
(16)
(5)
(15 )
24
(10)
33
(10)
8
(22)
(11)
Respiratory
Respiratory sales in 2014 declined 10% to £6,181 million.
Seretide/Advair sales were down 15% to £4,229 million,
Flixotide/Flovent sales decreased 6% to £702 million and
Ventolin sales grew 11% to £665 million. Xyzal sales, almost
exclusively made in Japan, grew 7% to £130 million.
In the US, Respiratory sales declined 18% (11% volume decline
and a 7% negative impact of price and mix), primarily reflecting the
continued price and contracting pressures in the market. Sales of
Advair were down 25% to £1,972 million (14% decline in volume
and an 11% decline of price and mix). Flovent sales were down
6% while Ventolin sales were up 18%, primarily reflecting the
impact of net favourable adjustments to previous accruals for
returns and discounts. Breo Ellipta recorded sales of £29 million
and Anoro Ellipta sold £14 million in the year.
European Respiratory sales were down 3%, primarily reflecting
increasing competition. Seretide sales declined 5% to
£1,330 million (1% decline in volume and a 4% negative impact
of price), reflecting increasing competitive pressures and the
transition of the Respiratory portfolio to the newer products in the
latter part of the year. Relvar Ellipta recorded sales of £18 million
in the year.
Respiratory sales in Emerging Markets grew 3%. Seretide grew
3% to £400 million, helped by an improved performance in China.
Sales growth of Ventolin, up 8% to £165 million, and Veramyst,
up 15% to £73 million, was offset by a 33% decline in Flixonase,
which was largely driven by lower sales in China.
In Japan, Respiratory sales fell 2% to £475 million. Sales of the
newly launched Relvar Ellipta of £17 million offset the impact
of increasing competitor action on Adoair, which fell 6% to
£228 million. The growth in Xyzal, up 8% to £114 million,
was more than offset by lower sales elsewhere in the
Respiratory portfolio.
Oncology
Oncology sales in 2014 grew 33% to £1,202 million. Votrient
sales grew 33% to £410 million and Promacta sales grew 34%
to £231 million. Arzerra sales fell 24% to £54 million and Tykerb/
Tyverb sales fell 11% to £171 million. Generic competition to both
Hycamtin and Argatroban was more than offset by new launches,
as Tafinlar and Mekinist recorded sales of £135 million and
£68 million, respectively.
In the US, Oncology grew 41% to £509 million. Votrient sales
grew 32% to £181 million and sales of Promacta grew 32% to
£91 million. Tafinlar and Mekinist sales were £58 million and
£67 million, respectively.
GSK Annual Report 2014 57
Governance & remunerationFinancial statementsInvestor informationStrategic report
Group financial review
continued
Vaccines turnover
Infanrix, Pediarix
Boostrix
Cervarix
Fluarix, Flulaval
Hepatitis
Rotarix
Synflorix
Other
Vaccines sales
2014
£m
2013
£m
Growth
CER%
Growth
£%
828
317
118
215
558
376
398
382
3,192
862
288
172
251
629
375
405
438
3,420
2
16
(26)
(9)
(6)
7
4
(6)
(1)
(4)
10
(31)
(14)
(11)
–
(2)
(13)
(7)
Vaccines sales fell 1% to £3,192 million with declines in Europe,
down 2%, and Japan, down 14% being partly offset by growth in
Emerging Markets of 1%. The US was flat. The Emerging Markets
performance primarily reflected the strength of Synflorix, Boostrix
and Rotarix.
Infanrix/Pediarix grew 2% to £828 million. Growth in the US
benefited from a favourable comparison with 2013, which was
impacted by a withdrawal from the CDC stockpile. This offset
declines in Europe and Emerging Markets.
Boostrix sales increased 16% to £317 million, reflecting growth
in all regions except the US. US sales fell 7% reflecting the return
of a competitor during the year and some supply constraints.
Cervarix sales declined 26% to £118 million in 2014, largely
reflecting declines in Emerging Markets and Japan and increasing
competitive pressures, particularly in the tender market.
Fluarix and FluLaval sales declined 9% to £215 million due to
lower production levels for 2014 and the impact of increased
competitive pressures.
Sales of hepatitis vaccines fell 6% to £558 million, in part
reflecting supply constraints that impacted the US and
Emerging Markets.
Rotarix sales were up 7% to £376 million, with growth driven by
tender shipments in Europe and Emerging Markets, partly offset
by a decline in the US, which was impacted by a CDC stockpile
withdrawal in Q4 2014.
Synflorix sales grew 4% to £398 million, primarily reflecting a
strong tender performance in Emerging Markets.
Sales from new pharmaceutical and vaccine launches
2014
£m
2013
£m
Growth
CER%
Growth
£%
67
17
135
68
230
6
173
9
282
57
19
398
1,461
8
–
16
10
209
–
146
17
19
–
12
405
842
>100
–
>100
>100
17
–
25
(47)
>100
–
69
4
84
>100
–
>100
>100
10
–
18
(49)
>100
–
55
(2)
74
Pharmaceuticals:
Respiratory:
Oncology:
CVMU:
Relvar/Breo Ellipta
Anoro/Ellipta
Tafinlar
Mekinist
Duodart/Jalyn
Eperzan/Tanzeum
Immuno-
inflammation: Benlysta
Other pharmaceuticals
ViiV Healthcare: Tivicay
Triumeq
Nimenrix
Synflorix
Vaccines:
58 GSK Annual Report 2014
New products are those launched in the last five years (2010
to 2014 inclusive). Sales of new products were £1,461 million,
grew 84% in the year and represented 8% of Pharmaceuticals
and Vaccines turnover. In Q4 2014, sales of new products were
£523 million, grew 78% and represented 10% of Pharmaceuticals
and Vaccines turnover.
In Q4 2013, Breo Ellipta was launched in the US for COPD,
and Relvar Ellipta was launched in Europe for COPD and asthma
in Q1 2014. In addition, Anoro Ellipta was launched in the US in
April 2014 for the treatment of COPD.
In Q3 2013, Tivicay was launched in the US and subsequently
launched in Europe in Q1 2014. Triumeq was launched in both
the US and Europe in Q3 2014.
Consumer Healthcare turnover
Wellness
Oral health
Nutrition
Skin health
USA
Europe
ROW
2014
£m
2013
(restated)
£m
Growth
CER%
Growth
£%
1,596
1,797
633
310
4,336
2014
£m
836
1,242
2,258
4,336
1,865
1,884
627
380
4,756
2013
(restated)
£m
951
1,392
2,413
4,756
(7)
4
10
(11)
(1)
(14)
(5 )
1
(18)
(9)
Growth
CER%
Growth
£%
(8)
(5)
4
(1)
(12)
(11)
(6)
(9)
Consumer Healthcare turnover was down 1% in 2014, reflecting
the impact of supply issues, comparison with a strong cold and flu
season in early 2013 and slowing markets in the Rest of World.
Estimated global market growth was approximately 3%.
Wellness
Wellness sales were £1,596 million, down 7%, primarily due to the
supply issues and product recalls that significantly impacted sales
of products for Smokers Health, down 29%, and alli.
Oral health
Oral health sales grew 4% to £1,797 million. The continued growth
of Sensodyne, up 11%, was partly offset by a 10% decline in sales
of Aquafresh which was impacted by supply issues in both Europe
and the US, together with increased competition.
Nutrition
Nutrition sales grew 10% to £633 million. Horlicks was up 11%,
reflecting continued growth in India, and Boost was up 9%.
Skin health
Sales of products for Skin health were down 11% to £310 million,
primarily due to lower sales of Bactroban in China.
Regional performance
Sales in the US and Europe were down 8% and 5%, respectively,
reflecting both supply issues and product recalls, primarily
affecting products for Smokers Health and alli. Growth in Rest
of World markets of 4% was restricted by a slower economic
environment, but did reflect some growth across most markets,
partly offset by a 5% reduction of sales in China and a 52%
decline in sales of Smokers Health products, both primarily
due to supply issues.
Governance & remunerationFinancial statementsInvestor informationStrategic report
Core results
We use the core reporting basis to manage the performance of
the Group and the definition of core results is set out on page 52.
A review of the Group’s total results is set out on pages 62 to 63.
The reconciliation of total results to core results is presented
on page 61.
Cost of sales
Cost of sales
2014
% of
turnover
(28.4)
£m
(6,535)
2013
(restated)
% of
Growth
£m
(7,075)
turnover CER% £%
(27.6)
(3)
(8 )
Core cost of sales as a percentage of turnover was 28.4%
compared with 27.6% in 2013. Net of adverse currency translation
effects, the cost of sales percentage increased 0.2 percentage
points. This reflected adverse price and mix movements,
particularly the decline in Pharmaceuticals sales in the US, the
costs of supply remediation activities and continuing investments
in new launch capacity and future manufacturing technology,
partly offset by the benefit of our ongoing cost reduction
programmes.
Selling, general and administration
2014
% of
turnover
£m
2013
(restated)
% of
Growth
£m
turnover CER% £%
Selling, general
and administration (7,074)
(30.7)
(7,749)
(30.3)
(2)
(9)
Core SG&A costs as a percentage of sales were 30.7%, 0.4
percentage points higher than in 2013. Excluding currency effects,
the SG&A percentage increased 0.5 percentage points, as SG&A
declined 2% on a turnover decline of 3%. The reduction in SG&A
reflected continued investments in our multiple new product
launches partly offset by the benefits of our restructuring
programmes and ongoing cost management efforts.
Advertising and promotion decreased 8% primarily reflecting
reduced activity in the Established Products category and ongoing
cost management efforts which were partly offset by new product
launches. Selling and distribution decreased 2% as investments
in product launches were offset by savings in from our ongoing
cost reduction programmes. General and administration expenses
increased 1% primarily due to higher phase IV expenditure, partly
offset by benefits from the restructuring programmes.
Research and development
2014
% of
turnover
£m
2013
(restated)
% of
Growth
£m
turnover CER% £%
Research and
development
(3,113)
(13.5) (3,394)
(13.3)
(4)
(8)
Core R&D expenditure declined 4% to £3,113 million (13.5%
of turnover) compared with £3,394 million (13.3% of turnover) in
2013. Excluding currency effects, the R&D percentage declined
0.1 percentage points, reflecting the phasing of ongoing project
spending as well as the completion of a number of programmes
and continuing cost management benefits.
We remain focused on delivering an improved return on our
investment in R&D. Sales contribution, reduced attrition and cost
reduction are all important drivers of an improving internal rate of
return. R&D expenditure is not determined as a percentage of
sales but instead capital is allocated using strict returns-based
criteria depending on the pipeline opportunities available.
The operations of Pharmaceuticals R&D are broadly split into
Discovery activities (up to the completion of phase IIa trials) and
Development work (from phase IIb onwards) each supported by
specific and common infrastructure and other shared services
where appropriate. Phase IV costs and other administrative
expenses are reported in SG&A and are not included in the
table below.
The table below analyses core R&D expenditure by these
categories:
Discovery
Development
Facilities and central support functions
Pharmaceuticals R&D
Vaccines R&D
Consumer Healthcare R&D
Research and development
2014
£m
2013
(restated)
£m
739
1,317
455
2,511
443
159
3,113
742
1,535
449
2,726
496
172
3,394
The proportion of Pharmaceuticals R&D investment made in the
late-stage portfolio decreased from 56% of Pharmaceuticals R&D
costs in 2013 to 52% in 2014, reflecting the completion of a
number of late-stage programmes.
Royalty income
Royalty income was £310 million (2013 – £387 million) reflecting
the conclusion of a number of royalty agreements. 2013 also
included a prior year catch-up adjustment.
GSK Annual Report 2014 59
Governance & remunerationFinancial statementsInvestor informationStrategic report
Group financial review
continued
Core operating profit by business
Net finance costs
Finance income
Interest and other income
Fair value movements
Finance expense
Interest expense
Unwinding of discounts on liabilities
Remeasurements and fair value movements
Other finance expense
2014
£m
66
2
68
(688)
(2)
(10)
(14)
(714)
2013
£m
59
2
61
(726)
–
(5)
(22)
(753)
Core net finance expense was £646 million compared with
£692 million in 2013, reflecting GSK’s strategy to improve the
funding profile of the Group, despite average net debt in 2014
being marginally higher than in 2013.
Share of after tax profits of associates and joint ventures
The share of profits of associates and joint ventures was
£30 million (2013 – £43 million), reflecting the reduced
shareholding in the Aspen group, currency movements and
a number of one-off adjustments.
Core profit before taxation
Core profit before tax
2014
% of
turnover
£m
26.0 7,122
£m
5,978
2013
(restated)
% of
Growth
turnover CER% £%
(16)
27.8
(6)
Taxation
Tax on core profit amounted to £1,172 million and reflected an
effective core tax rate of 19.6% (2013 – 23.0%). The reduction
in the effective rate included the resolution of a number of matters
that benefited the year, and an increase in the benefit of intellectual
property incentives.
Core earnings per share
Core EPS of 95.4p decreased 1% in CER terms compared
with a 6% decline in the operating profit as a result of financial
efficiencies.
Dividend
The Board declared four interim dividends resulting in a dividend
for the year of 80 pence, a 2 pence increase on the dividend for
2013. See Note 16 to the financial statements, ‘Dividends’.
Profit forecast
The Class 1 Circular dated 20 November 2014, issued to
shareholders in connection with the proposed three-part
transaction with Novartis included the following profit forecast in
respect of 2014: “In 2014, GSK expects to deliver full year core
EPS on a CER and ex-divestment basis broadly similar to last year
(from a 2013 base of 108.4p adjusted for divestments completed
during 2013).”
The actual results were that core EPS for 2014 declined 1% CER,
broadly in line with last year excluding divestments completed
in 2013.
2014
Margin
%
34.7
35.4
£m
5,368
1,129
2013
(restated)
Margin
Growth
£m
6,472
1,097
% CER%
(9)
13
37.1
32.1
£%
(17)
3
6,497
34.8
7,569
36.3
(6)
(14)
Pharmaceuticals
Vaccines
Pharmaceuticals
and Vaccines
Consumer
Healthcare
657
7,154
15.2
829
31.1 8,398
17.4
32.8
Corporate & other
(560)
unallocated costs
Core operating profit 6,594
(627)
7,771
28.7
30.4
Core operating profit by segment
(6)
(6)
(2)
(6)
(21)
(15)
(11)
(15)
2014
% of
turnover
£m
2013
(restated)
% of
Growth
£m
turnover CER%
£%
Pharmaceuticals and
Vaccines
3,173
USA
2,205
Europe
993
Emerging Markets
466
Japan
977
ViiV Healthcare
Established Products 1,793
Pharmaceutical R&D (2,708)
Other trading and
unallocated
pharmaceuticals
Pharmaceuticals and
Vaccines
Consumer Healthcare
(402)
6,497
657
7,154
Corporate & other
(560)
unallocated costs
Core operating profit 6,594
63.7 3,955
54.6 2,277
31.0
986
49.7
568
65.2
885
59.5 2,352
(2,823)
68.0
53.9
29.3
53.7
63.9
60.7
(16 )
2
16
(2)
20
(17)
–
(20 )
(3)
1
(18)
10
(24)
(4)
(40.0)
(631)
(56.6)
(37)
(36)
34.8 7,569
15.2
829
31.1 8,398
(627)
7,771
28.7
36.3
17.4
32.8
30.4
(6)
(6)
(6)
(2)
(6)
(14)
(21)
(15)
(11)
(15)
Core operating profit was £6,594 million, 6% lower than in 2013
in CER terms on a turnover decline of 3%. The core operating
margin of 28.7% was 1.7 percentage points lower than in 2013.
Excluding currency effects, the margin decreased 0.8 percentage
points. This primarily reflected an increase in SG&A as a
percentage of sales and lower royalty income. SG&A costs
declined 2% driven by targeted cost management and the benefit
of ongoing restructuring programmes. SG&A also included the
credit reported in Q3 2014 of £219 million from a release of
reserves following simplification of the Group’s entity structure
and our trading arrangements. Structural savings of approximately
£280 million were realised in 2013.
60 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
Core results reconciliation – 31 December 2014
Turnover
Cost of sales
Gross profit
Selling, general and administration
Research and development
Royalty income
Other operating income
Operating profit
Net finance costs
Share of after tax profits of
associates and joint ventures
Profit before taxation
Taxation
Tax rate
Profit after taxation
Profit attributable to
non-controlling interests
Profit attributable to shareholders
Core
results
£m
23,006
(6,535)
16,471
(7,074)
(3,113)
310
–
6,594
(646)
30
5,978
(1,172)
19.6%
4,806
222
4,584
Intangible
amortisation
£m
Intangible
impairment
£m
Major
restructuring
£m
Legal
charges
£m
Acquisition
accounting
and other
£m
(503)
(503)
(78)
(78)
(72)
(72)
(204)
(204)
(430)
(116)
(548)
(575)
(150)
(750)
(548)
(3)
(3)
(194)
(77)
(700)
(974)
Total
results
£m
23,006
(7,323)
15,683
(8,246)
(3,450)
310
(700)
3,597
(5)
(8)
(659)
(575)
(150)
(755)
(548)
(982)
209
29
215
26
556
30
2,968
(137)
4.6%
(366)
(121)
(540)
(522)
(426)
2,831
(366)
(121)
(540)
(522)
(147)
(279)
75
2,756
Earnings per share
95.4p
(7.6)p
(2.5)p
(11.3)p
(10.9)p
(5.8)p
57.3p
Weighted average number of shares (millions)
4,808
Core results reconciliation – 31 December 2013 (restated)
Intangible
amortisation
£m
Intangible
impairment
£m
Major
restructuring
£m
Legal
charges
£m
Acquisition
accounting
and other
£m
(450)
(450)
(408)
(408)
(97)
(331)
(178)
(178)
(300)
(39)
(252)
(547)
(739)
(517)
(252)
(56)
1,124
1,068
4,808
Total
results
£m
26,505
(8,585)
17,920
(8,480)
(3,923)
387
1,124
7,028
(6)
(8)
(706)
282
282
(547)
(739)
(523)
(252)
1,342
43
6,647
Core
results
£m
26,505
(7,549)
18,956
(7,928)
(3,400)
387
–
8,015
(692)
–
43
7,366
(179)
(6)
244
244
(60)
(1,695)
149
226
145
9
147
(1,019)
23.0%
15.3%
184
5,671
(398)
(513)
(378)
(243)
1,489
5,628
Turnover
Cost of sales
Gross profit
Core results
(before
divestments)
£m
25,602
(7,075)
18,527
Divestments
£m
903
(474)
429
Selling, general and administration
Research and development
Royalty income
Other operating income
Operating profit
Net finance costs
Profit on disposal of interest in
associates and joint ventures
Share of after tax profits of
associates and joint ventures
Profit before taxation
Taxation
Tax rate
Profit after taxation
(7,749)
(3,394)
387
–
7,771
(692)
–
43
7,122
(1,635)
23.0%
5,487
Profit attributable to
non-controlling interests
Profit attributable to shareholders
250
5,237
184
250
5,421
(398)
(513)
(378)
(243)
(58)
1,547
192
5,436
Earnings per share
108.4p
3.8p
112.2p
(8.2)p
(10.7)p
(7.8)p
(5.0)p
32.0p
112.5p
Weighted average number of
shares (millions)
4,831
4,831
GSK Annual Report 2014 61
Governance & remunerationFinancial statementsInvestor informationStrategic report
Group financial review
continued
Total results
Turnover
Cost of sales
Selling, general
and administration
Research and
development
Royalty income
Other operating
income
Operating profit
Net finance costs
Profit on disposal of
interest in associates
Share of after tax
profits of associates
and joint ventures
Profit before taxation
Taxation
Total profit after
taxation for the year
Total profit attributable
to shareholders
Earnings per share (p)
Earnings per ADS
(US$)
2014
2013
Growth
% of
£m turnover
23,006
(7,323)
100 26,505
(31.8) (8,585)
% of
£m turnover CER%
(7)
100
(11)
(32.4)
£%
(13)
(15)
(8,246)
(35.8) (8,480)
(32.0)
4
(3)
)
(3,450
310
(15.0
)
1.3
)
(3,923
387
)
(14.8
1.5
(8
)
(18)
(12
)
(20)
(700)
3,597
(659)
(3.1) 1,124
15.6
7,028
(706)
4.2 >(100) >(100)
(49)
(40)
26.5
–
282
30
2,968
(137)
2,831
2,756
57.3
1.89
43
6,647
(1,019)
5,628
5,436
112.5
3.53
(46)
(55)
(41)
(50)
(40)
(49)
Cost of sales
Cost of sales as a percentage of turnover was 31.8% compared
with 32.4% in 2013. Net of adverse currency translation effects,
the cost of sales percentage decreased 1.3 percentage points.
This reflected adverse price and mix movements, particularly the
decline in Pharmaceuticals sales in the US, the costs of supply
remediation activities and continuing investments in new launch
capacity and future manufacturing technology, more than offset
by lower intangible write-offs and the benefit of our ongoing cost
reduction programmes and lower intangible impairments.
Selling, general and administration
SG&A costs as a percentage of sales were 35.8%, 3.8
percentage points higher than in 2013. Excluding currency effects,
the SG&A percentage increased 3.7 percentage points, as SG&A
increased 4% on a turnover decline of 7%. The increase in SG&A
reflected continued investments in our multiple new product
launches, higher legal costs, restructuring costs and a charge of
£114 million for an additional, catch-up year of the US Branded
Prescription Drug fee in accordance with the final regulations
issued by the IRS in Q3 2014, partly offset by the benefits of our
restructuring programmes and ongoing cost management efforts.
Advertising and promotion decreased 11% reflecting reduced
activity in the Established Products category and ongoing cost
management efforts which were partly offset by new product
launches. Selling and distribution decreased 4% as investments
in product launches were offset by savings in Established
Products. General and administration expenses increased 20%
due to higher phase IV expenditure, legal and restructuring costs,
partly offset by restructuring benefits.
Research and development
R&D expenditure declined 8% to £3,450 million (15.0% of
turnover) compared with £3,923 million (14.8% of turnover) in
2013. Excluding currency effects, the R&D percentage declined
0.2 percentage points, reflecting lower intangible write-offs, the
phasing of ongoing project spending as well as the completion
of a number of programmes and continuing cost management
benefits and lower intangible impairments.
62 GSK Annual Report 2014
Other operating income
Net other operating expense of £700 million (2013 - £1,124 million
income) included, following the improved sales performance of
Tivicay and Triumeq, an increase in the liability for the contingent
consideration for the acquisition of the former Shionogi-ViiV
Healthcare joint venture which has increased to £1.7 billion,
resulting in a charge for the year of £768 million (2013 – £253
million). The liability represents the present value of expected
future payments to Shionogi. These will be paid over a number
of years and will vary in line with sales of products that contain
dolutegravir. The net income in 2013 included profits from the
disposals of the Lucozade and Ribena business and certain
anti-coagulant products, which in aggregate were £1,331 million.
Following announcement of the proposed Novartis transaction,
GSK entered into a number of forward exchange contracts to
protect the Sterling value of the net US Dollar proceeds due to the
Group on completion of the transaction. At 31 December 2014
these contracts were in a loss position and resulted in the
recognition of an unrealised loss in 2014 of £299 million which
has been included in net other operating expense. If these
contracts remain in a loss position on maturity, that loss will partly
offset the gain in the expected Sterling value of the proceeds that
will be received by the Group as a result of favourable exchange
movements since the inception of the forward contracts. If, on
maturity, the contracts are in a gain position, the gains will partly
offset losses in the Sterling value of the proceeds that will be
received by the Group as a result of unfavourable exchange
movements since the inception of the forward contracts.
Operating profit
Total operating profit was £3,597 million compared with
£7,028 million in 2013. The non-core items resulted in a net charge
of £2,997 million (2013 – £987 million, excluding trading profits on
products divested in 2013). The 2013 net charge included the
profits on the disposals of Lucozade and Ribena business and the
anti-coagulant products, which in aggregate were £1,331 million.
The intangible asset amortisation increased to £575 million
(2013 – £547 million), reflecting the accelerated amortisation of
Lovaza. Intangible asset impairments of £150 million (2013 –
£739 million) included write-offs of several R&D and commercial
assets.
Major restructuring charges of £750 million (2013 – £517 million)
included £101 million under the Operational Excellence programme,
£334 million under the Major Change programme and £243 million
under the new Pharmaceuticals restructuring programme.
The Operational Excellence programme initiated on 2007 and
expanded in 2009, 2010 and 2011 was substantially complete at
the end of 2014 at a total cost of £4.7 billion and delivered annual
pre-tax savings of approximately £2.9 billion. The Major Change
programme, announced in 2013, focuses on opportunities to
simplify our supply chain processes, build the Group’s capabilities
in manufacturing and R&D, and restructure our European
Pharmaceuticals business. The programme is expected to
cost £1.5 billion, of which non-cash charges are expected to be
£350 million. It has delivered approximately £0.6 billion of annual
savings and remains on track to deliver annual pre-tax savings of
at least £1.0 billion by 2016.
The new Pharmaceuticals restructuring programme, announced in
October 2014, will rescale commercial operations, global support
functions and the relevant R&D/manufacturing operations across
Pharmaceuticals. The programme is expected to cost £1.5 billion,
predominantly in cash charges. Approximately £1 billion of new
annual cost savings are expected over the next three years, with
around 50% delivered in 2016.
Legal charges of £548 million (2013 – £252 million) included a
£301 million fine paid to the Chinese government, settlement of
existing anti-trust matters and higher litigation costs.
Governance & remunerationFinancial statementsInvestor informationStrategic report
Acquisition accounting and other adjustments resulted in a net
charge of £974 million (2013 – income of £1,068 million) and
included the increase in the liability for the contingent consideration
for the acquisition of the former Shionogi-ViiV Healthcare joint
venture of £768 million (2013 – £253 million). The net credit in
2013 included profits on the disposal of Lucozade and Ribena
business and the anti-coagulant products, which in aggregate were
£1,331 million. Other items also included charges related to major
acquisitions, equity investment and asset disposals, one-off required
regulatory charges in R&D and certain other adjusting items.
Net finance costs
Finance income
Interest and other finance income
Fair value movements
Finance expense
Interest expense
Unwinding of discounts on liabilities
Remeasurements and fair value movements
Other finance expense
2014
£m
66
2
68
(688)
(15)
(10)
(14)
(727)
2013
£m
59
2
61
(726)
(14)
(5)
(22)
(767)
Profit on disposal of interest in associates
The pre-tax profit on disposals of associates was nil (2013 –
£282 million). The 2013 profit reflected the disposal of 28.2 million
ordinary shares in Aspen Pharmacare for £429 million.
Share of after tax profits of associates and joint ventures
The share of after tax profits of associates of £30 million
(2013 – £43 million) principally arose from the Group’s holdings
in Aspen Pharmacare.
Profit before taxation
Taking account of net finance costs, the profit on disposal of
interest in associates and the share of profit in associates, profit
before taxation was £2,968 million compared with £6,647 million
in 2013, a 46% CER decrease and a 55% decrease in sterling
terms.
Taxation
UK current taxation
Overseas current taxation
Total current taxation
Total deferred taxation
Taxation on total profits
2014
£m
(251)
993
742
(605)
137
2013
£m
265
1,284
1,549
(530)
1,019
The charge for taxation on total profits amounted to £137 million
and represented a total effective tax rate of 4.6% (2013 – 15.3%),
reflecting the differing tax effects of the various non-core items,
including a number of non-recurring tax only items.
Tax relating to acquisition accounting and other adjustments
included deferred tax on the increased liability for the expected
future payments to Shionogi; recognition of a deferred tax asset
in respect of tax losses expected to be used on completion of the
Novartis transaction, and tax credits arising on the resolution of a
number of tax matters with tax authorities, including matters related
to prior year acquisitions or disposals.
The UK current tax credit includes a benefit from resolution of a
number of tax matters and other prior year adjustments.
Earnings per share
Total EPS was 57.3p, compared with 112.5p in 2013 which
included 33.8p arising from gains on equity investment and asset
disposals. Of the remaining difference, 10.4p was due to currency.
Critical accounting policies
The consolidated financial statements are prepared in accordance
with IFRS, as adopted for use in the European Union, and also
with IFRS as issued by the IASB, following the accounting policies
approved by the Board and described in Note 2 to the financial
statements, ‘Accounting principles and policies’.
We are required to make estimates and assumptions that affect
the amounts of assets, liabilities, revenue and expenses reported
in the financial statements. Actual amounts and results could differ
from those estimates.
The critical accounting policies, for which information on the
judgements and estimates made is given in Note 3 to the financial
statements, ‘Key accounting judgements and estimates’, and in
the relevant detailed notes to the financial statements as indicated
below, relate to the following areas:
• Turnover
• Taxation (Note 14)
• Legal and other disputes (Notes 29 and 45)
• Impairments of goodwill and other intangible assets
(Notes 18 and 19)
• Business combinations (Note 38)
• Pensions and other post-employment benefits (Note 28).
Information on the judgements and estimates made in these areas
is given in Note 3 to the financial statements, ‘Key accounting
judgements and estimates’.
Turnover
In respect of the Turnover accounting policy, our largest business
is US Pharmaceuticals and Vaccines, and the US market has
the most complex arrangements for rebates, discounts and
allowances. The following briefly describes the nature of the
arrangements in existence in our US Pharmaceuticals and
Vaccines business:
• We have arrangements with certain indirect customers whereby
the customer is able to buy products from wholesalers at
reduced prices. A chargeback represents the difference
between the invoice price to the wholesaler and the indirect
customer’s contractual discounted price. Accruals for estimating
chargebacks are calculated based on the terms of each
agreement, historical experience and product growth rates
• Customer rebates are offered to key managed care and group
purchasing organisations (GPO) and other direct and indirect
customers. These arrangements require the customer to achieve
certain performance targets relating to the value of product
purchased, formulary status or pre-determined market shares
relative to competitors. The accrual for customer rebates is
estimated based on the specific terms in each agreement,
historical experience and product growth rates
• The US Medicaid programme is a state-administered
programme providing assistance to certain poor and vulnerable
patients. In 1990, the Medicaid Drug Rebate Program
was established to reduce state and federal expenditure
on prescription drugs. In 2010, the Patient Protection and
Affordable Care Act became law. We participate by providing
rebates to states. Accruals for Medicaid rebates are calculated
based on the specific terms of the relevant regulations or the
Patient Protection and Affordable Care Act
• Cash discounts are offered to customers to encourage prompt
payment. These are accrued for at the time of invoicing and
adjusted subsequently to reflect actual experience
• We record an accrual for estimated sales returns by applying
historical experience of customer returns to the amounts invoiced,
together with market related information such as stock levels at
wholesalers, anticipated price increases and competitor activity.
GSK Annual Report 2014 63
Governance & remunerationFinancial statementsInvestor informationStrategic report Group financial review
continued
A reconciliation of gross turnover to net turnover for the US
Pharmaceuticals and Vaccines business is as follows:
2014
Margin
%
100
2013
(restated)
Margin
%
100
£m
8,399
2012
(restated)
Margin
%
100
£m
7,964
£m
7,883
(1,205)
(15)
(976)
(12)
(873)
(11)
(1,459)
(139)
(19)
(2)
(1,273)
(152)
(15)
(2)
(1,255)
(142)
(16)
(2)
(58)
(1)
(69)
(1)
(91)
(1)
130
(172)
(2,903)
4,980
2
(2)
(37)
63
69
(181)
(2,582)
5,817
1
(2)
(31)
69
51
(146)
(2,456)
5,508
1
(2)
(31)
69
Gross turnover
Market driven
segments
Government
mandated and state
programs
Cash discounts
Customer
returns
Prior year
adjustments
Other items
Total deductions
Net turnover
Market driven segments consist primarily of Managed Care and
Medicare plans with which GSK negotiates contract pricing that
is honoured via rebates and chargebacks. Mandated segments
consist primarily of Medicaid and Federal government programs
which receive government mandated pricing via rebates and
chargebacks.
The balance sheet accruals for rebates, discounts, allowances
and returns for the US Pharmaceuticals and Vaccines business
and the US element of Established Products are managed on
a combined basis. At 31 December 2014, the total accrual
amounted to £1,308 million (2013 – £1,188 million).
A monthly process is operated to monitor inventory levels at
wholesalers for any abnormal movements. This process uses gross
sales volumes, prescription volumes based on third party data
sources and information received from key wholesalers. The aim
of this is to maintain inventories at a consistent level from year to
year based on the pattern of consumption.
On this basis, US Pharmaceuticals and Vaccines inventory levels
at wholesalers and in other distribution channels at 31 December
2014 were estimated to amount to approximately five weeks of
turnover. This calculation uses third party information, the accuracy
of which cannot be totally verified, but is believed to be sufficiently
reliable for this purpose.
Legal and other disputes
In respect of the accounting policy for Legal and other disputes,
the following briefly describes the process by which we determine
the level of provision that is necessary.
In accordance with the requirements of IAS 37, ‘Provisions,
contingent liabilities and contingent assets’, we provide for
anticipated settlement costs where an outflow of resources is
considered probable and a reliable estimate may be made of the
likely outcome of the dispute and legal and other expenses arising
from claims against the Group. We may become involved in
significant legal proceedings, in respect of which it is not possible
to make a reliable estimate of the expected financial effect, if any,
that could result from ultimate resolution of the proceedings. In
these cases, appropriate disclosure about such cases would be
included in the Annual Report, but no provision would be made.
This position could change over time and, therefore, there can be
no assurance that any losses that result from the outcome of any
legal proceedings will not exceed by a material amount the amount
of the provisions reported in the Group’s financial statements.
Like many pharmaceutical companies, we are faced with various
complex product liability, anti-trust and patent litigation, as well as
investigations of its operations conducted by various governmental
regulatory agencies. Throughout the year, the General Counsel
of the Group, as head of the Group’s legal function, and the
Senior Vice President and Head of Global Litigation for the Group,
who is responsible for all litigation and government investigations,
routinely brief the Chief Executive Officer, the Chief Financial
Officer and the Board of Directors on the significant litigation
pending against the Group and governmental investigations
of the Group.
These meetings, as appropriate, detail the status of significant
litigation and government investigations and review matters such
as the number of claims notified to us, information on potential
claims not yet notified, assessment of the validity of claims,
progress made in settling claims, recent settlement levels and
potential reimbursement by insurers.
The meetings also include an assessment of whether or not
there is sufficient information available for us to be able to make
a reliable estimate of the potential outcomes of the disputes.
Often, external counsel assisting us with various litigation matters
and investigations will also assist in the briefing of the Board and
senior management. Following these discussions, for those
matters where it is possible to make a reliable estimate of the
amount of a provision, if any, that may be required, the level of
provision for legal and other disputes is reviewed and adjusted
as appropriate.
64 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
Financial position and resources
Assets
Non-current assets
Property, plant and equipment
Goodwill
Other intangible assets
Investments in associates and joint ventures
Other investments
Deferred tax assets
Derivative financial instruments
Other non-current assets
Total non-current assets
Current assets
Inventories
Current tax recoverable
Trade and other receivables
Derivative financial instruments
Liquid investments
Cash and cash equivalents
Assets held for sale
Total current assets
Total assets
Liabilities
Current liabilities
Short-term borrowings
Trade and other payables
Derivative financial instruments
Current tax payable
Short-term provisions
Total current liabilities
Non-current liabilities
Long-term borrowings
Deferred tax liabilities
Pensions and other post-employment benefits
Other provisions
Derivative financial instruments
Other non-current liabilities
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium account
Retained earnings
Other reserves
Shareholders’ equity
Non-controlling interests
Total equity
2014
£m
2013
£m
9,052
3,724
8,320
340
1,114
2,688
–
735
25,973
4,231
138
4,600
146
69
4,338
1,156
14,678
40,651
8,872
4,205
9,283
323
1,202
2,084
1
889
26,859
3,900
129
5,442
155
66
5,534
1
15,227
42,086
(2,943)
(7,958)
(404)
(945)
(1,045)
(13,295)
(2,789)
(8,317)
(127)
(1,452)
(992)
(13,677)
(15,841)
(445)
(3,179)
(545)
(9)
(2,401)
(22,420)
(35,715)
4,936
(15,456)
(693)
(2,189)
(552)
(3)
(1,704)
(20,597)
(34,274)
7,812
1,339
2,759
(2,074)
2,239
4,263
673
1,336
2,595
913
2,153
6,997
815
4,936
7,812
Property, plant and equipment
Our business is science-based, technology-intensive and highly
regulated by governmental authorities. We allocate significant
financial resources to the renewal and maintenance of our property,
plant and equipment to minimise risks of interruption of production
and to achieve compliance with regulatory standards. A number of
our processes use chemicals and hazardous materials.
The total cost of our property, plant and equipment at 31
December 2014 was £19,355 million, with a net book value
of £9,052 million. Of this, land and buildings represented
£3,667 million, plant and equipment £2,392 million and assets in
construction £2,993 million. In 2014, we invested £1,261 million
in new and renewal property, plant and equipment. This is mainly
related to a large number of projects for the renewal, improvement
and expansion of facilities at various worldwide sites. Property
is mainly held freehold. New investment is financed from our
liquid resources. At 31 December 2014, we had contractual
commitments for future capital expenditure of £459 million and
operating lease commitments of £701 million. We believe that
our facilities are adequate for our current needs.
We observe stringent procedures and use specialist skills to
manage environmental risks from our activities. Environmental
issues, sometimes dating from operations now modified or
discontinued, are reported under ‘Our Planet’ on page 46 and
in Note 45 to the financial statements, ‘Legal proceedings’.
Goodwill
Goodwill decreased during the year to £3,724 million at
December 2014, from £4,205 million. The decrease reflects
the goodwill allocated to the oncology business and transferred
to assets held for sale following the decision to sell the business
to Novartis.
Other intangible assets
Other intangible assets include the cost of intangibles acquired
from third parties and computer software. The net book value
of other intangible assets as at 31 December 2014 was £8,320
million (2013 – £9,283 million). The decrease in 2014 reflected
a transfer of £506 million to assets held for sale to reflect the
proposed Novartis transaction, capitalised development costs
of £242 million and the amortisation and impairment of existing
intangibles of £704 million and £157 million, respectively.
Investments
We held investments, including associates and joint ventures,
with a carrying value at 31 December 2014 of £1,454 million
(2013 – £1,525 million). The market value at 31 December 2014
was £2,502 million (2013 – £2,212 million). The largest of these
investments are in an associate, Aspen Pharmacare Holdings
Limited, which had a book value at 31 December 2014 of
£274 million (2013 – £229 million) and investments in Theravance,
Inc. and Theravance Biopharma, Inc. which have a book value at
31 December 2014 of £367 million (2013 – £644 million).
The investments include equity stakes in companies with
which we have research collaborations, which provide access
to biotechnology developments of potential interest and interests
in companies that arise from business divestments.
GSK Annual Report 2014 65
Governance & remunerationFinancial statementsInvestor informationStrategic report
Group financial review
continued
Derivative financial instruments: assets
We had both non-current and current derivative financial
instruments held at fair value of £146 million (2013 – £156 million).
The majority of this amount related to interest rate swaps and
foreign exchange contracts both designated and non-designated
(inter-company loans and deposits) as accounting hedges.
Inventories
Inventory of £4,231 million increased by £331 million during the year.
The increase primarily reflected the impact of stock building for new
product launches and remediation of the Consumer Healthcare
supply chain, partly offset by a favourable exchange impact.
Trade and other receivables
Trade and other receivables of £4,600 million decreased from
2013 reflecting the receipt of the deferred receivable from Aspen
in respect of the inventory and a manufacturing site which formed
part of the disposal of the anti-coagulants products business in
2013, together with improved recoveries of receivables in various
markets and favourable exchange impacts.
Net debt
Cash, cash equivalents and liquid investments
Borrowings – repayable within one year
Borrowings – repayable after one year
Net debt
2014
£m
4,407
(2,943)
(15,841)
(14,377)
2013
£m
5,600
(2,789)
(15,456)
(12,645)
Net debt increased by £1,732 million and reflected the aggregate
consideration of £650 million paid to increase the shareholding in
the Group’s Indian pharmaceutical subsidiary from 50.7% to 75%
and the acquisition of the remaining 30% of the Group’s
Indonesian Consumer Healthcare business held by a third party,
together with a reduction in cash generated from operations.
The Group’s cash generation and liquidity enabled the payment
of ordinary dividends of £3,843 million and share repurchases
of £238 million.
Movements in net debt
Net debt at beginning of year
(Decrease)/increase in cash and bank overdrafts
Decrease in liquid investments
Net increase in long-term loans
Net repayment of short-term loans
Debt of subsidiary undertakings acquired
Exchange movements
Other movements
Net debt at end of year
2014
£m
(12,645)
(1,287)
(1)
(1,960)
1,709
–
(193)
–
(14,377)
2013
£m
(14,037)
1,473
(15)
(1,913)
1,872
(6)
(34)
15
(12,645)
Total equity
At 31 December 2014, total equity had decreased from £7,812
million at 31 December 2013 to £4,936 million. The decrease arose
principally from an increase in the pension deficit of £1,076 million
and the impact of dividends paid out in the year.
A summary of the movements in equity is set out below.
Total equity at beginning of year
Total comprehensive income for the year
Dividends to shareholders
Shares issued
Changes in non-controlling interests
Forward contract relating to non-controlling
interest
Shares purchased and cancelled or held
as Treasury shares
Shares acquired by ESOP Trusts
Share-based incentive plans
Tax on share-based incentive plans
Distributions to non-controlling interests
Total equity at end of year
2014
£m
7,812
1,081
(3,843)
167
(86)
2013
£m
6,737
6,215
(3,680)
585
(625)
21
–
(238)
(95)
326
(4)
(205)
4,936
(1,504)
(45)
294
73
(238)
7,812
Derivative financial instruments: liabilities
We held both non-current and current derivative financial
instruments at fair value of £413 million (2013 – £130 million).
This primarily related to foreign exchange contracts both
designated and non-designated (inter-company loans and
deposits, acquisitions and disposals, external debt and legal
provisions) as accounting hedges.
Trade and other payables
Trade and other payables amounting to £7,958 million decreased
from £8,317 million in 2013, reflecting the effect of the increased
shareholding in the Group’s Indian Pharmaceutical subsidiary
accrued in 2013 partly offset by the effect of an increase in the
returns and rebates accrual together with a favourable exchange
impact.
Provisions
We carried deferred tax provisions and other short-term and
non-current provisions of £2,035 million at 31 December 2014
(2013 – £2,237 million) in respect of estimated future liabilities,
of which £520 million (2013 – £646 million) related to legal
and other disputes. Provision has been made for legal and
other disputes, indemnified disposal liabilities, employee
related liabilities and the costs of restructuring programmes
to the extent that at the balance sheet date a legal or
constructive obligation existed and could be reliably estimated.
Pensions and other post-employment benefits
We account for pension and other post-employment
arrangements in accordance with IAS 19. The deficits,
net of surpluses before allowing for deferred taxation were
£1,689 million (2013 – £613 million) on pension arrangements
and £1,397 million (2013 – £1,246 million) on unfunded
post-employment liabilities. The increases in the deficits
were predominantly driven by lower discount rates that we
used to discount the value of the liabilities.
In December 2010, the UK scheme purchased an insurance
contract that will guarantee payment of specified pensioner
liabilities. This contract was valued at £803 million at
31 December 2014.
Other non-current liabilities
Other non-current liabilities of £2,401 million at 31 December
2014 (2013 – £1,704 million) include £1,619 million
(2013 – £958 million) of contingent consideration payable,
primarily in respect of the acquisition in 2012 of the former
Shionogi-ViiV Healthcare joint venture.
66 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Share purchases
In 2014, the Employee Share Ownership Plan (ESOP)
Trusts acquired £95 million of shares in GlaxoSmithKline plc
(2013 – £45 million). Shares are held by the Trusts to satisfy future
exercises of options and awards under the Group share option and
award schemes. A proportion of the shares held by the Trusts are
in respect of awards where the rules of the scheme require us to
satisfy exercises through market purchases rather than the issue of
new shares. The shares held by the Trusts are matched to options
and awards granted. During 2014, the company also transferred
£150 million of Treasury shares into the Trust.
At 31 December 2014, the ESOP Trusts held 53 million
(2013 – 64 million) GSK shares against the future exercise
of share options and share awards. The carrying value of
£151 million (2013 – £355 million) has been deducted from
other reserves. The market value of these shares was
£726 million (2013 – £1,025 million).
During 2014, 14.7 million shares were repurchased at a cost
of £238 million (see Note 33 ‘Share capital and share premium
account’). At 31 December 2014, we held 491.5 million shares
as Treasury shares (2013 – 487.4 million shares), at a cost of
£6,917 million (2013 – £6,829 million), which has been
deducted from retained earnings.
Following the completion of the Novartis transaction, expected
to be in the week commencing 2 March 2015, we intend to return
to shareholders £4 billion of the net proceeds. The company does
not expect to make any ordinary share repurchases in 2015.
No ordinary shares were purchased in the period 1 January 2015
to 19 February 2015.
Commitments and contingent liabilities
Financial commitments are summarised in Note 40 to the financial
statements, ‘Commitments’. Other contingent liabilities and
obligations in respect of short and long-term debt are set out
in Note 31 to the financial statements, ‘Contingent liabilities’
and Note 32 to the financial statements, ‘Net debt’.
Amounts provided for pensions and post-retirement benefits are
set out in Note 28 to the financial statements, ‘Pensions and other
post-employment benefits’. Amounts provided for restructuring
programmes and legal, environmental and other disputes are set
out in Note 29 to the financial statements, ‘Other provisions’.
Contractual obligations and commitments
The following table sets out our contractual obligations and
commitments at 31 December 2014 as they fall due for payment.
Loans
Interest on loans
Finance lease obligations
Finance lease charges
Operating lease
commitments
Intangible assets
Property, plant & equipment
Investments
Purchase commitments
Pensions
Other commitments
Total
Total Under 1 yr
£m
3-5 yrs
£m
1-3 yrs
£m
5 yrs+
£m
2,917 3,052 2,926 9,944
944 6,888
2
–
678 1,234
39
3
15
1
29
2
£m
18,839
9,744
85
6
701
7,079
359
100
428
425
186
37,952
102
164
138
297
320 1,037 1,091 4,631
–
324
5
39
–
142
–
85
4
70
4,744 6,137 5,300 21,771
35
47
265
170
91
–
9
21
170
21
Commitments in respect of loans and future interest payable
on loans are disclosed before taking into account the effect
of derivatives.
We have entered into a number of research collaborations to
develop new compounds with other pharmaceutical companies.
The terms of these arrangements can include upfront fees, equity
investments, loans and commitments to fund specified levels of
research. In addition, we will often agree to make further payments
if future ‘milestones’ are achieved.
As some of these agreements relate to compounds in the early
stages of development, the potential obligation to make milestone
payments will continue for a number of years if the compounds
move successfully through the development process. Generally,
the closer the product is to marketing approval, the greater the
probability of success. The amounts shown above within
intangible assets represent the maximum that would be paid
if all milestones were achieved, and include £5.7 billion which
relates to externalised projects in the discovery portfolio.
A number of new commitments were made in 2014 under
licensing and other agreements, including an arrangement
with Adaptimmune Ltd.
In 2013, we reached an agreement with the trustees of the
UK pension schemes to make additional contributions over a
three year period, including in 2013, to eliminate the pension
deficit identified at the 31 December 2011 actuarial funding
valuation. If the deficit persists, further contributions would be
payable in the following four years depending on the level of deficit.
The table above includes this commitment but excludes the normal
ongoing annual funding requirement in the UK of approximately
£100 million. For further information on pension obligations, see
Note 28 to the financial statements, ‘Pensions and other post-
employment benefits’.
Contingent liabilities
The following table sets out contingent liabilities, comprising
discounted bills, performance guarantees, letters of credit and
other items arising in the normal course of business, and when
they are expected to expire.
Total Under 1 yr 1-3 yrs 3-5 yrs 5 yrs+
£m
£m
£m
£m
£m
Guarantees
Other contingent liabilities
Total
87
98
185
78
9
87
3
26
29
–
12
12
6
51
57
In the normal course of business, we have provided various
indemnification guarantees in respect of business disposals
in which legal and other disputes have subsequently arisen.
A provision is made where an outflow of resources is considered
probable and a reliable estimate can be made of the likely outcome
of the dispute and this is included in Note 29 to the financial
statements, ‘Other provisions’.
We provide for the outcome of tax, legal and other disputes when
an outflow of resources is considered probable and a reliable
estimate of the outflow may be made. At 31 December 2014,
other than for those disputes where provision has been made,
it was not possible to make a reliable estimate of the potential
outflow of funds that might be required to settle disputes where
the possibility of there being an outflow was more than remote.
The ultimate liability for such matters may vary significantly from
the amounts provided and is dependent upon the outcome of
litigation proceedings and negotiations with the relevant tax
authorities. This is discussed further in ‘Risk factors’ on pages
232 to 241 and Notes 14 and 45 to the financial statements,
‘Taxation’ and ‘Legal proceedings’.
GSK Annual Report 2014 67
Governance & remunerationFinancial statementsInvestor informationStrategic report Group financial review
continued
Cash generation and conversion
A summary of the consolidated cash flow is set out below.
Net cash inflow from operating activities
Net cash (outflow)/inflow from investing activities
Net cash outflow from financing activities
(Decrease)/increase in cash and bank overdrafts
Cash and bank overdrafts at beginning of year
(Decrease)/increase in cash and bank overdrafts
Exchange adjustments
Cash and bank overdrafts at end of year
Cash and bank overdrafts at end of year
comprise:
Cash and cash equivalents
Overdrafts
2014
£m
5,176
(1,078)
(5,385)
(1,287)
5,231
(1,287)
84
4,028
2013
£m
7,222
524
(6,273)
1,473
3,906
1,473
(148)
5,231
4,338
(310)
4,028
5,534
(303)
5,231
The net cash inflow from operating activities for the year was
£5,176 million (2013 – £7,222 million). The decrease primarily
reflected the impact of the strength of Sterling on profits and
lower profits, including the impact of divestments.
Free cash flow
Free cash flow is the amount of cash generated by the business
after meeting our obligations for interest, tax and dividends paid to
non-controlling interests, and after capital expenditure on property,
plant and equipment and intangible assets.
Free cash flow (£m)
Free cash flow growth (%)
2014
2,620
(44)%
2013
4,657
>100%
Free cash flow was £2,620 million for the year. The decrease on 2013
primarily reflected the impact of the strength of Sterling and lower
profits, including the impact of divestments. We paid dividends to
shareholders of £3,843 million, and spent £238 million on
repurchasing shares.
A reconciliation of net cash inflow from operating activities, which is
the closest equivalent IFRS measure, to free cash flow is shown
below.
Reconciliation of free cash flow
Net cash inflow from operating activities
Purchase of property, plant and equipment
Purchase of intangible assets
Disposal of property, plant and equipment
Interest paid
Interest received
Dividends received from joint ventures and
associated undertakings
Distributions to non-controlling interests
Free cash flow
2014
£m
5,176
(1,188)
(563)
39
(707)
63
5
(205)
2,620
2013
£m
7,222
(1,188)
(513)
46
(749)
59
18
(238)
4,657
Investment appraisal
We have a formal process for assessing potential investment
proposals in order to ensure decisions are aligned with our overall
strategy. This process includes an assessment of the cash flow
return on investment (CFROI), as well as its net present value
(NPV) and internal rate of return (IRR) where the timeline for the
project is very long term. We also consider the impact on earnings
and credit profile where relevant.
The discount rate used to perform financial analyses is decided
internally, to allow determination of the extent to which investments
cover our cost of capital. For specific investments the discount rate
may be adjusted to take into account country or other risk weightings.
Capital expenditure and financial investment
Cash payments for tangible and intangible fixed assets amounted
to £1,751 million (2013 - £1,701 million) and disposals realised
£594 million (2013 – £2,033 million). Cash payments to acquire
equity investments of £83 million (2013 – £133 million) were made
in the year and sales of equity investments realised £205 million
(2013 – £59 million).
Future cash flow
We expect that future operating cash flow will be sufficient to fund
our operating and debt service costs, to satisfy normal levels of
capital expenditure, to meet obligations under existing licensing
agreements, to meet the expenditure arising from the major
restructuring programmes (the precise timing of which is
uncertain) as outlined in Note 10 to the financial statements,
‘Major restructuring costs’ and to meet other routine outflows
including tax and dividends, subject to the ‘Risk factors’ discussed
on pages 232 to 241. We may from time to time have additional
demands for finance, such as for acquisitions and share
repurchases. We have access to other sources of liquidity
from short and long-term capital markets and banks and other
financial institutions, in addition to the cash flow from operations,
for such needs.
Working capital
Working capital percentage of turnover (%)
Working capital conversion cycle (days)
2014
22%
209
2013
19%
176
Our working capital programme has continued to make progress
with further improvements in the collection of receivables and
more effective management of payables balances. During the
year a number of initiatives were implemented across our supply
chains supporting the Pharmaceutical, Vaccines and Consumer
Healthcare businesses that have provided stronger end-to-end
accountability in each case. These programmes are at an early
stage but have already reduced volatility and improved
responsiveness allowing better inventory management.
The reported working capital conversion cycle days are distorted
by divestments made in 2013 and the intangible asset impairments
included in the denominator used in the conversion cycle
computation. The year-end 2014 and 2013 conversion cycles,
adjusted for these factors, were around 211 days and around
190 days, respectively. The increase of 21 days is predominantly
due to stock building behind new launches and the remediation
of the Consumer Healthcare supply chain, compounded by a
reduction in the denominator arising from the translation effect
of stronger Sterling on overseas revenue and costs, which
contributed an increase of seven days.
68 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Maturity profile of gross debt
Maturity profile of gross debt
£m equivalent
3,000
2,500
2,000
1,500
1,000
500
0
2015 2016 2017 2018 2019 2022
2023
2024
2025
2027
2033 2034
2038 2039
2042
2043
2045
GBP bonds EUR bonds USD bonds Commercial Paper Other bank borrowings Leases
Treasury policies
We report in Sterling and pay dividends out of Sterling profits.
The role of Corporate Treasury is to monitor and manage our
external and internal funding requirements and financial risks
in support of our strategic objectives. We operate on a global
basis, primarily through subsidiary companies, and we manage
our capital to ensure that our subsidiaries are able to operate as
going concerns and to optimise returns to shareholders through
an appropriate balance of debt and equity. Treasury activities are
governed by policies approved by the Board of Directors, most
recently on 9 July 2014. A Treasury Management Group (TMG)
meeting chaired by our Chief Financial Officer, takes place on a
monthly basis to review treasury activities. Its members receive
management information relating to treasury activities.
Capital management
Our financial strategy supports the Group’s strategic priorities
and it is regularly reviewed by the Board. We manage the capital
structure of the Group through an appropriate mix of debt and
equity.
Free cash flow conversion improved to 101% of earnings excluding
after-tax legal charges and legal settlements in 2014 from 84%
in 2013. However free cash flow was lower in 2014 at £2.6 billion
compared to £4.7 billion in 2013. This reflected the impact of
the strength of Sterling and lower profits, including the impact
of divestments. As a consequence of this as well as £0.7 billion
paid to increase the shareholding in our Indian pharmaceutical
subsidiary from 50.7% to 75% and the acquisition of the remaining
30% of our Indonesian Consumer Healthcare business held by
a third party, our net debt increased from £12.6 billion at
31 December 2013 to £14.4 billion at 31 December 2014.
Our long-term credit rating with Moody’s Investors Service
(‘Moody’s’) is A2 (stable outlook). Standard and Poor’s rate us
as A+ (stable outlook). Our short-term credit ratings are A-1
and P-1 with Standard and Poor’s and Moody’s respectively.
Liquidity
As at 31 December 2014, our cash and liquid investments were
held as follows:
Bank balances and deposits
US Treasury and Treasury repo
only money market funds
Corporate debt instruments
Government securities
2014
£m
3,529
811
–
67
4,407
2013
£m
4,641
893
1
65
5,600
Cash and liquid investments of £2.8 billion, including amounts held
by ViiV Healthcare, were held centrally at 31 December 2014.
We had net debt of £14.4 billion at 31 December 2014.
The table below summarises cash and gross debt after the
effects of hedging.
Cash and liquid investments
Gross debt – fixed
– floating
– non-interest bearing
Net debt
2014
£m
4,407
(17,674)
(1,109)
(1)
(14,377)
2013
£m
5,600
(15,593)
(2,651)
(1)
(12,645)
Our policy is to borrow centrally in order to meet anticipated
funding requirements. The cash flow forecast and funding
requirements are monitored by the TMG on a monthly basis.
Our strategy is to diversify liquidity sources using a range of
facilities and to maintain broad access to funding markets.
Each day, we sweep cash from a number of global subsidiaries
to central Treasury accounts for liquidity management purposes.
GSK Annual Report 2014 69
Governance & remunerationFinancial statementsInvestor informationStrategic report
Counterparty risk management
We set global counterparty limits for each of our banking and
investment counterparties based on long-term credit ratings from
Moody’s and Standard and Poor’s. Corporate Treasury’s usage of
these limits is monitored daily by a Corporate Compliance Officer
(CCO) who operates independently of Corporate Treasury. Any
breach of these limits would be reported to the CFO immediately.
The CCO also monitors the credit rating of these counterparties
and, when changes in ratings occur, notifies Corporate Treasury
so that changes can be made to investment levels or to authority
limits as appropriate. In addition, relationship banks and their credit
ratings are reviewed regularly and a report is presented annually to
the TMG for approval.
Strategic report
The Strategic report was approved by a duly authorised
Committee of the Board of Directors on 26 February 2015 and
signed on its behalf by:
Simon Dingemans
Chief Financial Officer
26 February 2015
Group financial review
continued
Treasury operations
The objective of treasury activity is to manage the post-tax net
cost or income of financial operations to the benefit of earnings.
We use a variety of financial instruments to finance our operations
and derivative financial instruments to manage market risks from
these operations. These derivatives, principally comprising forward
foreign currency contracts, foreign currency options and interest
rate swaps, are used to swap borrowings and liquid assets into
currencies required for Group purposes and to manage exposure
to financial risks from changes in foreign exchange rates and
interest rates.
We do not hold or issue derivatives for speculative purposes.
Our Treasury policies specifically prohibit such activity. All
transactions in financial instruments are undertaken to manage
the risks arising from underlying business activities, not for
speculation.
Interest rate risk management
Our objective is to minimise the effective net interest cost and
to balance the mix of debt at fixed and floating interest rates over
time. The policy on interest rate risk management limits the amount
of floating interest payments to a prescribed percentage of
operating profit.
We used interest rate swaps to redenominate one of our fixed
rate bonds that matured in 2014 into floating interest rates. The
duration of these swaps matched the duration of the principal
instrument. These interest rate derivative instruments were
accounted for as fair value hedges of the relevant liability.
Foreign exchange risk management
Foreign currency transaction exposures arising on internal and
external trade flows are not generally hedged. Our objective is
to minimise the exposure of overseas operating subsidiaries to
transaction risk by matching local currency income with local
currency costs where possible. Our internal trading transactions
are matched centrally and we manage inter-company payment
terms to reduce foreign currency risk. Foreign currency cash flows
can be hedged selectively under the management of Corporate
Treasury and the TMG. These include hedges of the foreign
exchange risk arising from acquisitions and disposals of assets.
Where possible, we manage the cash surpluses or borrowing
requirements of subsidiary companies centrally using forward
contracts to hedge future repayments back into the originating
currency.
In order to reduce foreign currency translation exposure, we seek
to denominate borrowings in the currencies of our principal assets
and cash flows. These are primarily denominated in US dollars,
Euros and Sterling. Certain borrowings can be swapped into other
currencies as required.
Borrowings denominated in, or swapped into, foreign currencies
that match investments in overseas Group assets may be treated
as a hedge against the relevant assets. Forward contracts in major
currencies are also used to reduce exposure to our investment in
overseas Group assets. The TMG reviews the ratio of borrowings
to assets for major currencies monthly.
70 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Governance &
remuneration
In this section
Our Board
Our Corporate Executive Team
Chairman’s letter
Corporate governance framework
Board report to shareholders
Oversight and stewardship in
2014 and future actions
Leadership and effectiveness
Committee reports
Audit & Risk
Nominations
Corporate Responsibility
Remuneration report
Chairman’s annual statement
Annual report on remuneration
2014 Remuneration policy report
72
76
78
79
80
82
86
92
94
96
97
119
GSK Annual Report 2014 71
GSK Annual Report 2014 71
Governance & remunerationFinancial statementsInvestor informationStrategic report Our Board
Diversity
Experience
Scientific
Finance
Industry
International experience
Composition
Tenure (Non-Executives)
19%
31%
50%
Global
USA
Europe
EMAP
75%
100%
94%
63%
19%
Executive
Non-Executive 81%
69%
31%
Female
Male
Up to 3 years
3-6 years
7-9 years
Over 9 years
39%
15%
23%
23%
Sir Christopher Gent 66
Chairman
Nationality
British
Appointment date
1 June 2004 and as Chairman
on 1 January 2005
Committee membership
Corporate Responsibility
Committee Chairman,
Nominations, Remuneration
and Finance
Sir Philip Hampton 61
Chairman Designate
Nationality
British
Appointment date
1 January 2015. Deputy
Chairman from 1 April 2015
and Non-Executive Chairman
from 7 May 2015
Committee membership
Nominations Committee
Chairman, Finance
Sir Andrew Witty 50
Chief Executive Officer
Nationality
British
Appointment date
31 January 2008 and as
Chief Executive Officer
on 21 May 2008
Committee membership
Finance
Skills and experience
Sir Christopher has many years of experience of leading global
businesses and a track record of delivering outstanding performance
in highly competitive industries. He was appointed Managing Director
of Vodafone plc in 1985 and then became its Chief Executive Officer
in 1997 until his retirement in 2003. Sir Christopher was also a
Non-Executive Director of Ferrari SpA and a member of the British
Airways International Business Advisory Board.
External appointments
Sir Christopher is a Senior Adviser at Bain & Co.
Skills and experience
Prior to joining GSK, Sir Philip chaired major FTSE 100 companies
including J Sainsbury plc. He has also served as Group Finance
Director at Lloyds TSB Group, BT Group plc, BG Group plc, British
Gas and British Steel plc. Sir Philip was previously appointed an
Executive Director of Lazards and a Non-Executive Director at RMC
Group Plc and Belgacom SA. Until 2009, he was Chairman of UK
Financial Investments Limited, which manages the UK Government’s
shareholdings in banks.
External appointments
Sir Philip is currently Chairman of The Royal Bank of Scotland Group
plc. He is also the Senior Independent Director of Anglo American Plc,
Chairman of its Remuneration Committee and member of its Audit
Committee.
Skills and experience
Sir Andrew joined GSK in 1985. He has worked in the UK, South
Africa, the USA and Singapore in various senior roles. In 2003,
he was appointed President of Europe and joined GSK’s Corporate
Executive Team. Sir Andrew served as the Lead Non-Executive Board
member for the Department for Business, Innovation and Skills to
December 2013. He was also President of the European Federation
of Pharmaceutical Industries and Associations until July 2013.
External appointments
Sir Andrew is a member of the Prime Minister’s Business Advisory
Group. He is also appointed to the UK Business Ambassador Group
and School of Economics & Management Advisory Board (SEM),
Tsinghua University, Beijing, China. Sir Andrew is Chancellor of the
University of Nottingham.
Simon Dingemans 51
Chief Financial Officer
Nationality
British
Appointment date
4 January 2011 and as Chief
Financial Officer on 1 April 2011
Committee membership
Finance
Skills and experience
Prior to joining GSK, Simon has over 25 years of experience in
investment banking at SG Warburg and Goldman Sachs. During this
time, he advised a broad range of large corporates across a number of
industry sectors, including pharmaceuticals and consumer healthcare.
Simon advised GSK for over a decade before his appointment and
was closely involved in a number of GSK’s key strategic projects.
External appointments
Simon is Chairman of the 100 Group and a member of the Corporate
Development Council for the National Theatre.
72 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
Dr Moncef Slaoui 55
Chairman, Global Vaccines
Nationality
Moroccan, Belgian & American
Appointment date
17 May 2006
Committee membership
Finance
Sir Deryck Maughan 67
Senior Independent
Non-Executive Director
Nationality
British
Appointment date
1 June 2004 and as Senior
Independent Non-Executive
Director on 1 May 2013
Committee membership
Audit & Risk, Nominations,
Remuneration and Finance
Professor Sir Roy Anderson 67
Independent Non-Executive
Director & Scientific Expert
Nationality
British
Appointment date
1 October 2007
Committee membership
Nominations and Finance
Dr Stephanie Burns 60
Independent Non-Executive
Director
Nationality
American
Appointment date
12 February 2007
Committee membership
Corporate Responsibility,
Remuneration and Finance
Skills and experience
Moncef joined GSK Vaccines in 1988 where he engineered the
development of a robust vaccines pipeline. He then led Worldwide
Business Development for pharmaceutical products before his
appointment to lead R&D in 2006. He was given overall responsibility
for GSK’s Oncology Business in 2010; for GSK Vaccines in 2011; and
for all Global Franchises in 2012. Moncef has advised the US President’s
Council of Advisors on Science and Technology and he was a member of
the Board of the Agency for Science, Technology & Research (A*STAR)
until January 2011.
He has a PhD in Molecular Biology and Immunology from Université
Libre de Bruxelles and has published more than 100 scientific papers
and presentations. Prior to joining GSK, Moncef was Professor of
Immunology at the University of Mons, Belgium.
External appointments
Moncef is a member of the PhRMA and the Biotechnology Industry
Organization boards in the USA and a member of the Advisory
Committee to the Director of National Institutes of Health. He is also an
adviser to the Qatar Foundation, and a member of the Qatar Biomedical
Research Institute Scientific Advisory Committee. Moncef serves as a
Non-Executive Director for the International AIDS Vaccine Initiative (IAVI).
Skills and experience
Sir Deryck has a wealth of international corporate and investment
banking experience, having previously served as Chairman and
Chief Executive Officer of Citigroup International and of Salomon
Brothers Inc. He served as Vice Chairman of the New York Stock
Exchange from 1996 to 2000. Sir Deryck was a former Senior Adviser
to, and Partner of, Kohlberg Kravis Roberts & Co and previously served
as a Non-Executive Director of Thomson Reuters.
External appointments
Sir Deryck is a Non-Executive Director of BlackRock Inc, Trustee of the
British Museum and of New York University Langone Medical Center.
Skills and experience
Professor Sir Roy is a world-renowned medical scientist with advanced
knowledge of infectious disease epidemiology and is currently
Professor of Infectious Disease in the Faculty of Medicine, Imperial
College, London. He is a fellow of the Royal Society, the Academy of
Medical Sciences and the Royal Statistical Society. He is an Honorary
Fellow of the Institute of Actuaries and a Foreign Associate Member of
the Institute of Medicine at the US National Academy of Sciences and
the French Academy of Sciences. Professor Sir Roy brings scientific
expertise to the Board’s deliberations.
External appointments
Professor Sir Roy is a member of the International Advisory Board of
Holdingham Group and he is a Trustee of the Natural History Museum,
London. He is also a member of the Vaccine International Advisory
Board (VACCIAB) of AJ Pharma Holding Sdn. Bhd in Malaysia.
Skills and experience
Stephanie is a recognised global business leader, having served as
Chairman, President and CEO of Dow Corning Corporation until her
retirement at the end of 2011. She has a strong scientific background,
with a PhD in organic chemistry with an organosilicon specialty, and is
an advocate for science education. Stephanie previously sat on the US
President’s Export Council and was an Officer of the Society of Chemical
Industry, American Section, as well as the past Honorary President of the
UK-based parent society. Stephanie was also an Officer and Chairman
of the American Chemistry Council.
External appointments
Stephanie was appointed a Non-Executive Director of Corning Inc.
in January 2012 and a Non-Executive Director of Kellogg Company,
in February 2014.
GSK Annual Report 2014 73
Governance & remunerationFinancial statementsInvestor informationStrategic report Our Board
continued
74 GSK Annual Report 2014
Stacey Cartwright 51
Independent Non-Executive
Director
Nationality
British
Appointment date
1 April 2011
Committee membership
Audit & Risk and Finance
Lynn Elsenhans 58
Independent Non-Executive
Director
Nationality
American
Appointment date
1 July 2012
Committee membership
Audit & Risk, Corporate
Responsibility, Nominations
and Finance
Judy Lewent 66
Independent Non-Executive
Director
Nationality
American
Appointment date
1 April 2011
Committee membership
Audit & Risk Committee
Chairman, Nominations,
Remuneration and Finance
Dr Daniel Podolsky 61
Independent Non-Executive
Director & Scientific Expert
Nationality
American
Appointment date
1 July 2006
Committee membership
Audit & Risk, Corporate
Responsibility and Finance
Skills and experience
Stacey is a Chartered Accountant and has significant experience of
global consumer businesses and of corporate finance. She served as
Executive Vice President, Chief Financial Officer of Burberry Group plc
until July 2013. Prior to joining Burberry Group plc in 2004, Stacey held
the role of Chief Financial Officer at Egg plc between 1999 and 2003,
and from 1988 to 1999 she worked in various finance-related positions
at Granada Group plc.
The Board has determined that Stacey has recent and relevant financial
experience, and agreed that she has the appropriate qualifications and
background to be an audit committee financial expert.
External appointments
Stacey is Chief Executive Officer of Harvey Nichols Group of Companies.
Skills and experience
Lynn has a wealth of experience of running a global business and
significant knowledge of the global markets in which GSK operates.
She served as Chair, President and Chief Executive Officer of Sunoco
Inc. from 2009 to 2012. Prior to joining Sunoco in 2008 as President and
Chief Executive Officer, Lynn worked for Royal Dutch Shell which she
joined in 1980 and where she held a number of senior roles, including
Executive Vice President, Global Manufacturing from 2005 to 2008.
External appointments
Lynn is a Non-Executive Director of Baker Hughes Inc. and
Flowserve Corporation, a Director of the Texas Medical Center,
and a Non-Executive Director of The First Tee of Greater Houston.
She is also a Trustee of the United Way of Greater Houston and
a Trustee of Rice University.
Skills and experience
Judy has extensive knowledge of the global pharmaceutical industry
and of corporate finance, having joined Merck & Co. in 1980 and then
served as Chief Financial Officer from 1990 to 2007 when she retired.
Judy was previously a Non-Executive Director of Purdue Pharma Inc,
Napp Pharmaceutical Holdings Limited and certain Mundipharma
International Limited companies until 31 December 2014. Judy
previously served as a Non-Executive Director of Dell Inc. and
Quaker Oats Company.
The Board has determined that Judy has recent and relevant financial
experience, and agreed that she has the appropriate qualifications and
background to be an audit committee financial expert.
External appointments
Judy is a Non-Executive Director of Thermo Fisher Scientific Inc. and
Motorola Solutions Inc. She is also a Trustee of the Rockefeller Family Trust
and Chairperson of the Audit Committee of Rockefeller Financial Services,
a life member of the Massachusetts Institute of Technology Corporation
and a member of the American Academy of Arts and Sciences.
Skills and experience
Daniel is a world-renowned researcher who has advanced knowledge
of underlying mechanisms of disease and new therapies for
gastrointestinal disorders. He was formerly Mallinckrodt Professor
of Medicine and Chief of Gastroenterology at Massachusetts General
Hospital and Harvard Medical School, and previously served as the
Chief Academic Officer of Partners Healthcare System. Daniel’s
current responsibilities in leading a large academic medical centre
give him relevant insight into healthcare delivery. Daniel brings scientific
expertise to the Board and the Audit & Risk Committee’s deliberations.
External appointments
Daniel is President of the University of Texas Southwestern
Medical Center and holds the Philip O’Bryan Montgomery, Jr., M.D.
Distinguished Presidential Chair in Academic Administration, and the
Doris and Bryan Wildenthal Distinguished Chair in Medical Science.
He is a member of the Institute of Medicine of the US National Academy
of Sciences, member of the Board of the Southwestern Medical
Foundation and is a Director of Antibe Therapeutics, Inc.
He is also a member of the National Academies of Sciences Board
on Army Science and Technology.
Governance & remunerationFinancial statementsInvestor informationStrategic report Urs Rohner 55
Independent Non-Executive
Director
Nationality
Swiss
Appointment date
1 January 2015
Committee membership
Remuneration and Finance
Tom de Swaan 68
Independent Non-Executive
Director
Nationality
Dutch
Appointment date
1 January 2006
Committee membership
Remuneration Committee
Chairman, Audit & Risk,
Nominations and Finance
Jing Ulrich 47
Independent Non-Executive
Director
Nationality
American
Appointment date
1 July 2012
Committee membership
Audit & Risk and Finance
Skills and experience
Urs has a broad range of business and legal experience having served
as Chairman on a number of Boards, most recently for Credit Suisse,
a world leading financial services company. Prior to joining Credit
Suisse in 2004, Urs served as Chairman of the Executive Board and
CEO of ProSieben and ProSiebenSat.1 Media AG. This followed a
number of years in private practice at major law firms in Switzerland
and the USA, having been admitted to the bars of the canton of Zurich
in 1986 and the state of New York in 1990.
External appointments
Urs is currently appointed Chairman of the Board of Credit Suisse
Group AG and of the Chairman’s and Governance Committee.
He is also appointed Chairman and member of the Board of Trustees
of Credit Suisse Research Institute and Credit Suisse Foundation.
Skills and experience
Tom has had a long and distinguished career in the European banking
industry, having been a member of the Managing Board and Chief
Financial Officer of ABN AMRO. Tom has held various executive
positions at the Dutch Central Bank and was a Non-Executive Director
of the Financial Services Authority (now the Financial Conduct Authority)
from 2001 to 2007. He was previously a Non-Executive Director of
KPMG’s Public Interest Committee and was also Vice Chairman of the
Supervisory Board and Chairman of the Audit Committee of Royal Ahold.
The Board has determined that Tom has recent and relevant financial
experience, and agreed that he has the appropriate qualifications and
background to be an audit committee financial expert.
External appointments
Tom is Chairman of the Supervisory Board of Van Lanschot Bankiers
and Chairman of the Board of Directors of Zurich Insurance Group.
He is also a member of the Supervisory Board of Royal DSM, and
a Senior Adviser to Ondra Partners.
Skills and experience
Jing is Managing Director and Vice Chairman of Asia Pacific at JPMorgan
Chase. She advises the firm’s most senior global clients across all asset
classes, while building relationships with executives at Asia’s leading
enterprises. Jing is one of the most prominent advisers to large global
asset management companies, sovereign wealth funds, and multinational
corporations. She works with all lines of business at JPMorgan Chase
to foster greater cross-border collaboration and strengthen senior client
relationships in Asia Pacific and the rest of the world.
Jing was Managing Director and Chair of Global Markets, China at
JPMorgan between 2005 and 2013. From 2003 to 2005, Jing worked
for Deutsche Bank as Managing Director, Head of Greater China
Equities. She previously held financial positions, specialising in the
Asia Pacific region, with CLSA Asia Pacific Markets and the Emerging
Markets Investors Corporation. She was educated at Harvard and
Stanford Universities.
External appointments
Jing is currently an Independent Director of Ermenegildo Zegna SpA
and a member of Bocconi University’s International Advisory Council.
Hans Wijers 64
Independent Non-Executive
Director
Nationality
Dutch
Appointment date
1 April 2013
Committee membership
Corporate Responsibility,
Remuneration and Finance
Skills and experience
Hans has a broad range of business, economic and political
experience, having served as Chief Executive Officer and Chairman
at Akzo Nobel NV from 2002 to 2012. Hans had a long and
distinguished career in academia, public service and strategy
consulting. He served as Senior Partner of the Boston Consulting
Group from 1998 to 2002.
External appointments
Hans is Chairman of the Supervisory Board of Heineken NV and also
Deputy Chairman and Non-Executive Director of Royal Dutch Shell.
He is Chairman of the Supervisory Board of AFC Ajax and member
of the Supervisory Board of HAL Holding N.V.
GSK Annual Report 2014 75
Governance & remunerationFinancial statementsInvestor informationStrategic report Our Corporate Executive Team
Sir Andrew Witty
Chief Executive Officer
See ‘Our Board’ on page 72.
Simon Dingemans
Chief Financial Officer
See ‘Our Board’ on page 72.
Roger Connor
President, Global Manufacturing
& Supply
Roger joined CET in 2012 and
was appointed as President, Global
Manufacturing & Supply (GMS)
in 2013, after working for a year
as President Designate, GMS.
Roger joined GSK in 1998 from
AstraZeneca and has worked in
finance and manufacturing strategy
roles, including at GSK sites in
Cork in Ireland and Ware in the UK.
Prior to his position in GMS, Roger
was Vice President, Office of the
CEO and Corporate Strategy, from
February 2010.
He holds a degree in Mechanical
and Manufacturing Engineering from
Queen’s University Belfast and a
Masters in Manufacturing Leadership
from Cambridge University. He is
also a Chartered Accountant.
Deirdre Connelly
President, North America
Pharmaceuticals
Deirdre joined GSK and the CET
as President, North America
Pharmaceuticals in February 2009
after working at Eli Lilly and Company
for 24 years. She held a variety of
positions there including President of
US Operations, Senior Vice President
of Global Commercialisations for
Woman’s Health and Senior Vice
President of Human Resources.
Deirdre holds a Bachelor’s degree
in Marketing and Economics from
Lycoming College in Pennsylvania
and graduated from Harvard
University’s Advanced Management
Program in 1999.
She serves as a Director on the
PhRMA Board, the Board of
Macy’s Inc. and the Harvard
University Public Health Policy
Council. Deirdre is a native of
San Juan, Puerto Rico.
Deirdre announced her retirement
from GSK and stepped down from
CET in February 2015.
Nick Hirons
Senior Vice President, Global
Ethics and Compliance
Nick was appointed to CET in
September 2014 as Senior Vice
President, Global Ethics and
Compliance and is responsible for
compliance, risk management and
corporate security and investigations.
Nick joined GSK in 1994 as an
International Auditor in the UK. He
was later Head of Audit & Assurance,
where he combined five separate
audit functions into an independent
team operating with a common
risk-based methodology. In June
2013, Nick took up a role in China,
where he established a new
governance model for our China
business that created a consistent
approach to compliance.
Nick is a fellow of the Chartered
Institute of Management
Accountants.
Abbas Hussain
President, Global Pharmaceuticals
Abbas joined CET in 2008 and
was appointed President, Global
Pharmaceuticals in October 2014,
having joined the company as
President, Emerging Markets &
Asia Pacific in June 2008. He joined
the ViiV Healthcare Ltd. Board in
October 2009 and the Aspen Board
in December 2009.
Previously, he spent 20 years at
Eli Lilly where he held positions
including President, Europe and
before that Vice President, Europe.
He also held positions with Eli Lilly in
Australia, the USA, India, Turkey and
Germany in several roles including
business development, sales and
marketing, and management.
He has a degree in Medicinal
Chemistry & Pharmacology from
Loughborough University and was
born in Madras, India.
Bill Louv
Senior Vice President, Core
Business Services
Bill joined CET in 2007 and was
appointed in April 2010 to create and
lead Core Business Services (CBS),
which integrates the shared services
of the global support functions.
He joined the company in 1994
as Vice President of Medical Data
Sciences, and has held increasingly
senior roles in R&D and IT.
Prior to joining GSK, Bill was with
Marion Merrell Dow and earlier
was an associate professor at the
University of Alabama Medical Center.
Bill has a Bachelor of Science
degree in Biology from the College
of William and Mary, and Master
of Science and Doctor of Philosophy
degrees in Statistics from the
University of Florida. He joined
the Board of River Logic, Inc. in
February 2015.
David Redfern
Chief Strategy Officer
David joined CET as Chief Strategy
Officer in May 2008 and is
responsible for corporate
development and strategic planning.
In addition to his current role, he
was made Chairman of the Board
of ViiV Healthcare Ltd. in April 2011.
Previously, he was Senior Vice
President, Northern Europe with
responsibility for managing GSK’s
pharmaceutical businesses in that
region and, prior to that, was Senior
Vice President for Central and
Eastern Europe. David joined GSK
in 1994 and was Finance Director
of the European business from 1999
to 2002.
David has a Bachelor of Science
degree from Bristol University in the
UK and is a Chartered Accountant.
On 1 February 2015 David was
appointed as non-executive director
of Aspen Pharmacare Holdings Ltd,
the South Africa based global
generics company in which GSK
holds a minority equity stake.
76 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Dr Moncef Slaoui
Chairman, Global Vaccines
See ‘Our Board’ on page 73.
Claire Thomas
Senior Vice President,
Human Resources
Claire was appointed to CET as
Senior Vice President, Human
Resources in May 2008.
Claire joined the company in
1996 as Senior Manager, Human
Resources, Sales and Marketing
Group, UK Pharmaceuticals before
becoming Director of Human
Resources for UK Pharmaceuticals
in 1997. She was appointed Senior
Vice President, Human Resources,
Pharmaceuticals Europe in 2001,
and Senior Vice President Human
Resources International in 2006.
Prior to joining the company she
worked for Ford Motor Company,
holding various positions in Human
Resources.
Claire has a Bachelor of Science
degree in Economics, Management
and Industrial Relations from the
University of Wales.
Phil Thomson
Senior Vice President,
Communications and
Government Affairs
Phil joined CET in 2011 and was
appointed Senior Vice President,
Communications and Government Affairs
in 2014. He has responsibility for Media
Relations, Investor Relations, Corporate
Responsibility, Internal Communications,
Product Communications and
Government Affairs.
He joined Glaxo Wellcome as a trainee in
1996, moving from pharmaceutical brand
marketing to product communications.
In 1999, he became Director of Media
Relations for Glaxo Wellcome plc and
was then Director, Investor Relations
from 2001 to 2004, when he returned
to Corporate Media Relations as Vice
President. Phil has worked on numerous
corporate, product and reputational
matters at GSK.
Phil earned his degree in English and
History from Durham University.
Dan Troy
Senior Vice President
& General Counsel
Dan joined GSK and the CET as
Senior Vice President & General
Counsel in September 2008.
He was previously a Partner at the
Washington law firm Sidley Austin
LLP, where he represented mainly
pharmaceutical companies and trade
associations on matters related to the
US Food and Drug Administration
(FDA) and government regulations.
Dan was formerly Chief Counsel for
the FDA, where he served as a
primary liaison to the White House
and the US Department of Health
and Human Services.
Dan is a graduate from Cornell
University’s School of Industrial
and Labor Relations, and earned
his law degree from Columbia
University School of Law. Dan was
named a ‘Legend in the Law’ at the
Burton Awards.
Patrick Vallance
President, Pharmaceuticals R&D
Emma Walmsley
President, Consumer Healthcare
Patrick joined CET in 2010 and was
appointed President, Pharmaceuticals
R&D, in January 2012. Prior to this he
was Senior Vice President, Medicines
Discovery and Development.
Patrick joined the company in 2006
as Head of Drug Discovery. He has
focused the organisation on science
that has the best chance of leading
to new medicines, and created small,
multidisciplinary teams called
Discovery Performance Units.
He is transforming GSK’s approach
to late stage clinical trial design
and execution.
Before joining GSK Patrick was
a clinical academic at University
College London. He is a director
of Genome Research Limited.
Emma joined GSK in May 2010, and
was appointed to CET as President
of the Consumer Healthcare
business in October 2011. Under
Emma’s leadership the business
has a new strategy to become the
leading Fast Moving Consumer
Healthcare company.
On 22 April 2014, GSK announced
an inter-conditional deal with Novartis,
which includes a proposal to create
a joint venture for both companies’
consumer healthcare businesses.
If this provisional deal is completed,
Emma would be CEO of the joint
venture and a member of its Board.
Prior to joining GSK, Emma worked
with L’Oreal for 17 years. She has
a degree in Classics and Modern
Languages from Oxford University.
GSK Annual Report 2014 77
Governance & remunerationFinancial statementsInvestor informationStrategic report
Corporate governance
Letter to shareholders
Dear Shareholder
As Chairman of the Board, I am committed to GSK seeking to
operate to the highest standards of corporate governance. We
believe that it is our governance structure that underpins our ability
to deliver our strategy to grow a diversified business, deliver more
products of value and simplify our operating model, and in doing
so create additional long-term value for our shareholders.
No less important for myself and the Board is the need to firmly
embed values-based conduct and behaviour of our employees into
our governance structure. We want to ensure that everything that
we as a Board and our employees do is guided by our commitment
to our values and to being in compliance with the local laws and
regulations within which we operate. The foundations of these
commitments are laid out in our Code of Conduct, which we
strengthened and re-issued in January 2014, and which is available
in the governance area of our website. It draws together a number
of key company policy principles and provides a working guide for
the way in which we apply our values across our global operations.
I highlight below key corporate governance priorities that the
Board has addressed during 2014.
Board evaluation
An independent external evaluation was undertaken of the Board
and our Committees and I am pleased to report that the results of
Dr Tracy Long’s review were positive, confirming that the Board
was operating well and was effective in dealing with the various
challenges it faces. This is a time of significant transition for the
company and the Board and two key priorities for the Board are to:
• close our proposed three-part transaction with Novartis, which
is on track to complete in the week commencing 2 March 2015,
and integrate Novartis’ Vaccines and Consumer Healthcare
businesses into our existing governance arrangements; and
• manage an orderly refreshment of the Board as a result of a
number of planned retirements from the Board over the next
two to three years and address several identified additional
skills and experience gaps.
Sir Philip Hampton, our Chairman Designate, has succeeded me
as Nominations Committee Chairman so that he can immediately
focus on tailoring the refreshment of the Board to the requirements
of the future reshaped Group, which he will lead through the next
chapter in its development, and the evolving external landscape.
I continue to serve on the Committee to provide continuity and
support to Sir Philip. Further details of Dr Long’s key findings
and the action points that the Board has agreed to address are
set out on page 81.
Annual investor meetings
At these sessions, which were held in November, I was pleased
to discuss our corporate governance practices with our largest
shareholders, while Tom de Swaan, our Remuneration Committee
Chairman, covered our executive remuneration arrangements.
78 GSK Annual Report 2014
In addition, Judy Lewent, who chairs our Audit & Risk Committee,
provided an overview of the work of the Committee and Sir Deryck
Maughan, our Senior Independent Director, provided his insights
into the Board’s culture and dynamics. Listening to the views of our
shareholders and receiving their feedback at these sessions that
are held in the run up to the corporate reporting season, helps us to
shape key areas of our Governance & Remuneration disclosures.
UK Corporate Governance Code
We have reviewed our responsibilities and reporting requirements
against the new standards included in the Financial Reporting
Council’s updated UK Corporate Governance Code published in
September 2014, which are effective for our 2015 financial year.
The principal changes relate to going concern, “viability statements”
and other internal control and risk management areas and to bring
the Code up-to-date with new remuneration reporting practices.
Our review indicated that we are in a strong position to comply fully
with these new standards and the Board will report formally in next
year’s Annual Report on their implementation.
Appointment of Chairman Designate
I welcome the appointment of Sir Philip Hampton as my designated
successor. He joined the Board on 1 January 2015 and will become
Deputy Chairman from 1 April 2015. Sir Philip is due to succeed
me on 7 May 2015, from the end of our AGM. He has been
undergoing a thorough and wide-ranging induction process,
which has been tailored to his role and background, and which
is detailed on page 81. This has provided him with a firm basis to
make a valuable early contribution to our Board deliberations and
to be fully conversant with our businesses and the environment in
which we operate before he becomes Chairman. In the meantime,
I am working very closely with Sir Philip, with the support of Sir
Deryck Maughan, our Senior Independent Director, during this
handover period to ensure a smooth and seamless transition.
China investigations and ABAC
The Chinese authorities reached a conclusion in the investigations
of our Chinese business in September 2014, but this has been
a deeply disappointing matter for GSK. We cooperated fully with
the authorities and took steps to comprehensively rectify the issues
identified at our operations in China. The Audit & Risk Committee,
which each Board member attends, was fully appraised of
developments and continues to closely monitor the Group’s ABAC
activities. Further details are set out by Judy Lewent on page 86.
Audit tendering
We have regularly reviewed developments at a UK and EU level
to reform the audit market, particularly in relation to regulations
governing audit contract tendering and audit firm rotation. We
have also taken into consideration the views of our shareholders.
As part of its overall assessment of the auditors’ performance
our Audit & Risk Committee reviewed the implications of tendering
the external audit contract. Details of its conclusions are set out
on page 90. The Committee does not intend to initiate a tender
exercise during 2015 due to the significant level of change the
company is experiencing. It expects, however, to initiate
preparations for a tender process during the second half of 2016,
in order that a new auditor could take on the audit from 2018.
The following pages outline our approach to governance and how
these practices underpin the delivery of our strategy. The structure
of the Corporate Governance report has been maintained, so that
those statutory and risk disclosures that previously appeared in the
report can continue to be referred to in the Shareholder Information
section on pages 242 to 248 and the Risk Management section on
pages 16 to 17 respectively.
I commend this report to all of our shareholders.
