Image HIV virus
Annual Report
2017
GSK is a
science-led
global
healthcare
company
In the Strategic report
Our new CEO discusses
2017 performance and our
new long-term priorities
Measuring performance
and managing risk
See pages 05–07
See pages 18–21
How we create
long-term value
Innovation and Performance
in each of our three
businesses
See pages 08–09
See pages 22–41
Industry trends
How our three businesses
together contribute to our
Trust priority
See pages 10–11
See pages 42–51
Our new long-term priorities:
Innovation, Performance
and Trust
Financial review
See pages 12–17
See pages 52–78
Cover image
Cautionary statement
30 years after developing the first HIV
medicine, our research into treatment and
prevention of HIV continues. We remain
at the forefront of helping people living
with HIV, driving innovation and working
with communities all over the world.
See the inside back cover of this document
for the cautionary statement regarding
forward-looking statements.
GSK Annual Report 2017 GSK Annual Report 2017
01
01
Strategic report
Governance and remuneration
Financial statements
Investor information
Our financial performance in 2017a
£30.2bn
Group turnover
AER +8%
CER +3%
£6.7bn
New product salesb
AER +51%
CER +44%
£4.1bn
Total operating profit
AER +57%
CER +39%
£8.6bn
Adjusted operating profit
AER +12%
CER +5%
31.4p
Total earnings per share
AER +67%
CER +36%
111.8p
Adjusted earnings per share
AER +11%
CER +4%
£6.9bn
Net cash flow from
operating activities
£3.4bn
Free cash flow
£3.9bn
Dividends declared
for 2017
80p
2017 dividend
per share
Strategic report
Remuneration report
Investor information
At a glance
Chairman’s statement
CEO’s statement
How we create long-term value
Industry trends
Our long-term priorities
How we measure success
How we manage risk
Pharmaceuticals
Vaccines
Consumer Healthcare
Trust
Group financial review
Governance
Chairman’s Governance statement
Our Board
Our Corporate Executive Team
Leadership and effectiveness
Nominations Committee report
Accountability
Audit & Risk Committee report
Relations with stakeholders
Science Committee report
Corporate Responsibility
Committee report
02
04
05
08
10
12
18
20
22
30
36
42
52
80
82
86
88
94
96
96
107
109
110
Chairman’s annual statement
Annual report on remuneration
2017 Remuneration policy summary
114
116
142
Financial statements
Directors’ statement of
responsibilities
Independent Auditor’s report
Financial statements
Notes to the financial statements
Financial statements of
GlaxoSmithKline plc prepared
under UK GAAP
148
149
158
162
233
Quarterly trend
Five year record
Product development pipeline
Product, competition and
intellectual property
Principal risks and uncertainties
Share capital and control
Dividends
Financial calendar
Annual General Meeting 2018
Tax information for shareholders
Shareholder services and contacts
US law and regulation
Group companies
Glossary of terms
244
248
251
254
257
267
269
269
270
270
272
274
276
287
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 58, including Adjusted results, free cash flow
and CER 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. Adjusted results exclude a
number of items and are presented as management believes that Adjusted 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 Adjusted results is set out on page 67.
b As defined in 2015, new products are as follows: Pharmaceuticals: Relvar/Breo Ellipta, Incruse Ellipta, Anoro
Ellipta, Arnuity Ellipta, Eperzan/Tanzeum, Nucala, Tivicay, Triumeq. Vaccines: Menveo, Bexsero, Shingrix.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 02
GSK at a glance
Our purpose
Three global businesses
To help people do more, feel better
and live longer.
Our goal
To be one of the world’s most innovative,
best performing and trusted healthcare
companies.
Our strategy
Bring differentiated, high-quality and needed
healthcare products to as many people as
possible, with our three global businesses,
scientific and technical know-how and
talented people.
Our values and expectations
Our values and expectations are at the heart
of everything we do and form an important
part of our culture.
Our values
Patient focus
Transparency
Respect
Integrity
Our expectations
Courage
Accountability
Development
Teamwork
Immune system T-cells attacking a cancer cell
Herpes zoster virus of shingles
Novamin, a key technology in Sensodyne Repair and Protect
GSK Annual Report 2017 Three global businesses
03
Pharmaceuticals
Leading positions
in Respiratory
and HIV
% of Group turnover
57%
Read more page 22
Vaccines
Broadest portfolio
with leading position
in meningitis and
opportunity in shingles
Focused on our new
long-term priorities
Innovation
See pages 12–13
% of Group turnover
17%
Performance See pages 14–15
Read more page 30
Trust
See pages 16–17
Consumer Healthcare
Category leadership
in Respiratory, Pain
relief and Oral health
% of Group turnover
26%
Read more page 36
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 04
Chairman’s statement
“The Board believes the renewed focus on
innovation will enable GSK to capitalise on the
opportunities in our industry to drive long-term
value for investors.”
Philip Hampton
Chairman
I am pleased to report another year of
good performance with sales and earnings
growth, some important new product
approvals and continued cash returns
to shareholders in line with expectations.
Cash generation remains a key focus for
the Board and we were pleased to see
increased free cash flow for the year. We
approved a dividend of 80p per share for
2017 and expect the same for 2018.
Following Emma Walmsley’s appointment
as CEO, from April 2017, the Board
conducted a review of the company’s
strategy with management in the context
of the operating environment and industry
dynamics in global healthcare. In July,
Emma presented the new strategy to
investors setting out long-term priorities
under three main headings – Innovation,
Performance and Trust. Our top priority
is to improve performance in the
pharmaceuticals business and to seek
more growth from pharmaceuticals R&D.
The Board believes the renewed focus
on innovation will enable GSK to capitalise
on the opportunities in our industry to
drive long-term value for investors.
Early progress against the strategy has
been encouraging and the Board is closely
engaged with management on its delivery.
Capital allocation
The company now has a new capital
allocation framework to help shape our
strategic priorities. Improving our pipeline
of new pharmaceutical products is our main
priority and the company has the potential
for a marked improvement in performance.
We will also invest behind key products in
our vaccines business which we expect
to drive growth in the coming years. In
addition, we may invest further in our
Consumer joint venture if our partner
Novartis decides to exercise their option
to sell their interests to us. Dividends
represent an allocation of capital and the
Board is mindful of the value that many
shareholders attach to dividends. Under
our framework, any material acquisitions
have a lower priority and would have to
meet our strict returns criteria.
I noted in my first letter to shareholders
two years ago that cash dividends were
in excess of free cash flow generation
and that is still the case. The Board has
established a policy of achieving, over
time, cash dividend cover in the range
1.25x – 1.5x, since investment in growth
opportunities should be funded at least
in part by cash retentions in the business.
Culture
Central to ensuring long-term delivery
against the strategy is developing a culture
which rewards high performance but
also seeks to build on the values of the
company. The Board was pleased to see
employees support this, with a marked
increase in employee engagement
scores. In the past, there have been some
instances where our commercial practices
have been disappointing, leading to
regulatory intervention. The Board has
focused on improving both the framework
and the culture for our control environment.
Executive team
Following the announcement of Emma as
our new CEO, the Board was involved with
other top executive appointments. Dr Hal
Barron, our new Chief Scientific Officer
and President, R&D, has joined the Board.
We have a new President, Global
Pharmaceuticals, Luke Miels; and a new
Chief Digital and Technology Officer,
Karenann Terrell. The Board has taken
a keen interest in the balance between
external recruits, and the development
of internal succession planning.
Financial reporting
The Board is mindful of the need to
provide clear financial reports. In 2017 we
reviewed aspects of our financial reporting
framework and made changes to ensure we
remain in line with both the latest regulatory
requirements and best practice in the
industry. Commercial structures and
reporting requirements sometimes lead to
more complexity in reporting than we would
like but we make great efforts to simplify
and clarify where possible.
Board changes during the year
We continue to bring in new skills and
capabilities to the Board. During the year,
we welcomed Dr Laurie Glimcher as an
Independent Non-Executive Director and
Scientific and Medical Expert. At this year’s
AGM, Professor Sir Roy Anderson, who
joined the Board in 2007, will step-down.
I thank Roy for his excellent contribution,
both in his special areas of scientific
knowledge, but also more broadly.
Dr Patrick Vallance will also step down
from the Board at the end of March and
leave GSK to become the Chief Scientific
Adviser to the UK Government. Patrick has
been a fine leader and Board colleague.
Sir Andrew Witty and Dr Moncef Slaoui
both stepped down after long careers
with the company. I thanked them both
in my last letter.
The new Science Committee made good
progress last year. This is crucial as we
enter an important phase for the pipeline in
our pharmaceutical and vaccines activities
over the next 2 to 3 years. Dr Barron will be
working closely with the Committee.
I would like to thank all of GSK’s employees
and partners for their hard work throughout
2017 and our shareholders and customers
for their continued support and look
forward to a successful 2018.
Philip Hampton
Chairman
GSK Annual Report 2017 05
CEO’s statement
Our long-term priorities
Innovation
See page 12
Performance
See page 14
Trust
See page 16
Our three businesses
Pharmaceuticals
See page 22
Vaccines
See page 30
Consumer
Healthcare
See page 36
“Our ambition is to drive a high-performance
culture, putting science at the heart of GSK,
remaining true to our values and our purpose:
to help people do more, feel better, live longer.”
Emma Walmsley
Chief Executive Officer
I’m delighted to be introducing GSK’s
2017 Annual Report; my first as CEO.
Since starting in this role it has become
increasingly clear to me that while the
healthcare industry remains an attractive
sector, it is entering a period of significant
change bringing both challenges and
opportunities. In addition, despite improved
delivery in recent years, it is also clear there
are several areas of the company that need
to be strengthened.
That’s why, in July, I set out three long-term
priorities which everyone in the company
is focused on: Innovation, Performance
and Trust. I believe these priorities enable
us to focus on areas we can improve and
allow us to respond more effectively to our
operating environment. They will focus us
on delivering improved performance and
better returns for shareholders over both
the short and long term, as well as a
broader societal contribution.
2017 performance
Group sales were £30.2 billion, up 8% at
actual rates and 3% at constant exchange
rates (CER), with growth across all three
businesses. This is the first time Group
sales have reached more than £30 billion
in a year.
New Pharmaceutical and Vaccine product
sales were £6.7 billion, with continued
strong performances from our HIV
medicines, Tivicay and Triumeq, our Ellipta
portfolio and biologic medicine Nucala in
Respiratory, and our meningitis vaccines.
The performance of these new products
is a great demonstration of what we can
achieve when our commercial organisation
has clear focus.
Consumer Healthcare sales were driven
by our power brands which continued
to outpace market growth. Sales from
new GSK innovations represented
approximately 13% of turnover.
Total earnings per share were 31.4p
after accounting charges of £1.6 billion
related to US tax reform, with Adjusted
earnings per share up 11% AER, 4% CER
to 111.8p.
Group Adjusted operating margin improved,
reflecting effective management of costs
and successful integrations of our new
businesses in Vaccines and Consumer
Healthcare.
We have renewed our emphasis on cost
and cash discipline and I was pleased
to see our free cash flow for the year
was £3.4 billion, an improvement of over
£400 million on the previous year. We
met our expectation of paying a dividend
of 80 pence per share for 2017 and we
expect to deliver the same for 2018.
Pipeline progress
Towards the end of 2017 we received
approvals for three key new products:
Shingrix, our new vaccine which represents
a new standard for the prevention of
shingles; Juluca, the first in a series of
2-drug regimens for HIV which reduces
the number of drugs patients take as they
are now living longer with what is becoming
a more chronic disease; and Trelegy Ellipta,
which is the first once a day inhaler to
combine three medicines in one device
to treat chronic obstructive pulmonary
disease (COPD).
Our focus in 2018 is to successfully launch
these new products which bring significant
benefits to patients, and to continue to
maximise our current portfolio.
Footnote
We use a number of adjusted, non-IFRS,
measures to report performance, as
described on page 58.
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06
CEO’S statement continued
I have been clear that we need to strengthen
our Pharmaceutical business and pipeline
as this will ultimately drive sustainable,
long-term growth for the company.
During 2017, we set out how we are
refocusing our R&D organisation on
four areas: two where we are a world
leader – Respiratory and HIV; and two
potential areas – Oncology and Immuno-
inflammation. Our pipeline in these potential
areas is innovative but early, and over the
next 2 to 3 years we will continue to receive
data from a number of key assets which
will inform how we progress them.
New external appointments
I am delighted that we appointed Dr Hal
Barron to be our Chief Scientific Officer
and President, R&D. He joins us from
Calico, an Alphabet-funded company, and
before that spent many years at Roche and
Genentech where he gained an exceptional
reputation for leading highly productive
R&D teams. I would like to thank Dr Patrick
Vallance, our outgoing President of R&D,
for his contribution over the last 12 years
and for ensuring a smooth transition with
Hal. I wish him well in his new role as the
UK Government’s Chief Scientific Adviser,
for which he is uniquely qualified.
Hal is one of three senior leaders we
appointed to the executive team last year.
Luke Miels joined as our new President,
Pharmaceuticals and is responsible for
driving performance in the commercial
organisation and will work closely with
Hal to ensure alignment with R&D.
Karenann Terrell also joined us in a new
role as Chief Digital and Technology
Officer. Karenann joins at a time when
the overlap between healthcare and
technology has never been more apparent
and potentially transformative. Her role is
to ensure GSK is at the forefront of this
exciting new opportunity.
We have made a number of other changes
in our senior leadership through the year,
promoting great internal talent and
bringing in fresh expertise from outside
the company.
Performance and values based culture
Our ambition is to drive a high-performance
culture, putting science at the heart of
GSK, remaining true to our values and
our purpose: to help people do more, feel
better, live longer. We have a long history in
tackling some of the world’s biggest health
challenges. Our commitment to improving
global health and being a responsible
business will continue under my leadership.
Corporate Executive Team
1
8
2
9
3
10
4
11
5
12
6
13
7
1. Emma Walmsley
Chief Executive Officer
2. Dr Hal Barron
Chief Scientific Officer and
President, R&D
3. Roger Connor
President, Global Manufacturing
and Supply
4. Luc Debruyne
President, Global Vaccines
See pages 86 to 87
5. Simon Dingemans
Chief Financial Officer
6. Nick Hirons
Senior Vice President, Global Ethics
and Compliance
7. Brian McNamara
10. Karenann Terrell
Chief Digital and Technology Officer
11. Claire Thomas
Senior Vice President,
Human Resources
12. Phil Thomson
CEO, GSK Consumer Healthcare
President, Global Affairs
8. Luke Miels
President, Global Pharmaceuticals
9. David Redfern
Chief Strategy Officer
13. Dan Troy
Senior Vice President
and General Counsel
GSK Annual Report 2017 07
Our great people and their commitment are
foundational for GSK’s culture. During the
year, we conducted a new global employee
survey, aligned to our priorities, and I was
pleased to see a meaningful improvement
in employee engagement scores, which
are an important driver of performance.
Outlook
Given the momentum we are seeing in
our new products and recent launches,
the operating performance improvements
we are driving and the benefit of US tax
reform, we are increasingly confident in
our ability to deliver our 2020 outlook of
mid to high single digit growth in Adjusted
EPS CAGR (2016–2020 at 2015 CER).
While we could see generic competition
to Advair in the US in 2018 our guidance
for the year reflects this. Aside from Advair
we do not expect to face significant generic
erosion in the US until the mid-2020s.
Finally, I want to say thank you to GSK
employees, partners and customers for
their work in 2017 and especially for their
support to me in my first year as CEO.
I very much look forward to working with
them in 2018 and beyond to deliver our
long-term priorities and improved
performance for GSK.
Emma Walmsley
Chief Executive Officer
Technology is revolutionising healthcare
New frontiers of innovation, such as genomics, are
creating major opportunities for us – and patients.
We are also maximising the huge
amount of data within GSK by applying
artificial intelligence and machine
learning to allow us to identify
patterns that would have been almost
impossible to identify using traditional
methods. We can now model the right
patient population and where to find
them for our clinical trials, reduce or
eliminate the need for some studies,
and in some cases predict outcomes
in a virtual patient. It is allowing us
to more effectively manage diversity
within our clinical trials to align with
population demographics by analysing
our clinical trials from the last ten years.
GSK is connecting and bringing
to life patient data from genomics,
wearable devices, social media and
other emerging sources, ensuring
we can leverage the opportunities
presented by these.
The ability to apply new technology
across our R&D activities is creating
a major opportunity for GSK. Currently,
across the industry almost 90% of
medicines entering trials fail and never
reach patients. In part this is because
we have an incomplete understanding
of the link between the biological
target of a drug and human disease.
Pursuing drug targets with human
genetic evidence to support the
indication is estimated to double the
probability of developing safe and
effective medicines, and improve
research and development
productivity. In recent years,
approximately 60% of GSK’s new
targets have been supported by human
genetic evidence. It is also why GSK
was one of the first companies to make
a multi-million pound investment in UK
Biobank to support the generation of
new genetic sequencing data from half
a million volunteers. The information
generated from this ground-breaking
health resource will provide vital
insights that we hope will inform
and support the development of
transformative medicines.
Footnote
We use a number of adjusted, non-IFRS,
measures to report performance, as
described on page 58.
Image: Wellcome Images
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
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How we create long-term value
1
As a science-led global healthcare company our three businesses have the common
aim of improving health. On this page we describe the resources we rely on, how our
business activities span the lifecycle of a product, and how we create long-term value
for shareholders and society.
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Our resources
Talented people
Scientific and
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Effective capital
allocation
External collaborations
Supply chain
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Our expectations
Courage
Accountability
Development
Teamwork
Our long-term priorities
Innovation
Performance
Trust
Our values
Patient focus
Transparency
Respect
Integrity
GSK Annual Report 2017
09
2
Industry trends
3
Our long-term priorities
4
How we measure success
5
How we manage risk
How we create value
Invest in scientific research
We invested £3.9 billion in research and
development to bring new medicines, vaccines
and consumer healthcare products to patients,
payers and consumers. Strategic business
development, including external partnerships
and joint ventures, supports our in-house
scientific research.
Generate revenue and profit
We generate revenue by executing new product
launches brilliantly and from the sales of our
existing portfolios. Each of our three businesses
now has an integrated strategy with one P&L,
which enables us to drive competitive costs,
margins and cash flow across the company.
Reinvest and distribute returns
As part of our capital allocation framework we
reinvest in our three businesses and also provide
returns to shareholders in the form of dividends.
The value we create
For shareholders
We aim to deliver sustained industry-leading growth with competitive
costs, margins and cash flow. We distribute capital to shareholders
in the form of dividends.
31.4p
Total earnings per share
111.8p
Adjusted earnings per share
£3.9bn
80p
2017 dividends declared
2017 dividend per share
For patients and consumers
We aim to bring our differentiated, high-quality and needed healthcare
products to as many people as possible.
1.9bn
Packs of medicine
sold
798m
Vaccines sold
6.2bn
Consumer Healthcare
products made
For employees and society
We want to run our company responsibly and ethically, and be
a modern employer with strong employee engagement. We make
a positive contribution to communities in which we operate through
creating employment, working with suppliers and paying tax.
98,462
Employees
£1.34bn
Cash tax paid
Footnote
We use a number of adjusted, non-IFRS, measures
to report performance, as described on page 58.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
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Industry trends
1
How we create long-term value
2
We are operating in a fast-changing environment with potential
for growth. Here we outline some of the key opportunities and
challenges which influence our new long-term priorities.
The global healthcare market is growing.
Global pharmaceutical sales were
£738 billion on a 12-month rolling basis
(September 2016–2017), up 3% from
September 2015–2016. North America
remains the largest pharmaceutical
market with a 48% share of global sales.1
Global vaccine sales totalled approximately
£19 billion in 2017, up 6% from 2016.2
Sales for consumer healthcare markets
in which GSK operates total approximately
£135 billion.2
The healthcare industry is entering a
period of significant change bringing
opportunities and challenges. As life
expectancy increases, demographic
changes are both supporting market
growth and contributing to pressures
in the healthcare sector, particularly
on pricing and access. While these
challenges are not new for the industry,
advances in science and technology
are transforming the way scientists
research diseases and are likely to
improve how patients are diagnosed
and treated in the future.
Our strategic response
Our strategy is designed to respond
to this changing environment: To bring
differentiated, high-quality and needed
healthcare products to as many people
as possible, with our three global
businesses, scientific and technical
know-how, and talented people.
Our new long-term priorities of
Innovation, Performance and Trust
will help us to deliver our strategy.
Positive demographics
Demographic change such as
increasing life expectancy and an
expanding global population is driving
demand for healthcare products.
Growing prosperity and changing diets
and lifestyles are also fuelling demand
for healthcare products – especially
for chronic conditions such as
respiratory disease.
Advances in science and
technology disruption
Better understanding of human biology
and genomics is changing the way
scientists research diseases and their
ability to develop novel treatments for
patients. Advances in digital technology,
data and analytics are enabling
researchers to explore and interpret
ever-larger volumes of biological data
much faster than before. Technology
is also now central to the way people
gain information, and compare and
buy healthcare products.
Pricing and access
Increasing demand for healthcare, partly
led by demographic change, continues
to put pressure on government and
payer budgets. This is impacting both
developing and developed markets,
including Europe and the US where
both public and privately funded
organisations are looking for ways to
address the affordability of medicines.
1 IMS data
2 Internal data
GSK Annual Report 2017 11
3
Our long-term priorities
4
How we measure success
5
How we manage risk
Regulatory and political
environment
Healthcare is a highly regulated industry
reflecting public expectations that
products comply to stringent levels of
quality, safety and efficacy. Globally,
changing national politics are impacting
the operating environment particularly
as governments are often making
healthcare a priority. See page 55
for a summary of the impact of Brexit
for GSK.
Societal expectations
Companies are expected to behave
with greater integrity, fairness and
transparency and to make a positive
contribution to society. For companies
to be sustainable they must create
long-term value for all of their
stakeholders, including shareholders,
employees, customers and
communities.
Genericisation and competition
Patent protection applies to
pharmaceutical medicines. As patents
expire or challenges are upheld by
competition authorities, patients
and payers gain access to generic
alternatives which are lower priced.
This generic competition often results
in lower sales of patented products.
Our long-term priorities
Innovation
Performance
Trust
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GSK Annual Report 2017
Our long-term priorities
1
How we create long-term value
2
Industry trends
3
Innovation
A strong patient and payer focused pipeline,
with the most competitive claims and labels,
and brilliant execution of our launches.
GSK Annual Report 2017
13
Strategic report
Governance and remuneration
Financial statements
Investor information
4
How we measure success
5
How we manage risk
Innovation
Read more about Innovation
Innovation in
Pharmaceuticals
See pages 24–27
Innovation in
Vaccines
See pages 32–33
Innovation in
Consumer Healthcare
See pages 38–39
14
14
GSK Annual Report 2017
Our long-term priorities
1
How we create long-term value
2
Industry trends
3
Performance
Sustained industry-leading growth with
competitive costs, margin and cash flow.
GSK Annual Report 2017 GSK Annual Report 2017
15
15
Strategic report
Governance and remuneration
Financial statements
Investor information
4
How we measure success
5
How we manage risk
Performance
Read more about Performance
Performance in
Pharmaceuticals
See pages 28–29
Performance in
Vaccines
See pages 34–35
Performance in
Consumer Healthcare
See pages 40–41
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 16
16
GSK Annual Report 2017
Our long-term priorities
1
How we create long-term value
2
Industry trends
3
Trust
Maximising our social impact, ensuring
the reliable supply of our high-quality
products to as many people as possible,
and having highly engaged employees.
GSK Annual Report 2017 Trust
GSK Annual Report 2017
17
17
Strategic report
Governance and remuneration
Financial statements
Investor information
4
How we measure success
5
How we manage risk
Read about Trust across all three businesses
Addressing global health
through science
Sustainable access to our
high-quality products
See pages 44–45
See pages 46–47
Modern employer
Ethical conduct and
environmental sustainability
See pages 48–49
See pages 50–51
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 18
How we measure success
1
How we create long-term value
2
Industry trends
3
Our long-term priorities
4
We have identified ten operating Key Performance
Indicators (KPIs) to track progress against our new
long-term priorities:
Innovation
Innovation sales, pipeline value
and progress
Performance
Turnover, profit, cash flow, market
share, top talent in key roles
Trust
Supply service levels, employee
engagement, corporate reputation
Here we provide performance data for the operating
KPIs we are reporting externally. Due to commercial
sensitivities, we are not planning to publish data for
all operating KPIs.
Pay for performance
The Remuneration policy used to reward the performance
of our executives includes measures linked to our KPIs
(see pages 116, 120 and 122).
Group turnover
£30.2bn
AER +8%
CER +3%
2015
2016
2017
23.9
27.9
30.2
Growth %
AER
CER
4
17
8
6
6
3
0
6
12
18
24
30
How we performed
Group turnover for the year increased 8% AER, 3% CER to
£30.2 billion, with growth delivered by all three businesses.
Pharmaceuticals sales were up 7% AER, 3% CER reflecting the
continued strong growth of the new Respiratory and HIV products,
partly offset by declines in older Respiratory products. Vaccines sales
were up 12% AER, 6% CER, reflecting a strong performance from
meningitis and influenza vaccines. Consumer Healthcare sales grew
8% AER, 2% CER reflecting a strong performance from power brands
in the Pain and Oral health categories, partly offset by the impact of
continued competitive pressures in the US allergy category and a
broader market slowdown.
Operating profit and margin
Total £4.1bn
Adjustedc £8.6bn
Total
Adjusted
2015
2016
2017
5.7b
23.7%
10.3 43.1%
2.6
9.3%
4.1
13.5%
7.7b
27.5%
8.6
28.4%
Growth %
AER
CER
>100>100>100
(12)
>100
(8)
(75)
36
57
12
(86)
14
39
5
Earnings per share
Total 31.4p
Adjustedc 111.8p
Total
Adjusted
2015
18.8
2016
31.4
2017
74.6b
100.6b
111.8
174.3
Growth %
AER
CER
>100
(19)
>100
(14)
(89)
35
67
11
(99)
11
36
4
0
2
4
6
8
10
0
40
80
120
160
200
How we performed
Total operating profit was £4.1 billion, 57% higher on an AER basis,
39% higher CER.
Adjusted operating profit was £8.6 billion, 12% higher on a AER
basis, 5% higher CER. The Adjusted operating margin of 28.4% was
0.9 percentage points higher than in 2016 and 0.4 percentage points
higher on a CER basis. This reflected improved operating leverage driven
by sales growth together with a more favourable mix and continued tight
control of ongoing costs across all three businesses.
How we performed
The increase in total earnings per share reflected the reduced impact
of charges arising from the revaluations of the liabilities for contingent
consideration and the put options associated with the Group’s HIV and
Consumer Healthcare businesses, the benefit from Swiss tax reform
and improved performance by the relevant businesses, partly offset by
charges arising from US tax reform.
Adjusted earnings per share of 111.8p was up 11% at AER, 4% CER in
line with guidance provided in July 2017.
Linked to remuneration
GSK Annual Report 2017
19
5
How we manage risk
New product/innovation sales
£6.7bn
Free cash flow
£3.4bn
2.0
2015
2016
2017
4.5
6.7
2015
(0.5) a
2016
2017
0
1
2
3
4
5
6
7
-1
0
1
2
3.0a
3.4
3
4
Growth £%
>(100)
>100
14
Definition
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. A full list of the products included
in this definition is provided on page 60.
How we performed
Sales of New Pharmaceutical and Vaccine products were £6.7 billion,
an increase of 51% at AER, 44% CER and represented approximately
30% of Pharmaceuticals and Vaccines turnover in the year. At 2015
exchange rates, the equivalent value of the 2017 sales was £5.7 billion.
Definition
The calculation of free cash flow is described on page 58 and a
reconciliation is provided on page 71.
How we performed
We have increased free cash flow by over £400 million after investing
in the Priority Review Voucher and approximately £450 million into
inventory, primarily to support the new launches.
Linked to remuneration
Linked to remuneration
Dividends declared
£3.9bn
Employee engagement
79%
favourable responses to
our global employee survey
Dividends
2015
2016
2017
3.9
1.0d
3.9
3.9
0
1
2
3
4
5
6
7
How we performed
For both 2016 and 2017 we declared dividends to shareholders of
80p per share, giving a total return of £3.9 billion in each year.
Description
We now measure employee engagement twice annually by inviting
all GSK employees to participate in a global employee survey. Our
engagement KPI is based on favourable responses to four questions:
pride in the company, feeling valued as an employee, having the
opportunity to do meaningful and challenging work, and recommending
GSK as a great place to work. In 2017, 83% of employees participated
in our new survey; our engagement score was 79% and we have set this
as the baseline for future improvement. The score represented a 10%
increase from 2015 for three of the four questions directly comparable.
Footnotes
a Revised to include all contingent consideration payments.
b Adjusted results now exclude only significant legal charges per revised definition on page 58. Prior year figures have been revised.
c We use a number of adjusted, non-IFRS, measures to report the performance of our business, as described on page 58, including Adjusted results, free cash flow and
CER 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.
d 2015 includes special dividend.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 20
How we manage risk
1
How we create long-term value
2
Industry trends
3
Our long-term priorities
4
How we measure success
Our principal risks are regularly reviewed by the CET. Below we list the principal
risks managed across the Group in 2017, including our assessment of any change
in the risk during the year due to macro events or mitigating GSK activities.
GSK
exposure
post
mitigation
Macro
environment
Risk description
Assessment and mitigating activities
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.
Product quality
Failure to comply with current Good Manufacturing
Practices or inadequate controls and governance
of quality in the supply chain covering supplier
standards, manufacturing and distribution of
products.
– The macro environment remained unchanged, with patient
safety regulation and Good Pharmacovigilance Practices
remaining consistent.
– The GSK exposure level remained unchanged. The risk has
been maintained at an appropriate level through continued
strong oversight, by further developing our capabilities to
detect safety issues, and by making key safety processes
and standards simpler and more effective.
– The macro risk level remained unchanged, with continuing
industry-level regulatory scrutiny of data integrity, drug
shortages, and an expectation of timely communication
of issues with authorities.
– The GSK exposure level remained unchanged. The risk has
been maintained at an appropriate level through our effective
response to external inspections in 2017 and continuous
improvement in data integrity programmes and our quality
management system.
Financial controls & 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.
– The macro risk level remained unchanged, due to no material
increase in financial reporting requirements.
– The GSK exposure level reduced due to our strong risk
management and governance approach and further
embedding of system changes, controls standardisation
and process simplification.
Anti-bribery & corruption (ABAC)
Failure of GSK employees, complementary
workers and third parties to comply with our
ABAC principles and standards, as well as
with all applicable legislation.
– The macro risk level increased due to more stringent ABAC
laws and a rise in enforcement by regulators.
– The GSK exposure level remained unchanged as we enhanced
our use of data to better inform business decisions, strengthened
our management of ABAC risk in our third party network and
introduced an improved ABAC standard further clarifying our
stance on expected behaviours. Government investigations
regarding our China and other business operations are ongoing
(see page 230).
Commercial practices
Failure to engage in commercial activities
that are consistent with the letter and spirit of
the law, industry, or the Group’s requirements
relating to marketing and communications
about our medicines and associated therapeutic
areas; appropriate interactions with healthcare
professionals (HCPs) and patients; and legitimate
and transparent transfer of value.
– The macro risk level increased due to greater competitive
pressure, increased regulatory enforcement and an expansion
of digital marketing, where laws and regulations are still evolving.
– The GSK exposure level remained unchanged as we continued
to develop robust controls over mature commercial practices in
order to apply appropriate oversight and assurance across
markets. In 2017, as we increased digital capability across GSK,
we enhanced our internal controls to mitigate risk.
GSK Annual Report 2017 21
5
Arrows key
Increased risk
No change to risk
Decreased risk
Risk description
Assessment and mitigating activities
GSK
exposure
post
mitigation
Macro
environment
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, industry, or
the Group’s requirements, and failure to secure
adequate patent protection for GSK’s products.
Third party oversight (TPO)
Failure to maintain adequate governance and
oversight over third-party relationships and failure
of third parties to meet their contractual, regulatory,
confidentiality or other obligations.
Environment, health & safety
and sustainability (EHS&S)
Failure to manage environment, health and safety
and sustainability 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, typically because of cybersecurity
threats, although accident or malicious insider
action may be contributory causes. This also
includes the risk of failure to collect, secure, and
use personal information in accordance with data
privacy laws.
– The macro risk level remained unchanged despite evolving
regulation, and continuing industry-level regulatory scrutiny
of data integrity.
– The GSK exposure level remained unchanged. The risk
has been maintained at an appropriate level through our
strengthened governance structure, which includes enterprise-
wide management of risk and enables better information sharing,
and an increased focus on IT systems, data and analytics.
– The macro environment has remained unchanged as the industry
continues to be vigilant about third-party risks in global sourcing
and supply, and consumer and investor expectations mature.
– The GSK exposure level reduced following the roll-out of our
TPO programme, which risk assessed over 95% of our third
parties with whom we directly engage. This will enable us to
identify and manage risks consistently and proportionately.
Improvement plans are in place where required and the insights
from the programme have informed sourcing processes to
further mitigate risk.
– The macro risk level increased due to greater emphasis on
the environment and antimicrobial resistance, increasing
emerging market regulation, the potential impact of EU chemicals
legislation and the greater use of third parties to develop
pipeline assets.
– The GSK exposure level remained unchanged due to continued
execution of our enterprise strategy and our strengthening
of EHS&S controls.
– The macro risk level continued to increase as the threat against
the pharmaceutical business and industry generally became
more sophisticated and targeted, as evidenced by the Wannacry
and NotPetya global incidents, and new regulations were
introduced, including the EU General Data Protection Regulation.
– Despite this, the GSK exposure level remained unchanged
due to further development of our programme to safeguard
against cyber-attacks and protect critical information and
systems, and our ability to balance the demands of regulation
with our digital transformation, which involves increased data
collection and analysis.
Supply chain & crisis
management
Failure to deliver a continuous supply of compliant
finished products; inability to respond effectively
to a crisis incident in a timely manner to recover
and sustain critical operations, including key
supply chains.
– The macro risk level remained unchanged with ongoing stringent
regulation, a continued US focus on contract manufacturers
outside the US/EU, and increasing data integrity expectations.
– The GSK exposure level reduced due to improved risk
management of our supplier portfolio, progress in completing
supply remediation programmes, and improvements to our
crisis and continuity management framework.
For more information see pages 257 to 266
See page 57 for our viability statement
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 22
GSK Annual Report 2017
Oncology
Immune system T-cells attacking a cancer cell
23
Pharmaceuticals
Our Pharmaceuticals business has a broad portfolio of
innovative and established medicines. We are focused on
developing new medicines in respiratory, HIV, oncology
and immuno-inflammation, with discovery research
exploring these and other areas.
Pharmaceuticals sales were up 7% AER,
3% CER, reflecting the continued strong
growth of Nucala and our Ellipta portfolio
in Respiratory, and Tivicay and Triumeq
in HIV.
In 2017 we had two significant
Pharmaceutical approvals: Trelegy Ellipta,
which provides three medicines in a once
a day, single inhaler to treat COPD; and
Juluca, the first 2-drug regimen, once-daily,
single pill for HIV, which helps to reduce
the amount of medicines patients need.
Pharmaceuticals turnover
Respiratory
HIV
Immuno-inflammation
Established Pharmaceuticals
Total
£m
6,991
4,350
377
5,558
17,276
Dave, oncology scientist, UK
We have joined forces with our partners to rapidly
evolve the science of immuno-oncology, in one
area we are working on increasing the ability of
the body’s immune system to help detect and
attack cancer cells.
Fran, cancer survivor and GSK employee
What’s next
Innovation in
Pharmaceuticals
See pages 24–27
Performance in
Pharmaceuticals
See pages 28–29
Footnote
We use a number of adjusted, non-IFRS,
measures to report performance, as
described on page 58.
We report on our Trust priority
across all three businesses
See pages 42–51
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
24
Pharmaceuticals
Innovation
Our priority is to strengthen our Pharmaceuticals
business by focusing on fewer assets, improving the
R&D and commercial interface, and with brilliant
execution of launches.
Our Pharmaceuticals business continues
to grow and we are global leaders in
Respiratory and HIV. In 2017, we had two
best-in-class medicines approved: Trelegy
Ellipta, our once-daily triple therapy for
chronic obstructive pulmonary disease
(COPD) in a single inhaler; and Juluca, the
first two-drug regimen, once-daily, single
pill for HIV. We also made important
progress across our pipeline assets.
Delivering best-in-class innovation
We need to focus on medicines with the
greatest potential, back them and stop
other projects. Following a review of our
drug development process, we are
focusing on priority assets in two areas
where we are world leaders – Respiratory
and HIV – and two potential areas –
Oncology and Immuno-inflammation.
To ensure we have sufficient funding
and resource for our priority areas and
medicines – those where GSK can
support more patients and strengthen
our existing business over the long term
– we terminated more than 60 pre-clinical
and clinical programmes. These included
ending our collaboration with Janssen
Biologics on sirukumab and starting the
process of identifying a new owner for
our rare disease gene therapy medicines.
We have created a more integrated,
competitive Pharmaceuticals business
by significantly strengthening the existing
partnership between R&D and commercial.
We have made several significant
leadership appointments including
Hal Barron, Chief Scientific Officer
and President of R&D, and Luke Miels,
President, Global Pharmaceuticals.
Both are highly respected leaders with
a track record of bringing new medicines
to market.
Respiratory
We have been a leader in respiratory
medicine for nearly 50 years and remain
at the forefront of scientific research in this
area, offering innovative medicines aimed
at treating patients’ symptoms and reducing
the risk of their disease worsening.
Trelegy Ellipta
During the year, we gained US and
European regulatory approval for Trelegy
Ellipta, our new once-daily triple therapy
for COPD in a single inhaler. This launch
adds to our portfolio of once-daily, inhaled
respiratory medicines – the broadest in
our industry.
We also achieved positive headline results
from the Trelegy Ellipta phase III IMPACT
study. The 10,000+ patient study found
the once-daily triple therapy achieved
significant reductions in moderate/severe
exacerbations for COPD patients when
compared with two other once-daily
dual medicines from our Ellipta portfolio.
We have submitted additional regulatory
filings supported by the IMPACT data, with
the aim of expanding the patient population
for Trelegy Ellipta in COPD. We are
also investigating the efficacy and safety
of Trelegy Ellipta in a phase III study
(CAPTAIN) as a treatment for patients
with asthma.
GSK Annual Report 2017 Strategy in action
“Scientific innovation is
at the heart of GSK and
is our highest priority as
we build the next wave of
growth for the company.”
Dr Hal Barron
Chief Scientific Officer
and President, R&D
25
Other respiratory assets
We continue to lead in respiratory biologics
and believe Nucala (mepolizumab) offers
a highly competitive profile. We received
FDA approval for an additional indication
for mepolizumab, as the first targeted
treatment for uncontrolled eosinophilic
granulomatosis with polyangiitis (EGPA).
We have also submitted a regulatory file for
mepolizumab for the treatment of COPD.
Our other priority respiratory assets
also target COPD and are in phase II
trials: danirixin, a first-in-class oral
CXCR2 antagonist, and nemiralisib,
a highly selective first-in-class
phosphatidylinositol 3-kinase delta
(PI3Kδ) inhibitor.
HIV
We have a long-standing commitment
to HIV and are investigating new paradigms
for treatment, prevention and cure.
Dolutegravir is the number one core agent
globally, and through the success of Tivicay
and Triumeq, it offers important benefits
for a wide range of patients. It can be used
without the need for a booster, and showed
superior efficacy in five different clinical
studies. It is generally well tolerated and
has a high barrier to resistance and few
interactions with commonly used
medications.
Today, due to advances in antiretroviral
therapy (ART), people living with HIV have
near normal life expectancies compared
to the general population, but may spend
decades on HIV treatment. Our innovative
research into 2-drug regimens (2DR)
was initiated in response to physician
and patient demand to reduce long-term
ART exposure.
Juluca
In November, we received US FDA
approval for Juluca, a once-daily, single
pill 2DR regimen for HIV. Juluca combines
dolutegravir with rilpivirine (Edurant,
a Janssen medicine) and is a complete
regimen for treating HIV in adults who
are virologically suppressed and have
no resistance. The SWORD studies
of over 1,000 patients in phase III trials
showed Juluca achieved non-inferior viral
suppression compared with traditional
3-drug regimens. Through the purchase
and use of a Priority Review Voucher,
we accelerated this approval in the US.
Following our June 2017 submission to
the European Medicines Agency (EMA)
for regulatory approval, we expect a
response in 2018.
Other HIV assets
Our 2DR clinical trial programme now
consists of eight phase III clinical trials,
two of which have completed (SWORD
studies) and support approval of Juluca,
with four other studies due to report
in 2018.
Dolutegravir and lamivudine is being
investigated versus a traditional 3-drug
regimen for treatment-naive HIV patients
in the GEMINI 1 & 2 studies, and in the
TANGO trial for patients who have achieved
viral suppression on a tenofovir alafenamide
fumarate (TAF)-based regimen.
The long-acting 2DR of cabotegravir
and rilpivirine, is being investigated for
administration every four weeks in virally
suppressed adults with HIV-1 infection
(ATLAS and FLAIR). In addition, the
ATLAS 2M study has started to investigate
administration every two months.
We also have two phase III studies that
began in 2017 to evaluate cabotegravir
as a long-acting monotherapy in the
prevention of HIV. These trials are being
conducted through a public-private
funding collaboration.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 26
Pharmaceuticals continued
Read more about our Pharmaceuticals
pipeline on pages 251 to 252
Strengthening the
R&D commercial
interface
Oncology
In Oncology, we are focused on delivering
transformational therapies that can lengthen
the lives of patients with cancer. In 2017, we
made significant progress in our emerging
portfolio of next generation therapies in the
areas of immuno-oncology, cell therapy
and epigenetics.
Our 2857916 monoclonal antibody against
BCMA has the potential to target a number
of tumour types, including relapsed and
refractory multiple myeloma. Promising
early results suggest a highly competitive
profile compared with existing approved
treatments for multiple myeloma. It has
been granted European PRIME and FDA
breakthrough status, potentially resulting
in faster review by the regulatory authorities
when it is filed.
We exercised our option to gain an
exclusive global licence from Adaptimmune
for 3377794, an investigational SPEAR
T-cell receptor targeting NY-ESO-1, and
were granted European PRIME and FDA
breakthrough status. Another oncology
therapy, 3359609, is the first investigational
inducible T-cell costimulator (ICOS) agonist
antibody to enter human clinical trials.
Both of these assets are in phase I/II trials.
Immuno-inflammation
Immuno-inflammatory diseases are
relatively common, chronic and debilitating
conditions, for which there remains
significant unmet medical need. To
discover the next breakthrough for immune-
mediated diseases, we are focusing on
transformational medicines that could
potentially alter the course of inflammatory
disease and induce sustainable remission.
We received approval in the US and EU for
a new subcutaneous (SC) formulation of
Benlysta, our treatment for systemic lupus
erythematosus, which enables either home
or hospital administration of the medicine.
We also received approval in Japan for the
use of Benlysta for the first time.
We have two phase II immuno-inflammation
priority assets: 3196165, a monoclonal
antibody which blocks the effect of anti-
granulocyte-macrophage colony stimulating
factor (GM-CSF), for rheumatoid arthritis
and osteoarthritis, and 2982772, a receptor
interacting protein-1 (RIP1) kinase inhibitor
for psoriasis, ulcerative colitis and
rheumatoid arthritis.
Future pipeline optionality
Outside our core therapy areas, we have
a number of other promising programmes,
including two late-stage priority assets:
oral daprodustat, in phase III trials for
anaemia associated with chronic renal
disease, and an anti-SAP therapy for
amyloidosis, currently in phase II.
Ensuring there is a strong partnership
between our R&D and commercial
functions is a priority for us. This will
help ensure we deliver differentiated
medicines with the most competitive
profiles and robust evidence plans to
compete effectively in today’s dynamic
market. A single strategy across R&D
and commercial will ensure alignment
and focus across the business. We
are simplifying our processes to
eliminate complexity, and in parallel,
strengthening our commercial and
medical resource to drive
performance.
GSK Annual Report 2017 27
Accelerating priority assets
New technology frontiers
Strategy in action
“Digital technology
will transform many
aspects of how we
develop new medicines
and interact with our
customers.”
Karenann Terrell
Chief Digital and Technology Officer
We are improving the pace of our medicines
development by enhancing our speed-to-
clinical decision making through changes
to our governance and by adapting the way
we design and conduct our clinical trials.
To support this acceleration we established
a new Board committee of global scientific
experts, the Science Committee, to ensure
that emerging scientific and medical
knowledge is integrated into our strategic
planning. In addition, a new Development
Advisory Committee will provide the Board
with strategic guidance on all aspects of
our current and future development activity,
with full consideration of emerging trends
and alternative approaches. See page 109
for more information.
Our early research infrastructure –
around 25 discovery performance units
(DPUs) with their own project accountability
and budgets – encourages a competitive
dimension to proposed areas of discovery
research and capital allocation.
Digital technology is having an impact on
every part of our business and our goal is
to harness these developments in data-rich,
information-based medicine to accelerate
our drug discovery and development, and
drive our business forward.
Collaborations remain key to our innovation.
During the year, we joined forces with two
external companies to harness artificial
intelligence (AI): Exscientia, a UK specialist
in machine-learning; and Insilico Medicine,
a US leader in AI-led drug discovery.
We also co-founded the private-public
Accelerating Therapies for Opportunities
in Medicine (ATOM) consortium, based in
the US. This aims to cut pre-clinical cancer
drug discovery from six years to just one,
using supercomputers to analyse data
from failed R&D programmes with the aim
of finding patterns and vital clues to aid
successful future development. We are
also supporting the UK Biobank, a ground-
breaking initiative to generate anonymised
genetic sequence data from 50,000
volunteer participants to deliver insights
into why some people are at greater risk
of disease. In addition, we continue to work
on the Open Targets programme, which
supports an open access search engine
that searches, evaluates and integrates
biologic and genetic disease data.
Drug discovery and development
Drug discovery
Pre-clinical
Clinical trials
Regulatory
review
Manufacturing
5,000–10,000
compounds
250
5
y
r
e
v
o
c
s
d
-
e
r
P
i
Number of volunteers
20–80
100–300 1,000–3,000
d
e
t
t
i
m
b
u
s
Phase I
Phase II
Phase III
l
e
fi
y
r
o
t
a
u
g
e
R
l
One
approved
drug
d
e
t
t
i
m
b
u
s
e
c
n
a
l
l
i
e
v
r
u
s
g
n
i
t
e
k
r
a
m
-
t
s
o
P
n
o
i
t
a
c
i
l
p
p
a
g
u
r
d
w
e
N
3–6 years
6–7 years
0.5–2 years
Source: Pharmaceuticals Research and Manufacturers of America
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
28
Pharmaceuticals continued
Performance
Pharmaceuticals sales were up 7% AER, 3% CER,
reflecting the continued strong growth of our new
Respiratory and HIV products.
2017 performance summary
Pharmaceuticals turnover in 2017 was
£17,276 million, up 7% AER, 3% CER.
In the US, total sales were £7,568 million,
up 11% AER, 6% CER primarily driven
by new Respiratory and HIV products.
In Europe sales were £3,983 million,
up 3% AER but down 3% CER, reflecting
the continued transition of the Respiratory
portfolio, generic competition to Kivexa
and the disposal of the Romanian
distribution business. International sales
were £5,725 million, up 6% AER and
4% CER.
Respiratory sales were up 7% AER, 3%
CER to £6,991 million. New Respiratory
products recorded combined sales of
£1,930 million in 2017, more than offsetting
the decline in Seretide/Advair.
HIV sales increased 22% AER, 16% CER
to £4,350 million in the year. The growth
was driven by continued increases in
market share for Triumeq and Tivicay, partly
offset by the impact of generic competition
to Epzicom/Kivexa, particularly affecting
the European market.
Immuno-inflammation sales were
£377 million, up 11% AER, 6% CER
in the year.
Sales of Established Pharmaceuticals
were £5,558 million, declining 2% AER,
5% CER, reflecting a three percentage
point impact from recent divestments
of non-core assets.
The Pharmaceuticals operating margin
was 34.3%, up 0.2 percentage points
AER but down 0.6 percentage points
CER primarily reflecting increased R&D
investment, including using a Priority
Review Voucher in Q2 2017. The lower
operating margin also reflected increased
investment in new product support, as well
as the continued impact of lower prices,
particularly in Respiratory, partly offset by
a more favourable product mix, primarily
driven by the growth in HIV sales, and
the continued cost reduction benefit
of the Group’s Pharmaceuticals
restructuring programme.
Delivering world
class capability
For our asthma medicine, Relvar/Breo
Ellipta, this focus on target customer
groups helped this medicine become
the first of our new Respiratory portfolio
to be a £1 billion brand, helping over
four million patients this year.
Our ambitious commercial efforts are
focused on driving the continuous growth
of our priority brands in our largest
markets, most notably the US. Our R&D
teams continue to generate evidence
from clinical trials to support the right
patients for each medicine, as well
as the differentiation of our brands.
In 2017, strategic use of data and
analytics has enabled us to optimise
the role, engagement and training of our
salesforce. This has helped make sure
their knowledge of the disease, our
strategy and the competitive environment
have led to truly competitive customer
engagement from day one of launch.
GSK Annual Report 2017 29
Creating a simpler, competitive
supply chain
We are simplifying our manufacturing
and supply chain to achieve competitive
and sustainable performance – delivering
strong results in the fundamentals of safety,
quality and service, as well as improved
financial performance. We are focused on
fewer priorities, removing waste and making
things simpler. Our current plans address
productivity improvement, procurement
savings and working with our supplier base
to prioritise fewer, more strategic supplier
relationships. We are on track to reduce
our suppliers by approximately 30% –
leveraging our scale and standardising
specifications to use fewer bespoke
materials and improving our cost of goods.
We continue to invest in our manufacturing
network and advanced manufacturing
technologies which have the potential
to improve product quality while reducing
material waste and lead times for new
capacity. Our work with continuous
processing is well advanced and, where
deployed, could reduce cost of goods
by up to 20% in the long term.
Digital transformation
Our goal is to apply digital technology
that delivers truly competitive customer
engagement to drive better performance.
Our investment in this area is underpinned
by our appointment of Karenann Terrell
as Chief Digital and Technology Officer,
who joined in September 2017 to help
drive a digital transformation programme
across our three businesses.
Across the Pharmaceuticals business
we are using new technologies to improve
performance with an increased focus
on improving the customer experience.
This includes customer-centric integrated
campaigns and personalised content
to help healthcare professionals deliver
better patient outcomes and to drive
preference for our brands.
2020 outlook
Over the five years to 2020 we expect a
low single-digit CAGR for sales (at 2015
exchange rates) despite a higher level
of divestments over the period than we
originally expected. Strong performances
from our new medicines together with
disciplined cost management are expected
to enable the business to achieve an
operating margin in the low 30s percentage
range in 2020 (at 2015 exchange rates)
even if an automatically substitutable
generic version of Advair is launched
in the US.
Driving performance for
profitable, sustainable growth
In 2017, we refocused our Pharmaceuticals
business to make it stronger and more
competitive in order to deliver improved,
sustainable returns. Under the leadership
of Luke Miels, we have simplified our
commercial management structure
and reshaped our operations. We are
aggressively reallocating resources to
those areas best able to deliver profitable
sustainable growth and returns, with
much more focus on new medicines
and major markets.
The changes we are making will drive
sharper prioritisation, a simpler portfolio,
faster decision making, more effective
capital allocation and a strong focus
on execution.
In 2017, we began streamlining our
Pharmaceuticals products portfolio by
exiting from or divesting 90 non-core
brands and we are on track to reach
our goal of about 20% fewer brands.
This included announcing an end to the
manufacture and sale of the type 2 diabetes
therapy Eperzan/Tanzeum which we now
expect to end during 2018. In addition,
we announced a strategic review of our
cephalosporins antibiotics business
with an option to sell.
We are restructuring our emerging
markets business to improve growth,
profitability and sustainability while
continuing to ensure access for the patients
that need our medicines. Simplifying the
geographies, reducing organisational
layers and simplifying our cost structures,
including moving to an export model in
some markets, will support faster, more
aligned execution.
Strategy in action
“Strong sales of our new
products show we can
achieve great things
when we are focused.”
Luke Miels
President, Global Pharmaceuticals
Footnote
We use a number of adjusted, non-IFRS,
measures to report performance, as
described on page 58.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
30
GSK Annual Report 2017
Shingles
Herpes zoster virus
of shingles
GSK Annual Report 2017
31
Strategic report
Governance and remuneration
Financial statements
Investor information
Virginie, Laboratory Technician,
Vaccines R&D
Our new vaccine Shingrix represents a significant
advance in vaccine technology and has clinically
demonstrated a strong and sustained immune
response and efficacy against shingles and its
painful complications.
Alain, shingles sufferer and GSK employee
Vaccines
Our Vaccines business has a broad portfolio and innovative
pipeline of vaccines to help protect people throughout life.
We deliver over two million vaccine doses per day to people
living in over 160 countries.
Vaccines sales were up 12% AER,
6% CER, primarily driven by meningitis
vaccines, with Bexsero growing across all
regions and Menveo in the US and Europe,
and higher sales of influenza products,
primarily in the US and Europe.
During the year, we received US FDA
approval for Shingrix, our new vaccine
which represents a new standard for
the prevention of shingles.
Vaccines turnover
Meningitis
Influenza
Shingles
Established Vaccines
Total
£m
890
488
22
3,760
5,160
What’s next
Innovation in
Vaccines
See pages 32–33
Performance in
Vaccines
See pages 34–35
Footnote
We use a number of adjusted, non-IFRS,
measures to report performance, as
described on page 58.
We report on our Trust priority
across all three businesses
See pages 42–51
32
Vaccines
Innovation
Breakthrough
vaccine science
Our advanced science and technology platform capability
enables us to discover and develop vaccines that help
protect people in over 160 countries from serious diseases.
Our vaccines strategy is to bring
differentiated, high-quality and needed
vaccines to as many people as possible.
We have global scale and are well
positioned to take advantage of changing
demographics. Vaccines are long-term
assets without the volatility of patent cliffs,
which provides opportunities to invest in
life-cycle management and improve the
competitive profile of our existing vaccines
to better meet patient needs.
We focus on finding new candidate
vaccines to help protect people of all
ages from disease and have a pipeline
of 14 candidate vaccines currently in
development. We believe that a core
competitive advantage is our expertise in
technology platforms which facilitates the
development of more effective vaccines.
Innovation in action
In 2017, we received regulatory approval
in the US and Canada for Shingrix, with
an efficacy of over 90%, which we believe
provides a step change in the prevention
of shingles. We anticipate it could drive
one-third of Vaccines growth between
2015 and 2020. More than 90% of people
over 50 are infected with the varicella zoster
virus that causes shingles and one in three
will develop shingles in their lifetime.
Following approval by the US Food and
Drug Administration (FDA) in October
2017, the competitive position of
Shingrix has been further strengthened
by recommendations from the US Centers
for Disease Control and Prevention’s
(CDC’s) Advisory Committee on
Immunization Practices (ACIP) naming it
as the preferred shingles vaccine for adults
aged 50 and over. The recommendation
includes revaccinating those who had
previously received the competitor vaccine,
meaning over 100 million people in the US
will be eligible for the Shingrix vaccine.
In January 2018, we received a positive
opinion from the European Medicines
Agency’s (EMA’s) Committee for Medicinal
Products for Human Use for Shingrix.
The results of regulatory filings for
Shingrix in Australia and Japan are also
due in 2018. In addition, in December 2017
we announced new data confirming the
safety and efficacy of Shingrix in immuno-
compromised autologous haematopoietic
stem cell transplant patients.
Our commercial, manufacturing and R&D
teams have worked closely together to
ensure the Shingrix launch is executed
flawlessly. We are taking a staged approach
to the global launch in order to manage
the strong anticipated demand with
reliable supply.
Shingles is a painful and potentially
serious condition. Shingrix was
developed specifically to overcome the
age-related decline in immunity and is
the first shingles vaccine to combine a
non-live antigen, to trigger a targeted
immune response, with a specifically
designed adjuvant system, AS01B,
to make that response strong and
sustained. This adjuvant is also used
in our RTS,S vaccine for the prevention
of malaria in children.
GSK Annual Report 2017 Strategy in action
“With our global Vaccines
R&D organisation,
supported by unique
technology platforms
and talented people, we
are developing vaccines
to meet existing and
emerging needs.”
Emmanuel Hanon
Senior Vice President,
Head of R&D, Vaccines
33
Delivering best-in-class innovation
We are aiming to develop assets which
are best in class. Our investment in unique
technology platforms, including adjuvants,
is delivering a competitive advantage in
targeting new, emerging and remaining
medical needs.
Meningitis
Our focus is to maintain GSK’s
meningococcal meningitis market
leadership with both licensed and candidate
vaccines. We aim to broaden the age
range of our meningococcal vaccines
in the US and demonstrate their impact in
infants as well as meningococcal carriage
in adolescents. In February 2018, we were
granted Breakthrough Designation for
Bexsero in children aged 2 to 10 years.
We are also working on new formulations,
including a fully liquid presentation of our
tetravalent vaccine for MenACWY, Menveo,
which is expected to enter phase II clinical
trials in 2018. The results from our phase III
study of our booster for Menveo are
expected in 2018. We are also committed
to developing a single vaccine that tackles
all five of the most common serogroups,
A, B, C, W and Y.
Reflecting our active life-cycle management
of our vaccines – where we strategically
plan an asset’s commercial journey from
its final clinical trials onwards – we continue
to expand target populations and protection.
In this way, we aim to extend patient
benefits, increase use of our vaccines
and be the leader in helping to prevent
meningococcal disease.
In line with this approach, we are supporting
an extensive study to examine if the
meningococcal B vaccine reduces the
spread of meningococcal bacteria in
teenagers through ‘herd immunity’. This
involves vaccinating 35,000 teenagers in
South Australia, which has a high incidence
of meningococcal B disease.
Other priority assets
Building on GSK’s existing respiratory
leadership position through our
Pharmaceuticals business, we have
a number of candidate vaccines targeting
respiratory diseases. These include our
candidate vaccine for chronic obstructive
pulmonary disease (COPD), which
began a phase II proof of concept study
in Europe in 2017. Other growth drivers
in the respiratory portfolio are our
respiratory syncytial virus (RSV)
candidates, with different approaches
tailored to each age group. We also
have a research collaboration focused
on tuberculosis, with our candidate
vaccine currently in phase II trials.
We have developed the only malaria
vaccine candidate to have received positive
opinion from the European Medicines
Agency (EMA) (see page 44).
New technology frontiers
We have new technologies, including
adjuvant systems, structural vaccinology
and synthetic vaccine platforms that are
helping us move beyond observation and
experimentation methods of vaccine
development to create ‘vaccines by design’.
These are made up of antigens, delivery
systems and adjuvants that can help
increase the immune system’s response
to a vaccine.
GSK has been innovating in adjuvant
systems for more than 25 years. Our unique
approach has led to the development of
several ‘adjuvant systems (AS) families’,
which use a combination of adjuvants to
achieve a better immune response and
are fundamental to the next generation
of our vaccines portfolio.
Our self-amplifying mRNA (SAM)
technology uses the human body as
a ‘factory’ to produce its own vaccines.
SAM will not require traditional vaccine
production methods, so could potentially
enable us to produce vaccines more
quickly and simply. We are in the early
stages but data from a variety of animal
models show SAM performs well.
External partnerships
Collaboration is central to our innovation.
We have around 180 external scientific
collaborations, with most of our 14
candidate vaccines being developed in
partnership. Such collaborations enable
our 2,000 Vaccines scientists at our global
R&D centres, in the US, Belgium and Italy,
to learn from other experts and stay close
to emerging technologies. For example,
we are involved in the phase II trial of an
HIV vaccine with a group of NGOs and
other pharmaceutical companies, led by
the US National Institutes of Health.
Read more about our Vaccines
pipeline on page 253
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 34
Vaccines continued
Performance
Demand for our world-leading meningitis portfolio
contributed to a 12% AER, 6% CER increase in
Vaccines sales.
Following 2017 launches in Argentina
and Belgium, Bexsero is now available
in 24 countries. The vaccine’s broad age
indication provides competitive advantage
in Europe, and in the US it offers the
fastest series completion, with two doses
administered in about one month.
Menveo sales grew 36% AER, 29% CER,
primarily driven by the impact of favourable
year-on-year CDC stockpile movements,
partly offset by supply constraints in
International.
Influenza
Fluarix/FluLaval sales were up 18% AER,
12% CER to £488 million, reflecting strong
sales execution, primarily in the US, and
higher demand in Europe.
Shingles
Shingrix recorded initial sales to
distributors of £22 million in the US
after its FDA approval and favourable
ACIP recommendations.
2017 performance summary
Vaccines sales grew 12% AER, 6% CER
to £5,160 million, primarily driven by
meningitis vaccines, with Bexsero growing
across all regions and Menveo in the US
and Europe and higher sales of influenza
products, primarily in the US and Europe.
Vaccines operating margin was 31.9%,
up 0.8 percentage points AER and
1.3 percentage points higher on a CER
basis. This was primarily driven by improved
product mix, the benefit of a settlement
for lost third-party supply volume, together
with continued restructuring and integration
benefits. This was partly offset by
increased SG&A (selling, general and
administration) resources to support
business growth and new launches,
increased supply chain costs and
lower royalty income.
Meningitis
Meningitis sales grew 34% AER, 27% CER
to £890 million. Bexsero sales growth of
43% AER, 34% CER was driven by new
national immunisation programmes, private
market sales and regional tenders in
Europe, as well as growing demand in
the US, together with strong private
market sales in International.
Global demand
for Bexsero
Image Meningococcal
serogroup B bacteria,
commonly known as
meningitis B
Over 22 million doses of our
meningitis B vaccine Bexsero have
been distributed since its 2015 launch.
Bexsero was developed using reverse
vaccinology, which decodes the
genome sequence of meningitis B
and selects the most effective protein
candidates for use in the vaccine.
Bexsero is part of national
immunisation programmes in the
UK, Andorra, Ireland and Italy. In the
US, Bexsero current market share
represents approximately 70% in
the adolescent market.
GSK Annual Report 2017 35
Driving performance for profitable,
sustainable growth
During the year, we decided to discontinue
a number of our commercially available
vaccines within our Established Vaccines
portfolio that are low in volume and where
medical needs are met with other vaccines.
Creating a simpler, competitive
supply chain
Our global Vaccines network includes 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.
We continue to focus on removing
complexity in our supply chain. Since 2015
we have reduced the number of different
packs we have by 40%, increased our
manufacturing flexibility, and simplified
and standardised our product offerings
to support our commercial strategy.
Process and analytical robustness
During 2017, process improvements
and analytical robustness enabled us
to produce more of our Bexsero vaccine
more efficiently. This was due to a new
pyrogen test, approved in several countries,
which improved assay robustness and
eliminated about 10% of failures. We
have also demonstrated the feasibility
of increasing the yields and reducing
failure rates of two of the four antigen
manufacturing processes. The Synflorix
process robustness programme
(completed in 2016) continued to
deliver good results in 2017, enabling
us to manufacture product without any
major losses.
Transaction savings
Excellent execution and acceleration
of the Integration Implementation Plan
across R&D, manufacturing, global
support functions, commercial network
and procurement helped our Vaccines
business to deliver its £400 million
Novartis integration savings target.
Strategy in action
“We are focused on
maintaining our
leadership position
in meningitis vaccines
and executing our
Shingrix launch
flawlessly.”
Luc Debruyne
President, Global Vaccines
Established Vaccines
Established Vaccines growth was driven
by hepatitis vaccines, mainly due to a
competitor supply shortage in the US and
higher demand for Boostrix and Rotarix.
The launch of Cervarix in China, the first
cervical cancer vaccine to be approved and
launched in the country, also contributed
towards growth as did favourable year-on-
year CDC stockpile movements for Infanrix
and Pediarix in the US. This growth was
partly offset by increasing competitive
pressures on Infanrix and Pediarix in the
US and Europe, and lower Synflorix sales,
driven by lower pricing in developing
countries.
2020 outlook
Over the five years to 2020 we expect
a mid to high single-digit CAGR for sales
(at 2015 exchange rates). A strong launch
of Shingrix is a key priority and we believe
the vaccine could be one of our biggest
growth drivers over the 2015 to 2020
period. We are still targeting an operating
profit margin of at least 30% (at 2015
exchange rates) in 2020.
Footnote
We use a number of adjusted, non-IFRS,
measures to report performance, as
described on page 58.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
36
GSK Annual Report 2017
Oral health
Novamin, a key technology in Sensodyne
Repair and Protect
GSK Annual Report 2017
37
Strategic report
Governance and remuneration
Financial statements
Investor information
Consumer Healthcare
Our Consumer Healthcare business develops and
markets consumer-preferred and expert-recommended
brands in oral health, pain relief, respiratory, nutrition/
gastro-intestinal and skin health.
Consumer Healthcare sales were up
8% AER, 2% CER. A strong performance
by power brands across Wellness and
Oral health was partly offset by competitive
pressures in the US allergy category.
Sales from new GSK innovations (product
introductions within the last three years on
a rolling basis) represented approximately
13% of sales in the period. Some notable
launches in 2017 were several line
extensions for Sensodyne, including
next generation Sensodyne Rapid Relief
and Sensodyne Deep Clean as well
as Voltaren No Mess and parodontax.
We launched Flonase Sensimist in the
US and continued the global roll-out of
Flonase OTC (over-the-counter).
Consumer Healthcare turnover
Wellness
Oral health
Nutrition
Skin health
Total
£m
4,001
2,466
680
603
7,750
Footnote
We use a number of adjusted, non-IFRS,
measures to report performance, as
described on page 58.
Darren, Principal Scientist,
Oral Health R&D, UK
Our NovaMin technology in Sensodyne Repair
& Protect seeks out and forms a protective layer
over sensitive areas of the teeth, helping to relieve
the pain of sensitive teeth.
Van, sensitive teeth sufferer
What’s next
Innovation in
Consumer Healthcare
See pages 38–39
Performance in
Consumer Healthcare
See pages 40–41
We report on our Trust priority
across all three businesses
See pages 42–51
38
Consumer Healthcare
Innovation
Our priorities are to execute brilliant product launches and
to build a strong, differentiated pipeline of consumer-led,
science-based innovations and claims.
In 2017, we continued to demonstrate our
ability to innovate within the consumer
healthcare market, harnessing GSK’s
scientific and technical expertise alongside
deep consumer insights. The proportion
of sales from innovations launched within
the last three years was approximately 13%,
which included several key 2017 launches.
Delivering best-in-class innovation
New Sensodyne Rapid Relief, the latest
premium extension of our £1 billion
Sensodyne brand, was launched
successfully in more than 40 markets
in 2017. Developed in our UK-based
Oral health Innovation Hub, it has been
designed to provide fast relief from tooth
sensitivity and is supported by clinical
studies. The active ingredient, stannous
fluoride, seals the layer beneath the surface
of the tooth enamel known as dentine,
aided by a special polymer, which clinical
data shows can result in relief from the pain
of sensitivity within as little as 60 seconds.
We also introduced Sensodyne Deep
Clean toothpaste in a number of markets,
which provides a deep clean for sensitive
teeth using small particle silica and delivers
long-lasting freshness through novel
coolant technology.
A further key innovation launched in 2017
was Voltaren No Mess, which has a cap
that makes the product easier and less
messy to apply, addressing one of the
key consumer barriers to using a topical
pain-reliever. The unique and innovative
packaging was assessed extensively
in our new consumer sensory testing
laboratories. Roll-out continues in 2018.
We launched our parodontax brand –
clinically proven to help prevent bleeding
gums and gingivitis – for the first time
in the US.
Consumer insight-driven innovation
New ENO Cooling antacid creates
an instant cooling sensation when
taken. Our scientists developed the
formulation to create this cooling effect
after research at our consumer sensory
labs showed consumers believe that
feeling cool internally helps soothe
heartburn. ENO Cooling, which we
have just launched in India, is one
of many consumer-led innovations that
have been created following research
at our three consumer sensory facilities
in India, the UK and the US.
GSK Annual Report 2017 39
Strategy in action
“We deliver differentiated
products to consumers
by combining consumer
insights with scientific
and technical excellence.”
Richard Slater
Head of R&D,
GSK Consumer Healthcare
We continued to see success in our
switch programme with Flonase Sensimist
successfully changing from a prescription-
only medicine to an over-the-counter
product in the US, enhancing our offering
in the allergy market. We have also
continued the global roll-out of Flonase,
launching in several markets in 2017,
including Canada, Spain and the Czech
Republic. In switching Flonase from
prescription-only to over-the-counter, we
recognised the growing consumer demand
for greater personal control over healthcare.
Building industry-leading
capabilities
We continued to invest in understanding
and meeting consumers’ and retail
customers’ needs by expanding our
international network of consumer sensory
and shopper science laboratories, with
new labs opening in the UK and Singapore
in 2017. These state-of-the-art facilities
differentiate GSK, with retailer feedback
showing that our scientific approach to
shopper insight and customer collaboration
puts us ahead of our competitors.
Our integrated global innovation hubs,
co-locating both R&D and commercial
experts, continue to ensure that our
innovation is both science-based and
consumer-led. The breadth of this
network also keeps us in step with
local and regional trends.
Emerging market opportunities
Emerging markets continue to be a key
opportunity area for growth in Consumer
Healthcare. We have increased our
emerging market R&D investment and
focus, in particular in our China and
India-based innovation hubs, where we
continue to identify local consumer and
retailer insights to underpin our product
development and marketing, ensuring that
we remain locally relevant and competitive.
In India, for example, we discovered that
nearly half of all indigestion treatments
use home remedies. Using this insight,
we developed and launched a new variant
of our ENO antacid, using the popular
ajwain herb. This contributed to strong
brand growth in 2017.
External innovation
We continue to look beyond GSK for
additional innovation opportunities, and
in 2017 saw a significant increase in the
proportion of our pipeline coming from
outside the company. We identified over
1,000 possible partnerships, formally
reviewed more than 150 proposals and
entered into more than 40 partnerships.
This increased external focus, along with
our strong internal science capabilities,
ensures that we are able to develop and
deliver a strong, competitive pipeline of
consumer-led, science-based innovation.
Weather app
boosts sales
A Theraflu-sponsored weather app
kept US consumers informed of local
cold and flu levels – and boosted
sales. The GSK brand teamed up with
The Weather Channel to create the
Theraflu cold and flu tracker, as part
of the launch campaign for Theraflu
ExpressMax caplets. Reflecting social
media conversations, the app gave
likely cold and flu levels in users’ areas,
while advising them to treat symptoms
with Theraflu. Almost 50 million unique
visitors were exposed to Theraflu
messaging via the tracker and the
brand’s sponsorship of The Weather
Channel. This sparked a significant
rise in sales among app users during
the peak flu season.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
40
Consumer Healthcare continued
Performance
Strong performance by our power brands across
Wellness and Oral health helped drive growth.
2017 performance summary
Consumer Healthcare sales grew
8% AER, 2% CER to £7,750 million.
A strong performance by power brands
across Wellness and Oral health was
partly offset by competitive pressures in
the US allergy category, impacting Flonase
OTC as well as lower sales of tail brands
across the Nutrition and Skin health
categories. In addition, reported growth
was impacted by the disposal of the Nigeria
beverages business in Q3 2016 and the
implementation of the Goods & Service
Tax (GST) in India in July, the net effects
of which were partly offset by the benefit
of the comparison with the impact of
demonetisation in India in Q4 2016.
The divestment, GST and demonetisation
combined to reduce overall Consumer
Healthcare CER growth by approximately
one percentage point.
Sales from new GSK innovations (product
introductions within the last three years on
a rolling basis) represented approximately
13% of sales in the period. Some notable
launches in 2017 were several line
extensions for Sensodyne, including
next generation Sensodyne Rapid Relief
and Sensodyne Deep Clean, as well
as Voltaren No Mess and parodontax.
We also launched Flonase Sensimist
in the US and continued the global
roll-out of Flonase OTC.
