Annual Report
2018
GSK Annual Report 2018
Contents
Strategic report
GSK at a glance
Chairman’s statement
CEO’s statement
Financial performance
Our long-term priorities
Key performance indicators
Industry trends
Stakeholder engagement
Our business model
Pharmaceuticals
Vaccines
Consumer Healthcare
Trust
Risk management
Group financial review
Corporate Governance
Financial statements
01
02
03
04
07
08
09
11
12
13
18
21
24
34
37
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
Remuneration report
66
68
71
72
77
79
79
89
91
92
96
Chairman’s annual statement
Annual report on remuneration
98
2017 Remuneration policy summary 120
Directors’ statement of
responsibilities
Independent Auditor’s report
Financial statements
Notes to the financial statements
Financial statements of
GlaxoSmithKline plc prepared
under UK GAAP
Investor information
Quarterly trend
Five-year record
Product development pipeline
Product, competition and
intellectual property
Principal risks and uncertainties
Share capital and share price
Dividends
Financial calendar
Annual General Meeting 2019
Tax information for shareholders
Shareholder services and contacts
US law and regulation
Group companies
Glossary of terms
126
128
140
144
219
224
229
235
238
241
251
253
253
254
254
256
258
260
271
Cautionary statement
See the inside back cover of this document for the cautionary statement
regarding forward-looking statements.
Non-financial information statement
The following aligns to the non-financial reporting requirements contained in sections 414CA and 414CB of the Companies Act 2006.
Description of the business model
Human rights
Policy, due diligence and outcomes
GSK at glance
Our business model
Social matters
Global health
Health security
Affordability and availability
Employees
Employee engagement
Diversity
Wellbeing and development
Gender pay gap
Living our values and expectations
Board diversity
01
12
25
26
26
28
28
29
28
30
28
Human rights
Data and engagement
Third parties
Anti-corruption and bribery
Living our values and expectations
Reporting and investigating concerns
Anti-bribery and corruption
Environmental matters
Carbon, water and waste
31
31
31
30
30
30
32
Summary of our principal risks
Principal risks and uncertainties
Viability statement
Audit & Risk Committee report
Our policies
34
241
44
79
All of our public policies, codes and standards
are available on gsk.com
Non-IFRS measures
We use a number of adjusted, non-IFRS, measures to report the performance of our business. Total reported results represent the Group's overall performance
under IFRS. Adjusted results and other non-IFRS measures may be considered in addition to, but not as a substitute for or superior to, information presented
in accordance with IFRS. Adjusted results and other non-IFRS measures are defined on pages 40 to 42 and reconciliations to the nearest IFRS measures are
on pages 51 and 56.
We believe that Adjusted results, when considered together with Total results, provide investors, analysts and other stakeholders with helpful complementary
information to understand better the financial performance and position of the Group from period to period, and allow the Group's performance to be more
easily compared against the majority of its peer companies. These measures are also used by management for planning and reporting purposes. They may
not be directly comparable with similarly described measures used by other companies.
01
GSK at a glance
We are a science-led global healthcare company.
Our purpose is to help people do more, feel better,
live longer.
We have three global businesses that discover, develop
and manufacture innovative pharmaceutical medicines,
vaccines and consumer healthcare products. Every day,
millions of patients and consumers across the world use
our products. In 2018, we delivered around 2.3 billion
packs of medicine, 770 million vaccine doses and
3.8 billion consumer healthcare products.
In 2018, our turnover was £30.8 billion, up 2% at actual
exchange rates (AER), 5% at constant exchange rates
(CER). The US is our largest single commercial market,
representing 39% of revenue, followed by International
at 35% and Europe at 26%.
Our 95,490 employees across the world are driven
by our purpose and our goal to become one of the
world’s most innovative, best-performing and trusted
healthcare companies.
Our strategy is 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.
We are a science-led healthcare company. In 2018,
we invested £3.9 billion in R&D and announced a new
approach to our R&D focusing on science related to
the immune system, human genetics and advanced
technologies.
Our three long-term priorities of Innovation, Performance
and Trust are designed to create long-term value for
patients, consumers and shareholders. Our values –
patient focus, transparency, respect and integrity –
and our expectations – courage, accountability,
development and teamwork – define our culture.
Pharmaceuticals
Vaccines
Consumer Healthcare
Our Pharmaceuticals business
has a broad portfolio of innovative
and established medicines, with
leadership positions in respiratory
and HIV. We are strengthening
our pipeline through a focus on
immunology, human genetics and
advanced technologies to help
us identify the most promising
new medicines.
We are the leading Vaccines company
in the world, delivering over 2 million
vaccine doses every day to people
living in 158 countries. Our portfolio
and pipeline help protect individuals
throughout their lives. We have
recently introduced breakthrough
vaccines Shingrix for shingles and
Bexsero, the first vaccine for
meningitis B.
Our Consumer Healthcare business
develops and markets a portfolio
of globally recognised consumer-
preferred and expert-recommended
brands in the oral health, pain relief,
respiratory, skin health, nutrition and
digestive health categories. These
category-leading brands include
Sensodyne, parodontax, Poligrip,
Voltaren, Panadol, Otrivin and Theraflu.
Read more on page 13
Read more on page 18
Read more on page 21
Turnover
Respiratory
HIV
Immuno-inflammation
Established Pharmaceuticals
Total
£m
6,928
4,722
472
5,147
17,269
Turnover
Meningitis
Shingles
Influenza
Established Vaccines
Total
£m
881
784
523
3,706
5,894
Turnover
Wellness
Oral health
Nutrition
Skin health
Total
£m
3,940
2,496
643
579
7,658
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 02
Chairman’s statement
I am pleased to report that 2018 was a year of good financial performance for
GSK with improvements in sales, earnings and, particularly, cash flow generation.
The delivery against operating targets was excellent, with notably successful
launches of new products. It was also a year in which the strategic shape
of GSK in the coming years has been redefined.
Research & development
Success in R&D will always be fundamental to shareholder returns.
A renewed focus on R&D was set out by Emma Walmsley when she
became CEO in 2017, and a new plan to improve the pipeline of new
medicines has now been launched by Dr Hal Barron, our new Chief
Scientific Officer.
Progress is most evident in oncology, with some promising assets
in our own laboratories. We have also acquired Tesaro, an oncology
focused biotechnology company based in Boston, which has
a marketed oncology product and several pipeline assets with
development potential. Even more recently, we have proposed
an alliance with Merck KGaA, Darmstadt, Germany to develop
a promising new oncology medicine.
Through the Board Science Committee, the Directors continue
to engage closely with the executives on the actions being taken
to improve scientific innovation. A focus on world-class innovation
is essential to drive long-term value for investors.
Future direction
In addition to increasing investment in Pharmaceuticals, we also
took steps to strengthen the Consumer Healthcare business in 2018.
The first step was the buyout of the put option held by Novartis in
respect of their minority stake in GSK Consumer Healthcare, which
was completed in June. The second step was the announcement
in December to create a new Consumer Healthcare Joint Venture
with Pfizer.
This latter transaction offers the opportunity to create substantial
value for shareholders through a new world-leading Consumer
Healthcare business and has a significant bearing on the future
shape of the Group. This transaction would transform the scale
of GSK’s Consumer Healthcare business and therefore the Board
has stated that GSK intends to separate the Joint Venture within
three years of the completion of the transaction. This sets out a
path for GSK to create two focused new companies, with separate
listings and appropriate capital structures. Each business will be
well positioned to deliver attractive returns to shareholders and
benefits to patients and consumers.
The Board fully supports the proposed transaction with Pfizer and
is seeking approval from shareholders at a General Meeting which
will be held immediately after this coming Annual General Meeting.
A separate Circular recommending the transaction will be made
available to shareholders prior to the Annual General Meeting.
Capital allocation
Improving GSK’s pipeline of new medicines remains the first priority
for investment. We also continue to invest behind key products,
including increasing the manufacturing capacity of Shingrix,
GSK’s very successful new vaccine to help prevent shingles.
Dividend payments form part of the Group’s capital allocation
framework and the Board recognises the importance of dividends
to shareholders. Total dividends of 80p per share were paid in 2018
and for the first time in several years the cash flow has covered the
dividend payments. The same level of dividend is expected in 2019.
Cash generation should remain a key focus given the marked
increase in net debt, most of which arose from taking full control
of the Consumer Healthcare business.
Financial reporting
I have noted before that commercial structures and reporting
requirements sometimes lead to more complexity in reporting
than we would like. We continue to evolve our financial reporting
and over the course of 2018 we made further changes to give
greater prominence to Total results, which represent the Group’s
overall performance experienced by shareholders. The company
is committed to continuous improvement in this area in line with
evolving regulatory requirements and best practice.
Succession
In 2018, we announced that Simon Dingemans would step down
as Chief Financial Officer at this coming AGM after more than eight
years with GSK. I would like to thank him for his service to GSK.
Succeeding Simon, is Iain Mackay, formerly Group Finance Director
for HSBC, who we welcomed to the Board in January 2019.
This will be my last Annual Report as Chairman, following my
decision at the start of the year to step down from the Board.
GSK is one of the world’s great businesses and it has been
an enormous privilege to serve as its Chairman.
Under Emma’s leadership, GSK has made very good progress.
With the announcement of the intended separation in a few years’
time, I believe this is the right moment to step down and allow
a new Chair to oversee this process through to its conclusion.
Our Senior Independent Director, Vindi Banga, is leading the
search to appoint my successor.
I would like to thank all of GSK’s employees and partners for
their hard work throughout 2018, and our shareholders and
customers for their continued support.
Philip Hampton
Chairman
GSK Annual Report 2018 03
CEO’s statement
In 2018, GSK made significant progress against our long-term priorities of
Innovation, Performance and Trust, underpinned by a continuing shift in culture.
We delivered improved operating performance, started to strengthen
our Pharmaceuticals pipeline, particularly in oncology, and undertook
several significant transactions to support our strategy and reshape
the Group’s portfolio. Our focus for 2019 will be sustained delivery of
this progress and, in particular, continued development of the pipeline.
2018 performance
Group sales were £30.8 billion, up 2% at actual exchange rates
(AER) and up 5% at constant exchange rates (CER). Sales growth
was driven by new products. The standout continues to be Shingrix,
our vaccine for shingles, which had sales of £784 million – a
remarkable launch year for the vaccine. Our HIV medicines also
continued to grow with sales of £4.4 billion for our dolutegravir-
based products. And in respiratory we continued to build our new
portfolio with sales of £2.6 billion, including good performances
from Trelegy Ellipta – our new three-in-one medicine for chronic
obstructive pulmonary disease (COPD) – and Nucala, our biologic
medicine for severe asthma.
Total Group operating margin was 17.8%, up 4.3 percentage points
AER and 5.0 percentage points CER. Adjusted Group operating
margin was 28.4%, flat AER and up 0.5 percentage points CER.
Total earnings per share more than doubled to 73.7p AER and
CER, and Adjusted earnings per share were up 7% AER, 12%
CER at 119.4p.
We remain focused on controlling costs and cash generation
and I was very pleased that free cash flow was significantly
improved at £5.7 billion, up 63% in actual terms compared with
2017. We delivered on our expectation of paying an 80p per share
dividend in 2018 and expect to pay 80p per share in 2019.
Strengthening the pipeline
I have consistently said our key priority is to strengthen the
Pharmaceuticals pipeline to develop the next generation of medicines
for patients, and 2018 demonstrated good progress against this
objective, particularly in oncology. By advancing key internal assets
as well as targeted business development, we will have 161 oncology
assets in clinical development – double the number we had at the
start of 2018. Our acquisition of Tesaro added a major new product
to our portfolio, Zejula, which is approved for use in ovarian cancer
and we see strong development prospects for this product and the
other assets acquired in this transaction. We are pleased that we
will be adding to our portfolio with our proposed global alliance
with Merck KGaA, Darmstadt, Germany to co-develop and
co-commercialise a novel immunotherapy asset.
In 2019, we expect major data readouts and other significant
newsflow on several new medicines. We expect pivotal data
from three oncology assets which all have potential to be launched
in the next two years. We also expect an approval decision from the
US Food & Drug Administration (FDA) for dolutegravir + lamivudine
and FDA filings for two other new medicines in HIV, a phase III start
for a new treatment for rheumatoid arthritis, and results of a pivotal
respiratory study to support filing of Trelegy Ellipta for use in asthma.
Accelerating our strategy and reshaping our business
In line with our capital allocation priorities, through 2018 we
undertook a series of transactions to accelerate our strategy
and reshape our business. In June, we acquired full ownership
of our Consumer Healthcare business by buying out Novartis’
minority stake, and in December we reached agreement with
Unilever to divest Horlicks and other consumer nutrition products.
Expected proceeds from the disposal will be used to reduce
debt and increase our investment flexibility.
In December, we also announced the formation of a Consumer
Healthcare JV with Pfizer. When completed, this would create
a new global leader in Consumer Healthcare. The proposed
transaction also supports our key priority to strengthen the
Pharmaceuticals business by increasing cash flows. And with
our intention to separate we have set a clear direction for the
Group with the ultimate aim of creating two exceptional UK-based,
global companies. One, a Pharmaceuticals/Vaccines company,
with an R&D approach focused on science related to the immune
system, human genetics and advanced technologies. The other,
a new world-leading Consumer Healthcare company.
Building Trust
Trust is the third long-term priority I set out alongside Innovation
and Performance and is vitally important to me and all employees
at GSK. In 2018, we set out new commitments to build Trust with
a strong focus on three principal areas: using our science and
technology to address health needs, making our products more
affordable and available, and being a modern employer.
We are committed to providing access to our medicines and
vaccines across the world, and I was pleased that we once again
topped the Access to Medicines Index. I was also delighted to see
the approval of tafenoquine for P. vivax malaria and the encouraging
data we published on our potential vaccine for tuberculosis (TB),
which remains the leading cause of death through infectious
disease worldwide.
We also continue to drive a necessary shift in culture towards
one that is focused on performance and based on living our values
(patient focus, transparency, respect and integrity) and expectations
(courage, accountability, development and teamwork). Employee
engagement is key to the progress we are making here, and our
people are encouraged to share their views and ideas on key topics
through regular conversations hosted by our leaders, including
myself and my executive team.
2019 will be an important year for GSK as we continue to strengthen
our Pharmaceuticals pipeline, execute on our announced transactions,
and sustain improved operating performance, particularly as we
navigate the introduction of generic Advair in the US, for which
we have anticipated and prepared. We will remain vigilant in what
is a dynamic operating environment and continue to invest in our
long-term priorities, so that we can bring benefits to the patients
and consumers that we serve.
Finally, I want to sincerely thank all of our customers, suppliers,
investors and employees for their support and hard work in 2018
and I look forward to our continued partnership for an exciting
year ahead.
Emma Walmsley
Chief Executive Officer
1 Includes M7824, the subject of the proposed alliance with Merck KGaA, Darmstadt,
Germany, expected to close in Q1 2019.
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 04
Financial performance
Total results
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 interest in 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
How we performed
Cost of sales
Cost of sales as a percentage of turnover was 33.2%, down
1.0 percentage points AER and 1.4 percentage points CER.
This primarily reflected a favourable comparison with the write-
downs of assets in 2017 related to the decision to withdraw
Tanzeum, together with a more favourable product mix in
Vaccines and Consumer Healthcare.
Selling, general and administration
SG&A costs as a percentage of turnover were 32.2%, up
0.1 percentage points at both AER and CER. The increase
primarily reflected higher restructuring costs and investment
in promotional product support, particularly for new launches
in Respiratory, HIV and Vaccines.
Research and development
R&D expenditure was £3,893 million. (12.6% of turnover),
13% AER, 12% CER lower than in 2017. The reduction reflected
lower restructuring costs primarily due to the comparison with
the provision for obligations in 2017 as a result of the decision
to withdraw Tanzeum. In addition, there were lower intangible
asset impairments and a favourable comparison with the impact
of the Priority Review Voucher purchased and utilised in 2017.
2018
% of
turnover
100
(33.2)
£m
30,186
(10,342)
66.8
19,844
(32.2)
(12.6)
1.0
(5.2)
17.8
(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
£m
30,821
(10,241)
20,580
(9,915)
(3,893)
299
(1,588)
5,483
(717)
3
31
4,800
(754)
15.7%
4,046
423
3,623
73.7p
2017
% of
turnover
100
(34.3)
65.7
(32.0)
(14.8)
1.1
(6.5)
13.5
Growth
CER%
5
–
7
5
(12)
(17)
43
£%
2
(1)
4
3
(13)
(16)
34
36
46
87
100
>100
>100
Other operating income/(expense)
Other operating expense primarily reflected accounting charges
arising from the remeasurements of the contingent consideration
liability related to the acquisition of the former Shionogi-ViiV
Healthcare joint venture and the Consumer Healthcare Joint Venture
put option previously held by Novartis, partly offset by the profit
on a number of asset disposals.
Operating profit
Total operating profit was £5,483 million in 2018 compared with
£4,087 million in 2017. The increase primarily reflected a favourable
comparison with charges in 2017 arising from the impact of US
tax reform on the valuations of the Consumer Healthcare and HIV
businesses and reduced asset impairments and restructuring costs
in cost of sales and R&D.
Tax
The charge of £754 million represented an effective tax rate on
Total results of 15.7% (2017 – 38.5%) and reflected the different
tax effects of the various Adjusting items. The reduction in the
effective tax rate was driven primarily by a favourable comparison
with the impact of US tax reform, which resulted in a number of
charges in 2017.
Non-controlling interests
The allocation of earnings to non-controlling interests amounted
to £423 million (2017 – £637 million). The reduction was primarily
due to the lower allocation of Consumer Healthcare profits following
the buyout of Novartis’ interest.
Earnings per share
Total earnings per share was 73.7p, compared with 31.4p in 2017.
GSK Annual Report 2018 05
GSK has undertaken a number of Major restructuring programmes
in recent years in response to significant changes in the Group’s
trading environment or overall strategy, or following material
acquisitions, including the Novartis transaction in 2015. Costs,
both cash and non-cash, of these programmes are provided
for as individual elements are approved and meet the accounting
recognition criteria. As a result, charges may be incurred over
a number of years following the initiation of a Major restructuring
programme.
GSK is committed to continuously improving its financial reporting,
in line with evolving regulatory requirements and best practice and
has made a number of changes in recent years. In line with this
practice, GSK expects in 2019 to continue to review its reporting
framework (including, where relevant, the use of alternative
performance measures).
Intangible
asset
amortisation
£m
Intangible
asset
impairment
£m
Major
restructuring
£m
Transaction
-related
£m
Divestments,
significant
legal and
other items
£m
536
536
44
69
69
2
45
580
116
443
443
315
49
2
809
4
580
(109)
116
(19)
813
(170)
471
97
643
Adjusted
results
£m
30,821
(9,178)
21,643
(9,462)
(3,735)
299
–
8,745
(698)
–
31
8,078
(1,535)
19.0%
6,543
674
5,869
15
15
98
1,864
1,977
(3)
1,974
(239)
1,735
251
1,484
–
–
38
20
(278)
(220)
18
(3)
(205)
(244)
(449)
(449)
471
9.6p
97
2.0p
643
13.1p
30.2p
(9.2)p
119.4p
Total and Adjusted results
Total reported results represent the Group’s overall performance.
GSK uses a number of Adjusted, non-IFRS, measures to report the
performance of its business. Adjusted results and other non-IFRS
measures may be considered in addition to, but not as a substitute
for or superior to, information presented in accordance with IFRS.
See page 40 for a fuller definition.
GSK believes that Adjusted results, when considered together with
Total results, provide investors, analysts and other stakeholders with
helpful complementary information to understand better the financial
performance and position of the Group from period to period, and
allow the Group’s performance to be more easily compared against
the majority of its peer companies. These measures are also used
by management for planning and reporting purposes. They may not
be directly comparable with similarly described measures used by
other companies.
GSK encourages investors and analysts not to rely on any
single financial measure but to review GSK’s Annual Reports,
including the financial statements and notes, in their entirety.
Adjusting items
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
Adjusting items
Total
results
£m
30,821
(10,241)
20,580
(9,915)
(3,893)
299
(1,588)
5,483
(717)
3
31
4,800
(754)
15.7%
4,046
423
3,623
73.7p
Intangible asset amortisation and impairment
Amortisation and impairment of intangible assets excludes computer
software and goodwill.
Transaction-related
Transaction-related accounting or other adjustments related
to significant acquisitions.
Major restructuring
Major restructuring costs, which include impairments of tangible
assets and computer software (under specific Board-approved
programmes that are structural, of a significant scale and where
the costs of individual or related projects exceed £25 million),
including integration costs following material acquisitions.
Divestments, significant legal and other items
Proceeds and costs of disposals of associates, products and
businesses; significant legal charges (net of insurance recoveries)
and expenses on the settlement of litigation and government
investigations; other operating income other than royalty income,
and other items.
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 06
Financial performance continued
Adjusted results
Turnover
Cost of sales
Gross profit
Selling, general and administration
Research and development
Royalty income
Operating profit
Net finance costs
Share of after tax profits of associates and joint ventures
Profit before taxation
Taxation
Tax rate
Profit after taxation
Profit attributable to non-controlling interests
Profit attributable to shareholders
Earnings per share
How we performed
Cost of sales
Cost of sales as a percentage of turnover was 29.8%,
up 0.7 percentage points at AER, 0.4 percentage points
at CER. The increase primarily reflected continued adverse
pricing pressure in Pharmaceuticals and Established Vaccines
as well as increased input costs.
Selling, general and administration
SG&A costs as a percentage of turnover were 30.7%, down
0.2 percentage points at AER, 0.3 percentage points at CER.
This decrease reflected the impact of sales growth partly offset
by a cost increase of 1% AER, 4% CER, primarily resulting from
increased investment in promotional product support, particularly
for new launches in Respiratory, HIV and Vaccines.
Research and development
R&D expenditure was £3,735 million (12.1% of turnover), down 3%
AER, 2% CER. This primarily reflected the favourable comparison
with the impact of the Priority Review Voucher purchased and
utilised in 2017 and the benefit of the prioritisation initiatives
started in the second half of 2018.
Operating profit
Adjusted operating profit was £8,745 million, up 2% AER,
6% CER on a turnover increase of 5%. The Adjusted operating
margin of 28.4% was flat at AER but up 0.5 percentage points
at CER. This reflected the benefit from sales growth at CER in
all three businesses, a more favourable mix, primarily in Vaccines
and Consumer Healthcare, and reduced R&D expenditure.
2017
% of
turnover
100
(29.1)
70.9
(30.9)
(12.8)
1.2
28.4
2018
% of
turnover
100
(29.8)
70.2
(30.7)
(12.1)
1.0
28.4
£m
30,821
(9,178)
21,643
(9,462)
(3,735)
299
8,745
(698)
31
8,078
(1,535)
19.0%
6,543
674
5,869
119.4p
£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
111.8p
Growth
CER%
5
6
4
4
(2)
(17)
6
6
9
12
£%
2
5
1
1
(3)
(16)
2
2
5
7
Tax
Tax on Adjusted profit was £1,535 million representing an effective
Adjusted tax rate of 19.0% (2017 – 21.0%). The reduction in the
effective rate was primarily driven by the reduction in the US federal
tax rate.
Non-controlling interests
The allocation of Adjusted earnings to non-controlling interests
amounted to £674 million (2017 – £793 million). The reduction
was primarily due to the lower allocation of Consumer Healthcare
profits following the buyout of Novartis’ interest.
Earnings per share
Adjusted EPS of 119.4p was up 7% AER, 12% CER, compared
with a 6% CER increase in Adjusted operating profit, primarily
as a result of a reduced non-controlling interest allocation of
Consumer Healthcare profits and a lower Adjusted tax rate.
GSK Annual Report 2018 07
Our long-term priorities
We deliver our long-term priorities through each of our three
businesses. They are designed to create long-term value for patients,
consumers and shareholders, and are underpinned by our ambition
to build a culture with a greater performance focus, aligned to our
values and expectations.
This page sets out our 2018 objectives, highlights progress
in 2018 and our key objectives for 2019, with more detail provided
in the relevant business sections.
Our long-term priorities apply to our three businesses
Innovation
Performance
Trust
We invest in scientific and technical
excellence to develop and launch
a pipeline of new products that meet
the needs of patients, payers and
consumers.
2018 objectives
We deliver growth based performance
by investing effectively in our
business, developing our people
and executing competitively.
2018 objectives
– Excellent execution of key launches:
Trelegy Ellipta, Juluca, and Shingrix
– Strengthen Pharmaceutical pipeline
through greater focus, improved medicines
development and business development
– Grow sales in priority therapy areas,
categories and markets
– Increase operating margins and deliver
improved cash flow
– Strengthen top talent profile in key roles
We are a responsible company and
commit to use our science and
technology to address health needs,
make our products affordable and
available and to be a modern employer.
2018 objectives
– Focus on supply service levels
– Define new global health approach
– Competitive employee engagement
2018 progress
2018 progress
2018 progress
– Delivered industry-leading launches of
Shingrix and Trelegy Ellipta, with strong
start to sales of Juluca
– New R&D approach to focus on science
of the immune system, human genetics
and advanced technologies
– Strengthened pipeline through strategic
business development with 23andMe and
Tesaro and terminated or divested around
80 programmes to focus investment on
most promising assets
– Significant progress in reshaping
Pharmaceuticals R&D portfolio, with 331
of 46 new medicines targeting modulation
of the immune system
– Group sales £30.8 billion, up 2% AER,
5% CER, with growth in new respiratory
product sales and HIV
– Total Group operating margin 17.8%,
up 4.3 percentage points AER, up
5.0 percentage points CER. Adjusted
Group operating margin 28.4%, flat AER,
up 0.5 percentage points CER
– Net cash flow from operations £8.4 billion,
up from £6.9 billion. Free cash flow
£5.7 billion, up from £3.5 billion
– Announced transaction to create a
world-leading Consumer Healthcare Joint
Venture with Pfizer and bought out Novartis’
stake in GSK Consumer Healthcare
– Key leadership appointments in place
with 69% of top 125 leaders new in role
– Established new set of priorities and public
commitments to build trust
– Continued to simplify supply chain and
improve supply performance
– Received approval for tafenoquine, the first
new treatment for P. vivax malaria in 60 years
– Candidate TB vaccine showed positive
results in phase IIb trial
– Competitive employee engagement through
focus on modern employer
– All employees globally to have access
to a preventive healthcare package
2019 objectives
2019 objectives
2019 objectives
– Deliver continued strong sales of Trelegy
Ellipta, Nucala, HIV two-drug regimen
and Shingrix
– Continue to strengthen pipeline through
execution of new R&D approach,
accelerating priority assets and optimising
recent strategic business development
transactions
– Continue to drive sales growth and
operational performance
– Successful integration of Tesaro
– Deliver restructuring benefits and plan
for the integration of Pfizer’s consumer
healthcare business
– Accelerate capability build in priority areas
including digital data and analytics
– Focus on supply service levels, execute
portfolio and network simplification
– Deliver progress on Trust commitments
– Progress global health research in TB
and HIV
– Deliver modern employer programmes
to empower employees to be themselves,
feel good and keep growing at GSK
Culture
We are committed to building a new culture at GSK to accelerate delivery of our long-term priorities. In 2018, our focus was to establish a new set of
expectations – courage, accountability, development and teamwork – alongside our values – patient focus, transparency, respect and integrity – and
introduce a new approach to performance and reward. In 2019, we aim to continue to embed organisational understanding of how our values and
expectations will support a change in culture, leading to improved culture scores, and further embed our new performance system.
Principal risks
Our Principal risks are patient safety: product quality; financial controls and reporting; anti-bribery and corruption; commercial practices; privacy;
research practices; third party oversight; environment, health and safety, and sustainability; information security; and supply continuity. Our risk
management framework is designed to support our long-term priorities. More detailed information can be found on pages 34 to 36 and 241 to 250.
1 Includes M7824, the subject of the proposed alliance with Merck KGaA, Darmstadt, Germany, expected to close in Q1 2019.
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 08
Key performance indicators
Our 10 operating key performance indicators (KPIs) track progress
against our long-term priorities. They measure how we are performing
at an overall Group level and across our three businesses. They are
reviewed regularly by our Corporate Executive Team and the Board,
and employees are updated on progress every quarter. In 2018, we
launched a new performance system to align employees’ bonuses
to a relevant subset of our ten KPIs. The remuneration policy used
to reward the performance of our executives includes measures
linked to our KPIs (see pages 97, 101 and 103).
On this page 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.
We use a number of adjusted, non-IFRS, measures to report the
performance of our business, as described on pages 40 to 42,
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.
Innovation
2018
£bn
2018 growth
£%
CER%
2017
£bn
2016
£bn
Innovation sales R
Sales of Pharmaceuticals and Vaccines products launched in the last five years
5.7
43
46
4.0a
2.6a
For internal purposes we also measure pipeline value and progress.
Performance
Group turnover R
Operating profit and margin R
Total operating profit
Adjusted operating profit
Total margin
Adjusted margin
Free cash flow R
2018
£bn
30.8
5.5
8.7
17.8%
28.4%
2018 growth
CER%
5
43
6
£%
2
34
2
2017
£bn
30.2
2016
£bn
27.9
4.1
8.6
13.5%
28.4%
2.6
7.7
9.3%
27.5%
5.7
63
3.5b
3.3b
For internal purposes we also measure market share, and top talent in key roles.
Trust
Employee engagement
Employee engagement scores from our global employee survey
For internal purposes we also measure supply service levels and corporate reputation.
2018
78%
2017
2016
79%
R Linked to Executive LTI awards and bonus, see pages 97, 101 and 103.
a Comparative information reflects sales of those products that meet the definition for 2018.
b Revised to include proceeds from the sale of intangible assets.
GSK Annual Report 2018 09
Industry trends
The healthcare industry is changing rapidly and has strong growth
potential. Our strategy and long-term priorities, underpinned by
our culture, are designed to put us in the best position to be able
to respond to the opportunities and challenges that this presents.
Global economic growth remained steady in 2018, with a projected
annual growth rate of 3.7%1. This was despite concerns over
international trade, the weaker economic performance in some
countries, notably Europe and Asia, and geopolitical friction.
In Europe, a lack of clarity about the nature of the UK’s future
relationship with the EU caused some political and economic
uncertainty (see page 36).
The global healthcare market continues to grow, despite signs of
economic slowdown in some countries. Worldwide pharmaceutical
sales totalled £731 billion2 from September 2017–2018, up 5%.
North America remains the largest pharmaceutical market with
a 47% share of global sales, with Europe representing 16%3.
China is the second largest individual country for pharmaceutical
sales, representing 8% of global sales3. Global vaccine sales
rose to approximately £20.6 billion in 2018, up 7.3% from 20174.
Global consumer healthcare sales are estimated to be
approximately £135 billion4.
Global trends: opportunities and challenges
Positive demographics
Demographic change is driving demand for both preventive and
therapeutic healthcare products. People are living longer, with
the number of over 65-year-olds due to double between 2017
and 2050, and the global population is expanding, with the
worldwide headcount due to grow by more than 1 billion between
2015 and 2030, to 8.5 billion. Increasing affluence, changing
diets and lifestyles and longer lifespans are all contributing to
rising demand for healthcare, especially in areas such as cancer
and respiratory disease.
Advances in science and technology
Rapid advances in science and technology are transforming
healthcare and increasing the probability of success in R&D.
Better understanding of human biology and genetics is enabling
scientists to identify and develop novel, targeted treatments and
vaccines. Advances in digital technology, data and analytics
meanwhile allow researchers to explore and interpret a greater
volume of data much faster than before. The insights gained are
accelerating and improving the development of preventive and
therapeutic medicines and vaccines, and enabling manufacturers
and purchasers of healthcare products to better measure their
effectiveness. Technology is also now central to the way people
discover, assess and buy healthcare products, with 2018 US
research suggesting that 75% of consumers surveyed consider
that technology plays an important part in managing their
own health.
Pricing and access
The pricing of healthcare products continues to attract significant
attention from governments and the public, with calls for better
transparency on how prices are set and a greater emphasis on health
outcome-based pricing. Specialty medicines continue to receive
particular attention; their pricing reflects the therapeutic benefits
and small number of patients covered by targeted treatments.
Government and payer budgets remain subject to increasing reviews
as demand for healthcare grows, due to demographic change, the
push for universal health coverage and advances in preventive care
and treatment. Despite this, innovative medicines that are clearly
differentiated in areas of unmet medical need will continue to
attract strong coverage and funding in developed markets.
In the US, there is variability in how drugs are funded and reimbursed
across insurance programmes. The current administration is
undergoing a comprehensive review of drug pricing. During 2018,
it published the drug pricing Blue Print in an effort to lower prices of
pharmaceutical medicines for patients across the US. The Blue Print
focuses on improved competition, better government negotiation,
incentives for lower list prices and lowering out-of-pocket costs for
patients. The administration aims to achieve this through a number
of mechanisms, such as limiting rebates, introducing international
reference pricing to compare domestic drug prices with other
countries, value-based pricing pilots and reform of Medicare.
In Europe and emerging markets, international reference pricing
continues to gain traction, with over 70 markets now involved
globally, although many countries continue to negotiate confidential
contracts with manufacturers. Increasingly, countries are also
cooperating on pricing, procurement and health technology
assessments (HTAs), which assess the clinical and cost-
effectiveness and broader impacts of healthcare treatments.
A new HTA regulation has been proposed in Europe that would
centralise the clinical assessments of new medicines and medical
devices. This is now going through the legislative process.
In China, the authorities accelerated progress towards bringing
innovative treatments to market. This included increasing the
pace and frequency of reimbursement coverage, especially
for oncology drugs.
In Japan, the government continues to seek to expedite and
expand drug development. However, in 2018 a significant reduction
in the price maintenance premium, which exempts certain innovative
medicines from annual price reductions, eroded price stability
and plans to introduce a new HTA system have created further
uncertainty.
1 IMF World Economic Outlook Update, January 2019.
2 The volatility of the 2018 sterling exchange rate, and revised data collection methods at research
provider IQVIA, mean that this year’s global figure is not entirely comparable with 2017 (£738 billion).
3 IQVIA data.
4 Internal data.
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration Our strategic response
Our strategy – 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 – is designed to respond to these trends. Our long-term
priorities, underpinned by our culture, will help us deliver our strategy:
Innovation: we invest in scientific and technical excellence to
develop and launch a pipeline of new products that meet the needs
of patients, payers and consumers.
Performance: we deliver growth based performance by investing
effectively in our business, developing our people and executing
competitively.
Trust: we are a responsible company and commit to use our science
and technology to address health needs, make our products
affordable and available and be a modern employer.
We are making important progress on these long-term priorities
(see page 7), which is enabling us to respond to the dynamic
environment in which we operate. To harness advances in science
and technology, we are forming partnerships to bring ground-
breaking products to patients faster. We aim to manage pricing
pressure by researching and developing differentiated medicines
that will attract the greatest coverage and funding, and by pricing
our medicines according to the value and outcomes they bring to
patients, providers and payers. We are committed to building trust
by addressing societal expectations and by operating responsibly
and transparently.
10
Industry trends continued
Regulatory environment
Healthcare is a highly regulated industry, reflecting public
expectations that products comply to stringent levels of quality,
safety and efficacy. Governments are increasingly extending the
regulatory remit to support accelerated development and the
introduction of new medicines with, for example, China, Japan and
the US recently introducing regulatory approaches to encourage
pharmaceutical innovation. Meanwhile, work on cross-border
harmonisation of pharmaceutical regulation is increasing through
supra-national bodies such as the International Conference of
Drug Regulatory Authorities and the International Council for
Harmonisation. In this context, the healthcare industry supports
close cooperation on medicine regulation systems and processes
between the UK and EU after Brexit.
Competition
The healthcare sector remains intensely competitive, with companies
increasingly pursuing acquisitions and collaborations to strengthen
their pipelines and portfolios. In 2018, notable M&A activity
included Takeda’s $59 billion acquisition of Shire Pharmaceuticals.
This momentum continued in early 2019, with Bristol-Myers Squibb
announcing its intention to buy Celgene for $74 billion.
Intellectual property (IP) protection is important to continue to
incentivise innovation. This helps research-based healthcare
companies ensure a reasonable return on their investments and
allows them to continue to conduct research, and develop new and
innovative medicines. Once IP protection expires, or if challenges
to a patent are upheld, generic competitors can rapidly capture
a large share of the market.
Vaccines and other biologics do not face such exposure to generic
competition through these ‘patent cliffs’. They are complex and
more dependent on technical manufacturing processes.
In consumer healthcare, the over-the-counter (OTC) sector has seen
the greatest consolidation while, in fast moving consumer goods
(FMCG), lower barriers to entry and fewer regulatory hurdles
have seen the rise of niche and e-commerce based companies
focusing successfully on fast-adapting consumer trends.
Societal expectations
Public trust in all large institutions – including media, governments,
NGOs and businesses – remains low, by historical standards,
particularly in developed markets, making it an important issue for
businesses as they face growing public scrutiny. Society increasingly
expects companies to earn their trust by demonstrating integrity,
fairness and transparency, and by making a positive contribution
to the wider community. The pharmaceutical sector still suffers from
a trust deficit as a result of past challenges in relation to sales and
marketing practices and ethics and compliance issues.
Concern is also rising about the safeguarding of personal data.
In Europe, new legislation has tightened regulations on how
companies can use personal information. Loss or inappropriate
use of data could have major consequences for both individuals
and businesses.
There is a continuing focus on issues such as diversity, ranging from
equal pay to representation at senior management. The environment,
particularly climate change, ocean protection and plastic waste,
are issues where there is increased public concern and pressure
for action. Companies are also under increasing scrutiny on their
tax affairs, including their contribution and transparency. To be
successful companies must operate in a way that meets the
expectations of, and creates long-term value for, their wide range
of stakeholders, including shareholders, employees, customers
and suppliers.
GSK Annual Report 2018 11
Stakeholder engagement
Engaging with our stakeholders is key to our success and delivering
our strategy. We have various mechanisms that enable the Board and
management to understand and consider stakeholder views as part
of their oversight and decision-making (see page 89).
This page sets out our key stakeholder groups, why they are
important to us and some of the ways in which we engage
with them.
Patients and consumers
Investors
Insights from patient organisations and consumers enable us
to develop products and advocate for policies that better meet
their needs.
We maintain regular and constructive dialogue with investors to
communicate our strategy and performance in order to promote
investor confidence and ensure our continued access to capital.
– Advisory boards and Patient Advocacy Leaders Summits provide
– One-to-one meetings between Board members, senior executives
patient insights
and institutional investors
– Engaging with and supporting patient groups (disclosed on gsk.com)
and supporting initiatives that empower patients to get more involved
in medicine development
– Our market research and consumer sensory labs help us understand
consumer needs
– Running investor roadshows; attending conferences and events
– Annual General Meeting
Healthcare professionals and medical experts
R&D partners and academia
We work with healthcare professionals (HCPs) and medical experts
to understand patient needs and to ensure our products are being
administered in the right way.
We partner with scientific institutions, business partners, and
academia to further advance scientific discovery and development.
– Establishing joint ventures to improve efficiency and strengthen
– Advisory boards to gather insights related to scientific research
and improve innovation
and disease management
– Collaboration on clinical trials and research
– Peer-to-peer scientific dialogue to increase understanding
of diseases and develop effective prevention
– R&D collaborations such as our gene sequencing initiative
with 23andMe and UK Biobank
– Working with academic researchers to accelerate discovery
and development of new medicines
Governments and regulators
NGOs and multilateral organisations
We work with governments and regulators to advocate for policies
that encourage innovation, promote efficient management of
healthcare spending and give patients the support they need.
We work with partners to improve access to healthcare services
and our products, and to advocate for the policy environment
in which we can be successful.
– Engaging with regulatory bodies during drug development
– Engaging with government health agencies to demonstrate
the value of our products
– Working with governments to build a strong operating
environment for life sciences
– Working with non-governmental organisations (NGOs) and partners
to research and develop products to support global health
– Partnering with NGOs and generic manufacturers to manufacture
and supply our products to developing countries
– Working with multilateral organisations to drive progress on key
global health priority areas
Suppliers
Employees
We work with thousands of suppliers, large and small, who provide
goods and services that support us in delivering high-quality,
safe products for our patients and consumers.
– Engaging with suppliers through our Third Party Oversight
programme and external platforms to help monitor performance
– Providing a platform for our suppliers to share best practices
in environmental performance through our Supplier Exchange
online community
– Auditing our suppliers’ quality processes to ensure they comply
with relevant regulations
We involve and listen to employees to help us maintain strong
employee engagement and retain talented people.
– Conducting a twice-yearly global employee survey so we can
act on employee feedback
– Promoting informal dialogue and collaboration through our new
internal tech platform
– Let’s Talk events with leaders and members of the Corporate
Executive Team
– Established a Board-level Workforce Engagement Director
(Dr Vivienne Cox) (see page 90)
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 12
Our business model
We discover, develop and manufacture innovative pharmaceutical
medicines, vaccines and consumer healthcare products. Our operations
span the value chain, from identifying and researching ground-breaking
discoveries, through development and testing to regulatory approval,
manufacturing and commercialisation.
Our resources:
How we create value:
The value we create:
Talented employees
Our people help deliver
our purpose with their
scientific and technical
know-how and their
expertise in regulation,
intellectual property and
commercialisation
(see page 28).
Partnerships
Business development helps
strengthen our pipeline and
complement our in-house
resources. We have important
relationships with external
organisations, suppliers and
third parties (see page 11).
Access to capital
Cash, equity and debt
enables us to invest in
our business over the
long term (see page 57).
Our purpose
To help people do more, feel better, live longer
Our long-term priorities
Innovation
Performance
Trust
Through our three global businesses we
improve health and create financial 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.
Generate revenue and profit
We generate revenue by executing new product
launches brilliantly and from the sales of our
existing portfolios.
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.
For patients and
consumers
We improve the
health of patients and
consumers around
the world through our
innovative medicines,
vaccines and consumer
healthcare products
(see pages 13, 18, 21).
For investors
We deliver growth
based performance
and in 2018 we paid a
dividend of 80p per
share to shareholders
(see pages 17, 20, 22).
For employees
We employ 95,490
people globally and
offer a broad range
of benefits, including
preventative healthcare
services for all
employees, to attract,
retain and motivate
the best people to
support our business.
(see page 28).
Culture
We are committed to building a culture with greater performance focus underpinned by our values and expectations.
Our values
Our expectations
Patient focus – Transparency – Respect – Integrity
Courage – Accountability – Development – Teamwork
GSK Annual Report 2018 13
Pharmaceuticals
Our Pharmaceuticals business has a broad portfolio of innovative and
established medicines, with leadership positions in respiratory and HIV.
We are strengthening our pipeline through a focus on immunology,
human genetics and advanced technologies to help us identify the
most promising new medicines.
Progress against our long-term priorities
Innovation
Performance
Trust
– New R&D approach with a focus on
– Total 2018 turnover £17.3 billion,
flat AER, up 2% CER
– New Respiratory product sales
– Approval of tafenoquine, the first
new treatment for P. vivax malaria
in 60 years
£2.6 billion, up 35% AER, 38% CER;
HIV sales £4.7 billion, up 9% AER,
11% CER
– Partnering to increase access to
paediatric formulations of our HIV
medicines
– Refined the priority markets in
– Trained over 15,000 healthcare
which we target our resources to
accelerate growth
professionals across 21 countries
on the appropriate use of antibiotics
– Simplified our Pharmaceuticals
supply chain, separating it from
Consumer Healthcare, to improve
competitiveness
science related to the immune system,
human genetics and advanced
technologies
– Strengthened pipeline with 331 of 46
medicines in development targeting
modulation of the immune system
– Accelerated our oncology pipeline by
doubling the number of assets in clinical
development via advancing key internal
assets, e.g. GSK ‘916, and targeted
business development, e.g. acquisition
of Tesaro and the proposed alliance
with Merck KGaA.
– Launched Juluca, the first two-drug
HIV regimen, and expanded indications
for Trelegy Ellipta and Nucala
Innovation
To strengthen our pipeline and deliver the next generation of
medicines that we see bringing the greatest value to patients,
we are embedding a new approach to R&D.
This approach focuses on science related to the immune system,
the use of human genetics, and advanced technologies, and is driven
by the multiplier effect of Science x Technology x Culture. It will
help us to accelerate the pace at which we develop and deliver
transformational medicines, prioritising those molecules with a higher
probability of success and terminating less promising programmes.
It will also enable us to increase our focus on specialty medicines
in areas such as oncology.
We have a broad clinical pipeline including 46 potential new
medicines in development for a range of diseases. This includes
161 oncology assets – double the number we had at the start of
2018. 33 of our potential new medicines are immunomodulators,
reflecting our scientific focus on immunology as the area where
we see the greatest potential. In 2019, we anticipate phase III data
read-outs in key areas including HIV, oncology and respiratory.
For us to focus more effectively and ensure we rapidly progress
only the best assets, our culture encourages smart risk-taking and
single-point accountable decision making. Dr Hal Barron, Chief
Scientific Officer and President, R&D, has been instrumental in
driving scientific innovation since he joined GSK in January 2018.
HIV
We have a long-standing commitment to advancing the treatment,
prevention and cure of HIV by developing medicines that suppress
or prevent the virus in new ways and help reduce the burden of
treatment. Our HIV business is managed through ViiV Healthcare,
a global specialist HIV company that GSK controls as majority
owner, with Pfizer and Shionogi also as shareholders. Its broad
portfolio of 13 antiretroviral medicines offers a wide range of
therapeutic options for people living with HIV. They include the
highly successful therapies, Tivicay and Triumeq, which are based
on dolutegravir, the world-leading core agent.
Marking a new era in HIV care, Juluca, the first two-drug regimen
(2DR), once-daily, single-pill for the treatment of HIV, has now
been launched in the US, Japan and several European markets.
By containing fewer drugs than conventional HIV therapies,
Juluca – and the other potential 2DRs in the pipeline – reduces
patients’ exposure to multiple medicines during what is often
life-long treatment.
In 2018, we filed regulatory submissions in the US and Europe for
another single-tablet 2DR, of dolutegravir and lamivudine. These
followed the phase III GEMINI 1 & 2 studies which demonstrated
similar efficacy for the 2DR compared with traditional three-drug
regimens. Decisions on regulatory approvals are anticipated in 2019.
1 Includes M7824, the subject of the proposed alliance with Merck KGaA, Darmstadt,
Germany, expected to close in Q1 2019.
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 14
Pharmaceuticals continued
We made further progress with the investigational once-monthly,
long-acting injectable 2DR of cabotegravir and rilpivirine, a new
option for patients that avoids daily, oral treatment. The LATTE-2
study showed high rates of virologic response and long-term
durability over a three-year period, while the FLAIR and ATLAS
studies both demonstrated similar efficacy to Triumeq with a
once-monthly injection. Regulatory filing with the FDA is planned
in 2019.
In other research, the INSPIRING phase IIIb study demonstrated
the efficacy and safety of a dolutegravir-based treatment regimen
in HIV and tuberculosis co-infected patients.
A phase III study of fostemsavir on heavily treatment-experienced
patients with HIV, whose current antiretroviral medicines are
proving inadequate, also delivered positive results. An application
for regulatory approval of fostemsavir is expected to be filed in 2019.
Oncology
Cancer is one of the leading causes of death in the developed world.
We are focused on delivering transformational therapies for people
living with cancer. Our pipeline is focused on immuno-oncology,
cell therapy and cancer epigenetics. In 2018, we made significant
progress by doubling the number of oncology assets in clinical
development to 16.1 Our goal is to achieve a sustainable flow of
new treatments based on a diversified portfolio of investigational
medicines utilising modalities such as small molecules, antibodies,
antibody drug conjugates and cells, either alone or in combination.
Our antibody drug conjugate targeting BCMA, GSK 2857916,
has the potential to target multiple myeloma. It has been granted
European PRIME and FDA breakthrough status, potentially enabling
faster regulatory review, and has also been recognised as an orphan
drug. Despite advances in treatment of multiple myeloma over the last
decade, there remains no cure and high unmet need. We have an
extensive development plan exploring use in the fourth to first line
settings. In fourth line, following encouraging efficacy data from the
DREAMM-1 study, we initiated the pivotal DREAMM-2 study which
was fully recruited by October 2018. Data is expected in mid-2019
with potential regulatory submissions by year end. The second line
DREAMM-6 pilot study looking at use in combination with standard
of care was initiated in 2018. The results which will be available in
2019 will inform future pivotal studies. The DREAMM-5 pilot study
looking at first line use in relapsed and refractory patients is planned
to start in 2019.
In 2018, we accelerated the strengthening of our pipeline with the
acquisition of Tesaro, an oncology-focused biopharmaceutical
company. Tesaro’s major marketed product, Zejula, is an oral poly
ADP ribose polymerase (PARP) inhibitor approved in the US and
Europe for adults with recurrent ovarian cancer. PARP inhibitors
are transforming the treatment of ovarian cancer, demonstrating
marked clinical benefit in patients with and without germline
mutations in a BRCA gene. We believe they also offer significant
opportunities for treating patients with many other cancer types.
1 Includes M7824, the subject of the proposed alliance with Merck KGaA, Darmstadt,
Germany, expected to close in Q1 2019.
Clinical trials to assess the use of Zejula as a monotherapy and in
combinations for the significantly larger opportunity of first line
maintenance treatment of ovarian cancer are under way. Results
from the first of these studies, PRIMA, are expected in late 2019.
Zejula is also being investigated as a possible treatment in lung,
breast and prostate cancer, both as a monotherapy and in
combination with other medicines. In addition to Zejula, Tesaro
has several other oncology assets in its pipeline including a
PD-1 inhibitor (TSR-042, dostarlimab) currently being studied
for endometrial cancer. We expect pivotal data that could support
a regulatory filing of dostarlimab in the second half of 2019.
In January 2019, we announced a proposed global strategic alliance
with Merck KGaA, Darmstadt, Germany, to jointly develop and
commercialise M7824 (bintrafusp alfa). M7824 is an investigational
bifunctional fusion protein immunotherapy that is currently in clinical
development, including potential registration studies, for multiple
difficult-to-treat cancers. This includes a phase II trial to investigate
M7824 compared with pembrolizumab as a first line treatment in
patients with PD-L1 expressing advanced non-small cell lung cancer
(NSCLC).
We have completed the transition of the NY-ESO SPEAR T-cell
therapy programme to GSK from Adaptimmune. Early trial data
suggests that this asset could be transformational in synovial sarcoma.
It is the first cell therapy to show clinical response in solid tumours and
is another recipient of European PRIME and FDA breakthrough status.
Another of our oncology therapies is an agonistic antibody for
inducible T-cell costimulator (ICOS) – the first investigational
anti-ICOS agonist antibody to enter human clinical trials. Phase I
safety, pharmacokinetic and pharmacodynamic data, for the therapy
alone and in combination with pembrolizumab, show early, positive
indications of activity.
Respiratory
We have led the way in developing innovative medicines that advance
the management of asthma and COPD for nearly 50 years. Over the
past five years, we have launched six respiratory medicines, giving us
the broadest portfolio of once-daily, inhaled respiratory medicines in
our industry.
In 2018, we launched Trelegy Ellipta in 26 countries. We are now
class leaders in key markets including the US, UK and France.
Following the landmark IMPACT trial in which Trelegy Ellipta
demonstrated superiority to two of our dual medicines on multiple
endpoints, expanded indications were approved in the US and
Europe, enabling use across a broader group of COPD patients.
We submitted regulatory filings for Trelegy Ellipta in Japan and
China – the first for a single inhaler triple therapy for COPD in both
countries. Further launches are planned throughout 2019. Results
from our phase III CAPTAIN study, which is exploring the efficacy
and safety of Trelegy Ellipta in asthma, are anticipated in 2019.
Our Ellipta portfolio was further strengthened with an expanded
indication for Relvar Ellipta in asthma, and applications to support
label updates in the US and Europe for Anoro Ellipta and Incruse
Ellipta.
GSK Annual Report 2018 15
Our first-in-class severe eosinophilic asthma biologic, Nucala,
gained approval in Europe as the first anti-interleukin (IL-5) with
a paediatric indication, alongside its earlier approval for adults.
We also filed regulatory submissions for a paediatric licence in
the US, and in the EU and US for a new formulation of Nucala
that could be used subcutaneously to allow patients or caregivers
to administer treatment themselves.
We continue to innovate in respiratory biologics, with investigational
programmes for Nucala in nasal polyps and hypereosinophilic
syndrome.
Immuno-inflammation
Benlysta is the world’s first and only biologic medicine specifically
approved to treat systemic lupus erythematosus (SLE), a chronic,
incurable, autoimmune disease. Building on data from four previous
phase III clinical trials, we presented results from the phase II PLUTO
study exploring use in paediatric patients with childhood-onset SLE.
In addition, the pivotal phase III BLISS studies showed low rates of
organ damage progression in SLE patients treated with Benlysta.
Results from the phase IV EMBRACE study of black adult patients
with active, autoantibody-positive SLE are expected in 2019. We also
began a new phase III study investigating Benlysta in combination
with rituximab in adult patients with SLE. This is assessing whether
co-administration enhances Benlysta’s treatment effect, to potentially
provide sustained disease control, with the possibility of clinical
remission. Headline results are expected in 2020.
We are continuing research into our anti-GM-CSF antibody for
patients with rheumatoid arthritis and expect to progress to phase III
in 2019.
Additional programmes
In 2018, we received approvals in the US and Australia for Krintafel/
Kozenis (tafenoquine), the first new treatment for P. vivax malaria
in over 60 years (see page 25).
In Japan, we announced positive phase III results for daprodustat,
an oral hypoxia-inducible factor prolyl hydroxylase inhibitor, in patients
with anaemia associated with chronic kidney disease, and a strategic
collaboration with the Kyowa Hakko Kirin Company for its future
commercialisation. In addition, we have two ongoing daprodustat
phase III studies which are anticipated to report in 2020.
We also continue to develop gepotidacin, the first in a new class
of antibiotics.
Advanced technologies
Significant investment in a wide range of advanced technologies
is central to our new R&D approach. We are developing a core
capability in artificial intelligence and machine learning, to enhance
our ability to interpret and understand genetics and genomic data.
We will also invest in functional genomics, applying techniques for
gene modification such as CRISPR technology, to help discover
and validate potential targets. These investments supplement our
existing strengths in other advanced technologies, including our
leading position in cell and gene therapy, which we continue
to develop.
Partnerships are key to our innovation. In 2018, we formed an
exclusive collaboration with 23andMe, the world’s leading consumer
genetics and research company. This will combine our scientific
and medical knowledge with 23andMe’s large-scale genetic
resources and unique data science skills, improving the probability
of R&D success. This exciting collaboration builds on our existing
partnerships, such as the Altius Institute, which pioneers new
technologies and approaches for decoding gene control; the UK
Biobank, which is generating anonymised genetic sequence data
from 500,000 volunteers, and the Open Targets consortium, which
supports an open access search engine that searches, evaluates
and integrates biologic and genetic disease data.
Improving R&D governance
We have established two new governance boards, the Research
Review Board (RRB) and the Development Review Board (DRB).
The RRB is accountable for our future portfolio, providing technical
review on the quality of our research and early-stage programmes.
The DRB reviews late-stage programmes to make sure our studies
are robust and innovative.
Aligned to these changes, we have created separate organisations
for research and for development to enable rigorous and disciplined
decision-making and oversight across the early and late stage
portfolio. Due to their specialist nature, we have kept distinct R&D
units for oncology and global health.
To support the most promising potential medicines in the portfolio
we terminated or divested around 80 programmes. Terminations
included danirixin, miridesap and dezamizumab. We also transferred
our rare disease gene therapy portfolio to Orchard Therapeutics,
in which we have become an equity shareholder, and sold the rights
to tapinarof to Dermavant Sciences.
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 16
Pharmaceuticals continued
Pharmaceuticals pipeline overview
We have 46 assets in development, with 33 immunomodulators of which 16 are focused on oncology.
We expect a number of pivotal readouts in 2019.
Phase
Pivotal/registration*
Phase II
Phase I
Compound
Benlysta + Rituxan1
cabotegravir2 LA + rilpivirine1
D3, dolutegravir + lamivudine
1278863 (daprodustat HIF-PHI)
3684934 (fostemsavir HIV AI)
Nucala
Trelegy Ellipta1
Dectova1,4 IV
28579161 (BCMA ADC)1
Zejula (PARP inhibitor)1
dostarlimab (PD-1 antagonist )1
31961651 (GM-CSF inhibitor)
33894041/32288361 (HBV ASO)
33596091 (ICOS receptor agonist)
2982772 (RIP1k inhibitor)
37728471 (IL33r antagonist)
33777941 (NY-ESO-1 TCR)
25868811 (rhACE2)
Indication
SLE 2
LA HIV
HIV
anaemia
HIV
COPD/HES/nasal polyps
asthma
influenza
multiple myeloma
first-line maintenance ovarian cancer2
endometrial cancer
RA
HBV
cancer
pso/RA/UC
severe asthma
cancer
acute lung injury/PAH
2140944 (gepotidacin, topoisomerase IV inhibitor)
antibacterial
2330811 (OSM antagonist)
2881078 (SARM)
2862277 (TNFR1 antagonist)
31749981 (OX40 agonist)
525762 (BET inhibitor)
2330672 (IBAT inhibitor)
33265951 (PRMT5 inhibitor)
GR1216191 (oxytocin)
TSR-022 (TIM-3 antagonist) 1
M78241,3 (TGFβ trap/anti PD-L1 bispecific)
28317811 (LAG3)
33586991 (BET targeted inhibitor)
38582791 (CCL17 antagonist)
2636771 (PI3kb inhibitor)
2983559 (RIP2k inhibitor)
30366561 (leucyl t-RNA inhibitor)
3640254 (HIV maturation inhibitor)
35112941 (IL5 LA antagonist)
2292767 (PI3kd inhibitor)
1795091 (TLR4 agonist)
38101091 (broadly neutralizing antibody)
35371421 (NYESO1 ImmTAC)
34391711 (HPGD2 inhibitor)
3145095 (RIP1k inhibitor)
33687151 (PRMT1 inhibitor)
TSR-033 (LAG3)1
2269557 (nemiralisib PI3Kd inhibitor)
systemic sclerosis
COPD muscle weakness
acute lung injury
cancer
cancer
cholestatic pruritus
cancer
postpartum haemorrhage
cancer
NSCLC2
ulcerative colitis
RA
OA
cancer
IBD
TB
HIV
asthma
respiratory diseases
cancer
HIV
cancer
muscle repair
pancreatic cancer
cancer
cancer
APDS
* Includes programmes in pivotal phases of development or where pivotal data has reported and regulatory submissions are under consideration or under review.
1 In-licence or other alliance relationship with third party.
2 Additional indications also under investigation.
3 Pending closure of transaction with Merck, KGaA, Darmstadt, Germany.
4 Subject to regulatory approval.
Note: for oncology where phase I studies are conducted in patients, the shift from phase I to phase II is defined when expansion cohorts are started.
GSK Annual Report 2018 17
Performance
2018 performance summary
Pharmaceuticals turnover in 2018 was £17,269 million, flat at
AER, but up 2% CER, driven primarily by the growth in HIV sales.
In the US, sales declined 2% AER but grew 1% at CER, with
growth in the HIV portfolio and Benlysta offsetting declines in
established pharmaceuticals and respiratory following patent
expiries. In Europe, sales grew 2% AER, 1% CER, with growth
in the respiratory portfolio offsetting the continued impact of
generic competition to Epzicom and Avodart. International was
flat at AER but grew 5% CER, with growth driven by HIV and
the new respiratory portfolio.
Respiratory sales declined 1% AER, but grew 1% CER, to £6,928
million, with growth from the Ellipta portfolio and Nucala partly offset
by lower sales of Seretide/Advair as the market prepares for the entry
of a generic. Sales of new respiratory products, comprising Ellipta
products and Nucala, grew 35% AER, 38% CER to £2,612 million.
HIV sales increased 9% AER, 11% CER to £4,722 million,
reflecting share growth in the dolutegravir portfolio: Triumeq,
Tivicay and Juluca. This was partly offset by the decline in the
established portfolio, particularly the impact of generic competition
to Epzicom/Kivexa in Europe.
Immuno-inflammation sales were up 25% AER, 28% CER in 2018,
primarily driven by Benlysta.
Our Established Pharmaceuticals portfolio includes mainly off-patent
medicines. Sales were £5,147 million, down 7% AER, 4% CER,
reflecting efforts to maximise the value from this portfolio but also the
benefit of certain post-divestment contract manufacturing sales and
the first instalment of a 12-month Relenza supply contract in Europe.
The Pharmaceuticals operating margin of 33.3% was 1.0 percentage
points lower at AER than in 2017 and 0.9 percentage points lower
on a CER basis. This primarily reflected increased investment in new
product support, the continued impact of lower prices, particularly
in respiratory, the broader transition of the respiratory portfolio, and
a reduction in royalty income. This was partly offset by the benefits
of prioritisation within R&D and a favourable comparison with the
impact of the Priority Review Voucher purchased in 2017.
Focusing our resources to accelerate growth
In 2018, we made significant changes to the way our Pharmaceuticals
organisation works to accelerate growth and deliver the best results
for all our stakeholders.
We refocused our resources, prioritising the major markets such
as the US and China, while reducing investment in lower priority
markets. We have also prioritised resource behind brands and
therapies with the greatest growth potential and which generate
the highest revenue. To support our ambitions for the oncology
therapies in our pipeline, we strengthened our oncology commercial
infrastructure; recruiting more experts in oncology and haematology
and co-locating our R&D and commercial teams.
We simplified our commercial, medical and regulatory teams,
with fewer complex structures, systems and processes, and
clearer accountabilities. This enables greater speed and efficiency
and frees local operating companies to focus on customer-facing
activities and insights. The savings released by these changes
will be reinvested into our priority products and markets.
In recent years, we have significantly strengthened our online
resources and in-house medical capabilities to provide bespoke
product information for healthcare professionals (HCPs). In 2018,
we updated our policy on working with HCPs, following consistent
feedback that they value the opportunity to learn about new products
through peer-to-peer programmes with expert practitioners who have
direct experience of our medicines.
The new policy will ensure prescribers have access to all available
information on our innovative products, so they can make fully
informed decisions that support better outcomes for patients.
When we have new medicines or significant new data we will allow
payment to global experts to speak about the scientific evidence,
the diseases they treat and their own clinical experience. The change
was implemented in the US and Japan in late 2018, and depending
on effective implementation and assessment of risk will be
implemented in other major developed markets in Europe, North
America and Asia from 2019 onwards. To avoid any perceived
conflict of interest, we have strengthened our commitment to
transparency with new controls and expanded disclosure of
payments to individual HCPs.
Creating a simpler, competitive supply chain
Reliable supply is fundamental to enabling growth in key therapy
areas. Our Pharmaceuticals supply performance levels continued
to improve in 2018 with an on-time, in-full supply to customers
rating of 95.3%. All new products were launched on time.
We are adopting a simplified structure and operating model geared
to driving performance with increased focus on priority brands and
markets, clearer accountabilities and more pace. This has included
separating our Pharmaceuticals manufacturing and supply
organisation from our Consumer Healthcare network.
We continued to adapt our manufacturing network to support
growth, improve competitiveness and meet business and patient
needs. We opened a £54 million facility in Montrose, Scotland to
supply active pharmaceutical ingredients for our Ellipta respiratory
medicines, and a £26 million facility in Parma, Italy that will produce
fostemsavir, our investigational HIV treatment.
We revised our supply and demand, warehousing and distribution
operations to align with commercial priorities and announced
manufacturing site closures in Mexico and Bangladesh. Following
an extensive review of our cephalosporins antibiotics assets we
decided to restructure its supply chain and manufacturing site at
Ulverston in the UK. This will help us improve competitiveness and
support growth in emerging markets. We continued to simplify our
supplier base and product portfolio and are ahead of schedule to
reduce our contract manufacturers by 35% by 2021.
The Pharmaceuticals manufacturing and supply organisation again
delivered good performance for safety, quality and compliance.
There were 55 regulatory inspections in 2018, all resulting in
satisfactory outcomes.
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 18
Vaccines
We are the leading vaccines company in the world, delivering over 2 million
vaccine doses every day to people living in 158 countries. Our portfolio and
pipeline help protect individuals throughout their lives. We have recently
introduced breakthrough vaccines Shingrix for shingles and Bexsero, the
first vaccine for meningitis B.
Progress against our long-term priorities
Innovation
Performance
Trust
– Shingrix launched successfully in the
US and Canada
– Total 2018 turnover £5.9 billion,
up 14% AER, up 16% CER
– 23% of 2018 sales came from recent
innovations, driven by Shingrix and
Bexsero
– Grew ahead of the market,
strengthening our position as the
leading vaccines company by value
– We have 16 candidate vaccines across
– In addition to Shingrix, key
all R&D phases
– Capabilities in science and new
technologies continues to be
differentiator
contributions from our influenza and
hepatitis franchises, and Bexsero
– Over 120 million doses of vaccines
delivered to Gavi, the Vaccine Alliance,
to help prevent pneumococcal disease,
rotavirus and cervical cancer
– 270 million doses of oral polio vaccine
delivered to UNICEF for the Global
Polio Eradication Initiative
– Positive results from candidate TB
vaccine in phase IIb trial
Innovation
Our Vaccines business has 16 innovative candidate vaccines.
We balance our focus on this robust pipeline with the active
life-cycle management of our existing vaccines, helping to protect
more people through expanded indications and geographies.
Our investment in breakthrough vaccines technologies creates
a real point of differentiation and will deliver further benefits in the
future. We have more than 2,500 vaccines scientists working in three
global R&D centres, in Belgium, Italy and the US. This international
spread equips us with a diversity of skills and culture, helps to attract
the best talent, and opens doors to external partnerships. In 2018,
the proportion of our sales from innovations introduced in the past
five years was 23%.
We are expanding our capabilities to become a stronger player in
the world’s largest vaccines markets, the US and China. To achieve
this goal, we are simplifying complexity across the business, reducing
R&D timelines and developing a more dynamic culture. In September,
Roger Connor became the new President, Global Vaccines.
Delivering best-in-class innovation
Shingles
In 2018, our breakthrough shingles vaccine, Shingrix, was
recognised as the most successful biopharma launch in the past
10 years in North America1. In June, Canada’s National Advisory
Committee on Immunization (NACI) made a strong recommendation
for Shingrix to be offered to people over 50, following a similar
opinion in the US in 2017. In March, Shingrix received licensing
approval in the EU and Japan, and in May we launched it in Germany.
In December, the Standing Committee on Vaccination in Germany,
STIKO, recommended Shingrix for all people over 60 and for those
over 50 with an immune-compromising condition or severe
underlying disease. The vaccine was approved in Australia in
July 2018. In line with our phased launch strategy, we have the
detailed capacity plans in place that are necessary to deliver
the meaningful increase in doses needed to meet long-term
global demand.
Shingrix marks a step change in the prevention of shingles, a painful
and potentially serious condition that affects more than one in three
people during their lifetimes. It was designed specifically to address
the challenge of age-related decline in immunity and is the first
approved shingles vaccine to combine a non-live antigen, to trigger
a targeted immune response, with a specifically designed adjuvant
to generate a strong and sustained immune response. Clinical
trials have proven Shingrix efficacy of more than 90% for all
age groups studied.
1 Source – independent assessment from IQVIA.
GSK Annual Report 2018 19
Meningitis
We are the market leader in vaccines against meningococcal
meningitis, with our complementary portfolio of Menveo, against
serogroups A, C, W, and Y, and Bexsero, targeting serogroup B.
In 2018, we continued to consolidate our leadership by broadening
the age range that our vaccines cover. In the US, where Bexsero is
licensed for 10-to-25-year-olds, the vaccine received Breakthrough
Therapy Designation from the FDA for children between two- and
10 years old. In June, the European Medicines Agency approved
a new, alternative (2+1) dosing schedule for Bexsero in infants
(in addition to the existing 3+1 schedule), offering healthcare
professionals more options to help protect infants from invasive
meningococcal disease (IMD) caused by serogroup B and the
potential for fewer visits to the doctor for families.
We continued to support external research into meningitis B,
including funding the largest-ever study into the adolescent carriage
of meningococcal bacteria. The study, led by the University of
Adelaide, saw more than 34,000 teenagers being vaccinated with
Bexsero. The early findings, which are a significant step forward
in scientific understanding, show there was a fall in the number
of meningitis B cases in South Australian adolescents, but no
statistically significant reduction in nasopharyngeal carriage of the
bacteria that causes the disease. As such, these preliminary results
underscore the need for direct vaccination of vulnerable individuals,
particularly infants and adolescents, as the best way to protect
against meningococcal B disease.
We advanced our work on new formulations for meningitis vaccines,
with our fully liquid Menveo candidate vaccine entering phase II
clinical trials. The phase III results for the US Menveo booster found
that it can effectively and safely extend protection four to six years
after a primary course of MenACWY vaccine. We also remain
committed to the challenging goal of developing a single vaccine
to cover the five most common meningitis serogroups of A, B, C,
W and Y.
Other priority assets
We are pursuing a full portfolio of vaccines against respiratory
syncytial virus (RSV), tailored to the different age groups most
at risk of infection from the virus. There is currently no prophylactic
vaccine approved for the prevention of respiratory disease caused
by RSV, in spite of the significant medical need. Our maternal
vaccine is designed to increase antibodies in the mother that will
transfer to the baby and help protect them in the first months of life,
when the disease is most severe. Our candidate paediatric vaccine,
given directly to babies, is designed to induce protection from the
disease throughout childhood and, potentially, for recipients’ entire
lives. In late 2018, we began a phase I/II trial for children, and
commenced a phase I study on the maternal vaccine. The US
FDA has given fast track designation to our RSV candidate
vaccines for pregnant women and older adults, which have just
entered clinical development.
By 2030, COPD is predicted to become the world’s third-leading
cause of death. Our COPD candidate vaccine marks a move away
from the traditional concept of a vaccine given to healthy people
to prevent a specific disease towards the development of a
disease-modifying vaccine that could reduce the frequency
of COPD exacerbations and slow down the disease’s progress.
It combines two antigens from bacteria commonly found in acute
COPD exacerbations with our proprietary adjuvant system, ASO1.
The phase I and II studies demonstrated that our candidate vaccine
was safe and capable of inducing an immune response. We began
a phase IIb (proof of concept) study in Europe and North America
in 2017, with efficacy results expected in mid-2020.
In influenza, we are working on a universal (supra-seasonal) vaccine
with researchers at Mount Sinai in the US. We also expanded the
indications for our existing flu vaccines, with European approval for
a paediatric indication for Fluarix Tetra.
New technologies
Our success in innovation reflects our unique combination of
advanced technologies, scientific experts across three global
R&D centres, and external collaborations. Our broad range of
technologies includes adjuvant systems, self-amplifying messenger
RNA (SAM), bioconjugates, generalised modules for membrane
antigens (GMMA) and the chimpanzee adenovirus (ChAd) platform.
Such capabilities have the potential to significantly reduce the cost
and time of vaccine development and help make radical advances
that address unmet medical needs.
External partnerships
Partnerships remain central to our innovation. We have around
150 external scientific collaborations, with most of our 16 candidate
vaccines being developed in partnership. Our partnerships and
technologies also support our work on tuberculosis and shigella
for instance, which is part of our ongoing commitment to developing
vaccines against the diseases of the developing world. Such
collaborations enable our Vaccines scientists to learn from other
leading experts and stay close to emerging technologies and
new science.
Vaccines pipeline
Phase
Phase III
Phase II
Phase I/II
Indication/vaccine
Shingrix (for immunocompromised)
Bexsero (infants in the US)
Rotarix (PCV-free)
MMR (in US)
COPD
Hepatitis C
Malaria (next gen)
MenABCWY
Menveo (liquid)
Shigella
Tuberculosis
RSV paediatric
HIV
RSV older adults
Flu universal
RSV maternal
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 20
Vaccines continued
Performance
2018 performance summary
Focusing on growth markets
Vaccines turnover grew 14% AER, 16% CER to £5,894 million,
primarily driven by growth in sales of Shingrix, hepatitis vaccines,
which also benefited from a competitor supply shortage, and higher
sales of influenza products.
The operating margin of 33.0% was 1.1 percentage points higher at
AER than in 2017 and 2.5 percentage points higher on a CER basis.
This was primarily driven by enhanced operating leverage from strong
sales growth, an improved product mix, including the impact of the
launch of Shingrix, together with further restructuring and integration
benefits. This was partly offset by the comparison with the benefit
of a settlement for lost third-party supply volume recorded in 2017,
increased supply chain costs and increased SG&A investments
to support new launches and business growth.
Shingrix recorded sales of £784 million, primarily in the US and
Canada, driven by demand and share gains. US sales benefited
from market growth in new patient populations now covered by
immunisation recommendations and Shingrix has now achieved
a 98% market share. In the first half of 2018 alone, Shingrix
performed twice as strongly as the competitor vaccine had
during the whole of 2017.
Meningitis sales were down 1% AER but up 2% CER to
£881 million. Bexsero sales grew 5% AER, 9% CER, driven by
demand and share gains in the US, together with continued growth
in private market sales in International, partly offset by the completion
of vaccination of catch-up cohorts in certain markets in Europe.
Menveo sales declined 15% AER, 12% CER, primarily reflecting
supply constraints in Europe and International as well as a strong
comparator in 2017 and unfavourable year-on-year CDC stockpile
movements in the US, partly offset by demand and share gains
in the US.
Fluarix/FluLaval sales grew 7% AER, 10% CER to £523 million,
driven by strong sales execution in the US and improved sales
in Europe, partly offset by increased price competition in the US.
Established Vaccines sales were down 1% AER and flat CER
reflecting lower sales of DTPa-containing vaccines (Infanrix, Pediarix
and Boostrix) due to increased competitive pressures, particularly
in Europe, and unfavourable year-on-year CDC stockpile movements
in the US, together with lower Synflorix sales, reflecting lower pricing
and demand in emerging markets. Hepatitis vaccines sales grew
17% AER, 19% CER to £808 million, benefiting from stronger
demand in the US and Europe, as well as a competitor supply
shortage in the US.
In 2018, we strengthened our position as the world’s leading
vaccines company by value. Sales grew ahead of the market,
increasing our market share and profitability.
Having established our leadership in Europe and emerging markets,
we are now focusing on increasing our presence in the world’s
largest vaccines markets – US and China – to protect more people
and improve business performance. The US is our number one
priority market and our performance in the US in 2018 has been
particularly strong. We welcome the Chinese government’s recent
steps to fast-track the approval of ‘clinically urgently needed’ new
medicines and vaccines, reflecting its commitment to enabling
faster entry of new prevention and treatment options. We look
forward to responding to that need with our innovative vaccines
in the years ahead.
Creating a simpler, competitive supply chain
We have 13 manufacturing sites, across 10 countries. This
international presence enables us to produce our vaccines with
flexibility, as demonstrated during the year, when we leveraged our
secondary manufacturing network to increase capacity for Shingrix.
We have delivered more than 9 million doses globally since launch
and we are working hard to build capacity and meet long-term
global demand. We continue to target high-teens millions of doses
over the next two or three years. To do this, we are undertaking
multiple initiatives to boost production across our global
manufacturing network in the US and Europe, and at every stage
of the manufacturing process from primary antigen production to
packaging. These initiatives will ensure sustainable, steady supply
growth for the vaccine over the coming years.
During the year, we continued to simplify our supply chain, and
discontinued several vaccines that duplicate existing products.
Our ongoing investment in our manufacturing network enabled
a 10% growth in our filling volume and we maintained our strong
focus on the safety and high quality of all our vaccines.
GSK Annual Report 2018
21
Consumer Healthcare
Our Consumer Healthcare business combines science and consumer
insights to develop innovative everyday healthcare brands for oral health,
pain relief, respiratory, skin health, nutrition and digestive health categories.
In 2018, we reached agreement with Pfizer to combine our consumer
healthcare businesses into a new world-leading joint venture.
Progress against our long-term priorities
Innovation
Performance
Trust
– Worldwide rollout of Sensodyne
Rapid Relief, Voltaren No Mess and
parodontax/Corsodyl
– Science-based innovations included
Theraflu PowerPods and a Polident
denture care range
– New digital innovation hub established
to accelerate innovations in self-care
– Total 2018 turnover £7.7 billion,
down 1% AER, up 2% CER
– Bought out Novartis’ 36.5% stake
in Consumer Healthcare Joint Venture
for £9.2 billion
– Agreement with Pfizer to combine our
consumer healthcare businesses into
a new world-leading joint venture
– Announced the sale of Horlicks
and other consumer nutrition brands
to Unilever
– Supply chain service levels continued
to improve, achieving 98% on-time,
in-full delivery performance
– Five-year partnership with Smile Train
launched to help more children access
life-changing cleft lip and palate surgery
– Continued our partnership with Allied
Against Dengue in India and South
East Asia to prevent outbreaks of
dengue fever
– Employee engagement score
increased to 81%
Innovation
We delivered 36 first market launches across our categories and
250 roll outs of new products. In 2018, the proportion of our sales
from innovations introduced in the past three years was 11%.
Delivering best-in-class innovation
We use deep consumer insights and scientific and technical expertise
to deliver innovations across each of our categories. For example,
in oral health, we further strengthened our leadership in denture care
with the delivery of two innovations to improve the experience for
denture wearers. We addressed a consumer need for an easy,
discreet denture-cleaning solution with the launch of Polident Clean
& Refresh wipes, which can be used anywhere without the need
for water. The wipes combine a unique and patented combination of
tear-resistant tissue and a double mint solution, offering consumers
a quick and effective clean and improved denture confidence.
In addition, our new denture adhesive, Polident Max Seal, has an
innovative precision nozzle with a finer tip which enables exactly the
right amount of fixative to be applied, creating a precise seal around
the edge of the denture for a more comfortable eating experience.
The successful rollout of Sensodyne Rapid Relief, a premium
extension of our Sensodyne brand, continued. Launched in 2017,
it is designed to provide fast relief from tooth sensitivity in as little
as 60 seconds. During 2018, we introduced it in an additional
40 markets, including the US, Italy, Argentina, New Zealand and
Egypt bringing the total number of successful market launches
to more than 90.
In respiratory, consumer insight inspired the packaging innovation
behind Theraflu PowerPods, a new extension of Theraflu, our
respiratory power brand. Theraflu PowerPods, which were launched in
the US, contain cold and flu relief medicine or active ingredients within
a pod that can be used in single-serve coffee makers. This format is
much more convenient for US consumers, who rarely use kettles.
In pain relief, we continued the rollout of Voltaren No Mess in an
additional 17 markets in 2018, including Russia, UK, Australia, Italy
and Spain. The innovative No Mess cap was designed to address
a key consumer barrier to using topical pain relief and makes the
product easier and less messy to apply.
In digestive health, we launched two extensions of our Tums brand.
Tums Gas Relief which offers consumers multi-symptom relief from
heartburn as well as gas, was introduced in our ‘chewy bites’ format
which is the preferred format for the growing number of younger
consumers entering this category. We also introduced a sugar-free
version of Tums in 2018 for consumers looking to reduce their overall
daily sugar intake.
Building industry-leading capabilities
Each of our main categories is supported by a dedicated global
innovation hub, where our scientists work in close partnership with
commercial teams. This means that R&D in each of our hubs is both
science-based and consumer-led and helps speed new innovations
to market. The network’s footprint in Europe, the US and Asia, also
enables us to stay close – and relevant – to all global trends and
markets.
Our Consumer Sensory Labs enable us to listen to, understand
and meet the needs of consumers. Scientists and commercial teams
in these labs assess consumer reactions to products during the
development process to help improve existing products and develop
new ones. During the year, we brought the capabilities of our sensory
labs closer to our markets via labs in the US, the UK and India so
that we can understand consumer preferences in different parts
of the world. For example, we developed Otrivin Unblock & Heal in
response to consumer need for a medicated spray that both relieves
the congestion and nasal dryness that can accompany a cold and
also helps fight the virus. We launched this triple-action spray in
Europe in late 2018.
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 22
Consumer Healthcare continued
The increasing use of digital technology is revolutionising the way
that consumers learn about, buy, and use healthcare products.
In 2018, we created a new London-based consumer healthcare
digital innovation hub. The hub is a close partnership of commercial,
technology and R&D, focused on identifying and accelerating
innovations in our categories to develop digitally driven brands,
products and services that consumers can use to monitor, manage
and improve their own health.
