Annual Report 2016
2016 saw good sales momentum
across Pharmaceuticals, Vaccines
and Consumer Healthcare
and further pipeline progress
We are a global science-led
healthcare company.
Our three world-leading businesses
research and deliver innovative
medicines, vaccines and consumer
healthcare products.
Front cover case study
Arthur works at our Upper Providence R&D lab
return on R&D investment and accelerate
the development of new products that can
improve patients’ lives.
At GSK, innovation underpins each of our three businesses
We are using next generation technology
to develop new approaches to disease
management and control. In addition to
our own research and development,
we gain insights through our network of
collaborations with biotechs, other
companies and academic institutions.
This enables more efficient trial design
and greater use of software, analytics and
new technology, all of which is helping to
increase our productivity, maximise our
We have an active pipeline of innovative
products across six core areas: respiratory,
HIV and infectious diseases, vaccines,
immuno-inflammation, oncology and
rare diseases.
Cautionary statement regarding forward-looking statements
The Group’s reports filed with or furnished to the US Securities and Exchange Commission (SEC), including this document and written information released, or oral statements
made, to the public in the future by or on behalf of the Group, may contain forward-looking statements. Forward-looking statements give the Group’s current expectations or
forecasts of future events. An investor can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as ‘anticipate’,
‘estimate’, ‘expect’, ‘intend’, ‘will’, ‘project’, ‘plan’, ‘believe’ and other words and terms of similar meaning in connection with any discussion of future operating or financial
performance. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and
anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. Other than in accordance with its legal or regulatory
obligations (including under the UK Listing Rules and the Disclosure and Transparency Rules of the Financial Conduct Authority), the Group undertakes no obligation to update
any forward-looking statements, whether as a result of new information, future events or otherwise.
The reader should, however, consult any additional disclosures that the Group may make in any documents which it publishes and/or files with the SEC. All readers, wherever
located, should take note of these disclosures. Accordingly, no assurance can be given that any particular expectation will be met and shareholders and investors are cautioned
not to place undue reliance on the forward-looking statements.
Forward-looking statements are subject to assumptions, inherent risks and uncertainties, many of which relate to factors that are beyond the Group’s control or precise
estimate. The Group cautions investors that a number of important factors, including those in this document, could cause actual results to differ materially from those expressed
or implied in any forward-looking statement. Such factors include, but are not limited to, those discussed under ‘Principal risks and uncertainties’ on pages 253-262 of this
Annual Report. Any forward-looking statements made by or on behalf of the Group speak only as of the date they are made and are based upon the knowledge of and
information available to the Directors on the date of this Annual Report.
All expectations and targets regarding future performance should also be read together with ‘Assumptions related to 2016-2020 outlook’ on the inside back cover of this
document.
A number of adjusted measures are used to report the performance of our business. These measures are defined on page 57 and a reconciliation of core results to total results
is set out on page 66.
01 GSK Annual Report 2016
2016 performance summary
£27.9bn
Group turnover
(up 17% AER; 6% CER;
5% pro-forma CER)a
£2.6bn
Total operating profit
(down 75% AER; 86% CER)a,c
18.8p
Total earnings per share
(down 89% AER; 99% CER)a,c
£6.5bn
Net cash inflow from
operating activities
£3.9bn
Dividends declared
for 2016
£4.5bn
New Pharmaceutical
and Vaccine salesb
(up >100% AER; >100% CER)a
£7.8bn
Core operating profit
(up 36% AER; 14% CER;
17% pro-forma CER)a
102.4p
Core earnings per share
(up 35% AER; 12% CER )a
£3.1bn
Free cash flowa
20-30
Assets with data expected
by end of 2018
Delivering sustainable performance
1st in the Access
to Medicine Index
since launch in 2008
3rd in the
pharmaceutical sector
for Dow Jones Sustainability Index
Footnotes
a AER growth rates represent growth at actual exchange rates. We use a number of adjusted, non-IFRS,
measures to report the performance of our business, as described on page 57, including core results,
free cash flow and CER and pro-forma growth rates. These measures are used by management for
planning and reporting purposes and may not be directly comparable with similarly described measures
used by other companies. Core results exclude a number of items and are presented as management
believes that core results allow the key trends and factors driving that performance to be more easily
and clearly identified by shareholders. Non-IFRS measures may be considered in addition to, but not
as a substitute for or superior to, information presented in accordance with IFRS. A reconciliation
of total results to core results is set out on page 66.
b New products defined as:
Pharmaceuticals: Relvar/Breo Ellipta, Incruse Ellipta, Anoro Ellipta, Arnuity Ellipta, Eperzan/Tanzeum,
Nucala, Tivicay, Triumeq.
Vaccines: Menveo, Bexsero, Shingrix (not yet approved).
c Primarily reflecting impact of £9.2 billion profit in 2015 from disposal of Oncology business.
Strategic report
About us
Chairman’s statement
CEO’s statement
Our integrated approach
The market in which we operate
Our business model
A clear strategy for growth
How we measure success
How we manage risks
Pharmaceuticals
Vaccines
Consumer Healthcare
Responsible business
Group financial review
Governance and remuneration
Chairman's Governance statement
Our Board
Our Corporate Executive Team
Leadership and effectiveness
Nominations Committee report
Accountability
Audit & Risk Committee report
Relations with shareholders
Corporate Responsibility
Committee report
Remuneration report
Chairman’s annual statement
Annual report on remuneration
Remuneration policy summary
Remuneration policy report
Financial statements
02
04
05
06
08
12
14
16
18
20
28
34
40
52
80
82
86
88
94
97
97
107
108
112
115
137
138
Directors’ statement of responsibilities 148
149
Independent Auditors' report
158
Financial statements
Notes to the financial statements
162
Financial statements of GlaxoSmithKline
plc prepared under UK GAAP
232
Investor information
Quarterly trend
Five year record
Product development pipeline
Product, competition and
intellectual property
Principal risks and uncertainties
Share capital and share price
Dividends
Financial calendar
Annual General Meeting 2017
Tax information for shareholders
Shareholder services and contacts
US law and regulation
Group companies
Glossary of terms
240
244
247
250
253
263
265
265
266
266
268
270
272
283
Investor informationFinancial statementsGovernance and remunerationStrategic report
02 GSK Annual Report 2016
About us
At GSK, our mission
is to improve the
quality of human life
by enabling people
to do more, feel better
and live longer.
Three world-leading businesses
Our Pharmaceuticals, Vaccines and Consumer Healthcare
businesses generated combined turnover of £27.9 billion in 2016.
Each business benefits from our global commercial infrastructure,
integrated supply networks and innovative R&D.
99,300
Number of employees
150+
Number of markets
87
Manufacturing sites
R&D innovation underpins each of our businesses
In 2016, we invested £3.6 billion in R&D across our three
businesses. External partnerships and collaborations
enable us to develop and access knowledge, and increase
our understanding in new areas of science.
We focus our research across six core areas and are using
next generation technology to develop new approaches
to disease management and control.
Respiratory diseases
HIV/infectious diseases
Vaccines
Immuno-inflammation
Oncology
Rare diseases
Efficient global operating model
We are focused on optimising our operations through restructuring,
investment and modernisation to improve profitability and efficiency.
Footnote
a We use a number of adjusted, non-IFRS, measures to
report the performance of our business, as described on
page 57, including core results, free cash flow and CER
and pro-forma growth rates. Non-IFRS measures may be
considered in addition to, but not as a substitute for or
superior to, information presented in accordance with IFRS.
£1.4bn
Incremental annual
savings delivered in 2016
(including £0.2 billion
currency benefit)
9.3%
27.9%
Total operating profit
margin in 2016
Core operating profit
margin in 2016a
03 GSK Annual Report 2016
Pharmaceuticals
Vaccines
Consumer
Healthcare
Our Pharmaceuticals business
discovers, develops and
commercialises medicines to
treat a range of acute and chronic
diseases. We have a broad portfolio
of innovative and established
medicines in respiratory and HIV,
in which we are global leaders.
We focus our research across
respiratory, HIV and infectious
diseases, immuno-inflammation,
oncology and rare diseases.
Read more on pages 20 to 27
Our Vaccines business has the
broadest portfolio of any company,
with vaccines for people of all
ages – from babies and adolescents
to adults and older people. We
deliver over two million vaccine
doses per day to people living
in over 160 countries.
Read more on pages 28 to 33
Our Consumer Healthcare business
develops and markets products
in Wellness, Oral health, Nutrition
and Skin health categories. Our
seven global power brands – Otrivin,
Panadol, parodontax, Poligrip,
Sensodyne, Theraflu and Voltaren,
include some of the most trusted
and best-selling brands in the world.
Read more on pages 34 to 39
Top three categories by sales
Respiratory
HIV
Established products
£m
6,510
3,556
2,541
Top three categories by sales
Infanrix/Pediarix
Hepatitis
Meningitis
£m
769
602
592
£16.1bn
Turnover
£4.6bn
Turnover
£m
3,726
2,223
674
570
Sales by category
Wellness
Oral health
Nutrition
Skin health
£7.2bn
Turnover
% of Group turnover
% of Group turnover
% of Group turnover
58%
16%
2bn
packs of medicines
produced in 2016
833m
vaccines delivered
in 2016
26%
5bn
Consumer Healthcare products
produced in 2016
Investor informationFinancial statementsGovernance and remunerationStrategic report 04 GSK Annual Report 2016
Chairman’s statement
GSK made further
progress during 2016.
Operating performance
significantly improved
and there was continued
progress in the R&D
pipeline.
Read more
Governance report
See page 80
Our Corporate Governance report sets out our
corporate governance practices and includes the
reports of our Board Committees.
Remuneration
See page 112
Our Remuneration report sets out our
remuneration arrangements for Executive and
Non-Executive Directors and includes our new
Remuneration policy for 2017.
Diversity statement
See page 96
Our Board’s Diversity policy, including gender,
sets out measurable objectives which our
Nominations Committee monitors and reports
progress towards their achievement.
Viability statement
See page 56
Our Viability statement sets out our assessment of
the prospects of the Group over the next
three years.
I am pleased to report that GSK made
further good progress during 2016.
Operating performance significantly
improved in our three businesses and there
was continued progress in the late and early
stage R&D pipeline. In every important area,
it has been a year of solid achievement.
2016 performance
Management continues to make strong
progress in driving the sales and cost
benefits from the integration of the Novartis
businesses in Vaccines and Consumer
Healthcare. These businesses have been
transformed through the transaction and are
now true global leaders in their respective
markets, well positioned strategically and
improving financially.
In Pharmaceuticals, new product sales
have shown very good momentum,
particularly in HIV and Respiratory. New
products now make up around a quarter of
total pharmaceutical sales. This is important
given the pricing pressure faced generally by
pharmaceutical companies and the potential
introduction of generic competition to Advair
– for many years the Group’s biggest single
source of profits – in the US during 2017.
The Group’s improved operational
performance also contributed to markedly
increased cash generation. Operational
cash flow also benefited strongly from
the devaluation of Sterling following the
Brexit vote in June, although the value
of non-sterling liabilities for debt funding
and contingent consideration, has also
increased.
Ordinary dividends of 80p per share have
been declared for 2016, the same level as
2015. The company expects to maintain the
same payment in 2017, in accordance with
the statements made in 2015. This level of
distribution still exceeds the free cash flow
generated by the business despite the
material improvement in cash generated
in 2016 referred to above. Given that 2017
is the last year of the three year dividend
commitment made in 2015, the Board will
be considering the appropriate dividend
policy for 2018 and beyond during the
course of the year.
CEO succession
A key area of focus for the Board through
2016 has been to manage the CEO
succession as Sir Andrew steps down
after 33 years with the company and into
a tenth year as CEO. The Board conducted
a thorough, global search for a successor,
which included internal and external
candidates.
The Board was unanimous in its decision to
appoint Emma Walmsley, previously Head
of GSK’s Consumer Healthcare business,
as the new CEO. Emma has very strong
leadership skills and a clear track record of
delivery on performance. The Board believe
Emma will bring new thinking to how the
Group operates in today’s healthcare
environment, whilst at the same time
harnessing the momentum evident in
current performance.
I want to thank Sir Andrew again for his
dedicated service to GSK. Through his
commitment and leadership GSK has built
a balanced set of businesses with fine
prospects and delivered very significant
rewards to shareholders with substantial
cash returns. He has also led efforts to
address the most pressing concerns the
industry faces, ranging from reforming our
commercial model, increasing transparency
of trial results, and ensuring medicines are
priced more fairly and made more accessible
to patients worldwide. He will be much
missed within GSK and we wish him well in
his future endeavours.
Board changes during the year
We continue to refresh the Board. In 2016
we welcomed two new Non-Executive
Directors: Dr Jesse Goodman and
Dr Vivienne Cox. Jesse is Professor of
Medicine at Georgetown University and a
leader in public health, and Vivienne brings
many years experience in complex global
manufacturing organisations. Meanwhile,
Stacey Cartwright stepped down from the
Board at the end of December. My thanks go
to Stacey for nearly six years of dedicated
service to the Board.
As we enter a critical period of pipeline
activity, we have reflected this on the Board
with the creation of a new Board Science
Committee, chaired by Dr Goodman. In
addition, Dr Patrick Vallance, President R&D,
has joined the Board. Later this year, Moncef
Slaoui will step down from the Board after
28 years with the company. Moncef is a
scientist of global repute and has been a
remarkable presence at GSK, particularly
in the Vaccines business. We wish him,
too, well in the future.
In closing, I would like to thank all GSK’s
employees and partners for their hard
work and dedication. The business has
outstanding people and they have made
2016 a very successful year.
Philip Hampton
Chairman
05 GSK Annual Report 2016
CEO’s statement
GSK performed strongly
in 2016, with good sales
growth across all three
businesses, excellent new
product momentum and
further pipeline progress.
The Group executed strongly in 2016,
delivering sales growth across all three
businesses, remaining disciplined on
costs and progressing our pipeline of
innovative products.
Trading performance
Group sales rose 17% at actual rates,
6% CER (5% pro-forma) to £27.9 billion,
despite the uncertainty and volatility
experienced globally in 2016. Total earnings
per share was 18.8p (down 89% at actual
rates, 99% CER), primarily reflecting
comparisons with the £9.2 billion profit
in 2015 from the disposal of the marketed
Oncology assets. Core earnings per share
was 102.4pa – a 12% CER increase – and
at the top end of our guidance for the year.
We saw growth across all three of
the Group’s businesses in 2016, with
a particular contribution from new
Pharmaceuticals and Vaccine products.
Sales from this portfolio more than doubled
to £4.5 billion and in Pharmaceuticals,
new products accounted for 24% of sales.
HIV products, Tivicay and Triumeq, continued
to be the standout products with sales of
£2.7 billion, while our new respiratory
products – Relvar/Breo, Anoro, Incruse,
Arnuity and Nucala – also grew strongly
as did our meningitis vaccines, Bexsero and
Menveo. We expect the momentum in this
group of products to continue through 2017.
Our Consumer Healthcare business
performed strongly, with sales up 19%
at actual rates, 9% CER (5% pro-forma)
to £7.2 billion, driven by power brands
such as Sensodyne, Voltaren and Panadol
as well as growth from Flonase which
we switched from prescription to
over-the-counter.
Strong R&D innovation pipeline
We filed four assets with regulators in
2016 which, if approved, have the potential
to drive further growth in the business,
including Shingrix, our candidate vaccine
for shingles and our once-daily Closed
Triple therapy for COPD. In addition, we
also started a number of phase III trials for
assets in HIV, respiratory and anaemia.
Investment in our R&D organisation
continues to deliver significant innovation.
For example, 2016 saw the European
approval of Strimvelis, our first of its kind
gene therapy for children with the very rare
condition ADA-SCID. This remarkable
technology has the potential to be a platform
for a number of other gene therapies.
The next two years will be an exciting time
for our R&D organisation, with key research
data on 20-30 assets due by the end
of 2018.
Delivering performance responsibly
GSK has a strong commitment to operating
responsibly and playing our part in meeting
some of society’s biggest healthcare
challenges.
In 2016, we took further industry-leading
steps by stopping all payments to healthcare
professionals to speak about our medicines
to other prescribers, and offered essential
vaccines at our lowest price to organisations
supporting refugees in acute need. We
also introduced a new approach to filing
and enforcing patents and IP based on a
country's economic maturity, and are working
with partners to help the world better prepare
for future epidemics such as Ebola and Zika.
I was very pleased that our efforts to
operate as a values-based company
were recognised when we came first
in the Access to Medicine Index for the
fifth consecutive time.
Outlook
The progress in 2016 highlights the
investments we have made in the Group
over the last several years to build scale
and sustainability as well as develop new
products. I expect the Group to make
continued progress in 2017 and, as we
enter a new period of leadership for the
company, I believe GSK is well positioned
to deliver long-term performance for
shareholders.
Finally, as this is my last annual report
before I retire, I would like to thank all our
employees, partners and shareholders
for their support during my time as CEO.
GSK is a very special company that touches
people’s lives across the world and which
I have been enormously privileged to lead.
Footnote
a We use a number of adjusted, non-IFRS, measures to
report the performance of our business, as described on
page 57, including core results, free cash flow and CER
and pro-forma growth rates. Non-IFRS measures may be
considered in addition to, but not as a substitute for or
superior to, information presented in accordance with IFRS.
Sir Andrew Witty
Chief Executive Officer
Investor informationFinancial statementsGovernance and remunerationStrategic report 06 GSK Annual Report 2016
06 GSK Annual Report 2016
Our integrated approach
By understanding our operating environment and having
a clear strategy, against which we measure performance
and manage risks, we deliver long-term value for
shareholders and society.
The market in which we operate
Our business model
We operate in a growing marketplace and our strategy
is designed to respond to the challenges and opportunities
in our sector.
R&D underpins our three businesses and we prioritise our investments
to where we see the most potential to develop innovative products for
unmet medical needs.
R&D
Pharmaceuticals
Vaccines
Consumer Healthcare
Manufacturing
Commercialisation
and distribution
Demographic
change
Changing political
landscape
Increasing payer
emphasis on cost,
value and access
Increased
expectations
of businesses
Technological
and scientific
advances
Read more on page 8
Read more on page 12
07 GSK Annual Report 2016
07 GSK Annual Report 2016
Strategic report
Governance and remuneration
Financial statements
Investor information
A clear strategy for growth
How we measure success
How we manage risks
Our strategic priorities provide a framework
to create long-term value for shareholders
and society.
We assess our performance against
a set of financial and non-financial
measures, many of which form the
basis of our executive remuneration.
We manage a number of current and
emerging risks. Below, our Principal Risks
are mapped against the primary strategic
priority they are most likely to impact.
Grow
Grow a balanced business and
product portfolio, centred on our
three global businesses.
Deliver
Deliver more products of value to
offer improved treatment for patients,
consumers and healthcare providers.
Simplify
Simplify the way we operate to reduce
complexity, increase efficiency and free
up resources to reinvest in the business
or return to shareholders, wherever we
see the most attractive returns.
Responsible business
Being a responsible business,
as how we deliver success is as
important as the results we achieve.
– Turnover growth
– Growth of earnings per share
Intellectual property
Commercialisation
– New Pharmaceuticals and Vaccines
Product quality
product performance
Research practices
Supply continuity and crisis management
– Operating profit and margin
Financial control and reporting
– Free cash flow
– Dividends declared
– Net debt
Information protection
– Access to Medicine Index
Patient safety
– Dow Jones Sustainability Index
Anti-bribery and Corruption
Environment, Health and Safety
and Sustainability
Read more on page 14
Read more on page 16
Read more on page 18
Investor informationFinancial statementsGovernance and remunerationStrategic report 08 GSK Annual Report 2016
We operate in a growing marketplace and
our strategy is designed to respond to the
challenges and opportunities we face.
The market in which we operate
1.4bn
By 2030, the world’s
population of people
aged 60+ will be 1.4 billiona
60%
of the world’s population will
live in urban areas
by 2030 f
75%
of the global population has
access to a mobile phone f
90%
of global youth resides in
developing countries f
Future State 2030: The global megatrends shaping government. KPMG
66%
of the global middle class
will reside in Asia-Pacific
by 2030 f
09 GSK Annual Report 2016
Our business model
A clear strategy for growth
How we measure success
How we manage risks
In 2016, the global
healthcare market
continued to grow
against a backdrop
of a challenging global
economic environment.
Global pharmaceutical sales were
£648 billion on a 12 month rolling
basis (September 2015-2016), up from
£605 billion during the equivalent period
(September 2014-2015). North America
remained the largest pharmaceuticals
market with a 50% share of global sales.
Europe represented 21%, Asia Pacific
(including Japan) was 21% and emerging
markets was 8%.b
Global vaccine sales totalled ~£18 billion
in 2016 and are expected to grow 5%
annually by 2022.c
The consumer healthcare markets in which
GSK operates account for approximately
$70 billion, and are projected to grow
3-4% annually over the next five years.d
Societal trends supported market growth,
but are also contributing to challenges in
the healthcare sector, particularly on price
and affordability.
Demographic change
The world population continues to grow
and, according to the United Nations,
is predicted to reach 8.5 billion by 2030.
The proportion of elderly people is growing
and the number of people over the age
of 60 is expected to reach 1.4 billion by
2030.e At the same time, developing
countries are experiencing growth in their
middle classes, and by 2030 it is expected
that 60% of the world’s population will be
middle class.f
In emerging markets, long-term economic
growth, increasing expectations of
healthcare provision, and changing diets
and lifestyles are increasing demand for
healthcare products, especially to treat
chronic conditions including respiratory
and cardiovascular disease. This demand
is expected to grow significantly faster in
these markets over the coming years than
in more mature economies.
In developed economies, demand for
healthcare provision continues to remain
high, although the dynamics are becoming
more complex. Trends such as higher life
expectancy are contributing towards the
increasing proportion of elderly people,
and along with improvements in medical
technology, are putting pressure on
healthcare budgets.
The changing global political landscape
Shifting attitudes to globalisation and
free trade, wage stagnation for many and
concerns about inequality are causing
significant volatility and uncertainty in
western markets.
2016 was characterised by political
uncertainty and this was exemplified
by the vote to leave the EU in the UK and
the result of the US Presidential Election.
Political uncertainty in Europe is expected
to continue in 2017 with national elections
in France and Germany.
In the US there is also uncertainty as
to how the new administration will shape
healthcare, particularly with respect to
repealing and replacing the Affordable
Care Act, prescription drug pricing and
regulation. This is coupled with questions
over the impact of the new administration’s
economic, tax and trade policies.
In the UK, it remains unclear how Brexit
will affect the country’s trading relationships,
corporate taxation policy, the movement
of people, and regulatory affairs.
Footnotes
a
World Population Ageing 2015 Highlights.
United Nations.
IMS data (latest available at time of publishing).
Internal data and EvaluatePharma, World
Preview 2016.
Internal forecasts based on Nicholas Hall
and Euromonitor.
World Population Ageing 2015 Highlights.
United Nations.
Future State 2030: The global megatrends
shaping government. KPMG.
b
c
d
e
f
Investor informationFinancial statementsGovernance and remunerationStrategic report 10 GSK Annual Report 2016
The market in which we operate continued
Our strategy to create
a balanced business
and product portfolio
positions us well for
the changes in our
marketplace.
Increasing payer emphasis on cost,
value and access
Demographic changes are contributing
to increased demand for healthcare and
in turn putting pressure on government
budgets and payers. This has led to
continued focus on, and public debate
about, the industry’s approach to drug
pricing across all key markets.
In the US the ultimately unsuccessful
Proposition 61 vote, which called for
medicine price controls in California,
was the first of several drug pricing ballot
initiatives expected in the US. There has
also been increasing use of healthcare
technology assessments to consider
value for money as well as medical efficacy,
by government-appointed bodies like the
UK’s National Institute for Health and Care
Excellence and Australia’s Pharmaceutical
Benefits Advisory Committee.
As demand for healthcare in emerging
markets rises, governments are continuing
to reform healthcare systems to support
access. In China, the government continues
to work to realise the goals set out in the
Healthy China 2030 plan, with significant
measures taken during the year to reduce
pharmaceutical prices through the National
Price Negotiations.
During the year, the UN’s High-Level Panel
on Access to Medicines report, reiterated
the rights of countries to issue compulsory
licences to access cheaper supplies of
generic drugs.
We expect the political and public scrutiny
on pricing to continue.
Technological and scientific advances
Key advances in the understanding of
human biology and genomics are leading
to fundamental changes in how we research
diseases, and the pharmaceutical industry’s
ability to develop treatments specifically
to tackle them with innovative treatment
approaches has increased substantially
in recent years. Alongside these scientific
advances, digital technology and data
analytics are enabling researchers to explore
and interpret larger volumes of biological
data from genomics and disease biology
than ever before. This is providing
opportunities to increase the speed and
efficiency of drug discovery and the
development of novel therapies that could
transform how diseases are managed.
Increasing expectations of companies
Beyond our sector-specific context, where
value, cost and affordability are so important,
society has increasing and changing
expectations of companies, particularly
of large global companies. Stakeholders
– from employees to consumers to policy
makers and influencers – expect companies
to behave with integrity and fairness; operate
transparently; be connected to their local
communities; and play their part in
addressing global challenges from health
epidemics to climate change. Responding
to this requires strong partnership and
connectivity between public and private
sector organisations.
11 GSK Annual Report 2016
Our business model
A clear strategy for growth
How we measure success
How we manage risks
Our strategic response
Three world-leading
businesses,
underpinned
by innovative R&D
GSK is well positioned to take advantage of demographic-led demand for new innovative
products with our three world-leading businesses in Pharmaceuticals, Vaccines and
Consumer Healthcare, and our global presence in more than 150 markets. For example,
in emerging markets, where significant demographic changes and societal trends are
increasing demand for healthcare, our Pharmaceuticals business sells 47% more volume
than our nearest competitor. In emerging markets, we sell 70% of our vaccines, and the
region represents one-third of our Consumer Healthcare business.
Our strategy to create three balanced businesses helps mitigate risk because we can
access growth opportunities around the world and navigate changes both in our portfolio
and the challenges we face in today’s operating environment.
A global company
with a significant
local presence
As a global company, we understand the benefits of free trade and globalisation but also the
importance of companies like ours having a significant local presence in the communities in
which we operate. We have a large global footprint and can make an important contribution to
the markets in which we operate in, for example, through the tax we pay and the jobs we create.
Engaging with government, both directly and through industry trade bodies such as ABPI and
BIA, is an important way we can inform policy that will impact our sector. For example, through
the UK EU Life Sciences Steering Group, GSK is working closely with our peers and the UK
government to address the needs of our industry during the EU exit negotiations. Overall, we
continue to believe that Brexit will not cause a material impact on our financial position in the
long term, but may cause some disruption over the short-term.
Global and
sustainable
pricing
Our strategy to focus on pricing our products at a level that provides attractive volume expansion
opportunities means we are able to access patients and consumers around the world.
We understand payer and patient concerns about the affordability of healthcare, and we are
leading efforts to develop sustainable solutions. Our equitable pricing strategy for medicines
and vaccines is based on the country, disease area, product type and the patient’s ability to pay.
In the US, we have launched our six newest products priced similar to or below those of the
medicines we aim to replace. We are also pioneering efforts to show the impact our medicines
can have in real-world clinical practice settings.
As a research-based company, we rely on the protection of patents, regulatory data exclusivity,
and other rights, to ensure a reasonable return on our investment. However, we recognise the
need for a flexible approach to patent protection. In 2016, we expanded our current approach
to filing and enforcing patents by opting not to file for patent protection in least-developed and
low-income countries and by granting licences to generic manufacturers to supply versions of
our medicines in lower middle income countries (other than G20 countries).
Leading responsible
business approach
Being a responsible business is fundamental to GSK. We understand that society requires
businesses to behave with integrity. How we operate is as important as the financial results
we deliver: we lead industry efforts on access to medicines; clinical trial data transparency;
and the fight against anti-microbial resistance. In evolving our commercial model to ensure
patients’ interests come first, we no longer pay healthcare professionals to speak on our behalf.
Investor informationFinancial statementsGovernance and remunerationStrategic report 12 GSK Annual Report 2016
R&D underpins our three businesses and we prioritise
our investments to where we see the most potential to
develop innovative products for unmet medical needs.
The market in which
we operate
Our business model
Our resources
How we create value
People and culture
Almost 100,000 employees
bring expertise and our values
to everything they do.
Financial capital
Earnings, cash flow and access
to capital markets allow us to
invest in our business.
Collaborations
and partnerships
1,500 R&D partnerships and
collaborations with academic
institutions, biotechs, NGOs and
other companies bring important
insights to our innovation.
Suppliers
Suppliers provide essential
services and materials.
Strong R&D
innovation...
Across three world-
leading businesses...
R&D
Pharmaceuticals
Vaccines
Consumer
Healthcare
Reinvestment
13 GSK Annual Report 2016
A clear strategy for growth
How we measure success
How we manage risks
How we create value
The value we create
With an efficient
global operating model...
Manufacturing
Commercialisation
and distribution
For shareholders
– We aim to deliver sustainable
earnings growth
– Dividends
* Primarily reflecting comparison with £9.2bn profit
in 2015 from disposal of marketed Oncology assets
12%
2016 core
EPS growtha
(99)%
2016 total
EPS growth*
80p
2016 dividend
For patients and consumers
– Increased access to quality products
which enable people to do more,
feel better and live longer
833m
doses of vaccines
produced in 2016
For society
– Healthier communities
– Economic contribution through jobs
and taxation
£0.9bn
2016 tax charge
£210m
donated to local communities
through product donations, time
and cash
For employees
– An environment where they feel valued 75 countries
As part of the global roll-out,
100,000 employees and family
members in 75 countries
now have access to our
ground-breaking preventive
healthcare programme
Reinvestment
Footnote
a We use a number of adjusted, non-IFRS, measures to report the performance of our
business, as described on page 57, including core results, free cash flow and CER and
pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not
as a substitute for or superior to, information presented in accordance with IFRS.
Investor informationFinancial statementsGovernance and remunerationStrategic report 14 GSK Annual Report 2016
Our strategic priorities provide a framework to
create long-term value for shareholders and society.
The market in which
we operate
Our business model
A clear strategy for growth
Strategic priorities
Progress in 2016
Grow
Grow a balanced business and
product portfolio, centred on our
three global businesses.
Deliver
Deliver more products of value to
offer improved treatment for patients,
consumers and healthcare providers.
Simplify
Simplify the way we operate to reduce
complexity, increase efficiency and free
up resources to reinvest in the business
or return to shareholders, wherever we
see the most attractive returns.
Responsible business
Being a responsible business, as how
we deliver success is as important as
the results we achieve.
– Global sales: £27.9 billion, up 17%
AER; 6% CER; 5% pro-forma CER
– New Pharmaceutical and Vaccine
product sales were £4.5 billion,
up >100% AER; >100% CER
– Consumer Healthcare sales were
£7.2 billion (up 19% AER; 9% CER;
5% pro-forma CER), with strong
contributions from power brands
– Four filings with regulators, including
Shingrix candidate vaccine and
Closed Triple
– EU approval for Strimvelis, the
first gene therapy for rare disease
(ADA-SCID)
– 13% of Consumer Healthcare
innovation sales from products
launched in the last three years
– Improved core operating leverage
across all three businesses
– Incremental annual cost savings
of £1.4 billion delivered (including
£0.2 billion currency benefit)
– Continued to roll out new global
systems and standardisation
of our processes
18.8p
Total earnings per share
(down 89% AER; 99% CER)
102.4p
Core earnings per share
(up 35% AER; 12% CER)a
22%
New Pharmaceutical and
Vaccine product sales
4
filings with regulators
in 2016
Total operating profit margin
9.3%
27.9%
Core operating profit margin
(up 2.6 percentage points
pro-forma CER)a
– Expanded graduated approach
to patents and IP to widen access
to medicines
– Committed to supply essential
vaccines at the lowest price to civil
society organisations for refugees
– EMA approval for chlorhexedine,
our antiseptic gel for newborn
umbilical cord infections in
developing countries
1st
in the Access to
Medicine Index
3rd
in our sector for Dow Jones
Sustainability Index
Footnote
a We use a number of adjusted, non-IFRS, measures to report the performance of our business,
as described on page 57, including core results, free cash flow and CER and pro-forma growth rates.
Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to,
information presented in accordance with IFRS.
15 GSK Annual Report 2016
A clear strategy for growth
How we measure success
How we manage risks
Key challenges in 2016
Key priorities in 2017
– Continued pricing pressure
in the US and Europe
– Volatility and slowing emerging
market economies
– Continued prioritisation of
the pipeline and appropriate
deployment of resources
– Increasing global demand
for vaccines and complex
manufacturing process
leading to supply pressures
– Integration of reporting
systems and processes
following Novartis transaction
– Deliver our 2017 guidance
– Drive sales and market growth for respiratory,
HIV, meningitis vaccines, and power brands
– Progress the four regulatory filings made in
2016 and launch successfully if approved
– Manage impact of possible generic competition
to Advair in the US
– Deliver key data on 20-30 assets by the
end of 2018 and manage prioritisation of
capital allocation
– Continue to improve efficiency and capacity
of supply chain for new and existing products
– Continue to roll out new global systems and
standardisation processes
– Continue to focus on improving cash conversion
and management of working capital
– Continue to optimise capital expenditure
– Responding to stakeholder
concerns on affordability
and access
– Continue to strengthen
values-based culture
– Ensure sustainable funding for biopreparedness
organisation to enhance preparedness against
future epidemics
– Embed flexible approach to IP and patent protection
Investor informationFinancial statementsGovernance and remunerationStrategic report 16 GSK Annual Report 2016
We assess our performance against a set of financial
and non-financial metrics, many of which form the
basis of our executive remuneration.
The market in which
we operate
Our business model
A clear strategy for growth
How we measure
success
Group turnover
£27.9bn
2014
2015
2016
15.4 3.2
4.3
£23bn
14.2
3.7
6.0
£23.9bn
16.1
4.6
7.2
£27.9bn
Growth CER %
Pro-forma
Reported
(3)a
6
6
1
5
Growth CER%
Pharmaceuticals
Vaccines
Consumer Healthcare
2014
2015
2016
Reported Pro-forma
Reported Pro-forma
(5)a
(1)
(1)a
(7)
19
44
(1)
3
6
3
14
9
4
12
5
New Pharmaceutical and Vaccine product performanceb
R
£4.5bn
0.4
2.0
2014
2015
2016
Operating profit and margin
R
Total
Core
Total
Cored
£2.6bn
£7.8bn
Earnings per share
Total
18.8p
Cored
102.4p
2014
2015
2016
3.6
15.6%
6.6 28.7%
5.7
23.9%
10.3
43.1%
2.6
9.3%
7.8
27.9%
Total
Core
2014
2015
2016
57.3
95.4
75.7
174.3
18.8
102.4
00.0
Growth CER %
>100
>100
>100
4.5
Growth CER %
Reported
Pro-forma
(40)
(6)a
>100
(9)
(86)
14
(3)
17
Growth
£ %
CER %
(49)
(12)a
(40)
(1)a
>100
(21)
>100
(15)
(89)
35
(99)
12
17 GSK Annual Report 2016
How we measure
success
How we manage risks
Free cash flowd
R
£3.1bn
Dividends declared
£3.9bn
Net debt
£13.8bn
2014
2015
(0.2)
2016
Dividends
2014
2015
2016
2014
2015
2016
3.9e
2.6
2.5e
3.1
4.7e
Growth £ %
(44)
n/a
>100
2.0
3.8
3.9
3.9
1.0c
10.7
14.4
13.8
Access to Medicine Index ranking
Dow Jones Sustainability Index ranking
1st
We have been first since the
index began in 2008
3rd
in the pharmaceutical industry
(2016: 95th percentile 2015: 89th percentile, 2014:
98th percentile)
See page 43 for more information
See page 43 for more information
Key
R
The remuneration of our executives is linked to the key indicators marked. See page 119.
Footnotes
a Excluding divestments completed in 2013.
b New products defined as:
Pharmaceuticals: Relvar/Breo Ellipta, Anoro Ellipta, Incruse Ellipta, Arnutiy Ellipta, Eperzan/Tanzeum, Nucala, Tivicay, Triumeq.
Vaccines: Menveo, Bexsero, Shingrix (not yet approved).
c 2015 includes special dividend.
d
We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including core results, free cash flow and CER
and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented in accordance with IFRS.
Free cash flow excluding payments for legal costs, restructuring, tax on the Oncology disposal and the purchase of HIV clinical assets which are treated as
intangible asset purchases.
e
Investor informationFinancial statementsGovernance and remunerationStrategic report
18 GSK Annual Report 2016
We manage current and emerging risks that may
impact our strategic priorities through rigorous and
consistent risk management processes.
The market in which
we operate
Our business model
A clear strategy for growth
How we measure success
Our principal risks are regularly reviewed
by the Corporate Executive Team to assess
whether they are reflective of the most
significant risks facing the organisation,
based on evolving internal and external
factors. The table opposite lists the
principal risks that were managed across
the Group in 2016. It also includes our
definition of each risk and our assessment
of any change in the risk during the year,
both at a macro level and after GSK’s
mitigating activities.
Arrows key
Increased risk
No change to risk
Decreased risk
For more extensive information on GSK risks,
including risk impact and mitigating activities,
see pages 253 to 262.
See page 56 for our viability statement.
Principal risk and description
2016 assessment
Macro
environment
GSK exposure
post mitigation
Patient safety
Failure to appropriately collect, review, follow up, or report adverse events from
all potential sources, and to act on any relevant findings in a timely manner.
Intellectual property
Failure to appropriately secure, maintain and enforce intellectual property rights.
Product quality
Failure to comply with current Good Manufacturing Practices (cGMP) or inadequate
controls and governance of quality in the supply chain covering supplier standards,
manufacturing and distribution of products.
Financial controls and reporting
Failure to comply with current tax law or incurring significant losses due to treasury
activities; failure to report accurate financial information in compliance with accounting
standards and applicable legislation; failure to maintain adequate governance and oversight
over third-party relationships.
Anti-bribery and Corruption
Failure of GSK employees, consultants and third parties to comply with our
Anti-bribery and Corruption (ABAC) principles and standards, as well as all
applicable legislation.
Commercialisation
Failure to execute business strategies, or effectively manage competitive
opportunities and threats in accordance with the letter and spirit of legal,
industry or the Group’s requirements.
Research practices
Failure to adequately conduct ethical and sound pre-clinical and clinical research.
In addition, failure to engage in scientific activities that are consistent with the letter and
spirit of the law and industry, or the Group’s requirements.
Environment, Health and Safety and Sustainability
Failure to manage Environment, Health and Safety and Sustainability (EHS&S) risks
in line with our objectives and policies and with relevant laws and regulations.
Information protection
The risk to GSK business activities if information becomes disclosed to those not
authorised to see it, or if information or systems fail to be available or are corrupted.
Supply continuity and crisis management
Failure to deliver a continuous supply of compliant finished product; inability to respond
effectively to a crisis incident in a timely manner to recover and sustain
critical operations. This risk was previously called Crisis and continuity management.
– The macro environment has remained stable, with patient safety regulation and standards remaining consistent.
– We have improved safety data management, patient communications and product labelling. These improvements
are being incorporated throughout the organisation, leaving the GSK exposure level unchanged.
– The macro risk is unchanged due to no significant changes that affect our ability to secure, maintain and
enforce patents.
– The GSK exposure level is stable, based on the maturity of our risk management processes and general
ability to enforce and defend patents where appropriate.
– The macro risk is higher, with increasing regulatory scrutiny of data integrity, supply continuity and drug
shortages, accompanied by new guidance and revised legislation.
– Despite the challenging macro environment, the GSK exposure level is unchanged, reflecting effective responses
to external regulatory reviews during 2016, a greater focus on data integrity and improved governance.
– The macro environment has remained stable, due to no material change in financial reporting requirements.
– The unchanged GSK exposure level is reflective of the significant IT systems and operating model changes
that are being implemented throughout the organisation, as well as continued risk from third-party relationships.
While we expect that these system and model changes will reduce risk in the future, the risk impact from these
changes is being mitigated through strong risk management and governance, as well as the continued progress
of the global Third Party Oversight programme.
– The macro environment has remained stable, with the regulatory environment and global attitude towards
Anti-bribery and Corruption remaining within expectations.
– The GSK exposure level is lower as our risk management practices have gained strength and are embedded
deeper across the organisation through our ABAC programme, which builds on the Group's values and
standards and has enabled us to manage the risk more effectively.
– The macro risk level has increased due to greater industry pricing pressures and increased regulatory scrutiny
in respect of sales and promotional activities.
– The GSK exposure level is unchanged, as we implement industry-leading changes in our operating model and in
particular in the compensation model for sales representatives and our relationships with healthcare professionals.
– The macro risk level is elevated due to increased regulatory scrutiny of Good Clinical Practices.
– The GSK exposure level is unchanged based on mature internal control processes and an enhanced governance
programme, designed to promote best practice across the business units.
– The macro risk level is higher due to greater focus and increased regulatory activity on environmental issues.
– The GSK exposure level is unchanged due to our controls and governance being well established and capable
of allowing for the increased focus and regulatory activity.
– The macro risk has increased as the threat has become more sophisticated and targeted, with a higher
volume of incidents.
– The GSK exposure level is unchanged while we see the effects of the substantial progress we have made
in upgrading our level protection against cyber attacks and safeguarding our critical and sensitive data.
– Macro factors such as regulatory focus on contract manufacturers outside of the US and EU and increased
data integrity expectations, are increasing supply risk.
– The GSK exposure level is stable, based on the significant improvements delivered through our ongoing supply
remediation programmes and our increased monitoring and supervision of third parties.
19 GSK Annual Report 2016
How we manage risks
Principal risk and description
Patient safety
Failure to appropriately collect, review, follow up, or report adverse events from
all potential sources, and to act on any relevant findings in a timely manner.
Intellectual property
Failure to appropriately secure, maintain and enforce intellectual property rights.
Product quality
Failure to comply with current Good Manufacturing Practices (cGMP) or inadequate
controls and governance of quality in the supply chain covering supplier standards,
manufacturing and distribution of products.
Financial controls and reporting
Failure to comply with current tax law or incurring significant losses due to treasury
activities; failure to report accurate financial information in compliance with accounting
standards and applicable legislation; failure to maintain adequate governance and oversight
over third-party relationships.
Anti-bribery and Corruption
Failure of GSK employees, consultants and third parties to comply with our
Anti-bribery and Corruption (ABAC) principles and standards, as well as all
applicable legislation.
Commercialisation
Failure to execute business strategies, or effectively manage competitive
opportunities and threats in accordance with the letter and spirit of legal,
industry or the Group’s requirements.
Research practices
Failure to adequately conduct ethical and sound pre-clinical and clinical research.
In addition, failure to engage in scientific activities that are consistent with the letter and
spirit of the law and industry, or the Group’s requirements.
Environment, Health and Safety and Sustainability
Failure to manage Environment, Health and Safety and Sustainability (EHS&S) risks
in line with our objectives and policies and with relevant laws and regulations.
Information protection
The risk to GSK business activities if information becomes disclosed to those not
authorised to see it, or if information or systems fail to be available or are corrupted.
Supply continuity and crisis management
Failure to deliver a continuous supply of compliant finished product; inability to respond
effectively to a crisis incident in a timely manner to recover and sustain
critical operations. This risk was previously called Crisis and continuity management.
2016 assessment
– The macro environment has remained stable, with patient safety regulation and standards remaining consistent.
– We have improved safety data management, patient communications and product labelling. These improvements
are being incorporated throughout the organisation, leaving the GSK exposure level unchanged.
Macro
environment
GSK exposure
post mitigation
– The macro risk is unchanged due to no significant changes that affect our ability to secure, maintain and
enforce patents.
– The GSK exposure level is stable, based on the maturity of our risk management processes and general
ability to enforce and defend patents where appropriate.
– The macro risk is higher, with increasing regulatory scrutiny of data integrity, supply continuity and drug
shortages, accompanied by new guidance and revised legislation.
– Despite the challenging macro environment, the GSK exposure level is unchanged, reflecting effective responses
to external regulatory reviews during 2016, a greater focus on data integrity and improved governance.
– The macro environment has remained stable, due to no material change in financial reporting requirements.
– The unchanged GSK exposure level is reflective of the significant IT systems and operating model changes
that are being implemented throughout the organisation, as well as continued risk from third-party relationships.
While we expect that these system and model changes will reduce risk in the future, the risk impact from these
changes is being mitigated through strong risk management and governance, as well as the continued progress
of the global Third Party Oversight programme.
– The macro environment has remained stable, with the regulatory environment and global attitude towards
Anti-bribery and Corruption remaining within expectations.
– The GSK exposure level is lower as our risk management practices have gained strength and are embedded
deeper across the organisation through our ABAC programme, which builds on the Group's values and
standards and has enabled us to manage the risk more effectively.
– The macro risk level has increased due to greater industry pricing pressures and increased regulatory scrutiny
in respect of sales and promotional activities.
– The GSK exposure level is unchanged, as we implement industry-leading changes in our operating model and in
particular in the compensation model for sales representatives and our relationships with healthcare professionals.
– The macro risk level is elevated due to increased regulatory scrutiny of Good Clinical Practices.
– The GSK exposure level is unchanged based on mature internal control processes and an enhanced governance
programme, designed to promote best practice across the business units.
– The macro risk level is higher due to greater focus and increased regulatory activity on environmental issues.
– The GSK exposure level is unchanged due to our controls and governance being well established and capable
of allowing for the increased focus and regulatory activity.
– The macro risk has increased as the threat has become more sophisticated and targeted, with a higher
volume of incidents.
– The GSK exposure level is unchanged while we see the effects of the substantial progress we have made
in upgrading our level protection against cyber attacks and safeguarding our critical and sensitive data.
– Macro factors such as regulatory focus on contract manufacturers outside of the US and EU and increased
data integrity expectations, are increasing supply risk.
– The GSK exposure level is stable, based on the significant improvements delivered through our ongoing supply
remediation programmes and our increased monitoring and supervision of third parties.
Investor informationFinancial statementsGovernance and remunerationStrategic report 20 GSK Annual Report 2016
20 GSK Annual Report 2016
As a leader in
respiratory, GSK has
been at the forefront
of research in this area
for over 45 years.
Pharmaceuticals
Our Pharmaceuticals business discovers,
develops and commercialises medicines
to treat a broad range of the world’s most
common acute and chronic diseases.
21 GSK Annual Report 2016
21 GSK Annual Report 2016
Strategic report
Governance and remuneration
Financial statements
Investor information
Grow
Deliver
Simplify
£16.1bn
2016 Pharmaceutical
reported sales were up
14% AER and 3% CERa
(4% pro-forma CER).
Sales of new products
were 24% of
Pharmaceutical sales.
3
There were three filings
with regulators in 2016
for Closed Triple,
Benlysta subcutaneous
and sirukumab.
34.1%
Operating profit margin
in 2016 was 34.1%,
3.7 percentage points
higher than in 2015 and
1.2 percentage points higher
on a CER pro-forma basis.
Responsible
business
6
We have launched our
last six new products in
the US priced similar to
or below those we aim
to replace.
Footnote
a We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including
core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not
as a substitute for or superior to, information presented in accordance with IFRS.
Investor informationFinancial statementsGovernance and remunerationStrategic report 22 GSK Annual Report 2016
Pharmaceuticals
We improve healthcare
by preventing disease,
treating illness and
seeking long-lasting
solutions for chronic
and acute conditions
including rare diseases.
A leader in respiratory
Overview
Our Pharmaceuticals business has a
portfolio of innovative and established
medicines across a broad range of therapy
areas, including respiratory and HIV, in
which we are global leaders, as well as
immuno-inflammation, anti-infectives,
urology and rare diseases. Around a
quarter of Pharmaceutical sales come from
products launched over the past four years.
Respiratory
We have the industry’s broadest range of
inhaled respiratory products. Our respiratory
portfolio is the largest contributor to
Pharmaceutical sales and our expectation
is that by 2020, nine products will account
for approximately 90% of respiratory sales,
compared to four in 2015.
In the past four years, we have launched
a new generation of respiratory products
including Nucala (mepolizumab) and our
Ellipta portfolio.
HIV
Our global HIV business is managed
through ViiV Healthcare, a company
78.3% owned by GSK, with Pfizer and
Shionogi the other shareholders.
ViiV Healthcare is growing rapidly, and
accounts for over 20% of Pharmaceutical
sales. This was led by strong demand for
Tivicay (dolutegravir), an innovative integrase
strand transfer inhibitor, and Triumeq, a
single-pill treatment combining dolutegravir,
abacavir and lamivudine.
Specialty products
Our Specialty products portfolio includes
medicines such as Benlysta, a treatment
for lupus disease, and Tanzeum/Eperzan,
for Type 2 diabetes.
Classic and Established products
Our Classic and Established products
include over 400 post-patent medicines
in the areas of anti-infectives, allergy,
neurosciences, dermatology, respiratory
and urology. Many of these medicines
continue to be the top-selling brand in
their therapy area. These products are
an important part of our emerging markets
business, where we sell 47% more volume
than our nearest competitor.
As a leader in respiratory, GSK has been at the forefront
of research in this area for over 45 years.
Today we have over 13,500 patients in clinical
studies investigating chronic obstructive
pulmonary disease (COPD) in almost 40
countries. We believe that insights from this
research, alongside our early phase scientific
discovery, will help us meet patient needs
well into the future.
This will ensure patients get the full benefits,
in one inhalation, from all their treatments.
Research shows that patients taking the
medicine experienced improved lung
function, a higher quality of life and fewer
exacerbations compared to a leading
twice-daily treatment.
Our new generation of inhaled respiratory
medicines are clear evidence of the benefits
of our research. This range – including
Anoro Ellipta, the world’s leading long-acting
muscarinic antagonist/long-acting beta-agonist
against COPD by value – is giving physicians the
unprecedented choice to provide the right
treatment to the right patient.
This year, we filed for regulatory approval
for our Closed Triple therapy in the US and
Europe. If approved, this will be the first
COPD treatment to combine three vital once-daily
treatments in a single inhaler.
Looking beyond inhaled medicines, we
are now tackling the areas of highest unmet
need in respiratory diseases.
In 2015 we launched Nucala, our first
injectable biologic treatment for severe
eosinophilic asthma. Study results showed
that, for patients using Nucala, the risk of
experiencing an asthma attack requiring
emergency hospital care was half that
of those receiving the current standard
of care.
23 GSK Annual Report 2016
Grow
Sales of our Respiratory
products returned to
growth of 2% in 2016.
All growth rates are at CER, a
non-IFRS measure as described
on page 57, unless otherwise stated.
2016 performance summary
Reported Pharmaceutical sales were
£16,104 million, up 14% at actual rates
and 3% CER. Adjusting for the disposal
of the Oncology business to Novartis in
2015, pro-forma turnover was up 4% CER.
Performance reflected a return to growth
of the respiratory business, which grew 2%.
Sales of new Respiratory products launched
over the last four years, including our Ellipta
based products Breo, Anoro, Arnuity and
Incruse as well as biologic Nucala, more
than doubled to £1,052 million. HIV sales
increased 37% to £3,556 million, with the
US up 46%. This was driven primarily by
strong performances from both Triumeq
and Tivicay, with sales of £1,735 million
and £953 million.
Sales of new Pharmaceutical products
were £3,861 million and now account
for 24% of total Pharmaceutical sales.
US Pharmaceutical sales were £4,705
million and declined 1% on a reported basis
(up 1% pro-forma). Respiratory sales grew
7%, and sales of new Respiratory products
were £654 million, exceeding the decline
in Advair.
In Europe, Pharmaceutical reported sales
declined 8% (5% pro-forma). Respiratory
sales declined by 10%, reflecting the
ongoing transition to the new Respiratory
portfolio and generic competition to
Seretide. This was partly offset by growth
in the new Respiratory products, which
recorded sales of £225 million. Established
products were down 4% to £513 million.
International sales were £4,976 million,
down 5% (4% pro-forma). Sales in Emerging
Markets were impacted by the decline in the
China business, primarily as a result of the
ongoing reshaping programme and broader
Healthcare reforms, including price
reductions.
Worldwide HIV sales increased 37% to
£3,556 million, with the US up 46%,
Europe up 29% and International up 21%.
This growth was primarily driven by strong
performance from Triumeq and Tivicay.
In 2016, we continued to implement our new
commercial model. We stopped payments
to HCPs to speak on our behalf in January
and continued our drive to recruit HCPs
as internal medical experts. In addition, we
continued to roll out digital tools to further
our medical education efforts. Following
medical product information sessions with
GSK experts in over 60 countries, 92%
of more than 42,000 HCPs agreed that
the interaction helped them make a more
informed decision benefiting patient care.
Around 79% rated their experience as
superior to similar interactions with other
pharmaceutical companies.
We are working hard in early stage research to find a cure for HIV/AIDS
We have formed a unique partnership to accelerate the search
for an HIV cure.
More than 36 million men, women and children
around the world live with HIV. As a leading
research-based pharmaceutical and healthcare
company, we have a legacy of success in
developing treatments for HIV.
This partnership is recruiting top talent from
around the world and redefining the
traditional way of conducting research
in HIV/AIDS. One of the approaches being
investigated is known as ‘shock and kill’
which seeks to reveal the hidden virus
that persists in people with HIV infection
despite successful drug therapy, and
augment the patient’s immune system
to clear these last traces of the virus and
infected cells.
GSK has a strong pipeline of new medicines and
our HIV scientists continue to work towards the
goal of one day finding a cure
for the HIV/AIDS epidemic.
We continue to invest in the HIV Cure Center and
Qura Therapeutics, our unique joint-ownership
collaboration created in 2015 with The University
of North Carolina (UNC-Chapel Hill), with a single
focus on finding a cure for HIV/AIDS.
Investor informationFinancial statementsGovernance and remunerationStrategic report
24 GSK Annual Report 2016
Pharmaceuticals continued
Deliver
In 2016, we achieved
accelerated filing for the
first once-daily Closed Triple
therapy for COPD, received
approval in Europe for our
first gene therapy medicine
and obtained positive data to
support a new single tablet
two-drug HIV regimen.
Our Pharmaceuticals R&D organisation
drives discovery and development in several
areas of research, including respiratory, HIV,
infectious diseases, immuno-inflammation,
oncology and rare diseases.
2016 progress
We continued to see progress across all
stages of our R&D pipeline. In respiratory,
we filed our once-daily Closed Triple therapy
for COPD for regulatory approval in both
Europe and the US, bringing forward
our original US filing date by 18 months.
We also announced positive results from
the pioneering COPD Salford Lung Study.
The study showed that, compared to those
receiving usual standard of care, COPD
patients using Relvar/Breo Ellipta achieved
a superior reduction in exacerbations
in an everyday clinical practice setting.
We also strengthened the prospects for
our next wave of respiratory medicines
with the in-licensing of a novel anti-IL33R
antibody for severe asthma, and new data
supporting the progression of a potential
oral treatment, danirixin, into phase IIb
clinical development for potential use in
treating patients with COPD.
Our HIV pipeline contains a number of
promising medicines and regimens, with
innovative formulations, mode of action and
delivery methods. We announced positive
results from two phase III studies evaluating
a two-drug regimen combining dolutegravir
and rilpivirine (Edurant, a Janssen medicine).
By breaking the mould of conventional
three-drug treatments, this therapy could
reduce and streamline HIV medication in
the future.
We have three further HIV programmes
in phase III: a new attachment inhibitor;
another two-drug regimen, combining
dolutegravir and lamivudine; and
cabotegravir, a once-monthly injectable
therapy, which combined with long-acting
rilpivirine could also make HIV treatment
simpler and easier to adhere to. In addition,
we announced the start of a phase III study
to evaluate long-acting cabotegravir as an
injection every two months, for prevention
in men who have sex with men at risk of HIV
infection. We also completed the acquisitions
of the BMS HIV pipeline and discovery
teams and programmes, which have now
been fully integrated into ViiV Healthcare’s
R&D organisation.
Timeline and development stages for a pharmaceutical product (industry average)
Drug
discovery
Pre-clinical
testing
Clinical trials
Licensing approval
Phase I
Phase II
Phase III
5-10,000
candidates
10-20
candidates
1 medicine
Medicine available
for patients
5-10
candidates
2-5
candidates
1-2
candidates
4.5 years
5.5 years
7 years
8.5 years
11 years
12.5 years
Source: ABPI
25 GSK Annual Report 2016
20-30
assets with data expected
by the end of 2018.
We continued to strengthen our emerging
immuno-inflammation portfolio, with
regulatory filings in Europe and the US;
a subcutaneous formulation of Benlysta,
our treatment for systemic lupus disease
currently available as an IV formulation; and
sirukumab, an investigational IL-6 treatment
for rheumatoid arthritis which we are
co-developing with Janssen. If approved,
both treatments will be self-administered
at home, making them a convenient
treatment option for patients.
In 2016, we also gained approval of
Strimvelis, the first corrective gene therapy
for children suffering from the very rare
disease ADA-SCID (adenosine deaminase
severe combined immunodeficiency) –
see case study below.
We started several phase II studies
including: one to evaluate an anti-GM-CSF
(anti-granulocyte macrophage colony-
stimulating factor) monoclonal antibody for
inflammatory hand osteoarthritis; the other
assessing an oral RIP1 kinase inhibitor, for
rheumatoid arthritis and psoriasis patients.
We also received positive phase II data for
our first-in-class antibacterial gepotidacin, in
treating gonorrhoea, for which the US Food
and Drug Administration (FDA) has granted
fast-track status on the basis of the serious
unmet need for new medicines in this area.
In oncology, we have 11 assets in clinical
development and have seen encouraging
developments in our core areas of immuno-
oncology, cell therapy and epigenetics.
During the year, the FDA granted
breakthrough therapy status to the affinity
enhanced T-cell therapy, which targets the
antigen NY-ESO in synovial cancer that
we are developing with Adaptimmune.
During 2016, we terminated the development
of Iosmapimod for COPD following analysis
of phase II results, and halted development
of the HIV maturation inhibitor 3532795 in
favour of other maturation inhibitors in our
pipeline that may have a better profile.
2017/2018 milestones
The coming two years will be significant
for the pharmaceutical pipeline, marking
the start of another intense period of R&D
activity for the company, as we expect
important data on between 20 and 30
assets in areas including HIV, respiratory,
immuno-inflammation and oncology.
Approval of GSK’s first gene therapy opens new chapter in treatment of rare diseases
The application of groundbreaking technology has resulted
in the world’s first corrective gene therapy for children.
The European Commission’s approval of
Strimvelis, a one-time treatment for ADA-SCID
(adenosine deaminase severe combined
immunodeficiency) is the first authorisation of
a corrective stem cell gene therapy for children
and a major milestone in our commitment to
developing innovative transformative medicines.
Working together, we took an experimental
medicine procedure and developed rigorous
manufacturing and quality control systems to
ensure it could be evaluated
by regulators.
ADA-SCID, which is caused by a faulty gene
inherited from both parents, affects around
15 newborns in Europe each year. A child
born with ADA-SCID does not have a healthy,
fully-functioning immune system and, as a
consequence, is unable to fight off everyday
infections. The treatment involves correcting this
often fatal disorder using the patient’s
own cells.
The development of Strimvelis follows a
collaboration between GSK and the original Italian
developers, the San Raffaele Telethon Institute for
Gene Therapy in Milan, Italy.
A 100% survival rate three years after
treatment was observed for all children
in the pivotal study. Every child receiving
Strimvelis who contributed to the marketing
authorisation data package is alive today.
Patients referred for treatment will receive the
gene therapy at Ospedale San Raffaele.
We hope Strimvelis will be the first of
a number of innovative gene therapy
medicines that we will bring to patients over
the next few years.
Two further programmes using the same
platform, in metachromatic leukodystropy
and Wiskott-Aldrich syndrome, are both
in clinical trials.
Investor informationFinancial statementsGovernance and remunerationStrategic report
26 GSK Annual Report 2016
Pharmaceuticals continued
Deliver continued
1,500
Our range of partners includes
academic institutions, public-private
partnerships, and pharmaceutical and
biotechnology companies.
Pharmaceuticals R&D approach
We focus our investment on areas where
we believe there are the most attractive
opportunities, having considered patient
need, market opportunity and scientific
understanding. We concentrate on
mechanisms that might slow down or
reverse the course of diseases and present
opportunities to achieve remission or cure.
Our early research efforts centre on around
30 discovery performance units. These
nimble units have their own budgets and
project accountability, so are different from
the traditional hierarchical R&D model.
They help us to maintain flexibility, create
agility, and enable us to focus on the
most promising early opportunities.
As a treatment advances, Medicines
Development Teams of multi-disciplinary
specialists ensure its progress from
investigational medicine and later stage
development to filing with regulators and
ongoing evidence generation.
Strategic issues and overall budget
management are overseen by the R&D
management team. Robust governance
boards manage investment, technical,
scientific and commercial decisions
throughout a molecule’s lifecycle.
Collaboration with external partners
is an important part of our approach.
We partner with more than 1,500
organisations around the world, including
academic institutions, public-private
partnerships, and other pharmaceutical
and biotechnology companies.
Collaborating with the Francis Crick Institute
GSK joins forces with world-leading biomedical research centre.
development of novel approaches to
A landmark collaboration between GSK
problems. By pooling our knowledge and
and the Francis Crick Institute aims to achieve
resources we hope the collaboration will
new breakthroughs in understanding and
ultimately improve the success rate for
treating diseases.
discovering new medicines.
The open innovation collaboration combines
our pharmaceutical R&D expertise with the
Crick’s deep knowledge of disease biology.
Our mutual aim is to explore new avenues of
medical research and drug discovery across
a range of diseases. The collaboration takes
a ‘LinkLabs’ approach to working, with teams
of scientists from each organisation working
side-by-side in integrated teams at the
Crick’s world-leading centre of biomedical
research in the heart of London and GSK’s
global R&D hub in Stevenage. GSK and the
Crick believe this fluid interchange of skills
and ideas benefits both sides, introducing
new ways of working and stimulating the
In the spirit of open innovation, research
findings from the collaboration will be
shared externally, via joint publication in
peer-reviewed journals. This will enable
important discoveries to be applied across
the research community, maximising the
potential to progress scientific understanding
and accelerate the development of
treatments for patients.
The Francis Crick Institute is a charity funded
by the Medical Research Council, Cancer
Research UK, the Wellcome Trust, University
College London, Imperial College London
and King’s College London.
27 GSK Annual Report 2016
Simplify
Our supply chain
transformation programme
has delivered significant
reductions in manufacturing
costs and streamlined our
external supply network.
Responsible
business
In 2016, we continued to reshape our
Pharmaceuticals business and reduce
complexity in our supply chain while
maintaining our commitment to quality.
Cost savings generated in the
Pharmaceutical business have contributed
to the delivery of £3 billion of annual savings
(including £0.2 billion of currency benefit)
for the Group by the end of 2016. Operating
profit margin for Pharmaceuticals was
34.1%, 3.7 percentage points higher on a
CER basis than in 2015 and 1.2 percentage
points higher on a pro-forma CER basis.
In 2016, we completed our three-year
transformation programme to move
to an end-to-end supply chain. This has
delivered improvements in customer service,
quality and productivity which, combined
with simplification of our portfolio, has
delivered a significant reduction in
manufacturing costs and streamlined our
external supply network by more than 40%.
As part of our commitment to creating
a world-class supply chain, in 2016 we
agreed a five-year global logistics contract
with an international freight company.
This contract has been a key enabler
to reduce our site costs in the year.
Our enterprise resource planning (ERP)
system is enabling better sharing of data
to improve planning capabilities. By the end
of 2016, the system was live in 10 of our 40
Pharmaceuticals manufacturing sites.
Committed to quality
We are committed to meeting the highest
standards through stringent quality control
and quality assurance processes. Our
medicines and vaccines are manufactured
according to current Good Manufacturing
Practice (cGMP) regulations, and our
internal quality management system.
In 2016, our Pharmaceutical manufacturing
sites had 66 regulatory inspections;
six had findings which we are resolving.
In July, we received a Warning Letter from
the US Food and Drug Administration (FDA)
relating to an inspection carried out 12
months earlier at GSK’s Worthing, UK,
primary manufacturing site. We responded
promptly to the FDA to address the points
raised and advised them of a programme
of work which is now well advanced.
Leading the fight against antimicrobial resistance
We demonstrated our continuing commitment to tackling
antimicrobial resistance by signing up to a landmark
industry roadmap.
Resistance to antibiotics is becoming a major
public health crisis, with 700,000 people
dying every year from drug resistant infections.
The roadmap commits us, and other participating
pharmaceutical companies,
to achieving four significant targets by 2020.
These include reducing the environmental impact
of antibiotics production and ensuring they are
only used by patients who need them. The
roadmap builds on our January 2016 commitment
to the Davos Declaration to combat antibiotic
resistance.
Our most advanced asset in the
antibiotics pipeline is gepotidacin,
which we developed in collaboration
with the US government’s Biomedical
Advanced Research Development Authority
(BARDA). Gepotidacin is
now moving towards phase III studies,
following positive phase II results in 2016.
We have been active in discovering and
developing antibiotics for more than 70 years.
Today, our pharmaceuticals focus is on developing
new antibiotics and we have an active pipeline of
new medicines. In addition, our Vaccines business
researches and develops new vaccines to prevent
bacterial infections, so saving lives and reducing
dependence on antibiotics.
The global health threat of antimicrobial
resistance requires a multi-stakeholder
response, as seen in the industry
collaboration beyond last year’s roadmap and
our work with BARDA. We also partner with
other governments and companies to
progress research and development into new
antibiotics.
We are a member of the Innovative Medicines
Initiative’s NewDrugs4BadBugs, and are a
long-term partner of the
Defence Threat Reduction Agency.
Investor informationFinancial statementsGovernance and remunerationStrategic report
28 GSK Annual Report 2016
28 GSK Annual Report 2016
Following impressive clinical
trial results, we have filed
our candidate shingles
vaccine with regulators in
the US, Canada and Europe.
Vaccines
We have the broadest vaccines portfolio
of any company, with vaccines for people
of all ages – from babies and adolescents
to adults and older people.
29 GSK Annual Report 2016
29 GSK Annual Report 2016
Strategic report
Governance and remuneration
Financial statements
Investor information
Grow
Deliver
Simplify
£4.6bn
Vaccines sales were up
26% AER and 14% CERa
(12% pro-forma CER) in
2016 with growth across
the US, Europe and
International markets.
14
In 2016, we filed our
candidate shingles
vaccine, Shingrix,
and have 14 candidate
vaccines in our pipeline
for a range of diseases.
>30%
Operating profit margin
was 31.7% in 2016, 5.3
percentage points higher
than in 2015 and 7.6
percentage points higher
on a CER pro-forma basis.
Responsible
business
We are working with
partners to help the world
be better prepared for
global health epidemics.
Footnote
a We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including
core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not
as a substitute for or superior to, information presented in accordance with IFRS.
Investor informationFinancial statementsGovernance and remunerationStrategic report
30 GSK Annual Report 2016
Vaccines
Our Vaccines business is
one of the largest in the
world, delivering over
two million doses of
vaccines per day to
people in over 160
countries.
Candidate shingles vaccine filed
Our Vaccines business has a portfolio
of 41 paediatric, adolescent, adult, older
people and travel vaccines that offer
protection against 22 different diseases.
These include Bexsero, our meningitis B
vaccine; Menveo for meningitis A, C, W and
Y; Flu; Hepatitis; Synflorix for pneumococcal
disease; Rotarix for rotavirus gastroenteritis;
and vaccines against diphtheria, tetanus and
whooping cough, namely, Infanrix/Pediarix
and Boostrix.
Demand for vaccines continues to increase
as the world’s population grows and
changes. To meet this demand, we must
deliver reliable, high quality vaccines and
push the boundaries of science and
technology to develop innovative vaccines.
Behind our commercial portfolio is our
robust research pipeline, which reflects
our expertise in virology and bacterial
infection, and across different technological
platforms. We have more than 2,000
scientists dedicated to discovering and
developing vaccines across our three
global R&D centres in the US and Europe.
As well as our internal research, we have
more than 180 R&D partnerships with
external scientists and leading academic
and public health institutions.
To help more people benefit from
vaccine protection, we use a ‘tiered
pricing’ approach, based on nations’
gross national income per head and
ability to pay. We are also one of the
largest contributors to Gavi, the Vaccine
Alliance, a public-private partnership
that aims to improve access to vaccines
in developing countries.
Following impressive clinical trial results, we have filed our
candidate shingles vaccine Shingrix with regulators in the US,
Canada and Europe.
We are seeking approval for Shingrix, our
candidate vaccine, for use in preventing shingles
– a common but potentially serious condition –
and its complications in people over 50. Shingles
sufferers develop a painful itchy rash, with up to
30% also getting postherpetic neuralgia (PHN),
an intense pain that can last for at least three
months.
This is the first time such high efficacy has
been demonstrated in a candidate vaccine for
older people, whose weakened immune
systems often leave them more susceptible to
disease. There is a possibility therefore that
the technology it is based on may open up
effective treatments for other conditions
affecting older adults.
More than one in three people over 50
are likely to have shingles in their lifetime.
Individuals with compromised immune
systems, such as cancer patients undergoing
chemotherapy, are especially susceptible.
A study published in 2016 found Shingrix had
90% efficacy for people over 70, maintained
for up to four years, while earlier research
showed 97% efficacy in those over 50.
In 2017, we expect the results of clinical
studies with Shingrix both in people at
high risk of shingles, due to the weakening of
their immune systems, and in patients
revaccinated with our candidate vaccine who
have previously received the existing vaccine.
31 GSK Annual Report 2016
Sales in International markets grew 10%
(8% pro-forma), with growth primarily
driven by Synflorix, due to market expansion
in Asia and certain African countries.
Menveo sales also contributed to growth
driven by a significant tender award in
Argentina. Vaccine sales increased in
Brazil due to strong demand for Bexsero,
Menjugate and Boostrix.
Grow
Vaccines sales grew 14%
on a reported basis (12%
pro-forma) to £4.6 billion,
from strong performance
from our meningitis and
flu vaccines.
All growth rates are at CER, a
non-IFRS measure as described
on page 57, unless otherwise stated.
2016 performance summary
Vaccines sales grew 26% at actual rates,
14% CER and 12% pro-forma CER to
£4,592 million during 2016. Performance
was driven by sales of new products
including meningitis vaccines Bexsero and
Menveo which contributed £592 million.
There was also strong demand for Fluarix
/FluLaval which had sales of £414 million.
US sales grew 13% (12% pro-forma) with
Bexsero, Menveo and Boostrix all seeing
market and share growth while Infanrix
and Pediarix both benefited from competitor
supply issues in the market.
In Europe, sales grew 18% (16% pro-forma),
driven primarily by Bexsero sales through the
UK Government’s immunisation programme
and in private market channels in several
other countries. Boostrix sales in Europe
benefited from higher demand and
competitor supply issues.
UK infants benefit from meningitis B vaccine
The number of cases of meningitis B reported in the UK
fell significantly after babies were vaccinated with our Bexsero
meningococcal vaccine.
The UK became the first country in the world
to introduce a national infant immunisation
programme against meningitis B in late 2015,
with children being vaccinated at two and
four months and receiving a booster at
one-year-old.
Invasive meningococcal B disease is
the leading cause of meningitis in the
industrialised world. It develops rapidly,
typically among previously healthy children
and adolescents. About one in ten of
those who contract the disease die, with
a further 20% suffering a major physical
or neurological disability, such as limb or
hearing loss.
Just ten months after the programme was
launched, Public Health England (PHE)
figures showed 83% percent effectiveness of
Bexsero against meningitis B.
Bexsero is the only meningococcal B vaccine
licensed in Europe. In the past
two years, the numbers of doses of Bexsero
produced has grown from two million to a
cumulative total of ten million.
Investor informationFinancial statementsGovernance and remunerationStrategic report
32 GSK Annual Report 2016
Vaccines continued
Deliver
Our broad pipeline
includes vaccines targeting
shingles, meningitis, respiratory
syncytial virus, group B
streptococcus, and a new
vaccine concept for COPD.
Our Vaccines R&D work focuses on
discovering and developing vaccines to
help protect people against a broad range
of diseases and conditions across all age
groups. We have a pipeline of 14 candidate
vaccines in early, mid and late stage
development against a range of diseases.
In 2016, we received regulatory approval
to expand the indication for FluLaval in the
US to cover infants from six months of age,
rather than from three years. We obtained
approval in Europe for a label update for
Boostrix and Boostrix Polio with human
safety data to support use in pregnant
women. We also launched our Hiberix
vaccine in the US.
In 2016, we filed for regulatory approval
in North America and Europe for our
candidate vaccine for the prevention of
shingles and its complications. (See case
study on page 30.) In 2017, we plan to file
for its use in Japan.
We have a number of promising earlier
assets in our pipeline. For example, the
candidate vaccines in phase II, are for
meningococcal A,B,C,W,Y, respiratory
syncytial virus (RSV), group B streptococcus
and exacerbations in chronic obstructive
pulmonary disease (COPD).
Following the positive scientific opinion
from European regulators for our infant
malaria vaccine Mosquirix, the World Health
Organization will start pilot implementation
of the vaccine in three sub-Saharan Africa
countries in 2018. With our partners at the
non-profit organisation PATH, we will donate
doses of Mosquirix for the pilots.
In a bid to assist with the Zika virus, we are
evaluating a new vaccine technology known
as SAM (self-amplifying mRNA), with the
National Institutes of Health. We believe
this technology may potentially induce
protective immunity against Zika.
Investment and governance
Our priorities are meeting patient needs
and addressing global health challenges
for which no vaccines yet exist, or where
significant improvements could be made.
Our vaccine R&D investment in 2016 was
£597 million, up 2% from £525 million
in 2015.
In R&D, we complemented our existing
global hubs, in Siena, Italy and Wavre,
Belgium, with the opening of a third centre,
in Rockville, Maryland, close to our major
US public health stakeholders. Our three
global centres each have their own area of
expertise in vaccine discovery and specific
assets in development while also benefiting
from scientific exchange between the three
world-class teams.
Vaccines research development cycle (industry average)
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
33 GSK Annual Report 2016
Simplify
We have continued to
simplify our operating model
and realised significant savings.
Responsible
business
Committed to quality
The discovery and development of new
vaccines is a complex process. Our vaccines
are manufactured to the highest quality
standards, according to current Good
Manufacturing Practice (cGMP) regulations.
In 2016, we had 45 regulatory inspections
and 38 had minor or no findings. In all
cases, we worked with regulators to
address their observations.
In 2016, we continued to further simplify
our operating model, strengthen our
manufacturing network, and reduce
supply costs.
During the year, we completed the majority
of the Novartis Vaccines business integration.
Cost savings generated in the Vaccines
business have contributed to the delivery
of £3 billion of annual savings for the Group
by the end of 2016 (including £0.2 billion
currency benefit). These savings, combined
with strong sales growth, delivered improved
operating leverage and a profit margin of
31.7%. This was 5.3 percentage points
higher than in 2015 and 7.6 percentage
points higher on a pro-forma CER basis.
Investing in our supply chain
We have 16 vaccine manufacturing sites
in 11 countries. This international presence
enables us to manufacture our vaccines
with greater capacity, efficiency and flexibility.
We aim to keep critical production steps
in-house wherever possible, and during
the year we invested in new production
facilities at our Marburg site in Germany.
This will enable us to produce all of the
active components of our Bexsero vaccine
in-house, and adds a new mumps production
line for our combined measles, mumps,
rubella and varicella vaccine.
Preparing for public health emergencies
GSK is committed to helping whenever we can when
public health crises occur.
When Ebola broke out in West Africa, we
accelerated the development of our candidate
Ebola vaccine and, following the outbreak
of Zika, we employed our novel technology
platforms to start a vaccine discovery programme
with the US National Institutes
of Health.
guidance from independent experts. It would
have dedicated and permanent R&D and pilot
production facilities, and the capacity to
respond rapidly to future global health
emergencies.
However, responding after a life-threatening
disease surfaces is not enough. Vaccine research
and discovery is a lengthy process, typically taking
10 to 15 years. To have the
best chance to save lives, the global community
has to prepare itself in advance.
For this reason, we are proposing to create a
dedicated and permanent ‘biopreparedness
organisation’ (BPO) at our Global Vaccines R&D
Centre in Rockville. The planned facility would
design, develop and manufacture new vaccines
against potential public health threats, with
targeted pathogens selected and prioritised with
The BPO would operate on a no-profit,
no-loss basis, with funding from both
governments and non-governmental
organisations.
We also strongly support the Coalition for
Epidemic Preparedness Innovations (CEPI)
and its focus on vaccines development as a
solution to protecting against infectious
disease outbreaks. We stand ready to partner
with CEPI to advance epidemic
preparedness.
Investor informationFinancial statementsGovernance and remunerationStrategic report
34 GSK Annual Report 2016
34 GSK Annual Report 2016
Consumer Healthcare
Our Consumer Healthcare business develops and
markets products in Wellness, Oral health, Nutrition
and Skin health. Our portfolio includes some of the
world’s most trusted and best-selling brands, such
as Sensodyne, Voltaren and Panadol.
35 GSK Annual Report 2016
35 GSK Annual Report 2016
Strategic report
Governance and remuneration
Financial statements
Investor information
A migraine is more than
just a headache. Excedrin
is helping people in the US
manage their symptoms.
Grow
Deliver
Simplify
£7.2bn
Sales increased 19%
AER and 9% CERa (5%
pro-forma CER) in 2016,
with growth broadly
balanced across the
US, Europe and
International markets.
13%
of sales in 2016 were
from product innovations
launched over past
three years.
15.5%
Operating profit margin
was 15.5% in 2016, 4.2
percentage points higher
than in 2015 and 3.7
percentage points higher
on a CER pro-forma basis.
Responsible
business
Our Panadol power brand
is helping raise awareness
of dengue fever.
Footnote
a We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 57, including
core results, free cash flow and CER and pro-forma growth rates. Non-IFRS measures may be considered in addition to, but not
as a substitute for or superior to, information presented in accordance with IFRS.
Investor informationFinancial statementsGovernance and remunerationStrategic report
36 GSK Annual Report 2016
Consumer Healthcare
Our Consumer Healthcare
business is a world-
leading over-the-counter
and consumer healthcare
products company.
Our Consumer Healthcare business* is
split almost equally between over-the-
counter (OTC) medicines and fast moving
consumer goods (FMCG), across our four
categories of Wellness, Oral health, Nutrition
and Skin health.
Wellness
We are the global leader in Wellness, which
is our largest category, and number one in
36 countries by retail sales. We have leading
global positions in respiratory, cold and flu,
nasal decongestants, allergy, smoking
cessation, and pain management, where
we have two of the top four brands, Panadol
and Voltaren.
Oral health
We are a top three company, globally,
by sales in toothpaste and the number
one in specialist oral health, globally and
in 50 countries, with leading positions in
sensitivity, acid erosion, denture care and
gum health. In 2016, Sensodyne became
our first £1 billion consumer healthcare
brand, making it the third-largest product
by sales in the whole GSK portfolio.
Nutrition
Our Nutrition business includes Horlicks,
the long established wheat, milk and malted
barley drink.
Skin health
We are in the top three, by sales, globally
in medicated skin health which treats
such conditions as cold sores and dry
and sensitive skin. Our Abreva and Zovirax
brands hold leading positions in some
of the world’s largest markets.
Power brands
We prioritise seven global power brands
– Otrivin, Panadol, parodontax, Poligrip,
Sensodyne, Theraflu and Voltaren – and
12 regional core brands, including Flonase,
Horlicks and Tums. These brands, including
Physiogel, benefit from our broad geographic
footprint and a combined focus on scientific
expertise and consumer insight.
* Represents the Consumer Healthcare Joint Venture
with Novartis together with the GSK Consumer
Healthcare listed businesses in India and Nigeria.
Managing migraine symptoms
Excedrin brought home the painful reality of migraines
with a recent virtual reality campaign.
Excedrin, one of the top over-the-counter brands
in sales in the US, launched a
virtual reality (VR) campaign to correct
misunderstandings of migraines. The campaign,
which included multi-channel
media activity, an expert celebrity panel
discussion and a high profile New York event, was
launched in March 2016. Product sales rose 15%
during the campaign and have shown double digit
growth over the year.
The four worked with VR experts to create the
visual effects they experience during attacks,
including blurred vision, flashes, object
‘auras’, room spinning and partial blindness.
The campaign made an enormous impact on
social media, with over 17 million views and
almost 500,000 engagements, such as
shares of the film, comments and re-tweets.
Excedrin created the campaign after its customer
insight research showed that
88% of sufferers felt misunderstood.
The documentary-style film featured
a ‘migraine simulator’, developed with
the help of four migraine sufferers.
37 GSK Annual Report 2016
Grow
Strong growth in our
Oral health and Wellness
power brands helped
Consumer Healthcare
to a 9% increase in reported
sales (+5% pro-forma),
to £7.2 billion.
All growth rates are at CER, a
non-IFRS measure as described on
page 57, unless otherwise stated.
In Europe, sales grew 12% to £2,191 million
(4% pro-forma). Good momentum across
Germany, Scandinavia and Italy was partly
offset by the impact of challenging economic
conditions in the Commonwealth of
Independent States. Voltaren grew in
double-digits as a result of the continued
success of the 12-hour variant, while in
Oral health, Sensodyne and the Gum health
portfolio also recorded strong growth.
In International markets, sales grew 8%
(5% pro-forma) to £3,241 million. Growth
was impacted by the sale of the Nigerian
beverages business on 30 September
2016 and the effective cessation of
trade in Venezuela at the end of 2015.
Demonetisation implemented in India
in November also impacted the Indian
business. Sales in the Middle East, Latin
America and China grew particularly
strongly as a result of better pricing and
new product introductions.
2016 performance summary
Consumer Healthcare sales grew 19%
at actual rates, 9% CER and 5% on a
pro-forma basis to £7,193 million.
On a category basis there was growth
in Wellness (15%), Oral health (8%) and
Skin health (4%). This was partly offset
by Nutrition which declined 8%.
At a brand level, Sensodyne, Panadol
and Otrivin performed strongly. Sales
of Sensodyne reached £1 billion for the
first time. Sales from innovation within the
last three years represented 13% of sales,
with a particular contribution from Flonase,
which was switched to OTC in Q1 2015.
Other notable launches in 2016 included
Sensodyne True White and Excedrin
Gel-tabs in the US.
Growth was broadly balanced across
our three global geographies. US sales
grew 9% to £1,761 million (5% pro-forma)
driven primarily by Sensodyne delivering
double-digit growth following the launch
of True White combined with strong
momentum from Pronamel. Within Wellness,
Flonase OTC grew strongly in the first half
following line extensions.
New over-the-counter launch extends Flonase brand
We continue to see success in switching products from
prescription-only to over-the-counter.
In 2016 the FDA approved Flonase Sensimist
Allergy Relief for seasonal and perennial
allergies. This builds on our success in moving
products from prescription-only
to over-the-counter (OTC) in the USA.
The product was launched in February 2017, in
time for the allergy season. In making the
product available OTC, we are meeting
consumer demand for greater control
over their personal healthcare.
The new product acts on multiple inflammatory
substances and has additional features such
as being suitable for children as young as two
years old, being scent and alcohol-free, and
causing little or no drip while it is being
applied.
By bringing Sensimist under the Flonase
Allergy Relief umbrella, we aim to build on
Flonase’s market success.
The product was formerly available only on
prescription as Veramyst. In managing the
switch to OTC, we drew on the regulatory
insights of our Pharmaceuticals business
which helped us navigate through the highly
regulated pharmaceutical environment.
Investor informationFinancial statementsGovernance and remunerationStrategic report
38 GSK Annual Report 2016
Consumer Healthcare continued
Deliver
Our success in delivering
consumer-driven, science-led
innovation enabled us to
generate our best-ever sales
from recent launches.
13%
of our sales were generated from
innovations launched over the past
three years.
The success of our Consumer Healthcare
business is built on our ability to understand
customer needs and meet them with effective
products from our strong research pipeline.
In 2016, we refocused our investment in
innovation to ensure we achieve a high return
and delivered 30 new-to-market product
launches. During 2016, 13% of our sales
were generated from innovations launched
over the past three years – our highest
level ever.
In 2016, R&D investment in Consumer
Healthcare was £243 million (2015 –
£258 million). We prioritise investment
on our power and core brands, with our
strategic focus now on fewer but bigger
innovations. In 2016, examples included
Sensodyne True White, Excedrin Gel-tabs,
a new Eno ajwain herb flavour variant in
India and Otrivin Oxy which was launched
a record six months from conception.
We continue to see success in moving
products from prescription-only to over-
the-counter, with the approval and launch
of Flonase Sensimist Allergy Relief in the
US in 2017. (See case study on page 37).
Understanding consumers’ everyday
healthcare needs, views and product
preferences is an integral part of our new
product development process. As digital
technology becomes central to all our lives,
we are exploring ways – both internally and
in discussion with external entrepreneurs
and inventors – of harnessing digital
capability to improve consumer health.
We continued to invest in state-of-the-art
digital and real life innovation by opening
new US shopper and sensory labs.
(See case study below).
In 2016, we strengthened our commitment
to R&D in India, building headcount to
~200 people – a significant increase versus
both legacy organisations. Our increased
focus on innovation in this area is already
paying off, with seven market-first innovations
launched in the region over the course of
the year. Two of our six R&D hubs are now
based in emerging markets, a region that
represents over a third of our business.
The science of consumer insight
Our new innovation labs in the US increased our ability
to understand and deliver unmet consumer needs.
Following the success of our UK innovation labs
we launched three labs based at our
new US Consumer Healthcare HQ in Warren.
They enable us to integrate customer insights into
all stages of product development, from
the original inception of an idea to an item’s
positioning on the store shelf. They include:
– A shopper science facility that enables
us to work with our retail partners on the
best way to present products in store.
Together, the labs are enabling us to discover
fresh insights and develop tailor-made
products to meet the needs
of our consumers and retailers. This helps us
to meet our ambition of becoming first choice
for shoppers and customers.
– An R&D suite combining flexible work
spaces with rapid prototyping capabilities;
allowing us to move swiftly from concept
to manufacture, whether of tablets, liquids,
powders or creams.
– Consumer sensory capabilities to assess
how people use products. It includes
simulated environments where our products
are often found, for example, the bathroom,
doctor’s consulting room, a shop and
pharmacy.
39 GSK Annual Report 2016
Simplify
We continued to further
simplify and streamline our
Consumer Healthcare business
and increased our operating
profit margin.
Responsible
business
During 2016, we completed the majority
of the integration enabling us to increase
our emphasis on core innovation and to
deliver stronger growth from our brands.
Incremental annual cost savings in 2016
helped to increase the operating profit
margin by 4.2 percentage points to 15.5%.
This was 3.4 percentage points higher than
in 2015 on a CER basis and 3.7 percentage
points higher on a CER pro-forma basis.
We remain on track to deliver the annual cost
savings anticipated, and to deliver our target
operating margin of at least 20% by 2020.
Our consolidation activities over the year
resulted in a reduction of costs and
overheads. We established common
distribution routes and shared enterprise
resource planning platforms, enabling
access to data across the organisation
and more informed decision making.
In 2016, unified branding was rolled
out to all integrated sites and more than
10,000 artwork changes were delivered.
Our streamlining efforts also involved
59 markets moving to standardised
platforms over the course of the year,
and we are on track to deliver against
our synergy targets.
Committed to quality
Our Consumer Healthcare products
are manufactured to the highest quality
standards, according to current Good
Manufacturing Practice (cGMP) regulations.
In 2016, we had 56 regulatory inspections,
all with satisfactory outcomes.
Helping communities to better identify, prevent and treat dengue fever
A GSK-led health campaign encouraged better understanding
of how to manage the disease.
Mosquito-borne dengue fever causes around
400 million infections and 20,000 deaths
each year. It is endemic in more than 100
countries, particularly across the South East
Asia and Western Pacific regions.
It included 48 ‘train the trainer’ sessions,
to refresh physicians’ and pharmacists’
knowledge of the virus; the recruitment
of 21,000 voluntary ‘dengue warriors’
to spread the word about prevention and
treatment; and the distribution of ‘dengue
proficiency kits’ to healthcare professionals.
Paracetamol, in Panadol, can help treat some
of the symptoms of dengue fever,
so GSK Consumer Healthcare launched the
Allied Against Dengue campaign
in 2016 in Malaysia, Indonesia and the
Philippines. It brought together GSK and our
Panadol power brand with doctors, pharmacy
chains, governments and non-government
organisations.
The campaign has helped educate
seven million people about the disease.
Assisted by wide media coverage,
the campaign’s impact was dramatic.
In Malaysia, after three years of rising
mortality rates, the campaign contributed
towards the number of deaths falling
by 39%.
The campaign also helped increase our
regional Consumer Healthcare product
sales. In the Philippines alone, net sales
increased by 48% in Q3 2016, versus
the same period in 2015.
Investor informationFinancial statementsGovernance and remunerationStrategic report
40 GSK Annual Report 2016
40 GSK Annual Report 2016
Responsible business
Being a responsible business is central
to our strategy, how we deliver success
is as important as the results we achieve.
41 GSK Annual Report 2016
41 GSK Annual Report 2016
Strategic report
Governance and remuneration
Financial statements
Investor information
We have expanded our
graduated approach to
filing and enforcing patents
and intellectual property to
widen access to medicines
in the poorest countries.
Health for all
Our behaviour
Our people
Our planet
1.3m
Our partnership with
Save the Children reached
an additional 1.3 million
children in 2016 with
treatments, immunisations
and other interventions.
99%
Our mandatory annual
training on our code of
conduct was completed
by 99% of our employees
and complementary
workers in 2016.a
75 countries
Our Partnership for
Prevention programme
is being rolled out
globally and is offering
unprecedented access to
preventive healthcare for
almost 100,000 employees
and their family members
in 75 countries.
18%
We have cut operational
carbon emissions (Scope
1 and 2) by 18% since
2010. Total value chain
emissions have risen by
1% as we extend access
to our medicines, and we
are working to address this.
Footnote
a The remaining 1% represents employees who did not complete the training in the required timeframe and are subject to
disciplinary action (see page 47) and employees still within the completion timeframe (e.g. new starters)
Investor informationFinancial statementsGovernance and remunerationStrategic report 42 GSK Annual Report 2016
Responsible business
By being commercially
successful and operating
responsibly, we will improve
people’s health and benefit
society, as well as create
value for our shareholders.
Creating value for society
By developing innovative healthcare
products, we directly benefit patients and
consumers. Our equitable pricing strategy,
which allows prices to reflect a country’s
ability to pay, and global footprint enables
greater access to our medicines, vaccines
and consumer healthcare products.
By delivering profitable and sustainable
business performance, we generate value
and returns for our shareholders and can
reinvest in the business. Over and above
this, wider society benefits as healthy
people are essential to building strong
and sustainable communities.
We make significant direct and indirect
economic contributions to the countries
and communities where we operate through
tax, our employment of 99,300 people
and charitable support.