On a category basis, sales in Wellness
grew 7% AER, 2% CER to £4,001 million,
reflecting a strong performance from
Voltaren and cold and flu seasonal
products, partly offsetting a weaker
performance from US allergy products.
Oral health sales grew 11% AER, 6% CER
to £2,466 million, with Sensodyne sales
continuing to drive performance. Nutrition
sales grew 1% AER and declined 5% CER
to £680 million, adversely impacted by
the sale of the Nigeria beverages business
and the implementation of GST, as well
as continued competitive pressures from
Horlicks in India. Skin health sales grew 6%
AER, but were flat at CER at £603 million.
Consumer Healthcare operating margin
was 17.7%, up 2.2 percentage points AER
and 1.3 percentage points higher on a
CER basis, reflecting tight control of costs,
integration synergies principally in SG&A,
partly offset by increased investment in
power brands.
2020 outlook
Over the five years to 2020 we expect
a low to mid single-digit CAGR for sales
(at 2015 exchange rates) and we expect
an operating margin of 20+% in 2020
(at 2015 exchange rates).
Footnote
We use a number of adjusted, non-IFRS,
measures to report performance, as
described on page 58.
GSK Annual Report 2017
Strategy in action
“As the consumer
healthcare market
evolves, we are investing
in digital capabilities and
forming ground-breaking
partnerships to continue
to meet changing
consumer needs.”
Brian McNamara
CEO, GSK Consumer Healthcare
41
Industry partnerships
Collaboration is core to all aspects of our
innovation. In 2017, we signed a partnership
with Google, to bring our digital advertising
data platform in-house, enabling us to
better target relevant content to consumers
and drive efficiency in our marketing
campaigns. We formed another partnership
in 2017 with Alimama, the marketing and
media arm of Chinese technology group
Alibaba. This partnership helps us identify
more potential consumers and gain deeper
understanding of their online shopping
behaviour so we can reach them with the
right advertising at the appropriate time.
We continued to prioritise building
relationships with healthcare professionals
(HCPs), whose recommendations can be
key in introducing new consumers to our
brands. Seventy per cent of consumer
trial of Sensodyne in the US, for example,
is driven by dentist recommendation.
In 2017, we deployed a new customer
relationship management platform across
80 markets to our HCP field forces.
This system upgrade enables us to have
a more engaging and relevant science-
based dialogue with HCPs.
Creating a simpler, competitive
supply chain
We have continued to improve our
consumer health supply chain, across
quality, safety, service and cost. We have
simplified our network and announced
plans to exit three sites. Since 2015, we
have streamlined the number of contract
manufacturers (CMOs) we use by 24%
to reduce complexity in our supply chain.
Our supply chain has successfully
supported strong growth of our
higher-margin power brands through
improvements across productivity,
procurement and systems, ensuring
robust and reliable supply.
Driving performance for profitable
sustainable growth
In 2017, we took significant steps to
strengthen our performance now and in
the longer term, by increasing our focus
on our best performing brands and priority
markets.
Power brands
Our strategy of focusing our resources on
seven power brands and 12 regional core
brands continued to deliver. Our power
brands – including Sensodyne, Voltaren,
Panadol and Theraflu – significantly
outperformed the market, with high single
digit growth. Sensodyne continued to drive
performance, reporting growth of 12%
AER, 8% CER, with strong market-beating
delivery in all regions following the roll-out
of next generation Sensodyne Rapid
Relief and the launch of Pronamel Strong
& Bright.
Pain relief sales were up 10% AER, 4%
CER, driven significantly by Voltaren which
saw growth across the regions, benefiting
from momentum in the 12-hour variant,
strong in-store and marketing activation,
expansion of expert detailing and strong
performances in International markets.
To concentrate on our best performers, we
announced the divestment of some smaller
nutrition brands, including MaxiNutrition in
the UK.
Digital transformation
We invested strongly in our digital
transformation programme. This is intended
to both boost sales – through data-driven
marketing, new e-commerce sales channels
and digitally powered innovations – and
unlock efficiency savings by, for example,
optimising how we generate and deploy
digital content and extracting more value
from our media mix.
To drive our digital transformation,
in 2017 we appointed our first Consumer
Healthcare Chief Digital Officer and
established a Digital Advisory Board
of external digital marketing, data and
e-commerce experts. We also revised
our core training programmes to build
digital and e-commerce capabilities
across our sales, marketing and general
management teams.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 42
42
GSK Annual Report 2017
Trust
Maximising our social impact,
ensuring the reliable supply of our
high-quality products to as many
people as possible, and having
highly engaged employees.
GSK Annual Report 2017 GSK Annual Report 2017
43
Earning
Trust
Here we detail the progress we have made on: addressing
global health needs through our science, creating
sustainable access to our high-quality products, and being
a responsible business with modern employer practices.
Creating long-term value
for all our stakeholders
Investors, patients and consumers,
employees and communities rightly expect
companies to consider their social, as
well as financial, impact as they seek to
create value over the long term. By investing
in a balanced set of long-term priorities
– Innovation, Performance and Trust –
across each of our three businesses,
we will deliver both financial returns and
a broader contribution to society.
Focusing where we can have impact
We have a long history in tackling some
of the world’s biggest health challenges.
The biggest impact we can have is to use
our scientific and technical know-how
to address global health needs – like HIV
and malaria – and support sustainable
access to our high-quality products.
We must also be a responsible business,
with modern employer practices, to support
our talented people to give their very best.
Later this year, we will launch a set of
long-term commitments describing the
actions we will be taking to demonstrate
our continuing commitment to deliver
societal value. With these, we will seek to
establish clear, ambitious targets to drive
impact and progress in three areas:
– Addressing global health needs through
our science
– Creating sustainable access to our
high-quality products
– Being a responsible business with
modern employer practices
We will also continue to seek transparent
and trusted engagement with scientific
and medical communities, address our
environmental impact, and maintain the
ethical standards to which we conduct
our business.
This section reports progress in these
areas during 2017. More detail is available
in our Responsible Business Supplement
available at www.gsk.com/responsibility.
All three of our businesses contribute towards our Trust priority.
Pharmaceuticals
Vaccines
Consumer Healthcare
In 2017, our HIV drug, dolutegravir, was
made available in Brazil as a first line
treatment for people living with HIV who
have never received treatment via the
national health programme. It is also now
available as first line treatment in
Botswana.
Our Vaccines business has developed
the only malaria vaccine candidate to have
received a positive scientific opinion from
the European Medicines Agency and a
recommendation for pilot implementation
by the World Health Organization (WHO).
In early 2018, our Consumer Healthcare
business is launching a five-year
partnership with Smile Train, to provide
funding, support and expertise to help
more children living with cleft lip or palate
to lead a full and productive life.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 44
Trust continued
Addressing
global health
through science
We are using our science and technology to tackle
some of the biggest global health challenges while
delivering leading scientific and medical engagement.
We aim to use our science, and work
collaboratively and transparently with
partners and the scientific community,
to develop new medicines, vaccines and
consumer healthcare products where
there is the greatest need.
Global health impact
The biggest contribution we can make
to improve health globally is to focus on
diseases impacting people around the
world where we have specific scientific
and technological expertise: respiratory,
HIV, oncology, immuno-inflammation and
vaccines. We also have an important role
to play in tackling some of the biggest
global health challenges, including malaria
(see case study), tuberculosis (TB) and
neglected tropical diseases (NTDs),
where there is no commercial market.
In 2017, we created a Global Health Unit
to drive an integrated approach across
the business to innovate and deliver
medicines and vaccines that tackle the
biggest global health challenges, such
as malaria and NTDs.
Our open lab in Tres Cantos, Spain
supported seven new projects run by
external scientists in 2017 (64 since
it opened in 2010). During the year,
the Tres Cantos facility supported the
phase I clinical trials of a new candidate
drug for TB, with phase II studies expected
to begin in 2018. We also began late stage
pre-clinical studies for a molecule with
the potential to shorten TB treatment,
with funding from the Bill & Melinda
Gates Foundation.
In 2017, we received FDA approval
for Juluca (see page 25), an important
milestone in HIV care. It provides a
new treatment option and could make a
significant difference to people living with
HIV as they receive life-long treatment for
their chronic condition. Also in 2017, our
HIV drug, dolutegravir, was made available
in Brazil and Botswana, and has been
added to the Essential Medicines List
in Russia.
As part of our commitment to eliminate
and control NTDs, GSK has donated nearly
eight billion albendazole tablets since 1999
to reach more than 850 million people with
lymphatic filariasis (LF) or intestinal worms.
In April 2017, Togo became the first African
country to eliminate LF as a public health
problem, with seven other countries doing
so later that year.
Our Pharmaceuticals business is in the
late stage development of tafenoquine, a
single-dose treatment for P.vivax malaria,
which is common in South Asia, the Horn
of Africa and Latin America. If approved,
it will be the first new treatment for
P. vivax malaria in more than 60 years.
Our Vaccines business has developed
the only malaria vaccine candidate to
have received a positive scientific opinion
from the EMA and a recommendation for
pilot implementation by the WHO.
Following successful phase III trials
in 2016, we are supporting plans for
pilot malaria vaccine implementation
programmes in sub-Saharan Africa.
We are proud to be working together
with the WHO, PATH, the ministries
of health in Kenya, Ghana and Malawi,
and other stakeholders to ensure
successful implementation of the pilot
programmes. In parallel, GSK is
preparing for the implementation of the
phase IV programme and is starting
manufacturing activities. GSK will donate
the first 10 million doses of the RTS,S
vaccine to support pilot programmes in
sub-Saharan Africa.
Helping to
beat malaria
GSK Annual Report 2017 Strategy in action
“We have created a
Global Health Unit to
drive innovation and
delivery of medicines
and vaccines to tackle
global health challenges,
such as malaria.”
Phil Thomson
President, Global Affairs
45
Preparing for future health threats
We are committed to preparing for
global health threats and emergencies.
We maintain reserve capacity to respond
to a future influenza pandemic, and are
collaborating on the development of a
universal influenza vaccine candidate.
Fighting antibiotic resistance
The declining effectiveness of antibiotics,
due to their extensive use and misuse,
is becoming a major public health crisis.
It is important that we work with the
pharmaceutical industry and governments
to find creative ways to incentivise and
reward new research and development
in antibiotics and support ways to reduce
resistance.
In early 2018, we were ranked number
one out of the large pharmaceutical
companies in the Access to Medicine
Foundation’s first Anti-Microbial Resistance
(AMR) Benchmark, which assessed 30
pharmaceuticals, generics and biotech
company responses to AMR.
In our Pharmaceuticals pipeline, gepotidacin
is the first in a new class of antibiotics and
is expected to progress to phase III clinical
research. Our vaccines also play a critical
role in avoiding the need for antibiotics
by preventing bacterial, viral and other
infections.
To promote responsible antibiotics use,
in 2017 we trained over 21,000 healthcare
professionals (HCPs) in areas such as
appropriate antibiotics use and prescribing
guidelines.
Leading scientific and
medical engagement
We believe it is important to have trusted
and transparent engagement with the
scientific and medical communities.
Transparency in clinical trial data
GSK is one of the few companies that
publishes clinical study reports, whether
positive or negative. By the end of 2017,
2,310 of these reports were publicly
available on our clinical study register in
addition to 6,305 result summaries from
our trials. Reflecting our long-standing
commitment to clinical trial transparency,
during the year we ranked number one
on the AllTrials Transparency Index.
We also share anonymised patient-level
data for our interventional phase I-IV clinical
trials within six months of publication. By late
2017, we had listed more than 2,100 trials
on the www.clinicalstudydatarequest.com
platform for use by external researchers.
Since we started this initiative in 2013,
108 research proposals requesting GSK
data have been approved.
Sales and marketing practices
In 2013, we introduced a policy to stop
paying HCPs to speak to other prescribers
about our prescription medicines and
vaccines. We believe our policy has
improved transparency and trust, but
feedback from scientific experts is that
important scientific dialogue between
GSK and them has reduced. This was
not the intent of the policy. Transparent
scientific dialogue and engagement with
experts is in the interests of all those
working to develop new medicines and
improve care for patients.
To address this feedback, and having
consulted with HCPs, we have decided
to change our policy. We now allow fair
market value payments to be made by
GSK to expert researchers and HCPs
to speak about the science behind our
products, disease and clinical practice
in a limited number of GSK sponsored,
medical-led meetings.
We believe this change is in the best
interest of patients as it helps effective,
transparent scientific dialogue by allowing
HCPs to share new science with each
other. Our primary focus remains on
internal medical experts speaking about
our products and we will not pay HCPs
to talk about our products outside of an
approved, medical-led scientific workshop
or symposium.
We have continued to strengthen our
online resources and in-house medical
capabilities to provide bespoke product
information for HCPs. By using all of our
existing channels, we increased our overall
interactions with customers by 15% in 2017
with digital interactions growing by 50%.
GSK has eliminated the use of individual
sales targets for our pharmaceutical
and vaccines sales representatives.
This change was implemented in the
US in 2011, and expanded to all our
markets globally in 2015. Today, our sales
representatives are incentivised based
on their selling competency and broader
business performance.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 46
Trust continued
Sustainable
access to our
high-quality
products
We are expanding access to our high-quality medicines,
vaccines and consumer healthcare products so that
more people can benefit from their use.
We are committed to widening access
to our high-quality products. We do so
through embedding our equitable pricing
strategy, using innovative business models,
and ensuring that our products adhere
to high quality and safety standards.
Pricing
Our equitable pricing strategy for medicines
and vaccines is based on the country,
disease area, product type and patients’
ability to pay. Since 2010, we have capped
the prices of our patented medicines in
least developed countries at 25% of
those in Western Europe, as long as
manufacturing costs are covered.
More than 70% of our vaccine doses go
to least developed, low and middle-income
countries. Our lowest vaccine prices are
offered to organisations such as Gavi,
the Vaccine Alliance, which supports
poorer countries. We are the only
company committed to a ten-year price
freeze to support countries transitioning
from Gavi financing.
In 2017, the World Intellectual Property
Organization (WIPO) and the International
Federation of Pharmaceutical Manufacturers
and Associations (IFPMA) launched a
new partnership called Pat-INFORMED
to facilitate access to medicine patent
information. GSK played an instrumental
role in the development of this partnership
which was catalysed by our 2016
commitment to make information about
our patent portfolio freely available.
We also understand payer and patient
concerns about affordability in developed
markets. The prices of our new medicines
and vaccines reflect our goal to work in
the best interests of both patients and
shareholders and to balance reward for
innovation with access and affordability.
In the US, we negotiate with payers to gain
favourable placement on formularies (lists
of products covered by health insurers
and pharmacy benefit managers). Patients
generally have lower out-of-pocket costs
for medicines that have preferred treatment
under a formulary. The GSK Patient
Assistance Programme provided our
prescribed medicines and vaccines
to 126,419 patients in 2017.
Reducing child mortality
Image: Ilan Godfrey/
Save the Children
In 2013, we launched a five-year
partnership with Save the Children
with the aim of saving the lives of one
million children in the poorest
countries. As we approach the end
of the five years, we have reached
more than 2.7 million children in 41
countries with life-saving interventions.
Through the partnership, we have also
created and distributed a potentially
life-saving medicine, chlorhexidine
gel, that has benefited over 19,000
newborns. The next phase of the GSK
and Save the Children partnership,
which will continue to address child
mortality, will launch in 2018.
GSK Annual Report 2017 47
In Europe, we engage with governments
and payers to balance access and
affordability while working towards
sustainable health systems that support
ongoing innovation.
Partnerships to support access
We invest in communities around the
world through product and cash donations.
In 2017, our charitable giving totalled
£262 million.
Since 2009, we have reinvested 20% of
our profits from sales of pharmaceuticals
and consumer healthcare products in
least developed countries (LDCs) –
£33 million in total – into strengthening
local healthcare infrastructure. Our
partnerships with Amref Health Africa,
CARE International and Save the Children
have helped train over 60,000 frontline
health workers, helping us to exceed
our goal of reaching 20 million people by
2020. Our new programmes in Botswana,
Cameroon and Namibia are training
frontline health workers beyond
the LDCs.
Cleft surgery can cost from as little as
$250, but if left untreated, children will
struggle to eat, breathe and speak properly,
leaving them isolated from communities and
with ongoing health issues. In early 2018,
our Consumer Healthcare business is
launching a five-year partnership with
Smile Train, to provide funding, support
and expertise to help more children living
with cleft lip or palate lead a full and
productive life.
Our commitment to quality
and safety
We follow a strict Quality Management
System and comply with regulations on
Good Manufacturing Practice. In 2017,
194 regulatory inspections were held at our
manufacturing sites and, while the majority
resulted in zero or only minor observations,
we are committed to addressing issues
raised in all inspections as part of our
continuous improvement programme.
Regulatory authorities have accepted our
proposed plans for corrective actions.
We track risks to quality and safety
standards through our global risk register.
In 2017, we performed 273 audits on our
own trials and those conducted for us by
third parties. We enhanced our policy on
management of human safety information
for GSK products and trained all relevant
staff to safeguard the people who take
our products or are involved in our
clinical research.
Reliability of supply
We make reliable supply a daily priority
across all three of our businesses.
Significant improvements were achieved
in our Pharmaceutical supply performance
in 2017. These were instrumental in
enabling growth in key therapy areas, as
well as ensuring that the launch of new
products went to plan. Improvements are
the result of essential capability-building
and infrastructure investments made in our
supply chain to improve safety and quality,
as well as a consistent focus on meeting
patient and business needs through
performance management.
Our supply performance in Vaccines
continued to improve in 2017. We grew
manufacturing output by 7% which
underpinned our strong financial
performance. We maintained our focus
on safety and delivering all of our vaccines
to our high quality standards; we also
continued to invest in capacity, updating
older facilities and building new capacity
to support our long-term growth ambition.
Across the Consumer Healthcare supply
chain, we have implemented new ways
of working, including core business
planning processes to improve our service
levels. These have increased steadily and
significantly through 2017 and benchmark
well with FMCG competitors. All of our
2017 Consumer Healthcare product
launches have been supplied on time
and we continue to strive for higher targets
for product supply, while maintaining our
quality and safety standards.
Strategy in action
“Reliable supply is a daily
priority across all three
of our businesses.”
Roger Connor
President Global Manufacturing
and Supply
Our charitable giving in 2017 totalled
£261.6 million (2016 – £210.2 million)
Product & in-kind £165m
Cash £80m
Management £13m
Time (PULSE) £3m
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
48
Trust continued
Modern
employer
Engaging
employees in
our strategy
To attract and retain the best talent, we are committed
to being a modern employer and to driving high levels
of employee engagement.
Our staff are more engaged when they
are part of the conversation, so we have
put a strong focus on holding open and
inclusive conversations with each other, and
encouraging our leaders and employees
to share the ownership and delivery of our
strategy. We are also focused on creating
a safe and inclusive workplace where
everyone at GSK can feel able and inspired
to realise their potential.
Engagement
Senior leaders across GSK are playing a
pivotal role in engaging our people behind
our strategy, through initiatives such as our
new Let’s Talk programme (see case study).
In October 2017, 600 of our most senior
leaders attended a three-day conference
to deepen their understanding of our
strategy and priorities and to develop
effective tools to inspire their teams.
Delivering performance through
cultural change
Our strong values and purpose are
fundamental to the way we operate. Central
to the development of our high-performance,
values-based culture will be the alignment of
our people behind our long-term business
priorities. As part of our approach to
evolving GSK’s culture, we have retained
and reinforced our values while introducing
four new expectations that guide the
behaviour of our employees: Courage,
Accountability, Development and Teamwork.
Talent and development
In 2017, we made a number of key
appointments to our Corporate Executive
Team, identified significant GSK roles, and
supported the development of top talent.
This included changing approximately
40% of our top 125 manager roles
through promoting existing talent and
hiring externally to bring fresh ideas and
skills to leadership roles.
We have also launched a new employee
performance system. Individual objectives
are now linked to our priorities on
Innovation, Performance and Trust, and
a new GSK-wide bonus system will reflect
progress against the priorities and our
overall business performance. This will
encourage more regular, consistent
performance and development
conversations.
In 2017, we trained around 3,300 people
to support their promotion to first or second
line leadership; in addition, more than 1,600
GSK leaders shared their knowledge and
helped to improve colleagues’ performance
through our coaching programmes.
During the year, 434 graduates and
postgraduates joined our Future Leaders
and Esprit development programmes.
GSK ranked third in The Guardian 300
UK Graduate Employers and made the
top ten in The Times Top 100 Graduate
Employers 2017.
Our strategic success relies on our
ability to engage employees behind
GSK’s long-term priorities.
In 2017, more than 84,000 (83%) of
our people took part in GSK’s global
employee survey – our best ever response
rate. Our employee engagement score
was 79%, and we will be setting this as
a baseline year for improvement. 76%
of employees recommend GSK as a
great place to work – up 12% since the
previous survey – and 85% are proud
to work for us.
Survey questions aligned with our
new priorities and the results are being
discussed by leaders and employees
to identify priority focus areas. From 2018,
we plan to conduct the survey twice a year.
Our new Let’s Talk programme
encourages employees to discuss key
issues and share views and ideas on
strengthening GSK. Leaders across the
business have hosted conversations with
their teams on a range of topics. Feedback
and insights are collated and shared with
all employees and senior leaders to help
shape our future organisation.
GSK Annual Report 2017 Strategy in action
“For GSK, family-friendly
policies are a key success
factor to drive employee
engagement.”
Claire Thomas
Senior Vice President,
Human Resources
Women in management (%)
SVP/VP
Director
Manager
Total
2014
2015
2016
2017
29
40
45
42
29
40
45
42
30
42
46
43
31
43
47
44
Employees by gender (number)
Board
Male
Female
8
5
Total
13
Management*
9,784
7,825 17,609
Total
55,139 43,323 98,462
* 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.
A diverse and inclusive workplace
In 2017, the Hampton Alexander Review
of FTSE 100 companies found GSK has
the eighth-highest proportion of women
on the Board at 41.7%, and is in line with
the FTSE 100 average with 25.7% female
representation among executive committee
members and their direct reports. We are
continuing to focus on improving this
number over the coming years. Overall,
the proportion of women in management
roles at GSK is 44%.
Women made up half of our new graduates
and Esprit participants, and 38% of our
new apprentices in science, technology
and engineering roles, where women have
traditionally been under-represented.
We published data on our gender pay
gap in the UK for the first time, following
new legislation. Our gender pay gap for all
permanent UK-based GSK employees is
2.81% (mean), outperforming the national
average of 17.4%. We will continue to
review pay equity at a global level
during 2018.
Through our Accelerating Difference
programme, we provided coaching and
support for 209 high-performing female
managers. Around 49% of those who
began the programme in 2014 have been
promoted (compared with 31% of women
across GSK during the same period).
In the US, our diverse reverse mentoring
provides leaders with the opportunity to
learn from a more junior employee of a
different background to help our leaders
develop their inclusive leadership skills.
In 2017, we had 105 mentoring pairs in
place (up from 20 in 2016).
Seven nationalities are represented on
our Board and executive committee.
Seventy-eight nationalities make up our
Future Leaders graduate programme and
more than 60 people have completed our
Emerging Leaders programme in Singapore
to develop our Asia leadership pipeline.
Our global LGBT+ Council continued
to engage people across GSK on LGBT+
issues. It is supported by our LGBT+
employee resource group, Spectrum,
which now has over 900 employee
members across 29 countries around
the world.
49
In early 2018, we were ranked 21st in the
UK Stonewall Workplace Equality Index
of the top 100 most LGBT+ and inclusive
employers in the UK for 2017.
We are committed to removing barriers,
increasing understanding and ensuring
that those with disabilities have the same
opportunities. Our Disability Confidence
Network employee resource group now has
more than 250 employee members across
22 countries who support our Global
Disability Council in driving change and
promoting disability confidence.
Health and wellbeing
We are committed to providing health
programmes and services to help our
people lead healthy lives. In 2017, we made
more than 75% of these programmes and
services available in our top 24 countries,
covering 85% of employees globally.
Our Partnership for Prevention programme
offers over 119,000 employees and family
members access to up to 40 preventive
healthcare services, such as immunisations
and cancer screening, at little or no extra
cost. We expanded the programme into the
Asia Pacific region in 2017 and prepared
to extend it in Europe.
Our reportable injury and illness rate in
2017 was 0.23 per 100,000 hours worked,
compared with 0.26 in 2016. This rate is
comparable with other leading companies
in our sector1 and has remained low for
several years.
Flexible and life-friendly practices
For GSK, family-friendly policies are
a key success factor to drive employee
engagement. In 2017, in the US we
increased maternity leave for mothers to
up to 16 weeks, and introduced 8 weeks of
paid parental leave for all parents, adoptive
parents and partners to bond with their
new baby. We also raised our commitment
to family-friendly policies across our top
20 markets. For example, in Pakistan we
revised our maternity policy for eligible
employees to increase fully paid maternity
leave from 84 to 120 days.
We are also seeking to improve work/life
balance through a range of flexibility models
across our markets. In the UK, we offer a
tax-free holiday programme, which enables
employees to sacrifice part of their salary in
exchange for up to ten days of extra holiday.
In 2017, this programme had a 30% usage
rate among eligible employees.
1 Based on benchmarking data from the Pharmaceutical
Safety Group.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 50
Trust continued
Ethical
conduct and
environmental
sustainability
Employees disciplined in 2017:
breakdown of types of policy violation
18%
29%
4%
6%
12%
18%
13%
Training completion
Code of conduct
Attendance and
payroll
Good manufacturing
and distribution
practices
Marketing and
promotional activities
Local work
regulations
violations
Other policy
violations
We aim to run our business ethically and
in an environmentally sustainable way.
Ethical conduct
We strive to build a values-based culture
by training our people on the standards
we expect, encouraging the reporting
of any concerns and acting swiftly and
transparently when issues occur.
Living our Values
We provide mandatory annual training on
our values and Code of Conduct to help
employees and complementary workers
manage ethical dilemmas and put our
values into practice at work.
The Living our Values training emphasises
our zero tolerance to bribery and corruption,
highlights our commitment on issues such
as product quality and data protection,
and explains key risks. In 2017, 98% of
employees and 91% of complementary
workers completed the training. More
than 86,300 people had additional training
on anti-bribery and corruption to help them
manage the specific risks inherent in their
roles and responsibilities.
We assess how well our values are
embedded and have conducted around
260 values maturity assessments over
the past two years.
Reporting and investigating concerns
A 2017 Speak Up campaign raised
awareness of the multiple channels we
offer for people within and outside GSK
to voice concerns and ask questions
through an independent third party –
confidentially or anonymously if preferred.
During the year, we received 2,679 reports
(2,568 in 2016), with all being reviewed
and 1,919 formal investigations initiated.
We act when employees fail to adhere
to our policies. In 2017, 3,200 employees
were disciplined for policy violations
(3,600 in 2016), including 935 for failing
to complete our mandatory Living our
Values and Anti-bribery and Corruption
training on time. Some 1,801 employees
received a documented warning (2,499
in 2016), 901 received verbal warnings
(547 in 2016) and 233 were dismissed or
agreed to leave voluntarily (221 in 2016).
Working with third parties
We expect all our suppliers and third
parties to comply with our standards on
ethics, labour rights, health and safety,
and the environment. By the end of 2017,
we had deployed the roll-out of our Third
Party Oversight programme to 95% of
our third parties. We expect the remainder
to be completed by early 2018. Over
100,000 risk assessments of third parties
have been conducted and over 5,000
improvements plans agreed since the
programme began in 2015. Based on
our initial risk assessment, over 4,200
third parties underwent extensive
independent assessments.
The standardised programme enables
us to identify and manage third party risks
more effectively, and is being embedded
into the processes we use to engage
with suppliers.
We conducted 60 third party audits
on health and safety, ethics, environment
and labour rights, with a further 1,592
audits on quality processes.
Where we identify unsatisfactory areas,
we engage with third parties to develop
improvement plans and track progress.
If significant issues remain unresolved,
we may suspend or terminate work with
a third party.
Human rights
We are a signatory to the UN Global
Compact and we are committed to
upholding the Universal Declaration
of Human Rights and the core labour
standards set out by the International
Labour Organization (ILO). In 2017,
we expanded the information on our
human rights expectations in our Living our
Values training, particularly around labour
rights in our supply chain. We also held a
workshop with senior managers to build
understanding of labour rights risks and to
identify further team training requirements.
We continued to monitor existing suppliers
and screen new suppliers, included
standardised labour rights clauses in third
party contracts, and updated our supplier
portal and human rights policy with
more information on labour rights to
support compliance.
GSK Annual Report 2017 51
We also have our own platform, GSK
Supplier Exchange, to encourage suppliers
to share best practices on sustainability
and recognise outstanding performance
through our annual Supplier Environmental
Sustainability Awards.
The use of our products also has a
significant impact on our Scope 3
emissions. The majority is from patient
use of a propellant-based inhaler Ventolin,
where the propellant is a greenhouse gas
released during use. Reducing the impact
of the propellant is complex. We continue
to research feasible solutions to this
issue, including changing the way we
manufacture, to reduce the amount of
propellant used while maintaining efficacy
and safety for patients.
GSK’s new generation of inhaler products,
using our Ellipta device, were developed
and launched as dry powder inhalers
(DPIs) and do not release greenhouse
gas emissions. In 2017, a certified
assessment of our respiratory inhaler
portfolio by the Carbon Trust showed
that the lifecycle carbon footprint of
our DPI is around 24 times lower than
a propellant-based inhaler2 for one
month’s treatment.
Environmental sustainability
We aim to minimise our environmental
impact at every stage of the value chain,
while extending access to our products
to more people.
Carbon
Our overall carbon footprint is made up
of Scope 1 and 2 emissions from our direct
operations (18%), and Scope 3 emissions
from our supply chain (49%) and from use
of our products (33%).
In 2017, our operational emissions (Scope
1 and 2) were reduced by 2% compared
with the previous year, as a result of our
continuing focus on energy efficiency
measures and purchasing renewable
energy. Since our 2010 baseline, we have
reduced annual carbon emissions from
energy use by 25% saving a cumulative
1.9 million tonnes of CO2e.
Our Scope 3 emissions fell from 18.7 to
17.9 million tonnes of CO2e from 2015 to
2016;1 however, they were up 4% from our
2010 baseline year. This is a result of the
Novartis integration in 2015 and increasing
sales of our propellant-based inhalers.
We engage with suppliers to drive
improvement. For example we encourage
suppliers to monitor and disclose
performance through Ecodesk, an external
resource which offers benchmarking
information and helps them develop
improvement plans.
Water
We continue to seek ways to use less water
in our own operations, in our supply chain
and in the use of our products. We have
reduced water use by 22% since 2010
but water use increased by 1% in 2017,
driven by growth in our Vaccines business.
By the end of 2017, all of our
Pharmaceutical and Consumer Healthcare
manufacturing sites had completed water
risk assessments in line with our water
stewardship standard. These sites are now
developing plans to address any risks that
have been identified which may include
working with local communities and other
stakeholders. Our efforts to enhance water
stewardship will prioritise sites in areas of
water stress.
Waste
Since 2010, we have cut operational waste
by 23%, producing 10% less hazardous
waste and 29% less non-hazardous waste.
However, progress towards our 2020
target has slowed and the amount of waste
produced remained the same in 2017 as
2016. We have therefore increased our
focus on reclaiming more waste through
reuse, recycling and recovery.
Around 70% of our sites worldwide have
achieved zero waste to landfill and just 4%
of our 136,000 tonnes of operational waste
ended up in landfill – 25% less than in 2016.
Most (71%) was recycled or incinerated to
recover energy.
Carbon emissions plus intensity ratios (as per regulations)
‘000 tonnes CO2ea
Scope 1 emissions
Scope 2 emissions
2014
851
745
2015b
885
730
2016
889
700
Scope 3 emissions
16,093
18,690
17,897
Intensity ratios
Scope 1 and 2 emissions/sales
revenue (tonnes CO2e/£m)
Scope 1 and 2/FTE
(tonnes CO2e/FTE)
2014
69.4
16.3
2015
67.5
16.0
2016
57.0
16.0
2017
865
694
Data available
May 2018
2017
51.6
15.8
a Carbon emissions are calculated according to the Greenhouse Gas Protocol: A Corporate Accounting and Reporting
Standard (revised edition).
b Data included former Novartis sites’ emissions and headcount.
1 Our most recently available Scope 3 data is from 2016.
We will publish 2017 data online in late 2018.
2 For one month’s treatment, a 120 dose propellant inhaler
has a carbon footprint of 19kg CO2e per pack compared
with a 30 dose once-daily Ellipta DPI which has a carbon
footprint of 0.8kg CO2e per pack
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 52
52
GSK Annual Report 2017
Group
financial
review
In this section
CFO’s statement
Approach to Brexit
Approach to tax
Viability statement
Reporting framework
Non-controlling interests in ViiV Healthcare
Group turnover
Total results
Adjusted results
Cash generation and conversion
Financial position and resources
Critical accounting policies
Treasury policies
53
55
56
57
58
59
60
65
69
71
72
76
77
GSK Annual Report 2017Group financial review continued 53
Group financial review
“We continued to make progress in delivering
against our strategy and the financial goals
we have set out in our financial architecture.”
Simon Dingemans
Chief Financial Officer
Our 2017 results reflect a continued focus
on execution including driving growth
from existing products and recent launches;
controlling costs tightly to help build better
operating leverage across the Group, while
also investing behind our future growth
drivers; and improving cash generation
to increase our capacity to support both
investment and the dividends we pay to
our shareholders.
Financial architecture
We are using our financial architecture
to ensure that the delivery of our strategic
priorities of Innovation, Performance and
Trust translate into clear financial goals
that we can embed across the Group.
These goals are targeted at delivering
stronger growth in sales through improved
innovation across all three businesses,
driving earnings per share faster than sales,
through better operating leverage from
tight cost control and continued financial
efficiencies, and converting more of those
earnings into cash which can either be
reinvested in the business or returned to
shareholders. Critically, these goals need
to be delivered in the right way, consistent
with our values and our objective of building
trust in GSK.
We are using the architecture and its
goals to help create a step-change in the
alignment of our operations across three
fully integrated businesses, including a
new end-to-end emphasis on cost, cash
and capital discipline.
Reporting framework
Our Reporting Framework is described
in more detail on page 58. Following a
detailed review, we made some changes
in 2017. Core results were renamed
Adjusted results and now include
ordinary course legal charges.
Due to their magnitude, charges related
to the impact of the US Tax Cuts and Jobs
Act enacted in 2017 have been excluded
from Adjusted results.
GSK continues to present both Total
and Adjusted results in all tables and
commentaries and has provided a
reconciliation between the two on
page 67.
Sales growth
All three of our businesses delivered
growth in 2017.
Pharmaceuticals sales were up 7% AER,
3% CER, with growth from HIV products,
our Ellipta portfolio and Nucala more than
offsetting the decline in sales of Seretide/
Advair and Established Pharmaceuticals,
as well as a 1% drag from divestments.
In Vaccines, we generated significant
growth from our meningitis and flu portfolios,
and benefited from increased demand for
Established Vaccines. We finished the year
with overall Vaccines sales up 12% AER,
6% CER.
Consumer Healthcare delivered growth
of 8% AER, 2% CER, reflecting a strong
performance from power brands in the
Pain and Oral health categories, partly
offset by the impact of continued competitive
pressures in the US allergy category and
a broader market slowdown across key
categories. In addition, reported growth
was impacted by the divestment of the
Nigerian beverages business in 2016
and the implementation of the Goods
& Service Tax in India during 2017.
Operating leverage
The Total operating margin was 13.5%
of sales compared with 9.3% in 2016.
The increased margin reflected primarily
lower accounting charges related to
the remeasurement of the liabilities for
contingent consideration, put options
and preferential dividends.
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 57.
Footnote
We use a number of adjusted, non-IFRS, measures
to report the performance of our business, as described
on page 58, including Adjusted results, free cash flow
and CER 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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 54
Capital allocation framework
Innovation
Performance
Trust
Invest in the business
Key priorities for capital
– Pharmaceuticals pipeline
– Consumer Healthcare put option
– Vaccines capacity
Improved
cash
generation
Shareholder returns
– 80p per share dividend expected for 2018
– Focus on rebuilding free cash flow over time
– Target 1.25x to 1.5x cover before returning dividend to growth
Other transactions M&A
– Strict discipline on returns
The Adjusted operating margin of 28.4%
was 0.9 percentage points higher than in
2016 and 0.4 percentage points higher
on a CER basis. This reflected improved
operating leverage driven by sales growth
and a more favourable mix in all three
businesses, together with the benefit to
Vaccines of a settlement for lost third party
supply volume and a favourable year-on-year
comparison to inventory adjustments in 2016.
Tight control of ongoing costs across all
three businesses also contributed, along
with further benefits from restructuring and
integration. These were partly offset by
increases in R&D investment (including
a charge of £106 million on the Priority
Review Voucher utilised in HIV), as well as
continuing price pressure, particularly in
Respiratory, and supply chain investments.
Our work to maintain tight control of costs
across the Group included supply chain
efficiencies from a mixture of site closures,
consolidating our manufacturing supplier
base and simplifying our global distribution
and logistics network. We are also further
stepping up our focus on procurement
through a new global organisation.
Financial efficiency
Financial efficiency remains a priority.
Successfully refinancing maturing debt
during 2017 allowed us to hold net
financing costs relatively flat for the year.
We continue to focus on protecting our
credit profile and funding flexibility.
US tax reform
The enactment of the US Tax Cuts and Jobs
Act in December 2017 is expected to have
a positive impact on the future after tax
earnings of GSK’s US businesses. This is
primarily due to the reduction in Federal
corporation tax rates from 1 January 2018,
which is expected to benefit the Group
effective tax rate on Adjusted profits in
2018 by two to three percentage points.
We intend to apply the flexibility and cash
benefits these reforms will provide in
accordance with our capital allocation
framework.
The enactment of the new law has
resulted in a number of additional charges
in 2017, which reduced Total earnings by
£1,630 million.
These charges represent management’s
estimates of the impact of US tax reform on
the Group based on the information currently
available. As more information on the detailed
application of the Act becomes available,
the assumptions underlying these estimates
could change, with consequent adjustments
to the charges taken that could have a
material impact on the results of the Group.
Earnings per share
Total EPS was 31.4p (2016 – 18.8p).
The increase reflected primarily lower
accounting charges related to the
remeasurement of the liabilities for
contingent consideration, put options
and preferential dividends.
Adjusted EPS of 111.8p was up 11% AER,
4% CER, reflecting improved operating
leverage that delivered earnings growth
faster than sales growth.
Contingent consideration
At the end of 2017, GSK had liabilities
for contingent consideration payments of
£6.2 billion, of which £5.5 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
£6.9 billion and free cash flow for the Group
was £3.4 billion, compared with £3.0 billion
in 2016. The Sterling increase of 14%
reflected the improved operating profit
performance, a positive currency benefit
and reduced cash spending on restructuring
and capital expenditures, partly offset by
increased working capital, mainly due to
the building of inventory in advance of new
product launches.
Net debt
Net debt at the end of 2017 amounted to
£13.2 billion, £0.6 billion lower than at the
end of 2016. The reduction was primarily
attributable to improved free cash flow of
£3.4 billion and disposal proceeds of
£0.6 billion together with a translation
benefit of £0.6 billion on the Sterling value
of non-Sterling denominated debt, more
than offsetting the cash dividends paid to
shareholders in the year of £3.9 billion.
GSK Annual Report 2017Group financial review continued 55
Capital allocation framework
The priorities for the use of our capital
remain as presented in July 2017. They
are focused on three particular priorities:
investing in the business, delivering cash
returns to shareholders through dividends
and potentially accessing strategic
acquisitions that would strengthen the
business, subject to them meeting a strict
set of returns criteria. In establishing the
first priority as investing in the business,
we identified a primary focus on
strengthening the Pharmaceuticals business
and, in particular, its R&D pipeline. We also
confirmed the attractiveness of accepting
the Consumer Healthcare put option, should
it be exercised, and continuing to expand
capacity in key product lines across our
Vaccines business.
To strengthen how we allocate capital and
to ensure that we are allocating funding
to where the most attractive returns are
available, we have implemented a clearer
framework and created a new board to
govern the allocation of capital between
our businesses.
We have expanded the use of cash flow-
based return metrics beyond individual
project assessments. Now that we have
been able to create fully integrated business
units for Pharmaceuticals, Vaccines and
Consumer Healthcare, we have been able
to apply a more consistent cash return on
invested capital (CROIC) methodology to
prioritise investment across the Group as a
whole, so that we can compare the returns
from each of the three integrated businesses
as we allocate capital between them.
We also regularly benchmark ourselves
with peers relevant to each of our three
businesses.
2018 guidance
We expect continued progress in 2018,
including sales growth contributions from
our new and recent product launches in HIV,
Respiratory and Vaccines.
The expectation for 2018 Adjusted 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 substitutable generic
version of Advair is introduced to the US
market in 2018, the Group expects 2018
Adjusted EPS growth of 4-7% at CER.
This is based on an expected decline in
2018 in US Advair sales of 20-25%.
In the event of a mid-year introduction of a
substitutable generic competitor to Advair
in the US, the Group expects full-year 2018
US Advair sales of around £750 million at
CER (US$1.30/£1), with Adjusted EPS flat
to down 3% at CER.
Both scenarios reflect the benefit of US
tax reform with an expected 2018 effective
tax rate on Adjusted profits of 19-20%.
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
For 2017, we maintained our ordinary
dividend at 80p in line with the commitment
we made to shareholders at the time we
closed the Novartis transaction in early 2015.
GSK recognises the importance of
dividends to shareholders and aims to
distribute regular dividend payments that
will be determined primarily with reference to
the free cash flow generated by the business
after funding the investment necessary to
support the Group’s future growth.
The Board intends to maintain the dividend
for 2018 at the current level of 80p per share,
subject to any material change in the external
environment or performance expectations.
Over time, as free cash flow strengthens,
we intend to build free cash flow cover of
the annual dividend to a target range of
1.25-1.50x, before returning the dividend
to growth.
A fuller review of the financial results is
set out on pages 56 to 78.
Simon Dingemans
Chief Financial Officer
Our approach to Brexit
We have evaluated the impact of Brexit
on our business operations, including
our supply chain and quality oversight.
Our priority is to maintain continuity of
GSK’s supply of medicines, vaccines
and health products to our patients and
consumers in the UK and the EU.
Uncertainty remains about the future
relationship between the UK and the
EU. As a result, we have agreed a
risk-based approach to mitigation across
the organisation. Implementation of our
contingency plan has been underway
since January 2018, with an immediate
focus on our supply chains. This includes
expanding our ability in the EU and the
UK to conduct re-testing and certification
of medicines; transferring Marketing
Authorisations registered in the UK
to an EU entity; updating packaging
and packaging leaflets; amending
manufacturing and importation licences,
and securing additional warehousing.
We currently anticipate that the cost to
implement these and other necessary
changes could be up to £70 million
over the next two to three years, with
subsequent ongoing additional costs
of approximately £50 million per year,
including additional customs duties and
transaction or administration costs. These
charges represent our estimates of the
impact of Brexit based on the information
currently available. As more information
on the changes to our business that
will be required after Brexit becomes
available, the assumptions underlying
these estimates could change, with
consequent adjustments, either up or
down, to the additional costs we expect
to incur. We will continue to adjust our
plans and their expected financial impact
as negotiations and regulations develop.
Delivering these necessary but complex
changes by March 2019 will be ambitious
and potentially disruptive in the short term
and we support efforts to secure a status
quo transition period to minimise
disruption. Over the longer term, we
continue to believe that Brexit will not
have a material impact on our business.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 56
Our 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
We use a number of adjusted, non-IFRS,
measures to report the performance of our
business, as described on page 58.
We understand our responsibility to pay
an appropriate amount of tax, and fully
support efforts to ensure companies are
appropriately 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. We have a zero tolerance
approach to tax evasion and the facilitation
of tax evasion.
We have a substantial business and
employment presence in many countries
around the globe and we pay a significant
amount of tax, including corporation and
other business taxes, as well as tax
associated with our employees. At the
same time, we have a responsibility to our
shareholders to be financially efficient and
deliver a sustainable tax rate. As part of this
approach, we look to align our investment
strategies to those countries where we
already have substantial economic activity,
and where government policies promote
regimes which are attractive to business
investment and R&D activity, and are
transparent in their intent and available to
all relevant tax payers. Examples include
the UK Patent Box and Research and
Development Expenditure Credit.
In 2017, the Group corporate tax charge
was £1,356 million (2016 – £877 million)
on profits of £3,525 million (2016 – £1,939
million) representing an effective tax rate of
38.5% (2016 – 45.2%). We made cash
tax payments of £1,340 million in the year
(2016 – £1,609 million). In addition to the
taxes we pay on our profits, we pay duties,
levies, transactional and employment taxes.
Our Adjusted tax rate for 2017 was 21.0%
(2016 – 21.3%). Subject to any material
changes in our product mix, or other
material changes in tax regulations or laws
in the countries in which we operate, and
following the impact of US tax reform, the
Group’s effective Adjusted tax rate for 2018
and the next several years is expected to be
in the region of 19-20%.
The Group’s Total tax rate of 38.5% (2016
– 45.2%) for 2017 was higher than the
Adjusted tax rate as it was affected by the
impact of US and Swiss tax reforms,
as explained at Note 14, together with
transaction-related charges arising on
the Group’s put option liabilities.
The Total tax rate also reflected the
reassessment of estimates of uncertain
tax positions following the settlement of a
number of open issues with tax authorities
in various jurisdictions.
Tax risk is managed by a set of policies
and procedures 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 approach.
We seek to maintain open, positive
relationships with governments and tax
authorities worldwide and we welcome
constructive debate on taxation policy.
2017 has seen the enactment of significant
reforms of tax laws in multiple jurisdictions.
We expect there to be continued focus
on tax reform in the future, driven by the
OECD’s Base Erosion and Profit
Shifting (‘BEPS’) project and European
Commission initiatives such as fiscal state
aid investigations. The outputs from the
OECD BEPS projects clarified the
important principle that tax should be paid
on profits throughout the supply chain,
where the profit-making activity takes place.
GSK supports the BEPS proposals,
in particular the implementation of the
OECD’s recommendations on ‘Country by
Country Reporting’, including the exchange
of this data between tax authorities. This
data, validated against existing information
held on taxpayers, will support their ability
to ensure multinational groups pay an
appropriate amount of tax.
The detailed 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 the potential implications for the
industry in order to highlight key focus areas
for the Government as part of its Brexit
negotiations. The direct tax implications,
in particular, are expected to be limited
for GSK while the indirect 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 Brexit is set out on page 55.
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 177.
GSK Annual Report 2017Group financial review continued
57
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
20 and 21 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 delivery of our company
and three business strategies and aligned Innovation, Performance
and Trust priorities.
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 the
company and its three business units, and the market opportunity
in the pharmaceutical, vaccines and consumer healthcare 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 healthcare 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 analysis, which involves
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; intensifying competition in the HIV market; greater adverse
impact from generic competition and other competitive launches 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
related to patient safety, product quality, supply chain continuity as
well as anti-bribery and corruption and any consequent regulatory
actions or fines, all of which could fundamentally threaten our
operations. These risks are managed through mitigating activities
described on pages 257 to 266.
– 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 Healthcare 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 the stress tests described above, the company will be able to
continue in operation and meet its liabilities as they fall due over the
three year period of assessment.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 58
Reporting framework
Presentation of Group results
Our Group financial review discusses the operating and financial
performance of the Group, its cash flows and financial position and
our resources. We compare the results for each year primarily with
the results of the preceding year.
We use a number of 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.
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 Adjusted results, which is a non-IFRS measure.
Adjusted results
As announced on 11 April 2017 in the ‘Change to financial reporting
framework’ press release, from 2017, core results have been
renamed Adjusted results and, instead of all legal charges and
expenses, only significant legal charges and expenses are excluded
in order to present Adjusted results. All other legal charges and
expenses are included in Adjusted results. Significant legal charges
and expenses are those arising from the settlement of litigation or
a government investigation that are not in the normal course and
materially larger than more regularly occurring individual matters.
They also include certain major legacy legal matters. Any new
significant legal matters excluded in order to present Adjusted
results will be disclosed at the time.
As a result of the enactment of the US Tax Cuts and Jobs Act on
22 December 2017, GSK has recorded charges on initial application
which reduced Total earnings by £1.6 billion, as set out on page 68.
Due to their magnitude, GSK has reported these charges as
Adjusting items in 2017 so that they do not obscure the key trends
in the Group’s operational performance for the year.
Adjusted results now 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; significant 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 and the impact of the enactment
of the US Tax Cuts and Jobs Act in 2017.
GSK believes that Adjusted 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. The definition of Adjusted results, as set
out above, also aligns the Group’s results with the majority of its peer
companies and how they report earnings.
Reconciliations between Total and Adjusted results, as set out
on page 67, including detailed breakdowns of the key adjusting
items, are provided to shareholders to ensure full visibility and
transparency as they assess the Group’s performance.
Contingent consideration
GSK has recognised a significant liability for contingent
consideration (£6,172 million at 31 December 2017 on a fair value
discounted basis) of which £5,542 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 59.
The effect of the required IFRS accounting treatment is that GSK
recognises these fair value liabilities on the balance sheet, with
remeasurement charges reflected immediately in other operating
income. These charges are adjusted from Total results to present
Adjusted 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.
Free cash flow
From 2017, adjusted free cash flow is no longer being reported
and the free cash flow definition has been amended to include all
contingent consideration payments made during the period.
Free cash flow, which is a non-IFRS measure, is now defined as the
net cash inflow from operating activities less capital expenditure,
contingent consideration payments, net interest and dividends paid
to non-controlling interests plus proceeds from the sale of property,
plant and equipment and dividends received from joint ventures and
associates. 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.
Free cash flow conversion
Free cash flow conversion is free cash flow as a percentage of
Total earnings.
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 and AER 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.
GSK Annual Report 2017Group financial review continued 59
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 Adjusted earnings of ViiV Healthcare for 2017.
Remeasurements of the liabilities for the preferential dividends
allocated to Pfizer and Shionogi are included within Adjusting
items as other operating income.
Of the contingent consideration payable (on a post-tax basis) to
Shionogi at 31 December 2017, £724 million (31 December 2016 –
£545 million) is expected to be paid within one year.
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
2017
£m
1,304
17
2016
£m
1,319
23
Under the original agreements, Shionogi could also have requested
GSK to acquire its shareholding in ViiV Healthcare in six month
windows commencing in 2017, 2020 and 2022. GSK had the
unconditional right, so long as it made no subsequent distribution
to its shareholders, to withhold its consent to the exercise of the
Shionogi put option and, as a result, GSK did not recognise a liability
for the put option on its balance sheet. In Q1 2016, GSK notified
Shionogi that it had irrevocably given up this right and accordingly
recognised the liability for the put option on the Group’s balance
sheet at an initial value of £926 million. In Q4 2016, Shionogi
irrevocably agreed to waive its put option and as a result GSK
derecognised 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 derecognised.
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.
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
and within Adjusting items in the income statement.
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 2017, the total cash payments made to Shionogi in
respect of the contingent consideration amounted to £671 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
within investing activities. The tax relief on these payments is
reflected in the Group’s Adjusting items as part of the 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: investing activities
Other movements
2017
£m
5,304
–
909
(587)
(84)
–
2016
£m
3,409
154
2,162
(351)
(66)
(4)
Contingent consideration at end of the year
5,542
5,304
The additions in 2016 represented the recognition of the preferential
dividends payable to Shionogi.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
60
Group turnover
Turnover (£bn)
£30.2bn
Group turnover
Pharmaceuticals
Vaccines
Consumer Healthcare
Group turnover
2015
2016
2017
23.9
27.9
30.2
0
5
10
15
20
25
30
Group turnover by geographic region
AER growth
CER growth
8%
3%
US
Europe
International
2017
£m
2016
(revised)
£m
11,263
10,197
7,943
7,476
10,980
10,216
30,186
27,889
Growth
£%
Growth
CER%
10
6
7
8
6
–
3
3
The US sales growth of 10% AER, 6% CER was driven by continued
strong performances from Triumeq and Tivicay and growth in the
Respiratory portfolio, together with strong performances in the US
from Hepatitis and Meningitis vaccines.
Europe sales grew 6% AER, but were flat at CER as growth from
Triumeq, Tivicay and Meningitis vaccines was offset by the decline
in Established Pharmaceuticals, including the impact of the disposal
of the Romanian distribution business in Q4 2016. Respiratory sales
were up 5% AER, but flat at CER, as the decline in Seretide offset
the growth in the new Respiratory products.
2017
£m
2016
£m
Growth
£%
Growth
CER%
17,276
16,104
5,160
7,750
4,592
7,193
30,186
27,889
7
12
8
8
3
6
2
3
In International, sales growth of 7% AER, 3% CER reflected
strong growth in Triumeq, Tivicay and the Respiratory portfolio,
with Established Pharmaceuticals flat, including the impact of
divestments. Growth in Emerging Markets of 8% AER, 4% CER
was also impacted by divestments.
Group turnover for the year increased 8% AER, 3% CER to
£30,186 million, with growth delivered by all three businesses.
Pharmaceuticals sales were up 7% AER, 3% CER, reflecting the
continued strong growth of the new Respiratory and HIV products,
partly offset by declines in older Respiratory products, including
Seretide/Advair and Established Pharmaceuticals, including the
impact of recent divestments.
Vaccines sales were up 12% AER, 6% CER, reflecting a strong
performance from Meningitis and Influenza vaccines and higher
demand for Established Vaccines, as well as the benefit of
favourable year-on-year US CDC stockpile movements.
Consumer Healthcare sales grew 8% AER, 2% CER reflecting
a strong performance from power brands in the Pain and Oral health
categories, partly offset by the impact of continued competitive
pressures in the US allergy category and a broader market slowdown
in key categories. In addition, reported growth was impacted by
the Nigerian beverages business divestment in Q3 2016 and the
implementation of the Goods & Service Tax (GST) in India on
1 July 2017.
Sales from new Pharmaceutical and Vaccine products
Respiratory
Anoro Ellipta
Arnuity Ellipta
Incruse Ellipta
Nucala
Relvar/Breo Ellipta
CVMU
Eperzan/Tanzeum
HIV
Tivicay
Triumeq
Pharmaceuticals
Bexsero
Menveo
Shingrix
Vaccines
2017
£m
2016
£m
Growth
£ %
Growth
CER%
342
35
201
344
1,006
201
15
114
102
620
70
63
>100
>100
76
68
>100
>100
62
55
87
121
(28)
(31)
1,404
2,461
5,880
556
274
22
852
953
1,735
3,861
390
202
–
592
6,732
4,453
47
42
52
43
36
44
51
40
35
45
34
29
36
44
In 2015, GSK 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 are as set out
above and do not include Trelegy Ellipta and Juluca, which had initial
sales in 2017 of £2 million and £5 million, respectively. The Group
has previously announced its plans to withdraw Tanzeum. At 2015
exchange rates the equivalent value of the 2017 sales was
£5.7 billion.
Sales of New Pharmaceutical and Vaccine products were
£6,732 million, grew £2,279 million in Sterling terms (51% AER,
44% CER) and represented approximately 30% of Pharmaceuticals
and Vaccines turnover in the year.
GSK Annual Report 2017Group financial review continued
61
Respiratory
Total Respiratory portfolio sales were up 7% AER, 3% CER, with the
US up 8% AER, 3% CER, Europe up 5% AER but flat at CER and
International up 9% AER, 5% CER. Growth of the new Respiratory
products more than offset the decline in Seretide/Advair.
The new Respiratory products recorded combined sales of £1,930
million in 2017 with sales of Ellipta products up 67% AER, 59% CER
driven by continued strong growth in the US and the ongoing roll-out
across Europe and International. Sales of Nucala were £344 million,
a Sterling increase of £242 million, and included sales of £236
million in the US.
The aggregate growth of the Ellipta products was driven primarily
by the contribution of the US, where sales were up 72% AER, 65%
CER on the back of further market share gains. Total Relvar/Breo
Ellipta sales grew 62% AER, 55% CER to £1,006 million, with the
US up 75% AER, 67% CER to £602 million. Anoro Ellipta sales
grew 70% AER, 63% CER to £342 million, also reflecting market
share gains in the US. All Ellipta products, Breo, Anoro, Incruse and
Arnuity, continued to grow market share in the US in the year.
Seretide/Advair sales declined 10% AER, 14% CER to £3,130
million. Sales in the US declined 12% AER, 16% CER (5% volume
decline and a 11% negative impact of price), with payer rebate
adjustments related to prior periods favourably impacting sales in
the year. In Europe, Seretide sales were down 12% AER, 17% CER
to £736 million (11% volume decline and a 6% negative impact of
price), reflecting continued competition from generics and the
transition of the Respiratory portfolio to newer products. In
International, sales of Seretide declined 5% AER, 8% CER to
£784 million (6% volume decline and a 2% negative impact of price),
also reflecting increased generic competition and the transition to the
newer Respiratory products.
Pricing pressures also affected other older products with Ventolin
sales declining 2% AER, 6% CER to £767 million, including the
negative impact of payer rebate adjustments related to prior periods
in the US. Flixotide/Flovent sales were down 6% AER, 10% CER to
£596 million, with the US down 15% AER, 18% CER.
The net impact of adjustments to payer rebates for prior periods
across the US Respiratory portfolio was broadly neutral to reported
US Respiratory sales.
Pharmaceuticals
Turnover (£bn)
£17.3bn
57% of Group turnover
AER growth
CER growth
7%
3%
2015
2016
2017
14.2
16.1
17.3
0
5
10
15
20
Pharmaceuticals turnover
Respiratory
HIV
Immuno-inflammation
Established Pharmaceuticals
2017
£m
2016
£m
Growth
£%
Growth
CER%
6,991
4,350
6,510
3,556
377
340
5,558
5,698
17,276
16,104
7
22
11
(2)
7
3
16
6
(5)
3
Pharmaceuticals turnover in 2017 was £17,276 million, up 7% AER,
3% CER. Respiratory sales grew 7% AER, 3% CER to £6,991
million, driven by the Ellipta portfolio and Nucala, while HIV sales
were up 22% AER, 16% CER to £4,350 million, driven by increases
in market share for Triumeq and Tivicay. Sales of Established
Pharmaceuticals declined 2% AER, 5% CER, reflecting a three
percentage point impact of recent divestments. These divestments
reduced overall Pharmaceuticals CER growth by one percentage
point, most significantly impacting the contribution from Europe and
Emerging Markets.
In the US, sales growth of 11% AER, 6% CER was driven by the
HIV portfolio and new Respiratory products. Europe sales grew
3% AER but declined 3% CER, reflecting the continued transition
of the Respiratory portfolio and generic competition to Kivexa as
well as the disposal of the Romanian distribution business during
Q4 2016 which reduced growth by three percentage points.
Reported International sales growth was impacted by the benefit
to Q1 2016 of the accelerated sale of inventory under supply
agreements to Novartis as well as the disposal of the thrombosis
and anaesthesia businesses to Aspen in Q1 2017, which reduced
reported growth in International by one percentage point and in
Emerging Markets by two percentage points to 7% AER, 5% CER.
Sales in Japan grew 6% AER, 3% CER.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 62
HIV
HIV sales increased 22% AER, 16% CER to £4,350 million in the
year, with the US up 26% AER, 21% CER, Europe up 10% AER,
3% CER and International up 33% AER, 26% CER. The growth in
all three regions was driven by continued increases in market share
for Triumeq and Tivicay, partly offset by the impact of generic
competition to Epzicom/Kivexa, particularly affecting the European
market. The ongoing increase in patient numbers for both Triumeq
and Tivicay resulted in sales of £2,461 million and £1,404 million,
respectively, in the year. Juluca was approved in the US in
November 2017, and recorded initial sales of £5 million.
Epzicom/Kivexa sales declined 59% AER, 61% CER to £234
million, reflecting the ongoing generic competition since Q3 2016.
Immuno-inflammation
Sales grew 11% AER, 6% CER in the year. The negative impact
of the divestment of raxibacumab, which recorded strong sales
in Q4 2016, was more than offset by the growth of Benlysta,
up 23% AER, 17% CER to £375 million, driven by a strong
US performance.
Established Pharmaceuticals
Sales of Established Pharmaceuticals in 2017 were £5,558 million,
declining 2% AER, 5% CER, impacted by the comparison with the
accelerated sale of inventory under supply agreements to Novartis in
Q1 2016 as well as the disposal of the thrombosis and anaesthesia
businesses to Aspen in Q1 2017 and the disposal of the Romanian
distribution business in Q4 2016. The impact of these disposals on
the growth of the Established Pharmaceuticals portfolio was
approximately three percentage points.
The Avodart franchise declined 3% AER, 9% CER to £613 million
primarily due to the loss of exclusivity in the US and Europe and the
impact of favourable RAR adjustments in 2016.
Dermatology sales grew 16% AER, 11% CER to £456 million,
reflecting improved supply in Emerging Markets and growth in Japan,
while Augmentin sales grew 4% AER, 2% CER to £587 million.
GSK Annual Report 2017Group financial review continued 63
Established Vaccines
Sales of the DTPa-containing vaccines (Infanrix, Pediarix and
Boostrix) were up 5% AER, but flat at CER. Boostrix sales grew
19% AER, 13% CER, benefiting from higher demand across all
regions. Infanrix, Pediarix sales were down 3% AER, 8% CER,
mainly driven by increased competitive pressures in the US and
Europe, together with a new market entrant in Europe, partly offset
by favourable year-on-year CDC stockpile movements in the US.
Hepatitis vaccines grew 15% AER, 10% CER to £693 million,
benefiting from a competitor supply shortage and higher demand in
the US, partly offset by the unfavourable impact of CDC stockpile
movements in the US and supply constraints in Europe and
International.
Rotarix was up 12% AER, 6% CER to £524 million, reflecting higher
demand in Europe and International.
Synflorix sales were up 1% AER, but down 6% CER to £509 million,
due to lower pricing in Emerging Markets partly offset by higher
demand elsewhere in International.
Priorix/Priorix Tetra/Varilrix sales were flat at AER, but down 5% CER
to £301 million, mainly due to supply constraints in International.
Cervarix sales increased by 65% AER, 57% CER to £134 million,
driven by its recent launch in China.
Vaccines
Turnover (£bn)
£5.2bn
17% of Group turnover
2015
2016
2017
AER growth
CER growth
12%
6%
3.7
4.6
5.2
0
1
2
3
4
5
Vaccines turnover
Meningitis
Influenza
Shingles
Established Vaccines
2016
£m
Growth
£%
Growth
CER%
2017
£m
890
488
22
662
414
–
3,760
5,160
3,516
4,592
34
18
7
12
27
12
1
6
Vaccines turnover grew 12% AER, 6% CER to £5,160 million,
primarily driven by Meningitis vaccines, with Bexsero growing across
all regions and Menveo growing in the US and Europe, and higher
sales of influenza products, primarily in the US and Europe.
Established Vaccines growth was driven by Hepatitis vaccines,
mainly due to a competitor supply shortage in the US, higher
demand for Boostrix and Rotarix and the launch of Cervarix in China.
Favourable year-on-year CDC stockpile movements for Infanrix,
Pediarix and Menveo in the US also contributed to growth. These
were partly offset by increasing competitive pressures on Infanrix,
Pediarix in the US and Europe, and lower Synflorix sales, driven
primarily by lower pricing in developing countries.
Meningitis
Meningitis sales grew 34% AER, 27% CER to £890 million. Bexsero
sales growth of 43% AER, 34% CER was driven by new national
immunisation programmes, private market sales and regional tenders
in Europe, as well as growing demand and share gains in the US,
together with strong private market sales in International. Menveo
sales grew 36% AER, 29% CER, primarily driven by the impact of
favourable year-on-year CDC stockpile movements, partly offset by
supply constraints in International.
Influenza
Fluarix/FluLaval sales were up 18% AER, 12% CER to £488 million,
reflecting strong sales execution, primarily in the US, and higher
demand in Europe.
Shingles
Shingrix recorded initial sales into the channel of £22 million in the
US after its FDA approval and favourable ACIP recommendations.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 64
Consumer Healthcare
Turnover (£bn)
£7.8bn
26% of Group turnover
AER growth
CER growth
8%
2%
2015
2016
2017
6.0
7.2
7.8
0
2
4
6
8
10
Consumer Healthcare turnover
Wellness
Oral health
Nutrition
Skin health
US
Europe
International
2017
£m
2016
£m
Growth
£%
Growth
CER%
4,001
2,466
680
603
3,726
2,223
674
570
7,750
7,193
7
11
1
6
8
2
6
(5)
–
2
2017
£m
1,826
2,360
3,564
7,750
2016
(revised)
£m
1,761
2,169
3,263
7,193
Growth
£%
Growth
CER%
4
9
9
8
(1)
3
4
2
Consumer Healthcare turnover was up 8% AER, 2% CER at
£7,750 million, impacted by slower global growth in key categories.
A strong performance by power brands across Wellness and Oral
health was partly offset by competitive pressures in the US allergy
category, impacting Flonase OTC, as well as lower sales of tail
brands across the Nutrition and Skin health categories and a broader
market slowdown in key categories. In addition, reported growth was
impacted by the disposal of the Nigeria beverages business in
Q3 2016 and the implementation of the Goods & Service Tax (GST)
in India in July, the net effects of which were partly offset by the
benefit of the comparison with the impact of demonetisation in India
in Q4 2016. The divestment, GST and demonetisation combined to
reduce overall Consumer Healthcare CER growth by approximately
one percentage point.
Sales from new GSK innovations (product introductions within
the last three years on a rolling basis) represented approximately
13% of sales in the period. Notable launches this year included
parodontax and Flonase Sensimist in the US, the continued global
roll out of Flonase OTC and several line extensions for Sensodyne,
including next generation Sensodyne Rapid Relief and Sensodyne
Deep Clean.
Wellness
Wellness sales grew 7% AER, 2% CER to £4,001 million.
This reflected a strong performance from Voltaren and Cold & flu
seasonal products, partly offset by a weaker performance from
US allergy products.
Respiratory sales were up 7% AER, 2% CER as strong broadly-
based growth from Theraflu and Otrivin, particularly in Europe and
International, was partly offset by competitive pressures in the US
for Flonase OTC from private label products.
Pain relief sales were up 10% AER, 4% CER, driven significantly
by Voltaren with growth across all regions, benefiting from
momentum in the 12-hour variant, strong in-store and marketing
activation, expansion of expert detailing and strong performances
in International markets. Panadol also grew strongly in Europe,
benefiting from new advertising campaigns, and in International
in low single digits.
Oral health
Oral health sales grew 11% AER, 6% CER to £2,466 million.
Sensodyne continued to drive performance, reporting growth of
12% AER, 8% CER, with strong delivery in all regions following the
roll out of next generation Sensodyne Rapid Relief and the launch
of Pronamel Strong & Bright. Sales of parodontax continued to
grow strongly, reflecting double-digit performances in Europe
and International, driven by a brand reset and increases in dentist
recommendations, as well as the US launch in the first quarter.
Denture care grew in mid-single digits with double-digit growth
in emerging markets partly offset by slower consumption growth
in the US and Germany.
Nutrition
Nutrition sales grew 1% AER and declined 5% CER to £680 million,
adversely impacted by the sale of the Nigeria beverages business
in Q3 2016 and the implementation of GST on 1 July, as well as
continued competitive pressures for Horlicks in India. The net impact
of the divestment of the Nigeria beverages business, implementation
of GST offset by the favourable comparison with the impact of
demonetisation in the prior year reduced Nutrition CER growth
by approximately six percentage points.
Skin health
Skin health sales grew 6% AER, but were flat at CER at £603
million, with low single-digit growth in the US, a slight decline
within Europe and International flat. Fenistil sales grew strongly,
with good performances in Central & Eastern Europe, Germany
and the Middle East, following digital activation and new media
campaigns. Physiogel and Lamisil continued to be impacted by
competitor activity, whilst Lip care sales grew in mid-single digits.
GSK Annual Report 2017Group financial review continued 65
Cost of sales
Cost of sales as a percentage of turnover was 34.3%, up 1.0
percentage points in Sterling terms and up 1.4 percentage points
in CER terms compared with 2016. This primarily reflected the
phasing of costs of manufacturing restructuring programmes
including non-cash write downs as a result of plant closures and
the write down of assets related to the progressive withdrawal
of Tanzeum, as well as continued adverse pricing pressure in
Pharmaceuticals, primarily Respiratory, and additional supply chain
investments. This was partly offset by a more favourable product
mix across all three businesses, particularly in Pharmaceuticals,
reflecting the impact of higher HIV sales, and in Vaccines, reflecting
the benefit of a settlement for lost third party supply volume and a
favourable year-on-year comparison to inventory adjustments in
2016. There was also a continued contribution from integration
and restructuring savings in all three businesses.
Selling, general and administration
SG&A costs were 32.0% of turnover, 1.5 percentage points lower
than in 2016 in Sterling and CER terms. This primarily reflected
lower restructuring costs and tight control of ongoing operating
costs, particularly in Consumer Healthcare, as well as continued
cost reductions in Pharmaceuticals, including the benefits of the
Pharmaceuticals restructuring programme, and integration benefits
in Vaccines and Consumer Healthcare. This was partly offset by an
increased investment in promotional product support, particularly
for new launches in Respiratory, HIV and Vaccines.
Research and development
R&D expenditure was £4,476 million (14.8% of turnover), 23%
higher than in 2016 at AER and 19% higher at CER. This included
charges of £106 million from the utilisation of the Priority Review
Voucher in 2017 as well as increased investment in the progression
of a number of mid and late-stage programmes. In addition, there
were higher restructuring costs, primarily as a result of the provision
for future clinical obligations as a result of the progressive
withdrawal of Tanzeum and the decision to terminate the rights
to sirukumab, and higher intangible asset impairments.
Royalty and other operating income/(expense)
Net other operating expense of £1,609 million (2016 – £3,007
million) primarily reflected lower accounting charges arising from the
re-measurement of the contingent consideration liabilities related to
the former Shionogi-ViiV Healthcare joint venture and the acquisition
of the former Novartis Vaccines business, the value attributable to
the Consumer Healthcare Joint Venture put option and the liabilities
for the Pfizer put option and Pfizer and Shionogi preferential
dividends in ViiV Healthcare. The remeasurement charges of
£2,185 million (2016 – £3,914 million) reflected updated trading
forecasts and changes in exchange rate assumptions as well as
the unwinding of the discount applied to these future liabilities of
£1,001 million. They also included charges of £666 million arising
from the positive impact of US tax reform on the valuation of the
Consumer Healthcare and HIV businesses. These charges were
partly offset by the gain of £250 million on the disposal of the
anaesthesia business to Aspen and royalty income of £356 million
(2016 – £398 million).
Total results
Turnover (£bn)
£30.2bn
AER growth
CER growth
8%
3%
2015
2016
2017
23.9
27.9
30.2
0
5
10
15
20
25
30
Total operating profit (£bn)
£4.1bn
AER growth
CER growth
57%
39%
2015
2016
2017
2.6
4.1
10.3
0
2
4
6
8
10
12
The total results of the Group are set out below.
2017
2016
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
30,186
(10,342)
100 27,889
(9,290)
(34.3)
% of
£m turnover
100
(33.3)
£% CER%
3
8
8
11
(9,672)
(32.0)
(9,366)
(33.6)
3
(1)
(4,476)
356
(14.8)
1.1
(3,628)
398
(13.0)
1.4
23
(11)
19
(13)
(1,965)
4,087
(669)
(6.5)
13.5
(3,405)
2,598
(664)
(12.2)
9.3
57
39
94
–
13
3,525
(1,356)
2,169
1,532
31.4
0.82
5
1,939
(877)
1,062
912
18.8
0.51
82
58
>100
71
67
36
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 66
Total results continued
Operating profit
Total operating profit was £4,087 million in 2017 compared with
£2,598 million in 2016. The increase primarily reflected a reduced
impact from accounting charges related to the remeasurement of the
liabilities for contingent consideration, put options and preferential
dividends. In addition operating profit benefited from an improved
operating margin driven by sales growth across all three businesses,
but particularly Vaccines, and a more favourable mix in all three
businesses. In Vaccines, there was also a favourable year-on-year
comparison with inventory adjustments in 2016 and the benefit of
a one-off settlement in cost of sales. Continued tight control of
ongoing costs and benefits from restructuring and integration also
contributed to improved margins in Vaccines and Consumer
Healthcare, but in Pharmaceuticals, the benefits were offset by an
overall increase in Pharmaceuticals R&D investment (including the
impact of the Priority Review Voucher) together with continuing price
pressure, particularly in Respiratory, and supply chain investments
to support new products.