Emerging markets opportunities
More than one-third of our sales are in emerging markets, where
increasing prosperity is boosting the proportion of middle-class
consumers and, in turn, the demand for consumer healthcare.
Our innovation hubs in India and China are at the forefront of our
efforts to understand and meet this growing consumer need, and
to remain competitive in these important markets. In India, we entered
the high protein drink category with the launch of Horlicks Protein
Plus which blends quality, fast and slow release proteins with its
high level of amino acids, enabling the product to develop stronger
science-based claims than its competitors.
Performance
2018 performance summary
Our marketing and innovation resources are targeted on the
brands which deliver the strongest growth and highest returns –
our seven global power brands, including Sensodyne, Voltaren,
Panadol and Theraflu, and our 12 regional core brands, such as
Tums and Excedrin. Together, these brands drive performance
of Consumer Healthcare and reinforce our global leadership
in pain relief, respiratory and therapeutic oral health.
Consumer Healthcare sales were £7,658 million, down 1% AER
and up 2% CER, with broad-based growth in oral health and
wellness partly offset by a decline in Panadol and lower sales
of smaller brands. International markets performed strongly,
particularly India and Brazil, while Europe was impacted by
intensifying competitive pressure in the second half of 2018.
The aggregate impact from generic competition on Transderm
Scop in the US, the divestment of Horlicks and MaxiNutrition
in the UK and other small non-strategic brands and implementation
of the Goods & Service Tax (GST) in India reduced overall sales
growth by approximately one percentage point.
Oral health sales grew 1% AER, 4% CER to £2,496 million, as
increased competitive pressures in Europe were offset by double
digit growth from Sensodyne in a number of International markets,
including India and Turkey, and strong single-digit growth in the US
driven by Sensodyne Rapid Relief. Our premium gum health brand
parodontax/Corsodyl became the world’s fastest growing global
toothpaste, outperforming the market four fold, driven by continued
momentum in the US since its launch in 2017, and a strategic brand
repositioning across 40 countries. Our denture care brands out-
performed the category, supported by innovations including Polident
Max Seal and Polident Clean & Refresh, further strengthening our
global leadership position.
Wellness sales declined 2% AER but grew 1% CER to
£3,940 million. Respiratory sales grew in low single digits, led by
Theraflu supported by a strong cold and flu season earlier in the
year. Otrivin grew in mid single digits, benefiting from new variants,
and Flonase returned to growth following a weaker allergy season
earlier this year.
External partnerships
By combining the insights and expertise of our scientists with
breakthrough ideas developed externally, we can develop and deliver
a strong, competitive pipeline of consumer-led, science-based
innovation. Since 2016, the percentage of innovation sales coming
from externally sourced product innovation has increased fivefold.
In 2018, products from external partnerships accounted for 11% of
innovation sales, including Otrivin Unblock & Heal. During the year,
we entered into over 30 external R&D partnerships and our aim is
that they will make up 30% of our pipeline in the future.
In pain relief, sales were flat. Low single-digit growth in Voltaren,
supported by the roll-out of Voltaren No Mess in 20 markets, and
double-digit growth in Fenbid were offset by a decline in Panadol
sales due to a change in the route-to-market model in South East
Asia and the discontinuation of slow-release Panadol products in
the Nordic countries.
Nutrition sales declined 5% AER but grew 1% CER to £643 million.
The nutrition business in India performed strongly across the product
portfolio including new innovations such as Horlicks Protein Plus.
The impact of divestments and India GST implementation on nutrition
category growth was approximately eight percentage points.
Skin health sales were down 4% AER, 1% CER to £579 million.
Consumer Healthcare operating margin of 19.8% was
2.1 percentage points higher than in 2017 and 2.2 percentage
points higher on a CER basis. This primarily reflected improved
product mix and manufacturing restructuring and integration
benefits, as well as continued focus on delivering improved return
on investment on our advertising and promotional spend.
Strategic business development
During 2018, we made further progress against our Performance
priority to deliver sales growth, operating margin improvements
and attractive returns, completing a £9.2 billion buyout of Novartis’
36.5% stake in GSK Consumer Healthcare in June.
After conducting a strategic review of our nutrition portfolio, in
December we announced the sale of Horlicks and other consumer
nutrition brands to Unilever. As part of this transaction, we
announced that we will merge our 72.5% stake in GlaxoSmithKline
Consumer Healthcare Limited in India with Hindustan Unilever
Limited. The proposed merger includes a distribution arrangement,
which will allow Hindustan Unilever Limited to leverage its scale and
strong reach to sell and distribute our OTC and oral health brands
in India. This transaction is expected to close by the end of 2019.
GSK Annual Report 2018 23
Most recently, we reached an agreement with Pfizer in December
2018 to combine our consumer healthcare businesses to create
a new world-leading joint venture with combined sales of
approximately £9.8 billion. This brings together two highly
complementary portfolios of trusted consumer healthcare brands,
including GSK’s Sensodyne, Voltaren and Panadol and Pfizer’s,
Advil, Centrum and Caltrate. The new combined business will
have leadership positions in pain relief, respiratory and vitamins,
minerals and supplements in addition to our number one position
in therapeutic oral healthcare, and will be well positioned to deliver
strong sales, cash flow and earnings growth.
Together, these moves provide confidence to improve our margin
target to mid-to-high-20s by 2022, assuming the close of the
transaction with Pfizer. This improvement is expected to be achieved
in part by delivering £0.5 billion of total annual costs savings through
the joint venture and additionally through delivery of a business-wide
programme aimed at freeing up cash to improve returns to
shareholders and reinvest in the business to drive growth. This is
focused on four pillars: net revenue management to maximise the
value of our brands with shoppers and customers; cost and cash
discipline enabled by zero-based budgeting; strategic resource
allocation to focus our investments in the right areas to get the
best returns; and increased efficiencies in our supply chain.
Joining forces with Pfizer Consumer Healthcare will be
transformational to the scale of GSK Consumer Healthcare and
lays the foundations for the new JV to be separated from GSK
via a demerger. This is expected to take place within three years
of closing the transaction with Pfizer, which we expect to occur
in the second half of 2019, subject to approvals. Further details on
the risks associated to the transaction are set out on page 36.
Digital transformation
By putting digital technology at the heart of our business, we aim
to deliver more meaningful interactions with consumers, fuel brand
growth and achieve efficiency savings. In 2018, we invested
strongly in our digital capabilities, including hiring expert new talent.
Reflecting the far higher return on online media, compared with
traditional television advertising, we significantly increased the
digital balance of our marketing. To streamline our media buying,
we appointed one global media agency to oversee our digital and
offline paid media strategy and planning around the world. We also
boosted our attractiveness in e-commerce channels by optimising
the findability of our products, developing rich content for retailer
portals, and securing high-profile ads on customers’ e-commerce
sites. To enrich our people’s digital skills, we rolled out a new
Marketing IQ development programme to 1,300 of our marketers.
Our digital impact is aided by innovative industry partnerships:
a collaboration with Google helps us deliver relevant content to
consumers, while a partnership with Chinese marketing and media
organisation Alimama enables us to target shoppers with appropriate
and timely information. Our partnership with Google has driven
greater efficiency in our media targeting. We drove 4.5 billion more
viewable digital media impressions than the same investment would
have generated in 2017, representing a 74% increase. We also draw
on invaluable external insights from our Digital Advisory Board (DAB),
which is made up of digital marketing, data and e-commerce experts.
Members of the GSK Consumer Healthcare strategic leadership
team attend DAB meetings and benefit from the mentorship of
a DAB member. The role of the DAB is to challenge our thinking
and help shape our digital strategy.
Winning with shoppers, customers and experts
Expert endorsement builds trust in our brands and drives shopper
purchase decisions. Sensodyne, for instance, is the number one
dentist-recommended brand for sensitivity in 80% of the markets in
which we compete. Of our OTC brands 70% are sold in pharmacies.
We continued to prioritise our relationships with dentists and
pharmacists and to invest in information that supports our products.
In 2018, our expert sales representatives called on 400,000 dentists
in over 90 markets to share relevant science-based information
and we published approximately 30 abstracts on our clinical trials
and science.
Business partnering with retailers is key. For example, our top six
customers in the US account for approximately 70% of our sales
there. We continue to develop our strong capabilities in joint
business planning, category management and distribution
management to ensure we win with our retailers.
Our Shopper Science Labs in the UK, US and Singapore use
state-of-the-art technology to track shopper behaviour in real time
to provide us with rich insights on consumers’ shopping habits
around the world. We have satellite facilities located by the
headquarters of our major retail partners. These labs enable
us to adapt the shopping experience to meet each consumer’s
need and make decisions about what new products, promotions
or packaging will really make a difference.
Creating a simpler, competitive supply chain
We have continued to strengthen our supply chain and reduce
complexity to improve efficiency. In addition, we have formally
integrated it within our business, where previously some central
resources and processes were shared between the Consumer
Healthcare and Pharmaceuticals supply chains as a central unit.
We also reorganised our supply chain on a regional basis, more
closely reflecting our commercial operations, to make it more
responsive and agile.
During 2018, we sold two sites (Aiken, US and Slough, UK) and
announced the closure of three more in Ireland, the US and the
Philippines as part of our commitment to remove complexity across
our network and streamline our operations. Overall, since 2015,
we have removed four sites from our supply chain network and
announced the closure of another five. We continued to streamline
the number of contract manufacturers (CMOs) we use and have
reduced the number by almost 30% since 2015. We continued
to simplify our portfolio by further reducing the number of different
ways that our products are packaged.
Our manufacturing sites recorded a strong on-time in-full delivery
performance, as service levels continued to improve. Reflecting
this good performance, the supply chain successfully supported
our growing power brands and met business innovation targets
in full, including all first-market launches.
We continued to drive and deliver robust performance in quality
and safety, with no issues arising from regulatory inspections.
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 24
Trust
Operating responsibly to deliver on our purpose and ensure the greatest
possible long-term impact in improving health around the world.
Trust is one of our three long-term priorities and is essential to
how we deliver our purpose. Society has high expectations of us,
and the dynamic environment in which we operate presents us
with big challenges and opportunities that we must respond to
in order to remain commercially successful, uphold our reputation
and build trust.
To ensure that we are able to identify and respond to these
expectations effectively, we need to have mechanisms in place to
engage with our key stakeholders. On page 9 we summarise the key
trends for our industry and on page 11 we highlight how we engage
across the different stakeholder groups.
With these external expectations in mind, in 2018 we published
a new set of 13 commitments describing the actions we will take
to help deliver societal value and build trust. Our ambitious
commitments will drive progress in three key areas, underpinned by
our fundamental commitments to running our business responsibly:
– Using our science and technology to address health needs
– Making our products affordable and available
– Being a modern employer
External benchmarking
– ATMI: topped the Access to Medicines Index and led the industry
in the Antimicrobial Resistance Benchmark.
– DJSI: ranked 2nd in the DJSI World and Europe indices, placing
us in the top 2% of our sector.
– FTSE4Good: member of the FTSE4Good Index since 2004.
– CDP: received a score of ‘B’ in CDP Carbon and CDP Water.
Named a CDP Supplier Engagement Leader in CDP's supply
chain programme.
– Corporate Political Engagement Index: ranked number one
in Transparency International UK’s 2018 Corporate Political
Engagement Index.
Our approach to reporting
From 2019, we are reporting progress against our 13 commitments
in our Annual Report to reflect the integration of our responsible
business approach into our core business strategy. A performance
data document is also available online to provide both current and
previous years’ data. These replace the annual publication of our
Responsible Business Supplement.
GSK.com: 2018 performance data summary
Our commitments on Trust
Our purpose is to help people do more, feel better and live longer
Using our science and technology
to address health needs
Making our products affordable
and available
Being a modern
employer
New medical innovations
Develop differentiated, high-quality
and needed medicines, vaccines
and consumer healthcare products
to improve health
Global health
Improve global health impact through
R&D for infectious diseases that affect
children and young people in developing
countries focusing on HIV, malaria
and TB
Health security
Help the world to better prepare for
future disease outbreaks with pandemic
potential, and tackle antimicrobial
resistance
Being a responsible business
Pricing
Improve the health of millions of people
each year by making our products
available at responsible prices that
are sustainable for our business
Product reach
Use access strategies to reach
800 million underserved people in
developing countries with our products
by 2025
Healthcare access
Partner to improve disease prevention,
awareness and access to healthcare
services by 12 million people by 2025
Engaged people
Achieve and maintain a competitive
employee engagement score by 2022
Inclusion and diversity
Accelerate our progress on inclusion
and diversity, aiming for over 37% female
representation in senior roles and
recognition in global LGBT+ indices,
by 2022
Health, wellbeing and development
Be a leading company in how we support
employee health, wellbeing and personal
development
Reliable supply
Commit to quality, safety and
reliable supply of our products
for patients and consumers
Ethics and values
Operate an ethical, values-
driven culture, in which any
issues are responded to swiftly
and transparently
Data and engagement
Use data responsibly and
transparently. Improve patient
and scientific engagement
Environment
Reduce our environmental
impact by one quarter by 2030
GSK Annual Report 2018 25
Science and technology
We are using our science and technology to address health needs.
This is achieved through our medical innovation but we also have
a responsibility to impact global health, particularly in the prevention
and treatment of infectious diseases where we have world-leading
scientific expertise. We have taken a proactive approach to
addressing some of the biggest global health challenges, from
preventing child deaths from infectious diseases to tackling the
urgent public health threat from growing resistance to antibiotics.
New medical innovations
The biggest impact that we can have as a science-led global
healthcare company is to successfully research and develop
innovative products. Through our innovation, we aim to develop
differentiated, high-quality and needed medicines, vaccines and
consumer healthcare products to improve health. Read more about
innovation within our three businesses on pages 13, 18 and 21.
Global health
Each year malaria, TB and HIV/AIDS kill almost 3 million people,
the vast majority in developing countries. There remains huge need
for innovation to address this. Our new global health strategy aims
to improve global health impact through R&D for infectious diseases
that affect children and young people in developing countries,
focusing on HIV, malaria and TB.
The biggest contribution we can make is through our science, but to
have the greatest impact, we need strong collaboration with others
to ensure there is always a clear path for our innovation – end to end
– from lab to patient. We have learned from our malaria vaccine and
our chlorhexidine gel, Umbipro, that getting our innovation to patients
in developing countries is extremely challenging where the traditional
route to market is absent. We cannot alone carry the significant
costs and risks associated with full clinical development, registration,
manufacture and market access for new medicines and vaccines that
don’t have a commercial return. Without action to secure the right
procurement models and partnerships, we risk the potential impact
of these treatments being undermined. Instead we need new
sustainable, collaborative models, where risk and costs are shared
across partners, to translate scientific discoveries into benefit for
the most vulnerable patients.
As well as addressing the disease burden in developing countries,
our investment in global health also brings business benefits, which
helps us to ensure that it is sustainable over the long term. The
innovative science and platforms discovered through global health
R&D can be applied commercially. For example, the adjuvant used
in our RTS,S malaria vaccine has been pivotal to the success of our
shingles vaccine, Shingrix, and is being used in our TB candidate
vaccine, M72, and a number of other vaccines in development.
Our discovery work in infectious diseases also has the potential
to uncover insights relevant to other disease areas that will benefit
our portfolio in the long term.
Tuberculosis
We are aiming to develop a world-leading portfolio of first-in-class
medicines for TB, including a candidate vaccine in a phase IIb trial.
We have been working with non-profit scientific organisation Aeras
to develop the vaccine with the support of the Bill & Melinda Gates
Foundation, the UK’s Department for International Development and
others. We received positive interim results in 2018 for the phase IIb
study, which showed that our candidate vaccine reduced the risk of
developing pulmonary TB by half in adults with latent TB infection.
We are continuing the trial with the International AIDS Vaccine
Initiative, a long-standing GSK collaborator in HIV vaccine
development, which has recently acquired Aeras’ TB vaccine
clinical programme.
GSK also has a number of promising TB medicines in development,
including two that are in preparation for phase II trials. We are
a member of several major public–private partnerships and
programmes, such as the TB Drug Accelerator, which aim to
speed up the discovery and development of novel compounds
against the disease. We currently have three pre-clinical candidates
and a strong discovery pipeline arising from these partnerships.
Malaria
In 2018, we received approval from the US FDA and the Australian
Therapeutic Goods Administration for tafenoquine (Krintafel/
Kozenis), a single-dose radical cure for P. vivax malaria developed
in partnership with the Medicines for Malaria Venture (MMV).
This is the first new treatment for this type of relapsing malaria in over
60 years and marks a major contribution towards efforts to eradicate
the disease. Together with our partners, MMV and PATH, we aim
to provide the treatment at an affordable price in malaria endemic
countries. We have submitted a regulatory filing for tafenoquine
in Brazil, the first submission in a malaria endemic country.
Our RTS,S vaccine aims to protect children from P. falciparum
malaria, which is most common in sub-Saharan Africa and
responsible for most malarial deaths worldwide. Ghana, Kenya and
Malawi have approved the use of RTS,S for malaria as part of a pilot
vaccination implementation programme coordinated by the WHO.
Clinical trials are also under way for a next-generation malaria vaccine.
HIV
Developing new formulations of HIV medications specifically for
children, who are disproportionately affected by the disease in
developing countries, is a global priority. Through ViiV Healthcare,
we are progressing clinical development programmes for paediatric
formulations of our medicines in partnership with the International
Maternal Paediatric Adolescent AIDS Clinical Trials Network and
the Paediatric European Network for Treatment of AIDS.
TB is a leading cause of death for people living with HIV and this
co-infection is hard to treat. A phase IV study of ViiV Healthcare’s
Tivicay (dolutegravir) in combination with other antiretrovirals
demonstrated positive results in people receiving treatment for both
HIV and TB. The latest WHO HIV treatment guidelines recommend
dolutegravir-based regimens as the preferred first- and second-line
treatment.
Other developing world diseases
As well as our main focus on HIV, TB and malaria, our early discovery
work allows us to pursue the most promising scientific leads in other
areas, both within GSK and through our Tres Cantos Open Lab and
Vaccines Institute for Global Health.
In 2018, we pledged an additional £5 million in funding for the
Tres Cantos Open Lab Foundation. The Open Lab furthers R&D for
diseases of the developing world by offering external researchers
the potential to access GSK’s compound library, screening tools
and scientific expertise. As well as supporting research into TB
and malaria, projects include neglected tropical diseases such
as Chagas disease, leishmaniasis and sleeping sickness. Since it
was established in 2010, the Open Lab has approved 74 projects,
trained 85 scientists in global health drug discovery and delivered
a significant pipeline of candidate medicines, including a novel
TB drug candidate with treatment shortening potential.
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 26
Trust continued
The Vaccines Institute for Global Health also has around
40 scientists working on diseases such as Shigella, invasive
nontyphoidal salmonella, typhoid and paratyphoid fever, and
Group A streptococcus.
Health security
We are using our vaccines, medicines and scientific know-how to
help the world to better prepare for future disease outbreaks with
pandemic potential, and tackle antimicrobial resistance (AMR).
To prepare for future public health emergencies, we continue to
advance rapid-response vaccine platform technologies and we are
collaborating on the development of a universal influenza vaccine
candidate.
AMR is one of the biggest health challenges the world faces and
we are playing a leading role in the industry’s response, ranking
first among the large pharmaceutical companies in the Access
to Medicine Foundation’s AMR Benchmark in 2018.
Vaccines play a critical role in avoiding the need for antibiotics by
preventing bacterial, viral and other infections. Our vaccines against
diseases such as diphtheria, meningitis, pneumonia and pertussis
have protected tens of millions of individuals from bacterial infections,
which are major drivers of direct antibiotic prescribing. In addition,
our vaccines for non-bacterial infections such as influenza, rotavirus
and malaria prevent the development of diseases that can trigger
the use of antibiotics, for example to treat secondary infections.
We are also committed to researching and developing new vaccines
against infections that will reduce the need for antibiotics even
further. For example, we are currently developing vaccines against
RSV (a virus), as well as shigellosis and TB (both caused
by bacteria) which are all drivers of current antibiotic use.
In our Pharmaceuticals pipeline, gepotidacin, is the first in a new
class of antibiotics. In 2018, we worked with the UK government
on the proposal to develop and test a new payment model that
should incentivise much-needed R&D into new antibiotics from
the pharmaceutical industry. We are pleased that the UK will be
the first country in the world to progress this type of model, and
have submitted gepotidacin to the programme.
We supported the creation of the Innovative Medicines Initiative’s
AMR Accelerator, which launched a call for proposals in 2018.
This public–private partnership will aim to speed up the discovery
and development of new medicines to treat or prevent resistant
bacterial infections through collaboration and capability building.
Through our Survey of Antibiotic Resistance (SOAR) programme,
we study, analyse and publish reports on antibiotic resistance at
a local level and share the findings with HCPs and public health
bodies to inform the development of local antibiotic prescribing
guidelines. In 2018, we trained over 15,000 HCPs across 20
countries on the appropriate use of antibiotics.
GSK.com: Antimicrobial resistance
Affordability and availability
We are making our products affordable and available to more people
around the world through responsible pricing, and strategic access
programmes and partnerships.
In 2018, GSK topped the Access to Medicines Index for the sixth
consecutive time. The assessment recognised us for having the
largest proportion of our R&D pipeline dedicated to priority diseases,
and for the creation of an integrated Global Health R&D unit to
stimulate collaboration.
Pricing
We aim to improve the health of millions of people each year by
making our products available at responsible prices that are
sustainable for our business.
In developing countries, we use innovative pricing structures as
part of our access strategies to extend product reach (see page 27).
However, we recognise that pricing of pharmaceutical medicines
and vaccines is also an important issue in developed countries,
and we understand patient and payer concerns about affordability.
When setting the price of our medicines in developed markets, we
apply a value-based approach to balance reward for innovation with
access and affordability. We price our medicines according to the
value and outcomes they bring to patients, providers and payers,
while being sensitive to market and societal expectations.
In the US, the pricing of all our product launches – including our
most recent launches of Trelegy Ellipta, Benlysta SC, Shingrix and
Juluca – incorporate specific market dynamics unique to the drug,
as well as the profile of the new medicine or vaccine in the context
of existing treatment options.
The average net price1 for our products in the US has fallen by
around 3% on average per year over the past five years. We also
offer various types of patient assistance to help ensure appropriate
access to our medicines, and in 2018 we provided prescribed
medicines and vaccines to over 126,000 eligible uninsured patients
through our Patient Assistance Programme.
In Europe, we engage with governments and payers to work
towards sustainable health systems that support ongoing innovation.
For example, the pricing of Trelegy Ellipta reflects economic value
by demonstrating cost-effectiveness and innovation within an
acceptable budget and offering a potential cost saving compared
with alternatives.
We do not file patents for our medicines in least developed countries
and low-income countries, and do not enforce historic patents that
we have in those countries. This allows generic companies to
manufacture and supply generic versions of GSK medicines in
those countries.
GSK.com: IP and access in developing countries
1 Price after discounts, rebates or other allowances.
GSK Annual Report 2018 27
Product reach
Healthcare access
We have set a new target to use access strategies to reach
800 million underserved people in developing countries with our
products by 2025. These strategies include tiered pricing, product
donations and voluntary licensing agreements to extend access
through generic manufacturers. In 2018, our products reached
over 102 million people through these access strategies.1
In accordance with our tiered pricing principles, we reserve our
lowest vaccines prices for organisations such as Gavi, the Vaccine
Alliance, which supports countries with a GNI per head of less
than $1,580. Eight Gavi countries are now using our new four-dose
vial presentation of our Synflorix pneumococcal vaccine, designed
to address cold chain challenges in hot countries, and our Rotarix
vaccine is available in 36 Gavi countries to protect against rotavirus.
In 2018, we distributed around two million doses of our vaccine
Cervarix in Zimbabwe in support of its multi-age cohort vaccination
programme to protect over 800,000 girls against human
papillomavirus. In 2018, we delivered 270 million doses of oral
polio vaccine to UNICEF in support of the Global Polio Eradication
Initiative, reaching over 54 million children.
Umbipro, our innovative chlorhexidine gel to prevent umbilical cord
infections, has been approved in 13 countries so far and has already
benefited over 30,000 newborns in Kenya. Created in partnership
with Save the Children, this potentially life-saving product is available
at an access price (not for profit, not for loss). In collaboration with
USP and USAID, we will share manufacturing know-how to stimulate
local production and wider access to quality-assured chlorhexidine
in developing countries.
In 2018, ViiV Healthcare extended its voluntary licence agreements
for dolutegravir with the UN-backed Medicines Patent Pool and our
direct licensee Aurobindo to two further countries – Mongolia and
Tunisia – to enable generic manufacturers to supply dolutegravir
to more adults living with HIV. Our joint partnership with the Clinton
Health Access Initiative, Unitaid and two generic manufacturers is
also helping to catalyse the development, manufacture and supply
of paediatric formulations of dolutegravir.
In 2018, we donated over 840 million albendazole tablets (8.5 billion
over the last two decades) to the WHO to tackle neglected tropical
diseases, helping to deworm millions of school children and free
14 countries of lymphatic filariasis (LF). Tackling LF and intestinal
worms is part of our commitment with the WHO and other partners
to help control or eliminate 10 of the 17 neglected tropical diseases
by 2020.
Through our partnership with Americares, Direct Relief, IHP UK
and MAP International, we also donated 150,000 units of essential
medicines, including antibiotics and inhalers, for humanitarian and
emergency response in countries such as Guatemala, South
Sudan and Syria.
GSK.com: Access to medicines in developing countries
We have set a new long-term target to partner to improve
disease prevention, awareness and access to healthcare services
for 12 million people by 2025. In 2018, we reached 4.2 million people
through these partnerships.
This year, we have invested a further £10.5 million in improving
health infrastructure in developing countries by training frontline
health workers in partnership with Amref Health Africa, CARE
International and Save the Children. This support is tailored to
meet specific community needs and align with government health
priorities. In 2018, this investment helped to train over 20,000
frontline health workers, and over two million people were directly
reached with a health worker, healthcare service or health facility.2
As well as our efforts to combat malaria through R&D (see page 25),
we have partnered with Comic Relief in Africa and South East Asia
to support 21 local projects that improve awareness and prevention
efforts and get treatment to the people who need it. Together,
we reached more than one million people in 2018, including health
workers and vulnerable populations such as pregnant women and
young children.
Alongside local and global partner organisations, we continue
efforts to remove stigma and support HIV education and prevention
in at-risk communities around the world through ViiV Healthcare’s
Positive Action programmes for girls and women, adolescents,
children, men who have sex with men (MSM) and transgender
people. In 2018, for example, ViiV awarded grants of £2.3 million
to support organisations working to prevent and treat paediatric HIV,
and £1.8 million to support social science research in adolescent
HIV. Our Positive Action for Children programme reached over
530,000 people in 2018 with interventions to alleviate the impact
of HIV and AIDS on women and children’s health.
Our partnership with Save the Children aims to combine the two
organisations’ global expertise, skills and energy to help reduce
child mortality. In 2018, the partnership reached over 220,000
children under five (over 2.8 million children since 2013) with
interventions including: widening immunisation coverage,
accelerating access treatments and strengthening healthcare
systems. We have extended our partnership over the next five
years to support our shared ambition that no child under five
should die from preventable causes.
With GSK Consumer Healthcare’s heritage in specialist oral health,
we know the importance of a healthy mouth. This year, we launched
a five-year partnership with Smile Train to provide funding and
expertise that will help more children get access to life-changing
surgery for cleft lip and palate. We reached over 4,000 children in
the first year through corporate donations and employee fundraising.
As a leader in pain relief and fever management, GSK’s Consumer
Healthcare business has also created the Allied Against Dengue
campaign in India and South East Asia. The campaign was created
to bring together key stakeholders and partners to prevent and treat
outbreaks of dengue fever, a potentially fatal mosquito-borne disease.
In 2018, we trained over 1,000 healthcare workers and reached over
100,000 people through a range of programmes to mobilise
communities and promote behaviour change.
Our contribution to community health programmes amounted to
£224 million in 2018. This includes our support of access partnerships
such as Comic Relief and Save the Children, in-kind product
donations such as albendazole and those made through our Patient
Assistance programme, and the volunteering time of our employees.
1 Total excludes reach through albendazole donations which will be assessed
in 2025.
2 Health worker data is estimated based on 2017 reach through the same partner
programmes and level of funding. Final 2018 data will be available in April 2019.
GSK.com: Access to healthcare partnerships
ViiVHealthcare.com: Positive Action programmes
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 28
Trust continued
Modern employer
As a modern employer, we want to make sure that everyone is
empowered to be themselves, feel good and keep growing at GSK.
We believe this will help us to attract, retain and motivate the very
best people to support our business now and in the future.
Engaged people
Employee engagement is an important barometer to gauge how our
people feel about working at GSK. We aim to achieve and maintain
a competitive employee engagement score by 2022.
We now survey our employees twice a year to get more regular
feedback about how we are doing on our long-term priorities and
culture change. For our first global employee survey of the year
in April 2018, we had a record high 84% response rate and the
results showed we had strong employee engagement at 79%.
For the second survey in September, we saw a one-point drop
in engagement but it remained high at 78%.
As part of our culture change, we have encouraged our people
to share their views and ideas on key topics through regular
conversations hosted by our leaders, including Let’s Talk sessions
with our executive team. We also introduced a collaborative internal
tech platform to enable employees to communicate and collaborate
more informally, discuss the topics that matter to them, and share
knowledge and perspectives to support faster decisions across
the organisation. More than 68,000 users are active on this new
online tool.
Inclusion and diversity
We take a progressive approach to inclusion and diversity because
we want everyone to be themselves and bring their own perspectives
to our business. Together, these unique perspectives and wide
variety of personal experiences make our business stronger,
enhancing our ability to innovate and respond to the diverse
needs of patients and consumers around the world.
We want to accelerate our progress on inclusion and diversity,
aiming for over 37% female representation in senior roles and
recognition in global LGBT+ indices, by 2022.
In 2018, women made up 33% of our senior roles at SVP/VP
level (up from 31% in 2017) and we maintained strong female
representation at management level (45%). In January 2018,
we signed up to the 30% Club gender campaign focused on
achieving 30% female representation in senior management
within FTSE 100 companies by 2020. GSK has already exceeded
this target and remains committed to maintaining and improving
on this.
The latest independent Hampton-Alexander Review of FTSE 100
companies found that GSK has the sixth highest proportion of
women on the Board with 45.5% representation. Overall, we have
increased our female senior executive population (our executive team
and their direct reports) from 25.7% to 32.5% as our long-running
programmes to create a strong female pipeline deliver results.
GSK is also one of 12 prominent healthcare and life science
companies to join the Healthcare Businesswomen’s Association
Gender Parity Collaborative in the US, launched in 2018 to foster
measurable gender parity progress in the industry.
Women in management (%)
SVP/VP
Director
Manager
Total
2018
2017
2016
2015
33
43
48
45
31
43
47
44
30
42
46
43
29
40
45
42
Employees by gender (number)
Board
Management*
Total
Male
6
9,704
53,188
Female
5
8,051
42,302
Total
11
17,755
95,490
* 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.
We support development and career progression for high-performing
female managers through our Accelerating Difference programme,
which provided coaching and support for around 130 women in
2018. We also recruit and support women early in their careers,
with women representing more than half of the intake of our graduate
and MBA programmes and 35% of our apprentices in 2018.
We published our second gender pay gap report in 2018.
Our gender pay gap for all permanent UK-based GSK employees
is 2.15% (mean), outperforming the national average of 17.1%.
We do not tolerate harassment, unwelcome, unreasonable or
offensive behaviour, or discrimination of any kind. This includes any
form of sexual harassment and, in 2018, we included a module in our
mandatory Code of Conduct training to reinforce our zero-tolerance
approach. This emphasised the importance of bystander intervention
to empower our employees to intervene if they see harassment
occurring.
In September 2018, nearly 3,700 people at 150 locations took part
in activities to raise awareness of our commitment to inclusion and
diversity during Global Inclusion Week. As part of this, we launched
new learning programmes focused on unconscious bias and
resources to help build leaders’ awareness of inclusion and diversity.
We have a Global Disability Council and a Global LGBT+ Council,
as well as inclusion and diversity implementation groups. In addition,
in 2018 we created new global gender and ethnicity councils, all of
which will drive our diversity agenda with support from our employee
resource groups. We achieved a top 10 listing for our LGBT+
Network Group at the British LGBT Awards and, in early 2019,
the group was named the UK’s ‘Employee Network Group of the
Year’ by the Stonewall LGBT rights organisation.
In 2018, we pledged our support for the UN LGBTI Global Business
Standards. In the US, GSK was named Best Place to Work for
LGBT Equality for the third consecutive year in the Human Rights
Campaign’s Corporate Equality Index and, in early 2019, we were
ranked 24th in Stonewall’s UK Workplace Equality Index. We are
committed to removing barriers, increasing understanding and
ensuring that those with disabilities have the same opportunities.
We signed the Charter for Change at the 2018 UK government’s
Department for International Development Global Disability Summit,
joining other organisations with a common aim to ensure rights,
freedoms, dignity and inclusion for people with disabilities.
GSK Annual Report 2018 29
Health, wellbeing and development
We need resilient, motivated people with the right skills and
knowledge to help us achieve our objectives. That is why we
aim to be a leading company in how we support employee health,
wellbeing and personal development.
Health and wellbeing
In 2018, we successfully rolled out a comprehensive preventive
healthcare package for our employees – and their eligible
dependants – in every country where we operate. The Partnership
for Prevention programme, now covers over 200,000 people in
every country in which we operate and includes up to 40 preventive
healthcare services at little or no extra cost.
We provide programmes to help our people feel good by taking
control of their health, managing their energy levels and adopting
healthier behaviours – as well as giving them flexibility to manage
their lives through life-friendly policies.
In 2018, more than 15,000 people took part in our energy and
resilience programmes. Our personalised digital health platform
was piloted by over 5,000 employees in Belgium and 38% said
that they changed one or more health behaviours as a result.
We will continue to roll out technology platforms to support
a holistic approach to health and wellbeing in 2019.
GSK was named the World’s Most Active Organisation by Virgin
Pulse Global Challenge for the third year running, with over 15,500
employees collectively taking over 18 billion steps during May 2018.
Participants reported increased productivity and lower stress levels.
Mental wellbeing is just as important as physical wellbeing and we
raised awareness of this important issue on World Mental Health
Day, encouraging people to seek support through our 24-hour
confidential Employee Assistance Programme and other resources.
Preventing injuries and illnesses at work is fundamental to our
people’s health and wellbeing. Our reportable injury and illness rate
has continued to decline from 0.24 per 100,000 hours1 worked in
2017 to 0.23 in 2018, and remains comparable with other leading
companies in our sector.2
Reliable supply
Ensuring a high-quality, safe and reliable supply of our products for
patients and consumers is a priority for all three of our businesses.
Product shortages can happen for a variety of reasons, including
supply disruptions and unexpected demand. Since launching our
Shingrix vaccine, we have delivered more than 9 million doses globally,
but the unprecedented demand has meant that some people have
experienced supply shortages. We are working hard to build capacity
and meet this long-term global demand and we are committed to
communicating transparently on the actions we are taking.
Our robust quality management system supports continuous
improvement, helping us to maintain high standards for product
quality and safety and comply with relevant regulations, including
those on Good Manufacturing Practice, Good Pharmacovigilance
Practice and Good Clinical Practice.
Of the 151 external regulatory inspections at our Pharmaceutical,
Vaccines and Consumer Healthcare manufacturing sites in 2018,
most found no issues or resulted in only minor observations.
We address every issue, however minor, and regulatory authorities
have accepted our proposed plans for corrective actions.
1 2017 data has been restated from 0.23 to 0.24 due to incidents reported
after the previous verification period.
2 Based on benchmarking data from the Pharmaceutical Safety Group.
Development
We want our people to keep growing at every stage of their career.
That’s why development is one of four expectations for the company
and we have a strong focus on improving the effectiveness of our
people managers. In 2018, 89% of our employees had development
plans in place and, in support of developing leaders, more than
2,000 managers also participated in leadership development
programmes this year.
In 2018, we introduced One80 reviews for nearly 9,000 managers
to help them improve based on feedback from their teams. Through
a short survey, it measures leadership effectiveness in three key
areas: knowing their people, delivering results and maximising
potential. One80 is part of our performance management system
and is designed to ensure our managers are role models for our
values and expectations, as well as helping them enhance their
leadership skills. We know from One80 scores that employees
feel supported by managers in their development. The question
“my manager provides highly effective coaching and guidance to
support my development” scored an average of 3.8 out of 5 from
51,630 responses. We are encouraged by this and have aspirations
to further improve on these scores.
GSK is now a member of the 5% Club, a group of companies
committed to hiring young people in development programmes into
at least 5% of UK roles. In 2018, 336 people joined our graduate
development programmes globally and 165 began apprenticeships
in the UK, Canada, Ireland, Singapore, Belgium and the US.
This year, employees contributed over 120,000 volunteering hours
through our Orange Days and 63 employees went on PULSE
assignments with 25 non-profit organisations in 31 countries to
share their expertise and learn new skills. Our most recent volunteer
assessment found that, after completing their assignment, 73%
agreed that they brought new ideas and fresh ways of thinking
or working to GSK.
GSK.com: Employee volunteering • Training and development data
In 2018, we conducted 1,650 audits of our suppliers’ quality
processes and 221 audits of clinical trials run by, or on behalf
of GSK, to assess their quality and safety.
Detecting, monitoring, understanding and preventing side effects
(pharmacovigilance) is important in evaluating the safety of
pharmaceutical products, and we work with the WHO and other
partners to enhance systems for reporting these. Through the
TransCelerate Collaboration, we are working with others to promote
harmonised approaches and procedures for the clinical development
and safety evaluation of drugs, and to implement key regulations.
Counterfeit GSK products present a risk to patient safety.
We support efforts to prevent the manufacture and distribution
of counterfeit GSK products by working closely with government
bodies, international organisations (such as the World Customs
Organization and the WHO), customs authorities and industry
associations. We also conduct our own investigation and
enforcement activities to tackle counterfeit GSK products.
Our commitment to high standards of product quality and safety
across the value chain helps to ensure a reliable supply, which is
important for our performance (see the sections of this report on
performance in our individual businesses).
GSK.com: Pharmacovigilance • Anti-counterfeiting
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 30
Trust continued
Ethics and values
We are committed to creating an ethical, values-driven culture,
in which any issues are responded to swiftly and transparently.
We expect everyone at GSK to live our values and expectations,
speak up if they have any concerns, engage appropriately with
stakeholders and respect human rights. We also extend these
ethical expectations to the third parties we work with.
Living our values and expectations
Together, our values (patient focus, integrity, respect and
transparency) and expectations (courage, accountability,
development and teamwork) help us to create the culture we
want. They are included in our Code of Conduct, which we
have updated to make it simpler and easier to use.
Every GSK employee and complementary worker is required to
complete mandatory training on the Code of Conduct annually.
In 2018, 98% of our employees and 91% of our complementary
workers completed the training, which covered topics such as safety,
health and wellbeing, third party oversight, data breach reporting,
sexual harassment, and anti-bribery and corruption (ABAC).
We also introduced additional microlearning modules to be taken
throughout the year to keep our values and expectations top of mind,
and updated our discussion guides for leaders to engage with their
teams about related topics. Further in-depth training for over 35,000
people used real-life examples of dilemmas experienced at GSK to
help them understand how to manage ABAC risks relevant to their
roles and reinforce our zero-tolerance approach to bribery and
corruption.
In 2018, we assessed 18 different parts of the business against
a values maturity matrix – including interviewing approximately
1,500 employees – to understand how well our values and
expectations are embedded. Individual areas of the business
are using insights from the assessments to put plans in place
that further enhance the way our values are integrated into ways
of working at GSK. Local examples include increasing opportunities
for engagement with leadership teams to improve trust and
enhancing employee recognition to encourage a greater sense
of accountability.
GSK.com: GSK Code of Conduct
1 These are the latest available figures, and 2018 figures will be available in April
2019 for submission to the EU’s Transparency Register.
Reporting and investigating concerns
We encourage people to speak up if they have any concerns
relating to unethical conduct or behaviour that is inconsistent with
our values – or if they simply want to ask a question about how to
apply our Code of Conduct.
Anyone within or outside GSK can raise concerns or speak to an
independent third party through our integrity lines, confidentially
or anonymously if they prefer. We take every reported concern very
seriously and we review each one to understand whether a formal
investigation is warranted. If our investigations show that an employee
has breached our policies, we take appropriate disciplinary action.
In 2018, 2,842 employees were accused of misconduct; we
reviewed all of these cases, and initiated 1,805 formal investigations.
As a result, 940 employees were disciplined for policy violations,
of whom 115 employees were dismissed or voluntarily left the
organisation. A further 656 received other documented warnings.
In other instances, action short of a documented warning was taken.
Employees disciplined in 2018: breakdown of types of
policy violation (%)
Mandatory training completion
Behaviour in the workplace
Good manufacturing and distribution practices
Marketing and promotional activities
Expenses
Protection of physical assets and security
Other
Political engagement
29%
20%
11%
8%
4%
3%
25%
Everyone working for, or on behalf of, GSK must follow our
Code of Conduct in their interactions with political stakeholders.
Additionally our selection process for public policy groups includes
criteria to ensure those groups share our values.
In 2018, GSK topped Transparency International UK’s Corporate
Political Engagement Index of 104 global companies operating in
the UK, based on criteria such as political contributions, responsible
lobbying and transparency in reporting.
We spent $4.57 million on federal lobbying activities in the US in
2018, which are registered on the US Federal Lobbying Register.
The spend includes the cost of operating our office in Washington
DC, and the cost of travel and consulting. The cost of representing
our interests to EU institutions, published on the EU Transparency
Register, was €1.73 million.1 We also publish a list of our
memberships in trade associations that may lobby indirectly
on our behalf.
GSK does not make corporate political contributions. Our US
employees may support individual candidates or political groups
financially through a Political Action Committee, which contributed
$345,190 to state and federal candidates in 2018. A breakdown
of this spend is available online.
GSK.com and online: EU Transparency Register • US Federal Lobbying
Register • Trade association membership list • Criteria for working with
Public Policy Groups
GSK Annual Report 2018 31
Human rights
Working with third parties
GSK is committed to upholding the Universal Declaration of Human
Rights and the core labour standards set out by the International
Labour Organization. In 2018, as part of our commitment to
implementing the UN Guiding Principles on Business and Human
Rights, we reassessed our human rights risks to ensure we are
focusing efforts where our business has the greatest potential
to impact people.
Our Third Party Oversight programme strengthens our management
of risk in the supply chain by driving improvements in our network
of third parties – including suppliers, distributors and other
organisations with which there is a transfer of value – to ensure
that they share our values and work to the ethical and business
standards expected by GSK. The programme has now been rolled
out across all areas of the business.
Six priority areas were identified: access to healthcare; research
practices; patient safety; labour rights; environment, health and
safety; and privacy. An initial review found that there were appropriate
measures in place to manage the human rights risks related to most
of these areas, but identified the need to continue to strengthen
our approach to managing third-party labour rights risks. We are
developing actions to address this, and will continue to build our
understanding and management of human rights risks, taking
account of evolving external expectations and best practice.
GSK.com: Human rights • Modern Slavery Act statement
Data and engagement
We are committed to using data responsibly and transparently,
and engaging with patients and healthcare providers to help meet
patient needs. This includes treating data with respect, sharing
the results of our clinical trials, integrating patient insights into
our product development and providing healthcare professionals
with the information they want in the way that they want it.
Using data responsibly and transparently
Data is becoming increasingly central to our business and the
healthcare industry more broadly. Our digital, data and analytics
strategy harnesses the power of data and technology to strengthen
our business and make a real difference to patients around the world.
We believe this will help our scientists develop innovative medicines
more quickly and with higher probability of success than ever before,
it will enhance clinical trials and improve interaction with healthcare
providers, customers and consumers, and it will make our own
processes more efficient.
Data privacy
We recognise that people are increasingly concerned about the
protection, and inappropriate use of personal data, particularly
when this is related to health. New EU regulations have also
increased requirements on how companies use personal data.
Loss or inappropriate use of personal information could have a
serious impact, both on the individuals affected and on our business,
and we take our responsibility for data and privacy very seriously.
We have developed a comprehensive suite of training to drive a
culture where everyone at GSK takes personal responsibility for
the correct handling of personal data. Our privacy principles ensure
that our use of personal information is kept to the minimum necessary
and is fair, transparent, accurate and secure. In 2018, we trained
113,000 of our employees and complementary workers on our
privacy principles to help them understand how to apply them
in their daily work and raise awareness of why privacy matters
for all those who handle personal data.
During 2018, over 23,000 risk assessments were completed,
and over 1,400 third parties identified as high-risk have undergone
detailed independent assessments by EcoVadis. In 2018, we
also conducted 83 in-depth audits on health and safety, ethics
and environment. While we will work with third parties to help
them improve, if significant issues are not resolved, we may
suspend or terminate their contract.
GSK.com: Working with third parties
In addition, people in key roles across the organisation are
undergoing certification from an accredited external association
to increase expertise and enable us to make informed decisions
about handling personal data.
The protection of individuals’ data and privacy is a high priority
in our exclusive collaboration with 23andMe, which combines
23andMe’s genetic expertise and advanced data science skills
with GSK’s extensive scientific capabilities and scale, to enhance
the discovery and development of entirely new medicines and
potential cures. 23andMe customers can choose to participate in
research and contribute their information to the unique and dynamic
database for the purpose of advancing scientific research.
Participation is voluntary and customers are required to affirmatively
consent to their data being used for research. Should they choose
to participate, their information is aggregated so no individual will
be identifiable to GSK.
Clinical trial transparency
As part of our long-standing commitment to data transparency for
our clinical trials, we have published 2,484 clinical study reports
and 6,427 summaries of results – positive and negative – from our
trials on our clinical study register.
We also share anonymised patient-level data from 2,333 of our trials
via www.clinicalstudydatarequest.com, which we launched five years
ago to facilitate innovative data-driven research. It is now used by
19 other trial sponsors and funders. External researchers are granted
access based on a review of the scientific merit of their research
proposal by an independent panel. Access to GSK trial data has
been approved for 125 proposals since 2013.
GSK.com and online: GSK Privacy Notice • GSK Clinical Study Register
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 32
Trust continued
Improve patient and scientific engagement
To improve the delivery of ground-breaking new therapies, we are
strengthening our focus on patients’ needs by seeking their insights
across the business. In 2018, we began implementing new global
standards on working with and supporting patients.
We also support several initiatives that are empowering patients to
get more involved in the development of medicines through training,
tools and dialogue – including the European Patients’ Academy,
PARADIGM (Patients Active in Research and Dialogues for an
Improved Generation of Medicines) and Patient Focused Medicines
Development.
We held Patient Advocacy Leaders Summits in Japan, Portugal
and Switzerland and supported one in the US this year, to build
relationships between GSK employees, patient advocates, health
policy experts and industry. Representatives of patient organisations
also provide insights through our European Health Advisory Board
and our Respiratory Health Board.
To improve engagement with patients involved in our clinical trials,
we have begun developing patient engagement plans for key assets
to get their input on the development of trial protocols, improve their
experience during the trial and make sure they are informed about
the results when it is completed.
Through our engagement with HCPs, we aim to provide information
on our products in the way that best suits them. In recent years,
we have significantly strengthened our online resources and
in-house medical capabilities to provide bespoke product information
for HCPs.
In 2018, we updated our policy on working with HCPs, following
consistent feedback that they prefer to learn about new products
through peer-to-peer programmes with experts who have direct
experience of our medicines. The update was designed to ensure
that we continue to operate responsibly and improve how we help
prescribers to understand new data and clinical experience with
our innovative products. The Pharmaceuticals section of this report
provides more detail on this policy change.
GSK.com: Patient engagement
Globally, around 5% of our electricity came from renewable sources
in 2018. We are targeting 60% by 2030, with an interim target
of 30% by 2020 to further reduce our operational emissions.
In 2017 (our latest available data), Scope 3 emissions increased
by less than 1%, but decreased by 8% per £1 billion revenue.1
Our supply chain makes up the largest share (48%) of our value
chain carbon footprint. We encourage suppliers to share best
practices through the GSK Supplier Exchange, running ‘kaizen’
events to improve energy efficiency and recognising achievements
through our Supplier Environmental Sustainability Awards.
Carbon emissions plus intensity ratios (as per regulations)
‘000 tonnes CO2e2
Scope 1 emissions
Scope 2 emissions
Scope 3 emissions
Intensity ratios
Scope 1 and 2 emissions/
sales revenue (tonnes
CO2e/£m)
Scope 1 and 2 emissions/
FTE (tonnes CO2e/FTE)
Scope 3 emissions/£bn
revenue (million tonnes
CO2e/£bn revenue)
2018
823
606
Full data
available in
next year’s
report
2018
46.4
15.0
Full data
available in
next year’s
report
2017
865
694
2016
889
700
18,152
17,897
2017
51.5
15.8
0.6
2016
56.0
16.0
0.64
Environment
Our new goal, by 2030, is to reduce our environmental impact by
one quarter, cutting greenhouse gas emissions, reducing water
impact and redirecting waste for beneficial use. This is underpinned
by five new environmental commitments for 2030 (against a 2016
baseline) to:
– reduce operational carbon emissions (Scope 1 and 2) by 20%;
– reduce value chain carbon emissions (Scope 3) by 25%
per £ billion revenue;
– source 60% of electricity from renewable sources;
– reduce total water use at each high-risk site by 30%;
– ensure all waste is repurposed for beneficial uses.
Carbon
We are committed to playing our part to address climate change.
In 2018, we set new targets to cut our carbon footprint across the
value chain, which are intended to be challenging but achievable.
We also conducted a review of the reporting requirements of the
Task Force on Climate-related Financial Disclosures (TCFD)
and will be considering how we can use the guidelines to better
understand and report the risks that climate change presents to
our business. In early 2019, we were accredited by the Science
Based Targets Initiative for a set of Scope 1, 2 and 3 targets in line
with a level of decarbonisation required to keep global temperature
increase below 2°C.
Our overall value chain carbon footprint is made up of Scope 1 and 2
emissions from our own operations (14%) and Scope 3 emissions
from our supplier base (48%), logistics (4%) and the use of our
products (34%).
In 2018, Scope 1 and 2 emissions were reduced by 8% through
ongoing efficiency measures, investment in on-site generation of
renewable energy and a reduction in the number of sites. In India,
for example, we have saved over 24,700 tonnes of CO2e emissions
over the past four years through investment in solar installations, a
combined heat and power plant, and more efficient lighting, heating
and manufacturing.
1 2018 figures will be available from April 2019.
2 Carbon emissions are calculated according to the Greenhouse Gas Protocol:
A Corporate Accounting and Reporting Standard (revised edition).
GSK Annual Report 2018 33
Environmental stewardship
We are committed to moving towards deforestation-free sourcing
for all key commodities purchased directly by GSK or indirectly
on our behalf, although we recognise that this is a challenge due to
the complex nature of our supply chains. To date, we have focused
on paper packaging, palm oil and palm oil derivatives and have
developed supplier selection criteria, as well as sourcing standards
in conjunction with the Rainforest Alliance.
The packaging of our products plays an important role in delivering
safe, stable and trusted medicines, vaccines and consumer healthcare
products. However, GSK recognises the impact that plastic
packaging has on the environment. We have a number of initiatives
in place to reduce plastic use, increase use of recycled plastic content
and encourage the recycling of plastic components. For example,
ensuring our packaging is no larger in volume, weight and thickness
than it needs to be to fulfil its function of protecting the product.
In 2018, we took steps to understand and quantify the amount
of plastic packaging that we produce globally across our business.
We are now using this information to evaluate how we can further
reduce the impact that our plastic use has on the environment.
GSK.com: Environmental policies
In 2018, the emissions from the use of our products have increased
by 4% since 2017, as we make medicines accessible to more
people. Most of these emissions come from propellant gases used
in Ventolin metered dose inhalers (MDIs). Over the last few years
we have conducted detailed analysis to explore the requirements of
developing a new propellant for MDIs with a lower carbon footprint.
Our findings show that this would be extremely complex, requiring
extensive R&D, significant changes to our manufacturing process
and new clinical trials to test for efficacy and safety for patients.
Weighing up these challenges, and given there are no incremental
benefits to patients, along with the need for us to allocate our capital
investments to developing promising new medicines to improve
health, we have therefore decided to instead focus our investment
on our new generation dry powder inhaler technologies which do
not release greenhouse gas emissions. Our entire new portfolio
of inhaled medicines is delivered via the dry powder Ellipta inhaler
which has a lifecycle carbon footprint around 24 times lower than
a propellant-based inhaler,1 based on an assessment that won
GSK the Carbon Trust’s Best in Product Carbon Footprinting
Award in 2018. In addition, we support efforts to promote low-
carbon inhalers where possible, such as the commitment made
by the UK government, and to increase inhaler recycling for the
recovery and reuse of HFA gas.
Water
While climate change must be tackled at a global level, water
challenges are much more localised. We used 12.9 million cubic
metres of water across our operations in 2018 (compared with
14.7 in 2017) and we are focusing our reduction programmes
in the areas where we have the biggest overall water impact.
All our Pharmaceutical and Consumer Healthcare manufacturing
sites have completed risk assessments to ensure compliance
with our water stewardship standard by 2020. Through these
assessments, we identified 13 high-risk sites, based on water
scarcity, local water quality, health and social risks, and regulatory
and reputational risks. These sites are now developing strategies
to reduce their water impact. Our goal is to reduce our total water
use at each high-risk site by 30% by 2030.
Waste
We have cut the amount of waste we produce by 7% since 2016,
generating a total of 126,000 tonnes in 2018 (including 36,000
tonnes of hazardous waste).
Further reductions in the amount of waste created – or complete
elimination of waste – is extremely challenging. Our new goal is
for all our waste to be repurposed for beneficial uses by 2030.
This avoids harmful environmental impacts from landfill and keeps
materials, such as solvents, in circulation for use in new products.
In 2018, 71% of our sites achieved zero waste to landfill. Globally,
77% of our waste was recycled or incinerated with energy recovery.
For example, more than 1.5 million used inhalers have been recycled
through our Complete the Cycle programme in the UK since it began
in 2012.
1 For one year’s treatment, use of propellant-based inhalers results in a carbon
footprint of 228kg CO2e compared with a carbon footprint of 9.6kg CO2e from
using Ellipta dry powder inhalers.
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 34
Risk management
Our risk management framework is well embedded and continually
reviewed, with oversight at Board level through our Audit and Risk
Committee, assisted by our Risk Oversight and Compliance Council.
The framework enables the Board to identify, evaluate and manage
our Principal Risks and is designed to support our long-term priorities.
It provides our businesses with a framework for risk management and
upward escalation of significant risks. In conjunction with our values
and expectations and Speak Up processes, it ensures that the risks
associated with our business activities are actively and effectively
agreed and mitigated and provides reasonable assurance against
material misstatement or loss. Each of our businesses is governed
by a Risk Management and Compliance Board, which promotes
the ‘tone from the top’, establishes the culture regarding risk and
oversees internal controls. Our annual confirmation exercise ensures
a consistent risk management approach across GSK which
reinforces leader accountability.
Each Corporate Executive Team member performs a review of their
key Principal Risks to ensure controls are in place – and wherever
gaps are identified, clear plans are assigned to address them.
During the year, the Audit and Risk Committee considered GSK’s
risks and the strategies to address them. These reviews were
undertaken through: annual business unit risk and assurance
update reports; strategy papers for each of our most significant
risks; and an annual risk review.
We have emphasised the importance of data privacy from an internal
risk management perspective by separating Privacy as a new,
stand-alone Enterprise Risk from the Information Security Enterprise
Risk. Consequently, we now report on 11 Principal Risks, rather
than 10. The risks are listed below with our assessment of the
external macro environment and the risk exposure post mitigation.
They are not in order of significance.
Risk
Patient safety
Macro
environment
GSK exposure
post mitigation
Product quality
Macro
environment
GSK exposure
post mitigation
Assessment and mitigation activities
– The macro risk level has increased on a global scale due to an expanding, strict and diverse
regulatory environment, which is going to evolve further, as exemplified in China. In general
the macro environment in the established US and European markets remains unchanged with
patient safety and Good Pharmacovigilance Practices (GVP) remaining consistent. Plans are
in place to ensure that GSK’s approach to patient safety is not compromised by Brexit.
– The GSK risk exposure remains unchanged. We are providing strong oversight to mitigate
risk during implementation of organisational improvements to the local and central
pharmacovigilance model.
– The macro risk level remained unchanged, with continuing industry-level regulatory scrutiny
of data integrity, drug shortages caused by manufacturing issues, and the need for timely
communication of issues with authorities.
– The overall GSK exposure level remains unchanged; however, improvements in annual
performance metrics reflect GSK’s ongoing investment and improvement initiatives in
facilities, operating systems and training.
Financial controls & reporting
– The macro level remains unchanged, as there has been no material increase in financial
Macro
environment
GSK exposure
post mitigation
reporting requirements.
– The GSK exposure level has reduced as a result of the successful completion of the US
and intercompany system migrations onto the new ERP platform.
Anti-bribery & corruption (ABAC)
Macro
environment
GSK exposure
post mitigation
Commercial practices
Macro
environment
GSK exposure
post mitigation
– The macro risk level remains unchanged with continued strict ABAC laws and scrutiny
from government and regulators, and the high standards expected of corporations.
– The GSK exposure level remains unchanged as we improved targeted training to
those most exposed to bribery and corruption risks in their roles; revised and simplified
applicable written standards; and continued to develop risk indicators intended to provide
meaningful and useful data about the potential for corruption (e.g. financial crimes).
We have reduced our exposure to ABAC risk through a business model change in some
very high-risk markets and will continue to embed these changes into 2019. The SEC and
DOJ investigations regarding third party advisers engaged by GSK in China are ongoing.
– The macro risk level has increased due to greater competitive pressure, increased
regulatory enforcement and an expansion of digital engagement, where laws and
regulations are still evolving.
– The GSK exposure level remains unchanged as we continue to enhance and maintain
control over evolving commercial practices, notably the shift in marketing and sales
practices utilising data analytics and e-commerce channels. In October 2018, GSK
announced changes to the way we will engage expert practitioners to improve sharing
of new data on our innovative medicines and vaccines for a limited time among healthcare
practitioners. New controls and training have been implemented to support these changes
while ensuring appropriate oversight and assurance across the markets.
GSK Annual Report 2018 35
Risk
Privacy
Macro
environment
GSK exposure
post mitigation
Research practices
Macro
environment
GSK exposure
post mitigation
Third party oversight (TPO)
Macro
environment
GSK exposure
post mitigation
Environment, health & safety
and sustainability (EHS&S)
Macro
environment
GSK exposure
post mitigation
Information security
Macro
environment
GSK exposure
post mitigation
Supply continuity
Macro
environment
GSK exposure
post mitigation
ARC Report, see page 79
Principal risks and uncertainties, see page 241
Viability statement, see page 44
Internal Control Framework, see page 87
Assessment and mitigation activities
– The macro risk level has increased due to new, more stringent data privacy legislation
in multiple countries and the rise of enforcement by regulators.
– The GSK exposure level remains unchanged following implementation of a new global
privacy framework and operating model in the European Economic Area during 2018.
This has resulted in the development of critical privacy expertise in compliance, legal,
and business roles, along with the embedding of privacy controls within IT and third
party oversight.
– The macro risk level is increasing, primarily driven by the high rate of change to regulations
and external ethical standards and by increasing data use and technological complexity.
– The GSK exposure level remains unchanged as we continue to establish appropriate
controls and a culture of continuous improvement, overseen by an enterprise risk
governance structure.
– The macro environment remains 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 remains unchanged. The TPO programme has been fully
deployed. Due diligence for low-risk engagements is based on embedded process
controls, relieving Business Owners of TPO activity without a significant change in risk
appetite. High-risk engagements continue to require an engagement risk assessment
and prescribed next steps. The risk-based approach proposed means that some low-risk
issues may occur that will require a reactive response.
– The macro risk level has increased due to greater emphasis on environment controls
from regulators, activists and stakeholders. Particular focus areas include antimicrobial
resistance related to manufacturing releases, the wider issue of pharmaceuticals in the
environment (PiE) and increasing emerging market regulation. External scrutiny of our
external supply chain for active ingredients (both for existing and pipeline assets) has
also increased significantly.
– The GSK exposure level remains unchanged. Risks associated with restructuring
of the site network are being proactively managed. Mitigation and improvement plans
have been established and are progressing through implementation.
– The macro risk level continues to increase as the threat against the pharmaceutical
business and industry generally become more sophisticated and targeted, as evidenced
by the Wannacry and NotPetya global incidents.
– Despite this, the GSK exposure level remains 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.
– The macro risk level remains unchanged with ongoing stringent regulation, a continued
US focus on contract manufacturers outside the UK/EU, and Brexit uncertainties.
– The overall GSK risk exposure level is unchanged. We have improved risk management
of our supplier portfolio; reduced the complexity of our internal and external networks;
and improved our crisis and continuity management framework. However, we have seen
an increase in complexity with the introduction of a major serialisation change programme
for the EU Falsified Medicines Directive coinciding with Brexit preparations.
GSK Annual Report 2018Investor informationFinancial statementsStrategic reportGovernance and remuneration 36
Risk management continued
Risks associated with the proposed separation of GSK’s
Consumer Healthcare business
A separation of our Consumer Healthcare business may be
dependent on a number of factors that are outside GSK’s control,
including any required shareholder and regulatory approvals,
favourable conditions in public equity markets and public or
private debt markets and changes in applicable law and regulation.
Therefore, there can be no certainty that a separation will be
completed as proposed (or at all). In addition, if a separation is
completed, there can be no assurance that either GSK or Consumer
Healthcare will realise the expected benefits of separation or that
the separation will not adversely affect GSK or Consumer Healthcare
or the value or liquidity of their respective shares.
Our approach to Brexit
In preparing for the UK’s exit from the EU (Brexit), our overriding
priority has been to maintain continuity of supply of our medicines,
vaccines and consumer healthcare products to people in the UK
and EU.
As a result, we have taken a risk-based approach to planning
and mitigation, allocating costs of up to £70 million to implement
relevant changes over the next one to two years, while the future
relationship between the UK and EU is negotiated. We have made
good progress in implementing our Brexit contingency plan in 2018.
Our activity has included: arranging the retesting and certifying of
our medicines in Europe; submitting marketing authorisation holder
transfers; updating packaging; securing additional warehousing;
and supporting employees in obtaining settled status or equivalent
in both the UK and Europe. UK technical guidance, which outlines
acceptance of testing from EU sites for a time-limited period, has
allowed us to reduce some potential duplication in our supply chain
in the short term.
Our Brexit plans prepare us for elements that are within our control.
We have significant experience of maintaining resilient supply chains,
and we have used existing processes to develop a new supply
model based on the UK leaving the EU in March 2019. To minimise
disruption to patients, we have also adjusted stock levels in both
the UK and EU. Uncertainty remains about the new operating
environment, and as a result we support efforts to secure a status
quo operating period post-Brexit, and UK and EU preparations to
minimise potential disruption to the supply of medicines to patients.
We anticipate subsequent and ongoing costs arising from Brexit
could include further customs duties and will include the cost
of duplicate testing and release of our products. We continue to
estimate these potential costs at approximately £50 million per year.
As more details emerge on how our business will need to change
after Brexit, the assumptions underlying these forecasts could
change, with consequent adjustments up or down. We will
continue to revise our plans and their expected financial impact
as negotiations and regulations develop. Over the longer term,
we continue to believe that Brexit will not have a material impact
on our business.
GSK Annual Report 2018 GSK Annual Report 2018
37
37
Strategic report
Governance and remuneration
Financial statements
Investor information
Group
financial
review
In this section
CFO’s statement
Reporting framework
Approach to tax
Viability statement
Total results
Adjusting items
Adjusted results
Cash generation and conversion
Financial position and resources
Treasury policies
Critical accounting policies
38
40
43
44
45
51
54
56
58
62
63
GSK Annual Report 2018 38
CFO’s statement
“We continued to make progress in delivering against our strategy
and the financial goals we have set out in our financial architecture”
I am pleased to report that the Group’s results for 2018 demonstrate
continued operational execution of our key strategic objectives with
strong performances from all three businesses.
Sales
Group turnover was up 2% AER, 5% CER to £30,821 million.
Pharmaceuticals sales were flat at AER but up 2% CER, driven
primarily by growth in HIV sales and further progress by the new
Respiratory products, Nucala and the Ellipta portfolio. This was
partly offset by lower sales of Seretide/Advair and Established
Pharmaceuticals. Overall Respiratory sales declined 1% AER
but grew 1% CER.
Vaccines sales were up 14% AER, 16% CER, primarily driven by
sales of Shingrix in the US and growth in influenza and Hepatitis
vaccines, which also benefited from a competitor supply shortage,
partly offset by declines in some Established Vaccines.
Consumer Healthcare sales declined 1% AER but grew 2% CER
with broad-based growth in Oral health and Wellness partly offset
by increased competitive pressures in Europe, the divestments of
some smaller brands, including Horlicks and MaxiNutrition in the UK,
as well as the impact of the implementation of the Goods & Services
Tax (GST) in India.
Cost of sales
Cost of sales as a percentage of turnover was 33.2%, down
1.0 percentage points AER and 1.4 percentage points CER. This
primarily reflected a favourable comparison with the write-downs
of assets in 2017 related to the decision to withdraw Tanzeum,
together with a more favourable product mix in Vaccines and
Consumer Healthcare, partly offset by adverse pricing pressure
in Pharmaceuticals, particularly in Respiratory, and in Established
Vaccines.
Operating profit
Total operating profit was £5,483 million, up 34% AER, 43% CER,
and showed strong progression on 2017. Higher charges for
the re-measurement of the contingent consideration liability related
to ViiV Healthcare were more than offset by a stronger operating
performance, lower restructuring costs, lower asset impairment
charges and a favourable comparison with the charges taken in
2017 related to US tax reform of £0.7 billion.
Adjusted operating profit was £8,745 million, up 2% AER, 6% CER,
driven by margin growth in Vaccines and Consumer Healthcare.
Pharmaceuticals operating profit was down 3% AER, but flat at
CER, reflecting continued investment in our new products and
a weaker gross margin in the face of ongoing pricing pressures.
Earnings per share
Our stronger operational performance helped to deliver improved
earnings per share (EPS) for the Group. Total EPS more than
doubled to 73.7 pence. Adjusted EPS was 119.4 pence up 7% AER,
and up 12% CER.
Total EPS also benefited from a favourable comparison with
charges in 2017 arising from the impact of US tax reform and
a lower non-controlling interest allocation of Consumer Healthcare
profits following the acquisition of Novartis’ interest in our Consumer
Healthcare business in June 2018.
These factors were partly offset by higher transaction-related
charges arising from increases in the valuation of the liabilities for
contingent consideration, put options and preferential dividends.
The Adjusted EPS growth of 12% CER was well ahead of the 6%
CER increase in Adjusted operating profit, primarily as a result of the
reduced non-controlling interest allocation of Consumer Healthcare
profits and a lower Adjusted tax rate.
Selling, general and administration
Cash generation
SG&A costs as a percentage of turnover were 32.2%, up
0.1 percentage points at both AER and CER, reflecting growth
of 3% AER, 5% CER. The increase primarily reflected higher
restructuring costs and investment in promotional product support,
particularly for new launches in Respiratory, HIV and Vaccines.
Research and development
R&D expenditure was lower in 2018 compared with 2017 at
£3,893 million on a Total basis and £3,735 million on an Adjusted
basis. This reflected a favourable comparison with the impact of
the Priority Review Voucher, purchased and used to accelerate
registration of our first HIV two-drug regimen (dolutegravir and
lamivudine) in 2017, as well as benefits from recent R&D
prioritisation initiatives.
Savings from these initiatives are being used to build investments
in a number of mid and late-stage clinical development programmes,
particularly in oncology and functional genomics.
We have continued to drive a strong focus on greater cash discipline
across the Group and I am pleased to report we made significant
further progress this year, resulting in a net cash inflow from
operations of £8,421 million (2017 – £6,918 million) and free
cash flow of £5,692 million (2017 – £3,485 million). This increase
was particularly driven by progress on working capital, despite the
growth in the business, especially in inventory control and stronger
collections. Reductions in capital expenditure, lower legal costs
and higher proceeds from intangible divestments also contributed.
Cash conversion remains a key focus for 2019.
Net debt was £21.6 billion at 31 December 2018, compared
with £13.2 billion at 31 December 2017, comprising gross debt
of £26.1 billion and cash and liquid investments of £4.5 billion,
including £0.5 billion reported within Assets held for sale.
The increase in net debt from last year was primarily driven
by our decision to buy-in the minority stake held by Novartis
in our Consumer Healthcare business for £9.3 billion and an
adverse currency translation impact of £0.8 billion.
GSK Annual Report 2018 39
Capital allocation
Viability statement
We have pursued a disciplined approach to capital allocation,
reflected in the investment choices we made in 2018 and in the
transactions we initiated to strengthen our business and improve
our financial flexibility to support GSK’s key strategic priorities.
This culminated in the agreement announced in December last year
to establish a new world-leading Consumer Healthcare Joint Venture
that we intend to separate from the Group within three years of
the transaction closing. This will give us a unique value creating
opportunity to establish two leading global companies, each with
appropriate balance sheets better able to support their respective
future investment requirements, while continuing to offer
shareholders attractive distributions.
Given the improvements in cash conversion and free cash flow
generation across the Group over the last few years, we remain
comfortable that we can support our future investment requirements.
However, this new pathway for the Group gives us additional
confidence and visibility in our ability to invest behind our first
priority – strengthening the R&D pipeline.
Delivering cash returns to shareholders through dividends is also
a priority. Dividends paid to shareholders in 2018 were £3.9 billion
and we have delivered on the expectations we laid out, with a
dividend of 80p per share for the year. We expect to maintain
the dividend at the same level of 80p for 2019.
Our viability statement sets out our assessment of the prospects
of the Group over the next three years and is presented on page 44.
Outlook
In 2019, we expect Adjusted EPS to decline in the range of -5
to -9% at CER. This guidance reflects the expected impact of the
Tesaro acquisition and the significant investments we are making
behind its products and pipeline. It also reflects the completion of
the other recently announced transactions, as well as the approval
of a substitutable generic competitor to Advair in the US.
2018 was a strong year of operational performance, with good
progress made in commercial delivery of our new products, which
together with continued focus on costs, has led to improved
operating margins. The business is showing good momentum and,
together with the important strategic moves we have made through
the different transactions initiated in 2018, I am confident in the
outlook and prospects for GSK.
Finally, this is my last report to shareholders as CFO, and I would like
to thank them and our many partners for their support in my time with
the company.
Simon Dingemans
Chief Financial Officer
Capital allocation framework
Invest in the business
Key priorities for capital
– Pharmaceuticals pipeline
– Vaccines capacity
Innovation
Performance
Trust
Improved
cash
generation
Shareholder returns
– 80p per share dividend expected for 2019
– 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
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 40
Group financial review
Reporting framework
Total and Adjusted results
The Group financial review discusses the operating and financial
performance of the Group, its cash flows and financial position and
our resources. The results for each year are compared primarily with
the results of the preceding year.
Total results
Total reported results represent the Group’s overall performance.
GSK also uses a number of adjusted, non-IFRS, measures to report
the performance of its business. Adjusted results and other non-
IFRS measures may be considered in addition to, but not as a
substitute for or superior to, information presented in accordance
with IFRS. Adjusted results are defined below and other non-IFRS
measures are defined on page 42.
GSK believes that Adjusted results, when considered together with
Total results, provide investors, analysts and other stakeholders with
helpful complementary information to understand better the financial
performance and position of the Group from period to period, and
allow the Group’s performance to be more easily compared against
the majority of its peer companies. These measures are also used by
management for planning and reporting purposes. They may not be
directly comparable with similarly described measures used by other
companies.
GSK encourages investors and analysts not to rely on any single
financial measure but to review GSK’s Annual Reports, including
the financial statements and notes, in their entirety.
GSK is committed to continuously improving its financial reporting,
in line with evolving regulatory requirements and best practice and
has made a number of changes in recent years. In line with this
practice, GSK expects in 2019 to continue to review its reporting
framework (including, where relevant, the use of alternative
performance measures).
Adjusted results
Adjusted results exclude the following items from Total results,
together with the tax effects of all of these items:
– amortisation of intangible assets (excluding computer software)
and goodwill
– impairment of intangible assets (excluding computer software)
and goodwill
– major restructuring costs, which include impairments of tangible
assets and computer software, (under specific Board approved
programmes that are structural, of a significant scale and where
the costs of individual or related projects exceed £25 million),
including integration costs following material acquisitions
– transaction-related accounting or other adjustments related to
significant acquisitions
– proceeds and costs of disposals of associates, products and
businesses; significant legal charges (net of insurance recoveries)
and expenses on the settlement of litigation and government
investigations; other operating income other than royalty income,
and other items
– the impact of the enactment of the US Tax Cuts and Jobs Act
in 2017.
Costs for all other ordinary course smaller scale restructuring and
legal charges and expenses are retained within both Total and
Adjusted results.
As Adjusted results include the benefits of Major restructuring
programmes but exclude significant costs (such as significant
legal, major restructuring and transaction items), they should not be
regarded as a complete picture of the Group’s financial performance,
which is presented in its Total results. The exclusion of other
Adjusting items may result in Adjusted earnings being materially
higher or lower than Total earnings. In particular, when significant
impairments, restructuring charges and legal costs are excluded,
Adjusted earnings will be higher than Total earnings.
GSK has undertaken a number of Major restructuring programmes
in recent years in response to significant changes in the Group’s
trading environment or overall strategy, or following material
acquisitions, including the Novartis transaction in 2015. Costs,
both cash and non-cash, of these programmes are provided for
as individual elements are approved and meet the accounting
recognition criteria. As a result, charges may be incurred over a
number of years following the initiation of a Major restructuring
programme.
From time to time, the Group divests non-core investments, products
and businesses and records the profit or loss on disposal as an
Adjusting item. The most notable divestment in the past five years
was the disposal of the Oncology business as one element of the
three-part transaction with Novartis in 2015.
Significant legal charges and expenses are those arising from the
settlement of litigation or government investigations that are not in
the normal course and materially larger than more regularly occurring
individual matters. They also include certain major legacy matters.
Reconciliations between Total and Adjusted results, providing further
information on the key Adjusting items for 2017 and 2018 are set out
on page 51 and for the five years to 2018 are set out on pages 232
to 234.
GSK provides earnings guidance to the investor community on
the basis of Adjusted results. This is in line with peer companies
and expectations of the investor community, supporting easier
comparison of the Group’s performance with its peers. GSK is not
able to give guidance for Total results as it cannot reliably forecast
certain material elements of the Total results, particularly the future
fair value movements on contingent consideration and put options
that can and have given rise to significant adjustments driven by
external factors such as currency and other movements in capital
markets.
GSK Annual Report 2018 41
Reporting framework continued
Historical record of Adjusting items
The reconcilations between Total and Adjusted operating profit over the last five years can be summarised as follows:
Total operating profit
Intangible asset amortisation
Intangible asset impairment
Major restructuring
Transaction-related items
Divestments, significant legal and other items
US tax reform
Adjusted operating profit
2018
£m
5,483
580
116
809
1,977
(220)
–
2017
£m
4,087
591
688
1,056
1,599
(119)
666
2016
£m
2,598
588
20
970
3,919
(424)
–
2015
£m
10,322
563
206
1,891
2,238
(9,561)
–
2014
£m
3,597
575
150
750
839
545
–
8,745
8,568
7,671
5,659
6,456
The analysis of the impact of transaction-related items on operating profit for each of the last five years is as follows:
Novartis Consumer Healthcare Joint Venture put option
Contingent consideration on former Shionogi-ViiV Healthcare JV (including Shionogi preferential dividends)
ViiV Healthcare put options and Pfizer preferential dividends
Contingent consideration on former Novartis Vaccines business
Other adjustments
Transaction-related items
2018
£m
658
1,188
(58)
58
131
2017
£m
986
556
(126)
101
82
2016
£m
1,133
2,162
577
69
(22)
2015
£m
83
1,874
–
108
173
2014
£m
–
768
–
–
71
1,977
1,599
3,919
2,238
839
Full reconciliations between Total and Adjusted results for 2014–2018 are set out on pages 232 to 234.
Further explanations on the Adjusting items for 2018 are reported on page 51.
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 dolutegravir-containing products
have a favourable impact on the proportion of the preferential
dividends that is allocated to GSK. Adjusting items are allocated to
shareholders based on their equity interests. GSK was entitled to
approximately 85% of the Total earnings and 82% of the Adjusted
earnings of ViiV Healthcare for 2018. Re-measurements of the
liabilities for the preferential dividends allocated to Pfizer and
Shionogi are included within other operating income.
Acquisition-related arrangements
As consideration for the acquisition of Shionogi’s interest in the
former Shionogi-ViiV Healthcare joint venture in 2012, Shionogi
received the 10% equity stake in ViiV Healthcare and ViiV Healthcare
also agreed to pay additional future cash consideration to Shionogi,
contingent on the future sales performance of the products being
developed by that joint venture, principally dolutegravir. Under
IFRS 3 ‘Business combinations’, GSK was required to provide for
the estimated fair value of this contingent consideration at the time
of acquisition and is required to update the liability to the latest
estimate of fair value at each subsequent period end. The liability for
the contingent consideration recognised in the balance sheet at the
date of acquisition was £659 million. Subsequent re-measurements
are reflected within other operating income/expense and within
Adjusting items in the income statement in each period, and at
31 December 2018, the liability, which is discounted at 8.5%,
stood at £5,937 million, on a post-tax basis.
Cash payments to settle the contingent consideration are made
to Shionogi by ViiV Healthcare each quarter, based on the actual
sales performance of the relevant products in the previous quarter.
These payments reduce the balance sheet liability and hence are
not recorded in the income statement. The cash payments made
to Shionogi by ViiV Healthcare in 2018 were £793 million.
Because the liability is required to be recorded at the fair value of
estimated future payments, there is a significant timing difference
between the charges that are recorded in the Total income statement
to reflect movements in the fair value of the liability and the actual
cash payments made to settle the liability.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 42
Reporting framework continued
The cash payments 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
Re-measurement through income statement
Cash payments: operating cash flows
Cash payments: investing activities
Contingent consideration at end of the year
2018
£m
5,542
1,188
(703)
(90)
5,937
2017
£m
5,304
909
(587)
(84)
5,542
Of the contingent consideration payable (on a post-tax basis) to
Shionogi at 31 December 2018, £815 million (31 December
2017 – £724 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 option and, as a result, in accordance with IFRS, GSK did not
recognise a liability for the put option on its balance sheet. However,
during 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 during Q1 2016 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
2018
£m
1,240
15
2017
£m
1,304
17
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.
However, during 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 during Q1 2016 at
an initial value of £926 million. In Q4 2016, Shionogi irrevocably
agreed to waive its put option and as a result GSK de-recognised
the liability for this put option on the Group’s balance sheet directly
to equity. The value of the liability was £1,244 million when it was
de-recognised.
GSK also has a call option over Shionogi’s shareholding in ViiV
Healthcare, which under the original agreements was exercisable in
six month windows commencing in 2027, 2030 and 2032. GSK has
now irrevocably agreed to waive the first two exercise windows, but
the last six month window in 2032 remains. As this call option is at
fair value, it has no value for accounting purposes.
Free cash flow
With the introduction of the new R&D strategy in 2018, GSK has
revised its definition of free cash flow, a non-IFRS measure, to
include proceeds from the sale of intangible assets. This balances
with the expenditure on purchases of intangible assets, which is
deducted in calculating free cash flow, and makes the treatment
of intangible assets consistent with property, plant and equipment.
Free cash flow is now defined as the net cash inflow from operating
activities less capital expenditure on property, plant and equipment
and intangible assets, contingent consideration payments, net
interest, and dividends paid to non-controlling interests plus
proceeds from the sale of property, plant and equipment and
intangible assets, 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 set out on page 56.
Free cash flow conversion
Free cash flow conversion is free cash flow as a percentage of
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 the Group’s practice
to discuss its results in terms of constant exchange rate (CER)
growth. This represents growth calculated as if the exchange rates
used to determine the results of overseas companies in Sterling had
remained unchanged from those used in the comparative period.