Sir Christopher Gent
Chairman
26 February 2015
Governance & remunerationFinancial statementsInvestor informationStrategic report Corporate governance framework
The Board has a coherent corporate governance framework with clearly defined responsibilities and accountabilities designed to
safeguard and enhance long-term shareholder value and provide a robust platform to realise the Group’s strategy to Grow, Deliver and
Simplify. Our internal control and risk management arrangements, which are described on pages 84 to 85, and 16 to 17, are an integral
part of GSK’s governance framework.
Board Committees
In order for the Board to operate effectively and to give full consideration to key matters, Board Committees have been established by
the Board. A summary of the role of each Board Committee is set out in the table below. The full terms of reference of each Committee
are available on our website and reports on the membership of, and work undertaken by, the Audit & Risk, Remuneration, Nominations
and Corporate Responsibility Committees during 2014 are given on pages 86 to 95 and 108 to 109.
1
Chairman
Board
3
Executive
Directors
12
Independent
Non-Executive
Directors
Audit & Risk
Committee
Remuneration
Committee
Nominations
Committee
Reviews and
recommends to
the Board:
The structure, size
and composition of
the Board and the
appointment of
Directors, Committee
members and CET
members
Succession to the
Board and the CET
Reviews and
responsible for:
Financial and internal
reporting processes,
integrity of the
financial statements,
system of internal
controls,
identification and
management
of risks and external
and internal audit
processes
Initiating audit
tenders, the
selection and
appointment of
external auditors,
their remuneration
and oversight of
their work
Reviews and
recommends to
the Board:
The overall executive
remuneration policy
The appropriate fees
for the Chairman
Determines:
Terms of service
and remuneration of
Executive Directors
and other members
of the CET
Reviews and
approves:
The Remuneration
report
Corporate
Responsibility
Committee
Reviews:
External issues that
have the potential for
serious impact upon
GSK’s business
Reputation
management
Annual governance
oversight of GSK’s
responsible business
commitments
Finance
Committee
Reviews and
approves:
Annual Report
and Form 20-F,
convening of the
AGM and the
quarterly results
announcements
Certain major
licensing and capital
transactions and
changes to the
Group’s Investment
Instrument and
Counterparty Limits
Chief Executive
Officer
Corporate
Executive
Team
Corporate
Administration
& Transactions
Committee
Reviews and
approves:
Matters in
connection with
the administration
of the Group’s
business and
certain corporate
transactions
GSK Annual Report 2014 79
Governance & remunerationFinancial statementsInvestor informationStrategic report Corporate governance
continued
Board report to shareholders – Oversight and stewardship in 2014 and future actions
The Board
The Board is pleased to report that in 2014 it was in full compliance with the requirements of the UK Corporate Governance Code.
See page 87 with respect to our position on audit tendering.
The Board is responsible for the long-term success of the company, corporate governance, strategy, risk management and financial
performance. It is accountable to shareholders for ensuring that the Group is appropriately managed and governed, and delivers GSK’s
strategy to Grow, Deliver and Simplify.
2014 Board programme
The Board met six times in 2014 and each Board member attended all scheduled Board meetings.
The Board agendas were shaped to create more time for strategic discussion and debate by closely managing time allocated to routine items
to ensure focused consideration of our strategic priorities. During 2014, the agendas for Board meetings included the following business:
Month
Strategy
Board and risk oversight*
Governance
January
• Approval of 2014-16 plan
• Review of 2013 financial results
and outlook for 2014
• Re-appointment of auditors
March
• Review of GMS performance
and strategy update
• ‘Deep Dive’ – pipeline launches
May
July
October
• ‘Deep Dive’ – India
• Patent protection
• Review of financial results
for the year to date
• Credit profile and distribution policy
• Review of Funding strategy and
Treasury policy
• Review of Pensions strategy
• Review of Insurance strategy
• Review of output from the annual
Board & CET strategy meeting
• Review of Talent and Leadership
Development strategy
• Annual EMAP and Vaccines
business reviews
• R&D annual update
• North American
Pharmaceuticals annual update
December
• Review of 2015-17 plan
• Europe annual update
• Review of internal 2013
Board evaluation report
• Secretary’s Report (including
regulatory and governance updates)
• Secretary’s Report (including
regulatory and governance updates)
• Preparation for AGM
• Secretary’s Report (including
regulatory and governance updates)
• Secretary’s Report (including
regulatory and governance updates)
• Three-part Novartis transaction
shareholder approval process
• Secretary’s Report (including regulatory
and governance updates)
• Review of external 2014 Board evaluation
• Secretary’s Report (including regulatory
and governance updates)
* During the year, all Board members were invited to attend the Audit & Risk Committee meetings where risk matters were routinely discussed.
2014 Board performance
During 2013, the Board identified certain actions to assist in adding further value to its deliberations. The performance of the Board
in 2014 against these actions is set out below:
Actions
(i) Strategy
The Board would look to take a longer term view (ten years)
of the key strategic issues facing the company.
(ii) Board meetings
Time spent on routine matters would be further managed
to enable strategic/business discussions to take priority, while
ensuring the critical areas of oversight were maintained.
(iii) Annual Board/CET meetings
The structure and format of these sessions would be reviewed
to ensure that they are appropriately geared to realising maximum
value in terms of strategic insights and direction setting.
Progress/Achievement
The proposed transformational three-part Novartis transaction and
exploring an IPO of a minority interest in ViiV Healthcare to enhance future
strategic flexibility in the reshaped Group demonstrate the Board’s longer
term strategic positioning of GSK.
Consideration of the regular annual business unit updates by the
Board was adjusted to focus principally on strategic issues, while
the assurance and risk management aspects of these updates were
considered at the Audit & Risk Committee meetings which were
attended by the full Board.
The format of these sessions was refined and simplified. Presentations
were shortened and are now made by the CET member responsible
for the proposed shape and direction of the strategic issue under
consideration. This increased the time to challenge and develop
strategy in greater depth and enhanced personal accountability for
proposed direction setting.
(iv) China review
All appropriate actions would be reviewed by the Board and
implemented as necessary on the conclusion of the external
investigation and the Ropes and Gray independent review.
The Board remains committed to reviewing and implementing as
appropriate the recommended actions from Ropes and Gray’s
independent review. The actions already undertaken in China are
set out on page 86.
These actions are set out in full on page 84 of GSK’s 2013 Annual Report, which discusses the internally facilitated evaluation of the
Board’s activities by the Senior Independent Director.
80 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Board report to shareholders – Oversight and stewardship in 2014 and future actions continued
2014 & 2015 AGMs – Key highlights at a glance
2014 AGM – held on 7 May 2014 at QEII Conference Centre,
London
2015 AGM – to be held on 7 May 2015 at QEII Conference Centre,
London
• Full Director attendance
• 3.2 to 3.59 billion votes cast for each resolution (74% of issued
share capital)
• Sir Robert Wilson stood down after ten years of service
• All other Directors retired and were re-elected to the Board, receiving
at least 91.5% of the votes cast in favour
• Highest votes in favour: 99.9% to re-elect a number of Directors
• Lowest votes in favour: 89.4% to reduce the required notice for
• Sir Christopher Gent, Tom de Swaan and Jing Ulrich will stand
down from the Board after ten, nine and three years of service
respectively
• Sir Philip Hampton and Urs Rohner will stand for election to the Board
• All other Directors will stand for re-election to the Board
• The Board believes that each Director is effective and demonstrates
commitment to his or her role
• Each Director has been formally evaluated by the Chairman before
a general meeting
standing for re-election
Chairman designate induction programme – Sir Philip Hampton
Sir Philip’s induction programme has been designed and arranged by the Chairman in consultation with the Company Secretary and
the CEO. It is based on the principles used in the company’s new Non-Executive Director induction programme, but has been further
customised to take into account Sir Philip’s designated leadership role at GSK. It seeks to build a clear and comprehensive view of the
industry and GSK’s strategy and positioning. The induction programme is being rolled out in phases which are set out below.
Area of understanding
Induction content
The pharmaceutical industry
Briefing on the industry from an external consultant and investors’ perspectives.
Our businesses
Teach-in sessions with the Heads of Global Pharmaceuticals, Consumer Healthcare and Vaccines.
Our operating model
Teach-in sessions with the Heads of R&D and GMS.
Our Corporate operations
One-to-one meetings with the:
• CFO and Heads of HR, Remuneration, Corporate Strategy, Communications and Government Affairs,
Legal, Global Ethics and Compliance and Core Business Services, and
• senior executives responsible for Tax, Treasury, Pensions, IR, Media, Government Affairs,
Shareholders and other external
stakeholders and advisers
Audit & Assurance and Security.
A programme of meetings is arranged.
His induction is underpinned by a thorough grounding in our corporate governance arrangements. This includes meetings with each
Board Director, reviewing current and past Board evaluations and attending all meetings of Committees of which he is not a member,
so that he can assess and understand our corporate governance framework, Boardroom culture and dynamics. In addition, his induction
activities are being supplemented by an extensive programme of visits to our principal R&D, GMS and Vaccines sites and meeting each
of our external advisers.
Board performance action points for 2015
The main findings and agreed action points arising from the 2014 Board evaluation review, externally facilitated by Dr Tracy Long
of Boardroom Review Limited, against which progress will be disclosed in GSK’s 2015 Annual Report, are set out below:
Key findings
Agreed action points
The composition of the Board is due to change
over the next two to three years which will
require a carefully planned and thoughtfully
executed refreshment programme.
The Chairman Designate, together with the Nominations Committee, will seek to enhance the
governance processes relating to Board composition, tenure and size.
They will review and seek to develop objective specifications and plans for all the Board’s roles
in alignment with our strategy, the external landscape, and the company’s evolving circumstances.
The Directors have identified gaps in the Board’s
current composition relating to US pricing and
healthcare, emerging markets and consumer
healthcare knowledge.
Closing these knowledge and experience gaps will be considered as part of the process
of recruitment of new Non-Executive Directors combined with the refreshment of designated
specialist roles on the Board, such as medical and scientific expertise and the Senior Independent
Director (SID).
Given the speed and complexity of the external
landscape changes, and potential for surprises,
highly experienced Non-Executive Directors are
a crucial component of the Board’s composition.
The replacement of the current SID who is due
to retire at the 2016 AGM is a priority issue.
Consideration should be given to reducing
the size of the Board, if it is judged to have
a strong enough composition and dynamic.
The critical skill sets of potential candidates, such as international markets and cultural experience,
crisis and stakeholder management, will be considered and the composition choices of peer group
Boards will be benchmarked.
The Chairman Designate is leading the search involving internal and external candidates for this role.
A SID specification is being developed that balances the replacement of existing knowledge with
the ability to work well with the Chairman Designate, conduct robust Board evaluations, interact
well with shareholders and be able to commit the necessary time to the role.
This aspiration will be considered against a refreshed Board competence/skills matrix that is being
used as part of the Board refreshment programme, and is linked to the company’s strategy.
Consideration should be given to enhancing the
Non-Executive Director evaluation process.
The Chairman Designate will lead this process and consider best practice techniques, such as
a combination of annual individual and peer evaluations.
GSK Annual Report 2014 81
Governance & remunerationFinancial statementsInvestor informationStrategic report S
t
r
a
t
e
g
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Corporate governance
continued
Leadership and effectiveness
The Board
The Board met six times in 2014, with each member attending as
follows:
Number of
meetings held whilst a
Board member
Number of
meetings
attended
Sir Christopher Gent
Sir Andrew Witty
Simon Dingemans
Dr Moncef Slaoui
Professor Sir Roy Anderson
Dr Stephanie Burns
Stacey Cartwright
Lynn Elsenhans
Judy Lewent
Sir Deryck Maughan
Dr Daniel Podolsky
Tom de Swaan
Jing Ulrich
Hans Wijers
Sir Robert Wilson*
6
6
6
6
6
6
6
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6/6
6/6
6/6
6/6
6/6
6/6
6/6
6/6
6/6
6/6
6/6
6/6
3/3
In addition to the scheduled meetings, the Board also met on a
quorate basis on 13 occasions to consider corporate transactions,
including the three-part Novartis transaction, and China-related
developments and to approve the appointments of Sir Philip
Hampton and Urs Rohner to the Board.
Sir Philip Hampton and Urs Rohner were both appointed as
Non-Executive Directors with effect from 1 January 2015.
* Sir Robert Wilson retired from the Board on 7 May 2014.
The Chairman
The role of the Chairman is to lead and manage the business of
the Board and to provide direction and focus, while ensuring that
there is a clear structure for the effective operation of the Board
and its Committees. He sets the agenda for Board discussions
to promote effective and constructive debate and to support a
sound decision-making process, ensuring that the Board receives
accurate, timely and clear information, in particular about the
company’s performance.
The Chairman works closely with the Chief Executive Officer,
Sir Andrew Witty, to ensure that the strategies and actions
agreed by the Board are effectively implemented. He also provides
support and advice to Sir Andrew, while respecting his executive
responsibility for managing the Group. The division of responsibilities
between the Chairman and the CEO has been agreed by the Board
and is set out in the governance section of our website.
The Chairman is responsible to shareholders for the performance
of the Group and leads discussions and the development of
relations with them.
Sir Philip Hampton, who joined the Board on 1 January 2015,
will become Deputy Chairman on 1 April 2015, and will succeed
Sir Christopher Gent as Chairman with effect from the end of our
AGM on 7 May 2015.
Non-Executive Directors
The Non-Executive Directors provide a strong, independent
element on the Board. They are well placed to constructively
challenge and support management and to shape proposals
on strategy and succession planning. Between them, they bring
independent judgement and a breadth of skills and experience
gained at the most senior levels of international business
operations and academia.
82 GSK Annual Report 2014
Senior Independent Director
Sir Deryck Maughan has been our Senior Independent Director
(SID) since 1 May 2013. Sir Deryck’s role is to act as a sounding
board for the Chairman and a trusted intermediary for the other
Directors. He is also available as an additional point of contact for
shareholders. His responsibilities include the evaluation of the
performance of the Chairman and, at the request of the Chairman,
evaluating the Board and its Committees (in collaboration with the
Committee Chairmen) in years when the evaluation is conducted
internally. The SID also works on the process for the selection of
a new Chairman as appropriate, and he chairs the Nominations
Committee when agreeing the recommendation to the Board for
the Chairman’s successor. Further details of the SID’s role in the
process undertaken to select Sir Philip to replace Sir Christopher
as Chairman are available on page 92.
Sir Deryck maintains an understanding of the issues and concerns
of our major shareholders through meetings with them and reports
from our Investor Relations team and briefings from the Company
Secretary on corporate governance issues.
CEO
Sir Andrew is responsible for the management of the business,
developing the Group’s strategic direction for consideration and
approval by the Board and implementing the agreed strategy. He is
assisted by other members of the Corporate Executive Team (CET),
which meets at least 11 times a year and more often if required.
Short biographies of the members of the CET are given under
‘Our Corporate Executive Team’ on pages 76 and 77.
Company Secretary
The Company Secretary, Victoria Whyte, is a solicitor and a
Fellow of the Institute of Chartered Secretaries and Administrators.
Victoria was formerly Deputy Secretary and Secretary to the
Remuneration Committee. She has acted as Secretary to the
Board and all the Board’s Committees since her appointment
as Company Secretary on 1 January 2011.
Victoria supports the Chairman in designing the induction for new
Directors, in the delivery of our corporate governance agenda, in
particular in the planning of agendas for the annual cycle of Board
and Committee meetings, and in ensuring that information is made
available to Board members on a timely basis. Victoria advises the
Directors on Board procedures and corporate governance matters,
and arranges for the Non-Executive Directors to meet with investors
to discuss aspects of our corporate governance arrangements on
request. She also arranges for them to attend internal management
meetings and to make visits to our business operations to enhance
their knowledge and understanding of the business.
During 2014, the Company Secretary responded to various
consultations on the evolving global governance and corporate
reporting agenda on behalf of the Group and engaged with
shareholders to ensure they fully understood GSK’s governance
and remuneration arrangements.
Independence
The Board considers all of its Non-Executive Directors to be
independent in character and judgement and free from any
business or other relationship which could materially interfere with
the exercise of their judgement. Both Sir Christopher Gent and Sir
Philip Hampton satisfied the independence test on their respective
appointments to the Board.
The independence of those Non-Executive Directors who have served
on the Board for over six years was subjected to a rigorous review.
In particular, the Board considered that Sir Deryck Maughan, who has
served on the Board for over nine years, continued to demonstrate the
characteristics of independence, such as challenging management
and taking part in rigorous debate, whilst possessing outstanding
knowledge of the company’s business affairs.
Board composition and diversity
We seek to build an effective and complementary Board, whose
capability is appropriate for the scale, complexity and strategic
positioning of our business. The process for Board appointments
is led by the Nominations Committee and is described on pages
92 to 93.
We are mindful of the need to balance the composition of the Board
and its Committees and to refresh them progressively over time so
that we can draw upon the experience of longer serving Directors,
while tapping into the new external perspectives and insights which
more recent appointees bring to the Board’s deliberations.
Non-Executive Directors are drawn from a wide range of industries
and backgrounds, including pharmaceutical and healthcare, medical
research and academia, and retail, insurance and financial services,
and have appropriate experience of complex organisations with global
reach. Some have considerable experience of the pharmaceutical
industry and the more recent appointees bring a new approach to the
Group, and to Board discussions.
The Board’s diversity policy is set out on page 93 and for details
of the gender diversity of GSK’s global workforce, see page 45
under Responsible business.
Board induction, business awareness and training
The Company Secretary assists the Chairman in designing
and facilitating a tailored induction programme for new Directors
and their ongoing training. The Chairman Designate induction
programme that was devised for Sir Philip Hampton and
commenced when he joined the Board is presented on page 81.
The induction programme for Non-Executive Directors typically
includes meetings with members of the CET and other senior
executives to explain the company’s business, the commercial
and regulatory environment in which we operate and an investor’s
perspective, as well as guidance on the duties and obligations of
a Director of a listed company. Visits to our business operations
are also a feature of the induction programme.
To ensure that our Non-Executive Directors develop and maintain
a greater insight and understanding of the business, they are
invited to attend internal management meetings, including
meetings of the CET, the Research & Development Executive,
the Product Executive, the Scientific Review Board, the Portfolio
Investment Board, the Commercial Accountability Board and the
Risk Oversight and Compliance Council. They also meet
employees informally during visits to the Group’s operations
and at receptions held around Board meetings.
The Chairman also meets with each Director annually on a
one-to-one basis to discuss his or her ongoing training and
development requirements.
The Board is kept up-to-date on legal, regulatory and governance
matters through regular papers from the Company Secretary and
presentations by internal and external advisers.
During the year, the Board was briefed on various regulatory and
corporate governance developments. This principally included the
anticipated impact of the new UK and EU rules on auditing market
reform and the Financial Reporting Council’s consultation on, and
subsequent publication of, an updated UK Corporate Governance
Code and associated guidance covering remuneration, going
concern, internal control and risk management.
The Board members undertook specific refresher training on,
and under the provisions of, the Corporate Integrity Agreement
(CIA) in 2014. Each new Board member is required, as part of
his or her induction programme, to receive comprehensive training
on the CIA. Sir Philip Hampton and Urs Rohner have each taken
part in such a training session in January 2015 as part of their
induction programmes.
Time allocation
Each Non-Executive Director has a letter of appointment which
sets out the terms and conditions of his or her directorship.
The Chairman and our Non-Executive Directors are expected
to devote such time as is necessary for the proper performance
of their duties. No precise timings are given as this will vary from
year to year depending on the company’s activities. Directors
are expected to attend all Board meetings, and any additional
meetings as required.
They are also expected to attend meetings of the Committees
of which they are members, the Audit & Risk Committee meetings
(which are open to all Directors in furtherance of their risk and
compliance responsibilities) and strategy sessions, and to make
visits to our operational sites.
2014 External evaluation of the Board
The Board carries out an evaluation of its performance and
that of its Committees every year and the evaluation is facilitated
externally every third year. The 2014 evaluation was carried out
by an independent external facilitator, Dr Tracy Long of Boardroom
Review Limited, who has no other connection with the company.
The in-depth process involved Dr Long:
• conducting individual interviews with each of the current
Directors (with the exception of Sir Philip Hampton and Urs
Rohner who joined the Board on 1 January 2015), the Company
Secretary and other key senior executives who regularly attend
Board and Committee meetings;
• reviewing past papers and minutes;
• attending the Board and Committee meetings in September
and October, which included the annual Board and CET
strategy session; and
• compiling the output from the external evaluation into a report
that contained her findings and recommendations.
She also held:
• individual feedback sessions with each Director;
• a session led by the SID with the Non-Executive Directors
and the CEO without the Chairman present;
• a session with the Chairman only; and
• finally, a collective feedback session with the entire Board,
during which her areas of principal focus and recommended
action points were discussed in detail before they were formally
considered and agreed by the Board at its December meeting.
Dr Long’s report focused principally on the culture and
environment of the Boardroom, together with the composition
and tenure of the Board and succession planning arrangements.
The overall view of the Board’s performance was positive and
confirmed that the Board was effective at dealing with the
challenges it faced. The quality of decision making and
contribution of Board members was influenced by:
• the open culture and strong support for the Board’s senior roles;
• a thoughtful and disciplined approach to the use and
management of time, and
• improving risk, control and remuneration oversight.
Dr Long’s report had noted that there was good engagement
on issues and management interacted well with the Board and
its Committees, responding positively to constructive challenge
and enquiry. This was an aspect of Board dynamics that was
considered to be outstanding compared to other Boards.
GSK Annual Report 2014 83
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However, Dr Long’s report stressed that it was a time of
significant transition for the company and the Board. The context
within which the Board operated was changing and the Board’s
modus operandi would need to evolve with it. Future challenges
included the Board’s ability to:
• anticipate changes to the external landscape;
We have a briefing process in place for Non-Executive Directors,
managed by the Chairman, to focus on sector specific issues and
general shareholder preferences.
During the year, those aspects of our corporate governance
arrangements that have been raised by investors and discussed
with relevant Board Directors included;
• manage the transition from Sir Christopher to Sir Philip; and
• Board composition and refreshment, including the process used
• refresh the composition of the Board, including some of the
to search for Sir Christopher’s replacement as Chairman;
most senior roles on the Board.
• China and the company’s ABAC procedures and practices;
The agreed action points from Dr Long’s report focused mainly on
addressing these challenges and they are disclosed on page 81.
Chairman and Non-Executive Director evaluation
The Non-Executive Directors, led by Sir Deryck, met separately,
without Sir Christopher being present, to discuss his performance.
They considered his leadership, performance and overall
contribution to be of a high standard and he continues to have
their full support.
The Chairman met with each Non-Executive Director to discuss
individual contributions and performance, together with training
and development needs.
In addition, the Chairman met with all the Non-Executive Directors
independently of the Executive Directors.
Relations with shareholders
We work to engage effectively with shareholders through our regular
communications, the AGM and other investor relations activities.
We announce our financial results on a quarterly basis. The annual
results are included in our Annual Report. All shareholders receive
an Annual Summary which advises them that our Annual Report and
Notice of our Annual General Meeting are available on our website.
During the year, Sir Andrew Witty and Simon Dingemans gave
presentations to institutional investors, analysts and the media
on the full year results, which are also available via webcast and
teleconference. After the first, second and third quarter results,
we hold webcast teleconferences for the same audience.
Our results are available on our website.
Our Investor Relations department, with offices in London
and Philadelphia, acts as a focal point for communications with
investors. The CEO, CFO and the Chairman maintain a continuous
dialogue with institutional shareholders on performance, plans and
objectives through a programme of regular meetings. During the
year they held over 66 individual meetings with investors and they
have also hosted approximately 20 group meetings with investors
and potential investors.
The Company Secretary acts as a focal point for communications
on corporate governance matters. We also have a small central
Corporate Responsibility (CR) team which co-ordinates strategy,
policy development and reporting specifically with respect to CR
matters. The team communicates with socially responsible
investors and other stakeholders.
The Chairman also meets regularly with institutional shareholders
to hear their views and discuss issues of mutual importance, and
communicates their views to the other members of the Board.
The SID and all the Non-Executive Directors are available to
meet with shareholders.
The Chairman, Remuneration and Audit & Risk Committee
Chairmen, the SID, Company Secretary and the Head of Human
Resources held their annual meetings with major shareholders in
November 2014 to discuss executive remuneration and corporate
governance matters.
84 GSK Annual Report 2014
• External audit contract tendering arrangements; and
• Reporting of annual bonus performance and the description/
operation of our malus/clawback mechanism.
Accountability
Internal control framework
The Board recognises its responsibilities to present a fair,
balanced and understandable assessment of the Group’s
position and prospects.
The Board has accountability for reviewing and approving
the effectiveness of internal controls operated by the Group,
including financial, operational and compliance controls,
and risk management.
The GSK Internal Control Framework (the Framework) is
the means by which GSK assures compliance with laws
and regulations, the reliability of financial reporting and the
effectiveness of risk management. The Framework assists in the
identification, evaluation, and management of principal risks as
required by the UK Corporate Governance Code (the UK Code),
and is designed to manage rather than eliminate the risk of not
achieving business objectives. A fit-for-purpose internal control
framework, in conjunction with embedding the GSK Values and
our ‘Speak Up’ reporting lines, ensures that our Principal Risks
are actively and effectively controlled. For more information see
‘Risk Management’ on pages 16 to 17.
The Framework is designed to ensure the risks associated with
conducting our business activities are effectively controlled in line
with GSK’s risk appetite. We believe the Framework provides
reasonable, but not absolute, assurance against material
misstatement or loss.
To ensure effective governance and an ethical culture, GSK has
established the Risk Oversight and Compliance Council (ROCC).
This team of senior leaders is authorised by the Board to assist
the Audit & Risk Committee (the Committee) in overseeing risk
management and internal control activities. It also provides the
business with a framework for risk management, upward reporting
of significant risks, GSK Values and policies. Reporting upwards
to the ROCC is a risk board structure within each business unit
and global support function. These Risk Management and
Compliance Boards (RMCB) are responsible for local “tone
from the top”, risk management and internal controls.
The ROCC and the RMCBs are assisted by Global Ethics
and Compliance (GEC), which is responsible for supporting
risk management and the development and implementation of
practices that facilitate employees’ compliance with laws and
policy. GEC also provides assistance to help employees meet
high ethical standards by operating in accordance with our
Values, and to comply with applicable laws and regulations
and corporate responsibility.
GSK’s Audit & Assurance (A&A) provides an objective view
(i.e. assurance) to senior management and the Board of how
risk is being managed across the Group in line with an agreed
Assurance Plan. This assurance helps them meet their oversight
and advisory responsibilities in fulfilling our strategic and
operational ambitions and building trust with our patients and
other stakeholders. A&A has a dual reporting line into the CFO
and the Committee.
The Committee receives reports from Business Unit Heads,
GEC and A&A on areas of significant risk to the Group and on
related internal controls. Following consideration of these reports,
the Committee reports annually to the Board on the effectiveness
of controls.
The Board, through the Committee, has reviewed the assessment
of risks and the Framework, and has considered the effectiveness
of the system of internal controls in operation across the Group
for the year covered by this Annual Report and up to the date of
its approval by the Board. The Board’s review focuses on the
company and its subsidiaries and does not extend to material
associated undertakings, joint ventures or other investments,
although it considers the risk of the company’s participation in
these activities. There are established procedures and controls
in place to identify entities whose results must be consolidated
with the Group’s results.
We believe the process followed by the Board in reviewing the
system of internal controls accords with the guidance on internal
control issued by the Turnbull Committee. This is in accordance
with the provisions of the UK Code, which provide that the Board
is responsible for determining the nature and extent of the
significant risks it is willing to take in achieving its strategic
objectives. The Board provides oversight to help ensure that
the Group maintains sound risk management and internal control
systems. The Framework has been in operation for the whole year
and continues to operate up to the date of the approval of this
Annual Report.
A review of the Group’s risk management approach is further
discussed in the Risk Management section of the Strategic
Report on pages 16 to 17. Our management of each Principal
Risk is explained in the Risk Factors section of the Financial
Report on pages 232 to 241.
Committee reports
The reports of the Audit & Risk, Nominations and Corporate
Responsibility Committees, describing the activities of those
Committees during the year, are set out on pages 86 to 95.
Remuneration report
Our Remuneration report comprises the Remuneration
Committee Chairman’s annual statement and the annual report
on remuneration and is set out on pages 96 to 118. In addition,
we have reproduced for convenience the 2014 Remuneration
policy report, which is set out on pages 119 to 128.
Control framework
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Individual Accountability
Line Management Accountability with Compliance
Business Management Accountability with Compliance
Line Management Accountability with Compliance
Business Management Accountability with Compliance
Audit & Assurance
Audit & Assurance
GSK Annual Report 2014 85
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Corporate governance
continued
Audit & Risk Committee Report
Dear Shareholder
In last year’s Committee report, I stressed the importance of
vigilance and continuous improvements to our internal control,
financial reporting and risk management processes and systems.
However, the Committee has also been focused on a number
of activities associated with, and beyond, its core remit, in order
to review the risk environment and exposures across the Group
comprehensively. In doing so, it has overseen the implementation
of a number of planned changes and further enhancements to our
governance. This is principally around our compliance and risk
management policies and procedures as well as close monitoring
of the ongoing transformation of our finance processes and control
environment, including the very extensive upgrades and updating
of our IT systems. We have also considered the implications of
the changes in the US market environment, particularly pricing
dynamics, and the implementation of our ongoing cyber
protection programme, Infoprotect.
Refocusing of the ROCC and the inclusion of Enterprise risks
The Committee has strengthened key areas of our risk
management structure. Following a review of the Risk Oversight
and Compliance Council’s (ROCC) purpose, practices and
membership, representation from our business units was adjusted
to ensure that its membership was more appropriately aligned
with the changing shape of the business. In particular, CET
representation was increased, providing a much stronger strategic
direction to the ROCC’s deliberations and increasing its ability to
consider cross enterprise risk exposures alongside its existing
reviews of GSK’s Principal risks.
To reinforce this approach, the Committee agreed with the ROCC
to implement the designation of six Enterprise risks that specifically
consider, for a particular risk, the potential exposures across
GSK as a whole, as well as within individual business units and
functions. The ROCC and the Committee have been especially
focused on assessing and managing compounding or
consequential factors.
In-country risk oversight
At an operational level, the Committee also approved the
establishment of Country Executive Risk Boards (CERBs) to
provide a means for our different business units operating in
a particular country to manage the Principal risks which might
impact on more than one business unit more effectively from a
country perspective. Their work complements the work of our
existing Risk Management and Compliance Boards (RMCBs)
that are now well-embedded in each of our major business
units. CERBs and RMCBs report into the ROCC on a regular
review cycle.
86 GSK Annual Report 2014
Further enhancing our ABAC arrangements
These have remained a high priority for the Committee in
2014. We continue to review the lessons learned from recent
investigations, particularly those at our Chinese operations in
2013, and ask how we can improve the effectiveness of our
Anti-Bribery and Corruption (ABAC) approach. Significant steps
that the Committee has taken to further strengthen our ABAC
capabilities and controls across the Group include:
• a detailed review of our operations and ongoing presence
in higher risk territories;
• enhancing the ongoing monitoring of compliance with
ABAC-related controls in targeted emerging market
territories to help identify and implement further enhanced
controls where appropriate;
• our Emerging Markets and European General Managers
completing reviews of their key controls and documenting
adherence to GSK’s values, policies and procedures as well
as applicable local laws and regulations. Specific improvement
plans have also been identified and are in the process of being
implemented in a number of countries;
• creation of a specialist ABAC Centre of Excellence to provide
training, due diligence and expert guidance capabilities for
senior management across the Group;
• expanding the footprint and capabilities of our Global Ethics
and Compliance (GEC) organisation in designated higher risk
and emerging markets;
• ensuring that the resources and capabilities of our ABAC
investigations team were strengthened;
• further increasing the oversight of our third party suppliers
with the initiation of a new risk assessment and monitoring
framework that is now being rolled out across the Group; and
• review of the progress of the external (Ropes and Gray)
and internal China investigations, which have now been
ongoing for over a year and a half, and continued to be a
standing agenda item at Committee meetings throughout
2014. We are committed to implementing Ropes and Gray’s
conclusions. Many actions have already been implemented by
a new management team, including enhanced procedures for
monitoring the use of third party suppliers and local financial
transactions. The Committee will continue to monitor progress
in the related investigations closely until they are concluded.
Leadership of Global Compliance and Audit & Assurance
Our risk management boards are supported by our Global
Compliance operations, which have been reorganised as
Global Ethics and Compliance under the leadership of Nick
Hirons, who had previously been Head of Audit & Assurance.
Our Audit & Assurance (A&A) function has also been reorganised
under new leadership and the function now reports to the CFO,
but is directly accountable to this Committee for providing it and
the Board with effective assurance. Recent external benchmarking
confirmed that the A&A team provided such assurance but also
identified a number of areas for enhancement, including more local
coverage and more frequent, shorter audit reviews, alongside the
regular more detailed reviews, to enhance flexibility and improve
visibility. I believe these changes will improve the Committee’s
ability to identify emerging risks proactively.
Finance transformation
The Committee continued to focus on the ongoing enhancement
programme for our finance processes, including the creation of
stronger shared service capabilities within our Core Business
Services (CBS) operation. This programme is targeted at improving
our control environment by standardising our finance policies
and processes and updating them for the changing shape of the
business. The programme includes a substantial upgrading of our
IT platforms and, in particular, our enterprise resource planning
(ERP) systems to create common platforms across each of our
business units. Together, these improvements will deliver more
consistent processes and controls and allow the business to
manage its financial risks more effectively.
Implementation of this programme has created significant change
in the business. The Committee has reviewed its progress in detail
with input from our external auditors to ensure that effective controls
remain in place during and after this transition. Year end reviews
have not identified any material concerns.
US pricing
In light of the significant changes we have seen during the year in
the US market place, the Committee has reviewed the implications
of these changes for our Principal risks. In particular, we carry
significant provisions for returns and rebates offered to US customers
and in times of significant change these need to be especially
carefully monitored to ensure they are aligned with current
experience. Investments in new IT platforms in recent years have
allowed us to remain responsive during the year despite often rapid
change in the external environment and the Committee believes our
provisioning in this area remains appropriate and adequate.
Infoprotect
The company is well underway with a multi-year programme to
enhance and strengthen our cyber security defences. The Committee
reviewed progress of this programme in detail with the recently
appointed Chief Information Security Officer. We have made
significant progress despite an increasing level of threat. Additional
investments have been agreed to support this effort.
Proposed three-part Novartis transaction
In preparation for this transformative transaction, the Committee
has reviewed the ROCC’s assessments of the risk profile of the
Novartis businesses that will become part of the Group. This review
has utilised our Principal and Enterprise risks as a framework.
Detailed mitigation plans are in place for risk issues identified
and to ensure the incoming Novartis businesses can be successfully
incorporated into the GSK risk monitoring framework. None of the
risks identified was expected to give rise to material exposures,
although this position is being monitored closely by the transaction
integration planning teams. The ROCC has in place plans to
review progress in managing these risks on a regular basis and the
Committee will review these shortly after closing to ensure that our
standards, values and culture are properly embedded into the
reshaped and enlarged organisation.
External auditors
I would also like to assure shareholders how seriously the
Committee takes its role and responsibility in appointing, assessing
and monitoring the performance of the company’s auditors. The
Committee has, as usual, reviewed PwC’s performance during the
year and the audit process that they undertook and believes they
continue to provide a high quality service to the company and its
shareholders. The Committee has therefore recommended their
reappointment for a further year. Given the current level of change
in the business, the Committee concluded that it was not appropriate
to put the audit out to tender in 2015. However, having reviewed the
relative merits of conducting a tender and the recent changes in
regulations in this area, the Committee has concluded that we should
move towards a tender for new Auditors but that we should target the
new firm taking over the audit for the 2018 financial year. To deliver
this objective, we expect that we will start to prepare for a tender in
the second half of 2016.
My role
Finally, in my role as the Chair of the Committee, I continue to widen
and deepen my knowledge and understanding of the Group and the
external environment in which GSK operates, together with best
practice developments. In addition to holding regular meetings with
key senior executives and attending a range of management
meetings, including the CET, ROCC and Finance Leadership Team
meetings, I have also attended briefing meetings with our external
auditors, discussed aspects of the Committee’s work with our
shareholders and networked with audit committee chairmen at our
peers to exchange views on regulatory and market developments,
principally in the risk management and compliance arena.
Judy Lewent
Audit & Risk Committee Chairman
26 February 2015
Membership and attendance
The membership of the Committee, together with appointment
dates and attendance at meetings, is set out below:
Members
Judy Lewent (Chairman
from 1 January 2013)
Lynn Elsenhans
Stacey Cartwright
Sir Deryck Maughan
Dr Daniel Podolsky
Tom de Swaan
Jing Ulrich
Committee member since
Attendance at full
meetings during
2014
1 April 2011
1 January 2014
1 April 2011
21 January 2005
1 January 2007
1 January 2006
1 May 2013
6/6
6/6
6/6
6/6
6/6
6/6
6/6
In addition to the six scheduled meetings, the Committee also met
on a quorate basis on five occasions to review or approve matters
associated with the Annual Report and Form 20-F, and preliminary
and quarterly results announcements.
Details of the members’ financial, accounting or scientific experience
are given in their biographies under ‘Our Board’ on pages 72 to 75.
The entire Board is invited to attend the Committee meetings and
other attendees include:
Attendee
Chairman
CEO
CFO
General Counsel
Financial Controller
Head of Audit & Assurance
Company Secretary – Secretary to the Committee
Chairman, Global Vaccines
Head of Global Ethics and Compliance
Chief Medical Officer
Chief Product Quality Officer
External auditor
Regular
attendee
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Attends
as required
✓
In accordance with the UK Code, the Board has determined that
Stacey Cartwright, Judy Lewent and Tom de Swaan all have recent
and relevant financial experience. The Board has also agreed that they
each have the appropriate qualifications and background to be audit
committee financial experts as defined by the US Sarbanes-Oxley Act
of 2002 and has determined that each is independent within the
meaning of the US Securities Exchange Act of 1934, as amended.
In addition, Judy Lewent, Sir Deryck Maughan and Tom de Swaan
are also members of the Remuneration Committee, which allows
them to provide input on the Committee’s review of the Group’s
performance and oversight on any risk factors relevant to
remuneration matters.
GSK Annual Report 2014 87
Governance & remunerationFinancial statementsInvestor informationStrategic report
Corporate governance
continued
Work undertaken by the Committee during 2014
The Committee has worked largely to a recurring and structured programme of activities agreed in conjunction with the Committee Chair,
management and the external auditors at the start of the financial year. This programme comprised standing items that the Committee was
required to consider at each meeting and other matters timed to coincide with key events of the annual financial reporting cycle and other
business events.
The Committee considered, discussed and made decisions in relation to a number of matters during the year, the most significant of which
are set out below.
External auditors
Risk
Governance and
other matters
• Assessment of external
• China investigations and
• Compliance with UK
auditors, effectiveness of
external audit process
ABAC update
• Emerging risk review
Corporate Governance
Code
• Latest Annual Report
regulations
• Corporate governance
update
• Private meeting with the
external auditors
Financial reporting
• Integrity of draft financial
statements and
appropriateness of
accounting policies
• Draft 2013 Annual
Report and 20-F and
Annual Summary leaflet
• Directors’ expenses
• Going concern
assumption
• Preliminary results
announcement
• Approval of 2013 Annual
Report and Form 20-F
and Annual Summary
leaflet
Month
January
February
March
Global internal control
& compliance
• Annual Internal Control
and Compliance report
• Litigation report
• Corporate Integrity
Agreement (CIA) update
• Sarbanes-Oxley
confirmation
• Approach on Sarbanes-
Oxley compliance for
2014
• GMS business unit
report
• Audit & Assurance
(A&A) work
during 2013 and
plan for 2014
• Litigation report
• Re-appointment of
auditors proposed for
approval at AGM
• External auditor
year-end audit findings
• Audit/non-audit
expenditure during 2013
• External auditor
Sarbanes-Oxley control
findings
• External auditor Annual
Report and Form 20-F
findings
• Performance
expectations for
external auditors
• 1st Quarter results
announcement
• External auditor
1st Quarter results
review findings
• CIA compliance
• Litigation report
• External audit plan and
fee proposal for 2014
• China investigations and
• Private meeting with the
ABAC update
• Emerging risk review
• ROCC meeting update
external auditors
• China investigations and
• Private meeting with the
external auditors
ABAC update
• Product Quality
Enterprise Risk
• Vaccines and Emerging
Markets business unit
risks
• Emerging risk review
• ROCC meeting update
• Going concern
assumptions
• 2nd Quarter results
announcement
• External auditor
• China investigations and
• Corporate governance
2nd Quarter results
review findings
ABAC update
update
• Patient Safety Enterprise
• Private meeting with the
Risk
• Emerging risk review
• ROCC meeting update
external auditors
• China investigations and
• Private meeting with the
ABAC update
• EHSS Enterprise Risk
• Emerging risk review
• ROCC meeting update
external auditors
• Controls at GSK listed
and JV subsidiaries
• Litigation report
• R&D Pharmaceuticals
and North American
Pharmaceuticals
business unit reports
• Japan and Consumer
Healthcare business unit
reports
• External independent
review of A&A
• Evolution of Emerging
Markets compliance
model
• CIA update reports
S
t
r
a
t
e
g
c
i
r
e
p
o
r
t
G
o
v
e
r
n
a
n
c
e
&
r
e
m
u
n
e
r
a
t
i
o
n
F
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
I
n
v
e
s
t
o
r
i
n
f
o
r
m
a
t
i
o
n
April
May
July
September
October
• 3rd Quarter results
• Litigation report
announcement
• External auditor
3rd Quarter results
review findings
88 GSK Annual Report 2014
Month
Financial reporting
December
• Key accounting issues
and appropriateness of
accounting policies
Global internal control
& compliance
External auditors
Risk
• Europe business unit
• External auditor Phase
report
• Global Support
Functions business unit
report
• Litigation report
One findings
• Pre-approval of budget
for auditors to provide
Non-Audit Services for
2015 and update on
2014 budget
• China investigations
and ABAC update
• ABAC and Commercial
Practices & Scientific
Engagement Enterprise
Risks
• Infoprotect review
• Operational Excellence
programme review
• Emerging risk review
Governance and
other matters
• Corporate governance
update
• Tax strategy review
• External committee
evaluation
• Private meeting with
external auditors
• Collective meeting with
Heads of A&A and
GEC
• Individual meetings
with Heads of A&A
and GEC
In respect of financial reporting activities, the Committee reviews and recommends to the Finance Committee for its approval all financial
results announcements. In considering the quarterly financial results announcements and the annual financial results contained in the
2014 Annual Report, the Committee reviewed the significant issues and judgements made by management in determining those results.
The Committee reviewed papers prepared by management setting out the key areas of risk, the actions undertaken to quantify the effects
of the relevant issues and the judgements made by management on the appropriate accounting required to address those issues in the
financial statements.
Significant issues relating to the financial statements
The significant issues considered in relation to the financial statements for the year ended 31 December 2014 are set out in the following
table, together with a summary of the financial outcomes where appropriate. In addition, the Committee and the external auditors have
discussed the significant issues addressed by the Committee during the year and the areas of particular audit focus, as described in the
Independent Auditor’s Report on pages 131 to 135.
Significant issues considered
by the Committee in relation to
the financial statements
Going concern basis for the
preparation of the financial
statements
Revenue recognition, including
returns and rebates (RAR)
accruals
Provisions for legal matters,
including recent government
investigations in relation to
China to the extent that they
can be determined
Provisions for tax issues
Impairments of intangible
assets
Provisions for pension and other
post-employment obligations
US Branded Prescription
Drug fee
Valuation of contingent
consideration
How the issue was addressed by the Committee
The Committee considered the outcome of management’s half-yearly reviews of current and forecast net debt
positions and the various financing facilities and options available to the Group. Following a review of the risk and
potential impact of unforeseen events, the Committee confirmed that the application of the going concern basis for
the preparation of the financial statements continued to be appropriate.
The Committee reviewed management’s approach to the timing of recognition of revenue and accruals for
customer returns and rebates. The US Pharmaceuticals and Vaccines accrual for returns and rebates was £1.3
billion at 31 December 2014 and the Committee reviewed the basis on which the accrual had been made and
concurred with management’s judgements on the amounts involved. A fuller description of the process operated
in the US Pharmaceuticals and Vaccines business in determining the level of accrual necessary is set out in
‘Critical accounting policies’ on page 63.
The Committee received detailed reports on actual and potential litigation from both internal and external legal
counsel, together with a number of detailed updates concerning the government investigations in relation to China.
Management outlined the levels of provision and corresponding disclosure considered necessary in respect of
potential adverse litigation outcomes and also those areas where it was not yet possible to determine if a provision
was necessary, or its amount. At 31 December 2014, the provision for legal matters was £0.5 billion, as set out in
Note 29 to the financial statements, ‘Other provisions’.
The Committee considered current tax disputes and areas of potential risk and concurred with management’s
judgement on the levels of tax contingencies required. At 31 December 2014, the Group’s balance sheet included
a tax payable liability of £0.9 billion.
The Committee reviewed management’s process for reviewing and testing goodwill and other intangible assets
for potential impairment. The Committee accepted management’s judgements on the intangible assets that
required writing down and the resulting impairment charge of £157 million in 2014. See Note 19 to the financial
statements, ‘Other intangible assets’ for more details.
The Committee reviewed the significant assumptions adopted by management for the valuations of obligations
for the Group’s largest pension and post-retirement healthcare schemes in the UK and the US, together with the
resultant net obligation amounts, as calculated by external actuaries. The Group’s net deficit at 31 December
2014 amounted to £3.1 billion as set out in Note 28 to the financial statements, ‘Pensions and other post-
employment benefits’.
The Committee reviewed and concurred with management’s assessment of the additional charge necessary to
account for a further year of the fee in accordance with the final regulations issued by the US IRS in the year.
The Committee considered management’s judgement that following the improved sales performance of Tivicay
and Triumeq, it was necessary to increase the liability to pay contingent consideration for the acquisition of the
former Shionogi-ViiV Healthcare joint venture. At 31 December 2014, the Group’s balance sheet included a net
contingent consideration liability of £1.7 billion. See Note 38 to the financial statements, ‘Acquisitions and disposals’
for more details.
GSK Annual Report 2014 89
Governance & remunerationFinancial statementsInvestor informationStrategic report
Corporate governance
continued
Effectiveness of external audit process
In evaluating the effectiveness of the audit process prior to making
a recommendation on the re-appointment of the external auditors,
the Committee reviews the effectiveness of their performance
against criteria which it agrees, in conjunction with management,
at the beginning of each year’s audit.
In undertaking this review, the Committee considers the overall
quality of the audit, the independence of the auditors and whether
they have exhibited an appropriate level of challenge and
scepticism in their work.
• robustness of the audit process;
• quality of the delivery;
• quality of the people; and
• quality of the service.
Having reviewed all this feedback provided through the
mechanisms outlined above, and noted any areas of improvement
to be implemented in respect of the team or the following year’s
audit, provided the Committee:
• is satisfied with the effectiveness of the auditors and the external
audit process;
The annual Committee evaluation seeks feedback from Committee
members independently on the relationship with the auditors, the
quality of insight they provide to the Committee on their work and
whether the Committee has sufficient access to the auditors without
executive management.
• is satisfied with the auditors’ independence, appropriate level
of qualifications, expertise and resources; and
• has considered whether it is in the best interests of shareholders
and the company to initiate or defer a tender.
Finally, the Committee considers feedback on the prior year’s
external audit through a survey that seeks views from the financial
management team at corporate and business unit level. It covers
four key areas:
it will then consider recommending to the Board the
re-appointment of the auditors at the forthcoming AGM.
The detailed criteria the Committee uses for judging the
effectiveness of the external auditors and their overriding
responsibility to deliver a smooth running, thorough and efficiently
executed audit are set out below:
Specific auditor responsibilities
Wider auditor responsibilities
Performance expectations for GSK’s external auditor
• Discuss approach and areas of focus in advance with early
• Provide up-to-date knowledge of technical issues, providing
engagement on understanding the implications of GSK’s new
operating model
• Ensure Sarbanes-Oxley scope and additional procedures are
discussed and endorsed by management and communicated on a
timely basis within GSK and PricewaterhouseCoopers LLP (PwC)
• Avoid surprises through timely reporting of issues at all levels within
the Group
• Ensure there is clarity of roles and responsibilities between the
auditors and local management
• Respond to any issues raised by management on a timely basis
• Meet agreed deadlines
• Provide continuity and succession planning of key employees of
the auditors
• Provide sufficient time for management to consider draft auditor
reports and respond to requests and queries
• Employ consistent communication between local and central
audit teams.
accurate and timely advice
• Serve as an industry resource; communicating best practice
and industry trends in reporting
• Adhere to all independence policies (including GSK’s policies,
the Financial Reporting Council’s ISA 240 and applicable
Securities and Exchange Commission standards)
• Deliver a focused and consistent audit approach globally that
reflects local risks and materiality
• Liaise with GSK’s Audit & Assurance team to avoid duplication of
work and Global Ethics and Compliance team to ensure common
understanding of audit outcomes
• Provide consistency of advice at all levels of the organisation.
Audit tendering
PwC has remained in place as auditors since the Group’s
inception in December 2000. Their performance has been
reviewed annually and audit partner rotation requirements have
been observed since that time. However, the audit contract has
not been put out to tender in that period.
We observe the Financial Reporting Council’s current transitional
arrangements where an audit tender is tied to the end of the cycle
of the current rotating audit partner. Our current audit partner has
held the position for two years. The implications of the transitional
arrangements for both the Competition and Markets Authority’s
audit contract tender regulations and the EU audit firm rotation
requirements were also assessed when the Committee considered
putting the audit contract out to tender.
In addition, as part of the Committee’s review, evolving market
practice and the changing expectations of shareholders were
also noted.
However, given the integration challenges of the three-part Novartis
transaction, the ongoing finance transformation, further service
enhancements made by PwC, and having received competitive
audit fee proposals from PwC, the Committee agreed there was
currently a preference not to distract management and the
Committee by undertaking a tender at this stage. However, the
Committee also concluded that it would plan to undertake a tender
process in the second half of 2016 with a view to appointing the
new firm with effect from 1 January 2018.
Non-audit services
The Sarbanes-Oxley Act of 2002 prohibits the engagement of the
external auditors for the provision of certain services such as legal,
actuarial, internal audit outsourcing or financial information systems
design. Where the external auditors are permitted to provide
non-audit services (such as audit-related, tax and other services),
the Committee ensures that auditor objectivity and independence
are safeguarded by a policy requiring pre-approval by the
Committee for such services. There were no contractual or similar
obligations restricting the Group’s choice of external auditors.
90 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report All non-audit services over £50,000 are put out to competitive
tender with financial service providers other than the external
auditors, in line with the Group’s procurement process, unless the
skills and experience of the external auditors make them the most
suitable supplier of the non-audit service under consideration, in
which case a request for proposal is submitted by the relevant
CET member to the CFO for approval.
The following policy guidelines on engaging the external auditors
to provide non-audit services are observed:
• ascertaining that the skills and experience of the external
auditors make them a suitable supplier of the non-audit services;
• ensuring adequate safeguards are in place so that the objectivity
and independence of the Group audit are not threatened or
compromised; and
• ensure that the total fee levels do not exceed 50% of the annual
audit fee, except in special circumstances where there would be
a clear advantage in the company’s auditors undertaking such
additional work.
During the year, fees for the non-audit service work carried out
by PwC were 73% of the annual audit fee. This exceptional level
reflects the considerable services PwC has provided relating to the
reporting accountant role in connection with the Class 1 Circular
for the three-part Novartis transaction. Excluding the Novartis work,
PwC’s non-audit service fees would have represented 28% of the
annual audit fee. The Committee considered that hiring PwC to
undertake the Class 1 Circular work was in the best interests of
shareholders because:
• PwC possessed the type of expertise, experience, size
and international scope required to handle a major Class 1
transaction of this scale and complexity;
• the company benefited specifically from PwC’s in-depth
knowledge and understanding of our Vaccines, Consumer
Healthcare and Oncology businesses and their processes
and compliance environment;
• management time, that would otherwise have been devoted
to educating another firm on the company’s business and
operations, could instead be spent on delivering a transaction
that will substantially strengthen two of the Group’s core
businesses and create significant new options to increase value
for shareholders; and
• the Committee could leverage PwC’s capabilities to negotiate
the most advantageous and cost-effective price.
In addition, it should be noted that £3.6 million of the Novartis-
related fees due to PwC arose from work done by Novartis’
auditors who are also PwC.
To maintain the external auditors’ independence and objectivity,
for those Class I Circular workstreams where a self review threat
was identified, an independent partner not involved in the audit
was appointed to lead them. Management reviewed and
considered PwC’s findings and PwC did not make any decisions
on behalf of management. Additionally, PwC had no input in
respect of the production of financial information subsequently
used by the audit team.
Fees paid to the company’s auditor and its associates are set
out below. Further details are given in Note 8 to the financial
statements, ‘Operating profit’.
Where possible, other accounting firms are engaged to undertake
non-audit services.
Audit/non-audit service three year comparison graph (£m)
20.0
19.6
17.4
8.6
5.3
5.8
5.7
20
16
12
08
04
0
2012
2013
2014
Audit and assurance services
Other services, including tax, regulatory, compliance
and treasury-related services
Services related to the three-part Novartis transaction
Code of Conduct and reporting lines
We also have a number of well established policies, including a
Code of Conduct, which is available on the governance section
of our website, and confidential ‘Speak Up’ reporting lines for
the reporting and investigation of unlawful conduct. An updated
version of the Code of Conduct was published in January 2014.
Fair, balanced and understandable assessment
One of the key compliance requirements of a group’s financial
statements is for the Annual Report to be fair, balanced and
understandable. The coordination and review of Group-wide
contributions into the Annual Report follows a well established
and documented process, which is performed in parallel with
the formal process undertaken by the external auditors.
The Committee received a summary of the approach taken by
management in the preparation of GSK’s 2014 Annual Report to
ensure that it met the requirements of the UK Code. This enabled
the Committee, and then the Board, to confirm that GSK’s 2014
Annual Report taken as a whole is fair, balanced and
understandable.
Committee evaluation
The Committee’s annual evaluation was externally facilitated by
Dr Tracy Long of Boardroom Review Limited, and supplemented
by a questionnaire circulated to Committee members by the
Committee Chairman. It was concluded that the Committee
continued to operate effectively. In terms of enhancements to
the Committee’s deliberations, it was agreed that the following
areas will be considered further to underpin the Committee’s
effectiveness:
• More regular updates on new or emerging issues and
anticipating, through a streamlined reporting process,
potential risk and audit issues;
• Increase focus on setting, monitoring and adjusting risk appetite;
• Widening and deepening the Committee’s exposure to certain
areas of the business and the external landscape to further
increase understanding of potential threats and opportunities;
• Further enhance training requirements for Committee members;
and
• Consider the division of focus on risk areas between the Board
and the Committee.
GSK Annual Report 2014 91
Governance & remunerationFinancial statementsInvestor informationStrategic report Corporate governance
continued
Nominations Committee Report
Sir Philip Hampton
Nominations Committee
Chairman
Membership
The membership of the Nominations Committee (the Committee),
together with appointment dates and attendance at meetings,
is set out below:
Members
Committee member since
Attendance at
full meetings
during 2014
Sir Philip Hampton
(Chairman from
27 January 2015)
Professor Sir Roy Anderson
Lynn Elsenhans
Sir Christopher Gent
(Chairman from 1 January
2005 to 26 January 2015)
Judy Lewent
Sir Deryck Maughan
Tom de Swaan
Sir Robert Wilson*
27 January 2015
1 October 2012
27 January 2015
9 December 2004
8 May 2014
9 July 2009
1 October 2012
28 March 2008
* Sir Robert Wilson retired from the Board on 7 May 2014.
0/0
4/4
0/0
4/4
3/3
4/4
4/4
1/1
The following key attributes were identified:
• having experience of running a listed global organisation in
a highly regulated industry with a clear and collegiate style
of leadership;
• possessing a comprehensive knowledge and understanding
of UK corporate governance arrangements;
• having a deep appreciation of UK shareholder and media
perspectives; and
• treating the role as his or her primary commitment with a view
to serving in the role over the medium to long term.
These criteria were deemed key to the success of the new
appointee and MWM, who specialises in the recruitment of high
calibre Board Directors, was engaged to ensure that the widest
possible pool of candidates was available to select from. MWM
only provides recruitment consultancy services to the Committee.
Their work was validated from time-to-time to ensure that there
were no gaps in the search process and that the Committee was
receiving the best possible market advice for this key appointment.
The search was initiated by the Chairman and Senior Independent
Director (SID) with support from the Head of Human Resources
and the Company Secretary. As the search progressed and drew
to a conclusion, it was led by the SID. Regular oversight of the
process was exercised by the Committee and shareholders were
briefed on the search criteria used and progress made by the
Committee in identifying suitable candidates.
The pool of suitable candidates was reduced to a short-list.
Briefing reports on the shortlisted candidates were reviewed and
candidates met with key Board members. It became clear to the
Board and the Committee that Sir Philip Hampton was the most
suitable candidate to succeed Sir Christopher as Chairman.
In addition to the scheduled meetings, the Committee also met on
a quorate basis on two occasions to consider and recommend to
the Board the appointments of Sir Philip Hampton and Urs Rohner
as Chairman Designate and a Non-Executive Director.
Other attendees at Committee meetings may include:
On 24 September 2014, in accordance with the Committee’s
terms of reference, Sir Deryck Maughan, our SID, chaired the
meeting of the Nominations Committee that recommended
Sir Philip’s appointment as a Non-Executive Director and
successor to Sir Christopher.
Attends
as required
Feedback from investors was then sought before the Committee
made its recommendations to the Board. This positively
supported Sir Philip’s appointment.
Attendee
Chief Executive Officer
Head of Human Resources
Company Secretary – Secretary to the Committee
Appropriate external advisers
Regular
attendee
✓
✓
✓
✓
Chairman succession
In 2010, it was unanimously agreed to extend Sir Christopher
Gent’s appointment as Chairman for a further five years with
effect from 1 January 2011, subject to annual re-election
by shareholders. At that time, the Board was about to enter a
programme of progressive refreshment and this ensured continuity
of Board leadership during a period when several Non-Executive
Directors were approaching the end of their tenure. It also
reflected the Committee’s desire to plan and shape the
composition and balance of the Board over the longer term.
In 2012, the Committee commenced its search for Sir
Christopher’s successor with the intention that he would step
down as Chairman by the end of 2015.
At the start of the search process, the Committee drew up a
job specification for the role of Chairman. The job specification
was drafted to emphasise the importance that the Board and
Committee placed on the Chairman in overseeing the company’s
strategy at a time when the industry continued to evolve at pace.
92 GSK Annual Report 2014
The subsequent appointment recommendation received
unanimous Board approval on 25 September 2014 it was
announced that Sir Philip would join the Board as a Non-Executive
Director with effect from 1 January 2015 and would become
Deputy Chairman with effect from 1 April 2015. He will succeed
Sir Christopher as Non-Executive Chairman with effect from the
end of the AGM on 7 May 2015.
Sir Philip met the independence requirements set out in the UK
Corporate Governance Code on appointment and will be able
to dedicate the requisite time to the role.
New Non-Executive Director appointment
During 2014, in addition to the search for a successor
to Sir Christopher as Chairman, the Committee searched
for another Non-Executive Director as part of the phased
refreshment of the Board.
During the search process, broad selection criteria were used
which focused on achieving a balance between Continental
European, UK, US and Emerging Markets experience, and having
individuals with expertise and capabilities developed in various
sectors and specialities.
Governance & remunerationFinancial statementsInvestor informationStrategic report MWM, Egon Zehnder and Korn Ferry were engaged to conduct
the search and dossiers of potential Non-Executive appointees
were considered by the Committee. Egon Zehnder and Korn Ferry
only provide recruitment consultancy services to the Committee.
Candidates were shortlisted for interview on merit, after assessing
their relevant qualifications and time commitments.
After interviewing selected candidates, the Committee
was pleased to recommend to the Board Urs Rohner as a
Non-Executive Director. He was appointed to the Board with
effect from 1 January 2015. The Board considered that his
broad business background and extensive senior-level experience
at multinational companies achieved the aim of appointing a
candidate who has experience of running a highly regulated
organisation with an understanding of investor perspectives,
and who would bring fresh insights to the Board’s deliberations.
Board and Committee changes
The refreshment of the Board has resulted in orderly changes to
the composition of the Board and its Committees as set out below.
Sir Robert Wilson did not stand for re-election at the AGM in May
after ten years of service. Sir Christopher Gent, Tom de Swaan
and Jing Ulrich will not stand for re-election at the AGM in 2015
after ten, nine and three years of service respectively. Given the
current stage of the Board refreshment programme and that three
Board members will have stepped down from the Board by May
2015, Sir Deryck Maughan has agreed to stand for re-election by
shareholders for one further year before stepping down from the
Board at the 2016 AGM. He will provide continuity and balance
to the composition of the Board, given his significant knowledge
of, and experience in, GSK’s business affairs. Sir Deryck has
brought his own style to the role of SID and has discharged the
responsibilities of the role with great diligence. He will also play
an important part in the smooth transition between Sir Christopher
and Sir Philip during 2015.
The Board has confirmed that Sir Deryck continues to demonstrate
the characteristics of independence in carrying out his role on the
Board. A search for a replacement SID to succeed him is currently
being conducted by the Committee.
Sir Philip succeeded Sir Christopher as Chairman of the
Nominations Committee on 27 January 2015. Sir Christopher
will continue to serve as a member of the Committee for the
remainder of his tenure on the Board. A successor to Tom de
Swaan as Chairman of the Remuneration Committee, when he
retires from the Board at the 2015 AGM, will be appointed from
the membership of the Remuneration Committee.
Other appointments recommended by the Committee include
Lynn Elsenhans joining the Audit & Risk Committee with effect
from 1 January 2014 and the Nominations Committee with effect
from 27 January 2015. Judy Lewent was also appointed to the
Nominations Committee with effect from 8 May 2014, the day
after Sir Robert Wilson stepped down from the Committee.
Board diversity
We are committed to the diversity of our boardroom and we are
similarly committed to equal opportunities for all our employees
at all levels of the organisation. The diversity and inclusiveness
of our workforce are promoted throughout GSK.
A key requirement of an effective board is that it comprises
a range and balance of skills, experience, knowledge, gender
and independence, with individuals that are prepared to challenge
each other and work as a team. This needs to be backed by a
diversity of personal attributes, including character, intellect,
sound judgement, honesty and courage.
The Committee is responsible for developing measurable
objectives to support the implementation of the Board’s diversity
policy, including gender, and monitoring progress towards the
achievement of these objectives. In terms of gender diversity,
we exceeded the target of at least 25% by 2013 that we had set
ourselves in May 2011 and we are pleased to have maintained
female Board level representation at over 30%. We will seek to
at least maintain this level going forward.
We also have a good representation of women in management
positions which is illustrated on page 45 as part of the gender
diversity of GSK’s global workforce. We will continue to support
efforts to further increase the pipeline of women into senior
positions within GSK. We also support the engagement of
executive search firms such as MWM, Egon Zehnder and Korn
Ferry, who have signed up to the Voluntary Code of Conduct
on gender diversity and best practice.
CET changes
In terms of Executive succession planning, the Committee also
recommended the appointment of Nick Hirons to the CET in
September 2014 as Senior Vice President, Global Ethics and
Compliance. Nick joined the company in 1994 as an Internal
Auditor in the UK, taking on roles of increasing seniority until he
was appointed Head of Audit & Assurance in 2009. In June
2013, he took up a role in China, where he was responsible for
establishing a new governance model for our China business.
As part of ensuring more focused management of the company’s
Consumer Healthcare, Vaccines, and Pharmaceuticals businesses
in advance of the completion of the three-part transaction with
Novartis, the Nominations Committee recommended:
• in April 2014, that Emma Walmsley, who is currently President,
Consumer Healthcare, will be appointed CEO of the Consumer
Healthcare Joint Venture business and be a member of its Board
if the transaction is successfully completed;
• the appointments in October 2014 of Dr Moncef Slaoui and
Abbas Hussain as Chairman, Global Vaccines and Head of
Global Pharmaceuticals respectively. Abbas subsequently
assumed responsibility for US Pharmaceuticals as part of his
role in February 2015. Moncef was previously Chairman, Global
R&D & Vaccines, and he continues to provide scientific counsel
on pharmaceuticals R&D activities to the CEO and Board.
Abbas was previously President, Europe, Japan and EMAP; and
• following the announcement by Deirdre Connelly, President
North America Pharmaceuticals, in February 2015 of her
intention to retire from GSK and given the recent change to
Global Pharmaceuticals, that her role will not be replaced on
the CET.
Committee evaluation
The Committee’s annual evaluation was externally facilitated by
Dr Tracy Long of Boardroom Review Limited and concluded that
the Committee continued to operate effectively. A key finding
from Dr Long’s evaluation concerned the tenure of the Committee
members. Committee accountability is safeguarded when the
majority of the Committee members will serve alongside the new
Board appointees in the medium to long term. The Committee
agreed that it should continue to refresh its membership so that
there was a suitable balance of longer serving Directors and more
recent appointees to support the new Committee Chairman in
shaping the Board.
GSK Annual Report 2014 93
Governance & remunerationFinancial statementsInvestor informationStrategic report Corporate governance
continued
Corporate Responsibility Committee Report
Sir Christopher Gent
Corporate Responsibility
Committee Chairman
Membership
The membership of the Corporate Responsibility Committee (the
Committee), together with appointment dates and attendance at
meetings, is set out below:
Members
Committee member since
Attendance at
full meetings
during 2014
Sir Christopher Gent
(Chairman from
1 January 2005)
Dr Stephanie Burns
Lynn Elsenhans
Dr Daniel Podolsky
Hans Wijers
Sir Robert Wilson*
9 December 2004
6 December 2007
1 October 2012
1 July 2006
10 October 2013
1 May 2013
5/5
5/5
5/5
5/5
4/5
2/2
* Sir Robert Wilson retired from the Board on 7 May 2014.
Hans Wijers was unable to attend one Committee meeting due to
a prior business commitment.
Other attendees at Committee meetings may include:
Attendee
Chief Executive Officer
Chairman, Global Vaccines
General Counsel
Head of Governance, Ethics & Assurance
Head of Global Communications and
Government Affairs
Head of Global Corporate Responsibility
Company Secretary – Secretary to the Committee
Other Executives
Independent external corporate
responsibility adviser
Regular
attendee
✓
✓
✓
✓
✓
✓
✓
✓
Attends
as required
✓
Independent external corporate responsibility adviser
To augment GSK’s engagement with stakeholder opinion, in May
2013, Sophia Tickell was appointed as an independent external
adviser to the Committee, a position that she had held previously
from March 2009 to July 2011. Ms Tickell has extensive experience
in the pharmaceuticals industry in improving health systems
productivity, sustainability in energy supply and distribution,
climate change policy and short-termism in financial markets.
She is the co-founder and a Director of Meteos, from where she
directs the Pharma Futures Series, which aims to align better
societal and shareholder value. She holds a number of other
board and advisory roles.
Ms Tickell attended meetings of the Committee and provided
independent advice and guidance on corporate responsibility
matters to both the Chairman and the CEO.
94 GSK Annual Report 2014
Main responsibilities
The main responsibilities of the Corporate Responsibility
Committee are set out below.
The Committee has a rolling agenda and receives reports from
members of the CET and senior managers to ensure that progress
in meeting GSK’s Corporate Responsibility commitments, which
were set in 2012, is reviewed on an annual basis. These
commitments are grouped across four areas:
• Health for all: innovating to address currently unmet health
needs; improving access to our products, irrespective of where
people live or their ability to pay; and controlling or eliminating
diseases affecting the world’s most vulnerable people
• Our behaviour: putting the interests of patients and consumers
first, driven by our values in everything we do and backed by
robust policies and strong compliance processes
• Our people: enabling our people to thrive and develop as
individuals to deliver our mission
• Our planet: growing our business while reducing our
environmental impact across the value chain.
The Committee also reviews and approves the Responsible
Business Supplement which is available for reference on
www.gsk.com/responsibility.
Work of the Committee during 2014
During 2014, the Committee focused its attention on several
issues including:
CR Focus area
Committee’s area of focus during 2014
Health for all
• Flexible and open R&D approach for diseases
of the developing world and other areas of
great medical need, such as antibiotics and
dementia
• Strategic partnerships to address access and
child mortality e.g. Save the Children and
Neglected Tropical Diseases
• Strategic approach to drive access to
medicines in Africa, including pricing, capacity
building and health system strengthening
• Vaccines strategy to support global public
health priorities, including pricing models,
Malaria vaccine and Ebola response
• ViiV Healthcare Ltd’s strategy to drive
innovation and access to HIV medicines
Our behaviour
• Global incentive compensation programme
and selling competency model
• Changes to how GSK engages with
healthcare professionals
• Further embedding values-based decision
making in the organisation, including training
and compliance
• Progress on addressing human rights
• Conduct and public disclosure of clinical
research, transparency of detailed data behind
trial results and patient safety
• Replacement, refinement and reduction in use
of animals in research and development
• Organisational change and employee relations
• Inclusion and diversity
• Leadership, development and approach to
performance management
• Employee health, safety and wellbeing
• Volunteering
Our people
Our planet
• Environmental performance across carbon,
water and waste impacts
Governance & remunerationFinancial statementsInvestor informationStrategic report
Committee evaluation
The Committee’s annual evaluation was externally facilitated by Dr Tracy Long of Boardroom Review Limited and concluded that the
Committee continued to operate effectively. As part of the review, it was noted that the Nominations Committee would identify and
recommend a new Committee Chairman to succeed Sir Christopher Gent when he retires from the Board at the end of the AGM
on 7 May 2015.
Directors’ Report
For the purposes of the UK Companies Act 2006, the Directors’ Report of GlaxoSmithKline plc for the year ended 31 December 2014
comprises pages 71 to 95 of the Corporate Governance Report, the Directors’ Responsibility Statements on pages 130 and 211 and
pages 232 to 248 of Investor Information. As it is entitled to do by the Companies Act 2006, the Board has chosen to set out in the
Strategic report those matters required to be disclosed in the Directors’ Report which it considers to be of strategic importance to the
company, as follows:
• risk management objectives and policies (pages 16, 17 and 70)
• likely future developments of the company (throughout the Strategic report)
• research and development activities (pages 24 to 34)
• inclusion and diversity (pages 44 to 45)
• provision of information to, and consultation with, employees (pages 44 to 45)
• carbon emissions (pages 46 to 47)
In addition, the disclosures relating to the appointment or replacement of Directors and Directors’ Powers at year end as required by
the UK Corporate Governance Code are disclosed on page 246. The information in the following table is also incorporated into the
Directors’ Report:
Interest capitalised
Financial statements, Notes 17 and 19
Publication of unaudited financial information
Group financial review, page 60
Details of any long-term incentive schemes
Remuneration report
Location of details in 2014 Annual Report
Waiver of emoluments by a Director
Waiver of future emoluments by a Director
Non pre-emptive issues of equity for cash
Non pre-emptive issues of equity for cash by any unlisted major subsidiary
undertaking
Not applicable
Not applicable
Not applicable
Not applicable
Parent company participation in a placing by a listed subsidiary
Not applicable
Contracts of significance
Shareholder information
Provision of services by a controlling shareholder
Not applicable
Shareholder waiver of dividends
Financial statements, Notes 15 and 42
Shareholder waiver of future dividends
Financial statements, Notes 15 and 42
Agreements with controlling shareholders
Not applicable
The Directors’ Report 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. The Directors’
Report was approved by a duly authorised Committee of the Board of Directors on 26 February 2015 and signed on its behalf by:
Sir Christopher Gent
Chairman
26 February 2015
GSK Annual Report 2014 95
Governance & remunerationFinancial statementsInvestor informationStrategic report Remuneration report
Chairman’s annual statement
• Vesting of the 2012 PSP and DABP (Deferred Annual Bonus Plan)
matching awards was impacted by TSR and adjusted free cash
flow performance being below the thresholds set. On a positive
note, key investments for the long-term success of the Group were
not sacrificed. The overall vesting level of 13.5% was achieved by
above threshold performance against the R&D new products and
business diversification performance measures.
I am pleased to report that the executives continue to align their
personal interests with those of shareholders. Sir Andrew has
elected again this year to defer the maximum permitted amount
under our DABP. His share ownership requirement (SOR) is to hold
four times his base salary in GSK shares. He currently holds over
11 times his base salary in GSK shares, i.e. between two and three
times the level required.
Further details of 2014 remuneration for executives and related
performance under the annual bonus and long-term incentives
(PSP awards and DABP matching awards) are given on pages
99 to 103.
Executive remuneration for 2015
The key changes to the structure of 2015 remuneration were
disclosed in last year’s report. For the 2015 awards, the time
horizon for PSP awards to Executive Directors has been revised
with the extension of the vesting period to five years. The awards
continue to be subject to a three-year performance period. As we
have already implemented malus and clawback provisions in prior
years, no further changes are required in this regard to comply with
the most recent updates to the UK Corporate Governance Code.
Agenda for 2015
No other structural changes are proposed for this year. The
Committee decided that salary levels for Executive Directors would
not be increased for 2015, although management have awarded a
1% average increase for employees in the UK and USA below the
level of the CET.
The three-part transaction with Novartis is expected to be
completed in the week commencing 2 March 2015 and will have
wide-ranging implications for executive remuneration at GSK. It is
anticipated that our adjusted free cash flow and R&D new product
targets for the 2013, 2014 and 2015 PSP and DABP awards, and
our business diversification target for the 2013 award, will need
to be revised to reflect the nature of the business after the
transaction. The Committee is aware of the potential challenges
of making such adjustments and will appropriately engage with
shareholders regarding each of these points in due course.
During 2015, the Committee will keep executive remuneration
arrangements under review to ensure that they continue to meet
the needs of the business. The Committee is proud of its track
record of listening to the views of our shareholders. We will
continue to engage with shareholders on executive remuneration
matters to ensure that our remuneration policy is operated in their
long-term interests. During 2014, we held our annual meeting with
GSK’s largest investors to listen to their views and feedback on
corporate governance matters, and we will once again take this
approach later in 2015.
Finally, I will be retiring as a Non-Executive Director of GSK at the
2015 AGM and consequently I am presenting my final report as
Chairman of the Committee. A successor will be appointed from
the Committee to take the work forward. I would like to take this
opportunity to thank both my fellow Committee members and
shareholders for their support during my tenure as Chairman of
the Committee.
We look forward to receiving your support for our annual report
on remuneration at our AGM. As always, we would also welcome
all shareholders’ feedback on this report.
Tom de Swaan
Remuneration Committee Chairman
26 February 2015
Dear Shareholder
As the Chairman of the Remuneration Committee (the Committee),
I am pleased to present our Remuneration report for 2014.
Following a year of change in 2013 with the new remuneration
reporting regulations, 2014 has been a year of stability. During the
year, the Committee has operated our binding remuneration policy,
which received overwhelming shareholder support at our 2014
AGM. For ease of reference for shareholders, we have included a
copy of our approved Remuneration policy report at the end of this
document. I can confirm that the structure of our incentive plans
remains unchanged, with the exception of the extension of the
time horizons of the PSP awards granted to Executive Directors
in 2015, which now include a three year performance period and
a five year vesting period.
At our AGM on 7 May 2015, shareholders will be asked to show
their support for our annual report on remuneration for 2014.
Remuneration outcomes in respect of 2014
From a financial perspective, total turnover for 2014 was down
3% to £23 billion, with challenging trading conditions faced by the
Group, particularly in the US primary care market. Core operating
profit and core Group PBIT were down 6% at CER. Cost savings
and financial efficiencies offset a substantial proportion of the
impact from the top line pressures during the year and helped
deliver the core EPS (down 1%), while also protecting investments
in the business. The dividend for the year was increased by 3%.
Although 2014 has been a challenging year for GSK, there have
been notable examples where the company has delivered positive
outcomes, including great progress on key product launches and
improved formulary positioning, as well as the continued progress
in our respiratory pipeline. Our newly launched products, including
Tivicay and Triumeq from ViiV Healthcare, Tafinlar, Mekinist and
Tanzeum have contributed £1.5 billion in turnover, up 84% CER,
and now represent 8% of Pharmaceutical and Vaccine sales.
Furthermore, in responding to the Ebola crisis, GSK has been
a clear leader in developing a vaccine. All of this has happened
alongside our efforts to complete the transformational three-part
transaction with Novartis.
Against this background, the key decisions made in respect of
performance in 2014 by the Committee are highlighted below:
• The bonus outcome for the Executive Directors was determined
by Group Operating Profit and Group PBIT, which achieved
performance between threshold and target. This delivered
significantly reduced bonus payments for the CEO and CFO,
compared with those of 2013. Vaccines performance and
the R&D value driver delivered on-target performance, which
also resulted in a reduced bonus payment for Dr Slaoui when
compared to the strong performance in 2013. Further details
of these bonus awards are given on pages 99 to 101.
96 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Annual report on remuneration
Total remuneration for 2014 (audited)
Salary
Benefits
+
Annual
bonus
Value earned
from long-term
incentive
awards
+
Pension
=
Total
remuneration
A. Fixed pay
B. Pay for performance
C. Pension
The total remuneration for 2014 for each Executive Director is set out in the table below:
A. Fixed pay
Salary
Benefits (1)
Total fixed pay
Sir Andrew Witty,
CEO
Simon Dingemans,
CFO
2014
£000
% of
total
2013
£000
% of
total
2014
£000
% of
total
2013
£000
% of
total
2014
$000
Dr Moncef Slaoui,
Chairman,
Global Vaccines
2013
$000
% of
total
% of
total
1,087
70
1,059
67
718
79
699
65
1,212
571
1,180
747
1,157 30%
1,126
16%
797 43%
764
23%
1,783 41%
1,927
23%
B. Pay for performance
Annual bonus – including the
amount deferred
Value earned from LTI awards (2):
Matching awards under Deferred
Annual Bonus Plan
Performance Share Plan
Total value earned from LTI awards
917
1,875
111
1,035
1,146
249
3,250
3,499
446
65
398
463
886
1,108
1,973
n/a
1,502
1,502
138
939
1,077
485
3,763
4,248
Total pay for performance
2,063 53%
5,374
74%
909 49%
2,388
73%
2,185 51%
6,221
74%
C. Pension (3)
671 17%
707
10%
144
8%
140
4%
365
8%
266
3%
Total remuneration (4)
3,891
7,207
1,850
3,292
4,333
8,414
Notes:
(1) Certain expenses incurred in the normal course of business are considered to be taxable benefits by UK HM Revenue & Customs and as such the
table above includes these figures for 2013 and 2014. Further details are provided on page 98.
(2) An analysis of the value of LTIs earned by Sir Andrew Witty, Simon Dingemans and Dr Moncef Slaoui is set out on pages 113 to 116.
(3) Full details of the pension contributions and pensions accrued to date for the Executive Directors are given on page 106.
(4) The Committee may in specific circumstances, and in line with stated principles, apply clawback/malus, as it determines appropriate. Following due
consideration by the Committee, there has been no reduction of outstanding awards or vesting levels (malus) applied during 2014 in respect of any
of the Executive Directors.
The following sections provide details of each element of ‘Total remuneration’, including how we implemented the remuneration policy
approved by shareholders in May 2014 and how it will be applied in 2015.
GSK Annual Report 2014 97
Governance & remunerationFinancial statementsInvestor informationStrategic report
Annual report on remuneration
continued
Comparator groups for pay and performance
The Committee uses two primary pay comparator groups when
considering executive pay:
UK cross-industry
comparator group
Anglo American
AstraZeneca
BG Group
BHP Billiton
BP
British American Tobacco
Diageo
Reckitt Benckiser
Rio Tinto
Royal Dutch Shell
SAB Miller
Tesco
Unilever
Vodafone
Global pharmaceutical
comparator group
France
Switzerland Novartis
Sanofi
UK
USA
Roche Holdings
AstraZeneca
AbbVie*
Amgen*
Bristol-Myers Squibb
Eli Lilly
Johnson & Johnson
Merck & Co
Pfizer
* Amgen and AbbVie are included for remuneration benchmarking, but
are not included in the TSR comparator group.
The global pharmaceutical comparator group is also used as the
basis for the TSR comparator group which features in our long-term
incentive awards.
The primary pay comparator group for each of the Executive
Directors is shown in the table below:
Salary
For 2015, the average salary increase budget for employees
below the level of the CET will be approximately 1.0% in both
the UK and USA.
The Committee decided not to increase the Executive Directors’
salaries for 2015.
The table below sets out the base salaries of the Executive
Directors over the last two years and for 2015.
Sir Andrew Witty
Simon Dingemans
Dr Moncef Slaoui
Base salary
%
change
2015
2014
2013
0% £1,087,300 £1,087,300 £1,060,800
0%
£700,150
0% $1,211,800 $1,211,800 $1,182,200
£717,700
£717,700
Benefits (audited)
The following table shows a breakdown of the grossed up cash
value of the benefits received by the Executive Directors in 2014
and 2013.
Sir Andrew
Witty
Simon
Dingemans
Dr Moncef
Slaoui
2014 benefits
£000
£000
Employee benefits (1)
Travel(2)
Other benefits (3)
Total 2014 benefits
20
42
8
70
24
42
13
79
2013 benefits
£000
£000
Director
Sir Andrew Witty
Simon Dingemans
Dr Moncef Slaoui
Primary pay comparator group
Global
pharmaceutical
UK
cross-industry
✓
✓
✓
Employee benefits (1)
Travel(2)
Other benefits (3)
International assignment (4)
Total 2013 benefits
17
36
14
–
67
22
30
13
–
65
$000
136
105
330
571
$000
157
82
7
501
747
When reviewing the CEO’s remuneration, the Committee also
references pay for a group of leading European companies whose
selection is based on their size and complexity.
Summary of total package competitive positioning for the CEO
Total remuneration benchmarking (£m)
12
10
8
6
4
(1) Employee benefits include healthcare, car allowance, personal financial
advice and life assurance/death in service.
(2) Travel expenses include car, travel and family, spouse and partner costs
associated with accompanying the director on GSK business, which
are deemed to be taxable benefits on the individual.
(3) Other benefits comprise expenses incurred in the ordinary course of
business, which are deemed to be taxable benefits on the individual and,
as such, have been included in the table above. For Dr. Slaoui in 2014,
this includes UK accommodation of $326,610.
(4) Dr Moncef Slaoui was seconded to the UK in November 2010 in order
to enable him to be closer to the Vaccines business as he assumed
operational responsibility for that part of the Group. The secondment
ended on 31 December 2013. In line with other senior GSK expatriates,
he received appropriate assignment expenses, including
accommodation, location allowance, relocation specific financial advice
and tax equalisation.
No significant changes to the provision of benefits are proposed
for 2015. For further details, please refer to the Policy report (see
page 119).
UK cross-industry
group
Global pharmaceutical
group
Lower quartile to median Median to upper quartile Current position
European cross-industry
group
Benchmarking includes salary and the expected value of incentives based on the
Committee’s agreed benchmarking methodology.
98 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Pay for performance (audited)
Annual bonus
The majority of the annual bonus opportunity is based on a formal
review of performance against stretching financial targets. This
outcome is then adjusted to reflect individual performance by
applying an individual performance multiplier (IPM).
For the financial measures, the bonus threshold is 90% of target,
with the maximum being payable for achievement of 110% of
target. The bonus threshold of 90% reflects the stretching nature
of the bonus targets.
The IPM is set by the Committee taking into account
performance against individual objectives. The multiplier may
be set between 0% and 150%. Generally, in a year when an
Executive Director has performed strongly against all their
objectives, it would be expected that they would receive an
IPM towards the top of that range.
2014 performance against targets
For 2014, the annual bonus was based on the following financial performance measures and weightings.
Core Group operating
profit
Core Group PBIT
Vaccines performance
R&D value driver
Sir Andrew Witty
Simon Dingemans
Dr Moncef Slaoui
75%
75%
–
25%
25%
25%
–
–
25%
–
–
50%
As the actual financial targets are linked to the company’s financial and strategic plan, the Committee believes that the targets remain
commercially sensitive. The specific 2014 targets are therefore not disclosed. However, the following illustrates the performance
achieved in the year against the target for each of the four measures. Individual performance multipliers set for 2014 were also
substantially lower than 2013.
Performance
below
threshold
Performance
between threshold
and target
Target
performance
Performance
between target and
range maximum
Performance
above range
maximum
Performance measure
Core Group operating profit
Core Group PBIT
Vaccines performance
R&D value driver
Financial performance
Core Group operating profit and core Group profit before interest and tax
In the face of some major headwinds impacting the Group, the performance in 2014, both in terms of core
Group operating profit and core Group profit before interest and tax was resilient. Strong sales performances
were delivered in several important parts of the business, including Emerging Markets (+5%), Japan (+1%),
ViiV Healthcare (+15%) and oncology (+33%). Europe, helped by the benefits of refocusing the commercial
organisation, delivered another relatively stable performance despite ongoing government and competitive
pressures. In addition, a tight rein on costs, added to the delivery of incremental savings in 2014 from
restructuring and structural initiatives (approximately £400 million), helped to offset a substantial portion of
the impact from top line pressures while, importantly, protecting key investments required for the long-term
success of the Group.
Vaccines performance and R&D value drivers
Targets for the year around pipeline growth and value were achieved.
This reflects four important approvals in 2014 (Incruse Ellipta and Arnuity Ellipta in respiratory, Triumeq in HIV
and Tanzeum for Type 2 diabetes), two very important regulatory filings (Breo Ellipta for use in asthma in the
US and mepolizumab, our first-in-class anti-IL5 treatment, for severe asthma, filed in the US and Europe) and
the start of three major phase III programmes (our triple combination therapy for COPD, mepolizumab for
COPD and losmapimod for Acute coronary syndrome). Global sales of vaccines were down 1% as several
strong performances (Boostrix, Rotarix, Synflorix, Infanrix/Pediarix) offset most of the impact of the ongoing
suspension of HPV vaccines in Japan, the return to the market of competing vaccines and supply constraints.
The business also delivered exciting phase III data for the Group’s vaccine to prevent shingles and achieved
major milestones in the programmes for malaria and Ebola.
GSK Annual Report 2014 99
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continued
The table below sets out the matters which the Committee considered in respect of the individual objectives set for each Executive
Director.
Personal performance
Sir Andrew Witty
Sir Andrew’s bonus reflects financial performance, developments that offer the opportunity to positively re-shape
the Group’s business and management’s response to issues and challenges faced in the course of the year.
These included:
The Group’s financial performance and response to challenging trading conditions in the year, which included greater
than expected contracting and competitive pressures to the US respiratory business, the launch of Lovaza generics
and supply disruptions in Consumer Healthcare. Sales were down 3% to £23 billion and core EPS was down 1%
CER to 95.4p, helped by delivery of cost and financial efficiencies.
Initiation of the innovative proposed three-part transaction with Novartis, which accelerates the Group’s strategy
to re-shape its business and provide a better balance and broader range of growth drivers; synergy and operating
leverage opportunities; further financial efficiencies and increased balance and sustainability of cash flow.
The commencement of a new restructuring programme to simplify GSK’s global Pharmaceuticals Business.
Approximately £1 billion of annual cost savings are expected to be delivered over the next 3 years. £400 million of
net incremental cost savings were delivered from existing restructuring programmes and structural savings in 2014.
The establishment of a new executive management structure to simplify the organisation and ensure focus across
three core global businesses (Global Pharmaceuticals, Consumer Healthcare and Vaccines). The Group also
continued to restructure its ways of working, with global roll-out of measures to modernise GSK’s commercial model
and interaction with healthcare professionals.
Sustained delivery in R&D, with 16 approvals and 11 filings for key products in major markets in 2014, including
continued build of new products in core pharmaceutical areas of respiratory and HIV. Sustained progress of assets
in the advanced pipeline (7 advanced assets viewed with high potential: a closed triple combination in respiratory,
Iosmapimod for acute coronary syndrome, mepolizumab for severe asthma and COPD, sirukumab for RA, a vaccine
to prevent shingles, cabotegravir for HIV and ‘863 for anaemia).
Further strengthening of GSK’s business and contribution to public health in middle-income/developing countries.
During the year, the company filed its candidate vaccine to prevent malaria, developed a candidate Ebola vaccine to
help respond to the crisis in West Africa, launched a new long-term Africa strategy of investment and launched new
pricing approaches for vaccines. GSK was placed 1st in the Access to Medicine Index for the fourth consecutive year.
The Group’s response to the China investigation, both in reform of its subsidiary business and implementation of
steps to further strengthen ABAC monitoring, controls and procedures in other markets. The impact of the
investigation was also considered in the evaluation of Sir Andrew’s remuneration in 2013.
Overall evaluation of Sir Andrew’s performance and leadership of the Group in 2014 led the Committee to award a
bonus of £917,000 for 2014. This represents a reduction of £958,000 (51%) compared to the bonus award for
2013 (£1,875,000).
Simon Dingemans
GSK delivered core EPS down 1%, in line with the revised financial guidance provided in July 2014, while also
protecting ongoing investments in new launches, additional manufacturing capabilities and capacity for the long-term
success of the Group. Simon continued to drive operating and financial efficiencies and helped lead the planning for
the new restructuring programme that is expected to deliver £1 billion of annual savings by 2017 and 50% in 2016.