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
2017
£m
63
2
65
(720)
(16)
(4)
6
2016
£m
70
2
72
(701)
(16)
(4)
(15)
(734)
(736)
Profit on disposal of associates
The profit on disposal of associates was £94 million (2016 – £nil).
This arose from the disposal of our entire shareholdings in two
associates, River Vision Development Co. Ltd and JCR
Pharmaceuticals Co Ltd.
Share of after tax profits of associates and joint ventures
The share of profits of associates and joint ventures was £13 million
(2016 – £5 million).
Profit before taxation
Taking account of net finance costs, the profit on disposal of
associates and the share of profit of associates, profit before
taxation was £3,525 million compared with £1,939 million in 2016.
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
2017
£m
199
1,928
(508)
1,619
(263)
1,356
2016
£m
241
1,326
(149)
1,418
(541)
877
A tax charge of £1,356 million on Total profit represented an effective
tax rate of 38.5% (2016 – 45.2%) and included a charge of £1,078
million arising from US tax reform as described in more detail on
page 68. This was partly offset by a £483 million benefit from Swiss
tax reform, arising from the revaluation of deferred tax liabilities on
acquired Consumer Healthcare brands to reflect a reduction in the
headline tax rate.
Non-controlling interests
The allocation of earnings to non-controlling interests amounted to
£637 million (2016 – £150 million), including the non-controlling
interest allocations of Consumer Healthcare profits of £415 million
(2016 – £203 million) and the allocation of ViiV Healthcare profits,
which increased to £187 million (2016 – £83 million loss) including
the impact of changes in the proportions of preferential dividends
due to each shareholder. The increase in allocation of ViiV
Healthcare profits primarily reflected the impact of lower
remeasurement charges and the increase in allocation of Consumer
Healthcare profits reflected improved operating profits together with
the benefit of Swiss tax reform in 2017.
Earnings per share
Total earnings per share were 31.4p, compared with 18.8p in 2016.
The increase reflected the reduced impact of charges arising from
the revaluations 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 benefit
from Swiss tax reform and improved performances by the relevant
businesses, partly offset by the charges arising from US tax reform.
Dividends
The Board declared four interim dividends resulting in a total dividend
for the year of 80 pence, in line with the dividend declared for 2016.
See Note 16 to the financial statements, ‘Dividends’.
GSK Annual Report 2017Group financial review continued 67
Adjusted
results
£m
30,186
(8,771)
21,415
(9,341)
(3,862)
356
–
8,568
(657)
–
13
7,924
(1,667)
21.0%
6,257
793
5,464
Intangible
asset
amortisation
£m
Intangible
asset
impairment
£m
Major
restructuring
£m
Transaction
-related
£m
Divestments,
significant
legal and
other items
£m
US tax
reform
£m
19.2p
(9.4)p
33.3p
111.8p
4,886
Intangible
asset
amortisation
£m
Intangible
asset
impairment
£m
Major
restructuring
£m
Transaction
-related
£m
Divestments,
significant
legal and
other items
£m
546
546
400
400
45
288
545
545
248
263
591
688
1,056
4
80
80
1,519
1,599
591
(134)
688
(176)
1,060
1,599
(209)
(619)
457
512
851
457
9.4p
512
10.5p
851
17.4p
980
42
938
547
547
41
588
588
(130)
458
458
9.4p
7
7
13
20
20
(5)
15
297
297
514
159
970
4
974
(217)
757
15
0.3p
757
15.6p
86
86
(81)
3,914
3,919
3,919
(439)
3,480
487
2,993
61.6p
–
–
83
18
(220)
(119)
8
(94)
(205)
(251)
(456)
(456)
666
666
666
1,078
1,744
114
1,630
Adjusted
results
(revised)
£m
27,889
(8,351)
19,538
(8,797)
(3,468)
398
-
7,671
(652)
5
7,024
(1,498)
21.3%
5,526
637
4,889
2
2
55
28
(509)
(424)
8
(416)
170
(246)
(246)
(5.1)p
100.6p
4,860
Adjusting items
Adjusted results reconciliation
31 December 2017
Turnover
Cost of sales
Gross profit
Selling, general and administration
Research and development
Royalty income
Other operating income/(expense)
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
Profit attributable to non-controlling interests
Profit attributable to shareholders
Earnings per share
Weighted average number of shares (millions)
Adjusted 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
30,186
(10,342)
19,844
(9,672)
(4,476)
356
(1,965)
4,087
(669)
94
13
3,525
(1,356)
38.5%
2,169
637
1,532
31.4p
4,886
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
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 68
Adjusting items continued
Intangible asset amortisation and impairment
Intangible asset amortisation was £591 million, compared with
£588 million in 2016. Intangible asset impairments of £688 million
(2016 – £20 million) included impairments related to the progressive
withdrawal of Tanzeum and a number of other commercial and R&D
assets following the refocusing of the R&D pipeline during 2017.
Both of the amortisation and impairment charges were non-cash
items.
Major restructuring and integration
Major restructuring and integration charges of £1,056 million
have been incurred (2016 – £970 million). Non-cash charges
were £525 million, primarily reflecting the write down of assets as
a result of the decision to withdraw Tanzeum and terminate rights
to sirukumab arising from the establishment of the Group’s new
business priorities, as well as the write down of assets related to
reductions in the site network. Cash charges were £531 million
(2016 – £704 million), including charges as a result of the decisions
to withdraw Tanzeum and terminate rights to sirukumab. Cash
payments made were £555 million (2016 – £1,077 million), including
the settlement of certain charges previously accrued, but also
reflecting the deferral of some payments into 2018. Cash payments
of approximately £0.5 billion are expected in 2018. The programme
delivered incremental cost savings in 2017 of £0.7 billion, including
£0.2 billion of currency benefits.
Charges for the combined restructuring and integration programme
to date are £4.8 billion, of which cash charges are £3.5 billion. Cash
payments of £3.1 billion have been made to date. Non-cash charges
are £1.3 billion.
An extension to the existing combined programme was agreed by
the Board in July 2017, with total cash charges of the combined
programme now expected to be approximately £4.1 billion and
non-cash charges up to £1.6 billion. The programme has now
delivered approximately £3.7 billion of annual savings, including
a currency benefit of £0.4 billion. The extended programme is now
expected to deliver by 2020 total annual savings of £4.0 billion on
a constant currency basis, together with an estimated £0.4 billion
of currency benefits on the basis of 2017 average exchange rates.
Transaction-related adjustments
Transaction-related adjustments resulted in a net charge of
£1,599 million (2016 – £3,919 million). This primarily reflected
accounting charges for the re-measurement of the liability and the
unwinding of the discounting effects on the contingent consideration
related to the acquisition of the former Shionogi-ViiV Healthcare joint
venture, the contingent consideration related to the acquisition of the
former Novartis Vaccines business, and the value attributable to the
Consumer Healthcare Joint Venture put option held by Novartis.
These transaction-related adjustments exclude the impact on these
liabilities arising from the implementation of the US Tax Cuts and
Jobs Act in 2017 which is set out separately on this page.
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
Contingent consideration on former Novartis
Vaccines business
Other adjustments
Total transaction-related charges
2017
£m
986
2016
£m
1,133
556
2,162
(126)
577
101
82
69
(22)
1,599
3,919
The aggregate impact of unwinding the discount on these future
and potential liabilities was £1,001 million (2016 – £905 million),
including £543 million on the Consumer Healthcare Joint Venture
put option and £408 million on the contingent consideration related
to the former Shionogi-ViiV Healthcare Joint Venture. The remaining
charge of £598 million was driven by adjustments to trading
forecasts and the impact of updated exchange rate assumptions
on those forecasts for the relevant businesses as well as updated
multiples used in the valuation of the Consumer Healthcare Joint
Venture put option.
Contingent consideration cash payments which are made to
Shionogi and other companies reduce the balance sheet liability and
hence are not recorded in the income statement. Total contingent
consideration cash payments in 2017 amounted to £685 million
(2016 – £431 million). This included cash payments made by ViiV
Healthcare to Shionogi in relation to its contingent consideration
liability (including preferential dividends) which amounted to
£671 million (2016 – £417 million).
An explanation of the accounting for the non-controlling interests
in ViiV Healthcare is set out on page 59.
The impact on profit after tax from transaction-related adjustments
includes an accounting credit in respect of Swiss tax reform of
£483 million, arising from the revaluation of deferred tax liabilities
on acquired Consumer Healthcare brands to reflect a reduction in
the headline Swiss tax rate.
Divestments and other items
Divestments and other items included the profit on disposal of the
anaesthesia business to Aspen of £250 million, a number of other
asset disposals, equity investment impairments and certain other
adjusting items. Significant legal charges of £68 million (2016 –
£62 million) included the benefit of the settlement of existing matters
as well as provisions for ongoing litigation. Significant legal cash
payments were £192 million (2016 – £102 million).
US tax reform
The enactment of the US Tax Cuts and Jobs Act has resulted in a
number of additional charges in 2017, which reduced Total earnings
by £1,630 million.
Firstly, increased valuations of the HIV and Consumer Healthcare
businesses due to lower US tax rates resulted in an increase in the
related liabilities for contingent consideration and the put options of
£666 million.
Secondly, an additional tax charge of £1,078 million comprised
a reduction in the value of US deferred tax assets held against
future liabilities, such as pensions, and a current tax credit, together
amounting to £730 million, as well as a charge of £348 million arising
on the reserves of subsidiaries of US entities in the Group. The cash
impact of this latter charge will be spread over eight years from 2018,
with approximately 60% expected to be payable in years six to eight.
These charges were partly offset by an allocation to non-controlling
interests amounting to £114 million, as many of the adjustments
related to ViiV Healthcare and the Consumer Healthcare Joint
Venture.
These charges represent management’s estimates of the impact
of US tax reform on the Group based on the information currently
available. As further guidance from the US Treasury on implementation
of the Act becomes available, particularly with regard to the
repatriation tax provisions, the assumptions underlying these estimates
could change. This could result in adjustments to the charges taken
that could have a material impact on the results of the Group.
GSK Annual Report 2017Group financial review continued 69
Adjusted results
Turnover (£bn)
£30.2bn
AER growth
CER growth
8%
3%
2015
2016
2017
23.9
27.9
30.2
0
5
10
15
20
25
30
Adjusted operating profit (£bn)
AER growth
CER growth
£8.6bn
12%
5%
2015
2016
2017
5.7a
7.7a
0
2
4
6
8.6
8
10
a. Adjusted results now exclude only significant legal charges per revised definition on
page 58. Prior year figures have been revised.
We use Adjusted 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 Adjusted results is set out on page 58.
Cost of sales
Cost of sales
2017
% of
turnover
(29.1)
£m
(8,771)
2016
% of
turnover
(29.9)
Growth
£% CER%
1
5
£m
(8,351)
Cost of sales as a percentage of turnover was 29.1%, down 0.9
percentage points in Sterling terms and down 0.5 percentage
points in CER terms compared with 2016. This reflected a more
favourable product mix across all three businesses, particularly in
Pharmaceuticals, including the impact of higher HIV sales, as well
as favourable product mix, the benefit of a settlement for lost third
party supply volume and a favourable year-on-year comparison to
inventory adjustments in 2016 in Vaccines. There was also a further
contribution from integration and restructuring savings in all
three businesses, offset by continued adverse pricing pressure in
Pharmaceuticals, primarily Respiratory, and additional supply
chain investments.
Selling, general and administration
2017
% of
turnover
£m
2016
(revised)
% of
turnover
£m
Growth
£% CER%
Selling, general and
administration
(9,341)
(30.9)
(8,797)
(31.5)
6
1
SG&A costs were 30.9% of turnover, 0.6 percentage points lower
in Sterling terms than in 2016 and 0.5 percentage points lower on
a CER basis. This primarily reflected tight control of ongoing costs,
particularly in Consumer Healthcare, continued cost reductions in
Pharmaceuticals, including the benefits of the Pharmaceuticals
restructuring programme, and integration benefits in Vaccines
and Consumer Healthcare. This was partly offset by increased
investment in promotional product support, particularly for new
launches in Respiratory, HIV and Vaccines.
Research and development
2017
% of
turnover
£m
2016
% of
turnover
£m
Growth
£% CER%
Research and
development
(3,862)
(12.8)
(3,468)
(12.4)
11
8
R&D expenditure was £3,862 million (12.8% of turnover), 11% higher
than 2016 at AER and 8% higher at CER. This included a charge of
£106 million on the utilisation of the Priority Review Voucher in
Q2 2017 as well as increased investment in the progression of a
number of mid and late-stage programmes.
Discovery
Development
Facilities and central support functions
Total Pharmaceuticals
Vaccines R&D
Consumer Healthcare R&D
Research and development
2017
£m
1,020
1,450
536
3,006
621
235
3,862
2016
(revised)
£m
821
1,249
558
2,628
597
243
3,468
Growth
£% CER%
24
16
(4)
14
4
(3)
11
21
13
(7)
11
(2)
(7)
8
The growth in Development expenditure was driven by the
progression of a number of mid and late-stage programmes in
HIV, Respiratory and Anaemia, together with the utilisation of the
Priority Review Voucher in Q2 2017. The continuing high growth in
Discovery expenditure reflected further investment in the early stage
Oncology portfolio.
Royalty income
Royalty income was £356 million (2016 – £398 million). The
reduction was primarily due to the patent expiry of Cialis in Q4 2016
and a catch-up adjustment recorded in Q1 2016.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 70
Adjusted results continued
Adjusted operating profit
Adjusted operating profit was £8,568 million, 12% AER higher than
in 2016 and 5% CER higher on a turnover increase of 3% CER.
The Adjusted operating margin of 28.4% was 0.9 percentage points
higher than in 2016 and 0.4 percentage points higher on a CER
basis. This reflected improved operating leverage driven by sales
growth and a more favourable mix in all three businesses, together
with, in Vaccines, the benefit of a settlement for lost third party supply
volume and a favourable year-on-year comparison to inventory
adjustments in 2016. There was also continued tight control of
ongoing costs across all three businesses as well as benefits from
restructuring and integration. This was partly offset by the charge
of £106 million on the utilisation of the Priority Review Voucher in
Q2 2017 as well as other increases in R&D investment, continuing
price pressure, particularly in Respiratory, and supply chain
investments.
Adjusted operating profit by business
2017
Margin
%
50.2
£m
8,667
Pharmaceuticals
Pharmaceuticals R&D (2,740)
£m
7,976
(2,488)
Pharmaceuticals
Vaccines
Consumer
Healthcare
Corporate & other
unallocated costs
Adjusted operating
profit
5,927
1,644
34.3
31.9
5,488
1,429
1,373
8,944
17.7
29.6
1,116
8,033
(376)
(362)
2016
(revised)
Margin
%
49.5
34.1
31.1
15.5
28.8
10
8
15
23
11
4
7
1
11
11
4
(3)
5
8,568
28.4
7,671
27.5
12
Pharmaceuticals
Pharmaceuticals operating profit was £5,927 million, 8% AER higher
than in 2016 and 1% CER higher on a turnover increase of 3% CER.
The operating margin of 34.3% was 0.2 percentage points higher
than in 2016 on a Sterling basis but 0.6 percentage points down
on a CER basis. This primarily reflected increased R&D investment,
including the impact of the utilisation of the Priority Review Voucher
in Q2 2017. The operating margin also reflected increased
investment in new product support, as well as the continued impact
of lower prices, particularly in Respiratory, and the broader transition
of the Respiratory portfolio, partly offset by a more favourable
product mix, primarily driven by the growth in HIV sales, and the
continued cost reduction benefit of the Group’s Pharmaceuticals
restructuring programme.
Vaccines
Vaccines operating profit was £1,644 million, 15% AER higher than
in 2016 and 11% CER higher on a turnover increase of 6% CER. The
operating margin of 31.9% was 0.8 percentage points higher than in
2016 on a Sterling basis and 1.3 percentage points higher on a CER
basis. This was primarily driven by improved product mix, the benefit
of a settlement for lost third party supply volume and a favourable
year-on-year comparison with inventory adjustments in 2016,
together with continued restructuring and integration benefits. This
was partly offset by increased SG&A resources to support business
growth and new launches, increased supply chain costs and lower
royalty income.
Consumer Healthcare
Consumer Healthcare operating profit was £1,373 million, 23% AER
higher than in 2016 and 11% CER higher on a turnover increase of
2%. The operating margin of 17.7% was 2.2 percentage points
higher than in 2016 and 1.3 percentage points higher on a CER
basis, reflecting tight control of costs, integration synergies,
principally in SG&A, partly offset by increased investment in
power brands.
Net finance costs
Finance income
Interest and other income
Fair value movements
Finance expense
Interest expense
Unwinding of discounts on liabilities
Growth
Remeasurements and fair value movements
£% CER%
3
9
Other finance expense
2017
£m
63
2
65
2016
£m
70
2
72
(720)
(701)
(4)
(4)
6
(722)
(4)
(4)
(15)
(724)
Share of after tax profits of associates and joint ventures
The share of profits of associates and joint ventures was £13 million
(2016 – £5 million).
Adjusted profit before taxation
2017
% of
turnover
£m
2016
(revised)
% of
turnover
£m
Growth
£%
CER%
Adjusted profit
before tax
7,924
26.3
7,024
25.2
13
5
Taxation
Tax on Adjusted profit amounted to £1,667 million and represented
an effective Adjusted tax rate of 21.0% (2016 – 21.3%).
Non-controlling interests
The allocation of Adjusted earnings to non-controlling interests
amounted to £793 million (2016 – £637 million), including the
non-controlling interest allocations of Consumer Healthcare profits
of £344 million (2016 – £288 million) and the allocation of ViiV
Healthcare profits, which increased to £414 million (2016 –
£324 million) including the impact of changes in the proportions
of preferential dividends due to each shareholder. The increase
in allocation also reflected comparison with the reduction in the
allocation to non-controlling interests due to higher net losses in
some of the Group’s other entities with non-controlling interests
in 2016.
Adjusted earnings per share
Adjusted EPS of 111.8p was up 11% AER, 4% CER compared
with a 5% CER increase in Adjusted operating profit.
GSK Annual Report 2017Group financial review continued 71
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 from investing activities
Net cash outflow from financing activities
Decrease in cash and bank overdrafts
Cash and bank overdrafts at beginning of year
Decrease 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
2017
£m
6,918
(1,443)
(6,380)
(905)
4,605
(905)
(100)
3,600
2016
£m
6,497
(1,269)
(6,392)
(1,164)
5,486
(1,164)
283
4,605
3,833
(233)
3,600
4,897
(292)
4,605
The net cash inflow from operating activities for the year was
£6,918 million (2016 – £6,497 million). The increase primarily
reflected improved operating profit performance, as well as a positive
currency benefit, partly offset by increased working capital reflecting
the building of inventory in advance of new product launches,
increased contingent consideration payments and legal settlements.
Total cash payments to Shionogi in relation to the ViiV Healthcare
contingent consideration liability in the year were £671 million, of
which £587 million was recognised in cash flows from operating
activities and £84 million was recognised in contingent consideration
paid within investing cash flows. These payments are deductible for
tax purposes.
Capital expenditure and financial investment
Cash payments for tangible and intangible fixed assets amounted
to £2,202 million (2016 – £2,352 million) and disposals realised
£807 million (2016 – £453 million). Cash payments to acquire equity
investments of £80 million (2016 – £96 million) were made and sales
of equity investments realised £64 million (2016 – £683 million).
Free cash flow
Free cash flow is the amount of cash generated by the business
after meeting our obligations for interest, tax and dividends paid to
non-controlling interests, and after capital expenditure on property,
plant and equipment and intangible assets.
Free cash inflow
2017
£m
3,437
2016
£m
3,014
Free cash flow was £3,437 million for the year (2016 – £3,014
million). The increase primarily reflected improved operating profit
performance, as well as a positive currency benefit and increases
in returns and rebates, partly offset by increased working capital,
reflecting seasonal factors and the building of inventory in advance
of new product launches, increased contingent consideration
payments, the purchase of the Priority Review Voucher, increased
dividends to non-controlling interests, including a catch up
adjustment, and higher legal settlements. Free cash flow in 2016
was also impacted by the costs of acquiring the HIV Clinical assets
from BMS for £221 million.
Reconciliation of net cash inflow from operating activities
to 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
Purchase of property, plant and equipment
Purchase of intangible assets
Proceeds from sale of property, plant and equipment
Interest paid
Interest received
Dividends from associates and joint ventures
Contingent consideration paid (reported in
investing activities)
Contribution from non-controlling interests
Distributions to non-controlling interests
Free cash flow
2017
£m
6,918
(1,545)
(657)
281
(781)
64
6
(91)
21
(779)
3,437
2016
(revised)
£m
6,497
(1,543)
(809)
98
(732)
68
42
(73)
–
(534)
3,014
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 257 to 266. We may from time
to time have additional demands for finance, such as for acquisitions,
including potentially acquiring increased ownership interests in the
ViiV Healthcare and the Consumer Healthcare businesses where
minority shareholders hold put options. We have access to multiple
sources of liquidity from short and long-term capital markets and
financial institutions for such needs, in addition to the cash flow
from operations.
Investment appraisal and capital allocation
We have strengthened our framework for capital allocation,
including the creation of a new board to govern the allocation of
capital between our businesses. We utilise a consistent cash return
on invested capital (CROIC) methodology to prioritise investment
across the Group as a whole, so that we can more effectively
compare the returns from each of the businesses as we allocate
capital between them. We also consider the impact on EPS and
our credit profile where relevant.
The discount rate used to perform financial analyses is decided
internally, to allow determination of the extent to which investments
cover our cost of capital. For individual investments the discount rate
may be adjusted to take into account specific country, business or
project risk.
Working capital
Working capital percentage of turnover (%)
Working capital conversion cycle (days)
2017
22
191
2016
22
193
The reduction of two days in 2017 compared with 2016 was
predominantly due to a beneficial impact from exchange of
approximately seven days, partly offset by a build in inventory
in advance of new product launches and an increase in trade
receivables from higher sales.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 72
Financial position and resources
Assets
Non-current assets
Property, plant and equipment
Goodwill
Other intangible assets
Investments in associates and joint ventures
Other investments
Deferred tax assets
Derivative financial instruments
Other non-current assets
Total non-current assets
Current assets
Inventories
Current tax recoverable
Trade and other receivables
Derivative financial instruments
Liquid investments
Cash and cash equivalents
Assets held for sale
Total current assets
Total assets
Liabilities
Current liabilities
Short-term borrowings
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
Corporation tax payable
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
2017
£m
2016
£m
10,860
5,734
17,562
183
918
3,796
8
1,413
40,474
5,557
258
6,000
68
78
3,833
113
15,907
56,381
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
(2,825)
(1,076)
(4,129)
(561)
(20,970)
(11,964)
(74)
(995)
(629)
(194)
(1,305)
(848)
(26,569)
(19,001)
(14,264)
(14,661)
(411)
(1,396)
(3,539)
(636)
(5,096)
(981)
–
(1,934)
(4,090)
(652)
(5,335)
(8,445)
(26,323)
(35,117)
(52,892)
(54,118)
3,489
4,963
1,343
3,019
(6,477)
2,047
(68)
3,557
1,342
2,954
(5,392)
2,220
1,124
3,839
3,489
4,963
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
2017 was £21,719 million, with a net book value of £10,860 million.
Of this, land and buildings represented £4,270 million, plant and
equipment £4,132 million and assets in construction £2,458 million.
In 2017, we invested £1,584 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 2017, we had
contractual commitments for future capital expenditure of £584
million and operating lease commitments of £1,045 million. We
believe that our property and plant 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 ‘Environmental sustainability’ on page 61 and in
Note 45 to the financial statements, ‘Legal proceedings’.
Goodwill
Goodwill decreased during the year to £5,734 million at 31
December 2017, from £5,965 million. The decrease 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 2017 was £17,562 million
(2016 – £18,776 million). The decrease in 2017 reflected the impact
of exchange movements and the amortisation and impairment of
existing intangibles of £934 million and £680 million respectively,
partly offset by the development costs capitalised during the year
of £251 million and other additions of £454 million.
Investments in associates and joint ventures
We held investments in associates and joint ventures with a carrying
value at 31 December 2017 of £183 million (2016 – £263 million).
The market value at 31 December 2017 was £372 million (2016 –
£502 million). The largest of these investments was in Innoviva Inc.
which had a book value at 31 December 2017 of £147 million
(2016 – £138 million). The market value at 31 December 2017
was £336 million. See Note 20 to the financial statements
‘Investments in associates and joint ventures’.
Other investments
We held other investments with a carrying value at 31 December
2017 of £918 million (2016 – £985 million). The decrease in the
carrying value during the year was primarily due to the impact of
exchange movements. The most significant of the investments held
at 31 December 2017 was in Theravance Biopharma, Inc. which
had a book value at 31 December 2017 of £199 million (2017 –
£248 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.
GSK Annual Report 2017Group financial review continued 73
Financial position and resources continued
Derivative financial instruments: assets
We had current derivative financial instruments held at fair value
of £68 million (2016 – £156 million) and non-current derivative
financial instruments held at fair value of £8 million (2016 – £nil).
The majority of these financial instruments related to foreign
exchange contracts both designated and not designated as
accounting hedges.
Inventories
Inventory of £5,557 million increased from £5,102 million in 2016.
The increase primarily reflected inventory build in advance of new
product launches.
Trade and other receivables
Trade and other receivables of £6,000 million decreased from
£6,026 million in 2016, primarily reflecting exchange movements
partly offset by the impact of higher sales.
Deferred tax assets
Deferred tax assets of £3,796 million decreased from £4,374 million
in 2016 primarily as a result of the revaluation of existing deferred tax
assets to reflect the lower headline US tax rate following enactment
of US tax reform, partly offset by an increase in deferred tax assets
related to intra-Group profit on inventory.
Derivative financial instruments: liabilities
We held current derivative financial instruments at fair value of
£74 million (2016 – £194 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 £20,970 million increased
from £11,964 million in 2016, reflecting the reclassification of the
Consumer Healthcare put option of £8,606 million from non-current
liabilities. This relates 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. As this option became exercisable from 2 March 2018,
with payment likely to be due several months after exercise, it has
been classified within current liabilities on the Group balance sheet.
Further details are provided in Note 3, ‘Key accounting judgements
and estimates’.
Provisions
We carried deferred tax provisions and other short-term and
non-current provisions of £2,661 million at 31 December 2017
(2016 – £3,434 million). The decrease in the year primarily reflected
a reduction in the deferred tax provision as a result of Swiss tax
reform. Other provisions at the year-end include £186 million
(2016 – £344 million) related to legal and other disputes and
£504 million (2016 – £554 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
£1,505 million (2016 – £2,084 million) on pension arrangements
and £1,496 million (2016 – £1,693 million) on unfunded post-
employment liabilities. The decreases in the deficits were
predominantly driven by special funding contributions to the
UK and US schemes and significant UK asset gains partly
offset by lower discount rates that we used to discount the
value of the liabilities.
Other non-current liabilities
Other non-current liabilities amounted to £981 million at
31 December 2017 (2016 – £8,445 million). This decrease from
2016 reflects the reclassification of the Consumer Healthcare put
option to current liabilities during the year.
Contingent consideration liabilities
Contingent consideration liabilities amounted to £6,172 million at
31 December 2017 (2016 – £5,896 million), of which £5,542 million
(2016 – £5,304 million) represented the estimated present value
of amounts payable to Shionogi relating to ViiV Healthcare and
£584 million (2016 – £545 million) represented the estimated
present value of contingent consideration payable to Novartis related
to the Vaccines acquisition. The liability due to Shionogi included
£216 million in respect of preferential dividends. The liability for
preferential dividends due to Pfizer at 31 December 2017 was
£17 million. An explanation of the accounting treatment of our
interests in ViiV Healthcare is set out on page 59.
Net debt
Cash, cash equivalents and liquid investments
Borrowings – repayable within one year
Borrowings – repayable after one year
Net debt
2017
£m
3,911
2016
£m
4,986
(2,825)
(4,129)
(14,264)
(14,661)
(13,178)
(13,804)
At 31 December 2017, net debt was £13.2 billion, compared
with £13.8 billion at 31 December 2016, comprising gross debt
of £17.1 billion and cash and liquid investments of £3.9 billion.
The decrease in net debt primarily reflected the improved free cash
flow of £3.4 billion, disposal proceeds of £0.6 billion, together with
a £0.6 billion favourable exchange impact from the translation of
non-Sterling denominated debt, which more than offset the cost
of dividends paid to shareholders of £3.9 billion.
At 31 December 2017, our cash and liquid investments were held
as follows:
Bank balances and deposits
US Treasury and Treasury repo
only money market funds
Liquidity funds
Cash and cash equivalents
Liquid investments – Government securities
2017
£m
1,715
1,715
403
3,833
78
3,911
2016
£m
2,583
2,248
66
4,897
89
4,986
Cash and liquid investments of £2.5 billion (2016 – £3.2 billion) were
held centrally at 31 December 2017.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 74
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
2018 2019
2025
GBP bonds EUR bonds USD bonds Commercial paper Other bank borrowings Leases
2033 2034
2038 2039
2022
2027
2029
2023
2024
2020
2026
2042
2043
2045
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
Increase in long-term loans
Net repayment of/(increase in) short-term loans
Exchange movements
Other movements
Net debt at end of year
Total equity
At 31 December 2017, total equity had decreased from £4,963
million at 31 December 2016 to £3,489 million. This primarily
reflected the impact of the dividends paid exceeding the Total profit
for the year offset by favourable exchange translation impact from the
weaker Sterling rates. The Total profit for the year was impacted by
the charge in respect of US tax reform.
A summary of the movements in equity is set out below.
2017
£m
3,911
(16,229)
(805)
(55)
(13,178)
2016
£m
4,986
(17,288)
(1,496)
(6)
(13,804)
Total equity at beginning of year
Total comprehensive income for the year
Dividends to shareholders
Ordinary shares issued
Changes in non-controlling interests
Recognition of liabilities with non-controlling interests
De-recognition of liabilities with non-controlling
interests
Shares acquired by ESOP Trusts
Share-based incentive plans
2016
£m
(10,727)
(1,164)
–
–
(148)
(1,781)
16
Tax on share-based incentive plans
2017
£m
(13,804)
(905)
(4)
(2,233)
3,200
585
(17)
(13,178)
(13,804)
Contributions from non-controlling interests
Distributions to non-controlling interests
Total equity at end of year
2017
£m
4,963
2,882
2016
£m
8,878
2,024
(3,906)
(4,850)
56
(2)
–
–
(65)
333
(4)
21
(789)
3,489
89
32
(2,172)
1,244
(74)
319
7
–
(534)
4,963
GSK Annual Report 2017Group financial review continued
75
Financial position and resources continued
Share purchases
In 2017, the Employee Share Ownership Plan (ESOP) Trusts
acquired £65 million of shares in GlaxoSmithKline plc (2016 –
£74 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 2017, the ESOP Trusts held 66.7 million
(2016 – 43 million) GSK shares against the future exercise of
share options and share awards. The carrying value of £400 million
(2016 – £286 million) has been deducted from other reserves. The
market value of these shares was £882 million (2016 – £667 million).
During 2017, no shares were repurchased. At 31 December 2017,
we held 414.6 million shares as Treasury shares (2016 – 458.2
million shares), at a cost of £5,800 million (2016 – £6,451 million),
which has been deducted from retained earnings.
No ordinary shares were purchased in the period 1 January 2018
to 12 March 2018 and the company does not expect to make any
ordinary share repurchases in the remainder of 2018.
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 2017 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
2,802
£m
17,137
8,510
66
12
1,045
5,254
584
107
346
738
38
555
23
2
186
205
527
34
284
123
18
1-3 yrs
£m
2,422
985
35
3
271
546
51
47
23
246
20
3-5 yrs
£m
1,499
5 yrs+
£m
10,414
956
6,014
3
2
201
750
6
26
17
246
–
5
5
387
3,753
–
–
22
123
–
Total
33,837
4,759
4,649
3,706
20,723
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 £4.5 billion which relates to externalised
projects in the discovery portfolio. There was a reduction in the
commitments in 2017 due to amendments made to existing
agreements and obligations which have ceased.
In 2016, we reached an agreement with the trustees of the UK
pension schemes to make additional contributions, including in 2016,
to assist in eliminating the pension deficit identified as part of 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.
Guarantees
Other contingent liabilities
Total
Total Under 1 yr
£m
£m
1-3 yrs
£m
3-5 yrs
£m
5 yrs+
£m
315
119
434
151
17
168
127
61
188
31
3
34
6
38
44
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 2017, 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
257 to 266 and Notes 14 and 45 to the financial statements,
‘Taxation’ and ‘Legal proceedings’.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 76
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 45)
– Intangible asset impairments (Note 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:
2017
Margin
%
£m
100 13,363
2016
Margin
%
£m
100 10,093
2015
Margin
%
100
£m
16,365
(4,058)
(25)
(2,749)
(21)
(1,761)
(17)
Gross turnover
Market driven
segments
Government
mandated and
state programs
Cash discounts
Customer returns
Prior year adjustments
Other items
(3,938)
(330)
(97)
86
(460)
(24)
(2)
(3,070)
(261)
(23)
(2)
(2,357)
(192)
(1)
1
(3)
(98)
109
(457)
(1)
1
(3)
(93)
142
(298)
(23)
(2)
(1)
1
(3)
(45)
55
Total deductions
(8,797)
(54)
(6,526)
(49)
(4,559)
Net turnover
7,568
46
6,837
51
5,534
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 2017, Advair accounted for 21%
of US Pharmaceuticals turnover and approximately 40% of the total
deduction for rebates and returns, and the Respiratory portfolio as
a whole accounted for approximately 82% of the total deduction
in the year. Advair continued to suffer pricing pressures in 2017
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 2017, the
total accrual amounted to £2,837 million (2016 – £2,218 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 2017
were estimated to amount to approximately four 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.
GSK Annual Report 2017Group financial review continued
77
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 20 July 2017. A Treasury Management Group (TMG) meeting,
chaired by our Chief Financial Officer, takes place on a regular
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 45 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 (stable 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 regular 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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 78
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
12 March 2018 and signed on its behalf by:
Simon Dingemans
Chief Financial Officer
12 March 2018
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 regularly.
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.
GSK Annual Report 2017Group financial review continued GSK Annual Report 2017
79
79
Strategic report
Governance and remuneration
Financial statements
Investor information
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 stakeholders
Engagement activities
Science Committee report
Corporate Responsibility Committee report
Directors’ report
80
82
86
88
94
96
96
107
107
109
110
112
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 80
Chairman’s Governance statement
“Emma Walmsley and the
CET plan to ensure that
the company’s culture
and values are consistent
with our strategy and
performance objectives.”
Dear Shareholder
I am pleased to present our Corporate
Governance report for 2017.
Governance, strategy and long-term
value creation
The Board remains committed to achieving
the highest standards of corporate
governance and integrity. Our governance
structure operates from the Board across
the Group and we believe it is critical in
underpinning our ability to deliver our
strategy to create long-term value and
benefit for our shareholders and
stakeholders. Our investors are also
telling us that there has never been a
greater need for companies to combine
obligations to society with delivery of our
financial performance.
The following pages set out details on the
composition of our Board, its corporate
governance arrangements, processes and
activities during 2017, together with reports
from each of the Board’s Committees,
including the new Science Committee.
Last year we reported on the Board’s
work on CEO and executive management
succession. In 2017, the Board’s focus was
in supporting Emma Walmsley’s transition
into her new role and conducting a detailed
review of the company’s strategy with
management.
CEO transition
In the period before she formally took
up the reins as CEO in April, Emma was
working on how she would evolve the
company’s strategy with support and
guidance from the Board. She met with
each Board director to solicit their views
on the company, as well as meeting with
employees at all levels of the business,
external advisers and commentators to gain
a wide view. She shaped her thinking with
the Board as it evolved. Our Non-Executive
Directors were fully engaged in this process.
Emma utilised the diverse expertise around
the boardroom table to test and shape the
detail of her proposals. In particular, the
Board and its Committees provided Emma
and the management team with continuous
feedback and challenge. This review
culminated in a discussion at a joint strategy
meeting with the full Corporate Executive
Team (CET) in June at which the proposed
Innovation, Performance and Trust priorities
were scrutinised ahead of Board approval
in July.
Emma and the CET then laid out at the
Investor Update in July, how Innovation,
Performance and Trust would provide a
platform for growth from 2020 and beyond.
She also re-affirmed the commitment to the
three-business structure, subject to certain
conditions which would continue to be
reviewed periodically. This commitment
was tested by the Board at the joint strategy
session in June. In terms of continuing Board
oversight of the Innovation, Performance and
Trust priorities, all Board papers have been
re-shaped to align with the new business
priorities. In addition, the CEO’s report
includes Innovation, Performance and Trust
performance indicators. Our annual strategy
meetings will enable the Board to consider
the progress and effectiveness of our
business priorities in delivering long-term
value to investors.
GSK Annual Report 2017 81
The Government’s corporate governance
reform legislation and the new Code are
expected to be effective from 2019 financial
years. I look forward to providing an update
on how our arrangements measure up to
these new requirements in next year’s report.
UK Corporate Governance Code
compliance
I am pleased to report that we were in full
compliance with the requirements of the
FRC’s UK Corporate Governance Code
(Code) and a copy of the Code is available
on www.frc.org.uk.
I commend this report to all of our
shareholders.
Philip Hampton
Chairman
12 March 2018
Board evaluation
This was an appropriate time in the Board’s
evolution to carry out an external Board
evaluation and the CEO, our Senior
Independent Non-Executive Director and
I therefore chose to appoint a new external
Board evaluator for this review to bring a
fresh perspective. Details of the externally
facilitated review and its conclusions are
set out on pages 92 to 93.
Corporate Governance reform
The Board has taken a close interest in the
UK Government’s development of a package
of legislative and best practice measures
and supports initiatives that raise the bar
on corporate governance practices and
effectiveness.
As part of this reform drive, the Financial
Reporting Council (FRC) has recently
consulted on its proposals for a revised
UK Corporate Governance Code. We have
submitted our views. I am pleased to note
that the FRC has included new measures
to encourage companies to take steps to
align their strategy and culture and promote
effective engagement with their workforce
and wider stakeholders, issues that I have
described earlier in relation to the approach
of our own Board.
Aligning strategy and culture
A healthy culture is a vital tool in unlocking
and protecting value and the biggest
driver of our culture is the leadership of our
company. Emma Walmsley and the CET
plan to ensure that the company’s culture
and values are consistent with our strategy
and performance objectives. When the
Board reviewed her proposed strategy,
culture featured heavily in the discussions.
The Board approved a move to a high-
performance, values-based culture
where the new expectations of Courage,
Accountability, Development and Teamwork
guide employee behavior. The Board
received a report on management’s
commitments and initiatives as a
modern employer.
The CET held a leadership conference in
October for the company’s top 600 leaders,
which I and other Non-Executive Directors
attended. This was critical to transfer
ownership of our strategy and culture to
our leaders and on into the company. We
are now measuring progress in implementing
our priorities and monitoring aspects of our
culture twice a year through an all-employee
survey. This survey measures engagement,
progress on our Innovation, Performance
and Trust priorities, our values and
expectations. Emma reports progress
to the Board regularly on culture.
Further details on the company’s
commitment to being a modern employer
and driving high levels of employee
engagement as part of our Trust agenda
are set out on pages 48 and 49 of the
Strategic report.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 82
Our Board
Board composition
Composition
Composition
1
2
1. Executive
As at 1 April 2018
2. Non-Executive
1. Executive
2. Non-Executive
38%
62%
25%
75%
Gender diversity
Board
As at date of publication
Male
62%
Female
38%
Tenure Non-Executive
Tenure Non-Executive
1
4
3
2
1. Up to 3 years
As at 1 April 2018
2. 3-6 years
1. Up to 3 years
3. 7-9 years
2. 3-6 years
3. 7-9 years
4. Over 9 years
4. Over 9 years
62%
25%
0%
13%
45%
33%
11%
11%
As at 1 April 2018
Male
Female
58%
42%
Executive
As at date of publication
As at 1 April 2018
Male
75%
Male
67%
Female
25%
Female
33%
Non-Executive
As at date of publication
Male
Female
56%
44%
International experience
International experience
As at 1 April 2018
As at 1 April 2018
Male
Female
56%
44%
Global
75%
US
100%
Europe
92%
EMAP
67%
Philip Hampton 64
Non-Executive Chairman
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, 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. Philip was previously
appointed an Executive Director
of Lazards and a Non-Executive
Director of 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
Philip is the Senior Independent
Director of Anglo American Plc,
Chairman of its Remuneration
Committee and a member of its
Audit Committee. Philip is also Chair
of the Hampton-Alexander Review
on FTSE Women Leaders, an
independent review on improving
gender balance in FTSE leadership.
GSK Annual Report 2017
83
Emma Walmsley 48
Chief Executive Officer
Simon Dingemans 54
Chief Financial Officer
Dr Hal Barron 55
Chief Scientific Officer and
President, R&D
Dr Patrick Vallance 58
Outgoing President, R&D
Nationality
British
Nationality
British
Appointed
1 January 2017. Chief Executive
Officer from 1 April 2017
Appointed
4 January 2011. Chief Financial
Officer from 1 April 2011
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. Simon was
previously Chairman of the 100
Group of Finance Directors.
External appointments
None
Skills and experience
Emma joined GSK in 2010 with
responsibility for Consumer
Healthcare, Europe and was
subsequently appointed President
of GlaxoSmithKline Consumer
Healthcare in October 2011.
She has been a member of GSK’s
Corporate Executive Team since
2011 and was appointed CEO of
GSK Consumer Healthcare, a joint
venture between GSK and Novartis,
from its creation in March 2015
until her appointment as GSK CEO
Designate in September 2016.
Emma joined the GSK Board on
1 January 2017 and succeeded
Sir Andrew Witty as GSK CEO
on 1 April 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
Nationality
American
Appointed
1 January 2018
Nationality
British
Appointed
1 January 2017
Skills and experience
Hal was President R&D at Calico
LLC (California Life Company), an
Alphabet-funded company that uses
advanced technologies to increase
understanding of lifespan biology.
Prior to joining Calico, Hal was
Executive Vice President, Head of
Global Product Development, and
Chief Medical Officer of Roche,
responsible for all the products in
the combined portfolio of Roche
and Genentech. At Genentech,
he was Senior Vice President of
Development and Chief Medical
Officer. Hal was a Non-Executive
Director and Chair of The Science
& Technology Committee at Juno
Therapeutics, Inc.
External appointments
Hal is Associate Adjunct Professor,
Epidemiology & Biostatistics,
University of California, San
Francisco.
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, 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. Patrick was previously a
Non-Executive Director of UK
Biobank Limited and Genome
Research Limited.
External appointments
Patrick stepped down as President,
R&D at the end of 2017 and will
step down as an Executive Director
with effect from 31 March 2018 to
become the UK Government’s Chief
Scientific Adviser and Head of the
Government’s Office for Science.
Key
Committee Chair
N
A
R
S
C
Nominations
Audit & Risk
Remuneration
Science
Corporate Responsibility
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
84
Our Board continued
Manvinder Singh (Vindi) Banga 63
Senior Independent
Non-Executive Director
Professor Sir Roy Anderson 70
Independent Non-Executive
Director & Scientific and
Medical Expert
Dr Vivienne Cox 58
Independent Non-Executive
Director
Lynn Elsenhans 61
Independent Non-Executive
Director
N S C
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
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 Holdingham International
Advisory Board and 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,
Chairman of the Scientific Advisory
Board of the Netherlands Centre for
One Health (NCOH) and Chairman
of Oriole Global Health Ltd.
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 and
Lead Independent Director at the
UK Government’s Department for
International Development. 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 AB
and Chairman of the Supervisory
Board of Vallourec, a supplier to
the energy industry.
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. Lynn was previously a
Non-Executive Director of Flowserve
Corporation and The First Tee of
Greater Houston.
External appointments
Lynn is a Non-Executive Director
of Baker Hughes, a GE company,
and Chair of its Audit Committee,
and a Director of the Texas Medical
Center. She is also a Trustee of the
United Way of Greater Houston.
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. Vindi
was also previously Chairman of the
Supervisory Board of Mauser Group.
External appointments
Vindi is a Partner at private equity
investment firm Clayton Dubilier
& Rice. He is also Chairman of Kalle
GmbH, Senior Independent Director
of Marks & Spencer Group plc,
a member of its Nomination
Committee and Chairman of its
Remuneration Committee. Vindi
is a Non-Executive Director of the
Confederation of British Industry
(CBI), a Director of High Ridge
Brands Co, a member of the
Holdingham International Advisory
Board and Chair of the Board of
Trustees of Marie Curie. He is also
on the Governing Board of the
Indian School of Business (ISB),
Hyderabad, and is a member of
the Indo UK CEO Forum.
GSK Annual Report 2017 85
Dr Laurie Glimcher 66
Independent Non-Executive
Director & Scientific and
Medical Expert
Dr Jesse Goodman 66
Independent Non-Executive
Director & Scientific and
Medical Expert
Judy Lewent 69
Independent Non-Executive
Director
Urs Rohner 58
Independent Non-Executive
Director
A S
Nationality
American
Appointed
1 September 2017
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
Laurie is currently Professor of
Medicine at Harvard Medical School
and is CEO, President and an
Attending Physician at the Dana-
Farber Cancer Institute.
In addition to a number of senior
leadership positions held at both
Harvard Medical School and
Harvard School of Public Health,
Laurie has also served as Stephen
and Suzanne Weiss Dean and
Professor of Medicine at Weill
Cornell Medical College and as an
Attending Physician at the New York
Presbyterian Hospital/Weill Cornell
Medical Center. Laurie stepped
down from the Board of Bristol-
Myers Squibb Co (BMS) in 2017
after serving for 20 years on its
Board. Laurie brings scientific and
public health expertise to the Board’s
deliberations.
External appointments
Laurie is a member of the US
National Academy of Sciences and
the National Academy of Medicine.
She is a member of the Scientific
Steering Committee of the Parker
Institute for Cancer Immunotherapy
and a Non-Executive Director of the
Waters Corporation, where she also
serves on its Corporate Governance
Committee. In addition, Laurie is
co-founder and Chair of the
Scientific Advisory Board of Quentis
Therapeutics Inc and a Scientific
Advisory Board member of Repare
Therapeutics Inc and the American
Asthma Foundation.
Skills and experience
Jesse 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).
Jesse 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. Jesse
brings scientific and public health
expertise to the Board’s
deliberations.
External appointments
Jesse, 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 Regulatory Working
Group of the Coalition for Epidemic
Preparedness Innovations (CEPI).
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 its Chief Financial Officer from
1990 to 2007 when she retired.
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, a life member of
the Massachusetts Institute of
Technology Corporation, a member
of the American Academy of Arts
and Sciences and a member of
the Business Advisory Board of
twoXAR.
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 Switzerland in 1986 and
the state of New York in the US in
1990.
External appointments
Urs is currently Chairman of the
Board of Credit Suisse Group
AG and of its 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.
Key
Committee Chair
N
A
R
S
C
Nominations
Audit & Risk
Remuneration
Science
Corporate Responsibility
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 86
Our Corporate Executive Team
1
2
3
4
Roger Connor
President, Global Manufacturing & Supply
Luc Debruyne
President, Global Vaccines
Roger joined CET in 2012 and was appointed
President, Global Manufacturing & Supply
in 2013, after working for a year as President
Designate. Prior to this, he was Vice President,
Office of the CEO and Corporate Strategy.
Roger joined GSK in 1998 from AstraZeneca.
He was appointed to the Board of GSK
Consumer Healthcare, our joint venture
with Novartis, in April 2017.
Roger holds a degree in Mechanical and
Manufacturing Engineering from Queen’s
University Belfast and a Masters in Manufacturing
Leadership from Cambridge University.
He is a Chartered Accountant.
Luc joined CET in 2016 as President,
Global Vaccines, a role he has held since 2013.
He joined GSK in 1991 as a commercial strategy
director in R&D, before leading the European
Commercial Centre of Excellence. In 2006,
Luc became General Manager in 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 Vaccines CEO
Roundtable and the Management Committee
of the Belgian Federation of Enterprises.
He holds a Master’s degree in Physical Education
from University of Leuven.
1. Emma Walmsley
Chief Executive Officer
2. Simon Dingemans
Chief Financial Officer
3. Dr Hal Barron
Chief Scientific Officer
and President, R&D
4. Dr Patrick Vallance
Outgoing President, R&D
> For biographical details,
see page 83.
Abbas Hussain was a member of
CET before leaving the company
on 31 July 2017.
Nick Hirons
Senior Vice President, Global Ethics
and Compliance
Brian McNamara
CEO, GSK Consumer Healthcare
Nick was appointed to CET in 2014 as Senior
Vice President, Global Ethics and Compliance,
responsible for compliance, risk management,
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.
Brian joined CET in 2016, when he was
appointed CEO, GSK Consumer Healthcare.
He joined GSK in 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 Chairman 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.
GSK Annual Report 2017
87
Luke Miels
President, Global Pharmaceuticals
David Redfern
Chief Strategy Officer
Karenann Terrell
Chief Digital & Technology Officer
Luke joined GSK and CET in September
2017 as President, Global Pharmaceuticals
responsible for our commercial portfolio of
medicines and vaccines.
Previously, he worked for AstraZeneca as
Executive Vice President of their European
business and, prior to that, Executive Vice
President of Global Product and Portfolio
Strategy, Global Medical Affairs and Corporate
Affairs. Before then, he held roles of increasing
seniority at Roche and Sanofi-Aventis.
He holds a Bachelor of Science degree in
Biology from Flinders University in Adelaide and
an MBA from the Macquarie University, Sydney.
David joined CET as Chief Strategy Officer
in 2008 and is responsible for corporate
development and strategic planning. 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.
He was appointed Chairman of the Board of
ViiV Healthcare Limited in 2011 and a Non-
Executive Director of the Aspen Pharmacare
Holdings Limited Board in 2015.
David has a Bachelor of Science degree from
Bristol University in the UK and is a Chartered
Accountant.
Karenann joined GSK and CET in September
2017 as Chief Digital & Technology Officer,
responsible for our technology, digital, data
and analytics strategy.
Previously, she worked for Walmart as Chief
Information Officer. Prior to this, she was at
Baxter International, where she was Chief
Information Officer, and before that Daimler
Chrysler Corporation. Karenann began her
career in General Motors.
Karenann is a member of the board of trustees
for the New York Hall of Science and in 2017
she became a Non-Executive Director of
Pluralsight LLC.
She earned graduate and post-graduate degrees
in Electrical Engineering from Kettering and
Purdue Universities respectively.
Claire Thomas
Senior Vice President, Human Resources
Phil Thomson
President, Global Affairs
Dan Troy
Senior Vice President & General Counsel
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.
Phil joined CET in 2011. He was appointed
President, Global Affairs in April 2017, with
specific responsibilities for the Group’s strategic
approach to Reputation, Corporate Responsibility,
Global Health, China and Britain’s withdrawal from
the European Union. He is responsible for our
engagement with investors, media, government,
key global community partners and employees.
Previously, he was Senior Vice President,
Communications and Government Affairs.
He joined GSK as a commercial trainee
in 1996.
Phil is Chairman of The Whitehall & Industry
Group and a Board Member of the China-Britain
Business Council.
He earned his degree in English, History and
Russian Studies from Durham University.
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 and
is a member of the American Law Institute.
It was announced in January 2018 that Dan Troy
will leave GSK at a later date in 2018 when his
role relocates to the UK.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
88
Corporate Governance continued
Leadership and effectiveness
Corporate governance framework
The Board has established a 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 platform to realise the Group’s strategy through GSK’s
new Innovation, Performance and Trust priorities. Our internal control and risk management arrangements, described on pages 20 to 21
and 105 and 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
Nominations
Committee
Audit & Risk
Committee
Remuneration
Committee
Science
Committee
Corporate
Responsibility
Committee
> Read more on
page 94
> Read more on
page 96
> Read more on
page 114
> Read more on
page 109
> Read more on
page 110
See www.gsk.com for terms of reference for each Board Committee.
Scheduled Board and Committee attendance during 2017
Total number of scheduled meetings
6
6
6
5
Board
Nominations
Audit & Risk
Remuneration
Science
4
Corporate
Responsibility
4
Members
Philip Hampton
Emma Walmsley
Simon Dingemans
Dr Patrick Vallance
Professor Sir Roy Anderson
Vindi Banga
Dr Vivienne Cox
Lynn Elsenhans
Dr Laurie Glimcher
Appointed on 1 September 2017
Dr Jesse Goodman
Judy Lewent
Urs Rohner
Sir Andrew Witty
Retired on 31 March 2017
Dr Moncef Slaoui
Retired on 31 March 2017
Total number of ad-hoc meetings
Attended
Attended
Attended
Attended
Attended
Attended
6
6
6
6
6
6
5
6
2 (2)
6
6
6
2 (2)
2 (2)
10
6
6
6
6
6
1
6
6
2 (2)
6
4
5
4
5
5
7
4
2 (2)
4
4
0
4
4
4
3
0
For Directors who served for part of the year, the numbers in brackets denote the number of meetings the Directors were eligible to attend.
> See the Committee Reports for other attendees at Committee meetings, such as the Chairman, CEO and other Executive Directors, and the work of the Committees
during the year. These reports are included later in the Corporate Governance Report.
GSK Annual Report 2017
89
2017 Board programme
The Board is responsible for the long-term success of the company and has the authority, and is accountable to shareholders, for ensuring
that the Group is appropriately managed and achieves the strategic objectives it sets. In the performance of these duties, it has regard to
the interests of other key stakeholders and is cognisant of the potential impact of the decisions it makes. The Board discharges those
responsibilities through an annual programme of meetings and during the year it focused on a number of specific areas outlined in the table,
in line with its new long-term priorities of Innovation, Performance and Trust.
In addition, during the year the CEO met with Non-Executive Directors to discuss various matters, including the evolution of her thinking on
the company’s strategy, succession planning and the ongoing SFO investigation.
Areas of focus
Long-term priorities link
Strategy
The Board’s oversight of the execution of our strategy included:
– Receiving and discussing reports from our principal three businesses, Pharma, Vaccines and Consumer
– Briefings on products. In particular, the Board was keen to oversee launch plans for the Shingrix vaccine,
Trelegy Ellipta and Nucala products. It also reviewed the background to the withdrawal of Tanzeum
– A joint Board and Corporate Executive Committee strategy day was held to discuss the new Innovation,
Performance and Trust priorities against external landscape changes, business performance, competitors
and governance arrangements
– The evolution of our approach and changes to medical engagement with key external experts
– Conducting a deep dive on the Group’s business strategy in China
– Receiving and discussing reports on our pensions, insurance, tax and treasury strategies.
Performance
The Board’s focus on performance included:
– Setting the new CEO’s objectives
– Setting, reviewing and agreeing the annual budget and forward looking three year plan
– Receiving reports from the CEO on our principal three businesses
– Scrutinising the Group’s financial performance
– Reviewing Brexit impacts and planning arrangements
– Reviewing progress of the pipeline.
Governance
The Board’s approach to discharging its corporate governance duties included:
– Receiving reports from Board Committees
– Approving the 2016 Annual Report
– Reviewing AGM preparation and approving the 2017 Notice of AGM
– Considering observations and agreeing actions from the internal evaluation of the Board’s performance
– Receiving reports on corporate governance and regulatory developments
– Undertaking training on GSK’s Code of Conduct
– Approving the appointment of a new Chief Scientific Officer and President, R&D and a new Non-Executive
Cultural
transformation
Director and Scientific & Medical Expert.
The Head of HR briefed the Board on:
– Aligning GSK’s culture and values to support our strategy and long-term priorities.
Link to long-term priorities
Innovation
Performance
Trust
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
90
Corporate Governance: Leadership and effectiveness continued
Key Board roles and responsibilities
Leadership
Independent oversight and rigorous challenge
Chairman
Philip Hampton
– 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 to support sound
decision making
– Ensures the Board receives precise, timely and clear
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.
The Chairman’s role description is available on www.gsk.com
Chief Executive Officer
Emma Walmsley
– Is responsible for the management of the Group and its
three businesses
– 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
Non-Executive Directors
– 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
– Devote such time as is necessary to the proper
performance of their duties
– Are expected to attend all meetings required.
Independence statement
The Board considers all of its Non-Executive Directors
who are identified on pages 84 to 85 to be independent.
This includes Professor Sir Roy Anderson, with tenure
of more than nine years. They each demonstrate an
appropriate degree of independence in character and
judgement and are free from any business or other
relationship which could materially interfere with the
exercise of their judgement. The independence and
commitment of Professor Sir Roy Anderson and Judy
Lewent, 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
– Together with the Non-Executive Directors, leads the
annual review of the Chairman’s performance, taking into
account views of the Executive Directors
– 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
Company Secretary
Victoria Whyte
– Secretary to the Board and all Board Committees
– Supports the Board and Committee Chairs in annual agenda plan setting
– Ensures information is made available to the Board members in a timely fashion
– 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 practice and procedures and corporate governance matters
– Chairs the Group’s Disclosure Committee
– Is a point of contact for shareholders on corporate governance matters.
GSK Annual Report 2017 91
Board induction and development
The Company Secretary assists the Chairman in designing and
facilitating individual induction programmes for new Directors.
They are designed with the purpose of orientating and familiarising
new Directors with our industry, organisation, governance and our
strategy and Innovation, Performance and Trust priorities.
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.
New Corporate Executive Team (CET) members meet with Board
members as part of their induction, and to ensure the Board
maintains its connections with the CET.
During 2017, Dr Laurie Glimcher, a new US-based Science
and Medical Expert, and in January 2018, Dr Hal Barron, a highly
experienced R&D leader, joined the Board. Their customised
induction programmes are summarised below.
2017 Board induction
General Board induction
Executive
Non-Executive
– Role of an Executive 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’s Code of Conduct training
Personal Executive Director induction
Personal Non-Executive Director induction
Dr Hal Barron
Chief Scientific Officer and President, R&D
Dr Laurie Glimcher
Scientific & Medical Expert
– Maximise handover opportunity with the outgoing
President, R&D
– Detailed review of pipeline assets, including
R&D governance, processes and team, and
business development landscape to inform
updated R&D strategy
– R&D and Vaccines deep dives
– Briefings on R&D’s key therapy areas
– Site visits to: Ware, Stevenage and Wavre
– Briefing on US business and commercial model
– Audit & Risk and Science Committee inductions
Board, business and key stakeholder awareness
To ensure that our Non-Executive Directors develop and maintain
a greater insight and understanding of the business and key
stakeholders they:
– are invited to attend internal management meetings, including
meetings of the CET
– meet employees informally during visits to the Group’s operations
and at receptions held with staff around Board meetings
– receive monthly investor relations and stakeholder reports to
maintain awareness of investor and stakeholder views
– measure progress in implementing our Innovation, Performance
and Trust business priorities and evolving our culture through an
all-employee survey undertaken every six months and through
reports on the regular conversations the CET has directly with
the workforce through the Let’s Talk programme.
Training
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 2017, the Board members undertook training on GSK’s
Code of Conduct.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 92
Corporate Governance: Leadership and effectiveness continued
2017 External evaluation of the Board
The Board carries out an evaluation of its performance and that of its Committees every year and the evaluation is facilitated
externally every third year. After a market review, Ms Ffion Hague of Independent Board Evaluation was appointed to independently
facilitate the 2017 Board and Committee evaluation. Neither Ms Hague nor Independent Board Evaluation has any other connection
with the company.
Ms Hague met with the Chairman, Senior
Independent Non-Executive Director (SID),
CEO and the Company Secretary, to
discuss and agree the scope of the
evaluation exercise and the timetable of
activities.
The Secretary provided the evaluation
team with access to Board and Committee
papers and other materials as part of their
preparatory work for the evaluation.
The evaluation team attended the Board
and Committee meetings held in December
2017, to observe Directors and the
operation and dynamics of meetings.
See page 93.
Phase one
Phase two
Phase three
Preparation
Interviews
Observations
Phase four
Review
Phase five
Outcomes
During November and December 2017,
Ms Hague conducted detailed interviews
with each Board member. These were
based on a clear agenda which was sent
to each participant in advance. The
Company Secretary and the Head of
HR were also interviewed to gain a
broader perspective.
A report containing the output from the evaluation
and a set of draft conclusions was compiled by
Ms Hague, which was discussed initially with the
Chairman, CEO and the SID. A report containing
her findings and recommendations was then
presented by Ms Hague to the whole Board at
its main meeting in January 2018.
Separate reports were compiled for:
– each of the Board Committees, which were
presented to the individual Committee Chairs
first and were then discussed at the respective
Committee meetings in January 2018;
– each individual Board member, which were
presented to and discussed with the Chairman;
and
– the Chairman, which was initially discussed
with the SID. The SID and Ms Hague then
discussed this with the Non-Executive
Directors before the SID discussed it with
the Chairman.
GSK Annual Report 2017 93
2017 External evaluation of the Board continued
2017 Board review feedback and outcomes
Ms Hague’s report had noted the context in which her 2017 Board
evaluation has been conducted, where there has recently been
significant change to the composition of the Board, which is still
settling down, including:
In response to the report, Board members are highly engaged and
committed to the best interests of the company and feel that the
Board’s work is underpinned by the mechanisms it has established
to support its operations. The Board takes governance very seriously
and has chosen to work further on the following areas:
– a new Chairman appointed in May 2015;
– A review of R&D strategy following the appointment of the new
– the new CEO starting her role in April 2017;
Chief Scientific Officer and President, R&D.
– five other members joining the Board within the past three years,
some of whom, though experienced in their field, did not have
previous UK listed company experience; and
– Enhancing the Board’s focus and decision making by agreeing
its clear priorities to focus on each year.
– Succession planning at senior executive and Board level.
– welcoming Dr Barron to the Board in January 2018.
– Building Board relationships and culture in line with the CEO’s
culture work across the Group.
Due to the timing of the review, on this occasion the review team
only took input from Board members. In this context, Board members
expressed a broad range of views and, as the Board settles down,
some issues were identified as the focus for an action plan over the
coming year. The Board is strongly supportive of the new CEO.
It was pleased with the ongoing work to strengthen the focus on
science with the new Chief Scientific Officer and President, R&D,
Non- Executive Scientific and Medical Experts and the creation of
the Science Committee which is in its formative stages.
2017 Board performance
Progress against the conclusions of the 2016 Board evaluation review, internally facilitated by our Company Secretary, is set out below.
Areas of focus for 2017
Progress/Achievements
– 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.
During the year, the Board considered a detailed review of the company’s strategy with management in the
context of the operating environment, the company’s culture and industry dynamics in global healthcare.
– Identify ways to further improve the
Board’s decision making.
All papers submitted to the Board have been streamlined and re-shaped to align with the new Innovation,
Performance and Trust long-term business priorities to allow continuing oversight and more focused
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.
Good progress was made in establishing the Science Committee, further details of which can be found in the
Science Committee report on page 109.
Reporting to the Board has been enhanced in this area within a new Innovation, Performance and Trust
long-term business priorities framework and dashboards aiding the Board’s oversight of the company’s key
performance indicators.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 94
Corporate Governance: Leadership and effectiveness continued
Nominations Committee report
Philip Hampton
Nominations Committee
Chair
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
Committee member since
Philip Hampton Chair from 27 January 2015
27 January 2015
Professor Sir Roy Anderson
Vindi Banga
Lynn Elsenhans
Judy Lewent
Urs Rohner
1 October 2012
1 January 2016
27 January 2015
8 May 2014
1 January 2017
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
✓
✓
✓
Advisory services
During the year, Korn Ferry and Egon Zehnder provided
recruitment consultancy services to the Committee, in
addition to recruitment and HR services which they provide
to the company. They are both signatories to the Voluntary
Code of Conduct for Executive search firms on gender
diversity and best practice.
Dear Shareholder
The Committee has worked over the last few years to refresh the
Board and replace retiring directors. Following the CEO transition,
Emma Walmsley has established Innovation, Performance and Trust
as the long-term priorities for the business and the Committee’s
focus has turned to supporting the CEO in establishing the team
she needs to lead the company for the opportunities and
challenges ahead.
Executive management succession
When Dr Patrick Vallance, President, R&D informed the Board of his
intention to become the UK Government’s Chief Scientific Adviser
and Head of the Government’s Office for Science, the Committee
engaged Korn Ferry, who had previously conducted a proactive
desktop talent mapping exercise for R&D executives. The Committee,
with full participation of the other Non-Executive Directors, compiled
a profile for the next leader of R&D. The profile contained a brief of
the requirements and the desired skill set that a potential successor
to Patrick would need. The brief was drafted to emphasise the
importance the CEO and the Committee placed on identifying and
recruiting a world-renowned R&D leader with a strong track record
of developing R&D organisational capabilities and significant new
medicines. On reviewing the profile, the Committee decided that
it needed to look externally for such talent.
Korn Ferry then initiated global searches against this agreed profile
across the pharmaceuticals industry. Given the importance of this
search, the Committee sought a second opinion from Egon Zehnder,
who are also experts in the field of executive search. This yielded
a pool of candidates which was reduced to a shortlist of several
potential candidates. These shortlisted candidates met and were
subsequently interviewed by the company’s designated Scientific
and Medical Experts (SME), the Audit & Risk Committee Chair and
the Chairman, and their feedback on each candidate was compiled.
The Committee received the CEO’s analysis of the candidates and
a separate analysis by the Head of HR.
The process culminated with the Committee meeting to agree
a recommendation to the Board that proposed the appointment
of Dr Hal Barron as Chief Scientific Officer and President, R&D.
The recommendation received unanimous Board approval. On 8
November 2017, it was announced that Hal would join the Board
as an Executive Director with effect from 1 January 2018. Patrick
stepped down as President R&D at the end of 2017 and will resign
as an Executive Director and CET member from 31 March 2018.
The Board was pleased that Hal’s appointment demonstrated the
company’s continued ability to attract world class talent to the
organisation. As one of the world’s foremost R&D leaders, Hal
possesses an exceptional track record of developing significant
new medicines at Roche and Genentech, while recently at Calico
building a research organisation that uses cutting-edge technologies
in drug discovery and development.
In my Committee report last year, we reported that Mr Luke Miels
had been recruited from AstraZeneca, where he was Executive Vice
President of its European business, to succeed Abbas Hussain as
President, Global Pharmaceuticals. Luke subsequently joined GSK
and the CET on 1 September 2017. Luke and Hal had previously
worked together at Roche, and their appointments complete the top
team for our Global Pharmaceuticals business.
GSK Annual Report 2017
95
Nominations Committee report continued
Finally, in terms of senior executive appointments, Ms Karenann
Terrell was appointed, with the support of Korn Ferry, to the CET in
September 2017 as GSK’s first Chief Digital & Technology Officer.
She has a company-wide remit to transform how new technologies
are used to improve performance across the Group. Karenann’s
previous role was Chief Information Officer for Walmart, where she
led a multi-year effort to transform Walmart in the use of data,
analytics and digital engagement with its customers.
These senior executive appointments underscore the immediate
areas of focus for our new CEO since taking up her appointment,
as she continues to build her senior leadership team to drive the
Innovation, Performance and Trust agenda.
New Non-Executive Director appointment
During the year, Korn Ferry also assisted the Committee with a
search for an additional SME Non-Executive Director to further
enhance the Board’s scientific capabilities, strengthen the Board’s
scientific perspective and to join the new Science Committee. After
interviewing suitable SME candidates, the Committee recommended
Dr Laurie Glimcher to the Board as a potential Non-Executive
Director and SME. The Board subsequently approved Dr Glimcher’s
appointment to the Board with effect from 1 September 2017. Laurie
brings a wealth of expertise in scientific and medical innovation and
public health which will be invaluable in assisting the Board’s focus
on delivering its long-term Innovation, Performance and Trust
priorities. She was also appointed a member of the Science and
Audit & Risk Committees.
Board composition and diversity
We have sought to balance the composition of the Board and its
Committees over time.
Longer serving Directors maintain an understanding of the Group
and the sector, whilst newer appointees bring fresh external
perspectives and insights.
Our Non-Executive Directors have experience of a wide range of
industries and backgrounds, including the pharmaceuticals industry
and R&D, vaccines, consumer products and healthcare, medical
research and academia, insurance and financial services, as well
as complex organisations with global reach. Importantly, the majority
of our Board have a scientific or mathematical background which
means they are more attuned to the fundamentals of the industry
in which we operate.
GSK is committed to equal opportunities for all our employees at all
levels of the organisation and the Board is committed to encouraging
a diverse and inclusive culture led by the CET.
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, which
is to meet the measurable targets set out in:
– the Parker Review Commission’s report ‘Beyond One by ‘21’
published in October 2017 to increase ethnic diversity
appointments on the boards of FTSE 100 companies; and
– the Hampton-Alexander Review’s report, which I worked on with
the late Dame Helen Alexander, published in 2016 to increase the
number of women in senior leadership positions in all FTSE 350
companies.
We are currently meeting the Parker Report’s recommendation
of at least one board director of colour by 2021.
At this point, I wish to personally acknowledge how much I and
everyone involved in the work of the Hampton-Alexander Review
will miss Dame Helen, who sadly passed away in August last year.
She was an outstanding leader who believed that women could
and should be able to contribute far more to business than has ever
been acknowledged. The Review team and I will continue the work
in her memory.
The Committee was pleased at the progress made towards our
female Board representation and combined Corporate Executive
Team (CET) and Direct Reports targets of at least 33% by 2020.
GSK ranked 8th in the FTSE 100. A summary of our standing in the
Hampton-Alexander Review’s 2017 FTSE Women Leaders report
is reproduced below:
Female Representation as at 30 June 2017
2017 Report Female
Representation Metrics
Board
2020 FTSE 100 target
33.0%
GSK
41.7% (ranked 8th
in FTSE 100)
FTSE 100 average
FTSE 100 highest
27.7%
44.4%
We currently have:
Combined Executive
Committee and Direct
Reports
33.0%
25.7%
25.2%
47%
– 38% women on our Board (2016 – 31%), which will rise to 41.7%
on 1 April 2018 after Dr Patrick Vallance has stepped down from
the Board and left the company; and
– 21% women on our CET (2016 – 14%).
Going forward, closing the gap between the Board and CET gender
representation and further increasing the pipeline of female direct
reports to the CET to achieve our 2020 target is an area of focus.
In support of this approach, GSK has various actions to enhance
our development pipeline; including the Accelerating Difference
programme, Women’s Leadership Initiative and the Accelerating
Transitions coaching programme for those joining or re-joining the
company after an extended time of absence.
The representation of women in management positions 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.
Committee evaluation
The Committee’s annual evaluation exercise was externally facilitated
by Ms Ffion Hague of Independent Board Evaluation and concluded
that the Committee continued to operate effectively. It was agreed
that the Committee’s effectiveness could be further improved by:
– refining the approach to long-term succession planning around
key additional skills and capability needs of the Board; and
– improving the dialogue with the full Board on evolving areas of
focus for the Committee.
Philip Hampton
Nominations Committee Chair
12 March 2018
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96
Accountability
Audit & Risk Committee report
Judy Lewent
Audit & Risk Committee
Chair
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, setting their remuneration and
exercising oversight of their work.