CER% represents growth at constant exchange rates. £% or AER%
represents growth at actual exchange rates.
Group financial review continuedGSK Annual Report 2018 43
Our approach to tax
We understand our responsibility to pay an appropriate amount
of tax, and fully support efforts to ensure that 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.
Tax risk is managed through robust internal policies and processes to
ensure that we have alignment across our business 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.
In 2018, the Group corporate tax charge was £754 million
(2017 – £1,356 million) on profits before tax of £4,800 million
(2017 – £3,525 million) representing an effective tax rate of 15.7%
(2017 – 38.5%). We made cash tax payments of £1,326 million in
the year (2017 – £1,340 million). In addition to the taxes we pay on
our profits, we pay duties, levies, transactional and employment
taxes.
Our Adjusted tax rate for 2018 was 19.0% (2017 – 21.0%). 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
reflecting the ongoing impact of US tax reform, the Group’s effective
Adjusted tax rate for 2019 and the next several years is expected to
be around 19%.
The Group’s Total tax rate of 15.7% (2017 – 38.5%) for 2018 was
lower than the Adjusted tax rate as the Total tax charge includes the
effect of a reduced estimate of the 2017 impact of US tax reform,
following additional guidance being released by the IRS, and a
re-assessment of estimates of uncertain tax positions following the
settlement of a number of open issues with tax authorities.
In 2018, there has been an ongoing public focus on the tax affairs of
multinational companies as well as the continued focus on tax reform.
This has been 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 is subject to taxation throughout its supply chain.
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 that 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 tax implications may be more
significant, including potential customs duty costs and additional
transaction or administrative costs associated with managing import
and export obligations on the movement of goods between the UK
and the EU. Our approach to Brexit is set out on page 36.
Our Tax Strategy 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 161.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
44
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
34 and 35 in the Strategic report. This assessment has been made
assuming no separation of the new Consumer Healthcare Joint
Venture during the three-year period under consideration.
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 three business units, and the market opportunity in
the pharmaceutical, vaccines and consumer sectors. This approach
is aligned to GSK’s model of achieving balanced growth by investing
in high quality, innovative products for patients, consumers and
healthcare providers. However, since many internal and external
parameters become increasingly unpredictable over longer time
horizons, GSK focuses its detailed, bottom-up Plan on a three-year
cycle. The Plan is reviewed at least annually by the Directors, who
approve business forecasts showing expected financial impact. The
Directors believe that a three-year assessment period for the Viability
statement is most appropriate as it aligns with the Company’s well
established business planning processes that balance the long-term
nature of investments in the pharmaceutical, vaccines and consumer
sectors with an assessment of the period over which analysis of
near-term business performance is realistically visible.
The Plan has been stress tested in a series of robust operational
and principal risk downside scenarios as part of the Board’s review
on risk. These include the potential effects of Brexit, which are not
expected to be material, although there may be some short-term
disruption. 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;
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 241 to 250.
– Scenario 4: Put option exercise. This scenario evaluates the
additional funding requirements assuming the earliest potential
exercise of the outstanding put option held by our partner in the
HIV business.
The three-year review also makes certain assumptions about the
normal level of capital recycling likely to occur and considers whether
additional financing facilities will be required and the respective level
of funding flexibility and headroom.
The results of this stress testing show that certain combinations of
these hypothetical scenarios could increase funding demands on
GSK and require mitigating changes to the Group’s funding strategy.
However, in light of the liquidity available to the Group and based on
this analysis, the Directors have a reasonable expectation that, even
under these most severe stress tests, the Company will be able to
continue in operation and meet its liabilities as they fall due over the
three-year period of assessment.
Group financial review continuedGSK Annual Report 2018 45
2018
£m
2017
£m
Growth
£%
Growth
CER%
17,269
17,276
5,894
5,160
7,750
30,821 30,186
7,658
–
14
(1)
2
2
16
2
5
Group turnover
Pharmaceuticals
Vaccines
Consumer Healthcare
Group turnover
Group turnover was up 2% AER, 5% CER to £30,821 million.
Pharmaceuticals sales were flat at AER but up 2% CER, driven
primarily by the growth in HIV sales and the new Respiratory
products, Nucala and the Ellipta portfolio. This was partly offset by
lower sales of Seretide/Advair and Established Pharmaceuticals.
Overall Respiratory sales declined 1% AER but grew 1% CER.
Vaccines sales were up 14% AER, 16% CER, primarily driven by
sales of Shingrix in the US and growth in influenza and Hepatitis
vaccines, which also benefited from a competitor supply shortage,
partly offset by declines in some Established Vaccines.
Consumer Healthcare sales declined 1% AER but grew 2% CER
with broad-based growth in Oral health and Wellness partly offset by
increased competitive pressures in Europe, the divestments of some
smaller brands, including Horlicks and MaxiNutrition in the UK, as
well as the impact of the implementation of the GST in India.
Total results
Turnover (£bn)
£30.8bn
2016
2017
2018
AER growth
CER growth
2%
5%
27.9
30.2
30.8
0
5
10
15
20
25
30
Total operating profit (£bn)
£5.5bn
AER growth
CER growth
34%
43%
2016
2017
2018
2.6
4.1
5.5
0
2
4
6
8
10
12
Group turnover by geographic region
US
Europe
International
2018
£m
2017
£m
Growth
£%
Growth
CER%
11,982 11,263
7,943
7,973
10,866
10,980
30,821 30,186
6
–
(1)
2
9
(1)
4
5
US sales grew 6% AER, 9% CER, driven by the growth of Shingrix
and Hepatitis vaccines as well as strong performances from HIV and
Benlysta, offset by declines in Established Pharmaceuticals and
Respiratory.
Europe sales were flat at AER, but declined 1% CER, as declines
in Established Pharmaceuticals, older HIV products, Meningitis
vaccines and Consumer Healthcare more than offset growth from
Tivicay and Triumeq and the new Respiratory products.
In International, sales declined 1% AER, but grew 4% CER,
reflecting strong growth in Tivicay, Triumeq and the Respiratory
portfolio. Sales in Emerging Markets declined 2% AER, but grew
4% CER.
The total results of the Group are set out below.
2018
% of
£m turnover
30,821
(10,241)
100 30,186
(33.2) (10,342)
2017
Growth
% of
£m turnover
100
(34.3)
£% CER%
5
–
2
(1)
(9,915)
(32.2)
(9,672)
(32.0)
3
5
(3,893)
299
(12.6)
1.0
(4,476)
356
(14.8)
1.1
(13)
(16)
(12)
(17)
(1,588)
5,483
(717)
(5.2)
17.8
(1,965)
4,087
(669)
(6.5)
13.5
34
43
3
94
31
4,800
(754)
4,046
3,623
73.7
1.96
13
3,525
(1,356)
2,169
1,532
31.4
0.82
36
46
87
100
>100 >100
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$)
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
46
Total results continued
Pharmaceuticals
Turnover (£bn)
£17.3bn
56% of Group turnover
AER growth
CER growth
0%
2%
2016
2017
2018
16.1
17.3
17.3
0
5
10
15
20
Pharmaceuticals turnover
Respiratory
HIV
Immuno-inflammation
Established Pharmaceuticals
2017
£m
Growth
£%
Growth
CER%
2018
£m
6,928
4,722
6,991
4,350
472
377
5,147
5,558
17,269
17,276
(1)
9
25
(7)
–
1
11
28
(4)
2
Pharmaceuticals turnover in the year was £17,269 million, flat at AER,
but up 2% CER, driven primarily by the growth in HIV sales, which
were up 9% AER, 11% CER, to £4,722 million, reflecting share
growth over the year in the dolutegravir portfolio: Triumeq, Tivicay
and Juluca. Respiratory sales declined 1% AER, but grew 1% CER,
to £6,928 million, with growth from our Ellipta portfolio and Nucala
partly offset by lower sales of Seretide/Advair. Sales of Established
Pharmaceuticals were down 7% AER, 4% CER.
In the US, sales declined 2% AER but grew 1% at CER, with growth
in the HIV portfolio and Benlysta offsetting declines in Established
Pharmaceuticals and Respiratory. In Europe, sales grew 2% AER,
1% CER, with growth in the Respiratory portfolio offsetting the
continued impact of generic competition to Epzicom and Avodart.
International was flat at AER but grew 5% CER, with growth driven
by HIV and the new Respiratory portfolio.
Respiratory
Total Respiratory sales declined 1% AER, but grew 1% CER, with
the US down 5% AER, 3% CER. In Europe, sales grew 5% AER,
4% CER and International grew 3% AER, 7% CER. Growth from
our Ellipta portfolio and Nucala was partly offset by lower sales of
Seretide/Advair.
Sales of Nucala were £563 million in the year, up 64% AER, 66%
CER, continuing to benefit from the global rollout of the product. US
sales of Nucala grew 44% AER, 48% CER to £341 million, despite
increased competition, benefiting from continued market expansion.
Sales of Ellipta products were up 29% AER, 32% CER, driven by
continued growth in all regions. In the US, sales grew 24% AER,
27% CER, reflecting further market share gains, partly offset by the
impact of continued competitive pricing pressures, particularly for
ICS/LABAs. In Europe, sales grew 42% AER, 41% CER. Sales of
Trelegy Ellipta, our new once-daily closed triple product, contributed
£156 million to total Ellipta sales, benefiting from an expanded label
in the US.
Relvar/Breo Ellipta sales grew 8% AER, 10% CER, to £1,089
million, primarily driven by growth in Europe, which was up 25%
AER, 24% CER to £253 million, and in International, which was up
26% AER, 31% CER to £255 million. In the US, Breo Ellipta sales
declined 3% AER, 1% CER, with volume growth of 27%, reflecting
continued market share growth, offset by the combined impact of
prior period payer rebate adjustments and increased competitive
pricing pressure. Anoro Ellipta sales grew 39% AER, 42% CER to
£476 million, driven primarily by share gains in the US. All of our
Ellipta products, Breo, Anoro, Incruse, Arnuity and Trelegy, continued
to grow market share in the US during the year.
Sales of New Respiratory products, comprising Ellipta products and
Nucala, grew 35% AER, 38% CER to £2,612 million.
Seretide/Advair sales declined 23% AER, 21% CER to £2,422
million. Sales of Advair in the US declined 32% AER, 30% CER (9%
volume decline and 21% negative impact of price) primarily reflecting
increased competitive pricing pressures. In Europe, Seretide sales
were down 19% AER, 20% CER to £599 million (13% volume
decline and a 7% price decline). This reflected continued competition
from generic products and the transition of the Respiratory portfolio
to newer products. In International, sales of Seretide were down 7%
AER, 4% CER, to £726 million (5% volume decline and 1% positive
impact of price), with declines in markets with generic competition
partly offset by growth from other developing markets.
HIV
HIV sales increased 9% AER, 11% CER to £4,722 million in the
year, with the US up 8% AER, 10% CER, Europe up 7% AER,
6% CER and International up 14% AER, 20% CER.
The growth was driven by the increase in market share over the
year in our dolutegravir products which grew 14% AER, 16% CER.
This was partly offset by the decline in our established portfolio,
particularly the impact of generic competition to Epzicom/Kivexa in
Europe. Triumeq, Tivicay and Juluca (which was approved in the US
in November 2017), recorded sales of £2,648 million, £1,639 million
and £133 million, respectively, in the year. Epzicom/Kivexa sales
declined 50% AER, 48% CER to £117 million.
Immuno-inflammation
Sales in the year were up 25% AER, 28% CER, primarily driven by
Benlysta, which grew 26% AER, 29% CER to £473 million. In the
US, Benlysta grew 24% AER, 27% CER to £420 million, benefiting
from the launch of the sub-cutaneous formulation in the third quarter.
Established Pharmaceuticals
Sales of Established Pharmaceuticals were £5,147 million, down
7% AER, 4% CER, reflecting our efforts to maximise the value from
this portfolio but also the benefit of certain post-divestment contract
manufacturing sales and the first instalment of a 12-month Relenza
supply contract in Europe.
The Avodart franchise was down 7% AER, 5% CER to £572 million,
primarily due to the loss of exclusivity in Europe, with the US impact
now broadly annualised. Coreg franchise sales declined 63% AER,
63% CER following a generic Coreg CR entrant to the US market in
Q4 2017. Lamictal sales declined 5% AER, 3% CER to £617 million.
Group financial review continuedGSK Annual Report 2018 47
Influenza
Fluarix/FluLaval sales grew 7% AER, 10% CER to £523 million,
driven by strong sales execution in the US and improved sales in
Europe, partly offset by increased price competition in the US.
Shingles
Shingrix recorded sales of £784 million, primarily in the US and
Canada, driven by demand and share gains. US sales benefited
from market growth in new patient populations now covered by
immunisation recommendations, and Shingrix has now achieved
a 98% market share.
Established Vaccines
Sales of our DTPa-containing vaccines (Infanrix, Pediarix and
Boostrix) were down 8% AER, 7% CER. Infanrix, Pediarix sales
were down 8% AER, 7% CER to £680 million, reflecting increased
competitive pressures in Europe as well as unfavourable year-on-year
CDC stockpile movements in the US, partly offset by stronger
demand in International. Boostrix sales declined 8% AER, 7% CER
to £517 million, primarily driven by the return to the market of a
competitor in Europe and lower demand in International.
Hepatitis vaccines grew 17% AER, 19% CER to £808 million,
benefiting from stronger demand in the US and Europe as well as
a competitor supply shortage in the US.
Rotarix sales were down 1% AER but up 1% CER to £521 million,
reflecting higher demand in Europe, partly offset by lower demand
in International.
Synflorix sales declined 17% AER, 17% CER to £424 million,
primarily impacted by lower pricing and demand in Emerging
Markets.
Total results continued
Vaccines
Turnover (£bn)
£5.9bn
19% of Group turnover
2016
2017
2018
AER growth
CER growth
14%
16%
4.6
5.2
5.9
0
1
2
3
4
5
6
Vaccines turnover
Meningitis
Influenza
Shingles
Established Vaccines
2018
£m
881
523
784
3,706
5,894
2017
£m
Growth
£%
Growth
CER%
890
488
22
3,760
5,160
(1)
7
2
10
>100
>100
(1)
14
–
16
Vaccines turnover grew 14% AER, 16% CER to £5,894 million,
primarily driven by growth in sales of Shingrix, Hepatitis vaccines,
which also benefited from a competitor supply shortage and higher
sales of influenza products. This was partly offset by lower sales of
DTPa-containing vaccines (Infanrix, Pediarix and Boostrix) due to
increased competitive pressures, particularly in Europe, and
unfavourable year-on-year CDC stockpile movements in the US,
together with lower Synflorix sales, reflecting lower pricing and
demand in Emerging Markets.
Meningitis
Meningitis sales were down 1% AER but up 2% CER to £881
million. Bexsero sales grew 5% AER, 9% CER driven by demand
and share gains in the US, together with continued growth in
private market sales in International, partly offset by the completion
of vaccination of catch-up cohorts in certain markets in Europe.
Menveo sales declined 15% AER, 12% CER, primarily reflecting
supply constraints in Europe and International as well as a strong
comparator in 2017 and unfavourable year-on-year CDC stockpile
movements in the US, partly offset by demand and share gains in
the US.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 48
Total results continued
Consumer Healthcare
Turnover (£bn)
£7.7bn
25% of Group turnover
AER growth
CER growth
(1)%
2%
2016
2017
2018
7.2
7.8
7.7
0
2
4
6
8
10
Consumer Healthcare turnover
Wellness
Oral health
Nutrition
Skin health
US
Europe
International
2018
£m
3,940
2,496
643
579
4,001
2,466
680
603
7,658
7,750
2017
£m
Growth
£%
Growth
CER%
(2)
1
(5)
(4)
(1)
1
4
1
(1)
2
2018
£m
1,828
2,340
3,490
7,658
2017
£m
Growth
£%
Growth
CER%
1,826
2,360
3,564
7,750
–
(1)
(2)
(1)
2
(2)
4
2
Consumer Healthcare sales in the year declined 1% AER but grew
2% CER to £7,658 million, with broad-based growth in Oral health
and Wellness partly offset by a decline in Panadol and lower sales of
smaller brands. International markets performed strongly, particularly
India and Brazil, whilst Europe was impacted by intensifying
competitive pressure in the second half of 2018.
The aggregate impact from generic competition on Transderm Scop
in the US, the divestment of Horlicks and MaxiNutrition in the UK and
other small non-strategic brands and implementation of the GST in
India was to reduce overall sales growth by approximately one
percentage point.
Wellness
Wellness sales declined 2% AER but grew 1% CER to £3,940
million. Respiratory sales grew in low single digits, led by Theraflu
supported by a strong cold and flu season earlier in the year as well
as the Theraflu PowerPods launch in the US in the second half of the
year. Otrivin grew in mid single digits, benefiting from new variants,
and Flonase returned to growth following a weaker allergy season
earlier this year.
Pain relief sales were flat as low single-digit growth in Voltaren and
double-digit growth in Fenbid were offset by a decline in Panadol
sales due to a change in the route-to-market model in South East
Asia and the discontinuation of slow-release Panadol products in
the Nordic countries.
Oral health
Oral health sales grew 1% AER, 4% CER to £2,496 million, as
increased competitive pressures in Europe were offset by double-
digit growth from Sensodyne in a number of International markets,
including India and Turkey, and strong single-digit growth in the US
driven by Sensodyne Rapid. Denture care grew in high single digits
through the launch of Corega Max in Russia and Brazil, and Gum
health delivered double-digit growth with continued strong
parodontax performance in the US. Growth was also partly
impacted by de-stocking in International.
Nutrition
Nutrition sales declined 5% AER but grew 1% CER to £643 million.
Our Nutrition business in India performed strongly across the
product portfolio including new innovations such as Horlicks
Protein+ which was launched earlier in the year. The impact of
divestments and India GST implementation on growth was
approximately eight percentage points.
Skin health
Skin health sales were down 4% AER, 1% CER to £579 million,
largely driven by a decline in Physiogel and the divestment of several
small non-strategic brands in the US, which had a negative impact
on growth of one percentage point.
Group financial review continuedGSK Annual Report 2018 49
Total results continued
Cost of sales
Cost of sales as a percentage of turnover was 33.2%, down 1.0
percentage points at AER and 1.4 percentage points in CER terms
compared with 2017. This primarily reflected a favourable
comparison with £363 million of non-cash restructuring costs from
the write-downs of assets in 2017 related to the decision to withdraw
Tanzeum. The year also benefited from a more favourable product
mix in Vaccines and Consumer Healthcare, particularly the launch
of Shingrix, together with a further contribution from integration and
restructuring savings. This was partly offset by continued adverse
pricing pressure in Pharmaceuticals, particularly in Respiratory, and
in Established Vaccines, together with increased input costs and an
adverse comparison with the benefit of a settlement for lost third-
party supply volume in 2017 in Vaccines.
Selling, general and administration
SG&A costs as a percentage of turnover were 32.2%, 0.1
percentage points higher than in 2017 at both AER and CER,
reflecting growth of 3% AER, 5% CER. The increase in SG&A
costs primarily reflected higher restructuring costs, and investment
in promotional product support, particularly for new launches in
Respiratory, HIV and Vaccines, partly offset by tight control of
ongoing costs, particularly in non-promotional and back office
spending, across all three businesses.
Research and development
R&D expenditure was £3,893 million (12.6% of turnover), 13% AER,
12% CER lower than in 2017. This reflected reduced restructuring
costs primarily due to the comparison with the provision for
obligations as a result of the decision to withdraw Tanzeum in 2017
and lower intangible impairments, a favourable comparison with the
impact of the Priority Review Voucher purchased and utilised in
H1 2017 and the benefit of our R&D prioritisation initiatives started
in the second half of last year. This was partly offset by increased
investment in the progression of a number of mid and late-stage
programmes, particularly in Oncology, as well as provisions for the
costs payable to a third party relating to the use of a Priority Review
Voucher awarded in 2018.
Discovery
Development
Facilities and central support functions
Total Pharmaceuticals
Vaccines R&D
Consumer Healthcare R&D
Items reconciling Adjusted
R&D to Total R&D
Research and development
2018
£m
892
1,332
600
2,824
673
238
3,735
2017
(revised)
£m
1,007
1,423
576
3,006
621
235
3,862
Growth
£% CER%
(10)
(11)
(5)
(6)
6
4
(5)
(6)
8
8
3
1
(3)
(2)
158
614
3,893
4,476
(13)
(12)
The decline in Discovery reflected the transfer of certain Oncology
assets to the Development phase. The decline in Development
primarily reflects the comparison with the impact of the utilisation
of the Priority Review Voucher in 2017 and the benefit of the
prioritisation initiatives started in the second half of 2017. This was
partly offset by increased investment in the progression of a number
of mid and late-stage programmes, particularly in Oncology, and the
provision for costs payable to a third party relating to the use of a
Priority Review Voucher awarded in 2018. The growth in Technology,
facilities and functional support costs primarily reflected increased
investments in data analytics.
Royalty income
Royalty income was £299 million (2017 – £356 million), down 16%
AER and 17% CER, the reduction primarily reflecting the patent
expiry of Cialis, partly offset by an increase in the Gardasil royalty.
Other operating income/(expense)
Other operating expense of £1,588 million (2017 – £1,965 million)
primarily reflected £1,846 million (2017 – £1,517 million) of
accounting charges arising from the re-measurement of our
contingent consideration liabilities related to the acquisitions of
the former Shionogi-ViiV Healthcare joint venture and the former
Novartis Vaccines business, the value attributable to the Consumer
Healthcare Joint Venture put option previously held by Novartis and
the liabilities for the Pfizer put option and Pfizer and Shionogi
preferential dividends in ViiV Healthcare. The 2017 charges included
the impact of US tax reform, which increased the fair value of these
liabilities by £666 million. This was partly offset by the profit on a
number of asset disposals, including tapinarof, as well as a gain
arising from the increase in value of the shares in Hindustan Unilever
Limited to be received on the disposal of Horlicks and other
Consumer Healthcare brands, net of disposal costs.
The accounting charges were driven primarily by a £758 million
re-measurement of the contingent consideration liability due to
Shionogi, largely related to the regular updates of exchange rate
assumptions to period end rates and sales forecasts following a
number of studies including the GEMINI study completed in
Q2 2018, together with a £430 million unwind of the discount. In
addition, a net charge of £658 million reflected the re-measurement
of the valuation of the Consumer Healthcare put option to reflect the
price agreed with Novartis to acquire its shareholding, together with
movements in exchange rates, largely offset by gains on hedging
contracts.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 50
Total results continued
Operating profit
Total operating profit was £5,483 million in 2018 compared with
£4,087 million in 2017. The increase in operating profit primarily
reflected a favourable comparison with charges of £666 million
in 2017 arising from the impact of US tax reform on the valuation
of the Consumer Healthcare and HIV businesses and reduced
restructuring costs and asset impairments. In addition, there was
a contribution from sales growth, a more favourable mix, primarily in
Vaccines and Consumer Healthcare, benefits from the prioritisation
of R&D expenditure and comparison with the impact of the Priority
Review Voucher utilised and expensed in 2017, alongside continued
tight control of ongoing costs. This was partly offset by the increased
impact of accounting charges related to the re-measurement of the
liabilities for contingent consideration, put options and preferential
dividends, continuing pricing pressure, particularly in Respiratory,
increased input costs, the comparison with the benefit in Q2 2017
of a settlement for lost third-party supply volume in Vaccines,
investments in new product support, particularly for launches in
Respiratory, HIV and Vaccines and a reduction in royalty income.
Contingent consideration cash payments which are made to Shionogi
and other companies reduce our balance sheet liability and hence are
not recorded in the income statement. Total contingent consideration
cash payments in 2018 amounted to £1,137 million (2017 – £685
million). This included a cash milestone paid to Novartis of $450
million (£317 million) as well as cash payments made to Shionogi
of £793 million (2017 – £671 million).
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
2018
£m
81
–
81
(717)
(15)
3
(69)
(798)
2017
£m
63
2
65
(720)
(16)
(4)
6
(734)
Net finance costs were £717 million compared with £669 million in
2017. This reflected higher debt levels following our acquisition from
Novartis of its stake in the Consumer Healthcare Joint Venture in
June 2018 as well as additional interest on tax arising from a historic
tax settlement, recorded in Q3 2018, and an adverse comparison
with a provision release of £24 million in Q4 2017 (both reflected
in other finance expense). This was partly offset by the benefit of a
one-off accounting adjustment to the amortisation of long-term bond
interest charges of £20 million in Q1 2018 (reported through interest
expense), the benefit from older bonds being refinanced at lower
interest rates and the translation impact of exchange rate movements
on the reported Sterling costs of foreign currency denominated
interest-bearing instruments.
Profit on disposal of associates
The profit on disposal of associates was £3 million
(2017 – £94 million).
Share of after tax profits of associates and joint ventures
The share of profits of associates and joint ventures was £31 million
(2017 – £13 million), primarily arising from our investment in Innoviva.
Profit before taxation
Taking account of net finance costs the profit on disposal of
associates and the share of profits of associates, profit before
taxation was £4,800 million compared with £3,525 million in 2017.
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
2018
£m
234
1,426
(492)
1,168
(414)
754
2017
£m
199
1,928
(508)
1,619
(263)
1,356
The charge of £754 million represented an effective tax rate on
Total results of 15.7% (2017 – 38.5%) and reflected the different
tax effects of the various Adjusting items. This includes the effect
of a reduced estimate of the 2017 impact of US tax reform of £125
million, following additional guidance being released by the IRS
and a re-assessment of estimates of uncertain tax positions following
the settlement of a number of open issues with tax authorities. The
reduction from the prior year effective tax rate on Total profits was
driven primarily by a favourable comparison with the impact of US
tax reform, which resulted in a number of charges in Q4 2017.
Non-controlling interests
The allocation of earnings to non-controlling interests amounted to
£423 million (2017 – £637 million). The reduction was primarily due
to the lower allocation of Consumer Healthcare profits of £117 million
(2017 – £415 million) following the buyout of Novartis’ interest. This
was partly offset by an increased allocation of ViiV Healthcare profits
and higher net profits in some of our other entities with non-
controlling interests.
Earnings per share
Total earnings per share was 73.7p, compared with 31.4p in 2017.
The increase in earnings per share primarily reflected a favourable
comparison with charges in 2017 arising from the impact of US
tax reform, reduced restructuring costs and asset impairments,
increased operating profits, a lower tax rate and a reduced non-
controlling interest allocation of Consumer Healthcare profits, partly
offset by higher transaction-related charges arising from increases in
the valuation of the liabilities for contingent consideration, put options
and preferential dividends.
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 2017.
See Note 16 to the financial statements, ‘Dividends’.
Group financial review continuedGSK Annual Report 2018 51
Adjusted
results
£m
30,821
(9,178)
21,643
(9,462)
(3,735)
299
–
8,745
(698)
–
31
8,078
(1,535)
19.0%
6,543
674
5,869
Intangible
asset
amortisation
£m
Intangible
asset
impairment
£m
Major
restructuring
£m
Transaction
-related
£m
Divestments,
significant
legal and
other items
£m
536
536
44
69
69
2
45
580
116
443
443
315
49
2
809
4
580
(109)
116
(19)
813
(170)
471
97
643
471
9.6p
97
2.0p
643
13.1p
15
15
98
1,864
1,977
(3)
1,974
(239)
1,735
251
1,484
30.2p
–
–
38
20
(278)
(220)
18
(3)
(205)
(244)
(449)
(449)
(9.2)p
119.4p
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
19.2p
–
–
83
18
(220)
(119)
8
(94)
(205)
(251)
(456)
(456)
(9.4)p
4,914
US tax
reform
£m
666
666
666
1,078
1,744
114
1,630
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
33.3p
111.8p
4,886
Adjusting items
Adjusted results reconciliation
31 December 2018
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 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)
Total
results
£m
30,821
(10,241)
20,580
(9,915)
(3,893)
299
(1,588)
5,483
(717)
3
31
4,800
(754)
15.7%
4,046
423
3,623
73.7p
4,914
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
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 52
Adjusting items continued
Intangible asset amortisation and impairment
Intangible asset amortisation was £580 million compared with
£591 million in 2017. Intangible asset impairments related to
commercial and Pharmaceuticals R&D development assets were
£116 million (2017 – £688 million). The 2017 charge included
impairments related to the withdrawal of Tanzeum and a number
of other commercial and Pharmaceuticals R&D development
assets. These charges were non-cash items.
Major restructuring and integration
Within the Pharmaceuticals sector, the highly regulated manufacturing
operations and supply chains and long lifecycle of the business mean
that restructuring programmes, particularly those that involve the
rationalisation or closure of manufacturing or R&D sites, are likely
to take several years to complete.
Major restructuring costs are those related to specific Board-
approved Major restructuring programmes. Major restructuring
programmes, including integration costs following material
acquisitions, are those that are structural and are of a significant
scale where the costs of individual or related projects exceed
£25 million. Other ordinary course smaller scale restructuring
costs are retained within Total and Adjusted results.
The Board approved a new Major restructuring programme in July
2018, which is designed to significantly improve the competitiveness
and efficiency of our cost base with savings delivered primarily
through supply chain optimisation and reductions in administrative
costs.
Total Major restructuring charges incurred in 2018 were £809 million
(2017 – £1,056 million), analysed as follows:
Combined
restructuring
and integration
programme
2018 major
restructuring
programme
330
110
440
531
525 1,056
279
609
90
200
369
809
–
–
–
531
525 1,056
Non-cash charges arising under the existing Combined restructuring
and integration programme primarily related to the write-down of
assets as part of the announced plans to reduce the manufacturing
network. Cash charges arose from restructuring in the Europe and
International Pharmaceuticals commercial operations and some
manufacturing sites. Non-cash charges under the 2018 major
restructuring programme primarily related to announced plans to
restructure the manufacturing network and cash charges to date
under the 2018 major restructuring programme primarily related to
restructuring in the US Pharmaceuticals commercial operation, as
well as some manufacturing sites and central functions.
Total cash payments for the two programmes made in the year were
£537 million (2017 – £555 million).
The analysis of major restructuring charges by business was as
follows:
Pharmaceuticals
Vaccines
Consumer Healthcare
Corporate & central functions
Total Major restructuring charges
2018
£m
563
104
72
739
70
809
2017
£m
682
177
137
996
60
1,056
The analysis of Major restructuring charges by Income statement line
was as follows:
Cost of sales
Selling, general and administration
Research and development
Other operating income/(expense)
Total Major restructuring charges
2018
£m
443
315
49
2
809
2017
£m
545
248
263
-
1,056
The Combined restructuring and integration programme delivered
incremental annual cost savings in the year of £0.3 billion. Given its
relatively recent launch, the benefit delivery this year from the 2018
major restructuring programme was not material.
The analysis of incremental annual cost savings in the year by Income
statement line was as follows:
Total cash charges for the Combined restructuring and integration
programme are now expected to be approximately £4.1 billion with
non-cash charges up to £1.6 billion. The programme has now
delivered approximately £3.9 billion of annual savings, including an
estimated currency benefit of £0.3 billion. The programme is now
expected to deliver by 2020 total annual savings of £4.4 billion
on a constant currency basis, including an estimated benefit of £0.4
billion from currency on the basis of 2018 average exchange rates.
The 2018 major restructuring programme is expected to cost
£1.7 billion over the period to 2021, with cash costs of £0.8 billion
and non-cash costs of £0.9 billion, and is expected to deliver
annual savings of around £400 million by 2021 (at 2018 rates).
These savings will be fully re-invested to help fund targeted
increases in R&D and commercial support of new products.
Cash
£m
Non-
cash
£m
2018
Total
£m
Cash
£m
Non-
cash
£m
2017
Total
£m
Cost of sales
Selling, general and administration
Research and development
2018
£bn
0.2
0.1
-
0.3
2017
£bn
0.2
0.4
0.1
0.7
Group financial review continuedGSK Annual Report 2018 53
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 the year amounted to £1,137 million
(2017 – £685 million). This included a cash milestone paid to
Novartis of $450 million (£317 million) as well as cash payments
made by ViiV Healthcare to Shionogi in relation to its contingent
consideration liability (including preferential dividends) which
amounted to £793 million (2017 – £671 million).
An explanation of the accounting for the non-controlling interests
in ViiV Healthcare is set out on page 41.
Divestments, significant legal charges and other items
Divestments and other items included the profit on a number of
asset disposals, including tapinarof, a gain arising from the increase
in value of the shares in Hindustan Unilever Limited to be received
on the disposal of Horlicks and other Consumer Healthcare brands,
which is expected to complete by the end of 2019, net of disposal
costs, as well as equity investment impairments and certain other
adjusting items. A charge of £33 million (2017 – £68 million) for
significant legal matters included the benefit of the settlement
of existing matters as well as provisions for ongoing litigation.
Significant legal cash payments were £39 million
(2017 – £192 million).
Adjusting items continued
Transaction-related adjustments
Transaction-related adjustments resulted in a net charge of £1,977
million (2017 – £1,599 million). This primarily reflected £1,846 million
of accounting charges for the re-measurement of the contingent
consideration liabilities related to our acquisitions of the former
Shionogi-ViiV Healthcare joint venture and the former Novartis
Vaccines business, the value attributable to the Consumer
Healthcare Joint Venture put option held by Novartis and the
liabilities for the Pfizer put option and Pfizer and Shionogi
preferential dividends in ViiV Healthcare.
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
2018
£m
658
2017
£m
986
1,188
556
(58)
(126)
58
131
101
82
1,977
1,599
A net charge of £658 million relating to the Consumer Healthcare
Joint Venture represented the re-measurement of the valuation of
the Consumer Healthcare put option to the agreed valuation of
$13 billion (£9.2 billion on signing), together with an increase due
to movements in exchange rates, which was largely offset by gains
on hedging contracts.
The £1,188 million charge relating to the contingent consideration
for the former Shionogi-ViiV Healthcare Joint Venture represented a
£758 million increase in the valuation of the contingent consideration
due to Shionogi, primarily as a result of updated exchange rate
assumptions and sales forecasts following the GEMINI study
completed in Q2 2018, together with a £430 million unwind of
the discount.
Other adjustments included a £51 million charge reflecting the
release of an indemnity asset relating to the tax treatment of
inventory acquired as part of the Novartis Vaccines acquisition,
with a corresponding offset in tax, as well as acquisition costs
relating to our acquisition of Tesaro completed in January 2019
and the announced agreement with Pfizer to combine our
consumer healthcare businesses.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 54
Adjusted results
Adjusted operating profit (£bn)
Research and development
£8.7bn
AER growth
CER growth
2%
6%
2016
2017
2018
0
2
4
6
7.7
8.6
8.7
8
10
GSK uses a number of adjusted, non-IFRS, measures to report the
performance of its business. Adjusted results and other non-IFRS
measures may be considered in addition to, but not as a substitute
for or superior to, information presented in accordance with IFRS.
Adjusted results and other non-IFRS measures are defined on
pages 40 to 42.
2018
% of
turnover
£m
2017
% of
turnover
£m
Growth
£% CER%
Research and
development
(3,735)
(12.1)
(3,862)
(12.8)
(3)
(2)
R&D expenditure was £3,735 million (12.1% of turnover), 3% AER,
2% CER lower than 2017, primarily reflecting the favourable
comparison with the impact of the Priority Review Voucher
purchased and utilised in 2017 and the benefit of the prioritisation
initiatives started in the second half of 2017. This was partly offset
by increased investment in the progression of a number of mid and
late-stage programmes, particularly in Oncology, as well as the
provision for the costs payable to a third party relating to the use
of a Priority Review Voucher awarded and utilised in 2018.
2018
£m
892
1,332
600
2,824
673
238
3,735
2017
(revised)
£m
1,007
1,423
576
3,006
621
235
3,862
Growth
£% CER%
(11)
(6)
4
(6)
8
1
(3)
(10)
(5)
6
(5)
8
3
(2)
Cost of sales
Cost of sales
2018
% of
turnover
(29.8)
£m
(9,178)
2017
% of
turnover
(29.1)
Growth
£% CER%
6
5
£m
(8,771)
Total Pharmaceuticals
Vaccines R&D
Consumer Healthcare R&D
Research and development
Discovery
Development
Facilities and central support functions
Cost of sales as a percentage of turnover was 29.8%, up 0.7
percentage points at AER, and 0.4 percentage points in CER terms
compared with 2017. This primarily reflected continued adverse
pricing pressure in Pharmaceuticals, particularly in Respiratory, and
Established Vaccines, as well as increased input costs and an
adverse comparison with the benefit of a settlement for lost third-
party supply volume in 2017 in Vaccines. This was partly offset by a
more favourable product mix in Vaccines and Consumer Healthcare,
particularly with the launch of Shingrix, as well as a further
contribution from integration and restructuring savings in all three
businesses.
Selling, general and administration
2018
% of
turnover
£m
2017
% of
turnover
£m
Growth
£% CER%
Selling, general and
administration
(9,462)
(30.7)
(9,341)
(30.9)
1
4
SG&A costs as a percentage of turnover were 30.7%, 0.2
percentage points lower at AER than in 2017 and 0.3 percentage
points lower on a CER basis. This reflected an increase of 1% AER,
4% CER, primarily resulting from increased investment in
promotional product support, particularly for new launches in
Respiratory, HIV and Vaccines, partly offset by tight control of
ongoing costs, particularly in non-promotional and back office
spending, across all three businesses.
Adjusted R&D expenditure declined 3% AER, 2% CER with
Pharmaceuticals down 6% AER, 5% CER. The decline in Discovery
reflected the transfer of certain Oncology assets to the Development
phase. The decline in Development primarily reflects the comparison
with the impact of the utilisation of the Priority Review Voucher in
2017 and the benefit of the prioritisation initiatives started in the
second half of 2017. This was partly offset by increased investment
in the progression of a number of mid and late-stage programmes,
particularly in Oncology, and the provision for costs payable to a third
party relating to the use of a Priority Review Voucher awarded in
2018. The growth in Technology, facilities and functional support
costs primarily reflected increased investments in data analytics.
Royalty income
Royalty income was £299 million (2017 – £356 million), the
reduction primarily reflecting the patent expiry of Cialis, partly offset
by an increase in the Gardasil royalty.
Adjusted operating profit
Adjusted operating profit was £8,745 million, 2% higher at AER
compared with 2017 and 6% higher at CER on a turnover increase
of 5%. The Adjusted operating margin of 28.4% was flat at AER
compared with 2017 but 0.5 percentage points higher on a CER
basis. This reflected the benefit from sales growth at CER in all
three businesses, a more favourable mix, primarily in Vaccines
and Consumer Healthcare, the benefits of prioritisation of R&D
expenditure and the comparison with the impact of the Priority
Review Voucher utilised and expensed in 2017 as well as continued
tight control of ongoing costs across all three businesses. This
was partly offset by continuing pricing pressure, particularly in
Respiratory, increased input costs, the comparison with the benefit
in Q2 2017 of a settlement for lost third-party supply volume in
Vaccines, investments in promotional product support, particularly
for new launches in Respiratory, HIV and Vaccines and a reduction
in royalty income.
Group financial review continuedGSK Annual Report 2018 55
2018
£m
81
–
81
2017
£m
63
2
65
(717)
(720)
(5)
3
(60)
(779)
(4)
(4)
6
(722)
Adjusted results continued
Adjusted operating profit by business
Net finance costs
2017
Margin
%
50.2
Growth
£% CER%
–
(3)
Finance income
Interest and other income
Fair value movements
£m
8,420
Pharmaceuticals
Pharmaceuticals R&D (2,676)
5,744
Pharmaceuticals
1,943
Vaccines
2018
Margin
%
48.8
33.3
33.0
£m
8,667
(2,740)
5,927
1,644
Consumer
Healthcare
Corporate & other
unallocated costs
Adjusted operating
profit
1,517
9,204
19.8
29.9
1,373
8,944
(459)
(376)
8,745
28.4
8,568
28.4
34.3
31.9
17.7
29.6
(2)
(3)
18
10
3
22
2
(1)
–
25
15
7
15
6
Pharmaceuticals operating profit
Pharmaceuticals operating profit was £5,744 million, down 3% AER
but flat at CER on a turnover increase of 2% CER. The operating
margin of 33.3% was 1.0 percentage points lower at AER than in
2017 and 0.9 percentage points lower on a CER basis. This primarily
reflected the continued impact of lower prices, particularly in
Respiratory, and the broader transition of our Respiratory portfolio,
increased investment in new product support and a reduction in
royalty income. This was partly offset by the benefits of prioritisation
within R&D and a favourable comparison with the impact of the
Priority Review Voucher purchased in 2017.
Vaccines operating profit
Vaccines operating profit was £1,943 million, 18% AER, 25% CER
higher than in 2017 on a turnover increase of 16% CER. The
operating margin of 33.0% was 1.1 percentage points higher at AER
than in 2017 and 2.5 percentage points higher on a CER basis. This
was primarily driven by enhanced operating leverage from strong
sales growth, an improved product mix, including the impact of the
launch of Shingrix, together with further restructuring and integration
benefits. This was partly offset by the comparison with the benefit of
a settlement for lost third-party supply volume recorded in 2017,
increased supply chain costs and increased SG&A investments to
support new launches and business growth.
Consumer Healthcare operating profit
Consumer Healthcare operating profit was £1,517 million, up 10%
AER, 15% CER on a turnover increase of 2% CER. The operating
margin of 19.8% was 2.1 percentage points higher than in 2017 and
2.2 percentage points higher on a CER basis. This primarily reflected
improved product mix and manufacturing restructuring and
integration benefits, as well as continued tight control of promotional
and other operating expenses.
Finance expense
Interest expense
Unwinding of discounts on liabilities
Remeasurements and fair value movements
Other finance expense
Net finance costs were £698 million compared with £657 million
in 2017. The increase reflected higher debt levels following the
acquisition from Novartis of its stake in the Consumer Healthcare
Joint Venture in June 2018 as well as a £23 million increase in
interest on tax arising from settlement of a historic tax matter and an
adverse comparison with a provision release of £23 million in 2017
(both reflected in other finance expense). This was partly offset by
the benefit of a one-off accounting adjustment to the amortisation
of long-term bond interest charges of £20 million (reported through
interest expense), the benefit from older bonds and the facilities
utilised to fund the acquisition of Novartis’ stake in the Consumer
Healthcare Joint Venture being refinanced at lower interest rates
and fair value gains on hedging instruments.
Share of after tax profits of associates and
joint ventures
The share of profits of associates and joint ventures was £31 million
(2017 – £13 million), primarily arising from our investment in Innoviva.
Taxation
Tax on Adjusted profit amounted to £1,535 million and represented
an effective Adjusted tax rate of 19.0% (2017 – 21.0%). The
reduction in the effective Adjusted tax rate in 2018 was primarily
driven by the reduction in the US federal tax rate.
Non-controlling interests
The allocation of Adjusted earnings to non-controlling interests
amounted to £674 million (2017 – £793 million). The reduction was
primarily due to the lower allocation of Consumer Healthcare profits
of £118 million (2017– £344 million) following the buyout of Novartis’
interest. This was partly offset by an increased allocation of ViiV
Healthcare profits of £501 million (2017 – £414 million), and the
changes in the proportions of preferential dividends due to each
shareholder based on the relative performance of different products,
as well as increases in the allocation due to higher net profits in some
of the Group’s other entities with non-controlling interests.
Adjusted earnings per share
Adjusted EPS of 119.4p was up 7% AER, 12% CER, compared with
a 6% CER increase in Adjusted operating profit, primarily as a result
of a reduced non-controlling interest allocation of Consumer
Healthcare profits and a lower Adjusted tax rate.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 56
Cash generation and conversion
A summary of the consolidated cash flow statement is set out below.
Free cash flow
Net cash inflow from operating activities
Net cash outflow from investing activities
Net cash outflow from financing activities
Increase/(decrease) in cash and bank overdrafts
Cash and bank overdrafts at beginning of year
Increase/(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
Cash and cash equivalents reported in assets
held for sale
Overdrafts
2018
£m
8,421
(1,553)
(6,389)
479
3,600
479
8
4,087
2017
£m
6,918
(1,443)
(6,380)
(905)
4,605
(905)
(100)
3,600
3,874
3,833
485
(272)
4,087
–
(233)
3,600
The net cash inflow from operating activities for the year was £8,421
million (2017 – £6,918 million). The increase primarily reflected
improved operating profits, a smaller increase in working capital as
a result of a reduction of inventory balances and a strong focus on
collections, the favourable timing of payments for returns and rebates,
and reduced legal settlement and restructuring payments, partly
offset by a negative currency impact on operating profit.
Total cash payments to Shionogi in relation to the ViiV Healthcare
contingent consideration liability in the year were £793 million
(2017 – £671 million), of which £703 million was recognised in cash
flows from operating activities and £90 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 £1,796 million (2017– £2,202 million) and disposals realised
£453 million (2017 – £807 million). Cash payments to acquire
equity investments amounted to £309 million (2017 – £80 million),
primarily relating to 23andMe, and sales of equity investments
realised £151 million (2017 – £64 million).
Free cash flow is the amount of cash generated by the Group after
meeting our obligations for contingent consideration, interest, tax
and dividends paid to non-controlling interests, and after capital
expenditure on property, plant and equipment and intangible assets.
Free cash inflow
2018
£m
5,692
2017
(revised)
£m
3,485
Free cash flow was £5,692 million for the year (2017 – £3,485
million). The increase primarily reflected improved operating profits, a
smaller increase in working capital following a reduction of inventory
balances and a strong focus on collections, the favourable timing of
payments for returns and rebates, reduced legal settlement costs
and restructuring payments, lower capital expenditure, including a
favourable comparison with the impact of the Priority Review Voucher
in 2017, increased disposals of intangible assets of £256 million
(2017 – £48 million), primarily relating to the disposal of tapinarof,
and reduced dividend payments to non-controlling interests. This
was partly offset by a negative currency impact on operating profit
and increased contingent consideration payments including the
$450 million (£317 million) milestone paid to Novartis in the year.
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
Proceeds from disposal of intangible assets
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
2018
£m
8,421
(1,344)
(452)
168
256
(766)
72
39
(153)
21
(570)
5,692
2017
(revised)
£m
6,918
(1,545)
(657)
281
48
(781)
64
6
(91)
21
(779)
3,485
Group financial review continuedGSK Annual Report 2018 57
Cash generation and conversion continued
Future cash flow
Working capital
Working capital percentage of turnover (%)
Working capital conversion cycle (days)
2018
23
201
2017
22
191
The increase of 10 days in 2018 compared with 2017 was
predominantly due to an adverse impact from exchange of
approximately five days as well as a reduced denominator due to
lower restructuring and impairment costs in 2018. Excluding these
factors, significant improvements were made in working capital
relative to the growth in the business, with reduced inventory as a
result of tight control of inventory levels and stronger collections of
receivables.
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 241 to 250. 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 business 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 a strong framework for capital allocation, including a 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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 58
Financial position and resources
2018
£m
2017
£m
Property, plant and equipment
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
Derivative financial instruments
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
11,058
5,789
17,202
236
1,322
3,887
69
1,576
41,139
5,476
229
6,423
188
84
3,874
653
16,927
58,066
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
(5,793)
(837)
(2,825)
(1,076)
(14,037)
(20,970)
(127)
(965)
(732)
(74)
(995)
(629)
(22,491)
(26,569)
(20,271)
(14,264)
(272)
(1,156)
(3,125)
(691)
(1)
(5,449)
(938)
(31,903)
(54,394)
3,672
1,345
3,091
(2,137)
2,061
4,360
(688)
(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
3,672
3,489
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
2018 was £22,488 million, with a net book value of £11,058 million.
Of this, land and buildings represented £4,404 million, plant and
equipment £4,582 million and assets in construction £2,072 million.
In 2018, we invested £1,358 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 to support new product development and launches
as well as to improve the efficiency of existing supply chains.
Property is mainly held freehold. New investment is financed from
our liquid resources. At 31 December 2018, we had contractual
commitments for future capital expenditure of £665 million and
operating lease commitments of £1,138 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 ‘Environment’ on page 32 and in Note 45 to the
financial statements, ‘Legal proceedings’.
Goodwill
Goodwill increased to £5,789 million at 31 December 2018, from
£5,734 million. The increase primarily reflected the impact of
exchange movements, partly offset by the transfer of goodwill to
assets held for sale.
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 2018 was £17,202 million
(2017 – £17,562 million). The decrease in 2018 reflected the impact
of amortisation and impairment of existing intangibles of £902 million
and £134 million respectively, partly offset by the development
costs capitalised during the year of £203 million, other additions
of £327 million and the impact of exchange movements.
Investments in associates and joint ventures
We held investments in associates and joint ventures with a carrying
value at 31 December 2018 of £236 million (2017 – £183 million).
The market value at 31 December 2018 was £487 million
(2017 – £372 million). The largest of these investments was in
Innoviva Inc. which had a book value at 31 December 2018 of
£189 million (2017 – £147 million). The market value at 31 December
2018 was £440 million. See Note 20 to the financial statements,
‘Investments in associates and joint ventures’.
Group financial review continuedGSK Annual Report 2018 59
Financial position and resources continued
Other investments
Provisions
We held other investments with a carrying value at 31 December
2018 of £1,322 million (2017 – £918 million). The highest value
investments held at 31 December 2018 were in 23andMe, which
was acquired during the year and had a book value at 31 December
2018 of £229 million, and Theravance Biopharma, Inc. which had a
book value at 31 December 2018 of £194 million (2017 – £199
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.
We carried deferred tax provisions and other short-term and
non-current provisions of £2,579 million at 31 December 2018
(2017 – £2,661 million). Other provisions at the year-end included
£219 million (2017 – £186 million) related to legal and other disputes
and £641 million (2017 – £504 million) related to Major restructuring
programmes. 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.
Derivative financial instruments: assets
Pensions and other post-employment benefits
We had current derivative financial assets held at fair value of £188
million (2017 – £68 million) and non-current derivative financial assets
held at fair value of £69 million (2017 – £8 million). £100 million of
current derivative financial assets related to a derivative embedded
in the agreement to divest Horlicks and other nutritional brands to
Unilever plc. See Note 38 for further information. The majority of the
remainder of these financial instruments related to foreign exchange
contracts both designated and not designated as accounting hedges.
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 £995 million (2017 – £1,505
million) on pension arrangements and £1,379 million (2017 – £1,496
million) on unfunded post-employment liabilities. The decrease in net
deficit was predominantly driven by higher discount rates that we
used to discount the value of the liabilities, partly offset by a reduction
in UK asset values.
Inventories
Other non-current liabilities
Inventory of £5,476 million decreased from £5,557 million in 2017.
The decrease primarily reflected tight control of inventory levels.
Other non-current liabilities amounted to £938 million at
31 December 2018 (2017 – £981 million).
Trade and other receivables
Contingent consideration liabilities
Trade and other receivables of £6,423 million increased from
£6,000 million in 2017, primarily reflecting the impact of higher sales,
particularly in Vaccines, partly offset by better collections, together
with exchange movements.
Deferred tax assets
Deferred tax assets amounted to £3,887 million (2017 –
£3,796 million) at 31 December 2018.
Derivative financial instruments: liabilities
We held current and non-current derivative financial liabilities at fair
value of £128 million (2017 – £74 million). This primarily related to
foreign exchange contracts both designated and not designated as
accounting hedges.
Trade and other payables
At 31 December 2018, trade and other payables were £14,037
million compared with £20,970 million at 31 December 2017.
The decrease primarily reflected the elimination of the Consumer
Healthcare Joint Venture put option following the buyout of Novartis’
interest in the Consumer Healthcare Joint Venture on 1 June 2018.
The buyout was primarily funded by utilising the proceeds of bonds
issued with maturity dates of between two and twelve years, in both
the US and Europe, which raised $6 billion and €2.5 billion
respectively. Committed bank facilities financed the remaining
amount of the $13 billion transaction.
Contingent consideration amounted to £6,286 million at 31 December
2018 (2017 – £6,172 million), of which £5,937 million (2017 – £5,542
million) represented the estimated present value of amounts payable to
Shionogi relating to ViiV Healthcare and £296 million (2017 – £584
million) represented the estimated present value of contingent
consideration payable to Novartis related to the Vaccines acquisition
following a milestone payment of $450 million made to Novartis in
January 2018.
The liability due to Shionogi included £252 million in respect of
preferential dividends. The liability for preferential dividends due to
Pfizer at 31 December 2018 was £15 million (2017 – £17 million).
An explanation of the accounting for the non-controlling interests
in ViiV Healthcare is set out on page 41.
Of the contingent consideration payable (on a post-tax basis)
at 31 December 2018, £837 million (2017 – £1,076 million)
is expected to be paid within one year. The consideration payable
for the acquisition of the Shionogi-ViiV Healthcare joint venture and
the Novartis Vaccines business is expected to be paid over a number
of years. As a result, the total estimated liabilities are discounted to
their present values, on a post-tax basis using post-tax discount
rates. 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%.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 60
Financial position and resources continued
Maturity profile of long-term debt
£m equivalent
3,000
2,500
2,000
1,500
1,000
500
0
2020
2021
2024
GBP bonds EUR bonds USD bonds Other long-term debt
2028
2029
2023
2026
2022
2025
2027
2030
2033 2034
2038 2039
2042
2043
2045
Cash and liquid investments of £2.9 billion (2017 – £2.5 billion) were
held centrally at 31 December 2018.
The analysis of cash and gross debt after the effects of hedging
is as follows.
Cash and liquid investments
Gross debt – fixed1
– floating
– non-interest bearing
Net debt
2018
£m
4,443
(21,603)
(4,432)
(29)
(21,621)
2017
£m
3,911
(16,229)
(805)
(55)
(13,178)
1 Includes £1.3 billion equivalent of notes swapped from floating to fixed rates via interest
rate swaps.
Movements in net debt
Net debt at beginning of year
Increase/(decrease) in cash and bank overdrafts
Increase in liquid investments
Increase in long-term loans
Net repayment of short-term loans
Exchange movements
Other movements
Net debt at end of year
2018
£m
(13,178)
2017
£m
(13,804)
479
–
(10,138)
1,986
(776)
6
(905)
(4)
(2,233)
3,200
585
(17)
(21,621)
(13,178)
Net debt
Cash, cash equivalents and liquid investments
Cash, cash equivalents reported in assets
held for sale
Borrowings – repayable within one year
Borrowings – repayable after one year
Net debt
2018
£m
3,958
485
(5,793)
(20,271)
(21,621)
2017
£m
3,911
–
(2,825)
(14,264)
(13,178)
At 31 December 2018, net debt was £21.6 billion, compared with
£13.2 billion at 31 December 2017, comprising gross debt of £26.1
billion and cash and liquid investments of £4.5 billion, including £0.5
billion reported within Assets held for sale, reflecting the agreement to
divest Horlicks and the other Consumer Healthcare nutritional brands
to Unilever plc. Net debt increased due to the £9.3 billion acquisition
from Novartis of the remaining stake in the Consumer Healthcare Joint
Venture in June 2018, the £0.2 billion investment in 23andMe, £0.8
billion of unfavourable exchange impacts from the translation of
non-Sterling denominated debt, and dividends paid to shareholders
of £3.9 billion, partly offset by increased free cash flow of £5.7 billion
after the milestone payment to Novartis.
At 31 December 2018, GSK’s cash and liquid investments were held
as follows:
Bank balances and deposits
Bank balances and deposits reported in
assets held for sale
US Treasury and Treasury repo only money
market funds
Liquidity funds
Cash and cash equivalents
Liquid investments – Government securities
2018
£m
1,853
485
449
1,572
4,359
84
4,443
2017
£m
1,715
–
1,715
403
3,833
78
3,911
Group financial review continuedGSK Annual Report 2018
61
Financial position and resources continued
Total equity
Commitments and contingent liabilities
At 31 December 2018, total equity had increased from £3,489 million
at 31 December 2017 to £3,672 million. This primarily reflected the
impact of Total profit and the re-measurement gains on defined
benefit plans offset by dividends paid and an unfavourable exchange
translation impact in the year.
A summary of the movements in equity is set out below.
Total equity at beginning of year
Implementation of IFRS 15
Implementation of IFRS 9
Total equity at beginning of year, as adjusted
Total comprehensive income for the year
Dividends to shareholders
Ordinary shares issued
Changes in non-controlling interests
De-recognition of liabilities with non-controlling
interests
Shares acquired by ESOP Trusts
Share-based incentive plans
Tax on share-based incentive plans
Contributions from non-controlling interests
Distributions to non-controlling interests
Total equity at end of year
Share purchases
2018
£m
3,489
(4)
(11)
3,474
4,300
2017
£m
4,963
–
–
4,963
2,882
(3,927)
(3,906)
74
–
(62)
–
360
2
21
56
(2)
–
(65)
333
(4)
21
(570)
3,672
(789)
3,489
No shares were acquired by the Employee Share Ownership Plan
(ESOP) Trusts in 2018 (2017 – £65 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 2018, the ESOP Trusts held 41.5 million
(2017 – 66.7 million) GSK shares against the future exercise of
share options and share awards. The carrying value of £161 million
(2017 – £400 million) has been deducted from other reserves. The
market value of these shares was £619 million (2017 – £882 million).
During 2018, no shares were repurchased by the company. At
31 December 2018, GSK held 414.6 million shares as Treasury
shares (2017 – 414.6 million shares), at a cost of £5,800 million
(2017 – £5,800 million), which has been deducted from retained
earnings.
No ordinary shares were purchased in the period 1 January 2019
to 1 March 2019 and the company does not expect to make any
ordinary share repurchases in the remainder of 2019.
Financial commitments are summarised in Note 41 to the financial
statements, ‘Commitments’. Other contingent liabilities are set out
in Note 32 to the financial statements, ‘Contingent liabilities’.
Contractual obligations and commitments
The following table sets out our contractual obligations and
commitments at 31 December 2018 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
Total
Total Under 1 yr
£m
5,771
£m
26,154
9,418
68
16
1,138
4,762
665
82
561
238
714
24
5
223
172
560
38
436
75
1-3 yrs
£m
3,367
1,383
29
3
316
420
105
32
124
119
3-5 yrs
£m
5 yrs+
£m
3,562 13,454
1,187
6,134
9
3
228
743
–
12
1
44
6
5
371
3,427
–
–
–
–
43,102
8,018
5,898
5,789 23,397
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 £4.2 billion which relates to externalised
projects in the discovery portfolio. There was a reduction in the
commitments in 2018 due to amendments made to existing
agreements and obligations which have ceased.
In 2018, we reached a revised agreement with the trustees of the
UK pension schemes to make additional contributions, to assist in
eliminating the pension deficit identified as part of the 31 December
2017 actuarial funding valuation. The table above includes this
commitment but excludes the normal ongoing annual funding
requirement in the UK of approximately £140 million. This funding
commitment supersedes the previous agreement made in 2016.
For further information on pension obligations, see Note 28 to the
financial statements, ‘Pensions and other post-employment benefits’.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 62
Financial position and resources continued
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
33
60
93
13
17
30
13
13
26
4
11
15
3
19
22
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 2018, 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 negotiations with the
relevant tax authorities and the outcome of litigation proceedings,
where relevant. This is discussed further in ‘Principal risks and
uncertainties’ on pages 241 to 250 and Note 45 to the financial
statements, ‘Legal proceedings’.
ViiV Healthcare contingent consideration liability
The contingent consideration payable to Shionogi amounted to
£5,937 million at 31 December 2018 (2017 – £5,542 million),
discounted at 8.5%. The undiscounted value was £8,885 million
at 31 December 2018.
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 18 October 2018. 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 GSK’s Treasury activities is to minimise the post-tax
net cost of financial operations and reduce its volatility in order to
benefit earnings and cash flows. GSK uses a variety of financial
instruments to finance its operations and derivative financial
instruments to manage market risks from these operations.
Derivatives principally comprise foreign exchange forward contracts
and swaps which are used to swap borrowings and liquid assets
into currencies required for Group purposes as well as interest rate
swaps which are used to manage exposure to financial risks from
changes in interest rates.
Derivatives are used exclusively for hedging purposes in relation to
underlying business activities and not as trading or speculative
instruments.
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. We continue
to manage our financial policies to a credit profile that particularly
targets short-term credit ratings of A-1 and P-1 while maintaining
single A long-term ratings consistent with those targets.
Our long-term credit rating with Standard and Poor’s is A+
(negative outlook) and with Moody’s Investor Services (‘Moody’s’)
is A2 (negative outlook). Our short-term credit ratings are A-1 and
P-1 with Standard and Poor’s and Moody’s respectively.
Liquidity risk management
Our policy is to borrow centrally in order to meet anticipated funding
requirements. Our cash flow forecasts and funding requirements are
monitored by the TMG on a 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 net
amount of floating rate debt to a specific cap, reviewed and agreed
no less than annually by the Board.
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.
Group financial review continuedGSK Annual Report 2018 63
Treasury policies continued
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.
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.
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’.
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.
– 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 is as follows:
2018
2017
2016
Margin
%
(revised)
£m
Margin
%
(revised)
£m
Margin
%
£m
Turnover
Gross turnover
18,227
100 16,365
100 13,363
100
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 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
Market driven
segments
Government
mandated and
state programs
Cash discounts
(5,147)
(28)
(4,040)
(25)
(2,731)
(21)
(4,594)
(361)
(25)
(2)
(3,933)
(330)
(24)
(2)
(3,063)
(261)
Customer returns
Prior year adjustments
Other prior year items
Other items
(98)
98
(59)
(613)
(1)
1
–
(4)
(97)
86
(23)
(460)
(1)
1
–
(3)
(98)
109
(25)
(457)
Total deductions
(10,774)
(59)
(8,797)
(54)
(6,526)
Net turnover
7,453
41
7,568
46
6,837
(23)
(2)
(1)
1
–
(3)
(49)
51
Market-driven segments consist primarily of Managed Care and
Medicare plans with which we negotiate 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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
64
Critical accounting policies continued
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 2018, Advair accounted for 15%
of US Pharmaceuticals turnover and approximately 34% of the
total deduction for rebates and returns, and the Respiratory
portfolio as a whole accounted for approximately 78% of the
total deduction in the year. Advair continued to suffer pricing
pressures in 2018 as we sought to transition our 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 2018, the
total accrual amounted to £4,356 million (2017 – £2,837 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.
We may become involved in significant legal proceedings, in respect
of which it is not possible to make a reliable estimate of the expected
financial effect, if any, that could result from ultimate resolution of the
proceedings. In these cases, appropriate disclosure about such
cases would be included in the Annual Report, but no provision
would be made.
This position could change over time and, therefore, there can be
no assurance that any losses that result from the outcome of any
legal proceedings will not exceed by a material amount the amount
of the provisions reported in the Group’s financial statements.
Like many pharmaceutical companies, we are faced with various
complex product liability, anti-trust and patent litigation, as well as
investigations of its operations conducted by various governmental
regulatory agencies. Throughout the year, the General Counsel of
the Group, as head of the Group’s legal function, and the Senior
Vice President and Head of Global Litigation for the Group, who is
responsible for all litigation and government investigations, routinely
brief the Chief Executive Officer, the Chief Financial Officer and the
Board of Directors on the significant litigation pending against the
Group and governmental investigations of the Group.
On this basis, US Pharmaceuticals and Vaccines inventory levels at
wholesalers and in other distribution channels at 31 December 2018
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.
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.
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.
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’.
Strategic report
The Strategic report was approved by the Board of Directors on
11 March 2019
Simon Dingemans
Chief Financial Officer
11 March 2019
Group financial review continuedGSK Annual Report 2018 GSK Annual Report 2018
65
65
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
66
68
71
72
77
79
79
89
89
91
92
94
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 66
Chairman’s Governance statement
“Our purpose and values have always been a source of great
pride for the Board and our employees. It is a powerful force in
attracting and retaining talented people who, as individuals, want
to be part of a company that contributes meaningfully to society.”
Dear Shareholder
I am pleased to present our Corporate Governance report for 2018.
Our governance structure operates from the Board across the Group
and we believe it underpins our ability to deliver our strategy and
create long-term value and benefit for our shareholders and
stakeholders.
I can confirm that throughout 2018 the company complied with
the requirements of the Financial Reporting Council’s (FRC) UK
Corporate Governance Code (current Code) except that Dr Vivienne
Cox was unable to attend the company’s 2018 AGM. She was
required to attend a board meeting of another public company as
their Senior Independent Director and Nomination & Governance
Chair. This resulted in partial non-compliance with current Code
provision E.2.3.
A copy of the current Code is available on www.frc.org.uk.
The following pages set out details on the composition of our Board,
its corporate governance arrangements, processes and activities
during the year, together with reports from each of the Board’s
Committees. In addition, related statutory disclosures are set out in
the Shareholder Information section on pages 251 to 270.
Corporate governance reform
During the year, The Companies (Miscellaneous Reporting)
Regulations 2018 were published in conjunction with the FRC’s new
Code (the Reforms). The Reforms seek to raise the bar on existing
corporate governance practices and encourage companies to
demonstrate their broader responsibility within society, in fulfilment of
the Government’s aim to build trust in business. At their core, they:
– require boards to report on how they have had regard to matters
set out in section 172 of the Companies Act 2006, including
stakeholder impacts, when fulfilling their directors’ duties;
– introduce new requirements around employee consultation, pay
practices, board culture, composition and diversity; and
– encourage companies to report on how the new Code’s principles
have been applied each year.
The Reforms came into effect on 1 January 2019 and seek to drive a
number of changes to companies’ underlying corporate governance
processes. As a result, the Board has reviewed our existing practices
to identify where they are in line with the Reforms and implemented
enhancements where appropriate. We will report against the
Reforms in next year’s Annual Report to allow time to embed these
new practices in our corporate governance framework and to monitor
their operation and effectiveness.
However, I wish to highlight in this Report some of the more
significant implementation steps which may be of interest to our
investors and wider stakeholders. These include the early publication
of our CEO pay ratio on page 106 and the designation of Dr Vivienne
Cox as our Workforce Engagement Director, which is discussed on
page 90. We have also further strengthened reporting on our
stakeholder relationships agenda by:
– summarising our approach and the mechanisms we have in place
to promote stakeholder engagement on page 11;
– highlighting the specific role our Corporate Responsibility
Committee plays in monitoring, identifying and addressing the
evolving views and expectations of our broad range of
stakeholders on pages 92 and 93; and
– describing how we respond to the expectations of our
stakeholders to remain commercially successful, protect our
reputation and build trust by:
– using our science and technology to reduce health needs
– making our products more affordable and available
– being a modern employer.
GSK Annual Report 2018 67
Our purpose, strategy and culture
Succession process
In closing, I informed the Board at the start of the year of my intention
to retire from the Board once a successor has been appointed. Our
Senior Independent Director, Vindi Banga, is leading the process to
identify and recruit my successor to lead the Board into the next
phase of its development. His update on the process and the desired
attributes sought in a new Chairman are set out on page 78.
It has been a privilege to serve as Chairman of GSK for the last four
years and to observe the positive impact on the company that Emma
has made in such a relatively short time as CEO. This Annual Report
demonstrates the clarity of the current strategy that has resulted in an
improvement in the performance of the business. However, I feel that
it is the right time to hand over the reins to a new Chair to have a clear
run at overseeing the eventual separation of GSK into two world-
class businesses. In doing so, I am confident that my successor will
continue the crucial role of the Chair in promoting and supporting our
strategy for the long-term benefit of our shareholders, patients,
employees and other stakeholders.
I commend this report to all of our stakeholders.
Philip Hampton
Chairman
11 March 2019
Our purpose is to help people do more, feel better and live longer
and this is underpinned by our values of patient focus, integrity,
respect and transparency. Our purpose and values have always been
a source of great pride for the Board and our employees. It is a
powerful force in attracting and retaining talented people who,
as individuals, want to be part of a company that contributes
meaningfully to society. Emma Walmsley was keen to preserve
this commitment to our purpose and values as she and her team
developed the company’s priorities around IPT, supported by
evolving a culture to foster more pace and performance edge. The
Board receives regular papers from the CEO, Head of Human
Resources and our global businesses, that update it on progress on
the alignment between our strategy and our performance and
values-based culture that was introduced at the start of 2018.
Culture change in a complex, global organisation such as GSK takes
time and sustained effort. However, we are seeing some encouraging
signs that our new expectations are taking effect and supporting our
strategy. This ultimately should enable swifter progress in getting
new medicines, vaccines and consumer healthcare products to our
patients and consumers around the world.
Risk management
The Board continues to consider GSK’s Enterprise risks and the
strategies to address them. Reviews of the risks were undertaken
throughout the course of the year, including whether the key
Enterprise risks affecting the respective businesses are being
managed and mitigated in a proportionate way, and management’s
commitment to maintain a strong controls culture.
Also of note is the recent decision by the Serious Fraud Office,
in the UK, to close its investigation having concluded that no further
action is required. The investigation had focused on commercial
practices by the company, its subsidiaries and associated persons.
The company’s own findings have led to further improvements in
the control environment. Investigations by the US Securities and
Exchange Commission and Department of Justice remain ongoing.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 68
Our Board
Board composition
Gender diversity
Composition
Executive
Non-Executive
Tenure Non-Executive
Up to 3 years
3-6 years
7-9 years
33.3%
66.7%
25%
50%
25%
International experience
Board
Male
Female
Executive
Male
Female
Non-Executive
Male
Female
Global
US
Europe
EMAP
83%
100%
92%
67%
At close of AGM on 8 May 2019
At date of publication
58.3%
41.7%
Board
Male
Female
Executive
75%
25%
Male
Female
Non-Executive
50%
50%
Male
Female
54.5%
45.5%
66.7%
33.3%
50%
50%
Philip Hampton 65
Non-Executive Chairman N
Nationality
British
Emma Walmsley 49
Chief Executive Officer
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 plc, BT Group plc,
BG Group plc, British Gas plc and British Steel plc. Philip was previously
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. Philip was Senior Independent Director of Anglo American Plc
between 2014 and 2018, having served on its Board since 2009.
External appointments
Philip is Chair of the Hampton-Alexander Review of FTSE Women Leaders,
an independent review on improving gender balance in FTSE leadership.
As announced in January 2019, Philip will step down as Non-Executive
Chairman and the Board has started the process of identifying his successor.
Key
Committee Chair
Nominations
Audit & Risk
Remuneration
Science
Corporate Responsibility
N
A
R
S
C
Appointed
1 January 2017. Chief Executive Officer from 1 April 2017
Skills and experience
Prior to her appointment as GSK’s CEO, Emma was the CEO of GSK
Consumer Healthcare, leading its creation as a Joint Venture between
GSK and Novartis in March 2015 (solely owned by GSK since June 2018).
Emma joined GSK in 2010 from L’Oreal, having worked for 17 years
in a variety of roles in Paris, London, New York and Shanghai.
Emma holds an MA in Classics and Modern Languages from Oxford
University.
External appointments
Emma co-chairs the Consumer, Retail and Life Sciences Council, a business
advisory group for the UK Government, and is an Honorary Fellow of the
Royal Society of Chemistry.
Simon Dingemans 55
Chief Financial Officer
Nationality
British
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 between 2014 and 2016.
External appointments
Simon is a Trustee of The Donmar Warehouse.
Simon will step down from the Board at the conclusion of the AGM
on 8 May 2019.
GSK Annual Report 2018 69
Dr Vivienne Cox 59
Independent Non-Executive Director & Workforce
Engagement Director R C
Nationality
British
Appointed
1 July 2016
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.
She is an Advisory Board Member of the African Leadership Institute,
Chair of Rosalind Franklin Institute, Vice President of the Energy Institute
and a member of the advisory board of Montrose Associates. Vivienne sits
on the Global Leadership Council of Saïd Business School, Oxford and is
Patron of the Hospice of St Francis.
Lynn Elsenhans 62
Independent Non-Executive Director C N A
Nationality
American
Appointed
1 July 2012
Skills and experience
Lynn has a wealth of experience of running a global business and significant
knowledge of the global markets in which GSK operates. She served as
Chair, President and Chief Executive Officer of Sunoco Inc from 2009 to
2012. Prior to joining Sunoco in 2008 as President and Chief Executive
Officer, Lynn worked for Royal Dutch Shell, which she joined in 1980, and
where she held a number of senior roles, including Executive Vice President,
Global Manufacturing from 2005 to 2008. Lynn was previously a Non-
Executive Director of Flowserve Corporation, the First Tee of Greater
Houston, and a Trustee of the United Way of Greater Houston.
External appointments
Lynn is a Non-Executive Director of Baker Hughes, a GE company, and
Chair of its Audit Committee, as well as a Board Director of Saudi Aramco.
In addition, Lynn is a Director of the Texas Medical Center.
Iain Mackay 57
Chief Financial Officer Designate
Nationality
British
Appointed
14 January 2019. Chief Financial Officer from 1 April 2019
Skills and experience
Prior to joining GSK, Iain was Group Finance Director at the global bank
HSBC Holdings plc, a position he held for eight years. A chartered
accountant, Iain has worked in Asia, the US and Europe and before HSBC
was at General Electric, Schlumberger Dowell and Price Waterhouse.
External appointments
Iain is a Trustee of the British Heart Foundation and a member of the Court
of the University of Aberdeen.
Iain holds an MA in Business Studies and Accounting, and an Honorary
Doctorate from Aberdeen University in Scotland.
Dr Hal Barron 56
Chief Scientific Officer and President, R&D
Nationality
American
Appointed
1 January 2018
Skills and experience
Prior to joining GSK, 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 until March 2018, when it was acquired by
Celgene Corporation.
External appointments
Hal is Associate Adjunct Professor, Epidemiology & Biostatistics, University
of California, San Francisco. He is also a Non-Executive Board Director of
GRAIL, Inc, an early cancer detection healthcare company and a member
of the Advisory Board of Verily Life Sciences LLC, a subsidiary of
Alphabet Inc.
Manvinder Singh (Vindi) Banga 64
Senior Independent Non-Executive Director N A R
Nationality
British
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 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. Vindi has
been a Non-Executive Director of Thomson Reuters Corp, Chairman of
the Supervisory Board of Mauser Group and Senior Independent Director
of Marks & Spencer Group Plc.
External appointments
Vindi is a Partner at private equity investment firm Clayton Dubilier & Rice,
Chairman of Kalle GmbH, a Director of High Ridge Brands Co and a member
of the Holdingham International Advisory Board. Vindi is a Non-Executive
Director of the Confederation of British Industry (CBI), sits on the Governing
Board of the Indian School of Business, Hyderabad and the Global Leadership
Council of Saïd Business School, Oxford and is a member of the Indo UK CEO
Forum. Vindi is Chair of the Board of Trustees of Marie Curie.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
70
Our Board continued
Dr Laurie Glimcher 67
Independent Non-Executive Director and Scientific & Medical Expert
A S
Nationality
American
Appointed
1 September 2017
Skills and experience
In addition to a number of senior leadership positions held at both Harvard
Medical School and Harvard School of Public Health, Laurie 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, and a wealth of global, publicly listed,
pharmaceutical business experience.
External appointments
Laurie is currently Professor of Medicine at Harvard Medical School and is
CEO, President and an Attending Physician at the Dana-Farber Cancer
Institute.
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. She is a Scientific
Advisory Board member of Repare Therapeutics Inc, Abpro Therapeutics
and Kaleido Biosciences Inc.
Dr Jesse Goodman 67
Independent Non-Executive Director and Scientific & Medical Expert
S C
Nationality
American
Appointed
1 January 2016
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), a member
of the Regulatory and Legal Working Group of the Coalition for Epidemic
Preparedness Innovations (CEPI) and of the US National Academy of
Medicine. Jesse is a member of the Board of Intellia Therapeutics,
Cambridge, MA.
Judy Lewent 70
Independent Non-Executive Director A N R S
Nationality
American
Appointed
1 April 2011
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
served as a Non-Executive Director of Dell Inc, Quaker Oats Company and
Motorola Inc, and held Non-Executive Directorships at Purdue Pharma Inc,
Napp Pharmaceutical Holdings Limited and certain Mundipharma
International Limited companies until 2014.
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.
Urs Rohner 59
Independent Non-Executive Director R N
Nationality
Swiss
Appointed
1 January 2015
Skills and experience
Urs has a broad range of business and legal experience having served
as Chairman on a number of Boards, most recently for Credit Suisse, a
world-leading financial services company. Prior to joining Credit Suisse in
2004, Urs served as Chairman of the Executive Board and CEO of ProSieben
and ProSiebenSat.1 Media AG. This followed a number of years in private
practice at major law firms in Switzerland and the US, having been admitted
to the bars of the canton of Zurich in Switzerland in 1986 and the state of
New York in the US in 1990.
External appointments
Urs is 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.
GSK Annual Report 2018
71
Our Corporate Executive Team
Emma Walmsley
Chief Executive Officer
Simon Dingemans*
Chief Financial Officer
Iain Mackay*
Chief Financial Officer Designate
Dr Hal Barron
Chief Scientific Officer
and President, R&D
For biographical details, see pages 68 and 69
Roger Connor
President, Global Vaccines
Roger joined the CET in 2013. He was appointed
President of GSK Global Vaccines in 2018.
In addition to leadership of the Vaccines business,
he is responsible for GSK’s global procurement
organisation. Previously, he was President,
Global Manufacturing & Supply and, before
that, Vice President, Office of the CEO and
Corporate Strategy. Roger joined GSK in 1998
from AstraZeneca.
Roger holds a degree in Mechanical and
Manufacturing Engineering from Queen’s
University, Belfast and a Master’s in Manufacturing
Leadership from Cambridge University.
He is a Chartered Accountant.
James Ford
Senior Vice President & General Counsel
James joined the CET in 2018, when he was
appointed Senior Vice President and General
Counsel. He joined GSK in 1995 and has served
as General Counsel Consumer Healthcare,
General Counsel Global Pharmaceuticals,
Vice President of Corporate Legal and Acting
Head of Governance, Ethics and Compliance.
Prior to GSK, James was a solicitor at Clifford
Chance and DLA. He holds a law degree from
University of East Anglia and a Diploma in
Competition Law from Kings College. He is
qualified as a solicitor in England and Wales,
and is an attorney at the New York State Bar.
Nick Hirons
Senior Vice President, Global Ethics
and Compliance
Nick was appointed to the 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 McNamara
CEO, GSK Consumer Healthcare
Karenann Terrell
Chief Digital & Technology Officer
Brian joined the 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’ OTC division. Brian began his
career at Procter and Gamble.
Brian is a Board Member of the World Self-
Medication Industry Association, serving as
Chairman from February 2017 to March 2019,
and is a Board Member of the Consumer Goods
Forum. He earned an undergraduate degree
in Electrical Engineering from Union College
in New York and an MBA in Finance from the
University of Cincinnati.
Luke Miels
President, Global Pharmaceuticals
Luke joined GSK and the 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, was 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 in the US, Europe and Asia.
He is a member of the Board for ViiV Healthcare.
Luke holds a Bachelor of Science degree in
Biology from Flinders University in Adelaide and
an MBA from the Macquarie University, Sydney.
Karenann joined GSK and the CET in 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 at 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
Claire was appointed to the CET as Senior
Vice President, Human Resources in 2008.
She 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, Claire worked for the Ford Motor
Company, holding various positions in Human
Resources. She has a Bachelor of Science
degree in Economics, Management and Industrial
Relations from the University of Wales.
David Redfern
Chief Strategy Officer
Phil Thomson
President, Global Affairs
David joined the 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,
he was Senior Vice President for Central and
Eastern Europe. He joined GSK in 1994.
David 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. He has a
Bachelor of Science degree from Bristol
University and is a Chartered Accountant.
Regis Simard
President, Pharmaceuticals Supply Chain
Regis joined the CET in 2018, when he became
President, Pharmaceuticals Supply Chain.
He is responsible for the manufacturing and
supply of GSK’s pharmaceutical products.
He also leads Quality and Environment, Health,
Safety and Sustainability at a corporate level.
Regis joined GSK in 2005 as Site Director
at Notre Dame de Bondeville, rising to become
Senior Vice President of Global Pharmaceuticals
Manufacturing before his current role. Previously,
he held senior positions at Sony, Konica Minolta
and Tyco Healthcare. He is a member of the
Board for ViiV Healthcare. He is a mechanical
engineer and holds an MBA.
Phil joined the CET in 2011. He was appointed
President, Global Affairs in 2017, with
responsibility for the Group’s strategic approach
to reputation, policy development and stakeholder
engagement.
Previously, Phil was Senior Vice President,
Communications and Government Affairs.
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.