GSK was able to return £4.1 billion of cash to shareholders in 2014.
The roll out of GSK’s ERP system and the establishment of Core Business Services to bring together support
functions in order to streamline and standardise functional support to the business has continued at a significant pace.
Dr Moncef Slaoui
Dr Moncef Slaoui delivered a year of good performance for R&D. The number of candidate selections, commit to
medicines development and files approved were in line with or ahead of R&D’s fill and flow targets. First time in
human submissions were slightly below target. New product sales were encouraging. Dr Slaoui transitioned
leadership of R&D to Dr Vallance following a planned period of development. Under Dr Slaoui’s leadership, the
Vaccines business delivered strong performance in 2014 in line with plan.
100 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report The following table shows actual bonuses earned compared to opportunity for 2014 and 2013.
Bonus opportunity
Total bonus
Bonus paid
Base salary
£/$000
Target
(% of salary)
Maximum
(% of salary)
2014
(% of salary)
2013
(% of salary)
Sir Andrew Witty
Simon Dingemans
Dr Moncef Slaoui
£1,087
£718
$1,212
125%
80%
85%
200%
180%
200%
84%
62%
91%
177%
127%
167%
2014
£/$000
£917
£446
$1,108
2013
£/$000
£1,875
£886
$1,973
2015 operation of annual bonus plan
In line with the policy that performance measures should be based on relevant business unit performance and given the change to
Dr Moncef Slaoui’s responsibilities during 2014, for 2015 Dr Slaoui’s financial performance measures and weightings will be as follows:
Core Group operating
profit
Core Group PBIT
Vaccines performance
R&D value driver
Dr Moncef Slaoui – 2015
–
25%
75%
–
No other changes are proposed to the operation of the annual bonus plan for 2015. Inevitably, targets linked directly to the financial and
strategic plan are commercially sensitive and the Committee does not consider it appropriate to disclose annual bonus targets during
the year. However, details of performance achieved will be disclosed in the 2015 Annual Report.
Long-term incentive plans (audited)
Deferred Annual Bonus Plan and matching awards
The levels of participation in respect of 2013 and 2014 for the
Executive Directors are shown in the table below, together with the
maximum matching awards granted in 2015 in respect of the
deferrals of 2014 bonuses.
Performance Share Plan
The table below shows Performance Share Plan (PSP) award
levels for 2014 and 2015 for each Executive Director:
Sir Andrew Witty
Simon Dingemans
Dr Moncef Slaoui
2015
Matching
award
30,172 shares
14,680 shares
11,973 ADS
% of total bonus
deferred into
shares or ADS
2013
50%
35%
50%
2014
50%
50%
50%
Sir Andrew Witty
Simon Dingemans
Dr Moncef Slaoui
2015
Award
429,338 shares
188,930 shares
131,005 ADS
2015
Award level
as % of
base salary
600%
400%
500%
2014
Award level
as % of
base salary
600%
400%
500%
Vesting of matching awards with a performance period ended
31 December 2014 is shown on pages 113 and 114.
Performance conditions for matching awards made in 2015 under
the Deferred Annual Bonus Plan (DABP) are the same as for the
Performance Share Plan and are described on page 104.
25% of Sir Andrew Witty’s 2014 PSP award is subject to a further
two-year vesting period (five years in total). The PSP awards made
to all of the Executive Directors in 2015 are subject to a three year
performance period and a five year vesting period.
PSP and DABP matching awards are both subject to performance
and continued employment.
GSK Annual Report 2014 101
Governance & remunerationFinancial statementsInvestor informationStrategic report
Annual report on remuneration
continued
2012 awards with a performance period ended 31 December 2014 (audited)
The Committee reviewed the performance of the PSP and DABP matching awards granted to Executive Directors against targets set
in 2012. The performance achieved in the three years to 31 December 2014 and the actual vesting levels are set out in the table below.
The Committee previously provided estimates of vesting for 2012 awards in GSK’s 2012 and 2013 Annual Reports. Those estimates
were based on performance achieved at that time and the following reflects performance achieved over the course of the whole
performance period. No discretion was exercised in determining their vesting levels.
Due to commercial sensitivities, the targets for R&D new products and business diversification were not disclosed at the time
of grant and the Committee committed to disclosing them at the time of vesting. These targets are shown in the table below.
Performance
measures
and relative
weighting
Business
diversification
performance
(25%)
Performance targets and performance achieved
The business diversification measure was based on an aggregate three-year revenue
target for Vaccines, Consumer Healthcare, Dermatology and Emerging Markets, Asia
Pacific and Japan. The vesting schedule is shown below. Aggregate sales for the period
were £44.96 billion.
Maximum
Threshold
Target
£51.23 billion
£49.74 billion
£47.26 billion
£44.77 billion
% vesting*
100%
75%
50%
25%
Vesting
% of
maximum
% of award
27%
6.75%
R&D new product
performance
(25%)
The R&D new product performance measure was based on an aggregate three-year
revenue target for New Product sales. New Products are defined as products launched
in the performance period and the two preceding years. Therefore products launched in
the years 2010 to 2014 were included. The vesting schedule is shown below. Aggregate
sales for the period were £6.33 billion.
27%
6.75%
Maximum
Threshold
Target
£7.70 billion
£7.00 billion
£6.65 billion
£6.30 billion
% vesting*
100%
75%
50%
25%
Adjusted free
cash flow
performance
(25%)
Adjusted free cash flow (AFCF) for the three years was £14.40 billion which, in line with
the Committee’s agreed principles, included adjustments for a number of material
distorting items, including legal settlements, exchange rate movements and special
pension contributions.
The AFCF vesting schedule was disclosed at the time of grant. 25% (threshold) of the
award vests for achieving AFCF of £17.30 billion, 50% for achieving £17.84 billion, 75%
for achieving £19.62 billion and 100% (maximum) for achieving £20.52 billion, with
straight-line vesting between these points.
Relative TSR
performance
(25%)
GSK’s TSR rank position was 10th in the comparator group of ten pharmaceutical
companies (GSK and nine other companies). The vesting schedule and comparator
group is as set out for the 2015 awards on page 104.
Total vesting in respect of 2014
* Straight-line vesting applies between these points.
0%
0%
0%
0%
13.5%
Use of malus and clawback
The company’s policy on malus and clawback is set out in the 2014 Remuneration policy report on page 121.
The Committee has jurisdiction on malus and clawback in respect of the executives. The Recoupment Committee exercises this authority
for the wider employee base. It is comprised of senior executives with relevant oversight and appropriate experience, including the Senior
Vice President, Global Ethics and Compliance, and the Senior Vice President & General Counsel.
From 1 January 2015, in respect of each financial year, the Committee will disclose whether it (or the Recoupment Committee) has
exercised clawback or malus.
Disclosure will only be made when the matter has been the subject of public reports of misconduct, where it has been fully resolved,
where it is legally permissible to disclose and where it can be made without unduly prejudicing the company and therefore shareholders.
The Committee has determined that the release of some shares under the LTI plans may be delayed in the case of leavers, to reinforce
the implementation of the malus and clawback policy. Also, in the case of deferred bonus awards under the DABP granted to executives
who then retire or are made redundant, the vesting of those awards will normally be delayed so that they vest on their original timescales
rather than vesting earlier at the end of the year in which the termination date falls.
102 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
Update on performance of ongoing awards
The Committee reviewed the performance of the PSP and DABP matching awards granted to Executive Directors in 2013 and 2014.
The following tables provide an estimate of vesting taking into account performance to date. Actual vesting levels will only be determined
based on performance over the full three-year performance periods. The indications below should therefore not be regarded as
predictions of the final vesting levels. It is also noted that in relation to some measures, adjustments may be required following the close
of the three-part transaction with Novartis, which is expected to complete during the week commencing 2 March 2015, to reflect the
impact of the transaction on the business.
2013 awards with a performance period ending 31 December 2015
Performance
measures
and relative
weighting
Business
diversification
performance
(25%)
Performance update
Business diversification performance for the 2013 awards measures aggregate three-year sales across Vaccines, Consumer
Healthcare and Emerging Markets, Asia Pacific and Japan. Threshold performance results in 25% vesting and maximum
performance (114% of threshold) results in 100% vesting.
There were good sales for the two years for these business areas. Based on aggregate sales for the period and based on
performance measure definitions, vesting is currently estimated to be between 25% and 50% of the maximum for this element.
R&D new product
performance
(25%)
R&D new product sales performance measures aggregate three-year sales for new products launched in the three-year
performance period and preceding two years, i.e. 2011-2015. Threshold performance results in 25% vesting and maximum
performance (122% of threshold) results in 100% vesting.
There were strong sales of new products in the two years. Based on aggregate sales of new products for the two years, and
based on performance measure definitions, vesting is currently estimated to be between 75% and 100%.
Adjusted free
cash flow
performance
(25%)
The AFCF vesting schedule for the 2013 awards was disclosed at the time of grant.
25% (threshold) of the award vests for achieving AFCF of £14.06 billion, 50% for achieving £14.49 billion, 75% for achieving
£15.94 billion and 100% (maximum) for achieving £16.66 billion, with straight-line vesting between these points.
Based on AFCF for the two years, and on performance measure definitions, vesting is currently estimated to be below
threshold.
Relative TSR
performance
(25%)
For the period 1 January 2013 to 31 December 2014, GSK’s TSR rank position was 10th in the comparator group of ten
pharmaceutical companies (GSK and nine other companies). The vesting schedule and comparator group are as set out for
the 2015 awards on page 104. If the ranking position remains at this level, vesting would be below threshold.
Current estimate of potential total vesting for 2013 awards
Between 25% and 50% vesting
2014 awards with a performance period ending 31 December 2016
Performance
measures
and relative
weighting
Performance update
R&D new product
performance
(1/3rd)
R&D new product sales performance measures aggregate three-year sales for new products launched in the three-year
performance period and preceding two years, i.e. 2012-16. Threshold performance results in 25% vesting and maximum
performance (122% of threshold) results in 100% vesting.
There were strong sales of new products in the year. Based on aggregate sales of new products for the year, and based on
performance measure definitions, performance is currently estimated to be above the maximum vesting level (i.e. 100%) for
this element.
Adjusted free
cash flow
performance
(1/3rd)
Relative TSR
performance
(1/3rd)
The adjusted free cash flow (AFCF) vesting schedule for the 2014 awards was disclosed at the time of grant.
25% (threshold) of the award vests for achieving AFCF of £13.68 billion, 50% for achieving £14.10 billion, 75% for achieving
£15.51 billion and 100% (maximum) for achieving £16.22 billion, with straight-line vesting between these points.
Based on AFCF for the year, and on performance measure definitions, vesting is currently estimated to be below threshold.
For the period 1 January 2014 to 31 January 2014, GSK’s TSR rank position was 10th in the comparator group of ten
pharmaceutical companies (GSK and nine other companies). The vesting schedule and comparator group are as set out for
the 2015 awards on page 104. If the ranking position remains at this level, vesting would be below threshold.
Current estimate of potential total vesting for 2014 awards
Between 25% and 50% vesting
GSK Annual Report 2014 103
Governance & remunerationFinancial statementsInvestor informationStrategic report Annual report on remuneration
continued
Performance targets for 2015 awards
Inevitably, measures linked directly to strategy are commercially sensitive. In particular, the Committee does not consider it appropriate
to disclose the targets for R&D new product performance at grant, as it may result in competitive harm. However, the targets will be
disclosed in full in GSK’s 2017 Annual Report at the end of the performance period, together with details of the extent to which they
have been met. The Committee will provide updates on estimated vesting against the targets during the performance period. The 2015
performance targets and vesting schedules are set out in the table below.
2015 awards with a performance period ending 31 December 2017
Performance
measures
and relative
weighting
R&D new product
performance
(1/3rd)
Adjusted free
cash flow
performance
(1/3rd)
Link to strategy
Vesting schedule
Recognises importance of R&D to future business
growth.
Revenue target based on new product sales to
incentivise better R&D performance. New products
defined as products launched in the performance
period and the two preceding years. Therefore, for
the 2015-2017 performance period, products
launched in the years 2013-2017 will be included
in the measurement.
Aggregate three-year revenue target for 2015
awards for new product sales should reflect growth
on historic performance of new product sales.
Recognises importance of effective working capital
and cash management.
Maximum
Threshold
Performance
(% of threshold)
122%
100%
% vesting
100%
25%
The performance targets for this measure will be determined and
communicated following the close and implementation of the
three-part transaction with Novartis, which is expected to complete in
the week commencing 2 March 2015. It is anticipated that these will
be communicated by the end of July 2015.
TSR ranking
within comparator
group1
Maximum
1st, 2nd, 3rd
Threshold2
4th
5th
Median
6th to 10th
% vesting
100%
72%
44%
30%
0%
1 TSR comparator group: AstraZeneca, Bristol-Myers Squibb, Eli Lilly,
GSK, Johnson & Johnson, Merck & Co, Novartis, Pfizer, Roche
Holdings and Sanofi.
2 The vesting schedule is based on delivering 30% vesting for median
performance. In a comparator group of ten companies, median falls
between two companies. Threshold vesting is therefore for achieving
above median performance.
Relative TSR
performance
(1/3rd)
Focuses on delivery of value to shareholders.
Relative TSR using a comparator group
comprising GSK and nine other global
pharmaceutical companies.
Relative TSR is measured over three years, using
a twelve-month averaging period. TSR is measured
in local currency.
104 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
Historical vesting for GSK’s LTIs
The following table shows historical vesting levels under the company’s long-term incentive plans (Deferred Annual Bonus Plan matching
awards, Performance Share Plan and Share Option Plan) in respect of awards made to executives since 2004.
Deferred Annual Bonus Plan
Performance Share Plan
Year of
grant
2004
2006
2007
2008
2009
2010
2011
2012
Performance period
2005–2007
2006–2008
2007–2009
2008–2010
2009–2011/12
2010–2012/13
2011–2013
2012–2014
Total
vesting
%
n/a
n/a
n/a
n/a
n/a
30
40
13.5
Vesting
under
TSR
%
38.5
0
35
35
9
9
0
0
Vesting
under
adjusted free
cash flow
%
n/a
n/a
n/a
n/a
40
16
13
0
Vesting
under
R&D new
product
%
n/a
n/a
n/a
n/a
n/a
n/a
16
6.75
Vesting
under
business
diversification
%
n/a
n/a
n/a
n/a
n/a
n/a
11
6.75
Share
Option Plan
Vesting
under
EPS
%
100
50.7
0
0
0
n/a
n/a
n/a
Total
vesting
%
38.5
0
35
35
49
25
40
13.5
For the DABP, the 2010 awards were subject wholly to TSR performance and from 2011 awards were subject to the same performance measures
as PSP awards.
Other all-employee share plans
The Executive Directors participate in various all-employee share
plans, including ShareSave and ShareReward.
The ShareSave Plan is an HM Revenue & Customs approved plan
open to all UK employees. Participants may save up to £250 a
month from their net salaries for a fixed term of three years and at
the end of the savings period they have the option to buy GSK
shares at a discount of up to 20% of the market price set at the
launch of each savings contract. Sir Andrew Witty and Simon
Dingemans each contribute £250 a month into the ShareSave
Plan.
The ShareReward Plan is an HM Revenue & Customs approved
plan open to all UK employees on the same terms. Participants
contribute up to £125 a month from their gross salaries to
purchase GSK shares and the company matches the number
of GSK shares bought each month under this arrangement.
Sir Andrew Witty and Simon Dingemans each contribute £125
a month to buy shares under the ShareReward Plan.
Dilution limits
All awards are made under plans which incorporate dilution
limits consistent with the guidelines provided by the Investment
Association (formerly provided by the Association of British
Insurers). These limits are 10% in any rolling ten year period for
all plans and 5% in any rolling ten year period for executive share
plans. Estimated dilution from existing awards made over the last
ten years up to 31 December 2014 is as follows:
All GSK employee share plans
Executive share plans
10%
10
08
06
04
02
0
2.81%
Actual
Limit
5%
2.54%
Payments to past directors during 2014 (audited)
There were no payments to past directors during 2014.
Payments for loss of office during 2014 (audited)
There were no payments for loss of office to directors during 2014.
Share ownership requirements
To align the interests of executives with those of shareholders,
executives are required to build up and maintain significant
holdings of shares in GSK over time.
Executives are required to continue to satisfy these shareholding
requirements for a minimum of 12 months following retirement
from the company.
Current share ownership requirements (SOR) are set out in the
table below:
CEO
Other Executive Directors
Other CET members
Share ownership requirement
4x base salary
3x base salary
2x base salary
Executive Directors’ shareholdings for the purpose of SOR as at
19 February 2015 and achievement of SOR, based upon an average
share price for the 90 working days preceding that date, were as set
out in the following table (audited):
Holdings for SOR
purposes as at
19 February
2015
31 December
2013
Increase in
shareholding
%
Achievement
of SOR
%
Sir Andrew Witty
Simon Dingemans
Dr Moncef Slaoui
846,470
187,722
488,978
566,142
84,872
383,079
50%
121%
28%
279%
125%
300%
Any outstanding share awards still subject to performance criteria
or continued employment are not included in the shareholdings for
the purpose of SOR.
GSK Annual Report 2014 105
Governance & remunerationFinancial statementsInvestor informationStrategic report
Annual report on remuneration
continued
Pension (audited)
The arrangements for the current Executive Directors are set out in the table below.
Pension arrangements
Sir Andrew Witty
Sir Andrew Witty is a member of the Glaxo Wellcome defined benefit pension plan with an accrual rate of 1/30th of final
pensionable salary. This plan has been closed to new entrants since 2001. The section of the plan that Sir Andrew is a member
of provides for a normal retirement age of 60 and a maximum pension value of 2/3rds of pensionable salary. Since 1 April 2013,
pensionable earnings increases are limited to 2% per annum for all members, including Sir Andrew.
Simon Dingemans
Simon Dingemans is not a member of any GSK pension plan for pension contributions and instead receives a cash payment
in lieu of pension of 20% of base salary in line with GSK’s defined contribution pension plan rates.
Simon Dingemans receives death in service and ill-health insurance that is provided as part of the pension plan. This has been
included in his employee benefits on page 98.
Dr Moncef Slaoui
Dr Slaoui is a member of the US Cash Balance Pension Plan and the Supplemental Cash Balance Pension Plan which provides
for an Executive Pension Credit. GSK makes annual contributions to Dr Slaoui’s pension plans of 38% of his base salary. The
plans provide a cash sum at retirement and the fund increases at an interest rate set annually in advance, based on the 30 year
US Treasury bond rate. The plan has no entitlement to a spouse’s pension or to pension increases.
Dr Slaoui was an active member of the Belgium AG Insurance (ex-Fortis) Plan until 31 May 2006 and has been a deferred
member since. This plan is a defined benefit plan with a lump sum payable at a normal retirement age of 60. There are no
further company contributions to this plan.
Dr Slaoui is also a member of the GSK 401(k) savings scheme open to all US employees and the Executive Supplemental
Savings Plan (ESSP), a savings scheme open to executives to accrue benefits above US government limits imposed on the
GSK 401(k) plan. Contributions to both plans are invested in a range of funds. The combined contribution rate under the plans
is up to 6% (2% core contributions plus a match of up to 4%) of total base salary and bonus, less any bonus deferred under
the Deferred Annual Bonus Plan.
The following table shows the breakdown of the pension values set out on page 97.
Pension remuneration values
UK defined benefit
US defined benefit
Belgian defined benefit
Employer cash contributions
Member contributions to defined
benefit plans
Total pension remuneration value
Sir Andrew Witty
Simon Dingemans
Dr Moncef Slaoui
2014
£000
703
–
–
–
(32)
671
2013
£000
739
–
–
–
(32)
707
2014
£000
–
–
–
144
–
144
2013
£000
–
–
–
140
–
140
2014
000
–
$157
€58
$131
–
$365
2013
000
–
–
€101
$127
–
$266
a) The pension remuneration figures have been calculated in accordance with the methodology set out in the Remuneration Regulations.
In calculating the defined benefit pension values for 2014, the difference between the accrued pension as at 31 December 2014 and the
accrued pension as at 31 December 2013 increased by inflation (2.7% for UK defined benefit, 1.3% for US defined benefit,1.3% for Belgium
defined benefit) has been multiplied by 20. Where this results in a negative value, this has been deemed to be zero. In calculating total values,
amounts have been translated from Euros into US dollars using an exchange rate of 1.33 for 2014 and 1.38 for 2013.
b) For Sir Andrew, further details regarding the 2014 pension values are set out in the table below.
Sir Andrew Witty
UK – Funded
UK – Unfunded
Total
Accrued pension as at
31 December 2014 (£ p.a.)
70,810
613,521
684,331
Accrued pension as at
31 December 2013 (£ p.a.)
68,913
563,193
632,106
Pension remuneration
value for 2014 (£000)
1
702
703
Sir Andrew joined GSK predecessor companies in 1991 and progressed through roles of increasing seniority within GSK until he was appointed
CEO in May 2008. During this time, he built up pensionable service through the different tiers of the Glaxo Wellcome Pension Plan. His current
pension entitlement is a product of his service and progression within GSK. Please note that the 2013 figures have had a small adjustment made
to them, following a change to the inflationary measure used to value the Funded pension; the Total Pension number is unchanged.
c) For Dr Moncef Slaoui, further details regarding the 2014 pension values are set out in the table below.
Dr Moncef Slaoui
US – Funded
US – Unfunded
Belgium – Funded
US – 401(k) & ESSP
Total
Accrued pension as at
31 December 2014 (p.a.)
$12,310
$337,157
€88,000
–
Accrued pension as at
31 December 2013 (p.a.)
$12,200
$325,080
€84,000
–
Pension remuneration
value for 2014 (000)
–
$157
€58
$131
$365
Dr Slaoui joined GSK predecessor companies in 1988 and he progressed through a number of senior roles within GSK until he was
appointed Chairman, Research & Development in June 2006 and then Chairman, Global Vaccines in October 2014. During this time,
he has built up pensionable service in the Belgium AG Insurance (ex-Fortis) Plan and US Cash Balance Plan and Supplemental Pension Plan.
Annual employer cash contributions were made to the 401(k) plan and Executive Supplemental Savings Plan (ESSP). His current pension
entitlement is a product of his service and progression within GSK.
106 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
Performance graph and table
The following graph sets out the performance of the company
relative to the FTSE 100 index, and to the pharmaceutical
performance comparator group for the six-year period to
31 December 2014. The graph has been prepared in accordance
with the Remuneration Regulations and is not an indication of the
likely vesting of awards granted under any of the company’s
incentive plans. These indices were selected for comparison
purposes as they reflect both the index of which GSK is a
constituent and the industry in which it operates.
220
200
180
160
140
120
100
80
60
31/12/08
31/12/09
31/12/10
31/12/11
31/12/12
31/12/13
31/12/14
GSK Total Return
GSK Pharma Peers Total Return Index*
FTSE 100 Total Return Index
* This index comprises AstraZeneca, Bristol-Myers Squibb, Eli Lilly,
Johnson & Johnson, Merck & Co, Novartis, Pfizer, Roche Holdings and Sanofi.
Remuneration table
2014
£000
2013
£000
2012
£000
2011
£000
2010
£000
2009
£000
3,891 7,207 4,386 6,807 4,562 5,790
CEO
(Sir Andrew Witty)
CEO single figure of
remuneration
Annual bonus award(1)
(% of maximum)
Vesting of LTI awards
(% of maximum)
Percentage change in remuneration of CEO
Salary
Benefits
Annual bonus
Sir Andrew Witty
UK Employees
2014
£m
1,087
70
917
% change
2.7%
5.5%
(51)%
% change
2.5%
0%
(19)%
This reflects salary earned in, benefits received in and annual
bonus earned in respect of 2014 compared with 2013. For the
wider UK employee population, the salary increase includes the
annual salary review as well as any additional changes in the year,
e.g. on promotion. The 0% increase for benefits for UK employees
reflects there being no change to benefits policies or levels during
the year. It does not reflect any changes to the level of benefits an
individual may have received as a result of a change in role, e.g.
promotion. The UK population was considered to be the most
relevant comparison as it most closely reflects the economic
environment encountered by the CEO.
Relative importance of pay
The following table sets out the percentage changes in the
Group’s dividends paid to shareholders, share buy-back and total
employee pay.
Total employee pay
Dividends
Share buyback
2014
£m
7,520
3,843
238
2013
£m
7,591
3,680
1,504
% change
(2)%
4.4%
(85)%
The figures in the table above are as set out on pages 139 and
153. Dividends declared in respect of 2014 were £3,865 million
(2013: £3,754 million), i.e. an increase of 2.95%. In determining
specific share repurchase levels, the company considers the
development of free cash flow during the year. Given the impact of
the sustained strength of Sterling on free cash flow, the company
suspended its share repurchase programme during 2014.
Following the completion of the three-part Novartis transaction,
GSK intends to return to shareholders £4 billion of the net
proceeds. The company does not expect to make any ordinary
share repurchases in 2015.
42% 88% 44% 100% 59% 100%
Total employee pay is for all Group employees globally.
(7) 13.5% (6)31% (5)24% (4)70% (3)35% (2)35%
(1) 2009 and 2010 bonus amounts include amounts paid under the
Operational Efficiency Bonus in place for those years. The overall
maximum bonus receivable was subject to a limit of 200% of base
salary.
(2) In respect of the 2007 PSP award. Sir Andrew also had an
outstanding award over 195,500 share options, granted in 2007,
which lapsed in full. These have not been included in the total
vesting percentage due to the distorting effect of aggregating
conditional shares and share options.
(3) In respect of the 2008 PSP award. Sir Andrew also had an
outstanding award over 525,000 share options, granted in 2008,
which lapsed in full. These have not been included in the total
vesting percentage due to the distorting effect of aggregating
conditional shares and share options.
(4) In respect of the three-year element of the 2009 PSP award.
(5) In respect of the four-year element of the 2009 PSP award, the
three-year element of the 2010 PSP award and the 2010 DABP
matching award.
(6) In respect of the four-year element of the 2010 PSP award, the
three-year element of the 2011 PSP award and the 2011 DABP
matching award.
(7) In respect of the 2012 PSP and DABP matching awards.
External appointments for Executive Directors
The Board encourages Executive Directors to hold one external
directorship once they have become established in their role,
to broaden their experience and development, and help increase
the pool of Non-Executive Director candidates. Any outside
appointments are considered by the Nominations Committee
to ensure they would not cause a conflict of interest and are
then approved by the Chairman on behalf of the Board. It is
the company’s policy that remuneration earned from such
appointments may be kept by the individual Executive Director.
During 2014, Dr Moncef Slaoui received $12,000 in relation to his
membership of the Qatar Biomedical Research Institute Scientific
Advisory Committee. He also earned a $400 honorarium for
attending a board meeting of the Advisory Committee to the
Director of National Institute of Health. There are no other external
appointments for which he receives any remuneration. During
2014, Sir Andrew Witty and Simon Dingemans did not hold any
external appointments for which they were remunerated.
GSK Annual Report 2014 107
Governance & remunerationFinancial statementsInvestor informationStrategic report
Annual report on remuneration
continued
Adviser to the Committee
The Committee has access to external advice as required. The
Committee carried out a formal review of the independent advisers
to the Committee in 2013. As a result of this review, the Committee
reappointed Deloitte LLP to provide it with independent advice on
executive remuneration. The Committee Chairman agrees the
protocols under which Deloitte provides advice and the Committee
is satisfied that the advice they have received from Deloitte has been
objective and independent.
Deloitte is a member of the Remuneration Consultants’ Group and,
as such, voluntarily operates under the code of conduct in relation
to executive remuneration consulting in the UK. The code of conduct
can be found at www.remunerationconsultantsgroup.com.
Deloitte provided independent commentary on matters under
consideration by the Committee and updates on market practice
and legislative requirements. Deloitte’s fees for advice provided to
the Committee in 2014 were £139,865. Fees were charged on a
time and materials basis. Deloitte LLP also provided other consulting,
tax and assurance services to GSK during the year. However,
the Committee is satisfied that this does not compromise the
independence of the advice they have received from Deloitte.
Towers Watson provided additional market data to the Committee.
Commitment to shareholders
The Committee engages in regular dialogue with shareholders
and holds annual meetings with GSK’s largest investors to discuss
and take feedback on its remuneration policy. In particular, the
Committee discusses any significant changes to the policy or the
measures used to assess performance.
Shareholder votes on remuneration matters
2014
AGM
Remuneration report
Remuneration policy
Total votes
cast (billion)
3.4
3.5
Total votes
for (%)
98.5
97.4
Total votes
against (%)
1.5
2.6
Votes
withheld
(million)
171
100
The Remuneration Committee
Role of the Committee
The role of the Committee is to set the company’s remuneration
policy so that GSK is able to recruit, retain and motivate its
executives. The remuneration policy is regularly reviewed to
ensure that it is consistent with the company’s scale and scope
of operations, supports the business strategy and growth plans
and helps drive the creation of shareholder value.
Terms of reference
The Committee’s full terms of reference are available on the
company’s website. The terms of reference, which are reviewed
at least annually, were last revised in December 2014 to reflect
best practice and corporate governance developments.
Governance
The Board considers all of the members of the Committee to be
independent Non-Executive Directors in accordance with the
UK Corporate Governance Code, with the exception of Sir
Christopher Gent, Chairman of the company, who was considered
independent on appointment.
The Committee met six times in scheduled meetings during 2014,
with each member attending as follows:
Members
Tom de Swaan
Dr Stephanie Burns
Sir Christopher Gent
Judy Lewent
Sir Deryck Maughan
Hans Wijers
Committee
member
since
20 May 2009
1 May 2013
1 January 2007
1 January 2013
1 July 2012
10 October 2013
Attendance
at full
meetings
during 2014
6/6
6/6
6/6
6/6
5/6
6/6
Sir Deryck Maughan was unable to attend one Committee meeting
due to prior business commitments. Urs Rohner was appointed to
the Committee on 1 January 2015, so did not attend any meetings
during 2014.
In addition to the six scheduled meetings, the Committee met on
a quorate basis on four occasions to approve the formal grant of
long-term incentive awards to employees below the Corporate
Executive Team, Deferred Investment awards, Share Value Plan
awards and materials for use at the annual investor meetings.
Committee meetings usually include a closed session, during
which only members of the Committee are present. Other
individuals may also be invited to attend Committee meetings
during the year. Executives and other Committee attendees are
not involved in any decisions, and are not present at any
discussions regarding their own remuneration.
Other attendees at Committee meetings include:
Attendee
CEO
CFO
Head of Human Resources
Head of Reward
Company Secretary – Secretary to the Committee
Committee Adviser – Deloitte LLP
Regular
attendee
Attends
as required
✓
✓
✓
✓
✓
✓
108 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
Principal activities and matters addressed during 2014
The Committee’s principal activities and matters addressed during 2014 are set out below:
Remuneration
Overall
• Approve executives’ 2014
remuneration, including
salaries of CET members
and executives’ 2014 LTI
award levels
• Remuneration environment
update
Month
January
February
Governance and
other matters
• Review draft 2013
Remuneration report,
New remuneration policy
statement and shareholder
feedback
• Private session for
Committee members only
• Approve 2013
Remuneration report
Items specific to:
Annual bonus
• Review and approve
executives’ 2013 bonuses
• Set CEO 2014 bonus
objectives
LTIs
• Review LTI performance
outcomes and approve
vesting of outstanding
2010 LTI awards (2010-
2013) and 2011 LTI
awards (2011-2013)
• Approve LTI measures and
targets for 2014 awards
(2014-2016), and grant
awards to Executive
Directors and below
March
• Remuneration environment
update, including
consideration of new
reporting regulations
• Overview of bonuses for
employees below CET
July
• Update on new remuneration
reporting regulations,
including early drafting for
2014 Remuneration report
• CET remuneration review
• Review of Executive Directors’
pay competitiveness
• Review of Chairman and
Deputy Chairman fees
September
October
• Update on remuneration
report disclosures
November
• Draft messages and
disclosures for 2014
performance pay
December
• Annual benchmarking and
competitiveness review
• Approve Executive Directors’
salaries for 2015
• Consider CET remuneration
changes
• Papers provided to the
Committee examining how
the equivalent remuneration
elements operate for
employees below the CET
• Review shareholder
feedback
• Set Committee’s agenda
for 2014
• Private session for
Committee members only
• Review of LTI design
(performance measures,
comparator group and time
horizons)
• Review AGM feedback
and external environment
• Approve Committee
evaluation process
• Grant interim 2014 LTI
• Review implications of
awards (below executives)
three-part Novartis
transaction
• Private session for
Committee members only
• Grant interim 2014 Share
Value Plan awards (below
executives)
• Update on LTI vesting for
• Update on remuneration
2012 awards (2012-2014)
report disclosures
• Agree key messages for
annual investor meeting
Annual meeting with investors
• Administrative changes to
• Review feedback from
DABP
investor meetings
• Review findings from
Committee evaluation
• Review draft 2014
Remuneration report
• Update on implications
of three-part Novartis
transaction
• Corporate Governance
update
• Private session for
Committee members only
GSK Annual Report 2014 109
Governance & remunerationFinancial statementsInvestor informationStrategic report Annual report on remuneration
continued
Non-Executive Directors
Chairman and other Non-Executive Directors
The company aims to provide the Chairman and other Non-
Executive Directors with fees that are competitive with those paid
by other companies of equivalent size and complexity, subject to
the limits contained in GSK’s Articles of Association.
Chairman’s fees
Sir Christopher Gent took up the role of Chairman in January 2005.
The Chairman’s fees were last increased in January 2013 from
£675,000 to £710,000. £250,000 (or approximately 35%) of Sir
Christopher’s total fees for 2014 were delivered in shares, which
are deferred until he steps down from the Board later in 2015.
Chairman Designate Sir Philip Hampton was appointed a Non-
Executive Director with effect from 1 January 2015. Until he takes
on the role of Deputy Chairman on 1 April 2015, he will receive the
standard annual cash retainer for a Non-Executive Director of
£85,000. When he becomes Deputy Chairman on 1 April 2015,
he will receive fees of £350,000 per annum. On his appointment
as Chairman from 1 September 2015 at the latest, he will receive
fees of £700,000 per annum. He has elected to take 25% of his
fees as GSK shares.
Non-Executive Director fees
Non-Executive Director fees were last increased in January 2013.
There were no increases to the supplemental fees. A minimum of
25% of fees will continue to be delivered as shares deferred until
the Non-Executive Director steps down from the Board.
The Non-Executive Directors’ fees applying since 1 January 2013
are set out below:
Standard annual cash retainer fee
Supplemental fees
Chairman of the Audit & Risk Committee
Senior Independent Director and Scientific/Medical Experts
Chairmen of the Remuneration and Corporate
Responsibility Committees†
Non-Executive Director undertaking intercontinental
travel to meetings
Per annum
£85,000
£80,000
£30,000
£20,000
£7,500
per meeting
† Sir Christopher Gent is the Chairman of the Corporate Responsibility
Committee, but does not receive the additional fee listed above.
Non-Executive Directors’
emoluments (000) (audited)
Professor Sir Roy Anderson
Dr Stephanie Burns
Stacey Cartwright
Lynn Elsenhans
Sir Christopher Gent (c)
Judy Lewent
Sir Deryck Maughan
Dr Daniel Podolsky
Tom de Swaan
Jing Ulrich
Hans Wijers (d)
Sir Robert Wilson (d)
Sir Crispin Davis (d)
Cash
£98
$105
£75
£13
£460
$255
–
$65
£84
$167
£75
£22
–
Fees
Shares/ADS
Benefits
£32
$105
£25
£110
£250
$85
$247
$194
£28
$56
£25
£23
–
£11
$134
£6
£90
£67
$262
$149
$220
£30
$190
£19
£10
–
Letters of appointment
The terms of engagement of the Non-Executive Directors are
set out in letters of appointment which are available for inspection
at the company’s registered office and at the AGM. For each
Non-Executive Director, his or her initial appointment and any
subsequent re-appointment are subject to election and, thereafter,
periodic re-election by shareholders.
The Non-Executive Directors’ letters of appointment do not
contain provision for notice periods or for compensation if their
appointments are terminated.
The following table shows the date of the initial letter of
appointment of each Non-Executive Director:
Non-Executive Director
Sir Christopher Gent
Sir Philip Hampton
Professor Sir Roy Anderson
Dr Stephanie Burns
Stacey Cartwright
Lynn Elsenhans
Judy Lewent
Sir Deryck Maughan
Dr Daniel Podolsky
Urs Rohner
Tom de Swaan
Jing Ulrich
Hans Wijers
Date of letter of appointment
26 May 2004
25 September 2014
28 September 2007
12 February 2007
3 March 2011
3 May 2012
3 March 2011
26 May 2004
3 July 2008
3 October 2014
21 December 2005
3 May 2012
29 January 2013
The table below (audited) sets out the value of fees and benefits
received by the Non-Executive Directors in the form of cash and
shares or ADS. Further details of the Non-Executive Directors’
share allocation plan are set out on page 117.
2014
Total
£141
$344
£106
£213
£777
$602
$396
$479
£142
$413
£119
£55
–
Cash
£103
$86
£81
£11
£540
$235
–
$58
£90
$157
£53
£88
–
Fees
Shares/ADS
Benefits
£34
$86
£27
£104
£170
$78
$205
$175
£30
$52
£18
£29
£44
£15
$72
£5
£71
£40
$124
$114
$119
£38
$182
£11
£16
£11
2013
Total
£152
$244
£113
£186
£750
$437
$319
$352
£158
$391
£82
£133
£55
a) Benefits primarily consist of travel and subsistence costs incurred in the normal course of business, in relation to meetings on Board and
Committee matters and other GSK-hosted events which are considered to be taxable. For overseas-based Non-Executive Directors, this
includes travel to meetings in the UK.
b) Non-Executive Directors fees that are paid other than in GBP are converted using an exchange rate that is set annually based on the average rate
for the last quarter of the year prior to payment. The rate is reviewed if it moves significantly during the year.
c) The amounts for benefits and total emoluments in respect of 2013 for Sir Christopher Gent have been restated, resulting in an increase of
£16,000 over the amounts recorded in the 2013 Remuneration report.
d) Sir Crispin Davis retired from the Board on 1 May 2013 and Hans Wijers joined the Board from 1 April 2013. Sir Robert Wilson retired from
the Board on 7 May 2014.
110 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
Directors’ interests in shares (audited)
The following interests of the Directors of the company in office at 31 December 2014 and their connected persons are shown below.
Total directors’ interests as at
19 February
2015
31 December
2014
1 January
2014
(a)Unvested and
not subject to
performance
Shares/ADS
Unvested and
subject to
performance
Total share plan interests as at 31 December 2014
Options
(a)Unvested and
not subject to
performance
Unvested and
subject to
performance
Vested but
not exercised
Exercised in
the year
Executive Directors
Shares
Sir Andrew Witty(b, c, d, f, g)
Simon Dingemans(b, c, d, f)
Dr Moncef Slaoui (g)
ADS
Dr Moncef Slaoui (c, d, e, h)
Non-Executive Directors
Shares (j)
Professor Sir Roy Anderson
Dr Stephanie Burns
Stacey Cartwright
Sir Christopher Gent
Tom de Swaan
Hans Wijers
ADS (j)
Dr Stephanie Burns
Lynn Elsenhans
Judy Lewent
Sir Deryck Maughan
Dr Daniel Podolsky
Jing Ulrich
846,470
187,722
27,806
760,988
157,208
27,657
566,142
84,872
53,089
– 1,400,056
588,050
–
–
–
151,264
67,021
–
150,488
66,257
–
89,993
–
68,520
229,481
–
26,800
230,586
196,133
164,995
66,359
476,335
–
–
4,235
–
20,424
44
6,286
132,575
27,331
2,852
17,355
9,657
15,332
43,537
31,515
3,056
20,424
44
6,286
132,575
27,331
2,852
17,355
9,657
15,332
43,537
31,515
3,056
17,254
44
4,367
109,404
24,059
1,113
14,284
5,620
13,200
36,198
25,876
1,809
20,424
–
6,165
132,575
27,331
2,852
17,290
8,657
5,166
43,537
31,515
2,718
a) Unvested shares and ADS and unvested options held by Executive Directors which are not subject to performance reflect bonus deferrals
under the DABP, ShareSave and Share Value Plan (SVP) awards.
b) Total directors’ interests include shares purchased through the GlaxoSmithKline ShareReward Plan. During 2014, Sir Andrew Witty and
Simon Dingemans were each awarded 99 shares under the plan. The balance of shares within the plan is as follows:
ShareReward Plan (Shares)
Sir Andrew Witty
Simon Dingemans
19 February 2015
2,828
882
31 December 2014
2,758
837
1 January 2014
2,429
604
Dr Moncef Slaoui is not eligible to participate in the ShareReward Plan.
c) Total directors’ interests includes shares or ADS resulting from the deferral of bonus (and the subsequent re-investment of dividends) under the
DABP. The totals shown in the table below include bonus deferrals, but exclude any unvested matching awards which are subject to ongoing
performance criteria. The amounts represent the gross share and ADS balances prior to the sale of any shares or ADS to satisfy tax liabilities.
Deferred Annual Bonus Plan (Bonus deferrals)
Sir Andrew Witty (Shares)
Simon Dingemans (Shares)
Dr Moncef Slaoui (ADS)
19 February 2015
182,732
81,849
71,595
31 December 2014
150,488
66,257
58,769
1 January 2014
123,262
44,268
59,424
d) Total directors’ interests at 19 February 2015 include any shares or ADS which vested due to performance under elements of the PSP
(2012-2014 awards), less those sold to satisfy tax liabilities on the vested amounts (see pages 113 to 116 for further details).
e) For Dr Moncef Slaoui, total directors’ interests include ADS purchased within the 401(k) Plan and the US Executive Supplemental Savings Plan
(ESSP), and ADS awarded to Dr Slaoui’s connected person under the SVP. The relevant balances are as follows:
Dr Moncef Slaoui (ADS)
US Retirement Savings Plans
Share Value Plan
19 February 2015
13,340
5,290
31 December 2014
13,045
7,590
1 January 2014
10,241
7,740
As an Executive Director, Dr Moncef Slaoui is not eligible to receive awards under the SVP. The SVP awards shown above reflect the holdings of
Dr Slaoui’s connected person, who is also an employee of GSK. The awards are subject to three-year vesting periods and vesting is contingent
on continued employment within GSK. Any gains arising on vesting are not included in Dr Moncef Slaoui’s total remuneration figures. During the
year, his connected person was granted 2,300 ADS on 24 September 2014 at a grant price of $47.03 (face value of $108,169). Dr Slaoui’s
total share plan interests also include PSP awards held by his connected person. These awards are subject to performance criteria relevant to
employees below the CET. As at 31 December 2014, his connected person held 6,218 ADS under the PSP, comprising awards made in 2012
(1,891 ADS), 2013 (2,214 ADS) and 2014 (2,113 ADS), all amounts including dividend re-investment.
GSK Annual Report 2014 111
Governance & remunerationFinancial statementsInvestor informationStrategic report
Annual report on remuneration
continued
ShareSave Plan
f) For Sir Andrew Witty and Simon Dingemans, the unvested options not subject to performance include holdings of 776 and 764 respectively
in the ShareSave Plan, in which they participate on the same terms as all other employees. No ShareSave awards were granted to Sir Andrew
Witty during 2014. Simon Dingemans was granted 238 options under the plan on 29 October 2014. The remainder of unvested options not
subject to performance relate to bonus deferrals structured as nil-cost options under the DABP.
Share Option Plan
g) For the Executive Directors, the following table provides details of vested but unexercised options as at 31 December 2014 under the Share
Option Plan (SOP). GSK granted options under this plan to Executive Directors on an annual basis until 2009.
Date of grant
21.02.06
Lapse date
20.02.16
Exercise price
£14.68
Number of shares under option
Sir Andrew Witty
89,993
89,993
Dr Moncef Slaoui
68,520
68,520
h) The ADS vested but unexercised options totalling 4,235 for Dr Moncef Slaoui represents the ADS options held by Dr Moncef Slaoui’s
connected person.
i) The following table sets out details of options (including nil-cost options under the DABP) exercised during 2014 by Executive Directors.
Simon Dingemans did not exercise any options during the year (his first nil-cost options under the DABP will become exercisable in 2015).
Type of award
Sir Andrew Witty
SOP
SOP
DABP – deferral
DABP – matching
Dr Moncef Slaoui
SOP
Date of grant
Number of shares
under option
Date of exercise
Grant price
Market
price at exercise
Gain on exercise
(£000)
02.12.04
02.12.04
24.02.11
24.02.11
100,000
77,500
37,182
14,799
229,481
01.05.14
23.10.14
01.05.14
01.05.14
£11.23
£11.23
–
–
£16.39
£13.85
£16.27
£16.27
£516
£203
£605
£241
£1,565
02.12.04
26,800
24.10.14
£11.23
£14.17
£79
In respect of options under the SOP and the ShareSave plans, the remuneration receivable by an Executive Director is calculated on the date
that the options first vest. The remuneration is the difference between the amount the Executive Director is required to pay to buy the shares or
ADS and the total value of the shares or ADS on the vesting date. If the Executive Director chooses not to exercise the options on the vesting
date, any subsequent increase or decrease in the amount realised will be due to movements in the share or ADS price between the vesting date
and the date of exercise. This increase or decrease in value is the result of an investment decision by the Executive Director and, as such, is not
recorded as remuneration. No options vested for Executive Directors during 2014.
In respect of nil-cost options under the DABP, the bonus which is deferred by the Director is recorded as remuneration (under annual bonus) for
the year to which it relates. The gain recorded on exercise of the nil-cost option comprises this remuneration, the total of the amounts received
in re-invested dividends prior to vesting and the gains or losses resulting from movements in the share price between the dates of grant and
exercise for the initial bonus amount deferred and the dates of dividend reinvestment and exercise for the re-invested dividends.
For the matching element of the DABP, the remuneration of the Director is recorded in the year that the performance criteria end and represents
the number of vested shares multiplied by the price at vesting. The gain recorded on exercise of the nil-cost option comprises the total of this
remuneration and the gain or loss resulting from the movement in the share price between vesting and exercise.
For Sir Andrew Witty:
• The total gain of £719,050 following the exercise of 177,500 options granted under the SOP comprises remuneration of £nil in respect of
2007 (the share options granted on 2 December 2004 were subject to performance criteria for a three year period ended 2007 and vested
on 20 February 2008 with a vesting price of £11.23) and an investment gain of £719,050.
• The gain of £604,951 recorded following the exercise of the 37,182 nil-cost options relating to the deferral of bonus earned in respect
of 2010 comprises remuneration of £376,668 recorded in 2010 as annual bonus and a net gain of £228,283 relating to the re-investment
of dividends prior to vesting and movements in the share price between grant and dividend re-investment dates and the exercise date.
• The gain of £240,780 recorded following the exercise of the 14,799 nil-cost options relating to the DABP matching award comprises
remuneration of £249,067 recorded in 2013 in relation to the DABP (see page 113) and an investment loss of £8,287 relating to the
movement in the share price between the vesting and exercise dates.
For Dr Moncef Slaoui:
• The total gain of £78,792 following the exercise of 26,800 options granted under the SOP comprises remuneration of £45,828 in respect
of 2007 (these options vested in 2007) and an investment gain of £32,964.
j) For Non-Executive Directors, total interests include shares or ADS received as part or all of their fees under the Non-Executive Director Share
Allocation Plan (see page 117 for further details and balances). Note that dividends received on shares or ADS under the plan during 2014
were converted into shares or ADS as at 31 December 2014.
112 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
Deferred Annual Bonus Plan matching awards
Deferred Annual Bonus Plan (DABP) matching awards are made annually to Executive Directors, based on the individual’s mandatory
deferral and voluntary bonus deferral election. The company will match shares or ADS up to one-for-one depending on the company’s
performance during a three-year performance period. Performance conditions and vesting levels are described on pages 102 to 104 of
this report.
Awards to UK-based Executive Directors are made in the form of nil-cost options. Once an award vests, the UK-based Executive
Director may choose to exercise the award at any time up to 10 years from the date of grant. Awards to US-based Executive
Directors are made as conditional awards of ADS. The amount of remuneration receivable in respect of the matching shares or ADS
is calculated using the share or ADS price on the date the relevant award vests. If the award vests after the date of the Remuneration
report, the calculation is performed using the average share or ADS price over the last quarter of the financial year. If an Executive
Director chooses not to exercise the nil-cost options on the vesting date, any subsequent increase or decrease in the amount
realised will be due to movements in the share price between the vesting date and the date of exercise. This increase or decrease
in value is the result of an investment decision and, as such, is not recorded as remuneration.
Dividends are reinvested on the nil-cost options or conditional awards of shares or ADS made to Executive Directors up to the date
of vesting.
The following tables provide details for each Executive Director in respect of DABP matching awards. Market price at grant and at
vesting represent the closing share prices on those dates.
Sir Andrew Witty – Shares
Market price at grant
Unvested at 31 December 2013
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2014
Granted
Face value at grant (000)
Dividends reinvested
Vested*
Lapsed
Unvested at 19 February 2015
Vested shares
Number of shares
Market price at vesting
Gain:
Remuneration for 2013
Remuneration for 2014*
2011-2013
2012-2014
2013-2015
2014-2016
2015-2017
Performance period
£14.54
32,250
–
–
1,711
–
–
33,961
–
–
467
–
–
34,428
£16.43
–
57,060
£937
2,322
–
–
59,382
–
–
818
–
–
60,200
£15.20
–
–
–
–
–
–
–
30,172
£459
–
–
–
30,172
£11.80
36,746
–
–
436
(14,799)
(22,383)
–
14,799
£16.83
000
£249
–
£14.12
54,266
–
–
2,879
–
–
57,145
–
–
787
–
(50,111)
7,821
7,821
£14.14
000
–
£111
* Due to vest on 9 March 2015. An estimated vesting price of £14.14 has been used for calculating the remuneration for 2014. The actual vesting
price will be reported in the 2015 Remuneration report.
GSK Annual Report 2014 113
Governance & remunerationFinancial statementsInvestor informationStrategic report Annual report on remuneration
continued
Deferred Annual Bonus Plan matching awards continued
Simon Dingemans – Shares
Market price at grant
Unvested at 31 December 2013
Granted
Face value at grant (000)
Dividends reinvested
Unvested at 31 December 2014
Granted
Face value at grant (000)
Dividends reinvested
Vested*
Lapsed
Unvested at 19 February 2015
Vested shares
Number of shares
Market price at vesting
Gain:
Remuneration for 2014*
2012-2014
2013-2015
2014-2016
2015-2017
Performance period
£14.54
12,212
–
–
647
12,859
–
–
177
–
–
13,036
£16.43
–
18,876
£310
767
19,643
–
–
270
–
–
19,913
£15.20
–
–
–
–
–
14,680
£223
–
–
–
14,680
£14.12
32,056
–
–
1,699
33,755
–
–
465
–
(29,600)
4,620
4,620
£14.14
000
£65
* Due to vest on 9 March 2015. An estimated vesting price of £14.14 has been used for calculating the remuneration for 2014. The actual vesting
price will be reported in the 2015 Remuneration report.
Dr Moncef Slaoui – ADS
Market price at grant
Unvested at 31 December 2013
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2014
Granted
Face value at grant (000)
Dividends reinvested
Vested*
Lapsed
Unvested at 19 February 2015
Vested ADS
Number of ADS
Market price at vesting
Gain:
Remuneration for 2013
Remuneration for 2014*
2011-2013
2012-2014
2013-2015
2014-2016
Performance period
2015-2017
$44.27
16,435
–
–
865
–
–
17,300
–
–
251
–
–
17,551
$54.17
–
18,214
$987
737
–
–
18,951
–
–
275
–
–
19,266
$46.25
–
–
–
–
–
–
–
11,973
$554
–
–
–
11,973
$38.22
21,596
–
–
252
(8,696)
(13,152)
–
8,696
$55.75
000
$485
–
$44.68
21,393
–
–
1,125
–
–
22,518
–
–
327
–
(19,760)
3,085
3,085
$44.76
000
–
$138
* Due to vest on 9 March 2015. An estimated vesting price of $44.76 has been used for calculating the remuneration for 2014. The actual vesting
price will be reported in the 2015 Remuneration report.
114 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Performance Share Plan awards
Performance Share Plan (PSP) awards are made to Executive Directors on an annual basis. Under the terms of the PSP, the number
of shares or ADS vesting is determined following the end of the relevant performance period and is dependent on GSK’s
performance during that period. Performance conditions and vesting levels are described on pages 102 to 104.
Dividends are reinvested on the performance shares or ADS awarded to executives throughout the performance period and up to the
date of vesting. At vesting, UK participants receive the relevant number of shares and US participants may defer receipt of all or part
of their vested awards. The amount of remuneration receivable in respect of performance shares is calculated using the share or ADS
price on the date the relevant PSP award vests.
The PSP awards made to Sir Andrew Witty in 2012, 2013 and 2014 have three year performance periods. However, the deeds of
award specify that 25% of the awards will be subject to a further two year vesting period (five years in total). During this two year
period, there are no additional performance criteria and the awards will only lapse if Sir Andrew is dismissed for cause. The
remuneration in respect of these awards will therefore be considered to be realised in full following the determination by the
Remuneration Committee of the vesting levels of the initial 75% of the awards (i.e. full remuneration will be recognised at the end of
the three-year performance period). For the 2015 awards, the whole of the award made to each Executive Director has a three year
performance period, but will vest after five years. During the final two years of the vesting period, the award for each Director will only
lapse if he is dismissed for cause. The remuneration in respect of the awards will therefore be recognised at the end of the three year
performance period (i.e. in the 2017 Remuneration report).
The following tables provide details for each Executive Director in respect of PSP awards. Market price at grant and at vesting represent
the closing share prices on those dates.
2011-2013
2012-2014
2013-2015
2014-2016
2015-2017
Performance period
Sir Andrew Witty – Shares
Market price at grant
Unvested at 31 December 2013
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2014
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 19 February 2015
Vested shares:
Number of shares
Market price at vesting
Gain:
Remuneration for 2013
Remuneration for 2014
2010-2013
£12.04
150,919
–
–
1,795
–
(152,714)
–
£11.78
488,247
–
–
5,808
(196,634)
(297,421)
–
–
£16.53
000
–
–
196,634
£16.53
000
£3,250
–
£14.54
453,620
–
–
24,079
–
–
477,699
–
–
6,359
–
–
484,058
£16.43
–
397,066
£6,524
16,163
–
–
413,229
–
–
5,500
–
–
418,729
£15.20
–
–
–
–
–
–
–
429,338
£6,526
–
–
–
429,338
£14.12
483,464
–
–
25,664
–
–
509,128
–
–
6,777
(69,650)
(446,255)
–
69,650
£14.86
000
–
£1,035
GSK Annual Report 2014 115
Governance & remunerationFinancial statementsInvestor informationStrategic report Annual report on remuneration
continued
Performance Share Plan awards continued
Simon Dingemans – Shares
Market price at grant
Unvested at 31 December 2013
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2014
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 19 February 2015
Vested shares:
Number of shares
Market price at vesting
Gain:
Remuneration for 2013
Remuneration for 2014
Dr Moncef Slaoui – ADS
Market price at grant
Unvested at 31 December 2013
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2014
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 19 February 2015
Vested ADS
Number of ADS
Market price at vesting
Gain:
Remuneration for 2013
Remuneration for 2014
2011-2013
£11.78
225,570
–
–
2,683
(90,845)
(137,408)
–
90,845
£16.53
000
£1,502
–
2011-2013
$38.13
169,742
–
–
1,979
(68,345)
(103,376)
–
2010-2013
$37.32
47,483
–
–
554
–
(48,037)
–
–
$55.06
000
–
–
68,345
$55.06
000
$3,763
–
2012-2014
£14.12
186,133
–
–
9,881
–
–
196,014
–
–
2,609
(26,815)
(171,808)
–
26,815
£14.86
000
–
£398
2012-2014
$44.68
141,799
–
–
7,503
–
–
149,302
–
–
2,119
(20,443)
(130,978)
–
20,443
$45.95
000
–
$939
2013-2015
£14.54
199,598
–
–
10,596
–
–
210,194
–
–
2,798
–
–
212,992
2013-2015
$44.27
138,315
7,319
–
–
145,634
–
–
2,067
–
–
147,701
2014-2016
£16.43
–
174,729
£2,871
7,113
–
–
181,842
–
–
2,420
–
–
184,262
Performance period
2015-2017
£15.20
–
–
–
–
–
–
–
188,930
£2,872
–
–
–
188,930
Performance period
2015-2017
2015-2017
$54.17
–
111,851
$6,059
4,561
–
–
116,412
–
–
1,652
–
–
118,064
$46.25
–
–
–
–
–
–
–
131,005
$6,059
–
–
–
131,005
116 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
Non-Executive Directors’ Share Allocation Plan
The table below sets out the accumulated number of shares or ADS held by the Non-Executive Directors as at 31 December 2013 and
2014 under the share allocation plan in relation to their fees received as Board members, together with movements in their accounts
during the year.
Share allocation plan for Non-Executive Directors
Shares
Professor Sir Roy Anderson
Stacey Cartwright
Sir Christopher Gent
Tom de Swaan
Hans Wijers
Sir Robert Wilson
ADS
Dr Stephanie Burns
Lynn Elsenhans
Judy Lewent
Sir Deryck Maughan
Dr Daniel Podolsky
Jing Ulrich
Footnote
31 December
2014
Paid out
Dividends
reinvested
Number of shares or ADS
31 December
Allocated
2013
& elected
a
20,424
6,165
132,575
27,331
2,852
–
17,290
8,657
5,166
43,537
31,515
2,718
–
–
–
–
–
(26,151)
–
–
–
–
–
–
1,003
256
6,385
1,390
76
–
886
308
209
2,255
1,614
98
2,167
1,663
16,786
1,882
1,663
1,437
2,185
3,729
1,757
5,084
4,025
1,149
17,254
4,246
109,404
24,059
1,113
24,714
14,219
4,620
3,200
36,198
25,876
1,471
a) Sir Robert Wilson retired from the Board on 7 May 2014. He elected to receive his shares from the Non-Executive Directors’ Share Allocation
Plan immediately upon retiring from the Board. Dividend entitlements in respect of the Q3 and Q4 2013 and the Q1 2014 dividends were paid
in cash in accordance with the plan rules.
GSK Annual Report 2014 117
Governance & remunerationFinancial statementsInvestor informationStrategic report
Annual report on remuneration
continued
Directors and Senior Management
Further information is provided on compensation and interests of Directors and Senior Management as a group (‘the group’). For this
purpose, the group is defined as the Non-Executive and Executive Directors, other members of the Corporate Executive Team and the
Company Secretary. For the financial year 2014, the following table sets out aggregate remuneration for the group for the periods during
which they served in that capacity.
Remuneration for 2014
Total compensation paid
Aggregate increase in accrued pension benefits (net of inflation)
Aggregate payments to defined contribution schemes
(£)
18,507,965
67,434
808,286
During 2014, members of the group were awarded shares and ADS under the company’s various share plans, as set out in the table
below.
Awarded during 2014
Deferred Annual Bonus Plan
Performance Share Plan
Deferred Investment Awards (a) (b)
Share Value Plan(b)
Shares
156,848
1,287,752
199,482
12,265
Awards
ADS
36,024
269,757
–
2,300
Dividend reinvestment awards
Shares
20,417
221,990
8,190
–
ADS
5,730
53,093
–
–
At 19 February 2015, the group had the following interests in shares and ADS of the company. Holdings issued under the various
executive share plans are described in Note 42 to the financial statements, ‘Employee share schemes’ on page 200.
Interests at 19 February 2015
Owned
Unexercised options
Deferred Annual Bonus Plan
Performance Share Plan
Deferred Investment Awards (a) (b)
Share Value Plan(b)
a) Notional shares and ADS.
Shares
1,560,796
490,740
1,088,308
4,557,469
240,974
30,246
ADS
368,017
40,115
245,182
830,845
–
11,030
b) Executive Directors are not eligible to receive Deferred Investment Awards or participate in the Share Value Plan.
Basis of preparation
The Remuneration report has been prepared in accordance with the Companies Act 2006 and The Large and Medium-sized Companies
and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the Regulations). In accordance with the Regulations, the following
parts of the Annual report on remuneration are subject to audit: total remuneration figures for Executive Directors, including further details
for each element of remuneration (salary, benefits, annual bonus, long-term incentive awards and pension); Non-Executive Directors’ fees
and emoluments received in the year; Directors’ interests in shares, including interests in GSK share plans; payments to past directors;
payments for loss of office; and share ownership requirements and holdings, for which the opinion thereon is expressed on page 135.
The remaining sections of the Remuneration report are not subject to audit nor are the pages referred to from within the audited sections.
The Remuneration report has been approved by the Board of Directors and signed on its behalf by
Tom de Swaan
Remuneration Committee Chairman
26 February 2015
118 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 2014 Remuneration policy report
The company’s Remuneration policy report was approved on 7 May 2014 at GSK’s Annual General Meeting and received
an overwhelming vote in favour from shareholders. It will remain in place until another policy is presented to and approved by
shareholders. No changes have been made to the policy, however, certain confirmatory statements on how we operate the policy
have been made public which are described on pages 121 and 123 of this report. The Committee is satisfied that the refinements
would not provide for any additional payments above that permitted by the approved policy, and are in line with best practice and in
the interests of shareholders. A copy of the shareholder approved policy is available at www.gsk.com in the Investors section.
The total remuneration for each Executive Director comprises the following elements:
Salary
+
Benefits
+
Annual
bonus
+
Value earned
from long-term
incentive
awards
+
Pension
=
Total
remuneration*
* The Committee may, in specific circumstances and in line with stated principles, apply clawback/malus as it determines appropriate.
Future policy table
The company’s Remuneration policy from 7 May 2014 in respect of each of the above elements is outlined in the table below.
Salary
Benefits
International assignment policy
Purpose and link to strategy
GSK may require Executive Directors to
relocate in order to meet business
requirements.
Operation
In line with the policy for other employees,
secondment and travel expenses are provided
for executives on overseas placement to
facilitate the relocation process and to
provide a continued standard of living while
on assignment.
International assignment allowances cover:
relocation costs; accommodation based
on size of family with appropriate security;
location allowance; relocation-specific tax
and financial advice; school fees; and tax
equalisation.
Opportunity
Relocation benefits are dependent on a
number of factors such as home and host
country, family size and duration of the
assignment.
It is therefore not possible to provide typical
values or limits.
Performance measures
None.
Purpose and link to strategy
To provide a core reward for the role.
Set at a level appropriate to secure and retain
high calibre individuals needed to deliver the
Group’s strategic priorities.
Operation
Individual’s role, experience and performance
and independently sourced data for relevant
comparator groups considered when
determining salary levels.
Salary increases typically take effect in the
first quarter of each year.
Salaries are normally paid in the currency
of the Executive Director’s home country.
Opportunity
There is no formal maximum limit, however,
ordinarily, salary increases will be broadly in
line with the average increases for the wider
GSK workforce.
However, increases may be higher to reflect
a change in the scope of the individual’s role,
responsibilities or experience. Salary
adjustments may also reflect wider market
conditions in the geography in which the
individual operates.
Salary levels for 2014 are set out on page 98
of the 2013 Annual Report.
Performance measures
The overall performance of the individual
is a key consideration when determining
salary increases.
Purpose and link to strategy
Levels are set to recruit and retain high calibre
individuals to execute the business strategy.
Operation
Executive Directors are eligible to receive
benefits in line with the policy for other
employees which may vary by location.
These include car allowances, healthcare,
life assurance/death in service (where not
provided as part of the individual’s pension
arrangements), personal financial advice
and contractual post-retirement benefits.
Executive Directors are also eligible to
participate in all-employee share schemes
(e.g. ShareSave and ShareReward Plan),
under which they are subject to the same
terms as all other employees.
In order to recognise the high business and
travel requirements of the role, Executive
Directors are also entitled to car travel and
may be accompanied by their spouse/partner
on business trips. Other benefits include
expenses incurred in the ordinary course of
business, which are deemed to be taxable
benefits on the individual.
Benefit provision is tailored to reflect market
practice in the geography in which the
Executive Director is based and different
policies may apply if current or future
Executive Directors are based in a different
country.
Opportunity
There is no formal maximum limit as benefits
costs can fluctuate depending on changes in
provider cost and individual circumstances.
Details of current benefits and costs are set
out in the Annual Report on Remuneration.
Performance measures
None.
GSK Annual Report 2014 119
Governance & remunerationFinancial statementsInvestor informationStrategic report 2014 Remuneration policy report
continued
Pension
Purpose and link to strategy
Pension arrangements provide a
competitive level of retirement income.
Opportunity
Pension arrangements for existing
Executive Directors are as follows:
Sir Andrew Witty is a member of the legacy
Glaxo Wellcome defined benefit plan with
an accrual rate of 1/30th of final
pensionable salary per annum. From 1 April
2013, pensionable earnings increases are
limited to 2% per annum for all members,
including Sir Andrew Witty.
Simon Dingemans is not a member of
any GSK pension plan for pension
contributions and instead receives a cash
payment of 20% of salary in lieu of pension
contribution.
Dr Moncef Slaoui is a member of the US
Cash Balance Pension Plans, the GSK
401(k) plan and the Executive
Supplemental Savings Plan. He is also a
deferred member of the Belgium Fortis
Plan.
The policy for a new external recruit is:
UK:
• 20% of salary contribution to defined
contribution plan and further 5% in
matched contributions in line with the
policy for other members of the plan; or
• 20% of salary cash payment in lieu of
pension contribution.
Deferred bonus shares are eligible for
dividend equivalents up to the date of vesting.
The Committee may apply judgement in
making appropriate adjustments to individual
annual bonus amounts.
Clawback and/or malus provisions apply as
described on page 119 of the 2013 Annual
Report.
Opportunity
The threshold and maximum bonus
opportunities for Executive Directors are as
follows:
Threshold
bonus as
a % of
base
salary
Maximum
bonus
as a
% of base
salary
CEO
CFO
Chairman, Global
R&D & Vaccines
40
26
27
200
180
200
Operation
Pension arrangements are structured in
accordance with the plans operated in the
country in which the individual is likely to
retire. Where the individual chooses not
to become a member of the pension plan,
cash in lieu of the relevant pension
contribution is paid instead.
New Executive Directors in the UK will
be entitled either to join the defined
contribution pension plan or to receive
a cash payment in lieu of pension
contribution.
Where an individual is a member of a GSK
legacy defined benefit plan, a defined
contribution plan or an alternative pension
plan arrangement and is subsequently
appointed to the Board, he or she may
remain a member of that plan.
Annual bonus
Purpose and link to strategy
To incentivise and recognise execution of
the business strategy on an annual basis.
Rewards the achievement of stretching
annual financial and strategic business
targets and delivery of personal objectives.
Operation
Financial, operational and business targets
are set at the start of the year by the
Committee and bonus levels are
determined by the Committee based on
performance against those targets.
Individual objectives are set at the start of
the year by the Committee and performance
against objectives is assessed by the
Committee.
Executive Directors are required to defer
25% of any bonus earned into shares, or
ADS as appropriate, for three years. They
may defer up to an additional 25% of bonus
earned, i.e. up to an overall maximum
deferral of 50%. Deferred shares vest at the
end of the three year performance period.
120 GSK Annual Report 2014
US:
Eligible for the same benefits as other US
senior executives:
• Cash Balance Pension Plan and
Supplemental Cash Balance Pension
Plan, including Executive Pension Credit,
provide maximum contribution of 38%
of base salary across all pension plans.
• GSK 401(k) plan (formerly the US
Retirement Savings Plan) and the
Executive Supplemental Savings Plan
with core contributions of 2% of salary
and bonus and matched contributions
of 4% of salary and bonus .
Global:
• Eligible for appropriate equivalent
arrangement not in excess of the
US/UK arrangements.
Performance measures
None
Performance measures
Based on financial targets and individual
performance objectives.
25% based on core Group profit before
interest and tax for all Executive Directors.
For the CEO and CFO, the balance is
based on core Group operating profit.
For other Executive Directors, the balance
is based on relevant business unit
performance.
Individual performance objectives
A multiplier, based on the achievement of
individual performance targets, is applied to
the bonus awarded for performance against
the financial or operational targets.
Governance & remunerationFinancial statementsInvestor informationStrategic report
Performance measures
Three equally weighted performance
measures:
• R&D new product performance*
• Adjusted free cash flow*
• Relative TSR†
* 25% vests at threshold up to 100% for
maximum performance
† Against comparator group currently
comprising GSK and nine other global
pharmaceutical companies, with 30% vesting
at median, rising to 100% vesting for upper
quartile performance.
For details of unvested 2012, 2013 and
2014 awards, see pages 102 and 103,
and pages 112 to 114 of the 2013 Annual
Report.
Deferred Annual Bonus Plan (DABP) and Performance Share Plan (PSP)
Purpose and link to strategy
To incentivise and recognise delivery of the
longer term business priorities, financial
growth and increases in shareholder value
compared to other pharmaceutical
companies.
In addition, to provide alignment with
shareholder interests, a retention element,
to encourage long-term shareholding and
discourage excessive risk taking.
Operation
DABP
Deferred shares may be matched subject to
the achievement of performance conditions
over three years. Matching awards may be
conditional shares or nil-cost options and
are eligible for dividend equivalents in
respect of the performance period.
PSP
Conditional awards are made annually with
vesting dependent on the achievement of
performance conditions over three years.
From 2015 awards onwards, vested awards
must be held for a further two years, i.e. five
years in total, prior to release. 25% of the
CEO’s 2012, 2013 and 2014 PSP awards
are subject to an additional two-year
vesting period.
Awards are eligible for dividend equivalents
up to the date of vesting.
Performance targets for the DABP and
PSP are set at the start of each
performance period.
Clawback and/or malus provisions apply as
described below.
Clawback and malus
Opportunity
DABP
Maximum bonus deferral of 50% of annual
bonus (25% mandatory and up to an
additional 25% voluntary).
Maximum matching opportunity level is on a
one share for one share basis subject to
performance criteria over three years.
PSP
The normal maximum award limit is six
times base salary per annum on the
maximum initial value of performance
shares that may be granted under the PSP
to an individual in any one year.
The PSP rules allow for the Committee to
make awards of more than 600% of salary
in exceptional circumstances.
Current award levels for each of the
Executive Directors are as follows:
CEO
CFO
Chairman, Global
R&D & Vaccines
% of salary
600
400
500
A confirmatory statement was issued in
April 2014 to state that the flexibility in
exceptional circumstances, will only be
used in relation to external recruits.
Further details are set out in the
approach to recruitment section below.
With effect from the 2013 annual bonus (payable in 2014), Executive Directors are required to defer a minimum of 25% of their annual
bonus into the DABP. In the event of a ‘triggering event’ (eg significant misconduct by way of violation of regulation, law, or a significant
GSK policy, such as Code of Conduct) the company will have the ability to claw back up to three years’ annual and deferred bonuses as
well as vested and unvested LTIs. A separate Recoupment Committee has been established to investigate relevant claims of misconduct.
Additionally, where there has been continuity of responsibility between initiation of an adverse event and its emergence as a problem, the
adverse event should be taken into account in assessing annual bonus awards and LTI vesting levels in the year the problem is identified
and for future periods. The Committee may make appropriate adjustments to individual annual bonuses as well as grant and vesting levels
of LTI awards to reflect this.ments to individual annual bonus amounts.
GSK Annual Report 2014 121
Governance & remunerationFinancial statementsInvestor informationStrategic report
2014 Remuneration policy report
continued
Long-term incentive measures
The Committee has selected three equally weighted performance measures to focus Executive Directors’ long-term remuneration on
the delivery of GSK’s key strategic priorities. From 2014, PSP and DABP awards made to Executive Directors are based on R&D new
product performance, adjusted free cash flow and relative TSR.
In addition to setting robust targets, the Committee has implemented a number of safeguards to ensure the targets are met in a
sustainable way and any performance reflects genuine achievement against targets and therefore represents the delivery of value for
shareholders.
For each performance measure, the impact of any acquisition or divestment will be quantified and adjusted for after the event. Any major
adjustment in the calculation of performance measures will be disclosed to shareholders on vesting. The principal safeguards are
detailed under each measure below. The Chairman of the Audit & Risk Committee and other members, who are also members of the
Remuneration Committee, provide input on the Audit & Risk Committee’s review of the Group’s performance and oversight of any risk
factors relevant to remuneration decisions.
The rationale behind each performance measure and how it is calculated are as follows (for vesting schedules please see page 103 of
the 2013 Annual Report on Remuneration):
Performance
measure
R&D new
product
performance
Rationale
Calculation methodology
Recognises the importance of R&D to future business
growth
One of the key indicators used to assess performance in the
pharmaceutical industry is the strength of a company’s product
pipeline. The R&D new product performance measure recognises
the importance of R&D to future business growth and has been
included as a measure in order to incentivise R&D performance
and drive the development and sales of new products. The
Committee believes that it is a robust and appropriate measure
as it reflects actual delivery from the pipeline and launch
excellence.
The target is based on sales of new products launched in the
performance period and the preceding two years.
The aggregate three-year revenue target should reflect growth
on historic performance.
Vesting may be reduced if insufficient progress has been
made during the performance period towards GSK’s target
return on R&D investment.
The Committee recognises that, from time to time, it may
be appropriate for the company to respond to an emerging
pandemic, as this supports GSK’s ethical responsibilities and
values. The impact of such revenue will be included, unless
the Committee considers that this did not add to shareholder
value and provided that underlying performance was
sufficiently positive.
Adjusted free
cash flow
performance
Recognises the importance of effective working capital
and cash management
The use of cash flow as a performance measure is intended to
recognise the importance of effective working capital management
and of generating cash from assets for future value-creating
investments and for returns to shareholders.
Aggregate three-year adjusted free cash flow target.
Adjustments may be made for materially distorting items
which may include exchange rate movements, major legal
and taxation settlements and special pension contributions.
Relative TSR
performance
Focuses on delivery of value to shareholders
The Committee recognises that the delivery of value to
shareholders is a key priority. Relative total shareholder return
against a peer group of global pharmaceutical companies was
selected in order to closely align the interests of Executive
Directors with those of our investors.
The Committee regularly reviews the composition of the TSR
comparator group.
Relative TSR is measured over three years, using a
12-month averaging period. TSR is measured in local
currency.
122 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Annual bonus measures
The annual bonus is designed to drive the achievement of GSK’s annual financial and strategic business targets and the delivery of
personal objectives.
The majority of the annual bonus opportunity is based on a formal review of performance against stretching financial targets. This
outcome is then adjusted to reflect individual performance by applying an individual performance multiplier. For reasons of commercial
sensitivity, specific personal objectives are kept confidential.
Financial performance
The Committee believes that it is important for the majority of the CEO
and the CFO’s financial targets to be based on core Group operating profit
with a smaller element based on core Group profit before interest and tax
to reflect their wider responsibility for driving profitable investments
in associates and joint ventures.
Bonus measures for R&D employees, including Dr Moncef Slaoui, are
linked to pipeline performance. A robust governance structure has
been established to ensure that the bonus payable fairly reflects R&D
productivity and performance.
To recognise Dr Moncef Slaoui’s current dual responsibility for Global
R&D & Vaccines, an element of his bonus is currently based on Vaccines
performance. Consistent with the other Executive Directors, an element
of his bonus is also currently based on core Group profit before interest
and tax.
Individual performance
CEO
Individual performance objectives for Sir Andrew Witty are set by
the Board in January each year. The Board focuses on the strategic
priorities that have been developed for the Group. Following the
end of the financial year, the Board reviews his performance
generally and against the set objectives to determine the
appropriate bonus payable for his performance.
Other Executive Directors
The CEO sets individual objectives for the other Executive
Directors in line with company strategy and makes
recommendations to the Committee regarding their performance
against those objectives at the end of the year. Those
recommendations are then considered by the Committee before
it determines the level of bonuses payable.
Approach to recruitment remuneration
The Committee determines the remuneration package of new
Executive Directors on a case-by-case basis depending on the
role, the market from which they will operate and their experience.
Total remuneration levels will be set by reference to a relevant pay
comparator group and, where appropriate, will allow for future
development in the role.
It is expected that new Executive Directors will participate in short
and long-term incentive plans on the same basis as existing
directors. However, in exceptional circumstances, the Committee
reserves the flexibility to set the incentive limit for a new Executive
Director at up to an additional 50% of the existing limits.
The Committee retains this flexibility in recognition of the high
levels of variable pay in GSK’s global pharmaceutical competitors.
However, the Committee will only use this flexibility when it is
considered to be in the best interests of the company and its
investors.
A confirmatory statement was issued in April 2014 to state that
the Committee ‘anticipates that the ability to grant awards under
the PSP of more than six times salary in exceptional
circumstances would only be used for the recruitment of an
Executive Director from outside GSK’. The limit is as set out
above (i.e. PSP awards of up to a maximum of nine times salary).
Pension arrangements for external appointments as an Executive
Director will be as set out in the remuneration policy table on
page 118 of the 2013 Annual Report.
Other benefits will be provided in line with the policy for existing
Executive Directors.
Where required to meet business needs, relocation support
will be provided in line with company policy.
For any internal appointments, entitlements under existing
remuneration elements will continue, including pension entitlements
and any outstanding awards. However, where not already the case,
internal appointments will be required to move to Executive Director
contractual terms, including termination provisions.
The Committee is mindful of the sensitivity relating to recruitment
packages and, in particular, the ‘buying out’ of rights relating to
previous employment and sign-on payments. It will therefore
seek to minimise such arrangements. However, in certain
circumstances, to enable the recruitment of exceptional talent, the
Committee may determine that such arrangements are in the best
interests of the company and its shareholders. Such arrangements
will, where possible, be on a like-for-like basis with the forfeited
awards. Arrangements will therefore vary depending on the plans
and arrangements put in place by the previous employer and may
be in the form of cash or shares and may or may not be subject to
performance conditions. Explanations will be provided where
payments are made either as compensation for previous
remuneration forfeited or as a sign-on payment.
The remuneration arrangements for any newly appointed Executive
Director will be disclosed as soon as practicable after the
appointment.
The following policy and principles apply to the roles of Chairman
and Non-Executive Director.
Chairman
Fees will be set at a level that is competitive with those paid by
other companies of equivalent size and complexity. Fees will be
paid partly in shares.
Non-Executive Directors
Fee levels for new Non-Executive Directors will be set on the
same basis as for existing Non-Executive Directors of the
company. Subject to local laws and regulations, fees will be
paid partly in shares.
In the event of a Non-Executive Director with a different role and
responsibilities being appointed, fee levels will be benchmarked
and set by reference to comparable roles in companies of
equivalent size and complexity.
GSK Annual Report 2014 123
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continued
Loss of office payment policy
The following table sets out the contractual framework for Executive Directors. The terms specifically relating to termination are set out in
more detail below.
Policy
Duration of
contracts
The company does not have a policy of fixed term contracts. Generally, contracts for new appointments will expire in line
with the applicable policy on retirement age, which since 2009 has been 65.
Contracts for existing Executive Directors will expire on the dates shown on page 123 of the 2013 Annual Report.
Notice period
Notice period on termination by employing company or Executive Director is 12 calendar months.
Mitigation
The ability to impose a 12-month non-compete period (and a non-solicitation restriction) on an Executive Director is
considered important by the company to have the ability to protect the Group’s intellectual property and staff.
In light of this, the Committee believes that it would not be appropriate to provide for mitigation in the contracts.
Termination of employment
In the event that an Executive Director’s employment with the company terminates, the following policies and payments will apply.
Element of
Remuneration
Termination
payment
Loss of office payment policy
Termination by notice: 12 months annual salary payable on termination by the company (pro-rated where part of the notice
period is worked). No termination payment is made in respect of any part of a notice period that extends beyond the
contract expiry date.
A bonus element is not normally included in the termination payment. However, the terms of the contracts seek to balance
commercial imperatives and best practice. If the company enforces the non-compete clause for the current CEO and
Chairman, Global R&D and Vaccines, up to 12 months on-target bonus will be payable.
Redundancy: As above, for termination by notice. In the UK, only statutory redundancy pay will apply. In the US, general
severance policy does not apply.
Retirement, death and ill-health, injury or disability: No termination payment.
LTI awards
PSP and DABP matching awards are governed by the Plan Rules as approved by shareholders.
Termination by notice: Unvested awards lapse.
Redundancy and retirement: Generally, awards vest over the original timescales, subject to the original performance
conditions. Awards made in the last 12 months are forfeited.
Death and ill-health, injury or disability: Generally, awards will vest following the end of the financial year, normally taking
into account performance to that date. Awards may be pro-rated for time.
In the event of a change of control, PSP and DABP matching awards will vest, taking into account performance to date and
normally taking into account the proportion of the performance period that has elapsed. Alternatively, the awards may be
exchanged for new awards.
Annual bonus
Termination by notice by individual: If an individual serves notice and the termination date falls before 31 December,
the bonus is forfeited.
Termination by notice by the company, redundancy, retirement, death and ill-health, injury or disability: If the
termination date falls during the financial year, eligible for pro-rated on-target bonus (if employed on 31 December, bonus
payable based on actual results).
DABP deferred
bonus awards
Termination by notice: Deferred shares vest in full on the date of termination.
Redundancy, retirement, death and ill-health, injury or disability: Generally, deferred shares vest in full at the end of the
financial year in which the termination date falls.
Benefits
Generally, benefits will continue to apply until the termination date.
Termination by notice by the company and retirement (US executives): In line with the policy applicable to US senior
executives, the Chairman, Global R&D & Vaccines may become eligible, at a future date, to receive continuing medical and
dental insurance after termination/retirement.
Termination by mutual agreement: In certain circumstances it can be in the best interests of the company for the Board to manage proactively succession
planning and the development of the senior talent pipeline. In such circumstances, the Board may therefore agree that an executive’s departure will be by
mutual agreement. In order for this to apply, the Committee will need to be satisfied that the executive has demonstrated performance in line with
expectations, where required they should have contributed to an orderly succession, and they should have completed at least 20 years’ service with the
Group on the termination date. In the case of an Executive Director, they would then be treated as a ‘good leaver’ for the purposes of GSK’s long-term
incentive plans. If the termination date falls during the financial year, they would be eligible for a pro-rated on-target bonus and if they are employed on
31 December, the bonus payable would be based on actual results. In the case of the CEO, as a member of the UK defined benefit pension scheme,
his pension would then be payable from the later of his termination date and age 55 without actuarial reduction.
124 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
The Committee does not anticipate the exercise of discretion
provided by the PSP and DABP plan rules in respect of termination
payments. However, there may be unforeseen circumstances
where this is in the best interests of the company and its
shareholders. Where it is necessary to exercise discretion,
explanations will be provided.
Where an Executive Director leaves the company, the Committee
will carry out an assessment of the individual’s performance and
conduct over the time in role. If it is determined that the individual’s
performance or conduct was contrary to the legitimate
expectations of the company, the Committee reserves the right to
apply appropriate mechanisms such as ‘clawback’ (see page 119
of the 2013 Annual Report), or reduction or lapsing of outstanding
incentive awards (‘malus’), to ensure that any termination payments
are in the best interests of the company and its shareholders.
In the case of termination for cause, all payments and unvested
awards are forfeited except shares deferred under the DABP
(which vest in full on the date of termination) and accrued salary
and expenses.
Service contracts
The table below sets out the relevant dates of the current
Executive Directors’ service contracts, which are available for
review at the company’s registered office during office hours.
Sir Andrew
Witty
Simon
Dingemans
Dr Moncef
Slaoui
Date of
contract
Effective
date Expiry date
Notes
18.06.08 22.05.08 31.08.24 Contract amended
on 04.02.10 to
remove entitlement
to bonus on
termination
08.09.10 04.01.11 30.04.28
21.12.10
21.12.10 01.08.19 Contract replaced
on 21.12.10,
principally to remove
entitlement to bonus
on termination
Differences between remuneration policy
for Executive Directors and other employees
When setting remuneration levels for the Executive Directors,
the Committee considers the prevailing market conditions,
the competitive environment (through comparison with the
remuneration of executives at companies of similar size, complexity
and international reach) and the positioning and relativities of pay
and employment conditions across the broader GSK workforce.
In particular, the Committee considers the range of base salary
rises for the workforces of those parts of GSK where the CEO,
CFO and Chairman, Global R&D & Vaccines are employed.
This is considered to be the most relevant comparison as these
populations reflect most closely the economic environments
encountered by the individuals.
The same principles apply to the remuneration policy for Executive
Directors and other employees although the remuneration offered
to Executive Directors under this policy has a stronger emphasis
on performance-related pay than that offered to other employees
of the Group.
• Salary and benefits (including pension) are tailored to the local
market.
• The annual bonus plan applies to the wider employee population
and is based on business and individual performance.
• A combination of performance-related and restricted share
plans applies to the wider employee population.
• All-employee share plans are available to employees in the UK,
including the HM Revenue & Customs approved UK ShareSave
and ShareReward Plans.
The company conducts regular employee surveys which include
feedback on remuneration matters.
In the wider organisation, we have aligned our performance
and reward systems with our values and introduced a new
performance system in 2014 that formally evaluates employees
on both ‘what’ they need to do and ‘how’ they do it. Also, for our
most senior people we dis-incentivise unethical working practices
using a ‘clawback’ mechanism that allows us to recover
performance-related pay.
GSK Annual Report 2014 125
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continued
Scenarios for future total remuneration
CEO (£000)
The charts opposite provide illustrations of the future total
remuneration for each of the Executive Directors in respect of the
remuneration opportunity granted to each of them in 2014 under
the Policy. A range of potential outcomes is provided for each
Executive Director and the underlying assumptions are set out
below.
All scenarios:
• 2014 base salary has been used.
• 2013 benefits and pension figures have been used, i.e. based
on actual amounts received in 2013 in respect of the ongoing
policy.
• Each Executive Director is assumed to defer 50% of their
annual bonus (the maximum permitted amount) and receive the
corresponding matching award under the DABP (included
within the value of LTI awards).
• The amounts shown under value of LTI awards for the DABP
and PSP are based on the bonus opportunity and the relevant
multiples of 2014 salary respectively. They do not include
amounts in respect of dividends reinvested and do not factor
in changes to share price over the vesting period.
Fixed:
• None of the pay for performance (annual bonus and LTI) would
be payable.
Expected:
• For the annual bonus, it is assumed that target financial
performance is achieved, and the performance of each
Executive Director would result in an individual performance
multiplier of 100% (i.e. no increase to the financial performance
element of the bonus has been applied). This results in an
assumed bonus of 125%, 80% and 85% of salary for Sir
Andrew Witty, Simon Dingemans and Dr Moncef Slaoui
respectively.
• For the LTI awards, threshold levels of vesting are assumed.
Maximum:
• It is assumed that the annual bonus would be payable at the
maximum level and that the awards under the DABP and PSP
would vest in full.
12,000
10,000
8,000
6,000
4,000
2,000
0
CFO (£000)
12,000
10,000
8,000
6,000
4,000
2,000
0
11,647
65%
19%
16%
5,477
41%
25%
34%
1,861
100%
Fixed
Expected
Maximum
5,731
61%
23%
16%
2,486
40%
23%
37%
Expected
Maximum
923
Fixed
100%
Chairman, Global R&D & Vaccines ($000)
12,000
10,000
8,000
6,000
4,000
2,000
0
11,919
61%
20%
19%
5,314
39%
19%
42%
2,224
100%
Fixed
Expected
Maximum
Long-term variable remuneration
Fixed remuneration
Annual variable remuneration
126 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Non-Executive Director remuneration policy
Element
Purpose and link to strategy
Overview
Chairman’s fee
To provide an inclusive flat rate fee
that is competitive with those paid
by other companies of equivalent
size and complexity subject to the
limits contained in GSK’s Articles
of Association.
Basic fee
Supplemental
fees
Benefits
To provide additional compensation
for Non-Executive Directors
(excluding the Chairman) taking on
additional Board responsibilities or
undertaking intercontinental travel
to meetings.
To facilitate execution of
responsibilities and duties required
by the role.
Non-Executive
Directors’ share
allocation plan
To enhance the link between
directors and shareholders, GSK
requires Non-Executive Directors
to receive a significant part of their
fees in the form of GSK shares or
ADS.
There is no formal maximum, however, fees are reviewed annually and set
by reference to a review of the Chairman’s performance and independently
sourced market data.
The Remuneration Committee is responsible for evaluating and making
recommendations to the Board on the fees payable to the Chairman.
The Chairman does not participate in discussions in respect of his fees.
Fees can be paid in a combination of cash and/or GSK shares or ADS.
See further details of GSK’s Non-Executive Director’s share allocation plan
below.
There is no formal maximum, however, fees are reviewed annually and set
by reference to independently sourced market data.
The Chairman and CEO are responsible for evaluating and making
recommendations to the Board on the fees payable to the company’s
Non-Executive Directors.
A minimum of 25% is delivered in the form of GSK shares or ADS.
See further details of GSK’s Non-Executive Director’s share allocation plan
below.