Membership
Committee members
Judy Lewent Chair from 1 January 2013
Vindi Banga
Lynn Elsenhans
Dr Laurie Glimcher
Committee member since
1 April 2011
1 January 2016
1 January 2014
1 September 2017
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:
Regular
attendee
Attends as
required
Attendee
General Counsel
Financial Controller
Head of Audit & Assurance
Head of Global Ethics and Compliance
Chief Medical Officer
Chief Product Quality Officer
External auditors
✓
✓
✓
✓
✓
✓
✓
In accordance with the Financial Reporting Council’s UK
Corporate Governance Code, the Board has determined
that Judy Lewent has recent and relevant financial
experience. The Board has also agreed that she has the
appropriate qualifications and background to be an audit
committee financial expert as defined by the Sarbanes-
Oxley Act of 2002, and has determined that she is
independent within the meaning of the Securities Exchange
Act of 1934, as amended.
The Committee has, as a whole, competence relevant to the
sector in which the company operates.
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.
Overseeing a smooth audit transition process was an important
focus for the Committee during the year. This exercise, together
with details of the Committee’s continued scrutiny of further
enhancements and simplifications to our internal controls, risk
management and financial reporting systems and processes,
are covered below.
External auditors
Last year, we advised shareholders that after the conclusion
of a competitive audit contract tender, the Board appointed the
Committee’s preferred choice of Deloitte LLP (Deloitte) as the
company’s new auditors from GSK’s 2018 financial year onwards.
The Committee has overseen the significant activity necessary to
transition from PricewaterhouseCoopers LLP (PwC) to Deloitte. This
initially required Deloitte to achieve independence in the first half of
the year before they could observe PwC’s work as statutory auditors
during the 2017 year-end audit. The Committee has received regular
reports on the audit transition and I met regularly with the lead audit
partners from PwC and Deloitte to discuss progress.
I was pleased to hear more of the new perspectives that Deloitte will
bring to the audit when they presented their audit scoping at the end
of 2017. This included the significant opportunities that data analytics
can bring. A full report on the audit transition arrangements is given
on pages 103 to 104.
I would like to thank the PwC team for their professionalism in
continuing to deliver a high-quality audit, particularly against the
backdrop of the transition. Both audit firms have cooperated to make
the transition a smooth one with minimal disruption to the business.
I look forward to reporting to shareholders on Deloitte’s first audit in
GSK’s 2018 Annual Report.
Internal framework for control and risk management
developments
This is a core focus for the Committee. In 2017, the following
developments in the business units and across the enterprise helped
strengthen our culture of compliance and risk management.
– GSK Values & Expectations: These are a high priority for the
Committee. During the year, it oversaw progress driven by
Global Ethics & Compliance (GEC) to embed and measure the
effectiveness of our values and further integrate these values into
existing control processes. For example, the Third-Party Oversight
framework was updated to require third parties to confirm
adherence to our values and the third-party Code of Conduct.
GSK’s values and Speak Up programme elements were also
included into the General Manager (GM) certification process
where the company’s GMs confirm their adherence to our Internal
Control Framework. During 2017, GEC has continued to deploy
the Leader Led discussion programme on GSK’s values and ‘right
first time’ culture and ethical decision making workshops.
GSK Annual Report 2017 97
Audit & Risk Committee report continued
– Values Maturity Assessments & Values Assessment Reviews:
The Committee learned how the outcomes from Values Maturity
Assessments (VMAs) performed in 2016 had been used to target
assessments in specific areas during 2017. The implementation
of business unit specific action plans to address the areas for
improvement identified by the VMAs was overseen by our local
Risk Management & Compliance Boards. The VMA insights
highlighted that overall Patient Focus and Integrity are the values
with which our employees feel most affinity and are well
embedded. During 2017, a positive shift in perception relating
to our values of Transparency and Respect for People was noted
as a result of the Audit & Assurance team’s Values Assessment
Reviews that assess how well our values are embedded in the
organisation.
– The revised GSK Employee Survey: In 2017, more than 84,000
of our people took part in GSK’s employee engagement survey,
whose purpose and outcomes are discussed on page 48 of our
Strategic report.
– Written standards & controls: During 2017, work has continued to
harmonise and simplify written standards across several parts of
the enterprise; recognising that improved accessibility and clarity
around written standards is an enabler to improved risk
management and informed decision making.
– Training & communication: Our GEC function has continued to
focus on personal development, including:
– Ethics and Compliance Academy: In 2017, GEC ran a face-to-
face Ethics and Compliance Academy and launched a Virtual
Academy to enable more flexible participation. The first Virtual
Academy was held at the end of 2017 and will be held each
quarter. There are currently over 350 certified ethics and
compliance professionals since the inception of the Academy
in 2015.
– Living our Values: In April 2017, Part 1 of an enterprise-wide
‘Living our Values’ training was issued to a population of over
100,000 employees and complementary workers. The training
included scenarios which explored our values and their
application to the company’s ways of working, including the
awareness of our Enterprise Risks and Speak Up arrangements.
Part 2 focused on several critical risks, including Privacy and
Anti-bribery & Corruption (ABAC). Mandatory training on ABAC
and the US Corporate Integrity Agreement (CIA) was also
completed by targeted areas of our workforce, depending on
the role they performed.
Monitoring
Monitoring is a key element of our Internal Control Framework. It
serves as a continuous source of insights that inform improvements
in the control environment and there was significant focus by each
of our businesses in this area during 2017.
Compliance activities
– SEC settlement: The Committee continues to review and consider
updates to the US Securities and Exchange Commission (SEC),
as agreed under the settlement made with the SEC in 2016. Our
compliance with the terms of the settlement is on track with a final
report due for submission to the SEC in the summer of 2018.
– CIA: The Committee also has oversight of the company’s
responsibilities under the CIA entered into with the Office of
Inspector General (OIG) of the US Department of Health and
Human Services in 2012. Last year, the Group reported to the
OIG on commercial practices within Global Pharmaceuticals.
Affirmative obligations under the CIA expired in 2017, but the
Group is waiting for official closure once the OIG completes the
review of the Group’s final CIA Annual Report. The CIA required
the Group to ensure sufficient internal controls to mitigate risks
associated with commercial practices involving US pharmaceutical
products and interactions with US healthcare professionals.
The Group received positive feedback from the OIG, and,
consequently, received a release 6 months earlier than the original
5½ year term of the CIA, although commitments with certain
US states regarding salesforce compensation extend into 2019.
During 2017, the Committee continued to receive quarterly CIA
assurance updates from the Head of GEC.
– Responding to issues: During 2017, an integrated investigations
process was developed by GEC, HR and Legal to clarify
accountabilities, further safeguard reporters using our Speak
Up channels and deliver improved outcomes and decisions.
These improvements have helped to accelerate the steps taken to
substantiate an allegation and investigate it to a resolution, as well
as delivering enhancements in engagement with key stakeholders
and individuals who raise issues. Further details on reporting and
investigating concerns in GSK are set out on page 50 of our
Strategic report.
– Enterprise risk framework and strategies: During the year, the
Committee considered GSK’s Enterprise Risks and the strategies
to address them. These reviews were undertaken through:
– Annual unit risk and assurance update reports.
– Enterprise Risk strategy papers for each of our most
significant risks.
– Annual risk reviews contained in the Risk Management
and Internal Control Report, which is presented by the Head
of GEC.
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Corporate Governance: Accountability continued
Audit & Risk Committee report continued
As part of its review, the Committee assesses whether the key
Enterprise Risks affecting the unit are being managed and mitigated
in a proportionate way. The Committee examines whether it is
satisfied with the control environment, its operation and effectiveness
and whether refinements that management propose to ensure the
environment remains fit for purpose are appropriate. It also assesses
the commitment of the unit’s leadership to maintaining a strong
controls culture.
The Committee noted that progress has been made in delivering
the enablers to drive an even stronger top down risk management
approach for GSK’s Enterprise Risks to provide greater consistency
in risk management and drive efficiencies. This included a common
list of Enterprise Risks and sub-risks to be assessed by each unit
and a single list of business activities against which these risks can
be mapped.
– Third Party Oversight programme: The Committee was pleased to
note that by the end of December 2017, over 96,000 assessments
across 217 countries had been completed since the Third-Party
Oversight (TPO) programme had commenced in 2015, with a
further 9,500 assessments currently in progress. The
assessments have resulted in the issue of approximately 5,500
Corrective and Preventative Actions designed to improve our
third-party engagements. The TPO framework continues to evolve
so that it is more efficient and easier to use and is currently being
embedded in GSK’s ‘Making It Easier’ Buying Goods & Services
programme. Further details on working with third parties was set
out on page 50 of our Strategic report.
– Enhanced Privacy compliance capability: The Privacy Centre of
Excellence (CoE) is delivering a change programme to improve
and sustainably manage GSK’s data privacy compliance, whilst
also complying with the EU General Data Protection Regulations
(GDPR) that come into effect in May 2018. During 2017, the CoE
made good progress defining a privacy risk framework to enable
GSK to design proportionate controls, prioritise deployment, and
make effective decisions about risk. Whilst the programme’s
purpose is to increase privacy maturity globally, the CoE’s
remediation efforts are focused initially on our European
operations to mitigate the highest near-term risk created by the
GDPR. However, further remediation is expected to be delivered
by December 2018, at which point GSK’s enhanced privacy
operating model will have been deployed globally.
Financial Reporting – framework enhancements
The Committee continued to improve the clarity of GSK’s external
financial reporting by reviewing the company’s financial reporting
framework. The Committee made recommendations to the Board
which it approved for adoption in early 2017. These changes further
improved the way that GSK reports and explains its adjusted results
and adjusting items in line with European Securities and Markets
Authority and SEC requirements. In addition, two changes were
made to the company’s use of Adjusted Performance Measures to
further improve the clarity of our financial reporting. Finally, our free
cash flow calculation was adjusted to include all contingent
consideration payments.
Global reporting system platforms
The Committee was pleased to oversee the continued progress
being made in moving towards more standardised, global systems
which support our end-to-end processes. The last significant
deployments under this multi-year programme will have been
completed by early 2019, with the focus moving to capturing the
benefits that these new standardised systems and processes can
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.
The Committee and I have worked closely with Emma Walmsley,
GSK’s new CEO, as she set her new business priorities of
Innovation, Performance and Trust. The Committee has monitored,
and will continue to monitor, the evolution of GSK’s culture as the
company sharpens its business performance to ensure performance
is delivered appropriately.
Vindi Banga and I are also members of the Remuneration Committee,
which allows us to provide input on the Committee’s review of the
Group’s performance and oversight on any risk factors relevant to
remuneration matters.
Committee evaluation
The Committee’s annual evaluation exercise was externally facilitated
by Ms Ffion Hague of Independent Board Evaluation. Her report was
largely positive and confirmed that the Committee covered the
ground in detail. After consideration of her report, the Committee
concluded that it continued to operate effectively but agreed to
implement further performance improvements by reviewing:
– the format of papers in terms of their accessibility and considering
how to increase the focus of the Committee’s time in meetings,
allowing more opportunity for review and discussion; and
– with the Nominations Committee, the succession planning for
Board and Committee members with financial experience.
Judy Lewent
Audit & Risk Committee Chair
12 March 2018
GSK Annual Report 2017 99
Frequency
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What the Committee did during 2017
Areas of Committee focus
Items discussed
Financial
reporting
– Reviewed integrity of draft financial statements, appropriateness of accounting policies and going concern
assumptions
External
auditors
Global internal
control
& compliance
– Considered approval process for confirming and recommending to the Board that the 2016 Annual Report is
fair, balanced and understandable
– Reviewed and recommended to the Board approval of the 2016 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 2016 Annual Report
– Reviewed accounting developments and their impacts and key accounting issues.
– Received external auditors’ transition updates from management
– Reviewed and approved audit/non-audit expenditure incurred during 2016
– Considered the auditors’ report on the 2016 annual results
– Performed evidence-based assessment of external auditors and the effectiveness of 2016 external audit
– Considered qualifications, expertise and independence of the external auditors
– Recommended to the Board the re-appointment of the external auditors and for the Committee to agree auditors’
remuneration
– Approved the 2017 audit plan and audit fee proposal and set performance expectations for auditors
– Considered initial results of 2017 external audit.
– Reviewed assurance reports from Global Pharmaceuticals, Vaccines, Consumer Healthcare, R&D, GMS and
ViiV Healthcare
– Reviewed GSK’s internal control framework
– Confirmed compliance with Sarbanes-Oxley Act
– Reviewed Audit & Assurance work during 2016 and approved the planned work for 2017
– Undertook Corporate Integrity Agreement (CIA) training
– Received and reviewed 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 reports on ongoing investigations and on ABAC issues.
Risk
– Reviewed risk management framework compliance
– Reviewed the risk elements of Group treasury, pensions, risk and insurance and tax policies
– Received status reports on the following Enterprise Risks: ABAC, EHSS, Information Protection, Patient Safety,
Privacy, Product Quality, Research Practices and Third Party Oversight
– Received terrorism and cyber security risk assessment update
– Received updates on the implications of Brexit
– Received Risk Oversight and Compliance Council meeting updates
– Considered emerging risks.
Governance and
other matters
– Confirmed compliance with UK Corporate Governance Code
– Reviewed the Committee’s terms of reference and confirmed that they had been adhered to during 2017
– Received corporate governance updates
– Reviewed the Committee’s performance and effectiveness
– Reviewed and approved the Group’s approach to the Modern Slavery Act 2016
– Met privately and separately with the Heads of Global Ethics & Compliance and Audit & Assurance
– Met privately with the external auditors at the end of each meeting as required
– Approved the publication of the Group’s Tax strategy.
Committee Activity Key A Annually Q Quarterly P Periodically S Standing
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100
Corporate Governance: Accountability continued
Significant issues relating to the financial statements
In considering the quarterly financial results announcements and the financial results contained in the 2017 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 2017 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
Provisions for uncertain tax positions
Impairments of intangible assets
Valuation of contingent consideration
in relation to ViiV Healthcare
Consumer Healthcare put option
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
£2.8 billion at 31 December 2017 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 2017, the provision for legal matters
was £0.2 billion, as set out in Note 29 to the financial statements, ‘Other provisions’.
The Committee considered current tax disputes and areas of potential risk and concurred with
management’s judgement on the levels of tax contingencies required. At 31 December 2017, a tax payable
liability of £1.4 billion, including provisions for uncertain tax positions, was recognised on the Group’s
balance sheet.
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 £680 million in 2017. 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 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
2017, the Group’s balance sheet included a contingent consideration liability of £5.5 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 of £8.6 billion
recognised in respect of Novartis’ put option over its shareholding in the Consumer Healthcare Joint
Venture. This included a review of the impact of unwinding the discounting of the liability and the decrease
in the liability caused by the significant strengthening of Sterling in the latter part of the year.
ViiV Healthcare put option
The Committee reviewed and agreed the accounting for the Pfizer put option and concurred with
management’s judgement on the valuation of the put option of £1.3 billion at 31 December 2017.
GSK Annual Report 2017 101
Auditors’ appointment
External auditors
PricewaterhouseCoopers LLP (PwC) has been the auditor of the company and the Group since the inception of each in 2000. Its
performance has been reviewed annually and audit partner rotation requirements have been observed. GSK conducted an external
audit tender in 2016 with a view to replacing PwC from our 2018 financial year onwards. As disclosed in last year’s report, PwC
was not invited to participate in this audit tender process to comply with audit firm rotation requirements. The audit tender process was
completed in December 2016 when the Board announced that it had appointed Deloitte LLP (Deloitte) as GSK’s new external auditors
with effect from 1 January 2018.
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 from its external
auditors. The effectiveness of PwC’s performance and the quality of the external audit process during 2017 was formally evaluated
by the Committee in early 2018 against criteria which it agreed, in conjunction with management, in early 2017.
The Committee has undertaken a number of activities during the year to satisfy itself of PwC’s continuous external audit quality and
effectiveness, particularly in a year of audit firm transition from PwC to Deloitte. These activities and their timelines are set out below:
Recommend PwC’s
appointment and performance
expectations set
PwC’s formal appointment
approved and 2017 audit
process planning
Review PwC’s performance, accept
its resignation and recommend
Deloitte’s appointment
Matters addressed:
– effectiveness of PwC against expectations
Matters addressed:
– shareholders approved resolutions to appoint
Matters addressed:
– effectiveness of PwC against expectations
set in 2016 was reviewed
– an appropriate level of challenge/scepticism
exhibited by PwC in its work was considered
– PwC’s independence, appropriate level of
qualifications, expertise and resources was
reviewed
– a report on PwC’s audit of GSK’s 2015
Annual Report by the Financial Reporting
Council’s Audit Quality Team was reviewed
– once satisfied on these matters, the
re-appointment of PwC at the next AGM
in May to perform the 2017 audit was
recommended to the Board
– performance expectations of PwC as
auditors for 2017 audit were agreed.
PwC and to authorise the Committee to
determine their remuneration
– 2017 audit plan was reviewed and agreed
set in March 2017 were reviewed
– an appropriate level of challenge/scepticism
exhibited by PwC in their work was considered
– PwC’s quality control procedures were
– PwC’s letter of resignation to be received
considered
– 2017 statutory audit fee was agreed and set
– management feedback on 2016 audit process
through a survey was received covering:
– robustness of audit process
– quality of delivery, people and service.
– Deloitte’s independence, appropriate level
of qualifications, expertise and resources
was reviewed
– appointment of Deloitte to fill the vacancy
to be recommended to the Board to approve
– 2018 audit plan was reviewed and agreed
– performance expectations of Deloitte as
auditors for 2018 audit were agreed
– the appointment of Deloitte at the next
AGM in May to perform the 2018 audit
was recommended to the Board
– budget for non-audit services (below 50%
of audit fee) for 2018 was agreed.
March 2017
May 2017
March 2018
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Corporate Governance: Accountability continued
Auditors’ appointment continued
The detailed criteria the Committee used for judging the effectiveness of PwC as the external auditors and its overriding responsibility to
deliver a smooth-running, thorough and efficiently executed audit for 2017 are set out below:
Performance expectations for GSK’s external auditors
Specific auditor
responsibilities
– Discuss audit approach and areas of focus in advance and early engagement on understanding the implications of the new operating model
– Ensure Sarbanes-Oxley Act scope and additional procedures are discussed and endorsed by management and communicated in a timely
basis within GSK and PwC
– Avoid surprises through timely reporting of issues at all levels within the company
– Ensure clarity of roles and responsibilities between local PwC and GSK Finance Services
– Respond to any issues raised by management on a timely basis
– Meet agreed deadlines
– Provide continuity and succession planning of key staff members of PwC
– Provide sufficient time for management to consider draft auditors’ reports and respond to requests and queries
– Ensure consistent communication between local and central audit teams.
Wider auditor
responsibilities
– Provide timely up-to-date knowledge of technical and governance issues, including evolving market practice on the viability statement
requirements, European Securities and Markets Authority and Securities and Exchange Commission (SEC) guidelines and new IFRS
standards IFRS 15 and IFRS 16
– Serve as an industry resource, communicating best practice trends in reporting and integrated reporting
– Adhere to all independence policies (GSK’s, Financial Reporting Council’s 2016 Revised Ethical Standard and applicable SEC standards);
– Deliver a focused and consistent audit approach globally that reflects local risks and materiality
– Liaise with Audit & Assurance to avoid duplication of work and Global Ethics and Compliance to ensure a common understanding of
audit outcomes
– Provide consistency of advice at all levels
– Ultimately, provide a high quality service to the Board, be scrupulous in their scrutiny of the Group and act with utmost integrity.
Specific audit
firm transition
responsibilities
– Contribute to a seamless, effective and efficient auditor transition to Deloitte that includes the following actions:
– Provide access to all relevant information in respect of the audit of GlaxoSmithKline plc and its subsidiaries in relation to the audit
of the Group’s consolidated accounts
– Provide information concerning GSK obtained during the course of providing non-audit services, where this constitutes relevant
information for the audit of the Group’s consolidated accounts
– Provide factual/evidenced based oral or written explanation in a timely manner to aid Deloitte’s understanding of audit working papers
– Agree practical:
– terms of interaction to establish an appropriate environment/forum
– arrangements for providing access to information, including the format, mechanism and response time
– Liaise with Deloitte to enable their observation of audit activities once independent
– Provide sufficient analysis of the hours spent in the provision of relevant information
– Complete any additional ad-hoc handover expectations agreed during the year.
Competition and Markets Authority compliance statement: The Committee considers that, during 2017, 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. Pages 96 to 104 of this report describes the work of the Committee in discharging these responsibilities.
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.
The following core policy guidelines on engaging the external auditor
to provide non-audit services are observed:
– ensuring 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;
– 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.
The existing policy was reviewed and revised by the Committee
in December 2016 to ensure compliance with the Financial
Reporting Council’s (FRC) 2016 Revised Ethical Standard and the
EU Audit Regulation (new regulations). The new policy, which was
implemented across the Group from the beginning 2017,
contains the following three policy guidelines:
Fee cap: GSK’s existing policy cap of 50% of the annual audit fee
cap was retained in the new policy. This is more stringent than the
FRC’s new fees cap set at 70% of the average fees for the preceding
three year period.
GSK Annual Report 2017 103
Non-audit services continued
Prohibitions: GSK’s new policy includes a ‘black list’ of prohibited
non-audit services in the new regulations.
Pre-approval: The category-wide pre-approval process was updated
to reflect the restrictions in the FRC’s 2016 Guidance on Audit
Committees, 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.
As part of the external audit firm transition arrangements described
below, Deloitte has been subject to the restrictions of this policy
since it started its required period of independence from 1 July 2017
in advance of taking on the statutory audit of the Group’s 2018
financial statements from 1 January 2018.
Fees paid to the company’s auditors 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.
Auditors’ transition
This has been a significant activity for the Committee during the
year. The Committee has exercised its oversight responsibilities to
manage the transition period between PwC and Deloitte and for
the Committee to satisfy itself that there is a smooth handover of
audit responsibilities from one to the other. The Committee’s specific
audit transition performance expectations for PwC are set out on
page 101.
The Committee has received detailed transition papers at each
scheduled meeting. To begin with, a primary focus was to oversee
the steps needed for Deloitte to achieve independence by 1 July
2017 so that the firm could commence their audit planning activities.
This has involved scrutinising Deloitte’s plan to achieve
independence, together with progress made in overseeing the
termination of non-audit services that would be prohibited when
Deloitte takes up the role of auditor. For example, this included
Deloitte stepping down from its role as the Remuneration
Committee’s advisers before the end of June 2017.
Since independence has been achieved:
– Deloitte has been formally observing PwC’s work and its
2017 audit
– The prospective lead audit partner and his support have been
invited to attend all Committee meetings
– The Committee Chair has held a number of meetings with the
lead partner.
Audit/non-audit services three year comparison graph (£m)
2017
1.9
2016
3.5
27.7
26.6
2015
5.3
20.1
8.0
0
10
20
30
40
Audit and assurance services
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
Throughout the year, to enhance their understanding of GSK, the
Deloitte audit team has engaged extensively with various GSK
business stakeholders with a primary focus on the Finance and IT
communities. They have also begun to engage with priority local
market entities that have been identified as representing higher
transition complexity, given local regulatory requirements, and with
entities covered by the Group audit. These local introductions will
progress throughout 2018.
Deloitte has held a series of regional academies to on-board their
local teams and communicate the audit vision and approach to all
their local partners. Deloitte has also centrally coordinated
introductory meetings between senior finance managers and Deloitte
partners in every location where statutory audit is required.
Deloitte has, and will continue to take part in the key PwC clearance
meetings and targeted PwC walkthroughs to leverage its own work
from existing PwC procedures. The Deloitte team have performed
their initial audit scoping and risk assessment, designed a detailed
audit plan and compiled an initial insights report which it presented
to the Committee in December 2017.
PwC will resign after the firm has concluded the 2017 external audit
process and the Committee will recommend to the Board that
Deloitte be appointed to fill the casual vacancy. Shareholders will
be invited to appoint Deloitte as GSK’s new statutory auditors at the
2018 AGM. PwC’s audit partner will make himself available at the
AGM to answer shareholder questions on the 2017 Annual Report.
The transition process has been thorough with minimal disruption
to GSK’s business.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 104
Corporate Governance: Accountability continued
Auditors’ transition continued
2017 External Audit Firm Transition Process
Key phases
Pre-Independence Readiness
Post-Independence Transition
January – June 2017
July – December 2017
Key steps
Relationship Building
Detailed Audit
Design
Knowledge Transfer
and Audit planning
January – June 2017
July – September 2017
October – December 2017
Key tasks
– Achieving independence
– Completing full risk assessment and scoping
– Building understanding of the GSK organisation structure and business
– Implementing audit analytics tools
units
– Undertaking appropriate audit team selection and on-boarding
– Agreeing process for data extraction tools
– Agreeing collaboration terms with PwC.
– Deepening understanding of business and processes
– Walking through processes and assessing design of controls
– On-boarding of global teams and communicating of audit approach
– In-country market introductions
– Assessing and concluding on key historic accounting judgements
– Observing PwC interim review process
– Agreeing terms of engagement.
Fair, balanced and understandable assessment
One of the key compliance requirements of a group’s financial
statements is for the Annual Report to be fair, balanced and
understandable. The coordination and review of Group-wide
contributions into the Annual Report follows a well-established
and documented process, which is performed in parallel with
the formal process undertaken by the external auditors.
Code of Conduct and reporting lines
We also have a number of well-established policies, including
a Code of Conduct, which are 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 last published in April 2017.
The Committee received a summary of the approach taken by
management in the preparation of GSK’s 2017 Annual Report
to ensure that it met the requirements of the Financial Reporting
Council’s 2016 UK Corporate Governance Code. This enabled the
Committee, and then the Board, to confirm that GSK’s 2017 Annual
Report taken as a whole is fair, balanced and understandable and
provides the information necessary for shareholders to assess the
company’s position and performance, business model and strategy.
GSK Annual Report 2017 105
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 the risk management
processes operated by GSK.
A fit for purpose Framework, in conjunction with our corporate
values, behaviours and Speak Up processes, ensures that the risks
associated with GSK’s business activities are actively and effectively
controlled in line with our agreed risk appetite. The Framework
provides reasonable, but not absolute, assurance against material
misstatement or loss.
The Internal Control Framework (the Framework) is a comprehensive
enterprise-wide risk management model and the means by which
GSK ensures the reliability of financial reporting and compliance
with laws and regulations. The Framework supports the continuous
process of the Board’s identification, evaluation and management
of GSK’s Principal Risks, as required by the Financial Reporting
Council’s (FRC’s) UK Corporate Governance Code (UK Code),
and is designed to enable GSK to achieve its business objectives.
The Framework
E n t e r p rise oversight
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GSK’s Risk Oversight and Compliance Council (ROCC) is a
team of senior leaders. It is mandated by the Board to assist 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 is governed by a Risk Management & Compliance
Board (RMCB) which reports to the ROCC. The business unit
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.
Risk owners, who are members of senior management, are assigned
for each Principal Risk. Each risk owner is accountable for the
management of their respective Principal Risk and for reporting on
the risk management strategy to the ROCC and the Committee at
least once every two years. The ROCC and the RMCBs are assisted
by Global Ethics and Compliance (GEC), which is responsible
for advancing risk management across the enterprise and for the
development of working practices that are risk based and ethically
sound. GEC actively promotes ethical behaviours within the
organisation. It seeks to establish a framework in which all of its
employees can operate in accordance with GSK Values and
comply with applicable laws and regulations.
The Audit & Assurance division (A&A), in line with an assurance
plan agreed by the Committee, provides independent assurance
to senior management and the Board on the effectiveness of risk
management across GSK. This assurance helps senior management
and the Board to meet its oversight and advisory responsibilities in
fulfilling GSK’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 GSK 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 internal control
environment and reports to the Board annually. In accordance with
the UK Code provisions, the Committee, on the Board’s behalf, 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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
106
Corporate Governance: Accountability continued
Further information on GSK’s risk management approach is provided
in the ‘How we manage risk’ section of the Strategic report on pages
20 to 21. Our management of each Principal Risk is explained in
‘Principal risks and uncertainties’ on pages 257 to 266. The Group’s
viability is discussed in the Group financial review section of the
Strategic report on page 57.
Internal control framework continued
The Board, through the Committee, has maintained oversight to
ensure the effectiveness of the internal control environment and risk
management processes in operation across GSK for the whole year,
and up to the date of the approval of this Annual Report.
The Board’s review focuses on the company and its subsidiaries but
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.
Governance structure of risk management
Board of Directors
Audit & Risk Committee
– Responsible for our system of corporate
governance, strategy, risk management and
financial performance
– 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
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Risk Oversight and Compliance Council
Business units
Risk Management and Compliance Boards
– Authorised by the Board to assist the Audit
& Risk Committee in overseeing the risk
management and internal control activities
of the Group
– Responsible for our system of corporate
governance, strategy, risk management and
financial performance
– 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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GSK Annual Report 2017
107
Relations with stakeholders
Engagement activities
In the performance of its duties and as the company seeks to
build on its Trust priority, the Board listens to the views of
shareholders and other key stakeholders, including our patients,
consumers, customers and employees, and is cognisant of the
potential impacts of decisions it makes.
Our principal Board Committees have delegated powers that
enables a more in-depth assessment of the impacts of the
company’s engagement with stakeholders. It also provides a
means of identifying emerging stakeholder-related issues that
can be brought the attention of the Board, which in turn enables
us to further invest in activities to build trust.
All shareholders
We try to engage with shareholders in several ways. This includes
regular communications, the AGM and other investor relations
activities. We announce our results on a quarterly basis and our
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.
Annual Governance event
A cornerstone of our investor calendar is the annual governance
event that we hold with institutional shareholders, key investment
industry bodies and influential proxy advisory firms. This year’s
event was held in December 2017 at the Francis Crick Institute in
London and was hosted by the Chairman, our SID, and our
Committee Chairs.
We valued prior engagement with and input from the Investor
Forum and their members in helping shape the agenda for
the event. The Chairman shared updates on key areas of focus
for the Board including:
– Overview of business performance for 2017
– Board and CET Succession – skills, capabilities
and diversity
– New CEO
– Oversight of new business priorities:
– Innovation, Performance and Trust
– Capital Allocation
Our major shareholders
During the year, after publication of our quarterly results
Emma Walmsley and Simon Dingemans gave presentations
to institutional investors, analysts and the media by webcast
teleconference. In July, Emma Walmsley and her senior team held
an investor update event with the same audience at which she
shared her Innovation, Performance and Trust long-term priorities
and which concluded with an in-depth Q&A session.
Emma and Simon maintain a continual and active dialogue with
institutional shareholders on performance, plans and objectives
through a programme of regular meetings. During the year, they
held a total of 87 individual meetings with major shareholders
and they have hosted a total of 25 group meetings with major
shareholders and potential major shareholders.
Philip Hampton also meets with major shareholders to hear
their views and discuss issues of mutual importance. He then
communicates their views to the rest of the Board. During the year,
he held over 15 individual meetings with major shareholders on a
range of issues. Our Senior Independent Non-Executive Director
(SID) and our other Non-Executive Directors are available to meet
with major shareholders.
On an ongoing basis, our Investor Relations department,
with offices in London and Philadelphia, acts as a focal point for
communication with investors. The Company Secretary acts a
focal point for communications on corporate governance matters.
– Aligning culture and strategy
– Board stewardship and stakeholder relationships
– Brexit.
Lynn Elsenhans, Dr Jesse Goodman, Judy Lewent and
Urs Rohner provided an overview of the work of their respective
Board Committees undertaken during the year. Finally, Vindi
Banga, our SID, provided his insights and perspectives on Board
dynamics and the role and contribution of the Non-Executive
Directors in challenging and shaping the Group’s strategy and
business model.
Listening to the views of our shareholders and receiving their
feedback during this event held in the run up to the corporate
reporting and AGM season, helps the Board to understand
shareholders’ views.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 108
Corporate Governance: Relations with stakeholders continued
Engagement activities continued
Our retail shareholders
The Company Secretary acts a focal point for retail investors
and manages key relationships with the company’s registrars,
Equiniti in the UK and The Bank of New York Mellon, who
administer our ADR programme in the US.
Our people
The Board is fully supportive of the Group’s commitment to being
a progressive, modern employer to attract and retain the best talent
and drive high levels of employee engagement. In 2017, a key
transformation priority for Emma Walmsley and her CET was to
evolve the culture of the company to enhance business performance.
Our strategic success relies on our ability to engage our employees
behind the delivery of the company’s Innovation, Performance and
Trust long-term priorities. This was discussed at some length by the
Board, as well as at a three-day conference in October 2017
attended by 600 senior leaders.
Annual General Meeting
All shareholders are invited to attend our Annual General
Meeting, which this year will be held in May at the QEII,
London. Our 2017 AGM had a good level of attendance
and engagement by shareholders. All our proposed
resolutions were approved by shareholders. The level of
support ranged from 93% to 99%. It provides an opportunity
to put questions to our Board and the Chairs 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 the meeting.
Employee engagement enhancements
To help enhance our existing employee consultation activities, the Board supported management’s introduction
and roll out of the following engagement activities from 2017 into 2018:
– Let’s Talk programme through
which the CET has regular
conversations directly with our
workforce and feedback from these
engagement sessions is shared
with the Board and all employees.
– Employees were encouraged
to input their views through
Let’s Talk and other channels on
the employee performance system
in advance of a new performance
system linked to our Innovation,
Performance and Trust priorities
and business performance.
2017
2018
– A new all-employee survey
undertaken every six months,
whose engagement levels have
increased significantly since
the previous survey, and has
provided valuable insights into
employee sentiment.
– Regular all-employee
newsletter and video from
the CEO that rounds up
news of interest to our
employees and encourages
feedback.
Trust
Further details on our Trust
priority, including employee
engagement and the company’s
approach to developing its
workforce in a safe, diverse and
ethical environment, can be
found on pages 48 to 50.
GSK Annual Report 2017 109
Dear Shareholder
I am pleased to present this first report of the Science Committee
(the Committee), which was established by the main Board to
consider our science, pipeline and R&D capital allocation priorities.
The Committee’s core role throughout the first year of its operation
has been to provide assurance to the Board on the quality,
competitiveness and integrity of R&D. To discharge this role
effectively requires a Committee to be composed of members with
strong scientific capabilities. I am therefore pleased to be joined on
the Committee by fellow Scientific and Medical Experts, Professor
Sir Roy Anderson and Dr Laurie Glimcher, who, together with Judy
Lewent, each have a background in life sciences from either a
specialist or commercial perspective.
What the Committee did during 2017
During 2017, the Committee focused on establishing its role and
remit and considered the following matters:
– R&D’s Pharmaceutical Strategy, Performance and
Transformation Programme
– Review of vaccines strategy and science
– Medical Healthcare Trends
– Anti-Microbial Resistance.
An overarching focus of the Committee’s work has been its appraisal
of the R&D transformation proposals and associated funding
requirements prepared by our new CEO, Emma Walmsley and
President, R&D, Dr Patrick Vallance. The Committee shared its
feedback with management for incorporation into the proposals
and was pleased to note the key milestones below to date:
– Driving focus and prioritisation: Core therapy areas have been
refocused.
Science Committee report
Dr Jesse Goodman
Science Committee
Chair
Role
The Committee:
– undertakes periodic reviews of R&D strategy
and progress
– assesses the overall performance, including relevant
financial metrics, effectiveness and competitiveness
of R&D
– helps identify critical emerging trends in science and
medicine and their potential impact on the company
– undertakes periodic reviews of the company’s
scientific capability and talent
– reviews the scientific opportunity in specific large
scale investments or business transactions
– reviews the output of the Group’s science advisory
boards.
Membership
Committee members
Committee member since
– Enhancing pipeline governance: The Committee noted the effect
Dr Jesse Goodman Chair from 1 January 2017
1 January 2017
Professor Sir Roy Anderson
Dr Laurie Glimcher
Judy Lewent
1 January 2017
1 September 2017
1 January 2017
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:
Attendee
Company Chairman
Chief Scientific Officer and President, R&D
President, Global Vaccines
Independent senior external scientific
adviser(s)
Chief Financial Officer
Other company executives
Regular
attendee
Attends as
required
✓
✓
✓
✓
✓
✓
of the changes to strengthen portfolio governance, creating
greater robustness of financial, commercial and strategic review
following the introduction of a new Portfolio Strategy Committee
to guide and challenge this work.
– Improving Development: Significant progress has been made
in creating the roadmap for improving the company’s overall
capability in Development. In 2017, ‘quick wins’ included talent
development, team optimisation and acceleration planning,
in partnership with the commercial organisation.
Committee Evaluation
The first annual evaluation of the Committee was externally facilitated
by Ms Ffion Hague of Independent Board Evaluation and concluded
that the Committee was establishing itself, formalising its structure
and ways of working, including how to continue its oversight of R&D.
Next steps
The Committee is looking forward to working with Hal. It will
oversee the development of his plans to further reinvigorate R&D
and accelerate the discovery and development of transformational
new medicines.
Finally, I would like to thank Dr Patrick Vallance, who steps down
from the Board at the end of March, for his significant contribution in
helping to establish the Committee, devising its remit and helping me
develop a programme of activities as a basis for the Committee’s
deliberations. I wish him well for the future.
Dr Jesse Goodman
Science Committee Chair
12 March 2018
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
110
Corporate Governance continued
Corporate Responsibility Committee report
Lynn Elsenhans
Corporate Responsibility
Committee Chair
Role
The Committee reviews:
– external issues that have the potential for serious
impact upon GSK’s business and reputation
– oversight of stakeholder views and engagement
– annual governance oversight of progress against
GSK’s Responsible Business Commitments.
Membership
The membership of the Committee and appointment dates
are set out below:
Committee members
Committee member since
Lynn Elsenhans Chair from 8 May 2015
1 October 2012
Professor Sir Roy Anderson
Dr Vivienne Cox
Dr Jesse Goodman
1 May 2016
1 July 2016
1 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:
Attendee
Chief Executive Officer
Company Chairman
General Counsel
President, Global Affairs
Chief Scientific Officer and President, R&D
President, GMS
President, Global Pharmaceuticals
President, Global Vaccines
CEO, GSK Consumer Healthcare
Head of Human Resources
SVP, Corporate Affairs
Head of Global Corporate Responsibility
Other Executives
Independent external corporate
responsibility adviser
Regular
attendee
Attends as
required
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Dear Shareholder
The Corporate Responsibility Committee (the Committee) acts as
custodian of the policies and practices that define and safeguard
the reputation of the company. As Chair of the Committee I continue,
together with my fellow Committee members, to challenge and shape
the company’s responsible business agenda. Committee members
bring a wide range of sector experience, insight and stakeholder
perspectives to help provide oversight on these topics. This helps
the Board monitor the company’s work to engage effectively with its
key stakeholders and to assess if the company is operating in a way
that seeks to meet the high expectations of GSK as a global
healthcare company that delivers long-term value for both
shareholders and society.
The work of the Committee has again focused on topics that
are material to the company’s mission, strategy and values. During
2017, much of the Committee’s focus has been on reviewing the
company’s proposals for future responsible business activity in
support of the company’s new long-term priority of Trust. The
Committee has also provided oversight of management’s work
to review and refocus GSK’s activity in support of global health
moving forward.
The Committee pays close attention to the evolving views and
expectations of the company’s broad range of key stakeholders
and a regular report on stakeholder developments is reviewed
and discussed at each meeting. This year the Committee also
received an external report and held a discussion on the trends
and stakeholder expectations that are likely to influence trust in
the company over the long-term. The Committee and the
Remuneration Committee were interested to review the preparation
of the company’s gender pay gap disclosures set out on page 49.
Since the Committee’s membership was refreshed in mid-2016,
I have been impressed with the way in which Roy, Jesse and Vivienne
have exercised their knowledge and understanding of the issues
under discussion, which has brought new challenge and oversight
to the Committee and will stand us in good stead in 2018 as the
company further evolves its responsible business agenda. I was also
pleased to invite Roger Connor, President, GMS, who has company
responsibility for Product Quality as well as Environment, Health,
Safety and Sustainability, to attend the Committee on a regular basis
as the Committee continues to increase its focus in these vital areas
of the company’s operations.
This year we have continued to enjoy positive engagement with
investors on our responsible business approach and performance,
in particular where there are opportunities to enhance investment
value, create business opportunities and mitigate risk, alongside
creating social value.
The company is well positioned in 2018 to evolve its Responsible
Business Commitments to a new set of focused activity that
will support the delivery of Trust as one of GSK’s long-term
business priorities.
Lynn Elsenhans
Corporate Responsibility Committee Chair
12 March 2018
GSK Annual Report 2017
111
Corporate Responsibility Committee report continued
Main responsibilities
The main responsibilities of the Committee are set out on page 110.
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 as follows:
– 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 an analysis
by management of engagement with and expectations of the
company’s key stakeholders which may have a bearing on the
company’s reputation and the delivery of its responsible business
agenda. The Committee also reviews and approves the Responsible
Business Supplement which is available for reference on
www.gsk.com/responsibility.
Work of the Committee in 2018
In 2018, the Committee will continue to seek to understand
how management is responding to the expectations of external
stakeholders and will seek to align its agendas to the activities
that support the company’s long-term priority of Trust.
Independent External Corporate Responsibility Adviser
To support the Committee in ensuring that we give sufficient
consideration to the views of key stakeholders at each meeting, in
May 2013, Sophia Tickell was appointed as an independent external
adviser to the Committee, a position that she had previously held until
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 responsibility
matters to both the Committee Chair and the CEO.
Committee evaluation
The Committee’s annual evaluation exercise was externally facilitated
by Ms Ffion Hague of Independent Board Evaluation and concluded
that the Committee continued to operate effectively.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 112
Corporate Governance continued
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, if appointed by the Board,
the Director retires at the AGM following the 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.
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.
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 Executive Directors’ service contracts are given in the full version
of the company’s 2017 Remuneration policy report which is available
at www.gsk.com in the Investors section.
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.
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 2018 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 2017 and up to the signing
of the Annual Report.
Directors’ Report
For the purposes of the UK Companies Act 2006, the Directors’
Report of GlaxoSmithKline plc for the year ended 31 December
2017 comprises pages 79 to 112 of the Corporate Governance
Report, the Directors’ statements of responsibilities on pages
148 and 233 and pages 257 to 286 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:
– risk management objectives and policies (pages 20, 21 and
77 to 78)
– likely future developments of the company (Strategic report)
– research and development activities (pages 23 to 41)
– diversity and inclusion (page 49)
– provision of information to, and consultation with, employees
(page 48)
– carbon emissions (page 51)
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
12 March 2018 and signed on its behalf by:
Philip Hampton
Chairman
12 March 2018
GSK Annual Report 2017 GSK Annual Report 2017
113
113
Strategic report
Governance and remuneration
Financial statements
Investor information
Remuneration
In this section
Chairman’s annual statement
Annual report on remuneration
2017 Remuneration policy summary
114
116
142
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 114
Remuneration report
Chairman’s annual statement
The decisions which the
Remuneration Committee
has taken this year have
been aligned with our
Remuneration policy, which
received overwhelming
shareholder support at
our AGM in 2017.
Dear Shareholder
On behalf of the Board, I am pleased to
present to you our Remuneration report for
2017. This includes my annual statement, our
Annual report on remuneration and a
summary of our Remuneration policy which
was approved at our AGM in 2017, with
95.2% of shareholders voting in favour.
The Annual report on remuneration and
this annual statement will be subject to
an advisory vote at our AGM on 3 May 2018.
Context for Executive remuneration at GSK
2017 has seen GSK perform well. Sales
grew across each of our three businesses –
Pharmaceuticals, Vaccines and Consumer
Healthcare – with continued good
momentum in our new products, driven by
strong performances from Tivicay and
Triumeq in HIV, the inhaled Ellipta portfolio
and Nucala in Respiratory and meningitis
vaccines. We have also seen three key
approvals: Shingrix vaccine for shingles;
Trelegy Ellipta, a once-daily single inhaler
triple therapy for COPD; and Juluca
(dolutegravir and rilpivirine), the first 2-drug
regimen, once-daily, single pill for HIV. GSK
has demonstrated continued cost controls
throughout the year and improved free cash
flow. We also achieved earnings growth and
delivered Adjusted EPS growth in line with
our guidance. Total EPS also increased.
Finally, returns to shareholders through the
dividend were in line with expectations.
Remuneration outcomes for 2017
All awards in relation to 2017 were made
in accordance with the approved
Remuneration policy. 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 pre-agreed
financial measure, as well as the
Committee’s assessment of their
individual levels of performance. GSK
achieved performance in excess of the
relevant financial target for the year. In
conjunction with assessment 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 120.
– Vesting of the 2015 Performance Share
Plan (PSP) awards and the matching
awards under the Deferred Annual
Bonus Plan (DABP) were based on the
pre-agreed measures of R&D new
product performance, adjusted free cash
flow and relative TSR, each with an equal
weighting. Performance was measured
over the three years to 31 December
2017. The threshold levels for the TSR and
cash flow measures were exceeded, and
the maximum level was achieved for the
R&D new products measure, resulting in
an overall vesting level of 69%. Further
details of the vesting outcome for the
2015 PSP and DABP matching awards
are provided on page 122.
2018 Remuneration
The Committee reviewed the Executive
Director salaries for 2018. Both Emma
Walmsley’s and Simon Dingemans’ salaries
increased from 1 January 2018 by 2.5%,
in line with increases for the broader
employee population. It remains the
Committee’s intention to keep Ms
Walmsley’s package under review in
coming years subject to her development
and performance in the role.
GSK Annual Report 2017 115
The Financial Reporting Council (FRC)
has recently consulted on broadening the
role of remuneration committees and other
proposed measures on pay, as part of its
wide-ranging review of the UK Corporate
Governance Code (the revised Code). The
Committee has included its views on these
matters in the company’s response to the
consultation on the revised Code.
The Committee has reviewed its current
practices against the Government and
FRC’s measures and is well-placed to
comply with them. I look forward to providing
an update on these issues in next year’s
report.
AGM
Finally, I would like to thank shareholders
for their ongoing input and engagement and
I welcome all shareholders’ feedback on
this report. We look forward to receiving
your support for our Annual report on
remuneration at our AGM on 3 May 2018.
Urs Rohner
Remuneration Committee Chairman
12 March 2018
Board changes
In November 2017, Dr Patrick Vallance
announced that he would leave the
company to become the UK Government’s
Chief Scientific Adviser and Head of
the Government’s Office for Science.
Dr Vallance is a voluntary leaver and
therefore will not receive any severance
payment when he leaves the company at the
end of March 2018. Dr Vallance will continue
to receive his base salary, set in 2017, until
he leaves GSK. He was also eligible to
receive a bonus for 2017 based on a
combination of business and individual
performance. He will not receive any bonus
for the portion of 2018 for which he is
employed and any PSP and DABP matching
awards which have not already vested prior
to his departure will lapse when he leaves.
He was not eligible to receive an LTI award
in 2018.
In November 2017, we announced the
appointment of Dr Hal Barron to the role
of Chief Scientific Officer and President,
R&D from 1 January 2018. Dr Barron is
one of the world’s foremost R&D leaders
and has spent most of his career working
in the USA. Dr Barron’s package is fully in
line with the Remuneration policy approved
by shareholders in 2017. His base salary
is $1.7 million and his incentive opportunities
are in line with the approved Remuneration
policy. In aggregate, his total compensation
is within the competitive range seen among
our global pharmaceutical peer group. No
“buy-out” awards were made.
Sir Andrew Witty stepped down as CEO
and retired from GSK by mutual agreement
in March 2017 and Dr Moncef Slaoui
stepped down from the Board in March
and retired from GSK by mutual agreement
in June 2017. The agreed termination
arrangements in both cases were set
out in last year’s report. In both cases,
the arrangements were executed in line
with the approach described last year
and, accordingly, this year’s Remuneration
report provides further details of the final
amounts paid.
Looking ahead
The R&D new products measure for our LTI
plans was implemented to recognise the
importance of R&D to future business
growth. It will continue to be relevant for our
LTI performance through 2020. It rewards
not only the performance of our R&D
organisation but also successful
commercialisation. While launch excellence
remains important, the Committee considers
that there are other means to incentivise
commercial success across the Group. The
Committee will therefore be working during
2018 to design a new LTI measure based on
the R&D pipeline which will replace the R&D
new products measure from the 2019 LTI
awards. We look forward to sharing more
details of the new Innovation measure as this
year progresses.
Governance developments
The Committee has taken a close interest in
legislative and best practice developments
around Director pay policy and supports
initiatives that raise the bar in this area.
As a modern employer, the company takes
its responsibilities under the new gender pay
regulations very seriously. The Committee
and the Corporate Responsibility Committee
were interested to review the preparation of
the company’s gender pay disclosures set
out on page 49.
The UK Government has announced a
package of measures on executive pay,
including secondary legislation requiring
publication of pay ratios between
companies’ CEOs and the average of
their UK employees. The Committee
supports these further enhancements in
transparency for shareholders and other
interested stakeholders and will include
this information in our report once the
methodology for calculating the ratio is
finalised in new regulations.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 116
Annual report on remuneration
2017 at a glance
2017 highlights summary
The following shows a breakdown of total remuneration paid to Executive Directors in office at 31 December 2017, in respect of
2017 and 2016
(1) Emma Walmsley and Dr Patrick Vallance were both appointed to the Board on 1 January 2017.
Pay for performance
* Now called Adjusted Group PBIT.
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 share ownership
requirements (SOR) for a minimum of 12 months after
leaving GSK.
Executive Directors and CET
Multiple of base salary
CEO
Other Executive Directors
Other Corporate Executive Team members
6.5
3
2
Share ownership vs SOR (multiples of base salary)
Emma Walmsley
2.1x
6.5x
Simon Dingemans
3.0x
6.2x
Dr Patrick Vallance
3.0x
5.5x
0
2x
4x
6x
SOR
31 December 2017 shareholding
GSK Annual Report 2017Core Group PBIT*Maximum(105% of target)TargetThreshold(95% of target)Maximum performance targetPerformance achieved2017 Annual bonus: financial performance102%[•]%LapsedVested2015 LTI outcome – performance period ended 31 December 2017 33%15%21%R&D new products1/3rdRelativeTSR1/3rdAdjustedfree cash flow1/3rdOverall vesting 69%£0m£2m£4m£6m£8m201720172016Fixed pay – salary, benefits and pensionPerformance pay – 2017 annual bonus and LTIs earned in respect of the three years to the end of 2017Emma Walmsley, CEO(1)71%29%76%24%69%31%Simon Dingemans, CFODr Patrick Vallance, Outgoing President, R&D(1)201776%24% 117
Total remuneration for 2017 (audited)
Salary
Benefits
Pension
Annual
bonus
Value earned
from LTI
awards
Total
remuneration
A. Fixed pay
B. Pay for performance
The total remuneration for 2017 for each Executive Director is set out in the table below:
Emma Walmsley,(1)
CEO
Sir Andrew Witty,(1)(5)
(Former CEO)
Simon Dingemans,(7)
CFO
Dr Patrick Vallance,
Outgoing President,
R&D
Dr Moncef Slaoui,(5)
(Former Chairman,
Global Vaccines)
2017
£000
2016
£000
Jan-Mar
2017
£000
2016
£000
2017
£000
2016
£000
2017
£000
2016
£000
Jan-Mar
2017
$000
2016
$000
A. Fixed pay
Salary
Benefits
Pension
Other (6)
Total fixed pay
> See page 118
(2)965
> See page 118
> See page 119
266
195
–
1,426
B. Pay for performance
2017 Annual bonus(3)
> See pages 120 and 121
1,540
Vesting of LTI awards:
DABP matching awards(4)
112
PSP (4)
> See page 122
1,805
Total pay for performance
A+B = Total remuneration
3,457
4,883
Notes:
–
–
–
–
–
–
–
–
–
–
92
–
344
715
–
–
–
–
279
1,115
754
142
151
–
124
520
–
1,759
1,047
736
92
147
–
975
780
102
156
–
1,038
2,167
1,090
915
1,127
361
156
119
182
2,543
2,012
1,119
2,041
5,071
3,258
2,153
3,350
715
6,830
4,305
3,128
4,388
–
–
–
–
–
–
–
–
–
–
311
232
101
260
904
–
–
–
–
1,242
495
875
–
2,612
1,726
293
1,812
3,831
904
6,443
(1) Emma Walmsley was appointed to the Board with effect from 1 January 2017, and succeeded Sir Andrew Witty as CEO on 1 April 2017. Sir Andrew stepped down as CEO,
and retired from the Board, on 31 March 2017.
(2) Emma Walmsley’s salary as CEO Designate between 1 January and 31 March 2017 was £850,000. Ms Walmsley’s salary then increased from 1 April 2017 to £1,003,000
when she succeeded Sir Andrew Witty as CEO.
(3) Details of Deferred Annual Bonus Plan (DABP) (bonus deferrals) are set out on page 129. From 2017, no matching awards will be made under the DABP.
(4) Further details in respect of the vesting of DABP (matching awards) and Performance Share Plan (PSP) awards for the three-year period to 31 December 2017 are provided
on page 122.
(5) The PSP and DABP awards for Sir Andrew Witty and Dr Moncef Slaoui granted in 2015 have not yet vested. These awards will vest following the one-year anniversary of their
termination in accordance with the terms of the Executive Financial Recoupment Policy. For Sir Andrew, awards will vest after 31 March 2018 and for Dr Slaoui, after 30 June 2018.
In addition to this delayed vesting, the PSP awards for both have a two-year holding period from the point of normal vesting.
(6) As disclosed in the 2016 Annual Report on page 136, Sir Andrew Witty and Dr Moncef Slaoui left GSK by mutual agreement, neither received any termination payments and any
outstanding incentive awards were treated in accordance with the 2014 Remuneration policy approved by shareholders. Under those terms, Sir Andrew and Dr Slaoui received
payments pro-rated for the proportion of the financial year worked in lieu of performance related bonus payments. The pro-rated amounts paid for the three months to 31 March 2017
were £343,520 and $260,340 respectively.
(7) Simon Dingemans’ vested PSP shares will be subject to a two-year holding period.
(8) 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 2017 in respect of any of the Executive Directors.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
118
Annual report on remuneration continued
Total remuneration for 2017 (audited) continued
The following sections provide details of each element of ‘Total remuneration’, including how the Committee implemented the approved
Remuneration policy in 2017.
Comparator groups for pay and TSR
The Committee used two pay comparator groups for all roles when considering executive pay for 2017. The primary group used for each
Executive Director was as follows:
Emma Walmsley
Simon Dingemans
UK cross-industry comparator group
AstraZeneca
BHP Billiton
BP
British American Tobacco
Diageo
Reckitt Benckiser
Rio Tinto
Royal Dutch Shell
Unilever
Vodafone
Dr Patrick Vallance
Global pharmaceutical comparator group
France
Sanofi
Switzerland
Novartis
Roche Holdings
UK
AstraZeneca
US
AbbVie(1)
Amgen(1)
Bristol-Myers Squibb
Eli Lilly
Johnson & Johnson
Merck & Co
Pfizer
(1)
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.
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 2017 were aligned with those provided to the wider
workforce. Details of salary levels for 2018 are provided on page 140.
Emma Walmsley
(1 January to 31 March)
Emma Walmsley
(1 April to 31 December)
Sir Andrew Witty
Simon Dingemans
Dr Patrick Vallance
Dr Moncef Slaoui
%
change
Base salary
2017
2016
n/a
n/a
0%
2.5%
n/a
0%
£850,000
£1,003,000
–
–
£1,114,500 £1,114,500
£754,000
£780,000
£735,600
–
$1,242,100
$1,242,100
Benefits
The table opposite shows a breakdown of the grossed up cash value
of the benefits received by the Executive Directors in 2017 and 2016
which included:
– Employee benefits: all employee share plans, healthcare,
car allowance, personal financial advice and life assurance/death
in service cover.
– Travel expenses: car, travel and spouse/partner costs associated
with accompanying the Executive Director on GSK business,
which are deemed to be taxable benefits for the individual.
– Other benefits: expenses incurred in the ordinary course of
business, which are deemed to be taxable benefits for the
individual and, as such, have been included in the table.
Emma Walmsley
Employee benefits
Travel
Other benefits
Total
Sir Andrew Witty
Employee benefits
Travel
Other benefits
Total
Simon Dingemans
Employee benefits
Travel
Other benefits
Total
Dr Patrick Vallance
Employee benefits
Travel
Other benefits
Total
Dr Moncef Slaoui
Employee benefits
Travel
Other benefits (1)
Total
2017 benefits
£000
2016 benefits
£000
60
146
60
266
18
6
68
92
53
64
25
142
48
46
8
102
$000
85
10
137
232
–
–
–
–
63
23
38
124
30
38
24
92
–
–
–
–
$000
158
34
303
495
(1) For Dr Moncef Slaoui, other benefits include UK accommodation of $57,578 in 2017
(2016 – $247,875).
GSK Annual Report 2017 119
Fixed pay (audited) continued
Pensions
Executive Director
Emma Walmsley
Sir Andrew Witty
Simon Dingemans
Dr Patrick Vallance
Dr Moncef Slaoui
Pension plan type
Member since
20% of base salary and matching contributions on the first £33,333 of salary (1)
20% of base salary in lieu of pension on salary in excess of £33,333(2).
2010
UK defined benefit
20% of base salary in lieu of pension (3)
20% of base salary in lieu of pension (3)
US and Belgian plans (4)
1991
–
–
1988
(1) As a member of the defined contribution plan, Emma Walmsley 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.
(2) Emma Walmsley receives a cash payment in lieu of pension of 20% of base salary in excess of £33,333 in line with GSK’s defined contribution pension plan rates.
(3) Simon Dingemans and Dr Patrick Vallance receive a cash payment in lieu of pension of 20% of base salary in line with GSK’s defined contribution pension plan rates.
(4) Since becoming a member of these plans, Dr Moncef Slaoui 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.
The following table shows the breakdown of the pension values set out on page 117.
Pension remuneration values(1)
UK defined benefit
US defined benefit
UK defined contribution
Belgian defined benefit (2)
Employer cash contributions
Total pension remuneration value
Emma Walmsley
Sir Andrew Witty
Simon Dingemans
Dr Patrick Vallance
Dr Moncef Slaoui
2017
£000
2016
£000
Jan-Mar
2017
£000
–
–
9
–
186
195
–
–
–
–
–
–
–
–
–
–
–
–
2016
£000
520
–
–
–
–
520
2017
£000
2016
£000
2017
£000
2016
£000
–
–
–
–
151
151
–
–
–
–
147
147
–
–
–
–
156
156
–
–
–
–
–
–
Jan-Mar
2017
$000
–
7
–
–
94
101
2016
$000
–
742
–
10
123
875
(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 2017 for Sir Andrew Witty and Dr Slaoui, the
difference between the accrued pension as at 31 March 2017 and the accrued pension as at 31 December 2016 increased by inflation (1% for UK defined benefit, 2.2% for
US defined benefit, 2.2% 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.
Further details regarding the 2017 pension values for defined benefit plan participants are set out in the table below.
Sir Andrew Witty(1)
UK – Funded
UK – Unfunded
Total
Dr Moncef Slaoui(1)
US – Funded
US – Unfunded
Belgium – Funded (2)
Total
31 March 2017
£ (p.a.)
72,261
670,739
743,000
31 March 2017
$ (p.a.)
15,844
427,686
105,655
549,185
Accrued pension
31 Dec 2016
£ (p.a.)
71,591
670,500
742,091
Accrued pension
31 Dec 2016
$ (p.a.)
15,434
439,393
103,230
558,057
Pension remuneration
value for 2017 (£000)
–
–
–
Pension remuneration
value for 2017 ($000)
7
–
–
7
(1) The pensions figures are disclosed for both Sir Andrew Witty and for Dr Moncef Slaoui, who are members of defined benefit plans.
The table shows the accrued benefit (i.e. the annual pension accrued to date). The pension remuneration in 2017 is calculated as the increase in the accrued benefit, adjusted for
inflation and a multiplier (to reflect the fact that the benefit will be received for a number of years). Where a movement is negative in the year, no value is shown.
(2) Amounts have been translated from Euros into US Dollars using an exchange rate of 1.13 for 2017 and 1.11 for 2016.
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120
Annual report on remuneration continued
Pay for performance (audited)
Annual bonus
70%
Core Group PBIT*
30%
Individual
objectives
Annual bonus
* Renamed Adjusted Group PBIT.
2017 performance against targets
For 2017, the financial measures and weightings were as follows:
Performance measure
Core Group PBIT (now called Adjusted Group PBIT)
Individual objectives
Weighting
Executive Directors
2017 target (1)
70%
30%
£8,126m
2017 performance
Positioning
against target
102%
Outcome
£8,322m
(1) Threshold and maximum performance targets were set at 95% and 105% of Target respectively.
(2) The Core Group PBIT target and outcome for the purposes of the Annual bonus calculation differs from Core Group 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 2017:
Bonus
Emma Walmsley
Simon Dingemans
Dr Patrick Vallance
2017 bonus opportunity
2017 bonus outcome
2017
Base salary
£
1,003,000
754,000
780,000
Target
(% of salary)
Maximum
(% of salary)
Financial
performance
(% of salary)
Individual
objectives
(% of salary)
Total 2017
bonus
(% of salary)
100
200
98
98
98
55.5
46.5
46.5
153.5
144.5
144.5
Total 2017
bonus
£000
1,540
1,090
1,127
(1) As Sir Andrew Witty and Dr Moncef Slaoui ceased to be Executive Directors during the year, in accordance with the Remuneration policy they received a pro-rata payment for
2017 in lieu of a variable bonus opportunity. The Committee set role specific objectives for them for this period. As the two individuals ceased to be Executive Directors before the
2017 Remuneration policy was approved, the target bonus opportunities were 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 Slaoui). These contractual payments are shown under Other in the table on page 117.
The table below provides more detail on delivery against the Core Group PBIT target, now called Adjusted Group PBIT:
Financial performance
Core Group PBIT
(Adjusted Group
PBIT)
– Group turnover was £30.2 billion, an 8% increase AER and 3% CER
– Adjusted operating profit £8,568 million, 5% higher on a CER basis, and 12% higher AER
– The Adjusted operating margin of 28.4% was 0.9 percentage points higher than in 2016 and 0.4 percentage points higher on a
CER basis. This reflected improved operating leverage driven by sales growth and a more favourable mix in all three businesses.
The margin also benefited from continued tight control of ongoing costs across all three businesses as well as restructuring and
integration benefits in the Vaccines and Consumer Healthcare businesses, partly offset by continued pricing pressures, particularly
in respiratory, and investments in R&D and the supply chain.
GSK Annual Report 2017 121
Pay for performance (audited) continued
The following table summarises performance against the scorecard of individual objectives agreed by the Committee for each
Executive Director:
Individual objectives
Emma Walmsley
– Successful induction and transition from Sir Andrew Witty.
– Delivered a strong overall financial performance for the Group in 2017.
– Strong performance from new product sales: £6.7 billion, +51% AER, 44% CER (on track to deliver £6 billion in new product sales
on a CER basis by 2018; 2017 sales £5.7 billion at CER).
– Building a top Corporate Executive Team with outstanding new hires of new Chief Scientific Officer and President, R&D; President,
Global Pharmaceuticals; and Chief Digital & Technology Officer. 40% of top 125 roles are new hires or internal promotions.
– Successfully completed strategic review of the Pharmaceuticals business in key areas such as portfolio, footprint, operating model.
Implementation ongoing.
– Significant pipeline reprioritisation and new R&D portfolio governance process across R&D and commercial.
– New 5-year Pharmaceuticals supply chain-strategy to reduce complexity and improve productivity whilst maintaining compliance.
– Innovation, Performance and Trust priorities and KPIs defined, communicated and used as basis for all employee objectives and
business performance management.
– Improving cash and cost discipline, with newly established capital allocation process and integrated business P&L and cash flow
management.
– New employee expectations and incentive system launched as key enablers of culture change.
– Significant improvements in reliability and quality supply for our Pharmaceuticals and Consumer Health businesses.
– GSK ranked #1 in Access to Vaccines Index and Anti-Microbial Resistance Benchmark.
– 10 per cent improvement in comparable employee engagement score since 2015.
Simon Dingemans
– Delivered strong financial leadership for the Group in 2017.
– Improved cash flow generation. Improved cash and cost discipline, with newly established capital allocation process and integrated
business P&L and cash flow management.
– Restructuring and synergy programmes delivered combined benefits of £3.7 billion in 2017 (£3.3 billion at CER).
– Developed capital allocation framework to support the strategy, including business development requirements.
– Strong support to new CEO.
– Appointment of new Chief Digital & Technology Officer.
Dr Patrick Vallance
– Strong performance from new product sales: £6.7 billion, +51% AER, 44% CER, including strong performances from Tivicay
and Triumeq in HIV, inhaled Ellipta portfolio and Nucala in Respiratory.
– Two key approvals from Pharmaceuticals pipeline included:
– Trelegy Ellipta once daily single inhaler triple therapy for COPD;
– Juluca first 2-drug regimen, once-daily, single pill for HIV.
– Continued strong delivery by the R&D organisation across the R&D pipeline.
– Completed R&D performance review leading to significant pipeline reprioritisation and operational changes in the areas of
diagnosis and early implementation.
– Strengthened R&D partnership with Commercial Pharmaceuticals. Particular attention paid to pipeline prioritisation.
Malus and clawback policy
For details of our policy on malus/clawback, please refer to the 2017 Remuneration policy report on page 140 of the 2016 Annual Report,
available at www.gsk.com in the Investors section.
From 1 January 2015 in respect of each financial year, the Committee decided to disclose whether it (or the Recoupment Committee) has
exercised malus or clawback.
Disclosure is only 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) exercised malus or clawback during 2017.
Other policies
For details of our policies on recruitment remuneration, loss of office and termination payments, please refer to the 2017 Remuneration policy
report on pages 137 to 146 of the 2016 Annual Report, available at www.gsk.com in the Investors section.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 122
Annual report on remuneration continued
Pay for performance (audited) continued
Value earned from long-term incentives (LTIs)
The following tables set out the performance achieved by management against the targets set for the company’s LTI plans and also includes
an update on performance of outstanding awards.
In line with the Committee’s agreed principles, for each measure applicable to the 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. Further details on any adjustments made will be provided at the time of
vesting.
2015 awards with a performance period ended 31 December 2017
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 2017 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 the preceding two years,
i.e. 2013-17.
Original target
Adjusted target
% vesting
Maximum
Threshold
£7.58bn
£6.89bn
£6.54bn
£6.20bn
£7.91bn
£7.19bn
£6.83bn
£6.47bn
100%
75%
50%
25%
Outcome and vesting level
Outcome
% of
maximum
% of
award
£11.27bn
100
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.
£12.47bn
63
21
Maximum
Threshold
Target (1)
£13.6bn
£13.0bn
£11.8bn
£11.5bn
% vesting
100%
75%
50%
25%
(1) The AFCF target was set and announced following the close of the Novartis transaction in 2015.
The target was not adjusted.
TSR ranking within comparator group(1)
% vesting
Ranked 5th
44
15
Maximum
Threshold(2)
1st, 2nd, 3rd
4th
5th
Median
6th to 10th
100%
72%
44%
30%
0%
(1)
(2)
TSR comparator group: AstraZeneca, Bristol-Myers Squibb, Eli Lilly, GSK, Johnson & Johnson,
Merck & Co, Novartis, Pfizer, Roche Holdings and Sanofi.
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 2015 awards
69%
GSK Annual Report 2017 123
Pay for performance (audited) continued
Historical vesting for GSK’s LTIs
Year of grant
Performance measures
Total vesting level
Lapsed
2015
2014
2013
2012
2011
2010
2009
2008
2007
T A
R
T
A
R
15
21
33
33
T
A
R
B
21
17
A
R
B
A
R
B
A
A
T
T
T
T
T
T
7
7
13
16
11
16
9
9
40
35
35
31
67
62
86
60
75
51
65
65
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 2016 and 2017.
The following charts provide an estimate of the vesting levels taking into account performance to 31 December 2017.
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.
2016 award – Performance update
2017 award – Performance update
Maximum
Ranked 3rd
or above
£13.5bn
122% of
threshold
Maximum
Ranked 3rd
or above
£13.6bn
122% of
threshold
Threshold
Median
£11.35bn
Commercially
sensitive
Threshold
Median
£11.46bn
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 118 in respect of the 2015 awards.
The adjusted free cash flow target for the 2016 award has been revised to reflect additional investments in key R&D projects and in the Priority Review Voucher for the Juluca launch
in the U.S.; please refer to pages 25 and 54 of the Annual Report. The Committee intends to disclose targets in full following the end of the performance period, in the 2018 Annual
report on remuneration.
2017 LTI awards
The levels of participation in the DABP in respect of 2016 bonus deferrals are shown in the table below. The table details the last matching
award in 2017 showing the maximum vesting potential in respect of 2016 bonuses. The table also shows the PSP award details for 2017.
DABP matching awards
2016
% of total bonus
deferred
50%
25%
50%
50%
25%
2017
Number of
shares
31,945 shares
–
29,022 shares
21,632 shares
–
2017
Face value
of award(1)
£0.504m
–
£0.458m
£0.341m
–
2017
Award level as %
of base salary
2017
Number of
shares
550%
356,939 shares
–
400%
500%
–
–
195,147 shares
252,345 shares
–
PSP awards
2017
Face value
of award(2)
£5.5m
–
£3m
£3.9m
–
Emma Walmsley
Sir Andrew Witty
Simon Dingemans
Dr Patrick Vallance
Dr Moncef Slaoui
(1) The face value of the DABP awards have been calculated based on a share price of £15.77, being the closing price on 14 February 2017.
(2) The face value of the PSP awards have been calculated based on a share price of £15.455, being the closing price on 26 July 2017.
(3) The performance period for the 2017 awards is from 1 January 2017 to 31 December 2019.
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124
Annual report on remuneration continued
CEO pay comparison
2017 CEO total remuneration positioning
Historic CEO remuneration
2017
£000
2016
£000
2015
£000
2014
£000
2013
£000
2012
£000
2011
£000
2010
£000
2009
£000
4,883 6,830 6,661 3,902 7,207 4,386 6,807 4,562 5,790
77% 97% 100% 42% 88% 44% 100% 59% 100%
69% 33% 38% 14% 31% 24% 70% 35% 35%
Single figure of
remuneration
Annual bonus
award(1)
(% of maximum)
Vesting of LTI
awards
(% of maximum)
(1) 2009 and 2010 bonus 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.
Percentage change in remuneration of CEO
GSK CEO
UK
Employees
2017
£000
2016
£000
% change
% change
CEO
Salary
Benefits
Annual bonus
Emma Walmsley Sir Andrew Witty
1,003
266
1,540
1,115
124
2,167
(10)%
114%
(29)%
2.5%
0%
(4)%
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. 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.
CEO ratio
The Committee intends to disclose pay ratios between GSK’s CEO
and the average of its UK employees in the Annual Report once the
methodology for calculating the ratio is finalised by legislation.
UK
cross-industry
group
Global
pharmaceutical
group
European
cross-industry
group
(£m)
4
6
8
10
12
14
16
Lower quartile
to median
Median to upper
quartile
Emma Walmsley’s
current position
Remuneration includes salary and the expected value of incentives based on the
Committee’s agreed benchmarking methodology.
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 nine-year period to 31 December 2017.
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.
300
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
31.12.17
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.
GSK Annual Report 2017
125
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 and
Remuneration policy reports.
2017 AGM
Remuneration report
Remuneration policy
Total votes
cast (billion)
3.5
3.4
Total votes
for (%)
96.39
95.23
Total votes
against (%)
3.61
4.77
Votes
withheld
(million)
67
66
External appointments for Executive Directors
No Executive Directors held remunerated external appointments
during 2017. Dr Hal Barron was a director of Juno Therapeutics, Inc.
He retained the fees he received for that role.
Payments to past Directors (audited)
None
Payments for loss of office (audited)
None.
Membership
The members of the Committee, together with their appointment
dates, are set out below:
Committee members
Committee member since
Urs Rohner
Chair
Vindi Banga
Dr Vivienne Cox
Judy Lewent
1 January 2015
(Chair since 7 May 2015)
1 January 2016
1 January 2017
1 January 2013
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 82 to 85.
See page 88 for Committee member attendance levels.
Additional remuneration disclosures
Relative importance of spend on pay
The table shows total employee pay and the Group’s dividends paid
to shareholders.