* Simon Dingemans will step down from the
CET on 31 March 2019 and Iain Mackay
will take formal responsibility as CFO from
1 April 2019.
Luc Debruyne, Dan Troy and Sir Patrick
Vallance were members of the CET before
leaving the company in December 2018,
January 2019 and March 2018 respectively.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 72
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
long-term priorities of Innovation, Performance and Trust, that is consistent with its culture, values and expectations. Our internal control and
risk management arrangements, described on pages 87 to 88 and 34 to 36, are an integral part of our 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 77
Read more
on page 79
Read more
on page 96
Read more
on page 91
Read more
on page 92
See GSK.com for terms of reference for each Board Committee.
Scheduled Board and Committee attendance during 2018
Total number of scheduled meetings
6
6
6
5
Board
Nominations
Audit & Risk
Remuneration
Science
3
Corporate
Responsibility
5
Members
Philip Hampton
Emma Walmsley
Simon Dingemans
Dr Hal Barron
Vindi Banga
Dr Vivienne Cox
Lynn Elsenhans
Dr Laurie Glimcher
Dr Jesse Goodman
Judy Lewent
Urs Rohner
Sir Patrick Vallance
Stepped down on 31 March 2018
Professor Sir Roy Anderson
Retired on 3 May 2018
Number of ad-hoc meetings
Attended
Attended
Attended
Attended
Attended
Attended
6
6
6
6
6
6
6
6
6
6
6
2 (2)
3 (3)
37
6
6
6
6
3
6
6
6
6
6
5
5
5
5
6
4
5
5
3
3
3
2 (2)
3
2 (2)
1
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 2018
73
2018 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 long-term IPT priorities underpinned by a continuing shift in culture. In addition, during the year the CEO met with
Non-Executive Directors to discuss various matters, including the progress on the company’s strategy, succession planning and continuing
regulatory investigations.
Areas of focus
Strategy
The Board’s oversight of the execution of our strategy included:
– Receiving and discussing reports from our three principal businesses: Pharmaceuticals, Vaccines and
Consumer Healthcare
– Receiving IPT transformation programme
– Scrutinising and approving new R&D strategy
– Holding joint Board and Corporate Executive Team strategy day to discuss IPT priorities against external landscape
changes, business performance, competitors and governance arrangements
– Scrutinising and approving major Consumer deals with Novartis, Pfizer and Unilever
– Scrutinising and approving an oncology deal to purchase Tesaro
– Receiving and discussing reports on our pensions, insurance, tax and treasury strategies
Performance
The Board’s focus on performance included:
– Evaluating the CEO’s 2017 performance and setting her 2018 objectives
– Setting, reviewing and agreeing the annual budget and forward looking three year plan
– Receiving reports from the CEO on our three principal businesses
– Scrutinising the Group’s financial performance
– Approving a major Group restructuring plan
– Reviewing our digital, data and analytics capabilities and opportunities
Governance
The Board’s approach to discharging its corporate governance duties included:
– Receiving reports from Board Committees
– Approving the 2017 Annual Report
– Reviewing AGM preparation and approving the 2018 Notice of AGM and a General Meeting to approve the
transaction with Novartis
– Considering observations and agreeing actions from the independent external evaluation of the Board’s performance
– Receiving reports on corporate governance and regulatory developments
– Approving appointment of new auditor
– Undertaking training on GSK’s Code of Conduct and Anti-bribery and corruption
– Approving the appointment of a new Chief Financial Officer
The Head of HR briefed the Board on:
– Aligning GSK’s culture and values to support our strategy and long-term priorities
Cultural
transformation
Engagement
The Board’s regard for stakeholder impacts included:
– Reviewing and approving a new Trust framework that has been set in the context of external trends and stakeholder
expectations
– Receiving regular external stakeholder development reports
– Approving the evolution of our approach and changes to medical engagement with key external experts
– Designating Dr Vivienne Cox as Workforce Engagement Director to gather the views of the Group’s workforce
Link to long-term priorities Innovation
I
Performance P Trust T Culture C
Long-term priorities link
I
I
I
I
I
I
I
I
I
I
P T C
P T C
P T C
P T C
P T C
P T C
P T C
P T C
P T C
P T C
P T C
P T C
P T C
T C
T C
T C
T C
T C
T C
T C
I
P T C
P T C
T C
T C
I
I
P T C
P T C
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 74
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
– Maintains a dialogue with shareholders on the governance
of the company.
The Chairman’s role description is available on 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
– Maintains a continual and active dialogue with
shareholders in respect of the company’s performance.
The Chief Executive Officer’s role description is available on 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 as required.
Independence statement
The Board considers all of its Non-Executive Directors
who are identified on pages 68 to 70 to be independent.
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 Lynn Elsenhans
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 GSK.com
Company Secretary
Victoria Whyte
– Secretary to the Board and all Board Committees
– Supports the Board and Committee Chairs in annual agenda planning
– Ensures information is made available to the Board members in a timely fashion
– Supports the Chairman in designing and delivering Board inductions
– Coordinates continuing 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 2018
75
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
long-term IPT priorities.
New CET members meet with Board members as part of their
induction, and to ensure the Board maintains its connections
with the CET.
Induction
Each new Director receives a general induction, which includes
their duties and responsibilities as a Director of a listed company,
the company’s Corporate Governance structure and undertaking
training on GSK’s Code of Conduct. A personalised induction is
then devised which is individually tailored to each new Director’s
background, education, experience and role.
The induction programme for Executive Directors normally includes
an explanation of the role of an Executive Director, if appropriate,
building relationships with the Chairman, Board and the CET and
arranging to fill any capability gaps the new Director may have.
The Chief Financial Officer Designate’s induction programme was
tailored for Iain Mackay, a highly experienced global CFO, and
commenced when he joined the Board in January 2019. It includes
the following features:
– familiarisation with the industry and GSK;
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 and
competitors’ performance and strategy; and
– measure progress in implementing our long-term IPT 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 continuing 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.
– introduction to the Finance organisation and GSK’s financial
structure; and
During 2018, the Board members undertook and completed training
on GSK’s Code of Conduct and Anti-bribery and corruption.
– introduction to senior management, other CET members and
advisors to the company.
The induction programme for Non-Executive Directors normally
includes introductory meetings with members of the CET and other
senior executives to explain the company’s business and financial
structure, the commercial and regulatory environment in which we
operate, our competitors and an investor’s perspective.
Visits to our business operations are also a feature of Non-Executive
and Executive Directors’ induction programmes.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 76
Leadership and effectiveness continued
2018 Internal evaluation of the Board
The Board carries out an evaluation of its performance and the
performance of its Committees every year which is facilitated
externally every third year. The progress of the Board against
the outcomes of the 2017 external evaluation, which was
facilitated by Ms Ffion Hague of Independent Board Evaluation,
is disclosed below.
The 2018 Board and Committees evaluation process was conducted
internally by the Company Secretary who:
– interviewed each Director with a small number of focused
questions;
– drew all the responses together from the information gathered
and discussed the outcomes and recommendations with the
Chairman; and
– following discussion with the Board as a whole, identified areas
of focus and improvement for the Board which are set out below.
Further improvements and areas of focus for the Board were
identified and are set out below.
Board performance action points for 2019
Further improvements
Areas of focus for 2019
– Succession planning for the Board
– Oversight of R&D and pipeline revival and key business development
transactions, and the proposed Consumer Healthcare joint venture
with Pfizer
The SID is running the search process for the next Chairman supported by a
global executive search firm. Attendance at the Nominations Committee for this
process has been expanded to include all Non-Executive Directors. Further details
are set out on page 78.
The Nominations Committee has also been progressing the search for a
successor for Judy Lewent, the Chair of the Audit & Risk Committee.
The Board will continue to monitor the performance of R&D and the pipeline
and the integration and operation of the key business development transactions
including: Tesaro, 23andMe, Merck KGaA, Darmstadt, Germany. It will also be
reviewing and overseeing arrangements for the proposed Consumer Healthcare
joint venture with Pfizer.
– Building Board relationships and culture in line with the CEO’s culture
work across the Group
Continuing the evolution of the Board’s culture and building relationships as the
membership has changed is an important area of focus especially with the
impending Chairman succession.
– Further enhancing the Board’s decision-making and ways of working
Opportunities to further enhance the Board’s decision-making and ways of
working will continue to be considered to ensure that the Board can operate as
effectively as possible.
2018 Board performance
Progress against the conclusions of the 2017 Board evaluation review is set out below.
Areas of focus for 2018
Progress/Achievements
– A review of R&D strategy following the appointment of the new
Chief Scientific Officer and President, R&D
The Board reviewed and approved Dr Hal Barron’s new approach to R&D which
was announced with the company’s Q2 results. The new approach focused on
science relating to the immune system, the use of genetics and investments in
advanced technologies.
– Enhancing the Board’s focus and decision making by agreeing
its clear priorities to focus on each year
The Board agreed clear priorities for focus during 2018 and was pleased
to have achieved them.
– Succession planning at senior executive and Board level
The Board reviewed Executive and Non-Executive Director succession planning,
and succession processes are continuing to replace the Audit & Risk Committee
Chair. Following the Chairman’s decision to step down from the Board, the SID
is leading the succession process for the Chairman, in collaboration with the
Non-Executive Directors. Further details on Chairman succession are set out
on page 78.
– Building Board relationships and culture in line with the CEO’s
culture work across the Group
The Board was especially busy in 2018, but continues to build relationships and
evolve its culture as its membership changes.
GSK Annual Report 2018
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
Vindi Banga
Lynn Elsenhans
Judy Lewent
Urs Rohner
Professor Sir Roy Anderson
1 January 2016
27 January 2015
8 May 2014
1 January 2017
1 October 2012 until
3 May 2018
Details of the Committee members’ skills and experience are given in
their biographies under ‘Our Board’ on pages 68 to 70. See page 72
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
Attends as
required
Regular
attendee
✓
✓
✓
Advisory services
During the year, Egon Zehnder provided recruitment
consultancy services to the Committee, in addition to
recruitment and HR services which they provide to the
company. The Committee supports the engagement of
executive search firms, such as Egon Zehnder, who have
signed up to the Voluntary Code of Conduct on gender
diversity and best practice. Egon Zehnder is also one of the
13 executive search firms to be accredited in 2018 under the
Enhanced Code of Conduct, by meeting exacting performance
criteria and best practice standards in gender-balanced
selection for FTSE 350 boards.
77
Dear Shareholder
In the last few years, the Committee has been thoughtful in its
approach to refreshing the Board and replacing retiring directors.
More recently, the Committee has supported Emma Walmsley since
her appointment as CEO in 2017 in her refreshment of the senior
leadership team to drive the delivery of her IPT priorities for the
long-term benefit of shareholders, patients and our other key
stakeholders.
Executive management succession
In my Committee report last year, I shared insights on the recruitment
of several key senior executive appointments. This included Dr Hal
Barron, who joined the Board as Chief Scientific Officer and
President, R&D on 1 January 2018 to bring a fresh approach to our
R&D business. This process has continued this year and reflects
positively both on a strong pipeline of top talent in the organisation
and, also, the ability to attract high-quality external hires to bring new
perspectives and approaches from outside the business.
Iain Mackay joined the Board from HSBC, to be our next Chief
Financial Officer when Simon Dingemans (our current CFO) steps
down from the Board as planned in May 2019. Our CFO succession
process is described in more detail below.
When Simon informed the Board of his intention to leave the
company, the Committee engaged Egon Zehnder, which specialises
in the recruitment of high-calibre executives, to carry out a targeted
internal and external search for his successor. The Committee
compiled a role profile for the next CFO which set out the desired
skills.
In the Committee’s view, a potential successor to Simon would
require a strong technical grasp of reporting, internal controls,
and cost and capital discipline. He/she would be familiar with
international long cycle businesses, M&A execution and, though
not essential, an understanding of manufacturing and R&D. Finally,
a successor should be an effective business partner to the CEO,
a proven communicator with shareholders and possess a strong
set of personal values.
Egon Zehnder initiated a thorough global search against this agreed
profile which yielded a pool of candidates, which was then reduced
to a shortlist of several potential internal and external candidates.
These shortlisted candidates met and were subsequently interviewed
by the company’s Audit & Risk Committee Chair, the CEO, the
Remuneration Committee Chair and me, and our feedback on each
candidate was compiled. The Committee also received the CEO’s
analysis of the candidates and that of the Head of HR. The process
culminated with the Committee meeting to agree a recommendation
to the Board that Mr Iain Mackay be appointed the next CFO. The
recommendation received unanimous Board approval. On 7 August
2018, it was announced that Iain would join the Board as an
Executive Director with effect from 14 January 2019.
The Board was pleased to welcome Iain to GSK. He is a proven
CFO of a complex, regulated global bank, from his eight years as
Group Finance Director at HSBC. He brings tremendous finance
experience from different sectors from his time at HSBC, General
Electric, Schlumberger Dowell and Price Waterhouse where he
trained. He is a strong leader with a track record of driving cost,
cash and capital allocation discipline to deliver the strategy.
In addition to the new CFO, the Committee has also reviewed the
following internal senior executive appointments to the CET.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 78
Leadership and effectiveness continued
Nominations Committee report continued
James Ford was appointed SVP, General Counsel on 1 August
2018, succeeding Dan Troy who had performed the role at GSK
for 10 years. James was previously SVP and General Counsel for
Global Pharma. Through his 23-year career with GSK, he has
gained wide-ranging legal experience including investigations,
complex corporate transactions and litigation in senior roles across
the US, Asia and the UK.
Roger Connor was appointed President, Vaccines on 1 September
2018 succeeding Luc Debruyne, who in the last five years of his
27 year career at GSK had been President, Vaccines. Roger has
been on the CET since 2012 as President, Global Manufacturing
& Supply and led the strategic transformation of GSK’s supply chain
to support improved quality and supply performance. He has a
proven track record of leading a complex, global organisation,
developing organisational capability and driving cultural
transformation.
Regis Simard was appointed President, Pharmaceutical Supply
Chain on 1 September 2018. Regis was previously SVP, Global
Pharma Manufacturing and joined GSK in 2005 as a site director
in France, having in the past worked in the electronics, medical
devices and pharmaceutical industries.
Diana Conrad has been appointed to succeed Claire Thomas
as SVP, HR from 1 April 2019 to lead the HR function.
Board composition and diversity
The Board has sought to balance its composition and that of its
Committees and to refresh them progressively over time so that
they can benefit from the experience of longer serving Directors,
and the fresh external perspectives and insights from newer recent
appointees.
Non-Executive Directors are drawn from a wide range of industries
and backgrounds, including the pharmaceuticals industry and R&D,
vaccines, consumer products and healthcare, medical research and
academia, and insurance and financial services, and have a wealth
of experience of complex organisations with global reach. Many of
our Board members have experience of long-cycle industries, which
is of assistance in understanding the industry in which we operate.
We are committed to the diversity of our Boardroom just as GSK
is committed to equal opportunities for all our employees at all levels
of the organisation. The Board and management seek to encourage
a diverse and inclusive culture throughout GSK.
A key requirement of an effective board is that it comprises a
range and balance of skills, experience, knowledge, gender and
independence, with individuals who are prepared to challenge each
other and work as a team. This needs to be backed by a diversity of
personal attributes, including character, intellect, sound judgement,
honesty and courage.
The Committee is responsible for developing measurable objectives
to support the implementation of the Board’s diversity policy,
including gender, and monitoring progress towards the achievement
of these objectives. Our diversity policy is in line with the measurable
targets set out in the:
– Hampton-Alexander Review to increase the number of women
in senior leadership positions in all FTSE 350 companies; and
– Parker Review Commission’s report ‘Beyond One by ‘21’ to
increase ethnic diversity appointments on the boards of FTSE
100 companies.
Progress towards our female Board representation and combined
Executive Committee and Direct Reports targets of at least 33%
by 2020 was published in the FTSE Women Leaders 2018 report,
which is reproduced below:
Female Representation as at 30 June 2018
2018 Report Female
Representation Metrics
Board
Combined Executive
Committee and Direct
Reports
2020 FTSE 100 target
33.0%
33.0%
GSK
45.5% (2017 – 41.7%) 32.5% (2017 – 25.7%)
FTSE 100 average
30.2% (2017 – 27.7%) 27.0% (2017 – 25.2%)
FTSE 100 highest
50.0% (2017 – 44.4%) 47.0% (2017 – 47.0%)
As at the date of this Report we have 41.7% women on our Board
(2017 – 38%) and 21% women on our Corporate Executive Team
(2017 – 21%).
Our female Board representation will return to 45.5% when Simon
Dingemans steps down from the Board on 8 May 2019.
Closing this 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 a particular area of attention.
We are pleased that good progress has been made, such that at this
stage we are now almost in line with our 2020 target on combined
executive committee and direct reports. The representation of
women in management positions at GSK is illustrated on page 28,
as part of the gender diversity of GSK’s global workforce.
We are in line with the Parker Report’s recommendation.
I have decided to step down from the Board. Our SID, Vindi Banga,
is leading the process to identify my successor. More details are
given below.
Chairman succession: A search process for the next Chairman
is underway supported by a global executive search firm. The next
Chairman will oversee delivery of the next phase of the company’s
strategy, continuing to strengthen the pharmaceutical business
whilst demerging the consumer business formed through the
integration of the Pfizer business with that of GSK. A specification
has been agreed covering the key skills, experience and personal
characteristics deemed desirable for the role and we are also
engaging with shareholders to gather their views. The selection
committee for this process has been expanded to include all
Non-Executive Directors.
Vindi Banga
Senior Independent Director
Committee evaluation
The Committee’s annual evaluation exercise was internally facilitated
by the Company Secretary, who interviewed Committee members on
behalf of the Committee Chair. It was concluded that the Committee
continued to operate effectively. In terms of enhancements, the
Committee would seek to augment its appointment process
for the appointment of scientific and financial experts by co-opting
subject matter experts to advise the Committee.
Philip Hampton
Nominations Committee Chair
11 March 2019
GSK Annual Report 2018
79
Dear Shareholder
In the following pages of this report we aim to share insights into the
activities undertaken or overseen by 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
auditor at the start of each year. It is then adapted as appropriate
as the year progresses.
Financial reporting
The integrity of the financial statements, including the Annual Report
and quarterly results announcements, is a key focus for the
Committee. This includes the Committee’s assessment of the
effectiveness of the internal controls over financial reporting.
The Committee reviewed, at least quarterly, the company’s significant
accounting matters, including contingent consideration liabilities,
revenue recognition and accruals for returns and rebates,
restructuring, tax and accounting for significant transactions,
as well as the impact of changes to accounting standards.
The Committee’s position has always been to aim for clear and
transparent financial disclosure in GSK’s financial reporting and
to support a proactive approach that is in step with or ahead of
guidance and requirements from regulators. In line with prior years,
the Committee continued to review compliance with the latest
guidance and endorsed management proposals to further improve
disclosures particularly around the use of Alternative Performance
Measures in GSK’s 2018 preliminary results and the Annual Report.
External auditor
After a competitive tender exercise Deloitte LLP were appointed
the company’s new auditor at the 2018 AGM, replacing
PricewaterhouseCoopers LLP, after a smooth transition exercise
with minimal disruption to the business. I have maintained a strong
working relationship with the new audit partner throughout the
transition and during the 2018 audit process. Management and
Deloitte have also worked closely together, so that Deloitte could
develop a deep understanding of GSK’s business that it could bring
to bear during the 2018 Group audit. We have welcomed the new
perspectives and the challenge that Deloitte has brought to the audit.
We are also pleased to have observed further improvements in audit
quality and efficiencies that have resulted from Deloitte’s deployment
of data analytics.
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 auditor, 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 69 and 70. See page 72 for Committee member attendance
levels.
The Company Secretary is Secretary to the Committee and
attends all meetings. The entire Board is invited to attend the
Committee meetings and other attendees include:
Attendee
General Counsel
Group Financial Controller
Head of Audit & Assurance
Head of Global Ethics and Compliance
Chief Medical Officer
Chief Product Quality Officer
External auditor
Attends as
required
Regular
attendee
✓
✓
✓
✓
✓
✓
✓
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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 80
Accountability continued
Audit & Risk Committee report continued
Internal framework for control and risk
management developments
This is another core area of focus for the Committee. In 2018, the
following developments in Global Ethics and Compliance (GEC), the
business units, and across the enterprise, continued to strengthen
our controls and culture of compliance and risk management.
Technology user access controls: As part of the Committee’s
role in assessing the effectiveness of the internal controls over
financial reporting, certain technology systems and the associated
infrastructure were identified for further focus and consideration
by the Committee especially around user access management.
Throughout the year, the Committee closely monitored the Group’s
plans to address the control findings identified. In addition, a further
programme was implemented and completed in 2018 to identify and
validate the additional layers of controls the Group has established
to mitigate this risk area, as well as some further enhancements to
these controls.
Enterprise risk management enhancements: The Committee
has also overseen the launch of a new Enterprise risk management
(ERM) cycle, which provides an end-to-end approach to planning,
mitigation and reporting of key Enterprise risks:
– introducing Enterprise risk plans (ERP) for each business, and
the Global support function, which set out its risk appetite and
tolerance, the expected controls, mitigation actions and
monitoring. The Risk Oversight Compliance Council approves
and the Committee reviews executive summaries of these ERPs;
– a controlled process of adaptions for ERPs has been established
to achieve an appropriate balance between managing Enterprise
risks on a consistent basis, while providing a measure of risk-
based flexibility for various parts of the organisation where justified;
– making Enterprise risk reports more data-focused to generate
more informed discussion of risk exposure and mitigation; and
– the Committee agreed to separate Information protection into
two separate Enterprise risks – Information security and Privacy.
Privacy: During the year, the Privacy Centre of Excellence delivered
a change programme to improve and sustainably manage GSK’s
data privacy compliance, whilst ensuring compliance with the
General Data Protection Regulation that became law in May 2018.
This included:
– the implementation of a new control framework;
– remediation of certain existing business activities, including
adopting privacy controls, such as privacy contract terms, written
records of processing activities, and data protection impact
assessments; and
– a comprehensive training programme to drive greater expertise,
awareness and accountability for managing personal information
across the entire organisation.
Further details on our approach to data privacy issues is given on
page 31.
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 business 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 & Internal
Control Report which is presented by the Head of GEC.
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 business unit’s leadership to maintain a strong
controls culture.
Each business reported on key Internal Control Framework (ICF)
improvements and simplification activities to further improve how
we manage risks. These are summarised below.
Pharmaceuticals: An overall Pharmaceuticals Leadership Team
Risk Management and Compliance Board (RMCB) was established,
providing an improved governance structure better aligned to the
organisation and strengthening connections between the regional
and country RMCBs. In addition, the Distributor Control Framework
was designed and implemented by Export Markets, simplifying
management monitoring and enabling our third-party audits to focus
on high risk distributors. The General Manager confirmation process
continued to be a key focus with targeted discussions at RMCBs, a
better understanding of global mitigation actions, and accountability
for local control efforts. In addition, a Site Director confirmation was
run for the first time in 2018 with the End 2 End supply chain review.
Vaccines: Comprehensive risk reviews were carried out for key
assets such as Shingrix and Bexsero. The GEC Independent
Business Monitoring team also conducted its first review of Vaccines
focusing on high risk areas primarily within commercial, medical
and external R&D, with confirmation that controls are working as
intended. Monitoring of sites through the corporate Environment,
Health, Safety & Sustainability (EHSS) Assurance Group was also
established and an R&D mapping exercise was performed to
evaluate the need for IBM in key business activities. No gaps were
identified, and the next verification exercise is planned for 2019.
Consumer Health: Key risk themes from monitoring and audit
findings were reviewed to identify high risk areas for enhanced risk
management and low risk areas for clearer guidance and policy
simplification. An improved management monitoring toolkit was
developed as well as a new tool assessing country risk, incorporating
culture, commercial and qualitative criteria.
GSK Annual Report 2018 81
Audit & Risk Committee report continued
Emerging risks: For a number of years the Committee has been
considering emerging risks at each scheduled meeting. This year,
these discussions were enhanced by the results of the Audit &
Assurance (A&A) team’s Political, Economic, Social, Technological,
Legal and Environmental (PESTLE) external analysis of emerging
risks. The Committee is also examining the leveraging of new
technology and risk scanning services to better support identification
of emerging risks.
Written standards: During 2018 a review of GSK’s most important,
global written standards has been undertaken to further simplify
and harmonise written standards and controls to make them easier
to access and understand.
Monitoring and compliance activities
Monitoring is a key element of our ICF. It provides 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 in 2018. This included consolidated and streamlined business
monitoring and improved coordination between Enterprise risk
owners, businesses and monitoring groups. In addition, a new Travel
and Expenses system was implemented with control enhancements
utilising artificial intelligence and enhanced data analytics.
During 2018, GEC introduced an Early Case Assessment phase
to its investigation process. This empowers an investigator to quickly
determine the most appropriate action, improve the quality of the
investigation and ensure a more productive use of resources.
The Investigations team have sought to further increase trust in
our Speak Up channel arrangements by updating processes to
promote better quality decision making and improved monitoring
of lead indicators. In addition, the Investigations training and
education programme has been improved with more investigation
work performed in-house. This has resulted in a significant reduction
in the cost of external support. In 2018, a further 70 HR, Compliance
and Legal based employees have been trained in investigative
interviewing techniques.
GSK Values & Expectations
These are a high priority for the Committee. During the year, a range
of employee resources were introduced to promote awareness,
help facilitate discussions and bring values and expectations to life
for employees. These resources included Living our Values and
Expectations discussion guides, expectations descriptors and
Let’s Talk channels. In April 2018, GEC updated GSK’s Code
of Conduct to make it shorter, simpler and easier to use.
The A&A team has conducted 18 Values Assurance Reviews (VARs)
during 2018 to test how well our values and expectations are
embedded in the organisation. These have identified follow up
action areas including: creating an environment where people are
comfortable to speak up; continuing to develop managers’ leadership
capabilities; addressing perceptions of complexity and continuing
to drive simplification efforts; and raising awareness of GSK’s
expectations and what they mean in the context of an employee’s
roles.
GEC has continued to focus on people development and building
capabilities, including:
Ethics and Compliance Academy: A Virtual Academy run on a
quarterly basis.
Anti-bribery and corruption (ABAC): The ABAC training strategy
evolved to provide tailored and targeted modules based on
employees’ roles and responsibilities, with a particular emphasis
on further enhancing the skills of those who conduct high risk
business activities on behalf of the company.
Privacy certification: The privacy function offered a globally
recognized professional privacy certification from the International
Association of Privacy Professionals.
Code of Conduct: The annual mandatory training on our Code
of Conduct was delivered in two parts and focused on living our
values and expectations and ABAC. This was supplemented by
the introduction of microlearning modules that can be taken at
any time.
Committee evaluation
The Committee’s annual evaluation was internally facilitated by
the Company Secretary who interviewed Committee members on
behalf of the Committee Chair. It was concluded that the Committee
continued to operate effectively. In terms of enhancements, it was
agreed to continue:
– the good progress made during 2018 in ensuring Committee
papers are concise and accessible to facilitate productive
discussion; and
– to work with the Nominations Committee on succession planning
for the Committee Chair and for Board and Committee members
with financial experience.
Judy Lewent
Audit & Risk Committee Chair
11 March 2019
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 82
Accountability continued
What the Committee did during 2018
Areas of Committee focus Items discussed
Financial
reporting
– Reviewed integrity of draft financial statements, appropriateness of accounting policies and going concern
assumptions
– Considered approval process for confirming and recommending to the Board that the 2017 Annual Report
is fair, balanced and understandable
– Reviewed and recommended to the Board approval of the 2017 Annual Report and Form 20-F
– Reviewed and approved Directors’ expenses
– Reviewed and recommended approval of quarterly and preliminary results announcements, dividends
and earnings guidance
– Reviewed significant issues in relation to the quarterly and preliminary results
– Reviewed and recommended inclusion of the Viability Statement in the 2017 Annual Report
– Reviewed the financial reporting framework and disclosure arrangements
– Reviewed major restructuring reports
– Reviewed accounting developments and their impacts as well as key accounting issues
– Canvassed observations of the outgoing Audit Partner on the company, the Committee and the Finance organisations
– Reviewed and approved audit/non-audit expenditure incurred during 2017
– Considered the auditor’s report on the 2017 annual results
– Performed evidence-based assessment of external auditor and the effectiveness of 2017 external audit
– Considered qualifications, expertise and independence of the external auditor
– Recommended to the Board the appointment of Deloitte and for the Committee to agree auditor’s remuneration
– Approved the 2018 audit plan and fee proposal and set performance expectations for auditor for the year
– Considered non-audit services fees for 2018 and the 2019 audit budget
– Considered initial results of 2018 external audit
– Considered internal control over financial reporting
External
auditor
Global internal
control
& compliance
– Reviewed assurance reports from Global Pharmaceuticals (including R&D and ViiV Healthcare), Vaccines
and Consumer Healthcare, as well as the Global Support functions
– Reviewed GSK’s internal control framework and controls over financial reporting
– Reviewed Technology access controls and closely monitored plans to address control findings identified
and the programme to validate mitigation
– Confirmed compliance with Sarbanes-Oxley Act
– Received independent external evaluation outcomes of Audit & Assurance
– Reviewed Audit & Assurance work during 2017 and approved the planned work for 2018
– Reviewed the US Corporate Integrity Agreement
– Reviewed implementation of the enhancements to the Healthcare professional engagement policy
– Reviewed General Data Protection Regulation readiness and compliance
– Received litigation reports and updates
– Received reports on continuing investigations and on Anti-bribery and corruption (ABAC) issues
Risk
Governance and
other matters
– Reviewed risk management framework compliance
– Reviewed the risk elements of group treasury, pensions, risk and insurance and tax policies
– Agreed a new approach to enterprise risk management
– Received status reports on each of the company’s 11 Enterprise Risks (these Risks are disclosed on pages 34 and 35)
– Received fraud, site security and cyber security risk assessment update
– Received updates on the implications and planning for Brexit
– Received Risk Oversight and Compliance Council (ROCC) meeting updates
– Considered emerging risks
– Confirmed compliance with the UK Corporate Governance Code
– Reviewed the Committee’s terms of reference and confirmed that they had been adhered to during 2018
– Received corporate governance updates
– Reviewed the Committee’s performance and effectiveness
– Reviewed and approved the Group’s Modern Slavery Act Statement
– Reviewed the company’s gender pay gap disclosures
– Met privately and separately with the Heads of Global Ethics & Compliance, Audit & Assurance, and the General Counsel
– Met privately with the external auditor at the end of each meeting as appropriate
Committee Activity Key A Annually Q Quarterly P Periodically S Standing
Frequency
A
A
A
A
Q
Q
A
A
Q
P
S
A
A
A
A
A
A
A
P
A
A
A
P
A
P
A
P
P
P
S
S
A
A
P
P
P
P
S
S
A
A
P
A
P
A
P
S
GSK Annual Report 2018
83
Significant issues relating to the financial statements
In considering the quarterly financial results announcements and the financial results contained in the 2018 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 2018 are set out in the following
table, together with a summary of the financial outcomes where appropriate. In addition, the Committee and the external auditor have
discussed the significant issues addressed by the Committee during the year and the areas of particular audit focus, as described in
the Independent Auditor’s Report on pages 128 to 139.
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
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
£4.4 billion at 31 December 2018 and the Committee reviewed the basis on which the accrual had been
made and concurred with management’s judgements on the amounts involved. A fuller description of the
process operated in the US Pharmaceuticals and Vaccines business in determining the level of accrual
necessary is set out in ‘Critical accounting policies’ on page 63.
The Committee received detailed reports on actual and potential litigation from both internal and external
legal counsel, together with a number of detailed updates 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 2018, 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 2018, a tax payable
liability of £1.2 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 £134 million in 2018. 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
2018, the Group’s balance sheet included a contingent consideration liability of £5.9 billion in relation
to ViiV Healthcare. See Note 39 to the financial statements, ‘Contingent consideration liabilities’ for
more details.
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 £1.2 billion at 31 December 2018.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 84
Accountability continued
Auditor’s appointment
External auditor
Following an audit tender process conducted by the Committee
which concluded in December 2016, Deloitte’s appointment as
the auditor of the company and the Group was approved by
shareholders at the GSK AGM in May 2018. There were no
contractual or similar obligations restricting the Group’s choice of
external auditor.
Deloitte observed PricewaterhouseCoopers, (PwC) work as
GSK’s previous statutory auditor during the 2017 year end auditing
process. A full report on the transition process between PwC
and Deloitte is included on pages 103 and 104 in GSK’s 2017
Annual Report.
The Committee considers that during 2018, 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.
Finally, the Committee considered feedback on the 2018 external
audit through a survey that sought views from the financial
management team at corporate and business unit level. It covered:
– effectiveness of challenge by the auditor, their integrity and
the transparency of their reporting to management and the
Committee;
– clarity of communication by the auditor and their ways of working;
– alignment of the 2018 audit to the Group’s investment in SAP;
– quality of the audit team’s leadership; and
– skills and experience of the audit team.
Having reviewed all this feedback, and noted any areas of
improvement to be implemented in respect of the team on the
2019 audit, the Committee:
– was satisfied with the effectiveness of the auditor and the external
audit process; and
Effectiveness and quality of external audit process
– was satisfied with the auditor’s independence, qualifications,
objectivity, expertise and resources.
The Committee therefore recommended to the Board the re-
appointment of Deloitte at the forthcoming AGM.
The Committee is committed to ensuring on an ongoing basis that
GSK receives a high quality and effective audit from its external
auditor. In evaluating Deloitte’s performance during 2018, prior to
making a recommendation on their re-appointment in early 2019, the
Committee reviewed the effectiveness of their performance against
the criteria which it agreed, in conjunction with management, at the
beginning of 2018. The criteria are set out on page 85.
In undertaking this review, the Committee considered the overall
quality of the audit, the independence of Deloitte and whether they
have exhibited an appropriate level of challenge and scepticism in
their work. Because Deloitte had recently been appointed GSK’s
auditor, their length of tenure was not taken into account when
assessing their independence and objectivity.
GSK Annual Report 2018
85
Auditor’s appointment continued
The detailed criteria the Committee used for judging the effectiveness of Deloitte as the external auditor and their overriding responsibility
to deliver a smooth-running, thorough and efficiently executed audit for 2018 are set out below:
Performance expectations for GSK’s external auditor 2018
Audit approach
and strategy
– Leverage a centrally controlled audit approach, ensuring that GSK’s group, joint ventures and local statutory entities were audited
once and once only
– Refine a consistent technology-led audit with enhanced risk assessment and analytical procedures, providing insights that combine
data trend analysis, process cycle pathways, and the identification of audit risks, ensuring a well-informed and efficient audit
– Deliver a focused and consistent audit approach globally that reflects local risks and materiality
High quality
independent audit
– Adhere to all independence policies (GSK’s, FRC’s 2016 Revised Ethical Standard and applicable SEC standards)
– Maintain a relentless focus on audit quality and Deloitte’s internal quality control procedures
– Provide timely clarity on assessments of accounting treatments and ensure consistency of advice at all levels
– Maintain a forward-thinking approach by raising potential issues or concerns as soon as identified
– Provide timely up-to-date knowledge of technical and governance issues, including evolving market practice on the viability statement
requirements, ESMA/SEC guidelines and new IFRSs (i.e. IFRS 16)
– Serve as an industry resource, communicating best practice trends in reporting and integrated reporting
– Provide high quality and succession planning of key staff members of Deloitte and ensure their technical skillsets are continuously enhanced
Effective
partnership
– Deliver a smooth running, thorough and efficiently executed audit by:
– Discussing approach and areas of focus in advance and early engagement on understanding the implications of the new operating model
– Ensuring SOX scope and additional procedures are discussed and endorsed by corporate management and communicated on a timely
basis within GSK and Deloitte
– Avoiding surprises through timely reporting of issues at all levels within the Group
– Early engagement on and provision of impact assessments of key judgements
– Ensuring clarity of roles and responsibilities between local Deloitte and Finance Services
– Responding to any issues raised by corporate management on a timely basis
– Meeting agreed deadlines
– Providing sufficient time for management to consider draft auditor reports and respond to requests and queries
– Consistent and timely communication and engagement between local and central audit teams, and across all GSK stakeholder groups
– Liaise with Audit & Assurance to avoid duplication of work and Global Ethics and Compliance to ensure a common understanding of audit
outcomes, adopting a collaborative approach to solving issues
– Ultimately provide a high-quality service to the Board, be scrupulous in their scrutiny of the Group and act with utmost integrity
Auditor
transition
Value for
money
– Ensure a seamless, effective, and efficient auditor transition from PwC to Deloitte by maximising the use of relevant information provided
by PwC in respect of the 2016 and 2017 audits of the company and its subsidiaries in relation to the audit of the Group’s consolidated
accounts
– Work closely with management to agree on scope changes, overruns and efficiencies and set clear milestones for continuous monitoring
– Provide transparency of audit time and cost incurred analysis against budget, identifying areas that will enable reduction in audit hours
without compromising audit quality and commensurately reducing audit fees
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 86
Accountability continued
Non-audit services
Where possible, other accounting firms are engaged to undertake
non-audit services.
Where the external auditor is permitted to provide non-audit services
(such as audit-related, tax and other services), in accordance with
GSK’s policy contained in GSK’s Finance Manual, the Committee
ensures that auditor objectivity and independence are safeguarded
by requiring pre-approval by the Committee.
The following core policy guidelines on engaging the external auditor
to provide non-audit services are observed:
– Process: 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;
– Safeguards: ensuring adequate safeguards are in place so that
the objectivity and independence of the Group audit are not
threatened or compromised; and
– Fee cap: 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 company’s current policy complies with the Financial Reporting
Council’s (FRC) 2016 Revised Ethical Standard and the EU Audit
Regulation and the Sarbanes-Oxley Act of 2002. The policy contains
the following three guidelines:
Fee cap: GSK’s policy cap of 50% of the annual audit fee cap is
more stringent than the FRC’s fees cap set at 70% of the average
fees for the preceding three-year period.
Prohibitions: GSK’s policy includes a ‘black list’ of prohibited
non-audit services.
Pre-approval: The category-wide pre-approval process reflects
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.
Fees paid to the company’s auditor and its associates are set out
below. Further details are given in Note 8 to the financial statements,
‘Operating profit’.
Audit/non-audit services three year comparison graph (£m)
2018
Deloitte
1.9
3.9
2017
PwC
1.9
2016
PwC
3.5
26.2
27.7
26.6
0
10
20
30
40
Audit and assurance services
Other services, including tax, regulatory, compliance and
treasury-related services
Fair, balanced and understandable assessment
One of the key compliance requirements of a group’s financial
statements is for the Annual Report to be fair, balanced and
understandable. The coordination and review of Group-wide
contributions into the Annual Report follows a well-established
and documented process, which is performed in parallel with
the formal process undertaken by the external auditor.
The Committee received a summary of the approach taken by
management in the preparation of GSK’s 2018 Annual Report
to ensure that it met the requirements of the FRC’s 2016 UK
Corporate Governance Code. This enabled the Committee, and
then the Board, to confirm that GSK’s 2018 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.
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, together with details of our 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 2018.
GSK Annual Report 2018
87
Internal control framework
The Board recognises its obligation to present a fair, balanced
and diligent assessment of GSK’s current position and prospects.
The Board is accountable for evaluating and approving the
effectiveness of the internal controls, including financial, operational
and compliance controls, and risk management processes operated
by GSK.
A fit for purpose Framework, in conjunction with our corporate
values, expectations and Speak Up processes, ensures that the risks
associated with our business activities are actively and effectively
controlled in line with the agreed risk appetite. We believe the
Framework provides reasonable, but not absolute, assurance against
material misstatement or loss.
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
the Group’s Principal Risks, as required by the Financial Reporting
Council’s (FRC’s) UK Corporate Governance Code (the Code), and
is designed to manage the risk of not achieving business objectives.
The Framework
E n t e r p rise oversight
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The Group’s Risk Oversight and Compliance Council (ROCC), a
team of senior leaders, is mandated by the Board to assist the
Committee in overseeing risk management and internal control
activities. It also provides the business with a framework for risk
management and upward escalation of significant risks. Each
business unit has a risk board structure which reports to the ROCC.
The business unit Risk Management and Compliance Boards
(RMCBs) are responsible for promoting the local ‘tone from the top’
and risk culture, as well as ensuring effective oversight of internal
controls and risk management processes.
Each Principal Risk has an assigned risk owner who is a member
of senior management. The risk owner is accountable for the
management of his/her respective Principal Risk, including the
setting of risk mitigation plans, their implementation and for reporting
on the risk management approach and progress to the ROCC and
the Committee every year. 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 through enabling
all members of the organisation to operate in accordance with our
values, and to comply with applicable laws and regulations.
Audit & Assurance (A&A), in line with an agreed assurance plan,
provides independent assurance to senior management and the
Board on the effectiveness of risk management across the Group.
This assurance helps senior management and the Board to meet
their oversight and advisory responsibilities in fulfilling the Group’s
strategic objectives and building trust with patients and other
stakeholders. A&A has a dual reporting line into the Chief Financial
Officer and the Committee.
The Committee receives regular reports from business units,
Principal Risk owners, GEC and A&A on areas of significant risk
to the Group and on related internal controls. These reports provide
an assessment on the internal control environment within each
Principal Risk area, including enhancements to strengthen the
control environment. Following the consideration of these reports,
the Committee concludes on the effectiveness of the internal control
environment and reports to the Board annually. In accordance with
the FRC’s Code provisions, the Board, through the authority
delegated to the Committee, has conducted a robust assessment
of the Group’s Principal Risks. This includes the consideration of
the nature and extent of risk it is willing to take in achieving the
Group’s strategic objectives. The Board, through the Committee,
has maintained oversight to ensure the effectiveness of the internal
control environment and risk management processes in operation
across the Group for the whole year, and up to the date of the
approval of this Annual Report.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
88
Accountability continued
Internal control framework continued
The Board’s review focuses on the company and its subsidiaries and
does not extend to material associated undertakings, joint ventures
or other investments, although it considers the risk of the company’s
participation in these activities. There are established procedures
and controls in place to identify entities whose results must be
consolidated with the Group’s results. We believe the process
followed by the Board, through the Committee, in reviewing regularly
the system of internal controls and risk management processes is
in accordance with the Guidance on Risk Management, Internal
Control and Related Financial and Business Reporting issued by
the FRC.
Governance structure of risk management
A review of the Group’s risk management approach is further
discussed in the ‘Risk management’ section of the Strategic report
on pages 34 to 36. Our management of each Principal Risk is
explained in ‘Principal risks and uncertainties’ on pages 241 to 250.
The Group’s viability is discussed in the Group financial review
section of the Strategic report on page 37.
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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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 territories
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GSK Annual Report 2018
89
Relations with stakeholders
Engagement activities
In the performance of its legal duty to promote the success of the
company, the Board has regard to a number of factors, including
listening to and considering the views of shareholders and other key
stakeholders and is cognisant of the potential impacts of decisions it
makes on our stakeholders, the environment and the communities in
which we operate.
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 83 individual meetings with major shareholders and they
have hosted a total of 27 group meetings with major shareholders
and potential major shareholders.
Our principal Board Committees have delegated powers that enable
a more in-depth assessment of the impacts of the company’s wider
engagement with stakeholders. It also provides a means of
identifying emerging stakeholder-related issues that can be brought
to the attention of the Board, which in turn enables us to further
invest in activities to build trust in our reputation for operating
responsibly to deliver on our purpose.
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 six 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.
Engagement with the company’s main stakeholder groups, including
our patients, shareholders, consumers, customers and employees, at
all levels of the organisation and across the enterprise is summarised
on page 11. The Board’s interactions with two of the company’s main
stakeholder groups – shareholders and people – are set out in more
detail below.
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.
Our major shareholders
During the year, after publication of our quarterly results, the CEO,
Emma Walmsley, and CFO, Simon Dingemans, gave presentations
to institutional investors, analysts and the media by webcast
teleconference. In July, Emma and Dr Hal Barron held an R&D update
event at which they announced a new approach to R&D that is
designed to capitalise on the assets in the company’s promising
early-stage pipeline and build the next wave of growth for GSK for
the benefit of patients and shareholders. This update to our major
shareholders concluded with a Q&A session.
We normally hold a governance event at the end of each year with
institutional shareholders, key investment industry bodies and
influential proxy advisory firms, at which the Chairman, SID and
each of our Committee Chairs discuss particular areas of focus
associated with our corporate governance, corporate responsibility
and remuneration arrangements. The governance event for 2018 was
cancelled as the company was in possession of inside information
ahead of its announcement of the proposed joint venture with Pfizer’s
consumer healthcare business.
On a continuing basis, our Investor Relations department,
with offices in London and Philadelphia, acts as a focal point for
communication with institutional investors. Our Company Secretary
acts a focal point for communications on corporate governance
matters. We also have a small central Corporate Responsibility (CR)
team which coordinates strategy, policy development and reporting
specifically with respect to CR. The team communicates with socially
responsible investors and other stakeholders.
Our retail shareholders
The Company Secretary acts as 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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 90
Relations with stakeholders continued
Engagement activities continued
Annual General Meeting
All shareholders are invited to attend our Annual General Meeting.
This year’s AGM will be held in May at the Sofitel London Heathrow
Hotel.
Our 2018 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 90% to 99%.
The AGM 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.
Our people
The Board is fully supportive of the Group’s commitment to being
a progressive, modern employer to attract, retain and motivate the
very best talent and drive high levels of employee engagement.
A key transformation priority for the CEO is 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 long-term IPT priorities underpinned
by a continuing shift in culture. Therefore, employee engagement is
a key barometer for measuring how people feel working for GSK
and the tools we use to measure our people’s views are discussed
on page 28.
Stakeholder engagement,
see page 11
Modern employer,
see page 28
Trust, see page 24
Shareholder information,
see page 251
Workforce Engagement Director
To underscore the Board’s commitment to strengthen its
engagement with our people and to gather their views, it has
designated one of our independent Non-Executive Directors,
Dr Vivienne Cox, as the company’s Workforce Engagement
Director in December 2018.
The Board firmly believes that this formal model of engagement:
– is most likely to best connect our pre-existing employee
engagement activity and employee voice channels with
boardroom decision-making to promote meaningful
engagement;
– provides a regular platform for the independent element of
the Board to have direct conversations with the workforce,
individually and in group settings, to gain insights into their
experiences, concerns and perspectives, and to better
understand whether the cultural change already underway
is embedding in the organisation to support our long-term
IPT priorities; and
– is therefore the model most likely to add immediate value.
A programme of activities is being compiled to ensure that
Vivienne is accessible to the workforce and to gather their
feedback for consideration by the Board.
She is looking forward to sharing her insights and experiences
gained as our Workforce Engagement Director in next year’s
Annual Report.
GSK Annual Report 2018 91
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
Dr Jesse Goodman – Chair from 1 January 2017
1 January 2017
Dr Laurie Glimcher
Judy Lewent
Professor Sir Roy Anderson
1 September 2017
1 January 2017
1 January 2017 until
3 May 2018
Details of the Committee members’ skills and experience are given in
their biographies under ‘Our Board’ on pages 69 and 70. See page 72
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 Executive Officer
Chief Scientific Officer and President, R&D
President, Global Vaccines
Independent senior external scientific adviser(s)
Chief Financial Officer
Other company executives
Attends as
required
Regular
attendee
✓
✓
✓
✓
✓
✓
✓
Dear Shareholder
I am pleased to present my second report of the Science
Committee’s activities (the Committee).
During 2018, the Committee has sought to further evolve its ways of
working and oversight of R&D to support the Board and Dr Hal Barron
in considering our science, pipeline and R&D strategy and priorities.
The Committee has developed an annual programme of activities
to support its core role of R&D oversight to help discharge its
responsibilities. Items for consideration by the Committee include
receiving:
– regular updates on the Pharmaceuticals and Vaccines priority assets;
– regular R&D strategy updates;
– oversight of R&D projects portfolio governance; and
– R&D’s culture, talent, capabilities and incentive arrangements.
In particular in 2018, the Committee reviewed the key features
of Dr Barron’s new approach to R&D, which focuses on science
related to the immune system, the use of human genetics and
advanced technologies to help identify the next generation of
transformational medicines for patients.
The Committee has reviewed several assets currently in clinical
development and notes the significant progress made to strengthen
the pharmaceuticals pipeline, particularly in the area of oncology.
The company currently has 46 assets in development, with 33
immunomodulators, of which 16 are focused on oncology. In
addition, the Committee has considered from a scientific perspective
and was pleased to recommend to the Board the following key
business development transactions:
Tesaro: strengthening the Pharmaceuticals pipeline with the
acquisition of this oncology-focused biopharmaceutical company.
It has a major marketed project, Zejula, which is an oral poly ADP
ribose polymerase (PARP) inhibitor approved in the US and Europe
for adults with recurring ovarian cancer. We believe PARP inhibitors
also offer significant opportunities for treating patients with many
other cancer types. Several other promising oncology assets were
also acquired as part of this transaction, including a PD-1 inhibitor
(dostarlimab) currently being studied for endometrial cancer.
23andMe: forming this exclusive collaboration with the world’s
leading consumer genetics and research company. This will
combine our scientific and medical knowledge with large-scale
genetic resources and unique data science skills, improving the
probability of R&D success.
Merck: agreeing a proposed global strategic alliance with Merck
KGaA, Darmstadt, Germany to jointly develop and commercialise
M7824. This is an investigational bifunctional fusion protein
immunotherapy that is currently in clinical development, including
potential registration studies, for multiple difficult-to-treat cancers.
This includes a phase II trial to investigate M7824 compared with
pembrolizumab as a first line treatment in patients with PD-L1
expressing advanced non-small cell lung cancer.
Committee evaluation
The second annual evaluation of the Committee was internally
facilitated by the Company Secretary, who interviewed Committee
members on behalf of the Committee Chair. In terms of
enhancements, as the Committee settles into its role, consideration
would be given to how it refines its work and focus to exercise
effective oversight of the embedding of the new R&D strategy.
Next steps
The Committee will continue to review how the new approach to
R&D is progressing and the culture change underway in R&D, and
expects to see major data readouts and news flow on several new
medicines in 2019. Finally, I would like to thank Professor Sir Roy
Anderson who stood down from the Committee, when he retired
from the Board in May, for his significant contribution to helping me
shape the role and focus of the Committee.
Dr Jesse Goodman
Science Committee Chair
11 March 2019
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 92
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 the views and interests of internal and external
stakeholders
– consideration of GSK’s Trust priority and annual governance
oversight of progress against GSK’s commitments which
reflect the most important issues for responsible and
sustainable growth
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
Dr Vivienne Cox
Dr Jesse Goodman
1 July 2016
1 May 2016
Professor Sir Roy Anderson
1 May 2016 until 3 May 2018
Details of the Committee members’ skills and experience are given in
their biographies under ‘Our Board’ on pages 69 and 70. See page 72
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
Chief Scientific Officer and President, R&D
General Counsel
President, Global Affairs
President, Pharma Supply Chain
President, Global Pharmaceuticals
President, Global Vaccines
CEO, GSK Consumer Healthcare
Head of Human Resources
SVP, Corporate Affairs
VP, Trust and Global Health
Other Executives
Independent external corporate
responsibility adviser
Attends as
required
Regular
attendee
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Dear Shareholder
As Chair of the Corporate Responsibility Committee (the Committee)
I am pleased to present the Committee’s 2018 report.
The Committee forms an important part of the Board’s oversight of
the Company’s responsible business agenda, ensuring management
is working to deliver long-term value for both shareholders and
society. 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 is
reviewed on a regular basis.
Committee membership
Committee members bring a wide range of sector experience,
insight and stakeholder perspectives to help provide oversight on
these topics. This helps 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 external expectations
of GSK as a global healthcare company.
During the year, Professor Sir Roy Anderson stood down from
the Committee when he retired from the Board in May 2018.
I greatly appreciated the insights that he brought to the work of
the Committee during his tenure, including the development of the
new commitments to support the delivery of GSK’s Trust priority.
I was pleased to invite Regis Simard, President Pharma Supply
Chain, to attend the Committee on a regular basis. Regis has
responsibility for product quality and environment, health, safety
& sustainability (EHSS); vital areas of the company’s operations
over which the Committee exercises oversight.
Areas of focus in 2018
The Committee has again focused on topics that are material
to the company’s purpose, strategy, values and expectations.
The Committee plays an integral role in the oversight of GSK’s
responsible business commitments. This year, the work of the
Committee included continued oversight of the development of a
new set of focused commitments to support the Company’s Trust
priority. These new commitments build on a strong performance
in responsible business over many years and are set in the context
of external trends and stakeholder expectations. The framework
surrounding these commitments had been subject to review by key
stakeholders after which their feedback was incorporated to further
strengthen its design and operation. The Board was pleased to
support the Committee’s recommendations.
The new framework identifies 13 commitments across three focus
areas where the company can maximise its social impact: using
science and technology to address health needs; making products
affordable and available; and being a modern employer. These focus
areas are supported by commitments across the fundamentals of
being a responsible healthcare company: reliable supply; ethics
and values; data and engagement; and the environment.
GSK Annual Report 2018 93
Corporate Responsibility Committee report continued
During the year, management presented to the Committee on
a number of topics across the breadth of the Trust priority:
Using science and technology to address health needs:
The Committee reviewed proposals from management for a new
global health strategy, designed to align to the company’s IPT
strategy. The new approach is more focused to achieve maximum
social impact to support the strategic theme of fighting infectious
diseases impacting children and young people in developing
countries. The Committee discussed the importance of end-to-end
planning of global health assets – through partnering with others
from R&D to manufacturing – to ensure their sustainability over
the long-term.
Making products affordable and available: During the year
we also considered access and affordability, and the company’s
commitment to making our products available at prices that are
responsible and sustainable for the business. We reviewed the
global pricing strategies of our Pharmaceuticals business with a
particular focus on the US environment, which is the company’s
current largest single market, and where the operating context
continues to evolve.
Being a modern employer: The Committee also had oversight
of the company’s new commitments for being a modern employer
which centre on three main elements: engaged people; inclusion
and diversity; and health, wellbeing and development. The
Committee discussed the results from the global employee survey
and management’s plans for responding to lower scoring areas.
Responsible business: During the year the Committee reviewed
the progress made on GSK’s commitments to the fundamentals of
being a responsible business. This included oversight of progress
made to reduce the company’s environmental impacts across
carbon, water and waste, and the setting of new targets to 2030.
Updates on business conduct and engagement with healthcare
professionals were also discussed by the Committee.
Independent external corporate responsibility advisor
Ms Sophia Tickell serves as an independent external advisor to
the Committee. 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 co-founder and Director of Meteos, from where she directs
the Pharma Futures Series, which aims to better align societal and
shareholder value. She holds several 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, the CEO and the President,
Global Affairs.
Committee evaluation
The Committee’s annual evaluation exercise was internally facilitated
by the Company Secretary, who interviewed Committee members on
behalf of the Committee Chair. It was concluded that the Committee
continued to operate effectively. In terms of enhancements, the
Committee would continue to review opportunities to develop its
remit to further support the company’s CR agenda and goals.
As part of this process, it would consider best practice at similar
committees and examine its current responsibilities in relation to
the remit of GSK’s other Board Committees.
Committee aims for 2019
Over the next year we will continue to understand GSK’s
material responsible business topics and seek to understand
how management is responding to the expectations of external
stakeholders. The Committee is well positioned in 2019 to support
the delivery of the new commitments to support Trust, one of
GSK’s long-term business priorities.
The Committee also reviewed and approved the company’s reporting
on progress made on the company’s responsible business
commitments.
Stakeholder engagement and insights
Lynn Elsenhans
Corporate Responsibility Committee Chair
11 March 2019
The Committee pays close attention to the evolving views and
expectations of the company’s broad range of key stakeholders.
A regular report on stakeholder insights is reviewed and discussed
at each meeting to ensure the Committee considers the issues that
may have a bearing on the company’s reputation and the delivery of
its responsible business agenda. The Committee also received an
update on GSK’s reputation research to understand relevant insights
for its strategy. Employee insights were discussed in relation to the
company’s modern employer agenda and the results of the Global
employee survey.
This year we have continued to enjoy positive engagement with
investors on our responsible business approach and performance.
I meet directly with shareholders from time to time to understand
any issues and concerns they may have and other Committee
members also meet informally with shareholders before the AGM.
The Committee was very pleased to see the company maintain first
position in the Access to Medicines Index, and second position in
the Dow Jones Sustainability Index for our industry, two investor
supported external benchmarks.
Area of responsibility
Items addressed during 2018
External issues that have the
potential for serious impact upon
GSK’s business and reputation
– Health and safety update
– Regular reputational and emerging
issues update
– Oversight of corporate reputation
research and KPI
Oversight of stakeholder views
and engagement
– Stakeholder insights update
– Employee survey
Annual governance oversight
of progress against GSK’s
responsible business
commitments to support Trust
– Responsible Business Supplement
approval
– Oversight of new commitments
– Global health strategy
– Sustainable access and affordability
– Business conduct
– Modern employer
– Environmental targets
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 94
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 Board, provided that, if appointed by the
Board, the Director retires at the AGM following the appointment.
Our Articles also provide that all Directors are required to seek
re-election annually at the AGM in accordance with the UK
Corporate Governance Code.
A Director will 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 a continuing basis, the Directors are responsible for informing
the Company Secretary of any such 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 2019 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.
Our Articles also prohibit a Director from voting on any resolution
concerning his or her appointment or the terms or termination
of his or her appointment.
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 2018 and up to the
signing of the Annual Report.
Change of control and essential contracts
We do not have contracts or other arrangements which individually
are fundamental to the ability of the business to operate effectively,
nor is the company party to any material agreements that would take
effect, be altered, or terminate upon a change of control following
a takeover bid. We do not have agreements with any Director that
would provide compensation for loss of office or employment
resulting from a takeover, except that provisions of the company’s
share plans may cause options and awards granted under such
plans to vest on a takeover. Details of the termination provisions in
the Executive Directors’ service contracts are given in the full version
of the company’s 2017 Remuneration policy which is available at
www.gsk.com in the Investors section.
Directors’ Report
For the purposes of the UK Companies Act 2006, the Directors’
Report of GlaxoSmithKline plc for the year ended 31 December
2018 comprises pages 65 to 94 of the Corporate Governance
Report, the Directors’ statements of responsibilities on pages 126
and 127 and pages 241 to 270 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 34 to 36
and 241 to 250)
– likely future developments of the company (Strategic report)
– research and development activities (pages 13 to 23)
– inclusion and diversity (page 28)
– provision of information to, and consultation with, employees
(page 28)
– carbon emissions (page 32)
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 37
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 11 March 2019 and signed on its behalf by:
Philip Hampton
Chairman
11 March 2019
GSK Annual Report 2018 GSK Annual Report 2018
95
95
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
96
98
120
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 96
Remuneration report
Chairman’s annual statement
Dear Shareholder
On behalf of the Remuneration Committee (the Committee), I am
pleased to present to you our Remuneration report for 2018.
The Annual report on remuneration and this annual statement
will be subject to an advisory vote at our AGM on 8 May 2019.
2018 performance
Overall, 2018 was a year of very good progress for GSK. We saw
Group sales growth of 5% CER driven by growth across all three
businesses, strong commercial execution of new product launches,
especially Shingrix, continued cost discipline and better cash
generation. We also achieved earnings growth with adjusted EPS
up 12%. It was a significant year for the Group strategically, with the
launch of a new R&D strategy focused on immunology, genetics and
new technologies, together with a series of transactions that support
GSK’s strategy and reshape of the Group’s portfolio.
2018 remuneration outcomes
All awards in relation to 2018 were made in accordance with our
approved Remuneration policy. The key decisions made by the
Committee were as follows:
– The bonus outcomes for the Executive Directors were determined
by reference to performance against the agreed financial measure,
as well as the Committee’s assessment of their individual levels
of performance. In conjunction with assessment of individual
performance, this has resulted in bonus payments being made
above target. The Committee adjusted the Adjusted Group PBIT
target upwards to reflect the outperformance on this measure
attributable to the timing impact of the loss of Advair exclusivity.
The Committee believe the bonus outcomes appropriately reflect
the overall underlying performance in 2018. Further details of the
bonus outcomes for the year are provided on page 101.
– Vesting of the 2016 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 2018. The threshold target for
the TSR measure was not met, but the maximum R&D target was
achieved. In reviewing the adjusted free cash flow performance
the target was adjusted upwards to reflect the outperformance
attributable to the timing impact of the loss of Advair exclusivity.
This resulted in an overall vesting level of 59%. Further details
of the vesting outcome for the 2016 PSP and DABP matching
awards are provided on page 103.
Remuneration policy implementation for 2019
CEO remuneration
At the time of Ms Walmsley’s appointment to the role of CEO, the
Committee set her remuneration at a level to reflect the fact that this
was her first CEO role, significantly below the previous incumbent
and the market. At that time, in the 2016 Annual report on
remuneration and again in our 2017 report, we highlighted that it was
our intention to keep Ms Walmsley’s package under review in the
coming years, subject to her development and performance in role.
Ms Walmsley has now been in position for nearly two years and
in the Board’s view has already delivered a number of significant
achievements, including developing and deploying Innovation,
Performance and Trust strategic priorities, driving culture change
across the company and strong financial delivery in 2017 and 2018.
Looking ahead, Ms Walmsley has also set a clear capital allocation
framework for the Group and as part of this delivered the Consumer
Healthcare business buy-out from Novartis in 2018 and announced
the proposal creation of a Consumer Healthcare Joint Venture with
Pfizer towards the end of the year. While this remains subject to
shareholder approval, it has created a clear pathway for the Group
to deliver substantial further value for shareholders in the longer term.
Given the above, the view of the Board is that Ms Walmsley has
established herself successfully and is already demonstrating a track
record of delivering strongly against her priorities for the business. We
believe it is now the right time to start reflecting this development and
performance in her remuneration. This is consistent with how we
review the remuneration of all our employees as they develop and
progress in their roles.
2018 at a glance
2018 Total Remuneration
The following shows a breakdown of total remuneration paid to Executive Directors in office at 31 December 2018, in respect of 2018
and 2017.
(1) Dr Hal Barron was appointed to the Board on
1 January 2018.
GSK Annual Report 2018£0m£2m£4m£6m2017201820172018US$0mUS$2mUS$4mUS$6mUS$8mFixed pay – salary, benefits and pensionEmma WalmsleyCEO71%29%79%21%Performance pay – 2018 annual bonus and LTIs earned in respect of the three year performance period to the end of 2018Simon DingemansCFODr Hal Barron(1)Chief Scientific Officer and President, R&D201846%54%76%24%75%25% 97
Following consultation with some of our major shareholders, the
Committee has considered how to address this and has taken the
feedback from shareholders into account in deciding to implement
a two-step salary increase for Ms Walmsley’s as follows:
– An 8% increase from 1 January 2019 that results in a base
salary of £1,110,348 (currently £1,028,100); and
– An 8% increase from 1 January 2020, subject to continued
development and sustained performance in role. This would
result in a base salary from 2020 of £1,199,176.
This phased approach will enable the Committee to monitor
sustained performance as well as any market developments.
Incentive measures
Following careful consideration, the Committee has determined
that no changes to our LTI measures will be made in 2019.
As such, PSP awards granted in 2019 will be subject to the same
performance conditions as in previous grants: R&D new product
performance, adjusted free cash flow and relative TSR. Further
details on our implementation for 2019 are set out on page 108.
However, we are taking this opportunity to respond to feedback from
some of our shareholders to reduce the threshold level of vesting
under the TSR element of our PSP from 30% to 25% of the
maximum. Accordingly, all our performance measures for future
awards will now vest at 25% of the maximum opportunity for
threshold performance.
New appointments to the Board
In May 2018, Simon Dingemans announced that he would retire from
the company. He is a voluntary leaver and therefore will not receive
any severance payment when he leaves the company after the AGM
on 8 May 2019.
Simon will continue to receive his base salary until he leaves
GSK. He was also eligible to receive a bonus for 2018 based on
a combination of business and individual performance. He will
not receive any bonus for the portion of 2019 for which he will be
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 2019.
In August 2018, we announced the appointment of Iain Mackay to
the role of Chief Financial Officer from 1 April 2019. He joined the
CET and Board on 14 January 2019. Iain’s remuneration package is
fully in line with the Remuneration policy approved by shareholders
in 2017. His base salary will be £850,000, which the Committee
felt was appropriate to reflect his experience and qualifications
and his total compensation was also validated as being within the
competitive range seen among our UK cross-industry comparator
group.
Looking ahead
The Committee has reviewed its current practices against the revised
UK Corporate Governance Code (the 2018 Code) published by the
Financial Reporting Council (FRC) and we will report in 2020 on
how we complied with the 2018 Code during 2019.
In line with the commitment we made in our 2017 report we have
disclosed our CEO pay ratio this year, ahead of the reporting
requirement, in line with the methodology prescribed in the
secondary legislation published by the UK Government in 2018.
Given that our Remuneration policy will expire at our 2020 AGM,
this year the Committee will be undertaking a review of GSK’s
remuneration arrangements, taking into consideration the
governance developments during the period since our current
policy was approved.
We plan to continue our regular dialogue with shareholders and
will hold our annual meeting with GSK’s largest investors later in
the year to listen to their views and feedback.
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 8 May 2019.
Urs Rohner
Remuneration Committee Chairman
11 March 2019
Pay for performance
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018Adjusted Group PBITMaximum(105% of target)TargetThreshold(95% of target)Maximum performance targetPerformance achieved2018 Annual bonus: financial performance104%[•]%LapsedVested2016 LTI outcome: performance period ended 31 December 2018 R&D new products1/3rdRelativeTSR1/3rdAdjustedfree cash flow1/3rdOverall vesting 59%33.33%25.67%59.00% 98
Annual report on remuneration
2018 Total remuneration (audited)
Salary
Benefits
Pension
Annual
bonus
Vesting
of LTI
awards
Total
remuneration
A. Fixed pay
B. Pay for performance
The total remuneration for 2018 for each Executive Director is set out in the table below:
Emma Walmsley,
CEO
Simon Dingemans,(1)
CFO
Dr Hal Barron,(2)
Chief Scientific Officer
and President, R&D
Sir Patrick Vallance,(3)
(Former President, R&D)
2018
£000
2017
£000
2018
£000
2017
£000
2018
$000
2017
$000
A. Fixed pay
Salary
Benefits
Pension
See page 99
See page 99
See page 100
1,028
234
207
965
266
195
773
141
155
754
142
151
Total fixed pay
1,469
1,426
1,069
1,047
1,700
807
1,043
3,550
B. Pay for performance
2018 Annual bonus(4)
See pages 101 and 102
1,912
1,540
1,368
1,090
3,009
Vesting of LTI awards:
DABP matching awards(5)
See page 103
301
112
PSP (5)
See page 103
2,205
1,805
Total pay for performance
4,418
3,457
398
2,367
4,133
156
2,012
3,258
–
–
3,009
A+B = Total remuneration
5,887
4,883
5,202
4,305
6,559
–
–
–
–
–
–
–
–
–
Jan-Mar
2018
£000
203
42
39
2017
£000
780
102
156
284
1,038
–
–
–
–
1,127
182
2,041
3,350
284
4,388
Notes:
(1) Simon Dingemans’ vested PSP shares will be subject to a two-year holding period. Ms Walmsley’s PSP shares are not subject to the same holding requirement as her grant was
awarded before she was appointed an Executive Director.
(2) Dr Hal Barron was appointed to the Board with effect from 1 January 2018.
(3) Sir Patrick Vallance resigned from the company and the Board on 31 March 2018. Salary reflects the basic salary earned for the time worked from 1 January to 31 March 2018 plus
payment in lieu of accrued holiday not taken, in accordance with GSK’s standard UK holiday pay policy.
(4) Details of the mandatory bonus deferrals under the Deferred Annual Bonus Plan (DABP) are set out on page 114. Matching awards are no longer granted under the DABP.
(5) 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 2018 are provided on page
103.
(6) 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 2018 in respect of any of the Executive Directors.
Past Directors: Payments to past directors are set out on page 109. The PSP and DABP awards for Sir Andrew Witty and Dr Moncef Slaoui granted in 2015 and 2016 have now vested.
The 2015 awards vested following the one-year anniversaries of their respective leaving dates in accordance with the terms of the Executive Recoupment Policy. The 2016 awards vested in
accordance with the standard vesting policy. The 2015 and 2016 PSP awards are subject to an additional two-year holding period until February 2020 and February 2021 respectively.
As disclosed on page 136 of the 2016 Annual Report they both 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 which they were granted.
GSK Annual Report 2018
99
2018 Total remuneration (audited) continued
The following sections provide details of each element of ‘Total remuneration’, including how the Committee implemented the approved
Remuneration policy in 2018.
Comparator groups for pay and TSR
The Committee used two pay comparator groups for all roles when considering executive pay for 2018. The primary group used for each
Executive Director was as follows:
Emma Walmsley
Simon Dingemans
UK cross-industry comparator group
AstraZeneca
BHP Group
BP
British American Tobacco
Diageo
Reckitt Benckiser
Rio Tinto
Royal Dutch Shell
Unilever
Vodafone
Dr Hal Barron
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 2018 were aligned with those provided to the wider
workforce. Details of salary levels for 2019 are provided on page 108.
Emma Walmsley
Employee benefits
Travel
Other benefits
Base salary
Total
2018
2017
Simon Dingemans
Emma Walmsley
Simon Dingemans
Dr Hal Barron
Sir Patrick Vallance
%
change
2.5%
2.5%
n/a
0%
£1,028,100 £1,003,000(1)
£772,800
£754,000
$1,700,000
£780,000
–
£780,000
(1)
Ms Walmsley’s salary as CEO Designate between 1 January and 31 March 2017
was £850,000. Her salary then increased from 1 April 2017 to £1,003,000 when
she became CEO.
Benefits
The table opposite shows a breakdown of the grossed up cash value
of the benefits received by the Executive Directors in 2018 and 2017
which included:
– Employee benefits: all employee share plans, healthcare,
home security, car allowance, personal financial advice and life
assurance/death in service cover.
– Travel expenses: include travel costs for the Executive Director
and as appropriate for their spouse/partner associated with
accompanying the Executive Director on GSK business,
which are deemed to be taxable benefits on the Director.
– Other benefits: expenses incurred in the ordinary course
of business, which are deemed to be taxable benefits for
the individual.
Employee benefits
Travel
Other benefits
Total
Sir Patrick Vallance
Employee benefits
Travel
Other benefits
Total
Dr Hal Barron(1)
Employee benefits
Travel
Other benefits
Total
2018 benefits
£000
2017 benefits
£000
74
144
16
234
55
74
12
141
20
10
12
42
$000
42
464
301
807
60
146
60
266
53
64
25
142
48
46
8
102
$000
–
–
–
–
(1)
Dr Hal Barron is based in San Francisco and travels for business purposes which
is treated from a tax perspective as a benefit. It is therefore included in the table
above. The grossed up cash value of Dr Barron’s travel in 2018 was $464,314.
Other benefits includes the grossed up value of UK accommodation of $294,547.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 100
Annual report on remuneration continued
Fixed pay (audited) continued
Pensions
Executive Director
Emma Walmsley
Simon Dingemans
Dr Hal Barron
Member since
Pension arrangements in 2018
2010
–
2018
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).
20% of base salary in lieu of pension (3)
Member of the US Cash Balance and the Supplemental Cash Balance pension plans, under which GSK
makes annual contributions of 38% of base salary, in line with other US senior executives and members
of GSK’s Corporate Executive Team.
Dr Barron is also a member of the 401(k) plan open to all US employees and the Executive Supplemental
Savings Plan (ESSP), a savings scheme open to US executives to accrue benefits above the 401(k)
plan limits.
Having completed one year’s service, from 1 January 2019, Dr Barron receives a combined contribution
rate under the 401(k) and ESSP plans of 6% (2% core contributions plus a match of up to 4%) of total
base salary and bonus, less the bonus deferred under the DABP.
Sir Patrick Vallance
–
20% of base salary in lieu of pension (3)
(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 Sir Patrick Vallance received cash payments in lieu of pension of 20% of base salary in line with GSK’s defined contribution pension plan rates.
The following table shows the breakdown of the pension values set out on page 98.
Pension remuneration values(1)
UK defined contribution
US defined benefit
Employer cash contributions
Total pension remuneration value
Emma Walmsley
Simon Dingemans
Dr Hal Barron
Sir Patrick Vallance
2018
£000
8
–
199
207
2017
£000
9
–
186
195
2018
£000
–
–
155
155
2017
£000
–
–
151
151
2018
$000
–
1,043
–
1,043
2017
$000
–
–
–
–
Jan-Mar
2018
£000
–
–
39
39
2017
£000
–
–
156
156
(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).
Further details regarding the 2018 pension values for Dr Hal Barron, are set out in the table below.
Dr Hal Barron pension values(1)
US – Unfunded
Total
31 December 2018
$000
52
52
Accrued pension
31 December 2017
$000
–
–
Pension remuneration
value for 2018 $000
1,043
1,043
(1) Dr Hal Barron joined GSK on 1 January 2018. The pensions figures are disclosed for Dr Barron, who is a member of the US style defined benefit plans. In accordance with paragraph
10.e.ii of Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, as amended, the table shows the accrued benefit (ie the
annual pension accrued to date). The pension remuneration in 2018 is calculated as the increase in the accrued benefit, adjusted for inflation and multiplied by 20 to reflect the fact
that the benefit will be received for a number of years.
GSK Annual Report 2018
101
Pay for performance (audited)
Annual bonus
70%
Adjusted Group PBIT
30%
Individual
objectives
Annual bonus
2018 performance against targets
For 2018, the financial measures and weightings were as follows:
Performance measure
Adjusted Group PBIT
Individual objectives
Weighting
2018 Adjusted Group PBIT performance
Executive Directors
2018 target (1)
70%
30%
£8,423m
Outcome
£8,754m
Positioning
against target
104%
(1) Threshold and maximum performance targets were set at 95% and 105% of Target respectively. The target for 2018 was increased by £215 million to reduce the level of over
performance attributable to the original timing assumption for the loss of Advair exclusivity.
(2) The Adjusted Group PBIT target and outcome for the purposes of the Annual bonus calculation differ from Adjusted 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 bonus opportunity for 2018:
Bonus
Emma Walmsley
Simon Dingemans
Dr Hal Barron
2018 bonus opportunity
2018 bonus outcome
Target
(% of salary)
Maximum
(% of salary)
100
200
2018
Base salary
£1,028,100
£772,800
$1,700,000
Financial
performance
(% of salary)
Individual
objectives
(% of salary)
Total 2018
bonus
(% of salary)
126
126
126
60
51
51
186
177
177
Total 2018
bonus
000
£1,912
£1,368
$3,009
The table below provides more detail on delivery against Adjusted Group PBIT:
Financial performance
– Group turnover was £30.8 billion, a 2% increase AER and 5% CER.
– Adjusted operating profit was £8,745 million, 2% higher on an AER basis and 6% higher CER.
– The Adjusted operating margin of 28.4% was flat on an AER basis compared with 2017 and 0.5 % higher CER. This reflected the benefit from sales growth
across all three businesses on a CER basis and a more favourable mix, primarily in Vaccines and Consumer Healthcare. The margin also benefited from the
prioritisation of R&D expenditure and the comparison with the impact of the Priority Review Voucher utilised and expensed in 2017, as well as continued tight
control of ongoing costs across all three business. This was partly offset by continued pricing pressure, particularly in respiratory, increased input costs, the
comparison with the benefit in 2017 of a settlement for lost third party supply volume in Vaccines, investments in promotional product support, particularly for
new product launches, and a reduction in royalty income.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 102
Annual report on remuneration continued
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
– Continued focus and progress against long-term Innovation,
– Significant transactions undertaken to support strategy and
Performance and Trust priorities.
– Strong financial and operational performance for the Group in
2018. Turnover £30.8 billion, Total operating profit £5.5 billion,
Free cash flow £5.7 billion.
– Strong launch execution evidenced by Shingrix sales
£784 million, new Respiratory products £2,612 million and
Juluca £133 million.
– New approach to R&D launched and start of strengthening of
pipeline, particularly in oncology. New R&D senior leadership
team established with outstanding new hires. Significant
pipeline prioritisation and new R&D portfolio governance
process across R&D and commercial.
– Significant progress made in R&D business development
through agreement to acquire Tesaro and multi-year
collaboration with 23andMe.
– Successful implementation of portfolio/brand and geographic
prioritisation in Pharmaceuticals and Consumer Healthcare
businesses.
Dr Hal Barron
– New approach to R&D launched and start of strengthening of
pipeline, particularly in oncology. New R&D senior leadership
team established with outstanding new hires. Significant
pipeline prioritisation and new R&D portfolio governance
process across R&D and commercial.
– Significant progress made in business development through
agreement to acquire Tesaro and multi-year collaboration
with 23andMe.
Simon Dingemans
– Delivered strong financial leadership for the Group in 2018.
– Improved cash flow generation (Free cash flow £5.7 billion),
Total operating profit (£5.5 billion) and Group turnover
(£30.8 billion).
Malus and clawback policy
For details of our policy on malus/clawback, please refer to the 2017
Executive Director Remuneration policy summary on page 121.
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.
re-shape the business:
– Successful agreement with Novartis to acquire full ownership
of Consumer Healthcare business
– Divestment of Horlicks and other Consumer Healthcare
nutrition brands to Unilever
– Proposed Consumer Healthcare Joint Venture agreed with
Pfizer.
– New commercial operating model in Pharmaceuticals
implemented to support the evolving portfolio.
– New 5-year Pharmaceuticals supply chain strategy implemented
resulting in savings in improved productivity whilst maintaining
compliance.
– Successful employee engagement through increased visibility of
CET members through key internal communication platforms.
– Continued successful development of CET:
– Three internal CET promotions
– New external Chief Financial Officer appointment
– Key leadership appointments in place with 69% of top 125
leaders new in role.
– Successfully achieved diversity target of 33% women at the
Senior Vice President and the Vice President level.
– Good progress made in re-shaping and building capabilities in
Medicinal science and Technology organisations within R&D.
– Continued strong momentum in delivery of new approach to
R&D including:
– Ongoing re-build of Pharmaceuticals pipeline with majority
of new medicines now in development targeting modulation
of the immune system
– Major progress made in oncology pipeline reflecting organic
progress and agreement to acquire Tesaro
– Significant contribution in the successful execution of our
M&A strategy:
– Successful agreement with Novartis to acquire full ownership
of Consumer Healthcare business
– Divestment of Horlicks and other Consumer Healthcare
nutrition brands to Unilever
– Proposed Consumer Healthcare Joint Venture agreed with Pfizer
In line with these disclosure guidelines, neither the Committee (nor the
Recoupment Committee) exercised malus or clawback during 2018.
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 2018 103
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 LTI awards, actual performance against the targets is
reviewed and adjustments made as appropriate 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.
2016 awards with a performance period ended 31 December 2018
The Committee reviewed the performance of the PSP awards and the DABP matching awards granted to Executive Directors against the
targets set. The Committee decided to increase the Adjusted Free Cash Flow (‘AFCF’) target and associated vesting scale for the 2016
PSP and DABP matching awards to reduce the level of outperformance attributable to the original timing assumption for the loss of Advair
exclusivity. There are no changes to the targets set for the R&D New Product performance measure or the Relative TSR performance
measure for the 2016 PSP awards and DABP matching awards.
The performance achieved in the three years to 31 December 2018 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. 2014-18.
Maximum
Threshold
Target
£8.53bn
£7.76bn
£7.37bn
£6.98bn
% vesting
100%
75%
50%
25%
Outcome and vesting level
Outcome
% of
maximum
% of
award
£10.44bn
100
33.33
Adjusted free
cash flow
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.
£13.18bn
77
25.67
Maximum
Threshold
Maximum
Threshold(2)
Original
Target
£13.46bn
£12.87bn
£11.70bn
£11.35bn
Revised
Target
£13.72bn
£13.12bn
£11.93bn
£11.57bn
% vesting
100%
75%
50%
25%
TSR ranking within comparator group(1)
% vesting
Ranked 6th
0
0
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 2016 awards
59%
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 104
Annual report on remuneration continued
Pay for performance (audited) continued
Update on performance of ongoing LTI awards
The Committee also reviewed the performance of the PSP awards granted to Executive Directors in 2017 and 2018, and of the DABP
matching awards granted to Executive Directors in 2017. The following charts provide an estimate of the vesting levels taking into account
performance to 31 December 2018. 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.