Additional fees for Committee Chairmen, intercontinental travel and the
Senior Independent Director. Current fee levels are set out on page 109 of
the 2013 Annual Report on Remuneration.
Travel and subsistence costs for Non-Executive Directors are incurred in the
normal course of business in relation to meetings on Board and Committee
matters and other GSK-hosted events. For overseas-based Non-Executive
Directors, this includes travel to meetings in the UK. Non-Executive
Directors may from time to time be accompanied by their spouse or partner
to these meetings or events. The costs associated with the above are all met
by the company and in some instances, they are deemed to be taxable and
therefore treated as benefits for the Non-Executive Director.
At least 25% of the Non-Executive Directors’ total fees, excluding those of
the Chairman, are paid in the form of GSK shares or ADS and allocated to a
share or ADS account.
The Non-Executive Directors may also take the opportunity to invest part or
all of the balance of their fees into the same share or ADS account.
The GSK shares or ADS which are notionally awarded to the Non-Executive
Directors and allocated to their interest accounts are set out in the table on
page 115 of the 2013 Annual Report and are included in the Directors’
interests table on page 110 of the 2013 Annual Report.
The accumulated balances of these GSK shares or ADS, together with the
notional dividends accrued, are not paid out to Non-Executive Directors until
they leave the Board. Upon leaving, the Non-Executive Directors will receive
either the GSK shares or ADS, or a cash amount equivalent to the value of
the GSK shares or ADS at the date of leaving, or date of payment if later.
Letter of
appointment
Non-Executive Directors’ and the
Chairman’s terms of engagement
are set out in letters of appointment
as set out in the table on page 109
of the 2013 Annual Report.
Non-Executive Directors will be subject to annual election or re-election and
will normally serve no longer than nine years from the date of first election by
shareholders at a general meeting.
The Chairman will be subject to annual appointment by shareholders and
may serve longer than nine years from the date of first election by
shareholders at a general meeting.
GSK Annual Report 2014 127
Governance & remunerationFinancial statementsInvestor informationStrategic report 2014 Remuneration policy report
continued
Operation and scope of Remuneration policy
The current Remuneration policy (the Policy) is set out on pages
117 to 125 of the 2013 Annual Report and it is intended that the
Policy for GSK’s Executive and Non-Executive Directors will apply
from the close of the company’s Annual General Meeting on 7 May
2014 after it has been submitted by the Committee for approval by
shareholders. The Committee currently intends to operate in
accordance with this Policy prior to the Annual General Meeting,
with the exception of the additional two-year holding period for
Performance Share Plan awards which will apply to awards made
in 2015 onwards.
The Committee has written this Policy principally in relation to the
remuneration arrangements for the CEO, CFO and Chairman,
Global R&D & Vaccines whilst taking into account the possible
recruitment of a replacement or an additional Executive Director
during the operation of this Policy. The Committee intends this
Policy to operate for the period set out above in its entirety.
However, it may after due consideration, seek to change the Policy
during this period, but only if it believes it is appropriate to do so
for the long-term success of the company, after consultation with
shareholders and having sought shareholder approval at a general
meeting.
In drafting this Policy, the Committee reserves the right to make
any remuneration payments and payments for loss of office
(including exercising any discretions available to it in connection
with such payments) notwithstanding that they are not in line with
the Policy set out above where the terms of the payment were
agreed (i) before the policy came into effect or (ii) at a time when
the relevant individual was not a director of the company and, in
the opinion of the Committee, the payment was not in
consideration for the individual becoming a director of the
company. For these purposes “payments” includes the Committee
satisfying awards of variable remuneration. In relation to an award
over shares, the terms of the payment are “agreed” at the time the
award is granted.
The Committee may also make minor amendments to the Policy
set out in this report (for regulatory, exchange control, tax or
administrative purposes or to take account of a change in
legislation) without obtaining shareholder approval for such
amendments.
Statement of consideration of shareholder views
The Committee engages in regular dialogue with shareholders and
holds annual meetings with GSK’s largest investors to discuss and
take feedback on its remuneration policy and governance matters.
The annual meetings were held in November 2013, at which Tom
de Swaan, Committee Chairman, shared updates on remuneration
matters in the last 12 months and proposals for 2014 onwards.
In particular this covered the changes to performance conditions
applying to long-term incentives, the introduction of an additional
two-year holding period for performance share awards (i.e. five years
in total) which will apply to Executive Directors for awards made in
2015 onwards and policies that are now required to be disclosed
in the Remuneration Policy Report.
128 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Financial
statements
In this section
Directors’ statement of responsibilities 130
131
Independent Auditor’s report
136
Financial statements
Notes to the financial statements
140
Financial statements of
GlaxoSmithKline plc prepared
under UK GAAP
211
GSK Annual Report 2014 129
Governance & remunerationFinancial statementsInvestor informationStrategic report Directors’ statement
of responsibilities
The Directors are responsible for preparing the Annual Report,
the Remuneration report and the Group financial statements
in accordance with applicable law and regulations.
Disclosure of information to auditors
The Directors in office at the date of this Annual Report have each
confirmed that:
• so far as he or she is aware, there is no relevant audit information
of which the company’s auditors are unaware; and
• he or she has taken all the steps that he or she ought to have
taken as a Director to make himself or herself aware of any
relevant audit information and to establish that the company’s
auditors are aware of that information.
This confirmation is given and should be interpreted in accordance
with the provisions of section 418 of the Companies Act 2006.
Going concern basis
Pages 48 to 70 contain information on the performance of the
Group, its financial position, cash flows, net debt position and
borrowing facilities. Further information, including Treasury risk
management policies, exposures to market and credit risk and
hedging activities, is given in Note 41 to the financial statements,
‘Financial instruments and related disclosures’. After making
enquiries, the Directors have a reasonable expectation that the
Group has adequate resources to continue in operational
existence for the foreseeable future. For this reason, they
continue to adopt the going concern basis in preparing the
financial statements.
Internal control
The Board, through the Audit & Risk Committee, has reviewed the
assessment of risks and the internal control framework that operates
in GSK and has considered the effectiveness of the system of
internal control in operation in the Group for the year covered by
this Annual Report and up to the date of its approval by the Board
of Directors.
The UK Corporate Governance Code
The Board considers that GlaxoSmithKline plc applies the
principles and provisions of the UK Corporate Governance Code
maintained by the Financial Reporting Council, as described in
the Corporate Governance section on pages 78 to 95, and has
complied with its provisions. The Board further considers that
the Annual Report, taken as a whole, is fair, balanced and
understandable, and provides the information necessary for
shareholders to assess the Group’s performance, business
model and strategy.
As required by the Financial Conduct Authority’s Listing Rules,
the auditors have considered the Directors’ statement of
compliance in relation to those points of the UK Corporate
Governance Code which are specified for their review.
Annual Report
The Annual Report for the year ended 31 December 2014,
comprising the Report of the Directors, the Remuneration report,
the Financial statements and additional information for investors,
has been approved by the Board of Directors and signed on its
behalf by
Sir Christopher Gent
Chairman
26 February 2015
UK company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards
(IFRS) as adopted by the European Union. In preparing the Group
financial statements, the Directors have also elected to comply
with IFRS, as issued by the International Accounting Standards
Board (IASB). Under company law the Directors must not approve
the Group financial statements unless they are satisfied that they
give a true and fair view of the state of affairs of the Group and
of the profit or loss of the Group for that period.
In preparing those financial statements, the Directors are
required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and accounting estimates that are
reasonable and prudent;
• state that the Group financial statements comply with IFRS
as adopted by the European Union and IFRS as issued by
the IASB, subject to any material departures disclosed and
explained in the Group financial statements;
• prepare the financial statements on a going concern basis
unless it is inappropriate to presume that the Group will
continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Group and to enable them to ensure
that the Group financial statements and the Remuneration report
comply with the Companies Act 2006 and Article 4 of the IAS
Regulation. They are also responsible for safeguarding the assets
of the Group and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Group financial statements for the year ended 31 December
2014, comprising principal statements and supporting notes,
are set out in ‘Financial statements’ on pages 136 to 210 of this
report. The responsibilities of the auditors in relation to the Group
financial statements are set out in the Independent Auditors’
report on pages 131 to 135.
The Group financial statements for the year ended 31 December
2014 are included in the Annual Report, which is published in
printed form and made available on our website. The Directors are
responsible for the maintenance and integrity of the Annual Report
on our website in accordance with UK legislation governing the
preparation and dissemination of financial statements. Access to
the website is available from outside the UK, where comparable
legislation may be different.
Each of the current Directors, whose names and functions are
listed in the Corporate Governance section of the Annual Report
2014 confirms that, to the best of his or her knowledge:
• the Group financial statements, which have been prepared
in accordance with IFRS as adopted by the EU and IFRS
as issued by the IASB, give a true and fair view of the assets,
liabilities, financial position and profit of the Group; and
• the Strategic Report and risk sections of the Annual Report
include a fair review of the development and performance of
the business and the position of the Group, together with a
description of the principal risks and uncertainties that it faces.
130 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Independent Auditors’ report
to the members of GlaxoSmithKline plc
Report on the Group financial statements
Our opinion
In our opinion, the Group financial statements defined below:
• give a true and fair view of the state of the Group’s affairs at
31 December 2014 and of its profit and cash flows for the
year then ended;
• have been properly prepared in accordance with International
Financial Reporting Standards (‘IFRSs’) as adopted by the
European Union; and
• have been prepared in accordance with the requirements of
the Companies Act 2006 and Article 4 of the IAS Regulation.
Separate opinion in relation to IFRSs as issued by the IASB
As explained in Note 1 to the Group financial statements, in
addition to applying IFRSs as adopted by the European Union,
the Group has also applied IFRSs as issued by the International
Accounting Standards Board ( the ‘IASB’).
Our audit approach
Overview:
Materiality
• Overall group materiality: £215 million which represents 4%
of profit before tax, adding back certain non-recurring items.
Audit scope
• Our audit included full scope audits of 24 reporting components
with specific audit procedures performed at a further 32
reporting components.
• Taken together, the components at which audit work was
performed accounted for 68% of consolidated revenue and 74%
of consolidated profit before tax and covered all components
that individually contributed more than 2% of revenue and profit
before tax.
Areas of focus
• Rebates, discounts, allowances and returns in the US
Pharmaceuticals and Vaccines business
In our opinion, the Group financial statements comply with IFRSs
as issued by the IASB.
• Transformation of the Group’s finance processes
• Potential implications of alleged illegal acts
What we have audited
GlaxoSmithKline plc’s Group financial statements comprise:
• Litigation
• the consolidated balance sheet at 31 December 2014;
• the consolidated income statement and statement of
comprehensive income for the year then ended;
• the consolidated statement of changes in equity for the year
then ended;
• the consolidated cash flow statement for the year then ended;
and
• the notes to the consolidated financial statements, which
include a summary of significant accounting policies and other
explanatory information.
The financial reporting framework that has been applied in the
preparation of the Group financial statements comprises
applicable law and IFRSs as adopted by the European Union.
• Carrying value of goodwill and intangible assets
• Uncertain tax positions
The scope of our audit and our areas of focus
We conducted our audit in accordance with International
Standards on Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’).
We designed our audit by determining materiality and
assessing the risks of material misstatement in the Group financial
statements. In particular, we looked at where the Directors made
subjective judgements, for example in respect of significant
accounting estimates that involved making assumptions and
considering future events that are inherently uncertain. As in all
of our audits, we also addressed the risk of management override
of internal controls, including evaluating whether there was
evidence of bias by the Directors that represented a risk of
material misstatement due to fraud.
The risks of material misstatement that had the greatest effect on
our audit, including the allocation of our resources and effort, are
identified as areas of focus in the table below. We have also set
out how we tailored our audit to address these specific areas in
order to provide an opinion on the Group financial statements as
a whole. Any comments we make on the results of our procedures
should be read in this context. For each area of focus below,
where appropriate, we evaluated the design and tested the
operating effectiveness of key internal controls over financial
reporting, including testing the operation of IT systems from
which financial information is generated. This is not a complete
list of all risks identified by our audit.
GSK Annual Report 2014 131
Governance & remunerationFinancial statementsInvestor informationStrategic report Independent Auditors’ report
continued
Area of focus
How our audit addressed the area of focus
Rebates, discounts, allowances and returns in the US
Pharmaceuticals and Vaccines business
Refer to Note 3 in the Group financial statements
The Group makes sales to various customers in the US that fall under
certain commercial and government mandated contracts and
reimbursement arrangements, of which the most significant are
Medicaid and Medicare. The Group also provides a right of return to its
customers for certain products.
These arrangements result in deductions to gross sales in arriving at
turnover and give rise to obligations for the Group to provide customers
with rebates, discounts, allowances and the right of return, which for
unsettled amounts are recognised as an accrual.
We focused on this area because rebates, discounts, allowances and
returns arrangements are complex and because establishing an
appropriate accrual requires significant judgement and estimation by
the Directors. The Directors have determined an accrual of £1.3 billion
to be necessary at 31 December 2014.
Transformation of the Group’s finance processes
The Group continues to rationalise and simplify its finance processes
including the roll-out of an enterprise-wide resource planning system
(ERP) through Core Business Services. In addition, financial transaction
processes have continued to migrate to third party business process
outsourcing locations (BPOs) and related accounting services have
been centralised at in-house business service centres (BSCs).
These changes represent a financial reporting risk while migrations are
happening as controls and processes that have been established and
embedded over a number of years are updated and migrated into the
new ERP environment. There is an increased risk of breakdown in
internal financial controls during the transition and an increased risk of
inaccurate or incomplete migration of financial data, which would in turn
increase risk of material misstatements in the Group financial
statements.
Potential implications of alleged illegal acts
Refer to Notes 3 and 45 in the Group financial statements
We incorporated this risk as an area of focus in our 2013 audit as a
result of allegations of illegal acts carried out by the Group’s Chinese
Pharmaceuticals business. In addition, the Group is conducting
investigations in a number of other markets. The Group has continued to
co-operate with enquiries by the Department of Justice (‘DoJ’) in the US
and by the Serious Fraud Office (‘SFO’) in the UK. The SFO announced
in 2014 that it had commenced a criminal investigation into the Group’s
commercial practices. In addition, the Group announced in 2014 that it
had paid a £301 million fine to the Chinese government in connection
with these allegations.
We focused on the following risks, which might have a material impact
on the Group financial statements:
• That illegal acts similar to those previously alleged in China have
occurred elsewhere in the Group; and
• That further fines and penalties might be forthcoming in respect of
ongoing investigations into the Group’s commercial practices that
could give rise to the need for additional provisions or asset
impairments outside of China.
We obtained management’s calculations for accruals under applicable
schemes and validated the assumptions used by reference to the Group’s
stated commercial policies, the terms of the applicable contracts, third party
data related to patient enrolment in US government funded benefit schemes
and historical levels of product returns.
We compared the assumptions to contracted prices, historical rebates,
discounts, allowances and returns levels (where relevant) and to current
payment trends. We also considered the historical accuracy of the Group’s
estimates in previous years, including an evaluation of releases of accruals
in 2014 following payments or settlements with US state authorities.
We formed an independent expectation of the largest elements of the
accrual at 31 December 2014 using third party data and compared this
expectation to the actual accrual recognised by the Group. In undertaking
this work, we considered the impact of the decrease in revenue for certain
respiratory products, principally Advair, and relevant changes in pricing
and billing arrangements in 2015 with commercial and government
healthcare providers.
Based on the procedures performed, we did not identify any material
differences between our independent expectations and the accrual.
We centrally managed the work performed by component audit teams at
BPOs and BSCs, which consisted of controls and substantive testing,
and conducted oversight visits to all of the BSC and BPO sites in Group
audit scope (namely India, Malaysia, the US and the UK) to direct the work
performed.
We evaluated the design and tested the operating effectiveness of key
automated and manual controls both before and after the migration to the
centralised processing environment, including IT general controls and controls
in respect of data migration between ERP systems. We also substantively
tested the accuracy and completeness of data migration into the new ERP
along with the controls over this process and we did not note any significant
exceptions.
We inspected the ruling from the Changsha Intermediate People’s Court
in Hunan Province, China in respect of the allegations of bribery in China.
We validated that the amounts paid in the final settlement of this liability
were consistent with the ruling.
Using our specialist forensic knowledge, we independently assessed the
scope and findings of the investigative work performed by the Group’s
external legal counsel in respect of the allegations in China. We considered
the output of this assessment in determining our audit approach. We met with
the component audit team in Shanghai, China to understand and evaluate the
steps taken by the Group to address the allegations.
We met with the Directors, management, in-house legal counsel and the
Group’s external advisors to assess the risk of occurrence of similar acts
outside of China, the status of ongoing investigations and the potential for
further fines and penalties. This included understanding and evaluating the
Group’s internal investigations processes, which consider risks and
allegations reported through various channels including whistle-blowing
hotlines. We also evaluated the enhancements and changes that have been
made to other control processes and business practices since 2013.
To supplement these centralised procedures, we selected 15 territories
(including certain markets not otherwise included in Group audit scope)
where the country-specific risk of corruption and bribery was deemed high.
For these territories, we obtained specific reporting from the component audit
teams to provide us with evidence that each had appropriately designed and
performed audit procedures to address the audit risk that the Group financial
statements might be materially misstated due to the potential financial impact
of illegal acts.
We discussed the status of investigations opened by the DoJ and SFO
with the Audit & Risk Committee, the Board of Directors, management and
in-house general counsel. In addition, we engaged directly with the Group’s
external advisors to corroborate our understanding. We were satisfied with
the Group’s provisioning decisions at 31 December 2014 and with the
adequacy of disclosures given the status of these investigations.
132 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Area of focus
How our audit addressed the area of focus
Litigation
Refer to Notes 3 and 45 in the Group financial statements
The pharmaceuticals industry is heavily regulated which increases
inherent litigation risk. The Group is engaged in a number of legal
actions, including product liability, anti-trust and related private
litigation, of which the most significant are disclosed in Note 45.
We discussed the status of significant known actual and potential litigation
with in-house legal counsel. We obtained and substantively tested
evidence to support the decisions and rationale for provisions held or
decisions not to recognise provisions, including correspondence with legal
counsel and other counter-parties to litigation. We also monitored and
considered external information sources to identify potential legal actions.
We focused on this area as the eventual outcome of claims is uncertain
and the positions taken by the Directors are based on the application
of material judgement and estimation. Accordingly, unexpected adverse
outcomes could significantly impact the Group’s reported profit and
balance sheet position.
At 31 December 2014, the Group held provisions of £520 million in
respect of legal actions.
We developed an independent expectation of the litigation provisions
based on product litigation history and other available evidence to
challenge the valuation and completeness of the provisions recognised
by the Group. We obtained confirmations from external legal counsel to
confirm our understanding of settled and outstanding litigation and
asserted claims. We evaluated significant adjustments to legal reserves
recorded during the year to determine if they were indicative of
management bias.
Carrying value of goodwill and intangible assets
Refer to Notes 18 and 19 in the Group financial statements
The Group has £7.8 billion of intangible assets, including significant
licenses, patents and acquired brands, and £3.6 billion of goodwill at
31 December 2014. The Group recognised impairments of intangible
assets totalling £157 million during the year.
We have focused on acquired intangible assets, as these are the most
significant individually and in aggregate, and a number have indefinite
lives. The Group has also recognised goodwill from a number of
acquisitions.
The carrying values of goodwill and intangible assets are contingent
on future cash flows and there is risk that if these cash flows do not
meet the Group’s expectations that the assets will be impaired. The
impairment reviews performed by the Group contain a number of
significant judgements and estimates including revenue growth, the
success of new product launches, profit margins, cash conversion and
discount rate. Changes in these assumptions might lead to a change in
the carrying value of intangible assets and goodwill. The risk is greater
for the US and Emerging Markets Pharmaceuticals and Vaccines cash
generating units (‘CGUs’) where valuation headroom compared to
carrying value is lower than in previous years.
Uncertain tax positions
Refer to Note 14 in the Group financial statements
The Group operates in a complex multinational tax environment and
there are open tax and transfer pricing matters with UK and overseas
tax authorities. In addition, from time to time the Group enters into
transactions with complicated accounting and tax consequences.
Judgement is required in assessing the level of provisions required in
respect of uncertain tax positions. At 31 December 2014, the Group
has recognised provisions for uncertain tax provisions, offset by current
tax assets, included within the current tax payable of £945 million
(2013 – £1,452 million).
As disclosed in Note 45 to the Group financial statements, the eventual
outcome of legal proceedings is dependent on the outcome of future events
and therefore the position taken by the Group is inherently judgemental.
We found that in the context of the Group financial statements taken as a
whole the judgements made by management were reasonable and the
disclosures made in respect of these provisions and contingent liabilities
were appropriate.
Leveraging our specialist valuations knowledge, we obtained the Group’s
impairment analyses and tested the reasonableness of key assumptions,
including profit and cash flow growth, terminal values, the impact of the
expiry of patents, potential product obsolescence and the selection of
discount rates. We challenged management to substantiate its
assumptions, including comparing relevant assumptions to industry and
economic forecasts.
We interrogated the integrity of supporting calculations and we
corroborated certain information with third party sources, including
expectations of performance of certain assets and components of the
business.
We obtained and evaluated management’s sensitivity analyses to ascertain
the impact of reasonably possible changes and we performed our own
independent sensitivity calculations to quantify the downside changes
to management’s models required to result in impairment, focusing in
particular on Emerging Markets which is more sensitive to change than
the other CGUs.
As a result of our work, we determined that the quantum of impairment
recognised in 2014 was appropriate. For those intangible assets, including
goodwill, where management determined that no impairment was required,
we found that these judgements were supported by reasonable
assumptions that would require significant downside changes before any
additional material impairment was necessary.
Using our specialist UK, US, international tax and transfer pricing
knowledge, we evaluated and challenged management’s judgements in
respect of estimates of tax exposures and contingencies in order to assess
the adequacy of the Group’s tax provisions. This includes obtaining and
evaluating certain third party tax opinions that the Group has obtained to
assess the appropriateness of any assumptions used, including in respect
of steps taken in advance of the proposed three-part transaction with
Novartis AG.
In understanding and evaluating management’s judgements, we considered
the status of recent and current tax authority audits and enquiries, the
outturn of previous claims, judgemental positions taken in tax returns and
current year estimates and developments in the tax environment.
From the evidence obtained, we considered the level of provisioning to
be acceptable in the context of the Group financial statements taken as a
whole. However, we noted that the assumptions and judgements that are
required to formulate the provisions mean that the range of possible
outturns is broad.
GSK Annual Report 2014 133
Governance & remunerationFinancial statementsInvestor informationStrategic report Independent Auditors’ report
continued
How we tailored the audit scope
In identifying these areas of focus, we tailored the scope of our
audit to ensure that we performed sufficient work to be able to give
an opinion on the Group financial statements as a whole, taking
into account the geographic structure of the Group, the
accounting processes and controls and the industry in which the
Group operates.
The Group financial statements are a consolidation of over 400
reporting units, each of which is considered to be a component.
We identified 24 reporting units that, in our view, required an
audit of their complete financial information due to their size
or risk characteristics. Specific audit procedures over significant
balances and transactions were performed at a further 32
reporting units to give appropriate coverage of all material
balances. Where these reporting units are supported by shared
financial service centres, these centres were also included in
Group audit scope. None of the reporting units not included
in our Group audit scope individually contributed more than
2% to consolidated revenue or profit before tax.
Where the work was performed by component auditors,
we determined the level of involvement we needed to have in the
audit work at those reporting units. As a result, eight overseas
components were visited by senior members of the Group audit
team, including all of the Group’s significant components in the
US (which are visited at least annually) alongside Belgium, China,
France, Germany and Italy. In addition, each of the five shared
service centres supporting reporting components in Group audit
scope was visited. For those components in Group audit scope
where a site visit was not undertaken, our involvement included
review of component auditor work papers and attendance at
certain component audit clearance meetings.
Further specific audit procedures over central functions, the
Group consolidation and areas of significant judgement (including
taxation, goodwill, intangible assets, treasury, post-retirement
benefits, litigation and the elimination of unrealised intercompany
profit in inventory) were directly led by the Group audit team.
Taken together, the territories and functions where we performed
our audit work accounted for 68% of consolidated revenue and
74% of consolidated profit before tax. This was before considering
the contribution to our audit evidence from performing audit work
at the divisional and Group levels, including testing of monitoring
controls and disaggregated analytical review procedures, which
covers a significant portion of the Group’s smaller and lower risk
components that were not directly included in our Group audit
scope. In addition, we obtained audit evidence over certain
out-of-scope components through the procedures we undertook
at the Group’s shared service centres, encompassing BPOs and
BSCs, and over centralised IT infrastructure where these
processes are standardised.
Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for materiality.
These, together with qualitative considerations, helped us to
determine the scope of our audit and the nature, timing and
extent of our audit procedures and to evaluate the effect of
misstatements, both individually and on the Group financial
statements as a whole.
Based on our professional judgement, we determined materiality
for the Group financial statements as a whole as follows:
Overall group materiality
How we determined it
Rationale for benchmark applied
£215 million (2013 – £332 million)
4% of profit before tax (£2,968 million) adding back non-recurring items including the
remeasurement charge for the Shionogi-ViiV Healthcare contingent consideration (£768 million),
major restructuring costs (£755 million), legal costs including the fine paid in China (£548 million),
items of income and expense relating to major acquisition and disposal activity (net £8 million),
incremental costs of the change in timing of recognition of the US Branded Prescription Drug Fee
(£115 million) and impairment of intangible assets (£157 million).
The Group’s principal measure of earnings comprises core results, which adds back to statutory
results a number of items of income and expenditure including those detailed above. Management
uses this measure as it believes that it eliminates the volatility inherent in one-off items. We have
taken this measure into account in determining our materiality, except that we have not adjusted
profit before tax to add back amortisation of intangible assets and certain other smaller non-core
items as in our view these are recurring items which do not introduce volatility to the Group’s
earnings. Materiality is lower than last year primarily due to the effect of lower profitability in 2014.
We agreed with the Audit & Risk Committee that we would report to it misstatements above £10 million (2013 – £10 million) identified
during our audit as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Going concern
Under the Listing Rules, we are required to review the Directors’
statement, set out on page 130, in relation to going concern.
We have nothing to report having performed our review.
As noted in the Directors’ statement, the Directors have concluded
that it is appropriate to prepare the Group financial statements
using the going concern basis of accounting. The going concern
basis presumes that the Group has adequate resources to remain
in operation, and that the Directors intend for it to do so, for at least
one year from the date the Group financial statements are signed.
As part of our audit, we have concluded that the Directors’ use of
the going concern basis is appropriate.
However, because not all future events or conditions can be
predicted, these statements are not a guarantee of the Group’s
ability to continue as a going concern.
Other required reporting
Consistency of other information
Companies Act 2006 opinions
In our opinion:
• the information given in the Strategic Report and the Directors’
Report for the financial year for which the Group financial
statements are prepared is consistent with the Group financial
statements; and
• the information given in the Corporate Governance Statement
set out on pages 78 to 95 with respect to internal control and
risk management systems and about share capital structures
is consistent with the Group financial statements.
134 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
ISAs (UK & Ireland) reporting
• information in the Annual Report is:
- materially inconsistent with the information in the audited Group finanical statements; or
- apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in
We have no exceptions
to report arising from this
responsibility.
the course of performing our audit; or
- otherwise misleading
• the statement given by the Directors on page 130 in accordance with provision C.1.1 of the UK Corporate Governance
Code (the “Code”) that they consider the Annual Report taken as a whole to be fair, balanced and understandable and
provides the information necessary for members to assess the Group’s performance, business model and strategy is
materially inconsistent with our knowledge of the Group acquired in the course of performing our audit.
We have no exceptions
to report arising from this
responsibility.
• the section of the Annual Report on page 86, as required by provision C.3.8 of the Code, describing the work of the
Audit & Risk Committee does not appropriately address matters communicated by us to the Audit & Risk Committee.
We have no exceptions
to report arising from this
responsibility.
Adequacy of information and explanations received
Under the Companies Act 2006, we are required to report to
you if, in our opinion, we have not received all the information
and explanations we require for our audit. We have no exceptions
to report arising from this responsibility.
Directors’ remuneration
Under the Companies Act 2006, we are required to report to
you if, in our opinion, certain disclosures of Directors’ remuneration
specified by law have not been made. We have no exceptions to
report arising from this responsibility.
Corporate governance statement
Under the Listing Rules, we are required to review the part of
the Corporate Governance Statement relating to the parent
company’s compliance with 10 provisions of the UK Corporate
Governance Code. We have nothing to report having performed
our review.
Under the Companies Act 2006, we are required to report to you
if, in our opinion, a Corporate Governance Statement has not been
prepared by the parent company. We have no exceptions to report
arising from this responsibility.
• the reasonableness of significant accounting estimates made
by the Directors; and
• the overall presentation of the Group financial statements.
We primarily focus our work in these areas by assessing the
Directors’ judgements against available evidence, forming our
own judgements, and evaluating the disclosures in the Group
financial statements.
We test and examine information, using sampling and other
auditing techniques, to the extent we consider necessary to
provide a reasonable basis for us to draw conclusions. We obtain
audit evidence through testing the effectiveness of controls,
substantive procedures or a combination of both.
In addition, we read all the financial and non-financial information
in the Annual Report to identify material inconsistencies with the
audited Group financial statements and to identify any information
that is apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course of
performing the audit. If we become aware of any apparent material
misstatements or inconsistencies, we consider the implications
for our report.
Responsibilities for the financial statements
and the audit
Our responsibilities and those of the Directors
As explained more fully in the Directors’ statement of
responsibilities set out on page 130, the Directors are responsible
for the preparation of the Group financial statements and for being
satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the Group
financial statements in accordance with applicable law and ISAs
(UK & Ireland). Those standards require us to comply with the
Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and
only for the Company’s members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other
purpose. We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to
whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in writing.
What an audit of financial statements involves
An audit involves obtaining evidence about the amounts and
disclosures in the Group financial statements sufficient to give
reasonable assurance that the Group financial statements are
free from material misstatement, whether caused by fraud or error.
This includes an assessment of:
• whether the accounting policies are appropriate to the Group’s
circumstances and have been consistently applied and
adequately disclosed;
Other matters
We have reported separately on the parent company financial
statements of GlaxoSmithKline plc for the year ended 31
December 2014 and on the information in the Directors’
Remuneration report that is described as having been audited.
The company has passed a resolution in accordance with section
506 of the Companies Act 2006 that the senior statutory auditor’s
name should not be stated.
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
26 February 2015
Notes:
(a) The maintenance and integrity of the GlaxoSmithKline plc
website is the responsibility of the Directors; the work carried
out by the auditors does not involve consideration of these
matters and, accordingly, the auditors accept no responsibility
for any changes that may have occurred to the Group financial
statements since they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
GSK Annual Report 2014 135
Governance & remunerationFinancial statementsInvestor informationStrategic report Financial statements
Consolidated income statement
for the year ended 31 December 2014
Turnover
Cost of sales
Gross profit
Selling, general and administration
Research and development
Royalty income
Other operating income
Operating profit
Finance income
Finance expense
Profit on disposal of interest in associates
Share of after tax profits of associates and joint ventures
Profit before taxation
Taxation
Profit after taxation for the year
Profit attributable to non-controlling interests
Profit attributable to shareholders
Basic earnings per share (pence)
Diluted earnings per share (pence)
Consolidated statement of comprehensive income
for the year ended 31 December 2014
Profit for the year
Items that may be subsequently reclassified to income statement:
Exchange movements on overseas net assets and net investment hedges
Reclassification of exchange on liquidation or disposal of overseas subsidiaries
Deferred tax on exchange movements
Fair value movements on available-for-sale investments
Deferred tax on fair value movements on available-for-sale investments
Reclassification of fair value movements on available-for-sale investments
Deferred tax reversed on reclassification of available-for-sale investments
Fair value movements on cash flow hedges
Deferred tax on fair value movements on cash flow hedges
Reclassification of cash flow hedges to income statement
Share of other comprehensive income of associates and joint ventures
Items that will not be reclassified to income statement:
Exchange movements on overseas net assets of non-controlling interests
Remeasurement (losses)/gains on defined benefit plans
Deferred tax on actuarial movements in defined benefit plans
Notes
6
7
8
11
12
13
14
15
15
34
34
Other comprehensive (expense)/income for the year
34
2014
£m
23,006
(7,323)
15,683
(8,246)
(3,450)
310
(700)
3,597
68
(727)
–
30
2,968
2013
£m
26,505
(8,585)
17,920
(8,480)
(3,923)
387
1,124
7,028
61
(767)
282
43
6,647
2012
£m
26,431
(7,925)
18,506
(8,789)
(3,979)
306
1,256
7,300
79
(808)
–
29
6,600
(137)
(1,019)
(1,922)
2,831
75
2,756
2,831
57.3p
56.7p
5,628
192
5,436
5,628
112.5p
110.5p
4,678
179
4,499
4,678
91.6p
90.2p
2014
£m
2,831
2013
£m
5,628
2012
£m
4,678
(497)
(219)
(2)
29
(78)
(155)
58
5
(1)
(5)
18
(847)
16
(1,181)
262
(903)
(1,750)
(255)
–
–
367
(29)
(38)
7
(9)
1
2
15
61
(35)
847
(286)
526
587
(226)
–
–
77
(10)
(19)
10
(6)
–
2
30
(142)
(30)
(685)
193
(522)
(664)
Total comprehensive income for the year
1,081
6,215
4,014
Total comprehensive income for the year attributable to:
Shareholders
Non-controlling interests
Total comprehensive income for the year
990
91
1,081
6,058
157
6,215
3,865
149
4,014
136 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
Consolidated balance sheet
as at 31 December 2014
Non-current assets
Property, plant and equipment
Goodwill
Other intangible assets
Investments in associates and joint ventures
Other investments
Deferred tax assets
Derivative financial instruments
Other non-current assets
Total non-current assets
Current assets
Inventories
Current tax recoverable
Trade and other receivables
Derivative financial instruments
Liquid investments
Cash and cash equivalents
Assets held for sale
Total current assets
Total assets
Current liabilities
Short-term borrowings
Trade and other payables
Derivative financial instruments
Current tax payable
Short-term provisions
Total current liabilities
Non-current liabilities
Long-term borrowings
Deferred tax liabilities
Pensions and other post-employment benefits
Other provisions
Derivative financial instruments
Other non-current liabilities
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium account
Retained earnings
Other reserves
Shareholders’ equity
Non-controlling interests
Total equity
Notes
2014
£m
2013
£m
17
18
19
20
21
14
41
22
23
14
24
41
32
25
26
32
27
41
14
29
32
14
28
29
41
30
33
33
34
34
9,052
3,724
8,320
340
1,114
2,688
–
735
25,973
4,231
138
4,600
146
69
4,338
1,156
14,678
40,651
(2,943)
(7,958)
(404)
(945)
(1,045)
(13,295)
(15,841)
(445)
(3,179)
(545)
(9)
(2,401)
(22,420)
(35,715)
4,936
1,339
2,759
(2,074)
2,239
4,263
673
4,936
8,872
4,205
9,283
323
1,202
2,084
1
889
26,859
3,900
129
5,442
155
66
5,534
1
15,227
42,086
(2,789)
(8,317)
(127)
(1,452)
(992)
(13,677)
(15,456)
(693)
(2,189)
(552)
(3)
(1,704)
(20,597)
(34,274)
7,812
1,336
2,595
913
2,153
6,997
815
7,812
The financial statements on pages 136 to 210 were approved by the Board on 26 February 2015 and signed on its behalf by
Sir Christopher Gent
Chairman
GSK Annual Report 2014 137
Governance & remunerationFinancial statementsInvestor informationStrategic report Financial statements
continued
Consolidated statement of changes in equity
for the year ended 31 December 2014
At 1 January 2012
Profit for the year
Other comprehensive (expense)/income for the year
Total comprehensive income for the year
Distributions to non-controlling interests
Dividends to shareholders
Changes in non-controlling interests
Forward contract relating to non-controlling interest
Ordinary Shares issued
Ordinary Shares purchased and cancelled or held as Treasury shares
Ordinary Shares acquired by ESOP Trusts
Ordinary Shares transferred by ESOP Trusts
Write-down of shares held by ESOP Trusts
Share-based incentive plans
Tax on share-based incentive plans
At 31 December 2012
Profit for the year
Other comprehensive income/(expense) for the year
Total comprehensive income for the year
Distributions to non-controlling interests
Dividends to shareholders
Changes in non-controlling interests
Ordinary Shares issued
Ordinary Shares purchased and cancelled or held as Treasury shares
Ordinary Shares acquired by ESOP Trusts
Write-down of shares held by ESOP Trusts
Share-based incentive plans
Tax on share-based incentive plans
At 31 December 2013
Profit for the year
Other comprehensive (expense)/income for the year
Total comprehensive income/(expense) for the year
Distributions to non-controlling interests
Dividends to shareholders
Changes in non-controlling interests
Forward contract relating to non-controlling interest
Ordinary Shares issued
Ordinary Shares purchased and cancelled or held as Treasury shares
Ordinary Shares acquired by ESOP Trusts
Write-down of shares held by ESOP Trusts
Share-based incentive plans
Tax on share-based incentive plans
At 31 December 2014
Shareholders’ equity
Share
capital
£m
1,387
Share
premium
£m
1,673
Retained
earnings
£m
3,357
Other
reserves
£m
1,602
–
–
–
–
–
–
–
7
(45)
–
–
–
–
–
1,349
–
–
–
–
–
–
12
(25)
–
–
–
–
1,336
–
–
–
–
–
–
–
3
–
–
–
–
–
1,339
–
–
–
–
–
–
–
349
–
–
–
–
–
–
2,022
–
–
–
–
–
–
573
–
–
–
–
–
2,595
–
–
–
–
–
–
–
164
–
–
–
–
–
2,759
4,499
(665)
3,834
–
(3,814)
(382)
–
–
(2,493)
–
–
(80)
211
9
642
5,436
316
5,752
–
(3,680)
(584)
–
(1,504)
–
(80)
294
73
913
2,756
(1,626)
1,130
–
(3,843)
(58)
–
–
(238)
150
(450)
326
(4)
(2,074)
–
31
31
–
–
–
8
–
45
(37)
58
80
–
–
1,787
–
306
306
–
–
–
–
25
(45)
80
–
–
2,153
–
(140)
(140)
–
–
–
21
–
–
(245)
450
–
–
2,239
Non-
controlling
interests
£m
795
179
(30)
149
(171)
–
164
–
–
–
–
–
–
–
–
937
192
(35)
157
(238)
–
(41)
–
–
–
–
–
–
815
75
16
91
(205)
–
(28)
–
–
–
–
–
–
–
673
Total
£m
8,019
4,499
(634)
3,865
–
(3,814)
(382)
8
356
(2,493)
(37)
58
–
211
9
5,800
5,436
622
6,058
–
(3,680)
(584)
585
(1,504)
(45)
–
294
73
6,997
2,756
(1,766)
990
–
(3,843)
(58)
21
167
(238)
(95)
–
326
(4)
4,263
Total
equity
£m
8,814
4,678
(664)
4,014
(171)
(3,814)
(218)
8
356
(2,493)
(37)
58
–
211
9
6,737
5,628
587
6,215
(238)
(3,680)
(625)
585
(1,504)
(45)
–
294
73
7,812
2,831
(1,750)
1,081
(205)
(3,843)
(86)
21
167
(238)
(95)
–
326
(4)
4,936
138 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
Consolidated cash flow statement
for the year ended 31 December 2014
Cash flow from operating activities
Profit after taxation for the year
Adjustments reconciling profit after tax to operating cash flows
Cash generated from operations
Taxation paid
Net cash inflow from operating activities
Cash flow from investing activities
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Purchase of intangible assets
Proceeds from sale of intangible assets
Purchase of equity investments
Proceeds from sale of equity investments
Purchase of businesses, net of cash acquired
Disposal of businesses
Investments in associates and joint ventures
Proceeds from disposal of subsidiary and interest in associate
Decrease in liquid investments
Interest received
Dividends from associates and joint ventures
Net cash (outflow)/inflow from investing activities
Cash flow from financing activities
Proceeds from own shares for employee share options
Shares acquired by ESOP Trusts
Issue of share capital
Purchase of own shares for cancellation or to be held as Treasury shares
Purchase of non-controlling interests
Increase in long-term loans
Increase in short-term loans
Repayment of short-term loans
Net repayment of obligations under finance leases
Interest paid
Dividends paid to shareholders
Distributions to non-controlling interests
Other financing cash flows
Net cash outflow from financing activities
Notes
36
38
38
20
33
2014
£m
2013
£m
2012
£m
2,831
3,453
6,284
(1,108)
5,176
(1,188)
39
(563)
330
(83)
205
(104)
225
(9)
1
1
63
5
(1,078)
–
(95)
167
(238)
(679)
1,960
–
(1,709)
(23)
(707)
(3,843)
(205)
(13)
(5,385)
5,628
2,871
8,499
(1,277)
7,222
(1,188)
46
(513)
136
(133)
59
(247)
1,851
(8)
429
15
59
18
524
–
(45)
585
(1,504)
(588)
1,913
–
(1,872)
(31)
(749)
(3,680)
(238)
(64)
(6,273)
4,678
1,370
6,048
(1,673)
4,375
(1,051)
68
(469)
1,056
(229)
28
(2,235)
–
(99)
–
224
30
46
(2,631)
58
(37)
356
(2,493)
(14)
4,430
1,743
(2,559)
(35)
(779)
(3,814)
(171)
(36)
(3,351)
(Decrease)/increase in cash and bank overdrafts
37
(1,287)
1,473
(1,607)
Cash and bank overdrafts at beginning of year
Exchange adjustments
(Decrease)/increase in cash and bank overdrafts
Cash and bank overdrafts at end of year
Cash and bank overdrafts at end of year comprise:
Cash and cash equivalents
Overdrafts
5,231
84
(1,287)
4,028
4,338
(310)
4,028
3,906
(148)
1,473
5,231
5,534
(303)
5,231
5,605
(92)
(1,607)
3,906
4,184
(278)
3,906
GSK Annual Report 2014 139
Governance & remunerationFinancial statementsInvestor informationStrategic report Notes to the financial statements
1 Presentation of the financial statements
Description of business
GlaxoSmithKline is a major global healthcare group which is
engaged in the creation and discovery, development, manufacture
and marketing of pharmaceutical products including vaccines,
over-the-counter (OTC) medicines and health-related consumer
products. GSK’s principal pharmaceutical products include
medicines in the following therapeutic areas: respiratory, anti-
virals, central nervous system, cardiovascular and urogenital,
metabolic, anti-bacterials, oncology and emesis, dermatology,
rare diseases, immuno-inflammation, vaccines and HIV.
Compliance with applicable law and IFRS
The financial statements have been prepared in accordance with
the Companies Act 2006, Article 4 of the IAS Regulation and
International Accounting Standards (IAS) and International
Financial Reporting Standards (IFRS) and related interpretations,
as adopted by the European Union.
The financial statements are also in compliance with IFRS as
issued by the International Accounting Standards Board.
Composition of financial statements
The consolidated financial statements are drawn up in Sterling,
the functional currency of GlaxoSmithKline plc, and in accordance
with IFRS accounting presentation. The financial statements
comprise:
• Consolidated income statement
• Consolidated statement of comprehensive income
• Consolidated balance sheet
• Consolidated statement of changes in equity
• Consolidated cash flow statement
• Notes to the financial statements.
Composition of the Group
A list of the subsidiary and associated undertakings which, in the
opinion of the Directors, principally affected the amount of profit
or the net assets of the Group is given in Note 44, ‘Principal
Group companies’.
Accounting principles and policies
The financial statements have been prepared using the historical
cost convention modified by the revaluation of certain items, as
stated in the accounting policies, and on a going concern basis.
The financial statements have been prepared in accordance
with the Group’s accounting policies approved by the Board
and described in Note 2, ‘Accounting principles and policies’.
Information on the application of these accounting policies,
including areas of estimation and judgement is given in Note 3,
‘Key accounting judgements and estimates’.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Implementation of new accounting standards
An amendment to IAS 32 ‘Offsetting financial assets and financial
liabilities’ was issued in December 2011 and was implemented by
GSK from 1 January 2014. The amendment provides additional
guidance on when financial assets and financial liabilities may be
offset and has no material impact on the current period.
Financial period
These financial statements cover the financial year from 1 January
to 31 December 2014, with comparative figures for the financial
years from 1 January to 31 December 2013 and, where
appropriate, from 1 January to 31 December 2012.
Parent company financial statements
The financial statements of the parent company, GlaxoSmithKline
plc, have been prepared in accordance with UK GAAP and with UK
accounting presentation. The company balance sheet is presented
on page 213 and the accounting policies are given on page 214.
2 Accounting principles and policies
Consolidation
The consolidated financial statements include:
• the assets and liabilities, and the results and cash flows,
of the company and its subsidiaries, including ESOP Trusts
• the Group’s share of the results and net assets of associates
and joint ventures
• the Group’s share of assets, liabilities, revenue and expenses
of joint operations.
The financial statements of entities consolidated are made up
to 31 December each year.
Entities over which the Group has the power to direct the relevant
activities so as to affect the returns to the Group, generally through
control over the financial and operating policies, are accounted for
as subsidiaries. Where the Group has the ability to exercise joint
control over, and rights to the net assets of, entities, the entities
are accounted for as joint ventures. Where the Group has the
ability to exercise joint control over an arrangement, but has rights
to specified assets and obligations for specified liabilities of the
arrangement, the arrangement is accounted for as a joint
operation. Where the Group has the ability to exercise significant
influence over entities, they are accounted for as associates.
The results and assets and liabilities of associates and joint
ventures are incorporated into the consolidated financial
statements using the equity method of accounting. The
Group’s rights to assets, liabilities, revenue and expenses
of joint operations are included in the consolidated financial
statements in accordance with those rights and obligations.
Interests acquired in entities are consolidated from the date the
Group acquires control and interests sold are de-consolidated
from the date control ceases.
140 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Revenue
Revenue is recognised in the income statement when goods or
services are supplied or made available to external customers
against orders received, title and risk of loss is passed to the
customer, reliable estimates can be made of relevant deductions
and all relevant obligations have been fulfilled, such that the
earnings process is regarded as being complete.
Turnover represents net invoice value after the deduction of
discounts and allowances given and accruals for estimated future
rebates and returns. The methodology and assumptions used to
estimate rebates and returns are monitored and adjusted regularly
in the light of contractual and legal obligations, historical trends,
past experience and projected market conditions. Market
conditions are evaluated using wholesaler and other third-party
analyses, market research data and internally generated
information. Value added tax and other sales taxes are excluded
from revenue.
Where the Group co-promotes a product and the counterparty
records the sale, the Group records its share of revenue as
co-promotion income within turnover. The nature of co-promotion
activities is such that the Group records no costs of sales.
Pharmaceutical turnover includes co-promotion revenue of
£22 million (2013 – £37 million; 2012 – £234 million). In addition,
initial or event-based milestone income (excluding royalty income)
arising on development or marketing collaborations of the Group’s
compounds or products with other parties is recognised in
turnover. Milestone income of £57 million is included in turnover
(2013 – £78 million).
Royalty income is recognised on an accruals basis in accordance
with the terms of the relevant licensing agreements.
Expenditure
Expenditure is recognised in respect of goods and services
received when supplied in accordance with contractual terms.
Provision is made when an obligation exists for a future liability
in respect of a past event and where the amount of the obligation
can be reliably estimated. Manufacturing start-up costs between
validation and the achievement of normal production are expensed
as incurred. Advertising and promotion expenditure is charged
to the income statement as incurred. Shipment costs on inter-
company transfers are charged to cost of sales; distribution
costs on sales to customers are included in selling, general
and administrative expenditure.
Restructuring costs are recognised and provided for, where
appropriate, in respect of the direct expenditure of a business
reorganisation where the plans are sufficiently detailed and
well advanced, and where appropriate communication to those
affected has been undertaken.
2 Accounting principles and policies continued
Transactions and balances between subsidiaries are eliminated
and no profit before tax is taken on sales between subsidiaries
until the products are sold to customers outside the Group. The
relevant proportion of profits on transactions with joint ventures,
joint operations and associates is also deferred until the products
are sold to third parties. Transactions with non-controlling interests
are recorded directly in equity. Deferred tax relief on unrealised
intra-Group profit is accounted for only to the extent that it is
considered recoverable.
Goodwill is capitalised as a separate item in the case of
subsidiaries and as part of the cost of investment in the case
of joint ventures and associates. Goodwill is denominated
in the currency of the operation acquired.
Where the cost of acquisition is below the fair value of the
net assets acquired, the difference is recognised directly in
the income statement.
Business combinations
Business combinations are accounted for using the acquisition
accounting method. Identifiable assets, liabilities and contingent
liabilities acquired are measured at fair value at acquisition date.
The consideration transferred is measured at fair value and
includes the fair value of any contingent consideration. Where
the consideration transferred, together with the non-controlling
interest, exceeds the fair value of the net assets, liabilities and
contingent liabilities acquired, the excess is recorded as goodwill.
The costs of acquisition are charged to the income statement in
the period in which they are incurred.
Where not all of the equity of a subsidiary is acquired the non-
controlling interest is recognised either at fair value or at the
non-controlling interest’s share of the net assets of the subsidiary,
on a case-by-case basis. Changes in the Group’s ownership
percentage of subsidiaries are accounted for within equity.
Foreign currency translation
Foreign currency transactions are booked in the functional
currency of the Group company at the exchange rate ruling on
the date of transaction. Foreign currency monetary assets and
liabilities are retranslated into the functional currency at rates of
exchange ruling at the balance sheet date. Exchange differences
are included in the income statement.
On consolidation, assets and liabilities, including related goodwill,
of overseas subsidiaries, associates and joint ventures, are
translated into Sterling at rates of exchange ruling at the balance
sheet date. The results and cash flows of overseas subsidiaries,
associates and joint ventures are translated into Sterling using
average rates of exchange.
Exchange adjustments arising when the opening net assets
and the profits for the year retained by overseas subsidiaries,
associates and joint ventures are translated into Sterling, less
exchange differences arising on related foreign currency
borrowings which hedge the Group’s net investment in these
operations, are taken to a separate component of equity.
When translating into Sterling the assets, liabilities, results and
cash flows of overseas subsidiaries, associates and joint ventures
which are reported in currencies of hyper-inflationary economies,
adjustments are made where material to reflect current price levels.
Any loss on net monetary assets is charged to the consolidated
income statement.
GSK Annual Report 2014 141
Governance & remunerationFinancial statementsInvestor informationStrategic report Notes to the financial statements
continued
2 Accounting principles and policies continued
Research and development
Research and development expenditure is charged to the income
statement in the period in which it is incurred. Development
expenditure is capitalised when the criteria for recognising an
asset are met, usually when a regulatory filing has been made in a
major market and approval is considered highly probable. Property,
plant and equipment used for research and development is
capitalised and depreciated in accordance with the Group’s policy.
Environmental expenditure
Environmental expenditure related to existing conditions resulting
from past or current operations and from which no current or
future benefit is discernible is charged to the income statement.
The Group recognises its liability on a site-by-site basis when
it can be reliably estimated. This liability includes the Group’s
portion of the total costs and also a portion of other potentially
responsible parties’ costs when it is probable that they will not be
able to satisfy their respective shares of the clean-up obligation.
Recoveries of reimbursements are recorded as assets when
virtually certain.
Legal and other disputes
Provision is made for the anticipated settlement costs of legal
or other disputes against the Group where an outflow of resources
is considered probable and a reliable estimate can be made of
the likely outcome. In addition, provision is made for legal or
other expenses arising from claims received or other disputes.
In respect of product liability claims related to certain products,
there is sufficient history of claims made and settlements to
enable management to make a reliable estimate of the provision
required to cover unasserted claims. In certain cases, an incurred
but not reported (IBNR) actuarial technique is used to determine
this estimate.
The Group may become involved in legal proceedings, in respect
of which it is not possible to make a reliable estimate of the
expected financial effect, if any, that could result from ultimate
resolution of the proceedings. In these cases, appropriate
disclosure about such cases would be included but no provision
would be made. Costs associated with claims made by the Group
against third parties are charged to the income statement as they
are incurred.
Pensions and other post-employment benefits
The costs of providing pensions under defined benefit schemes
are calculated using the projected unit credit method and spread
over the period during which benefit is expected to be derived from
the employees’ services, consistent with the advice of qualified
actuaries. Pension obligations are measured as the present value
of estimated future cash flows discounted at rates reflecting the
yields of high quality corporate bonds. Pension scheme assets
are measured at fair value at the balance sheet date.
The costs of other post-employment liabilities are calculated in
a similar way to defined benefit pension schemes and spread
over the period during which benefit is expected to be derived
from the employees’ services, in accordance with the advice of
qualified actuaries.
Actuarial gains and losses and the effect of changes in actuarial
assumptions, are recognised in the statement of comprehensive
income in the year in which they arise.
The Group’s contributions to defined contribution plans are
charged to the income statement as incurred.
Employee share plans
Incentives in the form of shares are provided to employees under
share option and share award schemes.
The fair values of these options and awards are calculated at
their grant dates using a Black-Scholes option pricing model and
charged to the income statement over the relevant vesting periods.
The Group provides finance to ESOP Trusts to purchase company
shares on the open market to meet the obligation to provide shares
when employees exercise their options or awards. Costs of
running the ESOP Trusts are charged to the income statement.
Shares held by the ESOP Trusts are deducted from other
reserves. A transfer is made between other reserves and retained
earnings over the vesting periods of the related share options or
awards to reflect the ultimate proceeds receivable from employees
on exercise.
Property, plant and equipment
Property, plant and equipment (PP&E) is stated at the cost of
purchase or construction less provisions for depreciation and
impairment. Financing costs are capitalised within the cost of
qualifying assets in construction.
Depreciation is calculated to write off the cost less residual value
of PP&E, excluding freehold land, using the straight-line basis over
the expected useful life. Residual values and lives are reviewed,
and where appropriate adjusted, annually. The normal expected
useful lives of the major categories of PP&E are:
Freehold buildings
Leasehold land and buildings
Plant and machinery
Equipment and vehicles
20 to 50 years
Lease term or 20 to 50 years
10 to 20 years
3 to 10 years
On disposal of PP&E, the cost and related accumulated
depreciation and impairments are removed from the financial
statements and the net amount, less any proceeds, is taken to
the income statement.
Leases
Leasing agreements which transfer to the Group substantially
all the benefits and risks of ownership of an asset are treated as
finance leases, as if the asset had been purchased outright. The
assets are included in PP&E or computer software and the capital
elements of the leasing commitments are shown as obligations
under finance leases. Assets held under finance leases are
depreciated on a basis consistent with similar owned assets or
the lease term if shorter. The interest element of the lease rental
is included in the income statement. All other leases are operating
leases and the rental costs are charged to the income statement
on a straight-line basis over the lease term.
Goodwill
Goodwill is stated at cost less impairments. Goodwill is deemed
to have an indefinite useful life and is tested for impairment at
least annually.
Where the fair value of the interest acquired in an entity’s assets,
liabilities and contingent liabilities exceeds the consideration paid,
this excess is recognised immediately as a gain in the income
statement.
142 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 2 Accounting principles and policies continued
Other intangible assets
Intangible assets are stated at cost less provisions for amortisation
and impairments.
Licences, patents, know-how and marketing rights separately
acquired or acquired as part of a business combination are
amortised over their estimated useful lives, generally not exceeding
20 years, using the straight-line basis, from the time they are
available for use. The estimated useful lives for determining the
amortisation charge take into account patent lives, where
applicable, as well as the value obtained from periods of non-
exclusivity. Asset lives are reviewed, and where appropriate
adjusted, annually. Contingent milestone payments are recognised
at the point that the contingent event becomes probable. Any
development costs incurred by the Group and associated with
acquired licences, patents, know-how or marketing rights are
written off to the income statement when incurred, unless the
criteria for recognition of an internally generated intangible asset
are met, usually when a regulatory filing has been made in a major
market and approval is considered highly probable.
Acquired brands are valued independently as part of the fair value
of businesses acquired from third parties where the brand has a
value which is substantial and long term and where the brands
either are contractual or legal in nature or can be sold separately
from the rest of the businesses acquired. Brands are amortised
over their estimated useful lives of up to 20 years, except where
it is considered that the useful economic life is indefinite.
The costs of acquiring and developing computer software for
internal use and internet sites for external use are capitalised
as intangible fixed assets where the software or site supports
a significant business system and the expenditure leads to the
creation of a durable asset. ERP systems software is amortised
over seven to ten years and other computer software over three
to five years.
Impairment of non-current assets
The carrying values of all non-current assets are reviewed for
impairment, either on a stand-alone basis or as part of a larger
cash generating unit, when there is an indication that the assets
might be impaired. Additionally, goodwill, intangible assets with
indefinite useful lives and intangible assets which are not yet
available for use are tested for impairment annually. Any provision
for impairment is charged to the income statement in the year
concerned.
Impairments of goodwill are not reversed. Impairment losses on
other non-current assets are only reversed if there has been a
change in estimates used to determine recoverable amounts
and only to the extent that the revised recoverable amounts do
not exceed the carrying values that would have existed, net of
depreciation or amortisation, had no impairments been recognised.
Investments in associates, joint ventures and joint operations
Investments in associates and joint ventures are carried in the
consolidated balance sheet at the Group’s share of their net
assets at date of acquisition and of their post-acquisition
retained profits or losses together with any goodwill arising
on the acquisition. The Group recognises its rights to assets,
liabilities, revenue and expenses of joint operations.
Available-for-sale investments
Liquid investments and other investments are classified as
available-for-sale investments and are initially recorded at fair
value plus transaction costs and then remeasured at subsequent
reporting dates to fair value. Unrealised gains and losses on
available-for-sale investments are recognised directly in other
comprehensive income. Impairments arising from the significant
or prolonged decline in fair value of an equity investment reduce
the carrying amount of the asset directly and are charged to the
income statement.
On disposal or impairment of the investments, any gains and
losses that have been deferred in other comprehensive income
are reclassified to the income statement. Dividends on equity
investments are recognised in the income statement when the
Group’s right to receive payment is established. Equity investments
are recorded in non-current assets unless they are expected to be
sold within one year.
Purchases and sales of equity investments are accounted for on
the trade date and purchases and sales of other available-for-sale
investments are accounted for on settlement date.
Inventories
Inventories are included in the financial statements at the lower of
cost (including raw materials, direct labour, other direct costs and
related production overheads) and net realisable value. Cost is
generally determined on a first in, first out basis. Pre-launch
inventory is held as an asset when there is a high probability of
regulatory approval for the product. Before that point a provision
is made against the carrying value to its recoverable amount; the
provision is then reversed at the point when a high probability of
regulatory approval is determined.
Trade receivables
Trade receivables are carried at original invoice amount less any
provisions for doubtful debts. Provisions are made where there
is evidence of a risk of non-payment, taking into account ageing,
previous experience and general economic conditions. When a
trade receivable is determined to be uncollectable it is written off,
firstly against any provision available and then to the income
statement.
Subsequent recoveries of amounts previously provided for are
credited to the income statement. Long-term receivables are
discounted where the effect is material.
Trade payables
Trade payables are initially recognised at fair value and then held
at amortised cost which equates to nominal value. Long-term
payables are discounted where the effect is material.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand, current
balances with banks and similar institutions and highly liquid
investments with maturities of three months or less. They are
readily convertible into known amounts of cash and have an
insignificant risk of changes in value.
Borrowings
All borrowings are initially recorded at the amount of proceeds
received, net of transaction costs. Borrowings are subsequently
carried at amortised cost, with the difference between the
proceeds, net of transaction costs, and the amount due on
redemption being recognised as a charge to the income
statement over the period of the relevant borrowing.
GSK Annual Report 2014 143
Governance & remunerationFinancial statementsInvestor informationStrategic report Notes to the financial statements
continued
2 Accounting principles and policies continued
Taxation
Current tax is provided at the amounts expected to be paid
applying tax rates that have been enacted or substantively enacted
by the balance sheet date.
Deferred tax is provided in full, on temporary differences arising
between the tax bases of assets and liabilities and their carrying
amounts in the financial statements. Deferred tax assets are
recognised to the extent that it is probable that future taxable
profits will be available against which the temporary differences
can be utilised. Deferred tax is provided on temporary differences
arising on investments in subsidiaries, associates and joint
ventures, except where the timing of the reversal of the temporary
difference can be controlled and it is probable that the temporary
difference will not reverse in the foreseeable future. Deferred tax is
provided using rates of tax that have been enacted or substantively
enacted by the balance sheet date.
Derivative financial instruments and hedging
Derivative financial instruments are used to manage exposure to
market risks. The principal derivative instruments used by GSK
are foreign currency swaps, interest rate swaps, foreign exchange
forward contracts and options. The Group does not hold or issue
derivative financial instruments for trading or speculative
purposes.
Derivative financial instruments are classified as held-for-trading
and are carried in the balance sheet at fair value. Derivatives
designated as hedging instruments are classified on inception
as cash flow hedges, net investment hedges or fair value hedges.
Changes in the fair value of derivatives designated as cash flow
hedges are recognised in other comprehensive income to the
extent that the hedges are effective. Ineffective portions are
recognised in profit or loss immediately. Amounts deferred
in other comprehensive income are reclassified to the income
statement when the hedged item affects profit or loss.
Net investment hedges are accounted for in a similar way
to cash flow hedges.
Changes in the fair value of derivatives designated as fair value
hedges are recorded in the income statement, together with
the changes in the fair value of the hedged asset or liability.
Changes in the fair value of any derivative instruments that do
not qualify for hedge accounting are recognised immediately
in the income statement.
Discounting
Where the time value of money is material, balances are
discounted to current values using appropriate rates of interest.
The unwinding of the discounts is recorded in finance income
and finance expense.
3 Key accounting judgements and estimates
In preparing the financial statements, management is required
to make estimates and assumptions that affect the amounts of
assets, liabilities, revenue and expenses reported in the financial
statements. Actual amounts and results could differ from those
estimates. The following are considered to be the key accounting
judgements and estimates made.
Turnover
Revenue is recognised when title and risk of loss is passed to the
customer, reliable estimates can be made of relevant deductions
and all relevant obligations have been fulfilled, such that the
earnings process is regarded as being complete.
Gross turnover is reduced by rebates, discounts, allowances
and product returns given or expected to be given, which vary by
product arrangements and buying groups. These arrangements
with purchasing organisations are dependent upon the
submission of claims some time after the initial recognition of
the sale. Accruals are made at the time of sale for the estimated
rebates, discounts or allowances payable or returns to be made,
based on available market information and historical experience.
Because the amounts are estimated they may not fully reflect the
final outcome, and the amounts are subject to change dependent
upon, amongst other things, the types of buying group and
product sales mix.
The level of accrual is reviewed and adjusted regularly in the
light of contractual and legal obligations, historical trends, past
experience and projected market conditions. Market conditions
are evaluated using wholesaler and other third-party analyses,
market research data and internally generated information.
Future events could cause the assumptions on which the
accruals are based to change, which could affect the future
results of the Group.
Taxation
Current tax is provided at the amounts expected to be paid,
and deferred tax is provided on temporary differences between
the tax bases of assets and liabilities and their carrying amounts,
at the rates that have been enacted or substantively enacted by
the balance sheet date.
Deferred tax assets are recognised to the extent that it is
probable that future taxable profits will be available against
which the temporary differences can be utilised, based on
management’s assumptions relating to the amounts and timing
of future taxable profits. Factors affecting the tax charge in
future years are set out in Note 14, ‘Taxation’. A 1% change
in the Group’s effective tax rate in 2014 would have changed
the total tax charge for the year by approximately £30 million.
The Group has open tax issues with a number of revenue
authorities. Where an outflow of funds is believed to be probable
and a reliable estimate of the outcome of the dispute can be
made, management provides for its best estimate of the liability.
These estimates take into account the specific circumstances
of each dispute and relevant external advice, are inherently
judgemental and could change substantially over time as new
facts emerge and each dispute progresses. GSK continues to
believe that it has made adequate provision for the liabilities likely
to arise from open assessments. Where open issues exist the
ultimate liability for such matters may vary from the amounts
provided and is dependent upon the outcome of negotiations with
the relevant tax authorities or, if necessary, litigation proceedings.
144 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Business combinations
Any contingent consideration included in the consideration
payable for a business combination is recorded at fair value
at the date of acquisition. These fair values are generally based
on risk-adjusted future cash flows discounted using appropriate
interest rates. The fair values are reviewed on a regular basis,
at least annually, and any changes are reflected in the income
statement.
At 31 December 2014, the liability for contingent consideration
amounted to £1,724 million (see Note 38, ‘Acquisitions and
disposals’). Of this amount, £1,684 million arose on the acquisition
of the former Shionogi-ViiV Healthcare joint venture in 2012.
The assumptions relating to future cash flows and discount rates
are based on business forecasts and are therefore inherently
judgemental. Future events could cause the assumptions used
in these projections to change with a consequent adverse effect
on the future results of the Group.
Pensions and other post-employment benefits
The costs of providing pensions and other post-employment
benefits are charged to the income statement in accordance with
IAS 19 ‘Employee benefits’ over the period during which benefit
is derived from the employee’s services. The costs are assessed
on the basis of assumptions selected by management. These
assumptions include future earnings and pension increases,
discount rates, expected long-term rates of return on assets and
mortality rates, and are disclosed in Note 28, ‘Pensions and other
post-employment benefits’. Where a surplus on a defined benefit
scheme arises, or there is potential for a surplus to arise from
committed future contributions, the rights of the Trustees to
prevent the Group obtaining a refund of that surplus in the future
are considered in determining whether it is necessary to restrict
the amount of the surplus that is recognised.
The expected long-term rates of return on bonds are determined
based on the portfolio mix of index-linked, government and
corporate bonds. An equity risk premium is added to this for
equities.
Discount rates are derived from AA rated corporate bond yields
except in countries where there is no deep market in corporate
bonds where government bond yields are used. Sensitivity
analysis is provided in Note 28, ‘Pensions and other post-
employment benefits’, but a 0.25% reduction in the discount
rate would lead to an increase in the net pension deficit of
approximately £645 million and an increase in the annual pension
cost of approximately £32 million. The selection of different
assumptions could affect the future results of the Group.
3 Key accounting judgements and estimates
continued
Legal and other disputes
The Group provides for anticipated settlement costs where
an outflow of resources is considered probable and a reliable
estimate may be made of the likely outcome of the dispute and
legal and other expenses arising from claims against the Group.
These estimates take into account the specific circumstances
of each dispute and relevant external advice, are inherently
judgmental and could change substantially over time as new
facts emerge and each dispute progresses. Details of the status
and various uncertainties involved in the significant unresolved
disputes are set out in Note 45, ‘Legal proceedings’.
The company’s Directors, having taken legal advice, have
established provisions after taking into account the relevant
facts and circumstances of each matter and in accordance with
accounting requirements. In respect of product liability claims
related to certain products there is sufficient history of claims
made and settlements to enable management to make a reliable
estimate of the provision required to cover unasserted claims.
The Group may become involved in legal proceedings, in respect
of which it is not possible to make a reliable estimate of the
expected financial effect, if any, that will result from ultimate
resolution of the proceedings. In these cases, appropriate
disclosure about such cases would be included, but no provision
would be made and no contingent liability can be quantified.
At 31 December 2014 provisions for legal and other disputes
amounted to £0.5 billion (2013 – £0.6 billion).
The ultimate liability for legal claims may vary from the amounts
provided and is dependent upon the outcome of litigation
proceedings, investigations and possible settlement negotiations.
The position could change over time and, therefore, there can be
no assurance that any losses that result from the outcome of any
legal proceedings will not exceed the amount of the provisions
reported in the Group’s financial statements by a material amount.
Goodwill and other intangible asset impairments
Goodwill is deemed to have an indefinite life and so is not
amortised. Annual impairment tests of the cash generating
units to which goodwill is allocated are performed. Impairment
tests are based on established market multiples or risk-adjusted
future cash flows discounted using appropriate interest rates.
The assumptions used in these impairment tests are set out
in Note 18, ‘Goodwill’.
In each case the valuations indicate sufficient headroom such
that a reasonably possible change to key assumptions is unlikely
to result in an impairment of the related goodwill.
Impairment tests on other intangible assets are undertaken if
events occur which call into question the carrying values of the
assets. Where brands and other intangible assets which are not
yet available for use are not amortised, they are subject to annual
impairment tests. Valuations for impairment tests are based on
established market multiples or risk-adjusted future cash flows
over the estimated useful life of the asset, where limited,
discounted using appropriate interest rates as set out in
Note 19, ‘Other intangible assets’.
The assumptions relating to future cash flows, estimated useful
lives and discount rates are based on business forecasts and are
therefore inherently judgemental. Future events could cause the
assumptions used in these impairment tests to change with a
consequent adverse effect on the future results of the Group.
GSK Annual Report 2014 145
Governance & remunerationFinancial statementsInvestor informationStrategic report Notes to the financial statements
continued
5 Exchange rates
The Group uses the average of exchange rates prevailing during
the period to translate the results and cash flows of overseas
subsidiaries, joint ventures and associated undertakings into
Sterling and period end rates to translate the net assets of
those undertakings. The currencies which most influence
these translations and the relevant exchange rates were:
Average rates:
US$/£
Euro/£
Yen/£
Period end rates:
US$/£
Euro/£
Yen/£
2014
2013
2012
1.65
1.24
175
1.56
1.29
187
1.57
1.18
153
1.66
1.20
174
1.59
1.23
127
1.63
1.23
141
4 New accounting requirements
The following new and amended accounting standards have been
issued by the IASB and are likely to affect future Annual Reports.
With the exception of the amendment to IAS 19, the impact on
the results and financial position of the Group is currently being
assessed.
An amendment to IAS 19 ‘Defined benefit plans: Employee
contribution’ was issued in November 2013 and will be
implemented by the Group from 1 January 2015. The amendment
provides additional guidance on the treatment of contributions to
defined benefit plans from employees and third parties and is not
expected to have a material impact on the results or financial
position of the Group.
An amendment to IFRS 10 ‘Consolidated financial statements’
and IAS 28 ‘Investments in associates and joint ventures’ was
issued in September 2014 and will be implemented by the Group
from 1 January 2016. The amendment requires recognition of the
full gain or loss arising on the sale or contribution of a business to
an associate or joint venture, but only the investor’s share of the
gain or loss if assets that do not constitute a business are sold or
contributed to an associate or joint venture.
An amendment to IFRS 11 ‘Joint arrangements’ was issued in May
2014 and will be implemented by the Group from 1 January 2016.
The amendment requires the acquisition of a joint operation that
meets the definition of a business to be accounted for in
accordance with IFRS 3 ‘Business combinations’.
IFRS 15 ‘Revenue from contracts with customers’ was issued in
May 2014 and will be implemented by the Group from 1 January
2017. The Standard provides a single, principles-based approach
to the recognition of revenue from all contracts with customers.
It focuses on the identification of performance obligations in a
contract and requires revenue to be recognised when or as those
performance obligations are satisfied.
IFRS 9 ‘Financial instruments’ was issued in its final form in July
2014 and will be implemented by the Group from 1 January 2018.
The Standard will replace the majority of IAS 39 and covers the
classification, measurement and derecognition of financial assets
and financial liabilities, impairment of financial assets and provides
a new hedge accounting model.
146 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 6 Segment information
The Group’s operating segments are reported based on the financial information provided to the Chief Executive Officer and the
responsibilities of the Corporate Executive Team (CET). Individual members of the CET are responsible for each geographic segment
of the Pharmaceuticals and Vaccines business, ViiV Healthcare, Established Products and the Consumer Healthcare business as a
whole, respectively. The Established Products segment has been created and certain product reclassifications, principally the OTC
dermatology brands acquired with the Stiefel business, have been made between Pharmaceuticals and Vaccines segments and the
Consumer Healthcare segment, with effect from 1 January 2014. Comparative information has been restated accordingly. In addition,
the 2013 and 2012 segment turnover and profit have been restated to exclude the divestments completed in 2013.
R&D investment is essential for the sustainability of the pharmaceutical businesses. However, for segment reporting, the US, Europe,
Emerging Markets, Japan and Established Products Pharmaceuticals and Vaccines segment profits exclude allocations of globally
funded R&D as well as central costs, principally corporate functions and unallocated manufacturing costs. ViiV Healthcare and
Consumer Healthcare operating profits include R&D costs. The Group’s management reporting process allocates intra-Group profit
on a product sale to the market in which that sale is recorded, and the profit analyses below have been presented on that basis.
Other trading and unallocated pharmaceuticals and vaccines includes Canada, Puerto Rico, Australasia, central vaccine tender sales
and contract manufacturing sales, together with costs such as vaccines R&D, central dermatology costs and central manufacturing
costs not attributed to other segments.
Pharmaceuticals R&D is reported as a separate segment. Corporate and other unallocated costs represent the costs of corporate
functions.
Working capital in relation to Established Products is managed within the other Pharmaceutical and Vaccines segments.
Turnover by segment
Pharmaceuticals and Vaccines
USA
Europe
Emerging Markets
Japan
ViiV Healthcare
Established Products
Other trading and unallocated pharmaceuticals
Pharmaceuticals and Vaccines turnover
Consumer Healthcare turnover
Segment turnover excluding divestments
Divestments completed in 2013
Turnover including divestments
Pharmaceuticals and Vaccines turnover by therapeutic area
Respiratory
Oncology and emesis
Cardiovascular, metabolic and urology
Immuno-inflammation
Other pharmaceuticals
Established Products
Vaccines
ViiV Healthcare (HIV)
2014
£m
2013
(restated)
£m
2012
(restated)
£m
4,980
4,035
3,203
937
1,498
3,011
1,006
18,670
4,336
23,006
–
23,006
2014
£m
6,181
1,202
965
214
2,407
3,011
3,192
1,498
18,670
5,817
4,226
3,370
1,058
1,386
3,874
1,115
20,846
4,756
25,602
903
26,505
2013
(restated)
£m
7,289
969
1,073
161
2,674
3,874
3,420
1,386
20,846
5,508
3,956
3,309
1,203
1,374
4,351
1,035
20,736
4,747
25,483
948
26,431
2012
(restated)
£m
7,044
798
1,144
70
2,630
4,351
3,325
1,374
20,736
GSK Annual Report 2014 147
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
6 Segment information continued
Consumer Healthcare turnover by category
Wellness
Oral care
Nutrition
Skin health
2014
£m
1,596
1,797
633
310
4,336
2013
(restated)
£m
1,865
1,884
627
380
4,756
2012
(restated)
£m
1,991
1,806
590
360
4,747
During 2014, US Pharmaceuticals and Vaccines and the US element of ViiV Healthcare and Established Products made sales to three
wholesalers of approximately £1,478 million (2013 – £2,071 million; 2012 – £2,303 million), £2,315 million (2013 – £2,658 million;
2012 – £2,447 million) and £1,627 million (2013 – £1,695 million; 2012 – £1,318 million) respectively, after allocating final-customer
discounts to the wholesalers.
Segment profit
Pharmaceuticals and Vaccines
USA
Europe
Emerging Markets
Japan
ViiV Healthcare
Established Products
Pharmaceuticals R&D
Other trading and unallocated costs
Pharmaceuticals and Vaccines segment profit
Consumer Healthcare segment profit
Segment profit
Corporate and other unallocated costs
Other reconciling items between segment profit and operating profit
Operating profit
Finance income
Finance costs
Profit on disposal of interest in associates
Share of after tax profits of associates and joint ventures
Profit before taxation
Taxation
Profit after taxation for the year
2014
£m
3,173
2,205
993
466
977
1,793
(2,708)
(402)
6,497
657
7,154
(560)
(2,997)
3,597
68
(727)
–
30
2,968
(137)
2,831
2013
(restated)
£m
2012
(restated)
£m
3,955
2,277
986
568
885
2,352
(2,823)
(631)
7,569
829
8,398
(627)
(743)
7,028
61
(767)
282
43
6,647
(1,019)
5,628
3,706
2,088
1,054
657
849
2,521
(2,778)
(488)
7,609
856
8,465
(491)
(674)
7,300
79
(808)
–
29
6,600
(1,922)
4,678
Other reconciling items between segment profit and operating profit comprise items not specifically allocated to segment profit. These
include impairment and amortisation of intangible assets, major restructuring charges, legal charges and expenses on the settlement of
litigation and government investigations and certain other items related to major acquisition and disposal activity.
Depreciation and amortisation by segment
Pharmaceuticals and Vaccines
USA
Europe
Emerging Markets
Japan
ViiV Healthcare
Established Products
Pharmaceuticals R&D
Other trading and unallocated costs
Pharmaceuticals and Vaccines depreciation and amortisation
Consumer Healthcare depreciation and amortisation
Segment depreciation and amortisation
Corporate and other unallocated depreciation and amortisation
Other reconciling items between segment depreciation and amortisation and
total depreciation and amortisation
Total depreciation and amortisation
148 GSK Annual Report 2014
2014
£m
2013
(restated)
£m
2012
(restated)
£m
9
16
27
5
4
–
161
465
687
105
792
112
14
21
30
6
2
–
171
436
680
74
754
109
16
24
28
7
2
–
178
478
733
127
860
108
580
1,484
551
1,414
477
1,445
Governance & remunerationFinancial statementsInvestor informationStrategic report
6 Segment information continued
PP&E, intangible asset and goodwill impairment by segment
Pharmaceuticals and Vaccines
USA
Europe
Emerging Markets
Japan
ViiV Healthcare
Established Products
Pharmaceuticals R&D
Other trading and unallocated costs
Pharmaceuticals and Vaccines impairment
Consumer Healthcare impairment
Segment impairment
Corporate and other unallocated impairment
Other reconciling items between segment impairment and total impairment
Total impairment
PP&E and intangible asset impairment reversals by segment
Pharmaceuticals and Vaccines
USA
Europe
Emerging Markets
Japan
ViiV Healthcare
Established Products
Pharmaceuticals R&D
Other trading and unallocated costs
Pharmaceuticals and Vaccines impairment reversals
Consumer Healthcare impairment reversals
Segment impairment reversals
Corporate and other unallocated impairment reversals
Other reconciling items between segment impairment reversals and total impairment reversals
Total impairment reversals
2014
£m
2013
(restated)
£m
2012
(restated)
£m
1
3
–
–
2
–
24
49
79
16
95
3
153
251
1
2
1
–
–
–
22
33
59
11
70
–
799
869
1
1
1
–
–
–
2
30
35
1
36
18
700
754
2014
£m
2013
(restated)
£m
2012
(restated)
£m
(1)
(1)
–
–
–
–
(23)
(37)
(62)
(14)
(76)
–
–
(76)
–
(2)
–
–
–
–
(2)
(16)
(20)
(4)
(24)
–
–
(24)
–
–
–
–
–
–
(4)
(60)
(64)
–
(64)
(3)
(59)
(126)
GSK Annual Report 2014 149
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
6 Segment information continued
Net assets by segment
Pharmaceuticals and Vaccines
USA
Europe
Emerging Markets
Japan
ViiV Healthcare
Established Products
Pharmaceuticals R&D
Other trading and unallocated assets
Pharmaceuticals and Vaccines net operating assets
Consumer Healthcare net operating assets
Segment net operating assets
Corporate and other unallocated net operating assets
Net operating assets
Net debt
Investments in associates and joint ventures
Derivative financial instruments
Current and deferred taxation
Assets held for sale
Net assets
2014
£m
2013
(restated)
£m
(86)
532
1,744
268
301
43
542
13,396
16,740
3,036
19,776
(3,128)
16,648
(14,377)
340
(267)
1,436
1,156
4,936
43
779
2,097
362
1,267
114
590
14,578
19,830
2,856
22,686
(2,647)
20,039
(12,645)
323
26
68
1
7,812
The US Pharmaceuticals and Vaccines segment was in a net liability position as at 31 December 2014 principally as a result
of an accrual of £115 million for an additional year of the US Branded Prescription Drug fee.
The other trading and unallocated Pharmaceuticals and Consumer Healthcare segments include assets for the centrally managed
Pharmaceutical, Vaccine and Consumer Healthcare manufacturing operations, the depreciation on which, totalling £594 million
(2013 – £521 million; 2012 – £601 million) is recovered through the standard cost of product charged to businesses.
Geographical information
The UK is regarded as being the Group’s country of domicile.
2014
£m
1,116
7,359
14,531
23,006
2014
£m
3,518
10,768
17,227
31,513
1,994
3,432
3,081
8,507
1,524
7,336
14,146
23,006
2013
£m
1,541
8,730
16,234
26,505
2013
£m
4,174
11,684
18,515
34,373
1,772
3,026
3,070
7,868
2,402
8,658
15,445
26,505
2012
£m
1,525
8,476
16,430
26,431
2012
£m
3,738
11,250
19,719
34,707
1,508
2,886
3,882
8,276
2,230
8,364
15,837
26,431
Turnover by location of customer
UK
USA
Rest of World
External turnover
Turnover by location of subsidiary
UK
USA
Rest of World
Turnover including inter-segment turnover
UK
USA
Rest of World
Inter-segment turnover
UK
USA
Rest of World
External turnover
150 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 6 Segment information continued
Operating profit by location
UK
USA
Rest of World
Total operating profit
Net operating assets by location
UK
USA
Rest of World
Net operating assets
Non-current assets by location
UK
USA
Rest of World
Non-current assets
2012
£m
1,454
1,391
4,455
7,300
2014
£m
414
1,375
1,808
3,597
2014
£m
4,597
3,654
8,397
16,648
2014
£m
6,688
6,512
8,431
21,631
2013
£m
568
3,063
3,397
7,028
2013
£m
6,314
3,975
9,750
20,039
2013
£m
6,565
6,675
9,607
22,847
Non-current assets by location excludes amounts relating to other investments, deferred tax assets, derivative financial instruments,
pension assets, amounts receivable under insurance contracts and certain other non-current receivables.
7 Other operating income
Impairment of equity investments
Disposal of equity investments
Disposal of businesses and assets
Gain on settlement of pre-existing collaborations on acquisition of HGS
Gain on acquisition of the Shionogi-ViiV Healthcare joint venture
Fair value remeasurements on contingent consideration
recognised in business combinations
Fair value adjustments on derivative financial instruments
Other income/(expense)
2014
£m
(25)
155
244
–
–
(770)
(313)
9
(700)
2013
£m
(70)
38
1,413
–
–
(251)
12
(18)
1,124
2012
£m
(26)
19
661
233
349
(13)
3
30
1,256
Disposal of businesses and other assets in 2014 included a gain on disposal of Treximet and in 2013 included the gain on disposal of
the Lucozade and Ribena business to Suntory of £1,057 million and the gain on the sale of the worldwide intellectual property rights
(excluding certain emerging markets) of the anti-coagulant products business to Aspen Group of £274 million. Fair value remeasurements
on contingent consideration recognised in business combinations included £768 million related to the contingent consideration payable
for the acquisition of the former Shionogi-ViiV Healthcare joint venture.
Fair value adjustments on derivative financial instruments related to foreign exchange forward contracts and options taken out to
hedge against foreign currency movements when sales and purchases are denominated in foreign currencies (see Note 41, ‘Financial
instruments and related disclosures’). In 2014 this included an unrealised loss of £299 million arising from the loss position of a number
of forward exchange contracts entered into following announcement of the proposed Novartis transaction to protect the Sterling value
of the net US Dollar proceeds due to the Group on completion of the transaction. If these contracts remain in a loss position on maturity,
that loss will partly offset the gain in the expected Sterling value of the proceeds that will be received by the Group as a result of
favourable exchange movements since the inception of the forward contracts. If, on maturity, the contracts are in a gain position,
the gains will partly offset losses in the Sterling value of the proceeds that will be received by the Group as a result of unfavourable
exchange movements since the inception of the forward contracts.
GSK Annual Report 2014 151
Governance & remunerationFinancial statementsInvestor informationStrategic report Notes to the financial statements
continued
8 Operating profit
The following items have been included in operating profit:
Employee costs (Note 9)
Advertising
Distribution costs
Depreciation of property, plant and equipment
Impairment of property, plant and equipment, net of reversals
Amortisation of intangible assets
Impairment of intangible assets and goodwill, net of reversals
Net foreign exchange (gains)/losses
Inventories:
Cost of inventories included in cost of sales
Write-down of inventories
Reversal of prior year write-down of inventories
Operating lease rentals:
Minimum lease payments
Contingent rents
Sub-lease payments
Fees payable to the company’s auditor and its associates in relation to the Group (see below)
2014
£m
7,520
671
325
780
18
704
157
(18)
6,334
389
(169)
133
8
5
33.2
2013
£m
7,591
808
371
732
100
682
745
41
7,290
338
(43)
127
12
2
25.7
2012
£m
6,935
839
386
871
(68)
574
696
61
6,851
302
(61)
156
14
3
23.2
The reversals of prior year write-downs of inventories principally arise from the reassessment of usage or demand expectations prior to
inventory expiration.
Included within operating profit are major restructuring charges of £750 million (2013 – £517 million; 2012 – £557 million), see Note 10,
‘Major restructuring costs’.
Fees payable to the company’s auditor and its associates:
Audit of parent company and consolidated financial statements
Audit of the company’s subsidiaries
Audit-related assurance services, including attestation under s.404
of Sarbanes-Oxley Act 2002
Audit and audit-related services
Taxation compliance
Taxation advice
Other assurance services
All other services
In addition to the above, fees paid in respect of the GSK pension schemes were:
Audit
Other services
2014
£m
4.9
10.7
4.0
19.6
0.6
4.5
8.0
0.5
33.2
2014
£m
0.3
–
2013
£m
5.1
11.0
3.9
20.0
0.6
3.3
1.5
0.3
25.7
2013
£m
0.4
–
2012
£m
4.0
10.1
3.3
17.4
0.4
3.2
1.7
0.5
23.2
2012
£m
0.6
–
152 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
9 Employee costs
Wages and salaries
Social security costs
Pension and other post-employment costs, including augmentations (Note 28)
Cost of share-based incentive plans
Severance and other costs from integration and restructuring activities
2014
£m
5,879
639
403
346
253
7,520
2013
£m
6,262
685
170
319
155
7,591
2012
£m
5,846
643
95
220
131
6,935
The Group provides benefits to employees, commensurate with local practice in individual countries, including, in some markets,
healthcare insurance, subsidised car schemes and personal life assurance.
The charge for pension and other post-employment costs in 2013 includes a credit of £279 million following a restructuring of US
post-retirement medical obligations. The charge in 2012 includes a credit of £395 million following a change in policy relating to
discretionary pension increases under certain UK pension schemes and the introduction of a limit on future pensionable pay increases
in all UK schemes. These are set out in Note 28, ‘Pensions and other post-employment benefits’.
The cost of share-based incentive plans is analysed as follows:
Share Value Plan
Performance Share Plan
Share option plans
Other plans
The average number of persons employed by the Group (including Directors) during the year was:
Manufacturing
Selling, general and administration
Research and development
2014
£m
302
20
3
21
346
2013
£m
243
47
4
25
319
2012
£m
156
45
11
8
220
2014
Number
31,726
54,618
12,358
98,702
2013
Number
31,586
55,660
12,571
99,817
2012
Number
31,033
54,803
12,845
98,681
The average number of Group employees excludes temporary and contract staff. The numbers of Group employees at the end of each
financial year are given in the financial record on page 224. The average number of persons employed by GlaxoSmithKline plc in 2014
was nil (2013 – nil).
The compensation of the Directors and Senior Management (members of the CET) in aggregate, was as follows:
Wages and salaries
Social security costs
Pension and other post-employment costs
Cost of share-based incentive plans
2014
£m
19
3
3
13
38
2013
£m
23
3
3
13
42
2012
£m
20
2
3
13
38
GSK Annual Report 2014 153
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
10 Major restructuring costs
Major restructuring costs charged in arriving at operating profit include restructuring costs arising under the Operational Excellence
programme, initiated in 2007 and expanded in 2009, 2010 and 2011, under the Major Change programme initiated in 2013, under
the Pharmaceuticals Restructuring Programme announced in October 2014 and following the proposed Novartis transaction,
announced in 2014.
Of the total restructuring costs of £750 million incurred in 2014, £101 million was incurred under the Operational Excellence
programme, £334 million under the Major Change programme, £243 million under the Pharmaceuticals Restructuring Programme and
£67 million on Pre-Integration Planning on the proposed Novartis transaction in the following areas:
• Restructuring of the Pharmaceuticals business in North America, Emerging Markets and Europe leading to staff reductions in sales
force and administration.
• Projects to rationalise Core Business Services and to simplify or eliminate processes leading to staff reduction in support functions.
• Transformation of the Manufacturing and Vaccines businesses to deliver a step change in quality, cost and productivity.
• The rationalisation of the Consumer Healthcare business.
The remaining costs of £5 million were incurred under the restructuring programmes related to the integration of the Stiefel and HGS
(Human Genome Sciences Inc.) businesses.