Total employee pay
Dividends
2017
£m
9,122
3,906
2016
£m
8,212
4,850
The figures in the table above, which reflect payments made
during each year and the impact of movements in exchange rates,
are as set out on pages 174 and 180. However, dividends declared
in respect of 2017 were £3,911 million (2016 – £3,897 million) an
increase of 0.4%, excluding the special dividend of £969 million
declared in 2015 and paid in 2016. The company does not expect
to make any ordinary share repurchases in 2018.
Total employee pay is based on 99,349 employees, the average
number of people employed during 2017 (2016 – 99,827).
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 and on gsk.com.
Each Executive Director’s service contract contains a 12-month
notice period, as set out in our Remuneration policy.
Date of contract
Effective date
Expiry date
Emma Walmsley
Simon Dingemans
Dr Patrick Vallance
Dr Hal Barron
29.03.17
08.09.10
19.12.16
16.12.17
01.04.17
04.01.11
01.01.17
01.01.18
30.06.34
30.04.28
31.03.25
31.12.24
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 are reviewed at least
annually and were last revised in January 2018 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.
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126
Annual report on remuneration continued
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/Willis Towers Watson)
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.
Willis Towers Watson 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 for part of 2017, prior to Willis Towers
Watson’s appointment, and their fees for advice during that period
were £78,330. 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
did not compromise Deloitte’s independence.
Willis Towers Watson’s fees for advice provided during 2017 were
$64,571. Willis Towers Watson provided additional market data to
the Committee.
Adviser to the Committee
The company undertook a tender process during 2017 and appointed
Willis Towers Watson as independent adviser to the Committee with
effect from 1 July 2017. The Committee Chairman agrees the
protocols under which Willis Towers Watson provides advice and the
Committee is satisfied that such advice has been objective and
independent.
Committee evaluation
The Committee’s annual evaluation was externally facilitated by
Ffion Hague of Independent Board Evaluation. It was concluded
that the Committee continued to operate effectively. In terms of
enhancements to the Committee’s work, it was agreed that Board
members would be provided with more detailed updates on matters
being considered by the Committee.
What the Committee did during 2017
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
– Shareholder feedback on proposed Remuneration policy
Salary review
The Committee periodically reviews and considers the remuneration
environment of Executive Directors and 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 2018
– Setting remuneration for Dr Hal Barron
Annual bonus
The Committee is responsible for setting specific performance measures
for the Annual bonus.
– CEO, Executive Director and CET 2016 bonus recommendations and 2017
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.
– Review of Deferred Annual Bonus Plan and Performance Share Plan rules
– LTI performance outcomes and vesting of LTI awards for CET and below
– LTI grants for CET and below
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.
– Committee evaluation process
– 2016 Remuneration report
– Remuneration considerations for 2017
– AGM and Remuneration report feedback, the external remuneration
environment and performance target disclosure for incentives plans
– Chairman’s fees
– 2017 Remuneration report disclosures
– Remuneration Committee external adviser tender process
– Gender pay group reporting
GSK Annual Report 2017
127
2017 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
The Chairman, Philip Hampton, is paid a fee of £700,000 per annum,
of which he has elected to take 25% in GSK shares. The Chairman’s
fees were reviewed during the year but were not changed.
Non-Executive Directors’ fees
Non-Executive Director fees were reviewed during the year
following the last increase in January 2013. It was agreed to increase
the supplemental fees for the Chairs of the Remuneration and
Corporate Responsibility Committees from £20,000 to £30,000
from January 2017. The Chair of the new Science Committee also
receives a supplementary fee of £30,000. All other fees remain
unchanged. A minimum of 25% of fees will continue to be delivered
as shares or ADS deferred until the Non-Executive Director steps
down from the Board.
The Non-Executive Directors’ fees that applied during 2017 are set
out in the table below:
Standard annual fee
Supplemental fees
Chair of the Audit & Risk Committee
Senior Independent Director
Scientific/Medical Experts
Chairs of the Remuneration, Corporate
Responsibility and Science Committees
Per annum
£85,000
£80,000
£30,000
Non-Executive Director undertaking intercontinental
travel to meetings
£7,500 per meeting
The audited table below 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 128. Non-Executive Directors’ fees that are
paid in a currency other than 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
Lynn Elsenhans
Dr Laurie Glimcher (1)
Dr Jesse Goodman
Philip Hampton
Judy Lewent
Urs Rohner
Former directors:
Dr Stephanie Burns (2)
Stacey Cartwright (3)
Sir Deryck Maughan (2)
Dr Daniel Podolsky (2)
Jing Ulrich (4)
Hans Wijers (2)
Fixed fees
Fixed fees
Cash
Shares/ADS
Benefits
Total pay
Cash
Shares/ADS
Benefits
Total pay
2017
2016(5)
£92
–
£69
£15
–
$216
£525
$239
£92
–
–
–
–
–
–
£31
£123
£23
£137
$69
$72
£175
$80
£31
–
–
–
–
–
–
£9
£8
£14
£70
$32
$140
£20
$157
£16
–
£5
–
–
–
£6
£132
£131
£106
£222
$101
$428
£720
$476
£139
–
£5
–
–
–
£6
£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
£44
–
$187
£13
$177
£21
$16
£5
$44
$63
£3
£7
£130
£120
£48
£186
–
$407
£713
$496
£133
$94
£97
$127
$169
£3
£44
(1) Dr Laurie Glimcher was appointed to the Board with effect from 1 September 2017.
(2) Dr Stephanie Burns, Sir Deryck Maughan, Dr Daniel Podolsky and Hans Wijers all retired from the Board on 5 May 2016.
(3) Stacey Cartwright retired from the Board on 31 December 2016.
(4) Jing Ulrich retired from the Board on 7 May 2015.
(5) The 2016 figures have been restated to remove the tax gross up on the flights of Non UK-Domiciled Directors for travel to UK Board meetings, reflecting the fact that tax was not due
on those flights in the 2016/17 income tax year. At the time of publishing the 2016 Annual Report, it was believed that income tax would be due.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 128
Annual report on remuneration continued
Directors’ interests in shares (audited)
The interests of the Directors of the company in office during 2017 and their persons closely associated (PCA) are shown in the tables below.
Total directors’ interests as at
31 December
2017
or date of
retirement
1 January
2017
2 March
2018
Total share plan interests as at 31 December 2017 or date of retirement
Options
Shares/ADS
(a)Unvested and
not subject to
performance
Unvested and
subject to
performance
(a)Unvested and
not subject to
performance
Unvested and
subject to
performance
Vested but
not exercised
Exercised in
the year
Executive Directors
Shares
Emma Walmsley(a,b,c,d,h)
Sir Andrew Witty(a,b,c,f,h)
Simon Dingemans(a,b,c,d,f,h)
Dr Patrick Vallance(a,b,c,d,f,h)
Dr Moncef Slaoui
ADS
Dr Hal Barron(i)
Dr Moncef Slaoui(a,c,e,g,h)
Non-Executive Directors
Shares(j)
Professor Sir Roy Anderson
Vindi Banga
Dr Vivienne Cox
Philip Hampton
Urs Rohner
Stacey Cartwright
ADS(j)
Lynn Elsenhans
Dr Laurie Glimcher
Dr Jesse Goodman
Judy Lewent
Dr Daniel Podolsky
280,742
525,870
413,952
147,665
1,090,556
329,298
303,733
28,475
110,588
1,034,521
263,245
299,677
28,473
–
90,802
–
–
–
782,759
1,007,883
658,209
756,538
–
1,644
–
–
–
–
234,548
295,974
118,557
356,422
75,959
111,859
88,297
75,980
–
–
–
75,959
76,618
87,575
75,092
–
–
–
137,040
–
–
–
–
–
3,300
19,814
90,907
30,169
35,817
–
–
–
Share allocation plan for Non-Executive Directors
Number of shares or ADS
Total directors’ interests as at
31 December
2017
or date of
retirement
1 January
2017
or date of
appointment
2 March
2018
Dividends
reinvested
after year
end
31 December
2017
Paid out
Dividends
reinvested
during the
year
Allocated
& elected
31 December
2016
31,654
53,831
2,295
42,452
6,455
27,273
1,873
3,236
22,828
29,306
50,802
1,804
37,398
5,592
24,399
350
2,610
21,630
25,499
42,705
323
25,279
3,488
18,205
–
–
19,052
1,785
779
75
1,631
301
–
1,224
5
89
609
–
29,306
15,602
1,804
30,480
5,591
–
23,398
350
2,610
11,463
–
–
–
–
–
–
9,510
–
–
–
–
42,020
1,850
271
4
924
187
–
1,177
–
–
626
3,047
1,957
7,826
1,477
11,195
1,916
–
5,016
350
2,610
1,951
–
25,499
7,505
323
18,361
3,488
9,510
17,205
–
–
8,886
38,973
a) Unvested options not subject to performance of 75,959 for Emma Walmsley represent bonus deferrals.
Unvested shares not subject to performance of 90,802 for Sir Andrew Witty represent 25% of the shares awarded at the end of the three-year performance
periods for the 2013 and 2014 PSP grants, together with subsequent re-invested dividends. These shares are subject to further two-year holding periods.
Sir Andrew’s unvested options not subject to performance of 111,859 represent bonus deferrals of 110,971and Share Save options of 888.
Unvested options not subject to performance of 88,297 for Simon Dingemans represent bonus deferrals of 87,575 and Share Save options of 722.
Unvested options not subject to performance of 75,980 for Dr Patrick Vallance represent bonus deferrals of 75,092 and Share Save options of 888.
Unvested ADS not subject to performance of 118,557 for Dr Moncef Slaoui represent bonus deferrals of 46,425, deferrals under the PSP plan of 67,302 and
Share Value Plan awards for his PCA of 4,830.
b) Total Directors’ interests includes shares purchased through the GlaxoSmithKline Share Reward Plan. During 2017, Emma Walmsley, Simon Dingemans and
Dr Patrick Vallance were each awarded 97 shares under the plan. The total number of shares held within the plan are as follows:
Share Reward Plan (Shares)
Emma Walmsley
Sir Andrew Witty
Simon Dingemans
Dr Patrick Vallance
2 March 2018
31 December 2017
1 January 2017
1,274
–
1,703
3,348
1,219
–
1,642
3,263
972
3,541
1,375
2,917
Dr Hal Barron is not and Dr Moncef Slaoui was not eligible to participate in the Share Reward Plan, as this is only open to UK employees.
GSK Annual Report 2017
129
Directors’ interests in shares (audited) continued
c) Total directors’ interests includes options over 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)
Emma Walmsley
Sir Andrew Witty
Simon Dingemans
Dr Patrick Vallance
Dr Moncef Slaoui
2 March 2018
123,451
113,066
98,955
31 December 2017
or date of retirement
1 January 2017
75,959
110,971
87,575
75,092
46,425
55,377
142,752
76,811
76,601
56,646
Shares
Shares
Shares
Shares
ADS
d) Total directors’ interests at 2 March 2018 includes any shares or ADS which vested due to performance being met under elements of the DABP and PSP
(2015-2017 awards), less those sold to satisfy tax liabilities on the vested amounts (see pages 132 to 137 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 Slaoui’s PCA under the Share Value Plan (SVP). The relevant balances are as follows:
Dr Moncef Slaoui (ADS)
US Retirement Savings Plans
Share Value Plan
2 March 2018
31 March 2017
1 January 2017
18,268
4,830
16,452
7,130
As an Executive Director, Dr Slaoui was 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 which arose on vesting are not included in Dr Slaoui’s total remuneration figures. Dr 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.
f) Share Save Plan
For Sir Andrew Witty, Simon Dingemans and Dr Patrick Vallance, the unvested options not subject to performance include holdings of 888, 722 and 888
respectively in the Share Save Plan, in which Sir Andrew participated and Mr Dingemans and Dr Vallance participate on the same terms as all other
employees. Mr Dingemans was granted 248 options under the plan on 30 November 2017.
g) The ADS vested but unexercised options totalling 3,300 for Dr Moncef Slaoui represent the ADS options held by his PCA.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
130
Annual report on remuneration continued
Directors’ interests in shares (audited) continued
h) The following table sets out details of options (including nil-cost options under the DABP) exercised during 2017 by Executive Directors. Dr Moncef Slaoui
did not exercise any options during the year.
Type of award
Emma Walmsley
DABP – deferral
DABP – matching
Sir Andrew Witty
Share Save
DABP – deferral
DABP – matching
Simon Dingemans
Share Save
DABP – deferral
DABP – matching
Dr Patrick Vallance
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)
12.02.14
12.02.14
29.10.15
12.02.14
12.02.14
29.10.14
12.02.14
12.02.14
12.02.14
12.02.14
14,860
4,954
19,814
419
67,867
22,621
90,907
238
22,448
7,483
30,169
26,863
8,954
35,817
16.02.17
16.02.17
05.05.17
16.02.17
16.02.17
01.12.17
16.02.17
16.02.17
16.02.17
16.02.17
–
–
£16.35
£16.35
£10.13
–
–
£11.31
–
–
£15.88
£16.34
£16.34
£12.90
£16.39
£16.39
–
–
£16.36
£16.36
£243
£81
£324
£2
£1,109
£370
£1,481
–
£368
£123
£491
£440
£146
£586
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 and the total value of the shares 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 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 Emma Walmsley:
– The gain of £242,961 recorded following the exercise of the 14,860 nil-cost options relating to the deferral of bonus earned in respect of 2013 comprises
remuneration of £205,315 recorded in 2013 as Annual bonus and a net gain of £37,646 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 £80,998 recorded following the exercise of the 4,954 nil-cost options relating to the DABP matching award comprises remuneration of £79,016
recorded in 2016 in relation to the DABP (see page 132) and an investment gain of £1,982 relating to the movement in the share price between the vesting
and exercise dates.
For Sir Andrew Witty:
– A gain of £2,409 resulted from the exercise of 419 options granted under the Share Save Plan. The number of shares was reduced from 888 to 419 as
Sir Andrew retired on 31 March 2017, part of the way through the Share Save contract.
– The gain of £1,108,947 recorded following the exercise of the 67,867 nil-cost options relating to the deferral of bonus earned in respect of 2013 comprises
remuneration of £937,500 recorded in 2013 as Annual bonus and a net gain of £171,447 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 £369,521 recorded following the exercise of the 22,621 nil-cost options relating to the DABP matching award comprises remuneration of
£360,805 recorded in 2016 in relation to the DABP (see page 132) and an investment gain of £8,716 relating to the movement in the share price between
the vesting and exercise dates.
GSK Annual Report 2017
131
Directors’ interests in shares (audited) continued
For Simon Dingemans:
– A gain of £378 resulted from the exercise of 216 options granted under the Share Save Plan.
– The gain of £367,923 recorded following the exercise of the 22,448 nil-cost options relating to the deferral of bonus earned in respect of 2013 comprises
remuneration of £310,139 recorded in 2013 as Annual bonus and a net gain of £57,784 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 £122,646 recorded following the exercise of the 7,483 nil-cost options relating to the DABP matching award comprises remuneration of
£119,354 recorded in 2016 in relation to the DABP (see page 133) and an investment gain of £3,292 relating to the movement in the share price between
the vesting and exercise dates.
For Dr Patrick Vallance:
– The gain of £439,479 recorded following the exercise of the 26,863 nil-cost options relating to the deferral of bonus earned in respect of 2013 comprises
remuneration of £371,130 recorded in 2013 as Annual bonus and a net gain of £68,349 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 £146,461 recorded following the exercise of the 8,954 nil-cost options relating to the DABP matching award comprises remuneration of
£142,816 recorded in 2016 in relation to the DABP (see page 133) and an investment gain of £3,645 relating to the movement in the share price between
the vesting and exercise dates.
Dr Hal Barron was appointed to the Board from 1 January 2018.
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 2017 and January 2018 were converted into shares or ADS as at 7 February 2018.
i)
j)
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 132
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 during 2017 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.
Emma Walmsley – Shares
Market price at grant
Unvested at 31 December 2016
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2017
Dividends reinvested
Vested
Lapsed
Unvested at 2 March 2018
Vested shares
Number of shares
Market price at vesting
Gain:
Remuneration for 2016
Remuneration for 2017
Sir Andrew Witty – Shares
Market price at grant
Unvested at 31 December 2016
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2017
Dividends reinvested
Unvested at 2 March 2018
Vested shares
Number of shares
Market price at vesting
Gain:
Remuneration for 2016
2014-2016
2015-2017
2016-2018
2017-2019
Performance period
£13.59
28,989
–
–
1,485
–
–
30,474
435
–
–
30,909
£15.77
–
31,945
£504
1,234
–
–
33,179
474
–
–
33,653
£16.43
14,682
–
–
178
(4,954)
(9,906)
–
4,954
£15.95
(000)
£79
–
£15.20
11,706
–
–
600
–
–
12,306
176
(8,614)
(3,868)
–
8,614
£13.00
(000)
–
£112
2014-2016
2015-2017
2016-2018
Performance period
£15.20
33,606
1,721
–
–
35,327
504
35,831
£13.59
42,094
2,156
–
–
44,250
632
44,882
£16.43
67,052
814
(22,621)
(45,245)
–
–
–
22,621
£15.95
(000)
£361
GSK Annual Report 2017 133
Directors’ interests in shares (audited) continued
Deferred Annual Bonus Plan matching awards continued
Simon Dingemans – Shares
Market price at grant
Unvested at 31 December 2016
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2017
Dividends reinvested
Vested
Lapsed
Unvested at 2 March 2018
Vested shares
Number of shares
Market price at vesting
Gain:
Remuneration for 2016
Remuneration for 2017
Dr Patrick Vallance – Shares
Market price at grant
Unvested at 31 December 2016
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2017
Dividends reinvested
Vested
Lapsed
Unvested at 2 March 2018
Vested shares
Number of shares
Market price at vesting
Gain:
Remuneration for 2016
Remuneration for 2017
2014-2016
2015-2017
2016-2018
2017-2019
Performance period
£13.59
38,282
–
–
1,961
–
–
40,243
575
–
–
40,818
£15.77
–
29,022
£458
1,121
–
–
30,143
430
–
–
30,573
£16.43
22,179
–
–
269
(7,483)
(14,965)
–
7,483
£15.95
(000)
£119
–
£15.20
16,350
–
–
838
–
–
17,188
245
(12,030)
(5,403)
–
12,030
£13.00
(000)
–
£156
2014-2016
2015-2017
2016-2018
2017-2019
Performance period
£13.59
31,002
–
–
1,588
–
–
32,590
465
–
–
33,055
£15.77
–
21,632
£341
836
–
–
22,468
321
–
–
22,789
£16.43
26,541
–
–
322
(8,954)
(17,909)
–
8,954
£15.95
(000)
£143
–
£15.20
19,058
–
–
976
–
–
20,034
286
(14,022)
(6,298)
–
14,022
£13.00
(000)
–
£182
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 134
Annual report on remuneration continued
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 2016
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2017
Dividends reinvested
Unvested at 2 March 2018
Vested ADS
Number of ADS
Market price at vesting
Gain:
Remuneration for 2016
2014-2016
2015-2017
Performance period
2016-2018
$46.25
13,322
662
–
–
13,984
193
14,177
$39.13
21,930
1,089
–
–
23,019
318
23,337
$54.17
21,394
251
(7,215)
(14,430)
–
–
–
7,215
$40.57
(000)
$293
GSK Annual Report 2017 135
Directors’ interests in shares (audited) continued
Performance Share Plan awards
The following tables provide details for each Executive Director in office during 2017 in respect of PSP awards. Market price at grant and at
vesting represent the closing share prices on those dates.
Emma Walmsley – Shares
Market price at grant
Unvested at 31 December 2016
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2017
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 2 March 2018
Vested shares:
Number of shares
Market price at vesting
Gain:
Remuneration for 2016
Remuneration for 2017
Sir Andrew Witty – Shares
Market price at grant
Unvested at 31 December 2016
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2017
Dividends reinvested
Unvested at 2 March 2018
Vested shares:
Number of shares
Market price at vesting
Gain:
Remuneration for 2016
2014-2016
2015-2017
2015-2017
2016-2018
2017-2019
2018-2020
Performance period
£15.46
–
356,939
5,518
4,440
–
–
361,379
–
–
5,160
–
–
366,539
£12.91
–
–
–
–
–
–
–
437,997
£5,655
–
–
–
437,997
£16.43
121,203
–
–
1,471
(40,888)
(81,786)
–
40,888
£16.17
(000)
£661
–
£15.20
124,275
–
–
6,367
–
–
130,642
–
–
1,865
(91,430)
(41,077)
–
91,430
£13.00
(000)
–
£1,189
£14.01
64,415
–
–
3,300
–
–
67,715
–
–
967
(47,391)
(21,291)
–
47,391
£13.00
(000)
–
£616
£13.59
212,155
–
–
10,869
–
–
223,024
–
–
3,185
–
–
226,209
Total
(000)
£661
£1,805
2014-2016
2015-2017
2016-2018
Performance period
£15.20
478,034
24,492
–
–
502,526
7,175
509,701
£13.59
517,767
26,527
–
–
544,294
7,772
552,066
£16.43
466,222
5,656
(157,279)
(314,599)
–
–
–
157,279
£16.17
(000)
£2,543
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 136
Annual report on remuneration continued
Directors’ interests in shares (audited) continued
Performance Share Plan awards continued
Simon Dingemans – Shares
Market price at grant
Unvested at 31 December 2016
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2017
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 2 March 2018
Vested shares:
Number of shares
Market price at vesting
Gain:
Remuneration for 2016
Remuneration for 2017
Dr Patrick Vallance – Shares
Market price at grant
Unvested at 31 December 2016
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2017
Dividends reinvested
Vested
Lapsed
Unvested at 2 March 2018
Vested shares:
Number of shares
Market price at vesting
Gain:
Remuneration for 2016
Remuneration for 2017
2014-2016
£16.43
205,161
–
–
2,489
(69,210)
(138,440)
–
69,210
£16.17
(000)
£1,119
–
2015-2017
2016-2018
2017-2019
2018-2020
Performance period
£13.59
227,827
–
–
11,672
–
–
239,499
–
–
3,420
–
–
242,919
£15.46
–
195,147
£3,017
2,427
–
–
197,574
–
–
2,821
–
–
200,395
£12.91
–
–
–
–
–
–
–
239,442
£3,091
–
–
–
239,442
£15.20
210,358
–
–
10,778
–
–
221,136
–
–
3,158
(154,763)
(69,531)
–
154,763
£13.00
(000)
–
£2,012
2014-2016
2015-2017
2016-2018
2017-2019
Performance period
£13.59
263,258
–
–
13,488
–
–
276,746
3,952
–
–
280,698
£15.46
–
252,345
£3,901
3,139
–
–
255,484
3,648
–
–
259,132
£16.53
208,105
–
–
2,525
(70,203)
(140,427)
–
70,203
£16.17
(000)
£1,135
–
£15.20
213,377
–
–
10,932
–
–
224,309
3,203
(156,984)
(70,528)
–
156,984
£13.00
(000)
–
£2,041
GSK Annual Report 2017 137
Directors’ interests in shares (audited) continued
Performance Share Plan awards continued
Dr Moncef Slaoui – ADS
Market price at grant
Unvested at 31 December 2016
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2017
Dividends reinvested
Unvested at 2 March 2018
Vested ADS
Number of ADS
Market price at vesting
Gain:
Remuneration for 2016
Remuneration for 2017
2014-2016
2015-2017
2016-2018
Performance period
$46.25
145,747
7,239
–
–
152,986
2,115
155,101
$39.13
166,901
8,290
–
–
175,191
2,421
177,612
$54.17
131,350
1,539
(44,292)
(88,597)
–
–
–
44,292
$40.92
(000)
$1,812
–
Dr Hal Barron was appointed to the Board from 1 January 2018. The following table provides details of PSP awards granted to him on
14 February 2018:
Dr Hal Barron – Granted ADS
Number of ADS
Market price at grant
Face value at grant (000)
Unvested at 2 March 2018
Performance period
2018-2020
233,132
$36.46
$8,500
233,132
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 138
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 2017, the following table sets out aggregate remuneration for the group for the periods during which they served in that capacity.
Remuneration for 2017
Total compensation paid
Aggregate increase in accrued pension benefits (net of inflation)
Aggregate payments to defined contribution schemes
(£)
26,230,342
1,048,611
397,722
During 2017, members of the group (and one PCA who is also an employee of GSK) were awarded shares and ADS under the company’s
various executive share plans, as set out in the table below.
Awarded during 2017
Deferred Annual Bonus Plan
Performance Share Plan
Deferred Investment Awards (a) (b)
Share Value Plan(b)
Shares
206,177
1,322,859
–
11,060
Awards
ADS
21,220
225,442
–
–
Dividend reinvestment awards
Shares
25,978
179,820
5,674
–
ADS
2,675
24,792
1,306
–
At 2 March 2018, the group and their PCAs had the following interests in shares and ADS of the company. Interests awarded under the
various executive share plans are described in Note 43 to the financial statements, ‘Employee share schemes’ on page 225.
Interests at 2 March 2018
Owned
Unexercised options
Deferred Annual Bonus Plan
Performance Share Plan
Deferred Investment Awards (a) (b)
Share Value Plan (b)
Shares
1,396,375
164,680
978,751
4,772,105
143,018
30,699
ADS
273,511
12,270
93,450
816,020
6,322
20,206
(a) Notional shares and ADS.
(b) Executive Directors are not eligible to receive Deferred Investment Awards or participate in the Share Value Plan.
GSK Annual Report 2017 139
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, HM Revenue &
Customs approved plans.
Participants of the Share Save Plan 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.
Participants of the Share Reward Plan 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.
Monthly saving
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 2017 is as follows:
All GSK employee share plans
1.85%
10%
Share Save (£)
Share Reward (£)
0
02
04
06
08
10
Emma Walmsley
Simon Dingemans
Dr Patrick Vallance
–
225
250
125
125
125
Executive share plans
1.52%
5%
0
02
04
06
08
10
Actual
Limit
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 140
Annual report on remuneration continued
Implementation of Remuneration policy for 2018
Salary
The Committee determined the following salary increases taking into
account the average increase for the wider workforce:
Wider workforce (1)
Emma Walmsley
Simon Dingemans
Dr Patrick Vallance
Dr Hal Barron
2018
–
% change
2.5
£1,028,100
£772,800
£780,000
$1,700,000
2.5
2.5
0
N/A
(1) Based on the average increased budget for employees below the level of CET in the UK.
Benefits
No significant changes to the provision of benefits are proposed
for 2018. For full details of the policy in relation to benefits, please
refer to the details in the 2017 Remuneration policy report on pages
137 to 146 of the 2016 Annual Report, available at www.gsk.com in
the Investors section.
Pension
The table below provides an overview of the pension arrangements
for each ongoing Executive Director in 2018. Details of Dr Hal
Barron’s pension arrangements are set out on page 141.
Emma Walmsley(1)
Simon Dingemans
Pension contribution
20% of base salary and matching contributions
20% of base salary in lieu of pension
(1)
As a member of the defined contribution plan, is eligible to receive matching
contributions of up to 5% on the first £33,333 of her salary in accordance with the
terms of the plan (i.e. £1,667).
Annual bonus
No significant changes to the operation of the Annual Bonus plan,
in accordance with the shareholder approved 2017 Remuneration
policy, are proposed for 2018.
Emma Walmsley
Simon Dingemans
Dr Hal Barron
Target Maximum
100%
200%
The financial measure is Adjusted Group PBIT (previously Core
Group PBIT). 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 2018 Annual Report.
Long Term Incentive plans
Deferred Annual Bonus Plan (DABP) awards
The table below provides details of the mandatory deferral in the
DABP in respect of 2017 Annual bonus payments and associated
awards granted.
Emma Walmsley
Simon Dingemans
Dr Patrick Vallance
% of total bonus
deferred into shares
50
2018 DABP award
(number shares)
58,889
50
50
41,674
43,111
Performance Share Plan (PSP) awards
The table below provides details of awards granted under the PSP:
Emma Walmsley
Simon Dingemans
Dr Hal Barron (1)
(1)
Award in form of ADS
2018 PSP award
(% of salary)
550
2018 PSP award
(number shares)
437,997
400
500
239,442
233,132
Performance measures
The metrics for the PSP awards remain unchanged. The 2018
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 2018 Annual report on remuneration.
GSK Annual Report 2017 141
Implementation of Remuneration policy for 2018 continued
Termination arrangements for Dr Patrick Vallance
As announced in 2017, Dr Patrick Vallance will leave the Board on
31 March 2018.
As Dr Vallance is a voluntary leaver, he will not receive any severance
payment when he leaves the company. Salary, bonus and outstanding
incentive awards will be treated in accordance with the shareholder
approved 2017 Remuneration policy.
Remuneration arrangements for new Executive Director
Dr Hal Barron joined GSK as Chief Scientific Officer and President,
R&D on 1 January 2018, and is an Executive Director. A summary of
his remuneration is set out below:
US$
Notes
Base salary
$1,700,000
Full disclosure of all payments made upon cessation will be included
in the 2018 Annual report on remuneration.
Annual bonus
$1,700,000
Award of LTIs
$4,250,000
Remuneration element
Annual bonus
PSP and DABP
Summary of treatment
Will not receive any bonus for 2018.
Will not be granted PSP awards in 2018 but
will defer 50% of 2017 bonus into DABP.
Outstanding PSP
and DABP matching awards
Any awards not vested prior to Dr Vallance’s
departure will lapse when he leaves GSK.
DABP deferred bonus
awards
Awards in respect of bonuses deferred in
respect of 2017 and prior years will vest at
the normal vesting dates.
In addition to the above, Dr Vallance will be required to maintain a
shareholding equal to his respective share ownership requirement
for at least 12 months after leaving the company.
Benefits
Share Ownership
Requirement
(SOR)
Pension
300% of
base salary
This is in line with GSK’s 2017
Remuneration policy.
Pension is in line with GSK’s 2017
Remuneration policy and arrangements for
other executives based in the US.
Benefits will be in line with GSK’s 2017
Remuneration policy.
The comparator group for pay for the top
R&D position is the global pharmaceutical
comparator group.
The on-target bonus would be 100% with
a maximum of 200% as for the outgoing
President, R&D.
This assumes an expected value of 50% of
an award of performance shares under the
company’s 2017 Performance Share Plan
at a 5x multiple of base salary as for the
outgoing President, R&D.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 142
2017 Remuneration policy summary
Executive Director remuneration policy
The company’s Remuneration policy was approved on 4 May 2017 at GSK’s Annual General Meeting. The full policy is available at
www.gsk.com in the Investors section. The following is a summary of this policy.
Salary
Benefits
Pension
Annual
bonus
Value earned
from LTI
awards
Total
remuneration
A. Fixed pay
B. Pay for performance
Salary
To provide a core reward for the role. Set at a level appropriate to secure and retain high calibre individuals needed to deliver the Group’s
strategic priorities.
Operation
Individual’s role, experience and performance and
independently sourced data for relevant comparator groups
considered when determining salary levels.
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 on pages 118 and 140.
Performance measures
The overall performance of the
individual is a key consideration
when determining salary
increases.
Benefits
Levels are set to recruit and retain high calibre individuals to execute the business strategy.
Operation
Executive Directors are generally eligible to receive
benefits in line with the policy for other employees which
may vary by location. These include travel allowances
(including spouse/partner travel), 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.
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 on page 118.
Performance measures
None.
Pension
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.
New Executive Directors in the UK will be entitled either
to join the defined contribution pension plan or to receive
a cash payment in lieu of pension contribution. Where an
individual is a member of a GSK legacy defined benefit
plan, a defined contribution plan or an alternative
pension plan arrangement and is subsequently
appointed to the Board, he or she may remain a
member of that plan.
Opportunity
The policy for all current Executive Directors and new external
recruits is:
UK:
– 20% of salary contribution to defined
Performance measures
None.
US:
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.
Eligible for the same benefits as other US senior
executives:
– Cash Balance Pension Plan and Supplemental
Cash Balance Pension Plan, including Executive
Pension Credit, provide maximum contribution of
38% of base salary across all pension plans.
– GSK 401(k) plan (formerly the US Retirement
Savings Plan) and the Executive Supplemental
Savings Plan with core contributions of 2% of
salary and bonus and matched contributions of
4% of salary and bonus .
GSK Annual Report 2017
143
Executive Director remuneration policy summary continued
Annual
bonus
To incentivise and recognise execution of the business strategy on an annual basis. Rewards the achievement of stretching annual
financial and strategic business targets and delivery of personal objectives.
Operation
Financial, operational and business targets are set
at the start of the year by the Committee and bonus
levels are determined by the Committee based on
performance against those targets.
Individual objectives are set at the start of the year by
the Committee and performance against objectives is
assessed by the Committee.
Executive Directors are required to defer 50% of any
bonus earned into shares, or ADS as appropriate, for
three years. Deferred shares vest at the end of the
three years.
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.
LTI awards
To incentivise and recognise delivery of the longer term business priorities, financial growth and increases in shareholder value
compared to other pharmaceutical companies. To provide alignment with shareholder interests, a retention element, to encourage
long-term shareholding and discourage excessive risk taking.
PSP
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.
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.
DABP (current)
Operation
For bonus payments from 2018 onwards, Executive
Directors are required to defer 50% of any bonus
earned into shares for three years.
DABP (legacy, pre 2018)
Operation
For bonus payments until 2017, 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.
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:
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.
Opportunity
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.
Share Ownership Requirements (SOR)
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 SOR requirement for the CEO is 650% of salary,
and the SOR requirement for other Executive Directors is 300% of salary.
Executive Directors are required to continue to satisfy these requirements
for a minimum of 12 months following retirement from GSK.
For details of our policy on clawback/malus, recruitment remuneration, loss of office and termination payments, please refer to the full 2017 Remuneration
policy report on pages 138 to 146 of the 2016 Annual Report, available at www.gsk.com in the Investors section.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 144
2017 Remuneration policy summary 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 2018 under the
policy. A range of potential outcomes is provided for each Executive
Director and the underlying assumptions are set out below.
All scenarios:
– 2018 base salary has been used.
– 2017 benefits and pension figures have been used for the CEO,
CFO and the outgoing President, R&D, i.e. based on actual
amounts received in 2017 in respect of the ongoing policy. As the
new Chief Scientific Officer and President, R&D was not in role
during 2017, the benefits value for this role is based on the value of
benefits (excluding Other benefits and Travel) and including
pension contribution based on policy.
– The amounts shown under value of PSP awards are based on
the relevant multiples for 2018. 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, CEO (£000)
10,000
8,000
6,000
4,000
2,000
0
£9.20m
61%
£4.02m
37%
26%
37%
£1.49m
100%
22%
16%
Fixed
Expected
Maximum
Simon Dingemans, CFO (£000)
6,000
4,000
2,000
0
£1.07m
100%
£2.66m
31%
29%
40%
£5.70m
54%
27%
19%
Fixed
Expected
Maximum
Dr Hal Barron, Chief Scientific Officer and President, R&D ($000)
16,000
12,000
8,000
4,000
0
$14.27m
60%
24%
17%
$6.34m
36%
27%
37%
$2.37m
100%
Fixed
Expected
Maximum
Dr Patrick Vallance, outgoing President, R&D (£000)(1)
4,000
3,000
2,000
1,000
0
£0.26m
£0.26m
£0.26m
100%
100%
100%
Fixed
Fixed
Fixed
Fixed pay
Annual bonus
PSP
(1) Outgoing President, R&D, will leave GSK on 31 March 2018 and is not eligible for
bonus or PSP award for 2018. The figures represent his actual remuneration for
January through March 2018.
GSK Annual Report 2017 145
Non-Executive Director Remuneration policy
The company’s Remuneration policy for Non-Executive Directors, set out below, was approved on 4 May 2017 at GSK’s Annual
General Meeting.
Chairman’s
fees
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.
Operation
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.
Opportunity
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.
Details of current fees are set out in the Annual report on
remuneration on page 127.
Performance measures
None
Basic fees
As above
Operation
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.
Opportunity
As with the Chairman, fees are reviewed annually and set by
reference to independently sourced data.
Performance measures
None
Details of current fees are set out in the Annual report on
remuneration on page 127.
Supplemental To compensate Non-Executive Directors (other than the Chairman) for taking on additional Board responsibilities or undertaking
fees
intercontinental travel.
Operation
Additional fees for Committee Chairmen, the Senior
Independent Non-Executive Director, Science and Medical
Experts and intercontinental travel.
Opportunity
Details of supplemental fees are set out in the Annual report
on remuneration on page 127.
Performance measures
None
Benefits
To facilitate execution of responsibilities and duties required by the role.
Operation
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.
Opportunity
There is no formal maximum limit as benefit costs can
fluctuate depending on changes in provider costs and
individual circumstances.
Details of current benefits and costs are set out in the
Annual report on remuneration on page 127.
Performance measures
None
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 146
2017 Remuneration policy summary continued
Operation and scope of Remuneration policy
The 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 operate for a period of
three years from the date of approval at the company’s Annual
General Meeting on 4 May 2017.
The Committee wrote the 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 the Policy.
The Committee intends the 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 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 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 Annual report on remuneration 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 Annual report on remuneration are not subject to
audit nor are the pages referred to from within the audited sections.
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
(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 meeting was held in December 2017, at which Urs
Rohner, the Committee Chairman, shared updates on remuneration
matters in the last 12 months and proposals for 2018 onwards.
The Annual report on remuneration has been approved by the Board
of Directors and signed on its behalf by:
Urs Rohner
Remuneration Committee Chairman
12 March 2018
GSK Annual Report 2017 GSK Annual Report 2017
147
147
Strategic report
Governance and remuneration
Financial statements
Investor information
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
233
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 148
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
2017, comprising principal statements and supporting notes,
are set out in the ‘Financial statements’ on pages 158 to 232 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
2017 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 2017
confirms that, to the best of his or her knowledge:
– 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 79 to 112. 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 2017,
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
– 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
Philip Hampton
Chairman
12 March 2018
GSK Annual Report 2017 149
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
(the “financial statements”):
– give a true and fair view of the state of the Group’s affairs at
31 December 2017 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.
We have audited the financial statements, included within the
Annual Report, which comprise: the consolidated balance sheet
at 31 December 2017; 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 financial statements, which include a
description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit & Risk
Committee.
Separate opinion in relation to IFRSs as issued by the IASB
As explained in Note 1 to the 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 have been properly
prepared in accordance with IFRSs as issued by the IASB.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (“ISAs (UK)”) and applicable law.
Our responsibilities under ISAs (UK) are further described in the
auditors’ responsibilities for the audit of the financial statements
section of our report. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our
opinion.
Independence
We remained independent of the Group in accordance with the
ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard, as
applicable to listed public interest entities, and we have fulfilled our
other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit
services prohibited by the FRC’s Ethical Standard were not provided
to the Group.
Other than those disclosed in Note 8 to the financial statements,
we have provided no non-audit services to the Group in the period
from 1 January 2017 to 31 December 2017.
Our audit approach
Overview
Materiality
– Overall Group materiality: £290 million (2016 – £260 million),
based on 4% of profit before tax, adding back certain items.
Audit scope
– Our audit included full scope audits of 18 reporting components
with specific audit procedures performed at a further 49 reporting
components.
– Taken together, the components at which audit work was
performed accounted for 70% of consolidated revenue, 74%
of consolidated profit before tax and 78% of profit before tax
adjusted for certain items used to determine our materiality and
covered all components that individually contributed more than
2% of revenue, profit before tax and profit before tax adjusted
for certain items used to determine our materiality.
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, transfer pricing and the impact of
US tax reform
– Litigation
– Finance transformation
– Investigations into the Group’s commercial operations
The scope of our audit
As part of designing our audit, we determined materiality and
assessed 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.
We gained an understanding of the legal and regulatory framework
applicable to the Group and the industry in which it operates and
considered the risk of acts by the Group which were contrary to
applicable laws and regulations, including fraud. We designed audit
procedures at Group and significant component levels to respond
to the risk, recognising that the risk of not detecting a material
misstatement due to fraud is higher than the risk of not detecting one
resulting from error, as fraud may involve deliberate concealment by,
for example, forgery or intentional misrepresentations or through
collusion. We designed audit procedures that focused on laws and
regulations that could give rise to a material misstatement in the event
of non-compliance particularly relating to, but not limited to, defence
of products, pricing and practices legislation, taxation and anti-
bribery and corruption legislation. Our tests included, but were
not limited to, enquiries of management, review of related work
performed by component audit teams, review of relevant Internal
Audit reports and discussions with in-house legal counsel
supplemented by review of external legal counsel correspondence
and in certain cases by discussions with external legal counsel.
We also inspected underlying support and calculations and
assessed and tested the design and operating effectiveness of
related controls. There are inherent limitations in the audit procedures
described above as the further removed non-compliance with laws
and regulations is from the events and transactions reflected in the
financial statements, the less likely we would become aware of it.
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.
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Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud)
identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit;
and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon,
were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide
a separate opinion on these matters. This is not a complete list of all risks identified by our audit.
Key audit matter
How our audit addressed the key audit matter
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 increasingly prevalent.
The directors have determined an accrual of £2,837 million to
be necessary at 31 December 2017 (2016 – £2,218 million).
Carrying value of goodwill and intangible assets
Refer to Notes 3, 18 and 19 in the Group financial
statements.
The Group has £16.5 billion of intangible assets (31 December
2016 – £17.8 billion), comprising significant licences, patents and
acquired trademarks (excluding computer software). In addition,
the Group has £5.7 billion of goodwill at 31 December 2017
(2016 – £6.0 billion).
The carrying values of goodwill and intangible assets will be
recovered through 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.
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 2017 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.
Further, we verified 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 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 carrying values of
goodwill and intangible assets are appropriate in the context of the
Group financial statements taken as a whole.
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Key audit matter
How our audit addressed the key audit matter
Acquisition-related liabilities
Refer to Notes 3, 27, 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 joint venture 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.
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 2017, this liability had
a carrying value of £8,606 million (2016 – £7,420 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 the
expected payments to be made to Shionogi, contingent on
future sales of dolutegravir products. The liability is required to
be re-measured to its fair value at each reporting date. Since
initial recognition, it has increased in response to actual and
future sales significantly exceeding original expectations.
At 31 December 2017, the liability was £5,542 million
(2016 – £5,304 million); and
– ViiV Healthcare put option: In 2009, Pfizer was granted a
written put option by the Group that enables it to put its
non-controlling interest back to the Group in the future.
At 31 December 2017, the liability in respect of Pfizer’s
written put option had a carrying value of £1,304 million
(2016 – £1,319 million).
In addition to these liabilities, the Group has recorded certain
other acquisition-related liabilities at 31 December 2017,
including £584 million in relation to contingent consideration
payable on the acquisition of Novartis’ Vaccines business
in 2015.
We have 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, and US tax reform has
therefore had a significant impact on the valuations in 2017.
We deployed our valuations specialists to evaluate certain key
assumptions, including growth projections and discount rates as well
as the integrity and mechanical accuracy of each of management’s
valuation models. This evaluation included look-back tests to assess
the historical accuracy of the Group’s forecasts and assumptions and
performing sensitivity analysis over these key assumptions to determine
if they could 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 value (to be
agreed between GSK and Novartis) is estimated by GSK based on
a multiple of Consumer Healthcare’s profit. We verified the integrity
of the model and compared certain key assumptions including
exchange rates and multiples to third party sources. GSK obtained
valuations from third party banks to support its estimate, which we
obtained and considered. As part of our work, we compared the
earnings forecast approved by the Consumer Healthcare board of
directors and used by management in its model to actual earnings in
2017 and understood the reasons for changes. We also considered
the appropriateness of the assumed exercise date and considered
the impact of different exercise dates on the discounted redemption
value of the option;
– 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 option: Certain assumptions related to forecast
revenue from dolutegravir products used in the valuation of this
liability are consistent with the ViiV Healthcare contingent
consideration valuation. 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, based on our procedures performed, we are
comfortable that the value of each liability at 31 December 2017 is
reasonable in the context of the Group financial statements taken as
a whole 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.
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Key audit matter
How our audit addressed the key audit matter
Uncertain tax positions, transfer pricing and the impact
of US tax reform
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 commercial transactions with complicated accounting
and tax consequences.
Judgement is required in assessing the level of provisions required
in respect of uncertain tax positions. At 31 December 2017, the
Group has recorded provisions of £1,175 million in respect of
uncertain tax positions (2016 – £1,892 million).
There have also been a number of changes in tax law in the US
and Switzerland that have resulted in a material impact on the
Group’s current and deferred tax balances at 31 December 2017.
The most significant impact has been in respect of the US Tax
Cuts and Jobs Act which was substantively enacted before
year-end. In aggregate, the total adjusting item to account for
the impact amounts to £1,078 million in the tax line. The main
changes include a reduction in the corporate tax rate that should
be applied to deferred taxation balances and the introduction of
a toll tax for the deemed repatriation of certain deferred foreign
earnings. Some of the changes are complex and there are a
number of areas of uncertainty relating both to the manner in
which the law will apply and to the accounting in certain areas.
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 advice 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 and related disclosure to be
acceptable in the context of the Group financial statements taken
as a whole.
Deploying our US tax specialists, we evaluated the key judgements,
assumptions and interpretations used by management to assess the
impact of US tax reform. We have undertaken procedures to validate
the material corporate tax rate change adjustments to current and
deferred tax balances.
With respect to the £348 million toll tax charge for the deemed
repatriation of foreign earnings of subsidiaries of US entities in the
Group, we have evaluated the documentation prepared by management
and assessed the underlying calculations together with advice from third
party advisors, undertaken procedures to validate key inputs
underpinning the estimated charge and confirmed that the liability is
appropriately presented in the Group’s balance sheet.
Given the complexity and uncertainty relating to US tax reform, we
expect that there will be true-ups and updates to the estimates as
further guidance is issued. However, we are satisfied that the
accounting positions taken by the Group at 31 December 2017
represent management’s best estimate of the impact of US tax
reform at this time.
Litigation
Refer to Notes 3, 29 and 45 in the Group financial
statements.
The pharmaceuticals industry is heavily regulated which increases
inherent litigation risk. The Group is engaged in a number of legal
actions, including product liability, anti-trust and related private
litigation, of which the most significant are disclosed in Notes
29 and 45.
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 2017, the Group held provisions of £186 million
in respect of legal actions (2016 – £344 million). There has been
a significant reduction in the provision as a result of the Group
settling its largest individual cases relating to Paxil. Nevertheless,
we have continued to focus on this area given the possibility of
adverse outcomes.
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 external 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. This included obtaining confirmations from external legal
counsel to confirm our understanding of settled and outstanding
litigation and asserted claims. We also evaluated significant adjustments
to legal provisions recorded during the year.
As disclosed in Notes 29 and 45 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.
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Key audit matter
How our audit addressed the key audit matter
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). The number of
market migrations onto the central ERP system in 2017 was lower
than 2016. However, as a number of markets migrating in 2017
pose particular complexity due to their position in the Group’s
supply chain, we have continued to focus on this area.
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.
Investigations into the Group’s commercial operations
Refer to Notes 3, 29 and 45 in the Group financial
statements.
The Group remains subject to an ongoing investigation into its
commercial operations by the SFO in the UK. At 31 December
2017, 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 45 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 of markets to ascertain whether inappropriate
commercial operations 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 operations
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
impairments.
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 into
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.
We met with the directors, management and in-house legal counsel
and we 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 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 SFO investigation, we independently circularised and
spoke with 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 and the related disclosures in the Group financial statements.
We were satisfied with the Group’s provisioning decisions at 31
December 2017 in the context of the Group financial statements taken
as a whole and with the adequacy of the disclosures given the status
of investigations.
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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 structure of the Group, the
accounting processes and controls and the industry in which it
operates.
The Group financial statements are a consolidation of over 500
reporting components. We identified 18 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 49 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 profit before tax adjusted for certain items used
to determine our materiality.
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, 10 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
Japan, India, Switzerland, Italy, Brazil, Korea, Germany and Belgium.
In addition, we visited six 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 and review of component auditor work papers.
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 70% of consolidated revenue, 74% of
consolidated profit before tax and 78% of profit before tax adjusted
for certain items used to determine our materiality. 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.
GSK Annual Report 2017 155
Report on the Group financial statements continued
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 in aggregate 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
£290 million (2016 – £260 million).
4% of profit before tax, adding back certain items including the re-measurement charges for
Shionogi-ViiV Healthcare contingent consideration (£556 million) and Vaccines contingent
consideration (£101 million), the re-measurement charges for the Consumer Healthcare put
option liability (£986 million), the ViiV put option re-measurement credit (£126 million), the
re-measurement of acquisition related liabilities as a result of US tax reform (£666 million),
major restructuring costs (£1,060 million), significant legal costs (£68 million) and
impairment of intangible assets (£688 million) and deducting net income relating to the
gain on disposal of assets (£314 million).
The Group’s principal measure of earnings comprises adjusted 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 material unusual or
non-operational items that may obscure the key trends and factors determining the Group’s
operational performance.
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 adjusting items as in our view these are recurring items which do not introduce
volatility to the Group’s earnings.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of
materiality allocated across components was between £15 million and £154 million. Certain components were audited to a local statutory
audit materiality that was also less than our overall Group materiality.
We agreed with the Audit & Risk Committee that we would report to it misstatements identified during our audit above £10 million (2016
– £10 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or
draw attention to in respect of the directors’ statement in the
financial statements about whether the directors considered it
appropriate to adopt the going concern basis of accounting in
preparing the financial statements and the directors’ identification
of any material uncertainties to the Group’s ability to continue as
a going concern over a period of at least twelve months from the
date of approval of the financial statements.
We have nothing material to add or to draw attention to. However,
because not all future events or conditions can be predicted, this
statement is not a guarantee as to the Group’s ability to continue as a
going concern.
We are required to report if the directors’ statement relating to
going concern in accordance with Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit.
We have nothing to report.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 156
Independent Auditors’ report continued
Reporting on other information
Reporting on other information
The other information comprises all of the information in the Annual
Report other than the financial statements and our auditors’ report
thereon. The directors are responsible for the other information.
Our opinion on the financial statements does not cover the other
information and, accordingly, we do not express an audit opinion
or, except to the extent otherwise explicitly stated in this report, any
form of assurance thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the audit,
or otherwise appears to be materially misstated. If we identify an
apparent material inconsistency or material misstatement, we are
required to perform procedures to conclude whether there is a
material misstatement of the financial statements or a material
misstatement of the other information. If, based on the work we have
performed, we conclude that there is a material misstatement of this
other information, we are required to report that fact. We have
nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ Report, we also
considered whether the disclosures required by the UK Companies
Act 2006 have been included.
Based on the responsibilities described above and our work
undertaken in the course of the audit, the Companies Act 2006,
(CA06), ISAs (UK) and the Listing Rules of the Financial Conduct
Authority (FCA) require us also to report certain opinions and matters
as described below (required by ISAs (UK) unless otherwise stated).
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the
audit, the information given in the Strategic Report and Directors’
Report for the year ended 31 December 2017 is consistent with the
financial statements and has been prepared in accordance with
applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and its
environment obtained in the course of the audit, we did not identify
any material misstatements in the Strategic Report and Directors’
Report. (CA06)
The directors’ assessment of the prospects of the Group
and of the principal risks that would threaten the solvency
or liquidity of the Group
We have nothing material to add or draw attention to regarding:
– The directors’ confirmation on page 105 of the Annual Report 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;
– The disclosures in the Annual Report that describe those risks and
explain how they are being managed or mitigated; and
– The directors’ explanation on page 57 of the Annual Report 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 to report having performed a review of the
directors’ statement that they have carried out a robust assessment
of the principal risks facing the Group and 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 inquiries and
considering the directors’ process supporting their statements;
checking that the statements are in alignment with the relevant
provisions of the UK Corporate Governance Code (the “Code”);
and considering whether the statements are consistent with the
knowledge and understanding of the Group its environment obtained
in the course of the audit. (Listing Rules)
Other Code provisions
We have nothing to report in respect of our responsibility to report
when:
– The statement given by the directors, on page 104, that they
consider the Annual Report taken as a whole to be fair, balanced
and understandable, and provides the information necessary for
the members to assess the Group’s position and performance,
business model and strategy is materially inconsistent with our
knowledge of the Group obtained in the course of performing
our audit;
– The section of the Annual Report on pages 99 to 106 describing
the work of the Audit & Risk Committee does not appropriately
address matters communicated by us to the Audit & Risk
Committee; and
– The directors’ statement relating to the parent company’s
compliance with the Code does not properly disclose a departure
from a relevant provision of the Code specified, under the Listing
Rules, for review by the auditors.
GSK Annual Report 2017 157
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the directors’ statement of responsibilities
set out on page 148, the directors are responsible for the preparation
of the financial statements in accordance with the applicable
framework and for being satisfied that they give a true and fair view.
The directors are also responsible for such internal control as they
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due
to fraud or error.
Use of this report
This report, including the opinions, has been prepared for and only
for the parent 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.
Companies Act 2006 exception reporting
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
– certain disclosures of directors’ remuneration specified by law are
not made.
We have no exceptions to report arising from this responsibility.
Appointment
We have audited the Group since its inception in 2000 and our
legacy firms were previously auditors to certain of the Group’s legacy
components since at least 1974 (which is as far back as records can
be obtained). The period of total uninterrupted engagement is at least
44 years, covering, as a minimum, the years ended 31 December
1974 to 31 December 2017. The year ended 31 December 2017 is
the final year of engagement following the Group’s decision to rotate
the external audit.
In preparing the financial statements, the directors are responsible
for assessing the Group’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using
the going concern basis of accounting unless the directors either
intend to liquidate the Group or to cease operations or have no
realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’
report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted
in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the
financial statements is located on the FRC’s website at: www.frc.org.
uk/auditorsresponsibilities. This description forms part of our
auditors’ report.
Other matters
We have reported separately on the parent company financial
statements of GlaxoSmithKline plc for the year ended 31 December
2017.
The parent company has passed a resolution in accordance with
section 506 of the Companies Act that the senior statutory auditor’s
name should not be stated.
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
12 March 2018
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 158
Consolidated income statement
for the year ended 31 December 2017
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
2017
£m
30,186
(10,342)
19,844
(9,672)
(4,476)
356
(1,965)
4,087
65
(734)
94
13
3,525
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
14
(1,356)
(877)
(2,154)
2,169
637
1,532
2,169
31.4p
31.0p
1,062
150
912
1,062
18.8p
18.6p
8,372
(50)
8,422
8,372
174.3p
172.3p
15
15
Consolidated statement of comprehensive income
for the year ended 31 December 2017
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
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 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/(losses) 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
34
2017
£m
2,169
2016
£m
1,062
462
109
(14)
47
(42)
(18)
(10)
–
–
–
534
(149)
549
(221)
179
713
646
–
251
–
(245)
51
2
2
1
–
708
603
(475)
126
254
962
2,882
2,024
2,394
488
2,882
1,271
753
2,024
2015
£m
8,372
(618)
–
416
(91)
(346)
36
2
–
2
(77)
(676)
8
261
(80)
189
(487)
7,885
7,927
(42)
7,885
GSK Annual Report 2017 Consolidated balance sheet
as at 31 December 2017
Non-current assets
Property, plant and equipment
Goodwill
Other intangible assets
Investments in associates and joint ventures
Other investments
Deferred tax assets
Derivative financial instruments
Other non-current assets
Total non-current assets
Current assets
Inventories
Current tax recoverable
Trade and other receivables
Derivative financial instruments
Liquid investments
Cash and cash equivalents
Assets held for sale
Total current assets
Total assets
Current liabilities
Short-term borrowings
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
Corporation tax payable
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
159
Notes
2017
£m
2016
£m
17
18
19
20
21
14
42
22
23
14
24
42
31
25
26
31
39
27
42
14
29
31
14
14
28
29
39
30
33
33
34
34
10,860
5,734
17,562
183
918
3,796
8
1,413
40,474
5,557
258
6,000
68
78
3,833
113
15,907
56,381
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
(2,825)
(1,076)
(4,129)
(561)
(20,970)
(11,964)
(74)
(995)
(629)
(26,569)
(194)
(1,305)
(848)
(19,001)
(14,264)
(14,661)
(411)
(1,396)
(3,539)
(636)
(5,096)
(981)
(26,323)
(52,892)
3,489
1,343
3,019
(6,477)
2,047
(68)
3,557
3,489
–
(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
The financial statements on pages 158 to 232 were approved by the Board on 12 March 2018 and signed on its behalf by
Philip Hampton
Chairman
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 160
Consolidated statement of changes in equity
for the year ended 31 December 2017
At 1 January 2015
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
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
Distributions to non-controlling interests
Contribution from non-controlling interests
Dividends to shareholders
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 2017
Shareholders’ equity
Share
capital
£m
1,339
Share
premium
£m
2,759
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
72
–
–
–
–
Retained
earnings
£m
(2,074)
8,422
(520)
7,902
–
(3,874)
2,891
(6,204)
–
(229)
–
–
(175)
356
10
Other
reserves
£m
2,239
–
25
25
–
–
–
–
–
–
–
(99)
175
–
–
1,340
2,831
(1,397)
2,340
–
–
–
–
–
–
–
–
2
–
–
–
–
–
–
–
–
–
–
–
–
87
36
–
–
–
912
284
1,196
–
(4,850)
(2,013)
1,244
17
–
466
(381)
319
7
–
75
75
–
–
–
–
–
–
(576)
381
–
–
1,342
2,954
(5,392)
2,220
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
–
–
55
10
–
–
–
1,343
–
3,019
1,532
899
2,431
–
–
(3,906)
–
–
581
(520)
333
(4)
(6,477)
–
(37)
(37)
–
–
–
–
–
(656)
520
–
–
2,047
Total
£m
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
1,532
862
2,394
–
–
(3,906)
–
56
(65)
–
333
(4)
(68)
Non-controlling
interests
£m
673
(50)
8
(42)
(237)
–
–
–
3,370
–
–
–
–
–
–
3,764
150
603
753
(534)
–
(159)
–
15
–
–
–
–
–
3,839
637
(149)
488
(789)
21
–
(2)
–
–
–
–
–
3,557
Total
equity
£m
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
2,169
713
2,882
(789)
21
(3,906)
(2)
56
(65)
–
333
(4)
3,489
GSK Annual Report 2017 Consolidated cash flow statement
for the year ended 31 December 2017
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
Decrease/(increase) 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 non-controlling interests
Increase in long-term loans
(Repayment of)/Increase in short-term loans
Net repayment of obligations under finance leases
Interest paid
Dividends paid to shareholders
Distributions to non-controlling interests
Contributions from non-controlling interests
Other financing cash flows
Net cash outflow from financing activities
161
Notes
36
2017
£m
2016
£m
2015
£m
2,169
6,089
8,258
(1,340)
6,918
1,062
7,044
8,106
(1,609)
6,497
8,372
(3,741)
4,631
(2,062)
2,569
(1,545)
(1,543)
(1,380)
38
38
20
33
281
(657)
48
(80)
64
(91)
–
282
(15)
196
4
64
98
(809)
283
(96)
683
(73)
17
72
(11)
–
–
68
6
(1,443)
42
(1,269)
(65)
56
(29)
2,233
(3,200)
(23)
(781)
(3,906)
(779)
21
93
(6,380)
(74)
89
–
–
148
(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
–
–
(2,412)
(25)
(762)
(3,874)
(237)
–
233
(7,103)
(Decrease)/increase in cash and bank overdrafts
37
(905)
(1,164)
1,503
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
4,605
(100)
(905)
3,600
3,833
(233)
3,600
5,486
283
(1,164)
4,605
4,897
(292)
4,605
4,028
(45)
1,503
5,486
5,830
(344)
5,486
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 162
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, vaccines, over-the-counter (OTC)
medicines and health-related consumer products. GSK’s principal
pharmaceutical products include medicines in the following
therapeutic areas: respiratory, HIV, immuno-inflammation, anti-virals,
central nervous system, cardiovascular and urogenital, metabolic,
anti-bacterials, dermatology and rare diseases.
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 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 subsidiaries and associates which, in the opinion of
the Directors, principally affected the amount of profit or net assets
of the Group is given in Note 44, ‘Principal Group companies’.
Accounting principles and policies
The financial statements have been prepared using the historical
cost convention modified by the revaluation of certain items, as
stated in the accounting policies, and on a going concern basis.
The financial statements have been prepared in accordance
with the Group’s accounting policies approved by the Board
and described in Note 2, ‘Accounting principles and policies’.
Information on the application of these accounting policies,
including areas of estimation and judgement is given in Note 3,
‘Key accounting judgements and estimates’.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Implementation of new accounting standards and interpretations
An agenda decision by the IFRS Interpretations Committee in
September 2017 clarified that charges for interest on tax should
be reported within finance expense and certain penalties on tax
settlements should be reported within administrative expenses.
Previously GSK had reported these charges within the overall tax
charge in the income statement or other comprehensive income,
as appropriate.
GSK has adopted the revised basis of reporting in 2017 and, as
a result of a number of settlements during the year, has recorded
credits for interest on tax for 2017 of £24 million in finance expense.
There were no material charges for penalties on settlements during
2017 that required adjustment.
Accrued interest payable on tax at 31 December 2017 was
£52 million, and this is included within trade and other payables
on the Group balance sheet. The impact on prior years was not
material and so prior year amounts have not been restated.
Financial period
These financial statements cover the financial year from 1 January to
31 December 2017, with comparative figures for the financial years
from 1 January to 31 December 2016 and, where appropriate, from
1 January to 31 December 2015.
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 239 and the accounting policies are given on page 240.
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.
GSK Annual Report 2017 163
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
£16 million (2016 – £9 million; 2015 – £14 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.
No such income is included in turnover for all the periods presented.
Royalty income is recognised on an accruals basis in accordance
with the terms of the relevant licensing agreements.
Expenditure
Expenditure is recognised in respect of goods and services received
when supplied in accordance with contractual terms. Provision is
made when an obligation exists for a future liability in respect of a
past event and where the amount of the obligation can be reliably
estimated. Manufacturing start-up costs between validation and the
achievement of normal production are expensed as incurred.
Advertising and promotion expenditure is charged to the income
statement as incurred. Shipment costs on inter-company transfers
are charged to cost of sales; distribution costs on sales to customers
are included in selling, general and administrative expenditure.
Restructuring costs are recognised and provided for, where
appropriate, in respect of the direct expenditure of a business
reorganisation where the plans are sufficiently detailed and well
advanced, and where appropriate communication to those affected
has been undertaken.
2. Accounting principles and policies continued
Transactions and balances between subsidiaries are eliminated and
no profit before tax is taken on sales between subsidiaries until the
products are sold to customers outside the Group. The relevant
proportion of profits on transactions with joint ventures, joint
operations and associates is also deferred until the products are
sold to third parties. Transactions with non-controlling interests are
recorded directly in equity. Deferred tax relief on unrealised intra-
Group profit is accounted for only to the extent that it is considered
recoverable.
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.
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.
Where not all of the equity of a subsidiary is acquired the non-
controlling interest is recognised either at fair value or at the non-
controlling interest’s share of the net assets of the subsidiary, on a
case-by-case basis. Changes in the Group’s ownership percentage
of subsidiaries are accounted for within equity.
Foreign currency translation
Foreign currency transactions are booked in the functional currency
of the Group company at the exchange rate ruling on the date of
transaction. Foreign currency monetary assets and liabilities are
retranslated into the functional currency at rates of exchange ruling
at the balance sheet date. Exchange differences are included in the
income statement.
On consolidation, assets and liabilities, including related goodwill,
of overseas subsidiaries, associates and joint ventures, are translated
into Sterling at rates of exchange ruling at the balance sheet date.
The results and cash flows of overseas subsidiaries, associates and
joint ventures are translated into Sterling using average rates of
exchange.
Exchange adjustments arising when the opening net assets and the
profits for the year retained by overseas subsidiaries, associates and
joint ventures are translated into Sterling, less exchange differences
arising on related foreign currency borrowings which hedge the
Group’s net investment in these operations, are taken to a separate
component of equity.
When translating into Sterling the assets, liabilities, results and cash
flows of overseas subsidiaries, associates and joint ventures which
are reported in currencies of hyper-inflationary economies,
adjustments are made where material to reflect current price levels.
Any loss on net monetary assets is charged to the consolidated
income statement.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 164
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.
GSK Annual Report 2017 165
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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 166
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 judgements about when or how items should be
recognised in the financial statements and 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.
Taxation
The tax charge for the year was £1,356 million (2016 – £877 million).
At December 2017, current tax payable was £995 million
(2016 – £1,305 million), non-current corporation tax payable was
£411 million (2016 – £nil), current tax recoverable was £258 million
(2016 – £226 million), deferred tax liabilities were £1,396 million
(2016 – £1,934 million) and deferred tax assets were £3,796 million
(2016 – £4,374 million).
Turnover
Reported Group turnover for 2017 was £30,186 million
(2016 – £27,889 million).
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.
Deferred tax assets are recognised when the judgement is made 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, in particular,
US tax reform, are set out in Note 14, ‘Taxation’. A 1% change in the
Group’s effective tax rate in 2017 would have changed the Total tax
charge for the year by approximately £35 million.
The Group has open tax issues with a number of revenue authorities.
Where management makes a judgement that an outflow of funds is
probable and a reliable estimate of the outcome of the dispute can
be made, provision is made for the best estimate of the liability. In
estimating 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 each dispute progresses and new facts emerge.
GSK Annual Report 2017 167
3. Key accounting judgements and estimates continued
Contingent consideration and put option liabilities
The 2017 income statement charge for contingent consideration and
put option liabilities was £2,134 million (2016 – £3,991 million).
At 31 December 2017, the liability for contingent consideration
amounted to £6,172 million (2016 – £5,896 million). Of this amount,
£5,542 million (2016 – £5,304 million) related to the acquisition of
the former Shionogi-ViiV Healthcare joint venture in 2012 and
£584 million (2016 – £545 million) related to the acquisition of the
Vaccines business from Novartis in 2016.
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 £8,606 million at
31 December 2017 (2016 – £7,420 million). This represents the
present value of the redemption value estimated 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 27, ‘Trade and other
payables’.
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, which is derived from an internal valuation of the ViiV
Healthcare business, utilising both discounted forecast future cash
flow and multiples-based methodologies amounted to £1,304 million
at 31 December 2017 (2016 – £1,319 million). Sensitivity analysis is
also given in Note 27, ‘Trade and other payables’.
GSK continues to believe that it has made adequate provision for
the liabilities likely to arise from open assessments. At 31 December
2017, the Group had recognised provisions of £1,175 million in
respect of uncertain tax positions (2016 – £1,892 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 £166 million (2016 – £162 million).
At 31 December 2017 provisions for legal and other disputes
amounted to £186 million (2016 – £344 million).
The Group provides for anticipated settlement costs where
management makes a judgement that an outflow of resources is
probable and a reliable estimate can be made of the likely outcome of
the dispute and legal and other expenses arising from claims against
the Group. The estimated provisions take into account the specific
circumstances of each dispute and relevant external advice, are
inherently judgemental and could change substantially over time as
each dispute progresses and new facts emerge. Details of the status
and various uncertainties involved in the significant unresolved
disputes are set out in Note 45, ‘Legal proceedings’.
The company’s Directors, having taken legal advice, have
established provisions after taking into account the relevant facts
and circumstances of each matter and in accordance with accounting
requirements. In respect of product liability claims related to certain
products there is sufficient history of claims made and settlements to
enable management to make a reliable estimate of the provision
required to cover unasserted claims. The Group may become involved
in legal proceedings, in respect of which it is not possible to make a
reliable estimate of the expected financial effect, if any, that could
result from ultimate resolution of the proceedings. In these cases,
appropriate disclosure about such cases would be provided, 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.
Intangible asset impairments
At 31 December 2017, intangible assets were £17,562 million
(2016 – £18,776 million).
Impairment tests on intangible assets are undertaken if events occur
which call into question the carrying values of the assets. In addition,
intangible assets with indefinite useful lives, or which are not yet
available for use, 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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 168
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 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 has been 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 new Standard is not expected to have a material impact on the
amount or timing of recognition of reported revenue. In its financial
statements for 2018, GSK will adopt IFRS 15 applying the modified
retrospective approach, with a cumulative adjustment to decrease
equity at 1 January 2018 by approximately £4 million. In accordance
with the requirements of the Standard where the modified
retrospective approach is adopted, prior year results will not
be restated.
IFRS 9 ‘Financial instruments’ was issued in its final form in July 2014
and has been implemented by the Group from 1 January 2018. The
Standard replaces the majority of IAS 39 and covers the
classification, measurement and de-recognition of financial assets
and financial liabilities, introduces a new impairment model for
financial assets based on expected losses rather than incurred
losses and provides a new hedge accounting model.
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:
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 £800 million and
an increase in the annual pension cost of approximately £29 million.
The selection of different assumptions could affect the future results
of the Group.
The new Standard is not expected to have a material impact on
reported results. In its financial statements for 2018, GSK will adopt
IFRS 9 retrospectively, but with certain permitted exceptions.
As a result, prior year results will not be restated, but there will be
a cumulative adjustment to decrease equity at 1 January 2018 by
approximately £11 million.
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. This is expected to result in a significant increase
in both assets and liabilities recognised. The costs of operating
leases currently included within operating costs will be split and
the financing element of the charge will be reported within finance
expense. Finance lease obligations at 31 December 2017 are
set out in Note 31, ‘Net debt’ and the undiscounted commitments
under non-cancellable operating leases are set out in Note 41,
‘Commitments’.
The Group is assessing the potential impact of IFRS 16.
IFRIC 23 ‘Uncertainty over income tax treatments’ was issued in June
2017 and will be implemented by the Group from 1 January 2019.
The Interpretation clarifies that if it is considered probable that a tax
authority will accept an uncertain tax treatment, the tax charge should
be calculated on that basis. If it is not considered probable, the effect
of the uncertainty should be estimated and reflected in the tax charge.
In assessing the uncertainty, it is assumed that the tax authority will
have full knowledge of all information related to the matter.
The Group is continuing to assess the potential impact of the
new Interpretation.
Average rates:
US$/£
Euro/£
Yen/£
Period end rates:
US$/£
Euro/£
Yen/£
2017
1.30
1.15
145
1.35
1.13
152
2016
1.36
1.23
149
1.24
1.17
144
2015
1.53
1.37
185
1.47
1.36
177
GSK Annual Report 2017 169
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). GSK reports results under four segments: Pharmaceuticals; Pharmaceuticals R&D; Vaccines and
Consumer Healthcare, and individual members of the CET are responsible for each segment.
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.
As explained on page 58, from 1 January 2017 only significant legal charges have been excluded from segment profit and reported within
other reconciling items between segment profit and operating profit. Segment profits for 2016 and 2015 have been revised onto a
comparable basis.
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 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
HIV
Immuno-inflammation
Established Pharmaceuticals
2017
£m
17,276
5,160
7,750
30,186
–
2016
£m
16,104
4,592
7,193
27,889
–
2015
£m
14,157
3,656
6,038
23,851
72
30,186
27,889
23,923
2017
£m
6,991
4,350
377
5,558
17,276
2016
£m
6,510
3,556
340
5,698
16,104
2015
£m
5,741
2,322
263
5,831
14,157
During 2017, the US operations of the Pharmaceuticals and Vaccines businesses made sales to three wholesalers of approximately
£2,449 million (2016 – £2,139 million; 2015 – £1,574 million), £3,043 million (2016 – £2,691 million; 2015 – £2,471 million) and
£2,356 million (2016 – £2,129 million; 2015 – £1,602 million) respectively, after allocating final-customer discounts to the wholesalers.
Vaccines turnover by category
Meningitis
Influenza
Shingles
Established Vaccines
Consumer Healthcare turnover by category
Wellness
Oral care
Nutrition
Skin health
2017
£m
890
488
22
3,760
5,160
2017
£m
4,001
2,466
680
603
7,750
2016
£m
662
414
–
3,516
4,592
2016
£m
3,726
2,223
674
570
7,193
2015
£m
326
268
–
3,062
3,656
2015
£m
2,970
1,875
684
509
6,038
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 170
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
2017
£m
8,667
(2,740)
5,927
1,644
1,373
8,944
(376)
(4,481)
4,087
65
(734)
94
13
3,525
(1,356)
2,169
2016
(revised)
£m
7,976
(2,488)
5,488
1,429
1,116
8,033
(362)
(5,073)
2,598
72
(736)
–
5
1,939
(877)
1,062
2015
(revised)
£m
6,449
(2,168)
4,281
958
684
5,923
(264)
4,663
10,322
104
(757)
843
14
10,526
(2,154)
8,372
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, significant legal charges and expenses on the
settlement of litigation and government investigations, disposals of businesses, products and associates, certain other items related to major
acquisition and disposal activity and the pre-tax impact of the enactment of the US Tax Cuts and Jobs Act.