Our responsible business priorities
GSK’s responsible business priorities sit
within the context of the macro-economic
and social trends that affect all companies
and wider society. These trends present
both opportunities and challenges for global
healthcare companies like GSK (see page 8).
We report our progress across four areas:
Health for all, Our behaviour, Our people,
and Our planet. We identified our priorities
in these areas by understanding the issues
that are most important to our business and
to our stakeholders.
Our longer-term commitments across the
four areas reflect global health needs and
align with GSK’s strategic priorities and
our values. We detail our progress against
these commitments in our responsible
business supplement available at
www.gsk.com/responsibility.
A graduated approach to intellectual property
We have expanded our approach to filing and enforcing patents
to reflect a country’s economic maturity.
In 2016, we announced that we would adapt our
current approach to filing and enforcing patents
to ensure that we balance the need
to protect our intellectual property with a
country’s economic maturity.
This means that we will no longer file patents for
medicines in the least-developed countries and
low-income countries. In lower middle income
countries, we will apply for patents when we
think it appropriate but also offer licences that
allow supplies of generic versions of our
medicines to these countries (other than G20
countries) for ten years.
In line with this approach, in 2016 ViiV
Healthcare expanded its licence agreement
with the Medicines Patent Pool for the adult
formulation of their HIV drug dolutegravir
to include the vast majority of lower
middle income countries.
The agreement enables dolutegravir to be
made available for adults through generic
manufacturers, with royalty fees tiered
depending on national gross domestic
product, following approval from regulators.
This means that 94% of people living with HIV
in the developing world are now covered by
the licence agreement.
We have also outlined our intent to commit our
future portfolio of cancer treatments
to patent pooling and will work with the
Medicines Patent Pool to explore how this can
help address the increasing burden of cancer
in developing countries.
43 GSK Annual Report 2016
Measuring
progress
We have well-established, long-term
responsible commitments which sit across
four areas: Health for all, Our behaviour,
Our people and Our planet. We also
measure our performance in the Access
to Medicine Index and Dow Jones
Sustainability Index.
Access to Medicine Index
In 2016, GSK topped the Access to
Medicine Index for the fifth consecutive time.
This means we have led every edition of the
biannual index since its 2008 launch.
The Access to Medicine Index is funded by
the Bill & Melinda Gates Foundation and the
UK and Dutch governments. It measures the
top 20 pharmaceutical companies’ efforts to
improve access to healthcare in developing
countries. We led our peers in three of the
2016 index’s seven categories: research
and development; pricing, manufacturing
and distribution; and product donations.
The index describes GSK as ‘the most
access-oriented company’ and recognises
our clear strategy on increasing access
to medicines, which is aligned with our
corporate strategy.
It also cites our company-wide ownership for
access as a key strength, together with our
commitment to research and development
for low and middle income countries and
high-priority medical needs.
At the beginning of 2017 we also performed
well in the first ever Access to Vaccines
Index, leading in all three categories under
consideration.
Dow Jones Sustainability Index
In 2016, we came third in our sector in the
Dow Jones Sustainability Index. The Index
analyses the economic, environmental and
social performance of the world’s leading
companies. Our overall percentile ranking
increased from 89th in 2015 to 95th in
2016, meaning we scored within the top
5% of our sector.
We led the industry in code of business
conduct, climate strategy, environmental
reporting and health outcome contributions,
and had strong performance in corporate
governance, marketing practices, risk and
crisis management, tax and corporate
citizenship.
Progress against our responsible business commitments
Our 2016 assessment shows that three of our commitments are complete, 14 are progressing well, five are on track, and one has more
work to do. For more details about our performance, see our Responsible Business Supplement at www.gsk.com/responsibility.
Health for all
Our behaviour
Innovation for unmet medical needs
Completed
Ethical conduct
Progress
Better access to medicines and vaccines Progressing well
Building products to better meet needs
Progressing well
Strengthening healthcare infrastructure
Progressing well
Fighting malaria
Eliminating and controlling neglected
tropical diseases
Progressing well
Progressing well
Progress
Progressing well
Progressing well
Promoting values in sales and
marketing practices
Transparency in clinical trial data
Completed
Rigorous patient and consumer safety
Progressing well
Minimising animal testing
On track
Ensuring ethical interactions
Progressing well
Eradicating polio
Progressing well
Promoting human rights
Access to antiretroviral treatment for HIV Progressing well
Working with third parties
On track
On track
Reducing child mortality
Progressing well
Our people
Our planet
Developing our people in inspiring
and healthy workplaces
Promoting inclusion and diversity
Community volunteering to
create change
Progress
Progressing well
On track
Completed
Aiming to be carbon neutral
Reducing our water impact
Reducing our waste
Progress
Work needed
Progressing well
On track
Investor informationFinancial statementsGovernance and remunerationStrategic report
44 GSK Annual Report 2016
Responsible business continued
Health for all
We are committed to
developing innovative
products and extending
access to healthcare to
more people, no matter
where they live or their
ability to pay.
Our approach
We are tackling some of the greatest
global health challenges by innovating to
meet unmet needs, making our medicines
and vaccines more accessible, and
strengthening healthcare systems.
Innovating for unmet needs
We aim to develop innovative products
for diseases that disproportionately affect
the world’s poorest people and where
need is greatest.
In 2016, we committed to working with
governments, multinational organisations
and NGOs to enhance preparedness
against potential future outbreaks of
diseases such as Ebola and Zika. We
are supporting the Coalition for Epidemic
Preparedness Innovation (CEPI) (see case
study on page 33) and are proposing
to create a permanent ‘biopreparedness
organisation’ (BPO) at our Rockville,
Maryland Vaccines site.
In 2016, our gel to help prevent umbilical
cord infections in newborns received a
positive scientific opinion from the European
Medicines Agency (EMA). Three million
babies die each year from infection, often
when the newly-cut umbilical cord attracts
bacteria – a particular issue in developing
countries. If approved by local regulators, we
will make the gel available at a not-for-profit
price and share manufacturing knowledge
so it can be widely made.
Our Mosquirix vaccine targets a significant
health threat – malaria. Phase III trials of the
vaccine, which received a positive opinion
from the EMA in 2015, have shown the
vaccine could have a considerable public
health impact when used in combination
with malaria control measures.
In 2016, the World Health Organization
confirmed that full funding has been
committed to enable the pilot implementation
of Mosquirix in three settings in sub-Saharan
Africa due to begin in early 2018.
Protecting refugees with essential vaccines
We are supplying essential vaccines at our lowest price to civil
society organisations for use in acute humanitarian situations.
Photo: Nour Wahid/Save the Children
great humanitarian need where governments
are unable to assist,
by developing a reliable and predictable
supply to CSOs that have stepped in.
At the same time, we will continue to work
with partners to strengthen the long-term
capacity of local health systems to support
refugees and host communities.
This pledge comes as tens of thousands
of refugees continue to flee conflict in Syria,
South Sudan and elsewhere.
It builds on decades of effort by GSK, working
with partners, to increase
access to our vaccines through charities
responding to emergencies.
Along with their homes, livelihoods and
communities, refugees often lose easy
access to healthcare, leaving them potentially
vulnerable to vaccine-preventable disease.
In response, GSK has committed to supply
essential vaccines to internationally recognised
civil society organisations (CSOs) – such
as Médecins Sans Frontières and Save the
Children – at our lowest prices, for use in
acute humanitarian situations where governments
are unable to assist.
The first vaccine to be covered by this commitment
is Synflorix, our pneumococcal vaccine that
protects children against diseases such as
pneumonia. Working with partners such as Gavi,
the Vaccine Alliance, we will provide Synflorix at a
deeply discounted price to charities that fund and
deliver immunisation programmes to refugees and
displaced people. In the future, we will explore
extending this offer to other essential vaccines.
Our commitment is designed to help maintain
stable vaccination programmes during times of
45 GSK Annual Report 2016
£21m
Since 2009, we have invested £21million in
39 countries and trained 43,000 frontline
health workers who have reached 17.5
million people.
Our charitable giving in 2016 totalled
£210.2 million (2015 – £208.3 million)
Product & in-kind £127.2m
Cash £67.3m
Management £12.3m
Time (PULSE) £3.4m
We also share our expertise, resources
and intellectual property with external
researchers. Our open innovation lab in
Tres Cantos, Spain, has built up a portfolio
of 63 research projects looking at diseases
of the developing world since 2010. It had
20 visiting scientists in 2016 and results
from the lab have led to papers in more
than 50 scientific publications. Our Africa
Non-Communicable Diseases Open Lab
is currently focusing on cardiovascular
disease, oncology, chronic respiratory
disease, chronic kidney disease and
diabetes. Its first project looks at severe
asthma across East Africa, led by Uganda’s
Makerere University.
Extending affordability and availability
We are committed to widening access to
our medicines and vaccines. Our equitable
pricing strategy is based on the country,
disease area, product type, and patient’s
ability to pay.
Since 2010, we have capped the prices
of our patented medicines and vaccines
in the least-developed countries (LDCs)
at 25% of the prices in the EU5 (France,
Germany, Italy, Spain and the UK), as long
as our manufacturing costs are covered.
We offer our lowest vaccine prices to
organisations such as Gavi, the Vaccine
Alliance, which supports countries with
a low gross national income. In 2016, we
delivered more than 74 million doses of
our Synflorix vaccine against pneumoccal
disease and more than 35 million doses
of Rotarix, our vaccine against rotavirus
gastroenteritis.
In middle-income countries, where many
still live in poverty, our equitable pricing
approach enables more people to access
our products. In Egypt, we offer a portfolio
of prices to meet the needs of all levels
of income, including a price reduction
of Seretide inhaler devices targeted to
middle and lower income groups.
We also understand payer and patient
concerns about affordability in developed
markets and we are leading efforts to
develop sustainable solutions. For example,
in the USA, the last six GSK pharmaceutical
products were launched similar to or
below prices to the medicines we aim to
supersede. In 2016, we integrated three
of our US patient assistance programmes
into one GSK Patient Assistance Program,
which is designed to simplify and improve
the programme experience for eligible
uninsured patients and patients with a
Medicare Part D prescription Drug Plan.
In Europe, we continue to engage with
payers in all EU markets to balance affordable
cost to healthcare systems through funding
solutions which also support ongoing
innovation for medicines. We have achieved
reimbursement for our Ellipta portfolio in
most EU markets by finding local solutions
when issues of affordability challenged the
introduction of new innovation.
Strengthening healthcare systems
We reinvest 20% of our profits from the
sales of our Pharmaceuticals and Consumer
Healthcare products in LDCs to strengthen
healthcare infrastructure in these nations.
Since 2009, working with Amref Health
Africa, CARE International and Save the
Children, we have invested £21 million
in 39 countries, reached 17.5 million people
and trained 43,000 frontline health workers.
Through our pioneering partnership with
Save the Children, we reached 1.3 million
children with live-saving interventions
in 2016, bringing the total number to
2.6 million. Since 2013, over one million
children have been screened for malnutrition,
more than 86,500 under-fives have been
immunised, over 290,000 children have
been vaccinated against measles or polio,
and over 183,000 have been treated for
diarrhoea, malaria or pneumonia.
Investor informationFinancial statementsGovernance and remunerationStrategic report
46 GSK Annual Report 2016
Responsible business continued
Our behaviour
Our values underpin
everything we do – from
ensuring rigorous safety
standards to how we
interact with healthcare
professionals.
GSK values
We expect all employees to act in line
with our values.
Our approach
We aim to have a values-based culture by
training our people on the standards we
expect, encouraging the reporting of any
concerns and embedding our values into
the way we measure employee performance.
Patient and consumer safety
We manufacture our medicines and vaccines
according to current Good Manufacturing
Practice regulations and our internal Quality
Management System.
In 2016, we had 167 regulatory inspections
of our manufacturing sites and 86% of
these received no observations or minor
observations.a Eleven of the inspections
were conducted by the US Food and
Drug Administration (FDA), of which five
resulted in a Form 483 being issued to
sites, citing deficiencies to current Good
Manufacturing Practices (cGMP). None
of these observations had any direct impact
on product supply from our sites, and
corrective action plans to mitigate the
observations have been submitted to
the FDA in all cases.
Transparency in clinical trial data
GSK was the first company to sign up to
AllTrials, which campaigns for every clinical
trial to be registered and its results reported.
We have been leading the industry in clinical
study transparency over the past decade.
In 2016, we publicly posted more than
1,900 clinical study reports and more than
6,000 result summaries.
Researchers can submit proposals to
request access to the details of around
2,000 of our clinical trials through the
www.clinicalstudydatarequest.com website.
An independent panel reviews proposals
for scientific merit and to ensure patient
privacy and confidentiality are protected.
In 2016, 88 proposals were approved and
66 research teams were granted access
to anonymised patient-level data.
We have also begun providing plain
language summaries of our clinical studies
on our online clinical study register.
Working with third parties
We expect our suppliers to share our high
ethical standards. In 2016, we increased
our use of preferred suppliers, bringing
them to more than 90% of our global
purchase order spend. We continued the
roll-out of our global third-party oversight
programme, which reached a total of
43 countries across Latin America and
South East Asia. The programme aims
to drive improvements in our supply chain
and distributor network and ensure that
the third parties we engage with support
our values.
In 2016, we also completed over 70 third-
party audits on health and safety, ethics,
environment and labour rights. We also
conducted a further 1,850 audits focused
specifically on quality processes. Where
we identify areas for improvement, we
engage with the respective third parties to
develop improvement plans and track their
completion with the overall aim of enhancing
performance in the supply chain. We may
also suspend or terminate work with a
third-party if significant issues are identified.
Training our people
In 2016, we updated our Code of Conduct
and accompanying annual training to give
people a deeper understanding of how to
apply our values in their everyday activities.
In 2016, 99%b of our employees and
complementary workers completed
mandatory training on the code. The code
of conduct training enables the learner
to understand and manage the risks
associated with our business activities.
This includes anti-bribery and corruption
risk, to which we maintain a zero tolerance
approach. More than 70,000 people working
in high risk roles completed additional
in-depth anti-bribery and corruption training
to help them understand how to manage
particular challenges they may face in their
daily work.
Reporting and investigating concerns
We centrally track misconduct allegations
and concerns through our multiple Speak
Up channels. In 2016, our investigations
team received 2,568 reports, a 21%
reduction since 2015.
Footnotes
a
b
At this time we are still awaiting 11 reports from
2016 inspections.
The remaining 1% represents employees who did
not complete the training in the required time and are
subject to disciplinary action, as well as those who are
still within the completion timeframe (e.g. new starters).
47 GSK Annual Report 2016
Employees disciplined in 2016:
breakdown of types of policy violation
2%
2%
2%
3%
3%
5%
8%
12%
8%
14%
44%
Attendance and
payroll
Training completion
Good manufacturing
and distribution
practices
Local work regulations
violations
Marketing and
promotional activities
Code of conduct
Falsification of
documents
Travel and expense
Environment, health
and safety
Other
Disciplinary action
We take action when employees fail to act
in line with our policies. During the year,
3,600 employees were disciplined for policy
violations (2015 – 3,574), including 499
employees for failing to complete mandatory
training (Code of Conduct and Anti-bribery
and Corruption) within the required
timeframe. Of the total disciplined, 2,499
employees received a documented warning
(2015 – 2,890), 547 had verbal warnings
(2015 – 297) and 221 were dismissed or
agreed to leave the company voluntarily
(2015 – 387). Most of these were related
to attendance and payroll which included
disciplinary actions related to employee
absence, punctuality or misstating hours
worked.
Human rights
GSK is a signatory to the UN Global
Compact, which sets out key principles
for business on human rights. We are
committed to upholding the Universal
Declaration of Human Rights and the
International Labour Organisation’s core
labour standards.
We focus on those areas where our
operations have the biggest potential impact
on human rights. We manage human rights
risks in the supply chain by reinforcing our
requirements on labour rights and health
and safety and ensuring these are
communicated consistently through our
revised third-party contracts. We monitor
existing suppliers and screen new ones.
Our approach to tax
We understand our responsibility to pay
an appropriate amount of tax and we fully
support efforts to ensure companies are
transparent about how they manage their
tax affairs.
We pay a significant amount of tax in the UK,
where most of our global corporate functions
and significant manufacturing and R&D
facilities are located, and in other countries
around the world where we have a substantial
business and employment presence.
Over the past 16 years, we have paid
£28.9 billion in corporation tax globally.
Of this, £2.8 billion, nearly 10% of the
global total, was paid in the UK. Read
more on page 178.
We do not engage in artificial tax
arrangements – those without business
or commercial substance. At the same
time, we have a responsibility to our
shareholders to be financially efficient
and deliver a sustainable tax rate.
Further details on our approach to tax and
our tax disclosures can be found on page 55.
Putting patients’ interests first
We continue to lead the industry in modernising
the way we market and sell our medicines.
Since January 2016, we stopped paying
healthcare professionals (HCPs) to speak
to other prescribers about our medicines
and vaccines. Instead, we have strengthened our
online resources to supplement information
provided by our salesforce.
We have also significantly expanded our
global team of in-house medical experts to provide
information about our medicines and vaccines to
HCPs in ways that are convenient to them. We
now have around 400 medical experts dedicated
exclusively to supporting HCPs, and a further 900
who also engage
with them as part of their roles.
Where we do pay HCPs – for activities such
as clinical or market research that help us develop
medicines and vaccines to meet patients’ needs
– we are transparent about these transactions.
We now disclose all payments made to HCPs in
32 markets
across Europe (including Russia and Ukraine),
Australia, Japan and the US.
We have also changed the way GSK
sales teams are compensated. Since January
2015, our pharmaceutical medical sales
representatives are no longer compensated
for individual sales targets. Instead they are
rewarded on their technical skills, scientific
knowledge, quality of service, and broader
business performance.
Our new approach is being well received:
following medical product information
sessions with GSK experts in over 60
countries, 92% of more than 42,000
HCPs agreed the interaction helped them
make a more informed decision, benefiting
patient care. Around 79% rated their
experience as superior to similar interactions
with other pharmaceutical companies. We
have also seen an improvement in customer
trust. In a
survey of US HCPs in 2016, GSK ranked first
for customer trust for the fourth year
in a row, and for customer value for the
third time.
Investor informationFinancial statementsGovernance and remunerationStrategic report
48 GSK Annual Report 2016
Responsible business continued
Our people
We aim to create a safe
and inclusive environment
where everyone can reach
their full potential.
Our approach
We need a talented and motivated workforce
to deliver against our strategy. To achieve
this, we strive to attract the best people
and to create an environment that empowers
and inspires. Our people strategy focuses
on talent, leadership, performance and
engagement.
Talent and leadership
Our talent and leadership programmes
focus on developing our employees at all
levels with the skills they need to advance
their careers.
In 2016, we welcomed 465 graduates
and postgraduates onto our Future Leaders
and Esprit programmes, including 164
from emerging markets. GSK was voted
top graduate employer for Research and
Development in The Times Top 100
Graduate Employers 2016 (for the 19th
successive year) and ranked 13th overall.
We put particular emphasis on leadership
development. In 2016, we trained around
3,500 people to support their promotion to
first and second line leader roles; continued
to evolve our global leadership development
programmes; and have found that managers
who complete them show significant
improvement in effectiveness based on
feedback from their teams.
We also trained 245 leaders as coaches,
with our strategic use of coaching being
recognised as world-class by the
International Coach Federation’s Prism
Award.
Performance and engagement
Our global performance system centres
on a set of clear expectations that
emphasises not just the results people
achieve, but the way they achieve them
in line with our values.
Listening to our people is essential for
employee engagement. Responding even
more so. During the year, we responded to
the insights from our 2015 global employee
survey, which 78% of employees completed.
Members of our CET hosted five ‘listening
sessions’ with over 200 senior leaders.
They then conducted discussions on the
topics raised, including how we evaluate
performance.
Future Leaders programme
Building the next generation of leaders.
Our Future Leaders programme is delivering the
fresh ideas and talent needed to continue driving
our success across key markets.
It provides graduates with a breadth of potential
career pathways – from R&D and finance, to
marketing and procurement –
with the option to move between functions during
several job rotations.
Such job rotations make up 70% of the
programme, with feedback, mentoring and
coaching constituting a further 20%, and formal
training the remainder. This balance enables
graduates to develop the specific
skills to be effective in their individual role
and business, while getting a broad grasp
of the company and learning GSK’s
distinctive global leadership approach.
441
graduates joined our Future Leaders
programme in 2016
The programme is rated highly by participants.
A recent survey of alumni
from the Future Leaders programme found
that 89% of respondents felt the rotations
helped them to develop relevant skills and
experience for their career at GSK.
The benefits to the business are also clear.
The number and geographical spread of the
intake means we have home-grown leaders
rooted in all our markets, including emerging
countries. In 2016, we had 441 new recruits
representing 59 nationalities from 58
countries – up from 130 from
eight nations in 2012.
49 GSK Annual Report 2016
Women in management (%)
SVP/VP
Director
Manager
Total
2014
2015
2016
29
40
45
42
29
40
45
42
30
42
46
43
Employees by gender (number)
Board
Male
Female
9
4
Total
13
Management*
9,537
7,337
16,874
Total
56,104 43,196
99,300
* Management: senior managers as defined in the
Companies Act 2006 (Strategic Report and Directors’
Report) Regulations 2013 which includes persons
responsible for planning, directing or controlling the
activities of the company, or a strategically significant part
of the company, other than the Board, including directors
or undertakings included in the consolidated accounts.
73
GSK employees from 25 countries
spent up to six months with 31 non-profit
organisations to share their skills.
Employee volunteering
In 2016, 73 GSK employees from
25 countries contributed £3.4 million
worth of skilled services to 31 non-profit
partners in 27 countries, through our
PULSE Volunteer Partnership. They
worked on assignments aligned to
worldwide healthcare challenges and
the UN Sustainable Development Goals.
Health and wellbeing
As a healthcare company we think hard
about how we can best support not only
the health of our patients and consumers
but also our employees. Through our global
energy and resilience training programmes
and our innovative and ambitious Partnership
for Prevention programme (P4P), we have
created strong foundations.
Through P4P we now offer almost
100,000 employees and family members
in 75 countries unprecedented access
to preventive healthcare services, such
as immunisations and cancer screening,
at little or no extra cost. In 2016 we extended
these services to India, Russia and the
Commonwealth of Independent States,
keeping us on track to achieve our goal
of global coverage by 2018.
Protecting our people
We want to prevent incidents before
they occur; however, as a global business
operating in more than 150 markets,
injuries do occur.
In 2016, we had a reportable injury and
illness rate of 0.26 per 100,000 hours
worked which, according to Pharmaceutical
Safety Group (PSG) data, is comparable
to other leading companies in our sector.
Sadly, we had one fatality in 2016, a sales
representative died as a result of a road
traffic incident in India. To try to prevent
road incidents we have driver safety
programmes in India, Indonesia and Vietnam,
with 4,000 people taking part in 2016.
To monitor progress, we have also
introduced ‘pulse’ surveys to evaluate
the impact of engagement efforts at more
regular intervals than our annual survey.
Promoting inclusion and diversity
The diverse perspectives and experiences
of our global workforce strengthen our
business and help us meet the needs
of our patients and consumers.
The percentage of women in management
rose to 43% in 2016, and women
represented 15% of our Corporate Executive
Team (CET) and 31% of our Board (this
compares with an average of 26% among
FTSE100 boards, according to the Cranfield
Board report).
In 2016, more than 200 women began
our Accelerating Difference programme,
which helps female leaders progress to
senior roles. The programme was
recognised as best practice in Cranfield
University’s The Female FTSE Board
Report 2016.
We are a global organisation and we want
our leaders to represent the varied markets
we serve. Five nationalities are currently
represented on the CET and the Board.
As part of our efforts to promote an
environment where everyone feels included,
in 2016, we established a Lesbian, Gay,
Bisexual and Transgender (LGBT) Council.
The Council is chaired by our President of
Pharmaceuticals R&D, endorsed by the CET,
and aims to engage and educate employees
on LGBT issues. We achieved a 100%
score in the Human Rights Campaign
Foundation’s Corporate Equality Index
which rates workplaces on LGBT equality
in the US.
Making GSK a more accessible place to
work for people with disabilities is a priority
for us. We are working with the Global
Disability Council to develop an online
accessibility portal which allows employees
to find information on support or adjustments
to their working environments. We are
committed to removing barriers, increasing
understanding and ensuring that those with
disabilities have the same opportunities.
Investor informationFinancial statementsGovernance and remunerationStrategic report 50 GSK Annual Report 2016
Responsible business continued
Our planet
We aim to reduce our
environmental impacts
across our value chain
while extending access
to our products.
Our approach
We aim to reduce our environmental impacts
across our value chain while extending
access to our products, by minimising
our carbon footprint, water use and
operational waste.
Carbon
In 2016, our operational emissions (Scope
1 and 2) totalled 1.6 million tonnes of CO2e;
this is broadly the same as the previous year
and represents an 18% decrease against
our 2010 baseline. We reduced our
emissions through a continued focus on
energy efficiency, renewable energy and
investment in sustainable buildings.
In 2016, we revised our calculation method
for our Scope 3 emissions with the current
GHG protocol methodology which now
includes the impact of purchased services,
capital investments, fuel and energy related
activities, logistics upstream in the supply
chain, and all business travel and commuting.
Based on this latest methodology, we
increased our 2010 baseline figure to
18.7 million tonnes of CO2e from 15 million
tonnes of CO2e.
In 2015a, our overall carbon footprint
(Scope 1, 2 and 3) increased from
17.8 million tonnes CO2e in 2014 to
20.3 million tonnes of CO2e due to the
Novartis integration. This represents an
8.5% increase to our overall footprint
versus our 2010 baseline. Excluding
Novartis, our footprint has remained
flat from 2010-2015 despite the volume
of medicines, vaccines and consumer
healthcare products shipped from our
factories having increased by approximately
40% over the same period.
Our supply chain represents the largest
part of our value chain footprint (51%)
followed by the use of our products (30%).
Our own operations, logistics and end of
life disposal make up the remaining 19%.
As our largest value chain impact, we focus
on helping our suppliers make environmental
improvements. For example, 188 suppliers
(covering £1 billion of our spend on direct
raw materials) disclose information through
Ecodesk, an online platform to monitor and
promote environmental improvements in
our supply chain. In addition, more than
350 suppliers use our online sustainability
collaboration platform, the GSK Supplier
Exchange, to share best practice.
Certain products have a disproportionate
effect on our value chain emissions,
particularly our Ventolin propellant-based
inhalers, which emit greenhouse gases
during use. We continue to research
solutions to this issue, including changing
the way we manufacture, to reduce the
amount of propellant used, while maintaining
efficacy for patients.
Footnote
a
Our most recently available Scope 3 data is
from 2015. We will publish 2016 data online
in late 2017.
Carbon emissions plus intensity ratios (as per regulations)
Tonnes CO2ea
Scope 1 emissions
Scope 2 emissions
2013
1,040,928
788,149
2014
851,113
744,973
2015b
885,155
730,168
Scope 3 emissions
16,630,521
16,093,060
18,690,183
2016
893,418
716,448
Data available
May 2017
Intensity ratios
Scope 1 and 2 emissions/sales revenue
(tonnes CO2e/£m)
Scope 1 and 2/FTE
(tonnes CO2e/FTE)
2013
69.0
18.4
2014
69.4
16.3
2015
67.5
16.0
2016
57.7
16.2
a Carbon emissions are calculated according to the Greenhouse Gas Protocol: A Corporate Accounting and Reporting
Standard (revised edition).
b Data includes former Novartis sites’ emissions and headcount.
51 GSK Annual Report 2016
~70%
of our sites have successfully
achieved zero waste to landfill by re-
purposing materials that would otherwise go
to waste, or by using waste-to-energy
services.
Water
Our new Water Stewardship Policy
reinforces our commitment to reduce
GSK’s water impact across the value chain.
We continue to look for ways to use water
more efficiently and reduce consumption.
We used 14.5 million m3 of water across
our operations in 2016, a 23% reduction
on 2010 and 3% less than 2015.
The amount we use is just one aspect of
our overall water impact across our value
chain, which includes factors such as local
water scarcity and quality, and health, social,
regulatory and reputational risks.
We focus our efforts on a small number
of high-impact GSK sites in water-scarce
regions, and on the agricultural supply chain
for our Horlicks products, which makes up
the biggest portion of our total value chain
water footprint.
An innovative project in Rajasthan, an arid
region of India, is now replenishing the water
source for the village of Sawaipura with
around a quarter of the amount of water that
our three Horlicks factories located across
India use in their operations. Together with
Alternative Development Initiatives, an Indian
NGO, we are also supporting communities
around the Horlicks supply chain to improve
water management and agricultural yields.
Waste
We aim to reduce our operational waste
by 50% by 2020, compared with 2010.
In 2016, our operations produced 137
thousand tonnes of waste – 4% less than
the previous year and 23% below our 2010
baseline. The majority (73%) was recycled
or incinerated to recover energy, with only
5% sent to landfill. Around 70% of our sites
have now achieved zero waste to landfill
by repurposing materials that would
otherwise go to waste, or by using
waste-to-energy services.
GSK recognised by CDP as leaders in climate change and water
GSK included in prestigious CDP ‘A list’ for climate and water.
Our efforts to reduce carbon emissions
were acknowledged with inclusion in the
CDP ‘Climate A List’. CDP assessed companies
globally from across ten industry sectors, we were
one of only 193 companies (9% of applicants) and
seven healthcare companies to be A-listed.
This has included reducing emissions during
the manufacture of inhalers and launching our
Complete the Cycle scheme, the first of its
kind to work with pharmacists and patients to
recover and recycle inhalers. Such steps have
helped us to reduce our operational
emissions by 18% since 2010.
Our high rating reflects the significant steps
we have taken to help meet our goal of becoming
carbon neutral by 2050, while continuing to grow
our business and meet the healthcare needs of
more people.
We were also one of only 24 (3% of
applicants) companies, and the only
healthcare company to be included in
the Water A List. This success reflects
our achievements in reducing water usage
by 23% since 2010 and our commitment to
water stewardship.
Investor informationFinancial statementsGovernance and remunerationStrategic report
52 GSK Annual Report 2016
Group
financial
review
In this section
CFO’s statement
Approach to tax
Viability statement
Reporting framework
Non-controlling interests in ViiV Healthcare
Segmental review
Total results
Core results
Pro-forma growth rate reconciliations
Cash generation and conversion
Financial position and resources
Critical accounting policies
Treasury policies
53
55
56
57
58
59
64
68
70
71
72
76
77
53 GSK Annual Report 2016
Group financial review
In 2016, we continued to make progress
in delivering against our strategy as well
as the financial goals we have set out in
our financial architecture. All three of our
businesses contributed to the delivery of
more broadly-based revenue growth. Our
continued focus on the execution of our
integration and restructuring programmes
accelerated the delivery of the targeted
benefits, allowing us to improve margins
and operating leverage, while still making
substantial investments behind new
products, and supply chain improvements,
as well as progressing the R&D pipeline.
We have also maintained our focus on
financial efficiency and in the allocation of
our capital, allowing us to deliver core EPS
growtha ahead of sales growth and at the
top end of our financial guidance, as well
as a significant improvement in our cash
generation and a dividend of 80 pence
per share.
Financial architecture
Our financial architecture is designed to
support the consistent execution of our
strategy and to enhance the returns we
deliver to shareholders. It is focused on
delivering more sustainable sales growth
across the company, improving operating
leverage, or profitability, and enhancing our
financial efficiency. This is with the objective
of driving growth in EPS ahead of our sales
performance and then converting more
of those earnings into cash that can be
used to invest in the business or returned
to shareholders, wherever we see the
most attractive returns.
This clear set of priorities ensures
consistency in how capital is allocated
across and between the different businesses
within GSK, with relative returns from each
business benchmarked to relevant external
comparatives using a Cash Flow Return on
Investment (CFROI) based framework of
metrics. Specific capital investments are
also benchmarked in a similar way.
Reporting framework
In addition to total or reported results,
prepared under IFRS, the Annual Report
makes reference to a number of core
performance measures which are used
by management for planning and reporting
purposes. These are non-IFRS measures
adjusted for a number of items management
believe it is useful to separate so that the
key trends driving the performance of the
business can be more clearly identified by
shareholders. Core results may, however,
vary significantly from total results as some
of the adjustments may be material, as was
the case in 2016.
The items adjusted for between total and
core results are consistent each year but
those that were most significant in 2016
include re-measurement charges related
to the liabilities for future contingent
consideration, most significantly the
consideration due to Shionogi related
to its former interest in dolutegravir, and
the value of future put options as well as
major restructuring charges.
IFRS requires us to provide for contingent
consideration liabilities related to previous
business acquisitions on the basis of the
estimated present value of any potential
future payments. These estimates could have
a broad range of outcomes. The effect of the
IFRS accounting treatment is that GSK
recognises these fair value liabilities in the
balance sheet, with any charges for re-
measurement of them reflected immediately
in other operating income. GSK will make
cash payments in the future to discharge
these liabilities but as the liabilities were
established on acquisition or through
subsequent re-measurement charges to
the income statement, the payments will
not be charged to future earnings.
Sales growth
All three of our businesses delivered
growth in line with or above the medium-
term growth expectations we laid out for
them at our Capital Markets Day in 2015.
Pharmaceuticals sales were up 14% at
actual rates and 3% CER (4% pro-forma
CER) with growth from new products more
than offsetting the decline in Seretide/Advair
sales. In addition to strong growth in HIV,
the respiratory portfolio returned to growth in
2016, up 13% at actual rates and 2% CER.
Vaccines sales were up 26% at actual rates
and 14% CER (12% pro-forma CER), driven
by strong execution across the business,
particularly around the flu and meningitis
franchises, and Bexsero in particular.
Consumer Healthcare delivered a strong
performance in the first full year of the joint
venture with sales up 19% at actual rates
and 9% CER (5% pro-forma CER) as
growth from the seven power brands more
than offset some tough comparators and
headwinds in international markets.
Operating leverage
The total operating margin was 9.3%
of sales compared with 43.1% in 2015,
the movement primarily reflecting the
combination of higher remeasurement
charges for the Consumer Healthcare put
option and the ViiV Healthcare contingent
consideration liability in 2016, and the
benefit to 2015 of the profit on the disposal
of the Oncology business in that year.
We continued to make
progress in delivering
against our strategy as
well as the financial goals
we have set out in our
financial architecture.
Viability statement
Our viability statement sets out our
assessment of the prospects of the Group
over the next three years and is presented on
page 56.
Footnote
a We use a number of adjusted, non-IFRS, measures
to report the performance of our business, as
described on page 57, including core results, free
cash flow and CER and pro-forma growth rates.
Non-IFRS measures may be considered in addition
to, but not as a substitute for or superior to,
information presented in accordance with IFRS.
Investor informationFinancial statementsGovernance and remunerationStrategic report
54 GSK Annual Report 2016
Group financial review continued
GSK financial architecture: driving improved returns to shareholders
Sales growth
Operating leverage
EPS
Financial efficiency
Free cash flow
Returns to
shareholders
Cash flow growth
Our core operating margin improved,
driven by increased leverage in all three
businesses. The pro-forma core margina was
up 460 basis points in total, with 200 points
coming from currency, and 260 points from
operational improvements. This was driven
by a combination of leverage from stronger
growth in the top line, and £1.4 billion
(including £200 million of currency benefits)
of additional integration and restructuring
benefits, as well as continued tight cost
control that allowed us to deliver the margin
improvements while continuing to make
important investments in all three businesses.
Accelerating the delivery of the targeted
benefits of the integration and restructuring
programme has been a key objective and we
are pleased with the progress made this year
through a sustained focus across the Group
on executing this programme. By the end of
2016 we had delivered annual benefits of
£2.8 billion, (excluding £200 million of
currency benefits), almost the full target of
the programme a year earlier than originally
planned. We are confident in delivering the
remaining £200 million during 2017 to bring
the total benefits delivered to £3 billion of
annual savings on a constant currency basis.
Financial efficiency
We continue to focus on improving our
financial efficiency and overall funding
costs while protecting our credit profile
and, in particular, our short-term target credit
ratings. Net finance costs were up slightly,
mainly due to currency.
Earnings per share
Total EPS was 18.8p (2015 – 174.3p). The
decline primarily reflected the comparison
with the £9.2 billion profit from the sale of
our marketed Oncology assets to Novartis in
2015, but also the impact in 2016 of charges
arising from increases in the valuations of the
liabilities for contingent consideration and
the put options associated with increases
in the sterling value of the Group’s HIV and
Consumer Healthcare businesses.
The impact on the decline in total EPS was
partly offset by the benefit of the improved
operating performance and reduced
restructuring charges in the year.
Core EPS of 102.4pa was up 35% at actual
exchange rates and up 12% at constant
exchange rates.
Contingent consideration
At the end of 2016, GSK had liabilities for
contingent consideration payments of £5.9
billion, of which £5.3 billion related to the
estimated present value of future payments
to Shionogi by ViiV Healthcare. The payments
to Shionogi are calculated each quarter
based on a high-teens percentage of the
revenues of the relevant products, principally
dolutegravir, with the discounted fair value of
the total future payments reflecting the current
expectations of total future sales of those
products. Further details are provided in
Note 39, ‘Contingent consideration liabilities’.
Free cash flow
Net cash inflow from operating activities
was £6.5 billion and free cash flow for
the Group was £3.1 billiona, significantly
improved on the small outflow we saw
in 2015. This was driven by our improved
operating performance, including continued
tight control of capital expenditure and
restructuring expenditure, as well as the
benefit of currency tail winds. We continue
to make progress towards our objective of
rebuilding the cash generating capacity
of the Group post the completion of the
restructuring and integration programme.
Net debt
Net debt at the end of 2016 was £13.8
billion, £3.1 billion higher than the net debt at
the end of 2015. Currency was a significant
factor with adverse translation effects driving
£2.2 billion of the increase. The remaining
increase of £0.9 billion reflected the impact
of dividends paid during the year of £4.9
billion, including the special dividend of £1.0
billion declared in 2015, being only partly
offset by disposal proceeds of approximately
£1.0 billion and free cash flow of £3.1 billion.
2017 guidance
We expect continued progress in 2017, with
all three businesses expected to continue to
benefit from recent new product launches and
from the investments we made during 2016.
The expectation for 2017 core EPS growth is
dependent on a number of factors including,
in particular, uncertainties relating to the
timing and extent of potential generic
competition to Advair in the US.
In the event that no generic version of Advair
is introduced to the US market in 2017, the
Group expects 2017 core EPS growth of
5-7% at CERa. This is based on an expected
decline in 2017 in US Advair sales of
15-20%.
In the event of a mid-year introduction of a
substitutable generic competitor to Advair
in the US, the Group expects full-year 2017
US Advair sales of around £1 billion at CER
(US$1.36/£1), with core EPS flat to a slight
decline in percentage terms at CERa.
We are not able to give guidance for total
results as we cannot reliably forecast certain
material elements of our total results such
as the future fair value movements on
contingent consideration and put options.
Returns to shareholders
In 2016, we maintained our ordinary dividend
at 80p per share, the same level as we paid in
2015. This is in line with the commitment we
made to shareholders at the time we closed
the Novartis transaction in early 2015 to
maintain the dividend as we completed the
integration and reshaping of the Group,
despite the short-term pressures in free cash
flow that the restructuring costs would create.
A fuller review of the financial results is set
out on pages 55 to 78.
Simon Dingemans
Chief Financial Officer
55 GSK Annual Report 2016
Approach to tax
We understand our
responsibility to pay an
appropriate amount of tax
while being financially
efficient and delivering
a sustainable tax rate.
Footnote
a We use a number of adjusted, non-IFRS, measures
to report the performance of our business, as
described on page 57, including core results, free
cash flow and CER and pro-forma growth rates.
Non-IFRS measures may be considered in addition
to, but not as a substitute for or superior to,
information presented in accordance with IFRS.
We seek to maintain open, positive
relationships with governments and tax
authorities worldwide and we welcome
constructive debate on taxation policy.
There continued to be a significant
focus on tax reform during 2016,
including the OECD’s Base Erosion
and Profit Shifting (‘BEPS’) project and
European Commission initiatives such
as the increased use of fiscal state aid
investigations. The OECD BEPS reports
clarify the important principle that tax
should be paid on profits throughout the
supply chain, where the profit making
activity takes place.
GSK supports this approach, in particular
the implementation of the OECD’s
recommendations on ‘Country by Country
Reporting’, including the exchange of this
data between tax authorities, as being key
to its success. This data, validated against
existing information held on taxpayers, will
support their ability to ensure multinational
groups pay the right amount of tax.
While the scope and timeline for US
tax reform remain uncertain at present,
GSK would be supportive of any steps to
simplify the US tax code and to provide a
clear roadmap to make the US tax system
more efficient and competitive.
The tax implications of Brexit are
dependent on the outcome of negotiations
between the UK and EU, and are therefore
currently unknown. However, we continue
to work closely with the ABPI and BIA to
analyse implications for the industry in
order to highlight key focus areas for
the government as part of its Brexit
negotiations. The direct tax implications
are expected to be limited for GSK while
the indirect tax implications may be more
significant, including potential customs
duty costs and additional transaction
or administrative costs associated with
managing import and export obligations
on the movement of goods between the
UK and EU.
Our approach to tax is set out in detail
within the Public Policy positions section
of our website. Further details about our
corporate tax charges for the year are set
out on page 178.
We understand our responsibility to pay
an appropriate amount of tax, and fully
support efforts to ensure companies are
transparent about how their tax affairs are
managed. Tax is an important element of
the economic contribution we bring to the
countries in which we operate. We do not
engage in artificial tax arrangements –
those without business or commercial
substance. We do not seek to avoid tax by
the use of ‘tax havens’ or transactions we
would not fully disclose to a tax authority.
At the same time, we have a responsibility
to our shareholders to be financially
efficient and deliver a sustainable tax
rate. As part of this approach, we look
to align our investment strategies to
those countries where we already have
substantial economic activity, and where
government policies promote tax regimes
which are attractive to business
investment, transparent in their intent
and available to all relevant tax payers
such as the UK Patent Box.
In 2016, the Group corporate tax charge
was £877 million (2015 – £2,154 million)
on profits of £1,939 million (2015 –
£10,526 million) representing an effective
tax rate of 45.2% (2015 – 20.5%). The
increase in the total tax rate primarily
reflected higher non-deductible
remeasurement charges related to the put
option liabilities and lower credits from the
re-assessment of prior years’ tax charges.
We made cash tax payments of £1,609
million in the year (2015 – £2,062 million).
In addition to the taxes we pay on our
profits, we pay duties, levies, transactional
and employment taxes.
The ongoing alignment of our Group
structure to reflect our mix of operations
and geographies has helped us maintain
an efficient effective tax rate. Our core tax
rate for 2016 was 21.2%a (2015 – 19.5%).
The core tax rate for 2017 is expected to
be in the range of 21-22%a. Given the
Group’s momentum, changing earnings
mix and the challenging and uncertain
tax environment, (due to the factors
described below) some moderate upward
pressure on the rate is expected over the
next few years.
Tax risk is managed by a set of policies
and procedures to seek to ensure
consistency and compliance with tax
legislation. Our Audit & Risk Committee
and the Board are responsible for
approving our tax policies and risk
management.
Investor informationFinancial statementsGovernance and remunerationStrategic report 56 GSK Annual Report 2016
Group financial review continued
Viability statement
In accordance with provision C.2.2 of the 2014 revision of the
Code, GSK has assessed the prospects of the Company over a
longer period than the 12 months required by the ‘Going Concern’
provision. The Directors confirm that they have a reasonable
expectation that GSK will continue to operate and meets its liabilities,
as they fall due, over the next three years. The Directors’ assessment
has been made with reference to GSK’s current position and
prospects, our strategy, the Board’s risk appetite and GSK’s
principal risks and how these are managed, as detailed on pages
18 and 19 in the Strategic report.
The Board reviews our internal controls and risk management
policies and approves our governance structure and code of
conduct. It also appraises and approves major financing, investment
and licensing decisions, and evaluates and monitors the performance
and prospects of GSK as a whole. The focus is largely on improving
our long-term financial performance through simplifying the operating
model, growing a diversified global business, and delivering more
products of value.
The Board reviews GSK’s strategy and makes significant capital
investment decisions over a long term time horizon, based on a
multi-year assessment of return on capital, the performance of
business units, and the market opportunity in the pharmaceutical,
vaccines and consumer sectors. This approach is aligned to GSK’s
model of achieving balanced growth by investing in high quality,
innovative products for patients, consumers and healthcare
providers. However, since many internal and external parameters
become increasingly unpredictable over longer time horizons, GSK
focuses its detailed, bottom-up Plan on a three year cycle. The Plan
is reviewed at least annually by the Directors, who approve business
forecasts showing expected financial impact. The Directors believe
that a three year assessment period for the Viability statement is
most appropriate as it aligns with the Company’s well established
business planning processes that balance the long term nature of
investments in the pharmaceutical, vaccines and consumer sectors
with an assessment of the period over which analysis of near term
business performance is realistically visible.
The Plan has been stress tested in a series of robust operational
and principal risk downside scenarios as part of the Board’s review
on risk. The downside scenarios consider GSK’s cash flows,
sustainability of dividends, funding strategy, insurance provision and
recovery as well as other key financial ratios over the period. These
metrics have been subject to sensitivity analyses, which involve
flexing a number of the main assumptions underlying the forecasts
both individually and in combination, along with mitigating actions
that could realistically be taken to avoid or reduce the impact or
occurrence of the underlying risk.
The following hypothetical downside scenarios have been evaluated:
Scenario 1: Business performance risks. These include key
performance risks, including lower sales from new products; the
possible impact of a generic alternative to Seretide/Advair in the US;
greater adverse impact from generic competition to other GSK
products; as well as possible supply and manufacturing challenges.
Scenario 2: External and macroeconomic risks. This scenario reflects
incremental risks to the business driven by outside factors, such as
more intense competition, increased pricing pressure in both the US
and Europe as well as the potential impact of material negative
changes in the macro-economic and healthcare environment.
Scenario 3: Principal risks. This scenario includes a severe
assessment of the potential loss impact from the Principal Risks
set out on pages 253 to 262 related to patient safety, product
quality, supply chain continuity as well as anti-bribery and corruption,
all of which could fundamentally threaten our operations. These risks
are managed through mitigating activities described on pages 253
to 262.
Scenario 4: Put option exercise. This scenario evaluates the
additional funding requirements assuming the earliest potential
exercise of the outstanding put options held by our partners in the
HIV and consumer businesses.
The three year review also makes certain assumptions about the
normal level of capital recycling likely to occur and considers whether
additional financing facilities will be required and the respective level
of funding flexibility and headroom.
The results of this stress testing show that certain combinations of
these hypothetical scenarios could increase funding demands on
GSK and require mitigating changes to the Group’s funding strategy.
However, in light of the liquidity available to the Group and based on
this analysis, the Directors have a reasonable expectation that, even
under these most severe stress tests, the Company will be able to
continue in operation and meet its liabilities as they fall due over the
three year period of assessment.
57 GSK Annual Report 2016
Reporting framework
Presentation of Group results
Our Group financial review discusses the operating and financial
performance of the Group, cash flows and our financial position and
resources. We compare the results for each year primarily with the
results of the preceding year.
Total results
Total reported results represent the Group’s overall performance.
However, these results can contain material unusual or non-
operational items that may obscure the key trends and factors
determining the Group’s operational performance. As a result,
we also report core results, which is a non-IFRS measure.
Core results
Core results exclude the following items from total results:
amortisation and impairment of intangible assets (excluding
computer software) and goodwill; major restructuring costs,
including those costs following material acquisitions; legal charges
(net of insurance recoveries) and expenses on the settlement
of litigation and government investigations; transaction-related
accounting adjustments for significant acquisitions, and other
items, including disposals of associates, products and businesses,
and other operating income other than royalty income, together
with the tax effects of all of these items.
These items are excluded from core results either because their
impact can be significant or because their exclusion improves
comparabilities and consistency of reporting with the majority
of our peer companies. This definition of core results aligns the
Group’s results better with the majority of our peer companies
and how they report earnings.
Core results reporting is utilised as one of the bases for internal
performance reporting alongside total results, cash flow generation
and a number of other metrics. Core results are presented and
discussed in this Group financial review as we believe that core
results are more representative of the performance of the Group’s
operations and allow the key trends and factors driving that
performance to be more easily and clearly identified by shareholders.
For the same reasons, the results of our four segments:
Pharmaceuticals, Pharmaceuticals R&D, Vaccines and Consumer
Healthcare are reported and measured on the same basis.
Reconciliations between total and core results, including detailed
breakdowns of the key non-core items, are set out on page 66, and
are provided to shareholders to ensure full visibility and transparency
as they assess the Group’s performance.
We also use a number of other adjusted, non-IFRS, measures
to report the performance of our business. These measures are
used by management for planning and reporting purposes and in
discussions with and presentations to investment analysts and rating
agencies and may not be directly comparable with similarly described
measures used by other companies. Non-IFRS measures may be
considered in addition to, but not as a substitute for or superior to,
information presented in accordance with IFRS.
Pro-forma growth rates
The Novartis transaction completed on 2 March 2015 and so GSK’s
reported results include the results of the former Novartis Vaccines
and Consumer Healthcare businesses and exclude the results of the
former GSK Oncology business, both from 2 March 2015. For the
Vaccines and Consumer Healthcare segments, pro-forma growth
rates are calculated comparing reported turnover and core operating
profits for the year ended December 2016 with the turnover and
operating profit for the year ended December 2015 adjusted to
include the two months of sales of the former Novartis Vaccines
and Consumer Healthcare products, respectively.
For the Pharmaceuticals segment, the turnover and operating profit
for the year ended December 2015 is adjusted to exclude the two
months of sales of the former GSK Oncology business for January
and February 2015.
Reconciliations between the reported growth rates and pro-forma
growth rates, which are non-IFRS measures, are set out on page 70.
Contingent consideration
GSK has recognised a significant liability for contingent consideration
(£5,896 million at 31 December 2016 on a fair value discounted basis)
of which £5,304 million represented the estimated present value
of future amounts payable to Shionogi relating to ViiV Healthcare,
discounted at 8.5%. The payments to Shionogi are calculated
based on the sales performance over the life of the relevant products,
principally dolutegravir, as described on page 58. The effect of the
IFRS accounting treatment is that GSK recognises these fair value
liabilities in the balance sheet, with remeasurement charges reflected
immediately in other operating income. These charges are adjusted
from total results to present core results. GSK will make cash
payments in the future to discharge this liability which will not be
recorded in the profit and loss account and future earnings.
Changes to segment reporting
The completion of the Novartis transaction on 2 March 2015
changed the balance of the Group and GSK has changed its
segment reporting to reflect this. With effect from 1 January 2016,
GSK has reported results under four segments: Pharmaceuticals,
which includes HIV, Pharmaceuticals R&D, Vaccines and Consumer
Healthcare. In addition, a number of minor product reclassifications
between the segments have been made. Comparative information
has been restated accordingly.
Free cash flow
Free cash flow, which is a non-IFRS measure, is the net cash
inflow from operating activities less capital expenditure, interest and
dividends paid to non-controlling interests plus proceeds from the
sale of property, plant and equipment and dividends received from
joint ventures, associated undertakings and equity investments. It is
used by management for planning and reporting purposes and in
discussions with and presentations to investment analysts and rating
agencies. Free cash flow growth is calculated on a reported basis.
A reconciliation of net cash inflow from operations to free cash flow
is presented on page 71.
Adjusted free cash flow
Adjusted free cash flow, which is a non-IFRS measure, excludes
payments made to settle legal disputes. Such payments could
fluctuate significantly between reporting periods and removing
them allows the trends in free cash flow to be more easily identified
by shareholders. A reconciliation of net cash inflow from operations
to adjusted free cash flow is presented on page 71.
Working capital conversion cycle
The working capital conversion cycle is calculated as the number
of days sales outstanding plus days inventory outstanding, less days
purchases outstanding.
CER growth
In order to illustrate underlying performance, it is our practice to
discuss the results in terms of constant exchange rate (CER) growth.
This represents growth calculated as if the exchange rates used to
determine the results of overseas companies in Sterling had remained
unchanged from those used in the previous year. CER% represents
growth at constant exchange rates. £% or AER% represents growth
at actual exchange rates.
All growth rates included in this Report are at CER unless otherwise
stated.
Investor informationFinancial statementsGovernance and remunerationStrategic report 58 GSK Annual Report 2016
Group financial review continued
Exit rights
Pfizer may request an IPO of ViiV Healthcare at any time and if
either GSK does not consent to such IPO or an offering is not
completed within nine months, Pfizer could require GSK to acquire
its shareholding. Under the original agreements, GSK had the
unconditional right, so long as it made no subsequent distribution
to its shareholders, to withhold its consent to the exercise of the
Pfizer put options and, as a result, in accordance with IFRS, GSK
did not recognise a liability for the put option on its balance sheet.
In Q1 2016, GSK notified Pfizer that it had irrevocably given up
this right and accordingly recognised the liability for the put option
on the Group’s balance sheet at an initial value of £1,070 million.
Consistent with this revised treatment, at the end of Q1 2016
GSK also recognised liabilities for the future preferential dividends
anticipated to become payable to Pfizer and Shionogi on the
Group’s balance sheet.
The closing balances of the liabilities related to Pfizer’s shareholding
are as follows:
Pfizer put option
Pfizer preferential dividend
2016
£m
1,319
23
2015
£m
–
–
Under the original agreements, Shionogi could also have requested
GSK to acquire its shareholding in ViiV Healthcare in six month
windows commencing in 2017, 2020 and 2022. GSK had the
unconditional right, so long as it made no subsequent distribution
to its shareholders, to withhold its consent to the exercise of the
Shionogi put option and, as a result, GSK did not recognise a liability
for the put option on its balance sheet. In Q1 2016, GSK notified
Shionogi that it had irrevocably given up this right and accordingly
recognised the liability for the put option on the Group’s balance
sheet at an initial value of £926 million. In Q4 2016, Shionogi
irrevocably agreed to waive its put option and as a result GSK
de-recognised the liability for this put option on the Group’s balance
sheet directly to equity. The value of the liability was £1,244 million
when it was de-recognised.
GSK also has a call option over Shionogi’s shareholding in ViiV
Healthcare, which under the original agreements was exercisable in
six month windows commencing in 2027, 2030 and 2032. GSK has
now irrevocably agreed to waive the first two exercise windows, but
the last six month window in 2032 remains. As this call option is at
fair value, it has no value for accounting purposes.
Non-controlling interests in ViiV Healthcare
Trading profit allocations
Because ViiV Healthcare is a subsidiary of the Group, 100% of
its operating results (turnover, operating profit, profit after tax) are
included within the Group income statement and then a portion
of the earnings is allocated to the non-controlling interests owned
by the other shareholders, in line with their respective equity
shareholdings (Pfizer 11.7% and Shionogi 10%). Each of the
shareholders, including GSK, is also entitled to preferential dividends
determined by the performance of certain products that each
shareholder contributed. As the relative performance of these
products changes over time, the proportion of the overall earnings
of ViiV Healthcare allocated to each shareholder will change.
In particular, the increasing sales of Tivicay and Triumeq have a
favourable impact on the proportion of the preferential dividends
that is allocated to GSK. GSK was entitled to approximately 80%
of the core earnings of ViiV Healthcare for 2016. This does not
take account of the cash payments made to Shionogi by ViiV
Healthcare which are not recorded in earnings. Remeasurements
of the liabilities for the preferential dividends allocated to Pfizer
and Shionogi are included within other operating income.
Acquisition-related arrangements
As part of the agreement reached to acquire Shionogi’s interest
in the former Shionogi-ViiV Healthcare joint venture in 2012, ViiV
Healthcare agreed to pay additional consideration to Shionogi
contingent on the performance of the products being developed
by that joint venture, principally dolutegravir. The liability for this
contingent consideration was estimated and recognised in the
Group’s balance sheet at the date of acquisition. Subsequent
remeasurements are reflected within other operating income.
Cash payments are made to Shionogi by ViiV Healthcare each
quarter which reduce the balance sheet liability for the contingent
consideration and as a result are not recorded in the income
statement. In 2016, the total cash payments made to Shionogi in
respect of the contingent consideration amounted to £417 million.
The payments are calculated based on the sales performance of
the relevant products in the previous quarter and are reflected in
the cash flow statement partly in operating cash flows and partly
in purchases of businesses, within investing activities. The tax relief
on these payments is reflected in the Group’s non-core and total tax
charge. The part of each payment relating to the original estimate of
the fair value of the contingent consideration on the acquisition of
the Shionogi-ViiV Healthcare joint venture in 2012 of £659 million
is reported within investing activities in the cash flow statement and
the part of each payment relating to the increase in the liability since
the acquisition is reported within operating cash flows.
Movements in contingent consideration payable to Shionogi were
as follows:
Contingent consideration at beginning of the year
Additions
Remeasurement through income statement
Cash payments: operating cash flows
Cash payments: purchases of businesses
Other movements
2016
£m
3,409
154
2,162
(351)
(66)
(4)
2015
£m
1,684
–
1,874
(121)
(38)
10
Contingent consideration at end of the year
5,304
3,409
The additions represented the recognition in 2016 of the preferential
dividends payable to Shionogi.
59 GSK Annual Report 2016
Group turnover
Turnover (£bn)
£27.9bn
2014
2015
2016
23.0
23.9
27.9
AER growth
CER growth
17%
6%
Growth
£%
Growth
CER%
US
Europe
International
Group turnover
Pharmaceuticals
Vaccines
Consumer Healthcare
Segment turnover
Corporate and other
unallocated turnover
2015
(restated)
£m
2016
£m
16,104 14,157
4,592
7,193
3,656
6,038
27,889 23,851
–
72
Group turnover
27,889 23,923
17
14
26
19
17
3
14
9
6
6
Group turnover for the year increased 17% at actual rates and 6%
CER to £27,889 million, with Pharmaceuticals up 3%, Vaccines
up 14% and Consumer Healthcare up 9%, the growth in all three
businesses still reflecting the impact of the Novartis transaction
which completed on 2 March 2015. On a pro-forma basis, Group
turnover was up 5%, with Pharmaceuticals up 4%, Vaccines up 12%
and Consumer Healthcare up 5%. Sales of New Pharmaceutical
and Vaccine products were £4,453 million, a Sterling increase of
£2,465 million.
Group turnover by geographic region
2016
£m
2015
£m
Growth
£%
Growth
CER%
10,197
7,498
10,194
8,222
6,450
9,251
27,889 23,923
24
16
10
17
10
6
1
6
Group turnover outside of the US and Europe represented 37% of
total Group turnover in 2016 (2015 – 39%).
Sales from new Pharmaceutical and Vaccine products
Respiratory
Relvar/Breo Ellipta
Anoro Ellipta
Arnuity Ellipta
Incruse Ellipta
Nucala
CVMU
2016
£m
2015
£m
Growth
£ %
Growth
CER%
620
201
15
114
102
257
79
3
14
1
>100
>100
>100
>100
>100
>100
>100
>100
>100
>100
Eperzan/Tanzeum
121
41
>100
>100
HIV
Tivicay
Triumeq
Pharmaceuticals
Bexsero
Menveo
Vaccines
953
1,735
3,861
390
202
592
588
730
1,713
115
160
275
4,453
1,988
62
>100
>100
>100
26
>100
>100
45
>100
>100
>100
16
96
>100
In 2015, we identified a series of New Pharmaceutical and Vaccine
products that were expected to deliver at least £6 billion of revenues
per annum on a CER basis by 2020. Those products, plus current
clinical pipeline asset, Shingrix, are as set out above and, as a group
are defined as New Pharmaceutical and Vaccine products. Sales of
the New Pharmaceutical Vaccine products are now expected to
reach £6 billion of revenues per annum on a CER basis up to two
years earlier (2018).
Sales of New Pharmaceutical and Vaccine products were £4,453
million and represented approximately 22% of Pharmaceuticals and
Vaccines turnover.
Investor informationFinancial statementsGovernance and remunerationStrategic report
60 GSK Annual Report 2016
Group financial review continued
Pharmaceuticals
Turnover (£bn)
58%
of Group turnover
2014
2015
2016
15.4
14.2
16.1
AER growth
CER growth
14%
3%
Pharmaceuticals turnover
Respiratory
Cardiovascular, metabolic
and urology
Immuno-inflammation
Other pharmaceuticals
Established products
HIV
2015
(restated)
£m
2016
£m
6,510
5,741
860
340
2,297
2,541
3,556
858
263
2,445
2,528
2,322
16,104 14,157
Growth
£%
Growth
CER%
13
–
29
(6)
1
53
14
2
(11)
15
(14)
(8)
37
3
Pharmaceuticals
Pharmaceuticals turnover was £16,104 million, up 14% at actual
rates and 3% CER, but adjusting for the disposal of the Oncology
business to Novartis, up 4% pro-forma. HIV sales grew 37%. The
Respiratory portfolio returned to growth with sales up 2%, continuing
the transition globally to newer products. Respiratory sales grew 7%
in the US and 3% in International, but declined 10% in Europe. Sales
of New Pharmaceutical products were £3,861 million, a Sterling
increase of £2,148 million, which more than offset the Sterling
decline in Seretide/Advair sales of £196 million. Sales of Established
products declined 8%, with declines in all regions, but particularly
International, reflecting the loss of exclusivity for Valtrex in Canada,
the impact of market reforms and the continued reshaping of the
business in China and the impact of biennial price revisions in Japan.
The overall impact of pricing to net sales of Pharmaceuticals was
around -1%.
US Pharmaceuticals turnover of £4,705 million declined 1% in
2016 on a reported basis and grew 1% on a pro-forma basis. The
pro-forma performance reflected a 7% growth in the Respiratory
portfolio, partly offset by the impact of generic competition to
Avodart, down 63% to £70 million, and Lovaza, down 59% to
£43 million. Relenza sales were also down 91% to £7 million
following a reallocation of government funding. Sales of new
Respiratory products totalled £654 million and the growth of
these products exceeded the decline in Advair. Advair sales fell
13% to £1,829 million, representing a 7% volume decline and
a 6% negative impact of price. Ventolin sales were up 23% to
£421 million, benefiting from competitor supply constraints early
in the year, while Flovent sales declined 11% to £378 million,
reflecting pricing pressures in the ICS market. Benlysta sales
increased 18% to £277 million with ongoing demand growth.
In Europe, Pharmaceuticals turnover declined 8% to £2,867 million
on a reported basis and 5% on a pro-forma basis. Respiratory sales
declined 10% to £1,383 million reflecting the ongoing transition to
the new Respiratory portfolio and generic competition to Seretide
which declined 24% (16% volume decline and an 8% negative
impact of price) to £835 million. This was partly offset by growth in
the new Respiratory products, which recorded sales of £225 million.
Established products sales were down 4% to £513 million.
International Pharmaceuticals sales of £4,976 million were down
5% on a reported basis and 4% on a pro-forma basis. Sales in
Emerging Markets declined 4% reported and 3% on a pro-forma
basis, impacted by the decline in the China business (down 12%
primarily as a result of the ongoing reshaping programme and
broader Healthcare reforms including price reductions) but also
by recent divestments in the International region, and the limitation
of trading in Venezuela. In Japan, Pharmaceutical sales were
down 5% on a reported basis and 5% pro-forma to £1,425 million,
impacted by biennial price revisions on older products as well as
supply interruptions to Avodart early in the year. Respiratory sales
in Japan grew 3% with strong growth of the new Respiratory
products, up 57% to £118 million, more than offsetting the
decline in Adoair sales.
Established products
Established products turnover fell 8% to £2,541 million, with Valtrex
sales down 37% to £118 million driven by a decline in Canada, down
91% to £5 million, following the loss of exclusivity. Zeffix sales were
down 24% to £111 million and Lovaza sales in the US fell 59% to
£43 million.
HIV
HIV sales increased 37% to £3,556 million, with the US up 46%,
Europe up 29% and International up 21%. The growth in all three
regions was driven by Triumeq and Tivicay.
Triumeq and Tivicay sales were £1,735 million and £953 million,
respectively. Epzicom/Kivexa sales declined 27% to £568 million,
and Selzentry sales declined 9% to £125 million. There were also
continued declines in the mature portfolio, mainly driven by generic
competition to both Combivir, down 38% to £23 million, and Lexiva,
down 26% to £51 million.
61 GSK Annual Report 2016
Respiratory
Respiratory sales in 2016 increased 2% to £6,510 million, reflecting
the continuing transition of the Respiratory portfolio to newer
products. Growth in the new Respiratory products, which recorded
combined sales of £1,052 million, including Relvar/Breo Ellipta sales
of £620 million, more than offset the decline in Seretide/Advair.
Flixotide/Flovent sales decreased 8% to £637 million and Ventolin
sales grew 15% to £785 million.
In the US, Respiratory sales increased 7% to £3,306 million
(14% volume growth and a 7% negative impact of price). The growth
of new Respiratory products more than offset the 13% decline in
Advair (7% volume decline and a 6% negative impact of price).
The new Ellipta products recorded combined sales of £583 million,
including Breo Ellipta sales of £344 million, with Nucala, the
treatment for severe asthma, reporting sales of £71 million.
Established Respiratory assets included Ventolin, with sales up
23% to £421 million, and Flovent, which declined 11% to £378
million. Ventolin sales benefited from competitor supply constraints
early in the year, while Flovent continued to be impacted by ongoing
pricing pressures in the ICS market.
European Respiratory sales were down 10% to £1,383 million, with
Seretide sales down 24% to £835 million (16% volume decline and
an 8% negative impact of price), reflecting continued competition
from generics and the transition of the Respiratory portfolio to newer
products. The new Respiratory products recorded combined sales
of £225 million in 2016, including Relvar Ellipta sales of £140 million.
Respiratory sales in the International region increased 3% to
£1,821 million with Emerging Markets up 7% and Japan up 3%. In
Emerging Markets, sales of Seretide were down 3% at £476 million,
while Ventolin grew 13% to £219 million. In Japan, the growth in the
new Respiratory products offset the Adoair decline of 12%.
Cardiovascular, metabolic and urology
Sales in the category were down 11% to £860 million. The Avodart
franchise was down 14% to £635 million, primarily due to a 63%
decline in the US following the launch of generic competition in Q4
2015. Sales of Eperzan/Tanzeum were £121 million, primarily in the
US. Prolia was divested at the end of 2015 and therefore no sales
were recorded in 2016, compared with £43 million in 2015.
Immuno-inflammation
Immuno-inflammation sales grew 15% to £340 million. Sales of
Benlysta were £306 million, up 19%, with sales in the US of
£277 million, up 18%.
Other pharmaceuticals
Sales in other therapy areas decreased 14% to £2,297 million.
Dermatology sales declined 12% to £393 million, adversely
affected by supply constraints, while Augmentin sales were flat
at £563 million. Sales of products for Rare diseases were flat
at £423 million, and included sales of Volibris, which were up
1% to £172 million.
Investor informationFinancial statementsGovernance and remunerationStrategic report 62 GSK Annual Report 2016
Group financial review continued
Vaccines
Turnover (£bn)
16%
of Group turnover
2014
2015
2016
3.2
3.7
4.6
AER growth
CER growth
26%
14%
Rotarix
Synflorix
Fluarix, FluLaval
Bexsero
Menveo
Boostrix
Infanrix, Pediarix
Hepatitis
Priorix, Priorix Tetra, Varilrix
Cervarix
Other
2016
£m
469
504
414
390
202
470
769
602
300
81
391
2015
(restated)
£m
Growth
£%
Growth
CER%
417
381
268
115
160
358
733
540
260
88
336
12
32
54
1
19
38
>100
>100
26
31
5
11
15
(8)
17
26
16
18
(5)
1
5
(14)
6
14
4,592
3,656
Vaccines sales grew 26% at actual rates and 14% CER, but 12%
pro-forma to £4,592 million. Growth benefited from the strong
performance of Bexsero across all regions, higher demand for
Fluarix/FluLaval in the US and International and a tender award for
Menveo in International. Further growth was driven by Synflorix due
to market expansion in International and a tender award in Europe.
Boostrix sales benefited from higher demand in Europe and
International. Growth was partly offset by Infanrix/Pediarix due to
supply constraints in International, as well as unfavourable CDC
stockpile movements for a number of products across the portfolio.
In the US, sales grew by 13% and 12% on a pro-forma basis to
£1,599 million. Growth was driven by market and share growth for
Bexsero, Menveo and Boostrix, improved supply and higher demand
for Fluarix/FluLaval and competitor supply issues that benefited
Infanrix/Pediarix. This growth was partly offset by adverse stockpile
movements on Menveo and an unfavourable comparison with the
benefit to 2015 from CDC stockpile movements on Infanrix/Pediarix,
Boostrix and Rotarix.
In Europe, sales grew 18% and 16% on a pro-forma basis to
£1,423 million. Growth was driven primarily by Bexsero sales in
private market channels in several countries including Spain and
Italy, and in the UK following its inclusion in the NHS immunisation
programme. Boostrix sales benefited from higher demand and
competitor supply issues. Sales increased in Germany driven
by improved supply of Hepatitis vaccines and higher demand for
Encepur and Rabipur. Sales growth was also helped by a tender
award for Synflorix in Poland but Infanrix/Pediarix sales were
adversely impacted, mainly in Germany, France and Italy, by a
competitor’s return to the market during the year. Growth was
also partly offset by the unfavourable comparison with 2015 when
Menveo sales in the UK benefited from a catch-up tender win.
In International, sales grew 10% and 8% on a pro-forma basis to
£1,570 million. Growth was driven primarily by Synflorix, due to
market expansion in Nigeria, higher demand in Africa and private
market demand in Asia. The growth in Menveo sales was driven by
a tender award in Argentina and Rotarix sales benefited from higher
demand in Brazil and Japan. Further growth in the region was driven
by Brazil due to strong demand for Bexsero, Menjugate, and Boostrix.
Fluarix/FluLaval sales grew due to higher uptake in Australia. Growth
in the region was partly offset by lower sales of Infanrix/Pediarix, due
to supply constraints, and lower Hepatitis vaccines sales, due to
wholesaler destocking in China following the introduction of new
private market distribution regulations.
63 GSK Annual Report 2016
Consumer Healthcare
Turnover (£bn)
26%
of Group turnover
2014
2015
2016
4.3
6.0
7.2
AER growth
CER growth
19%
9%
2016
£m
3,726
2,223
674
570
2015
(restated)
£m
2,970
1,875
684
509
7,193
6,038
2015
(restated)
£m
2016
£m
1,761
2,191
3,241
7,193
1,430
1,798
2,810
6,038
Growth
£%
Growth
CER%
25
19
(1)
12
19
15
8
(8)
4
9
Growth
£%
Growth
CER%
23
22
15
19
9
12
8
9
Wellness
Oral health
Nutrition
Skin health
US
Europe
International
The Consumer Healthcare business represents the Consumer
Healthcare Joint Venture with Novartis together with the GSK
Consumer Healthcare listed businesses in India and Nigeria,
which are excluded from the Joint Venture. Results do not include
the trading performance of the Nigeria beverages business in Q4
2016 following its sale on 30 September 2016.
Sales grew 19% at actual rates and 9% CER to £7,193 million,
benefiting significantly from the inclusion of sales of the former
Novartis products for the first time for the first two months of the
period. Pro-forma growth was 5% of which price contributed 2%,
and volume 3%. Strong performances were delivered by the power
brands within the Oral health and Wellness categories and across all
regions. Sales from innovation within the last three years represented
approximately 13% of sales, with a particular contribution for
Flonase, which was switched to OTC in Q1 2015. Other notable
launches in 2016 included Sensodyne True White and Excedrin
Gel-tabs in the US.
US sales grew 9%, 5% pro-forma, to £1,761 million. Sensodyne
delivered double-digit growth, benefiting from the launch in 2015
of Repair and Protect and the launch of True White in the first quarter
of 2016, together with distribution gains for Pronamel and the newly
launched Pronamel Strong & Bright variant. Flonase OTC delivered
high single-digit growth, with a strong performance in the first half
of 2016, driven by new formats, but impacted in the second half by
increasing private label competition. Excedrin grew in double-digits,
driven by the Gel-tab launch and new digital campaigns, and
Tums also delivered double-digit growth, benefiting from supply
improvements. This was partly offset by a decline in Aquafresh
sales due to increased competitive pressures and a re-alignment
of investment behind power brands.
Sales in Europe grew 12% to £2,191 million and were up 4%
on a pro-forma basis, driven primarily by performances within the
Wellness and Oral health categories. Voltaren continued to deliver
double-digit growth, driven largely by the 12-hour variant and with
strong performances across all key markets. Oral health sales grew
in mid single-digits, with strong growth in Sensodyne and the Gum
health portfolio, partly offset by a flat performance in Aquafresh, due
to increased competitive pressures. At a market level, sales grew well
in Italy, Scandinavia, the UK and Germany, partly offset by a decline
in sales in CIS due to the impact on consumer spending of the
weaker economic environment.
International sales of £3,241 million grew 8% with pro-forma
growth of 5%. Growth was delivered in many priority markets,
primarily through the power brands across the Oral health and
Wellness categories. This was partly offset by the impact of the sale
of the Nigeria beverages business at the end of Q3 2016 as well as
the affect of the restructuring of activity in Venezuela at the end of
2015. Growth of the International region was also affected by the
combined impact on the Indian business of the demonetisation
implemented in November and a more general slowing of the health
food drink category which impacted the performance of the Nutrition
category and Horlicks in particular. Elsewhere, strong growth was
delivered in the Middle East, Latin America and China. The growth
in the Middle East was driven by strong momentum across the power
brands, particularly Otrivin, Panadol and Sensodyne. Double-digit
performances were delivered in Brazil and Argentina as a result of
better pricing and new product launches within Oral health. China
delivered high single-digit sales growth with contributions across
the portfolio and with Sensodyne and Voltaren in particular benefiting
from e-commerce and retail distribution expansion.
Investor informationFinancial statementsGovernance and remunerationStrategic report 64 GSK Annual Report 2016
Group financial review continued
Total results
Turnover (£bn)
£27.9bn
2014
2015
2016
23.0
23.9
27.9
AER growth
CER growth
17%
6%
Total operating profit (£bn)
£2.6bn
2014
2015
3.6
10.3
2016
2.6
AER growth
CER growth
(75)%
(86)%
The total results of the Group are set out below.
2016
2015
Growth
Turnover
Cost of sales
Selling, general and
administration
Research and
development
Royalty income
Other operating income/
(expense)
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
Profit after taxation
for the year
Profit attributable to
shareholders
Earnings per share (p)
Earnings per ADS
(US$)
% of
£m turnover
27,889
(9,290)
100 23,923
(8,853)
(33.3)
% of
£m turnover
100
(37.0)
(9,366)
(33.6)
(9,232)
(38.6)
(3,628)
398
(13.0)
1.4
(3,560)
329
(14.9)
1.4
(3,405)
2,598
(664)
(12.2)
7,715
9.3 10,322
(653)
32.2
43.1
–
843
5
1,939
(877)
1,062
912
18.8
0.51
14
10,526
(2,154)
8,372
8,422
174.3
5.33
£% CER%
6
17
(1)
5
1
2
21
(6)
(6)
16
(75)
(86)
(82)
(92)
(87)
(98)
(89)
(99)
Cost of sales
Cost of sales as a percentage of turnover was 33.3%, down 3.7
percentage points in Sterling terms and 2.4 percentage points in
CER terms compared with 2015. This reflected improved product mix,
particularly the impact of higher HIV sales in Pharmaceuticals, but also
in Vaccines and Consumer Healthcare and lower restructuring costs
as well as an increased contribution from integration and restructuring
savings in all three businesses.
These benefits were partly offset by continued adverse pricing
pressure in Pharmaceuticals, primarily Respiratory, as well as
continued investments in the supply chain.
Selling, general and administration
SG&A costs were 33.6% of turnover, 5.0 percentage points lower
than in 2015 and 4.3 percentage points lower on a CER basis. This
primarily reflected lower restructuring costs as well as the benefits
from the Pharmaceuticals restructuring programme and integration
benefits in Vaccines and Consumer Healthcare, partly offset by
investment in promotional product support, particularly for new
launches in Respiratory, HIV, Vaccines and Consumer Healthcare.
Research and development
R&D expenditure was £3,628 million (13% of turnover), 1.9% higher
than in 2015 and 5.6% lower on a CER basis. This reflected the
benefit from cost reduction programmes in Pharmaceuticals,
Consumer Healthcare and Vaccines R&D and lower restructuring
costs, partly offset by increased investment, particularly in
Pharmaceuticals, reflecting investments in a number of new
programmes and the costs of the acquired BMS HIV programme.
Other operating income/(expense)
Net other operating expense of £3,405 million (2015 - £7,715 million
income) primarily reflected further accounting charges related to
remeasurement of the contingent consideration liability related to
the former Shionogi-ViiV Healthcare joint venture, along with
remeasurement of the value attributable to the Consumer Healthcare
Joint Venture put option and the liabilities first recognised in Q1 2016
for the Pfizer and Shionogi put options and preferential dividends
in ViiV Healthcare. These remeasurements were driven by the
unwinding of the discount applied to these future liabilities as well
as updated trading forecasts and changes in the exchange rate
assumptions used, updating them to period-end rates, which have
increased the estimated total sterling values of GSK’s Consumer
Healthcare and ViiV Healthcare businesses.
These charges were partly offset by milestone income of £152
million in relation to the disposal of ofatumumab that was completed
in 2015 and gains on a number of other divestments made during
the year, including the remaining shares held by the Group in Aspen
Pharmacare. The net other operating income of £7,715 million in
2015 included the profit on the disposal of the Oncology business
to Novartis of £9,228 million.
65 GSK Annual Report 2016
Total results continued
Operating profit
Total operating profit was £2,598 million in 2016 compared with
£10,322 million in 2015 which benefited from the net disposal
gains recorded following the disposal of the Oncology business
as part of the Novartis transaction.
Operating profit benefited from improved operating leverage
driven by sales growth and a more favourable mix across all
three businesses, together with lower levels of restructuring costs
compared with 2015. However, there were further accounting
charges related to remeasurement of the contingent consideration
liability related to the former Shionogi-ViiV Healthcare joint venture,
along with remeasurement of the value attributable to the Consumer
Healthcare Joint Venture put option and the liabilities first recognised
in Q1 2016 for the Pfizer and Shionogi put options and preferential
dividends in ViiV Healthcare.
Contingent consideration cash payments are made to Shionogi
and other companies, which reduce the balance sheet liability and
hence are not recorded in the income statement. Total contingent
consideration cash payments in 2016 amounted to £431 million
(2015 – £459 million). This included cash payments made by ViiV
Healthcare to Shionogi in relation to its contingent consideration
liability (including preferential dividends) which amounted to
£417 million (2015 – £159 million). In 2015 a milestone payment
of £300 million was made to Novartis in relation to the Vaccines
acquisition.
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
2016
£m
70
2
72
2015
£m
99
5
104
(701)
(719)
(16)
(4)
(15)
(16)
(8)
(14)
(736)
(757)
Share of after tax profits of associates and joint ventures
The share of profits of associates and joint ventures was £5 million
(2015 – £14 million).
Profit before taxation
Taking account of net finance costs and the share of profit of
associates, profit before taxation was £1,939 million compared
with £10,526 million in 2015.
Taxation
UK current year charge
Rest of world current year charge
Charge in respect of prior periods
Total current taxation
Total deferred taxation
Taxation on total profits
2016
£m
241
1,326
(149)
1,418
(541)
877
2015
£m
156
2,924
(508)
2,572
(418)
2,154
A tax charge of £877 million on total profit represented an effective
tax rate of 45.2% (2015 – 20.5%) and reflected the non-deductibility
of certain items included within the transaction-related adjustments,
particularly the remeasurements of the put options related to ViiV
Healthcare and the Consumer Healthcare Joint Venture.
Non-controlling interests
The allocation of earnings to non-controlling interests amounted to
£150 million (2015 – (£50) million), including the non-controlling
interest allocations of Consumer Healthcare profits of £203 million
(2015 – £14 million) and the allocation of ViiV Healthcare losses of
£83 million (2015 – £143 million) including the impact of changes
in the proportions of preferential dividends due to each shareholder
based on the relative performance of different products in the year.
The allocation also reflected the impact on the contribution of some
of the Group’s other entities with non-controlling interests primarily
as a result of net losses in those entities arising from exchange.
Earnings per share
The total earnings per share was 18.8p, compared with 174.3p
in 2015. The decrease primarily reflected the benefit in 2015 from
the disposal of the Oncology business to Novartis that closed in
March 2015, together with the impact in 2016 of charges arising
from increases in the valuations of the liabilities for contingent
consideration and the put options associated with increases in
the Sterling value of the Group’s HIV and Consumer Healthcare
businesses, partly offset by improved performance and reduced
restructuring costs.
Dividends
The Board declared four interim dividends resulting in a total dividend
for the year of 80 pence, in line with the dividend declared in 2015.
See Note 16 to the financial statements, ‘Dividends’.
Investor informationFinancial statementsGovernance and remunerationStrategic report 66 GSK Annual Report 2016
Group financial review continued
Total results continued
Core results reconciliation – 31 December 2016
Turnover
Cost of sales
Gross profit
Selling, general and administration
Research and development
Royalty income
Other operating income/(expense)
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
Earnings per share
Weighted average number of shares (millions)
Total
results
£m
27,889
(9,290)
18,599
(9,366)
(3,628)
398
(3,405)
2,598
(664)
5
1,939
(877)
45.2%
1,062
150
912
18.8p
4,860
Core results reconciliation – 31 December 2015
Intangible
asset
amortisation
£m
Intangible
asset
impairment
£m
Major
restructuring
£m
Legal
charges
£m
Transaction
-related
£m
Divestments
and other
£m
Core
results
£m
27,889
(8,351)
19,538
(8,697)
(3,468)
398
-
7,771
7
7
13
20
20
(5)
15
547
547
41
588
588
(130)
458
458
9.4p
86
86
(81)
2
2
(7)
28
3,914
3,919
(509)
(486)
162
162
297
297
514
159
970
4
974
(217)
162
(14)
757
148
15
0.3p
757
15.6p
148
3.0p
8
(652)
(478)
173
(305)
(305)
5
7,124
(1,509)
21.2%
5,615
637
4,978
(6.3)p
102.4p
4,860
3,919
(439)
3,480
487
2,993
61.6p
Turnover
Cost of sales
Gross profit
Selling, general and administration
Research and development
Royalty income
Other operating income
Operating profit
Net finance costs
Profit on disposal of associates
Share of after tax profits of
associates and joint ventures
Profit before taxation
Taxation
Tax rate
Profit after taxation
(Loss)/profit attributable to
non-controlling interests
Profit attributable to shareholders
Earnings per share
Weighted average number of shares (millions)
Intangible
asset
amortisation
£m
Intangible
asset
impairment
£m
Major
restructuring
£m
Legal
charges
£m
Transaction
-related
£m
Divestments
and other
£m
522
522
41
147
147
7
52
563
563
1,009
319
221
563
206
1,891
221
5
89
89
88
2,061
2,238
12
12
52
(9,776)
(9,712)
12
(843)
563
(161)
206
(50)
1,896
(441)
221
(21)
2,238
(16)
(10,559)
(352)
2,186
402
156
1,455
200
1,886
(8,373)
402
8.3p
156
3.2p
1,455
30.1p
200
4.1p
500
1,386
(10)
(8,363)
28.8p
(173.1)p
Total
results
£m
23,923
(8,853)
15,070
(9,232)
(3,560)
329
7,715
10,322
(653)
843
14
10,526
(2,154)
20.5%
8,372
(50)
8,422
174.3p
4,831
Core
results
£m
23,923
(7,520)
16,403
(7,907)
(3,096)
329
–
5,729
(636)
–
(2)
5,091
(993)
19.5%
4,098
440
3,658
75.7p
4,831
67 GSK Annual Report 2016
Total results continued
Items adjusted from total results to present core results
Total results are adjusted for a number of items in order to present
core results, as explained on page 57. The items are discussed
below.
Intangible asset amortisation and impairment
Intangible asset amortisation was £588 million, compared with
£563 million in 2015. Intangible asset impairments of £20 million
(2015 – £206 million) included impairments of R&D and commercial
assets. Both of these charges were non-cash items.
Major restructuring and integration
Major restructuring and integration charges of £970 million have
been incurred (2015 – £1,891 million), reflecting the phasing of
planned restructuring projects following the completion of the
Novartis transaction in 2015, as well as reduced charges for
Pharmaceuticals restructuring projects as this programme enters
its later stages. Cash payments made were £1,077 million (2015
– £1,131 million) including the settlement of certain charges accrued
in previous quarters.
Charges for the combined restructuring and integration programme
to date are £3.7 billion, with cash charges of £2.9 billion and cash
payments to date of £2.7 billion. The anticipated total cash charges
of the combined programme were expected to be up to £3.65 billion
and the non-cash charges up to £1.35 billion. The programme
delivered incremental cost savings of £1.4 billion in 2016, including a
currency benefit of £0.2 billion, and has now delivered approximately
£3.0 billion of annual savings (including the currency benefit). The
programme remains on track to deliver the originally targeted total
annual savings of £3 billion on a constant currency basis during
2017. An estimated £300 million of additional cash charges are
expected in 2017 along with some residual non-cash charges.
Legal charges
Legal charges of £162 million (2015 – £221 million) included the
benefit of the settlement of existing matters as well as provisions for
ongoing litigation. Cash payments were £233 million compared with
£420 million in 2015.
Transaction-related adjustments
Transaction-related adjustments resulted in a net charge of
£3,919 million (2015 – £2,238 million). This primarily reflected
accounting charges for the remeasurement of the liability and the
unwinding of the discounting effects on the value attributable to the
Consumer Healthcare Joint Venture put option held by Novartis,
the remeasurement and the unwinding of the discounting effects on
the contingent consideration relating to the acquisition of the former
Shionogi-ViiV Healthcare Joint Venture and the value attributable to
the put options and preferential dividends payable to Pfizer and
Shionogi.
Charge/(credit)
Consumer Healthcare Joint Venture put option
Contingent consideration on former Shionogi-ViiV
Healthcare Joint Venture (including Shionogi
preferential dividends)
ViiV Healthcare put options and Pfizer preferential
dividends
Other adjustments
Total transaction-related charges
2016
£m
1,133
2015
£m
83
2,162
1,874
577
47
–
281
3,919
2,238
The aggregate impact of unwinding the discount on these future and
potential liabilities was £905 million (2015 – £757 million), including
£464 million on the Consumer Healthcare Joint Venture put option,
£334 million on contingent consideration on the former Shionogi-
ViiV Healthcare Joint Venture, and £58 million on the ViiV Healthcare
put options and preference dividends. The remaining charge of
£3,014 million was driven primarily by changes in exchange rate
assumptions as well as updates to trading forecasts.
During 2016, GSK and Shionogi made several amendments to
the Shareholders’ Agreement for ViiV Healthcare regarding the
Shionogi put option and the GSK call option. The estimated liability
for Shionogi’s put option was initially recognised on GSK’s balance
sheet at the end of Q1 2016 and de-recognised in December 2016,
directly to equity, when it stood at £1,244 million. An explanation of
the accounting for the non-controlling interests in ViiV Healthcare
is set out on page 58.
Divestments and other items
Divestments and other items included equity investment disposals,
including the disposal of the remaining Aspen Pharmacare
investment, dividends and impairments, milestone income on
ofatumumab, a number of other asset disposals, and certain other
adjusting items. Divestments and other items in 2015 included
the profit on the disposal of the Oncology business to Novartis.
Investor informationFinancial statementsGovernance and remunerationStrategic report 68 GSK Annual Report 2016
Group financial review continued
Core results
Turnover (£bn)
£27.9bn
2014
2015
2016
Research and development
23.0
23.9
2016
% of
turnover
£m
2015
% of
turnover
£m
Growth
£% CER%
Research and
development
27.9
(3,468)
(12.4)
(3,096)
(12.9)
12
3
AER growth
CER growth
17%
6%
Core operating profit (£bn)
£7.8bn
2014
2015
2016
6.6
5.7
7.8
AER growth
CER growth
36%
14%
We use core results, which is a non-IFRS measure, among
other metrics including total results and cash flow generation,
to manage the performance of the Group. Non-IFRS measures
may be considered in addition to, but not as a substitute for or
superior to, information presented in accordance with IFRS.
The definition of core results is set out on page 57.
Cost of sales
Cost of sales
2016
% of
turnover
(29.9)
2015
% of
turnover
(31.4)
Growth
£% CER%
5
11
£m
(7,520)
£m
(8,351)
Cost of sales as a percentage of turnover was 29.9%, down 1.5
percentage points in Sterling terms and 0.3 percentage points in
CER terms compared with 2015. On a pro-forma basis, the cost of
sales percentage decreased 1.8 percentage points compared with
2015 and was down 0.6 percentage points in CER terms. This
reflected improved product mix, particularly the impact of higher
HIV sales in Pharmaceuticals, but also in Vaccines and Consumer
Healthcare, as well as an increased contribution from integration
and restructuring savings in all three businesses, partly offset by
continued adverse pricing pressure in Pharmaceuticals, primarily
Respiratory, as well as continued investments in the supply chain.
Selling, general and administration
2016
% of
turnover
£m
2015
% of
turnover
£m
Growth
£% CER%
Selling, general and
administration
(8,697)
(31.2)
(7,907)
(33.1)
10
2
SG&A costs were 31.2% of turnover, 1.9 percentage points lower
than in 2015 and 1.2 percentage points lower on a CER basis.
On a pro-forma basis, SG&A as a percentage of sales reduced by
2.2 percentage points, 1.5 percentage points CER. This primarily
reflected tight control of ongoing costs as well as the benefits from
the Pharmaceuticals restructuring programme and integration
benefits in Vaccines and Consumer Healthcare, partly offset by
investment in promotional product support, particularly for new
launches in Respiratory, HIV, Vaccines and Consumer Healthcare.
R&D expenditure was £3,468 million (12.4% of turnover), 12% higher
than in 2015 and 3% higher on a CER basis, reflecting increased
investment, particularly in Total Pharmaceuticals, which increased
5% CER. 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.
Discovery
Development
Facilities and central support functions
Total Pharmaceuticals
Vaccines R&D
Consumer Healthcare R&D
Research and development
2016
£m
848
1,275
505
2,628
597
243
3,468
2015
£m
744
1,136
433
2,313
525
258
3,096
Growth
£% CER%
14
12
17
14
14
(6)
12
6
4
9
5
2
(12)
3
The most significant factor driving Total Pharmaceuticals R&D
growth was progression of the ViiV Healthcare HIV portfolio,
including programmes acquired from BMS earlier in the year. The
increase in Discovery was also driven by progression of the early
stage Oncology portfolio and early investment in Bioelectronics.