The analysis of the costs charged to operating profit under these programmes is as follows:
Increase in provision for major restructuring programmes (see Note 29)
Amount of provision reversed unused (see Note 29)
Impairment losses recognised
Other non-cash charges
Other cash costs
2014
£m
(267)
4
–
(15)
(472)
(750)
2013
£m
(179)
11
(60)
(5)
(284)
(517)
2012
£m
(268)
12
(7)
(18)
(276)
(557)
Asset impairments of £nil (2013 – £60 million; 2012 – £7 million) and other non-cash charges totalling £15 million (2013 – £5 million;
2012 – £18 million) are non-cash items, principally accelerated depreciation where asset lives have been shortened as a result of the
major restructuring programmes. All other charges have been or will be settled in cash and include the termination of leases, site closure
costs, consultancy and project management fees.
11 Finance income
Interest income arising from:
cash and cash equivalents
available-for-sale investments
loans and receivables
Realised gains on liquid investments
Fair value adjustments on derivatives at fair value through profit or loss
2014
£m
2013
£m
2012
£m
56
1
9
–
2
68
55
2
2
–
2
61
59
5
9
4
2
79
All derivatives at fair value through profit or loss other than designated and effective hedging instruments (see Note 41, ‘Financial
instruments and related disclosures’) are classified as held-for-trading financial instruments under IAS 39.
154 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 12 Finance expense
Interest expense arising on:
financial liabilities at amortised cost
derivatives at fair value through profit or loss
Fair value hedges:
fair value movements on derivatives designated as hedging instruments
fair value adjustments on hedged items
Fair value movements on other derivatives at fair value through profit or loss
Unwinding of discounts on provisions
Movements on amounts owed to non-controlling interests
Other finance expense
2014
£m
(665)
(23)
10
(5)
(15)
(15)
–
(14)
(727)
2013
£m
(708)
(18)
(37)
36
(2)
(14)
(2)
(22)
(767)
2012
£m
(731)
(14)
(28)
27
(13)
(15)
(10)
(24)
(808)
All derivatives at fair value through profit or loss other than designated and effective hedging instruments (see Note 41, ‘Financial
instruments and related disclosures’) are classified as held-for-trading financial instruments under IAS 39. Interest expense arising on
derivatives at fair value through profit or loss relates to swap interest expense.
13 Associates and joint ventures
At 31 December 2014, the Group held one significant associate, Aspen Pharmacare Holdings Limited (Aspen). Summarised income
statement information in respect of Aspen is set out below:
Turnover
Profit after taxation
Comprehensive income
Total comprehensive income
2014
£m
1,823
313
148
461
2013
£m
1,485
247
192
439
2012
£m
1,280
313
163
476
The results of Aspen included in the summarised income statement information above represent the estimated earnings of the Aspen
group in the year, adjusted for transactions between GSK and Aspen.
Amounts relating to joint ventures principally arise from a 50% interest in one joint venture, Japan Vaccine Co., Ltd., with Daiichi Sankyo Co.,
Ltd. Aggregated financial information in respect of other associated undertakings and joint ventures is set out below:
Associates:
Share of turnover
Share of after tax (losses)/profits
Share of other comprehensive income
Share of total comprehensive income
Joint ventures:
Share of turnover
Share of after tax losses
Share of other comprehensive income
Share of total comprehensive income
Sales to joint ventures and associates
2014
£m
2013
£m
2012
£m
24
(1)
–
(1)
163
(8)
–
(8)
85
26
–
–
–
199
(2)
–
(2)
103
27
1
–
1
203
(30)
–
(30)
124
GSK Annual Report 2014 155
Governance & remunerationFinancial statementsInvestor informationStrategic report Notes to the financial statements
continued
14 Taxation
Taxation charge based on profits for the year
UK current taxation
Overseas current taxation
Total current taxation
Total deferred taxation
2014
£m
(251)
993
742
(605)
137
2013
£m
265
1,284
1,549
(530)
1,019
2012
£m
170
1,510
1,680
242
1,922
The recognition of a deferred tax asset on tax losses expected to be used on completion of the Novartis transaction is included in the net
deferred tax credit. In 2013 the deferred tax credit arose predominantly as a result of non cash items related to the continuing
restructuring of our supply chain and intellectual property ownership.
The following table reconciles the tax charge calculated at the UK statutory rate on the Group profit before tax with the actual tax charge
for the year. Information for 2013 and 2012 has been re-analysed and is presented on a comparable basis.
Reconciliation of taxation on Group profits
Profit before tax
UK statutory rate of taxation
Differences in overseas taxation rates
Benefit of intellectual property incentives
R&D credits
Inter-company inventory profit
Impact of share-based payments
Benefit of previously unrecognised losses
Permanent differences on disposals and acquisitions
Other permanent differences
Re-assessments of prior year estimates
Disposal of associate
Tax on unremitted earnings
Deferred tax and other adjustments on restructuring
Tax charge / tax rate
2014
£m
2,968
638
406
(323)
(72)
(27)
31
(205)
23
264
(617)
–
19
–
137
2014
%
21.5
13.7
(10.9)
(2.4)
(0.9)
1.1
(6.9)
0.8
8.8
(20.8)
–
0.6
–
4.6
2013
£m
6,647
1,545
196
(189)
(88)
(121)
(2)
(18)
(227)
301
(197)
(67)
20
(134)
1,019
2013
%
23.3
2.9
(2.8)
(1.3)
(1.8)
–
(0.3)
(3.4)
4.4
(3.0)
(1.0)
0.3
(2.0)
15.3
2012
£m
6,600
1,617
278
(158)
(73)
73
–
(40)
(9)
(103)
(145)
–
26
456
1,922
2012
%
24.5
4.2
(2.4)
(1.1)
1.1
–
(0.6)
(0.1)
(1.6)
(2.2)
–
0.4
6.9
29.1
The Group operates in countries where the tax rate differs from the UK tax rate and the taxable profits earned and tax rates in those
countries vary from year to year. In 2013, a £234 million deferred tax charge related to the unwinding of deferred profit in inventory
arising from reorganisations of intellectual property ownership and supply chain restructuring was presented within differences in
overseas tax rates. This impact has now been presented as restructuring for 2013 as this better reflects the nature of this item. The
Group qualifies for intellectual property incentives such as patent box regimes in a number of countries. The permanent differences
associated with disposals and acquisitions have been presented separately and in 2013 included the benefit of lower tax rates applied
to the disposal of the Lucozade and Ribena business. The recognition of the deferred tax asset on tax losses expected to be used on
completion of the Novartis transaction is shown in the benefit of previously unrecognised losses. Other permanent differences include
non tax deductible legal settlements. Re-assessments of prior year estimates include a benefit of £478 million from the resolution of
a number of tax matters in various countries.
Future tax charges may be affected by factors such as acquisitions, disposals, restructurings, the location of research and development
activity, tax regime reforms, and agreements with tax authorities.
Tax on items charged to equity and statement of comprehensive income
Current taxation
Share-based payments
Deferred taxation
Share-based payments
Defined benefit plans
Exchange movements
Fair value movements on cash flow hedges
Fair value movements on available-for-sale investments
Total credit/(charge) to equity and statement of comprehensive income
2014
£m
55
55
(59)
262
(2)
(1)
(20)
180
235
2013
£m
31
31
42
(286)
–
1
(22)
(265)
(234)
2012
£m
34
34
(25)
193
–
–
–
168
202
All of the above items have been charged to the statement of comprehensive income except for tax on share based payments.
156 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
14 Taxation continued
Issues relating to taxation
The integrated nature of the Group’s worldwide operations involves significant investment in research and strategic manufacture at a
limited number of locations, with consequential cross-border supply routes into numerous end-markets. This gives rise to complexity and
delay in negotiations with revenue authorities as to the profits on which individual Group companies are liable to tax. Resolution of such
issues is an ongoing requirement for GSK.
The Group continues to believe that it has made adequate provision for the liabilities likely to arise from periods which are open and
not yet agreed by tax authorities. The ultimate liability for such matters may vary from the amounts provided and is dependent upon the
outcome of agreements with relevant tax authorities or litigation where appropriate.
The aggregate amount of unremitted profits at the balance sheet date was approximately £20 billion (2013 – £14 billion). UK legislation
relating to company distributions provides for exemption from tax for most repatriated profits, subject to certain exceptions. Provision
for deferred tax liabilities of £147 million (2013 – £129 million) has been made in respect of withholding taxation that would arise on
the distribution of profits by certain overseas subsidiaries. The unprovided deferred tax on unremitted earnings at 31 December 2014
is estimated to be £600 million (2013 – £500 million), which relates to taxes payable on repatriation levied by overseas tax jurisdictions.
No further provision is made on the grounds that the Group is able to control the timing of the reversal of the remaining temporary
differences and it is probable that they will not reverse in the foreseeable future.
Movement in deferred tax assets and liabilities
At 1 January 2014
Exchange adjustments
(Charge)/credit to income statement
(Charge)/credit to equity
Credit/(charge) to statement of
comprehensive income
At 31 December 2014
Accelerated
capital
allowances
£m
(432)
12
(26)
–
Intangibles
£m
(1,437)
(18)
399
–
Contingent
consideration
£m
270
–
134
–
Intra-group
profit
£m
641
19
24
–
Pensions &
other post
employment
benefits
£m
778
21
8
–
–
(446)
–
(1,056)
–
404
–
684
262
1,069
Share
option
and award
schemes
£m
189
6
(12)
(59)
Other
net
temporary
differences
£m
1,270
23
(221)
–
Total
£m
1,391
67
605
(59)
–
124
(23)
1,049
239
2,243
Tax
losses
£m
112
4
299
–
–
415
Recognised tax losses comprises £205 million (2013 – £nil) capital losses and £210 million (2013 – £112 million) trading losses.
Other net temporary differences include accrued expenses for which a tax deduction is only available on a paid basis.
After offsetting deferred tax assets and liabilities where appropriate within territories, the net deferred tax asset comprises:
Deferred tax assets
Deferred tax liabilities
Unrecognised tax losses
Trading losses expiring:
Within 10 years
More than 10 years
Available indefinitely
At 31 December
Capital losses
As 31 December
Deferred tax assets are recognised where it is probable that future taxable profit will be available to utilise losses.
2014
£m
2,688
(445)
2,243
2014
£m
186
723
–
909
2,210
2,210
2013
£m
2,084
(693)
1,391
2013
£m
131
680
3,908
4,719
3,180
3,180
GSK Annual Report 2014 157
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
15 Earnings per share
Basic earnings per share
Diluted earnings per share
2014
pence
57.3
56.7
2013
pence
112.5
110.5
2012
pence
91.6
90.2
Basic earnings per share has been calculated by dividing the profit attributable to shareholders by the weighted average number of
shares in issue during the period after deducting shares held by the ESOP Trusts and Treasury shares. The trustees have waived their
rights to dividends on the shares held by the ESOP Trusts.
Diluted earnings per share has been calculated after adjusting the weighted average number of shares used in the basic calculation
to assume the conversion of all potentially dilutive shares. A potentially dilutive share forms part of the employee share schemes where
its exercise price is below the average market price of GSK shares during the period and any performance conditions attaching to the
scheme have been met at the balance sheet date.
The numbers of shares used in calculating basic and diluted earnings per share are reconciled below.
Weighted average number of shares in issue
Basic
Dilution for share options and awards
Diluted
16 Dividends
2014
millions
4,808
57
4,865
2013
millions
4,831
88
4,919
Paid/payable
Dividend
per share
(pence)
First interim
10 July 2014
Second interim 2 October 2014
8 January 2015
Third interim
Fourth interim
9 April 2015
Total
19
19
19
23
80
2014
Total
dividend
£m
916
918
924
1,107
3,865
Paid/payable
11 July 2013
3 October 2013
9 January 2014
10 April 2014
Dividend
per share
(pence)
2013
Total
dividend
£m
Paid/payable
Dividend
per share
(pence)
18
18
19
23
78
878
5 July 2012
864 4 October 2012
3 January 2013
910
1,099
11 April 2013
3,751
17
17
18
22
74
2012
millions
4,912
77
4,989
2012
Total
dividend
£m
846
830
870
1,068
3,614
Under IFRS interim dividends are only recognised in the financial statements when paid and not when declared. GSK normally pays a
dividend two quarters after the quarter to which it relates and one quarter after it is declared. The 2014 financial statements recognise those
dividends paid in 2014, namely the third and fourth interim dividends for 2013, and the first and second interim dividends for 2014.
The amounts recognised in each year are as follows:
Dividends to shareholders
17 Property, plant and equipment
Cost at 1 January 2013
Exchange adjustments
Additions
Additions through business combinations
Capitalised borrowing costs
Disposals and write-offs
Reclassifications
Transfer to assets held for sale
Cost at 31 December 2013
Exchange adjustments
Additions
Capitalised borrowing costs
Disposals and write-offs
Reclassifications
Transfer to assets held for sale
Cost at 31 December 2014
158 GSK Annual Report 2014
2014
£m
3,843
2013
£m
3,680
2012
£m
3,814
Land and
buildings
£m
6,632
(68)
57
12
–
(77)
107
(53)
6,610
(104)
38
–
(62)
73
(91)
6,464
Plant,
equipment
and vehicles
£m
10,169
(105)
230
11
–
(516)
233
(296)
9,726
(142)
252
–
(322)
344
(36)
9,822
Assets in
construction
£m
1,941
(29)
948
–
16
(2)
(340)
(17)
2,517
(3)
971
16
(3)
(429)
–
3,069
Total
£m
18,742
(202)
1,235
23
16
(595)
–
(366)
18,853
(249)
1,261
16
(387)
(12)
(127)
19,355
Governance & remunerationFinancial statementsInvestor informationStrategic report
17 Property, plant and equipment continued
Depreciation at 1 January 2013
Exchange adjustments
Charge for the year
Disposals and write-offs
Transfer to assets held for sale
Depreciation at 31 December 2013
Exchange adjustments
Charge for the year
Disposals and write-offs
Transfer to assets held for sale
Depreciation at 31 December 2014
Impairment at 1 January 2013
Exchange adjustments
Disposals and write-offs
Impairment losses
Reversal of impairments
Transfer (from)/to assets held for sale
Impairment at 31 December 2013
Exchange adjustments
Disposals and write-offs
Impairment losses
Reversal of impairments
Impairment at 31 December 2014
Total depreciation and impairment at 31 December 2013
Total depreciation and impairment at 31 December 2014
Net book value at 1 January 2013
Net book value at 31 December 2013
Net book value at 31 December 2014
Land and
buildings
£m
(2,437)
38
(214)
51
20
(2,542)
28
(212)
27
18
(2,681)
(152)
1
14
(23)
2
(1)
(159)
–
30
(34)
47
(116)
(2,701)
(2,797)
4,043
3,909
3,667
Plant,
equipment
and vehicles
£m
(7,049)
80
(518)
422
139
(6,926)
70
(568)
250
23
(7,151)
Assets in
construction
£m
–
–
–
–
–
–
–
–
–
–
–
(266)
8
44
(100)
22
1
(291)
4
25
(45)
28
(279)
(7,217)
(7,430)
2,854
2,509
2,392
(62)
–
–
(1)
–
–
(63)
–
1
(15)
1
(76)
(63)
(76)
1,879
2,454
2,993
Total
£m
(9,486)
118
(732)
473
159
(9,468)
98
(780)
277
41
(9,832)
(480)
9
58
(124)
24
–
(513)
4
56
(94)
76
(471)
(9,981)
(10,303)
8,776
8,872
9,052
The net book value at 31 December 2014 of the Group’s land and buildings comprises freehold properties £3,160 million (2013 –
£3,478 million), properties with leases of 50 years or more £336 million (2013 – £366 million) and properties with leases of less than
50 years £162 million (2013 – £65 million).
Included in land and buildings at 31 December 2014 are leased assets with a cost of £733 million (2013 – £784 million), accumulated
depreciation of £226 million (2013 – £313 million), impairment of £9 million (2013 – £40 million) and a net book value of £498 million
(2013 – £431 million). Included in plant, equipment and vehicles at 31 December 2014 are leased assets with a cost of £68 million
(2013 – £99 million), accumulated depreciation of £17 million (2013 – £47 million), impairment of £2 million (2013 – £10 million) and a
net book value of £49 million (2013 – £42 million). Some lease agreements include renewal or purchase options or escalation clauses.
The impairment losses principally arise from decisions to rationalise facilities and are calculated based on either fair value less costs of
disposal or value in use. The fair value less costs of disposal valuation methodology uses significant inputs which are not based on
observable market data, and therefore this valuation technique is classified as level 3 of the fair value hierarchy. These calculations
determine the net present value of the projected risk-adjusted, post-tax cash flows of the relevant asset or cash generating unit, applying
a discount rate of the Group post-tax weighted average cost of capital (WACC) of 7%, adjusted where appropriate for relevant specific
risks. For value in use calculations, where an impairment is indicated and a pre-tax cash flow calculation is expected to give a materially
different result, the test would be reperformed using pre-tax cash flows and a pre-tax discount rate. The Group WACC is equivalent to
a pre-tax discount rate of approximately 9%. The impairment losses have been charged to cost of sales £36 million (2013 – £32 million),
R&D £11 million (2013 – £14 million) and SG&A £47 million (2013 – £78 million), and include £nil (2013 – £62 million) arising from the
major restructuring programmes.
Reversals of impairment arise from subsequent reviews of the impaired assets where the conditions which gave rise to the original
impairments are deemed no longer to apply. All of the reversals have been credited to cost of sales.
The carrying value at 31 December 2014 of assets for which impairments have been charged or reversed in the year was £225 million
(2013 – £6 million).
GSK Annual Report 2014 159
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
18 Goodwill
Cost at 1 January
Exchange adjustments
Additions through business combinations (Note 38)
Transfer to assets held for sale
Movements in contingent consideration balances
Cost at 31 December
Net book value at 1 January
Net book value at 31 December
2014
£m
4,205
34
–
(511)
(4)
3,724
4,205
3,724
2013
£m
4,359
(134)
53
(55)
(18)
4,205
4,359
4,205
During 2013, GSK completed the acquisition of three business, resulting in the recognition of £53 million of goodwill. The majority of
this goodwill related to the acquisition of Okairos AG. This goodwill was allocated to the US, Europe, Emerging Markets and Japan
Pharmaceuticals and Vaccines cash generating units for impairment testing purposes as the benefits of the acquired business are split
between these cash generating units.
The transfer to assets held for sale in 2014 arose on the anticipated sale of GSK’s Oncology business as part of the proposed three-part
transaction with Novartis.
The carrying value of goodwill, translated at year-end exchange rates, is allocated to the following cash generated units:
Cash generating unit
US Pharmaceuticals and Vaccines
Europe Pharmaceuticals and Vaccines
Emerging Markets Pharmaceuticals and Vaccines
Established Products
Other
Pharmaceuticals and Vaccines
Consumer Healthcare
2014
£m
1,734
458
501
338
354
3,385
339
3,724
2013
£m
2,013
628
786
–
446
3,873
332
4,205
The amounts allocated to Japan Pharmaceuticals and Vaccines, Other Pharmaceuticals and Vaccines and ViiV Healthcare are not
significant relative to the total balance.
160 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 18 Goodwill continued
The recoverable amounts of the cash generating units are assessed using either a fair value less costs of disposal model or a value in
use model. Value in use is calculated as the net present value of the projected risk-adjusted post-tax cash flows plus a terminal value of
the cash generating unit to which the goodwill is allocated. Initially a post-tax discount rate is applied to calculate the net present value
of the post-tax cash flows. The discount rate used is based on the Group WACC of 7%, as most cash generating units have integrated
operations across large parts of the Group. The discount rate is adjusted where appropriate for specific country or currency risks.
Fair value less costs of disposal is calculated using a similar discounted cash flow approach. A post-tax discount rate is applied to the
projected risk-adjusted post-tax cash flows and terminal value. The valuation methodology uses significant inputs which are not based
on observable market data, therefore, this valuation technique is classified as level 3 in the fair value hierarchy.
Details relating to the discounted cash flow models used in the impairment tests of the Pharmaceuticals and Vaccines and Consumer
Healthcare cash generating units are as follows:
Valuation basis
Key assumptions
Determination of assumptions
Higher of fair value less costs of disposal and value in use
Sales growth rates
Profit margins
Terminal growth rate
Discount rate
Taxation rate
Growth rates are internal forecasts based on both internal and external market information.
Margins reflect past experience, adjusted for expected changes.
Terminal growth rates based on management’s estimate of future long-term average growth rates.
Discount rates based on Group WACC, adjusted where appropriate.
Taxation rates based on appropriate rates for each region.
Period of specific projected cash flows
5 years
Terminal growth rate and discount rate
Terminal growth rate Discount rate
US Pharmaceuticals and Vaccines
Europe Pharmaceuticals and Vaccines
Emerging Markets Pharmaceuticals and Vaccines
Japan Pharmaceuticals and Vaccines
ViiV Healthcare
Established Products
Other Pharmaceuticals and Vaccines
Consumer Healthcare
1% p.a.
1% p.a.
3.0% p.a.
0.5% p.a.
2.5% p.a.
0% p.a.
1% p.a.
3% p.a.
7%
7%
10%
6%
10%
7%
7%
7%
The terminal growth rates do not exceed the long-term projected growth rates for the relevant markets. The terminal growth rates used in
the fair value less costs of disposal calculations for the cash generating units reflect the impact of future generic competition and take
account of new product launches.
In each case the valuations indicate sufficient headroom such that a reasonably possible change to key assumptions is unlikely to result
in an impairment of the related goodwill.
The Pharmaceutical and Vaccines cash generating units comprise a collection of smaller cash generating units including assets with indefinite
lives with a carrying value of £595 million (2013 – £599 million). The Consumer Healthcare cash generating unit also comprises a collection
of smaller cash generating units including brands with indefinite lives with a carrying value of £1.48 billion (2013 – £1.52 billion).
Details of indefinite life brands are given in Note 19 ‘Other intangible assets’.
GSK Annual Report 2014 161
Governance & remunerationFinancial statementsInvestor informationStrategic report Notes to the financial statements
continued
19 Other intangible assets
Cost at 1 January 2013
Exchange adjustments
Capitalised development costs
Additions through business combinations
Capitalised borrowing costs
Other additions
Disposals and asset write-offs
Transfer (to)/from assets held for sale
Cost at 31 December 2013
Exchange adjustments
Capitalised development costs
Capitalised borrowing costs
Other additions
Reclassifications
Disposals and asset write-offs
Transfer to assets held for sale
Cost at 31 December 2014
Amortisation at 1 January 2013
Exchange adjustments
Charge for the year
Disposals and asset write-offs
Transfer to assets held for sale
Amortisation at 31 December 2013
Exchange adjustments
Charge for the year
Disposals and asset write-offs
Amortisation at 31 December 2014
Impairment at 1 January 2013
Exchange adjustments
Impairment losses
Disposals and asset write-offs
Impairment at 31 December 2013
Exchange adjustments
Impairment losses
Disposals and asset write-offs
Impairment at 31 December 2014
Total amortisation and impairment at 31 December 2013
Total amortisation and impairment at 31 December 2014
Net book value at 1 January 2013
Net book value at 31 December 2013
Net book value at 31 December 2014
Computer
software
£m
1,501
(27)
79
–
5
99
(26)
–
1,631
11
–
6
179
12
(21)
–
1,818
(1,012)
17
(128)
21
–
(1,102)
(13)
(115)
17
(1,213)
(39)
–
(6)
4
(41)
2
(7)
4
(42)
(1,143)
(1,255)
450
488
563
Licences,
patents, etc.
£m
10,604
(143)
246
191
1
141
(346)
(222)
10,472
52
242
3
108
–
(9)
(587)
10,281
Amortised
brands
£m
412
–
–
7
–
–
–
–
419
3
–
–
–
–
–
–
422
Indefinite life
brands
£m
2,184
(37)
–
–
–
–
–
44
2,191
(6)
–
–
–
–
–
(30)
2,155
(2,473)
65
(536)
2
85
(2,857)
(63)
(578)
6
(3,492)
(729)
9
(702)
332
(1,090)
(18)
(131)
–
(1,239)
(3,947)
(4,731)
7,402
6,525
5,550
(106)
1
(18)
–
–
(123)
–
(11)
–
(134)
(129)
–
(11)
–
(140)
–
(14)
–
(154)
(263)
(288)
177
156
134
–
–
–
–
–
–
–
–
–
–
(52)
1
(26)
–
(77)
–
(5)
–
(82)
(77)
(82)
2,132
2,114
2,073
Total
£m
14,701
(207)
325
198
6
240
(372)
(178)
14,713
60
242
9
287
12
(30)
(617)
14,676
(3,591)
83
(682)
23
85
(4,082)
(76)
(704)
23
(4,839)
(949)
10
(745)
336
(1,348)
(16)
(157)
4
(1,517)
(5,430)
(6,356)
10,161
9,283
8,320
The net book value of computer software includes £82 million (2013 – £247 million) of internally generated costs.
The charge for impairments in the year includes the impairments of Lovaza, reflecting a reassessment of the Group’s expectations
on the likelihood of potential generic competition; Galapagos, Nanjing Meirui, retigabine and BMS Middle East. The carrying value at
31 December 2014 of intangible assets, for which impairments have been charged or reversed in the year, following those impairments
or reversals, was £121 million (2013 – £290 million).
162 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
19 Other intangible assets continued
Amortisation and impairment losses, net of reversals, have been charged in the income statement as follows:
Cost of sales
Selling, general and administration
Research and development
Amortisation
2013
£m
451
128
103
682
2014
£m
503
86
115
704
Net impairment losses
2013
£m
408
6
331
745
2014
£m
78
7
72
157
Licences, patents, etc. includes a large number of acquired licences, patents, know-how agreements and marketing rights, which are
either marketed or in use, or still in development. Note 38, ‘Acquisitions and disposals’ gives details of additions through business
combinations in the year. The book values of the largest individual items are as follows:
dolutegravir
Benlysta
FluLaval/Fluviral
Selzentry
Arzerra
Okairos technology platform
Lovaza
Duac
Toctino
Others
2014
£m
1,680
1,104
415
223
–
177
41
112
91
1,707
5,550
2013
£m
1,769
1,142
466
235
271
190
123
120
110
2,099
6,525
Indefinite life brands comprise a portfolio of Consumer Healthcare products primarily acquired with the acquisitions of Sterling Winthrop,
Inc. in 1994, Block Drug Company, Inc. in 2001 and CNS, Inc. in 2006, together with a number of pharmaceutical brands from the
acquisition of Stiefel Laboratories, Inc. in 2009. The book values of the major brands are as follows:
Panadol
Sensodyne
Stiefel trade name
Breathe Right
Physiogel
Polident
Biotene
Corega
Poligrip
Others
2014
£m
393
260
200
204
155
110
67
98
68
518
2,073
2013
£m
393
257
199
192
166
109
106
97
67
528
2,114
Each of these brands is considered to have an indefinite life, given the strength and durability of the brand and the level of marketing
support. The brands are in relatively similar stable and profitable market sectors, with similar risk profiles, and their size, diversification
and market shares mean that the risk of market-related factors causing a reduction in the lives of the brands is considered to be relatively
low. The Group is not aware of any material legal, regulatory, contractual, competitive, economic or other factor which could limit their
useful lives. Accordingly, they are not amortised.
Each brand is tested annually for impairment and other amortised intangible assets are tested when indicators of impairment arise.
This testing applies a fair value less costs of disposal methodology, generally using post-tax cash flow forecasts with a terminal value
calculation and a discount rate equal to the Group post-tax WACC of 7%, adjusted where appropriate for country and currency specific
risks. This valuation methodology uses significant inputs which are not based on observable market data, and therefore this valuation
technique is classified as level 3 of the fair value hierarchy. The main assumptions include future sales price and volume growth, product
contribution and the future expenditure required to maintain the product’s marketability and registration in the relevant jurisdictions. These
assumptions are based on past experience and are reviewed as part of management’s budgeting and strategic planning cycle for changes
in market conditions and sales erosion through competition. The terminal growth rates applied of between nil and 3% are management’s
estimates of future long-term average growth rates of the relevant markets. In each case the valuations indicate sufficient headroom such
that a reasonably possible change to key assumptions is unlikely to result in an impairment of these intangible assets.
GSK Annual Report 2014 163
Governance & remunerationFinancial statementsInvestor informationStrategic report Notes to the financial statements
continued
20 Investments in associates and joint ventures
At 1 January
Exchange adjustments
Additions
Disposals
Transfer to other investments
Distributions received
Other movements
(Loss)/profit after tax recognised in the consolidated
income statement
At 31 December
Joint
ventures
£m
15
(1)
2
–
–
–
–
Associates
£m
308
(18)
7
(1)
(13)
(5)
16
(8)
8
38
332
2014
Total
£m
323
(19)
9
(1)
(13)
(5)
16
30
340
Joint
ventures
£m
22
(3)
1
(1)
–
(2)
–
Associates
£m
557
(109)
7
(139)
(37)
(16)
–
(2)
15
45
308
2013
Total
£m
579
(112)
8
(140)
(37)
(18)
–
43
323
Investments in joint ventures principally arise from a 50% interest in one joint venture, Japan Vaccine Co., Ltd., with Daiichi Sankyo Co.,
Ltd. The joint venture holds the development and commercial rights for existing preventative vaccines from both parent companies.
It will supply vaccines including Human Papillomavirus (HPV) vaccine, Rotavirus vaccine, Seasonal flu vaccine, Mumps vaccine,
Diphtheria Pertussis (DTP) vaccine and Measles Rubella vaccine (MRV) in Japan.
The Group held one significant associate at 31 December 2014, Aspen Pharmacare Holdings Limited. At 31 December 2014, the Group
owned 56.5 million shares or 12.4% of Aspen. Aspen, listed on the Johannesburg Stock Exchange, is Africa’s largest pharmaceutical
manufacturer and a major supplier of branded and generic pharmaceutical, healthcare and nutritional products to the southern African
and selected international markets. The investment had a market value of £1,274 million (2013 – £872 million). Although the Group holds
less than 20% of the ownership interest and voting control of Aspen, the Group has the ability to exercise significant influence through
both its shareholding and its nominated director’s active participation on the Aspen Board of Directors.
Summarised balance sheet information in respect of Aspen is set out below:
2013
£m
1,442
968
(869)
(672)
869
2013
£m
973
247
192
(289)
(45)
(209)
869
108
121
229
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
2014
£m
2,336
1,791
(909)
(1,955)
1,263
The summarised balance sheet information in respect of Aspen is based on preliminary results information and analyst forecasts
available at 31 December 2014 with adjustments for transactions between GSK and Aspen.
A reconciliation of the summarised financial information to the carrying amount of the Aspen investment is set out below:
2014
£m
869
313
148
(75)
(44)
52
1,263
157
117
274
At 1 January
Profit for the year
Other comprehensive income
Exchange adjustments
Dividends paid
Other movements
At 31 December
Interest in associated undertaking at 12.4% (2013 – 12.4%)
Goodwill
Carrying value at 31 December
164 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
21 Other investments
At 1 January
Exchange adjustments
Additions
Net fair value movements
Impairment losses
Transfer from investments in associates and joint ventures
Disposals
At 31 December
2014
£m
1,202
63
95
(16)
(25)
–
(205)
1,114
2013
£m
787
(25)
132
379
(71)
58
(58)
1,202
Other investments comprise non-current equity investments which are available-for-sale investments recorded at fair value at each
balance sheet date. For investments traded in an active market, the fair value is determined by reference to the relevant stock exchange
quoted bid price. For other investments, the fair value is estimated by management with reference to relevant available information,
including the current market value of similar instruments and discounted cash flows of the underlying net assets. The Group holds a
number of equity investments in entities where the Group has entered into research collaborations. Other investments include listed
investments of £892 million (2013 – £1,000 million), the decrease arising from both disposals and fair value adjustments.
During 2014, one of the companies in which the Group holds an equity investment, Theravance, Inc. (Theravance), separated certain
of its activities into a new biopharmaceutical company, Theravance Biopharma, Inc. (Theravance Biopharma). Theravance’s ongoing
activities are focused on maximising the potential value of the respiratory assets partnered with the Group, including Relvar/Breo Ellipta
and Anoro Ellipta. Theravance is eligible to receive royalty revenues from Relvar/Breo Ellipta and Anoro Ellipta and, if approved and
commercialised, vilanterol monotherapy. Theravance Biopharma will carry on all of the other pre-separation activities of Theravance,
including development of its pipeline (other than development assets partnered with GSK) and marketing of its one approved medicine.
At 31 December 2014, the Group held 27% of the common stock of Theravance and 26% of the common stock of Theravance
Biopharma. Both are accounted for as equity investments as the Group does not have the power to exert significant influence over
the activities of either company.
In 2004, the Group and Theravance entered into a governance agreement related to the Group’s investment in the company. Under the
terms of this governance agreement, the Group does not have the right to appoint a director to the Theravance board, unless the Group’s
holding in Theravance exceeds 50%, and must (with certain limited exceptions) vote its shares either in support of the recommendation
of the independent directors of the board or in proportion to other shareholders’ votes cast. The governance agreement with Theravance
expires in September 2015.
On the creation of Theravance Biopharma in 2014, the Group and Theravance Biopharma entered into a governance agreement similar
in its terms to the agreement already in place with Theravance, but which expires in 2017. Under this agreement, the Group does not
have the right to appoint a director to the Theravance Biopharma board and must (with certain limited exceptions) vote its shares either
in support of the recommendation of the independent directors of the board or in proportion to other shareholders’ votes cast.
Net fair value movements include decreases in the value of the investments in Theravance of £280 million and Theravance Biopharma
of £62 million.
On disposal of investments, fair value movements are reclassified from equity to the income statement based on average cost for shares
acquired at different times.
The impairment losses recorded above have been recognised in the income statement for the year within Other operating income,
together with amounts reclassified from the fair value reserve on recognition of the impairments. These impairments initially result
from prolonged or significant declines in the fair value of the equity investments below acquisition cost, subsequent to which any
further declines in fair value are immediately taken to the income statement.
The carrying value at 31 December of Other investments which have been impaired is as follows:
Original cost
Cumulative impairments recognised in the income statement
Subsequent fair value increases
Carrying value at 31 December
22 Other non-current assets
Amounts receivable under insurance contracts
Pension schemes in surplus
Other receivables
2014
£m
558
(420)
268
406
2014
£m
447
93
195
735
2013
£m
555
(410)
147
292
2013
£m
396
330
163
889
GSK Annual Report 2014 165
Governance & remunerationFinancial statementsInvestor informationStrategic report Notes to the financial statements
continued
23 Inventories
Raw materials and consumables
Work in progress
Finished goods
24 Trade and other receivables
Trade receivables, net of provision for bad and doubtful debts
Other prepayments and accrued income
Interest receivable
Employee loans and advances
Other receivables
2014
£m
1,156
1,604
1,471
4,231
2014
£m
3,556
289
9
28
718
4,600
2013
£m
937
1,450
1,513
3,900
2013
£m
3,966
290
9
37
1,140
5,442
Trade receivables include £134 million (2013 – £262 million) after provision for bad and doubtful debts (£162 million before provision,
2013 – £294 million) due from state hospital authorities in Greece, Ireland, Italy, Portugal and Spain. Trade receivables also include
£28 million (2013 – £19 million) due from associates and joint ventures. Other receivables includes £8 million (2013– £233 million)
due from associates and joint ventures.
Bad and doubtful debt provision
At 1 January
Exchange adjustments
Charge for the year
Subsequent recoveries of amounts provided for
Utilised
At 31 December
25 Cash and cash equivalents
Cash at bank and in hand
Short-term deposits
26 Assets held for sale
Plant, equipment and vehicles
Goodwill
Other intangibles
Inventory
2014
£m
137
(3)
22
(13)
(1)
142
2014
£m
1,313
3,025
4,338
2014
£m
60
511
543
42
1,156
2013
£m
165
(2)
29
(48)
(7)
137
2013
£m
2,549
2,985
5,534
2013
£m
–
–
1
–
1
Non-current assets are transferred to assets held for sale when it is expected that their carrying amounts will be recovered principally
through disposal and a sale is considered highly probable. They are held at the lower of carrying amount and fair value less costs to sell.
As discussed in Note 43, ‘Proposed Novartis transaction’, GSK has announced that it will divest its marketed Oncology portfolio, related
R&D activities and rights to its AKT inhibitors to Novartis AG, subject to approvals, as part of a three-part interconditional transaction.
Assets associated with the Oncology business divestment have been classified as held for sale.
Included within Assets held for sale are assets which were written down to fair value less costs to sell of £26 million (2013 – £nil).
The valuation methodology uses significant inputs which are not based on observable market data, therefore, this valuation is classified
as level 3 in the fair value hierarchy.
166 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 27 Trade and other payables
Trade payables
Wages and salaries
Social security
Other payables
Deferred income
Customer return and rebate accruals
Contingent consideration
Other accruals
2014
£m
2,790
957
91
301
62
1,774
105
1,878
7,958
2013
£m
2,739
1,049
109
906
167
1,599
3
1,745
8,317
Customer return and rebate accruals are provided for by the Group at the point of sale in respect of the estimated rebates, discounts
or allowances payable to customers, including £1,308 million (2013 – £1,188 million) in respect of US Pharmaceuticals and Vaccines.
Accruals are made at the time of sale but the actual amounts paid are based on claims made some time after the initial recognition of
the sale. As the amounts are estimated they may not fully reflect the final outcome and are subject to change dependent upon, amongst
other things, the types of buying group and product sales mix. The level of accrual is reviewed and adjusted quarterly in the light of
historical experience of actual rebates, discounts or allowances given and returns made and any changes in arrangements. Future
events could cause the assumptions on which the accruals are based to change, which could affect the future results of the Group.
At 31 December 2013, Other payables include £620 million in respect of the maximum potential amount payable to non-controlling
shareholders in GlaxoSmithKline Pharmaceuticals Ltd, the Group’s pharmaceuticals subsidiary in India. This amount was an estimate
in the prior year and was settled in March 2014 for £625 million (see Note 39).
Trade and other payables include £9 million (2013 – £9 million) due to associates and joint ventures.
28 Pensions and other post-employment benefits
Pension and other post-employment costs
UK pension schemes
US pension schemes
Other overseas pensions schemes
Unfunded post-retirement healthcare schemes
Analysed as:
Funded defined benefit/hybrid pension schemes
Unfunded defined benefit pension schemes
Unfunded post-retirement healthcare schemes
Defined benefit schemes
Defined contribution pension schemes
2014
£m
125
85
123
70
403
267
34
70
371
32
403
2013
£m
139
95
111
(175)
170
283
30
(175)
138
32
170
2012
£m
(230)
92
129
104
95
(67)
14
104
51
44
95
The net reduction in the post-retirement healthcare schemes cost in 2013 arises from the restructuring of US post-retirement medical
obligations. The reduction in the UK pension scheme cost in 2012 relates to the one-off adjustments arising from the capping of future
pensionable salary increases and a change in the basis of future discretionary pension increased from RPI to CPI in certain legacy plans.
For further details see page 168.
The costs of the defined benefit pension and post-retirement healthcare schemes are charged in the income statement as follows:
Cost of sales
Selling, general and administration
Research and development
2014
£m
117
194
60
371
2013
£m
104
27
7
138
2012
£m
(2)
114
(61)
51
GSK entities operate pension arrangements which cover the Group’s material obligations to provide pensions to retired employees. These
arrangements have been developed in accordance with local practices in the countries concerned. Pension benefits can be provided by
state schemes; by defined contribution schemes, whereby retirement benefits are determined by the value of funds arising from contributions
paid in respect of each employee; or by defined benefit schemes, whereby retirement benefits are based on employee pensionable
remuneration and length of service. Some ‘hybrid’ defined benefit schemes also include defined contribution sections.
GSK Annual Report 2014 167
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
28 Pensions and other post-employment benefits continued
Pension costs of defined benefit schemes for accounting purposes have been calculated using the projected unit method. In certain
countries pension benefits are provided on an unfunded basis, some administered by trustee companies. Formal, independent, actuarial
valuations of the Group’s main plans are undertaken regularly, normally at least every three years.
Actuarial movements in the year are recognised through the statement of comprehensive income. Discount rates are derived from AA
rated corporate bond yields except in countries where there is no deep market in corporate bonds where government bond yields are
used. Discount rates are selected to reflect the term of the expected benefit payments. Projected inflation rate and pension increases
are long-term predictions based on the yield gap between long-term index-linked and fixed interest Gilts. In the UK, mortality rates are
determined by adjusting the SAPS standard mortality tables to reflect recent scheme experience. These rates are then projected to
reflect improvements in life expectancy in line with the CMI projections with a long-term rate of improvement of 1.25% per year for both
males and females. In the USA, mortality rates are calculated using the RP2014 white collar table adjusted to reflect recent experience.
These rates are projected using scale BB-2D to allow for future improvements in life expectancy.
The average life expectancy assumed now for an individual at the age of 60 and projected to apply in 2034 for an individual then at the
age of 60 is as follows:
Current
Projected for 2034
Male
Years
28.0
30.1
UK
Female
Years
30.2
32.2
Male
Years
27.0
28.7
USA
Female
Years
28.7
30.4
The assets of funded schemes are generally held in separately administered trusts, either as specific assets or as a proportion of a
general fund, or are insurance contracts. Assets are invested in different classes in order to maintain a balance between risk and return.
Investments are diversified to limit the financial effect of the failure of any individual investment. The Group reviewed the investment
strategy of the UK plans in 2011 and the asset allocation for the UK plans has been adjusted to approximately 55% return seeking assets
and 45% liability matching assets. In 2013, the target asset allocation of the US plans was also updated to 55% return seeking assets
and 45% liability matching assets.
The Pension Plans are exposed to risk that arises because the estimated market value of the Plans’ assets might decline, the investment
returns might reduce, or the estimated value of the Plans’ liabilities might increase.
In line with the agreed mix of return seeking assets to generate future returns and liability matching assets to better match future pension
obligations, the Group has defined an overall long-term investment strategy for the Plans, with investments across a broad range of
assets. The main market risks within the asset and hedging portfolio are against credit risk, interest rates, long-term inflation, equities,
property, and bank counterparty risk.
The Plan liabilities are a series of future cash flows with relatively long duration. On an IAS 19R basis, these cash flows are sensitive to
changes in the expected long-term inflation rate and the discount rate (AA corporate bond yield curve) where an increase in long-term
inflation corresponds with an increase in the liabilities, and an increase in the discount rate corresponds with a decrease in the liabilities.
In the UK the defined benefit pension schemes operated for the benefit of former Glaxo Wellcome employees and former SmithKline
Beecham employees remain separate. These schemes were closed to new entrants in 2001 and subsequent UK employees are entitled
to join a defined contribution scheme. In the USA the former Glaxo Wellcome and SmithKline Beecham defined benefit schemes were
merged during 2001. In addition, the Group operates a number of post-retirement healthcare schemes, the principal one of which is in
the USA.
During 2013, the Group restructured US post-retirement medical obligations for both active and retired members under the age of 65.
The prior plan for participants over 65, paid for medical expenses in excess of those covered by Medicare Part A and Part B as well as for
prescription drugs. Under the new arrangement these participants will instead be eligible to receive an amount, from age 65, from a health
reimbursement account, based on years of service, subject to an inflation linked maximum of $1,500 per year. Those already retired and over
the age of 65 have also been given the option to switch to this new arrangement. The impact of this change in 2013 is a credit to the income
statement of £279 million and a similar reduction in the post-retirement obligation.
During 2012, the Group changed its policy towards granting discretionary pension increases in the SmithKline Beecham defined benefit
schemes. In the year, the Group also introduced a limit for all UK defined benefit schemes of 2% per year on the rate at which
pensionable pay may increase.
The Group has applied the following financial assumptions in assessing the defined benefit liabilities:
Rate of increase of future earnings
Discount rate
Expected pension increases
Cash balance credit/conversion rate
Inflation rate
2014
% pa
2.00
3.60
3.00
n/a
3.00
2013
% pa
2.00
4.50
3.40
n/a
3.40
UK
2012
% pa
2.00
4.40
3.00
n/a
3.00
2014
% pa
4.00
3.80
n/a
3.00
2.25
2013
% pa
4.00
4.60
n/a
4.20
2.25
USA
2012
% pa
4.00
3.80
n/a
3.35
2.25
2014
% pa
2.60
2.00
2.00
0.50
1.40
Rest of World
2013
% pa
2.80
3.40
2.10
0.90
1.80
2012
% pa
3.00
3.30
1.90
1.30
1.70
168 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 28 Pensions and other post-employment benefits continued
The amounts recorded in the income statement and statement of comprehensive income for the three years ended 31 December 2014
in relation to the defined benefit pension and post-retirement healthcare schemes were as follows:
2014
Amounts charged to operating profit
Current service cost
Past service cost/(credit)
Net interest (credit)/cost
Gains from settlements
Expenses
USA
£m
Rest of World
£m
Pensions
Group
£m
Post-retirement
benefits
Group
£m
66
1
14
–
4
85
90
(11)
14
(4)
2
91
275
(3)
21
(4)
12
301
24
(8)
54
–
–
70
UK
£m
119
7
(7)
–
6
125
Remeasurements recorded in the statement of
comprehensive income
(629)
(223)
(244)
(1,096)
(85)
USA
£m
Rest of World
£m
Pensions
Group
£m
Post-retirement
benefits
Group
£m
2013
Amounts charged to operating profit
Current service cost
Past service cost/(credit)
Net interest cost
Expenses
UK
£m
117
4
12
6
139
74
–
17
4
95
89
(31)
17
4
79
280
(27)
46
14
313
Remeasurements recorded in the statement of
comprehensive income
349
257
74
680
37
(273)
61
–
(175)
167
2012
Amounts charged to operating profit
Current service cost
Past service (credit)/cost
Net interest cost
Remeasurements recorded in the statement of
comprehensive income
UK
£m
130
(391)
31
(230)
(384)
USA
£m
Rest of World
£m
Pensions
Group
£m
Post-retirement
benefits
Group
£m
66
–
26
92
48
75
–
10
85
271
(391)
67
(53)
36
2
66
104
(230)
(566)
(119)
The past service credit of £273 million in 2013 includes an amount of £279 million in relation to the restructuring of the US post-retirement
medical obligations. The past service credit of £391 million in 2012 reflects the adjustments of £395 million related to the capping of future
pensionable salary increases and a change in the basis of future discretionary pension increases from RPI to CPI in certain legacy plans.
For further details see page 168.
The amounts included within past service costs include £7 million (2013 – £nil; 2012 – £4 million) of augmentation costs arising from
major restructuring programmes (see Note 29, ‘Other provisions’).
GSK Annual Report 2014 169
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
28 Pensions and other post-employment benefits continued
A summarised balance sheet presentation of the Group defined benefit pension schemes and other post-retirement benefits is set out in the
table below:
Recognised in Other non-current assets:
Pension schemes in surplus
Recognised in Pensions and other post-employment benefits:
Pension schemes in deficit
Post-retirement benefits
2014
£m
93
(1,782)
(1,397)
(3,179)
2013
£m
330
2012
£m
124
(943)
(1,246)
(2,189)
(1,436)
(1,685)
(3,121)
The fair values of the assets and liabilities of the UK and US defined benefit pension schemes, together with aggregated data for other
defined benefit pension schemes in the Group are as follows:
At 31 December 2014
Equities:
Property:
Corporate bonds:
– listed
– unlisted
– unlisted
– listed
– unlisted
Government bonds: – listed
Insurance contracts
Other assets
Fair value of assets
Present value of scheme obligations
Recognised on the balance sheet
Included in other non-current assets
Included in pensions and other post-employment benefits
Actual return on plan assets
UK
£m
6,734
247
256
1,403
247
2,489
803
(127)
12,052
(12,492)
(440)
72
(512)
(440)
977
USA
£m
1,203
–
146
921
–
152
–
109
2,531
(3,133)
(602)
–
(602)
(602)
99
Rest of World
£m
325
9
4
97
25
603
378
88
1,529
(2,176)
(647)
21
(668)
(647)
181
Group
£m
8,262
256
406
2,421
272
3,244
1,181
70
16,112
(17,801)
(1,689)
93
(1,782)
(1,689)
1,257
In October 2013, the UK schemes entered into repurchase agreements to gain exposure to index-linked gilts. The related loan is also
included within ‘Other assets’ at a value of £(537) million (2013 – £(407) million; 2012 – £nil).
At 31 December 2013
Equities:
Property:
Corporate bonds:
– listed
– unlisted
– unlisted
– listed
– unlisted
Government bonds: – listed
Insurance contracts
Other assets
Fair value of assets
Present value of scheme obligations
Recognised on the balance sheet
Included in other non-current assets
Included in pensions and other post-employment benefits
Actual return on plan assets
UK
£m
6,474
–
254
1,484
–
2,376
775
(119)
11,244
(11,132)
112
292
(180)
112
1,383
USA
£m
1,202
–
131
531
–
320
–
330
2,514
(2,793)
(279)
–
(279)
(279)
218
Rest of World
£m
422
9
5
57
20
517
366
71
1,467
(1,913)
(446)
38
(484)
(446)
98
Group
£m
8,098
9
390
2,072
20
3,213
1,141
282
15,225
(15,838)
(613)
330
(943)
(613)
1,699
170 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
28 Pensions and other post-employment benefits continued
At 31 December 2012
– listed
Equities:
– unlisted
Property:
Corporate bonds:
– listed
Government bonds: – listed
Insurance contracts
Other assets
Fair value of assets
Present value of scheme obligations
Recognised on the balance sheet
Included in other non-current assets
Included in pensions and other post-employment benefits
Actual return on plan assets
Movements in fair values of assets
Assets at 1 January 2012
Exchange adjustments
Interest income
Remeasurement
Employer contributions
Scheme participants’ contributions
Benefits paid
Settlements and curtailments
Assets at 31 December 2012
Exchange adjustments
Interest income
Expenses
Remeasurement
Employer contributions
Scheme participants’ contributions
Benefits paid
Assets at 31 December 2013
Exchange adjustments
Interest income
Expenses
Settlements and curtailments
Remeasurement
Employer contributions
Scheme participants’ contributions
Benefits paid
Assets at 31 December 2014
UK
£m
5,270
265
1,439
2,054
751
202
9,981
(10,298)
(317)
103
(420)
(317)
665
USA
£m
1,018
116
586
427
–
374
2,521
(2,979)
(458)
–
(458)
(458)
308
Rest of World
£m
276
5
19
657
327
93
1,377
(1,914)
(537)
21
(558)
(537)
118
UK
£m
9,119
–
381
284
497
33
(333)
–
9,981
–
385
(6)
998
219
26
(359)
11,244
–
437
(6)
–
540
202
34
(399)
12,052
USA
£m
2,455
(125)
97
211
52
–
(169)
–
2,521
(49)
96
(4)
122
20
–
(192)
2,514
154
112
(4)
–
(13)
19
–
(251)
2,531
Rest of World
£m
1,284
(56)
55
63
86
9
(58)
(6)
1,377
(45)
45
(4)
53
104
10
(73)
1,467
(101)
47
(2)
(65)
134
102
10
(63)
1,529
Pensions
Group
£m
12,858
(181)
533
558
635
42
(560)
(6)
13,879
(94)
526
(14)
1,173
343
36
(624)
15,225
53
596
(12)
(65)
661
323
44
(713)
16,112
Group
£m
6,564
386
2,044
3,138
1,078
669
13,879
(15,191)
(1,312)
124
(1,436)
(1,312)
1,091
Post-retirement
benefits
Group
£m
–
–
–
–
76
15
(91)
–
–
–
–
–
–
76
15
(91)
–
–
–
–
–
–
70
10
(80)
–
The UK defined benefit schemes include defined contribution sections with account balances totalling £1,501 million at 31 December
2014 (2013 – £1,366 million; 2012 – £1,112 million).
During 2014, the Group made special funding contributions to the UK pension schemes totalling £85 million (2013 – £93 million;
2012 – £366 million) and £nil (2013 – £nil; 2012 – £32 million) to the US scheme. In 2013, GSK reached an agreement with the
trustees of the UK pension schemes to make additional contributions to eliminate the pension deficit identified at the 31 December
2011 actuarial funding valuation. Based on the funding agreements following the 2011 valuation, the additional contributions are
expected to be £85 million in 2015. The contributions were based on a government bond yield curve approach to selecting the
discount rate; the rate chosen included an allowance for expected investment returns which reflected the asset mix of the schemes.
Employer contributions for 2015, including special funding contributions, are estimated to be approximately £320 million in respect
of defined benefit pension schemes and £70 million in respect of post-retirement benefits.
GSK Annual Report 2014 171
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
28 Pensions and other post-employment benefits continued
Movements in defined benefit obligations
Obligations at 1 January 2012
Exchange adjustments
Service cost
Past service cost
Interest cost
Settlements and curtailments
Remeasurement
Scheme participants’ contributions
Benefits paid
Obligations at 31 December 2012
Exchange adjustments
Service cost
Past service cost
Interest cost
Other movements
Remeasurement
Scheme participants’ contributions
Benefits paid
Obligations at 31 December 2013
Exchange adjustments
Service cost
Past service cost
Interest cost
Settlements and curtailments
Other movements
Remeasurement
Scheme participants’ contributions
Benefits paid
Obligations at 31 December 2014
UK
£m
(9,779)
–
(130)
391
(412)
–
(668)
(33)
333
(10,298)
–
(117)
(4)
(397)
–
(649)
(26)
359
(11,132)
–
(119)
(7)
(430)
–
–
(1,169)
(34)
399
(12,492)
USA
£m
(2,945)
149
(66)
–
(123)
–
(163)
–
169
(2,979)
46
(74)
–
(113)
–
135
–
192
(2,793)
(188)
(66)
(1)
(126)
–
–
(210)
–
251
(3,133)
Rest of World
£m
(1,610)
74
(75)
–
(65)
6
(293)
(9)
58
(1,914)
37
(89)
31
(62)
–
21
(10)
73
(1,913)
139
(90)
11
(61)
69
(6)
(378)
(10)
63
(2,176)
Pensions
Group
£m
(14,334)
223
(271)
391
(600)
6
(1,124)
(42)
560
(15,191)
83
(280)
27
(572)
–
(493)
(36)
624
(15,838)
(49)
(275)
3
(617)
69
(6)
(1,757)
(44)
713
(17,801)
Post-retirement
benefits
Group
£m
(1,616)
78
(36)
(2)
(66)
–
(119)
(15)
91
(1,685)
9
(37)
273
(61)
12
167
(15)
91
(1,246)
(68)
(24)
8
(54)
–
2
(85)
(10)
80
(1,397)
The UK defined benefit schemes include defined contribution sections with obligations totalling £1,501 million at 31 December 2014
(2013 – £1,366 million; 2012 – £1,112 million).
The defined benefit pension obligation is analysed as follows:
Funded
Unfunded
2014
£m
(17,350)
(451)
(17,801)
2013
£m
(15,432)
(406)
(15,838)
2012
£m
(14,789)
(402)
(15,191)
The liability for the US post-retirement healthcare scheme has been assessed using the same assumptions as for the US pension
scheme, together with the assumption for future medical inflation of 6.75% (2013 – 6.5%), grading down to 5.0% in 2022 and thereafter.
During 2013, the US post-retirement healthcare scheme was amended (see page 168 for further details). The impact of this change is a
one-off reduction in the post-retirement obligation of £279 million. At 31 December 2014, the US post-retirement healthcare scheme
obligation was £1,191 million (2013 – £1,066 million; 2012 – £1,504 million).
Post-retirement benefits are unfunded.
172 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
28 Pensions and other post-employment benefits continued
The movement in the net defined benefit liability is as follows:
At 1 January 2012
Exchange adjustments
Service cost
Past service cost
Interest income/(cost)
Settlements and curtailments
Remeasurements:
Return on plan assets, excluding amounts included in interest
Gain from change in demographic assumptions
Loss from change in financial assumptions
Experience losses
Employers contributions
Scheme participants’ contributions
Benefits paid
At 31 December 2012
Exchange adjustments
Service cost
Past service cost
Interest income/(cost)
Remeasurements:
Return on plan assets, excluding amounts included in interest
Loss from change in demographic assumptions
Loss from change in financial assumptions
Experience losses
Employers contributions
Scheme participants’ contributions
Benefits paid
Expenses/other movements
At 31 December 2013
Exchange adjustments
Service cost
Past service cost
Interest income/(cost)
Settlements and curtailments
Remeasurements:
Return on plan assets, excluding amounts included in interest
Loss from change in demographic assumptions
Loss from change in financial assumptions
Experience losses
Employers contributions
Scheme participants’ contributions
Benefits paid
Expenses/other movements
At 31 December 2014
The remeasurements included within post-retirement benefits are detailed below:
Gain/(loss) from change in demographic assumptions
(Loss)/gain from change in financial assumptions
Experience gains
Fair value
of assets
£m
12,858
(181)
–
–
533
(6)
558
–
–
–
635
42
(560)
13,879
(94)
–
–
526
1,173
–
–
–
343
36
(624)
(14)
15,225
53
–
–
596
(65)
661
–
–
–
323
44
(713)
(12)
16,112
2014
£m
10
(120)
25
(85)
Present
value of
obligation
£m
(14,334)
223
(271)
391
(600)
6
–
55
(1,071)
(108)
–
(42)
560
(15,191)
83
(280)
27
(572)
–
(89)
(118)
(286)
–
(36)
624
–
(15,838)
(49)
(275)
3
(617)
69
–
(64)
(1,578)
(115)
–
(44)
713
(6)
(17,801)
2013
£m
(1)
143
25
167
Net
total
£m
(1,476)
42
(271)
391
(67)
–
558
55
(1,071)
(108)
635
–
–
(1,312)
(11)
(280)
27
(46)
1,173
(89)
(118)
(286)
343
–
–
(14)
(613)
4
(275)
3
(21)
4
661
(64)
(1,578)
(115)
323
–
–
(18)
(1,689)
2012
£m
1
(132)
12
(119)
GSK Annual Report 2014 173
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
28 Pensions and other post-employment benefits continued
The defined benefit pension obligation analysed by membership category is as follows:
Active
Retired
Deferred
The post-retirement benefit obligation analysed by membership category is as follows:
Active
Retired
Deferred
The weighted average duration of the defined benefit obligation is as follows:
Pension benefits
Post-retirement benefits
Sensitivity analysis
2014
£m
5,422
7,967
4,412
17,801
2014
£m
590
805
2
1,397
2014
years
16
12
2013
£m
5,053
7,137
3,648
15,838
2013
£m
545
699
2
1,246
2013
years
16
12
2012
£m
4,695
6,930
3,566
15,191
2012
£m
708
975
2
1,685
2012
years
16
11
Effect of changes in assumptions used on the benefit obligations and on the 2015 annual defined benefit pension and post retirement
costs after the revisions to IAS 19.
A 0.25% decrease in discount rate would have the following approximate effect:
Increase in annual pension cost
Decrease in annual post-retirement benefits cost
Increase in pension obligation
Increase in post-retirement benefits obligation
A one year increase in life expectancy would have the following approximate effect:
Increase in annual pension cost
Increase in annual post-retirement benefits cost
Increase in pension obligation
Increase in post-retirement benefits obligation
A 1% increase in the rate of future healthcare inflation would have the following approximate effect:
Increase in annual post-retirement benefits cost
Increase in post-retirement benefits obligation
A 0.25% increase in inflation would have the following approximate effect:
Increase in annual pension cost
Increase in pension obligation
£m
32
(1)
645
43
20
2
454
37
4
63
21
431
174 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 29 Other provisions
At 1 January 2014
Exchange adjustments
Charge for the year
Reversed unused
Unwinding of discount
Utilised
Reclassifications and other movements
Transfer to Pension obligations
At 31 December 2014
To be settled within one year
To be settled after one year
At 31 December 2014
Legal
and other
disputes
£m
Major
restructuring
programmes
£m
Employee
related
provisions
£m
Integration and
manufacturing
re-organisation
£m
Other
provisions
£m
646
37
549
(2)
(1)
(709)
–
–
520
496
24
520
349
10
267
(4)
5
(110)
3
7
527
298
229
527
260
2
20
–
–
(31)
1
–
252
76
176
252
8
1
–
(5)
–
(4)
–
–
–
–
–
–
281
1
61
(9)
11
(35)
(19)
–
291
175
116
291
Total
£m
1,544
51
897
(20)
15
(889)
(15)
7
1,590
1,045
545
1,590
Legal and other disputes
The Group is involved in a substantial number of legal and other
disputes, including notification of possible claims, as set out in
Note 45 ‘Legal proceedings’. Provisions for legal and other
disputes include amounts relating to product liability (principally
relating to Avandia, and Paxil), anti-trust (principally relating to
Wellbutrin XL and Lamictal), government investigations (principally
relating to the China settlement and SEC/DOJ and SFO related
investigations), contract terminations, self insurance, environmental
clean-up and property rental.
Major restructuring programmes
In October 2007 the Group announced the Operational
Excellence programme to improve the effectiveness and
productivity of its operations (see Note 10, ‘Major restructuring
costs’). This was substantially complete at the end of 2014.
In addition, in 2013, the Group initiated the Major Change
restructuring programme focused on opportunities to simplify
supply chain processes, build the Group’s capabilities in
manufacturing and R&D and restructure the European
Pharmaceuticals business.
The charge for the year of £549 million (£547 million net of
reversals and estimated insurance recoveries) included a
£301 million fine paid to the Chinese government and provisions
for product liability cases regarding Paxil and other products,
commercial disputes and various other government investigations.
The discount on the provisions decreased by £nil in 2014
(2013 – £nil) and was calculated using risk-adjusted projected
cash flows and risk-free rates of return. The movement in 2014
includes an increase of £1 million (2013 – £nil) arising from a
change in the discount rate in the year.
In respect of product liability claims related to certain products,
there is sufficient history of claims made and settlements to enable
management to make a reliable estimate of the provision required
to cover unasserted claims. The ultimate liability for such matters
may vary from the amounts provided and is dependent upon the
outcome of litigation proceedings, investigations and possible
settlement negotiations.
It is in the nature of the Group’s business that a number of
these matters may be the subject of negotiation and litigation
over many years. Litigation proceedings, including the various
appeal procedures, often take many years to reach resolution, and
out-of-court settlement discussions can also often be protracted.
The Group is in potential settlement discussions in a number of
the disputes for which amounts have been provided and, based
on its current assessment of the progress of these disputes,
estimates that £0.5 billion of the amount provided at 31 December
2014 will be settled within one year. At 31 December 2014, it was
expected that £nil (2013 – £1 million) of the provision made for
legal and other disputes will be reimbursed by third party insurers.
This amount is included within the Other receivables balances in
Note 22 ‘Other non-current assets’ and Note 24, ‘Trade and
other receivables’. For a discussion of legal issues, see Note 45,
‘Legal proceedings’.
The new Pharmaceuticals restructuring programme, announced in
October 2014, will rescale commercial operations, global support
functions and the relevant R&D/manufacturing operations across
Pharmaceuticals.
Provisions for staff severance payments are made when
management has made a formal decision to eliminate certain
positions and this has been communicated to the groups of
employees affected and appropriate consultation procedures
completed, where appropriate.
No provision is made for staff severance payments that are
made immediately.
Pension augmentations arising from staff redundancies of
£7 million (2013 – £nil) have been charged during the year and
then transferred to the pension obligations provision as shown
in Note 28, ‘Pensions and other post-employment benefits’.
Asset write-downs have been recognised as impairments of
property, plant and equipment in Note 17, ‘Property, plant and
equipment’. The majority of the amounts provided are expected
to be utilised in the next two years.
Employee related provisions
Employee related provisions include obligations for certain
medical benefits to disabled employees and their spouses in
the USA. At 31 December 2014, the provision for these benefits
amounted to £114 million (2013 – £111 million). Other employee
benefits reflect a variety of provisions for severance costs, jubilee
awards and other long-service benefits.
Other provisions
Included in other provisions are insurance provisions of £83
million (2013 – £31 million), onerous property lease provisions
of £33 million (2013 – £33 million) and a number of other
provisions including vehicle insurance and regulatory matters.
GSK Annual Report 2014 175
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
30 Other non-current liabilities
Accruals and deferred income
Contingent consideration
Other payables
2014
£m
92
1,619
690
2,401
2013
£m
101
958
645
1,704
The contingent consideration primarily relates to the acquisition of the 50% share of the Shionogi-ViiV Healthcare joint venture previously
held by Shionogi & Co Ltd in 2012.
31 Contingent liabilities
At 31 December 2014, contingent liabilities, comprising guarantees, discounted bills and other items arising in the normal course of
business, amounted to £185 million (2013 – £198 million). At 31 December 2014, £nil (2013 – £nil) of financial assets were pledged
as collateral for contingent liabilities. Provision is made for the outcome of tax, legal and other disputes where it is both probable that the
Group will suffer an outflow of funds and it is possible to make a reliable estimate of that outflow. At 31 December 2014, other than for
those disputes where provision has been made, it was not possible to make a reliable estimate of the potential outflow of funds that might
be required to settle disputes where the possibility of there being an outflow was more than remote. Descriptions of the significant tax,
legal and other disputes to which the Group is a party are set out in Note 14, ‘Taxation’ and Note 45, ‘Legal proceedings’.
Listing exchange
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London Stock Exchange
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London Stock Exchange
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32 Net debt
Current assets:
Liquid investments
Cash and cash equivalents
Short-term borrowings:
Commercial paper
Bank loans and overdrafts
Obligations under finance leases
4.375% US$ US Medium Term Note 2014
0.75% US$ US Medium Term Note 2015
3.875% € European Medium Term Note 2015
Long-term borrowings:
0.75% US$ US Medium Term Note 2015
3.875% € European Medium Term Note 2015
0.7% US$ US Medium Term Note 2016
1.50% US$ US Medium Term Note 2017
5.625% € European Medium Term Note 2017
5.65% US$ US Medium Term Note 2018
0.625% € European Medium Term Note 2019
2.85% US$ US Medium Term Note 2022
2.8% US$ US Medium Term Note 2023
1.375% € European Medium Term Note 2024
4.00% € European Medium Term Note 2025
3.375% £ European Medium Term Note 2027
5.25% £ European Medium Term Note 2033
5.375% US$ US Medium Term Note 2034
6.375% US$ US Medium Term Note 2038
6.375% £ European Medium Term Note 2039
5.25% £ European Medium Term Note 2042
4.2% US$ US Medium Term Note 2043
4.25% £ European Medium Term Note 2045
Obligations under finance leases
Net debt
176 GSK Annual Report 2014
2014
£m
69
4,338
4,407
(656)
(379)
(28)
–
(641)
(1,239)
(2,943)
–
–
(800)
(1,278)
(967)
(1,760)
(1,154)
(1,271)
(792)
(764)
(575)
(591)
(984)
(318)
(1,747)
(695)
(987)
(313)
(788)
(57)
(15,841)
(14,377)
2013
£m
66
5,534
5,600
(1,491)
(352)
(27)
(919)
–
–
(2,789)
(601)
(1,330)
(751)
(1,199)
(1,038)
(1,653)
–
(1,193)
(743)
–
(618)
(591)
(983)
(299)
(1,641)
(694)
(987)
(294)
(788)
(53)
(15,456)
(12,645)
Governance & remunerationFinancial statementsInvestor informationStrategic report 32 Net debt continued
Current assets
Liquid investments are classified as available-for-sale investments.
At 31 December 2014, they included US Treasury Notes and
other government bonds. The effective interest rate on liquid
investments at 31 December 2014 was approximately 0.3%
(2013 – approximately 0.5%). Liquid investment balances at
31 December 2014 earning interest at floating rates amount to
£69 million (2013 – £65 million). Liquid investment balances at
31 December 2014 earning interest at fixed rates are immaterial
(2013 – £1 million).
The effective interest rate on cash and cash equivalents at
31 December 2014 was approximately 1.6% (2013 – approximately
1.3%). Cash and cash equivalents at 31 December 2014 earning
interest at floating and fixed rates amount to £4,243 million and
£1 million respectively (2013 – £5,298 million and £1 million).
GSK’s policy regarding the credit quality of cash and cash
equivalents is referred to in Note 41, ‘Financial instruments and
related disclosures’.
Short-term borrowings
GSK has a $10 billion (£6.4 billion) US commercial paper
programme, of which $1.0 billion (£0.7 billion) was in issue at
31 December 2014 (2013 – $2.5 billion (£1.5 billion)). GSK also
has £1.9 billion of five year committed medium-term facilities and
$2.5 billion (£1.6 billion) of 364 day committed facilities. These
facilities were put in place in September 2012 and September
2014 respectively and were undrawn at 31 December 2014.
Liquid investments, cash and cash equivalents were as shown
in the table on page 176.
The weighted average interest rate on current bank loans and
overdrafts at 31 December 2014 was 4.28% (2013 – 3.7%).
The weighted average interest rate on commercial paper
borrowings at 31 December 2014 was 0.22% (2013 – 0.18%).
Long-term borrowings
At the year-end, GSK had long-term borrowings of £15.8 billion
(2013 – £15.5 billion) of which £9.8 billion (2013 – £8.8 billion)
falls due in more than five years. The average effective pre-swap
interest rate of all notes in issue at 31 December 2014 was
approximately 3.8% (2013 – approximately 4.5%).
Long-term borrowings repayable after five years carry interest
at effective rates between 1.55% and 6.41%. The repayment
dates range from 2022 to 2045.
Pledged assets
The Group has pledged investments in US Treasury Notes with
a par value of $105 million (£67 million), (2013 – $105 million
(£63 million)) as security against irrevocable letters of credit
issued on the Group’s behalf in respect of the Group’s self-
insurance activity. Provisions in respect of self-insurance are
included within the provisions for legal and other disputes
discussed in Note 29, ‘Other provisions’. In addition, £32 million
(2013 – £48 million) of assets included in Note 22, ‘Other
non-current assets’, which do not form part of Net debt, were
pledged as collateral against future rental payments under
operating lease arrangements entered into by Human Genome
Sciences, Inc. prior to its acquisition by the Group.
Finance lease obligations
Rental payments due within one year
Rental payments due between one and two years
Rental payments due between two and three years
Rental payments due between three and four years
Rental payments due between four and five years
Rental payments due after five years
Total future rental payments
Future finance charges
Total finance lease obligations
2014
£m
31
23
19
13
3
2
91
(6)
85
2013
£m
29
24
16
9
4
5
87
(7)
80
GSK Annual Report 2014 177
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
33 Share capital and share premium account
Share capital authorised
At 31 December 2012
At 31 December 2013
At 31 December 2014
Share capital issued and fully paid
At 1 January 2012
Issued under employee share schemes
Share capital cancelled
At 31 December 2012
Issued under employee share schemes
Share capital cancelled
At 31 December 2013
Issued under employee share schemes
At 31 December 2014
Number of shares issuable under employee share schemes (Note 42)
Number of unissued shares not under option
Ordinary Shares of 25p each
Share
premium
Number
£m
£m
10,000,000,000
10,000,000,000
10,000,000,000
5,550,203,098
28,045,821
(180,652,950)
5,397,595,969
44,610,727
(100,000,000)
5,342,206,696
13,090,536
5,355,297,232
31 December 2014
000
88,801
4,555,902
2,500
2,500
2,500
1,387
7
(45)
1,349
12
(25)
1,336
3
1,339
1,673
349
–
2,022
573
–
2,595
164
2,759
31 December 2013
000
91,303
4,566,351
At 31 December 2014, of the issued share capital, 52,734,605 shares were held in the ESOP Trusts, 491,515,950 shares were held as
Treasury shares and 4,811,046,677 shares were in free issue. All issued shares are fully paid. The nominal, carrying and market values of
the shares held in the ESOP Trusts are disclosed in Note 42, ‘Employee share schemes’.
A total of 15 million shares were purchased by the company during 2014 at a cost of £238 million.
Monthly purchases of shares during 2014 were as follows:
February
May
June
Total
For details of substantial shareholdings refer to page 242
Number of shares
000
1,741,006
6,718,745
6,245,765
14,705,516
Average share price excluding
commission and stamp duty
£
16.27
16.21
15.90
16.09
178 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
34 Movements in equity
Retained earnings and other reserves amounted to £165 million at 31 December 2014 (2013 – £3,066 million; 2012 – £2,429 million)
of which £337 million (2013 – £307 million; 2012 – £372 million) relates to joint ventures and associated undertakings. The cumulative
translation exchange in equity is as follows:
At 1 January 2012
Exchange movements on overseas net assets
At 31 December 2012
Exchange movements on overseas net assets
At 31 December 2013
Exchange movements on overseas net assets
Reclassification of exchange on liquidation or disposal of overseas subsidiaries
At 31 December 2014
The analysis of other comprehensive income by equity category is as follows:
2014
Items that may be subsequently reclassified to income statement:
Exchange movements on overseas net assets and net investment hedges
Reclassification of exchange on liquidation or disposal of overseas subsidiaries
Deferred tax on exchange movements
Fair value movements on available-for-sale investments
Deferred tax on fair value movements on available-for-sale investments
Reclassification of fair value movements on available-for-sale investments
Deferred tax on reclassification of fair value movements on available-for-sale investments
Reclassification of cash flow hedges to income statement
Fair value movements on cash flow hedges
Deferred tax on fair value movements on cash flow hedges
Share of other comprehensive income of associates and joint ventures
Items that will not be reclassified to income statement:
Exchange movements on overseas net assets of non-controlling interests
Actuarial losses on defined benefit plans
Deferred tax on actuarial movements in defined benefit plans
Other comprehensive (expense)/income for the year
2013
Items that may be subsequently reclassified to income statement:
Exchange movements on overseas net assets and net investment hedges
Fair value movements on available-for-sale investments
Deferred tax on fair value movements on available-for-sale investments
Reclassification of fair value movements on available-for-sale investments
Deferred tax on reclassification of fair value movements on available-for-sale investments
Reclassification of cash flow hedges to income statement
Fair value movements on cash flow hedges
Deferred tax on fair value movements on cash flow hedges
Share of other comprehensive income of associates and joint ventures
Items that will not be reclassified to income statement:
Exchange movements on overseas net assets of non-controlling interests
Actuarial gains on defined benefit plans
Deferred tax on actuarial movements in defined benefit plans
Other comprehensive income/(expense) for the year
Net translation exchange included in:
Non-
controlling
interests
£m
(68)
(30)
(98)
(35)
(133)
16
–
(117)
Fair value
reserve
£m
15
(23)
(8)
5
(3)
7
–
4
Retained
earnings
£m
1,049
(203)
846
(260)
586
(504)
(219)
(137)
Retained
earnings
£m
Other
reserves
£m
Non-
controlling
interests
£m
(504)
(219)
(2)
–
–
–
–
–
–
–
18
–
(1,181)
262
(1,626)
7
–
–
29
(78)
(155)
58
(5)
5
(1)
–
–
–
–
(140)
–
–
–
–
–
–
–
–
–
–
–
16
–
–
16
Retained
earnings
£m
Other
reserves
£m
Non-
controlling
interests
£m
(260)
–
–
–
–
–
–
–
15
–
847
(286)
316
5
367
(29)
(38)
7
2
(9)
1
–
–
–
–
306
–
–
–
–
–
–
–
–
–
(35)
–
–
(35)
Total
translation
exchange
£m
996
(256)
740
(290)
450
(481)
(219)
(250)
Total
£m
(497)
(219)
(2)
29
(78)
(155)
58
(5)
5
(1)
18
16
(1,181)
262
(1,750)
Total
£m
(255)
367
(29)
(38)
7
2
(9)
1
15
(35)
847
(286)
587
GSK Annual Report 2014 179
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
34 Movements in equity continued
2012
Items that may be subsequently reclassified to income statement:
Exchange movements on overseas net assets and net investment hedges
Fair value movements on available-for-sale investments
Deferred tax on fair value movements on available-for-sale investments
Reclassification of fair value movements on available-for-sale investments
Deferred tax on reclassification of fair value movements on available-for-sale investments
Reclassification of cash flow hedges to income statement
Fair value movements on cash flow hedges
Share of other comprehensive income of associates and joint ventures
Items that will not be reclassified to income statement:
Exchange movements on overseas net assets of non-controlling interests
Actuarial losses on defined benefit plans
Deferred tax on actuarial movements in defined benefit plans
Other comprehensive (expense)/income for the year
The analysis of other reserves is as follows:
Retained
earnings
£m
Other
reserves
£m
Non-
controlling
interests
£m
(203)
–
–
–
–
–
–
30
–
(685)
193
(665)
(23)
77
(10)
(19)
10
2
(6)
–
–
–
–
31
At 1 January 2012
Transferred to income and expense in the year on disposals
Transferred to income and expense in the year on impairment
Net fair value movement in the year
Ordinary Shares purchased and cancelled
Ordinary Shares acquired by ESOP Trusts
Ordinary Shares transferred by ESOP Trusts
Write-down of shares held by ESOP Trusts
Forward contract on non-controlling interest
At 31 December 2012
Transferred to income and expense in the year on disposals
Transferred to income and expense in the year on impairment
Net fair value movement in the year
Ordinary Shares purchased and cancelled
Ordinary Shares acquired by ESOP Trusts
Write-down of shares held by ESOP Trusts
At 31 December 2013
Transferred to income and expense in the year on disposals
Net fair value movement in the year
Ordinary Shares acquired by ESOP Trusts
Write-down of shares held by ESOP Trusts
Forward contract on non-controlling interest
At 31 December 2014
ESOP Trust
shares
£m
(492)
–
–
–
–
(37)
58
80
–
(391)
–
–
–
–
(45)
80
(356)
–
–
(245)
450
–
(151)
Fair value
reserve
£m
70
(18)
(1)
54
–
–
–
–
–
105
(38)
(1)
347
–
–
–
413
(155)
16
–
–
–
274
Cash flow
hedge reserve
£m
(6)
2
–
(6)
–
–
–
–
–
(10)
2
–
(4)
–
–
–
(12)
(5)
4
–
–
–
(13)
Total
£m
(226)
77
(10)
(19)
10
2
(6)
30
(30)
(685)
193
(664)
Total
£m
1,602
(16)
(1)
48
45
(37)
58
80
8
1,787
(36)
(1)
343
25
(45)
80
2,153
(160)
20
(245)
450
21
2,239
–
–
–
–
–
–
–
–
(30)
–
–
(30)
Other
reserves
£m
2,030
–
–
–
45
–
–
–
8
2,083
–
–
–
25
–
–
2,108
–
–
–
–
21
2,129
Other reserves include various non-distributable merger and pre-merger reserves amounting to £1,849 million at 31 December 2014
(2013 – £1,849 million; 2012 – £1,849 million). Other reserves also include the capital redemption reserve created as a result of the
share buy-back programme amounting to £280 million at 31 December 2014 (2013 – £280 million; 2012 – £256 million).
180 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
35 Related party transactions
GSK held a 12.4% interest in Aspen Pharmacare Holdings Limited at 31 December 2014 (2013 – 12.4%).
During 2014, GSK distributed £52 million (2013 – £64 million) of its products through Aspen’s extensive distribution network.
At 31 December 2014, the balance due to GSK from Aspen was £22 million (2013 – £11 million) and the balance payable by GSK to
Aspen was £9 million (2013 – £9 million). In addition, a further £8 million was due to GSK relating to the consideration of the sale of
worldwide intellectual property rights of the anti-coagulant products business to the Aspen Group in 2013 (2013 – £233 million).
At 31 December 2014, GSK held a 50% interest in Japan Vaccine Co. Ltd (JVC) through its subsidiary GlaxoSmithKline K.K. This joint
venture with Daiichi Sankyo Co., Ltd is primarily responsible for the development and marketing of certain prophylactic vaccines in
Japan. During 2014, GSK sold £27 million (2013 – £36 million) of its vaccine products into the joint venture. At 31 December 2014,
the balance due to GSK from JVC was £6 million and the balance payable by GSK to JVC was £nil.
The aggregate compensation of the Directors and CET is given in Note 9, ‘Employee Costs’.
36 Adjustments reconciling profit after tax to operating cash flows
Profit after tax
Tax on profits
Share of after tax profits of associates and joint ventures
Finance income net of finance expense
Depreciation
Amortisation of intangible assets
Impairment and assets written off
Profit on sale of businesses
Profit on sale of intangible assets
Profit on sale of investments in associates
Profit on sale of equity investments
Changes in working capital:
(Increase)/decrease in inventories
Decrease in trade receivables
Decrease/(increase) in other receivables
Increase in trade payables
Increase in other payables
Decrease in pension and other provisions
Share-based incentive plans
Fair value adjustments
Other
2014
£m
2,831
137
(30)
659
780
704
205
–
(255)
–
(149)
(529)
347
95
91
698
(41)
332
313
96
3,453
2013
£m
5,628
1,019
(43)
706
732
682
928
(1,331)
(78)
(282)
(36)
(95)
16
(218)
125
393
(165)
319
(12)
211
2,871
2012
£m
4,678
1,922
(29)
729
871
574
654
–
(652)
–
(16)
37
183
(27)
177
132
(2,839)
220
(575)
9
1,370
Cash generated from operations
6,284
8,499
6,048
GSK Annual Report 2014 181
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
37 Reconciliation of net cash flow to movement in net debt
Net debt at beginning of year
(Decrease)/increase in cash and bank overdrafts
Decrease in liquid investments
Net increase in long-term loans
Net repayment of short-term loans
Net repayment of obligations under finance leases
Net non-cash funds of subsidiary undertakings acquired
Exchange adjustments
Other non-cash movements
Movement in net debt
2014
£m
(12,645)
2013
£m
(14,037)
(1,287)
(1)
(1,960)
1,709
23
–
(193)
(23)
(1,732)
1,473
(15)
(1,913)
1,872
31
(6)
(34)
(16)
1,392
2012
£m
(9,003)
(1,607)
(224)
(4,430)
816
35
(3)
385
(6)
(5,034)
Net debt at end of year
(14,377)
(12,645)
(14,037)
Analysis of changes in net debt
Liquid investments
Cash and cash equivalents
Overdrafts
Debt due within one year:
Commercial paper
European and US Medium Term Notes
Other
Debt due after one year:
European and US Medium Term Notes
Other
Net debt
At 1 January
2014
£m
66
Exchange
£m
4
Other
£m
–
Reclass-
ifications
£m
–
Cash flow
£m
(1)
At 31December
2014
£m
69
5,534
(303)
5,231
(1,491)
(919)
(76)
(2,486)
(15,403)
(53)
(15,456)
(12,645)
78
6
84
–
55
–
55
(334)
(2)
(336)
(193)
–
–
–
–
16
(1)
15
(18)
(20)
(38)
(23)
–
–
–
–
(1,931)
(18)
(1,949)
1,931
18
1,949
(1,274)
(13)
(1,287)
835
899
(2)
1,732
(1,960)
–
(1,960)
4,338
(310)
4,028
(656)
(1,880)
(97)
(2,633)
(15,784)
(57)
(15,841)
–
(1,516)
(14,377)
For further information on significant changes in net debt see Note 32, ‘Net debt’.
182 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 38 Acquisitions and disposals
Details of the acquisition and disposal of significant subsidiaries and associates, joint ventures and other businesses are given below:
2014
Acquisitions
There were no acquisitions in 2014.
Acquisition and integration costs of £141 million arising on the proposed three-part inter-conditional transaction with Novartis AG
discussed in Note 43 ‘Proposed Novartis transaction’ were expensed in 2014, of which £104 million has been paid in cash.
A number of acquisitions made in previous years include contingent consideration payable in the future, as follows:
Contingent consideration payable
At 1 January
Additions
Remeasurement through goodwill
Remeasurement through income statement
Settlement
At 31 December
2014
£m
924
–
(4)
770
34
1,724
2013
£m
697
1
(18)
251
(7)
924
Contingent consideration is included within Trade and other payables and Other non-current liabilities. It includes contingent
consideration of £1,684 million (2013 – £923 million) payable for the acquisition in 2012 of the former Shionogi-ViiV Healthcare joint
venture. Remeasurements through the income statement include £768 million (2013 – £253 million) in respect of an increase in this
liability. The consideration is expected to be paid over a number of years and will vary in line with sales of dolutegravir.
Disposals
During the year, £225 million was received as deferred consideration from the sale of the anti-coagulent business completed in 2013
and £1 million from the disposal of an associate.
GSK also made cash investments of £9 million into associates.
Cash flows
Cash consideration paid
Transaction costs paid
Purchases of businesses and associates
Net cash proceeds from disposals
Business
acquisitions
and disposals
£m
–
104
104
Associates
and joint
ventures
£m
9
–
9
225
1
Total
£m
9
104
113
226
2013
Acquisitions
During 2013, GSK completed the acquisition of three businesses for cash, including Okairos AG, a European based biopharmaceutical
company focused on the development of a specific vaccine technology in the prophylactic and therapeutic fields, which was acquired in
May. The total purchase price for these businesses of £255 million included £7 million of cash acquired and
£1 million of contingent consideration.
Net assets acquired
Intangibles
Property, plant and equipment
Inventory
Trade and other receivables
Other assets including cash and cash equivalents
Deferred tax provision
Trade and other payables
Goodwill
Cash consideration paid
Contingent consideration
Total consideration
Book value
£m
Fair value
adjustments
£m
Fair value
£m
–
20
6
16
8
–
(26)
24
–
24
198
3
–
–
–
(23)
–
178
53
231
198
23
6
16
8
(23)
(26)
202
53
255
254
1
255
GSK Annual Report 2014 183
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
38 Acquisitions and disposals continued
If the acquisitions had been made at the beginning of the year, it is estimated that Group turnover would have increased by approximately
£50 million for the year. Okairos has been fully integrated into the GSK business and it is not practicable to separately identify the impact
on the Group profit for the year. The other acquisitions occurred shortly before the end of the year and had no material impact on the
Group profit for the year.
The goodwill arising on the acquisitions reflects potential for business synergies and the value of workforce acquired. The majority of
this goodwill is not expected to be deductible for income tax purposes.
The results of the acquisitions are reported within the US, Europe, Emerging Markets, Japan, Other trading and unallocated
Pharmaceuticals and Vaccines and Consumer Healthcare operating segments. The transactions were accounted for using the
acquisition accounting method.
Acquisition costs expensed in 2013 totalled £2 million.
Disposals
Lucozade and Ribena
On 31 December 2013, GSK completed the sale of the Lucozade and Ribena business including a manufacturing site and related
inventory to Suntory Beverage and Food Ltd for £1,352 million in cash and recognised a profit on disposal in Other operating income of
£1,057 million. Lucozade and Ribena sales, excluding retained markets, totalled £527 million for the year ending 31 December 2013.
Cash consideration
Net assets sold
Inventory
Property, plant and equipment
Goodwill
Disposal costs
Profit on disposal
£m
1,352
(45)
(149)
(24)
(218)
(77)
1,057
Anti-coagulant business
On 31 December 2013, GSK completed the sale of the anti-coagulant business comprising of worldwide intellectual property rights
(excluding China, India and Pakistan) of Fraxiparine and Arixtra together with related inventory and a manufacturing site to the Aspen
Group for consideration of £732 million, of which £499 million was received in cash and £233 million was deferred.
Profit on disposal of £274 million was recognised in Other operating income. Worldwide sales of Fraxiparine and Arixtra, excluding
retained markets, were £345 million for the year ending 31 December 2013.
£m
499
233
732
(138)
(91)
(80)
(31)
(340)
(79)
313
(39)
274
Cash consideration
Cash consideration receivable
Net assets sold
Inventory
Property, plant and equipment
Intangible assets
Goodwill
Disposal costs
Total profit on disposal
Deferral of profit
Profit recognised in year
184 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 38 Acquisitions and disposals continued
Investments in associates and joint ventures
In November 2013, GSK sold one third of its shareholding in Aspen, representing 6.2% of the issued share capital of the company,
for £429 million in cash. At 31 December 2013, GSK held 12.4% of Aspen and continued to recognise its investment in Aspen as
an associate.
Cash consideration
Net book value of shares
Reclassification of exchange from other comprehensive income
Reclassification of fair value movements from other comprehensive income
Profit on disposal
Cash flows
Cash consideration paid
Cash and cash equivalents acquired
Cash consideration paid, net of cash acquired
Total cash consideration payable, net of cash acquired
Contingent consideration
Cash consideration paid, net of cash acquired
Total cash proceeds receivable
Cash proceeds deferred
Net cash proceeds from disposals
£m
429
(132)
(42)
19
274
Total
£m
262
(7)
255
256
(1)
255
2,513
(233)
2,280
Business
acquisitions
and disposals
£m
254
(7)
247
Associates
and joint
ventures
£m
8
–
8
248
(1)
247
2,084
(233)
1,851
8
–
8
429
–
429
2012
Acquisitions
Human Genome Sciences, Inc.
On 3 August 2012, GSK completed the acquisition of 100% of the issued share capital of Human Genome Sciences, Inc. (HGS),
a US based biopharmaceutical company focused on the development of protein and anti-body drugs for the treatment of immuno-
inflammation diseases, for cash. The goodwill arising on the acquisition of this business reflected the potential business synergies
and realisation of the full value of Benlysta, albiglutide, darapladib and other assets by simplifying and optimising R&D, commercial
and manufacturing operations through complete ownership of the assets. The goodwill recognised is not expected to be deductible
for income tax purposes.
The results of the acquired business are reported as part of the US, Europe, Emerging Markets, Japan and Other trading and
unallocated costs operating segments. The transaction was accounted for using the acquisition accounting method.
The pro-forma turnover for the HGS business for the full year 2012 was £154 million. During 2012, GSK recorded turnover of
£69 million from HGS products. As the HGS products had been fully integrated into the GSK business, it was not practicable to
separately identify the impact of the acquisition on the Group profit for the year.