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
2017
£m
551
96
647
405
135
1,187
144
591
1,922
2016
£m
440
211
651
315
126
1,092
94
588
1,774
2015
£m
303
238
541
253
140
934
145
551
1,630
GSK Annual Report 2017Notes to the financial statements continued
171
2015
£m
57
105
162
17
5
184
18
385
587
2017
£m
38
10
48
13
10
71
3
995
1,069
2016
£m
29
88
117
34
46
197
24
68
289
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
The other reconciling items between segment impairment and total impairment included £229 million related to the progressive withdrawal
of Tanzeum.
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 reversals and total impairment reversals
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
2015
£m
(8)
(10)
(18)
–
(4)
(22)
(2)
–
(24)
2017
£m
(13)
(2)
(15)
–
(1)
(16)
–
(36)
(52)
2017
£m
2,017
522
2,539
9,707
2,003
14,249
868
15,117
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
(13,178)
(13,804)
183
2
1,252
113
3,489
263
(38)
1,361
215
4,963
The Pharmaceuticals segment includes the Shionogi-ViiV Healthcare contingent consideration liability of £5,542 million
(2016 – £5,304 million) and the Pfizer put option of £1,304 million (2016 – £1,319 million). The Consumer Healthcare segment
includes the put option liability of £8,606 million (2016 – £7,420 million).
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 172
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
Non-current assets by location of subsidiary
UK
US
International
Non-current assets
2015
£m
1,102
8,222
14,599
23,923
2017
£m
940
11,263
17,983
30,186
2017
£m
6,824
6,841
20,901
34,566
2016
£m
1,056
10,197
16,636
27,889
2016
£m
7,060
7,802
21,234
36,096
Non-current assets by location excludes amounts relating to other investments, deferred tax assets, derivative financial instruments, pension
assets, amounts receivable under insurance contracts and certain other non-current receivables.
7. Other operating income/(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)
2017
£m
(30)
37
195
(1,012)
13
(1,186)
9
9
2016
£m
(47)
254
283
(2,205)
(577)
(1,133)
(3)
23
2015
£m
(263)
342
9,661
(1,965)
–
(83)
2
21
(1,965)
(3,405)
7,715
Disposal of businesses and assets in 2017 included a profit of £250 million on the disposal of the anaesthesia business to Aspen.
Disposals 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 included £909 million related to the
acquisition of the former Shionogi-ViiV Healthcare joint venture and £53 million payable to Novartis related to the Vaccines acquisition.
The fair value remeasurements on contingent consideration, the remeasurement of ViiV Healthcare put option liabilities and preferential
dividends and the remeasurement of Consumer Healthcare put option liability include the additional charge arising from US tax reform
of £666 million.
GSK Annual Report 2017Notes to the financial statements continued 173
2015
£m
8,030
1,059
376
892
346
738
217
47
7,602
488
(65)
101
8
7
33.1
2017
£m
9,122
1,351
405
988
327
934
690
215
8,526
701
(352)
110
4
5
29.2
2016
£m
8,212
1,265
395
978
180
796
22
53
8,093
533
(145)
91
4
4
29.7
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
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)
The reversals of prior year write-downs of inventories principally arise from the reassessment of usage or demand expectations prior to
inventory expiration.
Net foreign exchange losses include a net loss of £109 million (2016 – £nil; 2015 – £nil) of exchange arising on the reclassification of
exchange on liquidation or disposal of overseas subsidiaries.
Included within operating profit are major restructuring charges of £1,056 million (2016 – £970 million; 2015 – £1,891 million), see Note 10,
‘Major restructuring costs’.
Fees payable to the company’s auditor and its associates:
Audit of parent company and consolidated financial statements
Audit of the company’s subsidiaries
Attestation under s.404 of Sarbanes-Oxley Act 2002
Audit and audit-related services
Taxation compliance
Taxation advice
Other assurance services
All other services
2017
£m
7.0
16.2
4.5
27.7
0.2
0.1
1.0
0.2
29.2
2016
£m
5.8
16.4
4.4
26.6
0.2
1.8
0.3
0.8
29.7
2015
£m
7.5
16.3
4.3
28.1
0.3
3.2
1.1
0.4
33.1
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 2017.
In addition to the above, fees paid in respect of the GSK pension schemes were:
Audit
Other services
2017
£m
0.3
0.1
2016
£m
0.4
–
2015
£m
0.3
–
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 174
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
2017
£m
7,116
802
616
347
241
2016
£m
6,391
733
541
338
209
2015
£m
6,132
633
467
349
449
9,122
8,212
8,030
The increase in wages and salaries included the impact of movements in exchange rates. 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
Cash settled and other plans
2017
£m
276
47
4
20
347
2016
£m
271
39
4
24
338
2015
£m
307
26
4
12
349
The average monthly number of persons employed by the Group (including Directors) during the year was:
Manufacturing
Selling, general and administration
Research and development
2017
Number
38,632
49,141
11,576
99,349
2016
Number
38,611
49,961
11,255
99,827
2015
Number
37,025
52,121
12,046
101,192
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 250. The monthly average number of persons employed by GlaxoSmithKline
plc in 2017 was nil (2016 – 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
2017
£m
26
4
3
22
55
2016
£m
25
4
2
15
46
2015
£m
23
2
3
18
46
GSK Annual Report 2017Notes to the financial statements continued 175
10. Major restructuring costs
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, following the Novartis transaction
completed in 2015 and the CEO Strategic Initiatives Programme announced in July 2017.
The total restructuring costs of £1,056 million in 2017 were incurred in the following areas:
– Restructuring of the R&D organisation, predominantly in the United Kingdom and North America.
– Projects to simplify or eliminate processes leading to staff reductions in support functions.
– Restructuring of the Pharmaceuticals commercial operating model and supply chain 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 costs charged to operating profit under these programmes were 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
2017
£m
259
(43)
278
247
315
1,056
2016
£m
163
(140)
158
108
681
970
2015
£m
718
(44)
419
51
747
1,891
Provision reversals of £43 million (2016 – £140 million; 2015 – £44 million) reflected the release of legacy support function and Novartis
integration provisions. Asset impairments of £278 million (2016 – £158 million; 2015 – £419 million) and other non-cash charges totalling
£247 million (2016 – £108 million; 2015 – £51 million) are non-cash items, principally fixed asset write downs across support functions,
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.
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
2017
£m
2016
£m
2015
£m
60
2
–
1
2
65
67
1
–
2
2
72
71
1
24
3
5
104
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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 176
12. Finance expense
Interest expense arising on:
financial liabilities at amortised cost
derivatives at fair value through profit or loss
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
2017
£m
(698)
(22)
(4)
–
(16)
6
(734)
2016
£m
(671)
(30)
(3)
(1)
(16)
(15)
2015
£m
(655)
(64)
(6)
(2)
(16)
(14)
(736)
(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. Other finance expense includes a £24 million credit for
interest relating to income taxes (see Note 1, ‘Presentation of the financial statements’). The amounts for 2016 and 2015 were not material and
so comparatives have not been restated.
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
2017
£m
16
(3)
13
2016
£m
9
(4)
5
2015
£m
16
(2)
14
At 31 December 2017, 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 2017 share of after tax profits of associates and other comprehensive income includes
a profit of £18 million and other comprehensive income of £nil in respect of Innoviva.
Turnover
Profit after taxation
Other comprehensive income
Total comprehensive income
Since
1 September
2015
£m
20
4
–
4
2016
£m
98
44
–
44
2017
£m
165
103
–
103
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, Anoro Ellipta and Trelegy Ellipta sales.
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 (expense)/income
2017
£m
252
(5)
–
(5)
2016
£m
133
(1)
–
(1)
2015
£m
188
12
25
37
The Group’s sales to associates and joint ventures were £41 million in 2017 (2016 – £43 million; 2015 – £41 million).
GSK Annual Report 2017Notes to the financial statements continued
177
14. Taxation
The Group’s tax charge is the sum of the total current and deferred tax expense.
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
Total tax
2017
£m
199
1,928
(508)
1,619
(263)
1,356
2016
£m
241
1,326
(149)
1,418
(541)
877
2015
£m
156
2,924
(508)
2,572
(418)
2,154
In 2017, GSK made payments of £212 million in UK corporation tax to HMRC. These amounts are for UK corporation tax only, and do not
include the various other business taxes borne in the UK by GSK each year.
The deferred tax credit in 2017 reflected the revaluation of existing deferred tax liabilities to reflect a lower Swiss tax rate applicable following
Swiss tax reform, and an increase in deferred tax assets related to intra-Group profit on inventory. The impact of these items was partly offset
by the revaluation of existing deferred tax assets to reflect the lower headline US tax rate following enactment of US tax reform. In comparison
to 2017, the 2016 and 2015 net deferred tax credits were impacted to a greater extent by remeasurements 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
Reassessment of prior year estimates in respect of current
and deferred taxes
US and Swiss tax reform
Tax on unremitted earnings
Tax charge/tax rate
2017
£m
3,525
679
635
(458)
(75)
227
28
4
196
(475)
595
–
1,356
2017
%
19.25
18.0
(13.0)
(2.1)
6.4
0.8
0.1
5.6
(13.5)
16.9
–
38.5
2016
£m
1,939
388
593
(321)
(93)
340
(15)
(21)
97
2016
%
20.0
30.6
(16.5)
(4.8)
17.5
(0.8)
(1.1)
5.0
2015
£m
10,526
2,131
1,035
(286)
(38)
17
31
(248)
58
2015
%
20.25
9.8
(2.7)
(0.4)
0.2
0.3
(2.4)
0.6
(116)
(6.0)
(578)
(5.5)
25
877
1.3
45.2
32
2,154
0.3
20.5
GSK has a substantial business presence in many countries around the globe. 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 2017 were the US, Belgium,
and India.
The adverse impact was partly offset by the increased benefit of intellectual property incentives such as 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’s 2017 tax rate of 38.5% has been influenced by the impact of US and Swiss tax reforms, together with transaction-related charges
arising on the Group’s put option liabilities in relation to ViiV Healthcare and the Consumer Healthcare Joint Venture and the reassessment of
estimates of uncertain tax positions following the settlement of a number of open issues with tax authorities in various jurisdictions.
Included within Other permanent differences is a £34 million charge that arises following the enactment of Belgium tax reform during 2017.
Future tax charges, and therefore the Group’s effective tax rate, may be affected by factors such as acquisitions, disposals, restructurings, the
location of research and development activity, tax regime reforms and resolution of open matters as we continue to bring our tax affairs up to
date around the world.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 178
14. Taxation continued
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 (charge)/credit to equity and statement of comprehensive income
2017
£m
–
26
26
(4)
(247)
–
–
29
(222)
(196)
2016
£m
2015
£m
7
32
39
–
94
–
2
51
147
186
22
30
52
(12)
(110)
–
–
(55)
(177)
(125)
All of the above items have been charged to the statement of comprehensive income except for tax on share based payments.
Following enactment of US and Belgian tax reform, the Group has recognised deferred tax charges of £27 million and £25 million
respectively to equity and the statement of comprehensive income. Both amounts are included within the £222 million net deferred tax
charge presented above.
International tax reform
The Group’s tax charge has been influenced by the impact of international tax reform enacted during the year. The US Tax Cuts and Jobs Act
(‘the Act’) is expected to have a positive impact on the future after tax earnings of GSK’s US businesses. However, enactment of the new law
in 2017 has resulted in a number of non-recurring charges. In addition, enactment of Swiss tax reform during 2017 resulted in a non-recurring
tax credit arising from the revaluation of deferred tax liabilities relating to certain Consumer Healthcare brands, acquired from Novartis in
2015, to reflect a reduction in the headline Swiss tax rate.
The charges associated with US tax reform are based on the information currently available. As further guidance from the US Treasury on
implementation of the Act becomes available, particularly with regard to the repatriation tax provisions, the assumptions underlying these
estimates could change. This could result in adjustments to the charges taken that could have a material impact on the results of the Group.
The impact of tax reform on profits attributable to shareholders in 2017 is set out below.
Other operating expenses
Current tax
Deferred tax
Impact on profit after taxation for the year
Profit attributable to non-controlling interests
Profit attributable to shareholders
Swiss tax
reform
£m
–
–
483
483
176
307
US tax
reform
£m
(666)
(273)
(805)
(1,744)
(114)
(1,630)
The valuations of the HIV and Consumer Healthcare businesses have increased due to lower US tax rates. This has resulted in an increase
in the related liabilities for contingent consideration and the put options and hence an additional operating cost of £666 million. The current
tax charge in respect of US tax reform relates primarily to the introduction of a repatriation tax on the accumulated reserves of non-US
subsidiaries of US entities in the Group, the cash impact of which will be spread over eight years from 2018 onwards. The deferred tax
charge relates primarily to the revaluation of existing balance sheet tax assets held against future liabilities, such as pensions.
The tax charge associated with US tax reform was partly offset by an allocation to non-controlling interests amounting to £114 million, as many
of the adjustments related to ViiV Healthcare and the Consumer Healthcare Joint Venture. The tax credit associated with Swiss tax reform was
similarly offset with a £176 million charge due to an allocation to non-controlling interests related to the Consumer Healthcare Joint Venture.
The impact on the tax charge arising from US tax reform was as follows:
Revaluation of assets and liabilities
Repatriation tax
Current tax
£m
75
(348)
(273)
Deferred tax
£m
(805)
–
(805)
Total
£m
(730)
(348)
(1,078)
The Group also incurred a charge of £34 million following the enactment of Belgian tax reform during 2017, predominantly relating to the
revaluation of existing deferred tax assets.
Continued focus on tax reform is expected in 2018 and future years driven by the OECD’s Base Erosion and Profit Shifting (“BEPS”) project
and European Commission initiatives including 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 GSK’s
effective tax rate or could result in higher cash tax liabilities.
GSK Annual Report 2017Notes to the financial statements continued 179
14. Taxation continued
Issues relating to taxation
The integrated nature of the Group’s worldwide operations involves significant investment in research and strategic manufacture at a limited
number of locations, with consequential cross-border supply routes into numerous end-markets. In line with current OECD guidelines the
Group base our transfer pricing policy on the ‘arm’s length’ principle. However, different tax authorities may seek to attribute further profit to
activities being undertaken in their jurisdiction, potentially resulting in double taxation. 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. 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 calculation of the Group’s total tax charge therefore necessarily involves a degree of estimation and judgment 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 2017 the Group had recognised provisions of £1,175 million in respect of such uncertain tax
positions (2016 – £1,892 million). The decrease in recognised provisions during 2017 was driven by the reassessment of estimates and
the utilisation of provisions for uncertain tax positions following the settlement of a number of open issues with tax authorities in various
jurisdictions. The transfer of accrued interest payable on tax balances to ‘Other payables’ and the foreign exchange impact of revaluing
overseas exposures also contributed to the reduction in recognised provisions. Whilst 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. We
do not currently anticipate any material changes to the amounts provided for transfer pricing or tax contingencies during the next 12 months.
A provision for deferred tax liabilities of £209 million (2016 – £205 million) has been made in respect of withholding taxation that would arise
on the distribution of profits by certain overseas subsidiaries. Whilst the aggregate amount of unremitted profits at the balance sheet date was
approximately £17 billion (2016 – £18 billion), the majority of these unremitted profits would not be subject to tax (including withholding tax)
on repatriation, as UK legislation relating to company distributions provides for exemption from tax for most overseas profits, subject to
certain exceptions. In prior years, a temporary difference arose on the accumulated reserves of non-US subsidiaries of US entities in the
Group. As the timing of reversal of this temporary difference could be controlled and was not considered probable in the foreseeable future,
deferred tax had not been provided. However, as a result of the US Tax Cuts and Jobs Act, the temporary difference reversed and the Group
recorded a one-off repatriation tax charge of £348 million. Accordingly, the unremitted profits on which deferred tax has not been provided is
now £nil (2016 – £1.7 billion).
Movement in deferred tax assets and liabilities
At 1 January 2017
Exchange adjustments
Credit/(charge) to income statement
Credit/(charge) to income statement
associated with US tax reform
Credit to income statement
associated with Swiss tax reform
(Charge)/credit to statement of
comprehensive income and equity
At 31 December 2017
Accelerated
capital
allowances
£m
(377)
(7)
62
Intangible
assets
£m
(2,324)
75
330
Contingent
consideration
£m
1,138
–
(52)
Intra-Group
profit
£m
1,054
(58)
256
Pensions &
other post
employment
benefits
£m
1,262
(48)
3
Share
option
and award
schemes
£m
110
(4)
(1)
Other
net
temporary
differences
£m
1,350
(18)
(88)
Tax
losses
£m
227
(5)
59
Total
£m
2,440
(65)
569
5
–
116
483
–
(317)
–
(1,320)
(218)
(235)
(210)
(20)
(27)
(216)
(805)
–
–
868
–
–
–
1,017
(247)
760
–
–
261
–
(4)
74
–
483
29
1,057
(222)
2,400
The net deferred tax credit of £247 million to the income statement included a £483 million credit associated with Swiss tax reform and a
£569 million credit in relation to the origination and reversal of temporary differences. These credits were partly offset by a £805 million
charge in relation to US tax reform. The net credit to the income statement of £247 million included a £16 million charge related to 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 inventory which are eliminated within the consolidated
financial statements. 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 inventory is sold externally. The deferred tax asset recognised on tax losses of £261 million related to trading
losses. In 2016, £173 million related to trading losses and £54 million related to capital losses. Other net temporary differences included
accrued expenses for which a tax deduction is only available on a paid basis, such as rebates.
Deferred tax assets and liabilities are recognised on the balance sheet as follows:
Deferred tax assets
Deferred tax liabilities
2017
£m
3,796
(1,396)
2,400
2016
£m
4,374
(1,934)
2,440
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
180
14. Taxation continued
Deferred tax assets are recognised on US foreign tax credits only where it is possible that future taxable profits will be available. The gross
amount of foreign tax credits on which deferred tax has not been recognised was £721 million at 31 December 2017.
Deferred tax assets are recognised where it is probable that future taxable profit will be available to utilise losses. Unrecognised tax losses are
as follows:
Unrecognised tax losses
Trading losses expiring:
Within 10 years
More than 10 years
Available indefinitely
At 31 December
Capital losses
At 31 December
15. Earnings per share
Basic earnings per share
Diluted earnings per share
2017
Unrecognised
deferred tax
asset
£m
Tax losses
£m
802
872
86
1,760
1,924
1,924
187
99
14
300
372
372
2016
Unrecognised
deferred tax
asset
£m
255
131
15
401
396
396
Tax losses
£m
786
842
95
1,723
2,320
2,320
2017
pence
31.4
31.0
2016
pence
18.8
18.6
2015
pence
174.3
172.3
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
2017
millions
4,886
55
4,941
2016
millions
4,860
49
4,909
2015
millions
4,831
57
4,888
First interim
Paid/payable
13 July 2017
Second interim
12 October 2017
Third interim
Fourth interim
Total
Special dividend
11 January 2018
12 April 2018
Dividend
per share
(pence)
2017
Total
dividend
£m
Dividend
per share
(pence)
Paid
2016
Total
dividend
£m
Dividend
per share
(pence)
Paid
19
19
19
23
80
928
14 July 2016
929 13 October 2016
929 12 January 2017
1,125
3,911
13 April 2017
19
19
19
23
80
923
9 July 2015
925 1 October 2015
925 14 January 2016
1,124
3,897
14 April 2016
14 April 2016
19
19
19
23
80
20
2015
Total
dividend
£m
920
919
919
1,114
3,872
969
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 2017 financial statements recognise those
dividends paid in 2017, namely the third and fourth interim dividends for 2016, and the first and second interim dividends for 2017.
The amounts recognised in each year were as follows:
Dividends to shareholders
2017
£m
3,906
2016
£m
4,850
2015
£m
3,874
GSK Annual Report 2017Notes to the financial statements continued
181
Total
£m
20,750
2,327
1,544
30
(1,824)
(139)
(524)
22,164
(234)
1,584
30
(1,092)
(38)
(695)
21,719
(10,329)
(1,094)
(978)
1,475
257
(10,669)
160
(988)
697
504
(10,296)
(753)
(93)
261
(258)
78
78
(687)
8
342
(349)
17
106
(563)
(11,356)
(10,859)
17. Property, plant and equipment
Cost at 1 January 2016
Exchange adjustments
Other additions
Capitalised borrowing costs
Disposals and write-offs
Reclassifications
Transfer to assets held for sale
Cost at 31 December 2016
Exchange adjustments
Other additions
Capitalised borrowing costs
Disposals and write-offs
Reclassifications
Transfer to assets held for sale
Cost at 31 December 2017
Depreciation at 1 January 2016
Exchange adjustments
Charge for the year
Disposals and write-offs
Transfer to assets held for sale
Depreciation at 31 December 2016
Exchange adjustments
Charge for the year
Disposals and write-offs
Transfer to assets held for sale
Depreciation at 31 December 2017
Impairment at 1 January 2016
Exchange adjustments
Disposals and write-offs
Impairment losses
Reversal of impairments
Transfer to assets held for sale
Impairment at 31 December 2016
Exchange adjustments
Disposals and write-offs
Impairment losses
Reversal of impairments
Transfer to assets held for sale
Impairment at 31 December 2017
Total depreciation and impairment at 31 December 2016
Total depreciation and impairment at 31 December 2017
Net book value at 1 January 2016
Net book value at 31 December 2016
Net book value at 31 December 2017
Land and
buildings
£m
7,305
956
117
–
(349)
110
(378)
7,761
(127)
69
–
(376)
602
(462)
7,467
(2,914)
(377)
(338)
205
165
(3,259)
50
(299)
158
314
(3,036)
(274)
(45)
91
(135)
38
46
(279)
8
210
(194)
7
87
(161)
(3,538)
(3,197)
4,117
4,223
4,270
Plant,
equipment
and vehicles
£m
10,775
1,100
384
–
(1,422)
512
(114)
11,235
(62)
296
–
(685)
1,186
(219)
11,751
Assets in
construction
£m
2,670
271
1,043
30
(53)
(761)
(32)
3,168
(45)
1,219
30
(31)
(1,826)
(14)
2,501
–
–
–
–
–
–
–
–
–
–
–
(106)
(11)
35
(6)
2
22
(64)
(2)
28
(17)
1
11
(43)
(64)
(43)
(7,415)
(717)
(640)
1,270
92
(7,410)
110
(689)
539
190
(7,260)
(373)
(37)
135
(117)
38
10
(344)
2
104
(138)
9
8
(359)
(7,754)
(7,619)
2,987
3,481
4,132
2,564
9,668
3,104
10,808
2,458
10,860
The weighted average interest rate for capitalised borrowing costs in the year was 4% (2016 – 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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
182
17. Property, plant and equipment continued
The net book value at 31 December 2017 of the Group’s land and buildings comprised freehold properties £3,896 million (2016 –
£3,887 million), properties with leases of 50 years or more £338 million (2016 – £294 million) and properties with leases of less than
50 years £36 million (2016 – £42 million).
Included in land and buildings at 31 December 2017 were leased assets with a cost of £630 million (2016 – £590 million), accumulated
depreciation of £255 million (2016 – £253 million), impairment of £nil (2016 – £1 million) and a net book value of £375 million
(2016 – £336 million). Included in plant, equipment and vehicles at 31 December 2017 were leased assets with a cost of £18 million
(2016 – £44 million), accumulated depreciation of £4 million (2016 – £15 million), impairment of £1 million (2016 – £nil) and a net
book value of £13 million (2016 – £29 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 £198 million (2016 – £45 million), R&D
£93 million (2016 – £15 million) and SG&A £36 million (2016 – £120 million), and included £278 million (2016 – £151 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 2017 of assets for which impairments have been charged or reversed in the year was £33 million
(2016 – £171 million).
During 2017, £38 million (2016 – £139 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
Goodwill is allocated to the Group’s segments as follows:
Pharmaceuticals
Vaccines
Consumer Healthcare
Net book value at 31 December
2017
£m
5,965
(228)
–
(3)
5,734
5,965
5,734
2017
£m
3,172
1,302
1,260
5,734
2016
£m
5,162
814
7
(18)
5,965
5,162
5,965
2016
£m
3,288
1,353
1,324
5,965
GSK Annual Report 2017Notes to the financial statements continued 183
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 £228 million (2016 – £211 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 £8.51 billion (2016 – £9.03 billion).
Details of indefinite life brands are given in Note 19, ‘Other intangible assets’.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 184
19. Other intangible assets
Cost at 1 January 2016
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
Exchange adjustments
Capitalised development costs
Capitalised borrowing costs
Other additions
Disposals and asset write-offs
Transfer to assets held for sale
Reclassifications
Cost at 31 December 2017
Amortisation at 1 January 2016
Exchange adjustments
Charge for the year
Disposals and asset write-offs
Transfer to assets held for sale
Amortisation at 31 December 2016
Exchange adjustments
Charge for the year
Disposals and asset write-offs
Transfer to assets held for sale
Amortisation at 31 December 2017
Impairment at 1 January 2016
Exchange adjustments
Impairment losses
Disposals and asset write-offs
Transfer to assets held for sale
Impairment at 31 December 2016
Exchange adjustments
Impairment losses
Disposals and asset write-offs
Transfer to assets held for sale
Impairment at 31 December 2017
Total amortisation and impairment at 31 December 2016
Total amortisation and impairment at 31 December 2017
Net book value at 1 January 2016
Net book value at 31 December 2016
Net book value at 31 December 2017
Computer
software
£m
2,028
Licences,
patents, etc.
£m
13,394
137
1,139
–
4
–
238
(389)
(1)
139
2,156
(37)
–
2
233
(217)
(1)
38
219
–
102
349
(21)
(39)
–
15,143
(215)
251
3
221
(38)
(90)
–
2,174
15,275
(1,294)
(4,030)
(92)
(152)
353
1
(410)
(553)
–
10
(1,184)
(4,983)
25
(163)
210
1
(1,111)
(39)
(3)
(2)
35
–
(9)
–
(2)
2
–
(9)
(1,193)
(1,120)
695
963
1,054
141
(761)
25
25
(5,553)
(1,439)
(266)
(15)
40
28
(1,652)
110
(546)
5
19
(2,064)
(6,635)
(7,617)
7,925
8,508
7,658
Amortised
brands
£m
387
20
21
–
–
–
(1)
–
–
427
(4)
–
–
–
–
–
66
489
(133)
(5)
(91)
5
–
(224)
–
(10)
–
–
(234)
(154)
–
–
11
–
(143)
–
–
–
–
(143)
(367)
(377)
100
60
112
Indefinite life
brands
£m
8,074
1,320
–
–
–
–
(7)
(12)
–
9,375
(272)
–
–
–
–
(44)
(66)
Total
£m
23,883
2,616
240
4
102
587
(418)
(52)
139
27,101
(528)
251
5
454
(255)
(135)
38
8,993
26,931
–
–
–
–
–
–
–
–
–
–
–
(122)
(3)
(5)
–
–
(130)
3
(132)
–
4
(255)
(130)
(255)
7,952
9,245
8,738
(5,457)
(507)
(796)
358
11
(6,391)
166
(934)
235
26
(6,898)
(1,754)
(272)
(22)
86
28
(1,934)
113
(680)
7
23
(2,471)
(8,325)
(9,369)
16,672
18,776
17,562
The weighted average interest rate for capitalised borrowing costs in the year was 4% (2016 – 3.8%).
The net book value of computer software included £669 million (2016 – £620 million) of internally generated costs.
The charge for impairments in the year included £229 million related to the progressive withdrawal of the pharmaceutical product, Tanzeum,
which was fully impaired. The carrying value at 31 December 2017 of intangible assets, for which impairments have been charged or reversed
in the year, following those impairments or reversals, was £300 million (2016 – £116 million).
The patent expiry dates of the Group’s most significant assets, where relevant, are set out on pages 254 and 255.
GSK Annual Report 2017Notes to the financial statements continued
185
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
2017
£m
578
116
240
934
2016
£m
582
95
119
796
2017
£m
400
2
278
680
2016
£m
7
2
13
22
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:
Meningitis portfolio
dolutegravir
Benlysta
Fluarix/FluLaval
HIV assets acquired from BMS
Selzentry
Okairos technology platform
Others
2017
£m
2,450
1,389
965
321
277
162
202
1,892
7,658
2016
£m
2,511
1,487
1,019
380
277
188
173
2,473
8,508
The Meningitis portfolio includes Menveo, Bexsero and Men ABCWY.
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
2017
£m
2,716
1,380
648
441
386
265
289
236
228
185
166
112
2016
£m
2,847
1,447
680
462
354
243
304
199
211
194
166
103
1,686
8,738
2,035
9,245
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.
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 specific country and currency 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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 186
20. Investments in associates and joint ventures
At 1 January
Exchange adjustments
Additions
Disposals
Distributions received
Other movements
(Loss)/profit after tax recognised in the consolidated income statement
At 31 December
Joint
ventures
£m
19
Associates
£m
244
(2)
–
–
(1)
–
(3)
13
(10)
15
(92)
(1)
(2)
16
170
2017
Total
£m
263
(12)
15
(92)
(2)
(2)
13
183
Joint
ventures
£m
20
Associates
£m
187
4
3
–
(2)
(2)
(4)
19
41
8
–
(1)
–
9
2016
Total
£m
207
45
11
–
(3)
(2)
5
244
263
The Group held one significant associate at 31 December 2017, Innoviva, Inc. At 31 December 2017, the Group owned 32 million shares
or 31.4% of Innoviva, which is a biopharmaceutical company listed on NASDAQ. Innoviva 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, Anoro Ellipta and Trelegy Ellipta. 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 17.8% of the common stock. The investment in Innoviva had a market
value of £336 million at 31 December 2017 (2016 – £278 million).
In 2017, the Group divested its shareholdings in two associates, see Note 38, ‘Acquisitions and disposals’.
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
2017
£m
At 31 December
2016
£m
124
148
(26)
(426)
(180)
2017
£m
(57)
86
118
147
146
160
(16)
(575)
(285)
2016
£m
(84)
84
138
138
GSK Annual Report 2017Notes to the financial statements continued
21. Other investments
At 1 January
Exchange adjustments
Additions
Net fair value movements
Impairment losses
Disposals
At 31 December
187
2017
£m
985
(64)
80
11
(30)
(64)
918
2016
£m
1,255
211
96
130
(24)
(683)
985
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 include listed
investments of £535 million (2016 – £580 million). The most significant of the investments held at 31 December 2017 was in Theravance
Biopharma, Inc. in which the Group holds 17.8% of the common stock. This investment had a fair value at 31 December 2017 of £199 million
(2016 – £248 million). The other investments include equity stakes in companies with which GSK has research collaborations and in
companies which provide access to biotechnology developments of potential interest.
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
23. Inventories
Raw materials and consumables
Work in progress
Finished goods
2017
£m
475
(283)
210
402
2017
£m
648
538
227
2016
£m
515
(314)
282
483
2016
£m
602
313
284
1,413
1,199
2017
£m
1,193
2,381
1,983
5,557
2016
£m
1,068
2,299
1,735
5,102
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 188
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
2017
£m
4,672
21
308
10
19
970
6,000
2016
£m
4,615
64
335
11
17
984
6,026
Trade receivables included £11 million (2016 – £9 million) due from associates and joint ventures. Other receivables included £7 million
(2016 – £7 million) due from associates and joint ventures.
Bad and doubtful debt provision
At 1 January
Exchange adjustments
Charge for the year
Subsequent recoveries of amounts provided for
Utilised
At 31 December
25. Cash and cash equivalents
Cash at bank and in hand
Short-term deposits
26. Assets held for sale
Property, plant and equipment
Goodwill
Other intangibles
Inventory
Other
2017
£m
207
(4)
31
(79)
(15)
140
2016
£m
167
23
77
(59)
(1)
207
2017
£m
826
3,007
3,833
2016
£m
1,462
3,435
4,897
2017
£m
57
–
49
7
–
2016
£m
184
13
12
7
(1)
113
215
Included within Assets held for sale is £31 million of intangible impairments, £10 million PP&E impairments, £21 million intangible impairment
reversals and £15 million PP&E impairment reversals.
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 £63 million (2016 – £79 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.
GSK Annual Report 2017Notes to the financial statements continued 27. Trade and other payables
Trade payables
Wages and salaries
Social security
Consumer Healthcare put option
ViiV Healthcare put option
Other payables
Deferred income
Customer return and rebate accruals
Other accruals
189
2017
£m
3,528
1,228
166
8,606
1,304
363
240
3,463
2,072
20,970
2016
£m
3,596
1,236
120
–
1,319
447
158
2,778
2,310
11,964
Trade and other payables included £53 million (2016 – £36 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 £2,837 million (2016 – £2,218 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.
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. As this option became exercisable from 2 March 2018, with payment likely to be due several
months after exercise, it has been classified within current liabilities. The liability is recorded at the present value of the estimated
redemption value, applying a discount rate of 7%, calculated by applying an average of relevant public company multiples approach
with no premium or discount, based on the forecast profits and earnings of the Consumer Healthcare Joint Venture, which forms part
of GSK’s Consumer Healthcare segment. The remeasurement charge in the year was £1,186 million, including the impact of US tax
reform (2016 – £1,133 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
2017
£m
850
(850)
88
(76)
303
(254)
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% increase in sales forecasts
10% decrease in sales forecasts
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 59.
2017
£m
150
(149)
76
(66)
44
(37)
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 190
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
2017
£m
198
113
218
87
616
335
55
87
477
139
616
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
2017
£m
162
238
77
477
2016
£m
135
221
81
437
2015
£m
177
96
135
59
467
291
36
59
386
81
467
2015
£m
127
194
65
386
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 2016 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 MP-2017 to allow for future improvements in life expectancy.
GSK Annual Report 2017Notes to the financial statements continued 191
28. Pensions and other post-employment benefits continued
The average life expectancy assumed now for an individual at the age of 60 and projected to apply in 2037 for an individual then at the age of
60 is as follows:
Current
Projected for 2037
Male
Years
27.5
29.1
UK
Female
Years
29.5
31.1
Male
Years
26.9
28.6
US
Female
Years
28.6
30.3
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
2017
% pa
2.00
2.50
3.20
n/a
3.20
2016
% pa
2.00
2.70
3.20
n/a
3.20
UK
2015
% pa
2.00
3.80
3.10
n/a
3.10
2017
% pa
4.00
3.60
n/a
2.90
2.25
2016
% pa
4.00
3.90
n/a
3.20
2.25
US
2015
% pa
4.00
4.20
n/a
3.20
2.25
Rest of World
2017
% pa
2.80
1.60
2.20
0.30
1.70
2016
% pa
2.70
1.60
2.10
0.30
1.50
2015
% pa
2.70
2.20
2.00
0.60
1.40
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 192
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 2017
in relation to the defined benefit pension and post-retirement healthcare schemes were as follows:
2017
Amounts charged to operating profit
Current service cost
Past service cost
Net interest cost
Expenses
UK
£m
79
37
7
7
130
70
–
31
12
113
131
–
16
–
147
280
37
54
19
390
Remeasurement gains/(losses) recorded in the statement of
comprehensive income
259
240
(14)
485
US
£m
Rest of World
£m
Pensions
Group
£m
Post-retirement
benefits
Group
£m
30
(2)
59
–
87
64
22
(8)
52
(7)
–
59
62
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)
US
£m
Rest of World
£m
Pensions
Group
£m
Post-retirement
benefits
Group
£m
67
2
22
1
4
96
110
(10)
13
(9)
4
108
254
17
49
(8)
15
327
UK
£m
77
25
14
–
7
123
2016
Amounts charged to operating profit
Current service cost
Past service cost
Net interest cost
Gains from settlements
Expenses
Remeasurement losses recorded in the statement of
comprehensive income
2015
Amounts charged to operating profit
Current service cost
Past service cost/(credit)
Net interest cost
Losses/(gains) from settlements
Expenses
Remeasurement gains/(losses) recorded in the statement of
comprehensive income
82
(30)
147
199
The amounts included within past service costs include £37 million (2016 – £52 million; 2015 – £25 million) of augmentation costs of which
£18 million is arising from major restructuring programmes (see Note 29, ‘Other provisions’).
GSK Annual Report 2017Notes to the financial statements continued
193
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
2017
£m
2016
£m
2015
£m
538
313
258
(2,043)
(1,496)
(3,539)
(2,397)
(1,693)
(4,090)
(1,842)
(1,387)
(3,229)
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 2017
Equities:
Multi-asset funds
Property:
– listed
– unlisted
– unlisted
Corporate bonds:
– listed
– unlisted
Government bonds:
– listed
Insurance contracts
Other assets
Fair value of assets
Present value of scheme obligations
Net surplus/(obligation)
Included in Other non-current assets
Included in Pensions and other post-employment benefits
Actual return on plan assets
UK
£m
4,902
–
2,517
352
297
326
5,127
849
(1,216)
13,154
(13,101)
53
470
(417)
53
893
At 31 December 2016
Equities:
Multi-asset funds
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
1,448
Rest of World
£m
544
Group
£m
6,894
13
2,517
593
1,220
346
6,128
1,556
(987)
18,280
(19,785)
(1,505)
538
(2,043)
(1,505)
Group
£m
7,201
14
1,545
558
601
345
7,719
1,493
(1,906)
17,570
(19,654)
(2,084)
313
(2,397)
(2,084)
13
–
32
103
20
762
707
71
2,252
(3,239)
(987)
68
(1,055)
(987)
14
–
28
96
24
739
637
73
2,097
(3,018)
(921)
37
(958)
(921)
99
2,725
82
1,369
US
£m
1,358
Rest of World
£m
486
–
–
209
820
–
239
–
158
2,874
(3,445)
(571)
–
(571)
(571)
394
–
–
216
213
–
815
–
288
2,890
(3,752)
(862)
–
(862)
(862)
153
The multi-asset funds comprise investments in pooled investment vehicles that are invested across a range of asset classes, increasing
diversification within the growth portfolio.
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 £(773) million (2016 – £(1,698) million; 2015 – £(2,215) million).
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
194
28. Pensions and other post-employment benefits continued
At 31 December 2015
Equities:
Multi-asset funds
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 2015
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
Exchange adjustments
Interest income
Expenses
Settlements and curtailments
Remeasurement
Employer contributions
Scheme participants’ contributions
Benefits paid
Assets at 31 December 2017
UK
£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
–
–
175
727
–
184
–
180
2,501
(3,134)
(633)
–
(633)
(633)
(30)
Rest of World
£m
355
1
–
8
76
2
664
439
205
1,750
(2,384)
(634)
26
(660)
(634)
23
Group
£m
6,777
1
481
485
1,054
234
6,535
1,194
(2,226)
14,535
(16,119)
(1,584)
258
(1,842)
(1,584)
(24)
Pensions
Post-retirement
benefits
UK
£m
10,551
–
–
374
(7)
–
(391)
164
4
(411)
10,284
-
385
(7)
–
2,088
319
4
(490)
12,583
–
333
(7)
–
560
225
4
(544)
13,154
US
£m
2,531
147
–
95
(4)
–
(125)
132
–
(275)
2,501
459
108
(12)
–
45
31
–
(242)
2,890
(244)
104
(12)
–
290
103
–
(257)
2,874
Rest of World
£m
1,529
(52)
233
33
(4)
(16)
(10)
112
14
(89)
1,750
305
37
–
(110)
62
131
14
(92)
2,097
24
33
–
(4)
49
116
17
(80)
2,252
Group
£m
14,611
95
233
502
(15)
(16)
(526)
408
18
(775)
14,535
764
530
(19)
(110)
2,195
481
18
(824)
17,570
(220)
470
(19)
(4)
899
444
21
(881)
18,280
Group
£m
–
–
–
–
–
–
–
82
14
(96)
–
–
–
–
–
–
91
17
(108)
–
–
–
–
–
–
101
17
(118)
–
During 2017, the Group made special funding contributions to the UK pension schemes totalling £136 million (2016 – £191 million;
2015 – £85 million) and £78 million (2016 – £nil; 2015 – £111 million) 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 2018. 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 2018, including special funding contributions, are estimated to be approximately £360 million in respect of
defined benefit pension schemes and £90 million in respect of post-retirement benefits.
GSK Annual Report 2017Notes to the financial statements continued
195
28. Pensions and other post-employment benefits continued
Movements in defined benefit obligations
Obligations at 1 January 2015
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
Exchange adjustments
Service cost
Past service cost
Interest cost
Settlements and curtailments
Remeasurement
Scheme participants’ contributions
Benefits paid
Obligations at 31 December 2017
The defined benefit pension obligation is analysed as follows:
Funded
Unfunded
UK
£m
(10,991)
–
–
(77)
(25)
(388)
–
473
(4)
411
(10,601)
–
(70)
(52)
(394)
–
(2,253)
(4)
490
US
£m
(3,133)
(184)
–
(67)
(2)
(117)
(1)
95
–
275
(3,134)
(586)
(66)
(1)
(135)
–
(72)
–
242
Rest of World
£m
(2,176)
Pensions
Group
£m
(16,300)
Post-retirement
benefits
Group
£m
(1,397)
78
(397)
(110)
10
(46)
25
157
(14)
89
(106)
(397)
(254)
(17)
(551)
24
725
(18)
775
(2,384)
(16,119)
(396)
(110)
(1)
(57)
138
(286)
(14)
92
(982)
(246)
(54)
(586)
138
(2,611)
(18)
824
(64)
(11)
(22)
8
(52)
7
62
(14)
96
(1,387)
(248)
(31)
(3)
(56)
–
(59)
(17)
108
(12,884)
(3,752)
(3,018)
(19,654)
(1,693)
–
(79)
(37)
(340)
–
(301)
(4)
544
305
(70)
–
(135)
–
(50)
–
257
(45)
(131)
–
(49)
4
(63)
(17)
80
260
(280)
(37)
(524)
4
(414)
(21)
881
119
(30)
2
(59)
–
64
(17)
118
(13,101)
(3,445)
(3,239)
(19,785)
(1,496)
2017
£m
(19,052)
(733)
2016
£m
(18,974)
(680)
2015
£m
(15,552)
(567)
(19,785)
(19,654)
(16,119)
The liability for the US post-retirement healthcare scheme has been assessed using the same assumptions as for the US pension scheme,
together with the assumption for future medical inflation of 6.75% (2016 – 7%), grading down to 5.0% in 2025 and thereafter. At
31 December 2017, the US post-retirement healthcare scheme obligation was £1,254 million (2016 – £1,463 million; 2015 – £1,208 million).
Post-retirement benefits are unfunded.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
196
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
Settlements and curtailments
Remeasurements:
Return on plan assets, excluding amounts included in interest
Gain 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)
2017
£m
(2,084)
40
–
(280)
(37)
(54)
–
899
209
(555)
(68)
444
(19)
2016
£m
(1,584)
(218)
–
(246)
(54)
(56)
28
2,195
85
(2,770)
74
481
(19)
2015
£m
(1,689)
(11)
(164)
(254)
(17)
(49)
8
(526)
120
362
243
408
(15)
(1,505)
(2,084)
(1,584)
2017
£m
47
(1)
18
64
2016
£m
–
(81)
22
(59)
2015
£m
15
59
(12)
62
GSK Annual Report 2017Notes to the financial statements continued 197
2015
£m
5,510
7,969
4,231
17,710
2015
£m
499
887
1
1,387
2015
years
16
12
2017
£m
4,611
9,805
5,369
2016
£m
4,576
9,574
5,504
19,785
19,654
2017
£m
514
981
1
1,496
2017
years
16
11
2016
£m
594
1,099
–
1,693
2016
years
16
12
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
Effect of changes in assumptions used on the benefit obligations and on the 2018 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
29
(1)
800
41
20
2
608
39
2
68
19
502
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 198
29. Other provisions
At 1 January 2017
Exchange adjustments
Charge for the year
Reversed unused
Unwinding of discount
Utilised
Reclassifications and other movements
Transfer to Pension obligations
At 31 December 2017
To be settled within one year
To be settled after one year
At 31 December 2017
Legal and other disputes
The Group is involved in a substantial number of legal and other
disputes, including notification of possible claims, as set out in
Note 45 ‘Legal proceedings’. Provisions for legal and other disputes
include amounts relating to product liability, anti-trust, government
investigations, contract terminations, self insurance and
environmental clean-up.
The charge for the year of £166 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 £2 million in 2017
(2016 – increased by £1 million). 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 £138 million of the amount provided at 31 December
2017 will be settled within one year. At 31 December 2017, it was
expected that £nil million (2016 – £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 45, ‘Legal proceedings’.
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.
Legal
and other
disputes
£m
Major
restructuring
programmes
£m
Employee
related
provisions
£m
Other
provisions
£m
344
(29)
173
(7)
2
(288)
(9)
–
186
138
48
186
554
(16)
259
(43)
4
(233)
(3)
(18)
504
292
212
504
306
(8)
50
(3)
–
(41)
–
–
304
90
214
304
296
(6)
69
(36)
10
(67)
5
–
271
109
162
271
Total
£m
1,500
(59)
551
(89)
16
(629)
(7)
(18)
1,265
629
636
1,265
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, and the CEO Strategic
Initiatives Programme was announced in July 2017. 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
£18 million (2016 – £23 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 2017, the provision for these benefits amounted to
£108 million (2016 – £135 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 £6 million
(2016 – £40 million), onerous property lease provisions of
£38 million (2016 – £39 million) and a number of other provisions
including vehicle insurance and regulatory matters.
GSK Annual Report 2017Notes to the financial statements continued
30. Other non-current liabilities
Accruals and deferred income
Consumer Healthcare put option liability
Other payables
31. Net debt
Current assets:
Liquid investments
Cash and cash equivalents
Short-term borrowings:
Commercial paper
Bank loans and overdrafts
Obligations under finance leases
1.50% US$ US Medium Term Note 2017
5.625% € European Medium Term Note 2017
5.65% US$ US Medium Term Note 2018
Long-term borrowings:
5.65% US$ US Medium Term Note 2018
0.625% € European Medium Term Note 2019
0% € European Medium Term Note 2020
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
1% € European Medium Term Note 2026
3.375% £ European Medium Term Note 2027
1.375% € European Medium Term Note 2029
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
Other long term borrowings
Net debt
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London Stock Exchange
London Stock Exchange
London Stock Exchange
London Stock Exchange
London Stock Exchange
London Stock Exchange
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London Stock Exchange
London Stock Exchange
New York Stock Exchange
London Stock Exchange
199
2017
£m
104
–
877
981
2016
£m
66
7,420
959
8,445
2017
£m
78
3,833
3,911
(529)
(236)
(23)
–
–
(2,037)
(2,825)
–
(1,324)
(1,060)
(1,474)
(919)
(876)
(659)
(617)
(593)
(439)
(986)
(368)
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)
(2,021)
(2,199)
(695)
(989)
(363)
(789)
(43)
(49)
(695)
(988)
(395)
(789)
(41)
–
(14,264)
(13,178)
(14,661)
(13,804)
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 200
31. Net debt continued
Current assets
Liquid investments are classified as available-for-sale investments. At 31 December 2017, they included US Treasury Notes and other
government bonds. The effective interest rate on liquid investments at 31 December 2017 was approximately 1.0% (2016 – approximately
0.7%). Liquid investment balances at 31 December 2017 earning interest at floating rates amount to £78 million (2016 – £89 million).
Liquid investment balances at 31 December 2017 earning interest at fixed rates amount to £nil million (2016 – £nil).
The effective interest rate on cash and cash equivalents at 31 December 2017 was approximately 1.3% (2016 – approximately 1.3%).
Cash and cash equivalents at 31 December 2017 earning interest at floating and fixed rates amount to £3,832 million and £1 million
respectively (2016 – £4,584 million and £3 million).
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 (£7.4 billion) US commercial paper programme, of which $0.7 billion (£0.5 billion) was in issue at 31 December 2017
(2016 – $1.4 billion (£1.1 billion)). GSK also has £1.9 billion five year committed facilities and $2.5 billion (£1.9 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 August 2017. Liquid investments, cash and cash equivalents were as shown in the table
on page 199.
The weighted average interest rate on commercial paper borrowings at 31 December 2017 was 1.53% (2016 – 0.88%).
The weighted average interest rate on current bank loans and overdrafts at 31 December 2017 was 4.65% (2016 – 3.47%).
The average effective pre-swap interest rate of notes classified as short term at 31 December 2017 was 5.92% (2016 – 3.18%).
Long-term borrowings
At the year-end, GSK had long-term borrowings of £14.3 billion (2016 – £14.7 billion) of which £10.3 billion (2016 – £11.1 billion) falls due
in more than five years. The average effective pre-swap interest rate of all notes in issue at 31 December 2017 was approximately 3.6%
(2016 – approximately 4.1%).
Long-term borrowings repayable after five years carry interest at effective rates between 1.07% and 6.66%, with repayment dates ranging
from 2023 to 2045.
Pledged assets
The Group held pledged investments in US Treasury Notes with a par value of $105 million (£78 million), (2016 – $105 million (£85 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,
£20 million (2016 – £23 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
2017
£m
25
29
9
3
2
10
78
(12)
66
2016
£m
25
23
12
7
–
–
67
(3)
64
At 31 December 2017, contingent liabilities, comprising guarantees, discounted bills and other items arising in the normal course of business,
amounted to £434 million (2016 – £281 million). At 31 December 2017, £2 million (2016 – £1 million) 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 2017, other than for those disputes
where provision has been made, it was not possible to make a reliable estimate of the potential outflow of funds that might be required to
settle disputes where the possibility of there being an outflow was more than remote. Descriptions of the significant tax, legal and other
disputes to which the Group is a party are set out in Note 14, ‘Taxation’ and Note 45, ‘Legal proceedings’.
GSK Annual Report 2017Notes to the financial statements continued
201
Ordinary Shares of 25p each
Number
£m
Share
premium
£m
10,000,000,000
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
2,500
1,339
1
1,340
2
–
2,759
72
2,831
87
36
5,368,316,062
1,342
2,954
4,237,758
–
1
–
55
10
5,372,553,820
1,343
3,019
31 December 2017
000
38,647
4,588,799
31 December 2016
000
71,382
4,560,302
33. Share capital and share premium account
Share capital authorised
At 31 December 2015
At 31 December 2016
At 31 December 2017
Share capital issued and fully paid
At 1 January 2015
Issued under employee share schemes
At 31 December 2015
Issued under employee share schemes
Ordinary shares acquired by ESOP Trusts
At 31 December 2016
Issued under employee share schemes
Ordinary shares acquired by ESOP Trusts
At 31 December 2017
Number of shares issuable under employee share schemes
Number of unissued shares not under option
At 31 December 2017, of the issued share capital, 66,696,677 shares were held in the ESOP Trusts, 414,605,950 shares were held as
Treasury shares and 4,891,251,193 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’.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
202
34. Movements in equity
Retained earnings and other reserves amounted to £(4,430) million at 31 December 2017 (2016 – £(3,172) million; 2015 – £943 million)
of which £334 million (2016 – £329 million; 2015 – £283 million) relates to joint ventures and associated undertakings. The cumulative
translation exchange in equity is as follows:
At 1 January 2015
Exchange movements on overseas net assets
At 31 December 2015
Exchange movements on overseas net assets
At 31 December 2016
Exchange movements on overseas net assets
Reclassification of exchange on liquidation or disposal of overseas subsidiaries
At 31 December 2017
The analysis of other comprehensive income by equity category is as follows:
2017
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
Fair value movements on available-for-sale investments
Reclassification of fair value movements on available-for-sale investments
Deferred tax on 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
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 income/(expense) for the year
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 reversed on reclassification of 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 losses on defined benefit plans
Tax on remeasurement losses in defined benefit plans
Other comprehensive income for the year
Net translation exchange included in:
Retained
earnings
£m
(137)
Fair value
reserve
£m
4
Non-
controlling
interests
£m
(117)
Total
translation
exchange
£m
(250)
(624)
(761)
633
(128)
462
109
443
6
10
13
23
–
–
23
8
(109)
603
494
(149)
–
345
(610)
(860)
1,249
389
313
109
811
Retained
earnings
£m
Other
reserves
£m
Non-
controlling
interests
£m
462
109
–
–
–
–
–
–
549
(221)
899
–
–
(14)
(42)
47
(18)
(10)
–
–
–
–
–
–
–
–
–
–
(149)
–
–
(37)
(149)
Retained
earnings
£m
Other
reserves
£m
Non-
controlling
interests
£m
633
–
–
–
–
–
–
–
(475)
126
284
13
251
(245)
51
1
2
2
–
–
–
75
–
–
–
–
–
–
–
603
–
–
603
Total
£m
462
109
(14)
(42)
47
(18)
(10)
(149)
549
(221)
713
Total
£m
646
251
(245)
51
1
2
2
603
(475)
126
962
GSK Annual Report 2017Notes to the financial statements continued
203
Total
£m
(618)
416
(91)
(346)
36
2
2
(77)
8
261
(80)
(487)
Total
£m
2,239
(354)
10
369
(99)
175
2,340
(284)
23
336
(576)
381
Retained
earnings
£m
(624)
–
–
–
–
–
–
(77)
–
261
(80)
(520)
Other
reserves
£m
Non-
controlling
interests
£m
6
416
(91)
(346)
36
2
2
–
–
–
–
25
–
–
–
–
–
–
–
–
8
–
–
8
ESOP Trust
shares
£m
(151)
Fair value
reserve
£m
274
Cash flow
hedge reserve
£m
(13)
Other
reserves
£m
2,129
–
–
–
(99)
175
(75)
(16)
–
–
(576)
381
(286)
22
–
–
(656)
520
(400)
(356)
10
367
–
–
295
(268)
23
330
–
–
380
(42)
–
(9)
–
–
2
–
2
–
–
–
–
–
–
–
(9)
2,129
–
–
–
–
–
–
–
6
–
–
(3)
–
–
(8)
–
–
2,129
2,220
–
–
–
–
–
(20)
–
(17)
(656)
520
34. Movements in equity continued
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 reversed on reclassification of available-for-sale investments
Reclassification of cash flow hedges to income statement
Fair value movements on cash flow hedges
Share of other comprehensive expense 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
The analysis of other reserves is as follows:
At 1 January 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 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
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 2017
Other reserves include various non-distributable merger and pre-merger reserves amounting to £1,849 million at 31 December 2017
(2016 – £1,849 million; 2015 – £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 2017 (2016 – £280 million; 2015 – £280 million).
329
(11)
2,129
2,047
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
204
35. Related party transactions
At 31 December 2017, GSK owned 32 million shares or 31.4% 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 £173 million
(2016 – £108 million). At 31 December 2017, the balance payable by GSK to Innoviva was £53 million (2016 – £36 million).
At 31 December 2017, 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 2017, GSK sold £41 million (2016 – £43 million) of its vaccine products into the joint venture. At 31 December 2017, the trading
balance due to GSK from JVC was £11 million (2016 – £9 million) and the balance payable by GSK to JVC was £nil million (2016 – £nil).
Loans of £7 million to JVC, £7 million to Medicxi Ventures I LP and £8 million to Index Ventures Life VI (Jersey) LP remained due to GSK at
31 December 2017.
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:
(Increase)/decrease 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
2017
£m
2,169
1,356
(13)
669
988
934
1,061
(157)
(46)
(94)
(37)
(461)
(287)
11
74
(594)
961
1,741
(255)
333
–
(95)
6,089
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)
Cash generated from operations
8,258
8,106
4,631
GSK Annual Report 2017Notes to the financial statements continued 205
2017
£m
(13,804)
2016
£m
(10,727)
2015
£m
(14,377)
(905)
(4)
(2,233)
3,200
23
585
(40)
626
(1,164)
1,503
–
–
(148)
18
(1,781)
(2)
2
–
2,412
25
(268)
(24)
(3,077)
3,650
(13,178)
(13,804)
(10,727)
37. Reconciliation of net cash flow to movement in net debt
Net debt at beginning of year
(Decrease)/increase in cash and bank overdrafts
(Decrease)/increase in liquid investments
Net increase in long-term loans
Net repayment of/(increase in) short-term loans
Net repayment of obligations under finance leases
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
At 1 January
2017
£m
89
4,897
(292)
4,605
(1,094)
(2,680)
(63)
(3,837)
(14,620)
(41)
(14,661)
(13,804)
Analysis of changes in liabilities from financing activities
Debt due within one year
Debt due after one year
Hedge of borrowings:
Derivative financial instruments
Other financing items
Interest payable
(3,837)
(14,661)
(38)
–
(158)
Total liabilities from financing activities
(18,694)
For further information on significant changes in net debt see Note 31, ‘Net debt’.
Exchange
£m
(7)
(106)
6
(100)
37
121
2
160
530
2
532
585
160
532
–
91
4
787
Other
£m
–
Profit
and loss
£m
–
Reclass-
ifications
£m
–
Disposals
£m
–
Cash flow
£m
(4)
At 31 December
2017
£m
78
–
–
–
–
–
(5)
(5)
4
(23)
(19)
(24)
(5)
(19)
37
–
1
14
–
–
–
–
–
–
–
(16)
–
(16)
(16)
–
–
–
–
(2,114)
(19)
(2,133)
2,114
19
2,133
–
(6)
–
(6)
–
–
–
–
–
–
–
(952)
53
(899)
528
2,636
59
3,223
3,833
(233)
3,600
(529)
(2,037)
(26)
(2,592)
(2,233)
(14,221)
–
(43)
(2,233)
(14,264)
(6)
87
(13,178)
–
(16)
(2,133)
2,133
5
–
(731)
(742)
–
–
(100)
(100)
–
–
–
–
–
–
3,223
(2,233)
(2,592)
(14,264)
(2)
(91)
781
1,678
2
–
(203)
(17,057)
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 206
38. Acquisitions and disposals
Details of the acquisition and disposal of significant subsidiaries and associates, joint ventures and other businesses are given below:
2017
Business acquisitions
There were no business acquisitions during 2017.
Business disposals
GSK made a number of small business disposals during the year for a net cash consideration of £342 million, including contingent
consideration receivable of £86 million. The profit on disposal was determined as follows:
Consideration including currency forwards and purchase adjustments
Net assets sold:
Goodwill
Intangible assets
Property, plant and equipment
Inventory
Cash and cash equivalents
Other net assets
Transaction costs
Reclassification of exchange from other comprehensive income
Profit on disposal
Investment in associates and joint ventures
During the year, GSK made cash investments of £15 million into associates and joint ventures. In addition, GSK sold its holdings in two
associates for £198 million in cash.
Cash consideration
Net book value of shares
Reclassification of exchange from other comprehensive income
Transaction costs
Profit on disposal
Cash flows
Cash consideration
Net deferred consideration received
Cash and cash equivalents divested
Transaction costs paid
Cash inflow
2016
Business 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 year for net cash consideration of £72 million. In addition, deferred consideration
receivable of £43 million was recognised.
Total
£m
342
(16)
(21)
(18)
(11)
(6)
(5)
(77)
(8)
(100)
157
Total
£m
198
(92)
(7)
(5)
94
Business
disposals
£m
256
39
(6)
(7)
282
Associates
and JV
investments
£m
(15)
Associates
and JV
disposals
£m
198
–
–
–
–
–
(2)
(15)
196
GSK Annual Report 2017Notes to the financial statements continued 38. Acquisitions and disposals continued
Cash flows
Cash consideration (paid)/received after purchase adjustments
Cash and cash equivalents acquired
Cash inflow
207
Business
acquisitions
£m
(24)
41
17
Business
disposals
£m
72
–
72
In addition, GSK made cash investments of £11 million into associates and joint ventures.
2015
Business acquisitions
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.
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
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 208
38. Acquisitions and disposals continued
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.
Business 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
Associates and joint ventures
During the year, GSK made cash investments of £16 million into associates and joint ventures. In addition, 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
£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
GSK Annual Report 2017Notes 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 2015
Additions through business combinations
Remeasurement through income statement
Cash payments: operating cash flows
Cash payments: investing activities
Other movements
At 31 December 2015
Additions through business combinations
Remeasurement through income statement
Cash payments: operating cash flows
Cash payments: investing activities
Other movements
At 31 December 2016
Remeasurement through income statement
Cash payments: operating cash flows
Cash payments: investing activities
At 31 December 2017
Shionogi-
ViiV
Healthcare
£m
1,684
Novartis
Vaccines
£m
–
–
1,874
(121)
(38)
10
3,409
154
2,162
(351)
(66)
(4)
5,304
909
(587)
(84)
5,542
594
111
–
(300)
–
405
–
152
(5)
(7)
–
545
53
(7)
(7)
584
Other
£m
40
–
1
–
–
–
41
40
(33)
(2)
–
1
47
(1)
–
–
46
209
Total
£m
1,724
594
1,986
(121)
(338)
10
3,855
194
2,281
(358)
(73)
(3)
5,896
961
(594)
(91)
6,172
Of the contingent consideration payable at 31 December 2017, £1,076 million (2016 – £561 million) is expected to be paid within one year.
The contingent consideration payable in respect of the Novartis Vaccines business included a sales milestone of $450 million which was
settled in January 2018.
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
5% increase in probability of milestone success
5% 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 59.
Shionogi-
ViiV Healthcare
£m
535
Novartis
Vaccines
£m
56
(535)
(228)
245
329
(284)
95
(80)
(55)
(18)
20
6
(6)
17
(15)
25
(21)
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 210
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
Profit/(loss) after taxation
Other comprehensive income
Total comprehensive income/(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
2017
£m
4,269
825
20
845
2017
£m
2,736
2,533
5,269
(2,409)
(8,011)
(10,420)
(5,151)
2017
£m
2,132
(207)
(1,820)
105
2016
£m
3,527
2015
£m
2,330
(1,249)
(1,426)
36
7
(1,213)
(1,419)
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
1,097
(63)
(814)
220
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 profit after taxation of £825 million (2016 – loss after taxation of £1,249
million; 2015 – loss after taxation of £1,426 million) is stated after charging preferential dividends payable to GSK, Shionogi and Pfizer and
after a charge of £909 million (2016 – £2,186 million; 2015 – £1,874 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 income/(expense) for the year attributable to non-controlling interests
Dividends paid to non-controlling interests
2017
£m
187
316
2016
£m
(83)
152
2015
£m
(143)
163
Non-controlling interests in the Consolidated balance sheet
(476)
(353)
GSK Annual Report 2017Notes to the financial statements continued 211
2015
£m
4,627
(39)
72
33
2015
£m
277
(691)
(42)
(456)
2017
£m
7,003
1,211
(387)
824
2017
£m
12,771
3,282
16,053
(2,675)
(1,537)
(4,212)
11,841
2017
£m
883
270
(1,194)
(41)
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)
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 inflow/(outflow) from investing activities
Net cash outflow from financing activities
Decrease in cash and bank overdrafts in the year
The above financial information relates to the Consumer Healthcare Joint Venture on a stand-alone basis, 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
Dividends paid to non-controlling interests
2017
£m
296
420
2016
£m
730
346
2015
£m
14
–
Non-controlling interests in the Consolidated balance sheet
3,631
3,755
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 212
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
2017
£m
2016
£m
5,254
7,199
584
107
346
738
38
8,510
12
496
166
52
874
143
9,410
3
15,589
18,343
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. The decrease in intangible commitments in 2017 is attributable to amendments made to the
agreement with Adaptimmune Therapeutics plc and reduction in commitments to third parties such as Ionis Pharmaceuticals, 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 2018 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. £117 million (2016 – £186 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
2017
£m
186
149
122
107
94
387
1,045
2016
£m
153
129
94
74
66
324
840
GSK Annual Report 2017Notes to the financial statements continued
213
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.
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 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.
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).
GSK does 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.
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 £13.2
billion (see Note 31, ‘Net debt’) and total equity, including that
provided by non-controlling interests, of £3.5 billion (see
‘Consolidated statement of changes in equity’ on page 160).
Total capital, including that provided by non-controlling interests,
is £16.7 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
(stable outlook). The Group’s short-term credit ratings are A-1
and P-1 with Standard and Poor’s and Moody’s respectively.
Liquidity risk 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 2017, GSK had £2.8 billion of borrowings
repayable within one year and held £3.9 billion of cash and
cash equivalents and liquid investments of which £2.5 billion
was held centrally. GSK has access to short-term finance under
a $10 billion (£7.4 billion) US commercial paper programme;
$0.7 billion (£0.5 billion) was in issue at 31 December 2017
(2016 – $1.4 billion). GSK also has £1.9 billion five year committed
facilities and $2.5 billion (£1.9 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 August 2017. These
facilities were undrawn at 31 December 2017. 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 2017, £9.0 billion of notes were in issue under
this programme. The Group also had $9.7 billion (£7.2 billion) of
notes in issue at 31 December 2017 under a US shelf registration.
GSK’s borrowings mature at dates between 2018 and 2045.
The put options owned by minority interest partners in ViiV
Healthcare and the Consumer Healthcare JV business are both
now exercisable. In reviewing liquidity requirements GSK considers
that sufficient financing options are available should the put options
be exercised.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
214
42. Financial instruments and related disclosures continued
At 31 December 2017, £45 million of cash is categorised as held
with unrated or sub-investment grade rated counterparties (lower
then BBB-/Baa3) of which £32 million is cash in transit. The
remaining exposure is concentrated in overseas banks used for local
cash management or investment purposes, including £7 million in
Nigeria held with United Bank for Africa, Zenith Bank and Stanbic
IBTC Bank and First Bank of Nigeria and £2 million with BTV in
Austria. Of the £80 million of bank balances and deposits held with
BBB/Baa rated counterparties, £27 million was held with BBB-/
Baa3 rated counterparties, including balances or deposits of
£17 million with HDFC Bank in India and £10 million with State
Bank of India. These banks are used for local investment purposes.
Credit risk
The Group considers its maximum credit risk at 31 December
2017 to be £9,988 million (31 December 2016 – £11,002 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 216 for details on the
Group’s total financial assets. At 31 December 2017, GSK’s greatest
concentrations of credit risk were £0.5 billion with Citibank (A/A1)
and £0.5 billion with one US wholesaler (BBB+/Baa2) (2016 –
£0.9 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 220 sets out
the Group’s financial assets and liabilities on an offset basis.
2017
Bank balances and deposits
US Treasury and Treasury repo only money market funds
Liquidity funds
Government securities
3rd party financial derivatives
Total
2016
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
–
1,715
403
–
–
2,118
AAA/Aaa
£m
–
2,248
66
–
–
2,314
AA/Aa
£m
423
–
–
77
26
526
AA/Aa
£m
542
–
–
85
70
697
A/A
£m
1,167
–
–
–
42
1,209
A/A
£m
1,560
–
–
–
86
1,646
BBB/Baa
£m
80
–
–
1
–
81
BBB/Baa
£m
388
–
–
4
–
392
BB+/Ba1
and below
/unrated
£m
45
–
–
–
–
45
BB+/Ba1
and below
/unrated
£m
93
–
–
–
–
93
Total
£m
1,715
1,715
403
78
68
3,979
Total
£m
2,583
2,248
66
89
156
5,142
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.
GSK Annual Report 2017Notes to the financial statements continued 215
42. Financial instruments and related disclosures continued
GSK’s centrally managed cash reserves amounted to £2.5 billion at
31 December 2017, all available within three months. This includes
£1.7 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 83% of the
sales of the US Pharmaceuticals and Vaccines businesses in 2017.
At 31 December 2017, the Group had trade receivables due from
these three wholesalers totalling £1,265 million (2016 – £1,323
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 216 presents the carrying amounts and the fair
values of the Group’s financial assets and liabilities at 31 December
2017 and 31 December 2016.
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 2017, the Employee Share Ownership Plan (ESOP)
Trusts held GSK shares with a carrying value of £400 million (2016
– £286 million) and a fair value of £882 million (2016 – £667 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 2017, 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
2017, GSK held Treasury shares at a cost of £5,800 million
(2016 – £6,451 million) which has been deducted from
retained earnings.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 216
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 Other non-current
assets in scope of IAS 39
Financial assets at fair value through profit or loss:
Trade and other receivables and 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
– other borrowings
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
Net financial assets and financial liabilities
Notes
a
a
b
a,b
a,d,e
a,d,e
d
f
c
a,c
a,d,e
a,d,e
Carrying
value
£m
78
918
2017
Fair
value
£m
78
918
Carrying
value
£m
89
985
2016
Fair
value
£m
89
985
3,833
3,833
4,897
4,897
5,495
5,495
5,499
5,499
506
5
71
506
5
71
361
23
133
361
23
133
10,906
10,906
11,987
11,987
(4,315)
(11,894)
(4,405)
(14,743)
(3,189)
(3,335)
(14,111)
(16,996)
(236)
(529)
(49)
(236)
(529)
(49)
(332)
(1,094)
–
(332)
(1,094)
–
(17,023)
(19,962)
(18,726)
(21,757)
(66)
(66)
(64)
(64)
(17,089)
(20,028)
(18,790)
(21,821)
(20,325)
(20,325)
(18,713)
(18,713)
(6,172)
(6,172)
(5,896)
(5,896)
(26)
(48)
(26)
(48)
(92)
(102)
(92)
(102)
(43,660)
(46,599)
(43,593)
(46,624)
(32,754)
(35,693)
(31,606)
(34,637)
The valuation methodology used to measure fair value in the above table is described and categorised on page 215. 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 page 218.
GSK Annual Report 2017Notes to the financial statements continued
217
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 2017
Financial assets at fair value
Available–for–sale financial assets:
Liquid investments
Other investments
Other non-current assets
Financial assets at fair value through profit or loss:
Other non-current assets
Trade and other receivables
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 2016
Financial assets at fair value
Available–for–sale financial assets:
Liquid investments
Other investments
Other non-current assets
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 for businesses divested/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
77
535
–
–
–
–
–
612
–
–
–
–
1
–
–
382
–
5
62
450
–
(26)
(47)
(73)
–
383
38
44
42
–
9
78
918
38
426
42
5
71
516
1,578
(6,172)
–
(1)
(6,173)
(6,172)
(26)
(48)
(6,246)
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
6
355
23
133
411
1,591
(5,896)
–
(1)
(5,897)
2017
£m
(5,486)
(970)
22
80
685
117
(52)
(24)
(29)
(5,657)
(5,896)
(92)
(102)
(6,090)
2016
£m
(3,582)
(2,283)
29
(194)
431
81
(15)
(11)
58
(5,486)
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
218
42. Financial instruments and related disclosures continued
The net losses of £970 million (2016 – £2,283 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. Losses of £971 million (2016 – £2,283 million)
were reported in Other operating income and income of £1 million (2016 – £nil) was recorded in Finance income. £909 million (2016 –
£2,162 million) arose from remeasurement of the contingent consideration payable for the acquisition of the former Shionogi-ViiV Healthcare
joint venture and £53 million (2016 – £152 million) arose from remeasurement of the contingent consideration payable on the acquisition in
2015 of the Novartis Vaccines business. Net gains of £22 million (2016 – £29 million) attributable to Level 3 financial instruments reported in
Other comprehensive income as Fair value movements on available-for-sale investments included net losses of £6 million (2016 – net gains of
£21 million) in respect of financial instruments held at the end of the year.