Development growth was primarily due to the start of new Phase III
programmes, including HIV, respiratory and anaemia, partly offset
by the benefit from R&D cost reduction programmes. The increase
in facilities and central support functions costs partly reflected
investment in new data warehousing and analytics to transform the
way data is harnessed across R&D together with a re-allocation of
central support costs.
Royalty income
Royalty income was £398 million (2015 – £329 million) primarily
reflecting increased royalty income from Gardasil sales as well as
the benefit of a catch-up adjustment to prior-year estimates.
Core operating profit
Core operating profit was £7,771 million, up 36% at actual rates
and 14% higher in CER terms than in 2015 on a turnover increase of
6%. The core operating margin of 27.9% was 3.9 percentage points
higher than in 2015 and 1.9 percentage points higher on a CER
basis.
On a pro-forma basis, core operating profit was 17% higher in
CER terms compared with 2015 on turnover growth of 5%. The core
operating margin of 27.9% was 4.6 percentage points higher than in
2015 and 2.6 percentage points higher in CER terms on a pro-forma
basis, reflecting improved operating leverage driven by sales growth
and a more favourable mix across all three businesses as well as
delivery of restructuring and integration benefits and tight control of
ongoing costs, partly offset by continued price pressure, particularly
in Respiratory, and supply chain and R&D investments.
69 GSK Annual Report 2016
Core results continued
Contingent consideration cash payments are made to Shionogi
and other companies, which reduce the balance sheet liability and
hence are not recorded in the income statement. Total contingent
consideration cash payments in 2016 amounted to £431 million
(2015 – £459 million). This included cash payments made by ViiV
Healthcare to Shionogi in relation to its contingent consideration
liability (including preferential dividends) which amounted to
£417 million (2015 – £159 million). In 2015 a milestone payment
of £300 million was made to Novartis.
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
Growth
Other finance expense
2016
£m
70
2
72
2015
£m
99
5
104
(701)
(719)
(4)
(4)
(15)
(724)
1
(8)
(14)
(740)
Net core finance expense was £652 million compared with
£636 million in 2015, reflecting the translation effect of exchange
rate movements on the reported Sterling costs of foreign currency
denominated interest-bearing instruments.
Share of after tax profits/(losses) and joint ventures
The share of profits of associates and joint ventures was £5 million
(2015 – £2 million loss).
Core profit before taxation
Core profit before tax
2016
% of
turnover
25.5
£m
7,124
2015
% of
turnover
21.3
£m
5,091
Growth
£% CER%
16
40
Taxation
Tax on core profit amounted to £1,509 million and represented an
effective core tax rate of 21.2% (2015 – 19.5%). The increase in the
effective rate primarily reflected the Group’s changing earnings mix.
See ‘Taxation’ on page 178 for further details.
Non-controlling interests
The allocation of earnings to non-controlling interests amounted to
£637 million (2015 – £440 million), including the non-controlling
interest allocations of Consumer Healthcare profits of £288 million
(2015 – £137 million) and the allocation of ViiV Healthcare profits,
which increased to £324 million (2015 – £224 million) including the
impact of changes in the proportions of preferential dividends due
to each shareholder based on the relative performance of different
products in the year. The allocation also reflected the impact on
the contribution of some of the Group’s other entities with non-
controlling interests primarily as a result of net losses in those
entities arising from exchange.
Core earnings per share
Core EPS of 102.4p was up 35% at actual rates and 12% in
CER terms compared with a 14% CER increase in operating profit,
primarily reflecting the increased tax rate compared with 2015 and
the greater contribution to growth from businesses in which there
are significant non-controlling interests.
Core operating profit by business
Pharmaceuticals
2016
Margin
%
49.5
£m
7,979
Pharmaceuticals R&D (2,488)
£m
6,466
(2,168)
4,298
964
5,491
1,454
34.1
31.7
1,116
8,061
15.5
28.9
684
5,946
2015
(restated)
Margin
%
45.7
30.4
26.4
11.3
24.9
Pharmaceuticals
Vaccines
Consumer
Healthcare
Corporate & other
unallocated costs
Core operating profit
(290)
7,771
(217)
27.9
5,729
23.9
£% CER%
6
23
15
28
51
63
36
34
36
6
6
38
42
16
58
14
Pharmaceuticals
Pharmaceuticals operating profit was £5,491 million, 6% higher in
CER terms than in 2015 on a turnover increase of 3%. The operating
margin of 34.1% was 3.7 percentage points higher than in 2015 and
1.1 percentage points higher on a CER basis. On a pro-forma basis,
the operating margin increased 1.2 percentage points on a CER
basis, reflecting a more favourable product mix, primarily driven by
the growth in HIV sales, and the cost reduction benefit from the
Pharmaceuticals restructuring programme, partly offset by increased
investment in new product support, increased investment in R&D in
a number of new programmes, the continued impact of lower prices,
particularly in Respiratory, and the broader transition of the
Respiratory portfolio.
Vaccines
Vaccines operating profit was £1,454 million, 38% higher than in
2015 in CER terms on a turnover increase of 14%. The operating
profit margin of 31.7% was 5.3 percentage points higher than in
2015 and 5.6 percentage points higher on a CER basis. On a
pro-forma basis, the operating margin improved by 7.3 percentage
points and 7.6 points in CER terms primarily driven by improved
product mix and enhanced operating leverage from strong sales
growth, together with restructuring and integration benefits in cost of
sales, SG&A and R&D, and higher royalty income. These were partly
offset by SG&A investments to support business growth, a number
of inventory adjustments and additional supply chain investments.
Consumer Healthcare
Consumer Healthcare operating profit was £1,116 million, 42%
higher than in 2015 in CER terms on a turnover increase of 9%.
The operating margin of 15.5% was 4.2 percentage points higher
than in 2015 and 3.4 percentage points higher on a CER basis.
On a pro-forma basis, the Consumer Healthcare operating margin
was 3.7 percentage points higher on a CER basis due to
improvements in gross margin, reflecting mix benefits from the
power brand strategy and better pricing, as well as a strong
contribution from integration synergies benefiting both SG&A
and R&D as a percentage of sales.
Investor informationFinancial statementsGovernance and remunerationStrategic report 70 GSK Annual Report 2016
Group financial review continued
Pro-forma growth rate reconciliations
The following table sets out reconciliations between reported CER growth rates and pro-forma CER growth rates on the stated items of turnover
for 2016.
Turnover 2016
Group turnover
US
Europe
International
Pharmaceuticals
US Pharmaceuticals
Europe Pharmaceuticals
International Pharmaceuticals
Emerging Markets Pharmaceuticals
Japan Pharmaceuticals
Vaccines
US Vaccines
Europe Vaccines
International Vaccines
Menveo
Other Vaccines
Consumer Healthcare
US Consumer Healthcare
Europe Consumer Healthcare
International Consumer Healthcare
Wellness
Oral health
Nutrition
Skin health
Adjustment to include
January and February
2015 turnover
of former Novartis
Vaccines products
CER%
Adjustment to include
January and February
2015 turnover of former
Novartis Consumer
Healthcare products
CER%
Adjustment to exclude
January and February
2015 turnover of former
GSK Oncology
products
CER%
Reported
growth rate
CER%
Pro-forma
growth rate
CER%
–
–
–
–
(2)
(1)
(2)
(2)
(8)
(10)
6
10
6
1
3
10
–
(3)
(4)
(5)
14
13
18
10
16
6
9
9
12
8
15
8
(8)
4
(2)
–
(2)
(1)
(4)
(4)
(8)
(3)
(9)
–
(1)
(6)
1
1
1
–
1
2
2
–
1
–
5
11
5
–
4
12
2
(3)
(3)
(5)
12
12
16
8
8
(4)
5
5
4
5
6
8
(9)
(2)
The following table sets out reconciliations between reported CER growth rates and pro-forma CER growth rates for the stated core expense
headings and core operating profit for 2016.
Core expenses and
operating profit 2016
Cost of sales
Selling, general and administration
Research and development
Royalty income
Core operating profit
Pharmaceuticals operating profit
Pharmaceuticals operating profit
excluding R&D
Pharmaceuticals R&D
Vaccines operating profit
Consumer Healthcare operating profit
Adjustment to include
January and February
2015 turnover of former
Novartis Vaccines
products
CER%
Adjustment to include
January and February
2015 turnover of former
Novartis Consumer
Healthcare products
CER%
Adjustment to exclude
January and February
2015 turnover of former
GSK Oncology
products
CER%
Reported
growth rate
CER%
Pro-forma
growth rate
CER%
5
2
3
16
14
6
6
6
38
42
(1)
(1)
(1)
(1)
1
9
(2)
(2)
–
2
–
(2)
1
1
1
–
2
2
2
2
3
–
3
17
17
8
8
8
47
40
71 GSK Annual Report 2016
Cash generation and conversion
A summary of the consolidated cash flow statement 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
2016
£m
6,497
(1,269)
(6,392)
(1,164)
5,486
(1,164)
283
4,605
2015
£m
2,569
6,037
(7,103)
1,503
4,028
1,503
(45)
5,486
4,897
(292)
4,605
5,830
(344)
5,486
Adjusted net cash inflow from operating activities
6,730
2,989
The net cash inflow from operating activities for the year was
£6,497 million (2015 – £2,569 million). The increase primarily
reflected the improved operating performance across all segments
and a positive currency benefit. Excluding legal settlements of
£233 million (2015 – £420 million) adjusted net cash inflow from
operating activities was £6,730 million (2015 – £2,989 million). In
addition, there were payments of restructuring and integration costs
of £1,077 million (2015 – £1,131 million) and a further tax payment
of £125 million (2015 – £1,071 million) on the sale of the Oncology
business, both of which have been funded from divestment
proceeds.
Total cash payments made by ViiV Healthcare to Shionogi in
relation to its contingent consideration liability (including preferential
dividends) in the year were £417 million (2015 – £159 million), of
which £351 million (2015 – £121 million) was recognised in cash
flows from operating activities and £66 million (2015 – £38 million)
was recognised within investing cash flows.
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.
Reconciliation of net cash inflow from operating activities to free
cash flow and adjusted free cash flow
A reconciliation of net cash inflow from operating activities, which is
the closest equivalent IFRS measure, to free cash flow is shown below.
Net cash inflow from operating activities
2016
£m
6,497
2015
£m
2,569
Purchase of property, plant and equipment
(1,543)
(1,380)
Purchase of intangible assets
Proceeds from sale of property, plant and equipment
Interest paid
Interest received
Dividends from associates and joint ventures
Distributions to non-controlling interests
Free cash flow
Legal payments
Adjusted free cash flow
(809)
98
(732)
68
42
(534)
3,087
233
3,320
(521)
72
(762)
99
5
(237)
(155)
420
265
Future cash flow
Over the long term, we expect that future cash generated from
operations will be sufficient to fund our operating and debt servicing
costs, normal levels of capital expenditure, obligations under
existing licensing agreements, expenditure arising from restructuring
programmes and other routine outflows including tax, pension
contributions and dividends, subject to the ‘Principal risks and
uncertainties’ discussed on pages 253 to 262. We may from time
to time have additional demands for finance, such as for acquisitions,
including potentially acquiring increased ownership portions of the
ViiV Healthcare and the Consumer Healthcare businesses where
minority shareholders hold put options, and share repurchases. We
have access to multiple sources of liquidity from short and long-term
capital markets and financial institutions, in addition to the cash flow
from operations, for such needs.
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 any individual 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 EPS and
our credit profile where relevant.
Free cash inflow/(outflow)
Adjusted free cash flow
2016
£m
3,087
3,320
2015
£m
(155)
265
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.
Free cash flow was £3,087 million for the year (2015 – £155 million
outflow). Excluding legal payments, adjusted free cash flow was
£3,320 million (2015 – £265 million) but this was also after making
restructuring and integration payments, the additional tax payment on
the sale of the Oncology business and the purchase of HIV Clinical
assets for £221 million, which are treated as intangible asset
purchases. Excluding these items, which are being funded from
divestment proceeds, the adjusted free cash flow would have been
£4,743 million (2015 – £2,467 million).
Capital expenditure and financial investment
Cash payments for tangible and intangible fixed assets amounted to
£2,352 million (2015 – £1,901 million) and disposals realised £453
million (2015 – £10,554 million). Cash payments to acquire equity
investments of £96 million (2015 – £82 million) were made and sales
of equity investments realised £683 million (2015 – £357 million).
Working capital
Our working capital programme has continued to make progress
with further improvements in the collection of receivables and
inventory management.
Working capital percentage of turnover (%)
Working capital conversion cycle (days)
2016
22
193
2015
23
191
The reported working capital conversion cycle days in 2015 were
distorted by a temporary favourable impact of 15 days arising from the
Novartis transaction. Excluding this impact, the conversion cycle for
2015 was around 206 days. The resulting reduction of 13 days in
2016 compared with 2015 was predominantly due to a beneficial
impact from exchange, reduced receivables days from improved
collections and reduced inventory days.
Investor informationFinancial statementsGovernance and remunerationStrategic report 72 GSK Annual Report 2016
Group financial review continued
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
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
Contingent consideration liability
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
Contingent consideration liability
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
2016
£m
2015
£m
10,808
5,965
18,776
263
985
4,374
1,199
9,668
5,162
16,672
207
1,255
2,905
990
42,370
36,859
5,102
226
6,026
156
89
4,897
215
16,711
59,081
4,716
180
5,615
125
75
5,830
46
16,587
53,446
(4,129)
(1,308)
(561)
(306)
(11,964)
(8,885)
(194)
(1,305)
(848)
(153)
(1,421)
(1,344)
(19,001)
(13,417)
(14,661)
(15,324)
(1,934)
(4,090)
(652)
(5,335)
(8,445)
(1,522)
(3,229)
(420)
(3,549)
(7,107)
(35,117)
(31,151)
(54,118)
(44,568)
4,963
8,878
1,342
2,954
1,340
2,831
(5,392)
(1,397)
2,220
1,124
3,839
2,340
5,114
3,764
4,963
8,878
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 to production
and to ensure compliance with regulatory standards. A number of
our processes use hazardous materials.
The total cost of our property, plant and equipment at 31 December
2016 was £22,164 million, with a net book value of £10,808 million.
Of this, land and buildings represented £4,223 million, plant and
equipment £3,481 million and assets in construction £3,104 million.
In 2016, we invested £1,544 million in new property, plant and
equipment. This was 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 2016, we
had contractual commitments for future capital expenditure of £496
million and operating lease commitments of £840 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 50 and in Note 46 to the
financial statements, ‘Legal proceedings’.
Goodwill
Goodwill increased during the year to £5,965 million at 31
December 2016, from £5,162 million. The increase primarily
reflected the impact of exchange movements.
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 2016 was £18,776 million
(2015 – £16,672 million). The increase in 2016 reflected the impact
of exchange movements, development costs capitalised during the
year of £240 million, partly offset by the amortisation and impairment
of existing intangibles of £796 million and £29 million, respectively.
Investments in associates and joint ventures
We held investments in associates and joint ventures, with a carrying
value at 31 December 2016 of £263 million (2015 – £207 million).
The market value at 31 December 2016 was £502 million (2015 –
£267 million). The largest of these investments was in Innoviva Inc.
which had a book value at 31 December 2016 of £138 million
(2015 – £112 million). The market value at 31 December 2016 was
£278 million. See Note 20 to the financial statements ‘Investments
in associates and joint ventures’.
73 GSK Annual Report 2016
Financial position and resources continued
Other investments
We held other investments with a carrying value at 31 December
2016 of £985 million (2015 – £1,255 million). The decrease in the
carrying value during the year was primarily due to the sale of the
Group’s remaining stake in Aspen Pharmacare Holdings Limited
which had a book value at 31 December 2015 of £383 million.
The most significant of the investments held at 31 December 2016
was in Theravance Biopharma, Inc. which had a book value at 31
December 2016 of £248 million (2015 – £93 million). The other
investments included 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.
Derivative financial instruments: assets
We had current derivative financial instruments held at fair value
of £156 million (2015 – £125 million). The majority of this amount
related to foreign exchange contracts both designated and not
designated as accounting hedges.
Inventories
Inventory of £5,102 million increased from £4,716 million in 2015.
The increase primarily reflected the impact of exchange movements.
Trade and other receivables
Trade and other receivables of £6,026 million increased from
£5,615 million in 2015, primarily reflecting exchange movements.
Derivative financial instruments: liabilities
We held current derivative financial instruments at fair value of
£194 million (2015 – £153 million). This primarily related to foreign
exchange contracts both designated and not designated as
accounting hedges.
Trade and other payables
Trade and other payables amounting to £11,964 million increased
from £8,885 million in 2015, reflecting the Pfizer put option related
to ViiV Healthcare recognised in the year, an increase in accruals for
customer returns and rebates and the impact of exchange
movements.
Provisions
We carried deferred tax provisions and other short-term and
non-current provisions of £3,434 million at 31 December 2016
(2015 – £3,286 million) of which £344 million (2015 – £352 million)
related to legal and other disputes and £554 million (2015 – £816
million) related to the major restructuring programme. Provision
has been made for legal and other disputes, indemnified disposal
liabilities, employee related liabilities and the costs of the
restructuring programme 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 £2,084 million (2015 –
£1,584 million) on pension arrangements and £1,693 million
(2015 – £1,387 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,
together with an increase in the UK inflation rate assumptions
and a stronger US Dollar at the year end, partly offset by special
funding contributions to the UK schemes and significant UK
asset gains.
Other non-current liabilities
Other non-current liabilities of £8,445 million at 31 December 2016
(2015 – £7,107 million) included £7,420 million (2015 – £6,287
million) related to the present value of the estimated amount payable
by us in the event of full exercise of Novartis’ right to require us to
acquire its 36.5% shareholding in the Consumer Healthcare Joint
Venture. Further details are provided in Note 3, ‘Key accounting
judgements and estimates’.
Contingent consideration liabilities
Contingent consideration liabilities amounted to £5,896 million at
31 December 2016 (2015 – £3,855 million), of which £5,304 million
(2015 – £3,409 million) represented the estimated present value of
amounts payable to Shionogi relating to ViiV Healthcare and £545
million (2015 – £405 million) represented the estimated present
value of contingent consideration payable to Novartis related to the
Vaccines acquisition. The liability due to Shionogi included £224
million in respect of preferential dividends of which £154 million was
recognised directly in equity in the year. The liability for preferential
dividends due to Pfizer at 31 December 2016 was £23 million. An
explanation of the accounting treatment of our interests in ViiV
Healthcare is set out on page 58.
Net debt
Cash, cash equivalents and liquid investments
Borrowings – repayable within one year
Borrowings – repayable after one year
Net debt
2016
£m
4,986
2015
£m
5,905
(4,129)
(1,308)
(14,661)
(15,324)
(13,804)
(10,727)
At 31 December 2016, net debt was £13.8 billion, compared
with £10.7 billion at 31 December 2015, comprising gross debt
of £18.8 billion and cash and liquid investments of £5.0 billion.
The increase in net debt primarily reflected a £2.2 billion adverse
exchange impact from the translation of non-Sterling denominated
debt and exchange on other financing items, dividends paid to
shareholders of £4.9 billion including the special dividend of
£1.0 billion, partly offset by free cash flow of £3.1 billion and
asset disposals of £1.0 billion.
At 31 December 2016, our cash and liquid investments were held
as follows:
Bank balances and deposits
US Treasury and Treasury repo
only money market funds
Liquidity funds
Government securities
2016
£m
2,583
2,248
66
89
4,986
2015
£m
3,767
624
1,439
75
5,905
Cash and liquid investments of £3.2 billion (2015 – £4.2 billion) were
held centrally at 31 December 2016.
Investor informationFinancial statementsGovernance and remunerationStrategic report 74 GSK Annual Report 2016
Group financial review continued
Financial position and resources continued
Maturity profile of gross debt
Maturity profile of gross debt
£m equivalent
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
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
The analysis of cash and gross debt after the effects of hedging
is as follows.
Cash and liquid investments
Gross debt – fixed
– floating
– non-interest bearing
Net debt
Movements in net debt
Net debt at beginning of year
(Decrease)/increase in cash and bank overdrafts
Increase in liquid investments
Net (increase in)/repayment of short-term loans
Exchange movements
Other movements
Net debt at end of year
2016
£m
4,986
(17,288)
(1,496)
(6)
(13,804)
2015
£m
5,905
(16,129)
(502)
(1)
(10,727)
2016
£m
(10,727)
(1,164)
–
(148)
(1,781)
16
2015
£m
(14,377)
1,503
2
2,412
(268)
1
(13,804)
(10,727)
Total equity
At 31 December 2016, total equity had decreased from £8,878
million at 31 December 2015 to £4,963 million. This primarily
reflected the recognition of the transaction-related adjustments
of £3,919 million, the impact of the dividends paid and an increase
in the pension deficit of £500 million, partly offset by the profit for the
year and the favourable exchange translation impact from the weaker
Sterling rates.
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
Ordinary shares issued
Gain on transfer of net assets
into Consumer Healthcare JV
Consumer Healthcare JV put option
Loss on transfer of equity investment to
investment in associate
Changes in non-controlling interests
Recognition of liabilities with non-controlling interests
(2,172)
De-recognition of liabilities with non-controlling
interests
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
1,244
(74)
319
7
(534)
4,963
2016
£m
8,878
2,024
2015
£m
4,936
7,885
(4,850)
(3,874)
89
–
–
–
32
73
2,891
(6,204)
(229)
3,370
–
–
(99)
356
10
(237)
8,878
75 GSK Annual Report 2016
Financial position and resources continued
Share purchases
In 2016, the Employee Share Ownership Plan (ESOP) Trusts
acquired £74 million of shares in GlaxoSmithKline plc (2015 –
£99 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.
At 31 December 2016, the ESOP Trusts held 43 million (2015 –
30 million) GSK shares against the future exercise of share options
and share awards. The carrying value of £286 million (2015 –
£75 million) has been deducted from other reserves. The market
value of these shares was £667 million (2015 – £409 million).
During 2016, no shares were repurchased. At 31 December 2016,
we held 458.2 million shares as Treasury shares (2015 – 491.5
million shares), at a cost of £6,451 million (2015 – £6,917 million),
which has been deducted from retained earnings.
No ordinary shares were purchased in the period 1 January 2017
to 13 March 2017 and the company does not expect to make any
ordinary share repurchases in the remainder of 2017.
Commitments and contingent liabilities
Financial commitments are summarised in Note 41 to the financial
statements, ‘Commitments’. Other contingent liabilities and
obligations in respect of short and long-term debt are set out in
Note 32 to the financial statements, ‘Contingent liabilities’ and
Note 31 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 2016 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 Under 1 yr
£m
4,108
£m
18,849
9,410
64
3
840
7,199
496
166
52
874
143
705
23
2
153
514
385
79
23
136
45
1-3 yrs
£m
3,500
1,069
34
1
3-5 yrs
£m
5 yrs+
£m
– 11,241
992
6,644
7
–
–
–
223
648
111
53
29
246
76
140
324
1,082
4,955
–
32
–
246
22
–
2
–
246
–
Total
38,096
6,173
5,990
2,521 23,412
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 £6.2 billion which relates to externalised
projects in the discovery portfolio. A number of new commitments
were made in 2016 under licensing and other agreements, offset
by amendments to existing agreements.
In 2016, we reached an agreement with the trustees of the UK
pension schemes to make additional contributions, including in 2016,
to eliminate the pension deficit identified at the 31 December 2014
actuarial funding valuation. The table above includes this commitment
but excludes the normal ongoing annual funding requirement in the
UK of approximately £130 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
£m
£m
1-3 yrs
£m
3-5 yrs
£m
5 yrs+
£m
Guarantees
Other contingent liabilities
Total
172
109
281
110
16
126
3
40
43
–
6
6
59
47
106
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 2016, 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 ‘Principal risks and uncertainties’ on pages
253 to 262 and Notes 14 and 46 to the financial statements,
‘Taxation’ and ‘Legal proceedings’.
Investor informationFinancial statementsGovernance and remunerationStrategic report 76 GSK Annual Report 2016
Group financial review continued
Critical accounting policies
The consolidated financial statements are prepared in accordance
with IFRS, as adopted for use in the European Union, and also
with IFRS as issued by the IASB, following the accounting policies
approved by the Board and described in Note 2 to the financial
statements, ‘Accounting 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 relate to the following areas:
– Turnover
– Taxation (Note 14)
– Legal and other disputes (Notes 29 and 46)
– Goodwill and other intangible asset impairments (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 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 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.
A reconciliation of gross turnover to net turnover for the US
Pharmaceuticals business, including Puerto Rico, is as follows:
2016
Margin
%
£m
100 10,093
2015
(restated)
Margin
%
100
2014
(restated)
Margin
%
100
£m
8,838
£m
13,363
(2,749)
(21)
(1,761)
(17)
(1,274)
(14)
Gross turnover
Market driven
segments
Government
mandated and
state programs
Cash discounts
Customer returns
Prior year adjustments
Other items
(3,070)
(261)
(98)
109
(457)
(23)
(2)
(2,357)
(192)
(23)
(2)
(1,697)
(169)
(1)
1
(3)
(93)
142
(298)
(1)
1
(3)
(69)
169
(181)
(19)
(2)
(1)
2
(2)
(36)
64
Total deductions
(6,526)
(49)
(4,559)
(45)
(3,221)
Net turnover
6,837
51
5,534
55
5,617
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 programmes
which receive government mandated pricing via rebates and
chargebacks.
The increased deductions in the market driven segments of the
gross turnover to net turnover reconciliation primarily reflected
higher rebates and chargebacks on Respiratory products, and
on Advair in particular. During 2016, Advair accounted for 27% of
US Pharmaceuticals turnover and approximately 45% of the total
deduction for rebates and returns, and the Respiratory portfolio as
a whole accounted for approximately 75% of the total deduction in
the year. Advair continued to suffer pricing pressure in 2016 as the
business sought to transition its Respiratory portfolio to newer
products.
The balance sheet accruals for rebates, discounts, allowances
and returns for the US Pharmaceuticals and Vaccines businesses
are managed on a combined basis. At 31 December 2016, the
total accrual amounted to £2,218 million (2015 – £1,671 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 2016
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.
77 GSK Annual Report 2016
Critical accounting policies continued
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.
Treasury policies
We report in Sterling and pay dividends out of Sterling cash flows.
The role of Treasury is to monitor and manage the Group’s external
and internal funding requirements and financial risks in support of
our strategic objectives. GSK operates 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 annually by the Board of Directors, and most recently
on 21 July 2016. 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 these activities.
Treasury operations
The objective of our Treasury activity is to minimise the post-tax net
cost of financial operations and reduce its volatility in order to benefit
earnings and cash flows. 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 interest rate swaps, foreign exchange forward contracts
and 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
and GSK’s Treasury policies specifically prohibit such activity.
All transactions in financial instruments are undertaken to manage
the risks arising from underlying business activities.
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. These matters are discussed
further in Note 46 to the financial statements, ‘Legal proceedings’.
Capital management
Our financial strategy, implemented through the Group’s Financial
architecture, supports GSK’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.
GSK’s long-term credit rating with Standard and Poor’s is A+
(stable outlook) and with Moody’s Investor Services (‘Moody’s’)
is A2 (negative outlook). Our short-term credit ratings are A-1 and
P-1 with Standard and Poor’s and Moody’s respectively.
Liquidity risk management
Our policy is to borrow centrally in order to meet anticipated funding
requirements. Our cash flow forecasts 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 financial markets.
Each day, we sweep cash from a number of global subsidiaries to
central Treasury accounts for liquidity management purposes.
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.
Investor informationFinancial statementsGovernance and remunerationStrategic report 78 GSK Annual Report 2016
Group financial review continued
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 the Group’s
investment in overseas Group assets. The TMG reviews the
ratio of borrowings to assets for major currencies monthly.
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. Treasury’s usage of these limits
is monitored daily by a Corporate Compliance Officer (CCO) who
operates independently of 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 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.
Treasury policies continued
Foreign exchange risk management
Foreign currency transaction exposures arising on external trade
flows are not normally hedged. Foreign currency transaction
exposures arising on internal trade flows are selectively 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. GSK’s 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. 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. Borrowings can be swapped into other
currencies as required.
Strategic report
The Strategic report was approved by the Board of Directors on
13 March 2017 and signed on its behalf by:
Simon Dingemans
Chief Financial Officer
13 March 2017
79 GSK Annual Report 2016
Corporate
Governance
In this section
Chairman’s Governance statement
Our Board
Our Corporate Executive Team
Leadership and effectiveness
Nominations Committee report
Accountability
Audit & Risk Committee report
Relations with shareholders
Engagement activities
Corporate Responsibility Committee report
Directors’ report
80
82
86
88
94
97
97
107
107
108
110
Strategic reportFinancial statementsGovernance and remunerationInvestor information 80 GSK Annual Report 2016
Chairman’s Governance statement
Last year, we reported
the steps taken to refresh
our non-executive
representation on the
Board to address a
number of planned
retirements. This year,
the Board’s primary
focus was on executive
succession.
Dear Shareholder
I am pleased to present our Corporate
Governance Report for 2016.
The Board remains committed to the highest
standards of corporate governance and
integrity. Our governance structure operates
from the Board across the Group, and we
believe that it is critical in underpinning our
ability to deliver our strategy and to create
long-term value for our shareholders.
CEO and executive management
succession
Last year, we reported the steps taken to
refresh our non-executive representation on
the Board to address a number of planned
retirements. This year, the Board’s primary
focus was on executive succession. The
review of Talent and Leadership Strategy
has been an annual item of Board and
Nominations Committee discussion and
oversight. When Sir Andrew Witty indicated,
in March 2016, his intention to retire from the
Board in early 2017, we were well placed to
accelerate an orderly CEO succession and
transition plan. The process we followed is
described in the report of our Nominations
Committee on pages 94 to 96.
The Board was unanimous in supporting
the appointment of Emma Walmsley, who
previously led GSK’s Consumer Healthcare
business, as our new CEO. It was felt that
her leadership skills, history of delivering
growth and driving performance and fresh
thinking made her an ideal choice.
Under Sir Andrew’s leadership, GSK has
successfully developed market-leading
positions in Vaccines and Consumer
Healthcare. These provide excellent
platforms for sustainable, long-term growth,
and we are confident Emma will successfully
build on these strengths and further
strengthen the Pharmaceuticals business.
Since her appointment as CEO Designate
in September 2016, and in the run up to
assuming the role of CEO on 1 April 2017,
she is focusing completely on the transition.
She is spending time with Sir Andrew so
he can share his knowledge and experience
and make key introductions, while also
deepening her understanding of the
business, especially R&D, Pharmaceuticals
and Vaccines. She has also started to meet
with major shareholders to listen to their
views on GSK. She will share her strategic
overview and vision for the Group later in
the year. Details of her induction plan are
set out on page 91.
A further change was made to our executive
representation on the Board when Dr
Moncef Slaoui, Chairman, Global Vaccines,
indicated his intention to retire from the
Board in 2017. In addition, Dr Patrick
Vallance, President, R&D, has been
appointed to the Board.
I would like to express my gratitude to both
Sir Andrew and Moncef for their dedication
and service to GSK over the years and their
professionalism and support in facilitating an
orderly Board succession process.
81 GSK Annual Report 2016
Review of our Board governance
arrangements
The Board keeps the functioning of its
governance framework under regular review.
During the year, it made the following
enhancements:
Finance Committee: After reviewing the
role of our Finance Committee, the Board
decided that a specific committee was no
longer required. Its responsibilities have
been reassigned to the Board or our Audit
& Risk Committee.
Science Committee: The Board decided
to establish a Science Committee to look
at our science, pipeline and R&D capital
allocation priorities. It is chaired by Dr Jesse
Goodman, one of our designated Scientific
and Medical Experts, and its members all
have a background in life sciences from
either a specialist or commercial perspective.
This matter has been under consideration
for some time and the timing of its
implementation has been driven by the
following considerations:
– science and innovation underpins each
of our businesses in Pharmaceuticals,
Vaccines and Consumer Healthcare;
– our R&D organisation continues to deliver
significant innovation for the Group, with
a number of decisions for potential new
medicines and vaccines coming up in the
next two years. This Committee can help
bring a greater focus to the Board’s
deliberations on R&D at a critical phase
for the company;
– the Board is looking to further increase its
scientific capabilities with a search for a
third Scientific and Medical Expert and
establishing this Committee is in step with
this approach.
Culture and values
As Chairman, I am responsible for leading
and ensuring we have an effective Board.
I also actively encourage a culture and
environment in the boardroom that facilitates
debate and where our Non-Executive
Directors are able to provide constructive
challenge to management. I am pleased to
advise that I believe the Board is hard-
working and engaged, with an appropriate
balance of skills and experience. The newer
appointees are bringing fresh insights and
perspectives to further improve our decision
making. Our recent annual Board evaluation
exercise was carried out by the Company
Secretary and centred on identifying further
performance improvements. The evaluation
outcomes are set out on page 92. Our 2017
Board evaluation will be undertaken by an
independent external Board review
specialist. The last such independent
evaluation was carried out in 2014.
No less important for myself, in setting the
tone of the organisation from the top, is
promoting the values-based conduct and
behaviours of our people that flow from
the Boardroom through every artery of
the business.
I seek to ensure that everything that we as a
Board do is guided by our commitment to
our values and to being in compliance with
the local laws and regulations within which
we operate. GSK’s Code of Conduct
(Code) draws together a number of our key
policies that lay the foundations of these
commitments and provides a working guide
for the way in which we apply our values
across our global operations.
Indeed, the Board felt it was important
to lead by example and has chosen to
undertake the same annual training on
our Code obligations as our employees.
The latest version of the Code, which was
updated and strengthened in April 2016,
is available in the governance area of
www.gsk.com.
UK Corporate Governance Code
compliance
I am pleased to report that we were in full
compliance with the requirements of the
Financial Reporting Council’s 2014 UK
Corporate Governance Code (UK Code)
– a copy of the UK Code is available on
www.frc.org.uk. The following pages outline
our approach to corporate governance.
I commend this report to all of our
shareholders.
Philip Hampton
Chairman
13 March 2017
Strategic reportFinancial statementsGovernance and remunerationInvestor information 82 GSK Annual Report 2016
Our Board
Board composition
Gender diversity
Board
As at date of publication
As at 1 April 2017
Male
69%
Male
64%
Female
31%
Female
36%
Sir Philip Hampton 63
Non-Executive Chairman
Sir Andrew Witty 52
Chief Executive Officer
Executive
As at date of publication
As at 1 April 2017
Male
80%
Male
67%
N
Nationality
British
Appointed
1 January 2015. Deputy Chairman
from 1 April 2015 and Non-Executive
Chairman from 7 May 2015
Skills and experience
Prior to joining GSK, Sir Philip
chaired major FTSE 100 companies,
including The Royal Bank of
Scotland Group plc and J Sainsbury
plc. He has also served as Group
Finance Director at Lloyds TSB
Group, BT Group plc, BG Group
plc, British Gas plc 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 the Senior
Independent Director of Anglo
American Plc, Chairman of its
Remuneration Committee and
member of its Audit Committee.
Sir Philip is also Chair of the
Hampton-Alexander Review
on FTSE Women Leaders, an
independent review on improving
gender balance in FTSE leadership.
Female
20%
Female
33%
Non-Executive
As at date of publication
As at 1 April 2017
Male
62%
Male
62%
Female
38%
Female
38%
Tenure Non-Executive
Tenure Non-Executive
1
4
2
Composition
Composition
1. Up to 3 years
2. 3-6 years
3. 7-9 years
1
4. Over 9 years
62%
25%
0%
13%
2
As at 1 April 2017
1. Up to 3 years
2. 3-6 years
3. 7-9 years
4. Over 9 years
As at 1 April 2017
1. Executive
2. Non-Executive
63%
25%
0%
12%
27%
73%
1. Executive
International experience
38%
2. Non-Executive
62%
International experience
As at 1 April 2017
Global
73%
US
100%
Europe
91%
EMAP
64%
Key
Committee Chair
N
A
R
C
S
Nominations
Audit & Risk
Remuneration
Corporate Responsibility
Science
Nationality
British
Appointed
31 January 2008. Chief Executive
Officer from 21 May 2008. Sir
Andrew is retiring from the Board
on 31 March 2017.
Skills and experience
Sir Andrew joined GSK in 1985.
He has worked in the UK, South
Africa, the US and Singapore in
various senior roles. In 2003, he was
appointed President of Europe and
joined GSK’s Corporate Executive
Team. Andrew has served in
numerous advisory roles to
Governments around the world,
including South Africa, Singapore,
Guangzhou China and the UK,
where he was a member of the Prime
Minister’s Business Advisory Group
from 2010-2015. He was awarded
a Knighthood for services to the
economy and to the UK
pharmaceutical industry in the
2012 New Year Honours List.
External appointments
Sir Andrew is a UK Business
Ambassador and serves on the
China-Britain Business Council
Advisory Council and the EDB
International Advisory Committee,
Singapore. Sir Andrew is also
Co-Chair of a UK EU Life Sciences
Steering Group to advise the UK
Government on life science priorities
in the context of the UK leaving the
EU, Visiting Professor to the Institute
of Global Health Innovation at
Imperial College, London, and
Chancellor of the University of
Nottingham.
83 GSK Annual Report 2016
Emma Walmsley 47
CEO Designate
Simon Dingemans 53
Chief Financial Officer
Dr Moncef Slaoui 57
Chairman, Global Vaccines
Dr Patrick Vallance 56
President, R&D
Nationality
British
Nationality
British
Nationality
Moroccan, Belgian & American
Nationality
British
Appointed
1 January 2017
Skills and experience
Patrick joined GSK in 2006 as
Head of Drug Discovery and was
subsequently appointed Senior
Vice President, Medicines Discovery
and Development. He has been
a member of GSK’s Corporate
Executive Team since 2010
and was appointed President,
Pharmaceuticals R&D in January
2012. Patrick joined the GSK
Board on 1 January 2017.
Prior to joining GSK, Patrick was a
clinical academic and, as Professor
of Medicine, led the Division of
Medicine at University College
London. He has over 20 years’
experience of research clinical
medicine, general internal medicine,
cardiovascular medicine and clinical
pharmacology. He was elected to
the Academy of Medical Sciences
in 1999.
External appointments
Patrick is a Non-Executive Director
of Genome Research Limited and
UK Biobank.
Appointed
1 January 2017. Chief Executive
Officer from 1 April 2017
Appointed
4 January 2011. Chief Financial
Officer from 1 April 2011
Appointed
17 May 2006. Moncef is retiring from
the Board on 31 March 2017.
Skills and experience
Prior to joining GSK, Simon had
over 25 years of experience in
investment banking at SG Warburg
and Goldman Sachs. 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 Deputy Chairman of the
100 Group of Finance Directors,
having been Chairman from 2014
to early 2017.
Skills and experience
Emma joined GSK in 2010 with
responsibility for Consumer
Healthcare, Europe and was
subsequently appointed President
of GlaxoSmithKline Consumer
Healthcare. She has been a member
of GSK’s Corporate Executive Team
since 2011 and, in 2015, was
appointed CEO of GSK Consumer
Healthcare, a joint venture between
GSK and Novartis. Emma joined the
GSK Board on 1 January 2017 and
will formally succeed Sir Andrew
Witty as GSK CEO when he retires
on 31 March 2017.
Prior to joining GSK, Emma worked
with L’Oreal for 17 years where she
held a variety of marketing and
general management roles in Paris,
London and New York. From 2007,
she was based in Shanghai as
General Manager, Consumer
Products for L’Oreal China. Emma
was a Non-Executive Director of
Diageo plc from 1 January to 21
September 2016. She holds an MA
in Classics and Modern Languages
from Oxford University.
External appointments
None
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 is Chairman of the Board of
Directors of Galvani Bioelectronics,
the company launched in November
2016 that GSK jointly owns with
Verily Life Sciences.
Moncef has advised the US
President’s Council of Advisors
on Science and Technology, was a
member of the Board of the Agency
for Science, Technology & Research
(A*STAR) until January 2011, the
PhRMA Foundation Board from
2008 to 2016 and the Advisory
Committee to the Director of
National Institutes of Health from
2011 to 2016.
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
Biotechnology Industry Organization
Board in the US. 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) and is a
member of the Board of Artizan
Biosciences Inc.
Strategic reportFinancial statementsGovernance and remunerationInvestor information
84 GSK Annual Report 2016
Our Board continued
Manvinder Singh (Vindi) Banga 62
Senior Independent
Non-Executive Director
Professor Sir Roy Anderson 69
Independent Non-Executive
Director & Scientific Expert
Dr Vivienne Cox 57
Independent Non-Executive
Director
Lynn Elsenhans 60
Independent Non-Executive
Director
N A R
Nationality
Indian
Appointed
1 September 2015 and as Senior
Independent Non-Executive Director
from 5 May 2016
Skills and experience
Prior to joining GSK, Vindi spent
33 years at Unilever plc, where his
last role (amongst several senior
positions) was President of the
Global Foods, Home and Personal
Care businesses, and he was a
member of the Unilever Executive
Board. Vindi sat on the Prime
Minister of India’s Council of Trade
& Industry from 2004 to 2014,
and was on the Board of Governors
of the Indian Institute of Management
(IIM), Ahmedabad. Vindi is also the
recipient of the Padma Bhushan,
one of India’s highest civilian
honours. Between 2015 and 2016,
Vindi was a Non-Executive Director
of Thomson Reuters Corp and a
member of its HR committee.
External appointments
Vindi is a Partner at private equity
investment firm Clayton Dubilier
& Rice. He is also Chairman of
the Supervisory Board of Mauser
Group, Chairman of Kalle GmbH,
Senior Independent Director of
Marks & Spencer Group plc and
a member of its Nominations and
Remuneration Committees. Vindi
is on the Governing Board of the
Indian School of Business (ISB),
Hyderabad, and is a member of the
Indo UK CEO Forum.
N C S
Nationality
British
Appointed
1 October 2007
R C
Nationality
British
Appointed
1 July 2016
C N A
Nationality
American
Appointed
1 July 2012
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.
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 National Academy
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
member of the Science Advisory
Board 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, the International
Alzheimer’s Consortium at Harvard
University, Boston, and Chairman
of the Scientific Advisory Board
(SAB) of the Netherlands Centre
for One Health (NCOH).
Skills and experience
Vivienne has wide experience of
business gained in the energy,
natural resources and publishing
sectors. She also has a deep
understanding of regulatory and
government relationships. She
worked for BP plc for 28 years,
in Britain and Continental Europe,
in posts including Executive Vice
President and Chief Executive of
BP’s gas, power and renewable
business and its alternative energy
unit. Vivienne was previously a
Non-Executive Director of BG
Group plc and Rio Tinto plc.
Vivienne was appointed Commander
of the Order of the British Empire in
the 2016 New Year Honours for
services to the UK Economy and
Sustainability.
External appointments
Vivienne is Senior Independent
Director of Pearson plc, a Non-
Executive Director of Stena
International and Chairman of the
Supervisory Board of Vallourec,
a supplier to the energy industry.
She is also Lead Independent
Director at the UK Government’s
Department for International
Development.
Key
Committee Chair
N
A
R
C
S
Nominations
Audit & Risk
Remuneration
Corporate Responsibility
Science
85 GSK Annual Report 2016
Dr Jesse Goodman 65
Independent Non-Executive
Director & Scientific Expert
Judy Lewent 68
Independent Non-Executive
Director
Urs Rohner 57
Independent Non-Executive
Director
S C
Nationality
American
Appointed
1 January 2016
A N R S
Nationality
American
Appointed
1 April 2011
R N
Nationality
Swiss
Appointed
1 January 2015
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 US, 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 Chairman of the
Board of Credit Suisse Group
AG and of the Chairman’s and
Governance Committee. He is
also Chairman and member of the
Board of Trustees of Credit Suisse
Research Institute and Credit Suisse
Foundation. Urs was appointed
Vice-Chairman of the Governing
Board of the Swiss Bankers
Association in 2015.
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.,
Quaker Oats Company and
Motorola Inc.
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
Dr Goodman previously served in
senior leadership positions at the
US Food and Drug Administration
(FDA), including most recently as the
FDA’s Chief Scientist and previously
as Deputy Commissioner for
Science and Public Health and as
Director of the Center for Biologics
Evaluation and Research (CBER).
Dr Goodman played a leadership
role in developing the FDA’s
Regulatory Science and Medical
Countermeasures Initiatives and has
worked collaboratively with industry,
academia, government and global
public health and regulatory partners
to prepare for and respond to major
public health threats, including
emerging infectious diseases,
disasters and terrorism. He led the
FDA’s response to West Nile Virus
and to the 2009 H1N1 influenza
pandemic and served on the Senior
Leadership Team for the 2010 White
House Medical Countermeasure
Review. Dr Goodman brings
scientific and public health expertise
to the Board’s deliberations.
External appointments
Dr Goodman, currently Professor of
Medicine at Georgetown University,
directs the Georgetown University
Center on Medical Product Access,
Safety and Stewardship
(COMPASS) and is an active
clinician who serves as Attending
Physician in Infectious Diseases.
He also serves as President and
Member of the Board of the United
States Pharmacopeia (USP) and as
a member of the Scientific Advisory
Board (SAB) of the Coalition for
Epidemic Preparedness Innovations
(CEPI).
Other Board members
Sir Deryck Maughan was
Senior Independent Non-
Executive Director and a member
of the Nominations, Audit & Risk
and Remuneration Committees
until his retirement from the
Board on 5 May 2016.
Dr Stephanie Burns was an
Independent Non-Executive
Director and a member of the
Remuneration and Corporate
Responsibility Committees until
her retirement from the Board
on 5 May 2016.
Dr Daniel Podolsky was an
Independent Non-Executive
Director and a member of the
Audit & Risk and Corporate
Responsibility Committees until
his retirement from the Board
on 5 May 2016.
Hans Wijers was an
Independent Non-Executive
Director and a member of the
Remuneration and Corporate
Responsibility Committees until
his retirement from the Board
on 5 May 2016.
Stacey Cartwright was an
Independent Non-Executive
Director and a member of the
Audit & Risk Committee until
her retirement from the Board
on 31 December 2016.
Strategic reportFinancial statementsGovernance and remunerationInvestor information
86 GSK Annual Report 2016
Our Corporate Executive Team
1
2
3
4
1. Sir Andrew Witty
Chief Executive Officer
2. Emma Walmsley
CEO Designate
3. Simon Dingemans
Chief Financial Officer
4. Patrick Vallance
President, R&D
For biographical details, see pages 82
and 83.
David Redfern
Chief Strategy Officer
Claire Thomas
Senior Vice President, Human Resources
David joined CET as Chief Strategy Officer
in 2008 and is responsible for corporate
development and strategic planning. He
was appointed Chairman of the Board of
ViiV Healthcare Ltd. in April 2011 and a
Non-Executive Director of Aspen
Pharmacare Ltd.
Previously, he was Senior Vice President,
Northern Europe with responsibility for 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.
David has a Bachelor of Science degree
from Bristol University in the UK and is a
Chartered Accountant.
Claire was appointed to CET as Senior Vice
President, Human Resources in 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, Pharmaceuticals
International in 2006.
Prior to GSK, 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.
Abbas Hussain
President, Global Pharmaceuticals
Dan Troy
Senior Vice President & General Counsel
Abbas joined CET in 2008 and was appointed
President, Global Pharmaceuticals in 2014,
having joined the company as President, Emerging
Markets & Asia Pacific in 2008. He joined the
ViiV Healthcare Ltd Board in October 2009.
Previously, he spent 20 years at Eli Lilly where
he held positions including President, Europe.
He also worked for Eli Lilly in Australia, the US,
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.
In January 2017, GSK announced Abbas’
decision to leave the company later in the year.
Dan joined GSK and CET as Senior Vice
President & General Counsel in 2008.
He was previously a Partner at the Washington
law firm Sidley Austin LLP, where he principally
represented 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.
Dan holds a B.S. in Industrial and Labor Relations
from Cornell University and a J.D. from Columbia
University School of Law. He chairs the US
Chamber of Commerce Litigation Center.
87 GSK Annual Report 2016
Phil Thomson
Senior Vice President, Communications
and Government Affairs
Roger Connor
President, Global Manufacturing
& Supply
Nick Hirons
Senior Vice President, Global Ethics
and Compliance
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, Government Affairs and GSK’s
Global Brand and Community Partnerships.
He joined the company as a commercial trainee
in 1996, moving from pharmaceutical brand
marketing to product communications. In 1999,
he became Director of Media Relations and was
then Director, Investor Relations from 2001 to
2004, when he returned to Corporate Media
Relations as Vice President.
In July 2016, he became a Co-Opted Member
of the China-Britain Business Council.
Phil earned his degree in English and History
from Durham University.
Roger joined CET in 2012 and was appointed
President, Global Manufacturing & Supply (GMS)
in 2013, after working for a year as President
Designate, GMS. Roger joined GSK in 1998
from AstraZeneca and worked in a number of
finance and manufacturing strategy roles.
Prior to his current position, he 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.
Nick was appointed to CET in 2014 as Senior
Vice President, Global Ethics and Compliance,
responsible for compliance, risk management
and corporate security and investigations.
Nick joined GSK in 1994 as an International
Auditor. He was later Head of Audit & Assurance,
where he combined five audit functions into an
independent team with a common risk-based
methodology. In 2013, Nick relocated to China
to establish a governance model for our China
business that created a consistent approach
to compliance.
Nick is a fellow of the Chartered Institute of
Management Accountants.
Luc Debruyne
President, Global Vaccines
Brian McNamara
CEO, GSK Consumer Healthcare
Luc joined CET in 2016 as President, Global
Vaccines, a role he has held since 2013. He joined
GSK in 1991 and worked as a commercial
strategy director in R&D, before leading the
European Commercial Centre of Excellence in
2005. In 2006, Luc became General Manager of
the Netherlands and then in 2010 Senior Vice
President and General Manager in Italy. In 2012,
he was appointed Senior Vice President, Pharma
Europe, prior to his current role. Luc is a member
of the International Federation of Pharmaceutical
Manufacturers & Associations (IFPMA) Vaccines
CEO Roundtable, as well as the Management
Committee of the Belgian Federation of
Enterprises.
He holds a Master’s degree in Physical Education
from University of Leuven.
Brian joined CET in 2016, when he was appointed
CEO, GSK Consumer Healthcare. Brian joined
GSK in March 2015 as Head of Europe and
Americas for GSK Consumer Healthcare,
following the creation of a joint venture between
GSK and Novartis. Previously, he was head of
Novartis’s OTC division. Brian began his career
at Procter and Gamble. He is a board member of
the World Self-Medication Industry Association.
He earned an undergraduate degree in Electrical
Engineering from Union College in New York
and an MBA in Finance from the University of
Cincinnati.
Further information
During the year Dr Moncef Slaoui
was a member of CET and stood down
on 31 December 2016 (see page 83).
In January 2017, Luke Miels was appointed
President, Global Pharmaceuticals; his start
date with GSK is to be confirmed.
Strategic reportFinancial statementsGovernance and remunerationInvestor information 88 GSK Annual Report 2016
Corporate Governance continued
Leadership and effectiveness
Corporate governance framework
The Board has a coherent corporate governance framework with clearly defined responsibilities and accountabilities. The framework is
designed to safeguard and enhance long-term shareholder value and to 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 18 to 19, and 105 to 106,
are an integral part of GSK’s governance framework.
For the Board to operate effectively and to give full consideration to key matters, Board Committees have been established as set out below.
Board
Chief
Executive
Officer
Corporate
Executive
Team
Audit & Risk
Committee
Remuneration
Committee
Nominations
Committee
Corporate
Responsibility
Committee
Science
Committee
Read more on
page 97
Read more on
page 112
Read more on
page 94
Read more on
page 108
Read more on
page 81
See www.gsk.com
for terms of reference
See www.gsk.com
for terms of reference
See www.gsk.com
for terms of reference
See www.gsk.com
for terms of reference
See www.gsk.com
for terms of reference
2016 Board and Committee meeting attendance
Members
Sir Philip Hampton
Sir Andrew Witty
Simon Dingemans
Dr Moncef Slaoui
Professor Sir Roy Anderson
Vindi Banga
Dr Vivienne Cox
Appointed on 1 July 2016
Lynn Elsenhans
Dr Jesse Goodman
Judy Lewent
Urs Rohner
Stacey Cartwright
Retired on 31 December 2016
Dr Stephanie Burns
Retired on 5 May 2016
Sir Deryck Maughan
Retired on 5 May 2016
Dr Daniel Podolsky
Retired on 5 May 2016
Hans Wijers
Retired on 5 May 2016
Board
Audit & Risk
Remuneration
Nominations
Corporate Responsibility
Attended
Maximum
possible
Attended
Maximum
possible
Attended
Maximum
possible
Attended
Maximum
possible
Attended
Maximum
possible
6
6
6
6
6
6
3
6
6
6
5
5
3
2
2
3
6
6
6
6
6
6
3
6
6
6
6
6
3
3
3
3
6
6
6
5
2
2
6
6
6
6
3
3
5
5
4
2
2
2
5
5
5
2
2
2
6
6
5
6
6
6
6
6
6
6
2
3
4
3
4
4
1
1
1
4
3
4
4
1
1
1
Details of other regular attendees at Committee meetings, such as the Chairman, CEO and other Executive Directors, are set out in the reports of our Committees. These
reports are included later in the Corporate Governance Report.
89 GSK Annual Report 2016
2016 Board programme
Areas of focus
Strategic priorities link
Strategy
The Board’s oversight of the execution of our strategy included:
– Reports from our principal businesses, R&D, and GMS organisations
– Discussion and approval of the strategic combination with Verily Life Sciences to develop bioelectronic
medicines, resulting in the Galvani joint venture
– Holding a joint Board & CET strategy day to discuss the evolution of our strategy, external landscape
changes, competitor advantage and governance arrangements
– Reports on our pensions, insurance, tax and treasury strategies
– Review of our R&D pipeline and new products
– Review of our ViiV Healthcare joint venture
Performance
During the year, the Board regularly discussed:
– Reports from the CEO, the heads of our principal businesses and R&D and GMS organisations
– The Group’s financial performance
– The annual budget and forward looking three year plan
– Progress on our Finance transformation programme to enhance our processes and service capabilities
– Brexit impacts and planning
Governance
The Board undertook the following corporate governance duties:
– Received reports from Board Committees
– Approved the 2015 Annual Report
– AGM preparation
– Considered observations and actions from the internal evaluation of the Board’s performance
– Received reports on corporate governance and regulatory developments
– Training on our Corporate Integrity Agreement (CIA), the new Market Abuse Regulations (MAR), and
our updated Code of Conduct
– Approved the appointment of new CEO and Directors
– Approved the appointment of new auditor with effect from 2018
Talent and succession
The Head of HR briefed the Board on:
– the Talent and Leadership Development strategy
Strategy key:
Grow
Deliver
Simplify
Strategic reportFinancial statementsGovernance and remunerationInvestor information
90 GSK Annual Report 2016
Corporate Governance continued
Leadership and effectiveness continued
Key Board roles and responsibilities
Strong leadership
Chairman
Philip Hampton
Independent oversight and rigorous challenge
Non-Executive Directors
– Leads and manages the business of the Board
– Provides direction and focus
– Ensures clear structure for effective operation of the Board
and its Committees
– Sets Board agenda and ensures sufficient time is allocated to
promote effective debate and support sound decision making
– Provide a strong independent element to the Board
– Constructively support and challenge management and
scrutinise their performance in meeting agreed deliverables
– Shape proposals on strategy and management
– Each has a letter of appointment setting out the terms and
conditions of their directorship
– Ensures the Board receives precise, timely and clear
– Devote such time as is necessary to the proper performance
information
– Meets with each Non-Executive Director on an annual basis
to discuss individual contributions and performance, together
with training and development needs
– Shares peer feedback that is provided as part of the Board
evaluation process
– Meets with all the Non-Executive Directors independently
of the Executive Directors
– Leads discussions with shareholders to whom he is
responsible for the Group’s performance
– Satisfied the Financial Reporting Council’s UK Corporate
Governance Code independence test on appointment.
The Chairman’s role description
is available on www.gsk.com
Chief Executive Officer
Sir Andrew Witty
– Is responsible for the management of the business
– Develops the Group’s strategic direction for consideration
and approval by the Board
– Implements the agreed strategy
– Is supported by members of the Corporate Executive Team.
The Chief Executive Officer’s role description
is available on www.gsk.com
of their duties
– Are expected to attend all Board meetings and additional
meetings as required.
Independence statement
The Board considers all of its Non-Executive Directors who are
identified on pages 84 to 85, including Professor Sir Roy Anderson
with tenure of more than nine years, to demonstrate an appropriate
degree of independence in character and judgement and to be
free from any business or other relationship which could materially
interfere with the exercise of their judgement. The independence
and commitment of those Non-Executive Directors who have served
on the Board for over six years has been subjected to a rigorous
review.
Senior Independent Non-Executive Director
Vindi Banga
– Acts as a sounding board for the Chairman and a trusted
intermediary for other Directors
– Leads the review annually of the Chairman’s performance,
canvassing views from the Non-Executive Directors collectively
– Discusses the results of the Chairman’s effectiveness review
with the Chairman
– Leads the search and appointment process and
recommendation to the Board of a new Chairman
– Acts as an additional point of contact for shareholders
– In doing so, maintains an understanding of the issues and
concerns of major shareholders through briefings from the
Investor Relations team and the Company Secretary.
The Senior Independent Non-Executive Director’s role
description is available on www.gsk.com
Timely support and advice
Company Secretary
Victoria Whyte
– Acts as a Secretary to the Board and all Board Committees
– Supports the Board and Committee Chairmen in annual agenda plan setting
– Ensures information is made available to the Board members in a timely fashion
– Facilitates the flow of information within the Board and Committees and between
Non-Executive Directors and management
– Supports the Chairman in designing and delivering Board inductions
– Coordinates ongoing business awareness and training requirements for the
Non-Executive Directors
– Undertakes internal Board and Committee evaluations at the request of the Chairman
– Advises the Directors on Board practices and procedures and corporate
governance matters
– Chairs the Group’s Disclosure Committee
– Acts as a point of contact for shareholders on corporate governance.
91 GSK Annual Report 2016
Board induction
The Company Secretary assists the Chairman in individually
designing and facilitating induction programmes for new Directors.
They are designed with the purpose of orientating and familiarising
new Directors with our industry, organisation, governance and
strategy to Grow, Deliver & Simplify. During the year, Emma Walmsley,
our CEO Designate, Dr Jesse Goodman, a new US-based Science
and Medical Expert, and Dr Vivienne Cox, a highly experienced
UK-based Non-Executive Director, were all appointed to the Board.
Each new Director receives a general induction. A personalised
induction is then devised which is individually tailored to each new
Director’s background, education, experience and role.
General Board induction
Executive
– Emma Walmsley
Non-Executive
– Dr Jesse Goodman
– Role of an Executive
– Dr Vivienne Cox
Director
– Build relationship with
Chairman and the
Board
– Fill any capability gaps
– Role of a Non-Executive
Director
– GSK strategy,
competitors and
external environment
– Meet CET members
– GSK’s financial
structure
All Directors
– Director’s duties and
responsibilities
– GSK’s Corporate
Governance structure
– GSK Corporate Integrity
Agreement (CIA) training
– GSK’s Code of Conduct
training
Customised Executive Director induction
Customised Non-Executive Director induction
Emma Walmsley
CEO Designate
– Maximise handover opportunity with CEO
– Continue to build knowledge of business and external
environment
– Engage broadly across the business and externally in
‘listening’ mode
– Define her leadership brand as CEO
– Finalise her strategy, its narrative and financial plan
– Define the culture/ways of working for the CET and the
wider GSK Group
– Legal responsibilities and duties of a CEO
Dr Jesse Goodman
Scientific & Medical Expert
– R&D and Vaccines
deep dives
– Site visits to: Ware,
Stevenage and Wavre
– Corporate Responsibility
Committee induction
Dr Vivienne Cox
– Briefing on US business
and commercial model
– Site visits to: Ware,
Stevenage and Wavre
– Remuneration and
Corporate Responsibility
Committee inductions
Board, business awareness and training
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, Research Advisory Board, the Research & Development
Management Team (RDMT), the Portfolio and Discovery Investment
Boards, the Global Pharma Operations Committee, the US
Commercial Leadership Team and the Risk Oversight and
Compliance Council (ROCC). They also meet employees
informally during visits to the Group’s operations and at
receptions held around Board meetings.
The Chairman 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 and briefings
from the Company Secretary and presentations by internal and
external advisers.
During 2016, the Board members undertook specific refresher
training on GSK’s CIA and on the new MAR regulations and
agreed to undertake training on GSK’s Code of Conduct.
Strategic reportFinancial statementsGovernance and remunerationInvestor information 92 GSK Annual Report 2016
Corporate Governance continued
Leadership and effectiveness continued
2016 Internal evaluation of the Board
Internally facilitated by the
Company Secretary at the
Chairman’s request.
She prepared an online survey
comprising a small number
of focused questions.
The Company Secretary drew
all the responses together
from the information gathering
stages of the evaluation
process and discussed them
with the Chairman.
Phase one
Preparation
Phase two
Interviews
Phase three
Review
Phase four
Outcomes
The Company Secretary had
follow-up face-to-face or
telephone interviews with
Board members to discuss
their responses and to invite
members to provide any
clarifications and further
insights and perspectives on
the performance of the Board.
The Company Secretary
prepared a Board paper for
the January 2017 meeting
that formed the basis of the
discussions with the Board.
Learning points/successes and
areas of focus for the Board
were identified and are set out
below.
Successes
Areas of focus for 2017
– The CEO succession process had been a
comprehensive, reflective and informative process,
which concluded successfully to schedule.
– Work to increase the Board’s visibility and
understanding of the pipeline and R&D organisation
had been appreciated.
– The creation and establishment of the Science
Committee would further enhance the Board’s
oversight of the Group’s R&D.
– New Board members had settled in quickly and
made immediate and positive contributions following
comprehensive inductions.
– The Board had successfully created increased
opportunity for strategic debate.
– Create more opportunities for deeper strategic
discussions, particularly on the evolution of the
pharmaceuticals industry, the competitive landscape,
therapy areas and GSK culture and performance.
– Identify ways to further improve the Board’s
decision making.
– Further increase Board oversight of science and
innovation in collaboration with the new Science Committee.
– Consider how data from the new IT systems can
contribute to greater understanding and hence help
evolve the business strategy.
93 GSK Annual Report 2016
2016 Board performance action points
Progress against the conclusions of the 2015 Board evaluation review, internally facilitated by our Company Secretary, is set out below.
Action points
Strategy
Progress/Achievements
– Assist newer Directors with additional background briefing materials
ahead of debates on strategy.
Additional materials are now provided on the
company’s Board portal.
– Arrange more regular discussion of medium and longer term strategy
with fresh insights from different perspectives.
– Implement suggestions to further enhance the effectiveness of the
annual Board & CET strategy meetings.
The Board agenda was compiled to include more
opportunities to consider strategy from different
perspectives.
The Board provided positive feedback on the
2016 meetings held at the newly acquired
Siena sites.
Executive
succession and
NED refreshment
– Further increase the focus on executive succession plans and ensure
the effectiveness of the disaster recovery plan.
– Consider alternative suggestions for Non-Executive Director refreshment.
The Board was well positioned to operate its
executive succession plans, that resulted in
appointments to the Board and CET. These are
described in more detail in the report of the
Nominations Committee on pages 94 to 96.
New approaches to identifying potential scientific
and medical experts were utilised during 2016,
supported by external recruitment experts.
Deep dives
and sites visits
– Consider further deep dives particularly on:
R&D strategy and pipeline, product launches, US pricing, joint ventures,
new business models and GMS.
The 2016 Board meeting programme was adjusted
to consider these matters during the year.
– Consider holding one site visit to an operational site each year.
Shareholders
– Review and look to further enhance how the company communicates
with shareholders.
The joint Board & CET strategy meetings in
September 2016 were held in Siena, Italy at the
manufacturing and R&D facilities acquired as a
result of the Novartis transaction. The Board had
the opportunity to meet employees and were able to
learn at first-hand how these facilities, people and
processes had been integrated into the wider Group.
During the year, the Board and Audit & Risk
Committee continued to enhance quarterly reporting
to assist shareholders’ understanding of the
company’s performance and standing.
Board materials
and logistics
– Continue the drive to make Board/Committee materials more concise
and also effective in highlighting issues and concerns.
– Aim to have less presentation time and more time for discussion and
debate at meetings.
– Allow for social time for Board members to get to know each other
better given the number of new Board members.
The Chairman, Committee Chairmen and the
Company Secretary focused on these issues in
the preparations for, and when chairing, meetings
during 2016.
Strategic reportFinancial statementsGovernance and remunerationInvestor information 94 GSK Annual Report 2016
Corporate Governance continued
Leadership and effectiveness continued
Nominations Committee Report
Philip Hampton
Nominations Committee
Chairman
Role
The Committee reviews and recommends to the Board:
– the structure, size and composition of the Board and
the appointment of Directors, members to the Board
Committees and the CET
– succession to the Board and the CET.
Membership
Committee members
Philip Hampton
Chairman
Professor Sir Roy Anderson
Vindi Banga
Lynn Elsenhans
Judy Lewent
Urs Rohner
Committee member since
27 January 2015
1 October 2012
1 January 2016
27 January 2015
8 May 2014
1 January 2017
Sir Deryck Maughan
9 July 2009 to 5 May 2016
Details of the Committee members’ skills and experience
are given in their biographies under ‘Our Board’ on pages
84 to 85. See page 88 for Committee member attendance
levels.
The Company Secretary is Secretary to the Committee and
attends all meetings. Other attendees at Committee meetings
may include:
Attendees
Chief Executive Officer
Head of Human Resources
Appropriate external advisers
Regular
attendee
Attends as
required
✓
✓
✓
Dear shareholder
2016 was a busy year for the Committee.
Our CEO, Sir Andrew Witty, indicated in March 2016, his intention
to retire from the Board in early 2017, after nearly 10 years as CEO
and almost 32 years with GSK. Our principal focus for 2016 then
became the CEO succession process and related executive
management succession planning.
CEO and executive management succession
The Committee has for some years annually scrutinised the
robustness of succession planning arrangements for the Executive
Directors and each executive management role. The annual review
of Talent and Leadership Strategy has been a key and regular item of
Board and Committee discussion and oversight. The overall aim of
this process is for the Board and Committee to seek assurance that
there is a continuous and adequate supply of high-quality internal
candidates to potentially step up to the Board and CET as required.
The Committee engaged Egon Zehnder and Korn Ferry, who
specialise in the recruitment of high calibre Board directors. Using
both firms ensured that the review process could be truly global
and no companies were inaccessible.
The Committee, with full participation of all the Non-Executive
Directors, then spent time considering the future strategic direction
of the company and, with input from the executive recruitment firms,
compiled a CEO role profile. The profile contained a brief of the
requirements and the desired skill-set that a potential successor
to Sir Andrew would need. This brief was drafted to emphasise the
importance that the Board and Committee placed on the CEO
being a great business leader and team builder.
The executive recruitment firms then initiated global searches
against this agreed profile across all large global pharmaceutical and
healthcare companies. This yielded a pool of internal and external
candidates which was reduced to a shortlist of potential candidates.
The firms reported regularly to the Committee as the process
progressed.
The shortlisted internal and external candidates then met with key
Board members first and were subjected to interviews, continuous
assessments and reviews over an extended period. Each Non-
Executive Director then met each shortlisted candidate at least once.
This culminated in one-to-one discussions between me and each of
our Non-Executive Directors to seek their views on the candidates.
I was very pleased that each Non-Executive Director made it clear
that they considered that the right candidate to succeed Sir Andrew
was Emma Walmsley, CEO of GSK’s Consumer Healthcare division.
The Committee then met to agree a proposal for the Board to
recommend Emma’s appointment as CEO Designate.
The recommendation received unanimous Board approval and on
20 September 2016 it was announced that Emma would join the
Board as an Executive Director with effect from 1 January 2017
and would become CEO with effect from 1 April 2017.
95 GSK Annual Report 2016
Nominations Committee Report continued
The Committee was well-positioned to appoint Emma’s successor
and Brian McNamara, Head of Americas and Europe for GSK
Consumer Healthcare, succeeded her at the end of September
2016. Brian became a CET member with immediate effect. He joined
GSK in March 2015 after the completion of the Novartis transaction.
Since 1 October, Emma has focused her attention completely
on her transition into the role of GSK’s next CEO. Details of her
transition and induction arrangements can be found on page 91.
During the year, the Committee also conducted a search and
appointment process for a new Executive Director when Dr Moncef
Slaoui, our Chairman, Global Vaccines, indicated in June 2016 his
intention to retire from the company in 2017 after over 10 years on
the Board and 28 years with GSK. Moncef will step down from the
Board on 31 March 2017 and will retire from the company on 30
June 2017.
The Committee recommended Dr Patrick Vallance’s appointment
to the Board and on 19 December the Board approved Patrick’s
appointment. He joined the Board as an Executive Director on
1 January 2017.
In addition, Luc Debruyne, our President, Global Vaccines,
since 2013, was appointed a CET member in September 2016 in
anticipation of Dr Slaoui’s retirement from the CET in December
2016.
Luke Miels has been appointed President, Global Pharmaceuticals
and will join GSK and the CET later this year from AstraZeneca
where he was Executive Vice President of their European business.
Abbas Hussain, President, Global Pharmaceuticals has decided to
leave the company after serving nine years on the CET, and he has
agreed that he will leave GSK later this year.
Enhancing the Board’s scientific capabilities
The Board’s scientific capabilities have recently been refreshed with
the appointment of Dr Jesse Goodman, the former Chief Scientist for
the US FDA, who was appointed to the Board on 1 January 2016. He
succeeded Dr Daniel Podolsky, who retired as planned, after 9 years
of service at our AGM in May 2016, as our designated US-based
Scientific and Medical Expert (SME). The Committee is currently
seeking to further enhance the Board’s science capabilities by
engaging Korn Ferry to conduct a global search for a further
Non-Executive Director as an SME.
In addition, a new wholly independent Board Committee, the
Science Committee, was established in December 2016 to provide
oversight of GSK’s R&D pipeline and scientific research strategy.
The Committee recommended to the Board that the Science
Committee be chaired by Dr Jesse Goodman. Other Non-Executive
Directors appointed to the Science Committee included our
UK-based SME, Professor Sir Roy Anderson, and Judy Lewent. The
SME currently being recruited will also be appointed to the Science
Committee. In light of this new Board Committee and to ensure
effective continuity, Professor Sir Roy Anderson, who joined the
Board in 2007, has agreed to stand for re-election by shareholders
before stepping down from the Board at the 2018 AGM. The Board
has confirmed that Professor Sir Roy continues to demonstrate the
characteristics of independence in carrying out his role on the Board.
New Non-Executive Director appointment
During 2016, in addition to the search for two new Executive
Directors and a US-based SME, the Committee searched for
another Non-Executive Director. Egon Zehnder were engaged to
conduct the search, which used broad selection criteria, and
dossiers of potential Non-Executive appointees were considered by
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 Dr Vivienne Cox as a Non-Executive
Director. She was appointed to the Board with effect from 1 July
2016. The Board considered that her many years of international
business experience in global manufacturing organisations with
challenging technologies would bring fresh insights to the Board’s
deliberations.
Board appointments and retirements
The ongoing refreshment of the Board has led to the following
planned changes.
Director
Appointment date
Retirement date
Dr Jesse Goodman
1 January 2016
1 July 2016
1 January 2017
1 January 2017
Dr Vivienne Cox
Emma Walmsley
Dr Patrick Vallance
Stephanie Burns
Sir Deryck Maughan
Dr Daniel Podolsky
Hans Wijers
Stacey Cartwright
Sir Andrew Witty
Dr Moncef Slaoui
5 May 2016
5 May 2016
5 May 2016
5 May 2016
31 December 2016
31 March 2017
31 March 2017
Egon Zehnder and Korn Ferry provide recruitment consultancy
services to the Committee, in addition to recruitment and HR
services which they provide to the company.
Strategic reportFinancial statementsGovernance and remunerationInvestor information 96 GSK Annual Report 2016
Corporate Governance continued
Leadership and effectiveness continued
Nominations Committee Report continued
Board Committee Chairman and membership changes
During the year, the Committee approved the following changes to the membership of our Board Committees.
Committee membership
Appointment date
Retirement date
Director
Vindi Banga
Nominations, Audit & Risk and Remuneration
Committees member
Professor Sir Roy Anderson and Dr Jesse Goodman
Corporate Responsibility Committee members
Dr Vivienne Cox
Dr Jesse Goodman
Corporate Responsibility Committee member
Science Committee Chairman
Professor Sir Roy Anderson and Judy Lewent
Science Committee members
Dr Vivienne Cox
Urs Rohner
Stephanie Burns
Sir Deryck Maughan
Dr Daniel Podolsky
Hans Wijers
Stacey Cartwright
Remuneration Committee member
Nominations Committee member
Remuneration and Corporate Responsibility
Committees member
Nominations, Audit & Risk and Remuneration
Committees member
Remuneration and Corporate Responsibility
Committees member
Remuneration and Corporate Responsibility
Committees member
Audit & Risk Committee member
1 January 2016
1 May 2016
1 July 2016
1 January 2017
1 January 2017
1 January 2017
1 January 2017
5 May 2016
5 May 2016
5 May 2016
5 May 2016
31 December 2016
Board composition and diversity
The Committee has sought to balance the composition of the Board
and its Committees and to refresh them progressively over time so
that it can draw upon the experience of longer serving Directors
and benefit from new external perspectives and insights which
more recent appointees can bring to the Board’s deliberations.
Non-Executive Directors are drawn from a wide range of industries
and backgrounds, including pharmaceuticals and R&D, vaccines,
consumer products and healthcare, medical research and academia
and financial services, and have a wealth of experience of complex
organisations with global reach. The majority of our Board have a
scientific or mathematical background and are attuned to the industry
in which we operate.
We are committed to the diversity of our boardroom just as GSK
is committed to equal opportunities for all our employees at all levels
of the organisation. The Board and management seek to encourage
a diverse and inclusive culture 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. Our diversity policy is in line with Lord Davies’
new voluntary target of at least 33% female Board level
representation by 2020. We currently have 31% women on our
Board and 14% on our Corporate Executive Team. Closing this
gap between Board and CET gender representation and further
increasing the pipeline of female direct reports to the CET is a
particular area of attention. Female pipeline development was also
a central theme of my review, together with Dame Alexander, across
the FTSE 350, which is continuing and developing the valuable work
that Lord Davies initiated in 2011.
The representation of women in management positions at GSK is
illustrated on page 49 as part of the gender diversity of GSK’s global
workforce and alongside initiatives to promote diversity and inclusion
throughout the organisation. We also support the engagement of
executive search firms such as Egon Zehnder and Korn Ferry who
have signed up to the Voluntary Code of Conduct on gender diversity
and best practice.
We have also noted the recommendation set out in the Parker
Review Committee’s report ‘Beyond One by ’21’, published in
November 2016, that each FTSE 100 board should have least one
director of colour by 2021 and have adjusted our diversity policy
accordingly to reflect this new target.
Committee evaluation
The Committee’s annual evaluation was internally facilitated by the
Company Secretary on behalf of the Committee Chairman, and
supplemented by a questionnaire circulated to Committee members.
It was concluded that the Committee continued to operate
effectively.
It was agreed for 2017 that the Committee would seek to identify
another experienced Scientific and Medical Expert and additional
consideration would be given on an ongoing basis to performance
and succession planning for the CET and top talent and GSK’s
performance culture. The Committee would continue to plan for
Non-Executive Director retirements based on the evolution of
Group strategy.
Philip Hampton
Nominations Committee Chairman
13 March 2017
97 GSK Annual Report 2016
Accountability
Audit & Risk Committee Report
Judy Lewent
Audit & Risk Committee
Chairman
Role
The Committee reviews and is responsible for:
– financial and internal reporting processes
– the integrity of the financial statements, including the
Annual Report and quarterly results announcements
– the 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.
Membership
Committee members
Judy Lewent
Chairman
Vindi Banga
Lynn Elsenhans
Stacey Cartwright
Sir Deryck Maughan
Dr Daniel Podolsky
Committee member since
1 April 2011
1 January 2016
1 January 2014
1 April 2011 to 31 December 2016
21 January 2005 to 5 May 2016
1 January 2007 to 5 May 2016
Details of the Committee members’ financial, accounting
or scientific experience and expertise are given in their
biographies under ‘Our Board’ on pages 84 to 85. See
page 88 for Committee member attendance levels.
The Company Secretary is Secretary to the Committee and
attends all meetings. The entire Board is invited to attend the
Committee meetings and other attendees include:
Attendee
General Counsel
Financial Controller
Head of Audit & Assurance
Head of Global Ethics and Compliance
Chief Medical Officer
Chief Product Quality Officer
External auditor
Regular
attendee
Attends as
required
✓
✓
✓
✓
✓
✓
✓
In accordance with the FRC’s Code, the Board has determined
that Judy Lewent has recent and relevant financial experience.
The Board has also agreed that Judy Lewent has the
appropriate qualifications and background to be an audit
committee financial expert as defined by the US Sarbanes-
Oxley Act of 2002, and has determined that she is independent
within the meaning of the US Securities Exchange Act of 1934,
as amended.
In addition, Judy Lewent and Vindi Banga 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.
Dear Shareholder
In the following pages of this report, we aim to share insights into
the activities undertaken or overseen by the Audit & Risk Committee
(the Committee) during the year. The Committee has worked largely
to a recurring and structured programme of activities. I devise this
programme with the Company Secretary and agree its content with
management and the external auditors at the start of each year.
It is then adapted as appropriate as the year progresses.
Running and concluding a successful tender of the external audit
contract was a significant undertaking for the Committee, supported
by management, during the year. This exercise, together with the
Committee’s scrutiny of further enhancements and simplifications
to our internal control, risk management and financial reporting
systems and processes, is covered below.
External auditors
Conclusion of audit tender: Last year, we advised shareholders
that the Committee was putting the external audit contract out to a
competitive tender process, which the Committee initiated in July.
The process was concluded in December 2016 when the Board
appointed the Committee’s preferred choice of Deloitte LLP
(Deloitte) as the company’s new auditors. Our current external
auditor, PricewaterhouseCoopers LLP (PwC), was not invited to
participate in the tender due to the prevailing rules on audit firm
rotation. They will continue in office during 2017. Subject to their
reappointment by shareholders at our 2017 AGM, they will retire
after completing the 2017 audit.
From GSK’s 2018 financial year onwards, Deloitte will be appointed
in PwC’s place, subject to shareholder approval. We wish to thank
each firm that participated in the tender for the professionalism and
commitment they demonstrated through the process.
A full report on the key steps, governance arrangements and outputs
from the audit tender process is given on page 102. The Committee’s
judgement was that Deloitte was best placed to succeed PwC and
deliver a high quality audit for GSK.
The Committee is currently overseeing the transition from PwC to
Deloitte to ensure that:
– PwC continues to discharge its auditing responsibilities effectively
to the end of its time in office; and
– Deloitte takes the necessary steps to ensure that it is independent
of GSK by the time it begins to observe PwC at an appropriate
juncture in 2017.
I look forward to reporting to shareholders on discharging the
activities associated with this transition in GSK’s 2017 Annual
Report.
Strategic reportFinancial statementsGovernance and remunerationInvestor information 98 GSK Annual Report 2016
Corporate Governance continued
Accountability continued
Audit & Risk Committee Report continued
The Financial Reporting Council Audit Quality Review:
The Committee’s confidence in the external auditor’s delivery of
a high quality and effective audit for GSK was reinforced by the
outcome of the FRC’s Audit Quality Review team’s (the AQR) review
of PwC’s audit of GSK’s 2015 financial statements. The GSK audit
was selected as part of the AQR’s annual inspection of the audit
quality of the largest audit firms in the UK. The Committee discussed
the results and outcome of the review. The AQR’s findings
corroborated the results of the Committee’s own independent
evaluation of PwC, which concluded that the external auditor was
effective. The Committee received a report from PwC detailing how
the 2016 audit would address the small number of findings identified
by the AQR team and was satisfied with PwC’s planned response.
Competition and Markets Authority compliance statement:
The Committee considers that, during 2016, the company has
complied with the mandatory audit processes and audit committee
responsibility provisions of the Competition and Markets Authority
Statutory Audit Services Order 2014. This report describes the work
of the Committee in discharging these responsibilities.
Pre-approval of non-audit services: The Committee reviewed and
discussed adapting the company’s approach to its existing non-audit
services policy, to comply with new requirements set out in the FRC’s
revised Ethical Standards and the implementation of the EU Audit
Regulation for GSK’s 2017 financial year. In particular, we agreed
changes to our non-audit services pre-approval process in line with
the new restrictions on auditors supplying non-audit services to UK
listed companies. These changes are outlined on page 104.
Internal framework for control and risk management
developments
This is a core discipline for the Committee. In 2016, the following
developments in the business units and across the enterprise in the
areas of communication, reporting, training and analytics helped
strengthen our culture of compliance and risk management.
Anti Bribery And Corruption (ABAC) and Third Party Oversight
(TPO) programmes: These are a high priority for the Committee and
it has overseen the following areas of progress made during the year:
– ABAC Global Risk Assessment: This new programme was
launched to significantly enhance the way our ABAC risk is
identified and prioritised across the Group. Existing ABAC
data has been centrally pooled by our Global Risk Office to help
how our ABAC risk exposure is measured. This has enabled
management to target risk mitigation techniques on the company’s
highest risk activities, business units and regions.
– TPO programme: This provides a standard framework which
governs all third party relationships and has moved from design
to deployment phase. This supplier assessment programme
operates in a large majority of our Latin America and South East
Asia markets. It is applied across our range of third parties and is
used in particular to assess suppliers deemed by GSK to be high
risk. Risk levels and corrective and preventative action tracking are
now managed via an easy-to-use reporting system by our
employees who are enrolled in this programme.
During 2017, the TPO programme is expected to cover our
global operations. This will ensure continued risk management
improvements in respect of our third party relationships,
embedding a basic TPO capability into our Supplier Lifecycle
Management software and introducing further buying experience
simplifications.
SEC settlement: In 2016, GSK entered into a settlement with the
US Securities and Exchange Commission (SEC) in relation to its
inquiry into past sales and marketing practices in China. Under this
settlement, the company has obligations to provide the SEC with
information on the framework and evolution of our ongoing ABAC
programme for monitoring purposes. The Committee reviews and
considers updates before they are provided to the SEC, as agreed
under the settlement.
InfoProtect: To reflect a fast evolving landscape and its potential
impacts on this key enterprise risk, our multi-year InfoProtect
programme was refreshed in 2016. Heightened attention is being
paid to those areas of our business that have the highest risk
exposure. Improvements have been prioritised for delivery to achieve
the greatest risk reduction and improve the maturity of our information
security and privacy processes. Our Chief Information Security
Officer (CISO) and our CFO (who has Board-level responsibility for
this enterprise risk) continue to ensure our cyber security defences
remain strong and effective. The CFO and CISO brief the Committee
regularly on developments.
Enhanced governance around reporting: The Committee and Risk
Oversight & Compliance Council (ROCC) receive internal control
and risk management reports throughout the year. These are based
on their respective governance responsibilities within the wider
organisational internal risk governance framework. The efficiency
and quality of this upward reporting mechanism is crucial in assisting
the Committee in properly monitoring GSK’s internal framework for
control and risk management. During 2016, the Global Risk Office
has implemented the following Committee and ROCC reporting
improvements into business units and across our risk enterprise
exposures.
The Committee reporting schedules have been improved so that risk
management reports from the business units are presented to the
ROCC after they have been submitted to the Committee. This means
that the Committee’s feedback can be properly incorporated into
management’s deliberations at the ROCC. In addition, our business
units now provide six monthly updates to the ROCC that concentrate
on progress against their top three risk management commitments.
This simplification has helped foster a more focused discussion at
the ROCC on each business unit’s risk management priorities.
To help the Committee improve its understanding of our enterprise
risk strategies, GSK’s enterprise risk owners are encouraged to
provide commentary on the organisation’s risk tolerance in respect
of the specific risk they are responsible for mitigating. In addition,
the development of risk performance dashboards for ABAC,
Product Quality and Research Practices, has further enhanced the
Committee’s ability to understand and monitor our risk exposure
levels on an ongoing basis.
Compliance activities
Building trust by embedding our Values: Our Global Ethics &
Compliance (GEC) function continues to embed its ‘Living our
Values and Building Trust’ strategy to help motivate employees to put
the company’s core values at the heart of every decision they make.
In particular, GEC deployed enterprise-wide training for employees
to coincide with the release in April 2016 of GSK’s updated Code
of Conduct. This is at the heart of our compliance programme and
focuses on GSK’s core values of Patient Focus and Integrity,
Respect for People and Transparency.
99 GSK Annual Report 2016
Audit & Risk Committee Report continued
In addition to delivering training to our employees across the
enterprise, GEC has also introduced the following training tools
specifically aimed at team leaders to help reinforce values based
conduct in their teams:
– Leader Led Discussion toolkit: This has been launched to enable
leaders and teams to have meaningful discussions on the
importance of GSK’s values and ‘right first time’ culture. These
discussions are informal and short in length, provide opportunities
to explore GSK’s values and for leaders and their teams to think
about what quality means in their part of the company’s business.
The toolkits use a combination of external events and research
such as academic studies around why good employees can
sometimes make poor decisions.
– Values Maturity Assessment: This is a leadership team self-
assessment tool which allows teams to assess how well values
are embedded into the business and establishes a values
improvement plan based on the outcome of the assessment.
During 2016, Values Maturity Assessments (VMA) were
undertaken by GEC across a third of GSK’s business units, in line
with a values objective set by the Corporate Executive Team. This
VMA roll out is continuing in 2017 across all our business units.
GM certifications: The General Manager (GM) confirmation process
across Pharmaceuticals and Vaccines has continued throughout
2016, requiring GMs to confirm their adherence to GSK’s Internal
Control Framework. A revised confirmation process was launched
in September 2016. It focused on specific risk areas, including
TPO, Health Care Professional and government official interactions,
embedding ABAC, and other risks associated with pricing and
commercial terms. In 2016, Consumer Healthcare implemented a
similar process for its GMs to confirm the operation of our internal
control framework for key risks and minimum controls.
Corporate Integrity Agreement: The Committee has oversight of
the company’s responsibilities under a US Corporate Integrity
Agreement (CIA) signed with the US Department of Health and
Human Services in 2012, which is now in its final year, although
commitments with certain States regarding salesforce compensation
extend into 2019. During 2016, the Committee continued to receive
quarterly CIA compliance and assurance updates from the Head of
GEC. It also reviewed and recommended to the Board the adoption
of the annual resolutions that confirm adherence to the terms of the
CIA for inclusion in the certification reports the company provides to
the appropriate US regulatory authorities each year.
Given the success of the GM confirmation and CIA certification
processes so far and because the CIA is due to end in 2017, the
Committee is keen to retain the best practice compliance disciplines
of the CIA. As a result it is assessing GEC’s proposal to roll-out
a tailored Business Unit Confirmation that combines the principles
of these two processes. This proposed simplification is designed to
provide the Committee with consolidated assurance that our internal
control framework requirements are identified and understood, and
that any possible gaps are identified and addressed at each of our
business units.
Global reporting system platforms
The Committee was pleased to oversee significant progress being
made in moving towards more standardised, global systems which
support our end-to-end processes. Management continued to
deploy upgrades as planned, with a major system deployment
completed during the first half of 2016 to schedule and on budget.
The remaining deployments under this multi-year programme are
being completed during 2017 and early 2018, with an increasing
focus on capturing the benefits that these new standardised systems
and processes generate for GSK.
My role
Finally, my role as Chair of the Committee continues to be busy and
varied. During the year, I had significant interactions with key senior
executives and our auditors, and attended a range of management
meetings, including those of the ROCC, Consumer Healthcare,
Finance GEC and Global Manufacturing & Supply leadership teams.
I also led the audit tender process and met the bidding firms’ audit
partners and teams to familiarise myself with their qualities and
capabilities and to gain an impression of what it could be like to
work with them.
Along with my Board colleagues, I was pleased to visit our
manufacturing and R&D facilities in Siena, Italy that had been
acquired as part of the Novartis transaction in 2015. We met local
senior executives and employees and were able to learn at first-hand
how these facilities, people and processes have been integrated into
the wider Group. I was also pleased to learn how GSK’s internal
control and risk management practices have been translated and
embedded in the business.
On a personal note I would like to acknowledge Sir Andrew’s
contribution to the company. He has been a visionary leader driving
GSK’s values during his term as CEO and he led positive change in
established industry ways of working. I would like to wish him well in
his next endeavours and I very much look forward to working with his
successor, Emma Walmsley, when she succeeds him as CEO from
1 April 2017.
Judy Lewent
Audit & Risk Committee Chairman
13 March 2017
Strategic reportFinancial statementsGovernance and remunerationInvestor information 100 GSK Annual Report 2016
Corporate Governance continued
Accountability continued
What the Committee did during 2016
Areas of Committee focus
Items discussed
Financial reporting
– Reviewed integrity of draft financial statements, appropriateness of accounting policies and going concern
assumptions
– Considered approval process for confirming and recommending that 2015 Annual Report is fair, balanced
and understandable
– Reviewed and recommended approval of 2015 Annual Report and Form 20-F
– Reviewed and approved Directors’ expenses
– Reviewed and recommended approval of quarterly and preliminary results announcements and dividends
– Reviewed significant issues in relation to the quarterly and preliminary results
– Considered evolving market practice on the Viability Statement requirements
– Reviewed and recommended inclusion of the Viability Statement for the 2015 Annual Report
– Reviewed accounting developments and their impacts and key accounting issues
– Reviewed GAAP vs Non-GAAP reporting
– Reviewed Global Pharmaceuticals, Vaccines, R&D, GMS and Consumer Healthcare business unit assurance
reports
– Reviewed GSK’s internal control framework
– Confirmed compliance with Sarbanes-Oxley Act
– Reviewed Audit & Assurance work during 2015 and approved the planned work for 2016
– Undertook Corporate Integrity Agreement (CIA) training
– Undertook new Market Abuse Regulation training
– Received and renewed CIA compliance and assurance reports
– Reviewed reports on the Operational Excellence programme
– Reviewed the implementation of new systems for Group Support Functions
– Received litigation reports and updates
– Received ABAC investigation status reports
– Reviewed and approved audit/non-audit expenditure incurred during 2015
– Considered the auditors’ report on the 2015 annual results
– Performed evidence-based assessment of external auditors and the effectiveness of 2015 external audit
– Considered qualifications, expertise and independence of the external auditors
– Recommended the re-appointment of the external auditor and for the Committee to agree auditors’ remuneration
– Approved the 2016 audit plan and audit fee proposal and set performance expectations for auditors
– Considered initial results of 2016 audit
– Reviewed and agreed pre-approval of budget for auditors to provide non-audit services for 2017
– Undertook a competitive audit tender process and recommended to the Board two audit firms, including a
preferred firm, to be appointed for the audit of the 2018 financial statements
Global internal control
& compliance
External auditors
Risk
– Reviewed risk management framework compliance
– Reviewed risk elements of Group treasury, pensions, risk and insurance and tax policies
– Received status reports on following enterprise risks: ABAC, Commercialisation, Crisis and Continuity, EHSS,
Information Protection, Management and Financial Controls and Reporting, Product Quality and Research Practices
– Received an update on integration following the Novartis transaction
– Received terrorism risk assessment reports
– Received update on Brexit implications
– Received Risk Oversight Compliance Council meeting updates
– Considered emerging risks
Governance and
other matters
– Confirmed compliance with UK Corporate Governance Code
– Discussed evaluation exercise of Committee, agreed action plan to further improve operation of Committee
– Reviewed the Committee’s terms of reference
– Met privately and separately with the Heads of Global Ethics & Compliance and Audit & Assurance
– Confirmed that the Committee’s terms of reference had been adhered to during 2016
– Received corporate governance updates
– Reviewed and approved the approach to the Modern Slavery Act 2015
– Met privately with the external auditors at the end of each meeting
Committee Activity Key A Annually Q Quarterly P Periodically S Standing
Frequency
A
A
A
A
Q
Q
A
P
P
P
A
A
A
A
A
A
Q
Q
P
S
S
A
A
A
A
A
A
P
Q
S
A
A
P
P
P
P
S
S
A
A
A
A
A
P
P
S
101 GSK Annual Report 2016
Significant issues relating to the financial statements
In considering the quarterly financial results announcements and the financial results contained in the 2016 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.