GSK Annual Report 2014 185
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
38 Acquisitions and disposals continued
Acquisition costs expensed in 2012 arising on this acquisition amounted to £28 million.
Net assets acquired
Intangible assets
Property, plant and equipment
Trade and other receivables
Other assets including cash and cash equivalents
Deferred tax asset
Trade and other liabilities
Goodwill
Cash consideration paid
Gain on settlement of pre-existing collaborations
Total consideration
Book value
£m
Fair value
adjustments
£m
Fair value
£m
–
21
33
431
–
(86)
399
–
399
1,249
10
–
83
156
(173)
1,325
791
2,116
1,249
31
33
514
156
(259)
1,724
791
2,515
2,282
233
2,515
Shionogi-ViiV Healthcare joint venture
On 29 October 2012, GSK acquired the 50% share of the Shionogi-ViiV Healthcare joint venture previously held by Shionogi & Co, Ltd.
The assets acquired included the investigational medicine dolutegravir and early stage integrase inhibitor compounds in development.
Total consideration comprised a 10% equity stake in ViiV Healthcare, GSK’s existing 50% investment in the joint venture and contingent
consideration payable in cash in the future, together with a deferred tax asset and a loss on settlement of pre-existing relationships.
The contingent consideration is payable based on a percentage of the future sales performance of compounds developed by the joint
venture, if they become marketed products, and so the total amount payable is unlimited.
The results of the acquired business are reported as part of ViiV Healthcare. The transaction was accounted for using the acquisition
accounting method.
Acquisition costs expensed in 2012 arising on this acquisition amounted to £2 million.
Net assets acquired
Intangible assets
Deferred tax provision
Negative goodwill
Consideration settled by shares in ViiV Healthcare
Contingent consideration
Deferred tax on contingent consideration
Fair value of investment in joint venture converted into subsidiary
Loss on settlement of pre-existing relationships
Total consideration
Book value
£m
Fair value
adjustments
£m
Fair value
£m
–
–
–
–
–
1,777
(628)
1,149
(124)
1,025
1,777
(628)
1,149
(124)
1,025
377
659
(236)
256
(31)
1,025
186 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
38 Acquisitions and disposals continued
Other acquisitions
During 2012, GSK completed two smaller acquisitions for cash. The total cash consideration paid of £206 million included £2 million of
cash acquired.
Net assets acquired
Intangible assets
Property, plant and equipment
Trade and other receivables
Other assets including cash and cash equivalents
Deferred tax provision
Trade and other liabilities
Goodwill
Cash consideration paid
Contingent consideration
Fair value of equity investment converted into subsidiary
Gain on settlement of pre-existing relationships
Total consideration
Book value
£m
Fair value
adjustments
£m
Fair value
£m
–
2
2
2
–
(8)
(2)
–
(2)
232
–
–
–
(14)
4
222
82
304
232
2
2
2
(14)
(4)
220
82
302
206
37
23
36
302
If the other acquisitions had been made at the beginning of the year, it is estimated that Group turnover would have increased by
£27 million for the year. As some of the acquisitions had been fully integrated into the GSK business it was not practicable to separately
identify the impact of the acquisitions on the Group profit for the year.
The goodwill arising on the acquisitions reflects the potential for business synergies and further sales growth through the increase
in GSK’s market presence following the acquisitions of these market participants. None of the goodwill recognised is expected to be
deductible for income tax purposes.
The results of the acquisitions are reported as part of the Europe Pharma and Research & Development reportable operating segments.
The Group recognised a settlement gain of £36 million as a result of measuring at fair value relationships that had existed prior to the
acquisition date. The gain was recognised in Other operating income on the income statement.
Acquisition costs expensed in 2012 arising on other acquisitions totalled £9 million.
Investments in associates and joint ventures
GSK made cash contributions of £39 million into the Shionogi-ViiV Healthcare joint venture prior to its acquisition as a subsidiary and
made cash investments of £19 million into a new joint venture in which the Group held a share of 50%. GSK also made cash investments
of £41 million into associates.
Cash flows
Cash consideration paid
Cash and cash equivalents acquired
Cash consideration paid, net of cash acquired
Total cash consideration payable, net of cash acquired
Contingent consideration
Cash consideration paid, net of cash acquired
Human
Genome
Sciences
£m
2,282
(251)
2,031
2,031
–
2,031
Shionogi-
ViiV joint
venture
£m
–
–
–
659
(659)
–
Other
acquisitions
£m
206
(2)
204
Total
business
acquisitions
£m
2,488
(253)
2,235
Associates
and joint
ventures
£m
99
–
99
241
(37)
204
2,931
(696)
2,235
99
–
99
Total
£m
2,587
(253)
2,334
3,030
(696)
2,334
GSK Annual Report 2014 187
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
39 Non-controlling interests
The Group has one subgroup that has material non-controlling interests, ViiV Healthcare Limited and its subsidiaries. The ViiV
Healthcare group is focused on the research, development and worldwide commercialisation of HIV medicines. Summarised financial
information in respect of the ViiV Healthcare group is set out below:
Turnover
(Loss)/profit after taxation
Other comprehensive income/(expense)
Total comprehensive (expense)/income
Total comprehensive (expense)/income for the year attributable to non-controlling interests
Dividends paid to non-controlling interests
Non-current assets
Current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Non-controlling interests attributable to the subgroup
Net cash inflow from operating activities
Net cash outflow from investing activities
Net cash outflow from financing activities
Increase/(decrease) in cash and bank overdrafts in the year
2012
£m
1,337
492
(12)
480
(4)
51
2014
£m
1,466
(606)
8
(598)
(16)
120
2014
£m
2,245
1,308
3,553
(815)
(3,253)
(4,068)
(515)
2013
£m
1,371
190
(9)
181
76
106
2013
£m
2,273
997
3,270
(463)
(2,253 )
(2,716)
554
374
530
2014
£m
765
(25)
(540)
200
2013
£m
637
(27)
(662)
(52)
2012
£m
620
(31)
(350)
239
The above financial information relates to the ViiV Healthcare group on a stand-alone basis, before the impact of Group-related
adjustments. The loss after taxation of £606 million (2013 – profit after taxation of £190 million) is stated after a charge of £768 million
(2013 – £253 million) for remeasurement of the contingent consideration payable for the acquisition of the former Shionogi-ViiV
Healthcare joint venture. This consideration is expected to be paid over a number of years and will vary in line with sales of products
that contain dolutegravir.
Acquisitions of non-controlling interests
On 20 March 2014, GSK increased its shareholding in GlaxoSmithKline Pharmaceuticals Limited, its pharmaceuticals subsidiary
in India, from 50.7% to 75% (representing an increase in shares held of 20,609,774 at a price of INR 3,100 per share) for £625 million.
The carrying amount of non-controlling interests acquired was £61 million. On 5 February 2013, GSK increased its shareholding in
GlaxoSmithKline Consumer Healthcare Ltd (India) from 43.2% to 72.5% for £588 million.
188 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 40 Commitments
Contractual obligations and commitments
Contracted for but not provided in the financial statements:
Intangible assets
Property, plant and equipment
Investments
Purchase commitments
Pensions
Other commitments
Interest on loans
Finance lease charges
2014
£m
2013
£m
7,079
359
100
428
425
186
9,744
6
18,327
7,056
443
111
614
510
233
10,063
7
19,037
The commitments related to intangible assets include milestone payments, which are dependent on successful clinical development
or on meeting specified sales targets, and which represent the maximum that would be paid if all milestones, however unlikely, are
achieved. The amounts are not risk-adjusted or discounted. A number of commitments were made in 2014 under licensing and other
agreements, including an arrangement with Adaptimmune Ltd. These new arrangements were offset by reduced commitments due
on prior year transactions including amendments to the agreement with Prosensa N.V.
In 2013, GSK reached an agreement with the trustees of the UK pension schemes to make additional contributions to eliminate the
pension deficit identified at the 31 December 2011 actuarial funding valuation. A payment of £85 million is due in 2015. Future
payments will be based on the deficit position of the scheme, up to a maximum of £340 million. The table above includes this
commitment, but excludes the normal ongoing annual funding requirement in the UK of approximately £100 million.
The Group also has other commitments which principally relate to revenue payments to be made under licences and other alliances.
Commitments in respect of future interest payable on loans are disclosed before taking into account the effect of interest rate swaps.
Commitments under non-cancellable operating leases are disclosed below. £310 million (2013 – £322 million) is provided against
these commitments on the Group’s balance sheet.
Commitments under non-cancellable operating leases
Rental payments due within one year
Rental payments due between one and two years
Rental payments due between two and three years
Rental payments due between three and four years
Rental payments due between four and five years
Rental payments due after five years
Total commitments under non-cancellable operating leases
2014
£m
138
91
73
54
48
297
701
2013
£m
134
97
73
58
52
363
777
GSK Annual Report 2014 189
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
41 Financial instruments and related
disclosures
GSK reports in Sterling and pays dividends out of Sterling profits.
The role of Corporate Treasury is to monitor and manage the
external and internal funding requirements and financial risks in
support of the strategic objectives. GSK operates on a global
basis, primarily through subsidiary companies and manages its
capital to ensure that subsidiaries are able to operate as going
concerns and to optimise returns to shareholders through an
appropriate balance of debt and equity. Treasury activities are
governed by policies approved by the Board of Directors, most
recently on 9 July 2014.
A Treasury Management Group (TMG) meeting, chaired by the
Chief Financial Officer, takes place on a monthly basis to review
treasury activities. Its members receive management information
relating to these activities. Internal audit reviews the Treasury
internal control environment regularly.
GSK uses a variety of financial instruments to finance its
operations and derivative financial instruments to manage
market risks from these operations. These derivatives, principally
comprising forward foreign currency contracts, foreign exchange
options and interest rate swaps, are used to swap borrowings and
liquid assets into currencies required for Group purposes and to
manage exposure to financial risks from changes in foreign
exchange rates and interest rates.
GSK does not hold or issue derivatives for speculative purposes
and the Treasury policies specifically prohibit such activity. All
transactions in financial instruments are undertaken to manage
the risks arising from underlying business activities, not for
speculation.
Capital management
GSK’s financial strategy supports the Group’s strategic priorities
and is regularly reviewed by the Board. GSK manages the capital
structure of the Group through an appropriate mix of debt and
equity. GSK’s financial architecture is designed to ensure we are
maximising the returns from our sales. There are four key priorities:
sustainable sales growth, operating leverage, financial efficiency
and converting more of our earnings into cash. The free cash flow
generated can then be returned to shareholders or reinvested in
the business, wherever the returns look most attractive.
GSK’s capital allocation decisions are rigorously benchmarked
using a Cash Flow Return on Investment framework.
Free cash flow conversion improved to 101% of earnings excluding
after-tax legal charges and legal settlements in 2014 from 84%
in 2013. However free cash flow was lower in 2014 at £2.6 billion
compared to £4.7 billion in 2013. This reflected the impact of
the strength of Sterling and lower profits, including the impact of
divestments. As a consequence of this, as well as £0.7 billion paid
to increase the shareholding in the Group’s Indian pharmaceutical
subsidiary from 50.7% to 75% and for the acquisition of the
remaining 30% of GSK’s Indonesian Consumer Healthcare
business held by a third party, GSK’s net debt increased from
£12.6 billion at 31 December 2013 to £14.4 billion at 31
December 2014.
The capital structure of the Group consists of net debt of
£14.4 billion (see Note 32, ‘Net debt’) and shareholders’ equity of
£4.3 billion (see ‘Consolidated statement of changes in equity’ on
page 138). Total capital, including that provided by non-controlling
interests, is £19.3 billion.
GSK’s long-term credit rating with Moody’s Investors Service
(‘Moody’s’) is A2 (stable outlook). Standard and Poor’s rate GSK
as A+ (stable outlook). The Group’s short-term credit ratings are
A-1 and P-1 with Standard and Poor’s and Moody’s respectively.
Liquidity risk
GSK’s policy is to borrow centrally in order to meet anticipated
funding requirements. The cash flow forecast and funding
requirements are monitored by the TMG on a monthly basis.
The strategy is to diversify liquidity sources using a range of
facilities and to maintain broad access to funding markets.
At 31 December 2014, GSK had £2.9 billion of borrowings
repayable within one year and held £4.4 billion of cash and cash
equivalents and liquid investments of which £2.0 billion was held
centrally. GSK also has access to short-term finance under a
$10 billion (£6.4 billion) US commercial paper programme and
$1.0 billion (£0.7 billion) was in issue under this programme at
31 December 2014. GSK has £1.9 billion five year committed
medium-term facilities and $2.5 billion (£1.6 billion) of 364 day
committed facilities. These facilities were put in place in
September 2012 and September 2014 respectively and were
undrawn at 31 December 2014. GSK considers this level of
committed facilities to be adequate given current liquidity
requirements.
GSK has a £15 billion European Medium Term Note programme
and at 31 December 2014, £8.9 billion of notes were in issue
under this programme. The Group also has a US shelf registration
statement and at 31 December 2014, had $14.0 billion
(£9.0 billion) of notes in issue under this programme. GSK’s
long-term borrowings mature at dates between 2016 and 2045.
Each day, GSK sweeps cash from a number of global subsidiaries
to central Treasury accounts for liquidity management purposes.
Market risk
Interest rate risk management
GSK’s objective is to minimise the effective net interest cost and
to balance the mix of debt at fixed and floating interest rates over
time. The policy on interest rate risk management limits the amount
of floating interest payments to a prescribed percentage of
operating profit.
GSK used interest rate swaps to redenominate one of its fixed
rate bonds that matured in 2014 into floating interest rates.
The duration of these swaps matched the duration of the principal
instrument. These interest rate derivative instruments were
accounted for as fair value hedges of the relevant liability.
Foreign exchange risk management
Foreign currency transaction exposures arising on internal and
external trade flows are not generally hedged. The Group’s
objective is to minimise the exposure of overseas operating
subsidiaries to transaction risk by matching local currency income
with local currency costs where possible. GSK’s internal trading
transactions are matched centrally and inter-company payment
terms are managed to reduce foreign currency risk. Foreign
currency cash flows can be hedged selectively under the
management of Treasury and the TMG. These include hedges
of the foreign exchange risk arising from acquisitions and
disposals of assets.
190 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
GSK actively manages its exposure to credit risk, reducing surplus
cash balances wherever possible. This is part of the Treasury
strategy to regionalise cash management and to concentrate cash
centrally as much as possible. GSK has continued to maintain its
conservative approach to counterparty risk throughout the period.
The table below sets out the credit exposure to counterparties by
rating for liquid investments, cash and cash equivalents and
derivatives. The gross asset position on each derivative contract is
considered for the purpose of this table, although, under ISDA
agreements, the amount at risk is the net position with each
counterparty. Table (e) on page 197 sets out the Group’s financial
assets and liabilities on an offset basis.
The £1.5 billion of bank balances and deposits invested in Aa3/
AA- rated counterparties at 31 December 2014 is significantly
lower than the equivalent at 31 December 2013 as a result of the
disposal proceeds received at the end of December 2013.
Compared to last year, there is a significantly higher amount of bank
balances and deposits held with A3/A- rated counterparties as a
result of GSK’s increased bank balances and deposits held with
Deutsche Bank (as a result of introducing more countries into the
European cash pool), which was downgraded to A3/A- during 2014.
The £116 million of cash held with Baa3/BBB- rated counterparties
includes bank balances or deposits with HDFC Bank, State Bank
of India, Halk Bank and Emirates Bank. These counterparties are
used either for local cash management purposes or for local
investment purposes where GSK is not the sole shareholder.
The £1 million held with a Ba1/BB+ rated counterparty relates
to Islandsbanki, which is used for cash management purposes
in Iceland, and the £3 million of cash held with a Ba2/BB rated
counterparty relates to GSK’s bank balances and deposits held
with Banque Marocaine du Commerce Extérieur.
41 Financial instruments and related
disclosures continued
Where possible, GSK manages the cash surpluses or borrowing
requirements of subsidiary companies centrally using forward
contracts to hedge future repayments back into the originating
currency. In order to reduce foreign currency translation exposure,
the Group seeks to denominate borrowings in the currencies of the
principal assets and cash flows. These are primarily denominated
in US dollars, Euros and Sterling. Certain borrowings can be
swapped into other currencies as required. Borrowings
denominated in, or swapped into, foreign currencies that match
investments in Group overseas assets may be treated as a hedge
against the relevant assets. Forward contracts in major currencies
are also used to reduce exposure to the Group’s investment in
overseas assets (see ‘Net investment hedges’ section of this note
for further details). The TMG reviews the ratio of borrowings to
assets for major currencies monthly.
Credit risk
The Group considers its maximum credit risk at 31 December
2014 to be £9,054 million (31 December 2013 – £10,922 million)
which is the total of the Group’s financial assets with the exception
of ’Other investments’ (comprising equity investments) which bear
equity risk rather than credit risk. See page 193 for details on the
Group’s total financial assets. At 31 December 2014, GSK’s
greatest concentration of credit risk was £0.9 billion (2013 –
£2.6 billion) with HSBC (Aa3/AA-).
Treasury-related credit risk
GSK sets global counterparty limits for each of GSK’s banking and
investment counterparties based on long-term credit ratings from
Moody’s and Standard and Poor’s. Corporate Treasury’s usage of
these limits is monitored daily by a Corporate Compliance Officer
(CCO) who operates independently of Corporate Treasury. Any
breach of these limits would be reported to the CFO immediately.
The CCO also monitors the credit rating of these counterparties
and, when changes in ratings occur, notifies Corporate Treasury so
that changes can be made to investment levels or to authority limits
as appropriate. In addition, relationship banks and their credit ratings
are reviewed regularly and a report is presented annually to the TMG
for approval.
2014
Bank balances and deposits
US Treasury and Treasury repo
only money market funds
Government securities
3rd party financial derivatives
Total
2013
Bank balances and deposits
US Treasury and Treasury repo
only money market funds
Corporate debt instruments
Government securities
3rd party financial derivatives
Total
Aa1/AA+
£m
–
Aa3/AA-
£m
1,514
A1/A+
£m
606
811
69
–
880
–
–
45
1,559
–
–
44
650
Aa1/AA+
£m
–
Aa3/AA-
£m
2,823
A1/A+
£m
637
A2/A
£m
848
–
–
19
867
A2/A
£m
967
A3/A-
£m
438
Baa1/BBB+
£m
1
Baa3/BBB-
£m
116
Ba1/BB+
£m
1
Ba2/BB
£m
3
Unrated
–
–
–
26
464
–
–
4
5
–
–
–
116
–
–
–
1
–
–
–
3
–
–
–
–
A3/A-
£m
48
Baa1/BBB+
£m
8
Baa3/BBB-
£m
157
Ba1/BB+
£m
–
Ba2/BB
£m
–
Unrated
1
893
–
64
–
957
–
1
–
66
2,890
–
–
–
11
648
–
–
–
54
1,021
–
–
–
17
65
–
–
–
–
8
–
–
–
–
157
–
–
–
–
–
–
–
1
–
1
–
–
–
–
1
Total
£m
3,527
811
69
138
4,545
Total
£m
4,641
893
1
65
148
5,748
The credit ratings in the above tables are as assigned by Moody’s and Standard and Poor’s respectively. Where the opinion of the two rating
agencies differ, GSK assigns the lower rating of the two to the counterparty. Where local rating agency data is the only source available, the
ratings are converted to global ratings equivalent to those of Moody’s or Standard and Poor’s using published conversion tables.
GSK Annual Report 2014 191
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
41 Financial instruments and related
disclosures continued
GSK’s centrally managed cash reserves amounted to £2.0 billion
at 31 December 2014, all available within 3 months. This excludes
£0.8 billion centrally managed cash held by ViiV Healthcare,
a 78.3% owned subsidiary. The Group has invested centrally
managed liquid assets in bank deposits and Aaa/AAA rated US
Treasury and Treasury repo only money market funds (which bear
credit exposure to the US Government (Aaa/AA+ rated)).
Wholesale and retail credit risk
Outside the USA, no customer accounts for more than 5% of the
Group’s trade receivables balance.
In the USA, in line with other pharmaceutical companies, the
Group sells its products through a small number of wholesalers
in addition to hospitals, pharmacies, physicians and other groups.
Sales to the three largest wholesalers amount to approximately
83% of the turnover of the US Pharmaceuticals and Vaccines
segment and the US elements of the ViiV Healthcare and
Established Products segments. At 31 December 2014, the Group
had trade receivables due from these three wholesalers totalling
£908 million (2013 – £835 million). The Group is exposed to a
concentration of credit risk in respect of these wholesalers such
that, if one or more of them encounters financial difficulty, it could
materially and adversely affect the Group’s financial results.
The Group’s credit risk monitoring activities relating to these
wholesalers include a review of their quarterly financial information
and Standard & Poor’s credit ratings, development of GSK internal
risk ratings, and establishment and periodic review of credit limits.
However, the Group believes there is no further credit risk
provision required in excess of the normal provision for bad and
doubtful debts (see Note 24, ‘Trade and other receivables’).
The following methods and assumptions were used to estimate
the fair values:
• Cash and cash equivalents – approximates to the carrying amount
• Liquid investments – based on quoted market prices or
calculated based on observable inputs in the case of marketable
securities; based on principal amounts in the case of non-
marketable securities because of their short repricing periods
• Other investments – equity investments traded in an active
market determined by reference to the relevant stock exchange
quoted bid price; other equity investments determined by
reference to the current market value of similar instruments or
by reference to the discounted cash flows of the underlying net
assets
• Short-term loans, overdrafts and commercial paper –
approximates to the carrying amount because of the short
maturity of these instruments
• Long-term loans – based on quoted market prices in the case
of European and US Medium term notes and other fixed rate
borrowings (a level 1 fair value measurement); approximates to
the carrying amount in the case of floating rate bank loans and
other loans
• Contingent consideration for business acquisitions after
1 January 2010 – based on present values of expected future
cash flows
• Interest rate swaps, foreign exchange forward contracts and
options – based on the present value of contractual cash flows
or option valuation models using market sourced data (exchange
rates or interest rates) at the balance sheet date
• Receivables and payables – approximates to the carrying
amount
Fair value of financial assets and liabilities
The table on page 193 presents the carrying amounts and the
fair values of the Group’s financial assets and liabilities at
31 December 2014 and 31 December 2013.
• Company-owned life insurance policies – based on cash
surrender value
• Lease obligations – approximates to the carrying amount.
The fair values of the financial assets and liabilities are included at
the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at
the measurement date.
Fair value of investments in GSK shares
At 31 December 2014, the Employee Share Ownership Plan
(ESOP) Trusts held GSK shares with a carrying value of
£151 million (2013 – £355 million) and a fair value of £726 million
(2013 – £1,025 million) based on quoted market price. The
shares represent purchases by the ESOP Trusts to satisfy future
exercises of options and awards under employee incentive
schemes. In 2014, Treasury shares with a fair value of £150 million
were transferred into the UK ESOP Trust to satisfy future awards
under the shareholder approved Performance Share Plan
(see Note 42, ‘Employee share schemes’). The carrying value,
which is the lower of cost or expected proceeds, of these
shares has been recognised as a deduction from other reserves.
At 31 December 2014, GSK held Treasury shares at a cost of
£6,917 million (2013 – £6,829 million) which has been deducted
from retained earnings.
192 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 41 Financial instruments and related disclosures continued
Cash and cash equivalents
Available-for-sale investments:
Liquid investments:
– Government bonds
– other
Total liquid investments
Other investments
Loans and receivables:
Trade and other receivables and certain Other non-current
assets in scope of IAS 39
Financial assets at fair value through profit or loss:
Other non-current assets in scope of IAS 39
Derivatives designated as at fair value through profit or loss
Derivatives classified as held for trading under IAS 39
Total financial assets
Financial liabilities measured at amortised cost:
Borrowings excluding obligations under finance leases:
– bonds in a designated hedging relationship
– other bonds
– bank loans and overdrafts
– commercial paper
Total borrowings excluding obligations under finance leases
Obligations under finance leases
Total borrowings
Trade and other payables, Other provisions and certain
Other non-current liabilities in scope of IAS 39
Financial liabilities at fair value through profit or loss:
Trade and other payables, Other provisions and certain
Other non-current liabilities in scope of IAS 39
Derivatives designated as at fair value through profit or loss
Derivatives classified as held for trading under IAS 39
Total financial liabilities
Carrying
value
£m
4,338
69
–
69
1,114
2014
Fair
value
£m
4,338
69
–
69
1,114
Carrying
value
£m
5,534
65
1
66
1,202
2013
Fair
value
£m
5,534
65
1
66
1,202
4,232
4,232
4,932
4,932
269
76
70
10,168
269
76
70
10,168
234
76
80
12,124
234
76
80
12,124
(4,124)
(13,540)
(379)
(656)
(18,699)
(85)
(18,784)
(4,349)
(15,706)
(379)
(656)
(21,090)
(85)
(21,175)
(3,288)
(13,034)
(352)
(1,491)
(18,165)
(80)
(18,245)
(3,531)
(14,163)
(352)
(1,491)
(19,537)
(80)
(19,617)
(7,566)
(7,566)
(7,989)
(7,989)
Notes
e
a
a
b
a,b
a,d,e
a,d,e
d
e
f
c
a,c
a,d,e
a,d,e
(1,724)
(3)
(410)
(28,487)
(1,724)
(3)
(410)
(30,878)
(961)
(5)
(125)
(27,325)
(961)
(5)
(125)
(28,697)
Net financial assets and financial liabilities
(18,319)
(20,710)
(15,201)
(16,573)
The valuation methodology used to measure fair value in the above table is described and categorised on page 192. Trade and other
receivables, Other non-current assets, Trade and other payables, Other provisions and Other non-current liabilities are reconciled to
the relevant Notes on page 195.
GSK Annual Report 2014 193
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
41 Financial instruments and related disclosures continued
(a) Financial instruments held at fair value
The following tables categorise the Group’s financial assets and liabilities held at fair value by the valuation methodology applied in
determining their fair value. Where possible, quoted prices in active markets are used (Level 1). Where such prices are not available,
the asset or liability is classified as Level 2, provided all significant inputs to the valuation model used are based on observable market
data. If one or more of the significant inputs to the valuation model is not based on observable market data, the instrument is classified as
Level 3. Other investments classified as Level 3 in the tables below comprise equity investments in unlisted entities with which the Group
has entered into research collaborations and also investments in emerging life science companies. Trade and other payables and Other
non-current liabilities classified as level 3 comprise contingent consideration for business acquisitions.
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
At 31 December 2014
Financial assets at fair value
Available–for–sale financial assets:
Liquid investments
Other investments
Financial assets at fair value through profit or loss:
Other non-current assets
Derivatives designated as at fair value through profit or loss
Derivatives classified as held for trading under IAS 39
Financial liabilities at fair value
Financial liabilities at fair value through profit or loss:
Trade and other payables
Other non-current liabilities
Derivatives designated as at fair value through profit or loss
Derivatives classified as held for trading under IAS 39
At 31 December 2013
Financial assets at fair value
Available–for–sale financial assets:
Liquid investments
Other investments
Financial assets at fair value through profit or loss:
Other non-current assets
Derivatives designated as at fair value through profit or loss
Derivatives classified as held for trading under IAS 39
Financial liabilities at fair value
Financial liabilities at fair value through profit or loss:
Trade and other payables
Other non-current liabilities
Derivatives designated as at fair value through profit or loss
Derivatives classified as held for trading under IAS 39
67
892
–
–
–
959
–
–
–
–
–
2
–
264
76
69
411
–
–
(3)
(402)
(405)
Level 1
£m
Level 2
£m
65
1,000
–
–
–
1,065
–
–
–
–
–
1
–
232
76
79
388
–
–
(5)
(124)
(129)
–
222
5
–
1
228
(105)
(1,619)
–
(8)
(1,732)
Level 3
£m
–
202
2
–
1
205
(3)
(958)
–
(1)
(962)
2014
£m
(757)
(775)
155
–
7
55
(153)
(47)
11
(1,504)
69
1,114
269
76
70
1,598
(105)
(1,619)
(3)
(410)
(2,137)
Total
£m
66
1,202
234
76
80
1,658
(3)
(958)
(5)
(125)
(1,091)
2013
£m
(512)
(262)
2
(1)
–
45
(10)
(17)
(2)
(757)
Movements in the year for financial instruments measured using Level 3 valuation methods are presented below:
At 1 January
Net losses recognised in the income statement
Net gains recognised in other comprehensive income
Contingent consideration liabilities for businesses acquired during the year
Payment of contingent consideration liabilities
Additions
Disposals
Transfers from Level 3
Exchange
At 31 December
Net losses of £775 million (2013 – £251 million) attributable to Level 3 financial instruments held at the end of the year were reported in
Other operating income, of which £768 million (2013 – £253 million) arose from remeasurement of the contingent consideration payable for
the acquisition of the former Shionogi-ViiV Healthcare joint venture. Net gains of £nil (2013 – £1 million) were reported in Selling, general
and administration. Net gains attributable to Level 3 equity investments reported in Other comprehensive income as Fair value movements
on available-for-sale investments included £32 million (2013 – £nil) in respect of equity investments held at the end of the year.
194 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 41 Financial instruments and related disclosures continued
The net liability position of £1,504 million (2013 – £757 million) in respect of financial instruments measured using Level 3 valuation
methods at 31 December includes £1,684 million (2013 – £923 million) in respect of contingent consideration payable for the
acquisition in 2012 of the former Shionogi-ViiV Healthcare joint venture. This consideration is expected to be paid over a number of
years and will vary in line with sales of products that contain dolutegravir. Regulatory approval for this product was obtained in the USA
and Canada during 2013 and in the European Union in 2014. The table below shows on an indicative basis the income statement and
balance sheet sensitivity to reasonably possible changes in key inputs to the valuation of this liability.
Increase/(decrease) in financial liability and loss/(gain) in Income statement from change in key inputs
10% increase in sales forecasts
10% decrease in sales forecasts
1% increase in market interest rates
1% decrease in market interest rates
2014
£m
186
(187)
(82)
88
(b) Trade and other receivables and Other non-current assets in scope of IAS 39
The following table reconciles financial instruments within Trade and other receivables and Other non-current assets which fall within
the scope of IAS 39 to the relevant balance sheet amounts. The financial assets are predominantly non-interest earning. Financial
instruments within the Other non-current assets balance include company-owned life insurance policies. Non-financial instruments
includes tax receivables, pension surplus balances and prepayments, which are outside the scope of IAS 39.
At fair value
through
profit or loss
£m
Loans and
receivables
£m
Financial
instruments
£m
Non-
financial
instruments
£m
2014
Total
£m
At fair value
through
profit or loss
£m
Loans and
receivables
£m
Financial
instruments
£m
Non-
financial
instruments
£m
2013
Total
£m
Trade and other receivables
(Note 24)
Other non-current assets
(Note 22)
–
3,921
3,921
679
4,600
–
4,664
4,664
778
5,442
269
269
311
4,232
580
4,501
155
834
735
5,335
234
234
268
4,932
502
5,166
387
889
1,165
6,331
The following table shows the age of such financial assets which are past due and for which no provision for bad or doubtful debts has
been made:
Past due by 1–30 days
Past due by 31–90 days
Past due by 91–180 days
Past due by 181–365 days
Past due by more than 365 days
2014
£m
116
130
110
67
41
464
2013
£m
142
152
89
64
79
526
Amounts past due by greater than 90 days and for which no provision for bad or doubtful debts has been made total £218 million
(2013 – £232 million). Of this balance, £45 million (2013 – £133 million) relates to receivables due from state hospital authorities in
Greece, Ireland, Italy, Portugal and Spain. The total receivables due from state hospital authorities in these countries (current and
past due, net of provisions) is £134 million (2013 – £262 million).
(c) Trade and other payables, Other provisions and Other non-current liabilities in scope of IAS 39
The following table reconciles financial instruments within Trade and other payables, Other provisions and Other non-current liabilities
which fall within the scope of IAS 39 to the relevant balance sheet amounts. The financial liabilities are predominantly non-interest
bearing. Accrued wages and salaries are included within financial liabilities. Non-financial instruments includes payments on account,
tax and social security payables and provisions which do not arise from contractual obligations to deliver cash or another financial asset,
which are outside the scope of IAS 39.
At fair value
through
profit or loss
£m
Other
liabilities
£m
Financial
instruments
£m
Non-
financial
instruments
£m
2014
Total
£m
At fair value
through
profit or loss
£m
Other
liabilities
£m
Financial
instruments
£m
Non-
financial
instruments
£m
2013
Total
£m
(105
)
(7,345)
(7,450)
(508)
(7,958)
(3
)
(7,798
)
(7,801
)
(516
)
(8,317
)
–
(158
)
(158
)
(1,432)
(1,590)
–
(148
)
(148
)
(1,396
)
(1,544
)
(1,619
)
(1,724)
(63)
(7,566)
(1,682)
(9,290)
(719)
(2,401)
(2,659) (11,949)
(958
)
(961)
(43
)
(7,989)
(1,001
)
(8,950)
)
(703
(1,704
)
(2,615) (11,565)
Trade and other payables
(Note 27)
Other provisions
(Note 29)
Other non-current liabilities
(Note 30)
GSK Annual Report 2014 195
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
41 Financial instruments and related disclosures continued
(d) Derivative financial instruments and hedging programmes
The following table sets out the fair values of derivatives held by GSK.
Fair value hedges – Interest rate swaps
(principal amount – £nil (2013 – £904 million))
Net investment hedges – Foreign exchange contracts
(principal amount – £5,365 million (2013 – £7,221 million))
Cash flow hedges – Foreign exchange contracts
(principal amount – £133 million (2013 – £92 million))
Derivatives designated as at fair value through profit or loss
Foreign exchange contracts
(principal amount – £15,851 million (2013 – £11,651 million))
Embedded and other derivatives
Derivatives classified as held for trading under IAS 39
Total derivative instruments
Analysed as:
Current
Non-current
Total
2014
Fair value
Liabilities
£m
Assets
£m
2013
Fair value
Liabilities
£m
Assets
£m
–
74
2
76
68
2
70
146
146
–
146
–
(1)
(2)
(3)
(399)
(11)
(410)
(413)
(404)
(9)
(413)
18
58
–
76
74
6
80
156
155
1
156
–
(1)
(4)
(5)
(120)
(5)
(125)
(130)
(127)
(3)
(130)
Foreign exchange contracts classified as held for trading under IAS 39
The principal amount on foreign exchange contracts is the absolute total of outstanding positions at the balance sheet date. The Group’s
foreign exchange contracts are for periods of 12 months or less. At 31 December 2014, the Group held outstanding foreign exchange
contracts with a net liability fair value of £331 million (£68 million asset less £399 million liability). At December 2013, the fair value was
£46 million net liability (£74 million asset less £120 million liability).
Following announcement of the proposed Novartis transaction, GSK entered into a number of forward exchange contracts to protect the
Sterling value of the net US Dollar proceeds due to the Group on completion of the transaction. At 31 December 2014 these contracts
were in a loss position and resulted in a liability of £264 million and the recognition of an unrealised loss in the year of £299 million. If
these contracts remain in a loss position on maturity, that loss will partly offset the gain in the expected Sterling value of the proceeds
that will be received by the Group as a result of favourable exchange movements since the inception of the forward contracts. If, on
maturity, the contracts are in a gain position, the gains will partly offset losses in the Sterling value of the proceeds that will be received
by the Group as a result of unfavourable exchange movements since the inception of the forward contracts.
The rest of the increase in the liability has been due to additional hedging of inter-company loans and deposits, external debt and legal
provisions that are not designated as accounting hedges. Fair value movements are taken to the income statement in the period to offset
the exchange gains and losses on the related inter-company lending and borrowing, external debt and legal provisions.
Fair value hedges
The Group had designated a series of interest rate swaps as a fair value hedge. The risk being hedged was the variability of the fair value
of the bond arising from interest rate fluctuations. Gains and losses on fair value hedges are disclosed in Note 12, ‘Finance expense’.
Both the bond and the swaps matured in April 2014. In 2013, the carrying value of bonds in that designated fair value hedging
relationship was £919 million.
Net investment hedges
During the year, certain foreign exchange contracts were designated as net investment hedges in respect of the foreign currency
translation risk arising on consolidation of the Group’s net investment in its European (Euro) and Japanese (Yen) foreign operations as
shown in the table above.
The carrying value of bonds in a designated hedging relationship on page 193 includes £4,124 million (2013 – £2,369 million) that is
designated a hedging instrument in a net investment hedge relationship.
Cash flow hedges
During 2014, the Group continued entering into forward foreign exchange contracts which it designated as cash flow hedges of its
foreign exchange exposure arising on Euro and US dollar denominated coupon payments relating to the Group’s European and US
medium term notes. This is a continuation of the initial hedging put in place in 2013.
In addition, the Group carries a balance in reserves that arose from pre-hedging fluctuations in long-term interest rates when pricing
bonds issued during the year as disclosed in Note 32. Hedging transactions of this nature have been carried out during 2014 and 2013.
The balance is reclassified to finance costs over the life of these bonds.
196 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 41 Financial instruments and related disclosures continued
(e) Offsetting of financial assets and liabilities
The following tables set out the financial assets and financial liabilities which are subject to offsetting, enforceable master netting
arrangements and similar agreements. Amounts which are set off against financial assets and liabilities in the Group’s balance sheet are
set out below. For Trade and other receivables, Trade and other payables, Derivative financial assets and Derivative financial liabilities,
amounts not offset in the balance sheet but which could be offset under certain circumstances are also set out.
At 31 December 2014
Trade and other receivables
Derivative financial assets
Cash and cash equivalents
Trade and other payables
Derivative financial liabilities
Bank loans and overdrafts
At 31 December 2013
Trade and other receivables
Derivative financial assets
Cash and cash equivalents
Trade and other payables
Derivative financial liabilities
Bank loans and overdrafts
Gross
financial
assets/
(liabilities)
£m
3,926
146
Gross
financial
(liabilities)/
assets
set off
£m
(5)
–
Net financial
assets/
(liabilities)
per balance
sheet
£m
3,921
146
Related
amounts not
set off in the
balance sheet
£m
(22)
(134)
Net
£m
3,899
12
4,570
8,642
(7,455)
(413)
(611)
(8,479)
Gross
financial
assets/
(liabilities)
£m
4,698
156
6,039
10,893
(7,835)
(130)
(857)
(8,822)
(232)
(237)
5
–
232
237
4,338
8,405
(7,450)
(413)
(379)
(8,242)
22
134
(7,428)
(279)
Gross
financial
(liabilities)/
assets
set off
£m
(34)
–
Net financial
assets/
(liabilities)
per balance
sheet
£m
4,664
156
Related
amounts not
set off in the
balance sheet
£m
(25)
(96)
Net
£m
4,639
60
(505)
(539)
34
–
505
539
5,534
10,354
(7,801)
(130)
(352)
(8,283)
25
96
(7,776)
(34)
The gross financial assets and liabilities set off in the balance sheet primarily relate to cash pooling arrangements with banks. Amounts
which do not meet the criteria for offsetting on the balance sheet but could be settled net in certain circumstances principally relate to
derivative transactions under ISDA (International Swaps and Derivatives Association) agreements where each party has the option to
settle amounts on a net basis in the event of default of the other party.
GSK Annual Report 2014 197
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
41 Financial instruments and related disclosures continued
(f) Debt interest rate repricing table
The following table sets out the exposure of the Group to interest rates on debt, including commercial paper, before and after the effect
of interest rate swaps. The maturity analysis of fixed rate debt is stated by contractual maturity and of floating rate debt by interest rate
repricing dates. For the purpose of this table, debt is defined as all classes of borrowings other than obligations under finance leases.
Floating and fixed rate debt less than one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
Between five and ten years
Greater than ten years
Total
Original issuance profile:
Fixed rate interest
Floating rate interest
Total interest bearing
Non-interest bearing
Effect of
interest
rate swaps
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
Debt
£m
(2,915)
(800)
(2,244)
(1,760)
(1,154)
(2,827)
(6,999)
(18,699)
(17,665)
(1,033)
(18,698)
(1)
(18,699)
2014
Total
£m
(2,915)
(800)
(2,244)
(1,760)
(1,154)
(2,827)
(6,999)
(18,699)
(17,665)
(1,033)
(18,698)
(1)
(18,699)
Effect of
interest
rate swaps
£m
–
–
–
–
–
–
–
–
919
(919)
–
–
–
Debt
£m
(2,762)
(1,932)
(751)
(2,237)
(1,653)
(1,936)
(6,894)
(18,165)
(16,432)
(1,732)
(18,164)
(1)
(18,165)
2013
Total
£m
(2,762)
(1,932)
(751)
(2,237)
(1,653)
(1,936)
(6,894)
(18,165)
(15,513)
(2,651)
(18,164)
(1)
(18,165)
The Group no longer holds interest rate swaps, designated as fair value hedges, to convert fixed rate debt into floating. In 2013,
£919 million of fixed rate debt with a maturity of less than one year were hedged in this manner.
(g) Sensitivity analysis
Foreign exchange and interest rate sensitivity analysis has been prepared on the assumption that the amount of net debt, the ratio of
fixed to floating interest rates of the debt and derivatives portfolio and the proportion of financial instruments in foreign currencies are all
constant and on the basis of the hedge designations as at 31 December. Financial instruments affected by market risk include cash and
cash equivalents, borrowings, trade receivables and payables and derivative financial instruments.
The following analyses are intended to illustrate the sensitivity of such financial instruments to changes in foreign exchange and interest rates.
Foreign exchange sensitivity
The table below shows on an indicative basis only the Group’s sensitivity to foreign exchange rates on its US dollar, Euro and Yen
financial instruments.
These three currencies are the major foreign currencies in which GSK’s financial instruments are denominated. GSK has considered
movements in these currencies and has concluded that a 10 cent or 10 yen movement in rates against Sterling is reasonable.
In this analysis, financial instruments are only considered sensitive to foreign exchange rates where they are not in the functional currency
of the entity that holds them. Obligations under finance leases, inter-company loans that are fully hedged to maturity and certain
non-derivative financial instruments not in net debt are excluded as they do not present a material exposure. Foreign exchange sensitivity
on Group assets and liabilities other than financial instruments is not included in the calculation.
For US dollar denominated financial instruments, the movement in the income statement in the table below relates primarily to hedges
of foreign exchange risk on acquisitions and disposals. Cash and cash equivalents, inter-company loans and deposits, inter-company
trading balances, hedging instruments for legal provisions and trade receivables and payables which are not denominated in the
functional currency of the entity that holds them are impacted when the spot rate changes. Whilst the hedging instruments provide
economic hedges, the related remeasurement of legal provisions is not included in the calculation.
Income statement impact of non-functional currency foreign exchange exposures
10 cent appreciation of the US dollar (2013: 10 cent)
10 cent appreciation of the Euro (2013: 10 cent)
10 yen appreciation of the Yen (2013: 10 yen)
2014
Increase/(decrease) in
income
£m
(263)
11
–
2013
Increase in
income
£m
40
8
1
An equivalent depreciation in the above currencies would cause the following increase/(decrease) in income £169 million, £(10) million
and £nil million for US dollar, Euro and Yen exchange rates respectively. (For 2013 it was a decrease in income of £35 million, £6 million
and £1 million).
198 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
41 Financial instruments and related disclosures continued
The movements in equity in the table below relate to hedging instruments (foreign exchange derivatives and external debt) designated as
a net investment hedge to hedge the Group assets denominated in Euro and Yen and cash flow hedges.
Equity impact of non-functional currency foreign exchange exposures
10 cent appreciation of the US dollar (2013: 10 cent)
10 cent appreciation of the Euro (2013: 10 cent)
10 yen appreciation of the Yen (2013: 10 yen)
2014
Increase/(decrease) in
equity
£m
2
(762)
(18)
2013
(Decrease) in
equity
£m
–
(840)
(21)
An equivalent depreciation in the above currencies would cause the following increase/(decrease) in equity: £(2) million, £652 million
and £16 million for US dollar, Euro and Yen exchange rates respectively (2013 – £nil, £711 million and £19 million).
The table below presents the Group’s sensitivity to foreign exchange rates based on the composition of net debt as shown in Note 32
adjusting for the effects of foreign exchange derivatives that are not part of net debt but affect future foreign currency cash flows.
Impact of foreign exchange movements on net debt
10 cent appreciation of the US dollar (2013: 10 cent)
10 cent appreciation of the Euro (2013: 10 cent)
10 yen appreciation of the Yen (2013: 10 yen)
2014
2013
(Increase)/decrease in
net debt
£m
(446)
227
11
(Increase)/decrease in
net debt
£m
(447)
289
10
An equivalent depreciation in the above currencies would have the following impact on net debt: £392 million, £(195) million and
£(9) million for US dollar, Euro and Yen exchange rates respectively (2013 – £396 million, £(244) million and £(9) million).
Interest rate sensitivity
The table below shows on an indicative basis only the Group’s sensitivity to interest rates on its floating rate Sterling, US dollar and
Euro financial instruments, being issued debt, bank borrowings, cash and cash equivalents and liquid investments. GSK has considered
movements in these interest rates over the last three years and has concluded that a 1% (100 basis points) increase is a reasonable
benchmark. Debt and bank borrowings with a maturity of less than one year is floating rate for this calculation. In 2013, interest rate
movements on derivative financial instruments designated as fair value hedges were deemed to have an immaterial effect on the Group
Income Statement due to compensating amounts in the carrying value of debt. These hedges and the hedged bond matured in 2014.
A 1% (100 basis points) movement in interest rates is not deemed to have a material effect on equity.
Income statement impact of interest rate movements
1% (100 basis points) increase in Sterling interest rates (2013: 1%)
1% (100 basis points) increase in US dollar interest rates (2013: 1%)
1% (100 basis points) increase in Euro interest rates (2013: 1%)
2014
2013
Increase/(decrease) in
income
£m
(19)
19
5
Increase/(decrease) in
income
£m
13
16
(8)
These interest rates could not be decreased by 1% as they are currently less than 1.0%. The maximum increase/(decrease) in income would
therefore be limited to £9 million, £1 million and £1 million for Sterling, US Dollar and Euro interest rates respectively (2013 –(£5) million, £nil and
£2 million). The decrease in interest income is due to lower levels of cash at the balance sheet date and less Euro net investment hedging activity
with foreign exchange forward contracts.
(h) Contractual cash flows for non-derivative financial liabilities and derivative instruments
The following tables provides an analysis of the anticipated contractual cash flows including interest payable for the Group’s non-derivative
financial liabilities on an undiscounted basis. The impact of interest rate swaps has been excluded. For the purpose of this table, debt is defined
as all classes of borrowings except for obligations under finance leases. Interest is calculated based on debt held at 31 December without
taking account of future issuance. Floating rate interest is estimated using the prevailing interest rate at the balance sheet date. Cash flows
in foreign currencies are translated using spot rates at 31 December. Contractual cash flows in respect of operating lease vacant space
provisions are excluded from the table below as they are included in the Commitments under non-cancellable operating leases table in
Note 40, ‘Commitments’.
At 31 December 2014
Due in less than one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
Between five and ten years
Greater than ten years
Gross contractual cash flows
Interest on
debt
£m
(678)
(623)
(611)
(497)
(447)
(2,074)
(4,814)
(9,744)
Obligations
under finance
leases
£m
(29)
(21)
(18)
(12)
(3)
(2)
–
(85)
Finance charge
on obligations
under finance
leases
£m
(2)
(2)
(1)
(1)
–
–
–
(6)
Trade payables
and other
liabilities not
in net debt
£m
(7,489)
(251)
(219)
(273)
(324)
(1,969)
(1,734)
(12,259)
Debt
£m
(2,917)
(801)
(2,251)
(1,763)
(1,163)
(2,859)
(7,085)
(18,839)
Total
£m
(11,115)
(1,698)
(3,100)
(2,546)
(1,937)
(6,904)
(13,633)
(40,933)
GSK Annual Report 2014 199
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
41 Financial instruments and related disclosures continued
Contractual cash flows for non-derivative financial liabilities and derivative instruments
At 31 December 2013
Due in less than one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
Between five and ten years
Greater than ten years
Gross contractual cash flows
Interest on
debt
£m
(674)
(650)
(594)
(582)
(467)
(2,032)
(5,064)
(10,063)
Obligations
under finance
leases
£m
(27)
(22)
(14)
(8)
(4)
(5)
–
(80)
Finance charge
on obligations
under finance
leases
£m
(2)
(2)
(2)
(1)
–
–
–
(7)
Trade payables
and other
liabilities not
in net debt
£m
(7,797)
(108)
(85)
(116)
(149)
(1,282)
(1,440)
(10,977)
Debt
£m
(2,747)
(1,936)
(753)
(2,246)
(1,657)
(1,958)
(6,984)
(18,281)
Total
£m
(11,247)
(2,718)
(1,448)
(2,953)
(2,277)
(5,277)
(13,488)
(39,408)
The increase in contractual cash flows for non-derivative financial liabilities of £1.5 billion over the year results principally from an
increase of £1.7 billion in forecast future cash flows in respect of contingent consideration payable for the acquisition of the former
Shionogi-ViiV Healthcare joint venture in 2012.
The table below provides an analysis of the anticipated contractual cash flows for the Group’s derivative instruments, excluding
embedded derivatives and equity options which are not material, using undiscounted cash flows. Cash flows in foreign currencies are
translated using spot rates at 31 December. The gross cash flows of foreign exchange contracts are presented for the purposes of this
table, though, in practice, the Group uses standard settlement arrangements to reduce its liquidity requirements on these instruments.
The amounts receivable and payable in less than one year have increased compared to 31 December 2013 due to higher levels of
hedging of inter-company loans, hedging of acquisitions and disposals denominated in foreign currency and external debt. This is
reflected in the increased principal amounts shown in the table below. All contractual cash flows for derivative instruments are due in
less than one year.
Gross contractual cash flows due in less than one year
Receivables
£m
21,586
2014
Payables
£m
(21,841)
Receivables
£m
18,890
2013
Payables
£m
(18,871)
42 Employee share schemes
The Group operates share option schemes, whereby options are granted to employees to acquire shares or ADS in GlaxoSmithKline plc
at the grant price, savings-related share option schemes and share award schemes. In addition, GSK operates the Performance Share
Plan, whereby awards are granted to employees to acquire shares or ADS in GlaxoSmithKline plc at no cost, subject to the achievement
by the Group of specified performance targets and the Share Value Plan, whereby awards are granted to employees to acquire shares
or ADS in GlaxoSmithKline plc at no cost after a three year vesting period. The granting of restricted share awards has replaced the
granting of options to employees as the cost of the scheme more readily equates to the potential gain to be made by the employee.
Grants under share option schemes are normally exercisable between three and ten years from the date of grant. Grants of restricted
shares and share awards are normally exercisable at the end of the three year vesting/performance period. Grants under savings-related
share option schemes are normally exercisable after three years’ saving. Grants under share option schemes and awards under the
Performance Share Plan are normally granted to employees to acquire shares or ADS in GlaxoSmithKline plc but in some circumstances
will be settled in cash. Options under the share option schemes were granted at the market price ruling at the date of grant. In
accordance with UK practice, the majority of options under the savings-related share option schemes are granted at a price 20% below
the market price ruling at the date of grant.
Option pricing
For the purposes of valuing options to arrive at the share based payment charge, the Black-Scholes option pricing model has been used.
The assumptions used in the model for 2012, 2013 and 2014 are as follows:
Risk-free interest rate
Dividend yield*
Volatility
Expected lives of savings-related share options and share award schemes
Weighted average share price for grants in the year:
Shares
* 0% for those plans where dividends are reinvested.
2014
0.7%
5.8%
19%
3-4 years
2013
0.7%
5.3%
20%
3-4 years
2012
0.1% – 0.5%
5.2%
18% – 23%
3-4 years
£14.14
£15.59
£14.49
200 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
42 Employee share schemes continued
Volatility is determined based on the three and five year share price history where appropriate. The fair value of performance share
plan grants take into account market conditions. Expected lives of options were determined based on weighted average historic
exercises of options.
Options outstanding
Share option
schemes – shares
Share option
schemes – ADS
Savings-related
share option schemes
At 1 January 2012
Options granted
Options exercised
Options lapsed
At 31 December 2012
Options granted
Options exercised
Options lapsed
At 31 December 2013
Options granted
Options exercised
Options lapsed
At 31 December 2014
Range of exercise prices on
options outstanding at year end
Weighted average market
price on exercise
Weighted average remaining
contractual life
Options outstanding
at 31 December 2014
Year of grant
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Total
Weighted
fair
value
–
–
–
Number
000
60,370
–
(12,473)
(5,168)
42,729
–
(20,355)
(2,112)
20,262
–
(3,907)
(591)
15,764
Weighted
exercise
price
£12.62
–
£11.97
£13.28
£12.72
–
£12.78
£12.63
£12.68
–
£12.14
£12.33
£12.82
Number
000
44,890
–
(9,698)
(4,593)
30,599
–
(12,099)
(1,192)
17,308
–
(4,548)
(520)
12,240
Weighted
exercise
price
$43.50
–
$39.33
$45.99
$44.36
–
$41.62
$42.94
$46.37
–
$43.11
$48.13
$47.50
Weighted
fair
value
–
–
–
Number
000
1,570
4,210
(1,230)
(89)
4,461
1,092
(241)
(210)
5,102
1,181
(126)
(547)
5,610
Weighted
fair
value
£1.76
£2.33
£1.92
Weighted
exercise
price
£9.68
£11.59
£9.67
£9.82
£11.48
£12.47
£9.79
£11.34
£11.78
£11.31
£11.65
£11.97
£11.66
£11.47 – £14.93
$33.42 – $58.00
£11.31 – £12.47
£15.44
3.2 years
$51.61
2.7 years
£15.67
2.0 years
Share option
schemes – shares
Weighted
exercise
price
Latest
exercise
date
£13.05 01.11.15
28.07.16
£14.69
26.07.17
£14.80
23.07.18
£11.49
22.07.19
£11.76
22.07.20
£12.03
–
–
–
–
–
–
–
–
£12.82
Number
000
50
2,453
2,937
2,444
3,286
4,594
–
–
–
–
15,764
Share option
schemes – ADS
Weighted
exercise
price
Latest
exercise
date
$47.40 01.11.15
28.07.16
$51.40
26.07.17
$57.59
23.07.18
$45.05
22.07.19
$33.72
22.07.20
$37.28
–
–
–
–
–
–
–
–
$47.50
Number
000
134
2,575
3,814
1,961
1,479
2,277
–
–
–
–
12,240
Savings-related
share option schemes
Weighted
exercise
price
–
–
–
–
–
–
–
Latest
exercise
date
–
–
–
–
–
–
–
£11.59 01.06.16
£12.47 01.06.17
£11.31 01.06.18
£11.66
Number
000
–
–
–
–
–
–
–
3,586
845
1,179
5,610
Options normally become exercisable from three years from the date of grant but may, under certain circumstances, vest earlier as set
out within the various scheme rules.
There has been no change in the effective exercise price of any outstanding options during the year.
Options exercisable
At 31 December 2012
At 31 December 2013
At 31 December 2014
Share option
schemes – shares
Number
000
33,930
Weighted
exercise
price
£12.90
Share option
schemes – ADS
Number
000
24,706
Weighted
exercise
price
$46.10
20,262
£12.68
17,308
$46.37
15,764
£12.82
12,240
$47.50
Savings-related
share option schemes
Number
000
261
Weighted
exercise
price
£9.72
–
–
–
–
GSK Annual Report 2014 201
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
42 Employee share schemes continued
GlaxoSmithKline share award schemes
Performance Share Plan
The Group operates a Performance Share Plan whereby awards are granted to Directors and senior executives at no cost. The percentage of
each award that vests is based upon the performance of the Group over a defined measurement period with dividends reinvested during the
same period. For awards granted in 2012 and 2013 to Directors and members of the CET, the performance conditions are based on four equally
weighted measures over a three year performance period. The first measure is based on the achievement of adjusted free cash flow targets.
The second measure is based on relative TSR performance against a comparator group. The remaining two measures are based on business-
specific performance measures on business diversification and R&D new product performance. For details on the calculation of these
measures, see the Remuneration report on pages 96 to 128.
For awards granted in 2014 onwards, the performance conditions are based on three equally weighted measures over a three year
performance period. These are adjusted free cashflow, TSR and R&D new product performance.
For those awards made to all other eligible employees the performance conditions are based on GSK’s EPS growth to the increase
in the UK Retail Prices Index over the three year measurement period and adjusted free cashflow. In addition, some businesses have
an element of their award based on a strategic or operational business measure, over a three year measurement period, specific to
the employee’s business area.
The fair value of the awards is determined based on the closing share price on the day of grant. For TSR performance elements,
this is adjusted by the likelihood of that condition being met, as assessed at the time of grant.
Number of shares and ADS issuable
At 1 January 2012
Awards granted
Dividends reinvested
Awards exercised
Awards cancelled
At 31 December 2012
Awards granted
Dividends reinvested
Awards exercised
Awards cancelled
At 31 December 2013
Awards granted
Dividends reinvested
Awards exercised
Awards cancelled
At 31 December 2014
Shares
Number (000)
10,541
4,268
529
(1,388)
(1,794)
12,156
4,483
722
(1,022)
(2,977)
13,362
4,147
673
(2,654)
(2,734)
12,794
Weighted
fair value
£11.43
£13.36
£15.48
ADS
Number (000)
3,926
1,420
225
(485)
(710)
4,376
1,352
251
(453)
(1,041)
4,485
1,251
211
(1,059)
(929)
3,959
Weighted
fair value
$37.63
$42.41
$52.40
Share Value Plan
The Group operates a Share Value Plan whereby awards are granted, in the form of shares, to certain employees at no cost. The awards
vest after two and a half to three years and there are no performance criteria attached. The fair value of these awards is determined
based on the closing share price on the day of grant, after deducting the expected future dividend yield over the duration of the award.
Number of shares and ADS issuable
At 1 January 2012
Awards granted
Awards exercised
Awards cancelled
At 31 December 2012
Awards granted
Awards exercised
Awards cancelled
At 31 December 2013
Awards granted
Awards exercised
Awards cancelled
At 31 December 2014
202 GSK Annual Report 2014
Shares
Number (000)
19,458
11,411
(4,650)
(901)
25,318
12,011
(5,324)
(938)
31,067
12,410
(9,642)
(923)
32,912
Weighted
fair value
£11.96
£14.76
£12.65
ADS
Number (000)
14,081
7,595
(3,410)
(478)
17,788
7,681
(4,009)
(622)
20,838
7,842
(6,787)
(666)
21,227
Weighted
fair value
$38.51
$46.04
$41.56
Governance & remunerationFinancial statementsInvestor informationStrategic report 42 Employee share schemes continued
Employee Share Ownership Plan Trusts
The Group sponsors Employee Share Ownership Plan (ESOP) Trusts to acquire and hold shares in GlaxoSmithKline plc to satisfy
awards made under employee incentive plans and options granted under employee share option schemes. The trustees of the ESOP
Trusts purchase shares with finance provided by the Group by way of loans or contributions. In 2014, Treasury shares with a fair value of
£150 million were transferred into the UK ESOP Trust to satisfy future awards under the shareholder approved Performance Share Plan.
Costs of running the ESOP Trusts are charged to the income statement. Shares held by the ESOP Trusts are deducted from other reserves
and held at the value of proceeds receivable from employees on exercise. If there is deemed to be a permanent diminution in value this is
reflected by a transfer to retained earnings. The Trusts also acquire and hold shares to meet notional dividends re-invested on deferred
awards under the SmithKline Beecham Mid-Term Incentive Plan. The trustees have waived their rights to dividends on the shares held by
the ESOP Trusts.
Shares held for share award schemes
Number of shares (000)
Nominal value
Carrying value
Market value
Shares held for share option schemes
Number of shares (000)
Nominal value
Carrying value
Market value
2014
2013
52,595
63,613
£m
13
150
724
2014
139
£m
–
1
2
£m
16
354
1,024
2013
139
£m
–
1
1
43 Proposed Novartis transaction
On 22 April 2014, GSK announced a three-part inter-conditional transaction with Novartis AG involving its Consumer Healthcare,
Vaccines and Oncology businesses.
As part of this proposed transaction, GSK and Novartis will create a new Consumer Healthcare business over which GSK will have
majority control, with an equity interest of 63.5%. In addition, GSK will acquire Novartis’ global Vaccines business (excluding influenza
vaccines) for an initial cash consideration of $5.25 billion with subsequent potential milestone payments of up to $1.8 billion and
ongoing royalties.
GSK will also divest its marketed Oncology portfolio, related R&D activities and rights to its AKT inhibitors and also grant
commercialisation partner rights for future oncology products to Novartis for an aggregate cash consideration of $16 billion. Under
the terms of the transaction, up to $1.5 billion of the purchase price may have to be returned to Novartis if certain conditions relating
to the COMBI-d trial are not met. Following the positive outcome from this study announced on 6 February 2015, GSK believes
these conditions will be satisfied.
The transaction is expected to be completed in the week commencing 2 March 2015.
GSK Annual Report 2014 203
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the financial statements
continued
44 Principal Group companies
The following represent the principal subsidiaries and associates of the GlaxoSmithKline Group at 31 December 2014. Details are given
of the principal country of operation, the location of the headquarters, the business sector and the business activities. The equity share
capital of these entities is wholly owned by the Group except where its percentage interest is shown otherwise. All companies are
incorporated in their principal country of operation except where stated.
Activity
%
Subsidiary
GlaxoSmithKline Holdings Limited *
GlaxoSmithKline Services Unlimited *
GlaxoSmithKline Mercury Limited *
GlaxoSmithKline Finance plc
GlaxoSmithKline Capital plc
SmithKline Beecham Limited
Wellcome Limited
Glaxo Group Limited
Glaxo Operations UK Limited
GlaxoSmithKline Export Limited
GlaxoSmithKline Research & Development Limited
GlaxoSmithKline UK Limited
Setfirst Limited
GlaxoSmithKline Trading Services Limited (i) (iv)
ViiV Healthcare Limited
ViiV Healthcare UK Limited
GlaxoSmithKline Pharma GmbH
GlaxoSmithKline Pharmaceuticals S.A.
GlaxoSmithKline Biologicals S.A.
GlaxoSmithKline s.r.o.
GlaxoSmithKline Oy
Groupe GlaxoSmithKline S.A.S.
Laboratoire GlaxoSmithKline S.A.S.
GlaxoSmithKline Sante Grand Public S.A.S.
ViiV Healthcare S.A.S.
GlaxoSmithKline Biologicals S.A.S.
GlaxoSmithKline Consumer Healthcare GmbH & Co. KG
GlaxoSmithKline GmbH & Co. KG
GlaxoSmithKline A.E.B.E
GlaxoSmithKline S.p.A.
GlaxoSmithKline Consumer Healthcare S.p.A.
GlaxoSmithKline B.V.
GlaxoSmithKline Far East B.V.
GSK Services Sp.z o.o.
SmithKline Beecham (Cork) Limited (i)
GlaxoSmithKline Consumer Healthcare (Ireland) Limited (i)
GlaxoSmithKline (Ireland) Limited (i)
Stafford Miller (Ireland) Limited (i)
GlaxoSmithKline Dungarvan Limited (i)
Stiefel Laboratories (Ireland) Limited (i)
Europharm Holding S.A.
GlaxoSmithKline Trading ZAO
Madrid
Muenchenbuchsee
GlaxoSmithKline S.A.
GlaxoSmithKline AG
Research Triangle Park Stiefel Laboratories, Inc.
Marietta
Philadelphia
Pittsburgh
Pittsburgh
Wilmington
Wilmington
Research Triangle Park ViiV Healthcare Company
Rockville
Corixa Corporation
GlaxoSmithKline LLC
GlaxoSmithKline Consumer Healthcare, L.P.
Block Drug Company, Inc.
GlaxoSmithKline Holdings (Americas) Inc.
GlaxoSmithKline Capital Inc.
Human Genome Sciences, Inc.
Europe
England
Austria
Belgium
Location
Brentford
Brentford
Brentford
Brentford
Brentford
Brentford
Brentford
Brentford
Brentford
Brentford
Brentford
Brentford
Brentford
Brentford
Brentford
Brentford
Vienna
Wavre
Rixensart
Germany
Greece
Italy
Czech Republic Prague
Espoo
Finland
Marly le Roi
France
Marly le Roi
Marly le Roi
Marly le Roi
St. Amand Les Eaux
Buehl
Munich
Athens
Verona
Milan
Zeist
Zeist
Poznan
Carrigaline
Dublin
Dublin
Dungarvan
Dungarvan
Sligo
Brasov
Moscow
Poland
Republic of
Ireland
Netherlands
Romania
Russian
Federation
Spain
Switzerland
USA
USA
204 GSK Annual Report 2014
Sector
Ph,CH
Ph,CH
Ph
Ph,CH
Ph,CH
Ph,CH
Ph,CH
Ph
Ph
Ph
Ph
Ph
Ph,CH
Ph
Ph
Ph
Ph
Ph
Ph
Ph,CH
Ph
Ph
Ph
CH
Ph
Ph
CH
Ph
Ph,CH
Ph
CH
Ph
Ph,CH
Ph
Ph
CH
Ph
CH
CH
Ph
Ph,CH
Ph
Ph
Ph
h
s
h
f
f
d e h m p r
h
h
p
e
d r
m p
h
e
h
m s
m
d m
d e m p r
m
m
h
m r d
e m
m
p
m s
d h m s
m
d m
m
m
h
m s
d p r
m
m
p
p
p
m s
m
m
m
Ph
Ph
h m p
p
Ph,CH d e h m p r s
m
h m
h
f
m
p
CH
CH
Ph,CH
Ph,CH
Ph
Ph
78
78
78
88
78
Governance & remunerationFinancial statementsInvestor informationStrategic report 44 Principal Group companies continued
Americas
Canada
Mexico
Asia Pacific
Australia
China
India
Malaysia
Pakistan
Philippines
Singapore
South Korea
Thailand
Japan
Japan
Location
Mississauga
Mississauga
Laval
Mexico City
Boronia
Beijing
Hong Kong
Tianjin
Mumbai
Gurgaon
Selangor
Karachi
Makati
Singapore
Singapore
Seoul
Bangkok
Subsidiary
GlaxoSmithKline Inc.
GlaxoSmithKline Consumer Healthcare Inc.
ID Biomedical Corporation of Quebec
GlaxoSmithKline Mexico S.A. de C.V.
GlaxoSmithKline Australia Pty Ltd
GlaxoSmithKline (China) Investment Co. Ltd
GlaxoSmithKline Limited
Sino-American Tianjin Smith Kline & French Laboratories Ltd
GlaxoSmithKline Pharmaceuticals Limited
GlaxoSmithKline Consumer Healthcare Limited
GlaxoSmithKline Consumer Healthcare Sdn Bhd
GlaxoSmithKline Pakistan Limited
GlaxoSmithKline Philippines Inc
Glaxo Wellcome Manufacturing Pte Ltd
GlaxoSmithKline Pte Ltd
GlaxoSmithKline Korea Limited
GlaxoSmithKline (Thailand) Limited
Sector
Ph
CH
Ph
Ph,CH
Ph,CH
Ph,CH
Ph,CH
CH
Ph
CH
CH
Ph,CH
Ph,CH
Ph
Ph,CH
Ph ,CH
Ph,CH
Activity
%
m p
m
d e p r
e m p
55
75
72
83
d e m p r
d h m r s
m
e m p
d m p
d e m p r s
m
e m p r
d e m
d e p r s
d e m s
m r
m
Tokyo
GlaxoSmithKline K.K.
Ph,CH
d m p
Latin America
Argentina
Brazil
Colombia
Venezuela
Buenos Aires
Rio de Janeiro
Bogota
Caracas
Middle East & Africa
Nigeria
Saudi Arabia
South Africa
Turkey
Lagos
Jeddah
Johannesburg
Istanbul
GlaxoSmithKline Argentina S.A.
GlaxoSmithKline Brasil Limitada
GlaxoSmithKline Colombia S.A.
GlaxoSmithKline Venezuela, C.A.
GlaxoSmithKline Consumer Nigeria plc (ii)
Glaxo Saudi Arabia Limited
GlaxoSmithKline South Africa (Pty) Limited
GlaxoSmithKline Ilaclari Sanayi ve Ticaret A.S.
Middle East & Africa Location
South Africa
Johannesburg
Associate
Aspen Pharmacare Holdings Limited (iii)
Ph,CH
Ph,CH
Ph,CH
Ph,CH
Ph,CH
Ph
Ph,CH
Ph,CH
Sector
Ph,CH
e m p r
d e m p
m
m
46
49
e m p
p
d e m p
m
Activity
m p r
%
12
(i)
Exempt from the provisions of section 7 of the Companies (Amendment) Act 1986 (Ireland). In addition to those subsidiary
companies scheduled in the table above, Stiefel Distributors (Ireland) Limited; SmithKline Beecham (Manufacturing) Limited;
GlaxoSmithKline Consumer Healthcare Investments (Ireland) Limited; GlaxoSmithKline Consumer Healthcare Investments (Ireland)
(No. 2); GlaxoSmithKline Investments (Ireland) Limited and GlaxoSmithKline Consumer Healthcare Ireland IP Limited are also
exempt from these provisions as they are consolidated in the group financial statements.
(ii)
Consolidated as a subsidiary in accordance with section 1162 (4)(a) of the Companies Act 2006 on the grounds
of dominant influence.
(iii) Equity accounted on the grounds of significant influence.
(iv) Incorporated in Ireland.
*
Directly held wholly owned subsidiary of GlaxoSmithKline plc.
Key
Business sector: Ph Pharmaceuticals CH Consumer Healthcare
Business activity: d development
m marketing
e exporting
p production
f finance
r research
h holding company
s service
i
insurance
The subsidiaries and associates listed above principally affect the figures in the Group’s financial statements. Full details of all Group
subsidiaries and associates will be attached to the company’s Annual Return to be filed with the UK Registrar of Companies. Each of
GlaxoSmithKline Capital Inc. and GlaxoSmithKline Capital plc is a wholly-owned finance subsidiary of the company, and the company
has fully and unconditionally guaranteed the securities issued by each of GlaxoSmithKline Capital Inc. and GlaxoSmithKline Capital plc.
GSK Annual Report 2014 205
Governance & remunerationFinancial statementsInvestor informationStrategic report Notes to the financial statements
continued
45 Legal proceedings
The Group is involved in significant legal and administrative
proceedings, principally product liability, intellectual property,
tax, anti-trust and governmental investigations, as well as related
private litigation. The Group makes provision for these proceedings
on a regular basis as summarised in Note 2, ‘Accounting principles
and policies’ and Note 29, ‘Other provisions’. The Group may
become involved in significant legal proceedings in respect of
which it is not possible to make a reliable estimate of the expected
financial effect, if any, that could result from ultimate resolution of
the proceedings. In these cases, appropriate disclosures about
such cases would be included, but no provision would be made.
With respect to each of the legal proceedings described below,
other than those for which a provision has been made, the Group
is unable to make a reliable estimate of the expected financial
effect at this stage. The Group does not believe that information
about the amount sought by the plaintiffs, if that is known, would
be meaningful with respect to those legal proceedings. This is due
to a number of factors, including, but not limited to, the stage of
proceedings, the entitlement of parties to appeal a decision and
clarity as to theories of liability, damages and governing law.
Intellectual property claims include challenges to the validity
and enforceability of the Group’s patents on various products
or processes as well as assertions of non-infringement of those
patents. A loss in any of these cases could result in loss of patent
protection for the product at issue. The consequences of any such
loss could be a significant decrease in sales of that product and
could materially affect future results of operations for the Group.
Legal expenses incurred and provisions related to legal claims are
charged to selling, general and administration costs. Provisions
are made, after taking appropriate legal and other specialist
advice, where an outflow of resources is considered probable
and a reliable estimate can be made of the likely outcome of the
dispute. For certain product liability claims, the Group will make
a provision where there is sufficient history of claims made and
settlements to enable management to make a reliable estimate of
the provision required to cover unasserted claims. At 31 December
2014, the Group’s aggregate provision for legal and other disputes
(not including tax matters described in Note 14, ‘Taxation’) was
£0.5 billion. The ultimate liability for legal claims may vary from the
amounts provided and is dependent upon the outcome of litigation
proceedings, investigations and possible settlement negotiations.
The Group’s position could change over time, and, therefore,
there can be no assurance that any losses that result from the
outcome of any legal proceedings will not exceed by a material
amount the amount of the provisions reported in the Group’s
financial statements. If this were to happen, it could have a material
adverse impact on the results of operations of the Group in the
reporting period in which the judgments are incurred or the
settlements entered into. The most significant of these matters
are described below.
Intellectual property
Avodart/Jalyn
On 29 November 2010, Banner Pharmacaps, Inc. (Banner) notified
the Group that it had filed an Abbreviated New Drug Application
(ANDA) to market a generic version of Avodart (dutasteride) in the
USA. Banner’s notification contained a Paragraph IV certification
alleging that two patents expiring in 2013 and one patent expiring
in 2015 (the ‘467 patent) covering the compound dutasteride were
invalid or not infringed by Banner’s proposed generic dutasteride
product. The Group subsequently received similar notices from
Anchen Pharmaceuticals (Anchen), Apotex (Apotex), Roxane
Laboratories (Roxane), Watson Laboratories, Inc (Watson),
and Mylan Pharmaceuticals, Inc. (Mylan) each variously
challenging either the ‘467 patent or all three patents.
206 GSK Annual Report 2014
On 29 December 2010, Anchen notified the Group that it had filed
an ANDA for Jalyn with a Paragraph IV certification alleging that
the ‘467 patent was invalid, unenforceable or not infringed. Jalyn,
a combination of dutasteride and tamsulosin, is covered by the
same three patents that cover Avodart. Subsequently, the Group
received similar notices from Impax Laboratories, Inc. (Impax) and
Watson challenging one or more of the patents covering Jalyn.
The Group filed suit against Anchen, Banner, Impax, Mylan,
Roxane and Watson in the United States District Court for the
District of Delaware for infringement of the Avodart and Jalyn
patents, as applicable, and the cases were consolidated for trial.
On 31 August 2012, the Group filed a separate suit against Apotex
in the same court for infringement of the ‘467 patent. This case
was not consolidated with the original case against the other
generic defendants. On 31 May 2013, the Court ordered that the
Apotex case would be stayed pending the entry of judgment in the
Banner et al case, and Apotex subsequently agreed to be bound
by the outcome of the consolidated cases. On 17 January 2013,
the Group and Anchen settled the litigation on terms that would
allow Anchen to enter the market for Jalyn in the fourth quarter of
2015 or earlier under certain circumstances. The Group previously
had settled an earlier patent challenge against Avodart by Teva
Pharmaceuticals (Teva) on terms that will allow Teva to launch its
generic dutasteride product in the fourth quarter of 2015 or earlier
under certain circumstances. Teva’s generic dutasteride product
was approved by the FDA on 21 December 2010.
A trial on the consolidated case against the generic defendants
was held on 28 January 2013. On 13 August 2013, the District
Court upheld the validity of the ‘467 patent. Banner, Impax, Mylan,
Roxane and Watson appealed the decision in favour of the Group
to the United States Court of Appeals for the Federal Circuit
on 27 August 2013. On 24 February 2014, the Federal Circuit
entered a decision in favour of the Group affirming the decision
of the District Court and concluding the matter.
Benlysta
Human Genome Sciences, Inc. (HGS), a Group company, holds
a European Patent covering 18 countries, including the UK, which
covers antibodies that bind to BLyS, defined in functional terms.
Eli Lilly and Company (Eli Lilly) previously had challenged the
validity of this patent, but the patent has been upheld by the
European Patent Office and the UK courts, and these validity
challenges have concluded.
Eli Lilly also had requested a declaration that any Supplementary
Protection Certificate (SPC) filed by HGS to extend the term of
this patent for five years, based upon Eli Lilly’s future Marketing
Authorisation (MA) for an anti-BLyS antibody, will be invalid. The
UK High Court denied Lilly’s motion in July 2014. On 2 October
2014, Eli Lilly announced that it was ceasing the development of
its anti-BLyS antibody. HGS applied to have the appeal dismissed
and, on 14 November 2014, Eli Lilly consented not to appeal the
Court’s decision, thus ending the litigation.
Epzicom/Trizivir/Kivexa
On 30 November 2007, the Group’s affiliate, ViiV Healthcare,
received notice that Teva Pharmaceuticals USA, Inc. (Teva)
had filed an ANDA with a Paragraph IV certification for Epzicom
(the combination of lamivudine and abacavir). The certification
challenged only the patent covering the hemisulfate salt of abacavir,
which expires in 2018. ViiV Healthcare did not sue Teva under this
patent. On 27 June 2011, ViiV Healthcare received notice that Teva
had amended its ANDA for Epzicom to contain a Paragraph IV
certification for two additional patents listed in the Orange Book,
alleging the patents were invalid, unenforceable or not infringed.
The patents challenged in this new certification relate to a method of
treating HIV using the combination (expiring in 2016), and a certain
crystal form of lamivudine (expiring in 2016). On 5 August 2011, ViiV
Healthcare filed suit against Teva under the combination patent in
the United States District Court for the District of Delaware.
Governance & remunerationFinancial statementsInvestor informationStrategic report 45 Legal proceedings continued
On 18 May 2011, ViiV Healthcare received notice that Lupin Ltd.
(Lupin) had filed an ANDA containing a Paragraph IV certification
for Trizivir (the triple combination of lamivudine, abacavir and
zidovudine) alleging that three patents listed in the Orange
Book for Trizivir were invalid, unenforceable or not infringed.
These patents relate to a method of treating HIV using the triple
combination (expiring in 2016), the hemisulfate salt of abacavir
(expiring in 2018), and a certain crystal form of lamivudine
(expiring in 2016). On 29 June 2011, ViiV Healthcare filed suit
against Lupin under the patent covering the triple combination
in the United States District Court for the District of Delaware.
The District Court consolidated the case relating to Epzicom
with the case relating to Trizivir.
On 17 December 2013, the United States District Court for
the District of Delaware upheld the validity of the US patent
with an expiry date in March 2016 which covers the combination
of lamivudine and abacavir (Epzicom) and the triple combination
of lamivudine, abacavir and zidovudine (Trizivir). In a separate
component to the decision, the judge ruled that the Lupin generic
version of Trizivir did not infringe the patent. Lupin subsequently
launched its generic version of Trizivir. Teva earlier had stipulated
that its generic version of Epzicom would infringe the patent, and
the District Court enjoined Teva from launching its generic version
of Epzicom until the expiration of the patent. The parties appealed
the judgments. On 12 February 2015, the United States Court
of Appeals for the Federal Circuit affirmed the decision of the
District Court.
On 6 February 2014, ViiV Healthcare received notice that Lupin
had filed an ANDA containing a Paragraph IV certification for
Epzicom, alleging that the three patents listed in the Orange
Book for Epzicom are either invalid, unenforceable or not infringed.
ViiV Healthcare filed suit against Lupin on 3 March 2014, alleging
infringement of both the patent covering the combination of
lamivudine and abacavir and the patent covering the hemisulfate
salt of abacavir. A trial date has been set for 18 April 2016.
On 2 June 2014, Apotex filed a Petition requesting Inter Partes
Review (IPR) of the combination patent covering Epzicom and
Trizivir. The United States Patent and Trademark Office (USPTO)
granted the petition on 8 December 2014 which initiates an IPR
of the patent by the USPTO. On 8 January 2015, Teva filed a
petition with the USPTO to join the proceedings.
Teva Canada and Apotex have each challenged patents for
Kivexa (lamivudine/abacavir) listed on the Canadian Patent
Register. ViiV Healthcare filed suit for infringement against each
party under the patent covering the combination of lamivudine and
abacavir and the patent covering the hemisulfate salt of abacavir.
A ruling that the hemisulfate salt patent was improperly listed has
resulted in the de-listing of such patent from the Canadian Patent
Register. ViiV Healthcare has appealed this ruling. Notwithstanding
this ruling, the infringement cases against Teva Canada and
Apotex relating to the validity of the combination and hemisulfate
salt patents will proceed; a hearing on the infringement case
against Teva Canada has been scheduled for 27 April 2015,
and a hearing on the infringement case against Apotex has
been scheduled for December 2015.
In addition, Teva has challenged the claims of the combination
patent covering Kivexa in Germany, France and Italy. There is also
related litigation ongoing in the United Kingdom. The combination
patent litigation involving ViiV Healthcare and Teva commenced
in Germany in December 2013, in France in June 2014, and in
Italy in September 2014. The combination patent expires across
Europe in 2016. In addition, ViiV Healthcare has a corresponding
Supplementary Protection Certificate (SPC) for Kivexa (but not
Trizivir) that does not expire until late 2019.
As well as challenging the validity of the underlying patents,
Teva is challenging the SPCs on the basis that they are invalid
due to a failure to comply with the requirements of Article 3(d)
of Regulation (EC) No. 469/2009 (the SPC Regulation) (‘Teva’s
Article 3(d) contention’). These cases are pending. In Germany,
oral hearing has been set for 19 May 2015, and in France, oral
hearing has been set for 15 December 2015. A final hearing
date has yet to be set in Italy.
On 26 November 2014, ViiV Healthcare commenced an action
in the UK against Teva for a declaration that Teva’s Article 3(d)
contention concerning the Kivexa SPC is incorrect. An interim
hearing is scheduled for 25 March 2015 to determine whether
questions regarding the SPC Regulation should be referred to
the Court of Justice for the European Union.
Lexiva
On 23 April 2012, Ranbaxy Laboratories Limited (Ranbaxy)
notified ViiV Healthcare that it had filed a Paragraph IV certification
alleging that a patent claiming a polymorphic form of fosamprenavir
calcium, the active ingredient in Lexiva, was invalid or not infringed.
The patent expires in 2020. ViiV Healthcare did not sue under this
patent.
On 30 July 2012, Mylan Pharmaceuticals, Inc. (Mylan) notified
ViiV Healthcare that it had filed an ANDA for Lexiva with a
Paragraph IV certification asserting that patents claiming (i)
the active ingredient (expiring in 2018) and (ii) a polymorphic form
of the active ingredient (expiring 2020), are invalid, unenforceable,
or not infringed. Mylan is the second generic company to file an
ANDA for Lexiva, but the first generic company to challenge the
basic compound patent on the active ingredient. On 23 August
2012, ViiV Healthcare and its licensor, Vertex Pharmaceuticals
Incorporated, filed a patent infringement suit against Mylan on the
patent claiming the active ingredient (but not the patent claiming
the polymorph) in the United States District Court for the District
of Delaware. On 26 May 2014, the parties settled the case on
terms that are confidential.
On 18 October 2012, Ranbaxy filed a petition for an Inter Partes
Review (IPR) alleging that the patent claiming the active ingredient
for Lexiva is invalid. On 5 March 2013, the USPTO granted
Ranbaxy’s petition. The IPR was settled October 2014 on terms
that are confidential.
On 10 December 2014, Lupin Limited filed a petition with the
USPTO for an IPR alleging that the compound patent covering
the active ingredient for Lexiva is invalid. The USPTO has not yet
ruled on whether the petition for the IPR will be granted.
Product liability
Pre-clinical and clinical trials are conducted during the
development of potential products to determine the safety and
efficacy of products for use by humans following approval by
regulatory bodies. Notwithstanding these efforts, when drugs
and vaccines are introduced into the marketplace, unanticipated
safety issues may become, or be claimed by some to be, evident.
The Group is currently a defendant in a number of product liability
lawsuits related to the Group’s Pharmaceutical, Vaccine and
Consumer Healthcare products. The most significant of those
matters are described below.
The Group has been able to make a reliable estimate of the
expected financial effect of the matters discussed in this category
and has included a provision, as appropriate, for the matters below
in the provision for legal and other disputes. Matters for which the
Group has made a provision are also noted in Note 29, ‘Other
provisions’.
GSK Annual Report 2014 207
Governance & remunerationFinancial statementsInvestor informationStrategic report Notes to the financial statements
continued
45 Legal proceedings continued
Avandia
The Group has been named in product liability lawsuits on behalf
of individuals asserting personal injury claims arising out of the use
of Avandia. The federal cases filed against the Group are part of
a multi-district litigation proceeding pending in the United States
District Court for the Eastern District of Pennsylvania (the ‘MDL
Court’). Cases have also been filed in a number of state courts.
As of February 2015, the Group has reached agreements to
settle the substantial majority of federal and state cases pending
in the US. 15 purported class actions on Avandia are pending
in Canada. The Group has reached an agreement in principle to
resolve the single purported consumer class action in Israel, which
has now been approved by the Court. In the UK, litigation against
the Group has ended following the formal discontinuance of the
claims of the majority of the claimants and a court order striking
the claims of the remaining claimants.
There are four purported class actions seeking economic damages
on behalf of third party payers asserting claims arising under
various state and federal laws, including the Racketeer Influenced
and Corrupt Organizations Act (RICO), state unfair trade practices
and/or consumer protection laws. The MDL Court denied the
Group’s motion to dismiss three of the third party payer actions,
and the fourth action has been stayed. The Group has appealed
the decision to the United States Court of Appeals for the Third
Circuit. One consumer class action brought on behalf of Missouri
residents remains pending in the MDL Court. Humana Medical
Group (Humana) has brought two separate subrogation actions,
one as a purported class action in the MDL Court. The MDL
Court has denied class certification. United Health Group, Inc.
has brought a separate subrogation action against the Group.
Paxil/Seroxat and Paxil CR
The Group has received numerous lawsuits and claims alleging
that use of Paxil (paroxetine) has caused a variety of injuries.
Most of these lawsuits in recent years have alleged that the use
of Paxil during pregnancy resulted in the birth of a child with birth
defects or health issues. Other lawsuits and claims have alleged
that patients who took Paxil committed or attempted to commit
suicide or acts of violence or that patients suffered symptoms
on discontinuing treatment with Paxil.
• Pregnancy
The Group has reached agreements to settle the substantial
majority of the US claims relating to the use of Paxil during
pregnancy as of February 2015, but a number of claims related to
use during pregnancy are still pending in various courts in the US.
Other matters have been dismissed without payment. Currently,
there are three trials scheduled in 2015.
There are two proposed, and one certified, class actions in
Canada. The action that has been certified as a national class
action is in British Columbia and relates to cardiovascular defects.
An appeal from that certification decision was dismissed in
October 2013, and the case is scheduled to be tried in October
2016.
• Acts of violence
As of February 2015, there were eight pending matters, including
one lawsuit on appeal (pending in the United States Court of
Appeals for the Ninth Circuit) concerning allegations that patients
who took Paxil committed or attempted to commit suicide or acts
of violence. Currently, there are no trials scheduled for 2015.
• Discontinuation
In the UK, in late 2010, public funding was withdrawn from the
claimants who had received funding to pursue litigation alleging
that Paxil/Seroxat had caused them to suffer from withdrawal
reactions and dependency. The majority of the claimants
discontinued their claims.
208 GSK Annual Report 2014
In June 2013, the Group was informed that the Legal Aid
Agency (LAA) (formerly the Legal Services Commission) was
considering whether to discharge the public funding certificate
following the recommendation of its Special Cases Review Panel
that the case has poor prospects of success. On 29 January
2015, the LAA discharged the public certificate, effectively
ending the group action.
Poligrip
Beginning in 2005, a number of product liability lawsuits and claims
were filed against the Group in both state and federal courts in the
USA, including purported class actions, alleging that the zinc in
Super Poligrip causes copper depletion and permanent neurologic
injury. The federal cases were consolidated in the Denture Cream
Adhesive multi-district litigation (MDL) in the United States District
Court for the Southern District of Florida which was established in
June 2009. The original four putative class actions in the MDL have
been dismissed. In 2013, a putative class action was filed in Puerto
Rico, which was removed to federal court and transferred to the
MDL where it remains pending as of February 2015.
With two current exceptions (one state court case in
Pennsylvania, and one state court case in small claims court in
Tennessee), all other state court cases were consolidated in the
Philadelphia state court Mass Tort Program (MTP). As of February
2015, there are no cases currently pending against GSK in the
Philadelphia MTP. The vast majority of individual cases have been
dismissed, with seven active individual cases and one putative
class action in the MDL, and two state court cases, still pending
against the Group in the USA.
In Canada, one individual lawsuit and five purported class actions
asserting consumer fraud claims have also been filed. Of those,
the individual lawsuit and one putative class action have been
dismissed. In addition, there are a few filed and unfiled claims in
Turkey, the UK and elsewhere. The Group voluntarily withdrew all
zinc-containing formulations of Super Poligrip from the market in
early 2010.
Sales and marketing and regulation
The Group has been able to make a reliable estimate of the expected
financial effect of the matters discussed in this category, and has
included a provision for such matters in the provision for legal and
other disputes, except as noted below. Matters for which the Group
has made a provision are also noted in Note 29, ‘Other provisions’.
China investigation
On 19 September 2014, the Group announced that the Changsha
Intermediate People’s Court in Hunan Province, China ruled that
according to Chinese law, GSK China Investment Co. Ltd
(GSKCI) had offered money or property to non-government
personnel in order to obtain improper commercial gains, and
been found guilty of bribing non-government personnel. The
verdict followed investigations initiated by China’s Ministry of
Public Security in June 2013. As a result of the Court’s verdict,
GSKCI paid a fine of RMB 3 billion (£301 million) to the
Chinese government.