In addition to the adjustments made to the target and associated vesting scale for the 2016 PSP awards and the DABP matching awards,
adjustments have been made to the AFCF targets and associated vesting scales for the 2017 and 2018 awards, as follows:
– The target for the 2017 PSP awards and the DABP matching awards have been decreased in aggregate by £557m to £11.26bn.
This is to reflect:
(i) a reduction to the target due to the forecast impact of the Tesaro acquisition and the major restructuring programme announced
with the Q2 2018 results; and
(ii) an increase to the target to reduce the level of Advair outperformance attributable to the delayed loss of exclusivity. The overall net
impact is a reduction to the target.
– The target for the 2018 PSP award has been similarly adjusted for the same factors applicable to the 2017 PSP. The net overall impact
is a decrease to the target of £1.29bn to £10.79bn. The reduction is primarily driven by the impact of the restructuring programme and
the Tesaro acquisition. The adjustment for the delayed loss of exclusivity results in an increase to target.
There are no changes to the targets set for the R&D New Product performance measure or the TSR performance measure for the 2017
and 2018 awards.
2017 award – Performance update
2018 award – Performance update
Ranked 3rd
or above
£12.95bn
122% of
threshold
Maximum
Ranked 3rd
or above
£12.41bn
122% of
threshold
Maximum
Threshold
Median
£10.93bn
Commercially
sensitive
Threshold
Median
£10.47bn
Commercially
sensitive
TSR
(1/3rd)
Estimated vesting level
Adjusted free
cash flow
(1/3rd)
R&D new
product
(1/3rd)
TSR
(1/3rd)
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 103 in respect of the 2016 awards.
GSK Annual Report 2018 105
Pay for performance (audited) continued
Historical vesting for GSK’s LTIs
Year of grant
Performance measures
Total vesting level
Lapsed
2016
2015
2014
2013
2012
2011
2010
2009
2008
T
A
R
T A
R
T
A
R
0 26
33
15
21
33
33
T
A
R
B
21
17
A
R
B
A
R
B
A
A
T
T
T
T
T
7
7
13
16
11
16
9
9
40
35
41
31
67
62
86
60
75
51
65
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Performance measures key
R
A
T
B
R&D new product
Adjusted free cash flow
TSR
Business diversification
Lapsed
2018 LTI awards
The levels of participation in the DABP in respect of 2017 bonus deferrals are shown in the table below. The table also shows the PSP award
details for 2018.
2017
% of total bonus
deferred
50%
50%
n/a
50%
2018
Number of
shares
58,889 shares
41,674 shares
–
43,111 shares
DABP awards
2018
Face value
of award(1)
£0.770m
£0.545m
–
£0.563m
2018
Award level as %
of base salary
550%
400%
500%
–
2018
Number of
shares
437,997 shares
239,442 shares
233,132 ADS
–
PSP awards
2018
Face value
of award(2)
£5.7m
£3.1m
$8.5m
–
Emma Walmsley
Simon Dingemans
Dr Hal Barron(4)
Sir Patrick Vallance (5)
(1) The face values of the DABP awards have been calculated based on a share price of £13.07, being the closing price on 28 February 2018. These are nil-cost options.
No performance conditions are attached to the DABP awards, as they reflect the mandatory deferrals in respect of the 2017 annual bonus earned.
(2) The face values of the PSP awards have been calculated based on a share price of £12.91, and an ADS price of $36.46, being the closing prices on 13 February 2018.
These are conditional shares, based on three equally weighted measures; (i) R&D New Product Performance; (ii) Adjusted free cash flow; and (iii) Relative TSR. The first
two performance measures vest at 25% at threshold, and the third performance measure at 30% at threshold.
(3) The performance period for the PSP 2018 awards is from 1 January 2018 to 31 December 2020.
(4) Dr Hal Barron was appointed to the Board on 1 January 2018.
(5) Sir Patrick Vallance’s DABP award will vest as normal three years after the date it was granted.
All-employee share plans
Dilution limits
UK Executive Directors may participate in HMRC approved
all-employee share plans, i.e. Share Save and Share Reward plans.
Participants of the Share Save Plan may save up to £250 a month
for three years and at the end of the period have the option to buy
GSK shares at a 20% discount to the share price at the start of the
savings contract. Participants of the Share Reward Plan contribute
up to £125 a month to purchase GSK shares which the company
then matches.
Monthly saving
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 2018 is as follows:
All GSK employee share plans
Share Save (£)
Share Reward (£)
1.94%
10%
Emma Walmsley
Simon Dingemans
250
150
125
125
0
02
Executive share plans
04
06
08
10
1.66%
5%
Actual
Limit
0
02
04
06
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
106
Annual report on remuneration continued
CEO pay comparison
2018 CEO total remuneration positioning
UK
cross-industry
group
Global
pharmaceutical
group
European
cross-industry
group
In light of this we have also provided supplemental ratios, where
Long Term Incentive compensation has been excluded. We believe
this provides an additional view as long term incentive forms a
substantial 42.6% of the CEO’s total remuneration in 2018, which
is highly variable and dependent on business performance. The
CEO single figure of remuneration excluding Long Term Incentive
Compensation is £3,381,135.
Financial Year Methodology
P25 (Lower
Quartile)
2018
Option A*
70:1
P50
(Median)
52:1
P75 (Upper
Quartile)
34:1
*Total single figure remuneration less Long-Term Incentive Plans
(£m)
4
6
8
10
12
14
16
Historic CEO remuneration
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.
CEO pay ratios
Financial Year Methodology
P25 (Lower
Quartile)
2018
Option A
122:1
P50
(Median)
90:1
P75 (Upper
Quartile)
56:1
The pay ratios above are calculated by using actual earnings for the
CEO and UK employees. The CEO total single figure remuneration
of £5,886,672 is given on page 98 of this Report.
Total remuneration for all UK full-time equivalent employees of the
company on 31 December 2018 have been calculated in line with
the single figure methodology and reflects their actual earnings
received in 2018 (excluding business expense), which were used
to produce the percentile calculation under Option A. Business
expenses have been excluded as they are reimbursed to the
employees and not substantial in value to significantly impact
the ratios.
GSK has chosen Option A because it is the most robust and
statistically accurate way for the company to calculate the three
ratios from the options available in the Regulations.
Set out in the table below is the base salary and total pay and
benefits for each of the percentiles.
£
Salary
Total pay and benefits
25th Percentile
(P25)
33,090
48,370
Median
(P50)
44,944
65,149
75th Percentile
(P75)
64,185
105,045
The Committee believes that the median pay ratio is consistent with
the company’s pay, reward and progression policies. Base salaries
of all employees, including our Executive Directors, are set with
reference to a range of factors including market practice, experience
and performance in role.
Supplemental/Additional Ratios
GSK’s CEO pay ratio is likely to vary, potentially significantly, over
time since it will be driven largely by CEO variable pay outcomes.
In line with our reward principles, the CEO has a larger portion of her
pay based on performance than the individuals at P25, P50 and
P75. This means that depending on GSK’s performance the ratio
could increase or decrease significantly. The Committee believes
that our senior executives should have a significant proportion of
their pay directly linked to performance.
Emma Walmsley
Sir Andrew Witty
2018
2017
2014
2009
2010
£000
£000
£000
£000
£000
5,887 4,883 715(3) 6,830 6,661 3,902 7,207 4,386 6,807 4,562 5,790
2013
£000
2011
£000
2012
£000
2015
£000
2016
£000
2017
£000
(1)
Single
figure of
remuneration
93% 77% 0%(3) 97% 100% 42% 88% 44% 100% 59% 100%
59% 69% 0%(4) 33% 38% 14% 31% 24% 70% 35% 35%
Annual
bonus
award(2)
(% of
maximum)
Vesting of
LTI awards
(% of
maximum)
(1) Ms Walmsley’s single figure of remuneration includes her pay for the period 1 January
to 31 March 2017, before she became CEO.
(2) 2009 and 2010 bonuses 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.
(3) Sir Andrew received a pro-rata payment for 2017 in lieu of a variable bonus opportunity,
in accordance with the 2014 Remuneration policy.
(4) PSP and DABP awards for Sir Andrew granted in 2015 did not vest until April 2018,
in accordance with the terms of the Executive Financial Recoupment Policy.
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 ten-year period to 31
December 2018. 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.
340
300
260
220
180
140
100
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 31.12.18
GSK Total Return
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 Pharma Peers
Total Return Index*
GSK Annual Report 2018 107
Additional remuneration disclosures
Percentage change in remuneration of CEO
Shareholder votes on remuneration matters
The table below shows most recent shareholder votes in respect
of the Remuneration report and Remuneration policy.
2018 AGM
Remuneration report
2017 AGM
Remuneration policy
Total votes
cast (billion)
2.9
Total votes
for (%)
90.4
Total votes
against (%)
9.59
Votes
withheld
(million)
752
3.4
95.23
4.77
66
External appointments for Executive Directors
The Board encourages Executive Directors to hold one listed
company external directorship (or equivalent) each as they
become established in their roles, to broaden their experience
and development, from which they may retain any fees. Any such
appointments are considered by the Nominations Committee and the
Board, in line with the company’s policy on external appointments, to
ascertain the nature and scope of the appointments and ensure they
would not cause an actual or potential conflict of interest, and that
the individual Executive Director continues to meet their existing
commitments to GSK. It is the company’s policy that remuneration
earned from such appointments may be kept by the individual.
The Board recognises the importance of ensuring that Dr Hal Barron
remains connected to the life sciences community and has therefore
approved his appointment to the boards of GRAIL Inc (a private
company), and Juno Therapeutics Inc (a NASDAQ listed company).
Prior to his appointment to GRAIL, Dr Barron was a director of Juno
until its acquisition by Celgene Corporation in March 2018.
Company
Juno Therapeutics Inc
(NASDAQ listed)
GRAIL, Inc
(private company)
Position
Non-Executive
Director
Non-Executive
Director
For period
January to March
2018
From August 2018
Fees earned
$29,232
$5,914
Salary
Benefits
Annual bonus
Emma Walmsley
UK Employees
% change
% change
2.5%
(12.03)%
24.16%
2.5%
0%
8%
2018
£000
1,028
234
1,912
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.
Relative importance of spend on pay
The table shows total employee pay and the Group’s dividends paid
to shareholders.
Total employee pay
Dividends
2018
£m
9,440
3,927
2017
£m
9,122
3,906
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 158 and 164. However,
dividends declared in respect of 2018 were £3,935 million
(2017 – £3,911 million) an increase of 0.5%.
Total employee pay is based on 96,851 employees, the average
number of people employed during 2018 (2017 – 99,349).
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 Hal Barron
Iain Mackay
29.03.17
08.09.10
16.12.17
18.09.18
01.04.17
04.01.11
01.01.18
14.01.19
30.06.34
30.04.28
31.12.24
n/a
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
108
Annual report on remuneration continued
Implementation of Remuneration policy for 2019
Salary
Long Term Incentive plans
The Committee determined the following salary increases taking
into account the average increase for the wider workforce:
Wider workforce(1)
Emma Walmsley(2)
Simon Dingemans
Iain Mackay
Dr Hal Barron
2019
–
% change
2.5
£1,110,348
£772,800
£850,000
$1,742,500
8
–
n/a
2.5
(1) Based on the average increase budget for employees below the level of CET in the UK.
(2) As referenced in the Chairman’s annual statement following shareholder consultation the
Committee has decided to adjust Ms Walmsley’s pay to reflect her development and
performance in role.
Benefits
Deferred Annual Bonus Plan (DABP) awards
The table below provides details of the mandatory deferral into the
DABP of 50% of 2018 annual bonus payments and the associated
awards granted. The shares awarded have no performance
conditions but must be held for three years, regardless of
continued employment.
Emma Walmsley
Simon Dingemans
Dr Hal Barron
% of total bonus
deferred into shares
50
50
50
(number shares)
61,813
44,215
2019 DABP award
(number ADS)
37,120
Performance Share Plan (PSP) awards
The table below provides details of awards granted under the PSP:
No significant changes to the provision of benefits are proposed
for 2019. 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.
Emma Walmsley
Iain Mackay
Dr Hal Barron
2019 PSP award
(% of salary)
550
(number shares)
404,592
2019 PSP award
(number ADS)
400
500
225,255
217,161
Pension
The table below provides an overview of the pension arrangements
for each ongoing Executive Director in 2019.
Pension contribution
20% of base salary and matching contributions of 5%
on the first £33,333 of salary in accordance with the terms
of the plan open to all employees, and 20% of base salary
in lieu of pension on salary in excess of £33,333
38% of base salary.
In addition, from 1 January 2019, a combined contribution
rate under the 401(k) and ESSP plans of 6% (2% core
contribution plus a match of up to 4%) of total base salary
and bonus, less the bonus deferred under the DABP.
Emma Walmsley
Iain Mackay
Dr Hal Barron
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 2019.
Emma Walmsley
Iain Mackay
Dr Hal Barron
Target Maximum
100%
200%
The financial measure is Adjusted Group PBIT, which represents
a weighting of 70% for the Annual Bonus Plan. The individual
performance measure represents the remaining weighting of 30%.
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 2019
Annual Report.
Performance measures
The metrics for the PSP awards remain unchanged. The 2019
awards will continue to be based on three equally weighted
measures:
– R&D new product performance;
– adjusted free cash flow; and
– relative TSR.
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.
TSR will continue to be measured against global pharmaceutical
peers. For achieving threshold performance, 25% of each award will
continue to vest in respect of the R&D new product performance
and AFCF performance measures. The relative TSR vesting
schedule for the 2019 awards has been revised as follows:
Ranking position
1st, 2nd or 3rd
4th
5th
Median (Threshold vesting)
6th or below
Vesting Schedule for the
2019 awards
100%
Vesting Schedule for the
2018 awards
100%
70%
40%
25%
0%
72%
44%
30%
0%
The TSR comparator group remains unchanged from that shown
on page 103 in respect of the 2016 awards.
The adjusted free cash flow targets for the 2019 awards are as follows:
Maximum
Threshold
Target
£13.91bn
£13.31bn
£12.10bn
£11.74bn
% vesting
100%
75%
50%
25%
GSK Annual Report 2018 109
Implementation of Remuneration policy for 2019 continued
Shareholdings versus Share Ownership Requirement (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. Executive Directors are required
to continue to satisfy these share ownership requirements for a
minimum of 12 months after leaving GSK.
Share ownership vs SOR (multiples of base salary)
In addition to the above, Simon Dingemans will be required to
maintain a shareholding equal to his share ownership requirement
for at least 12 months after leaving the company.
Remuneration arrangements for CFO Designate
Iain Mackay joined GSK as Chief Financial Officer Designate on
14 January 2019, and is an Executive Director. A summary of his
remuneration is set out below:
Base salary
£850,000
Annual bonus
£850,000
Award of LTIs
£1,700,000
Notes
The comparator group for pay for the
CFO position is the UK cross-industry
comparator group.
The on-target bonus would be 100%
with a maximum of 200% as for the
outgoing CFO.
This assumes an expected value of 50%
of an award of performance shares under
the company’s 2017 Performance Share
Plan at a 4x multiple of base salary as for
the outgoing CFO.
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.
20% of base
salary and
matching
contributions
Benefits
Benefits will be in line with GSK’s 2017
Remuneration policy.
There were no buy-out arrangements.
Emma Walmsley
4.2x
6.5x
Simon Dingemans
Dr Hal Barron(1)
3.0x
3.0x
10.7x
0
2x
4x
6x
8x
10x
SOR
31 December 2018 shareholding
(1) Dr Hal Barron was appointed to the Board on 1 January 2018, at which
point he had a shareholding of 1,644 GSK ADS.
Payments for loss of office (audited)
No loss of office payments were made in 2018.
Termination arrangements for CFO
As announced in 2018, Simon Dingemans will leave the Board in
May 2019. As Simon Dingemans 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.
Full disclosure of all payments made upon cessation will be included
in the 2019 Annual report on remuneration.
Remuneration element
Annual bonus
Summary of treatment
Will not receive any bonus for 2019.
PSP and DABP
Will not be granted PSP awards in 2019, but 50%
of his 2018 bonus will be deferred into DABP.
Outstanding PSP and
DABP matching awards
Any awards not vested prior to Simon Dingemans’
departure will lapse when he leaves GSK.
DABP deferred
bonus awards
Awards for bonuses deferred in respect of 2018 and
prior years will vest at the normal vesting dates.
Payments to past Directors (audited)
As set out in our 2016 Annual Report, Sir Andrew Witty and Dr Moncef Slaoui left the Board on 31 March 2017 by mutual agreement.
In accordance with the Remuneration policy, approved by shareholders in 2014, their 2015 PSP awards and 2015 DABP awards vested
following the one-year anniversary of their termination dates in 2018 under the terms of the Executive Financial Recoupment Policy.
Dr Moncef Slaoui
Sir Andrew Witty
Number of
ADS awarded
% vested in
July 2018
ADS price
$
Equating to
$
Number of
shares awarded
% vested in
April 2018
Share price
£
Equating to
£
2015 PSP
2015 DABP
108,725
9,937
69
69
40.85
40.85
4,441,444 2015 PSP
405,929 2015 DABP
357,352
25,122
69
69
14.21
14.21
5,077,972
356,984
Other benefits: the grossed up cost of the post employment
financial planning provided following his leaving the company
was $45,809.
Other benefits: the grossed up cost of the post employment
financial planning and home security following his leaving the
company was £23,184.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
110
Annual report on remuneration continued
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 2019 to reflect best
practice, particularly in respect of the new UK Corporate
Governance Code.
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.
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 68 to 70.
See page 72 for Committee member attendance levels.
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 (PwC)
Regular
attendee
✓
Attends as
required
✓
✓
✓
✓
Judy Lewent and Vindi Banga, as members of the Audit & Risk
and Remuneration Committees, provide input on the Audit & Risk
Committee’s review of the Group’s performance and oversight of
any risk factors relevant to remuneration decisions.
Adviser to the Committee
The company undertook a full commercial tender process during
2018 and appointed PricewaterhouseCoopers LLP (PwC) as
independent adviser to the Committee with effect from 6 September
2018. PwC replaced Willis Towers Watson LLP (WTW) who served
as independent adviser for the first part of 2018. Both PwC and
WTW are members of the Remuneration Consultants’ Group and,
as such, voluntarily operate 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.
PwC resigned as the Group’s statutory auditor after GSK’s 2017
Annual Report was signed in March 2018 and provided other
consulting and assurance services during the time they have been
the Committee’s independent advisers. WTW provided additional
market data to the Committee and also provided other HR consulting
services to the company prior to PwC’s appointment. In line with the
protocols agreed and set by the Committee Chair under which PwC
and WTW provided their advice, the Committee is satisfied that such
advice has been objective and independent.
During their respective tenures in 2018, PwC and WTW have
provided independent commentary on matters under consideration
by the Committee and updates on market practice and legislative
requirements. PwC’s and WTW’s fees for advice during that period,
which were charged on a time and materials basis, were £51,250
and $144,880 respectively. The Committee is satisfied that this did
not compromise either firm’s independence.
Committee evaluation
The Committee’s annual evaluation was facilitated by the Company
Secretary, who interviewed Committee members on behalf of the
Committee Chair. It was concluded that the Committee continued
to operate effectively. In terms of enhancements to the Committee’s
work, it was agreed that the Committee will examine the philosophy
underpinning the remuneration policy framework when reviewing our
policy for approval at the 2020 AGM.
GSK Annual Report 2018
111
Remuneration governance continued
What the Committee did during 2018
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.
– Remuneration impact of 2018 major Group restructuring
– Engagement with shareholders
– Employee consultation on setting policy and pay
Salary review
The Committee periodically reviews and considers the remuneration
environment of Executive Directors and CET, approving annual
adjustments 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 2019
– Setting remuneration for Iain Mackay
Annual bonus
The Committee is responsible for setting specific performance
measures for the Annual bonus.
– CEO, Executive Director and CET 2017 bonus recommendations
and 2018 bonus objectives
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.
– 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
– 2017 Remuneration report
– Remuneration considerations and committee programme for 2018
– AGM and Remuneration report feedback, the external remuneration
environment and performance target disclosure for incentive plans
– Chairman’s fees
– 2018 Remuneration report disclosures, including CEO pay ratio
– Remuneration Committee external adviser tender process
– Gender pay gap reporting
– Recruitment policy briefing
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 112
Annual report on remuneration continued
2018 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 and it was decided not to make any
change at this time. 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 2018 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 113. Non-Executive Directors’ fees that are
paid in a currency other than Sterling are converted using an average exchange rate that is reviewed from time to time. Benefits comprise the
grossed up cash value of travel and subsistence costs incurred in the normal course of business, in relation to attendance at Board and
Committee meetings. For overseas-based Directors, this includes travel to meetings in the UK.
Non-Executive Directors’
emoluments (000) (audited)
Fixed fees
Fixed fees
Cash
Shares/ADS
Benefits
Total pay
Cash
Shares/ADS
Benefits
Total pay
2018
2017
Vindi Banga
Dr Vivienne Cox
Lynn Elsenhans (1)
Dr Laurie Glimcher
Dr Jesse Goodman
Philip Hampton
Judy Lewent
Urs Rohner
Former directors:
Professor Sir Roy Anderson (2)
Sir Deryck Maughan (3)
Dr Daniel Podolsky (3)
Hans Wijers (4)
£65
£64
$56
–
$208
£525
$230
£86
£39
–
–
–
£50
£21
$175
$231
$69
£175
$77
£29
£7
–
–
–
£3
£11
$90
$73
$115
£19
$130
£23
£18
£5
£7
£8
£118
£96
$321
$304
$392
£719
$437
£138
£64
£5
£7
£8
(1) Lynn Elsenhans elected to receive her Non-Executive Director fees in USD in 2018.
(2) Professor Sir Roy Anderson retired from the Board on 3 May 2018.
(3) Dr Daniel Podolsky and Sir Deryck Maughan retired from the Board on 5 May 2016.
(4) Hans Wijers retired from the Board on 7 May 2015.
–
£69
£15
–
$216
£525
$239
£92
£123
£23
£137
$69
$72
£175
$80
£31
£8
£14
£70
$32
$140
£20
$157
£16
£131
£106
£222
$101
$428
£720
$476
£139
£92
£31
£9
£132
–
–
£6
£6
GSK Annual Report 2018 113
Directors’ interests in shares (audited)
The interests of the Directors of the company in office during 2018 and their persons closely associated (PCA) are shown in the tables below.
Total directors’ interests as at
31 December
2018
or date of
leaving
1 January
2018
1 March
2019
Total share plan interests as at 31 December 2018 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,e,f)
Simon Dingemans(a,b,c,d,e,f)
Sir Patrick Vallance(a,b,c,d,f)
ADS
Dr Hal Barron(a,c,e)
416,292
734,039
281,726
540,663
404,201
147,665
329,298
303,733
–
161,231
–
1,073,823
711,292
539,829
129,348
118,238
98,955
67,255
74,368
55,844
137,040
266
–
21,096
29,465
34,344
38,764
1,644
1,644
–
242,727
–
–
–
–
Total directors’ interests as at
31 December
2018
or date of
leaving
1 January
2018
or date of
appointment
1 March
2019
Dividends
reinvested
after year
end
Share allocation plan for Non-Executive Directors
Number of shares or ADS
31 December
2018
Paid out
Dividends
reinvested
during the
year
Allocated
& elected
31 December
2017
Non-Executive Directors
Shares(g)
Professor Sir Roy Anderson(h)
Vindi Banga
Dr Vivienne Cox
Philip Hampton
Urs Rohner
ADS(g)
Lynn Elsenhans
Dr Laurie Glimcher
Dr Jesse Goodman
Judy Lewent
–
58,326
3,857
56,208
8,748
33,134
7,562
5,167
25,459
32,152
56,753
3,352
51,157
7,785
30,587
5,961
4,538
24,271
29,306
50,802
1,804
37,398
5,591
24,398
350
2,610
21,630
–
1,091
150
2,125
382
1,497
202
206
718
–
21,553
3,352
44,239
7,885
29,587
5,961
4,538
14,105
32,152
–
–
–
–
–
–
–
–
1,785
779
75
1,631
301
1,225
5
89
609
1,061
5,172
1,473
12,128
1,993
4,964
5,606
1,839
2,033
29,306
15,602
1,804
30,480
5,591
23,398
350
2,610
11,463
a) Unvested options not subject to performance of 129,348 for Emma Walmsley represent bonus deferrals of 128,604 and Share Save options of 744.
Unvested shares not subject to performance of 161,231 for Simon Dingemans represent 100% of the shares awarded at the end of the three-year performance
period for the 2015 PSP grant, together with subsequent re-invested dividends. These shares are subject to a further two-year holding period. Unvested options
not subject to performance of 118,238 for Mr Dingemans represent bonus deferrals of 117,782 and Share Save options of 456.
Unvested options not subject to performance of 98,955 for Sir Patrick Vallance represent bonus deferrals.
b) Total Directors’ interests includes shares purchased through the GlaxoSmithKline Share Reward Plan. During 2018, Emma Walmsley and Simon Dingemans
were each awarded 103 shares under the plan. The total number of shares held within the plan are as follows:
Share Reward Plan (Shares)
Emma Walmsley
Simon Dingemans
Sir Patrick Vallance
1 March 2019
31 December 2018
1 January 2018
1,546
1,999
–
1,496
1,943
–
1,219
1,642
3,263
Dr Hal Barron is a US employee and is not eligible to participate in the Share Reward Plan, as this is only open to UK employees.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
114
Annual report on remuneration continued
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
Simon Dingemans
Dr Hal Barron
Sir Patrick Vallance
1 March 2019
31 December 2018
or date of retirement
1 January 2018
Shares
Shares
ADS
Shares
159,409
120,406
37,120
–
128,604
117,782
–
98,955
75,959
87,575
–
75,092
d) Total directors’ interests at 1 March 2019 includes any shares or ADS which vested due to performance being met under elements of the DABP and PSP
(2016-2018 awards), less those sold to satisfy tax liabilities on the vested amounts (see pages 115 to 118 for further details).
e) Share Save Plan
For Emma Walmsley and Simon Dingemans the unvested options not subject to performance include holdings of 744 and 456 respectively in the Share
Save Plan, in which Ms Walmsley and Mr Dingemans participate on the same terms as all other employees. Ms Walmsley was granted 744 options under
the plan on 29 November 2018.
f) The following table sets out details of options (all nil-cost options under the DABP) exercised during 2018 by Executive Directors.
Type of award
Emma Walmsley
DABP – deferral
DABP – matching
Simon Dingemans
DABP – deferral
DABP – matching
Sir 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)
11.02.15
11.02.15
11.02.15
11.02.15
11.02.15
11.02.15
12,482
8,614
21,096
17,435
12,030
29,465
20,322
14,022
34,344
16.02.18
16.02.18
16.02.18
16.02.18
19.02.18
19.02.18
–
–
–
–
–
–
£13.16
£13.16
£13.12
£13.12
£13.18
£13.18
£164
£113
£277
£229
£158
£387
£268
£185
£453
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.
GSK Annual Report 2018
115
Directors’ interests in shares (audited) continued
For Emma Walmsley:
– The gain of £164,263 recorded following the exercise of the 12,482 nil-cost options relating to the deferral of bonus earned in respect of 2014 comprises
remuneration of £159,715 recorded in 2014 as Annual bonus and a net gain of £4,548 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 £113,360 recorded following the exercise of the 8,614 nil-cost options relating to the DABP matching award comprises remuneration of
£111,982 recorded in 2017 in relation to the DABP (see table below) and an investment gain of £1,378 relating to the movement in the share price between
the vesting and exercise dates.
For Simon Dingemans:
– The gain of £228,747 recorded following the exercise of the 17,435 nil-cost options relating to the deferral of bonus earned in respect of 2014 comprises
remuneration of £223,065 recorded in 2014 as Annual bonus and a net gain of £5,682 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 £157,833 recorded following the exercise of the 12,030 nil-cost options relating to the DABP matching award comprises remuneration of
£156,390 recorded in 2017 in relation to the DABP (see page 116) and an investment gain of £1,444 relating to the movement in the share price between
the vesting and exercise dates.
For Sir Patrick Vallance:
– The gain of £267,844 recorded following the exercise of the 20,322 nil-cost options relating to the deferral of bonus earned in respect of 2014 comprises
remuneration of £260,015 recorded in 2014 as Annual bonus and a net gain of £7,829 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 £184,810 recorded following the exercise of the 14,022 nil-cost options relating to the DABP matching award comprises remuneration of
£182,286 recorded in 2017 in relation to the DABP (see page 116) and an investment gain of £2,524 relating to the movement in the share price between
the vesting and exercise dates.
g) 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 2018 and January 2019 were converted into shares or ADS as at 6 February 2019.
h) Professor Sir Roy Anderson retired from the Board on 3 May 2018.
Deferred Annual Bonus Plan matching awards
The following tables provide details for each Executive Director in office during 2018 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 2017
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2018
Dividends reinvested
Vested
Lapsed
Unvested at 1 March 2019
Vested shares
Number of shares
Market price at vesting
Gain:
Remuneration for 2017
Remuneration for 2018
2015-2017
2016-2018
2017-2019
Performance period
£15.77
33,179
1,878
–
–
35,057
432
–
–
35,489
£15.20
12,306
176
(8,614)
(3,868)
–
8,614
£13.00
(000)
£112
–
£13.59
30,474
1,724
–
–
32,198
398
(19,234)
(13,362)
–
19,234
£15.66
(000)
–
£301
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 116
Annual report on remuneration continued
Directors’ interests in shares (audited) continued
Deferred Annual Bonus Plan matching awards continued
Simon Dingemans – Shares
Market price at grant
Unvested at 31 December 2017
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2018
Dividends reinvested
Vested
Lapsed
Unvested at 1 March 2019
Vested shares
Number of shares
Market price at vesting
Gain:
Remuneration for 2017
Remuneration for 2018
Sir Patrick Vallance – Shares
Market price at grant
Unvested at 31 December 2017
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2018
Dividends reinvested
Vested
Lapsed
Unvested at 1 March 2019
Vested shares
Number of shares
Market price at vesting
Gain:
Remuneration for 2017
Remuneration for 2018
2015-2017
2016-2018
2017-2019
Performance period
£15.77
30,143
1,705
–
–
31,848
392
–
–
32,240
£15.20
17,188
245
(12,030)
(5,403)
–
12,030
£13.00
(000)
£156
–
£13.59
40,244
2,276
–
–
42,520
524
(25,398)
(17,646)
–
25,398
£15.66
(000)
–
£398
2015-2017
2016-2018
2017-2019
Performance period
£15.77
22,468
687
–
(23,155)
–
–
£15.20
20,035
286
(14,022)
(6,299)
–
–
14,022
£13.00
(000)
£182
–
£13.59
32,590
997
–
(33,587)
–
–
–
–
(000)
–
–
GSK Annual Report 2018 117
Directors’ interests in shares (audited) continued
Performance Share Plan awards
The following tables provide details for each Executive Director in office during 2018 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 2017
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2018
Dividends reinvested
Vested
Lapsed
Unvested at 1 March 2019
Granted
Face value at grant (000)
Unvested at 8 March 2019
Vested shares
Number of shares
Market price at vesting
Gain:
Remuneration for 2017
Remuneration for 2018
Simon Dingemans – Shares
Market price at grant
Unvested at 31 December 2017
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2018
Granted
Face value at grant (000)
Dividends reinvested
Vested
Lapsed
Unvested at 1 March 2019
Vested shares
Number of shares
Market price at vesting
Gain:
Remuneration for 2017
Remuneration for 2018
2015-2017
2015-2017
2016-2018
2017-2019
2018-2020
2019-2021
Performance period
£15.20
130,642
–
–
1,865
(91,430)
(41,077)
–
91,430
£13.00
(000)
£1,189
–
£14.01
67,715
–
–
967
(47,391)
(21,291)
–
47,391
£13.00
(000)
£616
–
2015-2017
£15.20
221,136
–
–
3,158
(154,763)
(69,531)
–
154,763
£13.00
(000)
£2,012
–
£13.59
223,024
–
–
12,639
–
–
235,663
2,915
(140,762)
(97,816)
–
–
–
–
140,762
£15.66
(000)
–
£2,204
£15.46
361,379
–
–
20,479
–
–
381,858
4,723
–
–
386,581
–
–
£12.91
–
437,997
£5,655
18,305
–
–
456,302
5,645
–
–
461,947
–
–
386,581
461,947
£15.12
–
–
–
–
–
–
–
–
–
–
–
404,592
£6,117
404,592
Total
(000)
£1,805
£2,204
2016-2018
2017-2019
2018-2020
Performance period
£15.46
197,574
–
–
11,197
–
–
208,771
–
–
2,582
–
–
211,353
£12.91
–
239,442
£3,091
10,007
–
–
249,449
–
–
3,086
–
–
252,535
£13.59
239,499
–
–
13,573
–
–
253,072
–
–
3,130
(151,161)
(105,041)
–
151,161
£15.66
(000)
–
£2,367
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 118
Annual report on remuneration continued
Directors’ interests in shares (audited) continued
Performance Share Plan awards continued
Sir Patrick Vallance – Shares
Market price at grant
Unvested at 31 December 2017
Granted
Dividends reinvested
Vested
Lapsed
Unvested at 31 December 2018
Vested shares:
Number of shares
Market price at vesting
Gain:
Remuneration for 2017
Performance period
2016-2018
2017-2019
£13.59
276,745
–
8,468
–
£15.46
255,484
–
7,817
–
(285,213)
(263,301)
–
–
2015-2017
£15.20
224,309
–
3,203
(156,984)
(70,528)
–
156,984
£13.00
(000)
£2,041
Iain Mackay was appointed to the Board from 14 January 2019. The following table provides details of PSP awards granted to him on
11 March 2019:
Iain Mackay – Shares
Market price at grant
Number of shares
Face value at grant (000)
Unvested at 8 March 2019
Dr Hal Barron – ADS
Market price at grant
Unvested at 31 December 2017
Granted
Face value at grant (000)
Dividends reinvested
Unvested at 31 December 2018
Dividends reinvested
Unvested at 1 March 2019
Granted
Face value at grant (000)
Unvested at 8 March 2019
Performance period
2019-2021
£15.12
225,255
£3,406
225,255
Performance period
2018-2020
2019-2021
$36.46
–
233,132
$8,500
9,595
242,727
2,953
245,680
–
–
245,680
$40.12
–
–
–
–
–
–
–
217,161
$8,172
217,161
GSK Annual Report 2018 119
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 2018, the following table sets out aggregate remuneration for the group for the periods during which they served in that capacity.
Remuneration for 2018
Total compensation paid
Aggregate increase in accrued pension benefits (net of inflation)
Aggregate payments to defined contribution schemes
(£)
29,142,577
906,937
363,756
During 2018, members of the group were awarded shares and ADS under the company’s various executive share plans, as set out in the
table below. To align the interests of Senior Management with those of shareholders, Directors and Senior Management are required to build
and maintain significant holdings of shares in GSK over time. CET members are required to hold shares to an equivalent multiple of two times
base salary, and are required to continue to satisfy these share ownership requirements for a minimum of 12 months after leaving GSK.
Awarded during 2018
Deferred Annual Bonus Plan
Performance Share Plan
Deferred Investment Awards (a) (b)
Share Value Plan(b)
Shares
–
2,002,494
101,327
11,060
Awards
ADS
–
438,542
6,320
–
Dividend reinvestment awards
Shares
19,804
229,872
6,600
–
ADS
1,827
37,819
673
–
At 1 March 2019, 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 212.
Interests at 1 March 2019
Owned
Unexercised options
Deferred Annual Bonus Plan
Performance Share Plan
Deferred Investment Awards (a) (b)
Share Value Plan (b)
Shares
1,382,607
149,382
646,472
3,359,591
120,454
36,200
ADS
141,889
7,670
81,555
562,043
13,021
6,320
(a) Notional shares and ADS.
(b) Executive Directors are not eligible to receive Deferred Investment Awards or participate in the Share Value Plan.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 120
2017 Remuneration policy summary
Executive Director Remuneration policy
The following is a summary of this policy.
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 99 and 108.
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 99.
Pension
Pension arrangements provide a competitive level of retirement income.
Performance measures
None.
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 .
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.
GSK Annual Report 2018
121
Executive Director Remuneration policy continued
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.
Clawback and malus
In the event of a ‘triggering event’ (e.g. significant misconduct by way of
violation of regulation, law, or a significant GSK policy, such as the Code
of Conduct), the company will have the ability to claw back up to three
years’ annual and deferred bonuses as well as vested and unvested
LTIs. In addition, if a participant in the new 2017 PSP or DABP, which
shareholders approved at the 2017 AGM, is subject to an investigation,
then the vesting of their awards may be delayed until the outcome of that
investigation.
A separate Recoupment Committee has been established to investigate
relevant claims of misconduct. The Recoupment Committee exercises this
authority for the wider employee base. It comprises of senior executives
with relevant oversight and appropriate experience, including the Senior
Vice President, Global Ethics and Compliance, and the Senior Vice
President & General Counsel.
In respect of each financial year, the Remuneration Committee will
disclose whether it (or the Recoupment Committee) has exercised
clawback or malus. Disclosure will only be made when the matter has been
subject to public reports of misconduct, where it has been fully resolved,
where it is legally permissible to disclose and where it can be made
without unduly prejudicing the company and therefore shareholders.
Additionally, where there has been continuity of responsibility between
initiation of an adverse event and its emergence as a problem, the adverse
event should be taken into account in assessing annual bonus awards and
LTI vesting levels in the year the problem is identified and for future
periods. The Remuneration Committee (or Recoupment Committee) may
make appropriate adjustments to individual annual bonuses as well as
grant and vesting levels of LTI awards to reflect this.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 122
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 2019
under the policy. A range of potential outcomes is provided for each
Executive Director and the underlying assumptions are set out below.
All scenarios:
– 2019 base salary has been used.
– 2018 benefits and pension figures have been used for the CEO,
CFO and the Chief Scientific Officer and President, R&D, i.e.
based on actual amounts received in 2018 in respect of the
ongoing policy. As the CFO Designate was not in role during
2018, the benefits value for this role is based on the value of
benefits for the CFO in 2018 and on the pension arrangements
to apply in 2019.
– The amounts shown under value of PSP awards are based on
the relevant multiples for 2019. 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
£9.88m
62%
£4.19m
36%
27%
37%
£1.55m
100%
22%
16%
Fixed
Expected
Maximum
Simon Dingemans, CFO(1) (£000)
6,000
4,000
2,000
0
£0.37m
100%
Fixed
£0.37m
100%
£0.37m
100%
Expected
Maximum
Iain Mackay, CFO Designate (£000)
6,000
4,000
2,000
0
£1.16m
100%
£2.86m
30%
30%
40%
£6.26m
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
$15.79m
55%
22%
23%
$3.59m
100%
$7.51m
29%
23%
48%
Fixed
Expected
Maximum
Fixed pay
Annual bonus
PSP
(1) CFO will leave GSK in May 2019 and is not eligible for bonus or a PSP award for
2019. The figures represent his actual remuneration for January through 8 May 2019.
GSK Annual Report 2018 123
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 112.
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.
Details of current fees are set out in the Annual report
on remuneration on page 112.
Performance measures
None
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 112.
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 112.
Performance measures
None
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 124
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.
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.
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 137. 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.
The Annual report on remuneration has been approved
by the Board of Directors and signed on its behalf by:
Urs Rohner
Remuneration Committee Chairman
11 March 2019
GSK Annual Report 2018 GSK Annual Report 2018
125
125
Strategic report
Governance and remuneration
Financial statements
Investor information
Financial
statements
In this section
Directors’ statement of responsibilities
Independent Auditor’s report
Financial statements
Notes to the financial statements
Financial statements of GlaxoSmithKline plc
prepared under UK GAAP
126
128
140
144
219
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 126
Directors’ statement of responsibilities
The financial statements for the year ended 31 December 2018 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 2018
confirms that, to the best of his or her knowledge:
– the Group financial statements, which have been prepared
in accordance with IFRS as adopted by the EU and IFRS
as issued by the IASB, give a true and fair view of the assets,
liabilities, financial position and profit of the Group; and
– the Strategic report and risk sections of the Annual Report,
which represent the management report, include a fair review of
the development and performance of the business and the position
of the company and the Group taken as a whole, together with a
description of the principal risks and uncertainties that it faces.
Disclosure of information to auditor
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 auditor is 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 auditor is 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 38 to 64 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.
The Directors are responsible for preparing the Annual Report, the
Remuneration report and the Group and parent company financial
statements in accordance with applicable law and regulations.
UK company law requires the Directors to prepare financial
statements for each financial year. 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). 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
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 the 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;
– 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 Group and 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 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
2018, comprising principal statements and supporting notes,
are set out in the ‘Financial statements’ on pages 140 to 218 of this
report. The parent company financial statements for the year ended
31 December 2018, comprising the balance sheet for the year
ended 31 December 2018 and supporting notes, are set out on
pages 219 to 222.
The responsibilities of the auditor in relation to the financial
statements are set out in the Independent Auditor’s report on
pages 128 to 139.
GSK Annual Report 2018 127
Directors’ statement of responsibilities continued
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 65 to 94. 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 auditor has 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 2018,
comprising the Report of the Directors, the Remuneration report,
the Financial statements and Additional information for investors, has
been approved by the Board of Directors and signed on its behalf by
Philip Hampton
Chairman
11 March 2019
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 128
Independent Auditor’s report to the members
of GlaxoSmithKline plc
Report on the audit of the financial statements
Opinion
In our opinion:
– the financial statements of GlaxoSmithKline plc (the ‘Parent
company’) and its subsidiaries (the ‘Group’) give a true and fair
view of the state of the Group’s and of the Parent company’s
affairs as at 31 December 2018 and of the Group’s profit for
the year then ended;
– the Group financial statements have been properly prepared in
accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union and IFRSs as issued
by the International Accounting Standards Board (IASB);
– the Parent company financial statements have been properly
prepared in accordance with United Kingdom Generally Accepted
Accounting Practice including FRS 101 ‘Reduced Disclosure
Framework’; and
– the financial statements have been prepared in accordance with
the requirements of the Companies Act 2006 and, as regards the
Group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements which comprise the:
Group:
– consolidated balance sheet as at 31 December 2018;
– consolidated income statement for the year then ended;
– consolidated statement of comprehensive income for the year
then ended;
– consolidated statement of changes in equity for the year then
ended;
– consolidated cash flow statement for the year then ended; and
– notes 1 to 46 to the financial statements, which includes the
accounting principles and policies.
Parent company:
– balance sheet as at 31 December 2018;
– statement of changes in equity for the year then ended; and
– notes A to N to the financial statements, which includes the
accounting principles and policies.
The financial reporting framework that has been applied in the
preparation of the Group financial statements is applicable law and
IFRSs as adopted by the European Union. The financial reporting
framework that has been applied in the preparation of the Parent
company financial statements is applicable law and United Kingdom
Accounting Standards, including FRS 101 ‘Reduced Disclosure
Framework’ (United Kingdom Generally Accepted Accounting
Practice).
Basis for opinion
We conducted our audit in accordance with International Standards
on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the auditor’s
responsibilities for the audit of the financial statements section of
our report.
We are independent of the Group and the Parent company in
accordance with the ethical requirements that are relevant to our
audit of the financial statements in the UK, including the Financial
Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to
listed public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
We confirm that non-audit services prohibited by the FRC’s Ethical
Standard were not provided to the Group or the Parent company.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our opinion.
Summary of our audit approach
First year audit transaction
This is the first year we have been appointed as auditors to the
Group. We undertook a number of transitional procedures to
prepare for the audit. Before we commenced our audit we had to
establish our independence of the Group which involved ceasing
a number of commercial relationships. We used the time prior to
commencing our audit to meet with key members of management
to gain an understanding of the business, its issues and the
environment in which it operates.
We became independent of the Group and commenced our audit
planning on 4 July 2017. From this date we attended all Audit & Risk
Committee meetings, initially in an observer capacity. We worked
alongside the former auditor and reviewed their working papers to
gain an understanding of the Group’s processes, their audit risk
assessment, the controls on which they relied for the purposes of
issuing their audit opinion, as well as understanding the evidence
they obtained on the key complex or significant judgements which
they made.
In September 2017, we held a two day meeting of audit partners
and senior staff who would be responsible for undertaking the audits
in the most significant locations in the Group. The main purpose of
this meeting was to outline our central audit approach including the
use of our data analytics tools, discuss possible significant audit
risks and brief our teams on the Group’s key processes, systems
and structure. A subsequent strategic planning meeting was held
in September 2018 with the same participants to take into account
any current period updates that impacted our audit approach.
During these meetings, we also heard directly from Group
management on the changes impacting the business to inform
our audit planning and risk assessment.
Key audit matters
The key audit matters that we identified in the current year were:
– valuation of acquisition-related liabilities;
– valuation of US Returns and Rebates (RAR) accruals;
– valuation of intangible assets;
– valuation of uncertain tax positions, including transfer pricing
and updates to the impacts of the US Tax Reform; and
– IT systems which impact financial reporting.
Key audit matters considered by the Group’s auditor in the prior
year were broadly aligned with the items identified above, but also
included consideration of litigations and investigations into the
Group’s commercial operations, which are less significant in the
current year.
Materiality
The materiality that we used for the Group financial statements
was £270 million, which was determined on the basis of a
composite benchmarking approach. This approach considers
profit before tax, adjusted profit before tax, revenue and net cash
flows from operations.
Risk assessment at group level
We applied a top-down risk assessment methodology which
considers the enterprise, industry and financial risks in the context of
the financial statements
GSK Annual Report 2018 129
Report on the audit of the financial statements continued
As part of this process, we spent time understanding the key
financial and business processes of the Group and how they are
implemented across the organisation. We used our audit analytics
tools to analyse client data and the flow of business transactions
to inform our fact-based risk assessment.
Audit scope and execution
We structured our approach to the audit to reflect how the Group
is organised as well as ensuring our audit was both effective and
risk focused. It can be summarised into the following areas which
enabled us to obtain the evidence required to form an opinion on
the Group and Parent company financial statements:
– Risk assessment and audit planning at a Group level.
The central control and common systems throughout most of the
Group, enabled us to structure the audit more centrally. In addition
to appointing partners for each of three businesses, we also had
partners coordinate the component and legal entity audits in each
country. These global business partners met regularly with the
relevant management to understand strategy and matters which
arose throughout the year that could have impacted on the
financial reporting. The regular meetings we had with members
of the Internal Audit, the internal Legal Counsel and the Global
Ethics & Compliance team allowed us to understand their work,
to review their reports and to enhance our risk assessment.
– Audit work performed at global shared service centres.
A significant amount of the Group’s operational processes which
cover financial reporting are undertaken in shared service centres.
Our central team, which included senior individuals responsible
for each of the global processes, coordinated our audit work at
the shared service centres in scope for the Group audit, to ensure
we developed a good understanding of the end-to-end view of
the key processes that supported material account balances,
classes of transactions and disclosures within the Group financial
statements. We then evaluated the effectiveness of internal
controls over financial reporting for these processes and
considered the implications for the remainder of our audit work.
– Audit work executed at component and individual
legal entities.
The following components were subject to market-specific audit
procedures as well as the assessment of the internal controls over
financial reporting: Belgium; Canada; France; Germany; Italy;
Japan; Spain; Switzerland; United Kingdom and United States.
The Group audit team was in active dialogue throughout the year
with the component audit teams responsible for the audit work
under the direction and supervision of the Group audit team. This
included determining whether the work was planned and
performed in accordance with the overall Group audit strategy
and the requirements of our Group audit instructions to the
components. As part of supervising the work of the components,
the Group audit team visited all the component countries, as well
as locations of all shared service centre audits.
– Audit procedures undertaken at a Group level and on
the Parent company.
In addition to the above, we also performed audit work at Group
and on the Parent company financial statements, including but not
limited to the consolidation of the Group’s results, the preparation
of the financial statements, certain disclosures within the Directors
remuneration report, litigation provisions and exposures in addition
to management’s entity level and oversight controls relevant to
financial reporting. We also carried out analytical procedures to
confirm our conclusion that there were no significant risks of
material misstatement of the aggregated financial information of
the remaining components not subject to the market-specific audit
procedures.
The coverage obtained from this strategy is summarised as follows:
Benchmark
Covered by market - specific procedures
Covered by review at Group level
Revenue
66%
34%
Profit
before tax
73%
27%
Total
assets
83%
17%
The residual consists of components or legal entities each with
annual revenue (turnover) less than 1.8% of the total Group revenue.
These entities and components are non-significant components that
individually and in the aggregate do not present a reasonable
possibility of risk of material misstatement.
Conclusions relating to going concern, principal risks
and viability statement
Going concern
We have reviewed the directors’ statement in notes 1 and A to the
financial statements about whether they considered it appropriate
to adopt the going concern basis of accounting in preparing them
and their identification of any material uncertainties to the Group’s
and Company’s ability to continue to do so over a period of at least
12 months from the date of approval of the financial statements.
We considered as part of our risk assessment the nature of the Group,
its business model and related risks including where relevant the
impact of Brexit, the requirements of the applicable financial reporting
framework and the system of internal control. We evaluated the
directors’ assessment of the Group’s ability to continue as a going
concern, including challenging the underlying data and key assumptions
used to make the assessment, and evaluated the directors’ plans for
future actions in relation to their going concern assessment.
We are required to state whether we have anything material to add
or draw attention to in relation to that statement required by Listing
Rule 9.8.6R(3) and report if the statement is materially inconsistent
with our knowledge obtained in the audit.
We confirm that we have nothing material to report, add or
draw attention to in respect of these matters.
Principal risks and viability statement
Based solely on reading the directors’ statements and considering
whether they were consistent with the knowledge we obtained in the
course of the audit, including the knowledge obtained in the evaluation
of the directors’ assessment of the Group’s and the Company’s ability
to continue as a going concern, we are required to state whether we
have anything material to add or draw attention to in relation to:
– the disclosures on pages 34 to 36 that describe the principal
risks and explain how they are being managed or mitigated;
– the directors’ confirmation on page 87 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; or
– the directors’ explanation on page 44 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 are also required to report whether the directors’ statement relating
to the prospects of the Group required by Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit.
We confirm that we have nothing material to report, add or
draw attention to in respect of these matters.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 130
Independent Auditor’s report continued
Report on the audit of the financial statements continued
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our 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) that we identified.
These matters included 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 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.
Key audit matter description
How the scope of our audit responded to the key audit matter
Valuation of acquisition-related liabilities
In recent years the Group has completed a number of significant
transactions which resulted in the recognition of material and
judgemental acquisition-related liabilities. The most significant
of these liabilities were:
– ViiV Healthcare Shionogi contingent consideration liability
(‘ViiV CCL’): The Group completed the acquisition of the
remaining 50% interest in the Shionogi-ViiV Healthcare joint
venture in 2012. Upon completion, the Group recognised a
contingent consideration liability for the fair value of the
expected future payments to be made to Shionogi. As at
31 December 2018, the liability was valued at £5,937 million
(2017 – £5,542 million); and
– Pfizer put option: The Group granted Pfizer a put option in
2009, enabling Pfizer to put its non-controlling interest in
ViiV Healthcare back to the Group in the future. As at
31 December 2018, the liability was valued at £1,240 million
(2017 – £1,304 million).
In the prior year, the acquisition-related liabilities also included the
Consumer Healthcare joint venture put option. The liability
represented the present value of the expected redemption price
of a put option over Novartis’ non-controlling interest in Consumer
Healthcare joint venture. On 3 May 2018, the Consumer
healthcare joint venture put option was de-recognised following
approval by shareholders of the acquisition of Novartis’
non-controlling interest in the Consumer healthcare joint venture
and therefore this liability did not exist at the year end.
The valuations of the liabilities are sensitive to changes in
exchange rates, discount rates and sales forecasts, which are
based upon management’s assessment of the probability of
success of pipeline products, expected launch dates, subsequent
sales volumes and pricing.
The key risks in the valuation of the acquisition-related liabilities,
specifically the sales forecast used to value the ViiV CCL and
particularly the dolutegravir-based regimens as, in our view, these
give rise to the most material source of estimation uncertainty.
The acquisition related liabilities are disclosed as a key
accounting judgement and estimate in note 3 of the Group
financial statement with further disclosures provided in notes 27,
38, 39 and 42. The matter is also discussed in the Audit & Risk
Committee report within the Corporate Governance section of
the Annual Report.
Audit procedures performed
We performed the following audit procedures where relevant:
– made enquiries of key individuals from the senior leadership
team, commercial strategy team and key personnel involved in
the budgeting and forecasting process, to discuss, challenge
and evaluate management’s evidence to support key inputs
and assumptions;
– challenged the business assumptions applied by management
in estimating sales forecasts, including benchmarking of sales
forecasts to external data. This included analysis of the results
of demand studies conducted by third parties on new drug
launches. We assessed the results of clinical studies and
the target medicine profile of new drugs to understand their
relative position in the market and to assess any sources of
contradictory evidence;
– assessed the historical accuracy of management’s forecasts
including estimates of the probability of success of pipeline
products;
– benchmarked sales forecasts against analyst expectations to,
both assess the estimations made by management and, for
consideration of any contradictory evidence available;
– assessed the reasonableness of valuation-specific assumptions
used by management, including exchange rates, discount rate,
valuation multiples and whether these assumptions were
consistent with how a well-informed independent third party
would value these liabilities;
– assessed the appropriateness of the accounting for acquisition-
related liabilities; and
– evaluated the disclosures in respect to these liabilities included
in the notes to the financial statements to determine whether
they were compliant with the requirements of the relevant
accounting standards.
Internal controls over financial reporting
We tested the design, implementation and operating effectiveness
of key controls identified over the valuation of the acquisition-related
liabilities, such as the review and approval of both the long-range
forecast and the valuation models.
Key observations communicated to the Audit & Risk Committee
Whilst there are significant commercial risks to the forecasts for the
future sales of dolutegravir-based regimens and related products,
we are satisfied that the valuations of associated liabilities are within
an acceptable range of values.
The approach to valuing the acquisition-related liabilities was
consistent with prior periods and we are satisfied that the valuations
of the acquisition-related liabilities are reasonable and consistent
with IFRS.
GSK Annual Report 2018 131
Report on the audit of the financial statements continued
Key audit matter description
How the scope of our audit responded to the key audit matter
Valuation of US Returns and Rebates (RAR) accruals
In the US the Group sells to customers under various commercial
and government mandated contracts and reimbursement
arrangements that include rebates, chargebacks and a right of
return for certain products. As such, revenue recognition reflects
gross-to-net sales adjustments which involve significant estimation
and judgement. These adjustments are known as the Returns and
Rebates (‘RAR’) accruals and are a source of estimation and
uncertainty which could have a material impact on reported revenue.
The three most significant payer channels within the RAR accrual are
managed healthcare organisations, Medicaid and Medicare Part D.
The two main causes of significant estimation uncertainty are:
– the utilisation rates (the portion of total sales which will be made
into each payer channel) estimated by management in recording
the accruals. The utilisation assumption is the most challenging
of the key assumptions used to derive the accrual given that it
is influenced by market demand and other factors outside the
control of the Group; and
– the time lag between the point of sale and the point at which
exact rebate amounts are known to the Group (upon receipt of
a claim). Those payer channels with the longest time lag result
in a greater accrued period, and as such a greater level of
estimation uncertainty.
The level of estimation uncertainty is also impacted by significant
shifts in channel mix driven by changes in the competitive
landscape.
In the US Pharmaceuticals business in 2018, £10,774 million of
RAR deductions were made to gross revenue of £18,227 million,
resulting in net revenue of £7,453 million. The balance sheet
accrual at 31 December 2018 accrual for the combined
Pharmaceuticals and Vaccines businesses amounted to
£4,356 million.
Returns and rebates are disclosed as a key accounting judgement
and estimate in note 3 of the Group financial statement with further
disclosures provided in note 27. The matter is also discussed in the
Audit & Risk Committee report within the Corporate Governance
section of the Annual Report.
Audit procedures performed
We performed the following audit procedures:
– assessed the historical accuracy of management’s estimates
against actual outcomes to evaluate the impact and inform our
assessment of the current year accrual;
– developed an expectation of the accrual balance for each of the
key channels, based on historical claims received adjusted to
reflect market changes in the period including an assessment of
the time lag between the initial point of sale and the claim receipt.
We then used this expectation to consider the appropriateness of
management’s ending accrual position;
– recalculated the accrual recognised to determine that it is
consistent with the assumptions determined through
management’s process;
– substantively tested individual utilisation rates on a sample basis;
– evaluated, through monitoring of news events and industry
developments, the appropriateness of period end adjustments
to the liability made as part of the ongoing review of the estimated
accrual;
– evaluated and benchmarked the methodology applied by
management in estimating the accrual against industry practice;
and
– monitored the market for any significant events in the period, giving
a particular focus to any potential generic competition in respect
to Advair, one of the Group’s most significant products. A generic
Advair competitor product was not approved by the US Food and
Drug Administration (‘FDA’) until the end of January 2019, and
therefore there was no additional risk associated with market
events in determining the 2018 Advair RAR liability.
Internal controls over financial reporting
We tested the design, implementation and operating effectiveness of
key controls over the estimation of RAR accruals including the review
of forecasts and monthly accruals.
Key observations communicated to the Audit & Risk Committee
Based on our assessment of the accuracy of historical estimates
made by management by comparing them to actual rebates claimed,
we determined that the estimates have been accurate in the past
giving further assurance over the strength of management’s process
for estimating the liability at the reporting date.
We are satisfied with the appropriateness of the RAR accruals at the
period end, and that management’s estimated liability is reasonable.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 132
Independent Auditor’s report continued
Report on the audit of the financial statements continued
Key audit matter description
How the scope of our audit responded to the key audit matter
Valuation of intangible assets
As at 31 December 2018, the Group held £16,156 million of
intangible assets (including licences, patents, trademarks and
brand names, but excluding goodwill and computer software).
The recoverable value of these intangible assets relies on certain
assumptions and estimates of future trading performance which
impact the valuation.
The assumptions applied by management in determining the
recoverable value include the discount rate, future sales growth
rate, the impact of the expiry of patents on the product and
potential product obsolescence. Changes in these assumptions
could lead to an impairment to the carrying value of the intangible
assets.
The assets most at risk of material impairment were identified using
sensitivity analysis on key assumptions and a review of potential
triggering events that could be indicative of an impairment in the
carrying value of associated assets.
The disclosures relating to other intangible assets are included in
note 19 of the Group financial statements. The matter is also
discussed in the Audit & Risk Committee report within the
Corporate Governance section of the Annual Report.
Audit procedures performed
We assessed the appropriateness of the carrying value of the
intangible assets by performing the following audit procedures:
– assessed the valuation methodology used by management,
with involvement of our valuation specialists, and tested the
mechanical accuracy of the impairment models;
– evaluated the reasonableness of the valuation assumptions,
such as discount rates, used by management through reference
to external market data;
– reviewed analyst reports and other external sources of
information to identify any contradictory evidence which
could indicate an impairment is required;
– challenged the appropriateness of the business assumptions
used by management, such as sales growth and the probability
of success of products in development by assessing externally
available reference data to look for contradictory evidence,
evaluate past performances where relevant and assessing
historical accuracy of the forecast produced by management;
– enquired of and challenged management on the commercial
strategy associated with the products to ensure that it was
consistent with the assumptions used in estimating future
cash flows; and
– considered whether events or transactions that occurred after
the balance sheet date but before the reporting date affect the
conclusions reached on the carrying values of the assets and
associated disclosures.
Internal controls over financial reporting
We tested the design, implementation and operating effectiveness
of key controls over the impairment review process including the
review and approval of forecasts and review of valuation models.
Key observations communicated to the Audit & Risk Committee
Our audit procedures did not identify any additional impairments.
We are satisfied that management’s intangible impairments
estimates are reasonable and in accordance with IFRS.
GSK Annual Report 2018 133
Report on the audit of the financial statements continued
Key audit matter description
How the scope of our audit responded to the key audit matter
Valuation of uncertain tax positions, including transfer pricing
and updates to the impacts of the US Tax Reform
The Group operates in numerous jurisdictions and there are
open tax and transfer pricing issues and exposures with UK
and overseas tax authorities that give rise to uncertain tax
positions. The range of possible outcomes for provisions and
contingencies can be wide and management is required to make
certain judgements in respect of estimates of tax exposures and
contingencies in order to assess the adequacy of tax provisions.
At 31 December 2018, the Group has recorded provisions of
£1,082 million in respect of uncertain tax positions (2017 –
£1,175 million).
On 22 December 2017, the US Tax Cuts and Jobs Act was
enacted. There was limited guidance provided by the US
Treasury on how to apply the principles of the reform in practice
and, as such, judgement was required as at 2017 year end.
Management continued to monitor the impact of the reform
on the US business and the associated accounting records.
Given the complexity and uncertainty relating to US tax reform,
management is required to make judgements, assumptions and
interpretations of the tax law. Following additional guidance
released by the Internal Revenue Service during 2018, the
Group reduced its estimate of the 2017 impact of US tax reform
by £125 million.
Valuation of uncertain tax positions is disclosed as a key
accounting judgement and estimate in note 3 of the Group
financial statements with further disclosures included in note 14.
The matter is also discussed in the Audit & Risk Committee
report within the Corporate Governance section of the Annual
Report.
Audit procedures performed
With the support of tax specialists, we assessed the
appropriateness of the uncertain tax provisions by performing the
following audit procedures:
– assessed and challenged provisions for uncertain tax positions,
and focused our work on those jurisdictions where the Group
has the greatest potential exposure and where the highest level
of judgement is required;
– involved our transfer pricing specialists to review the transfer
pricing methodology of the Group and associated approach
to provisioning;
– involved our UK, US and international tax and transfer specialists
to challenge the conclusions reached by management, both in
relation to the expected outcome and the financial impact;
– considered evidence such as the actual results of previous
outturns, recent and current tax authority audits and enquiries,
third party tax advice where obtained and our tax specialists
own knowledge of market practice in relevant jurisdictions; and
– involved Deloitte US Tax specialists to determine the
reasonableness of the judgements in respect of the US
Tax Reform.
Internal controls over financial reporting
We tested the design, implementation and operating effectiveness
of key controls over preparation of tax packs and tax consolidation.
Key observations communicated to the Audit & Risk Committee
We are satisfied that management’s judgements in relation to
uncertain tax positions and the related disclosures are in
accordance with IFRS. From our work we concluded that
management’s judgements were prudent, consistent with prior
periods, within an acceptable range and continue to be
appropriately recorded.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 134
Independent Auditor’s report continued
Report on the audit of the financial statements continued
Key audit matter description
How the scope of our audit responded to the key audit matter
IT systems which impact financial reporting
In our audit plan we set out to place a significant level of reliance
on the IT systems, underpinned by our ability to rely on effective
IT controls. The IT systems within the Group form a critical
component of the Group’s financial reporting activities and
impact all account balances. IT controls, in the context of our
scope for the financial audit, primarily relate to user access
security and change control. The purpose of such controls is to
prevent inappropriate changes being made to IT systems in
relation to application functionality, transactional processing and
direct changes to underlying data. GSK place significant reliance
on their IT systems and the associated controls.
Audit procedures performed over IT systems
We performed the following risk assessment and audit procedures
to test IT controls over the in scope IT systems, which are those
systems that we considered key for financial reporting purposes:
– identified the IT risks for each IT system based on our
understanding of the flows of transactions and the IT environment;
– determined whether each general IT control, individually or
in combination with other controls, is appropriately designed
to address the associated IT risk; and
– tested the design, implementation and operating effectiveness
of the relevant general IT controls.
IT control deficiencies were noted around user access
management for certain in scope IT systems and the associated
infrastructure. The existence of these deficiencies in the year
resulted in a heightened risk that data, reports and automated
system functionality (e.g. calculations) from the affected systems
might not be reliable.
We assessesed the impact of the deficiencies noted around user
access management on all account balances to determine the
specific impact on our audit plan.
Key observations communicated to the Audit & Risk Committee
During the year, the Group implemented a remediation plan to
address the user access deficiencies. This primarily involved the
removal of inappropriate access together with the implementation of
appropriate privileged access management processes and controls
which is planned to be fully complete in 2019. The Group has layers
of business process controls at many levels which help to mitigate
this IT risk. An additional programme to identify and validate these
controls, as well as some enhancement to these controls was
completed during 2018.
The IT deficiencies were reported to the Audit & Risk Committee
throughout the year and have been disclosed in the Audit & Risk
Committee section of the Annual Report. The matter is also
discussed in the Audit & Risk Committee report within the
Corporate Governance section of the Annual Report.
We were satisfied that the mitigating business process controls
addressed the risks of material misstatement.
GSK Annual Report 2018 135
Report on the audit of the financial statements continued
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of
a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and
in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Parent company financial statements
Materiality
£270 million
£67 million
Basic for
determining
materiality
Rationale for
the benchmark
applied
In determining our benchmark for materiality we
considered the metrics used by investors and other
readers of the financial statements. In particular, we
considered: Statutory profit before tax, Adjusted profit
before tax, Revenue and Net cash flows from
operations. However, given the importance of all these
metrics, we concluded that a composite approach was
most appropriate, based on the range of materiality we
determined using the benchmarks listed above.
Using professional judgement we have determined
preliminary materiality to be £270 million to apply
conservatism to our determination given that this is the
first year of our audit.
Metric
Statutory profit before tax
Adjusted profit before tax*
Revenue
Net cash inflow from operating activities
%
5.6
3.3
0.9
3.2
*
A reconciliation between the Statutory profit before tax and
Adjusted profit before tax is detailed in the Adjusting Items
section of the Strategic Report.
The materiality used by the former auditor in the audit
of the prior year’s Group financial statements was
£290 million.
We calculated the range for each of the relevant
benchmarks and used these ranges in exercising our
professional judgement to determine materiality. Our
chosen materiality of £270 million was deemed to be
appropriate taking into account various metrics used by
investors and other readers of the financial statements.
The component materiality allocated to the in-scope
components ranged between £67 million and
£189 million.
The range of materiality allocated across components
by the former auditor in the audit of the prior year’s
Group financial statements was between £15 million
and £154 million.
Materiality was determined using the total assets
benchmark.
The materiality used by the former auditor in the audit
of the prior year’s Parent company financial statements
was £70 million.
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.
We agreed with the Audit & Risk Committee that we would report to the Committee all audit differences in excess of £10 million (2017 –
£10 million was used by the previous auditor) as well as differences below that threshold that, in our view, warranted reporting on qualitative
grounds. We also report to the Audit & Risk Committee on disclosure matters that we identified when assessing the overall presentation of
the financial statements.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 136
Independent Auditor’s report continued
Other information
The directors are responsible for the other information. The other information comprises the information included in the Annual Report,
other than the financial statements and our auditor’s report thereon.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report,
we do not express any form of assurance conclusion 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 such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material
misstatement in 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 in respect of these matters.
We summarise below our work in relation to areas of the other information including those areas upon which we are specifically required to
report:
Matters we are specifically required to report
Our responsibility
Fair, balanced and understandable
Consider whether the statement given by the directors that they consider the
Annual Report and financial statements 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
is materially inconsistent with our knowledge obtained from the audit.
Our reporting
We consider that the directors’ statement is materially
consistent with our knowledge obtained from the audit.
Audit & Risk Committee report
Consider whether it deals appropriately with those matters that we reported
to the Audit & Risk Committee.
All matters we reported have been appropriately covered in
the Audit & Risk Committee report.
Directors’ statement of compliance with the UK Corporate Governance
Code (‘the Code’)
Consider whether the parts of the Directors’ statement required under the
Listing Rules relating to the Parent company’s compliance with the Code
containing provisions specified for review by the auditor in accordance with
Listing Rule 9.8.10R(2) properly discloses any departure from a relevant
provision of the Code.
Viability statement
Review the confirmation and description in the light of the knowledge
gathered during the audit, including making enquiries and considering the
directors’ processes used to support the statements made.
Consider if the statements are aligned with the relevant provisions of the
UK Corporate Governance Code (the ‘Code’).
Directors’ Remuneration report
Report whether the part of the directors’ remuneration report to be audited
is properly prepared and the disclosures specified by the Companies Act
have been made.
Strategic report and Directors’ report
Report whether they are consistent with the audited financial statements
and are prepared in accordance with applicable legal requirements.
Report if we have identified any material misstatements in either report in
the light of the knowledge and understanding of the group and of the Parent
company and their environment obtained in the course of the audit.
We did not identify any such matters.
As set out in the section ‘Conclusions relating to going
concern, principal risks and viability statement’, we have
nothing material to report, add or draw attention to in respect
of these matters.
As set out in the section ‘Opinions on other matters
prescribed by the Companies Act 2006’, in our opinion, the
part of the directors’ remuneration report to be audited has
been prepared in accordance with the Companies Act 2006.
As set out in the section ‘Opinions on other matters
prescribed by the Companies Act 2006’, in our opinion,
based on the work undertaken in the course of the audit, the
information in these reports is consistent with the audited
financial statements and has been prepared in accordance
with applicable legal requirements.
GSK Annual Report 2018
137
Other information continued
Other reporting on other information
Our responsibility
Alternative performance measures (APMs)
APMs are measures that are not defined by generally accepted accounting
practice (GAAP) and therefore are not typically included in the financial
statement part of the Annual Report. The Group use APMs, such as adjusted
profit, free cash flow and constant currency growth rates in some of its
quarterly and annual reporting of financial performance.
We have reviewed and assessed management’s calculation and reporting of
these metrics to assess consistency with the Group’s published definitions
and policies for these items.
We have also considered and assessed whether the use of APMs in the
Group’s reporting results is consistent with the guidelines produced by
regulators such as the European Securities and Markets Authority (‘ESMA’)
guidelines on the use of APMs and the FRC Alternative Performance Measures
Thematic Review published in November 2017.
We also considered whether there was an appropriate balance between the
use of statutory metrics and APMs, in addition to whether clear definitions and
reconciliation for APMs used in financial reporting.
Approach to Brexit
Consider whether the Brexit risks have been appropriately reflected.
The Group’s approach to Brexit is outlined in the Strategic report
(page 36).
Dividends and distribution policy
Consider whether the dividends policy is transparent and the dividends paid
are consistent with the policy.
Our reporting
Based on the work undertaken in the course of the audit, in
our opinion:
– the use, calculation and disclosure of APMs is consistent
with the Group’s published definitions and policies;
– the use of APMs in the Group’s reporting results is
consistent with the guidelines produced by ESMA
and FRC; and
– there is an appropriate balance between the use of
statutory metrics and APMs, together with clear definitions
and reconciliation for APMs used in financial reporting.
Based on the work undertaken in the course of the audit, in
our opinion, the risks in relation to Brexit have been
appropriately reflected.
Based on the work undertaken in the course of the audit, in
our opinion, the dividends policy is appropriately disclosed
and dividends paid are consistent with the policy.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
138
Independent Auditor’s report continued
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement,
the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view,
and for such internal control as the directors 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 Group’s and 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 Group
or the Parent company or to cease operations, or have no realistic
alternative but to do so.
Auditor’s 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 auditor’s
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.
– discussing among the engagement team including significant
component audit teams and involving relevant internal specialists,
including tax, valuations, pensions, IT and industry specialists
regarding how and where fraud might occur in the financial
statements and any potential indicators of fraud; and
– obtaining an understanding of the legal and regulatory frameworks
that the Group operates in, focusing on those laws and regulations
that had a direct effect on the financial statements, such as
provisions of the UK Companies Act, pensions legislation and tax
legislations or that had a fundamental effect on the operations of
the Group, including the Good Clinical Practice, the FDA
regulations, General Data Protection requirements, Anti-bribery
and corruption policy and the Foreign Corrupt Practices Act.
Audit response to risks identified
Our procedures to respond to risks identified included the following:
– reviewing the financial statement disclosures and testing to
supporting documentation to assess compliance with relevant
laws and regulations discussed above;
– enquiring of management, the Audit & Risk Committee and
in-house and external legal counsel concerning actual and
potential litigation and claims;
– performing analytical procedures to identify any unusual or
unexpected relationships that may indicate risks of material
misstatement due to fraud; and
– reading minutes of meetings of those charged with governance
and reviewing internal audit reports.
Details of the extent to which the audit was considered capable of
detecting irregularities, including fraud are set out below.
We have also considered the risks noted above in addressing the risk
of fraud through management override of controls:
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
auditor’s report.
Extent to which the audit was considered capable of
detecting irregularities, including fraud
– testing the appropriateness of journal entries and other
adjustments;
– assessing whether the judgements made in making accounting
estimates are indicative of a potential bias; and
– evaluating the business rationale of any significant transactions
that are unusual or outside the normal course of business.
We identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, and then design
and perform audit procedures responsive to those risks, including
obtaining audit evidence that is sufficient and appropriate to provide
a basis for our opinion.
We also communicated relevant identified laws and regulations and
potential fraud risks to all engagement team members and significant
component audit teams, and remained alert to any indications of
fraud or non-compliance with laws and regulations throughout
the audit.
Identifying and assessing potential risks related to
irregularities
In identifying and assessing the risks of material misstatement in
respect of irregularities, including fraud and non-compliance with
laws and regulations, our procedures included the following:
– enquiring of management, internal audit and the Audit & Risk
Committee, including obtaining and reviewing supporting
documentation, concerning the Group’s policies and procedures
relating to:
– identifying, evaluating and complying with laws and regulations
and whether they were aware of any instances of non-
compliance;
– detecting and responding to the risks of fraud and whether they
have knowledge of any actual, suspected or alleged fraud;
– the internal controls established to mitigate risks related to fraud
or non-compliance with laws and regulations;
Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act
2006
In our opinion, the part of the directors’ remuneration report to be
audited has been properly prepared in accordance with the
Companies Act 2006.
In our opinion, based on the work undertaken in the course of the
audit:
– the information given in the Strategic report and the Directors’
report for the financial year for which the financial statements are
prepared is consistent with the financial statements; and
– the Strategic report and the Directors’ report have been prepared
in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and of
the Parent company and their environment obtained in the course of
the audit, we have not identified any material misstatements in the
strategic report or the directors’ report.
GSK Annual Report 2018 139
Matters on which we are required to report by
exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
– we have not received all the information and explanations we
require for our audit; or
– adequate accounting records have not been kept by the Parent
company, or returns adequate for our audit have not been received
from branches not visited by us; or
– the Parent company financial statements are not in agreement with
the accounting records and returns.
We have nothing to report in respect of these matters.
Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in
our opinion certain disclosures of directors’ remuneration have not
been made or the part of the directors’ remuneration report to be
audited is not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
Other matters
Auditor tenure
Following the recommendation of the Audit & Risk Committee, we
were appointed by the Company at its annual general meeting on 3
May 2018 to audit the financial statements of GlaxoSmithKline plc for
the year ending 31 December 2018 and subsequent financial
periods. The period of uninterrupted engagement including previous
renewals and reappointments of the firm is accordingly one year.
Consistency of the audit report with the additional report to the
Audit & Risk Committee
Our audit opinion is consistent with the additional report to the Audit
& Risk Committee we are required to provide in accordance with
ISAs (UK).
Use of our report
This report is made solely to the Company’s members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
Company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company’s members as a
body, for our audit work, for this report, or for the opinions we have
formed.
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.
Deloitte LLP
Statutory Auditor
London, United Kingdom
11 March 2019
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 140
Consolidated income statement
for the year ended 31 December 2018
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 attributable to non-controlling interests
Profit attributable to shareholders
Basic earnings per share (pence)
Diluted earnings per share (pence)
Notes
6
7
8
11
12
13
14
15
15
2018
£m
30,821
(10,241)
20,580
(9,915)
(3,893)
299
(1,588)
5,483
81
(798)
3
31
4,800
(754)
4,046
423
3,623
4,046
73.7p
72.9p
2017
£m
30,186
(10,342)
19,844
(9,672)
(4,476)
356
(1,965)
4,087
65
(734)
94
13
3,525
(1,356)
2,169
637
1,532
2,169
31.4p
31.0p
2016
£m
27,889
(9,290)
18,599
(9,366)
(3,628)
398
(3,405)
2,598
72
(736)
–
5
1,939
(877)
1,062
150
912
1,062
18.8p
18.6p
Consolidated statement of comprehensive income
for the year ended 31 December 2018
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 equity investments
Deferred tax on fair value movements on equity investments
Reclassification of fair value movements on equity investments
Deferred tax reversed on reclassification of equity 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
Deferred tax reversed on reclassification of cash flow hedges
Items that will not be reclassified to income statement:
Exchange movements on overseas net assets of non-controlling interests
Fair value movements on equity investments
Deferred tax on fair value movements on equity investments
Remeasurement gains/(losses) on defined benefit plans
Tax on remeasurement of defined benefit plans
Other comprehensive income 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
2018
£m
4,046
(480)
–
–
–
140
(22)
(175)
20
(517)
(1)
180
10
728
(146)
771
254
4,300
3,878
422
4,300
2017
£m
2,169
2016
£m
1,062
462
109
(14)
47
(42)
(18)
(10)
–
–
–
534
646
–
251
–
(245)
51
2
2
1
–
708
(149)
603
549
(221)
179
713
2,882
2,394
488
2,882
(475)
126
254
962
2,024
1,271
753
2,024
GSK Annual Report 2018 Consolidated balance sheet
as at 31 December 2018
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
Derivative financial instruments
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
141
Notes
2018
£m
2017
£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
42
39
30
33
33
34
34
11,058
5,789
17,202
236
1,322
3,887
69
1,576
41,139
5,476
229
6,423
188
84
3,874
653
16,927
58,066
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
(5,793)
(837)
(2,825)
(1,076)
(14,037)
(20,970)
(127)
(965)
(732)
(22,491)
(74)
(995)
(629)
(26,569)
(20,271)
(14,264)
(272)
(1,156)
(3,125)
(691)
(1)
(5,449)
(938)
(31,903)
(54,394)
3,672
1,345
3,091
(2,137)
2,061
4,360
(688)
3,672
(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
The financial statements on pages 140 to 218 were approved by the Board on 11 March 2019 and signed on its behalf by
Philip Hampton
Chairman
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 142
Consolidated statement of changes in equity
for the year ended 31 December 2018
Shareholders’ equity
At 1 January 2016
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
Derecognition of liabilities with non-controlling interests
Changes in non-controlling interests
Shares issued
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
Shares issued
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
Implementation of IFRS 15
Implementation of IFRS 9
Share
capital
£m
1,340
Share
premium
£m
2,831
–
–
–
–
–
–
–
–
2
–
–
–
–
–
–
–
–
–
–
–
–
87
36
–
–
–
Retained
earnings
£m
(1,397)
912
284
1,196
–
(4,850)
(2,013)
1,244
17
–
466
(381)
319
7
Other
reserves
£m
2,340
–
75
75
–
–
–
–
–
–
(576)
381
–
–
1,342
2,954
(5,392)
2,220
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
–
–
–
55
10
–
–
–
1,532
899
2,431
–
–
(3,906)
–
–
581
(520)
333
(4)
1,343
3,019
(6,477)
–
–
–
–
(4)
277
At 31 December 2017, as adjusted
1,343
3,019
(6,204)
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
Derecognition of non-controlling interests in Consumer
Healthcare Joint Venture
Dividends to shareholders
Realised profits on disposal of equity investments
Share of associates and joint ventures realised profits on
disposal of equity investments
Shares issued
Write-down of shares held by ESOP Trusts
Share-based incentive plans
Tax on share-based incentive plans
At 31 December 2018
–
–
–
–
–
–
–
–
–
2
–
–
–
–
–
–
–
–
–
–
–
72
–
–
–
1,345
–
3,091
3,623
124
3,747
–
–
4,056
(3,927)
56
38
–
(265)
360
2
(2,137)
Total
£m
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)
(4)
(11)
(83)
3,623
255
3,878
–
–
Non-controlling
interests
£m
3,764
150
603
753
(534)
–
(159)
–
15
–
–
–
–
–
3,839
637
(149)
488
(789)
21
–
(2)
–
–
–
–
–
Total
equity
£m
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)
3,557
3,489
–
–
3,557
423
(1)
422
(570)
21
(4)
(11)
3,474
4,046
254
4,300
(570)
21
4,056
(3,927)
(4,118)
–
(62)
(3,927)
–
–
74
–
360
2
4,360
–
–
–
–
–
–
(688)
–
–
74
–
360
2
3,672
–
(37)
(37)
–
–
–
–
–
(656)
520
–
–
2,047
–
(288)
1,759
–
131
131
–
–
–
–
(56)
(38)
–
265
–
–
2,061
GSK Annual Report 2018 Consolidated cash flow statement
for the year ended 31 December 2018
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 interests in associates
Decrease in liquid investments
Interest received
Dividends from associates, joint ventures and equity investments
Net cash outflow 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 short-term Notes
Increase in/(repayment of) other 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
143
Notes
36
2018
£m
2017
£m
2016
£m
4,046
5,701
9,747
(1,326)
8,421
2,169
6,089
8,258
(1,340)
6,918
1,062
7,044
8,106
(1,609)
6,497
(1,344)
(1,545)
(1,543)
38
38
20
38
33
168
(452)
256
(309)
151
(153)
–
26
(10)
3
–
72
39
(1,553)
–
74
(9,320)
10,138
(2,067)
81
(28)
(766)
(3,927)
(570)
21
(25)
(6,389)
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
(2,636)
(564)
(23)
(781)
(3,906)
(779)
21
93
(6,380)
(74)
89
–
–
(865)
1,013
(18)
(732)
(4,850)
(534)
–
(421)
(6,392)
Increase/(decrease) in cash and bank overdrafts
37
479
(905)
(1,164)
Cash and bank overdrafts at beginning of year
Exchange adjustments
Increase/(decrease) 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
Cash and cash equivalents reported in assets held for sale
Overdrafts
3,600
8
479
4,087
3,874
485
4,359
(272)
4,087
4,605
(100)
(905)
3,600
3,833
–
3,833
(233)
3,600
5,486
283
(1,164)
4,605
4,897
–
4,897
(292)
4,605
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 144
Notes to the financial statements
1. Presentation of the financial statements
Description of business
Implementation of IFRS 9 ‘Financial instruments’
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 and dermatology.