The significant issues considered in relation to the financial statements for the year ended 31 December 2016 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 Auditors’ Report on pages 149 to 157.
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
investigations into the Group’s
commercial practices
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
£2.2 billion at 31 December 2016 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 76.
The Committee received detailed reports on actual and potential litigation from both internal and external
legal counsel, together with a number of detailed updates on investigations into the Group’s commercial
practices. 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 2016, the provision for legal matters
was £0.3 billion, as set out in Note 29 to the financial statements, ‘Other provisions’.
Provisions for uncertain tax positions
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 2016, the
Group’s balance sheet included a tax payable liability of £1.3 billion.
Impairments of intangible assets
Valuation of contingent consideration
in relation to ViiV Healthcare
Consumer Healthcare put option
ViiV Healthcare put options
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 £29 million in 2016. See
Note 19 to the financial statements, ‘Other intangible assets’ for more details.
The Committee considered management’s judgement that following the further improved sales
performance of Tivicay and Triumeq and the significant weakening of Sterling in the latter part of the year,
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 2016, the Group’s balance sheet included a
contingent consideration liability of £5.3 billion in relation to ViiV Healthcare. See Note 39 to the financial
statements, ‘Contingent consideration liabilities’ for more details.
The Committee considered management’s judgement on the valuation of the liability recognised in respect
of Novartis’ put option over its shareholding in the Consumer Healthcare Joint Venture. This included a
review of the unwinding impact of the discounting of the liability and the increase in the liability caused
by the significant weakening of Sterling in the latter part of the year.
The Committee considered the amendments to the ViiV Healthcare Shareholders’ Agreement made during
the year which resulted in the recognition of the put options held by Shionogi and Pfizer in Q1 2016 and
the subsequent de-recognition of the Shionogi put option in Q4 2016. The Committee reviewed and
agreed the accounting for the put options and concurred with management’s judgement on the valuation
of the Pfizer put option of £1,319 million at 31 December 2016.
Strategic reportFinancial statementsGovernance and remunerationInvestor information 102 GSK Annual Report 2016
Corporate Governance continued
Accountability continued
Audit tendering
PwC has been the auditor of the company and the Group since the
inception of each in 2000. Their performance has been reviewed
annually and audit partner rotation requirements have been observed.
As indicated in last year’s Annual Report, GSK decided to undertake
an external audit tender in 2016 with a view to replacing PwC from our
2018 financial year onwards. This was done in the best interests of our
shareholders and to comply with the audit firm rotation requirements.
A robust governance structure was implemented, headed by the
Audit & Risk Committee (ARC), to manage, support and deliver
a successful audit tender process.
Judy Lewent chaired the Executive Steering Committee (ESC), which
has overseen the audit tender process, evaluated the audit firms and
liaised with the ARC. The other members of the ESC were the CFO,
Group Financial Controller and Company Secretary. The Group
Financial Controller chaired the Operations Steering Committee,
which was made up of finance heads, and coordinated the audit
tender process and a cross-functional Planning Team has provided
day-to-day support and advice. These levels of governance and their
purpose are illustrated in last year’s Annual Report on page 92.
The key objective of the ARC was to deliver a fair, transparent and
successful audit contract tender process with minimum disruption
to the business. It endorsed weighted selection criteria and
evaluation methodology based on GSK’s expectations for the
external auditors. These were equally divided into Audit Quality
and Service and Audit Team Capability and Competence.
In addition, five critical success factors were prioritised and guided
the Committee and the Board in making their final recommendation
and decision which comprised:
– Audit Approach and Strategy;
– High Quality Independent Audit;
– Effective Partnership;
– Risk in Transitioning Auditors ‘in’ and ‘out’; and
– Value for Money
After a detailed market assessment, a number of audit firms,
including some firms outside the Big Four, were approached to
participate in this process. Judy Lewent then made the final pre-
selection of Audit Lead Partners before the Request for Proposal
and data room were issued and opened to the bidding firms in July
2016. Site meetings took place at GSK House over three days in
September 2016, which was an opportunity for our finance and
functional leaders to meet with the bidding firms’ teams face-to-face.
These meetings, which Judy Lewent oversaw with her ESC
colleagues, were a means of discussing GSK’s audit requirements
with each firm to help them develop their proposals, and to evaluate
their technical knowledge, strengths and weaknesses and get a feel
of what it could be like to work with them. Feedback from GSK’s
participants was discussed with the Committee and shared with the
audit partners prior to the submission of their audit tender proposals
in October 2016.
The bidding firms’ proposals were subject to detailed evaluation
with key areas to probe identified for discussion with the audit
partners and their teams at their oral presentations to the Committee
and other GSK attendees that took place in November 2016. All
information from the evaluation stages of the process – site meetings,
written proposal submissions and oral presentations – were shared
with and discussed by the ARC at the conclusion of the process.
This enabled the ARC to recommend to the Board the appointment
of Deloitte as the preferred new auditor from two shortlisted bidding
firms, a recommendation which the Board subsequently endorsed.
GSK has now entered the transition phase of the process leading
up to Deloitte taking on the external audit contract with effect from
1 January 2018 and an update on these activities will be disclosed
in our 2017 Annual Report.
2016 External Audit Tender Process
Governance oversight and key steps
Pre-Tender
Evaluation
Decision making
Key steps
Invitation to
Participate and
Interview of Lead
Partners
RFP issued
and Data
Room
Opened
Site
Meetings
Written
Proposals
Evaluation
Oral
Presentations
to ARC Panel
ARC
Recommendation
Board
Decision
May – July
Governance
ARC Chair,
CFO and
Group Financial
Controller
Outputs
Short listing and
pre-selection
of Lead Partners
September
October
November
December
Executive
and Operations
Steering Co
Executive
and Operations
Steering Co
ARC, Executive
and Operations
Steering Co
ARC and
Executive
Steering Co
ARC
Board
Knowledge
building by firms
Initial feedback
shared with Lead
Partners as input
to development
of their proposals
Proposal
Evaluation and
‘Exam Questions’
For Oral
Presentations
Debrief and
Final Evaluation
of each firm
Recommended
two firms for
appointment, with
a preference
expressed for
one firm
Successful firm
appointed with
effect from 1
January 2018
103 GSK Annual Report 2016
Auditors’ appointment
Ongoing effectiveness and quality of external audit process
The Committee is committed to ensuring on an ongoing basis that GSK receives a high quality and effective audit. In evaluating the
effectiveness of the audit process prior to making a recommendation on the re-appointment of the external auditor, 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.
The activities the Committee typically undertakes each year to satisfy itself of external audit quality and effectiveness, together with
their timelines, are set out below.
Auditor appointment
process
Auditor expectations
setting
Formal auditor appointment
and audit planning
Committee evaluation
and budget setting
Matters addressed:
– review effectiveness of external
auditor against expectations set
in previous year
Matters addressed:
– agree the performance
expectations of the auditor
for the upcoming audit
– review auditor’s independence,
appropriate level of qualifications,
expertise and resources
– consider whether the auditor
exhibited appropriate level
of challenge/scepticism in
their work
– consider whether to initiate or
defer an audit contract tender
– once satisfied, recommend to
the Board auditor re-appointment
at next AGM
Matters addressed:
– shareholders vote at AGM on
resolutions to appoint auditor
and determine their remuneration
– review and agree audit plan
for upcoming audit
Matters addressed:
– review feedback from Committee
members independently as part
of annual Committee evaluation
covering:
– relationship with auditor
– consider auditor’s quality control
– quality of insights they provide
procedures
– agree and set statutory audit fee
– receive management feedback
on prior year’s audit process
through survey covering:
– robustness of audit process
– quality of delivery, people
and service
Committee on their work
– whether they have sufficient
access to auditor without
management
– pre-approve budget for non-audit
services (ideally below 50% of
statutory audit fee) for following
year
January
March
May
December
The detailed criteria the Committee uses for judging the effectiveness of the external auditor and their overriding responsibility to deliver
a smooth running, thorough and efficiently executed audit are set out below:
Performance expectations for GSK’s external auditor
Specific auditor
responsibilities
– Discuss approach and areas of focus in advance with early 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 PwC
– Avoid surprises through timely reporting of issues at all levels within the Group
– Ensure there is clarity of roles and responsibilities between the auditor 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 auditor
– 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.
Wider auditor
responsibilities
– Provide up-to-date advice on the new Viability statement requirement
– Provide up-to-date knowledge of technical and governance issues, including evolving market practice on the Viability statement requirements
– Serve as an industry resource; communicating best practice and industry trends in reporting and integrated 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
– Ultimately provide a high quality service to the Board, be scrupulous in their scrutiny of the Group and act with utmost integrity.
Strategic reportFinancial statementsGovernance and remunerationInvestor information 104 GSK Annual Report 2016
Corporate Governance continued
Accountability continued
Non-audit services
The Sarbanes-Oxley Act of 2002 prohibits the engagement of the
external auditor for the provision of certain services such as legal,
actuarial, internal audit outsourcing or financial information systems
design. Where the external auditor is 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 auditor.
All non-audit services over £50,000 are put out to competitive
tender with financial service providers other than the external auditor,
in line with the Group’s procurement process, unless the skills and
experience of the external auditor make them the only suitable
supplier of the non-audit service under consideration. In this case, a
request for proposal is submitted by the relevant CET member to the
CFO for approval. Non-audit services spending is monitored by the
Committee on a quarterly basis and discussed with the Committee
Chairman.
The following policy guidelines on engaging the external auditor
to provide non-audit services are observed:
– ascertaining that the skills and experience of the external
auditor 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
– ensuring 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 auditor undertaking such
additional work.
This policy, which has been maintained for a number of years by the
Committee, was reviewed in December 2016 for compliance with
the Financial Reporting Council’s (FRC’s) revised Ethical Standards
and the EU Audit Regulation (new regulations). The following three
key policy guidelines were considered by the Committee as part of
its review:
Fee cap: GSK’s existing non-audit services fees cap of 50% of the
annual audit fee in GSK’s policy is more stringent than the FRC’s
new fees cap set at 70% of the average of the audit fees for the
preceding three year period. GSK’s existing policy cap of 50% has
been retained.
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 auditor.
The Committee received a summary of the approach taken by
management in the preparation of GSK’s 2016 Annual Report
to ensure that it met the requirements of the FRC’s Code.
This enabled the Committee, and then the Board, to confirm
that GSK’s 2016 Annual Report taken as a whole is fair,
balanced and understandable.
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 April 2016.
Prohibitions: GSK’s policy has been updated so that the ‘black list’
of prohibited non-audit services in the new regulations are applied
across the Group for GSK’s 2017 financial year onwards. This is
subject to those exceptions outside the EU that the Committee can
approve.
Pre-approval: The FRC’s new guidance for audit committees restricts
the category-wide pre-approval process in GSK’s policy from 2017.
This policy has been updated so that all non-audit services:
– over £50,000 are pre-approved by the Committee Chairman
and CFO as delegated by the Committee;
– between £25,000 and £50,000 are pre-approved by the
Group Financial Controller; and
– under £25,000 are approved by a designate of the Group
Financial Controller.
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 services three year comparison graph (£m)
40
30
20
10
0
20.1
8.6
5.3
8.0
20.1
8.6
5.3
2014
2015
Audit and assurance services
26.6
3.5
2016
The fee for audit and assurance services in 2015 included £8.0 million arising
from the Novartis transaction and the subsequent increase in complexity of the
Group. Approximately half of this is expected to be recurring
Other services, including tax, regulatory, compliance and treasury-related
services
Services related to the Novartis transaction
Committee evaluation
The Committee’s annual evaluation was internally facilitated by
the Company Secretary, and supplemented by a questionnaire
circulated to Committee members on behalf of the Committee
Chairman. It was concluded that the Committee continued to
operate effectively. In terms of enhancements to the Committee’s
deliberations the following improvement points were agreed:
The Committee would focus on ways to further improve the
transparency of the company’s reporting to reflect best practice.
The Committee considered its ways of working and agreed
enhancements to reflect the Committee’s changing agenda.
The Committee asked management to continue to improve the
crispness of reports it received.
The Committee was keen to continue to receive regular updates on
cyber security and to understand how data analytics and technology
could help to monitor employee and supplier behaviour against the
company’s values.
105 GSK Annual Report 2016
Internal control framework
The Board recognises its obligation to present a fair, balanced
and understandable assessment of GSK’s current position and
prospects. The Board is accountable for evaluating and approving
the effectiveness of the internal controls, including financial,
operational and compliance controls, and risk management
processes operated by the Group.
The Internal Control Framework (the Framework) is the means by
which the Group ensures compliance with laws and regulations, the
reliability of financial reporting and comprehensive risk management.
The Framework supports the continuous process of the Board’s
identification, evaluation and management of the Group’s Principal
Risks, as required by the Financial Reporting Council’s (FRC’s) UK
Corporate Governance Code (UK Code), and is designed to
manage, rather than eliminate, the risk of not achieving business
objectives.
A fit for purpose Framework, in conjunction with our values and
‘Speak Up’ processes, ensures that the risks associated with our
business activities are actively and effectively controlled in line with
the agreed risk appetite. We believe the Framework provides
reasonable, but not absolute, assurance against material
misstatement or loss.
To ensure effective governance and promote an ethical culture,
the Group has in place 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 units with a framework for risk management and upward
escalation of significant risks. Each business unit has a risk board
structure which reports to the ROCC. The business unit Risk
Management and Compliance Boards (RMCBs) are responsible
for promoting the local ‘tone from the top’ and risk culture, as well
as ensuring effective oversight of internal controls and risk
management processes.
Each Principal Risk has an assigned risk owner who is a member
of senior management. The risk owner is responsible for reporting
on the risk management strategy for their respective Principal Risk
to the ROCC and the Committee at least once every two years.
The ROCC and the RMCBs are assisted by the Global Ethics and
Compliance division (GEC), which is responsible for advancing risk
management and the development of practices that drive compliance
with policies and support risk-based decision making. GEC actively
promotes ethical behaviours through enabling all members of the
organisation to operate in accordance with our values, and to comply
with applicable laws and regulations.
E n t e r p r ise oversight
A u dit & Assurance
s
e
si n
u
B
Lin e m
s m a n a g e m e n t accountability with complian
a ccountability with com
plia
R i s k
W
A s sessment
&
e m e n t
ritt
n
c
e
e
g
a
a
n
c
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Strategic reportFinancial statementsGovernance and remunerationInvestor information
106 GSK Annual Report 2016
Corporate Governance continued
Accountability continued
Internal control framework continued
The Audit & Assurance division (A&A), in line with an agreed
assurance plan, provides independent assurance to senior
management and the Board on how risk is being managed across
the Group. This assurance helps senior management and the Board
to meet their oversight and advisory responsibilities in fulfilling the
Group’s strategic objectives and building trust with patients and
other stakeholders. A&A has a dual reporting line into the Chief
Financial Officer and the Committee.
The Committee receives regular reports from business units,
Principal Risk owners, GEC and A&A on areas of significant risk
to the Group and on related internal controls. These reports provide
an assessment on the internal control environment within each
Principal Risk area, including enhancements to strengthen the
control environment. Following the consideration of these reports,
the Committee concludes on the effectiveness of the control
environment and reports to the Board annually.
In accordance with the FRC’s UK Code provisions, the Board,
through the authority delegated to the Committee, has conducted
a robust assessment of the Group’s Principal Risks. This includes
the consideration of the nature and extent of risk it is willing to take in
achieving the Group’s strategic objectives. The Board, through the
Committee, has maintained oversight to ensure the effectiveness of
the internal control environment and risk management processes in
operation across the Group for the whole year, and up to the date of
the approval of this Annual Report.
Governance structure of risk management
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, through the
Committee, in reviewing regularly the system of internal controls
and risk management processes is in accordance with the Guidance
on Risk Management, Internal Control and Related Financial and
Business Reporting issued by the FRC.
A review of the Group’s risk management approach is further
discussed in the ‘How we manage risk’ section of the Strategic
report on pages 18 to 19. Our management of each Principal Risk
is explained in ‘Principal risks and uncertainties’ on pages 253 to
262. The Group’s viability is discussed in the Group financial review
section of the Strategic report on page 56.
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R
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 our system of corporate governance, strategy,
risk management and financial performance
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 geography level
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107 GSK Annual Report 2016
Corporate Governance continued
Relations with shareholders
Engagement activities
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 (IR) department, with offices in London and
Philadelphia, acts as a focal point for communications with investors.
The CEO, CFO and the Chairman maintain an active dialogue with
institutional shareholders on performance, plans and objectives
through a programme of regular meetings. During the year they held
over 24 individual meetings with investors and they have also hosted
approximately 13 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 coordinates strategy,
policy development and reporting specifically with respect to CR
matters. Meanwhile, the IR department 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 Senior Independent Non-Executive Director (SID) and all the
Non-Executive Directors are available to meet with shareholders.
Governance and remuneration meetings
A cornerstone of our investor calendar is the annual meetings
that we hold with our top 30 shareholders, key investment
industry bodies and influential proxy advisory firms to discuss
corporate governance and remuneration matters. These
sessions in December 2016, which were attended by the
Chairman, our SID, and our Committee Chairs, covered
a broad range of governance issues and were held morning
and afternoon to allow UK and overseas investors a
convenient opportunity to participate in the discussions.
Philip Hampton, the Chairman, shared updates on key areas
of focus for the Board including:
– oversight of management’s execution of strategy and
performance;
– R&D delivery and the assessment of the pipeline;
– CEO and executive team succession, including CEO
transition activities; and
– the wider evolution and refreshment of the Board.
Urs Rohner, our Remuneration Committee Chairman, took
the opportunity to discuss progress with the Remuneration
Committee’s review of executive remuneration ahead of
our Remuneration policy vote at our AGM in May 2017.
In addition, Judy Lewent, who chairs our Audit & Risk
Committee, and Lynn Elsenhans, who chairs our Corporate
Responsibility Committee, provided an overview of the work
of their respective committees.
Finally, Vindi Banga, our SID, provided his insights and
perspectives into the Board’s culture and dynamics, together
with his impressions of GSK’s senior team, its people and
businesses.
Listening to the views of our shareholders and receiving their
feedback at and after these sessions held in the run up to the
corporate reporting and AGM season helps us to shape key
areas of our corporate governance and remuneration
disclosures.
Annual General Meeting
All shareholders are invited to attend our Annual General
Meeting which this year, like last, will be held in May at the
QEII Centre, London. It provides an opportunity to put
questions to our Board and the Chairmen of each of our
Board Committees during the formal AGM proceedings,
while providing shareholders the chance to meet informally
with our Board directors who will make themselves available
before and after the meeting.
Strategic reportFinancial statementsGovernance and remunerationInvestor information 108 GSK Annual Report 2016
Corporate Governance continued
Corporate Responsibility Committee Report
Lynn Elsenhans
Corporate Responsibility
Committee Chairman
Role
The 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
Membership
Committee members
Committee member since
Lynn Elsenhans
Chairman
Professor Sir Roy Anderson
Dr Vivienne Cox
Dr Jesse Goodman
Dr Stephanie Burns
Dr Daniel Podolsky
Hans Wijers
1 October 2012
1 May 2016
1 July 2016
1 May 2016
6 December 2007 until 5 May 2016
1 July 2006 until 5 May 2016
10 October 2013 until 5 May 2016
See page 88 for Committee member attendance levels.
The Company Secretary is Secretary to the Committee and
attends all meetings. Other attendees at Committee meetings
may include:
Attendee
Chief Executive Officer
Company Chairman
Chairman, Global Vaccines
General Counsel
Head of Communications & Government Affairs
Head of Pharmaceuticals
Head of Pharmaceuticals R&D
Head of Human Resources
Head of External & Market Communication
Head of Global Corporate Responsibility
Other Executives
Independent external corporate
responsibility adviser
Regular
attendee
Attends as
required
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
To augment our engagement with stakeholder opinion, in May
2013, Sophia Tickell was appointed as an independent external
adviser to the Committee, a position that she had previously held
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 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 and social
responsibility matters to both the Chairman and the CEO.
Dear Shareholder
The Committee acts as custodian of the policies and practices
that define and safeguard the reputation of the company and as
Chair of the Committee I continue, together with my fellow
Committee members, to challenge and shape the company’s
responsible business agenda.
The Committee members bring a wide range of experience and
insight from across different sectors to provide oversight of the
company’s responsible business opportunities and risks. During
the year, long serving Committee members Dr Stephanie Burns
and Dr Daniel Podolsky stood down from the Committee when they
retired from the Board in May. Hans Wijers, who had served on the
Committee for three years, also stood down at the same time when
he retired from the Board. We have greatly appreciated the
knowledge and insights they have brought to the work of the
Committee in that time.
We are pleased to welcome Professor Sir Roy Anderson,
Dr Jesse Goodman and Dr Vivienne Cox as new members of the
Committee. Roy and Jesse, as world-renowned medical scientists
and researchers, have helped to maintain a continuity of scientific
advice to the Committee’s deliberations, while Vivienne brings a
deep knowledge of sustainable business practices developed over
many years of service, predominantly in the energy and natural
resources sectors.
The work of the Committee has this year again focused on issues
that are material to GSK’s mission, strategy and values. Our
discussions have included exploring how the company seeks to
balance the need for a return on investment in innovation with the
need to price its products appropriately to drive access for a broad
range of patients. In addition, we have considered the many ways
in which GSK seeks to operate with transparency and integrity –
from its approach to R&D, to its commercial selling model and
relationships with third parties.
This year we have continued to enjoy positive engagement with
investors on our Responsible Business approach and performance,
with a particular focus on how these are integrated into the Group’s
business model and strategy to help enhance investment value,
create business opportunities and mitigate risk, as well as create
broader social and environmental value.
Lynn Elsenhans
Corporate Responsibility Committee Chairman
13 March 2017
109 GSK Annual Report 2016
Corporate Responsibility Committee Report continued
Main responsibilities
The Committee has a rolling agenda and receives reports from
members of the CET and senior managers to ensure that progress in
meeting our Responsible Business Commitments within four areas of
focus is reviewed on an annual basis:
– 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.
In addition, at each meeting the Committee considers possible
emerging issues that may have a bearing on the company’s
reputation and interaction with its stakeholders. 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 2016
During 2016, the Committee focused primarily on the matters set out below:
Areas of Committee focus
Items discussed
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
– GSK’s approach to pricing, in particular how to balance returns for investment in innovation alongside the need to support
access to medicines
– Vaccines strategy to support global public health priorities, including pricing models, Malaria vaccine and Ebola response
Our behaviour
Our people
– Changes to how GSK engages with healthcare professionals
– Global incentive compensation program and selling competency model
– Further embedding values-based decision making in the organisation, including training and compliance
– Progress on work to align third parties with GSK’s standards and expectations
– 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
– Insights from the staff survey
Our planet
– Environmental performance across carbon, water and waste impacts
Committee evaluation
The Committee’s annual evaluation was internally facilitated by the Company Secretary, and supplemented by a questionnaire circulated
to Committee members and the Committee’s adviser on behalf of the Committee Chairman. It was concluded that the Committee continued
to operate effectively. In terms of enhancements to the Committee’s deliberations the following points were agreed:
The Committee’s programme and meeting agendas would be devised to ensure additional time to allow fuller discussion of issues.
Consideration would be given to monitor the Group’s CR work using a scorecard approach.
Directors
Our Directors’ powers are determined by UK legislation and our
Articles of Association, which contain rules about the appointment
and replacement of Directors. 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.
A Director may cease to be a Director if he or she:
– becomes bankrupt
– ceases to be a Director by virtue of the Companies Act or
the Articles
– suffers mental or physical ill health and the Board resolves
that he or she shall cease to be a Director
– 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
– is prohibited from being a Director by law
– resigns, or offers to resign and the Board accepts that offer
– is required to resign by the Board.
Strategic reportFinancial statementsGovernance and remunerationInvestor information 110 GSK Annual Report 2016
Corporate Governance continued
Directors continued
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. 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 regularly review any potential or actual conflict
authorisations, which are recorded by the Company Secretary
and noted by the Board. Directors are not counted in the quorum
for the authorisation of their own actual or potential conflicts.
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 January 2017 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 Person Closely Associated had any material interest in any
contract of significance with a Group company.
Independent advice
The company has an agreed procedure for Directors to take
independent legal and/or financial advice at the company’s expense
where they deem it necessary.
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 2016 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 in the full version of the company’s 2014 Remuneration policy
report which is available at www.gsk.com in the Investors section.
Directors’ Report
For the purposes of the UK Companies Act 2006, the Directors’
Report of GlaxoSmithKline plc for the year ended 31 December
2016 comprises pages 79 to 110 of the Corporate Governance
Report, the Directors’ statements of responsibilities on pages
148 and 232 and pages 253 to 282 of Investor Information. The
Strategic report sets out those matters required to be disclosed
in the Directors’ Report which are considered to be of strategic
importance to the company, as follows:
– risk management objectives and policies (pages 18, 19
and 77 to 78)
– likely future developments of the company (throughout the
Strategic report)
– research and development activities (pages 20 to 39)
– diversity and inclusion (page 49)
– provision of information to, and consultation with, employees
(page 48)
– carbon emissions (page 50)
The following information is also incorporated into the
Directors’ Report:
Interest capitalised
Location in Annual Report
Financial statements,
Notes 17 and 19
Publication of unaudited financial information Group financial review, page 52
Details of any long-term incentive schemes
Remuneration report
Waiver of emoluments by a Director
Not applicable
Waiver of future emoluments by a Director
Not applicable
Non pre-emptive issues of equity for cash
Not applicable
Non pre-emptive issues of equity for cash
by any unlisted major subsidiary undertaking
Not applicable
Parent company participation in a placing
by a listed subsidiary
Provision of services by a controlling
shareholder
Shareholder waiver of dividends
Shareholder waiver of future dividends
Not applicable
Not applicable
Financial statements,
Notes 15 and 43
Financial statements,
Notes 15 and 43
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 the Board of Directors on
13 March 2017 and signed on its behalf by:
Philip Hampton
Chairman
13 March 2017
111 GSK Annual Report 2016
Remuneration
In this section
Chairman’s annual statement
Annual report on remuneration
2017 Remuneration policy summary
2017 Remuneration policy report
112
115
137
138
Investor informationFinancial statementsGovernance and remunerationStrategic report 112 GSK Annual Report 2016
Remuneration report
Chairman’s annual statement
In developing our new
Remuneration policy we
have spent considerable
time listening to
shareholders. The
proposed approach
provides better
alignment, reduced
maximum pay levels
and greater simplicity.
Dear Shareholder
On behalf of the Board of Directors,
I am pleased to present to you our
Remuneration report for 2016. This
includes my annual statement, our Annual
report on remuneration, a summary of our
2017 remuneration policy and the 2017
Remuneration policy report, which
provides full details of the new policy.
The Annual report on remuneration and
this annual statement will be subject to
an advisory vote at the Annual General
Meeting (AGM) on 4 May 2017. The
Remuneration policy report will be
subject to a binding vote.
Context for Executive remuneration
at GSK
2016 has seen GSK perform strongly
with good sales growth across our
Pharmaceuticals, Vaccines and Consumer
Healthcare businesses, excellent new
product momentum, disciplined cost control
and further pipeline progress. Our results
against our key financial measures were
above target, with core earnings per share
growth being at the top end of our guidance.
In addition, Total Shareholder Return
(TSR) growth of 22% was achieved which
outperformed the FTSE 100 index over
the year.
Remuneration outcomes for 2016
All awards in relation to 2016 were made in
accordance with the Remuneration policy
approved by shareholders in May 2014. The
key decisions made by the Remuneration
Committee (the Committee) were as follows:
– The bonus outcomes for the Executive
Directors were determined by reference
to performance against the agreed
financial measures, as well as the
Committee’s assessment of their
individual levels of performance. GSK
achieved performance in excess of the
relevant financial targets for the year. In
conjunction with assessments of individual
performance, this has resulted in bonus
payments being made above target, but
below maximum opportunities. Further
details of the bonus outcomes for the year
are provided on page 119, including
enhanced disclosure of the bonus targets
for the year and details of the Individual
Performance Multipliers (IPMs) that have
been applied for each Executive Director.
– Vesting of the 2014 Performance Share
Plan (PSP) awards and the matching
awards under the Deferred Annual Bonus
Plan (DABP) were based on the agreed
measures of relative TSR, adjusted
free cash flow and R&D new product
performance, each with an equal
weighting. Performance was measured
over the three years to 31 December
2016. The threshold targets for the
TSR and cash flow measures were not
met, but the maximum R&D target was
achieved, resulting in an overall vesting
level of 33.3%. Further details of the
vesting outcome for the 2014 PSP and
DABP matching awards are provided
on page 121.
113 GSK Annual Report 2016
Review of Remuneration policy
During 2016, the Committee reviewed
the Remuneration policy with the objective
of maintaining alignment with strategic
goals and further aligning the policy with
best practice. The revised Remuneration
policy is designed to:
– Drive the success of the company and
the delivery of its business strategy;
– Create shareholder value;
– Simplify pay arrangements;
– Deliver an appropriately competitive
package to attract, retain and motivate
executive talent; and
– Further align remuneration arrangements
across the senior layers of the
organisation.
As part of the Remuneration policy review,
which included reviewing the packages
for the new CEO and President, R&D,
the Committee carried out an extensive
consultation process with a significant
number of our major shareholders. The
feedback received from shareholders
was greatly valued and given careful
consideration by the Committee.
The key changes which we proposed to
our Remuneration policy, with a focus on
increasing alignment with shareholders
and reducing maximum incentive
opportunities, included:
– Removal of the bonus matching plan;
– Reduction of maximum potential pay
levels;
– Simplification of the Annual bonus
scheme; and
– Increase to the CEO’s Share Ownership
Requirement.
In finalising the proposals and responding
to a number of points raised during the
shareholder consultation, the Committee
were particularly thoughtful about the
quantum of the incentives and about how
the new policy should be implemented for
Emma Walmsley in 2017. Full details of
the final changes to the policy are set out
in the Remuneration policy report on pages
137 to 146.
Executive Director changes and
implementation of Remuneration policy
for 2017
New appointments to the Board
As discussed elsewhere in the 2016 Annual
Report, Sir Andrew Witty will be stepping
down as CEO with effect from 31 March
2017 and will be succeeded by Emma
Walmsley. As noted above, the Committee
gave careful and detailed consideration to
Emma’s remuneration package for 2017,
taking into account all relevant factors.
This included the constructive feedback
received from shareholders which resulted
in a number of refinements to the original
proposals.
Taking into account the fact that this is
Emma’s first CEO role, reductions have been
made to all elements of her remuneration
package in comparison to Sir Andrew’s
current arrangements. Her overall package
for 2017 will be c.25% less than that
received by Sir Andrew. It is the Committee’s
intention to keep Emma’s package under
review in the coming years subject to her
development and performance in the role.
We would engage with shareholders
regarding any changes within the limits
set by the Remuneration policy.
A summary of Emma Walmsley’s new
package is set out after the end of this letter
on page 114. Further details are provided
in the Annual report on remuneration.
Dr Patrick Vallance joined the Board in
his role as President, R&D on 1 January
2017. He will receive a base salary of
£780,000 and his pension arrangements,
annual bonus and PSP opportunities will be
in accordance with those set out in the
Remuneration policy.
Changes to the annual bonus structure
for 2017
As part of the Remuneration policy review,
the Committee decided to simplify the
structure of the annual bonus. The Individual
Performance Multiplier has been removed
and from 2017, the annual bonus will operate
on an additive basis. 70% of the bonus
opportunity will be subject to a single profit
metric of Core Group PBIT instead of two
separate measures of profit which applied
in previous years. The remaining 30% will
be subject to a scorecard of individual
objectives. This ensures that maximum
bonus opportunities can only be delivered
if maximum targets are achieved in respect
of both the financial and individual elements
of the plan.
Departing executives
As noted above, Sir Andrew Witty will be
stepping down as CEO with effect from
31 March 2017. Dr Moncef Slaoui will also
be leaving the Board on 31 March 2017,
but will remain with the company until
30 June 2017.
No termination payment will be made to
either Executive and all outstanding incentive
awards will be treated in accordance with
the Remuneration policy. A more detailed
summary of the treatment of these awards
is provided on page 136 and full details of
the payments made will be included in future
Annual reports on remuneration.
AGM
Finally, I would like to thank shareholders
for their input and engagement during the
Remuneration policy review and I welcome
all shareholders’ feedback on this report.
We look forward to receiving your support
for our new Remuneration policy and Annual
report on remuneration at our AGM on
4 May 2017.
Urs Rohner
Remuneration Committee Chairman
13 March 2017
Investor informationFinancial statementsGovernance and remunerationStrategic report 114 GSK Annual Report 2016
Remuneration report
Chairman’s annual statement continued
Key changes to our Remuneration policy for 2017
Alignment with shareholders
– Increase in the level of mandatory deferral under the annual bonus from 25% to 50%
– Significant increase in Share Ownership Requirement for the CEO from 4x salary to 6.5x salary
Reduction in overall maximum
opportunity
– The overall maximum incentive opportunity for all Executive Directors has been reduced
e.g. the total remuneration package of the new CEO is c.25% less than that received by
the current CEO.
Simplification
– Removal of matching awards under the DABP plan
– Alignment of all Executive Directors’ on-target and maximum bonus opportunities
– Change from multiplicative to additive bonus structure
Overview of new CEO’s 2017 remuneration package
Base salary
Pension
Base salary
Annual bonus
LTIs
Share Ownership Requirement
– 650% of salary
Overview
Comparison with previous CEO
Rationale
– £1,003,000
– 10% reduction
– 20% of salary
– Significantly lower
contribution to defined
contribution plan (and
a further 5% matched
contribution on salary
up to £33,333
i.e. £1,667)
pension benefit than the
previous CEO’s defined
benefit arrangement
– Lower salary awarded on
initial appointment
– No increase in the level
of pension contribution
provided to Ms Walmsley
prior to her joining the
Board
– Remains aligned with the
pension contribution
provided to other
Executives immediately
below the Board
– Target opportunity of
100% of salary
– Maximum opportunity of
200% of salary
– Maximum opportunity of
550% of salary
– Reduction in the target
bonus opportunity from
125% of salary
– Aligns the annual bonus
opportunity and structure
for all Executive Directors
– Over 20% reduction in
total long-term incentive
opportunity from a
maximum of 700%
of salary (which included
awards under the PSP
and matching awards
under the DABP)
– Significantly above the
current requirement
of 400% of salary
Total reduction in package
of c. 25%
– Removal of matching
awards under the DABP
simplifies the remuneration
package and reduces the
overall incentive opportunity
– 2017 PSP opportunity
is also lower than that
previously awarded to Sir
Andrew Witty
– Aligns the Share
Ownership Requirement
with the maximum PSP
opportunity under the
Remuneration policy and
further aligns the interests
of the CEO with those of
shareholders
115 GSK Annual Report 2016
Annual report on remuneration
2016 at a glance
Pay for performance
Objectives
Financial:
Grow a balanced business
Non-financial:
Health for all
Our behaviour
Our people
Our planet
KPIs
Incentive scheme outcomes
2016 Annual bonus: financial performance
– Core Group Operating Profit
– Core Group PBIT
– Vaccines performance
– Increase access to healthcare
– Putting patients and consumers first
– Talent, development and diversity
– Reducing environmental impacts
Maximum
(110% target)
Target
Threshold
(90% target)
116%
103%
103%
Long-term strategic objectives:
2014 LTI outcome – performance period ended 31 December 2016
Core Group
Operating Profit
Core Group
PBIT
Vaccines
Performance
Maximum performance target
Performance achieved
Strong R&D innovation
– R&D new products
Efficient global
operating model
Three world-leading
businesses
– Adjusted free cash flow
– Relative TSR
Relative
TSR
1/3rd
0%
33.33%
Award lapsed
Award vested
0%
R&D
new products
1/3rd
Adjusted
free cash flow
1/3rd
2016 highlights summary
The following shows a breakdown of total remuneration paid to Executive Directors in respect of 2016 and 2015:
Simon Dingemans, CFO
Sir Andrew Witty, CEO
Dr Moncef Slaoui, Chairman, Global Vaccines
£8m
£6m
£4m
£2m
74%
75%
26%
25%
£0m
2015
Fixed pay – salary, benefits and pension
2016
$10m
$8m
$6m
$4m
$2m
$0m
59%
41%
58%
42%
2016
2015
69%
70%
31%
2016
30%
2015
Performance pay – annual bonus and LTIs earned
Executive Directors’ shareholdings (audited)
To align the interests of Executive Directors with those of
shareholders, they are required to build and maintain significant
holdings of shares in GSK over time. Executive Directors are
required to continue to satisfy these shareholding requirements
for a minimum of 12 months following retirement from the
company. CET members are also required to build up a Share
Ownership Requirement (SOR) of 2x base salary.
Current shareholdings compared to the SOR are illustrated in
the chart opposite.
Share ownership vs SOR
Sir Andrew Witty
4x base salary*
Simon Dingemans
3x base salary
Dr Moncef Slaoui
3x base salary
5.7x
SOR
0
4x
31.12.2016 shareholding
2x
14.8x
10.2x
6x
8x
10x
12x
14x
* Following her appointment as CEO, the SOR for Emma Walmsley will increase to 6.5x base salary.
The SOR for Dr Patrick Vallance will be 3x base salary. Their levels of ownership as at 3 March 2017
were 2.5x and 6.9x their base salaries as CEO and President, R&D respectively.
Investor informationFinancial statementsGovernance and remunerationStrategic report
116 GSK Annual Report 2016
Annual report on remuneration continued
Total remuneration for 2016 (audited)
Salary
Benefits
Pension
Annual
bonus
Value earned
from LTI
awards
Total
remuneration
A. Fixed pay
B. Pay for performance
The total remuneration for 2016 for each Executive Director is set out in the table below:
Sir Andrew Witty, CEO
Simon Dingemans, CFO
Dr Moncef Slaoui, Chairman,
Global Vaccines
2016
£000
2015
£000
2016
£000
2015
£000
2016
$000
2015
$000
A. Fixed pay
Salary
Benefits
Pension
See page 117
See page 117
See page 118
Total fixed pay
B. Pay for performance
Annual bonus
LTI awards:
See pages 119 and 120
Matching awards under DABP(1)
PSP (1)
See page 121
Total pay for performance
A+B = Total remuneration(2)
Notes:
1,115
124
520
1,759
1,087
110
458
1,655
736
92
147
975
718
82
144
944
1,242
495
875
2,612
1,212
545
1,316
3,073
2,167
2,175
915
989
1,726
1,632
361
2,543
5,071
194
2,637
5,006
119
1,119
2,153
73
1,160
2,222
293
1,812
3,831
274
2,345
4,251
6,830
6,661
3,128
3,166
6,443
7,324
(1) Further details in respect of the vesting of PSP and DABP awards are provided on pages 130 to 133.
(2) 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 recovery of sums paid (clawback) or reduction of outstanding awards or vesting levels (malus) applied during 2016 in respect of any of the Executive Directors.
Deferral of 2016 annual bonus
Amount of bonus deferred
Number of shares or ADS purchased
%
25
£000 Number of shares
542
%
50
£000 Number of shares
458
%
25
$000
Number of ADS
432
34,353
29,022
10,760
117 GSK Annual Report 2016
Total remuneration for 2016 (audited) continued
The following sections provide details of each element of ‘Total
remuneration’, including how the Committee implemented the
approved Remuneration policy in 2016.
The global pharmaceutical comparator group is also used as the
basis for the TSR comparator group, which features in our long-term
incentive awards.
Comparator groups for pay and TSR
The Committee used two pay comparator groups for all roles when
considering executive pay for 2016. The primary group used for each
Executive Director was as follows:
(1)
Following a review of the pay comparator group during the year,
these comparators have been removed from the group for 2017.
(2) AbbVie and Amgen are included for remuneration benchmarking,
but are not included in the TSR comparator group.
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.
Global pharmaceutical
comparator group
Dr Moncef Slaoui
France
Switzerland
Sanofi
Novartis
UK
US
Roche Holdings
AstraZeneca
AbbVie(2)
Amgen(2)
Bristol-Myers Squibb
Eli Lilly
Johnson & Johnson
Merck & Co
Pfizer
UK cross-industry
comparator group
Sir Andrew Witty
Simon Dingemans
Anglo American(1)
AstraZeneca
BG Group(1)
BHP Billiton
BP
British American Tobacco
Diageo
Reckitt Benckiser
Rio Tinto
Royal Dutch Shell
SAB Miller(1)
Tesco(1)
Unilever
Vodafone
Fixed pay (audited)
Salary
The table below sets out the base salaries of the Executive Directors
over the last two years. As disclosed last year, the salary increases
made in 2016 were aligned with those provided to the wider
workforce. Details of salary levels for 2017 are provided on page 135.
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 below.
2016 benefits
2015 benefits
Sir Andrew Witty
Simon Dingemans
Dr Moncef Slaoui
%
change
2.5%
2.5%
2.5%
Base salary
2016
2015
£1,114,500 £1,087,300
£717,700
$1,242,100 $1,211,800
£735,600
Benefits
The following table shows a breakdown of the grossed up cash value
of the benefits received by the Executive Directors in 2016 and 2015.
Employee benefits include all employee share plans, healthcare,
car allowance, personal financial advice and life assurance/death
in service cover.
Travel expenses include car, travel and spouse/partner costs
associated with accompanying the Executive Director on GSK
business, which are deemed to be taxable benefits on the individual.
Sir Andrew Witty (£000)
Employee benefits
Travel
Other benefits
Total
Simon Dingemans (£000)
Employee benefits
Travel
Other benefits
Total
Dr Moncef Slaoui ($000)
Employee benefits
Travel
Other benefits (1)
Total
63
23
38
124
30
38
24
92
158
34
303
495
26
48
36
110
29
39
14
82
216
86
243
545
(1) For Dr Moncef Slaoui, other benefits include UK accommodation of $247,875 in 2016
(2015 – $225,806).
Investor informationFinancial statementsGovernance and remunerationStrategic report 118 GSK Annual Report 2016
Annual report on remuneration continued
Fixed pay (audited) continued
Pensions
Executive Director
Sir Andrew Witty
Simon Dingemans
Dr Moncef Slaoui
Pension plan type
Member since
UK defined benefit(1)
Cash payment in lieu of pension(3)
US and Belgian plans
1991(2)
–
1988
(1) Sir Andrew’s maximum pension entitlement is two-thirds of final salary. Since 1 April 2013, pensionable salary increases have been limited to 2% p.a. for all members. The plan has been
closed to new entrants since 2001.
(2) Since becoming a member, Sir Andrew has 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.
(3) Simon Dingemans receives a cash payment in lieu of pension of 20% of base salary in line with GSK’s defined contribution pension plan rates.
The following table shows the breakdown of the pension values set out on page 116.
Pension remuneration values(1)
UK defined benefit
US defined benefit
Belgian defined benefit (2)
Employer cash contributions
Member contributions to defined benefit plans
Total pension remuneration value
Sir Andrew Witty
Simon Dingemans
Dr Moncef Slaoui
2016
£000
520
–
–
–
–
520
2015
£000
472
–
–
–
(14)
458
2016
£000
–
–
–
147
–
147
2015
£000
–
–
–
144
–
144
2016
$000
–
742
10
123
–
875
2015
$000
–
1,191
57
68
–
1,316
(1) The pension remuneration figures have been calculated in accordance with the methodology set out in The Large and Medium-sized Companies and Group (Accounts and
Reports) (Amendment) Regulations 2013 (Remuneration Regulations). In calculating the defined benefit pension values for 2016, the difference between the accrued pension as
at 31 December 2016 and the accrued pension as at 31 December 2015 increased by inflation (0% for UK defined benefit, 1.7% for US defined benefit, 1.7% for Belgian defined
benefit) has been multiplied by 20.
(2) Amounts have been translated from Euros into US Dollars using an exchange rate of 1.11 for 2016 and 1.12 for 2015.
For Sir Andrew and Dr Moncef Slaoui, further details regarding the 2016 pension values are set out in the table below.
Sir Andrew Witty
UK – Funded
UK – Unfunded
Total
Dr Moncef Slaoui(1)
US – Funded
US – Unfunded
Belgium – Funded (2)
US – 401(k) & ESSP
Total
2016
£ (p.a.)
71,591
670,500
742,091
2016
$ (p.a.)
15,434
439,393
103,230
–
558,057
Accrued pension as at 31 December
2015
£ (p.a.)
71,648
644,459
716,107
Accrued pension as at 31 December
2015
$ (p.a.)
14,473
396,297
101,010
–
511,780
Pension remuneration
value for 2016 (£000)
520
Pension remuneration
value for 2016 ($000)
14
728
10
123
875
(1) Since becoming a member of these plans, Dr Moncef Slaoui has built up pensionable service in the Belgian Plan, and in the US Cash Balance and Supplemental Pension Plans.
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.
(2) Amounts have been translated from Euros into US Dollars using an exchange rate of 1.11 for 2016 and 1.12 for 2015.
119 GSK Annual Report 2016
Pay for performance (audited)
Annual bonus
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).
The IPM is set by the Committee taking into account performance against individual objectives. The multiplier may be
set between 0% and 150%.
2016 performance against targets
For 2016, the financial measures and weightings were as follows:
Performance
measure
Core Group Operating Profit
Core Group PBIT
Vaccines performance
Sir Andrew Witty
75%
Simon Dingemans
75%
Dr Moncef Slaoui
–
2016 Target(1)(2)
£6,706m
Outcome (£)(2)
£6,914m
Weighting
2016 performance
Positioning
against target
103%
25%
–
25%
–
25%
75%
£6,386m
£6,592m
£1,038m
£1,207m
103%
116%
(1) Threshold and maximum performance targets were set at 90% and 110% of Target respectively.
(2) The Core Group Operating Profit and Core Group PBIT targets and outcomes for the purposes of annual bonus differ from Core Group Operating Profit and PBIT disclosed
elsewhere in this Annual Report, primarily because both the target and outcome numbers are calculated applying GSK budget exchange rates and not actual exchange rates.
The following table shows actual bonuses earned compared to opportunity for 2016:
2016 bonus opportunity
2016 bonus outcome
Bonus
Sir Andrew Witty
Simon Dingemans
Dr Moncef Slaoui
Base salary
£/$000
Target
(% of salary)
Maximum
(% of salary)
£1,115
£736
$1,242
125
80
85
200
180
200
Financial
performance
outcome
(% salary)
162
104
126
IPM %
120
120
110
Total 2016
(% of salary)
Total 2016
£/$000
194
124
139
£2,167
£915
$1,726
The table below sets out the matters which the Committee considered in respect of the financial measures and weightings set for the
Executive Directors.
Financial performance
Core Group Operating
Profit and Core Group
PBIT
– Group turnover increased 6% CER on a reported basis to £27.9 billion and 5% CER on a pro-forma basis.
– Core Group Operating Profit increased by 14% CER on a reported basis and 17% CER on a pro-forma basis. Core Group PBIT
grew 14% CER on a reported basis. Both of these were ahead of target performance for 2016 but below the maximum targets.
– Core operating margin of 27.9% was 4.6 percentage points higher than in 2015 and 2.6 percentage points higher in CER terms
on a pro-forma basis. This reflected improved operating leverage driven by sales growth and a more favourable mix across all three
businesses as well as delivery of restructuring and integration benefits and tight control of ongoing costs, partly offset by continued
price pressure, particularly in Respiratory, and supply chain and R&D investments.
Vaccines performance
– Vaccines sales increased 14% CER on a reported basis to £4,592 million and 12% CER on a pro-forma basis.
– Overall results benefited from the strong performance of Bexsero, as well as higher demand for Fluarix/FluLaval in the US and
International and Menveo in International. Further growth was driven by Synflorix due to market expansion in International and a
tender award in Europe and Boostrix, which grew in Europe and International.
– Vaccines core operating profit increased by 38% in CER terms. The operating profit margin of 31.7% was 7.6 percentage points
higher than in 2015 in CER terms on a pro-forma basis.
– The results were driven primarily by improved product mix and enhanced operating leverage from strong sales growth, together
with integration and restructuring benefits in costs of sales, SG&A and R&D, and higher royalty income.
Investor informationFinancial statementsGovernance and remunerationStrategic report
120 GSK Annual Report 2016
Annual report on remuneration continued
Pay for performance (audited) continued
In determining the appropriate Individual Performance Multiplier (IPM) that should be applied to the annual bonus outcome for each Executive
Director, the Committee took into account performance against a number of key strategic objectives that were set for each individual at the
start of the year.
A summary of the principal achievements of each Executive in respect of these objectives is provided in the table below:
Personal performance
2016 achievements
Sir Andrew Witty
– Delivered all key financial objectives ahead of the financial plan.
– Achieved strong progress in the integration of the Novartis businesses in Consumer and Vaccines.
– New product sales more than doubled to £4.5 billion.
– Strong returns on R&D investment during the year with the approval and submission targets for late stage assets exceeded.
– Delivered sustained pipeline progress with 4 assets filed in H2 2016 (Shingrix, Closed Triple, Benlysta SC and Sirukumab)
and 4 key phase III starts in Q4 for assets in HIV, respiratory and anaemia.
– Delivered continued improvement in the quality risk profile across all three businesses.
– Fully implemented the new commercial business model and maintained progress on delivering our responsible business
commitments, e.g. topping Access to Medicines Index for the 5th consecutive year.
– Embedded a number of critical simplification and change programmes, realising benefits from our global platforms.
– Provided effective leadership to the Group during a year of significant change, while also successfully transitioning towards
a new CEO.
Simon Dingemans
– Delivered strong financial leadership for the Group during 2016.
– Continued progress on cost savings made. Total annual cost savings now at £3 billion including currency benefit of £0.2 billion and
the Group remains on track to deliver the targeted annual savings of £3 billion at CER by 2017.
– Continued successful implementation of new business operating systems. BISON and IPT successfully went live and legacy systems
have been decommissioned. CERPS accounting systems were successfully deployed in 22 markets and MERPS system deployed
in nine sites.
– All but one exit from Novartis transaction related Service Agreements have been completed and Core Commercial cycle integrated
into financial planning process.
Dr Moncef Slaoui
– Led a highly successful year in the Vaccines business overall.
– Effectively managed the Vaccines’ leadership succession and transition to the new Head of Vaccines, Luc Debruyne.
– Finalised the successful creation of Galvani, a bioelectronics joint venture with Verily Life Sciences, with significant opportunity to
create value for shareholders.
– Worked towards the creation of Coalition for Epidemic Preparedness Innovations in support of biopreparedness and established
GSK’s place on the founding board amongst other major vaccines organisations.
– Supported GSK’s external reputation building in the global public health arena, working directly with WHO, BARDA, Wellcome Trust,
UNGA, and AMR.
Malus and clawback policy
The company’s policy on malus and clawback is set out in the company’s Remuneration policy report, (page 140) and is also available at
www.gsk.com in the Investors section.
From 1 January 2015 in respect of each financial year, the Committee discloses 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.
In line with these disclosure guidelines, neither the Committee (nor the Recoupment Committee) has exercised malus or clawback during 2016.
121 GSK Annual Report 2016
Pay for performance (audited) continued
Value earned from long-term incentives (LTIs)
In line with the Committee’s agreed principles, for each measure applicable to the 2014 and 2015 LTI awards, actual performance against
targets is reviewed and adjustments made as appropriate to reflect the impact of the Novartis transaction on the business and to ensure that
the vesting outcome reflects genuine underlying business performance. The Committee is satisfied that the adjusted targets remain suitably
stretching. Further details on any adjustments made will be provided at the time of vesting.
2014 awards with a performance period ended 31 December 2016
The Committee reviewed the performance of the PSP and DABP matching awards granted to Executive Directors against the targets set.
The performance achieved in the three years to 31 December 2016 and the vesting levels are set out in the table below.
Performance measures
and relative weighting
Performance targets
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.
Original target
Adjusted target
% vesting
Maximum
Threshold
£5.26 bn
£4.78 bn
£4.54 bn
£4.30 bn
£4.43 bn
£4.03 bn
£3.82 bn
£3.62 bn
100%
75%
50%
25%
Outcome and vesting level
Outcome
% of
maximum
% of
award
£6.72 bn
100
33.33
Adjusted free
cash flow (AFCF)
performance
(1/3rd)
Relative TSR
performance
(1/3rd)
In line with the company’s agreed principles, the AFCF figures included adjustments
for a number of material distorting items, including legal settlements, exchange rate
movements and special pension contributions.
£9.29 bn
0
0
Original target
Adjusted target
% vesting
Maximum
Threshold
£16.22 bn
£15.51 bn
£14.10 bn
£13.68 bn
£12.95 bn
£12.38 bn
£11.26 bn
£10.92 bn
100%
75%
50%
25%
TSR ranking within comparator group1
% vesting
Ranked 9th
0
0
Maximum
Threshold2
1st, 2nd, 3rd
4th
5th
Median
6th to 10th
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.
Total vesting in respect of 2014 awards
33.33%
Investor informationFinancial statementsGovernance and remunerationStrategic report 122 GSK Annual Report 2016
Annual report on remuneration continued
Pay for performance (audited) continued
Historical vesting for GSK’s LTIs
Year of grant
Performance measures
Total vesting level
2014
2013
2012
2011
2010
2009
2008
2007
A
R
A
R
B
A
R
B
A
R
B
A
A
T
T
T
T
T
T
T
T
33
21
17
7
7
13
16
11
16
9
9
40
35
35
DABP matching awards were made from
2010 onwards. In 2010, DABP matching
awards were wholly subject to TSR
performance and had a total vesting level
of 30%. From 2011, awards were subject
to the same measures as the PSP and
vested in line with the figures shown in
the chart.
Performance measures key
R
A
T
B
R&D new product
Adjusted free cash flow
TSR
Business diversification
Lapsed
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Update on performance of ongoing LTI awards
The Committee also reviewed the performance of the PSP and DABP matching awards granted to Executive Directors in 2015 and 2016.
The following charts provide an estimate of the vesting levels taking into account performance to 31 December 2016.
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.
2015 award – Performance update
2016 award – Performance update
Maximum
Ranked 3rd
or above
£13.6bn
122% of
threshold
Maximum
Ranked 3rd
or above
£13.8bn
122% of
threshold
Threshold
Median
£11.5bn
Commercially
sensitive
Threshold
Median
£11.6bn
Commercially
sensitive
TSR
(1/3rd)
Estimated vesting level
Adjusted free
cash flow
(1/3rd)
R&D new
product
(1/3rd)
TSR
(1/3rd)
Estimated vesting level
Adjusted free
cash flow
(1/3rd)
R&D new
product
(1/3rd)
For threshold performance, 25% of each award will vest in respect of R&D new product and AFCF measures and 30% for the TSR element. The TSR comparator group remains
unchanged from that shown on page 121 in respect of the 2014 awards.
2016 long-term incentive awards
The levels of participation in the DABP in respect of 2015 are shown in the table below, together with the maximum matching awards granted
in 2016 in respect of the deferrals of 2015 bonuses. The table also shows PSP award levels for 2016.
DABP matching awards
Sir Andrew Witty
Simon Dingemans
Dr Moncef Slaoui
2015
% of total bonus
deferred
25%
50%
50%
2016
Number of
shares/ADSs
40,003 shares
36,381 shares
20,854 ADSs
2016
Face value
of award*
2016
Award level as %
of base salary
2016
Number of
shares/ADSs
£0.54m
£0.49m
$0.82m
600%
400%
500%
492,052 shares
216,512 shares
158,714 ADSs
PSP awards
2016
Face value
of award*
£6.69m
£2.94m
$6.21m
The face values of the awards have been calculated based on a share price of £13.59 for share awards and $39.13 for ADS awards, being the closing prices on 10 February 2016.
*
** The performance period for the 2016 awards is from 1 January 2016 to 31 December 2018.
*** DABP matching awards to UK Executives are made in the form of nil-cost options and PSP awards are made in the form of conditional shares. Awards to US Executives are made
over ADSs in the form of conditional shares.
123 GSK Annual Report 2016
CEO pay comparison
2016 CEO total remuneration positioning
Historic CEO remuneration
(£m)
12
10
8
6
4
UK
cross-industry
group
Global
pharmaceutical
group
European
cross-industry
group
Lower quartile to
median
Median to upper
quartile
Sir Andrew Witty’s
current position
Remuneration includes salary and the expected value of incentives based on the
Committee’s agreed benchmarking methodology.
2016
£000
2015
£000
2014
£000
2013
£000
2012
£000
2011
£000
2010
£000
2009
£000
6,830 6,661 3,902 7,207 4,386 6,807 4,562 5,790
97.2% 100% 42% 88% 44% 100% 59% 100%
33.3% 37.8% 13.5% 31% 24% 70% 35%(2) 35%(2)
Single figure of
remuneration
Annual bonus
award(1)
(% of maximum)
Vesting of LTI
awards
(% of maximum)
(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 still subject
to a limit of 200% of base salary.
(2) In respect of the 2007 and 2008 PSP awards. Sir Andrew also had outstanding awards
over 195,500 and 525,000 share options, granted in 2007 and 2008 respectively,
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.
Percentage change in remuneration of CEO
Performance graph
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 eight year period to 31 December 2016.
These indices were selected for comparison purposes as they reflect
both the primary index of which GSK is a constituent and the industry
in which it operates.
Salary
Benefits
Annual bonus
Sir Andrew Witty
UK Employees
% change
% change
2.5%
12.7%
0%
2.9%
0%
(4%)
2016
£000
1,115
124
2,167
280
260
240
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
31/12/15
31/12/16
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-Aventis.
This reflects salary earned in, benefits received in and annual
bonus earned in respect of 2016 compared with 2015. 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 increase in benefits for the CEO is not as a result
of a change to his benefit arrangements. The CEO’s benefits were
higher in 2016 than in 2015 primarily as a result of an increased level
of financial planning fees. This was partially offset by a lower level of
travel. UK employee benefits are unchanged on the previous year as
there have been no changes to our benefit policies or levels. 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.
Investor informationFinancial statementsGovernance and remunerationStrategic report
124 GSK Annual Report 2016
Annual report on remuneration continued
Additional remuneration disclosures
Relative importance of spend on pay
The table shows the percentage changes in total employee pay and
the Group’s dividends paid to shareholders.
Total employee pay
Dividends
Share buyback
2016
£m
8,212
4,850
–
2015
£m
8,030
3,874
–
% change
2.3
25.2
–
The figures in the table above, which reflect payments made during
each year, are as set out on pages 174 and 180. However, dividends
declared in respect of 2016 were £3,892 million (2015 – £3,872
million plus a special dividend of £969 million), i.e. an increase of
0.5% excluding the special dividend. The company does not expect
to make any ordinary share repurchases in 2017.
Shareholder votes on remuneration matters
The table below provides details of the shareholder votes for the
most recent resolutions in respect of the Annual remuneration report
and Remuneration policy report.
2016 AGM
Remuneration report
Total votes
cast (billion)
3.7
Total votes
for (%)
84.7
Total votes
against (%)
15.3
2014 AGM
Remuneration policy
Total votes
cast (billion)
3.5
Total votes
for (%)
97.4
Total votes
against (%)
2.6
Votes
withheld
(million)
708
Votes
withheld
(million)
100
External appointments for Executive Directors
No Executive Directors held remunerated external appointments.
Total employee pay is based on 99,827 employees, the average
number of people employed during 2016 (2015 – 101,192).
Payments to past Directors (audited)
None.
Service contracts
The table below sets out the relevant dates of the Executive
Directors’ service contracts, which are available for review at the
company’s registered office during office hours. All Executive
Directors’ service contracts contain a 12-month notice period,
as set out in the Remuneration policy report.
Date of contract
Effective date
Expiry date
Sir Andrew Witty
Emma Walmsley(1)
Simon Dingemans
Dr Moncef Slaoui
Dr Patrick Vallance(1)
18.06.08
20.12.16
08.09.10
21.12.10
19.12.16
22.05.08
01.10.16
04.01.11
21.12.10
01.01.17
31.08.24
30.06.34
30.04.28
01.08.19
31.03.25
(1) Appointed to the Board on 1 January 2017.
Remuneration governance
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 January 2017 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.
Payments for loss of office (audited)
None.
Membership
The membership of the Committee, together with appointment
dates, is set out below:
Committee members
Committee member since
Urs Rohner
Chairman
Vindi Banga
Dr Vivienne Cox
Judy Lewent
1 January 2015
1 January 2016
1 January 2017
1 January 2013
Dr Stephanie Burns
1 May 2013 to 5 May 2016
Sir Deryck Maughan
1 July 2012 to 5 May 2016
Hans Wijers
10 October 2013 to 5 May 2016
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.
Details of the Committee members’ skills and experience are
given in their biographies under ‘Our Board’ on pages 84 to 85.
See page 88 for Committee member attendance levels.
125 GSK Annual Report 2016
Remuneration governance continued
The Company Secretary is Secretary to the Committee and attends
all meetings. Other attendees at the Committee include:
Committee attendees
Attendee
CEO
CFO
Head of Human Resources
Head of Reward
Committee Adviser – Deloitte LLP
Regular
attendee
✓
Attends as
required
✓
✓
✓
✓
Judy Lewent and Vindi Banga, as members of the Audit & Risk
and Remuneration Committees, provide input on the Audit & Risk
Committee’s review of the Group’s performance and oversight of
any risk factors relevant to remuneration decisions.
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 (Deloitte) 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 2016 were £205,860. Fees were charged on a
time and materials basis. Deloitte 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.
Following the announcement that Deloitte will replace
PricewaterhouseCoopers LLP as auditors of the company,
Deloitte will no longer be the named advisers to the Remuneration
Committee. The company is currently undergoing a tender process
with the intention that new advisers will be appointed by 1 July 2017.
Willis Towers Watson provided additional market data to the Committee.
Committee evaluation
The Committee’s annual evaluation was internally facilitated by
the Company Secretary and supplemented by a questionnaire
circulated to Committee members on behalf of the Committee
Chairman. It was concluded that the Committee continued to
operate effectively. In terms of enhancements to the Committee’s
work, it was agreed that it would seek to gain a deeper
understanding of the performance systems and culture and the
linkage with remuneration arrangements for the Group’s top talent.
What the Committee did during 2016
Areas of Committee focus
Items discussed
Remuneration policy
The Committee sets the broad structure for the Remuneration policy and
determines the remuneration of the Executive Directors, the Chairman and
other corporate officers for Board approval.
– Proposed Remuneration policy for 2017
– Engagement with shareholders
Salary review
The Committee periodically reviews and considers the remuneration
environment of Executive Directors & CET, approving annual amendments
as necessary.
– Remuneration environment (including wider employee trends)
– Executive Director and CET benchmarking, competitiveness and GSK
comparator groups
– Executive Director and CET salary recommendations and increases for 2017
Annual bonus
The Committee is responsible for setting specific performance measures
for the annual bonus.
– CEO, Executive Director & CET 2015 bonus recommendations and 2016
bonus objectives
– R&D annual bonus target metric
LTI plans
The Committee is responsible for approving LTI plan rule changes, grants,
assessments of performance, and the vesting of LTI awards for the Executive
Directors, CET and below.
– Deferred Annual Bonus Plan rules
– LTI performance outcomes and vesting of LTI awards for CET and below
– LTI grants for CET and below, including Share Value Plan awards.
– Committee evaluation process
– Shareholder feedback from Annual Investor Meetings
– 2015 Remuneration report
– Remuneration considerations for 2016
Governance and other areas of focus
The Committee adheres to a robust remuneration governance framework,
ensuring alignment between internal actions and external reporting/
compliance requirements.
– AGM and Remuneration report feedback, the external remuneration
environment and performance target disclosure for incentives plans
– Chairman’s fees
– 2016 Remuneration report disclosures
Investor informationFinancial statementsGovernance and remunerationStrategic report
126 GSK Annual Report 2016
Annual report on remuneration continued
2016 Non-Executive Directors’ fees
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
Chairman Philip Hampton is paid a fee of £700,000 per annum,
of which he has elected to take 25% in GSK shares.
Non-Executive Directors fees
No changes to Non-Executive Director fees were made during the
year and fees remained at the levels set in January 2013. For each
Non-Executive Director, a minimum of 25% of fees is delivered as
shares deferred until the Non-Executive Director steps down from
the Board.
The Non-Executive Directors’ fees that applied during 2016 are set
out in the table below:
Standard annual 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
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 145. Non-Executive Directors fees that are paid
other than in GBP are converted using an average exchange rate that is reviewed from time to time.
Non-Executive Directors’
emoluments (000) (audited)
Professor Sir Roy Anderson
Vindi Banga
Dr Vivienne Cox(1)
Lynn Elsenhans
Dr Jesse Goodman(1)
Philip Hampton
Judy Lewent
Urs Rohner
Dr Stephanie Burns(2)
Stacey Cartwright(2)
Sir Deryck Maughan(2)
Dr Daniel Podolsky(2)
Hans Wijers
Fixed fees
Fixed fees
Cash
Shares/ADS
Benefits(3)
Total pay
Cash
Shares/ADS
Benefits(3)
Total pay
2016
2015
£92
–
£32
£14
$165
£525
$239
£84
$51
£69
$28
$56
£32
£31
£112
£11
£128
$55
£175
$80
£28
$27
£23
$55
$50
£5
£7
£8
£5
£54
$268
£13
$218
£22
$21
£5
$44
$78
£8
£130
£120
£48
£196
$488
£713
$537
£134
$99
£97
$127
$184
£45
£98
–
–
£14
–
£389
$249
£85
$91
£75
–
$60
£75
£32
£28
–
£122
–
£130
$83
£28
$91
£25
$241
$181
£25
£10
£1
–
£63
–
£3
$171
£19
$77
£7
$146
$155
£16
£140
£29
–
£199
–
£522
$503
£132
$259
£107
$387
$396
£116
(1) Dr Jesse Goodman joined the Board from 1 January 2016. In accordance with the Non-Executive Directors’ Share Allocation Plan, 25% of Dr Jesse Goodman’s fees will
be retained and will be re-invested in the company’s ADSs at a future date, to be mutually agreed. Dr Vivienne Cox joined the Board from 1 July 2016.
(2) Dr Stephanie Burns, Sir Deryck Maughan, Dr Daniel Podolsky and Hans Wijers all retired from the Board at the AGM on 5 May 2016. Stacey Cartwright retired from the Board on
31 December 2016.
(3) 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.
127 GSK Annual Report 2016
Directors’ interests in shares (audited)
The interests of the Directors of the company in office at 31 December 2016 and their persons closely associated (PCA) are shown in the
tables below.
Total directors’ interests as at
3 March
2017
31 December
2016
1 January
2016
(a)Unvested and
not subject to
performance
Shares/ADS
Unvested and
subject to
performance
Total share plan interests as at 31 December 2016
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,h)
Simon Dingemans(b,c,d,f,h)
Dr Moncef Slaoui(c,d,e,g)
Emma Walmsley(k)
Dr Patrick Vallance(k)
ADS
Dr Moncef Slaoui(c,d,e,g)
1,090,542
323,181
28,475
161,046
345,947
1,034,521
263,245
28,473
N/A
N/A
859,350
179,527
28,300
N/A
N/A
70,252
–
–
N/A
N/A
1,462,023
643,346
–
N/A
N/A
143,640
77,523
–
N/A
N/A
142,752
76,811
–
N/A
N/A
–
–
–
N/A
N/A
50,199
19,224
–
N/A
N/A
346,846
295,974
234,270
86,519
507,421
–
–
3,810
–
Total directors’ interests as at
31 December
2016
or date of
retirement
1 January
2016
or date of
appointment
3 March
2017
Share allocation plan for Non-Executive Directors
Number of shares or ADS
(i)Dividends
reinvested
31 December
2016
Paid out
Allocated
& elected
31 December
2015
Non-Executive Directors
Shares(i)
Professor Sir Roy Anderson
Vindi Banga
Dr Vivienne Cox
Philip Hampton
Urs Rohner
Dr Stephanie Burns(j)
Stacey Cartwright(j)
Hans Wijers(j)
ADS(i)
Lynn Elsenhans
Dr Jesse Goodman(i)
Judy Lewent
Dr Stephanie Burns(j)
Sir Deryck Maughan(j)
Dr Daniel Podolsky(j)
27,812
44,825
669
29,016
4,097
–
–
–
20,809
–
20,219
–
–
–
25,499
42,705
323
25,279
3,488
44
9,631
5,223
18,205
–
19,052
21,263
53,294
38,973
23,969
37,303
–
16,696
2,080
44
8,469
4,845
14,839
–
17,636
20,584
51,937
37,745
1,850
271
4
924
187
–
–
–
1,177
–
626
–
–
–
25,499
7,505
323
18,361
3,488
–
9,510
–
17,205
–
8,886
–
–
38,973
–
–
–
–
–
–
–
5,223
–
–
–
21,198
53,294
–
1,530
5,402
323
8,583
1,408
–
1,163
378
3,366
–
1,417
678
1,357
1,228
23,969
2,103
–
9,778
2,080
–
8,347
4,845
13,839
–
7,469
20,520
51,937
37,745
a) Unvested shares not subject to performance of 70,252 for Sir Andrew represent 25% of the shares awarded at the end of the three year performance periods
for the 2012 and 2013 PSP grants, together with subsequent re-invested dividends. These shares are subject to further two-year vesting periods. Sir Andrew’s
unvested options not subject to performance of 143,640 represent bonus deferrals of 142,752 and Share Save options of 888.
Unvested options not subject to performance of 77,523 for Simon Dingemans represent bonus deferrals of 76,811 and Share Save options of 712.
Unvested ADS not subject to performance of 86,519 for Dr Moncef Slaoui represent bonus deferrals of 56,646, deferrals under the PSP plan of 22,743 and
Share Value Plan awards for his PCA of 7,130.
b) Total Directors’ interests includes shares purchased through the GlaxoSmithKline Share Reward Plan. During 2016, Sir Andrew Witty and Simon Dingemans
were each awarded 99 shares under the plan. The total number of shares held within the plan are as follows:
Share Reward Plan (Shares)
Sir Andrew Witty
Simon Dingemans
Emma Walmsley(k)
Dr Patrick Vallance(k)
3 March 2017
31 December 2016
1 January 2016
3,616
1,423
1,016
2,984
3,541
1,375
N/A
N/A
3,132
1,100
N/A
N/A
Dr Moncef Slaoui is not eligible to participate in the Share Reward Plan, as this is only open to UK employees.
Investor informationFinancial statementsGovernance and remunerationStrategic report
128 GSK Annual Report 2016
Annual report on remuneration continued
Directors’ interests in shares (audited) continued
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
Simon Dingemans
Dr Moncef Slaoui
Emma Walmsley(k)
Dr Patrick Vallance(k)
3 March 2017
31 December 2016
1 January 2016
Shares
Shares
ADS
Shares
Shares
110,972
84,317
46,425
73,134
72,299
142,752
76,811
56,646
N/A
N/A
130,307
49,729
50,897
N/A
N/A
d) Total directors’ interests at 3 March 2017 includes any shares or ADS which vested due to performance being met under elements of the DABP and PSP
(2014-2016 awards), less those sold to satisfy tax liabilities on the vested amounts (see pages 130 to 133 for further details).
e) For Dr Moncef Slaoui, total directors’ interests includes ADS purchased within the 401(k) Plan and the US Executive Supplemental Savings Plan (ESSP), and
ADS awarded to Dr Moncef Slaoui’s PCA under the SVP. The relevant balances are as follows:
Dr Moncef Slaoui (ADS)
US Retirement Savings Plans
Share Value Plan
3 March 2017
31 December 2016
1 January 2016
16,839
4,830
16,452
7,130
13,431
7,820
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
PCA, 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 PCA was granted 2,300 ADS on 22
September 2016 at a grant price of $43.58 (face value of $100,234). Dr Moncef Slaoui’s total share plan interests also include PSP awards held by his PCA.
These awards are subject to performance criteria relevant to employees below the CET. As at 31 December 2016, his PCA held 6,777 ADS under the PSP,
comprising awards made in 2014 (2,384 ADS), 2015 (2,258 ADS) and 2016 (2,135 ADS), all amounts including dividend re-investment.
f) Share Save Plan
For Sir Andrew Witty and Simon Dingemans, the unvested options not subject to performance include holdings of 888 and 712 respectively in the Share
Save Plan, in which they participate on the same terms as all other employees. No Share Save options were granted to Sir Andrew Witty during 2016.
Simon Dingemans was granted 208 options under the plan on 30 November 2016.
g) The ADS vested but unexercised options totalling 3,810 for Dr Moncef Slaoui represent the ADS options held by his PCA.
129 GSK Annual Report 2016
Directors’ interests in shares (audited) continued
h) The following table sets out details of options (including nil-cost options under the DABP) exercised during 2016 by Executive Directors. Dr Moncef Slaoui
did not exercise any options during the year.
Type of award
Sir Andrew Witty
DABP – deferral
DABP – matching
Simon Dingemans
Share Save
DABP – deferral
DABP – matching
Date of grant
Number of shares
under option
Date of exercise
Grant price
Market
price at exercise
Gain on exercise
(000)
28.02.13
28.02.13
30.10.13
28.02.13
28.02.13
36,442
13,757
50,199
216
13,799
5,209
19,224
18.03.16
18.03.16
01.12.16
06.05.16
06.05.16
–
–
£13.82
£13.82
£12.47
–
–
£14.69
£14.50
£14.50
£504
£190
£694
–
£200
£76
£276
In respect of options under the Share Save Plan, 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.
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 Executive Director is recorded in the year that the performance period ends 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 gain of £503,628 recorded following the exercise of the 36,442 nil-cost options relating to the deferral of bonus earned in respect of 2012 comprises
remuneration of £452,400 recorded in 2012 as annual bonus and a net gain of £51,228 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 £190,122 recorded following the exercise of the 13,757 nil-cost options relating to the DABP matching award comprises remuneration of
£194,111 recorded in 2015 in relation to the DABP (see page 130) and an investment loss of £3,989 relating to the movement in the share price between
the vesting and exercise dates.
For Simon Dingemans:
– A gain of £480 resulted from the exercise of 216 options granted under the Share Save Plan.
– The gain of £200,086 recorded following the exercise of the 13,799 nil-cost options relating to the deferral of bonus earned in respect of 2012 comprises
remuneration of £171,330 recorded in 2012 as annual bonus and a net gain of £28,756 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 £75,531 recorded following the exercise of the 5,209 nil-cost options relating to the DABP matching award comprises remuneration of £73,499
recorded in 2015 in relation to the DABP (see page 130) and an investment gain of £2,032 relating to the movement in the share price between the vesting
and exercise dates.
For Non-Executive Directors, total interests include shares or ADS received as part or all of their fees under the Non-Executive Directors’ Share Allocation
Plan. Note that dividends received on shares or ADS under the plan during 2016 and January 2017 were converted into shares or ADS as at 8 February 2017.
In accordance with the share allocation arrangements for Non-Executive Directors, 25% of Dr Jesse Goodman’s fees will be retained and will be reinvested in
the company’s ADS at a future date, to be mutually agreed.
Dr Stephanie Burns, Sir Deryck Maughan and Hans Wijers all retired from the Board on 5 May 2016. They elected to receive their shares or ADS from the
Non-Executive Directors’ Share Allocation Plan immediately upon retiring from the Board. Dividend entitlements in respect of the Q3 and Q4 2015 and the
Q1 2016 dividends were paid in cash in accordance with the plan rules. Dr Daniel Podolsky also retired on 5 May 2016, but has not yet been paid out his GSK
ADS under the Non-Executive Directors’ Share Allocation Plan as he elected to defer payment until after Q1 2017. Stacey Cartwright retired from the Board on
31 December 2016 and elected to receive her GSK shares under the Non-Executive Directors’ Share Allocation Plan immediately following retirement.
i)
j)
k)
Emma Walmsley and Dr Patrick Vallance were appointed to the Board from 1 January 2017.
Investor informationFinancial statementsGovernance and remunerationStrategic report
130 GSK Annual Report 2016
Annual report on remuneration continued
Directors’ interests in shares (audited) continued
Deferred Annual Bonus Plan matching awards
The following tables provide details for each Executive Director in office at 31 December 2016 in respect of DABP matching awards. Market
price at grant and at vesting represent the closing share prices from the business day prior to those dates.
Sir Andrew Witty – Shares
Market price at grant
Unvested at 31 December 2015
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2016
Dividends reinvested
Vested
Lapsed
Unvested at 3 March 2017
Vested shares
Number of shares
Market price at vesting
Gain:
Remuneration for 2015
Remuneration for 2016
Simon Dingemans – Shares
Market price at grant
Unvested at 31 December 2015
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2016
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 3 March 2017
Vested shares
Number of shares
Market price at vesting
Gain:
Remuneration for 2015
Remuneration for 2016
2013-2015
2014-2016
2015-2017
2016-2018
Performance period
£15.20
31,503
–
–
2,103
–
–
33,606
408
–
–
34,014
£13.59
–
40,003
£544
2,091
–
–
42,094
511
–
–
42,605
£14.54
35,947
–
–
495
(13,757)
(22,685)
–
13,757
£14.11
(000)
£194
–
£16.43
62,857
–
–
4,195
–
–
67,052
814
(22,621)
(45,245)
–
22,621
£15.95
(000)
–
£361
2013-2015
2014-2016
2015-2017
2016-2018
2017-2019
Performance period
£15.20
15,327
–
–
1,023
–
–
16,350
–
–
198
–
–
16,548
£13.59
–
36,381
£494
1,901
–
–
38,282
–
–
465
–
–
38,747
£15.77
–
–
–
–
–
–
–
29,022
£458
–
–
–
29,022
£14.54
13,611
–
–
187
(5,209)
(8,589)
–
5,209
£14.11
(000)
£73
–
£16.43
20,791
–
–
1,388
–
–
22,179
–
–
269
(7,483)
(14,965)
–
7,483
£15.95
(000)
–
£119
131 GSK Annual Report 2016
Directors’ interests in shares (audited) continued
Deferred Annual Bonus Plan matching awards continued
Dr Moncef Slaoui – ADS
Market price at grant
Unvested at 31 December 2015
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2016
Dividends reinvested
Vested
Lapsed
Unvested at 3 March 2017
Vested ADS
Number of ADS
Market price at vesting
Gain:
Remuneration for 2015
Remuneration for 2016
2013-2015
2014-2016
2015-2017
Performance period
2016-2018
$46.25
12,500
–
–
822
–
–
13,322
156
–
–
13,478
$39.13
–
20,854
$816
1,076
–
–
21,930
257
–
–
22,187
$44.27
18,325
–
–
247
(7,011)
(11,561)
–
7,011
$39.14
(000)
$274
–
$54.17
20,073
–
–
1,321
–
–
21,394
251
(7,215)
(14,430)
–
7,215
$40.57
(000)
–
$293
Emma Walmsley and Dr Patrick Vallance were appointed to the Board from 1 January 2017. The following table provides details on their DABP
matching awards granted on 15 February 2017.
Granted shares
Performance period
Number of shares
Market price at grant
Face value at grant (000)
Unvested at 3 March 2017
Emma Walmsley
Dr Patrick Vallance
2017-2019
31,945
£15.77
£504
31,945
2017-2019
21,632
£15.77
£341
21,632
Investor informationFinancial statementsGovernance and remunerationStrategic report 132 GSK Annual Report 2016
Annual report on remuneration continued
Directors’ interests in shares (audited) continued
Performance Share Plan awards
The following tables provide details for each Executive Director in office at 31 December 2016 in respect of PSP 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 2015
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2016
Dividends reinvested
Vested
Lapsed
Unvested at 3 March 2017
Vested shares:
Number of shares
Market price at vesting
Gain:
Remuneration for 2015
Remuneration for 2016
Simon Dingemans – Shares
Market price at grant
Unvested at 31 December 2015
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2016
Dividends reinvested
Vested
Lapsed
Unvested at 3 March 2017
Vested shares:
Number of shares
Market price at vesting
Gain:
Remuneration for 2015
Remuneration for 2016
2013-2015
£14.54
505,239
–
–
6,954
(193,354)
(318,839)
–
193,354
£13.64
(000)
£2,637
–
2013-2015
£14.54
222,312
–
–
3,060
(85,078)
(140,294)
–
85,078
£13.64
(000)
£1,160
–
2014-2016
2015-2017
2016-2018
Performance period
£15.20
448,125
–
–
29,909
–
–
478,034
5,800
–
–
483,834
£13.59
–
492,052
£6,687
25,715
–
–
517,767
6,282
–
–
524,049
Performance period
2015-2017
2016-2018
£15.20
197,197
–
–
13,161
–
–
210,358
2,552
–
–
212,910
£13.59
–
216,512
£2,942
11,315
–
–
227,827
2,764
–
–
230,591
£16.43
437,051
–
–
29,171
–
–
466,222
5,656
(157,279)
(314,599)
–
157,279
£16.17
(000)
–
£2,543
2014-2016
£16.43
192,325
–
–
12,836
–
–
205,161
2,489
(69,210)
(138,440)
–
69,210
£16.17
(000)
–
£1,119
133 GSK Annual Report 2016
Directors’ interests in shares (audited) continued
Performance Share Plan awards continued
Dr Moncef Slaoui – ADS
Market price at grant
Unvested at 31 December 2015
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2016
Dividends reinvested
Vested
Lapsed
Unvested at 3 March 2017
Vested ADS
Number of ADS
Market price at vesting
Gain:
Remuneration for 2015
Remuneration for 2016
2013-2015
2014-2016
2015-2017
2016-2018
Performance period
$46.25
136,751
–
–
8,996
–
–
145,747
1,708
–
–
147,455
$39.13
–
158,714
$6,210
8,187
–
–
166,901
1,955
–
–
168,856
$44.27
154,179
–
–
2,082
(58,989)
(97,272)
–
58,989
$39.76
(000)
$2,345
–
$54.17
123,242
–
–
8,108
–
–
131,350
1,539
(44,292)
(88,597)
–
44,292
$40.92
(000)
–
$1,812
Investor informationFinancial statementsGovernance and remunerationStrategic report
134 GSK Annual Report 2016
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 CET and the Company Secretary. For the financial
year 2016, the following table sets out aggregate remuneration for the group for the periods during which they served in that capacity.
Remuneration for 2016
Total compensation paid
Aggregate increase in accrued pension benefits (net of inflation)
Aggregate payments to defined contribution schemes
(£)
24,279,911
184,582
974,193
During 2016, members of the group (and one PCA who is also an employee of GSK) were awarded shares and ADS under the company’s
various share plans, as set out in the table below.
Awarded during 2016
Deferred Annual Bonus Plan
Performance Share Plan
Deferred Investment Awards(a) (b)
Share Value Plan(b)
Shares
237,822
1,828,527
–
11,060
Awards
ADS
35,614
260,411
–
2,300
Dividend reinvestment awards
Shares
33,451
323,503
13,493
–
ADS
5,281
49,964
284
–
At 3 March 2017, the group and their PCAs had the following interests in shares and ADS of the company. Holdings issued under the various
executive share plans are described in Note 43 to the financial statements, ‘Employee share schemes’ on page 223.
Interests at 3 March 2017
Owned
Unexercised options
Deferred Annual Bonus Plan
Performance Share Plan
Deferred Investment Awards(a) (b)
Share Value Plan(b)
Shares
2,262,806
179,582
1,235,336
3,821,454
118,012
37,132
ADS
421,300
20,170
165,711
708,471
23,907
27,199
(a) Notional shares and ADS.
(b) Executive Directors are not eligible to receive Deferred Investment Awards or participate in the Share Value Plan.
Other share plans and dilution limits
All-employee share plans
The Executive Directors participate in various all-employee share
plans, including Share Save and Share Reward.
The Share Save 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 and £225 respectively a month
into the Share Save Plan.
The Share Reward 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 the maximum of £125 a month
to buy shares under the Share Reward Plan.
Dilution limits
All awards are made under plans which incorporate dilution
limits consistent with the guidelines published by the Investment
Association. 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 2016 is as follows:
All GSK employee share plans
Executive share plans
10
08
06
04
02
0
10%
5%
2.53%
2.20%
Actual
Limit
135 GSK Annual Report 2016
Implementation of Remuneration policy for 2017
Salary
The Committee determined the following salary increases taking into
account the average increase for the wider workforce:
Wider workforce(1)
Sir Andrew Witty
Dr Moncef Slaoui
Simon Dingemans
Emma Walmsley(2)
Dr Patrick Vallance(3)
2017
–
% change
2.5
£1,114,500
$1,242,100
£754,000
£1,003,000
£780,000
0
0
2.5
N/A
N/A
(1) Based on the average increase budget for employees below the level of CET in the UK.
(2) Effective from appointment to the role of CEO on 1 April 2017 and is 10% lower than
that received by Sir Andrew Witty. Emma Walmsley was appointed to the Board on
1 January 2017 as CEO Designate with a base salary of £850,000.
(3) Effective from appointment to the Board on 1 January 2017.
Benefits
No significant changes to the provision of benefits are proposed for
2017. For full details of the policy in relation to benefits, please refer
to the details in the Remuneration policy report on page 138.
Pension
The table below provides an overview of the pension arrangements
for each Executive Director in 2017.
Sir Andrew Witty(1)
Dr Moncef Slaoui(1)
Simon Dingemans
Emma Walmsley(2)
Dr Patrick Vallance
Pension contribution
UK defined benefit
US and Belgian plans
20% of base salary in lieu of pension
20% of base salary and matching contributions
20% of base salary in lieu of pension
Inevitably, targets linked directly to the financial and strategic plan
are commercially sensitive. The Committee does not consider it
appropriate to disclose annual bonus targets during the year as it
may result in competitive harm. However, details of the performance
targets will be disclosed on a retrospective basis in the 2017 Annual
Report.
As Sir Andrew and Dr Moncef Slaoui will cease to be Executive
Directors during the year, in accordance with the Remuneration
policy they will receive a pro-rata on-target bonus payment for 2017.
The Committee has set role specific objectives for them for this
period. As the two individuals will cease to be Executive Directors
before the new Remuneration policy is approved, the target bonus
opportunities will be as set out in the policy approved by
shareholders in 2014 (i.e. 125% of salary for Sir Andrew and 85%
of salary for Dr Moncef Slaoui).
Legacy awards – matching awards under the DABP
2017 was the last time matching awards were made under the
DABP. These awards relate to 2016 bonus outcomes under the
2014 Remuneration policy.
The table below provides details of the level of participation in the
DABP in respect of 2016 annual bonus payments and associated
matching awards granted.
Sir Andrew Witty and Dr Moncef Slaoui did not receive matching
awards in 2017 as they will cease to be Executive Directors during
the year. However, their 2016 annual bonus payments were subject
to a 25% mandatory deferral.
% of total bonus
deferred into
shares
50
2017 matching
award (number
shares)
31,945
50
50
29,022
21,632
(1) Further details provided on page 118.
(2) As a member of the defined contribution plan, is eligible to receive a matching award
of up to 5% on the first £33,333 of her salary in accordance with the terms of the plan
(i.e. £1,667).
Emma Walmsley(1)
Simon Dingemans
Dr Patrick Vallance(1)
Annual bonus plan
A number of changes have been made to the operation of the
Annual bonus plan for 2017 to simplify and align it for all
Executive Directors.
– The matching awards have been removed from the Deferred
Annual Bonus Plan (DABP) and the percentage of the bonus
that will be subject to mandatory deferral into shares for a
period of three years has increased from 25% to 50%.
– Financial performance will now be measured by reference
to just one profit related measure, Core Group PBIT, with
operating profit removed as a measure. Group PBIT has
been selected as being the profit measure most aligned to
shareholders.
– The calculation of the bonus will now operate on an additive
basis, with the removal of the Individual Performance Multiplier
and the introduction of a scorecard of individual objectives
aligned to the strategic goals of the business for the year.
Bonus opportunity
% of salary
Weighting of
performance measures
Target
Maximum
Core
Group
PBIT %
Scorecard
of individual
objectives %
100
200
70
30
Emma Walmsley
Simon Dingemans
Dr Patrick Vallance
(1) Matching awards based on bonus earned in respect of 2016 prior to appointment
to the Board.
Performance Share Plan (PSP) awards
It is intended that awards under the PSP will be made later in the year
following the approval of the PSP rules at the AGM on 4 May 2017.
No awards will be made in 2017 to Sir Andrew Witty and Dr Moncef
Slaoui. Awards to the remaining Executive Directors will be made at
the following levels.
Emma Walmsley
Simon Dingemans
Dr Patrick Vallance
2017 PSP award
(% of salary)
550
400
500
Performance measures
The metrics for the PSP and DABP matching awards remain
unchanged. The 2017 awards will continue to be based on three
equally weighted measures: R&D new product performance,
adjusted free cash flow and relative TSR.
TSR will continue to be measured against global pharmaceutical
peers. As in prior years, targets for R&D new products are
commercially sensitive at the time of grant. However, the Committee
intends to disclose targets in full following the end of the
performance period. In addition, the Committee will continue to
provide shareholders with interim performance updates for this
element over the course of the performance period. The adjusted
free cash flow targets will be disclosed to shareholders on a
prospective basis at the time of grant, and will thereafter be reported
in the 2017 Annual report on remuneration.
Investor informationFinancial statementsGovernance and remunerationStrategic report 136 GSK Annual Report 2016
Annual report on remuneration continued
Non-Executive Director fees for 2017
Non-Executive Director fees were reviewed during the year following
the last increase in January 2013.
It was agreed to increase the fees for the Chairmen of the
Remuneration and Corporate Responsibility Committees from
£20,000 to £30,000. The Chairman of the new Science Committee
will also receive a fee of £30,000. All other fees remain unchanged.