SEC/DOJ and SFO Anti-Corruption enquiries
The US Securities and Exchange Commission (SEC) and the US
Department of Justice (DOJ) initiated an industry-wide enquiry in
2010 into whether pharmaceutical companies may have engaged
in violations of the US Foreign Corrupt Practices Act (FCPA)
relating to the sale of pharmaceuticals, including in Argentina,
Brazil, Canada, China, Germany, Italy, Poland, Russia and Saudi
Arabia. The Group is one of the companies that has been asked to
respond to this enquiry and is cooperating with the SEC and DOJ.
The Group has informed the DOJ and SEC about the investigation
of its China operations by the Chinese government that was
initiated in 2013 and the outcome of that investigation.
Governance & remunerationFinancial statementsInvestor informationStrategic report 45 Legal proceedings continued
The Group also has advised the UK Serious Fraud Office (SFO)
regarding the investigation of its China operations by the Chinese
government and the outcome of that investigation. The SFO
has requested information from the Group on its commercial
operations in a number of countries. On 27 May 2014, the
SFO informed the Group that it had formally opened a criminal
investigation into the Group’s practices. The Group is responding
to the SFO’s requests. The Group is unable to make a reliable
estimate of the expected financial effect of these investigations,
and no provision has been made for them.
US State Sales and Marketing Investigations
After the Group concluded an agreement in 2012 with the United
States Government, multiple states and the District of Columbia
to conclude the Group’s most significant ongoing United States
federal government investigations, the Group was notified by
a consortium of US state attorneys general that they were
investigating the conduct underlying the Group’s 2012 federal
and state settlements related to products other than Avandia to
determine if the Group violated state unfair and deceptive trade
practices statutes. The Group has resolved these allegations with
47 states and the District of Columbia through civil settlement
agreements. No other state attorney general actions are pending
related to this matter.
Avandia
The Group is defending an action by the County of Santa Clara,
California, which was brought under California’s consumer
protection laws seeking civil penalties and restitution as a result
of the Group’s marketing of Avandia. Pre-trial activities are
continuing. If the case proceeds to trial, the MDL Court will
send the case back to California federal court for a bench trial.
Seven lawsuits were filed on behalf of Native American tribes
relating to the sale and marketing of Avandia and other Group
products. The Group resolved all claims by and against these
groups in December 2014.
Average wholesale price
A number of states through their respective Attorneys General,
and most of the counties in New York State, filed civil lawsuits
in state and federal courts against the Group and many other
pharmaceutical companies claiming damages and restitution due
to average wholesale price (AWP) and/or wholesale acquisition
cost (WAC) price reporting for pharmaceutical products covered
by the states’ Medicaid programmes. These cases alleged that the
Group reported or caused to be reported false AWP and WAC
prices, which, in turn, allegedly caused state Medicaid agencies
to reimburse providers more money for covered medicines than
the agencies intended. The states have sought recovery on behalf
of the states as payers and, in some cases, on behalf of in-state
patients as consumers. The Group has resolved AWP claims
by state Medicaid programmes in almost all of the states through
the Group’s settlement agreement with the federal government
announced in September 2005 and in multiple additional
settlements since then. Litigation concerning AWP issues
is continuing with two states, Illinois and Wisconsin. No trial
involving the Group is scheduled for 2015.
Cidra third-party payer litigation
On 25 July 2013, a number of major US healthcare insurers
filed suit against the Group in the Philadelphia, Pennsylvania
County Court of Common Pleas seeking compensation for
reimbursements they made for medicines manufactured at the
Group’s former Cidra plant in Puerto Rico. These insurers claim
that the Group knowingly and illegally marketed and sold
adulterated drugs manufactured under conditions non-compliant
with cGMP and that they, as third-party insurers, were unlawfully
induced to pay for them. The suit alleges both US federal and
various state law causes of action.
On 12 August 2013, the Group removed the case to the United
States District Court for the Eastern District of Pennsylvania and
has moved to dismiss the complaint. Oral argument on the motion
to dismiss was held on 4 February 2013. The case has been
stayed pending the decision of the United States Court of Appeals
for the Third Circuit on an overlapping, potentially dispositive
issue in the Group’s third-party payer litigation regarding Avandia.
The Group has made no provision for this matter.
The manufacturing issues at the Group’s plant at Cidra were the
subject of federal and state claims that the Group resolved with
the US federal Government in 2010 and for which the Group has
compliance obligations under a Corporate Integrity Agreement
with the US Government.
Paxil/Seroxat
In 2004, the Group settled a lawsuit filed by the New York State
Attorney General’s office alleging that the Group failed to disclose
data on the use of Paxil in children and adolescents. In 2007 and
2008, the Group made class settlements of lawsuits brought by
consumers and third-party payers, respectively, for economic
damages allegedly resulting from prescriptions of Paxil to children
and adolescents. The Group denied liability in these settlements.
In 2010, plaintiffs voluntarily dismissed a similar purported class
action filed on behalf of governmental entities that paid for
prescriptions of Paxil to minors.
There remains a similar purported class action in Canada
seeking economic damages on behalf of individuals who
purchased Paxil for use by patients under the age of 18. The
certification application as part of this purported class action
was adjourned in 2012 to permit the filing of further evidence
and is likely to resume in 2015.
Anti-trust/competition
The Group has been able to make a reliable estimate of the
expected financial effect of the matters discussed in this category
and has included a provision for such matters in the provision for
legal and other disputes, except as noted below. Matters for which
the Group has made a provision are also noted in Note 29, ‘Other
provisions’.
EU sector enquiry
In 2008, the European Commission launched an enquiry
to investigate possible anti-competitive conditions in the
pharmaceutical sector. The Final Report of the Pharmaceutical
Sector Inquiry was published on 8 July 2009. As announced in
the Final Report, the Commission decided to continue monitoring
patent settlement agreements between originator and generic
companies relating to EU markets. As a result, the Group has
provided input to the reports published in 2010, 2011, 2012,
2013 and 2014. No provision has been made for this matter.
UK Competition and Markets Authority investigation
On 12 August 2011, the UK Office of Fair Trading (now known as
the Competition and Markets Authority (CMA)) launched a formal
investigation of the Group and other pharmaceutical companies
for potential infringement of the Competition Act. The investigation
focuses on whether: (i) litigation settlements between the Group
and potential suppliers of generic paroxetine formulations, entered
between 2001 and 2003, had as their object or effect the
prevention, restriction, or distortion of competition in the UK,
and (ii) the Group has infringed its dominant position by making
payments to potential suppliers of generic paroxetine with the aim
of restricting the development of full generic competition in the UK.
The Group terminated the agreements at issue in 2004. The CMA
investigation covers issues that were also investigated by the
European Commission in 2005 – 2006 in respect of paroxetine
in the European Union, and also in 2008, as part of the European
Commission Pharmaceutical Sector enquiry.
GSK Annual Report 2014 209
Governance & remunerationFinancial statementsInvestor informationStrategic report Notes to the financial statements
continued
45 Legal proceedings continued
On 2 March 2012, the Commission announced that it had formally
concluded its enquiry with no further action. In March 2012, the
CMA decided to focus its investigation on potential anti-competitive
aspects of the paroxetine settlement agreements and dropped the
investigation in relation to potential abuse of dominance. However,
in February 2013, the CMA decided to re-open the dominance
aspects of the matter.
The Group has cooperated with the CMA in its investigations
since the outset. On 19 April 2013, the CMA issued its Statement
of Objections (SO) setting out the decision that the CMA would
propose to make and allowing the affected parties to make
representations on the proposed decision. In the SO, the CMA
states that it would propose a fine on the Group, but no details
were provided on how any fine might be calculated. On 7 August
2013, the Group submitted its response to the SO, rebutting the
CMA’s arguments. On 21 October 2014, the CMA issued a
Secondary Statement of Objections, amending its “theory of
harm”. The Group responded on 2 December 2014. At a “State
of Play” meeting on 22 January 2015, the CMA informed the
Group that no final decision has been made, but that it will
continue its investigation. The CMA’s website indicates that
a final decision will be made in late spring 2015. If the CMA
decides to fine the Group, the CMA’s decision may be appealed
to the Competition Appeal Tribunal.
Lamictal
Purported direct and indirect purchaser class actions were filed
in the United States District Court for the District of New Jersey
alleging that the Group and Teva Pharmaceuticals unlawfully
conspired to delay generic competition for Lamictal, resulting
in their being overcharged. A separate count accuses the Group
of monopolising the market. The District Court denied the motion
of the purported direct purchaser class for reconsideration of the
order granting the Group’s motion to dismiss in December 2012.
The plaintiffs have appealed this decision to the United States
Court of Appeals for the Third Circuit, and oral argument was heard
on 18 November 2014. We await decision by the Third Circuit.
The action by the purported indirect purchase class has been
suspended pending a decision on the direct purchasers’ appeal.
Wellbutrin XL
Actions have been filed against Biovail Corporation (Biovail)
and the Group in the United States District Court for the Eastern
District of Pennsylvania by purported classes of direct and indirect
purchasers who allege unlawful monopolisation and other anti-
trust violations related to the enforcement of Biovail’s patents for
Wellbutrin XL and the filing, by Biovail, of citizen petitions. Both
direct and indirect purchaser classes have been certified, although
a motion to decertify the indirect purchaser class remains pending.
The District Court granted the Group’s motion for partial summary
judgment primarily on immunity grounds.
The sole remaining claim relates to plaintiffs’ allegations that the
Group entered into an anti-competitive reverse payment settlement
to resolve the patent infringement litigation. Dispositive motions
in connection with the remaining issue in the case are due on
20 March 2015.
Commercial and corporate
Where the Group is able to make a reliable estimate of the
expected financial effect, if any, for the matters discussed in this
category, it has included a provision in respect of such matters
in the provision for legal and other disputes as set out in Note 29,
‘Other provisions’.
Securities/ERISA class actions – Stiefel
On 6 July 2009, a class action suit brought on behalf of current
and former employees of Stiefel Laboratories, Inc. (Stiefel),
a Group company, was filed in the United States District Court
for the Southern District of Florida.
210 GSK Annual Report 2014
The complaint alleges that Stiefel and its officers and directors
violated the US Employee Retirement Income Security Act (ERISA)
and federal and state securities laws by inducing Stiefel employees
to sell their shares in the employee stock plan back to Stiefel at a
greatly undervalued price and without disclosing to employees that
Stiefel was about to be sold to the Group. On 21 July 2011, the
District Court denied plaintiffs’ motion for class certification.
In October 2011, the District Court granted the defendants’
motions for summary judgment, dismissing all but one of the
remaining plaintiffs in the litigation. Trial of claims of that one
plaintiff, Timothy Finnerty, took place in May 2012 and resulted in
a $1.5 million jury verdict in favour of Mr. Finnerty on his securities
claims (separately, the Group settled Mr. Finnerty’s ERISA claims).
The Group appealed the verdict, but the Court of Appeals for the
Eleventh Circuit affirmed the verdict on 30 June 2014. A petition
for certiorari has been filed with the US Supreme Court.
Additionally, Stiefel won a complete defence verdict in the Fried
case, tried in federal court in Florida in October 2013. Plaintiff
appealed that verdict to the Eleventh Circuit, and a decision from
that Court is pending. Two other Stiefel cases pending in Florida
now have been dismissed: the Bacon case, settled by the Group
in January 2015, and MacKay (in which summary judgment was
granted in favour of the Group, a ruling that was later upheld by
the 11th Circuit). The remaining case in Florida (Martinolich) is
scheduled for trial in August 2015. Discovery continues in the
Georgia and New York suits. All of these lawsuits involve claims
similar to those brought in Finnerty.
In addition to the private litigant suits, on 12 December 2011,
the US Securities and Exchange Commission (SEC) filed a formal
complaint against Stiefel and Charles Stiefel in the United States
District Court for the District of Florida alleging that Stiefel and
its principals violated federal securities laws by inducing Stiefel
employees to sell their shares in the employee stock plan back to
the company at a greatly undervalued price and without disclosing
to employees that the company was about to be sold. This matter
has been stayed pending a final ruling on the Finnerty appeal.
The Group has made a provision for the Stiefel litigation.
Environmental matters
The Group has been notified of its potential responsibility relating
to past operations and its past waste disposal practices at certain
sites, primarily in the USA. Some of these matters are the subject
of litigation, including proceedings initiated by the US federal or
state governments for waste disposal, site remediation costs and
tort actions brought by private parties.
The Group has been advised that it may be a responsible party
at approximately 22 sites, of which 11 appear on the National
Priority List created by the Comprehensive Environmental
Response Compensation and Liability Act (Superfund). These
proceedings seek to require the operators of hazardous waste
facilities, transporters of waste to the sites and generators of
hazardous waste disposed of at the sites to clean up the sites
or to reimburse the US Government for cleanup costs. In most
instances, the Group is involved as an alleged generator of
hazardous waste.
Although Superfund provides that the defendants are jointly
and severally liable for clean up costs, these proceedings are
frequently resolved on the basis of the nature and quantity of waste
disposed of by the generator at the site. The Group’s proportionate
liability for cleanup costs has been substantially determined for
18 of the sites referred to above.
The Group’s potential liability varies greatly from site to site. While
the cost of investigation, study and remediation at such sites could,
over time, be significant, the Group routinely accrues amounts
related to its share of the liability for such matters.
Governance & remunerationFinancial statementsInvestor informationStrategic report Financial statements of GlaxoSmithKline plc
prepared under UK GAAP
Disclosure of information to auditors
The Directors in office at the date of this Annual Report have each
confirmed that:
• so far as he or she is aware, there is no relevant audit information
of which the company’s auditors are unaware; and
• he or she has taken all the steps that he or she ought to have
taken as a Director to make himself or herself aware of any
relevant audit information and to establish that the company’s
auditors are aware of that information.
This confirmation is given and should be interpreted in accordance
with the provisions of section 418 of the Companies Act 2006.
Going concern basis
After making enquiries, the Directors have a reasonable
expectation that the company has adequate resources to continue
in operational existence for the foreseeable future. For this reason,
they continue to adopt the going concern basis in preparing the
financial statements.
The UK Corporate Governance Code
The Board considers that GlaxoSmithKline plc applies the
principles and provisions of the UK Corporate Governance
Code maintained by the Financial Reporting Council, as described
in the Corporate Governance section on pages 78 to 95, and
has complied with its provisions. The Board further considers
that the Annual Report, taken as a whole, is fair, balanced and
understandable, and provides the information necessary for
shareholders to assess the Group’s performance, business
model and strategy.
As required by the Financial Conduct Authority’s Listing Rules,
the auditors have considered the Directors’ statement of
compliance in relation to those points of the UK Corporate
Governance Code which are specified for their review.
Sir Christopher Gent
Chairman
26 February 2015
Directors’ statement of responsibilities
in relation to the company’s financial
statements
The Directors are responsible for preparing the parent company,
GlaxoSmithKline plc, financial statements and the Remuneration
report in accordance with applicable law and regulations.
UK company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have elected to prepare the parent company financial statements
in accordance with United Kingdom Accounting Standards and
applicable law (United Kingdom Generally Accepted Accounting
Practice). Under company law the Directors must not approve the
parent company financial statements unless they are satisfied that
they give a true and fair view of the state of affairs of the company
for that period.
In preparing those financial statements, the Directors are required
to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and accounting estimates that are reasonable
and prudent;
• state with regard to the parent company financial statements
that applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in
the parent company financial statements;
• prepare the financial statements on a going concern basis
unless it is inappropriate to presume that the Group will continue
in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the company and to enable them to ensure that
the parent company financial statements and Remuneration report
comply with the Companies Act 2006. They are also responsible
for safeguarding the assets of the company and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
The parent company financial statements for the year ended
31 December 2014, comprising the balance sheet for the year
ended 31 December 2014 and supporting notes, are set out
on pages 213 to 216 of this report.
The responsibilities of the auditors in relation to the parent
company financial statements are set out in the Independent
Auditors’ report on page 212.
The financial statements for the year ended 31 December 2014
are included in the Annual Report, which is published in printed
form and made available on our website. The Directors are
responsible for the maintenance and integrity of the Annual Report
on our website in accordance with UK legislation governing the
preparation and dissemination of financial statements. Access to
the website is available from outside the UK, where comparable
legislation may be different.
The Strategic Report and risk sections of the Annual Report
include a fair review of the development and performance of the
business and the position of the company and the Group taken
as a whole, together with a description of the principal risks and
uncertainties that it faces.
GSK Annual Report 2014 211
Governance & remunerationFinancial statementsInvestor informationStrategic report Independent Auditor’s report
to the members of GlaxoSmithKline plc
Report on the parent company financial
statements
Our Opinion
In our opinion, the parent company financial statements defined
below:
• give a true and fair view of the state of the parent company’s
affairs as at 31 December 2014;
• have been properly prepared in accordance with United
Kingdom Generally Accepted Accounting Practice; and
• have been prepared in accordance with the requirements
of the Companies Act 2006.
What we have audited
GlaxoSmithKline plc’s financial statements comprise:
• the Company balance sheet as at 31 December 2014; and
• the notes to the Company balance sheet, which include a
summary of significant accounting policies and other explanatory
information.
The financial reporting framework that has been applied in the
preparation of the financial statements is applicable law and
United Kingdom Accounting Standards (United Kingdom
Generally Accepted Accounting Practice).
Other required reporting
Consistency of other information
Companies Act 2006 opinion
In our opinion, the information given in the Strategic Report
and the Directors’ Report for the financial year for which the
financial statements are prepared is consistent with the
financial statements.
ISAs (UK & Ireland) reporting
Under International Standards on Auditing (UK and Ireland)
(‘ISAs (UK & Ireland)’) we are required to report to you if, in
our opinion, information in the Annual Report is:
• materially inconsistent with the information in the audited
financial statements; or
• apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the company acquired
in the course of performing our` audit; or
• otherwise misleading.
We have no exceptions to report arising from this responsibility.
Adequacy of accounting records and information and
explanations received
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
• we have not received all the information and explanations we
require for our audit; or
• adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been
received from branches not visited by us; or
• the financial statements and the part of the Directors’
Remuneration report to be audited are not in agreement with
the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Directors’ remuneration
Directors’ Remuneration report – Companies Act 2006 opinion
In our opinion, the part of the Directors’ Remuneration report to be
audited has been properly prepared in accordance with the
Companies Act 2006.
Other Companies Act 2006 reporting
Under the Companies Act 2006 we are required to report to you
if, in our opinion, certain disclosures of directors’ remuneration
specified by law are not made. We have no exceptions to report
arising from this responsibility.
212 GSK Annual Report 2014
Responsibilities for the financial statements
and the audit
Our responsibilities and those of the directors
As explained more fully in the Directors’ statement of
responsibilities set out on page 211, the directors are responsible
for the preparation of the financial statements and for being
satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the
financial statements in accordance with applicable law and ISAs
(UK & Ireland). Those standards require us to comply with the
Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only
for the company’s members as a body in accordance with Chapter
3 of Part 16 of the Companies Act 2006 and for no other purpose.
We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to whom
this report is shown or into whose hands it may come save where
expressly agreed by our prior consent in writing.
What an audit of financial statements involves
We conducted our audit in accordance with ISAs (UK & Ireland).
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes
an assessment of:
• whether the accounting policies are appropriate to the parent
company’s circumstances and have been consistently applied
and adequately disclosed;
• the reasonableness of significant accounting estimates made
by the directors; and
• the overall presentation of the financial statements.
We primarily focus our work in these areas by assessing the
directors’ judgements against available evidence, forming our
own judgements, and evaluating the disclosures in the financial
statements.
We test and examine information, using sampling and other
auditing techniques, to the extent we consider necessary to
provide a reasonable basis for us to draw conclusions. We obtain
audit evidence through testing the effectiveness of controls,
substantive procedures or a combination of both.
In addition, we read all the financial and non-financial information
in the Annual Report to identify material inconsistencies with the
audited financial statements and to identify any information that is
apparently materially incorrect based on, or materially inconsistent
with, the knowledge acquired by us in the course of performing the
audit. If we become aware of any apparent material misstatements
or inconsistencies we consider the implications for our report.
Other matter
We have reported separately on the group financial statements
of GlaxoSmithKline plc for the year ended 31 December 2014.
The company has passed a resolution in accordance with section
506 of the Companies Act 2006 that the senior statutory auditor’s
name should not be stated.
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
26 February 2015
Governance & remunerationFinancial statementsInvestor informationStrategic report Company balance sheet – UK GAAP
at 31 December 2014
Fixed assets – investments
Debtors
Cash at bank
Current assets
Creditors: amounts due within one year
Net current assets
Total assets less current liabilities
Provisions for liabilities
Net assets
Capital and reserves
Called up share capital
Share premium account
Other reserves
Profit and loss account
Equity shareholders’ funds
Notes
E
F
G
H
I
I
J
J
2014
£m
19,691
10,900
2
10,902
(1,799)
9,103
28,794
(25)
28,769
2013
£m
19,691
3,358
12
3,370
(531)
2,839
22,530
–
22,530
1,339
2,759
1,420
23,251
1,336
2,595
1,420
17,179
28,769
22,530
The financial statements on pages 213 to 216 were approved by the Board on 26 February 2015 and signed on its behalf by
Sir Christopher Gent
Chairman
GlaxoSmithKline plc
Registered number: 3888792
GSK Annual Report 2014 213
Governance & remunerationFinancial statementsInvestor informationStrategic report
Notes to the company balance sheet –
UK GAAP
A) Presentation of the financial statements
Description of business
GlaxoSmithKline plc is the parent company of GSK, a major global
healthcare group which is engaged in the creation and discovery,
development, manufacture and marketing of pharmaceutical
products, including vaccines, over-the-counter (OTC) medicines
and health-related consumer products.
Preparation of financial statements
The financial statements, which are prepared on a going concern
basis, are drawn up in accordance with UK Generally Accepted
Accounting Practice (UK GAAP) and with UK accounting
presentation as at 31 December 2014, with comparative figures
as at 31 December 2013. Where appropriate, comparative figures
are reclassified to ensure a consistent presentation with current
year information.
As permitted by section 408 of the Companies Act 2006,
the profit and loss account of the company is not presented
in this Annual Report.
The company is included in the Group financial statements of
GlaxoSmithKline plc, which are publicly available. Advantage
has been taken of the exemption provided by FRS 1 ‘Cash flow
statements (revised 1996)’ not to prepare a cash flow
statement and of the exemption provided by FRS 8 ‘Related
party disclosures’ not to disclose any related party transactions
within the Group.
Accounting convention and standards
The balance sheet has been prepared using the historical
cost convention and complies with applicable UK accounting
standards.
Accounting principles and policies
The preparation of the balance sheet in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the balance sheet. Actual amounts could
differ from those estimates.
The balance sheet has been prepared in accordance with the
company’s accounting policies approved by the Board and
described in Note B.
B) Accounting policies
Foreign currency transactions
Foreign currency transactions are recorded at the exchange rate
ruling on the date of transaction, or at the forward rate if hedged
by a forward exchange contract. Foreign currency assets and
liabilities are translated at rates of exchange ruling at the balance
sheet date, or at the forward rate.
Dividends paid and received
Dividends paid and received are included in the financial
statements in the period in which the related dividends are
actually paid or received.
Expenditure
Expenditure is recognised in respect of goods and services
received when supplied in accordance with contractual terms.
Provision is made when an obligation exists for a future liability
in respect of a past event and where the amount of the obligation
can be reliably estimated.
Investments in subsidiary companies
Investments in subsidiary companies are held at cost less any
provision for impairment.
Impairment of investments
The carrying value of investments are reviewed for impairment
when there is an indication that the investment might be impaired.
Any provision resulting from an impairment review is charged to
the income statement in the year concerned.
Share based payments
The issuance by the company to its subsidiaries of a grant over
the company’s shares, represents additional capital contributions
by the company in its subsidiaries. An additional investment in
subsidiaries results in a corresponding increase in shareholders’
equity. The additional capital contribution is based on the fair value
of the grant issued, allocated over the underlying grant’s vesting
period.
Taxation
Current tax is provided at the amounts expected to be paid
applying tax rates that have been enacted or substantively
enacted by the balance sheet date.
The company accounts for taxation which is deferred or
accelerated by reason of timing differences which have originated
but not reversed by the balance sheet date. Deferred tax assets
are only recognised to the extent that they are considered
recoverable against future taxable profits.
Deferred tax is measured at the average tax rates that are expected
to apply in the periods in which the timing differences are expected
to reverse. Deferred tax liabilities and assets are not discounted.
Financial guarantees
Liabilities relating to guarantees issued by the company on behalf
of its subsidiaries are initially recognised at fair value and
amortised over the life of the guarantee.
Legal and other disputes
The company provides for anticipated settlement costs where
an outflow of resources is considered probable and a reliable
estimate may be made of the likely outcome of the dispute and
legal and other expenses arising from claims against the company.
C) Operating profit
A fee of £11,523 (2013 – £10,299) relating to the audit of the
company has been charged in operating profit.
D) Dividends
The directors declared four interim dividends resulting in a
dividend for the year of 80 pence, a 2 pence increase on the
dividend for 2013. For further details, see Note 16 to the Group
financial statements, ‘Dividends’.
214 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report 2014
£m
613
18
17,888
33
18,552
1,139
19,691
2013
£m
613
18
17,888
33
18,552
1,139
19,691
2014
£m
2013
£m
205
3
205
10,055
10,468
432
10,900
203
–
–
2,761
2,964
394
3,358
2013
£m
10
460
61
531
Notes to the company balance sheet – UK GAAP continued
E) Fixed assets – investments
Shares in GlaxoSmithKline Services Unlimited
Shares in GlaxoSmithKline Holdings (One) Limited
Shares in GlaxoSmithKline Holdings Limited
Shares in GlaxoSmithKline Mercury Limited
Capital contribution relating to share based payments
F) Debtors
Amounts due within one year:
UK Corporation tax recoverable
Other receivables
Deferred tax recoverable
Amounts owed by Group undertakings
Amounts due after more than one year:
Amounts owed by Group undertakings
The deferred tax asset arises as a result of the recognition of deferred tax on tax losses expected to be used on completion of the
Novartis transaction.
G) Creditors
Amounts due within one year:
Bank overdraft
Other creditors
Amounts owed to Group undertakings
2014
£m
–
497
1,302
1,799
The company has guaranteed debt issued by one of its subsidiary companies for which it receives an annual fee from the subsidiary.
In aggregate, the company has outstanding guarantees over $9 billion of debt instruments.
The amounts due from the subsidiary companies in relation to these guarantee fees will be recovered over the life of the bonds and are
disclosed within debtors (see Note F).
H) Provisions for liabilities
At 1 January
Charge for the year
Utilised
Other movements
At 31 December
2014
£m
–
148
(138)
15
25
2013
£m
–
–
–
–
–
The provisions for liabilities relate to a number of legal and other disputes in which the company is currently involved.
GSK Annual Report 2014 215
Governance & remunerationFinancial statementsInvestor informationStrategic report Notes to the company balance sheet – UK GAAP continued
I) Called up share capital and share premium account
Share capital authorised
At 31 December 2013
At 31 December 2014
Share capital issued and fully paid
At 1 January 2013
Issued under employee share schemes
Share capital cancelled
At 31 December 2013
Issued under employee share schemes
At 31 December 2014
Number of shares issuable under outstanding options
Number of unissued shares not under option
Ordinary Shares of 25p each
Number
£m
Share
premium
account
£m
10,000,000,000
10,000,000,000
5,397,595,969
44,610,727
(100,000,000)
5,342,206,696
13,090,536
5,355,297,232
31 December
2014
000
88,801
4,555,902
2,500
2,500
1,349
12
(25)
1,336
3
1,339
2,022
573
–
2,595
164
2,759
31 December
2013
000
91,303
4,566,351
At 31 December 2014, of the issued share capital, 52,734,605 shares were held in the ESOP Trusts, 491,515,950 shares were held
as Treasury shares and 4,811,046,677 shares were in free issue. All issued shares are fully paid. The nominal, carrying and market
values of the shares held in the ESOP Trusts are disclosed in Note 42, ‘Employee share schemes’.
A total of 15 million shares were purchased by the company during 2014 at a cost of £238 million.
J) Reserves
At 1 January 2013
Profit attributable to shareholders
Dividends to shareholders
Shares purchased and cancelled or held as Treasury shares
Capital contribution relating to share based payments
At 31 December 2013
Profit attributable to shareholders
Dividends to shareholders
Shares purchased and held as Treasury shares
Treasury shares transferred to the ESOT held by a subsidiary company
At 31 December 2014
Other
reserves
£m
1,393
–
–
25
2
1,420
–
–
–
–
1,420
Profit and
loss account
£m
22,401
(38)
(3,680)
(1,504)
–
17,179
10,003
(3,843)
(238)
150
23,251
Total
£m
23,794
(38)
(3,680)
(1,479)
2
18,599
10,003
(3,843)
(238)
150
24,671
The profit of GlaxoSmithKline plc for the year was £10,003 million (2013 – £38 million loss), which after dividends of £3,843 million
(2013 – £3,680 million), gave a retained profit of £6,160 million (2013 – £3,718 million loss). After the cost of shares purchased
and held as Treasury shares of £238 million (2013 – £1,504 million) and the effect of the £150 million Treasury shares transferred
to a subsidiary company (2013 – £nil), the profit and loss account reserve at 31 December 2014 stood at £23,251 million
(2013 – £17,179 million), of which £4,096 million is unrealised (2013 – £4,096 million).
K) Adoption of Financial Reporting Standard (FRS) 101 ‘Reduced Disclosure Framework’
Following the publication of FRS 100 ‘Application of Financial Reporting Requirements’, GlaxoSmithKline plc is required to change its
accounting framework for its entity financial statements, which is currently UK GAAP, for its financial year commencing 1 January 2015.
It considers that it is in the best interests of the Group for GlaxoSmithKline plc to adopt FRS 101. No disclosures in the current financial
statements would be omitted on adoption of FRS 101.
216 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
Investor
information
In this section
Quarterly trend
Five year record
Product development pipeline
Products, competition and
intellectual property
Risk factors
Share capital and share price
Dividends
Tax information for shareholders
Annual General Meeting 2015
US law and regulation
Shareholder services and contacts
Glossary of terms and index
218
222
225
229
232
242
244
244
245
247
249
251
GSK Annual Report 2014 217
GSK Annual Report 2014 217
Governance & remunerationFinancial statementsInvestor informationStrategic report Financial record
Quarterly trend
An unaudited analysis of the Group results is provided by quarter in Sterling for the financial year 2014.
12 months 2014
Q4 2014
Q3 2014
Q2 2014
CER%
(6)
(11)
(7)
(11)
4
(8)
(18)
£%
(12)
(18)
(13)
(15)
(3)
(12)
(20)
(40)
(49)
(46)
(55)
(41)
(50)
(40)
(49)
(3)
(3)
(2)
(4)
(18)
(6)
(10)
(8)
(9)
(8)
(20)
(15)
(6)
(16)
(2)
(12)
£m
5,070
1,116
6,186
(2,029)
(2,207)
(979)
67
(347)
691
(171)
–
11
531
494
(93.0)%
1,025
(8)
1,033
21.5p
21.3p
6,186
(1,798)
(1,864)
(821)
67
1,770
(168)
11
1,613
(246)
15.3%
1,367
52
1,315
£m
CER%
£m
CER%
CER%
(7)
(7)
(7)
(18)
4
(7)
(31)
£%
(10)
(10)
(10)
(20)
–
(9)
(32)
(69)
(72)
(52)
(55)
(8)
(21)
(12)
(33)
(77)
(79)
(56)
(59)
(55)
(58)
(5)
(3)
(2)
(8)
(31)
(9)
(8)
(6)
(5)
(9)
(32)
(12)
(10)
(14)
(2)
(6)
(1)
(12)
27.3p
(1)
(6)
19.1p
(12)
(25)
(58)
(61)
(9)
(23)
(13)
(36)
(59)
(62)
(22)
(35)
(56)
(59)
(23)
(37)
4,575
1,071
5,646
(1,829)
(2,013)
(803)
101
(399)
703
(165)
–
10
548
(163)
29.7%
385
(16)
401
8.3p
8.2p
5,646
(1,641)
(1,477)
(742)
101
1,887
(161)
10
1,736
(348)
20.0%
1,388
47
1,341
27.9p
(4)
(13)
(6)
(9)
15
(6)
11
£%
(12)
(20)
(13)
(13)
(11)
1
7
(3)
(1)
(6)
(1)
11
(1)
4
5
(10)
(6)
(19)
(6)
7
(6)
(1)
–
(6)
(14)
(8)
(7)
1
(18)
(10)
£%
(14)
(23)
(16)
(13)
(7)
(23)
(12)
(4)
(3)
3
(3)
(10)
(14)
(13)
(9)
(6)
(9)
(12)
(25)
(12)
(24)
4,539
1,022
5,561
(1,722)
(2,055)
(809)
72
90
1,137
(159)
–
8
986
(284)
28.8%
702
48
654
13.6p
13.4p
5,561
(1,538)
(1,922)
(766)
72
1,407
(156)
8
1,259
(277)
22.0%
982
61
921
(1)
(5)
(14)
(26)
Q1 2014
£m
CER%
(5)
(9)
(6)
(7)
(3)
(1)
(36)
£%
(12)
(18)
(13)
(12)
(5)
(5)
(38)
4,486
1,127
5,613
(1,743)
(1,971)
(859)
70
(44)
1,066
(164)
–
1
903
(184)
20.4%
719
51
668
13.9p
13.7p
5,613
(1,558)
(1,811)
(784)
70
1,530
(161)
1
1,370
(301)
22.0%
1,069
62
1,007
21.0p
(6)
(30)
(4)
(30)
(2)
(5)
(3)
(4)
(36)
–
–
1
2
(10)
(10)
(5)
(8)
(38)
(18)
(20)
(20)
(20)
Income statement – total
Turnover – Pharmaceuticals and Vaccines
– Consumer Healthcare
Total turnover
Cost of sales
Selling, general and administration
Research and development
Royalty income
Other operating income
Operating profit
Net finance costs
Profit on disposal of interest in associates and joint ventures
Share of after tax profits of associates and joint ventures
Profit before taxation
Taxation
Tax rate %
Profit after taxation for the period
Profit attributable to non-controlling interests
Profit attributable to shareholders
Basic earnings per share (pence)
Diluted earnings per share (pence)
Income statement – core
Total turnover
Cost of sales
Selling, general and administration
Research and development
Royalty income
Operating profit
Net finance costs
Share of after tax profits of associates and joint ventures
Profit before taxation
Taxation
Tax rate %
Profit after taxation for the period
Profit attributable to non-controlling interests
Profit attributable to shareholders
Adjusted earnings per share (pence)
The calculation of core results is described on page 52.
£m
18,670
4,336
23,006
(7,323)
(8,246)
(3,450)
310
(700)
3,597
(659)
–
30
2,968
(137)
4.6%
2,831
75
2,756
57.3p
56.7p
23,006
(6,535)
(7,074)
(3,113)
310
6,594
(646)
30
5,978
(1,172)
19.6%
4,806
222
4,584
95.4p
218 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report An unaudited analysis of the Group results is provided by quarter in Sterling for the financial year 2014.
Quarterly trend
Income statement – total
Turnover – Pharmaceuticals and Vaccines
– Consumer Healthcare
Total turnover
Cost of sales
Selling, general and administration
Research and development
Royalty income
Other operating income
Operating profit
Net finance costs
Profit before taxation
Taxation
Tax rate %
Profit after taxation for the period
Profit attributable to non-controlling interests
Profit attributable to shareholders
Basic earnings per share (pence)
Diluted earnings per share (pence)
Profit on disposal of interest in associates and joint ventures
Share of after tax profits of associates and joint ventures
Income statement – core
Total turnover
Cost of sales
Selling, general and administration
Research and development
Royalty income
Operating profit
Net finance costs
Profit before taxation
Taxation
Tax rate %
Share of after tax profits of associates and joint ventures
Profit after taxation for the period
Profit attributable to non-controlling interests
Profit attributable to shareholders
Adjusted earnings per share (pence)
The calculation of core results is described on page 52.
18,670
4,336
23,006
(7,323)
(8,246)
(3,450)
310
(700)
3,597
(659)
–
30
2,968
(137)
4.6%
2,831
75
2,756
57.3p
56.7p
23,006
(6,535)
(7,074)
(3,113)
310
6,594
(646)
30
5,978
(1,172)
19.6%
4,806
222
4,584
95.4p
£m
CER%
£m
CER%
(6)
(11)
(7)
(11)
4
(8)
(18)
£%
(12)
(18)
(13)
(15)
(3)
(12)
(20)
(7)
(7)
(7)
(18)
4
(7)
(31)
£%
(10)
(10)
(10)
(20)
–
(9)
(32)
(40)
(49)
(69)
(72)
(46)
(55)
(77)
(79)
(41)
(50)
(56)
(59)
(40)
(49)
(55)
(58)
(3)
(3)
(2)
(4)
(18)
(6)
(10)
(8)
(9)
(8)
(20)
(15)
(5)
(3)
(2)
(8)
(31)
(9)
(8)
(6)
(5)
(9)
(32)
(12)
(6)
(16)
(10)
(14)
(2)
(12)
(2)
(6)
(1)
(12)
27.3p
(1)
(6)
5,070
1,116
6,186
(2,029)
(2,207)
(979)
67
(347)
691
(171)
–
11
531
494
(93.0)%
1,025
(8)
1,033
21.5p
21.3p
6,186
(1,798)
(1,864)
(821)
67
1,770
(168)
11
1,613
(246)
15.3%
1,367
52
1,315
12 months 2014
Q4 2014
Q3 2014
Q2 2014
Q1 2014
£m
4,575
1,071
5,646
(1,829)
(2,013)
(803)
101
(399)
703
(165)
–
10
548
(163)
29.7%
385
(16)
401
8.3p
8.2p
5,646
(1,641)
(1,477)
(742)
101
1,887
(161)
10
1,736
(348)
20.0%
1,388
47
1,341
27.9p
CER%
(4)
(13)
(6)
(9)
15
(6)
11
£%
(12)
(20)
(13)
(13)
1
(11)
7
(52)
(55)
(58)
(61)
(59)
(62)
(56)
(59)
(3)
(1)
(6)
(1)
11
(1)
(10)
(6)
(19)
(6)
7
(6)
(1)
(5)
4
5
(1)
–
£m
4,539
1,022
5,561
(1,722)
(2,055)
(809)
72
90
1,137
(159)
–
8
986
(284)
28.8%
702
48
654
13.6p
13.4p
5,561
(1,538)
(1,922)
(766)
72
1,407
(156)
8
1,259
(277)
22.0%
982
61
921
19.1p
CER%
(6)
(14)
(8)
(7)
1
(18)
(10)
£%
(14)
(23)
(16)
(13)
(7)
(23)
(12)
(8)
(21)
(9)
(23)
(22)
(35)
(23)
(37)
(4)
(3)
3
(3)
(10)
(14)
(13)
(9)
(6)
(9)
(12)
(25)
(14)
(26)
(12)
(24)
(12)
(25)
£m
4,486
1,127
5,613
(1,743)
(1,971)
(859)
70
(44)
1,066
(164)
–
1
903
(184)
20.4%
719
51
668
13.9p
13.7p
5,613
(1,558)
(1,811)
(784)
70
1,530
(161)
1
1,370
(301)
22.0%
1,069
62
1,007
21.0p
CER%
(5)
(9)
(6)
(7)
(3)
(1)
(36)
£%
(12)
(18)
(13)
(12)
(5)
(5)
(38)
(12)
(33)
(13)
(36)
(6)
(30)
(4)
(30)
(2)
(5)
(3)
(4)
(36)
–
–
1
2
(10)
(10)
(5)
(8)
(38)
(18)
(20)
(20)
(20)
GSK Annual Report 2014 219
Governance & remunerationFinancial statementsInvestor informationStrategic report Financial record
continued
Pharmaceuticals and Vaccines turnover by therapeutic area 2014
Total
USA
Europe
Emerging Markets
Japan
Therapeutic area/
major products
Respiratory
Avamys/Veramyst
Flixotide/Flovent
Relvar/Breo Ellipta
Seretide/Advair
Ventolin
Other
Oncology
Arzerra
Mekinist
Promacta
Tafinlar
Tyverb/Tykerb
Votrient
Other
Cardiovascular,
metabolic and
urology (CVMU)
Avodart
Other
Immuno-
inflammation
Benlysta
Other
Other
pharmaceuticals
Dermatology
Augmentin
Other anti-bacterials
Rare diseases
Other
Innovative
Pharmaceuticals
Vaccines
Boostrix
Cervarix
Fluarix, FluLaval
Hepatitis
Infanrix, Pediarix
Rotarix
Synflorix
Other
Innovative
Pharmaceuticals
and Vaccines
ViiV Healthcare
(HIV)
Combivir
Epzicom/Kivexa
Lexiva/Agenerase
Selzentry
Tivicay
Trizivir
Other
Established
Products
Coreg
Hepsera
Imigran/Imitrex
Lamictal
Lovaza
Requip
Serevent
Seroxat/Paxil
Valtrex
Zeffix
Other
2013
2014 (restated)
£m
6,181
238
702
67
4,229
665
280
1,202
54
68
231
135
171
410
133
965
805
160
214
173
41
2,407
481
573
215
417
721
10,969
3,192
317
118
215
558
828
376
398
382
7,289
249
796
Growth
£%
£m CER%
(15)
(10)
(4)
5
(12)
(6)
8 >100 >100
(20)
(15)
5,274
11
4
642
(13)
(3)
320
33
24
969
(28)
(24)
75
10 >100 >100
24
34
16 >100 >100
(17)
(11)
24
33
(8)
(1)
207
331
144
186
2014
2,810
31
432
1,972
328
2014
Growth
Growth
£%
£m CER%
£%
£m CER%
(7)
(3)
1,675
(22)
(18)
–
4
69
(26)
(21)
(13)
(9)
102
(10)
(6)
–
–
18
29 >100 >100
(25)
(9)
(5)
(29) 1,330
(2)
2
124
13
18
3
10
32
18 >100 >100
23
29
417
34
41
509
(15)
(11)
23
(39)
(35)
28
–
–
–
67 >100 >100
71
91
29
36
25
32
67 >100 >100
58 >100 >100
(18)
(15)
67
(18)
(15)
45
18
23
153
26
32
181
(12)
(10)
36
(5)
–
39
293
280
13
12
12
–
660
150
189
61
134
126
1,073
857
216
(3)
1
(21)
(10)
(6)
(26)
364
258
106
(16)
(13)
(23)
(20)
(17)
(26)
161
146
33
40
18
25
15 >100 >100
196
155
32
39
16
22
41 >100 >100
2,674
631
630
224
495
694
12,166
3,420
288
172
251
629
862
375
405
438
(2)
(18)
(2)
3
(8)
15
(3 )
(1)
16
(26)
(9)
(6)
2
7
4
(6)
(10)
(24)
(9)
(4)
(16)
4
(10)
(7)
10
(31)
(14)
(11)
(4)
–
(2)
(13)
(31)
171
(56)
49
–
1
(14)
6
67
(38)
48 >100
(34)
(57)
–
(14)
(41)
92
(16)
(12)
4,050
(5)
–
930
(11)
(7)
163
(17)
(17)
5
(3)
2
142
(11)
(6)
234
10
15
297
(20)
(16)
86
–
–
–
3 >100 >100
3,057
978
78
48
22
186
369
67
40
168
–
8
(63)
63
63
–
(4)
(8)
(2)
(3)
9
(12)
–
(2)
26
(16)
(34)
(2)
(3)
19
(13)
(5)
(5)
3
(63)
50
50
–
(8)
(12)
(7)
(8)
4
(17)
(4)
(7)
20
(21)
(37)
(6)
(7)
14
(17)
(9)
2014
£m CER%
3
777
15
73
9
55
–
2
3
400
8
165
(18)
82
30
169
–
1
–
–
50
29
–
–
13
47
49
46
19
46
Growth
£%
(7)
3
(5)
–
(7)
(4)
(24)
13
–
–
32
–
–
24
7
145
113
32
20
20
19
7
9
3
3
3
–
>100 >100
>100 >100
–
–
1,053
240
356
145
40
272
2,147
1,056
55
63
30
97
104
179
355
173
5
(9)
(1)
6
(6)
30
(6)
(17)
(9)
(2)
(17)
11
7
1
(4)
(6)
>100 >100
(32)
(30)
(21)
(21)
9
1
(14)
(24)
(23)
(15)
(12)
18
7
(6)
2014
228
7
147
65
Growth
£%
£m CER%
(14)
(2)
475
(2)
48
10
(33)
(24)
28
17 >100 >100
(18)
(6)
(22)
(11)
(16)
(3)
3
17
3 >100 >100
–
–
–
27
33
10
–
–
–
(53)
(41)
8
89
17 >100
(33)
(33)
4
114
114
–
–
–
–
256
22
11
2
157
64
14
14
–
–
–
–
1
(7)
–
(33)
(3)
16
–
–
–
–
–
–
(12)
(21)
(15)
(33)
(15)
2
(11)
2
910
(25)
(14)
27
–
–
–
(100)
(100)
–
–
–
–
–
–
–
–
–
–
12
28
28
–
–
–
(1) <(100) <(100)
14,161
15,586
(3 )
(9)
4,980
(10)
(14)
4,035
–
(5)
3,203
5
(5)
937
1
(11 )
1,498
59
768
87
136
282
36
130
3,011
124
85
172
531
240
109
108
210
154
166
1,112
18,670
1,386
116
763
113
143
8
15
(49)
(46)
1
8
(23)
(17)
(5)
–
19 >100 >100
(63)
(61)
97
(4)
5
135
670
11
274
45
53
21
28
(68)
(67)
2
7
(27)
(24)
(9)
(4)
200 >100 >100
(82)
(81)
51
55
10
77
2
6
534
(54)
(52)
18
2
7
335
(28)
(25)
20
(7)
(3)
58
56 >100 >100
(31)
(28)
22
(32)
(30)
25
3,874
131
96
188
557
584
125
129
285
224
182
1,373
20,846
(16)
(1)
(5)
(4)
3
(57)
(4)
(12)
(19)
(24)
(3)
(12)
(4)
(22)
(5)
(11)
(9)
(5)
(59)
(13)
(16)
(26)
(31)
(9)
(19)
(10)
854
123
–
83
253
238
7
43
–
26
3
78
(31)
(1)
–
5
(4)
(57)
–
(12)
–
(40)
(77)
(28)
(34)
(5)
–
4
(8)
(59)
–
(16)
–
(42)
(77)
(33)
601
–
–
61
106
–
39
48
43
27
8
269
(13)
–
–
2
1
–
(19)
(9)
(15)
(3)
(25)
(19)
(16)
–
–
(3)
(4)
–
(25)
(13)
(19)
(7)
(33)
(22)
142
25
71
18
7
1
1
19
1,050
–
64
6
78
–
14
3
62
33
141
649
(4)
(20)
7
22
37
–
(53)
(33)
(1)
–
(3)
–
10
–
14
(25)
(13)
(3)
7
(3)
(17)
(27)
(9)
1
16
–
(61)
(37)
(9)
–
(9)
(14)
–
–
–
(25)
(22)
(18)
1
(10)
63
2
36
2
2
14
–
7
444
–
20
17
89
–
48
9
98
50
13
100
35
(15)
14
(27)
(16)
–
–
(22)
(15)
–
(8)
(21)
22
–
6
(23)
(19)
(45)
(13)
(17)
18
(26)
–
(36)
(26)
–
–
(22)
(25)
–
(20)
(29)
7
–
(6)
(31)
(29)
(53)
(19)
(28)
The table above includes the sales by product reported in the Other trading and unallocated pharmaceuticals segment (which includes
Canada, Puerto Rico, Australasia, central vaccine tender sales and contract manufacturing sales) in the total column only.
CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.
220 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Pharmaceuticals and Vaccines turnover by therapeutic area 2013
£m
7,289
249
796
8
5,274
642
320
969
75
10
186
16
207
331
144
1,073
857
216
161
146
15
2,674
631
630
224
495
694
12,166
3,420
288
172
251
629
862
375
405
438
Therapeutic area/
major products
Respiratory
Avamys/Veramyst
Flixotide/Flovent
Relvar/Breo Ellipta
Seretide/Advair
Ventolin
Other
Oncology
Arzerra
Mekinist
Promacta
Tafinlar
Tyverb/Tykerb
Votrient
Other
Cardiovascular,
metabolic and
urology (CVMU)
Avodart
Other
Immuno-
inflammation
Benlysta
Other
Other
pharmaceuticals
Dermatology
Augmentin
Other anti-bacterials
Rare diseases
Other
Innovative
Pharmaceuticals
Vaccines
Boostrix
Cervarix
Fluarix, FluLaval
Hepatitis
Infanrix, Pediarix
Rotarix
Synflorix
Other
Innovative
Pharmaceuticals
and Vaccines
ViiV Healthcare
(HIV)
Combivir
Epzicom/Kivexa
Lexiva/Agenerase
Selzentry
Tivicay
Trizivir
Other
Established
Products
Coreg
Hepsera
Imigran/Imitrex
Lamictal
Lovaza
Requip
Serevent
Seroxat/Paxil
Valtrex
Zeffix
Other
2012
2013 (restated)
Total
Growth
£%
3
1
2
–
5
2
(6)
21
25
–
43
–
(13)
81
(23)
USA
Growth
£%
8
(29)
8
–
9
5
(69)
18
21
–
35
–
(19)
58
(41)
2013
£m CER%
7
(29)
6
–
8
4
(69)
17
18
–
33
–
(21)
56
(40)
3,594
42
482
5
2,769
291
5
380
46
10
73
11
55
144
41
Europe
Emerging Markets
Japan
2013
£m CER%
(2)
8
(7)
–
(2)
(2)
(6)
28
29
–
47
–
(9)
91
(17)
1,802
69
117
–
1,458
127
31
339
27
–
55
4
82
130
41
Growth
£%
1
11
(4)
–
1
1
(3)
32
29
–
53
–
(6)
97
(11)
2013
£m CER%
4
837
16
71
7
58
–
–
4
429
2
171
(1)
108
18
149
–
–
–
–
92
22
–
–
(9)
47
77
37
2
43
Growth
£%
3
13
5
–
3
–
(1)
14
–
–
83
–
(13)
68
–
2013
Growth
£%
£m CER%
(8)
10
554
7
28
49
(24)
(7)
42
–
–
3
(10)
8
277
(18)
–
9
(5)
14
174
13
36
63
–
–
1
–
–
–
20
44
30
–
–
–
(23)
(5)
17
9 >100 >100
(25)
(25)
6
£m CER%
4
5
2
–
4
2
4
22
23
–
46
–
(13)
80
(23)
7,044
246
779
–
5,046
631
342
798
60
–
130
–
239
183
186
1,144
790
354
(5)
10
(40)
(6)
8
(39)
456
312
144
(27)
(3)
(53)
(26)
(2)
(53)
70 >100
70 >100
–
–
>100
>100
–
148 >100
134 >100
–
14
>100
>100
–
2,630
680
608
233
495
614
11,686
3,325
238
270
200
646
775
360
385
451
5
(5)
5
(4)
7
18
2
2
19
(37)
25
(4)
9
5
2
(4)
2
(7)
4
(4)
–
13
4
3
21
(36)
26
(3)
11
4
5
(3)
261
115
1
7
113
25
4,839
978
183
6
146
263
271
108
–
1
(25)
(37)
–
–
(4)
(37)
2
17
23
–
65
(3)
23
7
–
(100)
(24)
(36)
–
–
(3)
(36)
3
18
24
–
66
(1)
24
8
–
–
308
273
35
8
8
–
720
170
203
66
129
152
3,177
1,049
65
61
35
198
398
59
48
185
18
15
48
100
100
–
2
6
(3)
5
1
6
2
3
19
11
(21)
(3)
2
49
2
2
23
20
52
100
100
–
7
10
–
10
5
12
7
7
23
15
(19)
1
6
51
7
6
135
104
31
1
1
–
1,124
289
393
148
48
246
2,246
1,124
20
92
43
123
132
164
350
200
27
27
24
–
–
–
2
8
11
(4)
2
(12)
2
1
25
23
(2)
(2)
11
3
1
(14)
24
24
24
–
–
–
(2)
4
7
(6)
–
(16)
2
2
25
23
(2)
(4)
10
3
5
(13)
114
114
–
–
–
–
25
25
–
–
–
–
4
4
–
–
–
–
291
28
13
3
184
13
36
(15)
3
(19)
(6)
–
–
(2)
18
63 >100 >100
1,022
36
–
10
–
–
–
25
–
1
2
(76)
–
(90)
–
–
–
(30)
–
–
(1)
(80)
–
(92)
–
–
–
(43)
–
–
15,586
15,011
4
4
5,817
4
6
4,226
3
7
3,370
3
2
1,058
6
(12)
1,386
116
763
113
143
19
97
135
3,874
131
96
188
557
584
125
129
285
224
182
1,373
20,846
1,374
179
665
127
128
–
107
168
4,351
133
126
190
610
607
164
145
374
252
243
1,507
20,736
–
(36)
14
(11)
10
–
(10)
(20)
(8)
(2)
(21)
1
(7)
(5)
(18)
(10)
(16)
(2)
(26)
(6)
1
552
35
269
62
58
19
58
51
1,300
130
–
80
276
581
7
51
–
45
13
117
1
(35)
15
(11)
12
–
(9)
(20)
(11)
(2)
(24)
(1)
(9)
(4)
(24)
(11)
(24)
(11)
(25)
(9)
1
5
46
9
(10)
1
–
(6)
(25)
(7)
(2)
–
11
(18)
(5)
(63)
(2)
–
26
(13)
(5)
6
48
10
(9)
2
–
(4)
(24)
(6)
(2)
–
11
(17)
(4)
(63)
–
–
29
(13)
(1)
526
39
328
27
63
–
32
37
718
–
–
63
110
–
52
55
53
29
12
344
(3)
(41)
11
(22)
8
–
(17)
(26)
(14)
–
–
(7)
(4)
–
(33)
(17)
(11)
(15)
(25)
(14)
–
(39)
15
(18)
13
–
(14)
(23)
(11)
–
–
(6)
(2)
–
(32)
(14)
(7)
(12)
(25)
(10)
171
35
78
18
6
-
4
30
1,157
–
70
7
78
–
14
4
79
40
140
725
(12)
(56)
38
(1)
67
–
(26)
(8)
(5)
–
(28)
–
8
–
–
33
(4)
11
(28)
2
(14)
(56)
37
(6)
60
–
(30)
(8)
(7)
–
(26)
–
4
–
–
33
(6)
8
(26)
(3)
54
3
36
3
3
–
–
9
595
–
25
24
83
–
51
13
138
106
16
139
14
(11)
21
(7)
49
–
–
(5)
(5)
–
(3)
(13)
28
–
11
(20)
(22)
(2)
(5)
(5)
(6)
(26)
1
(23)
23
–
–
(21)
(22)
–
(19)
(25)
6
–
(7)
(35)
(36)
(18)
(20)
(23)
The table above includes the sales by product reported in the Other trading and unallocated pharmaceuticals segment (which includes
Canada, Puerto Rico, Australasia, central vaccine tender sales and contract manufacturing sales) in the total column only.
CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.
GSK Annual Report 2014 221
Governance & remunerationFinancial statementsInvestor informationStrategic report Financial record
continued
Five year record
A record of financial performance is provided, analysed in accordance with current reporting practice. The information included in the
Five year record is prepared in accordance with IFRS as adopted by the European Union and also with IFRS as issued by the
International Accounting Standards Board.
The Established Products segment has been created and certain product reclassifications, principally the OTC dermatology brands
acquired with the Stiefel business, have been made between Pharmaceuticals and Vaccines segments and the Consumer Healthcare
segment, with effect from 1 January 2014. Comparative turnover information in all four years has been restated accordingly. In
addition, the 2013 and 2012 core results have been restated to exclude the divestments completed in 2013.
Comparative information for 2012 is also reported including the effect of the divestments completed in 2013.
2014
£m
15,478
3,192
18,670
4,336
23,006
–
23,006
7,340
6,412
6,193
1,608
1,453
23,006
–
23,006
4,980
4,035
3,203
937
1,498
3,011
1,006
18,670
4,336
23,006
–
23,006
2014
£m
6,181
1,202
965
214
2,407
3,011
3,192
1,498
18,670
2013
(restated
£m)
17,426
3,420
20,846
4,756
25,602
903
26,505
8,620
6,862
6,579
1,886
1,655
25,602
903
26,505
5,817
4,226
3,370
1,058
1,386
3,874
1,115
20,846
4,756
25,602
903
26,505
2013
)
(restated
£m
7,289
969
1,073
161
2,674
3,874
3,420
1,386
20,846
2012
(restated
£m)
17,411
3,325
20,736
4,747
25,483
948
26,431
8,330
6,675
6,629
2,219
1,630
25,483
948
26,431
5,508
3,956
3,309
1,203
1,374
4,351
1,035
20,736
4,747
25,483
948
26,431
2012
)
(restated
£m
7,044
798
1,144
70
2,630
4,351
3,325
1,374
20,736
2012
(restated)
£m
17,838
3,325
21,163
5,268
26,431
–
26,431
8,476
7,330
6,784
2,225
1,616
26,431
–
26,431
5,556
3,956
3,309
1,203
1,374
4,730
1,035
21,163
5,268
26,431
–
26,431
2012
)
(restated
£m
7,044
798
1,144
70
2,678
4,730
3,325
1,374
21,163
2011
(restated
£m)
18,474
3,497
21,971
5,416
27,387
–
27,387
8,696
8,276
6,407
2,318
1,690
27,387
–
27,387
5,338
4,374
3,067
1,257
1,569
5,325
1,041
21,971
5,416
27,387
–
27,387
2011
)
(restated
£m
7,012
683
1,108
15
2,762
5,325
3,497
1,569
21,971
2010
(restated
£m)
18,890
4,326
23,216
5,176
28,392
–
28,392
9,346
9,097
6,078
2,155
1,716
28,392
–
28,392
5,430
4,899
3,287
1,182
1,566
6,069
783
23,216
5,176
28,392
–
28,392
2010
)
(restated
£m
6,930
679
946
–
2,700
6,069
4,326
1,566
23,216
Turnover by division
Pharmaceuticals
Vaccines
Pharmaceuticals and Vaccines
Consumer Healthcare
Divestments
Total turnover including divestments
Group turnover by geographic region
USA
Europe
Emerging Markets
Japan
Other
Divestments
Total turnover including divestments
Group turnover by segment
USA
Europe
Emerging Markets
Japan
ViiV Healthcare (HIV)
Established Products
Other trading and unallocated pharmaceuticals
Pharmaceuticals and Vaccines
Consumer Healthcare
Divestments
Total turnover including divestments
Pharmaceuticals and Vaccines turnover by
therapeutic area
Respiratory
Oncology and emesis
Cardiovascular, Metabolic and urogenital
Immuno-inflammation
Other pharmaceuticals
Established Products
Vaccines
ViiV Healthcare (HIV)
222 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
Five year record continued
Consumer Healthcare turnover
Wellness
Oral care
Nutrition
Skin health
Financial results – total
Turnover
Operating profit
Profit before taxation
Profit after taxation
Basic earnings per share
Diluted earnings per share
Weighted average number of shares in issue:
Basic
Diluted
Financial results – core
Turnover
Operating profit
Profit before taxation
Profit after taxation
Core earnings per share
Return on capital employed
2014
£m
1,596
1,797
633
310
4,336
2014
£m
23,006
3,597
2,968
2,831
pence
57.3
56.7
2013
(restated
£m)
1,865
1,884
627
380
4,756
2013
£m
26,505
7,028
6,647
5,628
pence
112.5
110.5
2012
(restated
£m)
1,991
1,806
590
360
4,747
2012
£m
26,431
7,300
6,600
4,678
pence
91.6
90.2
2012
(restated
£m)
1,998
1,806
1,104
360
5,268
2012
£m
26,431
7,300
6,600
4,678
pence
91.6
90.2
2011
(restated
£m)
2,310
1,722
1,025
359
5,416
2011
£m
27,387
7,734
7,625
5,405
pence
103.6
102.1
2010
(restated
£m)
2,217
1,596
953
410
5,176
2010
£m
28,392
3,715
3,089
1,806
pence
31.2
30.9
2014
millions
2013
millions
2012
millions
2012
millions
2011
millions
2010
millions
4,808
4,865
4,831
4,919
4,912
4,989
4,912
4,989
5,028
5,099
5,085
5,128
2014
£m
23,006
6,594
5,978
4,806
2013
(restated
£m)
25,602
7,771
7,122
5,487
pence
95.4
pence
108.4
%
46.6
%
91.4
2012
(restated
£m)
25,483
7,974
7,279
5,511
pence
107.4
%
84.9
2012
£m
26,431
8,238
7,543
5,705
2011
£m
27,387
8,730
8,038
5,954
2010
£m
28,392
9,429
8,798
6,553
pence
111.4
pence
114.5
pence
124.6
%
84.9
%
82.3
%
30.2
Return on capital employed is calculated as total profit before taxation as a percentage of average net assets over the year.
GSK Annual Report 2014 223
Governance & remunerationFinancial statementsInvestor informationStrategic report
Financial record
continued
Five year record continued
Balance sheet
Non-current assets
Current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Shareholders’ equity
Non-controlling interests
Total equity
Number of employees
USA
Europe
Emerging Markets
Japan
Other
Manufacturing
Selling
Administration
Research and development
2014
£m
25,973
14,678
40,651
(13,295)
(22,420)
(35,715)
2013
£m
26,859
15,227
42,086
(13,677)
(20,597)
(34,274)
2012
£m
27,789
13,692
41,481
(13,815)
(20,929)
(34,744)
2011
£m
24,921
16,167
41,088
(15,010)
(17,264)
(32,274)
2010
£m
26,207
16,036
42,243
(12,794)
(19,724)
(32,518)
4,936
7,812
6,737
8,814
9,725
4,263
673
4,936
2014
16,579
37,899
36,730
3,560
3,153
97,921
32,171
42,785
10,630
12,335
97,921
6,997
815
7,812
2013
16,530
38,367
37,747
3,531
3,276
99,451
31,502
45,397
10,232
12,320
99,451
5,800
937
6,737
2012
17,201
38,788
36,738
3,515
3,246
99,488
31,369
45,601
9,607
12,911
99,488
8,019
795
8,814
2011
16,707
38,696
35,080
3,573
3,333
97,389
30,664
45,155
8,883
12,687
97,389
8,867
858
9,725
2010
17,555
39,910
31,992
3,461
3,543
96,461
30,611
43,918
8,850
13,082
96,461
The geographic distribution of employees in the table above is based on the location of GSK’s subsidiary companies. The number of
employees is the number of permanent employed staff at the end of the financial period. It excludes those employees who are employed
and managed by GSK on a contract basis.
Exchange rates
As a guide to holders of ADS, the following tables set out, for the periods indicated, information on the exchange rate of US dollars for
Sterling as reported by the Bank of England (4pm buying rate).
Average
2014
1.65
2013
1.56
2012
1.59
The average rate for the year is calculated as the average of the 4pm buying rates for each day of the year.
High
Low
The 4pm buying rate on 19 February 2015 was £1= US$1.54.
2015
Feb
1.54
1.50
2015
Jan
1.54
1.50
2014
Dec
1.57
1.55
2014
Nov
1.60
1.56
2011
1.60
2014
Oct
1.62
1.59
2010
1.55
2014
Sep
1.66
1.61
224 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Pipeline, products and competition
Pharmaceuticals and Vaccines product development pipeline
Key
†
*
S
A
In-licence or other alliance relationship with third party
Also being developed for indications in another therapeutic area
Month of first submission
Month of first regulatory approval (for MAA, this is the first EU
approval letter)
Biological Licence Application
Marketing Authorisation Application (Europe)
New Drug Application (USA)
BLA
MAA
NDA
small number of patients
Phase I Evaluation of clinical pharmacology, usually conducted in volunteers
Phase II Determination of dose and initial evaluation of efficacy, conducted in a
Phase III Large comparative study (compound versus placebo and/or established
treatment) in patients to establish clinical benefit and safety
MAA and NDA/BLA regulatory review milestones shown in the table below are those that have been achieved. Future filing dates are not included in this list.
Type
Indication
Phase
MAA
Achieved regulatory
review milestones
NDA/BLA
Compound
Respiratory
2126458
2256294
2862277
961081† +
fluticasone furoate
961081†
2245035
2269557
2586881†
idiopathic pulmonary fibrosis
chronic obstructive pulmonary disease (COPD)
acute lung injury
phosphoinositide 3 kinase (PI3K) inhibitor
soluble epoxide hydrolase (sEH) inhibitor
tumour necrosis factor receptor-1 (TNFR1)
domain antibody
muscarinic acetylcholine antagonist, beta2 agonist COPD
(MABA) + glucocorticoid agonist
MABA
toll-like receptor 7 agonist
PI3K inhibitor
recombinant human angiotensin converting
enzyme 2
CXCR2 chemokine receptor antagonist
COPD
asthma
asthma & COPD
acute lung injury
COPD
asthma COPD overlap syndrome
COPD*
nasal polyposis*
COPD
agonist + muscarinic acetylcholine antagonist
antagonist
p38 kinase inhibitor (oral)
IL5 monoclonal antibody
danirixin
fluticasone furoate + glucocorticoid agonist + muscarinic acetylcholine
umeclidinium
losmapimod
mepolizumab
fluticasone furoate + glucocorticoid agonist + long-acting beta2
vilanterol†
+ umeclidinium
mepolizumab
Relvar/Breo Ellipta
(vilanterol† +
fluticasone furoate)
vilanterol†
mepolizumab
Anoro Ellipta
(umeclidinium +
vilanterol†)
Arnuity Ellipta
(fluticasone furoate)
Incruse Ellipta
(umeclidinium)
Relvar/Breo Ellipta
(vilanterol† +
fluticasone furoate)
muscarinic acetylcholine antagonist
glucocorticoid agonist
IL5 monoclonal antibody
long-acting beta2 agonist + glucocorticoid agonist COPD – mortality outcomes
COPD*
long-acting beta2 agonist
IL5 monoclonal antibody
muscarinic acetylcholine antagonist + long-acting COPD
beta2 agonist
COPD
severe eosinophilic asthma*
long-acting beta2 agonist + glucocorticoid agonist asthma
asthma
COPD*
I
I
I
I
II
II
II
II
II
II
II
II
III
III
III
III
Submitted S: Nov14
A: May14
Approved
S: Nov14
A: Dec13
Approved N/A
A: Aug14
Approved
A: Apr14
A:Apr14
Approved
A: Nov13
S: Jun14
Paediatric Vaccines
RSV
recombinant
RSV
S. pneumoniae next
generation†
MMR
Mosquirix
(Malaria RTS,S)†
DTPa-HBV-IPV/Hib†
Nimenrix
(MenACWY-TT)
recombinant viral vector
recombinant – conjugated
live attenuated
recombinant
conjugated
conjugated
respiratory syncytial virus prophylaxis
(maternal immunisation)
respiratory syncytial virus prophylaxis
Streptococcus pneumoniae disease prophylaxis
I
I
II
measles, mumps, rubella prophylaxis
malaria prophylaxis (Plasmodium falciparum)
III (US)
Submitted S: Jun14
N/A
N/A
diphtheria, tetanus, pertussis, poliomyelitis,
hepatitis B, haemophilus influenza
Neisseria meningitis groups A, C, W & Y
disease prophylaxis
Approved N/A
II (US)
Approved
II (US)
A: Apr12
GSK Annual Report 2014 225
Governance & remunerationFinancial statementsInvestor informationStrategic report Type
Indication
Phase
MAA
Achieved regulatory
review milestones
NDA/BLA
Pipeline, products and competition
continued
Pharmaceuticals and Vaccines product development pipeline continued
Compound
Other Vaccines
Malaria next generation†
NTHi†
Tuberculosis†
Hepatitis C
Ebola†
recombinant
recombinant
recombinant
recombinant viral vector
recombinant viral vector
Zoster†
recombinant
Antigen-Specific Cancer Immunotherapeutic
MAGE-A3
immunotherapeutic†
recombinant
HIV (ViiV Healthcare)
cabotegravir (1265744) HIV integrase inhibitor
(long-acting parenteral formulation)
malaria prophylaxis (Plasmodium falciparum)
non-typeable Haemophilus influenzae prophylaxis
tuberculosis prophylaxis
hepatitis C virus prophylaxis
prevention of filovirus haemorrhagic fevers caused
by Ebola Zaire virus
Herpes Zoster prophylaxis
treatment of melanoma
HIV infections
II
II
II
II
III
III
III
II
II
cabotegravir (1265744) HIV integrase inhibitor
HIV pre-exposure prophylaxis
Triumeq (dolutegravir
+ abacavir sulphate
+ lamivudine)
(long-acting parenteral formulation)
HIV integrase inhibitor +
reverse transcriptase inhibitors
(fixed dose combination)
HIV infections – fixed dose combination
Approved
A: Sep14
A: Aug14
Oncology
525762
2256098
2636771
2816126
2849330
2857916
2879552
bromodomain inhibitor
focal adhesion kinase inhibitor
PI3K inhibitor
enhancer of zeste homologue2 (EZH2)
inhibitor
ErbB3 monoclonal antibody
beta cell maturation antigen antibody
drug conjugate
lysine-specific demethylase 1 (LSD1)
inhibitor
fibroblast growth factor ligand trap
AKT protein kinase inhibitor
multi-kinase angiogenesis inhibitor +
PD-1 monoclonal antibody
AKT protein kinase inhibitor
kinase inhibitor
kinase inhibitor
monoclonal antibody
thrombopoietin receptor agonist
3052230†
afuresertib (2110183)
Votrient (pazopanib) +
MK-3475†
afuresertib (2110183)
Mekinist (trametinib)† + MEK1/2 inhibitor + BRAF protein
Tafinlar (dabrafenib)
Mekinist (trametinib)† + MEK1/2 inhibitor + BRAF protein
Tafinlar (dabrafenib)
Mekinist (trametinib)† + MEK1/2 inhibitor + BRAF protein
Tafinlar (dabrafenib) + kinase inhibitor + human anti-EGFR
panitumumab†
Revolade/Promacta
(eltrombopag)†
Arzerra (ofatumumab)†
CD20 human monoclonal antibody
Arzerra (ofatumumab)†
CD20 human monoclonal antibody
Mekinist (trametinib)† + MEK1/2 inhibitor + BRAF protein
Tafinlar (dabrafenib)
Revolade/Promacta
(eltrombopag)†
Votrient (pazopanib)
Arzerra (ofatumumab)†
Mekinist (trametinib)†
Mekinist (trametinib)† + MEK1/2 inhibitor + BRAF protein
Tafinlar (dabrafenib)
Revolade/Promacta
(eltrombopag)†
multi-kinase angiogenesis inhibitor
CD20 human monoclonal antibody
MEK1/2 inhibitor
kinase inhibitor
thrombopoietin receptor agonist
kinase inhibitor
thrombopoietin receptor agonist
cancer
cancer
cancer
cancer
cancer
multiple myeloma
cancer
cancer
multiple myeloma
renal cell cancer
ovarian cancer
non-small cell lung cancer
rare cancers
colorectal cancer
acute myeloid leukaemia
chronic lymphocytic leukaemia, use in relapsed patients
follicular lymphoma (refractory & relapsed patients)
metastatic melanoma, adjuvant therapy
myelodysplastic syndromes
I
I
I
I
I
I
I
I
I
I
II
II
II
II
II
III
III
III
III
renal cell cancer, adjuvant therapy
chronic lymphocytic leukaemia, first line therapy
metastatic melanoma
metastatic melanoma
III
Approved
Approved
Approved
A: Jun14
A: Jul14
A: Apr14
A: May13
A: Jan 14
aplastic anaemia
Approved
S: Nov14
A: Aug14
226 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Pharmaceuticals and Vaccines product development pipeline continued
prolyl hydroxylase inhibitor (topical)
transient receptor potential cation
channel V4 (TRPV4) antagonist
selective androgen receptor modulator
prolyl hydroxylase inhibitor
ileal bile acid transport inhibitor
motilin receptor agonist
GLP 1 agonist
Indication
wound healing
heart failure
muscle wasting
anaemia associated with chronic renal disease
type 2 diabetes & cholestatic pruritus
delayed gastric emptying
type 1 diabetes
Achieved regulatory
review milestones
Phase
MAA
NDA/BLA
I
I
I
II
II
II
II
p38 kinase inhibitor
CD3 monoclonal antibody
p38 kinase inhibitor
oxytocin antagonist
GLP 1 agonist
focal segmental glomerular sclerosis*
new onset type 1 diabetes
acute coronary syndrome*
threatened pre-term labour
type 2 diabetes
II
II
III
III
Approved A: Mar14 A:Apr14
Type
Compound
Cardiovascular & Metabolic
1278863
2798745
2881078
1278863
2330672
camicinal
Eperzan/Tanzeum
(albiglutide)
losmapimod
otelixizumab
losmapimod
retosiban
Eperzan/Tanzeum
(albiglutide)
Immuno-inflammation
2618960
2646264
IL7 receptor monoclonal antibody
spleen tyrosine kinase (Syk) inhibitor
(topical)
LAG3 monoclonal antibody
RIP1 kinase inhibitor
CCL20 monoclonal antibody
macrophage targeted histone
deacetylase inhibitor
granulocyte macrophage colony-
stimulating factor monoclonal antibody
B lymphocyte stimulator monoclonal
antibody (i.v.)
B lymphocyte stimulator monoclonal
antibody (s.c.)
B lymphocyte stimulator monoclonal
antibody (i.v.)
IL6 human monoclonal antibody (s.c.)
SAP monoclonal antibody +
SAP depleter (CPHPC)
ex-vivo stem cell gene therapy
ex-vivo stem cell gene therapy
neurite outgrowth inhibitor (NOGO-A)
monoclonal antibody
ex-vivo stem cell gene therapy
2831781†
2982772
3050002†
3117391†
3196165 (MOR103)†
Benlysta (belimumab)
Benlysta (belimumab)
Benlysta (belimumab)
sirukumab†
Rare Diseases
2398852† +
23156898†
2696274†
2696275†
ozanezumab
2696273†
autoimmune disease
chronic urticaria
autoimmune disease
autoimmune disease
autoimmune disease
rheumatoid arthritis
rheumatoid arthritis
transplant rejection*
systemic lupus erythematosus*
vasculitis*
rheumatoid arthritis
amyloidosis
metachromatic leukodystrophy
Wiscott-Aldrich syndrome
amyotrophic lateral sclerosis
adenosine deaminase severe combined immune
deficiency (ADA-SCID)
eosinophilic granulomatosis with polyangiitis*
chronic thromboembolic pulmonary hypertension
mepolizumab
Volibris (ambrisentan)†
IL5 monoclonal antibody (s.c.)
endothelin A antagonist
Infectious Diseases
2838232
2878175
2140944
tafenoquine†
Relenza i.v. (zanamivir)†
Neurosciences
ofatumumab†
Benlysta (belimumab)
ofatumumab†
rilapladib
antiviral maturation inhibitor
NS5B polymerase inhibitor
type 2 topoisomerase inhibitor
8-aminoquinoline
neuraminidase inhibitor (i.v.)
HIV infections
hepatitis C
bacterial infections
Plasmodium vivax malaria
influenza
CD20 human monoclonal antibody (s.c.)
B lymphocyte stimulator monoclonal
antibody (i.v.)
CD20 human monoclonal antibody (s.c.)
Lp-PLA2 inhibitor
neuromyelitis optica*
myaesthenia gravis*
multiple sclerosis*
Alzheimer's disease
I
I
I
I
I
I
II
II
III
III
III
I
II
II
II
III
III
III
I
I
II
III
III
II
II
II
II
GSK Annual Report 2014 227
Governance & remunerationFinancial statementsInvestor informationStrategic report Pipeline, products and competition
continued
Pharmaceuticals and Vaccines product development pipeline continued
Compound
Ophthalmology
933776
Dermatology
1940029
umeclidinium
2894512†
chlorhexidine
ofatumumab†
Toctino (alitretinoin)†
Type
Indication
Phase
MAA
NDA/BLA
Achieved regulatory
review milestones
beta amyloid monoclonal antibody
geographic retinal atrophy
stearoyl CoA desaturase 1 inhibitor (topical)
muscarinic acetylcholine antagonist (topical)
non-steroidal anti-inflammatory
cationic polybiguanide (topical)
CD20 human monoclonal antibody (s.c.)
retinoic acid receptor modulator
acne vulgaris
hyperhidrosis*
atopic dermatitis & psoriasis
umbilical cord care
pemphigus vulgaris*
chronic hand eczema
II
I
I
II
III
III
III
N/A
Brand names appearing in italics are trade marks either owned by and/or licensed to GSK or associated companies.
Option-based alliances with third parties that include assets in phase I to phase III development:
Company
Adaptimmune
Cancer Research UK
ISIS Pharmaceuticals
OncoMed Pharmaceuticals
Shionogi
Disease Area
Phase
cancer
cancer
hepatitis B
transthyretin-mediated amyloidosis
oncology
oncology
bacterial infection
I
I
I
III
I
II
I
228 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Pharmaceutical products, competition and intellectual property
Products
Respiratory
Anoro Ellipta
Compounds
Indication(s)
umeclidinium bromide/
vilanterol terfenatate
COPD
Arnuity Ellipta
fluticasone furoate
asthma
Major
competitor brands
Spiriva, Onbrez
Qvar, Pulmicort
Asmanex,
Alvesco
Avamys/Veramyst
Flixotide/Flovent
fluticasone furoate
fluticasone propionate
rhinitis
asthma/COPD
Nasonex
Qvar, Singulair
Incruse Ellipta
umeclidinium bromide
COPD
Spiriva, Seebri
Relvar/Breo
Ellipta
fluticasone furoate/
vilanterol terfenatate
asthma/COPD
(US – COPD only)
Symbicort, Foster,
Flutiform, Dulera
Seretide/Advair*
salmeterol xinafoate/
fluticasone propionate
asthma/COPD
Symbicort, Foster,
Flutiform, Dulera
Serevent
salmeterol xinafoate
asthma/COPD
Foradil, Spiriva,
Onbrez
Ventolin HFA
albuterol sulphate
asthma/COPD
generic companies
Patent expiry dates
USA
2025
(NCE)
2016-2030
(device/
formulation)
2021
(NCE)
2016-2030
(device/
formulation)
20213
2016
(Diskus device)
2015-2025
(HFA-device)
2025
(NCE)
2016-2030
(device/
formulation)
2022
(NCE)
2016-2030
(device/
formulation)
2016
(Diskus device)
2015-2026
(HFA-device)
2016
(Diskus device)
2015-2025
(HFA-device)
EU
2025
(NCE)
2016-2026
(device/
formulation)
2023
(NCE)
2016-2026
(device/
formulation)
2023
expired
(Diskus device)
2017
(HFA-device)
2025
(NCE)
2016-2026
(device/
formulation)
2022
(NCE)
2016-2026
(device/
formulation)
expired
(Diskus device)
2017
(HFA-device)
expired
(Diskus device)
2019
(HFA-device)
2015-2017
(HFA-device)
Anti-virals
Relenza
Valtrex
zanamivir
valaciclovir
lamivudine
Zeffix/Epivir-HBV
Central nervous system
Lamictal
Imigran/Imitrex
Requip XL
Seroxat/Paxil
lamotrigine
sumatriptan
ropinirole
paroxetine
influenza
genital herpes, coldsores,
shingles
Tamiflu
Famvir
expired
expired
expired
expired
chronic hepatitis B
Hepsera
expired
expired
epilepsy, bipolar disorder
migraine
Parkinson’s disease
depression, various
anxiety disorders
Keppra, Dilantin
Zomig, Maxalt, Relpax
Mirapex
Effexor, Cymbalta,
Lexapro
expired
expired
expired
expired
expired
expired
expired
expired
Cardiovascular and urogenital
Eperzan/Tanzeum albiglutide
Type 2 diabetes
Avodart
dutasteride
benign prostatic hyperplasia
Coreg CR
carvedilol phosphate
mild-to-severe heart failure,
hypertension, left ventricular
dysfunction post MI
Victoza, Byetta
Bydureon, Lyxumia
Trulicity
Proscar, Flomax,
finasteride
Toprol XL
Lovaza
omega-3 acid ethyl esters
very high triglycerides
Tricor
expired
* See ’Risk factors’ on page 233 for details of uncertainty on the timing of follow-on competition.
1 See Note 45 to the financial statements, ‘Legal proceedings’.
2 Generic competition possible in 2015.
3 Generic competition possible in 2016.
2022
2022
20151
2017
20162
(formulation)
NA
NA
GSK Annual Report 2014 229
Governance & remunerationFinancial statementsInvestor informationStrategic report Rare diseases
Volibris
ambrisentan
pulmonary hypertension
Tracleer, Revatio
NA
Pipeline, products and competition
continued
Pharmaceutical products, competition and intellectual property continued
Compounds
Indication(s)
competitor brands
USA
EU
Major
Patent expiry dates
amoxicillin/clavulanate
potassium
common bacterial
infections
generic products
NA
expired
Products
Anti-bacterials
Augmentin
Oncology
Arzerra
ofatumumab
Mekinist
trametinib
Promacta/
Revolade
eltrombopag
Tafinlar
dabrafenib
Tykerb/Tyverb
lapatanib
Votrient
pazopanib
Immuno-inflammation
Benlysta
belimumab
Vaccines
Boostrix
Infanrix/Pediarix
Cervarix
Fluarix
Fluarix Tetra
FluLaval
Pandemrix
Prepandrix
Synflorix
diphtheria, tetanus, acellular
pertussis
diphtheria, tetanus, pertussis,
polio, hepatitis B,
Haemophilus influenzae
type B
HPV 16 & 18 virus like
particles (VLPs), AS04
adjuvant (MPL + aluminium
hydroxide)
split inactivated influenza
virus subtypes A and
subtype B antigens
split inactivated influenza
virus subtypes A and
subtype B antigens
split inactivated influenza
virus subtypes A and
subtype B antigens
derived split inactivated
influenza virus antigen,
AS03 adjuvant
derived split inactivated
influenza virus antigen,
AS03 adjuvant
conjugated pneumococcal
polysaccharide
230 GSK Annual Report 2014
refractory chronic
lymphocytic leukaemia
BRAF V600+ metastatic
melanoma
idiopathic thrombocytopenic
purpura, hepatitis C
associated thrombocytopenia
BRAF V600+ metastatic
melanoma
advanced and metastatic
breast cancer in HER2
positive patients
soft tissue sarcoma
metastatic renal cell
carcinoma
MabThera/Rituxan,
Imbruvica
Yervoy, Opdivo,
Keytruda
Nplate,
MabThera/Rituxan
Yervoy, Zelboraf
Opdivo, Keytruda
Herceptin,
Kadcyla
Yondelis, Sutent,
Nexavar, Afinitor
Temsirolimus
2030
2025
2022
2030
2020
2023
NA
2025
not yet granted
2023
2023
2025
systemic lupus erythematosus
booster vaccination
Adacel
diphtheria, tetanus, pertussis, Pentacel, Pediacel,
polio, hepatitis B
Haemophilus influenzae
type B
human papilloma virus
type 16 and 18
Pentaxim, Pentavac,
Hexaxim
Gardasil (Silgard)
2023
2017
NA
2020
2021
2017
2016
2020
2020
2022
2022
2022
2022
none
none
Vaxigrip, Mutagrip,
Fluzone, Influvac,
Aggripal, Fluad,
Intenza, Flumist
Intenza, Flumist QIV,
Vaxigrip QIV,
Fluzone QIV,
Fluzone High Dose
Vaxigrip, Mutagrip,
Fluzone, Influvac,
Aggripal, Fluad,
Intenza, Flumist
Focetria, Celvapan,
NA
2020
Aflunov, Vepacel
not yet granted
2026
Prevenar (Prevnar)
NA
2021
seasonal influenza
seasonal influenza
seasonal influenza
A(H1N1)v2009 influenza
prophylaxis
pandemic H5N1
influenza prophylaxis
invasive pneumococcal
disease, pneumonia
acute otitis media
Governance & remunerationFinancial statementsInvestor informationStrategic report Pharmaceutical products, competition and intellectual property continued
Products
HIV
Epzicom/Kivexa
Compounds
Indication(s)
lamivudine and abacavir
HIV/AIDS
Lexiva/Telzir
fosamprenavir
Selzentry
maraviroc
Tivicay
Triumeq
Trizivir
dolutegravir
dolutegravir, lamivudine
and abacavir
lamivudine, zidovudine
and abacavir
HIV/AIDS
HIV/AIDS
HIV/AIDS
HIV/AIDS
HIV/AIDS
Major
competitor brands
Patent expiry dates 3
USA
EU
Truvada, Atripla
Stribild
Complera/Eviplera
Prezista, Kaletra,
Reyataz
Isentress, Intelence,
Prezista
Isentress, Prezista
Reyataz, Kaletra
Truvada, Atripla
Stribild
Complera/Eviplera
Truvada, Atripla
Stribild
Complera/Eviplera
20161
(combination)
20191
(combination)
20181
2021
2027
2027
2019
2022
2026
2026
20161,2
(combination)
2016
(combination)
1 See Note 45 to the financial statements, ‘Legal proceedings’.
2 Generic competition commenced in 2014.
3 Includes Supplementary Protection Certificates and other patent term extensions, where granted.
Consumer Healthcare products and competition
Brand
Wellness
Panadol and
Panadol Cold
& Flu
ENO
Tums
Nicorette (US),
Nicoderm,
NiQuitin CQ
and Nicabate
Oral health
Sensodyne
Polident
Poligrip
Corega
Aquafresh
Nutrition
Horlicks
Skin health
Physiogel
Zovirax
Abreva
Products
Application
Markets
Competition
tablets, caplets, infant drops
paracetamol-based treatment
for headache, joint pain,
fever, cold symptoms
global (except US)
effervescent
immediate relief antacid
global (except US)
chewable tablets
immediate relief antacid
US
lozenges, gum and
trans-dermal patch
treatment of nicotine
withdrawal as an aid to
smoking reduction and
cessation
global
toothpastes, toothbrushes
mouth rinse
treat and prevent dental
sensitivity and acid erosion
global
denture adhesive, denture
cleanser
toothpastes, toothbrushes
mouthwashes
improve comfort of
fitted dentures and to
clean dentures
prevention of caries, gum
disease and bad breath
global
global
Reckitt-Benckiser’s Nurofen
Bayer’s Aspirin
Johnson & Johnson’s Tylenol
Retailer own label
Hypermarcas’ Estomazil
Pfizer’s Gelusil
Sanofi’s Rolaids
Bayer’s Alka-Seltzer
Retailer own label
Novartis’s Nicotinell
Johnson & Johnson’s Nicorette
(except US)
Retailer own label
Colgate-Palmolive’s
Colgate Sensitive Pro Relief
Proctor and Gamble’s
Crest Sensi-Relief and
Crest Sensi-Stop Strips
Procter & Gamble’s Fixodent
Reckitt-Benckiser’s Kukident
and Steradent
Colgate-Palmolive’s Colgate
Procter & Gamble’s Crest
and Oral-B
malted drinks and foods
nutritional
beverages & food
Indian sub continent,
UK, Ireland
Mondelez’s Bournvita
Nestle’s Milo
moisturising, creams,
lotions and cleansers
face and body care for dry,
sensitive and irritated skin
Germany, France, Italy,
Poland, Spain
topical cream
lip care to treat and prevent
the onset of cold sores
global
L’Oreal’s La Roche Posay
Beiersdorf’s Eucerin
Pierre Fabre’s Avene
Johnson & Johnson’s Compeed
Carma Labs Carmex
Blistex Incorporated’s Blistex
Retailer own label
GSK Annual Report 2014 231
Governance & remunerationFinancial statementsInvestor informationStrategic report
Principal risks and uncertainties
Risk factors
The principal risks discussed below are the risks and uncertainties
relevant to our business, financial condition and results of operations
that may affect our performance and ability to achieve our objectives.
The factors below are those that we believe could cause our actual
results to differ materially from expected and historical results.
We operate on a global basis in an industry that is both highly
competitive and highly regulated. Our competitors may make
significant product innovations and technical advances and may
intensify price competition. In light of this competitive environment,
continued development of commercially viable new products and the
development of additional uses for existing products are critical to
our ability to maintain or increase overall sales.
Developing new pharmaceutical, vaccine and consumer healthcare
products is a costly, lengthy and uncertain process, however, and a
product candidate may fail at any stage, including after significant
Group economic and human resources have been invested. Our
competitors’ products or pricing strategies or any failure on our
part to develop commercially successful products, or to develop
additional uses for existing products, could materially and adversely
affect our financial results.
We must also adapt to and comply with a broad range of laws
and regulations. These requirements apply to research and
development, manufacturing, testing, approval, distribution,
sales and marketing of Pharmaceutical, Vaccine and Consumer
Healthcare Products, and affect not only the cost of product
development but also the time required to reach the market and
the uncertainty of successfully doing so.