Financial liabilities measured using Level 3 valuation methods at 31 December included £5,542 million (2016 – £5,304 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 £584 million (2016 – £545 million) in respect of contingent consideration for the acquisition in 2015
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
2017
Total
£m
At fair value
through
profit or loss
£m
Loans and
receivables
£m
Financial
instruments
£m
Non-
financial
instruments
£m
2016
Total
£m
Trade and other receivables
(Note 24)
Other non-current assets
(Note 22)
42
5,148
5,190
810
6,000
–
5,135
5,135
891
6,026
464
506
347
5,495
811
6,001
602
1,412
1,413
7,413
361
361
364
5,499
725
5,860
474
1,365
1,199
7,225
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
2017
£m
142
70
64
27
108
411
2016
£m
137
178
55
53
98
521
(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
2017
Total
£m
At fair value
through
profit or loss
£m
Other
liabilities
£m
Financial
instruments
£m
Non-financial
instruments
£m
2016
Total
£m
–
–
–
(20,129)
(20,129)
(841)
(20,970)
(117)
(117)
(1,148)
(1,265)
(79)
(79)
(902)
(981)
–
–
–
(11,041)
(11,041)
(923)
(11,964)
(113)
(113)
(1,387)
(1,500)
(7,559)
(7,559)
(886)
(8,445)
(6,172)
–
(6,172)
–
(6,172)
(5,896)
–
(5,896)
–
(5,896)
(6,172)
(20,325)
(26,497)
(2,891)
(29,388)
(5,896)
(18,713)
(24,609)
(3,196)
(27,805)
GSK Annual Report 2017Notes to the financial statements continued
219
42. Financial instruments and related disclosures continued
(d) Derivative financial instruments and hedging programmes
The following table sets out the fair values of derivatives held by GSK. All the derivative liabilities and £68 million (2016 – £156 million) of the
derivative assets have a maturity of less than one year.
Net investment hedges – Foreign exchange contracts
(principal amount – £6,333 million (2016 – £5,362 million))
Cash flow hedges – Foreign exchange contracts
(principal amount – £38 million (2016 – £170 million))
Derivatives designated as at fair value through profit or loss
Foreign exchange contracts
(principal amount – £14,449 million (2016 – £14,943 million))
Embedded and other derivatives
Derivatives classified as held for trading under IAS 39
Total derivative instruments
2017
Fair value
Liabilities
£m
Assets
£m
2016
Fair value
Liabilities
£m
Assets
£m
5
–
5
62
9
71
76
(25)
(1)
(26)
(47)
(1)
(48)
(74)
18
5
23
133
–
133
156
(92)
–
(92)
(99)
(3)
(102)
(194)
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 2017, the Group held outstanding foreign exchange
contracts with a net asset fair value of £15 million (£62 million asset less £47 million liability). At 31 December 2016, the fair value was
£34 million net asset (£133 million asset less £99 million liability).
The overall decrease in the net asset fair value has been due to the weakening of Sterling against the Euro in 2017 and the strengthening of
Sterling against the US Dollar which has impacted on the portion of the hedging portfolio that is not in a designated accounting hedge. Fair
value movements are taken to the income statement in the period to offset the exchange gains and losses on the related underlying balances.
Fair value hedges
At 31 December 2017, 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 carrying value of bonds on page 216 includes £4,315 million (2016 – £3,189 million) that are designated as hedging instruments in net
investment hedges.
Cash flow hedges
During 2017, 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 denominated coupon payments relating to notes issued under the Group’s European
Medium Term Note programme 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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 220
42. Financial instruments and related disclosures continued
(e) Offsetting of financial assets and liabilities
Financial assets and liabilities are offset and the net amount reported in the balance sheet where there is a legally enforceable right to offset
the recognised amounts, and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. There are
also arrangements that do not meet the criteria for offsetting but still allow for the related amounts to be offset in certain circumstances, such
as bankruptcy or the termination of a contract.
The following tables set out the financial assets and liabilities that are offset, or subject to enforceable master netting arrangements and other
similar agreements but not offset, as at 31 December 2017 and 31 December 2016. The column ‘Net amount’ shows the impact on the
Group’s balance sheet if all offset rights were exercised.
At 31 December 2017
Financial assets
Trade and other receivables
Derivative financial instruments
Financial liabilities
Trade and other payables
Derivative financial instruments
At 31 December 2016
Financial assets
Trade and other receivables
Derivative financial instruments
Financial liabilities
Trade and other payables
Derivative financial instruments
Gross
financial
assets/
(liabilities)
£m
Financial
(liabilities)/
assets
offset
£m
Net financial
assets/
(liabilities)
£m
Related
amounts not
offset
£m
Net
amount
£m
5,159
12
Net
balance
£m
5,106
39
5,191
76
(20,130)
(74)
Gross
financial
assets/
(liabilities)
£m
5,136
156
(11,042)
(194)
(1)
–
1
–
(1)
–
1
–
5,190
76
(31)
(64)
(20,129)
(74)
31
64
(20,098)
(10)
Financial
(liabilities)/
assets
offset
£m
Net financial
assets/
(liabilities)
£m
Related
amounts not
offset
£m
5,135
156
(29)
(117)
(11,041)
(194)
29
117
(11,012)
(77)
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. As there is presently not a legally enforceable right of offset, these amounts
have not been offset in the balance sheet, but have been presented separately in the table above.
GSK Annual Report 2017Notes to the financial statements continued
221
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
2017
Total
debt
£m
(2,802)
(1,340)
(1,076)
(16)
(1,475)
(3,664)
(6,650)
(17,023)
(16,209)
(765)
(16,974)
(49)
(17,023)
2016
Total
£m
(4,106)
(2,216)
(1,277)
–
–
(4,082)
(7,045)
(18,726)
(17,342)
(1,381)
(18,723)
(3)
(18,726)
(g) Sensitivity analysis
The tables below illustrate the estimated impact on the income statement and equity as a result of hypothetical market movements in foreign
exchange and interest rates in relation to the Group’s financial instruments. The range of variables chosen for the sensitivity analysis reflects
management’s view of changes which are reasonably possible over a one-year period.
Foreign exchange sensitivity
The Group operates internationally and is primarily exposed to foreign exchange risk in relation to Sterling against movements in US Dollar,
Euro and Japanese Yen. Foreign exchange risk arises from the translation of financial assets and liabilities which are not in the functional
currency of the entity that holds them. Based on the Group’s net financial assets and liabilities as at 31 December, a weakening and
strengthening of Sterling against these currencies, with all other variables held constant, is illustrated in the tables below. The tables exclude
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
Income statement impact of non-functional currency foreign exchange exposures
10 cent depreciation of the US Dollar
10 cent depreciation of the Euro
10 yen depreciation of the Yen
2017
2016
Increase/(decrease) in
income
£m
76
Increase/(decrease) in
income
£m
77
(5)
9
2017
18
1
2016
Increase/(decrease) in
income
£m
(66)
Increase/(decrease) in
income
£m
(66)
4
(8)
(16)
(1)
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
222
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 denominated coupon payments relating to notes issued under the Group’s European Medium Term Note programme and a number
of highly probable forecast transactions denominated in US Dollar.
Equity impact of non-functional currency foreign exchange exposures
10 cent appreciation of the US Dollar
10 cent appreciation of the Euro
Equity impact of non-functional currency foreign exchange exposures
10 cent depreciation of the US Dollar
10 cent depreciation of the Euro
2017
2016
Increase/(decrease)
in equity
£m
Increase/(decrease)
in equity
£m
1
(1,028)
2017
11
(795)
2016
Increase/(decrease)
in equity
£m
Increase/(decrease)
in equity
£m
(1)
861
(10)
670
The tables below present the Group’s sensitivity to a weakening and strengthening of Sterling against the relevant currency based on the
composition of net debt as shown in Note 31 adjusted 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
Impact of foreign exchange movements on net debt
10 cent depreciation of the US Dollar
10 cent depreciation of the Euro
10 yen depreciation of the Yen
2017
2016
(Increase)/decrease
in net debt
£m
(637)
(Increase)/decrease
in net debt
£m
(746)
197
(4)
2017
190
(11)
2016
(Increase)/decrease
in net debt
£m
549
(165)
4
(Increase)/decrease
in net debt
£m
634
(160)
10
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 floating
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 2017 would have
increased by approximately £5 million (2016 – £3 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
2017
2016
Increase/(decrease)
in income
£m
24
Increase/(decrease)
in income
£m
3
(24)
5
(3)
3
GSK Annual Report 2017Notes to the financial statements continued
223
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 2017
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 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
Debt
£m
(2,802)
(1,344)
(1,078)
(16)
(1,483)
(3,694)
(6,720)
(17,137)
Debt
£m
(4,108)
(2,218)
(1,282)
–
–
(4,117)
(7,124)
(18,849)
Interest on
debt
£m
(555)
(497)
(488)
(488)
(468)
(2,018)
(3,996)
(8,510)
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
(21,521)
(27)
(8)
(2)
(1)
(5)
–
(66)
(2)
(1)
(1)
(1)
(5)
–
(12)
(853)
(813)
(784)
(752)
(3,609)
(1,471)
(29,803)
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)
Total
£m
(24,903)
(2,723)
(2,388)
(1,291)
(2,705)
(9,331)
(12,187)
(55,528)
Total
£m
(16,459)
(11,591)
(2,758)
(1,289)
(1,201)
(9,713)
(14,781)
(57,792)
The increase in contractual cash flows for non-derivative financial liabilities due in less than one year of £8.4 billion and the decrease in cash
flows due between one and two years of £8.9 billion principally reflect the move of the Consumer Healthcare put option into amounts due in
less than one year. This option relates to the ability of Novartis to put its shares in the Consumer Healthcare Joint Venture to GSK at certain
points commencing on 2 March 2018 with payment likely to be due several months after exercise. See Note 27 ‘Trade and other payables’
for further information on the Consumer Healthcare put option.
Anticipated contractual cash flows for the repayment of debt and debt interest have decreased by £2.6 billion over the year due to a
reduction in the issuance of commercial paper and favourable exchange rate movements on US Dollar denominated debt.
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 decreased compared with 31 December 2016 as a result of reduced
hedging of the US commercial paper programme.
Due in less than one year
Between one and two years
Gross contractual cash flows
Receivables
£m
20,319
–
2017
Payables
£m
(20,326)
–
Receivables
£m
21,266
20
2016
Payables
£m
(21,303)
(20)
20,319
(20,326)
21,286
(21,323)
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
224
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 2017 was £347 million (2016 – £338 million; 2015 – £349 million). Of this amount,
£276 million (2016 – £271 million; 2015 – £307 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 4.8% (2016 – 4.5%; 2015 – 5.7%) over the duration of the award.
Number of shares and ADS issuable
At 1 January 2015
Awards granted
Awards exercised
Awards cancelled
At 31 December 2015
Awards granted
Awards exercised
Awards cancelled
At 31 December 2016
Awards granted
Awards exercised
Awards cancelled
At 31 December 2017
Shares
Number (000)
32,912
13,019
(11,476)
(1,878)
32,577
12,983
(11,198)
(1,507)
32,855
13,018
(10,596)
(1,352)
33,925
Weighted
fair value
£11.57
£14.97
£13.68
ADS
Number (000)
21,227
7,198
(8,878)
(2,027)
17,520
6,589
(6,214)
(812)
17,083
6,610
(5,674)
(627)
17,392
Weighted
fair value
$35.66
$39.18
$35.63
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 2015, 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.
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 2017, awards were made of 3.9 million shares at a weighted fair value of £11.09 and 1.0 million ADS at a weighted fair value of
$32.85. At 31 December 2017, there were outstanding awards over 12.9 million shares and 3.2 million ADS.
GSK Annual Report 2017Notes to the financial statements continued 225
43. Employee share schemes continued
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)
Options outstanding
At 31 December 2017
Range of exercise prices on options outstanding
at year end
Weighted average market price on exercise
during year
Weighted average remaining contractual life
2017 Grant
0.54%
2016 Grant
0.32%
2015 Grant
0.88%
5.9%
23%
3 years
£10.86
4.9%
23%
3 years
£12.95
6.5%
21%
3 years
£10.14
Share option
schemes – shares
Weighted
exercise
price
£11.86
Number
000
3,600
Share option
schemes – ADS
Weighted
exercise
price
$39.62
Number
000
3,277
Savings-related
share option schemes
Weighted
exercise
price
£10.77
Number
000
6,852
£11.47
– £12.21
$33.42
– $48.66
£10.13
– £12.95
£16.07
1.4 years
$41.50
1.0 years
£14.28
2.1 years
Options over 2.0 million shares were granted during the year under the savings-related share option scheme at a weighted average fair value
of £2.08. At 31 December 2017, 6.7 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 2017, Treasury shares with a carrying value of £610 million
were purchased by the US 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
2017
2016
66,558
42,571
£m
17
399
880
2017
139
£m
–
1
2
£m
11
285
665
2016
139
£m
–
1
2
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
226
Notes to the financial statements continued
44. Principal Group companies
The following represent the principal subsidiaries and their countries of incorporation of the Group at 31 December 2017. 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.
GSK Consumer Health, Inc. (formerly Novartis Consumer Health, Inc.) (63.5%)
S.R. One, Limited
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 Consumer Healthcare Sp.z.o.o. (Poland) (63.5%)
GlaxoSmithKline Pharmaceuticals S.A. (Poland)
GSK Services Sp z o.o. (Poland)
GlaxoSmithKline Trading Services Limited (Republic of Ireland) (i)
GlaxoSmithKline Healthcare AO (Russia) (63.5%)
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 276 to 286, 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., GlaxoSmithKline Capital plc and GlaxoSmithKline LLC, 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., GlaxoSmithKline Capital plc and
GlaxoSmithKline LLC.
See pages 276 to 286 for a complete list of subsidiary undertakings, associates and joint ventures, which form part of these financial
statements.
GSK Annual Report 2017 227
45. Legal proceedings
The Group is involved in significant legal and administrative
proceedings, principally product liability, intellectual property, tax,
anti-trust and governmental investigations, as well as related private
litigation. The 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 2017, the Group’s
aggregate provision for legal and other disputes (not including tax
matters described in Note 14, ‘Taxation’) was £186 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.
Flovent HFA
On 15 February 2017, the Group received a Paragraph IV
certification from Teva for Flovent HFA. This was the first Paragraph
IV certification the Group had received from a generic
pharmaceutical company seeking to make an AB rated version of
Flovent HFA. Three patents are at issue. Teva alleged that its generic
version of Flovent did not infringe two patents directed to actuation
indicators (metered dose) listed in the Orange Book. Teva also
alleged that U.S. Patent No. 6,743, 413 (‘413 patent’) which 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 Flovent is not valid. After reviewing the Teva complaint,
the Group did not sue Teva under the ‘413 patent and asked the FDA
to remove the ‘413 patent from the Orange Book. Teva produced
evidence showing that it did not infringe the dose counter patents.
On 20 June 2017, the Group withdrew the case against Teva.
Bexsero/Men B vaccines
Following its acquisition of the Novartis Vaccines business, the
Group took over patent litigation originally filed by Novartis against
Pfizer, Inc. (Pfizer) in the UK, Italy and the United States related to
meningococcal B (Men B) vaccines. In various cases, Novartis had
alleged that European patents owned by Pfizer were not infringed by
the Group’s vaccine, Bexsero and were invalid. Novartis had also
filed suit against Pfizer for patent infringement, alleging that Pfizer’s
sale of its vaccine, Trumenba, infringes Novartis’ patents related to
Men B vaccines. Pfizer had filed suit against the Group in the UK
seeking to invalidate six UK patents owned by the Group that have
relevance to Trumenba and in Canada for infringement of a patent
covering Trumenba. On 24 April 2017, the Group and Pfizer entered
into a confidential global settlement resolving all matters that permits
each company to manufacture and sell their respective Men B
vaccines.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 228
Notes to the financial statements continued
45. Legal proceedings continued
Dolutegravir/Tivicay/Triumeq
In September and October, 2017, ViiV Healthcare received patent
challenge letters under the Hatch-Waxman Act from Lupin, Mylan,
Cipla and Dr. Reddy’s Labs for Triumeq, and from Cipla, Dr. Reddy’s,
Apotex and Sandoz for Tivicay and Triumeq. ViiV Healthcare lists two
patents for dolutegravir, the active ingredient in Tivicay and one of the
active ingredients in Triumeq, in the FDA Orange Book. One patent,
covering the molecule dolutegravir, expires on 5 October 2027. A
second patent, claiming a certain crystal form of dolutegravir, expires
on 8 December 2029. All the letters challenged only the patent for
the crystal form. Some generic companies alleged that the crystal
form patent is not valid. Others challenged validity and asserted that
their proposed product would not infringe the crystal form patent.
On 7 February 2017, ViiV Healthcare filed patent infringement suits
against all the generic companies in the US District Court for the
District of Delaware. Additionally, ViiV Healthcare also filed suit
against certain of the generic companies in the US District Court for
the District of New Jersey, and the US District Court for the District
of West Virginia. No trial date has yet been set.
On 7 February 2018, ViiV Healthcare filed patent infringement
litigation against Gilead Sciences Inc. (Gilead) over bictegravir in
the US District Court for the District of Delaware (US Patent No.
8,129,385) and the Canadian Federal Court (Canadian Patent No.
2,606,282). ViiV Healthcare alleges that Gilead’s triple combination
HIV drug containing the HIV integrase inhibitor bictegravir infringes
ViiV Healthcare’s patent covering dolutegravir and other compounds
that include dolutegravir’s unique chemical scaffold. In both the US
and Canada, ViiV Healthcare seeks financial redress rather than
injunctive relief. No trial date has yet been set.
Kivexa
Between Q1 2017 and Q1 2018, ViiV Healthcare reached
confidential agreements with each of Vale Pharmaceuticals, Lupin,
Sandoz, STADA and Zentiva to settle various challenges to the
validity of the Supplementary Protection Certificate (‘SPC’) for the
patent covering the combination of lamivudine and abacavir for
Kivexa and certain counterclaims brought by ViiV Healthcare for
infringement of that SPC. These settlements brought an end to
litigation and arbitration proceedings between ViiV Healthcare and
Lupin in Germany and Portugal, between ViiV Healthcare and
STADA in Germany and Italy, between ViiV Healthcare and Sandoz
in Austria, Germany, Portugal, Spain and Sweden, between
ViiV Healthcare and Vale Pharmaceuticals in Portugal, and between
ViiV Healthcare and Zentiva in Portugal.
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 lamivudine and
abacavir combination patent. ViiV Healthcare has counterclaimed for
infringement of the Italian SPC. The trial in this action is to be heard
in Q3 2018.
In June 2017, Biogaran commenced proceedings in France seeking
revocation of the French SPC covering Kivexa. No trial date has been
set for this action.
In Portugal, ViiV Healthcare initiated arbitration proceedings against
Farmoz under the SPC covering Kivexa. Farmoz had filed for
marketing approval for a generic version of Kivexa. No arbitration
date has yet been scheduled in this action.
In February 2017, Kyowa Pharmaceuticals filed a nullity action
relating to Kivexa in Japan. Oral hearing of the trial was held at the
Japan Patent Office on 30 January 2018. The decision of the Japan
Patent Office is expected in 2018.
Lexiva
The US patent covering Lexiva expired on 24 December 2017 and
the product has paediatric exclusivity until 24 June 2018. Pursuant to
a settlement of litigation and confidential licence agreement, Mylan is
presently selling a generic version of Lexiva in the US.
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.
GSK Annual Report 2017 229
45. Legal proceedings continued
Avandia
The Group has been named in product liability lawsuits on behalf
of individuals asserting personal injury claims arising out of the use
of Avandia. 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 2018, there are five remaining personal injury cases
on appeal from summary judgement decisions in favour of the Group
(one in federal court in Pennsylvania and four in California state
court).
There were four purported class actions in the US seeking economic
damages on behalf of third party payers asserting claims under the
Racketeer Influenced and Corrupt Organizations Act (RICO) and
consumer protection laws. Two plaintiffs voluntarily dismissed their
actions. On 7 December 2017, the MDL Court granted the Group’s
motion for summary judgement on the two remaining plaintiffs’
claims. Plaintiffs have filed an appeal of the decision in the US
Court of Appeals for the Third Circuit, and a briefing schedule
has been set.
In the Santa Clara County action, the Group filed a motion for
summary judgement on the basis of pre-emption and also is
seeking partial summary judgement on the County’s restitution
claim. On 7 December 2017, the MDL Court granted the Group’s
motion. The County’s claims for civil penalties remain pending
before the MDL Court.
There are 13 purported class actions in Canada, two of which are
active. In the two active cases, class certification hearings were
held. In the Ontario action, the proceedings were adjourned. On
7 December 2017, the Nova Scotia court issued an Order certifying
a nationwide class of all users of Avandia. The Group has filed an
appeal of that class certification decision.
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,
persistent pulmonary hypertension or autism; (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
2018, but a number of claims related to use during pregnancy are
still pending in various courts in the US. Of these remaining lawsuits,
there are three cases still pending in state court in California and one
in federal court in California. There is one case in state court in
Kentucky, one in state court in Oklahoma, and one lawsuit joining the
claims of eight plaintiffs in state court in Illinois. Other matters have
been dismissed without payment.
The Singh action in Alberta, Canada, a proposed national class
action, seeks to certify a class relating to birth defects generally.
The Group is awaiting a hearing on the motion in Singh to certify
the case as a class action. Another Canadian class action, Jensen,
alleging claims of Paxil (and other SSRI) use and autism was filed in
Saskatchewan in January 2017. On 27 March 2017, court approval
was received for the settlement of Bartram, a third class action suit
in British Columbia.
– Acts of violence
As of February 2018, 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. One
of the US cases, Dolin, involving the suicide of a man who allegedly
took generic paroxetine manufactured by Mylan, resulted in a
$3 million verdict for the plaintiff. The Group has appealed the
verdict to the US Court of Appeals for the Seventh Circuit.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 230
Notes to the financial statements continued
45. Legal proceedings continued
– Discontinuation
In the UK, a long-pending group action alleges that Seroxat caused
severe discontinuation symptoms. In 2010, the Legal Services
Commission (“LSC”) withdrew public funding from hundreds of
claimants, causing termination of most claims. In 2015, the Legal
Aid Agency (formerly the LSC) discharged the public funding
certificate following a 2013 recommendation of its Special Cases
Review Panel that these cases have poor prospects of success.
However, more recently, Fortitude Law was engaged with the
purpose of resurrecting the Seroxat group action, and obtained
third-party funding for the experts and the 103 remaining claimants.
The Group asked the court to require the third-party funder to
provide security for the litigation costs in the event plaintiffs lose.
On 8 December 2017, the High Court ruled in favour of the Group
on its application for an order that the claimants’ litigation funder
give security for costs for a sum in excess of the total funding it had
committed to the case. The trial of the action is scheduled to
commence in May 2019.
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 2018, the Group is a defendant
in 420 personal injury lawsuits in the US. 406 of the cases are part
of a multi-district litigation proceeding (MDL) in the District of
Massachusetts.
The MDL cases are in discovery. 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.
The Brown case pending in Oregon is in discovery and is scheduled
for trial in October 2018. The remaining nine state court cases in
the US, eight of which are in California, are still in their early days.
The Group is also a defendant in four proposed class actions in
Canada. There has been no significant activity in 2017 in the
Canadian class actions.
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 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 Group is co-operating
with and responding to these requests. The SFO inquiry followed
investigations initiated by China’s Ministry of Public Security in June
2013 (the “China Investigations”) which resulted in a ruling in 2014
that, according to Chinese law, GSK China Investment Co. Ltd.
(“GSKCI”) had offered money or property to non-government
personnel in order to obtain improper commercial gains and GSKCI
being found guilty of bribing non-government personnel.
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, including China. 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) confirmed that it had concluded its
investigation into the Group’s commercial practices and would take
no action against the Group. As part of the resolution with the SEC,
the Group agreed to certain undertakings, including a period of
self-monitoring and reporting. The Group’s obligations under that
resolution continue through 30 September 2018.
In the course of its current inquiry, the SFO has requested additional
information from the Group regarding third party advisers engaged
by the company in the course of the China Investigations. The SEC
and DOJ are also investigating these matters following the Group’s
reporting of the SFO’s inquiries. The Group is co-operating and
responding to these 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 has completed its response 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.
GSK Annual Report 2017 231
45. Legal proceedings continued
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 as to the Group.
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 2018, with
the case to be scheduled for trial sometime in late 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 totaling £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 for its
appeal of the CMA’s finding to the Competition Appeal Tribunal
(CAT) in order to overturn the fine or substantially reduce it. The
appeal concluded in April 2017. The CAT delivered its initial
judgement on the appeal on 8 March 2018 referring all the principle
points at issue to the Court of Justice of the EU for a preliminary
ruling. The matter will then return to the CAT for final judgement.
No provision has been made for this matter.
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 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. Plaintiffs alleged that a conspiracy to delay
generic approval existed between Biovail and the Group, but the US
District 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. On 9 August 2017, the US Court of Appeals
for the Third Circuit Court affirmed the trial court’s dismissal of
plaintiffs’ case on summary judgement. On 31 August 2017, plaintiffs
filed a motion for a rehearing en banc before the Third Circuit which
was denied on 20 September 2017. Plaintiffs did not file a petition for
certiorari asking the United States Supreme Court to review the
decision, so the dismissal of the action is now final.
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. Matters for
which the Group has made a provision are also noted in Note 29,
‘Other provisions’.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 232
Notes to the financial statements continued
45. Legal proceedings continued
Securities/ERISA class actions – Stiefel
On 12 December 2011, the US Securities and Exchange
Commission (SEC) filed a formal complaint against Stiefel
Laboratories, Inc. 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 to the Group. The case was stayed
while several private actions brought by former Stiefel employees
proceeded through the courts, but was returned to active status in
early summer 2015. It is unclear when the case ultimately will be
scheduled for trial.
In addition to the SEC case, one private matter (the “Martinolich”
case) remains. It is also pending in federal district court in Florida,
but has been stayed pending the trial of the SEC matter. The
allegations in the Martinolich case largely track those in the SEC
matter: plaintiff, a former Stiefel employee, alleges that Stiefel and
its officers and directors violated the US Employee Retirement
Income Security Act (ERISA) and federal and state securities
laws by inducing Stiefel employees to sell their shares in the
employee stock plan back to Stiefel at a greatly undervalued price
and without disclosing to employees that Stiefel was about to be
sold to the Group.
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 19 sites, of which 10 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. The cost
of investigation, study and remediation at such sites could, over time,
be significant. The Group has made a provision for these matters, as
noted in Note 29, ‘Other provisions’.
GSK Annual Report 2017 233
Financial statements of GlaxoSmithKline plc
prepared under UK GAAP (including FRS 101 ‘Reduced Disclosure Framework’)
Directors’ statements 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 112. 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
12 March 2018
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 113 to 141) 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 2017, comprising the balance sheet for the year
ended 31 December 2017 and supporting notes, are set out on
pages 239 to 242 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 234 to 238.
The financial statements for the year ended 31 December 2017 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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 234
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 2017;
– have been properly prepared in accordance with United Kingdom
Generally Accepted Accounting Practice (United Kingdom
Accounting Standards, comprising FRS 101 “Reduced
Disclosure Framework”, and applicable law); and
– have been prepared in accordance with the requirements of the
Companies Act 2006.
We have audited the financial statements, included within the
Annual Report, which comprise: the Company balance sheet at 31
December 2017; the Company statement of changes in equity for the
year then ended; and the notes to the financial statements, which
include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit & Risk
Committee.
Basis for opinion
We conducted our audit in accordance with International Standards
on Auditing (UK) (“ISAs (UK)”) and applicable law. Our
responsibilities under ISAs (UK) are further described in the Auditors’
responsibilities for the audit of the financial statements section of our
report. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the
ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard, as
applicable to listed public interest entities, and we have fulfilled our
other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit
services prohibited by the FRC’s Ethical Standard were not provided
to the Group or to the parent company.
Other than those disclosed in Note 8 to the Group financial
statements, we have provided no non-audit services to the Group
and to its subsidiaries in the period from 1 January 2017 to
31 December 2017.
Our audit approach
Overview
Materiality
– Overall materiality: £70 million (2016 – £70 million), based on 1%
of total assets capped at an allocation of Group materiality.
Scope
– The parent company is a single entity and operates in one location.
Areas of focus
– Carrying value of investments in subsidiaries
– Vaccines contingent consideration liability.
The scope of our audit
As part of designing our audit, we determined materiality and
assessed 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.
We gained an understanding of the legal and regulatory framework
applicable to the Company and the pharmaceutical industry in which
it operates, and considered the risk of acts by the Company which
were contrary to applicable laws and regulations, including fraud. We
designed audit procedures to respond to the risk, recognising that
the risk of not detecting a material misstatement due to fraud is
higher than the risk of not detecting one resulting from error, as fraud
may involve deliberate concealment by, for example, forgery or
intentional misrepresentations, or through collusion. We focused on
laws and regulations that could give rise to a material misstatement in
the Company financial statements in the event of non-compliance
including, but not limited to, the Companies Act 2006, UK Listing
Rules and UK taxation legalisation. Our tests included, but were not
limited to, the review of the financial statement disclosures to
underlying supporting documentation, review of correspondence
with legal advisors, enquiries of management and review of Internal
Audit reports in so far as they related to the financial statements.
There are inherent limitations in the audit procedures described
above and the further removed non-compliance with laws and
regulations is from the events and transactions reflected in the
financial statements, the less likely we would become aware of it.
We did not identify any key audit matters relating to irregularities,
including fraud. As in all of our audits, we also addressed the risk of
management override of internal controls, including testing journals
and evaluating whether there was evidence of bias by the directors
that represented a risk of material misstatement due to fraud.
GSK Annual Report 2017 235
Report on the parent company financial statements continued
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud)
identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit;
and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon,
were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide
a separate opinion on these matters. This is not a complete list of all risks identified by our audit.
Key audit matter
How our audit addressed the key audit matter
Carrying value of investments in subsidiaries
Refer to Note F in the parent company financial statements
The parent company holds fixed asset investments comprising
investments in subsidiaries of £20,275 million at 31 December
2017 (2016 – £20,236 million).
Investments in subsidiaries are accounted for at cost less
impairment in the Company balance sheet at 31 December 2017.
Investments are tested for impairment if impairment indicators
exist. If such indicators exist, the recoverable amounts of the
investments in subsidiaries are estimated in order to determine the
extent of the impairment loss, if any. Any such impairment loss is
recognised in the income statement.
Management judgement is required in the area of impairment
testing, particularly in determining whether any impairment triggers
have arisen that trigger the need for an impairment review and in
assessing whether the carrying value of an asset can be
supported by the recoverable amount which is determined by
reference to the Group’s market capitalisation and the valuations
implied by other acquisition-related liabilities.
Vaccines contingent consideration liability
Refer to Note H and J in the parent company financial
statements.
On acquisition of the Vaccines business from Novartis in 2015,
the parent company recognised a contingent consideration liability
which represents certain future milestone and royalty payments.
The liability includes milestone payments for acquired products
reaching set revenue and development targets.
The liability is required to be re-measured to its fair value at each
reporting date based on latest forecast and expectations of the
probability of successful product launches. The value of the liability
at 31 December 2017 was £584 million (2016 – £545 million).
The carrying value of the liability is based on assumptions such as
forecast cash flows, discount rates, taxation rates and the
probability of certain vaccines achieving development milestones.
We evaluated management’s assumption whether any indicators of
impairment existed by comparing the net assets of the subsidiaries at
31 December 2017 with the parent company’s investment carrying
values.
For those investments where the net assets were lower than the
carrying values, we considered their recoverable value by reference to
the Group’s market capitalisation at 31 December 2017 and the
valuations implied by other models, including valuation models prepared
for the acquisition-related liabilities and for goodwill impairment review
purposes, all of which were subject to audit procedures as part of our
Group audit.
As a result of our work, we agreed with management that the carrying
values of the investments held by the parent company are supportable
in the context of the parent company financial statements taken as a
whole.
We deployed our valuation specialists to consider the reasonableness
of management’s assumptions including growth projections and
probability of success as well as the integrity and accuracy of
management’s model. We compared sales forecasts to independent
market analysis and to board approved long range forecasts. We also
verified that the projections are consistent with those used in other
estimates, including intangible asset impairment models.
We considered the appropriateness of management’s judgements
about the probability of achieving the milestones in relation to
development progress and quantified how sensitive the liability is to
different assumptions around the probability of success. Where the
probability of success changed in 2017, we verified that this was driven
by a comparative change in the stage of development of the vaccine.
The liability is subject to significant estimation uncertainty. However,
based on our procedures performed, we are comfortable that the value
of the liability at 31 December 2017 is reasonable in the context of the
parent company financial statements taken as a whole and reflects
management’s best estimate at this time.
We reviewed the disclosures about the liability included in the Group
financial statements. We are satisfied that these disclosures are
appropriate.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 236
Independent Auditors’ report to the members
of GlaxoSmithKline plc continued
Report on the parent company 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 structure of the parent company, the accounting processes and controls and the industry in which it operates.
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 in aggregate 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
£70 million (2016 – £70 million).
1% of total assets capped at an allocation of Group materiality.
The parent company holds the Group’s investments and is not in itself profit-oriented. The
strength of the balance sheet is the key measure of financial health that is important to
shareholders since the primary concern for the parent company is the payment of dividends.
Using a benchmark of total assets is therefore most appropriate. This has been capped at
£70 million following an allocation of Group audit materiality since the parent company is a
component for the Group audit.
We agreed with the Audit & Risk Committee that we would report to it misstatements identified during our audit above £10 million
(2016 – £10 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or
draw attention to in respect of the directors’ statement in the
financial statements about whether the directors considered it
appropriate to adopt the going concern basis of accounting in
preparing the financial statements and the directors’ identification
of any material uncertainties to the parent company’s ability to
continue as a going concern over a period of at least twelve
months from the date of approval of the financial statements.
We have nothing material to add or to draw attention to. However,
because not all future events or conditions can be predicted, this
statement is not a guarantee as to the parent Company’s ability to
continue as a going concern.
We are required to report if the directors’ statement relating to
going concern in accordance with Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit.
We have nothing to report.
GSK Annual Report 2017 237
We have nothing to report having performed a review of the
directors’ statement that they have carried out a robust assessment
of the principal risks facing the parent company and statement in
relation to the longer-term viability of the parent company. Our review
was substantially less in scope than an audit and only consisted of
making inquiries and considering the directors’ process supporting
their statements; checking that the statements are in alignment with
the relevant provisions of the UK Corporate Governance Code (the
“Code”); and considering whether the statements are consistent with
the knowledge and understanding of the parent company and its
environment obtained in the course of the audit. (Listing Rules)
Other Code provisions
We have nothing to report in respect of our responsibility to report
when:
– The statement given by the directors, on page 104, that they
consider the Annual Report taken as a whole to be fair, balanced
and understandable, and provides the information necessary for
the members to assess the parent company’s position and
performance, business model and strategy is materially
inconsistent with our knowledge of the parent company obtained
in the course of performing our audit;
– The section of the Annual Report on pages 99 to 106 describing
the work of the Audit & Risk Committee does not appropriately
address matters communicated by us to the Audit Risk
Committee; and
– The directors’ statement relating to the parent company’s
compliance with the Code does not properly disclose a departure
from a relevant provision of the Code specified, under the Listing
Rules, for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be
audited has been properly prepared in accordance with the
Companies Act 2006. (CA06)
Reporting on other information
The other information comprises all of the information in the Annual
Report other than the financial statements and our auditors’ report
thereon. The directors are responsible for the other information. Our
opinion on the financial statements does not cover the other
information and, accordingly, we do not express an audit opinion or,
except to the extent otherwise explicitly stated in this report, any form
of assurance thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent with
the financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If we identify an
apparent material inconsistency or material misstatement, we are
required to perform procedures to conclude whether there is a
material misstatement of the financial statements or a material
misstatement of the other information. If, based on the work we have
performed, we conclude that there is a material misstatement of this
other information, we are required to report that fact. We have
nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ Report, we also
considered whether the disclosures required by the UK Companies
Act 2006 have been included.
Based on the responsibilities described above and our work
undertaken in the course of the audit, the Companies Act 2006,
(CA06), ISAs (UK) and the Listing Rules of the Financial Conduct
Authority (FCA) require us also to report certain opinions and matters
as described below (required by ISAs (UK) unless otherwise stated).
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the
audit, the information given in the Strategic Report and Directors’
Report for the year ended 31 December 2017 is consistent with the
financial statements and has been prepared in accordance with
applicable legal requirements. (CA06)
In light of the knowledge and understanding of the parent company
and its environment obtained in the course of the audit, we did not
identify any material misstatements in the Strategic Report and
Directors’ Report. (CA06)
The directors’ assessment of the prospects of the parent
company and of the principal risks that would threaten the
solvency or liquidity of the parent company
We have nothing material to add or draw attention to regarding:
– The directors’ confirmation on page 105 of the Annual Report that
they have carried out a robust assessment of the principal risks
facing the parent company, including those that would threaten its
business model, future performance, solvency or liquidity;
– The disclosures in the Annual Report that describe those risks and
explain how they are being managed or mitigated; and
– The directors’ explanation on page 57 of the Annual Report as to
how they have assessed the prospects of the parent company,
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 parent company 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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 238
Independent Auditors’ report to the members
of GlaxoSmithKline plc continued
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the directors’ statement of responsibilities
set out on page 233, the directors are responsible for the preparation
of the financial statements in accordance with the applicable
framework and for being satisfied that they give a true and fair view.
The directors are also responsible for such internal control as they
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are responsible for
assessing the parent company’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using
the going concern basis of accounting unless the directors either
intend to liquidate the parent company or to cease operations or have
no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditors’ report that
includes our opinion. Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit conducted in
accordance with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users
taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial
statements is located on the FRC’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditors’
report.
Use of this report
This report, including the opinions, has been prepared for and only for
the parent 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.
Companies Act 2006 exception reporting
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
– certain disclosures of directors’ remuneration specified by law are
not made; 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.
Appointment
We have audited the financial statements of the parent company since
the year ended 31 December 2000 following the parent company’s
inception. The period of total uninterrupted engagement is 18 years,
covering the years ended 31 December 2000 to 31 December 2017.
The year ended 31 December 2017 is our final year of engagement
following the Company’s decision to rotate the external audit.
Other matters
We have reported separately on the Group financial statements of
GlaxoSmithKline plc for the year ended 31 December 2017.
The parent company has passed a resolution in accordance with
section 506 of the Companies Act that the senior statutory auditor’s
name should not be stated.
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
12 March 2018
GSK Annual Report 2017 Company balance sheet –
UK GAAP (including FRS 101 ‘Reduced Disclosure Framework’) as at 31 December 2017
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 for liabilities
Other non-current liabilities
Net assets
Capital and reserves
Share capital
Share premium account
Other reserves
Retained earnings:
At 1 January
Profit/(loss) for the year
Other changes in retained earnings
Equity shareholders’ funds
2017
£m
Notes
F
G
H
I
J
K
K
L
15,538
9,893
(3,325)
2016
£m
20,033
(111)
(4,384)
2017
£m
20,275
8,715
15
8,730
(15)
(837)
(852)
7,878
28,153
(27)
(238)
27,888
1,343
3,019
1,420
22,106
27,888
239
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
The financial statements on pages 239 to 242 were approved by the Board on 12 March 2018 and signed on its behalf by
Philip Hampton
Chairman
GlaxoSmithKline plc
Registered number: 3888792
Company statement of changes in equity
for the year ended 31 December 2017
At 1 January 2016
Loss attributable to shareholders
Dividends to shareholders
Shares issued under employee share schemes
Treasury shares transferred to the ESOP Trust
At 31 December 2016
Profit attributable to shareholders
Dividends to shareholders
Shares issued under employee share schemes
Treasury shares transferred to the ESOP Trust
At 31 December 2017
Share
capital
£m
1,340
Share premium
account
£m
2,831
Other
reserves
£m
1,420
–
–
2
–
–
–
87
36
–
–
–
–
1,342
2,954
1,420
–
–
1
–
–
–
55
10
–
–
–
–
Retained
earnings
£m
20,033
(111)
(4,850)
–
466
15,538
9,893
(3,906)
–
581
Total
equity
£m
25,624
(111)
(4,850)
89
502
21,254
9,893
(3,906)
56
591
1,343
3,019
1,420
22,106
27,888
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
240
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 2017, with comparative
figures as at 31 December 2016.
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 2017 provisions for legal and other disputes
amounted to £27 million (2016 – £23 million).
GSK Annual Report 2017 241
C) Key accounting judgements and estimates
Legal and other disputes
The company provides for anticipated settlement costs where
management makes a judgement that an outflow of resources is
probable and a reliable estimate can be made of the likely outcome
of the dispute and legal and other expenses arising from claims
against the company. The estimated provisions take into account the
specific circumstances of each dispute and relevant external advice,
are inherently judgemental and could change substantially over time
as each dispute progresses and new facts emerge.
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 2017 provisions for legal and other
disputes amounted to £27 million (2016 – £23 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 (2016 – £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 2016. 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
H) Trade and other payables
Amounts due within one year:
Other creditors
Contingent consideration payable
Amounts owed to Group undertakings
2017
£m
613
18
2016
£m
613
18
17,888
17,888
33
18,552
1,139
584
20,275
33
18,552
1,139
545
20,236
2017
£m
2016
£m
31
1
8,299
8,331
384
8,715
2017
£m
438
346
53
837
201
4
1,478
1,683
445
2,128
2016
£m
514
11
30
555
The company has guaranteed debt issued by its subsidiary companies from two of which it receives fees. In aggregate, the company has
outstanding guarantees over £16.7 billion of debt instruments (2016 – £18.4 billion). 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).
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 242
Notes to the company balance sheet – UK GAAP
(including FRS 101 ‘Reduced Disclosure Framework’) continued
I) Provisions for liabilities
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
2017
£m
23
(3)
52
(45)
27
2017
£m
238
238
2016
£m
40
13
78
(108)
23
2016
£m
534
534
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) Share capital and share premium account
Share capital authorised
At 31 December 2016
At 31 December 2017
Share capital issued and fully paid
At 1 January 2016
Issued under employee share schemes
Treasury shares transferred to the ESOP Trust
At 31 December 2016
Issued under employee share schemes
Treasury shares transferred to the ESOP Trust
At 31 December 2017
Number of shares issuable under employee share schemes
Number of unissued shares not under option
Ordinary Shares of 25p each
Share
premium
account
Number
£m
£m
10,000,000,000
10,000,000,000
2,500
2,500
5,361,307,647
1,340
2,831
7,008,415
–
2
–
87
36
5,368,316,062
1,342
2,954
4,237,758
–
1
–
55
10
5,372,553,820
1,343
3,019
31 December
2017
000
38,647
4,588,799
31 December
2016
000
71,382
4,560,302
At 31 December 2017, of the issued share capital, 66,696,677 shares were held in the ESOP Trusts, 414,605,950 shares were held as
Treasury shares and 4,891,251,193 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) Retained earnings
The profit of GlaxoSmithKline plc for the year was £9,893 million (2016 – £111 million loss), which after dividends of £3,906 million
(2016 – £4,850 million), gave a retained profit of £5,987 million (2016 – £4,961 million loss). No Treasury shares were purchased in the
year (2016 – £nil). After the effect of the £581 million Treasury shares transferred to a subsidiary company (2016 – £466 million), retained
earnings at 31 December 2017 stood at £22,106 million (2016 – £15,538 million), of which £4,096 million was unrealised (2016 – £4,096
million). In addition, the £10 billion dividend received by the company during 2017 will not be distributable until after the 2017 Annual Report
is filed during April 2018.
M) Group companies
See pages 276 to 286 for a complete list of subsidiaries, associates and joint ventures, which forms part of these financial statements.
GSK Annual Report 2017
GSK Annual Report 2017
243
243
Strategic report
Governance and remuneration
Financial statements
Investor information
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 2018
Tax information for shareholders
Shareholder services and contacts
US law and regulation
Group companies
Glossary of terms
244
246
248
251
254
257
267
269
269
270
270
272
274
276
287
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 244
Financial record
Quarterly trend
An unaudited analysis of the Group results is provided by quarter in Sterling for the financial year 2017.
Income statement – Total
Turnover
Pharmaceuticals
Vaccines
Consumer Healthcare
Total turnover
Cost of sales
Selling, general and administration
Research and development
Royalty income
Other operating income/(expense)
Operating profit/(loss)
Net finance costs
Profit on disposal of associates
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 attributable to non-controlling interests
Profit/(loss) attributable to shareholders
Basic earnings/(loss) per share (pence)
Diluted earnings/(loss) per share (pence)
Income statement – Adjusted
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 Adjusted results is described on page 58.
12 months 2017
£m
17,276
5,160
7,750
30,186
(10,342)
(9,672)
(4,476)
356
(1,965)
4,087
(669)
94
13
3,525
(1,356)
38.5%
2,169
637
1,532
31.4p
31.0p
30,186
(8,771)
(9,341)
(3,862)
356
8,568
(657)
13
7,924
(1,667)
21.0%
6,257
793
5,464
111.8p
£%
7
12
8
8
11
3
23
(11)
57
82
>100
67
8
5
6
11
(11)
12
13
13
11
Reported
CER%
Q4 2017
£m
£%
Reported
CER%
Q3 2017
Q2 2017
Q1 2017
£m
£%
£m
£%
£m
£%
Reported
CER%
Reported
CER%
3
6
2
3
8
(1)
19
(13)
39
58
71
36
3
1
1
8
(13)
5
5
6
4
4,540
1,208
1,891
7,639
(2,558)
(2,533)
(1,209)
69
(896)
512
(138)
66
2
442
(805)
>100%
(363)
183
(546)
(11.2)p
(11.2)p
7,639
(2,258)
(2,420)
(992)
69
2,038
(135)
2
1,905
(381)
20.0%
1,524
192
1,332
27.2p
(1)
6
1
1
2
(7)
21
(41)
(14)
3
9
4
4
4
(3)
24
(39)
(4)
4
17
>(100)
>(100)
>(100)
>(100)
1
3
(2)
(2)
(41)
1
3
5
7
4
5
2
–
(39)
5
7
9
11
4,190
1,689
1,964
7,843
(2,652)
(2,308)
(1,047)
107
(66)
1,877
(181)
8
7
1,711
(316)
18.5%
1,395
183
1,212
24.8p
24.6p
7,843
(2,304)
(2,280)
(898)
107
2,468
(177)
7
2,298
(482)
21.0%
1,816
228
1,588
32.5p
3
5
5
4
5
1
14
–
31
34
58
49
4
1
4
3
–
7
7
7
3
2
–
2
2
3
(2)
11
(3)
27
30
53
46
(2)
2
2
1
(3)
5
5
4
–
4,357
1,111
1,852
7,320
(2,619)
(2,379)
(1,260)
98
(1,180)
(20)
(177)
20
(1)
(178)
92
51.7%
(86)
94
(180)
(3.7)p
(3.7)p
7,320
(1,988)
(2,294)
(1,053)
98
2,083
(176)
(1)
1,906
(405)
21.2%
1,501
174
1,327
27.2p
12
16
10
12
23
9
42
18
87
44
83
59
12
3
11
32
18
14
15
15
12
3
5
–
3
16
–
34
12
(45)
(18)
50
29
3
(2)
2
24
12
–
–
–
(2)
Reported
CER%
4
16
2
5
8
7
(1)
(15)
100
17
31
16
19
18
12
18
(10)
>100
>100
>100
>100
>100
>100
>100
19
15
13
19
(10)
30
33
32
31
5
5
–
8
9
(15)
11
10
9
4,189
1,152
2,043
7,384
(2,513)
(2,452)
(960)
82
177
1,718
(173)
–
5
1,550
(327)
21.1%
1,223
177
1,046
21.4p
21.3p
7,384
(2,221)
(2,347)
(919)
82
1,979
(169)
5
1,815
(399)
22.0%
1,416
199
1,217
25.0p
GSK Annual Report 2017 An unaudited analysis of the Group results is provided by quarter in Sterling for the financial year 2017.
Quarterly trend continued
12 months 2017
Q4 2017
£m
£%
£m
£%
Reported
CER%
Q3 2017
£m
£%
Reported
CER%
Q2 2017
£m
£%
Reported
CER%
Q1 2017
£m
£%
Reported
CER%
245
4,190
1,689
1,964
7,843
(2,652)
(2,308)
(1,047)
107
(66)
1,877
(181)
8
7
1,711
(316)
18.5%
1,395
183
1,212
24.8p
24.6p
7,843
(2,304)
(2,280)
(898)
107
2,468
(177)
7
2,298
(482)
21.0%
1,816
228
1,588
32.5p
3
5
5
4
5
1
14
–
31
34
58
49
4
1
4
3
–
7
7
7
3
2
–
2
2
3
(2)
11
(3)
27
30
53
46
2
(2)
2
1
(3)
5
5
4
–
4,357
1,111
1,852
7,320
(2,619)
(2,379)
(1,260)
98
(1,180)
(20)
(177)
20
(1)
(178)
92
51.7%
(86)
94
(180)
(3.7)p
(3.7)p
7,320
(1,988)
(2,294)
(1,053)
98
2,083
(176)
(1)
1,906
(405)
21.2%
1,501
174
1,327
27.2p
12
16
10
12
23
9
42
18
87
44
83
59
12
3
11
32
18
14
15
15
12
3
5
–
3
16
–
34
12
(45)
(18)
50
29
3
(2)
2
24
12
–
–
–
(2)
4,189
1,152
2,043
7,384
(2,513)
(2,452)
(960)
82
177
1,718
(173)
–
5
1,550
(327)
21.1%
1,223
177
1,046
21.4p
21.3p
7,384
(2,221)
(2,347)
(919)
82
1,979
(169)
5
1,815
(399)
22.0%
1,416
199
1,217
25.0p
17
31
16
19
18
12
18
(10)
>100
4
16
2
5
8
(1)
7
(15)
100
>100
>100
>100
>100
>100
>100
19
15
13
19
(10)
30
33
32
31
5
5
–
8
(15)
9
11
10
9
Quarterly trend
Income statement – Total
Turnover
Pharmaceuticals
Vaccines
Consumer Healthcare
Total turnover
Cost of sales
Selling, general and administration
Research and development
Royalty income
Other operating income/(expense)
Operating profit/(loss)
Net finance costs
Profit on disposal of associates
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 attributable to non-controlling interests
Profit/(loss) attributable to shareholders
Basic earnings/(loss) per share (pence)
Diluted earnings/(loss) per share (pence)
Income statement – Adjusted
Total turnover
Cost of sales
Selling, general and administration
Research and development
Share of after tax profits/(losses) of associates
Royalty income
Operating profit
Net finance costs
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 Adjusted results is described on page 58.
17,276
5,160
7,750
30,186
(10,342)
(9,672)
(4,476)
356
(1,965)
4,087
(669)
94
13
3,525
(1,356)
38.5%
2,169
637
1,532
31.4p
31.0p
30,186
(8,771)
(9,341)
(3,862)
356
8,568
(657)
13
7,924
(1,667)
21.0%
6,257
793
5,464
111.8p
7
12
8
8
11
3
23
57
(11)
82
>100
67
8
5
6
11
(11)
12
13
13
11
3
6
2
3
8
(1)
19
(13)
39
58
71
36
(13)
3
1
1
8
5
5
6
4
4
17
>(100)
>(100)
>(100)
>(100)
Reported
CER%
3
9
4
4
4
(3)
24
(39)
(4)
(39)
4
5
2
–
5
7
9
11
(1)
6
1
1
2
(7)
21
(41)
(14)
1
3
(2)
(2)
(41)
1
3
5
7
4,540
1,208
1,891
7,639
(2,558)
(2,533)
(1,209)
69
(896)
512
(138)
66
2
442
(805)
>100%
(363)
183
(546)
(11.2)p
(11.2)p
7,639
(2,258)
(2,420)
(992)
69
2,038
(135)
2
1,905
(381)
20.0%
1,524
192
1,332
27.2p
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 246
Financial record continued
Pharmaceutical turnover by therapeutic area 2017
Total
US
Europe
International
Therapeutic area/major products
Respiratory
Anoro Ellipta
Arnuity Ellipta
Avamys/Veramyst
Flixotide/Flovent
Incruse Ellipta
Nucala
Relvar/Breo Ellipta
Seretide/Advair
Trelegy Ellipta
Ventolin
Other
HIV
Epzicom/Kivexa
Juluca
Selzentry
Tivicay
Triumeq
Other
Immuno-inflammation
Benlysta
Other
Established pharmaceuticals
Dermatology
Augmentin
Avodart
Coreg
Eperzan/Tanzeum
Imigran/Imitrex
Lamictal
Requip
Serevent
Seroxat/Paxil
Valtrex
Zeffix
Other
Pharmaceuticals
2017
£m
6,991
342
35
281
596
201
344
1,006
3,130
2
767
287
4,350
234
5
128
1,404
2,461
118
377
375
2
5,558
456
587
613
134
87
168
650
110
96
184
128
89
2,256
17,276
2016
(revised)
£m
6,510
201
15
277
637
114
102
620
3,485
–
785
274
3,556
568
–
125
953
1,735
175
340
306
34
5,698
393
563
635
131
121
177
614
116
96
206
118
111
2,417
16,104
7
70
1
(6)
76
Growth
£% CER%
3
63
>100 >100
(4)
(10)
68
>100 >100
55
(14)
–
(6)
3
16
(61)
–
(2)
40
35
(37)
6
17
(99)
(5)
11
2
(9)
(2)
(31)
(8)
1
(9)
(4)
(14)
3
(22)
(8)
3
62
(10)
–
(2)
5
22
(59)
–
2
47
42
(32)
11
23
(95)
(2)
16
4
(3)
2
(28)
(5)
6
(5)
–
(11)
8
(20)
(7)
7
2017
£m
3,556
234
32
1
323
134
236
602
1,610
2
380
2,697
27
5
66
923
1,632
44
339
338
1
976
7
–
15
134
83
77
332
12
52
–
20
1
243
7,568
8
68
(96)
(15)
56
Growth
£% CER%
3
61
>100 >100
(96)
(18)
49
>100 >100
67
(16)
–
(14)
3
21
(87)
–
(5)
38
34
(31)
5
17
(96)
(14)
(56)
–
(79)
(2)
(32)
(12)
1
(15)
2
–
19
(50)
(11)
6
75
(12)
–
(10)
2 >(100)
26
(86)
–
–
44
40
(28)
9
22
(98)
(10)
(56)
–
(79)
2
(30)
(9)
6
(8)
6
–
25
(50)
(7)
11
2017
£m
1,458
69
–
76
95
51
70
202
736
–
132
27
1,114
114
–
42
315
606
37
27
27
–
1,384
162
182
297
–
3
65
107
29
33
39
29
6
432
3,983
5
77
–
3
1
Growth
£% CER%
–
67
–
(3)
(5)
>100 >100
>100 >100
36
(17)
–
(2)
(4)
3
(57)
–
(4)
30
31
(44)
24
19
–
(11)
5
(4)
(12)
–
–
–
(5)
(13)
(11)
(8)
12
(29)
(21)
(3)
44
(12)
–
4
(4)
10
(54)
–
1
39
39
(41)
29
29
–
(5)
11
3
(6)
–
–
5
1
(3)
(6)
(3)
16
(14)
(16)
3
9
70
15
8
2017
£m
1,977
39
3
204
178
16
38
49
202
(5)
784
–
–
8
255
4
258
33
539
(22)
93
–
–
15
20
95
166
66
223
(28)
37
37
11
26
10
–
1
2
3,198
24
287
5
405
21
301
–
–
1 >(100)
(13)
8
(5)
(8)
(4)
3
(20)
(4)
6
Growth
£% CER%
5
65
>100 >100
9
5
>100 >100
>100 >100
42
(8)
–
5
3
26
(25)
–
11
88
58
(35)
–
26
–
–
20
5
16
–
(100)
(17)
5
(5)
(8)
(7)
(3)
(21)
(4)
4
26
211
69
11
145
79
82
1,581
5,725
Vaccines turnover 2017
Total
US
Europe
International
Major products
Meningitis
Bexsero
Menveo
Other
Influenza
Fluarix, FluLaval
Shingles
Shingrix
Established vaccines
Infanrix, Pediarix
Boostrix
Hepatitis
Rotarix
Synflorix
Priorix, Priorix Tetra, Varilrix
Cervarix
Other
Vaccines
2017
£m
890
556
274
60
488
488
22
22
3,760
743
560
693
524
509
301
134
296
5,160
2016
(revised)
£m
662
390
202
70
414
414
–
–
3,516
769
470
602
469
504
300
81
321
4,592
Growth
£% CER%
27
34
34
43
29
36
(20)
(14)
12
18
12
18
–
–
–
–
1
7
(8)
(3)
13
19
15
12
1
–
65
(8)
12
10
6
(6)
(5)
57
(13)
6
2017
£m
339
152
187
–
361
361
22
22
1,147
330
262
379
132
–
–
–
44
1,869
Growth
£% CER%
34
40
20
25
48
55
–
–
10
15
10
15
–
–
–
–
10
5
(7)
(2)
5
10
29
2
–
–
–
8
17
23
(2)
–
–
–
–
12
2017
£m
391
342
34
15
49
49
–
–
1,160
315
185
201
95
67
164
29
104
1,600
Growth
£% CER%
31
40
36
45
19
26
(18)
(12)
44
53
44
53
–
–
–
–
(2)
4
(11)
(6)
24
33
2
27
(1)
8
(12)
(7)
12
(4)
19
(7)
1
(18)
(11)
6
2017
£m
160
62
53
45
78
78
–
–
1,453
98
113
113
297
442
137
105
148
1,691
£% represents growth at actual exchange rates. CER% represents growth at constant exchange rates.
Growth
£% CER%
6
15
75
94
(7)
(2)
(21)
(15)
9
16
9
16
–
–
–
–
1
7
(4)
2
14
22
2
12
1
(2)
6
(5)
(8)
(12)
>100 >100
(17)
1
(12)
8
GSK Annual Report 2017 247
Pharmaceutical turnover by therapeutic area 2016
Total
US
Europe
International
Therapeutic area/major products
Respiratory
Anoro Ellipta
Arnuity Ellipta
Avamys/Veramyst
Flixotide/Flovent
Incruse Ellipta
Nucala
Relvar/Breo Ellipta
Seretide/Advair
Ventolin
Other
HIV
Epzicom/Kivexa
Selzentry
Tivicay
Triumeq
Other
Immuno-inflammation
Benlysta
Other
Established pharmaceuticals
Dermatology
Augmentin
Avodart
Coreg
Eperzan/Tanzeum
Imigran/Imitrex
Lamictal
Requip
Serevent
Seroxat/Paxil
Valtrex
Zeffix
Other
Pharmaceuticals
2016
£m
6,510
201
15
277
637
114
102
620
3,485
785
274
3,556
568
125
953
1,735
175
340
306
34
5,698
393
563
635
131
121
177
614
116
96
206
118
111
2,417
16,104
2015
(revised)
£m
5,741
79
3
229
623
14
1
257
3,681
620
234
2,322
698
124
588
730
182
263
230
33
5,831
412
528
657
123
41
160
531
93
93
165
165
134
2,729
14,157
21
2
(5)
27
17
53
(19)
1
62
Growth
£% CER%
2
13
>100 >100
>100 >100
8
(8)
>100 >100
>100 >100
>100 >100
(15)
15
(1)
37
(27)
(9)
45
>100 >100
(12)
15
19
(9)
(11)
(12)
–
(14)
(5)
>100 >100
3
5
8
(6)
10
(37)
(24)
(19)
3
11
16
25
3
25
(28)
(17)
(11)
14
(4)
29
33
3
(2)
(5)
7
(3)
7
2016
£m
3,306
1,829
421
(1)
2,132
195
65
635
Growth
£% CER%
20
7
139 >100 >100
14 >100 >100
(12)
–
25
378
(11)
–
86 >100 >100
71 >100 >100
344 >100 >100
(13)
(2)
23
38
(100)
34
46
64
(32)
(23)
(2)
10
46
65
1,159 >100 >100
(28)
78
14
311
18
277
(9)
34
(21)
1,088
(63)
16
–
–
(63)
70
131
(5)
118 >100 >100
8
12
18
5
13 >100 >100
–
49
14
(100)
15 >(100)
(30)
(20)
16
–
–
2
(51)
(45)
260
10
24
6,837
(19)
29
33
3
(12)
(61)
–
(58)
7
85
313
2016
£m
1,383
39
–
74
94
23
23
140
835
127
28
1,017
251
41
228
434
63
21
21
–
1,463
146
177
317
–
3
62
106
30
35
40
25
7
515
3,884
–
12
2
75
(18)
9
5
42
(17)
(14)
55
Growth
£% CER%
(10)
(2)
>100 >100
–
2
(8)
>100 >100
>100 >100
60
(24)
1
(3)
29
(25)
(22)
40
>100 >100
36
27
20
–
(5)
(2)
(5)
13
–
100
4
1
(7)
(11)
6
(4)
(14)
(17)
–
50
40
40
–
4
6
4
25
–
>100
11
10
3
(3)
14
4
–
(9)
9
2016
£m
1,821
23
1
178
165
5
8
136
821
237
247
407
122
19
90
142
34
8
8
–
3,147
231
386
248
–
–
30
195
73
12
151
77
102
1,642
5,383
–
97
2
19
19
34
(13)
11
62
Growth
£% CER%
3
16
>100 >100
(100)
>100
15
29
–
9
>100 >100
–
67
(7)
12
(2)
21
(21)
4
47
>100 >100
(24)
17
33
–
(9)
(9)
2
(8)
–
–
(11)
9
3
(14)
(8)
(45)
(25)
(10)
(3)
(23)
33
33
–
(1)
(1)
8
5
–
–
7
15
24
(14)
6
(36)
(18)
(3)
6
Vaccines turnover 2016
Major products
Meningitis
Bexsero
Menveo
Other
Influenza
Fluarix, FluLaval
Established vaccines
Infanrix, Pediarix
Boostrix
Hepatitis
Rotarix
Synflorix
Priorix, Priorix Tetra, Varilrix
Cervarix
Other
Vaccines
2016
£m
662
390
202
70
414
414
3,516
769
470
602
469
504
300
81
321
4,592
2015
(revised)
£m
326
115
160
51
268
268
3,062
733
358
540
417
381
260
88
285
3,656
Total
US
Europe
International
Growth
£% CER%
>100
86
>100 >100
16
29
38
38
4
(5)
18
26
37
54
54
15
5
31
Growth
2016
£% CER%
£m
243
85
>100
122 >100 >100
8
22
121
–
–
–
42
60
315
42
60
315
(2)
10
1,041
12
26
338
1
14
238
11
12
32
15
(8)
13
26
1
1
19
5
(14)
1
14
294
129
–
–
1
41
1,599
8
(7)
–
–
(67)
(21)
27
(4)
(17)
–
–
(67)
(27)
13
2016
£m
280
236
27
17
32
32
1,111
335
139
197
75
68
152
33
112
1,423
Growth
£% CER%
>100
87
>100 >100
(31)
–
26
26
8
(8)
43
(25)
13
39
39
19
1
58
28
17
74
12
(11)
29
30
17
8
59
–
(22)
22
18
2016
£m
139
32
54
53
67
67
1,364
96
93
111
265
436
148
47
168
1,570
Growth
£% CER%
69
74
>100 >100
>100 >100
39
31
31
5
(31)
39
44
40
40
16
(27)
52
(2)
24
27
19
(2)
21
21
(8)
10
15
9
(4)
4
10
£% represents growth at actual exchange rates. CER% represents growth at constant exchange rates.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 248
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.
Comparative information for 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
Respiratory
HIV
Immuno-inflammation
Established Pharmaceuticals
Vaccines turnover
Meningitis
Influenza
Shingles
Established Vaccines
Consumer Healthcare turnover
Wellness
Oral care
Nutrition
Skin health
2017
£m
11,263
7,943
10,980
30,186
–
30,186
2017
£m
17,276
5,160
7,750
30,186
–
30,186
–
30,186
6,991
4,350
377
5,558
17,276
890
488
22
3,760
5,160
4,001
2,466
680
603
7,750
2016
(revised)
£m
10,197
7,476
10,216
27,889
–
27,889
2016
£m
16,104
4,592
7,193
27,889
–
27,889
–
27,889
6,510
3,556
340
5,698
16,104
662
414
–
3,516
4,592
3,726
2,223
674
570
7,193
2015
(revised)
£m
8,222
6,435
9,266
23,923
–
23,923
2015
£m
14,157
3,656
6,038
23,851
72
23,923
–
23,923
5,741
2,322
263
5,831
14,157
326
268
–
3,062
3,656
2,970
1,875
684
509
6,038
2014
(revised)
£m
7,409
6,284
9,313
23,006
–
23,006
2014
£m
15,438
3,159
4,322
22,919
87
23,006
–
23,006
6,168
1,498
214
7,558
15,438
–
215
–
2,944
3,159
1,565
1,806
633
318
4,322
2013
(revised)
£m
8,695
6,670
10,237
25,602
903
26,505
2013
£m
17,359
3,384
4,713
25,456
146
25,602
903
26,505
7,259
1,386
161
8,553
17,359
–
251
–
3,133
3,384
1,807
1,892
628
386
4,713
GSK Annual Report 2017
249
2017
£m
30,186
4,087
3,525
2,169
pence
31.4
31.0
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
2017
millions
2016
millions
2015
millions
2014
millions
2013
millions
4,886
4,941
4,860
4,909
4,831
4,888
4,808
4,865
4,831
4,919
2017
£m
30,186
8,568
7,924
6,257
2016
(revised)
£m
27,889
7,671
7,024
5,526
2015
(revised)
£m
23,923
5,659
5,021
4,045
2014
(revised)
£m
23,006
6,456
5,840
4,675
2013
(revised)
£m
25,602
7,724
7,075
5,443
pence
111.8
pence
100.6
pence
74.6
pence
92.7
pence
107.5
%
83.4
%
28.0
%
152.4
%
46.6
%
91.4
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 – Adjusted
Turnover
Operating profit
Profit before taxation
Profit after taxation
Adjusted earnings per share
Return on capital employed
Return on capital employed is calculated as total profit before taxation as a percentage of average net assets over the year.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 250
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
2017
£m
40,474
15,907
56,381
(26,569)
(26,323)
(52,892)
2016
£m
42,370
16,711
59,081
(19,001)
(35,117)
(54,118)
2015
£m
36,859
16,587
53,446
2014
£m
25,973
15,059
41,032
(13,417)
(31,151)
(44,568)
(13,676)
(22,420)
(36,096)
2013
£m
26,859
15,732
42,591
(14,182)
(20,597)
(34,779)
3,489
4,963
8,878
4,936
7,812
(68)
3,557
3,489
1,124
3,839
4,963
5,114
3,764
8,878
2017
14,526
43,002
40,934
98,462
38,245
37,374
11,307
11,536
98,462
2016
14,491
42,330
42,479
99,300
38,372
38,158
11,244
11,526
99,300
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
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).
The average rate for the year is calculated as the average of the 4pm buying rates for each day of the year.
Average
High
Low
The 4pm buying rate on 2 March 2018 was £1= US$1.38.
2017
1.29
2018
Jan
1.43
1.35
2016
1.35
2017
Dec
1.35
1.33
2015
1.53
2017
Nov
1.35
1.31
2014
1.65
2017
Oct
1.33
1.31
2013
1.56
2017
Sep
1.36
1.30
2018
Mar
1.38
1.37
2018
Feb
1.42
1.38
GSK Annual Report 2017 251
Pipeline, products and competition
Pharmaceuticals and Vaccines product development pipeline
Key
†
^
1
S
A
BLA
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.
Option-based alliance with Ionis Pharmaceuticals, Inc.
Month of first submission
Month of first regulatory approval (for MAA, this is the first
EU approval letter)
Biological Licence Application
MAA
NDA
Phase I
Phase II
Phase III
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 integrase strand transfer inhibitor + non-
nucleoside reverse transcriptase inhibitor (NNRTI)
8-aminoquinoline
HIV infection – (virologically suppressed patients) Approved S: May17 A: Nov17
plasmodium vivax malaria
influenza
Submitted
Submitted S: Nov17
S: Nov17
HIV^ and Infectious Diseases
dolutegravir +
rilpivirine†
tafenoquine†
Dectova (zanamivir) i.v.† neuraminidase inhibitor (i.v.)
dolutegravir +
lamivudine
fostemsavir
cabotegravir
cabotegravir +
rilpivirine†
HIV infection
HIV integrase strand transfer inhibitor + nucleoside
reverse transcriptase inhibitor (NRTI)
HIV attachment inhibitor
HIV integrase strand transfer inhibitor (long-acting) HIV pre-exposure prophylaxis
HIV integrase strand transfer inhibitor + non-
nucleoside reverse transcriptase inhibitor (NNRTI)
(long-acting regimen)
type 2 topoisomerase inhibitor
bacterial infections
HIV infection
HIV infection
HBV antisense oligonucleotide
HBV LICA antisense oligonucleotide
viral replication inhibitor (nucleoside)
HIV maturation inhibitor
leucyl t-RNA synthetase inhibitor
hepatitis B
hepatitis B
viral exacerbations of COPD
HIV infection
tuberculosis
III
III
III
III
II
II
II
I
I
I
interleukin 5 (IL5) monoclonal antibody
glucocorticoid agonist + long-acting beta2
agonist + muscarinic acetylcholine antagonist
eosinophilic granulomatosis with polyangiitis
chronic obstructive pulmonary disease (COPD) Approved A:Nov17
Approved
A:Dec17
A:Sep17
interleukin 5 (IL5) monoclonal antibody
glucocorticoid agonist + long-acting beta2
agonist + muscarinic acetylcholine antagonist
COPD
asthma
Submitted
III
S:Nov17
COPD
hypereosinophilic syndrome
nasal polyposis
interleukin 5 (IL5) monoclonal antibody
interleukin 5 (IL5) monoclonal antibody
phosphatidylinositol 3-kinase delta (PI3Kδ) inhibitor COPD (acute and chronic)
chemokine (C-X-C Motif) receptor 2 (CXCR2)
antagonist (oral)
recombinant human angiotensin converting
enzyme 2 (rhACE2)
tumour necrosis factor receptor-1 (TNFR1)
domain antibody
toll-like receptor 7 (TLR7) agonist
phosphatidylinositol 3-kinase delta (PI3Kδ) inhibitor activated PI3K delta syndrome
interleukin 33r (IL33r) monoclonal antibody
recombinant human angiotensin converting
enzyme 2 (rhACE2)
severe asthma
pulmonary arterial hypertension
acute lung injury
acute lung injury
asthma
III
III
II
II
II
II
II
II
II
I
gepotidacin
(2140944)
32288361
33894041
CCI15106 †
3640254
3036656†
Respiratory
mepolizumab
Trelegy (fluticasone
furoate + vilanterol†
+ umeclidinium)
mepolizumab
fluticasone furoate +
vilanterol† +
umeclidinium
mepolizumab
mepolizumab
nemiralisib
danirixin
2586881†
2862277
2245035
nemiralisib
3772847†
2586881†
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report Achieved regulatory
review milestones
MAA
NDA/BLA
Phase
I
I
I
I
252
Pipeline, products and competition continued
Pharmaceuticals and Vaccines product development pipeline continued
Compound
Respiratory continued
3008348
Type
alpha V beta 6 integrin antagonist
Indication
idiopathic pulmonary fibrosis
nemiralisib
2292767
3511294
Oncology
3377794†
2857916†
525762
3174998†
3326595
3359609
1795091
2636771
phosphatidylinositol 3-kinase delta
(PI3Kδ) inhibitor
phosphatidylinositol 3-kinase delta
(PI3Kδ) inhibitor
interleukin 5 (IL5) long-acting
monoclonal antibody
bronchiectasis
COPD
asthma
NY-ESO-1 autologous engineered
TCR-T cells (engineered TCR)
B-cell maturation antigen antibody
drug conjugate
BET family bromodomain inhibitor
OX40 agonist monoclonal antibody
sarcoma, multiple myeloma, non-small cell lung cancer,
melanoma and ovarian cancer
multiple myeloma
II
II
solid tumours and haematological malignancies
solid tumours and haematological malignancies
protein arginine methyltransferase 5
(PRMT5) inhibitor
induced T-cell costimulator (ICOS)
agonist antibody
toll-like receptor 4 (TLR4) agonist
cancer
cancer
cancer
phosphatidylinositol 3-kinase (PI3K) beta
inhibitor
castration resistant prostate cancer
Immuno-inflammation
Benlysta
3196165†
3196165†
Benlysta + Rituxan
2982772
2982772
2330811
2982772
2831781†
2983559
3335065
B lymphocyte stimulator monoclonal
antibody (s.c.)