A minimum of 25% of fees will continue to be delivered as shares
deferred until the Non-Executive Director steps down from the
Board.
Implementation of Remuneration policy for 2017 continued
Termination arrangements for Sir Andrew Witty and
Dr Moncef Slaoui
As announced in 2016, both Sir Andrew Witty and Dr Moncef
Slaoui will leave the Board by mutual agreement on 31 March
2017. Dr Moncef Slaoui will remain an employee of the Group until
30 June 2017.
No termination payments will be made to Sir Andrew Witty and
Dr Moncef Slaoui. Defined benefit pension arrangements and
outstanding incentive awards will be treated in accordance with
the Remuneration policy as approved by shareholders in 2014.
Full disclosure of all payments made upon cessation will be included
in the 2017 Annual report on remuneration.
Remuneration element
2017 Annual bonus
Summary of treatment
Will receive an on-target bonus payment
pro-rated for the proportion of the financial
year worked
2017 PSP award and
DABP matching award
Will not be granted 2017 PSP awards and no
DABP matching awards will be granted in
respect of their 2016 bonuses
2016 and 2015 PSP
and DABP matching awards
Will vest at the normal vesting dates, subject
to the achievement of performance conditions
assessed at the end of the performance
periods
2016, 2015 and 2014
deferred bonuses
Awards in respect of bonuses deferred in
respect of prior years will vest at the normal
vesting dates
In addition to the above, both Executive Directors will be required to
maintain a shareholding equal to their respective share ownership
requirements for at least 12 months after leaving the company.
137 GSK Annual Report 2016
2017 Remuneration policy summary
Remuneration policy review
Our first Remuneration policy was approved by our shareholders
at our AGM on 7 May 2014. As required under the regulations,
shareholders are being asked to approve a new Remuneration policy
at our AGM on 4 May 2017 which it is intended will apply for the
next three financial years.
During 2016, the Committee reviewed the Remuneration policy to
ensure that the Policy continues to:
– Be aligned with best practice;
– Create shareholder value; and
– Drive the success of the company and the delivery of its
business strategy.
In addition, changes to the policy have been made to:
– Further align remuneration arrangements across the senior layers
of the organisation;
– Deliver an appropriately competitive package to attract, retain and
motivate executive talent; and
– Simplify pay arrangements.
The Committee consulted with our largest shareholders in respect of
the proposed changes and took shareholders’ feedback into account
when finalising the revised Remuneration policy. The table below
provides an overview of the main changes that are proposed in
respect of the Remuneration policy.
The full Remuneration policy that shareholders are asked to approve
is set out on pages 138 to 146.
Remuneration element
Proposed changes to policy
Rationale for the change
Mandatory deferral of Annual bonus
– Increased from 25% to 50% of any bonus
earned.
Simplification of the Annual bonus
– Simplify and align structure for all Executive
Directors.
– Reduce the level of pay-out for threshold
performance to nil.
Alignment with shareholders:
Further aligns executives with the long-term
interests of shareholders.
Simplification:
Consistent approach for all Executive Directors,
that can be clearly communicated.
Pay for performance:
Ensures that higher levels of bonus pay-out are
only received for significant performance.
Annual bonus and Performance Share Plan
(PSP) performance measures
– Provide additional flexibility for the Committee
to determine the performance measures used
on an annual basis during the three year life
of the Remuneration policy.
– The Committee would consult with
shareholders prior to changing the
performance measures used.
Flexibility:
In the context of the appointment of the new
CEO, it is considered appropriate to provide
sufficient flexibility to ensure performance
metrics chosen over the next three years will
remain aligned with the key financial and
strategic objectives of the company.
LTI opportunities
– The matching element of the DABP has been
removed.
– The maximum LTI opportunity for the CEO
will be reduced from 700% to 650% of
salary.
Share Ownership Requirements (SOR)
– Formally include the shareholding guidelines
as part of the Remuneration policy.
– Increased SOR for CEO to 6.5x salary.
Simplification:
Going forward, the PSP will be the only
long-term incentive plan that is used.
Reduction in maximum opportunity:
Total LTI opportunity for all Executive Directors
has been reduced. In 2017, the award to the
CEO will be below the maximum opportunity
(550% of salary).
Alignment with shareholders:
To provide further alignment with shareholders.
Investor informationFinancial statementsGovernance and remunerationStrategic report 138 GSK Annual Report 2016
Remuneration policy report
Future policy table
Subject to shareholder approval at the company’s AGM on 4 May 2017, the Remuneration Policy for each remuneration element will be as
outlined in the table below.
Salary
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, 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.
No material change
Opportunity
There is no formal maximum limit and, 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.
Details of current salary levels are set out in the Annual report on
remuneration.
Performance measures
The overall performance of the individual is a key consideration
when determining salary increases.
Benefits
No material change
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,
but are not limited to, 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. In line with the policy for other employees,
Executive Directors may be eligible to receive overseas relocation
allowances and international transfer-related benefits when required.
Executive Directors are also eligible to participate in all-employee
share schemes (e.g. Share Save and Share Reward Plan), under
which they are subject to the same terms as all other employees.
In order to recognise the high business 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.
Pension
No material change
Purpose and link to strategy
Pension arrangements provide a competitive level of retirement
income.
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.
UK:
– 20% of salary contribution to defined contribution plan and further
5% in matched contributions subject to any relevant cap and in
line with implementation principles for other members of the plan;
or
– 20% of salary cash payment in lieu of pension contribution.
US:
Eligible for the same benefits as other US senior executives:
Executive Directors in the UK are entitled either to join the defined
contribution pension plan or to receive a cash payment in lieu of
pension contribution.
– 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.
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.
Opportunity
The policy for all current Executive Directors and new external
recruits is:
– 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.
139 GSK Annual Report 2016
Future policy table continued
Annual bonus
Change
Purpose and link to strategy
To incentivise and recognise execution of the business strategy
on an annual basis.
The Committee may apply judgement in making appropriate
adjustments to bonus outcomes to ensure they reflect underlying
business performance.
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 those objectives is assessed by the
Committee.
Executive Directors are required to defer 50% of any bonus earned
into shares, or ADS as appropriate, for three years.
Deferred bonus shares are eligible for dividend equivalents up to
the date of vesting.
Clawback and/or malus provisions apply as described on page 140.
Opportunity
The maximum bonus opportunity for Executive Directors is 200% of
salary. For threshold performance, the bonus pay-out will be nil.
For target performance, the bonus payout will be 50% of the
maximum opportunity.
Performance measures
Based on a combination of financial targets and individual/strategic
performance objectives, with the majority of the bonus assessed
against the financial measures. The weighting between different
measures will be determined each year according to business
priorities.
Further details, including the measures to be used in the financial
year, are provided in the Annual report on remuneration.
Selection of 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 with the
remainder of the bonus subject to a balanced scorecard of strategic
and individual targets which are aligned to the company’s key
objectives for that financial year.
Performance Share Plan (PSP)
Change
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
Conditional awards are made annually with vesting dependent on
the achievement of performance conditions over three years and
are subject to an additional two-year holding period.
Awards are eligible for dividend equivalents up to the date of
vesting and release.
The Committee may adjust the formulaic vesting outcome (either
up or down) to ensure that the overall outcome reflects underlying
business performance over the vesting period.
Clawback and/or malus provisions apply as described on page 140.
Opportunity
The normal maximum award limits that may be granted under the
PSP to an individual in any one year are set out in the table below:
In 2017, the award to the CEO will be 550% of salary.
CEO
CFO
Other Executive Directors
% of salary
650
400
500
Performance measures
Based on a combination of financial, share price related and
strategic performance conditions which are aligned to the
company’s strategic plan. Up to 30% of awards will vest at
threshold performance. Further details, including the performance
targets attached to the PSP in respect of each year, are provided
in the Annual report on remuneration.
Selection of long-term incentive measures
The Committee selects performance measures which focus
Executive Directors’ long-term remuneration on the delivery of GSK’s
key strategic priorities over the longer term. 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
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 Chairman of the Audit
and 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.
Details of the rationale behind the performance measures selected
and how they are calculated are set out in the Annual report on
remuneration.
Investor informationFinancial statementsGovernance and remunerationStrategic report 140 GSK Annual Report 2016
Remuneration policy report continued
Future policy table continued
Legacy arrangements – Deferred Annual Bonus Plan (DABP)
Removed from 2017 onwards
Purpose
To incentivise and recognise delivery of longer term business
priorities and to provide alignment with shareholder interests and
encourage long-term shareholding.
Operation and maximum opportunity
For bonus payments up to and including the bonus in respect
of 2016, Executive Directors were required to defer 25% of
any bonus earned into shares for three years. They could also
voluntarily defer up to an additional 25% of any bonus earned.
These deferred shares were matched up to a maximum of 1:1 subject
to the achievement of performance conditions over three years.
Matching awards were conditional shares or nil-cost options and
eligible for dividend equivalents.
Performance measures
Outstanding matching awards are subject to the same measures as
awards made under the PSP in any given year.
Further details of outstanding awards are provided on pages 122
and 135 of the Annual report on remuneration. No matching awards
will be made under the DABP in respect of bonus from 2017
onwards.
Share Ownership Requirements
Increase in requirement for CEO
To align the interests of Executive Directors with those of
shareholders, they are required to build and maintain significant
holdings of shares in GSK over time. The requirements for each
Executive Director are as follows:
Executive Directors are also required to continue to satisfy these
requirements for a minimum of 12 months following retirement from
the company.
CEO
Other Executive Directors
% salary
650
300
Clawback and malus
No change
In the event of a ‘triggering event’ (e.g. significant misconduct by way
of violation of regulation, law, or a significant GSK policy, such as the
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. In addition, if a participant in the new 2017 PSP or
DABP, which shareholders are asked to approve at the 2017 AGM,
is subject to an investigation, then the vesting of their awards may be
delayed until the outcome of that investigation.
A separate Recoupment Committee has been established to
investigate relevant claims of misconduct. The Recoupment
Committee exercises this authority for the wider employee base.
It comprises 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.
In respect of each financial year, the Remuneration Committee will
disclose whether it (or the Recoupment Committee) has exercised
clawback or malus. Disclosure will only be made when the matter has
been subject to 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.
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 Remuneration
Committee (or Recoupment Committee) may make appropriate
adjustments to individual annual bonuses as well as grant and
vesting levels of LTI awards to reflect this.
141 GSK Annual Report 2016
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.
Pension arrangements for any external recruit as an Executive
Director will be as set out in the Remuneration policy table on
page 138.
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. 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 remuneration terms.
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 as compensation for previous remuneration
forfeited.
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.
Investor informationFinancial statementsGovernance and remunerationStrategic report 142 GSK Annual Report 2016
Remuneration policy report continued
Loss of office payment policy
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 124.
Notice period on termination by the employing company or the
Executive Director is 12 calendar months.
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
Loss of office payment policy
Termination payment
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.
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. For awards made prior to the
approval of the 2017 PSP and DABP rules, the following provisions will normally apply:
Termination by notice: Unvested awards will lapse.
Redundancy and retirement: Generally, awards will continue to vest over the original timescales, subject to the original performance
conditions. Awards made in the last 12 months are forfeited.
Death, ill-health, injury, disability or any other reason: Generally, performance will be assessed following the end of the financial
year in which cessation of employment occurs and awards will vest up to 12 months following cessation. Awards may be pro-rated
for time.
For awards made under the approved rules of the 2017 PSP, the following provisions will normally apply:
Termination by notice: Unvested awards will lapse.
Redundancy, retirement, death, ill-health, injury, disability or any other reason: Generally, awards will continue to vest over the
original timescales subject to performance and 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, 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
DABP deferred bonus awards are governed by the plan rules as approved by shareholders. For awards made prior to the approval of
the 2017 DABP rules, the following provisions will normally apply:
Termination by notice: Awards will vest in full on the date of termination or original vesting date as determined at the date of grant
Redundancy, retirement, death, ill-health, injury, disability or any other reason: Generally, awards will vest in full on the original
vesting date.
For awards made under the approved rules of the 2017 DABP, the following provisions will normally apply:
Termination for gross misconduct: Generally, unvested awards will lapse
Any other reason: Generally, awards will vest in full on the original vesting date.
In the event of a change of control, awards will vest or may be exchanged for new awards.
Benefits
Generally, benefits will continue to apply until the termination date. The Committee may make payments in connection with an existing
legal obligation or in respect of any claim related to the cessation of employment. This may include fees for outplacement assistance,
legal and/or professional advice.
Termination by notice by the company and retirement (US executives): In line with the policy applicable to US senior executives,
the Chairman, Global 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.
143 GSK Annual Report 2016
Loss of office payment policy continued
The Committee does not anticipate the exercise of discretion
provided by the PSP and DABP plan rules in respect of termination
payments in a manner which would benefit an Executive Director.
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 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 (see page 140).
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 Executive
Directors 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
apply to the wider employee population.
– All-employee share plans are available to employees in the UK,
including the HM Revenue & Customs approved UK Share Save
and Share Reward Plans.
While employees are not formally consulted in respect of the
Remuneration policy, 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 since 2014, our
performance system 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.
Investor informationFinancial statementsGovernance and remunerationStrategic report 144 GSK Annual Report 2016
Remuneration policy report continued
Scenarios for future total remuneration
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 2017 under the
policy. A range of potential outcomes is provided for each Executive
Director and the underlying assumptions are set out below.
All scenarios:
– 2017 base salary has been used.
– 2016 benefits and pension figures have been used for the CFO,
i.e. based on actual amounts received in 2016 in respect of the
ongoing policy. As the new CEO and President, R&D were not in
role during 2016, the benefits value for each is based on the value
of benefits (excluding pensions) provided in 2016 to the current
CEO and CFO respectively.
– The amounts shown under value of PSP awards are based on
the relevant multiples for 2017. 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 PSP) would
be payable.
Expected:
– For the annual bonus, it is assumed that target performance is
achieved.
– For the PSP 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 PSP would vest
in full.
Emma Walmsley, new CEO (£000)
10,000
8,000
6,000
4,000
2,000
£1.33m
100%
£8.85m
62%
£3.80m
39%
26%
35%
23%
15%
0
Fixed
Expected
Maximum
Simon Dingemans, CFO (£000)
6,000
4,000
2,000
0
£1.0m
100%
£2.56m
31%
30%
39%
£5.52m
55%
27%
18%
Fixed
Expected
Maximum
Dr Patrick Vallance, President, R&D (£000)
8,000
6,000
4,000
2,000
0
£6.49m
60%
£1.03m
100%
£2.85m
37%
27%
36%
24%
16%
Fixed
Expected
Maximum
Fixed pay
Annual bonus
PSP
145 GSK Annual Report 2016
Non-Executive Director remuneration policy 2017
Element
Purpose and link to strategy
Operation
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.
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.
The 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 via the Non-Executive
Directors’ Share Allocation Plan.
Chairman’s fees
Basic fees
As above
Supplemental
fees
To compensate Non-Executive Directors
(other than the Chairman) for taking on
additional Board responsibilities or
undertaking intercontinental travel.
Benefits
To facilitate execution of responsibilities and
duties required by the role.
As with the Chairman, fees are reviewed annually and set by reference to independently
sourced 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. Using the Non-Executive
Directors’ Share Allocation Plan which delivers the shares or ADS to the Non-Executive
Director following retirement from the Board.
Additional fees for Committee Chairmen, the Senior Independent Non-Executive Director,
Science and Medical Experts and intercontinental travel.
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. In the event it is necessary for business purposes, whilst not normal practice, Non-
Executive Directors may 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.
Investor informationFinancial statementsGovernance and remunerationStrategic report 146 GSK Annual Report 2016
Remuneration policy report continued
Operation and scope of Remuneration policy
The proposed Remuneration policy (Policy) is set out on pages 138
to 146 of the 2016 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 4 May 2017
after it has been submitted by the Committee for approval by
shareholders.
Performance Share Plan and Deferred Annual Bonus Plan awards
are subject to the terms of the relevant plan rules under which the
award has been granted. The Committee may adjust or amend
awards only in accordance with the provisions of the plan rules.
This includes making adjustments to reflect one-off corporate
events, such as a change in the company’s capital structure.
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 December 2016, at which Urs
Rohner, the Committee Chairman, shared updates on remuneration
matters in the last 12 months and proposals for 2017 onwards.
Further shareholder consultations were carried out in February
and March 2017 by the Committee Chairman on the proposed
Remuneration policy. The Committee took into account the feedback
from shareholders in determining the Policy which shareholders are
being asked to approve at the AGM on 4 May 2017.
The Committee has written this Policy principally in relation to the
remuneration arrangements for the Executive Directors, 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.
The Committee reserves the right to make any remuneration
payments and/or 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 AGM on 7 May 2014 (the date the company’s first
shareholder-approved Directors’ Remuneration Policy came into
effect);
(ii) before the Policy set out above came into effect, provided that the
terms of the payment were consistent with the shareholder-approved
Remuneration policy in force at the time they were agreed; or
(iii) 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 and, in relation to an
award over shares or ADS, the terms of the payment are ‘agreed’
at the time the award is granted.
Basis of preparation
The Directors’ 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, pension, annual bonus and long-term
incentive awards); 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 156. The remaining sections
of the Directors’ Remuneration Report are not subject to audit nor
are the pages referred to from within the audited sections.
The Directors’ Remuneration Report has been approved by the
Board of Directors and signed on its behalf by:
Urs Rohner
Remuneration Committee Chairman
13 March 2017
147 GSK Annual Report 2016
Financial
statements
In this section
Directors’ statement of responsibilities
Independent Auditors’ report
Financial statements
Notes to the financial statements
Financial statements of GlaxoSmithKline plc
prepared under UK GAAP
148
149
158
162
232
Investor informationFinancial statementsGovernance and remunerationStrategic report 148 GSK Annual Report 2016
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.
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 its profit or loss 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; and
– 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
2016, comprising principal statements and supporting notes,
are set out in ‘Financial statements’ on pages 158 to 231 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 149 to 157.
The Group financial statements for the year ended 31 December
2016 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 2016
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,
which represent the management 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.
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 53 to 78 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 42 to the financial statements,
‘Financial instruments and related disclosures’. Having assessed the
principal risks and other matters considered in connection with the
viability statement, the Directors considered it appropriate to adopt
the going concern basis of accounting 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 complies with the provisions of the UK Corporate Governance
Code maintained by the Financial Reporting Council, as described
in the Corporate Governance section on pages 80 to 110. 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 position and
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 2016,
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
Philip Hampton
Chairman
13 March 2017
149 GSK Annual Report 2016
Independent Auditors’ report
to the members of GlaxoSmithKline plc
Report on the Group financial statements
Our opinion
In our opinion, GlaxoSmithKline plc’s Group financial statements:
– give a true and fair view of the state of the Group’s affairs at 31
December 2016 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, the Group,
in addition to applying IFRSs as adopted by the European Union,
has also applied IFRSs as issued by the International Accounting
Standards Board (IASB).
In our opinion, the Group financial statements comply with IFRSs as
issued by the IASB.
What we have audited
The Group financial statements, included within the Annual Report,
comprise:
– the consolidated balance sheet at 31 December 2016;
– the consolidated income statement and consolidated statement
of comprehensive income for the year then ended;
– the consolidated cash flow statement for the year then ended;
– the consolidated statement of changes in equity for the year then
ended; and
– the notes to the Group financial statements, which include a
summary of significant accounting policies and other explanatory
information.
Certain required disclosures have been presented elsewhere in the
Annual Report, rather than in the notes to the financial statements.
These are cross-referenced from the financial statements and are
identified as audited.
The financial reporting framework that has been applied in the
preparation of the Group financial statements is applicable law and
IFRSs as adopted by the European Union and applicable law.
Our audit approach
Context
The context of our audit is set by the Group’s activities in 2016.
Having reduced the extent of finance transformation in 2015 because
of the completion of the three-part transaction with Novartis, the
Group increased the pace of change in 2016, with a number of
markets migrating onto the Group’s common enterprise-wide
resource planning platforms (‘ERP’) or moving financial transaction
processing and accounting services to business process
outsourcing locations (‘BPO’) and to in-house business service
centres (‘BSC’) as well as establishing two new BPOs in Europe and
one in Asia. The Group also migrated to a new consolidation platform
(BISON) and implemented a new system for tracking intercompany
inventory transfers and calculating intra-group unrealised profit in
inventory (IPT). As a result, transformation of the Group’s finance
processes is included as an area of focus in our 2016 report.
In addition, the Group has made certain changes in 2016 to its
agreements with Pfizer and Shionogi in respect of the non-controlling
interest each holds in ViiV Healthcare. These changes, together with
remeasurements to ViiV and other acquisition-related liabilities, had a
significant impact on the corresponding accounting and valuation
judgements and have therefore also been included as an area of focus.
Our other areas of focus have been refined to reflect developments
in the Group’s business including continued competitive pricing
pressure and discounting in the US and the resolution of the
investigation into the Group’s commercial practices by the SEC-DoJ.
Overview
Materiality
– Overall group materiality: £260 million which represents 4%
of profit before tax adding back certain items (‘adjusted profit
before tax’) (2015 – £200 million).
Audit scope
– Our audit included full scope audits of 15 reporting components
with specific audit procedures performed at a further 45 reporting
components.
– Taken together, the components at which audit work was
performed accounted for 71% of consolidated revenue, 71% of
consolidated profit before tax and 73% of adjusted profit before
tax and covered all components that individually contributed more
than 2% of revenue, profit before tax and adjusted profit before tax.
Areas of focus
– Rebates, discounts, allowances and returns in the US
Pharmaceuticals and Vaccines business
– Carrying value of goodwill and intangible assets
– Acquisition-related liabilities
– Uncertain tax positions
– Litigation
– Finance transformation
– Investigations into the Group’s commercial practices
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 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, and the risk of fraud in revenue recognition. Procedures
designed and executed to address these risks included use of data
enabled auditing techniques to test journal entries and post-close
adjustments, testing and evaluating management’s key accounting
estimates for reasonableness and consistency, undertaking cut-off
procedures to verify proper cut-off of revenue and expenses and
testing the existence and accuracy of revenue transactions. In
addition, we incorporate an element of unpredictability into our
audit work each year.
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 financial statements as a whole and
any comments we make on the results of our procedures should be
read in this context. This is not a complete list of all risks identified by
our audit.
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Report on the Group financial statements 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 notes 3 and 27 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. This judgement is particularly complex
in a US healthcare environment in which competitive pricing
pressure and product discounting are growing trends. The
directors have determined an accrual of £2,218 million to be
necessary at 31 December 2016 (31 December 2015 – £1,671
million). The increase in the accrual in 2016 is primarily due to
foreign exchange rate impacts. Two other factors driving the
increased accrual were higher sales, as well as greater discounts
due to competitive pressures, particularly in relation to Advair.
Carrying value of goodwill and intangible assets
Refer to notes 3, 18 and 19 in the Group financial
statements.
The Group has £17.8 billion of intangible assets (31 December
2015 – £16.0 billion), comprising significant licences, patents
and acquired trademarks (and excluding computer software). In
addition, the Group has £6.0 billion of goodwill at 31 December
2016 (31 December 2015 – £5.2 billion).
The carrying values of goodwill and intangible assets are
contingent on future cash flows and there is a risk that the assets
will be impaired if these cash flows do not meet the Group’s
expectations. The impairment reviews performed by the Group
contained a number of significant judgements and estimates
including revenue growth, the success of new product launches,
genericisation of existing products following patent expiry, profit
margins, cash conversion, terminal values and discount rate.
Changes in these assumptions could lead to an impairment to
the carrying value of intangible assets and goodwill.
During the year, the Group changed its basis of aggregating
individual cash generating units (‘CGUs’) for goodwill impairment
testing purposes now comprising Global Pharmaceuticals,
Consumer Healthcare and Vaccines. This exercise was
undertaken to align to the Group’s operating segments, which
resulted in the aggregation of Pharmaceuticals and ViiV
Healthcare.
We focused on intangible assets acquired through historical
acquisitions, as these are the most significant individually and in
aggregate, and a number have indefinite lives, including the most
significant of the intangible assets acquired from Novartis in 2015.
The Group has also recognised goodwill from a number of its
acquisitions, including the three-part transaction with Novartis.
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, and the impact of competitive
pricing pressures and greater discounting in the US market more
generally. We formed an independent expectation of the largest
elements of the accrual at 31 December 2016 using third party data
and compared this expectation to the actual accrual recognised by the
Group.
Based on the procedures performed, we did not identify any material
differences between our independent expectations and the accrual.
Deploying our valuations specialists, we obtained the Group’s
impairment analyses and tested the reasonableness of key
assumptions, including profit and cash flow growth or decline,
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 in
key assumptions and we performed our own independent sensitivity
calculations to quantify the downside changes to management’s
models required to result in impairment.
As a result of our work, we determined that the impairment charge of
£22 million recorded for intangible assets 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 which would require
unreasonable downside changes before any additional material
impairment was necessary.
In respect of the aggregation of CGUs, we confirmed that this is
the lowest level at which management monitors goodwill for internal
purposes and that it is consistent with the way in which the Group’s
results are reported to the Board and the Corporate Executive Team.
151 GSK Annual Report 2016
Report on the Group financial statements continued
Area of focus
How our audit addressed the area of focus
We deployed our valuations specialists in evaluating certain key
assumptions, including growth projections and discount rate as well as
the integrity and mechanical accuracy of each of management’s valuation
models. We considered whether reasonably possible changes would have
a significant impact on the value recorded. Certain procedures are specific
to individual liabilities and included the following:
– Consumer Healthcare put option: The redemption price will contractually
be based on a multiple (to be agreed between GSK and Novartis) of
Consumer Healthcare’s revenue and profit. We compared the earnings
forecast approved by the Consumer Healthcare board of directors and
used by management in its model to the actual earnings in 2016 and
understood the reasons for changes. We also considered the
appropriateness of earnings multiples applied to this forecast and the
assumption about option exercise date;
– ViiV Healthcare contingent consideration: We compared the projections
for the Group’s dolutegravir products to third party expectations of
growth and considered the potential upside and downside impact of
products launched and expected to be launched by the Group’s
competitors; and
– ViiV Healthcare put options: We obtained and reviewed the written
agreements between the Group and each of Pfizer and Shionogi. Certain
assumptions related to forecast revenue from dolutegravir products used
in the valuation of these liabilities are consistent with the ViiV Healthcare
contingent consideration. For other components of the valuation, we
considered the appropriateness of the assumptions made about forecast
growth rates and margins by reference to historical performance and to
Board approved budgets and third party forecast data.
Each of these three acquisition-related liabilities is subject to significant
estimation uncertainty and the range of possible outcomes is very broad.
However, we are comfortable that the value of each liability at 31 December
2016 is reasonable and reflects management’s best estimates at this time.
We reviewed the disclosures about each acquisition-related liability,
including management’s commentary about estimation uncertainty and the
range of alternative outcomes. We are satisfied that these disclosures are
appropriate.
Acquisition-related liabilities
Refer to notes 3, 27, 30, 38, 39 and 42 in the Group financial
statements.
In recent years, the Group has completed a number of significant
transactions, including:
– The three-part transaction with Novartis in 2015;
– The establishment of ViiV Healthcare in 2009; and
– The acquisition by ViiV Healthcare of the remaining 50% interest
in the Shionogi-ViiV Healthcare in 2012.
Each of these transactions resulted in the recognition and
measurement of material acquisition-related liabilities, which
necessitate significant management judgement at each balance
sheet date.
In addition, during February 2016 the Group waived certain rights it
had in respect of non-controlling interests held by Pfizer and Shionogi
in ViiV Healthcare and the terms of the arrangement with Shionogi
were amended again in December 2016.
The most significant of the acquisition-related liabilities are outlined
below:
– Consumer Healthcare put option: The Group recorded a liability
for the present value of the expected redemption price of a written
put option over Novartis’ non-controlling interest in Consumer
Healthcare. At 31 December 2016, this liability had a carrying
value of £7,420 million (2015 – £6,287 million);
– ViiV Healthcare contingent consideration: On acquisition of the
remaining 50% interest in the Shionogi-ViiV Healthcare joint venture
in 2012, £659 million was recorded as contingent consideration.
This represented the fair value of expected payments to be made
to Shionogi, contingent on future sales of dolutegravir products.
This liability is required to be re-measured to its fair value at each
reporting date. Since initial recognition, it has been increased in
response to actual and future sales significantly exceeding original
expectations including the impact of changes in foreign exchange
rates. At 31 December 2016, the liability was £5,304 million
(2015 – £3,409 million); and
– ViiV Healthcare put options: In 2009 and 2012, both Pfizer and
Shionogi were granted written put options by the Group that
enabled each to put its non-controlling interest back to the Group
in the future. Up to and including 31 December 2015, no financial
liabilities were recorded for these two options as each arrangement
contained clauses that enabled the Group to avoid acquiring these
interests if certain conditions were met. In February 2016, the
Group unilaterally waived certain of its rights. As a result, liabilities
with an aggregate value of £2,172 million were recognised. In
December 2016, agreement was reached with Shionogi, whereby
it agreed to forego its rights to exercise its written put option. As
a result, the Group’s associated liability of £1,244 million was de
recognised during December 2016. At 31 December 2016, the
liability in respect of Pfizer’s written put option had a carrying value
of £1,319 million.
In addition to these liabilities, the Group has recorded certain
other acquisition-related liabilities at 31 December 2016, including
£545 million in relation to contingent consideration payable on the
acquisition of Novartis’ Vaccines business in 2015.
We focused on this area as the carrying value of each of the financial
liabilities is material and is determined by management judgements
and estimates, including projections of future sales of products, the
potential impact of competitor products and the delivery of anticipated
synergies. In addition, each valuation is sensitive to changes in other
assumptions, including discount rates and tax rates.
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Area of focus
How our audit addressed the area of focus
Uncertain tax positions
Refer to Notes 3 and 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, including the three-part transaction with Novartis
in 2015. Judgement is required in assessing the level of provisions
required in respect of uncertain tax positions. At 31 December
2016, the Group has recorded provisions of £1,892 million in
respect of uncertain tax positions (2015 – £1,687 million).
Litigation
Refer to Notes 3, 29 and 46 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 Notes 29
and 46.
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 2016, the Group held provisions of £344 million
in respect of legal actions (31 December 2015 – £352 million).
In conjunction with our UK, US, international tax and transfer pricing
specialists, 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 included
obtaining and evaluating certain third party tax opinions that the Group
has obtained to assess the appropriateness of any assumptions used.
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. We noted that the assumptions and judgements that are
required to formulate the provisions mean that the range of possible
outcomes is broad. However, based on the evidence obtained we
considered the level of provisioning to be acceptable in the context
of the Group financial statements taken as a whole. We considered
management’s disclosures in this regard and we agree with
management’s view that a material change to the Group’s estimates
of tax exposures is not expected within the next 12 months.
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 the decisions not to record provisions, including correspondence
with legal counsel. We also monitored and considered external
information sources to identify potential 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
provisions recorded during the year to determine if they were indicative
of management bias.
As disclosed in Notes 29 and 46 to the Group financial statements,
the eventual outcome of legal proceedings is dependent on the
outcome of future events and the position taken by the Group is
inherently judgemental. We found in the context of the Group financial
statements taken as a whole that the judgements made by management
were reasonable and the disclosures made in respect of these
provisions and contingent liabilities were appropriate.
153 GSK Annual Report 2016
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Area of focus
How our audit addressed the area of focus
Finance transformation
The Group continues to rationalise and simplify its finance
processes including the roll-out of an enterprise-wide resource
planning system (ERP) and migrations of accounting services
to in-house business service centres (BSCs) and to third party
business process outsourcing locations (BPOs). In addition,
the Group migrated onto new platforms for consolidation and
for tracking intercompany inventory transfers and calculating
intra-group unrealised profit in inventory in 2016.
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 a new 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
to the Group financial statements.
We centrally managed the work performed by component audit teams at
BPOs and BSCs, which consisted of controls and substantive testing,
and we conducted oversight visits to key BSC and BPO sites in Group
audit scope (namely India, Malaysia, Romania, 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. Similar procedures were
performed for the migrations onto the consolidation and intercompany
profit tracking systems. In respect of the latter, because of the
significance of the inter-company profit in inventory adjustment we
performed detailed testing of the calculation at a component and Group
level, supported by validation of key manual controls over this process.
We did not note any significant or unresolved exceptions in our testing.
Investigations into the Group’s commercial practices
Refer to Notes 3, 29 and 46 in the Group financial
statements.
The SEC-DoJ investigation into the Group’s commercial practices
was concluded in September 2016, resulting in the Group paying
a penalty of $20 million. The Group remains subject to an ongoing
investigation by the SFO in the UK. At 31 December 2016, the
Group concluded that it does not have sufficient clarity on the
likely timing of the completion of this investigation nor is it able
to make a sufficiently reliable estimate of any fine or penalty
that the SFO might impose on the Group on completion of
its investigation. As a result, the Group has stated in Note 46
that it is unable to recognise a provision for its estimate of the
eventual outcome.
In addition, the Group continues to carry out its own investigations
in a number markets to ascertain whether inappropriate
commercial practices may have taken place.
We focused on the following risks, which might have a material
impact on the Group’s financial statements:
– That a fine and penalty might be forthcoming in respect of
ongoing investigation into the Group’s commercial practices
by the SFO, which could give rise to the need for a material
provision; and
– That inappropriate activities have occurred, which could
also give rise to material fines or penalties or result in asset
impairment.
We met with the directors, management and in-house legal counsel
and spoke with the Group’s external advisors to assess the risk of
occurrence of inappropriate activities, 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 assess risks and allegations reported
through various channels including whistle-blowing hotlines. We also
evaluated the ongoing enhancements and changes that have been
made to other control processes and business practices in recent years.
Deploying our forensic specialists, we assessed the scope and findings
of the investigative work performed by the Group as well as the risk
assessment exercise that management has performed into third party
interaction and engagement more broadly. We used the output of this
assessment to instruct ten component teams (including certain markets
not otherwise included in Group audit scope) to undertake risk-focused
audit procedures to address the audit risk that the Group financial
statements might be materially misstated due to the potential financial
implications of alleged illegal acts.
In respect of the SEC-DoJ investigation, we verified the settlement
agreement and payment. In respect of the SFO investigation, we
independently circularised external legal counsel engaged by the Group
to obtain its views about the status of the investigation and to ascertain
the reasonableness of management’s assertions in respect of the likely
outcome.
Based on these procedures, we were satisfied with the Group’s
provisioning decisions at 31 December 2016 and with the adequacy
of the disclosures given the status of investigations.
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Further specific audit procedures over central functions, the Group
consolidation and areas of significant judgement (including taxation,
goodwill, intangible assets, treasury, post-retirement benefits 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 71% of consolidated revenue, 71% of
consolidated profit before tax and 73% of adjusted 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 indirect 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.
Report on the Group financial statements continued
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the 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 500
reporting components. We identified 15 reporting components that,
in our view, required an audit of their complete financial information
due to their size or risk characteristics. This excludes 13 central
adjustment entities audited at a Group level. Specific audit
procedures over significant balances and transactions were
performed at a further 45 reporting components to give appropriate
coverage of all material balances. Where these reporting
components are supported by shared financial service centres,
these centres were also included in Group audit scope. None of
the reporting components not included in our Group audit scope
individually contributed more than 2% to consolidated revenue,
profit before tax or adjusted 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 component units. As a result, 19 overseas
components were visited by senior members of the Group audit
team, including each of the Group’s financially significant
components in the US (which are visited at least annually) as well
as Belgium, Japan, China, Switzerland, Germany, Ireland and Italy.
In addition, we visited four of the overseas shared service centres
supporting reporting components in Group audit scope. For those
components in Group audit scope where a site visit was not
undertaken, our involvement included regular dialogue with our
component teams, review of component auditor work papers and
participation in certain component audit clearance meetings.
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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 on the
individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial
statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall group materiality
How we determined it
Rationale for benchmark applied
£260 million (2015 – £200 million).
4% of profit before tax adding back certain items, including the remeasurement charges
for Shionogi-ViiV Healthcare contingent consideration (£2,162 million) and Vaccines
contingent consideration (£64 million), the re-measurement charges for the Consumer
Healthcare (£1,133 million) and ViiV Healthcare (£567 million) put options, major
restructuring costs (£974 million), legal costs (£162 million) and impairment of intangible
assets (£22 million) and deducting net income relating to the gain on disposal of assets
(£525 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 took this measure into account in determining our materiality, except that
we did not adjust 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.
We agreed with the Audit & Risk Committee that we would report to it misstatements identified during our audit above £10 million
(2015 – £10 million) 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 148, in relation to going concern.
We have nothing to report having performed our review.
Under ISAs (UK & Ireland), we are also required to report to you if
we have anything material to add or to draw attention to in relation to
the directors’ statement about whether they considered it appropriate
to adopt the going concern basis in preparing the Group financial
statements. We have nothing material to add or to draw attention to.
As noted in the directors’ statement, the directors have concluded
that it is appropriate to adopt the going concern basis in preparing
the Group financial statements. The going concern basis presumes
that the Group has adequate resources to remain in operation, and
that the directors intend it to do so, for at least one year from the date
the Group financial statements were 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 as to the Group’s
ability to continue as a going concern.
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Other required reporting
Consistency of other information and compliance with
applicable requirements
– the Strategic Report and the Directors’ Report have been
prepared in accordance with applicable legal requirements.
Companies Act 2006 reporting
In our opinion, based on the work undertaken in the course of the
audit:
– 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; and
ISAs (UK & Ireland) reporting
Under ISAs (UK & Ireland), we are required to report to you if, in our opinion:
– information in the Annual Report is:
In addition, in light of the knowledge and understanding of the Group
and its environment obtained in the course of the audit, we are
required to report if we have identified any material misstatements in
the Strategic Report and the Directors’ Report. We have nothing to
report in this respect.
– materially inconsistent with the information in the audited Group financial statements; or
– apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the
course of performing our audit; or
– otherwise misleading.
We have no exceptions
to report.
– the statement given by the directors on page 148, 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 position and 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.
– the section of the Annual Report on page 97, as required by provision C.3.8 of the Code, describing the work of the Audit
Committee does not appropriately address matters communicated by us to the Audit Committee.
We have no exceptions
to report.
The directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group
Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to:
– the directors’ confirmation on page 106 of the Annual Report, in accordance with provision C.2.1 of the Code, that they have
carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business
model, future performance, solvency or liquidity.
We have nothing material to
add or to draw attention to.
– the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
– the directors’ explanation on page 56 of the Annual Report, in accordance with provision C.2.2 of the Code, as to how they
have assessed the prospects of the Group, over what period they have done so and why they consider that period to be
appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
We have nothing material to
add or to draw attention to.
We have nothing material to
add or to draw attention to.
Under the Listing Rules, we are required to review the directors’ statement that they have carried out a robust assessment of the principal risks facing the Group
and the directors’ statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only consisted of
making enquiries and considering the directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of
the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to
report having performed our review.
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.
Corporate governance statement
Under the Listing Rules, we are required to review the part of the
Corporate Governance Statement relating to ten further provisions
of the UK Corporate Governance Code. We have nothing to report
having performed our review.
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 are not made. We have no exceptions to report
arising from this responsibility.
157 GSK Annual Report 2016
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 148, 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 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 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 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
2016.
The parent 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
13 March 2017
– 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. With
respect to the Strategic Report and Directors’ Report, we consider
whether those reports include the disclosures required by applicable
legal requirements.
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 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.
Investor informationFinancial statementsGovernance and remunerationStrategic report 158 GSK Annual Report 2016
Consolidated income statement
for the year ended 31 December 2016
Turnover
Cost of sales
Gross profit
Selling, general and administration
Research and development
Royalty income
Other operating income/(expense)
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/(loss) attributable to non-controlling interests
Profit attributable to shareholders
Basic earnings per share (pence)
Diluted earnings per share (pence)
Notes
6
7
8
11
12
13
14
15
15
2016
£m
27,889
(9,290)
18,599
(9,366)
(3,628)
398
(3,405)
2,598
72
(736)
–
5
1,939
2015
£m
23,923
(8,853)
15,070
(9,232)
(3,560)
329
7,715
10,322
104
(757)
843
14
10,526
2014
£m
23,006
(7,323)
15,683
(8,246)
(3,450)
310
(700)
3,597
68
(727)
–
30
2,968
(877)
(2,154)
(137)
1,062
150
912
1,062
18.8p
18.6p
8,372
(50)
8,422
8,372
174.3p
172.3p
2,831
75
2,756
2,831
57.3p
56.7p
Consolidated statement of comprehensive income
for the year ended 31 December 2016
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 (expense)/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
Tax on remeasurement of defined benefit plans
Other comprehensive income/(expense) for the year
Total comprehensive income for the year
Total comprehensive income for the year attributable to:
Shareholders
Non-controlling interests
Total comprehensive income for the year
34
34
34
2016
£m
1,062
2015
£m
8,372
2014
£m
2,831
646
–
–
251
–
(245)
51
2
2
1
–
708
603
(475)
126
254
962
2,024
1,271
753
2,024
(618)
–
–
416
(91)
(346)
36
2
–
2
(77)
(676)
8
261
(80)
189
(487)
7,885
7,927
(42)
7,885
(497)
(219)
(2)
29
(78)
(155)
58
5
(1)
(5)
18
(847)
16
(1,181)
262
(903)
(1,750)
1,081
990
91
1,081
159 GSK Annual Report 2016
Consolidated balance sheet
as at 31 December 2016
Non-current assets
Property, plant and equipment
Goodwill
Other intangible assets
Investments in associates and joint ventures
Other investments
Deferred tax assets
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
Contingent consideration liabilities
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
Contingent consideration liabilities
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
2016
£m
2015
£m
17
18
19
20
21
14
22
23
14
24
42
31
25
26
31
39
27
42
14
29
31
14
28
29
39
30
33
33
34
34
10,808
5,965
18,776
263
985
4,374
1,199
42,370
5,102
226
6,026
156
89
4,897
215
16,711
59,081
(4,129)
(561)
(11,964)
(194)
(1,305)
(848)
(19,001)
9,668
5,162
16,672
207
1,255
2,905
990
36,859
4,716
180
5,615
125
75
5,830
46
16,587
53,446
(1,308)
(306)
(8,885)
(153)
(1,421)
(1,344)
(13,417)
(14,661)
(15,324)
(1,934)
(4,090)
(652)
(5,335)
(8,445)
(35,117)
(54,118)
4,963
1,342
2,954
(5,392)
2,220
1,124
3,839
4,963
(1,522)
(3,229)
(420)
(3,549)
(7,107)
(31,151)
(44,568)
8,878
1,340
2,831
(1,397)
2,340
5,114
3,764
8,878
The financial statements on pages 158 to 231 were approved by the Board on 13 March 2017 and signed on its behalf by
Philip Hampton
Chairman
Investor informationFinancial statementsGovernance and remunerationStrategic report 160 GSK Annual Report 2016
Consolidated statement of changes in equity
for the year ended 31 December 2016
Shareholders’ equity
At 1 January 2014
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
Profit/(loss) 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
Gains on transfer of net assets into Consumer Healthcare
Joint Venture
Consumer Healthcare Joint Venture put option
Changes in non-controlling interests
Loss on transfer of equity investment to investment in
associate
Ordinary Shares issued
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 2015
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
Distributions to non-controlling interests
Dividends to shareholders
Recognition of liabilities with non-controlling interests
De-recognition of liabilities with non-controlling interests
Changes in non-controlling interests
Ordinary Shares issued
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 2016
Share
capital
£m
1,336
Share
premium
£m
2,595
–
–
–
–
–
–
–
3
–
–
–
–
–
–
–
–
–
–
–
–
164
–
–
–
–
–
1,339
2,759
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
72
–
–
–
–
Retained
earnings
£m
913
2,756
(1,626)
1,130
–
(3,843)
(58)
–
–
(238)
150
(450)
326
(4)
(2,074)
8,422
(520)
7,902
–
(3,874)
2,891
(6,204)
–
(229)
–
–
(175)
356
10
Other
reserves
£m
2,153
–
(140)
(140)
–
–
–
21
–
–
(245)
450
–
–
2,239
–
25
25
–
–
–
–
–
–
–
(99)
175
–
–
1,340
2,831
(1,397)
2,340
–
–
–
–
–
–
–
–
2
–
–
–
–
–
–
–
–
–
–
–
87
36
–
–
–
1,342
–
2,954
912
284
1,196
–
(4,850)
(2,013)
1,244
17
–
466
(381)
319
7
(5,392)
–
75
75
–
–
–
–
–
–
(576)
381
–
–
2,220
Total
£m
6,997
2,756
(1,766)
990
–
(3,843)
(58)
21
167
(238)
(95)
–
326
(4)
4,263
8,422
(495)
7,927
–
(3,874)
2,891
(6,204)
–
(229)
73
(99)
–
356
10
5,114
912
359
1,271
–
(4,850)
(2,013)
1,244
17
89
(74)
–
319
7
1,124
Non-controlling
interests
£m
815
75
16
91
(205)
–
(28)
–
–
–
–
–
–
–
673
(50)
8
(42)
(237)
–
–
–
3,370
–
–
–
–
–
–
3,764
150
603
753
(534)
–
(159)
–
15
–
–
–
–
–
3,839
Total
equity
£m
7,812
2,831
(1,750)
1,081
(205)
(3,843)
(86)
21
167
(238)
(95)
–
326
(4)
4,936
8,372
(487)
7,885
(237)
(3,874)
2,891
(6,204)
3,370
(229)
73
(99)
–
356
10
8,878
1,062
962
2,024
(534)
(4,850)
(2,172)
1,244
32
89
(74)
–
319
7
4,963
161 GSK Annual Report 2016
Consolidated cash flow statement
for the year ended 31 December 2016
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
Contingent consideration paid
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
(Increase)/decrease in liquid investments
Interest received
Dividends from associates, joint ventures and equity investments
Net cash (outflow)/inflow from investing activities
Cash flow from financing activities
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
2016
£m
2015
£m
2014
£m
1,062
7,044
8,106
(1,609)
6,497
8,372
(3,741)
4,631
(2,062)
2,569
2,831
3,453
6,284
(1,108)
5,176
(1,543)
(1,380)
(1,188)
38
38
20
33
98
(809)
283
(96)
683
(73)
17
72
(11)
–
–
68
42
(1,269)
(74)
89
–
–
–
1,067
(919)
(18)
(732)
(4,850)
(534)
(421)
(6,392)
72
(521)
236
(82)
357
(338)
(3,203)
10,246
(16)
564
(2)
99
5
6,037
(99)
73
–
–
–
–
39
(563)
330
(83)
205
(3)
(101)
225
(9)
1
1
63
5
(1,078)
(95)
167
(238)
(679)
1,960
–
(2,412)
(1,709)
(25)
(762)
(3,874)
(237)
233
(7,103)
(23)
(707)
(3,843)
(205)
(13)
(5,385)
(Decrease)/increase in cash and bank overdrafts
37
(1,164)
1,503
(1,287)
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*
* Comparative figures for 2014 have been restated, see page 162 for further details.
5,486
283
(1,164)
4,605
4,897
(292)
4,605
4,028
(45)
1,503
5,486
5,830
(344)
5,486
5,231
84
(1,287)
4,028
4,719
(691)
4,028
Strategic reportFinancial statementsGovernance and remunerationInvestor information 162 GSK Annual Report 2016
Notes to the financial statements
1. Presentation of the financial statements
Description of business
GSK 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,
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 45, ‘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
Following an agenda decision by the IFRS Interpretations Committee
regarding offsetting and cash pooling arrangements, the Group has
revised its disclosure of its cash pooling arrangements. There is no
change to the results or cash flows for the year to 31 December
2015 and there was no impact on the balance sheet at 31 December
2015. The impact at 1 January 2015 was to increase both cash and
cash equivalents and short-term borrowings by £381 million.
The amendment to IFRS 11 ‘Joint arrangements’ has been
implemented from 1 January 2016. This revision has not had a
material impact on the results or financial position of the Group.
Financial period
These financial statements cover the financial year from 1 January to
31 December 2016, with comparative figures for the financial years
from 1 January to 31 December 2015 and, where appropriate, from
1 January to 31 December 2014.
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 235 and the accounting policies are given on page 236.
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.
163 GSK Annual Report 2016
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.
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
£9 million (2015 – £14 million; 2014 – £22 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 £nil is included in turnover (2015 – £nil;
2014 – £57 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.
Investor informationFinancial statementsGovernance and remunerationStrategic report 164 GSK Annual Report 2016
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 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
20 to 50 years
Leasehold land and buildings
Lease term or 20 to 50 years
Plant and machinery
Equipment and vehicles
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.
165 GSK Annual Report 2016
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.
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.
Investor informationFinancial statementsGovernance and remunerationStrategic report 166 GSK Annual Report 2016
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.
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.
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.
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 discount rates.
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
Group turnover for 2016 was £27,889 million (2015 – £23,923
million).
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 for rebates and returns 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
The tax charge for the year was £877 million (2015 – £2,154 million).
At December 2016, current tax payable was £1,305 million
(2015 – £1,421 million), current tax recoverable was £226 million
(2015 – £180 million), deferred tax liabilities were £1,934 million
(2015 – £1,522 million) and deferred tax assets were £4,374 million
(2015 – £2,905 million).
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 2016 would have changed the total tax charge for the year by
approximately £19 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. In calculating any such
liability GSK applies a risk based approach which takes into account,
as appropriate, the probability that the Group would be able to obtain
compensatory adjustments under international tax treaties. 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.
167 GSK Annual Report 2016
3. Key accounting judgements and estimates continued
GSK continues to believe that it has made adequate provision for
the liabilities likely to arise from open assessments. At 31 December
2016, the group had recognised provisions of £1,892 million in
respect of uncertain tax positions (2015 – £1,687 million) 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.
Legal and other disputes
Legal costs for the year were £162 million (2015 – £221 million).
At 31 December 2016 provisions for legal and other disputes
amounted to £344 million (2015 – £352 million).
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 judgemental 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 46, ‘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.
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
At 31 December 2016, goodwill was £5,965 million (2015 –
£5,162 million) and other intangible assets were £18,776 million
(2015 – £16,672 million).
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 discount 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
discount 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.
Contingent consideration and put option liabilities
The 2016 income statement charge for contingent consideration and
put option liabilities was £3,991 million (2015 – £2,069 million).
At 31 December 2016, the liability for contingent consideration
amounted to £5,896 million (2015 – £3,855 million). Of this amount,
£5,304 million (2015 – £3,409 million) relates to the acquisition of
the former Shionogi-ViiV Healthcare joint venture in 2012 and £545
million (2015 – £405 million) relates to the acquisition of the
Vaccines business from Novartis in 2015.
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 post-tax discount
rates. The fair values are reviewed on a regular basis, at least
annually, and any changes are reflected in the income statement.
See Note 39 ‘Contingent consideration liabilities’.
During 2015, the Group granted a put option to Novartis in respect
of Novartis’ shareholding in the Consumer Healthcare Joint Venture.
In certain circumstances, Novartis has the right to require GSK to
acquire its 36.5% shareholding in the Consumer Healthcare Joint
Venture at a market-based valuation. This right is exercisable in
certain windows from 2018 to 2035 and may be exercised either in
respect of Novartis’ entire shareholding or in up to four instalments.
GSK has recognised a financial liability of £7,420 million in Other
non-current liabilities at 31 December 2016 (2015 – £6,287 million).
This represents the present value of the estimated redemption value
by GSK in the event of full exercise of the right by Novartis and is
calculated by applying relevant public company multiples, with no
premium or discount, to forecast future profits in accordance with
the shareholder agreements. Sensitivity analysis is given in Note 30,
‘Other non-current liabilities’.
Pfizer may request an IPO of ViiV Healthcare at any time and if either
GSK does not consent to such IPO or an offering is not completed
within nine months, Pfizer could require GSK to acquire its
shareholding. A liability for the put option was recognised on the
Group’s balance sheet during 2016 at an initial value of £1,070
million. GSK also recognised liabilities for the future preferential
dividends anticipated to become payable to Pfizer and Shionogi on
the Group’s balance sheet during 2016. The liability for the Pfizer put
option of £1,319 million at 31 December 2016 was recognised in
Trade and other payables. Sensitivity analysis is also given in Note 27
‘Trade and other payables’.
Shionogi also held a put option over its shareholding in ViiV
Healthcare and during 2016, GSK recognised the liability for the
put option on the Group’s balance sheet at an initial value of £926
million. In Q4 2016, Shionogi irrevocably agreed to waive its put
option and as a result GSK de-recognised the liability for this put
option on the Group’s balance sheet directly to equity. The value of
the liability was £1,244 million when it was de-recognised. See
‘Non-controlling interests in ViiV Healthcare’ on page 58 for full
details on these put options.
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 underlying
these projections or the market-based multiples, which are used to
value the liabilities for contingent consideration and the put options,
to change with a consequent adverse effect on the future results of
the Group.
Investor informationFinancial statementsGovernance and remunerationStrategic report 168 GSK Annual Report 2016
Notes to the financial statements continued
3. Key accounting judgements and estimates continued
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 employees’ 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.
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.
IFRS 15 ‘Revenue from contracts with customers’ was issued in May
2014 and will be implemented by the Group from 1 January 2018.
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.
The Group is currently assessing the new IFRS and does not expect
to be able to quantify the impact of any potential changes until later
in 2017.
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 associates into Sterling and period
end rates to translate the net assets of those entities. The currencies
which most influence these translations and the relevant exchange
rates were as follows:
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. A 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 £769 million and
an increase in the annual pension cost of approximately £27 million.
The selection of different assumptions could affect the future results
of the Group.
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 de recognition of financial assets
and financial liabilities, impairment of financial assets and provides
a new hedge accounting model.
The Group is currently assessing the new IFRS and does not expect
to be able to quantify the impact of any potential changes until later
in 2017.
IFRS 16 ‘Leases’ was issued in January 2016 and will be
implemented by the Group from 1 January 2019. The Standard will
replace IAS 17 ‘Leases’ and will require lease liabilities and ‘right of
use’ assets to be recognised on the balance sheet for almost all
leases.
The Group is in the early stages of assessing the potential impact
of the new IFRS.
Average rates:
US$/£
Euro/£
Yen/£
Period end rates:
US$/£
Euro/£
Yen/£
2016
1.36
1.23
149
1.24
1.17
144
2015
1.53
1.37
185
1.47
1.36
177
2014
1.65
1.24
175
1.56
1.29
187
169 GSK Annual Report 2016
6. Segment information
Operating segments are reported based on the financial information provided to the Chief Executive Officer and the responsibilities of the
Corporate Executive Team (CET). The completion of the Novartis transaction on 2 March 2015 changed the balance of the Group and GSK
changed its segment reporting to reflect this. With effect from 1 January 2016, GSK has reported results under four segments:
Pharmaceuticals, which now includes HIV, Pharmaceuticals R&D, Vaccines and Consumer Healthcare and individual members of the CET
are responsible for each segment. Comparative information has been restated accordingly.
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.
The Pharmaceuticals R&D segment is the responsibility of the President, Pharmaceuticals R&D and is reported as a separate segment.
Corporate and other unallocated turnover and costs included the results of several Vaccines and Consumer Healthcare products which
were held for sale in a number of markets in order to meet anti-trust approval requirements in 2014 and 2015, together with the costs of
corporate functions.
Turnover by segment
Pharmaceuticals
Vaccines
Consumer Healthcare
Segment turnover
Corporate and other unallocated turnover
Pharmaceuticals turnover by therapeutic area
Respiratory
Cardiovascular, metabolic and urology
Immuno-inflammation
Other pharmaceuticals
Established Products
HIV
2016
£m
16,104
4,592
7,193
27,889
–
2015
(restated)
£m
14,157
3,656
6,038
23,851
72
2014
(restated)
£m
15,438
3,159
4,322
22,919
87
27,889
23,923
23,006
2016
£m
6,510
860
340
2,297
2,541
3,556
2015
(restated)
£m
5,741
858
263
2,445
2,528
2,322
2014
(restated)
£m
6,168
965
214
3,582
3,011
1,498
16,104
14,157
15,438
During 2016, the US operations of the Pharmaceuticals and Vaccines businesses made sales to three wholesalers of approximately
£2,139 million (2015 – £1,574 million; 2014 – £1,478 million), £2,691 million (2015 – £2,471 million; 2014 – £2,315 million) and
£2,129 million (2015 – £1,602 million; 2014 – £1,627 million) respectively, after allocating final-customer discounts to the wholesalers.
Consumer Healthcare turnover by category
Wellness
Oral care
Nutrition
Skin health
2016
£m
3,726
2,223
674
570
7,193
2015
(restated)
£m
2,970
1,875
684
509
6,038
2014
(restated)
£m
1,565
1,806
633
318
4,322
Investor informationFinancial statementsGovernance and remunerationStrategic report
170 GSK Annual Report 2016
Notes to the financial statements continued
6. Segment information continued
Segment profit
Pharmaceuticals
Pharmaceuticals R&D
Pharmaceuticals, including R&D
Vaccines
Consumer Healthcare
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
2016
£m
7,979
(2,488)
5,491
1,454
1,116
8,061
(290)
(5,173)
2,598
72
(736)
–
5
1,939
(877)
1,062
2015
(restated)
£m
6,466
(2,168)
4,298
964
684
5,946
(217)
4,593
10,322
104
(757)
843
14
10,526
(2,154)
8,372
2014
(restated)
£m
7,405
(2,326)
5,079
997
496
6,572
22
(2,997)
3,597
68
(727)
–
30
2,968
(137)
2,831
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, disposals of businesses, products and associates and certain other items related to major acquisition
and disposal activity.
Depreciation and amortisation by segment
Pharmaceuticals
Pharmaceuticals R&D
Pharmaceuticals, including R&D
Vaccines
Consumer Healthcare
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
2016
£m
440
211
651
315
126
1,092
94
588
1,774
2015
(restated)
£m
303
2014
(restated)
£m
302
238
541
253
140
934
145
161
463
224
105
792
112
551
1,630
580
1,484
171 GSK Annual Report 2016
6. Segment information continued
PP&E, intangible asset and goodwill impairment by segment
Pharmaceuticals
Pharmaceuticals R&D
Pharmaceuticals, including R&D
Vaccines
Consumer Healthcare
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
Pharmaceuticals R&D
Pharmaceuticals, including R&D
Vaccines
Consumer Healthcare
Segment impairment reversals
Corporate and other unallocated impairment reversals
Other reconciling items between segment impairment reversal and total impairment reversal
Total impairment reversals
Net assets by segment
Pharmaceuticals
Pharmaceuticals R&D
Pharmaceuticals, including R&D
Vaccines
Consumer Healthcare
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
2016
£m
29
88
117
34
46
197
24
68
289
2016
£m
(15)
(10)
(25)
(19)
(8)
(52)
(26)
(9)
(87)
2016
£m
3,225
572
3,797
9,676
3,721
17,194
(228)
16,966
2015
(restated)
£m
57
2014
(restated)
£m
54
105
162
17
5
184
18
385
587
24
78
1
16
95
3
153
251
2015
(restated)
£m
(8)
2014
(restated)
£m
(39)
(23)
(62)
–
(14)
(76)
–
–
(76)
(10)
(18)
–
(4)
(22)
(2)
–
(24)
2015
(restated)
£m
5,721
615
6,336
8,884
4,154
19,374
(136)
19,238
(13,804)
(10,727)
263
(38)
1,361
215
4,963
207
(28)
142
46
8,878
The Pharmaceuticals segment includes the Shionogi-ViiV Healthcare contingent consideration liability of £5,304 million
(2015 – £3,409 million) and the Pfizer put option of £1,319 million (2015 – £nil). The Consumer Healthcare segment includes the put
option liability of £7,420 million (2015 – £6,287 million).
Investor informationFinancial statementsGovernance and remunerationStrategic report
172 GSK Annual Report 2016
Notes to the financial statements continued
6. Segment information continued
Geographical information
The UK is regarded as being the Group’s country of domicile.
Turnover by location of customer
UK
US
International
External turnover
Turnover by location of subsidiary
UK
US
International
Turnover including inter-segment turnover
UK
US
International
Inter-segment turnover
UK
US
International
External turnover
Operating profit by location of subsidiary
UK
US
International
Total operating profit
Non-current assets by location of subsidiary
UK
US
International
Non-current assets
2014
£m
1,100
7,409
14,497
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
2014
£m
414
1,375
1,808
3,597
2016
£m
1,056
10,197
16,636
27,889
2016
£m
3,519
16,105
19,805
39,429
2,018
5,990
3,532
11,540
1,501
10,115
16,273
27,889
2016
£m
1,561
2,343
(1,306)
2,598
2016
£m
7,060
7,802
21,234
36,096
2015
(restated)
£m
1,102
8,222
14,599
23,923
2015
£m
3,146
13,273
17,385
33,804
1,751
4,934
3,196
9,881
1,395
8,339
14,189
23,923
2015
£m
8,243
4,307
(2,228)
10,322
2015
£m
6,967
7,524
17,474
31,965
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.
173 GSK Annual Report 2016
7. Other operating income/(expense)
Impairment of equity investments
Disposal of equity investments
Disposal of businesses and assets
Fair value remeasurements on contingent consideration recognised in business combinations
Remeasurement of ViiV Healthcare put option liabilities and preferential dividends
Remeasurement of Consumer Healthcare put option liability
Fair value adjustments on derivative financial instruments
Other income/(expense)
2016
£m
(47)
254
283
(2,205)
(577)
(1,133)
(3)
23
2015
£m
(263)
342
9,661
(1,965)
–
(83)
2
21
(3,405)
7,715
2014
£m
(25)
155
244
(770)
–
–
(313)
9
(700)
Disposal of businesses and assets in 2016 included milestone income of £152 million in relation to the divestment of ofatumumab and a
number of other smaller divestments and in 2015 included the disposal of the Oncology business to Novartis for £9,228 million and an
initial £200 million for the divestment of ofatumumab. Fair value remeasurements on contingent consideration recognised in business
combinations comprised £2,162 million related to the acquisition of the former Shionogi-ViiV Healthcare joint venture and £152 million
related to the contingent consideration, payable to Novartis related to the Vaccines acquisition, partially offset by hedging gains and other
smaller items.
Fair value adjustments on derivative financial instruments arise from 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 42, ‘Financial
instruments and related disclosures’). In 2014 this included an unrealised loss of £299 million arising from 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.
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, net of reversals
Net foreign exchange losses/(gains)
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)
2016
£m
8,212
1,265
395
978
180
796
22
53
8,093
533
(145)
91
4
4
29.7
2015
£m
8,030
1,059
376
892
346
738
217
47
7,602
488
(65)
101
8
7
33.1
2014
£m
7,520
671
325
780
18
704
157
(18)
6,334
389
(169)
133
8
5
33.7
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 £970 million (2015 – £1,891 million; 2014 – £750 million), see Note 10,
‘Major restructuring costs’.
Investor informationFinancial statementsGovernance and remunerationStrategic report 174 GSK Annual Report 2016
Notes to the financial statements continued
8. Operating profit continued
Fees payable to the company’s auditor and its associates:
Audit of parent company and consolidated financial statements
Audit of the company’s subsidiaries
Attestation under s.404 of Sarbanes-Oxley Act 2002
Audit and audit-related services
Taxation compliance
Taxation advice
Other assurance services
All other services
2016
£m
5.8
16.4
4.4
26.6
0.2
1.8
0.3
0.8
29.7
2015
(restated)
£m
7.5
16.3
4.3
28.1
0.3
3.2
1.1
0.4
33.1
2014
£m
4.9
11.2
4.0
20.1
0.6
4.5
8.0
0.5
33.7
The other assurance services provided by the auditor relate to agreed upon procedures and other assurance services outside of statutory
audit requirements. All other services provided by the auditor primarily related to advisory services for the year ended 31 December 2016.
In addition to the above, fees paid in respect of the GSK pension schemes were:
Audit
Other services
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
2016
£m
0.4
–
2015
£m
0.3
–
2014
£m
0.3
–
2016
£m
6,391
733
541
338
209
2015
£m
6,132
633
467
349
449
2014
£m
5,879
639
403
346
253
8,212
8,030
7,520
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 cost of share-based incentive plans is analysed as follows:
Share Value Plan
Performance Share Plan
Share option plans
Other plans
2016
£m
271
39
4
24
338
2015
£m
307
26
4
12
349
2014
£m
302
20
3
21
346
175 GSK Annual Report 2016
9. Employee costs continued
The average monthly number of persons employed by the Group (including Directors) during the year was:
Manufacturing
Selling, general and administration
Research and development
2016
Number
38,611
49,961
11,255
99,827
2015
Number
37,025
52,121
12,046
101,192
2014
Number
31,726
54,618
12,358
98,702
The average monthly 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 246. The monthly average number of persons employed by GlaxoSmithKline
plc in 2016 was nil (2015 – 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
10. Major restructuring costs
2016
£m
25
4
2
15
46
2015
£m
23
2
3
18
46
2014
£m
19
3
3
13
38
Major restructuring costs charged in arriving at operating profit include restructuring costs arising under the Major Change programme
initiated in 2013, under the Pharmaceuticals Restructuring Programme announced in October 2014 and following the Novartis transaction,
completed in 2015.
Under the combined programme the total restructuring costs of £970 million in 2016 were incurred in the following areas:
– Restructuring of the R&D organisation, predominantly in the United Kingdom, North America and Japan.
– Projects to simplify or eliminate processes leading to staff reductions in support functions.
– Restructuring of the Pharmaceuticals business in Emerging Markets and Europe leading to staff reductions in sales force and
administration.
– Transformation of the Manufacturing and Vaccines businesses to deliver a step change in quality, cost and productivity.
– The continued integration of the enhanced Vaccines business and the Consumer Healthcare Joint Venture.
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
2016
£m
163
(140)
158
108
681
970
2015
£m
718
(44)
419
51
747
1,891
2014
£m
267
(4)
–
15
472
750
Provision reversals of £140 million (2015 – £44 million; 2014 – £4 million) reflect release of legacy support function and Novartis integration
provisions. Asset impairments of £158 million (2015 – £419 million; 2014 – £nil) and other non-cash charges totalling £108 million (2015
– £51 million; 2014 – £15 million) are non-cash items, principally fixed asset write downs across support function, manufacturing and
research facilities and accelerated depreciation where asset lives in R&D and manufacturing have been shortened as a result of the major
restructuring programme. 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.
Investor informationFinancial statementsGovernance and remunerationStrategic report 176 GSK Annual Report 2016
Notes to the financial statements continued
11. Finance income
Interest income arising from:
cash and cash equivalents
available-for-sale investments
derivatives at fair value through profit or loss
loans and receivables
Fair value adjustments on derivatives at fair value through profit or loss
2016
£m
2015
£m
2014
£m
67
1
–
2
2
72
71
1
24
3
5
104
56
1
–
9
2
68
2014
£m
(665)
(23)
10
(5)
(15)
–
(15)
(14)
(727)
All derivatives accounted for at fair value through profit or loss other than designated and effective hedging instruments (see Note 42,
‘Financial instruments and related disclosures’) are classified as held-for-trading financial instruments under IAS 39.
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
Reclassification of cash flow hedge from other comprehensive income
Unwinding of discounts on provisions
Other finance expense
2016
£m
(671)
(30)
–
–
(3)
(1)
(16)
(15)
(736)
2015
£m
(655)
(64)
–
–
(6)
(2)
(16)
(14)
(757)
All derivatives accounted for at fair value through profit or loss, other than designated and effective hedging instruments (see Note 42,
‘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.
177 GSK Annual Report 2016
13. Associates and joint ventures
The Group’s share of after tax profits and losses of associates and joint ventures is set out below:
Share of after tax profits of associates
Share of after tax losses of joint ventures
2016
£m
9
(4)
5
2015
£m
16
(2)
14
2014
£m
38
(8)
30
At 31 December 2016, the Group held one significant associate, Innoviva, Inc.
Summarised income statement information in respect of Innoviva is set out below for the periods in which the Group accounted for its
investment in Innoviva as an associate. The Group’s 2016 share of after tax profits of associates and other comprehensive income includes
a profit of £6 million and other comprehensive income of £nil in respect of Innoviva.
Turnover
Profit after taxation
Comprehensive income
Total comprehensive income
Since
1 September
2015
£m
20
4
–
4
2016
£m
98
44
–
44
The results of Innoviva included in the summarised income statement information above represent the estimated earnings of Innoviva in the
relevant periods. Innoviva’s turnover is from royalty income from GSK in relation to Relvar/Breo Ellipta and Anoro Ellipta sales.
In March 2015, the Group divested half of its shareholding in Aspen Pharmacare Holdings Limited and ceased to account for the remaining
investment as an associate. In 2014, Aspen was the Group’s only significant associate. Summarised income statement information in respect
of Aspen is set out below for the periods in which the Group accounted for its investment in Aspen as an associate.
Turnover
Profit after taxation
Comprehensive income
Total comprehensive income
2016
£m
To 20 March
2015
£m
–
–
–
–
441
67
16
83
2014
£m
1,823
313
148
461
The results of Aspen included in the summarised income statement information above represent the estimated earnings of the Aspen group in
the relevant periods, adjusted for transactions between GSK and Aspen.
Aggregated financial information in respect of GSK’s share of other associated undertakings and joint ventures is set out below:
Share of turnover
Share of after tax (losses)/profits
Share of other comprehensive income
Share of total comprehensive income/(expense)
2016
£m
133
(1)
–
(1)
2015
£m
188
12
25
37
2014
£m
187
(9)
–
(9)
The Group’s sales to associates and joint ventures were £43 million in 2016 (2015 – £41 million; 2014 – £85 million).
Investor informationFinancial statementsGovernance and remunerationStrategic report
178 GSK Annual Report 2016
Notes to the financial statements continued
14. Taxation
Taxation charge based on profits for the year
UK current year charge
Rest of World current year charge
Credit in respect of prior periods
Total current taxation
Total deferred taxation
2016
£m
241
1,326
(149)
1,418
(541)
877
2015
£m
156
2,924
(508)
2,572
(418)
2,154
2014
£m
221
1,092
(571)
742
(605)
137
In 2016, GSK made payments of £146 million in UK corporation tax to HMRC. In January 2017, GSK made further payments of £71 million in
relation to UK corporation tax. These amounts are for corporation tax only, and do not include the various other business taxes borne by GSK
each year.
A significant component of the deferred tax credit for each of 2016 and the prior periods arose in respect of the remeasurement of the
contingent consideration in relation to the former Shionogi-ViiV Healthcare joint venture. In 2015, the credit also included the unwind of
deferred tax liabilities on the disposal of the Group’s Oncology business to Novartis.
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.
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
Remeasurement of non-taxable put option liabilities
Losses not recognised/(previously unrecognised losses)
Permanent differences on disposals and acquisitions
Other permanent differences
Re-assessments of prior year estimates in respect of current
and deferred taxes
Tax on unremitted earnings
Tax charge/tax rate
2016
£m
1,939
388
593
(321)
(93)
340
(15)
(21)
97
(116)
25
877
2016
%
20.0
30.6
(16.5)
(4.8)
17.5
(0.8)
(1.1)
5.0
(6.0)
1.3
45.2
2015
£m
10,526
2,131
1,035
(286)
(38)
17
31
(248)
58
(578)
32
2,154
2015
%
20.25
9.8
(2.7)
(0.4)
0.2
0.3
(2.4)
0.6
(5.5)
0.3
20.5
2014
£m
2,968
638
406
(323)
(72)
–
(205)
23
268
(617)
19
137
2014
%
21.5
13.7
(10.9)
(2.4)
–
(6.9)
0.8
9.0
(20.8)
0.6
4.6
GSK has a substantial business presence in many countries around the world. The impact of differences in overseas taxation rates arose from
profits being earned in countries with tax rates higher than the UK statutory rate, the most significant of which in 2016 were the US, France
and India. This was partly offset by the increased benefit of intellectual property incentives from the UK Patent Box and Belgian Patent Income
Deduction regimes. Such regimes provide a reduced rate of corporate income tax on profits earned from qualifying patents. The Group also
incurred material non-deductible charges following the revaluation of liabilities for the ViiV Healthcare and Consumer Healthcare Joint Venture
put options. The impact of higher overseas tax rates was reduced in 2015 by permanent differences arising on disposals.
The Group’s overall effective tax rate for 2016 of 45.2% was influenced by significant transaction-related remeasurement charges arising
on the ViiV Healthcare contingent consideration liability and the Consumer Healthcare Joint Venture and ViiV Healthcare put option liabilities.
The remeasurement of these liabilities gave rise to a charge to profit before tax in 2016 of £3,862 million with a related tax credit of £396 million
(10.3%). Excluding these items, the effective tax rate for the year would have been 21.9%. Further details on the Consumer Healthcare Joint
Venture put option are set out in Note 30, ‘Other non-current liabilities’ and on the ViiV Healthcare arrangements on page 58.
Future tax charges, and therefore our effective tax rate, may be affected by factors such as acquisitions, disposals, restructuring, the location of
research and development activity, tax regime reforms and the resolution of open matters as we continue to bring our tax affairs up to date around
the world.
Tax on items charged to equity and statement of comprehensive income
Current taxation
Share-based payments
Defined benefit plans
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
2016
£m
2015
£m
2014
£m
7
32
39
–
94
–
2
51
147
186
22
30
52
(12)
(110)
–
–
(55)
(177)
(125)
55
–
55
(59)
262
(2)
(1)
(20)
180
235
All of the above items have been charged to the statement of comprehensive income except for tax on share based payments.
179 GSK Annual Report 2016
14. Taxation continued
Issues relating to taxation
The Group’s tax charge is the sum of the total current and deferred tax expense. The calculation of the Group’s total tax charge necessarily
involves a degree of estimation and judgement in respect of certain items whose tax treatment cannot be finally determined until resolution has
been reached with the relevant tax authority or, as appropriate, through a formal legal process. At 31 December 2016 the Group held
provisions of £1,892 million in respect of such uncertain tax positions (2015 - £1,687 million). The increase in recognised provisions during
2016 was primarily driven by the foreign exchange impact of revaluing overseas exposures. While the ultimate liability for such matters may
vary from the amounts provided and is dependent upon the outcome of agreements with the relevant tax authorities, or litigation where
appropriate, the Group continues to believe that it has made appropriate provision for periods which are open and not yet agreed by the tax
authorities.
The integrated nature of the Group’s worldwide operations involves significant investment in research and strategic manufacturing at a limited
number of locations, with consequential cross-border supply routes into numerous end-markets. GSK’s biggest risk with respect to taxation
is that, despite our adherence to the OECD’s established ‘arm’s length principle’, different tax authorities will seek to attribute further profit to
activities being undertaken in their jurisdiction, potentially resulting in double taxation. GSK applies a risk-based approach to determine the
transactions most likely to be subject to challenge and the probability that the Group would be able to obtain compensatory adjustments
under international tax treaties. The Group also has open items in several jurisdictions concerning such matters as the deductibility of
particular expenses and the tax treatment of certain business transactions. The Group does not consider there to be any major sources of
estimation uncertainty at the end of the reporting period that have a significant risk of resulting in a material adjustment to the carrying amounts
of tax-related assets and liabilities within the next financial year.
There continues to be a significant international focus on tax reform, including the OECD’s BEPS project and European Commission
initiatives, including the increased use of fiscal state aid investigations. Together with domestic initiatives around the world these may result in
significant changes to established tax principles and an increase in tax authority disputes. In turn, this could adversely affect our effective tax
rate or result in higher cash tax liabilities.
The aggregate amount of unremitted profits at the balance sheet date was approximately £18 billion (2015 – £16 billion). The majority of these
unremitted profits would not be subject to tax on repatriation as UK legislation relating to company distributions provides for exemption from
tax for most overseas profits, subject to certain exceptions. Provision for deferred tax liabilities of £205 million (2015 – £180 million) has been
made in respect of withholding tax that would arise on the distribution of profits by certain overseas subsidiaries. The remainder of unremitted
profits on which deferred tax has not been provided was £1.7 billion at 31 December 2016 (2015 – £1.5 billion). Deferred tax on distribution
of these remaining profits has not been provided 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
Asset/liability at 1 January 2016
Exchange adjustments
Credit to income statement
Credit to statement of
comprehensive income
Accelerated
capital
allowances
£m
(346)
Intangible
assets
£m
(2,234)
Contingent
consideration
£m
790
Intra-Group
profit
£m
825
(47)
16
–
(153)
63
–
–
348
–
168
61
–
Asset/liability at 31 December 2016
(377)
(2,324)
1,138
1,054
Pensions &
other post
employment
benefits
£m
989
164
15
94
1,262
Share
option
and award
schemes
£m
92
Other
net
temporary
differences
£m
1,170
14
4
–
110
87
40
53
1,350
Tax
losses
£m
97
13
117
–
227
Total
£m
1,383
246
664
147
2,440
The deferred tax credit to the income statement of £664 million includes £123 million of R&D incentives recognised within Operating profit
(and not the taxation charge) in the Income statement.
Deferred tax liabilities provided in relation to intangible assets predominately relate to temporary differences arising on assets and liabilities
acquired as part of historic business combinations. The Group continues to recognise deferred tax assets on future obligations in respect of
contingent consideration amounts payable to minority shareholders. These payments are tax deductible at the point in time at which payment
is made.
A deferred tax asset is recognised on intra-Group profits arising on inter-company stock which are eliminated within the consolidated
accounts. As intra-Group profits are not eliminated from the individual entities’ tax returns a temporary difference arises that will reverse at
the point in time stock is sold externally.
The deferred tax asset recognised on tax losses comprises a £173 million (2015 – £97 million) asset related to trading losses and a
£54 million (2015 – £nil) asset related to capital 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
2016
£m
4,374
(1,934)
2,440
2015
£m
2,905
(1,522)
1,383
Investor informationFinancial statementsGovernance and remunerationStrategic report
180 GSK Annual Report 2016
Notes to the financial statements continued
14. Taxation continued
Unrecognised tax losses
Trading losses expiring:
Within 10 years
More than 10 years
Available indefinitely
At 31 December
Capital losses
At 31 December
2016
Unrecognised
deferred tax
asset
£m
Tax losses
£m
786
842
95
1,723
2,320
2,320
255
131
15
401
396
396
2015
(restated)
Unrecognised
deferred tax
asset
£m
102
280
15
397
472
472
Tax losses
£m
414
1,206
58
1,678
2,771
2,771
Deferred tax assets are recognised where it is probable that future taxable profit will be available to utilise losses. The amount of unrecognised
trading losses for 2015 has been revised following a reassessment of available losses for which deferred tax was not recognised.
15. Earnings per share
Basic earnings per share
Diluted earnings per share
2016
pence
18.8
18.6
2015
pence
174.3
172.3
2014
pence
57.3
56.7
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
2016
millions
4,860
49
4,909
2015
millions
4,831
57
4,888
2014
millions
4,808
57
4,865
First interim
Paid/payable
14 July 2016
Second interim
13 October 2016
12 January 2017
13 April 2017
Third interim
Fourth interim
Total
Special dividend
Dividend
per share
(pence)
19
19
19
23
80
2016
Total
dividend
£m
923
925
Paid
9 July 2015
1 October 2015
925 14 January 2016
1,119
3,892
14 April 2016
14 April 2016
Dividend
per share
(pence)
2015
Total
dividend
£m
Dividend
per share
(pence)
Paid
19
19
19
23
80
20
920
10 July 2014
919 2 October 2014
919
8 January 2015
9 April 2015
1,114
3,872
969
19
19
19
23
80
2014
Total
dividend
£m
916
918
924
1,111
3,869
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 2016 financial statements recognise those
dividends paid in 2016, namely the third and fourth interim dividends for 2015, the special dividend declared in 2015 and the first and second
interim dividends for 2016.
The amounts recognised in each year are as follows:
Dividends to shareholders
2016
£m
4,850
2015
£m
3,874
2014
£m
3,843
181 GSK Annual Report 2016
17. Property, plant and equipment
Cost at 1 January 2015
Exchange adjustments
Additions through business combinations
Other additions
Capitalised borrowing costs
Disposals and write-offs
Reclassifications
Transfer to assets held for sale
Cost at 31 December 2015
Exchange adjustments
Other additions
Capitalised borrowing costs
Disposals and write-offs
Reclassifications
Transfer to assets held for sale
Cost at 31 December 2016
Depreciation at 1 January 2015
Exchange adjustments
Charge for the year
Disposals and write-offs
Transfer (from)/to assets held for sale
Depreciation at 31 December 2015
Exchange adjustments
Charge for the year
Disposals and write-offs
Transfer to assets held for sale
Depreciation at 31 December 2016
Impairment at 1 January 2015
Exchange adjustments
Disposals and write-offs
Impairment losses
Reversal of impairments
Transfer to assets held for sale
Impairment at 31 December 2015
Exchange adjustments
Disposals and write-offs
Impairment losses
Reversal of impairments
Transfer to assets held for sale
Impairment at 31 December 2016
Total depreciation and impairment at 31 December 2015
Total depreciation and impairment at 31 December 2016
Net book value at 1 January 2015
Net book value at 31 December 2015
Net book value at 31 December 2016
Land and
buildings
£m
6,804
(48)
310
95
–
(74)
228
(10)
7,305
956
117
–
(349)
110
(378)
7,761
(2,681)
16
(291)
54
(12)
(2,914)
(377)
(338)
205
165
(3,259)
(116)
(8)
7
(162)
5
–
(274)
(45)
91
(135)
38
46
(279)
(3,188)
(3,538)
4,007
4,117
4,223
Plant,
equipment
and vehicles
£m
10,170
(92)
285
242
–
(340)
557
(47)
10,775
1,100
384
–
(1,422)
512
(114)
11,235
Assets in
construction
£m
2,381
(42)
103
1,099
19
(15)
(875)
–
2,670
271
1,043
30
(53)
(761)
(32)
3,168
Total
£m
19,355
(182)
698
1,436
19
(429)
(90)
(57)
20,750
2,327
1,544
30
(1,824)
(139)
(524)
22,164
(9,832)
57
(892)
329
9
(10,329)
(1,094)
(978)
1,475
257
(10,669)
(471)
(6)
23
(370)
24
47
(753)
(93)
261
(258)
78
78
(687)
(11,082)
(11,356)
–
–
–
–
–
–
–
–
–
–
–
(76)
1
–
(31)
–
–
(106)
(11)
35
(6)
2
22
(64)
(106)
(64)
2,305
9,052
2,564
9,668
3,104
10,808
(7,151)
41
(601)
275
21
(7,415)
(717)
(640)
1,270
92
(7,410)
(279)
1
16
(177)
19
47
(373)
(37)
135
(117)
38
10
(344)
(7,788)
(7,754)
2,740
2,987
3,481
The weighted average interest rate for capitalised borrowing costs in the year was 3.8% (2015 – 3.8%). Disposals and write-offs in the year
include a number of assets with nil net book value that are no longer in use in the business.
Investor informationFinancial statementsGovernance and remunerationStrategic report
182 GSK Annual Report 2016
Notes to the financial statements continued
17. Property,plant and equipment continued
The net book value at 31 December 2016 of the Group’s land and buildings comprised freehold properties £3,887 million (2015 –
£3,251 million), properties with leases of 50 years or more £294 million (2015 – £327 million) and properties with leases of less than
50 years £42 million (2015 – £100 million).
Included in land and buildings at 31 December 2016 were leased assets with a cost of £590 million (2015 – £756 million), accumulated
depreciation of £253 million (2015 – £233 million), impairment of £1 million (2015 – £nil) and a net book value of £448 million
(2015 – £523 million). Included in plant, equipment and vehicles at 31 December 2016 were leased assets with a cost of £44 million
(2015 – £31 million), accumulated depreciation of £15 million (2015 – £27 million), impairment of £nil (2015 – £nil) and a net
book value of £29 million (2015 – £4 million). Some lease agreements include renewal or purchase options or escalation clauses.
The impairment losses principally arose 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 net impairment losses have been charged to cost of sales £45 million (2015 – £109 million),
R&D £15 million (2015 – £63 million) and SG&A £120 million (2015 – £174 million), and included £151 million (2015 – £327 million)
arising from the major restructuring programmes.
Reversals of impairment arose from subsequent reviews of the impaired assets where the conditions which gave rise to the original
impairments were deemed no longer to apply. All of the reversals have been credited to cost of sales.
The carrying value at 31 December 2016 of assets for which impairments have been charged or reversed in the year was £171 million
(2015 – £138 million).
During 2016, £139 million (2015 – £90 million) of computer software was reclassified from assets in construction to intangible assets on
becoming ready for use.
18. Goodwill
Cost at 1 January
Exchange adjustments
Additions through business combinations (Note 38)
Transfer to assets held for sale
Cost at 31 December
Net book value at 1 January
Net book value at 31 December
2016
£m
5,162
814
7
(18)
5,965
5,162
5,965
2015
£m
3,724
66
1,372
–
5,162
3,724
5,162
In 2016, GSK acquired the HIV R&D preclinical and discovery stage portfolio from Bristol Myers Squibb. Goodwill of £7 million arose from
this acquisition which was allocated to Pharmaceuticals.
Goodwill is allocated to the Group’s segments as follows. The allocations for 2015 have been revised to reflect the current segment structure.
Pharmaceuticals
Vaccines
Consumer Healthcare
Net book value at 31 December
2016
£m
3,288
1,353
1,324
5,965
2015
£m
2,952
1,003
1,207
5,162
183 GSK Annual Report 2016
18. Goodwill continued
The recoverable amounts of the cash generating units are assessed using a fair value less costs of disposal model. Fair value less costs of
disposal is calculated using a discounted cash flow approach, with a post-tax discount rate applied to the projected risk-adjusted post-tax
cash flows and terminal value.
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. 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, Vaccines and Consumer Healthcare
cash generating units are as follows:
Valuation basis
Key assumptions
Determination of assumptions
Fair value less costs of disposal
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
Five years
Terminal growth rate and discount rate
Terminal growth rate Discount rate
Pharmaceuticals
Vaccines
Consumer Healthcare
1% p.a.
2% p.a.
2% p.a.
7%
7%
7%
The terminal growth rates do not exceed the long-term projected growth rates for the relevant markets, reflect the impact of future generic
competition and take account of new product launches.
In each case the valuations indicated sufficient headroom such that a reasonably possible change to key assumptions is unlikely to result in an
impairment of the related goodwill. Goodwill is monitored at the segmental level.
The Pharmaceuticals cash generating unit comprises a collection of smaller cash generating units including assets with indefinite lives with a
carrying value of £211 million (2015 – £240 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 £9.03 billion (2015 – £7.71 billion).
Details of indefinite life brands are given in Note 19 ‘Other intangible assets’.
Investor informationFinancial statementsGovernance and remunerationStrategic report 184 GSK Annual Report 2016
Notes to the financial statements continued
19. Other intangible assets
Cost at 1 January 2015
Exchange adjustments
Capitalised development costs
Capitalised borrowing costs
Additions through business combinations
Other additions
Reclassifications
Disposals and asset write-offs
Transfer to assets held for sale
Cost at 31 December 2015
Exchange adjustments
Capitalised development costs
Capitalised borrowing costs
Additions through business combinations
Other additions
Disposals and asset write-offs
Transfer to assets held for sale
Reclassifications
Cost at 31 December 2016
Amortisation at 1 January 2015
Exchange adjustments
Charge for the year
Disposals and asset write-offs
Transfer to assets held for sale
Amortisation at 31 December 2015
Exchange adjustments
Charge for the year
Disposals and asset write-offs
Transfer to assets held for sale
Amortisation at 31 December 2016
Impairment at 1 January 2015
Exchange adjustments
Impairment losses
Disposals and asset write-offs
Transfer to assets held for sale
Impairment at 31 December 2015
Exchange adjustments
Impairment losses
Disposals and asset write-offs
Transfer to assets held for sale
Impairment at 31 December 2016
Total amortisation and impairment at 31 December 2015
Total amortisation and impairment at 31 December 2016
Net book value at 1 January 2015
Net book value at 31 December 2015
Net book value at 31 December 2016
Computer
software
£m
1,818
Licences,
patents, etc.
£m
10,281
Amortised
brands
£m
422
Indefinite life
brands
£m
2,155
32
–
7
–
174
90
(91)
(2)
74
217
–
2,791
132
–
(98)
(3)
2,028
137
13,394
1,139
–
4
–
238
(389)
(1)
139
2,156
219
–
102
349
(21)
(39)
–
15,143
(1,213)
(3,492)
(15)
(140)
73
1
(34)
(596)
92
–
(1,294)
(4,030)
(92)
(152)
353
1
(410)
(553)
–
10
(1,184)
(4,983)
(42)
1
(14)
16
–
(39)
(3)
(2)
35
–
(9)
(1,333)
(1,193)
563
695
963
(1,239)
(58)
(148)
6
–
(1,439)
(266)
(15)
40
28
(1,652)
(5,469)
(6,635)
5,550
7,925
8,508
9,375
27,101
Total
£m
14,676
95
217
7
8,788
306
90
(189)
(107)
23,883
2,616
240
4
102
587
(418)
(52)
139
(4,839)
(50)
(738)
165
5
(5,457)
(507)
(796)
358
11
(6,391)
(1,517)
(57)
(217)
22
15
(1,754)
(272)
(22)
86
28
(1,934)
(7,211)
(8,325)
8,320
16,672
18,776
3
–
–
–
–
–
–
(38)
387
20
21
–
–
–
(1)
–
–
427
(134)
(1)
(2)
–
4
(133)
(5)
(91)
5
–
(224)
(154)
–
(15)
–
15
(14)
–
–
5,997
–
–
–
(64)
8,074
1,320
–
–
–
–
(7)
(12)
–
–
–
–
–
–
–
–
–
–
–
–
(82)
–
(40)
–
–
(154)
(122)
–
–
11
–
(143)
(287)
(367)
134
100
60
(3)
(5)
–
–
(130)
(122)
(130)
2,073
7,952
9,245
The weighted average interest rate for capitalised borrowing costs in the year was 3.8% (2015 – 3.8%).
The net book value of computer software included £620 million (2015 – £407 million) of internally generated costs.
The charge for impairments in the year includes the impairments of Oncomed, Ansolar and Maxinutrition. The carrying value at
31 December 2016 of intangible assets, for which impairments have been charged or reversed in the year, following those impairments
or reversals, was £116 million (2015 – £308 million).
The patent expiry dates of the Group’s most significant assets, where relevant, are set out on pages 250 and 251.
185 GSK Annual Report 2016
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
Net impairment losses
2016
£m
582
95
119
796
2015
£m
532
66
140
738
2016
£m
7
2
13
22
2015
£m
143
22
52
217
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
Menveo
Bexsero
Men ABCWY
Fluarix/FluLaval
HIV assets acquired from BMS
Selzentry
Okairos technology platform
Others
2016
£m
1,487
1,019
919
941
669
380
277
188
173
2,455
8,508
2015
£m
1,585
1,083
833
819
591
333
–
208
167
2,306
7,925
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, CNS, Inc. in 2006 and the Novartis Consumer Healthcare business in 2015, 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:
Voltaren
Otrivin
Fenistil
Theraflu
Panadol
Sensodyne
Lamisil
Breathe Right
Stiefel trade name
Excedrin
Physiogel
Polident
Others
2016
£m
2,847
1,447
680
462
354
243
304
199
211
194
166
103
2015
£m
2,411
1,225
576
391
361
258
257
217
201
164
147
109
2,035
9,245
1,635
7,952
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 factors which could limit their useful lives.