Moreover, as rules and regulations change, and governmental
interpretation of those rules and regulations evolves, the nature of
a particular risk may change. Changes to certain regulatory regimes
may be substantial. Any change in, and any failure to comply with,
applicable law and regulation could materially and adversely affect
our financial results.
Similarly, our business exposes us to litigation and government
investigations, including but not limited to product liability litigation,
patent and antitrust litigation and sales and marketing litigation. Litigation
and government investigations, including related provisions we may
make for unfavourable outcomes and increases in related costs such as
insurance premiums, could materially and adversely affect our financial
results. More detail on the status and various uncertainties involved in
the significant unresolved disputes and potential litigation is set out in
Note 45, ‘Legal proceedings,’ on page 206.
UK regulations require a discussion of the mitigating activities
a company takes to address principal risks and uncertainties.
A summary of the activities that the Group takes to manage each
of our principal risks accompanies the description of each principal
risk below. The principal risk factors and uncertainties are not listed
in order of significance.
Patient safety
Risk definition
Failure to appropriately collect, review, follow up, or report adverse events
from all potential sources, and to act on any relevant findings in a timely
manner.
Risk impact
The impact of this risk is potentially to compromise our ability to conduct
robust safety signal detection and interpretation and to ensure that
appropriate decisions are taken with respect to the risk/benefit profile of
our products, including the completeness and accuracy of product labels
and the pursuit of additional studies/analyses, as appropriate. This could
lead to potential harm to patients, reputational damage, product liability
claims or other litigation, governmental investigation, regulatory action
such as fines, penalties or loss of product authorisation.
Context
Pre-clinical and clinical trials are conducted during the development
of investigational Pharmaceutical, Vaccine and Consumer Healthcare
Products to determine the safety and efficacy of the products for use
by humans. Notwithstanding the efforts we make to determine the safety
of our products through appropriate pre-clinical and clinical trials,
unanticipated side effects may become evident only when products are
widely introduced into the marketplace. Questions may be raised not only
by our ongoing safety surveillance and post-marketing studies but also
by governmental agencies and third-parties that may analyse publicly
available clinical trial results.
The Group is currently a defendant in a number of product liability
lawsuits, including class actions, that involve significant claims for
damages related to our products. Litigation, particularly in the US, is
inherently unpredictable. Class actions that seek to sweep together all
persons who were prescribed our products increase the potential liability.
Claims for pain and suffering and punitive damages are frequently
asserted in product liability actions and, if allowed, can represent
potentially open-ended exposure and thus, could materially and adversely
affect the Group’s financial results.
Mitigating activities
The Chief Medical Officer (CMO) is responsible for medical governance
for the Group under a global policy. Under that policy, safeguarding
human subjects in our clinical trials and patients who take our products is
of paramount importance, and the CMO has the authoritative role
for evaluating and addressing matters of human safety. Individual
Medical Officers and the Group’s substantial Global Safety and
Pharmacovigilance organisation keep track of any adverse issues
reported for our products during the course of clinical studies.
Once a Group product is approved for marketing, the Group has an
extensive post-marketing surveillance and signal detection system.
Information on possible side effects of medicines is received from several
sources including unsolicited reports from health professionals and
patients, regulatory authorities, medical and scientific literature and the
media. It is our policy that employees are required to report immediately
any issues relating to the safety or quality of its medicines. Each of our
country managers is responsible for monitoring, exception tracking and
training that helps assure the collection of safety information and
reporting the information to the relevant central safety department,
in accordance with Group policy and legal requirements.
Information that changes the benefit/risk profile of one of the Group’s
medicines will result in certain actions to characterise, communicate
and minimise the risk. Proposed actions are discussed with regulatory
authorities and can include modifying the prescribing information,
communications to physicians and other healthcare providers,
restrictions on product prescribing/availability to help assure safe use,
and sometimes carrying out further clinical trials. In certain cases, it may
be appropriate to stop clinical trials or to withdraw the medicine from the
market. The Group’s Global Safety Board (GSB), comprising senior
physicians and representatives of supporting functions, is an integral
component of the system. The GSB (including subsidiary boards
dedicated to Consumer Healthcare Products and Vaccines) reviews
the safety of investigational and marketed products across the Group
and has the authority to stop a clinical trial if continued conduct of such
trial is not ethically or scientifically justified in light of information that has
emerged since the start of the trial.
In addition to the medical governance framework within the Group as
described above, the Group uses several mechanisms to foster the early
evaluation, mitigation, and resolution of disputes as they arise and of
potential claims even before they arise. The goal of the programmes is to
create a culture of early identification and evaluation of risks and claims
(actual or potential), in order to minimise liability and litigation.
232 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Intellectual property
Risk definition
Failure to appropriately secure and protect intellectual property
rights.
Risk impact
Any failure to obtain or subsequent loss of patent protection,
including reducing the availability or scope of patent rights or
compulsory licensing (in which a government forces a manufacturer
to license its patents for specific products to a competitor), could
materially and adversely affect our financial results in those markets.
Absence of adequate patent or data exclusivity protection could limit
the opportunity to rely on such markets for future sales growth for our
products, which could also materially and adversely affect our
financial results.
Context
As an innovative Pharmaceutical, Vaccine and Consumer Healthcare
Products company, we seek to obtain appropriate intellectual
property protection for our products. Our ability to obtain and enforce
patents and other proprietary rights with regard to our products is
critical to our business strategy and success. Pharmaceutical and
Vaccine products are usually only protected from being copied by
generic manufacturers during the period of exclusivity provided by
an issued patent or related intellectual property rights such as
Regulatory Data Protection or Orphan Drug status. Following
expiration of certain intellectual property rights, a generic
manufacturer may lawfully produce a generic version of the product.
We operate in markets where intellectual property laws and patent
offices are still developing and where governments may be unwilling
to grant or enforce intellectual property rights in a fashion similar to
more developed regions such as the EU, Japan and the US. Some
developing countries have limited, or threatened to limit, effective
patent protection for pharmaceutical products generally, or in
particular therapeutic areas, in order to facilitate early competition
within their markets from generic manufacturers.
We face competition from manufacturers of proprietary and generic
pharmaceutical products in all of our major markets. Introduction of
generic products, particularly in the US where we have our highest
turnover and margins, typically leads to a rapid and dramatic loss
of sales and reduces our revenues and margins for our proprietary
products. In 2014, we had nine Pharmaceutical and Vaccine
products with over £500 million in annual global sales. For certain
of these products, there is generic competition in the US and some
markets in Europe. We may also experience an impact on sales of
one of our products due to the expiry or loss of patent protection for
a product marketed by a competitor in a similar product class or for
treatment of a similar disease condition.
We depend on certain key products for a significant portion of our
sales. One such product is our respiratory pharmaceutical product
Seretide/Advair which accounts for 18% of Group sales worldwide.
The timing and impact of entry in the US for a generic product
containing the same combination of active substances as Seretide/
Advair is uncertain. The US patent for compositions containing the
combination of active substances in Seretide/Advair expired during
2010 although the US patent on a component of the Advair Diskus
device continues until August 2016. Generic products containing the
same combination of active substances as Seretide/Advair (in both
metered dose inhalers and dry powder inhalers) have been launched
by several manufacturers in a number of European markets. The
timing and impact of entry in the US and major markets in Europe
for a ‘follow-on’ product to Seretide/Advair is uncertain.
Generic drug manufacturers have also exhibited a readiness to
market generic versions of many of our most important products
prior to the expiration of our patents. Their efforts may involve
challenges to the validity or enforceability of a patent or assertions
that their generic product does not infringe our patents. As a result,
we are and may continue to be involved in legal proceedings
involving patent challenges, which may materially and adversely
affect our financial results. Moreover, in the US, it has become
increasingly common for patent infringement actions to prompt
claims that anti-trust laws have been violated during the prosecution
of the patent or during litigation involving the defence of that patent.
Such claims by direct and indirect purchasers and other payers are
typically filed as class actions. The relief sought may include treble
damages and restitution claims. Similarly, anti-trust claims may be
brought by government entities or private parties following
settlement of patent litigation, alleging that such settlements are
anti-competitive and in violation of anti-trust laws. A successful
anti-trust claim by a private party or government entity could
materially and adversely affect our financial results.
The expiration dates for patents for our major products which may
affect the dates on which generic versions of our products may be
introduced are set out on pages 229 to 231. Legal proceedings
involving patent challenges are set out in Note 45 to the financial
statements, ‘Legal proceedings’.
Mitigating activities
Our Global Patents group focuses on securing and protecting
our patent rights. This global group maintains internal processes
designed to help ensure successful procurement, enforcement and
defence of our patents with the goal of maintaining exclusive rights
in markets for our products.
The Global Patents group monitors new developments in
international patent law to help ensure appropriate protection of
our assets. Sometimes acting through trade associations, we work
with local governments to seek to secure effective and balanced
intellectual property protection designed to meet the needs of
patients and payers while supporting long-term investment in
innovation.
GSK Annual Report 2014 233
Governance & remunerationFinancial statementsInvestor informationStrategic report Principal risks and uncertainties
Risk factors – continued
Product quality
Risk definition
Failure to comply with current Good Manufacturing Practice
(cGMP) requirements in commercial manufacture, through the
distribution chain, by GSK, its contractors or suppliers; or through
inadequate controls and governance of quality through product
development, and in supporting regulated activities.
Risk impact
A failure to ensure product quality could have far reaching
implications in terms of patient and consumer safety, delays in
launching new products, drug shortages, product recalls, potential
damage to our reputation and that of the relevant product, as well
as regulatory, legal, and financial consequences, which could
materially and adversely affect our reputation and financial results.
Context
Patients, consumers and healthcare professionals trust the quality
of our products. A failure to ensure product quality is an enterprise
risk which is applicable across all of our business activities.
Product quality may be influenced by many factors including
product and process understanding, supply chain security,
consistency of manufacturing components, compliance with GMP,
accuracy of labeling, reliability of the external supply chain, and the
embodiment of an overarching quality culture. The internal and
external environment continues to evolve as new products, new
markets and new legislation are introduced, particularly around
security of supply, good distribution practice and product
standards. Inspectional trending from national authorities during
2014 has highlighted a focus on issues relating to data integrity,
contamination and the robustness of quality investigations.
Mitigating activities
In medicines development, scientists adopt the principles of quality
by design for new products and devise control strategies to be
deployed throughout the product lifecycle to help ensure
consistency and reliability in their performance and supply.
We have adopted a single Quality Management System (QMS)
that defines our quality standards and systems for our businesses
associated with Pharmaceuticals, Vaccines and Consumer
Healthcare Products and R&D investigational materials. The QMS
has a broad scope, covering the end-to-end supply chain from
starting materials to distributed product, and is applicable
throughout the complete lifecycle of products from R&D to
mature commercial supply.
The QMS is periodically updated based on experience, evolving
regulatory agency expectations and requirements and improved
scientific understanding to help ensure that operations comply
with cGMP requirements globally, and support the delivery of
consistent and reliable products. A large network of quality and
compliance professionals is aligned with each business unit to
provide oversight and assist the delivery of quality performance
and operational compliance. Management oversight of those
activities is accomplished through a hierarchy of quality council
meetings. Staff are trained to help ensure that standards, as
well as expected behaviours based on our values, are followed.
Refresher training on cGMP issues includes a focus on the
issues raised in inspectional trends.
We have implemented a risk-based approach to assessing and
managing our third-party suppliers that provide materials used in
finished products. Contract manufacturers making our products are
expected to comply with standards identified by the Group and are
audited to help provide assurance that expected standards are met.
The Chief Product Quality Officer oversees the activities of the
GSK Quality Council which serves as a forum to escalate
emerging risks, share experiences of handling quality issues from
all of our businesses and help ensure that lessons learned are
assessed and deployed globally. The preparation for and
implementation of new legislation is regularly reviewed by the GSK
Quality Council and advocacy and communication programmes
are used to maintain awareness of the external environment and
convey consistent messages across the Group. There is emphasis
on quality performance metrics and a culture of ‘right first time’.
234 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Supply chain continuity
Risk definition
Failure to deliver a continuous supply of compliant finished product.
Risk impact
A material interruption of supply or exclusion from healthcare
programmes could impact patient access to our products, expose
us to litigation or regulatory action and materially and adversely
affect our financial results. In particular, the incurring of fines or
disgorgement as a result of noncompliance with manufacturing
practice regulations could also materially and adversely affect the
Group’s financial results and result in reputational damage.
Context
Our supply chain operations are subject to review and approval by
various regulatory agencies that effectively provide our licence to
operate. Failure by our manufacturing and distribution facilities or
by suppliers of key services and materials could lead to litigation or
regulatory action such as product recalls and seizures, interruption
of supply, delays in the approval of new products, and suspension
of manufacturing operations pending resolution of manufacturing
or logistics issues. In 2014, our Consumer Healthcare business,
particularly our Smokers’ Health products, alli and Bactroban,
were impacted by various supply issues and our Vaccines
business, particularly our hepatitis vaccines and Boostrix,
were impacted by supply constraints.
Materials and services provided by third-party suppliers are
necessary for the commercial production of our products, including
active pharmaceutical ingredients (API), antigens, intermediates,
commodities and components necessary for the manufacture and
packaging of many of our Pharmaceutical, Vaccine and Consumer
Healthcare Products. Some of the third-party services procured,
such as services provided by contract manufacturing organizations
and clinical research organisations to support development of key
products, are important to ensure continuous operation of our
businesses. Although we undertake business continuity planning,
single sourcing of certain components, bulk API, finished products,
and services creates a risk of failure of supply in the event of
regulatory non-compliance or physical disruption at the
manufacturing sites or logistics system.
Financial reporting and disclosure
The failure of a small number of single-source, third-party suppliers
or service providers to fulfill their contractual obligations in a timely
manner or as a result of regulatory non-compliance or physical
disruption of logistics and manufacturing sites may result in delays
or service interruptions.
Mitigating activities
Our supply chain model is designed to help ensure the supply,
quality and security of our products globally. We closely monitor,
through the Supply Chain Governance Committees, the inventory
status and delivery of our products to help ensure that our
customers have the medicines, vaccines and products they need.
Safety stocks and backup supply arrangements for high revenue
and medically-critical products are in place, where practical, to
help mitigate this risk. In addition, the compliance of manufacturing
external suppliers is routinely monitored in order to identify and
manage supply base risks.
Where practical, dependencies on single sources of critical items
are removed. Our reliance on single source components was
reduced in 2014 for some key products through qualification of
alternative materials that will help improve supply chain robustness.
In cases, where dual sourcing is not possible, an inventory strategy
has been developed to protect the supply chain from unanticipated
disruption.
In 2014, we continued to implement anti-counterfeit systems such
as product serialization in accordance with emerging requirements
to mitigate this risk.
Throughout 2014, our supply chain operating model was improved
to strengthen the link between commercial forecasting and
manufacturing by implementation of the Core Commercial
Cycle methodology. This action will over time, decrease the risk
associated with demand fluctuations impacting ability to supply or
write-offs associated with product exceeding expiry dating. Under
the new model, each node of the supply chain is being optimised
to help ensure adequate safety stock while balancing working
capital associated with the end-to-end supply chain.
Risk definition
Failure to report accurate financial information and material events
in compliance with accounting standards and applicable legislation.
Risk impact
Non-compliance with existing or new financial reporting and
disclosure requirements, or changes to the recognition of income
and expenses, could expose us to litigation and regulatory action
and could materially and adversely affect our financial results.
Context
New or revised accounting standards, rules and interpretations
issued from time to time by the International Accounting Standards
Board could result in changes to the recognition of income and
expense that may materially and adversely affect our financial results.
The Group is also required by the laws of various jurisdictions to
disclose publicly its financial results and events that could materially
affect the financial results of the Group. Regulators routinely review
the financial statements of listed companies for compliance with
accounting and regulatory requirements. The Group believes that it
complies with the appropriate regulatory requirements concerning
our financial statements and disclosure of material information.
However, should we be subject to an investigation into potential
non-compliance with accounting and disclosure requirements,
there is potential for restatements of previously reported results
and we could be subject to significant penalties.
Mitigating activities
The Group maintains a control environment designed to identify
material errors in financial reporting and disclosure. The design
and operating effectiveness of key financial reporting controls
is periodically tested. This provides us with the assurance that
controls over key financial reporting and disclosure processes
have operated effectively.
We keep up-to-date with the latest developments in financial
reporting requirements by working with our external auditors and
legal advisors to help ensure adherence to relevant reporting and
disclosure requirements.
There is shared accountability for financial results across our
businesses. Financial results are reviewed and approved by
regional management and then reviewed with the Financial
Controller and the Chief Financial Officer (CFO). This allows our
Financial Controller and our CFO to assess the evolution of the
business over time, and to evaluate performance to plan. Significant
judgments are reviewed and confirmed by senior management.
The Group maintains a Disclosure Committee which reports to
the Board which reviews the Group’s quarterly results and Annual
Report and determines throughout the year, in consultation with
its legal advisors, whether it is necessary to disclose publicly
information about the Group through Stock Exchange
announcements.
GSK Annual Report 2014 235
Governance & remunerationFinancial statementsInvestor informationStrategic report Principal risks and uncertainties
Risk factors – continued
Tax and treasury
Risk definition
Failure to comply with current tax law, or react to the rapidly
evolving tax environment. Incurring significant losses due to
treasury activities.
Risk impact
Changes in tax laws or in their application with respect to matters
such as transfer pricing, foreign dividends, controlled companies,
R&D tax credits, taxation of intellectual property or a restriction in
tax relief allowed on the interest on intra-group debt, could impact
our effective tax rate. Significant losses may arise from Treasury
activities through inconsistent application of Treasury policies,
dealing or settlement errors, or counterparty defaults. Any such
changes in tax laws or their application, failure to comply with tax
law or significant losses due to treasury activities could materially
and adversely affect our financial results.
Context
Our Treasury group deals in high value transactions, mostly foreign
exchange and cash management transactions, on a daily basis.
The Group’s effective tax rate is driven by rates of tax in
jurisdictions that are both higher and lower than the UK. In
addition, many jurisdictions currently offer regimes that encourage
innovation and investment in science by providing tax incentives,
such as R&D tax credits and lower tax rates on income derived
from patents. Furthermore, as an international business, we face
risks associated with intra-group transfer pricing.
The tax charge included in our financial statements is our best
estimate of tax liability pending audits by tax authorities. We submit
tax returns according to statutory time limits and engage tax
authorities to help ensure our tax affairs are current. In exceptional
cases where matters cannot be settled by agreement with tax
authorities, we may have to resolve disputes through formal
appeals or other proceedings. As an international business,
we are also subject to a range of other duties and taxes carrying
similar types of risk.
There is an increased focus on the tax position of multinational
businesses, as a consequence of the challenging economic
environment and the priority placed by the G20 on addressing
allegations of unlawful tax avoidance. We have seen some increase
in audits as governments seek to raise revenues, both from
corporate taxes and above the line taxes such as customs duties.
Such audits regardless of their merit or outcomes can be costly,
divert management attention and may adversely impact our
reputation. In addition, there are an increasing number of changes
to the international tax framework which could lead to an increase
or decrease in our tax costs.
Mitigating activities
The Group’s Treasury function does not operate as a profit centre
and does not enter into financial derivative transactions for
speculative purposes. All transactions in financial instruments are
undertaken to manage the risks arising from underlying business
activities. Treasury activities are governed by policies approved by
the Board of Directors and compliance is regularly reviewed by the
Treasury Management Group (TMG), which is chaired by the CFO.
Liquidity risk is managed by diversifying our liquidity sources using
a range of facilities and by maintaining broad access to funding
markets in order to meet anticipated future funding requirements.
We also hold significant amounts of cash and investments which
are invested in line with strict investment guidelines.
Interest rate risk is managed by limiting the amount of floating rate
interest payments to a prescribed percentage of operating profit,
and the mix of debt at fixed and floating interest rates is monitored
regularly by the TMG.
Foreign currency transaction risk arising on internal and external
trade flows is not generally hedged. Our internal trading
transactions are matched centrally, and we manage inter-company
payment terms to reduce foreign currency risk. Foreign currency
cash flows can be hedged selectively under the management of
Treasury and the TMG. Where possible, we manage the cash
surpluses or borrowing requirements of subsidiary companies
centrally. In order to reduce foreign currency translation exposure,
we seek to denominate borrowings in the currencies of our
principal assets and cash flows. The TMG reviews the ratio
of borrowings to assets for the major currencies monthly.
Counterparty risk is managed by setting global counterparty limits
for each of our banking and investment counterparties based on
long-term credit ratings from Moody’s and Standard and Poor’s.
Treasury’s usage of these limits is monitored daily by a Corporate
Compliance Officer (CCO) who operates independently of
Corporate Treasury. The CCO also monitors the credit rating
of these counterparties and, when changes in ratings occur,
notifies Treasury so that changes can be made to investment
levels or to authority limits as appropriate.
Further details on mitigation of Treasury Risks can be found on
page 190, Note 41, ‘Financial instruments and related disclosures’.
We monitor government debate on tax policy in our key
jurisdictions to deal proactively with any potential future changes
in tax law. Tax risk is managed by a set of policies and procedures
to help ensure consistency and compliance with tax legislation.
We engage advisors and legal counsel to review tax legislation
and applicability to our business.
We attempt to mitigate the risk of more aggressive tax authority
audits by being as up to date as possible with our tax affairs
and working proactively with tax authorities where possible.
We have also moved to a more centralised and simplified
intellectual property ownership and trading model. The model
centralises our Pharmaceutical intellectual property in the UK,
reducing the complexity of our inter-company arrangements and
enabling us to drive more bilateral Advance Pricing Agreements
(APAs) between the UK and other jurisdictions where we operate.
APAs give greater certainty to the application of transfer pricing
and our direct tax affairs and hence reduce risks. A centralised
team of dedicated specialists are responsible for managing
transactional tax reporting and compliance.
236 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Anti-Bribery and Corruption
Risk definition
There is a risk that GSK personnel, or third parties acting on our
behalf, seek to induce improper performance of someone’s role
in order to gain or retain GSK a business advantage through the
offer, promise or giving of a bribe. This goes against our ethical
standards and is contrary to the laws by which we are bound.
Risk impact
Failure to mitigate this risk could expose the Group and associated
persons to governmental investigation, regulatory action and civil
and criminal liability, as well as damage the Group’s reputation,
shareholder value, and our licence to operate in particular
jurisdictions, all of which could materially and adversely affect
our financial results.
Context
We are exposed to bribery and corruption risk through our global
business operations. In some markets, the government structure
and the rule of law are less developed, and this has a bearing on
our bribery and corruption risk exposure. In addition to the global
nature of our business, the healthcare sector is highly competitive
and subject to regulation. This increases the instances where we
are exposed to activities and interactions with bribery and
corruption risk.
As has previously been disclosed, the Group in 2014 has been
subject to regulatory action and media focus with regard to bribery
investigations in China and other markets. On 19 September 2014,
the Group announced that the Changsha Intermediate People’s
Court in Hunan Province, China ruled that, according to Chinese
law, GSK China Investment Co. Ltd (“GSKCI”) had offered money
or property to non-government personnel in order to obtain
improper commercial gains, and been found guilty of bribing
non-government personnel. The verdict followed investigations
initiated by China’s Ministry of Public Security in June 2013.
As a result of the Court’s verdict, GSKCI has paid a fine of
RMB 3 billion (£301 million) to the Chinese government.
The US and UK authorities are leading extra-territorial
ABAC inquires into certain of the Group’s operations.
These investigations are further discussed in Note 45
‘Legal Proceedings’.
Mitigating activities
Our Code of Conduct, values and behaviours and commitment
to zero tolerance are integral to how we mitigate this risk. In light
of the complexity and geographic breadth of this risk, we
constantly enhance our oversight of activities and data, reinforce
to our employees and contractors clear expectations regarding
acceptable behaviours, and maintain on-going communications
between the Group centre headquarters and local markets.
The Group has an enterprise-wide ABAC programme designed
to respond to the threat and risk of bribery and corruption. It
builds on the Group’s values and existing standards to form a
comprehensive and practical approach to compliance. Our ABAC
programme is supported by: top-level commitment from the Group
Board of Directors and leadership throughout the business;
ongoing risk assessment; a global policy; control documents that
address commercial and other practices that give rise to ABAC
risk; due diligence of high risk third parties; ongoing training and
communications; a confidential reporting line; monitoring of
compliance and an investigations team. In addition, the programme
mandates enhanced controls over interactions with government
officials and when undertaking business development
transactions. Programme governance is provided by the Group’s
ABAC Oversight Committee which includes representation from
key functional areas and business units.
Additionally, we have a dedicated ABAC team responsible for the
implementation and evolution of the programme in response to
developments in the internal and external environment. This is
complemented with ABAC investigations and ABAC Audit teams
which have separate reporting lines.
We continually benchmark our ABAC programme against other
large multi-national companies and use external expertise to review
and help improve elements of our ABAC programme. As a result
of the China and other country investigations, the Group has
increased resources in both its centrally located ABAC team as
well as regional ABAC teams.
GSK Annual Report 2014 237
Governance & remunerationFinancial statementsInvestor informationStrategic report Principal risks and uncertainties
Risk factors – continued
Commercial practices and scientific engagement
Risk definition
Failure to engage in commercial and/or scientific activities that
are consistent with the letter and spirit of legal, industry, or the
Group’s requirements relating to marketing and communications
about our medicines and associated therapeutic areas;
appropriate interactions with healthcare professionals (HCPs)
and patients; and legitimate and transparent transfer of value.
At times, researchers, HCPs, healthcare organisations (HCOs)
and other external experts that we engage may be compensated
for services and expertise provided. However, payments must
not be excessive and must never be or be perceived to be an
inducement or reward for prescribing our products. Consistent
with our ABAC policies, they also must comply with a market’s
ABAC laws if the recipient of any payment is a government official.
Risk impact
Failure to comply with applicable laws, rules and regulations may
result in governmental investigation, regulatory action and legal
proceedings brought against the Group by governmental and
private plaintiffs. Failure to provide accurate and complete
information related to our products may result in incomplete
awareness of the benefit:risk profile of our medicines and possibly
suboptimal treatment of patients. Any of these consequences
could materially and adversely affect our financial results. Any
practices that are found to be misaligned with our values could
also result in reputational damage and dilute trust established
with key stakeholders. In 2012, we paid $3 billion to resolve
government investigations in the US focused in large part on
promotional practices.
Context
We are committed to legitimate Scientific Engagement and the
ethical and responsible commercialisation of medicines to support
our mission to improve the quality of human life by enabling people
to do more, feel better, and live longer. To accomplish this mission,
we engage the healthcare community in various ways to advance
our scientific knowledge as well as to provide important
information about our medicines.
The Group disseminates information about its products through
both non-promotional Scientific Engagement and promotional
activities. The former is the interaction and exchange of information
between the Group and partners and external communities in
order to advance scientific and medical understanding including
the appropriate development and use of our products; the
management of disease; and patient care. It is distinct from
promotional activities which may take place only after authorisation
of a new product or indication, and must be conducted strictly in
accordance with promotional laws, codes and the Group’s Policy.
Promotion of approved medicines helps ensure that HCPs globally
have access to information they need, that patients have access to
the medicines they need and that medicines are prescribed and
used in a manner that provides the maximum healthcare benefit to
patients. We are committed to communicating information related
to our approved products in a responsible, legal, and ethical
manner.
Mitigating activities
We have taken action at all levels of the Group to enhance and
improve standards and procedures for Scientific Engagement
and promotional interactions, based on our values of transparency,
respect, integrity and patient focus. We have policies and
standards governing promotional activities and Scientific
Engagement undertaken by the Group or on its behalf. All of these
activities we conduct worldwide must conform to high ethical,
medical, and scientific standards. Where local standards differ
from global standards, the more stringent of the two applies.
The Group has harmonized policies and procedures to guide
above country Commercial Practices and Scientific Engagement
processes as well as clarified applicable standards when
engaging in the markets. Specific accountability and authorisation
for Scientific Engagement resides within the Medical Governance
framework that is overseen by the Medical Governance Executive
Committee (MGEC), accountable to the Chief Medical Officer.
MGEC is responsible for oversight of applicable Policies and
ensuring the highest level of integrity and continuous development
of Scientific Engagement at GSK. Commercial Practices activities
have oversight from both business unit Risk Management and
Compliance Boards (RMCBs) and Country Executive Boards
(CEBs) that manage risks across in-country business activities.
All promotional materials and activities must be reviewed and
approved according to the Group’s policies and standards,
and conducted in accordance with local laws and regulations,
to help ensure that these materials and activities fairly represent
the products or services of the Group. When necessary, we have
disciplined (up to and including termination) employees who have
engaged in misconduct and have broadened our ability to claw
back remuneration from senior management in the event of
misconduct.
During 2014, we took further proactive risk mitigation steps to
assure our operations reflect our values. GSK publicly committed
to stop in 2016 various payments to HCPs and Healthcare
Organisations (HCOs). GSK also committed extended steps
already taken in the US to changing its sales compensation model
globally from one based on sales targets to an approach that
individually rewards our sales force on the quality of their
interactions with healthcare professionals, not on the end result.
238 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Research practices
Risk definition
Failure adequately to protect and inform patients involved in human
clinical trial research; conduct objective, ethical preclinical and
clinical trials using sound scientific principles; guarantee the integrity
of discovery, preclinical, and clinical development data; manage
human biological samples according to established ethical
standards and regulatory expectations; treat animals ethically and
practice good animal welfare; appropriately disclose human subject
research for medicinal products; and ensure the integrity of our
regulatory filings and of the data that we publish.
Risk impact
The impacts of the risk include harm to patients, reputational
damage, failure to obtain the necessary regulatory approvals
for our products, governmental investigation, legal proceedings
(product liability suits and claims for damages), and regulatory
action such as fines, penalties or loss of product authorisation,
which could materially and adversely affect our financial results.
Context
Research relating to animals can raise ethical concerns. While we
attempt to proactively address this, animal studies remain a vital part
of our research. In many cases, they are the only method that can be
used to investigate the effects of a potential new medicine in a living
body before it is tested in humans, and they are generally mandated
by regulators and ethically imperative. Animal research can provide
critical information about the causes of diseases and how they
develop. Some countries require additional animal testing even
when medicines have been approved for use elsewhere.
Clinical trials in healthy volunteers and patients are used to assess
and demonstrate an investigational product’s efficacy and safety
or further evaluate the product once it has been approved for
marketing. We also work with human biological samples. These
samples are fundamental to the discovery, development and safety
monitoring of our products.
The integrity of our data is essential to success in all stages of
the research data lifecycle: design, generation, recording and
management, analysis, reporting and storage and retrieval.
Our research data is governed by legislation and regulatory
requirements.
Research data and supporting documents are core components
at various stages of pipeline progression decision-making and also
form the content of regulatory submissions. Poor data integrity can
compromise our research efforts.
There are innate complexities and interdependencies required
for regulatory filings, particularly given our global research and
development footprint. Rapid changes in submission requirements
in developing countries continue to increase the complexity of
worldwide product registration.
Mitigating activities
We established an Office of Animal Welfare, Ethics and Strategy
(OAWES), led by the Chief of Animal Welfare, Ethics and Strategy,
to help ensure the humane and responsible care of animals and
increase the knowledge and application of non-animal alternatives
for the Group. OAWES embeds a framework of animal welfare
governance, promotes application of 3Rs (replacement, refinement
and reduction of animals in research), explores opportunities for
cross-industry data sharing, and conducts quality assessments.
We report the results of our human subject research for our
medicines and vaccines on our publicly accessible clinical study
register website, on government-required repositories, and we
submit human research results as manuscripts for publication in
peer reviewed scientific journals. During 2014, we disclosed over
130 Clinical Study Reports of marketed and terminated medicines
(once the research results were published in the scientific literature)
on our register. In early 2014, the GSK online system to allow
researchers to request access to anonymised patient-level data from
the Group’s clinical trials, was re-configured into a multi-sponsor
request site, www.clinicalstudydatarequest.com, to include studies
conducted by other sponsors and by the end of 2014 we had listed
over 1000 GSK trials available for request.
We have a Global Human Biological Samples Management (HBSM)
governance framework in place to oversee the ethical and lawful
acquisition and management of human biological samples. Our
global HBSM network champions HBSM activities and provides an
experienced group to support internal Sample Custodians on best
practice.
It remains an important priority to enhance our data integrity
controls. During 2014 we established plans to develop new written
standards to ensure the integrity of our data across Research and
Development (R&D). A Data Integrity Committee was established to
provide oversight and a Data Integrity Quality Assurance team was
created to provide independent business monitoring of our internal
controls for R&D activities.
The Chief Regulatory Officer oversees the activities of the
Regulatory Governance Board which includes promoting
compliance with regulatory requirements and Group-wide
standards, making regulatory services more efficient and agile,
and further aligning regulatory capabilities with our international
business needs at the enterprise and local levels.
GSK Annual Report 2014 239
Governance & remunerationFinancial statementsInvestor informationStrategic report Principal risks and uncertainties
Risk factors – continued
Environment, health and safety and sustainability
Risk definition
Failure to manage environment, health and safety and sustainability
(EHSS) risks consistent with the Group’s ethics, objectives,
policies and relevant laws and regulations.
Risk impact
Failure to manage EHSS risks could lead to significant harm to
people, the environment and communities in which we operate,
fines, failure to meet stakeholder expectations and regulatory
requirements, litigation or regulatory action, and damage to the
Group’s reputation and could materially and adversely affect our
financial results.
Context
The Group is subject to health, safety and environmental laws of
various jurisdictions. These laws impose duties to protect people,
the environment and the communities in which we operate as well
as potential obligations to remediate contaminated sites. We have
also been identified as a potentially responsible party under the
US Comprehensive Environmental Response Compensation and
Liability Act at a number of sites for remediation costs relating to
our use or ownership of such sites. Failure to manage these
environmental risks properly could result in litigation, regulatory
action and additional remedial costs that may materially and
adversely affect our financial results. See Note 45 to the financial
statements, ‘Legal proceedings’, for a discussion of the
environmental related proceedings in which we are involved. We
routinely accrue amounts related to our liabilities for such matters.
Information protection
Risk definition
Risk to the Group’s business activity if critical or sensitive
computer systems or information are not available when needed,
are accessed by those not authorised, or are deliberately changed
or corrupted.
Risk impact
Failure to adequately protect critical and sensitive systems and
information may result in our inability to maintain patent rights,
loss of commercial or strategic advantage, damage to our
reputation or business disruption including litigation or regulatory
sanction and fines, which could materially and adversely affect
our financial results.
Context
We rely on critical and sensitive systems and data, such as
corporate strategic plans, sensitive personally identifiable
information, intellectual property, manufacturing systems and trade
secrets. There is the potential that malicious or careless actions
expose our computer systems or information to misuse or
unauthorised disclosure.
Mitigating activities
The Corporate Executive Team is responsible for EHSS
governance for the Group under a global policy. Under that policy,
the CET ensures there are systems in place to manage the risks,
impacts and legal compliance issues that relate to EHSS and for
assigning responsibility to senior managers for providing and
maintaining those systems. Individual managers are responsible for
making sure the EHSS management system is effective and well
implemented in their respective business area and that it is fully
compliant with all applicable laws and regulations, adequately
resourced, maintained, communicated, and monitored.
Additionally, each employee is personally responsible for ensuring
that all applicable local standard operating procedures are
followed and expected to take responsibility for EHSS matters.
Our risk-based, proactive approach is articulated in our Global
EHS Standards which support our EHSS policy and objective to
discover, develop, manufacture, supply and sell our products
without harming people or the environment. In addition to the
design and provision of safe facilities, plant and equipment, we
operate rigorous procedures that help us eliminate hazards where
practicable and protect employees’ health and well-being. Our
employment practices are designed to create a work place culture
in which all employees feel valued, respected, empowered and
inspired to achieve our goals.
Through our continuing efforts to improve environmental
sustainability we have reduced water consumption, hazardous
waste, and energy consumption. We actively manage our
environmental remediation obligations to help ensure practices are
environmentally sustainable and compliant.
Our EHSS performance results are shared with the public each
year in our Responsible Business Supplement.
Mitigating activities
The Group has a global information protection policy that is
supported through a dedicated programme of activity. To increase
our focus on information security, the Group established the
Information Protection & Privacy function to provide strategy,
direction, and oversight while enhancing our global information
security capabilities.
We assess changes in our information protection risk environment
through briefings by government agencies, subscription to
commercial threat intelligence services and knowledge sharing
with other Pharmaceutical and cross-industry companies.
We aim to use industry best practices as part of our information
security policies, processes and technologies and invest in
strategies that are commensurate with the changing nature of the
security threat landscape.
We are also subject to various laws that govern the processing of
Personally Identifiable Information (Pll). To help ensure compliance
with cross-border PII transfer requirements, the Group’s Binding
Corporate Rules (BCRs) have been approved by the UK
Information Commissioner’s Office for human resource and
research activities data. BCRs make it possible to transfer PII
internationally between the Group’s entities without individual
privacy agreements in each European Union country.
240 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Crisis and continuity management
Risk definition
Inability to recover and sustain critical operations following a
disruption or to respond to a crisis incident in a timely manner.
Risk impact
Failure to manage crisis and continuity management (CCM)
effectively can lead to prolonged business disruption, greater
damage to the Group’s assets, and risk of supply disruption to
patients of a medicine, any of which could materially and adversely
affect our financial results. Delays to operational activities and
delivery of our products to consumers and patients who rely on
them could also expose us to litigation or regulatory action,
materially and adversely affect our financial results and lead to
reputational damage.
Context
The Group’s international operations, and those of its partners,
maintain a vast global footprint exposing our workforce, facilities,
operations and information technology to potential disruption
resulting from a natural event (e.g. storm or earthquake), a man-
made event (e.g. civil unrest, terrorism), or a global emergency
(e.g. Ebola outbreak, Flu pandemic). Through effective crisis
management and business continuity planning we are committed
to providing for the health and safety of our people, minimising
damage and impact to the Group, and maintaining functional
operations following a natural or man-made disaster,
or a public health emergency.
Third-Party Oversight
Risk definition
Failure to maintain adequate governance and oversight over third-party
relationships; failure of third-parties to meet their contractual,
regulatory, confidentiality or other obligations; failure of third-parties to
comply with the law or appropriately manage their respective
operations to mitigate the Principal Risks to the Group outlined above.
Risk impact
Failure to adequately manage third-party relationships could result
in business interruption and exposure to risk ranging from sub-
optimal contractual terms and conditions, to severe business
sanctions and/or significant reputational damage. Any of these
consequences could materially and adversely affect our business
operations and financial results.
Context
Third parties are critical to our business delivery and are an integral
part of the solution to improve our productivity, quality, service and
innovation. We rely on third-parties, including suppliers, distributors,
individual contractors, licensees, and other pharmaceutical and
biotechnology collaboration partners for discovery, manufacture, and
marketing of our products and important business processes.
However, these business relationships present a material risk.
For example, we share critical and sensitive information such as
marketing plans, clinical data, and employee data with specific
third parties who are conducting the relevant outsourced business
operations. Inadequate protection or misuse of this information
by third parties could have significant business impact. Similarly,
we use distributors and agents in a range of activities such as
promotion and tendering which have inherent risks such as
inappropriate promotion or corruption. Insufficient internal
compliance and controls by the distributors could affect our
reputation. These risks are further increased by the complexities
of working with large numbers of third parties.
Mitigating activities
CCM governance for the Group is set forth in a global policy.
Under that policy, each business unit and functional area head
(“BU”) ensures effective crisis management and business
continuity plans are in place that include authorised response and
recovery strategies, key areas of responsibility and clear
communication routes before a business disruption occurs.
Additionally, each BU is represented on a CCM governance board
which performs risk oversight and provides vital information to the
CCM programme team regarding new threats, acquisitions or
significant business or organisational changes.
A dedicated team of CCM experts supports the business.
Their responsibilities include: chairing the governance board;
coordinating crisis management and business continuity training;
facilitating exercises and monitoring to provide for global
consistency and alignment; and centrally storing and monitoring
updates for plans supporting our critical business processes.
These activities help ensure an appropriate level of readiness and
response capability is maintained. We also develop and maintain
partnerships with external bodies like the Business Continuity
Institute and the UN International Strategy for Disaster Risk
Reduction which helps improve our business continuity initiatives
in disaster prone areas and supports the development of
community resilience to disasters.
We continually improve our CCM risk management programme
and tools based on learning from plan activations. For example, the
Group has implemented a Global Disaster Monitoring tool to
monitor disruptions and support local crisis teams with guidance
and central support as needed. We regularly evaluate and
introduce new tools to improve our CCM practices.
Mitigating activities
It is our responsibility that all activities are performed safely and
in compliance with applicable laws and GSK’s values, standards
and code of conduct. Each business unit leadership team retains
ultimate accountability for managing third party interactions and
risks, and for appropriately governing these interactions. When
working with third parties, all GSK employees are expected to
manage external interactions and commitments responsibly. This
expectation is embedded in our values and code of conduct.
To help guide and enforce our global principles for interactions
with third-parties we have in place a policy framework applicable
to buying goods and services, managing our external spend,
paying and working with our third-parties. This policy framework
applies to all employees and complementary workers worldwide.
The framework is complemented by technical and local standards
designed to help ensure alignment with the nature of third party
interactions, such as good manufacturing practice and adherence
to local laws and regulations. Independent business monitoring
of key financial and operational controls is in place and is
supplemented by periodic checks from the company’s
independent Audit & Assurance function.
To help enhance continuous monitoring and performance of third
party interactions we established in 2014 the Third Party Oversight
programme. This global programme takes an enterprise view of
third party related risks, and will help strengthen due diligence
efforts on third parties and improve overall management of
our third party risks through the lifecycle of the third-party
engagement. Oversight for the programme is provided from
GSK’s Global Ethics and Compliance group.
GSK Annual Report 2014 241
Governance & remunerationFinancial statementsInvestor informationStrategic report Shareholder information
Share capital and control
Details of our issued share capital and the number of shares
held in Treasury as at 31 December 2014 can be found in Note 33
to the financial statements, ‘Share capital and share premium
account’.
Our Ordinary Shares are listed on the London Stock Exchange
and are also quoted on the New York Stock Exchange (NYSE)
in the form of American Depositary Shares (ADS). Each ADS
represents two Ordinary Shares. For details of listed debt and
where it is listed refer to Note 32 to the financial statements,
‘Net debt’.
Holders of Ordinary Shares and ADS are entitled to receive
dividends (when declared), the company’s Annual Report or
Annual Summary, to attend and speak at general meetings of
the company, to appoint proxies and to exercise voting rights.
There are no restrictions on the transfer, or limitations on the
holding, of Ordinary Shares and ADS and no requirements to
obtain approval prior to any transfers. No Ordinary Shares or ADS
carry any special rights with regard to control of the company and
there are no restrictions on voting rights. Major shareholders have
the same voting rights per share as all other shareholders. There
are no known arrangements under which financial rights are held
by a person other than the holder of the shares and no known
agreements on restrictions on share transfers or on voting rights.
Shares acquired through our share schemes and plans rank
equally with the other shares in issue and have no special rights.
The trustees of our Employee Share Ownership Plan trusts have
waived their rights to dividends on shares held by those trusts.
Exchange controls and other limitations
affecting security holders
Other than certain economic sanctions, which may be in force
from time to time, there are currently no applicable laws, decrees
or regulations restricting the import or export of capital or affecting
the remittance of dividends or other payments to holders of the
company’s shares who are non-residents of the UK. Similarly, other
than certain economic sanctions which may be in force from time to
time, there are no limitations relating only to non-residents of the UK
under English law or the company’s Articles of Association on the
right to be a holder of, and to vote in respect of, the company’s
shares.
Interests in voting rights
Other than as stated below, as far as we are aware, there are no
persons with significant direct or indirect holdings in the company.
Information provided to the company pursuant to the Financial
Conduct Authority’s (FCA) Disclosure and Transparency Rules
(DTRs) is published on a Regulatory Information Service and on
the company’s website.
At 19 February 2015, the company had received notifications in
accordance with the FCA’s DTRs of the following notifiable
interests in the voting rights in the company’s issued share capital:
BlackRock, Inc.
Legal & General Group Plc
No. of
shares
304,779,454
149,809,659
*Percentage of
issued
capital (%)
6.27%
3.08%
* Percentage of Ordinary Shares in issue, excluding Treasury shares.
We have not acquired or disposed of any interests in our own
shares during the period under review, other than in connection
with our share buy-back programme.
242 GSK Annual Report 2014
Share buy-back programme
The Board has been authorised to issue and allot Ordinary Shares
under Article 9 of the company’s Articles of Association. The
power under Article 9 and the authority for the company to make
purchases of its own shares are subject to shareholder authorities
which are sought on an annual basis at our Annual General
Meeting (AGM). Any shares purchased by the company may be
cancelled or held as Treasury shares or used for satisfying Share
Options and Grants under Group Employee Share Plans.
We continued our long-term buy-back programme in 2014 and
14.7 million shares were purchased at a total cost of £238 million.
The date of the final share purchase in 2014 was 24 June 2014.
No shares were purchased in the period 25 June 2014 to
19 February 2015.
Our programme covers purchases of shares for cancellation or
to be held as Treasury shares, in accordance with the authority
renewed by shareholders at the AGM in May 2014, when the
company was authorised to purchase a maximum of just under
486 million shares. Details of shares purchased, those cancelled,
and those held as Treasury shares are disclosed in Note 33 to the
financial statements, ‘Share capital and share premium account’.
In determining specific share repurchase levels, the company
considers the development of free cash flow during the year. Given
the impact of the sustained strength of Sterling on free cash flow,
the company suspended its share repurchase programme during
2014. Following the completion of the Novartis transaction, GSK
intends to return to shareholders £4 billion of the net proceeds.
The company does not expect to make any Ordinary Share
repurchases in 2015.
Market capitalisation
The market capitalisation, based on shares in issue excluding
Treasury shares, of GSK at 31 December 2014 was £66.92
billion.
At that date, GSK was the fourth largest company by market
capitalisation in the FTSE index.
Share price
At 1 January
At 31 December
(Decrease)/increase
High during the year
Low during the year
2014
£
16.12
13.76
(14.6)%
16.91
13.24
2013
£
13.35
16.12
20.7%
17.82
13.35
2012
£
14.72
13.35
(9.3)%
15.08
13.18
The table above sets out the middle market closing prices.
The company’s share price decreased by 14.6% in 2014. This
compares with a decrease in the FTSE 100 index of 2.7% during
the year. The share price on 19 February 2015 was £15.26.
UK£
18
17
16
15
14
13
12
11
10
US$
75
70
65
60
55
50
45
40
35
09
31/12/11
31/12/12
31/12/13
30
31/12/14
UK share price (UK£)
US ADS price (US$)
Governance & remunerationFinancial statementsInvestor informationStrategic report
Nature of trading market
The following tables set out, for the periods indicated, the high and low middle market closing quotations in pence for the shares on the
London Stock Exchange, and the high and low closing prices in US dollars for the ADS on the NYSE.
February 2015*
January 2015
December 2014
November 2014
October 2014
September 2014
August 2014
Quarter ended 30 September 2014
Quarter ended 30 June 2014
Quarter ended 31 March 2014
Quarter ended 31 December 2013
Quarter ended 30 September 2013
Quarter ended 30 June 2013
Quarter ended 31 March 2013
Year ended 31 December 2012
Year ended 31 December 2011
Year ended 31 December 2010
* to 19 February 2015
Analysis of shareholdings at 31 December 2014
Holding of shares
Up to 1,000
1,001 to 5,000
5,001 to 100,000
100,001 to 1,000,000
Over 1,000,000
Held by
Nominee companies
Investment and trust companies
Insurance companies
Individuals and other corporate bodies
BNY (Nominees) Limited
Held as Treasury shares by GlaxoSmithKline
Ordinary Shares
Pence per share
Low
1453
1357
1327
1414
1324
1413
1377
1377
1543
1554
1546
1558
1520
1359
1318
1312
1095
High
1556
1500
1502
1485
1434
1467
1475
1583
1666
1691
1665
1753
1782
1539
1508
1474
1340
ADS
US dollars per share
High
47.94
45.19
47.14
46.52
45.90
48.62
49.10
54.52
56.39
56.66
53.68
52.96
53.59
46.91
47.45
45.74
42.97
Low
43.96
41.68
41.30
44.75
42.88
45.97
46.35
45.97
51.55
50.90
49.31
50.17
46.79
43.93
41.90
40.53
32.34
Number of
accounts
% of total
accounts
% of total
shares
Number of
shares
99,244
32,256
6,929
749
357
139,535
7,071
27
5
132,429
2
1
139,535
71.12
23.12
4.96
0.54
0.26
100.00
5.07
0.02
0.00
94.91
0.00
0.00
100.00
0.68
1.29
1.83
4.91
91.29
100.00
64.62
0.06
0.00
10.03
16.11
9.18
100.00
36,674,916
68,979,416
98,225,447
262,941,428
4,888,476,025
5,355,297,232
3,460,457,315
3,399,366
3,648
537,234,534
862,686,419
491,515,950
5,355,297,232
BNY Mellon is the Depositary for the company’s ADSs, which are listed on the NYSE. Ordinary Shares representing the company’s
ADR programme, which is managed by the Depositary, are registered in the name of BNY (Nominees) Limited. At 19 February 2015,
BNY (Nominees) Limited held 863,571,705 Ordinary Shares representing 17.75% of the issued share capital (excluding Treasury shares)
at that date.
At 19 February 2015, the number of holders of Ordinary Shares in the USA was 1,044 with holdings of 1,088,475 Ordinary Shares,
and the number of registered holders of ADS was 26,022 with holdings of 431,785,852 ADS. Certain of these Ordinary Shares and
ADS were held by brokers or other nominees. As a result, the number of holders of record or registered holders in the USA is not
representative of the number of beneficial holders or of the residence of beneficial holders.
GSK Annual Report 2014 243
Governance & remunerationFinancial statementsInvestor informationStrategic report Shareholder information
continued
Dividends
The company pays dividends quarterly and continues to return
cash to shareholders through its dividend policy. Dividends remain
an essential component of total shareholder return and the
company is committed to increasing its dividend over the long-
term. Details of the dividends declared, the amounts and the
payment dates are given in Note 16 to the financial statements,
‘Dividends’.
Dividends per share
The table below sets out the dividend per share and per ADS for the
last five years. The dividend per ADS is translated into US dollars at
applicable exchange rates.
Year
2014
2013
2012
2011
2011
2010
Dividend
Supplemental*
pence
80
78
74
70
5
65
US$
2.59
2.47
2.35
2.25
0.16
2.04
* The 2011 supplemental dividend related to the disposal of certain
non-core OTC brands in North America. This was paid with the fourth
quarter ordinary dividend for 2011.
Dividend calendar
Quarter
ADS ex-dividend
date
Ex-dividend
date
Record date
Payment date
Q4 2014
18 February 2015 19 February 2015 20 February 2015
9 April 2015
Q1 2015
13 May 2015
14 May 2015
15 May 2015
9 July 2015
Q2 2015
12 August 2015
13 August 2015
14 August 2015 1 October 2015
Q3 2015
10 November 2015 12 November 2015 13 November 2015 14 January 2016
Tax information for shareholders
A summary of certain UK tax and US federal income tax
consequences for holders of shares and ADR who are citizens
of the UK or the USA is set out below. It is not a complete analysis
of all the possible tax consequences of the purchase, ownership
or sale of these securities. It is intended only as a general guide.
Holders are advised to consult their advisers with respect to the
tax consequences of the purchase, ownership or sale of their
shares or ADR and the consequences under state and local
tax laws in the USA and the implications of the current UK/US
tax conventions.
US holders of ADR generally will be treated as the owners of
the underlying shares for the purposes of the current USA/UK
double taxation conventions relating to income and gains (Income
Tax Convention), estate and gift taxes (Estate and Gift Tax
Convention), and for purposes of the Internal Revenue Code
of 1986, as amended (the Code).
UK shareholders
This summary only applies to a UK resident shareholder that holds
shares as capital assets.
Taxation of dividends
UK resident shareholders will generally be subject to UK income
tax on the full amount of dividends paid, grossed up for the amount
of a tax credit. The tax credit may be set against the individual’s
income tax liability in respect of the gross dividend, but is not
repayable to shareholders with a tax liability of less than the
associated tax credit. For the tax year 2010-11 and subsequent tax
years, an additional rate of income tax on dividends was imposed
for taxpayers whose income is above £150,000. UK resident
shareholders that are corporation taxpayers should note that
dividends are generally entitled to exemption from corporation tax.
Taxation of capital gains
UK shareholders may be liable for UK tax on gains on the disposal
of shares or ADR. For disposals by individuals and subject to the
availability of any exemption or relief such as the annual exempt
amount, a taxable capital gain accruing on a disposal of shares
or ADR will be taxed at 28% if, after all allowable deductions, such
shareholders’ taxable income for the tax year exceeds the basic
rate income tax limit. In other cases, a taxable capital gain accruing
on a disposal of shares or ADR may be taxed at 18% or 28% or at
a combination of both rates. Corporation taxpayers may be entitled
to an indexation allowance which applies to reduce capital gains
to the extent that such gains arise due to inflation. Indexation
allowance may reduce a chargeable gain but will not create an
allowable loss.
Inheritance tax
Individual shareholders may be liable to inheritance tax on the
transfer of shares or ADR. Tax may be charged on the amount by
which the value of the shareholder’s estate is reduced as a result
of any transfer by way of gift or other disposal at less than full
market value. If such a gift or other disposal were subject to both
UK inheritance tax and US estate or gift tax, the Estate and Gift
Tax Convention would generally provide for tax paid in the USA
to be credited against tax payable in the UK.
Stamp duty
UK stamp duty or stamp duty reserve tax (SDRT) will, subject to
certain exemptions, be payable on the transfer of shares at a rate
of 0.5% of the consideration for the transfer.
244 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report
US shareholders
This summary only applies to a shareholder (who is a citizen or
resident of the USA or a domestic corporation or a person that is
otherwise subject to US federal income tax on a net income basis
in respect of the shares or ADR) that holds shares or ADR as
capital assets, is not resident in the UK for UK tax purposes and
does not hold shares for the purposes of a trade, profession or
vocation that is carried on in the UK through a branch or agency.
The summary also does not address the tax treatment of holders
that are subject to special tax rules, such as banks, tax-exempt
entities, insurance companies, dealers in securities or currencies,
persons that hold shares or ADR as part of an integrated
investment (including a ‘straddle’) comprised of a share or ADR
and one or more other positions, and persons that own (directly
or indirectly) 10% or more of the voting stock of the company.
Taxation of dividends
The gross amount of dividends received is treated as foreign
source dividend income for US tax purposes. It is not eligible
for the dividend received deduction allowed to US corporations.
Dividends on ADR are payable in US dollars; dividends on shares
are payable in pounds Sterling. Dividends paid in pounds Sterling
will be included in income in the US dollar amount calculated by
reference to the exchange rate on the day the dividends are
received by the holder. Subject to certain exceptions for short-term
or hedged positions, an individual eligible US holder will be subject
to US taxation at a maximum rate of 23.8% in respect of qualified
dividends.
Taxation of capital gains
Generally, US holders will not be subject to UK capital gains tax,
but will be subject to US tax on capital gains realised on the sale
or other disposal of shares or ADR. Such gains will be long-term
capital gains (subject to reduced rates of taxation for individual
holders) if the shares or ADR were held for more than one year.
Information reporting and backup withholding
Dividends and payments of the proceeds on a sale of shares or
ADR, paid within the USA or through certain US-related financial
intermediaries are subject to information reporting and may be
subject to backup withholding unless the US holder is a
corporation or other exempt recipient or provides a taxpayer
identification number and certifies that no loss of exemption has
occurred. Non-US holders generally are not subject to information
reporting or backup withholding, but may be required to provide a
certification of their non-US status in connection with payments
received. Any amounts withheld will be allowed as a refund or
credit against a holder’s US federal income tax liability provided
the required information is furnished to the Internal Revenue
Service.
Estate and gift taxes
Under the Estate and Gift Tax Convention, a US shareholder is
not generally subject to UK inheritance tax.
Stamp duty
UK stamp duty or SDRT will, subject to certain exemptions,
be payable on any transfer of shares to the ADR custodian or
depository at a rate of 1.5% of the amount of any consideration
provided (if transferred on sale), or their value (if transferred for
no consideration).
No SDRT would be payable on the transfer of, or agreement to
transfer, an ADR. No UK stamp duty should be payable on the
transfer of an ADR provided that any instrument of transfer is
executed and remains at all times outside the UK. Any stamp duty
on the transfer of an ADR would be payable at a rate of 0.5% of
the consideration for the transfer. Any sale of the underlying shares
would, subject to certain exceptions, result in liability to UK stamp
duty or, as the case may be, SDRT at a rate of 0.5%.
Annual General Meeting 2015
2.30pm (UK time) on Thursday 7 May 2015
The Queen Elizabeth II Conference Centre, Broad Sanctuary,
Westminster, London SW1P 3EE.
The AGM is the company’s principal forum for communication
with private shareholders. In addition to the formal business,
there will be a presentation by the CEO on the performance of
the Group and its future development. There will be an opportunity
for questions to be asked to the Board. Chairmen of the Board’s
Committees will take questions relating to those Committees.
Investors holding shares through a nominee service should arrange
with that nominee service to be appointed as a proxy in respect of
their shareholding in order to attend and vote at the meeting.
ADR holders wishing to attend the meeting must obtain a proxy
from BNY Mellon, as Depositary, by notifying them of your request
to do so. This will enable you to attend and vote on the business
to be transacted. ADR holders may instruct BNY Mellon as to the
way in which the shares represented by their ADR should be voted
by completing and returning the voting card provided by the
Depositary.
Documents on display
The Articles of Association of the company and Directors’ service
contracts or, where applicable, letters of appointment between
Directors and the company or any of its subsidiaries (and any side
letters relating to severance terms and pension arrangements) are
available for inspection at the company’s registered office and will
be made available for inspection at the AGM.
GSK Annual Report 2014 245
Governance & remunerationFinancial statementsInvestor informationStrategic report Shareholder information
continued
Financial calendar
Event
Quarter 1 results’ announcement
Annual General Meeting
Quarter 2 results’ announcement
Quarter 3 results’ announcement
Preliminary/Quarter 4 results’ announcement
Annual Report announcement
Annual Report/Summary distribution
Date
April/May 2015
May 2015
July 2015
October 2015
February 2016
February/March 2016
March 2016
Information about the company, including the share price, is available
on our website at www.gsk.com. Information made available on the
website does not constitute part of this Annual Report.
Results announcements
Results announcements are issued to the London Stock Exchange
and are available on its news service. They are also sent to the
US Securities and Exchange Commission and the NYSE, issued
to the media and made available on our website.
Financial reports
The company publishes an Annual Report and, for the shareholder
not needing the full detail of the Annual Report, a Summary.
These documents are available on our website from the date of
publication. The Summary is sent to all shareholders. Shareholders
may elect to receive the Annual Report by contacting the registrar.
Alternatively, shareholders may elect to receive notification by
email of the publication of financial reports by registering on
www.shareview.co.uk.
Copies of previous financial reports are available on our website.
Printed copies can be obtained from our registrar in the UK and
from the GSK Response Center in the USA (see pages 249 and
250 for the contact details).
Donations to political organisations
and political expenditure
With effect from 1 January 2009, to ensure a consistent approach
to political contributions across the Group, we introduced a global
policy to stop voluntarily all corporate political contributions.
In the period from 1 January 2009 to 31 December 2014, the
Group did not make any political donations to EU or non-EU
organisations.
Notwithstanding the introduction of this policy, in accordance with
the Federal Election Campaign Act in the USA, we continue to
support an employee-operated Political Action Committee (PAC)
that facilitates voluntary political donations by eligible GSK
employees.
The PAC is not controlled by GSK. Decisions on the amounts and
recipients of contributions are made by participating employees
exercising their legal right to pool their resources and make
political contributions, which are subject to strict limitations. In
2014, a total of US$525,900 (US$484,810 in 2013) was donated
to political organisations by the GSK employee PAC.
At the AGM in May 2001, shareholders first authorised the
company to make donations to EU political organisations and to
incur EU political expenditure, under the provisions of the Political
Parties, Elections and Referendums Act 2000, of up to £100,000
each year. This authority has since been renewed annually. The
Companies Act 2006 requires companies to continue to obtain
shareholder approval before they can make donations to EU
political organisations or incur EU political expenditure.
However, we do not make and do not intend to make donations to
political parties or independent election candidates, nor do we
make any donations to EU political organisations or incur EU
political expenditure.
246 GSK Annual Report 2014
The definitions of political donations, political expenditure and
political organisations used in the legislation are very wide. In
particular, the definition of EU political organisations may extend to
bodies such as those concerned with policy review, law reform, the
representation of the business community and special interest
groups such as those concerned with the environment, which the
company and its subsidiaries might wish to support. As a result,
the definitions may cover legitimate business activities not in the
ordinary sense considered to be political donations or political
expenditure.
Such activities are not designed to support any political party or
independent election candidate. The authority which the Board
has sought annually is a precautionary measure to ensure that the
company and its subsidiaries do not inadvertently breach the
legislation.
Directors
Our Directors’ powers are determined by UK legislation and our
Articles of Association, which are available on our website. The
Articles may be amended by a special resolution of the members.
The Directors may exercise all the company’s powers provided that
the Articles or applicable legislation do not stipulate that any such
powers must be exercised by the members.
The rules about the appointment and replacement of Directors
are contained in our Articles. They provide that Directors may be
appointed by an ordinary resolution of the members or by a resolution
of the Directors, provided that, in the latter instance, a Director
appointed in this way retires at the first AGM following his or her
appointment.
Our Articles also provide that Directors should normally be subject
to re-election at the AGM at intervals of three years or annually if
they have held office for a continuous period of nine years or more.
However, the Board agreed in 2011 that all Directors who wish to
continue as members of the Board should seek re-election
annually in accordance with the UK Corporate Governance Code.
Members may remove a Director by passing an ordinary resolution
of which special notice has been given, or by passing a special
resolution.
A Director may automatically cease to be a Director if:
• he or she becomes bankrupt or compounds with his or her
creditors generally
• he or she ceases to be a Director by virtue of the Companies
Act or the Articles
• he or she is suffering from mental or physical ill health and the
Board resolves that he or she shall cease to be a Director
• he or she has missed Directors’ meetings for a continuous
period of six months without permission and the Board
resolves that he or she shall cease to be a Director
• he or she is prohibited from being a Director by law
• he or she resigns
• he or she offers to resign and the Board accepts that offer
• all other Directors (being at least three in number) require
him or her to resign.
Governance & remunerationFinancial statementsInvestor informationStrategic report US law and regulation
A number of provisions of US law and regulation apply to the
company because our shares are quoted on the New York Stock
Exchange (NYSE) in the form of ADSs.
NYSE rules
In general, the NYSE rules permit the company to follow UK
corporate governance practices instead of those applied in the
USA, provided that we explain any significant variations. This
explanation is contained in our Form 20-F, which can be accessed
from the Securities and Exchange Commission’s (SEC) EDGAR
database or via our website. NYSE rules that came into effect in
2005 require us to file annual and interim written affirmations
concerning the Audit & Risk Committee and our statement on
significant differences in corporate governance.
Sarbanes-Oxley Act of 2002
Following a number of corporate and accounting scandals in the
USA, Congress passed the Sarbanes-Oxley Act of 2002.
Sarbanes-Oxley is a wide-ranging piece of legislation concerned
largely with financial reporting and corporate governance.
As recommended by the SEC, the company has established a
Disclosure Committee. The Committee reports to the CEO, the
CFO and to the Audit & Risk Committee. It is chaired by the
Company Secretary and the members consist of senior managers
from finance, legal, corporate communications and investor
relations.
External legal counsel, the external auditors and internal experts
are invited to attend its meetings periodically. It has responsibility
for considering the materiality of information and, on a timely basis,
determining the disclosure of that information. It has responsibility
for the timely filing of reports with the SEC and the formal review of
the Annual Report and Form 20-F. In 2014, the Committee met 11
times.
Sarbanes-Oxley requires that the annual report on Form 20-F
contain a statement as to whether a member of our Audit & Risk
Committee (ARC) is an audit committee financial expert as defined
by Sarbanes-Oxley. Such a statement for each of the relevant
members of the ARC (Stacey Cartwright, Judy Lewent and Tom
de Swaan) is included in the Audit & Risk Committee report on
page 87 and in their biographies on pages 74 and 75. Additional
disclosure requirements arise under section 302 and section
404 of Sarbanes-Oxley in respect of disclosure controls and
procedures and internal control over financial reporting.
Directors’ conflicts of interest
All Directors have a duty under the Companies Act 2006 to avoid
a situation in which they have, or could have, a direct or indirect
conflict of interest or possible conflict with the company. The duty
applies, in particular, to the exploitation of any property, information or
opportunity whether or not the company could take advantage of it.
Our Articles provide a general power for the Board to authorise such
conflicts.
The Nominations Committee has been authorised by the Board to
grant and periodically, but in any event annually, to review any
potential or actual conflict authorisations. Directors are not
counted in the quorum for the authorisation of their own actual or
potential conflicts. Authorisations granted are recorded by the
Company Secretary in a register and are noted by the Board.
On an ongoing basis, the Directors are responsible for informing
the Company Secretary of any new actual or potential conflicts
that may arise or if there are any changes in circumstances that
may affect an authorisation previously given. Even when provided
with authorisation, a Director is not absolved from his or her
statutory duty to promote the success of the company. If an actual
conflict arises post-authorisation, the Board may choose to
exclude the Director from receipt of the relevant information and
participation in the debate, or suspend the Director from the
Board, or, as a last resort, require the Director to resign.
The Nominations Committee reviewed the register of potential
conflict authorisations in October 2014 and reported to the Board
that the conflicts had been appropriately authorised and that the
process for authorisation continues to operate effectively. Except
as described in Note 35 to the financial statements, ‘Related party
transactions’, during or at the end of the financial year no Director
or connected person had any material interest in any contract of
significance with a Group company.
Independent advice
The Board recognises that there may be occasions when one or
more of the Directors feel it is necessary to take independent legal
and/or financial advice at the company’s expense. There is an
agreed procedure, which is set out on our website, to enable them
to do so.
Indemnification of Directors
Qualifying third party indemnity provisions (as defined in the
Companies Act 2006) are in force for the benefit of Directors and
former Directors who held office during 2014 and up to the signing
of the Annual Report.
Change of control and essential contracts
We do not have contracts or other arrangements which individually
are fundamental to the ability of the business to operate effectively,
nor is the company party to any material agreements that would take
effect, be altered, or terminate upon a change of control following
a takeover bid. We do not have agreements with any Director that
would provide compensation for loss of office or employment
resulting from a takeover, except that provisions of the company’s
share plans may cause options and awards granted under such
plans to vest on a takeover. Details of the termination provisions in
the company’s framework for contracts for Executive Directors are
given on pages 124 and 125.
GSK Annual Report 2014 247
Governance & remunerationFinancial statementsInvestor informationStrategic report Shareholder information
continued
Section 302: Corporate responsibility for financial reports
Sarbanes-Oxley also introduced a requirement for the CEO and
the CFO to complete formal certifications, confirming that:
• they have each reviewed the annual report on Form 20-F
• based on their knowledge, the annual report on Form 20-F
contains no material misstatements or omissions
• based on their knowledge, the financial statements and other
financial information fairly present, in all material respects, the
financial condition, results of operations and cash flows as of
the dates, and for the periods, presented in the annual report on
Form 20-F
• management conducted an evaluation of the effectiveness of
internal control over financial reporting based on the framework,
Internal Control – Integrated Framework (2013) issued by
the Committee of Sponsoring Organisations of the Treadway
Commission (COSO)
• there have been no changes in the Group’s internal control over
financial reporting during 2014 that have materially affected,
or are reasonably likely to affect materially, the Group’s internal
control over financial reporting
• management has assessed the effectiveness of internal control
over financial reporting as at 31 December 2014 and its
conclusion will be filed as part of the Group’s Form 20-F, and
• they are responsible for establishing and maintaining disclosure
controls and procedures that ensure that material information is
made known to them, and have evaluated the effectiveness of
these controls and procedures as at the year-end, the results of
such evaluation being contained in the annual report on
Form 20-F
PricewaterhouseCoopers LLP, which has audited the consolidated
financial statements of the Group for the year ended 31 December
2014, has also assessed the effectiveness of the Group’s internal
control over financial reporting under Auditing Standard No. 5 of
the Public Company Accounting Oversight Board (United States).
Their audit report will be filed with the Group’s Form 20-F.
Section 13(r) of the US Securities Exchange Act
Section 13(r) of the US Securities Exchange Act of 1934, as
amended, requires issuers to make specific disclosure in their Annual
Reports of certain types of dealings with Iran, including transactions
or dealings with government-owned entities, as well as dealings with
entities sanctioned for activities related to terrorism or proliferation of
weapons of mass destruction, even when those activities are not
prohibited by US law and do not involve US persons. The Group
does not have a legal entity based in Iran, but it does export certain
pharmaceutical and vaccine products to Iran, via sales by non-US
entities, to two privately held Iranian distributors. The Group also
does business, via non-US entities, in other jurisdictions targeted by
sanctions laws, including Syria, Crimea, North Korea and Sudan.
We do not believe that any of the Group’s direct dealings with Iran
require specific disclosure under these requirements, and the Group
limits sales to Iran, North Korea, Syria, Sudan and Cuba to essential
medicines (determined in part using criteria set by the World Health
Organization). The Group has no direct knowledge of the identity of
its distributors’ downstream customers in Iran, and it is possible that
these customers include entities, such as government-owned
hospitals and pharmacies, that are owned or controlled directly or
indirectly by the Iranian government or by persons or entities
sanctioned in connection with terrorism or proliferation activities.
Because the Group has no direct knowledge of its distributors’
customers, it cannot establish the proportion of gross revenue or
sales potentially attributable to entities affiliated with the Iranian
government or parties sanctioned for disclosable activities. As a
result, the Group is reporting the entire gross revenues (£0.2 million)
and net losses (£1.36 million) from the Group’s sales to Iran in 2014.
The Group is also aware that some hospitals or other medical
facilities in Lebanon may be affiliated with or controlled by Hezbollah,
which is designated by the United States as a terrorist organization.
Again, the Group does not deal directly with such facilities and sells
through a distributor. The Group is also unable to identify with
certainty the degree or nature of any affiliation of the end customers
with Hezbollah, and the Group is unable to establish the proportion
of gross revenue or sales potentially attributable to reportable
entities. As a result, the Group is reporting the entire gross revenues
(£41 million) and net profits (£16.3 million) from the Group’s sales to
Lebanon in 2014.
• they are responsible for establishing and maintaining internal
control over financial reporting that provides reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles
• they have disclosed in the annual report on Form 20-F any
changes in internal controls over financial reporting during the
period covered by the annual report on Form 20-F that have
materially affected, or are reasonably likely to affect materially,
the company’s internal control over financial reporting, and they
have disclosed, based on their most recent evaluation of internal
control over financial reporting, to the external auditors and the
ARC, all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
which are reasonably likely to affect adversely the company’s
ability to record, process, summarise and report financial
information, and any fraud (regardless of materiality) involving
persons that have a significant role in the company’s internal
control over financial reporting.
The Group has carried out an evaluation under the supervision
and with the participation of its management, including the CEO
and CFO, of the effectiveness of the design and operation
of the Group’s disclosure controls and procedures as at
31 December 2014.
There are inherent limitations to the effectiveness of any system
of disclosure controls and procedures, including the possibility
of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls
and procedures can only provide reasonable assurance of
achieving their control objectives.
The CEO and CFO expect to complete these certifications and
report their conclusions on the effectiveness of disclosure controls
and procedures in February 2015, following which the certificates
will be filed with the SEC as part of our Group’s Form 20-F.
Section 404: Management’s annual report on internal control
over financial reporting
In accordance with the requirements of section 404 of Sarbanes-
Oxley, the following report is provided by management in respect
of the company’s internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the US Securities
Exchange Act of 1934):
• management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Group.
Internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with IFRS
248 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Shareholder services and contacts
Registrar
The company’s registrar is:
Equiniti Limited
Aspect House, Spencer Road, Lancing, BN99 6DA
www.shareview.co.uk
Tel: 0871 384 2991 (in the UK)*
Tel: +44(0)121 415 7067 (outside the UK)
Equiniti provides a range of services for shareholders:
Service
What it offers
How to participate
Dividend Reinvestment Plan
(DRIP)
As an alternative to receiving cash dividends you may
choose to reinvest your dividends to buy more GSK
shares.
A DRIP election form can be
downloaded from
www.shareview.co.uk or
requested by telephoning Equiniti.
Dividend payment direct to your bank
account (Bank Mandate)
If you currently receive your dividends by cheque through
the post, you can instead have them paid directly into your
bank or building society account. This is quicker, more
secure and avoids the risk of your cheque going astray.
A dividend bank mandate form can be
downloaded from
www.shareview.co.uk or
requested by telephoning Equiniti.
Dividend payment direct to
bank account for overseas shareholders
Electronic communications
Shareview service
Duplicate publications or mailings
Share dealing service†
(please note that market trading hours
are from 8.00am to 4.30pm UK time,
Monday to Friday, excluding UK public
holidays)
Corporate Sponsored Nominee Account
Instead of waiting for a sterling cheque to arrive by post,
Equiniti will convert your dividend into your local currency
and send it direct to your local bank account. This service
is available in over 100 countries worldwide.
Shareholders may elect to receive electronic notifications
of company communications including our Annual Report,
dividend payments (if paid by way of a Bank Mandate),
access to electronic tax vouchers and the availability of
online voting for all general meetings. Each time GSK
mails out hard copy shareholder documents you will
receive an email containing a link to the document or
relevant website.
This enables you to create a free online portfolio to view
your share balance and movements, update your address
and dividend payment instructions and register your votes
for our AGM.
If you receive duplicate copies of this report or other
mailings, please contact Equiniti and they will arrange for
your accounts to be merged into one for your convenience
and to avoid waste and unnecessary costs.
Shareholders may trade shares, either held in certificated
form or held in our Corporate Sponsored Nominee, by
internet, telephone or by a postal dealing service provided
by Equiniti Financial Services Limited.
This is a convenient way to manage your shares without
requiring a share certificate. The service provides a facility
for you to hold your shares in a nominee company
sponsored by the company. You will continue to receive
dividend payments, annual reports and can attend and
vote at the company’s general meetings. Shareholders’
names do not appear on the publicly available share
register and the service is free to join.
For more details on this service and the
costs involved please contact Equiniti.
You can register at
www.shareview.co.uk
You can register at:
www.shareview.co.uk
Please contact Equiniti.
For internet transactions, please log on
to www.shareview.co.uk/dealing.
For telephone transactions, please call
0845 603 7037 (in the UK) or
+44 (0)121 415 7560 (outside the UK).
For postal transactions, please call
0871 384 2991 to request a dealing
form.
An application form can be downloaded
from
www.shareview.co.uk or
requested by telephoning Equiniti.
Individual Savings Accounts (ISAs)†
The company has arranged for Equiniti Financial Services
Limited to provide a GSK Corporate ISA to hold GSK
Ordinary Shares.
Details are available from
www.shareview.co.uk or can be
requested by telephoning Equiniti.
* UK lines are open from 8.30am to 5.30pm, Monday to Friday, except UK public holidays, and calls to the number are charged at 8p
per minute plus network extras.
† The provision of share dealing details is not intended to be an invitation or inducement to engage in an investment activity. Advice on
share dealing should be obtained from a stockbroker or independent financial adviser.
GSK Annual Report 2014 249
Governance & remunerationFinancial statementsInvestor informationStrategic report
Shareholder information
continued
ADR Depositary
The ADR programme is administered by The Bank of New York
Mellon:
Contacts
Investor relations
Investor relations may be contacted as follows:
BNY Mellon Shareowner Services
PO Box 30170
College Station, TX 77842-3170
Overnight correspondence should be sent to:
BNY Mellon Shareowner Services
211 Quality Circle, Suite 210
College Station, TX 77845
www.mybnymdr.com
Tel: 1 877 353 1154 (US toll free)
Tel: +1 201 680 6825 (outside the USA)
email: shrrelations@cpushareownerservices.com
UK
980 Great West Road
Brentford, Middlesex, TW8 9GS
Tel: +44 (0)20 8047 5000
USA
Five Crescent Drive
Philadelphia PA 19112
Tel: 1 888 825 5249 (US toll free)
Tel: +1 215 751 4611 (outside the USA)
GSK Response Center
Tel: 1 888 825 5249 (US toll free)
The Depositary also provides Global BuyDIRECT†, a direct ADS
purchase/sale and dividend reinvestment plan for ADR holders.
For details of how to enrol please visit www.mybnymdr.com or call
the above helpline number to obtain an enrolment pack.
Share scam alert
If you receive an unsolicited telephone call offering to sell or buy
your shares, please take extra care. The caller may be part of a
highly organised financial scam.
If you are a UK shareholder, please contact the Financial Conduct
Authority for further information on this, or other similar activities,
at www.fca.org.uk/consumers or on its consumer helpline:
Tel: 0845 606 1234 (in the UK)
Lines are open from 8.00am to 6.00pm, UK time,
Monday to Friday, except UK public holidays.
Responsible Business Supplement
We are publishing our Responsible Business Supplement 2014
online. This will outline GSK’s approach to, and performance in,
our key responsible business areas, Health for all, Our behaviour,
Our people and Our planet.
Glaxo Wellcome and SmithKline Beecham
Corporate PEPs
The Share Centre Limited
Oxford House, Oxford Road, Aylesbury, Bucks HP21 8SZ
Tel: +44 (0)1296 414 141
www.share.com
Donating shares to Save the Children
In 2013, GSK embarked on an ambitious global partnership with
Save the Children to share our expertise and resources with the
aim of helping to save the lives of one million children.
Shareholders with a small number of shares, the value of which
makes it uneconomical to sell, may wish to consider donating them
to Save the Children. Donated shares will be aggregated and sold
by Save the Children who will use the funds raised to help them
reach the above goal.†
To obtain a share donation form, please contact our registrar,
Equiniti, who is managing the donation and sale of UK shares to
Save the Children free of charge.
† The provision of share dealing details is not intended to be an
invitation or inducement to engage in an investment activity.
Advice on share dealing should be obtained from a stockbroker
or independent financial adviser.
250 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report Glossary of terms
Terms used in the Annual Report
US equivalent or brief description
Accelerated capital allowances
Tax allowance in excess of depreciation arising from the purchase of fixed assets that delay
the charging and payment of tax. The equivalent of tax depreciation.
American Depositary Receipt (ADR)
Receipt evidencing title to an ADS. Each GSK ADR represents two Ordinary Shares.
American Depositary Shares (ADS)
Listed on the New York Stock Exchange; represents two Ordinary Shares.
Basic earnings per share
Basic income per share.
Called up share capital
Ordinary Shares, issued and fully paid.
CER growth
The company
Corporate Integrity Agreement (CIA)
Currency swap
Defined benefit plan
Defined contribution plan
Growth at constant exchange rates.
GlaxoSmithKline plc.
In 2012, the company entered into a settlement with the US Federal Government related to past
sales and marketing practices. As part of the settlement the company entered into a Corporate
Integrity Agreement with the US Department of Health and Human Services, under which
improvements are being built into its existing compliance programmes.
An exchange of two currencies, coupled with a subsequent re-exchange of those currencies,
at agreed exchange rates and dates.
Pension plan with specific employee benefits, often called ‘final salary scheme’.
Pension plan with specific contributions and a level of pension dependent upon the growth
of the pension fund.
Derivative financial instrument
A financial instrument that derives its value from the price or rate of some underlying item.
Diluted earnings per share
Diluted income per share.
Employee Share Ownership Plan Trusts
Trusts established by the Group to satisfy share-based employee incentive plans.
Equity Shareholders’ funds
Shareholders’ equity.
Finance lease
Freehold
The Group
GSK
Hedging
Intangible fixed assets
Ordinary Share
Profit
Profit attributable to shareholders
Share capital
Share option
Capital lease.
Ownership with absolute rights in perpetuity.
GlaxoSmithKline plc and its subsidiary undertakings.
GlaxoSmithKline plc and its subsidiary undertakings.
The reduction of risk, normally in relation to foreign currency or interest rate movements,
by making off-setting commitments.
Assets without physical substance, such as computer software, brands, licences, patents,
know-how and marketing rights purchased from outside parties.
A fully paid up ordinary share in the capital of the company.
Income.
Net income.
Ordinary Shares, capital stock or common stock issued and fully paid.
Stock option.
Share premium account
Additional paid-up capital or paid-in surplus (not distributable).
Shares in issue
Subsidiary
Treasury share
Turnover
The number of shares outstanding.
An entity in which GSK exercises control.
Treasury stock.
Revenue.
UK Corporate Governance Code
As required by the UK Listing Authority, the company has disclosed in the Annual Report how it
has applied the best practice corporate governance provisions of the Financial Reporting
Council’s UK Corporate Governance Code.
GSK Annual Report 2014 251
Governance & remunerationFinancial statementsInvestor informationStrategic report Late-stage pipeline summary
Legal proceedings
Long-term Incentive plans
Major restructuring costs
Movements in equity
Net debt
New accounting requirements
Non-Executive Directors’ fees
Notes to the financial statements
Operating profit
Other intangible assets
Other investments
Other non-current assets
Other non-current liabilities
Other operating income
Other provisions
Our Board
Our business
Our people
Our strategy priorities
Outlook
Pensions and other post-employment benefits
Pharmaceutical products, competition and
intellectual property
Pipeline
Presentation of the financial statements
Principal Group companies
Property, plant and equipment
Proposed Novartis transaction
Quarterly trend
Reconciliation of net cash flow to movement in net debt
Registrar
Related party transactions
Relations with shareholders
Remuneration policy report
Remuneration report
Research and development
Responsible business
Risk factors
Segment information
Share capital and control
Share capital and share premium account
Share price
Shareholder information
Taxation
Tax information for shareholders
The Remuneration Committee
Trade and other payables
Trade and other receivables
US law and regulation
Page
29
206
101
154
179
176
146
110
140
152
162
165
165
176
151
175
72
18
44
12
5
167
229
229
140
204
158
203
218
182
249
181
84
119
96
24,32,34
36
232
147
242
178
242
242
156
244
108
167
166
247
Index
Accounting principles and policies
Acquisitions and disposals
Adjustments reconciling profit after tax to operating
cash flows
Annual General Meeting 2015
Assets held for sale
Associates and joint ventures
Cash and cash equivalents
CEO’s statement
Chairman’s statement
Commitments
Committee reports
Competition
Consolidated balance sheet
Consolidated cash flow statement
Consolidated income statement
Consolidated statement of changes in equity
Consolidated statement of comprehensive income
Consumer Healthcare products and competition
Contingent liabilities
Corporate Executive Team
Corporate governance
Critical accounting policies
Directors and senior management
Directors’ interests in shares
Directors’ statement of responsibilities
Dividends
Donations to political organisations and
political expenditure
Earnings per share
Employee costs
Employee share schemes
Exchange rates
Executive Director remuneration
Finance expense
Finance income
Financial instruments and related disclosures
Financial position and resources
Financial statements of GlaxoSmithKline plc, prepared
under UK GAAP
Five year record
Glossary of terms
Goodwill
Group financial review
Independent Auditors’ report
Inventories
Investments in associates and joint ventures
Investor relations
Key accounting judgements and estimates
Key performance indicators
Page
140
183
181
245
166
155
166
4
2
189
85
10
137
139
136
138
136
231
176
76
78
63
118
111
130
158
246
158
153
200
146
97
155
154
190
65
211
222
251
160
52
131
166
164
250
144
14
252 GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic report About GSK
GlaxoSmithKline plc was incorporated as an
English public limited company on 6 December
1999. We were formed by a merger between
Glaxo Wellcome plc and SmithKline Beecham
plc. GSK acquired these two English companies
on 27 December 2000 as part of the merger
arrangements.
Our shares are listed on the London Stock
Exchange and the New York Stock Exchange.
Read more at www.gsk.com
Here you will find downloadable PDFs of:
• Annual Report 2014
• Annual Summary 2014
• Form 20-F
• Responsible Business Supplement 2014
Brand names
Brand names appearing in italics throughout this report
are trade marks either owned by and/or licensed to GSK
or associated companies, with the exception of Boniva/
Bonviva, a trade mark of Roche, NicoDerm, a trade
mark of Johnson & Johnson, Merrell, Novartis, Sanofi or
GlaxoSmithKline, Potiga, a trade mark of Valeant, Prolia
and Xgeva, trade marks of Amgen, Vesicare, a trade mark
of Astellas Pharmaceuticals in many countries and of
Yamanouchi Pharmaceuticals in certain countries, Volibris,
a trade mark of Gilead, Xyzal, a trade mark of UCB or GSK
and Zyrtec, a trade mark of UCB or GSK all of which are
used in certain countries under licence by the Group.
Acknowledgements
Design
Salterbaxter
Printing
Printed at Pureprint Group, ISO 14001.
FSC certified and CarbonNeutral.
Paper
This Annual Report is printed on
Amadeus 100 Silk, a 100% recycled
paper with full FSC certification. All pulps
used are made from 100% de-inked,
post-consumer waste and are elemental
chlorine free. The manufacturing mill
holds the ISO 14001 and EU Ecolabel
certificates for environmental
management.
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 Directors’ Report (for which see page
95), the Strategic report and the Remuneration report.
Under English law the Directors would be liable to the
company, but not to any third party, if one or more of these
reports contained errors as a result of recklessness or
knowing misstatement or dishonest concealment of a
material fact, but would otherwise not be liable. Pages 71
to 95, 130, 211 and 232 to 248 inclusive comprise the
Directors’ Report, pages 2 to 70 inclusive comprise the
Strategic report and pages 96 to 118 inclusive comprise
the Remuneration report, each of which have been drawn
up and presented in accordance with and in reliance upon
English company law and the liabilities of the Directors
in connection with these reports shall be subject to the
limitations and restrictions provided by such law.
Website
GSK’s website www.gsk.com gives additional information
on the Group. Notwithstanding the references we make
in this Annual Report to GSK’s website, none of the
information made available on the website constitutes part
of this Annual Report or shall be deemed to be incorporated
by reference herein.
Cautionary statement regarding
forward-looking statements
The Group’s reports filed with or furnished to the US
Securities and Exchange Commission (SEC), including
this document and written information released, or oral
statements made, to the public in the future by or on behalf
of the Group, may contain forward-looking statements.
Forward-looking statements give the Group’s current
expectations or forecasts of future events. An investor
can identify these statements by the fact that they do not
relate strictly to historical or current facts. They use words
such as ‘anticipate’, ‘estimate’, ‘expect’, ‘intend’, ‘will’,
‘project’, ‘plan’, ‘believe’ and other words and terms of
similar meaning in connection with any discussion of future
operating or financial performance. In particular, these
include statements relating to future actions, prospective
products or product approvals, future performance or
results of current and anticipated products, sales efforts,
expenses, the outcome of contingencies such as legal
proceedings, and financial results. Other than in accordance
with its legal or regulatory obligations (including under the
UK Listing Rules and the Disclosure and Transparency
Rules of the Financial Conduct Authority), the Group
undertakes no obligation to update any forward-looking
statements, whether as a result of new information, future
events or otherwise. The reader should, however, consult
any additional disclosures that the Group may make in any
documents which it publishes and/or files with the SEC.
All readers, wherever located, should take note of these
disclosures. Accordingly, no assurance can be given that
any particular expectation will be met and shareholders are
cautioned not to place undue reliance on the forward-
looking statements.
Forward-looking statements are subject to assumptions,
inherent risks and uncertainties, many of which relate to
factors that are beyond the Group’s control or precise
estimate. The Group cautions investors that a number of
important factors, including those in this document, could
cause actual results to differ materially from those expressed
or implied in any forward-looking statement. Such factors
include, but are not limited to, those discussed under ‘Risk
factors’ on pages 232 - 241 of this Annual Report. Any
forward-looking statements made by or on behalf of the
Group speak only as of the date they are made and are
based upon the knowledge and information available to the
Directors on the date of this Annual Report.
A number of adjusted measures are used to report the
performance of our business. These measures are defined
on page 52 and a reconciliation of core results to total
results is set out on page 61.
The information in this document does not constitute an
offer to sell or an invitation to buy shares in GlaxoSmithKline
plc or an invitation or inducement to engage in any other
investment activities. Past performance cannot be relied
upon as a guide to future performance. Nothing in this
Annual Report should be construed as a profit forecast.
B GSK Annual Report 2014
GSK Annual Report 2014
Governance & remunerationFinancial statementsInvestor informationStrategic Report
Doctors like Kaali (pictured) are on the frontline against malaria.
He works in Ghana, where he treats children with malaria and
educates families about how to prevent the disease. Along with
our partners, we are committed to fighting malaria on all fronts –
from improving access to medicines, to encouraging use of
preventative tools like bed nets, and searching for new treatments
as well as developing a potential vaccine.
Head Office and Registered Office
GlaxoSmithKline plc
980 Great West Road
Brentford, Middlesex TW8 9GS
United Kingdom
Tel: +44 (0)20 8047 5000
Registered number: 3888792
www.gsk.com
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