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’.
Financial period
These financial statements cover the financial year from 1 January to
31 December 2018, with comparative figures for the financial years
from 1 January to 31 December 2017 and, where appropriate, from
1 January to 31 December 2016.
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.
The Group has applied IFRS 9 ‘Financial instruments’ with effect
from 1 January 2018. IFRS 9 introduces new requirements for the
classification and measurement of financial assets and financial
liabilities, impairments for financial assets and general hedge
accounting.
Details of these new requirements as well as their impact on the
Group’s consolidated financial statements are described below.
The Group has adopted IFRS 9 retrospectively but with certain
permitted exceptions as detailed below.
Classification and measurement of financial assets
The date of initial application was 1 January 2018. The Group has
not applied the requirements of IFRS 9 to instruments that were
derecognised prior to 1 January 2018 and has not restated prior
years. Any difference between the previous carrying amount and the
revised carrying amount at 1 January 2018 has been recognised as
an adjustment to opening retained earnings at 1 January 2018.
All financial assets that are within the scope of IFRS 9 are required to
be measured at amortised cost or fair value, with movements through
other comprehensive income or the income statement on the basis of
GSK’s business model for managing the financial assets and the
contractual cash flow characteristics of the financial assets.
IFRS 9 had the following impact on the Group’s assets:
– The Group has elected to recognise movements in the fair value of
equity investments in other comprehensive income under IFRS 9.
Investments in equity instruments that were previously classified as
available-for-sale financial assets measured at fair value have been
designated as measured at fair value through other comprehensive
income (FVTOCI) under IFRS 9. As a result, fair value movements
are now recorded in other comprehensive income along with gains
or losses on disposal of the investments.
– The Group’s investments in limited life funds included in Other
investments that were previously classified as available-for-sale
financial assets under IAS 39 and measured at fair value have
been classified as measured at fair value through profit or loss
(FVTPL) under IFRS 9 as the contractual cash flows are not solely
payments of principal and interest on the principal amount
outstanding.
– Liquid investments that were classified as available-for-sale
financial assets measured at fair value under IAS 39 have been
classified as measured at amortised cost under IFRS 9 as they are
held within a business model, the objective of which is to collect
the contractual cash flows.
– Investments in money market funds included in Cash and cash
equivalents that were classified as amortised cost financial assets
under IAS 39 have been classified as FVTPL under IFRS 9 as the
contractual cash flows are not solely payments of principal and
interest on the principal amount outstanding.
– The Group’s trade receivables were all classified as financial
assets measured at amortised cost under IAS 39. Under IFRS 9,
the business model under which each portfolio of trade
receivables held has been assessed. The Group has portfolios
in each of the three business models under IFRS 9: to collect the
contractual cash flows (measured at amortised cost), to sell the
contractual cash flows (measured at FVTPL), and both to collect
and to sell the contractual cash flows (measured at FVTOCI).
GSK Annual Report 2018 145
Impact of new standards on each financial
statement line item
The table below shows the amount of adjustment for each financial
statement line item affected by the application of IFRS 9 and IFRS 15
at 1 January 2018.
As previously
reported
£m
6,000
IFRS 9
adjustments
£m
(15)
IFRS 15
adjustments
£m
–
Trade and other receivables
Liquid investments
Other payables - returns
and rebates
Other payables - deferred
income
Deferred tax assets
78
(3,463)
(240)
3,796
1
–
–
3
Total effect on net assets
3,489
(11)
Fair value reserve
Retained earnings
329
(6,477)
(288)
277
Total effect on equity
3,489
(11)
As restated
£m
5,985
79
(3,492)
–
(29)
27
(213)
(2)
(4)
–
(4)
(4)
3,797
3,474
41
(6,204)
3,474
The £288 million transfer between retained earnings and the
fair value reserve resulted from the reclassification of previous
impairment losses on equity investments now designated as
measured at FVTOCI under IFRS 9 from retained earnings to
the fair value reserve.
The application of IFRS 9 and IFRS 15 has had no impact on the
consolidated cash flows of the Group.
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 219 and the accounting policies are given on page 220.
1. Presentation of the financial statements continued
– Amounts receivable under insurance contracts included in Other
non-current assets were held at FVTPL or amortised cost under
IAS 39. Under IFRS 9, as the contractual cash flows are not
solely payments of principal and interest on the principal amount
outstanding, the amounts receivable are classified as measured
at FVTPL.
There were no material changes in carrying value of financial assets
as a result of these changes in measurement basis.
Impairment of financial assets
IFRS 9 requires an expected credit loss (ECL) model to be applied
to financial assets rather than the incurred credit loss model required
under IAS 39. The expected credit loss model requires the Group
to account for expected losses as a result of credit risk on initial
recognition of financial assets and to recognise changes in those
expected credit losses at each reporting date.
12-month ECLs are applied to all financial assets not measured
at FVTPL except for net trade receivables which are measured
reflecting lifetime ECLs using the simplified approach. An additional
ECL allowance of £15 million for trade receivables was recognised
on transition to IFRS 9. There were no other transition adjustments
arising from the change in impairment basis.
The additional ECL allowance of £15 million at 1 January 2018 has
been recognised against opening retained earnings, together with
a related deferred tax impact of £3 million.
General hedge accounting
The new general hedge accounting requirements retain the three
types of hedge accounting which were available under IAS 39:
fair value hedges, cash flow hedges and net investment hedges.
However, the effectiveness testing requirements have been
simplified.
The Group has applied the IFRS 9 hedge accounting requirements
prospectively from the date of initial application of 1 January 2018.
All existing hedging relationships are eligible, and continued to be
effective, under IFRS 9.
Implementation of IFRS 15 ‘Revenue from contracts
with customers’
The Group has applied IFRS 15 ‘Revenue from contracts with
customers’ with effect from 1 January 2018. IFRS 15 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.
GSK adopted IFRS 15 applying the modified retrospective
approach. IFRS 15 did not have a material impact on the amount
or timing of recognition of reported revenue. At 1 January 2018, a
cumulative adjustment to decrease retained earnings of £4 million
was recognised. In accordance with the requirements of IFRS 15
where the modified retrospective approach is adopted, prior year
results have not been restated.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
146
Notes to the financial statements continued
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.
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.
The fair value of contingent consideration liabilities are re-assessed
at each balance sheet date with changes recognised in the income
statement. Payments of contingent consideration reduce the balance
sheet liability and as a result are not recorded in the income statement.
The part of each payment relating to the original estimate of the fair
value of the contingent consideration on acquisition 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
date is reported within operating cash flows.
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.
Revenue (applicable from 1 January 2018)
The Group receives revenue for supply of goods to external
customers against orders received. The majority of contracts that
GSK enters into relate to sales orders containing single performance
obligations for the delivery of pharmaceutical, vaccine and consumer
healthcare products. The average duration of a sales order is less
than 12 months.
Product revenue is recognised when control of the goods is passed
to the customer. The point at which control passes is determined by
each customer arrangement, but generally occurs on delivery to the
customer.
Product revenue represents net invoice value including fixed and
variable consideration. Variable consideration arises on the sale of
goods as a result of discounts and allowances given and accruals for
estimated future returns and rebates. Revenue is not recognised in
full until it is highly probable that a significant reversal in the amount
of cumulative revenue recognised will not occur.
GSK Annual Report 2018 147
2. Accounting principles and policies continued
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. Once the uncertainty associated with
the returns and rebates is resolved, revenue is adjusted accordingly.
GSK enters into development and marketing collaborations and
out-licences of the Group’s compounds or products to other parties.
These contracts give rise to fixed and variable consideration from
upfront payments, development milestones, sales-based milestones
and royalties.
Income dependent on the achievement of a development milestone
is recognised when it is highly probable that a significant reversal in
the amount of cumulative revenue recognised will not occur, which
is usually when the related event occurs. Sales-based milestone
income is recognised when it is highly probable that the sales
threshold will be reached.
Sales-based royalties on a licence of intellectual property are not
recognised until the relevant product sale occurs.
If the time between the recognition of revenue and payment from
the customer is expected to be more than one year and the impact
is material, the amount of consideration is discounted using
appropriate discount rates.
Value added tax and other sales taxes are excluded from revenue.
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.
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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 148
Notes to the financial statements continued
2. Accounting principles and policies continued
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.
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.
Expected credit losses are recognised in the income statement on
financial assets measured at amortised cost and at fair value through
other comprehensive income apart from equity investments.
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.
GSK Annual Report 2018 149
2. Accounting principles and policies continued
Financial instruments (applicable from 1 January 2018)
Financial assets
Financial assets are measured at amortised cost, fair value through
other comprehensive income (FVTOCI) or fair value through profit
or loss (FVTPL). The measurement basis is determined by reference
to both the business model for managing the financial asset and
the contractual cash flow characteristics of the financial asset. For
financial assets other than trade receivables a 12-month expected
credit loss (ECL) allowance is recorded on initial recognition. If there
is subsequent evidence of a significant increase in the credit risk of
an asset, the allowance is increased to reflect the full lifetime ECL.
If there is no realistic prospect of recovery, the asset is written off.
Other investments
Other investments comprise equity investments and investments
in limited life funds. The Group has elected to designate equity
investments as measured at FVTOCI. They are initially recorded at
fair value plus transaction costs and then remeasured at subsequent
reporting dates to fair value. Unrealised gains and losses are
recognised in other comprehensive income.
On disposal of the equity investment, gains and losses that have
been deferred in other comprehensive Income are transferred directly
to retained earnings. Investments in limited life funds are measured at
FVTPL. They are initially recorded at fair value and then remeasured
at subsequent reporting dates to fair value. Unrealised gains and
losses are recognised in the income statement.
Dividends on equity investments and distributions from funds are
recognised in the income statement when the Group’s right to
receive payment is established.
Purchases and sales of Other investments are accounted for on
the trade date.
Trade receivables
Trade receivables are measured in accordance with the business
model under which each portfolio of trade receivables is held. The
Group has portfolios in each of the three business models under IFRS
9: to collect the contractual cash flows (measured at amortised cost),
to sell the contractual cash flows (measured at FVTPL), and both to
collect and to sell the contractual cash flows (measured at FVTOCI).
Trade receivables measured at amortised cost are carried at the
original invoice amount less allowances for expected credit losses.
Expected credit losses are calculated in accordance with the simplified
approach permitted by IFRS 9, using a provision matrix applying
lifetime historical credit loss experience to the trade receivables. The
expected credit loss rate varies depending on whether and the extent
to which settlement of the trade receivables is overdue and it is also
adjusted as appropriate to reflect current economic conditions and
estimates of future conditions. For the purpose of determining credit
loss rates, customers are classified into groupings that have similar
loss patterns. The key drivers of the loss rate are the nature of the
business unit and the location and type of customer.
When a trade receivable is determined to have no reasonable
expectation of recovery it is written off, firstly against any expected
credit loss allowance available and then to the income statement.
Subsequent recoveries of amounts previously provided for or written
off are credited to the income statement. Long-term receivables are
discounted where the effect is material.
Cash and cash equivalents
Cash held in deposit accounts is measured at amortised cost.
Investments in money market funds are held at fair value through
profit or loss.
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.
Derivative financial instruments
Derivative financial instruments are used to manage exposure to
market risks. The principal derivative instruments used by GSK are
foreign currency swaps, interest rate swaps, foreign exchange
forward contracts and options. The Group does not hold or issue
derivative financial instruments for trading or speculative purposes.
Derivative financial assets and liabilities, including derivatives
embedded in host contracts which have been separated from the
host contract, are classified as held-for-trading and are measured at
fair value. Changes in the fair value of any derivative instruments that
do not qualify for hedge accounting are recognised immediately in
the income statement.
Hedge accounting
Derivatives designated as hedging instruments are classified on
inception as cash flow hedges, net investment hedges or fair value
hedges.
Changes in the fair value of derivatives designated as cash flow
hedges are recognised in other comprehensive income to the extent
that the hedges are effective. Ineffective portions are recognised in
profit or loss immediately. Amounts deferred in other comprehensive
income are reclassified to the income statement when the hedged
item affects profit or loss.
Net investment hedges are accounted for in a similar way to cash
flow hedges.
Changes in the fair value of derivatives designated as fair value
hedges are recorded in the income statement, together with the
changes in the fair value of the hedged asset or liability.
Taxation
Current tax is provided at the amounts expected to be paid applying
tax rates that have been enacted or substantively enacted by the
balance sheet date.
Deferred tax is provided in full, on temporary differences arising
between the tax bases of assets and liabilities and their carrying
amounts in the financial statements. Deferred tax assets are
recognised to the extent that it is probable that future taxable profits
will be available against which the temporary differences can be
utilised. Deferred tax is provided on temporary differences arising
on investments in subsidiaries, associates and joint ventures, except
where the timing of the reversal of the temporary difference can be
controlled and it is probable that the temporary difference will not
reverse in the foreseeable future. Deferred tax is provided using rates
of tax that have been enacted or substantively enacted by the
balance sheet date.
Where an uncertain tax position is identified, management will make
a judgement as to what the probable outcome will be. Where it is
assessed that an economic outflow is probable to arise a 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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 150
Notes to the financial statements continued
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.
Derivative financial instruments and hedging
Derivative financial instruments are used to manage exposure to
market risks. The principal derivative instruments used by GSK are
foreign currency swaps, interest rate swaps, foreign exchange
forward contracts and options. The Group does not hold or issue
derivative financial instruments for trading or speculative purposes.
Derivative financial instruments are classified as held-for-trading and
are carried in the balance sheet at fair value. Derivatives designated
as hedging instruments are classified on inception as cash flow
hedges, net investment hedges or fair value hedges.
Changes in the fair value of derivatives designated as cash flow
hedges are recognised in other comprehensive income to the extent
that the hedges are effective. Ineffective portions are recognised in
profit or loss immediately. Amounts deferred in other comprehensive
income are reclassified to the income statement when the hedged
item affects profit or loss.
Net investment hedges are accounted for in a similar way to cash
flow hedges.
Changes in the fair value of derivatives designated as fair value
hedges are recorded in the income statement, together with the
changes in the fair value of the hedged asset or liability.
Changes in the fair value of any derivative instruments that do not
qualify for hedge accounting are recognised immediately in the
income statement.
2. Accounting principles and policies continued
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.
Revenue (applicable up to 31 December 2017)
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. 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.
Royalty income is recognised on an accruals basis in accordance
with the terms of the relevant licensing agreements.
Financial instruments (applicable up to 31 December 2017)
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.
GSK Annual Report 2018 151
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 critical
accounting judgements and key sources of estimation uncertainty.
Turnover
Reported Group turnover for 2018 was £30,821 million (2017 –
£30,186 million).
Estimates
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.
Revenue is not recognised in full until it is highly probable that a
significant reversal in the amount of cumulative revenue recognised
will not occur. The amount of turnover recognised in the year from
performance obligations satisfied in previous periods is set out in
Note 6, ‘Turnover and segment information’.
Future events could cause the assumptions on which the accruals
are based to change, which could affect the future results of the
Group.
Taxation
The tax charge for the year was £754 million (2017 – £1,356 million).
At December 2018, current tax payable was £965 million (2017 –
£995 million), non-current corporation tax payable was £272 million
(2017 – £411 million) and current tax recoverable was £229 million
(2017 – £258 million).
Judgement
The Group has open tax issues with a number of revenue authorities.
Management makes a judgement of whether there is sufficient
information to be able to make a reliable estimate of the outcome
of the dispute. If insufficient information is available, no provision
is made.
Estimates
If sufficient information is available, in estimating a potential tax
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.
At 31 December 2018, the Group had recognised provisions
of £1,082 million in respect of uncertain tax positions (2017 –
£1,175 million). Because of the nature of these uncertain positions,
it is not practicable to give meaningful sensitivity estimates.
Factors affecting the tax charge in future years are set out in Note 14,
‘Taxation’. GSK continues to believe that it has made adequate
provision for the liabilities likely to arise from open assessments.
Where open issues exist the ultimate liability for such matters may
vary from the amounts provided and is dependent upon the outcome
of negotiations with the relevant tax authorities or, if necessary,
litigation proceedings.
Legal and other disputes
Legal costs for the year were £117 million (2017 – £166 million).
At 31 December 2018 provisions for legal and other disputes
amounted to £219 million (2017 – £186 million).
Judgement
Management makes a judgement of whether there is sufficient
information to be able to make a reliable estimate of the likely
outcome of the dispute and legal and other expenses arising from
claims against the Group. If insufficient information is available,
no provision is made and disclosure of the claim is given.
Estimates
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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 152
Notes to the financial statements continued
3. Key accounting judgements and estimates continued
Contingent consideration and put option liabilities
Pensions and other post-employment benefits
The 2018 income statement charge for contingent consideration
and put option liabilities was £1,851 million (2017 – £2,134 million).
At 31 December 2018, the liability for contingent consideration
amounted to £6,286 million (2017 – £6,172 million). Of this amount,
£5,937 million (2017 – £5,542 million) related to the acquisition
of the former Shionogi-ViiV Healthcare joint venture in 2012 and
£296 million (2017 – £584 million) related to the acquisition of the
Vaccines business from Novartis in 2015.
Estimates
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’.
In June 2018, GSK acquired Novartis’ shareholding in the Consumer
Healthcare Joint Venture for $13 billion. This resulted in a net charge
in the period of £658 million to remeasure the Consumer Healthcare
Joint Venture put option to the agreed valuation.
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. 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 £1,240 million at 31 December 2018
(2017 – £1,304 million). Sensitivity analysis is given in Note 27,
‘Trade and other payables’.
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 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. The overall impact on earnings is not expected to be
material. Finance lease obligations at 31 December 2018 are set
out in Note 31, ‘Net debt’ and the undiscounted commitments
under non-cancellable operating leases are set out in Note 41,
‘Commitments’.
Judgement
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.
Four UK schemes are in surplus, with a combined surplus of £711
million at 31 December 2018 (2017 – £470 million). GSK has made
the judgement that these amounts meet the requirements of
recoverability.
Estimates
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’.
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 £707 million and
an increase in the annual pension cost of approximately £28 million.
The selection of different assumptions could affect the future results
of the Group.
GSK will implement IFRS 16 applying the modified retrospective
approach. For larger leases, the right of use asset at 1 January 2019
will be calculated based on the original lease inception date and for
smaller leases the right of use asset will be set equal to the lease
liability, adjusted for any prepaid or accrued lease payments, onerous
lease provisions and business combination fair value adjustments.
On the transition date of 1 January 2019, the Group expects to
recognise right of use assets of £1.1 billion and a lease liability of
£1.3 billion, including existing finance leases. The implementation
is expected to reduce net assets and total equity by £0.1 billion.
GSK Annual Report 2018 153
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:
Average rates:
US$/£
Euro/£
Yen/£
2018
1.33
1.13
147
2017
2016
Period end rates:
1.30
1.15
145
1.36
1.23
149
US$/£
Euro/£
Yen/£
2018
1.27
1.11
140
2017
2016
1.35
1.13
152
1.24
1.17
144
6. Turnover and 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.
Corporate and other unallocated costs included the costs of corporate functions.
Revenue recognised in the year from performance obligations satisfied in previous periods totalled £426 million and included £122 million
reported in turnover arising from changes to prior year estimates of RAR accruals and £299 million of royalty income.
Turnover by segment
Pharmaceuticals
Vaccines
Consumer Healthcare
Pharmaceuticals turnover by therapeutic area
Respiratory
HIV
Immuno-inflammation
Established Pharmaceuticals
Vaccines turnover by category
Meningitis
Influenza
Shingles
Established Vaccines
2018
£m
17,269
5,894
7,658
30,821
2018
£m
6,928
4,722
472
5,147
17,269
2018
£m
881
523
784
3,706
5,894
2017
£m
17,276
5,160
7,750
30,186
2017
£m
6,991
4,350
377
5,558
17,276
2017
£m
890
488
22
3,760
5,160
2016
£m
16,104
4,592
7,193
27,889
2016
£m
6,510
3,556
340
5,698
16,104
2016
£m
662
414
–
3,516
4,592
During 2018, the US operations of the Pharmaceuticals and Vaccines businesses made sales to three wholesalers of approximately
£2,709 million (2017 – £2,449 million; 2016 – £2,139 million), £2,962 million (2017 – £3,043 million; 2016 – £2,691 million) and
£2,656 million (2017 – £2,356 million; 2016 – £2,129 million) respectively, after allocating final-customer discounts to the wholesalers.
Consumer Healthcare turnover by category
Wellness
Oral care
Nutrition
Skin health
2018
£m
3,940
2,496
643
579
7,658
2017
£m
4,001
2,466
680
603
7,750
2016
£m
3,726
2,223
674
570
7,193
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 154
Notes to the financial statements continued
6. Turnover and 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
2018
£m
8,420
(2,676)
5,744
1,943
1,517
9,204
(459)
(3,262)
5,483
81
(798)
3
31
4,800
(754)
4,046
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 costs, which include impairments of tangible assets and
computer software; transaction-related adjustments related to significant acquisitions; proceeds and costs of disposals of associates,
products and businesses, significant legal charges and expenses on the settlement of litigation and government investigations, other
operating income other than royalty income and other items, 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
2018
£m
506
123
629
395
146
1,170
106
580
1,856
2017
£m
551
96
647
405
135
1,187
144
591
1,922
2017
£m
8,667
2016
£m
7,976
(2,740)
(2,488)
5,927
1,644
1,373
8,944
(376)
(4,481)
4,087
65
(734)
94
13
3,525
(1,356)
2,169
5,488
1,429
1,116
8,033
(362)
(5,073)
2,598
72
(736)
–
5
1,939
(877)
1,062
2016
£m
440
211
651
315
126
1,092
94
588
1,774
GSK Annual Report 2018 155
2016
£m
29
88
117
34
46
197
24
68
289
(15)
(10)
(25)
(19)
(8)
(52)
(26)
(9)
(87)
2018
£m
51
15
66
5
4
75
14
261
350
(4)
(1)
(5)
–
–
(5)
–
(8)
(13)
2018
£m
869
502
1,371
9,966
10,559
21,896
1,141
23,037
2017
£m
38
10
48
13
10
71
3
995
1,069
(13)
(2)
(15)
–
(1)
(16)
–
(36)
(52)
2017
£m
2,017
522
2,539
9,707
2,003
14,249
868
15,117
(21,621)
(13,178)
236
129
1,723
168
3,672
183
2
1,252
113
3,489
6. Turnover and segment information continued
PP&E, intangible asset and goodwill impairment by segment
Pharmaceuticals
Pharmaceuticals R&D
Pharmaceuticals, including R&D
Vaccines
Consumer Healthcare
Segment impairment
Corporate and other unallocated impairment
Other reconciling items between segment impairment and total impairment
Total impairment
PP&E and intangible asset impairment reversals by segment
Pharmaceuticals
Pharmaceuticals R&D
Pharmaceuticals, including R&D
Vaccines
Consumer Healthcare
Segment impairment reversals
Corporate and other unallocated impairment reversals
Other reconciling items between segment impairment 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 (excluding cash and cash equivalents)
Net assets
The Pharmaceuticals segment includes the Shionogi-ViiV Healthcare contingent consideration liability of £5,937 million (2017 –
£5,542 million) and the Pfizer put option of £1,240 million (2017 – £1,304 million). The put option liability (2017 – £8,606 million)
related to the Consumer Healthcare segment was extinguished during 2018.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 156
6. Turnover and segment information continued
Geographical information
The UK is regarded as being the Group’s country of domicile.
Turnover by location of customer
UK
US
Rest of World
External turnover
Non-current assets by location of subsidiary
UK
US
Rest of World
Non-current assets
2016
£m
1,056
10,197
16,636
27,889
2018
£m
923
11,982
17,916
30,821
2018
£m
6,118
7,540
20,768
34,426
2017
£m
940
11,263
17,983
30,186
2017
£m
6,824
6,841
20,901
34,566
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)
Fair value remeasurements of equity investments under IFRS 9
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 (expense)/income
Impairment of available-for-sale equity investments under IAS 39
Disposal of available-for-sale equity investments under IAS 39
2018
£m
16
258
(1,252)
58
(658)
(3)
(7)
2017
£m
2016
£m
195
(1,012)
13
(1,186)
9
9
(30)
37
283
(2,205)
(577)
(1,133)
(3)
23
(47)
254
(1,588)
(1,965)
(3,405)
Disposal of businesses and assets in 2018 included a profit of £119 million on the disposal of tapinarof to Dermavant Sciences, a profit of
£33 million on the disposal of Consumer Healthcare tail brands in the US and a gain arising from the increase in value of the shares in
Hindustan Unilever Limited to be received on the disposal of Horlicks and other Consumer Healthcare brands, which is expected to complete
by the end of 2019, net of disposal costs.
Fair value remeasurements on contingent consideration recognised in business combinations included £1,188 million related to the
acquisition of the former Shionogi-ViiV Healthcare joint venture and £56 million payable to Novartis related to the Vaccines acquisition and
fair value movements on derivatives hedging foreign exchange exposure.
Notes to the financial statements continuedGSK Annual Report 2018 157
2016
£m
8,212
1,265
395
978
180
796
22
53
8,093
533
(145)
91
4
4
29.7
2018
£m
9,440
1,376
389
954
203
902
134
81
8,713
695
(302)
188
12
5
29.8
2017
£m
9,122
1,351
405
988
327
934
690
215
8,526
701
(352)
110
4
5
29.2
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 £nil (2017 – £109 million; 2016 – £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 £809 million (2017 – £1,056 million; 2016 – £970 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
2018
£m
6.7
12.9
6.6
26.2
0.1
–
3.0
0.5
29.8
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
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 2018.
In addition to the above, fees paid in respect of the GSK pension schemes were:
Audit
Other services
2018
£m
0.3
–
2017
£m
0.3
0.1
2016
£m
0.4
–
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 158
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
2018
£m
7,203
795
586
393
463
2017
£m
7,116
802
616
347
241
2016
£m
6,391
733
541
338
209
9,440
9,122
8,212
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
2018
£m
304
49
4
36
393
2017
£m
276
47
4
20
347
2016
£m
271
39
4
24
338
The average monthly number of persons employed by the Group (including Directors) during the year was:
Manufacturing
Selling, general and administration
Research and development
2018
Number
37,296
47,887
11,668
96,851
2017
Number
38,632
49,141
11,576
99,349
2016
Number
38,611
49,961
11,255
99,827
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 231. The monthly average number of persons employed by GlaxoSmithKline plc
in 2018 was nil (2017 – 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
2018
£m
29
3
3
20
55
2017
£m
26
4
3
22
55
2016
£m
25
4
2
15
46
Further information on the remuneration of the Directors is given in the Remuneration report on pages 96 to 124.
10. Major restructuring costs
Within the Pharmaceuticals sector, the highly regulated manufacturing operations and supply chains and long lifecycle of the business mean
that restructuring programmes, particularly those that involve the rationalisation or closure of manufacturing or R&D sites, are likely to take
several years to complete.
Major restructuring costs are those related to specific Board approved Major restructuring programmes, including integration costs following
material acquisitions, which are structural and are of a significant scale where the costs of individual or related projects exceed £25 million.
The existing Combined restructuring and integration programme incorporates the previous Major Change programme, the Pharmaceuticals
restructuring programme and the restructuring and integration programme following the Novartis transaction in 2015. In July 2018, the Board
approved a new Major restructuring programme, which is designed to significantly improve the competitiveness and efficiency of the Group’s
cost base with savings delivered primarily through supply chain optimisation and reductions in administrative costs.
Notes to the financial statements continuedGSK Annual Report 2018 159
10. Major restructuring costs continued
The total restructuring costs of £809 million in 2018 were incurred in a number of areas, including the following:
– Restructuring of the commercial operating model, including staff reductions in the US, Europe and International Pharmaceutical commercial
operations and the US Respiratory field sales force
– Manufacturing site restructuring, including the GSK steriles manufacturing facility at Ulverston, United Kingdom
– Vaccines transformation and remediation
– Restructuring of the Pharmaceutical and Consumer Healthcare supply chains leading to simplification of the operating model and
improved resource allocation
– Transformation of central functions, including GSK technology platforms and interfaces, to deliver greater digital synergies, simplification
of applications and staff reductions.
The analysis of the costs charged to operating profit under these programmes was 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
2018
£m
450
(99)
130
72
256
809
2017
£m
259
(43)
278
247
315
1,056
2016
£m
163
(140)
158
108
681
970
Asset impairments and other non-cash charges principally comprise fixed asset write-downs across support function, manufacturing and
research facilities and accelerated depreciation where asset lives in R&D and manufacturing have been shortened as a result of the major
restructuring programmes. All other charges have been or will be settled in cash and include the termination of leases, site closure costs
and consultancy and project management fees.
The analysis of Major restructuring charges by income statement line was as follows:
Cost of sales
Selling, general and administration
Research and development
Other operating income/(expense)
11. Finance income
Year to 31 December 2018 under IFRS 9
Finance income arising from:
Financial assets measured at amortised cost
Financial assets measured at fair value through profit or loss
Net gains arising from hedge ineffectiveness on net investment hedges
Years to 31 December 2017 and 31 December 2016 under IAS 39
Interest income arising from:
Cash and cash equivalents
Available-for-sale investments
Loans and receivables
Fair value adjustments on derivatives at fair value through profit or loss
2018
£m
443
315
49
2
809
2017
£m
545
248
263
–
1,056
2016
£m
297
514
159
–
970
2018
£m
2017
£m
2016
£m
73
1
7
81
60
2
1
2
65
67
1
2
2
72
Interest income arising from financial assets measured at amortised cost in 2018 includes interest income arising from assets which would
have been classified as available-for-sale investments and loans and receivables in prior years under IAS 39. This also includes interest
income arising from certain cash and cash equivalents. Interest income arising from financial assets measured at fair value through profit or
loss in 2018 includes interest income arising from other cash and cash equivalents.
Net gains arising from hedge ineffectiveness on net investment hedges were recorded in ‘Fair value adjustments on derivatives at fair value
through profit or loss’ in 2017 and 2016. 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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 160
Notes to the financial statements continued
12. Finance expense
Finance expense arising on:
Financial liabilities at amortised cost
Derivatives at fair value through profit or loss
Net losses arising from:
Financial instruments mandatorily measured at fair value through profit or loss
Reclassification of hedges from other comprehensive income
Unwinding of discounts on provisions
Other finance expense
2018
£m
(677)
(38)
3
(2)
(15)
(69)
2017
£m
(698)
(22)
(4)
–
(16)
6
2016
£m
(671)
(30)
(3)
(1)
(16)
(15)
(798)
(734)
(736)
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. Interest expense arising on
derivatives at fair value through profit or loss relates to swap interest expense. Other finance expense in 2018 includes a £39 million charge
(2017 – £24 million credit) for interest relating to historical income tax settlements.
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 profits/(losses) of joint ventures
2018
£m
28
3
31
2017
£m
16
(3)
13
2016
£m
9
(4)
5
At 31 December 2018, 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 2018 share of after tax profits of associates and other comprehensive income includes
a profit of £33 million and other comprehensive income of £nil in respect of Innoviva.
Turnover
Profit after taxation
Other comprehensive income
Total comprehensive income
2018
£m
183
134
–
134
2017
£m
165
103
–
103
2016
£m
98
44
–
44
The results of Innoviva included in the summarised income statement information above represent the estimated earnings of Innoviva in the
relevant periods, based on publicly available information. 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
2018
£m
242
(2)
–
(2)
2017
£m
252
(5)
–
(5)
2016
£m
133
(1)
–
(1)
The Group’s sales to associates and joint ventures were £43 million in 2018 (2017 – £41 million; 2016 – £43 million).
GSK Annual Report 2018 161
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
2018
£m
234
1,426
(492)
1,168
(414)
754
2017
£m
199
1,928
(508)
1,619
(263)
1,356
2016
£m
241
1,326
(149)
1,418
(541)
877
In 2018, GSK made payments of £113 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 2018 reflected the origination of current year tax losses, where offset against taxable profits in future periods is
probable, as well as an uplift in the tax carrying value of certain Consumer Healthcare brands as a result of the acquisition of Novartis’ interest
in the former Consumer Healthcare Joint Venture.
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 US tax rate applicable following the enactment of US tax reform. In 2016,
the net deferred tax credit was impacted to a greater extent by remeasurement of the contingent consideration in relation to the former
Shionogi-ViiV Healthcare Joint Venture.
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
FV remeasurement of non-taxable put options
Tax losses where no benefit is recognised
Permanent differences on disposals and acquisitions
Other permanent differences
Re-assessments of prior year estimates
US and Swiss Tax Reform
Tax charge/tax rate
2018
£m
4,800
912
675
(522)
(73)
221
24
(7)
85
(436)
(125)
754
2018
%
19.0
14.1
(10.9)
(1.5)
4.6
0.5
(0.1)
1.7
(9.1)
(2.6)
15.7
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)
122
(116)
2016
%
20.0
30.6
(16.5)
(4.8)
17.5
(0.8)
(1.1)
6.3
(6.0)
877
45.2
GSK has a substantial business presence in many countries around the world. The impact of differences in overseas taxation rates arose from
profits being earned in countries with tax rates higher than the UK statutory rate, the most significant of which in 2018 were the US, Belgium,
India and Japan. 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 2018 tax rate of 15.7% has been influenced by the reassessment of open issues with tax authorities in various jurisdictions,
together with the £125 million credit related to a reduced estimate of the 2017 impact of US Tax Reform following additional guidance being
released by the US tax authorities and the transaction related charges arising on the Group’s put option liabilities to ViiV Healthcare and the
former Consumer Healthcare Joint Venture with Novartis.
Future tax charges, and therefore the Group’s effective tax rate, may be affected by factors such as acquisitions, disposals, restructuring, the
location of research and development activity, tax regime reforms and resolution of open matters as tax affairs are brought up to date around
the world.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 162
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
Fair value movements on cash flow hedges
Fair value movements on equity investments
Total (charge)/credit to equity and statement of comprehensive income
2018
£m
–
(2)
(2)
2
(144)
(2)
10
(134)
(136)
2017
£m
2016
£m
–
26
26
(4)
(247)
–
29
(222)
(196)
7
32
39
–
94
2
51
147
186
All of the above items have been charged to the statement of comprehensive income except for tax on share-based payments.
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 GSK
bases its 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 judgement in respect of certain items
whose tax treatment cannot be finally determined until resolution has been reached with the relevant tax authority or, as appropriate, through a
formal legal process. At 31 December 2018 the Group had recognised provisions of £1,082 million in respect of such uncertain tax positions
(2017 – £1,175 million). The decrease in recognised provisions during 2018 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. 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. GSK does 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 £185 million as at 31 December 2018 (2017 – £209 million) has been made in respect of withholding
taxation that would be payable on the remittance of profits by certain overseas subsidiaries. Whilst the aggregate amount of unremitted profits
at the balance sheet date was approximately £18 billion (2017 – £17 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. Deferred tax is not provided on temporary differences of £231 million (2017 – £nil) arising
on unremitted profits as management has the ability to control any future reversal and does not consider such a reversal to be probable.
Notes to the financial statements continuedGSK Annual Report 2018 163
14. Taxation continued
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 1 January 2018
Exchange adjustments
Credit/(charge) to income statement
Credit/(charge) to statement of
comprehensive income and equity
Reclassification on disposal
At 31 December 2018
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
–
–
(317)
(6)
(12)
–
–
(335)
116
483
–
(1,320)
(4)
365
–
–
(959)
(218)
(235)
(210)
(20)
(27)
(216)
(805)
–
–
868
–
(34)
–
–
834
–
–
–
1,017
43
(31)
–
–
1,029
(247)
760
38
33
(144)
7
694
–
–
261
2
183
–
1
447
–
(4)
74
2
(7)
2
–
71
–
483
29
1,057
9
(101)
8
(23)
950
(222)
2,400
84
396
(134)
(15)
2,731
The net credit to the income statement of £396 million included an £18 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
accounts. As intra-Group profits are not eliminated from the individual entities’ tax returns a temporary difference arises that will reverse at the
point in time inventory is sold externally.
The deferred tax asset recognised on tax losses of £447 million (2017 – £261 million) related to trading losses. Other net temporary
differences included accrued expenses for which a tax deduction is only available on a paid basis, such as for pensions.
Deferred tax asset and liabilities are recognised on the balance sheet as follows:
Deferred tax assets
Deferred tax liabilities
2018
£m
3,887
(1,156)
2,731
2017
£m
3,796
(1,396)
2,400
Deferred tax assets are recognised on US foreign tax credits only where it is probable that future taxable profits will be available. The net
amount of foreign tax credits on which deferred tax has not been provided was £114 million at 31 December 2018 (2017 – £151 million).
Unrecognised tax losses
Trading losses expiring:
Within 10 years
More than 10 years
Available indefinitely
At 31 December
Capital losses expiring:
Available indefinitely
At 31 December
2018
Unrecognised
deferred tax
asset
£m
2017
Unrecognised
deferred tax
asset
£m
Tax losses
£m
Tax losses
£m
678
957
89
1,724
2,042
2,042
148
93
15
256
399
399
802
872
86
1,760
1,924
1,924
187
99
14
300
372
372
Deferred tax assets are only recognised where it is probable that future taxable profit will be available to utilise losses.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
164
15. Earnings per share
Basic earnings per share
Diluted earnings per share
2018
pence
73.7
72.9
2017
pence
31.4
31.0
2016
pence
18.8
18.6
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
2018
millions
4,914
57
4,971
2017
millions
4,886
55
4,941
2016
millions
4,860
49
4,909
First interim
Paid/payable
12 July 2018
Second interim
11 October 2018
Third interim
Fourth interim
Total
10 January 2019
11 April 2019
Dividend
per share
(pence)
2018
Total
dividend
£m
Dividend
per share
(pence)
Paid
2017
Total
dividend
£m
Dividend
per share
(pence)
Paid
19
19
19
23
80
934
13 July 2017
934 12 October 2017
935 11 January 2018
1,132
3,935
12 April 2018
19
19
19
23
80
928
14 July 2016
929 13 October 2016
929 12 January 2017
1,130
3,916
13 April 2017
19
19
19
23
80
2016
Total
dividend
£m
923
925
925
1,124
3,897
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 2018 financial statements recognise those
dividends paid in 2018, namely the third and fourth interim dividends for 2017, and the first and second interim dividends for 2018.
The amounts recognised in each year were as follows:
Dividends to shareholders
2018
£m
3,927
2017
£m
3,906
2016
£m
4,850
Notes to the financial statements continuedGSK Annual Report 2018
165
Total
£m
22,164
(234)
1,584
30
(1,092)
(38)
(695)
21,719
362
1,358
21
(583)
(67)
(322)
22,488
(10,669)
160
(988)
697
504
(10,296)
(172)
(954)
478
177
(10,767)
(687)
8
342
(349)
17
106
(563)
(13)
91
(205)
7
20
(663)
(10,859)
(11,430)
17. Property, plant and equipment
Cost at 1 January 2017
Exchange adjustments
Other additions
Capitalised borrowing costs
Disposals and write-offs
Reclassifications
Transfer to assets held for sale
Cost at 31 December 2017
Exchange adjustments
Other additions
Capitalised borrowing costs
Disposals and write-offs
Reclassifications
Transfer to assets held for sale
Cost at 31 December 2018
Depreciation at 1 January 2017
Exchange adjustments
Charge for the year
Disposals and write-offs
Transfer to assets held for sale
Depreciation at 31 December 2017
Exchange adjustments
Charge for the year
Disposals and write-offs
Transfer to assets held for sale
Depreciation at 31 December 2018
Impairment at 1 January 2017
Exchange adjustments
Disposals and write-offs
Impairment losses
Reversal of impairments
Transfer to assets held for sale
Impairment at 31 December 2017
Exchange adjustments
Disposals and write-offs
Impairment losses
Reversal of impairments
Transfer to assets held for sale
Impairment at 31 December 2018
Total depreciation and impairment at 31 December 2017
Total depreciation and impairment at 31 December 2018
Net book value at 1 January 2017
Net book value at 31 December 2017
Net book value at 31 December 2018
Land and
buildings
£m
7,761
(127)
69
–
(376)
602
(462)
7,467
150
33
–
(90)
403
(152)
7,811
(3,259)
50
(299)
158
314
(3,036)
(61)
(268)
77
55
(3,233)
(279)
8
210
(194)
7
87
(161)
(8)
10
(16)
1
–
(174)
(3,197)
(3,407)
4,223
4,270
4,404
Plant,
equipment
and vehicles
£m
11,235
(62)
296
–
(685)
1,186
(219)
11,751
187
190
–
(440)
1,016
(167)
12,537
Assets in
construction
£m
3,168
(45)
1,219
30
(31)
(1,826)
(14)
2,501
25
1,135
21
(53)
(1,486)
(3)
2,140
–
–
–
–
–
–
–
–
–
–
–
(64)
(2)
28
(17)
1
11
(43)
(1)
22
(46)
–
–
(68)
(43)
(68)
(7,410)
110
(689)
539
190
(7,260)
(111)
(686)
401
122
(7,534)
(344)
2
104
(138)
9
8
(359)
(4)
59
(143)
6
20
(421)
(7,619)
(7,955)
3,481
4,132
4,582
The weighted average interest rate for capitalised borrowing costs in the year was 3% (2017 – 4%). Disposals and write-offs in the year
included a number of assets with nil net book value that are no longer in use in the business.
3,104
10,808
2,458
10,860
2,072
11,058
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
166
17. Property, plant and equipment continued
The net book value at 31 December 2018 of the Group’s land and buildings included £24 million (2017 – £27 million) held under finance
leases. In addition, the net book value of plant, equipment and vehicles held under finance lease at 31 December 2018 was £59 million
(2017 – £55 million).
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 specific segment,
country and currency risk. 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 £142 million
(2017 – £198 million), R&D £9 million (2017 – £93 million) and SG&A £54 million (2017 – £36 million), and included £138 million
(2017 – £278 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 2018 of assets for which impairments have been charged or reversed in the year was £95 million
(2017 – £33 million).
During 2018, £67 million (2017 – £38 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
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
2018
£m
5,734
199
(144)
5,789
5,734
5,789
2018
£m
3,273
1,342
1,174
5,789
2017
£m
5,965
(228)
(3)
5,734
5,965
5,734
2017
£m
3,172
1,302
1,260
5,734
Notes to the financial statements continuedGSK Annual Report 2018 167
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 segment, country and 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.
1% p.a.
2% p.a.
7.5%
7.5%
6%
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 £236 million (2017 – £228 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 £8.5 billion (2017 – £8.5 billion).
Details of indefinite life brands are given in Note 19, ‘Other intangible assets’.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 168
Notes to the financial statements continued
19. Other intangible assets
Cost at 1 January 2017
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
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 2018
Amortisation at 1 January 2017
Exchange adjustments
Charge for the year
Disposals and asset write-offs
Transfer to assets held for sale
Amortisation at 31 December 2017
Exchange adjustments
Charge for the year
Disposals and asset write-offs
Transfer to assets held for sale
Amortisation at 31 December 2018
Impairment at 1 January 2017
Exchange adjustments
Impairment losses
Disposals and asset write-offs
Transfer to assets held for sale
Impairment at 31 December 2017
Exchange adjustments
Impairment losses
Reversal of impairments
Disposals and asset write-offs
Transfer to assets held for sale
Impairment at 31 December 2018
Total amortisation and impairment at 31 December 2017
Total amortisation and impairment at 31 December 2018
Net book value at 1 January 2017
Net book value at 31 December 2017
Net book value at 31 December 2018
Computer
software
£m
2,156
Licences,
patents, etc.
£m
15,143
(37)
–
2
233
(217)
(1)
38
(215)
251
3
221
(38)
(90)
–
2,174
15,275
32
–
1
173
(80)
(2)
67
235
203
–
154
(129)
(81)
–
2,365
15,657
(1,184)
(4,983)
25
(163)
210
1
141
(761)
25
25
(1,111)
(5,553)
(24)
(240)
67
1
(1,307)
(9)
–
(2)
2
–
(9)
–
(17)
–
14
–
(12)
(1,120)
(1,319)
963
1,054
1,046
(104)
(645)
124
18
(6,160)
(1,652)
110
(546)
5
19
(2,064)
(69)
(51)
3
4
11
(2,166)
(7,617)
(8,326)
8,508
7,658
7,331
Amortised
brands
£m
427
Indefinite life
brands
£m
9,375
(4)
(272)
–
–
–
–
–
66
489
29
–
–
–
–
(9)
–
509
(224)
–
(10)
–
–
(234)
(3)
(17)
–
1
(253)
(143)
–
–
–
–
(143)
(20)
–
–
–
–
(163)
(377)
(416)
60
112
93
–
–
–
–
(44)
(66)
8,993
63
–
–
–
–
–
–
9,056
–
–
–
–
–
–
–
–
–
–
–
(130)
3
(132)
–
4
(255)
–
(69)
–
–
–
(324)
(255)
(324)
9,245
8,738
8,732
Total
£m
27,101
(528)
251
5
454
(255)
(135)
38
26,931
359
203
1
327
(209)
(92)
67
27,587
(6,391)
166
(934)
235
26
(6,898)
(131)
(902)
191
20
(7,720)
(1,934)
113
(680)
7
23
(2,471)
(89)
(137)
3
18
11
(2,665)
(9,369)
(10,385)
18,776
17,562
17,202
The weighted average interest rate for capitalised borrowing costs in the year was 3% (2017 – 4%).
The net book value of computer software included £578 million (2017 – £669 million) of internally generated costs.
The carrying value at 31 December 2018 of intangible assets, for which impairments have been charged or reversed in the year, following
those impairments or reversals, was £73 million (2017 – £300 million).
The patent expiry dates of the Group’s most significant assets, where relevant, are set out on pages 238 and 239.
GSK Annual Report 2018
169
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
2018
£m
593
178
131
902
2017
£m
578
116
240
934
2018
£m
69
19
46
134
2017
£m
400
2
278
680
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
2018
£m
2,363
1,319
905
274
277
136
205
1,852
7,331
2017
£m
2,450
1,389
965
321
277
162
202
1,892
7,658
The Meningitis portfolio includes Menveo, Bexsero, Men ABCWY and Menjugate.
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
2018
£m
2,735
1,385
651
449
388
265
293
262
236
193
150
112
2017
£m
2,716
1,380
648
441
386
265
289
236
228
185
166
112
1,613
8,732
1,686
8,738
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 segment, 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 3% are management’s
estimates of future long-term average growth rates of the relevant markets. In each case the valuations indicate sufficient headroom such
that a reasonably possible change to key assumptions is unlikely to result in an impairment of these intangible assets.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 170
20. Investments in associates and joint ventures
At 1 January
Exchange adjustments
Additions
Disposals
Distributions received
Other movements
Profit/(loss) after tax recognised in the consolidated income statement
At 31 December
Joint
ventures
£m
13
Associates
£m
170
1
1
–
–
1
3
19
11
9
–
(40)
39
28
217
2018
Total
£m
183
12
10
–
(40)
40
31
236
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
The Group held one significant associate at 31 December 2018, Innoviva, Inc. At 31 December 2018, the Group owned 32 million shares
or 31.7% 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 and Anoro Ellipta. It also has a 15% economic interest in royalties paid by GSK on sales of Trelegy Ellipta. The remaining 85% of the
economic interest in these royalties is held by Theravance Biopharma Inc., in which the Group holds 17.4% of the common stock. The
investment in Innoviva had a market value of £440 million at 31 December 2018 (2017 – £336 million).
Summarised balance sheet information, based on published information, in respect of Innoviva is set out below:
At 31 December
2018
£m
At 31 December
2017
£m
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets/(liabilities)
Interest in associated undertaking
Goodwill
Fair value and other adjustments
Carrying value at 31 December
21. Other investments
At 1 January
Exchange adjustments
Additions
Net fair value movements through Other comprehensive income
Net fair value movements through profit or loss
Impairment losses
Disposals and settlements
Transfers to Assets held for sale
At 31 December
275
157
(4)
(302)
126
2018
£m
40
91
58
189
Investments
designated as
measured at
FVTOCI
£m
869
Investments
measured at
FVTPL
£m
49
48
363
118
–
–
(89)
(59)
1,250
4
9
–
16
–
(6)
–
72
2018
£m
918
52
372
118
16
–
(95)
(59)
1,322
124
148
(26)
(426)
(180)
2017
£m
(57)
86
118
147
2017
£m
985
(64)
80
11
–
(30)
(64)
–
918
Other investments comprise non-current equity investments which are 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 £656 million (2017 – £535 million).
Notes to the financial statements continuedGSK Annual Report 2018
171
21. Other investments continued
GSK has elected to designate the majority of its equity investments as measured at fair value through other comprehensive income (FVTOCI).
The most significant of these investments held at 31 December 2018 were in Theravance Biopharma, Inc. in which the Group holds 17.4%
of the common stock, Orchard in which the group holds 14.5% and 23andMe in which the Group holds 14.5%. These investments had a
fair value at 31 December 2018 of £194 million (2017 – £199 million), £154 million and £229 million respectively. No other investment is
individually material. 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. Information on dividends received from investments measured at
FVTOCI is provided in Note 7 ‘Other operating income/(expense)’.
On disposal of equity investments measured at FVTOCI, the accumulated fair value movements are reclassified from the fair value reserve to
retained earnings. Investments with a fair value of £148 million were disposed of during the year. The cumulative gain on these investments
after tax was £56 million.
Certain other investments, such as investments in funds with limited lives, are measured at fair value through profit or loss (FVTPL). The
cumulative gain/loss on investments measured at FVTPL which were disposed of during the year was £nil. The fair value of these investments
on derecognition was £nil.
In 2017, prior to the Group’s implementation of IFRS 9, the cumulative fair value movements, based on average cost for shares acquired at
different times, for all other investments disposed of during the period were reclassified from the fair value reserve to the income statement.
The impairment losses recorded above for the prior year were recognised in the income statement within Other operating income, together
with amounts reclassified from the fair value reserve on recognition of the impairments. These impairments resulted from prolonged or
significant declines in the fair value of the equity investments below acquisition cost.
The carrying value at 31 December 2017 of Other investments which had been impaired was as follows:
Original cost
Cumulative impairments recognised in the income statement
Subsequent fair value increases
Carrying value at 31 December 2017
Cumulative impairments on those Other investments designated as measured at FVTOCI under IFRS 9 were transferred from retained
earnings to the fair value reserve on 1 January 2018 on adoption of IFRS 9.
22. Other non-current assets
Amounts receivable under insurance contracts
Pension schemes in surplus
Other receivables
2018
£m
675
760
141
2017
£m
475
(283)
210
402
2017
£m
648
538
227
Amounts receivable under insurance contacts are held at fair value through profit or loss.
In regards to the other receivables of £141 million, £89 million is classified as financial assets of which £41 million is classified as fair value
through profit or loss. Of the remaining balance of £48 million, the expected credit loss allowance was immaterial at 31 December 2018.
1,576
1,413
23. Inventories
Raw materials and consumables
Work in progress
Finished goods
2018
£m
1,122
2,286
2,068
5,476
2017
£m
1,193
2,381
1,983
5,557
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 172
24. Trade and other receivables
Trade receivables, net of loss allowance
Accrued income
Other prepayments
Interest receivable
Employee loans and advances
Other receivables
2018
£m
5,176
9
330
4
14
890
6,423
Trade receivables included £15 million (2017 – £11 million) due from associates and joint ventures. Other receivables included £nil
(2017 – £7 million) due from associates and joint ventures.
Loss allowance
At 1 January
Implementation of IFRS 9
At 1 January, as adjusted
Exchange adjustments
Charge for the year
Subsequent recoveries of amounts provided for
Utilised
At 31 December
2018
£m
140
15
155
–
7
(30)
(4)
128
2017
£m
4,672
21
308
10
19
970
6,000
2017
£m
207
–
–
(4)
31
(79)
(15)
140
Of the total trade receivables balance, £71 million was considered credit impaired, against which a £7 million expected credit loss allowance
has been applied. No amount was purchased or originated credit impaired.
Of the other receivables of £890 million, £376 million was classified as financial assets of which £41 million was classified as at fair value
through profit and loss. On the remaining balance of £335 million, an expected credit loss allowance of £5 million was recognised at
31 December 2018 with no charge reported in profit or loss during the year.
For more discussion on credit risk practices, please refer to Note 42.
25. Cash and cash equivalents
Cash at bank and in hand
Short-term deposits
2018
£m
569
3,305
3,874
2017
£m
826
3,007
3,833
In addition, £485 million of cash and cash equivalents has been reported in Assets held for sale, see Note 26, ‘Assets held for sale’.
Cash and cash equivalents included £0.2 billion (2017 – £0.8 billion) not available for general use due to restrictions applying in the
subsidiaries where it is held. Restrictions include exchange controls and taxes on repatriation.
Notes to the financial statements continuedGSK Annual Report 2018 26. Assets held for sale
Property, plant and equipment
Goodwill
Other intangibles
Inventory
Cash and cash equivalents
Other
173
2018
£m
109
144
1
50
485
(136)
653
2017
£m
57
–
49
7
–
–
113
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.
Assets held for sale primarily reflect the disposal group arising from GSK’s agreement to divest Horlicks and other Consumer Healthcare
nutritional brands to Unilever plc announced in December 2018, and which is expected to complete by the end of 2019. See Note 38,
‘Acquisitions and disposals’.
Included within assets held for sale are assets which were written down to fair value less costs to sell of £51 million (2017 – £63 million).
The valuation methodology used significant inputs which were not based on observable market data and therefore this valuation is classified
as level 3 in the fair value hierarchy.
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
2018
£m
3,645
1,355
139
–
1,240
401
216
5,064
1,977
14,037
2017
£m
3,528
1,228
166
8,606
1,304
363
240
3,463
2,072
20,970
Trade and other payables included £64 million (2017 – £53 million) due to associates and joint ventures. The Group provides limited supplier
financing arrangements to certain customers. The amounts involved at 31 December 2018 were not material.
Revenue recognised in the year that was included in deferred income at 1 January 2018 was £66 million. Of the remaining balance, £64 million
related to proceeds from a site disposal in India, which was expected to complete in 2018, but is now expected to complete in 2019.
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 £4,356 million (2017 – £2,837 million) in respect of US Pharmaceuticals and Vaccines, as
more fully described in the Group financial review on page 63. 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 amounts paid and any changes in arrangements. Future events could
cause the assumptions on which the accruals are based to change, which could affect the future results of the Group.
Pfizer’s put option over its shareholding in ViiV Healthcare is currently exercisable. The amount of the liability recognised is derived from
several valuation methodologies, including reference to market multiples of comparable companies. 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 41.
2018
£m
140
(140)
75
(64)
44
(37)
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 174
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
2018
£m
2017
£m
2016
£m
246
100
190
50
586
369
43
50
462
124
586
198
113
218
87
616
335
55
87
477
139
616
205
106
140
90
541
304
43
90
437
104
541
2016
£m
135
221
81
437
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
2018
£m
160
228
74
462
2017
£m
162
238
77
477
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 2017 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.
Notes to the financial statements continuedGSK Annual Report 2018 175
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 2038 for an individual then at the age of
60 is as follows:
Current
Projected for 2038
Male
Years
27.5
29.0
UK
Female
Years
29.1
30.6
Male
Years
27.0
28.7
US
Female
Years
28.7
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 physical asset allocation strategy for three of the four
UK plans remains unchanged, with 55% in return-seeking assets and 45% in liability-matching assets. The remaining plan has materially
de-risked given its relative higher maturity as well as improved funding position. The asset allocation of the US plans is currently set at 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,
currency and bank counterparty risk.
The plan liabilities are a series of future cash flows with relatively long duration. On an IAS 19 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.
The interest rate risk and credit rate risk in the US are partially hedged. The targets are based on an accounting measure of the plan liabilities.
For the UK plans, there is an interest rate and inflation hedging strategy in place. The targets are based on an economic measure of the plan
liabilities. Furthermore, the plans also currently hedge a portion of their equity exposure with a staggered maturity profile.
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 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
2018
% pa
2.00
2.90
3.20
n/a
3.20
2017
% pa
2.00
2.50
3.20
n/a
3.20
UK
2016
% pa
2.00
2.70
3.20
n/a
3.20
2018
% pa
4.00
4.20
n/a
3.20
2.25
2017
% pa
4.00
3.60
n/a
2.90
2.25
US
2016
% pa
4.00
3.90
n/a
3.20
2.25
2018
% pa
2.70
1.80
2.10
0.40
1.50
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
Sensitivity analysis detailing the effect of changes in assumptions is provided on page 182. The analysis provided reflects the assumption
changes which have the most material impact on the results of the Group.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 176
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 2018
in relation to the defined benefit pension and post-retirement healthcare schemes were as follows:
2018
Amounts charged to operating profit
Current service cost
Past service cost/(credit)
Net interest (income)/cost
Gains from settlements
Expenses
US
£m
Rest of World
£m
Pensions
Group
£m
Post-retirement
benefits
Group
£m
72
1
20
–
7
100
134
–
19
(14)
–
139
281
94
36
(14)
15
412
29
(27)
49
(1)
–
50
UK
£m
75
93
(3)
–
8
173
Remeasurement gains/(losses) recorded in the statement of
comprehensive income
495
(108)
196
583
145
US
£m
Rest of World
£m
Pensions
Group
£m
Post-retirement
benefits
Group
£m
2017
Amounts charged to operating profit
Current service cost
Past service cost/(credit)
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
30
(2)
59
–
87
64
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
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)
The amounts included within past service costs in the UK include a charge of £40 million in relation to the estimated impact of GMP
equalisation and £43 million (2017 – £37 million; 2016 – £52 million) of augmentation costs of which £21 million is arising from major
restructuring programmes (see Note 29, ‘Other provisions’).
Notes to the financial statements continuedGSK Annual Report 2018
177
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 Assets held for sale:
Post-retirement benefits
Recognised in Pensions and other post-employment benefits:
Pension schemes in deficit
Post-retirement benefits
2018
£m
760
(9)
2017
£m
2016
£m
538
313
–
–
(1,755)
(1,370)
(3,125)
(2,043)
(1,496)
(3,539)
(2,397)
(1,693)
(4,090)
In the event of a plan wind-up, GSK believes the UK pension scheme rules provide the company with the right to a refund of surplus assets
following the full settlement of plan liabilities. As a result, the net surplus in the UK defined benefit pension schemes is recognised in full.
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 2018
Equities:
Multi-asset funds
Property:
– listed
– unlisted
– listed
– 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
3,257
–
2,997
–
423
404
306
3,835
770
589
12,581
(12,087)
494
711
(217)
494
(88)
US
£m
1,280
Rest of World
£m
518
–
–
–
231
783
–
286
–
228
2,808
(3,474)
(666)
–
(666)
(666)
(123)
7
–
33
4
111
25
795
831
66
2,390
(3,213)
(823)
49
(872)
(823)
55
Group
£m
5,055
7
2,997
33
658
1,298
331
4,916
1,601
883
17,779
(18,774)
(995)
760
(1,755)
(995)
(156)
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 ‘Other assets’ category comprises cash and mark to market values of derivative positions.
In previous years, index-linked gilts held as part of a UK repo programme were included in government bonds. The related loan was
included within ‘Other assets’ at a value of £(773) million at 31 December 2017 (2016 – £(1,686) million). This programme was cancelled
during 2018.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
178
28. Pensions and other post-employment benefits continued
At 31 December 2017
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 surplus/(obligation)
Included in Other non-current assets
Included in Pensions and other post-employment benefits
Actual return on plan assets
At 31 December 2016
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
UK
£m
4,902
–
2,517
352
297
326
5,127
849
(1,216)
13,154
(13,101)
53
470
(417)
53
893
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)
13
–
32
103
20
762
707
71
2,252
(3,239)
(987)
68
(1,055)
(987)
82
1,369
Rest of World
£m
486
14
–
28
96
24
739
637
73
2,097
(3,018)
(921)
37
(958)
(921)
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)
99
2,725
–
–
209
820
–
239
–
158
2,874
(3,445)
(571)
–
(571)
(571)
394
US
£m
1,358
–
–
216
213
–
815
–
288
2,890
(3,752)
(862)
–
(862)
(862)
153
Notes to the financial statements continuedGSK Annual Report 2018
179
28. Pensions and other post-employment benefits continued
Movements in fair values of assets
Assets at 1 January 2016
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
Exchange adjustments
Interest income
Expenses
Settlements and curtailments
Remeasurement
Employer contributions
Scheme participants’ contributions
Benefits paid
Assets at 31 December 2018
Pensions
Post-retirement
benefits
UK
£m
10,284
–
385
(7)
–
2,088
319
4
(490)
12,583
–
333
(7)
–
560
225
4
(544)
13,154
–
323
(8)
–
(411)
119
4
(600)
12,581
US
£m
2,501
459
108
(12)
–
45
31
–
(242)
2,890
(244)
104
(12)
–
290
103
–
(257)
2,874
171
102
(7)
–
(225)
150
–
(257)
2,808
Rest of World
£m
1,750
305
37
–
(110)
62
131
14
(92)
2,097
24
33
–
(4)
49
116
17
(80)
2,252
53
29
–
(14)
26
117
16
(89)
2,390
Group
£m
14,535
764
530
(19)
(110)
2,195
481
18
(824)
17,570
(220)
470
(19)
(4)
899
444
21
(881)
18,280
224
454
(15)
(14)
(610)
386
20
(946)
17,779
Group
£m
–
–
–
–
–
–
91
17
(108)
–
–
–
–
–
–
101
17
(118)
–
–
–
–
–
–
93
16
(109)
–
During 2018, the Group made no special funding contributions to the UK pension schemes (2017 – £136 million; 2016 – £191 million) but
£125 million (2017 – £78 million; 2016 – £nil) to the US scheme. In 2018, GSK reached a revised agreement with the trustees of the UK
pension schemes to make additional contributions to eliminate the pension deficits identified within the schemes at the 31 December 2017
actuarial funding valuation. Based on these funding agreements, the additional contributions to eliminate the pension deficit are expected to
be £75 million in 2019. Further payments have been agreed for the years 2020 to 2022 and these are included within Note 41, ‘Commitments’
on page 197. This funding commitment supersedes the previous agreement made in 2016. 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 2019, including special funding contributions, are estimated to be approximately £420 million in respect of defined
benefit pension schemes and £100 million in respect of post-retirement benefits.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
180
28. Pensions and other post-employment benefits continued
Movements in defined benefit obligations
Obligations at 1 January 2016
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/(credit)
Interest cost
Settlements and curtailments
Remeasurement
Scheme participants’ contributions
Benefits paid
Obligations at 31 December 2017
Exchange adjustments
Service cost
Past service cost
Interest cost
Settlements and curtailments
Remeasurement
Scheme participants’ contributions
Benefits paid
Obligations at 31 December 2018
The defined benefit pension obligation is analysed as follows:
Funded
Unfunded
UK
£m
(10,601)
–
(70)
(52)
(394)
–
(2,253)
(4)
490
US
£m
(3,134)
(586)
(66)
(1)
(135)
–
(72)
–
242
(12,884)
(3,752)
–
(79)
(37)
(340)
–
(301)
(4)
544
(13,101)
–
(75)
(93)
(320)
–
906
(4)
600
305
(70)
–
(135)
–
(50)
–
257
(3,445)
(208)
(72)
(1)
(122)
–
117
–
257
Rest of World
£m
(2,384)
(396)
(110)
(1)
(57)
138
(286)
(14)
92
(3,018)
(45)
(131)
–
(49)
4
(63)
(17)
80
(3,239)
(63)
(134)
–
(48)
28
170
(16)
89
Pensions
Group
£m
(16,119)
(982)
(246)
(54)
(586)
138
(2,611)
(18)
824
Post-retirement
benefits
Group
£m
(1,387)
(248)
(31)
(3)
(56)
–
(59)
(17)
108
(19,654)
(1,693)
260
(280)
(37)
(524)
4
(414)
(21)
881
119
(30)
2
(59)
–
64
(17)
118
(19,785)
(1,496)
(271)
(281)
(94)
(490)
28
1,193
(20)
946
(71)
(29)
27
(49)
1
145
(16)
109
(12,087)
(3,474)
(3,213)
(18,774)
(1,379)
2018
£m
(18,025)
(749)
(18,774)
2017
£m
(19,052)
(733)
2016
£m
(18,974)
(680)
(19,785)
(19,654)
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 6.50% (2017 – 6.75%), grading down to 5.0% in 2025 and thereafter. At
31 December 2018, the US post-retirement healthcare scheme obligation was £1,179 million (2017 – £1,254 million; 2016 – £1,463 million).
Post-retirement benefits are unfunded.
Notes to the financial statements continuedGSK Annual Report 2018
181
2018
£m
(1,505)
(47)
(281)
(94)
(36)
14
(610)
131
1,149
(87)
386
(15)
(995)
2018
£m
6
100
39
145
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)
(1,505)
(2,084)
2017
£m
47
(1)
18
64
2016
£m
–
(81)
22
(59)
28. Pensions and other post-employment benefits continued
The movement in the net defined benefit liability is as follows:
At 1 January
Exchange adjustments
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
Gain/(loss) from change in financial assumptions
Experience (losses)/gains
Employer contributions
Expenses
At 31 December
The remeasurements included within post-retirement benefits are detailed below:
Gain from change in demographic assumptions
Gain/(loss) from change in financial assumptions
Experience gains
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 182
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
2017
£m
4,611
9,805
5,369
2016
£m
4,576
9,574
5,504
19,785
19,654
2018
£m
4,427
9,542
4,805
18,774
2018
£m
499
879
1
2017
£m
514
981
1
1,379
1,496
2018
years
15
11
2017
years
16
11
2016
£m
594
1,099
–
1,693
2016
years
16
12
The effect of changes in assumptions used on the benefit obligations and on the 2019 annual defined benefit pension and post-retirement
costs are detailed below. This information has been determined by taking into account the duration of the liabilities and the overall profile of
the plan memberships.
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
28
(1)
707
34
21
2
592
33
1
38
18
447
Notes to the financial statements continuedGSK Annual Report 2018 29. Other provisions
At 1 January 2018
Exchange adjustments
Charge for the year
Reversed unused
Unwinding of discount
Utilised
Reclassifications and other movements
Transfer to Pension obligations
At 31 December 2018
To be settled within one year
To be settled after one year
At 31 December 2018
Legal
and other
disputes
£m
Major
restructuring
programmes
£m
Employee
-related
provisions
£m
Other
provisions
£m
186
13
119
(2)
2
(98)
(1)
–
219
156
63
219
504
17
450
(99)
4
(226)
12
(21)
641
362
279
641
304
9
105
(25)
–
(41)
(2)
–
350
145
205
350
271
5
50
(46)
9
(79)
3
–
213
69
144
213
183
Total
£m
1,265
44
724
(172)
15
(444)
12
(21)
1,423
732
691
1,423
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.
Major restructuring programmes
The Group is undertaking two major restructuring programmes:
the Combined restructuring and integration programme and the
2018 major restructuring programme. The programmes are focused
primarily on simplifying supply chain processes, rationalising the
Group’s manufacturing network and restructuring the
Pharmaceuticals commercial operations.
The charge for the year of £117 million (net of reversals and
estimated insurance recoveries) primarily related to provisions
for product liability cases, commercial disputes and various other
government investigations.
The discount on the provisions increased by £2 million in 2018
(2017 – increased by £2 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.
Indemnified disputes will recognise a provision charge and a
corresponding receivable.
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 £156 million of the amount provided at 31 December
2018 will be settled within one year. At 31 December 2018, it was
expected that £37 million (2017 – £nil) of the provision made for
legal and other disputes will be reimbursed by third parties. For
a discussion of legal issues, see Note 45, ‘Legal proceedings’.
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
£21 million (2017 – £18 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 2018, the provision for these benefits amounted to
£87 million (2017 – £108 million). Other employee benefits reflect
a variety of provisions for severance costs, jubilee awards and other
long-service benefits. Given the nature of these provisions, the
amounts are likely to be settled over many years.
Other provisions
Included in other provisions are insurance provisions of £7 million
(2017 – £6 million), onerous property lease provisions of
£6 million (2017 – £38 million) and a number of other provisions
including vehicle insurance and regulatory matters.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
184
30. Other non-current liabilities
Accruals
Deferred Income
Other payables
2018
£m
71
19
848
938
Other payables includes acquisition accounting market value lease adjustments and a number of employee-related liabilities.
Listing exchange
31. Net debt
Current assets:
Liquid investments
Cash and cash equivalents
Cash and cash equivalents reported in Assets held for sale
Short-term borrowings:
Commercial paper
Bank loans and overdrafts
Obligations under finance leases
Drawn bank facility
5.650% US$ US Medium Term Note 2018
0.625% € European Medium Term Note 2019
New York Stock Exchange
London Stock Exchange
Long-term borrowings:
0.625% € European Medium Term Note 2019
London Stock Exchange
EURIBOR +0.20% € European Medium Term Note 2020
London Stock Exchange
0.000% € European Medium Term Note 2020
3.125% US$ US Medium Term Note 2021
LIBOR +0.35% US$ US Medium Term Note 2021
2.850% US$ US Medium Term Note 2022
2.800% US$ US Medium Term Note 2023
3.375% US$ US Medium Term Note 2023
1.375% € European Medium Term Note 2024
4.000% € European Medium Term Note 2025
3.625% US$ US Medium Term Note 2025
1.000% € European Medium Term Note 2026
1.250% € European Medium Term Note 2026
3.375% £ European Medium Term Note 2027
3.875% US$ US Medium Term Note 2028
1.375% € European Medium Term Note 2029
1.750% € European Medium Term Note 2030
5.250% £ 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
5.250% £ European Medium Term Note 2042
4.200% US$ US Medium Term Note 2043
4.250% £ European Medium Term Note 2045
Obligations under finance leases
Other long-term borrowings
Net debt
London Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
London Stock Exchange
London Stock Exchange
New York Stock Exchange
London Stock Exchange
London Stock Exchange
London Stock Exchange
New York Stock Exchange
London Stock Exchange
London Stock Exchange
London Stock Exchange
New York Stock Exchange
New York Stock Exchange
London Stock Exchange
London Stock Exchange
New York Stock Exchange
London Stock Exchange
2017
£m
82
22
877
981
2017
£m
78
3,833
–
3,911
(529)
(236)
(23)
–
2018
£m
84
3,874
485
4,443
(630)
(290)
(24)
(3,500)
–
(2,037)
(1,349)
(5,793)
–
(2,825)
–
(1,324)
(677)
(1,079)
(980)
(589)
(1,568)
(978)
(977)
(893)
(670)
(780)
(629)
(897)
(593)
(1,372)
(447)
(673)
(982)
(390)
–
(1,060)
–
–
(1,474)
(919)
–
(876)
(659)
–
(617)
–
(593)
–
(439)
–
(986)
(368)
(2,143)
(2,021)
(694)
(986)
(386)
(788)
(44)
(56)
(695)
(989)
(363)
(789)
(43)
(49)
(20,271)
(21,621)
(14,264)
(13,178)
Notes to the financial statements continuedGSK Annual Report 2018 185
31. Net debt continued
Current assets
Liquid investments are classified as financial assets at amortised cost (previously available-for-sale investments in prior years).
At 31 December 2018, they included US Treasury Notes and other government bonds. The effective interest rate on liquid investments
at 31 December 2018 was approximately 1.0% (2017 – approximately 1.0%). Liquid investment balances at 31 December 2018 earning
interest at floating rates amount to £84 million (2017 – £78 million). Liquid investment balances at 31 December 2018 earning interest
at fixed rates amount to £nil (2017 – £nil).
The effective interest rate on cash and cash equivalents at 31 December 2018 was approximately 1.9% (2017 – approximately 1.3%).
Cash and cash equivalents at 31 December 2018 earning interest at floating and fixed rates amount to £4,094 million and £2 million
respectively (2017 – £3,832 million and £1 million) and non-interest bearing holdings amount to £263 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 (£7.9 billion) US commercial paper programme, of which $0.8 billion (£0.6 billion) was in issue at 31 December 2018
(2017 – $0.7 billion (£0.5 billion)). GSK has a £1.9 billion five-year committed facility and $2.5 billion (£2.0 billion) under a 364 day
committed facility. The five-year committed facility was agreed in September 2015 and extended by one year to 2021 in September 2016.
The 364 day committed facility was agreed in September 2018. Additional bank facilities were agreed in 2018 to support transactions and
two remained active at 31 December 2018. In June 2018, £3.5 billion was drawn to support the acquisition from Novartis of the remaining
stake in the Consumer Healthcare Joint Venture. In addition, a $5.0 billion bank facility was agreed in December 2018 to support the
acquisition of Tesaro and was undrawn at 31 December 2018. Liquid investments, cash and cash equivalents were as shown in the table
on page 184.
The weighted average interest rate on commercial paper borrowings at 31 December 2018 was 2.5% (2017 – 1.5%).
The weighted average interest rate on current bank loans and overdrafts at 31 December 2018 was 12.0% (2017 – 4.7%). At 31 December
2018, short-term loan rates of 60% in Argentina had a disproportionate effect on the weighted average interest rate. Excluding this impact
the weighted average interest rate on current bank loans and overdrafts stands at 4.4%.
The average effective pre-swap interest rate of notes classified as short term at 31 December 2018 was 0.8% (2017 – 5.9%). The material
decrease in the rate largely reflects the maturity of a 5.65% coupon note in May 2018 and the upcoming maturity of a 0.625% coupon note
in December 2019.
Long-term borrowings
At the year-end, GSK had long-term borrowings of £20.3 billion (2017 – £14.3 billion), of which £13.3 billion (2017 – £10.3 billion) falls
due in more than five years. The average effective pre-swap interest rate of all notes in issue at 31 December 2018 was approximately 4.4%
(2017 – approximately 3.6%).
Long-term borrowings repayable after five years carry interest at effective rates between 1.1% and 6.4%, with repayment dates ranging from
2024 to 2045.
Pledged assets
The Group held pledged investments in US Treasury Notes with a par value of $50 million (£39 million), (2017 – $105 million (£78 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, in 2017, £20 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 which were previously entered into by Human Genome
Sciences, Inc. prior to its acquisition by the Group, and terminated in 2018.
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
2018
£m
29
20
13
7
4
11
84
(16)
68
2017
£m
25
29
9
3
2
10
78
(12)
66
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
186
32. Contingent liabilities
At 31 December 2018, contingent liabilities, comprising guarantees, discounted bills and other items arising in the normal course of business,
amounted to £93 million (2017 – £434 million). At 31 December 2018, £nil (2017 – £2 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 2018, 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 legal and other disputes to
which the Group is a party are set out in Note 45, ‘Legal proceedings’.
33. Share capital and share premium account
Share capital authorised
At 31 December 2016
At 31 December 2017
At 31 December 2018
Share capital issued and fully paid
At 1 January 2016
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
Issued under employee share schemes
At 31 December 2018
Number of shares issuable under employee share schemes
Number of unissued shares not under option
Ordinary Shares of 25p each
Number
£m
Share
premium
£m
10,000,000,000
10,000,000,000
10,000,000,000
2,500
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
–
5,372,553,820
6,513,804
5,379,067,624
1
–
1,343
2
1,345
55
10
3,019
72
3,091
31 December 2018
000
56,723
4,564,209
31 December 2017
000
38,647
4,588,799
At 31 December 2018, of the issued share capital, 41,530,909 shares were held in the ESOP Trusts, 414,605,950 shares were held
as Treasury shares and 4,922,930,765 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’.
Notes to the financial statements continuedGSK Annual Report 2018
187
34. Movements in equity
Retained losses and other reserves amounted to £76 million at 31 December 2018 (2017 – £4,430 million loss; 2016 – £3,172 million loss)
of which £337 million (2017 – £334 million; 2016 – £329 million) relates to joint ventures and associated undertakings. The cumulative
translation exchange in equity is as follows:
Net translation exchange included in:
At 1 January 2016
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
Exchange movements on overseas net assets
At 31 December 2018
The analysis of other comprehensive income by equity category is as follows:
2018
Items that may be subsequently reclassified to income statement:
Exchange movements on overseas net assets and net investment hedges
Fair value movements on cash flow hedges
Reclassification of cash flow hedges on income and expense
Deferred tax on fair value movements on cash flow hedges
Deferred tax reversed on reclassification of cash flow hedges
Items that will not be reclassified to income statement:
Exchange movements on overseas net assets of non-controlling interests
Fair value movements on equity investments
Deferred tax on fair value movements on equity investments
Remeasurement gains on defined benefit plans
Tax on remeasurement gains in defined benefit plans
Other comprehensive income/(expense) for the year
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
Retained
earnings
£m
(761)
Fair value
reserve
£m
10
Non-
controlling
interests
£m
(109)
603
494
(149)
–
345
(1)
344
13
23
–
–
23
(22)
1
Other
reserves
£m
Non-
controlling
interests
£m
(22)
140
(175)
(22)
20
–
180
10
–
–
131
–
–
–
–
–
(1)
–
–
–
–
(1)
633
(128)
462
109
443
(458)
(15)
Retained
earnings
£m
(458)
–
–
–
–
–
–
–
728
(146)
124
Retained
earnings
£m
Other
reserves
£m
Non-
controlling
interests
£m
462
109
–
–
–
–
–
–
549
(221)
899
–
–
(14)
(42)
47
(18)
(10)
–
–
–
–
–
–
–
–
–
–
(149)
–
–
(37)
(149)
Total
translation
exchange
£m
(860)
1,249
389
313
109
811
(481)
330
Total
£m
(480)
140
(175)
(22)
20
(1)
180
10
728
(146)
254
Total
£m
462
109
(14)
(42)
47
(18)
(10)
(149)
549
(221)
713
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
188
34. Movements in equity continued
2016
Items that may be subsequently reclassified to income statement:
Retained
earnings
£m
Other
reserves
£m
Non-
controlling
interests
£m
Exchange movements on overseas net assets and net investment hedges
633
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
The analysis of other reserves is as follows:
At 1 January 2016
Exchange adjustments
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
Exchange adjustments
Transferred to income and expense in the year on disposals
Net fair value movement in the year
Ordinary shares acquired by ESOP Trusts
Write-down of shares held by ESOP Trusts
At 31 December 2017
Implementation of IFRS 9
At 31 December, as adjusted
Exchange adjustments
Transferred to Retained earnings in the year on disposal of equity investments
Net fair value movement in the year
Write-down of shares held by ESOP Trusts
At 31 December 2018
ESOP Trust
shares
£m
(75)
(16)
–
–
–
(576)
381
(286)
22
–
–
(656)
520
(400)
–
(400)
(26)
–
–
265
(161)
–
–
–
–
–
–
–
(475)
126
284
13
251
(245)
51
1
2
2
–
–
–
75
–
–
–
–
–
–
–
603
–
–
603
Fair value
reserve
£m
295
Cash flow
hedge reserve
£m
(9)
Other
reserves
£m
2,129
–
(268)
23
330
–
–
380
–
(42)
(9)
–
–
329
(288)
41
–
(94)
193
–
140
–
–
–
6
–
–
(3)
–
–
(8)
–
–
(11)
–
(11)
–
–
(36)
–
(47)
–
–
–
–
–
–
2,129
–
–
–
–
–
2,129
–
2,129
–
–
–
–
Total
£m
646
251
(245)
51
1
2
2
603
(475)
126
962
Total
£m
2,340
(16)
(268)
23
336
(576)
381
2,220
22
(42)
(17)
(656)
520
2,047
(288)
1,759
(26)
(94)
157
265
Other reserves include various non-distributable merger and pre-merger reserves amounting to £1,849 million at 31 December 2018
(2017 – £1,849 million; 2016 – £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 2018 (2017 – £280 million; 2016 – £280 million).