Accordingly, they are not amortised. The increase in carrying value in the year primarily reflects the impact of exchange rate movements.
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, the
future expenditure required to maintain the product’s marketability and registration in the relevant jurisdictions and exchange rates. 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 5% 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.
Investor informationFinancial statementsGovernance and remunerationStrategic report 186 GSK Annual Report 2016
Notes to the financial statements continued
20. Investments in associates and joint ventures
At 1 January
Exchange adjustments
Additions
Disposals
Transfer from other investments
Distributions received
Other movements
(Loss)/profit after tax recognised in the consolidated income statement
Other comprehensive income recognised in the consolidated
statement of comprehensive income
At 31 December
Joint
ventures
£m
20
Associates
£m
187
4
3
–
–
(2)
(2)
(4)
–
19
41
8
–
–
(1)
–
9
–
244
2016
Total
£m
207
45
11
–
–
(3)
(2)
5
–
263
Joint
ventures
£m
8
Associates
£m
332
1
13
–
–
–
–
(2)
–
20
2
10
(143)
146
(38)
(165)
16
27
187
2015
Total
£m
340
3
23
(143)
146
(38)
(165)
14
27
207
The Group held one significant associate at 31 December 2016, Innoviva, Inc. At 31 December 2016, the Group owned 32 million shares
or 29.5% of Innoviva, which is a biopharmaceutical company listed on NASDAQ. The company partnered with GSK in the development
of the long acting beta agonist vilanterol and currently receives royalty income from sales of products that contain this component, namely
Relvar/Breo Ellipta and Anoro Ellipta. It also retains a 15% economic interest in future royalties to be paid by GSK on sales of Closed Triple,
if approved and commercialised. The remaining 85% of the economic interest in these royalties will be due to Theravance Biopharma Inc.,
a company spun out of Innoviva in 2014, in which the Group holds 18.6% of the common stock. The investment in Innoviva had a market value
of £278 million at 31 December 2016 (2015 – £229 million).
Summarised balance sheet information, based on results information, in respect of Innoviva is set out below:
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net liabilities
Interest in associated undertaking
Goodwill
Fair value and other adjustments
Carrying value at 31 December
At 31 December
2016
£m
At 31 December
2015
£m
146
160
(16)
(575)
(285)
2016
£m
(84)
84
138
138
143
146
(9)
(513)
(233)
2015
£m
(65)
64
113
112
187 GSK Annual Report 2016
21. Other investments
At 1 January
Exchange adjustments
Additions
Fair value gain on reclassification from investment in associate
Other net fair value movements
Impairment losses
Transfer to investments in associates and joint ventures
Disposals
At 31 December
2016
£m
1,255
211
96
–
130
(24)
–
(683)
985
2015
£m
1,114
38
120
457
323
(258)
(146)
(393)
1,255
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. Other investments included listed investments of
£580 million (2015 – £987 million). The decrease in the carrying value during the year was primarily due to the sale of the Group’s remaining
stake in Aspen Pharmacare Holdings Limited which had a book value at 31 December 2015 of £383 million. The most significant of the
investments held at 31 December 2016 was in Theravance Biopharma, Inc. in which the Group holds 18.6% of the common stock. This
investment had a fair value at 31 December 2016 of £248 million (2015 – £93 million). The other investments include equity stakes in
companies with which GSK has research collaborations, which provide access to biotechnology developments of potential interest and
interests in companies that arise from business divestments.
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
2016
£m
515
(314)
282
483
2015
£m
1,049
(549)
279
779
2016
£m
602
313
284
1,199
2015
£m
477
258
255
990
Investor informationFinancial statementsGovernance and remunerationStrategic report 188 GSK Annual Report 2016
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
Accrued income
Other prepayments
Interest receivable
Employee loans and advances
Other receivables
Trade receivables included £9 million (2015 – £8 million) due from associates and joint ventures. Other receivables included £7 million
(2015– £nil) 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
Property, plant and equipment
Goodwill
Other intangibles
Inventory
Other
2016
£m
1,068
2,299
1,735
5,102
2015
£m
1,563
1,453
1,700
4,716
2016
£m
4,615
64
335
11
17
984
6,026
2016
£m
167
23
77
(59)
(1)
207
2015
£m
3,824
55
307
9
36
1,384
5,615
2015
£m
142
(2)
45
(17)
(1)
167
2016
£m
1,462
3,435
4,897
2015
£m
1,114
4,716
5,830
2016
£m
184
13
12
7
(1)
215
2015
£m
32
–
5
15
(6)
46
Non-current assets and disposal groups 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.
Included within Assets held for sale are assets which were written down to fair value less costs to sell of £79 million (2015 – £36 million).
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.
189 GSK Annual Report 2016
27. Trade and other payables
Trade payables
Wages and salaries
Social security
ViiV Healthcare put option
Other payables
Deferred income
Customer return and rebate accruals
Other accruals
2016
£m
3,596
1,236
120
1,319
447
158
2,778
2,310
11,964
2015
£m
3,120
1,069
118
–
368
73
2,056
2,081
8,885
Trade and other payables included £36 million (2015 – £17 million) due to associates and joint ventures.
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, and included £2,218 million (2015 – £1,671 million) in respect of US Pharmaceuticals and Vaccines, as
more fully described in the Group financial review on page 76. 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 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.
Pfizer’s put option over its shareholding in ViiV Healthcare was recognised during 2016 and is currently exercisable. The table below shows
on an indicative basis the income statement and balance sheet sensitivity of the Pfizer put option to reasonably possible changes in key
assumptions.
Increase/(decrease) in financial liability and loss/(gain) in Income statement
10 cent appreciation of US Dollar
10 cent depreciation of US Dollar
10 cent appreciation of Euro
10 cent depreciation of Euro
An explanation of the accounting for ViiV Healthcare is set out on page 58.
28. Pensions and other post-employment benefits
Pension and other post-employment costs
UK pension schemes
US pension schemes
Other overseas pension 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
2016
£m
205
106
140
90
541
304
43
90
437
104
541
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
2016
£m
135
221
81
437
2015
£m
127
194
65
386
2016
£m
65
(55)
36
(30)
2015
(restated)
£m
177
2014
(restated)
£m
125
96
135
59
467
291
36
59
386
81
467
85
123
70
403
216
34
70
320
83
403
2014
£m
102
165
53
320
Investor informationFinancial statementsGovernance and remunerationStrategic report
190 GSK Annual Report 2016
Notes to the financial statements continued
28. Pensions and other post-employment benefits continued
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.
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 S2 standard mortality tables to reflect recent scheme experience. These rates are then projected to reflect improvements
in life expectancy in line with the CMI 2015 projections with a long-term rate of improvement of 1.25% per year for both males and females. In
the US, 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 2036 for an individual then at the age of
60 is as follows:
Current
Projected for 2036
Male
Years
27.8
29.6
UK
Female
Years
29.8
31.9
Male
Years
27.2
28.9
US
Female
Years
28.9
30.6
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 US 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 US.
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
2016
% pa
2.00
2.70
3.20
n/a
3.20
2015
% pa
2.00
3.80
3.10
n/a
3.10
UK
2014
% pa
2.00
3.60
3.00
n/a
3.00
2016
% pa
4.00
3.90
n/a
3.20
2.25
2015
% pa
4.00
4.20
n/a
3.20
2.25
US
2014
% pa
4.00
3.80
n/a
3.00
2.25
Rest of World
2016
% pa
2.70
1.60
2.10
0.30
1.50
2015
% pa
2.70
2.20
2.00
0.60
1.40
2014
% pa
2.60
2.00
2.00
0.50
1.40
191 GSK Annual Report 2016
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 2016
in relation to the defined benefit pension and post-retirement healthcare schemes were as follows:
2016
Amounts charged to operating profit
Current service cost
Past service cost
Net interest cost
Gains from settlements
Expenses
Remeasurements recorded in the statement of
comprehensive income
2015
Amounts charged to operating profit
Current service cost
Past service cost/(credit)
Net interest cost
Gains from settlements
Expenses
Remeasurements recorded in the statement of
comprehensive income
2014
Amounts charged to operating profit
Current service cost
Past service cost/(credit)
Net interest (credit)/cost
Gains from settlements
Expenses
Remeasurements recorded in the statement of
comprehensive income
US
£m
Rest of World
£m
Pensions
Group
£m
Post-retirement
benefits
Group
£m
66
1
27
–
12
106
110
1
20
(28)
–
103
246
54
56
(28)
19
347
31
3
56
–
–
90
UK
£m
70
52
9
–
7
138
(165)
(27)
(224)
(416)
(59)
UK
(restated)
£m
US
£m
Rest of World
£m
Pensions
Group
(restated)
£m
Post-retirement
benefits
Group
£m
77
25
14
–
7
123
67
2
22
1
4
96
110
(10)
13
(9)
4
108
254
17
49
(8)
15
327
82
(30)
147
199
22
(8)
52
(7)
–
59
62
UK
(restated)
£m
US
£m
Rest of World
£m
Pensions
Group
(restated)
£m
Post-retirement
benefits
Group
£m
68
7
(7)
–
6
74
66
1
14
–
4
85
90
(11)
14
(4)
2
91
224
(3)
21
(4)
12
250
24
(8)
54
–
–
70
(629)
(223)
(244)
(1,096)
(85)
The amounts included within past service costs include £52 million (2015 – £25 million; 2014 – £7 million) of augmentation costs of which
£23 million is arising from major restructuring programmes (see Note 29, ‘Other provisions’).
Investor informationFinancial statementsGovernance and remunerationStrategic report
192 GSK Annual Report 2016
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
2016
£m
2015
£m
2014
£m
313
258
93
(2,397)
(1,693)
(4,090)
(1,842)
(1,387)
(3,229)
(1,782)
(1,397)
(3,179)
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 2016
Equities:
Property:
– listed
– unlisted
– unlisted
Corporate bonds:
– listed
Government bonds:
– listed
– unlisted
Insurance contracts
Other assets
Fair value of assets
Present value of scheme obligations
Net obligation
Included in Other non-current assets
Included in Pensions and other post-employment benefits
Actual return on plan assets
UK
£m
5,357
1,545
314
292
321
6,165
856
(2,267)
12,583
(12,884)
(301)
276
(577)
(301)
2,473
US
£m
1,358
Rest of World
£m
486
Group
£m
7,201
1,559
558
601
345
7,719
1,493
(1,906)
17,570
(19,654)
(2,084)
313
(2,397)
(2,084)
14
28
96
24
739
637
73
2,097
(3,018)
(921)
37
(958)
(921)
99
2,725
–
216
213
–
815
–
288
2,890
(3,752)
(862)
–
(862)
(862)
153
The index-linked gilts held as part of the UK repo programme are included in government bonds. The related loan is included within ‘Other
assets’ at a value of £(1,698) million (2015 – £(2,215) million; 2014 – £(537) million).
At 31 December 2015
Equities:
Property:
– listed
– unlisted
– unlisted
Corporate bonds:
– listed
Government bonds:
– listed
– unlisted
Insurance contracts
Other assets
Fair value of assets
Present value of scheme obligations
Net obligation
Included in Other non-current assets
Included in Pensions and other post-employment benefits
Actual return on plan assets
UK
(restated)
£m
5,187
481
302
251
232
5,687
755
(2,611)
10,284
(10,601)
(317)
232
(549)
(317)
(17)
US
£m
1,235
Rest of World
£m
355
–
175
727
–
184
–
180
2,501
(3,134)
(633)
–
(633)
(633)
(30)
1
8
76
2
664
439
205
1,750
(2,384)
(634)
26
(660)
(634)
23
Group
(restated)
£m
6,777
482
485
1,054
234
6,535
1,194
(2,226)
14,535
(16,119)
(1,584)
258
(1,842)
(1,584)
(24)
193 GSK Annual Report 2016
28. Pensions and other post-employment benefits continued
At 31 December 2014
Equities:
Property:
Corporate bonds:
Government bonds:
Insurance contracts
Other assets
– listed
– unlisted
– unlisted
– listed
– unlisted
– listed
Fair value of assets
Present value of scheme obligations
Net obligation
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 2014
Exchange adjustments
Interest income
Expenses
Settlements and curtailments
Remeasurement
Employer contributions
Scheme participants’ contributions
Benefits paid
Assets at 31 December 2014
Exchange adjustments
Additions through business combinations
Interest income
Expenses
Settlements and curtailments
Remeasurement
Employer contributions
Scheme participants’ contributions
Benefits paid
Assets at 31 December 2015
Exchange adjustments
Interest income
Expenses
Settlements and curtailments
Remeasurement
Employer contributions
Scheme participants’ contributions
Benefits paid
Assets at 31 December 2016
UK
(restated)
£m
5,358
247
256
1,358
247
2,445
803
(163)
10,551
(10,991)
(440)
72
(512)
(440)
913
US
£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)
Group
(restated)
£m
6,886
256
406
2,376
272
3,200
1,181
34
14,611
(16,300)
(1,689)
93
(1,782)
(1,689)
181
1,193
UK
(restated)
£m
9,878
–
437
(6)
–
476
151
4
(389)
10,551
–
–
374
(7)
–
(391)
164
4
(411)
10,284
-
385
(7)
–
2,088
319
4
(490)
US
£m
2,514
154
112
(4)
–
(13)
19
–
(251)
2,531
147
–
95
(4)
–
(125)
132
–
(275)
2,501
459
108
(12)
–
45
31
–
(242)
12,583
2,890
Pensions
Group
(restated)
£m
13,859
53
596
(12)
(65)
597
272
14
(703)
14,611
95
233
502
(15)
(16)
(526)
408
18
(775)
14,535
764
530
(19)
(110)
2,195
481
18
(824)
17,570
Rest of World
£m
1,467
(101)
47
(2)
(65)
134
102
10
(63)
1,529
(52)
233
33
(4)
(16)
(10)
112
14
(89)
1,750
305
37
–
(110)
62
131
14
(92)
2,097
Post-retirement
benefits
Group
£m
–
–
–
–
–
–
70
10
(80)
–
–
–
–
–
–
–
82
14
(96)
–
–
–
–
–
–
91
17
(108)
–
In addition to the above assets, there are assets held by UK defined contribution plans amounting to £1,862 million at December 2016
(2015 – £1,591 million; 2014 – £1,501 million) which had previously been included in these figures. Prior year figures have been restated to
reflect this change.
During 2016, the Group made special funding contributions to the UK pension schemes totalling £191 million (2015 – £85 million;
2014 – £85 million) and £nil (2015 – £111 million; 2014 – £nil) to the US scheme. In 2016, 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 2014 actuarial
funding valuation. Based on the funding agreements following the 2014 valuation, the additional contributions to eliminate the pension deficit
are expected to be £123 million in 2017. 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 2017, including special funding contributions, are estimated to be approximately £362 million in respect of
defined benefit pension schemes and £100 million in respect of post-retirement benefits.
Investor informationFinancial statementsGovernance and remunerationStrategic report
194 GSK Annual Report 2016
Notes to the financial statements continued
28. Pensions and other post-employment benefits continued
Movements in defined benefit obligations
Obligations at 1 January 2014
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
Exchange adjustments
Additions through business combinations
Service cost
Past service cost
Interest cost
Settlements and curtailments
Remeasurement
Scheme participants’ contributions
Benefits paid
Obligations at 31 December 2015
Exchange adjustments
Service cost
Past service cost
Interest cost
Settlements and curtailments
Remeasurement
Scheme participants’ contributions
Benefits paid
Obligations at 31 December 2016
UK
(restated)
£m
(9,766)
–
(68)
(7)
(430)
–
–
(1,105)
(4)
389
(10,991)
–
–
(77)
(25)
(388)
–
473
(4)
411
(10,601)
–
(70)
(52)
(394)
–
(2,253)
(4)
490
US
£m
(2,793)
(188)
(66)
(1)
(126)
–
–
(210)
–
251
(3,133)
(184)
–
(67)
(2)
(117)
(1)
95
–
275
(3,134)
(586)
(66)
(1)
(135)
–
(72)
–
242
Rest of World
£m
(1,913)
139
(90)
11
(61)
69
(6)
(378)
(10)
63
Pensions
Group
(restated)
£m
(14,472)
(49)
(224)
3
(617)
69
(6)
(1,693)
(14)
703
(2,176)
(16,300)
78
(397)
(110)
10
(46)
25
157
(14)
89
(2,384)
(396)
(110)
(1)
(57)
138
(286)
(14)
92
(106)
(397)
(254)
(17)
(551)
24
725
(18)
775
(16,119)
(982)
(246)
(54)
(586)
138
(2,611)
(18)
824
(19,654)
(12,884)
(3,752)
(3,018)
Post-retirement
benefits
Group
£m
(1,246)
(68)
(24)
8
(54)
–
2
(85)
(10)
80
(1,397)
(64)
(11)
(22)
8
(52)
7
62
(14)
96
(1,387)
(248)
(31)
(3)
(56)
–
(59)
(17)
108
(1,693)
In addition to the above obligations, there are obligations of UK defined contribution plans amounting to £1,862 million at December 2016
(2015 – £1,591 million; 2014 – £1,501 million) which had previously been included in these figures. Prior year figures have been restated
to reflect this change.
The defined benefit pension obligation is analysed as follows:
Funded
Unfunded
2016
£m
(18,974)
(680)
2015
(restated)
£m
(15,552)
(567)
2014
(restated)
£m
(15,849)
(451)
(19,654)
(16,119)
(16,300)
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 7% (2015 – 6.5%), grading down to 5% in 2025 and thereafter. At 31 December
2016, the US post-retirement healthcare scheme obligation was £1,463 million (2015 – £1,208 million; 2014 – £1,191 million). Post-
retirement benefits are unfunded.
195 GSK Annual Report 2016
28. Pensions and other post-employment benefits continued
The movement in the net defined benefit liability is as follows:
At 1 January
Exchange adjustments
Additions through business combinations
Service cost
Past service cost
Interest (cost)/income
Settlements and curtailments
Remeasurements:
Return on plan assets, excluding amounts included in interest
Gain/(loss) from change in demographic assumptions
(Loss)/gain from change in financial assumptions
Experience (losses)/gains
Employer contributions
Expenses/other movements
At 31 December
The remeasurements included within post-retirement benefits are detailed below:
Gain from change in demographic assumptions
(Loss)/gain from change in financial assumptions
Experience gains/(losses)
2016
£m
(1,584)
(218)
–
(246)
(54)
(56)
28
2,195
85
(2,770)
74
481
(19)
2015
(restated)
£m
(1,689)
2014
(restated)
£m
(613)
(11)
(164)
(254)
(17)
(49)
8
(526)
120
362
243
408
(15)
4
–
(224)
3
(21)
4
597
(64)
(1,578)
(51)
272
(18)
(2,084)
(1,584)
(1,689)
2016
£m
–
(81)
22
(59)
2015
£m
15
59
(12)
62
2014
£m
10
(120)
25
(85)
Investor informationFinancial statementsGovernance and remunerationStrategic report 196 GSK Annual Report 2016
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
2016
£m
4,576
9,574
5,504
19,654
2016
£m
594
1,099
–
1,693
2016
years
16
12
2015
£m
5,510
7,969
4,231
17,710
2015
£m
499
887
1
2014
£m
5,422
7,967
4,412
17,801
2014
£m
590
805
2
1,387
1,397
2015
years
16
12
2014
years
16
12
Effect of changes in assumptions used on the benefit obligations and on the 2017 annual defined benefit pension and post retirement costs.
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
27
(1)
769
48
20
2
548
43
4
77
18
491
197 GSK Annual Report 2016
29. Other provisions
At 1 January 2016
Exchange adjustments
Charge for the year
Reversed unused
Unwinding of discount
Utilised
Reclassifications and other movements
Transfer to Pension obligations
At 31 December 2016
To be settled within one year
To be settled after one year
At 31 December 2016
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 46 ‘Legal proceedings’. Provisions for legal and other disputes
include amounts relating to product liability, anti-trust, government
investigations (principally relating to the SFO related investigation),
contract terminations, self insurance and environmental clean-up.
The charge for the year of £162 million (net of reversals and
estimated insurance recoveries) primarily related to provisions
for product liability cases regarding Paxil and other products,
commercial disputes and various other government investigations.
The discount on the provisions increased by £1 million in 2016
(2015 – decreased by £1 million) due to higher discount rates in
2016 compared to 2015. The discount was calculated using
risk-adjusted projected cash flows and risk-free rates of return.
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 £296 million of the amount provided at 31 December
2016 will be settled within one year. At 31 December 2016, it was
expected that £nil (2015 – £nil) of the provision made for legal and
other disputes will be reimbursed by third party insurers. For a
discussion of legal issues, see Note 46, ‘Legal proceedings’.
Legal
and other
disputes
£m
Major
restructuring
programmes
£m
Employee
related
provisions
£m
Other
provisions
£m
352
67
162
–
(1)
(233)
(3)
–
344
296
48
344
816
100
163
(140)
4
(368)
2
(23)
554
363
191
554
275
32
58
(9)
–
(41)
(9)
–
306
90
216
306
321
37
66
(7)
13
(108)
(26)
–
296
99
197
296
Total
£m
1,764
236
449
(156)
16
(750)
(36)
(23)
1,500
848
652
1,500
Major restructuring programmes
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 Pharmaceuticals restructuring programme, announced in
October 2014, has been focused on rescaling commercial
operations, global support functions and certain R&D/manufacturing
operations across Pharmaceuticals. In addition, an integration
restructuring programme was initiated in 2015, following the
completion of the Novartis transaction. All of these restructuring and
integration programmes are now reported together as one combined
major restructuring programme.
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
£23 million (2015 – £25 million) 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 US. At
31 December 2016, the provision for these benefits amounted to
£135 million (2015 – £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 £40 million
(2015 – £98 million), onerous property lease provisions of
£113 million (2015 – £135 million) and a number of other provisions
including vehicle insurance and regulatory matters.
Investor informationFinancial statementsGovernance and remunerationStrategic report
198 GSK Annual Report 2016
Notes to the financial statements continued
30. Other non-current liabilities
Accruals and deferred income
Consumer Healthcare put option liability
Other payables
2016
£m
66
7,420
959
8,445
2015
£m
64
6,287
756
7,107
The Consumer Healthcare put option liability relates to the ability of Novartis to put its shares in the Consumer Healthcare Joint Venture to
GSK at certain points in the future, commencing in 2018. The liability is recorded at the present value of the estimated redemption value,
applying a discount rate of 7%, of the expected redemption amount, calculated using an average of relevant public company multiples
approach with no premium or discount, based on the forecast revenue and earnings of the Consumer Healthcare Joint Venture, which forms
part of GSK’s Consumer Healthcare segment. The remeasurement charge in the year was £1,133 million (2015 – £83 million), see Note 7,
‘Other operating income/(expense)’. The table below shows on an indicative basis the income statement and balance sheet sensitivity to
reasonably possible changes in key assumptions.
Increase/(decrease) in financial liability and loss/(gain) in Income statement
10% increase in sales forecasts or sales multiple applied
10% decrease in sales forecasts or sales multiple applied
10 cent appreciation of US Dollar
10 cent depreciation of US Dollar
10 cent appreciation of Euro
10 cent depreciation of Euro
31. Net debt
Current assets:
Liquid investments
Cash and cash equivalents
Short-term borrowings:
Commercial paper
Bank loans and overdrafts
Obligations under finance leases
0.7% US$ US Medium Term Note 2016
1.50% US$ US Medium Term Note 2017
5.625% € European Medium Term Note 2017
Long-term borrowings:
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
Listing exchange
New York Stock Exchange
New York Stock Exchange
London Stock Exchange
New York Stock Exchange
London Stock Exchange
New York Stock Exchange
London Stock Exchange
New York Stock Exchange
New York Stock Exchange
London Stock Exchange
London Stock Exchange
London Stock Exchange
London Stock Exchange
London Stock Exchange
New York Stock Exchange
London Stock Exchange
London Stock Exchange
New York Stock Exchange
London Stock Exchange
2016
£m
726
(726)
42
(36)
203
(171)
2016
£m
89
4,897
4,986
(1,094)
(332)
(23)
–
(1,612)
(1,068)
(4,129)
–
–
(2,216)
(1,276)
(1,603)
(999)
(845)
(635)
(593)
(986)
(401)
2015
£m
75
5,830
5,905
–
(435)
(23)
(850)
–
–
(1,308)
(1,358)
(918)
(1,869)
(1,096)
(1,351)
(841)
(726)
(546)
(592)
(985)
(338)
(2,199)
(1,854)
(695)
(988)
(395)
(789)
(41)
(695)
(987)
(333)
(788)
(47)
(14,661)
(13,804)
(15,324)
(10,727)
199 GSK Annual Report 2016
31. Net debt continued
Current assets
Liquid investments are classified as available-for-sale investments. At 31 December 2016, they included US Treasury Notes and other
government bonds. The effective interest rate on liquid investments at 31 December 2016 was approximately 0.7% (2015 – approximately
0.7%). Liquid investment balances at 31 December 2016 earning interest at floating rates amount to £89 million (2015 – £4 million). Liquid
investment balances at 31 December 2016 earning interest at fixed rates amount to £nil (2015 – £71 million).
The effective interest rate on cash and cash equivalents at 31 December 2016 was approximately 1.3% (2015 – approximately 1.3%).
Cash and cash equivalents at 31 December 2016 earning interest at floating and fixed rates amount to £4,584 million and £3 million
respectively (2015 – £5,654 million and £nil).
GSK’s policy regarding the credit quality of cash and cash equivalents is referred to in Note 42, ‘Financial instruments and related
disclosures’.
Short-term borrowings
GSK has a $10 billion (£8.1 billion) US commercial paper programme, of which $1.4 billion (£1.1 billion) was in issue at 31 December 2016
(2015 – no issuances). GSK also has £1.9 billion five year committed facilities and $2.5 billion (£2.0 billion) of 364 day committed facilities.
The five-year committed facilities were agreed in September 2015 and were extended by one year to 2021 in September 2016. The 364 day
committed facilities were agreed in September 2016. Liquid investments, cash and cash equivalents were as shown in the table on page 198.
The weighted average interest rate on commercial paper borrowings at 31 December 2016 was 0.88% (2015 – no issuances).
The weighted average interest rate on current bank loans and overdrafts at 31 December 2016 was 3.47% (2015 – 3.49%).
The average effective pre-swap interest rate of notes classified as short term at 31 December 2016 was 3.2% (2015 – 0.04%).
Long-term borrowings
At the year-end, GSK had long-term borrowings of £14.7 billion (2015 – £15.3 billion) of which £11.1 billion (2015 – £10 billion) falls due
in more than five years. The average effective pre-swap interest rate of all notes in issue at 31 December 2016 was approximately 4.1%
(2015 – approximately 3.9%).
Long-term borrowings repayable after five years carry interest at effective rates between 1.54% and 6.42%. The repayment dates range
from 2022 to 2045.
Pledged assets
The Group held pledged investments in US Treasury Notes with a par value of $105 million (£85 million), (2015 – $105 million (£71 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,
£23 million (2015 – £37 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
32. Contingent liabilities
2016
£m
25
23
12
7
–
–
67
(3)
64
2015
£m
25
21
15
6
6
4
77
(7)
70
At 31 December 2016, contingent liabilities, comprising guarantees, discounted bills and other items arising in the normal course of business,
amounted to £281 million (2015 – £200 million). At 31 December 2016, £1 million (2015 – £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 2016, 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 46, ‘Legal proceedings’.
Investor informationFinancial statementsGovernance and remunerationStrategic report
200 GSK Annual Report 2016
Notes to the financial statements continued
33. Share capital and share premium account
Share capital authorised
At 31 December 2014
At 31 December 2015
At 31 December 2016
Share capital issued and fully paid
At 1 January 2014
Issued under employee share schemes
At 31 December 2014
Issued under employee share schemes
At 31 December 2015
Issued under employee share schemes
Ordinary shares acquired by ESOP Trusts
At 31 December 2016
Number of shares issuable under employee share schemes
Number of unissued shares not under option
Ordinary Shares of 25p each
Number
£m
Share
premium
£m
10,000,000,000
10,000,000,000
10,000,000,000
5,342,206,696
13,090,536
5,355,297,232
6,010,415
5,361,307,647
7,008,415
–
2,500
2,500
2,500
1,336
3
1,339
1
1,340
2
–
2,595
164
2,759
72
2,831
87
36
5,368,316,062
1,342
2,954
31 December 2016
000
71,382
4,560,302
31 December 2015
000
99,833
4,538,859
At 31 December 2016, of the issued share capital, 42,710,419 shares were held in the ESOP Trusts, 458,205,950 shares were held as
Treasury shares and 4,867,399,693 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 43, ‘Employee share schemes’.
201 GSK Annual Report 2016
34. Movements in equity
Retained earnings and other reserves amounted to £(3,172) million at 31 December 2016 (2015 – £943 million; 2014 – £165 million)
of which £329 million (2015 – £283 million; 2014 – £337 million) relates to joint ventures and associated undertakings. The cumulative
translation exchange in equity is as follows:
At 1 January 2014
Exchange movements on overseas net assets
Reclassification of exchange on liquidation or disposal of overseas subsidiaries
At 31 December 2014
Exchange movements on overseas net assets
At 31 December 2015
Exchange movements on overseas net assets
At 31 December 2016
The analysis of other comprehensive income by equity category is as follows:
2016
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
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
Items that will not be reclassified to income statement:
Exchange movements on overseas net assets of non-controlling interests
Remeasurement gains on defined benefit plans
Tax remeasurement gains in defined benefit plans
Other comprehensive income for the year
2015
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
Remeasurement gains on defined benefit plans
Tax on remeasurement gains in defined benefit plans
Other comprehensive (expense)/income for the year
Net translation exchange included in:
Retained
earnings
£m
586
Fair value
reserve
£m
(3)
(504)
(219)
(137)
(624)
(761)
633
(128)
7
–
4
6
10
13
23
Non-
controlling
interests
£m
(133)
16
–
(117)
8
(109)
603
494
Total
translation
exchange
£m
450
(481)
(219)
(250)
(610)
(860)
1,249
389
Retained
earnings
£m
Other
reserves
£m
Non-
controlling
interests
£m
633
–
–
–
–
–
–
–
(475)
126
284
Retained
earnings
£m
(624)
–
–
–
–
–
–
(77)
–
261
(80)
(520)
13
251
(245)
51
1
2
2
–
–
–
75
–
–
–
–
–
–
–
603
–
–
603
Other
reserves
£m
Non-
controlling
interests
£m
6
416
(91)
(346)
36
2
2
–
–
–
–
25
–
–
–
–
–
–
–
–
8
–
–
8
Total
£m
646
251
(245)
51
1
2
2
603
(475)
126
962
Total
£m
(618)
416
(91)
(346)
36
2
2
(77)
8
261
(80)
(487)
Investor informationFinancial statementsGovernance and remunerationStrategic report
202 GSK Annual Report 2016
Notes to the financial statements continued
34. Movements in equity continued
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
Remeasurement losses on defined benefit plans
Deferred tax on remeasurement losses in defined benefit plans
Other comprehensive (expense)/income for the year
The analysis of other reserves is as follows:
At 1 January 2014
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
Transferred to income and expense in the year on disposals
Transferred to income and expense in the year on impairments
Net fair value movement in the year
Ordinary shares acquired by ESOP Trusts
Write-down of shares held by ESOP Trusts
At 31 December 2015
Transferred to income and expense in the year on disposals
Transferred to income and expense in the year on impairments
Net fair value movement in the year
Ordinary shares acquired by ESOP Trusts
Write-down of shares held by ESOP Trusts
At 31 December 2016
Retained
earnings
£m
Other
reserves
£m
Non-
controlling
interests
£m
–
–
–
–
–
–
–
–
–
–
–
16
–
–
16
Other
reserves
£m
2,108
–
–
–
–
21
2,129
–
–
–
–
–
(504)
(219)
(2)
–
–
–
–
–
–
–
18
–
(1,181)
262
(1,626)
7
–
–
29
(78)
(155)
58
(5)
5
(1)
–
–
–
–
(140)
ESOP Trust
shares
£m
(356)
Fair value
reserve
£m
413
Cash flow
hedge reserve
£m
(12)
(5)
4
–
–
–
(13)
2
–
2
–
–
–
–
(245)
450
–
(151)
–
–
–
(99)
175
(75)
(16)
–
–
(576)
381
(286)
(155)
16
–
–
–
274
(356)
10
367
–
–
295
(268)
23
330
–
–
380
Total
£m
(497)
(219)
(2)
29
(78)
(155)
58
(5)
5
(1)
18
16
(1,181)
262
(1,750)
Total
£m
2,153
(160)
20
(245)
450
21
2,239
(354)
10
369
(99)
175
2,340
(284)
23
336
(576)
381
(9)
2,129
–
–
6
–
–
–
–
–
–
–
(3)
2,129
2,220
Other reserves include various non-distributable merger and pre-merger reserves amounting to £1,849 million at 31 December 2016
(2015 – £1,849 million; 2014 – £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 2016 (2015 – £280 million; 2014 – £280 million).
203 GSK Annual Report 2016
35. Related party transactions
At 31 December 2016, GSK owned 32 million shares or 29.5% of Innoviva Inc. which is a biopharmaceutical company listed on NASDAQ.
GSK began recognising Innoviva as an associate on 1 September 2015. The royalties due from GSK to Innoviva in the year were £108 million
(£28 million from 1 September to 31 December 2015). At 31 December 2016, the balance payable by GSK to Innoviva was £36 million.
At 31 December 2016, 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 2016, GSK sold £43 million (2015 – £27 million) of its vaccine products into the joint venture. At 31 December 2016, the trading
balance due to GSK from JVC was £9 million and the balance payable by GSK to JVC was £nil. Loans of £6 million to JVC, £2 million to
Medicxi Ventures I LP and £2 million to Index Ventures Life VI (Jersey) LP remained due to GSK at 31 December 2016.
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 expense net of finance income
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:
Decrease/(increase) in inventories
(Increase)/decrease in trade receivables
Increase in trade payables
Decrease/(increase) in other receivables
Contingent consideration paid (see Note 39)
Other non-cash increase in contingent consideration liabilities
Increase in other payables
(Decrease)/increase in pension and other provisions
Share-based incentive plans
Fair value adjustments
Other
2016
£m
1,062
877
(5)
664
978
796
226
(5)
(178)
–
(254)
70
(188)
96
381
(358)
2,281
1,989
(621)
319
(3)
(21)
7,044
2015
£m
8,372
2,154
(14)
653
892
738
822
(9,308)
(349)
(843)
(342)
(111)
98
40
(593)
(121)
1,986
276
100
368
–
(187)
(3,741)
2014
£m
2,831
137
(30)
659
780
704
205
–
(255)
–
(149)
(529)
347
91
95
(4)
770
(68)
(41)
332
313
96
3,453
Cash generated from operations
8,106
4,631
6,284
Investor informationFinancial statementsGovernance and remunerationStrategic report 204 GSK Annual Report 2016
Notes to the financial statements continued
37. Reconciliation of net cash flow to
movement in net debt
Net debt at beginning of year
Increase/(decrease) in cash and bank overdrafts
Decrease/(increase) in liquid investments
Net increase in long-term loans
Net (increase in)/repayment of short-term loans
Net repayment of obligations under finance leases
2016
£m
(10,727)
2015
£m
(14,377)
2014
£m
(12,645)
(1,164)
1,503
(1,287)
–
–
(148)
18
(1,781)
(2)
(3,077)
2
–
2,412
25
(268)
(24)
3,650
(1)
(1,960)
1,709
23
(193)
(23)
(1,732)
(13,804)
(10,727)
(14,377)
At 1 January
2016
£m
75
Exchange
£m
14
Other
£m
–
Reclass-
ifications
£m
–
Acquisitions
£m
–
Cash flow
£m
–
At 31 December
2016
£m
89
5,830
(344)
5,486
–
(850)
(114)
(964)
297
(14)
283
(27)
(414)
(8)
(449)
(15,277)
(1,624)
(47)
(5)
(15,324)
(1,629)
(10,727)
(1,781)
–
–
–
–
–
3
3
–
(5)
(5)
(2)
–
–
–
–
(2,281)
(16)
(2,297)
2,281
16
2,297
–
41
–
41
–
–
–
–
–
–
–
(1,271)
66
(1,205)
(1,067)
865
72
(130)
4,897
(292)
4,605
(1,094)
(2,680)
(63)
(3,837)
–
–
–
(14,620)
(41)
(14,661)
41
(1,335)
(13,804)
Exchange adjustments
Other non-cash movements
Movement in net debt
Net debt at end of year
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
For further information on significant changes in net debt see Note 31, ‘Net debt’.
205 GSK Annual Report 2016
38. Acquisitions and disposals
Details of the acquisition and disposal of significant subsidiaries and associates, joint ventures and other businesses are given below:
2016
Acquisitions
GSK completed two small business acquisitions during 2016.
Cash consideration of £24 million was paid in the year to acquire the HIV R&D preclinical and discovery stage portfolio from Bristol Myers
Squibb. Further consideration, contingent on commercial milestones and future sales performance, may be due, and an initial estimate of
£40 million was recognised for this contingent consideration. Intangible assets acquired were valued at £57 million and goodwill of £7 million
was recognised.
GSK formed Galvani Bioelectronics Limited during the year and acquired intangible assets of £45 million and cash and cash equivalents of
£41 million from Verily Life Sciences LLC in return for a 45% shareholding in Galvani Bioelectronics. The fair value of this shareholding was
£47 million, and GSK also recognised a credit of £39 million in non-controlling interests representing Verily’s share of the net assets it
contributed.
Business disposals
GSK also made a number of small business disposals in the period for net cash consideration of £72 million. In addition, deferred
consideration receivable of £43 million was recognised.
Cash flows
Cash consideration (paid)/received after purchase adjustments
Cash and cash equivalents acquired
Cash inflow
In addition, GSK made cash investments of £11 million into associates and joint ventures.
2015
Acquisitions
Business
acquisitions
£m
(24)
41
17
Business
disposals
£m
72
–
72
Novartis Consumer Healthcare and Vaccines businesses
The three-part inter-conditional transaction with Novartis AG involving the Consumer Healthcare, Vaccines and Oncology businesses
completed on 2 March 2015.
GSK and Novartis have contributed their respective Consumer Healthcare businesses into a Consumer Healthcare Joint Venture in a
non-cash transaction. GSK has an equity interest of 63.5% and majority control of the Joint Venture. In addition, GSK has acquired Novartis’
global Vaccines business (excluding influenza vaccines) for an initial cash consideration of $5.25 billion (£3.417 billion) with contingent
consideration representing subsequent potential milestone payments of up to $1.8 billion (£1.2 billion) arising on the achievement of specified
development targets and ongoing royalties based on the future sales performance of certain products, and so the total amount payable is
unlimited. The first milestone of $450 million (£300 million) was paid on 26 March 2015.
Other business acquisitions
In addition, GSK completed one smaller Vaccines business acquisition for cash consideration of £120 million, net of cash acquired, and the
fair value of existing investments of £15 million. This represented goodwill of £22 million and intangible assets of £124 million less other net
liabilities of £11 million.
Investor informationFinancial statementsGovernance and remunerationStrategic report 206 GSK Annual Report 2016
Notes to the financial statements continued
38. Acquisitions and disposals continued
The fair values of the assets acquired in business combinations, including goodwill, are set out in the table below.
Net assets acquired:
Intangible assets
Property, plant and equipment
Inventory
Trade and other receivables
Other assets including cash and cash equivalents
Trade and other payables
Deferred tax liabilities
Other liabilities
Non-controlling interest
Goodwill
Consideration settled by shares in GSK Consumer Healthcare Holdings
Cash consideration paid after purchase adjustments
Fair value of equity investment disposal
Contingent consideration
Deferred tax on contingent consideration
Loss on settlement of pre-existing relationships
Total consideration
Novartis
Consumer
Healthcare
business
£m
Novartis
Vaccines
business
£m
Other
£m
6,003
2,680
124
249
257
400
304
(402)
(1,154)
(165)
5,492
(2,150)
774
4,116
4,116
–
–
–
–
–
434
347
162
283
(107)
(78)
(299)
3,422
(19)
576
3,979
–
3,461
–
594
(52)
(24)
1
–
2
19
(3)
(26)
–
117
–
22
139
–
124
15
–
–
–
4,116
3,979
139
The non-controlling interest in the Consumer Healthcare Joint Venture, calculated applying the full goodwill method, represents Novartis’
share of the net assets it contributed to the Joint Venture together with attributable goodwill.
The goodwill in the businesses acquired represents the potential for further synergies arising from combining the acquired businesses with
GSK’s existing businesses together with the value of the workforce acquired. The majority of the goodwill recognised is not expected to be
deductible for tax purposes.
Total transaction costs recognised in 2014 and 2015 for the acquisitions from Novartis amounted to £102 million.
Between 2 March 2015 and 31 December 2015, turnover of £1,941 million arising from the Novartis Consumer Healthcare and Vaccines
businesses was included in Group turnover. If the businesses had been acquired at the beginning of the year, it is estimated that Group
turnover in 2015 would have been approximately £320 million higher. These businesses have been integrated into the Group’s existing
activities and it is not practical to identify the impact on the Group profit in the period.
Disposals
Oncology
GSK has divested its marketed Oncology business, related R&D activities and rights to its AKT inhibitor and also granted commercialisation
partner rights for future oncology products to Novartis for consideration of $16 billion (£10,395 million) before purchase adjustments.
Other business disposals
GSK also made a number of small business disposals in the period for net cash consideration of £309 million. Profit on disposal of the
businesses has been determined as follows:
Cash consideration including currency forwards and purchase adjustments
Net assets sold:
Goodwill
Intangible assets
Property, plant and equipment
Inventory
Cash
Other net assets
Loss on currency forwards booked in 2014
Disposal costs
Profit on disposal
Oncology
£m
10,060
(497)
(516)
–
–
–
–
(1,013)
299
(118)
9,228
Other
£m
309
(14)
(107)
(25)
(51)
(5)
(6)
(208)
–
(21)
80
207 GSK Annual Report 2016
38. Acquisitions and disposals continued
Investments in associates and joint ventures
In March 2015, GSK sold half of its shareholding in Aspen, representing 6.2% of the issued share capital of the company, for £571 million in
cash. As a result of the sale, the Group was no longer considered to have the ability to exert significant influence over Aspen and the Group’s
remaining investment was transferred from Investments in associates to Other investments.
Cash consideration
Net book value of shares
Reclassification of exchange from other comprehensive income
Transaction fees
Other items
Profit on disposal
Cash flows
Cash consideration (paid)/received after purchase adjustments
Cash and cash equivalents acquired/(divested)
Deferred cash proceeds
Contingent consideration paid
Transaction costs and other
Cash (outflow)/inflow in 2015
£m
571
(143)
(30)
(7)
(5)
386
Total
£m
7,355
399
(38)
(338)
(109)
7,269
Business
acquisitions
£m
(3,585)
Business
disposals
£m
10,369
Associates and
JV disposals
£m
571
404
–
(338)
(22)
(5)
(38)
–
(80)
(3,541)
10,246
–
–
–
(7)
564
In addition, GSK made cash investments of £16 million into associates and joint ventures.
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 were
expensed in 2014, of which £104 million was paid in cash in the year.
Disposals
During the year, £225 million was received as deferred consideration from the sale of the anti-coagulant 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
Purchase of businesses and associates
Net cash proceeds from disposals
Business
acquisitions
and disposals
£m
–
Associates and
joint ventures
£m
9
104
104
225
–
9
1
Total
£m
9
104
113
226
Investor informationFinancial statementsGovernance and remunerationStrategic report 208 GSK Annual Report 2016
Notes to the financial statements continued
39. Contingent consideration liabilities
The consideration for certain acquisitions includes amounts contingent on future events such as development milestones or sales
performance. The Group has provided for the fair value of this contingent consideration as follows:
At 1 January 2014
Remeasurement through goodwill
Remeasurement through income statement
Cash payments: operating cash flows
Cash payments: purchases of businesses
Other movements
At 31 December 2014
Additions through business combinations
Remeasurement through income statement
Cash payments: operating cash flows
Cash payments: purchases of businesses
Other movements
At 31 December 2015
Additions through business combinations
Remeasurement through income statement
Cash payments: operating cash flows
Cash payments: purchases of businesses
Other movements
At 31 December 2016
Shionogi-
ViiV
Healthcare
£m
923
Novartis
Vaccines
£m
–
–
768
(4)
(3)
–
1,684
–
1,874
(121)
(38)
10
3,409
154
2,162
(351)
(66)
(4)
5,304
–
–
–
–
–
–
594
111
–
(300)
–
405
–
152
(5)
(7)
–
545
Other
£m
1
(4)
2
–
–
41
40
–
1
–
–
–
41
40
(33)
(2)
–
1
47
Total
£m
924
(4)
770
(4)
(3)
41
1,724
594
1,986
(121)
(338)
10
3,855
194
2,281
(358)
(73)
(3)
5,896
The additions in the year represented the recognition of the preferential dividends payable to Shionogi of £154 million and a contingent
consideration liability on the acquisition of the HIV business from BMS of £40 million.
Of the contingent consideration payable at 31 December 2016, £561 million (2015 – £306 million) is expected to be paid within one year.
The consideration payable for the acquisition of the Shionogi-ViiV Healthcare joint venture and the Novartis Vaccines business is expected to
be paid over a number of years. As a result, the total estimated liabilities are discounted to their present values, shown above. The Shionogi-
ViiV Healthcare contingent consideration liability is discounted at 8.5% and the Novartis Vaccines contingent consideration liability is
discounted partly at 8% and partly at 9%.
The Shionogi-ViiV Healthcare contingent consideration liability is calculated based on the forecast sales performance of specified products,
principally dolutegravir, over the life of those products.
The table below shows on an indicative basis the income statement and balance sheet sensitivity to reasonably possible changes in key
inputs to the valuations of the contingent consideration liabilities.
Increase/(decrease) in financial liability and loss/(gain) in Income statement
10% increase in sales forecasts
10% decrease in sales forecasts
1% increase in discount rate
1% decrease in discount rate
10% increase in probability of milestone success
10% decrease in probability of milestone success
10 cent appreciation of US Dollar
10 cent depreciation of US Dollar
10 cent appreciation of Euro
10 cent depreciation of Euro
An explanation of the accounting for ViiV Healthcare is set out on page 58.
Shionogi-
ViiV Healthcare
£m
535
Novartis
Vaccines
£m
66
(535)
(233)
252
358
(304)
94
(79)
(62)
(38)
45
48
(47)
34
(5)
17
(8)
209 GSK Annual Report 2016
40. Non-controlling interests
The Group has two subgroups that have material non-controlling interests, ViiV Healthcare Limited and its subsidiaries and GSK Consumer
Healthcare Holdings Limited and its subsidiaries. Summarised financial information in respect of the ViiV Healthcare group and GSK
Consumer Healthcare Joint Venture is set out below:
ViiV Healthcare
Turnover
Loss after taxation
Other comprehensive income
Total comprehensive expense
Non-current assets
Current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net liabilities
Net cash inflow from operating activities
Net cash outflow from investing activities
Net cash outflow from financing activities
Increase in cash and bank overdrafts in the year
2016
£m
3,527
(1,249)
36
2015
£m
2,330
(1,426)
7
(1,213)
(1,419)
2014
£m
1,466
(606)
8
(598)
2016
£m
3,064
2,357
5,421
(1,977)
(7,983)
(9,960)
(4,539)
2016
£m
1,750
(326)
(1,023)
401
2015
£m
2,466
1,619
4,085
(1,218)
(5,490)
(6,708)
(2,623)
2015
£m
1,097
(63)
(814)
220
2014
£m
765
(25)
(540)
200
The above financial information relates to the ViiV Healthcare group on a stand-alone basis, before the impact of Group-related adjustments,
primarily related to the recognition of preferential dividends. The loss after taxation of £1,249 million (2015 – loss after taxation of £1,426
million; 2014 – loss after taxation of £606 million) is stated after charging preferential dividends payable to GSK, Shionogi and Pfizer and
after a charge of £2,186 million (2015 – £1,874 million; 2014 – £768 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.
The following amounts attributable to the ViiV Healthcare group are included in GSK’s Consolidated statement of comprehensive income,
Consolidated statement of changes in equity and Consolidated balance sheet:
Total comprehensive expense for the year attributable to non-controlling interests
Dividends paid to non-controlling interests
Non-controlling interests in the Consolidated balance sheet
2016
£m
(83)
152
(353)
2015
£m
(143)
163
68
2014
£m
(16)
120
Investor informationFinancial statementsGovernance and remunerationStrategic report 210 GSK Annual Report 2016
Notes to the financial statements continued
40. Non-controlling interests continued
Consumer Healthcare Joint Venture
Turnover
Profit/(Loss) after taxation
Other comprehensive income
Total comprehensive income
Non-current assets
Current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Net cash inflow from operating activities
Net cash outflow from investing activities
Net cash outflow from financing activities
Decrease in cash and bank overdrafts in the year
2016
£m
6,530
660
1,640
2,300
2016
£m
13,315
3,996
17,311
(3,060)
(2,062)
(5,122)
12,189
2016
£m
1,496
(537)
(980)
(21)
2015
£m
4,627
(39)
72
33
2015
£m
11,602
3,810
15,412
(2,822)
(1,849)
(4,671)
10,741
2015
£m
277
(691)
(42)
(456)
The above financial information relates to the Consumer Healthcare Joint Venture on a stand-alone basis since its formation on 2 March 2015,
before the impact of Group-related adjustments but after major restructuring charges.
The following amounts attributable to the Consumer Healthcare Joint Venture are included in GSK’s Consolidated statement of
comprehensive income, Consolidated statement of changes in equity and Consolidated balance sheet:
Total comprehensive income for the year attributable to non-controlling interests
Non-controlling interests in the Consolidated balance sheet
2016
£m
730
2015
£m
14
3,755
3,371
211 GSK Annual Report 2016
41. 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
2016
£m
2015
£m
7,199
6,264
496
166
52
874
143
9,410
3
502
157
38
340
191
9,282
7
18,343
16,781
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 2016 under licensing and other agreements including
arrangements with Janssen Sciences Ireland UC and Miltenyi Biotec GmbH. These new arrangements were offset by reduced commitments
due on prior year transactions including amendments to the agreement with OncoMed Pharmaceuticals, Inc. and Five Prime Therapeutics, Inc.
In 2016, 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 2014 actuarial funding valuation. A payment of £123 million is due in 2017 and each subsequent year up
to, and including 2023. The table above includes this commitment, but excludes the normal ongoing annual funding requirement in the UK of
approximately £130 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. £186 million (2015 – £314 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
2016
£m
153
129
94
74
66
324
840
2015
£m
191
98
76
58
53
313
789
Investor informationFinancial statementsGovernance and remunerationStrategic report
212 GSK Annual Report 2016
Notes to the financial statements continued
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.
Foreign exchange risk management
Foreign currency transaction exposures arising on external trade
flows are not normally hedged. Foreign currency transaction
exposures arising on internal trade flows are selectively 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 including hedges of the foreign
exchange risk arising from acquisitions and disposals of assets.
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. 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 the Group’s
investment in overseas assets (see ‘Net investment hedges’
section of this note for further details).
42. Financial instruments and related disclosures
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 interest
rate swaps, foreign exchange forward contracts and 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.
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.
The capital structure of the Group consists of net debt of £13.8
billion (see Note 31, ‘Net debt’) and shareholders’ equity of £1.1
billion (see ‘Consolidated statement of changes in equity’ on
page 160). Total capital, including that provided by non-controlling
interests, is £18.8 billion.
Our long-term credit rating with Standard and Poor’s is A+ (stable
outlook) and with Moody’s Investor Services (‘Moody’s’) it is A2
(negative 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 management
GSK’s policy is to borrow centrally in order to meet anticipated
funding requirements. The strategy is to diversify liquidity sources
using a range of facilities and to maintain broad access to financial
markets.
At 31 December 2016, GSK had £4.1 billion of borrowings
repayable within one year and held £5.0 billion of cash and cash
equivalents and liquid investments of which £3.2 billion was held
centrally. GSK has access to short-term finance under a $10 billion
(£8.1 billion) US commercial paper programme; $1.4 billion
(£1.1 billion) was in issue at 31 December 2016 (2015 – no
issuances). GSK also has £1.9 billion five year committed facilities
and $2.5 billion (£2.0 billion) of 364 day committed facilities. The
five-year committed facilities were agreed in September 2015 and
were extended by one year to 2021 in September 2016. The 364 day
committed facilities were agreed in September 2016. These facilities
were undrawn at 31 December 2016. 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 2016, £7.9 billion of notes were in issue under this
programme. The Group also had $11.8 billion (£9.5 billion) of notes
in issue at 31 December 2016 under a US shelf registration. GSK
is currently in the process of renewing its US shelf registration
statement in order to maintain access to the US debt markets.
GSK’s borrowings mature at dates between 2017 and 2045.
The put options owned by minority interest partners in ViiV
Healthcare and the Consumer Healthcare JV business are
exercisable immediately and from 2018, respectively. In reviewing
liquidity requirements GSK considers that sufficient financing options
are available should the put options be exercised.
213 GSK Annual Report 2016
42. Financial instruments and related disclosures continued
Credit risk
The Group considers its maximum credit risk at 31 December
2016 to be £11,002 million (31 December 2015 – £11,423 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 215 for details on the
Group’s total financial assets. At 31 December 2016, GSK’s
greatest concentration of credit risk was £0.9 billion with Citibank
(A/A1) (2015 – £0.8 billion with Citibank (A/A1)).
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. Usage of these limits is monitored
daily.
GSK actively manages its exposure to credit risk, reducing surplus
cash balances wherever possible. This is part of GSK’s strategy to
regionalise cash management and to concentrate cash centrally as
much as possible. 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 219 sets out the
Group’s financial assets and liabilities on an offset basis.
At 31 December 2016, £93 million of cash is categorised as held
with unrated or sub-investment grade rated counterparties (lower
then BBB-/Baa3) of which £63 million is cash in transit. The
remaining exposure is concentrated in overseas banks used for local
cash management or investment purposes, including £19 million in
Nigeria held with United Bank for Africa, Zenith Bank and Stanbic
IBTC Bank, £4 million with BTV in Austria, £2 million with
Islandsbanki in Iceland and £1 million with Produbanco in Ecuador.
Of the £388 million of bank balances and deposits held with BBB/
Baa rated counterparties, £42 million was held with BBB-/Baa3
rated counterparties, including balances or deposits of £12 million
with State Bank of India and £27 million with HDFC Bank in India.
These banks are used for either local cash management or local
investment purposes.
2016
Bank balances and deposits
US Treasury and Treasury repo only money market funds
Liquidity funds
Government securities
3rd party financial derivatives
Total
2015
Bank balances and deposits
US Treasury and Treasury repo only money market funds
Liquidity funds
Government securities
3rd party financial derivatives
Total
AAA/Aaa
£m
–
2,248
66
–
–
2,314
AAA/Aaa
£m
–
624
1,439
–
–
AA/Aa
£m
542
–
–
85
70
697
AA/Aa
£m
1,354
–
–
72
55
A/A
£m
1,560
–
–
–
86
1,646
A/A
£m
1,979
–
–
–
67
BBB/Baa
£m
388
–
–
4
–
392
BBB/Baa
£m
386
–
–
3
3
2,063
1,481
2,046
392
BB+/Ba1
and below
/unrated
£m
93
–
–
–
–
93
BB+/Ba1
and below
/unrated
£m
48
–
–
–
–
48
Total
£m
2,583
2,248
66
89
156
5,142
Total
£m
3,767
624
1,439
75
125
6,030
Credit ratings are assigned by Standard and Poor’s and Moody’s respectively. Where the opinions of the two rating agencies differ, GSK
assigns the lower rating of the two to the counterparty. Where local rating agency or Fitch data is the only source available, the ratings are
converted to global ratings equivalent to those of Standard and Poor’s or Moody’s using published conversion tables.
Investor informationFinancial statementsGovernance and remunerationStrategic report 214 GSK Annual Report 2016
Notes to the financial statements continued
42. Financial instruments and related disclosures continued
GSK’s centrally managed cash reserves amounted to £3.2 billion at
31 December 2016, all available within three months. This includes
£1.6 billion centrally managed cash held by ViiV Healthcare, a 78.3%
owned subsidiary. The Group has invested centrally managed liquid
assets in bank deposits, Aaa/AAA rated US Treasury and Treasury
repo only money market funds and Aaa/AAA rated liquidity funds.
Wholesale and retail credit risk
Outside the US, no customer accounts for more than 5% of the
Group’s trade receivables balance.
In the US, 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 amounted to approximately 82% of the
sales of the US Pharmaceuticals and Vaccines businesses in 2016.
At 31 December 2016, the Group had trade receivables due from
these three wholesalers totalling £1,323 million (2015 – £990
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’).
Fair value of financial assets and liabilities
The table on page 215 presents the carrying amounts and the fair
values of the Group’s financial assets and liabilities at 31 December
2016 and 31 December 2015.
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.
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 – based on
present values of expected future cash flows
– Interest rate swaps, foreign exchange forward contracts, swaps
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, including put options – approximates
to the carrying amount
– Company-owned life insurance policies – based on cash
surrender value
– Lease obligations – approximates to the carrying amount.
Fair value of investments in GSK shares
At 31 December 2016, the Employee Share Ownership Plan (ESOP)
Trusts held GSK shares with a carrying value of £286 million (2015
– £75 million) and a fair value of £667 million (2015 – £409 million)
based on quoted market price. The shares are held by the ESOP
Trusts to satisfy future exercises of options and awards under
employee incentive schemes. In 2016, 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
2016, GSK held Treasury shares at a cost of £6,451 million (2015
– £6,917 million) which has been deducted from retained earnings.
215 GSK Annual Report 2016
42. Financial instruments and related disclosures continued
Available-for-sale investments:
Liquid investments (Government bonds)
Other investments
Loans and receivables:
Cash and cash equivalents
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:
Contingent consideration liabilities
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
89
985
2016
Fair
value
£m
89
985
Carrying
value
£m
75
1,255
2015
Fair
value
£m
75
1,255
4,897
4,897
5,830
5,830
5,499
5,499
5,114
5,114
361
23
133
361
23
133
279
6
119
279
6
119
11,987
11,987
12,678
12,678
(3,189)
(3,335)
(2,740)
(2,872)
(14,111)
(16,996)
(13,387)
(15,209)
(332)
(1,094)
(18,726)
(64)
(332)
(1,094)
(21,757)
(64)
(435)
–
(435)
–
(16,562)
(18,516)
(70)
(70)
(18,790)
(21,821)
(16,632)
(18,586)
(18,713)
(18,713)
(14,748)
(14,748)
Notes
a
a
e
b
a, b
a, d, e
a, d, e
d
e
f
c
a, c
a, d, e
a, d, e
(5,896)
(5,896)
(3,855)
(3,855)
(92)
(102)
(92)
(102)
(97)
(56)
(97)
(56)
(43,593)
(46,624)
(35,388)
(37,342)
Net financial assets and financial liabilities
(31,606)
(34,637)
(22,710)
(24,664)
The valuation methodology used to measure fair value in the above table is described and categorised on page 214. Trade and other
receivables, Other non-current assets, Trade and other payables, Other provisions, Other non-current liabilities and Contingent consideration
liabilities are reconciled to the relevant Notes on pages 217 and 218.
Investor informationFinancial statementsGovernance and remunerationStrategic report
216 GSK Annual Report 2016
Notes to the financial statements continued
42. 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.
At 31 December 2016
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:
Contingent consideration liabilities
Derivatives designated as at fair value through profit or loss
Derivatives classified as held for trading under IAS 39
At 31 December 2015
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:
Contingent consideration liabilities
Derivatives designated as at fair value through profit or loss
Derivatives classified as held for trading under IAS 39
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
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
84
580
–
–
–
664
–
–
–
–
5
–
355
23
133
516
–
(92)
(101)
(193)
–
405
6
–
–
89
985
361
23
133
411
1,591
(5,896)
–
(1)
(5,897)
(5,896)
(92)
(102)
(6,090)
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
71
987
–
–
–
1,058
–
–
–
–
4
–
276
6
116
402
–
(97)
(55)
(152)
–
268
3
–
3
75
1,255
279
6
119
274
1,734
(3,855)
–
(1)
(3,856)
2016
£m
(3,582)
(2,283)
29
(194)
431
81
(15)
(11)
58
(5,486)
(3,855)
(97)
(56)
(4,008)
2015
£m
(1,504)
(1,994)
36
(594)
459
77
(64)
(7)
9
(3,582)
217 GSK Annual Report 2016
42. Financial instruments and related disclosures continued
The net losses of £2,283 million (2015 – £1,994 million) attributable to Level 3 financial instruments which were recognised in the income
statement were all attributable to financial instruments which were held at the end of the year. These net losses were reported in Other
operating income. £2,162 million (2015 – £1,874 million) arose from remeasurement of the contingent consideration payable for the
acquisition of the former Shionogi-ViiV Healthcare joint venture and £152 million (2015 – £111 million) arose from remeasurement of the
contingent consideration payable on the acquisition in 2015 of the Novartis Vaccines business. Net gains of £29 million (2015 – £36 million)
attributable to Level 3 equity investments reported in Other comprehensive income as Fair value movements on available-for-sale investments
included net gains of £21 million (2015 – net losses of £8 million) in respect of equity investments held at the end of the year.
Financial liabilities measured using Level 3 valuation methods at 31 December included £5,304 million (2015 – £3,409 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 the future performance of specified products and movements in certain
foreign currencies. They also included £545 million (2015 – £405 million) in respect of contingent consideration for the acquisition of the
Novartis Vaccines business. This consideration is expected to be paid over a number of years and will vary in line with the future performance
of specified products, the achievement of certain milestone targets and movements in certain foreign currencies. Sensitivity analysis on these
balances is provided in Note 39, ‘Contingent consideration liabilities’.
(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 include 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
2016
Total
£m
At fair value
through
profit or loss
£m
Loans and
receivables
£m
Financial
instruments
£m
Non-
financial
instruments
£m
2015
Total
£m
Trade and other receivables
(Note 24)
Other non-current assets
(Note 22)
–
5,135
5,135
891
6,026
–
4,751
4,751
864
5,615
361
361
364
5,499
725
5,860
474
1,365
1,199
7,225
279
279
363
5,114
642
5,393
348
1,212
990
6,605
The following table shows the ageing 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
2016
£m
137
178
55
53
98
521
2015
£m
200
136
76
49
90
551
Investor informationFinancial statementsGovernance and remunerationStrategic report
218 GSK Annual Report 2016
Notes to the financial statements continued
42. Financial instruments and related disclosures continued
(c) Trade and other payables, Other provisions, Other non-current liabilities and Contingent consideration liabilities in scope of IAS 39
The following table reconciles financial instruments within Trade and other payables, Other provisions, Other non-current liabilities and
Contingent consideration 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.
Trade and other payables
(Note 27)
Other provisions
(Note 29)
Other non-current liabilities
(Note 30)
Contingent consideration
liabilities (Note 39)
At fair value
through
profit or loss
£m
Other
liabilities
£m
Financial
instruments
£m
Non-financial
instruments
£m
2016
Total
£m
At fair value
through
profit or loss
£m
Other
liabilities
£m
Financial
instruments
£m
Non-financial
instruments
£m
2015
Total
£m
–
–
–
(11,041)
(11,041)
(923)
(11,964)
(113)
(113)
(1,387)
(1,500)
(7,559)
(7,559)
(886)
(8,445)
–
–
–
(8,199)
(8,199)
(686)
(8,885)
(159)
(159)
(1,605)
(1,764)
(6,390)
(6,390)
(717)
(7,107)
(5,896)
–
(5,896)
–
(5,896)
(3,855)
–
(3,855)
–
(3,855)
(5,896)
(18,713)
(24,609)
(3,196)
(27,805)
(3,855)
(14,748)
(18,603)
(3,008)
(21,611)
(d) Derivative financial instruments and hedging programmes
The following table sets out the fair values of derivatives held by GSK. All the derivatives have a maturity of less than one year.
Net investment hedges – Foreign exchange contracts
(principal amount – £5,362 million (2015 – £6,192 million))
Cash flow hedges – Foreign exchange contracts
(principal amount – £170 million (2015 – £69 million))
Derivatives designated as at fair value through profit or loss
Foreign exchange contracts
(principal amount – £14,943 million (2015 – £12,152 million))
Embedded and other derivatives
Derivatives classified as held for trading under IAS 39
Total derivative instruments
2016
Fair value
Liabilities
£m
Assets
£m
2015
Fair value
Liabilities
£m
Assets
£m
18
5
23
133
–
133
156
(92)
–
(92)
(99)
(3)
(102)
(194)
3
3
6
115
4
119
125
(97)
–
(97)
(54)
(2)
(56)
(153)
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 2016, the Group held outstanding foreign exchange
contracts with a net asset fair value of £34 million (£133 million asset less £99 million liability). At December 2015, the fair value was a
£61 million net asset (£115 million asset less £54 million liability).
The overall decrease in the net asset fair value has been due to the weakening of Sterling against all major currencies in 2016, in particular
impacting the hedging of Euro and US Dollar denominated inter-company loan balances 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
loan balances.
219 GSK Annual Report 2016
42. Financial instruments and related disclosures continued
Fair value hedges
At 31 December 2016, the Group had no designated fair value hedges.
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) foreign operations as shown in the table above. The hedges
relating to the Japanese (Yen) foreign operations were closed out during the year.
The carrying value of bonds on page 215 includes £3,189 million (2015 – £2,740 million) that are designated as hedging instruments in net
investment hedges.
Cash flow hedges
During 2016, the Group entered into forward foreign exchange contracts which have been designated as cash flow hedges. These are
hedging the foreign exchange exposure arising on Euro and US Dollar denominated coupon payments relating to the Group’s European and
US medium term notes and a number of highly probable forecast transactions denominated in US Dollars.
In addition, the Group carries a balance in reserves that arose from pre-hedging fluctuations in long-term interest rates when pricing bonds
issued in prior years. The balance is reclassified to finance costs over the life of these bonds.
(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 2016
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 2015
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
5,136
Gross financial
(liabilities)/
assets
set off
£m
(1)
156
4,897
10,189
(11,042)
(194)
(332)
(11,568)
–
–
(1)
1
–
–
1
Gross
financial
assets/
(liabilities)
£m
4,757
Gross financial
(liabilities)/
assets
set off
£m
(6)
125
5,833
10,715
(8,205)
(153)
(438)
(8,796)
–
(3)
(9)
6
–
3
9
Net financial
assets/
(liabilities)
per balance
sheet
£m
5,135
Related
amounts not
set off in the
balance sheet
£m
(29)
156
(117)
Net
£m
5,106
39
4,897
10,188
(11,041)
(194)
(332)
(11,567)
29
117
(11,012)
(77)
Net financial
assets/
(liabilities)
per balance
sheet
£m
4,751
Related
amounts not
set off in the
balance sheet
£m
(17)
125
(98)
Net
£m
4,734
27
5,830
10,706
(8,199)
(153)
(435)
(8,787)
17
98
(8,182)
(55)
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.
Investor informationFinancial statementsGovernance and remunerationStrategic report
220 GSK Annual Report 2016
Notes to the financial statements continued
42. 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. 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
2016
Total
debt
£m
(4,106)
(2,216)
(1,277)
–
–
(4,082)
(7,045)
(18,726)
(17,342)
(1,381)
(18,723)
(3)
(18,726)
2015
Total
£m
(1,285)
(2,276)
(1,868)
(1,096)
–
(3,464)
(6,573)
(16,562)
(16,127)
(434)
(16,561)
(1)
(16,562)
(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
Foreign currency exposures arise from the translation of financial assets and liabilities which are not in the functional currency of the entity
that holds them (cash and cash equivalents, bank loans and overdrafts, inter-company loans and deposits, other receivables and payables
and trade receivables and payables) and derivative financial instruments hedging legal provisions and activities arising from acquisitions and
disposals of assets.
The Group is primarily exposed to foreign exchange risk in relation to Sterling against movements in US Dollar, Euro and Japanese Yen. Based
on the Group’s net financial assets and liabilities as at 31 December, a weakening of Sterling against these currencies, with all other variables
held constant, is illustrated in the table below. The table excludes financial instruments that expose the Group to foreign exchange risk where
this risk is fully hedged with another financial instrument.
Income statement impact of non-functional currency foreign exchange exposures
10 cent appreciation of the US Dollar
10 cent appreciation of the Euro
10 yen appreciation of the Yen
2016
2015
Increase/(decrease) in
income
£m
77
Increase/(decrease) in
income
£m
77
18
1
7
(1)
An equivalent depreciation in the above currencies would cause the following increase/(decrease) in income £(66) million, £(16) million and
£(1) million (2015 – £(67) million, £(6) million and £1 million) for US Dollar, Euro and Yen exchange rates respectively.
221 GSK Annual Report 2016
42. Financial instruments and related disclosures continued
The equity impact, shown below, for foreign exchange sensitivity relates to derivative and non-derivative financial instruments hedging
the Group’s net investments in its European (Euro) foreign operations and 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 and a number of highly probable
forecast transactions denominated in US Dollars.
Equity impact of non-functional currency foreign exchange exposures
10 cent appreciation of the US Dollar
10 cent appreciation of the Euro
10 yen appreciation of the Yen
2016
2015
Increase/(decrease)
in equity
£m
Increase/(decrease)
in equity
£m
11
(795)
–
–
(676)
(20)
An equivalent depreciation in the above currencies would cause the following (decrease)/increase in equity: £(10) million, £670 million and
£nil (2015 – £nil, £584 million and £18 million) for US Dollar, Euro and Yen exchange rates respectively.
The table below presents the Group’s sensitivity to foreign exchange rates based on the composition of net debt as shown in Note 31
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
10 cent appreciation of the Euro
10 yen appreciation of the Yen
2016
2015
(Increase)/decrease
in net debt
£m
(746)
(Increase)/decrease
in net debt
£m
(471)
190
(11)
221
4
An equivalent depreciation in the above currencies would have the following impact on net debt: £634 million, £(160) million and £10 million
for US Dollar, Euro and Yen exchange rates respectively (2015 – £411 million, £(190) million and £(4) million).
Interest rate sensitivity
The Group is exposed to interest rate risk on its outstanding borrowings and investments where any changes in interest rates will affect future
cash flows or the fair values of financial instruments.
The majority of debt is issued at fixed interest rates and changes in the floating rates of interest do not significantly affect the Group’s net
interest charge, although the majority of cash and liquid investments earn floating rates of interest.
The table below hypothetically shows the Group’s sensitivity to changes in interest rates in relation to Sterling, US Dollar and Euro variable
rate financial assets and liabilities. If the interest rates applicable to floating rate financial assets and liabilities were to have increased by 1%
(100 basis points), and assuming other variables had remained constant, it is estimated that the Group’s finance income for 2016 would have
increased by approximately £3 million (2015 – £37 million increase). 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
1% (100 basis points) increase in US Dollar interest rates
1% (100 basis points) increase in Euro interest rates
2016
2015
Increase/(decrease)
in income
£m
3
(3)
3
Increase/(decrease)
in income
£m
19
14
4
Investor informationFinancial statementsGovernance and remunerationStrategic report
222 GSK Annual Report 2016
Notes to the financial statements continued
42. Financial instruments and related disclosures continued
(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 Group did not use interest rate swaps to manage its interest rate risk. 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 41, ‘Commitments’.
At 31 December 2016
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
At 31 December 2015
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
Debt
£m
(4,108)
(2,218)
(1,282)
–
–
(4,117)
(7,124)
(18,849)
Interest on
debt
£m
(705)
(566)
(503)
(496)
(496)
(2,122)
(4,522)
(9,410)
Obligations
under finance
leases
£m
(23)
Finance charge on
obligations under
finance leases
£m
(2)
Trade payables and
other liabilities not
in net debt
£m
(11,621)
(22)
(12)
(7)
–
–
–
(64)
(1)
–
–
–
–
–
(3)
(8,784)
(961)
(786)
(705)
(3,474)
(3,135)
(29,466)
Debt
£m
(1,285)
(2,280)
(1,871)
(1,103)
–
(3,498)
(6,651)
(16,688)
Interest on
debt
£m
(638)
(625)
(510)
(457)
(451)
(2,047)
(4,554)
(9,282)
Obligations
under finance
leases
£m
(23)
Finance charge on
obligations
under finance
leases
£m
(2)
Trade payables
and other
liabilities not
in net debt
£m
(8,505)
(20)
(14)
(6)
(6)
(1)
–
(70)
(1)
(1)
–
–
–
(3)
(7)
(479)
(7,688)
(452)
(655)
(2,452)
(2,635)
(22,866)
Total
£m
(16,459)
(11,591)
(2,758)
(1,289)
(1,201)
(9,713)
(14,781)
(57,792)
Total
£m
(10,453)
(3,405)
(10,084)
(2,018)
(1,112)
(7,998)
(13,843)
(48,913)
The increase in contractual cash flows for non-derivative financial liabilities of £8.8 billion over the year resulted partially from the initial
recognition of the ViiV Healthcare put option liability of £1.3 billion. In addition, there was an increase of £2.9 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 and for
the acquisition of the Novartis Vaccines business in 2015.
Anticipated contractual cash flows for the repayment of debt and debt interest have increased by £2.3 billion over the year, principally due to
the retranslation of US Dollar denominated debt which has been adversely impacted by the weakening of Sterling due to volatility in the
markets compounded by political and economic events throughout 2016.
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 purpose of this table although, 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 with 31 December 2015 as a result of hedging of the
US commercial paper programme and increased hedging of Euro receivables.
Due in less than one year
Between one and two years
Gross contractual cash flows
Receivables
£m
21,266
20
2016
Payables
£m
(21,303)
(20)
Receivables
£m
18,283
20
2015
Payables
£m
(18,318)
(20)
21,286
(21,323)
18,303
(18,338)
223 GSK Annual Report 2016
43. Employee share schemes
GSK operates several employee share schemes, including 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 and 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. The granting of these restricted share awards has replaced the granting of options to employees as the cost of the schemes more
readily equates to the potential gain to be made by the employee. The Group also operates savings related share option schemes, whereby
options are granted to employees to acquire shares in GlaxoSmithKline plc at a discounted price.
Grants of restricted share awards are normally exercisable at the end of the three year vesting or performance period. Awards are normally
granted to employees to acquire shares or ADS in GlaxoSmithKline plc but in some circumstances may be settled in cash. Grants under
savings-related share option schemes are normally exercisable after three years’ saving. 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.
Options under historical share option schemes were granted at the market price ruling at the date of grant.
The total charge for share-based incentive plans in 2016 was £338 million (2015 – £349 million; 2014 – £346 million). Of this amount,
£271 million (2015 – £307 million; 2014 – £302 million) arose from the Share Value Plan. See Note 9, ‘Employee Costs’ for further details.
GlaxoSmithKline share award schemes
Share Value Plan
Under the Share Value Plan, share awards are granted 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 of 4.5% (2015 – 5.7%; 2014 – 5.2%) over the duration of the award.
Number of shares and ADS issuable
At 1 January 2014
Awards granted
Awards exercised
Awards cancelled
At 31 December 2014
Awards granted
Awards exercised
Awards cancelled
At 31 December 2015
Awards granted
Awards exercised
Awards cancelled
At 31 December 2016
Shares
Number (000)
31,067
12,410
(9,642)
(923)
32,912
13,019
(11,476)
(1,878)
32,577
12,983
(11,198)
(1,507)
32,855
Weighted
fair value
£12.65
£11.57
£14.97
ADS
Number (000)
20,838
7,842
(6,787)
(666)
21,227
7,198
(8,878)
(2,027)
17,520
6,589
(6,214)
(812)
17,083
Weighted
fair value
$41.56
$35.66
$39.18
Performance Share Plan
Under the Performance Share Plan, share 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 from 2014 to Directors and members of the CET, the performance conditions are based on three equally weighted
measures over a three year performance period. These are adjusted free cash flow, TSR and R&D new product performance.
For those awards made to all other eligible employees the performance conditions are based on both GSK’s EPS growth compared with the
increase in the UK Retail Prices Index over the three year measurement period and adjusted free cash flow. 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.
During 2016, awards were made of 4.6 million shares at a weighted fair value of £11.01 and 1.2 million ADS at a weighted fair value of $31.78.
At 31 December 2016, there were outstanding awards over 13.2 million shares and 3.3 million ADS.
Share options and savings-related options
For the purposes of valuing savings-related options to arrive at the share based payment charge, a Black-Scholes option pricing model has
been used. The assumptions used in the model are as follows:
Risk-free interest rate
Dividend yield
Volatility
Expected life
Savings-related options grant price (including 20% discount)
2016 Grant
0.32%
2015 Grant
0.88%
2014 Grant
0.7%
4.9%
23%
3 years
£12.95
6.5%
21%
3 years
£10.14
5.8%
19%
3 years
£11.31
Investor informationFinancial statementsGovernance and remunerationStrategic report 224 GSK Annual Report 2016
Notes to the financial statements continued
43. Employee share schemes continued
Options outstanding
At 31 December 2016
Range of exercise prices on options outstanding
at year end
Weighted average market price on exercise
during year
Weighted average remaining contractual life
Share option
schemes – shares
Weighted
exercise
price
Number
000
6,133
£12.37
Share option
schemes – ADS
Weighted
exercise
price
Savings-related
share option schemes
Weighted
exercise
price
Number
000
$47.06
6,267
£10.89
Number
000
7,547
£11.47
– £14.88
$33.42
– $58.00
£10.13
– £12.95
£15.85
1.8 years
$42.08
1.1 years
£14.93
2.5 years
Options over 1.3 million shares were granted during the year under the savings-related share option scheme at a weighted average fair value
of £2.69. At 31 December 2016, 6.1 million of the savings-related share options were not exercisable. All of the other share options and ADS
options are currently exercisable and all will expire if not exercised on or before 22 July 2020.
There has been no change in the effective exercise price of any outstanding options during the year.
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 2016, Treasury shares with a carrying value of £466 million
were purchased by the UK ESOP Trust to satisfy future awards. The costs of running the ESOP Trusts are charged to the income statement.
Shares held by the ESOP Trusts are deducted from other reserves and amortised down to the value of proceeds, if any, receivable from
employees on exercise by a transfer to retained earnings. 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
44. Post balance sheet events
2016
2015
42,571
29,662
£m
11
285
665
2016
139
£m
–
1
2
£m
7
74
407
2015
139
£m
–
1
2
On 28 February 2017, GSK completed the sale of its anaesthesia portfolio to Aspen, excluding the US and Canada markets, for £180 million
together with milestones of up to £100 million.
225 GSK Annual Report 2016
45. Principal Group companies
The following represent the principal subsidiaries and their countries of incorporation of the Group at 31 December 2016. 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.
England
US
Glaxo Group Limited
Glaxo Operations UK Limited
GlaxoSmithKline Capital plc
GlaxoSmithKline Consumer Healthcare Holdings Limited (63.5%)
GlaxoSmithKline Consumer Healthcare (UK) Trading Limited (63.5%)
GlaxoSmithKline Export Limited
GlaxoSmithKline Finance plc
GlaxoSmithKline Holdings Limited *
GlaxoSmithKline Research & Development Limited
GlaxoSmithKline Services Unlimited *
GlaxoSmithKline UK Limited
Setfirst Limited
SmithKline Beecham Limited
ViiV Healthcare Limited (78.3%)
ViiV Healthcare UK Limited (78.3%)
Block Drug Company, Inc. (63.5%)
Corixa Corporation
GlaxoSmithKline Capital Inc.
GlaxoSmithKline Consumer Healthcare, L.P. (55.9%)
GlaxoSmithKline Holdings (Americas) Inc.
GlaxoSmithKline LLC
Human Genome Sciences, Inc.
Novartis Consumer Health, Inc. (63.5%)
Stiefel Laboratories, Inc.
ViiV Healthcare Company (78.3%)
Europe
Others
GlaxoSmithKline Biologicals SA (Belgium)
GlaxoSmithKline Pharmaceuticals SA (Belgium)
GlaxoSmithKline Biologicals S.A.S. (France)
GlaxoSmithKline Sante Grand Public SAS (France) (63.5%)
Laboratoire GlaxoSmithKline (France)
ViiV Healthcare SAS (France) (78.3%)
GlaxoSmithKline Consumer Healthcare GmbH & Co. KG
(Germany) (63.5%)
GlaxoSmithKline GmbH & Co. KG (Germany)
GSK Vaccines GmbH (Germany)
GlaxoSmithKline Consumer Healthcare S.p.A. (Italy) (63.5%)
GlaxoSmithKline S.p.A. (Italy)
GSK Vaccines S.r.l. (Italy)
GlaxoSmithKline B.V. (Netherlands)
GlaxoSmithKline Pharmaceuticals S.A. (Poland)
GSK Services Sp z o.o. (Poland)
GlaxoSmithKline Trading Services Limited (Republic of Ireland) (i)
GlaxoSmithKline S.A. (Spain)
Laboratorios ViiV Healthcare, S.L. (Spain) (78.3%)
Novartis Consumer Health S.A. (Switzerland) (63.5%)
GlaxoSmithKline Argentina S.A. (Argentina)
GlaxoSmithKline Australia Pty Ltd (Australia)
GlaxoSmithKline Consumer Healthcare Australia Pty Ltd (Australia) (63.5%)
GlaxoSmithKline Brasil Limitada (Brazil)
GlaxoSmithKline Consumer Healthcare Inc. (Canada) (63.5%)
GlaxoSmithKline Inc. (Canada)
ID Biomedical Corporation of Quebec (Canada)
GlaxoSmithKline Limited (China (Hong Kong))
Sino-American Tianjin Smith Kline & French Laboratories Ltd (China) (34.9%)
GlaxoSmithKline Consumer Healthcare Limited (India) (72.5%)
GlaxoSmithKline Pharmaceuticals Limited (India) (75%)
GlaxoSmithKline Consumer Healthcare Japan K.K. (Japan) (63.5%)
GlaxoSmithKline K.K. (Japan)
ViiV Healthcare Kabushiki Kaisha (Japan) (78.3%)
GlaxoSmithKline Pakistan Limited (Pakistan) (82.6%)
Glaxo Wellcome Manufacturing Pte Ltd. (Singapore)
GlaxoSmithKline Korea Limited (Republic of Korea)
GlaxoSmithKline llaclari Sanayi ve Ticaret A.S. (Turkey)
(i)
Exempt from the provisions of section 347 and 348 of the Companies Act 2014 (Ireland), in accordance with the exemptions noted
in Section 357 of that Act. Further subsidiaries, as disclosed on pages 272 to 282, are exempt from these provisions as they are also
consolidated in the group financial statements.
*
Directly held wholly owned subsidiary of GlaxoSmithKline plc.
The subsidiaries and associates listed above principally affect the figures in the Group’s financial statements. 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.
See pages 272 to 282 for a complete list of subsidiary undertakings, associates and joint ventures, which form part of these financial
statements.
Investor informationFinancial statementsGovernance and remunerationStrategic report 226 GSK Annual Report 2016
Notes to the financial statements continued
46. 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 most significant of these matters, other than tax
matters, are described below. 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 in this note, but
no provision would be made for the cases.
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.
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 2016, the Group’s
aggregate provision for legal and other disputes (not including tax
matters described in Note 14, ‘Taxation’) was £344 million. 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 judgements are incurred or the settlements
entered into.
Intellectual property
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.
Advair HFA, Flovent HFA, Ventolin HFA
On 29 September 2015, Mylan Pharmaceuticals (Mylan) filed a
petition for an Inter Partes Review (IPR) with the United States Patent
and Trademark Office (USPTO) seeking to invalidate a patent, U.S.
Patent No. 6,743, 413 (‘413 patent’). The ‘413 patent claims a method
of treatment with a formulation containing an active medication and a
propellant known as 134a, substantially free of surfactant, and its use
in the hydrofluoroalkane (HFA) metered dose inhalers for Advair,
Flovent and Ventolin. The Group exclusively licenses the patent from
3M and has the first right to enforce and defend it. The patent, which
expires on 1 December 2021, is listed in the Orange Book. On 14
November 2016, the Group entered into a settlement agreement
with Mylan resolving the IPR. The terms of the settlement agreement
are confidential. The patent that was the subject of the IPR and
settlement is one of a number of patents covering Advair, Flovent
and Ventolin and their use in HFA metered dose inhalers.
On 15 February 2017, the Group received a Paragraph IV
certification from Teva for Flovent HFA. This is the first Paragraph IV
certification the Group has received from a generic pharmaceutical
company seeking to make an AB rated version of Flovent HFA. Three
patents are at issue. Teva alleges that their generic version of Flovent
will not infringe two patents directed to actuation indicators listed in
the Orange Book. Teva also alleges that the ‘413 patent, which was
the subject of the Mylan IPR proceeding that was settled in
November 2016, is not valid. The Group is evaluating Teva’s
Paragraph IV certification. The deadline for filing a patent
infringement suit that would trigger a ‘30-month stay’ (a statutory
preclusion of ANDA approval for the generic product for 30 months
from the date of the Group’s receipt of notice of the Paragraph IV
certification) under the Hatch-Waxman Act is 2 April 2017.
Bexsero/Men B vaccines
Following its acquisition of the Novartis Vaccine business, the
Group has taken over litigation originally filed by Novartis against
Pfizer, Inc. (Pfizer) in the UK, Italy and the United States related to
meningococcal B (Men B) vaccines. On 18 February 2015, Novartis
filed suit against Pfizer in the UK High Court (Patents Court) for a
declaration that a European patent owned by Pfizer was not infringed
by Bexsero and was invalid. Pfizer filed a Statement of Defence on
27 May 2015 and counterclaimed for infringement. Trial was held on
8-18 March 2016, and on 5 May 2016, the judge ruled that Pfizer’s
patent was valid and infringed by the Bexsero product. The Group
has appealed the decision, and the appeal hearing is expected to be
heard in the week of 12 December 2017.
On 18 February 2015, Novartis filed suit against Pfizer in the Court of
Rome for a declaration that a European patent owned by Pfizer was
not infringed by Bexsero and was invalid. The Group has assumed
responsibility for this matter. The Group is also prosecuting a lawsuit
against Pfizer, originally filed by Novartis, for a declaration that a
European patent issued to Pfizer related to meningitis B vaccines is
not infringed by Bexsero. Pfizer has counterclaimed seeking a
declaration that Bexsero infringes their patents and an order for
damages. The Group is actively pursuing these actions.
227 GSK Annual Report 2016
46. Legal proceedings continued
On 18 February 2015, Novartis filed suit against Pfizer in the US
District Court for the District of New Jersey for patent infringement.
The complaint asserts six patents against Pfizer, alleging that Pfizer’s
sale of Trumenba infringes those patents. On 27 April 2015, the
Group filed a First Amended Complaint against Pfizer reasserting
the six patents originally asserted by Novartis, but also asserting
one additional recently-granted patent. The Group filed a Second
Amended Complaint on 15 March 2016 asserting an additional five
patents covering Trumenba against Pfizer. No dates have been set
for summary judgement motions or trial.
On 25 July 2016, Pfizer filed a suit with the UK High Court against
the Group, Novartis, and the Craig Venter Institute, seeking to
invalidate six UK patents owned by the Group that have relevance to
Pfizer’s Trumenba. These six patents, formerly owned by Novartis,
have also been opposed in the European Patent Office (EPO) by
Pfizer. Two of the six patents were revoked by the EPO Opposition
Division. However, in September 2016, one of the patents was
upheld by the EPO Board of Appeal and another one was upheld by
the EPO Opposition Division. The Group believes that Trumenba
infringes both of these patents. Two trials have been set to cover the
patents in issue. The first trial date is January 2018 and the second
trial date is February 2018.
On 12 October 2016, the Group filed suit seeking injunctive relief
against Pfizer in Ireland claiming infringement of four Group patents
(including the Group patent upheld by the EPO Board of Appeals
in September, 2016 and the other patent maintained in the first
instance) by virtue of its manufacture of Trumenba and its proposed
commercialisation in Ireland. The Group’s application to enter the
Commercial Division of the Irish High Court in order to expedite
the case was successful. The hearing is likely to be scheduled for
Q3 2017.
On 12 October 2016, the same day that the Group filed suit against
Pfizer in the UK and Ireland, the Group filed suit in Austria seeking
injunctive relief against Boehringer Ingelheim (BI), Pfizer’s contract
manufacturer of the antigens for Trumenba, claiming infringement of
a Group patent upheld by the EPO Board of Appeal in September
2016. BI has filed a response to the complaint. The trial is likely to
be scheduled for some time in 2017.
On 25 November 2016, Pfizer filed suit in the Canadian Federal
Court against the Group for infringement of a Pfizer Canadian patent
covering Trumenba. Pfizer seeks damages but is not seeking an
injunction. The trial is not likely to occur before 2019.
Coreg CR
Mylan sent a Paragraph IV certification, dated 26 August 2015, to the
Group and Flamel Ireland Ltd. (Flamel) stating that it had submitted
an Abbreviated New Drug Application (ANDA) to the US Food and
Drug Administration (FDA) seeking approval of a generic version of
Coreg CR. The notice asserted that the patents listed in the Orange
Book for Coreg CR were either invalid or not infringed by Mylan’s
product. On 9 October 2015, Flamel filed a civil complaint in the US
District Court for the Northern District of West Virginia alleging that
Mylan’s product infringes Flamel’s Orange Book-listed extended
release formulation patent which expires on 11 March 2026. The
Group is the exclusive licensee of this patent for Coreg CR. Mylan
answered on 18 December 2015, asserting that Flamel’s patent was
invalid or not infringed. Mylan also filed a third party complaint against
the Group requesting a declaration that the Group’s patent on
carvedilol phosphate hemihydrate was invalid or not infringed. On
2 December 2016, the parties settled the matter on terms that are
confidential.
Kivexa
The patent covering the combination of lamivudine and abacavir for
Kivexa and the corresponding Supplementary Protection Certificates
(SPCs) were challenged independently by Teva and Mylan in several
major European markets. These challenges have been withdrawn
pursuant to a confidential settlement agreement with Teva dated
18 May 2015 and a confidential settlement agreement with Mylan
dated 10 May 2016.
In Q3 2016, challenges to the validity of the SPC for the combination
patent for Kivexa were brought in Germany by Betapharm (Dr.
Reddy’s), Hexal (Sandoz) and Hormosan (Lupin). ViiV Healthcare
commenced proceedings for injunctive relief against all three
companies. ViiV Healthcare’s application for injunctive relief against
Hexal was denied. On 10 October 2016, a confidential settlement
agreement was reached with Dr. Reddy’s covering a number of
European markets. Pursuant to this agreement, the German actions
involving Betapharm have been withdrawn. No trial dates have been
set for the Hexal or Hormosan actions.