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.)
osteoarthritis
rheumatoid arthritis
Sjogren’s syndrome
rheumatoid arthritis
psoriasis
receptor-interacting protein 1 (RIP1)
kinase inhibitor
receptor-interacting protein 1 (RIP1)
kinase inhibitor
oncostatin M (OSM) monoclonal antibody systemic sclerosis
receptor-interacting protein 1 (RIP1)
kinase inhibitor
lymphocyte activation gene 3 (LAG3)
protein monoclonal antibody
receptor-interacting protein 2 (RIP2)
kinase inhibitor
Kynurenine 3-monooxygenase inhibitor
acute pancreatitis
ulcerative colitis
autoimmune disease
inflammatory bowel diseases
Future pipeline optionality
daprodustat (1278863) prolyl hydroxylase inhibitor (oral)
dezamizumab
(2398852)† +
2315698†
serum amyloid P component (SAP)
monoclonal antibody + SAP depleter
(CPHPC)
anaemia associated with chronic renal disease
amyloidosis
oxytocin (inhaled)†
tapinarof (2894512)†
tapinarof (2894512)†
2881078
oxytocin
non-steroidal anti-inflammatory (topical)
non-steroidal anti-inflammatory (topical)
postpartum hemorrhage
atopic dermatitis
psoriasis
selective androgen receptor modulator
muscle wasting
I
I
I
I
I
I
II
II
II
II
II
II
II
I
I
I
III
II
II
II
II
I
Following a strategic review in 2017, assets from the Rare Diseases Unit are no longer included in the pipeline table with the future ownership of these assets in consideration.
systemic lupus erythematosus
Approved A: Nov17 A: Jul17
GSK Annual Report 2017 253
Achieved regulatory
review milestones
MAA
NDA/BLA
S: Nov16 A: Oct17
Phase
Approved
(US)
Submitted
(EU)
III
III (US)
II
II
Pharmaceuticals and Vaccines product development pipeline continued
Compound
Vaccines
Shingrix†
(Zoster Vaccine)
Type
recombinant
Indication
Herpes Zoster prophylaxis
Rotavirus
MMR
Ebola†
S. pneumoniae next
generation†
COPD
live attenuated, PCV
(Porcine circovirus) free
live attenuated
recombinant viral vector
recombinant – conjugated
recombinant
Hepatitis C†
heterologous recombinant viral vectors
Malaria next generation† recombinant
Men ABCWY
recombinant – conjugated
Shigella†
Tuberculosis†
RSV
Flu universal †
conjugated and outer membrane
recombinant
replication-defective recombinant
viral vector
universal inactivated influenza vaccine
HIV†
recombinant proteins
Rotavirus prophylaxis
measles, mumps, rubella prophylaxis
Ebola haemorrhagic fever prophylaxis
Streptococcus pneumoniae disease prophylaxis
reduction of the frequency of moderate and severe
acute exacerbations in COPD patients by targeting
non-typeable Haemophilus influenzae and Moraxella
catarrhalis
hepatitis C virus prophylaxis: prevention of
establishment of chronic infection
malaria prophylaxis (Plasmodium falciparum)
meningococcal A,B,C,W and Y disease prophylaxis
in adolescents
Shigella diarrhea prophylaxis
tuberculosis prophylaxis
respiratory syncytial virus prophylaxis in paediatric
population
Flu infection prophylaxis with broad protection
over multiple seasons
HIV infection prophylaxis
II
II
II
II
II
II
II
I/II
II
Brand names appearing in italics are trade marks owned by or licensed to the GSK group of companies, with the exception of Rituxan owned by Biogen MA Inc.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
254
Pipeline, products and competition continued
Pharmaceuticals products, competition and intellectual property
Products
Respiratory
Anoro Ellipta
Compounds
Indication(s)
umeclidinium bromide/
vilanterol trifenatate
COPD
Arnuity Ellipta
fluticasone furoate
asthma
Major
competitor brands
Patent expiry dates3
US
EU
Respimat, Stiolto
Utibron/Ultibro
Breezhaler,
Duaklir Genuair
Bevespi
Qvar, Pulmicort
Asmanex, Alvesco
2027
(NCE)
2027-2030
(device/
formulation)
2021
(NCE)
2027-2030
(device/
formulation)
20212
expired
(Diskus device)
2018-20261
(HFA-device)
2027
(NCE)
2027-2030
(device/
formulation)
expired4
2025
(NCE)
2027-2030
(device/
formulation)
expired
(Diskus device)
2018-2026
(HFA-device)
expired
(Diskus device)
2027
(NCE)
2027-2030
(device/
formulation)
2018-2026
(HFA-device)
2029
(NCE)
2022-2025
(device/
formulation)
NA
2023
expired
(Diskus device)
expired
(HFA-device)
2029
(NCE)
2022-2025
(device/
formulation)
20204
2027
(NCE)
2022-2025
(device/
formulation)
expired
(Diskus device)
expired
(HFA-device)
expired
(Diskus device)
2021
(HFA-device)
2029
(NCE)
2022-2025
(device/
formulation)
expired
(HFA-device)
Avamys/Veramyst
Flixotide/Flovent
fluticasone furoate
fluticasone propionate
rhinitis
asthma/COPD
Nasonex
Qvar, Singulair
Incruse Ellipta
umeclidinium bromide
COPD
Spiriva Handihaler/
Respimat, Eklira Genuair
Seebri Breezhaler
Nucala
Relvar/Breo Ellipta
mepolizumab
fluticasone furoate/
vilanterol trifenatate
severe eosinophilic asthma, EGPA Xolair, Cinqair, Fasenra
asthma/COPD
Symbicort, Foster,
Flutiform, Dulera
Seretide/Advair
salmeterol xinafoate/
fluticasone propionate
asthma/COPD
Symbicort, Foster,
Flutiform, Dulera
Serevent
salmeterol xinafoate
asthma/COPD
Foradil, Striverdi,
Respimat, Onbrez
Breezhaler
Trelegy Ellipta
fluticasone furoate/
vilanterol trifenatate
umeclidinium bromide
COPD
Trimbow
Ventolin HFA
albuterol sulphate
asthma/COPD
generic companies
Anti-virals
Valtrex
valaciclovir
genital herpes, coldsores, shingles Famvir
expired
expired
Central nervous system
Lamictal
Imigran/Imitrex
Seroxat/Paxil
lamotrigine
sumatriptan
paroxetine
Cardiovascular and urogenital
Avodart
dutasteride
Coreg CR
carvedilol phosphate
epilepsy, bipolar disorder
migraine
depression, various anxiety
disorders
Keppra, Dilantin
Zomig, Maxalt, Relpax
Effexor, Cymbalta,
Lexapro
expired
expired
expired
expired
expired
expired
benign prostatic hyperplasia
mild-to-severe heart failure,
hypertension, left ventricular
dysfunction post MI
Proscar, Flomax,
finasteride
Toprol XL
expired
expired
20262
(formulation)
NA
Anti-bacterials
Augmentin
amoxicillin/clavulanate
potassium
common bacterial
infections
generic products
NA
expired
1 See Note 45 to the financial statements, ‘Legal proceedings’.
2 Generic competition commenced in 2017.
3
4 Data exclusivity expires 2025 (EU) and 2027 (US).
Includes Supplementary Protection Certificates which were granted in multiple countries in EU and patent term extensions granted in the US.
GSK Annual Report 2017 255
Pharmaceutical products, competition and intellectual property continued
Compounds
Indication(s)
Major
competitor brands
Patent expiry dates3
US
EU
Products
Rare diseases
Volibris
ambrisentan
pulmonary hypertension
Tracleer, Revatio
NA
Immuno-inflammation
Benlysta, Benlysta SC belimumab
systemic lupus erythematosus
HIV
Epzicom/Kivexa
lamivudine and abacavir
HIV/AIDS
Juluca
dolutegravir, rilpivitine
HIV/AIDS
Lexiva/Telzir
fosamprenavir
Selzentry/Celsentri
maraviroc
Tivicay
dolutegravir
Triumeq
dolutegravir, lamivudine
and abacavir
HIV/AIDS
HIV/AIDS
HIV/AIDS
HIV/AIDS
2025
expired
2027
(NCE)
expired
2021
(NCE)
20271
(NCE)
2027
(NCE)
Truvada, Atripla
Descovy, Genvoya
Odefsey
Genvoya, Odefsey
Descovy, Atripla
Prezista, Kaletra,
Reyataz
Isentress, Intelence,
Prezista
Isentress, Prezista
Reyataz, Kaletra,
Biktarvy
Atripla, Descovy,
Odefsey, Genvoya,
Biktarvy
Vaccines products, competition and intellectual property
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)
Cervarix
Fluarix Tetra
FluLaval
Menveo
Prepandrix
Priorix, Priorix Tetra a,b
Varilrix b
Rotarix
Synflorix
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)
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
Shingrix
zoster vaccine
recombinant, adjuvanted
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
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
herpes zoster
(shingles)
Patent expiry dates3
US
2027
expired
2018
2020
2020
2022
2022
2022
2022
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
Nimenrix, Menactra
2025
Aflunov, Vepacel
–
2025
2026
MMR II (M-M-RVaxPro)
Proquad, Varivax
Rotateq
Prevenar (Prevnar)
20194
expired
–
NA
2020
2024
Zostavax
2026
2026
1 See Note 45 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
2020
2026
20191,2
(combination)
2029
(NCE)
2019
(NCE)
2022
(NCE)
2029
(NCE)
2029
(NCE)
EU
2028
expired
expired
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
256
Pipeline, products and competition continued
Consumer Healthcare products and competition
Products
Application
Markets
Competition
Brand
Wellness
Respiratory
Otrivin
nasal spray
nasal decongestant
Theraflu
tablets and syrups
cold and flu relief
Germany, Poland,
Russia, Sweden, Ukraine
Russia, Poland, Ukraine,
US
Flonase
Flixonase, Piriton
Nicorette (US),
NicoDerm,
Nicotinell
(ex. Australia)
Pain relief
Panadol and
Panadol Cold
& Flu
Voltaren
Other
ENO
Tums
Oral health
Sensodyne,
Pronamel
nasal spray
nasal spray, tablets
lozenges, gum and trans-dermal
patches
allergy relief
allergy relief
treatment of nicotine withdrawal
as an aid to smoking reduction
and cessation
US
UK, Ireland
global
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 (except US)
effervescent
immediate relief antacid
global (except US)
chewable tablets
immediate relief antacid
US
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
Afrin, Merck
Nasivin, Merck
Tylenol Cold & Flu,
Johnson & Johnson
Mucinex, Reckitt Benckiser
Lemsip, Reckitt Benckiser
Claritin, Bayer, Nasacort, Sanofi
Benadryl, Johnson & Johnson
Nicorette, Johnson & Johnson
NiQuitin, Perrigo
Advil, Pfizer
Aspirin, Bayer
Tylenol, Johnson & Johnson
Advil, Pfizer
Aspirin, Bayer
Tylenol, Johnson & Johnson
Estomazil, Hypermarca
Gelusil, Pfizer
Alka-Seltzer, Bayer
Gaviscon, Reckitt Benckiser
Rolaids, Sanofi
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
malted drinks and foods
nutritional
beverages & food
Indian sub-continent,
United Kingdom, Ireland
Bournvita, Mondelez
Complan, Heinz
GSK Annual Report 2017
257
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 risk impact has the potential 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), who is also the Medical Officer
for Pharmaceuticals, is responsible for medical governance 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 global 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 45, ‘Legal proceedings,’ on pages 227 to 232.
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 our 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, we have 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 healthcare professionals (HCPs)
and patients, regulatory authorities, medical and scientific literature,
traditional media and social 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 policy and
legal requirements.
Information that changes the risk/benefit profile of one of our
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.
Our 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 our marketed products 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 as described
above, we use several mechanisms to foster the early evaluation,
mitigation, and resolution of disputes as they arise and of potential
claims even before they occur. 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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 258
Principal risks and uncertainties continued
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.
This would have the potential to do damage to our reputation, as
well as result in other regulatory, legal and financial consequences.
Context
Patients, consumers and HCPs 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 and new legislation are introduced.
Critically, we are addressing the impact of Brexit on our supply
chain management and quality oversight between the UK and the
EU and are developing and deploying appropriate contingency
plans to avoid interruption of supply to patients.
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 it meets external
expectations for product quality in the markets supplied. The PQS is
routinely updated to ensure that it keeps pace with the evolving
external regulatory environment and with new scientific
understanding of our products and processes. As part of our drive to
continually improve the operational deployment of our PQS, we are
making our policies and procedures simpler to understand and
implement, as well as adopting innovative tools to give a more
user-friendly experience.
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. We provide the Corporate
Executive Team & Risk Oversight and Compliance Council with an
integrated assessment of Regulated Quality (GxP) performance. The
defined key performance indicators 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’.
Financial controls and reporting
Risk definition
Failure to comply with current tax laws or incurring significant
losses due to treasury activities; failure to report accurate financial
information in compliance with accounting standards and applicable
legislation.
Risk impact
Non-compliance with existing or new financial reporting and
disclosure requirements, or changes to the recognition of income
and expenses, could expose us to litigation and regulatory action and
could materially and adversely affect our financial results. 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 debt funding, 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.
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.
GSK Annual Report 2017 259
Financial controls and reporting continued
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 means that our intellectual property, R&D
and manufacturing operations are centred in a number of key
locations. A consequence of this is that our cross-border supply
routes, necessary to ensure supplies of medicines into numerous
end markets, can be complex and result in conflicting claims from tax
authorities as to the profits to be taxed in individual countries. Tax
legislation itself is also complex and differs across the countries in
which we operate. As such, tax risk can also arise due to differences
in the interpretation of such legislation. The tax charge included in our
financial statements is our best estimate of tax liability pending audits
by tax authorities.
We expect there to be continued focus on tax reform in 2018 and
future years driven by the Organisation for Economic Cooperation
& Development’s Base Erosion and Profit Shifting project and
European Commission initiatives including the 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 and relationship with key
stakeholders.
Mitigating activities
We maintain 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. A
minimum standard control set has been implemented, whereby all
Finance personnel, irrespective of size or geographical location, are
required to apply and ensure they are monitored. Our Global Finance
Risk Management and Controls Centre of Excellence provides extra
support to large Group organisations undergoing transformation
such as system deployment or significant business transformation.
We have also added operational resources to ensure processes and
controls are maintained during business transformation, the upgrade
of our financial systems and processes. Additional risk mitigation
has been introduced by amending the programme timelines of
system upgrades.
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 judgments 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.
The Disclosure Committee reporting to the Board, reviews the
Group’s quarterly results and Annual Report and determines
throughout the year, in consultation with its legal advisors, whether
it is necessary to disclose publicly information about the Group
through Stock Exchange announcements. 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.
Counterparty exposure is subject to defined limits approved by the
Board for both credit rating and individual counterparties. 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 213 and 214, Note 42,
‘Financial instruments and related disclosures’. Tax risk is managed
through robust internal policies, processes, training and compliance
programmes to ensure we have alignment across our business and
meet our tax obligations. We seek to maintain open, positive
relationships with governments and tax authorities worldwide and we
welcome constructive debate on taxation policy. 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 confirm the implications for our
business of tax legislation such as the recently enacted US Tax Cuts
and Jobs Act. Where appropriate we are active in providing relevant
business input to tax policy makers. Significant decisions are
submitted for consideration to the Tax Governance Board which
meets quarterly and comprises senior personnel from across the
GSK’s Finance division.
Our tax affairs are managed on a global basis through a co-ordinated
team of tax professionals led by the Global Head of Tax who works
closely with the business. They are suitably qualified for the roles they
perform and we support their training needs in order that they
continue to be able to provide up to date technical advice. We submit
tax returns according to statutory time limits and engage with tax
authorities to seek to ensure our tax affairs are current, entering
arrangements such as Continuous Audit Programmes and Advance
Pricing Agreements where appropriate. These agreements provide
long-term certainty for both tax authorities and for us over the tax
treatment of our business. 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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 260
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 & 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 and may compromise the Group’s ability to supply its
products under certain government contracts. 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 by its very nature maintains
relationships with government bodies, 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
reached a resolution with the US authorities in 2016 regarding their
ABAC inquiry, following which we are subject to a self-monitoring
arrangement until September 2018. Government investigations
regarding our China and other business operations are ongoing.
These investigations are discussed further in Note 45, ‘Legal
proceedings’.
Mitigating activities
Our Code of Conduct, values and behaviours and commitment to
zero tolerance are integral to how we mitigate this risk. In light of the
complexity and geographic breadth of this risk, we constantly evolve
our oversight of activities and data, reinforce to our workforce clear
expectations regarding acceptable behaviours, and maintain regular
communications between the centre and local markets.
We have an enterprise-wide ABAC programme designed to ensure
compliance with our ABAC policies and mitigate 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 is
subject to ongoing review and development. It provides us with the
basis from which we seek to manage the risk from top down and
bottom up. For example, the programme comprises top-level
commitment from the Board of Directors and leadership and 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. We provide mandatory periodic
ABAC training to our staff and relevant third parties in accordance
with their roles, responsibilities and the risks they face.
Programme governance is provided by the 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 & 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.
GSK Annual Report 2017 261
Commercial practices
Risk definition
Failure to engage in commercial activities that are consistent with the
letter and spirit of legal, industry, or the Group’s requirements relating
to marketing and communications about our medicines and
associated therapeutic areas; appropriate interactions with HCPs
and patients; and legitimate and transparent transfer of value.
Risk impact
Failure to manage risks related to commercial practices 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 which could result in government sanctions, and
criminal and/or financial penalties. 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 practices that are found to be misaligned with our values could
also result in reputational harm 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 that reflect
insights which help ensure those products address the needs of
patients/consumers, HCPs, and payers are critical to achieve our
strategic objectives.
As do other pharmaceutical, vaccine and consumer companies, we
face 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 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 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.
Mitigating activities
Our strategic objectives are designed to ensure we achieve our
mission of helping people do more, feel better and live longer.
We continue to strive for new product launches that are competitive
and resourced effectively. We also strive to have a healthy proportion
of the Group’s sales ratio attributable to new product or innovation
sales.
This innovation helps us 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 us to
maintain a strong global business and remain relevant to the needs of
patients and consumers. Our values and behaviours provide a guide
for how we lead and make decisions. We constantly strive to do the
right thing and deliver quality products and ensure supply is
sustained to meet customer needs and demand requirements,
seeking to ensure our actions reflect our values, behaviours and the
mission of our company.
We have taken action to enhance and improve standards and
procedures for promotional interactions including an increased focus
on digital marketing, based on our values of transparency, respect,
integrity and patient focus. We have policies and standards
governing promotional activities undertaken by us or on our 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.
We have harmonised policies and procedures to guide above
country commercial practices processes as well as clarified
applicable standards for operations in the various markets in which
we operate. Each business unit has adopted the 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.
Where in the past we have fallen below our own or any other
regulatory or industry standards, we have sought to improve both the
framework and culture for our compliance processes.
All promotional materials and activities must be reviewed and
approved according to our 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.
We have evolved our 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 individual sales or market
share of prescription products in individuals’ territories in favour of
rewards based on the quality of the individuals’ interactions with
HCPs. We now allow fair market value payments to be made by
GSK to expert researchers and practitioners to speak about the
science behind our products, disease and clinical practice in a
limited number of GSK sponsored, medical-led meetings.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 262
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, and failure to secure adequate patent
protection for GSK’s products.
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), loss of revenue due to
inadequate patent protection or inability to supply GSK products,
and regulatory action such as fines, penalties, or loss of product
authorisation. Any of these consequences could materially and
adversely affect our financial results and cause loss of trust from our
customers and patients.
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 form the content of regulatory submissions. Poor data
integrity can compromise our research efforts and negatively impact
company reputation.
There are innate complexities and interdependencies required for
regulatory filings, particularly given our global research and
development footprint. Continually changing and increasingly
stringent submission requirements 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 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. SE activities are essential but
present legal, regulatory, and reputational risk if the sharing of data,
invited media coverage or payments to HCPs have, or are perceived
to have, promotional intent.
A wide variety of biological materials are used by GSK in discovery,
research and development phases. Through the Convention on
Biological Diversity (CBD) and the Nagoya Protocol, the
international community has established a global framework
regulating access to, and use of, genetic resources of non-human
origin in R&D. We support the principles of access and benefit
sharing to genetic resources as outlined in the CBD and the Nagoya
Protocol, recognising the importance of appropriate, effective and
proportionate implementation measures at national and regional
levels.
In addition, any loss of patent protection in a market for GSK’s
products developed through our R&D, 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, which could lead to, for
example, competition from manufacturers of generic pharmaceutical
products, could limit the opportunity to rely on such markets for
future sales growth for our products, which could also materially and
adversely impact our financial results. Following expiration of certain
intellectual property rights, a generic manufacturer may lawfully
produce a generic version of a product, and 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. Introduction of generic products typically
leads to a rapid and dramatic loss of sales and reduces our
revenues and margins for our proprietary products. 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.
GSK Annual Report 2017 263
We established an Access and Benefit Sharing Centre of
Excellence to oversee applicable requirements and enforcement
measures for the acquisition and use of genetic material of non-
human origin in scope of the Nagoya Protocol.
R&D maintains and controls pre-publication procedures to guard
against public disclosure in advance of filing patent applications. In
addition, because loss of patent protection can occur due to lack of
data integrity in preparing patent application data and information,
legal experts collaborate with R&D to support the review process for
new patent applications.
The Research Practices risk is now aligned with a new Enterprise
framework that seeks to ensure strengthened governance across
the R&D businesses in Pharmaceuticals, Vaccines and Consumer
Healthcare. Under the leadership of the Chief Research Practices
Officer, management of the risk takes a pragmatic 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.
Research practices continued
Mitigating activities
We have an established Office of Animal Welfare, Ethics and
Strategy (OAWES), led by the Chief of Animal Welfare, Ethics and
Strategy, that ensures the humane and responsible care of animals
and increases the knowledge and application of non-animal
alternatives. The OAWES provides a framework of animal welfare
governance, promotes application of 3Rs (replacement, refinement
and reduction of animals in research), conducts quality assessments
and develops and deploys strategies on animal model reproducibility
and translatability.
The Chief Medical Officer oversees the following enterprise Medical
Governance Boards:
– The Human Subject Research Board is in place to provide
oversight for the management of clinical trials sponsored and
supported by us to ensure they conform to ethical, medical and
scientific standards.
– The Data Disclosure Board provides oversight for disclosure of our
sponsored and supported clinical trials. We make information
available on our clinical studies, including summaries of the results
– whether positive or negative. We were the first company to
publish clinical study reports that form the basis of submissions to
regulatory agencies and we have publicly posted more than 2,300
clinical study reports in addition to more than 6,300 study result
summaries. Detailed and appropriately protected patient-level data
from approximately 2,000 clinical studies can be requested and
accessed through clinicalstudydatarequest.com.
– Specific accountability and authorisation for SE is overseen by
the Scientific Engagement and Promotional Practices Board.
This Board is responsible for oversight of applicable policies and
seeking to ensure the highest level of integrity and continuous
development of SE.
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. Data Integrity Committees are in place to provide oversight
and a Data Integrity Quality Assurance team conducts assessments
to provide independent business monitoring of our internal controls
for R&D activities.
The Chief Regulatory Officer chairs the Regulatory Governance
Board which serves as the global regulatory risk management and
compliance board, promoting compliance with regulatory
requirements and procedures and oversees Group-wide written
standards for cross business regulatory processes.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 264
Principal risks and uncertainties continued
Third party oversight risk
Risk definition
Failure to maintain adequate governance and oversight over third
party relationships and failure of third parties to meet their
contractual, regulatory, confidentiality or other obligations.
Risk impact
Failure to adequately manage third party relationships could result in
business disruption and exposure to risks ranging from sub-optimal
contractual terms and conditions, to severe business and legal
sanctions and/or significant reputational damage. Any of these
consequences could materially and adversely affect our business
operations and financial results.
Context
Third parties are critical to our business delivery and are an integral
part of the solution to meeting our business objectives. We rely on
third parties, including suppliers, advisors, distributors, individual
contractors, licensees, and other pharmaceutical and biotechnology
collaboration partners for discovery, manufacture, and marketing of
our products and for supporting other important business processes.
These business relationships present a material risk. For example, we
share critical and sensitive information such as marketing plans, clinical
data, and employee data with specific third parties who are conducting
the relevant outsourced business activities. Inadequate protection or
misuse of this information by third parties could have significant
business impact. Similarly, we use distributors and agents in a range of
activities such as promotion and tendering which have inherent risks
such as inappropriate promotion or corruption. Insufficient internal
compliance and controls by the distributors could affect our reputation.
These risks are further increased by the complexities of working with
large numbers of third parties across a diverse geographical spread.
Mitigating activities
Each business unit leadership team retains ultimate accountability for
managing third party interactions and risks. When working with third
parties, our 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
carried out on our behalf are performed safely and in compliance with
applicable laws and our values, standards and Code of Conduct.
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 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 programme takes
an enterprise-wide view of third party related risks, has strengthened
risk assessment, contractual terms and due diligence efforts on third
parties and improved the overall management of our third party risks
through the lifecycle of the third party engagement.
Environment, health & safety and sustainability
Risk definition
Failure to manage environment, health & safety and sustainability
(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,
which could materially and adversely affect our financial results.
Context
We are 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 45 to the financial
statements, ‘Legal proceedings’, for a discussion of the
environmental related proceedings in which we are involved. We
routinely accrue amounts related to our liabilities for such matters.
Mitigating activities
The Corporate Executive Team (CET) is responsible for EHS&S
governance 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.
GSK Annual Report 2017 265
We aim to apply 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. This will include suitable levels of cyber-risk insurance
cover in future.
Nevertheless, cyber threats are growing and evolving. They
increasingly involve highly-resourced threat actors such as nation-
states and organised criminals. Combined with the size and
complexity of our IT systems and those of our supply chain partners
(including outsourced operations), this means that our systems
and information have been and are expected to continue to be,
the subject of cyber-attacks of various types.
We are enhancing our approach to data privacy compliance, in part
to comply with the new EU General Data Protection Regulation
(GDPR), by deploying an enterprise-wide privacy programme,
launched in 2017 and scheduled for deployment in 2018.
This will involve greater standardisation and additional expert
resources to support the business. New standards and controls
will enable us to better to address data privacy at the outset of
any business process. These changes also prepare us for the
introduction of GDPR in May 2018.
All employees are required to complete training on privacy and
the appropriate handling and maintaining of personal information.
Programme governance is provided by the Privacy Governance
Board, which includes representation from key functional areas.
We have a dedicated Privacy team, responsible for the
implementation and evolution of the programme in response
to developments in the internal and external environment.
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, typically because of cybersecurity threats,
although accident or malicious insider action may be contributory
causes.
This also includes the risk of failure to collect, secure, and use
personal information in accordance with data privacy laws.
Risk impact
Failure to adequately protect critical and sensitive systems and
information may result in loss of commercial or strategic advantage
and could materially affect our ongoing business operations, such
as scientific research, clinical trials and manufacturing and supply
chain activities. Failure to comply with data privacy laws could lead
to adverse impact on individuals (for example financial loss, distress
or prejudice). In both cases, damage to our reputation, litigation, or
other business disruption including regulatory sanction could occur,
which could materially and adversely affect our financial results.
Context
We rely on critical and sensitive systems and data, such as corporate
strategic plans, 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 believe that the cyber security incidents that we have
experienced to date have not resulted in significant disruptions to
our operations, and have not had a significant adverse effect on our
results of operations, or on third parties. However, as the threats
evolve we cannot provide assurance that our significant efforts in
protecting and monitoring our systems and information will always
be successful in preventing compromise or disruption in future.
All parts of our business process personal information. The use of
this information is critical to our operations and innovation, including
the development and sale of our products, as well as management
of our employees.
New and evolving laws and regulations, such as the European Union
General Data Protection Regulation (GDPR), are likely to bring
increased scrutiny of our data management.
Mitigating activities
We have a global information protection policy and accompanying
information technology standards and processes that are supported
through a dedicated team and programme of activity. Our Information
Protection function provides strategy, direction, and oversight,
including active monitoring of cyber security, while enhancing our
global information security capabilities, through an ongoing
programme of investment that is in its fifth year.
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 businesses and cross-industry bodies. Such
changes are regularly reviewed by our Executive team and our Board
and suitable adjustments agreed.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 266
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.
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
we have 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 risk mitigation we recognise that certain
events could nevertheless still 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 us, 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. Particular attention is placed on mitigating supply risks
associated with medically critical and high-revenue products.
We routinely monitor the compliance of manufacturing external
suppliers 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 our preparedness and recovery capability; and
providing assurance oversight of our 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. We have a
coordinated approach to evaluate and manage the implications for
our business arising from Brexit. Our approach to Brexit is set out
on page 55.
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.
GSK Annual Report 2017 267
Shareholder information
Share capital and control
Details of our issued share capital and the number of shares held
in Treasury as at 31 December 2017 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 the Group’s employee share 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 Guidance and Transparency
Rules (DTRs) is published on a Regulatory Information Service and
on the company’s website, www.gsk.com.
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:
31 December 2017
No. of
shares
348,457,982
*Percentage
of issued
capital (%)
7.03
No. of
shares
338,195,351
2 March 2018
*Percentage
of issued
capital (%)
6.82
BlackRock, Inc
* 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
employee 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 2017, when the
company was authorised to purchase a maximum of just under
492 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 employee 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. No shares were purchased during the financial years ended
2015, 2016 or 2017.
The company confirms that it does not currently intend to make
any market purchases in 2018. The company will review the
potential for future share buy-backs during 2019 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 2017 was £65.57 billion.
At that date, GSK was the sixth largest company by market
capitalisation in the FTSE index.
Share price
At 1 January
At 31 December
(Decrease)/increase
High during the year
Low during the year
2017
£
15.62
13.23
(15.3)%
17.22
12.76
2016
£
13.73
15.62
13.8 %
17.23
13.44
2015
£
13.76
13.73
(0.2 )%
16.42
12.38
The table above sets out the middle market closing prices. The
company’s share price decreased by 15.3% in 2017. This compares
with an increase in the FTSE 100 index of 7.6% during the year.
The share price on 2 March 2018 was £12.90.
UK£
18
17
16
15
14
13
12
11
10
US$
75
70
65
60
55
50
45
40
35
09
31/12/14
31/12/15
31/12/16
30
31/12/17
UK share price (UK£)
US ADS price (US$)
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
268
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 2018*
February 2018
January 2018
December 2017
November 2017
October 2017
September 2017
Quarter ended 31 December 2017
Quarter ended 30 September 2017
Quarter ended 30 June 2017
Quarter ended 31 March 2017
Quarter ended 31 December 2016
Quarter ended 30 September 2016
Quarter ended 30 June 2016
Quarter ended 31 March 2016
Year ended 31 December 2017
Year ended 31 December 2016
Year ended 31 December 2015
Year ended 31 December 2014
Year ended 31 December 2013
* to 2 March 2018
Ordinary Shares
Pence per share
ADS
US dollars per share
Low
1290
1243
1320
1276
1280
1358
1452
1276
1452
1550
1520
1459
1592
1388
1345
1276
1345
1238
1324
1359
High
36.22
37.70
39.04
35.58
36.48
41.10
40.65
41.10
42.77
44.37
42.73
43.44
45.49
43.47
42.05
44.37
45.49
48.81
56.66
53.68
Low
35.97
35.49
36.40
34.66
34.81
36.23
39.89
34.66
38.68
40.68
38.72
37.39
42.50
40.04
38.54
34.66
37.39
37.56
41.30
43.93
High
1304
1325
1364
1323
1363
1536
1533
1536
1630
1722
1691
1723
1712
1605
1439
1722
1723
1642
1691
1782
Analysis of shareholdings at 31 December 2017
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
Number of
accounts
% of total
accounts
% of total
shares
Number of
shares
81,508
25,832
5,909
758
362
114,369
5,417
21
4
108,925
1
1
71.27
22.59
5.17
0.66
0.31
100.00
4.74
0.02
0.00
95.24
0.00
0.00
0.53
1.04
1.64
4.92
91.87
100.00
63.60
0.08
0.00
11.25
17.35
7.72
28,558,492
55,701,236
88,042,723
264,426,210
4,935,825,159
5,372,553,820
3,416,723,552
4,444,309
1,894
604,455,960
932,322,155
414,605,950
BNY Mellon is the Depositary for the company’s ADS, which are listed on the NYSE. Ordinary Shares representing the company’s ADS
programme, which is managed by the Depositary, are registered in the name of BNY (Nominees) Limited. At 2 March 2018, BNY (Nominees)
Limited held 931,975,461 Ordinary Shares representing 18.79% of the issued share capital (excluding Treasury shares) at that date.
At 2 March 2018, the number of holders of Ordinary Shares in the US was 1,007 with holdings of 1,093,635 Ordinary Shares, and the
number of registered holders of ADS was 465,987,730 with holdings of 22,275 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.
GSK Annual Report 2017 269
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 GSK recognises the importance of dividends to shareholders. The company aims to
distribute regular dividend payments that will be determined primarily with reference to the free cash flow generated by the business after
funding the investment necessary to support the Group’s future growth.
The Board intends to maintain the dividend for 2018 at the current level of 80p per share, subject to any material change in the external
environment or performance expectations. Over time, as free cash flow strengthens, it intends to build free cash flow cover of the annual
dividend to a target range of 1.25-1.50x, before returning the dividend to growth. Details of the dividends declared, the amounts and the
payment dates are given in Note 16 to the financial statements, ‘Dividends’.
Dividend calendar
Quarter
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Ex-dividend
date
Record date
Payment date
22 February 2018
23 February 2018
12 April 2018
10 May 2018
11 May 2018
12 July 2018
9 August 2018
10 August 2018
11 October 2018
15 November 2018
16 November 2018
10 January 2019
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
2017
2016
2015
2015
2014
2013
pence
80
80
20
80
80
78
US$
–1
2.00
0.57
2.37
2.59
2.47
1 The Q4 2017 interim ordinary dividend receivable by ADS holders will be calculated
based on the exchange rate on 12 April 2018. 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 ADS holders for Q1, Q2 and Q3 2017 was $1.51.
* 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
Date
April 2018
May 2018
July 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.
Quarter 3 Results announcement
Preliminary/Quarter 4 Results announcement
Annual Report publication
Annual Report distribution
October 2018
February 2019
February/March 2019
March 2019
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.
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 272 for the contact details).
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
270
Shareholder information continued
Annual General Meeting 2018
2.30pm (UK time) on 3 May 2018
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.
Tax information for shareholders
A summary of certain UK tax and US federal income tax
consequences for holders of shares and ADS 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 ADS 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 ADS 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
For UK tax years from 2016/17 UK resident individuals are entitled 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. This allowance will
reduce to £2,000 from the 2018/19 UK 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.
ADS holders wishing to attend the meeting should contact BNY
Mellon, as Depositary, to request a proxy appointment. This will
enable them to attend and vote on the business to be transacted.
ADS holders may instruct BNY Mellon as to the way in which the
shares represented by their ADS 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.
Taxation of capital gains
UK resident shareholders may be liable for UK tax on gains on the
disposal of shares or ADS.
For disposals by individuals from the 2016/17 UK tax year onwards,
a taxable capital gain accruing on a disposal of shares or ADS will be
taxed at 10% for basic rate taxpayers, or 20% if, after all allowable
deductions, the individual’s taxable income for the year exceeds the
basic rate income tax limit. Note this is following the use of any
exceptions available to the individual taxpayer such as the annual
exempt amount.
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. For assets acquired on or
before 1 January 2018, legislation in the Finance Bill (No. 2) 2017-19
freezes the level of indexation allowance that is given in calculating a
company’s chargeable gains at the value that would apply to the
disposal of an asset in December 2017. For assets acquired from
1 January 2018 onwards, legislation in the Finance Bill (No. 2)
2017-19 removes any indexation allowance on disposal.
Inheritance tax
Individual (UK-domiciled or otherwise) shareholders may be liable
to UK inheritance tax on the transfer of shares or ADS. 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.
GSK Annual Report 2017 271
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 ADS) that holds shares or ADS 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 ADS as part of an integrated investment
(including a ‘straddle’) comprised of a share or ADS 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 ADS
are payable in US dollars; dividends on shares are payable in
Sterling. Dividends paid in 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 (IRS) 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 1 October, the shares must be held
for more than 60 days in the period between 2 August and 30
November 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 40.8%. 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 ADS. Such gains will be long-term capital
gains (subject to reduced rates of taxation for individual holders) if
the shares or ADS 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 40.8%, 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
ADS, 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 ADS 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 ADS.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 272
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.
Dividend payment direct to your bank
account (Bank Mandate)
Dividend payment direct to bank
account for overseas shareholders
Electronic communications
Shareview portfolio service
Duplicate publications or mailings
Share dealing service†
(please note that market trading hours
are from 8.00am to 4.30pm UK time,
Monday to Friday (excluding public
holidays in England and Wales))
Corporate Sponsored Nominee Account
Individual Savings Accounts (ISAs)†
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.
Instead of waiting for a sterling cheque to arrive by post,
Equiniti will convert your dividend into your local currency
and send it direct to your local bank account. This service is
available in over 100 countries worldwide.
Shareholders may elect to receive electronic notifications of
company communications including our Annual Report, dividend
payments (if paid by way of a Bank Mandate), access to electronic
tax vouchers and the availability of online voting for all general
meetings. Each time GSK mails out hard copy shareholder
documents you will receive an email containing a link to the
document or relevant website.
This enables you to create a free online portfolio to view your
share balance and movements, update your address and dividend
payment instructions and register your votes for our AGM.
If you receive duplicate copies of this report or other mailings,
please contact Equiniti and they will arrange for your accounts
to be merged into one for your convenience and to avoid waste
and unnecessary costs.
Shareholders may trade shares, either held in certificated form
or held in our Corporate Sponsored Nominee, by internet,
telephone or by a postal dealing service provided by Equiniti
Financial Services Limited.
This is a convenient way to manage your shares without requiring
a share certificate. The service provides a facility for you to hold
your shares in a nominee 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.
The company has arranged for Equiniti Financial Services
Limited to provide a GSK Corporate ISA to hold GSK
Ordinary Shares.
A DRIP election form can be downloaded
from www.shareview.co.uk or requested by
contacting Equiniti.
A dividend bank mandate form can be
downloaded from www.shareview.co.uk
or requested by contacting Equiniti.
For more details on this service and the costs
involved please contact Equiniti.
You can register at www.shareview.co.uk
You can register at www.shareview.co.uk
Please contact Equiniti.
For internet transactions, please log on to
www.shareview.co.uk/dealing.
For telephone transactions, please call
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
contacting Equiniti.
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.
GSK Annual Report 2017 273
Shareholders services and contacts continued
ADS Depositary
The ADS 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 (0)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 2017
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 505000
Louisville, KY 40233-5000
Overnight correspondence should be sent to:
BNY Mellon Shareowner Services
462 South 4th Street, Suite 1600
Louisville, KY 40202
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 ADS 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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
274
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 ADS.
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 (ARC). 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 2017, 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 the 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 96 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 2017.
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 2018, 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 2017 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 2017 and its
conclusion will be filed as part of the Group’s Form 20-F, and
GSK Annual Report 2017 275
US law and regulation continued
– PricewaterhouseCoopers LLP, which has audited the
consolidated financial statements of the Group for the year
ended 31 December 2017, 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.
Because the Group does not regularly receive information regarding
the identity of its distributors’ downstream 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 (£12 million) and net profits
(£4 million) from the Group’s sales to Iran in 2017.
Section 13(r) of the Exchange Act
Section 13(r) of the Exchange Act (Section 13(r)) 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
exports certain pharmaceutical, vaccine and consumer products
to Iran, via sales by non-US entities, to two privately held Iranian
distributors.
We do not believe that any of the Group’s direct dealings with
Iran require specific disclosure under these requirements.
The Group does not regularly receive information regarding 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.
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
(£48 million) and net profits (£25 million) from the Group’s sales to
Lebanon in 2017.
In addition to Section 13(r), US law also generally restricts dealings
by US persons or persons which are subject to US jurisdiction with
certain countries or territories that are subject to comprehensive
sanctions. The Group does business, via non-US entities, in such
jurisdictions targeted by sanctions laws, including Syria, Cuba,
North Korea and Crimea. While we believe the Group complies
with all applicable US sanctions laws, such laws are complex and
continue to evolve rapidly.
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 2017, 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 2017, a total
of US$ 384,875 (2016 – US$ 380,360) 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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 276
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 2017 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
Affymax Research Institute
Security
Common
Ordinary
Ordinary
Common
Alenfarma – Especialidades Farmaceuticas, Limitada (iv)
Ordinary Quota
Allen & Hanburys Limited (iv)
Allen & Hanburys Pharmaceutical Nigeria Limited
Allen Farmaceutica, S.A.
Allen Pharmazeutika Gesellschaft m.b.H.
Barrier Therapeutics, Inc.
Beecham Group p.l.c
Beecham Pharmaceuticals (Pte) Limited
Beecham Pharmaceuticals S.A. (iv) (vi)
Ordinary
Ordinary
Ordinary
Ordinary
Common
20p Shares ‘A’; 5p Shares ‘B’
Ordinary
Nominative
Beecham Portuguesa-Produtos Farmaceuticos e Quimicos, Lda, Ordinary Quota
Beecham S.A. (iv) (vi)
Biddle Sawyer Limited
Biovesta Ilaçlari Ltd. Sti. (iv)
Ordinary
Equity
Nominative
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, 1499-013, 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
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 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,
1499-013, Portugal
Parc de la Noire Epine, rue Fleming 20, 1300 Wavre, Belgium
252 Dr Annie Besant Road, Mumbai, 400030, India
Büyükdere Caddesi No. 173, 1.Levent Plaza B Blok, 1.Levent, Istanbul,
34394, Turkey
Burroughs Wellcome & Co (Australia) Pty Limited (in liquidation) Ordinary
1061 Mountain Highway, Boronia, VIC, 3155, Australia
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.
Ordinary
Ordinary
Fouzderhat Industrial Area, Dhaka Trunk Road, North Kattali, Chittagong
– 4217, Bangladesh
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Partnership Capital
Industriestrasse 32-36, Bad Oldesloe, 23843, Germany
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary;
Series A Preferred;
Series B Preferred;
Series C-1 Convertible Preferred;
Series C-3 Convertible Preferred
C/O DTOS, 19 Cybercity, 10th Floor Standard Chartered Tower, Ebene,
Mauritius
Meyerhofstrasse 1, Heidelberg, 69117, Germany
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Charles Midgley Limited (iv)
Ordinary; 7% Cumulative Preference
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Chiron Behring Vaccines Private Limited
Ordinary
401-402, A, Wing, 4th Floor,Floral Deck Plaza, Opp Rolta Bhavan,
Central MIDC Road, Mumbai, Andheri (E), 400093, India
Clarges Pharmaceuticals Limited
Colleen Corporation
Corixa Corporation
Coulter Pharmaceutical, Inc. (iv)
Dealcyber Limited
Desarrollo Energia Solar Alternativa S.L.
Ordinary; Preference (99.97%)
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Common with no par value
Common
Common
Ordinary
Ordinary
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos, Madrid,
28760, Spain
GSK Annual Report 2017 277
Group companies continued
Name
Security
Registered address
Wholly owned subsidiaries continued
Domantis Limited
Duncan Flockhart Australia Pty Limited (iv) (vi)
Edinburgh Pharmaceutical Industries Limited (iv)
Eskaylab Limited
Etex Farmacéutica Limitada
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
Glaxo Wellcome Australia Pty Ltd (iv) (vi)
Glaxo Wellcome Farmaceutica, Limitada
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; Preference
10p Ordinary
Social Capital
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary Quota
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 (Malta) Limited
GlaxoSmithKline (Private) Limited (iv)
GlaxoSmithKline (Thailand) Limited
GlaxoSmithKline A.E.B.E.
GlaxoSmithKline AB
GlaxoSmithKline AG
GlaxoSmithKline Angola Unipessoal Limitada
Ordinary
Ordinary
Equity
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Quotas
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Shewalton Road, Irvine, Ayrshire, KA11 5AP, Scotland
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Avenida Andres Bello 2687, Piso 19, Las Condes, Santiago, C.P.
7550611, Chile
12th Floor Wave Place, 55 Wireless Road, Lumpini, Pathumwan,
Bangkok, 10330, Thailand
Corporation Service Company, 2710 Gateway Oaks Drive, Suite 150N,
Sacramento, California, 95833, United States
Klaus Torgårds vei 3, Oslo, NO-0372, Norway
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
1-8-1 Asasaka Minato-ku, Tokyo, Japan
82 Marine Road, Apapa, Lagos, Nigeria
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Level 11, 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
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1499-013, Portugal
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
1 Pioneer Sector 1, Jurong Industrial Estate, Jurong, 628413, Singapore
23 rue François Jacob, 92500, Rueil-Malmaison, 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
23 Rochester Park, 139234, Singapore
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1499-013, 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. 1065,
Cyprus
1-5 Costache Negri Street, Opera Center One, 5th and 6th floors,
Zone 1, District 5, Bucharest, Romania
12 Riverwalk Citywest Business Campus, Dublin, 24, Ireland
25 Basel Street, PO Box 10283, Petach-Tikva, 49002, Israel
1, First Floor, De La Cruz Avenue, Qormi, QRM2458, Malta
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
At Bollore Africa Logistics Angola, Estrada de Cacuaco n° 288,
CP 2163, Bairro Petrangol, Luanda, Angola
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 278
Other statutory disclosures continued
GlaxoSmithKline Chile Farmaceutica Limitada
Social Capital
GlaxoSmithKline Colombia S.A.
GlaxoSmithKline Consumer Healthcare Investments (Ireland)
Limited (ii) (iv) (v)
Ordinary
Ordinary
GlaxoSmithKline Consumer Healthcare Ireland IP Limited (ii) (v)
Ordinary
Group companies continued
Name
Wholly owned subsidiaries continued
GlaxoSmithKline Argentina S.A.
GlaxoSmithKline AS
GlaxoSmithKline Asia Pvt. Limited
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 Capital Inc.
GlaxoSmithKline Capital plc
GlaxoSmithKline Caribbean Limited
GlaxoSmithKline Consumer Holding B.V. (iv)
GlaxoSmithKline d.o.o
GlaxoSmithKline d.o.o.
GlaxoSmithKline doo Beograd
GlaxoSmithKline Ecuador S.A.
GlaxoSmithKline Eesti OU
GlaxoSmithKline ehf (iv) (vi) (Dissolved January 2018)
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 (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
Quotas
Equity capital
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Security
Ordinary
Ordinary
Equity
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Registered address
Tucumán 1, piso 4, Buenos Aires, C1049AAA, Argentina
Klaus Torgårds vei 3, Oslo, NO-0372, Norway
Patiala Road, Nabha 147201, Dist Patiala, Punjab, India
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
Prinzregentenplatz 9, München, 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
Estrada dos Banderiantes, 8464, Rio de Janeiro, 22783-110, Brazil
Wilmington Trust SP Services Inc., 1105 North Market Street,
Suite 1300, Wilmington, Delaware, 19801, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Avenida Andres 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
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, 19801, United States
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, 1.Levent, Istanbul,
34394, Turkey
Partnership Capital
Prinzregentenplatz 9, München, 81675, Germany
GlaxoSmithKline Holdings (Americas) Inc.
Common with no par value
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
7333 Mississauga Road North, Mississauga, ON, L5N 6L4, Canada
Ordinary
Ordinary
Ordinary
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
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.
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 Tecnológico de Madrid, Tres Cantos, Madrid,
28760, Spain
GSK Annual Report 2017 279
Registered address
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Currabinny, Carrigaline, County Cork, Ireland
1061 Mountain Highway, Boronia, VIC, 3155, Australia
1-8-1 Asasaka Minato-ku, Tokyo, Japan
9F LS Yongsan Tower 92, Hangangdae-ro Yongsan-gu, Seoul, 140-702,
Republic of Korea
Panama City, Republic of Panama, Panama
Duntes iela 3, 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, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
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
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
Group companies continued
Name
Wholly owned subsidiaries continued
GlaxoSmithKline Investment Holdings Limited
GlaxoSmithKline Investment Services Limited
GlaxoSmithKline Investments (Ireland) Limited (ii) (v)
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
Ordinary
Ordinary
Ordinary
GlaxoSmithKline LLC
LLC Interests
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
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
GlaxoSmithKline Pharmaceuticals Ukraine LLC
Chartered Capital
Pavla Tychyny avenue, 1-V, Kiev, 02152, Ukraine
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
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
GlaxoSmithKline Services GmbH & Co. KG
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.
Ordinary
LLC Interests
LLC Interests
Partnership
Ordinary
23 Rochester Park, 139234, Singapore
Centro Internacional de Mercadeo, 90 Road # 165, Tower II, Suite 800,
Guaynabo, 00968, Puerto Rico
Ave. 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, München, 81675, Germany
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Galvaniho 7/A, Bratislava, 821 04, Slovakia
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 280
Other statutory disclosures continued
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
Group companies continued
Name
Wholly owned subsidiaries continued
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.
GlaxoSmithKline UK Limited
GlaxoSmithKline Uruguay S.A.
GlaxoSmithKline Venezuela C.A.
Groupe GlaxoSmithKline S.A.S.
GSK Business Service Centre Sdn Bhd
GSK Capital K.K.
GSK CH Argentina S.A.
GSK Commercial Sp. z o.o.
GSK d.o.o., Ljubljana
GSK Kazakhstan LLP
GSK Pharmaceutical Trading SA
GSK Services Sp z o.o.
GSK Vaccines BV (iv)
GSK Vaccines GmbH
GSK Vaccines Institute for Global Health S.r.l.
GSK Vaccines S.r.l.
GSK Vaccines Vertriebs GmbH
HGS France S.a.r.l. (iv) (vi)
Horlicks Limited
Human Genome Sciences Pacific Pty Ltd (in liquidation)
Human Genome Sciences, Inc.
ID Biomedical Corporation of Quebec
ID Biomedical Corporation of Washington (iv)
Instituto Luso Farmaco, Limitada (iv)
InterPharma Dienstleistungen GmbH
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Quotas
Quotas
Ordinary
Ordinary
Ordinary
Ordinary
Common
Common
Common
Quotas
Quotas
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
Ordianry
Ordianry
Ordianry
Laboratorios Farmaceuticos Stiefel (Portugal) LTDA (iv)
Ordinary
Laboratorios Stiefel de Chile & Compañía Limitada (vi)
Social Capital
Laboratorios Stiefel de Venezuela SA (vi)
Laboratorios Stiefel Ltda.
Ordinary
Ordinary
Security
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Registered address
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
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Registered shares provisory stock
Salto 1105, CP 11.200 Montevideo, Uruguay
Nominative non endorseable ordinary shares
Tucumán 1, piso 4, Buenos Aires, C1049AAA, Argentina
Ordinary
Ordinary
Charter Capital
ul. Rzymowskiego 53, Warsaw, 02-697, Poland
Ameriška ulica 8,Ljubljana, 1000, Slovenia
273, Furmanov Street, Almaty, Medeu District, 050059, Kazakhstan
Urbanizacion La Trinidad, Calle luis De Camoems, Edif No 115-117
Apatado Posta, Caracas, 1010, Venezuela
The Metropolitan, 235 Dong Khoi Street, District 1, 7th Floor Unit 701,
Ho Chi Minh City, Viet Nam
Grabenstrasse 3, 8952 Schlieren, Switzerland
Flushing Meadows Building, The Campus, 57 Sloane Street,
Bryanston 2021, South Africa
23 rue François Jacob, 92500, Rueil-Malmaison, France
Level 6, Quill 9, 112, Jalan Semangat, Petaling Jaya, Selangor Darul
Ehsan, 46300, Malaysia
1-8-1 Asasaka Minato-ku, Tokyo, Japan
5 Poienelor Street, Brasov, Romania
Ul. Grunwaldzka 189, Poznan, 60-322, Poland
Hullenbergweg 85, Amsterdam, 1101 CL, Netherlands
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
52-54 rue de la Belle Feuille, Boulogne-Billancourt, 92100, France
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
2323 du Parc Technologique, Québec, PQ, G1P 4R8, Canada
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1499-013, Portugal
Wagenseilgasse 3, Euro Plaza, Gebäude I, 4. Stock, Vienna, A-1120,
Austria
Corporation Service Company, 100 Shockoe Slip, 2nd Floor,
Richmond, VA 23219, United States
23 rue François Jacob, 92500, Rueil-Malmaison, France
Zone Industrielle Est, Boudouaou, Boumerdes, Algeria
Zone Industrielle Est, Boudouaou, Boumerdes, Algeria
23 rue François Jacob, 92500, Rueil-Malmaison, France
23 rue François Jacob, 92500, Rueil-Malmaison, France
Calzada Mexico Xochimilco, 4900 San Lorenzo Huipulco, District Federal
Mexico, 14370, Mexico
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1499-013, Portugal
Avenida Andres Bello 2687, Piso 19, Las Condes, Santiago, C.P.
7550611, Chile
Urbanizacion La Trinidad, Calle luis De Camoems, Edif No 115-117
Apatado Posta, Caracas, 1010, Venezuela
Rua Professor Joao C Salem 1081 1301, Guarulhos, Sao Paulo, Brazil
GSK Annual Report 2017 281
Group companies continued
Name
Security
Registered address
Wholly owned subsidiaries continued
Laboratorios Wellcome De Portugal Limitada (iv)
Ordinary Quota
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1499-013, Portugal
Maxinutrition Limited (in liquidation)
Mixis Genetics Limited
Montrose Fine Chemical Company Ltd
Montrose Pharma Company Limited (iv) (vi)
Novartis Vaccines and Diagnostics AG (in liquidation)
Novartis Vaccines and Diagnostics Pty Ltd (iv) (vi)
Okairos AG (in liquidation)
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)
SmithKline Beecham (Australia) Pty Ltd (in liquidation)
SmithKline Beecham (Bangladesh) Private Limited (iv)
SmithKline Beecham (Cork) Limited (ii)
SmithKline Beecham (Export) Limited
SmithKline Beecham (H) Limited
SmithKline Beecham (Investments) Limited
SmithKline Beecham (Manufacturing) Limited (ii)
SmithKline Beecham (SWG) Limited
Ordinary
55 Baker Street, London, W1U 7EU, England
Ordinary; Ordinary Euro
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Ordinary
Ordinary Quota
Ordinary
Ordinary
Common;
Preferred A;
Preferred B
Common
Ordinary
Units (Common)
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Shewalton Road, Irvine, Ayrshire, KA11 5AP, Scotland
H-1124, Csorsz utca 43, Budapest, Hungary
c/o OBC Suisse AG, Aeschenvorstadt 71, Basel, 4051, Switzerland
1061 Mountain Highway, Boronia, VIC, 3155, Australia
c/o OBC Suisse AG, Aeschenvorstadt 71, 4051, Basel, Switzerland
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
Corporation Service Company, 2595 Interstate Drive, Suite 103,
Harrisburg, Pennsylvania, 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,
1499-013, 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
Non-cumulative non-redeemables; Ordinary
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Ordinary
Ordinary
Ordinary
SmithKline Beecham Biologicals US Partnership
Partnership Interest
SmithKline Beecham Egypt L.L.C.
SmithKline Beecham Farma, S.A.
SmithKline Beecham Holdings (Australia) Pty. Limited
(in liquidation)
Quotas
Ordinary
Ordinary
SmithKline Beecham Inter-American Corporation (iv)
Common
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Currabinny, Carrigaline, County Cork, Ireland
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Amoun Street, El Salam City, Cairo, Egypt
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos, Madrid,
28760, Spain
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
SmithKline Beecham Limited
Ordinary 6.25p
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
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)
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
SmithKline Beecham Pharma GmbH & Co KG
Partnership Capital
SmithKline Beecham Pharma Verwaltungs GmbH
SmithKline Beecham Pharmaceuticals (Pty) Limited (iv) (vi)
SmithKline Beecham Pharmaceuticals Co.
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, S.R.L. (iv) (vi)
Stiefel Farma, S.A.
Ordinary
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
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, München, 81675, Germany
Prinzregentenplatz 9, München, 81675, Germany
Flushing Meadows Building, The Campus, 57 Sloane Street,
Bryanston 2021, South Africa
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
C/o CIM Corporate Services Ltd, Les Cascades Building,
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
Stiefel GmbH & Co. KG
Partnership Capital
Industriestrasse 32-36, Bad Oldesloe, 23843, Germany
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 282
Other statutory disclosures continued
Group companies continued
Name
Wholly owned subsidiaries continued
Stiefel India Private Limited
Stiefel Laboratories (Maidenhead) Ltd
Stiefel Laboratories (U.K.) Ltd
Stiefel Laboratories Legacy (Ireland) Limited (ii)
Stiefel Laboratories Limited (iv)
Stiefel Laboratories Pte Limited (vi)
Stiefel Laboratories Pty Ltd (in liquidation)
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)
Security
Equity
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common
Ordinary
Ordinary
Ordinary
LLC Interests
Common
Registered address
401-402, A, Wing, 4th Floor, Floral Deck Plaza, Opp Rolta Bhavan,
Central MIDC Road, Mumbai, Andheri (E), 400093, India
Eurasia Headquarters, Concorde Road, Maidenhead, Berkshire,
SL6 4BY, England
Eurasia Headquarters, Concorde Road, Maidenhead, Berkshire,
SL6 4BY, England
Finisklin Business Park, Sligo, Ireland
Eurasia Headquarters, Concorde Road, Maidenhead, Berkshire,
SL6 4BY, England
103 Gul Circle, 629589, Singapore
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 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, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Series A Preference;
Series B Preference; Common
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
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
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.
New Monetary Shares
(99.5%)
Beecham Enterprises Inc. (iv)
Block Drug Company, Inc.
Block Drug Corporation (iv)
British Pharma Group Limited (i)
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
Common
Common
Common
Captial (50%)
Ordinary
Common
Common
Common
Common
A Ordinary;
B Ordinary (0%)
Ordinary
90.7
55.9
63.5
63.5
50
63.5
63.5
91.5
63.5
55
55
75
El Salam City 11491, PO Box 3001, Cairo, Egypt
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 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 Don Chino Roces Avenue, Makati City, Philippines
The Prentice Hall Corporation System, Puerto Rico, Inc., c/o Fast
Solutions, LLC, Citi Tower, 252 Ponce de Leon Avenue, Floor 20,
San Juan, 00918, Puerto Rico
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 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
GSK Annual Report 2017 283
Group companies continued
Name
Security
Effective %
Ownership
Registered address
Subsidiaries where the effective interest is less than 100% continued
Glaxo Wellcome Ceylon Limited
GlaxoSmithKline (Tianjin) Co. Ltd
GlaxoSmithKline Algérie S.P.A.
GlaxoSmithKline Bangladesh Limited
Ordinary;
Ordinary B
Ordinary (90%)
Ordinary
Ordinary (82%)
63.3
90
99.99
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
GlaxoSmithKline Consumer Healthcare (Thailand) Limited
GlaxoSmithKline Consumer Healthcare (UK) IP Limited
GlaxoSmithKline Consumer Healthcare (UK) Trading Limited
Ordinary
Ordinary
Ordinary
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
Ordinary A;
Ordinary B (0%)
GlaxoSmithKline Consumer Healthcare Inc.
GlaxoSmithKline Consumer Healthcare Investments (Ireland)
(No 3) Limited (ii) (v)
GlaxoSmithKline Consumer Healthcare Investments (Ireland)
(No.2) Unlimited Company (ii) (iv) (v)
GlaxoSmithKline Consumer Healthcare Japan K.K.
GlaxoSmithKline Consumer Healthcare Korea Co., Ltd.
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.
Common
Ordinary
Ordinary
Ordinary
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
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
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
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, 251 Little Falls Drive, Wilmington,
Delaware, 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, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
7333 Mississauga Road North, Mississagua, ON, L5N 6L4, Canada
Knockbrack, Dungarvan, Co Waterford, X35 RY76, Ireland
Knockbrack, Dungarvan, Co Waterford, X35 RY76, Ireland
1-8-1 Asasaka Minato-ku, Tokyo, 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, 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
23 Rochester Park, 139234, Singapore
Site Apollo, Avenue Pascal 2-4-6, Wavre, 1300, Belgium
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos, Madrid,
28760, Spain
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 284
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 Healthcare S.p.A.
GlaxoSmithKline Consumer Healthcare Sdn. Bhd.
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
Common
Ordinary
Ordinary
GlaxoSmithKline Consumer Healthcare Vietnam
Company Limited
Charter Capital
63.5
63.5
63.5
63.5
63.5
63.5
63.5
63.5
GlaxoSmithKline Consumer Healthcare, L.P.
Partnership Interest (55.9%) 55.9
GlaxoSmithKline Consumer Healthcare, Produtos para
a Saude e Higiene, Lda
GlaxoSmithKline Consumer Nigeria plc (iii)
GlaxoSmithKline Consumer Private Limited
GlaxoSmithKline Consumer Trading Services Limited
GlaxoSmithKline Costa Rica S.A.
GlaxoSmithKline Dungarvan Limited (ii)
GlaxoSmithKline Healthcare AO
GlaxoSmithKline Healthcare GmbH
Ordinary Quota
Ordinary (46.4%)
Equity
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
GlaxoSmithKline Healthcare Ukraine O.O.O.
Ownership interest
GlaxoSmithKline Limited
GlaxoSmithKline OTC (PVT.) Limited
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 Anonim Sirketi
Ordinary
Ordinary
Equity (75%)
Common
Ordinary (91.2%)
Ordinary
Nominative
GlaxoSmithKline-Consumer Hungary Limited Liability Company
Membership
GSK CH Kazakhstan LLP
GSK Consumer Health, Inc.
Charter Capital
Common
GSK Consumer Healthcare Israel Ltd (iv)
GSK Consumer Healthcare Schweiz AG
GSK Consumer Healthcare Services, Inc.
GSK Consumer Healthcare Singapore Pte. Ltd.
GSK-Gebro Consumer Healthcare GmbH
Iodosan S.p.A.
Kuhs GmbH
Laboratorios ViiV Healthcare, S.L.
Ordinary
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Modern Pharma Trading Company L.L.C.
N.C.H. – Nutrition Consumer Health Ltd (vi)
Novartis Consumer Health Australasia Pty Ltd (iv) (vi)
Novartis Consumer Health GmbH
Quotas (98.2%)
Ordinary
Ordinary;
Redeemable Preference
Ordinary
63.5
46.4
63.5
63.5
63.5
63.5
63.5
63.5
63.5
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
63.5
38.1
63.5
63.5
78.3
98.2
63.5
63.5
63.5
Via Zambeletti snc, Baranzate, Milan, 20021, Italy
Lot 89, Jalan Enggang, Ampang/Ulu Kelang Industrial Estate, Selangor,
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 One, 6th floor (Zone 2),
District 5, Bucharest, Romania
Floor 16, Metropolitan, 235 Dong Khoi, Ben Nghe Ward, District 1,
Ho Chi Minh City, Viet Nam
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1499-013, Portugal
1 Industrial Avenue, Ilupeju, Ikeja, Lagos, PM B 21218, Nigeria
Patiala Road, Nabha 147201, Dist Patiala, Punjab, India
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
Barthstr. 4, München, 80339, Germany
Pavla Tychyny avenue, 1-V, Kiev, 02152, Ukraine
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
252 Dr Annie Besant Road, Mumbai, 400030, India
2266 Chino Roces Avenue, Makati City, Philippines
Boomerang Office Building – Land No. 46, Zone (J) – 1st District,
Town Center – 5th Tagammoe, New Cairo City, Egypt
23 rue François Jacob, 92500, Rueil-Malmaison, France
Büyükdere Caddesi No. 173, 1.Levent Plaza B Blok, 1.Levent, Istanbul,
34394, Turkey
H-1124, Csorsz utca 43, Budapest, Hungary
32 A Manasa Str., Bostandyk District, Almaty, 050008, Kazakhstan
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
25 Basel Street, Petech Tikva 49510, Israel
Suurstoffi 14, Rotkreuz, 6343, Switzerland
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
23 Rochester Park, 139234, Singapore
Bahnhofbichl 1, 6391 Fieberbrunn, Kitzbühel, Austria
Via Zambeletti snc,Baranzate, Milan, 20021, Italy
Barthstr. 4, München, 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
14 Hamephalsim St, Petach Tikva, Israel
82 Hughes Avenue, Ermington, NSW, 2115, Australia
Barthstr. 4, München, 80339, Germany
GSK Annual Report 2017 285
Group companies continued
Name
Security
Effective %
Ownership
Registered address
Subsidiaries where the effective interest is less than 100% continued
Novartis Consumer Health S.A.
Novartis Consumer Health UK Limited
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
Ordinary
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
Shionogi-ViiV Healthcare LLC (iv)
Common Interests
Sino-American Tianjin Smith Kline & French Laboratories Ltd
Ordinary (55%)
SmithKline Beecham (Private) Limited
Ordinary (99.6%)
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
78.3
34.9
63.3
63.5
63.5
Route de I'Etraz 2, 1197 Prangins, Switzerland
Park View, Riverside Way, Watchmoor Park, Camberley, Surrey,
GU15 3YL, England
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, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Jl Pulobuaran Raya Kav III DD/, Kawasan Industri Pulogadung, Timur,
Jakarta, 13930, Indonesia
Graha Paramita 3B Floor, Jl. Denpasar Raya Blok D-2, Kuningan, Jakarta,
12940, Indonesia
Gedung Graha Ganesha Lantai 3, Jl Raya Bekasi Km 17, No5, Jakarta
Timur 13930, Indonesia
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 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
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 Laboratories (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
Ordinary
Ordinary
Participation Interest (97%) 97
Krylatskaya str., 17/3., Moscow, 121614, Russian Federation
Clocherane, Youghal Road, Dungarvan, Co. Waterford, Ireland
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Lot 89, Jalan Enggang, Ampang/Ulu Kelang Industrial Estate, Selangor,
54200, Malaysia
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 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, 251 Little Falls Drive, Wilmington,
Delaware, 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, München, 81675, Germany
Talstrasse 3-5, 3053 Muenchenbuchsee, Switzerland
23/F Tower 6, The Gateway, 9 Canton Road, Harbour City, Tsimshatsui,
Kowloon, Hong Kong
1-8-1 Asasaka Minato-ku, Tokyo, Japan
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
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
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%)
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report
286
Other statutory disclosures continued
Group companies continued
Name
Security
Effective %
Ownership
Registered address
Subsidiaries where the effective interest is less than 100% continued
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 (iv)
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
ViiVHIV Healthcare Unipessoal Lda
Winster Pharmaceuticals Limited (iv)
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
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
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
23 rue François Jacob, 92500, Rueil-Malmaison, 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, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1499-013, 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
Index Ventures Life VI (Jersey) LP
Partnership Interest (25%)
Partnership Interest (25%)
25
Series A and Junior
Preferred (33.9%)
Common (40%)
Common (31.4%)
Ordinary (50%)
Partnership Interest (32%)
Partnership Interest (28%)
43.3
40
25
31.4
50
32
28
Associates
Apollo Therapeutics LLP
Calci Medica Inc.
GlaxoSmithKline Landholding Company, Inc.
Innoviva, Inc.
Japan Vaccine Distribution Co., Ltd
Kurma Biofund II, FCPR
Longwood Founders Fund LP
Medicxi Ventures I LP
Joint Ventures
Chiron Panacea Vaccines Private Limited (in liquidation)
Japan Vaccine Co., Ltd.
Qualivax Pte. Limited
Qura Therapeutics, LLC
Partnership Interest (26.2%) 26.2
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, 251 Little Falls Drive, Wilmington,
Delaware, 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.
GSK Annual Report 2017 287
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
Currency swap
Defined benefit plan
Defined contribution plan
Growth at constant exchange rates.
GlaxoSmithKline plc.
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.
GSK Annual Report 2017Investor informationFinancial statementsGovernance and remunerationStrategic report 288
Index
Access to our high-quality products
Accountability
Accounting principles and policies
Acquisitions and disposals
Adjustments reconciling profit after tax to operating
cash flows
Annual General Meeting 2018
Approach to Brexit
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 annual 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
Ethical conduct and environmental sustainability
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
Global health through science
Glossary of terms
Goodwill
Group companies
Group financial review
How we create long-term value
How we manage risk
Independent Auditors’ report
Industry trends
Inventories
Page
46
96
162
206
204
270
55
56
188
176
96
188
5
4
80
114
212
159
161
158
160
158
36
256
209
200
86
79
110
76
138
128
148,233
180,269
275
180
174
224
50
168
117
176
175
269
213
72
233
248
44
287
182
276
52
8
20
149,234
10
187
Investments in associates and joint ventures
Investor relations
Key accounting judgements and estimates
Key performance indicators
Leadership and effectiveness
Legal proceedings
Major restructuring costs
Modern employer
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 Board
Our long-term priorities
Pay for performance
Pensions and other post-employment benefits
Pharmaceuticals
Pharmaceuticals products, competition and
intellectual property
Pipeline
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 stakeholders
Remuneration governance
Remuneration policy summary
Remuneration report
Reporting framework
Science Committee report
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
Treasury policies
Trust
US law and regulation
Vaccines
Vaccines products, competition and intellectual property
Viability statement
Page
186
273
166
18
88
227
175
48
202
199
168
94
210
59
127
162
173
184
187
187
199
172
198
82
12
120
190
22
254
251
162
226
257
181
244
205
272
204
107
125
142
113
58
109
169
267
201
267
267
272
177
270
189
188
77
42
274
30
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GSK Annual Report 2017 GSK Annual Report 2017
About GSK
GlaxoSmithKline plc was incorporated as an English
public limited company on 6 December 1999. We were
formed by a merger between Glaxo Wellcome plc and
SmithKline Beecham plc. GSK acquired these two
English companies on 27 December 2000 as part
of the merger arrangements.
Our shares are listed on the London Stock Exchange
and the New York Stock Exchange.
Read more at www.gsk.com
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 Edurant
owned by Janssen, Cialis owned by Eli Lilly and Company
and Rituxan owned by Biogen MA Inc. Zofran owned by
Novartis AG and Trumenba owned by Pfizer Inc.
Acknowledgements
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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,
paper waste and are elemental chlorine free.
The manufacturing mill holds the ISO 14001 and
EU Ecolabel certificates for environmental management.
Download PDFs:
Annual Report 2017
Form 20-F
Responsible Business Supplement 2017
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 257 to
266 of this Annual Report. Any forward-looking statements
made by or on behalf of the Group speak only as of the date
they are made and are based upon the knowledge and
information available to the Directors on the date of this
Annual Report.
A number of adjusted measures are used to report the
performance of our business. These measures are defined
on page 58 and a reconciliation of Adjusted results to Total
results is set out on page 67.
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 2018 and 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
expects at least £6 billion of revenues per annum on a CER
basis in 2018 from products launched since 2013 including
contributions from Shingrix.
The assumptions for the Group’s revenue and earnings
expectations assume no material interruptions to supply of
the Group’s products and 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. The 2018 guidance and 2016-2020 outlook
have factored in all divestments and product exits since
2015, including the divestment and exit of more than 130
non-core tail brands (£0.5 billion in annual sales) as
announced on 26 July 2017.
The Group’s expectations assume successful delivery of the
Group’s integration and restructuring plans over the period
2016-2020 including the extension and enhancement to the
combined programme announced on 26 July 2017. Material
costs for investment in new product launches and R&D have
been factored into the expectations given.
Given the potential development options in the Group’s
pipeline, the outlook may be affected by additional
data-driven R&D investment decisions. The expectations are
given on a constant currency basis (2016-2020 outlook at
2015 CER). Subject to material changes in the product mix,
and following the enactment of US tax reform, the Group’s
medium-term effective tax rate is expected to be in the
region of 19-20% of Adjusted profits. This incorporates
management’s best estimates of the impact of US tax reform
on the Group based on the information currently available.
As more information on the detailed application of the US
Tax Cuts and Jobs Act becomes available, the assumptions
underlying these estimates could change with consequent
adjustments to the charges taken that could have a material
impact on the results of the Group.
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
112), 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 112, 148, 233 and 257 to 286 inclusive comprise the
Directors’ Report, pages 2 to 78 inclusive comprise the
Strategic report and pages 113 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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