2,129
2,061
Notes to the financial statements continuedGSK Annual Report 2018
189
35. Related party transactions
At 31 December 2018, GSK owned 32 million shares or 31.7% 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 £209 million
(2017 – £173 million). At 31 December 2018, the balance payable by GSK to Innoviva was £64 million (2017 – £53 million).
At 31 December 2018, 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 2018, GSK sold £43 million (2017 – £41 million) of its vaccine products into the joint venture. At 31 December 2018, the trading
balance due to GSK from JVC was £15 million (2017 – £11 million) and the balance payable by GSK to JVC was £nil (2017 – £nil).
Loans of £5 million to Medicxi Ventures I LP and £6 million to Index Ventures Life VI (Jersey) LP remained due to GSK at 31 December 2018.
In 2018, GSK increased the equity investment in Kurma Biofund II, FCPR by £3 million, Apollo Therapeutics LLP by £2 million and Longwood
Founders Fund LP by £0.2 million, and reduced a liability with Qura Therapeutics LLC by £3 million. As at 31 December 2018, the
outstanding liability to Qura was £4 million.
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
Gain on Consumer Healthcare Joint Venture put hedging
Business acquisition costs
Changes in working capital:
Decrease/(increase) in inventories
Increase in trade receivables
Increase in trade payables
Decrease in other receivables
Contingent consideration paid (see Note •)
Other non-cash increase in contingent consideration liabilities
Increase in other payables
Increase/(decrease) in pension and other provisions
Share-based incentive plans
Fair value adjustments
Other
2018
£m
4,046
754
(31)
717
954
902
350
(63)
(201)
(3)
(4)
(513)
47
51
(429)
131
18
(984)
1,250
2,362
102
360
(7)
(62)
5,701
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
Cash generated from operations
9,747
8,258
8,106
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
190
37. Reconciliation of net cash flow to movement in net debt
Net debt at beginning of year
Increase/(decrease) in cash and bank overdrafts
Decrease in liquid investments
Net increase in long-term loans
Repayment of short-term Notes
(Increase in)/repayment of other 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
Cash and cash equivalents – AHFS
Overdrafts
Debt due within one year:
Commercial paper
European/US Medium Term Notes and bank facilities
Other
Debt due after one year:
European/US Medium Term Notes and bank facilities
Other
Net debt
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
Total liabilities from financing activities
2018
£m
(13,178)
479
–
(10,138)
2,067
(81)
28
(776)
(22)
(8,443)
2017
£m
(13,804)
(905)
(4)
(2,233)
2,636
564
23
585
(40)
626
2016
£m
(10,727)
(1,164)
–
–
865
(1,013)
18
(1,781)
(2)
(3,077)
(21,621)
(13,178)
(13,804)
Reclass-
ifications
£m
–
(485)
485
–
–
–
(4,824)
(16)
(4,840)
4,824
16
4,840
Cash flow
£m
–
At 31 December
2018
£m
84
522
(43)
479
(65)
2,067
12
2,014
3,874
485
(272)
4,087
(630)
(4,849)
(42)
(5,521)
(10,138)
–
(10,138)
(20,227)
(44)
(20,271)
–
(7,645)
(21,621)
(4,840)
4,840
2,014
(10,138)
(5,521)
(20,271)
–
–
–
–
–
–
–
4
–
4
4
–
4
(10)
–
(802)
(808)
–
–
–
–
6
19
766
129
–
(239)
(7,333)
(25,902)
At 1 January
2018
£m
78
Exchange
£m
5
Other
£m
1
Profit
and loss
£m
–
3,833
–
(233)
3,600
(529)
(2,037)
(26)
(2,592)
(14,221)
(43)
(14,264)
(13,178)
(2,592)
(14,264)
2
–
(203)
(17,057)
4
4
8
(36)
(55)
(1)
(92)
(696)
(1)
(697)
(776)
(92)
(697)
1
(19)
(2)
(809)
–
–
–
–
–
(11)
(11)
–
(16)
(16)
(26)
(11)
(16)
130
–
2
105
For further information on significant changes in net debt see Note 31, ‘Net debt’.
Notes to the financial statements continuedGSK Annual Report 2018 191
38. Acquisitions and disposals
Details of the acquisition and disposal of significant subsidiaries and associates, joint ventures and other businesses are given below:
2018
Business acquisitions
There were no business acquisitions during 2018.
Business disposals
GSK made a number of small business disposals during the year for a net cash consideration of £2 million.
Cash flows
Cash consideration
Net deferred consideration received
Cash and cash equivalents divested
Cash inflow
Associates
and joint
venture
investments
£m
(10)
Associates
and joint
venture
disposals
£m
3
–
–
(10)
–
–
3
Business
disposals
£m
2
24
–
26
Transactions signed but not yet completed
In December 2018, GSK agreed to divest Horlicks and other Consumer Healthcare nutrition brands to Unilever plc and to merge
GSK Consumer Healthcare Limited with Hindustan Unilever Limited for a total consideration valued at approximately £3.1 billion. GSK
Consumer Healthcare Limited is a public company listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) in
India, in which GSK holds a 72.5% stake. Hindustan Unilever Limited is a public company listed on the NSE and BSE. Following the merger,
GSK will own approximately 5.7% of Hindustan Unilever Limited. The transaction is expected to complete by the end of 2019, subject to
the fulfilment of certain conditions including the approval of the merger by the shareholders of GSK Consumer Healthcare Limited and
Hindustan Unilever Limited.
The Group has entered into forward foreign exchange contracts which have been designated as a cash flow hedge of part of the foreign
exchange exposure arising on the transaction. In addition, the exposure to share price movements in the forward purchase of shares in
Hindustan Unilever Limited has been recognised as an embedded derivative. The embedded derivative was in an asset position and had
a fair value of £100 million at 31 December 2018.
In December 2018, GSK agreed to acquire 100% of Tesaro, Inc., an oncology-focused biopharmaceutical company, for $5.1 billion
(£4.0 billion) in cash. This transaction completed on 22nd January 2019. The exercise to determine the acquisition fair values of assets
and liabilities is not yet complete. Initial transaction costs were recognised in December 2018.
In December 2018, GSK agreed to form a new Consumer Healthcare Joint Venture by acquiring Pfizer’s consumer health business in
an all-share transaction. Pfizer will hold 32% of the combined business which will be controlled by GSK. The new Consumer Healthcare
Joint Venture is expected to be formed in the second half of 2019, subject to approvals. Initial transaction costs were recognised in
December 2018.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 192
38. Acquisitions and disposals continued
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
Total
£m
342
(16)
(21)
(18)
(11)
(6)
(5)
(77)
(8)
(100)
157
Total
£m
198
(92)
(7)
(5)
94
Associates
and joint
venture
investments
£m
(15)
Associates
and joint
venture
disposals
£m
198
–
–
–
–
–
(2)
(15)
196
Business
disposals
£m
256
39
(6)
(7)
282
Notes to the financial statements continuedGSK Annual Report 2018 193
38. Acquisitions and disposals continued
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.
Cash flows
Cash consideration (paid)/received after purchase adjustments
Cash and cash equivalents acquired
Cash inflow
In addition, GSK made cash investments of £11 million into associates and joint ventures.
Business
acquisitions
£m
(24)
41
17
Business
disposals
£m
72
–
72
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 194
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 2016
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
Remeasurement through income statement
Cash payments: operating cash flows
Cash payments: investing activities
At 31 December 2018
Shionogi-
ViiV
Healthcare
£m
3,409
Novartis
Vaccines
£m
405
154
2,162
(351)
(66)
(4)
5,304
909
(587)
(84)
5,542
1,188
(703)
(90)
5,937
–
152
(5)
(7)
–
545
53
(7)
(7)
584
56
(281)
(63)
296
Other
£m
41
40
(33)
(2)
–
1
47
(1)
–
–
46
7
–
–
53
Total
£m
3,855
194
2,281
(358)
(73)
(3)
5,896
961
(594)
(91)
6,172
1,251
(984)
(153)
6,286
Of the contingent consideration payable at 31 December 2018, £837 million (2017 – £1,076 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 and Novartis Vaccines contingent consideration liabilities are calculated principally based on the forecast sales
performance of specified products over the lives 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 41.
Shionogi-
ViiV Healthcare
£m
569
Novartis
Vaccines
£m
62
(569)
(238)
256
367
(313)
114
(95)
(62)
(22)
26
7
(7)
(13)
11
29
(25)
Notes to the financial statements continuedGSK Annual Report 2018 195
40. Non-controlling interests
ViiV Healthcare
The ViiV Healthcare subgroup has a material non-controlling interest. Summarised financial information in respect of the ViiV Healthcare
group is as follows:
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
(Decrease)/increase in cash and bank overdrafts in the year
2018
£m
4,665
560
19
579
2018
£m
2,787
2,643
5,430
(2,638)
(8,895)
(11,533)
(6,103)
2018
£m
2,212
(237)
(1,982)
(7)
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
(1,249)
36
(1,213)
2016
£m
1,750
(326)
(1,023)
401
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 £560 million (2017 – profit after taxation of
£825 million; 2016 – loss after taxation of £1,249 million) is stated after charging preferential dividends payable to GSK, Shionogi and Pfizer
and after a charge of £1,194 million (2017 – £909 million; 2016 – £2,186 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
Non-controlling interests in the Consolidated balance sheet
2018
£m
254
332
2017
£m
187
316
2016
£m
(83)
152
(543)
(476)
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 196
40. Non-controlling interests continued
Consumer Healthcare Joint Venture
During 2018, the Group acquired Novartis’ interest in the Consumer Healthcare Joint Venture to obtain 100% ownership. The acquisition
became unconditional on 3 May 2018 and completed on 1 June 2018. Summarised financial information in respect of the Consumer
Healthcare Joint Venture is as follows:
Turnover
Profit after taxation
Other comprehensive (expense)/income
Total comprehensive (expense)/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
Increase/(decrease) in cash and bank overdrafts in the year
Period ended
3 May 2018
£m
2,306
7
(79)
(72)
Period ended
3 May 2018
£m
65
442
(504)
3
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
1,496
(537)
(980)
(21)
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
Non-controlling interests in the Consolidated balance sheet
2018
£m
111
183
–
2017
£m
296
420
3,631
2016
£m
730
346
Notes to the financial statements continuedGSK Annual Report 2018 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
197
2018
£m
2017
£m
4,762
5,254
665
82
561
238
–
9,418
16
15,742
584
107
346
738
38
8,510
12
15,589
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 2018 is mainly attributable to the reduction
in commitments to third parties such as Nkarta, Inc.
In 2018, 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 2017 actuarial funding valuation. A payment of £75 million is due in both 2019 and 2020 and a payment
of £44 million is due in both 2021 and 2022. The table above includes this commitment, but excludes the normal ongoing annual funding
requirement in the UK of approximately £140 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. £161 million (2017 – £117 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
2018
£m
223
173
143
123
105
371
2017
£m
186
149
122
107
94
387
1,138
1,045
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
198
42. Financial instruments and related disclosures
The objective of our Treasury activity is to minimise the post-tax
net cost of financial operations and reduce its volatility to benefit
earnings and cash flows. GSK uses a variety of financial instruments
to finance its operations and derivative financial instruments to
manage market risks from these operations. Derivatives principally
comprise of foreign exchange forward contracts and swaps which
are used to swap borrowings and liquid assets into currencies
required for Group purposes as well as interest rate swaps which
are used to manage exposure to financial risks from changes in
interest rates. These financial instruments reduce the uncertainty
of foreign currency transactions and interest payments.
Derivatives are used exclusively for hedging purposes in relation
to underlying business activities and not as trading or speculative
instruments.
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
£21.6 billion (see Note 31, ‘Net debt’) and total equity, including
items related to non-controlling interests, of £3.7 billion (see
‘Consolidated statement of changes in equity’ on page 142).
Total capital, including that provided by non-controlling interests,
is £25.3 billion.
The Group continues to manage its financial policies to a credit
profile that particularly targets short-term credit ratings of A-1 and
P-1 while maintaining single A long-term ratings consistent with
those targets. The Group’s long-term credit rating with Standard and
Poor’s is A+ (negative outlook) and with Moody’s Investor Services
(‘Moody’s’) it is A2 (negative outlook). The Group’s short-term credit
ratings are A-1 and P-1 with Standard and Poor’s and Moody’s
respectively.
Liquidity risk management
GSK’s policy is to borrow centrally in order to meet anticipated
funding requirements. The strategy is to diversify liquidity sources
using a range of facilities and to maintain broad access to financial
markets.
At 31 December 2018, GSK had £5.8 billion of borrowings
repayable within one year and held £4.5 billion of cash and cash
equivalents and liquid investments of which £2.9 billion was
held centrally. GSK has access to short-term finance under a
$10.0 billion (£7.9 billion) US commercial paper programme;
$0.8 billion (£0.6 billion) was in issue at 31 December 2018
(2017 – $0.7 billion). GSK has a £1.9 billion five-year committed
facility and a $2.5 billion (£2.0 billion) 364-day committed facility.
The five-year committed facility was agreed in September 2015 and
was extended by one year to 2021 in September 2016. The 364-day
committed facility was agreed in September 2018. These facilities
were undrawn at 31 December 2018. GSK considers this level of
committed facilities to be adequate, given current liquidity
requirements.
Additional bank facilities were agreed in 2018 to support
transactions and two remain active at 31 December 2018. In
June 2018, £3.5 billion was drawn to support the acquisition from
Novartis of the remaining stake in the Consumer Healthcare Joint
Venture. This facility, which is due to mature in December 2019
includes one extension option through to June 2020.
In addition a $5.0 billion bank facility was agreed in December 2018
to support the acquisition of Tesaro and was undrawn at 31
December 2018. This 12-month facility includes two six-month
extension options.
GSK has a £20.0 billion European Medium Term Note programme
and at 31 December 2018, £11.4 billion of notes were in issue under
this programme. The Group also had $12.9 billion (£10.2 billion) of
notes in issue at 31 December 2018 under a US shelf registration.
GSK’s borrowings mature at dates between 2019 and 2045.
The put option owned by Pfizer in ViiV Healthcare is exercisable.
In reviewing liquidity requirements GSK considers that sufficient
financing options are available should the put option be exercised.
Market risk
Interest rate risk management
The objective of GSK’s Treasury activity is to minimise the effective
net interest cost and to balance the mix of debt at fixed and floating
rates over time.
The Group’s main interest rate risk arises from borrowings and
investments with floating rates and refinancing of maturing fixed rate
debt where any changes in interest rates will affect future cash flows
or the fair values of financial instruments. The policy on interest rate
risk management limits the net amount of floating rate debt to a
specific cap, reviewed and agreed no less than annually by the
Board.
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. This includes some borrowings for which interest
rate swaps are in place which removes the impact of the associated
periodic repricing. Short-term borrowings including bank facilities
are exposed to the risk of future changes in market interest rate as
are the majority of cash and liquid investments.
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).
Notes to the financial statements continuedGSK Annual Report 2018
199
42. Financial instruments and related disclosures continued
Credit risk
Credit risk is the risk that a counterparty will default on its
contractual obligations resulting in financial loss to the Group
and arises on cash and cash equivalents, favourable derivative
financial instruments held with banks and financial institutions
as well as credit exposures to wholesale and retail customers,
including outstanding receivables.
The Group considers its maximum credit risk at 31 December
2018 to be £11,080 million (31 December 2017 – £9,988 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 201 for details on the
Group’s total financial assets. At 31 December 2018, GSK’s
greatest concentration of credit risk was £0.7 billion with Citibank
(A+/A1) (2017 – £0.5 billion with Citibank (A/A1) and £0.5 billion
with one US wholesaler (BBB+/Baa2)).
There has been no change in the estimation techniques or
significant assumptions made during the current reporting period in
assessing the loss allowance for financial assets at amortised cost
since the adoption of IFRS 9 at the start of the current reporting
period.
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 208 sets out the Group’s financial assets and liabilities on
an offset basis.
At 31 December 2018, £20 million of cash is categorised as held
with unrated or sub-investment grade rated counterparties (lower
than BBB-/Baa3) of which £1 million is cash in transit. The remaining
exposure is concentrated in overseas banks used for local cash
management or investment purposes, including £6 million in Nigeria
held with United Bank for Africa, Zenith Bank, Stanbic IBTC Bank and
First Bank of Nigeria, £3 million with BTV in Austria, £2 million with
Nacion Argentina bank, and £2 million with Banco de la Republica in
Uruguay. Of the £381 million of bank balances and deposits held
with BBB/Baa rated counterparties, £22 million was held with BBB-/
Baa3 rated counterparties, including balances or deposits of £20
million with HDFC Bank in India and £1 million with State Bank of
India. These banks are used for local investment purposes.
GSK measures expected credit losses over cash and cash
equivalents as a function of individual counterparty credit ratings
and associated 12 month default rates. Expected credit losses over
cash and cash equivalents and third-party financial derivatives are
deemed to be immaterial and no such loss has been experienced
during 2018.
2018
Bank balances and deposits
US Treasury and Treasury repo only money market funds
Liquidity funds
Government securities
3rd party financial derivatives
Total
2017
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
–
449
1,572
–
–
2,021
AAA/Aaa
£m
–
1,715
403
–
–
2,118
AA/Aa
£m
662
–
–
83
19
764
AA/Aa
£m
423
–
–
77
26
526
A/A
£m
1,275
–
–
–
127
1,402
A/A
£m
1,167
–
–
–
42
1,209
BBB/Baa
£m
381
–
–
1
4
386
BBB/Baa
£m
80
–
–
1
–
81
BB+/Ba1
and below
/unrated
£m
20
–
–
–
–
20
BB+/Ba1
and below
/unrated
£m
45
–
–
–
–
45
Total
£m
2,338
449
1,572
84
150
4,593
Total
£m
1,715
1,715
403
78
68
3,979
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. These credit ratings
form the basis of the assessment of the expected credit loss on Treasury related balances held at amortised cost being bank balances and
deposits and Government securities.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 200
42. Financial instruments and related disclosures continued
GSK’s centrally managed cash reserves amounted to £2.9 billion
at 31 December 2018, all available within three months. This
includes £1.7 billion of cash managed by the Group for ViiV
Healthcare, a 78.3% owned subsidiary. The Group has invested
centrally managed liquid assets in bank deposits, Aaa/AAA rated
US Treasury and Treasury repo only money market funds and Aaa/
AAA rated liquidity funds.
Wholesale and retail credit risk
Outside the US, no customer accounts for more than 5% of the
Group’s trade receivables balance.
In the US, in line with other pharmaceutical companies, the Group
sells its products through a small number of wholesalers in addition
to hospitals, pharmacies, physicians and other groups. Sales to the
three largest wholesalers amounted to approximately 82% of the
sales of the US Pharmaceuticals and Vaccines businesses in 2018.
At 31 December 2018, the Group had trade receivables due from
these three wholesalers totalling £2,134 million (2017 – £1,265
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.
All new customers are subject to a credit vetting process and
existing customers will be subject to a review at least annually.
The vetting process and subsequent reviews involves obtaining
information including the customer’s status as a government or
private sector entity, audited financial statements, credit bureau
reports, debt rating agency (e.g. Moody’s, Standard & Poor’s)
reports, payment performance history (from trade references,
industry credit groups) and bank references.
Trade receivables consist of a large number of customers, spread
across diverse industries and geographical areas. Ongoing credit
evaluation is performed on the financial condition of accounts
receivable and, where appropriate, credit insurance is purchased
or factoring arrangements put in place.
The amount of information obtained is proportional to the level of
exposure being considered. The information is evaluated quantitatively
(i.e., credit score) and qualitatively (i.e. judgement) in conjunction with
the customer’s credit requirements to determine a credit limit.
Trade receivables are grouped into customer segments that have
similar loss patterns to assess credit risk while other receivables
other financial assets are assessed individually. Historical and
forward-looking information is considered to determine the
appropriate expected credit loss allowance. The Group believes
there is no further credit risk provision required in excess of the
allowance for expected credit losses (see Note 24, ‘Trade and
other receivables’).
Credit enhancements
The Group uses credit enhancements including factoring and
credit insurance to minimise credit risk of the trade receivables in
the Group. During 2018, a new Global Insurance Programme was
launched in order to consolidate all locally negotiated programmes
and to expand the use of credit insurance to new markets. At
31 December 2018, £240 million of GSK trade receivables were
insured protecting GSK’s account receivables balance from loss
due to credit risks such as default, insolvency and bankruptcy.
Each Group entity assesses the credit risk of its private customers
to determine if credit insurance is required.
Factoring arrangements are managed locally by entities and are
used to mitigate risk arising from large credit risk concentrations.
All factoring arrangements are non-recourse.
Fair value of financial assets and liabilities
The table on pages 201 and 202 presents the carrying amounts
and the fair values of the Group’s financial assets and liabilities at
31 December 2018 and 31 December 2017.
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 – approximates to the carrying amount
– 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 (a level 1 fair
value measurement) in the case of European and US Medium
Term Notes; approximates to the carrying amount in the case
of other fixed rate borrowings and floating rate bank 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, and
– Lease obligations – approximates to the carrying amount.
Notes to the financial statements continuedGSK Annual Report 2018 42. Financial instruments and related disclosures continued
Financial assets measured at fair value through other comprehensive
income (FVTOCI):
Other investments designated at FVTOCI
Trade and other receivables
Financial assets measured at amortised cost:
Other non-current assets
Trade and other receivables
Liquid investments
Cash and cash equivalents
Other items in Assets held for sale
Financial assets mandatorily measured at fair value through profit or loss (FVTPL):
Other investments
Other non-current assets
Trade and other receiveables
Derivatives designated and effective as hedging instruments
Held for trading derivatives that are not in a designated and
effective hedging relationship
Cash and cash equivalents
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
Other non-current liabilities
Other items in Assets held for sale
Financial liabilities mandatorily at fair value through profit or loss (FVTPL):
Contingent consideration liabilities
Derivatives designated and effective as hedging instruments
Held for trading derivatives that are not in a designated and
effective hedging relationship
Total financial liabilities
Net financial assets and financial liabilities
Notes
a
a,b
b
b
b
a
a,b
a,b
a,d,e
a,d,e
a
d
f
c
c
c
c
a,c
a,d,e
a,d,e
201
2018
Fair
value
£m
1,250
1,687
49
3,761
84
2,338
47
72
716
120
69
Carrying
value
£m
1,250
1,687
49
3,761
84
2,338
47
72
716
120
69
188
2,021
12,402
188
2,021
12,402
(8,213)
(13,307)
(290)
(630)
(8,279)
(15,475)
(290)
(630)
(3,556)
(3,556)
(25,996)
(28,230)
(68)
(26,064)
(13,338)
(58)
(149)
(167)
(68)
(28,298)
(13,338)
(58)
(149)
(167)
(6,286)
(105)
(6,286)
(105)
(23)
(46,190)
(23)
(48,424)
(33,788)
(36,022)
The valuation methodology used to measure fair value in the above table and the table on page 202 is described and categorised on
page 200.
Trade and other receivables, Other non-current assets, Trade and other payables, Other provisions, Other non-current liabilities,
Contingent consideration liabilities and Other items in Assets held for sale are reconciled to the relevant Notes on pages 204 and 205.
Cash and cash equivalents in the table above include £485 million reported in Assets held for sale (see Note 26, ‘Assets held for sale’).
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
202
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
Fair value of investments in GSK shares
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
3,833
3,833
5,495
5,495
506
5
71
506
5
71
10,906
10,906
(4,315)
(11,894)
(236)
(529)
(49)
(4,405)
(14,743)
(236)
(529)
(49)
(17,023)
(19,962)
(66)
(66)
(17,089)
(20,028)
(20,325)
(20,325)
(6,172)
(6,172)
(26)
(48)
(26)
(48)
(43,660)
(46,599)
(32,754)
(35,693)
At 31 December 2018, the Employee Share Ownership Plan (ESOP) Trusts held GSK shares with a carrying value of £161 million
(2017 – £400 million) and a market value of £619 million (2017 – £882 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 2018, 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 2018,
GSK held Treasury shares at a cost of £5,800 million (2017 – £5,800 million) which has been deducted from retained earnings.
Notes to the financial statements continuedGSK Annual Report 2018
203
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 2018
Financial assets at fair value
Financial assets at fair value through other comprehensive income (FVTOCI):
Other investments designated at FVTOCI
Trade and other receivables
Financial assets mandatorily measured at fair value through profit or loss (FVTPL):
Other investments
Other non-current assets
Trade and other receivables
Derivatives designated and effective as hedging instruments
Held for trading derivatives that are not in a designated and effective hedging relationship
Cash and cash equivalents
Financial liabilities at fair value
Financial liabilities mandatorily at fair value through profit or loss (FVTPL):
Contingent consideration liabilities
Derivatives designated and effective as hedging instruments
Held for trading derivatives that are not in a designated and effective hedging relationship
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
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
656
–
–
–
–
–
–
2,021
2,677
–
–
–
–
–
1,687
–
675
79
69
182
–
594
–
72
41
41
–
6
–
2,692
754
1,250
1,687
72
716
120
69
188
2,021
6,123
–
(105)
(23)
(128)
(6,286)
–
–
(6,286)
(6,286)
(105)
(23)
(6,414)
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)
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
204
42. Financial instruments and related disclosures continued
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 and settlements
Transfers from Level 3
Exchange adjustments
At 31 December
2018
£m
(5,657)
(1,233)
123
–
1,095
381
(27)
(241)
27
(5,532)
2017
£m
(5,486)
(970)
22
80
685
117
(52)
(24)
(29)
(5,657)
The net losses of £1,233 million (2017 – £970 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 £1,233 million were reported in
Other operating income (2017 – £971 million losses in Other operating income and £1 million income in Finance income). £1,188 million
(2017 – £909 million) arose from remeasurement of the contingent consideration payable for the acquisition of the former Shionogi-ViiV
Healthcare joint venture and £56 million (2017 – £53 million) arose from remeasurement of the contingent consideration payable for the
acquisition of the Novartis Vaccines business. Net gains of £123 million (2017 – £22 million) attributable to Level 3 financial instruments
reported in Other comprehensive income as Fair value movements on equity investments included net gains of £117 million (2017 – net
losses of £6 million) in respect of financial instruments held at the end of the year, of which net gains of £98 million (2017 – net losses of
£6 million) arose prior to transfer from Level 3 on equity investments which transferred to a Level 1 valuation methodology as a result
of listing on a recognised stock exchange during the year.
Financial liabilities measured using Level 3 valuation methods at 31 December included £5,937 million (2017 – £5,542 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 £296 million (2017 – £584 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, Other non-current assets and other items in Assets held for sale in scope of
IFRS 9 (2017 – IAS 39)
The following table reconciles financial instruments within Trade and other receivables, Other non-current assets and other items in Assets
held for sale which fall within the scope of IFRS 9 (2017 - 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
IFRS 9 (2017 – IAS 39).
Trade and other receivables
(Note 24)
Other non-current assets
(Note 22)
Other items in Assets held
for sale (Note 26)
At FVTPL
£m
At FVTOCI
£m
Amortised
cost
£m
Financial
instruments
£m
Non-
financial
instruments
£m
Total
£m
At FVTPL
£m
Loans and
receivables
£m
Financial
instruments
£m
2018
Non-
financial
instruments
£m
2017
Total
£m
120
1,687
3,761
5,568
855
6,423
42
5,148
5,190
810
6,000
716
–
836
–
–
49
47
1,687
3,857
765
811
1,576
47
6,380
37
84
1,703
8,083
464
–
506
347
811
602
1,413
–
–
–
–
5,495
6,001
1,412
7,413
The Group applied IFRS 9 ‘Financial Instruments’ with effect from 1 January 2018 and therefore now accounts for expected credit losses on
initial recognition of financial assets. The following table shows the ageing of financial assets which were past due at 31 December 2017 and
for which no provision for bad or doubtful debts had been made at that date under IAS 39:
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
Notes to the financial statements continuedGSK Annual Report 2018
205
42. Financial instruments and related disclosures continued
(c) Trade and other payables, Other provisions, Other non-current liabilities, Contingent consideration liabilities
and other items in Assets held for sale in scope of IFRS 9 (2017 - IAS 39)
The following table reconciles financial instruments within Trade and other payables, Other provisions, Other non-current liabilities,
Contingent consideration liabilities and other items in Assets held for sale which fall within the scope of IFRS 9/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 IFRS 9/IAS 39.
Trade and other payables
(Note 27)
Other provisions
(Note 29)
Other non-current liabilities
(Note 30)
Contingent consideration
liabilities (Note 39)
Other items in Assets held
for sale (Note 26)
At FVTPL
£m
Amortised
cost
£m
Financial
instruments
£m
Non-
financial
instruments
£m
Total
£m
At FVTPL
£m
Amortised
cost
£m
Financial
instruments
£m
2018
Non-
financial
instruments
£m
2017
Total
£m
–
–
–
(13,338)
(13,338)
(699)
(14,037)
(58)
(58)
(1,365)
(1,423)
(149)
(149)
(789)
(938)
–
–
–
(20,129)
(20,129)
(841)
(20,970)
(117)
(117)
(1,148)
(1,265)
(79)
(79)
(902)
(981)
(6,286)
–
(6,286)
–
(6,286)
(6,172)
–
(167)
(167)
(53)
(220)
–
–
–
(6,172)
–
–
–
(6,172)
–
(6,286)
(13,712)
(19,998)
(2,906)
(22,904)
(6,172)
(20,325)
(26,497)
(2,891)
(29,388)
(d) Derivative financial instruments and hedging programmes
Derivatives are only used for economic hedging purposes and not as speculative investments and are classified as ‘held for trading’, other
than designated and effective hedging instruments, and are presented as current assets or liabilities if they are expected to be settled within
12 months after the end of the reporting period, otherwise they are classified as non-current. The Group has the following derivative financial
instruments:
Non-current
Cash flow hedges – Interest rate swap contracts
(principal amount – £1,266 million (2017 – £nil))
Net investment hedges – Cross currency swaps
(principal amount – £1,575 million (2017 – £nil))
Current
Cash flow hedges – Foreign exchange contracts
(principal amount – £1,809 million (2017 – £38 million))
Net investment hedges – Foreign exchange contracts
(principal amount – £7,316 million (2017 – £6,333 million))
Derivatives designated and effective as hedging instruments
Non-current
Embedded and other derivatives
Current
Foreign exchange contracts
(principal amount – £18,537 million (2017 – £14,449 million))
Embedded and other derivatives
Derivatives classified as held for trading
Total derivative instruments
2018
Fair value
Liabilities
£m
Assets
£m
2017
Fair value
Liabilities
£m
Assets
£m
–
64
1
4
69
4
82
102
188
257
(1)
–
(56)
(48)
(105)
–
(23)
–
(23)
(128)
–
–
–
5
5
8
62
1
71
76
–
–
(1)
(25)
(26)
–
(47)
(1)
(48)
(74)
Fair value hedges
At 31 December 2018, 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 201 includes £8,213 million (2017 – £4,315 million) that are designated as hedging instruments in net
investment hedges.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
206
42. Financial instruments and related disclosures continued
Cash flow hedges
During 2018, the Group entered into forward foreign exchange contracts which have been designated as cash flow hedges. These were
entered into to hedge the foreign exchange exposure arising on cash flows from Euro denominated coupon payments relating to notes issued
under the Group’s European Medium Term Note programme, on the buyout of Novartis’ non-controlling interest in the Consumer Healthcare
Joint Venture in 2018 and on the planned divestment of Horlicks and other nutrition brands in 2019.
The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. 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.
Foreign exchange forward contracts and swaps
In the current year, the Group has designated certain foreign exchange forward contracts and swaps as cash flow and net investment
hedges. The following tables detail the foreign exchange forward contracts and swaps outstanding at the end of the reporting period,
as well as information on the related hedged items. Foreign exchange derivative financial assets and liabilities are presented in the line
‘Derivative financial instruments’ (either as assets or liabilities) on the Consolidated balance sheet. The notional value of foreign exchange
forward contracts and swaps is the absolute total of outstanding positions at the balance sheet date.
Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments
to ensure that an economic relationship exists between the hedged item and hedging instrument. The Group enters into hedge relationships
where the critical terms of the hedging instrument match exactly with the terms of the hedged item, and so a qualitative assessment of
effectiveness is performed. If changes in circumstances affect the terms of the hedged item such that the critical terms no longer match
exactly with the critical terms of the hedging instrument, the Group uses the hypothetical derivative method to assess effectiveness.
The main source of hedge ineffectiveness in these hedging relationships is the effect of the counterparty and the Group’s own credit risk
on the fair value of the foreign exchange forward contracts and swaps, which is not reflected in the fair value of the hedged item attributable
to changes in foreign exchange rates. No other sources of ineffectiveness emerged from these hedging relationships. Consequently, there
was no ineffectiveness to be recorded from cash flow hedges and net investments in foreign entity hedges.
Hedging instruments
Cash flow hedges
Foreign exchange contracts
Buy foreign currency:
Less than 3 months
3 to 6 months
Over 6 months
Sell foreign currency:
Less than 3 months
3 to 6 months
Over 6 months
Net investment hedges
Foreign exchange contracts
Sell foreign currency:
Less than 3 months
3 to 6 months
Over 6 months
Hedged items
Cash flow hedges
Variability in cash flows from a highly probable forecast transaction
Variability in cash flows from foreign exchange exposure arising on
Euro denominated coupon payments relating to debt issued
Net investment hedges
Investment in European foreign operations
Average
exchange rate
Foreign
currency
Notional
value
£m
–
1.13
–
–
Euro
–
–
–
–
–
96.40 Indian Rupee
1.11
–
1.11
Euro
–
Euro
–
26
–
–
–
1,783
1,809
6,933
–
383
7,316
2018
Fair
value
£m
–
1
–
–
–
(56)
(55)
(40)
–
(4)
(44)
2018
Change in value for calculating
hedge ineffectiveness
£m
Balance in cash flow hedge
reserve/foreign currency
translation reserve for
continuing hedges
£m
56
(1)
50
(49)
1
286
There are no balances in the cash flow hedge reserve arising from hedging relationships for which hedge accounting is no longer applied.
Notes to the financial statements continuedGSK Annual Report 2018
207
42. Financial instruments and related disclosures continued
The following table details the effectiveness of the hedging relationships and the amounts reclassified from the hedging reserve to
profit or loss:
Cash flow hedges
Variability in cash flows from a highly probable forecast transaction
Variability in cash flows from foreign exchange exposure arising on
Euro denominated coupon payments relating to debt issued
Net investment hedges
Net investment in European foreign operations
Amount reclassified to profit or loss
2018
Hedging
gains/(losses)
recognised in
reserves
£m
Amount
of hedge
ineffectiveness
recognised in
profit or loss
£m
Line item
in profit or
loss in
which hedge
ineffectiveness
is included
Hedged
future cash
flows
no longer
expected to
occur
£m
127
1
286
–
–
7
Other
operating
income/
(expense)
Finance
income/
(expense)
Finance
income/
(expense)
–
–
–
As hedged
item affects
profit or loss
£m
(176)
–
–
Line item
in which
reclassification
adjustment
is included
Other
operating
income/
(expense)
Finance
income/
(expense)
Finance
income/
(expense)
Interest rate swap contracts
The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps, where at quarterly intervals the difference
between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional principal amounts are exchanged.
The interest rate swap contracts, exchanging floating rate interest for fixed interest, have been designated as cash flow hedges to hedge the
variability of the interest cash flows associated with floating rate debt relating to notes issued under the Group’s European Medium Term Note
programme. The interest rate swaps and the interest payments on the loan occur simultaneously and the amount accumulated in equity is
reclassified to profit or loss over the period that the floating rate interest payments affect profit or loss.
The critical terms of the interest rate swap contracts and their corresponding hedged items are the same. A qualitative assessment of
effectiveness is performed and it is expected that the value of the interest rate swap contracts and the value of the corresponding hedged
items will systematically change in opposite directions in response to movements in the underlying interest rates. The main sources of
ineffectiveness in these hedge relationships are the effects of currency basis risk and the counterparty’s and the Group’s own credit risk on
the fair value of the interest rate swap contracts, which are not reflected in the fair value of the hedged item attributable to the change in
interest rates. No other sources of ineffectiveness emerged from these hedging relationships.
The following tables provide information regarding interest rate swap contracts outstanding and the related hedged items at 31 December
2018. Interest rate swap contract assets and liabilities are presented in the line ‘Derivative financial instruments’ (either as assets or liabilities)
on the Consolidated balance sheet.
Hedging instruments
Less than 1 year
1 to 2 years
2 to 5 years
Over 5 years
Hedged items
Variable rate borrowings
Average
contracted fixed
rate
%
–
0.11
0.16
–
Change in
fair value for
recognising
hedge
ineffectiveness
£m
–
–
–
–
Notional
principal
value
£m
–
676
591
–
2018
Fair value
assets/
(liabilities)
£m
–
(1)
23
–
2018
Change in value
used for
calculating
hedge
ineffectiveness
£m
3
Balance in cash
flow hedge
reserve for
continuing
hedges
£m
(3)
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 208
42. Financial instruments and related disclosures continued
The following table details the effectiveness of the hedging relationships and the amounts reclassified from the hedging reserve to profit or loss:
Cash flow hedges
Variability in cash flows
Pre-hedging of long-term interest rates
Amount reclassified to profit or loss
2018
Hedging
gains/(losses)
recognised in
reserves
£m
Amount
of hedge
ineffectiveness
recognised in
profit or loss
£m
Line item
in profit or
loss in
which hedge
ineffectiveness
is included
Hedged
future cash
flows
no longer
expected to
occur
£m
Line item
in which
reclassification
adjustment is
included
As hedged
item affects
profit or loss
£m
(3)
15
–
–
Finance
income/
(expense)
Finance
income/
(expense)
–
–
(2)
3
Finance
income/
(expense)
Finance
income/
(expense)
(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 2018 and 31 December 2017. The column ‘Net amount’ shows the impact on the
Group’s balance sheet if all offset rights were exercised.
At 31 December 2018
Financial assets
Trade and other receivables
Derivative financial instruments
Financial liabilities
Trade and other payables
Derivative financial instruments
At 31 December 2017
Financial assets
Trade and other receivables
Derivative financial instruments
Financial liabilities
Trade and other payables
Derivative financial instruments
Gross
financial
assets/
(liabilities)
£m
5,568
257
(13,338)
(128)
Gross
financial
assets/
(liabilities)
£m
5,191
76
(20,130)
(74)
Financial
(liabilities)/
assets
offset
£m
Net financial
assets/
(liabilities)
£m
Related
amounts not
offset
£m
5,568
257
(37)
(62)
–
–
–
–
(1)
–
1
–
(13,338)
(128)
37
62
(13,301)
(66)
Financial
(liabilities)/
assets
offset
£m
Net financial
assets/
(liabilities)
£m
Related
amounts not
offset
£m
5,190
76
(31)
(64)
(20,129)
(74)
31
64
(20,098)
(10)
Net
amount
£m
5,531
195
Net
balance
£m
5,159
12
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.
Notes to the financial statements continuedGSK Annual Report 2018
209
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
2018
Total
debt
£m
(5,769)
(1,757)
(1,570)
(1,568)
(2,010)
(5,833)
(7,489)
(25,996)
(20,322)
(5,635)
(25,957)
(39)
(25,996)
2017
Total
£m
(2,802)
(1,340)
(1,076)
(16)
(1,475)
(3,664)
(6,650)
(17,023)
(16,209)
(765)
(16,974)
(49)
(17,023)
(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
2018
2017
Increase/(decrease) in
income
£m
36
(7)
15
Increase/(decrease) in
income
£m
76
(5)
9
2018
2017
Increase/(decrease) in
income
£m
(30)
6
(13)
Increase/(decrease) in
income
£m
(66)
4
(8)
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
210
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.
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
2018
2017
Increase/(decrease)
in equity
£m
Increase/(decrease)
in equity
£m
–
(1,307)
2018
1
(1,028)
2017
Increase/(decrease)
in equity
£m
Increase/(decrease)
in equity
£m
–
1,091
(1)
861
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
2018
2017
(Increase)/decrease
in net debt
£m
(714)
(Increase)/decrease
in net debt
£m
(637)
(60)
15
2018
197
(4)
2017
(Increase)/decrease
in net debt
£m
610
50
(13)
(Increase)/decrease
in net debt
£m
549
(165)
4
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 2018 would have
decreased by approximately £13 million (2017 – £5 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
2018
2017
Increase/(decrease)
in income
£m
(2)
Increase/(decrease)
in income
£m
24
1
(12)
(24)
5
Notes to the financial statements continuedGSK Annual Report 2018
211
42. Financial instruments and related disclosures continued
(h) Contractual cash flows for non-derivative financial liabilities and derivative instruments
The following tables provide an analysis of the anticipated contractual cash flows including interest payable for the Group’s non-derivative
financial liabilities on an undiscounted basis. 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 2018
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 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
Interest
on debt
£m
(714)
(708)
(675)
(620)
(567)
(2,370)
(3,764)
(9,418)
Interest
on debt
£m
(555)
(497)
(488)
(488)
(468)
(2,018)
(3,996)
(8,510)
Obligations
under finance
leases
£m
(24)
Finance charge
on obligations
under finance
leases
£m
(5)
Trade payables
and other
liabilities not
in net debt
£m
(14,278)
(18)
(11)
(6)
(3)
(6)
–
(68)
(2)
(2)
(1)
(1)
(5)
–
(16)
(1,107)
(902)
(851)
(826)
(3,748)
(1,468)
(23,180)
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)
Total
£m
(20,792)
(3,610)
(3,182)
(3,070)
(3,367)
(12,004)
(12,811)
(58,836)
Total
£m
(24,903)
(2,723)
(2,388)
(1,291)
(2,705)
(9,331)
(12,187)
(55,528)
Debt
£m
(5,771)
(1,775)
(1,592)
(1,592)
(1,970)
(5,875)
(7,579)
(26,154)
Debt
£m
(2,802)
(1,344)
(1,078)
(16)
(1,483)
(3,694)
(6,720)
(17,137)
Anticipated contractual cash flows for the repayment of debt and debt interest have increased by £9.9 billion over the year due to funding
of the buyout of Novartis’ 36.5% stake in the Consumer Healthcare Joint Venture, an increase in the issuance of commercial paper and
unfavourable exchange impacts from the translation of non-Sterling denominated debt.
The table below provides an analysis of the anticipated contractual cash flows for the Group’s derivative instruments excluding equity options
which do not give rise to cash flows, and other embedded derivatives, 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.
Receivables
Foreign
exchange
forward
contracts
and swaps
£m
26,680
1,575
–
28,255
Interest
rate swaps
£m
49
48
24
121
Interest
rate swaps
£m
(3)
(3)
(2)
(8)
2018
Payables
Foreign
exchange
forward
contracts
and swaps
£m
(26,802)
(1,513)
–
(28,315)
Receivables
Foreign
exchange
forward
contracts
and swaps
£m
20,319
–
–
20,319
Interest
rate swaps
£m
–
–
–
–
Interest
rate swaps
£m
–
–
–
–
2017
Payables
Foreign
exchange
forward
contracts
and swaps
£m
(20,326)
–
–
(20,326)
Due in less than one year
Between one and two years
Between two and three years
Gross contractual cash flows
The amounts receivable and payable in less than one year have increased compared with 31 December 2017 predominantly from hedging of the
buyout of Novartis’ 36.5% stake in the Consumer Healthcare Joint Venture and the divestment of Horlicks and other nutrition brands to Unilever.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
212
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 2018 was £393 million (2017 – £347 million; 2016 – £338 million). Of this amount,
£304 million (2017 – £276 million; 2016 – £271 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% (2017 – 4.8%; 2016 – 4.5%) over the duration of the award.
Number of shares and ADS issuable
At 1 January 2016
Awards granted
Awards exercised
Awards cancelled
At 31 December 2016
Awards granted
Awards exercised
Awards cancelled
At 31 December 2017
Awards granted
Awards exercised
Awards cancelled
At 31 December 2018
Shares
Number (000)
32,577
12,983
(11,198)
(1,507)
32,855
13,018
(10,596)
(1,352)
33,925
12,751
(11,089)
(1,519)
34,068
Weighted
fair value
£14.97
£13.68
£13.74
ADS
Number (000)
17,520
6,589
(6,214)
(812)
17,083
6,610
(5,674)
(627)
17,392
6,503
(5,583)
(925)
17,387
Weighted
fair value
$39.18
$35.63
$35.28
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 2018, awards were made of 4.7 million shares at a weighted fair value of £10.46 and 1.3 million ADS at a weighted fair value of
$29.43. At 31 December 2018, there were outstanding awards over 13.1 million shares and 3.4 million ADS.
Notes to the financial statements continuedGSK Annual Report 2018 213
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 2018
Share option
schemes – shares
Weighted
exercise
price
Number
000
1,796
£11.96
Number
000
1,216
2018 Grant
0.76%
2017 Grant
0.54%
2016 Grant
0.32%
5.3%
21%
3 years
£12.09
Share option
schemes – ADS
Weighted
exercise
price
5.9%
23%
3 years
£10.86
4.9%
23%
3 years
£12.95
Savings-related
share option schemes
Weighted
exercise
price
Number
000
$36.19
5,929
£11.70
Range of exercise prices on options outstanding at year end
£11.60
– £12.21
$33.42
– $38.14
£10.13
– £12.95
Weighted average market price on exercise during year
Weighted average remaining contractual life
£14.43
0.9 years
$39.77
0.9 years
£15.13
2.6 years
Options over 2.9 million shares were granted during the year under the savings-related share option scheme at a weighted average fair value
of £2.40. At 31 December 2018, 5.5 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. 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
2018
41,391
2017
66,558
£m
10
160
617
2018
139
£m
–
1
2
£m
17
399
880
2017
139
£m
–
1
2
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
214
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 2018. 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
GlaxoSmithKline Consumer Healthcare (UK) Trading Limited
GlaxoSmithKline Consumer Trading Services Limited
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.
Corixa Corporation
GlaxoSmithKline Capital Inc.
GlaxoSmithKline Consumer Healthcare Holdings (US) LLC
GlaxoSmithKline Consumer Healthcare, L.P. (88%)
GlaxoSmithKline Holdings (Americas) Inc.
GlaxoSmithKline LLC
Human Genome Sciences, Inc.
GSK Consumer Health, Inc. (formerly Novartis Consumer Health, Inc.)
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)
Laboratoire GlaxoSmithKline (France)
ViiV Healthcare SAS (France) (78.3%)
GlaxoSmithKline Consumer Healthcare GmbH & Co. KG (Germany)
GlaxoSmithKline GmbH & Co. KG (Germany)
GSK Vaccines GmbH (Germany)
GlaxoSmithKline Consumer Healthcare S.p.A. (Italy)
GlaxoSmithKline S.p.A. (Italy)
GSK Vaccines S.r.l. (Italy)
GlaxoSmithKline B.V. (Netherlands)
GlaxoSmithKline Consumer Healthcare Sp.z.o.o. (Poland)
GSK Services Sp z o.o. (Poland)
GlaxoSmithKline Trading Services Limited (Republic of Ireland) (i)
GlaxoSmithKline Healthcare AO (Russia)
GlaxoSmithKline S.A. (Spain)
Laboratorios ViiV Healthcare, S.L. (Spain) (78.3%)
GSK Consumer Healthcare S.A. (Switzerland)
GlaxoSmithKline Argentina S.A. (Argentina)
GlaxoSmithKline Australia Pty Ltd (Australia)
GlaxoSmithKline Consumer Healthcare Australia Pty Ltd (Australia)
GlaxoSmithKline Brasil Limitada (Brazil)
GlaxoSmithKline Consumer Healthcare Inc. (Canada)
GlaxoSmithKline Inc. (Canada)
ID Biomedical Corporation of Quebec (Canada)
GlaxoSmithKline Limited (China (Hong Kong))
GlaxoSmithKline (Tianjin) Co. Ltd (China) (90%)
Sino-American Tianjin Smith Kline & French Laboratories Ltd (China) (55%)
GlaxoSmithKline Consumer Healthcare Limited (India) (72.5%)
GlaxoSmithKline Pharmaceuticals Limited (India) (75%)
GlaxoSmithKline Consumer Healthcare Japan K.K. (Japan)
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 260 to 270, 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 260 to 270 for a complete list of subsidiary undertakings, associates and joint ventures, which form part of these financial
statements.
GSK Annual Report 2018 215
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 2018, the
Group’s aggregate provision for legal and other disputes (not
including tax matters described in Note 14, ‘Taxation’) was £219
million. However, this provision is offset by a related £37 million
receivable which means the net exposure to the Group is £182
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.
Dolutegravir/Tivicay/Triumeq
In September and October 2017, ViiV Healthcare received
patent challenge letters under the Hatch-Waxman Act from Cipla,
Dr. Reddy’s Labs and Apotex for Triumeq and Tivicay, and from
Lupin and Mylan for Triumeq and from Sandoz for Tivicay. 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 forms 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. The case against Mylan is now proceeding in the
Northern District of West Virginia. The court has set the case against
Mylan for trial in June 2020. The cases against the other defendants
are proceeding in the District of Delaware. The District of Delaware
has not yet set a trial date for the cases.
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 (U.S. 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. The District of Delaware case is set for trial in
September 2020. The Canadian court has not set a trial date for
the Canadian action.
Kivexa
In 2018, ViiV Healthcare reached confidential agreements with
each of DOC Generici, Farmoz and Kyowa Pharmaceuticals 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 DOC Generici in Italy, between ViiV
Healthcare and Farmoz in Portugal, and between ViiV Healthcare
and Kyowa Pharmaceuticals in Japan.
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 Q2 2018, ViiV Healthcare commenced proceedings against
Sandoz in Switzerland. Sandoz countered challenging the validity
of the patent relating to Kivexa. No trial date has been set for
this action.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
216
Notes to the financial statements continued
45. Legal proceedings continued
Product liability
Pre-clinical and clinical trials are conducted during the development
of potential products to determine the safety and efficacy of
products for use by humans following approval by regulatory bodies.
Notwithstanding these efforts, when drugs and vaccines are
introduced into the marketplace, unanticipated safety issues may
become, or be claimed by some to be, evident. The Group is
currently a defendant in a number of product liability lawsuits related
to the Group’s Pharmaceutical, Vaccine and Consumer Healthcare
products. The Group has been able to make a reliable estimate of
the expected financial effect of the matters discussed in this
category and has included a provision, as appropriate, for the
matters below in the provision for legal and other disputes. Matters
for which the Group has made a provision are also noted in Note 29,
‘Other provisions.’
Avandia
The Group has been named in product liability lawsuits on behalf
of individuals asserting personal injury claims arising out of the use
of Avandia. Economic loss actions have also been filed seeking
restitution and penalties under consumer protection and other laws.
As of February 2019, there are seven remaining US cases. Four are
personal injury actions subject to a settlement agreement and will
be dismissed once the settlement has been finalised. Two are class
actions, brought by third-party payers asserting claims under the
Racketeer Influenced and Corrupt Organizations Act (RICO) and
state consumer protection laws, and are on appeal from summary
judgements granted in favour of the Group. In the last of the seven,
the Santa Clara County (California) Action, summary judgement
was granted in favour of the Group on all issues except for the
civil penalty claims under California’s False Advertising Act.
Additionally, there are 13 class actions pending in Canada, but the
Group has reached an agreement, subject to court approval, to
settle all of them.
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 2019, but 11 lawsuits related to use during pregnancy
are still pending in various courts in the US.
The Singh action in Alberta, Canada, a proposed national class
action, seeks to certify a class relating to birth defects generally.
The court, after hearing argument in January 2019, has plaintiffs’
class certification motion under consideration.
Another Canadian class action, Jensen, alleging claims of Paxil
(and other SSRI) use and autism was filed in Saskatchewan in
January 2017; however, there has been no activity in the case
since the filing.
– Acts of violence
As of February 2019, 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; however, on 22 August 2018 the US Court
of Appeals for the Seventh Circuit reversed the jury verdict and
found in favour of the Group. Plaintiff has filed a petition for writ of
certiorari asking the US Supreme Court to review the case. The
remaining US cases are largely dormant.
In the one pending Canadian action, Carmichael, the Group has filed
a motion for summary judgement based on the statute of limitations.
– 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 April 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 2019, the Group is a defendant in 430 personal injury
lawsuits. All but two of the lawsuits are part of a multi-district
litigation proceeding (“MDL”) in the US District Court for the District
of Massachusetts.
In the MDL, the parties are in the process of completing case-
specific discovery and selecting cases for potential trials. While the
court recently denied the Group’s motion for summary judgment
based on a federal preemption argument, the Group continues to
seek the dismissal of individual cases on other grounds as
appropriate.
GSK is also a defendant in four proposed class actions in Canada.
There has been no significant activity in these four matters; however,
the parties have recently agreed to a schedule for class certification
proceedings in the matter pending in Ontario.
GSK Annual Report 2018
217
45. Legal proceedings continued
Sales and marketing and regulation
The Group’s marketing and promotion of its Pharmaceutical
and Vaccine products are the subject of certain governmental
investigations and private lawsuits brought by litigants under various
theories of law. The Group has been able to make a reliable estimate
of the expected financial effect of the matters discussed in this
category and has included a provision for such matters in the
provision for legal and other disputes, except as noted below.
Matters for which the Group has made a provision are also noted
in Note 29, ‘Other provisions’.
SFO and SEC/DOJ 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 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 continued through 30 September 2018 and
have now concluded.
In the course of its inquiry, the SFO had 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. On 22 February 2019, the SFO
announced that it would be closing its investigation and confirmed
that it would be taking no further action against the Group.
The SEC and DOJ investigations into these issues continue.
The Group is unable to make a reliable estimate of the expected
financial effect of these investigations, and no provisions have
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
responded to the subpoena and was informed by the government
in 2018 that the government would be closing the matter without
further action.
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. Discovery is complete, and the Group
has filed a motion for summary judgement, which likely will be heard
in spring 2019. No trial date has yet been set.
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 into
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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
218
Notes to the financial statements continued
45. Legal proceedings continued
Lamictal
Purported classes of direct and indirect purchasers filed suit in
the US District Court for the District of New Jersey alleging that
the Group and Teva Pharmaceuticals unlawfully conspired to delay
generic competition for Lamictal, resulting in overcharges to the
purchasers, by entering into an allegedly anti-competitive reverse
payment settlement to resolve patent infringement litigation. A
separate count accuses the Group of monopolising the market.
On 26 June 2015, the Court of Appeals reversed the trial court’s
decision to dismiss the case and remanded the action back to
the trial court. On 18 May 2016, the trial court denied the indirect
purchaser class plaintiffs’ motion for reconsideration of the Court’s
dismissal of their claims. As a result, the indirect purchaser class
representatives agreed to a settlement to exit the case and resolve
their remaining claims. On 13 December 2018, the trial judge
granted plaintiffs’ class certification motion, certifying a class of
direct purchasers in this action. The Group is pursuing an appeal
with the Court of Appeals regarding the class certification.
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”.
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.
46. Post balance sheet events
The agreement to acquire Tesaro, Inc. for $5.1 billion in cash, which
was signed in December 2018, completed on 22 January 2019.
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: the
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 16 sites, of which nine 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’.
On 31 January 2019, Mylan N.V. announced that the US Food and
Drug Administration had approved their therapeutically equivalent
generic of Advair Diskus for certain patients with asthma or chronic
obstructive pulmonary disease.
GSK Annual Report 2018 Company balance sheet –
UK GAAP
(including FRS 101 ‘Reduced Disclosure Framework’) as at 31 December 2018
Fixed assets – investments
Current assets:
Trade and other receivables
Cash at bank
Total current assets
Bank overdrafts
Short term borrowings
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
(Loss)/profit for the year
Other changes in retained earnings
Equity shareholders’ funds
2018
£m
Notes
F
G
H
I
J
K
L
L
M
22,106
(62)
(3,927)
2017
£m
15,538
9,893
(3,325)
2018
£m
19,987
8,394
12
8,406
(12)
(3,500)
(610)
(4,122)
4,284
24,271
(16)
(282)
23,973
1,345
3,091
1,420
18,117
23,973
219
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
The financial statements on pages 219 to 222 were approved by the Board on 11 March 2019 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 2018
At 1 January 2017
Profit and Total comprehensive income attributable to shareholders
Dividends to shareholders
Shares issued under employee share schemes
Treasury shares transferred to the ESOP Trust
At 31 December 2017
Loss and Total comprehensive expense attributable to shareholders
Dividends to shareholders
Shares issued under employee share schemes
At 31 December 2018
Share
capital
£m
1,342
Share premium
account
£m
2,954
Other
reserves
£m
1,420
–
–
1
–
–
–
55
10
–
–
–
–
1,343
3,019
1,420
–
–
2
–
–
72
–
–
–
Retained
earnings
£m
15,538
9,893
(3,906)
–
581
22,106
(62)
(3,927)
–
1,345
3,091
1,420
18,117
Total
equity
£m
21,254
9,893
(3,906)
56
591
27,888
(62)
(3,927)
74
23,973
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
220
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 2018, with comparative
figures as at 31 December 2017.
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.
GSK Annual Report 2018 221
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 2018, provisions for legal
and other disputes amounted to £16 million (2017 – £27 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 £12,000 (2017 – £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 2017. 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) Short-term borrowings
2018
£m
613
18
17,888
33
18,552
1,139
296
19,987
2017
£m
613
18
17,888
33
18,552
1,139
584
20,275
2018
£m
2017
£m
10
–
7,889
7,899
495
8,394
31
1
8,299
8,331
384
8,715
The £3.5 billion borrowing relates to a facility taken out in June 2018 as part of the financing of the buyout of the non-controlling interest in the
Consumer Healthcare Joint Venture held by Novartis. The facility has a maturity date of 1 December 2019.
I) Trade and other payables
Amounts due within one year:
Other creditors
Contingent consideration payable
Amounts owed to Group undertakings
2018
£m
567
14
29
610
2017
£m
438
346
53
837
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 £22.2 billion of debt instruments (2017 – £16.7 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).
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 222
Notes to the company balance sheet – UK GAAP
(including FRS 101 ‘Reduced Disclosure Framework’) continued
J) 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.
K) Other non-current liabilities
Contingent consideration payable
2018
£m
27
2
16
(29)
16
2018
£m
282
282
2017
£m
23
(3)
52
(45)
27
2017
£m
238
238
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’.
L) Share capital and share premium account
Share capital authorised
At 31 December 2017
At 31 December 2018
Share capital issued and fully paid
At 1 January 2017
Issued under employee share schemes
Treasury shares transferred to the ESOP Trust
At 31 December 2017
Issued under employee share schemes
At 31 December 2018
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
5,368,316,062
1,342
2,954
4,237,758
–
5,372,553,820
6,513,804
5,379,067,624
31 December
2018
000
56,723
4,564,209
1
–
1,343
2
1,345
55
10
3,019
72
3,091
31 December
2017
000
38,647
4,588,799
At 31 December 2018, of the issued share capital, 41,530,909 shares were held in the ESOP Trusts, 414,605,950 shares were held as
Treasury shares and 4,922,930,765 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’.
M) Retained earnings
The loss of GlaxoSmithKline plc for the year was £62 million (2017 – £9,893 million profit), which after dividends of £3,927 million
(2017 – £3,906 million), gave a retained loss of £3,989 million (2017 – profit of £5,987 milion). After the effect of £nil Treasury shares
transferred to a subsidiary company (2017 – £581 million), retained earnings at 31 December 2018 stood at £18,117 million
(2017 – £22,106 million), of which £4,096 million was unrealised (2017 – £4,096 million).
N) Group companies
See pages 260 to 270 for a complete list of subsidiaries, associates and joint ventures, which forms part of these financial statements.
GSK Annual Report 2018
GSK Annual Report 2018
223
223
Strategic report
Governance and remuneration
Financial statements
Investor information
Investor
information
In this section
Quarterly trend
Pharmaceuticals turnover
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 2019
Tax information for shareholders
Shareholder services and contacts
US law and regulation
Group companies
Glossary of terms
224
226
228
229
235
238
241
251
253
253
254
254
256
258
260
271
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 224
Financial record
Quarterly trend
An unaudited analysis of the Group results is provided by quarter in Sterling for the financial year 2018.
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
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 for the period
Profit attributable to non-controlling interests
Profit attributable to shareholders
Basic earnings per share (pence)
Diluted earnings per share (pence)
Income statement – 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 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 40.
12 months 2018
Q4 2018
Q3 2018
Q2 2018
£m
17,269
5,894
7,658
30,821
(10,241)
(9,915)
(3,893)
299
(1,588)
5,483
(717)
3
31
4,800
(754)
15.7%
4,046
423
3,623
73.7p
72.9p
30,821
(9,178)
(9,462)
(3,735)
299
8,745
(698)
31
8,078
(1,535)
19.0%
6,543
674
5,869
119.4p
Reported
CER%
2
16
2
5
–
5
(12)
(17)
43
46
100
£%
–
14
(1)
2
(1)
3
(13)
(16)
34
36
87
>100
>100
2
5
1
(3)
(16)
2
2
5
7
5
6
4
(2)
(17)
6
6
9
12
Reported
CER%
4
18
1
5
13
1
(14)
6
£%
6
22
1
7
14
3
(11)
14
>100
>100
£m
4,810
1,479
1,908
8,197
(2,904)
(2,620)
(1,076)
79
(122)
1,554
(185)
–
5
1,374
>100
>100
>100
>100
(29)
(15)
(74)
5.4%
1,300
85
1,215
24.7p
24.4p
8,197
(2,532)
(2,529)
(1,019)
79
2,196
(173)
5
2,028
(355)
17.5%
1,673
139
1,534
31.2p
>100
>100
>100
>100
7
12
5
3
14
8
6
10
14
5
12
3
(1)
6
4
2
6
10
£m
4,221
1,924
1,947
8,092
(2,636)
(2,527)
(988)
94
(125)
1,910
(223)
3
15
1,705
(193)
11.3%
1,512
94
1,418
28.8p
28.5p
8,092
(2,388)
(2,313)
(961)
94
2,524
(221)
15
2,318
(430)
18.6%
1,888
141
1,747
35.5p
Reported
CER%
3
17
3
6
–
12
(5)
(13)
7
5
14
23
6
5
4
8
6
5
8
£%
1
14
(1)
3
(1)
9
(6)
(12)
16
2
–
8
3
4
1
7
2
1
4
(12)
(13)
10
14
£m
4,229
1,253
1,828
7,310
(2,310)
(2,457)
(925)
73
(912)
779
(167)
–
2
614
(139)
22.6%
475
34
441
9.0p
8.9p
7,310
(2,079)
(2,334)
(868)
73
2,102
(165)
2
1,939
(388)
20.0%
1,551
170
1,381
28.1p
Reported
CER%
1
16
3
4
8
(10)
(25)
(23)
£%
(3)
13
(1)
–
(12)
3
(27)
(26)
>100
>100
–
5
2
(18)
(26)
1
2
3
3
4
7
6
(15)
(23)
7
8
10
10
Q1 2018
£m
£%
Reported
CER%
4,009
1,238
1,975
7,222
(2,391)
(2,311)
(904)
53
(429)
1,240
(142)
–
9
1,107
(348)
31.4%
759
210
549
11.2p
11.1p
7,222
(2,179)
(2,286)
(887)
53
1,923
(139)
9
1,793
(362)
20.2%
1,431
224
1,207
24.6p
(4)
7
(3)
(2)
(5)
(6)
(6)
(35)
(28)
(2)
(2)
(3)
(3)
(35)
(3)
(1)
1
(2)
2
13
2
4
(3)
(2)
(1)
(34)
(15)
4
–
2
2
9
(34)
11
13
11
>100
>100
(38)
(24)
>100
>100
(48)
(33)
GSK Annual Report 2018 An unaudited analysis of the Group results is provided by quarter in Sterling for the financial year 2018.
Quarterly trend continued
12 months 2018
Q4 2018
Q3 2018
Q2 2018
£m
4,221
1,924
1,947
8,092
(2,636)
(2,527)
(988)
94
(125)
1,910
(223)
3
15
1,705
(193)
11.3%
1,512
94
1,418
28.8p
28.5p
8,092
(2,388)
(2,313)
(961)
94
2,524
(221)
15
2,318
(430)
18.6%
1,888
141
1,747
35.5p
Reported
CER%
3
17
3
6
–
12
(5)
(13)
7
5
14
23
6
5
4
8
(13)
6
5
8
£%
1
14
(1)
3
(1)
9
(6)
(12)
2
–
8
16
3
4
1
7
(12)
2
1
4
10
14
£m
4,229
1,253
1,828
7,310
(2,310)
(2,457)
(925)
73
(912)
779
(167)
–
2
614
(139)
22.6%
475
34
441
9.0p
8.9p
7,310
(2,079)
(2,334)
(868)
73
2,102
(165)
2
1,939
(388)
20.0%
1,551
170
1,381
28.1p
Reported
CER%
1
16
3
4
(10)
8
(25)
(23)
£%
(3)
13
(1)
–
(12)
3
(27)
(26)
>100
>100
>100
>100
>100
>100
>100
>100
–
5
2
(18)
(26)
1
2
3
3
4
7
6
(15)
(23)
7
8
10
10
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
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 for the period
Profit attributable to non-controlling interests
Profit attributable to shareholders
Basic earnings per share (pence)
Diluted earnings per share (pence)
Income statement – Adjusted
Total turnover
Cost of sales
Selling, general and administration
Research and development
Share of after tax profits 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 40.
£m
17,269
5,894
7,658
30,821
(10,241)
(9,915)
(3,893)
299
(1,588)
5,483
(717)
3
31
4,800
(754)
15.7%
4,046
423
3,623
73.7p
72.9p
30,821
(9,178)
(9,462)
(3,735)
299
8,745
(698)
31
8,078
(1,535)
19.0%
6,543
674
5,869
119.4p
Reported
CER%
2
16
2
5
–
5
(12)
(17)
43
46
100
5
6
4
(2)
(17)
6
6
9
12
£%
–
14
(1)
2
(1)
3
(13)
(16)
34
36
87
(3)
(16)
2
2
5
1
2
5
7
1,374
>100
>100
>100
>100
>100
>100
>100
>100
£m
4,810
1,479
1,908
8,197
(2,904)
(2,620)
(1,076)
79
(122)
1,554
(185)
–
5
(74)
5.4%
1,300
85
1,215
24.7p
24.4p
8,197
(2,532)
(2,529)
(1,019)
79
2,196
(173)
5
2,028
(355)
17.5%
1,673
139
1,534
31.2p
Reported
CER%
4
18
1
5
13
1
(14)
6
£%
6
22
1
7
14
3
(11)
14
>100
>100
7
12
5
3
14
8
6
10
14
5
12
3
(1)
6
4
2
6
10
225
Q1 2018
£m
£%
Reported
CER%
4,009
1,238
1,975
7,222
(2,391)
(2,311)
(904)
53
(429)
1,240
(142)
–
9
1,107
(348)
31.4%
759
210
549
11.2p
11.1p
7,222
(2,179)
(2,286)
(887)
53
1,923
(139)
9
1,793
(362)
20.2%
1,431
224
1,207
24.6p
(4)
7
(3)
(2)
(5)
(6)
(6)
(35)
(28)
2
13
2
4
(3)
(2)
(1)
(34)
(15)
(29)
(15)
(38)
(24)
(48)
(33)
(2)
(2)
(3)
(3)
(35)
(3)
(1)
1
(2)
4
–
2
2
(34)
9
11
13
11
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 226
Financial record continued
Pharmaceutical turnover by therapeutic area 2018
Therapeutic area/major products
Respiratory
Seretide/Advair
Ellipta products
Anoro Ellipta
Arnuity Ellipta
Incruse Ellipta
Relvar/Breo Ellipta
Trelegy Ellipta
Nucala/Mepolizumab
Avamys/Veramyst
Flixotide/Flovent
Ventolin
Other
HIV
Dolutegravir products
Tivicay
Triumeq
Juluca
Epzicom/Kivexa
Selzentry
Other
Immuno-inflammation
Benlysta
Established pharmaceuticals
Dermatology
Augmentin
Avodart
Coreg
Eperzan/Tanzeum
Imigran/Imitrex
Lamictal
Requip
Serevent
Seroxat/Paxil
Valtrex
Zeffix
Other
2018
£m
6,928
2,422
2,049
476
44
284
1,089
156
563
300
595
737
262
4,722
4,420
1,639
2,648
133
117
115
70
472
473
5,147
435
570
572
50
31
141
617
85
82
170
123
69
2,202
2017
£m
6,991
3,130
1,586
342
35
201
1,006
2
344
281
596
767
287
4,350
3,870
1,404
2,461
5
234
128
118
377
375
5,558
456
587
613
134
87
168
650
110
96
184
128
89
2,256
Pharmaceuticals
17,269
17,276
Total
Growth
£% CER%
1
(1)
(21)
(23)
29
39
26
41
8
32
42
29
44
10
>100 >100
64
7
-
(4)
(9)
9
14
17
8
66
10
3
(1)
(7)
11
16
19
9
>100 >100
(50)
(10)
(41)
25
26
(7)
(4)
(3)
(7)
(63)
(64)
(16)
(5)
(23)
(15)
(8)
(4)
(22)
(2)
-
(48)
(9)
(40)
28
29
(4)
-
2
(5)
(63)
(64)
(16)
(3)
(21)
(14)
(5)
(1)
(22)
1
2
2018
£m
3,368
1,097
1,245
318
39
186
581
121
341
-
333
352
-
2,913
2,830
1,036
1,670
124
7
58
18
420
420
752
3
-
12
50
30
58
310
5
43
-
21
1
219
7,453
US
Growth
£% CER%
(3)
(5)
(30)
(32)
24
36
22
39
(3)
27
39
25
42
(1)
>100 >100
44
-
3
(7)
-
8
11
12
2
48
-
6
(5)
-
10
13
15
5
>100 >100
(74)
(12)
(59)
24
24
(23)
(57)
-
(20)
(63)
(64)
(25)
(7)
(58)
(17)
-
5
-
(10)
(2)
(74)
(11)
(59)
27
27
(21)
(57)
-
(20)
(63)
(63)
(23)
(5)
(58)
(15)
-
5
-
(6)
1
2018
£m
1,533
599
457
101
-
74
253
29
152
74
93
130
28
1,194
1,091
377
706
8
44
35
24
36
37
1,309
161
181
240
-
1
57
113
28
30
39
30
5
424
4,072
Europe
Growth
£% CER%
4
(20)
5
(19)
42
46
-
45
25
41
45
-
45
24
>100 >100
>100 >100
(4)
(3)
(2)
-
6
17
18
15
-
(3)
(2)
(2)
4
7
18
20
17
-
(61)
(17)
(35)
33
37
(5)
(1)
(1)
(19)
-
(60)
(12)
6
(3)
(9)
-
3
(17)
(2)
2
(61)
(17)
(38)
33
33
(7)
(2)
(2)
(20)
-
(61)
(14)
5
(7)
(9)
-
3
(17)
(3)
1
2018
£m
2,027
726
347
57
5
24
255
6
70
226
169
255
234
615
499
226
272
1
66
22
28
16
16
3,086
271
389
320
-
-
26
194
52
9
131
72
63
1,559
5,744
International
Growth
£% CER%
7
(4)
3
(7)
33
46
67
50
26
-
84
11
(5)
-
(9)
14
28
37
21
-
(28)
10
(26)
45
60
(4)
(5)
(4)
6
-
-
-
(8)
(25)
(18)
(10)
(9)
(23)
(1)
-
38
54
67
56
31
-
89
16
1
7
(7)
20
35
47
25
-
(24)
15
(21)
64
80
2
2
3
11
-
-
-
(4)
(20)
(18)
(7)
(4)
(23)
4
5
GSK Annual Report 2018 227
International
Growth
£% CER%
5
(8)
9
(5)
58
70
50
65
>100 >100
>100 >100
42
–
49
–
>100 >100
9
5
5
3
26
70
88
58
–
15
8
8
4
33
77
95
66
–
Europe
Growth
£% CER%
–
(17)
5
(12)
59
77
–
51
67
–
>100 >100
36
–
44
–
>100 >100
(3)
(5)
(2)
(4)
3
31
30
31
–
3
1
4
(4)
10
39
39
39
–
2017
£m
1,977
784
260
39
3
16
202
–
38
204
178
255
258
539
389
166
223
–
(54)
1
(41)
29
29
(5)
11
3
(6)
–
–
5
1
(3)
(6)
(3)
16
(14)
(16)
3
(57)
(4)
(44)
24
19
(11)
5
(4)
(12)
–
–
–
(5)
(13)
(11)
(8)
12
(29)
(21)
(3)
(22)
93
15
20
(28)
37
37
11
26
10
2
3,198
24
287
5
405
21
301
–
–
1 >(100)
(13)
8
(5)
(8)
(4)
3
(20)
(4)
26
211
69
11
145
79
82
1,581
5,725
6
(25)
11
(35)
–
26
–
20
5
16
–
(100)
(17)
5
(5)
(8)
(7)
(3)
(21)
(4)
4
2017
£m
1,458
736
322
69
–
51
202
–
70
76
95
132
27
1,114
921
315
606
–
114
42
37
27
27
1,384
162
182
297
–
3
65
107
29
33
39
29
6
432
3,983
Pharmaceutical turnover by therapeutic area 2017
Therapeutic area/major products
Respiratory
Seretide/Advair
Ellipta products
Anoro Ellipta
Arnuity Ellipta
Incruse Ellipta
Relvar/Breo Ellipta
Trelegy Ellipta
Nucala/Mepolizumab
Avamys/Veramyst
Flixotide/Flovent
Ventolin
Other
HIV
Dolutegravir products
Tivicay
Triumeq
Juluca
Epzicom/Kivexa
Selzentry
Other
Immuno-inflammation
Benlysta
Established pharmaceuticals
Dermatology
Augmentin
Avodart
Coreg
Eperzan/Tanzeum
Imigran/Imitrex
Lamictal
Requip
Serevent
Seroxat/Paxil
Valtrex
Zeffix
Other
2017
£m
6,991
3,130
1,586
342
35
201
1,006
2
344
281
596
767
287
4,350
3,870
1,404
2,461
5
234
128
118
377
375
5,558
456
587
613
134
87
168
650
110
96
184
128
89
2,256
2016
£m
6,510
3,485
950
201
15
114
620
–
102
277
637
785
274
3,556
2,688
953
1,735
–
568
125
175
340
306
5,698
393
563
635
131
121
177
614
116
96
206
118
111
2,417
Pharmaceuticals
17,276
16,104
Total
Growth
£% CER%
3
(14)
7
(10)
67
70
59
63
>100 >100
68
55
–
76
62
–
>100 >100
(4)
(10)
(6)
3
16
37
40
35
–
1
(6)
(2)
5
22
44
47
42
–
2017
£m
3,556
1,610
1,004
234
32
134
602
2
US
Growth
£% CER%
3
(16)
8
(12)
72
68
65
61
>100 >100
49
67
–
56
75
–
236
1
323
380
>100 >100
(96)
(18)
(14)
3
21
35
38
34
–
(96)
(15)
(10)
2 >(100)
26
42
44
40
–
2,697
2,560
923
1,632
5
(59)
2
(32)
11
23
(2)
16
4
(3)
2
(28)
(5)
6
(5)
–
(11)
8
(20)
(7)
7
(61)
(2)
(37)
6
17
(5)
11
2
(9)
(2)
(31)
(8)
1
(9)
(4)
(14)
3
(22)
(8)
3
27
66
44
339
338
976
7
–
15
134
83
77
332
12
52
–
20
1
243
7,568
(86)
–
(28)
9
22
(10)
(56)
–
(79)
2
(30)
(9)
6
(8)
6
–
25
(50)
(7)
11
(87)
(5)
(31)
5
17
(14)
(56)
–
(79)
(2)
(32)
(12)
1
(15)
2
–
19
(50)
(11)
6
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 228
Financial record continued
Vaccines turnover 2018
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
2018
£m
881
584
232
65
523
523
784
784
3,706
680
517
808
521
424
305
138
313
2017
£m
890
556
274
60
488
488
22
22
3,760
743
560
693
524
509
301
134
296
Vaccines
5,894
5,160
Total
Growth
£% CER%
2
(1)
9
5
(12)
(15)
7
8
10
7
7
10
>100
>100
>100
>100
-
(1)
(7)
(8)
(7)
(8)
19
1
(17)
2
2
6
17
(1)
(17)
1
3
6
14
2018
£m
374
200
174
–
385
385
733
733
1,209
296
265
458
126
-
-
-
64
US
Growth
£% CER%
13
10
34
32
(5)
(7)
–
–
7
9
9
7
>100
>100
>100
>100
5
8
(8)
(10)
3
1
21
(5)
-
-
-
45
45
24
(2)
-
-
-
49
48
2018
£m
336
311
17
8
66
66
2
2
1,157
266
162
245
110
58
159
20
137
1,561
16
2,701
£% represents growth at actual exchange rates. CER% represents growth at constant exchange rates.
Vaccines turnover 2017
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
2017
£m
890
556
274
60
488
488
22
22
3,760
743
560
693
524
509
301
134
296
2016
£m
662
390
202
70
414
414
–
–
3,516
769
470
602
469
504
300
81
321
Vaccines
5,160
4,592
Total
Growth
£% CER%
27
34
34
43
29
36
(20)
(14)
12
18
12
18
–
–
–
–
1
7
(8)
(3)
13
19
10
6
(6)
(5)
57
(13)
15
12
1
–
65
(8)
12
2017
£m
339
152
187
–
361
361
22
22
1,147
330
262
379
132
–
–
–
44
US
Growth
£% CER%
34
40
20
25
48
55
–
–
10
15
10
15
–
–
–
–
10
5
(7)
(2)
5
10
29
2
–
–
–
8
23
(2)
–
–
–
–
2017
£m
391
342
34
15
49
49
–
–
1,160
315
185
201
95
67
164
29
104
£% represents growth at actual exchange rates. CER% represents growth at constant exchange rates.
Europe
Growth
£% CER%
(15)
(14)
(11)
(9)
(50)
(50)
(47)
(47)
33
35
33
35
-
-
-
-
(1)
-
(17)
(16)
(14)
(12)
22
16
(13)
(3)
(31)
32
(2)
21
15
(13)
(4)
(34)
30
(4)
Europe
Growth
£% CER%
31
40
36
45
19
26
(18)
(12)
44
53
44
53
–
–
–
–
(2)
4
(11)
(6)
24
33
(4)
19
(7)
1
(18)
(11)
2
27
(1)
8
(12)
(7)
12
2018
£m
171
73
41
57
72
72
49
49
1,340
118
90
105
285
366
146
118
112
1,632
2017
£m
160
62
53
45
78
78
–
–
1,453
98
113
113
297
442
137
105
148
International
Growth
£% CER%
22
52
(15)
24
(1)
(1)
-
-
(6)
28
(19)
7
18
(23)
27
(8)
(8)
-
-
(8)
20
(20)
(7)
(4)
(17)
6
12
(24)
(3)
-
(2)
(18)
9
12
(25)
-
International
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)
(12)
6
1,869
17
12
1,600
6
1,691
8
1
GSK Annual Report 2018 229
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.