Sandoz also has filed nullity actions in Austria, Germany, Spain
and Sweden in September and October 2016 alleging that the
Kivexa SPC was invalid because the underlying patent covering
the combination of lamivudine and abacavir was invalid. Sandoz
launched an abacavir/lamivudine product in Austria, Spain and
Sweden. ViiV Healthcare has commenced proceedings for injunctive
relief in Austria and Sweden, with decisions on injunctive relief
expected in the first half of 2017. ViiV Healthcare also has
counterclaimed for infringement within the nullity action in Spain.
No trial dates have been set in these jurisdictions.
Investor informationFinancial statementsGovernance and remunerationStrategic report 228 GSK Annual Report 2016
Notes to the financial statements continued
46. Legal proceedings continued
DOC Generici filed an action in September 2016 in the Court of
Rome seeking a declaration that the Italian SPC covering Kivexa
was invalid because it is based upon the invalid combination patent.
Company Eurogenerics has joined the action. No trial date has
been set.
In Portugal, ViiV Healthcare initiated arbitration proceedings against
Lupin, Vale Pharmaceuticals and Zentiva under the patent covering
the combination of lamivudine and abacavir. All three companies had
filed for marketing approval for a generic version of Kivexa. Sandoz
joined the proceedings as the future holder of the Lupin marketing
approval. No arbitration date has yet been scheduled in any of these
actions.
In December 2016, Accord Healthcare Ltd. (Accord) filed a
revocation action against the SPC in the UK. The action has been
resolved in a confidential settlement between Accord and the Group.
In February 2017, Kyowa Pharmaceuticals filed a nullity action
relating to Kivexa in Japan. ViiV Healthcare is evaluating its options
with regard to this action.
Lexiva
On 4 February 2016, Lupin filed a petition in the US Patent and
Trademark Office (USPTO) seeking to challenge the validity of the
patent claims covering Lexiva in an Inter Partes Review (IPR). This is
the second petition for IPR that Lupin has filed against this patent. In
the earlier petition, the USPTO instituted an IPR on broad claims in
the patent, but denied instituting a challenge to the specific claims to
Lexiva, which are now being challenged. The patent expires on 24
June 2018. On 2 August 2016, the USPTO granted the petition and
instituted a trial on the remaining claims in the Lexiva patent. An oral
hearing is scheduled for 5 April 2017. Under the relevant rules, the
USPTO must issue a decision on the IPR by 2 August 2017.
Additionally, on 9 February 2017, Lupin sent ViiV Healthcare a
Paragraph IV certification under the Hatch-Waxman Act alleging that
the patent covering Lexiva is not valid. The patent expires on 24
December 2017 and has pediatric exclusivity extending to 24 June
2018. ViiV Healthcare is evaluating the certification.
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 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’.
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. Economic loss actions have also been filed, seeking
restitution and penalties under consumer protection and other laws.
The federal cases filed against the Group are part of a multi-district
litigation proceeding pending in the US District Court for the Eastern
District of Pennsylvania (the ‘MDL Court’). Cases have also been
filed in a number of state courts. In addition, the County of Santa
Clara, California, has brought an action on behalf of California
residents which is pending in the MDL Court, alleging violations of
California’s False Advertising Act and seeking restitution, damages,
and civil penalties.
As of February 2017, the Group has reached agreements to settle
the substantial majority of federal and state cases pending in the US.
There are four purported class actions in the US seeking economic
damages on behalf of third party payers (TPPs) 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 has
consolidated these four actions for pre-trial proceedings, and has
appointed a Plaintiffs Steering Committee. The Group was
successful in obtaining an initial case management order that
requires the four named plaintiffs to produce documentation relating
to the merits of their claims. Two of the four named plaintiffs have
filed motions to dismiss voluntarily their claims, which the Group has
opposed in order to require these plaintiffs to comply with their
discovery obligations. The Group has filed a motion for summary
judgement on the basis of pre-emption in the TPP actions. Oral
argument on the motions was heard on 13 February 2017, and the
Court has taken the matter under advisement.
In the Santa Clara County action, the Group has pending a motion
for summary judgement on the basis of pre-emption and also is
seeking partial summary judgement on the County’s restitution claim.
However, no decision is expected until the MDL Court first disposes
of Santa Clara’s motion to dismiss based on lack of federal
jurisdiction. Oral argument was heard on 12 November 2015 on
Santa Clara’s motion to dismiss for lack of jurisdiction. The Court
has not yet issued its decision.
There are fifteen class actions in Canada, two of which are active.
In the two active cases, class certification hearings were held. On 7
December 2016, the court issued a decision certifying a nationwide
class of all users of Avandia. The Group has filed a notice of intent to
appeal.
229 GSK Annual Report 2016
46. Legal proceedings continued
Seroxat/Paxil 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 contain one or more of the following allegations: (i)
that use of Paxil during pregnancy caused congenital malformations
or persistent pulmonary hypertension; (ii) that Paxil treatment caused
patients to commit suicidal or violent acts; and (iii) that the Group
failed to warn that patients could experience certain symptoms on
discontinuing Paxil treatment.
– Pregnancy
The Group has reached agreements to settle the majority of the US
claims relating to the use of Paxil during pregnancy as of February
2017, 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.
There are nine cases pending in the Philadelphia, Pennsylvania Mass
Tort Program (MTP). Rader v. GSK went to trial on 17 March 2016.
On 4 April 2016, the judge presiding over the trial granted the
Group’s motion for non-suit, ending the trial in the Group’s favour
when he ruled that the plaintiff failed to introduce the necessary
evidence to proceed. On 17 June 2016, the court denied plaintiff’s
motion for post-trial relief, which sought a new trial. Plaintiff’s appeal
was docketed on 19 July 2016 and is proceeding.
Following their loss in Rader, plaintiffs’ counsel asked the MTP
Court to stay the remaining eight cases until an issue in Rader
was addressed by the Pennsylvania appellate courts. The Group
opposed that request. On 19 April 2016, the MTP Court granted
plaintiffs’ counsel’s request and entered an Order staying all the
cases until the resolution of the Rader appeal. The Group then
moved to lift the Order granting the stay, arguing that a host of
dispositive issues in these cases did not depend on the outcome
of the Rader appeal. The Court denied the Group’s motions on
13 July 2016.
There are eight cases pending in a single California state court
pursuant to a coordination order. Motions to quash for personal
jurisdiction and forum non conveniens were denied. On 6 December
2016, the Group filed writs seeking review by the California Court
of Appeals. The court has not yet issued a ruling.
Fourteen cases were filed in state court in St. Louis, Missouri.
The Group removed each of the cases to the Federal Court for
the Eastern District of Missouri and, concurrently, filed motions to
dismiss for lack of personal jurisdiction, or in the alternative, to
transfer to the federal court in the plaintiffs’ respective home states.
As of 15 February 2017, all fourteen cases have been dismissed.
On 10 October 2016, the parties agreed to a settlement of the
65-plaintiff case in state court in St. Louis, Missouri. In Meyers, the
denial of the Group’s motion to dismiss on personal jurisdiction
grounds was affirmed by the Illinois appellate court. In El-Massri,
the Connecticut federal court granted the Group’s motion for
summary judgement on 1 February 2017. The Kiker case that had
been set for trial on 21 January 2017 was settled.
In Canada, the Bartram action, which was certified as a national
class action in British Columbia, was settled in December 2016,
eliminating the need for a trial. The Singh action in Alberta, also a
proposed national class action, seeks to certify a class relating to
birth defects generally. A hearing on the motion to certify this class,
previously scheduled for early 2015, was adjourned at plaintiffs’
request so that additional evidence could be filed. A revised hearing
date has not been set, but is likely to be in mid-2017. There is also
one inactive proposed national class action in British Columbia
(Wakeman). A new class action, Jensen, alleging Paxil (and other
SSRI) use and autism was filed in Saskatchewan in January 2017.
– Acts of violence
As of February 2017, there were six pending claims or cases
concerning allegations that patients who took paroxetine or Paxil
committed or attempted to commit suicide or acts of violence: five
claims or cases are in the US and one case is in Canada. Trial on one
of the US cases, Dolin, begins on 14 March 2017 in federal court in
Chicago, Illinois.
– Discontinuation
In the UK, one hundred and three cases remain. These were the
subject of a hearing held on 14 December 2015. The judgement from
the hearing was published on 4 February 2016 and allowed the
remaining claims to continue under court management. Further case
management conferences were held on 29 July 2016 and 23
February 2017 and a new timetable ordered for the proceedings.
Zofran
Plaintiffs allege that their children suffered birth defects as a result
of the mothers’ ingestion of Zofran and/or generic ondansetron for
pregnancy-related nausea and vomiting. Plaintiffs assert that the
Group sold Zofran knowing it was unsafe for pregnant women, failed
to warn of the risks, and illegally marketed Zofran “off-label” for use
by pregnant women. As of February 2017, the Group is a defendant
in 312 personal injury lawsuits in the US. Three hundred and two of
the cases are part of a multi-district litigation proceeding (MDL) in
the District of Massachusetts. The MDL cases are in discovery.
On 27 January 2016, the MDL court issued an order denying the
Group’s motion to dismiss all claims of the grounds that they are
pre-empted under federal law. The Group may renew the motion at
a later date. The MDL continues with monthly status conferences
where issues such as the sufficiency of the pleadings and the scope
of discovery will be addressed. The Group continues to seek the
dismissal of individual cases as appropriate.
There has been no significant activity in 2016 in the ten state court
cases in the US, eight of which are located in California. The Group
is also a defendant in four proposed class actions in Canada. There
has been no significant activity in 2016 in the Canadian class
actions.
Investor informationFinancial statementsGovernance and remunerationStrategic report 230 GSK Annual Report 2016
Notes to the financial statements continued
46. Legal proceedings continued
Sales and marketing and regulation
The Group’s marketing and promotion of its Pharmaceutical and
Vaccine products are the subject of certain governmental
investigations and private lawsuits brought by litigants under various
theories of law. 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’.
SEC/DOJ and SFO Anti-corruption enquiries
On 30 September 2016, the Group reached a global resolution with
the US Securities and Exchange Commission (SEC) regarding the
SEC’s investigation under the US Foreign Corrupt Practices Act
(FCPA) into the Group’s commercial practices in countries outside
of the US. As part of the resolution, the Group agreed to pay a civil
penalty of $20 million to the US Government. The US Department of
Justice (DOJ) also confirmed that it had concluded its investigation
into the Group’s commercial practices and would take no action
against the Group. The SEC and DOJ investigations were initiated as
part of an industry-wide inquiry in 2010 into whether pharmaceutical
companies had violated the US FCPA. The Group agreed to the
resolution without admitting or denying the SEC’s allegations.
On 27 May 2014, the UK Serious Fraud Office (SFO) began a formal
criminal investigation into the Group’s commercial operations in a
number of countries, including China. The SFO has requested
information from the Group on its commercial operations in these
countries. 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 Vaccines subpoena
On 25 February 2016, the Group received a subpoena from the US
Attorney’s Office for the Southern District of New York requesting
documents relating to the Group’s Vaccines business. The Group is
responding to the subpoena. The Group is unable to make a reliable
estimate of the expected financial effect of this matter, and no
provision has been made for it.
US subpoena relating to Imitrex and Amerge
On 7 March 2016, the Group received a subpoena from the US
Attorney’s Office for the Southern District of New York requesting
documents relating to the Group’s US contracts for Imitrex and
Amerge. The Group is responding to the subpoena. The Group is
unable to make a reliable estimate of the expected financial effect
of this matter, and no provision has been made for it.
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. The Group has filed a number of dispositive
motions which are pending before the MDL Court. The County of
Santa Clara recently has filed a motion to dismiss the action from
federal court for lack of federal jurisdiction. This motion has been
briefed and argued by the parties.
Average wholesale price
The Attorney General in Illinois filed suit against the Group and a
number of 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 state’s Medicaid programmes. The case alleges that
the Group reported or caused to be reported false AWP and WAC
prices, which, in turn, allegedly caused the state Medicaid agency to
reimburse providers more money for covered medicines than the
agency intended. The state has sought recovery on behalf of itself as
payer and on behalf of in-state patients as consumers. The case is
ongoing, and no trial date has yet been set.
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 (current good manufacturing
practices) 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. The Court denied the Group’s motion to
dismiss, and discovery is scheduled to be completed in 2017, with
trial expected to be scheduled sometime in 2018.
Anti-trust/competition
Certain governmental actions and private lawsuits have been brought
against the Group alleging violation of competition or anti-trust laws.
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’.
UK Competition and Markets Authority investigation
On 12 February 2016, the UK Competition and Markets Authority
(CMA) issued a decision fining the Group and two other
pharmaceutical companies for infringement of the Competition Act.
The CMA imposed a fine of £37.6 million on the Group, as well as
fines totalling £7.4 million against the other companies. This relates
to agreements to settle patent disputes between the Group and
potential suppliers of generic paroxetine formulations, entered
between 2001 and 2003. The Group terminated the agreements at
issue in 2004. The Group believes it has strong grounds to appeal
the CMA’s finding to the Competition Appeal Tribunal (CAT) such
that the fine is overturned or substantially reduced. The appeal to the
CAT is due to commence on 28 March 2017. No provision has been
made for this matter.
231 GSK Annual Report 2016
46. Legal proceedings continued
Lamictal
Purported classes of direct and indirect purchasers filed suit in the
US 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 overcharges to the
purchasers, by entering into an allegedly anti-competitive reverse
payment settlement to resolve patent infringement litigation. A
separate count accuses the Group of monopolising the market.
On 26 June 2015, the Court of Appeals reversed the trial court’s
decision to dismiss the case and remanded the action back to the
trial court. On 26 October 2015, the trial court denied the Group’s
motion for a stay and set a schedule for early dispositive motions
and discovery. The Group filed a petition for certiorari with the US
Supreme Court on 19 February 2016. On 7 November 2016, the
US Supreme Court denied the Group’s petition for certiorari. In the
trial court, on 22 March 2016, the Group’s motion for judgement on
the pleadings was granted in large part, dismissing, on statute of
limitations grounds, most of the claims alleged by the purported
indirect purchaser class. On 18 May 2016, the trial court denied the
indirect purchaser class plaintiffs’ motion for reconsideration. As a
result, the indirect purchaser class representatives have agreed to a
settlement to exit the case and resolve their remaining claims. Terms
of the settlement are confidential. The case will continue to move
forward with document production and witness depositions with
regard to the claims of the direct purchasers.
Wellbutrin XL
Plaintiffs claimed anti-trust injury related to allegedly sham patent
litigation filed by Biovail against generic companies pursuing ANDAs
for generic Wellbutrin XL. The Group initially was named as a party
plaintiff in two patent infringement actions but later withdrew from
those matters. The Group was not a party in the remaining two
patent infringement actions relating to Wellbutrin XL. Plaintiffs
alleged that a conspiracy to delay generic approval existed between
Biovail and the Group, but the Court granted summary judgement in
favour of the Group on those claims. The sole remaining claims in the
matter relate to plaintiffs’ allegations that the Group entered into an
anti-competitive reverse payment settlement to resolve the patent
infringement litigation. The District Court granted summary
judgement in favour of the Group on all claims, and the matter is
currently pending on appeal before the US Court of Appeals for the
Third Circuit Court.
Commercial and corporate
The Group is a defendant in certain cases which allege violation of
US federal securities and ERISA laws. 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’.
Securities/ERISA class actions – Stiefel
There are currently three outstanding private lawsuits brought by
former Stiefel Laboratories, Inc. (Stiefel) employees alleging 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.
The Fried case is currently on appeal to the US Court of Appeals for
the Eleventh Circuit, with oral argument having taken place in
February 2016. Stiefel won a complete defence verdict in this matter
at a jury trial in federal court in Florida in October 2013 and the
plaintiff appealed. Trial of a second Florida case has been stayed
pending resolution of the Fried matter. Discovery also continues in a
case pending in New York federal court.
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 US 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. The case had been stayed but was
returned to active status in early summer 2015. Since then, the
parties engaged in discovery and re-briefed their summary
judgement motions at the court’s request. However, although briefing
on the motions was completed in July 2016, the court has not yet
ruled on the motions.
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 US. 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 21 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 cleanup 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.
Investor informationFinancial statementsGovernance and remunerationStrategic report 232 GSK Annual Report 2016
Financial statements of GlaxoSmithKline plc
prepared under UK GAAP (including FRS 101 ‘Reduced Disclosure Framework’)
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.
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
Having assessed the principal risks and other matters considered in
connection with the viability statement, the Directors considered it
appropriate to adopt the going concern basis of accounting in
preparing the financial statements.
The UK Corporate Governance Code
The Board considers that GlaxoSmithKline plc applies the principles
and complies with the provisions of the UK Corporate Governance
Code maintained by the Financial Reporting Council, as described in
the Corporate Governance section on pages 79 to 110. 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 position and
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.
Philip Hampton
Chairman
13 March 2017
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 parent
company and its profit or loss 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; and
– prepare the financial statements on a going concern basis unless
it is inappropriate to presume that the parent company 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
(on pages 111 to 136) 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 2016, comprising the balance sheet for the year ended
31 December 2016 and supporting notes, are set out on pages
235 to 238 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 pages 233 to 234.
The financial statements for the year ended 31 December 2016 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,
which represent the management 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.
233 GSK Annual Report 2016
Independent Auditors’ report
to the members of GlaxoSmithKline plc
Report on the parent company financial
statements
Our Opinion
In our opinion, GlaxoSmithKline plc’s parent company financial
statements (the “financial statements”):
– give a true and fair view of the state of the parent company’s
affairs at
– 31 December 2016;
– 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
The financial statements, included within the Annual Report,
comprise:
– the Company balance sheet at 31 December 2016;
– the Company statement of changes in equity for the year then
ended; and
– the notes to the financial statements, which include a summary of
significant accounting policies and other explanatory information.
Certain required disclosures have been presented elsewhere in the
Annual Report, rather than in the notes to the financial statements.
These are cross-referenced from the financial statements and are
identified as audited. 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), including FRS 101
“Reduced Disclosure Framework”.
Other required reporting
Consistency of other information
Companies Act 2006 opinion
In our opinion, based on the work undertaken in the course of the
audit;
– 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; and
– the Strategic Report and the Directors’ Report have been
prepared in accordance with applicable legal requirements.
In addition, in light of the knowledge and understanding of the group
and its environment obtained in the course of the audit, we are
required to report if we have identified any material misstatements in
the Strategic Report and the Directors’ Report. We have nothing to
report in this respect.
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
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.
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.
Investor informationFinancial statementsGovernance and remunerationStrategic report 234 GSK Annual Report 2016
Independent Auditors’ report
to the members of GlaxoSmithKline plc continued
Report on the parent company financial statements continued
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 232, 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:
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 mis-statements
or inconsistencies, we consider the implications for our report. With
respect to the Strategic Report and Directors’ Report, we consider
whether those reports include the disclosures required by applicable
legal requirements.
Other matters
We have reported separately on the Group financial statements of
GlaxoSmithKline plc for the year ended 31 December 2016 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
– whether the accounting policies are appropriate to the parent
13 March 2017
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.
235 GSK Annual Report 2016
Company balance sheet – UK GAAP
(including FRS 101 ‘Reduced Disclosure Framework’) as at 31 December 2016
Fixed assets – investments
Current assets:
Trade and other receivables
Cash at bank
Total current assets
Bank overdrafts
Trade and other payables
Total current liabilities
Net current assets
Total assets less current liabilities
Provisions
Other non-current liabilities
Net assets
Capital and reserves
Called up share capital
Share premium account
Other reserves
Retained earnings:
At 1 January
(Loss)/profit for the year
Other changes in retained earnings
Equity shareholders’ funds
2016
£m
Notes
F
G
H
I
J
K
K
L
20,033
(111)
(4,384)
2016
£m
20,236
2,128
12
2,140
(10)
(555)
(565)
1,575
21,811
(23)
(534)
21,254
1,342
2,954
1,420
15,538
21,254
2015
£m
23,251
656
(3,874)
2015
£m
20,096
6,635
2
6,637
–
(671)
(671)
5,966
26,062
(40)
(398)
25,624
1,340
2,831
1,420
20,033
25,624
The financial statements on pages 235 to 238 were approved by the Board on 13 March 2017 and signed on its behalf by
Philip Hampton
Chairman
GlaxoSmithKline plc
Registered number: 388879
Company statement of changes in equity
for the year ended 31 December 2016
At 1 January 2015
Profit attributable to shareholders
Dividends to shareholders
Shares issued under employee share schemes
At 31 December 2015
Loss attributable to shareholders
Dividends to shareholders
Shares issued under employee share schemes
Treasury shares transferred to the ESOP Trust
At 31 December 2016
Share
capital
£m
1,339
Share premium
account
£m
2,759
–
–
1
–
–
72
Other
reserves
£m
1,420
–
–
–
1,340
2,831
1,420
–
–
2
–
–
–
87
36
–
–
–
–
Retained
earnings
£m
23,251
656
(3,874)
–
20,033
(111)
(4,850)
–
466
Total
£m
28,769
656
(3,874)
73
25,624
(111)
(4,850)
89
502
1,342
2,954
1,420
15,538
21,254
Investor informationFinancial statementsGovernance and remunerationStrategic report
236 GSK Annual Report 2016
Notes to the company balance sheet – UK GAAP
(including FRS 101 ‘Reduced Disclosure Framework’)
A) Presentation of the financial statements
B) Accounting policies
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 using the historical
cost convention (as modified to include the revaluation of certain
financial instruments) and on a going concern basis, are prepared in
accordance with Financial Reporting Standard 101 ‘Reduced
Disclosure Framework’ and with UK accounting presentation and the
Companies Act 2006 as at 31 December 2016, with comparative
figures as at 31 December 2015.
As permitted by section 408 of the Companies Act 2006, the
income statement 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.
The following exemptions from the requirements of IFRS have
been applied in the preparation of these financial statements,
in accordance with FRS 101:
– Paragraphs 45(b) and 46 to 52 of IFRS 2, ‘Share-based payment’
– IFRS 7, ‘Financial Instruments - Disclosures’
– Paragraphs 91-99 of IFRS 13, ‘Fair value measurement’
– Paragraph 38 of IAS 1, ‘Presentation of financial statements’
comparative information requirements in respect of
paragraph 79(a) (iv) of IAS 1
– Paragraphs 10(d), 10(f), 16, 38(A), 38 (B to D), 40 (A to D),
111 and 134 to 136 of IAS 1, ‘Presentation of financial statements’
– IAS 7, ‘Statement of cash flows’
– Paragraph 30 and 31 of IAS 8, ‘Accounting policies, changes
in accounting estimates and errors’
– Paragraph 17 of IAS 24, ‘Related party disclosures’ and the
further requirement in IAS 24 to disclose related party transactions
entered into between two or more members of
a 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. These policies have been consistently applied,
unless otherwise stated.
Foreign currency transactions
Foreign currency transactions are recorded at the exchange rate
ruling on the date of transaction. Foreign currency assets and
liabilities are translated at rates of exchange ruling at the balance
sheet date.
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 and also adjusted for movements in
contingent consideration.
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.
Deferred tax is provided in full, using the liability method, on
temporary differences arising between the tax bases of assets
and liabilities and their carrying amounts in the financial statements.
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 temporary differences are
expected to be realised or settled. 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.
At 31 December 2016 provisions for legal and other disputes
amounted to £23 million (2015 – £40 million).
237 GSK Annual Report 2016
C) Key accounting judgements and estimates
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.
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.
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. At 31 December 2016 provisions for legal and other
disputes amounted to £23 million (2015 – £40 million).
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 company’s financial statements by a material amount.
D) Operating profit
A fee of £12,053 (2015 – £12,053) relating to the audit of the
company has been charged in operating profit.
E) Dividends
The directors declared four interim dividends resulting in a dividend
for the year of 80 pence, in line with the dividend for 2015. For further
details, see Note 16 to the Group financial statements, ‘Dividends’.
F) 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
Contribution relating to contingent consideration
G) Trade and other receivables
Amounts due within one year:
UK Corporation tax recoverable
Other receivables
Amounts owed by Group undertakings
Amounts due after more than one year:
Amounts owed by Group undertakings
2016
£m
613
18
17,888
33
18,552
1,139
545
20,236
2015
£m
613
18
17,888
33
18,552
1,139
405
20,096
2016
£m
2015
£m
201
4
1,478
1,683
445
2,128
201
41
5,977
6,219
416
6,635
Investor informationFinancial statementsGovernance and remunerationStrategic report 238 GSK Annual Report 2016
Notes to the company balance sheet – UK GAAP
(including FRS 101 ‘Reduced Disclosure Framework’) continued
H) Trade and other payables
Amounts due within one year:
Other creditors
Contingent consideration payable
Amounts owed to Group undertakings
2016
£m
514
11
30
555
2015
£m
478
7
186
671
The company has guaranteed debt issued by its subsidiary companies from one of which it receives an annual fee. In aggregate, the company
has outstanding guarantees over £18.4 billion of debt instruments. The amounts due from the subsidiary company in relation to these
guarantee fees will be recovered over the life of the bonds and are disclosed within ‘Trade and other receivables’ (see Note G).
I) Provisions
At 1 January
Exchange adjustments
Charge for the year
Utilised
At 31 December
The provisions relate to a number of legal and other disputes in which the company is currently involved.
J) Other non-current liabilities
Contingent consideration payable
2016
£m
40
13
78
(108)
23
2016
£m
534
534
2015
£m
25
3
139
(127)
40
2015
£m
398
398
The contingent consideration relates to the amount payable for the acquisition in 2015 of the Novartis Vaccines portfolio. The current year
liability is included within ‘Trade and other payables’.
K) Called up share capital and share premium account
Share capital authorised
At 31 December 2015
At 31 December 2016
Share capital issued and fully paid
At 1 January 2015
Issued under employee share schemes
At 31 December 2015
Issued under employee share schemes
Treasury shares transferred to the ESOP Trust
At 31 December 2016
Number of shares issuable under employee share schemes
Number of unissued shares not under option
Ordinary Shares of 25p each
Number
£m
10,000,000,000
10,000,000,000
5,355,297,232
6,010,415
5,361,307,647
7,008,415
–
2,500
2,500
1,339
1
1,340
2
–
Share
premium
account
£m
2,759
72
2,831
87
36
5,368,316,062
1,342
2,954
31 December
2016
000
71,382
4,560,302
31 December
2015
000
99,833
4,538,859
At 31 December 2016, of the issued share capital, 42,710,419 shares were held in the ESOP Trusts, 458,205,950 shares were held as
Treasury shares and 4,867,399,693 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 43, ‘Employee share schemes’.
L) Reserves
The loss of GlaxoSmithKline plc for the year was £111 million (2015 – £656 million profit), which after dividends of £4,850 million
(2015 – £3,874 million), gave a retained loss of £4,961 million (2015 – £3,218 million loss). No Treasury shares were purchased in the
year (2015 – £nil). After the effect of the £466 million Treasury shares transferred to a subsidiary company (2015 – £nil), retained earnings
at 31 December 2016 stood at £15,538 million (2015 – £20,033 million), of which £4,096 million was unrealised (2015 – £4,096 million).
M) Group companies
See pages 272 to 282 for a complete list of subsidiaries, associates and joint ventures, which forms part of these financial statements.
239 GSK Annual Report 2016
Investor
information
In this section
Quarterly trend
Pharmaceuticals and Vaccines turnover
Five year record
Product development pipeline
Products, competition and intellectual property
Principal risks and uncertainties
Share capital and share price
Dividends
Financial calendar
Annual General Meeting 2017
Tax information for shareholders
Shareholder services and contacts
US law and regulation
Group companies
Glossary of terms
240
242
244
247
250
253
263
265
265
266
266
268
270
272
283
Investor informationFinancial statementsGovernance and remunerationStrategic report 240 GSK Annual Report 2016
Financial record
Quarterly trend
An unaudited analysis of the Group results is provided by quarter in Sterling for the financial year 2016.
Income statement – total
Turnover
Pharmaceuticals
Vaccines
Consumer Healthcare
Corporate and other unallocated turnover
Total turnover
Cost of sales
Selling, general and administration
Research and development
Royalty income
Other operating income
Operating profit/(loss)
Net finance costs
Share of after tax profits/(losses) of associates
and joint ventures
Profit/(loss) before taxation
Taxation
Tax rate %
Profit/(loss) after taxation for the period
Profit/(loss) attributable to non-controlling interests
Profit/(loss) attributable to shareholders
Basic earnings/(loss) per share (pence)
Diluted earnings/(loss) 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/(losses) 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 57.
12 months 2016
£m
CER%
Reported
£%
Pro-forma
CER%
Q4 2016
£m
CER%
Reported
£%
Q3 2016
Q2 2016
Q1 2016
£m
CER%
£m
CER%
£m
CER%
Reported
£%
Reported
£%
Pro-forma
CER%
4
12
5
5
5
5
3
–
3
17
17
16,104
4,592
7,193
27,889
–
27,889
(9,290)
(9,366)
(3,628)
398
(3,405)
2,598
(664)
5
1,939
(877)
45.2%
1,062
150
912
18.8p
18.6p
27,889
(8,351)
(8,697)
(3,468)
398
7,771
(652)
5
7,124
(1,509)
21.2%
5,615
637
4,978
102.4p
3
14
9
6
6
(1)
(6)
(6)
16
14
26
19
17
17
5
1
2
21
(86)
(75)
(92)
(82)
(98)
(87)
(99)
(89)
6
5
2
3
16
14
16
14
12
17
11
10
12
21
36
40
37
35
4,575
1,137
1,874
7,586
–
7,586
(2,508)
(2,711)
(1,003)
117
(886)
595
(173)
1
423
(106)
25.1%
317
60
257
5.3p
5.2p
7,586
(2,195)
(2,429)
(1,017)
117
2,062
(170)
1
1,893
(410)
21.7%
1,483
212
1,271
26.1p
4
–
2
3
3
(9)
(7)
(16)
22
22
18
20
21
21
(1)
9
(5)
29
>100
>100
>100
>100
97
>100
>100
>100
3
(2)
(1)
6
22
16
18
12
11
21
6
15
20
29
52
58
51
45
4,061
1,613
1,868
7,542
–
7,542
(2,525)
(2,292)
(922)
107
(479)
1,431
(163)
6
1,274
(389)
30.5%
885
77
808
16.6p
16.5p
7,542
(2,289)
(2,165)
(876)
107
2,319
(160)
6
2,165
(451)
20.8%
1,714
157
1,557
32.0p
6
20
5
8
8
3
3
1
1
5
6
(6)
(1)
8
6
4
8
1
13
14
13
12
22
37
18
24
23
15
16
11
8
40
47
37
50
23
18
18
20
8
35
38
37
39
Reported
£%
10
18
12
11
11
6
(14)
9
34
11
9
(2)
9
34
36
42
40
42
2
11
7
5
4
2
(16)
4
31
4
4
(2)
4
31
15
19
17
16
3,882
960
1,690
6,532
–
6,532
(2,124)
(2,174)
(888)
83
(1,580)
(151)
(165)
(2)
(318)
(174)
(54.7)%
(492)
(57)
(435)
(9.0)p
(9.0)p
6,532
(1,931)
(2,053)
(800)
83
1,831
(163)
(2)
1,666
(354)
21.3%
1,312
121
1,191
24.5p
>(100)
>(100)
(93)
(92)
>(100)
>(100)
(95)
(94)
>(100)
>(100)
(97)
(96)
>(100)
>(100)
(97)
(97)
5
14
4
6
6
6
3
1
(7)
20
28
3,586
882
1,761
6,229
–
6,229
(2,133)
(2,189)
(815)
91
(460)
723
(163)
–
560
(208)
37.1%
352
70
282
5.8p
5.8p
6,229
(1,936)
(2,050)
(775)
91
1,559
(159)
–
1,400
(294)
21.0%
1,106
147
959
19.8p
(1)
23
26
9
8
1
(2)
(9)
16
8
12
8
(5)
16
13
15
13
8
2
26
27
11
11
1
(2)
(6)
18
11
11
10
(2)
18
19
21
20
14
An unaudited analysis of the Group results is provided by quarter in Sterling for the financial year 2016.
12 months 2016
£m
CER%
Reported
£%
Pro-forma
CER%
Q4 2016
£m
CER%
Reported
£%
Q3 2016
Q2 2016
Q1 2016
£m
CER%
Reported
£%
£m
CER%
Reported
£%
£m
CER%
Reported
£%
Pro-forma
CER%
241 GSK Annual Report 2016
Quarterly trend continued
4,061
1,613
1,868
7,542
–
7,542
(2,525)
(2,292)
(922)
107
(479)
1,431
(163)
6
1,274
(389)
30.5%
885
77
808
16.6p
16.5p
7,542
(2,289)
(2,165)
(876)
107
2,319
(160)
6
2,165
(451)
20.8%
1,714
157
1,557
32.0p
6
20
5
8
8
3
3
1
1
5
6
(6)
(1)
8
6
4
8
1
13
14
13
12
22
37
18
24
23
15
16
11
8
40
47
37
50
23
18
18
20
8
35
38
37
39
3,882
960
1,690
6,532
–
6,532
(2,124)
(2,174)
(888)
83
(1,580)
(151)
(165)
(2)
(318)
(174)
(54.7)%
(492)
(57)
(435)
(9.0)p
(9.0)p
6,532
(1,931)
(2,053)
(800)
83
1,831
(163)
(2)
1,666
(354)
21.3%
1,312
121
1,191
24.5p
2
11
7
5
4
2
(16)
4
31
10
18
12
11
11
6
(14)
9
34
>(100)
>(100)
>(100)
>(100)
>(100)
>(100)
>(100)
>(100)
4
4
(2)
4
31
15
19
17
16
11
9
(2)
9
34
36
42
40
42
5
14
4
6
6
6
3
1
(7)
20
28
3,586
882
1,761
6,229
–
6,229
(2,133)
(2,189)
(815)
91
(460)
723
(163)
–
560
(208)
37.1%
352
70
282
5.8p
5.8p
6,229
(1,936)
(2,050)
(775)
91
1,559
(159)
–
1,400
(294)
21.0%
1,106
147
959
19.8p
(1)
23
26
9
8
1
(2)
(9)
16
2
26
27
11
11
1
(2)
(6)
18
(93)
(92)
(95)
(94)
(97)
(96)
(97)
(97)
8
12
8
(5)
16
13
15
13
8
11
11
10
(2)
18
19
21
20
14
Income statement – total
Turnover
Pharmaceuticals
Vaccines
Consumer Healthcare
Corporate and other unallocated turnover
Total turnover
Cost of sales
Selling, general and administration
Research and development
Royalty income
Other operating income
Operating profit/(loss)
Net finance costs
and joint ventures
Profit/(loss) before taxation
Taxation
Tax rate %
Share of after tax profits/(losses) of associates
Profit/(loss) after taxation for the period
Profit/(loss) attributable to non-controlling interests
Profit/(loss) attributable to shareholders
Basic earnings/(loss) per share (pence)
Diluted earnings/(loss) 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
and joint ventures
Profit before taxation
Taxation
Tax rate %
Share of after tax profits/(losses) of associates
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 57.
16,104
4,592
7,193
27,889
–
27,889
(9,290)
(9,366)
(3,628)
398
(3,405)
2,598
(664)
5
1,939
(877)
45.2%
1,062
150
912
18.8p
18.6p
27,889
(8,351)
(8,697)
(3,468)
398
7,771
(652)
5
7,124
(1,509)
21.2%
5,615
637
4,978
102.4p
(86)
(75)
>100
>100
(92)
(82)
>100
>100
(98)
(87)
97
>100
(99)
(89)
>100
>100
4
12
5
5
5
5
3
–
3
17
17
3
14
9
6
6
(1)
(6)
(6)
16
6
5
2
3
16
14
16
14
12
14
26
19
17
17
5
1
2
21
17
11
10
12
21
36
40
37
35
4,575
1,137
1,874
7,586
–
7,586
(2,508)
(2,711)
(1,003)
117
(886)
595
(173)
1
423
(106)
25.1%
317
60
257
5.3p
5.2p
7,586
(2,195)
(2,429)
(1,017)
117
2,062
(170)
1
1,893
(410)
21.7%
1,483
212
1,271
26.1p
4
–
2
3
3
(9)
(7)
(16)
22
3
(2)
(1)
6
22
16
18
12
11
22
18
20
21
21
(1)
9
(5)
29
21
6
15
20
29
52
58
51
45
Investor informationFinancial statementsGovernance and remunerationStrategic report
242 GSK Annual Report 2016
Financial record continued
Pharmaceuticals turnover by therapeutic area 2016
Total
US
Europe
International
2015
(restated)
£m CER%
2
5,741
79
3
229
623
14
1
257
3,681
620
234
858
657
41
160
263
230
33
2,445
412
528
184
371
255
695
2,528
123
63
160
531
93
93
93
165
165
134
908
2,322
34
698
65
124
588
730
26
57
14,157
2015
(restated)
Therapeutic area/major products
Respiratory
Anoro Ellipta
Arnuity Ellipta
Avamys/Veramyst
Flixotide/Flovent
Incruse Ellipta
Nucala
Relvar/Breo Ellipta
Seretide/Advair
Ventolin
Other
Cardiovascular, metabolic
and urology (CVMU)
Avodart
Eperzan/Tanzeum
Other
Immuno-inflammation
Benlysta
Other
Other pharmaceuticals
Dermatology
Augmentin
Other anti-bacterials
Rare diseases
Oncology
Other
Established products
Coreg
Hepsera
Imigran/Imitrex
Lamictal
Lovaza
Requip
Serevent
Seroxat/Paxil
Valtrex
Zeffix
Other
HIV
Combivir
Epzicom/Kivexa
Lexiva/Telzir
Selzentry
Tivicay
Triumeq
Trizivir
Other
Pharmaceuticals
Vaccines turnover 2016
Major products
Rotarix
Synflorix
Fluarix, FluLaval
Bexsero
Menveo
Boostrix
Infanrix, Pediarix
Hepatitis
Priorix, Priorix Tetra, Varilrix
Cervarix
Other
Vaccines
2016
£m
6,510
201
15
277
637
114
102
620
3,485
785
274
860
635
121
104
340
306
34
2,297
393
563
169
423
161
588
2,541
131
58
177
614
43
116
96
206
118
111
871
3,556
23
568
51
125
953
1,735
16
85
16,104
2016
£m
469
504
414
390
202
470
769
602
300
81
391
4,592
£m CER%
(10)
£m CER%
3
8
(8)
Growth
£%
13
>100 >100
>100 >100
21
2
>100 >100
>100 >100
>100 >100
(5)
27
17
(15)
15
(1)
3,306
2016
£m CER%
7
Growth
£%
20
139 >100 >100
14 >100 >100
25
–
(12)
–
(11)
378
86 >100 >100
71 >100 >100
344 >100 >100
(2)
(13)
38
23
34
(100)
1,829
421
(1)
2016
1,383
39
–
74
94
23
23
140
835
127
28
–
2
(8)
Growth
£%
(2)
>100 >100
–
12
2
>100 >100
>100 >100
75
(18)
9
5
60
(24)
1
(3)
2016
1,821
23
1
178
165
5
8
136
821
237
247
15
–
Growth
£%
16
>100 >100
(100) >100
29
9
>100 >100
–
97
2
19
19
–
67
(7)
12
(2)
(11)
(14)
(42)
15
19
(9)
(14)
(12)
–
(15)
–
(38)
(23)
(8)
(5)
(17)
3
5
(59)
8
(6)
10
(37)
(24)
(10)
37
(38)
(27)
(26)
(9)
45
–
(3)
>100 >100
(35)
29
33
3
(6)
(5)
7
(8)
14
(37)
(15)
1
7
(8)
11
16
(54)
25
3
25
(28)
(17)
(4)
53
(32)
(19)
(22)
1
62
>100 >100
(38)
49
14
(42)
33
3
288
70
(8)
(18)
(58)
(63)
118 >100 >100
(7)
(17)
100
29
14
311
33
18
277
(9)
34
3
(65)
(69)
98
(61)
(63)
16
–
–
–
(33)
(50)
4
49
4
(4)
(100) >(100)
(1)
(72)
(68)
30
(3)
702
9
(5)
7
131
–
–
–
8
12
85
5
18
313
43
(54)
(59)
13 >100 >100
14
49
–
(100) >(100)
15
(20)
(30)
16
–
–
2
(6)
35
9
64
46
2,132
(72)
(75)
3
(23)
(32)
195
(24)
(33)
29
10
(2)
65
65
46
635
1,159 >100 >100
(49)
8
24
5
41
6,837
(54)
(4)
10
323
317
3
3
21
21
–
627
146
177
49
137
–
118
513
–
–
62
106
–
30
35
40
25
7
208
1,017
6
251
8
41
228
434
10
39
3,884
24
12
13
25
100 >100
(40)
(60)
40
27
40
20
–
–
(4)
(13)
6
(2)
4
(5)
(4)
(14)
12
2
–
–
13
2
4
(4)
–
–
–
–
11
4
10
1
–
–
3
(7)
(3)
(11)
14
6
4
(4)
–
(14)
–
(8)
42
29
(28)
(35)
(17)
(25)
(36)
(42)
(14)
(22)
55
40
>100 >100
(28)
>100 >100
9
(35)
–
249
248
–
1
8
8
–
1,572
231
386
116
237
162
440
1,326
–
58
30
195
–
73
12
151
77
102
628
407
14
122
14
19
90
142
1
5
5,383
(23)
(8)
–
(98)
17
33
–
(4)
(9)
2
(13)
(1)
73
(19)
(12)
–
(16)
(11)
9
–
3
(14)
(8)
(45)
(25)
(11)
21
(16)
(21)
4
4
47
(12)
5
–
(98)
33
33
–
4
(1)
8
(9)
17
76
(11)
(4)
–
(6)
7
15
–
24
(14)
6
(36)
(18)
(6)
34
(9)
(13)
(2)
11
62
>100 >100
(61)
(59)
6
(42)
(66)
(3)
Total
US
Europe
International
£m CER%
1
417
19
381
268
38
115
160
358
733
540
260
88
336
3,656
Growth
£%
12
32
54
>100 >100
26
31
5
11
15
(8)
17
26
16
18
(5)
1
5
(14)
6
14
2016
Growth
£%
£m CER%
(7)
(17)
129
–
–
–
315
60
42
122 >100 >100
22
121
14
238
26
338
294
8
–
–
(67)
1
(21)
41
1,599
27
8
1
12
(4)
–
(67)
(27)
13
2016
£m CER%
8
75
59
68
32
26
236
27
139
335
197
152
33
129
1,423
Growth
£%
17
74
39
>100 >100
(25)
58
1
28
12
(11)
27
30
(31)
43
(8)
17
–
(22)
19
18
2016
£m CER%
10
265
15
436
67
31
32
54
93
96
111
148
47
221
1,570
Growth
£%
24
27
40
>100 >100
>100 >100
52
(27)
(2)
19
(2)
22
21
39
(31)
(8)
9
(4)
8
10
CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.
243 GSK Annual Report 2016
Pharmaceuticals turnover by therapeutic area 2015
Total
US
Europe
International
Therapeutic area/major products
Respiratory
Anoro Ellipta
Avamys/Veramyst
Flixotide/Flovent
Relvar/Breo Ellipta
Seretide/Advair
Ventolin
Other
Cardiovascular, metabolic and
urology (CVMU)
Avodart
Other
Immuno-inflammation
Benlysta
Other
Other pharmaceuticals
Dermatology
Augmentin
Other anti-bacterials
Rare diseases
Oncology
Other
Established products
Coreg
Hepsera
Imigran/Imitrex
Lamictal
Lovaza
Requip
Serevent
Seroxat/Paxil
Valtrex
Zeffix
Other
HIV
Combivir
Epzicom/Kivexa
Lexiva/Telzir
Selzentry
Tivicay
Triumeq
Trizivir
Other
Pharmaceuticals
2015
(restated)
£m
5,741
79
229
623
257
3,681
620
252
2014
(restated)
£m CER%
(7)
Growth
£%
(7)
>100 >100
(4)
(11)
>100 >100
(13)
(7)
1
(13)
(7)
6
3
(12)
6,168
17
238
702
67
4,229
665
250
858
657
201
263
230
33
2,445
412
528
184
371
255
695
2,528
123
63
160
531
93
93
93
165
165
134
908
2,322
34
698
65
124
588
730
26
57
14,157
965
805
160
214
173
41
3,582
470
573
215
417
1,202
705
3,011
124
85
172
531
240
109
108
210
154
166
1,112
1,498
59
768
87
136
282
57
36
73
15,438
(9)
(15)
21
16
25
(24)
(29)
(9)
(2)
(11)
(6)
(79)
1
(15)
(8)
(27)
(5)
(1)
(64)
(10)
(14)
(16)
14
(22)
(16)
54
(42)
(7)
(25)
(8)
(11)
(18)
26
23
33
(20)
(32)
(12)
(8)
(14)
(11)
(79)
(1)
(16)
(1)
(26)
(7)
–
(61)
(15)
(14)
(21)
8
(19)
(18)
55
(42)
(9)
(25)
(9)
>100 >100
>100 >100
(28)
(22)
(8)
(28)
(19)
(7)
Vaccines turnover 2015
Major products
Rotarix
Synflorix
Fluarix, FluLaval
Bexsero
Menveo
Boostrix
Infanrix, Pediarix
Hepatitis
Rabipur/RabAvert
Cervarix
Other
Vaccines
2015
(restated)
£m
417
381
268
115
160
358
733
540
61
88
535
3,656
2014
£m CER%
14
376
5
398
21
215
–
–
–
–
12
317
(9)
828
(4)
558
–
–
(20)
118
65
349
19
3,159
Total
Growth
£%
11
(4)
25
–
–
13
(11)
(3)
–
(25)
52
16
2,750
2015
Growth
£m CER%
£%
(10)
(3)
56 >100 >100
(19)
(26)
25
379
(13)
(19)
108 >100 >100
(6)
(13)
(15)
(8)
13 >100 >100
1,865
304
2015
(restated)
£m CER%
(9)
Growth
£%
(15)
>100 >100
(4)
(10)
>100 >100
(24)
(6)
7
(18)
1
11
4
(1)
1,415
16
66
92
80
1,014
117
30
£m CER%
–
2015
1,576
7
138
152
69
802
199
209
Growth
£%
(5)
>100 >100
–
(6)
>100 >100
(12)
(6)
(5)
(8)
–
–
9
1
(14)
(20)
314
(36)
(41)
166
38
28
148
23
14
242
34
24
209
(20)
(24)
33
(59)
(62)
280
(16)
(20)
41
(100)
(100)
–
–
–
6
(30)
(33)
47
(82)
(83)
92
92
76
94
(25)
(30)
647
(1)
(8)
123
–
–
–
(8)
(11)
76
5
(3)
266
(61)
(64)
93
(29)
(29)
5
–
(7)
43
–
–
(13)
(23)
(27)
20
(33)
(33)
2
(60)
(63)
32
91
77
1,301
(11)
(17)
10
(7)
(14)
258
(15)
(21)
40
9
2
60
389
93
79
510 >100 >100
(15)
(21)
(24)
(27)
(1)
(8)
9
25
5,534
US
2015
Growth
£%
£m CER%
58
47
139
–
–
–
38
28
197
–
–
17
–
–
99
27
18
209
(10)
(17)
269
16
7
273
–
–
28
(50)
(50)
3
24 >100 >100
34
24
1,258
260
254
6
15
15
–
657
138
170
51
122
70
106
493
–
1
56
96
–
29
36
35
24
7
209
716
9
304
12
48
147
176
14
6
3,556
(3)
(1)
(46)
42
42
–
(33)
(1)
(2)
(8)
(1)
(82)
4
(11)
–
–
–
(2)
–
(23)
(21)
(12)
(4)
(13)
(16)
46
(46)
(1)
(32)
(10)
(11)
(9)
(54)
25
25
–
(38)
(8)
(10)
(16)
(9)
(83)
(7)
(18)
–
–
(8)
(9)
–
(26)
(25)
(19)
(11)
(13)
(22)
34
(51)
(9)
(39)
(18)
>100 >100
>100 >100
(35)
(45)
(15)
(29)
(36)
(8)
284
237
47
6
6
–
1,508
233
358
127
202
93
495
1,388
–
62
28
169
–
59
14
143
121
125
667
305
15
136
13
16
52
44
3
26
5,067
–
(4)
23
20
20
–
(15)
(12)
(2)
(12)
(1)
(65)
(6)
(8)
–
(28)
4
3
–
–
(12)
(10)
30
(23)
(11)
15
(50)
(5)
(27)
(26)
(7)
(11)
21
20
20
–
(18)
(14)
(7)
(14)
(6)
(66)
(9)
(10)
–
(27)
–
(1)
–
(6)
(18)
(14)
21
(19)
(13)
8
(49)
(12)
(36)
(30)
>100 >100
>100 >100
11
(7)
(10)
(43)
–
(6)
2015
£m CER%
3
64
8
39
14
23
–
86
–
36
23
88
(2)
332
(11)
154
–
17
(15)
37
56
221
23
1,097
Europe
Growth
£%
(4)
(3)
5
–
–
13
(10)
(17)
–
(23)
44
14
International
2015
(restated)
£m CER%
4
214
4
342
2
48
–
12
–
25
(12)
61
(9)
132
(12)
113
–
16
(21)
48
64
290
12
1,301
Growth
£%
(3)
(4)
(2)
–
–
(19)
(17)
(16)
–
(24)
48
4
CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.
Investor informationFinancial statementsGovernance and remunerationStrategic report 244 GSK Annual Report 2016
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.
With effect from 1 January 2016, GSK has reported turnover under three segments: Pharmaceuticals, which now includes HIV, Vaccines
and Consumer Healthcare. Comparative turnover information in all four years has been restated accordingly. Comparative information has
also been restated to reflect the current breakdown of the group by geographic region.
Comparative information for 2012 and 2013 is also reported including the effect of the divestments completed in 2013.
Group turnover by geographic region
US
Europe
International
Divestments
Total turnover including divestments
Group turnover by segment
Pharmaceuticals
Vaccines
Consumer Healthcare
Segment turnover
Corporate and other unallocated turnover
Divestments completed in 2013
Pharmaceuticals turnover by therapeutic area
Respiratory
Cardiovascular, Metabolic and urogenital
Immuno-inflammation
Other pharmaceuticals
Established Products
HIV
Pharmaceuticals
Vaccine turnover
Consumer Healthcare turnover
Wellness
Oral care
Nutrition
Skin health
2016
£m
10,197
7,498
10,194
27,889
–
27,889
16,104
4,592
7,193
27,889
–
27,889
–
27,889
6,510
860
340
2,297
2,541
3,556
16,104
2015
(restated)
£m
8,222
6,450
9,251
23,923
–
23,923
2014
(restated)
£m
7,409
6,292
9,305
23,006
–
23,006
14,157
3,656
6,038
23,851
72
23,923
–
23,923
5,741
858
263
2,445
2,528
2,322
14,157
15,438
3,159
4,322
22,919
87
23,006
–
23,006
6,168
965
214
3,582
3,011
1,498
15,438
2013
(restated)
£m
8,695
6,681
10,226
25,602
903
26,505
17,359
3,384
4,713
25,456
146
25,602
903
26,505
7,259
1,073
161
3,611
3,869
1,386
17,359
2012
(restated)
£m
8,330
6,675
10,478
25,483
948
26,431
17,349
3,296
4,731
25,376
107
25,483
948
26,431
7,016
1,144
70
3,394
4,351
1,374
17,349
4,592
3,656
3,159
3,384
3,296
3,726
2,223
674
570
7,193
2,970
1,875
684
509
6,038
1,565
1,806
633
318
4,322
1,807
1,892
628
386
4,713
1,941
1,814
591
385
4,731
245 GSK Annual Report 2016
Five year record continued
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
2016
£m
27,889
2,598
1,939
1,062
pence
18.8
18.6
2015
£m
23,923
10,322
10,526
8,372
pence
174.3
172.3
2014
£m
23,006
3,597
2,968
2,831
pence
57.3
56.7
2013
£m
26,505
7,028
6,647
5,628
pence
112.5
110.5
2016
millions
2015
millions
2014
millions
2013
millions
4,860
4,909
4,831
4,888
4,808
4,865
4,831
4,919
2016
£m
27,889
7,771
7,124
5,615
2015
£m
23,923
5,729
5,091
4,098
2014
£m
23,006
6,594
5,978
4,806
2013
£m
25,602
7,771
7,122
5,487
2012
£m
26,431
7,300
6,600
4,678
pence
91.6
90.2
2012
millions
4,912
4,989
2012
£m
25,483
7,974
7,279
5,511
pence
102.4
pence
75.7
pence
95.4
pence
108.4
pence
107.4
%
28.0
%
152.4
%
46.6
%
91.4
%
84.9
Return on capital employed is calculated as total profit before taxation as a percentage of average net assets over the year.
Investor informationFinancial statementsGovernance and remunerationStrategic report 246 GSK Annual Report 2016
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
US
Europe
International
Manufacturing
Selling
Administration
Research and development
2016
£m
42,370
16,711
59,081
(19,001)
(35,117)
(54,118)
2015
£m
36,859
16,587
53,446
(13,417)
(31,151)
(44,568)
2014
(restated)
£m
25,973
15,059
41,032
(13,676)
(22,420)
(36,096)
2013
(restated)
£m
26,859
15,732
42,591
(14,182)
(20,597)
(34,779)
2012
(restated)
£m
27,789
14,220
42,009
(14,343)
(20,929)
(35,272)
4,963
8,878
4,936
7,812
6,737
1,124
3,839
4,963
2016
14,491
42,330
42,479
99,300
38,372
38,158
11,244
11,526
99,300
5,114
3,764
8,878
2015
14,696
43,538
43,021
101,255
38,855
39,549
11,140
11,711
101,255
4,263
673
4,936
2014
16,579
37,899
43,443
97,921
32,171
42,785
10,630
12,335
97,921
6,997
815
7,812
2013
16,530
38,367
44,554
99,451
31,502
45,397
10,232
12,320
99,451
5,800
937
6,737
2012
17,201
38,788
43,499
99,488
31,369
45,601
9,607
12,911
99,488
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
2016
1.35
2015
1.53
2014
1.65
2013
1.56
2012
1.59
For the purpose of the above table only, 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 3 March 2017 was £1= US$1.23.
2017
Mar
1.23
1.23
2017
Feb
1.26
1.24
2017
Jan
1.26
1.21
2016
Dec
1.27
1.22
2016
Nov
1.26
1.22
2016
Oct
1.28
1.21
2016
Sep
1.34
1.29
247 GSK Annual Report 2016
Pipeline, products and competition
Pharmaceuticals and Vaccines product development pipeline
Key
†
^
*
1
2
3
4
5
In-licence or other alliance relationship with third party
ViiV Healthcare, a global specialist HIV company with
GSK, Pfizer, Inc. and Shionogi Limited as shareholders,
is responsible for developing and delivering HIV medicines.
Also being developed for indications in another
therapeutic area
Option-based alliance with Ionis Pharmaceuticals
Option-based alliance with Adaptimmune Ltd.
Option-based alliance with OncoMed Pharmaceuticals
Option-based alliance with Telethon and Ospedale
San Raffaele
Option-based alliance with Valneva
S
BLA
MAA
NDA
Phase I
Phase II
Phase III
Month of first submission
Biological Licence Application
Marketing Authorisation Application (Europe)
New Drug Application (US)
Evaluation of clinical pharmacology, usually conducted
in volunteers
Determination of dose and initial evaluation of efficacy,
conducted in a small number of patients
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.
Compound
Type
Indication
Achieved regulatory
review milestones
MAA
NDA/BLA
Phase
HIV infections – two drug maintenance regimen III
HIV^ and Infectious Diseases
dolutegravir +
rilpivirine†
dolutegravir +
lamivudine
3684934
cabotegravir
HIV integrase inhibitor + non-nucleoside
reverse transcriptase inhibitor (NNRTI)
HIV integrase inhibitor + nucleoside reverse
transcriptase inhibitor (NRTI)
HIV attachment inhibitor
HIV integrase inhibitor (long-acting parenteral
formulation)
HIV integrase inhibitor + non-nucleoside
reverse transcriptase inhibitor (NNRTI)
(long-acting parenteral formulations)
8-aminoquinoline
neuraminidase inhibitor (i.v.)
type 2 topoisomerase inhibitor
HIV infections
HIV infections
HIV pre-exposure prophylaxis
HIV infections
plasmodium vivax malaria
influenza
bacterial infections
cabotegravir +
rilpivirine†
tafenoquine†
Relenza i.v.†
gepotidacin
(2140944)
danirixin i.v.
2878175+RG101†
3342830
2838232
32288361
33894041
Respiratory
fluticasone furoate
+ vilanterol†
+ umeclidinium
mepolizumab
fluticasone furoate
+ vilanterol†
+ umeclidinium
961081†
961081† +
fluticasone furoate
danirixin
2269557
2586881†
2862277
mepolizumab
mepolizumab
2245035
sirukumab†
chemokine (C-X-C Motif) receptor 2
(CXCR2) antagonist
nonstructural protein 5B (NS5B) polymerase
inhibitor + anti-miR122 antisense oligonucleotide
antibacterial cephalosporin
HIV maturation inhibitor
HBV antisense oligonucleotide
HBV LICA antisense oligonucleotide
influenza*
hepatitis C
bacterial infection
HIV infections
hepatitis B
hepatitis B
glucocorticoid agonist + long-acting beta2
agonist + muscarinic acetylcholine antagonist
interleukin 5 (IL5) monoclonal antibody
glucocorticoid agonist + long-acting beta2
agonist + muscarinic acetylcholine antagonist
muscarinic acetylcholine antagonist, beta2
agonist (MABA)
muscarinic acetylcholine antagonist, beta2
agonist (MABA) + glucocorticoid agonist
chemokine (C-X-C Motif) receptor 2 (CXCR2)
antagonist (oral)
phosphatidylinositol 3-kinase delta (PI3Kδ)
inhibitor
recombinant human angiotensin converting
enzyme 2 (rhACE2)
tumour necrosis factor receptor-1 (TNFR1)
domain antibody
interleukin 5 (IL5) monoclonal antibody
interleukin 5 (IL5) monoclonal antibody
toll-like receptor 7 (TLR7) agonist
COPD*
asthma
COPD
COPD
COPD*
COPD (acute and chronic)
acute lung injury
acute lung injury
hypereosinophilic syndrome*
nasal polyposis*
asthma
interleukin 6 (IL6) human monoclonal antibody (s.c.) severe asthma*
III
III
III
III
III
III
II
II
II
I
I
I
I
III
III
II
II
II
II
II
II
II
II
II
II
chronic obstructive pulmonary disease (COPD) Submitted S: Dec16 S: Nov16
Investor informationFinancial statementsGovernance and remunerationStrategic report 248 GSK Annual Report 2016
Pipeline, products and competition continued
Pharmaceuticals and Vaccines product development pipeline continued
Compound
Respiratory continued
2269557
Type
phosphatidylinositol 3-kinase delta
(PI3Kδ) inhibitor
interleukin 33r (IL33r) monoclonal
antibody
recombinant human angiotensin
converting enzyme 2 (rhACE2)
alpha V beta 6 integrin antagonist
phosphatidylinositol 3-kinase
delta (PI3Kδ) inhibitor
Indication
activated PI3K delta syndrome
severe asthma
pulmonary arterial hypertension
idiopathic pulmonary fibrosis
bronchietasis
NY-ESO-1 autologous engineered
TCR-T cells (engineered TCR)
notch 2/3 monoclonal antibody
OX40 agonist monoclonal antibody
enhancer of zeste homologue2
(EZH2) inhibitor
BET family bromodomain inhibitor
lysine-specific demethylase 1 (LSD1)
inhibitor
B-cell maturation antigen antibody
drug conjugate
protein arginine methyltransferase 5
(PRMT5) inhibitor
induced T-cell costimulator (ICOS)
agonist antibody
toll-like receptor 4 (TLR4) agonist
sarcoma, multiple myeloma, non-small cell lung
cancer, melanoma and ovarian cancer
small cell lung cancer
solid tumours and haematological malignancies
solid tumours and haematological malignancies
solid tumours and haematological malignancies
acute myeloid leukemia and small cell lung cancer
multiple myeloma
cancer
cancer
cancer
phosphatidylinositol 3-kinase (PI3K)
beta inhibitor
castration resistant prostate cancer
3772847†
2586881†
3008348
2269557
Oncology
33777942
tarextumab3
3174998†
2816126
525762
2879552
2857916†
3326595
3359609
1795091
2636771
Achieved regulatory
review milestones
MAA
NDA/BLA
Phase
I
I
I
I
I
II
II
I
I
I
I
I
I
I
I
I
Immuno-inflammation
sirukumab†
Benlysta
sirukumab†
3196165†
3196165†
Benlysta + Rituxan
2982772
3117391†
2330811
2982772
2618960
2646264
2831781†
3050002†
3179106
interleukin 6 (IL6) human monoclonal
antibody
B lymphocyte stimulator monoclonal
antibody (s.c.)
interleukin 6 (IL6) human monoclonal
antibody
granulocyte macrophage colony-
stimulating factor monoclonal antibody
granulocyte macrophage colony-
stimulating factor monoclonal antibody
B lymphocyte stimulator monoclonal
antibody (s.c.) + cluster of differentiation
20 (CD20) monoclonal antibody (i.v.)
receptor-interacting protein 1 (RIP1)
kinase inhibitor
macrophage targeted histone
deacetylase inhibitor
oncostatin M (OSM) monoclonal
antibody
receptor-interacting protein 1 (RIP1)
kinase inhibitor
interleukin 7 (IL7) receptor monoclonal
antibody
spleen tyrosine kinase (Syk) inhibitor
(topical)
lymphocyte activation gene 3 (LAG3)
protein monoclonal antibody
chemokine (C-C motif) ligand 20
(CCL20) monoclonal antibody
rearranged during transfection (RET)
kinase inhibitor
rheumatoid arthritis*
Submitted S: Sep16 S: Sep16
systemic lupus erythematosus*
Submitted S: Sep16 S: Sep16
giant cell arteritis*
osteoarthritis
rheumatoid arthritis
Sjogren’s syndrome
psoriasis and rheumatoid arthritis
rheumatoid arthritis
systemic sclerosis
ulcerative colitis
Sjogren's syndrome
chronic urticaria
autoimmune disease
psoriatic arthritis
inflammatory disorders of bowel
III
II
II
II
II
II
I
I
I
I
I
I
I
249 GSK Annual Report 2016
Pharmaceuticals and Vaccines product development pipeline continued
Type
Indication
ex-vivo stem cell gene therapy
transthyretin (TTR) production inhibitor
ex-vivo stem cell gene therapy
ex-vivo stem cell gene therapy
interleukin 5 (IL5) monoclonal antibody
serum amyloid P component (SAP)
monoclonal antibody + SAP depleter
(CPHPC)
ex-vivo stem cell gene therapy
focal adhesion kinase inhibitor
adenosine deaminase severe combined immune
deficiency (ADA-SCID)
transthyretin-mediated amyloidosis
metachromatic leukodystrophy
Wiscott-Aldrich syndrome
eosinophilic granulomatosis with polyangiitis*
amyloidosis
beta-thalassemia
pulmonary arterial hypertension (PAH)
Achieved regulatory
review milestones
MAA
NDA/BLA
Phase
Approved A: May16
III
III
III
III
II
II
I
recombinant
Herpes Zoster prophylaxis
Submitted S: Nov16 S: Oct 16
Compound
Rare diseases
Strimvelis†
29987281
2696274†
2696275†
mepolizumab
2398852†
+ 2315698†
26962774
2256098
Vaccines
Shingrix†
(Zoster Vaccine)
MMR
Ebola†
Group B
Streptococcus
S. pneumoniae
next generation†
COPD†
live attenuated
recombinant viral vector
conjugated
recombinant – conjugated
recombinant
Hepatitis C†
Malaria next generation†
Men ABCWY
recombinant viral vector
recombinant
recombinant – conjugated
Shigella†
Tuberculosis†
RSV
RSV
conjugated and outer membrane
recombinant
recombinant
replication-defective recombinant
viral vector
recombinant proteins
HIV†
Other pharmaceuticals
Metabolic
retosiban
daprodustat (1278863) prolyl hydroxylase inhibitor (oral)
2330672
2798745
oxytocin antagonist
ileal bile acid transport (IBAT) inhibitor
transient receptor potential cation
channel V4 (TRPV4) antagonist
measles, mumps, rubella prophylaxis
Ebola haemorrhagic fever prophylaxis
Group B streptococcus prophylaxis
(maternal immunisation)
Streptococcus pneumoniae disease prophylaxis
reduction of the frequency of moderate and severe acute
exacerbations in COPD patients by targetting non-
typeable Haemophilus influenzae and Moraxella catarrhalis
hepatitis C virus prophylaxis
malaria prophylaxis (Plasmodium falciparum)
meningococcal A,B,C,W and Y disease prophylaxis
in adolescents
Shigella diarrhea prophylaxis
tuberculosis prophylaxis
respiratory syncytial virus prophylaxis
(maternal immunisation)
respiratory syncytial virus prophylaxis
HIV infection prophylaxis
spontaneous pre-term labour
anaemia associated with chronic renal disease
cholestatic pruritus
heart failure
1070806
otelixizumab
interleukin 18 (IL18) neutralisation mAb
cluster of differentiation 3 (CD3)
monoclonal antibody
delayed graft function after renal transplantation
new onset type 1 diabetes
daprodustat (1278863) prolyl hydroxylase inhibitor (topical)
3008356
diglyceride acyltransferase (DGAT) 1
inhibitor
selective androgen receptor modulator
oxytocin
wound healing
nonalcoholic steatohepatitis
muscle wasting
postpartum hemorrhage
interleukin 5 (IL5) monoclonal antibody
non-steroidal anti-inflammatory (topical)
non-steroidal anti-inflammatory (topical)
ROR gamma inverse agonist (topical)
atopic dermatitis*
atopic dermatitis
psoriasis
psoriasis
ocular target LICA antisense
oligonucleotide
geographic atrophy age-related macular disease
2881078
oxytocin (inhaled)†
Dermatology
mepolizumab
2894512†
2894512†
2981278
Neurosciences
IONIS-GSK4-L1
Brand names appearing in italics are trademarks either owned by and/or licensed to GlaxoSmithKline or associated companies
N/A
III (US)
II
II
II
II
II
II
II
II
II
II
II
II
III
III
II
II
II
II
I
I
I
I
II
II
II
II
I
Investor informationFinancial statementsGovernance and remunerationStrategic report
250 GSK Annual Report 2016
Pipeline, products and competition continued
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
Patent expiry dates3
US
EU
Spiriva Handihaler/
Respimat, Stiolto/
Spiolto Respimat
Ultibro Breezhaler,
Duaklir Genuair
Bevespi Aerosphere
Qvar, Pulmicort
Asmanex, Alvesco
Avamys/Veramyst
Flixotide/Flovent
fluticasone furoate
fluticasone propionate
rhinitis
asthma/COPD
Nasonex
Qvar, Singulair
Incruse Ellipta
umeclidinium bromide
COPD
Spiriva Handihaler/
Respimat, Eklira Genuair
Nucala
Relvar/Breo Ellipta
mepolizumab
fluticasone furoate/
vilanterol terfenatate
severe eosinophilic asthma
asthma/COPD
Xolair, Cinqair
Symbicort, Foster,
Flutiform, Dulera
Seretide/Advair*
salmeterol xinafoate/
fluticasone propionate
asthma/COPD
Symbicort, Foster,
Flutiform, Dulera
Serevent
salmeterol xinafoate
asthma/COPD
Foradil, Spiriva,
Handihaler/Respimat
Onbrez
Ventolin HFA
albuterol sulphate
asthma/COPD
generic companies
Anti-virals
Valtrex
valaciclovir
genital herpes, coldsores, shingles
Famvir
lamivudine
Zeffix/Epivir-HBV
Central nervous system
Lamictal
Imigran/Imitrex
Seroxat/Paxil
lamotrigine
sumatriptan
paroxetine
chronic hepatitis B
Hepsera
epilepsy, bipolar disorder
migraine
depression, various anxiety
disorders
Keppra, Dilantin
Zomig, Maxalt, Relpax
Effexor, Cymbalta,
Lexapro
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
2022
2027
expired
20261,2
(formulation)
2017
NA
* See ’Principal risks and uncertainties’ on page 254 for details of uncertainty on the timing of follow-on competition.
1 See Note 46 to the financial statements, ‘Legal proceedings’.
2 Generic competition possible in 2017.
3
Includes Supplementary Protection Certificates which were granted in multiple countries in EU and patent term extensions granted in the US.
4 Data exclusivity expires 2025 (EU) and 2027 (US).
5 Generic competition exists in some markets.
2025
(NCE)
2027-2030
(device/formulation)
2029
(NCE)
2022-2025
(device/formulation)
2021
(NCE)
2027-2030
(device/formulation)
20212
expired
(Diskus device)
2018-20261
(HFA-device)
2025
(NCE)
2027-2030
(device/formulation)
expired4
2022
(NCE)
2027-2030
(device/formulation)
expired
(Diskus device)
2018-20261
(HFA-device)
expired
(Diskus device)
2018-20261
(HFA-device)
NA
2023
expired
(Diskus device)
2017
(HFA-device)
2029
(NCE)
2022-2025
(device/formulation)
20204
2027
(NCE)
2022-2025
(device/formulation)
expired
(Diskus device)
20175
(HFA-device)
expired
(Diskus device)
2019
(HFA-device)
2017
(HFA-device)
expired
expired
expired
expired
expired
expired
expired
expired
expired
expired
Products
Anti-bacterials
Augmentin
Rare diseases
Volibris
Compounds
Indication(s)
Major
competitor brands
Patent expiry dates3
US
EU
amoxicillin/clavulanate
potassium
common bacterial
infections
generic products
NA
expired
ambrisentan
pulmonary hypertension
Tracleer, Revatio
NA
251 GSK Annual Report 2016
Pharmaceutical products, competition and intellectual property continued
Immuno-inflammation
Benlysta
belimumab
systemic lupus erythematosus
HIV
Epzicom/Kivexa
lamivudine and abacavir
HIV/AIDS
Lexiva/Telzir
fosamprenavir
Selzentry/Celsentri
maraviroc
Tivicay
Triumeq
Trizivir
dolutegravir
dolutegravir, lamivudine
and abacavir
lamivudine, zidovudine
and abacavir
HIV/AIDS
HIV/AIDS
HIV/AIDS
HIV/AIDS
HIV/AIDS
Vaccines products, competition and intellectual property
Indication(s)
Meningitis group B prevention
diphtheria, tetanus, acellular
Pertussis booster vaccination
Prophylaxis against diphtheria,
tetanus, pertussis, polio,
hepatitis B, Haemophilus
influenzae type B (EU)
human papilloma virus
type 16 and 18
seasonal influenza prophylaxis
seasonal influenza prophylaxis
Products
Bexsero
Boostrix
Compounds
meningococcal group-B
vaccine
diphtheria, tetanus, acellular
pertussis
Infanrix Hexa/Pediarix diphtheria, tetanus, pertussis,
polio, hepatitis B, Haemophilus
influenzae type B (EU)
HPV 16 & 18 virus like
particles (VLPs), AS04
adjuvant (MPL + aluminium
hydroxide)
split inactivated influenza
antigens (2 virus subtypes A
and 2 subtype B)
split inactivated influenza
antigens (2 virus subtypes A
and 2 subtype B)
Cervarix
Fluarix Tetra
FluLaval
Menveo
Prepandrix
Priorix 2, Priorix Tetra a,b
Varilrix b
Rotarix
Synflorix
2020
2026
20191,2
(combination)
2019
2022
2029
2029
2023
expired
20181
2021
2027
2027
expired
expired
Patent expiry dates3
US
2027
2017
2018
EU
20281
2017
expired
2020
2020
2022
2022
2022
2022
Truvada, Atripla
Descovy, Genvoya
Odefsey
Prezista, Kaletra,
Reyataz
Isentress, Intelence,
Prezista
Isentress, Prezista
Reyataz, Kaletra
Truvada, Atripla
Descovy, Genvoya
Odefsey
Truvada, Atripla
Descovy, Genvoya
Odefsey
Major
competitor brands
Trumenba
Adacel
Pentacel, Pediacel,
Pentaxim, Pentavac,
Hexaxim, Hexyon
Vaxelis
Gardasil (Silgard)
Intenza, Flumist QIV,
Vaxigrip QIV,
Fluzone QIV,
Fluzone High Dose
Vaxigrip, Mutagrip,
Fluzone, Influvac,
Aggripal, Fluad,
Intenza, Flumist
meningococcal group A, C, W-
135 and Y conjugate vaccine
derived split inactivated
influenza virus antigen,
AS03 adjuvant
live attenuated measles, mumps,
rubella and varicella vaccine
Human rotavirus RIX4414 strain
conjugated pneumococcal
polysaccharide
Meningitis group A, C, W-135
and Y prophylaxis
pandemic H5N1 influenza
prophylaxis
measles, mumps, rubella and
chickenpox prophylaxis
Rotavirus prophylaxis
Prophylaxis against invasive
disease, pneumonia,
acute otitis media
Mencevax, Menactra
2025
Aflunov, Vepacel
–
2025
2026
MMR II (M-M-RVaxPro)
Proquad, Varivax
Rotateq
Prevenar (Prevnar)
20194
expired
–
NA
2020
2024
1 See Note 46 to the financial statements, ‘Legal proceedings’.
2 Generic competition commenced in many markets during 2016.
3
Includes Supplementary Protection Certificates which were granted in
multiple countries in EU and patent term extensions granted in the US.
4 Refers to Priorix and Priorix Tetra, as all patents on Varilrix have expired.
a Related compounds/indications are measles, mumps and rubella vaccine/prophylaxis
b Related compound is varicella vaccine
Investor informationFinancial statementsGovernance and remunerationStrategic report
252 GSK Annual Report 2016
Pipeline, products and competition continued
Consumer Healthcare products and competition
Brand
Wellness
Panadol and
Panadol Cold
& Flu
Voltaren
Otrivin
Theraflu
Products
Application
Markets
Competition
tablets, caplets, infant
syrup drops
topical gel
paracetamol-based treatment
for headache, joint pain, fever,
cold symptoms
non-steroidal, diclofenac based
anti-inflammatory
global (except US)
global
nasal spray
nasal decongestant
tablets and syrups
cold and flu relief
Germany, Poland,
Russia, Sweden, Ukraine
Russia, Poland, Ukraine,
US
Flonase
Flixonase, Piriton
ENO
nasal spray
nasal spray, tablets
effervescent
allergy relief
allergy relief
immediate relief antacid
US
UK, Ireland
global (except US)
Tums
chewable tablets
immediate relief antacid
US
Nicorette (US),
NicoDerm,
Nicotinell
(ex. Australia)
Oral health
Sensodyne,
Pronamel
lozenges, gum and trans-dermal
patches
treatment of nicotine withdrawal
as an aid to smoking reduction
and cessation
global
toothpastes, toothbrushes,
mouth rinse
relief of dentinal hypersensitivity.
Pronamel additionally protects
against acid erosion
global
Parodontax/
Corsodyl
toothpaste, medicated
mouthwash, gel and spray
helps prevent bleeding gums,
treats and prevents gingivitis
Germany, Ireland
Italy, United Kingdom
denture adhesive, denture
cleanser
improve retention and comfort
of dentures, cleans dentures
toothpastes, toothbrushes
mouthwashes
aids prevention of dental cavities,
maintains healthy teeth, gums
and fresh breath
topical cream and
non-medicated patch
lip care to treat and prevent
the onset of cold sores
global
global
global
Polident,
Poligrip,
Corega
Aquafresh
Skin health
Zovirax
Abreva
Nutrition
Horlicks
malted drinks and foods
nutritional
beverages & food
Indian sub-continent,
United Kingdom, Ireland
Bournvita, Mondelez
Complan, Heinz
Advil, Pfizer
Aspirin, Bayer
Tylenol, Johnson & Johnson
Advil, Pfizer
Aspirin, Bayer
Tylenol, Johnson & Johnson
Afrin, Merck
Nasivin, Merck
Tylenol Cold & Flu,
Johnson & Johnson
Mucinex, Reckitt Benckiser
Lemsip, Reckitt Benckiser
Claritin, Bayer, Nasacort, Sanofi
Benadryl, Johnson & Johnson
Estomazil, Hypermarca
Gelusil, Pfizer
Alka-Seltzer, Bayer
Gaviscon, Reckitt Benckiser
Rolaids, Sanofi
Nicorette, Johnson & Johnson
NiQuitin, Perrigo
Colgate Sensitive Pro-Relief,
Colgate-Palmolive
Elmex, Colgate-Palmolive
Oral B, Procter & Gamble
Colgate Total Gum Health,
Colgate-Palmolive
Yunnan Baiyao, State
Enterprise (China)
Fixodent and Kukident,
Procter & Gamble,
Steradent, Reckitt Benckiser
Colgate, Colgate-Palmolive
Crest, Procter & Gamble
Oral-B, Procter & Gamble
Compeed, Johnson & Johnson
Carmex, Carma Labs
Blistex, Blistex Incorporated
retail own label
253 GSK Annual Report 2016
Principal risks and uncertainties
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 risks below are those that we believe could cause our actual
results to differ materially from expected and historical results.
We must 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 likelihood of doing so
successfully.
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 regulations could materially and adversely affect
our financial results.
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
about the safety of our products 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 take 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.
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 our
significant unresolved disputes and potential litigation is set out in
Note 46, ‘Legal proceedings,’ on pages 226 to 231.
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 risks and uncertainties are not listed in
order of significance.
Individual Medical Officers within the Pharmaceutical, Vaccines and
Consumer Healthcare businesses and the Group’s substantial
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 products 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 our products. 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 risk/benefit profile of one of the Group’s
products 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.
Investor informationFinancial statementsGovernance and remunerationStrategic report 254 GSK Annual Report 2016
Principal risks and uncertainties continued
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 250 to 251. The listed annual
expiration dates are not meant to indicate the certainty of exclusivity
for the listed products, as patents may be designed around or
invalidated prior to their expiration, resulting in earlier entry of a
generic product. Legal proceedings involving patent challenges are
set out in Note 46 to the financial statements, ‘Legal proceedings’.
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 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.
Mitigating activities
Our Global Patents group focuses on securing, maintaining and
enforcing our patent rights. This global group maintains internal
processes designed to seek to ensure successful procurement,
enforcement and defence of our patents with the goal of lawfully
maintaining exclusive rights in markets for our products.
The Global Patents group monitors new developments in
international patent law to seek to 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 laws designed to meet the needs of patients
and payers while supporting long-term investment in innovation.
Intellectual property
Risk definition
Failure to appropriately secure, maintain and enforce intellectual
property rights.
Risk impact
Any failure to obtain or subsequent loss of patent protection in a
market, 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 that market.
Absence of adequate patent or data exclusivity protection in a market
could limit the opportunity to rely on that market for future sales
growth for our products, which could also materially and adversely
affect our financial results in that market.
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
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 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. Since there is no abbreviated pathway that leads to
substitutable generic vaccines, competition in that market arises from
branded products or generic branded products and erosion of sales,
revenues and margins is less dramatic. In addition, the proprietary
technology used in manufacture and the capital investment in
facilities create barriers to entry into the vaccine markets.
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 significant Group sales
worldwide. The patent for compositions containing the combination
of active substances in Seretide/Advair has expired. Generic
products containing the same combination of active substances as
Seretide/Advair (in both dry powder inhalers and metered dose
inhalers) have been launched by several manufacturers in a number
of European markets. New drugs applications (ANDAs) have been
filed in the US by generic competitors for Seretide/Advair Diskus.
The date of such approvals is uncertain at this time but could come
as early as March 2017. The timing of an ANDA for Advair HFA in
the US is uncertain. We have patents on the formulation and device
used in the metered dose inhaler, although the protection afforded
by these patents is uncertain at present. Similar patents exist for
Ventolin HFA and Flovent HFA.
An extensive global network of quality and compliance professionals
is aligned with each business unit to provide oversight and assist
with the delivery of quality performance and operational compliance,
from site level to senior management level. Management oversight
of those activities is accomplished through a hierarchy of Quality
Councils and through an independent Chief Product Quality
Officer and Global Product Quality Office. In 2016 we introduced
a revised approach to monitoring Regulated Quality (GxP)
performance to provide the Corporate Executive Team with an
integrated assessment of key performance indicators (KPIs).
The defined KPIs cover manufacturing practice, clinical practice,
pharmacovigilance practice, regulatory practice, drug safety
assessment, and animal welfare.
We have implemented a risk-based approach to assessing and
managing third party suppliers that provide materials which are used
in finished products. Contract manufacturers making our products
are expected to comply with GSK standards and are regularly
audited to provide assurance that standards are met.
All staff members are regularly trained to ensure that cGMP
standards and behaviours based on our values are followed.
Additionally, advocacy and communication programmes are routinely
deployed to ensure consistent messages are conveyed across the
organisation, whether they originate from changes in regulation,
learnings from inspections, or regulatory submissions. There is a
continued emphasis on the value of quality performance metrics to
facilitate improvement and foster a culture of ‘right first time’.
255 GSK Annual Report 2016
Product quality
Risk definition
Failure to comply with current Good Manufacturing Practices
(cGMP) or inadequate controls and governance of quality in the
supply chain covering supplier standards, manufacturing and
distribution of products.
Risk impact
A failure to ensure product quality could have far reaching
implications in terms of patient and consumer safety resulting in
product launch delays, supply interruptions and product recalls
which would have the potential to do damage to GSK’s reputation.
Associated regulatory, legal, and financial consequences could
materially and adversely affect company reputation and financial
results.
Context
Patients, consumers and healthcare professionals trust the quality
of our products. Product quality may be influenced by many factors
including product and process understanding, consistency of
manufacturing components, compliance with GMP, accuracy of
labelling, 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, with increasing scrutiny of data
integrity, supply continuity and drug shortages. Review of inspections
conducted across the industry by national regulatory authorities
during 2016 highlighted an ongoing focus on data integrity, third
party oversight and the timely escalation of pertinent issues to
regulatory authorities.
Mitigating activities
We have developed and implemented a single Pharmaceutical
Quality System (PQS) that defines the quality standards and systems
for our businesses associated with Pharmaceuticals, Vaccines and
Consumer Healthcare products and clinical trial materials. This
system has a broad scope and is applicable throughout the product
lifecycle from R&D to mature commercial supply.
There is no single external quality standard or system that governs
the detailed global regulatory expectations for the quality of medicinal
products. Requirements are often complex and fragmented across
national and regional boundaries. Consequently, we have adopted
the internationally recognised principles from the ‘ICH Q10:
Pharmaceutical Quality Systems’ framework as the basis for the
GSK PQS. This is an industry standard which incorporates quality
concepts throughout the product lifecycle. The GSK PQS is
augmented by a consolidation of the numerous regulatory
requirements defined by markets across the world, which assures
that the GSK PQS meets external expectations for product quality
in the markets supplied. The PQS is regularly updated to ensure
that it keeps pace with the evolving external regulatory environment.
New scientific understanding and operational improvements are
incorporated into the PQS to support the delivery of consistent
and reliable products.
Investor informationFinancial statementsGovernance and remunerationStrategic report 256 GSK Annual Report 2016
Principal risks and uncertainties continued
Financial controls and reporting
Risk definition
Failure to comply with current tax law or incurring significant losses
due to treasury activities; failure to report accurate financial
information in compliance with accounting standards and applicable
legislation; failure to maintain adequate governance and oversight
over third-party relationships.
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. 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 inconsistent
application of treasury policies, transactional or settlement errors, or
counterparty defaults. Any changes in the substance or application
of the governing tax laws, failure to comply with such tax laws or
significant losses due to treasury activities could materially and
adversely affect our financial results.
Failure to adequately manage third party relationships could result in
business disruption 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
The Group is 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 new,
revised or existing accounting and regulatory requirements. The
Group believes that it complies with the appropriate regulatory
requirements concerning our financial statements and disclosure of
material information including any transactions relating to business
restructuring such as acquisitions and divestitures. However, should
we be subject to an investigation into potential non-compliance with
accounting and disclosure requirements, this may lead to
restatements of previously reported results and significant penalties.
Our Treasury group deals in high value transactions, mostly foreign
exchange and cash management transactions, on a daily basis.
These transactions involve market volatility and counterparty risk.
The Group’s effective tax rate reflects rates of tax in the jurisdictions
in which the Group operates that are both higher and lower than the
UK rate and takes into account regimes that encourage innovation
and investment in science by providing tax incentives which, if
changed, could affect the Group’s tax rate. In addition, the worldwide
nature of our operations and cross-border supply routes can result
in conflicting claims from tax authorities as to the profits to be taxed
in individual countries. The tax charge included in our financial
statements is our best estimate of the Group’s tax liability pending
audits by tax authorities.
There continues to be a significant international focus on tax reform,
including the OECD’s Base Erosion and Profit Shifting (BEPS)
project and European Commission initiatives such as the increased
use of fiscal state aid investigations. Together with domestic
initiatives around the world, these may result in significant changes to
established tax principles and an increase in tax authority disputes.
These, regardless of their merit or outcomes, can be costly, divert
management attention and may adversely impact our reputation.
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.
Third party 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 unethical business practices. 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
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 are
regularly tested by management and via independent business
monitoring. 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.
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 judgements are reviewed
and confirmed by senior management. Business reorganisations and
newly acquired activities are integrated into risk assessments and
appropriate controls and reviews are applied. Counterparty exposure
is subject to defined limits approved by the Board for both credit
rating and individual counterparties.
In 2016, we created a Finance Risk and Controls Centre of
Excellence to maintain the Finance control framework. We added
resources to ensure processes and controls were maintained during
business transformation, the upgrade of our financial systems and
processes and the ongoing integration of the former Novartis’
businesses into our control and reporting framework. Additional risk
mitigation was introduced by amending the programme timelines of
system upgrades.
257 GSK Annual Report 2016
Financial controls and reporting continued
The Group maintains a Disclosure Committee reporting to the
Board, which reviews the Group’s quarterly results and Annual
Report and Form 20-F 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. The Treasury Management Group
meets on a regular basis to seek to ensure that liquidity, interest
rate, counterparty, foreign currency transaction and foreign
currency translation risks are all managed in line with the
conservative approach as detailed in the associated risk
strategies and policies which have been adopted by the Board.
Oversight of Treasury’s role in managing counterparty risk in line
with agreed policy is performed by a Corporate Compliance Officer,
who operates independently of Treasury. Further details on mitigation
of Treasury Risks can be found on pages 212 to 213 in Note 42,
‘Financial instruments and related disclosures’. Tax risk is managed
by a set of policies and procedures to seek to ensure consistency
and compliance with tax legislation. We seek to maintain open,
positive relationships with governments and tax authorities
worldwide. We monitor government debate on tax policy in our key
jurisdictions to deal proactively with any potential future changes in
tax law. We engage advisors and legal counsel to review tax
legislation and the implications for our business. Where relevant we
are active in providing relevant business input to tax policy makers.
Significant decisions are considered and agreed by the Tax
Governance Board, which meets quarterly and is made up of senior
personnel from across the Finance group.
A centralised team of dedicated specialists are responsible for
managing transactional tax reporting and compliance. We submit
tax returns according to statutory time limits and engage with tax
authorities to seek to ensure our tax affairs are current, entering into
arrangements such as Continuous Audit Programmes and Advance
Pricing Agreements to provide long-term certainty over tax treatment
where appropriate. 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.
Each business unit leadership team retains ultimate accountability
for managing third party interactions and risks. When working
with third parties, all employees are expected to manage external
interactions and commitments responsibly. This expectation is
embedded in our values and Code of Conduct. It is our responsibility
that all activities are performed safely and in compliance with
applicable laws and our values, standards and Code of Conduct.
To seek to 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 seek to
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.
Continuous monitoring and performance of third parties is enhanced
through the Third Party Oversight programme managed through the
Global Ethics and Compliance organisation. The global programme,
which completed deployment across LATAM and South East Asia
countries in 2016, takes an enterprise wide view of third party related
risks. The programme is strengthening risk assessment and due
diligence efforts on third parties and improving the overall
management of our third party risks through the lifecycle of the
third party engagement.
Investor informationFinancial statementsGovernance and remunerationStrategic report 258 GSK Annual Report 2016
Principal risks and uncertainties continued
Anti-Bribery and Corruption
Risk definition
Failure of GSK employees, consultants and third parties to comply
with our Anti-bribery and corruption (ABAC) principles and
standards, as well as with all applicable legislation.
Risk impact
Failure to mitigate this risk could expose the Group and associated
persons to governmental investigation, regulatory action and civil
and criminal liability.
In addition to legal penalties, a failure to prevent bribery through
complying with ABAC legislation and regulations could have
substantial implications for the reputation of the company, the
credibility of senior leaders, and an erosion of investor confidence
in our governance and risk management.
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.
The Group has been subject to a number of ABAC inquiries. We
have reached a resolution with US authorities in 2016 regarding their
ABAC inquiry, whilst the inquiry of the UK authorities is ongoing.
These investigations are discussed further in Note 46 ‘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 evolve
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 headquarters
and local markets.
The Group has an enterprise-wide ABAC programme designed to
ensure compliance with the Group’s ABAC policies and prevent the
risk of bribery and corruption. It builds on our values and business
standards to form a comprehensive and practical approach to
compliance, and is flexible to the evolving nature of our business.
Our ABAC programme is built on best in class principles and a range
of features which collectively enable us to manage the risk from top
down and bottom up. For example, the programme comprises
top-level commitment from the Group Board of Directors and
leadership; a global risk assessment to enable targeted intervention
and compliance monitoring activities. The programme is underpinned
by a global ABAC policy and written standards that address
commercial and other practices that give rise to ABAC risk and
ongoing training and communications. In addition, the programme
mandates enhanced controls over interactions with government
officials and during business development transactions. All
employees are required to complete comprehensive ABAC training
dependent on role requirements.
Programme governance is provided by the Group’s ABAC
Governance Board which includes representation from key functional
areas and business units. 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 independent oversight and assurance
undertaken by the Audit and Assurance and Independent Business
Monitoring teams.
We continually benchmark our ABAC programme against other
large multinational companies and use external expertise to drive
improvements in the programme.
259 GSK Annual Report 2016
Commercialisation
Risk definition
Failure to execute business strategies, or effectively manage
competitive opportunities and threats in accordance with the letter
and spirit of legal, industry, or the Group’s requirements.
Risk impact
Failure to manage risks related to commercialisation could materially
and adversely affect our ability to grow a diversified global business
and deliver more products of value for patients and consumers.
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
risk/benefit profile of our products and possibly suboptimal treatment
of patients and consumers. Any of these consequences could
materially and adversely affect the Group.