Group turnover by geographic region
US
Europe
International
Group turnover by segment
Pharmaceuticals
Vaccines
Consumer Healthcare
Segment turnover
Corporate and other unallocated turnover
Pharmaceuticals turnover
Respiratory
HIV
Immuno-inflammation
Established Pharmaceuticals
Vaccines turnover
Meningitis
Influenza
Shingles
Established Vaccines
Consumer Healthcare turnover
Wellness
Oral care
Nutrition
Skin health
2018
£m
11,982
7,973
10,866
30,821
2018
£m
17,269
5,894
7,658
30,821
–
30,821
6,928
4,722
472
5,147
17,269
881
523
784
3,706
5,894
3,940
2,496
643
579
7,658
2017
£m
11,263
7,943
10,980
30,186
2017
£m
17,276
5,160
7,750
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
£m
10,197
7,476
10,216
27,889
2016
£m
16,104
4,592
7,193
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
£m
8,222
6,435
9,266
23,923
2015
£m
14,157
3,656
6,038
23,851
72
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
£m
7,409
6,284
9,313
23,006
2014
£m
15,438
3,159
4,322
22,919
87
23,006
6,168
1,498
214
7,558
15,438
–
215
–
2,944
3,159
1,565
1,806
633
318
4,322
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 230
Financial record continued
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
2018
£m
30,821
5,483
4,800
4,046
pence
73.7
72.9
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
2018
millions
2017
millions
2016
millions
2015
millions
2014
millions
4,914
4,971
4,886
4,941
4,860
4,909
4,831
4,888
4,808
4,865
2018
£m
30,821
8,745
8,078
6,543
2017
£m
30,186
8,568
7,924
6,257
2016
£m
27,889
7,671
7,024
5,526
2015
£m
23,923
5,659
5,021
4,045
2014
£m
23,006
6,456
5,840
4,675
pence
119.4
pence
111.8
pence
100.6
pence
74.6
pence
92.7
%
134.0
%
83.4
%
28.0
%
152.4
%
46.6
Return on capital employed is calculated as total profit before taxation as a percentage of average net assets over the year.
GSK Annual Report 2018 231
2018
£m
41,139
16,927
58,066
(22,491)
(31,903)
(54,394)
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)
3,672
3,489
4,963
8,878
4,936
4,360
(688)
3,672
(68)
3,557
3,489
2018
13,804
41,943
39,743
95,490
36,527
36,351
10,768
11,844
95,490
2017
14,526
43,002
40,934
98,462
38,245
37,374
11,307
11,536
98,462
1,124
3,839
4,963
2016
14,491
42,330
42,479
99,300
38,372
38,158
11,244
11,526
99,300
5,114
3,764
8,878
2015
14,696
43,538
43,021
101,255
38,855
39,549
11,140
11,711
101,255
4,263
673
4,936
2014
16,579
37,899
43,443
97,921
32,171
42,785
10,630
12,335
97,921
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
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 1 March 2019 was £1= US$1.32.
2018
1.34
2019
Jan
1.32
1.26
2017
1.29
2018
Dec
1.28
1.25
2016
1.35
2018
Nov
1.31
1.27
2015
1.53
2018
Oct
1.32
1.27
2014
1.65
2018
Sep
1.33
1.28
2019
Mar
1.32
1.32
2019
Feb
1.33
1.28
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 232
Financial record continued
Five year record continued
Adjusted results reconciliation
31 December 2018
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 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)
Total
results
£m
30,821
(10,241)
20,580
(9,915)
(3,893)
299
(1,588)
5,483
(717)
3
31
4,800
(754)
15.7%
4,046
423
3,623
73.7p
4,914
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
Intangible
asset
amortisation
£m
Intangible
asset
impairment
£m
Major
restructuring
£m
Transaction
-related
£m
Divestments,
significant
legal and
other items
£m
536
536
44
69
69
2
45
580
116
443
443
315
49
2
809
4
580
(109)
116
(19)
813
(170)
471
97
643
471
9.6p
97
2.0p
643
13.1p
15
15
98
1,864
1,977
(3)
1,974
(239)
1,735
251
1,484
30.2p
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
Adjusted
results
£m
30,821
(9,178)
21,643
(9,462)
(3,735)
299
–
8,745
(698)
–
31
8,078
(1,535)
19.0%
6,543
674
5,869
(9.2)p
119.4p
–
–
38
20
(278)
(220)
18
(3)
(205)
(244)
(449)
(449)
–
–
83
18
(220)
(119)
8
(94)
(205)
(251)
(456)
(456)
4,914
US tax
reform
£m
666
666
666
1,078
1,744
114
1,630
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
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
GSK Annual Report 2018 Five year record continued
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)
Adjusted results reconciliation
31 December 2015
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
(Loss)/profit attributable to non-controlling interests
Profit attributable to shareholders
Earnings per share
Weighted average number of shares (millions)
Total
results
£m
27,889
(9,290)
18,599
(9,366)
(3,628)
398
(3,405)
2,598
(664)
5
1,939
(877)
45.2%
1,062
150
912
18.8p
4,860
Total
results
£m
23,923
(8,853)
15,070
(9,232)
(3,560)
329
7,715
10,322
(653)
843
14
10,526
(2,154)
20.5%
8,372
(50)
8,422
174.3p
4,831
Intangible
asset
amortisation
£m
Intangible
asset
impairment
£m
Major
restructuring
£m
Transaction
-related
£m
Divestments,
significant
legal and
other items
£m
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
Intangible
asset
amortisation
£m
Intangible
asset
impairment
£m
Major
restructuring
£m
Transaction
-related
£m
Divestments,
significant
legal and
other items
£m
522
522
41
147
147
7
52
563
563
1,009
319
563
206
1,891
5
89
89
88
2,061
2,238
563
(161)
206
(50)
1,896
2,238
(441)
(352)
2,182
402
156
1,455
402
8.3p
156
3.2p
1,455
30.1p
1,886
500
1,386
(8,226)
(10)
(8,216)
28.8p
(170.1)p
2
2
55
28
(509)
(424)
8
(416)
170
(246)
(246)
12
12
151
52
(9,776)
(9,561)
12
(843)
(16)
(10,408)
(5.1)p
100.6p
4,860
233
Adjusted
results
£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
Adjusted
results
£m
23,923
(7,520)
16,403
(7,977)
(3,096)
329
–
5,659
(636)
–
(2)
5,021
(976)
19.4%
4,045
440
3,605
74.6p
4,831
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 234
Financial record continued
Five year record continued
Adjusted results reconciliation
31 December 2014
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
23,006
(7,323)
15,683
(8,246)
(3,450)
310
(700)
3,597
(659)
30
2,968
(137)
4.6%
2,831
75
2,756
57.3p
4,808
Intangible
asset
amortisation
£m
Intangible
asset
impairment
£m
Major
restructuring
£m
Transaction
-related
£m
Divestments,
significant
legal and
other items
£m
503
503
72
78
78
72
575
150
204
204
430
116
750
5
575
(209)
150
(29)
755
(215)
366
121
540
366
7.6p
121
2.5p
540
11.3p
10.2p
3
3
68
768
839
839
(207)
632
147
485
Adjusted
results
£m
23,006
(6,535)
16,471
(7,212)
(3,113)
310
–
6,456
(646)
30
5,840
(1,165)
19.9%
4,675
222
4,453
92.7p
4,808
536
77
(68)
545
8
553
(368)
185
185
3.8p
GSK Annual Report 2018 235
Pipeline, products and competition
Pharmaceuticals and Vaccines product development pipeline
Key
†
^
*
**
1
2
3
S
A
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.
Registrational in PhII
Under review
Option-based alliance with Ionis Pharmaceuticals, Inc.
Option-based alliance with Immunocore Ltd.
Pending closure of transaction with Merck KGaA,
Darmstadt, Germany
First submission
First regulatory approval (for MAA, this is the first EU
approval letter)
R
BLA
MAA
NDA
Phase I
Phase II
Phase III
Receipt of Complete Response Letter
Biological Licence Application
Marketing Authorisation Application (Europe)
New Drug Application (US)
Evaluation of clinical pharmacology, usually conducted
in volunteers
Determination of dose and initial evaluation of efficacy,
conducted in a small number of patients
Large comparative study (compound versus placebo
and/or established treatment) in patients to establish
clinical benefit and safety
MAA and NDA/BLA regulatory review milestones shown in the table below are those that have been achieved. Future filing dates are not included in this list.
Type
Indication
Achieved regulatory
review milestones
MAA
NDA/BLA
Phase
Poly (ADP-ribose) polymerase (PARP)
1/2 inhibitor
Anti-Programmed Cell Death protein 1 receptor
(PD-1) antibody
First line maintenance ovarian cancer and other
solid tumours
Ovarian cancer
Non-small cell lung cancer, MSI-H cancer
(incl endometrial)*
III
III
II
B-cell maturation antigen antibody drug conjugate
NY-ESO-1 autologous engineered TCR-T cells
(engineered TCR)
Induced T-cell co-stimulator (ICOS) agonist
antibody
BET family bromodomain inhibitor
Multiple myeloma*
Sarcoma, solid and heme malignancies
Non-small cell lung cancer and solid tumours
ER+ breast cancer, other solid tumours and
haematological malignancies
Non-small cell lung cancer
Non-small cell lung cancer
Transforming growth factor beta (TGFβ) trap and
immune checkpoint (PD-1) inhibitor bispecific
Anti-T-cell immunoglobulin and mucin domain-3
(TIM-3) antibody
OX40 agonist monoclonal antibody
Protein arginine methyltransferase 5 (PRMT5)
inhibitor
Toll-like receptor 4 (TLR4) agonist
Phosphatidylinositol 3-kinase (PI3K) beta inhibitor
Protein arginine methyltransferase 1 (PRMT1)
inhibitor
Pancreatic cancer and selected solid tumors
RIP1 kinase inhibitor
NY-ESO-1-targeting bispecific
Cancer
Anti-lymphocyte activation gene-3 (LAG-3) antibody Cancer
Solid tumours and haematological malignancies
Solid tumours, heme malignancies
Cancer
Cancer
Cancer
3145095
35371422
TSR-033†
HIV^ and Infectious Diseases
Dectova
(zanamivir) i.v.†
dolutegravir +
lamivudine
fostemsavir
cabotegravir +
rilpivirine†
Neuraminidase inhibitor (i.v.)
HIV integrase strand transfer inhibitor +
nucleoside reverse transcriptase inhibitor (NRTI)
HIV attachment inhibitor
HIV integrase strand transfer inhibitor +
non-nucleoside reverse transcriptase inhibitor
(NNRTI) (long-acting regimen)
Influenza
HIV infection
HIV infection
HIV infection
cabotegravir
gepotidacin
32288361
33894041
3640254
3036656†
3810109†
HIV integrase strand transfer inhibitor (long-acting)
Type 2 topoisomerase inhibitor
HBV antisense oligonucleotide
HBV LICA antisense oligonucleotide
HIV maturation inhibitor
Leucyl t-RNA synthetase inhibitor
HIV broadly neutralizing antibody
HIV pre-exposure prophylaxis
Bacterial infections
Hepatitis B
Hepatitis B
HIV infection
Tuberculosis
HIV infection
II
II
II
II
II
II
II
I/II
I
I
I
I
I
I
Submitted S: Nov17
Submitted S:Sep18
S:Oct18
III
III
III
II
II
II
II
I
I
Compound
Oncology
Zejula (niraparib)†
dostarlimab†
2857916†
3377794†
3359609†
molibresib
(525762)
M7824†3
TSR-022†
3174998†
3326595†
1795091
2636771
3368715†
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 236
Pipeline, products and competition continued
Pharmaceuticals and Vaccines product development pipeline continued
Compound
Type
Immuno-inflammation
Benlysta + Rituxan†
B lymphocyte stimulator monoclonal
antibody (s.c.) + cluster of differentiation
20 (CD20) monoclonal antibody (i.v.)
3196165†
2982772
2330811
2831781†
2983559
3358699†
3858279†
Respiratory
mepolizumab
Granulocyte macrophage colony-
stimulating factor monoclonal antibody
Receptor-interacting protein 1 (RIP1)
kinase inhibitor
Oncostatin M (OSM) monoclonal
antibody
Lymphocyte activation gene 3 (LAG3)
protein monoclonal antibody
Receptor-interacting protein 2 (RIP2)
kinase inhibitor
BET targeted inhibitor
CCL17 inhibitor
Interleukin 5 (IL5) monoclonal antibody
COPD
Indication
Systemic lupus erythematosus
Sjogren’s syndrome
Rheumatoid arthritis
Psoriasis**, rheumatoid arthritis, ulcerative colitis
Systemic sclerosis
Ulcerative colitis
Inflammatory bowel diseases**
Rheumatoid arthritis
Pain in osteoarthritis
fluticasone furoate +
vilanterol† +
umeclidinium
Glucocorticoid agonist + long-acting
beta2 agonist + muscarinic a
cetylcholine antagonist
Asthma
hypereosinophilic syndrome and nasal polyposis
2586881†
2862277
3772847†
2881078
nemiralisib
2292767
3511294†
Acute lung injury** and pulmonary arterial
hypertension
Acute lung injury
Recombinant human angiotensin
converting enzyme 2 (rhACE2)
Tumour necrosis factor receptor-1
(TNFR1) domain antibody
Interleukin 33r (IL33r) monoclonal
antibody
Selective androgen receptor modulator COPD muscle weakness
Phosphatidylinositol 3-kinase delta
(PI3Kδ) inhibitor
Phosphatidylinositol 3-kinase delta
(PI3Kδ) inhibitor
Interleukin 5 (IL5) long-acting
monoclonal antibody
Respiratory diseases**
Asthma
Asthma
Activated PI3K delta syndrome
Other Pharmaceuticals
Krintafel† (tafenoquine) 8-aminoquinoline
daprodustat (1278863) Prolyl hydroxylase inhibitor (oral)
oxytocin (inhaled)†
Oxytocin
linerixibat (2330672)
Ileal bile acid transporter (IBAT) inhibitor Cholestatic pruritus
3439171†
Muscle repair
Hematopoietic prostaglandin D2
(hPGD2) synthase inhibitor
Plasmodium vivax malaria
Anaemia associated with chronic renal disease
Postpartum hemorrhage
Achieved regulatory
review milestones
MAA
NDA/BLA
R: Sep18
Phase
III
II
II
II
II
I
I
I
I
Complete
response
letter
III
III
II
II
II
II
I
I
I
A: Jul18
Approved
III
II
II
I
GSK Annual Report 2018
237
Pharmaceuticals and Vaccines product development pipeline continued
Type
Recombinant
Recombinant
Live attenuated, PCV (Porcine circovirus)
free
Live attenuated
Recombinant
Indication
Herpes Zoster prophylaxis
Herpes Zoster prophylaxis for immunocompromised
Meningococcal B disease prophylaxis in infants
Rotavirus prophylaxis
Measles, mumps, rubella prophylaxis
Reduction of the frequency of moderate and severe
acute exacerbations in COPD patients by targeting
non-typeable Haemophilus influenzae and Moraxella
catarrhalis
Phase
Approved
III
III (US)
III
III (US)
II
Achieved regulatory
review milestones
MAA
NDA/BLA
A:March
2018
Heterologous recombinant viral
vectors
Recombinant
Hepatitis C virus prophylaxis: prevention of
establishment of chronic infection
Malaria prophylaxis (Plasmodium falciparum)
Compound
Vaccines
Shingrix†
(Zoster Vaccine)
Bexsero
Rotarix
MMR
COPD†
Hepatitis C†
Malaria next
generation†
Men ABCWY
Recombinant – conjugated
Menveo Liquid
Conjugated
Shigella†
Tuberculosis†
RSV†
Conjugated and outer membrane
Recombinant
Replication-defective recombinant
viral vector
Meningococcal A,B,C,W and Y disease prophylaxis
in adolescents
Meningococcal A,C,W and Y disease prophylaxis
in adolescents
Shigella diarrhea prophylaxis
Tuberculosis prophylaxis
Respiratory syncytial virus prophylaxis in paediatric
population
Respiratory syncytial virus prophylaxis in older adult
population
Respiratory syncytial virus prophylaxis in maternal
population
HIV†
Flu universal†
Recombinant proteins
Universal inactivated split influenza
vaccine
HIV infection prophylaxis
Flu disease prophylaxis with broad protection over
multiple seasons
Brand names appearing in italics are trade marks owned by or licensed to the GSK group of companies.
II
II
II
II
II
II
II
I/II
I/II
II
I/II
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
238
Pipeline, products and competition continued
Pharmaceutical 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 dates2
US
EU
Stiolto Respimat,
Utibron/Ultibro
Breezhaler,
Duaklir Genuair
Bevespi, Aerosphere
Qvar, Pulmicort
Asmanex, Alvesco
Avamys/Veramyst
Flixotide/Flovent
fluticasone furoate
fluticasone propionate
rhinitis
asthma/COPD
Nasonex
Qvar, Singulair
Incruse Ellipta
umeclidinium bromide
COPD
Spiriva Handihaler/
Respimat, Eklira Genuair
Seebri Breezhaler
Nucala
mepolizumab
severe eosinophilic asthma, EGPA Xolair, Cinqair,
Relvar/Breo Ellipta
fluticasone furoate/
vilanterol trifenatate
asthma/COPD
Fasenra, Dupixent
Symbicort, Foster,
Flutiform, Dulera
Seretide/Advair
salmeterol xinafoate/
fluticasone propionate
asthma/COPD
Symbicort, Foster,
Flutiform, Dulera
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
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
Proscar, Flomax,
finasteride
expired
expired
Anti-bacterials
Augmentin
amoxicillin/clavulanate
potassium
common bacterial
infections
generic products
NA
expired
Rare diseases
Volibris
Immuno-inflammation
Benlysta, Benlysta SC belimumab
ambrisentan
pulmonary hypertension
Tracleer, Revatio
NA
systemic lupus erythematosus
2025
2020
2026
1 Generic competition commenced in 2017.
2
3 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.
2027
(NCE)
2027-2030
(device/
formulation)
2021
(NCE)
2027-2030
(device/
formulation)
20211
expired
(Diskus device)
2019-2026
(HFA-device)
2027
(NCE)
2027-2030
(device/
formulation)
20193
2025
(NCE)
2027-2030
(device/
formulation)
2029
(NCE)
2022-2026
(device/
formulation)
NA
2023
expired
(Diskus device)
expired
(HFA-device)
2029
(NCE)
2022-2026
(device/
formulation)
20203
2027
(NCE)
2022-2026
(device/
formulation)
expired
(Diskus device)
2019-2026
(HFA-device)
expired
(Diskus device)
expired
(HFA-device)
2027
(NCE)
2027-2030
(device/
formulation)
2019-2026
(HFA-device)
2029
(NCE)
2022-2026
(device/
formulation)
expired
(HFA-device)
GSK Annual Report 2018 239
Pharmaceutical products, competition and intellectual property continued
Vaccine products, competition and intellectual property
Products
HIV
Epzicom/Kivexa
Compounds
Indication(s)
lamivudine and abacavir
HIV/AIDS
Juluca
dolutegravir, rilpivirine
HIV/AIDS
Selzentry/Celsentri
maraviroc
Tivicay
dolutegravir
Triumeq
dolutegravir, lamivudine
and abacavir
HIV/AIDS
HIV/AIDS
HIV/AIDS
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
1 See Note 45 to the financial statements, ‘Legal proceedings’.
2 Generic competition commenced in many markets during 2016.
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)
20191,2
(combination)
2029
(NCE)
2022
(NCE)
2029
(NCE)
2029
(NCE)
EU
2028
expired
expired
Major
competitor brands
Patent expiry dates3
US
EU
Truvada, Atripla
Descovy, Genvoya
Odefsey
Genvoya, Odefsey
Descovy, Atripla
Isentress, Intelence,
Prezista
Isentress, Prezista
Reyataz, Kaletra,
Biktarvy
Atripla, Descovy,
Odefsey, Genvoya,
Biktarvy
expired
2027
(NCE)
2021
(NCE)
20271
(NCE)
2027
(NCE)
Patent expiry dates3
US
2027
expired
expired
2028
2022
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
3
Includes Supplementary Protection Certificates which were granted in multiple countries in EU and patent term extensions granted in the US.
4 Refers to Priorix and Priorix Tetra, as all patents on Varilrix have expired.
a Related compounds/indications are measles, mumps and rubella vaccine/prophylaxis
b Related compound is varicella vaccine
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 240
Pipeline, products and competition continued
Consumer Healthcare products and competition
Products
Application
Markets
Competition
nasal spray
nasal decongestant
Theraflu
tablets, syrups and pods
cold and flu relief
Germany, Poland,
Russia, Sweden, Ukraine
Russia, Poland, Ukraine,
US
Brand
Wellness
Respiratory
Otrivin
Flonase
Flixonase, Piriton
Nicorette (US),
NicoDerm,
Nicotinell
(ex. Australia)
Pain relief
Panadol and
Panadol Cold
& Flu
Voltaren
Other
ENO
Tums
Oral health
Sensodyne,
Pronamel
Polident,
Poligrip,
Corega
Aquafresh
Skin health
Zovirax
Abreva
Nutrition
Horlicks
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
parodontax/
Corsodyl
toothpaste, medicated
mouthwash, gel and spray
helps stop and prevent
bleeding gums, treats and
prevents gingivitis
denture adhesive, denture
cleanser, wipes
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
global
global
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
Oral B Gum & Enamel Repair,
Crest Gum Detoxify,
Procter & Gamble
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 2018
241
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. During
2018 we have evolved the cycle of management of these risks which
helps us Identify, manage and report on our most important risks in
a proportionate and consistent way.
We must adapt to and comply with a broad range of laws and
regulations which apply to research and development, manufacturing,
testing, approval, distribution, sales and marketing of Pharmaceutical,
Vaccine and Consumer Healthcare products. These affect not only
the cost of product development but also the time required to reach
the market and the likelihood of doing so successfully on a
continuous basis.
Also, during 2018 we have improved consistency of risk management
across the organisation through evolution of our enterprise risk
management and reporting cycle.
Patient safety
Risk definition
Failure to appropriately collect, review, follow up, or report human
safety information (HSI), including 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. Constant vigilance and flexibility is
required in order to respond to a varied regulatory environment
which continues to evolve and diverge globally.
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.
As rules and regulations change, and governmental interpretation
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.
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 215 to 218.
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.
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.
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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 242
Principal risks and uncertainties continued
Patient safety continued
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) that remains strong through organisational
and regulatory change, in order to minimise liability and litigation.
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
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 have developed and implemented a single Quality Management
System 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. We have therefore adopted the
internationally recognised principles from the ‘ICH Q10:
Pharmaceutical Quality Systems’ framework as the basis for the
GSK Quality Management System.
This is an industry standard which incorporates quality concepts
throughout the product lifecycle. The GSK Quality Management
System 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 Quality Management System 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 Quality Management System, 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.
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 and expectations 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’.
GSK Annual Report 2018 243
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.
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 centered 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 2019 and
future years driven by initiatives of the Organisation for Economic
Cooperation & Development to address the taxation of the digital
economy 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
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 re-organisations
and newly acquired activities are integrated into risk assessments
and appropriate controls and reviews are applied.
Counterparty exposure is subject to defined limits approved by the
Board for both credit rating and individual counterparties. 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 198 to 200, Note 42,
‘Financial instruments and related disclosures’.
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 activities, 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 and finance transformations. 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 to optimise delivery.
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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 244
Principal risks and uncertainties continued
Financial controls and reporting continued
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 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. Our tax professionals 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.
We keep up-to-date with the latest developments in financial
reporting requirements by working with our external auditor and
legal advisors.
Anti-bribery and corruption (ABAC)
Risk definition
Mitigating activities
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 and financial 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 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 were subject to a self-monitoring
arrangement. The self-monitorship concluded in September 2018.
Government investigations regarding our China and other business
operations are ongoing. These investigations are discussed further
in Note 45, ‘Legal proceedings’.
Programme governance is provided through Enterprise Risk
Management overseen by the ABAC Governance Board which
includes representation from key functional areas and the business.
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 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 business standards, values and
expectations to form a comprehensive and practical approach to
compliance and is flexible to the evolving nature of our business.
Our Code of Conduct, values and expectations, 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.
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, a global risk
assessment and key risk indicators to enable targeted intervention
and risk management 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
communications. We provide mandatory periodic ABAC training
to our staff and relevant third parties in accordance with their roles,
responsibilities and the risks they face. In addition, the programme
mandates enhanced controls over interactions with government
officials and during business development transactions.
We continually benchmark our ABAC programme against other large
multinational companies and use external expertise and internal
insights to drive improvements in the programme.
GSK Annual Report 2018 245
Commercial practices
Risk definition
Mitigating activities
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.
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.
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 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.
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 customer and consumer engagement utilising the
application of data analytics and e-commerce channels. We have
policies and standards governing commercial activities undertaken
by us or on our behalf. Training has been implemented to support
the evolution of our activities to all relevant employees. 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 practice processes as well as clarified applicable
standards for operations in the various markets in which we operate.
Each business 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 eliminated rewards based on individual sales or market
share of prescription products for sales professionals and their
managers who interact with HCPs in favour of rewards based on
the quality of the individuals’ interactions with HCPs.
In October 2018, we announced changes that allow fair market
value payments to be made by GSK to expert practitioners to speak
about our innovative medicines and vaccines in a limited number
of countries during a restricted time period in a product’s lifecycle.
New controls and training have been implemented to support these
changes while ensuring appropriate oversight and assurance across
the markets. Under the new policy, we will expand our reporting of
payments to individual HCPs as part of our commitment to
transparency and responsible disclosure.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 246
Principal risks and uncertainties continued
Privacy
Risk definition
The failure to collect, secure, use and destroy personal information
(PI) in accordance with applicable data privacy laws.
Risk impact
Non-compliance can lead to harm to individuals (e.g. financial
loss, distress, prejudice) and GSK (e.g. fines, management time,
operational inefficiency, out of pocket costs, and reputational
damage). It can also damage trust between GSK and individuals,
communities, business partners and government authorities.
The General Data Protection Regulation (GDPR) increased the
enforcement powers of EU supervisory authorities, including by
allowing them to impose fines of up to 4% of global revenue, and to
require the suspension of processing PI in certain circumstances.
GDPR also gives individuals the right to bring collective legal actions
against GSK for failure to comply with data privacy laws.
Context
Data Privacy laws are diverse, with limited harmonisation, despite
Europe’s adoption of GDPR. In many countries in which GSK
operates, local data privacy laws govern how GSK can collect
and use PI. It is challenging for multi-nationals to standardise their
approach to compliance with data privacy laws due to the high-level
of local variation. Governments are enforcing compliance with data
privacy laws more rigorously. There is an increasing focus on the
ethical use of PI, over and above compliance with data privacy laws,
and individuals are increasingly aware of their rights under data
privacy laws.
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.
Mitigating activities
The Chief Compliance Officer is also the chairperson of the Privacy
Governance Board (PGB), which oversees GSK’s overall data
privacy programme. Each business and function has appointed a
Risk Owner who is accountable for the oversight of privacy risks
associated with that business or functional area. They are supported
by Privacy Leaders within their business or function. Additionally, in
some countries data privacy laws require a Data Protection Officer
(DPO) to be appointed. GSK has appointed a single DPO for the
European Union, who is represented and supported in specific
countries by Country Privacy Advisors. The Chief Compliance
Officer is the Enterprise Risk Owner (ERO). The ERO has appointed
a delegate risk owner, the Global Privacy Officer (GPO) who has
accountability on a day-to-day basis for designing and implementing
the control framework. The GPO co-leads the cross-functional
Privacy Centre of Excellence (CoE), together with the Global
Privacy Counsel. They are supported by Privacy Officers and Privacy
Counsel for each Region and multiple Country Privacy Advisors
(who are familiar with local privacy regulations).
GSK has emphasised the importance of data privacy from an internal
risk management perspective by separating Privacy as a new,
standalone Enterprise Risk from the Information Security Enterprise
Risk. It has created a Privacy Centre of Excellence in Global Ethics
and Compliance, which has overseen: (i) the implementation of a
control framework; (ii) remediation of certain existing business
activities to ensure compliance with GDPR (including adopting
privacy controls e.g. privacy contract terms, written records of
processing activities, data protection impact assessments) and (iii)
a comprehensive training programme to drive greater awareness
and accountability for managing PI across the entire organisation.
Key roles of the privacy network at GSK will be certified with an
accredited international privacy association.
Through monitoring, we continuously improve our processes, such
as issue identification, reporting and handling capabilities. We are
developing a process to detect and assess new privacy regulations
to proactively prepare and mitigate regulatory risk to GSK.
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 studied in humans. 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.
GSK Annual Report 2018 247
Research practices continued
The integrity of our data is essential to success in all stages of
the research data lifecycle: design, generation, recording and
management, analysis, reporting, 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, publications and patent filings.
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 Research
and Development (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.
Patent rights play an important role in providing GSK with a
competitive advantage in the market. 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, 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.
Introduction of generic products typically leads to a rapid and
dramatic loss of sales and reduces our revenues and margins for
our proprietary products.
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 human subject research sponsored and
supported by us to ensure it conforms to ethical, medical and
scientific standards
– The Data Disclosure Board provides oversight for disclosure of
our sponsored and supported human subject research. 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 2,400 clinical study reports in addition to more than
6,400 study result summaries
– 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
HBSM Enterprise Risk Management Team champions HBSM
activities and provides an experienced group to support internal
sample custodians regarding best practice.
It remains an important priority to enhance our data integrity controls.
Data Integrity Committees are in place to provide oversight and Data
Integrity Quality Assurance teams conduct assessments to provide
independent business monitoring of our internal controls for R&D
activities.
The Regulatory Governance Board 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.
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 overseen by an Enterprise framework
that seeks to ensure strengthened governance across the R&D
businesses in Pharmaceuticals, Vaccines and Consumer Healthcare.
Under the leadership of the Research Practices Enterprise Risk
Owner, management of the risk takes a pragmatic approach to
information sharing, streamlining risk identification and escalation,
while ensuring ownership stays with the business.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 248
Principal risks and uncertainties continued
Third party oversight (TPO)
Risk definition
Mitigating activities
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.
To guide and enforce our global principles for interactions with
third parties we have a global 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 enterprise-
wide TPO programme takes an enterprise-wide view of third party
related risks to ensure compliance with our ABAC policies and
additional risks such as Labour Rights, Health and Safety and Human
Safety Information. It forms a comprehensive and practical approach
to third party oversight that is flexible to the evolving nature of our
business and the type of engagement being managed. The
programme is managed through the Global Ethics and Compliance
organisation and has been globally deployed. It 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.
Programme governance is provided through Enterprise Risk
Management overseen by the TPO Governance Board which
includes representation from key functional areas and the business.
We have a dedicated TPO team responsible for the implementation
and evolution of the programme in response to developments in the
internal and external environment.
Each business 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, expectations, standards and Code
of Conduct (See ABAC report above).
Our programme is complemented with independent oversight and
assurance undertaken by the Audit & Assurance and Independent
Business Monitoring teams. We review the TPO programme against
other large multinational companies and use external expertise and
internal insights to drive improvements in the programme.
Environment, health & safety and sustainability (EHS&S)
Risk definition
Context
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.
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.
GSK Annual Report 2018 249
Environment, health & safety and sustainability (EHS&S) continued
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.
Information security
Our risk-based, proactive approach is articulated in our 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.
Risk definition
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 sixth 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.
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.
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.
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.
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.
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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 250
Principal risks and uncertainties continued
Supply continuity
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,
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 license 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
business.
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. Through
the Supply Chain Governance Committees we closely monitor the
inventory status and delivery of our products, with the aim of ensuring
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
such as the EU Falsified Medicines Regulation around the world.
A corporate policy requires each business 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 performs risk oversight to assure adequate risk
mitigation 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 36.
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 2018 251
Shareholder information
Share capital and control
Details of our issued share capital and the number of shares held
in Treasury as at 31 December 2018 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 2018
No. of
shares
348,328,939
*Percentage
of issued
capital (%)
7.02
No. of
shares
359,325,075
1 March 2019
*Percentage
of issued
capital (%)
7.24
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 2018, when the
company was authorised to purchase a maximum of just under
497 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.
No shares were purchased during the financial years ended 2015,
2016, 2017 or 2018.
The company confirms that it does not currently intend to make
any market purchases in 2019. The company will review the
potential for future share buy-backs 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 2018 was £73.23 billion.
At that date, GSK was the fifth largest company by market
capitalisation in the FTSE index.
Share price
At 1 January
At 31 December
(Decrease)/increase
High during the year
Low during the year
2018
£
13.23
14.91
12.7%
16.22
12.43
2017
£
15.62
13.23
(15.3)%
17.22
12.76
2016
£
13.73
15.62
13.8 %
17.23
13.44
The table above sets out the middle market closing prices. The
company’s share price increased by 12.7% in 2018. This compares
with a decrease in the FTSE 100 index of 12.5% during the year.
The share price on 1 March 2019 was £15.10.
UK£
18
17
16
15
14
13
12
11
10
US$
75
70
65
60
55
50
45
40
35
09
31/12/15
31/12/16
31/12/17
30
31/12/18
UK share price (UK£)
US ADS price (US$)
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
252
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.
Ordinary Shares
Pence per share
ADS
US dollars per share
March 2019*
February 2019
January 2019
December 2018
November 2018
October 2018
September 2018
Quarter ended 31 December 2018
Quarter ended 30 September 2018
Quarter ended 30 June 2018
Quarter ended 31 March 2018
Quarter ended 31 December 2017
Quarter ended 30 September 2017
Quarter ended 30 June 2017
Quarter ended 31 March 2017
Year ended 31 December 2018
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 1 March 2019
High
1510
1558
1537
1513
1622
1558
1585
1622
1619
1580
1397
1536
1630
1722
1691
1622
1722
1723
1642
1691
1782
Low
1510
1458
1436
1418
1480
1429
1484
1418
1484
1378
1243
1276
1452
1550
1520
1243
1276
1345
1238
1324
1359
High
40.39
40.76
39.38
38.61
41.87
40.87
40.53
41.87
41.87
41.94
35.49
41.10
42.77
44.37
42.73
41.94
44.37
45.49
48.81
56.66
53.68
Low
40.39
38.58
37.83
37.07
38.84
38.31
38.99
37.07
38.99
38.85
39.38
34.66
38.68
40.68
38.72
35.49
34.66
37.39
37.56
41.30
43.93
Analysis of shareholdings at 31 December 2018
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
78,209
24,687
5,762
842
355
109,855
5,102
24
3
104,724
1
1
71.19
22.47
5.25
0.77
0.32
100.00
4.65
0.02
0.00
95.33
0.00
0.00
0.50
0.99
1.66
5.49
91.36
100.00
62.48
0.02
0.00
12.45
17.34
7.71
27,196,746
53,245,886
89,028,177
295,494,317
4,914,102,498
5,379,067,624
3,360,713,155
1,210,233
768
669,844,173
932,693,345
414,605,950
The Bank of New York 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 1 March 2019,
BNY (Nominees) Limited held 934,362,581 Ordinary Shares representing 18.81% of the issued share capital (excluding Treasury shares) at
that date.
At 1 March 2019, the number of holders of Ordinary Shares in the US was 974 with holdings of 994,696 Ordinary Shares, and the number of
registered holders of ADS was 21,197 with holdings of 467,181,290 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 2018 253
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 2019 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’.
Dividends per share
Dividend calendar
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
2018
2017
2016
2015
2015
2014
2013
pence
80
80
80
20
80
80
78
US$
–1
2.16
2.00
0.57
2.37
2.59
2.47
1 The Q4 2018 interim ordinary dividend receivable by ADS holders will be calculated
based on the exchange rate on 11 April 2019. An annual fee of $0.03 per ADS
(or $0.0075 per ADS per quarter) will be charged by the Depository. The cumulative
dividend receivable by ADS holders for Q1, Q2 and Q3 2018 was $1.48.
* 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
May 2019
May 2019
July 2019
Quarter 3 Results announcement
Preliminary/Quarter 4 Results announcement
Annual Report publication
Annual Report distribution
October 2019
February 2020
February/March 2020
March 2020
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.
Quarter
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Ex-dividend
date
21 February 2019
Record date
22 February 2019
16 May 2019
17 May 2019
Payment date
11 April 2019
11 July 2019
8 August 2019
9 August 2019
10 October 2019
14 November 2019 15 November 2019
9 January 2020
20 February 2020
21 February 2020
9 April 2020
Results announcements
Results announcements are issued to the London Stock Exchange
and are available on its news service. They are also sent to the
US Securities and Exchange Commission and the NYSE, issued
to the media and made available on our website.
Financial reports
The company publishes an Annual Report which is made available
on our website from the date of publication. Shareholders may
elect to receive the Annual Report by contacting the registrar.
Alternatively, shareholders may elect to receive notification by
email of the publication of financial reports by registering on
www.shareview.co.uk.
Copies of previous financial reports are available on our website.
Printed copies can be obtained from our registrar in the UK (see
page 256 for the contact details).
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
254
Shareholder information continued
Annual General Meeting 2019
Our Annual General Meeting (AGM) will be held at 2.30pm
(UK time) on Wednesday 8 May 2019 at Sofitel London Heathrow,
Terminal 5, London Heathrow Airport, TW6 2GD.
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. Chairs 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 the 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 the UK tax year from 2018/19 UK resident individuals are entitled
to a dividend tax allowance of up to £2,000, so that the first £2,000
of dividends received in a tax year will be free of tax. 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 in the 2018/19 UK tax year, 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 Act 2018 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 Act 2018
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 2018 255
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 Ordinary 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
federal rate of 23.8% plus applicable state and local tax 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. However, a US capital
shareholder may be subject to US Estate and Gift 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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 256
Other statutory disclosures
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
De-duplication of 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
dividend confirmations 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 mailings, you may have more
than one account. 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, online, by
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 online 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 2018 257
Shareholders services and contacts continued
ADS Depositary
Contacts
The ADS programme is administered by The Bank of New York
Mellon:
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.
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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
258
Other statutory disclosures continued
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 (ARC) 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 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 the Disclosure Committee’s meetings
periodically. The Committee 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 2018, the Committee met 26 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 79 and in
her biography on page 70. 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 auditor 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 2018.
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 2019, following which the certifications
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 2018 that have materially affected, or
are reasonably likely to affect materially, the Group’s internal
control over financial reporting
GSK Annual Report 2018 259
US law and regulation continued
– management has assessed the effectiveness of internal control
over financial reporting as at 31 December 2018 and its
conclusion will be filed as part of the Group’s Form 20-F, and
– Deloitte LLP, which has audited the consolidated financial
statements of the Group for the year ended 31 December 2018,
has also assessed the effectiveness of the Group’s internal control
over financial reporting under Auditing Standard 2201 of the
Public Company Accounting Oversight Board (United States).
Their audit report will be filed with the Group’s Form 20-F.
Section 13(r) of the Exchange Act
Section 13(r) of the Exchange Act (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.
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 (£16.3 million) and net profits
(£7.8 million) from the Group’s sales to Iran in 2018.
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
(£45.4 million) and net profits (£21.5 million) from the Group’s sales
to Lebanon in 2018.
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 in all material respects,
such laws are complex and continue to evolve rapidly.
Donations to political organisations and political expenditure
As a result, the definitions may cover legitimate business activities
not in the ordinary sense considered to be political donations or
political expenditure, nor are they designed to support any political
party or independent election candidate.
Therefore, notwithstanding our policy, and while we do not intend to
make donations to any EU political parties or organisations, nor to
incur any EU political expenditure, we annually seek shareholder
authorisation for any inadvertent expenditure.
The authority 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.
With effect from 1 January 2009, to ensure a consistent approach
to political contributions across the Group, we introduced a global
policy to voluntarily stop all corporate political contributions.
In the period from 1 January 2009 to 31 December 2018, 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 2018, a total
of US$ 345,190 (2017 – US$ 384,875) was donated to political
organisations by the GSK employee PAC.
English law requires prior shareholder approval for political
contributions to EU political parties and independent election
candidates as well as for any EU political expenditure. The definitions
of political donations, political expenditure, and political organisations
used in the legislation are, however, quite broad. 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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 260
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 2018 are disclosed below. Unless
otherwise stated the share capital disclosed comprises ordinary shares which are indirectly held by GlaxoSmithKline plc. The percentage
held by class of share is stated where this is less than 100%. Unless otherwise stated, all subsidiary companies have their registered office in
their country of incorporation. All subsidiary companies are resident for tax purposes in their country of incorporation unless otherwise stated.
Name
Wholly owned subsidiaries
1506369 Alberta ULC
Action Potential Venture Capital Limited
Adechsa GmbH (iv)
Adriatic Acquisition Corporation
Affymax Research Institute
Security
Common
Ordinary
Ordinary
Common
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
Ordinary
Nominative
Common
Common
Ordinary
Ordinary
Beecham S.A. (iv)
Biovesta Ilaçlari Ltd. Sti. (iv)
Block Drug Company, Inc.
Block Drug Corporation (iv)
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.
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, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Corporation Service Company, 2710 Gateway Oaks Drive, Suite 150N,
Sacramento, California, 95833, United States
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1495-131, Portugal
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
24 Abimbola Way, Ilasamaja, Isolo, Lagos, Nigeria
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos, Madrid,
28760, Spain
Wagenseilgasse 3, Euro Plaza, Gebäude I, 4. Stock, Vienna, A-1120,
Austria
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,
1495-131, Portugal
Parc de la Noire Epine, rue Fleming 20, 1300 Wavre, Belgium
Büyükdere Caddesi No. 173, 1.Levent Plaza B Blok, 1.Levent, Istanbul,
34394, Turkey
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
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
Common
Common;
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 (vi)
Ordinary
401-402, A, Wing, 4th Floor,Floral Deck Plaza, Opp Rolta Bhavan,
Central MIDC Road, Mumbai, Andheri (E), 400093, India
Clarges Pharmaceuticals Limited (iv)
Ordinary; Preference (99.97%)
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Colleen Corporation
Corixa Corporation
Coulter Pharmaceutical, Inc. (iv)
Common
Common
Common
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
GSK Annual Report 2018 261
Group companies continued
Name
Wholly owned subsidiaries continued
de Miclén s.r.o.
Dealcyber Limited
Desarrollo Energia Solar Alternativa S.L.
Domantis Limited
Duncan Consumer Healthcare Philippines Inc
Duncan Flockhart Australia Pty Limited (iv) (vi)
Duncan Pharmaceuticals Philippines Inc.
Security
Ordinary
Ordinary
Ordinary
Ordinary
Common
Ordinary
Common
Registered address
Priemyselny Park Gena, Ul. E. Sachsa 4-6, 934 01, Levice, Slovakia
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos, Madrid,
28760, Spain
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
2266 Don Chino Roces Avenue, Makati City, Philippines
1061 Mountain Highway, Boronia, VIC, 3155, Australia
2266 Chino Roces Avenue, City of Makati, 1231, Philippines
Edinburgh Pharmaceutical Industries Limited
Ordinary; Preference
Shewalton Road, Irvine, Ayrshire, KA11 5AP, Scotland
Eskaylab Limited
Etex Farmaceutica Ltda
Ex-Lax, Inc.
Fipar (Thailand) Ltd (in liquidation)
Genelabs Technologies, Inc.
Glaxo AS (iv) (vi)
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 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)
10p Ordinary
Social Capital
Common
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary Quota
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary;
Ordinary B;
Ordinary C
Ordinary
GlaxoSmithKline - Produtos Farmaceuticos, Limitada
Ordinary Quota
GlaxoSmithKline (Cambodia) Co., Ltd. (vi)
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)
Ordinary
Ordinary
Equity
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Avenue Andres Bello 2687, Piso 19, Las Condes, Santiago, C.P.
7550611, Chile
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
12th Floor Wave Place, 55 Wireless Road, Lumpini, Pathumwan,
Bangkok, 10330, Thailand
Corporation Service Company, 2710 Gateway Oaks Drive, Suite 150N,
Sacramento, California, CA, 95833, United States
Drammensveien 288, 1326 Lysaker, Norway
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
1-8-1 Akasaka 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,
1495-131, 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
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,
1495-131, Portugal
5th Floor DKSH Building, No.797 Preah Monivong Boulevard (Corner of
Street 484), Sangkat Phsar Deum Thakov, Khan Chamkarmon, Phnom
Penh, Cambodia
Room 901 - 910, Building A, Ocean International Center, 56 Mid 4th East
Ring Road, Bejing, Chaoyang District, China
No 3 Building, 898 Halei Road, Zhang Jiang, Hi Tech Park Pudong New
Area, Shanghai, China
Arch. Makariou III, 2-4, Capital Center, 9th Floor, Nicosia, P.C. 1505,
Cyprus
1-5 Costache Negri Street, Opera Center 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
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 262
Other statutory disclosures continued
Group companies continued
Name
Wholly owned subsidiaries continued
GlaxoSmithKline (Thailand) Limited
GlaxoSmithKline A.E.B.E.
GlaxoSmithKline AB
GlaxoSmithKline AG
GlaxoSmithKline Angola Unipessoal Limitada (vi)
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 Brasil Produtos para Consumo e Saude Ltda
GlaxoSmithKline Capital Inc.
GlaxoSmithKline Capital plc
GlaxoSmithKline Caribbean Limited
Quotas
Quotas
Common
Ordinary
Ordinary
GlaxoSmithKline Chile Farmaceutica Limitada
Social Capital
GlaxoSmithKline Colombia S.A.
GlaxoSmithKline Consumer Healthcare (China) Co. Ltd
GlaxoSmithKline Consumer Healthcare (Hong Kong) Limited
GlaxoSmithKline Consumer Healthcare (Ireland) Limited (ii)
GlaxoSmithKline Consumer Healthcare (Overseas) Limited
GlaxoSmithKline Consumer Healthcare (Thailand) Limited
GlaxoSmithKline Consumer Healthcare (UK) (No.1) Limited
GlaxoSmithKline Consumer Healthcare (UK) IP Limited
GlaxoSmithKline Consumer Healthcare (UK) Trading Limited
Ordinary
Ordinary
Ordinary
Ordinary
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
Security
Ordinary
Ordinary
Ordinary
Ordinary
Quotas
Ordinary
Ordinary
Equity
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Registered address
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
Luanda, Bairro Petrangol, Estrada de Cacuaco n° 288, Angola
Tucumán 1, piso 4, Buenos Aires, C1049AAA, Argentina
Drammensveien 288, 1326 Lysaker, 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, Munchen, 81675, Germany
No. 277 Niudun Road, China (Shanghai) Pilot Free Trade Zone
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
66 BL1/302, Vitor Civita Street, Barra Tijuca, Rio de Janeiro,
22775-044, 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
Avenue Andres Bello No. 2687, Piso 19, Las Condes, Santiago,
C.P. 7550611, Chile
Avenida El Dorado, #69B-45/Piso 9, Bogota, Colombia
Floor 8, 168 Xizangzhong Road, Huangpu District, Shanghai, 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
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
GlaxoSmithKline Consumer Healthcare GmbH & Co. KG
Partnership Capital
Barthstr. 4, München, 80339, Germany
GlaxoSmithKline Consumer Healthcare Greece Societe
Anonyme
Ordinary
GlaxoSmithKline Consumer Healthcare Holdings (US) LLC
LLC Interests
GlaxoSmithKline Consumer Healthcare Holdings Limited
GlaxoSmithKline Consumer Healthcare Inc.
GlaxoSmithKline Consumer Healthcare Investments (Ireland)
(No 3) Limited (ii) (v)
GlaxoSmithKline Consumer Healthcare Investments (Ireland)
(No.2) Unlimited Company (ii) (v)
GlaxoSmithKline Consumer Healthcare Investments (Ireland)
Limited (ii) (v) (vi)
Ordinary A
Common
Ordinary
Ordinary
Ordinary
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
6900 Cork Airport Business Park, Kinsale Road, Cork, County Cork,
Ireland
GSK Annual Report 2018 263
Group companies continued
Name
Security
Registered address
Wholly owned subsidiaries continued
GlaxoSmithKline Consumer Healthcare Ireland IP Limited (ii) (v) (vi) Ordinary
GlaxoSmithKline Consumer Healthcare Japan K.K.
GlaxoSmithKline Consumer Healthcare Korea Co., Ltd.
Ordinary
Ordinary
GlaxoSmithKline Consumer Healthcare L.L.C.
LLC Interests
GlaxoSmithKline Consumer Healthcare Mexico,
S. De R.L. de C.V.
GlaxoSmithKline Consumer Healthcare New Zealand Limited
GlaxoSmithKline Consumer Healthcare Norway AS
GlaxoSmithKline Consumer Healthcare Philippines Inc
GlaxoSmithKline Consumer Healthcare Pte. Ltd.
GlaxoSmithKline Consumer Healthcare S.A.
GlaxoSmithKline Consumer Healthcare S.A.
GlaxoSmithKline Consumer Healthcare S.p.A.
GlaxoSmithKline Consumer Healthcare Saudi Limited
GlaxoSmithKline Consumer Healthcare Sdn. Bhd.
Ordinary
Ordinary
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Currabinny, Carrigaline, County Cork, Ireland
1-8-1 Akasaka Minato-Ku, Tokyo, Japan
9F LS Yongsan Tower, 92, Hangang-daero, Yongsan-gu, Seoul, 04386,
Korea, Republic of
Corporation Service Company, 2595 Interstate Drive Suite 103,
Harrisburg, Pennsylvania, 17110, United States
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
Drammensveien 288, 1326 Lysaker, Norway
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
Via Zambeletti snc,Baranzate, Milan, 20021, Italy
603 Salamah Tower 6th Floor, Madinah Road Al-Salamah District Jeddah
21425 Saudi Arabia
Lot 89, Jalan Enggang, Ampang/Ulu Kelang Industrial Estate, Selangor,
54200, Malaysia
GlaxoSmithKline Consumer Healthcare Slovakia s. r. o.
Ownership interest
Galvaniho 7/A, Bratislava, 821 04, Slovakia
GlaxoSmithKline Consumer Healthcare South Africa (Pty) Ltd
Ordinary
Flushing Meadows Building, The Campus, 57 Sloane Street, Bryanston
2021, South Africa
GlaxoSmithKline Consumer Healthcare Sp.z.o.o.
Ordinary
Ul. Grunwaldzka 189, Poznan, 60-322, Poland
GlaxoSmithKline Consumer Healthcare Sri Lanka Holdings Limited Ordinary
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
GlaxoSmithKline Consumer Healthcare SRL
Ordinary
GlaxoSmithKline Consumer Healthcare Vietnam Company Limited
(iv)
Charter Capital
GlaxoSmithKline Consumer Healthcare, Produtos para
a Saude e Higiene, Lda
Ordinary Quota
GlaxoSmithKline Consumer Holding B.V. (iv)
GlaxoSmithKline Consumer Private Limited
GlaxoSmithKline Consumer Trading Services Limited
GlaxoSmithKline Costa Rica S.A.
GlaxoSmithKline d.o.o
GlaxoSmithKline d.o.o.
GlaxoSmithKline doo Beograd
GlaxoSmithKline Dungarvan Limited (ii)
GlaxoSmithKline Ecuador S.A.
GlaxoSmithKline Eesti OU
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 Healthcare AO
GlaxoSmithKline Healthcare GmbH
Ordinary
Equity
Ordinary
Ordinary
Quotas
Equity capital
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
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
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1495-131, Portugal
Huis ter Heideweg 62, 3705 LZ, Zeist, Netherlands
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
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
Knockbrack, Dungarvan, Co Waterford, X35 RY76, Ireland
Av 10 De Agosto N36-239, y Naciones Unidas, Edificio
Electroectuatoriana, 2do piso, Quito, Ecuador
Lõõtsa 8a, Tallinn, 11415, Estonia
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
Partnership Capital
Prinzregentenplatz 9, Munchen, 81675, Germany
Ordinary
Ordinary
Ordinary
Novena Avenida 0-09, Zona 4, Guatemala City, Guatemala
Presnenskaya nab 10, Moscow, 123112, Russian Federation
Barthstr. 4, München, 80339, Germany
GlaxoSmithKline Healthcare Ukraine O.O.O.
Ownership interest
Pavla Tychyny avenue, 1-V, Kiev, 02152, Ukraine
GlaxoSmithKline Holding AS
GlaxoSmithKline Holdings (Americas) Inc.
Ordinary
Common
Drammensveien 288, 1326 Lysaker, Norway
Wilmington Trust SP Services Inc., 1105 North Market Street,
Suite 1300, Wilmington, Delaware, 19801, United States
GlaxoSmithKline Holdings (Ireland) Limited
Ordinary; Deferred
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 264
Other statutory disclosures continued
Group companies continued
Name
Wholly owned subsidiaries continued
GlaxoSmithKline Holdings (One) Limited (i)
GlaxoSmithKline Holdings Limited (i)
GlaxoSmithKline Holdings Pty Ltd
GlaxoSmithKline Honduras S.A.
GlaxoSmithKline IHC Limited
Security
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
GlaxoSmithKline Ilaclari Sanayi ve Ticaret A.S.
Nominative
Registered address
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
GlaxoSmithKline Inc.
GlaxoSmithKline Insurance Ltd.
GlaxoSmithKline Intellectual Property (No.2) Limited
GlaxoSmithKline Intellectual Property (No.3) Limited
GlaxoSmithKline Intellectual Property (No.4) Limited
GlaxoSmithKline Intellectual Property Development Limited
Class A Common; Class C Preference
7333 Mississauga Road North, Mississauga, ON, L5N 6L4, Canada
Ordinary
Ordinary
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
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.
GlaxoSmithKline Investment Holdings Limited
GlaxoSmithKline Investment Services Limited
GlaxoSmithKline Investments (Ireland) Limited (ii) (v) (vi)
GlaxoSmithKline Investments Pty Ltd
GlaxoSmithKline K.K.
GlaxoSmithKline Korea Limited
GlaxoSmithKline Latin America, S.A.
GlaxoSmithKline Latvia SIA
GlaxoSmithKline Lietuva UAB
GlaxoSmithKline Limited
GlaxoSmithKline Limited
GlaxoSmithKline LLC
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 Panama S.A.
GlaxoSmithKline Paraguay S.A.
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
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
LLC Interests
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary A;
Ordinary B
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Severo Ochoa 2 Parque Tecnológico de Madrid, Tres Cantos, Madrid,
28760, Spain
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Currabinny, Carrigaline, County Cork, Ireland
1061 Mountain Highway, Boronia, VIC, 3155, Australia
1-8-1 Akasaka Minato-Ku, Tokyo, Japan
9F LS Yongsan Tower 92, Hangangdae-ro Yongsan-gu, Seoul, 04386,
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
Likoni Road, PO Box 78392, Nairobi, Kenya
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
Urbanizacion Industrial Juan D, Calles A Y B, Republic of Panama,
Panama
Oficial Gilberto Aranda 333, Planta Alta casi Salvador del Mundo,
Asuncion, Paraguay
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
GSK Annual Report 2018 265
Group companies continued
Name
Security
Registered address
Wholly owned subsidiaries continued
GlaxoSmithKline Pharmaceuticals S.A.
GlaxoSmithKline Pharmaceuticals SA
Ordinary A;
Ordinary B;
Ordinary C;
Ordinary D
Ordinary
Ul. Grunwaldzka 189, Poznan, 60-322, Poland
Site Apollo, Avenue Pascal 2-4-6, Wavre, 1300, Belgium
GlaxoSmithKline Pharmaceuticals Ukraine LLC
Chartered Capital
Pavla Tychyny avenue, 1-V, Kiev, 02152, Ukraine
GlaxoSmithKline Philippines Inc
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.
GlaxoSmithKline Sante Grand Public SAS
GlaxoSmithKline Services GmbH & Co. KG
GlaxoSmithKline Services Inc. (iv)
GlaxoSmithKline Services Unlimited (i)
GlaxoSmithKline SL Holdings, LLC
GlaxoSmithKline SL LLC
GlaxoSmithKline SL LP (iv)
GlaxoSmithKline Slovakia s.r.o.
GlaxoSmithKline South Africa (Pty) Limited
GlaxoSmithKline Trading
GlaxoSmithKline Trading Services Limited (ii) (v)
GlaxoSmithKline Tuketici Sagligi Anonim Sirketi
GlaxoSmithKline Tunisia S.A.R.L.
GlaxoSmithKline UK Limited
GlaxoSmithKline Uruguay S.A.
GlaxoSmithKline US Trading Limited
GlaxoSmithKline Venezuela C.A.
GlycoVaxyn AG (vi)
Groupe GlaxoSmithKline S.A.S.
GSK Australia NVD Pty Ltd (iv) (vi)
GSK Business Service Centre Sdn Bhd
GSK Capital K.K.
GSK CH Argentina S.A.
GSK CH Kazakhstan LLP
GSK Commercial Sp. z o.o.
GSK Consumer Health, Inc.
GSK Consumer Healthcare Israel Ltd
GSK Consumer Healthcare S.A.
GSK Consumer Healthcare Schweiz AG
GSK Consumer Healthcare Services, Inc.
GSK Consumer Healthcare Singapore Pte. Ltd.
Common
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Partnership Capital
Common
Ordinary
LLC Interests
LLC Interests
Partnership
Ordinary
Ordinary
Ordinary
Ordinary
Nominative
Ordinary
Ordinary
2266 Chino Roces Avenue, City of Makati, 1231, Philippines
23 Rochester Park, 139234, Singapore
Centro Internacional de Mercadeo, 90 Road # 165, Tower II, Suite 800,
Guaynabo, 00968, Puerto Rico
Av. Lope de Vega No. 29, Torre Empresarial Novocentro, Local 406,
Ensanche Naco, Santo Domingo, Distrito Nacional, 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
23 rue François Jacob, 92500, Rueil-Malmaison, France
Prinzregentenplatz 9, Munchen, 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
Flushing Meadows Building, The Campus, 57 Sloane Street,
Bryanston 2021, South Africa
Leningradskiy Prospect, 37A, bld. 4, Moscow, 125167, Russian
Federation
Currabinny, Carrigaline, County Cork, Ireland
Büyükdere Caddesi No. 173, 1.Levent Plaza B Blok, 1.Levent, Istanbul,
34394, Turkey
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
Ordinary
Ordinary
Common; Preferred A;
Preferred B; Preferred C
Ordinary
Ordinary
Ordinary
Ordinary
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
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
H-1124, Csorsz utca 43, Budapest, Hungary
Grabenstrasse 3, 8952 Schlieren, Switzerland
23 Rue françois Jacob, 92500, Rueil-Malmaison, France
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Level 6, Quill 9, 112, Jalan Semangat, Petaling Jaya, Selangor Darul
Ehsan, 46300, Malaysia
1-8-1 Akasaka Minato-Ku, Tokyo, Japan
Nominative non endorseable ordinary shares
Tucumán 1, piso 4, Buenos Aires, C1049AAA, Argentina
Charter Capital
32 A Manasa Str., Bostandyk District, Almaty, 050008, Kazakhstan
Ordinary
Common
Ordinary
Ordinary
Ordinary
Common
Ordinary
ul. Rzymowskiego 53, Warsaw, 02-697, Poland
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
25 Basel Street, Petech Tikva 49510, Israel
Route de I'Etraz 2, 1197 Prangins, Switzerland
Suurstoffi 14, Rotkreuz, 6343, Switzerland
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
23 Rochester Park, 139234, Singapore
GlaxoSmithKline Vietnam Limited Liability Company (iv) (vi)
Equity capital
GlaxoSmithKline-Consumer Hungary Limited Liability Company
Membership
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 266
Other statutory disclosures continued
Group companies continued
Name
Wholly owned subsidiaries continued
GSK d.o.o., Ljubljana
GSK Finance (No 2) Limited
GSK Kazakhstan LLP
GSK Pharmaceutical Trading SA (iv) (vi)
GSK Services Sp z o.o.
GSK Vaccines BV
GSK Vaccines GmbH
GSK Vaccines Institute for Global Health S.r.l.
GSK Vaccines S.r.l.
GSK Vaccines Vertriebs GmbH (iv)
HGS France S.a.r.l. (iv) (vi)
Horlicks Limited
Human Genome Sciences, Inc.
ID Biomedical Corporation of Quebec
ID Biomedical Corporation of Washington (iv)
Ordinary
Ordinary
Ordinary
Ordinary
Quotas
Quotas
Ordinary
Ordinary
Ordinary
Common
Common
Common
Instituto Luso Farmaco, Limitada (iv)
Ordinary Quota
InterPharma Dienstleistungen GmbH
Quotas
Iodosan S.p.A.
J&J Technologies, LC (iv)
Kuhs GmbH
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
LLC Interests
Ordinary
Ordinary
Ordinary
Ordinary
Ordianry
Ordianry
Ordinary A,
Ordinary B
Laboratorios Farmaceuticos Stiefel (Portugal) LTDA (iv)
Ordinary Quota
Laboratorios Stiefel de Venezuela SA
Ordinary
Ordinary
Ordinary Quota
Ordinary
Laboratorios Stiefel Ltda.
Laboratorios Wellcome De Portugal Limitada (iv)
Maxinutrition Limited (in liquidation)
Mixis Genetics Limited (vi)
Montrose Fine Chemical Company Ltd
Montrose Pharma Company Limited (iv) (vi)
N.C.H. – Nutrition Consumer Health Ltd (iv)
Okairos AG (in liquidation)
P.T. Sterling Products Indonesia
Panadol GmbH
Penn Labs Inc. (iv)
PT GSK Consumer Healthcare Indonesia
PT. Bina Dentalindo (in liquidation)
S.R. One International B.V.
S.R. One, Limited
Security
Ordinary
Ordinary
Registered address
Ameriška ulica 8,Ljubljana, 1000, Slovenia
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Partnership Interest
273, N. Nazarbayev ave., Almaty, Medau District, 050059, Kazakhstan
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
117 Avenue, Victor Hugo, Boulogne-Billancourt, 92100, France
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
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,
1495-131, Portugal
Wagenseilgasse 3, Euro Plaza, Gebäude I, 4. Stock, Vienna, A-1120,
Austria
Via Zambeletti snc,Baranzate, Milan, 20021, Italy
Corporation Service Company, Bank of America, 16th Floor,
1111 East Main Street, Richmond, Virginia, 23219, United States
Barthstr. 4, München, 80339, Germany
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,
1495-131, Portugal
Calle Luis de Camoens, Edificio GlaxoSmithKline, No. 115-117,
Urb. La Trinidad, Caracas, Venezuela
Rua Professor Joao Cavalheiro Salem 1077, Guarulhos, Sao Paulo, Brazil
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1495-131, Portugal
55 Baker Street, London, W1U 7EU, England
Ordinary; Ordinary Euro
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Ordinary
Ordinary Quota
Ordinary
Shewalton Road, Irvine, Ayrshire, KA11 5AP, Scotland
H-1124, Csorsz utca 43, Budapest, Hungary
14 Hamephalsim St, Petach Tikva, Israel
Common; Preferred A; Preferred B
c/o OBC Suisse AG, Aeschenvorstadt 71, 4051, Basel, Switzerland
A shares; B Shares
Ordinary
Common
Ordinary
Ordinary
Ordinary
Units (Common)
Graha Paramita Building, 5th F, Jalan Denpasar Raya Blok D-2, Jakarta,
12940, Indonesia
Barthstr. 4, München, 80339, Germany
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
Graha Paramita 5th F, 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
Huis ter Heideweg, 62 3705, LZ Zeist, Netherlands
Corporation Service Company, 2595 Interstate Drive, Suite 103,
Harrisburg, Pennsylvania, 17110, United States
GSK Annual Report 2018 267
Group companies continued
Name
Security
Registered address
Ordinary; Preference
Ordinary
Ordinary Quota
Ordinary
Ordinary
Ordinary
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Rua Dr Antonio Loureiro Borges No 3, Arquiparque, Miraflores, Alges,
1495-131, Portugal
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
SmithKline Beecham Limited
Ordinary 6.25p
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Wholly owned subsidiaries continued
Setfirst Limited
Smith Kline & French Laboratories Limited
Smith Kline & French Portuguesa-Produtos Farmaceuticos,
LDA (iv)
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
Ordinary
Ordinary
SmithKline Beecham Biologicals US Partnership
Partnership Interest
SmithKline Beecham Egypt L.L.C.
SmithKline Beecham Farma, S.A.
Quotas
Ordinary
SmithKline Beecham Inter-American Corporation (iv)
Common
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
Ordinary
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary; Non-Cumulative Non
Redeemable Preference
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
SmithKline Beecham Pharma Verwaltungs GmbH
SmithKline Beecham Pharmaceuticals (Pty) Limited (iv) (vi)
SmithKline Beecham Pharmaceuticals Co.
SmithKline Beecham Port Louis Limited (vi)
SmithKline Beecham Research Limited
SmithKline Beecham S.A.
SmithKline Beecham Senior Executive Pension Plan Trustee
Limited (iv)
Stafford-Miller (Ireland) Limited (ii)
Stafford-Miller Limited
Sterling Drug (Malaya) Sdn Berhad
Sterling Products International, Incorporated (iv)
Stiefel Consumer Healthcare (UK) Limited
Stiefel Distributors (Ireland) Limited (ii) (iv)
Stiefel Dominicana, S.R.L. (iv) (vi)
Stiefel Farma, S.A.
Stiefel GmbH & Co. KG
Stiefel India Private Limited
Stiefel Laboratories (Ireland) Limited (ii)
Stiefel Laboratories (Maidenhead) Ltd (vi)
Stiefel Laboratories (U.K.) Ltd
Stiefel Laboratories Legacy (Ireland) Limited (ii)
Stiefel Laboratories Limited (iv)
Stiefel Laboratories Pte Limited (iv)
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
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
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Prinzregentenplatz 9, Munchen, 81675, Germany
Prinzregentenplatz 9, Munchen, 81675, Germany
Flushing Meadows Building, The Campus, 57 Sloane Street,
Bryanston 2021, South Africa
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
C/o CIM Corporate Services Ltd, Les Cascades Building, Edith Cavell
Street, Port Louis, Mauritius
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
Ctra de Ajalvir Km 2.500, Alcala de Henares, Madrid, 28806, Spain
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
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
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
Partnership Capital
Industriestrasse 32-36, Bad Oldesloe, 23843, Germany
Equity
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
401-402, A, Wing, 4th Floor, Floral Deck Plaza, Opp Rolta Bhavan,
Central MIDC Road, Mumbai, Andheri (E), 400093, India
Finisklin Business Park, County Sligo, Ireland
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
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 268
Other statutory disclosures continued
Group companies continued
Name
Wholly owned subsidiaries continued
Stiefel Laboratories, Inc.
Stiefel Maroc SARL (iv) (vi)
Stiefel Research (Australia) Holdings Pty Ltd
Stiefel Research Australia Pty Ltd
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)
Vog AU PTY LTD (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
Common
Ordinary
Ordinary
Ordinary
LLC Interests
Common
Registered address
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
Common
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
Ordinary; Redeemable Preference
82 Hughes Avenue, Ermington, NSW, 2115, Australia
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
1061 Mountain Highway, Boronia, VIC, 3155, Australia
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Name
Security
Effective %
Ownership
Registered address
Subsidiaries where the effective interest is less than 100%
Amoun Pharmaceutical Industries Co. S.A.E.
Beecham Enterprises Inc. (iv)
Biddle Sawyer Limited
British Pharma Group Limited (i)
Galvani Bioelectronics Inc.
Galvani Bioelectronics Limited
Glaxo Saudi Arabia Limited
Glaxo Wellcome Ceylon Limited
GlaxoSmithKline (Tianjin) Co. Ltd
GlaxoSmithKline Algérie S.P.A.
GlaxoSmithKline Bangladesh Limited (vi)
New Monetary Shares
(99.5%)
Common
Equity
Capital (50%)
Common
A Ordinary;
B Ordinary (0%)
Ordinary
Ordinary;
Ordinary B
Ordinary
Ordinary
Ordinary (82%)
GlaxoSmithKline Consumer Healthcare Limited (vi)
Ordinary
GlaxoSmithKline Consumer Healthcare Pakistan Limited
Ordinary (85.8%)
GlaxoSmithKline Consumer Healthcare, L.P.
Partnership Capital
GlaxoSmithKline Consumer Nigeria plc (iii)
GlaxoSmithKline OTC (PVT.) Limited
GlaxoSmithKline Pakistan Limited
GlaxoSmithKline Pharmaceuticals Limited
GlaxoSmithKline S.A.E.
Ordinary (46.4%)
Ordinary
Ordinary (82.6%)
Equity (75%)
Ordinary (91.2%)
90.7
El Salam City 11491, PO Box 3001, Cairo, Egypt
88
75
50
55
55
75
99.6
90
99.99
82
72.5
85.8
88
46.4
85.8
82.6
75
91.2
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
252 Dr Annie Besant Road, Mumbai, 400030, India
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
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
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
Patiala Road, Nabha 147201, Dist Patiala, Punjab, India
The Sykes Building, 35 Dockyard Road, West Wharf, Karachi, 74000,
Pakistan
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, 19808, United States
1 Industrial Avenue, Ilupeju, Ikeja, Lagos, PM B 21218, Nigeria
The Sykes Building, 35 Dockyard Road, West Wharf, Karachi,
74000, Pakistan
35 Dockyard Road, West Wharf, Karachi, 74000, Pakistan
252 Dr Annie Besant Road, Mumbai, 400030, India
Boomerang Office Building - Land No. 46, Zone (J) – 1st District, Town
Center – 5th Tagammoe, New Cairo City, Egypt
GSK Annual Report 2018 269
Group companies continued
Name
Security
Effective %
Ownership
Registered address
Subsidiaries where the effective interest is less than 100% continued
GSK-Gebro Consumer Healthcare GmbH
Laboratorios ViiV Healthcare, S.L.
Ordinary
Ordinary
Modern Pharma Trading Company L.L.C.
P.T. SmithKline Beecham Pharmaceuticals
Quotas (98.2%)
A Shares; B Shares (0%)
PHIVCO Jersey II Limited (iv) (v) (vi)
PHIVCO Jersey Limited (iv) (v) (vi)
PHIVCO UK II Limited
PHIVCO UK Limited
PHIVCO-1 LLC
PHIVCO-2 LLC
Ordinary
Ordinary
Ordinary
Ordinary
LLC Interests
LLC Interests
60
78.3
98.2
99
78.3
78.3
78.3
78.3
78.3
78.3
PT Glaxo Wellcome Indonesia
A Shares; B Shares (0%)
95
Shionogi-ViiV Healthcare LLC (iv)
Common Interests
Sino-American Tianjin Smith Kline & French Laboratories Ltd
Ordinary (55%)
SmithKline Beecham (Private) Limited
Ordinary (99.6%)
78.3
55
99.6
SmithKline Beecham-Biomed O.O.O.
Participation Interest (97%) 97
Stiefel Egypt LLC (iv)
Quota (99%)
ViiV Healthcare (South Africa) (Proprietary) Limited (iv) (vi)
Ordinary
ViiV HealthCare BV
ViiV Healthcare Company
ViiV Healthcare Finance 1 Limited (vi)
ViiV Healthcare Finance 2 Limited
ViiV Healthcare Finance Limited
ViiV Healthcare GmbH
ViiV Healthcare GmbH
ViiV Healthcare Hong Kong Limited (iv)
ViiV Healthcare Kabushiki Kaisha
ViiV Healthcare Limited
ViiV Healthcare Overseas Limited
ViiV Healthcare Pty Ltd
ViiV Healthcare Puerto Rico, LLC
ViiV Healthcare S.r.l.
ViiV Healthcare SAS
ViiV Healthcare sprl
ViiV Healthcare Trading LLC (iv)
ViiV Healthcare Trading Services UK Limited
ViiV Healthcare UK (No.2) Limited (v) (vi)
ViiV Healthcare UK (No.3) Limited
ViiV Healthcare UK (No.4) Limited
ViiV Healthcare UK (No.5) Limited
ViiV Healthcare UK (No.6) Limited
Ordinary
Common
Ordinary
Ordinary
Ordinary; Redeemable
Preference
Ordinary
Ordinary
Ordinary
Ordinary
Class A Shares, Deferred;
Class B Shares (0%);
Class C Shares (0%);
Class D1 (0%);
Class D2 (0%);
Class E 5%
Cumulative Preference (0%)
Ordinary
Ordinary
LLC Interests
Quota
Ordinary
Ordinary
Participation Interest
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
99
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
78.3
Bahnhofbichl 13, 6391 Fieberbrunn, Kitzbühel, Austria
Severo Ochoa, 2, Parque Tecnologico de Madrid, Tres Cantos, Madrid,
28760, Spain
Amoun Street, PO Box 3001, El Salam City, Cairo, 11491, Egypt
Jl. Pulobuaran Raya, Kav. III DD/2,3,4, Kawasan Industri Pulogadung,
Jakarta, 13930, Indonesia
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
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
Leningradskiy Prospect, 37A, bld. 4, Moscow, 125167, Russian
Federation
Amoun Street, El Salam City, Cairo, Egypt
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, Munchen, 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 Akasaka Minato-Ku, Tokyo, Japan
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
980 Great West Road, Brentford, Middlesex, TW8 9GS, England
1061 Mountain Highway, Boronia, VIC, 3155, Australia
Centro International de Mercadeo, 90 carr. 165 Torre 2, Suite 800,
Guaynabo, 00968, Puerto Rico
Via Alessandro Fleming 2, Verona, 37135, Italy
23 rue François Jacob, 92500, Rueil-Malmaison, France
Site Apollo, Avenue Pascal 2-4-6, Wavre, 1300, Belgium
Leningradskiy Prospect, 37A, bld. 4, Moscow, 125167, 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
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018
270
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 UK Limited
ViiV Healthcare ULC
ViiV Healthcare Venture LLC
ViiVHIV Healthcare Unipessoal Lda
Winster Pharmaceuticals Limited (iv)
Zhejiang Tianyuan Bio-Pharmaceutical Co. Ltd.
Associates
Apollo Therapeutics LLP
Calci Medica Inc.
GlaxoSmithKline Landholding Company, Inc.
Index Ventures Life VI (Jersey) LP
Innoviva, Inc.
Japan Vaccine Distribution Co., Ltd
Kurma Biofund II, FCPR
Longwood Founders Fund LP
Medicxi Ventures I LP
Joint Ventures
Ordinary
Common
LLC Interests
Quota
Ordinary
Ordinary
78.3
78.3
78.3
78.3
46.4
95
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,
1495-131, Portugal
2A Association Avenue, Ilupeju Industrial Estate, Lagos, PO Box 3199,
Nigeria
No. 56, Tian He Road, Yuhang Economic Development Zone, Hangzhou,
Zhejiang Province, China
Partnership Interest (25%)
25
Gunnels Wood Road, Stevenage SG1 2FX, England
Series A and Junior
Preferred (33.9%)
Common (40%)
Partnership Interest (25%)
Common (31.7%)
Ordinary (50%)
Partnership Interest (32%)
Partnership Interest (28%)
43.3
40
25
31.7
50
32
28
505 Coast Boulevard South, Suite 202, La Jolla, CA 92037,
United States
2266 Chino Roces Avenue, City of Makati, 1231, Philippines
3 Burlington Gardens, London W15 3EP, England
2000 Sierra Point Parkway, Suite 500, Brisbane, CA 94005,
United States
6 Yobancho, Chiyoda-Ku, Tokyo, Japan
24 Rue Royale, 5e étage, 75008 Paris, France
The Prudential Tower, 800 Boylston Street, Suite 1555, Boston,
MA 02199, United States
Partnership Interest (26.2%) 26.2
25 Great Pulteney Street, Soho, London W1F 9ND, England
Chiron Panacea Vaccines Private Limited (vi)
Equity Shares (50%)
Japan Vaccine Co., Ltd. (vi)
Japan Vaccine Distribution Co., Ltd. (vi)
Qualivax Pte. Limited
Ordinary
Ordinary
Ordinary
Quell Intellectual Property Corp., LLC (iv)
Membership Interest
Qura Therapeutics, LLC
Units
50
50
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
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
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 2018 271
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.
Investor informationFinancial statementsGovernance and remunerationStrategic reportGSK Annual Report 2018 272
Index
Accountability
Accounting principles and policies
Acquisitions and disposals
Adjustments reconciling profit after tax to operating
cash flows
Affordability and availability
Annual General Meeting 2019
Approach to Brexit
Approach to tax
Assets held for sale
Associates and joint ventures
Audit & Risk Committee Report
Business model
Cash and cash equivalents
Cash generation and conversion
CEO’s statement
CFO’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
Data and engagement
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
Environment
Ethics and values
Exchange rates
Executive Director remuneration
Finance expense
Finance income
Financial calendar
Financial instruments and related disclosures
Financial performance
Financial position and resources
Financial statements of GlaxoSmithKline plc, prepared
under UK GAAP
Five year record
Glossary of terms
Goodwill
Group companies
Group financial review
Independent Auditor’s report
Industry trends
Inventories
Investments in associates and joint ventures
Page
79
146
191
189
26
254
36
43
173
160
79
12
172
56
03
38
02
66
96
197
141
143
140
142
140
21
240
194
186
71
65
92
63
31
119
113
126
164,253
259
164
158
212
32
30
153
98
160
159
253
198
04
58
219
229
271
166
260
37
128
09
171
170
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
Non-financial information statement
Notes to the financial statements
Operating profit
Other intangible assets
Other investments
Other non-current assets
Other non-current liabilities
Other operating income/(expense)
Other provisions
Our Board
Our long-term priorities
Pensions and other post-employment benefits
Pharmaceuticals
Pharmaceutical products, competition and
intellectual property
Pipeline
Post balance sheet events
Presentation of the financial statements
Principal Group companies
Principal risks and uncertainties
Property, plant and equipment
Quarterly trend
Reconciliation of net cash flow to movement in net debt
Registrar
Related party transactions
Relations with stakeholders
Reliable supply
Remuneration governance
2017 Remuneration policy summary
Remuneration report
Reporting framework
Risk management
Science and technology
Science Committee report
Share capital and control
Share capital and share premium account
Shareholder information
Shareholder services and contacts
Stakeholder engagement
Taxation
Tax information for shareholders
Trade and other payables
Trade and other receivables
Treasury policies
Trust
Turnover and segment information
US law and regulation
Vaccines
Vaccine products, competition and intellectual property
Viability statement
Page
257
151
08
72
215
158
28
187
184
152
77
195
41
112
IFC
144
157
168
170
171
184
156
183
68
07
174
13
238
235
218
144
214
241
165
224
190
256
189
89
29
110
120
98
40
34
25
91
251
186
251
256
11
161
254
173
172
62
24
153
258
18
239
44
GSK Annual Report 2018 GSK Annual Report 2018
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 Cialis owned
by Eli Lilly and Company, Gardasil owned by Merck Sharp &
Dohme Corp. and Rituxan owned by Biogen MA Inc. Zofran
owned by Novartis AG Trumenba owned by Pfizer Inc. and
Volibris owned by Gilead Science.
Acknowledgements
Design
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Printing
Pureprint Group, ISO 14001.
FSC certified and Carbon Neutral.
Paper
This Annual Report is printed on Revive 100 Silk,
a 100% recycled paper with full FSC certification.
All pulps used are made from 100% de-inked,
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 2018
Form 20-F
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 241 to
250 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 non-IFRS measures are used to report the
performance of our business. These measures are defined
on pages 40 to 42 and a reconciliation of Adjusted results to
Total results is set out on page 51.
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 2019 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 assumptions for the Group’s revenue, earnings and
dividend expectations assume no material interruptions
to supply of the Group’s products, no material mergers,
acquisitions or disposals, except for the acquisition of
Tesaro, the proposed divestment of Horlicks and other
Consumer Healthcare products to Unilever and the
proposed formation of a new Consumer Healthcare
Joint Venture with Pfizer, all announced in December 2018,
no material litigation or investigation costs for the Company
(save for those that are already recognised or for which
provisions have been made), no share repurchases by
the Company, and no change in the Group’s shareholdings
in ViiV Healthcare. The assumptions also assume no
material changes in the macro-economic and healthcare
environment. The 2019 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 and the product divestments
planned in connection with the proposed Consumer
Healthcare transaction with Pfizer.
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 as
well as the new major restructuring plan announced on
25 July 2018.
They also assume that the proposed Consumer Healthcare
nutrition disposal closes by the end of 2019 and the
proposed Consumer Healthcare Joint Venture with Pfizer
closes during H2 2019 and that the integration and
investment programmes following the Tesaro acquisition
and the proposed Consumer Healthcare Joint Venture
with Pfizer over this period are delivered successfully.
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, the Group’s
medium-term effective tax rate is expected to be around
19% 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
94), 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 65
to 94, 126 to 127, and 241 to 270 inclusive comprise the
Directors’ Report, pages 01 to 64 inclusive comprise the
Strategic report and pages 95 to 124 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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