Any practices that are found to be misaligned with our values could
also result in reputational damage and dilute trust established with
external stakeholders.
Context
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
achieve our strategic objectives. As do other pharmaceutical, vaccine
and consumer companies, the Group faces downward price
pressure in major markets, declining emerging market growth, and
negative foreign exchange impact.
Developing new Pharmaceutical, Vaccine and Consumer Healthcare
products is a costly, lengthy and an uncertain process. 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 ability to achieve our strategic objectives.
We are committed to the ethical and responsible commercialisation
of our products 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 provide important information about our medicines.
Promotion of approved products seeks to ensure that healthcare
professionals (HCPs) globally have access to information they need,
that patients and consumers have access to the information and
products they need and that products are prescribed, recommended
or used in a manner that provides the maximum healthcare benefit to
patients and consumers. We are committed to communicating
information related to our approved products in a responsible, legal,
and ethical manner.
While business units within the Group are confronted by common
types of commercialisation risks, differences do exist in the types of
risks that present themselves, the degree of risk presented in that
business unit and, consequently, how those risks are managed. This
reflects the different nature and profile of the business units across
the Group.
Mitigating activities
Our strategic objectives are designed to ensure the Group achieves
its mission of helping people do more, feel better and live longer.
The Group continues to strive for new product launches that are
competitive and resourced effectively, as well as a healthy proportion
of its sales ratio attributable to new product or innovation sales.
This innovation helps the Group defray the effect, for example, of
downward price pressure in major markets, declining emerging
market growth and negative foreign exchange impact.
Establishing new products that are priced to balance expectations
of patients and consumers, HCPs, payers, shareholders, and the
community enables the Group to maintain a strong global business
and remain relevant to the needs of patients and consumers. Our
values provide a guide for how we lead and make decisions. We
constantly strive to do the right thing and deliver quality products,
seeking to ensure our behaviours reflect our values and the mission
of our company.
We have taken action at all levels of the Group to enhance and
improve standards and procedures for promotional interactions,
based on our values of transparency, respect, integrity and patient
focus. We have policies and standards governing promotional
activities undertaken by the Group or on its behalf. All of these
activities we conduct worldwide must conform to high ethical,
regulatory, and industry standards. Where local standards differ
from global standards, the more stringent of the two applies.
The Group has harmonised policies and procedures to guide
above country commercial practices processes as well as clarified
applicable standards when engaging in the markets. Each business
unit within the Group has adopted GSK’s Internal Control Framework
to support the assessment and management of its risks. Commercial
practices activities have appropriate monitoring programmes and
oversight from both business unit Risk Management and Compliance
Boards and Country Executive Boards 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 seek
to 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.
The Group continues to evolve its commercial operating model,
embedding industry leading changes in the compensation model
for sales professionals and their managers who interact with HCPs.
These changes eliminated rewards based on sales or market share
of prescription products in individuals’ territories in favour of rewards
based on the quality of the individuals’ interactions with HCPs.
Furthermore, from the beginning of 2016, GSK stopped paying
HCPs to deliver promotional presentations for GSK to other HCPs
or sponsor their travel to medical educational conferences.
Investor informationFinancial statementsGovernance and remunerationStrategic report 260 GSK Annual Report 2016
Principal risks and uncertainties continued
Research practices
Risk definition
Failure to adequately conduct ethical and sound preclinical and
clinical research. In addition, failure to engage in scientific activities
that are consistent with the letter and spirit of the law, industry, or
the Group’s requirements.
Risk impact
The impacts of the risk include harm to human subjects, reputational
damage, failure to obtain the necessary regulatory approvals for our
products, governmental investigation, legal proceedings brought
against the Group by governmental and private plaintiffs (product
liability suits and claims for damages), and regulatory action such
as fines, penalties, or loss of product authorisation. Any of these
consequences could materially and adversely affect our financial
results.
Context
Research relating to animals can raise ethical concerns. While we
attempt to address this proactively, 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. Nonetheless, we are continually seeking ways in which we
can minimise our use of animals in research, whilst complying with
regulatory requirements.
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. Scientific engagement (SE), defined
as the interaction and exchange of information between GSK and
external communities in order to advance scientific and medical
understanding, including the appropriate development and use
of our products, is an essential part of scientific discourse. Such
non-promotional engagement with external stakeholder groups
is vital to GSK’s mission and necessary for scientific and medical
advance. The scope of SE activities includes: advisory boards;
scientific consultancies; pre-planned informal discussions with
healthcare professionals (HCP); sharing medical information;
publications (including abstracts to congresses); scientific
interactions with payers, patients, governments and the media;
and support for independent medical education. SE activities are
essential but present legal, regulatory, and reputational risk if the
sharing of data, invited media coverage or payments for service
providers has, or is perceived to have, promotional intent. The risks
are particularly high where HCP engagement and associated
financial and/or transfer of value disclosures are required by GSK.
Mitigating activities
We established an Office of Animal Welfare, Ethics and Strategy
(OAWES), led by the Chief of Animal Welfare, Ethics and Strategy,
to seek to 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 make information available on our studies, including summaries
of the results – whether positive or negative. GSK was the first
company to publish clinical study reports that form the basis of
submissions to regulatory agencies and we have publically posted
more than 1,830 clinical study reports in addition to more than
6,000 study result summaries. Detailed patient-level data from
approximately 2,000 clinical studies can be requested and
accessed through clinicalstudydatarequest.com.
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. A Data Integrity Committee was in place
throughout the year to provide oversight and a Data Integrity Quality
Assurance team began conducting assessments intended 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. The Group strictly prohibits
promotional practices prior to marketing authorisation, and care is
taken to seek to ensure that SE activity is not promotional.
Specific accountability and authorisation for SE resides within the
Medical Governance framework that is overseen by the Global
Medical Topic Board (GMTB), accountable to the Chief Medical
Officer. GMTB is responsible for oversight of applicable policies
and seeking to ensure the highest level of integrity and continuous
development of SE at GSK. This framework seeks to ensure the
right level of accountability and clear programme guidance at
above country across R&D business units and in Local Operating
Companies.
The Research Practices risk is now aligned with a new Enterprise
framework that seeks to ensure strengthened governance across
the R&D businesses in Pharmaceutical, Vaccines and Consumer
Healthcare. Under the leadership of the Chief Research Practices
Officer, management of the risk will take a practical approach to
information sharing, streamlining risk identification and escalation
while ensuring ownership stays at the business unit level and allows
for a proportional risk treatment plan.
261 GSK Annual Report 2016
Environment, health and safety and sustainability
Risk definition
Failure to manage environment, health and safety and substainability
(EHS&S) risks in line with our objectives and policies and with
relevant laws and regulations.
Risk impact
Failure to manage EHS&S 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 in the US. 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 46 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.
Mitigating activities
The Corporate Executive Team (CET) is responsible for EHS&S
governance for the Group under a global policy. Under that policy,
the CET seeks to ensure there is a control framework in place to
manage the risks, impacts and legal compliance issues that relate
to EHS&S and for assigning responsibility to senior managers for
providing and maintaining those controls. Individual managers seek
to ensure that the EHS&S control framework 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 by
them and expected to take responsibility for EHS&S matters.
Our risk-based, proactive approach is articulated in our refreshed
Global EHS&S standard which supports our EHS&S policy and
our 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. Through
our continuing efforts to improve environmental sustainability we
have reduced our value chain carbon intensity per pack, water
consumption and waste generation. We actively manage our
environmental remediation obligations and seek to ensure practices
are environmentally sustainable and compliant. Our EHS&S
performance results are shared externally each year in our
Responsible Business Supplement.
Information protection
Risk definition
The risk to GSK business activities if information becomes disclosed
to those not authorised to see it, or if information or systems fail to be
available or are corrupted.
Risk impact
Failure to adequately protect critical and sensitive systems and
information may result in loss of commercial or strategic advantage,
damage to our reputation, litigation, or other business disruption
including regulatory sanction, 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 (PII),
intellectual property, manufacturing systems and trade secrets.
There is the potential that our computer systems or information may
be exposed to misuse or unauthorised disclosure. We are also
subject to various laws that govern the processing of PlI.
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. A Privacy Centre of Excellence has been
established to ensure compliance prior to the deadline with the
new General Data Protection Requirements (GDPRs). All employees
are required to complete training on the appropriate handling and
maintaining of PII.
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 have been recognised by 29
European states and Switzerland allowing us to transfer PII
internationally between the Group’s entities without individual privacy
agreements in each European Union country. The approval in the
remaining two countries, Greece and Romania is expected in 2017.
Investor informationFinancial statementsGovernance and remunerationStrategic report 262 GSK Annual Report 2016
Principal risks and uncertainties continued
Supply continuity and crisis management
Risk definition
Failure to deliver a continuous supply of compliant finished product;
inability to respond effectively to a crisis incident in a timely manner
to recover and sustain critical operations, including key supply
chains. This risk was previously called Crisis and continuity
management.
Risk impact
We recognise that failure to supply our products can adversely
impact consumers and patients who rely on them. A material
interruption of supply or exclusion from healthcare programmes
could expose us to litigation or regulatory action and financial
penalties that could adversely affect the Group’s financial results.
The Group’s international operations, and those of its partners,
expose our workforce, facilities, operations and information
technology to potential disruption from natural events (e.g. storm or
earthquake), man-made events (e.g. civil unrest, terrorism), and global
emergencies (e.g. Ebola outbreak, Flu pandemic). It is important that
GSK has robust crisis management and recovery plans in place to
manage such events.
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.
We rely on materials and services provided by third party suppliers
to make our products, including active pharmaceutical ingredients
(API), antigens, intermediates, commodities, and components for
the manufacture and packaging of Pharmaceutical, Vaccine and
Consumer Healthcare products. Some of the third party services
procured, such as services provided by contract manufacturing
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 supply risk in the event of regulatory non-compliance or
physical disruption at the manufacturing sites or logistics system.
If any of the small number of single-source, third party suppliers and
service providers we use fail to fulfil their contractual obligations in a
timely manner or experience regulatory non-compliance or physical
disruption of their logistics and manufacturing sites, this could also
result in delays or service interruptions.
We use effective crisis management and business continuity
planning to provide for the health and safety of our people and to
minimise impact to the Group, by maintaining functional operations
following a natural or man-made disaster, or a public health
emergency.
Mitigating activities
Our supply chain model is designed to ensure the supply, quality
and security of our products globally, as far as possible. We closely
monitor, through the Supply Chain Governance Committees, the
inventory status and delivery of our products with the aim to ensure
that customers have the Pharmaceutical, Vaccines and Consumer
Healthcare products they need.
Improved links between commercial forecasting and manufacturing
made possible by our core commercial cycle should, over time,
reduce the risk associated with demand fluctuations and any impact
on our ability to supply or the cost of write-offs where products
exceed their expiry date. Each node of the supply chain is periodically
reviewed to ensure adequate safety stock, while balancing working
capital in our end-to-end supply chain. Safety stocks and backup
supply arrangements for medically critical and high-revenue products
are in place to help mitigate this risk. In addition, we routinely monitor
the compliance of manufacturing external suppliers in order to
identify and manage risks in our supply base. Where practical, we
minimise our dependence on single sources of supply for critical
items. Where alternative sourcing arrangements are not possible, our
inventory strategy aims to protect the supply chain from unanticipated
disruption.
We continue to implement anti-counterfeit systems such as product
serialisation in accordance with emerging supply chain requirements
around the world. A corporate policy requires each business unit
and functional area head to ensure 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 any business disruption occurs.
Corporate Security supports the business by: coordinating crisis
management and business continuity training; facilitating simulation
exercises; assessing Group preparedness and recovery capability;
and providing assurance oversight of the Group’s central repository
of plans supporting our critical business processes. Each business
unit has a governance board which performs risk oversight and
monitoring including identifying new and emerging threats. The
Group has a coordinated approach to evaluate and manage the
implications for our business regarding the UK’s exit from the
European Union.
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.
263 GSK Annual Report 2016
Shareholder information
Share capital and control
Details of our issued share capital and the number of shares
held in Treasury as at 31 December 2016 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 31 to the financial statements, ‘Net
debt’.
Holders of Ordinary Shares and ADS are entitled to receive
dividends (when declared), the company’s Annual Report, 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 in force in the UK 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, www.gsk.com.
At 3 March 2017, 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.
No. of
shares
327,305,939
*Percentage of
issued
capital (%)
6.66
* 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, with the exception of those
transferred from Treasury to satisfy awards under the Group’s
share plans.
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.
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 2016, when the
company was authorised to purchase a maximum of just over
487 million shares. Details of shares purchased, those cancelled,
those held as Treasury shares and those subsequently transferred
from Treasury to satisfy awards under the Group’s share plans 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 and no shares were purchased during the financial years
ended 2015 or 2016.
The company confirms that it does not currently intend to make
any further market purchases in 2017. The company will review
the potential for future share buy-backs during 2018 in line with
its usual annual cycle and subject to return and ratings criteria.
Market capitalisation
The market capitalisation, based on shares in issue excluding
Treasury shares, of GSK at 31 December 2016 was £76.69 billion.
At that date, GSK was the fifth largest company by market
capitalisation in the FTSE index.
Share price
At 1 January
At 31 December
Increase/(decrease)
High during the year
Low during the year
2016
£
13.73
15.62
13.8%
17.22
13.44
2015
£
13.76
13.73
(0.2 )%
16.42
12.38
2014
£
16.12
13.76
(14.6 )%
16.91
13.24
The table above sets out the middle market closing prices. The
company’s share price increased by 13.8% in 2016. This compares
with an increase in the FTSE 100 index of 14.4% during the year.
The share price on 3 March 2017 was £16.88.
UK£
18
17
16
15
14
13
12
11
10
US$
75
70
65
60
55
50
45
40
35
09
31/12/13
31/12/14
31/12/15
30
31/12/16
UK share price (UK£)
US ADS price (US$)
Investor informationFinancial statementsGovernance and remunerationStrategic report
264 GSK Annual Report 2016
Shareholder information continued
Share capital and control continued
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.
March 2017*
February 2017
January 2017
December 2016
November 2016
October 2016
September 2016
Quarter ended 31 December 2016
Quarter ended 30 September 2016
Quarter ended 30 June 2016
Quarter ended 31 March 2016
Quarter ended 31 December 2015
Quarter ended 30 September 2015
Quarter ended 30 June 2015
Quarter ended 31 March 2015
Year ended 31 December 2016
Year ended 31 December 2015
Year ended 31 December 2014
Year ended 31 December 2013
Year ended 31 December 2012
* to 3 March 2017
Analysis of shareholdings at 31 December 2016
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
ADS
US dollars per share
Low
1667
1535
1520
1459
1496
1619
1592
1459
1592
1388
1345
1268
1238
1323
1357
1345
1238
1324
1359
1318
High
41.99
41.63
39.73
38.54
40.40
43.44
44.26
43.44
45.49
43.47
42.05
43.53
45.14
48.23
48.81
45.49
48.81
56.66
53.68
47.45
Low
41.38
39.30
38.72
37.39
37.79
40.01
42.50
37.39
42.50
40.04
38.54
38.74
37.56
41.65
41.68
37.39
37.56
41.30
43.93
41.90
High
1688
1654
1596
1563
1607
1723
1655
1723
1712
1605
1439
1421
1458
1642
1635
1723
1642
1691
1782
1508
Number of
accounts
% of total
accounts
% of total
shares
Number of
shares
84,752
26,603
6,026
737
360
118,478
5,699
23
4
112,750
1
1
71.53
22.46
5.09
0.62
0.30
100.00
4.81
0.02
0.00
95.17
0.00
0.00
0.56
1.07
1.63
4.81
91.93
100.00
63.52
0.22
0.00
12.04
15.68
8.54
29,909,424
57,343,549
87,628,148
258,261,583
4,935,173,358
5,368,316,062
3,410,289,986
11,672,809
1,860
646,321,560
841,823,897
458,205,950
BNY Mellon is the Depositary for the company’s ADS, 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 3 March 2017, BNY (Nominees)
Limited held 848,389,001 Ordinary Shares representing 17.25% of the issued share capital (excluding Treasury shares) at that date.
At 3 March 2017, the number of holders of Ordinary Shares in the US was 1,022 with holdings of 1,091,064 Ordinary Shares, and the
number of registered holders of ADS was 22,622 with holdings of 424,194,500 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 US is not representative of the number
of beneficial holders or of the residence of beneficial holders.
265 GSK Annual Report 2016
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.
Dividend
Special*
Year
2016
2015
2015
2014
2013
2012
pence
80
20
80
80
78
74
US$
–1
0.57
2.37
2.59
2.47
2.35
1 The Q4 2016 interim ordinary dividend and special dividend receivable by ADR
holders will be calculated based on the exchange rate on 11 April 2017. An annual fee
of $0.02 per ADS (or $0.005 per ADS per quarter) will be charged by the Depository.
The cumulative dividend receivable by ADR holders for Q1, Q2 and Q3 2016 was
1.43 US$.
* The 2015 special dividend related to the return of part of the net cash proceeds from
the Novartis transaction completed in March 2015. This was paid with the fourth quarter
ordinary dividend for 2015.
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 publication
Annual Report distribution
Date
April/May 2017
May 2017
July 2017
October 2017
February 2018
February/March 2018
March 2018
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.
Dividend calendar
Quarter
ADS ex-dividend
date
Ex-dividend
date
Record date
Payment date
Q4 2016
22 February 2017 23 February 2017 24 February 2017
13 April 2017
Q1 2017
10 May 2017
11 May 2017
12 May 2017
13 July 2017
Q2 2017
9 August 2017
10 August 2017
11 August 2017 12 October 2017
Q3 2017
8 November 2017 9 November 2017 10 November 2017
11 January 2018
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 which is made available
on our website from the date of publication. 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 (see
page 268 for the contact details).
Investor informationFinancial statementsGovernance and remunerationStrategic report
266 GSK Annual Report 2016
Shareholder information continued
Annual General Meeting 2017
2.30pm (UK time) on Thursday 4 May 2017
The Queen Elizabeth II 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 their request to do
so. This will enable them 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.
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 US 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
US 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 US/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
Different regimes apply to the taxation of dividend income payable
to UK resident individuals in UK tax years up to 5 April 2016 and to
those tax years commencing on or after 6 April 2016.
For UK tax years up to and including 2015/16, 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. To the extent
that individuals’ income exceeds the basic rate limit, but not the
higher rate limit, an upper dividend rate applies, which is set at
32.5% of the grossed up dividend figure and for those whose
income exceeds the higher rate limit of £150,000, an additional
dividend rate of 37.5% will normally apply.
For UK tax years from 2016/17 onwards, dividend tax credits will no
longer apply and UK resident individuals will be entitled instead to a
dividend tax allowance of up to £5,000, so that the first £5,000 of
dividends received in a tax year will be free of tax (proposals were
announced on 8 March 2017 to reduce this allowance to £2,000
from the 2018/19 tax year onwards). Dividends in excess of this
allowance will be taxed at 7.5% for basic rate taxpayers, 32.5% for
higher rate taxpayers and 38.1% for additional rate taxpayers.
UK resident shareholders that are corporation taxpayers should note
that dividends payable on ordinary shares 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. Different rates apply to the taxation of capital gains
across the 2015/16 and 2016/17 tax years.
For disposals by individuals during the 2015/16 UK tax year 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. From 6 April 2016, these rates reduced
to 20% and 10% or 20% respectively.
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 (UK-domiciled or otherwise) shareholders may be liable
to UK 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 lifetime gift or
other disposal at less than full market value. In the case of a bequest
on death, tax may be charged on the value of the shares at the date
of the shareholder’s death. 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 US to be credited against tax payable in the UK.
267 GSK Annual Report 2016
Tax information for shareholders continued
Stamp duty and stamp duty reserve tax
UK stamp duty and/or stamp duty reserve tax (SDRT) will, subject to
certain exemptions, be payable on the transfer of shares at a rate of
0.5% (rounded up to the nearest £5 in the case of stamp duty) of the
consideration for the transfer. Notwithstanding this, provided that an
instrument is executed in pursuance of the agreement that gave rise
to the charge to SDRT and that instrument is stamped within six
years of the agreement (including being stamped as exempt) any
SDRT charge should be cancelled and any SDRT which has already
been paid will be repaid.
US shareholders
This summary only applies to a shareholder (who is a citizen or
resident of the US 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, nor does it address tax
treatment that may be applicable as a result of international income
tax treaties.
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. A qualified dividend as
defined by the US Internal Revenue Service is a dividend that meets
the following criteria:
1. Must be issued by a US corporation, a corporation incorporated
in a US possession, or a corporation that is eligible for the
benefits of a comprehensive income tax treaty deemed
satisfactory, as published by the IRS.
2. The dividends are not listed with the IRS as dividends that do
not qualify.
3. The required dividend holding period has been met. The shares
must have been owned by you for more than 60 days of the
‘holding period’ – which is defined as the 121-day period that
begins 60 days before the ex-dividend date, or the day in which
the stock trades without the dividend priced in. For example, if a
stock’s ex-dividend date is October 1, the shares must be held
for more than 60 days in the period between August 2 and
November 30 of that year in order to count as a qualified dividend.
Dividends that are not qualified are subject to taxation at the US
federal graduated tax rates, at a maximum rate of 43.4%. Some
types of dividends are automatically excluded from being qualified
dividends, even if they meet the other requirements. These include
(but are not limited to):
1. Capital gains distributions
2. Dividends on bank deposits
3. Dividends held by a corporation in an Employee Stock Ownership
Plan (ESOP)
4. Dividends paid by tax-exempt corporations
US state and local tax rates on qualified and non-qualified dividends
may vary and would be assessed in addition to the federal tax rates
communicated above.
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, from the date the
shares were vested/released. Short-term capital gains can be
subject to taxation of rates of up to 43.4%, whereas long-term capital
gains may be subject to rates of up to 23.8%. State and local tax
rates on capital gains may also apply.
Information reporting and backup withholding
Dividends and payments of the proceeds on a sale of shares or
ADR, paid within the US 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 and/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).
However, no stamp duty or SDRT should be payable on the transfer
of, or agreement to transfer, an ADR.
Investor informationFinancial statementsGovernance and remunerationStrategic report 268 GSK Annual Report 2016
Shareholder information continued
Shareholder services and contacts
Registrar
The company’s registrar is:
Equiniti Limited
Aspect House, Spencer Road, Lancing, BN99 6DA
www.shareview.co.uk
Tel: 0371 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
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.
For more details on this service and the costs
involved please contact Equiniti.
Electronic communications
Shareview portfolio service
Duplicate publications or mailings
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.
You can register at www.shareview.co.uk
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.
You can register at www.shareview.co.uk
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.
Please contact Equiniti.
Share dealing service†
(please note that market trading hours
are from 8.00am to 4.30pm UK time,
Monday to Friday (excluding public holidays
in England and Wales))
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.
Corporate Sponsored Nominee Account
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 account 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.
Individual Savings Accounts (ISAs)†
The company has arranged for Equiniti Financial Services Limited
to provide a GSK Corporate ISA to hold GSK Ordinary Shares.
For internet transactions, please log
on to www.shareview.co.uk/dealing.
For telephone transactions, please
call 0345 603 7037 (in the UK) or
+44 (0)121 415 7560 (outside the UK).
For postal transactions, please call
0371 384 2991* to request a
dealing form.
An application form can be requested
from www.shareview.co.uk or
by telephoning Equiniti on
0371 384 2991*.
Details are available from
www.shareview.co.uk or can be
requested by telephoning Equiniti,
on 0345 300 0430. Lines are open 8.00am
to 4.30pm for dealing, and until 6.00pm
for enquiries Monday to Friday (excluding public
holidays in England and Wales).
* UK lines are open from 8.30am to 5.30pm, Monday to Friday (excluding public holidays in England and Wales).
†
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.
269 GSK Annual Report 2016
Shareholders services and contacts 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:
UK
980 Great West Road
Brentford, Middlesex, TW8 9GS
Tel: +44 (0)20 8047 5000
US
5 Crescent Drive
Philadelphia PA 19112
Tel: +1 888 825 5249 (US toll free)
Tel: +1 215 751 4611 (outside the US)
GSK Response Center
Tel: +1 888 825 5249 (US toll free)
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: 0800 111 6768 (in the UK)*
Tel: +44 20 7066 1000 (outside the UK)
* Lines are open from 8.00am to 6.00pm, UK time, Monday to Friday, except UK public
holidays, and 9.00am to 1.00pm on Saturdays.
Responsible Business Supplement
We are publishing our Responsible Business Supplement 2016
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.
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 US)
email: shrrelations@cpushareownerservices.com
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.
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, which 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.
Investor informationFinancial statementsGovernance and remunerationStrategic report 270 GSK Annual Report 2016
Other statutory disclosures
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 US,
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 US,
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 2016, the Committee met
18 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 the relevant member of the
ARC (Judy Lewent) is included in the Audit & Risk Committee report
on page 97 and in her biography on page 85. 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.
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
– 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
– 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 2016.
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 March 2017, 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, as amended (the ‘Exchange Act’):
– 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
– 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 2016 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 2016 and its
conclusion will be filed as part of the Group’s Form 20-F, and
271 GSK Annual Report 2016
US law and regulation continued
PricewaterhouseCoopers LLP, which has audited the consolidated
financial statements of the Group for the year ended 31 December
2016, 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 Exchange Act
Section 13(r) of the Exchange Act 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 (£2 million)
and net profits (£1 million) from the Group’s sales to Iran in 2016.
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 organisation.
Again, the Group does not deal directly with such facilities and sells
through distributors. 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
(£52 million) and net profits (£27 million) from the Group’s sales to
Lebanon in 2016.
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 2016, 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 US, 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 2016, a total
of US$ 380,360 (2015 – US$446,727) was donated to political
organisations by the GSK employee PAC.
Notwithstanding our policy, 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. Therefore, while we do not make and do not intend to
make donations to any EU political parties or organisations nor do
we incur any EU political expenditure, the definitions of political
donations, political expenditure and political organisations used in
the legislation are so wide that we annually seek shareholder
authorisation for any inadvertent expenditure. 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.
This authorisation process, for expenditure of up to £100,000
each year, dates back to the AGM held in May 2001, following the
introduction of the Political Parties, Elections and Referendums Act
2000. The authority has since been renewed annually.
Investor informationFinancial statementsGovernance and remunerationStrategic report 272 GSK Annual Report 2016
Other statutory disclosures continued
Group companies
In accordance with Section 409 of the Companies Act 2006 a full list of subsidiaries, associates, joint ventures and joint arrangements, the
address of the registered office and effective percentage of equity owned, as at 31 December 2016 are disclosed below. Unless otherwise
stated the share capital disclosed comprises ordinary shares which are indirectly held by GlaxoSmithKline plc. The percentage held by class
of share is stated where this is less than 100%. Unless otherwise stated, all subsidiary companies have their registered office in their country
of incorporation. All subsidiary companies are resident for tax purposes in their country of incorporation unless otherwise stated.
Name
Wholly owned subsidiaries
1506369 Alberta ULC
Action Potential Venture Capital Limited
Adechsa GmbH (iv)
Affymax Research Institute
Alenfarma – Especialidades Farmaceuticas,
Limitada (iv)
Allen & Hanburys Limited (iv)
Allen & Hanburys Pharmaceutical Nigeria Limited
Allen Farmaceutica, S.A.
Allen Pharmazeutika Gesellschaft m.b.H.
Aners S.A (iv)
Barrier Therapeutics, Inc.
Beecham Group p l c
Beecham Pharmaceuticals (Pte) Limited
Beecham Pharmaceuticals S.A (iv) (vi)
Security
Common
Ordinary
Ordinary
Common
Ordinary Quota
Ordinary
Ordinary
Ordinary
Ordinary
Non-endorsable Nominative
Ordinary
Common
20p Shares 'A'; 5p Shares B
Ordinary
Nominative
Beecham Portuguesa-Produtos Farmaceuticos e
Quimicos, Lda
Beecham S.A. (iv)
Biddle Sawyer Limited
Biovesta Ilaçlari Ltd. Sti. (iv)
Ordinary Quota
Ordinary
Equity
Nominative
Burroughs Wellcome & Co (Australia) Pty Limited (in liquidation) Ordinary
Ordinary
Burroughs Wellcome & Co (Bangladesh) Limited
Burroughs Wellcome International Limited
Cascan GmbH & Co. KG
Castleton Investment Ltd (vi)
Cellzome GmbH
Cellzome Limited
Cellzome Therapeutics, Inc. (iv)
Cellzome, Inc.
Charles Midgley Limited (iv)
Ordinary
Partnership Capital
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Series A Preferred
Series B Preferred
Series C-1 Convertible Preferred
Series C-3 Convertible Preferred
Ordinary
7% Cumulative Preference
Chiron Behring Vaccines Private Limited
Ordinary
Clarges Pharmaceuticals Limited
Colleen Corporation
Corixa Corporation
Coulter Pharmaceutical, Inc. (iv)
Dealcyber Limited
Desarrollo Energia Solar Alternativa S.L.
Domantis Limited
Duncan Flockhart Australia Pty Limited (iv) (vi)
Ordinary
Preference (99.97)
Common
Common
Common
Ordinary
Ordinary
Ordinary
Ordinary
Registered address
3500 855-2nd Street SW, Calgary, AB, T2P 4J8, Canada
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
c/o PRV Provides Treuhandgesellschaft AG, Dorfstrasse 38,
Baar, 6341, Switzerland
Corporation Service Company, 2710 Gateway Oaks Drive, Suite 150N,
Sacramento, California, CA, 95833, United States
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1495-131, Portugal
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
24 Abimbola Way, Ilasamaja, Isolo, Lagos, Nigeria
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos,
Madrid, 28760, Spain
Wagenseilgasse 3, Euro Plaza, Gebäude I, 4. Stock,
Vienna, A-1120, Austria
Tucuman 1, piso 4to. Ciudad Autonoma de, Buenos Aires,
C1049AAA, Argentina
Corporation Services Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
38 Quality Road, Jurong Industrial Estate, Jurong, 618809, Singapore
Av 10 De Agosto N36-239 y Naciones Unidas, Edificio
Electroectuatoriana, 2do piso, Quito, Ecuador
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1495-131, Portugal
Parc de la Noire Epine, rue Fleming 20, 1300 Wavre, Belgium
252 Dr Annie Besant Road, Mumbai, 400 030, India
Büyükdere Caddesi No. 173, 1.Levent Plaza B Blok Kat:4, 1.Levent,
Istanbul, 34394, Turkey
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Fouzderhat Industrial Area, Dhaka Trunk Road, North Kattali,
Chittagong - 4217, Bangladesh
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Industriestrasse 32-36, Bad Oldesloe, 23843, Germany
C/o DTOS Ltd, 10th Floor, Standard Charted Tower, 19 Cybercity,
Ebene, Mauritius
Meyerhofstrasse 1, Heidelberg, 69117, Germany
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
401-402, A, Wing, Floral Deck Plaza, Opp Rolta Bhavan,
Central MIDC Road, Mumbai, Andheri (East), India
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos,
Madrid, 28760, Spain
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
1061 Mountain Highway, Boronia, VIC, 3155, Australia
273 GSK Annual Report 2016
Group companies continued
Name
Security
Registered address
Wholly owned subsidiaries continued
Edinburgh Pharmaceutical Industries Limited
Ordinary; Preference
Shewalton Road, Irvine, Ayrshire, KA11 5AP, Scotland
10p Ordinary
Social Capital
Ordinary
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Avenue Andres Bello 2687, Piso 19, Las Condes, Santiago,
C.P. 7550611, Chile
5 Poienelor Street, Brasov, Romania
12th Floor Wave Place, 55 Wireless Road, Lumpini, Pathumwan,
Bangkok, 10330, Thailand
Corporation Service Company, 2710 Gateway Oaks Drive, Suite 150N,
Sacramento, California, CA, 95833, United States
Klaus Torgårds vei 3, Oslo, NO-0372, Norway
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
4-6-15 Sendagaya, Shibuya-ku, Tokyo, 151-8566, Japan
82 Marine Road, Apapa, Lagos, Nigeria
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Level II, Zurich House, 21 Queen Street, Auckland, 1010, New Zealand
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
Industriestrasse 32-36, Bad Oldesloe, 23843, Germany
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Ordinary Quota
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1495-131, Portugal
Eskaylab Limited
Etex Farmaceutica Ltda
Europharm S.A.
Fipar (Thailand) Ltd (In liquidation)
Genelabs Technologies, Inc.
Glaxo AS (iv)
Glaxo Group Limited
Glaxo Kabushiki Kaisha (iv)
Glaxo Laboratories (Nigeria) Limited (iv)
Glaxo Laboratories Limited (iv)
Glaxo New Zealand Pension Plan Trustee Limited
Glaxo Operations UK Limited
Glaxo Properties BV
Glaxo Verwaltungs GmbH (vi)
Glaxo Wellcome Australia Pty Ltd (iv) (vi)
Glaxo Wellcome Farmaceutica, Limitada
Glaxo Wellcome Holdings Limited (in liquidation)
Glaxo Wellcome International B.V. (v)
Glaxo Wellcome Manufacturing Pte Ltd
Glaxo Wellcome Production S.A.S.
Glaxo Wellcome PST Pty Ltd (in liquidation)
Glaxo Wellcome UK Limited
Glaxo Wellcome Vidhyasom Limited (iv)
Glaxo Wellcome, S.A.
Glaxo, S.A.
Glaxo-Allenburys (Nigeria) Limited (iv)
Glaxochem (UK) Unlimited
Glaxochem Pte Ltd (v)
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary B
Ordinary C
Ordinary
GlaxoSmithKline – Produtos Farmaceuticos, Limitada
Ordinary Quota
GlaxoSmithKline (Cambodia) Co., Ltd.
GlaxoSmithKline (China) Investment Co Ltd
GlaxoSmithKline (China) R&D Company Limited
GlaxoSmithKline (Cyprus) Limited
GlaxoSmithKline (GSK) S.R.L.
GlaxoSmithKline (Ireland) Limited (ii)
GlaxoSmithKline (Israel) Ltd
GlaxoSmithKline (Private) Limited (iv)
GlaxoSmithKline (Thailand) Limited
GlaxoSmithKline A.E.B.E.
GlaxoSmithKline AB
GlaxoSmithKline AG
GlaxoSmithKline Angola Unipessoal Limitada
GlaxoSmithKline Argentina S.A.
GlaxoSmithKline AS
GlaxoSmithKline Asia Pvt. Limited
Ordinary
Ordinary
Equity
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Quotas
Ordinary
Ordinary
Equity
55 Baker Street, London, W1U 7EU, England
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
1 Pioneer Sector 1, Jurong Industrial Estate, Jurong, 628413, Singapore
100 Route de Versailles, Marly le Roi, 78160, France
1061 Mountain Highway, Boronia, VIC, 3155, Australia
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
12th Floor Wave Place, 55 Wireless Road, Lumpini, Pathumwan,
Bangkok, 10330, Thailand
Poligono Industrial Allendeduero, Avenida de Extremadura, 3,
Aranda de Duero, Burgos, 09400, Spain
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos,
Madrid, 28760, Spain
41 Creek Road, Apapa, Lagos, PMB 1401, Nigeria
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
150 Beach Road, #21-00 Gateway West, 189720, Singapore
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1495-131, Portugal
5th Floor DKSH Building, No.797 Preah Monivong Boulevard
(Corner of Street 484), Sangkat Phsar Deum Thakov, Khan
Chamkarmon, Phnom Penh, Cambodia
Room 901-910, Building A, Ocean International Center, 56 Mid 4th
East Ring Road, Bejing, Chaoyang District, China
No 3 Building, 898 Halei Road, Zhang Jiang, Hi Tech Park Pudong New
Area, Shanghai, China
Arch. Makariou III, 2-4, Capital Center, 9th Floor, Nicosia, P.C. 1505,
Cyprus
1-5 Costache Negri Street, Opera Center 1, floor 5 and 6 (Zone 1),
District 5, Bucharest, Romania
12 Riverwalk Citywest Business Campus, Dublin, 24, Ireland
25 Basel Street, PO Box 10283, Petach-Tikva, 49002, Israel
Unit 3, 20 Anthony Road, Msasa, Harare, Zimbabwe
12th Floor Wave Place, 55 Wireless Road, Lumpini, Pathumwan,
Bangkok, 10330, Thailand
266 Kifissias Avenue, Halandri, Athens, 152 32, Greece
Hemvarnsg. 9, Solna, 171 54, Sweden
Talstrasse 3-5, 3053 Muenchenbuchsee, Switzerland
Estrada de Cacuaco 288, Bairro Petrangol, Luanda, Angola
Tucumán 1, piso 4to Ciudad Autonoma de, Buenos Aires, C1049AAA,
Argentina
Klaus Torgårds vei 3, Oslo, NO-0372, Norway
Patiala Road, Nabha 147201, Dist Patiala, Punjab, India
Investor informationFinancial statementsGovernance and remunerationStrategic report 274 GSK Annual Report 2016
Other statutory disclosures continued
Security
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Registered address
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
Prinzregentenplatz 9, Munchen, 81675, Germany
No. 277 Niudun Road, Zhangjiang Hi-Teck Park, Shanghai, China
2100 Gödöllõ, Homoki Nagy István utca 1, Hungary
637 Rue des Aulnois, Saint-Amand Les Eaux, 59230, France
Ordinary; Preference
Rue de l'Institut 89, B-1330 Rixensart, Belgium
GlaxoSmithKline Chile Farmaceutica Limitada
Social Capital
GlaxoSmithKline Colombia S.A.
GlaxoSmithKline Consumer Healthcare Investments
(Ireland) Limited (ii) (v)
Ordinary
Ordinary
GlaxoSmithKline Consumer Healthcare Ireland IP Limited (ii) (v)
Ordinary
Group companies continued
Name
Wholly owned subsidiaries continued
GlaxoSmithKline Australia Pty Ltd
GlaxoSmithKline B.V.
GlaxoSmithKline Beteiligungs GmbH
GlaxoSmithKline Biologicals (Shanghai) Ltd.
GlaxoSmithKline Biologicals Kft.
GlaxoSmithKline Biologicals S.A.S.
GlaxoSmithKline Biologicals SA
GlaxoSmithKline Brasil Limitada
GlaxoSmithKline Business Services S.A.
(dissolved 20 January 2017)
GlaxoSmithKline Capital Inc.
GlaxoSmithKline Capital plc
GlaxoSmithKline Caribbean Limited
GlaxoSmithKline Consumer Holding B.V.
GlaxoSmithKline d.o.o
GlaxoSmithKline d.o.o.
GlaxoSmithKline doo Beograd
GlaxoSmithKline Ecuador S.A.
GlaxoSmithKline Eesti OU
GlaxoSmithKline ehf
GlaxoSmithKline El Salvador S.A. de C.V.
GlaxoSmithKline EOOD
GlaxoSmithKline Export Limited
GlaxoSmithKline Export Panama S.A.
GlaxoSmithKline Far East B.V.
GlaxoSmithKline Finance plc
GlaxoSmithKline GmbH & Co. KG
GlaxoSmithKline Guatemala S.A.
GlaxoSmithKline Holding AS
GlaxoSmithKline Holdings (Americas) Inc.
GlaxoSmithKline Holdings (Ireland) Limited
GlaxoSmithKline Holdings (One) Limited (i)
GlaxoSmithKline Holdings Limited (i)
GlaxoSmithKline Holdings Pty Ltd
GlaxoSmithKline Honduras S.A.
GlaxoSmithKline IHC Limited
Quotas
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Quota
Equity Capital
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Estrada dos Banderiantes, 8464, Camorim, Jacarepagua, Rio de Janeiro,
22783-110, Brazil
300 metros al este de la Rotonda de la Betania, Mercedes de Montes
de Oca, Sabanilla, Montes de Oca, San Jose, Costa Rica
Wilmington Trust SP Services Inc., 1105 North Market Street,
Suite 1300, Wilmington, Delaware, DE, 19801, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Avenue Andrés Bello No. 2687, Piso 19, Las Condes, Santiago,
C.P. 7550611, Chile
Avenida El Dorado, #69B-45/Piso 9, Bogota, Colombia
6900 Cork Airport Business Park, Kinsale Road, Cork, County Cork,
Ireland
Currabinny, Carrigaline, County Cork, Ireland
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
Zmja od Bosne broj 7-7a, Sarajevo, 71000, Bosnia and Herzegovina
Ulica Damira Tomljanovica Gavrana 15, Zagreb, Croatia
Omladinskih brigada 88, New Belgrade, City of Belgrade, 11070, Serbia
Av 10 De Agosto N36-239 y Naciones Unidas, Edificio
Electroectuatoriana, 2do piso, Quito, Ecuador
Lõõtsa 8a, Tallinn, 11415, Estonia
Thverholt 14, 105, Reykjavik, Iceland
Avenida El Boqueron y Calle Izalco No 7 y 8 Parque Industrial El
Boqueron, Santa Elen, Antiguo Custatlan, La Libertad, El Salvador
115 G Tsarigradsko Shose Blvd., floor 9, Mladost Region, Sofia,
1784, Bulgaria
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Panama City, Republic of Panama, Panama
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Tegucigalpa, MDC, Honduras
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Büyükdere Caddesi No. 173, 1.Levent Plaza B Blok Kat:4,
1.Levent, Istanbul, 34394, Turkey
7333 Mississauga Road North, Mississauga, ON, L5N 6L4, Canada
19 Par-La-Ville Road, Hamilton, HM11, Bermuda
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Partnership Capital
Prinzregentenplatz 9, Munchen, 81675, Germany
Ordinary
Ordinary
Common
Novena Avenida 0-09, Zona 4, Guatemala City, Guatemala
Klaus Torgårds vei 3, Oslo, NO-0372, Norway
Wilmington Trust SP Services Inc., 1105 North Market Street,
Suite 1300, Wilmington, Delaware, DE, 19801, United States
Ordinary; Deferred
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
GlaxoSmithKline Ilaclari Sanayi ve Ticaret A.S.
Nominative
GlaxoSmithKline Inc.
GlaxoSmithKline Insurance Ltd.
GlaxoSmithKline Intellectual Property (No.2) Limited
GlaxoSmithKline Intellectual Property Development Limited
Class A Common
Class C Preference
Ordinary
Ordinary
Ordinary
GlaxoSmithKline Intellectual Property Holdings Limited
A Ordinary; B Ordinary
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
GlaxoSmithKline Intellectual Property Limited
Ordinary; Deferred
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
GlaxoSmithKline Intellectual Property Management Limited
GlaxoSmithKline International Limited
GlaxoSmithKline Investigación y Desarrollo, S.L.
GlaxoSmithKline Investment Holdings Limited
GlaxoSmithKline Investment Services Limited
GlaxoSmithKline Investments (Ireland) Limited (ii) (v)
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos,
Madrid, 28760, Spain
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Currabinny, Carrigaline, County Cork, Ireland
275 GSK Annual Report 2016
Group companies continued
Name
Wholly owned subsidiaries continued
GlaxoSmithKline Investments Pty Ltd
GlaxoSmithKline K.K.
GlaxoSmithKline Korea Limited
GlaxoSmithKline Latin America, S.A.
GlaxoSmithKline Latvia SIA
GlaxoSmithKline Lietuva UAB
GlaxoSmithKline Limited
Security
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
GlaxoSmithKline LLC
LLC Interests
GlaxoSmithKline (Malta) Limited
GlaxoSmithKline Manufacturing SpA
GlaxoSmithKline Maroc S.A.
GlaxoSmithKline Medical and Healthcare Products Limited
GlaxoSmithKline Mercury Limited (i)
GlaxoSmithKline Mexico, S.A. de C.V.
GlaxoSmithKline NZ Limited
GlaxoSmithKline Oy
GlaxoSmithKline Peru S.A.
GlaxoSmithKline Pharma A/S
GlaxoSmithKline Pharma GmbH
GlaxoSmithKline Pharmaceutical Kenya Limited
GlaxoSmithKline Pharmaceutical Nigeria Limited
GlaxoSmithKline Pharmaceutical Sdn Bhd
GlaxoSmithKline Pharmaceuticals (Pvt) Ltd
GlaxoSmithKline Pharmaceuticals (Suzhou) Limited
GlaxoSmithKline Pharmaceuticals Costa Rica S.A
GlaxoSmithKline Pharmaceuticals S.A.
GlaxoSmithKline Pharmaceuticals SA
GlaxoSmithKline Pharmaceuticals Ukraine LLC
GlaxoSmithKline Pte Ltd
GlaxoSmithKline Puerto Rico Inc.
GlaxoSmithKline Republica Dominicana S.A.
GlaxoSmithKline Research & Development Limited
GlaxoSmithKline S.A.
GlaxoSmithKline S.p.A.
GlaxoSmithKline s.r.o.
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary A; Ordinary B;
Ordinary C; Ordinary D
Ordinary
Chartered Capital
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
GlaxoSmithKline Services GmbH & Co. KG (vi)
GlaxoSmithKline Services Inc. (iv)
Partnership Capital
Common
GlaxoSmithKline Services Unlimited (i)
GlaxoSmithKline SL Holdings, LLC
GlaxoSmithKline SL LLC
GlaxoSmithKline SL LP (iv)
GlaxoSmithKline Slovakia s.r.o.
GlaxoSmithKline South Africa (Pty) Limited
GlaxoSmithKline Superannuation Company Pty Ltd
(in liquidation)
GlaxoSmithKline Trading Services Limited (ii) (v)
GlaxoSmithKline Trading ZAO
GlaxoSmithKline Tunisia S.A.R.L.
Ordinary
LLC Interests
LLC Interests
Partnership
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Registered address
1061 Mountain Highway, Boronia, VIC, 3155, Australia
4-6-15 Sendagaya, Shibuya-ku, Tokyo, 151-8566, Japan
9F LS Yongsan Tower 92, Hangangdae-ro Yongsan-gu, Seoul,
140-702, Republic of Korea
Panama City, Republic of Panama, Panama
Duntes iela 11, Riga, Latvia
Ukmerges st. 120, Vilnius, LT-08105, Lithuania
Units 2201, 2214 and 23/F, Tower 6, The Gateway, 9 Canton Road,
Harbour City, Tsimshatsui, Kowloon, Hong Kong
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
1, First Floor, De La Cruz Avenue, Qormi, QRM2458, Malta
Via Alessandro Fleming 2, Verona, 37135, Italy
42-44 Angle Bd, Rachidi et Abou Hamed El Glaza, Casablanca, Morocco
H-1124, Csorsz utca 43, Budapest, Hungary
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Calzada, Mexico-Xochimilco 4900, Colonia San Lorenzo, Huipulco,
Delegacion Tlalpan, 14370, Mexico
Level 11, Zurich House, 21 Queen Street, Auckland, 1010, New Zealand
The Piispansilta 9A, P.O. Box 24, Espoo, FIN-02230, Finland
Av. Javier Prado Oeste, 995, San Isidro, LIMA 27, Peru
Nykaer 68, Brondby, DK-2605, Denmark
Wagenseilgasse 3, Euro Plaza, Gebäude I, 4. Stock, Vienna,
A-1120, Austria
L.R. NO. 209/6921, 5th Floor, Icea Lion Centre, Riverside Park West
Wing, Chiromo Road, Westlands P.O. Box 10643-00100, Nairobi, Kenya
1 Industrial Avenue, Ilupeju, Ikeja, Lagos, PM B 21218, Nigeria
Level 6, Quill 9, 112, Jalan Semangat, Petaling Jaya, Selangor Darul
Ehsan, 46300, Malaysia
121 Galle Road, Kaldemulla, Moratuwa, Sri Lanka
No 40 Su Hong Xi Road, Suzhou Industrial Park, Suzhou, 215021, China
300 metros al este de la Rotonda de la Betania, Mercedes de
Montes de Oca, Sabanilla, Montes de Oca, San Jose, Costa Rica
Ul. Grunwaldzka 189, Poznan, 60-322, Poland
Site Apollo, Avenue Pascal 2-4-6, Wavre, 1300, Belgium
Pavla Tychyny avenue, 1-V, Kiev, 02152, Ukraine
150 Beach Road, #21-00 Gateway West, 189720, Singapore
Centro Internacional de Mercadeo, 90 Road # 165, Tower II,
Suite 800, Guaynabo, 00968, Puerto Rico
Av. Lope de Vega 29, Torre NovoCentro, Local 406, Santo Domingo,
Dominican Republic
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos,
Madrid, 28760, Spain
Via Alessandro Fleming 2, Verona, 37135, Italy
Hvezdova 1734/2c, Prague, 4 140 00, Czech Republic
Prinzregentenplatz 9, Munchen, 81675, Germany
Corporation Services Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Corporation Services Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Galvaniho 7/A, Bratislava, 821 04, Slovakia
Flushing Meadows Building, The Campus, 57 Sloane Street,
Bryanston 2021, South Africa
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Currabinny, Carrigaline, County Cork, Ireland
Yakimanskaya nab., 2, Moscow, 119180, Russian Federation
Immeuble Les Quatres R, Rue du Lac Lochness, Berges du Lac,
Tunis, Tunisia
Investor informationFinancial statementsGovernance and remunerationStrategic report 276 GSK Annual Report 2016
Other statutory disclosures continued
Partnership Interest
273, Furmanov Street, Almaty, 050059, Kazakhstan
Group companies continued
Name
Wholly owned subsidiaries continued
GlaxoSmithKline UK Limited
GlaxoSmithKline Uruguay S.A.
Security
Ordinary
Registered Shares Provisory
Stock
GlaxoSmithKline Venezuela C.A.
Ordinary
GlaxoSmithKline Vietnam Limited Liability Company (iv) (vi)
Equity Capital
Glycovaxyn AG (vi)
Common; Preferred A,
Preferred B; Preferred C
Group Laboratories South Africa (Pty) Limited (iv) (vi)
Ordinary
Groupe GlaxoSmithKline S.A.S.
GSK Business Service Centre Sdn Bhd
GSK Commercial Sp. z o.o.
GSK d.o.o., Ljubljana
GSK Kazakhstan LLP
GSK Services Sp z o.o.
GSK Vaccines GmbH
GSK Vaccines Institute for Global Health S.r.l.
GSK Vaccines S.r.l.
GSK Vaccines Vertriebs GmbH
Herbridge Unlimited Company (ii) (vi)
HGS France S.a.r.l. (iv) (vi)
Horlicks Limited
Human Genome Sciences Pacific Pty Ltd (iv) (vi)
Human Genome Sciences, Inc.
ID Biomedical Corporation of Quebec
ID Biomedical Corporation of Washington (iv)
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Quotas
Quotas
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common
Common
Common
Instituto Luso Farmaco, Limitada (iv)
Ordinary Quota
InterPharma Dienstleistungen GmbH
Quota
J&J Technologies, LC (iv)
LLC Interests
Laboratoire GlaxoSmithKline
Laboratoire Pharmaceutique Algérien LPA Production SPA
Laboratoire Pharmaceutique Algérien SPA
Laboratoires Paucourt (iv)
Laboratoires Saint-Germain (iv)
Laboratorios Dermatologicos Darier, S.A de C.V.
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Laboratorios Farmaceuticos Stiefel (Portugal) LTDA (iv)
Ordinary Quota
Registered address
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Salto 1105, CP 11.200 Montevideo, Uruguay
Urbanizacion La Trinidad, Calle luis De Camoems, Edif No 115-117
Apatado Posta, Caracas, 1010, Venezuela
Metropolitan, 235 Dong Khoi, Ben Nghe Ward, District 1,
Ho Chi Minh City, Viet Nam
Grabenstrasse 3, 8952 Schlieren, Switzerland
Flushing Meadows Building, The Campus, 57 Sloane Street,
Bryanston 2021, South Africa
100 Route de Versailles, Marly le Roi, 78160, France
Level 6, Quill 9, 112, Jalan Semangat, Petaling Jaya, Selangor Darul
Ehsan, 46300, Malaysia
ul. Rzymowskiego 53, Warsaw, 02-697, Poland
Ameriška ulica 8,Ljubljana, 1000, Slovenia
Ul. Grunwaldzka 189, Poznan, 60-322, Poland
Emil-von-Behring-Str.76, 35041 Marburg, Germany
Via Fiorentina 1, Siena, 53100, Italy
Via Fiorentina 1, Siena, 53100, Italy
Rudolf-Diesel-Ring 27, Holzkirchen, 83607, Germany
Currabinny, Carrigaline, County Cork, Ireland
117 Avenue, Victor Hugo, Boulogne-Billancourt, 92100, France
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Corporation Service Company,2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
2323 Boul. du Parc Technologique, Québec, G1P 4R8, Canada
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores,
Alges, 1495-131, Portugal
Wagenseilgasse 3, Euro Plaza, Gebäude I, 4. Stock, Vienna,
A-1120, Austria
Corporation Service Company, Bank of America, 16th Floor,
1111 East Main Street, Richmond, Virginia, VA, 23219, United States
100 Route de Versailles, Marly le Roi, 78160, France
Zone Industrielle Est, Boudouaou, Boumerdes, Algeria
Zone Industrielle Est, Boudouaou, Boumerdes, Algeria
100 Route de Versailles, Marly le Roi, 78160, France
100 Route de Versailles, Marly le Roi, 78160, France
Calzada Mexico Xochimilco, 4900 San Lorenzo Huipulco,
District Federal Mexico, 14370, Mexico
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1495-131, Portugal
Laboratorios Phoenix Sociedad Anonima Industrial
Comercial Y Financiera
Non-endorsable Nominative
Ordinary Shares
Tucuman 1, piso 4to. Ciudad Autonoma de, Buenos Aires, C1049AAA,
Argentina
Laboratorios Stiefel de Chile Y Compañía Limitada
Social Capital
Laboratorios Stiefel de Venezuela SA
Ordinary
Laboratorios Stiefel Ltda.
Laboratorios Wellcome De Portugal Limitada (iv)
Maxinutrition Limited (In liquidation)
Mixis Genetics Limited
Montrose Fine Chemical Company Ltd
Montrose Pharma Company Limited
Montrose Pharma UAB (in liquidation)
Novartis Vaccines and Diagnostics AG (in liquidation)
Novartis Vaccines and Diagnostics Pty Ltd (iv) (vi)
Ordinary
Ordinary Quota
Ordinary
Ordinary
Ordinary Euro
Ordinary
Ordinary Quota
Ordinary
Ordinary
Ordinary
Avenue Andrés Bello No. 2687, Piso 19, Las Condes, Santiago,
C.P. 7550611, Chile
Calle Luis de Camoens, Edificio GlaxoSmithKline, No. 115-117, Urb.
La Trinidad, Caracas, Venezuela
Rua Professor Joao Cavalheiro Salem 1077, Guarulhos, Sao Paulo, Brazil
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1495-131, Portugal
55 Baker Street, London, W1U 7EU, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Shewalton Road, Irvine, Ayrshire, KA11 5AP, Scotland
H-1124, Csorsz utca 43, Budapest, Hungary
A.Gostauto 40A, Vilnius, LT-01112, Lithuania
c/o OBC Suisse AG, Aeschenvorstadt 71, 4051, Basel, Switzerland
1061 Mountain Highway, Boronia, 3155, Australia
277 GSK Annual Report 2016
Group companies continued
Name
Security
Registered address
Wholly owned subsidiaries continued
Okairos AG (iv) (vi)
Penn Labs Inc. (iv)
S.R. One International B.V.
S.R. One, Limited
Setfirst Limited
Smith Kline & French Laboratories Limited
Smith Kline & French Portuguesa-Produtos
Farmaceuticos, LDA (iv)
Common; Preferred A;
Preferred B
Common
Ordinary
Units (Common)
Ordinary
Ordinary
Ordinary Quota
SmithKline Beecham (Australia) Pty Ltd (in liquidation)
SmithKline Beecham (Bangladesh) Private Limited (iv)
SmithKline Beecham (Cork) Limited (ii)
Ordinary
Ordinary
Ordinary
SmithKline Beecham (Export) Limited
SmithKline Beecham (H) Limited
SmithKline Beecham (Investments) Limited
SmithKline Beecham (Manufacturing) Limited (ii)
SmithKline Beecham (SWG) Limited
SmithKline Beecham Animal Health Company (in liquidation)
SmithKline Beecham Biologicals US Partnership
SmithKline Beecham Egypt L.L.C.
SmithKline Beecham Farma, S.A.
SmithKline Beecham Holdings (Australia) Pty. Limited
(in liquidation)
Ordinary
Non-Cumulative
Non-Redeemables;
Ordinary
Ordinary
Ordinary
Ordinary
Common
Partnership Interests
Quotas
Ordinary
Ordinary
SmithKline Beecham Inter-American Corporation (iv)
Shares No par Value (Common)
SmithKline Beecham Limited
SmithKline Beecham Marketing and Technical Services Limited
SmithKline Beecham Nominees Limited
SmithKline Beecham Overseas Limited
SmithKline Beecham Pension Plan Trustee Limited (iv)
SmithKline Beecham Pension Trustees Limited (iv)
SmithKline Beecham Pharma GmbH & Co KG
SmithKline Beecham Pharma Verwaltungs GmbH
SmithKline Beecham Pharmaceuticals (Pty) Limited (iv) (vi)
Ordinary 6.25p
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Partnership Capital
Ordinary
Ordinary
SmithKline Beecham Pharmaceuticals Co.
Shares No par Value (Common)
SmithKline Beecham Port Louis Limited (vi)
SmithKline Beecham Retirement Plan (Nominees)
Pty Limited (in liquidation)
SmithKline Beecham Senior Executive Pension Plan
Trustee Limited (iv)
Stiefel Distributors (Ireland) Limited (ii) (iv)
Stiefel Dominicana SRL (iv) (vi)
Stiefel Farma, S.A
Stiefel GmbH & Co. KG
Stiefel India Private Limited
Stiefel Laboratories (Ireland) Limited (ii)
Stiefel Laboratories (Maidenhead) Ltd
Stiefel Laboratories (U.K.) Ltd
Stiefel Laboratories Limited (iv)
Stiefel Laboratories Pte Limited (iv)
Stiefel Laboratories Pty Ltd (in liquidation)
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Partnership Capital
Equity
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
c/o OBC Suisse AG, Aeschenvorstadt 71, 4051, Basel,
Switzerland
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
Corporation Service Company, 2595 Interstate Drive, Suite 103,
Harrisburg, Pennsylvania, PA, 17110, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1495-131, Portugal
1061 Mountain Highway, Boronia, VIC, 3155, Australia
14, Topkhana Road, Segunbagicha, Dhaka 1000, Bangladesh
Currabinny, Carrigaline, County Cork, Ireland
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Currabinny, Carrigaline, County Cork, Ireland
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
1959 Upper Water Sreet, Suite 800, Halifax, NS B3J 3N2, Canada
Corporation Service Company,2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Amoun Street, PO Box 3001, El Salam City, Cairo, 11491, Egypt
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos,
Madrid, 28760, Spain
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Prinzregentenplatz 9, Munchen, 81675, Germany
Prinzregentenplatz 9, Munchen, 81675, Germany
Flushing Meadows Building, The Campus, 57 Sloane Street, Bryanston
2021, South Africa
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
C/o CIM Global Business, 33 Edith Cavell Street, Port Louis, Mauritius
1061 Mountain Highway, Boronia, VIC, 3155, Australia
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Finisklin Business Park, Sligo, Ireland
Ave. Lope de Vega 29, Torre NovoCentro, Local 406, Santo Domingo,
Dominican Republic
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos, Madrid,
28760, Spain
Industriestrasse 32-36, Bad Oldesloe, 23843, Germany
401-402, A, Wing, Floral Deck Plaza, Opp Rolta Bhavan, Central MIDC
Road, Mumbai, Andheri (East), India
Finisklin Business Park, Sligo, Ireland
Eurasia Headquarters, Concorde Road, Maidenhead, Berkshire,
SL6 4BY, England
Eurasia Headquarters, Concorde Road, Maidenhead, Berkshire,
SL6 4BY, England
Eurasia Headquarters, Concorde Road, Maidenhead, Berkshire,
SL6 4BY, England
103 Gul Circle, 629589, Singapore
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Investor informationFinancial statementsGovernance and remunerationStrategic report 278 GSK Annual Report 2016
Other statutory disclosures continued
Group companies continued
Name
Security
Registered address
Wholly owned subsidiaries continued
Stiefel Laboratories, Inc.
Stiefel Maroc SARL
Stiefel Research (Australia) Holdings Pty Ltd (vi)
Stiefel Research Australia Pty Ltd (vi)
Stiefel West Coast LLC
Strebor Inc.
Tempero Pharmaceuticals, Inc.
The Sydney Ross Co. (iv)
The Wellcome Foundation Limited
UCB Pharma Asia Pacific Sdn Bhd (iv)
Wellcome Consumer Healthcare Limited (iv)
Wellcome Consumer Products Limited (iv)
Wellcome Developments Pty Ltd (iv) (vi)
Wellcome Limited
Wellcome Operations Pty Ltd (iv) (vi)
Common
Ordinary
Ordinary
Ordinary
LLC Interests
Common
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
275 Boulevard Zerktouni, Casablanca, Morocco
1061 Mountain Highway, Boronia, VIC, 3155, Australia
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Series A Preference
Series B Preference; Common
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Corporation Service Company, 830 Bear Tavern Road, West Trenton,
New Jersey, NJ, 08628, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Level 8, Symphony House, Pusat Dagangan Dana 1, Jalan PJU 1A/46,
Petaling Jaya, Selangor Darul Ehsan, 47301, Malaysia
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
1061 Mountain Highway, Boronia, VIC, 3155, Australia
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Name
Security
Effective %
Ownership
Registered address
Subsidiaries where the effective interest is less than 100%
Amoun Pharmaceutical Industries Co. S.A.E.
Beecham Enterprises Inc. (iv)
Block Drug Company, Inc.
New Monetary Shares
(99.5%)
Common
Common
90.7
55.9
63.5
Block Drug Corporation (iv)
Common No Par Value
63.5
British Pharma Group Limited
de Miclén a.s.
Duncan Consumer Healthcare Philippines Inc
Duncan Pharmaceuticals Philippines Inc.
Ex-Lax, Inc.
Galvani Bioelectronics Inc.
Galvani Bioelectronics Limited
Glaxo Saudi Arabia Limited
Glaxo Wellcome Ceylon Limited
GlaxoSmithKline (Tianjin) Co. Ltd
GlaxoSmithKline Algérie S.P.A.
GlaxoSmithKline Bangladesh Limited
Capital (50%)
Ordinary
Common
Common
Common
Common
A Ordinary
B Ordinary (0%)
Ordinary (49%)
Ordinary
Ordinary B
Ordinary (90%)
Ordinary
Ordinary (82%)
GlaxoSmithKline Brasil Produtos para Consumo e Saude Ltda
Quotas
GlaxoSmithKline Consumer Healthcare (China) Co. Ltd
Ordinary
GlaxoSmithKline Consumer Healthcare (Hong Kong) Limited
Ordinary
GlaxoSmithKline Consumer Healthcare (Ireland) Limited (ii)
GlaxoSmithKline Consumer Healthcare (Overseas) Limited
Ordinary
Ordinary
50
63.5
63.5
91.5
63.5
55
55
49
68.3
90
99.99
82
63.5
63.5
63.5
63.5
63.5
El Salam City 11491, PO Box 3001, Cairo, Egypt
Corporation Service Company,2711 Centerville Road,
Suite 400, Wilmington, Delaware, DE, 19808, United States
Corporation Service Company, Princeton South Corporate Center, Suite
160, 100 Charles Ewing Blvd, Ewing, New Jersey, 08628, United States
Corporation Service Company, Princeton South Corporate Center, Suite
160, 100 Charles Ewing Blvd, Ewing, New Jersey, 08628, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Priemyselny Park Gena, Ul. E. Sachsa 4-6, 934 01,
Levice, Slovakia
2266 Don Chino Roces Avenue, Makati City, Philippines
2266 Chino Roces Avenue, City of Makati, 1231, Philippines
FGR Corporate Services Inc., Oriental Center, Suite P1, 254 Munoz
Rivera Avenue, San Juan, 00918, Puerto Rico
Corporate Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
PO Box 22617, Area No 73 to 156, Warehouse City, First Stage Al
Khomrah, Jeddah 21416, Saudi Arabia
121 Galle Road, Kaldemulla, Moratuwa, Sri Lanka
No. 65, the Fifth Avenue, Tai Feng Industrial Park, Tianjin Economic
and Technolog, Tianjin, 300457, China
Zone Industrielle Est, Boudouaou, Wilaya de Boumerdes, Algeria
Fouzderhat Industrial Area, Dhaka Trunk Road, North Kattali,
Chittagong - 4217, Bangladesh
66 BL1/302, Vitor Civita Street, Barra Tijuca, Rio de Janeiro,
22775-044, Brazil
Rooms 01A, 06B-09, 23F, The Headquarters Building, No. 168 Tibet
Road (M), Shanghai, 200001, China
Units 2201, 2214 and 23/F, Tower 6, The Gateway, 9 Canton Road,
Harbour City, Tsimshatsui, Kowloon, Hong Kong
12 Riverwalk Citywest Business Campus, Dublin, 24, Ireland
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
279 GSK Annual Report 2016
Group companies continued
Name
Security
Effective %
Ownership
Registered address
Subsidiaries where the effective interest is less than 100% continued
GlaxoSmithKline Consumer Healthcare (Thailand) Limited
Ordinary
GlaxoSmithKline Consumer Healthcare (UK) IP Limited
GlaxoSmithKline Consumer Healthcare (UK) Trading Limited
Ordinary
Ordinary
GlaxoSmithKline Consumer Healthcare (US) IP LLC
LLC Interests
GlaxoSmithKline Consumer Healthcare A/S
GlaxoSmithKline Consumer Healthcare AB (vii)
GlaxoSmithKline Consumer Healthcare Australia Pty ltd
GlaxoSmithKline Consumer Healthcare B.V.
GlaxoSmithKline Consumer Healthcare Colombia SAS
GlaxoSmithKline Consumer Healthcare Czech Republic s.r.o.
GlaxoSmithKline Consumer Healthcare Finance Limited
GlaxoSmithKline Consumer Healthcare Finance No.2 Limited
GlaxoSmithKline Consumer Healthcare Finland Oy
GlaxoSmithKline Consumer Healthcare GmbH
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
GlaxoSmithKline Consumer Healthcare GmbH & Co. KG
Partnership Capital
GlaxoSmithKline Consumer Healthcare Greece Societe
Anonyme
Ordinary
GlaxoSmithKline Consumer Healthcare Holdings (US) LLC
LLC Interests
GlaxoSmithKline Consumer Healthcare Holdings Limited
GlaxoSmithKline Consumer Healthcare Inc.
GlaxoSmithKline Consumer Healthcare Investments
(Ireland) (No 2) Unlimited Company (ii) (v)
GlaxoSmithKline Consumer Healthcare Investments
(Ireland) (No 3) Limited (ii) (v)
GlaxoSmithKline Consumer Healthcare Japan K.K.
GlaxoSmithKline Consumer Healthcare Korea Co., Ltd.
Ordinary A
Ordinary B (0%)
Common
Ordinary
Ordinary
Ordinary
Ordinary
GlaxoSmithKline Consumer Healthcare L.L.C.
LLC Interests
GlaxoSmithKline Consumer Healthcare Limited
GlaxoSmithKline Consumer Healthcare Mexico, S.
De R.L. de C.V.
Equity (72.5%)
Ordinary
GlaxoSmithKline Consumer Healthcare New Zealand Limited
GlaxoSmithKline Consumer Healthcare Norway AS
Ordinary
Ordinary
GlaxoSmithKline Consumer Healthcare Pakistan Limited
Ordinary (82.6%)
GlaxoSmithKline Consumer Healthcare Philippines Inc
GlaxoSmithKline Consumer Healthcare Pte. Ltd.
GlaxoSmithKline Consumer Healthcare S.A.
GlaxoSmithKline Consumer Healthcare S.A.
GlaxoSmithKline Consumer Healthcare S.p.A.
GlaxoSmithKline Consumer Healthcare Sdn. Bhd.
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
GlaxoSmithKline Consumer Healthcare Slovakia s. r. o.
Ownership interest
GlaxoSmithKline Consumer Healthcare South Africa (Pty) Ltd
Ordinary
GlaxoSmithKline Consumer Healthcare Sp.z.o.o.
GlaxoSmithKline Consumer Healthcare Sri Lanka
Holdings Limited
GlaxoSmithKline Consumer Healthcare SRL
GlaxoSmithKline Consumer Healthcare, L.P.
GlaxoSmithKline Consumer Healthcare, Produtos para
a Saude e Higiene, Lda
GlaxoSmithKline Consumer Healthcare Vietnam
Company Limited
GlaxoSmithKline Consumer Nigeria plc (iii)
GlaxoSmithKline Consumer Private Limited
Common
Ordinary
Ordinary
Partnership Interest
(55.9%)
Ordinary Quota
Charter Capital
Ordinary (46.4%)
Equity
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
72.5
63.5
63.5
63.5
52.4
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
55.9
63.5
63.5
46.4
63.5
13th Floor, Unit 13.05 and 13.06, Wave Place, 55 Wireless Road,
Lumpini, Pathumwan, Bangkok, 10330, Thailand
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Corporation Service Company,2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Nykaer 68, Brondby, DK-2605, Denmark
Nykaer 68, DK-2605, Brondby, Denmark
82 Hughes Avenue, Ermington, NSW, 2115, Australia
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
Avenida El Dorado, #69B-45/Piso 9, Bogota, Colombia
Hvezdova 1734/2c, Prague, 4 140 00, Czech Republic
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Piispansilta 9A, Fin-02230, Espoo, Finland
Wagenseilgasse 3, Euro Plaza, Gebäude I, 4. Stock, Vienna, A-1120,
Austria
Barthstr. 4, München, 80339, Germany
274 Kifissias Avenue Halandri, Athens, 152 32, Greece
Corporation Service Company,2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
7333 Mississauga Road, 4th Floor, Mississauga, ON, L5N 6L4, Canada
Knockbrack, Dungarvan, Co Waterford, X35 RY76, Ireland
Knockbrack, Dungarvan, Co Waterford, X35 RY76, Ireland
4-6-15 Sendagaya, Shibuya-ku, Tokyo, 151-8566, Japan
9F LS Yongsan Tower, 92, Hangang-daero, Yongsan-gu, Seoul,
140-702, Republic of Korea
Corporation Service Company, 2595 Interstate Drive Suite 103,
Harrisburg, Pennsylvania, PA, 17110, United States
Patiala Road, Nabha 147201, Dist Patiala, Punjab, India
Calzada Mexico-Xochimilco 4900, Colonia San Lorenzo Huipulco,
Delegacion Tlalpan, Mexico, D.F. 14370, Mexico
Level 11, Zurich House, 21 Queen Street, Auckland, 1010, New Zealand
Klaus Torgårds vei 3, Oslo, NO-0372, Norway
The Sykes Building, 35 Dockyard Road, West Wharf, Karachi, 74000,
Pakistan
2266 Don Chino Roces Avenue, Makati City, Philippines
150 Beach Road, #21-00 Gateway West, 189720, Singapore
Site Apollo, Avenue Pascal 2-4-6, Wavre, 1300, Belgium
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos, Madrid,
28760, Spain
Via Zambeletti snc,Baranzate, Milan, 20021, Italy
Lot 89 Jalan Enggang, Ampang-Ulu Klang Industrial Estate, Selangor
Darul Ehsan, 54200, Malaysia
Galvaniho 7/A, Bratislava, 821 04, Slovakia
Flushing Meadows Building, The Campus, 57 Sloane Street, Bryanston
2021, South Africa
ul. Rzymowskiego 53, Warsaw, 02-697, Poland
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
1-5 Costache Negri Street, Opera Center 1, floor 5 and 6 (Zone 1),
District 5, Bucharest, Romania
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1495-131, Portugal
Floor 16, Metropolitan, 235 Dong Khoi, Ben Nghe Ward, District 1,
Ho Chi Minh City, Vietnam
1 Industrial Avenue, Ilupeju, Ikeja, Lagos, PM B 21218, Nigeria
Patiala Road, Nabha 147201, Dist Patiala, Punjab, India
Investor informationFinancial statementsGovernance and remunerationStrategic report 280 GSK Annual Report 2016
Other statutory disclosures continued
Group companies continued
Name
Security
Effective %
Ownership
Registered address
Subsidiaries where the effective interest is less than 100% continued
GlaxoSmithKline Consumer Trading Services Limited
GlaxoSmithKline Costa Rica S.A.
GlaxoSmithKline Dungarvan Limited (ii)
GlaxoSmithKline Healthcare AO
GlaxoSmithKline Healthcare GmbH
GlaxoSmithKline Healthcare Ukraine O.O.O.
GlaxoSmithKline Landholding Company, Inc
GlaxoSmithKline Limited
GlaxoSmithKline OTC (PVT.) Limited
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ownership Interest
Common (40%)
Ordinary
Ordinary
GlaxoSmithKline Pakistan Limited
Ordinary (82.6%)
GlaxoSmithKline Panama S.A.
GlaxoSmithKline Paraguay S.A.
GlaxoSmithKline Pharmaceuticals Limited
GlaxoSmithKline Philippines Inc
GlaxoSmithKline S.A.E.
GlaxoSmithKline Sante Grand Public SAS
GlaxoSmithKline Tuketici Sagligi A.S.
Ordinary
Ordinary
Equity (75%)
Common
Ordinary (91.2%)
Ordinary
Nominative
GlaxoSmithKline-Consumer Hungary Limited Liability Company
Membership
GSK Consumer Healthcare Singapore Pte. Ltd
Ordinary
GSK CH Argentina S.A.
GSK CH Kazakhstan LLP
GSK Consumer Healthcare Schweiz AG
GSK Consumer Healthcare Services, Inc.
GSK-Gebro Consumer Healthcare GmbH
Iodosan S.p.A.
Kuhs GmbH
Laboratorios ViiV Healthcare, S.L.
Modern Pharma Trading Company L.L.C.
Novartis Consumer Health Australasia Pty Ltd (iv) (vi)
N.C.H. – Nutrition Consumer Health Ltd
Novartis Consumer Health GmbH
Novartis Consumer Health S.A.
Nominative non
endorseable ordinary
shares
Charter Capital
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
Quotas (98.2%)
Ordinary
Redeemable Preference
Ordinary
Ordinary
Ordinary
Novartis Consumer Health Services S.A.
Registered Shares
Novartis Consumer Health UK Limited
Novartis Consumer Health, Inc.
P.T. SmithKline Beecham Pharmaceuticals
P.T. Sterling Products Indonesia
Panadol GmbH
PHIVCO Jersey II Limited (iv) (v)
PHIVCO Jersey Limited (iv) (v)
PHIVCO UK II Limited
PHIVCO UK Limited
PHIVCO-1 LLC
PHIVCO-2 LLC
PT Glaxo Wellcome Indonesia
PT GSK Consumer Healthcare Indonesia
Ordinary
Common
A Shares
B Shares (0%)
A Shares
B Shares
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
LLC Interests
LLC Interests
A Shares
B Shares (0%)
Ordinary
PT. Bina Dentalindo (In liquidation)
Ordinary
63.5
63.5
63.5
63.5
63.5
63.5
36.6
63.5
63.5
82.6
63.5
63.5
75
91.5
91.2
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
38.1
63.5
63.5
78.3
98.2
63.5
63.5
63.5
63.5
63.5
63.5
63.5
99
63.5
63.5
78.3
78.3
78.3
78.3
78.3
78.3
95
63.5
63.5
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
San Jose 300 Este de la Rotonda Betania, Carretera a Sabanilla,
Costa Rica
Knockbrack, Dungarvan, Co Waterford, X35 RY76, Ireland
Presnenskaya nab 10, Moscow, 123112, Russian Federation
Barthstr. 4, Munchen, 80339, Germany
Pavla Tychyny avenue, 1-V, Kiev, 02152, Ukraine
2266 Chino Roces Avenue, City of Makati, 1231, Philippines
Likoni Road, PO Box 78392, Nairobi, Kenya
The Sykes Building, 35 Dockyard Road, West Wharf, Karachi, 74000,
Pakistan
The Sykes Building, 35 Dockyard Road, West Wharf, Karachi, 74000,
Pakistan
Panama City, Republic of Panama, Panama
Oficial Gilberto Aranda 333, Planta Alta casi Salvador del Mundo,
Asuncion, Paraguay
Dr Annie Besant Road, Mumbai, 400 030, India
2266 Chino Roces Avenue, City of Makati, 1231, Philippines
Boomerang Office Building – Land No. 46, Zone (J) – 1st District,
Town Center - 5th Tagammoe, New Cairo City, Egypt
100 Route de Versailles, Marly le Roi, 78160, France
Büyükdere Caddesi No. 173, 1.Levent Plaza B Blok 1.Levent,
Istanbul, 34394, Turkey
H-1124, Csorsz utca 43, Budapest, Hungary
150 Beach Road, #21-00 Gateway West, 189720, Singapore
Tucuman 1, piso 4to, Ciudad Autonoma de, Buenos Aires, C1049AAA,
Argentina
32 A Manasa Str., Bostandyk District, Almaty, 050008, Kazakhstan
Suurstoffi 14, Rotkreuz, 6343, Switzerland
Corporation Services Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Bahnhofbichl 13, 6391 Fieberbrunn, Kitzbühel, Austria
Via Zambeletti snc,Baranzate, Milan, 20021, Italy
Barthstr. 4, Munchen, 80339, Germany
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos,
Madrid, 28760, Spain
Amoun Street, PO Box 3001, El Salam City, Cairo, 11491, Egypt
82 Hughes Avenue, Ermington, NSW, 2115, Australia
14 Hamephalsim St, Petach Tikva, Israel
Barthstr. 4, München, 80339, Germany
Route de I'Etraz 2, 1197 Prangins, Switzerland
Route de l'Etraz, Prangins, 1196, Switzerland
Park View, Riverside Way, Watchmoor Park, Camberley,
Surrey, GU15 3YL, England
Corporation Service Company,2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Jl. Pulobuaran Raya, Kav. III DD/2,3,4, Kawasan Industri Pulogadung,
Jakarta, 13930, Indonesia
Graha Paramita Building, 5th F, Jalan Denpasar Raya Blok D-2, Jakarta,
12940, Indonesia
Barthstr. 4, München, 80339, Germany
13 Castle Street, St. Helier, JE4 5UT, Jersey
13 Castle Street, St. Helier, JE4 5UT, Jersey
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Jl Pulobuaran Raya Kav III DD/, Kawasan Industri Pulogadung, Timur,
Jakarta, 13930, Indonesia
Graha Paramita 3B Floor, JI. Denpasar Raya Blok D-2, Kuningan,
Jakarta, 12940, Indonesia
Gedung Graha Ganesha Lantai 3, Jl Raya Bekasi Km 17, No5,
Jakarta Timur 13930, Indonesia
281 GSK Annual Report 2016
Group companies continued
Name
Security
Effective %
Ownership
Registered address
Subsidiaries where the effective interest is less than 100% continued
Shionogi-ViiV Healthcare LLC
Common Interests
Sino-American Tianjin Smith Kline & French Laboratories Ltd
Ordinary (55%)
SmithKline Beecham (Private) Limited
Ordinary (99.6%)
SmithKline Beecham Research Limited
SmithKline Beecham S.A.
SmithKline Beecham-Biomed O.O.O.
Stafford-Miller (Ireland) Limited (ii)
Stafford-Miller Limited
Sterling Drug (Malaya) Sdn Berhad
Sterling Products International, Incorporated (iv)
Stiefel Consumer Healthcare (UK) Limited
Stiefel Egypt LLC (iv)
Stiefel Manufacturing (Ireland) Limited (ii)
ViiV Healthcare (South Africa) (Proprietary) Limited
ViiV Healthcare BV
ViiV Healthcare Company
ViiV Healthcare Finance 1 Limited
ViiV Healthcare Finance 2 Limited
ViiV Healthcare Finance Limited
ViiV Healthcare GmbH
ViiV Healthcare GmbH
ViiV Healthcare Hong Kong Limited
ViiV Healthcare Kabushiki Kaisha
ViiV Healthcare Limited
ViiV Healthcare Overseas Limited
ViiV Healthcare Pty Ltd
ViiV Healthcare Puerto Rico, LLC
ViiV Healthcare S.r.l.
ViiV Healthcare SAS
ViiV Healthcare sprl
ViiV Healthcare Trading LLC
ViiV Healthcare Trading Services UK Limited
ViiV Healthcare UK (No.2) Limited (v)
ViiV Healthcare UK (No.3) Limited
ViiV Healthcare UK (No.4) Limited
ViiV Healthcare UK (No.5) Limited
ViiV Healthcare UK Limited
ViiV Healthcare ULC
ViiV Healthcare Venture LLC
ViiV HIV Healthcare Unipessoal Lda
Winster Pharmaceuticals Limited
Ordinary
Ordinary
Participation Interest
(97%)
Ordinary
Ordinary;
Non-Cumulative Non
Redeemable Preference
Ordinary
Common
Ordinary
Quota (99%)
Ordinary
Ordinary
Ordinary
Common
Ordinary
Ordinary
Ordinary; Redeemable
Preference
Ordinary
Ordinary
Ordinary
Ordinary
Class A Shares, Deferred;
Class B Shares (0%)
Class C Shares (0%)
Class D1 (0%)
Class D2 (0%);
Class E 5% Cumulative
Preference (0%)
Ordinary
Ordinary
LLC Interests
Quota
Ordinary
Ordinary
Participation Interest
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common
LLC Interests
Quota
Ordinary
Zhejiang Tianyuan Bio-Pharmaceutical Co. Ltd
Ordinary (95%)
78.3
34.9
63.3
63.5
63.5
97
63.5
63.5
63.5
63.5
63.5
99
63.5
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
46.4
95
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Cheng Lin Zhuang Industrial Zone, Dong Li District, Tianjin, 300163,
China
World Trade Center, Level 34, West Tower, Echelon Square,
Colombo 1, Sri Lanka
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Ctra de Ajalvir Km 2.500, Alcala de Henares, Madrid, 28806, Spain
Nab Kosmodamianskaya d-52, Building 1, 3rd Floor, Moscow,
113054, Russian Federation
Clocherane, Youghal Road, Dungarvan, Co. Waterford, Ireland
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Lot 89 Jalan Enggang, Ampang-Ulu Klang Industrial Estate, Selangor
Darul Ehsan, 54200, Malaysia
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
3 Amoun Street, El Salam City, Cairo, Egypt
Finisklin Business Park, County Sligo, Ireland
Flushing Meadows Building, The Campus, 57 Sloane Street,
Bryanston 2021, South Africa
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Prinzregentenplatz 9, Munchen, 81675, Germany
Talstrasse 3-5, 3053 Muenchenbuchsee, Switzerland
23/F Tower 6, The Gateway, Harbour City, 9 Canton Road, Tsimshatsui,
Kowloon, Hong Kong
4-6-15 Sendagaya, Shibuya-ku, Tokyo, 151-8566, Japan
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Centro International de Mercadeo, 90 carr. 165 Torre 2, Suite 800,
Guaynabo, 00968, Puerto Rico
Via Alessandro Fleming 2, Verona, 37135, Italy
100 Route de Versailles, Marly le Roi, 78160, France
Site Apollo, Avenue Pascal 2-4-6, Wavre, 1300, Belgium
Krylatskaya str., 17/3., Moscow, 121614, Russian Federation
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
13 Castle Street, St. Helier, JE4 5UT, Jersey
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
3500 855-2nd Street SW, Calgary, AB, T2P 4J8, Canada
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1495-131, Portugal
2A Association Avenue, Ilupeju Industrial Estate, Lagos, PO Box 3199,
Nigeria
No. 56, Tian He Road, Yuhang Economic Development Zone, Hangzhou,
Zhejiang Province, China
Investor informationFinancial statementsGovernance and remunerationStrategic report
282 GSK Annual Report 2016
Other statutory disclosures continued
Group companies continued
Name
Security
Effective %
Ownership
Registered address
Subsidiaries where the effective interest is less than 100% continued
Associates
Apollo Therapeutics LLP
Calci Medica Inc.
Index Ventures Life VI (Jersey) LP
Innoviva, Inc.
Japan Vaccine Distribution Co., Ltd
JCR Pharmaceuticals Co. Ltd
Kurma Biofund II, FCPR
Longwood Founders Fund LP
Medicxi Ventures I LP
River Vision Development Corp.
Joint Ventures
Chiron Panacea Vaccines Private Ltd (In liquidation)
Japan Vaccine Co., Ltd
Qualivax Pte Limited
Qura Therapeutics LLC
Partnership Interest (25%)
25
Series A and Junior
Preferred (33.9%)
33.9
Partnership Interest (25%)
25
Common (29.5%)
Ordinary (50%)
Common (24.6%)
Partnership Interest (32%)
Partnership Interest (28%)
29.5
50
24.6
32
28
Partnership Interest (26.2%) 26.2
Series A Preferred (33%)
33
50
50
50
50
708/718, 7th Floor, A Wing, Sagar Tech Plaza, Saki Naka, Andheri East,
Mumbai, Maharashtra, 400072, India
6 Yonbancho, Chiyoda-ku, Tokyo, Japan
80 Robinson Road, #02-00, 068898, Singapore
Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware, DE, 19808, United States
Key
(i) Directly owned by GlaxoSmithKline plc.
(ii) Exempt from the provisions of section 347 and 348 of the Companies Act 2014
(Ireland), in accordance with the exemptions noted in Section 357 of that Act.
(iii) Consolidated as a subsidiary in accordance with section 1162 (4)(a) of the
Companies Act 2006 on the grounds of dominant influence.
(iv) Dormant company.
(v) Tax resident in the UK.
(vi) Entity expected to be disposed of or removed.
(vii) Incorporated in Sweden.
283 GSK Annual Report 2016
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.
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
Novartis transaction
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.
The three-part inter-conditional transaction with Novartis AG involving the Consumer Healthcare,
Vaccines and Oncology businesses completed on 2 March 2015.
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.
Investor informationFinancial statementsGovernance and remunerationStrategic report 284 GSK Annual Report 2016
Index
Accountability
Accounting principles and policies
Acquisitions and disposals
Adjustments reconciling profit after tax to operating
cash flows
Annual General Meeting 2017
Approach to tax
Assets held for sale
Associates and joint ventures
Audit & Risk Committee Report
Cash and cash equivalents
CEO’s statement
Chairman’s statement
Chairman’s Governance statement
Chairman’s Remuneration report statement
Commitments
Consolidated balance sheet
Consolidated cash flow statement
Consolidated income statement
Consolidated statement of changes in equity
Consolidated statement of comprehensive income
Consumer Healthcare
Consumer Healthcare products and competition
Contingent consideration liabilities
Contingent liabilities
Corporate Executive Team
Corporate governance
Corporate Responsibility Committee Report
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 calendar
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 companies
Group financial review
Health for all
How we manage risks
Independent Auditors’ report
Inventories
Investments in associates and joint ventures
Investor relations
Key accounting judgements and estimates
Key performance indicators
Leadership and effectiveness
Legal proceedings
Page
97
162
205
203
266
55
188
177
97
188
5
4
80
112
211
159
161
158
160
158
34
252
208
199
86
79
108
76
134
127
148,232
180,265
271
180
174
223
168
116
176
176
265
212
72
232
244
283
182
272
52
44
18
149,233
188
186
269
166
16
88
226
Page
175
201
198
168
94
209
58
126
162
173
184
187
187
198
173
197
46
82
12
8
6
48
50
14
119
189
20
Major restructuring costs
Movements in equity
Net debt
New accounting requirements
Nominations Committee Report
Non-controlling interests
Non-controlling interests in ViiV Healthcare
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 behaviour
Our Board
Our business model
Our global marketplace
Our integrated approach
Our people
Our planet
Our strategy priorities
Pay for performance
Pensions and other post-employment benefits
Pharmaceuticals
Pharmaceutical products, competition and
intellectual property
Pipeline
Post balance sheet events
Presentation of the financial statements
Principal Group companies
Principal risks and uncertainties
Property, plant and equipment
Quarterly trend
Reconciliation of net cash flow to movement in net debt
Registrar
Related party transactions
Relations with shareholders
Remuneration governance
Remuneration policy report
Remuneration report
Reporting framework
Research and development
Responsible business
Segment information
Share capital and control
Share capital and share premium account
Share price
Shareholder information
Shareholder services and contacts
Taxation
Tax information for shareholders
Trade and other payables
Trade and other receivables
US law and regulation
Vaccines
Viability statement
250
247
224
162
225
18,253
181
240
204
268
203
107
124
138
112
57
12,24,32,38
40
169
263
200
263
263
268
178
266
189
188
270
28
56
GSK Annual Report 2016
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.
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 Prolia,
owned by Amgen, Zofran, owned by Novartis and
Trumenba, owned by Pfizer.
Acknowledgements
Design
Friend www.friendstudio.com
Printing
Pureprint Group, ISO 14001.
FSC certified and Carbon Neutral.
Paper
This Annual Report is printed on Revive 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.
Read more at www.gsk.com
Download PDFs:
Annual Report 2016
Form 20-F
Responsible Business Supplement 2016
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 ‘Principal risks and uncertainties’ on pages 253 to
262 of this Annual Report. Any forward-looking statements
made by or on behalf of the Group speak only as of the date
they are made and are based upon the knowledge and
information available to the Directors on the date of this
Annual Report.
The assumptions for the Group’s revenue and earnings
expectations assume no material mergers, acquisitions,
disposals, litigation costs or share repurchases for the
Company; and no change in the Group’s shareholdings in
ViiV Healthcare or Consumer Healthcare. They also assume
no material changes in the macro-economic and healthcare
environment.
A number of adjusted measures are used to report the
performance of our business. These measures are defined
on page 57 and a reconciliation of core results
to total results is set out on page 66.
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.
Assumptions related to 2016-2020 outlook
In outlining the expectations for the five-year period
2016-2020, the Group has made certain assumptions about
the healthcare sector, the different markets in which the
Group operates and the delivery of revenues and financial
benefits from its current portfolio, pipeline and restructuring
programmes.
For the Group specifically, over the period to 2020
GSK expects further declines in sales of Seretide/Advair.
The introduction of a generic alternative to Advair in the US
has been factored into the Group’s assessment of its future
performance. The Group assumes no premature loss of
exclusivity for other key products over the period. The
Group’s expectation of at least £6 billion of revenues per
annum on a CER basis by 2020 from products launched in
the last three years includes contributions from the current
pipeline asset Shingrix. This target is now expected to be
met up to two years earlier. The Group also expects volume
demand for its products
to increase, particularly in Emerging Markets.
The Group’s expectations assume successful delivery of the
Group’s integration and restructuring plans over the period
2016-2020. Material costs for investment in new product
launches and R&D have been factored into the expectations
given. The expectations are given on a constant currency
basis and assume no material change to the Group’s
effective tax rate.
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 110), 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 79 to
110, 148, 232 and 253 to 282 inclusive comprise the
Directors’ Report, pages 2 to 78 inclusive comprise the
Strategic report and pages 111 to 146 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.
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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